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Centene Corp  (NYSE:CNC)
Q4 2018 Earnings Conference Call
Feb. 05, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Centene 2018 Fourth Quarter and Year-end Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Ed Kroll, Senior Vice President of Finance and Investor Relations, Mr. Kroll. Please go ahead.

Edmund E. Kroll -- Senior Vice President, Finance & Investor Relations

Thank you, Anita and good morning everyone. Thank you for joining us on our 2018 fourth Quarter and full-year earnings results conference call. Michael Neidorff, Chairman and Chief Executive Officer; and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene will host this morning's call, which can also be accessed through our website at centene.com. A replay will be available shortly after the call's completion also at centene.com or by dialing 877-344-7529 in the US and Canada, or in other countries by dialing 412-317-0088. The playback code for both of those dial-ins is 10127647.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's most recently filed Form 10-Q, which is dated October 23rd, 2018, Form 10-K dated February 20th, 2018 and other public SEC filings. Centene anticipates that subsequent events and developments will cause its estimates to change. While the Company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

The call may also refer to certain non-GAAP that's Generally Accepted Accounting Principles. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our fourth quarter 2018 press release, which is available on the Company's website at centene.com under the Investors section.

Finally, a reminder that our next Investor Day will be on Friday, June 14th in New York City.

With that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Michael F. Neidorff -- Chairman and Chief Executive Officer

Thank you, Ed. Good morning everyone, and thank you for joining Centene's fourth quarter and full-year 2018 earnings call. During the course of this morning's call, we will discuss our fourth quarter and full-year 2018 financial results and provide updates on Centene's markets and products. We will also bring you up-to-date on the integration of Fidelis and regulatory and legislative environment.

First, let me provide commentary on healthcare legislation, legal and regulatory environment. We are hopeful that the divided government leads to greater constructive dialog from both parties when it comes to healthcare policy. It is clear Medicaid and the services we provide, are needed more than ever. Clearly numerous Governors from both parties strongly supported Medicaid managed care during the repeal and replace debate.

We also have seen Utah, Nebraska and Idaho, by ballot initiative, recently passing Medicaid expansion. It also appears from the most recent marketplace enrollment figures, there continues to be consistent demand for affordable, high-quality healthcare coverage. As stated in the 2020 proposed payment notice, we support CMS' goal of maintaining a stable regulatory environment, allowing for greater product predictability. The payment notice is CMS' annual regulatory and financial guidance for the marketplace.

Importantly, we support the administration's continued efforts to give states greater flexibility via 1332, 1115 waivers. This works well with our local operating model where we have strong relationships with providers and regulators. We look forward to working with the states who are on the front lines in making sure all of their citizens have access to affordable, high-quality healthcare.

Next, I'd like to recap Centene's highlights of 2018. 2018 was another year of strong growth and accomplishment for Centene, capped off by the robust fourth quarter results we reported this morning. In 2018, we added 1.8 million members, surpassing the 14 million mark. We grew revenues by 24% to $60.1 billion and adjusted EPS by 41% to $7.08. The HBR improved 140 basis points year-over-year to 85.9%. The adjusted net income margin improved 50 basis points to 2.5%. Cash flows from operations remained strong at 1.4 times net earnings.

During the year, we stuck to our business as usual approach. We have not been distracted by ACA legal headlines. As we agree with all the legal experts, it will be reversed. While there has been chatter about possible disruption to the exchanges, individuals like to have an insurance card with comprehensive coverage.

We remain the leader in the ACA (ph) marketplace. In 2018, Centene successfully entered three new exchange markets and expanded in six existing and better markets. I'll remind you in 2018, year-over-year, our exchange membership increased by approximately 500,000 members or 52% to 1.5 million. Please note, this is ahead of our initial expectations.

In Medicaid, we successfully reprocured contracts in Arizona, Florida, Washington and Kansas and won two new Medicaid contracts in New Mexico and Iowa. Overall, our win rate in Medicaid RFPs remains an industry-leading 80%. Also our medical management efforts and network initiatives continue to gain traction and help drive the improved HBR, I previously noted.

In addition, it is our strong organic growth, we engaged in strategic M&A and investments throughout the year. In 2018, we closed the acquisition of Fidelis, the only statewide health plan in all 62 counties of New York. During the year, we began integrating Fidelis, now our New York health plan into our enterprise. We are very pleased with how the integration is going.

For example, on January 1, we moved all Fidelis employees to Centene's HR systems without incident. Fidelis has also been on our general ledger since the day we closed the transaction. We remain on track to achieve the accretion and synergy targets. We anticipate high single-digit percentage accretion to adjusted EPS in the first 12 months following the close and low-to-mid teens percentage accretion to adjusted EPS in the second full year following the close.

We are also anticipating to generate approximately $25 million in pre-tax net synergies in the first 12 months following the close, and $100 million in total pre-tax net synergies in year two. On a run rate basis, we expect Fidelis to add approximately $12 billion in revenue and over $515 million in adjusted EBITDA, including net synergies.

In addition to Fidelis, we completed the acquisition of MHM Services, a national provider in healthcare and staffing to correctional systems and other government agencies. MHM was previously our joint venture partner in Centurion. We are now providing correctional services in 15 states with 32 contracts.

We also completed the acquisition of Community Group -- Community Medical Group, CMG, a leading at-risk primary care provider in Miami-Dade, Florida. CMG has 15 clinics that focus on low-income beneficiaries with an expertise in social determinants.

We increased our ownership in Interpreta, a technology company focused on clinical and genomic data, as well as real-time analytics. Our total ownership is now 80%.

We made an investment in RxAdvance, technology-based pharmacy benefits management platform. We support a shift toward a more transparent PBM model that is sustainable with higher quality and lower costs for consumers. Over the past year, we have been advocating for net pricing versus rebates.

Lastly, Centene purchased a controlling stake in University Hospital of Torrejon in Madrid. This is an important addition to our Ribera Salud model, which sets the standard for successful public private partnerships in healthcare.

As a final point, we introduced Centene Forward, a transformative program to enhance key parts of our enterprise. We expect Centene Forward to realize up to $500 million in savings over a multi-year period. It is important to note that this is not a short-term effort to have savings immediately go to the bottom line in 2019. Rather, it is a self-generating effort to reinvest capital into additional capabilities and technologies that better position Centene for long-term growth, increased margins and profitability.

Moving on to market product updates. First we will discuss Medicaid activity. Florida; in December, as part of a successful reprocurement, we continue providing physical and behavioral healthcare services to the state's Medicaid program. We are now statewide in all 11 regions. Importantly, this large geographic footprint results in additional membership and revenue than our previous -- from our previous contract.

Kansas; on January 1, our Kansas health plan renewed its contract to continue providing managed care services for the state's Medicaid program. This was a successful reprocurement of an existing contract. We currently serve approximately 130,000 recipients in this state.

New Mexico; last month Centene began serving recipients enrolled in New Mexico's Medicaid Managed Care program. We currently have approximately 65,000 members. While still early in the process, the launch is progressing as expected.

Pennsylvania; in January, we began serving over 30,000 beneficiaries enrolled in Pennsylvania's long-term care program in the Southeast zone. We launched the Southwest zone in January 2018. We now serve over 50,000 long-term members in the state. The third and final zone will be implemented by January of 2020. Our participation in this major program reinforces our national leadership position in long-term care.

North Carolina; we are pleased to be selected in two regions in the North Carolina Medicaid Managed Care program. These two regions are among the largest in the state. Our joint venture Carolina Complete Health is the only provider sponsored winner in the RFP. This will result in better health outcomes with members at a lower cost for the state. The contract is set to commence February 1, 2020. As this was only awarded yesterday, we'll provide more details on our first quarter earnings call.

I do want to highlight, however, that we believe that the state did not fully understand our innovative approach with providers in North Carolina. However, we believe our partnership with the North Carolina Medical Society and the FQHCs will be proven to be the right model for success in that market. We are a believer in the provider-led entity approach for growth and quality, and we expect to be the best partner this state has in its Medicaid program. We are currently considering an appeal and helping them to understand what this innovative model means and how we can help manage costs and improve quality.

Next, Centurion. Florida; in December -- in December, Centurion began operating under an additional new contract providing comprehensive healthcare services. This new contract covers an average of 1,425 detainees in Volusia County detention facilities. With the addition of this new contract, Centurion is now statewide in Florida.

New Mexico; in February, Centurion began providing comprehensive healthcare services to detainees in the Metropolitan Detention Center in Albuquerque. Centurion is providing a wider range of healthcare services to an average detainee population of 1,550.

Arizona; in late January, Centurion was notified by the State of Arizona of its intent to award a contract to provide healthcare services to inmates housed in the state's prison system. The contract is expected to begin in July of 2019. Under the agreements, Centurion will provide healthcare services to an average daily population of approximately 34,000.

Now Health Insurance Marketplace. Our marketplace business continued to perform well in the fourth quarter. At year-end 2018, we served approximately 1.5 million exchange members in 16 states. For 2019, our continued focus on providing high-quality affordable healthcare led to a very successful open enrollment. In a national market that shrunk almost 3%, Ambetter grew approximately 15% and now has approximately 20% national market share. We achieved this while maintaining our pricing discipline. We began offering exchange products in four new states in 2019. We also expanded our footprint in six of our existing Ambetter states.

In January, we had almost 2 million paid members across 20 states. This would represent a year-over-year increase of 250,000 legacy Ambetter members, as well as 80,000 Fidelis members. The 250,000 increase is well ahead of our most recent estimate of 150,000 to 200,000. As you recall, the initial estimate we provided at our December Investor Day was 50,000 to 150,000. The key demographics of these members remain consistent with the comments we made at our December Investor Day. Excluding Fidelis, approximately 90% are eligible for subsidies. Middle Tier and other demographics are consistent with prior years. Our retention rate is maintained at 80%. We expect to have another strong year of operations in our industry-leading Marketplace business.

On the Medicare, at year-end, we served approximately 417,000 Medicare and MMP beneficiaries. This represents year-over-year growth of approximately 83,000 or 25%. Consistent with our growth strategy, we have expanded our geographic footprint and are in 21 states in 2019. We continue to take targeted approach to growing our Medicare Advantage business.

As we commented at our December Investor Day, we priced for margin stability in 2019 recognizing the headwinds that came with the lowest star rating. As a reminder, we expect first quarter 2019 MA membership to decrease by approximately 20,000 members. This is due to a reposition in Fidelis to get back its poor star rating. We continue to expect 2019 MA revenue and membership to be flat compared to 2018. We will return to a 4-star MA parent rating for the 2020 plan year. We expect this will have a positive impact on multiple new plans, including the joint venture we announced with Ascension Healthcare. This should allow us, along with other product enhancement efforts, to accelerate growth in MA in 2020 and beyond. I remind you, it is not how fast, but how well one grows.

Shifting gears to our rate outlook. For 2018, our composite Medicaid rate increase was 1%. We are expecting a composite Medicaid rate increase of 1.5% in 2019. Separately, CMS issued the 2020 advance notice last week. And preliminary Medicare Advantage rates appear to be in line with our expectations. We continue to see, as well as anticipate overall stable medical cost trends, including flu, consistent with our expectations in the low-single digits.

In conclusion, 2018 was another successful year for Centene. Our strong 2018 results reaffirmed our growth momentum for 2019 and beyond. Our pipeline of growth opportunities is robust and we remain focused on margin expansion.

We are raising our 2019 guidance to reflect the higher-than-expected open enrollment for Marketplace, the Centurion win in Arizona, and the win in Madrid -- or the acquisition of the Madrid Hospital.

Before I turn the call over to Jeff, I would like to remind you that the approval -- approved two-for-one stock split will be distributed tomorrow, February 6. This split stock enhances liquidity for shareholders in line with Centene's market cap growth. Importantly, it moves our float (ph) to a level appropriate for an enterprise of our size.

Thank you for your interest in Centene. Jeff will now provide you further details on fourth quarter and full-year 2018 financial results, as well as our increased 2019 guidance. Jeff?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Thank you, Michael and good morning. This morning we reported strong fourth quarter and full-year 2018 results. Fourth quarter revenues were $16.6 billion, an increase of 29% over the fourth quarter of 2017 and adjusted diluted earnings per share was $1.38 this quarter compared to $0.97 last year. Both the fourth quarter and full-year results include additional costs associated with the Marketplace open enrollment period.

During the fourth quarter, we invested an additional $0.04 per diluted share into growth-related initiatives, including member outreach efforts associated with the Marketplace business. This was above our forecast and previous business expansion cost guidance range.

The strong fourth quarter caps off a very successful year for the Company. Total revenues grew 24% in 2018 to $60.1 billion, driven by the acquisition of Fidelis Care, continued growth in the Health Insurance Marketplace business, product and market expansions, and the return of the health insurer fee in 2018. This growth led to record adjusted earnings in 2018, with adjusted diluted earnings per share of $7.08, an increase of 41% over 2017. And the growth in earnings year-over-year was driven by the Fidelis acquisition and the growth in the Marketplace business.

Before I get into the details, I want to remind everyone of the upcoming stock split. The split was declared by the Board of Directors on December 12, 2018 to be distributed on February 6, 2019 to stockholders of record as of December 24, 2018. The split is not reflected in this morning's earnings release unless otherwise noted.

Now let me provide some more details for the fourth quarter. Total revenues grew by approximately $3.8 billion year-over-year, primarily as a result of the acquisition of Fidelis Care, growth in the Health Insurance Marketplace business, the expansions and new programs in many of our states in 2018, including the Illinois contract expansion, and the Pennsylvania LTSS program, other acquisitions including MHM and CMG, and the return of the health insurer fee in 2018. This growth was partially offset by lower revenues in California associated with a reduction in pass-through payments and the impact of the removal of the in-home support services program from managed care, which took effect in January 2018.

Moving on to HBR. Our health benefits ratio was 86.8% in the fourth quarter this year compared to 87.3% in last year's fourth quarter and 86.3% in the third quarter of 2018. The decrease year-over-year is primarily driven by growth in the Health Insurance Marketplace business and the reinstatement of the health insurer fee in 2018. These decreases were partially offset by the acquisition of Fidelis Care, which operates at a higher HBR. Sequentially, the 50 basis point increase in HBR from the third quarter of 2018 is primarily attributable to the impact of the IHSS reconciliation in the third quarter of 2018 and normal seasonality in the Health Insurance Marketplace business. These HBR increases were partially offset by improved Medicaid performance over the third quarter of 2018.

The Marketplace business continues to perform well and membership remained strong as we ended the year with 1.5 million members. We had a successful open enrollment season adding approximately 250,000 members from our peak enrollment last year, excluding Fidelis. This growth with the addition of the Fidelis membership is expected to give us almost 2 million members for 2019 peak membership. The demographics of our membership remain consistent and we ended 2018 with approximately $930 million of risk adjustment payable and over $260 million associated with minimum MLR rebates.

Now on to SG&A. Our adjusted selling, general and administrative expense ratio was 9.9% in the fourth quarter this year compared to 10.5% last year and 10% in the third quarter of 2018. The year-over-year decrease was primarily due to the acquisition of Fidelis Care, which operates at a lower SG&A expense ratio. This decrease was partially offset by growth in the Health Insurance Marketplace business, which operates at a higher SG&A expense ratio and the impact of the removal of the IHSS program from California's Medicaid contract. The sequential decrease is primarily due to the costs associated with the end of our contract with the U.S. Department of Veterans Affairs and the contribution to our charitable foundation recognized in the third quarter 2018.

Additionally, as commented on earlier, we spent $0.20 per diluted share on business expansion costs during the fourth quarter, which was $0.04 higher than our previous expectations. For the full-year 2018, we spent $0.38 per diluted share on business expansion costs compared to our previous guidance range of $0.30 per diluted share to $0.34 per diluted share.

Investment income was $67 million during the fourth quarter compared to $53 million last year and $80 million last quarter. The increase year-over-year is due to higher investment balances mainly associated with Fidelis acquisition, as well as higher interest rates on short-term investments. Sequentially, investment income decreased due to lower investable balances associated with the payment of the health insurer fee, risk adjustment and the California Medicaid expansion minimum MLR rebate payments.

Interest expense was $98 million in the fourth quarter of 2018 compared to $66 million last year and $97 million last quarter. The increase year-over-year was driven by additional debt to fund the Fidelis acquisition and higher interest rates on our debt associated with our interest rate swaps.

Our effective tax rate for the fourth quarter was 32.5% and in line with our expectations. The fourth quarter tax rate is lower than the full year, driven by the vesting of our employee stock awards, which lowers the rate in the fourth quarter.

Now on to the balance sheet. Cash and investments totaled $13.5 billion at quarter-end, Including $478 million held by unregulated subsidiaries. Our risk-based capital percentage for NAIC filers continues to be in excess of 350% of the authorized control level.

Debt at quarter-end was $6.7 billion, which includes $284 million of borrowings on our revolving credit facility. Our debt-to-capital ratio was 37.4%, excluding our non-recourse mortgage note and construction loan compared to 40.3% at fourth quarter last year and 36.9% at the third quarter of 2018.

Our medical claims liability totaled $6.8 billion at quarter-end and represents 48 days in claims payable compared to 51 days for the third quarter of 2018. As expected and highlighted on our third quarter earnings call and Investor Day in December, the DCP decreased during the quarter associated with timing items and the Fidelis acquisition from the third quarter. We continue to expect days in claims payable to be in the mid-40s range on a long-term basis.

Cash flow used in operations was $634 million in the fourth quarter and cash flow provided by operations was $1.2 billion for the full-year 2018, or 1.4 times net earnings. Cash flow for the quarter was negatively impacted by the payment of the 2018 health insurer fee of approximately $700 million and the repayment of approximately $370 million of Medicaid expansion MLR rebate payments in California, which was previously accrued.

Before we discuss 2019 guidance, let me provide an update on the Fidelis acquisition. Through the first six months, Fidelis has performed in line with our expectations, including the realization of anticipated synergies. The integration continues to go well and we expect to achieve our previously communicated synergy targets for the first and second years post acquisition.

Now on to our 2019 annual guidance. Our updated 2019 annual guidance is included in our press release issued this morning. We have provided our earnings per share guidance on a split-adjusted basis for convenience.

In summary, we have increased both our 2019 total revenues guidance at the midpoint by $600 million and adjusted earnings per share by $0.04 at the midpoint on a split-adjusted basis to reflect the additional membership growth in the Marketplace business, which came in above our expectations, the acquisition of Torrejon in Spain, and the new contract win for Centurion in Arizona.

In summary, our full-year 2019 guidance on a split-adjusted basis is as follows; total revenues of $70.3 billion to $71.1 billion, GAAP diluted earnings per share of $3.65 to $3.83, adjusted diluted earnings per share of $4.11 to $4.31, and HBR of 86.5% to 87%, and SG&A ratio of 9.3% to 9.8% and adjusted SG&A ratio of 9.3% to 9.8%, and effective tax rate of 25% to 27%, and diluted shares outstanding of 421.5 million to 422.5 million shares split-adjusted.

In conclusion, 2018 was a successful year for the Company led by strong top and bottom line growth. The performance in the fourth quarter and continued growth in the Marketplace business provide tailwinds heading into 2019, where we expect to continue to drive long-term growth and margin expansion.

That concludes my remarks. And operator, you may now open the line for questions.

Questions and Answers:

Operator

(Operator Instructions) The first question today comes from Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Kevin Fischbeck -- BofA Merrill Lynch -- Analyst

Hi. Great, thanks. I wanted to focus on the exchanges. I guess, the first question there is, you mentioned retention similar and the demographics similar. Any markets in particular that you would highlight as kind of faster growing than average?

Michael F. Neidorff -- Chairman and Chief Executive Officer

I think, I mean, we have a very balanced approach to our markets. It's -- of course, different markets have different sizes, so different penetration, but it's very balanced across our markets. And the demographics across the markets are the same, the middle tier, there's everything about it, Kevin, it's just consistent with what we have historically seen. Do you want to add Jeff?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

No.

Kevin Fischbeck -- BofA Merrill Lynch -- Analyst

I was going to ask also, Jeff, your comment there, what you said that you -- at the very end, you said the growth in the Marketplace business provides tailwinds for 2019, and you expect to drive continued (ph) long-term growth and margin expansion. I wasn't sure if you were saying that you expect additional margin expansion in the exchanges or whether that was a broader comment about the overall business and margin expansion?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

No, that was an overall broader comment. I mean, I think the tailwinds comment is evident by obviously, we haven't even closed the books for January and we're raising guidance, right. So membership came in higher than we expected and we have obviously the new win in Centurion in Arizona and the acquisition, and we are updating guidance for those items.

Kevin Fischbeck -- BofA Merrill Lynch -- Analyst

All right. Great. Thank you.

Operator

Your next question comes from Josh Raskin with Nephron. Please go ahead.

Josh Raskin -- Nephron Research -- Analyst

Hi, thanks. Good morning. Want to stick with the exchanges as well.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Good morning.

Josh Raskin -- Nephron Research -- Analyst

Good morning, Michael. Two questions I guess, related to the exchanges. One is, can we get an updated revenue contribution in terms of your total top line of that $70 billion-ish or so, how much of that is actually exchanges? And then, is there any assumed margin reset? It doesn't sound like there's any reason to think that -- I know you talked about conservatism in the past in certain years, so curious on that. And then just on new competition, I don't know, are you seeing any traction from the Oscars or even new competitors in any of your markets? Sorry for a bunch of questions on exchanges, but that's it.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Go ahead, Jeff.

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah. So Josh, a couple of things. I think you could probably bridge our Investor Day slides to get there. But for 2019, I would say around the $10 billion -- $10 billion mark would be for the exchange product. And as far as margins, I think what we mentioned at our Investor Day in December was kind of the -- what we were projecting margins for 2019 to be similar to 2017, 2016, 2015, which was between the 5% and 10% range. And I think that's exactly what we're expecting for 2019.

Michael F. Neidorff -- Chairman and Chief Executive Officer

And from a competitive standpoint, we're not seeing activity that in any way affects us.

Josh Raskin -- Nephron Research -- Analyst

Okay. You're not seeing any pockets of growth from some new entrants or anything like that in any of the specific markets?

Michael F. Neidorff -- Chairman and Chief Executive Officer

No. If anything -- I mean, we like to see more people out there because it creates more noise and more activity, and in a competitive environment, we tend to do very well.

Josh Raskin -- Nephron Research -- Analyst

Got you. And then just one last one. I just want to ask on North Carolina. Could you size sort of the start-up and development cost. I know you guys have been in the state, you guys were one of the earliest in there. You know, I know you've grown, you've entered the exchange as well. Any way to size what that total cost of...

Michael F. Neidorff -- Chairman and Chief Executive Officer

Yeah.

Josh Raskin -- Nephron Research -- Analyst

Kind of the market entry was in North Carolina?

Michael F. Neidorff -- Chairman and Chief Executive Officer

We recognized that we just got the information yesterday. I'd like to suggest that we delay that comment to the next quarter -- to the first quarter call, if I may, Josh. I mean, we have some ballpark numbers, but we like to -- on something like that, we want to be very specific. We are talking about an appeal of this. So I don't want to put anything out there that can in any way mislead. Do you agree Jeff?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah. I know, I would (multiple speakers). Yeah, I would agree on a specific number. I would say that included in our guidance that we gave today are costs. We're refining those estimates obviously based on what we learned yesterday.

Josh Raskin -- Nephron Research -- Analyst

Got you. All right. That's fair. Thank you.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Scott Fidel with Stephens. Please go ahead.

Scott Fidel -- Stephens -- Analyst

Hi, thanks. Good morning.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Good morning.

Scott Fidel -- Stephens -- Analyst

Just wanted to follow up on North Carolina and just as you continue to do the postmortem today on the results yesterday, just interested in as you evaluate the awards, what do you think were the key reasons why the state didn't award Centene statewide contract? And then Michael, as you mentioned, you're considering the appeal. Maybe help us think about some of the key sort of substantive points that you think that Centene can raise around the appeal.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Yeah, I think one, I want to back off. I mean, we're not unhappy. When you win the largest service region and the third largest, it's meaningful numbers and I have them here somewhere I could quote up. So it's not -- I don't see this as a loss, I see it as a win. I think as I said in my comments that the state did not fully understand the innovative approach we had working with providers, which we have personally done before. And I think as they understand that and this was something that was in the legislation that they wanted and that we have worked very hard. And we do believe that the partnership when they understand it, with the FQHCs, the Medical Society and others, will prove to be a very successful model in North Carolina when you look at the history of what their models have looked like. So I think we're going to be a strong provider in those two regions. We're going to take them through what happened and we're going to understand their decision-making because you win too, you say if it works there this model, maybe they're trying to understand it more and they don't really go too far with it until they do. I can see lots of recent spread (ph). So we'll work with them, we will appeal and -- but regardless of what happens, we believe in being a strong partner with states and work with them, and I think it's going to have a short and longer term, a very positive outlook for quality and cost effectiveness in the state.

Scott Fidel -- Stephens -- Analyst

Got it. If I could just relate a follow-up to just on, I know you're not ready to size the revenue impact from North Carolina, but I think from all of our end, we're trying to sort of sort out just what the margin profile of the North Carolina business can look like, because you've got some different dynamics in terms of the JV with providers and the minimum MLR's in North Carolina, and some other factors. Just sort of I guess, conceptually, how do you guys think about sort of the margin profile of North Carolina more broadly at relative to, let's say, sort of the more broader normalized margins that you target in the Medicaid book?

Michael F. Neidorff -- Chairman and Chief Executive Officer

I expect our margins over time, because you -- as you know, we have always taken conservatism and said that for the first three, four quarters there's an investment period and the MLR we book high until we see that the system is understanding what's involved with the managed care profiling system that we use. And so I mean, I don't expect great, great margins in the first three, four quarters. But I do believe that these margins will be consistent to better. And as a worker with the providers effectively, yes, even while we have some pretty good systems with our Interpreta and Casenet and other things, that will help make these providers particularly successful. And so I see an opportunity for -- in '20 because -- I mean, we're not going to start immediately, I do see over -- as the year unfolds, some opportunity with some upside on it. So -- and I think we're going to be putting together a model here that others will want to emulate over time.

Scott Fidel -- Stephens -- Analyst

Okay, thanks.

Operator

The next question comes from Michael Newshel with Evercore ISI. Please go ahead.

Michael Newshel -- Evercore ISI -- Analyst

Thanks. Can you address the contract extension disclosed last night and what it means for succession planning? And did the Board ask you to stay longer or did the impetus come from you?

Michael F. Neidorff -- Chairman and Chief Executive Officer

I would say once succession planning continues as originally planned with the Board and we continue to work through that. And as we were talking about succession planning, the Board asked me if I'd be willing to extend it. And I said that I would. I mean we're having fun, we're having success. I don't want to jinx it, but we are blessed with good health and so -- and we have a great team here that it's -- found the lead, it's taking on more and more of the of the load. So I can continue what I'm doing and maybe even add a couple of rounds of golf.

Michael Newshel -- Evercore ISI -- Analyst

So succession planning is still iconic and continues (multiple speaker)?

Michael F. Neidorff -- Chairman and Chief Executive Officer

No, no. The success planning -- one, succession planning can be a point in time, but it can also be a process that can be implemented any time one feels it's appropriate to do so. So I'd rather take that approach and it's business as usual. And based -- it was their idea next day to extend it, so -- because I had a lot questions about it. And to give a sense to -- to all of you and everyone and the people in the Company, there is -- there will be continuity and we'll continue down the line.

Michael Newshel -- Evercore ISI -- Analyst

Got it. And maybe if I can just squeeze one more in, and -- can you just also confirm whether you're buying the QualChoice health plan in Arkansas from CHI, and what the financial impact and timing would be?

Michael F. Neidorff -- Chairman and Chief Executive Officer

Yeah. We have -- we have the terms decided. We have not closed on it yet. And now we have to close, Jeff what, later this month, next month?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yes, so we have executed the contract on that Mike. So we would expect to close in the second quarter and I would just say, this is an end-market transaction. So we tend to like those and work for those. So, not material in the macro scheme, but certainly Arkansas has been a good market and we're excited to expand our presence there.

Michael Newshel -- Evercore ISI -- Analyst

Right. Thank you very much.

Operator

The next question comes from Peter Costa with Wells Fargo Securities. Please go ahead.

Peter Costa -- Wells Fargo -- Analyst

Thanks and congratulations on the quarter. I wanted to say...

Michael F. Neidorff -- Chairman and Chief Executive Officer

Hi, Peter.

Peter Costa -- Wells Fargo -- Analyst

I think going forward, first off in North Carolina, what do you expect the start-up costs will be in 2019 and 2020. And then -- because usually your business doesn't start till 2020. And then also on 2020, can you talk about what's going to happen with silver loading and the cost-sharing subsidies and what might change there?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah. So Pete, this is Jeff. I'll handle the first question on the cost. I think what we said was, we have some costs in for our 2019 guidance. But -- since we just got this information yesterday, it's a little early and we're reevaluating the costs, I guess, is what I would say. So early for us to give a pinpoint number on that given the information that came out yesterday. And on the second, I mean, we're not talking about 2020 guidance here today. So... (multiple speakers) Kevin?

Peter Costa -- Wells Fargo -- Analyst

Curious if you want to talk about when that might happen in Washington this year regarding the cost-sharing subsidies and the way silver loading works, and if that may change for 2020 relative to the -- HHS is allowing it for 2019. But it seems to be more up in the year for 2020?

Kevin J. Counihan -- Senior Vice President of Products

Hey Peter, it's Kevin. Yeah, you're right. If you look at the -- at the '19 payment notice, they make allusion to that. I think, again, it's premature to think about what that might actually look like into 2020. We're going to be prepared to pivot irrespective of what the policy decides. And again, as you know, within CMS, a year is a long time. So we'll see what happens.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Yeah. I think also we do have two sides of the government now looking at these issues and our feeling is that, that's going to be positive if we get some good constructive discussion going. And so I think trying -- we are going to play every part we can to move it to policy versus power takes. There may be some real opportunities there for you.

Peter Costa -- Wells Fargo -- Analyst

Okay, thank you.

Operator

The next question comes from Sarah James with Piper Jaffray. Please go ahead.

Sarah James -- Piper Jaffray & Co. -- Analyst

Thank you.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Thank you.

Sarah James -- Piper Jaffray & Co. -- Analyst

In North Carolina, did Centene submit a bid as a health plan also or only a PLE ? and I'm wondering since the provider-led entities could be awarded regions and health plans statewide, can you speak a little bit to the strategy around deciding to submit a debt as the PLE?

Michael F. Neidorff -- Chairman and Chief Executive Officer

Well, we actually -- we actually did submit on both sides of that, but we emphasize the PLE. You have to go back and look at the historic programs, they've had in the state and the role providers have had. And I think, working with the State Medical Society and they've been great constructive partners and they really want to deliver high-quality care, they understand the cost issues and they want to work with us because of our systems and how we can support them doing a better job and everybody doing well. We decided that's a good place to be and I still believe that, Sarah. And I think over time, it's going to prove to be a very effective model in markets like North Carolina with the history they've had. So this is one of those things that I think time will prove to be on our side. And -- so it's going to be business as usual. We did do both, but we thought the real need to emphasize this side of it. And I think the states just -- I think they had some value and that's why they did give us the largest and third largest regions as opposed to, say, no, we are not going to do any of this provider-led organizations, but we're going to go back and talk to them and see if that can be expanded some through the appeal process. If not, we'll still be as a partner, no matter how it comes out. So it's going to be a sizable business with full size for you on the Q1 call.

Sarah James -- Piper Jaffray & Co. -- Analyst

Got it. That makes a lot of sense. And one more question if I can. If I look back at 2018, there were points of 2Q and 3Q where consensus didn't really get seasonality right on a couple of different lines and that caused some confusion. So I'm wondering if there's any commentary you can offer around 2019 seasonality, your cadence, and how you see that differing from 2018?

Michael F. Neidorff -- Chairman and Chief Executive Officer

I want to make an opening comment and let Jeff take that. Of course we're not -- we don't look at consensus. We look at the business and how it's developing, but Jeff, do you want to talk about seasonality?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah, yeah. I think what we said in our December Investor Day we kind of gave -- we've been trying to give more insight, I guess, to the seasonality of the business giving a first-half second- half view as far as how earnings progression goes. And I would say the comment we made there I think were consistent. So over 60% in the first half of the year. And again, as we continue to grow the marketplace business, that shift continues to happen. I mean the real -- the real driver of our change in seasonality is really the product mix. It's the diversification of the product mix. And so to the extent that you have a higher mix of exchange, then you will pull more earnings forward to the first half of the year, because of the -- number one, that's when we have the highest level of membership and number two, that's when we have the lowest HPR as a result of deductibles.

Sarah James -- Piper Jaffray & Co. -- Analyst

Okay. So even though you guys are doing much better on exchange growth than you thought at Investor Day, you still think the 60-40 net is the appropriate way to think about the year?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah, yeah, I would think that's a good place to start.

Sarah James -- Piper Jaffray & Co. -- Analyst

Thank you.

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

The next question comes from A.J. Rice with Credit Suisse. Please go ahead.

A.J. Rice -- Credit Suisse -- Analyst

Thanks. Hi everybody.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Hi.

A.J. Rice -- Credit Suisse -- Analyst

First I want to just ask about Fidelis a little more. It sounds like generally on a broad sense, everything is tracking. Are there any pockets as you drill down where you've seen new opportunities now that you've had it for a while? Are there any areas where you're seeing challenges that weren't anticipated?

Michael F. Neidorff -- Chairman and Chief Executive Officer

I'll start off and others can add if they feel. I think it's an incredibly well-run company. We're pleased with what we've had. Father Frawley will continue to work with us in social responsibility. For some obvious legal reasons, it was important that he appoint a new CEO. We did in great continuity there. The whole team is in place. In fact, he commented to me the other -- not too long away, he was saying that the turnover rate since we announced the acquisition has been the lowest they've seen historically. So people are really pleased with it. I think the opportunity -- there are opportunities to continue to grow, there's some opportunities there to help them with the medical loss ratio using our systems. So it's -- but it's -- they are hitting all the numbers, they are functioning on all eight of 12 cylinders, depending how many you have in your automobile. And so I think I'm familiar with every aspect of it where I made this comment one day that if we could find more businesses like that, I'd just want to do one in the morning, and one in the afternoon. They are really a well-run company.

A.J. Rice -- Credit Suisse -- Analyst

Okay. I was going to also ask about in Mississippi, in the press release you highlight that you completed the implementation of the new PBM model. Can you update us on your thought about rolling it out to other markets and will you wait for sort of proof-of-concept? Is Mississippi going to play out for a little while or how should we think about that?

Michael F. Neidorff -- Chairman and Chief Executive Officer

No, it -- we are actively rolling it out now and I like to roll it out as best as we can. But once again, I want to make sure as well, proof of concepts there, it's working incredibly well in Mississippi and we're confident that we're going to roll it out into additional markets we are right now as we speak. And by the end of 2020, we will be in all the markets. And if I can pick it up in some way, we will. But once again, I'm not going to overload it, and -- but it's a great system, it's going to prove to be, I think, where pharmacy benefits should be headed.

A.J. Rice -- Credit Suisse -- Analyst

Okay. What's the most significant economic benefit of making that transition that you're seeing in Mississippi?

Michael F. Neidorff -- Chairman and Chief Executive Officer

Well, there's administrative expenses, it's cloud-based, we can reduce the admin costs significantly and we're working with -- I mean, John, Scott, have all been -- people there are really innovative and creative and I'm working with them now, because I have a commitment to speak about is some way to move to net pricing as opposed to rebates. And I think they have the system skills and capabilities that we can start talking about those kinds and we are talking about those kinds of things with them. So that could be instant. So there's a lot of significance in what you are doing. It's is very innovative and as we're able to demonstrate more and more of it, you'll see it.

A.J. Rice -- Credit Suisse -- Analyst

Okay. All right. Thanks a lot.

Operator

The next question comes from Lance Wilkes with Sanford Bernstein. Please go ahead.

Lance Wilkes -- Bernstein -- Analyst

Yeah, good morning. Could you talk a little bit about in the Medicaid book, medical cost trend and management, in particular, if you could just kind of hit upon some color on what's doing better-than-expected, and what's doing worse, how important steerage and restricted networks are and what's going on with risk profile at the state level with them, sort of the reenrollment efforts that are taking place at those levels?

Michael F. Neidorff -- Chairman and Chief Executive Officer

Jeff, you want to comment on that?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah, yeah, a couple of things. We did see the Medicaid improvement over the third quarter. Really, it's a combination of many things, combination of the net management, network initiatives, premium -- premium rate adjustments, combined with I think what we saw was stable cost trends in the fourth quarter. So your comment about risk profile, I mean, you really have to go on -- on a state by state basis. So if you aggregate the business -- I mean that's one of the benefits of diversification. If you aggregate the business, I would say the risk profile has remained relatively consistent.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Yeah, I'd like to add that if you look at the scale and size we have in most -- I mean, albeit in the newest markets, it's 65,000 in Mexico and Iowa (ph), but we have the size we do and you get a balanced book of business. And we were expecting to have some that are (inaudible) and some that are healthier and we look across the whole book, and we're seeing that. And that's really the large numbers as much with anything else coming into play. So that's for the -- the benefit of our size being the largest Medicaid provider and but -- also, as Jeff highlighted you have 31 states. It puts you in a strong position because as I tell investors, it's no different in their portfolios. At any given time they might have one stock that's not performing well or two. Well, we're going to have -- we're going to have a market that has a couple of issues but we have others doing well and they offset, while we collect the one that has an issue. So it's -- it's a balance that gives us certain comfort.

Lance Wilkes -- Bernstein -- Analyst

And can you just talk to the -- just clarify on the behavioral membership for the quarter? What was the decrease in that and does it go into an integrated medical offering?

Michael F. Neidorff -- Chairman and Chief Executive Officer

Yeah. It's moving and we're moving more and more to the integrated medicine. I want to do that as quickly as we can. I really -- I really believes that's an important place to be. I have used, probably the example that somebody's diagnosed a new -- as a new diabetic, I sure want them to talk to a behavioral version as quickly as they can because it gives you more control of the total medical condition.

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah. The membership decrease, we previewed this at our Investor Day. It was really a behavioral health-only program in Arizona that was integrated with the traditional Medicaid program. And so while the membership decreased quite a bit, the revenues are up on a consolidated basis. So lower membership, higher revenue, because it's been integrated with the physical health.

Lance Wilkes -- Bernstein -- Analyst

Got you. Thanks.

Operator

Your next question comes from Steve Tanal with Goldman Sachs. Please go ahead.

Stephen Tanal -- Goldman Sachs -- Analyst

Good morning, guys. Thanks for the question.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Good morning.

Stephen Tanal -- Goldman Sachs -- Analyst

Just quick one on the Marketplace. I missed the minimal MLR accrual number. If you could just give us that once more and then maybe just let us know where 2018 margins ended for the business.

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah. So, I think $260 million -- approximately $260 million. And as I said in our December Investor day, we're not going to give -- it's a competitively priced product. We're not going to give a specific margin number.

Stephen Tanal -- Goldman Sachs -- Analyst

Okay, all right, fair enough. And then the other question that I had, we're hearing a little bit more sort of anecdotally around the eligibility redeterminations in Medicaid potentially affecting risk polls and making for a bit of a short-term blip as some of the -- the MCAs go back to the States for better rates. What are your views on whether or not that's happening and if it is, maybe is this part of sort of the uptick in Medicaid rates where you're looking for a 1.5% comp as an increase in '19 versus one in '18, or how should we think about that if that's not really behind that?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Again, I think you have to go on a state by state basis. We have seen where redeterminations have changed the risk pool and states have been relatively quick to react. I wouldn't necessarily call that meaningful. It's certainly helpful, but it's not a meaningful driver of the medical cost if you look at the actual volume of redeterminations. But we actually have had states do adjustments, I would say relatively quickly after the redeterminations. And when you look at acuity mix, it's different by state. Some states have had redeterminations that had no effect on acuity.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Yeah. It's once again -- it's the law of large numbers, large number of states in the mix.

Stephen Tanal -- Goldman Sachs -- Analyst

That's helpful. And so then the acceleration in the rate, is there anything specifically you can sort of think about that's driving that?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

The acceleration in what rate, the composites?

Stephen Tanal -- Goldman Sachs -- Analyst

Composite. Yeah composite rate 1.5 (ph) versus one in '18.

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah, I mean I think I mentioned at our December Investor Day, we do have a state -- certain states which aren't performing at the long-term margin, some of that is a rating issue. So we have seen and are projecting some improvement in rates into 2019.

Stephen Tanal -- Goldman Sachs -- Analyst

Perfect. Thank you.

Operator

The next question comes from Dave Windley with Jefferies. Please go ahead.

David Steinberg -- Jefferies & Company, Inc. -- Analyst

Hi, good morning. It's Dave Steinberg in for Dave Windley. First question I had was just on the Medicaid business. It seems like that, that's driving the MLR moving to the bottom end of your 2018 guidance range. I'd be curious just to get a better sense of where the margins are at this point and we are hearing peers obviously talk about net margin is getting close to 3% over the next couple of years. Do you think that's something possible for Centene or is there some business mix or for other structural considerations that might make it hard for you guys to replicate that type of profile?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah, I commented on this in our December Investor Day where we've also grown faster than anybody else in the industry on the Medicaid side. And as Michael mentioned before, when you're starting up these new markets, you have compressed margins versus what you'd say is your long-term margin target. So I think from our standpoint, we still think 3% to 5% is a good margin target and just because of the mix and the growth that we've had, it's probably different than our competitors.

Michael F. Neidorff -- Chairman and Chief Executive Officer

And I would add something else. If you look at it, we -- we showed the net margin up 50 basis points with what we gave you today. It's easy to say what do you think is going to happen in the future. We prefer to say we have a continued focus on margin expansion and growing the business and we tend to deliver against it versus saying I'm going to get it to x number, because -- I mean that's easy to say. In fact, I used to learn that -- they used to say, in Brazil and other that people will accept anything. I'm going to simply say that we are going to continue to grow this business and it's dramatic in my opinion. And we're going to work hard at margin expansion, using systems and other capabilities we have to improve outcomes and reduce cost.

David Steinberg -- Jefferies & Company, Inc. -- Analyst

Sure. And Jeff, I think I heard you mention that the risk adjustment payables was with that $930 million up the fourth quarter. I think that's up about 37% year-over-year. Compared to exchange enrollment, that's up a little bit over 50%. Can you just help us understand maybe the delta there, why those don't look a little bit more comparable in terms of growth?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah, I mean you have to look at number of months, I think is one of the first things -- so in total. But I mean it wasn't -- it wasn't out of line with our expectations. So -- and I did give you -- it's $930 million and the reason I'm giving those is because typically what we file in the quarter is we file the 10-Q and you can pull those from the 10-Q. Obviously, here the annual report comes later. So I'm just giving this to you now.

David Steinberg -- Jefferies & Company, Inc. -- Analyst

Sure. Thanks.

Operator

The next question comes from Matt Borsch with BMO Capital Markets. Please go ahead.

Matt Borsch -- BMO Capital Markets -- Analyst

Oh, thanks for fitting me in. A question about, if you look out with your, the various providers that you're working with, do you anticipate shortages as you look ahead the next five years or maybe even beyond that? And I'll ask a question in the context of a hypothetical that if you had one of the big drug retailers, let's say, with sort of ancillary personnel providing primary care services, would that be something that would be an attractive model for Centene to contract with?

Michael F. Neidorff -- Chairman and Chief Executive Officer

Yeah, I think we tend to kind of march our own drum. And we will grow as primary care. We work well with specialists and sometime when some of you have the chance to come into the office, we will take you through our Casenet and our Interpreta. We've shown some of it in the Investor Day. But there are systems that help physicians become very successful in treating new patients. And given the data and give real-time heated scores and things that they can get on, we are moving to where they can get on their iPhone, and so I believe that there are effective contracts in equity, where you can have equity in contracts is I'm trying to say.

Matt Borsch -- BMO Capital Markets -- Analyst

Yeah.

Michael F. Neidorff -- Chairman and Chief Executive Officer

That's kind -- that tends to be the direction. If we see -- and I said this in Investor Day, if we saw an area where there is not enough positions for (inaudible) we're working with some governmental agencies in just that issue. We have CMG now that has the capability to open up very successful clinics that deal with this population, social determinants et cetera, and we'd ask Louis (ph) who runs it to move in the region x and put together a little multi-specialty clinic. So we think we have the capability to meet our members' needs, and once again, we all know what you're thinking of. And that's a big operation, but they also have a lot of commercial and other membership and we're very focused in the government services area.

Matt Borsch -- BMO Capital Markets -- Analyst

Great. Thank you.

Operator

The next question comes from Ana Gupte with the SVB Leerink. Please go ahead.

Ana Gupte -- Leerink -- Analyst

Hi. Thanks. Good morning.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Hi.

Ana Gupte -- Leerink -- Analyst

Thanks for fitting me in. Just wanted some color as you go into 2020 on a couple of drivers -- growth drivers. Firstly on exchanges, can you talk about what your growth profile might be there as you look at the demand and then the under penetration, the move to short-term plans and anything else in the competitive environment as you go into the selling season?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

I will start and Jeff, you can pick up. The short-term plans -- I mean short-term plans who may have (inaudible) have been around forever. The benefits of maturity are less. The majority of our membership has subsidies. So why jump out if something else gives you a lot less benefits to go into it. And those things still have to be proven out. And they are just at the short term. And I think over time, costs and short-term plans go up because you have such a turnover that you have different disease states. And they have -- they've tried to overcome that by being able to underwrite health risks and that itself I think is going to long-term be a problem, not for us but just for health states in general. So I think it's a long way, it's an attempt to be disruptive, but I'm not sure how disruptive we -- our particular model. So I think that it's. So looking forward, I mean I'll just remind Ana, not you, but others has talked about our growth rate as we have got bigger wallets. We're still maintaining a significant growth rate. They talk about the exchanges and all the disruption and how it is and were up 15% this year when the market it's declining. So we're just going to continue to -- business as usual and deal with the facts as we have now and the fact says, it's a good business, it's a strong business and we know how to manage it. We have the systems to manage it. Does that help?

Ana Gupte -- Leerink -- Analyst

Yeah helpful. Yes, thanks. Thanks, Mike. On the MA side then for 2020, and I think, it's really thought-leading on the Ascension JV, but you do also have the 4-star contract at this point. Are you planning to do two different products, one that's co-branded and then one that's with Ascension and then one Centene or how are you thinking about 2020 as an opportunity for growth?

Michael F. Neidorff -- Chairman and Chief Executive Officer

I think that's going to depend by market. It depends on the size of the market where we are, our network. We are going to work -- we are going first work effectively with our partners at Ascension. And they -- we're not doing (inaudible) they work with. So I mean they -- so it's a -- it will be a mix depending on the size of market, scale and what makes sense. I mean we have some markets we've had historically more than one product. So that's not a bad thing. I can go back to my consumer package goods days. There was a time in Canada we had three different soap ads and it worked very well.

Ana Gupte -- Leerink -- Analyst

Makes sense. (multiple speakers)

Michael F. Neidorff -- Chairman and Chief Executive Officer

Pardon me.

Ana Gupte -- Leerink -- Analyst

No, I think that makes sense. You are not customized -- I mean, you will be more customized by local market than dependents.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Right. I think what the key is -- I think what's key Ana is you had the -- you used to have the systems and the overall capability to manage that multiplicity of opportunities. And that's where we're focused and have made comments. We're going to continue invest in technology. And I think we've demonstrated that we have the wherewithal to do it in a very meaningful way. It goes back to the $500 million we are going to generate internally so as to be able to invest in new technologies and new opportunities without affecting margins and the overall growth of the business.

Ana Gupte -- Leerink -- Analyst

Yeah, truly that's a competitive advantage. Yeah, that makes a lot of sense on the systems.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Steven Valiquette with Barclays. Please go ahead .

Steven Valiquette -- Barclays -- Analyst

Great, thanks. Good morning everybody.

Michael F. Neidorff -- Chairman and Chief Executive Officer

Good morning.

Steven Valiquette -- Barclays -- Analyst

So there were some moving parts in Medicaid costs throughout 2018 for really Centene and really a lot of companies in the overall MCO sector. But just given all the drivers you mentioned earlier that led to your sequential improvement in Medicaid cost trend in 4Q '18 and also just exiting the year, I guess when you add it all up, is there any extra color you can provide just on your expected Medicaid MLR assumptions for 2019 overall versus 2018 overall just when comparing on an apples-to-apples basis? Thanks.

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah, I commented on this at our Investor Day. I mean, we do expect Medicaid margins to improve in 2019 over 2018, and a lot of that's driven by a lot of actions that we've taken this year which will have a full-year run rate heading into 2019. But we do, we do anticipate improvement in the Medicaid margins in '19 .

Steven Valiquette -- Barclays -- Analyst

Yeah. And bottom line is that the trends in 4Q '18 are certainly very suggestive that you're on track to achieve, and so that's, I guess kind of the key takeaway at least from my perspective.

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah , Yes, it was a good quarter.

Steven Valiquette -- Barclays -- Analyst

Yeah. Got it, OK. All right. Thanks guys .

Operator

Your next question comes from Gary Taylor with J.P. Morgan. Please go ahead.

Gary Taylor -- J.P. Morgan -- Analyst

Hi, good morning. Just a couple of questions left. The first is on the 2019 exchange enrollment. Have you guys disclosed they will be willing to help us with on the four new states, how much does that contribute to the 250,000 increase ex Fidelis?

Michael F. Neidorff -- Chairman and Chief Executive Officer

Jeff?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah, I guess what I would say is consistent with what we've done historically, it's not the largest driver of membership growth. Typically when we go into new markets, it's a test and learn approach and I think we followed that for the new markets this year. So it's not the majority of the driver of the membership growth, it really is coming from existing markets that we've had.

Gary Taylor -- J.P. Morgan -- Analyst

Okay and then my second question is cash from ops for 2018 was weighed by about $1 billion I think with some of these California accruals that you ended up paying this year, the normal free cash flow looks quite good compared to earnings. As we head into 2019, just remind us, I don't recall from Investor Day you called out anything but versus kind of your long-term guidance of 1.5 times to 2 times cash from ops versus earnings. Are there any material variances that for 2019?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

No, I mean I think the 1.5 to 2 times would apply. There's always -- there's always timing issues right. There can always be a timing of the state payment that you don't get at the end of the quarter, the end of the year that is subsequently paid within the next few days. And so -- and given our size in some states, those can be meaningful. So you always have timing items that come up, but nothing that I can think of similar to what we experienced in the -- over $1 billion of MLR payables in California.

Gary Taylor -- J.P. Morgan -- Analyst

Okay, thank you very much .

Operator

The next question comes from Ralph Giacobbe with Citi. Please go ahead.

Ralph Giacobbe -- Citi -- Analyst

Thanks. Good morning. So you ended with a 1.46 million fixed members, you mentioned 2 million, which I understand is sort of the peak number and I think you also said 250,000 year-over-year. So just want to clarify that sort of year-end membership on the HICS somewhere in that kind of '17 to '18, is that the right way to think about it?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

We don't -- we don't actually provide the year-end. Obviously there's attrition from the peak membership. So what we're talking about is if you go back to our Investor Day slides, we would have said 2018 peak was 1,650 million (ph). You're growing 250 on top of that plus, the addition of 80,000 with Fidelis gets you close to the 2 million, right. But we don't -- we are not providing a year-end 2019 number.

Ralph Giacobbe -- Citi -- Analyst

Okay. Is there any reason to think that it wouldn't just be similar to prior years in terms of -- and being versus peak?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yeah, I would expect a normal attrition rate. That's certainly what we have forecasted.

Ralph Giacobbe -- Citi -- Analyst

Okay, that's helpful. And then just real quick, just effective tax rate we should use for 2019?

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

It's in the guidance. I provided that in the guidance this morning. Or did I miss that?

Michael F. Neidorff -- Chairman and Chief Executive Officer

Yeah, yeah, it's in the press release.

Ralph Giacobbe -- Citi -- Analyst

Okay. And one more if I could. Can you just remind us of the level of incremental maybe strategic investment that you called out in and just framing on sort of the ongoing expense or if you see that pace on? Thanks.

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Strategic investment for which year 2018 or 2019, what specifically are you...?

Ralph Giacobbe -- Citi -- Analyst

'19.

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Yes, I think we said start -- what we call business expansion, business expansion costs. I think what we said, now this is on a split-adjusted basis, obviously $0.12 to $0.14.

Ralph Giacobbe -- Citi -- Analyst

Okay. All right. Thank you.

Operator

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

Michael F. Neidorff -- Chairman and Chief Executive Officer

Well, I just want to thank everybody for the questions, the time and we look forward to continuing the record year after year. So have a good first quarter. We'll talk to you soon.

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 74 minutes

Call participants:

Edmund E. Kroll -- Senior Vice President, Finance & Investor Relations

Michael F. Neidorff -- Chairman and Chief Executive Officer

Jefferey A. Schwaneke -- Executive Vice President and Chief Financial Officer

Kevin Fischbeck -- BofA Merrill Lynch -- Analyst

Josh Raskin -- Nephron Research -- Analyst

Scott Fidel -- Stephens -- Analyst

Michael Newshel -- Evercore ISI -- Analyst

Peter Costa -- Wells Fargo -- Analyst

Kevin J. Counihan -- Senior Vice President of Products

Sarah James -- Piper Jaffray & Co. -- Analyst

A.J. Rice -- Credit Suisse -- Analyst

Lance Wilkes -- Bernstein -- Analyst

Stephen Tanal -- Goldman Sachs -- Analyst

David Steinberg -- Jefferies & Company, Inc. -- Analyst

Matt Borsch -- BMO Capital Markets -- Analyst

Ana Gupte -- Leerink -- Analyst

Steven Valiquette -- Barclays -- Analyst

Gary Taylor -- J.P. Morgan -- Analyst

Ralph Giacobbe -- Citi -- Analyst

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