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Wellcare Health Plans Inc  (NYSE:WCG)
Q4 2018 Earnings Conference Call
Feb. 05, 2019, 9:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning and welcome to the WellCare Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) We are asking that you please limit your questions to one only. Please note this event is being recorded.

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

Beau Garverick -- Senior Vice President

Thank you, Andrea. And thank you all for joining us this morning for a discussion of WellCare's 2018 fourth quarter results. Today, we'll be making forward-looking statements, including but not limited to our 2019 financial guidance and outlook. Various risks and uncertainties, such as those described in our SEC filings, may materially impact those statements. While these risks and uncertainties may cause our future results to differ from today's statements, we are not undertaking any obligation to update or revise any forward-looking statements. Certain financial information that we will discuss today include adjustments to expenses that we believe are not indicative of long-term business operations. Please refer to our news release published this morning and available on our website at www.wellcare.com for a reconciliation of financial measures determined under generally accepted accounting principles to our adjusted measures. We will identify measures that have been adjusted.

Our discussion today will be led by Ken Burdick, WellCare's Chief Executive Officer; and Drew Asher, the Company's Chief Financial Officer.

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

Kenneth A. Burdick -- Chief Executive Officer

Thank you, Beau. Good morning, everyone, and thank you for joining us today as we review our fourth quarter and full year 2018 results. Our performance this past year and the actions we have taken over the last several years, position us to capitalize on the many opportunities for profitable growth in the years to come. In fact, within the past 24 hours, we received notice from the North Carolina Department of Health and Human Services that we were awarded a contract to provide managed care services statewide. While we'll celebrate this award today, we will quickly shift our focus to implementation tomorrow, and beginning Monday, we'll have senior leadership in the state to begin implementation planning for what is a very thoughtful and comprehensive program structure. We look forward to collaborating with providers and our state partners to serve the Medicaid beneficiaries throughout North Carolina for many years to come.

This morning, I'll highlight some of our accomplishments from 2018 and discuss how we are well positioned for continued success across the enterprise, then Drew will review our financial results in more detail and provide some commentary on our outlook for 2019. We finished 2018 on a strong note with full year adjusted earnings per diluted share of $11.03, an increase of nearly 30% as compared to 2017. Adjusted net income for the full year 2018 was 2.6%, a 30 basis point improvement year-over-year. Total revenue of $20.4 billion increased by 20%, driven by our acquisition of Meridian and organic growth in our Medicaid and Medicare lines of business. While we are pleased with our performance this past year, we're even more enthusiastic about the future. We entered 2019 with momentum and are increasing our full year 2019 adjusted earnings per diluted share guidance to a range of $13.25 to $13.50, reflecting our strong finish in 2018 and higher than expected enrollment in our Medicare PDP segment.

Turning to a review of our business segments. Our Medicaid Health Plans segment continues to perform well. At the end of the year we served over 3.9 million Medicaid members, which represents an increase of over 44% versus a year ago. Our adjusted Medicaid premium revenue grew by more than 18%, driven by our mid-year acquisition of Meridian, as well as organic growth in Illinois and Arizona. Beginning December 1, 2018, we began the implementation of our new and expanded Managed Medicaid Assistance contract and our new long-term care and serious mental illness contracts in Florida. While the implementation is still in its early days, it remains on schedule and we look forward to providing multiyear benefits to our members, providers, and state partners by facilitating cost-effective, high quality care. This expanded presence will increase our Florida Medicaid revenue by approximately $1.9 billion. On January 1st, as expected, our legacy Harmony Health Plan Medicaid members in Illinois were consolidated into our Meridian Health Plan. With the consolidation of these members into one contract, we expect to drive improved operational and financial performance over the next several years.

Additionally, our overall Meridian integration continues to progress well. More recently, on February 1st, we began the implementation of the Children's Medical Services contract in Florida. As a reminder, this statewide program serves over 60,000 children with extremely complex physical and behavioral needs and is completely new to managed care. While the program just started, we are leveraging our expanded presence in Florida to engage with these children, their families, providers, and state partners to effectively transition our members to a managed care program.

In Medicaid, we believe WellCare is differentiated through our local approach, coupled with our high touch integrated care model, which incorporates physical, behavioral, pharmaceutical, and socioeconomic needs. By integrating our social determinants of health program community connections within our care model, WellCare is able to support our members in unique and innovative ways, providing tangible benefits to their overall well-being. In 2018, for example, we connected more than 51,000 people to over 194,000 social service resources, displacing the need for higher cost services with less costly, community-based solutions.

A recent example of the success of our local approach and integrated care model comes from our Arizona market, where certain of our members faced immediate eviction as their building was condemned. Within a very short period, our local market team was able to identify the issue and engage with our local care managers and Community Connections' social services program to provide alternative housing resources. We feel these programs are vital to our success and continue to focus on local and community-based solutions that have the potential to improve the overall health and well-being of our members.

Moving to our Medicare Health Plans segment. The premium revenue grew by nearly 19% year-over-year, driven by a combination of organic growth and our acquisition of Meridian. Through January, we serve over 561,000 Medicare Advantage members across 22 states. Our Medicare PDP business posted strong financial results in 2018 that exceeded our expectations. Driven by our new Value Script product, our enrollment was over 530,000 net new members in 2019. With the addition of new members on January 1, 2020, from the recently closed Aetna PDP divestiture, we expect to see further earnings contribution from our PDP segment in 2020. Regarding the Aetna PDP transaction, we have already begun to work on ensuring an effective transition of these members for January 1, 2020. With the addition of these PDP members, we estimate that our total 2020 pharmacy spend across all of our lines of business will be approximately $15 billion to $20 billion.

As we look ahead, we continue to see a path toward continued earnings growth for WellCare. Some of the drivers of this growth are currently visible. Our Meridian business is expected to continue to improve and drive further accretion. Our new business in the state of Florida is being structured for long-term profitability and success, and our recent PDP acquisition will provide further earnings growth in 2020 and beyond.

The recent North Carolina results, coupled with our number one score in the most recent Florida RFP, are a validation of the years of investments into improving our capabilities and our solutions, and are a testament to the effective execution by our 12,000 WellCare associates. In closing, 2018 was a very good year for WellCare. We exited the year with continued momentum and line of sight to multiple earnings levers ahead of us. While we focus on the execution of our near-term commitments, we are also seeking out additional opportunities to drive further growth. The results of these efforts will provide further benefits to our members, providers, partners, and shareholders. It's an exciting time for WellCare and we look forward to the next few years.

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

Drew Asher -- Executive Vice President & Chief Financial Officer

Thanks, Ken. I'm going to provide you with a wrap-up of 2018, including the fourth quarter highlights, and then focus on 2019 and beyond. As Ken mentioned, 2018 was another very good year for WellCare with meaningful growth in revenue and earnings, but our best accomplishments were the actions we took in 2018 to drive business improvements, growth, and earnings in 2019 and beyond.

We ended 2018 at $11.03 of adjusted EPS, above the top end of our prior 2018 guidance. This represents nearly 30% adjusted EPS growth year-over-year. With respect to the fourth quarter, our adjusted EPS was $1.63, which was a slightly better result than we had forecasted, driven largely by continued PDP outperformance due to an MBR that came in below the low end of our prior guidance, certainly a good way to exit 2018.

Regarding other metrics, the 2018 adjusted SG&A percentage of 8.3%, ended up slightly better than the low end of our prior range. As of year-end, our debt-to-cap ratio was 33.4% with parent cash at $516 million, approximately half of which is earmarked for statutory capital for known 2019 growth, and we have a $1.1 billion available on our credit facility.

In Medicaid, our adjusted MBR ended up 10 basis points above the top of our prior guidance range, as we established the appropriate level of reserves for new business and revenue streams, including Meridian, Arizona, and Florida. Absent reserve build, our Medicaid performance was right on track in the quarter. On that topic, days in claims payable was 52.2 days, slightly higher than the 51.9 days as of the end of 2017.

Favorable prior year development was $28.6 million in the fourth quarter, bringing the full year to $244 million. This compares to $225 million in 2017, good consistency. Fundamentally, we are pleased with how we ended 2018 and entered 2019 with medical trends stable and in line with our expectations. So good metrics that give us confidence as we start 2019.

While we provided initial 2019 guidance on December 17th, we are updating that guidance today to an adjusted EPS range of $13.25 to $13.50, largely reflecting higher PDP volume than previously expected. We also increased the midpoint of the PDP revenue by $50 million, as I'll cover in a minute. Our current guidance excludes any impact from North Carolina in 2019.

A few other highlights from our 2019 guidance. Revenues growing nearly 30%. Net income is growing 30% at the midpoint. Adjusted EPS is growing 21% year-over-year, and all three of our business segments are showing meaningful organic growth year-over-year.

Let me share a few early updates for 2019. We had a strong PDP annual enrollment period, and our PDP membership growth for January is over 530,000 net members. We were able to put forth a competitive product in our second enhanced plan, based upon our strong pharmacy cost structure, the change in the meaningful difference rule for 2019, and the product structure that encourages the use of generics. For instance, we have deductibles for drugs classified in Tiers 3 through 5. Besides the business value of the new enhanced plan, we believe this growth in the chooser product will position us well as we prepare for the addition of the Aetna PDP business in 2020.

In Medicare Advantage, we grew organically approximately 16,000 members in January of 2019. This represents about 3% growth compared to year-end, and we are targeting 8% to 10% full year membership growth in Medicare Advantage. As a reminder, we have a higher relative proportion of DSNP, Dual Special Needs Plan members, and have historically experienced the majority of our membership growth outside of the annual enrollment period.

Our early read on the CMS advance notice for 2020 is that the rate increase for WellCare, including the benefit we get for our star rating progression is around 2%. This pure rate change is before risk score trend and the impact of the ACA fee.

Beyond 2019, we're excited about some positive levers that we've already created for 2020 and beyond. For instance, number one, we expect to advance the Meridian accretion from $0.40 to $0.50 in 2019 to $0.70 to $0.80 in 2020, and a $1 plus in 2021. Number two, we have cohorts of margin expansion opportunity in our new business, such as the $1.9 billion of new revenue in Florida, and the legacy WellCare Illinois business, which was merged into Meridian effective January 1, 2019. Three, WellCare will begin to receive the economic benefits from the Aetna PDP business effective January 1, 2020. And four, as Ken mentioned, with our additional pharmacy spend projected at $15 billion to $20 billion, we are enthusiastic about our PBM RFP to be launched this summer for an effective date of January 1, 2021. It's actually fortuitous timing, given the potential changing landscape in the pharmacy ecosystem.

As Ken mentioned, we are thrilled to be one of four statewide awardees for the state of North Carolina's Medicaid program. We'll be focused on execution as we work with the state on launching the new statewide contract as early as November 1, 2019, for certain regions. As we are able to gain more information around this award, we will update investors regarding its projected financial impact.

While we finished 2018 strong, we've been focused on 2019 and beyond for some time. We're energized about the opportunity in government programs and WellCare's positioning to seize those opportunities. So while we are working on delivering on our commitments for 2019, we're also focused on driving success in 2020 and beyond.

Operator, we can now open the call for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Sarah James of Piper Jaffray. Please go ahead.

Sarah James -- Piper Jaffray -- Analyst

Thank you. So Part D came in meaningfully better than consensus again, and I know part of the bid strategy for 2019 was to reset to a low 80 (ph) MLR, but I'm wondering if that contemplated how well cost management is going as evidenced by your 4Q MLR, and how you think about the Part D MLR setup for 2019?

Kenneth A. Burdick -- Chief Executive Officer

It's a good question. We certainly really like the way we exited, and it was a favorable trend in Q4. You're also right that we reset the bids every year, but you certainly would rather be exiting the year in a position of strength as we start a new year. And then, obviously, we're going to be watching closely our 530,000 new members and the performance on the enhanced product, so I sort of look forward to getting a couple of months under our belt to see where PDP takes us for 2019.

Next question?

Operator

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

Matthew Borsch -- BMO Capital Markets -- Analyst

Yes. Thank you. Just maybe if you could tell us a little bit more of your view on the MA rate, when you say before risk score trend, do you -- would you expect then that you might have something in the sort of 4% to 5% range, if that's not overly ambitious when all is said and done?

Kenneth A. Burdick -- Chief Executive Officer

Yes. That sounds pretty ambitious, given the pure rate change is 2%. Obviously, we've got trend coming at us, like we do every year, and we've got initiatives to bend that trend. But you're right, risk score trend would be a positive add, not from a pure rate perspective, but in the economics of constructing a bid, but there's other small things like county rebasing that we need to see what the final answer is on, and so it's sort of too early to declare sort of what that 2% might become.

Matthew Borsch -- BMO Capital Markets -- Analyst

If I could sneak in just one more, do you have a line of sight on where you think the National Medicaid managed care penetration stands today?

Kenneth A. Burdick -- Chief Executive Officer

Let's see, Matthew. If you look at it in terms of percentage spend, it's just slightly over (ph) 50%. If you look at that as a percentage of eligible Medicaid beneficiaries, it's quite a bit higher. The difference being that there are still many high acuity populations that have not been enrolled into a managed Medicaid program.

Matthew Borsch -- BMO Capital Markets -- Analyst

Yes. Thank you.

Operator

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

Peter Costa -- Wells Fargo Securities -- Analyst

Hi. Thanks for the question. Can you explain sort of the range in your guidance for Rx spend of $15 billion to $20 billion, a $5 billion range is pretty big. Can you talk about what puts it to the higher end of that, maybe talk about sort of what could Aetna be in terms of revenues, and what puts you at the bottom end of that spend target?

Drew Asher -- Executive Vice President & Chief Financial Officer

Yes. There's a number of components, part of which is what portion do we end up migrating over to our own PBM, MeridianRx, but you're right to point out, I mean we don't yet know what we're going to retain as of 01/01/20, as we seek to move the Aetna business into WellCare product, so that's a swing factor. As well as seeing sort of where our new PDP volume sort of ultimately lands us in terms of pharmacy spend. So $15 billion to $20 billion, either one of those numbers is a huge number that should be very attractive for third-party PBMs.

Peter Costa -- Wells Fargo Securities -- Analyst

You didn't mentioned your own pricing or the pricing you'd get on the rebid, but presumably those are factors as well or at least one side of that is?

Drew Asher -- Executive Vice President & Chief Financial Officer

The pricing on the rebid? So when we say $15 billion to $20 billion, that would be before any change in the contract for 2021.

Peter Costa -- Wells Fargo Securities -- Analyst

Okay. And then just a last question, what exactly triggered the decision to increase the Medicaid reserves here in the fourth quarter?

Drew Asher -- Executive Vice President & Chief Financial Officer

What triggered the decision? Well, I guess you'd start with the fact that we had an acquisition, and that we had an acquisition where we have sort of a zero sum settlement with the prior owners, sort of a prudent way to protect the Company from the closing balance sheet, which also means that we've got to rebuild reserves. And as you know, reserves are largely represented by the last three months to four months of incurred claims expense and we've happened to own Meridian for four months in 2018. I'm not sure if that's what you're getting at, but...

Peter Costa -- Wells Fargo Securities -- Analyst

In this case if you saw some differing trend than you expected relative to Meridian or if you saw something else that triggered that, perhaps in your overall business?

Drew Asher -- Executive Vice President & Chief Financial Officer

No. It's nothing to do with sort of our view on trends. It's sort of the process of building up a balance sheet, and quite frankly if you look at DCP being up year-over-year, that's actually a little unusual when you're mixing in a large transaction into the most recent few quarters. So, we were able to take the opportunity to establish appropriate reserves at Meridian, and the other new business lines as well, but it was largely Meridian.

Peter Costa -- Wells Fargo Securities -- Analyst

Okay. Thanks.

Operator

Our next question comes from Ana Gupte of Leerink Partners. Please go ahead.

Ana Gupte -- Leerink Partners -- Analyst

Hi. Thanks. Good morning. I had a question on the proposals that HHS has put forward on the Part D business where you've generally exceeded expectations as you move through the year. One was on changing the risk profile that plans take after the donut hole, and then most recently they've come out with the notion of rebates being passed through to seniors perhaps at the point of sales for higher utilizers, have you any thoughts on that, and are you interacting with HHS and what might your feedback be?

Kenneth A. Burdick -- Chief Executive Officer

Sure. Ana, it's Ken, First, I want to point out that we're completely on board with the notion that we need to find ways to lower the cost of prescription drugs to consumers throughout the US. Secondly, we believe that more pricing transparency is in everyone's best interest. So, having stipulated that those two things are attractive, important, and we're fully supportive of, the devil now lies in the details in terms of how to best accomplish that. So, we are in the process of reviewing the various proposals. As you know, there's going to be a 60-day comment period, which hasn't even started yet, but we're formulating our responses, and yes, we expect to be very engaged on multiple levels with the administration, with elected officials, and through our various trade association groups.

Ana Gupte -- Leerink Partners -- Analyst

And just to follow up, actuaries have told us that the risk-sharing being increased is more likely to be positive than negative for plans, so would you just assume that you do that on a voluntary basis, assuming you get to a point where you like what you see in the final move?

Kenneth A. Burdick -- Chief Executive Officer

Yes. You're talking about the...

Ana Gupte -- Leerink Partners -- Analyst

The risk-sharing in the corridor, which I think -- the reinsurance, which tends to be something you would probably get some benefit from over the years -- course of the year?

Kenneth A. Burdick -- Chief Executive Officer

Yes. I mean, we're certainly evaluating that as an opportunity for 2020, too early to say if we will participate, but you're right, participating plans would take on more of the catastrophic risk in both directions, so it's an interesting pilot and we're evaluating it.

Drew Asher -- Executive Vice President & Chief Financial Officer

And we do believe -- we like the idea that there are some new ideas to create some flexibility, and I think you're referencing maybe the voluntary Part D model, which the two-sided risk makes a lot of sense, and so we are assessing that as we speak.

Ana Gupte -- Leerink Partners -- Analyst

Got it. Thanks, Ken and Drew.

Operator

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

Stephen Tanal -- Goldman Sachs -- Analyst

Good morning, guys. Just wanted to follow up on the Medicaid MBR. I think guidance probably did include some assumptions from Meridian, Arizona and Florida, if we're not mistaken, so maybe just confirm that. And if so, we're trying to make some assumptions about the impact of each of these. It seemed like the underlying core Medicaid business ex those items would still run a bit higher than at least we were modeling. So, any comments on kind of the underlying MBR in the balance of the Medicaid book, and maybe if you'd be willing to size those discrete pieces -- Meridian, Arizona, Florida, that could be helpful as well.

Drew Asher -- Executive Vice President & Chief Financial Officer

Yes. Maybe let me try to simplify it to make it useful to answer the question. Absent the reserve build in Meridian, we would have ended up in the middle, close to the middle of the previous MBR guidance range of 88.4% to 88.8%.

Stephen Tanal -- Goldman Sachs -- Analyst

Okay. That actually helps. Okay. And then just one quick one for me on the PBM contract RFP, why effective 2021, is there a scenario in which that could be accelerated?

Kenneth A. Burdick -- Chief Executive Officer

Well, it was only a few years ago that we made a wholesale change, moved the business to CVS. And we learned in that process that to do it right, and to make sure that there was not disruption for our members, you need something in the neighborhood of 10 months or 11 months. So that there's nothing that we're going to do to create disruption, so we think a thoughtful RFP process, probably kicking off early this summer, sort of gets you to that time frame. We're not interested in short circuiting the transition process, should there be a transition of the PBM.

Stephen Tanal -- Goldman Sachs -- Analyst

Perfect. Thank you.

Operator

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

Justin Lake -- Wolfe Research -- Analyst

Thanks. Good morning. A couple of questions on Medicare, first on Medicare Advantage. The January enrollment numbers from CMS pointed to minimal new member adds so far. I know this isn't complete until February, so wanted your view on how open enrollment is going versus your expectations, and how much membership you expect in open enrollment versus the rest of the year relative to your guide. And then on Part D, given this new product and a lot of new membership, just curious how the membership health status is coming in relative to your expectations? Thanks.

Drew Asher -- Executive Vice President & Chief Financial Officer

Sure. I mentioned this in my script, but yes, we were up 16,000 members in January, and you're right Justin, the initial data from CMS show like a 1,000 members, so clearly that was early. That puts us up about 3% since year-end, and given our high proportion of DSNP, which we sell throughout the year, if you look back historically, the majority of our growth is always outside of the annual enrollment period. So, we're targeting 8% to 10% full year growth with 3% under our belt in the month of January. And then on PDP, I wasn't quite following your question, but we certainly got more volume than expected in the Value Script product or second enhanced plan, but -- so what was (multiple speakers)

Justin Lake -- Wolfe Research -- Analyst

Drew, what I was asking, I was basically just trying to figure out, it looked like that -- that lower price point plan might have -- you might have expected a healthier membership in general to be attracted to that plan. I'm just wondering if it's coming in like you expected there?

Drew Asher -- Executive Vice President & Chief Financial Officer

Yes. It's too early to sort of make that call, but you're right, you have to -- the consumer must be really interested in generic utilization to sort of have that product screen as attractive, and that was an intentional design.

Justin Lake -- Wolfe Research -- Analyst

Thanks.

Operator

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

David Windley -- Jefferies -- Analyst

Hi. I think in your -- thanks for taking the question. I think in your prepared remarks you commented that guidance does not include any impact from North Carolina. Wanted to understand if that also means no kind of incremental business expansion or onboarding costs? Or maybe another way to ask it is, for the two months that you would have part of this, would this be accretive or dilutive to your guidance, if you were to add it in?

Drew Asher -- Executive Vice President & Chief Financial Officer

Too early to make that call, coming off of 24 hours, the news coming out yesterday. You're right, there will be some expense, we've got to frame the exact amount, but you're also right that there will be revenue, presumably if things happen on time with the implementation for November, December. And I guess the way you should think about, the first year or so of a new launch there's going to be an investment period, but we've got to sort of get the final rates and the terms and make sure we frame all that out.

David Windley -- Jefferies -- Analyst

Okay. And then probably even earlier, but how do you think about or what have you had -- what communication have you had from the state in terms of their plans for the second tranche of the overall Medicaid, the shift to managed of their populations that next, call it, $7 billion?

Kenneth A. Burdick -- Chief Executive Officer

Yes. David, right now the focus is on beginning the implementation for the phase-in with two sections, one will be November 1st of this year with the next wave February 1st of '19. Certainly there has been some very early on discussions over the past year about bringing more complex populations in. And for those of you that aren't familiar, this current award covers TANF, CHIP and ABD with some very select non-waiver LTSS membership. So behind David's question is this notion that by winning this we're pretty enthusiastic about our opportunity as they add some additional, more complex populations in the years to come. But there have been no commitments made by Secretary Cohen or anybody else in North Carolina as it relates to the timing. But we're just thrilled with this award, because it -- again it falls in that line of what we've seen recently, a very thoughtful, rigorous program, a highly competitive procurement process, and the philosophy, the underpinnings behind this program are all about integration of physical, behavioral and pharmacy, as well as an extremely strong emphasis on the social determinants of health, including food and security, stable housing, transportation, domestic violence, et cetera, so very forward looking program, and we're committed to doing a great job and we're all going to advance our game by virtue of participating in this program.

David Windley -- Jefferies -- Analyst

Great. Thank you. Appreciate that.

Operator

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

Mary -- Nephron Research -- Analyst

Good morning. It's Mary (ph) on for Josh today. My question is just around Medicaid, and what are you seeing in terms of in-contract or in-state membership changes there? Any state being more aggressive around calling the rolls, just any commentary on the drivers of Medicaid membership to clients in some markets?

Kenneth A. Burdick -- Chief Executive Officer

We were seeing some of that, it feels like it's tapered off a bit, but there's a combination of things. Obviously, in a robust economy you'll tend to see some drop in the rolls. Several states have gone through a recertification process, that's largely now behind us. So, I would say that was a theme as we had pointed out in 2018, very, very early in 2019, but we're preliminarily seeing a bit less of that currently.

Mary -- Nephron Research -- Analyst

All right. Thank you.

Operator

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

Steven Valiquette -- Barclays -- Analyst

Thanks. Good morning, everybody. So, I guess, just based on your comments earlier on the Medicaid reserves, I get to a normalized MLR of maybe 89.3% for 4Q '18 versus 90.2% you reported. I don't want you to comment on that, unless you want to, but really the question I have tied to that is whether that math is right or wrong. There seemed to be a trend so far that for the managed care companies that have reported earnings so far on the fourth quarter that the Medicaid results and Medicaid cost trends in particular do seem to be improving sequentially versus 3Q '18. I'm just curious if you saw that same trend or not when adjusting for that reserve build? Thanks.

Drew Asher -- Executive Vice President & Chief Financial Officer

Yes. We're actually satisfied with the trends that we're seeing that we've seen in the last few quarters in Medicaid, consistent with our expectations and stable, absent any reserve build for new acquisitions.

Steven Valiquette -- Barclays -- Analyst

Okay. Any other color on the initiatives that might be driving the stability there?

Drew Asher -- Executive Vice President & Chief Financial Officer

Well, you're right. It's a combination of macro trend, but the influence that we and payers have on that trend, based upon clinical initiatives, and we've had a full agenda of those for the last few years, and there's ample runway ahead to continue to improve on behalf of our state and federal customers. So, we like our ability to mitigate trend, but trends are stable nonetheless.

Steven Valiquette -- Barclays -- Analyst

Okay. Got it. Okay. Thanks.

Operator

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

Gary Taylor -- JPMorgan -- Analyst

Hi. Good morning. Just wanted to return to North Carolina for a moment. I think there's been a trend in some of the new contracts lately or certainly states that are RFP-ing new populations, where the initial profitability is less or even de minimis with the anticipation it would move as the contract improve. So, I know in North Carolina you didn't bid on rates, but you did get to see rates by (inaudible) in region that the state has established. So, given what you've seen and whatever other actuarial data the state may have shared, is this a state where you would anticipate a similar sort of setup or do you have an ability to say with some confidence the rates look entirely adequate, just looking for some color there?

Kenneth A. Burdick -- Chief Executive Officer

Yes, Gary. Probably at this juncture, we wouldn't go so far as to say that the rates look entirely adequate as we move to the process. They look reasonable, but we fully expect that as with any greenfield type of implementation, transition of care issues et cetera, that in the early year for sure and perhaps a year or two, we'll see less than our target margins in North Carolina. But we don't see anything that's obviously flawed in the assumptions that were used to build the rate, so we take some comfort in that. But having said that, certainly as we move this population into a managed care setting, we expect that we will be building into our target margins over a multiyear time frame.

Gary Taylor -- JPMorgan -- Analyst

Thank you. Two other quick ones. So Illinois -- Michigan and Illinois Medicaid enrollments slipped a little sequentially. Is that anything outside of just improving economy, basically, or changes are even too small that you even characterize it as that?

Kenneth A. Burdick -- Chief Executive Officer

Yes. We're not aware of anything sort of either systemic or a singular event that would account for that, so it would be consistent with the comments I made earlier, improved economy, sort of cleansing the roles with the recertification program et cetera.

Gary Taylor -- JPMorgan -- Analyst

Last question for Drew on cash flow. So, if we look at 2018 free cash flow versus reported earnings, I think it's about 25%. And so, can you just remind us, some of the biggest -- I guess Meridian, but outside of Meridian, were there other things that I'm not coming to mind in terms of headwinds to 2018 cash flow? And then as we move into 2019, are there any obvious factors, why we shouldn't get back to a run rate or free cash flows as good as earnings?

Drew Asher -- Executive Vice President & Chief Financial Officer

Sure. That's a good question, I'm glad you asked it, because human investors understand things that quant funds don't. If you look at Q4, we actually had a big improvement year-over-year in sort of a Q4 cash flow, and even relative to the GAAP net income. So, if you look at Q4 in isolation, which we put in our press release in the -- in sort of a number of (ph) tables, but as we described the highlights that's something to take note of. But you're right, when you look at the full year -- in our business we're so dependent on, in terms of the cash flow statement optics on when a state pays their bills, or when the federal government decides on the 31st to pay you or on the 1st to pay you, and so there's really not this notion of uncollectible receivables in the managed care industry, but if Illinois drags an extra month, that's going to be a cash flow item, and we're a pretty big customer there. There are about half of our receivable on the books at 12/31. By the way they made a $260 million payment in January. So those timing elements are going to drive the mechanics around the cash flow statement, but you really have to understand the business in the context, because unearned premiums will swing, receivables will swing, the ACA fee, receivable reimbursement on Medicaid will be a swing item, which is merely timing.

Gary Taylor -- JPMorgan -- Analyst

Got you. And did I miss prior year development, did you give that?

Drew Asher -- Executive Vice President & Chief Financial Officer

Yes. Gave that in my script. It's $28.6 million in the fourth quarter, full year $244 million, and that compares to $225 million last year. And so, the takeaway for you and others is that's pretty stable, that's actually really good year-to-year comparison.

Gary Taylor -- JPMorgan -- Analyst

Thank you.

Operator

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

Michael Newshel -- Evercore ISI -- Analyst

Thank you. So, last night CVS provided some revenue in earnings disclosure of Aetna's Part D business, so I just want to see if there's anything incremental that you're able to share on what the new baseline is for 2019. So like the revenue number for the first three quarters implies a run rate of $1.7 billion, plus, there's enrollment growth at 15% at least in the CMS data, so is that closer to $2 billion now or anything you can say about what the revenue run rate is?

Drew Asher -- Executive Vice President & Chief Financial Officer

Well, there won't be any revenue that we report of 2019.

Michael Newshel -- Evercore ISI -- Analyst

Right. As in terms of like just sizing the 2019 baseline that you'll obviously then take on in 2020?

Drew Asher -- Executive Vice President & Chief Financial Officer

Yes. There are about two -- they grew a little bit, there are about 2.3 million members excluding the employer group business, which is not part of the transaction. And so, yes, we're going to stay away from giving 2020 guidance when we've got a lot to execute on, and sort of nail a retention rate in the 2020 in enrollment period.

Michael Newshel -- Evercore ISI -- Analyst

For like 2019, I think you've talked about $1.5 billion revenue number, is that closer to $2 billion now in 2019?

Drew Asher -- Executive Vice President & Chief Financial Officer

It's probably a good question, you should ask Aetna CVS, since they own the economics of that business for 2019. We're not going to give an estimate for 2020.

Michael Newshel -- Evercore ISI -- Analyst

Got it. And in terms of retention, are you allowed to communicate with members now about the transition in the WellCare brand, or are you still like -- or communications like that are limited by marketing regulations until you get to the open enrollment period?

Drew Asher -- Executive Vice President & Chief Financial Officer

There's a comprehensive project plan that we've negotiated and are working with CVS Aetna as we speak right here in terms of the sequence of the steps throughout this year, and you better believe there will be a lot of communication with members as we get closer to the in-enrollment period.

Michael Newshel -- Evercore ISI -- Analyst

Okay. Thank you very much.

Operator

Our next question comes from Scott Fidel of Stephens. Please go ahead.

Scott Fidel -- Stephens -- Analyst

Hi. Thanks. Good morning. Just had a question on the Medicare Advantage/MLR, walked through quite a bit of detail just on sort of the core Medicaid MLR trends in the 4Q. Looks like on the MA/MLR, just came in right at the high end of the guidance range, so just interested if anything you wanted to call out around sort of underlying MA/MLR trends in the 4Q, and if there was any sort of other factors that played in there?

Drew Asher -- Executive Vice President & Chief Financial Officer

Yes. Trends look fine, similar to Medicaid in terms of stability and consistent with our expectations. We do have the ability in Q4 in Medicare Advantage to sort of (inaudible) quality investment spending up and down based upon how the enterprise is doing, and so we've taken advantage of that at least the last couple of years, if not the last few if you look at Q4s, so that sort of played into us ending up sort of at that top of that range.

Scott Fidel -- Stephens -- Analyst

Maybe fair to think about through that sort of toggling that is the variance between the high end and sort of the midpoint of the guidance range?

Drew Asher -- Executive Vice President & Chief Financial Officer

Yes. I don't have the precision in front of me, but clearly we're able to proactively lean into certain quality spend with a couple of months notice.

Scott Fidel -- Stephens -- Analyst

Okay. All right. Thanks.

Operator

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

Kevin Fischbeck -- Bank of America -- Analyst

Great. Thanks. Wanted to ask a question about the PDP membership, I appreciate the color on adding the second enhanced plan, but I guess, how similar is that plan to kind of what you've been offered in the market, I guess, you said that it was growing membership pretty quickly, there's always questions about do you grow too quickly, and the visibility you have on the cost for that type of plan?

Drew Asher -- Executive Vice President & Chief Financial Officer

Yes. It's a good question, and it's clearly when you have a new revenue stream you're not as comfortable as the revenue stream that you've been managing for years. We have had an enhanced product for a number of years, it just hasn't been a large part of our PDP portfolio. And so, with the changes and the meaningful difference we're able to introduce a second enhanced plan, so we're familiar with the dynamics. We actually launched in the preceding year a few pilot regions with product design to get us a little bit smarter in anticipation of launching the second enhanced plan. So, we have some data around it, although sort of it's a microcosm of now what's a pretty big business. So, we'll know very quickly, we're confident in sort of the benefit plan design. We like the growth that we had, so we'll -- I guess we'll be updating you in the next couple of conferences and in Q1, but sort of like our position and our cost structure in Part D, the PDP business, which is a pretty critical component of performance the underlying cost structure.

Kevin Fischbeck -- Bank of America -- Analyst

Okay. And appreciate all the tailwinds, you guys have a lot of tailwind over the next several years. I guess the one headwind I could think about is, just HIF returning. If HIF does return, is what we expect next year, do you guys have a rough number for what that might be?

Drew Asher -- Executive Vice President & Chief Financial Officer

Rough number like the absolute, I mean it was like $340 million was what we wired to the IRS in September of '18. So, no, we haven't sort of worked through all the bid math, you're probably referring to the relevance of Medicare Advantage, clearly it would be a headwind in a vacuum inside of a bid that has a collection of headwinds and tailwinds, and we have to see where the final rates came out first from CMS, how our trends were running and then what initiatives we can have to help pay for some of that ACA fee should have come back.

Kenneth A. Burdick -- Chief Executive Officer

Yes. Kevin, I would just remind you that and others on the call that as we did our bids for 2019, we anticipated that the HIF would come back in 2020. And while we are certainly advocating for a repeal or a continuation of the moratorium, we plan for the return.

Kevin Fischbeck -- Bank of America -- Analyst

Great. That's what I wanted to hear. Thank you.

Operator

This concludes our question-and-answer session. The conference is now also concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 52 minutes

Call participants:

Beau Garverick -- Senior Vice President

Kenneth A. Burdick -- Chief Executive Officer

Drew Asher -- Executive Vice President & Chief Financial Officer

Sarah James -- Piper Jaffray -- Analyst

Matthew Borsch -- BMO Capital Markets -- Analyst

Peter Costa -- Wells Fargo Securities -- Analyst

Ana Gupte -- Leerink Partners -- Analyst

Stephen Tanal -- Goldman Sachs -- Analyst

Justin Lake -- Wolfe Research -- Analyst

David Windley -- Jefferies -- Analyst

Mary -- Nephron Research -- Analyst

Steven Valiquette -- Barclays -- Analyst

Gary Taylor -- JPMorgan -- Analyst

Michael Newshel -- Evercore ISI -- Analyst

Scott Fidel -- Stephens -- Analyst

Kevin Fischbeck -- Bank of America -- Analyst

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