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.
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Earnings Conference Call
Molina Healthcare Q2 2025
00:00 / 00:00

There are 4 speakers on the call.

Speaker 1

Good day and welcome to the Molina Healthcare second quarter 2025 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jeff Geyer, Vice President of Investor Relations. Please go ahead.

Speaker 2

Good morning and welcome to Molina Healthcare's second quarter 2025 earnings call. Joining me today are Molina's President and CEO Joseph Zubretsky and our CFO Mark Keim. A press release announcing our second quarter 2025 earnings was distributed after the market close yesterday and is available on our investor relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, July 24, 2025, and have not been updated subsequent to the initial earnings call. On this call we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in the second quarter 2025 earnings release.

Speaker 2

During the call we will be making certain forward-looking statements including but not limited to statements regarding our 2025 guidance and 2025 guidance elements, the medical cost trend and our projected MCRs, Medicaid rate adjustments and updates, our 2026 Marketplace pricing and rate filings, our RFP awards and our M&A activity, revenue growth related to RFPs and M&A activity, the recently enacted Big Beautiful Bill and expected Medicaid, Medicare, and Marketplace program changes, and the estimated amount of our embedded earnings power. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC, as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC.

Speaker 2

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, Joseph Zubretsky.

Operator

Joe, thank you, Jeff, and good morning. Today I will discuss several of our reported financial results for the second quarter, an update on our full year 2025 guidance, our growth initiatives and strategy for sustaining profitable growth, and some commentary on the potential impacts of the recently passed budget bill. Let me start with our second quarter performance, which greatly informs our discussion on 2025 guidance. Last night we reported adjusted earnings per share of $5.48 on $10.9 billion of premium revenue. Our 90.4% consolidated MCR reflects a very challenging medical cost trend environment, but moderated by our consistently effective medical cost management. We produced a 3.3% adjusted pretax margin year to date. Our consolidated MCR is 89.8%, and our adjusted pretax margin is 3.6%. In Medicaid, the business produced an MCR of 91.3%, which is above our long term target range.

Operator

We continue to experience medical cost pressure in behavioral, pharmacy, and inpatient and outpatient care. Let me expand on what we are seeing in our Medicaid business. Behavioral health costs have increased nationally, reflecting both supply side and demand side drivers, and imposed limitations on utilization management in certain states. High cost drugs remain a source of pressure, driven by higher script volumes and the introduction of a variety of expensive therapies beyond GLP1s for conditions such as cancer and HIV. Higher inpatient utilization in the quarter was driven by a higher volume of admissions for complex health episodes, many of which originated from increased ER visits, and the increase in outpatient utilization in the quarter was driven by primary care visits and preventive screenings, many of which led to subsequent treatment in specialist settings. This is the fourth consecutive quarter we have observed some combination of these trends.

Operator

The magnitude and persistence of these medical cost increases are unprecedented. To briefly recap how these trends have emerged over time, starting in the third quarter of 2024, while an increasing trend emerged from the end of the redetermination process, rates and Molina's risk corridor positions at the time were sufficient to offset that increasing trend. By the fourth quarter of 2024, the increasing medical cost trend moved beyond the 2024 mid year rate updates, and corridors had largely become depleted moving into the first quarter of 2025. The January 1 rate cycle captured much of the continued trend pressure, and now in the second quarter of 2025 we experienced yet another increase in trend, which moved beyond the rate updates received in the first quarter, and risk corridor protection at this point is very limited and isolated.

Operator

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 consolidated medical cost ratio (MCR) of 90%, which is above our long-term target range as utilization was higher in the more acute populations, particularly for long-term services and supports and high-cost drugs in Marketplace. The second quarter MCR of 85.4% was much higher than expected, including the new store MCR related to ConnectiCare. 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&A ratio at 6.1% reflects lower incentive compensation as a result of our revised view of performance as well as continued productivity enhancements.

Operator

Turning now to our 2025 guidance, full year 2025 premium revenue guidance remains unchanged at approximately $42 billion. Our full year 2025 adjusted earnings per share (EPS) guidance is now expected to be no less than $19 per share, a floor if you will, which is $5.50 below our initial guidance of $24.50 and $3 lower than the midpoint that was recently communicated on July 7, 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 use this most recent experience data to forecast the balance of the year, which resulted in a more conservative view and a view within a wider range of probable outcomes than is normal for this point in the year.

Operator

This revised guidance of a $19 floor produces a consolidated MCR and pre-tax margin of 90.2% and 3.1%, respectively. Our full year guidance now includes 140 basis points of consolidated MCR pressure compared to our initial guidance at $24.50, which is disproportionately attributed to Marketplace. Marketplace is 10% of our revenue and accounts for nearly half of this 140 basis point MCR revision. We consider the $19 guidance to be a floor as we believe the cost trend could moderate from this conservative indication and produce earnings upside. A reminder that 35 basis points of MCR in the second half equates to $1 of upside earnings per share potential. Now some color on the segments in Medicaid. Our guidance assumes a full year MCR of 90.9% which produces a pretax margin of 3.6%.

Operator

While this Medicaid MCR result is above the high end of our long term target range, we do evaluate it in the context of this unprecedented and challenging trend environment. We received on cycle rate adjustments and new off cycle rate updates in a few states that will benefit the second half of 2025. With approximately 55% of our Medicaid premium renewing on January 1, our rate cycle is well timed for early 2026. There is little question that most state programs are significantly underfunded as a result of medical cost inflection. We have very strong rate advocacy efforts working with our state partners to restore rates to appropriate levels. States are listening and have been responsive. With that in mind, our own analysis validated by fact based external reports has us operating with Medicaid MCRs 200 to 300 basis points lower than the broader market.

Operator

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. We considered this higher cost trend in our bid 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 2025 but also on the positions taken in rate filings for 2026. With respect to full year 2025, we expect to produce an MCR of 85% and a pre tax margin in the low single digits.

Operator

This result includes the pressure from the prior year items we recognized in the first half and the new store impact of ConnectiCare. We conservatively forecasted medical cost trend 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.

Speaker 3

Medical.

Operator

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. In summary, with respect to our full year guidance, we provide it with full confidence, quantification, and detail in this season of great uncertainty.

Operator

Turning now to our growth initiatives, we remain on track to achieving our premium revenue target of $46 billion in 2026, and with a modest estimate of future growth initiatives, at least $52 billion for 2027. Our outlook considers growth in our current footprint and recent Medicaid and Medicare duals RFP wins. These wins should more than offset the Marketplace headwind due to the expiration of enhanced subsidies. This outlook is before considering any impacts of membership declines due to the budget bill, which we continue to evaluate in size and believe the ultimate impact of which is likely to manifest beyond 2028. With respect to M&A activity, our acquisition pipeline still contains many actionable opportunities, and we remain opportunistic in deploying capital to accretive acquisitions.

Operator

This current challenging operating environment has been a catalyst for many smaller and less diverse health plans to consider their strategic options, creating more opportunities. Our embedded earnings, which accounts for the estimated accretion related to new contract wins and recent acquisitions, remains at $8.65 per share. For all of these reasons, we remain confident in our long term growth targets. Turning now to the political and legislative landscape and the related long term outlook for our businesses in Medicaid, we believe changes 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.

Operator

Biannual redetermination verifications 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 1.3 million 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. We anticipate that whatever a state elects to do will follow prevailing state-specific political tendencies.

Operator

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. 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.

Operator

Regardless, our strategy of keeping this business small, stable, and oriented towards silver tiered products has served us well. In summary, we are disappointed with our second quarter results and guidance revision even in the backdrop of this difficult environment of accelerating medical cost 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. I do step back and take stock in doing so. I am encouraged by a number of observations that deserve emphasis.

Operator

Even in this broadly challenging environment, we have the confidence and clarity to provide a specific earnings per share guidance floor with upside potential. We continue to grow premium this year at 9% and 19% over the past few years. Our consolidated medical cost ratio outlook is 90.2% in an extended period of accelerating trend. When combined with our G&A efficiencies harvested over the past number of years, we are still projecting a full year 3.1% pretax margin, which is just 90 basis points off the lower end of our long term range. Finally, with margins normalizing as we are heading towards $46 billion and $52 billion of premium revenue in 2026 and 2027, we are very well positioned to reestablish our profitable growth trajectory. At Molina Healthcare, we power through short term industry wide challenges and strive to deliver superior sector performance.

Operator

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

Speaker 3

Mark, thanks Joe, and good morning everyone. Today I'll discuss additional details of our second quarter performance, the balance sheet, and our 2025 guidance. Beginning with our second quarter results. For the quarter, we reported approximately $11 billion in total revenue and $10.9 billion of premium revenue with adjusted EPS of $5.48. Our second quarter consolidated MCR was 90.4%, reflecting a very challenging medical cost trend environment for each of our segments, but moderated by our consistently effective medical cost management in Medicaid. Our second quarter MCR was 91.3%, higher than our expectations. We continue to experience medical cost pressure in behavioral, pharmacy, 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.

Speaker 3

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 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 ConnectiCare 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. The initial Wakelys just received in late June clearly confirm that national Marketplace risk pools are trending higher.

Speaker 3

Our adjusted G&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 million of subsidiary dividends, and our parent company cash balance was approximately $100 million at the end of the quarter. Our operating cash flow for the first six months of 2025 was an outflow of $100 million due to the timing of government receivables and risk corridor settlement activity that offset the normal positive items. Debt at the end of the quarter was reduced by approximately $200 million through cash flow at the parent and now stands at just 1.9 times trailing twelve month EBITDA. Our debt-to-capital ratio is about 43%. We continue to have ample cash and access to capital to fuel our growth initiatives.

Speaker 3

Days in claims payable at the end of the quarter was 43, significantly lower than prior quarters, driven by several items. 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 aged liabilities. Normalizing for these items, our DCP is more in line with historical averages as some of these items are sustaining. We guide to lower DCPs in the mid-40s in future periods. We remain confident in the strength of our actuarial process and our reserve position. Next, a few comments on our 2025 guidance. We continue to expect full year premium revenue to be approximately $42 billion. Our adjusted earnings guidance is no less than $19 per share.

Speaker 3

Within our guidance, the full year consolidated MCR increases to 90.2%, up 140 basis points from our initial guidance at 2,450. As Joe mentioned, the higher MCR is disproportionately driven by Marketplace. Marketplace is just 10% of our premium revenue yet accounts for almost half of the consolidated increase in MCR. In Medicaid, we are raising the full year MCR guidance from 89.9% to 90.9% as trend is now expected to exceed rates. With the observed trend in Q2 and our expectations for higher trend over the rest of the year, we are updating our full year over year trend outlook from 5% to 6%. Updated rates in several states increase 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.

Speaker 3

We continue to see a willingness from states to discuss off-cycle and retro rate adjustments as data develops, but we do not include speculative off-cycle rate updates in our guidance. In the second half of the year, ongoing medical cost pressure will exceed known rate updates. As such, we expect our Medicaid MCR of 90.8 in the first half to increase to 91 in the second half of the year. Even at these MCR guidance levels, higher than our long-term target range, our Medicaid segment full year 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 higher utilization among our high acuity duals membership.

Speaker 3

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%. Looking forward to 2026, we believe the final rate notice and our product designs, which we filed in May, captured this higher 2025 jumping off point for our 2026 bids. In Marketplace, we are increasing our full year MCR guidance from 80 to 85. The full year Marketplace MCR now includes approximately 200 basis points attributable to the combination of prior year member reconciliations and the new store impact of ConnectiCare. Excluding these items, the normalized full year Marketplace MCR is approximately 83.

Speaker 3

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. While we are disappointed with these results for Marketplace, I will note that even with an expected full year reported MCR of approximately 85, we would achieve low single digit pre-tax margins in this business. The Marketplace segment full year pre-tax 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.

Speaker 3

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 pre-tax margins. We will prioritize margin and let membership fall where it may. We now expect the full year G&A ratio to be approximately 6.6%, better than previously guided by 30 basis points, reflecting the very low second quarter expense and continued efficiencies in our operations. Our full year EPS guidance is now expected to be no less than $19 per share, lower than our first quarter guidance by $5.50. Guidance now includes $8 for our updated full year MCR outlook, partially offset by $2.50 from the improved G&A ratio and slightly higher investment income given the fewer Fed rate cuts now expected. Our consolidated guidance pretax margin is expected to be approximately 3.1% despite the significant dislocation of rates and trends.

Speaker 3

With 55% of our revenue renewing on January 1 of next year, our rate cycle is well timed for 2026. This concludes our prepared remarks. Operator, we are now ready to take questions.

Speaker 1

We will now begin the question and answer session. To ask a question, you may press Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. In the interest of time, please limit yourself to one question and one follow up. At this time we will pause momentarily to assemble our roster. The first question comes from Andrew Mok from Barclays. Please go ahead.

Speaker 2

Hi, good morning. You noted that the back half Medicaid MCR is higher than the first half, but it looks like there's some modest improvement from the Q2 MCR. 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.

Speaker 3

Yeah, 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 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. 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.

Speaker 3

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. To me it's all about the relationship of rates and trend and we already had a lot of rate back in for us. This trend keeps coming and we're going to model it like it is. Great.

Speaker 2

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 2025 and 2026 and reset to a normalized margin? Thanks.

Operator

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 7% to 11%. You can rest assured we're putting a healthy dose of trend into rates. Thirdly, the acuity shift that's going to occur next year due to the expiration of the APTCs. Again, modeled conservatively, a healthy dose of conservatism put into rates. We're not going to go state by state, but we've captured all the elements that need to be captured and we don't expect the business to grow next year. The market will shrink and we're not looking to grow.

Operator

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.

Speaker 2

Great, thank you.

Speaker 1

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

Operator

Yeah, thanks.

Speaker 2

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.

Operator

Marketplace pricing can actually be done at.

Speaker 2

This points to the states and the Fed Exchange, they allow significant adjustments at this point. Maybe when's the last time you.

Operator

Could submit pricing changes for 2026? Yeah.

Speaker 3

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's a little bit different, 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? It's a little bit about what components of pricing are changing. States view the components differently on where the flexibility is. 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.

Speaker 3

They need to be accommodating on pricing because it's part of a sustaining market.

Speaker 2

Yeah, that makes sense.

Speaker 3

I'm just sort of.

Speaker 2

Thinking about your comments last quarter and the quarter before, where you spoke about a more stable Marketplace membership, you talked about higher retention this year.

Operator

I guess I'm just still struggling.

Speaker 2

What do you think is the root cause of this pickup in utilization?

Operator

I guess market wide it is market wide. As demonstrated by the Wakely analysis, 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. 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. There's no other explanation except that the Marketplace risk pool nationally is higher acuity. Wakely's estimate, 8% higher this year than last. All right, perfect, thanks.

Speaker 1

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

Operator

Hi, thanks.

Speaker 2

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 this big picture, how are you thinking about market wide enrollment decline in 2026? Obviously that's a key component of forecasting acuity correctly. Is it fair to say that the acuity shift that you're putting into pricing is going to be multiples of the acuity shift we're seeing this year? Ultimately, if you do have states that don't let you take the rate increases that you want, how do you plan to respond?

Operator

Thanks, Mark.

Speaker 3

Yeah, 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. 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. The dynamics 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. 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.

Speaker 3

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. 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.

Operator

Related to the acuity shift, which is the wild card for next year, it will 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 the 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. 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. Our state-based partners are absolutely willing to give us a second pass rate filing to use the latest information, which should mitigate any mispricing risk.

Speaker 1

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

Speaker 3

Thanks.

Speaker 2

Good morning. First question is around run rate earnings. It looks like your back half is around $750 that you've talked about and even seen historically about even split, give or take, of first half, the second half. You look like you're run rating at about $15 a share in the back half of the year. Curious if that's a reasonable way to think about it in your mind and if so, how does that bias us to think about your ability to grow earnings year over year into 2026?

Operator

I think that is the run rate math. Bear in mind that over half our Medicaid revenue has a 1:1 renewal cycle. We're advocating very hard for adequate rates for 1:1, making sure our state partners use the most reasonable and recent baseline. We're advocating for July 2024 to July 2025 as the baseline, which is really important. It takes a lot of risk out of what you, the jumping off point that you trend off of. We're optimistic about the 1:1 rate cycle for 2026. 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. It's too early to make a call on 2026. That is the back half math, about $15 a share. We feel good about the pricing cycle for Marketplace, feel pretty good about the rate cycle for 2026 and Medicaid.

Operator

Of course, we have embedded earnings, 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, Justin?

Speaker 3

Your math is good. Roughly $750 million in the second half. You can't just double it for next year for all the reasons Joe mentioned. The rate cycle is just critical for January 1 and the industry needs these rates more than Molina does. At the moment, the industry is very underfunded. We need money just to get back to target margins. We should see a lot of progress on the rate cycle for January 1. Lastly, as Joe mentioned, we're carrying that $865 million 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. As Joe mentioned, if the guidance is a third of that for next year, a dollar if it's guaranteed, it's just a reversal of the implementation fees we carry this year.

Speaker 3

It's too soon to give guidance for next year, but I think those are the building blocks and the setup for next year.

Operator

The last comment I'll make on the back half is when we closed out the second quarter, it became obvious to us that that quarterly trend in Medicaid had again accelerated. Trend in the 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? We repeated that 1.6% Medicaid trend in each of Q3 and Q4. Whether it proves to be conservative or not enough remains to be seen. We used the last data point, which is the highest quarterly trend we've observed in the last four, and projected it forward.

Speaker 2

Thanks. Just a couple quick numbers questions. First, the SGA benefit for the year from lower comp, executive comp, that probably comes back next year. If it's possible to put a number on that, that would be helpful. If I missed it, I apologize. 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.

Speaker 3

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

Speaker 2

Right.

Speaker 3

Those two offset, which if I were modeling a G&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. We need to take our own views internally, and why that's critical is linked to the membership decline is the acuity shift. We're working through that right now, as you can imagine.

Operator

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 mid single digit margins, that's the way it's going to be.

Speaker 2

Great. Thank you.

Speaker 1

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

Speaker 2

Think about second half of this year versus potentially first half of next year. I know you've got 55% of your rate or your book resets in rates. If I think about where you're at on margin for first half of this year and then second half, I 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. 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.

Speaker 3

I think I do, A.J. It's a matter of degree. 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 traffic 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. 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?

Speaker 2

Yeah, I think I'm just trying to figure out. I don't think you were target margins in the first half of the year. 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 1H26, but they definitely move us forward.

Speaker 3

It's just 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. It's just a matter of how quickly states move back to what is actuarially appropriate.

Speaker 2

Okay. Just the other thing I wanted to ask you about is I appreciate the comments about the budget bill. I think there's the 15% to 20% of the expansion population that could be at risk under the work rules. Any comments about how that might affect the underlying acuity or risk pool and whether we're going to be dealing with another Medicaid redetermination type of phenomenon there? You didn't mention the issue of the undocumented immigrants that are getting covered in some of the states. Some I know you have exposure to, how meaningful an issue is that if they eliminate federal funding for that Medicaid population.

Operator

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 shock loss that can't be dealt with either administratively or from an acuity perspective. We have looked at all of our cohorts by age, duration, geography, et cetera for our expansion population, and the MCR skewers, the way it's skewed, are not significant. You start with the premise that if people need insurance, they're going to keep it and people who leave don't need it. There'll be a little bit of a shift there, but the skews by cohort are not so significant. The fact that we believe it'll 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.

Speaker 3

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. This is a dramatically lower impact and potential decline than the broader redet that we experienced over the last couple of years.

Operator

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 are working to continue to figure out how they're going to handle that, cover them or not. Obviously, the FMAP match reduction, if they do decide to cover them, disappeared in the final budget bill, so that's not a factor. The only state that's material to us to the program is California. We're monitoring that closely. No answers at this point.

Speaker 2

Thanks so much.

Speaker 1

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

Speaker 2

Great, thanks. Just want to see if you guys have a better understanding of why TRND is so elevated across all these products. I know you've already mentioned kind of the bucket 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.

Operator

Interesting question. We have our arms around the what. I think the industry generally doesn't have their arms around the why. I mean, you could go cost component by cost component for behavioral. The prevalence of behavioral conditions is up, so the prevalence is higher. The stigma around getting services has begun to disappear in older populations that existed in younger populations. It doesn't. States have encouraged us to widen our networks. People did not go for services during the pandemic and now they are. There's some pent up demand. I could go cost category by cost category and, you know, it's a supply and demand side equation. The supply side is finding interesting ways to code, to bundle codes, et cetera, using AI, et cetera. There's a myriad of reasons why the demand is higher and the supply is more rich.

Operator

It's happening nationally and it's not just Medicaid, it's not just Medicare, it's in commercial populations, self-insured population regulations. It's across the board.

Speaker 2

Okay. Maybe 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 costs will be high. This year's costs will still see risk pool shifts. Do you ever catch up and I guess separately, but similarly on that embedded earnings power number, you reaffirmed the number.

Speaker 2

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.

Operator

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 2024 to June 2025 because that will capture a lot of the cost inflection that's already occurred. Trending off the most recent baseline that includes the inflection is the best position to be in. We're hoping states, in recognizing that there's been a cost inflection, will use that as the baseline period. 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 2%, 3%, maybe 4% in a bad year. In Medicaid we're forecasting 6% this year, year over year, 1.6% per quarter. You're asking the right question. Will one catch up with it completely? We're at 90. Call it a 91% consolidated medical cost ratio. 200 basis points.

Operator

190 basis points above the top end of our range. We need 200 basis points on top of trend in order to get back to our target margin. We think the broader market, based on external analysis, needs a lot more than that. If we can get 200 basis points on top of an appropriate trend, it'll bring us back into target margin territory. Whether that happens on 11/26 or not remains to be seen.

Speaker 3

Mark, anything to add, Kevin, on the embedded earnings question? Yeah, $8.65 unchanged. $8.65 or embedded earnings is always an ultimate run rate that we talk about. 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. I don't think $8.65 changes because in the long term these markets need to be appropriately funded. We'll have to wait till guidance for 2026 to let you know specifically how that affects what we realize next year out of the $8.65. The principle stays the same and the ultimate's intact.

Speaker 2

Thanks.

Speaker 1

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

Speaker 3

Good morning. On the exchange side, I believe in.

Speaker 2

the past you've given us some commentary on what I might call a same store basis.

Speaker 3

Is there any way you can call?

Speaker 2

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?

Operator

I'll kick it to Mark, but 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 is a disparity. SEP members, given the free period of getting in when you need it, usually run hotter as the initial year and then settle down. This year, whether a member came in through OEP, SEP, or whether they are the freshman class or the sophomore class or beyond, we saw very little distinction in the performance of the member. We do have a lot of members that have very low HCCs, which means you're not going to get risk adjustment, but that is typical for this line of business. Mark, anything to add?

Speaker 3

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

Operator

Got it.

Speaker 3

Just last thing I know.

Speaker 2

On the long term side, I know you say you're pretty confident there.

Speaker 3

If the one BBB is going to.

Speaker 2

Impact Medicaid for probably a few years in the Marketplace just constantly shifting.

Speaker 3

I guess, does that imply you have?

Speaker 2

To rely more on some of this accretive M&A to hit those longer term goals? Thanks.

Operator

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

Speaker 3

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.

Operator

Okay, thank you.

Speaker 1

Next question is from Sarah James from Cantor Fitzgerald. Please go ahead. Thank you. I wanted to go back to the comment on sometimes it taking a few years to bring M&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 and experience, can you touch on if you still think you're going to end year end at 6.20 million members and what the increase meant to MLR pressure this quarter?

Operator

Thanks, Sarah. If I recall correctly, the ConnectiCare acquisition model had us getting to target margins in a two-year period, 2027. Mark's confirming here that was the original assumption. There are two competitors in the market. We're one of two. Obviously, we'll have to put rates in the market that get us there, but that was a two-year scenario, 2027 to get back to target. Your second question.

Speaker 3

On your second question, Sarah, it was on Marketplace membership. We're seeing just a little bit more on SEP, not dramatically big, but I'm expecting about 650,000 of membership by year end, just a little bit more than we thought before.

Speaker 1

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?

Speaker 3

It is a little bit more for a couple reasons. SEP is the big one, and as we said, they're not coming in in a meaningfully different place. As far as we know from the rest of the book in the past years, sometimes SEP came in for all the wrong reasons. Right. Because of the changes in SEP rules this year, it feels like they're coming in not as immediate pent up demand, but pretty much with the same acuity and utilization profiles as the rest of the book. I don't know that I would attribute necessarily more MLR pressure to what is a subtle increase in membership.

Speaker 1

Thank you. The next question is from John Stansel from JP Morgan. Please go ahead.

Speaker 3

Great.

Operator

Just wanted to circle back to the MA pipeline. Clearly in the prepared remarks you highlighted that the pipeline is active and that there are smaller players who are probably struggling with some of these pressures more than you are. How do you balance that with other capital deployment options around things like share repo right now and think about that framework for the next six to 18 months? Obviously we'll be opportunistic with share repurchases. It's always part of our capital plan. It's the third use of capital. Organic growth is number one because the operating leverage is huge. Second is M&A. We're buying these things barely above book value and they are fixer uppers. 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.

Operator

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

Speaker 3

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

Operator

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&A at the amount of revenue we need to acquire and at the price that we acquire it. Great. If I can just squeeze one more in. At Investor Day last year you did.

Speaker 3

Highlight the idea that Marketplace might have.

Operator

A pull forward of demand in the fourth quarter ahead of, you know, subsidy expiration or integrity rule changes. Is that embedded in the current guidance that there be uptick beyond normal seasonality in the fourth quarter for your Marketplace business?

Speaker 3

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

Operator

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

Speaker 1

The next question is from Erin Wright from Morgan Stanley. Please go ahead. Great, thanks. You gave us some of your expectation on the impact of the one big beautiful bill on the expansion population. How do you think about that, the cadence of that, and what are you factoring now in terms of state mitigation efforts? Does this not incorporate that at this point? That would be upside.

Operator

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

Speaker 1

Okay, all right, thank you.

Operator

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

Speaker 1

Great, thank you. The next question is from Michael Ha from Baird. Please go ahead.

Speaker 2

Thank you. When I look at your updated guidance, I know you embedded a wider range of outcomes in your MLR. You talked about added conservatism. When I look at the implied second half MLR progression versus your historical average first half versus second half seasonality for both total MLR and by segment, it doesn't appear to be overly conservative versus historical. Mark, I know you mentioned those lists of things, FTR rechecks, induced utilization, maybe even more SCT member pickup and redetermination pressure. Of those lists of items you mentioned, I wanted to get a sense of which one right now you think carries the most, call it uncertainty and potential magnitude of impact into the remainder of the year.

Operator

I'll frame it and kick it to Mark. Our first half Marketplace MCR was, I believe, 83.7% on a reported basis. As Mark said, it includes 200 to 300 basis points of non-recurring items, both the ConnectiCare acquisition drag and some of those one-time items from the first quarter. Call it, you know, 81%, 82%, and it's progressing to 86.6% in the second half to blend to the 85% for the full year. There is a pretty meaningful normalized increase first half to second half.

Speaker 3

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 copays, deductibles, and things like that in the first half. That 600 basis point shift first half to second half is beyond what we would normally see in our mix of metallics. I think there's a lot of conservatism baked in there. 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.

Speaker 3

Medicaid, you know, 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. 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.

Speaker 2

Thank you. Just another question, longer term topics of policy, 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, 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 maybe shouldn't even be eligible for work requirements, that pressures rate for security.

Operator

Just trying to think, are there any.

Speaker 2

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.

Operator

We are working state by state to make sure that the administrative process goes smoothly and everything we can do to help. Now to your question. The data as we analyze the 1.3 million expansion members that we have, there is a definition of able bodied. I don't like the term, but that's the term that's used. 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. They may not be working to the capacity of 80 hours a month, we don't know, but they are working, working in some capacity. By the way, at a minimum wage job for 80 hours a month, you still might be under 100% of FPL.

Operator

We are analyzing the book of business. That's all we can do right now. 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. That's our best estimate for now. It's consistent with the think tank estimates and the consulting house estimates. If it happens gradually over time, the market can absorb it.

Speaker 1

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

Operator

Great, thanks. Good morning.

Speaker 2

I just wanted to ask about the embedded earnings number. You left that the same at $8.65. I know you got the dollar implement.

Operator

Implementation costs that unwind next year, but maybe can you just give us a sense of how much of that.

Speaker 2

Embedded earnings you can kind of like feasibly harvest next year, or how to think about that just as we think about next year?

Speaker 3

Yeah, I'm not going to give you specific numbers and you'll appreciate why, but some framing concepts. The $8.65 is comprised of about $2.25 from acquisitions and about $5.40 from new contract wins. You add in a dollar of the implementation cost that's in our P&L this year that just automatically reverses next year. Those are the components that get you to $8.65. The good news, and Joe pointed this out, is the dollar has no execution risk. It just happens; we're not going to spend that money next year. Of the remaining, we have a really good transformation and integration team that look at our acquisitions and also look at our new implementations. They're doing a good job tracking from an operating perspective to the ultimates. The wild card then becomes where are we in the rate cycle? What would have been a 4.5% pre-tax margin at the ultimate?

Speaker 3

Does it take longer to get there because of the rate cycle? Joe and I don't have a view on the rate cycle for January 1 yet, so I just can't give you a view on that. Rate cycle aside, we feel pretty good about what I've said in the last couple of quarters, which is roughly a third of that $8.65 would come out next year.

Operator

Okay, got it. Thanks. Maybe I could just follow up. I wanted to go back to your commentary on Medicaid inpatient and outpatient specifically.

Speaker 2

I know you spiked calling those out.

Operator

Were those pieces kind of included in previous commentary around?

Speaker 2

Trend or are you seeing that those.

Operator

Two kind of accelerate at this juncture.

Speaker 2

You know, thinking about the inpatient/outpatient that you're seeing, should we think about that as the new.

Operator

Cost baseline for which to grow off.

Speaker 2

For those pieces or, you know, 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.

Operator

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

Operator

Is it back to pre-pandemic levels? Likely. Once you go to see your PCP or get a screening, there is typically a specialist follow-up visit. 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. It spiked yet again in the second and we decided to call it out. Okay, thank you.

Speaker 1

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

Speaker 3

Yeah, good morning, guys.

Operator

Thanks for taking the question. I guess I have two.

Speaker 3

First, Mark, at a high level, you'll get the free buck next year from.

Operator

The implementation cost and the embedded earnings. This should help grow earnings in 2026.

Speaker 3

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.

Operator

In the future to a biannual redetermination process.

Speaker 3

I would just love your commentary on beneficiary response rates and time to turn around to get people re-enrolled and kind of following.

Operator

Up on Michael's question, how disruptive do we expect that to be? I'll answer the second question first on the biannual redetermination process. I mean it's really a question of math. If somebody became ineligible during a year, didn't notify the state, it's possible that we're collecting premium for 11 months without anybody legitimately collecting premium for 11 months until they had to reverify and couldn't. Now the maximum that somebody can go unverified is five or six months. There will be a slight decline in membership as a result of that faster spin, that faster churn. It's all contemplated in the models. 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. It's just too early to put the pieces together.

Operator

As we move forward here to Q3 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 key, our Marketplace rate filings second key, and third, you know, maybe up to a third of the $865 million embedded earnings. That's as much as I can say right now at this early stage. That's helpful. Thank you.

Speaker 1

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

Operator

Thank you very much for your time this morning.

Speaker 2

will be available for any follow up questions. Thank you and have a great day.