Molina Healthcare (MOH) Q4 2016 Results - Earnings Call Transcript

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Molina Healthcare, Inc. (NYSE:MOH) Q4 2016 Earnings Call February 15, 2017 5:00 PM ET

Executives

Juan José Orellana - Molina Healthcare, Inc.

Joseph Mario Molina, MD - Molina Healthcare, Inc.

John C. Molina, JD - Molina Healthcare, Inc.

Joseph W. White - Molina Healthcare, Inc.

Analysts

A.J. Rice - UBS Securities LLC

Kevin Mark Fischbeck - Bank of America Merrill Lynch

David Anthony Styblo - Jefferies LLC

Sarah E. James - Piper Jaffray & Co.

Ana A. Gupte - Leerink Partners LLC

Gary P. Taylor - JPMorgan Securities LLC

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare Fourth Quarter and Year-End 2016 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Wednesday, February 15, 2017.

I will now turn the conference over to Juan José Orellana, SVP of Investors Relations. Please go ahead, sir.

Juan José Orellana - Molina Healthcare, Inc.

Thank you, George. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter and fiscal year ended December 31, 2016. The company issued its earnings release reporting these results today after the market closed, and this release is now posted for viewing on our company website.

On the call with me today are Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will open the call to take your questions. If you've multiple questions, we ask that you get back in the queue, so that others can have an opportunity to ask their questions.

As a reminder, we will be discussing the company's outlook for 2017 tomorrow during our Investor Day presentation. Today, we will only be taking questions on our earnings release related to 2016. Additionally, our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially.

A description of such risk factors can be found in our earnings release, and in our reports filed with the Securities and Exchange Commission, including our Form 10-K Annual Report, our Form 10-Q Quarterly Reports, and our Form 8-K Current Reports. These reports can be accessed under the Investor Relations tab of our company website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of February 15, 2017, and we disclaim any obligation to update such statements, except as required by securities laws.

This call is being recorded and a 30-day replay of the conference call will be available at our company's website, molinahealthcare.com.

I would now like to turn the call over to Dr. Mario Molina.

Joseph Mario Molina, MD - Molina Healthcare, Inc.

Thank you, Juan José. While the 2016 results we have announced today are clearly unacceptable, I want to remind everyone that outside of the Marketplace issues, 2016 was, in many respects, a successful year. It marked the third consecutive year in which our earnings (sic) [revenues] (02:38) grew by more than $3 billion.

Strong enrollment growth generated 23% more premium revenue, when compared to 2015, despite a 4% decrease in premium revenue per member per month, driven primarily by cuts in Medicaid Expansion rates.

We also lowered medical costs by approximately 3% on a per member per month basis. And we continue to reduce our administrative costs. Administrative costs decreased by 5% per member per month for the year. However, ongoing issues related to the Affordable Care Act's insurance Marketplace have continued and have had a significant adverse impact on our financial results during the fourth quarter.

I want to emphasize that, while the losses that we incurred in the Marketplace program are likely to capture headlines and overshadow the operational progress we have made during 2016, it has not changed the positive trajectory in our core business.

In order to stabilize the Marketplace program for 2017 and beyond, we believe that federal government must do four key things. First, the federal government must continue to provide cost-sharing reductions and premium subsidies. Second, there must be a strong incentive for individuals to purchase health insurance. Third, there must be more strict validation of eligibility for the Special Enrollment Period or SEP. We must not allow the Special Enrollment Period to become a substitute for open enrollment. Higher costs from people enrolling through the SEP force insurance companies to raise premiums for everyone. And finally, the flaws in the risk transfer methodology must be addressed now.

Our Marketplace challenges are not new and have negatively affected many of the industry to a varying degrees. During our third quarter call, I spent a considerable amount of time outlining the deficiencies and the mechanics behind Marketplace risk transfer methodology.

As a reminder, the program's key weakness is that it redistributes dollars among health plans based on total premiums and not purely health risk. The methodology penalizes low cost and low premium health insurers like Molina. This flaw has transformed Molina into one of the largest net payers into the risk transfer pools.

To put this in perspective, 24% of our 2016 premiums were transferred to our competitors. During the fourth quarter alone, we accrued an additional $152 million in risk transfer payments. And for the 2016 benefit year, we have accrued approximately $520 million. As reflected in the Federal Register in late December, the U.S. Department of Health and Human Services made changes to this methodology, and will reduce the statewide average premium in the risk transfer formula to 86% of the statewide average premium to account for the portion of administrative costs that do not vary with claims. This change is too little and maybe too late.

Had the risk transfer methodology changes that CMS announced for 2018 been in effect for all of 2016, we estimate that our pre-tax income would have been approximately $70 million higher for all of 2016. We continue to advocate for changes to the risk transfer methodology.

We are also seeking money owed to us for risk corridors. Molina has filed a lawsuit against the federal government in the U.S. Court of Federal Claims on behalf of its health plan subsidiaries participating in the Marketplace program. The lawsuit seeks the recovery of over $50 million in damages for 2015, and roughly $90 million owed for 2016 for the federal government's failure to honor its obligations related to Molina's participation in the healthcare marketplaces.

Moving beyond issues of public policy to specific company related issues, I want to talk further about our Marketplace results in the fourth quarter. Many of you will recall that during our second and third quarter calls, we highlighted four factors that would reduce Marketplace profitability in the second half of the year. Those factors were: number one, normal membership attrition; two, the addition of higher cost members through the special enrollment process; three, higher cost, as members reach the limits of the cost-sharing provisions of their coverage; and four, increasing utilization, as members become more engaged with our care networks.

John will go into more detail in a minute, but I want to point out that the financial impact of the last three of these items was more pervasive in the fourth quarter than we had expected. Those developments not only reduced fourth quarter performance, but also led us take a closer look at our 2017 pricing. As a result, we recorded a $30 million premium deficiency reserve in the fourth quarter.

I noted earlier that our management team has identified the Marketplace challenges and remains focused on taking action to address them quickly and efficiently. We have therefore increased our Marketplace premium rates between 6% and 37% across all of our markets, resulting in an average of about 15%. And we'll continue to advocate for policies that stabilize the marketplace.

With that said, and recognizing that we are one of the nation's largest marketplace providers, we believe there are simply too many unknowns with the Marketplace program to commit to our participation beyond 2017. We will wait and see how the new administration and Congress will adjust the program, and we plan to evaluate our participation on a state-by-state basis.

On another front, we are disappointed by the court ruling last month, which blocked the merger Aetna and Humana. And while Aetna and Humana have terminated their transaction and consequently their divestiture transaction of Medicare assets to Molina, we remain committed to growing our Medicare Advantage program. We intend to build on the experience we have developed in delivering quality healthcare to nearly 100,000 Medicare beneficiaries in 11 states. And we wish Aetna and Humana the best of luck.

Our company has always been committed to seeing that each of our plans is measured for quality by the National Committee for Quality Assurance. Why does quality matter and why is quality important? There are two important financial reasons. First, a growing number of states are tying reimbursement and patient assignment to quality scores. And second, Medicare links quality scores to our premium rates. We're proud that all of our eligible health plans, 11 in total, have been accredited by the National Committee for Quality Assurance.

Furthermore, nine of our health plans have been accredited for Marketplace. Finally, our plans in New Mexico, Utah and Washington were top rated Medicaid health plans in their states. We're proud of our continued success as we work to deliver the highest quality care to the population we've served for the last 36 years.

All of our eligible health plans maintained or increased their star ratings for Medicare. Furthermore, our Michigan health plan was the highest rated plan among Medicare Special Needs Plans for dual-eligible beneficiaries; and our New Mexico health plan earned four stars.

Despite the difficulties we encountered in 2016, we are looking forward to improvement in 2017. As has been our practice, we will reserve our comments on our outlook for 2017 for Investor Day tomorrow.

I would now like to turn the call over to John.

John C. Molina, JD - Molina Healthcare, Inc.

Thank you, Mario. Before I get into the fourth quarter and year-end results, I wanted to correct what I believe is a misstatement you made, Mario. You said that this was the third consecutive year in which our earnings grew by $3 billion, and in fact, it was our revenues grew by $3 billion, not our earnings. Thank you.

Today, we reported full year net income per diluted share of $0.14 and a net loss of $1.64 per diluted share for the fourth quarter. On an adjusted basis, full year net income was $0.50 per diluted share, and a net loss of $1.54 per diluted share during the fourth quarter. As Mario noted earlier, poor results in the Marketplace program was the primary challenge impacting our 2016 results.

However, the results of our business is faring better. To be clear, fourth quarter results for our Medicaid and Medicare business were adversely impacted by about $60 million of out-of-period items primarily related to revenue. But even allowing for that, we have good reason to be satisfied with our Medicaid and Medicare performance in 2016.

Entering this year, our Medicaid and Medicare programs were under considerable stress as a result of declining Medicaid expansion margins, and disappointing results at our Ohio, Texas and Puerto Rico health plans. For the full year 2016, however, the combined medical care ratio of our TANF, ABD, Medicare, and MMP membership decreased to 91.3% from 92% in 2015. In the past, when we've encountered problems, they were primarily related to medical costs.

Our issues in the fourth quarter as we have outlined in the earnings release are predominantly revenue related. In the Marketplace, we continue to suffer from reductions to revenue as a result of a risk transfer payments that far exceed the favorable results we are seeing in the reduced medical expenses.

In our Medicaid business, we continued to experience retroactive reductions to revenue that in some cases extend back a year or more. Unlike many of our competitors that have reported poor Marketplace results due to adverse risk selection, which raised their medical costs, our performance issues are linked to a risk transfer methodology that has depressed our at-risk revenue.

Let's take a closer look at what happened in 2016 by starting with Marketplace. We think it is worthwhile to compare 2016 results to what we would have expected based on our 2016 pricing. It is important to remember that we developed our 2016 pricing with essentially no visibility into historic risk transfer payments. Based on our 2016 enrollment, our Marketplace program was priced to produce income before taxes of approximately $60 million for the year. Instead, we lost $110 million.

The $170 million difference between our reported results and our expectations is due to the following four factors. Number one, risk transfer payments were approximately $325 million higher than anticipated in our pricing. Number two, despite this $325 million reduction in revenue for risk transfer payments, medical costs were only $120 million lower than anticipated by our pricing model. In other words, we lost nearly $3 of revenue per every $1 of medical cost reduction. Three, other items increased pre-tax income by approximately $65 million. And four, we reported a $30 million premium deficiency reserve for the Marketplace in 2017.

Let me take you through these items in order. First, we must address the risk transfer payments. As Mario mentioned during the third quarter conference call, the Marketplace risk transfer methodology penalizes efficient and affordable health plans like Molina, harms our performance, and makes it harder for patients to purchase affordable Marketplace policies. And once again, risk transfer contributed to our Marketplace difficulties in the fourth quarter. Marketplace revenue decreased 16% in the fourth quarter of 2016, yet our risk transfer remained constant from the previous quarter. This had a negative impact of $24 million on the fourth quarter.

Second, risk transfer payments do not offset higher medical costs on a one-for-one basis. While we recorded $325 million of additional risk transfer, we were only able to offset that with $120 million of lower medical costs.

Last, regarding our premium deficiency reserve, accounting rules require the immediate recognition of a loss associated with the group of members as soon as that loss becomes certain. Our premium deficiency reserve is an estimate of the losses we expect to incur in 2017 for those members who had enrolled as of December 31, 2016.

The premium deficiency reserve does not include estimated losses from members, including Special Enrollment Period members who will active in 2017, but who are not enrolled as of December 31, 2016. So the premium deficiency reserve does not capture all Marketplace losses we are likely to occur in 2017, but only those that are truly locked in for 2017 as of December 31, 2016. We will explain this further when we discuss our 2017 outlook at our Investor Day tomorrow. We evaluate our Marketplace programs for premium deficiency on a state-by-state basis.

Now, let's talk about the fourth quarter. We have previously shared with you that we expected additional challenges in the Marketplace for the fourth quarter of 2016. We expected lower financial results in the fourth quarter as a result of four trends: normal membership attrition, the addition of higher cost members in the special enrollment process, higher cost as members reached the limits of the cost sharing provisions of the coverage; and increasing utilization as members become more engaged with our care networks.

Throughout the fourth quarter, all of these trends except the first, that is normal member attrition, were more pronounced than we had expected. First, the number of members enrolled in the special enrollment process increased by an unexpectedly large amount in the fourth quarter. Because these members bring with them pent-up demand and lower risks scores, they're a drag on profitability compared to those joining us to the normal annual enrollment period. It has been well documented that SEP members come in with higher costs. Specifically, we estimate that the average medical care ratio for those SEP members that enrolled during the fourth quarter of 2016 was 185%.

Increased utilization driven by special enrollment membership was compounded by higher pharmacy cost at the number of prescriptions filled by our members, especially early refills, increased during the month of December. Per-member per-month pharmacy cost increased by approximately 10% over the November run rate.

Whether these developments were a result of patients being worried about losing their coverage after the November elections, we don't know. But there is no doubt that these developments put pressure on our fourth quarter results.

The increasing costs borne by Molina, as members reached the limits of cost-sharing provisions of their coverage, was also a factor in our poor fourth quarter performance. The share of total member pharmacy costs borne by the company, for example, increased from 82% in January of 2016 to 88% by December.

Marketplace medical cost trend was 4% for the year, but the per-member per-month costs spiked in December. Of course, the risk corridor program of the Affordable Care Act was designed to partially mitigate the damages of situations like ours. As all of you know, the federal government has not met its obligations under the risk corridor program, and we have not recognized any benefit from this program in the results we are sharing today. Nevertheless, we are pursuing collection of the amounts due us as part of that program.

To support our belief that we're entitled to the risk corridor payments, consider that Judge Thomas Wheeler recently ruled that the federal government is liable to Moda Health for all unpaid risk corridor payments. This gives Molina reason for optimism as the facts in our lawsuit are similar to those in the Moda Health case. The $140 million owed to Molina for risk corridor payments, if realized, would give a truer picture of the financial results of the Marketplace program.

Leaving the Marketplace and looking at our business as a whole, our total premium revenue for the year was up 23% from 2015 with year-over-year increases in all programs. It's important to note that nearly 75% of all new premium revenue came from programs other than the Marketplace.

I want to emphasize that margins in our TANF, ABD and Medicare programs improved in 2016 over 2015. To put it another way, our traditional business lines of Medicaid and Medicare are improving, despite the deterioration we experienced in Marketplace. Our management of administrative expenses also improved in 2016.

Our general and administrative expense ratio decreased to 7.9% for the full year 2016 compared to 8.1% in 2015. Finally, at December 31, 2016, days and claims payable was flat sequentially at 47 days. And the company had cash and investments of nearly $4.6 billion, including an excess of $260 million at the parent company. As disclosed Tuesday, the termination of our purchase agreements with Aetna and Humana will result in a $75 million breakup fee, which we will recognize in the first quarter of 2017.

As a reminder, we will be hosting our Investor Day conference in New York City tomorrow, Thursday, February 16, at 12:30 PM Eastern Time. At that presentation, we will be discussing the company's outlook and strategy for 2017. We look forward to seeing you there. If you're not able to attend in person, we encourage you to join the webcast.

This concludes our prepared remarks. We are now ready to take questions on the quarter and the year, but we'll save questions on our outlook for tomorrow's call.

Question-and-Answer Session

Operator

Our first question comes from the line of A.J. Rice with UBS. Please go ahead with your question.

A.J. Rice - UBS Securities LLC

Thanks. Hello, everybody. I'm sure there'll be plenty of discussion about the Marketplace, but I thought I might ask you about some of the other states that you're flagging here. It sounds like more on the Medicaid side, I think you're flagging Ohio which it look like was an issue early in the year, but it sounds like that was turning around, and now, it sounds like the MLR increased 310 basis points. Can you tell us what's going on with that? Any update on – maybe a little more flavor on Puerto Rico? And then, Texas is one you've talked about but it didn't – wasn't flagged today. Any update on what you're seeing there?

John C. Molina, JD - Molina Healthcare, Inc.

Sure, A.J. So, on the Medicaid side, we did talk about Ohio early in the year. The first quarter was a bit rocky for us. And then, we were able to bring the medical cost down in Q2 and Q3. I think that in Q4, it's just normal seasonality as opposed to anything else.

In Puerto Rico, we did again flag that early in the year, and have had some very good results in improving the profitability of the Puerto Rico plan. Texas, again, we cited early, but the Texas issues again are largely behind us.

A.J. Rice - UBS Securities LLC

Okay. Thanks a lot.

Operator

Our next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead with your question.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Great. Thanks. I guess with the exchange business, if you could go into the little detail about the other items. I guess, there was a $35 million favorable number. What was that related to? And then, I think you said that you would look at exchange in a state-by-state basis. Are there any state exchange products that were profitable in 2016?

Joseph W. White - Molina Healthcare, Inc.

Hi. It's Joe speaking. To your first question, that $35 million variance from pricing is a combination of things. It's lower admin costs than we anticipated plus a little bit more revenue around some other aspects of the program, in total, it added up to about $35 million.

Regarding the individual state performance, we don't normally give that, but I can speak to Texas particularly as being a state where we're doing relatively well on the Marketplace program. We feel really good about Texas. Florida is hanging in there. California hanging in there. So there's three states.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay. Actually, just to clarify that, SG&A will be a little bit lower. The number – is that like a bonus accrual? Like earlier we had like Anthem report worse numbers.

Joseph W. White - Molina Healthcare, Inc.

Oh, no. It's just about the usual things, commissions, just allocation of admin costs, things like that.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay. All right. Great. Thanks.

Operator

Our next question comes from the line of Dave Styblo with Jefferies. Please go ahead with your question.

David Anthony Styblo - Jefferies LLC

Sure. Thanks for taking (26:27) the questions. Maybe just to circle back to the exchange and then understand better the pressure, it looks like there's about $1.20 of pressure in full year 2016. Is that sort of the right way to think about it? At the end of the day, you were not able to participate and ultimately had to exit. Is that earnings release that we would think about on 2016 or are there some other puts and takes? And also, I'd like to ask about perhaps any negative SG&A leverage that might be associated with that.

John C. Molina, JD - Molina Healthcare, Inc.

Sure, Dave. I want to be careful, because when you ask what would happen if we got out, we're beginning to get into forward-looking guidance type of things. But the way that you described – the way I would say, the puts and takes for Marketplace, it really relates to the risk transfer. If you look at that, we ended up transferring $350 million in excess of what we priced it at. Now, if the risk transfer methodology were structured in a more accurate way, you would expect almost a one for one decrease in medical expenses, idea being you would have helped your members, so their costs would be lower. But in fact, our costs were only $120 million lower than pricing. So that differential really speaks to where the miss comes in the Marketplace.

David Anthony Styblo - Jefferies LLC

Okay. And then, on a CMS release today, they talked about some of the exchange rules, and I didn't get a chance to fully look through that being on the road today. Was there anything in there that really meaningfully will help you on that? I don't think I saw on the quick headlines there was anything on the risk adjusters there, but curious to hear your takes and thoughts about rules around Special Enrollment Period, and what they did right, and got right that should help you versus what else you need besides what you've discussed earlier about the risk transfers?

Joseph Mario Molina, MD - Molina Healthcare, Inc.

Hi. This is Mario. We're going to discuss that tomorrow during our outlook discussion. But I do think it is a positive step, but it's not going to solve the really big issue that we have which is risk transfer. It addresses a number of other things and we'll go over those tomorrow.

David Anthony Styblo - Jefferies LLC

Thanks.

Operator

Our next question comes from the line of Sarah James with Piper Jaffray. Please go ahead with your question.

Sarah E. James - Piper Jaffray & Co.

Thank you. I realize that HIQ (29:17) is fluid, so I'd rather focus on the core. You've been talking about high acuity numbers, ABD and MMP contracts continuing to mature towards a run rate in 2016. And if I look at the timing of contract wins that make sense, I can see an absolute improvement on year-over-year MLR, but I'm wondering about the pace. So is MLR on the new high acuity membership, I guess, those gained over the last, call it, two years or so, both ABD and MMP improving at the pace that you would have expected? How long do you think is the path to normal margins on that book? And do you still think that ABD and MMP is 1.5% to 2% net margin business?

John C. Molina, JD - Molina Healthcare, Inc.

That's a great question, Sarah. I would say that we are progressing along the plane that we wanted to for the higher acuity members. We did have a bit of a hiccup, for example, in Washington, when we rolled out the integrated program down in Southwest Washington. I think the state and the state's actuaries realized that they mispriced that business somewhat, and we've been working with them to correct that. But the medical management efforts that Dr. Wilson and his team have put in place have really stabilized utilization, brought it down, and we do think that we're making good progress.

Sarah E. James - Piper Jaffray & Co.

Got it. And then just a clarification. You mentioned in the press release some rate pressure being reversed in January 2017. I'm just wondering if that was specific to the fourth quarter, because it's a bit unusual to talk about rate pressure so late in the year for the rate resets. So if you could clarify that a little bit more.

Joseph W. White - Molina Healthcare, Inc.

Sarah, it's Joe speaking. What we were just tried to point out there is that, in those three states, where we have seen some margin pressure – Ohio, Illinois and Washington – we did receive some pretty decent rate increases effective January 1, 2017, which we'll go into more detail tomorrow. But I would just say that in today's state funding environment, you generally don't get 4% to 5% rate increases without there being some pressure on margins.

Sarah E. James - Piper Jaffray & Co.

Thank you.

Operator

Our next question comes from the line of Ana Gupte with Leerink. Please go ahead with your question.

Ana A. Gupte - Leerink Partners LLC

Yeah. Okay. Thanks. The first question is around Medicaid expansion. It does look like you had a pretty big sequential MLR increase just on our early read of this as opposed to TANF and CHIP. I'm just trying to understand what's going on there. And you talked about December being the pressure point, was that flu and more cost-related or something else? And does that a big contributor in the deterioration in loss ratio in some of the states that you had, Ohio, California, Illinois, Q-over-Q?

Joseph W. White - Molina Healthcare, Inc.

Well, Ana, it's Joe speaking. Two points I'd make about Medicaid expansion. First, as we spoke about in the first quarter, just we started this year with rates on Medicaid expansion coming down, which lowered margins. We also – if you recall, we had a Medicaid expansion rate cut in California mid-year. The additional item that's happened regarding expansion in the fourth quarter is our determination that we were going to have to take a charge of about $40 million, $45 million out-of-period related to an item in New Mexico involving contractual interpretations on our Medicaid expansion contract.

Ana A. Gupte - Leerink Partners LLC

So, that was the only reason is New Mexico, wasn't anything you saw in some of the other states I just talked about that had the issue?

Joseph W. White - Molina Healthcare, Inc.

No. Again, as far as Medicaid expansion, the big dip really took place January 1 of 2016 when new rates rolled in.

Ana A. Gupte - Leerink Partners LLC

Okay. So, you still maintain that the worst of the rate pressure is behind us and you're not going to see pressure going forward on expansion?

Joseph W. White - Molina Healthcare, Inc.

Yeah. I think we're certainly seeing – we'll talk more about this tomorrow. We've actually seen a little bit of relief in Washington. I think our point would be our – as you would probably be that over time, as the Fed stops funding expansion so much that those margins are probably going to approach the TANF and ABD margins, which is why we're so pleased with the progress we have made this year in TANF and ABD.

Ana A. Gupte - Leerink Partners LLC

Then, on the exchanges, if I could get a little bit more clarity around, you talk about the risk (34:20) which I'm assuming is risk adjusters and those seem to have come in a lot worse than expected. And then, you talk about risk corridors not delivering and you saw some cost pressures, but you didn't see the relief from risk corridors. Can you talk about what percentage of the miss with risk adjusters relative to risk corridors? And I understand Moda might have won the case and all, but that's a lot more dicey, right, than risk adjusters?

Joseph Mario Molina, MD - Molina Healthcare, Inc.

So, this is Mario. First of all, on the risk corridor issue, we do believe that we are owed the money, and our case is very similar to the one that was filed by Moda, so we do believe that we'll prevail in that. The biggest single problem we have, and we started saying this earlier in the year, is the risk corridor methodology. The fact that we are a plan that has relatively low premiums, relative to the state-wide average, really hurts us. And to give you an example, in California where we operate only in Southern California, the costs in Northern California are about 30% higher, so it drags up the statewide average and further magnifies the problems that we have. The basic problem that we have today and going forward is around risk transfer. I think the secondary problem is the Special Enrollment Period, and perhaps the new regulations will address that. But we need to continue to press for some relief on the risk transfer issue.

Ana A. Gupte - Leerink Partners LLC

The risk transfer corridors or adjusters or both? I'm still not clear.

Joseph Mario Molina, MD - Molina Healthcare, Inc.

There are three Rs. So there's reinsurance, risk corridors and risk transfer. Right now, the first two have gone away, and the risk transfer remains. So, it's going to be a problem going forward, unless something is done, and that's what our advocacy efforts are focused on.

Ana A. Gupte - Leerink Partners LLC

And if you don't get...

Joseph W. White - Molina Healthcare, Inc.

Ana, I'm sorry. It's Joe. Just to be clear, I think from the terminology you're using, you would relate risk transfer to risk adjustment.

Ana A. Gupte - Leerink Partners LLC

Okay. Okay. And if you don't get what you have, what you need with advocacy, might you consider exiting for 2018?

Joseph Mario Molina, MD - Molina Healthcare, Inc.

Yes.

Ana A. Gupte - Leerink Partners LLC

Okay. Thank you. I appreciate the color.

Operator

Our next question comes from the line of Gary Taylor with JPMorgan. Please go ahead with your question.

Gary P. Taylor - JPMorgan Securities LLC

Hi. Good afternoon. I just wanted to get a little more color on page 2, and maybe I missed this, and I think Joe White has alluded to one of the items. But items two and three, so when you talk about items – $25 million related to 2014 and 2015, is that prior to your development or is that specific contractual issues? And it sounds like maybe number three was the New Mexico thing you'd just mentioned, but I wanted to clarify.

Joseph W. White - Molina Healthcare, Inc.

That's correct. Both of those items relate to unique issues specific to states, one being the New Mexico item I talked about, the second one being in the state of Illinois, where the state cut back on Medicaid rates and risk adjusted been back to the beginning of 2016. So it's not prior period development issue we think of it in terms of the claims liability. It's specific contractual revenue issues.

Gary P. Taylor - JPMorgan Securities LLC

Got it. And the $1.21 per share loss related to Marketplace, that I presume I'm sure that includes the full risk adjustment payment you're talking about. But the PDR impact is also included in that $1.21?

Joseph W. White - Molina Healthcare, Inc.

Bear with us for a second. I'm trying to find the $1.21 you're talking about.

Gary P. Taylor - JPMorgan Securities LLC

I thought you said...

Joseph W. White - Molina Healthcare, Inc.

(38:33) at the very beginning.

Gary P. Taylor - JPMorgan Securities LLC

Yeah.

Joseph W. White - Molina Healthcare, Inc.

Yes. Yes. That is correct. That $1.21 does include the impact of the $30 million PDR.

Gary P. Taylor - JPMorgan Securities LLC

Okay. Thank you.

Operator

Our next question comes from the line of Tom Carroll with Stifel. Please go ahead with your question.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Hey there. So good evening, I guess, for us, and good afternoon to you guys. But your stock is going to be on sale here tomorrow and probably for a little while. Has the management team discussed doing anything like maybe pulling in the share repurchase sometime during the first quarter or discuss the policy like that especially with the breakup fee coming from the Humana deal?

Joseph Mario Molina, MD - Molina Healthcare, Inc.

Hi, Tom. This is Mario. We do have an authorization for share repurchase from the board, but we're not planning to do a share repurchase at this time.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

So, you don't think that would be something that would maybe support the stock or show some confidence in your planning and everything that you're doing going forward? There's just hasn't been any talk of that at all?

Joseph Mario Molina, MD - Molina Healthcare, Inc.

No.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Okay. Thank you.

Operator

There are no further questions at this time. I'll turn the call back to the presenters.

Joseph Mario Molina, MD - Molina Healthcare, Inc.

All right. Well, thank you very much for joining us today. And just a reminder that tomorrow we'll be discussing the outlook for 2017; that will be at the Parker Méridien at 12:30 PM. And, please, join us in person. If you can't, it will be webcast. We look forward to talk with you tomorrow.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.

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