Good day and welcome to the Molina Healthcare Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Krocheski, SVP, Investor Relations. Please go ahead.

Good morning and welcome to Molina Healthcare’s fourth quarter 2021 earnings call. Joining me today are Molina’s President and CEO, Joe Zubretsky and our CFO, Mark Keim. A press release announcing our fourth quarter earnings was distributed after the market closed 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 are listening to the rebroadcast of this presentation, we remind you that remarks made are as of today, Thursday, February 10, 2022 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 2021 press release. During our call, we will be making certain forward-looking statements, including but not limited to, statements regarding the COVID-19 pandemic, the current environment, recent acquisitions, 2022 guidance, our embedded earnings power, and our longer term outlook. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could 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 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 to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Thank you, Joe and good morning. Today, we will provide updates on several topics; our financial results for the fourth quarter and full year 2021, our initial 2022 revenue and earnings guidance, and our growth initiatives and reaffirmation of our sustaining profitable growth strategy. Let me start with the fourth quarter highlights. Last night, we reported adjusted earnings per diluted share for the fourth quarter of $2.88 with adjusted net income of $170 million and premium revenue of $7.2 billion, an increase of 48% over the prior year. The 88.8% consolidated medical care ratio demonstrates solid performance while managing through pandemic-related challenges. The net effect of COVID increased our consolidated medical care ratio by 150 basis points, decreasing net income per diluted share by approximately $1.50, which is $0.50 more than previously expected. We managed to 7.4% adjusted G&A ratio, reflecting continued discipline and cost management while making the appropriate investments in our business to fuel growth. We produced an adjusted after tax margin of 2.3%. Excluding the net effect of COVID, our adjusted after tax margin was 3.5%, squarely in line with our long-term target. We are very pleased with our fourth quarter performance with respect to both the delivery of solid earnings and the focused execution of our profitable growth strategy. The quarter marks the end of yet another very successful year, a year in which we continue to produce a high level of financial performance while navigating the effects of a global pandemic. We executed well and sustained solid operating margins, while driving significant revenue growth. Now, turning to full year highlight, we reported full year 2021 adjusted earnings per diluted share of $13.54, a 6% increase over initial full year guidance. We absorbed $3.50 of cost related to the net effect of COVID, which was $2…

Thank you, Joe. Good morning, everyone. This morning I will discuss some additional details of our fourth quarter and full year performance. I will then turn to the balance sheet and some thoughts on our 2022 guidance. Beginning with our fourth quarter results by segment. In Medicaid, we reported an 88.3% MCR, a strong result that included continuation of costs from the net effect of COVID, offset by strong medical cost management. In Medicare, our reported MCR was 88.3%. During the quarter, the emergence of the Omicron variant had a greater impact on our Medicare population than on our other segments. Focused medical cost management and better than expected risk adjustment offset the net effect of COVID in the quarter. In marketplace, reported MCR was 92.1%. While COVID infection rates in our marketplace population declined from the peak of the Delta variant in August, the net effect of COVID continued to pressure results in the fourth quarter. The Special Enrollment Period membership, which grew to almost 40% of our marketplace book in the quarter, also contributed to the elevated marketplace MCR. Turning to full year results, our full year consolidated MCR was 88.3%. This result is modestly above our long-term target, as strong performance in our Medicaid and Medicare businesses was offset by the performance of our marketplace business. Specifically, our full year Medicaid MCR was 88.7%, in line with our 88% to 89% long-term target. Our full year Medicare MCR was 87.2%, in line with our 87% to 88% long-term target. In both Medicaid and Medicare, strong medical cost management, offset the net effect of COVID. Our full year marketplace MCR of 86.9% is well above our 78% to 80% long-term target, and includes approximately 430 basis points of the net effect of COVID as well as approximately 360…

[Operator Instructions] The first question is from Kevin Fischbeck of Bank of America, please go ahead.

Okay. Great. Thanks. I just wanted to ask about the exchange because that was a surprise for me in this guidance. Can you talk a little bit about how do you think about this business sustainably, just looking back and, I guess, over the last eight years, six of those years, you either grew that business by over 50% or you dropped that business by over 50% in a given year, so very volatile from year to year, it’s hard to see kind of what the strategy is long term. How comfortable are you that this is actually a base that you can grow off of in that low to mid -- sorry, mid to high single digits picture forecasting long term. Thanks.

Sure, Kevin. It is Joe. The strategic positioning of the business really hasn’t changed. This is an adjunct to Medicaid. We serve the working poor, we leverage our Medicaid network, we leverage our Medicaid network pricing and our Medicaid footprint. So the strategy hasn’t changed, 90% of our members are fully or partially subsidized. That is the market segment we are approaching. What you’re observing this year is really a capital allocation decision. We never intended to have 728,000 members; that was a function of the Special Enrollment Period, which not only grew membership beyond what anybody expected, but added a significant element of adverse selection. Really what you’re seeing this year is the repositioning of the product, as Mark suggested in his comments, from a pricing perspective, from a structural perspective, from a metallic tear perspective, and from a distribution perspective, to continue to target the working poor and to more emphasize the silver tier that is much easier to price to and to financially manage. So, this is a business where we’re more focused on margin than we are on membership and we will let membership float up and down with our ability to obtain mid-single digit margin. Mark, anything to add?

I think that’s right, Joe. If you look back to 2020, we were about 318,000 members at the end of the year. 2021 probably would have looked a lot more like 2020, if it wasn’t for the SEP that Joe talked about, which almost none of us in this space knew pretty much at this time last year. Backing out that SEP, 2021 would have looked a lot like 2020. Here we are in ‘22 with an outlook that’s a lot like 2020 and 2021 before the SEP, so I think this level in our portfolio is about the right level, but as Joe mentioned, we will be entirely pricing for margin not for volume.

You’re not talking about increased competition or irrational pricing here. This is more of a company-specific decision. I just want to make sure I understand is this a market issue or is it just Molina’s strategy.

Our strategy is to focus on our Medicaid footprint and to capture individuals who at times income out of Medicaid and have a marketplace product to buy from us at zero premium. That’s always been the strategy. And again, if you look back just a year ago, we’re at 300,000 members and then of course the Special Enrollment Period, added 20,000 to 40,000 members a month while coming on to the to the marketplace roles at a higher acuity. So this is a capital allocation decision. It’s a function of the SEP, it’s a function of the pandemic, and we are comfortable with this business at roughly 7% to 8% of revenue, leveraging our Medicaid footprint, and we think our capital allocation is appropriate as we’ve now repositioned the risk profile of this business.

Okay. That’s helpful. Thank you.

The next question is from Matt Borsch of BMO Capital Markets. Please go ahead.

Good morning. This is Arianna Brady on for Matt Borsch. I was wondering if you could give more detail on the expected timing of the Medicaid redetermination and how much certainty and visibility you have around the process? Thanks.

Sure. With the public health emergency now having been extended to April, given the notification periods that are required, the first members will not be re-determining, reestablishing eligibility until July 1. We estimate that given that we grew organically, approximately 750,000 members, since the beginning of a pandemic, that equates to approximately $2.9 billion of revenue. We believe that $2.9 billion of revenue will decrease by 1.3 billion to a $1.6 billion residual target and that will happen partially over 2022 and then partially over 2023. Mark, you want to go through the numbers.

Yeah, just to build on that. So that’s a 1.3 billion decline over time but that’s going to happen over a couple of years. So in my prepared remarks, I mentioned 400 million impacting our 2022 outlook, and the additional 900 million in ‘23. So our target was expectation that we would keep half of these members gain since the start of the pandemic. They’ll come off over time per the public health emergency, and the revenue impacts across the two years are as I mentioned.

Great. Thank you.

Next question is from Nathan Rich of Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for the questions. I wanted to follow up on the member attrition in marketplace. I guess I’m just trying to think about the 475,000 member decline for 2022 and how that’s balanced between member attrition, potentially due to SEP and maybe the adverse selection that you mentioned, I think, the 300,000 that you saw sign up during that period and any competitive factors that you may have seen in the in the market. And Mark, maybe could help us think about how much marketplace margins were impacted by that adverse selection dynamic in 2021, as we think about where kind of marketplace margins ended the year and the improvement that’s contemplated to get to mid-single digit margins for 2022.

Well, first on the membership and revenue question, what’s interesting and should be noted, that although membership is down by over 60%, revenue is down by less than 40% because we shifted the book to the silver tier, the silver tier has a much richer product design and therefore revenue flow. So the PMPM revenue on silver is much higher. So the operating leverage is very positive. With respect to the margin, we are very confident on a return to mid-single digit. This produced -- this business -- due to the SEP and a pandemic, this business produced a low-single digit margin loss on $3 billion of revenue in 2021. We expect now to return that to a mid-single digit margin gain on $2 billion of revenue in 2022. So, sort of a seven to eight point increase in margins, a lot of it due to the elimination of the COVID pandemic, and much of it also due to the adverse selection that the SEP produced. Mark, the numbers?

Yeah, absolutely. So if you look at our membership, as you point out, we’re down some 60% end of ‘21 versus ‘22 but as Joe mentioned, our revenues in marketplace are down 38%. Why the disconnect? Within our new membership is a very different mix of bronze versus silver. Last year, 2021, we had about 41% of our portfolio in bronze, that’ll be down to 15% in 2022. As I’m sure you know the PMPM, the revenue PMPMs are quite different between bronze and silver, they’re about 300 in bronze, and about 550 in silver on average across the portfolio. So that kind of offsets a lot of the volume decline, just on higher PMPMs on those members. Now on the margins, Joe mentioned last year it’s 86.9 MCR but we’re tracking this year to a 79, which is smack in the middle of our long-term guidance for marketplace MLR. A couple of things that bridges from last year two this year, obviously, we took significant pricing, as we looked into the New Year. Your specific question around what did SEP and COVID cost us? I think we mentioned at a high level in our prepared remarks, we carried across marketplace 430 basis points of COVID last year and 360 basis points from the SEP. So you put those two together that’s 8% of headwind that I’m not expecting in the New Year. COVID, we all have a more optimistic outlook for COVID in the New Year and SEP, the market will be behaved differently this year, the regulations are different, pure people can sign up and our distribution strategy puts us in a different place, I just don’t think we’ll have that exposure. So you get the 8% pricing coming into the New Year. You remove that headwind of COVID and SEP throw a trend assumption on there for what a normalized trend assumption could be and you have a very clear path to that high 70%, 79% MLR I’m talking about.

Thanks. Appreciate the detail.

The next question is from Stephen Baxter of Wells Fargo. Please go ahead.

Hi. Thanks for the updated view on earnings power. I guess just, first, appreciated actions were required on the exchange business. I guess, how should we think about the foregone membership there is impacting the earnings power dynamics you’ve talked about through 2021? It seems like, in aggregate you’re kind of at the same ballpark as you were before, just trying to make sure I can follow that. And then second, just sort of appreciate if you could provide a little more detail on what’s still in the $2 of COVID pressure at this point. It sounds like maybe you’re getting back $0.50 of the dollar per scores, maybe that’s half -- or excuse me a quarter of it. But we think about the balance, it sounds like you’re saying that all three businesses, I think, will be roughly a target margins. Just trying to understand where you feel like the opportunity still is. Thanks.

Sure, Stephen. You mentioned the embedded earnings power, which is not a theoretical construct, we didn’t construct it in the abstract, it’s real. And as we previously disclosed, sitting on top of our $13.50 actual results for 2021, about $6.50 was embedded earnings power. Clearly, with the significant impact of the pandemic, was something reasonable to account for. And because we’ve been so acquisitive, we thought it was also helpful to account for the growing accretion of our closed acquisition. So sitting on top of our $13.50 results in ‘21 was an additional $6.50 in embedded earnings. We have harvested $3.50 of that embedded earnings inside our $17 -- at least $17 plan for 2022. Also, as you suggested, sitting on top of the $17 is an additional $2.50 of continued embedded earnings power, due to the net effect of COVID, due to the Affinity and Cigna Texas acquisitions, which are new to the portfolio and AgeWell will add a little bit as well. So it’s a real construct, the Embedded earnings have been harvested inside the 2022 plan, and some still exists to add to future earnings growth here over time. And the net effect is COVID, we account for three things. We account for the direct cost of COVID-related care, we attempt to estimate the effect of utilization curtailment due to the pandemic, and then we account for the effects of the corridor. As we previously suggested, the corridors were significant in 2021. We had nine of them that were financially significant that has been reduced to three for 2022. So they linger on into ‘22 in the state of Washington, Ohio, and Mississippi. We have every confidence when the PAHD [phonetic] ends, they too will be eliminated. But that’s really what’s in the $2 net effective COVID for 2022 are the lingering effects of three corridor.

Thanks for color.

The next question is from Michael Hall of Morgan Stanley. Please go ahead.

Hey, thank you guys. Appreciate the color on the exchanges, I understand you’re pretty confident on double digit margin to appears but just wanted to clarify, so a large percent of these lives that were lost, basically, were very low to no margin, maybe even negative margin, so earnings impact was basically negligible. And looking forward, are you now at a place where the portfolio is fully right-sized, you’re ready to charge ahead at 5% to 8% long-term growth a year?

Yes. Just, again, some additional color, the answer is yes, that special enrollment membership ran at a very high loss ratio. In fact, the volume, it represented about 40% of the member month volume in the fourth quarter alone and 25% for the year; ran at 105% MCR in the fourth quarter and just about 100% for the full year. So that was a significant contribution to our issues this year. As Mark suggested, blend it over the entire year, it was 260 basis points of MCR pressure, so we expect that to completely reverse into next year. The business is positioned where it should have been, pre-SEP. As I said, we follow our Medicaid footprint, we sell to highly subsidized members. Now that we’ve repositioned the mix to more silver than bronze, we have every confident that this is a solid baseline, mid-single digit margins, and probably mid to low single digit growth here over the foreseeable future.

The next question is from Josh Raskin of Nephron Research. Please go ahead.

Thanks. Good morning. I’ve got a bigger picture question around where Molina is in their sort of corporate life cycle. And obviously the turnaround, Joe, since you’ve got there about four years ago, it’s been much more successful than I think anyone expected and feels mainly driven by this big margin improvement and some opportunistic M&A. But it seems as though we’re getting to a point where there are some top line headwinds, and it’s sort of ebbing and flowing. And as you look over the next few years, I’m curious about the plan to extract more value from that membership, not just the embedded earnings that you talked about, but real value over the long term. And are we at a point where scale and maybe other non-insurance-based capabilities become more important? Thanks.

It certainly is part of our strategic planning process to look at all opportunities for allocation of capital. And yes, we’re well aware of the capability builds that happen in other companies, we’re well aware of vertical integration with providers. We believe, for the foreseeable future, there is so much growth, both in the demographics, actual membership growth, particularly in the high acuity segment, that we don’t have to look far beyond our ability to take capitated risks, particularly with high acuity members, manage it really well, be a rate taker in Medicaid, grow Medicare, and use this ballast of marketplace, as this residual mechanism, that we don’t need to do much beyond that, to sustain the growth around. We never would have suggested a 13% to 15% revenue growth and 15% to 18% EPS growth by 2025, if we didn’t see enough runway to continue growing the business and in the swim lanes we’re in. So certainly in our strategic planning process, we always look at capability build, we are not going to allocate capital to vertically integrate with providers. For us, we do not think that’s a good deployment of capital. But there’s so much runway with the number of lives that will go managed and particularly the high acuity lives that we don’t need to do much beyond that.

Very helpful. Thanks.

The next question is from Justin Lake of Wolfe Research. Please go ahead.

Thanks. Good morning. A couple of questions here on the exchanges. First, Joe, going back to the third quarter, you had talked about exchange membership being flat to down. So you certainly indicated that there could be some pressure here, but the fact that flat was in the ballpark, potentially, right the 60% decline is certainly more than I think any of us expected. So I was hoping you could tell us a little bit more about what happened between the third quarter and today that so significantly changed the outlook for the exchanges, like did you cut commissions or something? Is there something structural that you did or is this just pie or turn? What can you tell?

Well, certainly all the strategies that we were executing for 2022 were in place during the third quarter, they had to be, as we’re going into open enrollment. Yes, membership is down but we withdrew in just about all of our markets the bronze product. Now, how many of those members were going to then take up a Molina-based silver product was a matter of estimation. Would I have hoped to end up with more membership if it was silver? Sure but 320,000 out of the gate is just fine. So as you take a complete product set off the shelf, except in three states where the circumstances are quite different, so basically pull it off the shelf, it was hard to know how much of that membership would have stayed in a Molina product with silver. But the good news is the members that we do have, most of them are renewal members, and 85% of them are silver. So irrespective of where we started and where we ended up, we’re ending up in a really, really good place that portends well for the production of the mid-single digit margin.

Great. And then I’d love to get your opinion on a couple of things. You talked about the impact of the Special Enrollment Period, both in margins and membership. I’d love to hear your view on like, how sticky do you think that membership is, in terms of 2022, right, if we don’t have those Special Enrollment Period, like what do you think happens with those members? Also, there’s a lot of talk about the fact that with Medicaid redetermination, we could see a lot of those members move from Medicaid over to the exchanges. So, what do you think happens with those two things specifically? And then maybe you can give us your kind of view of what you think the marketplace is going to do in terms of enrollment overall, given all those different swing factors in 2022 versus 2021? Do you think it grows or shrinks?

Sure. Well, certainly. When insurance is available to you, anytime you need it, you buy it, and it should be no surprise that the effects of the adverse selection were significant. So the question then becomes, what happens to that cohort, a lot of the uptake during the special enrollment period was bronze. So to the extent that that product was one that was affordable, and no Molina bronze product was available, they either renewed with us into silver or didn’t renew us at all. The other fact that’s really important is if the acuity of the member didn’t change, they’re still high acuity, but now we still have them. The fact that we’ve now had them for over a year means that we’ll be able to capture risk scoring more appropriately and the fact that they’re in silver means the risk score will count for more revenue. So the fact that some of these members renewed into the renewal book into 2022 is fine, the number is not very high, but now we have visibility into their acuity, we will be able to capture the risk score and at least earn a silver product. Long term, my comments are going to really extend to our strategy, which is this is a high subsidy strategy to follow our Medicaid footprint. My view of this has always been and I’m looking -- I was always looking for the right word, it’s a residual market for Medicaid. As members get part time jobs and have an income level just above Medicaid, they’re probably eligible for highly subsidized marketplace product. Our strategy has always been to target that market. Now, our execution has been less than perfect on that but that’s always been the strategy. So this is going to grow with the working poor, with the Medicaid population as people flex up and down. So we think there, as we said, an Investor Day low-single digit growth rate, mid to -- I think it’s 5% to 8%, I think is the right number. And we’re confident that that’s the way the business will grow with a yield that’s probably half of that and membership growth that’s another half of that. But it’s a product that should flex up and down with Medicaid as the Medicaid rolls move up and down.

And Justin, it is Mark. The only thing I’d add to that is I think you asked about redetermination as well. As you know we have the projections for some revenue coming off and some members through redetermination, what we don’t have is those members picked up in our marketplace product at the margins we expect to drive here that is all upside to our projections. But we have a meaningful effort out there to pick up the redetermination members in our marketplace and Medicare in some case products through cross sell, which has meaningful upside to the numbers we’ve talked about today.

Right. Thanks.

Your next question is from AJ Rice of Credit Suisse. Please go ahead.

Hi, everybody. Let me just ask you about the Medicaid business. So can you comment on what the RFP pipeline looks like, where the opportunities are, where the defending requirements might be? And specifically, maybe comment on California that’s been in the press lately with discussion about this idea with Kaiser Permanente. Do you think that’s going to be a normal RFP process, from your perspective or are there nuances of difference? And I don’t think you’ve commented on your expectations for the ‘22 average composite rating crease across your state that you’re seeing in Medicaid. And I wonder if I’ve missed that or if you would give that.

AJ, first, thanks for asking about Medicaid. It’s obviously 80% of the revenue base and we couldn’t be more pleased with the result that the Medicaid team produced in 2021 and the plan for ‘22. I mean, it’s now a total of nearly $24 billion of revenue, $23 billion of premium revenue, and it’s going to operate north of a 3% after tax margin. We continue to win new business. And yes, we do have to retain and defend our existing contracts, as you suggested. The California RFP was distributed just yesterday. We believe the Texas RFP will be distributed late in the first quarter and Mississippi is in the middle of a proposal writing effort, as we sit here today. Most of the other procurements are longer dated, but those are the three, we have a high confidence in all three of them. We run a really well run business in California, we have a great team. As you know, it’s a pretty complex state with respect to how the region’s work. And yes, I think us and the rest of the managed care industry were disappointed that Kaiser was awarded a no bid contract but it’s not as though it’s some transformational event that’s going to reshape the entire medical landscape, it’s incremental. In fact, most of the impact will be in tooth plan regions where the local health plans have major share. So, high confidence in California, high confidence in Texas. In fact, we say that the fact that the regulatory process for the Cigna acquisition went so well, that it is testimony to the high regard the state holds us in with respect to the STAR+PLUS population. With respect to new states, as you know, there’s $108 billion pipeline over four to five years. We certainly won’t chase every opportunity in every state. We are very selective as to where we think we can win evaluating a series of criteria. But our proposal writing team, our business development team, are extremely active, and to date have demonstrated a great deal of success with a Kentucky win and Nevada win and defending the Ohio contract. So the business is performing extremely well and at 80% of revenue, it needs to enhance and the outlook for growth, both organically and inorganically, is pretty robust.

Okay. Any thoughts on the rate increase for ‘22 on average?

I don’t think we’ve given a specific percentage but the rate increase was low-single digit across in Medicaid across the book. We are comfortable with its actuarial soundness. It has generally kept pace with our view of normalized medical costs trend, which also was low-single digit. So the rate environment is stable. It’s rational, the principle of actuarial soundness and the return to a prospective setting of rates based on a sound medical baseline and the removal of these corridors seems to be happening as quickly as we originally estimated.

Okay, great. Thanks a lot.

The next question is from Steven Valiquette of Barclays. Please go ahead.

Great. Thanks. Good morning, I guess two more interrelated questions on marketplace. You know, first, just with the drop off in membership by 65% from 728 to 250. As we think about the quarterly cadence around that, do you have any sense where that’ll shake out at the end of the first quarter in particular? And then is it possible that the 250 year end number, maybe, it’s just conservative around the progression around all this? And then the second question, maybe just ask it now to this kind of interrelated, with the 65% decline in membership, revenue is expected to decline 38%. As we think about the delta between those two numbers, how much of that is just driven by that shift from bronze to silver versus just premium increases, just trying to get a proxy for what drives the delta between that two, a little more color on that?

Most of it is the shift from bronze to silver, which is a very significant differential in the PMPM revenues that those products generate. But we did go for it and attain a highest single digit rate increase in that business. In terms of where we start, and where we end, I think we said we started with 323 [phonetic] and 30,000 members, after the whole Annual Enrollment period. We are projecting pre-pandemic levels of attrition, which averaged 1.5% to 2% a month. Now, if that doesn’t happen, we’ll end up with more than 250,000 members by year end. We’re also expecting not to pick up many members during Special Enrollment. As you know, the Special Enrollment Period still exists but the eligibility requirements have been significantly reduced to where only people at less than 150% of Federal Poverty Level income are eligible. So, if we – we won’t pick up SEP members, we’re confident in that and if attrition is at 1.5% to 2% a year, the 250,000 number by year end is about where we will end.

Okay, all right. Got it. Thanks.

The next question is from Scott Fidel of Stephens. Please go ahead.

Hi. Thanks. Good morning. Just interested if you can give us your initial thoughts on the 2023 MA [phonetic] advance notice? And then just walk us through your capital priorities and how you think about capital appointment at GR in terms of M&A opportunity, buybacks, etc. Thanks.

Sure. Obviously, like the rest of the industry, we were pleased with the advanced notice, second year in a row that it looked very attractive on its surface. We’ve grown our Medicare business, even though half of it is demonstrations, which likely won’t grow, the other half is his marketing business and the DSNP product that will grow. And in the fact we are growing from 142,000 to 152,000 members is significant. So we’re really happy with the growth characteristics of the business. We think two years straight of rate increases, give us a lot of room to put the right benefits in the product to rate it appropriately, and to win new business and have margins in the mid-single digit after tax territory where we’re positioned today. So we’re really bullish on our Medicare business and we have a great team that will grow that business here over the foreseeable future, as we said in our Investor Day. Capital deployment, mark?

So on the capital side, I feel really good about our dry powder. We’re starting off the year with a good cash balance at the parent. Our projected cash flow for the year is strong. And you can see the leverage metrics gives me a lot of room to raise more if I needed. On the M&A side, I’m encouraged by what we’re seeing for the year. Number of things in the hopper right now; of course, they all move at their own speed, we never make commitments about when they might happen but good line of sight on a number of targets, which I’m hoping to deploy the capital against. What Joe and I have always been adamant about, though, is share repurchases, when and where appropriate. There’s some small amount that is just not part of our normal hygiene that we would probably do during the course of the year. Not a big commitment by any means but just on an annual basis, there is some small amount we like to do. Part of that’s, though, a function of what the M&A pipeline turns out on, we’ll have to see how that plays out on the year.

The next question is from George Hill of Deutsche Bank. Please go ahead.

Hey, good morning, guys, and thanks for taking the question. I know a lot has been covered here, so I just was going to ask one about the PBM carve-ins. And I guess could you talk about, is the impact that meaningful at all? I didn’t hear you guys called out in the prepared commentary and didn’t have anything on in my notes. So maybe just kind of maybe walk through the mechanics, how does it impact the income statement? Is there any meaningful impact of the financials from the PBM carve-ins?

I think, you are, George, referring to the PBM carve outs, yes in California.

Carve out for you guys, carve in to the state.

Okay. Okay. Thank you. Just wanted to make sure we’re talking about the same thing. Sure, we have a $500 million revenue decrement, in our forecast for the year due to the carve outs, which is a full year of California and a half a year of Ohio. And obviously, there’s margin implication to that. These revenues that are taken out into a fee for service environment generally carry with them the average Medicaid margin. So think of it as the loss of the average Medicaid margins on $500 million of revenue.

Helpful. Thank you.

And the last question comes from Gary Taylor of Cowen. Please go ahead.

Hi, good morning. Most of my questions sort of touched on one way or the other, but just refining a little bit. Do you have any -- on the non-SEC exchange population, do you have any retention figures on that piece versus what it historically look like or it is too early?

Gary, want to make sure we answer your question. When you say retention, you’re talking about throughout the year our lapse rate or you’re talking about how many members renew from the prior year?

The latter.

Yeah, we do have pretty good insight at this point, a much better proportion of our starting membership this year is renewal, meaningfully better than say even last year. Part of that is with the smaller book, a number of our members rolled over with us. So we kept a much higher percentage of renewal members this year and that’s a really good thing because we know those members better, we have the history on them and that converts right into risk adjustment, and starting the year with a much better risk adjustment position and obviously being able to code those members right out of the gate. So we feel good about that higher level of renewals, and it does translate into risk adjustments.

Right. And then my second one was on the Medicare risk adjustment headwinds related to the pandemic, I thought at one point, you cited that $1, it sounds like you’re saying you’re going to recoup $0.50 of that in 2022. Does it still mean there’s another $0.50 for that and that’s maybe kind of embedded in your remaining COVID recapture or has the dollar changed or am I just [Multiple Speakers].

No. It’s Mark. Your memory is quite good. We, we used to talk about $1 of Medicare risk score in our embedded earnings. That is we just weren’t able to get out there and do the in-home assessments and the risk scoring during the pandemic the way we had historically, so we were carrying $1. Now the good news is late in the third quarter, especially in the fourth quarter, we were actually able to realize part of that. CMS extended the window for submissions from 2020, which meant we were able to get a little bit more of that into the back half of ‘21. As a result, that dollar fell to $0.50 at the end of the year and will realize that $0.50 in our guidance. So the dollar we used to talk about $0.50 you got in third and fourth quarters, the other $0.50 you’re getting in guidance at it.

Got it. Okay, thank you.

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