WellCare Health Plans (WCG) Q3 2018 Results - Earnings Call Transcript

|
About: WellCare Health Plans, Inc. (WCG)
by: SA Transcripts

WellCare Health Plans, Inc. (NYSE:WCG) Q3 2018 Earnings Call October 30, 2018 8:30 AM ET

Executives

Beau Garverick - WellCare Health Plans, Inc.

Kenneth A. Burdick - WellCare Health Plans, Inc.

Andrew Lynn Asher - WellCare Health Plans, Inc.

Analysts

Ana Gupte - Leerink Partners LLC

Matthew Borsch - BMO Capital Markets (United States)

Sarah E. James - Piper Jaffray & Co.

Joshua Raskin - Nephron Research LLC

Catherine Anderson - Bank of America Merrill Lynch

Justin Lake - Wolfe Research LLC

David Styblo - Jefferies LLC

Stephen Tanal - Goldman Sachs & Co. LLC

Michael J. Baker - Raymond James & Associates, Inc.

Peter Heinz Costa - Wells Fargo Securities LLC

Steven Valiquette - Barclays Capital, Inc.

Gary P. Taylor - JPMorgan Securities LLC

Zachary Sopcak - Morgan Stanley & Co. LLC

Michael Newshel - Evercore Group LLC

Operator

Good day, and welcome to the WellCare's Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Beau Garverick, Senior Vice President of Investor Relations. Please go ahead.

Beau Garverick - WellCare Health Plans, Inc.

Thank you, Nicole, and thank you all for joining us this morning for a discussion of WellCare's 2018 third quarter results. Today, we'll be making forward-looking statements, including but not limited to our 2018 financial guidance and outlook. Various risk and uncertainties, such as those described in our SEC filings, may materially impact those statements. While these risk and uncertainties may cause our future results to differ from today's statements, we are not undertaking any obligation to update or revise any forward-looking statement.

Today, we will be discussing certain financial measures that have been adjusted for expenses that we believe are not indicative of long-term business operations which we will identify. Please refer to our news release published this morning and available on our website at www.wellcare.com for a reconciliation of these financial measures determined under Generally Accepted Accounting Principles to our adjusted measures. Our discussion today will be led by Ken Burdick, WellCare's Chief Executive Officer; and Drew Asher, the company's Chief Financial Officer.

I will now turn the discussion over to Ken. Ken?

Kenneth A. Burdick - WellCare Health Plans, Inc.

Thank you, Beau. Good morning, everyone, and thank you for joining us today as we review our third quarter results and update our outlook for 2018. I'm pleased to report that our continued focus on improving operationally and financially has yielded strong results. We continued to build upon our momentum with the closing of the Meridian transaction, our pending acquisition of Aetna's Part D business, and continued improvement in our Medicare Star Ratings.

We are pleased to report third quarter adjusted earnings per diluted share of $3.33, and as we announced this morning, an increase in our full-year 2018 adjusted EPS guidance to a range of $10.90 to $11, or an increase of $0.15 at the midpoint.

This morning, I'll review key items from the quarter and discuss some recent developments that give us confidence we are well positioned for continued success as we move toward the end of this year and into 2019. Then, Drew will review our financial results in more detail and provide some commentary on our revised 2018 guidance.

First, let's begin with Meridian. We were thrilled to be able to close the transaction effective September 1, only 96 days after signing. Our integration efforts are well underway and are on track. Through these integration activities, we continue to be impressed with the people and systems on which Meridian has been built. The associates are a significant reason for its long-term success. Their relentless focus on quality and the ability to attract a multi-generational workforce are proven strengths which we intend to build upon at WellCare.

Further, the systems that Meridian built to operate their health plans and PBM provide real-time data integration and cutting-edge enterprise information management. We look forward to leveraging these and other best practices across the entire WellCare enterprise.

In late September, we entered into agreements with Aetna to acquire their standalone Medicare Part D prescription drug plan business, contingent upon the closing of the CVS Health-Aetna transaction. This is an exciting transaction for WellCare as it will significantly expand our Medicare Part D business, enhance our competitive position in Part D and, over time, help us continue to improve our pharmacy cost structure across all three lines of business: PDP, Medicare and Medicaid.

We're delighted that we were able to provide a solution to the Department of Justice as well as our partners at CVS. We look forward to working closely with CVS and Aetna as we execute this transaction and welcome these new members to WellCare.

Turning to our financial results, for the third quarter of 2018, we reported total revenue of $5.1 billion, representing an increase of nearly 15% compared with the third quarter of 2017. All three business segments continued to execute well in the quarter and we feel confident that our momentum will continue as we look toward 2019.

Our Medicaid Health Plans segment performed well in the quarter, with an adjusted MBR of 87.8%. Additionally, with the closing of the Meridian transaction, WellCare added approximately 1.1 million members, bringing our total Medicaid Health Plans segment membership to 3.9 million at the end of the quarter.

As you may recall, in March of this year, we were selected to enter into a contract with the state of Arizona's Medicaid program, the Arizona Health Care Cost Containment System or AHCCCS to coordinate physical and behavioral services in the Central and North geographic service areas. The services under this new contract began October 1 and we added approximately 50,000 new members. Effective collaboration between our local market leadership and our integration management office contributed to a successful launch of this program.

In Florida, we are in the process of receiving initial membership assignments for our Managed Medical Assistance, Long-Term Care and Serious Mental Illness contracts, as we began the phased implementation of our expanded service offerings in the months ahead. We continue to remain engaged with this state and the respective healthcare agencies as we seek resolution on the outstanding protests of the Children's Medical Services and Serious Mental Illness contracts. We look forward to serving our new members in Florida and continue to expect over $1.5 billion in incremental annualized revenue from these new and expanded contracts.

Finally, in North Carolina, we recently submitted our bid for the new statewide managed Medicaid RFP with strong support from Community Care of North Carolina, an important provider partner in this state.

Our Medicare Health Plans segment produced strong results with an MBR of 84.8%, down 90 basis points versus the third quarter of 2017. Additionally, with the closing of the Meridian acquisition, we added nearly 27,000 members to bring our total Medicare Advantage membership to approximately 544,000.

On October 10, CMS released the Plan Year 2019 Medicare Star Ratings, with WellCare showing continued improvement year-over-year. Excluding our demonstration program members, we now have approximately 42% of our MA members in 4-star or higher-rated plans.

Our Houston Medicare Advantage Plan improved to 4.5 stars from 4 stars, a first for WellCare, while our California Health Plan moved to 4 stars from 3.5 stars. Additionally, three of our health plans moved up to 3.5 stars, Connecticut, Kentucky and Texas, which will enable us to have improved bid economics in 2020 as we continue to grow our Medicare Advantage business.

Our PDP business continued to deliver strong financial results in the quarter with an MBR of 63.1%. Of note, we believe that our capabilities and insights with the prescription drug program have grown over the past few years. As a result, we're offering a new enhanced product for 2019 that should appeal to a broad cross-section of members. Based on our industry positioning for next year, we are confident in our ability to balance margin and membership growth.

While most of the discussion around quality has been on Medicare Advantage, we continue to invest in improving the quality of our Medicaid Health Plans. We were pleased with our quality scores in the recently released National Committee for Quality Assurance or NCQA Health Insurance Plan Ratings. Over half of our Medicaid Health Plans were rated 3.5 or higher. With our disciplined focus and continued investments, we look forward to making further improvements in Medicaid quality in 2019.

We have also placed a sharper focus on our network strategy and on enhancing our provider partnerships which we expect will drive quality – improve quality, while reducing the overall cost of care. For example, we have an expanded partnership with VillageMD in Georgia and Illinois, a new partnership with agilon health in Texas, and we continue to enhance our partnerships with ChenMed and Seoul Medical Group across multiple markets. We will continue to seek innovative partnerships and value-based arrangements that align us with provider groups, while ensuring the best care for our members.

In closing, while we are pleased with our progress over the last few years, we are far from satisfied. We are focused on continued improvement in our operational execution and technology deployment, so that we can drive operating leverage, improve our quality results and support our accelerating growth agenda. WellCare has much more to do to fulfill our mission and vision on behalf of our members, our government partners and our shareholders.

I'll now turn the call over to Drew for a discussion of our financial results. Drew?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Thanks, Ken. I'm going to cover our third quarter results and improved 2018 guidance, an update on our recent acquisitions, as well as a couple of minor changes in our presentation of metrics. And while we're still working on finalizing our 2019 plan, I can weave in some early commentary on 2019.

For the third quarter of 2018, our adjusted EPS was $3.33, which was a better result than we had forecasted. And accordingly, we've improved our 2018 adjusted earnings per share guidance by $0.15 at the midpoint. For those of you comparing this quarter to Q3 2017 at $4.08 of adjusted EPS, recall that we had two discrete favorable items last year: an income tax benefit and a Florida Medicaid retro revenue item benefiting the Q3 2017 adjusted EPS by $0.93.

We were thrilled to close the Meridian transaction at the beginning of September, preceded by successful equity and debt offerings in early August. With respect to Q3 results, our Medicaid business performed well in the third quarter with an adjusted MBR of 87.8%, such that we were able to improve our full-year 2018 forecast by reducing the top end of our prior MBR range by 20 basis points. Our revenue and MBR metrics for the full-year 2018 guidance include four months of operations from Meridian.

We are currently working on a number of growth drivers for our Medicaid business. As Ken mentioned, the Meridian integration is on track and we plan to combine our WellCare Harmony and Meridian contracts in Illinois in the first quarter of 2019.

We're also focused on the implementation of our multiple wins in Florida, MMA, Long-Term Care, SMI and Children's Medical Services, which should yield over $1.5 billion in new annualized revenue in Florida. In addition, our new Arizona region and contract expansion, including behavioral health, commenced at the beginning of this month. Assuming all of the Florida programs stay on schedule and the protests clear, our Medicaid segment should have over $17 billion of premium revenue in 2019 and we continue to pursue additional organic growth opportunities in Medicaid.

Let's move on to our Medicare business, which posted a good quarter with sequential growth of approximately 34,000 members compared to Q2, largely driven by the Meridian acquisition. As we forecasted the remainder of 2018, we were able to slightly improve the full-year 2018 Medicare MBR range by lowering the previous top end by 20 basis points as well.

On the last two quarterly earnings calls, we conveyed our enthusiasm in Medicare Advantage for 2019 based upon the Medicare rate update as well as our improvement in Star scores, both of which positively impacted our 2019 bid economics. As we sit here today, we continue to expect both margin expansion and an improved organic growth rate in Medicare Advantage for 2019. We also look forward to 2020 now that we have clarity on our Plan Year 2019 Star scores that will impact 2020 revenue and bids.

I share Ken's enthusiasm with the recent results showing great progress in stars. For instance, we earned another 4-star WellCare Health Plan, our 30,000-member California Medicare plan. We improved our Houston, Texas-focused health plan from a 4-star to a 4.5-star plan and, importantly, we did this while preserving our 4-star Florida and New York and Maine contracts.

Our PDP business continues to perform very well, and accordingly, we lowered the full-year 2018 PDP MBR range by 125 basis points. Given the positioning of our PDP products for 2019, we are optimistic that we will see some membership growth in 2019, the extent of which we'll have to see once we have further visibility into the annual enrollment period. And as I reminded you on the Q2 earnings call, as a function of the annual bid process, we expect to reset the PDP MBR in 2019 to the low-80s.

Beyond our current business, we're very excited about our recently announced acquisition of Aetna's entire individual standalone PDP business, representing today over 2 million members and approximately $1.5 billion of revenue. This transaction is expected to close shortly after the closing of the broader CVS-Aetna transaction.

The structure of this transaction is such that Aetna will be fully responsible both operationally and financially for this business in 2019, while we are preparing to migrate the business during the 2020 annual enrollment period. Therefore, we'll be working in 2019 to enhance our products and capabilities and filing bids in June of 2019 to preserve as much membership as possible with the new WellCare products in 2020. We look forward to working hand-in-hand with CVS-Aetna to successfully execute on this transaction and the business migration to WellCare.

Before I get to other elements of the third quarter, let me first point you to some minor reporting changes post the Meridian transaction for those of you preparing models. Upon closing of the Meridian transaction, we now have third-party PBM revenue and related costs. Therefore, we've created two new financial statement lines, you can see on our income statement, to incorporate these new items.

Related to this, we will now calculate net income percentage and SG&A percentage metrics off of total revenue, which includes product and services revenue and investment and other income. All of these items are clearly defined in our earnings release and 10-Q.

Now, back to other elements of the third quarter, our SG&A is on track in the quarter and we tightened the range for the full year, leaving the same midpoint of 8.4%, and while our year-to-date adjusted SG&A ratio was 8.1%, recall we traditionally have our heaviest spending in the fourth quarter. Additionally, we'll be incurring start-up costs associated with our recent contract wins. This is incorporated into our SG&A guidance. We expect this ratio to drop below 8% for 2019.

Prior year favorable development was $41.8 million in the third quarter, bringing the year-to-date favorable development to $215 million, pretty consistent with the same time last year at $205 million. And days in claims payable was at 54.2 days, slightly down from Q2, but up from 51 days at the end of Q3 2017.

In advance of the Meridian transaction closing, we completed successful debt and equity offerings in early August. We now have approximately 50 million shares issued and outstanding, and we have $200 million drawn on our new five-year $1.3 billion credit facility at quarter-end. Our debt-to-cap ratio post-Meridian is in great shape at 33.8%, and our parent cash is $462 million as of September 30, a portion of that is earmarked for the Aetna PDP acquisition.

2018 has been a busy year so far, and because of our execution on both organic growth and acquisitions, we have line of sight into at least $25 billion of revenue in 2019. We are working to wrap up our 2019 budget, which we will review with our board in December, and plan to provide guidance in mid-December, consistent with prior years.

As we sit here today, excluding costs to implement the Aetna PDP acquisition, the current 2019 consensus estimate for adjusted EPS is not unreasonable. We look forward to finishing the strong 2018, while preparing for our revenue growth in 2019. Beyond 2019, we look forward to significantly growing our PDP business through our pending acquisition, while continuing to pursue the many opportunities in the government program space.

Operator, we can now open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Ana Gupte of Leerink Partners. Please go ahead.

Ana Gupte - Leerink Partners LLC

Hey, thanks. Good morning. Great quarter. Thank you. My first question was about the Medicare Advantage medical loss ratio. And can you give us a sense for – with all those levers you're deploying in addition to rate and tax policy, your stars, the various physician medical group contracts and so on, what the runway would be and what a normalized MA MLR could look like? I mean, you've been expanding, but seems like there's room here.

Andrew Lynn Asher - WellCare Health Plans, Inc.

Yes. Ana, this is Drew. We're very pleased with the performance in the quarter. And such, we lowered the top end of our MBR guidance, so you're right to sort of point out that it was a good quarter, including Medicare Advantage. As we look longer term, we continue to believe that there is margin expansion opportunity, and we've cited that certainly for 2019 with the visibility we have into the levers for 2019 and how we prepare the bids.

The MBR is somewhat driven by the inclusion or the absence of the ACA fee. So, it will depend on which year has an ACA fee, which year doesn't. But we're sort of targeting the low to mid-80s as the landing spot ultimately for the Medicare Advantage MBR, and, of course, mix would play into that as we look to the future.

Ana Gupte - Leerink Partners LLC

Okay. Low to mid, and how long would that be, like, would that be like a three-year runway for 2021 or earlier than that?

Kenneth A. Burdick - WellCare Health Plans, Inc.

Well, I think – Ana, this is Ken. I'll just add on to Drew's points. We certainly see a multi-year runway, but we're not going to have to wait two or three years. There's really a combination of continued improvement in our medical management execution. Also, the improvement in quality obviously contributes.

While some of that goes to improved benefits and much of that goes to sharing those bonuses and incentives with physicians that are performing well, there is a portion of that that goes to the bottom line. So, when we think about quality and when we think about medical management, we ought to see sort of continued progression 2019, 2020, 2021. We don't see that we're going to run out of runway anytime soon.

Ana Gupte - Leerink Partners LLC

Okay, great. Thanks. On the Part D loss ratio, again, you're back in the high-70s. You say you'll reset it, but typically you beat those numbers. Can you talk about what the CVS contract rebid could do? And then on the 2.2 million members that you're getting from Aetna in 2020, can you give us some color on what the loss ratios are kind of currently, what the margins are, and what margin expansion you might see with the earnings power in 2020?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Yeah, we're definitely pleased with how our PDP business is performing this year. I will point you back to last year, though, where we ended up in the low-80s at the end of the year. But you're right, we always strive to do better than that bid reset where the mechanics of the bid sort of drive you back to assumptions in the low-80s, and that's sort of what we expect as we look at for 2019.

On the Aetna PDP business, I think you clearly understand this, but the economics and so the results of the operations won't accrue to WellCare until 2020. And so, our 2020 performance will be driven by sort of our bid assumptions and how we intend to execute for 2020. And so, the 2019 performance, that's sort of not as relevant to WellCare, and it would be probably a better question for the Aetna gang.

Ana Gupte - Leerink Partners LLC

But you'll be bidding for the pricing for 2020 on their book will be yours for 2020?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Yeah. It will migrate to our products. It will be our best contracts, our bids, our products, our operations for 2020. And so, we'd love having this time period in 2019 to sort of ramp up, to work with Aetna-CVS hand-in-hand so that we're ready to migrate the business over directly onto WellCare's products effective 1/1/2020.

Operator

Our next question comes from Matt Borsch of BMO Capital Markets. Please go ahead.

Matthew Borsch - BMO Capital Markets (United States)

Yes, I just wanted to circle back to a comment you made about the SG&A ratio that you expect, and maybe I missed the characterization if that was for 2019 or beyond. And let me just continue a little bit with that; I realize that you're not giving guidance yet, and I'm not trying to get that specifically. But if I do take that SG&A below 8% for 2019 and take sort of the reasonable assumption on the MCRs and the $25 billion in revenue, I get to something that is several dollars higher than where the Street consensus is today.

Andrew Lynn Asher - WellCare Health Plans, Inc.

Yeah, I mean, without reviewing every input in your model and there's probably 50 of them, it's tough for me to comment on that, but we do expect the SG&A ratio to fall below 8% for 2019. So, that's one element of many as we're constructing a plan. Don't know exactly where it's going to end up below 8%, but we're comfortable enough at this point to know that it will be below 8% for 2019.

And then when you put all the other inputs, the complexities of our business, all the other assumptions in growth and I don't know if you've adjusted your share count or the interest expense, there's just so many...

Matthew Borsch - BMO Capital Markets (United States)

Yeah.

Andrew Lynn Asher - WellCare Health Plans, Inc.

...inputs into our model, we felt like it was – we had enough visibility at this point to comment on 2019 consensus as it sits today not being unreasonable.

Matthew Borsch - BMO Capital Markets (United States)

Okay, okay. I will refine that then. And maybe just as a follow-up question here, can you comment your thoughts on the CMS guidance for – it's a pretty extraordinary growth that they're expecting for 2019 open enrollment and whether there's anything from open enrollment so far that you can share with us.

Kenneth A. Burdick - WellCare Health Plans, Inc.

Well, Matt, this is Ken. It's really early to try to give you any sense of the open enrollment. We are optimistic. Activity levels are high, but that's about as far as I can comment. As it relates to the bullish projections for MA, we tend to agree with that that, as we have seen, MA continues to win share versus traditional fee-for-service Medicare. And this year, we've got across the industry the removal of the health insurance tax. We've got, I would say, adequate and responsible price increase.

And then for WellCare on top of that, we've got really the first year where we're able to benefit from our improved quality scores. And having invested a significant amount of those dollars into benefits, we're bullish and quite optimistic. But I mean, I don't think that's a one-year phenomenon for the industry. I look for continued strong growth in Medicare Advantage for the foreseeable future.

Matthew Borsch - BMO Capital Markets (United States)

All right. Thank you.

Operator

Our next question comes from Sarah Jane (sic) [Sarah James] (00:30:03) of Piper Jaffray. Please go ahead.

Sarah E. James - Piper Jaffray & Co.

Great. Thank you. Can you talk about the motivation to have the Aetna PDP members come on on an ASO basis for 2019? It was unusual, so I just wanted to understand if that was a criteria for WellCare, Aetna. And could you talk about how much of that book is from auto-assignment from low-income seniors? Just trying to think through 2019 if WellCare would get two allotments because I'm not sure what time those auto-assignment determinations are made or if it would just be one allotment for any regions under the benchmark. Thanks.

Kenneth A. Burdick - WellCare Health Plans, Inc.

Yeah. Sarah, this is Ken. I'm going to take the first part of the question, and I'll let Drew speak to the auto-assignments. But all parties involved, so that would include the Department of Justice and Aetna-CVS and ourselves, felt that having Aetna retain responsibility both financially and operationally for 2019 made sense. Obviously, we had no way of knowing when that transaction would close. It hasn't even closed yet. And then our transaction would close several days later.

So, with that, and knowing that we were entering the annual enrollment period, it seemed very prudent that we not put those members at risk and try to make a dramatic and urgent transition. So, this way, we get to submit the bids in June of 2019 for 2020, and we will have full financial and operational responsibility, as Drew said, effective January 1, 2020. So, all parties were sort of in agreement. It wasn't one party, sort of, negotiating with the others. It just seemed like the best way to treat these 2.1 million members.

Andrew Lynn Asher - WellCare Health Plans, Inc.

And then, Sarah, mechanically, we are acquiring two S (00:32:10) contracts. And S (00:32:12) contracts are the contracts between a payer and CMS specific for PDP, which include three products, basic and two enhanced products. So, there's – we get to preserve those products in addition to our legacy products. So there'll be a home for those members in very similar products, both basic and enhanced, and about 55% to 60% of the approximate 2.2 million members are in the basic plan, and then a subset of those are actually auto-assigned.

Sarah E. James - Piper Jaffray & Co.

Got it. So, just to clarify, when we think about going forward in 2020 as one combined product, you would just get one allotment. So, how should we think about that book transitioning as you go from two allotments of auto assignees in 2019 to just one in 2020?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Well, we would preserve two basic products for some time period and then ultimately, you're right, we would merge them down the road. But for 2020, we'd preserve the – we would replicate the three products and preserve that business subject to members getting to choose obviously where they wanted to go for 2020.

Sarah E. James - Piper Jaffray & Co.

Thank you.

Operator

Our next question comes from Josh Raskin of Nephron Research. Please go ahead.

Joshua Raskin - Nephron Research LLC

Hi. Thanks. Good morning. First question, just on Illinois. Drew, I think you mentioned you guys were going to combine Harmony with Meridian in Illinois as early as next year, and have you gotten any color on the state in terms of rates and what the combination does there and how you think that impacts the profitability of those two books?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Sure. We spent a lot of time before closing with the Department of Health and Family Services in Illinois to make sure there was clarity on the economic construct of combining the businesses and think of it as a weighted average blend. So, it sort of preserves the positioning of both the payer as well as the state ultimately when we blend those two contracts together. And that, quite frankly, was our assumption in the acquisition valuation as well as the accretion estimates that we had announced. So, we expect to be able to accomplish the mechanics of that in the first quarter.

Joshua Raskin - Nephron Research LLC

Okay. So, it is kind of one plus one is two sort of combination there. And then the second question just on the Aetna PDP acquisition, obviously, the price, I think, struck everyone as unusually low, I think, is what we said. So, was there more to the situation in term – is this more sort of situational in terms of what Aetna and CVS really had to get done, or was there something about that book? We talked a little about it in the last question around the auto assignees, but is there something that suggests maybe retention will be a little bit lower when you look at their sort of bid structure or product structure? Does it feel like in 2020 you're going to have to overhaul those bids? I'm just curious what you think in terms of those 2 million, 2.2 million lives, how many you think ultimately you're successful in retaining.

Kenneth A. Burdick - WellCare Health Plans, Inc.

Yeah, Josh, I wouldn't say that it reflects anything unusual or particularly difficult about the existing book of business. It's really a reflection of the fact that the Department of Justice was driving for a divestiture, and CVS and Aetna looked at WellCare, as did the DoJ, as a responsible party that could compete. And that's what it was all about. They wanted to move these members to an organization that over an extended period of time would represent real competition to CVS.

So, we tried to be a good partner. We tried to move quickly because we understood they had a bigger transaction that they were focused on, and our teams worked really well together to get this done. And I think being expeditious was as important as anything in view of the complexity of the broader transaction that they're trying to consummate as we speak.

In terms of retention, we can't give you a specific amount. We're going to work real hard, as Drew has outlined, through all of 2019 to make sure that we are ready, that we have the products, the services, the features that these members will find attractive, so that we can retain as many as possible.

Joshua Raskin - Nephron Research LLC

All right. Thanks, guys.

Operator

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

Catherine Anderson - Bank of America Merrill Lynch

Hi. This is Catherine Anderson on for Kevin. Can you quantify the impact of Meridian in the quarter either on MLR or EPS, or give some sort of additional color on its performance? Thanks.

Kenneth A. Burdick - WellCare Health Plans, Inc.

Yeah, it's right on track. As I mentioned at a conference a couple of months ago, in the first month or two of a large acquisition, there are always, what I'll call, investments that the buyer makes, or typically, and we experienced this with UAM also, where reserve positioning and other elements of running a prudently positioned public company, we've got to sort of migrate the private company to that sort of level. So, that's already reflected in our Q3 results. And so, right on track is sort of what I would convey to you in terms of the performance.

And probably more importantly, the jump that we got on integration and the collaboration across the entire company, including Meridian, to try to sort of take the best of both of our organizations and improve Meridian as well as improve WellCare based upon some of the things that Meridian brings to the table.

Catherine Anderson - Bank of America Merrill Lynch

Okay, thanks. And then can you give us an update on trend? Are there any components that are coming in better or worse than you're expecting? Thanks.

Kenneth A. Burdick - WellCare Health Plans, Inc.

Sure. Trend, very stable, sort of consistent with our expectations, low to mid-single digits. We spend a lot of time sort of working on bending that trend on behalf of our federal and state customers. And it's gratifying when we see the impact that we can have directly on trend. So, I would say stable as expected.

Catherine Anderson - Bank of America Merrill Lynch

Okay. Thank you.

Operator

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

Justin Lake - Wolfe Research LLC

Thanks. Good morning. First question on the guidance. Drew, you – I'm getting to backing into Q4 of about $1.45. Drew, I think you had given some color around the seasonality of earnings kind of shifting during Q3, and you told us to take down Q3 by $0.50 and Q4 up by $0.50. I think (00:40:03) at about $1.65, so just trying to – including myself, I'm just curious if there's anything we should think about for moving parts here and kind of what's going on in Q4 versus your previous comments.

Andrew Lynn Asher - WellCare Health Plans, Inc.

Yeah, no, actually my previous comments still stand in terms of some of the – getting a straighter picture in terms of the progression of earnings and – but as we look at timing of spending SG&A, sometimes it's not easy to perfectly predict how much you're going to spend in September versus October in terms of ramping up for new business. So, there's an element of some of that SG&A getting into the fourth quarter.

But you're right, in terms of doing the math on how do we achieve $10.90 to $11, as you know, Q4 is always – almost always the lowest earnings quarter of the year, and a lot of that has to do with sort of that ramp up in SG&A, which if you do the math you get to sort of a 9%-plus fourth quarter SG&A rate, which actually is better than last year. So, we're sort of excited about the momentum of the business and look forward to producing on the $10.90 to $11 as we focus more on 2019.

Justin Lake - Wolfe Research LLC

Got it. And then just a follow-up on the SG&A. Drew, you talked about sub-8% there and I'm curious maybe you can shed some light on how we should think about the moving parts, meaning, I know Meridian is going to drag that number down I believe in 2019. But if you think about core WellCare group versus the impact of Meridian, how should we think about SG&A moving year-over-year? Is core WellCare group changing or is it really just the Meridian SG&A and maybe you can share with us what you kind of see as the Meridian SG&A number.

Andrew Lynn Asher - WellCare Health Plans, Inc.

No. We fully expect to get leverage in what you'll call the core WellCare on the non-Meridian growth. What I'll tell you, it quickly blends together in terms of when you start integrating and you've got months to plan for that integration, it starts blending together in terms of SG&A and whether you can call it legacy Meridian or WellCare. But your theory is right, that the more you grow Medicaid business, you should expect a drop in SG&A.

But above and beyond that, we expect to get invest – returns on our investments from the last couple of years in terms of all the capital expenditures that we've had, if you look back at our cash flow statements, and running a more efficient business beyond just the math of blending in more Medicaid business.

Justin Lake - Wolfe Research LLC

Is there any color you could share in terms of how much the SG&A would have improved if it was just standalone WellCare?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Well, you're sort of asking me to bifurcate guidance we haven't even given yet. So, while I appreciate the question and the enthusiasm, I think at this point I want to give you enough color on it being sub-8% as we talked about other elements of at least $25 billion of revenue for the company, on track for $17 billion of revenue in Medicaid, and give you the best color we've given you at this point in the year in terms of commenting on where 2019 consensus sits right now as being not unreasonable. So hopefully, that's enough to hold you guys interested until we're able to give you the detailed information in December.

Justin Lake - Wolfe Research LLC

Okay.

Kenneth A. Burdick - WellCare Health Plans, Inc.

Justin, this is Ken. I just want to punctuate what Drew said because this is an important topic for me. I have no regrets about the way we've been investing in anticipation of growth. But as we look at 2019, as we look back from 2015 onward, we've made prudent investments in technology so that we have automated many of our processes that were, I would say, far too manual. We have brought on great talent, and we've streamlined many of our processes so they're more end to end. So, for all three of those reasons, I really do expect and will require that we show the operating leverage that should be expected in a company that is close to now doubling in size over a four-year period.

Justin Lake - Wolfe Research LLC

Thanks for all the color.

Operator

Our next question comes from Dave Windley of Jefferies. Please go ahead.

David Styblo - Jefferies LLC

Hi, there. It's Dave Styblo in for Windley. Couple of questions. The first one would just be, if you guys could maybe go through your margin opportunities for expansion after 2019, and you've touched on some of those where it seems like there would be some opportunity in Medicaid for Illinois as you guys get started there, or on a larger scale basis, Florida new revenue, if there's any comments about sort of what year one margins look like? I would think perhaps those aren't at target margins on the $1.5 billion of incremental revenue.

And certainly, you guys have talked about MA stars, and I assume broader SG&A scale, but maybe you could just talk about anything I haven't hit on there, where you guys would see margin expansion opportunities after 2019?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Well, I think you've hit on a number of the things as you think about 2020, sort of the multi-year implementation of new business, whether it's acquired or organic. And so, certainly I would expect Florida over the next few years, at least the new businesses component of Florida, to sort of improve over the course of that multi-year period. When we announced Meridian, we announced $0.70 to $0.80 of accretion in 2020, and that's relative to $0.40 to $0.50 in 2019. So, you would expect – you should expect a lift there as well.

Illinois is a multi-year proposition, as you correctly point out. Obviously, we'll pick up in 2020 the absolute earnings of the Aetna PDP business, and depending on the business that we're able to sort of retain and migrate into our products. Medicare's tougher one to predict because while you're right to point out that we've got another tailwind, not as large as the tailwind coming into 2019 with the significant stride we made in star score results impacting 2019, but on top of that some incremental improvement in our 4-star positioning and our – importantly, our 3.5-star positioning as well which is important.

That is certainly a tailwind. None of us know what the 2020 advance notice rates are. And obviously, we have to finish 2018 and get through part of 2019 to see the run rate of the business and trends. So, more difficult to predict 2020 and beyond, although it's certainly good at this point to have some positive weights on the scale as we see how that progresses.

David Styblo - Jefferies LLC

Okay, thanks, Drew. That's helpful. And then on the Aetna Part D business, are you guys willing, at this point, to give us maybe a rough range of what the accretion on that looks like or perhaps if there's at least some cost synergies that you guys could pull forward from that, realizing you don't have perfect visibility and you want to understand retention, but is there sort of at least a bottom line that you guys could provide for us?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Yeah. At this point, it's pretty difficult to make that call certainly publicly because we still have to play out the submission of the bids that we will control for 2020, and those get submitted in June of 2019. Clearly, adding business to an existing platform is attractive, and we'll think about that as we construct our bids and seek to retain as much of that business as we can. So, there's still a lot to play out. But you're right to assume that for a purchase price where it landed, it will be accretive. It's just to what degree and we'll have to see how that plays out with our bids.

David Styblo - Jefferies LLC

Great, thanks.

Operator

Our next question comes from Steve Tanal of Goldman Sachs. Please go ahead.

Stephen Tanal - Goldman Sachs & Co. LLC

Good morning, guys. Thanks for all the color this morning. One question on days in claims payable. So, just looking at that level, it looks like the highest third quarter ending level in probably, I guess, about seven years since 2011. And I'm wondering if there's anything unusual in that, whether Meridian put upward pressure on the level, any color you could provide there.

Andrew Lynn Asher - WellCare Health Plans, Inc.

No. You're right to point that out. You've got data further back than I do at my fingertips. So I sort of tend to stop four years back. But, yeah, it's the highest third quarter. Now, it is a day lower than second quarter. And I think I signaled that when we announced Q2. There is one – in our pharmacy payable, there's actually a couple of invoices when usually there's just one. So, that's actually worth about a day which is merely the timing during that specific week of paying pharmacy invoices. But absent that, the rest of it reflects sort of the positioning of our business and our reserve positioning.

Stephen Tanal - Goldman Sachs & Co. LLC

Got it. And so, there isn't some like Meridian pressure of a couple of days or something like that and I guess it sounds like you guys have taken a prudent approach, if I got the word right, to Meridian as well. So maybe a little bit of conservatism in there, if I could think about it that way.

Andrew Lynn Asher - WellCare Health Plans, Inc.

Well, Meridian came in below sort of where we would typically set reserves and we've rectified some of that and we'll continue to look at that as the performance of the business that accrues to us because as you would expect in a private company transaction there is a balance sheet settlement with the seller for the pre-closing time period. So we're focused on the incurred period of September and beyond and ensuring that the estimates and the reserves are at the WellCare standard.

Stephen Tanal - Goldman Sachs & Co. LLC

Perfect. Really helpful. And just thinking about the delta in their MBR versus your Medicaid MBR, is there anything to – can you give us some updated thoughts on your ability now that you've got a month or two under the belt, sort of your ability to improve it or to drive it lower over time, or how do you think about it these days?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Well, there's a lot of work to do in Illinois, both from the legacy WellCare business as well as Meridian. And so, we like our positioning, our number one position in Illinois, and we look forward the combination operationally of that business which will lend itself to being able to implement initiatives quicker than having two separate contracts. And so, that will commence in Q1.

In Michigan, Meridian has always run a pretty good business there, but there's always opportunities that cut both ways. Things that we've learned over time, and we can bring to that Michigan business and vice versa, there's elements that we've already learned from what Meridian was able to accomplish that will help the rest of our Medicaid business at WellCare. So, we're once again excited about that acquisition.

Stephen Tanal - Goldman Sachs & Co. LLC

Great. And I guess just before I jump off, just thinking about the Meridian, the PBM that you guys acquired, have you made any determinations on how you leverage that or what you'll look to do with third-parties versus insourced going forward, or it's still work in progress?

Kenneth A. Burdick - WellCare Health Plans, Inc.

Steve, it's still work in progress. As we said when we announced the acquisition, this will be a multi-year effort, first to assess both the sort of the infrastructure, the capabilities and then assess the external landscape and our alternatives as we set our longer-term strategy relative to the PBM that we have now acquired. So, we haven't seen anything that is disappointing. We continue to be excited. We love the optionality that it provides, but we certainly are ways away from any firm conclusion.

Operator

Our next question comes from Michael Baker of Raymond James. Please go ahead.

Michael J. Baker - Raymond James & Associates, Inc.

Yeah. I was wondering if you could give us an update on the Medicare Shared Savings Program in terms of performance in the quarter and as well as just your thoughts in general. I know it's not a major piece to the business, but just curious as we look into 2019, I know you're not providing specific guidance, but any color would be helpful in terms of shaping up that looking forward.

Andrew Lynn Asher - WellCare Health Plans, Inc.

Thanks, Michael; this is Drew. You're right. It's not a major part of our business, but every component of our business is important. And right now, it's sort of a breakeven-ish business. Last year, we had pretty good earnings in it. Part of that was because of the partial year revenue recognition during the year in which we closed the transaction. But fundamentally, it's around breakeven and it needs to be better than that.

And so, we've got a team that's working on it with the team that we inherited from Universal American. And we're thinking as much about the long-term strategic benefit of that, which is really what's most interesting about that business and the potential to earn trust with the physicians and work hand-in-hand collaboratively with them on the ACO project, while we think longer-term about Medicare Advantage.

Having said that, it still needs to be a contributor to the company, and so that's our goal as we look ahead. But you're right to point out it's pretty immaterial in the grand scheme of the company, but could be an interesting strategic asset longer-term.

Michael J. Baker - Raymond James & Associates, Inc.

Thanks. And then I just had a question on membership. Obviously, we've had a strong economy here. Maybe you can give us a sense of what you see that headwind being to that part of the business as well as I know some states have been kind of shaping up their roles or taking deeper looks as well as work rule requirements, so just in general, maybe some thoughts on that front.

Kenneth A. Burdick - WellCare Health Plans, Inc.

Sure. Well, what I can do is I can confirm that the combination of a strong economy as well as the – at least several states sort of doing some recertification to clean up their eligibility roles, that continues to have a bit of a headwind impact; nothing beyond sort of the things that we've referenced in the last quarter or so.

But as long as the economy stays strong and given that this is the Medicaid portion that the state pays, it continues to become an increasingly large part of their budget, we expect that they will continue to clean up the eligibility roles, and so we expect some modest headwind in Medicaid membership for the foreseeable future. That gets far outpaced by what we're seeing as the increasing trend towards states moving their more complex populations into managed Medicaid. So, it's not even close to a tradeoff (56:46). The growth opportunity in the managed Medicaid space remains robust.

Michael J. Baker - Raymond James & Associates, Inc.

Thanks for the color.

Operator

Our next question comes from Peter Costa of Wells Fargo Securities. Please go ahead.

Peter Heinz Costa - Wells Fargo Securities LLC

Good morning, guys. Thanks for all the color on Meridian. Wanted to ask you a little bit about Part D, in particular your low premium plan. I know you have a high deductible on that, but what other cost savings are there for that plan for you guys to prevent that from being a problem for you or do you just expect it to be a lower margin product for you relative to Part D?

And then going into 2020, President Trump has a number of changes that he's proposing for Part D. Which of those do you think would be perhaps the best from an earnings perspective for you guys and which of those would perhaps be the worst from an earnings perspective?

Andrew Lynn Asher - WellCare Health Plans, Inc.

We're probably going to focus more on part one of your question than part two. But the – so, to frame our PDP business today and then I'll sort of march into 2019, our basic plan is about 95% of our membership. So we have very little enhanced. We do have an enhanced product, but because of the change in the meaningful difference rule, it sort of opened the door for us to be able to offer a second enhanced plan that we call our value plan.

And given our strong cost structure and you're right to point out product design, for instance, we've got deductibles on tiers three through five. It encourages the use of generic even at non-preferred pharmacies. We were able to construct a plan that we believe is going to be attractive from a premium standpoint, but do not expect it to detract from earnings in terms of the margin profile nor the MBR sort of estimate in that low-80s for next year.

So, we're actually really excited that we were able to leverage our cost structure, finally had that opportunity to introduce a new enhanced product because of the change in that meaningful difference rule. And really like our positioning for the choosers as we look ahead, but the vast majority of our business we still expect to be in our basic plan.

Kenneth A. Burdick - WellCare Health Plans, Inc.

And, Peter, as it relates to the various proposals coming out of the administration, first thing I'd say is we are very supportive of the focus that they've got on trying to manage the cost trends in pharmacy. While we talk about stable cost trends in the low to mid-single digit, clearly pharmacy continues to far outpace that. So, across the country, we need to find ways to mitigate those trends.

As it relates to the various proposals, we're staying on top of all of them, staying close to them. But we're not in a position this morning to try to describe which one we think will have the best impact. What I'd say is we've thoroughly gone through the international drug pricing index proposal from last Thursday. And again, we're very supportive of the approach.

We've looked at the medications in Medicare Part B that would be affected, and I would just remind you that Part B spending makes up about 3% of Medicare's total spending. So, while we're supportive and we're encouraged by this emphasis on drug pricing, way too early for us to try to make predictions as to what it might mean for WellCare spend in 2020 and beyond.

Peter Heinz Costa - Wells Fargo Securities LLC

Thanks a lot.

Operator

Our next question comes from Steven Valiquette of Barclays. Please go ahead.

Steven Valiquette - Barclays Capital, Inc.

Thanks. Good morning. Sorry. Juggling on a couple different calls here, I apologize. So, if I heard you right in your prepared remarks, you said you're looking forward to making further investments in Medicaid quality in 2019 and perhaps beyond. I'm wondering if you can just give a little more on that either categorically or even geographically if you're thinking about it that way; just looking for a little more color in relation to your comment on that. Thanks.

Kenneth A. Burdick - WellCare Health Plans, Inc.

Sure, Steve. I'm happy to provide color. That's another area that I'm very focused on. There's been so much focus around Medicare, and I think Medicaid quality has been a distant second. Our view is that it's just as important, and we have really ramped up our focus and are investing on Medicaid quality, A, because it's the right thing to do and, B, because we're seeing more and more states put appropriate emphasis on quality scores, whether that's measured in terms of HEDIS or measured in terms of member satisfaction, et cetera.

So, we do see a move where quality will become even more important both in terms of reimbursement from the state and then winning new business in future RFPs. So, what you can expect and what I expect going forward is a continued meaningful improvement in our Medicaid scores going forward, and it would be an area that I'd like to see us differentiated by our Medicaid quality scores in the years to come. So, it's not specific to a geography. It's really a broad emphasis that it donned on us a couple of years back that we were probably under-investing in Medicaid quality and we have rectified that.

Steven Valiquette - Barclays Capital, Inc.

Okay. That's helpful. Thanks.

Operator

Our next question comes from Gary Taylor of JPMorgan. Please go ahead.

Gary P. Taylor - JPMorgan Securities LLC

Hi. Good morning. Just a couple details at this point. One, Drew, can you just help us on cash from ops reconciliation, the $579 million use of funds, I think it's missing maybe $470 million MA that maybe came in the 2Q. And then you also mentioned you paid the HIF which – if that's for the full 2018, I guess could be as much as $400 million. So, am I in the ballpark on those two adjustments?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Yeah, if you want to go through sort of the ins and outs of the cash flow statement, we should probably do that after that call, but one thing to remember is that when you do a large acquisition intra-quarter, it's difficult to get from the balance sheet change to the cash flow statement because we inherited all of the balances of the acquisition. I don't know if that's maybe thrown you off, but we can probably better off post the call.

Gary P. Taylor - JPMorgan Securities LLC

Okay. Illinois PDR, was there any material change in that balance this quarter?

Andrew Lynn Asher - WellCare Health Plans, Inc.

We're down to a little over $20 million now. Remember, we've started in the mid-40s. So, it's continuing on sort of the pace that we expected when we laid out the forecast which resulted in the original PDR late last year.

Gary P. Taylor - JPMorgan Securities LLC

Okay. And then last question, did you ever – I guess you guys must have booked this, but just trying to think about the impact of the move in Florida Medicaid to the enhanced APGs on the outpatient side. One of your competitors took a – or called out a charge related to the out-of-period portion of that. Did you guys just absorb that in either the 2Q or the 3Q print?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Yes.

Gary P. Taylor - JPMorgan Securities LLC

Third quarter, because it was July 1 retro?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Both quarters, actually, I mean to us, there's retro good guys and bad guys and...

Gary P. Taylor - JPMorgan Securities LLC

Yeah.

Andrew Lynn Asher - WellCare Health Plans, Inc.

...this happened to be a retro bad guy that we're able to absorb, but certainly been working with the state of Florida to make sure that states or the rates properly reflect the relevant pass-throughs.

Gary P. Taylor - JPMorgan Securities LLC

Willing to quantify the retro amount or no?

Andrew Lynn Asher - WellCare Health Plans, Inc.

No. It's once again sort of part of running a business in Medicaid where you've got sort of pluses and minuses in any given quarter.

Gary P. Taylor - JPMorgan Securities LLC

Okay. Thank you.

Operator

Our next question comes from Zack Sopcak of Morgan Stanley. Please go ahead.

Zachary Sopcak - Morgan Stanley & Co. LLC

Hey. Thank you for squeezing me in. Just had one question. When we think about Meridian going forward, is there anything about the seasonality that would be different from your historic WellCare business? And particularly, I guess, I'm thinking about MeridianRx, would there be any expenses that might run counter to your typical expense cadence?

Andrew Lynn Asher - WellCare Health Plans, Inc.

While we'd love owning our own PBM, it is pretty small in the grand scheme of things and in terms of the third party revenue, and you can see that on our new income statement line item. So, really shouldn't – that shouldn't have a meaningful impact on our quarterly seasonal earnings.

Zachary Sopcak - Morgan Stanley & Co. LLC

Okay, great. Thank you.

Operator

Our next question comes from Michael Newshel of Evercore ISI. Please go ahead.

Michael Newshel - Evercore Group LLC

Thanks. I just wanted to clarify something on the Part D margins for 2019. And I understand you've factored a margin reset into your bids, but did those bids fully reflect the MBR guidance cut that you made today for the back half of the year or is it possible that some, not all but some of this year's outperformance could roll forward into 2019?

Andrew Lynn Asher - WellCare Health Plans, Inc.

Well, it's always the goal to do better than that low-80s where the bids sort of force you back. And we do, as we've said, you don't know sort of a full year, obviously, when you submit the bids in early June, and so the rest of the year is somewhat relevant to how that might perform the following year. But we use the best information we have at the time, and we think about the potential pluses and minuses and forward trend as we try to predict what we would bid for 2019.

Michael Newshel - Evercore Group LLC

Got it. So, maybe the bid is still valid, but maybe that lower MLR guidance for the back half of the year gives you like a more increased positive bias that you would have had already?

Andrew Lynn Asher - WellCare Health Plans, Inc.

I think right now given we're not even sort of into 2019, we'll stick with an expectation of low-80s MBR. And you better believe we will work hard to try to outperform that like we have, I think, in three of the four last years.

Michael Newshel - Evercore Group LLC

Yeah. Thank you.

Operator

As we have no further questions, this concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.

Andrew Lynn Asher - WellCare Health Plans, Inc.

Thank you.