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Molina Healthcare Inc (NYSE:MOH)
Q3 2020 Earnings Call
Oct 29, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Molina Healthcare Third Quarter 2020 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] Please note, today's event is being recorded.

I would now like to turn the conference over to Julie Trudell, Senior Vice President of Investor Relations at Molina Healthcare. Please go ahead.

Julie Trudell -- Senior Vice President of Investor Relations

Good morning, and welcome to Molina Healthcare's third quarter 2020 earnings call. Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Tom Tran. A press release announcing our third quarter earnings was distributed yesterday after the market closed and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Thursday, October 29, 2020, and have not been updated subsequent to the initial earnings call.

In this call, we'll refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter 2020 earnings release. During our call, we will be making certain forward-looking statements, including, but not limited to, statements regarding the COVID-19 pandemic, the current environment, recent acquisitions, 2020 guidance and our longer-term outlook.

Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K Annual Report for the 2019 year filed with the SEC as well as risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open up the call and take your questions.

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

Joe Zubretsky -- President and Chief Executive Officer

Thank you, Julie, and good morning. Today, we would like to provide you with updates on a number of topics. First, we will cover the enterprisewide financial results for the third quarter. Second, we will discuss the impact of the COVID-19 pandemic on various aspects of our business. Third, we will convey our 2020 guidance in the context of our third quarter results. And fourth, we will provide an update related to the continued execution of our growth strategy.

Let me start with the third quarter highlights. Last night, we reported GAAP earnings per diluted share for the third quarter of $3.10 with net income of $185 million. This result was supported by an MCR of 85.9%, a G&A ratio of 7.3%, and an after tax margin of 3.7%. Our year-to-date GAAP earnings per diluted share is now $10.65. On an adjusted basis, which excludes non-recurring non-operating items are earnings per diluted share were $3.36 for the third quarter. Excluded items related primarily to costs associated with our exit for Puerto Rico and start-up costs associated with various growth initiatives.

In summary, we are pleased with our third quarter performance, both with respect to the continued delivery of solid earnings and the focused execution of our growth strategy. All of this was achieved while dealing with the effects of a global pandemic. Unlike the second quarter, in which the combined COVID-related impacts serve to temporarily increase our earnings, in this third quarter, the combination of all COVID-related impacts net its way negligible to slightly positive impact on earnings.

Therefore, our reported results and ex-COVID results are essentially the same. We will once again quantify the various COVID impacts on our results to provide some clarity on how they affected our operating metrics. But it is clear to us that our operating metrics were substantially in line with our expectations both as reported and as adjusted for COVID impacts.

Now I will provide some highlights related to our third quarter results from an enterprise perspective. Beginning with revenue, our premium revenue of $4.8 billion increased by 17% over the prior year, and by nearly $400 million and 9% sequentially. Relatedly, our membership increased sequentially by 478,000 members or 13% primarily in Medicaid. Bear in mind, these increases include the membership and revenue of Passport, which we assumed on September 1 when the Commonwealth of Kentucky novated Passport's Medicaid contract to Molina.

With respect to medical margin with an 85.9% MCR, our performance was also strong and only modestly impacted by COVID. We experienced a modest amount of utilization curtailment, which was partially offset by the cost of COVID-related care. The net of which favorably impacted the medical cost line. This was substantially offset by COVID-related rate refunds on the premium revenue line. In the quarter, these items combined had a negligible impact on the total company medical margin and earnings, but serve to decrease the medical care ratio by approximately 60 basis points.

This strong medical margin performance anchored by Medicaid reflects a sound non-COVID rate environment, continued excellent management of medical costs and a moderately lower acuity population. All of the COVID-related impacts on our third quarter metrics will be described in more detail in a few moments.

Next, we continued to effectively manage our administrative costs through productivity gains and fixed cost leverage reducing a G&A ratio of 7.3% despite spending on specific COVID-related items, including the cost of servicing the additional membership volume. Net investment income usually not in earnings item with significant variability was again unusually low at $14 million compared to $40 million a year ago, due to the current low interest rate environment.

Our line of business results were mostly in line with our expectations with strong metrics in both Medicaid and Medicare. However, our marketplace results fell short of our expectations. In Medicaid and Medicare, control over medical cost utilization and unit cost continues to provide the ballast for a sustained consistent performance all while ensuring our members receive high quality care.

COVID-related impacts were slightly favorable in the Medicaid and Medicare businesses. Excluding the COVID-related impacts our performance and resulting margins in these lines still exceeded our pre-COVID expectations. In our marketplace business, the COVID-related impacts in the quarter were net unfavorable. We also operationally underperformed in our bronze product with respect to both utilization control and the achievement of risk scores that accurately reflect the acuity level of that population.

We remain confident in our ability to titrate the medical margin performance of this metallic tier. As we have done in our Medicare and our flagship Medicaid business. In summary, we continue to perform well across the many domains of managed care and our operating fundamentals remain very strong.

Now I will provide some commentary about the item by item effects of COVID on our third quarter. While these items are of note, when individually considered, together they net way negligible to slightly positive impact on enterprise earnings and earnings per share in the quarter. The COVID impacts on our quarterly results include a modest net decrease in medical costs due primarily to COVID-related utilization curtailment. Rate refunds to a number of our state Medicaid customers and response to the COVID-related utilization curtailment, which we experienced in both the second and third quarters, in increase in our G&A spending on activities related to COVID and a meaningful increase to our Medicaid membership.

We experienced several significant COVID-related impacts on medical costs in the quarter. First, at the beginning of the quarter, utilization was still moderately curtailed, but rebounded to more normal levels during the quarter. Second, we attracted approximately 300,000 new Medicaid members to Molina since the end of March. And the acuity of that population is clearly lower than the book of business average. And third, direct costs to care for COVID patients totaled $35 million in the quarter. As a resurgence of COVID infections and episodes has occurred in places including Texas and California and disproportionately impacted the marketplace business.

In the quarter, the net effect of these three factors reduced normalize medical costs and increased pre-tax earnings by a range of $95 million to $105 million. As you recall, in the second quarter, six of our state customers enacted temporary rate refunds with the stated intent of recouping the portion of our capitated rates not spent on medical costs due to the pandemic. In some of those states, the refund period extended into the third quarter.

In addition, during the quarter one additional state Michigan enacted a refund mechanism. In the third quarter, the total impact from COVID-related rate refunds serve to reduce premium revenue and earnings by $88 million on a pre-tax basis. With respect to rate adequacy, we do not intend nor do we want to keep state Medicaid money that was intended to be spent on medical benefits, but was not due to utilization curtailment caused by COVID.

In many of our Medicaid states, there are already mechanisms in place to protect against a surplus margin as there are minimum MLRs in seven of our states and profit caps in two others. And once the COVID-19 pandemic abates, we believe that the traditional process of establishing prospective actuarially sound rates based on a credible medical cost baseline and cost trend off that baseline will resume. COVID-related activity increased our third quarter administrative expense by approximately $7 million.

We continue to develop a variety of new operational protocols, technology implementations, and benefits for our employees all related to the COVID pandemic and the related increased volume. Medicaid membership increased sequentially by 473,000 in a quarter, a 15% increase. 325,000 of this increase was directly related to the Passport membership and Kentucky, which we assumed on September 1.

The addition of the YourCare membership in New York was almost entirely offset by the expected membership decline from the early stages of our Puerto Rico exit. The remaining 148,000 member increase was primarily due to the suspension of redeterminations. As we believe that unemployment related enrollment has not yet materially accessed managed Medicaid.

It remains unclear how high the COVID-related membership peak will be, how quickly it will fall as the economy recovers and where it will ultimately settle. However, it does appear that since unemployment nationally is now just under 8% initial industry estimates of unemployment related Medicaid membership increases were overstated. Relatedly, the declaration of the extension of the public health emergency period and the related maintenance of effort extension into next year will likely have a favorable impact.

In summary, as we work through this unprecedented period of the COVID pandemic, we remain focused on executing on the underlying fundamentals of our business to continue to produce solid results, regardless of the short-term COVID-related impacts on our reported financial metrics and results.

Now I turn to our guidance for the full year. In September 1, we closed on the Passport acquisition and the Commonwealth of Kentucky novated Passport's Medicaid contract to Molina. For 2020, the four months of revenue from this transaction will add approximately $700 million of revenue with negligible earnings. This increase combined with higher Medicaid enrollment through the third quarter, supports the increase in our 2020 total revenue guidance to $19.6 billion from the previous estimate of $18.8 billion. This total revenue guidance for 2020 includes $18.6 billion in premium revenue.

Our core performance each quarter has been strong and stable producing at or about $3 of earnings per share. Although this core business performance is expected to remain strong through the fourth quarter, we are choosing to maintain our existing guidance. We take this cautious approach because of the continued uncertainty related to COVID impact on medical costs and the possibility for additional COVID-related rate refunds.

We further note that the proceeds from the previously announced favorable settlement with respect to the federal risk corridor litigation will be reported in our fourth quarter. Also in the fourth quarter, we intend to make a sizable contribution to our recently launched MolinaCares charitable foundation. These two items will likely offset each other. When we report our fourth quarter, we will certainly focus on providing a clear view of the earnings power of the business as a baseline for gauging the quality of our 2021 earnings guidance.

Shifting the discussion now to our growth initiatives, we made another major stride in the quarter related to the activation of our growth strategy. In September, we signed a definitive agreement to purchase Affinity Health Plan of New York for approximately $380 million. The profile of Affinity is perfectly aligned with our philosophy of staying close to our core business. It is a managed Medicaid business in New York City, as well as surrounding counties and is a nice compliment to the Senior Whole Health business that we are acquiring with the Magellan Complete Care acquisition.

Affinity serves approximately 284,000 Medicaid members. Its membership base is stable and the company has very good share in the markets it serves. Affinity's operating infrastructure sound, it has solid provider relationships, a high performing team of enrollment coordinators and a platform, which has the ability to successfully defend and expand its market position.

Affinity has not performed to the levels of profitability that Molina has achieved. It therefore provides yet another opportunity for us to bring our operating discipline, business processes and technologies to improve margins and harvest fixed cost leverage with our other New York-based businesses.

The transaction is expected to close as early as the second quarter. So the acquisition could provide up to $600 million of revenue for 2021. At a purchase price of less than 30% of reporting revenue, we are projecting excellent returns in excess of our cost of capital. The transaction is expected to be immediately accretive by $0.15 to $0.20 adjusted earnings per share in the first 12 months of our ownership. After that initial integration period, we expect to achieve margins consistent with both Molina's performance track record and the industry norm for the New York metro area.

The purchase of Affinity is another milestone in a growth oriented 2020. Our growth initiatives continued to be anchored by our capital allocation priorities. First, organic growth of our core businesses, second, inorganic growth through accretive acquisitions, and third programmatically returning excess capital to shareholders.

We previously provided you with a 2021 premium revenue outlook. This outlook included a pro forma estimate of the revenue associated with our announced acquisition of Magellan Complete Care, which is on track to close around the end of the year and an estimate of the revenue expected from auto assigned membership and our new Kentucky Medicaid contract. That outlook, which included only a modest early estimate of organic growth, was 2021 premium revenue of $21.5 billion.

This 2021 outlook has improved now that we are currently serving all of Passport's existing membership in Kentucky, the majority of which we are expecting to keep. Our expectation is not affected by a court ruling last Friday that a sixth player should be added to the Kentucky Medicaid program for 2021. That ruling did not rescind our Medicaid contract award, does not impact the earlier novation of the Passport Medicaid contract to us and does not affect our status as a current incumbent in the program.

Our 2021 outlook has also improved the announcement of the Affinity acquisition. We will provide refined revenue guidance with all the supporting details, when we announce our 2021 full year guidance. There was so much activity related to the political arena, legislative actions and judicial review that we feel obligated to provide some brief commentary on these topics.

We have no new perspective to add on the upcoming election, except to say, that all of the most likely potential political outcomes are generally positive for managed Medicaid and related government subsidized programs, although, some political scenarios are more favorable than others.

On the legislative front, the recently announced expansion of the COVID public health emergency is likely a positive indicator for continued membership gains and to provide more support for an actuarially sound rate environment. Much has been written and discussed regarding the Affordable Care Act case that is scheduled to be argued before the Supreme Court on November 10.

We believe that even if the court were to find the individual mandate to be unconstitutional, it should nevertheless find the individual mandate to be separable from the balance of the law, both as a matter of logic and based on the clear intent of the 2017 Congress, which zeroed out the individual mandate tax penalty. It is also clear as a factual matter that the marketplace business can function effectively without any penalty for failure to purchase health insurance. Regardless of the Supreme Court's ruling, we believe there is a high likelihood of a legislative fix to the law before any final legal opinion would go into effect.

As I conclude my remarks, I offer another heartfelt thank you to our management team and our 10,000 associates for delivering excellent results, while dealing with their own stresses and life challenges. Even when facing these challenges, our associates are inspired and motivated by the opportunity to make positive change by delivering high quality healthcare to the country's most vulnerable populations. Our associates continue to excel and I stand in admiration of their dedication and desire to serve our membership base, during these most challenging times.

In conclusion, this was yet another meaningful quarter for the company. We are pleased with our third quarter performance, especially, in light of the turbulence caused by the COVID pandemic. We took major steps forward in our transformation. We sustained our margins and did right by our members and customers. We continue to execute on our revenue growth strategy and deployed excess capital in strategic acquisitions. This strong performance points to a very bright future.

With that, I will turn the call over to Tom Tran for some additional color on the financials. Tom?

Tom Tran -- Chief Financial Officer

Thank you, Joe. Good morning, everyone. I am going to provide highlights of our financial results for the quarter and then discuss our balance sheet, cash flow, 2020 guidance and 2021 outlook. We reported GAAP earnings per diluted share of $3.10 and adjusted earnings per share of $3.36, representing 13% and 19% growth respectively over the same period in 2019. The solid results were supported by premium revenue of $4.8 billion, which grew 17% from the third quarter of 2019 and include 22% year-over-year growth in Medicaid membership, inclusive of the Passport and YourCare acquisitions.

As it relates to the COVID-19 impact by line of business, COVID reduce the Medicaid MCR by approximately 90 basis points and the Medicare MCR by approximately 130 basis points. However, COVID related impacts increase a marketplace MCR by approximately 310 basis points. Overall, the impact of COVID on third quarter earnings was negligible to slightly positive. The G&A ratio improves and came in at 7.3% compared to 7.6% in a prior year due to the fixed cost leverage we created from the increase in revenue, offset somewhat by increase in COVID specific costs and the integration of Passport.

Now, turning to balance sheet and cash flow. Our reserve approach remains consistent with prior quarters and our reserve position remained strong. Days in claim payable represent 52 days of medical cost expense compared to 52 days in the second quarter of 2020 and 50 days in the third quarter of 2019. Prior year reserve development for the third quarter of 2020 was negligible, as was the case with a comparable period in 2019.

Operating cash flow for the nine months of 2020 was $591 million, reflecting the strong operating results and the timing of government receipts and payments. We extract $120 million of subsidiary dividends in the quarter, which brought our parent company cash balance to $1.3 billion and give us ample capacity to fund our recent acquisitions and organic growth initiatives.

Debt at the end of the quarter is 1.6 times trailing 12-month EBITDA. Our leverage ratio is 48.2%. However, on a net debt basis, net of parent company cash, the leverage ratio is 25.8%. Taken together, these metrics reflect a conservative leverage position. Our unsecured debt rating was recently upgrade by two notch to Ba3 by Moody's, a recognition of our operating performance, growth prospects and financial strength. As of September 30, 2020, our health plans has statutory capital and surplus of approximately $2.2 billion, which equates to approximately 365% of risk-based capital.

Now turning to our 2020 guidance. We increase our full year 2020 total revenue guidance to approximately $19.6 billion from $18.8 billion, mainly due to the completion of the Passport acquisition in Kentucky and the novation of its Medicaid contract to Molina on September 1. As previously noted, we are maintaining our existing earnings guidance. Let me provide more color on the reasons for this cautious approach.

First, while we have enclosed all known COVID related rate refunds in our guidance, additional rate refunds be enacted, such refunds would have a more disproportionate impact in the fourth quarter because of their retroactive nature. And second, there remains a level of uncertainty about COVID itself and/or related medical cost increase or decrease that could occur. If you recall, in the second quarter, we report approximately $190 million to $240 million of net COVID related medical cost decrease due to utilization curtailment. And in this third quarter, medical cost curtailment was $95 million to $105 million.

We have been averaging $12 million to $13 million a month in COVID direct costs of care. How these many dynamics play out in a fourth quarter is a matter of significant uncertainty. As Joe mentioned previously, our core performance each quarter has been strong and stable producing at or above $3 of earnings per share. And our business performance is expect to remain strong through the fourth quarter.

We will remind investor of the seasonality of the marketplace NCR and higher open enrollment expenses in both the Medicare and marketplace businesses in the fourth quarter. When we report our fourth quarter results, we will provide a clear picture of the run rate of the business, excluding the distortions cost by COVID, all with a goal of presenting a clear baseline off of which to gauge our 2021 guidance.

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

Questions and Answers:

Operator

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Matthew Borsch with BMO Capital Markets.

Matthew Borsch -- BMO Capital Markets -- Analyst

Hi. Thank you. I was just hoping maybe you could elaborate a little bit further on the pressure factors in the marketplace business. And I guess, I'm a little surprised just because I was unaware of that 300 basis point increase in the MCR there maybe you can parse that out. That would be fantastic.

Joe Zubretsky -- President and Chief Executive Officer

Sure. Obviously in producing an 81% MCR for the quarter, we clearly underperformed. But 300 basis points of that was directly related to COVID. And it;s all geography based. We have, as you know, a significant amount of membership in Texas, there was a COVID spike in Texas, and it's certainly impacted our marketplace business. But even with an ex-COVID MCR of 78%, we underperformed. We've analyzed it thoroughly. It's related to the bronze product. Silver product is performing fine.

And we think we're well priced and well positioned and product design and price. We underperformed on two very important operating levers and that is utilization control and the ability to attract and record appropriate risk scores commensurate with the acuity of that population. We have those disciplines in place for our other products and our other businesses through various organizational design issues. We have not yet excelled at those two operating disciplines in the marketplace business and we'll fix that the way we fixed everything else over the last couple of years.

Matthew Borsch -- BMO Capital Markets -- Analyst

And if I could just ask, given maybe where you're expecting the full year margin to land for the marketplace businesses. Is that above or below what you would view as sort of target sustainable?

Joe Zubretsky -- President and Chief Executive Officer

It will likely be below. As you know, a couple of years ago, the last time we gave you long-term targets is that our Investor Day, where we suggested that the long-term after tax margin for the marketplace business was 8.5% to 9.5%. We're certainly backing off that long-term target. This is a mid-single-digit business, but the likely to underperform after the year, but I think that's where our long-term margin expectation will lie mid-single-digits.

Matthew Borsch -- BMO Capital Markets -- Analyst

Thank you.

Operator

Thank you. And the next question comes from Kevin Fischbeck with Bank of America.

Kevin Fischbeck -- Bank of America -- Analyst

Great. Thanks. Maybe just to follow-up on that. So I guess, when we think about the business for 2021, you're saying it sounds like you're saying that you're not worried about the pricing for this business in 2021, that even though costs are up, you've priced appropriately, it's really just operational changes that need to be made for next year. And you should get that business back to normal next year.

Joe Zubretsky -- President and Chief Executive Officer

That is correct. In that bronze product, our bronze mix is slightly higher this year than last. And the bronze membership actually had a higher churn. And as you know, when you attract a new member, you're always starting with a risk score of one in new members. They haven't interacted with the healthcare system yet. So you need to work really hard at making sure, you get the right risk scores.

So the fact that higher percentage that membership was new and our bronze mix is slightly higher. Product is adequately priced, product design and our zero-based our zero premium products are in the right geographies. We're well positioned for next year. The companion question is, did you consider all this and the pricing that you filed recently? The answer is yes. We filed prices that included a very conservative pre-COVID medical cost baseline and reasonably conservative trends off that baseline. So our view, this is not a pricing issue. This is a performance issue, and we plan to get that back next year.

Kevin Fischbeck -- Bank of America -- Analyst

Okay, great. And then just to confirm some of the numbers that you mentioned on COVID, the $95 million to $105 million number. Was that a gross number? I think you saw $30 million of COVID costs. Is the $95 million to $105 million net about $30 million or should we think about that as a gross benefit $30 million offset.

Joe Zubretsky -- President and Chief Executive Officer

No. You're correct. That's net. The gross range of costs curtailment due to the pandemic was $130 million to $140 million and direct costs related to COVID were $35 million, producing the net range of $95 million to $105 million.

Kevin Fischbeck -- Bank of America -- Analyst

Okay. But the $95 million to $105 million is on the same basis as the $190 million to $240 million you mentioned last quarter.

Joe Zubretsky

That is correct. The estimates we gave in the second quarter were net of their direct inpatient medical costs related to COVID. All right. Perfect. Thank you.

Joe Zubretsky -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And the next question comes from Charles Rhyee with Cowen. Please go ahead, Mr. Rhyee, your line is live. All right. Well, moving on the next question comes

From Justin Lake with Wolfe Research.

Justin Lake -- Wolfe Research -- Analyst

Thanks. Good morning. First question on state to be margin corridors and state rebasing. Joe, can you I think you said, margin corridors first little over $80 million this quarter, in terms of payback numbers. Do you have an estimate for the full year on both margin

Corridors and rebasing? And how you're thinking about that going into next year?

Joe Zubretsky -- President and Chief Executive Officer

Sure. Well, just to recap the entire year, $75 million when we reported the second quarter due to six enacted retroactive rate refunds all clearly contained and related to COVID curtailment. That same number for the third quarter with $88 million, meaning we've incurred $163 million year-to-date. The third quarter number included one additional state, Michigan that introduced a refund mechanism. And many of those corridors and refund mechanisms extended to the fourth quarter. We haven't disclosed exactly what that number is and obviously depends on a lot of other profitability factors, but various of those mechanisms do extend into the fourth quarter and we'll report that number against the COVID curtailment, just the way we did in the second and the third quarters.

Long-term, we are very comfortable at the time tested mechanism of prospective rate development off a credible cost baseline and a reasonable trend off that baseline will resume. These refund mechanisms are clearly related to the recruitment of money that was paid to us with the full intention of us, paying it out to members and benefits and due to COVID that level of utilization didn't occur. So again, very contained, very specific, all related to COVID, when all that the pandemic abates, we believe that the system will function as intended and as time tested process of prospective rate development will resume.

Justin Lake -- Wolfe Research -- Analyst

Thanks. And then Joe, when you think about these members, who have the growth in membership, that's come from the lack of churn in this I don't think any of us know, when the federal government is take off the federal emergency status and these members will start being reverified. But I'm curious, as you think into 2021, whenever that does happen. Do you have a view on how these members kind of move off Medicaid, how long it takes for the state steady verify?

Joe Zubretsky -- President and Chief Executive Officer

It's a really interesting question, because we have begun conversations with many of our state customers about the prospects of moving members, who are no longer eligible for Medicaid, but we're on it due to the redetermination paws, how they will move them off. Obviously, and not for revenue reasons, we're not suggesting that they do it in a stage process for revenue generating reasons. But for the lack of tumult and lack of churn and the disruption, it will create for members who are on Medicaid and are suddenly taken off.

So we're certainly arguing and in support of a more staged approach, but our state customers are still deliberating in terms of whether they're going to turn the switch off immediately or whether they're going to face this over time, which again, causes yet another variable. And what the redetermined member redetermined patient-based revenue will look like for 2021. How fast those members roll off is still yet to be determined.

Justin Lake -- Wolfe Research -- Analyst

Great. Thank you, Joe.

Joe Zubretsky -- President and Chief Executive Officer

Youre welcome, Justin.

Operator

Thank you. And next question comes from Dave Windley with Jefferies.

Dave Styblo -- Jefferies -- Analyst

Hi, good morning. It's Dave Styblo in for Windley. I was hoping you could talk Joe a little bit more about how you think about the both margin profile for Kentucky in year one. Usually, margins on a new contract are well below the target or even negative earnings in that first period. However, does it considerably help you that you'll have an existing platform via the Passport acquisition that might allow you to earn something closer to your target margins for all of your Kentucky business in the first year?

Joe Zubretsky -- President and Chief Executive Officer

Sure. Well, when it comes to our acquisitions, we certainly and the extensive due diligence that we perform. We certainly able to give our investors a clear view of the early accretion, as we've done on Magellan and as we just did on Affinity. When it came to Passport, it was a different model. We actually were buying into a membership base, a revenue stream, not necessarily an earnings stream. So we view Kentucky as sort of a hybrid between a new installation and the integration of a business.

Now, as you know, the Passport earnings margin profile was not where Molina has operated in the past. So it's going to take some time to get it there. So we're going to be very cautious with our early estimate of how much how many dollars of earnings will flow off the Kentucky Medicaid business in the first year. And when we report our 2021 guidance, we'll certainly have a reasonable estimate at that time. But right now, we are in full mode of analyzing Passport and integrating it due to the contract novation we have getting ready for open enrollment. All those processes are fully in motion. But it's too early to actually have a point estimate on the first year. But I will say that the Passport acquisition clearly allowed us to avoid a lot of the very expensive start-up costs that are normally associated with a new contract.

Dave Styblo -- Jefferies -- Analyst

Got it. Thanks. And then just a follow-up on the parent cash. Can you give us some sense of a roll forward over the next year. So obviously, you've got a couple of acquisitions that you have to pay for, but how we should think about that cash balance toward the end of next year. So we can gauge a little bit more about your propensity to an appetite for acquisitions of these assets that you'd like to have a bolt-on such as Affinity.

Joe Zubretsky -- President and Chief Executive Officer

The way to think about the capital model goes something like this. You can look at our forecasted earnings and except for the amount of capital that one would need to reserve and it's regulated subsidiaries to fund organic growth, which averages between 8% and 10% of premium. That cash flow ought to be able to be extracted in the form of dividends from our operating subsidiaries.

Once it's brought to the parent company, you can put leverage on it and pick a leverage ratio of 50%, you can double your capacity. So earnings less retained capital for organic growth ought to be dividend to the parent doubled the size of it for debt capacity. And that gives your sort of view of how much free cash flow you have available for acquisitions and other activities.

Dave Styblo -- Jefferies -- Analyst

Thanks so much.

Operator

Thank you. And the next question comes from Josh Raskin of Nephron Research.

Josh Raskin -- Nephron Research -- Analyst

Hi. Thanks. Good morning. First question is just around utilization patterns. And if you feel like toward the end of the quarter, you were back to whatever normal is supposed to look like our baseline, and maybe a progression to the quarter as well as an early view on October.

Joe Zubretsky -- President and Chief Executive Officer

Sure, Josh. At the beginning of the quarter, we still had the curtailment effect in place and that sort of evaporated as the quarter moved on. Now, I will tell you that toward the end of the quarter, when the infection rate in many of our geographies and across the nation spikes, we saw a reaction to that. We're learning a lot about consumer behavior and about how the healthcare economy works and how reactive it is. It's very reactive to the COVID infection rate, both in the number of hospitalizations we have directly related to COVID and how quickly elective and discretionary procedures begin to wane when the COVID infection rate is reported.

So the healthcare economy is very responsive to that infection rate. And toward the end of the quarter, we saw it spike back a little bit. Not commenting on October at this point, but as I said, it's very, very responsive. And the fact that we're now seeing a resurgence of COVID, I believe, will impact the fourth quarter. You'll see more COVID related costs, and I believe you'll see the shadow effect of continued curtailment.

Dave Styblo -- Jefferies -- Analyst

Perfect. And then just second question, as you think about 2021, you guys gave some visibility into a revenue number last quarter. It sounds like, you're updating it to be just simply larger. Is there any major difference expected between the top line and bottom line? I just want to make sure I'm not missing something. It sounds like Passport kind of maybe a little bit lower than typical earnings. But just want to make sure there's no there's nothing brought, I'm missing that large acquired books aren't going to be similar margins, when you think about the synergies, etc.

Joe Zubretsky -- President and Chief Executive Officer

Well, ultimately, the premise of your question is correct. We plan to get these to our target margins, producing 6%, 6.5% EBITDA margins depending on the geography, we plan to get them there. We gave the accretion numbers for Magellan. We just gave them, at least the first 12 months for Affinity. And I would say, you're right, on Kentucky, given that it's a hybrid between an installation and the integration of a non-for-profit plan. I would not giving you a forecast, but I would say that in the first year, that is likely not to perform to our target margin.

Josh Raskin -- Nephron Research -- Analyst

All right. That's helpful. Thank you.

Operator

Thank you. And the next question comes from Sarah James of Piper Sandler.

Sarah James -- Piper Sandler -- Analyst

Hi, thank you. I appreciate the commentary on the payback situation in multiple States in Medicaid. And I'm wondering if that also indicates that Medicaid margins are operating near peak. Then if you layer on the lower long-term tax margin guidance, I'm wondering if the right number for the total co is still the 3.8% to 4.2%, that you gave it last I-Day. Thanks.

Joe Zubretsky -- President and Chief Executive Officer

Let me comment on our margin performance, vis-a-vis the long-term targets and you're absolutely right. The last time we updated this, which is now some time ago. We gave you a long-term target of 3.8% to 4.2% and we just produced a quarterly margin of 3.7%, which had somebody you have recognized falls just slightly out of that range. I will remind you that 3.8% to 4.2% included a marketplace target of 8.5% to 9.5%, which were clearly going to come off of that's going to land in mid-single-digits, not picking a point estimate now.

So the fact that we're actually able to produce 3.7% after tax, when the marketplace this quarter was breakeven. I think we're still in the strike zone of our long-term targets, even though, we can pullback our projection of what the marketplace business will produce. And the fact that we're not the chatter two years ago, and it was legitimate was that our financial profile was over-relying over reliance on marketplace revenues and profits. That's certainly not the case anymore, but if we can produce, our long-term part of margins having pulled back our marketplace estimates, I think that's certainly bodes well for the future.

Sarah James -- Piper Sandler -- Analyst

And then on the bronze hicks, but last quarter you guys talked about COVID creating some challenges or delays in getting the adjusted risk scores. I'm just wondering if you learned anything from this year's process that makes you more optimistic about the new members that come on next year and the pace at which you might get them scored.

Joe Zubretsky -- President and Chief Executive Officer

Yes, I mean the entire industry is facing the same challenges. As you know in order to get the right codes and the right interventions, people need to go to the doctor. And when they stopped going to the doctor and the hospital, you don't have the data to support their risks. Some of these require face-to-face interventions. We have a fantastic arm of our business with nurse practitioners and visit patients in their home. They were unable to do that for a long period of time. So we're sort of facing the same headwind that the rest of the industry is facing with respect to the attainment of risk scores.

But as the economy opens up as people get back into the field, again we think this will come back quickly. We know how to get them. We know how to chase the charts, get the codes. And when the world returns to normal movements in consumer activity, we believe this thing snaps back into place. As you know the marketplace business reacts quickly to risk adjustment to immediate Medicare like one year delayed and Medicaid two years delayed. So there's a lag effect. But we believe as the world comes back to normal, we'll be able to get our metrics back to where they need to be as well the rest of the industry.

Sarah James -- Piper Sandler -- Analyst

Thank you.

Operator

Thank you. And the next question comes from Scott Fidel with Stephens.

Scott Fidel -- Stephens -- Analyst

Hi, thanks. Good morning. First question, just interested in Joe, I know you talked about

How you're comfortable with the pricing for 2021 and with your exchange products as it relates to the bronze. Just interested in how you're looking at the overall market pricing environment for the marketplace for next year and how competitive you see that and how that positions you for growth in that market next year given some of the pricing that you're taking on your own book of business

Joe Zubretsky -- President and Chief Executive Officer

Sure. There are some new entrants that have entered some of our states, but you know who the big competitors are. We operate at a much different level than many of our competitors that we are going after the highly subsidized members who perhaps just earn a little more money than that would qualify them for Medicaid and we're leveraging our Medicaid network. So we're in a slice of the market that's heavily dependent on the federal subsidy.

We think we can grow the pool of profits, trust management to pick the right geographies, push price and ease up on membership or to ease on price to push membership. We'll make those judgments geography by geography, depending on the strength of the competition, the strength of our network. And we believe as we always have that we can grow the pool of profits. Obviously we'll be growing it off of a smaller base, even our performance this year, but we're still pretty confident we can do that.

Scott Fidel -- Stephens -- Analyst

Got it. And then just on my follow-up question, why don't you just ask maybe a little conceptually about how you're thinking about the New York market and confidence in the rate in regulatory environment when we think of that longer-term, clearly you've been deploying a meaningful amount of capital into New York. And from a bottoms up perspective, these are all deals that very much are attractive and fit the Molina profile. At the same time, obviously New York does have some larger long-term budget gaps relative to a lot of other states that are rejected. So just obviously I know that you think about the top down as well so interested in how you're evaluating just the broader market dynamics.

Joe Zubretsky -- President and Chief Executive Officer

Well, fair point. And obviously, you're always balancing those dynamics against where the population is. And if you want to be in the Medicaid business, you can't ignore places like California and New York where the Medicaid population live. So clearly a New York Metro is a place we want it to be. We have a nice blend of business there now. We have a traditional Medicaid business with the purchase of affinity, and we have a managed long-term care business with the purchase of senior whole health in New York.

And you're right. New York is clearly has budget pressures and lots of other factors that are indigenous to New York. But in buying these properties and projecting the earning stream off of which they're valued, we certainly took all of that into consideration. So when you're an incumbent, those things happen, you might have some issues, but when you're contemplating all those puts and takes, when you're valuing a property in order to buy it, we're pretty comfortable that we pay for them correctly. We considered all the puts and takes that could happen in both New York Metro and the State of New York. And we're very comfortable that these are going to create long-term value with the accretion numbers we've given.

Scott Fidel -- Stephens -- Analyst

Okay. Thank you.

Operator

Thank you. And the next question comes from George Hill with Deutsche Bank.

George Hill -- Deutsche Bank. -- Analyst

Hey, good morning, guys, and thanks for taking the question. I guess, Joe, circling back to the Texas exchange and Medicaid issues. Are you able to call out what types of utilization that you guys saw that drove the MLR up? And I guess what I'm looking for are kind of any consistencies or correlation that, that might I guess that might kind of rear its head in the future or kind of maybe even more color on what makes you think that this is kind of a contained issue that's readily fixable.

Joe Zubretsky -- President and Chief Executive Officer

Sorry, George, I couldn't hear the first part of your question. Which business were you referring to?

George Hill -- Deutsche Bank. -- Analyst

The broad business, the exchange business.

Joe Zubretsky -- President and Chief Executive Officer

And we try to be very clear and transparent if we have an operating issue that didn't meet our expectations, but I think we need to put a box around this. Our entire marketplace business is 8% of our total revenue and to bronze business is about a quarter of the total marketplace business. It did underperform, but this is boxed, it's contained, it's identified, it's clearly related to operational performance. And we fixed so many operating protocols, introduced so many different performance improvement initiatives over the past couple of years. We're going to fix this. Again, when you look at where it is and how much of the company's profile, it actually consumes, it is a very contained, easy to fix issue. So I don't want to have this painted with a broad brush, because it's very specific and very contained.

George Hill -- Deutsche Bank. -- Analyst

Okay. And then maybe just a quick follow-up to the question that Justin asked earlier. I don't know if you guys quantify this, but have you talked about what percent of the membership in Medicaid that you think is at risk of falling off when redeterminations resume?

Joe Zubretsky -- President and Chief Executive Officer

No, we haven't. We continue to see the redetermination pause. Last quarter, we broke protocol by giving an inner quarter update. I'll do the same now. We saw more membership increase in October. I think the number of increase is slightly over 30,000 in the month of October so far. Now that will be offset by our Puerto Rico exit. But in terms of new members coming on through redetermination, it continues into the quarter.

But no, as we said in our prepared remarks, how high does the people be, how far how quickly it will fall off as the economy approves. And to the point someone made earlier, how will the states actually unwind this in a staged approach or in a sudden approach is still yet to be determined. So no, we have not given any impact of this on our revenue forecast either for the balance for 2021. It certainly increased our revenue outlook for the rest of the year.

George Hill -- Deutsche Bank. -- Analyst

Okay. Thank you.

Operator

Thank you. And the next question comes from Stephen Tanal with SVB Leerink.

Stephen Tanal -- SVB Leerink -- Analyst

Good morning, guys. Thanks for so much detail today. I guess I'll just do quick ones that, I don't know if I missed this, but I don't think you commented on the risk corridor settlement funding. I think you expected to get about $128 million. Is that still accurate and any plans for that money?

Joe Zubretsky -- President and Chief Executive Officer

Yes, that is accurate. We received it, $128 million pre-tax. It will be reported in the fourth quarter. And we are likely to have an offsetting amount in the quarter where we will be making a sizable contribution to our new 501(c)(3) charitable trust called the MolinaCares cord foundation. So likely a wash in the quarter when we report the fourth quarter, but yes, $128 million was the pre-tax number. And much of that will be deposited or contributed, I should say to our 501(c)(3) trust.

Stephen Tanal -- SVB Leerink -- Analyst

Great, helpful. Thanks, Joe. And then maybe one last one for me, the Ohio rebid just wanted to get your major sort of confidence there and the likelihood of success. Is there an ability to take share? Any commentary there would be helpful.

Joe Zubretsky -- President and Chief Executive Officer

Well, we have we run a fine business in Ohio with 12%, 15% market share. We're well-positioned across the entire state. And obviously we have our A team on this to key state for us. And we're very confident that we'll submit a high quality proposal. That'll be scored well. But it's a reprocurement and we'll submit it on November 20 when it's due. And when the announcement comes out, we'll certainly report that, but we have our ATM on this. We run a great business there. And we have every reason to believe we'll be successful. And not only retaining, but perhaps even expanding.

Stephen Tanal -- SVB Leerink -- Analyst

Got it. There's an opportunity. Okay, great. Thank you.

Operator

Thank you. And the next question comes from Gary Taylor with JPMorgan.

Gary Taylor -- JPMorgan -- Analyst

Hi, good morning. Thanks for all the detail and the transparency. Most of my questions were answered. So I'll just ask a couple of little farther down the list. Just going back to Kentucky Passport, what are the applications though of adding the six player? Will there just be auto assignments and we just take a sixth off your expected membership or is it unclear how the allocations will be made at this point?

Joe Zubretsky -- President and Chief Executive Officer

It's unclear. And we don't want to get ahead of our customer on this one, because they have the jurisdiction over how to allocate in a portion membership. But yes, that's the way we're thinking about it. We are an incumbent. We're servicing 320,000 members today as we sit here today through the Passport brand, out of the Molina Healthcare, Kentucky legal entity. And when you introduce a six player, if in fact that's what's done, we believe the state will have to go through some process of reapportioning members. How that's done through auto assignment through or judgment. We just don't know, and we don't want to speculate, but that is the practical implication of that ruling that was made last Friday introduction of the six player, which will have to be a portion membership.

Gary Taylor -- JPMorgan -- Analyst

Okay. My one other is just thinking about when you looked at the COVID impact on your exchange business and you geographically called out Texas, if we look at the positive net benefit of COVID and care deferrals on your Medicaid MLR, would you similarly call out California as a geography that disproportionately benefit? Or is there anything else to say about the geography on the Medicaid MLR?

Joe Zubretsky -- President and Chief Executive Officer

The reason that it's less pronounced on the Medicaid MLRs, it's a more diversified book of business in 15 states. So no, I mean there's California was certainly a pressure point in all of our businesses with COVID as was Texas. But it's just less pronounced in Medicaid just because of the geographic diversification that we have.

Gary Taylor -- JPMorgan -- Analyst

Okay, thank you.

Operator

Thank you. And the next question is another time from Charles Rhyee with Cowen.

Charles Rhyee -- Cowen -- Analyst

Hi, can you guys hear me? Hello.

Joe Zubretsky -- President and Chief Executive Officer

Yes, perfectly.

Charles Rhyee -- Cowen -- Analyst

Okay. Yes, sorry about that earlier. Similarly I think I got through most of my questions here. I just wanted to follow-up maybe Joe, when you were talking about the 2021 outlook here, obviously some of your peers have been speaking a little bit more cautiously. I think you've obviously given some very solid targets and a positive outlook here.

Any other additional comments you could add maybe in terms of what other areas and maybe conservatism that you're thinking about building in as you're approaching guidance maybe relative to prior years given sort of given the heightened higher uncertainties that we're in here any other puts or takes that we should take into account, obviously take into account all the other comments you made earlier. Thanks.

Joe Zubretsky -- President and Chief Executive Officer

No, I think the actually the word you use to ask the question are actually reflective of the situation. There's clearly more uncertainty and risks to consider. As you move from this very intentive COVID pandemic into what may be a less intentive COVID pandemic environment. But all the puts and takes on managing a managed Medicaid business are certainly in play. It's what is the medical cost baseline look like for next year? How it will be influenced by COVID either increased or decreased by direct COVID or COVID curtailment. And then how that cost baseline is reflected in rates.

We have good visibility into our rates at this early stage. We are for 2021 revenue base, we know about we know the rates and about 40% of the revenue base at this point. When we give guidance in February, we'll understand the rates and about 70% of our revenues. So we'll have good visibility into that. And the conversations we're having with our state customers are very balanced. They're actuarially sound. They're based on reasonable cost baselines. But to me, the big issues that you always consider going into a year when you're trying to forecast earnings is medical cost projection, and how rates will be reflective of that medical cost baseline. And those certainly are the two issues that have to be considered as you look forward to next year. Not to mention the accretion that we're going to produce from the recent acquisitions that we've integrated.

Charles Rhyee -- Cowen -- Analyst

Great. That's helpful. Thanks a lot.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Julie Trudell -- Senior Vice President of Investor Relations

Joe Zubretsky -- President and Chief Executive Officer

Tom Tran -- Chief Financial Officer

Matthew Borsch -- BMO Capital Markets -- Analyst

Kevin Fischbeck -- Bank of America -- Analyst

Justin Lake -- Wolfe Research -- Analyst

Dave Styblo -- Jefferies -- Analyst

Josh Raskin -- Nephron Research -- Analyst

Sarah James -- Piper Sandler -- Analyst

Scott Fidel -- Stephens -- Analyst

George Hill -- Deutsche Bank. -- Analyst

Stephen Tanal -- SVB Leerink -- Analyst

Gary Taylor -- JPMorgan -- Analyst

Charles Rhyee -- Cowen -- Analyst

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