Molina Healthcare Inc · NYSE:MOH
Molina Healthcare — Investor Day (May 2018)
73 slides from Molina Healthcare's investor day presentation, May 31, 2018
Slide 1: Molina Healthcare, Inc. Investor Day 2018
Molina Healthcare, Inc.Investor Day 2018 May 31, 2018 SSID: Molina Healthcare Password: #MOH2018
Slide 2: Cautionary Statement
Cautionary Statement Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:This slide presentation and our accompanying oral remarks contain forward-looking statements regarding, without limitation, our business, operations, turnaround, plans, guidance, projections, and lo
Slide 3: Agenda
Agenda 9:30 – 9:35 Welcome and Overview Ryan Kubota & Joe Zubretsky 9:35 – 9:50 Company Overview 9:50 – 10:50 The Plan Joe Zubretsky 10:50 – 11:15 Projections 11:15 – 11:30 Break 11:30 – 12:00 Health Plan Operations Pam Sedmak 12:00 – 12:20 Financial Discussion Joe White 12:20 – 1:00 Q&A 1:00 – 2:00
Slide 4: Welcome and Overview
aa ee BRRMOLINA HEALTHCARE Welcome and Overview
Slide 5: Investment Thesis
Investment Thesis The growth opportunity in government-sponsored healthcare is enhanced by Molina’s active turnaround Low-Risk Execution Long-Term Growth Potential Compelling Turnaround Opportunity Strong presence in government-sponsored programs aligns with highest-growth profit pools in managed ca
Slide 6: Early Accomplishments
Realigned management incentive programs with investor objectives Produced solid first quarter results and raised guidance Formed a new executive leadership team Early Accomplishments Management has taken swift and decisive action in first six months Addressed burdensome SG&A profile Strengthened bal
Slide 7: The Team
The Team We have assembled a team of industry-leading senior executives who know how to win, recruit top talent and execute Pam Sedmak Health Plans Jim Woys Health Plan Services Mark Keim Transformation Tom Tran CFO Jeff Barlow General Counsel Sherri Hollingsworth Human Resources Hal Gooch, M.D. CMO
Slide 8: Company Overview
Company Overview Joe ZubretskyPresident & Chief Executive Officer 8
Slide 9: Our Franchise
Our Franchise High-quality health care through government programs for disadvantaged people 152 Ranking Began as a single clinic serving Medicaid patients 3-year revenue CAGR of 10% through 2018 revised guidance 3-year membership CAGR of 11% through March 2018 Well-diversified, staggered reprocureme
Slide 10: Geographic Diversification
Geographic Diversification Revenue base spans 14 states and the Commonwealth of Puerto Rico Premium Revenue by State $2.5B $1.5B $ 0.8B ≤$ 0.4B Puerto Rico Geographically diversified with no state greater than 18% of premium revenue Meaningful in-state market share Staggered reprocurements Strong in
Slide 11: Full Range of Government-Sponsored Product Lines
Full Range of Government-Sponsored Product Lines Core Medicaid footprint provides access to valuable high-acuity populations Note: Company estimates for 2018 Premium Revenue Mix 32% TANF & CHIP 17% Expansion 30% ABD 8% MMP 61% TANF & CHIP 16% Expansion 10% ABD 2% MMP 1% D-SNP 10% Marketplace 4% D-SN
Slide 12: Complementary Business Lines
Complementary Business Lines Opportunities for future growth in D-SNP, MMP, and Marketplace 1 Medical Care Ratio excludes impact of prior year CSR of $70M Marketplace Revenue Medical Care Ratio 1 Extension of core Medicaid population Leverage existing Medicaid network Risk pools stabilizing Potentia
Slide 13: Pivoting from Past Performance
Pivoting from Past Performance Turnaround underway as operational reset restores margins 1.5% - 1.6% Total Revenue and Net Income Margin Turnaround Underway New management team Execution on managed care fundamentals Effective operational and financial infrastructure Improved Marketplace performance
Slide 14: Portfolio Performance
Portfolio Performance Strong base of well-performing businesses with significant performance upside across the enterprise 2018 Revenue Mix by Profitability Opportunities for Improvement Leverage success in California, Ohio, Michigan, Texas, and Washington to other health plans Performance manage Ill
Slide 15: Guidance (as of April 30, 2018)
Guidance (as of April 30, 2018) Low High Total Revenue $18.7B $18.7B MCR 89% 88% G&A Ratio 7.4% 7.4% Net Profit Margin 1.5% 1.6% Net Income per Diluted Share $4.00 $4.50 2018 Guidance We reaffirm with a high degree of confidence Key Assumptions No benefit from prior period development Excludes any r
Slide 16: Secure Existing Business
Secure Existing Business Recent success, process revamp, and incumbency fuel our confidence Company Health Plan Washington Puerto Rico Texas Medicaid Programs All TANF and CHIP ABD TANF and CHIP Annualized Revenue $1.8 $0.7 $1.5 $0.3 Status Awarded Award Pending Submitted In-Flight Award Date May 24
Slide 17: The Plan
The Plan Joe Zubretsky President & Chief Executive Officer 17
Slide 18: The Plan: Overview
The Plan: Overview A clear path to attractivemargins by 2019 1 2 3 Margin recovery Restore margins through operating improvements and managed care fundamentals Secure revenue base and position to grow Win in-flight reprocurements and pursue measured growth Capital management Enhance balance sheet an
Slide 19: The March to Margin Recovery
The March to Margin Recovery Turnaround is well underway with path to attractive margins by 2019 2019 2020 2018 Earnings Capital Revenue Base Margin Recovery Organization Rebuild senior leadership team Defend existing revenue in reprocurements Identify and implement profit improvement initiatives De
Slide 20: Three-Year Outlook: Revenue
Total Revenue and Percentage Growth Three-Year Outlook: Revenue Despite lost contracts, we will maintain scale and resume measured growth in 2020 2018 a year of decisive action, revenue stabilization, and turnaround 2019 revenue declines due to $2.7 billion premium loss in Florida and New Mexico, HI
Slide 21: Three-Year Outlook: Net Income
Three-Year Outlook: Net Income Plan achieves attractive margins by 2019 In 2018, we stabilized the business and achieved a credible baseline In 2019, we currently project to lose $50 million of contribution margin from Florida and New Mexico, but profit improvement initiatives expand margins In 2020
Slide 22: The Plan
The Plan A clear path to attractivemargins by 2019 1 2 3 Margin recovery Restore margins through operating improvements and managed care fundamentals Secure revenue base and position to grow Win in-flight reprocurements and pursue measured growth Capital management Enhance balance sheet and capital
Slide 23: Margin Recovery
Margin Recovery At the midpoint, profit improvement initiatives represent a $500 million opportunity for 2019 and beyond Margin Recovery Fundamentals Opportunity Estimate ($ in Millions, before tax) Medical Costs Administrative Costs Revenue Utilization Management High-Acuity Care Management Pharmac
Slide 24: Timing of Pre-Tax Earnings Impact
Timing of Pre-Tax Earnings Impact 60% of the total opportunity realized in projection period after considering timing and execution risk Opportunity Midpoint 2019 2020 2021 and Beyond Resources allocated Work streams commenced Redundancies harvested Behavioral change Process engineering and redesign
Slide 25: Margin Recovery: Utilization Management
Opportunity Estimate ($ in Millions) Margin Recovery: Utilization Management 2017 Challenges 2018 Actions Prior authorization and concurrent review processes Inpatient utilization; $4.8 billion annual expense Emergency room; $1.9 billion annual expense Excess short-term hospital admissions Clinical
Slide 26: Margin Recovery: High-Acuity Care Management
Opportunity Estimate ($ in Millions) Margin Recovery: High-Acuity Care Management 2017 Challenges 2018 Actions Long-term care and behavioral health benefits under-managed Opioid Use Disorder; 65,000 members Disparate models of care deployed locally, leading to inconsistent interventions High-impact
Slide 27: Margin Recovery: Pharmacy
Opportunity Estimate ($ in Millions) Margin Recovery: Pharmacy 2017 Challenges 2018 Actions Pharmacy benefit under-managed Utilization management (UM) and formulary compliance Specialty drug unit costs and site of service Generic dispensing rate too low Analytical expertise AWP discounts lower than
Slide 28: Margin Recovery: Core Facility and Physician Networks
Opportunity Estimate ($ in Millions) Margin Recovery: Core Facility and Physician Networks 2017 Challenges 2018 Actions Broad and untailored networks Inpatient cases reaching outlier status (% of billed charges) Contract unit costs not competitive in certain geographies Limited financial impact of v
Slide 29: Margin Recovery: Ancillary Services
Opportunity Estimate ($ in Millions) Margin Recovery: Ancillary Services 2017 Challenges 2018 Actions No cost center focused leadership Behavioral health, lab, DME, dental, transportation, and vision undermanaged Multiple vendor contracts, inconsistent standards Behavioral health benefit: 330,000 li
Slide 30: Margin Recovery: Claims Payment Integrity
Opportunity Estimate ($ in Millions) Margin Recovery: Claims Payment Integrity 2017 Challenges 2018 Actions Sub-optimal provider payment process Claims backlogs, excessive re-work Provider abrasion Grievances and appeals Claims edits not implemented to market standards $135 million in provider settl
Slide 31: Margin Recovery: Corporate SG&A Control
Opportunity Estimate ($ in Millions) Margin Recovery: Corporate SG&A Control 2017 Challenges 2018 Actions Health plan operating decisions frequently subordinated to corporate headquarters Staffing, compensation and talent performance not always aligned with business needs Numerous labor pools in hig
Slide 32: Margin Recovery: Corporate SG&A Transformation
Opportunity Estimate ($ in Millions) Margin Recovery: Corporate SG&A Transformation 2017 Challenges 2018 Actions Majority of corporate functions performed in-house with low efficiency or efficacy benchmarkingLow utilization of outsourcing opportunities even in commodity functionsLow awareness of bes
Slide 33: Margin Recovery: At-Risk Revenue
Opportunity Estimate ($ in Millions) Margin Recovery: At-Risk Revenue 2017 Challenges 2018 Actions Risk scores in Medicaid and Medicare are not consistentwith member acuityLow quality scores reduce Medicaid auto-enrollmentSTAR ratings in Medicare range from 2.5 to 3.5; no 4.0 STAR plansMarketplace b
Slide 34: The Plan
The Plan A clear path to attractivemargins by 2019 1 2 3 Margin recovery Restore margins through operating improvements and managed care fundamentals Secure revenue base and position to grow Win in-flight reprocurements and pursue measured growth Capital management Enhance balance sheet and capital
Slide 35: Secure Revenue Base and Position to Grow
Secure Revenue Base and Position to Grow Focus on reprocurements and rebuilding the growth engine Action Realized In Short-Term Opportunities 2019-2020 Long-Term Strategic Value 2020 and Beyond Secure Existing Business 2018 Win reprocurements in Washington, Texas, and Puerto Rico Pursue organic grow
Slide 36: Secure Existing Business
Secure Existing Business Recent success, process revamp, and incumbency fuel our confidence Company Health Plan Washington Puerto Rico Texas Medicaid Programs All TANF and CHIP ABD TANF and CHIP Annualized Revenue $1.8 $0.7 $1.5 $0.3 Status Awarded Award Pending Submitted In-Flight Award Date May 24
Slide 37: Short-Term Opportunities
Short-Term Opportunities Building on 2018 momentum, revenue opportunities in our core markets are achievable in 2019 and 2020 2020 Improve auto-assignment Increase voluntary selectionExpand geographically in existing markets Benefit carve-ins Targeted Marketplace growthD-SNP penetration and expansio
Slide 38: Long-Term Strategic Value
Long-Term Strategic Value Renew focus on procurements to enable opportunities in new markets Potential New Markets Kentucky W. Virginia Delaware Indiana Minnesota Georgia Tennessee Nevada 2016 Medicaid Spend $9.5 $3.5 $2.0 $10.5 $11.0 $9.5 $9.5 $3.5 2016 Managed Care Spend $7.0 $1.5 $1.5 $4.5 $5.0 $
Slide 39: The Plan
The Plan A clear path to attractivemargins by 2019 1 2 3 Margin recovery Restore margins through operating improvements and managed care fundamentals Secure revenue base and position to grow Win in-flight reprocurements and pursue measured growth Capital management Enhance balance sheet and capital
Slide 40: Capital Management: Debt Overview
Capital Management: Debt Overview Suboptimal capital structure creates an opportunity to drive shareholder value Note: Balance sheet as of March 31, 2018, market value as of May 25, 2018 Debt currently $2.0 billion of book valueConvertible notes create share count volatilityRevolver partially drawn
Slide 41: Capital Management: Parent Company Cash Resources
Capital Management: Parent Company Cash Resources Turnaround will generate substantial cash at the parent company Sources of Cash ($ in Millions) Robust dividend flow No new equity issuance neededSubstantial parent-level cash balancesSubsidiaries now adequately capitalizedParent company cash flow mo
Slide 42: Capital Management: $0.40 To $0.50 Per Share Opportunity
Capital Management: $0.40 To $0.50 Per Share Opportunity Significant and immediate redeployment opportunity on excess cash can drive shareholder value Potential Impact Repay Revolver 1 2 Terminate Bridge Facility 3 Repurchase or Redeem Convertibles 4 Repurchase High-Yields 5 Stock Buyback Cash Redep
Slide 43: Capital Management: Longer-Term Outlook
Capital Management: Longer-Term Outlook With optimal capital structure, attractive underlying cash flow profile enables multiple redeployment strategies to drive incremental shareholder value Faster Organic Growth 1 2 Inorganic Growth 3 Share Repurchase 4 Shareholder Dividends Capital Redeployment S
Slide 44: Projections
Projections Joe Zubretsky President & Chief Executive Officer 44
Slide 45: Three-Year Outlook: Revenue
Total Revenue and Percentage Growth Three-Year Outlook: Revenue Despite lost contracts, we will maintain scale and resume measured growth in 2020 2018 a year of decisive action, revenue stabilization, and turnaround 2019 revenue declines due to expected $2.7 billion premium loss in Florida and New M
Slide 46: Three-Year Outlook: Net Income
Three-Year Outlook: Net Income Plan achieves attractive margins by 2019 In 2018, we stabilized the business and achieved a credible baseline In 2019, we currently project to lose $50 million of contribution margin from Florida and New Mexico, but profit improvement initiatives expand margins In 2020
Slide 47: 2019 Projections: Lost Medicaid Contracts
2019 Projections: Lost Medicaid Contracts Lost revenue in New Mexico and Florida, currently under protest, is expected to be a modest headwind due to lost contribution margin 2018 Guidance Metrics New Mexico Florida Total Membership 220,000 355,000 575,000 Premium Revenue $1.2B $1.5B $2.7B Administr
Slide 48: 2019 Projections: Premium Revenue
2019 Projections: Premium Revenue Contract losses are expected to lead to a decline in revenue in 2019 $ in Millions ($2,700) 48
Slide 49: 2019 Projections: Pre-Tax Income
2019 Projections: Pre-Tax Income Profit improvement initiatives are expected to offset impact of contract losses 1. 2018 Guidance Adjusted is 2018 income before taxes per 2018 Guidance, reduced by: 1) the net benefit of $35 million for items that were not included in the Company’s preliminary 2018 G
Slide 50: 2020 Outlook: Premium Revenue
2020 Outlook: Premium Revenue Organic growth and yield are expected to drive a 6% increase in 2020 and accelerate positive operating leverage $ in Millions 50
Slide 51: 2020 Outlook: Pre-Tax Income
2020 Outlook: Pre-Tax Income Modest growth, operating leverage, and accelerating profit improvement initiatives are expected to sustain a 2.3% margin or higher by 2020 More efficient capital management is expected to drive additional EPS impact of $0.40-$0.50 $90 $90 $ in Millions 1.9%-2.2% 2.3%-2.7
Slide 52: The Plan: Our Plan is Achievable
The Plan A clear path to attractivemargins by 2019 Our Plan is Achievable Profit opportunities are identified; merely executing on fundamentalswill achieve our goals Assumes only 60% of identified profit improvement initiativesharvested through 2020 In 2020, only $600 million of revenue growth from
Slide 53: BRRMOLINA
@@ wv BRRMOLINA HEALTHCARE
Slide 54: Health Plan Operations
Health Plan Operations Pam SedmakExecutive Vice President, Health Plan Operations 54
Slide 55: Core Competencies and Growing Strengths
Strong relationships with state partners, providers and communities reinforced by new leadership Years of combined incumbency experience with significant local relationships Organic opportunities for long-term growth in all geographies Core Competencies and Growing Strengths A solid foundation for b
Slide 56: Portfolio Performance
Portfolio Performance Strong base of well-performing businesses with significant performance upside across the enterprise 2018 Revenue Mix by Profitability Opportunities for Improvement Leverage success in California, Ohio, Michigan, Texas, and Washington to other health plansPerformance manage Illi
Slide 57: Operating Discipline, Rigor, and Accountability
Operating Discipline, Rigor, and Accountability Essential for plan performance, margin recovery, and sustainability Operating Discipline Multi-Disciplinary Approach Weekly performance dashboardsRegular forecast updatesMonthly/quarterly operating reviewsPerformance improvement initiativesSWAT teams F
Slide 58: Health Plan Performance Turnaround: Illinois
Health Plan Performance Turnaround: Illinois Impact of new leadership and operating discipline 2017 Challenges 2018 Actions $593M 107.6% 2017 Premium Revenue 2017 MCR $141M 86.4% 1Q 2018 Premium Revenue 1Q 2018 MCR Inexperienced senior leadership with high leadership turnoverPervasive provider claim
Slide 59: Health Plan Performance Turnaround: Ohio
Health Plan Performance Turnaround: Ohio Building momentum 2017 Challenges 2018 Actions $2.2B 89.1% 2017 Premium Revenue 2017 MCR $577M 82.6% 1Q 2018 Premium Revenue 1Q 2018 MCR New plan leadership with variable performanceClinical management inconsistent with a lack of focus on high-priority issues
Slide 60: Product Performance: D-SNP and MMP
Product Performance: D-SNP and MMP Focusing on the basics and sharing best practices 2017 Challenges 2018 Actions $2.0B 88.4% 2017 Premium Revenue 2017 MCR $514M 84.8% 1Q 2018 Premium Revenue 1Q 2018 MCR Product leadership internally focused and lacking breadth of expertiseTactical, not strategic, a
Slide 61: Product Performance: Marketplace
Product Performance: Marketplace Stabilizing and building sustainability 1.Medical Care Ratio excludes impact of prior year CSR of $70M 2017 Challenges 2018 Actions $3.0B 88.1% 2017 Premium Revenue 2017 MCR $430M ~67% 1Q 2018 Premium Revenue 1Q 2018 MCR1 Expanded footprint faster than capacity to ma
Slide 62: Rebuilt Procurement Process
Rebuilt Procurement Process Procurements are given the highest priority; 2018 win in Washington 2017 Challenges 2018 Actions Inadequate procurement resourcesProcurement team drove/controlled processat parent company levelProcurement process entirely internalNo executive leadership involvement in pro
Slide 63: Financial Discussion
Financial Discussion Joe WhiteChief Financial Officer 63
Slide 64: Guidance (as of April 30, 2018)
Guidance (as of April 30, 2018) Low High Total Revenue $18.7B $18.7B MCR 89% 88% G&A Ratio 7.4% 7.4% Net Profit Margin 1.5% 1.6% Net Income per Diluted Share $4.00 $4.50 2018 Guidance We reaffirm with a high degree of confidence Key Assumptions No benefit from prior period developmentExcludes any re
Slide 65: Revenue and Net Income Outlook
Revenue and Net Income Outlook Despite the 2019 revenue setback, we expect to achieve sequential margin growth 2019 margin percentages expand despite expected $2.7 billion premium loss in Florida and New Mexico Projection and Outlook include appropriate contingencies for inherent operating uncertain
Slide 66: Capital Management: $0.40 To $0.50 Per Share Opportunity
Capital Management: $0.40 To $0.50 Per Share Opportunity Significant and immediate redeployment opportunity on excess cash can drive shareholder value Potential Impact Repay Revolver 1 2 Terminate Bridge Facility 3 Repurchase or Redeem Convertibles 4 Repurchase High-Yields 5 Stock Buyback Cash Redep
Slide 67: Financial Dimensions of Margin Recovery
Financial Dimensions of Margin Recovery Financial actions expected to increase earnings and reduce volatility Action Impact Medical claimsand benefits payable Less downward volatility to earnings Introduce more conservativism into estimates and improve processes Marketplace risk adjustment liability
Slide 68: Medical Claims and Benefit Payable
Medical Claims and Benefit Payable Prior period development returned to historical levels in the first quarter 2018 2017 Issues Unfavorable 2016 claims run-out exacerbatedpoor 2017 performanceInaccurate and inconsistent claims processingHigh volume of provider settlementsLimited input from health pl
Slide 69: Marketplace Risk Adjustment Liabilities
Marketplace Risk Adjustment Liabilities More rigorous estimates expected to reduce negative earnings volatility 2015 and 2016 year end estimates were inadequate, so starting in 2017 we added an incremental risk margin to our estimates. Margin/(Deficit) on Marketplace Risk Adjustment Liability $ in M
Slide 70: Effective Tax Rate (ETR) and Pre-Tax Income
Effective Tax Rate (ETR) and Pre-Tax Income The Health Insurer Fee has a noticeable impact on ETR ETR and Pre-Tax Income ($ in millions) Nondeductible expenses (ACA health insurer fee and a portion of executive compensation) result in an effective tax rate that exceedsour statutory tax rate Impact o
Slide 71: Share Count Dilution and Stock Price
Share Count Dilution and Stock Price Convertible notes increase total fully-diluted share count as stock price rises Share Count Dilution and Stock Price Convertible notes increase total fully-diluted share count as stock price rises 63.6M 64.5M 65.3M 66.0M 66.6M 67.1M 67.6M 68.0M 68.4M 68.8M 69.1M
Slide 72: ARRMOLINA
@@ ARRMOLINA HEALTHCARE
Slide 73: Investment Thesis
Investment Thesis The growth opportunity in government-sponsored healthcare is enhanced by Molina’s active turnaround Low-Risk Execution Long-Term Growth Potential Compelling Turnaround Opportunity Strong presence in government-sponsored programs aligns with highest-growth profit pools in managed ca