Good day, and welcome to the Molina Healthcare Second Quarter 2026 Earnings Conference Call. Please also note today's event is being recorded.

I would now like to turn the conference over to Jeff Geyer, Vice President, Investor Relations. Please go ahead.

Good morning. And welcome to Molina Healthcare's Second Quarter 2026 Earnings Call.

Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Mark Keim. A press release announcing our second quarter 2026 earnings was distributed after the market closed yesterday and is available on our Investor Relations website.

Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release.

For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, July 23, 2026, and have not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures.

A reconciliation of these measures with the most directly comparable GAAP measures can be found in the earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2026 guidance and the expected performance of each one of our business segments, rates and the medical cost trend, earnings seasonality and our new Florida CMS contract.

Our preliminary 2027 financial outlook and earnings building blocks, our 2027 marketplace pricing and business strategy, our longer-term outlook, including our 2029 premium revenue and EPS targets, our growth initiatives, the political and regulatory landscape our M&A activity, the impact of Medicaid work requirements, our RFP awards and the amount and realization of our embedded earnings. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations.

We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions.

I will now turn the call over to our Chief Executive Officer, Joseph Zubretsky. Joe?

Thank you, Jeff, and good morning. Today, I will discuss several topics: our reported financial results for the second quarter and update on our full year 2026 guidance.

Early commentary on our 2027 outlook for premium and earnings per share, our growth initiatives and strategy for sustaining profitable growth and some commentary on the political and regulatory landscape. Let me start with our second quarter performance.

Last night, we reported adjusted earnings per share of $1.51 on $10.2 billion of premium revenue. Our 92.2% consolidated MCR reflects solid operating performance as we continue to navigate a challenging medical cost environment.

We produced a 1% adjusted pretax margin in the quarter and 1.3% year-to-date. In Medicaid, the business produced an MCR of 92.7% in the second quarter, which was in line with our expectations.

Medical cost trend in the quarter remained stable, and was consistent with our full year guidance of 5%. In Medicare, we reported a second quarter MCR of 90.7% and very favorable to our expectations as our dual business performed much better than expected.

Recall with $2 billion of MMP premium being converted to new products, and incremental premium from RFP wins, we were initially very cautious about margins in our duals business. These early results position us well to achieve target margins sooner than originally expected.

In Marketplace, the second quarter MCR was 88.9%, higher than our expectations. We were again impacted by prior year items related to risk adjustment and member reconciliations.

Our performance was also affected by unfavorable current year member acuity mix. Turning now to our 2026 guidance.

Our full year 2026 premium revenue guidance is unchanged at approximately $42 billion. We have increased our full year 2026 adjusted earnings guidance by $0.25 to at least $5.25 per share.

This increase to our earnings guidance reflects first half performance in Medicaid. Excluding the downward revision in our marketplace guidance, our full year guidance would have increased to $6.75 per share.

Now some color on the segments. In Medicaid, our guidance assumes a full year MCR of 92.9% and is unchanged from prior guidance.

Rate updates, we received are consistent with our guidance of 4%. Full year medical cost trend is unchanged at 5%.

The imbalance between rates and trend appears to have stabilized and is well positioned to be corrected with future rate increases. Medicaid is expected to produce a 1.2% pretax margin in 2026 or approximately $5.75 per share.

This is up $0.25 from our prior guidance due to first half performance. We continue to believe that 2026 represents a trough year for Medicaid margins, and we remain optimistic about the 2027 rate setting process as state actuaries take account of more recent periods of observed medical cost.

In Medicare, our full year MCR guidance is now 92.2%, a 180 basis point improvement from our previous guidance, reflecting lower medical cost trend in our duals products. Medicare is now expected to contribute $0.25 per share this year, anchored by stronger performance in our duals products, which will now yield $1.25 per share, offset by the $1 per share loss, we expect in our discontinued MAPD product.

In Marketplace, our full year MCR guidance is now 90%. We are reducing our marketplace guidance by $1.50 per share from a gain of approximately $0.75 to a loss of $0.75 due to prior year items and current year unfavorable member acuity mix.

Looking forward, we plan to again reduce our footprint in volumes in 2027 to minimize our exposure to this segment. In summary, our updated 2026 earnings per share guidance of at least $5.25 includes the following elements and revisions from prior guidance.

Medicaid is $0.25 better due to first half performance. Excluding the implementation of the new Florida CMS contract, Medicaid is projected to produce a 1.6% pretax margin and contribute $7.25 per share.

Medicare guidance increases by $1.50 per share with the increase driven by our duals products. Excluding MAPD, Medicare duals is projected to contribute a 1.4% pretax margin and $1.25 per share.

However, marketplace guidance decreases by $1.50 of earnings per share as our process of deemphasizing and downsizing this business in the portfolio bears the cost of higher member acuity mix. We are pleased that the Medicaid and Medicare duals businesses, which represent the flagship and the future of the enterprise are producing strong results.

Excluding the 2026 losses from our Florida CMS contract and MAPD product, the 2026 earnings power is $7.75 per share. Now some updated commentary on the outlook for 2027 that we have provided at our Investor Day.

While it is too early to provide full detailed guidance for 2027, we revisit a few of the building blocks that inform our early views. The reduction in our volume and footprint in marketplace in California's decision to pull undocumented members into fee-for-service account for approximately a $1.5 billion reduction in premium.

Our premium outlook for 2027 is now approximately $46.5 billion before capturing any remaining items. This is 11% growth year-over-year.

The earnings per share building blocks for 2027 summed to more than $10 per share before considering any MCR improvement in Medicaid. Mark will elaborate on the 2027 building blocks in a moment.

Now some comments on recent RFP wins and our growth initiatives. We remain confident in achieving the $64 billion premium revenue mark in 2029 that was detailed at our Investor Day.

During the second quarter, we reprocured 2 significant contracts. First, we retained our $2 billion managed Medicaid contract in Illinois, a very large Medicaid state for us.

We also renewed a regional contract in Wisconsin, that provides additional opportunity to grow our integrated duals business. These wins continue our highly successful track record of retaining contracts where our historical win rate on reprocurement has now increased to above 90%.

With respect to M&A activity, our acquisition pipeline contains many actionable opportunities, and we remain opportunistic in deploying capital to accretive acquisitions. This current challenging operating environment has been a catalyst for many smaller and less diverse health plans to consider their strategic option.

Turning now to the political and legislative landscape. The interim final rule from CMS on Medicaid work requirements and biannual reverifications does not change our long-term view of enrollment reductions.

We expect membership reductions will emerge gradually and resulted in only a minor acuity shift. There is still some ambiguity surrounding many of the features of the role, including the definition of medical frailty and the use of self-attestation not to mention legal challenges to the rule itself.

We are working closely with our state partners on the administrative requirements needed to implement these new policies. In Medicare, we do not expect the recent Stars court rulings to have a material impact on our business or product offerings.

In summary, our second quarter results and full year guidance reflects solid performance in our Medicaid business and strong performance in our Medicare duals products in a challenging environment. The imbalance between Medicaid rates and medical cost trend appears to have stabilized and is well positioned to be corrected with future rate increases.

This reinforces our belief that 2026 is the trough year for Medicaid pretax margins. We remain confident in our disciplined approach to medical cost management and believe the premium and earnings per share building blocks position us well for profitable growth in 2027.

This year and next, are the first steps to achieving the financial targets we outlined at our Investor Day. The path to our $25 earnings per share target in 2029 is predicated on a few assumptions.

First, we expect the MCRs on our current business to improve over 3 years. This is led by Medicaid, which assumes 90 basis points of MCR improvement over 3 years, which is a modest improvement in the current rate and trended balance; second, future revenue growth from announced revenue wins, projected initiatives and M&A will achieve target margins as they have done in the past.

And third, our operating discipline will help realize the benefit of operating leverage as we grow our business. These expected value-creating components underpin our 2029 financial targets.

While continuing to refresh embedded earnings to support the long-term growth of our franchise. With that, I will turn the call over to Mark for some additional color on the financials.

Mark?

Thanks, Joe, and good morning, everyone. Today, I'll discuss additional details on the second quarter performance, the balance sheet and our 2026 guidance.

Beginning with our second quarter results. For the quarter, we reported approximately $10.2 billion of premium revenue with adjusted EPS of $1.51.

In Medicaid, our second quarter MCR was 92.7 in which was in line with our expectations. Medical cost trend in the quarter remained stable and consistent with our full year outlook for trend at 5%.

High trend categories such as behavioral health professional office visits and inpatient care are expected to remain stable in the second half of the year. In Medicare, our second quarter MCR was 90.7%, favorable to our expectations.

Our duals products performed better due to lower trend in several cost categories and the pricing we implemented for 2026. In Marketplace, our second quarter MCR was $88.9, we continue to be impacted by unfavorable prior year risk adjustment and program integrity items.

Excluding these prior year items, the normalized MCR was $87.3 and reflects the unfavorable member acuity mix in our current book of business. Our adjusted G&A ratio for the quarter was 6.5% and reflects continued operating cost discipline.

Turning to the balance sheet. Our capital foundation remains strong.

In the quarter, we harvested approximately $110 million of subsidiary dividends our parent company cash balance was $290 million at the end of the quarter. Our operating cash flow for the first 6 months of 2026 was $788 million, and was driven by the timing of government payments in Medicaid and Marketplace.

At the end of the quarter, our debt-to-cap ratio was about 47%. We have ample cash and access to capital to fuel our growth initiatives.

At the end of the year, we project parent company cash of approximately $600 million and a debt-to-cap ratio of 44%. Days in claims payable at the end of the quarter was 44% and consistent with the first quarter.

We remain confident in the strength and consistency of our actuarial process and our reserve position. Next, a few comments on our 2026 guidance.

We continue to expect year-end membership of 5 million members and a full year premium revenue of approximately $42 billion, with no changes within the segments. Our full year consolidated MCR of 92.6% is unchanged.

We increased our full year EPS guidance by $0.25 from at least $5 to at least $5.25. The increase reflects first half performance in Medicaid.

Second half earnings are expected to be fairly evenly split between the quarters. So additional color on our guidance in the segments.

In Medicaid, we reaffirmed the full year MCR of $92.9 million. Our full year guidance on rates of 4% and trend of 5% are unchanged.

Rate updates received are in line with our expectations and consistent with our full year guidance. And full year medical cost trend is expected to remain stable.

In the second half of the year, normal seasonality and the implementation of the Florida CMS contract will increase the first half Medicaid MCR of 92.4% to 93.3%. Any further off-cycle rate updates or initial outperformance in our Florida CMS contract represent upside to our 2026 guidance.

In Medicare, we are lowering our full year MCR guidance from $94 million to $92.2 million. We expect our first half total Medicare MCR of 90.3% to increase to 93.8% in the second half of the year, driven by normal seasonality.

Excluding the MAPD product, which we will exit for 2027, our full year Medicare Duals MCR is approximately 92%. The Medicare segment improved $1.50 versus our prior guidance and is expected to earn $0.25 per share this year.

Within this segment, Medicare duals is $1.50 better than our prior guidance and will produce $1.25 per share this year, while MAPD is unchanged and still expected to lose $1 per share. In Marketplace, we are increasing our full year MCR guidance from 85.5% to 90% due to current year member acuity mix and prior year items.

Without those prior year items, MCR guidance is 88%. The latest Wakely files indicate the total market membership declines and acuity mix shift were not as severe as we anticipated in our pricing.

However, current year performance reflects unfavorable member acuity mix. Our full year marketplace guidance is a loss of $0.75 per share.

This is $1.50 per share or less than our prior guidance due to unfavorable prior year items and current year member mix. We expect to reduce our marketplace exposure for 2027 by approximately $1 billion.

Full year G&A ratio guidance is unchanged at 6.4% as we drive efficiencies in our operations. Our 2026 EPS guidance of at least $5.25 and includes $2.50 of losses in our segments that we expect will not recur in 2027.

The implementation of the Florida CMS contract in the fourth quarter will impact Medicaid by $1.50 and the MAPD product is projected to lose $1 before we discontinue it for 2027. Excluding those items, our 2026 earnings power is at least $7.75 per share and represents a strong foundation of which to grow earnings in 2027.

Turning to embedded earnings. Our new store embedded earnings remained at $9 per share.

We anticipate approximately half to emerge in 2027. Embedded earnings will remain a highly transparent driver of value in the future, and we remain confident in achieving our 2029 financial targets.

As Joe discussed, our 2027 premium outlook is now $46.5 billion, a decline from the $48 billion we outlined at our Investor Day. First, we expect to reduce our marketplace footprint, which will decrease premium by approximately $1 billion.

Second, California plans to transition members with undocumented immigration status from managed Medicaid to fee-for-service, yielding a premium headwind of approximately $500 million for 2027. The EPS building blocks for 2027 summed to more than $10 a share.

We start with our revised 2026 guidance of at least $5.25 per share. First, we expect to realize known items from embedded earnings that account for approximately $4.50 per share.

This includes the reversal of Florida CMS implementation costs, the nonrecurring MAPD losses from 2026 as we exit the product for 2027 in the benefit of operating leverage and efficiency as we grow. Second, marketplace is expected to produce a loss of $0.75 per share in 2026.

We assume pretax margins in 2027 will be at least breakeven as we reduce our footprint, adding $0.75 to next year's outlook. Third, we expect a de minimis impact from California's undocumented immigration status members moving out of Vantage Medicaid.

Recall, we are subject to a risk corridor in this population, which greatly limits margin. Fourth, we remain optimistic about Medicaid margin improvement in 2027.

The imbalance between trend in rates appears to have stabilized and is well positioned to be corrected with future rate increases. We estimated the broader managed Medicaid market is underfunded by 300 basis points and not sustainable at these funding levels.

Recall, every 100 basis points on Molina's MCR yields $5 per share. We are well positioned for early 2027 rate updates with approximately 55% of our premium scheduled to receive rate updates on January 1.

And finally, any further improvement in our Medicare duals segment represents upside to these building blocks with each 100 basis points on the MCR worth $0.75 per share. These building blocks position us well for profitable growth in 2027.

This concludes our prepared remarks. Operator, we are now ready to take questions.

I guess maybe multipart 1 question. As far as the exchange commentary, can you -- I guess you probably gave us the math that we could do it, but can you just break it up from an EPS perspective as far as how much was 2025 related versus 2026 related to to the changes that you made to EPS on the exchanges?

And then do these changes keep coming through. So I guess I want to get a better sense from you about why they keep coming through your visibility on that and these types of fluctuations in '26, so that they won't recur again over the next few quarters.

And then are these things that you kind of have to reprice for? I'm just trying to think about -- you talked about $1 billion less revenue next year.

How big is the repricing issue versus kind of onetime things versus core?

Sure, Kevin. I'll provide some high-level commentary on the exchange business and then hand it to Mark for the current year, prior year accounting.

But as you recall, coming into 2026, we put on average, 30% rate increases into the market, ranging from 50% to 45% depending on the state, all with the sole purpose of allocating less capital to the business and reducing our footprint, recall that we reduced our -- we positioned the product to be #1 and #2 priced in only a handful of markets. And we are successful in doing that now at $2.5 billion of premium and 280,000 members.

We did include an element in pricing to account for the potential for an acuity shift. Now the Wakely reports are showing that acuity shift is probably less in the entire market.

but we're not a microcosm of the entire market. At 280,000 members, we had more adverse selection, if you will, or member acuity mix than the rest of the market.

And that element of pricing was underestimated. Going into next year, we again plan to put prices into the market to reduce our footprint again, where our philosophy is until we're convinced that the market.

The risk pool is stable in that market, we're going to allocate less capital to it. Mark, do you want to comment on Kevin's other question?

Just a quick rundown on the numbers. So right now, our guidance is a $0.75 loss in Marketplace for the full year.

That guidance includes about $1 for prior year items of loss and about $0.25 of gain in the current year book, netting to $0.75. Now that's $1.50 lower than where we were previously on guidance.

$0.50 of that lower guidance is due to prior year items and about $1 is on a lower outlook for the current year membership. On the prior year items, what we said in our prepared remarks is it's split pretty evenly between risk adjustment true-ups from last year and program integrity items.

Hope that helps.

I just wanted to follow up on the ACA acuity comment. Can you help us understand sort of the underlying dynamics that drove the adverse selection?

And to the extent your acuity is worse how are you accruing for 2026 plan year risk adjustment?

Sure, Andrew. It's really a simple case of as the book shrinks in size consciously due to our positioning of the product and the pricing.

-- the old antigen insurance is people that need coverage are going to seek it. So we certainly priced for an acuity shift.

Many of these members are on high-cost drug therapies HIV, oncology and the like. And even with a $50, $75 or even $100 per month price difference, they tend to stay with the health plan, that they're comfortable that their drug therapies will be paid for prescribed and paid for.

So we're seeing a lot of that. We're seeing high-cost drug utilization without corresponding HCC to drive risk adjustment, which is creating an imbalance.

Now we price for this phenomenon, as I said, coming into 2026, but that incremental pricing was not enough, we underestimated it. Mark, anything to add?

No, I think that's well summarized. The Wakely are a tailwind for 2026.

The market attrition as well as the market acuity impact is probably less than most people thought. It's less than we thought.

But as Joe mentioned, the members we did retain our view right now halfway through the year is that their medical expense will not fully be offset by risk adjustment. That's an evolving view, as you know, with the Wakeley being a moving target.

But right now, we're taking a conservative pick on that. And it looks like the members we did retain about 280,000 right now, as Joe said, are likely to skew negative from our original outlook.

Just I guess 1 more on the exchange. As we think about how you're trying to fix this.

I mean, clearly, just taking rate did not solve your problem for 2026. Like how do you think about what needs to be done in terms of maybe restructuring the product.

I think there's a lot of concern that maybe you've seen a lot of the good risk migrate out of silver and into potentially low-cost prongs in gold categories, and that might be related to the issues that you're seeing? And how do you think about what needs to happen from a product restructuring point of view to actually make this business more stable and durable.

We don't think it's a product design. It literally is the members retained.

In fact, the members retained individually are not higher acuity. -- we had the acuity per member right.

We retained more high-acuity members. So that's why we call it a mix shift.

We just underestimated the amount of stickiness on these high-cost members that don't have commensurate HCC code. So it's not a gold -- it's not a metallic tiering issue.

It's not our formularies are not designed properly. It literally is in a declining book of business, that acuity shift was underestimated in pricing, pure and simple, unfortunate, but pure and simple.

Wanted to ask a question on Medicaid or a couple actually. First, on just Medicaid cost trend, you talked about it being in line in 2Q.

I talked about it being slightly favorable in the first quarter. So what was running better in Q1?

And did that go away? Or did something else kind of offset as you went 2Q and maybe you just confirm that the $0.25 guidance raised, was that all coming from Q1 given Q2 was in line?

And then just one last question. Have you gotten any off-cycle rate updates so far this year?

And maybe if so, you can quantify them?

We have -- Justin, we have a very small number of off-cycle rate increases, but they're all within expectations. So we estimated 4% for the year.

There were pluses and minuses. We had very, very minor, not worth mentioning, and that's why we're sticking to our 4% rate assumption for the year.

On the quarters, we're actually sort of splitting hairs on that. When we said the first quarter came in slightly better than 5% it did.

And all we said was if you annualized it, it might be slightly better than 5%. which then implies that maybe the second quarter was slightly north of 5%.

But we're very comfortable that the first half -- we're projecting at 4% to 5%. The high cost categories that we're providing pressure in the past like behavioral, high-cost drugs, outpatient visits and the like are still high cost, but stable trend, meaning the trend has plateaued.

And that's why we say that this is a trough year for margins, while the trend is still high at 5% -- it has plateaued and that acuity shift of 250 basis points that occurred last year has not recurred this year. After 2 quarters of it not recurring, we're pretty comfortable and it's only core trend that's going to impact our results, and we're very comfortable at the 5% trend assumption in the first half extending into the second half.

Mark, anything to add?

Justin, I'll just build on what Joe said a little bit. We may be parsing decimals here.

when we said trend was 5% for the full year. Each quarter is roughly 1/4 of that, maybe a little bit more or maybe a little bit less, but very close to 1/4 of that.

So very stable first and second quarter. Why did MCR come off a little bit?

Well, the rate cycle is a little bit skewed to the first quarter. Remember, 55% of our revenue comes up for fresh rates on January 1 less in the second quarter.

So it's just timing of the revenue. Recall that trend is 5% split evenly across quarters.

Rate is 4% for the year, but lumpy into certain quarters, and that will explain small variances quarter-to-quarter. And just building on what Joe said about the stability of that underlying remember, we exited 2025, feeling pretty good.

The third and fourth quarters were much closer to that new run rate of 5%, which gave us the confidence that, that was the right pick for this year. And so far, it looks like that's playing out.

Just to add one more point to what Mark said. Obviously, you're getting into a first half, second half question, which leads to jump off point into 2027, which we talked a lot about in the prepared remarks.

-- in the second half ex Florida Kids, Medicaid is positioned to produce a 1.9% -- nearly a 2% pretax margin in the second half. And that assumes no rate increases and the 5% trend continues, which we're very comfortable with.

So strong second half result, good jump-off point for 2027.

Just wanted to also ask about Medicaid more broadly. Obviously, the states have a lot on themselves now with the administration's initiatives around waste, fraud and abuse putting in place work rules and other priorities, budgets, et cetera.

Two things maybe -- is that affecting in any way their pacing on RFPs? It seemed like that slowed down a little bit when we went through redeterminations.

I know you've got a number of over the next year or 2 that you're looking to come to market. Do you have any sense that they may slow down?

And then you did specifically mention in your prepared remarks about the self-test stations under work rules. I know the states, I believe, have discretion whether they allow that in the first year.

Have you got any sense of what they're going to do at this point? And if they -- is it meaningful to you if they allow self testation in the first year and then the documentations required in year 2?

A.J., I'll take the second part of the question first. Obviously, every state is slightly different.

-- but they're all working within the framework outlined by CMS. The only real data point we have fortunately have is Nebraska, which actually started this process early.

And you would not be surprised nor are we that the 2 biggest issues that any state is dealing with is what types of information are we going to accept to verify eligibility, self-attestation or ex parte either one; and two, what definition of medical frailty are we allowed to use. In Nebraska, they have 290 pages of diagnosis codes to support medical frailty.

And they have a very comprehensive program of the types of information that they will accept to verify eligibility. So nothing we learned in Nebraska nor in any of our other states causes us to change from our long-term assumption that Medicaid membership will decline by 2% to 3% and each year for a 3-year period, which is fully baked into our $64 billion premium projection and our assertion that the acuity shift will be minor and protracted, so it will be picked up in rates.

Your first question was about RFP timing. Now the RFP calendar appears to be intact.

I think it was announced that Missouri dropped about a week ago, maybe 2 weeks ago. But nothing in our RFP count, nothing in the regulatory realm seems to be inhibiting the pace of RFPs.

So the projection we showed you at Investor Day still holds, in our opinion.

I want to talk about that minimal acuity shift for the Medicaid expansion population. Can you just frame -- I think you've talked about the narrowing of the gap between stayers and levers in previous quarters, but we dig into that for Medicaid expansion, particularly.

And then as you're having discussions with states as they've started to internalize the how are they thinking about potential acuity shifts? And when they start kind of thinking about '27 rate updates, how are they going to incorporate that or not into their updates?

John, I want to make sure I understand your question is related to Medicaid and expansion, correct?

Exactly, yes.

Okay. The -- that is true that in the Big Wave redetermination process that happened over a 3-year period, the SKUs as we call them, on your average MLR, MLR being 90, the SKUs were significant, which means that if stayers and levers could provide a significant acuity shift, which it did by 250 basis points.

Those SKUs are much tighter right now, which means that a lot of the low and no users exited the enrollment roles during the first wave of redetermination. And therefore, the work requirements is unlikely to have a significant shift.

Now the work requirements will happen in a more measured process, we call it protracted and measured over time. And if you look at the last CMS bulletin on rate setting, they specifically mentioned capturing acuity shifts due to enrollment changes, which gives state actuaries the leeway gives them the imprimatur to actually include an element of rating addressing an acuity shift on membership changes if it should occur.

Mark, do you have anything to add either 1 of those?

Joe, I think that's well summarized. I'll just reinforce a couple of those things.

In the big redetermination coming out of the pandemic, the market declined 20% over 2 years. And it started with a lot, as Joe said, of low acuity and no acuity users -- and a lot of those fell out during that period.

Here, we're in a very different situation. We're expecting over the next 3 years, an 8% to 9% decline, which is why we say 2% to 3% a year.

A total cumulative of 8% to 9% decline. And we're at a starting point where with an expansion, so many of those low and no acuity users are already out of the system.

The only other thing I'd add is as the state actuaries look at this, they certainly have a case study on what happened before and how to think about some of this but the fact that it's such a smaller impact over a longer period of time with fewer low no acuity users, just gives me great comfort that this is very gradual and subtle and easy to be rated for.

So it sounds like the issue in exchanges isn't formulary or benefit designs, so maybe that's not the right lever for next year? It sounds like it's not geographic-specific -- so what is in your control to change as you think about next year?

And is there any effort at the state level or CMS to address the gap in the HCC categories? Or is that more of like a longer-term journey.

There's really -- it's not the HCC construct. It's that it is possible to have a high utilizing member that doesn't drive commensurate ACC scores.

We believe we're as good as anyone at capturing risk adjustment it's just not there relative to the utilization of the member. So what we can control is how much capital we're willing to allocate to the business, where we make it available and what the price levels are to make sure that if we want to deemphasize membership in a particular state that we're not #1 or 2 -- next year, our forecast based on our pricing models for this year would suggest that with a $1 billion decline or even a decline to $1 billion from $2.2 billion, our membership will be concentrated in about 6 states, and here to 4 up to now, we've been pretty widespread in most of our Medicaid footprint, 13 or 14 states.

But next year, that should reduce to about 6% based on how we position the product.

Sara, the only thing I'd add is we will price to the members we have, so our pricing will reflect the acuity and the risk adjustment we have in our book. It will result in fewer members next year, which is why we gave you the headline of probably $1 billion lower next year.

So our pricing will very much reflect what we see in our book today.

The question gets at elasticity of demand. And at some point, a member who's on a $1,000 a month therapy and is comfortable that a competing product has that in their formulary.

-- and they're looking at our price, which might be $50, $75 or $100 higher than the competitors, they will move at some point.

Great. Can you talk a little bit about G&A and your G&A leverage going forward, in particular, interested in understanding, as I'm looking at things like 27, 28, how much of the benefits and scale leverage are you expecting to come from just purely holding the line on G&A as opposed to being able to reduce G&A.

And then do you see that there are going to be efficiencies that could allow for reduction in some areas to offset inflation? -- inflation -- and then just a quick question on expectations for implementation of some upcoming contracts in Georgia, Texas and the continuation of some coverage in Florida.

Lance, high level on G&A, I think our Investor Day outlined it exactly the way we're thinking about it. when you're growing premium to $64 billion off of $42 million, the G&A leverage alone should pull the G&A ratio down below 6%, just below 6%.

I think we had it at 5.9% at our Investor Day. Recall that we also talked about artificial intelligence and additional benefits that should accrue to the company if and when we -- and we intend to be successful implementing artificial intelligence to reduce the administrative the labor cost that goes into the administrative burden of this business.

That's not in our projection to the $25 margin to 6% G&A ratio, it is upside to that. So -- we have exercised discipline over a period of time.

You've seen it happen. You've seen the 10, 20, 30, 40, 50 basis points of improvement as we've grown the book of business from $16 billion 5 years ago to $42 billion, we are projecting the same amount of fixed cost leverage as we grow from 42 to 64 million.

Mark, anything to add to that?

Lance, the math is real straightforward. The way I explain it for Investor Relations purposes is exactly how we talk about it internally.

-- of the G&A load we currently carry, about half is fixed and about half is variable. So when we project out and what we've been very successful in delivering is fixed gross that inflation -- when we say fixed stays fixed, it grows at inflation and variable growth with revenue -- so when we give you the G&A projections that we have done, it is exactly that formula, which counts on us keeping that disciplined -- now to the extent we do incremental things, Joe has talked about ANI and the large AI and the large opportunities that are with artificial intelligence, that would be incremental.

But if you do your models, you can model G&A that's simply because that's how we think about it, and that's how we execute it.

The only thing I would add to that is when we say we're -- our margins are 300 basis points better than the market, 2/3 of that is arguably NCR as proven by regulatory reports but a lot of that is G&A. And 10, 20, 30, 40, 50 basis points of G&A leverage is just as valuable as the same amount sitting inside your MCR.

In fact, that argue is even more valuable since you don't return it inside a corridor. So we've been very efficient and we're going to continue to be.

And we're really looking at our early read on artificial intelligence is that the numbers we gave you at Investor Day that's upside to our outlook are real and achievable. And we're going to be transparent with that as we move forward on how much impact that has on the G&A ratio.

We're very optimistic that the projections at Investor Day are going to be achieved.

Just wanted to ask about thinking about the margin sort of recovery potential and and the stat mark sites around like the 300 basis points of underfunding in Medicaid. And how that's going to sort of contrast against the sort of just bolus of regulations that CMS has released for the big and beautiful act.

And looking separate from work requirements, which I know is the big sort of rig that's in the near-term focus you've got 3 other regs with state-directed payment reform. And with the provider tax reg that just came out last night or yesterday and then also with the 1115 waivers now being required to go budget neutral, those are like 3 of the -- really of the sort of levers that states have historically been using to really use their Medicaid funding.

And this is going to be a meaningful sort of tightening of that spigot of sort of the levers that the states have traditionally used. So I'm just curious how you guys are sort of -- obviously, it's difficult to sort of then boil that down and to how does that play out?

It's rates and then into sort of solving for that 300 basis point funding gap -- but I know you guys started talking about trough margins this year, but this probably has more to do with like ultimately, the sort of the recovery and margins sort of sloping against what could be a lot of funding headwinds for the states for multiple years ahead. So Joe, Mark, just really sort of curious to your insights on that.

And then just very quickly also, just on the cash flows. I know that the first half had some timing dynamics around government payments.

Just if you guys can give us the full year or the back half expectations for operating cash flow.

Sure, Scott. On the first part of your question, certainly, there are regulatory, political and legislative initiatives to get at, whether it's fraud, waste and abuse or just to reduce the level of federal funding of the Medicaid program.

You mentioned a couple of them. Backing up from that, the underlying premise of our assertion is that the market, I would almost say irrefutably is 300 basis points under funded, whether it's public companies disclosing their Medicaid results at negative 1.5% to 2% margins, whether it's the regulatory reports that include all the non-for-profits.

If the market just gets back to breakeven we blow through the top of our 2.5% margin assumption. 150 basis points, getting the market back to breakeven or north of 3.

And so when we only need 90 basis points to hit our target and the market needs 300 to get back to a respectable margin we're pretty confident in the assertion that will hit to 2.5%. Now you've mentioned the 1115 waiver being budget neutral, state-directed payments caps on state directed payments sure.

states are going to have to get clever about eligibility, benefit levels, looking at supplemental benefits and all the things they're going to do. Keep in mind, providers and fee schedules can help pay for this, too.

So yes, certainly, there is pressure on the federal funding of Medicaid over the next number of years. But the current level of funding is unaffordable to those in managed care that manage it very capably.

We all know that managed care saves state budgets 10% to 15%, we have 75% of the lives and 50% of the cost, and it's not going anywhere. So it has to get funded despite the pressures that you mentioned.

Mark, anything to add on cash flows or anything on the rates?

On the rates, I think Joe makes exactly the right point. Some of the headwinds for rate setting you point out are very fair and justified, the market needs 300 bps and some of that may be a challenge for the market getting all 300 bps.

But again, at Investor Day, we said we need 90 bps on across the 3 years to get to our target margins. So the odds of rates moving in that small fraction of what the market needs to me feel very good.

Now on cash flow, I will never give you a projection on operating cash flow because it's just not particularly relevant to the way we manage the business. Recall, in state Medicaid, every state is its own subsidiary and every state retains its own liabilities and assets.

We only dividend out the difference, so whether operating cash flow is positive or negative, is a subsidiary concept and self-contained at that level. What is important is my ability to pull dividends out of those subsidiaries up to the parent where I can use it for all kinds of things.

And our track record of pulling dividends out is very, very good. Just to put a point on that, we're holding about $300 million of cash at the parent currently, I expect that to raise to about 600 by year-end on those additional dividends.

Again, it's the dividends, cash to parent that is critical to our company. The operating cash flows really just come and go with the subsidiary assets and liabilities.

Maybe on Medicare, a nice performance in that line of business. In the prepared remarks, you mentioned several cost categories driving better expected performance for the duals versus non-duals members.

I guess can you elaborate on what those specific categories are and any insight why there's such a difference between MA duals and nonduals.

Thanks for recognizing the performance of Medicare. We're really pleased with it.

To be very clear, what we did and converting the $2 billion of MMP premium to finding high and with the increase due to our expanded footprint in the RFP wins, we were consciously and purposely conservative in forecasting guiding on medical cost trend, which we picked at 6%. It's -- our new forecast is it's going to come in at 4%, which is more in line with what the Medicare market is saying, but we were conservative due to the inaugural launch of these new products.

The cost categories really, everything came in better, whether it's the pharmacy category, inpatient outpatient ancillary, it all came in better. None of it is a trend driver plus or minus, but trend is coming in sort of where the rest of the market is reporting and we're comfortable with our 4% projection.

And that $1.25 duals contribution is significant, 1.4% margin. Pretax in the first year of launch.

And our target, as you know, at Investor Day, is only 2.5%, which makes us even more confident that we'll get to 2.5% and we'll get there sooner. So duals market is growing at 12%.

And exclusive the aligned enrollment, the concept as the states deliver on that is preferential to those with a wide Medicaid footprint. And this performance out of the gate is certainly giving us a lot of confidence that the dual segment represents part of the flagship of this enterprise in the future.

Mark, anything to add?

Yes. Just a reminder, on our Medicare segment for the full year, we're projecting $6 billion of revenue, $5 billion is duals.

And as Joe mentioned, trend is lower in just about all categories in duals. And I want to point out, we raised our full year guidance for the Medicare segment by $1.50 in but all of it is attributable to the duals segment.

Medicare continues right where we thought Medicare Advantage, MAPD continues right where we thought. We projected a $1 loss and that's still where we are for the year.

And that's the component that goes away. The $1.50 for the segment is entirely attributable to the duals part.

For Change Marketplace, Joe, regarding your comment on how utilizing members that do not drive comes any stores. I guess I'm a bit confused by that.

Is this something related to the change in seasonality of utilization amongst your members may be occurring later in the year, and that's driving more incomplete full year risk code capture. Is that the dynamic you're talking about?

And if so, I guess, why would that be happening? Some more color there would be helpful.

I think it's -- I think it's merely a case of when you're 1% of the market, 28,000 members out of a 20 million member market. the mix effects can be dramatic.

We're not a microcosm of the market. We're not a representative of the market.

And it is possible as our internal data shows, I'll kick it to market in a minute because he's the architect of all this data analysis that we do, it is possible to have high-utilizing members that do not have enough ACCs to drive enough revenue to produce the target margin. And as I said, we included a load in our pricing, that 30% average price increase we put into the market for 2026, included a load contemplating that we would attract higher-cost members, they would stay with us.

We underestimated the number that stayed with us, and therefore, that's what's putting the drag on the earnings for this year. Mark, anything to add?

Joe, I think that's well summarized. Michael, not all medical expense is risk adjustable.

And what we're seeing is the declining book we have in marketplace, there's more of a skew of medical expense that is not risk adjustable. Now that will play out across the year.

The Wakeley will evolve and our insights and our own memberships will evolve. But our view right now is that a lot of the medical expense we have in this membership is not risk adjustable, which results in the guidance we've given you.

Maybe just on the Florida CMS contract. Can you give us a sense on how that $1.50 headwind is spread over 2026?

Obviously, it's predominantly in the fourth quarter, but I guess just wondering how much of that G&A within the $150 million is already hit year-to-date and expected to hit in the third quarter before the contract goes live. And then you also mentioned potential upside for Florida.

CMS as a lever for second half upside. I guess curious how that could develop?

Is there a propensity for better rate development ahead of that contract start? Or any thoughts there?

I'll answer your question at level and kick it to Mark. We're really pleased with the build-out of the Florida CMS program.

It's going to be a $6 billion annual program at full annual run rate. The build is going fine.

The financial information we received from the state, both for the rates in the current program and the medical costs in the current program suggests that the program is we're inheriting a very financially viable program. We're in the middle of rate discussions right now for the new program year, and the early read is we're very encouraged by what we've seen.

Now you asked the question about the $1.50 drag, it's -- some of it is hiring people in advance of revenue. Some of it is margin build and a little bit of it is just an initial outlook and a new program that is more conservative than target margin.

Mark, do you want to take the accounting for the quarterly progression of the build?

Sure. At its simplest, the $1.50, about 1/3 of it, $0.50 is G&A we're carrying in the third quarter before we get the revenue.

Obviously, you have to put all the resources and people in place before you book revenue. So about $0.50 is drag on G&A in the third quarter pre revenue.

Another $0.50 is in the fourth quarter, we have to book onetime margin on new revenue -- we do this on all business. Just this 1 is particularly big.

So the way the actuaries and the accountants think about IBNR reserves is they book their best pick and they put a small margin on top of it. Any time you have new business, you have to recognize that margin in this case, it's a lot.

That's another $0.50. And then the final $0.50 of the total $1.50 is just an MLR that we're conservatively saying it's going to run a little bit hot our first quarter.

whenever you have a new network and new members, I think you need to be just a little bit conservative on how that first initial period might run. And I think we have been with that additional $0.50, but those 3 pieces, each $0.50 should give you a view on how this is -- now the good news is that additional revenue in the fourth quarter helps me with my overall G&A leverage story.

So with overall enterprise efficiency, I'll defray some of that. But on discretely Florida, those are the 3 components of $1.50

And that's why we're comfortable saying that this reverses next year because the first 2 pieces that Marge do, by definition, do not repeat. They're nonrecurring in nature.

With the financial information that we're seeing now and the rate development process, we're as comfortable, even more comfortable saying now that this program breaks even in the first full year of contract against the target margin in year 2.

I think 2 quick ones. Number one is Mark, just to ask the Medicare question a different way, is that I guess can you kind of bucket like what drove the upside in Medicare versus expectations?

either from a care delivery perspective or a like disease state perspective? And then number 2 is in the marketplace business.

Do you guys think there's any impact from the IDR process that's driving increased MLR in that space? Or is this just like utilization in acuity and kind of all the other things that you call it, just because some of your peers have caught out, IDR as a cost driver.

I'll answer the last question first and then kick it to Mark for the other 2. Yes, we have the same types of impacts from the IDR process, which where the industry is legitimately claiming is flawed in its construct, that certainly does cost us in our medical cost line.

But not beyond expectations. It's really the acuity shift that we're referring to that's causing the pressure.

The IDR process in 2 states, in particular, certainly is a drag. But not outside the bounds of our original expectations.

Mark, do you want to take the rest of the 2.

Absolutely. George, on Medicare, on the MAPD product, trend pretty much what we thought.

That's the part we're exiting, on the other $5 billion of revenue, trend wasn't just 1 thing. Pretty much across the board, we're seeing claims just a little bit better than we thought.

Certainly inpatient and pharmacy down meaningfully. In the past, outpatient and ER have sometimes been an issue, not at all.

professional office visits and LTSS always a meaningful part of that population. But even there, we're seeing a little bit of favorability to what we might have thought.

So chart this up, I think, to 2 things. One, trends are a little lower than most folks expected.

And two, we might have been just a little conservative in our first year picks. On these new fights and hides.

Remember, these converted from MMPs last year, and then we want a whole lot of RFPs to put on more of these. So this is the first year in this product.

We could have been just a little bit conservative but a 4% trend is what we now believe year-over-year we're at. And it's across the board.

It's not just one thing.

And that concludes our question-and-answer conference call. We thank you all for attending today's presentation.

You may now disconnect your lines, and have a wonderful day.