Molina Healthcare, Inc. Aktie

All right. Good morning, everyone, and welcome to Molina Healthcare's 2026 Investor Day. I'm Jeff Geyer, Vice President of Investor Relations for the company. Before we begin today, I would like to remind everyone that today's event is being recorded. And shortly after the event ends, the replay will be available on the Investor Relations section of our website, www.melinahealthcare.com, where you can also find a copy of the presentation materials that we'll discuss today.

Turning to the event. We'll start this morning with Joe Zubretsky, our President and Chief Executive Officer. Then following Joe's presentation, Mark Keim, our Chief Financial Officer, will speak to the company's financial profile. Then after the conclusion of the presentation, we'll have a live Q&A session with Joe and Mark, and they will be joined by Jim Woys, our Chief Operating Officer. Please note that our presentation and remarks today will include numerous forward-looking statements, including, without limitation, the forward-looking statements described on Slides 3 and 4 of the presentation and in the Form 8-K that was filed with the SEC earlier this morning.

Please take a few minutes to review the cautionary language. Our forward-looking statements are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially due to numerous known and unknown risks and uncertainties. These risks and uncertainties are discussed under the headings, Forward-Looking Statements and Risk Factors in the company's annual report on Form 10-K for the year ended December 31, 2025, which is on file with the SEC and in the company's other filings with the SEC.

Our forward-looking statements represent our judgment as of today, Friday, May 8, 2026, and -- and except as otherwise required by law, the company disclaims any obligation to update any forward-looking statements to conform the statement to actual results or changes in our expectations.

I will now turn the presentation over to Joe.

Good morning, everybody, and welcome to Molina's Investor Day 2026. Everything we do here at the company has a purpose, including picking the title of today's session. We embarked on this journey, this new management team, 8 years ago, we built durable operational, financial and strategic infrastructure. And that infrastructure created a sustainable, profitable growth model, top line and bottom line. Nothing has happened to that infrastructure.

That machine that apparatus is still in place. What's happened is fuel line has been temporarily disrupted rates, rate and trend is out of balance. And when it comes back into balance and that fuel to the business once again, the machine that we've created of sustaining profitable growth will again be an action, as you'll see here today.

Second point I'll make is stylistic. We know you have a very important responsibility to your client base and trying to assess the investment thesis we're going to outline here today. But you can only challenge an assumption if you know what they are. And so we're going to unpack everything in painstaking granular and transparent detail. So you know exactly what this management team thinks. You will not leave here wondering what we're going to do. You may challenge it, but you're not going to leave here wondering how we're going to do this.

I cover 6 topics today. First, again, our style is we're going to give you the answer upfront, instead of talking to you for 1.5 hours, wondering where this is going. We're telling you where we're going. And then every detail that Mark and I talk about for the next 1.5 hours can be in support of the answer, which we're going to give you right out of the gate. The investment thesis very simply laid out, and we're going to do a franchise retrospective. We don't celebrate success here, and that's not why we're doing this.

But when you look at what we're going to accomplish in the next 3 years, the best proof point is what did you accomplish in the past 5. And when you look at the trajectory of the business, top line growth margin sustainability, it puts a point on the art of the possible for the next 3 years. Yes, the current environment is a bit challenging right now. Everything that's happened in this environment we dealt with before. The confluence of exogenous factors is pretty extraordinary, as many of you have recognized, but we'll lay those out in how management intends to deal with them.

The next section, we're going to talk about growth. Now we're going to give equal prominence to rate recovery and margin restoration and growth, but we didn't want anybody to forget that with $42 billion of revenue, in mid-single-digit market share in Medicaid, there's plenty of growth still to occur. These are growth businesses and whether it's by M&A or whether it's by winning new contracts, or growing our existing footprint, we want to unpack the growth story for you.

And lastly, I'm often asked, how do you do it? There seems to be some differentiating factor between Molina's performance and others. We're going to talk a little bit about that. We think it's just as important to understand the investment thesis on not just what we're going to do, but how we do it. It is a differentiator. Okay, the answer, so you don't have to flip to Page 65. Here it is. Our 3-year outlook, and we're calling it a 3-year outlook for a variety of reasons. One is the longer-term outlook might actually be more attractive.

But as we say internally, 5 years, you're dreaming 1 year, you're trading, 3 years you're investing. This is a good time frame over which to look at a valid incredible investment thesis. So this is our 3-year outlook. We're going to go premium revenue from the $42 billion base we have today to $64 billion over the next 3 years. Now you may think that 15% is pretty sporty. But as we unpack that, you'll see that much of that is already in the bank. It's in contract backlog, wait a few minutes and we'll unpack that for you.

Our consolidated MCR is going to range from 91% to 92%, 91.5% at the midpoint, which is 100 basis points better than what we're achieving in 2026. That results in margins at the midpoint of 2.5% on a pretax basis, which produces $25 of earnings per share. As we unpack this for you today, you're going to notice that there's many sources of value, including rate recovery and margin restoration, but there are other sources of value many of which we are in total control of. That's everything you'll hear today from Mark and me will support $64 billion in revenue and a 15% CAGR, a 91.5% consolidated MCR a 2.5% pretax margin at the midpoint and $25 of earnings per share.

And unpacking that for you, -- you can see the growth as it has been in the past, is balanced. We're not relying on any one thing. We're not making some heroic assumption on rates. We're not projecting a huge number of contract wins. In fact, the contract wins that we're projecting are a fraction of what we have achieved in the last number of years. So if you look here at the $64 billion revenue outlook for 2029, $5 billion of it is just by being there, rates and modest growth, particularly in Medicare, embedded future revenue. It's in contract backlog. Don't forget, Georgia, Florida kids, Texas Star chip. We have huge contract backlog that's creating $6 billion of the revenue growth. It's in the bank.

Projected initiatives of 7, you'll see as we lay that out for you that the win rate that supports that is a fraction of what we've achieved over the past number of years. And lastly, our expert M&A team we believe can action enough opportunities to create $4 billion of revenue, $42 million turning to $64 million, balanced across many initiatives, $11 billion, half of it is in footprint and in the bank. That's why the 15% CAGR is realistic, it's credible. It's supportable and entirely achievable.

Now how do you get to $25 a share from $5, which is our guide for 2026. Again, very balanced. It's not all banking on the rate recovery that you see on the right side of the page. Only 25% of the $20 increase relies on that, discipline. What do you mean discipline? If we're growing the top line of $64 billion, we're going to get that same fixed cost leverage that we've harvested over the past number of years. And this plan throws off enough cash to fund the M&A, fund organic growth and to repurchase shares, $6 purely from operating discipline. .

Future revenue growth? Sure. Embedded as I said, embedded earnings projected initiatives and M&A producing another $6.75. And then, of course, as rates and trend come back into balance, both on revenue that's in backlog and on our current footprint, we're projecting $7.25 of improvement from margin recovery due to rates. Balanced going from 5% to 25%, a 70% CAGR and very balanced on how we get there. None of the assumptions that underlie this are heroic. They're all data-driven, supportable and achievable.

Well, that sounds like a very precise analysis, $25 we have, there's variability around this. There are scenarios that produce less. There are scenarios that produce more. In fact, if you want to see models come inside the shop and you'll see models that produce many different ranges of outcomes, faster growth, lower margin recovery, faster margin recovery, lower growth and faster margin recovery and faster growth. They all seem to triangulate around the $25 number.

So we came out at bottoms up and top down and this is where we landed. But what have trend moderates, what if trend accelerates, would there be variability around how fast rates respond to that, sure. We think the $25 number is a very solid baseline. It's credible believable and data supported. But if trend moderates and rate catch up faster we could easily be at 3% pretax margins in 2029, which is $30 of earnings per share. And conversely, if trend continued to accelerate or did accelerate, then maybe you come in shorter. So there's variability around it.

But we really believe that the midpoint is solid, and we wouldn't put a number on a page that we didn't think was achievable. We unpack some of the segments for you here, so you can see how the segments contribute to this outlook. On the top swim lane is our organic growth assumptions. And we've save you the effort of going back and looking at last Investor Day, we laid it out for you.

And on Medicaid, it's all about point in time. It's all about point in time, even with some attrition from the One Big Beautiful Bill, we believe we can grow organically in Medicaid at 12% to 14%. Why? Because a lot of it is in the bank. The comparison to the last time we did this is really how much is in the tank when you're presenting those. But since much of it is in backlog, the 12% to 14% organic growth in Medicaid is entirely achievable.

In Medicare, which we're calling our rejuvenation line, deemphasizing MAPD and emphasizing the duals, 10% to 14% CAGR in our 2029 outlook. It's a high-growth business, exclusive line enrollment, really advantages somebody who's in Medicare and Medicaid and the market itself is growing at 12% to 14% a year. And in Marketplace, which we call our rationalization business line, we're going to talk about optionality, rates will grow at 5%, probably more if trend continues to accelerate, but we're not projecting growth until we're sure that the risk pool has stabilized.

Once the risk pool has stabilized, it comes out of the optionality category and maybe gets back into the growth category, recalibration in Medicaid rate trend, Medicare rejuvenation, focus on the duals, marketplace rationalization, don't allocate capital until you're sure the risk pool has stabilized. Now down below, we'll give you the MCRs that balance to that 91.5% view for the full company.

Medicaid at 92% coming off of 92.9% for 2026, 90 basis point improvement. And with nearly a 90 basis point improvement in Medicaid, we're getting to $25 a share. You can see that Medicare, again, 90 to 91, 90.5% at the midpoint off of where we were before, a realistic view of the profitability of the duals business.

And of course, in marketplace, as we've often said, always said that the growth is the variable -- the fixed component is mid-single-digit margin. We'll never put a price out there in the market that does not contemplate hitting a mid- to high single-digit margin. Growth becomes the variable. That's the segment you -- now everybody always knows sort of the elephant in the room for managed care these days is tell me about trend. What is your outlook for trend over the next 3 years?

We believe trend will stabilize. Maybe it already has, but we have to wait and see in 2026, whether the second and third quarter data points support that. Why do we think it's moderated? Guys, health care costs are 21% higher today than they were 3 years ago, after 3 years of high single-digit trends. Right now, we're forecasting Medicaid trend to be 5%. Our forecast only relies on that stabilizing, not decreasing to its historical norm, which is 3% to 3.5%, but staying at 4.5% to 5%.

The post-pandemic acuity shift is behind us. We have a lower mix of lower acuity members. We're very confident that as you look ahead 3 years by looking at all these different aspects of medical cost trend, including what we consider our best-in-class management of medical costs that a 5% outlook for the next 3 years is entirely reasonable. Okay. The counter to that is, okay, so if that's what you're saying trend is going to do, what are rates going to do?

Well, we're not in control of it. But Mark is going to really dive deep into this when he gets up here. Managed Medicaid is underfunded by 300 basis points. Well, how do you know that? Because the data supports it, not macro data, data at the local level, peeling through regulatory reports of every company that's out there in a single geography, looking at reported MCRs. The market is underfunded by 300 basis points. If an actuarial pricing target, rating target is 1.5% can be a little more in some states generally 1.5%.

And the market is producing a 1.5% pretax loss. The market is 300 basis points underfunded. Actuarial soundness is fundamental to Medicaid rates. And states continue to recognize the underfunding nature of many components of their program and keep giving the market off-cycle rates, retrospective and prospective. We got a few of them in the first quarter. We've been asked about the cost baseline. When is the baseline going to be taken as true?

Well, we can't wait for the 2025 year end up in the baseline. When the 2025 year is fully baked into the cost base line we think that the flexibility that actuaries may have to project trend off a baseline that is a bit, I don't know, unclear that the ability to do that is low, when 2024 and 2025 are in the baseline, the flexibility to misforecast trend is lower. So all of these factors point to a better rate environment versus a stabilized trend over time.

That's why we're confident in the outlook we're giving you here this morning. Complicated investment thesis. Some people get really interested in the more complicated it is, the more interesting and smart you sound about something. Our investment thesis is quite simple. We take capitated risk in government-sponsored health care and manage it as well or better than everyone else. That's what we do. It's that simple. Medicaid, Medicare and Marketplace. We're a pure-play government-sponsored health care company. These programs have sustainability. We all know it's a barbelled economy.

We all know that these entitlement programs are integral to the social fabric we have in the company, not going anywhere. They'll change from time to time as they are now, but they're not going on. It's a sustainable business model. Given our market share, we can comfortably project double-digit revenue growth organically and through M&A. Now we were at 4.5%, 5% pretax margins in our historical view. And now we're sitting here in Medicaid at 1.2, 1.5 in our Florida Kids, which is a good place to start. But we're going to show you a very credible path to attractive margins, whether they ever get back to 4.5% to 5% time will tell, but the $25 per share number is supported by 2.5% pretax margins in Medicare and Medicaid and a little more in the marketplace.

The balance sheet characteristics of this business are stellar. The cash flows, the return on equity of $1 of organic growth on how much the rather meager capital requirements are and the cash flows to the parent to generate the growth, the capital deployment characteristics of managed care. Yes, it's internet insurance model, yes, they're regulatory subs. But the cash flow characteristics, the excess cash flow characteristics of this business are outstanding.

And lastly, and I'll brag about my guys toward the end here, the management team that produced the last 7 years as a result the people, the process and technology that produced the last 7 years of results are here today and they're proven. As I mentioned a few minutes ago, we're proud of what we've done. We don't celebrate it, but I present this to you to juxtapose the performance of the past against what I'm suggesting will be the performance of the future.

We have a franchise. We built a franchise. We might have 8 years ago, I consider this sort of a collage a collection of contracts. We have converted that collage into a mosaic into this apparatus, this machine that is structured to produce sustainable and profitable growth. You've seen the numbers, we're big enough to be relevant, and we're small enough to be nimble. And this is what our goal is, is to create and to sustain an iconic franchise in government-sponsored health care.

You know the numbers. I'm not going to read them to you. but the premium growth rate and at the same time, producing margins at 4.5% to 5% pretax is an incredible feat, an incredible feat. The generation of capital of $8 billion or $6 billion of capital generated internally, I won't read the numbers to you, but the tail of the tape from 2018 to our peak at 2024 is attractive. It was outstanding performance at the time. And we'll talk about where we are now but whether it's the RFP win rate, our ability to acquire companies at 20% of revenue, whatever it has been -- whatever the metric has been over the last 8 years, I think we can all agree that it produced sustainable, profitable growth over that 8-year period.

We like the portfolio. We like the diversification in the golden age of managed Medicaid, I remember this back 20 years ago, most managed Medicaid companies had 2 or 3 large contracts and a bunch of hobbies. In every 3 years, you held your breath on the RP. And that's just the way it was. And they were great companies, and they did really well. Look at the diversification we have. Now there's 42 managed care states in Medicaid, we have 20 of them. So there's room to grow.

We're in 21 states all together. Many states, even our biggest ones, don't represent more than 10% of revenue. the myth that you have to have $4 billion or $5 billion of revenue state to make money of the bucket right here. It's not true. So we like the portfolio. It doesn't matter whether it's a red state or blue state or a purple state that matters least. It doesn't matter whether it's in the middle of the country or in the East or West Coast. The portfolio is well diversified. And the recent wins have really filled in this map over the last 3 or 4 years.

The reason we're showing this again is go back to the chart I showed you earlier, balanced growth. Are you swinging for the fences on any 1 thing? No. Are you relying on a hope and a dream. No. legacy footprint with rates and organic growth, strategic initiatives, 90% win rate on new contracts, that's pretty darn good, and acquisitions, $10 billion of revenue acquired in building this company from $16 billion of revenue at low point to $42 billion today.

Keep that in mind and bear that in mind we're trying to evaluate whether we can get from $42 to $64. Now I say we don't celebrate things. I'm going to celebrate this thing a little bit. This is 10 straight years of 100 win seasons. Nobody's ever had a stretch like those. A 90% win rate, $14 billion of retained revenue in our existing states. And I'm telling you right now, these RFPs are fierce. Everybody is competing the new guys that want in and the existing guys want more. It is fiercely competitive, 90% win rate, $14 billion of revenue retained.

New RFP wins, very proud of this. Our new business development engine and the team we have built, combined with our operators, not only tell a great story, but have the results to back it up. Anybody can write an innovative RFP, you have the chance to deliver? Do you have the reference ability to deliver 80% win rate, $20 billion of new revenue over the past number of years. Keep that in mind when we get to the growth section in terms of whether we can achieve what we say we're going to achieve.

Our M&A history. Mark Menkowski, the Head of our M&A shop is here, string appears right across the board, all shapes and sizes generally either orphaned assets or things that might have been in mild forms of distress. We've purchased these things at just slightly more than 20% of revenue. Bear in mind that half of that is regulatory capital. So very little goodwill deployed and hugely accretive. That's why we developed the embedded earnings concept, embedded earnings in our vocabulary is backlog revenues.

It's not future performance, it's backlog revenue, revenue that has yet to hit the top line in our P&L, but it's waiting to manifest itself. Mark will cover embedded earnings in a few moments when he gets up here. But this is the one of the main catalysts for our growth rate has been our expert ability to buy things at reasonable values and to get them from underperforming assets, open up the [indiscernible] playbook and these guys at it. And all of a sudden, you're at target margins, hugely accretive.

Well, you know this story, we had a crescendo of $2.65 a share in 2024. And that run was a 14% CAGR, while we're growing the top line at 19% or in the same period of time, 4.5% pretax margins on average over that period of time. Now will the market return to that former glory, I don't know, and we're not forecasting in 3 years, it will, but it could. It could. So what happened? Right side of the page starting in mid-2025. Remember, we said 2025 was a tale of 2 halves. First half, we earned over $11 a share.

Second half trend in rate became tremendously imbalanced, which leads us to where we are today with a $5 guide, but line of sight to a $25 picture here by 2029, that leads us to a discussion of the current environment. Yes, it is a challenging environment, okay? Supporting the chart I just showed you where the earnings are today in terms of the margin compression that this company has experienced, here it is by segment. 4.7% pretax margin historically in Medicaid softened, particularly in the second half of '25, and now we sit here, not a negative 1.5%, but a positive 1.2%. And if you factor out Florida Kids, it's 1.5%, in the trough of this Medicaid rate cycle, we're at 1.5% pretax margins. That's a great jumping off point to get to where we need to go. That is a great jumping off point, but it has been a challenging environment. .

Medicare. Same story, different reasons. Sure, there's been margin pressure in Medicare generally. We know that, whether it's V-28 risk adjustment, stars the whole thing. But in that period of time, the Medicare book that we inherited with 2 acquisitions was not performing, which is why we decided to retire that product going into 2027. And in Marketplace, follow the line of business year-to-year, sometimes it's volatile within the year. But we're projecting a 1.7% pretax margin this year.

Last year was a pretty bad year from a probability perspective. Over time, that business has produced, on average, 3% margins over an 8-year period. The problem is, it can be negative 10% and positive 10%, and that's no way to forecast the business. But right now, we're projecting low single-digit margins for 2020. But that's the margin pressure that we're working our way out of right now. And the story on margin restoration is somewhat different for each line of business, Mark will impact that for you in a few minutes.

And this is what I was saying before. If you then drill down on Medicaid pressure, the market is underfunded by 300 basis points. That is almost an irrefutable fact. Public companies have reported where they are in managed Medicaid and the statutory, the regulatory reports are very clear where the market is. Those same reports actually support the fact that we're operating 300 to 400 basis points better than the market. At least in 2025, we were, we posted a 2.8% pretax margin last year when the market was at negative 1.5%, half of which was MCR performance. The other half was G&A.

Because how do you have a 5.5% G&A ratio in Medicaid because we do. There's no hocus focus there. There's no magic, there's no alchemy. We are very disciplined on our operating costs, and Medicaid is operating at a 5.5% G&A ratio, which is sort of unheard of in the managed Medicaid industry. Industry is underfunded by 300, we're outperforming by 400. Keep that in mind as we start to paint the picture of margin restoration here over the next number of years.

We could spent 2 hours on this page, but you know all this. Most of you have written about this, you have people in your shop to follow the stuff as well as we do in terms of the Washington seeing what happens at the state level. But you can just go across the page. There are many challenges, regulatory challenges to the profitability and growth of these programs. Sure.

And we all know what they are. They've been well chronicled and written about by your good selves and we've talked about them on our earnings calls. But there's also some catalysts, particularly the actuarial soundness of Medicaid rates, duals, catalysts, CMS regulatory regime, exclusive online enrollment. I want a dual member who has both Medicare and Medicaid. I want those 2 products connected at the same parent company MCO. Somebody has a deep and wide Medicaid footprint. We'll talk about this in a few minutes. So there's as many catalysts as there are challenges, but we're navigating through all this.

There's not 1 topic on this page, that I and that team has not dealt with over the past 20 years, we've been doing this 25, 30, 35 to 40. Not one topic. The fact that many of them are sort of here at the same time, is a bit challenging, but we're working our way through it. And we have good line of sight to the impact of many of these issues. We have ways to work around them. And certainly, the industry is strongly advocating against some of the things that are not well thought out that made great policy headlines legislation that comes out of a committee without any operational content.

Many of these things are not operationally well thought out when they're presented as policy alternatives, but we know what they are. We're dealing with all of them. You've heard the story before. The preponderance of them is quite extraordinary at this 1 single point in time. And then, of course, the One Big Beautiful Bill. Now we're going to -- when we get to the growth section, show you a Medicaid membership attrition number that's 2% to 3% annually, decline, 2% to 3% decline annually.

And we started descending order, the work requirements and everybody's got their own best number and what's going to happen there with the expansion population, semi-aneverification , same thing. Program integrity, states are just getting more disciplined about ex parte in and procedural out. And then, of course, in just a handful of states, the imrigant enrollment population will add some pressure.

But all of these combined, we're looking at a 2% to 3% decline and Medicaid membership over the next 3 years annually but with only a minor acuity shift. Mark will take you through that on why we believe that's true. But yes, this is another -- this is get a lot of headlines these days. What's the One Big Beautiful Bill going to do to manage Medicaid. It is completely contemplated in our outlook. And the headline is 2% to 3% membership decline each year for the next 3.

These are growth businesses. They said, "Well, how can a business that was $92 million in members that's going to 70? Well, it's rebaseline. The barbell economy isn't going anywhere. Entitlement programs are still in place. And by the way, with only 5% or 6% national market share, 10% to 12% in service in state. There's plenty of room to grow. And in only 21 states out of 42 that have managed Medicaid, plenty of room to grow. These are growth businesses, which is why we're forecasting growing from $42 billion to $64 billion to 15% CAGR in the next 3 years.

As our style has always been, we're not just going to tell you what we're going to do. We're going to show you how we're going to do it. Medicaid. 12% to 14% organic growth. 2% in the footprint. That footprint growth has been about 5%, 6% over the last number of years, but there's 2% to 3% attrition assumption that's going to offset what happens in rates. Rates will grow 4% to 5%. That's in our forecast. Volume will come off by 2% to 3%. So the footprint is going to grow less dramatically and not contribute as much as it has in the past because of that membership attrition.

Embedding revenue, it's there. All we have to do is get those contracts out of whatever administrative procedures they're in, get them effectuated and implemented and the 6% embedded revenue growth becomes -- it is real, it becomes top line growth and projected initiatives, winning RFP states $6 billion adds 4% to 6%, and we'll show you how we get to $6 billion on the next page.

So by contract inception year, not when the RFP comes out, not when we're working on it, but by revenue inception year or contract inception year. There's $90 billion that has the ability to end up in someone's P&L over the next 3 years. 10 of it in 27, 25 and 55 in 2029, a little back-end loaded. That's okay. $90 billion, and you can see the states right there, we have our eyes on all of these. $90 billion of contract value, and of course, if 4 or 5 players win, your market share is going to be about 20%, maybe 25%, but 20% is a conservative number, which means the revenue opportunity is $18 billion.

We're projecting a 1/3 -- a 33% win rate. Look at the note next to it. The historical win rate has been 80%. 33% a batting average. We have free-throw percentage is our win rate. 80% win rate, we're only projecting 33, which is $6 billion of growth. Now nothing is to lay up in this business. It's highly competitive. We look at the track record. When I said, remember the track record, remember the track record and judge for yourself whether this is reasonable, conservative or aggressive. I know what I think.

Proofpoint. For some reason, I had to talk a lot about this. I get it, $6 billion of revenue and people wanted to understand it. It's been a lot of chatter in the market about it. But the proof point most recent proof point on our skill in this area is Florida CMS will call it, Florida Kids. The contract right now is in full implementation mode. $6 billion of revenue at full run rate. We were able to tell a story not just a story, but a referenceable story, supported by facts, supported by real infrastructure of what we do nationally.

And if you're not good at high acuity and you're not good at BH, you can't service this contract. We're good at both. If you don't want high acuity business, you shouldn't be in Medicaid, we seek high acuity businesses. These are very complex cases, and this is what we do best. So this $6 billion program we're highly confident this gets to target margins. Mark will take you through what's an embedded earnings related to this contract. But the latest proof point on all of this is something that we have only learned in the past, I think, 45 days.

And that is how is the business performing today? I mean it's a live contract. How do you know you can get the target margins if you don't know what you're inheriting? Well, we know now. because we have cost and claim information to the state, and we've got the entire rating regime. We got it all laid out. This business is producing mid- to low single-digit pretax margins today, which gives us confidence that we can hold on to that over time.

So in our view, this is a winner. Testimony to the RFP team, testimony to the operational team are clinical people who are creating best-in-class infrastructure for handling these very complex medical and behavioral cases. It's all there. We can't wait for this to incept in the fourth quarter of this year. And we look forward to at least breaking even on it in full year 1 and getting it to target margin in year 2.

Proofpoint on our ability to win. The Medicare duals organic growth at 10% to 14%, 12% is just by being there. Now first job, first job was converting the MMPs I don't know if you're familiar with these MMP, these demonstrations, but we had 80,000 members and a little over $2 billion of revenue in these demonstrations. Well, the demonstrations were sunset at the end of 2025. Okay. Then you just inherited the new program? No. We had to bid on, those went to RFP in Illinois, Michigan and Ohio.

And we ran the table, we sweat them. first job, convert your MMP 80,000 members and $2 billion of revenue to a commercial-based HIDE and FIDE product, highly competitive, we won. That was job number one. Job #2 is now make sure it's competitive. We believe that this is a high-growth business. We believe the footprint can grow at 4% and trended rates might be 7 or 8, give you a 12% head start on the current footprint. The MAPD Exit is fully accounted for in this model and projected initiatives, which is a slight increase to market share all produces a 10% to 14% growth rate.

I said, nothing is easy, but when you start to unpack this and look at the detail behind it, it's data supported and we believe, entirely achievable. 10% to 14%, 12% at the midpoint growth rate in our Medicare duals business, even after accounting for the exit of MAPD, which is about $1 billion, $1.2 billion of revenue. And here's the reason. Exclusively aligned enrollment is a catalyst. It's not a panacea. It's not a silver bullet, it's a catalyst. The rules, both the state level and at the CMS level favor a company that's got a D-SNP product from the state, a D-SNP license from the state through a SMAC agreement and a Medicaid footprint for those 2 products to come together in a very integrated way to offer a seamless benefit to a dual eligible.

If you look at our market share today, with 16% service area market share, our duals market share is only 6%. We think that can go to 10% to 16% over a period of time and get to that same level now. All boats don't rise to the same level, but that's sort of a model. There's no reason why it shouldn't. But we're only relying on a 1% increase in market share to support our growth thesis, not 10, not 6 stages of 1% going from 6% market share to 7%. You can do the math if you think that's conservative. What happens if it's 8, 9 or 10, easy math matters.

Very conservative, 1% increase in market share in our footprint because of how we're going to distribute how we're going to increase our Stars performance, our product design, and the fact that we do this really well, and we are just credentialed by 3 states saying, you're 1 of the best of doing this. Increased tools market share, 1% when the market would suggest that there could be multiples of that.

Next, optionality in the marketplace. I got to see the risk pool stabilize. Mark would agree with that. We're aligned on this. The risk pool is still a little unstable with market movements, regulatory changes, subsidies in, subsidies out, SAPN/SCPL. And when members come in and out of this and you don't have a good line of sight over the duration of membership and what risk adjustment will look like, it makes it a little bit of a perilous pace. Other companies have done better than we have in this business, and I applaud them for it.

Right now, we're holding this out as an option. In our growth model, it is merely an option. And when we see line of sight, both from a competitive perspective and a regulatory perspective, the risk pool might have stabilized, we can go back into it from a growth perspective. We talked about M&A before. The track record of $10 billion of revenue has been outstanding. We've purchased our properties for a little over 20% of revenue, which means we've deployed very little goodwill value to acquiring these properties and we've got them to target margins.

As testimony to the fact that when we buy a property, it goes into embedded earnings and then it comes out of a better earnings actually into the EPS run rate. It's not theory, it's actual. It actually happens. Right now, there's a lot of distressed property in the market. As you can imagine, with the margin compression that's happened in the industry, we believe that valuations have also reset. That's pretty obvious. Whether we're willing to pay 20%, 22% of revenue anymore, I don't know. I'm kind of thinking book value, but there's a lot of distressed property in the market, many of which we've walked away from because there's a difference between distressed and broken.

We like distress, we don't like broken. And we can get these things to target margin. So the M&A pipeline, the M&A story and the pipeline is a very important part of the story and want to have a high degree of confidence in. And Mark Menkowski here and his team do a great job sourcing proprietary deals, moving them along through the process and executing with operational and financial excellence.

A key part of the story. Now sometimes, I've asked like something differentiates Molina, I would agree something differentiates us. The results in the past have suggested that's true. Everybody brags about their team and their business. But at the end of the day, show me the numbers, and I'll tell you whether I actually believe you're better than the other guys. The competition is fierce in this business. Our competitors are highly respected, but there is something about what we do here at Molina that is differentiating.

So I'm going to talk a little bit about how we execute the fundamentals of managed care, our operating platforms, the playbook, the Molina manifesto and most about my team a little bit at the end. In 2018, in January of 2018, 8 weeks into the business, 8 weeks into the company, I was presenting at a big investor conference, and this wheel end up. Real hasn't changed in 8 years, no. The fundamentals of managed care, a blocking and tackling and executing on the fundamentals will never change. There's different ways to come out of it. Using technology more effectively in the future using AI, but the fundamentals are the fundamentals. If you can't do this well, everybody gets the same rate. Everybody's got the same corridors with 25% market share, everybody has got the same cross-section of membership.

So how does 1 company outperform in the MCR. There's no other reason. If everything else is at par, this is a differentiator. And you go right around the wheel on how it's done. And whether it's utilization management, care manage the clinical side of it, whether it's just expert payment integrity, making sure you're paying claims exactly and according to the contract, whatever it is, we do it really, really well. And a lot has been written about behavior just as a case study of if you look at the components of trend inflection here over the last couple of years, what are you doing different?

Well, we're always doing something different. We're not perfect. You're always diving into areas that are performing hotter than they have in history and drilling down into them sure what's going on. And I'm not going to take you through everything that's going on behavioral, but we have an expert behavioral clinical team an excellent behavioral operational team. One of the reasons why we're so confident in the Florida Kids is because of this. 20% of our Medicaid members have a behavioral condition. That cohort trends at 9% a year.

The behavioral side of that cohort trends at 16% a year. You got to be good at this. And whether it's SMI or OUD, whatever it is, we all know that the range of diagnosis and behavioral is a lot wider and more variant than it is in medical and the treatment protocols are very much wider and more flexible and more judgmental. You got to be good at this. And whether it's this or LTSS or high-cost drugs, this is the area of focus. It's that wheel of managed care, knowing where the next point of trend pressure is and getting on it and drilling into it.

This is a bigger deal than it may sound. Our operating platforms are uniform. After all your acquisitions, you have 1 operating platform. Yes. We have 1 version of our claim and administrative platform. We have 14 instances of it, but 1 version. What does that mean? It means when you go to plug something into it, you don't have to figure it out 21x. We've had the discipline through our acquisitive period to synergize and integrate everything we've done. One way of doing business. One administrative platform, all acquisitions fully integrated. All our stuff is in the cloud, no other companies may save that, too. Data center is gone, everything is in the cloud.

From a security perspective, from a perspective of uptime, all those things that we worry about from an operational perspective, work well at Molina. Now we're good at this. Our G&A ratios not only reflect that we're efficient, but our operational ratios and metrics are proved that were effective. And we still think that, over time, 3 years with $22 billion of revenue coming on board that we can actually drive 50 basis points more of productivity and fixed cost leverage into our G&A ratio.

As Mark will show you, that 6.5% coming down to just below 6% without skipping a beat on making sure we keep the trains running, keep our customers happy, a great member experience. This doesn't get talked about a lot, but the way we approach this is with a great deal of discipline, 1 platform across the entire company, which also gives you great insight into your claims and cost data. That shouldn't be under that should be underscored. I mean, we just spent a lot of time doing this. We just put this in here because we know it's top of mind.

We know what other companies have talked about it. We don't have the time to drill down on this today. But not only are we not ignoring it, we're fully immersed in an AI model that will first 3 phases. One, do managed care fundamentals more efficiently. Second phase, reimagine the fundamentals of managed care. And the third phase, whether the industry ever gets or not, can you imagine the way managed care is done, period.

But first and foremost is can I get marginal cost savings in the next couple of years before I reimagine it and before we throw the whole model up in the air and say, managed care is just different today. That's a few many years out. We believe that in the next number of years, we can get another 100 to 150 basis points in our cost ratios, probably mostly in G&A, but some in our MCR over the next number of years. It's not in our forecast. I want to be very clear.

We have 50 basis points in our forecast that comes from mostly fixed cost leverage on G&A. We think there's another $100 million to $150 million out there that is not in the forecast. But we're on this. We have an intense management team and platform that is working this hard, and we know -- we believe and know that this will add value over the next couple of years, that's not contemplated in our forecast.

I've been asked about this a lot. Some people have actually asked to see it. It's hermetically sealed that's under glass, under pressure. We don't let it out. Nothing in it is going to surprise you. Nothing in it's going to surprise you at all. You're going to read and say, "Oh, decision rights." That sounds pretty basic Yes. But is it clear? There's nothing about our playbook that's magic. Our religious and our obsession with it is what's different. Many operational models, management processes or designs can work as long as there's religious adherence to an 18,500 people are doing the same thing for the same reason. That's the difference.

We tell people to come in here. You come here, you play in Alabama football. You want a fling and bling to LSU. You want to run the Wishbone go to Oklahoma here, you play in Alabama football. This is the way we do it. This is the way information flows. This is the way we make decisions. We run flat and we run hard. We don't have headquarters generals. We have field generals. Spans of control are very flat and very wide. It's a way of doing things individually, none of which will shock you or surprise you or astonish you but the collection of which creates a culture of performance that we believe is unparalleled.

And lastly, I'll brag about my team. The statement at the top of the page was a big tongue in cheek, but it actually is a cultural statement. I didn't put an org chart here, I have names. I mean I'm very fond of our team. I spent tons of time with them, not just these guys here, but dozens, not hundreds and hundreds of people. They're really good at what they do. We have subject matter experts, but it's the way they discharge their responsibilities as differentiating. We have a collection of individuals, battle hard and veterans and young up and comers who are innovative and creative.

It's an incredible collection of talent. And we've created a culture of performance. Everybody who's in our company, the senior leadership team knows that the name on the front of the Jersey means more than a name on the back. They'll do anything to produce the results as a commitment to our constituents, and that's what's differentiating. They leave, they don't just manage. They put team before self, and they have high integrity character. And I'm very fond to them, and you've gotten to know many of them over the years. That's how we do it.

That's our story. I gave you the outlook for the next 3 years. We wound through the growth model. The operational excellence is not what we do but how we do it. And speaking of team, with that, I'm going to turn it over to one of my best teammates here, someone you know and have come to deal with over time.

Mark Keim, who's going to take you through our compelling financial profile. Thanks for listening, guys.

Great. Good morning, and it's good to see so many familiar faces out here. Let's get to the numbers. We're going to go through 6 topics, just like Joe did this morning. First and foremost, what's top of mind for all of you is margin recovery. We'll spend a lot of time on that. That's going to lead neatly into 2026 guidance, 2027 outlook. We'll double click a little bit more on 2029, the numbers that Joe laid out. And then lastly, capital foundation. How does the whole thing come together? So let's get into it.

Margin recovery, we're coming off 2 years of really high trend. It's not news. The chart shows it well. historically 3% to 4% average, 6.5% in 2024, 7.5% in 2025. We've broken those high trends into 2 components. One component is the acuity shift that we've talked a lot about. The other 1 is core. Think of core as the underlying sustaining run rate of trend whereas the acuity mix shift is just that, it's a mix shift of members. I'll talk more about the acuity mix shift in a moment. But let's talk about the core. What's driving core. We're at 5%. Is that the new normal? Maybe. What's in there?

High-cost drugs that are a big part of it, anti-inflammatories, HIV, diabetes, GLP-1s and on it goes. Behavioral health services, Joe talked about this. What's in BH? We think of it in 2 categories: substance use disorder, SUD, and SMI or mental health conditions. Definitely utilization running high, rates running high. Prevalence of chronic and high-cost conditions, yes, more complex visits and procedures, yes. Now suddenly, is something we're starting to see a little bit more of to take note of is on professional office visits.

The mix of Level 1 through Level 5 visits. We're seeing a few more 4s and 5s than we used to. Now it's subtle, but something to keep our eyes on provider upcoding, Joe mentioned across 3 years, medical cost trend is up 20%. The baseline is up 20% from where it used to be. That's an inflection. So a few words about the acuity shift. I think this is a constructive way to think about it. April 2023 is when redetermination started. That's 3 years ago now, time flies, right?

April of 2023, there were 95 million people in Medicaid, 95 million people in Medicaid. 3 years later now, there are $77 million, Medicaid has come down 20% across 3 years. Now within that, at Molina, we track a metric we call low acuity users. That mix since redetermination is down 5%. So the people with really low costs are down as a mix, 5% within our book. What's interesting is, yes, 5% since redetermination, but look, since we've been tracking it, it's down meaningfully. This is the lowest we've ever seen it today. So that sets you up well then for the medical cost at the bottom of the page.

We're up 20%. But lay that out against the mix of low acuity members as the total population came down, you can see that sure, there's core costs driving trend, but that acuity shift drove a meaningful part of it. Those low users came out. So we're up 20%. About 5% of that trend is that mix shift.

So it's an interesting way to see it. It gives Joe and I a lot of comfort that, one, you're not going to see another decline in membership like this. But even if you saw a subtle one, the bolus of low users, the low-acuity folks, the bolus of them are out of the system. So you might lose some value on volume. I don't expect you'll lose it on margin. It's an important point for where we are. So without a doubt, trend has been underfunded. We all know that.

Rates are not where they need to be. Rate advocacy is a big deal here at Molina. We kind of take 3 approaches on advocacy. Our planned presidents are kind of the local face of the market with the local regulator. Our government affairs team is really more on the national policy side and the real engine of its are actuaries. The state health plan associations are a really important tool. Why? Underfunding of rates is a market problem, not a Molina problem.

So working with the other health plans in a given state, the association, we can attack that as a team. Finally, increased use of managed care initiatives, there have been states that, for 1 reason or another, have turned off with Joe called the Wheel of managed care, certain parts of the wheel of managed care. When they start to see the trend in the data that we give them, they're quite anxious to let us turn back things like utilization management for behavioral health or high-cost drugs, whatever it might be. That's an important part of advocacy as well.

So on the actuarial review, sharing data is the ultimate tool with the actuaries. We do that really well, sharing general trends, but also discrete items, what's called rate cells. Certain things are discretely rated for pharmacy, BH, sharing rate cells for discrete items to make sure that discrete items are properly funded. I wanted to take a moment just to talk about how the actuarial process works because I think this is helpful as you all think about what might be the trough year and why rates are probably going to recover here.

The way the actuarial process works, is, for example, 2026, the rates that we get for 2026 were set on baseline 2024 data. Why is it a 2-year lag. Well, the concept from the actuaries is they want to see fully developed baseline data. So they don't want to see any more estimation, full run out, so there's no question about what the baseline data is. Okay, so they want to go back to 2024. How the '26 rates come about is they take that fully developed 2024, they estimate what trend might have been in '25 and they project what might trend be in 2026? That gets us to the rates. The problem with that is you're using rock solid, indisputable baseline but you got a lot of room for the estimate of those 2 years of trend.

Now when we look at 2027, we're optimistic that things are going to be a little bit better. In 2024, when they looked at the baseline 2024 for '26 rates, the 2024 calendar year, but what a lot of folks don't realize is that 2024 calendar year actually straddled a bunch of fiscal years, many states run on fiscal years that are different than calendar years. That 2024 base was for almost half of our revenue straddling into '23 and '24. We remember '24 and '25 with a big inflection. If the '24 base rate really included a lot of '23, you're not capturing a lot of the inflection. When we go to '27, we'll be using '25 jump-off point. Even if it's straddling into 2024 a little bit, that's a very powerful place to be because that now represents so much of those 2 years of big inflection we saw.

So we're optimistic that '26 is the trough year for a variety of reasons, but that's an important one on the actuarial side. So here's just a quick word about how the actuaries actually rate and put rates into the market. As you can see here's an example of market. The market runs at 94%. Molina runs at a 92%. It's an example, but it's indicative of typically, we're about 200 basis points better on the MCR line. That 94% is where rates are set, not Molina's 92%. That 94% is made up of Molina's 92% but it's also the average of plans 2, 3 and 4. Rates are set at the market average. So the question I get all the time is, sure, Molina is best-in-class on the MCR 200 basis points better.

But is that sustainable? As long as Molina can continue to outperform the market average, of course, it's sustainable. Rates are set at the average, we outperform the average. It's sustainable. And you've seen that. For the last 2, 3, 4 years, a very sustainable advantage to the market. It's an important point. Now pushback is, well, wait a minute, can't you cut corners to do that. Maybe you're doing something you shouldn't be doing. And that's really why you're outperforming.

The last bullet on the page talks a little bit about quality requirements. Every state publishes a set of metrics, quality standards that you have to perform against. At the extreme, if you fall short, you'll lose your contract. But more suddenly, there's either penalties or what's called quality withholds. That if you don't hit your metrics, you'll lose revenue. Many states have roughly 2% of quality withholds. If you don't hit your metrics, you don't get 2% of your revenue.

Well, in a business that has whispered thin margins like Medicaid does. If you're not booking 2% of your revenue, you have a problem. Molina has been really good about getting the vast majority of our quality withholds, put it another way, we couldn't put up these numbers if we didn't. So we're delivering on our quality metrics, and we're performing at the MCRs. Rates are set at the total market, not Molina specific, important points.

So Joe showed a version of this slide this morning. The punchline is we believe the markets Molina footprint markets are underfunded by about 300 basis points. Our analysis through stat filings, discussions and reported GAAP numbers show us the markets in our markets are running about 1.5% pretax loss, actuarial targets 1.5, they're 300 basis points underfunded. Molina, on the other hand, our guidance for 2026 is 1.2%.

Joe laid out a target of 2.5% for the whole company as well as Medicaid. How does Medicaid get to 2.5? Well, we're jumping off 1.2, really 1.5 without Florida CMS, but put that aside, we're jumping off 1.2. We're going to improve our G&A ratio by 50 bps over the coming 3 years. I'm going to talk more about that. So there's 50 bps of recovery right there. If we want to get to 2.5, we just need 90 basis points across 3 years. Market needs 300. We need 90. We need 1/3 of what the market needs.

So I like our odds in that situation. It's something I think that bodes really well for the company. If Molina gets the 90 bps, we hit our target margin. The market gets the same 90 bps. Well, wait a minute, the market's losing $1.5 billion, they get 90, they're still at 40, 50 basis points pretax loss. So we're hitting our numbers. 3 years from now, the market is still sustaining losses. Tough to see how that plays out. So it bodes well for this set of numbers, should the market get the full 300, of course, they should. Will they tough to say? Are the odds good, we'll get our 90? I think so on that logic.

So roll up the whole company segment margins. Joe gave you a taste of this this morning. Medicaid, I just walked you through it. 92.9% goes down to 92%. That's the 90 bps we just talked about. In addition to the 90 bps, you get the $50 million of G&A. So look at the pretax margin, 1.2% goes to 2.5%, pretty straightforward math. Medicare, it's about 15% of the portfolio. Look at the pretax margin, a loss of $1.7 billion goes to 2.5 across 3 years.

Well, don't forget, SMAC in the middle of that is the MAPD program. MAPD, we're losing $1 a share this year. We're going to exit that program at the end of the year. Once that comes out, that 1.7% loss goes to breakeven. So you're almost halfway there just on exiting that program. Now the duals which is the remainder of Medicare, $5 billion of revenue today. There are breakeven. We're very confident with our Stars profile and a number of our initiatives, we can get that up to 2.5. 2.5 would be a fraction of how these things have historically run.

So we feel good about that. Marketplace, 5% of our book. We target mid-single-digit pretax margins on that. On the consolidated line, 92.6 drops 110 basis points. You can see the whole company is going from 0.8 to 2.5 target. Hopefully, that's a pretty good walk of how we're thinking about margins.

Ient itself really well to jump into '26, '27 and '29. All right, '26 guidance, middle column was what we reported in the first quarter. Right-hand column is guidance. Now when we gave guidance back in February, we said expect about 2/3 of the full year earnings in the first half. We're on track to do that. $2.35 in the first quarter. Full year guidance unchanged at 5%, very front-end loaded. Won the rate cycle, two, Florida CMS. There's a bunch of reasons for that, but we're right on track.

Look at the MCR, it's 91.1% on a consolidated basis in the first quarter, we've left ourselves a lot of room for the back half of the year. 91.1% for the first quarter, 92.6% across the full year, a lot of room for the back half of the year. Adjusted G&A, we ran a little bit higher in 6.9% in the first quarter, full year guidance unchanged, just timing.

We've got a number of expenditures and projects that make that a little bit lumpy. We're right on track. Some of the other highlights from the quarter. All of our segments did better than we thought a little bit. We reaffirm $5 for the full year. We said that before we revisit guidance, we want to see first and second quarters to really have a firm handle on the jumping off point. A lot of volatility would trend transitioning Medicare products; and finally, marketplace always volatile. So we want to see 2 quarters before we revisit $5, but certainly a good setup for the first quarter.

In Medicaid, same-store attrition, we took from 2% up to 6% for the full year. 2 quarters in a row, we saw a little more attrition than we were expecting about 1.5% per quarter, more to the point, 3 states, in particular, drove most of the decline, California, Illinois and New York. So we thought it was prudent to recognize that's probably going to play out through the rest of the year. Full year rates at 4 unchanged full year trend at 5, unchanged.

Medicare Marketplace, we talked about transitioning MMPs, year-end Marketplace membership. In the first quarter, we were at 305,000 members. That's half of what we ended last year with a meaningful and purposeful decline in membership on marketplace given the volatility. I expect that will shift to about 250 by the end of the year. That's normal seasonality. We've got about 70% renewal in the book today.

Embedded earnings. Well, if you're going to take down target margins for the company, you're going to take down embedded earnings. Target margin used to be 4% to 5%, 4.5% at the midpoint. We're now 2.5%. So commensurately, embedded earnings. We're going to go rebaseline those as well. When we talk about embedded earnings, 2 categories. There's what's in our current revenue. The revenue is there, the earnings aren't and future revenue, the revenue is not in our P&L yet, that will be next year or the year after and then you get the earnings as well.

So in current revenue, a few things are in there already. The Medicare duals wins, remember, they're breakeven, I got the revenue. I don't have the earnings. ConnectiCare Marketplace got the revenue, don't have the earnings yet breakeven and then the Florida CMS, we've got about $1.50 drag from all the implementation we're doing to get ready for revenue that incepts fourth quarter of this year and the rest next year. You roll those 3 together, that's $275 million, at 2.5% target margin.

Future revenue, about $6 billion. We talked about this this morning, a bunch of things in there. Joe mentioned Florida CMS, Georgia, Texas, going the other way, a loss of revenue exiting MAPD, that's about $1.2 billion loss, roll all that up into the $6 billion of future revenue. The EPS equivalent on all of that is 4.25. Now the last component, the $2 is at the bottom of the page, we're going to drive 14% revenue growth next year. We've had really good discipline about keeping fixed costs fixed.

So in the presence of 14% revenue growth, if I can keep fixed costs fixed, we drive a lot of value on the G&A line. That 14% revenue growth gives me 20 to 30 bps advantage on the G&A ratio. That 20 to 30 bps is worth $2 a share EPS. So embedded earnings down $9, down a little from where we were before. Really important point for all of you within the $9, 450 is known to come out next year. The items in blue help you to see that.

Florida CMS implementation costs. That's the drag we have this year, by definition, goes away next year. MAPD exit, we're losing $1 on the MAPD this year. Next year, the revenue goes away, but so is the dollar loss. You get that. And then finally, -- the rest is math, $2 as long as we keep fixed costs fixed, which we do $2 of EPS. So you roll that through, $450 of the $9 is known to come out next year.

Maybe some of the rest does too, not ready to speculate on that yet, but a really important point on the embedded earnings. Sets us well for '27. Premium outlook. We're not going to give you guidance for 2027, how would I do that in May, but the building blocks are pretty clear and apparent. Let's lay them out, and I think it will help you with your models. If we're jumping off $42 billion, we get $1.5 billion just on rates and membership.

Embedded Future revenue total is $6 million you get 4.5% next year. Joe rattled through these this morning. We're working on a few other things, not really ready to make any announcements, but I think it's important to have a placeholder for other initiatives. You roll that up, you've got visibility to 14% growth. On the EPS side, once again, this is not guidance. These are building blocks in search your own assumptions on top of these. Jumping off $5. We talked about 450 of the embedded earnings coming out known to be harvested next year Florida CMS, the MAPD the operating leverage.

There's a placeholder in here for other embedded earnings, not ready to populate that yet, but there's got to be something there. And that lastly, legacy Medicaid MCR. If we believe and we do that the rates are underfunded, and rates need to catch up with trend. How much is that going to be next year? I can't give you a view yet. Academically, we would think it's something. You have to put your own assumption in there, but that's a very helpful mechanic to drive your models on how you might think of next year.

2029, I'll repeat a lot of what Joe said here just because hearing it a second time may be helpful, but I'll also double-click on a few things. The revenue target, Joe went through this. We grew 50% in 3 years, 15% CAGR. We jump off 42, current footprint, rates membership, embedded future revenue, the 4 things Joe talked about this morning. The projected initiatives of 7 that Joe walked you through; and finally, the M&A of $4 billion. What I like about this, 50% of this, Joe said in the bank, 50% of this is known. Sure. 15% is a lot of growth. By the way, I think it's the same growth we exhibited for the last 7 years.

Half of it's in the bank, half of its known. Now we got to go execute the rest, but our track record is pretty good on that. We'll talk more about that in a minute. So you know most of the numbers. The projected initiatives, let me remind you just in the $7 billion what Joe said this morning. There's the $7 billion, where does it come from? Seven is 6 of RFP wins and 1 of duals market share. The 6 RFP wins comes out of an $18 billion opportunity that Joe mentioned, at the 33% win rate, you know the story. Our track record is 80%. I like our odds.

In the 7, the other $1 billion is Medicare market share. Joe identified a $6 billion opportunity that will be a little bit ambitious to put the whole 6 in. We took 1, I like our odds. Lastly, Marketplace. We're someplace between $2.5 billion and $3 billion, call it, $2.7 billion this year on premium revenue. If we were to double that next year, call it $3 billion of opportunity. That's not in our model at the moment, but it's certainly an opportunity. We'll see how the year progresses.

So to believe $7 billion of projected initiatives over the next 3 years, you have to assume we can execute on 25% of this opportunity and we've done it before. Let me roll up the segment targets. Medicaid, 13% growth at the midpoint. Most of it is what Joe called money in the bank, stuff we've already announced as well as rates and membership trends. At the midpoint, 92%, that's only on the MCR, that's only 90 bps better than we are today.

For the whole company, 12% growth rate organically. You stack the M&A assumption on that. That's how you get to the 15%. For the company 91.2%, 91.5% at the midpoint on MCR. G&A ratio goes below 6%, you're at 2% to 3%, 2.5% at the midpoint. So gosh, we've been talking a lot about these G&A efficiencies today. I really do need to expose that a little bit more. Here's our G&A ratio, 6.4% today. We'll grow 50% over the next 3 years, 15% CAGR, half of it's known.

How do I get such a meaningful contribution 6. 4% goes down below 6%. So 50 bps, by the way, that's $5 a share. A really simple way to think about it we have complicated models, but simple way to think about it, that 6.4% G&A ratio implies $2.8 billion of operating expense, G&A, take the $2.8 billion, half and half fixed and variable, grow the fixed debt inflation, grow the variable at 50%. That's the top line growth, you'll get a G&A ratio meaningfully below 6. It's just math.

So if you believe the math, and I do, do you believe we can hold the operating discipline to hold our fixed cost fixed? Because otherwise, it's just spreading the same cost across more revenue, of course, you're going to drive value. So we like that a lot, 6.4 falls below 6, 50 basis points of value. Now what's not here, in many ways, I'm more excited about some of this is we left the placeholder without numbers on artificial intelligence.

Joe said 100 to 150 basis points. We are so excited about a number of use cases, not in our numbers. It's all upside. But this is happening fast and there's real value there. So 100 to 150 basis points on top of all this, not in our model, but that sure gets my attention. We're very focused on these things.

All right. This chart's busy. Joe showed a simple version of this chart upfront. And if I didn't break out the components, I know you'd ask me, so here they are. Joe mentioned operating discipline $6, -- there it is, $5 of the G&A ratio, that's the 50 bps. We circled the $2 because that's the part that's in the bag. 14% growth next year is known. We'll harvest $2 out of that. That's already done. The other 3 is the rest of the growth. $1 a share repurchases, that's not a heroic assumption.

We use the term maintenance repurchase sometimes, which is from time to time, we'll buy small amounts if nothing else just to make sure that share count is suddenly going down, not going up, not a big assumption. The projected initiatives, that's the $7 billion we talked about. M&A, that's the $4 billion of revenue we talked about. Remember, the embedded earnings, future revenue was $4.5 in a quarter, current revenue was $2.75. The last section, current revenue MCR recovery, that's essentially today's company, moving back up to the MCRs we've targeted. That's 110 bps of MCR recovery across the whole company or as it says here, 40 bps a year.

So you can see 3 distinct drivers. Current revenue, the current company recovering to 2.5% is a big driver of it, future revenue growth and then, of course, the operating discipline that you've come to expect from us. A bit of an eye chart, but I bet if I didn't put it up there. Happy you would have asked me. So it's good that we have it.

Last thing that's been on some of your minds is, do we have the capital to drive this plan? The quick answer is yes. Upper left, where are we today? Net debt to cap 48%, revolver is undrawn at $1.250 billion. I put the RBC ratio up here just because a few of you have been asking me about this lately. We run at RBC 300 or more. State minimum is $200 million. Our policy is to run 50% higher than state minimum. We're at 3.11 today. Will continue going forward to run at 300 or more. I think the reason I've gotten the question a couple of times is, gosh, will you maybe drop your RBC levels to fund your company?

Well, no. Our policy is $300 million. And we will continue to run it that way. We have ample cash and capital to drive our agenda. So sources and uses to drive the plan, the outlook that we just talked through we need $3 billion of additional capital. Most of it goes to organic growth. Remember the required capital on revenue, you've got to capitalize revenue. That growth is going to take, call it, $1.5 million range around that. M&A, we said we'd buy $4 billion of revenue at the kind of multiples Molina pays, it's someplace in this 0.8 to 1.2 range.

Share repurchases, that's the maintenance concept I talked about, not a big number, call it $0.5 billion. Rolled together, that's $3 billion of capital we need. Where does it come from? Most of it's internal. Internal capital generated $1.7 billion, we'll borrow the rest. Now what do I mean by internally generated? That's net income. No, it's not net income. We love net income at our subsidiaries because that's what rolls up in consolidation and becomes EPS. Love it.

But that net income at the subsidiary isn't money I can use at the parent today. Subsidiaries generally require dividends to go through state approval, which means the net income is booked 1 period, you dividended a subsequent period. This is the amount of capital I think I can move up to the parent through dividends. Our simplifying modeling assumption is we usually this year dividend of last year's net income. $1.7 million falls out of this model.

We borrow $1.3 billion, you're at $3 billion of sources. So if you're borrowing 1.3, what happens across the years with your debt to cap. We'll hover in the mid-40s which is a very comfortable place for us to be. If you were looking for additional debt to cap up to 50, maybe temporarily, what would it give you, an extra $1 billion along the way if you needed it. But we think we're adequately capitalized here. I'll remind you of how we think about capital deployment.

Joe touched on ROEs in some of the earlier statements this morning. I call this the pecking order of capital allocation. Highest and best use is organic. The ROE on organic is 60%, even at these lower target margins. 2.5% target margin, ROE of 60%. Organic returns are phenomenal in this business. Accretive acquisitions, even at target margins at 2.5%, roughly 25% ROEs, and again, whatever is left, we'll return to shareholders, love doing it. But with 60% and 25% ROEs, our money is best put in the first 2 categories. We're in the home stretch now.

I'll leave you with 2 slides. What should you take away from today's presentation, the big things our message is today? What drives the story? Joe laid this out, our markets are underfunded by 300 bps. Most of our competitors are losing money on a pretax basis. Molina outperforms by 400. The data shows it. The outperformance is split between the MCR. And remember, these are direct MCRs that fall right out of the stat filings and 200 bps on the operating costs. We need 90 bps across 3 years to hit our target margins. The market needs 300. So we're in a good spot.

Will the market get the full thing? I don't know, I like our odds on getting the 90. I'll remind you the point I made earlier. If the market and Molina are only getting 90, the market is still losing money. Is that sustainable 3 years from now. So I feel good, does it Joe mentioned potential acuity shift from One Big Beautiful Bill. We've got Medicaid attrition of 2% to 3% a year for the next 3 years, one, that's not a very big movement, but two, the bolus of low acuity members is at the lowest we've seen it.

So would there be an impact? If there is one, I think it's modest for 2 reasons. Point four, our operating costs improved 50 bps on the ratio, just math, 50% growth, hold your fixed fixed. Number five, $11 billion of new growth. We talked about RFPs, 33% win rate. We talked about M&A.

Lastly, Medicare duals. Our $5 billion Medicare duals business today is running breakeven. Part of that is they just converted FIDE and HIDE's to the new program. Second is we're growing into some new stars ratios. I feel very good about our outlook here. Historically, 2.5% would be lower than duals programs nationally have run and definitely lower than Molina's duals programs have run. So feel really good about that.

I'm going to leave you with the same page that Joe opened with this morning. 15% revenue growth, 50% in total, half of it in the bank. MCR across the entire company better by 100, pretax margin better by 150 bps. That's the MCR in the G&A. Adjusted EPS ratio 2.5% pretax margin, $25 a share. Now we tried to lay things out in about as much detail as we can. It's kind of what we do around here. Something tells me you're still going to have a few questions. So if that's the case, Joe, why don't I ask you to come up. Jim Woys, our Chief Operating Officer; Jim come on up, and we'll take your questions.

John Stansel, JPMorgan. Just a quick one. A topic we talked about in 2024 that didn't really come up today was risk corridors in Medicaid. As we think about the 90 basis points of MCR improvement that's kind of embedded in the 2029 targets, -- is there something about reestablishing those risk orders? I think you're running about 200 basis points below the risk corridors for Medicaid. How do we think about reestablishing those as it interplays with the amount that the states need or the other managed care companies need and what flows through to your MCR?

I'll frame it and kick it to Mark. The corridor regime has not changed. The quarters that have been in place during the pandemic are still in place. Now if you recall, when the inflection started to happen in late 2024, we had 200 basis points of cushion. People said, you didn't see the inflection No, we saw it. We had 200 basis points of cushion [indiscernible] 2024. We were basically without protection in 2025. Now right now, with the MCRs where they are, we're not near the quarters. We are actually are in a couple of places, but there's plenty of room.

If we -- if the market gets what it needs to get back to actuarial soundness, we'll be into the corridors again in various places. I want to be there. I want to always be the chart that Mark showed where we're operating better than the market. If we're paying into the quarters, it gives me intra-year protection, and it means I'm operating better than everybody in the market. Mark, anything to add?

Yes. That's exactly right, Joe. We used to be at an 89% on the MLR. We're at 92% now. We're a long way from those attachment points. The thing about the averages, which is what you see here is there's always 1 state that's a little better, 1 that's a little bit worse. So sure, are we in a corridor in 1 particular place, Maybe. But as a company, we're nowhere near the corridor positions we were and they're not a deterrent on this plan.

Thanks. Good morning. Quickly on the MLR or I should say, the margin target of 2.5%. Can you give us a little color in terms of -- I think you're expecting about 100 basis points of improvement over the next 3 years. How do you think about the slope of that line given the work requirements out there? Do you still expect to be 200 basis points ahead of the industry in 2029, such that the industry is breakeven still in 2029? And if that's the case, walk us through why you think that 3 years from now, the industry is going to be breakeven in Medicaid, how that's sustainable?

We're not giving you the 3-year trajectory yet. You noticed that Mark left that sort of blank in 2027. In Medicaid, we need 30 basis points a year for 3 years. Is that going to come ratably? Nothing ever comes ratably in this business. But getting 90%, meaning rates are ahead of trend by 90 basis points over the next 3 years when the market is at a 1.5% pretax loss to me, is a great place to be. When we're starting at 1.5% pretax. So we're not going to give you a 2027, '28 and '29, but we love our odds of getting 90 basis points of rate trend rebalancing over the next number of years given the market needs $300.

And I'll just echo what I said before, if we're getting that 90, the market is still not getting what it needs. Justin, I think part of your question is, can we also maintain our advantage to the market of 200 on the MCR line, every bit of evidence shows that we can on the operating cost, we're actually going to grow it.

And if I could just squeeze in 1 more on the -- on trend. You're talking about 5%. I think that's logical. When you look at -- when the states look back in '24 and '25 and they build in that 5% trend that's going to help -- but what are they building in for forward trend? Are they -- are you starting to hear some willingness to build in something that's 2x history, right? Trends historically has been are they willing to build in that 5% trend going forward? Because that's what you're going to need, right, to get your margins back. So what are you hearing from them on that forward trend beyond the actualized.

Yes. So if they were really looking to make up the historical difference, they'd have to onetime put in 300 bps. And then I think your question was, are they going to put in the full trend on a go-forward basis that they need to? Well, they're going to have to estimate what the current year is, and they'll have to project what the next year is every bit of data with the actuaries are showing will support the numbers we're talking about.

Now if part of the question is if they just don't want to go there, they drag their feet to go there. I think a really compelling data point is that so many folks are losing money that if you don't honor both the historical catch-up and an appropriate go-forward trend, you're going to keep a lot of these folks under water and especially the local not-for-profits they're doing even worse than the numbers we put up today, rates need to come back either for actuarial standard or just for the practicality of solvency on many of these players.

They got to catch up to the 21% cost increase over the last 3 years. And when the 25 seasons into that baseline, then I think there's less flexibility to jam the market on trend. 5% seems to be a great place to do. We've got 2 straight years of core trend being 5%. We're going to argue hard. And nothing is happening on behavioral to soften that trend. Nothing's happened on high-cost drugs to soften that trend. If we can get them to the 21% baseline increase and then convince them that 5% is the new normal, no longer 3.5%, we're in good shape.

It's A.J. Rice from UBS. You guys have been talking for a while about the 200 basis point differential on MCR you have versus the rest of the industry. I think 1 thing that would make it more helpful for us to understand how sustainable that really is is where do you -- when you drill down, where do you see that differential coming from? How come you -- you think you'll be consistently 200 basis points better than everybody else?

What gives us the advantage in actually being pretty clear and assertive on that point is 1 of the points I made earlier. How can anybody MCR be better or worse than some elses. All right, pull it apart. Rates. We're not rate makers, we're rate takers. We all have the same rate. Corridors. Well, we can be deep into it and somebody else is them, but we have the same corridors. And if there are 4 players in the market with 25% market share, it's hard to get selected against, you all have the same membership.

I got the same membership, the same level of acuity. We are at the same corridors in the same rates. The only differentiating factor is how you're managing medical costs. And so the way we saw them for it is by holding at par the 3 other criteria that can drive an MCR, the only 1 that can be -- that can flex up and down by competitor is medical cost management. Everything else is atpar..

Is there -- I know you're not going to give up your secret sauce, but what is it about what you're doing with medical management that is a sustainable thing that others don't figure out and see a copy or whatever.

Hard to say, but I'm going to kick it to Jim to talk about how we approach the clinical activities. And Mark, you can talk about some of the payment integrity and other financial things we do, Jim.

Yes. I think Joe talked about it earlier, a multitude of sort of reasons. And the operating model and how we operate and the discipline in which we operate in operating model, I think, has like a big part of what we do very strong teams from a centralized point of view from an enterprise perspective of how we manage clinical network, behavioral health costs, using what we call center of excellence category, the enterprise who develop policies, procedures and they deliver them to the markets for their execution great opportunity for us to continue to do well in that area.

I think we have best-in-class payment integrity, operations, best-in-class pharmacy management operations, but it really is the operating model and the discipline that we work. It even goes back to the point that Joe and Mark said that we operate of with 1 single platform. So very much consistency in what we do. Our operating metrics are as good as they ever have been. So there's no big claim lag that we worry about actuarial issues, claims are paid accurately and timely all of our operational metrics are at or better than anybody else in the industry.

And I think that drives to a lot of operational performance that drives them to better execution that we do in the medical management arena. But at the end of the day, it's discipline. It's discipline that we have in the company more than they think that I would put.

Mark, medical e-com?

I would just echo what Jim said, we're doing the same things everybody else does. But culturally, we're a little bit different. We're big enough to be relevant in all the big company ways, but we run the place like a small company and so much of what we do is personal to us. I think we just execute at a very different level. Joe mentioned Medical Economics. We've got just a fantastic medical economics team that continues to pull apart medical costs.

We call it the cube. You can look at a cube. It's got 6 sides. There are 6 perspectives on Metiecon. Geography, condition, member, provider, so many different ways to look at medical econ by constantly ripping it apart, you're constantly exposing different perspectives on it, which gives you insight on how to manage -- but at the end of the day, it's cultural. We just have an intense focus here.

Okay. All right. Maybe just 1 follow-up. We're talking about the recovery sort of as if the whole portfolio was 1 state, but it's 21 different states. Is there a lot of divergence? Or are you sort of thinking everyone's going to -- every state is going to sort of come back and be in line or you weigh off in some states and closer in others, and you need those handful of really key states to improve.

Every state is different, and we're not going to peel down into individual states, but I will tell you, your question is a good one. Because if you had 2.5% margins and half of your properties are 0 and the other half at 5%, that's a bad portfolio outcome. You don't want that. You want everything operating toward the me. We talk about performance SKUs. Is everybody operating close to the mean. And the answer is yes.

Now some properties are performing better than others. So not everybody is contributing equally to the recovery to 2.5. But I would say on balance, all of our properties are performing very tight around the mean, and most of them are contributing to the outcome. There are no wild SKUs in the portfolio. To your prior question on medical costs, we have many isms in the company as one, pay attention to a dime before it becomes $1 to pay attention to 10 basis points before it comes 100, because we know in this business, that's what happen.

Andrew Mok from Barclays. I understand you frame some of your G&A leverage against 2026 guidance. But relative to your previous targets, I think Medicaid G&A is down about 150 basis points. which is a pretty significant reduction. So can you remind us, one, how much of your Medicaid cost structure is fixed versus variable and how you're able to achieve that much operating leverage over the next 3 years.

You want to talk about fixed and variable and...

Yes, absolutely. So I'm not going to parse our products or segments or states on a fixed versus variable. What's important is the whole company. But if we were to go into the segments, it's not much different by segment. Again, it's 50-50 and we've demonstrated that. I made some very simple and high-level comments about splitting $2.8 billion of G&A today into 2 components. That's a very simplistic way to think about it, but our practical and sophisticated models sort of get to the same conclusion.

The fixed components are a lot of leverage and corporate functions that we keep constant. And then variable so much of that on membership, on utilization management on medical cost management, enrollment. There are a lot of things that move with revenue and membership. But step back, look at the whole company, the cost base is pretty evenly split 50-50.

Great. And maybe just a follow-up. The Florida Kids contract, I think, is a meaningful portion of the embedded earnings figure. Can you help us understand the assumptions embedded into the outlook for that piece of business, specifically, including the time line to breakeven and target margins?

As you saw in our analysis, there's a 2026 drag. You're hiring people before the revenue shows up. You always project a new contract to start out high in the MCR. New people getting used to new technology, so on and so forth. We believe we get that to breakeven in full year 1, and then we hit target margins sometime in full year too.

Now that's a significant contributor to the fixed cost leverage. Everything we do in embedded earnings is on a fully allocated basis. And when you bring $6 billion of revenue in 1 year, and you have the discipline of holding fixed cost fixed. We're going to get the operating leverage off that. So we're pretty excited about it. And 1 of the reasons we're actually even more confident of that today than we maybe were 2 months ago is we've seen the numbers. We've got the climate cost data, and we have the rates. And the program is on pretty sound footing, and we're inheriting a program on very sound footing. Anything to add, Mark? .

No, I think that's well said. In the embedded earnings, just to be clear, it's $1.50 of current losses with the contract and $2 of forward profitability at 2.5% pretax margin. So a 350 swing, you get to $1.50 next year. And as Joe mentioned, it will take us a year or 2 to get to target margin.

We'll go to Kevin, and then we'll go to Lance next. Kevin.

Great. You guys talk a lot about embedded earnings. And just going back to that previous guide, last Investor Day, you guys had a margin that was basically almost twice what you're talking about now if you think about 50 basis points more G&A leverage today than what you were talking about back then, -- like should we be thinking about that number being off the table?

Is that number still an aspirational number we should be thinking about where 25% relative to $50 of earnings power? Or is it in a new world we should be thinking about something in between what you're doing in that prior number?

We gave you a 3-year outlook. I said any investment thesis in our view, ought to have a 3-year outlook to it. And we got models. We have higher growth models and lower margin recovery and vice versa. It all seemed to triangulate toward a 3-year outlook around $25. So we presented what we think is the most realistic case of margin recovery.

The reason we showed you the sensitivity is tell me what happens to trend. If rates are going to catch up to the baseline, the 21% increase -- if trends softens, they catch up faster and to a greater degree. If trend accelerates, maybe they catch up slower. We think we've presented a very rational data supported and conservative case of what we can accomplish by 2029.

Is there a reason to believe that managed Medicaid comes back to its former glory of where we were 4.5% pretax margins, it could -- but giving you our best outlook for 2029, we settled in a 2.5% number and $25 a share. But is there upside to that? Tell me where -- how fast rates of recovery will recover? And the answer is yes.

Yes. I think that is 1 of the concerns people have. When you think about '28, '29 that's when a lot of the Medicaid rate cuts start to kick in from OBBB. And so what are the -- so it sounds like you're kind of assuming that the rates are still at the lower end of what's maybe actuarially sound by then. But if that were to happen, is there you mean you said a few times ago, I don't know how that will play out. Like do you guys have to exit some states to prove to the states that they have to pay correctly?

Or do -- is it you're going to wait for the competitors to do that, and that's going to cause the states to do that? And if rates are at the low end of actuarial sound, and a lot of people losing money, does that mean they're going to go out of business and you're going to get more share? Like should we think about that as maybe the margins don't get back, but now you've got more revenue upside? Or how does that play out? How do you get the states to get you to actuarial soundness even if they're seeing some pressure.

We laid out what we thought the reasons were. Number one, just to be clear, No, there were no states -- first of all, if there was, I wouldn't be announcing it at our Investor Day that we're going to exit. But no, there are states that have stronger rates than others. States where we have stronger advocacy efforts to get back to actuarial soundness. But no, the every state in the portfolio right now, we have a forward outlook on where we need to be.

As others exit states, there's more market share for us. And we do think that rates come back to actual soundness. I don't know how to answer your question any more directly than that. The market is significantly underfunded, not-for-profits and for profits. And rates are based on the market average. And where we're operating, we continue to operate 200 basis points on the MCR better than the market and the market gets the rates it needs just to get back breakeven, the 90 basis points is in the bank.

That's what makes us feel good about this. Actuarial sound is a concept. CMS does have oversight responsibility on rates. The programs have to be adequately funded. Mark, anything to add? You're right in the middle of all this with me.

So the principle of actuarial selling is harder to implement in a period of inflection, and that's what we just saw. When things normalize, the concept of actuarial appropriate rates does come back. We believe we're through the period of inflection. So I have high hopes that acturial selling this prevails once again, even if that's slightly delayed for whatever reason, as I pointed out before, the practical reality of so many players losing money is a real concern to states at the moment. So to me, I take comfort in those 2 items.

I wanted to dig into medical management a little more. And could you just talk a little bit about the lower trend environment that existed historically? Maybe what the impact that you are creating into trend from medical management initiatives, UM, et cetera, i.e., gross trend was 5%, but you were achieving 3. And then now that we've hit a much higher trend level -- is it a larger amount of trend impact that you're achieving? Or do you project you can achieve through medical management? And are there particular areas where you see that happening?

I'll kick in my colleagues here. Let me frame the answer. We're not going to start giving numbers on what our cost management initiatives aggregate to. But every single year, they are a significant component of our operating plan, okay? This is inflecting what are the 5 or 6 things we're going to do at the provider level, the member level to arrest the rate of growth of this particular trend. It's meaningful. Now what's happened here people said, "Well, how do you know your cost management techniques are still operating?

Well, ER diversion, unnecessary ER visits. How do you know you're diverting the right number. The percentage that we're diverting and avoiding is the same percentage as it always was, except the ER visits are up. So if end is up, but your percentage of diversion is the same, then you know you're operating effectively. So we're not going to start giving numbers, but every single year at the point you're making, there is growth trend, what the unmanaged market would produce, and then there's net trend, what do we think we can get it to. It's a meaningful number. Anything to add, guys?

Yes. I would just say that the process that we go through around medical management and around initiatives around medicos is a dynamic process. It's not a 1 time during the year. We define all the projects -- it is a constant sort of process to look at the data that's presented to us by medical economics, strong analytical presence. We target sort of where those variances are, and we create initiatives to go after them.

But it's a very dynamic process, not only just on medical management, but we do around unit cost management as well as we see where we need to take better unit cost approaches and use that data to renegotiate our contracts going forward. It may mean that we have to do more intensive payment integrity initiatives around where we see a cost variance that might occur.

It might be even some place like fraud, waste and abuse, so all of those activities combined sort of puts us in that process around how do we get a better medical management outcome in line with where our forecast is. But it's a dynamic process. Every single day, we're working the initiatives.

Got you. And as you've had concentration in some of the areas that have been driving aggregate trend, -- have you seen an increased revenue in driving an increase in value-based care, especially value-based care initiatives? Or how do you see value based care plan out for kind of your approaches?

Do you want to comment on that, Mark?

Yes, absolutely. I think it's well known that value-based care in the Medicaid area is probably at least penetrated of anywhere, right Medicare enjoys the best penetration just because of the dollars and the continuity of the members. But in Medicaid, not only do we see business upside to it, many of our states are looking for us from a compliance perspective to drive more VBC as well as value-based care.

We're certainly on that. We're more than meeting our compliance objectives. And in many cases, we're exceeding our own expectations. So again, you don't hear a lot about it in Medicaid just because among all products, it's probably the least penetrated of all forms of health insurance.

We're moving it up to scale. I mean, bonus payments are pretty common. And then, of course, gain share, everybody loves gain share. Then you try to get to the symmetric gain in last year, it gets a little more the debate is a little more intense with a provider. Getting at the full capitation, obviously, in California is a whole separate animal. But getting this to symmetrical gain and loss share in Medicaid is the journey we're taking.

Jason Cassorla, Guggenheim. Maybe shifting gears a little bit. On the dual side, curious, going from 6% share to 10% to 16% over time. Maybe can you help a bit more in terms of the building blocks there? I guess what's different today for you to go after that versus where you're at a 6% currently?

We're excited about it. The market itself is growing at 12% to 14%, exclusive line enrollment, highly incentivized as states encourages them over a period of time up to 20 and 30 to combine a dual member in a Medicare and Medicaid product that's connected at the same parent company MCL. So we're well positioned with Medicaid contracts in 20 states and having snacks. The contract that you need to do this business, we're well positioned. We were running 80,000 members in the MMPs. We're already running integrated products. The reason we ran the table on the RFPs is where our experts in doing this.

The difference is now it's highly competitive with the rest of the market, right? We know the big guys are going to be in there. But we're highly confident, as Mark said, 2.5% pretax margin seems pretty bigger. Our star ratings are improving our risk adjustment processes, our market average, and we're well positioned with that Medicaid footprint to take advantage of the growth in that market. And we only put in a 1% market share increase into the model. That's it. We didn't need any more to justify $64 billion in revenue. There's probably some revenue upside there. Mark, Jim, anything to add, Jim, you're close to it?

Yes. I would only add that I think when we think about running the table on the MMP contract, we realized early on that these were state programs not run by CMS, right? And so we focused on our customer in the state who is doing the procurement. Even though Medicare was probably the largest piece of the activity, the -- it became a state program and recognizing that the decisions are made locally in the state and us attributing our business to that, I think, has really created a different operating model for us than some of our competitors.

And maybe if I could follow up on the $80 billion or so revenue opportunity through the new RFPs in '28 and '29, I guess with all changes in Medicaid over the past few years, the active policy environment -- do you anticipate any material changes to the way these RFPs could develop, whether it's a set of downside risk to the revenue opportunity within RFPs, ways to win on the margin side or anything along those lines as it relates to the RFPs that are coming down the line. Any changes or anything you're looking out for?

No, there's a couple of imminent ones. Missouri and Indiana will come out really soon. and we're not -- we're going after a new RFP. We're in that state, 2 years in advance of the RFP, you have to be. You're developing relationships, provider relationships, regulatory relationships, et cetera. So we have good visibility into how the RFP will unfold every once in a while, we're surprised by something. But for the most time, for most of the time when the RFPs come out, there are no surprises.

And they're pretty traditional. They are pretty traditional you -- there's a hundreds, if not thousands of questions and capabilities you have to showcase. So I would say that there's subtle changes in the RFP processes. But for the most part, it's the traditional process, submit your bid, go into orals down select and we move on. Nothing has really changed in that process. Yes, sir? .

Steve Baxter from Wells Fargo. I just wanted to come back to AI and you guys think about the durable 200 basis points of outperformance you generated versus your Medicaid peers. I guess how do you think about the durability of that? I would think, if anything, like AI might enable some of the other larger for-profit companies potentially try to study what you do and maybe catch up in some of the areas that are deficient, -- maybe the not-for-profits never get there, but you think about kind of future proof in that margin premium that you're generating versus peers?

That wheel of progression, we showed you is exactly the way we think about it. There are 10 core processes that in a combined way go to the management of managed care. How can you make those more efficient? That's job one. And we think there's 50, 100 -- maybe even more, 150 basis points of improvement we can generate just on making the existing managed care processes more efficient.

Second, -- could you reimagine that entire process? Take whatever process it is, payment integrity, UM, whatever it is, and reimagine it, that's Phase II we're not even contemplating that. And third is there are a complete reimagination of the way managed care is done, who knows? But right now, the number we put on the page is only taking existing managed care processes and making them more efficient and we think that's a 1- to 2.5-year journey.

We already have -- we do things without talking about them a lot sometimes. We already have use cases that are being used. We have 1 operation in the company, I will mention where it is with the volume in that operation has doubled over the last 3 years and headcount's down by 20%. And it's all -- it was early adoption of -- we're taking that model that we used in this particular operation and replicating it across the wheel of managed care. So we're confident it's there, why didn't model it. It's I wouldn't say speculative, but it's at least a nascent form. As we move forward here and have more Investor Days and more communications with you, it will end up in the numbers.

And then just thinking about the -- it's obviously helpful to hear about the actuarial processes. And I think on the medical side, we're starting to maybe understand those better. Do you think about the admin side and how states approach kind of the admin component of setting rates and operating costs, like, obviously, some of the scenarios you pointed to that by the end of the decade, Medicaid enrollment is going to be lower than where it started, but rates might be 40% or 50% higher in a 1 incorporate lower admin loads going forward? And have you kind of factored that into your long-term outlook?

Mark, do you want to take that?

Yes, absolutely. Most states do everything around the MLR line, some states have begun thinking about the admin side. But honestly, it's not something that we're seeing very much of even in the few instances we see it for Molina with a best-in-class structure, it's not necessarily prohibitive. I think when you see something like that, it's really aimed at the very extreme players that have the least attractive G&A ratios. It hasn't been a limiter for us. Not seeing much penetration and where you do, it's not a limiter.

George Hill from Deutsche Bank. I've got a quick 1 for Joe and a quick 1 for Mark. Do you have a top-down kind of perspective on what state Medicaid spend looks like from now through 2029. Like is that number up? Or is that number down? And I'd love to know how you think about the interplay between the decline in membership and the growth in rate like from a state perspective because they tend to be solving for a budget line item.

And then, Mark, if you could just sort of rank order or unpack the 150 basis points in MLR improvement as we look out over the next couple of years, like how much of it is rate ahead of trend, how much of it is medical management? How much of it is benefit cuts at the state level. Would love to hear kind of like the building blocks as we think about the expansion there.

We have a very intense effort internally. Health care is all local, and it's -- there's no national trend really it's state by state. So we track very carefully is the state in surplus or deficit. Do they still have rainy day funds from all the COVID stimulus money that went out. How do they think they're going to handle what we call the indirect impacts. The OB3 has direct impacts, right, work requirements semi and reterminations. How about on the indirect impacts in terms of provider taxes and MCO taxes.

So we're tracking that. And we have a very, very cable, if not intense, government affairs engine that stays wired into how states are thinking about managing your spend. Every day, you'll see a report come out from 1 of the 1 of the industry publications that talks about some state taking $200 million out of the program for this or putting $200 million in for that.

We track all that. Right now, I would say the big watch out? Or unknown would be how are they going to react to when the FMAP match on the indirect taxes begins to hit their budget, what will they do? Where it follow political lines red versus blue in terms of membership and benefits. But there still are incidental benefits, value-added benefits that could be cut if they wanted to. So we're tracking it state by state.

Those types of issues were fully contemplated in our revenue outlook. And as states make their decisions, we'll be reporting what happens to our revenue base. accordingly. Mark, do you want to take the second question?

I think the question was how do I think about the MLR recovery? Yes. So we're not going to get into the specific components because that would essentially be laying out trend in rate for the next 3 years, which I don't have a crystal ball to do. Here's the better way I would think about it though.

If the industry is underfunded by 300 bps, it has to get back at some point. But maybe a different version of the question is how long does it take? Joe alluded to this, if trend settles down and normalizes, rates can catch up a lot quicker. If trend bounces around and stays higher, it will be harder for rates to catch up. And if trend goes down, my gosh, rates probably catch up even quicker.

So on the 300 basis points, I don't have the crystal ball to say how quickly does that come back? But what gives me great comfort is I'm only looking for 90% of it. And more to the point, we're not assuming anything in the 90% on our ability to manage medical costs better than we do today. So that's just market exposure.

Michael [indiscernible] from Baird. So with the incoming D-SNP integration role, are you seeing any fierce competition for acquiring these lower-performing Medicaid assets from MA plans that are under index in Medicaid heading into next year and that ramping up in the '29.

I want to make sure I understood the question. The question was on -- can you hear me, on M&A? .

Yes, M&A, the incoming D-SNP integration role. Medicaid, Medicare Advantage? Are you seeing fiercer competition in M&A for Medicaid assets across the country?

No, I wouldn't say we're seeing any increased competition on Medicaid properties at all. They're still out there. Most of the ones that have come to market are what I'll call underperforming, I would even say maybe distressed. Distressed is a little worse than underperforming. And the question is, when we look at an M&A opportunity, whether it's because they can't compete in D-SNP or not or they're just running out of capital. What we look at is perpetuity of revenue stream.

Give me a long-dated revenue stream, and these guys are going to manage it to target margins, absolutely convinced a bit. Now whether those target margins are 2.5%, 3.5% to 4.5%, remains to be seen. But right now, our target is 2.5%, but look for long-dated revenue streams, the reprocurement is out there. The membership is stable. And if it's distressed but not broken, then we trust our operators to open up the milling playbook and get it to target margins.

But no, I wouldn't say that the opportunities are getting any more competitive than they were and [indiscernible] is here somewhere is done with his team a brilliant job of creating proprietary opportunity, opportunities that don't come to market. We just have a great story to tell about being part of the Molina family of companies, particularly not for profits. They like the story. They're running out of capital.

I need a capital base. I need a big brother. I need a brand. We really like our local presence. Let me become part of the Molina family. 4 out of our 9 deals were nonprofit maybe more. They like the story. But no, we're not seeing that much more increased competition that makes us less confident in the $4 billion of revenue we projected.

Great. And 1 more. On the incoming Medicaid interim final rule by June 1, is what I guess what key details are you looking for that you would consider like your base case, like a good scenario? Are there key definitions around medical frailty that you're looking for?

It's a great question because it's unanswered at this point in time. I'll kick it to these guys because we've -- the 3 of us have been totally immersed in this, is that we have a slight advantage over many of the market because we're in Nebraska. And they're they go May 1 or June 1st, May 1, they already went. So we're using that as kind of our laboratory. Medical frailty undefined. These are going to social security definition or come up with their own who knows. -- what types of information do you actually have to submit to prove the work requirement or the 80-hour requirement? Don't know. How aggressive are they going to be on ex parte, how aggressive they're going to be on on procedural. None of that is known. Nebraska has taken its own position on this and doing what they think is right, and we're following it along.

But we have our tentacles as you can imagine, in every single state we're certainly following the final rule. The 3 issues you mentioned are the big ones. What's medical frailty and what types of information do I need to support someone being eligible or ineligible. It's pretty clear what managed care can and can't do. For the most part, we can't participate in the process. We can educate and inform and provide clinical information that proves frailty, but we can't actually participate in the process. That's a general statement. It's pretty true across the states.

Yes, sir. Ryan Langston from TD Cowen. On the initiatives growth, you're assuming 33% wins track record 80%. It sounds like you have some visibility maybe near term and some opportunities. Why assume only 33%, I think, to get to that $80 is another $8 billion of opportunity pretty substantial.

The truth is we like the 15% CAGR at $64 billion. And when you look at $90 billion of opportunity and 20% market share, it's a little too sporty. And look, 80% win rate that's hard to reproduce. But I'm telling you, I can go and call that slide up and go state by state. And Mark and myself and Jim are neck deep in the business development process with our business development team and our operators. We're very close to what goes on there. I like our chances to beat -- but trying to be conservative, put a realistic view out there, something that is eminently achievable.

We kind of just reduced the win rate $6 billion of revenue or whatever came to seemed to be enough, and it supports a 15% growth rate. As I said, 33%. We're not going to be happy with that. We have to make sure that people don't take that as an internal target.

50% growth rate, 15% CAG I think we made our point -- we're a growth business. To Joe's point, sure, I said more, but I don't know that we need to put more on the table here.

And then just on M&A, is that likely more a couple of smaller transactions? Are there assets available that you could hit that maybe 1 or 2 transactions .

Yes. If you look over time, we've done a little bit of both. We've done some large ones. We did 1 as large as $3 billion revenue, and we've done some in the $0.5 billion of revenue. We've got a pipeline at any given time, we're in advanced discussions with a couple of targets.

Over the last 6 months, we've been in deep discussions with 2 very large ones, another large 1 just came up. And there's always a couple of small ones out there, closer to the $0.5 billion size. So I'm not going to comment more than that, they arrange the gamut.

All right. It looks like we are done. Yes, Jeff, we're done?

No, you're good.

Thank you for attending our 2026 investor conference, and thank you for your interest in our company. we aim to deliver. This is an interesting environment right now. We're not happy with our recent performance. We're proud of our 8-year track record. The industry went into a downturn. the rate trend imbalance, and I assure you that the apparatus, the engine, the machinery we built to create durable and sustainable, profitable growth is intact.

And when that fuel line becomes unclogged rates will get back to the normal trajectory you expect from us, and we're going to deliver these numbers. Thanks for attending today. Take care. Have a great weekend.

Good morning, and welcome to Molina Healthcare's First Quarter 2026 earnings call. [Operator Instructions] Please note this event is being recorded. [Operator Instructions]. I would now like to turn the conference over to Jeffrey Geyer, Vice President, Investor Relations at Molina Healthcare. Please go ahead.

Good morning, and welcome to Molina Healthcare's First Quarter 2026 Earnings Call. Joining me today are Molina's President and CEO, Joseph Zubretsky; and our CFO, Mark Keim. A press release announcing our first quarter 2026 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 of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, April 23, 2026, and have not been updated subsequent to the initial earnings call.

On 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 the earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2026 guidance, the medical cost and utilization trend during the year, the political, legislative and regulatory landscape, the impact of Medicaid work requirements and redeterminations, our expected growth and margin expansion, the estimated amount of our embedded earnings power and future earnings realization, Medicaid rate adjustments and updates, our RFP awards and our acquisitions and M&A activity.

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 our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions.

I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Thank you, Jeff, and good morning. Today, I will discuss several topics. Our reported financial results for the first quarter, our full year 2026 guidance, which we reaffirm at approximately $42 billion of premium revenue and at least $5 in adjusted earnings per share, the political and regulatory landscape and a brief glimpse of our Investor Day agenda and growth outlook.

Let me start with our first quarter performance. Last night, we reported adjusted earnings per share of $2.35 on $10.2 billion of premium revenue. We would characterize the results as solid under the circumstances but that characterization is against the backdrop of current modest expectations.

Our 91.1% consolidated MCR reflects strong operating performance as we continue to navigate a challenging medical cost environment. We produced a 1.6% adjusted pretax margin in the quarter. In Medicaid in the first quarter, the business produced an MCR of 92%. While the January 1 rate updates came in as expected, our medical cost trend was modestly favorable to our expectations.

We continue to work to enhance our medical cost management protocols to address the areas of high cost trend we observed in 2025. Last year, we observed a 7.5% medical cost trend that included 250 basis points of acuity shift related to the post-pandemic redetermination process. However, the acuity shift in core utilization impacts diminished as the year progressed.

Our expectation that the acuity shift trend that we had experienced in 2025 was behind us and would not recur is holding up. We feel confident in our 5% medical cost trend assumption for 2026. In Medicare, we reported a first quarter MCR of 89.8%. At the beginning of the year, we successfully completed the transition of MMP members to the new integrated products.

Our Duals business is the strategic focus for us in Medicare. As previously mentioned, we will exit the MAPD product for 2027. In Marketplace, the first quarter MCR was 84%. Membership stands at 305,000 and is slightly higher than our prior guidance, but the profile of our membership is as expected, following our decision to reduce our exposure in this highly volatile segment. The majority of our members are renewal members, and we remain concentrated in the silver tier, which leads to greater stability and predictability in our membership base.

Turning now to our 2026 guidance. Although the quarter was strong when compared to internal and external expectations, we are merely reaffirming our full year 2026 adjusted earnings per share guidance of at least $5. Our full year 2026 premium revenue guidance remains at approximately $42 billion. We note that our forecast for Medicaid membership attrition increased slightly, but the associated revenue loss is projected to be offset by higher revenue in marketplace.

We remain optimistic that states may provide off-cycle and retro rate updates throughout the year as they did last year. We are keenly aware that medical cost trend and earnings came in modestly favorable to expectations in the quarter. That being said, merely reaffirming our prior full year guidance is a prudent approach at this early point in the year and in this current environment. When we report second quarter results, we will update our full year 2026 guidance to reflect the first and second quarter results, which will provide a time-tested base off of which to project the second half of the year.

Turning now to the political and legislative landscape. In Medicaid, States continue to evaluate their processes and how to implement work requirements and biannual redeterminations. The guidance from CMS affords States some flexibility on how to proceed with these requirements, particularly as it relates to the timing of these reviews. We are working closely with our state partners on the administrative requirements needed to implement these new policies.

We continue to believe that membership impact will be minor and emerge gradually through 2027 and 2028 and therefore, any impact due to changes in the risk pool will be small. In Medicare, we are pleased with the improvement in the CMS final rate notice compared to the preliminary notice. In addition, the continued progress of States promoting the integration of Medicaid and Medicare supports the long-term competitive position of our duals products.

In Marketplace, as we approach the 2027 pricing cycle, we will likely remain cautious as it is still possible for disruptive regulatory changes to occur. We look forward to updating you on our 3-year outlook at our Investor Day event on Friday, May 8. We see a clear path to margin expansion to the correction of the rate and trended balance that exists today and the revenue growth opportunities continue to be attractive in our businesses.

We will provide a detailed financial outlook for premium revenue and earnings per share through 2029 and demonstrate how we will again realize the intrinsic value of the franchise we have built over the past 8 years. We will do so with the same level of detail and specificity that has been our hallmark.

In summary, we are pleased with our solid first quarter results and continued disciplined approach to medical cost management. Our reaffirmed full year 2026 guidance reflects a prudent view of full year results at this early point in the year.

With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Thanks, Joe, and good morning, everyone. Today, I'll discuss additional details on our first quarter performance, the balance sheet and our 2026 guidance.

Beginning with our first quarter results. For the quarter, we reported approximately $10.2 billion of premium revenue with adjusted EPS of $2.35. Our first quarter consolidated MCR was 91.1% and reflects continued disciplined medical cost medicine. In Medicaid, our first quarter reported MCR was 92%. The January 1 rate update came in as expected, while medical cost trend was modestly favorable to our expectations.

In Medicare, our first quarter reported MCR was 89.8%, in line with our expectations. We remain confident in the pricing and benefit adjustments we implemented for 2026. In particular, our duals products, which now include last year's MMP members are off to a good start.

In Marketplace, our first quarter reported MCR was 84%. Adjusted for prior year risk adjustment and program integrity impacts reduces that metric to approximately 79.5%. Given the pricing actions we took in our Marketplace segment this year, we have reduced our exposure and prioritized margin improvement. Our adjusted G&A ratio for the quarter was 6.9% and reflects the timing of certain operating expenses with no change to our full year outlook.

Turning to the balance sheet. Our capital foundation remains strong. In the quarter, we harvested approximately $35 million of subsidiary dividends and our parent company cash balance was approximately $213 million at the end of the quarter. Our operating cash flow for the quarter was $1.1 billion and driven by the timing of government payments in Medicaid and Marketplace.

Debt at the end of the quarter was 6.1x trailing 12-month EBITDA, and our debt-to-cap ratio was about 48 we continue to have ample cash and access to capital to fuel our growth initiatives. Days in claims payable at the end of the quarter was 44, modestly lower than is typical due to the timing of payments at quarter end.

We remain confident in the strength and consistency of our actuarial process and our reserve position. Next, a few comments on our 2026 guidance. As Joe mentioned, we continue to expect full year premium revenue to be approximately $42 billion. Within that number are a few moving pieces. We now expect same-store membership in Medicaid to decline 6% this year, up from previous guidance of a 2% decline.

We expect to end the year with approximately 4.5 million members. Meanwhile, Marketplace sold moderately higher paid renewals, ending the first quarter at 305,000. With normal market attrition, we expect membership in our Marketplace segment to end the year at approximately 250,000. Renewing members now represent 70% of our book. Lower membership in Medicaid and higher membership in marketplace results in our premium guidance remaining at approximately $42 billion.

With low and no utilizers now at the lowest level we have seen, we do not expect any acuity shift from additional Medicaid membership declines. Our full year consolidated MCR and each of our segment MCRs are unchanged. In Medicaid, the full year MCR of 92.9% includes rate increases of 4% and medical cost trend at 5%. States continue to update their actuarial data to reflect higher observed trends. We remain optimistic States may provide off-cycle and retro rate updates throughout the year as they did last year.

Several of our States have already provided off-cycle rate increases, and these would represent upside to our guidance. Full year medical cost trend guidance remains in line with our previous expectations. States continue to evaluate program design and benefit changes to address medical cost categories with the highest observed trends.

Our MCR guidance on Medicare is 94%. We remain confident in the performance of our Medicare duals and integrated product business. In Marketplace, our full year MCR guidance is 85.5% and includes the normal expected seasonality. We continue to expect the full year G&A ratio to be approximately 6.4% as we drive efficiencies in our operations.

The higher ratio reported in the first quarter with simply timing of a few items within the year. We reaffirm our full year EPS guidance of at least $5. We continue to expect earnings seasonality to be front-end loaded this year, reflecting the January 1 Medicaid rate cycle in the first half of the year and implementation of the Florida CMS contract in the second half.

Turning to embedded earnings. Recall that our definition of embedded earnings is the future incremental contribution of our new contract wins and acquisitions. Recall that $2.50 a share of embedded earnings is the combination of 2026 MAPD losses and Florida CMS first year implementation costs. Both are certain to be positive impacts to our 2027 performance. Embedded earnings will remain a driver of value in the future. We look forward to providing you with an updated view of this important measure at our Investor Day.

This concludes our prepared remarks. Operator, we are now ready to take questions.

[Operator Instructions] The first question comes from Andrew Mok with Barclays.

I appreciate the updated comments around lower Medicaid membership. Can you help us understand which states are driving that incremental pressure and how that impacts the MLR outlook and cadence for the balance of the year?

Sure, Andrew. I'll frame it and I'll kick it to Mark. We are pretty spot on with our membership forecast in Medicaid for about 15 or 17 of our states at about 2%. We underestimated the impact in California, Illinois and New York and somewhat in Texas. And in California, it was certainly influenced by the undocumented immigrant population.

I'll kick it to Mark to talk about why we don't expect a continued acuity shift here. And it has to do with what we call low and no utilizers and the fact that, that's a much smaller component of our population today than it was in the past. Mark?

Yes. Absolutely. Andrew. Yes, so the States that Joe mentioned are driving why we're looking for a little bit higher attrition this year, California, Illinois, New York, Texas, Joe mentioned in California, it's the UIS, the undocumented immigration status members that are probably very disproportionately driving that State.

Now our guidance has -- membership attrition was 2% for the year. In our new guidance, it's now 6%. So certainly on volume, that's down. In our prepared remarks, we said the revenue would be offset by marketplace. But to Joe's point, the acuity impact, potential acuity impact on a higher attrition assumption for Medicaid, we're really not seeing it. When we look at the low and no users, most of them came out over the last 1.5 years or 2 years since the start of redetermination after the pandemic.

Right now, we're seeing a lower percentage of low users and no users in our Medicaid population than we ever have, at least since we've been recording it. The other point I'd mention is when we look at our stairs, levers analysis, on Medicaid, the people that are staying with us versus the people that are leaving us, the levers at this point are leaving very close to portfolio averages, which is just one more data point that suggests to us that any of this pent-up acuity shift is largely behind us. So yes, lower on Medicaid membership, but we don't really see an acuity impact here.

The next question comes from Stephen Baxter with Wells Fargo.

Just to kind of follow up on that. I hear your point that low and no utilizers are at the lowest point you've seen. But I guess enrollment is also being more tightly managed, I think, probably at any time in the recent history of the Medicaid program. So I guess, can you talk a little bit about your confidence level that, that actually is kind of the reasonable baseline for looking at this.

And then I hear you on the kind of the acuity narrowing and the lever stayer narrowing as you got through the second half of the year. But do you think you're actually at the point now where it is truly 0, and there is no difference. I hope you'd just be able to expand a little bit more on this assumption.

A couple of data points. I'll [indiscernible] it and hand it to Mark again. Our definition of low and no utilizes, we don't actually talk about exactly what it is, but it's a good metric to figure out whether there's large SKUs of MCRs in your population. That right now is very tight. In fact, in our definition, the percentage of total membership that are low and no users is 7.5 percentage points higher -- lower, sorry, than it was at the peak of the pandemic, and it's actually below pre-pandemic levels.

So we're really confident that the post-pandemic redetermination process eliminated a lot of people who weren't using the system and eliminated them from the Medicaid roles. Now with respect to membership, yes, the whole eligibility verification process has gotten tighter in States. Right now, we're comfortable with our 6% membership attrition assumption for 2026. And when we talk to you at Investor Day on May 8, we'll give you a longer-term view of what that might look like for our Medicaid business over a 3-year period.

The next question comes from Ann Hynes with Mizuho Securities.

Can we talk about free cash flow. Your free cash flow was strong in the quarter. after a couple of years that weren't great. What are you expecting for 2026? And then on your debt to cap, I know it's right now 48%. What is the goal? What's the ultimate goal to get that to and maybe the timing?

Ann, it's Mark. Thanks a lot for that. I get questions on operating cash flow all the time. And as you know, in a regulated business like Molina, what's more important than total company operating cash flow is cash flow at the parent, right? Operating cash flow swings a lot as we do accruals for risk adjustment for corridors, we hold those accruals. Maybe we don't pay them down for a year or two. Then if we're not accruing new liabilities, you see those operating cash flows, but they aren't meaningful for the company because, again, the cash flow stays in the subs. .

What is meaningful is the cash flow at the parent. We continue to have a lot of success with dividends moving from our subsidiaries to the parent. We moved cash to the parent once again in the first quarter and our outlook for the rest of the year is pretty good. My cash at the parent is a little over $200 million in the first quarter. It will be more than $600 million at the end of the year based on the dividends I expect to take throughout the rest of the year. So very good cash flow to the parent, and that's where we can actually use it to redeploy. That's what's really important. So on debt to cap, we are a little higher than we've been, but still at a very comfortable level, 47%, 48% depending on how you measure it. Typically, we target something in the low 40s as the more sustaining and enduring level. But with normal net income and the outlook we have for the business, I'm very comfortable with where we are in debt to cap.

The next question comes from Kevin Fischbeck with Bank of America.

Great. I understand the desire to kind of reaffirm this early in the year. I think we usually expect a lot more clarity for companies with Q2 results, so that makes sense. But just trying to understand a little bit whether this is that type of normal assumption around always kind of wait for Q2 to kind of raise guidance or whether you believe that there is still meaningful unknowns that aren't quantifiable at this point? And if there are, where you think that those things that could push the numbers in either direction that are still unknown?

Our prudent move to not increase guidance at the first quarter, even though the indicators are all positive for all 3 businesses are for vastly different reasons. In Medicaid, the volatility of the network cost inflection we experienced in late 2025, we had a very good trend result. In fact, the annualized trend result in the first quarter would indicate we might even come in less than 5% for the year, but we're not yet calling that.

In Marketplace, we want to wait to see the June [indiscernible] before truing up our estimate for the full year. And we had a very, very good start in our new integrated products, our FIDE and HIDE in Medicare, but it's 1 quarter. It's a brand-new product, existing members, but a brand-new product. We want to see that develop for another quarter.

We use the term time tested because I think it is prudent to see 6 months of results before updating our guidance, particularly coming off a highly volatile medical cost inflection environment in 2025, bearing in mind in Medicaid with a 92% result in the first quarter a 92.9% indication in our guidance for the full year, we can actually produce loss ratios north of 93% and still hit our guidance for the rest of the year. So cautious perhaps, but in this environment, we think it's entirely prudent to do so.

The next question comes from Justin Lake with Wolfe Research.

Medicaid cost trend last year, you said 7.5%, this year, you're saying around 5%, appreciate the company's transparency and giving quarterly Medicaid trend? I think you said 1.2% in the first quarter last year and 1.6% in the second. Can you give us the Q3 and Q4 trends that you saw quarterly coming out, what are you seeing in the first quarter? And can you give us the split between trend and acuity each quarter? And maybe also tell us what's driving the lower trend, what cost categories driving lower trend this year?

Sure, Justin. I'll frame it and hand it to Mark. The framing remarks that I'll make is that in 2025 on a reported basis, the trend appeared to be accelerating. But as normalized and viewed on a pure period basis, it was actually declining throughout the year. Now the real key point is all of that 2025 information is trying to be used by observers to predict what's going to happen in 2026. In 2026 for 1 quarter only, the 2.5% acuity shift component of trend for 2025 did not recur. And the trend observed in the first quarter annualized, would put us at better than 5% for the full year. .

So despite what it was doing in 2025, it looks like, at least for 1 quarter, our trend pick for 2026 is holding. Mark, do you want to discuss the quarter?

Sure. Justin, I appreciate your question. And the 1.2% to 1.6% you cited, I certainly recall. The way we look at our medical cost expenses is at the time what we report is what we know at the time. The other way we look at medical cost is on a pure period basis. we go back and we look at the full development of medical costs, and we put them in the periods of their dates of service.

Those dates of service on a pure period basis in retrospect, can look different than what we reported at the time. So the 7.5% that we looked at for last year is certainly the number we saw. The evolution of it is a little bit different than we reported at the time. So what we saw is higher trends in the first and second quarters, declining when we put the cost into their appropriate time periods, which we call a pure period basis.

Within that declining overall medical cost PMPM, the component of the acuity shift that we've talked about declined very meaningfully, such that by the end of the year, it was de minimis, almost gone. And as what Joe said, what gives us great confidence is here in the first quarter, we're seeing exactly that bear out. We're seeing the run rate of the 5% we saw last year of the core, but we're not seeing the acuity shift.

In fact, as Joe said, we're seeing just a little bit better than that run rate of 5%. But at this point, it's too early to really lay that out. I always am reluctant to talk about trends on a quarterly basis because there's seasonality and there's noise. It's a much better annual concept, but I certainly appreciate the question.

The next question comes from Sarah James with Cantor Fitzgerald..

Days came in at 44, which is below the 46 to 47 range in the prior 3 quarters. I know you're attributing that to timing, but is there any way that you can give us look at normalized DCP ex the timing items and then help us understand how you're thinking about reserve funding for Florida Kids, given the scale of the contract and typical pressure in the beginning of new contracts?

And then second, in your assumption that the sub dividend bring parent cash up to $600 million by the end of the year. Would that be possible while your company-wide RBC still remain similar to the 305% that you exited '25 with?

I'll take the floor to -- I think your second question is about Florida Kids. Let me frame that. And we'll be talking about this on May 8 as a proof point of the significant amount of new business wins we've had over the last 5 or 6 years. The Florida Kids program, Florida CMS, the official name. We believe that total run rate is a $6 billion revenue program. We are in full implementation mode currently. We are experts at managing high-acuity lives, which is what this is. And we also have an unparalleled platform in our opinion, of managing behavioral costs, both from a clinical and cost perspective, which is a very large component of this program.

We're really proud of the RFP proposal that we put forward in one. We have good visibility into the economics of the program now that we're in implementation mode. We have all the cost and claim data from our customer, our state regulator, and we have visibility on the '25, '26 program rates.

So all that being said, we believe and we've seen that the financial profile of this program is attractive, and we believe will provide for a meaningful -- it already has provided for a meaningful addition to our embedded earnings to be harvested over a 2-year period. Mark, do you want to address the reserve stat?

Absolutely. Sarah, there was a lot in that question. Let me start with DCP. We were at 44 in the first quarter. Now that was down 1.5 days from our recent average. And what we said on the prepared remarks, it was entirely the timing of payments. Now if you wanted to poke on that, you would look at what we call the roll forward of our reserves that was in the earnings release, you'll see it again in the [ queue ]. But if you look at it on a kind of per member per month basis, what you would see is that our medical expenses were tracking like average incurred. But on a paid basis, we just paid faster, and that will stick out in the PMPMs, if you do the math.

Now the other thing you guys do a lot of times to test our reserves is you look at the growth of premium versus the growth of claims payable. And our premium revenue was actually slightly negative year-over-year and our claims payable was actually meaningfully positive year-over-year, which would certainly give you comfort. Now on top of this, these are just testing balance sheet liabilities, underlying this are true actuarial [ tics ], which remain standard like they always are.

I think the last part of your question was, can the dividends that I talked about still be possible in the presence of the RBC ratio? Absolutely. We only take dividends when they are above the RBC target of $300 million. So we would never dividend to get below 300. If that was the point of your question, we'll finish the year well above $300 million RBC even with those forecasted dividends.

The next question comes from A.J. Rice with UBS.

Maybe just to clarify something on the quarterly trend and then ask about the marketplace. You were nicely ahead on MCR relative to consensus. I wonder how that compared to your internal expectation? And is any of your hesitancy on rolling that forward and updating guidance related to unusual items that might have impacted the quarter? I know some of the other companies have called out weather and flu being favorable. I don't know whether that had any impact on the trend you saw.

And then my question on the exchanges, you're probably the only one that's saying you're seeing silver level continue to be the predominant one. Others are talking about move to bronze, someone even said they had some backup into gold. Is that pretty much benefit design that's driving that? Or are you seeing something different in the market than perhaps others are seeing?

And then finally, just to comment your 305,000 current membership down to 250,000. Is that just evenly spread over the back half of the year? Do you sort of expect a more material drop at some point?

Let me take in the reverse order. So I can remember the about 305,000, think of it as going down to 250,000. Think of it as 40,000 terminations per quarter and 20,000 SAP adds. So 20,000 decline per quarter to 3 quarters. That's the easy one. On HICS product mix, we are still predominantly silver at 50%. But yes, we are in bronze where States allow a pricing regime that bronze can be profitable. And yes, there was a slight shift to gold during the year and I'll let Mark take that and put some color on that in a minute.

And on your question about the Medicaid MCR. We use the word time tested for a very specific reason. There was nothing unusual about the first quarter. Yes, the flu season, what we call ILI is coming in slightly better than last year but within expectations. The weather had an effect here and there in various states, but for a few days here and there. No impact. The quarter was clean. Coming off of the unprecedented inflection of 2025, we want to see 2 quarters of information before we declare that the 5% trend is coming down and the 4% rates are going up, it's as simple as that. Mark, anything to add on HICS.

Yes, absolutely. On the point of the metallic mixes, the market is certainly up on bronze, a lot of what people call buy-downs as the subsidies declined. And certainly, we have a little bit more. We reported about 20% of our mix was bronze this year, which is up a little bit since last year. We're at silver, 50% and gold, almost 30%. What's interesting about gold is a lot of states have shifted their metallics such that gold becomes just as attractive as silver. As a result, we have a lot of gold and silver.

Now why maybe do we have less buydowns than the market? Remember, our renewal rate is 70%. So we're keeping a lot of the same people. And very often, they're staying in the same metallic.

[Operator Instructions] Next question comes from Scott Fidel with Goldman Sachs. .

I was hoping you could maybe just on the Medicare MLR, just because you have the dynamic of exiting, MAPD plan for next year. Would you be able to parse out what the sort of continuing operations in Medicare, which I guess, would be more of the duals versus the MAPD MLR was in the quarter?

And maybe any thoughts around maybe sort of giving us at those metrics, each of this quarter just as we try to think about sort of the run rate on Medicare MLR heading into next year?

You're right to point out that the Medicare story is a little more complicated than most Medicare story because it's a combination of our D-SNP product, which has been in force for many, many years. Our MMP members who are now converted to commercial-based HIDE and FIDE and then our MAPD product, which is going to be -- we're going to eliminate that product for 2027.

We cited a drag on this year's earnings due to the MAPD product. I think we cited as producing $1 earnings per share drag that won't repeat next year. And it is tracking to plan. D-SNPs have always produced a modest profit, and they continue to the surprise, if there was one, a positive surprise was that we took a very cautious approach to converting 80,000 members and over $2 billion of revenue to HIDE and FIDE that are highly competitive new product, new rating regime. It performed a lot better out of the gate than we had anticipated. But it's 1 quarter, and we're going to be cautious in terms of updating guidance for the full year on that product.

So in 2027 and beyond, we'll only be talking about duals. We'll be talking about D-SNP and we'll be talking about HIDE and FIDE, which will become a dual segment, and it will be a lot easier to follow. Those are the 3 pieces, and they will have different dynamics for different reasons. Mark, anything to add?

Yes. I'll just put some numbers around that. For our guidance for Medicare, we have about $6.6 billion in revenue, $6.6 billion, and a loss of $1.25. As Joe mentioned, the MAPD component of that is $1 loss on $1.2 billion of revenue. That goes away next year. So with next year just being the duals, the D-SNPs, the FIDEs, the HIDEs.

The current run rate is about $5.5 billion, about a 94% MLR and we see that only getting better over time. In fact, our Stars profile for payment year 2027 has improved. So the outlook for 2027, but that should give you the jumping off point.

We'll give you a good 3-year outlook for our duals business in a couple of weeks at our Investor Day. We're pretty excited about it. As you know, the regulatory regime is favoring the integration of Medicaid and Medicare. And since we have a very deep and wide footprint in Medicaid and a Medicare business is quite robust. We're quite enthusiastic about the prospects for our duals business. .

The next question comes from John Stansel with JPMorgan.

Over the last few quarters, usually in the prepared remarks, you spent time talking about an actionable M&A pipeline. A little bit last commentary on that today. I just want to understand, we've seen some Medicaid plans announced that they're exiting either in '26 or '27. How are you seeing the pipeline? Has anything changed or anything that's kind of making that more or less actionable right now?

John, really, the only reason, very practical reason why we didn't talk about growth this quarter was because we have an Investor Day coming up in 2 weeks. What we'll talk about on this. And you're right to cite that as you plumb the depths of what goes on around the country in various states, there are plans that are reportedly in trouble, distressed. We know where they are. We know who they are. We've probably talked to them. And the pipeline, the M&A pipeline is quite replete with actionable opportunities -. We are going to remain disciplined, stick to our knitting on properties that fit into our core strategy. And I'll tell you, Mark and I have this debate with ourselves all the time. While we only paid 22%, 23% of revenue in the past, book value seems to be the best benchmark that one can look at now. And if you're putting -- if you're only paying for regulatory capital, an M&A opportunity is as good, if not better, than a new contract win.

So we'll talk more about that in 2 weeks' time. The only reason we didn't talk about here is not because it's less important. We're not actionable. We'll be talking about it in great detail in 2 weeks' time.

The next question comes from Erin Wright with Morgan Stanley.

So you mentioned several of those moving pieces a lot throughout the call in terms of the various different books of business where you want better clarity -- you mentioned, for instance, June Wakely data, but what are the latest weekly data. How did that inform you? And then as we think about all those variables, can you kind of rank them on the level of clarity or how comfortable or vulnerable you are across those segments? And then just as we think about you give long-term growth aspirations or targets on May 8, how do we get comfortable with the baseline if -- could you give us any incremental clarity on the near term on May 8 at all?

Erin, we are encouraged by the start to the new year. The data points we laid out are real, as someone suggested before, is there anything in the first quarter of an unusual nature that is creating the caution that you're exhibiting. And the answer is no. We use the board time tested because in this environment, we think it is entirely reasonable, if not prudent, to have 2 full quarters of information, let the first quarter develop and become fully seasoned. [ Look ] in the second quarter, particularly on businesses where you have new membership, in order to update our forecast.

So no, there is nothing in the first quarter result that is causing this caution. It is the test of time coming off this unprecedented inflection we experienced last year. Now when we get to Investor Day in 2 weeks' time, all you're going to have at the baseline is our current guidance for 2026 at $5, but we're going to give you a really good view of what this looks like in 2029. We'll show you the building blocks of growth. We'll show you how we expect margins to recover and to what extent.

Obviously, we'll give you the numbers then. But you will see block by block, brick by brick, how we're building a story for 2029 in all 3 of our businesses. And the 2026 baseline of $42 billion of revenue and $5 is going to be the baseline. We're not updating it at Investor Day.

The next question comes from Ryan Langston with TD Cowen.

Sorry if I missed this, but can you elaborate a little bit more on the commentary of timing for operating expenses and G&A. Is that for incentive comp or something else? And then on the MAPD business, exit. You said in the past that you might have an opportunity to monetize that. Can you give us an update where you're at in that process?

Sure. I'll comment on the second question, Ryan, first and tag it to Mark on the timing of operating expenses. Yes, on the MAPD business, which is mostly in -- here in the Northeast and in California, we are still working with potential counterparties to transfer that business. We'd rather transfer to a strategic partner. We're still working with various counterparties to that end. .

If we feel we won't be successful doing that, we will terminate the business and terminate the product for next year. So either way, we will be out of the -- the traditional MAPD product for 2027. We prefer the one transfer to a strategic partner. But if we're not able to do that, and we're still in the process of exploring that, we will wind it down. Mark, timing of expenses?

Yes. Ryan, full year guidance unchanged, as I said in my prepared remarks, 6.4%. We booked a 6.9% in the first quarter, which is entirely timing. There's some IT projects. And separately, as you know, we're gearing up for that very large contract in Florida, the Florida CMS Kids contract, which is $6 billion of run rate. You can imagine that's a big lift as we think about that. So it's just some lumpy expenses quarter-to-quarter. The emphasis here is that full year is unchanged at 6.4%. It's just the lumpiness of how we recognize expense. .

Next question comes from Michael Ha with Baird. .

Just wanted to follow up on Steve's question about low and no utilizers. I understand you have a lot at you've seen. You don't expect additional acuity shifts Medicaid declines and that your low utilizes, I think you said 7.5% below peak. And I know, Joe, you mentioned you won't provide a definition on that, but is there any way you could provide a bit more color around perhaps what buckets of MLR you consider low utilized? Or is that 0 to 20%, 20% to 40% MLR higher, for example, would a 70% MLR number be considered that because the 70% MLR number dropping off is still like a 20% delta basically where your book is running at today.

So curious if you had more color there, what percent of your members fit in those buckets, how those cohorts change over the past couple of years? Also, how do they compare versus your expansion book?

I'm not sure we actually -- I'll respect your question and try to answer as best as I can without. I think we're going to stop short of giving detailed numbers. So let me frame it this way. First of all, over what time period, if somebody doesn't use a service in a 90-day period is that no utilizer. Many people don't get a service for 3 months at a time. So the way I'll frame it is we didn't lock in on the definition, we tested all definitions. We tested time periods. We tested 0 utilizers very clear, no claims. What's a low utilizer? Is it a PMPM number? Is it a medical loss ratio number. .

We tested definitions and centered in on one. And to be honest, the fact that low and no utilizers are down substantially, even below pre-pandemic levels. It almost matters not -- it doesn't matter what definition you use, it's down. So we're not giving absolute numbers, and we're not giving the model that we're using. But I absolutely assure you that making up a definition to make yourself feel good about is not what we do here.

We tested the definition across a wide range of time frames and PMPM medical costs for that time frame to test whether it matters or not. And I will tell you it doesn't matter all that much. It is markedly down and therefore, we're not anticipating an acuity shift. Mark, you the architect of all this, do you have anything to add?

Yes. What's important is this is a directional statistic. As Joe mentioned, we've taken a lot of different approaches. And directionally, the number of low users and no users by all approaches is much lower. The specific numbers, in this case, are less relevant. The other statistic that I use, which just gives us great comfort in what we're seeing is the stayers, levers analysis. A year or two ago, levers would have left at much lower PMPM or MLRs, whereas now they're leaving at those ratios being much closer to the average, which again, is one more data point supporting our view on this. .

The next question comes from Lance Wilkes with Bernstein. .

Can you talk a little bit about the state behaviors you're observing as we're going through this. And what I'm interested in, obviously, you commented a little bit on off-cycle rate increases. And maybe if you can talk about maybe what are the characteristics that help to drive that. But interested in kind of comments on pipeline, how states are approaching implementation, new processes, what types of products, if any, they're looking at kind of given the backdrop?

And then just as a cleanup, if you could make any comments on the trend favorability in the first quarter. If there is any aspects of trend beyond acuity shift you're seeing some positive favorability in 1Q, that would be helpful.

Sure, Lance. On State behaviors, it's hard to -- you can draw some themes across the various states, but they're all different. But generally speaking, we're seeing states step up to the reality that a cost inflection has occurred and they are catching up to it. What do they need to catch up to? If you look at the trends we've experienced over the past 3 years, 4.5, 6.5 and 7.5 the cost baseline is 20% higher than it was 3 years ago. That's what they need to catch up to. Now we believe we're operating 300 basis points -- 300 to 400 basis points better than the average market. So as they catch up, we should be going back into a much more positive territory than we already are.

Bearing in mind, our guidance in Medicaid is for a 1.5% pretax margin this year, eliminating the impact of Florida Kids. So we're in good shape there. So states are stepping up on rates. They are also, obviously, due to the indirect impacts of OB3, they're looking at eligibility. They're looking at carbons and carve-outs. They're wrestling with provider and MCO taxes. They're dealing with all the effects of that. They're looking at helping MCOs reintroduce UM on behavioral, for instance, during the pandemic, a lot of that was relaxed because people weren't using services.

So you can go state by state, but those are the general themes focusing on eligibility a lot, focusing on program features, supplemental benefits that maybe don't need to be funded and trying to deal with the residual impacts of OB3, that's what we're seeing.

On first quarter trend, I think your question was, is there any more color to put around it? From a medical cost perspective, we're seeing good controls over inpatient in Medicaid. The inpatient trend is flattening in Medicaid. That's pretty obvious. Pharmacy is actually behaving favorably. High-cost drugs are still a pressure point. But number of script volume per 1,000 and unit cost is actually leveling as well. And BH, which has been a trend inflection over the past 2 or 3 years, is more favorable this year, at least in the early stages than it was in the past due to state controls, client controls and company controls.

So those are a few but it's certainly good news and encouraging news in the first quarter that the first quarter trend in Medicaid annualized would have us slightly better than the 5% trend assumption for the year. Mark, did I miss anything?

No, Joe, I think that's well summarized. The only thing I'd add on [indiscernible] is comments that Joe made, obviously, very appropriate. There's always questions about ILI or flu, whatever you want to call it, pretty much a normal season for us, and we're now coming out of that. So I think that's behind us. Thanks, Lance. .

The next question comes from George Hill with Deutsche Bank. .

Two quick ones. Mark, I think you talked about -- I want to follow up on Michael's question. You talked about the decline in 0 or low utilizers down to the lowest level. It seems like it moves a lot sequentially from Q4 to Q1. I would love to have you talk a little bit about what drove that? And Joe, as we talked to state administrators on the Medicaid side, we're hearing a lot of worry about the community engagement requirements as we go into 2027. I would love to hear any early thoughts that you guys have had. We know work requirements are an issue, but a lot of states are worried about how to administer the community engagement requirements. Would love to hear what you think about that.

I'll take the second one first, and then we'll go back to low and no mark. Acuity engagement. Every state is different. We're actually fortunate in a way where we have a business in Nebraska, which is a state that has declared it's going early on work requirements.

So we have some insights. And I'll tell you, they're going to move and they're going to move for the middle of this year. But it is very clear that the rules around what information you need to terminate Comex Part procedurally, how does it work? What's the definition of medical frailty that's going to be used. So we are working with each of our states in different ways. Various states allow different levels of intervention with MCOs in terms of whether you can help people find work, whether you control it performs, every state is different. But our community engagement teams nationally, property-by-property are extremely engaged with each of our state clients on working through these requirements.

But I will tell you that it is still a bit unclear given the very general guidance CMS has given, what information is going to be required to terminate someone or allow them on ex parte and what the -- what are the exceptions, particularly with medical frailty. Mark, do you want to take the lower now user question?

Absolutely. So George, the market is down. Medicaid membership market is down about 20% since its peak in 2023 when redetermination began. As those 20% of the people came out, a lot of them were 0 and low utilizers. That is what drove the acuity shift, right? As they come out, the remaining population is on a weighted average, slightly higher cost per member. So what we saw in '24 and '25 was a component of our trend attributed to that mix shift, which we call acuity shift across '24 into '25. Across '25 we saw the percentage of low utilizers and utilizers fall to the lowest level with a little higher at the beginning of '25 and by the end of '25, it was at its very low level. which gave us confidence that, that acuity shift is largely behind us. So again, the component of low and no utilizers falling '24 and '25, that's what contributes to the acuity shift. And our data shows us that's largely behind us, if not totally behind us.

Our last question comes from Jason Cassorla with Guggenheim. .

Most of my questions have been asked. Maybe just a quick 1 on earnings seasonality. You talked about the majority of earnings in the first half -- you've got an updated Medicaid enrollment expectation, higher exchange enrollment at the start of the year. I know this prudence in your outlook, given the unknowns and some timing nuances with the G&A and the ramp-up of the Florida CMS, maybe just you could step back, is there anything more or anything else on the seasonality side are you willing to give for us as we sit here today ahead of your Investor Day would be helpful. .

Mark, do you want to take what we expect for seasonality this year.

Absolutely. .What we had said previously was about 2/3 in the first half, 1/3 in the second half. I'm not going to update that now because if I did, I'd effectively be giving you second quarter earnings. But proportionately, we're in the same place. We had a nice first quarter, but I think proportionately, we would be in the same front half, second half.

What drives that while the Medicaid rate cycle, remember, we get -- we're a little bit front-end loaded on the Medicaid rate cycle. Remember, seasonality on marketplace means always the first half of the year is a little better than second half. That's baked into our full year guidance. And then lastly, fourth quarter, Florida Kids, as Joe mentioned earlier on this Q&A session, Florida Kids will come in pretty high MOR in its first quarter, which is typical for new business. That will be some weight on the fourth quarter, no doubt. But those are the major components and proportionately higher in the first half, lower in the second half, as we said.

This concludes our question-and-answer session and Molina Healthcare's First Quarter 2026 Earnings Call. Thank you for attending today's presentation. You may now disconnect.

All right. Well, thank you, everybody, for day 2 at TD Healthcare Conference. I'm Ryan Langston, I'm the health care facilities and services analyst here. Very, very happy to have Mark Keim, Senior EVP and Chief Financial Officer for Molina. Thanks for being here.

Absolutely, Ryan, it's a pleasure. Good morning, everybody.

So at the top, I just have to point out, I think if my fact checkers have it right, I don't think you've been to a sell-side conference in 1,874 days. So we appreciate you choosing us for your first time in a couple of days. So thank you.

Listen, right at the top, you reiterated guidance last week, $5 per share for full year '26. It's been a little less than a month now since you reported. I guess, anything to update us on in terms of cost trends, utilization? I think everything -- something that's on people's minds right now is effectuation rates and exchange. Just anything you can highlight since you reported?

Yes. Well, obviously, anything material would be inappropriate to report at this time. And more to the point, I've only really seen January, which is in the very early stages. So both from a disclosure perspective and from what I'm actually seeing in my business perspective, it'd be way too soon to give any kind of an indication on performance. But we are highly confident in our guidance this year and where we are. You talk about effectuation on marketplace. That's one thing we can talk about. As you know, in the Marketplace, every year, there's new members coming in and there's renewing members.

Renewing members is always a bit of a challenge because they have several months to make their payments or not. And the way it's set up is there's a grace period, which essentially gives them the effect of being covered for a couple of months even if they don't pay. So for the first couple of the months of the year, you don't really know where you are. Now if you're following Marketplace at all, everyone says there were 24 million members in Marketplace last year across the country. Everyone's saying, well, gee, it's not falling that much.

Well, that's because we don't know effectuation across the country. Most people think that the 24 million that we had last year will fall to the mid- to high teens, call it, 15 million to 18 million this year. But we don't know, Ryan, for exactly the reasons you're talking about, who's paying the renewals and not. Now the good news is by the time all of the MCOs give their first quarter numbers, they'll have a very good handle on that because we'll be through effectuation. But that's been the big disconnect in the media about, gee, everyone said the Marketplace membership would fall, it's not. Well, it is. We just haven't seen it fully yet.

On the $5 guidance, so you had called out, I think, $1 of drag from Florida implementation, $1.50 from MAPD. I guess maybe on the other assumptions, maybe walk us through another of the key pieces that kind of drive that $5 guidance, maybe particularly the 5% sort of net cost assumption on Medicaid?

Yes, sure. So we're at $5 right now. In the third quarter, I suggested something more like $14. How do we get from $14 to $5 is effectively your question. About $650 million of it is a deteriorating Medicaid MLR. Now back in the third quarter, we were jumping off a 92% MLR for Medicaid in the second half. I thought rates would improve by about 50 basis points on MLR to get us down to a 91.5%. Where I really am at the moment for the full year is a 92.9%. Why is it so much higher than what I thought back in October? One, the Florida Kids contract was a win. We like that a lot, but it comes in initially at a high MLR.

Two, the carryover effect from a couple of those California items that we announced in the fourth quarter, the $2 of drag that we recognized in the fourth quarter will have a run rate impact into 2026. And then lastly, I hope that the rate cycle would help us by about 50 basis points. It actually hurt us by about 50 basis points. Rates have still not responded to increased trend.

Another thing you had called out on the call was this California retro adjustment. I believe it was related to the undocumented population. I think you talked about L.A. in particular, there was some churn there. I guess why was Molina maybe sort of more exposed to this versus your competitors? Because we haven't heard a lot of other folks really talking about this issue?

So just to set the stage for everybody, in the fourth quarter, we missed by about $3 versus where we expect it to be. $2 of that were 2 large retro items in California. One was a risk adjustment update, specifically on the L.A. population. The other $1 was on a new corridor for the undocumented population. Now that deserves a little bit of commentary. Five years ago, CMS said corridors can no longer be put in place retrospectively. That is if you don't know you have one at the beginning of the fiscal year, they can't pull it on you later on, which is what they did in the pandemic. So in theory, there shouldn't be surprise retro corridors.

Why was there one in California? Because the corridor was specific to the undocumented population. Remember, CMS, federal funds pays FMAP, a meaningful part of most Medicaid plans. It pays nothing for undocumented populations because CMS doesn't recognize those populations. As a result, since the state of California paid for that entirely out of their own budget, they make up their own rules. So that's why suddenly we had a retro corridor in California. Now folks say, can this happen everywhere? Well, in theory, yes, but almost no other states have an undocumented program in the way that California does. New York has a small one, Illinois has a small one. Washington has a small one, but they're rounding errors compared to the 1.5 million people covered on undocumented basis in California.

Now the second part of the question is, why was that a bigger item for us and not some of our competitors? Well, a couple of things there. One, we give transparency at a level that none of my competitors do. I give you very clear MLRs on my segments, and I go pretty granular on the drivers of my business by segment, which you just don't see in other players. So it's going to come out for that reason. Two, what's material for me may not be material for 1 or 2 of my bigger competitors. But third, and I think this should be somewhat obvious in retrospect, Molina is a best-in-class player. We typically are 400 basis points better than the market on our MLR performance. If you're not a best-in-class performer, you don't have a corridor problem. It sounds tongue and cheek. But if you're not a very good performer, throw a corridor at me, I don't care because it doesn't affect me. So I think for those reasons, you're not maybe seeing some of the others talk about it. But again, when you're a best-in-class performer, these things will hit you.

And then building from the $5 sort of into the future, I think you had talked about an $11 per share sort of embedded opportunity. Obviously, there's margin recovery potential sort of across the book. Maybe walk us through on that $11, what's in that? And maybe even further, what are some of the building blocks to kind of get you back to where you want to get to?

So what you're referring to $11 is what we call embedded earnings. And for Molina, the concept of embedded earnings is not just get your act together and get your margin back to where it belongs. For us, $11 embedded earnings. The concept of embedded earnings has always been new things that we've done, that aren't in the P&L yet. So if you have an acquisition, if you won a big new state RFP, those are things that are in future earnings, embedded earnings, but not in today's earnings, not underperformance on margin. So just embedded earnings on that new store concept I just talked about is $11.

What's in there, things like the Georgia win, not in our P&L yet, things like Florida CMS, not in our run rate yet. Texas, so many items that are yet to come that you can stack on top of 2026 performance. So there's $11 embedded earnings, new things on the come. Now some of my competitors have talked about embedded earnings of, gee, margins are lower than where they should be, let's just bring them up. Well, that's not embedded earnings to us, but let's go through the math. So this year, my guidance is about 1.5% pretax margin. It's the lowest it's ever been since I've been in the seat. Why? Because some of the bigger things we'll talk about with rates versus trend. That has to normalize. And again, Molina is a best-in-class performer. We're 400 basis points better than the market. The market needs those rates more than I do, but man, I need them too. Every 100 basis points on the MLR line or the pretax line, your choice is $5 a share.

If the market is underfunded by 400 basis points, do the math, what's your assumption on where we get back to? Is it 100 basis points, 200 basis points, 300 basis points are the full thing, multiplied by 5. So is it $5, $10, $15 that you're adding on to where we are already. Now all in Medicare and Marketplace, same math, they're smaller business, every 100 basis points is $1. But you add those things up and you're approaching $30 a share, maybe the better question is, how much of the rate do we get back by when? And without a crystal ball, I can't tell you, but I think things are moving in the right direction.

You also announced at the fourth quarter, you were exiting the MAPD market in 2027. I guess maybe remind us the reasoning behind that. I have gotten some questions from folks. Is this just a simple exit? Is there a monetary value to that book? Maybe just kind of give us where you think that goes over the next year?

Yes. So let's talk a little bit about what we're talking about in particular. What we call MAPD is what some people call general issue or just Main Street Medicare Advantage. It is not the duals. I currently have $6 billion of revenue in what I call Medicare. This affects $1 billion of it. The other $5 billion is duals, which are very core to our strategy. Now on MAPD, it's never been particularly strategic. If you follow the company, you know a year ago, we exited 12 states that were very subscale in MAPD. The $1 billion we're now talking about are the assets that we picked up through 2 acquisitions, one in Bright in California and one in ConnectiCare.

Those were picked up as part of larger acquisitions. Bright was done largely for the dual footprint. MAPD was option value. ConnectiCare was done for the marketplace footprint, MAPD was option value. So as we look at this MAPD, we look at the CMS environment going forward for MA. We're a subscale player. We're better served focusing on the duals, which are so strategically aligned with our Medicaid business. So that's exactly where we are. Now the second part of your question is how will we exit. You can imagine since we announced that just a month ago, the phone has been ringing off the hook with all kinds of people maybe looking to make offers, do something. Ultimately, what we do, I'm not ready to tell you yet, but it could be a runoff, it could be a sale.

Got it. You mentioned the Florida Medicaid contract win. You talked about it on the fourth quarter, a large competitor, I think you took that from kind of said it was a very low single-digit margin business. I think in the fourth quarter, you just said it's sort of high 90s MLR. So what's attractive about that particular business? And again, crystal ball, but where do we think that goes moving forward?

Yes. So a couple of things, and I've gotten the same question, Ryan, from a couple of different perspectives. That competitor you mentioned, if you look at the stat filings, tends to run at a significantly different level than Molina does. So maybe that's the first premise for your question, why they maybe see it differently. But what we do really well is manage high acuity populations. And the Florida business we're talking about, it's called CMS, Children's Medical Services are high-acuity kits. And we're very good on these high acuity populations. We're very good on medical management in general. We believe we can make attractive margins in this business. Right out of the gate, as you may know, it's not performing at its ultimate run rate. That's typical for new contracts. Very often, we say that it takes between 1.5 years and 2 years to get to target margins. The first quarter always runs a little bit higher. But again, I believe Molina with a best-in-class MLR is probably best situated to make a margin on these kind of populations.

Maybe just sort of big picture now, right? Medicaid, in general, how are we viewing that? Or how do you view it, right? We're sort of now past redeterminations, but acuity trend are up a ton, rates aren't keeping up. We'll get to that in a minute. You have OBBB changes in '27 and then further changes in 2028. Where are we at right now with Medicaid in general, knowing those things coming over the next couple of years?

We believe 2026 is a trough year for margins. Look at how we got here. In the pandemic, there was no check for eligibility. So anybody just got coverage and kept coverage and didn't get kicked off. After redetermination starting in mid-2023, they started to check eligibility again. As a result, national membership went down by 20% across about a year or 15 months. Now what happened when so many people came off, many of them were low users and no users. We track low users and no users, and the percentage in our book dropped by 5%.

So if you think about it, if close to no users or no users drops by 5%, that's immediately pressure on the remaining population. We call it an acuity shift. So you lose 20% of your members, they're disproportionately low users, no users. Over a 2-year period, you feel that an increased trend. It's not the kind of trend you normally think about where same-store people are utilizing more. There's some of that, but it's more about low users and no users falling out, driving over the average cost per member. That's a lot of the trend pressure we saw. So in '24 and '25, we estimate that about 2.5% of trend was attributable just to that mix of members coming out. We reported 6.5% trend in '24. We reported 7.5% trend in '25. In both years, about 2.5% was that acuity shift.

Now I'm guiding to 5% trend in '26. Why do I feel good about that? Because last year, it was 7.5%, 2.5% was the acuity shift. I no longer have acuity shift. So let's go with the same number we had last year ,5%. So that's how we got here. Really high trend, rates didn't keep up. Now why do we feel good about this being a trough and next year turning around? So a lot of the acuity shift is behind us. And more to the point, I get the question all the time on actuarial soundness, well, shouldn't actuarial soundness prevent this. Concept of actuarial soundness is a longer-term concept. The protection next year, it doesn't protect it tomorrow.

So what it says is that eventually, rates and trends must converge. But whenever there's a spike or a lull in trend, actuarial soundness doesn't necessarily offset that. Why do I feel good about 2027? Here's a little insight into how the actuarial process works. The way the actuarial process works is they go back a couple of years to get what they call a solid baseline. Why do they want to do that? Because medical trends take sometimes a year to 1.5 years to fully what we call develop. So for 2026, for example, we won't know '26 definitively until late '27 or early '28 just because it takes so long for certain claims to come in. So the actuaries will say, let's look back at a certain baseline. For '26, they use 2024. So that's a rock-solid indisputable number.

Where does the human element come in? Okay, well, I have to put 2 years of trend on that to give you 2026 rates. Rock-solid baseline. What was trend in '25, don't know, I'll make it up. '26, don't know, I'll guess. So the actuarial process, rock solid on the baseline, a lot of latitude on the 2 years of trend. Okay. Jump to '27, they'll be jumping off '25. Remember, '25 was the second year of those artificially high trends because of the mix of acuity shift. Now I'm jumping off a rock-solid inflated number. And if I use anything close to a normal trend number, I'll get to an appropriate rate. So I feel really good about that.

Now what you're also seeing is states just step forward when they don't have to and do the right thing. Here's a retro rate adjustment. Here's a midterm rate adjustment, recognizing the market is underfunded. Why did they do that? They're looking at the stat filings and saying, actuarially, I'm where I need to be, but half of my MCOs are losing money, particularly that big not-for-profit, that's the second biggest employer in my state capital. Oops, better get some rates in there. So not required actuarially, but they just look at the results, they know the market is underfunded.

Lastly, when they fund, Ryan, they don't just fund one big black box. They're actually funding what we call rate cells. So if pharmacy is running like crazy, they have to discretely recognize that. If behavioral health is running crazy, which it is, they have to specifically recognize that. So for all those reasons, technically, I feel good about the recovery of rates versus trend in 2027. But the one I really hang my hat on is we know from the stat filings that the market is underfunded by 400 basis points. Even with that, I'm guiding to 1.5% pretax margin. My competitors are losing money. The big publicly traded companies have told you they're in the low 2s, high 2s pretax margin losses. Guess what, the not-for-profits are doing even worse. They're just not as efficient. That's not sustainable. States have to step up and do the right thing. If we get half of that 400 basis points of underfunded, I'm right back at target margin. My competitors are maybe breakeven again. So for all those reasons, we're feeling pretty good about '27. That's why we call it '26 a trough.

On the flip side from rates and trend is really benefits. And this is something we've been sort of contemplating. It seems that states have not necessarily broadly been open to benefit cuts or allowing you to do more UM, et cetera. I guess what are the conversations like with the states that maybe the budgets just don't allow for these actuarially sound rates? Is there openness to, again, revisions to benefits, not necessarily cuts, but UM, anything on the benefit side that you're seeing maybe broadly with your -- especially your larger states?

There's such more receptivity now to it. Remember, we said that actuarial soundness was a delayed concept. Well, in the early stages, states can kind of ignore it. In the early stages, inevitably, they have to fund those rates at an appropriate level. Suddenly, they're a lot more interested in saying, well, what else can we do? If we have to put rates back to where they need to be, what else can we do to take the pressure off this? Now Ryan, we're back to what you just said. The other lever is for them to say, gosh, I have to fund appropriately, but where else can I reduce the expense? Can I reduce eligible members? Can I reduce the benefit load or can I allow MCOs to put more utilization management in place so that they save money so that we can fund less longer term? I think you're seeing all of those things.

What are the good examples? Pharmacy is a huge one. We had a number of states that it was a free for all in GLP-1s. Literally, whatever the condition was, you get GLP-1s. Well, they don't fund that. And then eventually, the bills come in, they have to make rates right. And they say, well, gee, maybe GLP-1s should be restricted to what's medically appropriate. Well, now we're doing the right thing on utilization management. What's another one? BH. We had certain states that completely had an open door for BH, no utilization management for BH, which means you've got a lot of unchecked use but you also get a lot of fraudulent providers pop up. There's no utilization management, open your doors as anyone come in, we'll charge an arm and a leg. So states realize that these unchecked protocols result in much higher expenses.

So doing the right thing on high-cost drugs, doing the right thing on BH, checking eligibility, making sure the benefit loads are appropriate and allowing MCOs to do utilization management so that things are clinically appropriate out there. We avoid the fraud waste and abuse. You're going to see a lot more of this going forward. It's the appropriate thing.

Maybe sort of a sensitive topic, but we have heard, I think, a little bit more chatter and maybe a little bit more openness from some of your competitors about exiting states if they just don't see sort of a glide path to some appropriate margin, whatever we can argue what that is. I guess what is your stance given your exposure to Medicaid on the willingness to potentially walk away from a state, small, large, whatever, but just given the political ramifications and just sort of the view from the market?

Ryan, it's a good question, and I've gotten that one from a bunch of people. And just anecdotally, I am seeing some of my big competitors with similar actions or at least suggested actions. What's really interesting about Molina, I mentioned that in Medicaid, I'm guiding to 1.5% pretax margin for the whole company this year. We're in 20 states Medicaid. It's amazing how tightly around that 1.5% mean they all gather. I don't have big performance SKUs. I don't have big outliers, which is really surprising.

You'd go back and look at your portfolio and you'd say, well, surely, the Republican states are doing worse than the Democratic states, not true at all. Maybe the high FMAP states are doing better than the low FMAP states, not true. Oh, my favorite one, look at state budgets and rainy day funds. Clearly, that would show you who's doing better or for worse, no correlation, big states, little states. So I don't have performance SKUs. I might be thinking more like the competitors if I did. If I had one massive negative outlier, would I be thinking differently? I don't know. We've never been in that situation. But what's unique maybe about Molina is we're best-in-class on margin, but it's also highly consistent across the book, big, little, small, red, blue, et cetera.

On the MA side, obviously, that has had some pressure to it, too, over the past couple of years. Growth is slowing. Competitors are revising sort of long-term margins in some cases. But thinking about that as an analog to the Medicaid side, Medicaid struggling, of course. I know you say it's a trough year, but you said your competitors are doing worse than you are. Is it time for maybe the market to sort of reset the margin expectations broadly? I know you have your Investor Day coming up in the front row in Molina, but just thinking in general, does the market need to look at that and say, historic margins may be off the table at this point?

Well, let me go through a little framework, which is the way we think about it. When the actuaries set rates, they target a 1.5% pretax margin. So they target a certain MLR, they acknowledge a certain G&A load and they get to a 1.5% target margin. Right now, the market is under by 2.5%. On average, the stat filings say the market is losing 2.5%. That's why we say the market is underfunded 400%. Now unless someone's going to suggest that the 1.5% target margin is no longer the target margin, states have to get back to that number. Now if Molina is always 300 to 400 basis points better than the market, the market is targeting 1.5% as they did historically and achieved 1.5% historically. If we're 300 to 400 basis points better, doesn't our target margin stay the same? It's a matter of actuaries bringing rates back to where they need to be.

I think this is a really powerful part of the discussion, though, Ryan. Actuaries have to target 1.5%. Remember, those little not-for-profits need to be making some return on their capital to even stay solvent and have continuity. If they're getting back to the 1.5% and Molina keeps its benefit to the market, we're well within our target margin of 4% to 5% just because we perform that much better than the market. But I think that's the fundamental model on how to think about it.

So you think the market can eventually get to a target margin?

Oh, it has to. Actuarially, it has to.

As we sort of think about the exit of MAPD, and obviously, you talked about sort of your duals membership and your line membership. Are you going to sort of approach that market more from the Medicaid side at this point, maybe going forward as opposed to sort of the traditional MA broker type channel?

Yes. So what Ryan is talking about is the integrated duals market. We left the MAPD market. Remember, that was a little part of my Medicare business. The duals, though, is a very different proposition, and it's highly attractive for us. What is a dual? It's a member that has Medicaid benefits and Medicare benefits. States are increasingly saying, I don't want those 2 benefits from different MCOs. The member experience and the clinical outcome and the economic outcome are so much better when both sides of the equation are managed by the same MCO. That makes sense, right? Two membership cards, 2 call centers, 2 networks, it doesn't make sense for somebody with both benefits to have 2 different insurance plans.

So put them together, that's what we call exclusive alignment. It's truly integrated. This is highly strategic for us, unlike mainstream MAPD because these are Medicaid folks. They're Medicaid folks that just turned Medicare eligible, which means the Molina name resonates with them, our value prop, our network resonates with them. We know these members. Now going forward, states want this exclusive enrollment. Any incumbent Medicaid player is tremendously advantaged in this environment. Why? If you have to be on both sides, it's very easy to become a Medicare player. You just go out and get an H contract. It's very hard to become a Medicaid player. There's only 3 or 4 at any given time and RFPs only come up 6, 7, 8 years. So if you want to be on both sides, easy to become a Medicare player, not so easy to become a Medicaid player. So incumbent Medicaid players tremendously advantaged. If you don't have an H contract for Medicare, you just grab one -- player doesn't have the same option. They can't just grab a Medicaid contract. So we like this a lot, both because it's continuity for our current Medicaid members, but also there's a real strategic advantage to our current footprint, which we like a lot.

And maybe to that point in the last minute or so here, we've written on the benefits, I think, to this duals alignment of this fully aligned model. There are some provisions coming in '27 and 2030 as well. In your public comments, you've been very supportive of those, obviously, given your sort of overlay the vast majority of your members in your states. How are you thinking about stepping into '27 and the opportunities given those change in provisions?

Well, so a lot of this has already happened. You may know that in 2025, what's called the MMP demonstration program came to an end. We were one of the biggest players in the MMP demonstration program, if not the biggest player in the MMP demonstration program. January 1 of this year, MMP transitioned into what's called FIDE/HIDE, fully integrated or highly integrated dual eligible program. So essentially D-SNPs with integration. So as of January 1, we already converted this big MMP book to a large HIDE/FIDE footprint. To do that, we had to win a number of RFPs, Ohio, Michigan, Illinois, so many places like that. So we're suddenly in a really good spot on these FIDE/HIDEs.

Now going forward, you mentioned brokerage distribution. We need to do all that. That's business as usual. But again, we have that strong Medicaid footprint that very few others do that we're able to go chase this FIDE/HIDE program. And remember, these are high acuity folks where we do really well. And by high acuity, you might also think financially high PMPM, per member per month revenue. Typical Medicaid member is about $400 per member per month. These high acuities are $3,000, $4,000 a month. So think about the opportunity to manage medical costs when the base is that much bigger. This is what we do really well. These duals will grow 10% to 15% a year as a market going forward. We think we're pretty well positioned.

Great. Well, I think that's all the time we have. We'll leave it there. Mark, thank you so much for joining us, and thanks, everybody. Enjoy the rest of the day too.

Thanks for your interest in Molina.

Good day, and welcome to the Molina Healthcare Fourth Quarter 2025 Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Jeff Geyer, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Molina Healthcare's Fourth Quarter and Full Year 2025 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 and full year 2025 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 of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Friday, February 6, 2026 and have not been updated subsequent to the initial earnings call.

On 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 the fourth quarter and full year 2025 earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2026 guidance, the medical cost trend and our projected MCRs, Medicaid rate adjustments and updates, our recent Florida CMS RFP win and contract inception, our M&A pipeline and deal activity, upcoming RFPs, our expected future growth, Medicaid, Medicare and Marketplace membership levels, earnings seasonality, the transition to Medicaid, Medicare integrated product designs, our G&A costs, our credit facility and the estimated amount of our embedded earnings power.

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 our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions.

I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Thank you, Jeff, and good morning. Today, we will provide you with updates on our reported financial results for the fourth quarter and full year 2025. Our top line growth initiatives and our full year 2026 premium revenue and earnings guidance.

Let me start with our fourth quarter performance. Last night, we reported an adjusted loss per share of $2.75 on $10.7 billion of premium revenue. Our fourth quarter results fell well below our expectations due to continued strong trend pressure in Medicare and Marketplace; and two, retroactive items in Medicaid, which totaled $2 per share. While disappointed in the performance for the quarter, we continue to remain confident in our durable and sustainable operating platform as the rate environment returns to equilibrium.

In Medicaid, the MCR for the quarter was 93.5% and was impacted by unfavorable and unexpected retroactive premium rate actions taken by the state of California. Adjusting for these retroactive items, we produced a 2% pretax margin and the MCR was favorable to our prior guidance even as we continue to experience higher utilization of professional office visits, behavioral health services, LTSS and high-cost drugs.

In Medicare, the MCR for the quarter was 97.5%. We continue to experience elevated utilization for LTSS and high-cost drugs and slower-than-expected margin improvement in our MAPD product.

Finally, in Marketplace, the MCR was 99% which was impacted by elevated utilization and several prior period provider claim settlements.

For the full year 2025, we reported premium revenue of $43 billion, representing 11% year-over-year growth. Adjusted earnings per share were $11.03, and our pretax margin was 1.6%, which is below our long-term target range. 2025 was clearly a tale of 2 halves as the company earned over $11 per share in the first half, largely tracking expectations. Trend pressure work against us in each of the third and fourth quarters. Our fourth quarter performance resulted in our full year performance falling below our most recent guidance.

As we compare our initial 2025 EPS guidance of $24.50 for our final result of $11.03, nearly half of the underperformance for the year was attributable to the unprecedented trend and increased acuity in our Marketplace segment. A very disproportionate outcome given that the segment is just 10% of our total premium. The rate in trended balance in Medicaid accounted for approximately 1/3 of the underperformance, while the remainder was due to persistent higher utilization in Medicare.

In Medicaid, our flagship business, representing 75% of our total premium revenue, we reported an MCR of 91.8% and pretax margin of 2.8%. Rates increased from 4.5% in our initial guidance to 6% for the year, but medical cost trend continually increased from 4.5% in initial guidance to 7.5%, an unprecedented inflection in such a short period of time. 250 basis points of this 7.5% trend is attributable to the acuity shift from membership declines related to the final stages of redeterminations. While we are disappointed in our fourth quarter and full year results, many published reports indicate our Medicaid performance is industry-leading by 300 to 400 basis points in pretax margin. We believe the medical cost trend in 2025 was an aberration, an anomaly by historical standards.

The important point, which I will get to in a moment, is what all of this means for 2026 and the longer-term outlook for the business. But first, turning to our growth initiatives. Despite the short-term margin challenges, 2025 was another extraordinary year for securing future growth for our flagship Medicaid business. We continued our successful track record of winning renewal and new RFPs. During the quarter, Molina secured a historic RFP win in Florida where the state awarded Molina, the sole Children's Medical Services or CMS contract. This contract is expected to yield $6 billion in annual run rate premium and is expected to go live late 2026. This award in Florida complements our previously announced contract win in Wisconsin, where we renewed our Wisconsin MyChoice LTSS contract in Regions 2 and 7.

The significant win in Florida in our previously announced Georgia and Texas start ship wins represent over $9 billion of Medicaid premium and significantly contribute to our embedded earnings. Since we embarked on this growth strategy, we have achieved an RFP win rate of 90% on renewal contracts, representing $14 billion in retained revenue and 80% on new contracts representing $20 billion of new revenue. We are engaged in active RFPs in several states and have an active pipeline of $50 billion of new opportunities over the next few years.

On the M&A side, our acquisition pipeline contains a number of actionable opportunities. The current challenging operating environment is a catalyst for many smaller and less diverse health plans to consider their strategic options. We remain opportunistic about deploying capital to accretive acquisitions. In this temporary period of rate and trend in balance, we will work to acquire as much Medicaid revenue as possible, as we have done in the past, manage it to target margins.

Turning now to our 2026 guidance. We project 2026 premium revenue of approximately $42 billion, which is slightly lower than 2025. The premium growth from the new Florida CMS contract in Medicaid and higher revenues in our Medicare segment are more than offset by the planned reduction in the Marketplace segment. Our 2026 adjusted earnings per share guidance is at least $5. This guidance is burdened by $1.50 of new contract performance of the Landmark Florida CMS contract and dollar due to the underperformance of our traditional MAPD product.

We have determined that the MAPD product does not align with our strategic shift to focus exclusively on dual eligible members in Medicare and we will exit the traditional MAPD product for 2027. After adjusting for these 2 items, our 2026 guidance produces underlying earnings of approximately $7.50 per share.

There are 3 aspects of the business that represent significant upside to our guidance. First, our view on Medicaid cost trend could moderate from our initial estimates. Second, Medicaid rates may develop favorably due to on and off-cycle adjustments as they did in 2025. Recall that every 100 basis points on the Medicaid MCR from this current rate and trend relationship, is worth nearly $5 per share. Finally, Medicare and Marketplace are both going through transformations for very different reasons.

Our guidance assumes these segments combined for a headwind of $1 per share in 2026, but both contain significant upside as we priced conservatively. Mark will take you through the detailed 2026 earnings guidance build in a few minutes, but let me highlight the major assumptions underlying our $5 per share guidance.

In Medicaid, 2026 rates are expected to average approximately 4% and will not offset medical cost trend projected at 5%. This trend outlook for 2026 is comparable to the 2025 trend without the 250 basis point impact of the redetermination related acuity shift. In Medicare, members are transitioning to new integrated product designs, which we expect to produce lower margins in their first year before reaching their full margin potential. Finally, in Marketplace, we made the conscious decision to reduce our exposure and stabilize margins in this highly volatile risk pool, which we expect to yield a 50% decline in our annual marketplace premium. Early enrollment results drove a larger mix of renewal members, which we expect will improve the stability and predictability of our member acuity profile.

In summary, our 2025 results did not meet our expectations, but I am pleased with our team's focus on managing through these industry headwinds and producing in the fourth quarter a normalized pretax margin in Medicaid of 2%. There is little question that Medicaid rates and medical cost trends are in balance. We believe our 2026 forecast for Medicaid is the trough for managed Medicaid margins. In this margin trough, we expect that Molina Medicaid will produce a low single-digit margin, not losses, and that the market is underfunded by 300 to 400 basis points. We are confident in the outlook for this business and that rates and trend will eventually reach equilibrium.

Even at this low point in the cycle, we remain optimistic about the future earnings trajectory of the enterprise, which is a function of anticipated rate restoration and future embedded earnings. Of note, we anticipate that actuarial soundness will ultimately prevail as Medicaid rates are restored by state actuarial processes, and that will allow us to achieve target margins. This potential is significant as every 100 basis points on the Medicaid MCR is worth nearly $5 per share.

Then our existing new store embedded earnings, which represent future contract revenue at average target margins, are additive to the earnings accretion implied by the rate restoration cycle. Embedded earnings are now greater than $11 per share. The intrinsic value of our businesses remains unchanged. Modest capital requirements, mid-single-digit pretax target margins, robust parent company cash flow and ample organic and inorganic growth opportunities will combine to yield significant shareholder value. The cycle will turn and these underlying valuation parameters will again become apparent.

Finally, we look forward to updating you on our outlook for sustaining profitable growth at an Investor Day event on Friday, May 8. We will provide you with our long-term goals as well as the detailed playbook for achieving our growth rates and maintaining industry-leading margins.

With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Thanks, Joe, and good morning, everyone. Today, I'll discuss some additional details on our fourth quarter and full year performance, the balance sheet and our 2026 guidance.

Beginning with our fourth quarter results. For the quarter, we reported approximately $10.7 billion of premium revenue with an adjusted loss of $2.75 per share. Adjusted earnings were approximately $3 below our expectations with approximately $2 driven by unexpected retroactive premium items in California Medicaid and the remainder due to continued trend pressure in Medicare and Marketplace.

In Medicaid, our fourth quarter MCR was 93.5%. As Joe mentioned, this result includes both a retroactive risk corridor and a retro rate reduction in California, totaling 160 basis points. Both were driven by new and unforeseen state actions impacting the full year but introduced late in the fourth quarter. Adjusting for these retroactive items, our reported MCR restated to 92.3% and our pretax margin was 2%, both better than our expectation for the quarter. For the full year, the reported Medicaid MCR was 91.8% and pretax margin was 2.8%.

We take some comfort that even in this unprecedented medical cost trend environment, the stat filings continue to show our Medicaid margins remain best-in-class. Simply put, rates have not kept up with trend over the past 6 quarters. Looking at the stat filings for all MCOs in our markets, we believe Medicaid plans are underfunded by 300 to 400 basis points.

In Medicare, our fourth quarter MCR was 97.5% and our full year MCR was 92.4%. Our results for the year reflected elevated utilization of LTSS and high-cost drugs among our high-acuity dual populations. Margin recovery in the MAPD product was slower than we expected.

In Marketplace, our fourth quarter reported MCR was 99%, and our full year MCR was 90.6%. In the quarter, the MCR reflected elevated utilization across nearly all services, particularly behavioral health, high-cost drugs and professional outpatient visits and several prior period claim settlements with providers.

The adjusted G&A ratio for the quarter was 6.9%, and our full year was 6.5%. Our cost management remains disciplined, and we continue to harvest fixed cost leverage as we grow. Recall, the full year G&A ratio reflects added expense for implementation costs in the new integrated tools products, offset by a reduction in management incentive compensation expense.

Turning to the balance sheet. Our capital foundation remains strong. Positive full year earnings continue to add to our capital base and drive parent company cash via dividends. In the quarter, we harvested approximately $337 million of subsidiary dividends and our parent company cash balance was approximately $223 million at the end of the year. RBC ratios, which test the level of capital at the subsidiary level compared to regulatory requirements, are 305% in aggregate, more than 50% above state minimums. In November, we closed a bond offering of $850 million of senior notes due 2031. The proceeds were used to repay the outstanding term loans and general corporate purposes.

Debt at the end of the year was 3.7x trailing 12-month EBITDA and our debt-to-cap ratio was about 49%. Based on our current guidance, we took action to address any issues with our debt covenants. We have secured an agreement with our bank syndicate to appropriately amend these metrics.

Our operating cash flow for the full year 2025 was an outflow of $535 million due to the settlement of Medicaid risk corridors, the timing of tax payments and lower operating performance in the second half of the year.

Turning to reserves. Days in claims payable at the end of the quarter was 47. We remain confident in the strength and consistency of our actuarial process and our reserve position. even in this period, a sustaining high trend.

Moving to guidance. We project 2026 premium revenue of approximately $42 billion, a 0.8% pretax margin and adjusted EPS of at least $5. Our guidance is lower than the $14 per share initial outlook we provided on the third quarter call due to a number of factors. First, in Medicaid, our full year 2026 MCR guidance is 92.9%. That's 140 basis points higher than previously expected, driving $6.50 of the shortfall. The higher MCR results from several items. The fourth quarter retro revenue items in California, which resulted in $2 per share impact will continue in 2026, yielding 40 basis points of margin pressure across the year. Our Florida CMS contract incepting in the fourth quarter will add 30 basis points of full year pressure as that initial quarter will run significantly higher before reaching target margins as new stores typically do.

And expected rates for 2026 are approximately 50 basis points lower than our initial outlook. We previously projected rates exceeding expected trend to improve MCR by 50 basis points off the second half of 2025. While our initial discussions with states were encouraging, particularly in the presence of demonstrated underfunding across most of our markets, the rates we finally received fell short, now matching expected trend off second half with no benefit to the MCR.

Second, in the items driving our lower EPS guidance, underlying performance in our Medicare business deterred by $1 per share, largely due to the MAPD product. And finally, G&A efficiencies only partly offset a higher effective tax rate interest expense and lower volumes, resulting in a headwind of $1.50 per share. As Joe mentioned, upside components to this guidance include moderation in Medicaid cost trends, off-cycle and late 2026 rate adjustments as we sell in 2025 and Medicare and Marketplace performance.

Now some additional details on our 2026 guidance, beginning with membership. In Medicaid, we expect year-end membership of approximately 4.6 million members to be flat compared with 2025. We expect modest contraction in our current footprint as some states continue to review membership eligibility to be offset by the implementation of the new Florida CMS contract incepting October of 2026.

In Medicare, we expect to begin and end 2026 with approximately 230,000 members based on open enrollment and transition to our integrated tools products. In Marketplace, we expect approximately 280,000 members at the end of the first quarter, down more than 50% from the end of 2025. Recall that we sought to stabilize margins in 2026 and reduce our exposure to the shifting risk pool caused by the expiration of enhanced subsidies and new program integrity initiatives.

Our average pricing increased 30% and range from 15% to 45% across our footprint. Renewing members now represent 70% of our current book and retention through the grace periods is less certain than in prior years. We expect to end the year with 220,000 members.

Our 2026 premium revenue guidance is approximately $42 billion. The small decline versus 2025 is driven by several items. Medicaid is up $1.1 billion due to the new Florida CMS contract and the modest rate cycle, partially offset by the Virginia contract loss in 2025 and slight market contraction in our current footprint. Medicare is up $300 million due to the product mix shift in our Medicare portfolio as members transition to new integrated products, which have a higher average PMPM. This is partly offset by a decline in our MAPD product. Finally, Marketplace premium declined $2.3 billion pursuant to the plan to reduce exposure to that segment. Our 2026 premium guidance does not include the Georgia Medicaid and Texas [ STAR CHIP ] contracts, which are now expected to go live in 2027.

Turning to earnings guidance within our segments. In Medicaid, we expect a pretax margin of 1.2% on $33.4 billion of premium. The MCR of 92.9% includes a 30 basis point headwind due to the new Florida CMS contract. I'll remind you that our Medicaid MCR guidance assumes year-over-year rates of approximately 4% and trend of 5%. In Medicare, we expect $6.6 billion of premium revenue with the MCR at 94% and pretax margin of negative 1.7%. Excluding the MAPD product, which we will exit for 2027, the pretax margin is closer to breakeven.

Within the segment, margin improvements in the legacy products in the new rate cycle are offset by MMP members transitioning to new integrated products. These integrated products are expected to achieve lower margins in their first year before reaching their full margin potential in years 2 and 3. In Marketplace, we project a 1.7% pretax margin on $2.2 billion of premium revenue. The MCR of 85.5% reflects continued conservatism given market volatility and risk pool acuity shifts resulting from the expiration of enhanced subsidies.

We expect the adjusted G&A ratio at 6.4%. This is slightly lower than 2025 as the tailwind from duals contract implementation costs, cost management discipline and mix within our business is partly offset by the Florida CMS contract implementation costs and the return of management incentive compensation. Rounding out the other guidance metrics, we expect the effective tax rate at 30% and weighted average share count of 51.1 million shares. Our earnings seasonality is expected to be much more front-end loaded this year with 2/3 of earnings in the first half of the year, reflecting the Medicaid rate cycle and the implementation of Florida CMS in the second half. Our Medicare and Marketplace segments are expected to follow normal seasonal patterns.

Turning to embedded earnings. At the end of 2025, we reported $8.65 of new store embedded earnings. Our 2026 guidance harvest $0.60 for Medicare tools implementation costs net of the Virginia contract loss. Updates include the addition of the new Ford CMS contract of $4.50 and a reduction for the MAPD exit. Embedded earnings now exceed $11 per share and form a compelling view of long-term future earnings power on top of our legacy business rate recovery. We will outline the components and expected realization time line at our May Investor Day. This concludes our prepared remarks.

Operator, we are now ready to take questions.

[Operator Instructions] The first question comes from Joshua Raskin with Nephron Research.

Sort of a 2-parter on the Medicaid side. Is there a large variance that remains across your states with regard to Medicaid margins? And are you at the point in any state where you're contemplating a potential exit? And sort of part b would be, what were the drivers of the negative retro adjustments in California that seems incongruous with what you were seeing in terms of rate increases and margins? Is California just a market that happen to be running higher than average margins?

Josh, on part A of your question, no. Rates are generally underfunded across the universe of our portfolio and there's no state where the regulatory environment is so unfriendly to managed care in the rating environment that we are contemplating an exit. We believe, as we've said in our prepared remarks, that these will come back into equilibrium over time for many, many reasons, which I'll cover in a moment.

To your second question, the 2 issues in California were very situational. They were event-driven. The undocumented population, which we serve, I think, 180,000 members for a lot of [indiscernible], which are pretty obvious, did not use services during the year that we're priced to. And therefore, the state decided to, call it, claw back due to the introduction of a retroactive corridor. And in L.A. County -- separately in L.A. County, there was a dramatic shift of churn in the membership roles during the year, which caused a disequilibrium and risk profile amongst the various carriers -- they did a risk adjustment update at the end of the year, moved money around, and we had to pay it back.

Mark, anything to add on those 2 items?

No, Joe, I think that's well summarized. Josh, it's about $135 million between those 2 items. That's the $2 per share. And they're both pretty unusual in nature. On the corridor from the undocumented immigration status normally, CMS has a rule that they can't put retro corridors in place. That rule went back in place during the pandemic. However, since this undocumented program in California is state funded, it doesn't -- the CMS restriction doesn't apply. So they were able to put that restriction in place on the corridor on that population. So I don't know of another state where that could happen. On the risk adjustment, risk adjustment data refreshes are common. We have them all the time. Normally, they're de minimis up or down. In this case, there was enough change in the population in LA, as Joe mentioned, that it was material to us.

And one final point, Josh, you didn't ask, but inherent in the movement from our $14 per share outlook and $5 per share guidance, we pulled through that California effect to 2026 because we believe those same situations will apply to the 2026 operation. So we pulled it through a lot of conservatism.

The next question comes from A.J. Rice with UBS.

Just want to think a little bit more about what you're seeing in the Medicaid book. We've heard some of the other companies talk about states working with them to allow them to make adjustments to benefit design in addition to just absolutely hoping for a better rate update. Are you seeing any of that play out? And you're saying you're going to bottom in Medicaid in 2026 and recover. Obviously, some of the Big Beautiful Bill, work rules, et cetera, kicking in '27. Does that -- you're confident you can overcome that and still show margin improvement in '27 and beyond?

A.J., let me answer the second question first, and I'll come back to benefit design. But the context is even in what we consider to be a trough environment in Medicaid, we are operating at low single-digit margins, 2% in the fourth quarter, 1.6% adjusted for [ Florida Kids ] in 2026. By analysis of the regulatory filings and other public company reports, the market appears to be 300 to 400 basis points underfunded. If we get even partially way there, we're back flirting with our target margins in Medicaid, number one.

Number two, don't forget that last year, we got 150 basis points of mid-cycle updates. Now it wasn't enough to offset a 300 basis point increase in trend during the year, but states are recognizing that aspects of this program are underfunded.

Next point on rates. Generally speaking, the states are using a 2024 cost baseline. That baseline does not include the full impact of what we're calling the great inflection here over the last 2 years. When the 2025 cost baseline fully developed begins to be used as the baseline off of which the trend rates will become stronger.

Next point, discrete rating factors. LTSS benefits, pharmacy benefits and behavioral, all trending up, and those are very discrete rating components, very transparent. Actuaries can debate and have clinical and actuarial debates over how those costs are being burned into rates in a very transparent way.

And lastly, in 2025, we are experiencing the tail end of the redetermination acuity shift, 250 basis points to our estimation that will not recur in 2026. But to your point, in '27, '28 and '29, we will begin to see the emergence of perhaps a small acuity shift related to [ OBBB ].

Mark, do you want to take that part?

I think that's well covered. Across the next 3 years, we see any place between 2% and 4% annual impact on One Big Beautiful Bill. But that's also before any influx of new members, as you've typically had in the past, or even a recessionary impact as jobs are lost to AI and who knows what else. So the outlook, I think, if there's membership decline over the next 3 years is rather small. And as Joe always says, the small changes in membership or cohorts don't really get you because they sort of even out with everything else going on and rates do adequately reflect them. It's the big jumps in population that are problematic like the 20% decline we had in the pandemic with redetermination. So I don't really see a meaningful impact on membership here going forward, either in magnitude or impact on acuity.

A.J., the first part, part of your question was about benefit design. We're seeing some of that. During the pandemic, states really loosened the utilization control requirements on things like behavioral health. They were paying for -- they required us to pay for GLP-1s for weight loss and not accompanied by diabetes diagnosis. Those things are starting to close up. States are reintroducing our ability to have tighter utilization control global behavioral. And most of our states, I think, 12 out of 15, now have a diagnosis requirement, diabetes diagnosis requirement for GLP-1s. There's things like that. But I wouldn't say there's a wholesale shift to benefit design. It's on the margin, and it's sporadic from geography to geography.

The next question comes from Justin Lake with of Wolfe Research.

I wanted to ask Joe about your attrition assumption in 2026. Looks like you're assuming down about 2% membership attrition, and that's offset by, I think, 100,000 members in Florida coming on. Let me know if I'm wrong on that. But 2% versus what it appears some of your peers are talking about mid- to high single digits, it looks like you had some pretty significant attrition just in the last quarter. Why are you assuming that attrition is going to be so modest next year relative to what you're seeing just in the last quarter or 2 and what some of your peers are talking about? And then maybe you could talk about if you do see attrition hire, would we assume that, that would impact risk pool and cost trend?

Sure. Going back a little bit historical here is clinical data. The industry and Molina on a same-store basis, not counting our new store growth, lost 20% membership organically over the past number of years. It is 13% in 2024, 4% in 2025. And now we're projecting it to be 2%. We believe that the redetermination effects are largely over. We're feeling the tail end of that. And now it's just about program integrity. It's about tightening up on -- before [ OB3 ] kicks in, that will kick in for '27 to '28. So we're talking about '26. .

Due to just more rigor around the enrollment process, the redetermination process, we believe that 4% we experienced in 2025, which is exact -- that's the exact number will fall to 2% next year. Now if we're wrong, it ends up being a little higher, Mark -- I'll kick it to Mark here in a minute. We've done an exhaustive analysis of low users. And it depends on what your definition is over what period of time what's a lower-than-average loss ratio. Everybody doesn't use services at 90% of premium. Some use a lot more, some us a lot less. And so your question you're asking is, if we won about it, is there an acute shift coming and we don't think so.

Mark, do you want to take that?

Joe, that's well summarized across the board. So Justin, to your framing question, yes, we're 4.6% roughly flat across the beginning of the year to the end of the year. That's a 2% decline organically offset by Florida. So you got that exactly right. And then to Joe's point, the market is down about 20% since the start of redetermination. We've done exhaustive cohort analysis of who were the joiners, who were the levers. And it's really interesting.

Of the people that left since the start-up redetermination we estimate about 5% fewer people in our population are low users or no users. So if you look at any given quarter, how many folks didn't use it all, or used very low, say, $200 PMPM, something like that, that population is now 5% smaller within our current population than it was 2 years ago. That's not the only impact. Many of the cohorts changed around, but that's the one that kind of grab your attention. So that's a lot of what's driving trend over the last 2 years as that mix shift happens, I think Joe referred to it in his prepared remarks.

So going forward, most of those people are out now as a result of that. The low users and no users that were on there when redetermination was suspended mostly are gone now. So on a go-forward basis, we're estimating 2% attrition across the year organically, which is a relatively small number. Even if it's a little bit bigger -- the big driver of acuity shift or trend is those low users and no users, and those are mostly out of the system now.

The next question comes from Stephen Baxter with Wells Fargo.

I was hoping if you could update us on the size of your Medicaid expansion enrollment both, I guess, enrollment and premiums would be great. And as we think about dimensioning the attrition that you saw throughout the course of 2025, how much of that came from Medicaid expansion versus other sources, other program types?

Just sizing Medicaid expansion, Mark will correct me, but I'll go from memory here. Medicaid expansion population is about 1.3 million members and about $8 billion of the $32 billion of premium. Now when we're talking about [ OB3 ] work requirements, semiannual determination -- semiannual redeterminations, et cetera, we still predict losing about 15% to 20% at the high end of that population, which is only 25% of the total Medicaid book. And as Mark said, when you're trying to calculate or estimate whether that causes a huge acuity shift, the fact that, that cohort is operating closer to the mean of portfolio average is a meaningful statistic.

Mark, do you want to talk about the attrition in that population?

Sure. We definitely see more people coming out of expansion due to the OBB, just because that's where the policies are aimed, but that's also where you have more volatility in the population. As Joe mentioned, if you lose 15% to 20% of the folks in expansion, one, it's a quarter of our overall Medicaid population; and two, if it happens over 3 years, it's even smaller as an impact on the overall book. So could be an impact there over time. But annually, I don't think it's meaningful. And again, if all folks are more gathered around the average MLR, the impact shouldn't be meaningful.

The next question comes from Kevin Fischbeck with Bank of America.

Great. Just trying to understand a couple of things. First, I guess, in your commentary around 2026 guidance, you listed a number of positive potential levers to upside. There were no negative dynamics that you're thinking of. Obviously, things have been difficult the last couple of years to predict. I was wondering if there's anything that you would highlight as something you were watching?

And then just -- if you could just follow up on the commentary around risk pool shifts. Obviously, you said last year was 250 basis points of pressure on 4% membership, and now you're saying 2% membership is 0. So if you could just kind of square that a little bit better?

On the last point, yes, we've been asked that before. It's not linear, and it's not proportional. And the reason is, as Mark just described, it matters how many low and no users you actually have in your population. So if your supposition is it 4% created 250 basis points of pressure, why does it 2% create 125 basis points of pressure because largely speaking -- not largely speaking, the low and no user population as we define it, is down 5%. So people are operating closer to the mean MOR rather than the SKUs.

On the 2026 guide, I mean, suffice it to say, anything that is potentially upside is potentially downside. But we believe the rates at 4% of our floor -- we got 150 basis points of release last year and midyear. So we don't think there's downside to rates. We think it's all upside. Now medical costs trended 5%, medical costs is up 20% over the last 3-year period, baseline medical costs. And now we're trending in 2026 comparable to 2025 without the acuity shift.

Same trend number, 5%. Is there downside? Sure, you could [indiscernible] about it. But we believe that we have a reasonable -- a reasonably conservative trend assumption. The 4% rate [indiscernible], it's all upside from there on midyear on and off-cycle rate increases. And the reason we say there's upside to Marketplace and Medicare is because we were priced more conservatively than we're guiding to. Our pricing targets are low single-digit margins. As Mark said, we're expecting a 1.7% negative margin in Medicaid, and I think a positive 1.7% margin in Marketplace. Those could end up being higher. But could they be lower? Sure.

Mark, anything to add there?

And just to begin, the 1.7% was Medicare, not Medicaid.

Medicare, sorry. Medicare.

The only other thing, Kevin, which might have been obvious to you, but the impact of -- on the cohorts of the low users and no users coming out isn't when they come out. It's the subsequent period, right? So if they come out in '24, you'll feel that in your trends in '25 because it's the year-over-year impact. It's not the day they come out. So if you're putting that all together, Joe mentioned it was 4% membership decline in '25 but the much bigger decline in '24 of 13% is would put the pressure on '25. So now that only 4% came out in '25, the implied rollover to '26 is much lower. More to the point, a lot of the low users, no users are already out of the system. So it's really a declining impact.

The next question comes from Ann Hynes with Mizuho.

I just want to follow up on your trend assumptions. Obviously, trend has been very difficult, up 7.5% this year. But why do you have confident trend only increasing 5%? Is it a large number? Is there a sort of an area that you already see decreasing? Is it more utilization management? Just from our seats, this industry has underwritten all businesses [indiscernible] for 3 years. So when I just see a 5% trend going forward, for me personally, I would like more than just saying like trend has to come down at some point. That doesn't make sense to me. So if I could -- if we could have some more detail on specific state actions that utilization management, anything more than -- I personally just like more detail on why you think the rates -- the trend will only grow 5%?

Well, thanks for the question. And of course, it is a key assumption in our outlook through 2026. Context, we had a 7.5% trend in '25 off of '24. With perfect hindsight, 2.5 percentage points of that was related to the redetermination related acuity shift as we've just been describing and a couple of questions that were asked. So core trend is 5%. Core trend includes every impact. Supply -- it's a supply and demand economy. It includes the higher acuity of the American population that we serve. It includes any "upcoding" or aggressive billing from providers. 5% is what we experienced in 2025. And again, it's off a cost base that's increased 20% over the past 3 years. It's 50% higher than historical averages.

Medicaid trend over the last 10, 15 years has been 2% to 3%. We're seeing BH behavioral health services now nearly 20% prevalence -- of BH diagnosis is now 20% prevalent in our population, up from 17% to 18% 3 years ago. Why is that important? It's trending at 9%, and the BH services themselves are trending at 18%. Our pharmacy trend, 13%. Top 10 therapeutic classes trending at 36%. These are in the 5% number. LTSS hours, [indiscernible] admits, professional office visits up 16% and the number of services, the number of procedures per office is dramatically higher this year than it was in the last 2.

So we believe that the 2025 5% number includes a lot of the phenomenon that industry pundits and commentators talk about, and we believe that's a good number off of which to project. Are we seeing signs of, I call it, aggressive billing, but upcoding? Level 3 is becoming Level 4, Level 5 service intensity, psychiatric hours going from 30-minute visits to 60-minute visits sure. But that's in the 2025 trend. And that's why we think the 2026 number is fully loaded for all the supply and demand dynamics that are being experienced in the market.

The next question comes from Andrew Mok with Barclays.

I'll shift focus to the ACA. I wanted to ask how January open enrollment tracked relative to expectations and what's embedded in your membership assumption for [indiscernible] and attrition this year? And if possible, it would be great to share how year-to-date [indiscernible] are tracking now versus this time last year?

Sure. We're in real time. I'll give you a global answer and I'll give it to Mark because we're right in the middle of that process now. But as you recall, we ended the year with 650,000 members. We priced up 30% on average, ranging from 15% to 45%, consciously reduced our #1 and #2 position from 50% of our counties to 15% and reduced our footprint by 20%, conscious effort as we will not allocate capital to an unstable risk pool. Our speculation or forecast at the time was we would come down into the 200,000 zone, 200,000 to 300,000 and reduce our revenue to $2.2 billion. As we're right in the middle of that story right now, I'll hand it to Mark to give you the latest [indiscernible] what we're forecasting and what's likely to happen with retention and effectuation. Mark?

Andrew, this year, forecasting marketplace members is a little more difficult than in past years. Big picture to get right to the answer to your question. I'm looking for about 280 at the -- 280,000 at the end of the first quarter, which will decline down to 220,000 at the end. The reason it's a little harder this year is new members are real obvious and clear. It's the renewals that are the wildcard. Now there's some confusion, I think, in the media, they're saying, gee, marketplace members are still quite high. Everyone thought they were going to come down. And what I think some of the media misses is that they're assuming the renewals all stick.

Now as partly or fully subsidized people see what their new premium is in January and February, a lot of passive renewals will not renew. They'll go into grace period, not pay and they'll eventually fall off. That will be much bigger in past years, just given the price dynamics in the market. So right now, I think I'm at 280,000 in the first quarter. As Joe mentioned, we're about 70% renewal, about 30% new members.

And I think the stats you're looking for is on the new members, the effectuation rate, I think it's 60%. Everything is telling me it's about 60%. Historically, I would have thought 70% to 80%. So effectuation is much lower. But remember, that's new members. On renewal, I think my renewal tension is more like 30%, whereas in the past, I would have expected more like 60% and that goes right to the dynamic of people possibly renewing seeing their new premium if they're not fully subsidized, which almost no one has and probably not going through the grace period of making the payments and falling off at some point in the first quarter, which is why I give you a March estimate, not a current estimate.

The next question comes from Sarah James with Cantor Fitzgerald.

Sticking on the ACA MCR. Can you help clarify went on in fourth quarter? Was there a pull forward of utilization or any category that was running high? And then how do you think about the slope of the MCR curve for 2026, given the attrition and effectuation that you're assuming? Should we think that the peak to trough swing widens maybe by a few hundred basis points on what you've experienced historically?

Mark?

Sarah, it's Mark. A couple of things there. What you're calling pull forward, we don't see it. And I've gotten that question a lot. And just for everyone's benefit, the concept of pull forward might be if subsidies are declining and people might drop or lose their coverage in January, would they increase utilization in the fourth quarter in anticipation of that. And we're just not seeing it.

If you look at my MORs, I'm only slightly up Q4 versus Q3 part of which is normal seasonality and a little bit of which is we talked about the out-of-period provider settlements. So you're just not seeing it in the MCR and I'm not seeing it in the utilization. Now on next year's seasonality, we're going to have to see exactly what the membership content looks like when it all settles in March. But I would expect a fairly normal seasonality as we've seen in the past. The only thing that might be a little bit different there is metallic mixes are shifting. In past years, we were more 70% silver. This year, we're more 50% silver. So with deductibles, co-pays, things like that, you might see some changes based on metallic mix. But I wouldn't think you'll see something much different seasonality than we normally have.

The only other point I would make is in 2026, we're projecting a much lower special enrollment period addition for the 3 quarters. And as you know, special enrollment is an invitation to buy insurance when you need it. They usually come in with very high MLRs until they settle down, and the SEP enrollment during the 2026 is forecasted to be much lower than it was in 2025 [indiscernible].

The next question comes from Scott Fidel with Goldman Sachs.

Just so I'm interested in how you're thinking about, let's call it, maybe sort of underwriting around new business development? And I'm putting it that way because that would maybe include both sort of new contracts organically and then also M&A. And just around the downturn and sort of the pressures we're see that -- just maybe curious around -- I'm thinking about Florida, for example, your thoughts on pursuing that contract. And then maybe also just talk about how the overall book of M&A that you've built up over the last couple of years, how has that performed, would you say within the overall enterprise relative to, let's say, more of the ongoing operations?

Scott, first on the new business, we are still actively pursuing new contracts. Our win rate is 80%. $20 billion of run rate revenue over the past number of years, including the Florida Kids contract, which we believe is a very valuable contract. We have proven over time that we expertly handle high acuity, low-income lines, and these are very high acuity situations for young adult, young children in the state of Florida. So we've worked hard for this contract. We believe it's accretive. We wouldn't have put $3 of ultimate run rate into our embedded earnings if that wasn't the case.

And I want to clarify the start-up here. The fact that there is a $1.50 drag on 2026. The reason is you have to spend money before any revenue ever shows up. You got to hire people, number one. Number two, new programs, whether it's Nebraska, Iowa, or Florida Kids, a new program or a new entrant always runs higher as people get used to systems and business processes, et cetera.

And third, as Mark would like to talk about, there is a financial implication of building reserves in the early years. So that $1.50 drag is not symptomatic or emblematic of the power, the earnings power of that business. We added a $3 run rate to our embedded earnings for the ultimate attainment of a target margin.

Mark, anything to add on Florida?

Joe, I think there's some important distinctions there that you point out. One, the MOR always runs hot on a new property. And typically, we say it's a 2-year path to target margins. We have one quarter of performance of Florida which means these margins we put on top of our normal picks, which are onetime items, really exaggerate the performance in the first quarter. So Florida will run a hot MLR in its first quarter, but a lot of it is new property getting everything settled and these margins we put on day one, which are part of our normal actuarial policy.

The other part of the $1.50 is the business doesn't just start on the fourth quarter. We've got 2, 3 quarters here of prep, where we're hiring people in advance of revenue, incurring expenses. Obviously, that's not part of the run rate. So the $1.50 isn't meant to be -- this is an extrapolation of how it is. It's kind of an anomaly of one quarter of new business and a lot of G&A prep.

Yes, $6 billion of revenue, which to us is, you're adding 15% of revenue with one contract. And we never measure our acquisitions or contracts on contribution margin. But in this case, it's entirely appropriate. The contribution margin of this contract is going to be significant.

To your question on M&A. This is the perfect environment to be exploring M&A and we have. Our pipeline is as actionable opportunities in it. Many of them are what I'll call challenging situations for single state, single geography payers who are in the same rate environment that everybody else is in and they're eroding capital. Without naming names or states, we've tried to action 2 or 3 of these in the past 6 months. And they were so troubled. They had to kind of seek other alternatives rather than to be acquired. But this is a great time to acquire revenue. At the [indiscernible] of margin entertainment, we are still acquiring things at just over 20% of revenue which means very little goodwill value, you're mostly exchanging cash for regulatory capital.

Now in this environment, Mark and I say, give me a property at book value, and I'm good to go, and we'll get it to target margins in our 2- to 3-year period. So this is the perfect time. We believe long term in the veracity of this business and its margin potential, and this is the perfect time to responsibly purchase long-dated revenue streams with stable membership in states where we want to do business, either states that we're already in and are underrepresented in market share or states that we're not in and want to create a foot.

The next question comes from Ryan Langston with TD Cowen.

Maybe within the cost trend assumption of 5%, maybe give us a little sense on some of the components within that assumption, maybe cost categories, you assumed higher, lower and maybe any sort of swing factors with the widest range is positive or negative?

Sure. Sure, Ryan. I covered a few of these before. Behavioral health services are the cohort of Medicaid patients with a behavioral condition trends at 9%. We did reduce that at all, and the behavioral services themselves are trending at 18%, not only due to the prevalence of behavioral conditions, but let's face it, providers are using their judgment on diagnosis and treatment protocols. The pharmacy trend globally is 13%, the top 10 therapeutic classes are trending at 35% [ antiretrovirals, anti-psoriatics ], GLP-1s, all the things you read about. Cancer diagnosis are prevalent. We did not soften any of the current trends that we're experiencing in 2025.

As I said, now that the baseline, the cost base line is 20% higher today than it was 3 years ago. LTSS, skilled nursing facility admits are up. LTSS hours, home service hours are creeping up, didn't reduce any of our trend assumptions there. And professional office visits is the one that doesn't get a lot of airtime, but that's trending at -- it trended at 16% in 2025 off '24. And one of the reasons it's not that the number of office visits is necessarily up per 1,000. But the number of procedures per diagnosis per visit is up significantly.

One diagnosis code, 3 CPT codes in the past, maybe there's now 4 CPT codes. So we didn't soften any of what we experienced in '25 and '25 was, again, a year of medical cost inflection off '24, and we kept all those trends rolling through the 2026 numbers. There's probably others that are missing, but those are the big ones.

Mark, did I miss anything?

No. I think that's good. So once the acuity shift is behind us, the 7.5 is now 5 in our projections. Joe, you hit the big ones, pharmacy, professional office visits and BH continued to be high considered within our 5% outlook.

The next question comes from Michael Ha with Baird.

I appreciate your exhaustive cohort analysis commentary. But what assumption is currently embedded in your '26 guide relating to possible [indiscernible] more and more [indiscernible] budgetary pressures [indiscernible] more stringent eligibility requirements. And if this prompt spike [indiscernible] sort of procedure this enrollment, is there a range of outcomes embedded in your guide? And because there are states reactively [indiscernible], where we're seeing pretty alarming procedural [indiscernible] rates, come up to 90%. And a lot of those trends are beginning to spike in more recent months, which is -- its impact is felt typically next year, it concerns us -- I know they might not be 0% utilizers, but I know these [indiscernible] are typically healthier overall. So stepping back, I know you're very confident given the much lower presence overall lower utilized in your book. But I just wanted to ask again how should we think about the achievability of your guide if more states were to tighten eligibility?

We have confidence in it. And I will tell you this, Michael. We don't -- I mean we do top down. Everybody uses global assumptions to testing theories. This is all bottoms up. This is about [indiscernible] actuaries and our local resources, talking to our state customer on what they're up to and what they're all about and what they're going to do. And it's with every state customers, it's in all their best interest to tell us exactly what to expect, so we can resource appropriately. So this is all bottoms up.

We forecast in some states to [indiscernible] higher than others, but this all bottoms up based on what the state is telling us they intend to do, either with just more strict enrollment, eligibility requirements, et cetera, before the [ OB3 ] impacts of work requirements, [indiscernible] and all that kicks in for 2027. So we're pretty confident in the 2%. And as we said, if we are wrong, we're very confident that a lot of the -- what we call low and no users have left the portfolio during the redetermination shift. And therefore, if we won by a percent they're closer to the portfolio average likely and therefore, a volume impact, for sure, but not a margin shift impact. Important point.

The last question today comes from [indiscernible] with Morgan Stanley.

Great. So I understand it's early, but what are some of those items that we should be thinking about in terms of the earnings growth profile into 2027? Do you get back to growth algo? Do you add back some of those burdens? I think you were talking about that earlier in terms of what's an anomaly, what's not or what's recurring in nature. And then is that the right way to think about it? And the $11 in earnings, embedded earnings power, the trajectory to get there, I guess, we'll hear more about it at Investor Day, but just higher level conceptually how we should be thinking about that as well in terms of the time frame from here?

Sure. On the embedded earnings, yes, thank you for that because we will give a more specific accounting of it at an Investor Day and obviously, not just the accounting of it, what's in it, whether it ends up being slightly higher or slightly lower or different, we'll update that at Investor Day. But to the point, how it rolls out into '27, '28 and '29, will be a key determinant, and we will update that at our Investor Day.

Look, as far as '27 to '28 goes, we're not yet predicting because we can't exactly how rate versus trend is going to improve over the next 3 years. It's a valid question. I don't have an answer for you. But again, 100 basis points of MCR improvement in Medicaid is $5 a share. Now imagine an environment where the entire platform across all geographies, improves by 50, 75, 100 basis points a year for the next 2 or 3. But where we're starting from -- in the trough, what people are calling the trough of -- and some people think the trough is 2027, we believe it's '26. We're earning a 1.6% pretax margin, not a loss. Many of our competitors have said they're losing 1.5% to 2%.

So if the market gets to 300 to 400 basis points, it needs to get back to, call it, respectability, we're again at target margins. I can't give you an exact projection now. We'll update you at Investor Day, but imagine an environment that improves trend rates versus trend is positive by 50, 75 or 100 basis points a year for the next 2 or 3, recalling that given the leverage effect of $32 billion of revenue -- on $32 billion of revenue, 100 basis points to the MCR in Medicaid for Molina is $5 a share.

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.

Good morning, and welcome to Molina Healthcare's Third Quarter 2025 Earnings Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions question, [Operator Instructions]. I would now like to turn the conference over to Jeffrey Geyer, Vice President Investor Relations at Molina Healthcare. Please go ahead.

Good morning, and welcome to Molina Healthcare's Third Quarter 2025 Earnings Call.

Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Mark Keim. A press release announcing our third quarter 2025 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 of you who listen to the rebroadcast of this presentation, we remind you that all of these remarks are made as of today, Thursday, October 23, 2025 and have not been updated subsequent to the initial earnings call.

On 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 the third quarter 2025 earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2025 guidance, our preliminary 2026 outlook, the medical cost trend and our projected MCRs, Medicaid rate adjustments and updates, our 2026 marketplace pricing and rate filings, our RFP awards, including our contract wins in Georgia and Texas as well as our M&A pipeline and activity, revenue growth related to RP wins and M&A activity.

The recently enacted big beautiful bill and expected Medicaid, Medicare and Marketplace program changes, our expected future growth in both our existing footprint and in the new products and markets and the estimated amount of our embedded earnings power.

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 our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions.

I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Thank you, Jeff, and good morning. Today, we will provide you with updates on our reported financial results for the third quarter. an update on our full year 2025 guidance, our outlook for 2026 and our growth initiatives. Let me start with our third quarter performance. Last night, we reported adjusted earnings per share of $1.84 on $10.8 billion of premium revenue, below our expectations. Our 92.6% consolidated MCR reflects the continuation of a very challenging medical cost environment in the third quarter. We produced an adjusted pretax margin of 1%. The headline for the quarter is that approximately half of our underperformance is driven by the Marketplace business and that Medicaid while experiencing some pressure, it's still producing strong margins. Year-to-date, our consolidated MCR is 90.8%, and our adjusted pretax margin is 2.7%.

Some color on the quarter. In Medicaid, our flagship business, representing 75% of our total premium revenue, we reported an MCR of 92% and and an adjusted pretax margin of 2.6%. Medical cost trend was higher than expected and driven by utilization of behavioral health, pharmacy and inpatient care, largely consistent with what we observed throughout the year. A few positive rate updates were not enough to offset the elevated trend, and our risk corridor protection is now very limited. While our Medicaid performance did not meet our expectations for the quarter, many would characterize these results as best-in-class in this environment.

In Medicare, we reported a third quarter MCR of 93.6%. We continue to experience higher utilization in this high acuity population, particularly related to LTSS and high-cost drugs. In Marketplace, the third quarter MCR at 95.6% was significantly higher than expected. We continue to experience much higher utilization relative to risk adjustment revenue. Our third quarter adjusted G&A ratio of 6.3% was very strong, reflecting our continued operating discipline.

Turning now to our 2025 guidance. Our full year premium revenue increases to approximately $42.5 billion. Our full year 2025 adjusted earnings per share guidance is now expected to be approximately $14 per share which is $5 below our prior guidance of $19 per share. This revised guidance reflects a consolidated MCR of 91.3% and a pretax margin of 2.1%. As we recount our original EPS guidance of $24.50 and a $10.50 revision to $14, we note that half of this revision emerges from the unprecedented utilization trend in Marketplace, which represents nearly 10% of our business. Only 1/3 emerges from the rate and trend imbalance in Medicaid, which is 75% of our business and the remainder for Medicare.

Now some color on the segments related to our revised guidance. In Medicaid, our guidance assumes a full year MCR of 91.5%, which produces a pretax margin of 3.2%. This Medicaid MCR result is above the high end of our long-term target range, but we evaluate it in the context of this challenging trend environment. Average rates achieved are now expected to be 5.5% and but medical cost trend for the year is now expected to be 7%, which is 100 basis points higher than previous guidance. Our early 2025 rate increases were sufficient at the beginning of the year. But as medical cost trend increase beyond those rates, our MCR increased each quarter. The rate updates we received later in the year and risk corridors did not provide an adequate buffer.

In Medicare, our full year guidance includes an MCR of 91.3% and pretax margin is at breakeven. We continue to effectively manage elevated utilization through our cost control protocols. In Marketplace, the full year guidance NCR of 89.7% produces a negative pretax margin. We expect higher utilization to persist as in past quarters with little to no risk adjustment revenue offset. Our Marketplace business has significantly underperformed our expectations, but its performance appears consistent with industry-wide trends.

As noted a moment ago, approximately half the earnings per share reduction from initial guidance and prior guidance is attributable to this business. which represents just 10% of our consolidated revenue. Marketplace was initially projected to produce over $3 of earnings per share, but is now expected to produce a loss of $2 per share. a swing of over $5 of the $10.50 reduction from our initial 2025 guidance. Our updated full year guidance at $14 per share, implies earnings per share of approximately $0.35 in the fourth quarter. Within this fourth quarter EPS guidance, Medicaid is projected to earn $3 per share with a 92.5% MCR and a pretax margin of approximately 2.5%. Medicare and Marketplace are expected to offset the Medicaid performance with a combined $2.65 loss per share.

The fourth quarter and second half projected Medicaid performance provides a strong jump-off point for our 2026 outlook. Now some commentary on our outlook for 2026. While it is far too early to provide formal guidance, we believe a discussion of the 2026 building blocks for both revenue and earnings per share will be helpful. I will lay out the components and Mark will provide further details. Our 2026 premium revenue outlook anticipates growth in our current footprint, consistent with historical levels, significant new Medicaid contracts in Georgia and Texas, and Medicare duals growth in 5 states through our recent RFP wins and MMP conversions.

These items alone would put us on track to meet our target of $46 billion of revenue in 2026. However, our 2026 pricing strategy for Marketplace with the intention and expectation of reducing our exposure will likely be a revenue headwind, although earnings accretive. With respect to our outlook for 2026 earnings per share, there are several items to consider, particularly related to the Medicaid earnings baseline. First, our Medicaid performance in the second half of 2025 is expected to produce a 92.3% MCR and a 2.5% pretax margin. This equates to $6.50 per share in the second half, the annualization of which is an appropriate jumping off point for 2026.

Second, we note that there is normal rate-related seasonality pressure in Medicaid in the second half of the year. Third, with some early views of our January rate cycle, which comprises 60% of our full year revenue, we project rates will be modestly in excess of trend. And Medicare and Marketplace are projected to at least break even, although we are driving to achieve our target margins. This early view of the 2026 earnings per share baseline should provide for an outlook for 2026, which likely approximates this year's updated full year guidance. However, we further note the following areas of potential upside to this baseline view.

Medicaid rates as every 100 basis points of improvement produces an additional $4.50 per share, performing better than breakeven in Medicare and Marketplace as we continue to target low to mid-single-digit pretax margins and harvesting a portion of our $8.65 of embedded earnings. That at a high level is our outlook for 2026. Mark will take you through more detail on this in a moment. Finally, turning to our growth initiatives. Despite the short-term margin challenges, we continue to fuel our growth engines and see a clear path to surpass the $50 billion premium revenue mark in the next few years. During the third quarter, we continued our successful track record of winning RFPs with the renewal of our Wisconsin My Choice contract in Regions 2 and 7.

We are engaged in active RFPs in several states and have an active pipeline of $54 billion of new opportunities over the next few years. On the M&A side, our acquisition pipeline contains a growing number of actionable opportunities. This current challenging operating environment has been a catalyst for many smaller and less diverse health plans to consider their strategic options. We remain opportunistic in deploying capital to accretive acquisitions. In this temporary period of rate and trend in balance, we are going to work to acquire as much Medicaid revenue as possible and as we have done in the past, work it up to target margins.

At our last Investor Day, we characterized this environment as inclement weather rather than climate change, metaphorically, meaning temporary rather than permanent. We continue to believe this to be true. Medicaid is expected to produce a 3.2% pretax margin and contribute approximately $16 per share this year. Rates will come back into balance with medical cost trend and the business will recalibrate to target margins. Medicare is experiencing a rejuvenation aimed at serving the very attractive dual eligible segment, which we believe is poised for significant profitable growth. Marketplace is undergoing a rationalization, addition by subtraction as we reduce our exposure, while the risk pool stabilizes. In short, these businesses are well positioned for the long term and sustainable profitable growth.

With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Thanks, Joe, and good morning, everyone. Today, I'll discuss some additional details on our third quarter performance, the balance sheet, our 2025 guidance and the building blocks of our 2026 outlook.

Beginning with our third quarter results. For the quarter, we reported approximately $11 billion in total revenue and $10.8 billion of premium revenue with adjusted EPS of $1.84. Our third quarter consolidated MCR was 92.6%, reflecting a continued challenging medical trend environment for each of our segments, but was moderated by our consistently effective medical cost management. Half [indiscernible] versus our expectations this quarter was due to the significant underperformance in Marketplace.

In Medicaid, our third quarter MCR was 92, higher than our expectations. We continue to experience medical cost pressure across many cost categories, particularly for behavioral, pharmacy and LTSS. The combination of these trends exceeded rate updates received throughout the year. In Medicare, our third quarter MCR was 93.6, also higher than our expectations. We experienced higher utilization among our high-acuity duals populations, particularly for LTSS and high-cost pharmacy drugs.

In Marketplace, our third quarter reported MCR was 95.6%. Utilization in our membership was significantly elevated compared to our prior guidance. In past years, higher trends have often been offset by risk adjustment benefits. However, since Marketplace risk adjustment is relative to the market, not absolute like Medicare, the higher trend this year across the entire national population mitigates the risk adjustment offset we would have expected to realize. Our adjusted G&A ratio for the quarter was 6.3, reflecting our normal operating discipline. I will note that our effective tax rate in the third quarter dropped significantly, reflecting benefits related to acquired federal tax credits and the impact of lower nondeductible expenses.

Turning to the balance sheet. Our capital foundation remains strong. While margins are lower than our targets, I point out that positive earnings continued to add to our capital base and drive cash flow via dividends to the parent. In the quarter, we harvested approximately $278 million of subsidiary dividends and our parent company cash balance was approximately $108 million at the end of the quarter. RBC ratios, which test the level of capital at the subsidiary level compared to regulatory requirements, are 340% in aggregate and unchanged since the end of 2024.

Total subsidiary capital is 70% above state minimums. Our operating cash flow for the first 9 months of 2025 was an outflow of $237 million due to the settlement of Medicaid risk corridors and Marketplace risk transfer payments. as well as the timing of tax payments and government receivables that offset the normal positive items. In the quarter, we have repurchased approximately 2.8 million shares at a cost of $500 million. We see real value in our shares at current market prices, which we believe at this low point in the rate cycle underappreciate the longer-term margin targets of our business. Debt balances at the end of the quarter increased temporarily to fund the share repurchase.

Current ratios are 2.5x trailing 12-month EBITDA and our debt-to-cap ratio is about 48. We continue to have ample cash and access to capital to fuel our growth initiatives and execute on our capital allocation priorities.

Turning to reserves. Days in claims payable at the end of the quarter was 46. We remain confident in the strength and consistency of our actuarial process and our reserve position even in this period of sustaining high trend.

Next, a few comments on our 2025 guidance. Our full year premium revenue guidance is slightly higher at $42.5 billion. Our adjusted earnings are now expected to be approximately $14 per share. Within our guidance, the full year consolidated MCR increases to 91.3, up 110 basis points from our prior guidance. Updated EPS guidance is $5 below our prior guidance of $19 per share, reflecting our higher full year MCR outlook. The medical margin decline of $6.25 in our guidance is partially offset by $1.25 of favorable G&A and the modest impact of lower average share count.

I will note that Marketplace, which comprises just 10% of our total revenue, contributes half of that medical margin-driven EPS shortfall. In Medicaid, we expect fourth quarter MCR of 92.5% and full year now at 91.5%. This full year outlook is up 60 basis points from our prior guidance, reflecting the third quarter experience and our expectations for higher trend in the fourth quarter. Within those numbers, our full year Medicaid trend rises from 6% to 7%. Updates in several states increased our full year rate outlook from 5% to 5.5%. We continue to see a willingness from states to discuss off-cycle and retro rate adjustments as data develops, but we do not include speculative updates in our guidance.

Even in this challenging operating environment, our Medicaid segment's full year pretax guidance margin is 3.2 and implied second half margin is 2.5, demonstrating the underlying strength and execution of our main business. In Medicare, we expect fourth quarter MCR of 93.6, in line with the third quarter. Our guidance for the full year of Medicare MCR rises to 91.3, a 130 basis point increase from our prior guidance, mainly driven by expectation for full year trend rising from about 4 to 5. The Medicare segment full year pretax guidance margin is breakeven.

In Marketplace, we expect fourth quarter MCR of 96.2 and full year at 89.7. Within our marketplace guidance, full year trend rises from about 11 to 15. We expect the full year G&A ratio to be approximately 6.5%. Due to third quarter share repurchases, our fourth quarter share count falls to 50.9 million and full year is $53 million.

Finally, I'll expand on Joe's comments on our initial outlook for 2026. While we're unable to give guidance at this early stage, I would like to further detail our initial views on the premium and EPS building blocks for 2026, which may help shape your perspectives and modeling. A number of known items put us on track to meet our target of $46 billion of revenue in 2026. They include normal growth in our current footprint, the new Medicaid contract wins in Georgia and Texas, and the Medicare duals growth in 5 states as our MMPs transition to and IDs.

However, we anticipate 2 revenue headwinds in 2026, which we are unable to size at this early stage. First, given the lapse of enhanced tax credits or subsidies in marketplace and the significant uncertainty will cause in the risk pool, we are repricing the marketplace book of business to reduce exposure and restore margins. Our 2026 rate increases averaged 30%, ranging from 15% to 45%, and we have exited difficult geographies. I will note that for the next year, we have reduced our county footprint by 20% and our #1 and #2 price position goes from 50% of our footprint in 2025 and to an estimated 10% of our footprint in 2026. Separately, we may see a small impact to Medicaid membership due to the recently passed budget bill, but continue to expect that most of that impact will manifest in 2027 and 2028.

I'll now run through a similar set of building blocks on the EPS side. As a baseline for 2026, our Medicaid performance in the second half of 2025 is expected to produce a 92.3 MCR, a 2.5% pretax margin and contributed $6.50 per share to earnings. We annualized that to $13 per share for full year Medicaid baseline for 2026.

Next, we adjust that baseline upward to reflect normal seasonality pressure in the second half of the year. Remember, second half MLR is typically 50 basis points higher for seasonal items in our rate cycle, which implies a 25 basis point increase to next year's annualized outlook from the second half of 2025. Then early views of draft rates in our January rate cycle, which comprises 60% of our full year revenue, now suggest next year's full year rates could be better than an initial proxy for trend by 50 basis points. While still short of the significant cash up needed in rates more generally, our early data points suggest states are moving in the right direction.

Next, we anticipate increased G&A expense next year as a return to normal compensation expense levels are only slightly offset by the end of the unusual implementation expenses we recognized in 2025. Lastly, we expect the benefit of lower share count next year to be largely offset by the impact of declining interest rate environment on our interest income. These building blocks will enable a fair outlook for 2026 that likely approximate for this year's updated full year guidance. I will note that this approach inherently assumes that both Medicare and Marketplace are earnings neutral next year.

As we build our plan for next year, we see additional potential upsides in 3 areas. Most significantly, we remain optimistic on the margin improvement potential as state set rates for 2026. Many state programs are underfunded as we are now in the sixth consecutive quarter of abnormally high medical cost trend. Published reports and our own internal analysis suggests that the market needs 300 to 500 basis points of rate in excess of trend to breakeven. States are listing, becoming more responsive and weighing more heavily on recent medical claims data in the rate setting process.

We have very strong rate advocacy efforts working with our state partners to restore rates to appropriate levels. Rate increases beyond our initial assumptions create significant earnings upside as each 100 basis points of MLR yields $4.50 of earnings per share. Separately, as noted, this 2026 outlook also conservatively assumes Medicare and Marketplace will break even. In Medicare, we remain strategically focused on our dual eligible population and improving pretax margins. Each 100 basis points of MLR yields $0.80 of earnings per share. In Marketplace, any positive margins are also upside to our building blocks even on declining revenues. A final source of upside is our embedded earnings which accounts for the estimated accretion from new contract wins and recent acquisitions. We will harvest some portion of the $8.65 per share in 2026. This concludes our prepared remarks.

Operator, we are now ready to take questions.

[Operator Instructions] The first question comes from Andrew Mok with Barclays.

Can you elaborate on the drivers of ACA MLR pressure in the quarter? It sounds like there was a negative surprise in the September Wakely data can you confirm and quantify that for us? And given the timing of the ACA pressure, how confident are you that this most recent utilization and morbidity experience was captured in your 2026 pricing?

I'll frame the answer and then hand it to Mark for more detail. The pressure in the quarter was strictly related to increased medical cost trend literally across all categories. We have a higher percentage of special enrollment membership, which usually runs hot initially. It's all medical cost trends. The risk adjustment was not a factor in our trajectory of earnings per share.

Now for next year, as Mark mentioned in his comments, we don't like to allocate capital to a product in an unstable risk pool. That's why we kept this small, silver and stable at 10% of revenue. So next year, our rate increases state-by-state range from 15% to 45%. They averaged 30%. We reduced our footprint by 20%, and more importantly than the raw price increase that went into the market is where does your product price sit compared to the other market participants. We were #1 or #2 silver in 50% of our markets last year. And this year, an early read, we don't have all the information, suggests that we're only going to be priced #1 or #2 in 10% of our core markets.

Mark, anything to add?

Joe, I think that's well summarized. Just to hit that in the third quarter, a number of drivers because certainly, our MLR is up a lot Q3 over Q2, to your question. In general, it's the same trend pressure that every one of our segments are seeing. Joe mentioned SEP volumes keep coming. Program integrity, the different forms of membership attrition that come out certainly put a little pressure on it. What you'll also see, and I expect you to ask about this is in our IBNR roll forward, you'll see some development that went back to last year on some large dollar items and some provider claim settlements. So you put those items all together, it certainly is the driver of a lot of pressure here in the third quarter on marketplace. Joe hit the key theme for next year exactly. We'll reduce our exposure significantly next year. We're not as competitive in most markets. We're pretty far down the rankings on most prices, which means I think we have enough price in there to jump over any unforeseen in the third and fourth quarters and more importantly, minimize exposure next year.

That initial 2026 outlook only assumed on a reduced revenue base that we get marketplace back to breakeven. We in our pricing, we certainly targeted mid-single-digit pretax margins.

The next question comes from Stephen Baxter with Wells Fargo.

Just a couple of clarifications on how you're thinking about Medicaid going into next year. In terms of the rates that you're discussing, are you then expecting rates to be in excess of the 7% cost trend that you're seeing right now? And then when you speak to enrollment trends, on one hand, it sounded like you talked to some level of normal enrollment growth, but then also talking about some expected pressure on enrollment. I guess could you just clarify whether you're expecting on a same contract basis in Medicaid for next year, whether enrollment is going to be up, down or stable?

I'll answer the second question first. In each of the last 3 quarters, we saw a 1% membership decline in Medicaid, and that's just due to more rigorous and disciplined enrollment activities in each of our states. Now as you know, staters versus levers, that usually adds a little bit of acuity shift, which is probably part of the issue of why medical cost trend is increasing. But your first question about rates, there are 4 reasons why we're optimistic that rates will at least keep pace with trend and probably be slightly in excess of trend. One is, in the past, over the past year, states have been very responsive, on-cycle, off-cycle, retroactive, prospective and responding to the increased trend. Two, this cost inflection started in mid-'24 through mid-'25. We have a full year baseline that includes significant cost increases that can be rated for.

So the updated baseline gives us optimism if that's included in the rate projections, then it captures a lot of the cost increase. Third, 3 of the cost categories that are increasing pressure on our results, LTSS, pharmacy and behavioral are discrete rating cells in the rating process, very visible, very prominent, gives you great visibility into those cost components, and they can be rated for adequately. And lastly, an early glimpse, very early glimpse at the 1/1 cycle where 60% of our revenue renews gives us some optimism that rates will be slightly ahead of trend and including rate updates for the full year in 2026, be slightly in excess of trend.

Mark, did I miss anything?

No, Joe, I think it's well summarized. Stephen, it's indisputable that managed Medicaid rates are 300 to 400 basis points underfunded. -- and our state partners are recognizing that. We understand there's budget pressures out there. But with the development of data, as Joe mentioned, that's indisputable. And our early outlook for next year is that rates will be at least somewhat better than expected trend. But as you can imagine, we're feeling our way through both of those right now, and we'll have more as guidance develops.

The next question comes from A.J. Rice with UBS.

I appreciate the early comments about next year. Thinking about what you're assuming on the public exchanges, there are a lot of different scenarios on the table now with respect to subsidies, enhanced subsidies, et cetera. How does that affect -- what have you assumed embedded in the comment about breakeven? And how much of a variability might there be depending on the various ways this could play out?

Well, we gave you the rate increases ranging from 15 to 45 averaging 30. And I won't go through the discrete components. I'll describe them qualitatively. You were underwater this year. We're going to have a 3% negative margin. So you put in a catch-up to get you back to target margins. You put in an estimate of trend, which we believe is very conservative. And then, of course, you have to estimate the impact of the acuity shift as the membership roles reduced due to the enhanced subsidy expiration. We believe we conservatively priced for all those 3 elements.

But again, the more important point is where does the product sit on the shelf compared to your competitors. And the fact that it's not 1 or 2 in most of our markets gives us a view that volume will be reduced next year. I can't tell you how much right now, but it will be reduced. And our assumption is that on that reduced volume, we can at least get this back to breakeven. But those conservative pricing assumptions did target mid-single-digit margins.

Anything to add, Mark?

The only thing to add, A.J., is right now, we're priced for the expiration of subsidies, which is the base case on the table. I think inherent in your question might be, well, what if the rules on subsidies change? If the rules on subsidies change, then pricing changes as well. Our objective, as Joe said, would be the same, which is to break even or be better. But if the outlook and the regulation on subsidies changes, then the rates need to change as well.

The next question comes from Josh Raskin with Nephron Research.

When you look at that early view of 2026 being similar to the $14 this year, would you characterize that as a new baseline from which you grow and realize your embedded earnings going forward? Or do you view that as abnormally depressed still and we should expect above-average growth for a couple of years as margins get back to targets in all 3 segments?

Whether we're taking the full year of 2025 in Medicaid at $16 or an annualization of the second half at $13, with the items of upside we mentioned, we certainly believe that rates will come back into balance with medical cost trend over time. Now the question everybody asks is, well, how much time will that take? We don't know, and we're not forecasting that. But next year, we are assuming that rates are in excess of trend, modestly in excess of trend, and that's a good jumping off point.

But we do believe we have not changed our long-term outlook on the margins for this business. In the first half of the year, we had a 3.8% pretax margin. And that -- even that was below our long-term target of about 4.5% for the business. We believe, over time, these things come back to target margins. The market in Medicaid needs 300 to 500 basis points to break even, just to breakeven. We've consistently operated 200 to 300 basis points better than the competitors in all of our markets. We only need a fraction of what the market needs in order to get back to target margins.

Mark?

And Josh, just to build on that, I noticed overnight, some of you did the math on our initial outlook, the building blocks to $14 and a few of you got pretty close. It sort of implies next year that the whole company would run about a 2% pretax margin and maybe a 2.5% on Medicaid. -- which, in both cases, is significantly below our longer outlook of 4% to 5% pretax for the whole company or 4.5% at the midpoint. So it certainly implies that next year, margins are reduced with a lot of growth potential as this rate cycle normalizes.

The next question comes from Justin Lake with Wolfe Research.

I was hoping I could get you to share where you think exchange revenue would be for next year, given all those moving parts you talked about versus kind of the $4.5 billion run rate this year. And then maybe you talked about SG&A be a little pressured year-over-year. given bonuses returning. Can you -- anything you could share with us in terms of where you think that SG&A ratio will shake out year-over-year?

I'll answer the exchange revenue question first and then kick it to Mark for the G&A color. We have various scenarios. And of course, what you're doing is you're looking at your price position versus the price positions of other players and looking at your competitive position and trying to forecast how much volume will you keep and how much volume will you get. We don't believe we'll get a lot of new membership, but we believe we'll hold on to some renewal membership. We have scenarios that indicate that revenue could come down from $4 billion to $2 billion or even slightly less than that at $1.5 -- in either case, we are 100% comfortable of at least breaking even in that line of business next year. But our pricing models, even at that reduced volume, were priced to produce mid-single-digit target margins.

Mark, do you want to take the G&A question?

Yes, Joe, just to build on the marketplace one, a lot of the consensus views out there are that marketplace could shrink nationally 30% to 50% next year. I think what Joe is suggesting is it wouldn't be out of line to think we would as well with some of the numbers Joe mentioned. On the G&A ratio, we'll probably come in at a 6.5% this year within our guidance. That is low for the reasons you mentioned, compensation and a few other items, probably targeting roughly about a 6. 8-ish is the right way to go for next year, at least to start your modeling.

On the -- another point on the G&A question is really important because when we talk about target margins in Medicaid, one of the facts that is usually missed is that we operate just north of 5% of a G&A ratio in that line of business, which we believe is best-in-class. So if we get 200 to 300 basis -- 100 basis points of rates, which is equal to $4.50 a share and continue to operate just north of 5% on the G&A line in Medicaid, then we're well on our way back to target margins.

The next question comes from Kevin Fischbeck with Bank of America.

Great. I guess I appreciate with the guidance that you basically are only signaling potential areas of upside. It really seems like the market is much more focused on potential areas of downside. You have some peers who are thinking that margins trough next year rather than are slightly better in Medicaid. Obviously, the exchanges are unknown.

So I would just love to hear your view on where you think the downside risk to the numbers are. You said that this year, trends matched -- rates matched trend, but then trend got worse as the year went on. It's not clear to me why you have confidence that today, when you say rates look like they're going to be slightly above, why you'd have confidence that by the end of the year, that would still be the case. And then with your embedded earnings comment with, I guess, the business underperforming, how do we think about the embedded earnings? I guess, in the past, you've kind of talked about the trajectory of realizing them. Is that all pushed out a year? Like how should we be thinking about that part of the equation?

Well, on the margin question or the MCR question in Medicaid, when you produce a 91% MCR in the first half of the year, 92% in the second, averaging 91.5% and your pretax margins at 3.2%. It depends what you mean at trough from. I mean these are the lowest point of our margins because we started at 4.5% to 5%. So I think we have to -- when comparing our results to others, you have to look at the starting point. We started at 4.5% to 5%. It was just a year ago, we were 200 basis points into the corridors. One of the reasons why the cost inflection that began in mid-2024 didn't hit us as much is we were 200 basis points into the corridors late in '24, which buffered a lot of that medical cost pressure.

So we're operating the way we want to operate. We believe we'll get back to target margins and even back into the corridors. And we're -- I articulated the early view of rates to our idles, past state rate updates, the '24/'25 baseline already including a lot of the cost inflection, 3 rating components that are very discrete and highly prominent and an early glimpse at 1/1/26. So we think the Medicaid business, which is the earnings b of the company, 75% of our revenue, producing a 3.2% pretax margin at $16 a share this year is going to continue to perform.

Is there downside? Any business has downside on medical cost trends. And there's no question that in all of our businesses with a 7% cost trend in Medicaid, a 5% cost trend in Medicare and a 15% cost trend in Marketplace, it's all about cost trend and where that settles in, in 2026. But our view is the appointment logs are filled in doctors' offices, the beds are filled in the hospitals. And at some point in time, capacity has to level out and trend levels out on this highly increased cost base. If trend just levels, costs are still up 15%, 20% of where they were 2 years ago.

Yes, Kevin, the second part of your question was on embedded earnings. As we said in our prepared remarks, we've got $8.65 now. And remember what that is, that's earnings on top of what we're currently guiding to in the current year, things that will emerge in future years. We're at $8.65. We had previously signaled we thought about 1/3 would come out into earnings in 2026. We're not ready to give a more specific number.

Joe and I certainly will when we give guidance after the fourth quarter. But what you can think about is within that $865 million, remember, we were carrying $1 of implementation costs, which depressed our earnings in 2025. That just goes away. That was the preparation for the FIDEs and HIDEs. We'll kick those into gear January 1. So that kind of headwind goes away for next year. The other small component was we were expecting a little bit of a loss on -- from the Virginia contract going away. That was a $0.40 item. So that falls out.

So you get the dollar next year. You have to recognize the $0.40 headwind from Virginia, but net, you're up at least $0.60 just on things that are money in the bank. The rest we'll update as Joe and I have a better view on trend in rates next year, but you'll get some portion of that $8.65.

The only thing I would add is embedded earnings is what we call an ultimate concept, meaning that you get to your ultimate target margins over a period of time. Now given where margins have settled recently, could that then take longer to get to ultimate? Sure. But we have not changed our view of the ultimate target margins in those businesses, but the timing of emergence is certainly something we'll update you on when we give 2026 guidance in February.

[Operator Instructions] The next question comes from Scott Fidel and Goldman Sachs.

Maybe switching over -- let's switch back over to Medicare a little bit. And interested maybe if you can sort of break down for us around the performance for this year, sort of breaking it down between, let's say, the traditional MOH sort of D-SNP focused book of business. And then the acquisition of the bright assets in California and how each of those sort of have built into the performance this year. And that then looking out to next year as well of how each of those 2 categories influence your view on Medicare and so that, I think, sort of breakeven margin view that you have for next year?

Well, I'll tee it up, and I'll hand to Mark. The Medicare business, as I said in my prepared remarks, is sort of going through a rejuvenation, and that is because it is -- it was always aimed at the dual eligible segment. But now with the MMPs, the $2 billion, 44,000 members, $2 billion of revenue converting to FIDEs and HIDEs, we're really well positioned, particularly with the swipe of Illinois, Ohio and Michigan and the D-SNP RFP process. So as we look year-over-year, this year versus next, the Bright acquisition will be what, the third full year of ownership, and that was coming from a very low margin position, and we're building it up. That will provide some improvement. But as we convert these 44,000 members and by the way, add 20,000 due to the service are extension and the MMP conversions, we're being a little cautious. They're the SIM members are in the same geographies, but it is a different product chassis. So we're being a little cautious with the margins in that product.

So breakeven to breakeven, Bright does better than the third year of ownership, and we're a little bit cautious on the profitability of the MMP conversions until we have 1 year of experience.

Mark, do you want to add anything? .

Joe, that's well summarized. Within our $6 billion of Medicare, it's about 1/3 MAPD, about 1/3 MNP and about 1/3 D-SNP -- as we look to next year, those MMPs will translate to FIDEs and HIDEs given all of the RFPs that we won -- so I think you'll see slight margin erosion as you go from MMPs into FIDEs and HIDEs, and that's one, just us being cautious about a new product; and two, recognizing that the second half of the year was higher than we thought this year. that slight margin erosion though, I think, is offset as on the MPD side, Bright ConnectiCare come back up to closer to where they should be on target margin. You put that all together, we're starting off at least margin neutral for next year.

The next question comes from John Stansel with JPMorgan.

On the M&A pipeline, since Investor Day last year, you spent a fair amount of time talking about the opportunities you see with smaller and regional players. And I think we've heard a fair amount of commentary across the space about potentially negative margins in Medicaid -- and to contrast that with the significant share repurchase done in the quarter, can you just talk through how you're thinking about capital allocation priorities from here, capacity and how developed that pipeline is in the coming quarters? .

Sure. Our capital priorities have not changed. The order priority, organic growth, inorganic growth and returning capital to shareholders very share repurchase, that haven't changed, and we have ample capital, as Mark said, we're still producing earnings. You throw leverage on top of earnings. We're producing $1.5 billion of capital capacity a year even at these compressed margins.

On the M&A pipeline, -- if you look at our history of purchasing, what, $11 billion of revenue over 7 or 8 deals and only acting capital equal to 22% of purchase revenue, half of which is regulatory capital, hard capital we barely paid any goodwill value for the acquisitions. In this period of cyclically low margins, we're going to be very disciplined about prices paid for revenue streams. If you can buy a revenue stream, from a struggling local health plan at or about book value, it's just as good as winning a new contract, no goodwill capital. All the capital was hard capital and regulatory capital. So the number of local not-for-profit health plans in Medicaid that have experienced prolonged operating difficulties and therefore, profitability and capital problems has been a catalyst for the pipeline being replenished in very full, very full of actionable opportunities. And if you can action them at or around book value is as good or even better than winning a new contract.

Mark, anything on capital allocation? .

On capital allocation, Joe mentioned the prioritization, we always prefer to grow organically. But these M&A situations, when you buy them so close to book, almost feel organic. If the industry is 300 to 400 basis points underfunded, you can imagine some of these smaller players are starting to really struggle, which is why we feel good about the opportunities to do some M&A here and drive additional value from that perspective.

On the capital side, we remain in a really good spot with our financial ratios. And again, with the earnings power of the business, even at these lower levels, we just continue to build book value and therefore, debt capacity. So we feel pretty good about on the opportunities and to our capital position.

The next question comes from Ryan Langston with TD. Cowen.

Great. I appreciate all the details for 2026. It sounds like you see states moving in the right direction in terms of rates. But I'm wondering, is there any other type of relief that states are offering just above and beyond. I think you got the second quarter in utilization management was range sort of allow those services. Are you seeing any signaling some states this could change over time?

With -- I think what you're describing is the construction of the program. Look, as states are pressured on budgets. They have a variety of things they can do. They can change the program, reduce benefits, reduce eligibility. And we've heard other companies talk about this. We've seen this at the margin. Have there been utilization pauses called by various states? Yes, isolated, mostly on behavioral. And what do you think happens when you pause utilization on any component of cost that goes up. Most states are going back to full utilization protocols at this point, but it's not a major phenomenon. Benefit changes, meaning reduction in the size of the program to the benefit changes. We've seen those on the margin in various places, but not significant.

So going into next year, program changes, program construction is really not a major phenomenon to consider as we -- in our outlook for 2026. It's here, it's there, it's isolated, but it's not a major driver. Now the other component that we are seeing, as I mentioned before, and it shouldn't be ignored, is states even before work requirements are taking enrollment processes more seriously, and we've lost about 1% of membership per quarter for each of the last 3. Levers usually have a lower MCR than stayers. So they're putting a little bit of pressure due to an acuity shift, but most of the pressure Medicaid is higher utilization by the stayers, not the acuity shift by the levers, but continued program integrity is another phenomenon that we're experienced state by state.

The next question comes from Erin Wright with Morgan Stanley.

Just a bigger picture question on the exchange business in light of just the uncertainties, whether it's subsidies or otherwise or the lack of visibility sometimes across that business, and you're taking a conservative approach, but I guess, can you talk about your overall commitment to that business, how you think about that? And at what point would your thinking change on that front in terms of your priorities and the overall mix of your business.

As I mentioned previously, thanks for the question. We will allocate capital to the business as long as we are convinced that the risk pool will continue to be stable. And I look over the past 5 years, insurtechs coming in with unreasonable pricing, expanding the eligibility for special enrollment. -- enhanced subsidies in enhanced subsidies out. I mean you can go back and look at duration of membership, fast-churn membership, you need risk adjustment, you have a member for 18 months, you don't get risk adjustment. So when you look at the inherent what I call inherent volatility of the book, we have no choice in my -- in our capital philosophy of allocating a little capital to an unstable risk pool as we can. However, we did not pull the product. The product is available. It's available in over 300 counties. It's on the shelf. And if we come to the conclusion that the risk pool stabilizes for a period of time, we can allocate more capital, leverage our broker relationships. And while other market participants might consider this product a necessity, we consider it an option. We believe that option is out of the money next year. But when it goes back closer to the money, in the money, we'll exercise it.

The next question comes from Lance Wilkes with Bernstein.

Great. Just a couple of clarifications on Medicaid and Marketplace. For the '26 assumptions on trend and rate, are you kind of presuming that rates, given visibility you've got thus far are going to improve up to that trend level? Or do you think that trend level is going to be normalizing down? Could you also talk a little bit about the variability you see contract-to-contract or state to state in your margin performance? And does that present any opportunities for exiting any particular contracts? Or are they all doing kind of comparably well? And then the last question is just on marketplace. If you're seeing any sort of pull forward in activity kind of the uncertainty in the membership there, if they're going to have the program going into next year for some of them. And if you could quantify that?

Mark, do you want to take the Medicaid rate question, the 2026 rate question...

Absolutely. Lance, on the Medicaid rates versus trend, again, the industry is 300 to 400 basis points underfunded right now. And while states might have budget pressures and be reluctant to completely address that, it's inevitable they need to. And so our view into early next year and what we're seeing from our state partners, is that the trend in rate imbalance can't perpetuate. We're faring up into at least 6 quarters into it, that the trailing data is catching up with it. And our assumption is that extremely high trends as we've seen don't continue that they moderate somewhat. But more importantly, that states are recognizing with the trailing data that they need to catch up. It may take them many quarters to catch up, but they are starting to recognize that and catch up.

And remember, if the industry is 300 to 400 basis points underfunded, the stat filings show that Molina is still performs 200 to 250 basis points better than the industry. So we need half of what the broader industry needs to get to our target margins and the probability of us getting that half sooner than later is probably better than the whole market coming back to stasis. So we feel that some catch-up is appropriate and warranted, and we're expecting, again, if all catch up in our initial outlook here.

With the question state-by-state, Mark and I spent a lot of time managing what we call the portfolio. and we do not tolerate performance SKUs, everybody's got to deliver. Now things go through cycles and sometimes the state rate will get weaker and then sometimes it gets stronger. But every property in the portfolio is performing at least in excess of its cost of capital. There's a supposition out there that some of the smaller plans can't be doing well because they can't be scaled properly. We have $5 billion health plans, and we have $500 million health plans. The margins are not correlated to the size of the plan. They're just not.

We can make money in a $500 million to $1 billion health plan, all the shared services, claims, grievances and appeals all those shared services call centers are completely leveraged at an enterprise level. So right now, sure, states go through -- our state properties, go through various cycles of profitability, ebbing and flowing. But no, there is no contemplation of reducing the size of the portfolio. We still have an active pipeline targeting $54 billion of opportunities over the next number of years. We have 2 active RFPs, 2 of our bigger states in flight right now. So now we're building the portfolio. And right now, there is no discussion over any underperformance or any state where we're not happy to do business.

The next question comes from George Hill with Deutsche Bank.

I had a Medicare question. And I guess, Mark, when I think of your portfolio in Medicare, I think you talked about like the LTSS and the dual penetration, I think if you guys as having high duals in a relatively sick book of business. which is why I was surprised at the magnitude of the MLR miss in the quarter. I guess, can you talk about the variable consumption that you guys saw in the Medicare business? And what's driving that because, again, I think the really sick members is constant utilizers of care. So I kind of really like to hear about the marginal -- like what's driving the marginal cost of care in Medicare .

I think you have a variety of things going on. We typically talk about LTSS as being a bigger driver in a high acuity population, and it's certainly a built-in big part of each of these high acuity and dual products. And then on the high-cost drug side, that continues to be a factor across all of our businesses, but with certain cancer treatments with certain other of the therapies that are out there. high-cost drugs continue to be a very big driver of it.

And you make an interesting point. that in highly chronic populations, by definition, ABD and Medicaid and Duals, you wouldn't expect to see a cost inflection because they're using services from day 1 to day 365. And but we have seen it. And those are the 2 cost components in Medicare, LTSS hours and SNF admits and high-cost drugs, which are our Rx trends as a company are about of 16% and 36% in the top 10 therapeutic categories. So they're being used across all our populations, and that is what's putting the cost pressure in Medicare. Even though they're already high acuity chronic populations, utilization is up.

The next question comes from Michael Ha with Baird.

With regard to Medicaid margins and state rate increases, I understand you're strongly advocating for better rate alignment. So I'm wondering how many of your states are actually reflecting recent '25 trends into the reference look back period for the upcoming January rates. Curious because in our conversations with state actuaries, it seems like actuaries at best can only consider a look-back period of 12 to 24 months, just given how difficult it is to shorten it, just given they need a few months ahead of time to submit to CMS for approval, need roughly half a year to run the process and then clean 12-month look back to reflect about 3 months of claims runoff. So I'm curious, are you seeing states who actually reflecting '25 trends? And also on the Medicaid member attrition this year. I was wondering if you could quickly elaborate on the nature of that enrollment. How many of these lives are rolling off because the procedural or administrative reasons? Just trying to better understand if this might be emblematic at the higher level. of outsized procedural disenrollment that we've been seeing?

On the Medicaid rates, and Mark and I, particularly Mark spent a lot of time in this process. the data through -- through June of 2025 is virtually complete. Yes, actuaries like to see data very well seasoned. And this cost inflection did start in mid-'24. So whether they use '24 but include early '25 as a trend factor or used mid-'24, '25 as the baseline and late 25 as a trend factor. As long as they capture the medical cost inflection either in the baseline or trend, we believe we'll be in good shape. So I'm not going to go state by state. The industry's advocacy efforts to fully consider the latest experience are very strong, and we believe are working. Whether the actual baseline period is 12 months older and then they include a generous trend on top of it or more recent period and less generous rent, it mathematically doesn't matter. But we are confident that the latest cost information either in the baseline or in a trend assumption is being contemplated in rates.

Mark?

And Joe, that's a big point that isn't always well understood. If the look-back period is 6 months or 12 months ago, sure, that makes a difference from one perspective, but that's not the rate you get. The rate you get is that look back starting point plus a fair trend on top of it. Now actuaries can argue over what that fair trend is on top of it. But if that fare trend comes out at an appropriate place, the specific data, the look-back period is less relevant.

On your membership question, yes, states have just gotten more disciplined on eligibility requirements, and there's no one state or one area, about 1% per quarter for the last 3. And I believe in the membership decline in a must be in there as of June 30. So the loss of Virginia, I don't have the number in front of me. Mark might have it. That also accounted for some of the membership loss. That contract rolled off months ago.

Right? And in the third quarter, 120,000 of our Medicaid members fell off due to the transmission number game, right.

Our last question comes from Jason Cassorla with Guggenheim. .

Great. Maybe just piggybacking off of the benefits questions from Medicaid. You noted program construction isn't like a phenomenon for 2026. But as opposed to multiple years of elevated rates, discussion around being 300 to 400 basis points unfunded in Medicaid. What do you believe needs to happen for states to take a deeper look at benefit structures and find areas that they'd be willing to pare back? And what would be like the mechanism or timing around when that could possibly happen? Or do you see a greater honors for states to do that and look at benefit structures?

Well, they do from time to time, carving out pharmacy, putting pharmacy back in. And the real issue here is while we don't like to see swings in revenue, revenue, we like to see revenue coming in. We certainly don't like to see it leave. The real issue here is if they take out benefits, how much rate do they take out? Do they take out the right amount of rate for the reduced benefit. So it should be margin neutral that and over time, it usually is. But there are value-added benefits in many states. I mean there's the core essential benefits that you'd always provide, but there are benefits around the edges that are always provided where they could actually cut back. states tended to have a tendency to carve out pharmacy. Some states have done that and found that it increased costs substantially. So we don't see that as a new emerging fan, there's 4 or 5 states that already do it. we don't see any more that are inclined to do it.

So I think around the edges, they will look at that in order to save money. It will reduce revenue, but as long as the right amount of rate is taken out of the capitated rate, then volume goes down a little -- premium line goes down a little bit, but margins should be neutral and should not be affected.

This concludes our question-and-answer session and Molina Healthcare's Third Quarter 2025 Earnings Call. Thank you for participating and attending today's presentation. You may now disconnect.

Good day, and welcome to the Molina Healthcare Second Quarter 2025 Earnings Conference Call. [Operator Instructions].

Please note, this event is being recorded. I would now like to turn the conference over to Jeff Geyer, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Molina Healthcare's Second Quarter 2025 Earnings Call. Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Mark Keim. A press release announcing our second quarter 2025 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 of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, July 24, 2025 and have not been updated subsequent to the initial earnings call.

On 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 the second quarter 2025 earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2025 guidance and 2025 guidance elements, the medical cost trend and our projected MCRs, Medicaid rate adjustments and updates our 2026 marketplace pricing and rate filings, our RFP awards and our M&A activity, revenue growth related to RFPs and M&A activity, the recently enacted big, beautiful bill and expected Medicaid, Medicare and Marketplace program changes and the estimated amount of our embedded earnings power.

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 our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions.

I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Thank you, Jeff, and good morning. Today, I will discuss several topics, our reported financial results for the second quarter, an update on our full year 2025 guidance. Our growth initiatives and strategy for sustaining profitable growth and some commentary on the potential impacts of the recently passed budget bill. Let me start with our second quarter performance, which greatly informs our discussion on 2025 guidance.

Last night, we reported adjusted earnings per share of $5.48 on $10.9 billion of premium revenue. Our 90.4% consolidated MCR reflects a very challenging medical cost trend environment, but moderated by our consistently effective medical cost management. We produced a 3.3% adjusted pretax margin. Year-to-date, our consolidated MCR is 89.8%, and our adjusted pretax margin is 3.6%. In Medicaid, the business produced an MCR of 91.3%, which is above our long-term target range.

We continue to experience medical cost pressure in behavioral pharmacy and inpatient and outpatient care. Let me expand on what we are seeing in our Medicaid business. Behavioral health costs have increased nationally reflecting both supply side and demand side drivers and imposed limitations on utilization management in certain states. High-cost drugs remain a source of pressure driven by higher script volumes and the introduction of a variety of expensive therapies beyond GLP-1s for conditions such as cancer and HIV.

Higher inpatient utilization in the quarter was driven by a higher volume of admissions for complex health episodes, many of which originated from increased ER visits. And the increase in outpatient utilization in the quarter was driven by primary care visits and preventive screenings, many of which led to subsequent treatment in specialist settings. This is the fourth consecutive quarter we have observed some combination of these trends.

The magnitude and persistence of these medical cost increases are unprecedented. To briefly recap how these trends have emerged over time. Starting in the third quarter of 2024, while an increasing trend emerged from the end of the redetermination process, rates and Molina's risk corridor positions at that increasing trend. By the fourth quarter of 2024, the increasing medical cost trend moved Beyond the 2024 midyear rate updates and corridors have largely become depleted. Moving into the first quarter of 2025, the January 1 rate cycle captured much of the continued trend pressure.

And now in the second quarter of 2025, we experienced yet another increase in trend would move beyond the rate updates received in the first quarter and risk corridor protection at this point is very limited and isolated. We are confident our cost control protocols and procedures continue to be effective albeit applied to much higher intake volumes.

Cross data indicates a higher prevalence of allowable and appropriate diagnosis and medical procedures. In Medicare, we reported a second quarter MCR of 90% which is above our long-term target range as utilization was higher in the more acute populations, particularly for long-term services and supports and high-cost drugs.

In Marketplace, the second quarter MCR of 85.4% was much higher than expected, including the new store MCR related to Connecticut. We continue to experience much higher utilization relative to risk adjustment revenue, the rata which has now been validated by external sources. Our adjusted G&A ratio at 6.1% reflects lower incentive compensation as a result of our revised view of performance as well as continue productivity enhancement.

Turning now toward 2025 guidance. Full year 2025 premium revenue guidance remains unchanged at approximately $42 billion. Our full year 2025 adjusted earnings per share guidance is now expected to be no less than $19 per share, a floor, if you will, which is $5.50 below our initial guidance of $24.50 and $3 lower than the midpoint of what was recently communicated on July 7.

Providing some color. [Audio Gap] This further revision results from new information gained in our June close process and implications for trend assumptions for the second half of the year, particularly related to marketplace. We use this most recent experience data to forecast the balance of the year, which resulted in a more conservative view and a view within a wider range of probable outcomes than is normal for this point in the year.

This revised guidance of a $19 floor produces a consolidated MCR and pretax margin of 90.2% and 3.1%, respectively. Our full year guidance now includes 140 basis points of consolidated MCR pressure compared to our initial guidance at $24.50, which is disproportionately attributed to marketplace. Marketplace is 10% of our revenue and accounts for nearly half of this 140 basis point MCR revision.

We consider the $19 guidance to be a floor as we believe the cost trend could moderate from this conservative indication and produce earnings upside. A reminder that 35 basis points of MCR in the second half equates to $1 of upside earnings per share potential.

Now some color around the segments. In Medicaid, our guidance assumes a full year MCR of 90.9%, which produces a pretax margin of 3.6%, while this Medicaid MCR result is above the high end of our long-term target range, we do evaluate it in the context of this unprecedented and challenging trend environment. We received on-cycle rate adjustments and new off-cycle rate updates in a few states that will benefit the second half of 2025. Then with approximately 55% of our Medicaid premium renewing on January 1, our rate cycle is well timed for early 2026.

There is little question that most state programs are significantly underfunded as a result of medical cost inflection. We have very strong rate advocacy efforts working with our state partners to restore rates to appropriate levels. States are listening and have been responsive. With that in mind, our own analysis validated by fat-based external reports, has us operating with Medicaid MCR 2 to 300 basis points lower than the broader market. When rates and trends reach equilibrium for the broader market, we should be back to operating within our long-term target range.

In Medicare, our full year guidance includes an MCR of 90% and a low single-digit pretax margin. We continue to effectively manage the elevated utilization through our cost control protocols. We consider this higher cost trend in our bids for 2026 and remain strategically focused on our dual eligible population.

In Marketplace, at this time in the cycle, the focus is not only on the second half of 2025, but also on the positions taken in rate filings for 2026. With respect to full year 2025 we expect to produce an MCR of 85% and a pretax margin in the low single digits. This result includes the pressure from the prior year items we recognized in the first half and the new store impact of ConnectiCare.

We conservatively forecasted medical cost trend and our risk adjustment revenue, the rata which has now been validated by external sources. As it is clear that the market-wide risk pool is higher acuity. Medical cost trend relative to risk adjustment continues to produce a higher-than-expected MCR. And we have considered this higher cost baseline and trend in our rate filings for 2026. More on that later, as rates for 2026 will also be affected by the expiration of the enhanced subsidies and program integrity policies.

Our small silver and stable approach to this line of business, where we target mid-single-digit margins even at the expense of growth was deliberate and well considered. This line of business has significant inherent volatility and a constantly shift in risk pool. We have limited this segment to just 10% of our portfolio and we always approach it cautiously.

In summary, with respect to our full year guidance, we provide it with full confidence, quantification and detail in this season of great uncertainty. Turning now to our growth initiatives. We remain on track to achieving our premium revenue target of $46 billion in 2026, and with a modest estimate of future growth initiatives, at least $52 billion for 2027.

Our outlook considers growth in our current footprint and recent Medicaid and Medicare duals RFP wins. These wins should more than offset the marketplace headwind due to the expiration of enhanced subsidies. This outlook is before considering any impacts of membership declines due to the budget bill, which we continue to evaluate in size and believe the ultimate impact of which is likely to manifest beyond 2028.

With respect to M&A activity, our acquisition pipeline still contains many actionable opportunities, and we remain opportunistic in deploying capital to accretive acquisitions. This current challenging operating environment has been a catalyst for many smaller and less diverse health plans to consider their strategic options, creating more opportunities.

Our embedded earnings, which accounts for the estimated accretion related to new contract wins and recent acquisitions remains at $8.65 per share. For all of these reasons, we remain confident in our long-term growth targets. Turning now to the political and legislative landscape and the related long-term outlook for our businesses.

In Medicaid, we believe changes in the Medicaid program related to the recently passed budget bill will be modest and gradual. We evaluate its impact in 2 broad categories: direct and indirect. By direct impact, we mean any impact specific to our actual membership and the potential for a related risk pool acuity shift.

Note that for the expansion population, work requirements commenced in 2027 or later by approval. Biannual reverifications also commenced in 2027 or later by approval as well. We continue to estimate that the ultimate impact will be in the range of 15% to 20% on the 1.3 million members in our expansion population.

As many of these members will automatically qualify as a result of exclusions and 2/3 already work in some capacity. By indirect impacts to the program, we are referring to funding reductions not expressly linked to certain populations. For instance, it is more difficult to predict how states will react to the reductions in federal funding resulting from limitations on directed payments and provider taxes.

States could limit eligibility, reduce benefits or keep their programs intact by funding it with additional state revenues. We anticipate that whatever a state elects to do will follow prevailing state-specific political tendencies. We believe these changes will be implemented over the course of the 2-year period of 2027 and in 2028 and possibly into 2029 and therefore, allow the market time to react appropriately, so any impact would be gradual and not abrupt.

Finally, in marketplace, we continue to expect the enhanced subsidies will not be extended beyond this year. External sources estimate a significant industry impact to 2026 enrollment. In addition to taking a conservative view of the current medical cost baseline and forward trend, we are attempting to conservatively capture the potential related acuity shift in the risk pool in our 2026 rate filings.

Most of our states have confirmed that they will allow market participants a second pass rate filing, which will give us a last look based on the most current information available, thus mitigating any mispricing risk. Regardless, our strategy of keeping this business small, stable and oriented towards silver tiered products has served us well.

In summary, we are disappointed with our second quarter results and guidance revision, even in the backdrop of this difficult environment of accelerating medical cost. In Medicaid, where health plan participants are essentially rate takers, we believe this dislocation between rates and trend is temporary and will normalize over time, just as it has in the past years of the program.

And in Marketplace, where there has been significantly increased utilization relative to risk adjustment, our rate filing process, we'll address this incongruity and restore the product to target margins. I do step back and take stock, in doing so, I am encouraged by a number of observations that deserve emphasis.

Even in this broadly challenging environment, we have the confidence and clarity to provide a specific earnings per share guidance floor with upside potential. We continue to grow premium this year at 9% and 19% over the past few years. Our consolidated MCR outlook is 90.2% and in an extended period of accelerating trend. When combined with our G&A efficiencies harvested over the past number of years, we are still projecting a full year 3.1% pretax margin, which is just 90 basis points off the lower end of our long-term range.

And finally, with margins normalizing as we are heading towards $46 billion and $52 billion of premium revenue, in 2026 and 2027. We are very well positioned to reestablish our profitable growth trajectory. At Molina, we power through short-term industry-wide challenges and strive to deliver superior sector performance.

We have built a durable government-sponsored health care franchise. This franchise has been signed to deliver results with the same consistency and commitment to operating excellence that has been our hallmark. With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Thanks, Joe, and good morning, everyone. Today, I'll discuss additional details of our second quarter performance, the balance sheet and our 2025 guidance. Beginning with our second quarter results. For the quarter, we reported approximately $11 billion in total revenue and $10.9 billion of premium revenue with adjusted EPS of $5.48.

Our second quarter consolidated MCR was $90.4 million reflecting a very challenging medical cost trend environment for each of our segments, but moderated by our consistently effective medical cost management. In Medicaid, our second quarter MCR was 91.3%, higher than our expectations. We continue to experience medical cost pressure in behavioral, pharmacy in the inpatient and outpatient care settings that Joe summarized.

The combination of these trends exceeded rate updates received in the first half of the year. In Medicare, our second quarter MCR was 90%, also higher than our expectations. We experienced higher utilization among our high-acuity duals populations, particularly for LTSS and high-cost pharmacy drugs. We remain confident in our cost controls.

In marketplace our second quarter reported MCR was $85.4 million, similar to first quarter, the MCR includes approximately 150 basis points of higher new store MCR in ConnectiCare, and 150 basis points for member reconciliation from previous years. Excluding these items, the normalized MCR of approximately $82.4 million was higher than we expected. Utilization among our renewing membership and new membership was elevated compared to previous guidance. While risk adjustment might normally offset higher observed trend, our market indicators clearly suggest that the overall market risk pool is also significantly elevated.

We -- reducing the value of the natural hedging effect of risk adjustment. The initial [ wake lies ] just received in late June clearly confirmed that national marketplace risk pools are trending higher. Our adjusted G&A ratio for the quarter was $6.1 significantly below normal levels, reflecting reduced incentive compensation tied to lower expected performance and our normal operating discipline.

Turning to the balance sheet. Our capital foundation remains strong. In the quarter, we harvested approximately $260 million of subsidiary dividends and our parent company cash balance was approximately $100 million at the end of the quarter. Our operating cash flow for the first 6 months of 2025 was an outflow of $100 million due to the timing of government receivables and risk corridor settlement activity that offset the normal positive items.

Debt at the end of the quarter was reduced by approximately $200 million through cash flow at the parent and now stands at just 1.9x trailing 12-month EBITDA. Our debt-to-cap ratio is about 43%. We continue to have ample cash and access to capital to fuel our growth initiatives. Days in claims payable at the end of the quarter was $43 million. significantly lower than prior quarters, driven by several items.

Recall the DCP calculation compares to fee-for-service components of our IBNR balance to the average daily medical claims expense. By quarter end, larger-than-normal cash payments significantly reduced the IBNR balances driven by faster processing and adjudication of claims as well as several large discrete cash settlements of age liabilities. Normalizing for these items, our DCP is more in line with historical averages.

As some of these items are sustaining we guide to lower DCPs in the mid-40s in future periods. We remain confident in the strength of our actuarial process and our reserve position. Next, a few comments on our 2025 guidance. We continue to expect full year premium revenue to be approximately $42 billion. Our adjusted earnings guidance is no less than $19 per share.

Within our guidance, the full year consolidated MCR increases to 90.2%, up 140 basis points from our initial guidance at $24.50. As Joe mentioned, the higher MCR is disproportionately driven by marketplace. Marketplace is just 10% of our premium revenue yet accounts for almost half of the consolidated increase in MCR.

In Medicaid, we are raising the full year MCR guidance from 89.9% to 90.9% as trend is now expected to exceed rates. With the observed trend in Q2, and our expectations for higher trend over the rest of the year. We are updating our full year-over-year trend outlook from 5% to 6%. The Updated rates in several states increased our full year-over-year rate only modestly from 5% to a little higher than 5%.

We have several known on-cycle rates time for Q3 and Q4. And recognizing higher experience trends. We continue to see a willingness from states to discuss off-cycle and retro rate adjustments as data develops. -- but we do not include speculative off-cycle rate updates in our guidance. In the second half of the year, ongoing medical cost pressure will exceed known rate updates. As such, we expect our Medicaid MCR of 90.8% in the first half to increase to 91% in the second half of the year.

Even at these MCR guidance levels higher than our long-term target range, -- our Medicaid segment full year pretax guidance margin is approximately 3.5%, demonstrating the underlying strength of this segment even in this challenging operating environment. In Medicare, we are increasing our full year MCR guidance from 89% to 90%, reflecting higher utilization among our high-acuity duals membership. We expect our Medicare first half MCR of 89.2% to increase to 90.9% in the second half of the year, driven by our outlook on trends, normal medical cost seasonality and the new inpatient facility fee schedule in the fourth quarter.

The Medicare segment full year pretax guidance margin is approximately 1.5%. Looking forward to 2026, we believe the final rate notice and our product designs, which we filed in May captured this higher 2025 jumping off point for our 2026 bids. In marketplace, we are increasing our full year MCR guidance from 80 to 85. The full year Marketplace MCR now includes approximately 200 basis points attributable to the combination of prior year member reconciliations and the new store impact of ConnectiCare.

Excluding these items, the normalized full year Marketplace MCR is approximately $83 million. We expect the normalized Marketplace MCR of $80 million in the first half of the year to increase to approximately $86 million in the second half of the year, reflecting higher observed trends and normal seasonal patterns for marketplace. While we are disappointed with these results for Marketplace, I will note that even with an expected full year reported MOR of approximately $85 million we would achieve low single-digit pretax margins in this business.

The Marketplace segment full year pretax guidance margin is approximately 1% or 3% normalized for the items I have detailed. We believe we can capture this trend pressure in our 2026 marketplace pricing with additional conservative assumptions included for the expiration of enhanced subsidies, new program integrity policies, and the related potential acuity shift in the market risk pool.

Given our relatively low exposure to marketplace at just 10% of our current portfolio revenue mix, we can remain focused on producing mid-single-digit pretax margins. We will prioritize margin and let membership fall where it may. We now expect the full year G&A ratio to be approximately 6.6% better than previously guided by 30 basis points, reflecting the very low second quarter expense and continued efficiencies in our operations.

Our full year EPS guidance is now expected to be no less than $19 per share lower than our first quarter guidance by $550 million. Guidance now includes $8 for our updated full year MCR outlook, partially offset by $250 million from the improved G&A ratio and slightly higher investment income given the fewer Fed rate cuts now expected.

Our consolidated guidance pretax margin is expected to be approximately 3.1% despite the significant dislocation of rates and trends with 55% of our revenue renewing on January 1 of next year, our rate cycle is well timed for 2026. This concludes our prepared remarks. Operator, we are now ready to take questions.

[Operator Instructions] The first question comes from Andrew Mok from Barclays.

You noted that the back half Medicaid MLR is higher than the first half, but it looks like there's some modest improvement from the 2Q MLR. How do you get confidence that Medicaid margins will improve from here when the spot rate for reimbursement seems to be inadequate in an inflationary trend environment and newer redeterminations and integrity measures look like they may impact both membership and risk pool on a go-forward basis?

Andrew, it's Mark. In the first half, we reported a 90.8% and my guidance implies a 91% for the second half of the year. Essentially, what we have is trend slightly outstripping the rates that we know about, which is why we have a little upward pressure on that. Now the good news is our previous guidance already had a bunch of rate manifesting in Q3 and Q4. We didn't get much more. I originally thought second half would be better than this. So we are factoring in that observed trend. On the other issue you mentioned -- there's the news plan around about the duplicative members in marketplace and/or Medicaid.

If you look, I think they're saying it's about 2.8% of the combined Medicaid and Marketplace pool, which we think there's a lot of errors in the numbers, and I think it's also going to take a long time to play out. I don't see that as being a meaningful membership headwind this year. So to me, it's all about the relationship of rates and trends. And we already had a lot of rate back in for us. This trend keeps coming, and we're going to model it like it is.

Great. Maybe just a follow-up on the ACA, as you look to refile the rates, is there a number you have in mind for the required premium increases next year to properly account for all the trend in risk pool issues across both '25 and '26 and reset to a normalized margin?

We're not -- we're not going to disclose our rate filing state by state. But I will tell you, the rate model is very clearly, first, have to catch up with the underperformance this year to get it back to mid-single-digit target margins. Second, a healthy dose of medical cost trend. Bear in mind, we've increased our assumption this year on medical cost trend year-over-year from 7% to 11%.

And you can rest assured we're putting a healthy dose of trend into rates. And then thirdly, the acuity shift that's going to occur next year due to the expiration of the APTCs, Again, modeled conservatively a healthy dose of conservatives and put into rates. But we're not going to go state by state, but we've captured all the elements that need to be captured. And we don't expect the business to grow next year. The market will shrink and we're not looking to grow. We're looking to get back to mid-single-digit target margins, having rated up for all the elements that are going to impact next year.

The next question comes from the line of Josh Raskin from Nephron Research.

I guess the question on the marketplace would be in light of the trends developing even worse, just the last couple of weeks, how much adjustment to your marketplace pricing cap should be done at this point to the states from the Fed Exchange? Do they allow significant adjustments at this point? And maybe when is the last time you could submit pricing changes for 2026?

Josh, yes, the states are adding a lot of flexibility this year. In past years, it was pretty hard and fast when the deadlines are. This year, every state is a little bit different, but there is either new deadlines even through August or there's soft kind of rolling discussions about where we are. Now some states also parse things a little bit differently. Can you change your trend assumption year-to-year just on core utilization that might be harder than can you change your assumption for acuity shift as more data evolves.

So it's a little bit about what components of pricing are changing. States view the components differently on where the flexibility is. But that's an ongoing discussion. And you have to appreciate that states need to be a little bit accommodating here, because the last thing they want is folks to drop out. They need to be accommodating on pricing because it's part of a sustaining market.

Yes, That makes sense. But I guess I'm just sort of thinking about your comments last quarter and the quarter before, where you spoke about a more stable marketplace membership. You talked about higher retention this year. So I guess I'm just still struggling with, what do you think is the root cause of this pickup in utilization and now, I guess, market-wide?

It is market-wide. And as demonstrated by the Wakely analysis that the risk pool as deteriorated by 8% year-over-year. The acuity of the entire marketplace risk pool is higher by 8% year-over-year, which means on a relative basis, risk adjustment is not going to keep up with the elevated trend. As I said, we've increased our trend assumption from 7% that went into pricing to 11% in our forecast.

And as I said, all we can do is put a healthy dose of trend into next year's rates, catch-up adjustment acuity adjustment, and we feel confident that we'll get back to mid-single-digit margins at the expense of growth. But there's no other explanation except that the Marketplace risk pool nationally is higher acuity, wake estimate 8% higher this year than last.

The next question comes from Stephen Baxter from Wells Fargo.

Just another couple on the exchanges. I guess, I know you're not going to give specific rate increases or request by state. But I guess just big picture, like how are you thinking about market-wide enrollment decline in 2026, obviously, that's a key component of forecasting acuity correctly. And I guess, is it fair to say that the acuity shift that you're putting into pricing is going to be multiples of the acuity shift we're seeing this year. And ultimately, if you do have states that don't let you take the rate increases that you want, like how do you plan to respond?

Mark?

Yes. So a couple of things. We're hesitant to talk about specific acuity adjustments or member shifts just because this is a competitive market, and you can imagine that, that's something everyone needs to do independently. The other thing, though, is it varies so much by state. There are national averages for trend for acuity shift from the subsidies from acuity shift from program integrity. But the dynamic state by state are so different.

One of the things you have to look at is some of these states didn't grow their marketplace meaningfully from pre-pandemic. So they're not in a different place. but it also really matters what is the distribution of metallic cohorts? What is the distribution of federal poverty level cohorts? And then finally, what states expanded, which ones didn't. All those things mean that some states will have very material declines in marketplace. Other ones will be quite subtle because things aren't that meaningfully different under the new rules.

So look, we have to go about this and price state by state, very specifically. In some cases, the numbers are big and in some cases, not so much. And related to the acuity shift, which is the wildcard for next year, it will be interesting to see how all the market participants reacted that -- we have very intricate models trying to assess what the elasticity of demand is around $1 differential in price, looking at whether -- we're #1, 2, 3 or 4 in that market and where the competitors were last year is a bronze product available in that market.

So a lot of factors go into it. As I said, all you can do is lean on the assumptions approach it conservatively when it comes to the acuity adjustment and the -- our state-based partners are absolutely willing to give us a second pass rate filing to use the latest information, which should mitigate any mispricing risk.

Next question comes from Justin Lake from Wolfe Research.

First question is around run rate earnings. It looks like the back half is around $750 million that you've talked about and even seen historically about even split, give or take, of first half to second half. So you look like you're run rating at about $15 a share in the back half of the year.

Curious if that's a reasonable way to think about it in your mind? And if so, how does that bias us to think about your ability to grow earnings year-over-year into 2026?

Well, I think that is the run rate math. Bear in mind that over half our Medicaid revenue has a 1/1 renewal cycle. We're advocating very hard for adequate rates for 1/1. And making sure our state partners use the most reasonable and recent baseline. We're advocating for July of '24 to July '25 as the baseline, which is really important takes a lot of risk out of what the jumping off point that you trend off of.

So we're optimistic about the 1/1 rate cycle for '26. Of course, we have 1/3 of embedded earnings that are going to emerge in 2026, including the $1 of implementation cost that just disappears. But too early to make a call in 2026, but that is the back half of half about $15 a share, but we feel good about the pricing cycle for marketplace, I feel pretty good about the rate cycle for 1-1-'26 in Medicaid. And then, of course, we have embedded earnings. But far too early to make a call in 2026, we'll have to wait till the third or the fourth quarter to do that. Mark, anything to add?

Just is your math is good, roughly $750 million in the second half, but you can't just double it for next year for all the reasons Joe mentioned. Again, the rate cycle is just critical for January 1. And the industry needs these rates more than Molina does at the moment. The industry is very underfunded. We need money just to get back to target margins. So we should see a lot of progress on the rate cycle for January 1.

And then lastly, as Joe mentioned, we're hiring at $865 million of embedded earnings. We had previously guided to seeing about 1/3 of it next year. We'll update that as we see the rate cycle and everything else coming forward. But as Joe mentioned, if the guidance is 1/3 of that for next year, $1 of it is guaranteed. It's just the reversal of the implementation fees we carry this year. So too soon to give guidance for next year, but I think those are the building blocks in the setup for next year.

The last comment I'll make on the back half is, when we closed out the second quarter. It became obvious to us that quarterly trend in Medicaid had again accelerated, trended in the first quarter of the fourth was 1.2%. That's just a quarterly trend when we closed out June it's 1.6%, just a quarterly trend. We -- of course, you have a decision to make, how conservative you want to be for the back half. We repeated that 1.6% Medicaid trend in each of Q3 and Q4. So whether it proves to be conservative or not or enough remains to be seen, but we used the last data point, which is the highest quarterly trend we've observed in the last [ 4 ] and projected it forward.

And then just a couple of quick numbers questions. First, the SG&A benefit for the year from lower comp executive comp that probably comes back next year, if it's possible to put a number on that, that would be helpful. If I missed it, I apologize, but I heard Steve ask what you think the exchanges decline by next year in terms of membership. I didn't hear an answer there?

So a couple of things there. Our original G&A guidance was $6.9 million way back at the beginning of the year. We're currently guiding to $6.6 million and a meaningful part of that is the onetime or the management compensation that came out in the second quarter. Now if you're going to, how do I think about the setup for next year yes, that management compensation piece comes back next year as potentially a G&A headwind. The good news is it's offset by that implementation cost that's in our G&A that go away for next year, right?

So those 2 offset, which if I were modeling a G&A number for next year, it would be a little better than $6.9 million, call it, $6.8 million, and we'll see how that evolves. But I think that's the ZIP code. Now on Marketplace membership, we're not here to give projections on the market and specifically not on our own member base.

Some pundits out there have kicked around numbers of a roughly 30% decline you can make an argument for why it's more. You can make an argument for why it's less. We need to take our own views internally and why that's critical is linked to the membership decline is the acuity shift. So we're working through that right now, as you can imagine.

And given that it's only 10% of the portfolio, we have far more optionality and flexibility than many others in the market. We'd like to keep it at 0, but if it becomes lower in order to get to mid-single-digit margins, that's the way it's going to be.

the next question comes from A.J. Rice from UBS. .

Think about second half of this year versus potentially first half of next year. I know you've got 55% of your rate or your book resets and rates -- if I think about where you're at on margin for first half of this year versus -- and then second half, I assume when you came into the year, you assumed a step-up in our performance in the second half of this year. That doesn't seem like it's material.

I'm trying to understand how much of a hole you have when you compare first half of this year against you're jumping off point for first half next year. Are you dependent on those rate updates to even get back to where you had in the first half of the year? Or -- or would that be a step forward to getting to your target margins, if you understand what I'm trying to ask.

Yes. I think I do, A.J., it's a matter of degree. So clearly, we're disappointed in our outlook for the second half of the year. rates that should have been good enough to carry us through the year for our expectations are now woefully short of how trend is emerging, which is why we have a significantly lower second half of the year than the first. Now for the setup of next year, as Joe mentioned, 55% of the revenue on January 1, we clearly need the rate cycle to help us get back to our normal target margins.

The question is how much will we see and how does it manifest? I'm also somewhat encouraged that there will be some off cycles along the way that juice that 55% of revenue a little further, but we're just not going to project those for right now. Does that help?

Yes. I think I'm just trying to figure out -- I don't think you were to target margins in the first half of the year. So just how much of a hole are you starting on the year-to-year comparison before you take into the rate updates or they move you forward, you just might not get to pull target margins in the first half of '26, but...

They definitely move us forward. It's just a matter of to what degree we get them. If the industry is funded to where it needs to be, we'll be well back into the target margins even paying into corridors again. So it's just a matter of how quickly do states move back to what is actuarially appropriate.

Okay. Just the other thing I wanted to ask you about is I appreciate the comments about the budget bill. I think there's -- and the 15% to 20% of the expansion population, that could be at risk under the work rules. Any comments about how that might affect the underlying acuity or risk pool and whether we're going to be dealing with another Medicaid redetermination type of phenomenon there.

And you didn't mention the issue of the undocumented immigrants that are getting covered in some of the states, some I know you have exposure to, how meaningful an issue is that, if they eliminate federal funding for that Medicaid population.

First, with respect to the risk pool, we believe this will happen in a gradual manner. A state would be well served not to have a shop loss. They can't be dealt with either administratively or from an acuity perspective. We have looked at all of our cohorts by age, duration, geography, et cetera, for our expansion population.

And the MCR skewers the way it skewed are not significant. Now you start with the premise that if people need insurance, they're going to keep it and people who we don't need it. So there will be a little bit of a shift there. but the SKUs by cohort are not so significant and the fact that we believe it will happen gradually gives us comfort that it can ease into the rate cycle without a seismic shift the way the 3-year pause on the redetermination process caused the risk pool to shift initially.

And just so there's no confusion, A.J., the 15% to 20% we're talking about is of the expansion population, not the Medicaid book. So this is a dramatically lower impact and potential decline than the broader REIT debt that we experienced over the last couple of years.

On the second question about undocumented immigrants, -- we have about 5 states where they are in the program, but it's very, very minor. The 1 state where there's a significant number, where we are a player is California. We have -- we are working to continue to figure out how they're going to handle that, cover them or not. Obviously, the FMAP match reduction if they do decide to cover them, disappeared in the final budget bill. So that's not a factor. But -- the only state that's material to us to the program is California, and we're monitoring that closely, but no answers at this point.

The next question comes from Kevin Fischbeck from Bank of America.

Great. Just wanted to see, if you guys have a better understanding of why trend is so elevated across all of these products. I know you already mentioned kind of the buckets that they're elevated in. But is there something driving that this year that would give you confidence or optimism that these trends will start to moderate in future years. It's just not clear to me why we're so instantly high, and therefore, it's hard to forecast how much margin improvement we should be forecasting?

Interesting question. We have really -- we have our arms around the what. I think the industry generally doesn't have their arms around the why. I mean you go cost component by cost component for behavioral, the prevalence of behavioral conditions is up, so the prevalence is higher. The stigma around getting services has begun to disappear in older populations that existed in younger populations it doesn't. States have encouraged us to widen our networks. People did not go for services during the pandemic and now they are. So there's some pent-up demand.

But I could go cost category by cost category, and it's a supply and demand side equation. The supply side is finding interesting ways to code, to bundle codes, et cetera, using AI, et cetera. So there's a myriad of reasons, why the demand is higher and the supplies were rich, but it's happening nationally, and it's not just Medicaid, it's not just Medicare. It's in commercial population, self-insured population that's across the board.

Okay. And then maybe just the second question would just be on timing because I think that these rate cycles go through and they're still always on a lag. I mean do you believe that when you get these rate updates, you'll be at in that target margin range next year? Does it take more rate cycle?

It just seems like the risk pool is continuing to shift underneath everything and that you'll get the rate cycle to reflect last year's cost. But this year's cost will be high. This year's cost will still see risk pool shifts. So like do you ever catch up? And then I guess separately, but similarly, on that embedded earnings power number, you reaffirm the number, but do you still feel like you'll capture it in the same time period? Or is that time period stretching out a little bit because of these underlying risk pool shifts?

With respect to rates, your -- the model that you've articulated is exactly the right model, which is why we are strongly advocating using a baseline period of July '24 to July '25 because that will capture a lot of the cost inflection that's already occurred. Trending off the most recent baseline that includes the inflection is the best position to be in, and we're hoping states in recognizing that there's been a cost inflection, we'll use that as the baseline period.

Then, of course, as you suggested, is, okay, what's the most recent trend? And are you putting enough trend into the rates. Trend is typically 2%, 3%, maybe 4% in a bad year in Medicaid. We're forecasting [indiscernible] this year year-over-year, 1.6% per quarter. So, you're asking the right question. Will 1/1 on catch up a bit completely. We're at 90 -- call it, 91% MCR, 200 basis points, 190 basis points above the top end of our range. So we need 200 basis points on top of trend in order to get back to our target margin.

We think the broader market based on external analysis needs a lot more than that. So if we can get 200 basis points on top of an appropriate trend, it will bring us back into target margin territory, whether that happens on 1/1 '26 or not remains to be seen. Mark, anything to add?

Kevin, on the embedded earnings question, yes, $865 million, unchanged. $865 million our embedded earnings is always an ultimate run rate that we talked about and the reason that in the near term, it can be something less than the ultimate has historically been because we buy fixer uppers, and it takes us a year or 2 to get them to target margin. In a situation like where we are right now, another reason that initial earnings is different than Ultimate is obviously just where we are on industry trends and rates.

So I don't think $865 million changes because in the long term, these markets need to be appropriately funded we'll have to wait till guidance for 2026 to let you know specifically how that affects what we realize next year out of the $865 million, but the principle stays the same and the ultimate is intact.

The next question comes from the line of Ryan Langston from TD Cowen.

On the exchange side, I believe in the past, you've given us some commentary on what I might call a same-store basis. Is there any way you can call out unit utilization for your same membership that you had in 2024? And this year versus the new members in 2025 and maybe just any differences between those 2 cohorts?

I'll kick it to Mark. Well, I'll frame it for you. Interestingly enough, this year, whether a member came in through OEP or SEP or whether they're -- we call it the freshman class or the sophomore class, everything land higher than expected. In sometimes and usually, there is a disparity SEP members given the free period of getting in when you need it, usually run hotter as the initial year and then settle down, but this year, whether a member came in through OEP, SEP or whether they're the freshman class or the sophomore class or beyond, we saw very little distinction in the performance of the member. .

We do have a lot of members that have very low HCCs, which means you're not going to get risk adjustment, but that is typical for this line of business. Mark, anything to add.

Look, I think that's well summarized. It's just 1 more data point that high trend by utilization is pervasive from so many perspectives.

Got it. And then just last thing. I know on the long-term side, I know you say you're pretty confident there, but if the 1 BBB is going to impact Medicaid for probably a few years in the HICS market just constantly shifting I guess does that imply you have to rely more on some of this accretive M&A to hit those longer-term goals?

Well, I think on the hits, you've captured it appropriately. We like it at 10% of revenue. Small silver stable because every time you're lulled into thinking the risk pool hasn't shifted yet another government regulation or competitive force that causes it to shift. So we like it where it is. Mark, anything to add on that?

No, I think that's appropriately said. Over time, if we can keep it small, silver and stable, it will be a nice kicker and minimal exposure in down markets. even this year where marketplace is not just an attractive place, we're still going to make very small, low single-digit pretax margins.

Next question is from Sarah James from Cantor Fitzgerald.

I wanted to go back to a comment on sometimes taking a few years to bring M&A in line. When you think about ConnecticutCare, is that something that you think could run at margins similar to the rest of your book in '26? Or could that take until '27 and then just given the growth in exchanges this year, can you touch on if you still think you're going to end year-end at 620 members? And what the increase meant to MLR pressure this quarter?

Sarah, if I recall correctly, the Connecticure acquisition model had us getting to target margins in a 2-year period confirm a year. That was the original assumption. There's 2 competitors in the market. We're 1 of 2. Obviously, we'll have to put rates in the market to get us there, but that was a 2-year scenario of 2027 to get back to target. Your second question?

On your second question, Sarah, was on Marketplace membership. We're seeing just a little bit more on SAP, not dramatically big, but I'm expecting about 650 of membership by year-end. So just a little bit more than we thought before.

And did that contribute to some of the pressure in the quarter, the growth in and, I guess, now the higher membership at year-end?

Well, it's a little bit more for a couple of reasons. SEP is the big one. And as we said, they're not coming in, in a meaningfully different place as far as we know from the rest of the book. In the past years, sometimes SEP came in for all the wrong reasons, right, because of the changes in SEP rules this year, it feels like they're coming in not as immediate pent-up demand, but pretty much with the same acuity and utilization profiles as the rest of the book.

So I don't know that I would attribute necessarily more MLR pressure to what is a subtle increase in membership.

The next question is from John Stansell from JPMorgan.

Great. Just want to circle back to the M&A pipeline. Clearly, in the prepared remarks, you highlighted that the pipeline is active and that there are smaller players, who are probably struggling with some of these pressures more than you are -- how do you balance that with other capital deployment options around things like share repo right now and think about that framework for the next 6 to 18 months?

Well, obviously, we'll be opportunistic with share repurchases. It's always part of our capital plan, but it's the third use of capital. Organic growth is #1 because of the operating leverage is huge. Second is M&A. We're buying these things barely above book value, and they are fixer uppers, but we know how to get these things to target margins.

And more of them are in the market today than even 3 to 6 months ago, single geography players don't have the diversification benefit that we have and others have. If you don't -- if you're a single geography player and you've got a rate problem, you got a problem. So we're seeing more of these come to market, in a very subtle way. So we're opportunistic and optimistic that we'll harvest some M&A here, the same way we always have and maybe even at better rate than 25% of revenue purchased. Mark, anything to add?

The only thing I'd add is I think about dry powder and capital all the time, as you would expect. And if you just look at our balance sheet, our cash flow, projecting anything forward. I'm comfortable someplace between $1.5 billion and $2 billion is what our dry powder is over the coming year, which puts us well positioned for a variety of ways to deploy it. We always prefer organic growth, but M&A is going to be a big part of it going forward, and we always have an eye towards share repurchase.

If we did take advantage and of the market where it is now and did a share repurchase, it would not impact our ability to do M&A at the amount of revenue we need to acquire and at the price that we acquire.

Great. And if I can just squeeze 1 more in. At Investor Day last year, you did highlight the idea that marketplace might have a pull forward of demand in the fourth quarter ahead of subsidy expiration or integrity rule changes, is that embedded in the current guidance that there will be uptick beyond normal seasonality in the fourth quarter for your marketplace business?

Absolutely. With marketplace, I think you have to be very conservative on your projections. There's a few things in the back half of the year. Some people refer to what you're talking to about is induced demand at the end of the year, fourth quarter, maybe, I mean it's a valid concept. Just historically, in these situations, we don't see it. There's FTR, which we really haven't talked about. I don't think it's a meaningful item for us in the third quarter. But of course, we have placeholders and our projections for these kind of items. I just don't think either of them are particularly meaningful.

With a trend increase from 7% in our original guidance to 11% we think we have it captured.

Next question is from Kieren Wright from Morgan Stanley.

So you gave us some of your expectation on the impact of the 1 big beautiful bill on the expansion population. But how do you think about that cadence of that? And what are you factoring now in terms of state mitigation efforts? Or does this not incorporate that at this point and that would be upside?

All of our membership projections at this point the $46 billion for 2026 and $52 billion for 2027 do not yet include an estimate from the budget bill. We are working on it. Regulations have not come out yet on exactly how it's going to work. There is flexibility on the timing of the state to implement the biannual reverification and the work requirements. So which states will take advantage of that. We'll follow political lines, red blue. We just don't know yet.

But we do believe that what will happen will be gradual and not abrupt and therefore, allow the market, not only the market to adjust to it from an acuity perspective, but the administrative burden on the space to actually do this is going to be significant and it will be in their best interest to do it gradually and not abrupt.

Our revenue does not -- our revenue estimates at $46 billion and $52 billion do not yet include an estimate from the budget bill.

The next question is from Michael Ha from Baird.

When I look at your updated guidance, I know you embedded a wide range of outcomes in your MLR and you talked about added conservatism. But when I look at the implied second half MLR progression versus your historical average first half versus second half seasonality for both total MLR and by segment.

Does it appear to be overly overly conservative versus historical Scott, Mark, I know you mentioned the list of things FTR rechecks, induced utilization, maybe even more SEP member picked up and redetermination pressure. But of those list of items you've mentioned wanted to get a sense of which 1 right now, do you think carries the most, call it, uncertainty and potential magnitude of impact into the remainder of the year?

I'll frame it and kick it to Mark. But our first half marketplace MCR with 837 on a reported basis. As Mark said, it includes 200 to 300 basis points of nonrecurring items, both the ConnectiCare, acquisition drag and some of those onetime items from the first quarter. So call it, 81%, 82% and it's progressing to 86.6% in the second half to blend to the 85% for the full year. So there is a pretty meaningful normalized increase first half to second half.

That's exactly right. If you go through the normalized numbers, I hit in the script, normalized 80% in the first half goes to a normalized 86% in the second half. That's beyond normal seasonality. We all know that marketplace is seasonal because of co-pays, deductibles and things like that in the first half. But that 600 basis point shift first half to second half is beyond what we would normally see in our mix of metallics. So I think there's a lot of conservatism baked in there. And the same means we have first half, second half in Medicare, 89.2% going to a 99.9% in the second half. That's a pretty meaningful shift beyond what you would normally see.

And then Medicaid, we've got just a little bit hotter in the second half, but that's with a very big assumption on trend, which, as Joe said, it just continues as much as it was first and second half. and a pretty good rate pattern that we thought was enough to really give us a kick in the second half, which is now going to just keep us level. So I think we've got a fair amount of conservatism layered in here, which is why we feel pretty good about saying $19 as a 4.

And just another question. So longer-term topics of policy I understand you're expecting 15% to 20% ultimate impact on your expansion population. I know you mentioned this a few times, already. But I guess just given what we saw with the last redetermination, I guess the magnitude of unexpected outsized refutal disenrollment. And as it relates to work requirements to the extent that does drive more outsized procedural this enrollment for even members that might that maybe you shouldn't even be eligible for work requirements that pressure is rate versus security.

Just trying to think, are there any learnings from your recent redetermination, things that Molina can do to potentially practically perhaps engage your own Medicaid patient promote compliance, help prevent procedural disenrollment going forward?

We are working state by state to make sure that the administrative process goes smoothly and everything we can do to help. Now to your question, the data as we analyze the $1.3 million expansion members that we have, there is a definition of able-bodied. I don't like the term, but that's the term that it's used.

And people with certain medical conditions are not able body a significant number of our expansion members meet that definition and therefore, qualify for 1 of the exclusions and could stay on. Of the remaining 2/3 of the remaining our data shows work in some capacity. Now they may not be working to the capacity of 80 hours a month, we don't know, but they are working in some capacity. And by the way, at a minimum job -- at a minimum wage job for 80 hours a month, you still might be under 100% of FDL.

So we're analyzing the book of business. That's all we can do right now. And it's too complicated to go in and how we're working with our state-based partners on a gradual approach to doing this in a meaningful way and what we can do to help. But that's our best estimate for now. It's consistent with the think tank estimates and the consulting house estimates and if it happens gradually over time, the market can absorb it.

The next question is from Jason Cassorla from Guggenheim.

Great. I just wanted to ask about the embedded earnings number. You left at the same at $865 million. I know you got the dollar implementation costs that don't wind next year. But -- maybe can you just give us a sense of how much of that embedded earnings you can kind of like feasibly harvest next year or how to think about that just as we think about next year?

Yes. I'm not going to give you specific numbers, and you'll appreciate why, but some framing concepts. So the $865 is comprised of about $2.25 from acquisitions. -- and about $5.40 from new contract wins. You add in 1 of the implementation cost that's in our P&L this year that just automatically reverse next year. those are the components that get you to $8.65. Now the good news, and Joe pointed this out, is the dollar has no execution risk. It just happens. We're not going to spend that money next year.

Now of the remaining, we have a really good transformation and integration team that look at our acquisitions and also look at our new implementations. They're doing a good job tracking from an operating perspective to the ultimates. The wildcard then becomes where are we in the rate cycle and what would have been a 4.5% pretax margin at the ultimate -- does it take longer to get there because of the rate cycle.

Well, Joe and I don't have a view on the rate cycle for January 1, yes, so I just can't give you a view on that. Rate cycle aside, we feel pretty good about what I've said in the last couple of quarters, which is roughly 1/3 of that $865 would come out next year.

Okay. Got it. And maybe if I could just follow-up. I wanted to go back to your commentary on Medicaid inpatient outpatient specifically. I know you spiked kind of calling those out -- was that kind of -- were those pieces kind of included in previous commentary around trend? Or are you seeing that -- those 2 kind of accelerate at this juncture?

And then thinking about the inpatient outpatient that you're seeing, like should we think about that as the new cost baseline for which to grow off of for those pieces or the inpatient outpatient you're just seeing kind of like a spike in the near term? Just any color around the inpatient and outpatient side would be helpful.

Yes. As we started to talk about trend as early as the third quarter of 2024 in Medicaid, we mostly attributed it to high-cost drugs, LTSS services, both skilled nursing and home-based services and behavioral. That persisted into the fourth quarter. I will say that the inpatient outpatient what we call core utilization did start to trend in the first quarter of this year, but the increase in the second quarter was significant that it deserved to call out.

And I believe it's consistent with what everybody else is saying, what the national provider reports are saying ER visits up significantly. What happens when somebody goes through the ER, they get admitted. And they're being admitted for complex medical conditions, not for episodic care or for episodic care, but for complex conditions.

On the outpatient side, people are going to get their screenings and seeing their primary care physicians. Is it back to prepandemic levels likely and once you go to see your PCP or get a screening, there is typically a specialist follow-up visit. So yes, the trend on those 2 categories, in particular, began to trend up in the first quarter, but the rate cycle kept pace of it. But it spiked yet again in the second, and we decided to call it out.

The next question is from George Hill from Deutsche Bank.

Yes. I have 2, first, Mark, at a high level, you'll get the free book next year from the implementation costs and the embedded earnings this should help grow earnings in '26. But I guess from where you sit right now, is it clear that you guys can grow underlying earnings in 2026? And then Joe, my follow-up would just be given what you guys saw in the redetermination process as we move in the future to a biannual redetermination process, I would just hold your commentary on like beneficiary response rates and time to turn to get people reenrolled and kind of like kind of following up on Michael's question, how disruptive do we expect that to be?

I'll answer the second question first. On the biannual redetermination process. I mean it's really a question of math. If somebody became ineligible during a year, didn't notify the state, it's possible that we're collecting premium for 11 months. without anybody legitimately collecting premium for 11 months until they had to reverify and couldn't now the maximum that somebody can go unverified is 5 or 6 months.

So there will be a slight decline in membership as a result of that faster spend, that faster churn, but it's all contemplated in the model. On your first question about underlying earnings, it's too early for 2026. The building blocks are the rate cycle for Medicaid, our rate filings for marketplace and embedded earnings. And it's just too early to put the pieces together.

But as we move forward here to Q3 and perhaps even Q4, we give guidance for next year, we'll give -- as we always have, we'll give the building blocks of what our 2026 outlook is. Medicaid rate cycle 1/1, Key, our marketplace rate filings, second key and third, maybe up to 1/3 of the 865 and better earnings. But that's as much as I can say right now at this early stage.

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

Thank you very much for your time this morning. We'll be available for any follow-up questions. Thank you, and have a great day.

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