Good day and welcome to the Molina Healthcare 3rd Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Geyer. Please go ahead.

Good morning and welcome to Molina Healthcare's third 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 third 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 listened to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, October 22, 2026, and have not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures. 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 and expected segment performance, rates and medical cost trend, the implementation and performance of the Florida CMS contract, our preliminary 2027 premium and earnings outlook and related building blocks, marketplace pricing, footprint, and program integrity initiatives, Medicare STARS and DUALS performance, Medicaid work requirements and re-verifications and associated medical costs, our RFP awards and implementation timing, our long-term financial targets, and the amount and realization of embedded earnings. 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 third quarter results, our reaffirmed full year 2026 guidance, and our preliminary 2027 premium and earnings outlook. Let me start with our third quarter performance. Last night, we reported adjusted earnings per share of 89 cents on $10.5 billion of premium revenue. Our 92.9% consolidated MCR reflects solid operating performance as we continue to navigate a challenging medical cost environment. We produced a 0.6% adjusted pretax margin in the quarter and 1.1% year to date. In Medicaid, the business produced an MCR of 93% in the third quarter. The result was in line with our expectations as rate updates largely offset a slight increase in medical costs. In Medicare, We reported a third quarter MCR of 93%. Results were in line with our expectations as our duals business performed well, giving us a very positive start for our duals focused Medicare strategy. In Marketplace, the third quarter MCR was 92.5% and in line with our expectations. The result includes the impact of the latest CMS program integrity initiatives which was not material. Turning now to our 2026 guidance. Our full year 2026 premium revenue guidance remains approximately $42 billion. We also reaffirmed 2026 adjusted earnings guidance of at least $5.25 per share. Our full year guidance on the medical cost ratio and G&A ratio is unchanged. In Medicaid, our full year MCR guidance remains 92.9%, unchanged from our prior guidance. We increased our full year rate outlook from 4% to 4.5% due to the combination of off-cycle and on-cycle rate updates in the third and fourth quarters. We also increased our full year medical cost trend outlook from 5% to 5.5% to account for slightly elevated utilization Thank you very much. The temporary imbalance between rates and trend is gradually being corrected. Our Medicaid business is expected to contribute approximately $5.75 per share for the full year. The legacy Medicaid business is projected to achieve a 1.6% pre-tax margin for the full year, a strong result given the current rate environment. In Medicare, Full-year MCR guidance remains 92.2% and the segment is expected to contribute approximately 25 cents per share. Within the Medicare segment, the duals product is core to our Medicare strategy and expected to produce a pre-tax margin of 1.4% and earn $1.25 per share this year. We expect a loss of $1 per share in our MAPD business which we are exiting for 2027. In Marketplace, full-year MCR guidance remains 90%. The segment is expected to produce a loss of approximately 75 cents per share, a result which, due to our reduced footprint and pricing strategy for 2027, is not expected to recur. Our embedded earnings. The earnings contribution from known backlogged revenue remains at $9 per share. Now, some updated commentary on the outlook for 2027. Our 2027 premium revenue is expected to be at least $45 billion. We now expect the new Medicaid contracts in Georgia and Texas to be delayed from our previously expected implementation dates, which delays Thank you for joining us. later in 2027 or in 2028. The preliminary 2027 earnings per share building blocks sum to more than $9.50 per share from known items and do not yet assume any improvement in the legacy Medicaid or Medicare MCRs at this very early stage. Mark will elaborate more on the building blocks, but let me offer a few high-level comments on the Medicaid rate and Tren environment. With respect to rates, our January 1st renewal cohort represents 55% of full year premium. We know draft rates on 80% of this cohort and they average approximately 7%. When we combine those known January 1 rates with the carryover of rates from late 2026, we know the rates on 70% of our full year 2027 premium. These known rates along with an estimation of rates we do not yet know provide an early indication that overall 2027 rate increases may approximate 6%. Several dynamics give us confidence in the continuation of stronger rates. States will continue to incorporate more recent medical claims data into the baseline period when setting rates and states are expected to grant prospective rate adjustments in anticipation of acuity shifts caused by the implementation of work requirements. With regard to medical cost trend for 2027, we project medical cost trend in a range of five and a half to 6%, which at this early stage includes 50 basis points of conservatism. Using the upper end of the trend range, we take the early view that rates should at a minimum capture trend for 2027 and our legacy Medicaid MCR should at least be flat year over year with the potential for margin improvement. We will update this view in our initial 2027 guidance in February. In Medicare, our duals business is building on strong 2026 performance as we look to grow profitably. We are pleased with our 2027 bids and our supplemental benefits are competitive in most of our markets. In Marketplace, we will reduce our footprint to seven states, but will maintain adequate scale in each market. This will ensure we enter 2027 with risk scores commensurate with the acuity of the retained population. Finally, we remain bullish on our RFP pipeline. Recall, we just implemented the $6 billion Florida CMS contract, which is off to a great start. Among the near-term prospects, we submitted a bid on the Texas Star Kids program, a process which is on hold in the state. We have also submitted bids in Missouri and Arizona, and our bid for Indiana will be finalized very soon. In total, these RFPs represent approximately $26 billion of the $90 billion total opportunity that we highlighted at our investor day. We have great confidence in favorable RFB award outcomes. 2027 will also be the first year in which our industry is impacted by work requirements and biannual re-verifications. States continue to prepare for the implementation of federal work requirements and more frequent eligibility verifications. In Nebraska, an early adopter, the rollout of work requirements is in the very early stages, but progressing in line with our initial expectations. We are working closely with all our state partners on readiness and administrative execution of work requirements. Most of our states are selecting policies that should limit disenrollment, such as the use of certain ex parte reviews, flexible medical or hardship exemptions, and allowing self-attestations. The ultimate timing and impact on membership will vary by state, and the phased approach that states are taking will delay some disenrollments to 2028. We continue to expect membership reductions to emerge gradually and to produce a minor acuity impact, all of which is contemplated in our 2027 premium outlook and the 2029 targets we presented at our investor day. In summary, we are pleased with our third quarter results in this challenging environment and reaffirm full year guidance of at least $5.25 per share. We are also pleased that without yet counting on any improvement in legacy Medicaid margins, our preliminary 2027 building blocks reached more than $9.50 per share of adjusted earnings. With the apparent plateauing of medical cost trend, which remains at elevated levels, and the strength of recent rate updates, we believe we are likely observing the beginning of the turn in Medicaid 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 additional details in our third quarter performance The balance sheet and reserves, our 2026 guidance, and the building blocks for 2027. Beginning with our third quarter results. For the quarter, we reported approximately $10.5 billion of premium revenue with adjusted EPS of $0.89. Consolidated MTR was $92.9, adjusted G&A ratio was $6.3, and adjusted pre-tax margin was $0.6. In Medicaid, our third quarter MCR was 93 in line with our expectations as rate updates largely offset trend. We saw another small decline in membership in the quarter with year-to-date membership now down about 4.5% consistent with our full year 2026 expectation of a 6% decline before the addition of Florida CMS membership. Trend in LTSS and behavioral health remained elevated but stable while outpatient and high cost drugs were slightly higher. In Medicare, our third quarter MCR was 93%, also in line with our expectations. The result reflects normal seasonality and continued strong performance in our duals products. Trend is in line with expectations in most categories, but higher for professional office visits and LTSS. In Marketplace, Our third quarter MCR was 92.5, also consistent with our expectations. Within that result was normal seasonality as well as a minor impact from statewide risk scores stemming from CMS program integrity efforts in the quarter. Turning to the balance sheet. Our capital foundation remains strong. In the quarter, we harvested 185 million of subsidiary dividends and our parent company cash balance was approximately 600 million at the end of the quarter. Our operating cash flow for the first nine months of 2026 was 629 million. At the end of the quarter, our net debt to cap ratio was 45%. We continue to have ample cash and access to capital to support our growth initiatives. Dasing claims payable at the end of the quarter were 44, We remain confident in the strength and consistency of our actuarial process and reserve position. Turning to 2026 guidance. We continue to expect full year premium revenue of approximately 42 billion. Full year consolidated MCER guidance remains at 92.6 and adjusted G and A ratio at 6.4. And we reaffirm adjusted EPS guidance of at least $5.25. The year-to-date results imply fourth quarter adjusted EPS of 50 cents, reflecting normal seasonality in our businesses and a dollar drag due to the implementation of the Florida CMS contract. At the segment level, we expect fourth quarter Medicaid MCR of 93.6 and the full year MCR guidance of 92.9 is unchanged. Excluding the new store impact of Florida CMS, we expect fourth quarter MCR of 92.5 and the full year MCR of 92.6. With the first three quarters behind us, our outlook for full year 2026 rates and medical cost trends each increased by 50 basis points. Guidance now includes rates at 4.5% and trend at 5.5%. Our rate update is driven by improvements, some retrospective, some prospective, in several states. We continue to see a willingness from states to discuss off-cycle rate adjustments as data develops, but we do not include speculative updates in our guidance. Our updated view on full-year trend increases from 5% to 5.5% and reflects elevated utilization in several medical cost categories and a slight acuity shift throughout the year. In Medicare, we expect fourth quarter MCR of 94.7 and the full year MCR guidance remains at 92.2. Excluding MAPD, the full year duals MCR is approximately 92%. The Medicare segment is expected to contribute 25 cents per share for the year. Within that result, duals are expected to contribute $1.25 per share while MAPD is expected to lose a dollar before the product is discontinued for 2027. In Marketplace, we expect fourth quarter MCR of 96.1. The full year Marketplace MCR guidance remains at 90% and the outlook results in a loss of 75 cents per share. We expect the fourth quarter G&A ratio to fall below 6% due to the impact of operating leverage on the additional Florida CMS revenue, and Discipline Cost Management. The full-year G&A ratio is unchanged, expected at approximately 6.4%. Turning to embedded earnings. Embedded earnings remains approximately $9 per share. Recall, embedded earnings are the projected impact to future earnings that emerge from known strategic initiatives, including RFP wins and acquisitions. Embedded earnings do not include legacy business margin recovery. We now expect to harvest $4 per share of embedded earnings in 2027. The components include $1.50 of current year losses on the new Florida CMS contract, which we expect to run at breakeven or better next year. Also, $1 of current year MAPD losses, which will not recur in 2027, and higher revenues will drive $1.50 of operating leverage next year. The amount we expect to harvest in 2027 is 50 cents lower than our prior estimate due to the potential timing of the full benefit of operating leverage on the Georgia and Texas contracts. As Joe discussed, our preliminary 2027 premium outlook is now at least $45 billion, lower than our prior outlook of $46.5 billion. The change Reflects the delay of Georgia and Texas star chip. The building blocks to $45 billion include known tailwinds, totaling $6 billion with several components. First is modest growth in our current Medicaid segment, as rate expectations should more than offset our initial view of Medicaid member attrition, stemming from work requirements and semiannual re-verifications. Strong growth in our Medicaid duals business, including state program changes in Ohio, Texas, and California. And third, the annualization of the Florida CMS contract. Known headwinds total approximately $3 billion and include the MAPD exit, the reduction in our marketplace footprint, and the state's termination of the California UIS program. Preliminary EPS building blocks for 2027 To get there, we begin with full-year 2026 guidance of at least $5.25 per share. Add approximately $4 of known embedded earnings realization that I just outlined. Then, add $0.75 assuming marketplace reaches at least break-even next year. And finally, California's termination of the UIS program will be a slight headwind. These building blocks do not yet include any impact of the new rate cycle and trend on the legacy Medicaid MCRs. As Joe mentioned, at this early stage, we project 2027 Medicaid rates will approximate 6%, and the trend will be in a range of 5.5% to 6%. Any improvement in legacy Medicaid MCR would be upside to our 2027 outlook, as every 100 basis points of Medicaid MCR is worth approximately $5 per share. These building blocks position us well for profitable growth in 2027. This concludes our prepared remarks. Operator, we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question today comes from Andrew Mock with Barclays. Please go ahead.

Hi, good morning. If we exclude the dollar EPS burden from the new Florida contract in 4Q, it looks like underlying Medicaid MLR would improve sequentially and EPS would also be up sequentially. So can you walk us through what's driving the Medicaid MLR improvement and the stronger than usual 4Q EPS performance, particularly given the normal ACA seasonality?

Thanks. Sure. Your numbers are accurate. The underlying, the core, the legacy book of business is improving by 50 basis points in the quarter. A function of the recent rate updates offset by or embed by normal seasonality of the business. And as we've indicated in our prepared remarks, the trend assumption for the full year at 5.5% is a good jumping off point for 2027. There is nothing going on in the fourth quarter that's unusual. It's the function of normal seasonality, a function of the rate updates, and the fact that the underlying Medicaid MCR is improving by 50 basis points is a good fact. Mark, anything to add?

Andrew, I think you got it right. There's a dollar of drag from CMS. So outside of that, you'd add a dollar to the fourth quarter implied guidance. And just on the MCR, exactly as I think you applied, absent Florida CMS, we're 50 bps, 60 bps better in the fourth quarter, just on the rate cycle and the seasonality that we expect. So you put those things together, it puts the 50 cents of implied guidance for the quarter in context. I think you got it right.

The next question comes from Kevin Fishback with Bank of America. Please go ahead.

Great, thanks. You know, I guess I think one of the big questions that investors have right now is just, you know, rates seem to be getting better, but there is the expected decline in enrollment. from Work Requirements. I think your point about it probably ramping up through the year is a good one, but can you give any color about what you've seen so far in Nebraska as far as the acuity shift that's happening within the stayers versus the leavers there? Because I think that is probably the biggest variable, I think, in people's minds. How should we think about what kind of acuity shift happens when that next leg of enrollment drops off? Thanks.

I think on balance, what we're seeing in Nebraska is an interpretation of the guidance given by CMS that leans more toward enrollment rather than disenrollment. The medical frailty exemption list is 300 pages long on diagnosis codes that qualify for medical frailty. We're seeing a very deliberate effort to find ex parte information to keep members enrolled. and not only are we seeing that in Nebraska, we're seeing that in 80% of our states have what I would say are more, are interpretations of the guidance that lean more toward enrollment than disenrollment. But we're still projecting a 6% membership loss next year. Bear in mind that only has a half year effect on revenue. And in our preliminary trend outlook for next year, a 5.5% at the bottom of the range, We're saying that 4.5% of that is core and 1% of that is due to the acuity shift. At this point in time, I have no reason to believe that that's not true, that that's not going to happen, but the states are leaning toward more liberal interpretations of the rules that promote enrollment rather than disenrollment. Mark, anything to add?

No, I think that's right. I think we're seeing a more gentle interpretation of this. It's too soon to make that conclusion, but everything tells us there's a more gentle interpretation of this. Nebraska so far, we're only a few months in, but Nebraska so far, many of us are surprised the impact is rather moderate. What the state itself said is that 90% of renewing members are re-enrolled. And within that, the one that caught my attention was 20% of them are for frailty, which is much more than you might otherwise have expected. So I think, as Joe mentioned, most of our markets are taking a very gentle approach on this. We'll update our guidance in February, but I think a 6% assumption for next year on membership attrition is probably appropriate.

And just to put a point on it, since the final tally on trend for 2026 is 5.5%, 4.5% of which is core, and 1% acuity shift, Carrying that forward into next year to account for the acuity shift due to OB3 makes perfect sense to us. In fact, throwing in the 50 basis points of conservatism because it's October even gives us more comfort that we've got trend adequately captured both for core trend and for the potential for an acuity shift due to OB3.

The next question comes from John Stancil with JP Morgan. Please go ahead.

Great, thanks for taking the question. Just want to quickly touch on early days with the Florida CMS contract. You know, obviously only been like 22 days, but as you look at that contract and kind of ramping it to break even over the next year, what are the levers that you have? How do you balance things like continuity of care? Just what you're looking at as you kind of have gotten in and kind of fully ramped the program. Thanks.

We're very encouraged in the first 22 days of the program The operational and clinical implementation was nearly flawless. We took on 115,000 members, a run rating of $6 billion of revenue, if you recall. These are challenged children with complex medical and behavioral conditions, but the operational implementation of the program, as I said, nearly flawless. Now, our view of the program is that it is structurally intact. that rates appear to capture the cost of the program. We have certain clinical protocols that are pursuant to the contract that we have to deliver. And nothing at this point tells us that the break-even forecast for next year and full target margin in year two of the contract, nothing tells us that that can't be achieved. Off to a great start. Certainly because it's a new program, we have to be cautious in our outlook. Mark will tell you that one of the reasons why we're a little cautious with our fourth quarter guide is it's a new program. A billion and a half revenue comes in, 115,000 new members, and you just have to be flexible at the start to know exactly what the early read will be from a financial perspective. Great program for us. We're really good at managing high acuity programs. and this would be a great contributor in the second full year of contract. Mark, anything to add?

Yeah, John, I'll just give you a couple of numbers which will help you with your analysis. In the fourth quarter, our guidance includes Florida CMS for a billion fiber revenue which tracks to the six billion of full year run rate. But in the fourth quarter, I expect about a 99% MLR and a 5% pre-tax loss. Now, to get the 5% pre-tax loss to zero next year, I got to find 500 BIPs at least. 200 basis points just comes from the one-time PFAT and LAE reserves I have to put up. I'm sure you're familiar from an accounting perspective when you put on new revenue, you have to put up one-time reserves. So 2% of our 99% MOR is just the one-time reserves, which I need to find another 300 basis points. And I think between G&A and MOR, as we settle in and get our operations in run rate conditions, that's high confidence on that. I would expect most of it to come from MOR, some of it from GNA, but that's the path from a 5% pre-tax loss to break even or better next year.

The next question comes from Justin Lake with Wolf Research. Please go ahead.

Thanks. Good morning. Just a couple of numbers questions here. First, on the Florida G&A, can you talk about the third quarter versus the fourth quarter? Meaning, does the fourth quarter have incremental G&A versus 3Q, or did you have to ramp up? And therefore, it's kind of similar in both periods. And then secondly, on cost trend, going from five to five and a half in the back half of the year, mathematically, it would imply that the back half is actually 6%. Is that the right way to think about it in terms of that's the run rate going into next year? And if so, now you're assuming improvement. Just want to kind of dig through that. Thanks.

I'll answer the second part first, and then I'll kick it to Mark on the Florida G&A question. Now, the 5.5% for the full year is the right way of looking at the jump-off point into next year. The increase was spread throughout the year, some in the third, some in the fourth. but the first and second quarters restated slightly. The 50 basis point increase was half due to core trend and half due to a re-estimate of the acuity shift. So I would think about the 5.5% as being throughout the year, a good jumping off point for 2027. There's nothing going on in the back half that would cause you to think about a higher jump off point and therefore putting more pressure on 2027. Mark, anything to add to that and Florida GNA question please?

I would just repeat, Joe, what you said is that increase in trend isn't necessarily a back-end weighted concept. It's fairly spread through the year. We're seeing pretty even trends quarter to quarter. On the first part of your question, Justin, if you back into the numbers I just ran through, you'll see we had about $100 million expense in the fourth quarter on the Florida CMS. There was very little expense before that. We had suggested, remember, that of the $1.50 of loss this year, that $1 was in the fourth quarter and $0.50 was roughly in the prep, Q2 and Q3 as we ramped up. So you can probably put some numbers around that to better answer your question.

The next question comes from AJ Rice with UBS. Please go ahead.

Hi, everybody. I was thinking if you're at a pre-tax margin of roughly 1.6% now, that's significantly better than what some of your major peers are talking about. When you think about margin recovery from here, is it relatively concentrated and a subset of your Thanks for asking the question and that is the right context.

Now we say that our relative performance needs to be taken in context of in this 2026 trough where three straight years of medical cost trend and rates lagging behind it. In this trough, We are producing a 1.6% pre-tax margin on our same-store Medicaid book context. So now when it comes to improvement, think about Investor Day and us projecting forward to margins that get to 2.5% in 2029. 90 basis points of improvement, 30 basis points a year for three years. The market needs 300 to get back to actuarial soundness, and we only need a fraction of that to get back to our target. So the context of the starting point is very important. I would say that in the portfolio, most states are slightly underfunded, some more than others. And we have great advocacy efforts that we engage in along with our competitors and through state associations. But for the most part, I would say that most states are slightly underfunded. But the good news is when you look at the rating dynamics that created a 7% rate increase on the one ones we know about, key data point. What happened? The 2025 year starting to be introduced to the baseline, number one. Two, acuity shifts being recognized, including specifically rating for a prospective acuity shift due to OB3. That has entered the rating dialogue And third, as I've said many times, what are the cost pressures on medical cost trend? High cost drugs, LTSS, and behavioral. Those are discrete rating components, very transparent in the rating methodology, and those are being rated up to account for the recent cost inflection in those three categories. So all in, I would say that the rate cycle, we are very encouraged by what we're seeing for the 1-1 rate cycle. Most states are underfunded to some extent, and we're very encouraged by what we see. Mark, anything to add?

Yeah, I'd just build on that. Variations among our states that we're seeing are less about specific outliers and more just about the timing of the rate cycle. As Joe mentioned, we're very encouraged by what we're seeing for January 1st, with an aggregate 7% on the ones we know about, which of course is much better than the ones, you know, back in 26 on the midyear, which somewhat disappointed us. So the variation is more about the timing of the rate cycle. Very encouraged about January 1st.

The next question comes from Steven Baxter with Wells Fargo. Please go ahead.

Hi, thanks. I wanted to come back to the early 2027 assumptions for Medicaid cost trend and acuity. I guess I'm trying to understand, as you're thinking about it, why the 1% acuity assumption, holding that stable, is a conservative point of view. I guess I'm trying to understand... whether any of the current or sort of like non-work requirement acuity shift is expected to continue into 2027 in your thinking or is essentially that going to go to zero and then the one percent that you have is entirely driven by the upcoming work requirements I guess how should we think about the balance of the the one percent acuity shift and what comes from work requirements versus maybe like legacy contribution thanks well I well I think in the contextual statement is being October

In this environment, we are being conservative and forecasting medical cost trend for next year. But a little bit of history is actually really important here. Each of the last three years, 24, 25, and 26, if memory serves me correct, Medicaid trend was 6.5%, 7.5%, and 5.5%. Core trend during that period ranged from 4% to 5%, and the acuity shift ranged from 1% to 2.5%. Now, the recent data point, Thank you very much. at the lower end of the range of five and a half is consistent with 2026. And because it's October and because we were hesitant to call any Medicaid MCR improvement for next year at this early stage, we put in 50 basis points of additional conservatism for the vagaries of medical cost trend. We will give a refined estimate when we give February guidance, but the early indicators both on rate and trend are very positive.

Hey, the only thing I'll add is just repeat the numbers. We're tracking in 2026 to a 6% same store membership decline trend. We're estimating at 5.5% of which we think roughly 1% is acuity shift. Looking forward to 2027, my best pick on membership attrition at this early stage is another 6%. So rolling the same core trend to 4.5% forward, and acuity of one to one and a half just to be conservative is a range that gets us to the numbers we told you. I think that's a fair accounting for what we might see on the membership loss next year. Essentially more like this year with a little bit of a conservative range put on it.

The next question comes from Scott Fidel with Goldman Sachs. Please go ahead.

Hi, thanks. Good morning. I was hoping maybe we could just go back to the Medicaid trajectory question and just try to include the whole business and not carving out any sort of new blocks of business because you guys are looking to be a growth company. You always have new sort of blocks of business that are more dilutive. So I thought it would be helpful just to sort of frame sort of the trajectory of your Medicaid margins and especially because you talked about some higher trend in the first half of this year. Joe and Mark, maybe if you want to sort of walk us through your adjusted pre-tax margin for the overall Medicaid business in the first half and then in the third and the fourth quarter and then how your setup that you're talking about, what that implies for the adjusted pre-tax margin into 2027. I think for the whole Medicaid business, that would be really helpful. Thank you.

I'll kick it to Mark, but Scott, I'll give you a context of why we did what we did and we talk about it the way we do. And you're right. We're going to be successful winning 500 million contracts here, a billion dollars worth of contracts there. And at the end of the day, that's the cost of growth when they start out running higher than your normal run rate. But bear in mind, $6 billion of revenue new coming in on a $30 billion base. and a high acuity population is a very unusual growth phenomenon. One, by the way, we're enjoying a lot, but a very unusual growth phenomenon. So if there was ever a reason to call out a new contract, this is it due to the materiality of it and due to the complexity of the program and the acuity of the population. Mark, do you want to go through the tail of the tape on the Medicaid trajectory, please? Absolutely.

So just to repeat what Joe said, the magnitude of that contract coming in isn't business as usual. That's a billion to five on top of what normally would be eight, eight and a half. So at a 99% MOR, that's certainly a skew for the quarter. So we call it out, I think appropriately so. On Medicaid total, we'll report a pre-tax margin of 1.2%. Barring the 99% on the Florida contract, that would be a 1.6%. Now, looking into next year, we're not ready to give you guidance, but what Joe said in his prepared remarks is you can see a scenario where trend is at least equal to, maybe equal to rates, and maybe a little bit better. So assuming we hold rates equal to trend, expect a flat MLR year over year. But even with that, we're pointing out the G&A leverage that we'll add because of the growth next year. And the building blocks help you with that. I'm sure we'll get to that a little bit later in the call. But I think if there's optimism on rates versus trend, you can start to model in a benefit on MLR. But we're not quite ready to guide you there. That's something we'll tell you in February. Okay.

The next question comes from Sarah James with Cantor Fitzgerald. Please go ahead.

Thank you. I appreciate the comments that you've made around 27 Medicaid enrollment and the slower pace assumed in your 27 commentary for the work requirement losses, but I just wanted to see if we could put a finer point on that. So when you say slower, are you talking about The second half being more losses than first half or are you talking about the mix between 27 and 28 because there are some self-attestation changes that come in in 28 and put some pressure. So how do you think about the pacing of the losses from work requirement as you've built it into your 27 guidance assumptions?

So thanks for the question, Sarah. What we said earlier is that cumulatively we can see about a 10% loss over the next bunch of years. At Investor Day, we actually said and applied 3% CAGR over the next three years. So call it 9%, 10% total from work requirements and semi-annual re-verification. What we're suggesting today is our initial pick for year one, 2027, is a 6% impact to membership, which implies most of it's in 27 with a little more in 28 and maybe even 29. That's our best guess right now and I think consistent with many outside data points. Does that help?

Next question, please.

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

Hi, good morning. Thanks for taking my question. I wanted to ask around the comment, your comments on some prospective rate adjustment for acuity. The two things that we consistently hear from folks in the Medicaid space are that state actuaries want to base rates on completed claims data with, you know, as much as six months of run out. and two, that state budgets are under a lot of pressure, general revenue, SNAP error rates, Medicaid, et cetera. So I'm interested in a little more detail around what form those prospective rate bumps for acuity are taking. How are those conversations going and who are the ones or how are the ones that are able to or seem to be wanting to Give a prospective rate bump. How are they coming up with that money? Thanks.

A handful of states have specifically included an allowance of prospective rating adjustment for the potential for an acuity shift. A handful of other states have said that while they may not put it in initial rates, they would certainly entertain a mid-cycle review. And they have history. stayers, leavers, joiners. It's not a real, it's not a difficult model to come to grips with. You have stayers, leavers, and joiners, and we have three straight years where the acuity shift, not related to OB3, obviously, on what it means when people leave the program with lower than portfolio average MCRs means to the program. So the data does exist on leavers, stayers, and joiners, and that's what they're using to put in for the prospective nature of an acuity shift due to disenrollment. So we're encouraged by what we see, and we'll obviously look how membership goes, and we'll be reporting during the year on what we're seeing. Mark, anything to add?

Yeah, when we talked about the prospective and retrospective in Q3, Q4, most of those rate updates were more about the existing gap of underfunding. When we move to the Jan 1s, that's where there's been explicit assumptions on next year's work requirements and redeterminations. And I will tell you, six of our states on January 1st have built in explicit adjustments for what they're expecting on work requirements and redeterminations. So I think that's very encouraging.

And in the latest rating bulletin put out by CMS, they strongly encouraged state actuaries to anticipate and capture their

The next question comes from Ryan Langston with TD Cowan. Please go ahead.

Thanks, good morning. On the Florida Kids contract, I understand it's early and the expectation hit break even overall next year, but any insight into how the underlying performance of that contract might pace through 27? Is there any reason to think the seasonality is different versus the legacy business just in terms of building up to that sort of full year break even for the year? Thank you.

The nature of the membership base is less about seasonality because this is kind of continual month-to-month programs. in regularly scheduled appointments. So I think the seasonality of the underlying business is less of a driver. Given that we're expecting to go from a minus 5% pre-tax in the fourth quarter to break even, you might expect there to be a linear progression through the year as we kind of settle into our MCR and G&A. I'm not ready to give you a quarter-to-quarter outlook. Perhaps we'll do that in February, but you can expect some linear improvement throughout the year.

The next question comes from Lance Wilkes with Bernstein. Please go ahead.

Great. Could you talk a little bit about puts and takes with respect to 3Q MCR, in particular in Medicaid? I'm just interested in if the acuity shift hit all represented in 3Q MOR and how prior period development impacted 3Q. Thanks.

Mark? Sure, what you had in 3Q was pretty much normal trend. We had, as Joe mentioned, a little bit of prior period development, not meaningfully. I saw a couple of the analysts commented on prior year development being a bigger contributor this year. I think that's probably somewhat misguided compared to last year, that's true, but as you know, last year prior year development was significantly lower than it normally would be. So a normal contribution from prior year development, first, second and third quarters progression of trend. What Joe made clear was that moving trend from five to five and a half was not a Q3 or Q4 specific item, but more our observation of development of Q1, Q2 and our expectations for Q3 and Q4, both on the underlying core trend but the acuity of the membership losses that we are seeing. So I don't think anything particularly notable to observe other than a little bit of a creep on core and just an expectation that acuity is just maybe a little bit higher than we thought.

The next question comes from Michael Ha with Baird. Please go ahead.

Hi, thank you. With the California Medicaid asset limit being lowered starting in July of next year, I think that Thank you so much for joining us. Thank you.

Michael, can you please repeat the first part of your question? Mark and I want to make sure we understand it and we can be responsive. Can you repeat the first part of your question, please?

Yeah, of course. With the California Medicaid asset limit being lowered starting in July of 27, I think the asset limit for one person falling over 80%, I think it's what you can own from $130,000 down to something like $20,000. Just wondering if you have any thoughts about how that might impact your Medicaid and even your DSMIP lives if they fall above that threshold.

I now understand your question. Any eligibility rules in any state, this is built bottoms up. This is not a top down. When we give outlooks and forecasts and guidance and membership projections, everything is built bottoms up. Anything that happens within a state, with respect to eligibility requirements is fully contemplated in our outlook. So yes, the asset limitations were fully complemented. Now, on the corridors, I'm going to say that our corridor accounting, we've gotten pretty good at this. Corridors have been introduced in many states, including California. We conservatively account for corridors. I'll kick it to Mark here. But I wouldn't expect anything unusual. We account for it as experience emerges. And if experience changes, we adjust the accounting.

Hey, the only thing I'll add is on current year membership, we've seen most of our membership declines in three states, which is one of them is California. I would expect our modeling for next year will be similar, where we'll probably see disproportionate declines in memberships in a handful of states, California being one of them. So that will partly reflect the matter you just raised. Other than that, I don't see a meaningful impact for MLR.

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

Good morning, guys, and thanks for taking the question. Jay, you talked a little bit about the implementation of work requirements, community engagement requirements in Nebraska. I guess, can you talk about, I want to think about like the range of outcomes in the other states that you guys participate in. And I'm kind of thinking about this on like reflecting on AJ's question. Nebraska seems to be a pretty benign implementation. I guess, can you talk about the range of what you're seeing across the states from where the implementations look like they're more arduous and could have a greater impact versus where they'll have a lesser impact? Thanks.

At this early stage, I mean, it's fair to say as of 10 days ago when I last checked, many of the states haven't even decided on their Tier 1 definitions of medical frailty, which are the diagnosis codes that by themselves would constitute medical frailty. So some of these things haven't even been decided yet. But as we work with our states and look at the range of possibilities, the range of flexibility that states have in interpreting CMS guidelines, I would say that on balance, 80% of our states are leaning toward policies that promote enrollment rather than disenrollment. whether it comes to how hard are we going to look for information that determines an ex parte eligibility, are we going to accept self-attestation or not, and medical frailty and the other types of exemptions. Within a range of possible outcomes, are we going to be more conservative or more liberal? So I would say it's leaning and many more. And in Nebraska, I would say that the results here to date have actually been lower disenrollment than anybody forecast. And in fact, on renewal enrollments, I think that 90% of the applications have been upheld on people that are already in the program, are up for renewal, running through the process, 90% of them renewed, which is far greater than anybody anticipated.

And within that, 20% for frailty, which is significantly higher than most of us thought.

Thank you.

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