Molina Healthcare Q2 2025 Earnings Report

Molina Healthcare EPS Results

• Actual EPS: $5.48
• Consensus EPS: $5.50
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: $5.86

Molina Healthcare Revenue Results

• Actual Revenue: $11.43 billion
• Expected Revenue: $10.94 billion
• Beat/Miss: Beat by +$484.31 million
• YoY Revenue Growth: +15.70%

Molina Healthcare Announcement Details

• Quarter: Q2 2025
• Date: 7/23/2025
• Time: After Market Closes
• Conference Call Date: Thursday, July 24, 2025
• Conference Call Time: 8:00AM ET

Molina Healthcare (NYSE:MOH). provides managed healthcare services to low-income families and individuals under the Medicaid and Medicare programs and through the state insurance marketplaces. It operates in four segments: Medicaid, Medicare, Marketplace, and Other. The company served in across 19 states. The company was founded in 1980 and is headquartered in Long Beach, California.

Molina Healthcare Q2 2025 Earnings Call Transcript

Key Takeaways

• Negative Sentiment: We now expect full‐year 2025 Adjusted EPS to be no less than $19 (down from $24.50), driven by higher cost trends particularly in our Marketplace segment.
• Negative Sentiment: Second quarter consolidated MCR of 90.4% reflected an “unprecedented” spike in medical cost trend across all segments (Medicaid 91.3%, Medicare 90%, Marketplace 85.4%).
• Positive Sentiment: We remain on track to reach $46 billion in 2026 and $52 billion in premium revenue by 2027, aided by recent RFP wins and an active M&A pipeline.
• Positive Sentiment: Ongoing state rate advocacy and 2026 Marketplace pricing filings are designed to realign reimbursement with elevated cost trends and restore target margins.
• Neutral Sentiment: The newly passed budget bill may ultimately reduce our expansion population by 15–20% over 2027–2028, a change expected to be implemented gradually.

Presentation

[Operator]

Good day, and welcome to the Molina Healthcare Second Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jeff Guyer, Vice President of Investor Relations. Please go ahead.

[Jeffrey Geyer, VP - IR at Monlina HealthCare]

Good morning and welcome to Molina Healthcare's second quarter twenty twenty five earnings call. Joining me today are Molina's President and CEO, Joe Zabretsky and our CFO, Mark Keim. A press release announcing our second quarter twenty twenty five 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 thirty days. The numbers to access the replay are in the earnings release.

[Jeffrey Geyer, VP - IR at Monlina HealthCare]

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, 07/24/2025, 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 twenty twenty five 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 and A activity revenue growth related to RFPs and M and 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.

[Jeffrey Geyer, VP - IR at Monlina HealthCare]

We advise listeners to review the risk factors discussed in our Form 10 ks annual report filed with the SEC as well as our risk factors listed in our Form 10 Q and Form eight ks 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 Zabretsky. Joe?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 $10,900,000,000 of premium revenue.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 pre tax margin. Year to date, our consolidated MCR is 89.8%, and our adjusted pre tax 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 twenty twenty four, while an increasing trend emerged from the end of the redetermination process, rates and Molina's risk corridor positions at the time were sufficient to offset that increasing trend. By the fourth quarter of twenty twenty four, the increasing medical cost trend moved beyond the 2024 midyear rate updates, and corridors had largely become depleted.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Moving into the first quarter of twenty twenty five, the January first rate cycle captured much of the continued trend pressure. And now, in the second quarter of twenty twenty five, we experienced yet another increase in trend, which moved 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. Cost data indicates a higher prevalence of allowable and appropriate diagnoses and medical procedures. In Medicare, we reported a second quarter MCR of ninety percent, 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

In marketplace, the second quarter NCR of 85.4% was much higher than expected, including the new store NCR related to Connecticut. We continue to experience much higher utilization relative to risk adjustment revenue, the latter which has now been validated by external sources. Our adjusted G and A ratio at 6.1% reflects lower incentive compensation as a result of our revised view of performance, as well as continued productivity enhancements. Turning now to our 2025 guidance. Full year 2025 premium revenue guidance remains unchanged at approximately $42,000,000,000 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 $5.5 below our initial guidance of $24.5 and $3 lower than the midpoint of what was recently communicated on July 7.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Providing some color. 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 used 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 90.23.1%, respectively. Our full year guidance now includes 140 basis points of consolidated MCR pressure compared to our initial guidance at $24.5 which is disproportionately attributed to Marketplace.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 on the segments. In Medicaid, our guidance assumes a full year MCR of 90.9%, which produces a pre tax margin of 3.6.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 adjustments and new off cycle rate updates in a few states that will benefit the second half of twenty twenty five. Then, with approximately 55% of our Medicaid premium renewing on January 1, our rate cycle is well timed for early twenty twenty six. 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

States are listening and have been responsive. With that in mind, our own analysis, validated by fact based external reports, has us operating with Medicaid MCRs 200 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 pre tax margin. We continue to effectively manage the elevated utilization through our cost control protocols.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

We consider this higher cost trend in our bids for 2026 and remain strategically focused on our dual eligibles population. In Marketplace, at this time in the cycle, the focus is not only on the second half of twenty twenty five, 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 pre tax 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 Connecticut. We conservatively forecasted medical cost trend in our risk adjustment revenue, the latter which has now been validated by external sources, as it is clear that the market wide risk pool is higher acuity.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 in a constantly shifting risk pool. We have limited this segment to just 10% of our portfolio, and we always approach it cautiously.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 $46,000,000,000 in 2026, and with a modest estimate of future growth initiatives, at least $52,000,000,000 for 2027. Our outlook considers growth in our current footprint and recent Medicaid and Medicare dual RFP wins. These wins should more than offset the marketplace headwind due to the expiration of enhanced subsidies.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 and 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Turning now to the political and legislative landscape and the related long term outlook for our businesses. In Medicaid, we believe changes to the Medicaid program related to the recently passed budget bill will be modest and gradual. We evaluate its impacts in two 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 commence in 2027 or later by approval.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Biannual reverifications also commence 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 1,300,000 members in our expansion population, as many of these members will automatically qualify as a result of exclusions, and two thirds 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 two year period of 2027 and 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 cured 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 trend. 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 past years of the program. And in marketplace, where there has been significantly increased utilization relative to risk adjustment, our rate filing process will address this incongruity and restore the product to target margins.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 919% over the past few years. Our consolidated MCR outlook is 90.2% in an extended period of accelerating trend.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

When combined with our G and 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 $46,000,000,000 and $52,000,000,000 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 healthcare franchise. This franchise has been designed to deliver results with the same consistency and commitment to operating excellence that has been our hallmark.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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 $11,000,000,000 in total revenue and $10,900,000,000 of premium revenue with adjusted EPS of $5.48 Our second quarter consolidated MCR was 90.4 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

We continue to experience medical cost pressure in behavioral, pharmacy and 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 dual populations, particularly for LTSS and high cost pharmacy drugs. We remain confident in our cost controls.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

In Marketplace, our second quarter reported MCR was 85.4%. Similar to first quarter, the MCR includes approximately 150 basis points of higher new store MCR in Connecticut and 150 basis points for member reconciliation from previous years. Excluding these items, the normalized MCR of approximately 82.4% 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, reducing the value of the natural hedging effect of risk adjustment.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Initial Wakeleys just received in late June clearly confirm that national marketplace risk pools are trending higher. Our adjusted G and A ratio for the quarter was 6.1, significantly below normal levels, reflecting reduced incentive compensation tied to lower expected performance in our normal operating discipline. Turning to the balance sheet. Our capital foundation remains strong. In the quarter, we harvested approximately $260,000,000 of subsidiary dividends and our parent company cash balance was approximately $100,000,000 at the end of the quarter.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Our operating cash flow for the first six months of twenty twenty five was an outflow of $100,000,000 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 $200,000,000 through cash flow at the parent and now stands at just 1.9 times trailing twelve 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 and claims payable at the end of the quarter was 43, significantly lower than prior quarters, driven by several items.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Recall, the DCP calculation compares the 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Next, a few comments on our 2025 guidance. We continue to expect full year premium revenue to be approximately $42,000,000,000 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 twenty four point five 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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%. 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 timed for Q3 and Q4, 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

As such, we expect our Medicaid MCR of 90.8% in the first half to increase to ninety one percent 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 pre tax 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 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 pre tax guidance margin is approximately 1.5%.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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 Connecticut. Excluding these items, the normalized full year Marketplace MCR is approximately 83. We expect the normalized Marketplace MCR of 80 in the first half of the year to increase to approximately 86 in the second half of the year, reflecting higher observed trends and normal seasonal patterns for Marketplace.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

While we are disappointed with these results for Marketplace, I will note that even with an expected full year reported MLR of approximately 85%, 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

We now expect the full year G and 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 5.5 Guidance now includes $8 for our updated full year MCR outlook, partially offset by two fifty from the improved G and A ratio and slightly higher investment income given the fewer Fed rate cuts now expected. Our consolidated guidance pre tax 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, our rate cycle is well timed for 2026. This concludes our prepared remarks. Operator, we are now ready to take questions.

[Operator]

The first question comes from Andrew Mok from Barclays. Please go ahead.

[Andrew Mok, Director at Barclays]

Hi, good morning. 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? Thanks.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Yes. Good morning, 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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 flying around about the duplicative members in marketplace and or Medicaid.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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 rates back in for us.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

This trend keeps coming and we're going to model it like it is.

[Andrew Mok, Director at Barclays]

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 and risk pool issues across both '25 and '26 and reset to a normalized margin? Thanks.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Andrew, we're not going to disclose our rate filings state by state. But I will tell you, the rate models 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 seven percent to eleven percent, 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Again, modeled conservatively, a healthy dose of conservatism put into rates. But we're not going 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.

[Andrew Mok, Director at Barclays]

Great. Thank you.

[Operator]

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

[Joshua Raskin, Partner - Managed Care & Providers at Nephron Research LLC]

Yes, thanks. 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 can actually be done at this point to the states and the Fed exchange? Do they allow significant adjustments at this point? And maybe when's the last time you could submit pricing changes for 2026?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Yes. Hey, Josh, good morning. 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

But there's 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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.

[Joshua Raskin, Partner - Managed Care & Providers at Nephron Research LLC]

Yes, that makes sense. But I guess I'm just sort of thinking about your comments last quarter and the quarter before where you 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?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

It is market wide. And as demonstrated by the Wakeley analysis that the risk pool has 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

But there's no other explanation except that the marketplace risk pool nationally is higher acuity. Wakeley's estimate, 8% higher this year than last.

[Joshua Raskin, Partner - Managed Care & Providers at Nephron Research LLC]

All right. Perfect. Thanks.

[Operator]

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

[Stephen Baxter, Senior Equity Research Analyst at Wells Fargo]

Hi. Thanks. Just another couple on the exchanges. I guess, I know you're not going to give specific rate increases or requests 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.

[Stephen Baxter, Senior Equity Research Analyst at Wells Fargo]

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 shifts 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? Thanks.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Mark? Yes. So a couple of things. We're hesitant to talk about specific acuity adjustments or memberships just because this is a competitive market. And you can imagine that that's something everyone needs to do independently.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

And related to the acuity shift, which is the wildcard for next year, it'll be interesting to see how all the market participants react to that. We have very intricate models trying to assess what the elasticity of demand is around a dollar differential in price, looking at whether we're number one, two, three, or four 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 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 of this pricing risk.

[Operator]

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

[Justin Lake, Analyst - Healthcare Services at Wolfe Research, LLC]

Thanks. Good morning. First question is around run rate earnings. It looks like your back half is around $7.50. I think you've talked about and even seen historically about even split, give or take, of first half or second half.

[Justin Lake, Analyst - Healthcare Services at Wolfe Research, LLC]

So you look like you're one 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?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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

[Joseph Zubretsky, President & CEO at Molina Healthcare]

So we're optimistic about the one one rate cycle for '26. Of course, we have a third 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 math, about $15 a share. But we feel good about the pricing cycle for marketplace, feel pretty good about the rate cycle for 01/01/1926 in Medicaid. And then, of course, we have embedded earnings.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

But far too early to make a call in 2026, we'll have to wait to the third or the fourth quarter to do that. Mark, anything to add?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Justin, your math is good, roughly $7.50 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, 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

And then lastly, as Joe mentioned, we're carrying that $865,000,000 of embedded earnings. We had previously guided to seeing about a third 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 a third of that for next year, a dollar of its 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Last comment make the back half is when we closed out the second quarter, it became obvious to us that quarterly trend in Medicaid had again accelerated. Trending in first quarter off the fourth was 1.2%. That's just a quarterly trend. When we closed out June, it was 1.6%, just a quarterly trend. Of course, you have a decision to make, how conservative do you want to be for the back half?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 four and projected it forward.

[Justin Lake, Analyst - Healthcare Services at Wolfe Research, LLC]

Thanks. And then just a couple of quick numbers questions. First, the SG and 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'd 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. Thanks.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

So a couple of things there. Our original G and A guidance was 6.9% way back to the beginning of the year. We're currently guiding to 6.6% and a meaningful part of that is the one time or the management compensation that came 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 and A headwind. The good news is it's offset by that implementation cost that's in our G and A that go away for next year, right?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

So those two offset, which if I were modeling a G and A number for next year, it would be a little better than 6.9%, call it 6.8 and we'll see how that evolves. 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 10%, but if it becomes lower in order to get to mid single digit margins, that's the way it's going to be.

[Justin Lake, Analyst - Healthcare Services at Wolfe Research, LLC]

Great. Thank you.

[Operator]

The next question comes from A. J. Rice from UBS. Please go ahead.

[A.J. Rice, Managing Director at UBS Group]

Think about second half of this year versus potentially first half of next year. I know you 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, assume when you came into the year, you assumed a step up in performance in the second half of this year. That doesn't seem like it's materialized. I'm trying to understand how much of a hole you have when you compare first half of this year against your jumping off point for first half next year.

[A.J. Rice, Managing Director at UBS Group]

Are you dependent on those rate updates to even get back to where you had in the first half of the year? Or would that be a step forward to getting to your target margins, if you understand what I'm trying to ask?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Yes, I think I do, AJ. 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 per expectations are now woefully short of how trend is emerging, which is why we have a significantly lower second half of the year than 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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?

[A.J. Rice, Managing Director at UBS Group]

Yes. I think I'm just trying to figure out I don't think you were 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 full target margins in the first half of twenty six, but

[Mark Keim, CFO & Treasurer at Molina Healthcare]

They definitely move us forward. It's a matter 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.

[A.J. Rice, Managing Director at UBS Group]

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 gonna be dealing with another Medicaid redetermination type of phenomenon there. And you didn't mention the the issue of the undocumented immigrants that are getting covered in some of the states, and some I know you have exposure to.

[A.J. Rice, Managing Director at UBS Group]

How meaningful an issue is that if they eliminate federal funding for that Medicaid population?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 shot 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, etcetera, for our expansion population, and the MCR skewers, the the way it's skewed, are not significant. Now you start with the premise that if people need insurance, they're gonna keep it, and people, who leave don't need it.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

So there'll be a little bit of a shift there, but the the skews 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 three year pause on the redetermination process caused the risk pool to shift initially.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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 redebt that we experienced over the last couple of years.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

On the second question about undocumented immigrants, we have about five states where they are in the program, but it's very, very minor. The one 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 in the final budget bill. So that's not a factor.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

But the only state that's material to us, to the program is California. We're monitoring that closely, but no answers at this point.

[A.J. Rice, Managing Director at UBS Group]

Thanks so much.

[Operator]

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

[Kevin Fischbeck, Equity Analyst at Bank of America]

Great, thanks. 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've 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 persistently high and therefore it's hard to forecast how much margin improvement we should be forecasting.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Interesting question. You know, 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

The stigma around getting services has begun to disappear in older populations that existed and younger populations 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, you know, it's a supply and demand side equation.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

The supply side is finding interesting ways to code, to bundle codes, etcetera, using AI, etcetera. So there's a myriad of reasons why the demand is higher and the supply is more rich. But it's happening nationally and it's not just Medicaid, it's not just Medicare, it's in commercial populations, self insured populations, it's across the board.

[Kevin Fischbeck, Equity Analyst at Bank of America]

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

[Kevin Fischbeck, Equity Analyst at Bank of America]

Then I guess separately, but similarly on that embedded earnings power number, do 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? Thanks.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

With respect to rates, 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 June 25, because that will capture a lot of the cost inflection that's already occurred. Trending off the most recent baseline that includes 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, it's okay, what's the most recent trend? Now, are you putting enough trend into the rates? Trend is typically two, three, maybe 4% in a bad year.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

In Medicaid, we're forecasting six this year, year over year, 1.6% per quarter. So you're asking the right question. Will one one catch up with it completely? We're at 90, call it a 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 oneonetwenty six or not remains to be seen. Mark, anything to add?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Kevin, on the embedded earnings question, yes, $865,000,000 unchanged. Dollars $865,000,000 or embedded earnings is always an ultimate run rate that we talk 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 two 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 eight sixty five changes because in the long term, these markets need to be appropriately funded.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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 eight sixty five million But the principle stays the same and the ultimate is intact.

[Kevin Fischbeck, Equity Analyst at Bank of America]

All right. Thanks.

[Operator]

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

[Ryan Langston, Director & Senior Analyst - Healthcare Research at TD Cowen]

Good morning. 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 two cohorts?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 ran higher than expected. Sometimes, and usually there's a disparity, SEP members, given 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, whether or they're the freshman class or the sophomore class or beyond, we saw very little distinction in the performance of the member.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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

[Ryan Langston, Director & Senior Analyst - Healthcare Research at TD Cowen]

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 one BBB is going to impact Medicaid for probably a few years and the Hicks market just constantly shifting. I guess does that imply you have to rely more on some of this accretive M and A to hit those longer term goals? Thanks.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Well, think on the Hicks 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?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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

[Ryan Langston, Director & Senior Analyst - Healthcare Research at TD Cowen]

Okay. Thank you.

[Operator]

Next question is from Sarah James from Cantor Fitzgerald. Please go ahead.

[Sarah James, MD and Equity Analyst - Healthcare Services & HCIT at Cantor Fitzgerald]

Thank you. I wanted to go back to the comment on sometimes it taking a few years to bring M and A in line. When you think about Connecticut Care, is that something that you think could run at margins similar to the rest of your book in 2026? Or could that take until 2027? 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 six twenty members?

[Sarah James, MD and Equity Analyst - Healthcare Services & HCIT at Cantor Fitzgerald]

And what the increase meant to MLR pressure this quarter? Thanks.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

So if I recall correctly, the Connecticut acquisition model had us getting to target margins in a two year period, 2027 marks confirming here. That was the original assumption. There's two competitors in the market. We're one of two. Obviously, we'll have to put rates in the market that get us there.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

But that was a two year scenario of 2027 to get back to target. Your second question?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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

[Sarah James, MD and Equity Analyst - Healthcare Services & HCIT at Cantor Fitzgerald]

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

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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.

[Sarah James, MD and Equity Analyst - Healthcare Services & HCIT at Cantor Fitzgerald]

Thank you.

[Operator]

The next question is from John Stansell from JPMorgan. Please go ahead.

[John Stansel, VP - Equity Research at JP Morgan]

Great. Just want to circle back to the M and A pipeline. Clearly, 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 six to eighteen months?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Well, obviously, we'd be opportunistic with share repurchases. It's always part of our capital plan, but it's the third use of capital. Organic growth is number one, because the operating leverage is huge. Second is M and A. We're buying these things fairly above book value.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 three to six months ago. Single geography players don't have the diversification benefit that we have and others have. If you're a single geography player and you got a rate problem, you got a problem. So we're seeing more of these come to market in a very subtle way.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

So we're opportunistic and optimistic that we'll harvest some M and A here, the same way we always have and maybe even at better rate than 25% of revenue purchased. Mark, anything to add?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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, project anything forward, I'm comfortable someplace between $1,000,000,000 and $2,000,000,000 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 and A is going to be a big part of it going forward. And we always have an eye towards share repurchase.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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

[John Stansel, VP - Equity Research at JP Morgan]

Great. And if I can just squeeze one 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'd be uptick beyond normal seasonality in the fourth quarter for your marketplace business?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Absolutely. With marketplace, 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

I don't think it's a meaningful item for us in the third quarter. But of course, we have placeholders in our projections for these kind of items. I just don't think either of them are particularly meaningful.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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

[John Stansel, VP - Equity Research at JP Morgan]

Thanks.

[Operator]

The next question is from Erin Wright from Morgan Stanley. Please go ahead.

[Erin Wright, Equity Research Analyst at Morgan Stanley]

Great, thanks. So you gave us some of your expectation on the impact of the one big beautiful bill on the expansion population. But how do you think about that the 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?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

All of our membership projections at this point, the $46,000,000,000 for '20, '26 and the $52,000,000,000 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?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Will it 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 states to actually do this is gonna be significant, and it will be in their best interest to do it gradually, not abrupt.

[Erin Wright, Equity Research Analyst at Morgan Stanley]

Okay. All right. Thank you.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

So our revenue does not our revenue estimates at '46 and '52 do not yet include, an estimate from the budget bill.

[Erin Wright, Equity Research Analyst at Morgan Stanley]

Great. Thank you.

[Operator]

The next question is from Michael Hall from Baird. Please go ahead.

[Michael Ha, Senior Research Analyst at Robert W. Baird & Co]

Thank you. So when I looked at your updated guidance, I know you embedded wider range of outcomes in your MLR and talked about added conservatism. But when I looked at the implied second half MLR progression versus your historical average first half versus second half seasonality for both total MLR and by segment. It doesn't appear to be overly, overly conservative versus historical. Mark, I know you mentioned those list of things, FTR rechecks, induced utilization, maybe even more SAT member picked up and redetermination pressure.

[Michael Ha, Senior Research Analyst at Robert W. Baird & Co]

But of those list of items you've mentioned, why don't you get a sense of which one right now do you think carries the most, call it uncertainty and potential magnitude of impact into the remainder of the year?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

I'll frame it and kick it to Mark, but our first half marketplace MCR was with 83.7 on a reported basis. As Mark said, it includes two to 300 basis points of non recurring items, both the Connecticut acquisition drag and some of those one time items from the first quarter. So call it, 1%, 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

That's exactly right. If you go through the normalized numbers I hit in the script, a normalized 80% in the first half goes to a normalized 86 in the second half. That's beyond normal seasonality. Heck, we all know that marketplace is seasonal because of co pays, deductibles and things like that in the first half. But that 6,600 basis point shift first half to second half is beyond what we would normally see in our mix of metallics.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

So I think there's a lot of conservatism baked in there. And the same means we have first half, second half Medicare 89.2% going to a 90.9% 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 floor.

[Michael Ha, Senior Research Analyst at Robert W. Baird & Co]

Thank you. And just another question. So longer term topic 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 three determinations, I guess the magnitude of unexpected outsized procedural disenrollment. And as it relates to work requirements, to the extent that does drive more outsized procedural disenrollment for even members that might, that maybe shouldn't even be eligible for work requirements that pressures rate for security.

[Michael Ha, Senior Research Analyst at Robert W. Baird & Co]

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

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 1,300,000 expansion members that we have, there is a definition of able-bodied. I like the term but that's the term that's used And people with certain medical conditions are not able-bodied. A significant number of our expansion members meet that definition and therefore qualify for one of the exclusions and could stay on. Of the remaining, two thirds of the remaining, our data shows work in some capacity.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Now they may not be working to the capacity of eighty 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 eighty hours a month, you still might be under 100% of FPL. 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.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

And if it happens gradually over time, the market can absorb it.

[Operator]

The next question is from Jason Kasorla from Guggenheim. Please go ahead.

[Jason Cassorla, Senior Equity Research Analyst at Guggenheim Partners]

Great. Thanks. Good morning. I just wanted to ask about the embedded earnings number. You left that the same at $8.65

[Jason Cassorla, Senior Equity Research Analyst at Guggenheim Partners]

I know you got the dollar implementation costs that unwind 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?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Yes, I'm not going to give you specific numbers and you'll appreciate why. But some framing concepts. So the $865,000,000 is comprised of about $2.25 from acquisitions and about $5.4 from new contract wins. You add in a dollar of the implementation costs that's in our P and L this year that just automatically reversed 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.

[Mark Keim, CFO & Treasurer at Molina Healthcare]

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 ultimate. The wildcard then becomes where are we in the rate cycle and what would have been a 4.5% pre tax margin at the ultimate, does it take longer to get there because of the rate cycle?

[Mark Keim, CFO & Treasurer at Molina Healthcare]

Well, Joe and I don't have a view on the rate cycle for January 1 yet. 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 a third of that $865,000,000 would come out next year.

[Jason Cassorla, Senior Equity Research Analyst at Guggenheim Partners]

Okay, got it. Thanks. And maybe I could just follow-up. I wanted to go back to your commentary on Medicaid inpatient and outpatient specifically. I know you spiked kind of calling those out.

[Jason Cassorla, Senior Equity Research Analyst at Guggenheim Partners]

Was that kind of were those pieces kind of included in previous commentary around trend? Or are you seeing that those two kind of accelerate at this juncture? And then thinking about the inpatientoutpatient 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 outpatient side would be helpful. Thanks.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

Yeah, as we started to talk about trend as early as the third quarter of twenty twenty four, 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 and 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 deserves a 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 to the ER?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 pre pandemic levels? Likely. And once you go to see your PCP or get a screening, there's typically a specialist follow-up visit.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

So yes, the trend on those two categories in particular began to trend up in the first quarter, but the rate cycle kept pace with it, but it spiked yet again in the second and we decided to call it out.

[Jason Cassorla, Senior Equity Research Analyst at Guggenheim Partners]

Okay, thank you.

[Operator]

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

[George Hill, MD & Equity Research Analyst at Deutsche Bank]

Yes. Good morning, guys. Thanks for taking the question. I guess I have two. First, Mark, at a high level, you'll get the free bucks next year from the implementation costs and the embedded earnings.

[George Hill, MD & Equity Research Analyst at Deutsche Bank]

This should help grow earnings in 2026. 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 love your commentary on like beneficiary response rates and time to turn around to get people re enrolled and kind of like of following up on Michael's question, how disruptive do we expect that to be?

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 eleven months, without anybody legitimately, collecting premium for eleven months until they had to reverify and couldn't. Now, the maximum that somebody can go unverified is, you know, five or six months. So there will be a slight decline in membership as a result of that faster spin, that faster churn, but it's all contemplated in the models.

[Joseph Zubretsky, President & CEO at Molina Healthcare]

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 q three and perhaps even Q4 when 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 one one key, our marketplace rate filings, second key, and third, maybe up to a third of the August and better earnings. But that's as much as I can say right now at this early stage.

[George Hill, MD & Equity Research Analyst at Deutsche Bank]

That's helpful. Thank you.

[Operator]

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

[Jeffrey Geyer, VP - IR at Monlina HealthCare]

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.

Participants

Executives

• Joseph Zubretsky, President & CEO
• Mark Keim, CFO & Treasurer

Analysts

• Jeffrey Geyer, VP - IR at Monlina HealthCare
• Andrew Mok, Director at Barclays
• Joshua Raskin, Partner - Managed Care & Providers at Nephron Research LLC
• Stephen Baxter, Senior Equity Research Analyst at Wells Fargo
• Justin Lake, Analyst - Healthcare Services at Wolfe Research, LLC
• A.J. Rice, Managing Director at UBS Group
• Kevin Fischbeck, Equity Analyst at Bank of America
• Ryan Langston, Director & Senior Analyst - Healthcare Research at TD Cowen
• Sarah James, MD and Equity Analyst - Healthcare Services & HCIT at Cantor Fitzgerald
• John Stansel, VP - Equity Research at JP Morgan
• Erin Wright, Equity Research Analyst at Morgan Stanley
• Michael Ha, Senior Research Analyst at Robert W. Baird & Co
• Jason Cassorla, Senior Equity Research Analyst at Guggenheim Partners
• George Hill, MD & Equity Research Analyst at Deutsche Bank