Good morning, and welcome to the Molina Healthcare Fourth Quarter 2020 Earnings Conference Call. Please note, this event is being recorded. I would like to turn the conference over to Ms. Julie Trudell, Senior Vice President of Investor Relations at Molina Healthcare. Please go ahead.

Good morning, and welcome to Molina Healthcare's Fourth Quarter 2020 Earnings Call. Joining me today are Molina's President and CEO, Joe Zubretsky; our current CFO, Tom Tran, who is retiring later this month; and our current Head of Transformation and Corporate Development and CFO-elect, Mark Keim. A press release announcing our fourth quarter earnings was distributed after the market close yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30-days. The numbers to access the replay are in the earnings release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein or as of today, Thursday, February 11, 2021, and have not been updated subsequent to the initial earnings call. In this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our fourth quarter 2020 press release. During our call, we will be making Forward-Looking Statements, including, but not limited to, statements regarding the COVID-19 pandemic, the current environment, recent acquisitions, 2021 guidance and our longer-term outlook. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report for the 2019 year filed with the SEC, as well as the risk factors listed in our Form 10-Q and our Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open up the call and take your questions. I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe.

Thank you, Julie, and good morning. Today, we will provide updates on several topics. First, we will cover enterprise-wide financial results for the fourth quarter and full-year 2020; second, we will provide initial earnings and earnings per share guidance for 2021; and lastly, we will conclude with some thoughts on our compelling strategic position and our future growth prospects. Let me start with fourth quarter highlights. Last night, we reported GAAP earnings per diluted share for the fourth quarter of $0.56 with net income of $34 million and total revenue of $5.2 billion a revenue increase of 22% over the prior year. On a normalized basis, defined as adjusted earnings per share and excluding the net effect of COVID, our earnings per diluted share were $2.29 for the fourth quarter. This is consistent with our performance in the first three quarters of 2020, each of which produced approximately $3 per share, after adjusting for the effect of COVID. Two items significantly impacted the earnings in the fourth quarter. The first and most prominent of these items was the net effect of COVID which decreased net income in the quarter by $3.80 per share. The most significant contributor to this impact was the continuation of rate refunds already in flight and the introduction in the quarter of COVID-related retroactive rate actions in California, Michigan and Ohio. These refunds taken together more than offset the net effect of modest utilization curtailment and a high level of COVID direct cost of care. The second significant item having an impact in the quarter came from adjustments that produced a combined net benefit of $1.07 in earnings per share. The most significant of these was a net benefit from the proceeds of federal litigation which was partially offset by a charitable contribution to our foundation.…

Thank you, Joe. Good morning, everyone. I’m going to discuss our balance sheet, cash flow and 2021 outlook. Operating cash flow for the full-year 2020 was $1.9 billion, reflecting the strong operating result rose membership and the timing of government receipts and payments. Our reserve approach remains consistent with prior quarters, and our reserve position remains strong. Days in claim payable at the end of the quarter represents 50-days of medical cost expense compared to 52-days in the third quarter of 2020 and 50-days in the fourth quarter of 2019. Prior year's reserve development in the fourth quarter of 2020 was modestly favorable and was negligible in the comparable period in 2019. We extract $280 million of subsidiary dividends in the quarter and $635 million year-to-date. The parent company cash balance at December 31, 2020, were $644 million, a decrease from the prior quarter cash balance of approximately $1.3 billion, due primarily to the cash outlay for the Magellan Complete Care acquisition. As of December 31, 2020, our health plans had total statutory capital and surplus of approximately $2 billion, which equates to approximately 330% of risk-based capital. Through December 31, 2020, we repurchased an aggregate of approximately 760,000 shares for $159 million. At an average price of approximately $208 per share. We continue to reduce our cost of capital. In November of 2020, we closed on a private offering of $650 million senior notes due November 2030 and used a portion of the proceeds to repay the $330 million senior notes. Debt at the end of the quarter is 2.1 time trailing 12-month EBITDA. Our leverage ratio is 53%. However, On a net debt basis, not a parent company cash, the leverage ratio is 45%. Taken together, these metrics reflect a reasonably conservative leverage position. Now turning to guidance, we introduced our initial full-year 2021 adjusted earnings per share guidance range of $12.50 to $13. We expect premium revenue to exceed $23 billion a greater than 25% increase over 2020, and total revenue is expected to exceed $24 billion. We expect the medical care ratio to be approximately 88%. The MCR increase over 2020 is primarily due to the continuing net effect of COVID, temporary Medicare risk score disruption and higher MCR from recent acquisitions. We expect our adjusted G&A ratio to improve to approximately 7%. This reflects continued disciplined cost management, revenue growth, and fixed cost leverage. The tax rate is expected to be approximately 25.6%. And adjusted after-tax margin is expected to be approximately 3%, which is impacted by approximately 90 basis points related to the items I just mentioned, including the continuing net effect of COVID, Medicare risk scores and initial performance of recent acquisition operating below target margins. This concludes our prepared remarks. Operator, we are now ready to take questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matt Borsch with BMO Capital Markets. please go ahead.

Yes good morning. I was hoping you could just talk a little bit about the marketplace special enrollment period. And how you expect that to impact you when you take into consideration what you have characterized this underperformance in 2020?

Sure, Matt. Our forecast for membership in the marketplace starting the year with 500,000 ending the year with just under four and a thousand and didn't contemplate the special enrollment period. We are certainly aware of it. We certainly have forecasted what it could provide. And for those 90-days, it couldn't provide anywhere from 20,000 to 30,000 additional members. We are forecasting that potentially it could provide an extra $100 million to $150 million of revenue for the year. Now in the context of our margin recovery process, it is unaffected by that. We are very comfortable with the pricing we put into the marketplace, we are very comfortable with our product designs and our benefit designs, our product positioning, and we are very comfortable in achieving our mid-single-digit pre-tax margins for the year, irrespective of any additional revenue attained to the special enrollment period.

And maybe if I, just related to that, how much do you think the competitive environment in the marketplace impacts your efforts to get to the mid-single-digit level?

Well, it is very competitive. There is lots of new entrants, but we are very confident. And one of the reasons we are confident is the two areas of operational let down, if you will in 2020, utilization review and attainment risk scores. We have introduced operational excellence of those two operating fundamentals and our other two businesses. We are really good at it in Medicaid and really good at it in Medicare. And we were just behind and importing those skills that exist in our company to the marketplace platform. That has been corrected. And so we are very comfortable that by executing across those two fundamentals, we will get back to mid-single-digit margins.

Yes. Thank you.

Our next question comes from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Hi, good morning. A couple of questions here. Just thinking about the onetime items in 2021, just to clarify, as we think about 2022, what can we exclude from the sort of temporary onetime headwind? As we think about sort of kind of like the starting point for next year? Because it just a COVID it caused and a number of moving parts in it.

Sure. During our prepared remarks, we gave a sort of a qualitative bridge - quantitative bridge committed bridge and understanding the catalysts and pressures inside our 2021 guidance all with the goal of helping our investors understand what might be looked at as a jumping off point into 2022. So here are the puts and takes. First of all, the net effect of COVID of $1.50 per share or $110 million of pre-tax will dissipate overtime as utilization comes back to normal, as the risk quarters disappear that $1.50 overhead will evaporate as the pandemic is solved. In addition, the Medicare risk score phenomenon, last year was an interesting year. Seniors didn't access health care. And so interacting with them, getting the right codes to attain the right risk force us was a challenge, not just for us, but for many of our competitors. Next year, we will either - meaning this year, we will either attain the risk scores, because they will be getting services, or if we aren’t satisfied that we can, we can include that in our bids. And last year, obviously, the bids were done far before the impact of COVID has ever known. So we are very comfortable that combined at $2.50 overhang sort of disappears as COVID gets behind us. As we said, in addition, our acquisitions are being integrated really, really well, and we are very comfortable with the $1 of accretion that we are putting in this year's guidance, but we are also comfortable in saying, that when they hit their full target margin and when Affinity is closed and hit its target margin, there is an additional $1.50 of earnings per share there. So all in, there is a good $4 of earnings per share embedded power sitting inside our 2021 guidance.

And just to follow when we think about the acquisitions, I mean, clearly, you have done multiple acquisitions in 2020. How should we think about sort of management bandwidth to continue to do acquisitions in 2021 or should we think about you kind of taking sort of a pause this year, making sure that they are all integrated getting to the target margin and then coming back to the market?

We have created the bandwidth. We have an expert M&A team that finds the properties and knows how to action them and close them. We have built a world-class integration team. The Passport integration is going really well and the early read on the Magellan integration is going really, really well. That is why we are so comfortable in affirming the accretion targets that we have given you. We have actually very fortunately, laid out quite nicely on a timeline. By the time Magellan is fully integrated, we would just be closing on Affinity, perhaps by the second quarter. And so if we action one, two or who knows how many more this year and they close either late in the year, early next year, the timeline couldn't be more amenable to being very effective at integrating them and harvesting the accretion that we promised our investors.

Thank you.

Thank you.

Our next question comes from Robert Jones with Goldman Sachs. Please go ahead.

Great. Thanks for the questions. I guess maybe just two on the bridge and I appreciate you guys breaking out a lot of these components, it looks like the core growth off of that 2020 baseline of $12.97 would be somewhere in the 9.5% range. I'm not sure how much of the HIF benefit would be flowing through. But obviously, that is below the long-term target of 12 to 15. Just wanted to see if you could maybe walk through some of the moving pieces here and probably more importantly, how you are thinking about the timeline to get back into that into that long-term range of 12 to 15.

I want to make sure I understand your question. You are talking about the puts and takes within our 2021 guidance or beyond.

Yes. Sorry, just in 2021, it seems like if you look at the core growth that you have laid out in these slides of $1.25 on top of the kind of $12.97, obviously, that would be below the long-term targets. Just curious if you could talk through kind of getting back towards that range. And obviously, it sounds like there are some tailwinds that are not necessarily baked in yet, which I'm sure would be helpful. But I just wanted to get your thoughts on the growth you have laid out here at the core versus getting back to the long-term range.

Sure. Well, bear in mind that the core performance here is irrespective of the net effect of COVID, which is tracked in a different place as the way we have articulated this. So the $1.25 is mostly the marketplace since that was the business that underperformed last year. It was just about breakeven in 2020, and we are targeting mid-single-digit pre-tax. And if you look at the potential for $1.9 billion, $2 billion of revenue, you can start to formulate a picture of how that is a significant contributor to the $1.25 core performance tailwind into this year. There are some puts and takes there, but with Medicare and Medicaid margins where they are, we are going to grow the top line and obtain the margin position there is. But there is not a lot of margin upside in Medicare and Medicaid. So we are very comfortable with the position that we presented here from a core business perspective. Medicare and Medicaid are pretty much optimized with respect to margins. The marketplace as a first step to getting back to where we said we would be. A mid-single-digit pre-tax margin would be our target for 2021.

Now, that is super helpful. I guess just one follow-up on the bridge, the dollar you have here for acquisitions and repos, and if I remember, I think you guys had called out $0.50 to $0.75 expected from Magellan. It sounded like YourCare and maybe the Puerto Rico exit would roughly net out. So $0.40 for repo and I think fast forward would be the other swing factor. I guess, first, does that math make sense as far as trying to bridge to that dollar and then how should we think about the split between repo and Passport to make up that $0.40 balance?

Yes, you are generally in the right area. If I were to break apart the dollar, I would say that $0.75 is Magellan, which is the top end of the range that we committed to for the first full-year of ownership, $0.10 on Kentucky. It would be very close to breakeven in the first full-year of ownership, and we will drive it to peak margins after that and about $0.15 on buyback. That is how you get to the dollar.

Super helpful. thanks Joe.

Okay. Thank you.

Next question comes from Charles Rhyee with Cowen. Please go ahead.

Yes, hi thanks for taking the question. Joe, I just wanted to just follow-up to just to clarify one other thing. I apologize if I missed that. When we talk about the net effect of COVID in the $1.50, is that pulling out all the effective COVID you have been for acquisitions? I guess the question is in your assumptions for accretion here in 2021 for something like Kentucky, are you factoring in the impact of COVID or Passport within the acquisition bucket or is it all in the COVID bucket?

We have attempted to capture all COVID impacts in the COVID line item. And just to sort of reframe how we track that, our estimate of COVID impact, is the amount of medical cost suppression we believe we have observed offset by the direct cost of caring for COVID patients. And then, of course, both offset by the impact of any liabilities generated due to the retroactive rate refunds or corridors. That is how we capture it. And if it related to an acquisition is captured in the COVID line.

Okay, thank you. And just a quick follow-up in Kentucky and Passport, do we have a sense yet on timing for when they are going to do sort of the on enrollment, so you will know what your sort of membership numbers will look like?

In Kentucky, the open enrollment period was extended to March 15th. So there is still members moving around. We began the year with 320,000 members. The latest accounting has us about in that same zone. But on March 15th, the period will shutdown, and we will know how many members that we are beginning our new contract with.

Okay. Great. Thank you.

Our next question comes from Gary Taylor with JPMorgan. Please go ahead.

Hey good morning Joe. I just wanted to make sure I understand what you are saying about your reverification assumptions. So when we look at, for example, the bridge between 2020 and 2021, that $1.25 of core growth, you are saying most of that is from exchanges. But if you are anticipating at this moment that you are still going to have reverifications in mid-year start to take place and some of your Medicaid enrollment rolling off, I'm presuming there is like a net negative number embedded in there. Is that the right way to think about it and I just want to make sure you are suggesting if that doesn't happen this year, whatever the embedded negative number is that comes back and can you size that for us?

Sure. It is interesting because it is all about your assumption of how fast membership roles will attrite once the states turn redetermination back on. But I would tell you, in our numbers, the way the membership flows, both in 2020 and 2021, there is actually a member month increase in 2021, just based on the timing of both acquisitions and redetermination. So no, I would say that the redetermination process is with the 100% upside to our revenue and earnings picture in the year. We just felt it wasn't prudent nor did we have any credible way of estimating how many more members we would get if the redetermination pause was extended, and then how fast would they actually roll off depending on how states plan to implement the reintroduction of the determination. So I would just say that the redetermination issue or phenomenon is upside to both our revenue and earnings guidance for the year.

So you have still got enrollment growth playing out now through the first half, some assumptions about some leakage in the second half, but that weighted average is still positive year-over-year.

Yes. The way we look at it on a Medicaid basis, we are beginning the year with 3.6 million members. On January 1st, 200,000 members come over due to MCC. And in the first quarter, based on our historical average of about 30,000 a month during redetermination suspension. We pull in another 100,000 members. It would hit its peak at 3.9, but then 600,000 would roll off in the balance of the year. Now that is a pretty quick roll off, and it might happen slower, which is another perhaps element of conservatism in our forecast. And yes, if you then process that against 2020 and the timing of how membership grew and the timing of our acquisitions, there is actually a 9% number month growth in 2021 on Medicaid.

Very helpful. Thank you.

Thank you.

Our next question comes from Justin Lake with Wolfe Research. Please go ahead.

Thanks, good morning. A couple of questions here. First, Joe, a lot of people at JPMorgan got the impression that that the COVID headwind was going to be materially less than the $2. So I'm curious if there is something that happened between then and now to push that number up closer to $2. And then you did a great job of kind of laying out for us the 2020 components within the COVID headwind. Can you do the same for 2021 and specifically on utilization? Can you tell us where you expect COVID cost to be versus normal utilization? Thanks.

Sure, sure, so let's provide the context for 2020. Our estimate of medical cost suppression for the entire year was about $620 million. That was offset by approximately $200 million of the direct cost of COVID care for COVID patients, netting to a $420 million surplus, we hesitate to call it a benefit, a surplus due to the impact on medical costs from the COVID pandemic. And this is not an estimate, it is an actual number, recorded $565 million of rate refunds, risk-sharing quarter of liabilities in the year and that combined with additional G&A of $35 million resulted in a net $180 million cost of COVID in our company for the year, which is $2.30 a share. Juxtaposed against that, to answer now your direct question, we are forecasting a more moderate, more modest level of suppression. And the reason is both the supply and demand side of the health care economy were shutdown last year for a while. Patients were afraid to go in for services. And if they wanted them, there were many executive orders and direct mandates not to provide elective and discretionary procedures. The supply side is open for business this year, but we still think there would be a demand side softening and will result in utilization suppression of somewhere around $200 million for the year, which is one-third of the amount of suppression we experienced in 2020. We will incur direct costs of COVID care. And the net of all that is somewhere between $140 million and $150 million. Most of this, we forecast will happen in the first half of the year. Hopefully, the vaccinations in the vaccine and social distancing will cause all this to really dissipate in the later half of the year. Now against that, we are also forecasting approximately $250 million of impact from retroactive or not retroactive, but risk-sharing quarters, I should say, which nets to about $110 million, which is your $1.50 a share. So the gross numbers are a lot less dramatic, but it is still netting to $1.50 a share. One of the reasons we are very comfortable of this estimate is really we focus on the net impact. Because if utilization is higher or lower than expected, there would be some flex up and down with the risk-sharing corridors. There is actually sort of a natural hedge between the suppression and the corridors themselves. So we look at the net number, we are very comfortable with that net number. And as the pandemic goes away, we think this goes back to normal times, and there would be no impact from COVID on a going-forward basis, obviously. So I hope that helps that tail with tape. I know that was pretty detailed, but that is what's included in our $1.50 estimate for the cost of COVID for 2021.

Joe that is really helpful and so what you are seeing here effectively is you have got $110 million risk corridor whole where they are just setting your margins lower than your typical target, and that is really the problem. The other stuff is going to flex up and down, but you are below target here by $110 million. like all of your states at this point have risk corridors, is there any uncertainty around more of them coming on?

Let me address the first part. The answer to the first part, the response is, yes, that is true. If you are already in a risk corridor and your medical costs go up or down, there is no net impact on the company. But that is the way to look at it, that because risk sharing corridors didn't address COVID suppression specifically, it just addressed through MLR, then if you are outperforming your MLR targets, you are getting back some money to the state. So the intention was to have a direct correlation between COVID suppression in a corridor, but the corridor is against medical costs generally. So the fact that we are very profitable in some states, the fact that we outperform many of the market participants in some states, the rate refund number is probably a little higher than people might have expected. But the answer to your second part of your question is correct. It will flex up and down in a state where we are already in a corridor and we are a state where there is not, we would either enjoy the benefits of additional surplus or the effects of additional higher medical costs. The only state that made - the biggest state that does not have a corridor in 2021 is California. Texas and Washington already have done and all of our other states continue them on into 2021.

Thanks.

Our next question comes from Scott Fidel with Stephens. Please go ahead.

Hi, thanks. Good morning. First question, Joe, I just wanted to just talk a little conceptually about the long-term margin target. It looks like you gave us a crosswalk back to that 4% level that you had been guiding for us, the long-term view for the last couple of years. And just interested, though, and maybe taking the other side that a bit just in terms of comfort with that sort of longer term, just when we think about the exchange margin profile, you have rebate that since your Investor Day a couple of years ago, you guys are doing more inorganic growth, acquiring lower-margin businesses. So there is sort of a consistent mix impact that will likely come from that. And then also just at some of these risk corridor programs, the states end up liking them a bit light and end up keeping them. So I just wanted to just get your thoughts on sort of framing some of those maybe longer-term headwinds against that 4% long-term target.

Sure, Scott. As we sit here in the second year of this global pandemic, we are not going to update our long-term margin guidance. We are just sort of going to go as you go, as you plow through this, start to form your views of what the landscape is looking like as you plow through it. I think that is the more prudent approach. But having said that, when you actually look at the pro forma impacts of many of these phenomenon that we consider quite temporary, you can pro forma this thing back to the high 3s or close to 4%. To the second part of your question, I actually hope that we always have a decrement sitting inside our margin for acquisitions that do not perform in their first year. That is a good decrement to have because if we can buy properties that are underperforming and with sweat equity, get them to perform, that is just another form of accretion. So the 40 basis points, this 40 basis points in our margin in 2021 in our guidance, that is literally related to the underperformance in the first year of our acquired properties both on the G&A line and on the MCR line. In the last part of your question was related to the risk corridors. Look, when they were introduced in 2020, they were clearly related to pandemic. They were presented that way, they were retroactive because they had to be because they were introduced mostly after the pandemic started. As they were reintroduced for 2021, they were presented as pandemic-related. The feeling was that there could be strange effects from the pandemic additional COVID costs, the cost of the vaccine, additional suppression, and that is why they were introduced on a symmetrical basis. You are protected on the downside and the state is protected on the upside. In CMS' approval guidelines, they have clearly stipulated that when they receive these for approval, they are viewing these as being attributed to the utilization impacts related to the pandemic. So it has been pretty clear to us that they were presented as relating to pandemic. CMS is approving them on the basis of relating to the pandemic. And we believe when the pandemic dissipates that these will disappear as well and will be back to the traditional rate-setting environment where rates are set prospectively using a credible medical cost baseline and a trend off that baseline.

Got it. And then just for my follow-up question. I know a lot of this content has just come out in the last day or two, and you guys are probably absorbing it. But just interested, Joe, in sort of your framing on some of the proposals that came out of ways and means on expanding the HIC subsidies and from E&C on some of the Medicaid expansion proposals and how you would frame the opportunity from that? And then I guess also caveated with that because they use reconciliation, the funding for it is only temporary for two-years. So I guess there would be questions on sustainability right at the funding, for example, the Republicans took back it to the House or the Senate in 2022.

Well, thanks for that question. We are only three weeks into the new government and look what has been done. We all knew that the new government would be proponents of the social safety net of making sure the disadvantage have access to high-quality health care and plenty of subsidies so they can afford it. And look what has happened just in the first three weeks in terms of the executive order, at least the intention to extend the PHE to the end of the year. the executive order to introduce the special enrollment period on the marketplace. The executive order that the euphemism in the executive order was encouraging states to look at prior administration policies, which was really taking a shot at the public chargeable and Medicaid work requirements. So just what's come out of the White House in the past three weeks is incredibly bullish on government-sponsored health care, particularly for the disadvantaged. To your other point, things can get done through the reconciliation process and they are going to. The three committees in the house that generally write to health care issues are ways and means energy, e-commerce and oversight. And look at the language that they are introducing, increasing subsidies in the marketplace up to 150% of FPL. Making the product accessible to people over 400%, capping the cost at 8.5% of their income, and so on and so on and so on. Just in three weeks of a new government, both in the legislative bills that are coming out of the House and from Executive order in the White House just couldn't be better for government-sponsored Managed Care, and we are pleased to see that progress already being made.

Okay. Thanks.

Our next question comes from Dave Windley with Jefferies. Please go ahead.

Hi, thanks for taking my questions. Joe good morning. I wanted to follow on Gary's line of questioning on the redetermination. Last time around that when it was turned back on, there was kind of this realization that the risk profile or the margin on those folks redetermined off was pretty attractive, like maybe even included a lot of zero utilizers. I'm wondering if you think that is likely to happen this time around when that finally gets turned back on. And have you made that assumption in your guidance or in your estimates?

The answer to your last part of your question, Dave, is no, we haven't. But it still remains to be seen what it does to the acuity of the population. Now because we haven't introduced many more members in our forecast, so our guidance only includes 100,000 member growth in the first quarter of the year and then the attrition starts in the last three quarters of the year. But we certainly have not forecasted a continued softening of the acuity profile of our membership base. And in fact, if that in fact happens, and it happens in a quarter, say, it will go back against corridors anyway. So net-net, The impact of the extension of the redetermination suspension is a net positive, on any dimension, it is a net positive to our guidance. We did not include any members past the first quarter, we rolled them off pretty quickly. As I said in my prepared remarks, if you take 500,000 members, which is sort of what we got in redetermination for every month at $300 PMPM there is $150 million of additional revenue. What is the margin profile of that revenue, you can speculate that it is very, very good as the acuity population improves as you get more members. But we have not included any of that impact in our guidance for the year, either the membership flow or a acuity improvement that is sort of a positive jolt to our earnings and earnings per share.

Okay. And follow-up then, separate topic. As you think about to your comments earlier on having built the bandwidth and the integration team to continue to look at M&A, as you look at targets, does a thought around the balance of how you would like to build your book of business influence what you are looking at, i.e. increasing MA and - well, really MA, I guess, from an acquisition standpoint, in your mix or is it more opportunistic and what looks the best? How do you think about the balance of your book as it relates to inorganic growth?

We would love to balance it out with more Medicare. They are hard to find. But we would love to balance out with more Medicare. We are growing it nicely organically, but we would love to find properties that have Medicare Advantage or D-SNP populations. I would say along the lines you have asked the question, we more look to the state. Is it a bolt-on within a state where we don't have so much market share that we couldn't get it done? Lighting up new states is really important. High acuity, really important, we are really good at high acuity. And there is a lot of players out there that have a lot of high-acuity lives and have little ability to manage them. So the upside on $1,500 of premium per month is huge, huge margin potential. So I would actually say that the geography is important, we love high acuity. And if they are underperforming but not broken, all the better because then we will take our operating team, open up the Molina playbook and drive accretion through margin expansion.

Great. Thank you.

Our next question comes from Kevin Fischbeck with Bank of America. Please go ahead.

Great. Thanks. Just wanted to make sure that I understand, you talked a lot about redeterminations this year. But I guess in theory, it is a headwind in 2022 guidance. It is not something that you guys spiked out as something that would be contrary to that $4 of earnings power. I wasn't sure if that was included in your kind of net COVID number when you thought about 2022 or that is something that we should separately identify if it is separate, are there any other kind of factors we should take into account?

No. I mean, since we did not put the - any impact, if there is a positive impact from redetermination in 2021, since it is not in our guidance, we did not - then, therefore, create a headwind in 2022. So just to be very clear, I appreciate the question, any impact from the extension beyond April of any additional membership or a slower attrition of membership is not in our revenue guidance. And any profit enjoyed by additional member months in 2021 is not in our guidance. So as I said, we are really comfortable to it, there is only upside to 2021 on the redetermination suspension.

Well I'm talking about what is in 2021 in your guidance, because you have it going through April and then slowly coming off as the year goes on. So to your point about member months, you will end at your Medicaid enrollment number, but your member months in 2021 will be higher than your 2022 member months just because redeterminations in for the first full quarter and partially rolling off as the year goes on.

Sure, I understand your question. I'm sorry, I apologize I misunderstood your question. No, and again, we weren't giving a specific 2022 outlook. We are more trying to craft the bridge that we gave you as if we are guiding to $13 a share for 2021, sitting inside that is an earnings power that is higher than $13 due to some temporary phenomenon. But we weren't necessarily trying to extend into 2022 with an earnings or revenue bridge. Sorry, I misunderstood your initial question. But now that will come at a later date.

Okay, so that is something else we should factor in to think about earnings power then?

Sure, unless the suspension goes on and members stay on through the end of 2021, depending on other acquisitions that we might do, then there is the Affinity piece that is coming in. So we are not doing a 2022 guidance bridge per se. But I understand your question, and it is a legitimate one.

Okay and then maybe just a second question, then the exchanges, it is obviously unusual to see a company grow very quickly and expand margins the way that you guys did. Obviously, it sounds like risk coding is part of it. But how should we think about that business? is 2021 guidance normalized margin? And how do you think about long-term the top line growth outlook for exchanges?

We are going to be guarded in giving a forecast of where the margins will land. The competitive landscape changes every day. We are very comfortable in getting this to mid-single-digit pre-tax this year. Now our hope, again, given the competitive landscape, that would lead to mid-single-digit after-tax in the future. That is where we think the business could perform. But let's work through the 2021. There is a lot of revenue to bring on, a lot of members to service. Some of them are new. We will have to get their risk scores. So one step at a time, I asked my team, let's get to the mid-single-digit pre-tax margin this year. And then as we prepare our bids for 2022, let's sort through how much margin we think we can get and how much membership we think we can get. But starting the year with 500,000 and a 25% to 30% revenue growth year-over-year was a nice start to get back in the game in this business.

Great. Alright, thanks.

Okay. Thank you.

Our next question comes from Josh Raskin with Nephron Research. Please go ahead.

Thanks. Good morning. A question on the Medicare risk or headwind of the dollar per share, I sort of calculate that to about 3% of your total Medicare revenues which seems a little bit higher than I think what some others are suggesting. So I guess my question would be how much of your overall Medicare premium dollar actually comes from risk adjusters? And then are there any actions you are taking sort of shorter term to try and improve that risk scoring this year as you sort of get ready for next year and to the bids in the middle of the year?

Yes, Josh, truth be told in that dollar is a little bit from the physician fee schedule. So we just didn't think it was that big enough to call out. So there is a little bit of physician fee schedule in there. But you are in the right zone, 2.5% to 3%, our risk score revenue is multiples of that, two to three times that at least from what I recall. And the industry had a choice last year. We are in the middle of the pandemic, it just started in March and April. We are now starting to develop your bid. And for the most part, while we always tend to be conservative in our bids, we didn't put any specific load for, okay, we are going to fall short on risk scores. Obviously, with hindsight, that cost us three points on the revenue line. But next year, meaning this year, we will either have an estimate of what we think we can attain, and then based on what we target for benefit design and our margins, we would then allow for that in the bid we submit. So either way, whether we get the risk for or whether we price to it, we think this is a one-year phenomenon. That is the way we look at it.

Okay, got it. But it could be as much as a third to even half of your total risk score revenues disappearing this year. That is sort of the math, right?

I think it is about a third. I will check that, but I think it is about a third.

And then just a quick follow-up on your margins, where did you end 2020 full-year margins in Medicaid and Medicare?

Where did we end? Well, again, depending on whether you look at a normalized basis or not, but, On adjusted earnings for 2020, we are at 3.3% net income margin, normalized 3.9%. And I would tell you that the individual margins for the lines of business were generally in line with our long-term targets. So 3.3% adjusted, 3.9% normalized, and the lines of business, acceptable marketplace, obviously, which is close to breakeven, we are pretty much in line.

Alright.

Our next question comes from George Hill with Deutsche Bank. Please go ahead.

Well thank you for that. Joe, as it relates to the Medicare risk scoring, I guess, can you talk about the timing or your expectations as it relates to the ability to conduct the beneficiary valuations and maybe talk about what you have seen in the back half of 2020 and kind of the expectations as we roll through 2021 just as your ability to get in front of these people?

Sure, well, utilization did remain suppressed through the balance of 2020. It wasn't as suppressed late in the year. But look, our team is on this. We have a crackerjack Medicare team. They are all over this, and their instructions are very simple, have a credible estimate of how many interactions you can actually achieve, what is your reasonable estimate of proper risk scores attained. And to the extent it falls short of your long-term expectation, make sure you consider it in your bid. So either way, and obviously, with the goal of making sure your product remains competitive with benefit designs from competitors. So the team is all over it. And the good news is this year, we will have full visibility. Last year, it was [indiscernible] submitting your bids right as the pandemic was in full throttle. And we made the conscious decision not to introduce that into our bid. This year, we would think otherwise.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Joe Zubretsky for any closing remarks.

Thank you, operator. When we started this transformational journey over three-years ago, the work ahead moved pretty large. We knew that if we form the right team, that we could succeed, so we sought to recruit Managed Care industry veterans, battle-hardened veterans, if you will, who would know exactly what to do. Tom Tran personifies that. We developed a durable financial infrastructure that has been instrumental in our early success and which will have lasting impact. The team we built is a high-performing one, and we are very confident in their continued success. Tom's tireless energy, steady hand and good nature will certainly be missed by us all. Tom, on behalf of all of our constituents, and from me personally, thank you for your immense contribution to our success, and we wish you the best of luck and good health in your retirement. Operator, with that, we will end our call today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.