Prepared remarks
Good day, and welcome to the Molina Healthcare Second Quarter 2026 Earnings Conference Call. Please also note today's event is being recorded. I would now like to turn the conference over to Jeff Geyer, Vice President, Investor Relations. Please go ahead.
Good morning. And welcome to Molina Healthcare's Second Quarter 2026 Earnings Call. Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Mark Keim. A press release announcing our second quarter 2026 earnings was distributed after the market closed yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, July 23, 2026, and have not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in the earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2026 guidance and the expected performance of each one of our business segments, rates and the medical cost trend, earnings seasonality and our new Florida CMS contract. Our preliminary 2027 financial outlook and earnings building blocks, our 2027 marketplace pricing and business strategy, our longer-term outlook, including our 2029 premium revenue and EPS targets, our growth initiatives, the political and regulatory landscape, our M&A activity, the impact of Medicaid work requirements, our RFP awards and the amount and realization of our embedded earnings. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joseph Zubretsky. Joe?
Thank you, Jeff, and good morning. Today, I will discuss several topics: our reported financial results for the second quarter and an update on our full year 2026 guidance; early commentary on our 2027 outlook for premium and earnings per share; our growth initiatives and strategy for sustaining profitable growth; and some commentary on the political and regulatory landscape. Let me start with our second quarter performance. Last night, we reported adjusted earnings per share of $1.51 on $10.2 billion of premium revenue. Our 92.2% consolidated MCR reflects solid operating performance as we continue to navigate a challenging medical cost environment. We produced a 1% adjusted pretax margin in the quarter and 1.3% year-to-date. In Medicaid, the business produced an MCR of 92.7% in the second quarter, which was in line with our expectations. Medical cost trend in the quarter remained stable and was consistent with our full year guidance of 5%. In Medicare, we reported a second quarter MCR of 90.7% and very favorable to our expectations as our dual business performed much better than expected. Recall with $2 billion of MMP premium being converted to new products, and incremental premium from RFP wins, we were initially very cautious about margins in our duals business. These early results position us well to achieve target margins sooner than originally expected. In Marketplace, the second quarter MCR was 88.9%, higher than our expectations. We were again impacted by prior year items related to risk adjustment and member reconciliations. Our performance was also affected by unfavorable current year member acuity mix. Turning now to our 2026 guidance. Our full year 2026 premium revenue guidance is unchanged at approximately $42 billion. We have increased our full year 2026 adjusted earnings guidance by $0.25 to at least $5.25 per share. This increase to our earnings guidance reflects first half performance in Medicaid. Excluding the downward revision in our marketplace guidance, our full year guidance would have increased to $6.75 per share. Now some color on the segments. In Medicaid, our guidance assumes a full year MCR of 92.9% and is unchanged from prior guidance. Rate updates we received are consistent with our guidance of 4%. Full year medical cost trend is unchanged at 5%. The imbalance between rates and trend appears to have stabilized and is well positioned to be corrected with future rate increases. Medicaid is expected to produce a 1.2% pretax margin in 2026 or approximately $5.75 per share. This is up $0.25 from our prior guidance due to first half performance. We continue to believe that 2026 represents a trough year for Medicaid margins, and we remain optimistic about the 2027 rate-setting process as state actuaries take account of more recent periods of observed medical cost. In Medicare, our full year MCR guidance is now 92.2%, a 180 basis point improvement from our previous guidance, reflecting lower medical cost trend in our duals products. Medicare is now expected to contribute $0.25 per share this year, anchored by stronger performance in our duals products, which will now yield $1.25 per share, offset by the $1 per share loss we expect in our discontinued MAPD product. In Marketplace, our full year MCR guidance is now 90%. We are reducing our marketplace guidance by $1.50 per share from a gain of approximately $0.75 to a loss of $0.75 due to prior year items and current year unfavorable member acuity mix. Looking forward, we plan to again reduce our footprint and volumes in 2027 to minimize our exposure to this segment. In summary, our updated 2026 earnings per share guidance of at least $5.25 includes the following elements and revisions from prior guidance. Medicaid is $0.25 better due to first half performance. Excluding the implementation of the new Florida CMS contract, Medicaid is projected to produce a 1.6% pretax margin and contribute $7.25 per share. Medicare guidance increases by $1.50 per share with the increase driven by our duals products. Excluding MAPD, Medicare duals is projected to contribute a 1.4% pretax margin and $1.25 per share. However, marketplace guidance decreases by $1.50 of earnings per share as our process of deemphasizing and downsizing this business in the portfolio bears the cost of higher member acuity mix. We are pleased that the Medicaid and Medicare duals businesses, which represent the flagship and the future of the enterprise, are producing strong results. Excluding the 2026 losses from our Florida CMS contract and MAPD product, the 2026 earnings power is $7.75 per share. Now some updated commentary on the outlook for 2027 that we provided at our Investor Day. While it is too early to provide full detailed guidance for 2027, we revisit a few of the building blocks that inform our early views. The reduction in our volume and footprint in marketplace and California's decision to move undocumented members into fee-for-service account for approximately a $1.5 billion reduction in premium. Our premium outlook for 2027 is now approximately $46.5 billion before capturing any remaining items. This is 11% growth year-over-year. The earnings per share building blocks for 2027 summed to more than $10 per share before considering any MCR improvement in Medicaid. Mark will elaborate on the 2027 building blocks in a moment. Now some comments on recent RFP wins and our growth initiatives. We remain confident in achieving the $64 billion premium revenue mark in 2029 that was detailed at our Investor Day. During the second quarter, we reprocured two significant contracts. First, we retained our $2 billion managed Medicaid contract in Illinois, a very large Medicaid state for us. We also renewed a regional contract in Wisconsin that provides additional opportunity to grow our integrated duals business. These wins continue our highly successful track record of retaining contracts where our historical win rate on reprocurement has now increased to above 90%. With respect to M&A activity, our acquisition pipeline contains many actionable opportunities, and we remain opportunistic in deploying capital to accretive acquisitions. This current challenging operating environment has been a catalyst for many smaller and less diverse health plans to consider their strategic options. Turning now to the political and legislative landscape. The interim final rule from CMS on Medicaid work requirements and biannual reverifications does not change our long-term view of enrollment reductions. We expect membership reductions will emerge gradually and result in only a minor acuity shift. There is still some ambiguity surrounding many of the features of the rule, including the definition of medical frailty and the use of self-attestation, not to mention legal challenges to the rule itself. We are working closely with our state partners on the administrative requirements needed to implement these new policies. In Medicare, we do not expect the recent Stars court rulings to have a material impact on our business or product offerings. In summary, our second quarter results and full year guidance reflect solid performance in our Medicaid business and strong performance in our Medicare duals products in a challenging environment. The imbalance between Medicaid rates and medical cost trend appears to have stabilized and is well positioned to be corrected with future rate increases. This reinforces our belief that 2026 is the trough year for Medicaid pretax margins. We remain confident in our disciplined approach to medical cost management and believe the premium and earnings per share building blocks position us well for profitable growth in 2027. This year and next are the first steps to achieving the financial targets we outlined at our Investor Day. The path to our $25 earnings per share target in 2029 is predicated on a few assumptions. First, we expect the MCRs on our current business to improve over three years. This is led by Medicaid, which assumes 90 basis points of MCR improvement over three years, which is a modest improvement in the current rate and trended balance. Second, future revenue growth from announced revenue wins, projected initiatives and M&A will achieve target margins as they have done in the past. And third, our operating discipline will help realize the benefit of operating leverage as we grow our business. These expected value-creating components underpin our 2029 financial targets, while continuing to refresh embedded earnings to support the long-term growth of our franchise. With that, I will turn the call over to Mark for some additional color on the financials. Mark?
Thanks, Joe, and good morning, everyone. Today, I'll discuss additional details on the second quarter performance, the balance sheet and our 2026 guidance. Beginning with our second quarter results. For the quarter, we reported approximately $10.2 billion of premium revenue with adjusted EPS of $1.51. In Medicaid, our second quarter MCR was 92.7% which was in line with our expectations. Medical cost trend in the quarter remained stable and consistent with our full year outlook for trend at 5%. High trend categories such as behavioral health, professional office visits and inpatient care are expected to remain stable in the second half of the year. In Medicare, our second quarter MCR was 90.7%, favorable to our expectations. Our duals products performed better due to lower trend in several cost categories and the pricing we implemented for 2026. In Marketplace, our second quarter MCR was 88.9%. We continue to be impacted by unfavorable prior year risk adjustment and program integrity items. Excluding these prior year items, the normalized MCR was 87.3% and reflects the unfavorable member acuity mix in our current book of business. Our adjusted G&A ratio for the quarter was 6.5% and reflects continued operating cost discipline. Turning to the balance sheet. Our capital foundation remains strong. In the quarter, we harvested approximately $110 million of subsidiary dividends; our parent company cash balance was $290 million at the end of the quarter. Our operating cash flow for the first six months of 2026 was $788 million, and was driven by the timing of government payments in Medicaid and Marketplace. At the end of the quarter, our debt-to-cap ratio was about 47%. We have ample cash and access to capital to fuel our growth initiatives. At the end of the year, we project parent company cash of approximately $600 million and a debt-to-cap ratio of 44%. Days in claims payable at the end of the quarter was 44 and consistent with the first quarter. We remain confident in the strength and consistency of our actuarial process and our reserve position. Next, a few comments on our 2026 guidance. We continue to expect year-end membership of 5 million members and a full year premium revenue of approximately $42 billion, with no changes within the segments. Our full year consolidated MCR of 92.6% is unchanged. We increased our full year EPS guidance by $0.25 from at least $5 to at least $5.25. The increase reflects first half performance in Medicaid. Second half earnings are expected to be fairly evenly split between the quarters. So additional color on our guidance in the segments. In Medicaid, we reaffirmed the full year MCR of 92.9%. Our full year guidance on rates of 4% and trend of 5% are unchanged. Rate updates received are in line with our expectations and consistent with our full year guidance. Full year medical cost trend is expected to remain stable. In the second half of the year, normal seasonality and the implementation of the Florida CMS contract will increase the first half Medicaid MCR of 92.4% to 93.3%. Any further off-cycle rate updates or initial outperformance in our Florida CMS contract represent upside to our 2026 guidance. In Medicare, we are lowering our full year MCR guidance from 94% to 92.2%. We expect our first half total Medicare MCR of 90.3% to increase to 93.8% in the second half of the year, driven by normal seasonality. Excluding the MAPD product, which we will exit for 2027, our full year Medicare Duals MCR is approximately 92%. The Medicare segment improved $1.50 versus our prior guidance and is expected to earn $0.25 per share this year. Within this segment, Medicare duals is $1.50 better than our prior guidance and will produce $1.25 per share this year, while MAPD is unchanged and still expected to lose $1 per share. In Marketplace, we are increasing our full year MCR guidance from 85.5% to 90% due to current year member acuity mix and prior year items. Without those prior year items, MCR guidance is 88%. The latest Wakely files indicate the total market membership declines and acuity mix shift were not as severe as we anticipated in our pricing. However, current year performance reflects unfavorable member acuity mix. Our full year marketplace guidance is a loss of $0.75 per share. This is $1.50 per share worse than our prior guidance due to unfavorable prior year items and current year member mix. We expect to reduce our marketplace exposure for 2027 by approximately $1 billion. Full year G&A ratio guidance is unchanged at 6.4% as we drive efficiencies in our operations. Our 2026 EPS guidance of at least $5.25 includes $2.50 of losses in our segments that we expect will not recur in 2027. The implementation of the Florida CMS contract in the fourth quarter will impact Medicaid by $1.50 and the MAPD product is projected to lose $1 before we discontinue it for 2027. Excluding those items, our 2026 earnings power is at least $7.75 per share and represents a strong foundation off which to grow earnings in 2027. Turning to embedded earnings. Our new store embedded earnings remained at $9 per share. We anticipate approximately half to emerge in 2027. Embedded earnings will remain a highly transparent driver of value in the future, and we remain confident in achieving our 2029 financial targets. As Joe discussed, our 2027 premium outlook is now $46.5 billion, a decline from the $48 billion we outlined at our Investor Day. First, we expect to reduce our marketplace footprint, which will decrease premium by approximately $1 billion. Second, California plans to transition members with undocumented immigration status from managed Medicaid to fee-for-service, yielding a premium headwind of approximately $500 million for 2027. The EPS building blocks for 2027 summed to more than $10 a share. We start with our revised 2026 guidance of at least $5.25 per share. First, we expect to realize known items from embedded earnings that account for approximately $4.50 per share. This includes the reversal of Florida CMS implementation costs, the nonrecurring MAPD losses from 2026 as we exit the product for 2027 and the benefit of operating leverage and efficiency as we grow. Second, marketplace is expected to produce a loss of $0.75 per share in 2026. We assume pretax margins in 2027 will be at least breakeven as we reduce our footprint, adding $0.75 to next year's outlook. Third, we expect a de minimis impact from California's undocumented immigration status members moving out of managed Medicaid. Recall, we are subject to a risk corridor in this population, which greatly limits margin. Fourth, we remain optimistic about Medicaid margin improvement in 2027. The imbalance between trend and rates appears to have stabilized and is well positioned to be corrected with future rate increases. We estimated the broader managed Medicaid market is underfunded by 300 basis points and not sustainable at these funding levels. Recall, every 100 basis points on Molina's MCR yields $5 per share. We are well positioned for early 2027 rate updates with approximately 55% of our premium scheduled to receive rate updates on January 1. And finally, any further improvement in our Medicare duals segment represents upside to these building blocks with each 100 basis points on the MCR worth $0.75 per share. These building blocks position us well for profitable growth in 2027. This concludes our prepared remarks. Operator, we are now ready to take questions.
Questions and answers
I guess maybe a multi-part question. As far as the exchange commentary, can you — I guess you probably gave us the math that we could do it, but can you just break it up from an EPS perspective as far as how much was 2025 related versus 2026 related to the changes that you made to EPS on the exchanges? And then do these changes keep coming through? So I guess I want to get a better sense from you about why they keep coming through your visibility on that and these types of fluctuations in '26, so that they won't recur again over the next few quarters. And then are these things that you kind of have to reprice for? I'm just trying to think about — you talked about $1 billion less revenue next year. How big is the repricing issue versus kind of one-time things versus core?
Sure, Kevin. I'll provide some high-level commentary on the exchange business and then hand it to Mark for the current year, prior year accounting. But as you recall, coming into 2026, we put on average 30% rate increases into the market, ranging from 50% to 45% depending on the state, all with the sole purpose of allocating less capital to the business and reducing our footprint. Recall that we positioned the product to be #1 or #2 priced in only a handful of markets. We are successful in doing that now at $2.5 billion of premium and 280,000 members. We did include an element in pricing to account for the potential for an acuity shift. Now the Wakely reports are showing that acuity shift is probably less in the entire market, but we're not a microcosm of the entire market. At 280,000 members, we had more adverse selection, or member acuity mix, than the rest of the market. That element of pricing was underestimated. Going into next year, we again plan to put prices into the market to reduce our footprint again, where our philosophy is until we're convinced that the market risk pool is stable in that market, we're going to allocate less capital to it. Mark, do you want to comment on Kevin's other question?
Just a quick rundown on the numbers. So right now, our guidance is a $0.75 loss in Marketplace for the full year. That guidance includes about $1 for prior year items of loss and about $0.25 of gain in the current year book, netting to $0.75. Now that's $1.50 lower than where we were previously on guidance. $0.50 of that lower guidance is due to prior year items and about $1 is on a lower outlook for the current year membership. On the prior year items, what we said in our prepared remarks is it's split pretty evenly between risk adjustment true-ups from last year and program integrity items. Hope that helps.
I just wanted to follow up on the ACA acuity comment. Can you help us understand sort of the underlying dynamics that drove the adverse selection? And to the extent your acuity is worse how are you accruing for 2026 plan year risk adjustment?
Sure, Andrew. It's really a simple case: as the book shrinks in size consciously due to our positioning of the product and the pricing, the people that need coverage are going to seek it. We certainly priced for an acuity shift. Many of these members are on high-cost drug therapies — HIV, oncology and the like. Even with a $50, $75 or $100 per month price difference, they tend to stay with the health plan that they're comfortable with so that their drug therapies will be prescribed and paid for. So we're seeing a lot of that. We're seeing high-cost drug utilization without corresponding HCC codes to drive risk adjustment, which is creating an imbalance. Now we priced for this phenomenon coming into 2026, but that incremental pricing was not enough; we underestimated it. Mark, anything to add?
No, I think that's well summarized. The Wakely files are a tailwind for 2026. The market attrition as well as the market acuity impact is probably less than most people thought. It's less than we thought. But as Joe mentioned, the members we did retain — about 280,000 — right now, our view is they are likely to skew negative from our original outlook because their medical expense will not fully be offset by risk adjustment. That's an evolving view, as you know, with the Wakely files being a moving target, but right now we're taking a conservative pick on that.
Just I guess one more on the exchange. As we think about how you're trying to fix this, clearly, just taking rate did not solve your problem for 2026. How do you think about what needs to be done in terms of maybe restructuring the product? I think there's a lot of concern that maybe you've seen a lot of the good risk migrate out of silver and into potentially low-cost plans in gold categories, and that might be related to the issues that you're seeing. How do you think about what needs to happen from a product restructuring point of view to actually make this business more stable and durable?
We don't think it's product design. It literally is the members retained. In fact, the members retained individually are not higher acuity — we had the acuity per member right. We retained more high-acuity members, which is why we call it a mix shift. We just underestimated the amount of stickiness of these high-cost members that don't have commensurate HCC codes. So it's not a metallic tiering issue. It's not that our formularies are designed improperly. It literally is in a declining book of business where that acuity shift was underestimated in pricing, pure and simple. Unfortunate, but pure and simple.
Wanted to ask a question on Medicaid, a couple actually. First, on Medicaid cost trend, you talked about it being in line in 2Q. You talked about it being slightly favorable in the first quarter. So what was running better in Q1? And did that go away, or did something else offset as you went into Q2? Maybe you can confirm that the $0.25 guidance raise was all coming from Q1 given Q2 was in line. And then just one last question. Have you gotten any off-cycle rate updates so far this year? If so, can you quantify them?
We have, Justin, a very small number of off-cycle rate increases, but they're all within expectations. So we estimated 4% for the year. There were pluses and minuses, very minor, not worth mentioning, and that's why we're sticking to our 4% rate assumption for the year. On the quarters, we're actually splitting hairs on that. When we said the first quarter came in slightly better than 5% it did. If you annualized it, it might be slightly better than 5%, which then implies that maybe the second quarter was slightly north of 5%. But we're very comfortable that the first half is projecting at 4% to 5%. The high-cost categories that provided pressure in the past like behavioral, high-cost drugs, outpatient visits and the like are still high cost, but stable trend, meaning the trend has plateaued. That's why we say this is a trough year for margins. While the trend is still high at 5%, it has plateaued and that acuity shift of 250 basis points that occurred last year has not recurred this year. After two quarters of it not recurring, we're pretty comfortable and it's only core trend that's going to impact our results, and we're very comfortable at the 5% trend assumption in the first half extending into the second half. Mark, anything to add?
Justin, I'll just build on what Joe said a little bit. We may be parsing decimals here. When we said trend was 5% for the full year, each quarter is roughly one quarter of that, maybe a little bit more or less, but very close to a quarter of that. So very stable first and second quarter. Why did MCR come off a little bit? Well, the rate cycle is a little skewed to the first quarter. Remember, 55% of our revenue comes up for fresh rates on January 1, less in the second quarter. So it's just timing of the revenue. Trend is 5% split evenly across quarters. Rate is 4% for the year, but lumpy into certain quarters, and that will explain small variances quarter-to-quarter. Building on what Joe said about the stability, we exited 2025 feeling pretty good. The third and fourth quarters were much closer to that new run rate of 5%, which gave us the confidence that that was the right pick for this year. So far, it looks like that's playing out.
Just to add one more point to what Mark said. You're getting into a first half, second half question, which leads to a jump-off point into 2027, which we talked a lot about in the prepared remarks. In the second half ex-Florida CMS implementation, Medicaid is positioned to produce a nearly 2% pretax margin in the second half. That assumes no rate increases and the 5% trend continues, which we're very comfortable with. So a strong second half result and a good jump-off point for 2027.
Just wanted to also ask about Medicaid more broadly. Obviously, the states have a lot on themselves now with the administration's initiatives around waste, fraud and abuse, putting in place work rules and other priorities, budgets, et cetera. Two things: is that affecting in any way their pacing on RFPs? It seemed like that slowed down a little bit when we went through redeterminations. I know you've got a number of RFPs over the next year or two that you're looking to come to market. Do you have any sense that they may slow down? And then you did specifically mention in your prepared remarks about self-attestation under work rules. I know the states, I believe, have discretion whether they allow that in the first year. Have you got any sense of what they're going to do at this point? And is it meaningful to you if they allow self-attestation in the first year and then require documentation in year two?
Albert, I'll take the second part of the question first. Obviously, every state is slightly different, but they're all working within the framework outlined by CMS. The only real data point we have is Nebraska, which started this process early. The two biggest issues any state is dealing with are: one, what types of information are we going to accept to verify eligibility — self-attestation or ex parte, either one; and two, what definition of medical frailty are we allowed to use. In Nebraska, they have 290 pages of diagnosis codes to support medical frailty and a very comprehensive program of the types of information they will accept to verify eligibility. Nothing we've learned in Nebraska or in any of our other states causes us to change from our long-term assumption that Medicaid membership will decline by 2% to 3% each year for a three-year period, which is fully baked into our $64 billion premium projection and our assertion that the acuity shift will be minor and protracted and will be picked up in rates. Your first question was about RFP timing. The RFP calendar appears to be intact. I think it was announced that Missouri dropped about a week or two ago, but nothing in our RFP count or the regulatory realm seems to be inhibiting the pace of RFPs. So the projection we showed at Investor Day still holds, in our opinion. Mark, do you have anything to add?
Joe, I think that's well summarized. I'll just reinforce a couple of things. In the big redetermination coming out of the pandemic, the market declined 20% over two years, and it started with a lot of low- and no-acuity users — a lot of those fell out during that period. Here, we're in a very different situation. We're expecting over the next three years an 8% to 9% decline, which is why we say 2% to 3% a year, a total cumulative of 8% to 9% decline. We're at a starting point where with expansion, many of those low- and no-acuity users are already out of the system. As state actuaries look at this, they certainly have a case study on what happened before and how to think about some of this, but the fact that it's such a smaller impact over a longer period of time with fewer low- or no-acuity users gives me great comfort that this is very gradual and subtle and easy to be rated for.
I want to talk about that minimal acuity shift for the Medicaid expansion population. Can you just frame it for us — I think you've talked about the narrowing of the gap between stayers and leavers in previous quarters — particularly for Medicaid expansion. As you're having discussions with states as they've started to internalize the changes, how are they thinking about potential acuity shifts? When they start thinking about '27 rate updates, how are they going to incorporate that or not into their updates?
John, the big redetermination wave that happened over a two-year period produced significant SKUs, which means if stayers and leavers could provide a significant acuity shift, which it did by 250 basis points. Those SKUs are much tighter right now, which means a lot of the low- and no-use members exited during that first wave. Therefore, the work requirements are unlikely to have a significant shift. The work requirements will happen in a more measured, protracted process. If you look at the recent CMS bulletin on rate setting, they specifically mentioned capturing acuity shifts due to enrollment changes, which gives state actuaries the imprimatur to include an element of rating addressing an acuity shift on membership changes if it occurs.
Joe, I think that's well summarized. I'll just reinforce that in the big redetermination coming out of the pandemic the market declined 20% over two years and we started with a lot of low- and no-acuity users. Here, we're expecting over the next three years about an 8% to 9% decline, which is why we say 2% to 3% per year. We're at a starting point where many low- and no-acuity users are already out of the system, which makes the potential acuity shift much smaller and more manageable for state actuaries to rate for.
So it sounds like the issue in exchanges isn't formulary or benefit design, so maybe that's not the right lever for next year. It sounds like it's not geographic-specific — so what is in your control to change as you think about next year? And is there any effort at the state level or CMS to address the gap in the HCC categories? Or is that more of a longer-term journey?
It's not the HCC construct. It is possible to have a high-utilizing member that doesn't drive commensurate HCC scores. We believe we're as good as anyone at capturing risk adjustment; it's just not there relative to the utilization of the member. What we can control is how much capital we're willing to allocate to the business, where we make it available and what the price levels are. If we want to deemphasize membership in a particular state, we will not be #1 or #2 priced. Next year, our forecast based on our pricing models for this year suggests that with a $1 billion decline from $2.2 billion, our membership will be concentrated in about six states; up to now we've been more widespread in most of our Marketplace footprint. Next year that should reduce based on how we position the product.
Sara, the only thing I'd add is we will price to the members we have, so our pricing will reflect the acuity and the risk adjustment in our current book. That will result in fewer members next year, which is why we gave the headline of probably $1 billion lower next year. Our pricing will very much reflect what we see in our book today.
The question gets at elasticity of demand. At some point, a member who's on a $1,000-a-month therapy and is comfortable that a competing product has that in their formulary, and they're looking at our price, which might be $50, $75 or $100 higher than competitors, they will move at some point.
Great. Can you talk a little bit about G&A and your G&A leverage going forward? In particular, I'm interested in understanding as I'm looking at things like 2027 and 2028, how much of the benefits and scale leverage are you expecting to come from purely holding the line on G&A as opposed to being able to reduce G&A. And then do you see efficiencies that could allow for reduction in some areas to offset inflation? And then just a quick question on expectations for implementation of some upcoming contracts in Georgia, Texas and the continuation of some coverage in Florida.
Lance, high level on G&A: I think our Investor Day outlined it exactly. When you're growing premium to $64 billion off of $42 billion, the G&A leverage alone should pull the G&A ratio down below 6% — we had it at 5.9% at our Investor Day. We also talked about artificial intelligence and additional benefits that should accrue to the company if and when we successfully implement AI to reduce the administrative labor cost. That incremental AI benefit is not in our projection to the $25 target or the 6% G&A ratio; it is upside to that. We've exercised discipline over a period of time; you've seen 10, 20, 30, 40, 50 basis points of improvement as we've grown the book from $16 billion five years ago to $42 billion. We are projecting the same amount of fixed-cost leverage as we grow from $42 billion to $64 billion.
Lance, the math is straightforward. The way I explain it internally is about half of the G&A load we currently carry is fixed and about half is variable. So when we project out, fixed costs grow at inflation and variable costs grow with revenue. That's exactly the formula we use, which counts on us keeping disciplined. The incremental AI opportunities Joe mentioned would be additional upside, but the baseline projection uses the fixed/variable split.
The only thing I would add is that when we say our margins are 300 basis points better than the market, two-thirds of that is arguably G&A. Ten, twenty, thirty, forty, fifty basis points of G&A leverage is just as valuable as the same amount inside your MCR, and arguably more valuable since you don't return it inside a corridor. We've been very efficient and we're going to continue to be. Our early read on artificial intelligence suggests the numbers we gave at Investor Day are upside and achievable. We'll be transparent as we move forward on how much impact that has on the G&A ratio. We're optimistic the projections at Investor Day will be achieved.
Just wanted to ask about thinking about the margin recovery potential and the 300 basis points around the Medicaid underfunding. How does that contrast against the new regulations from CMS? Separate from work requirements, there are three other regs: state-directed payment rules, provider tax rules, and 1115 waivers being required to go budget neutral. Those are meaningful tightenings of the levers states have historically used. I'm curious how you think about that versus solving for the 300 basis point funding gap. You started talking about trough margins this year, but this could push recovery out. Also, a quick question on cash flows: I know the first half had some timing around government payments. Any thoughts on the back half expectations for operating cash flow?
Sure, Scott. On the regulatory front, certainly there are initiatives to address fraud, waste and abuse or to reduce federal funding of Medicaid, as you mentioned. Backing up from that, our underlying premise is that the market is about 300 basis points underfunded. Whether it's public companies disclosing negative margins or regulatory reports, if the market simply gets back to breakeven we exceed our assumptions. We only need 90 basis points to hit our target and the market needs 300 to get to a respectable margin. So when we need 90 basis points on our business to hit our three-year targets, and the broader market needs 300, we are confident in our assertion that we'll hit our goals. Yes, some levers will be tighter for states, and they'll get creative about eligibility, benefits, and provider arrangements. But managed care saves state budgets and will remain a central part of Medicaid, so funding needs to be addressed despite pressures.
On the rates, Joe makes the right point. Some of the headwinds are fair, but given we only need a small fraction of what the market needs, the odds of rates moving enough to hit our targets feel very good. On cash flow, I generally don't give a projection on operating cash flow because it's not how we manage the business. Each state is its own subsidiary with its own liabilities and assets and we dividend out the difference to the parent. What is important is the ability to pull dividends to the parent. Our track record of pulling dividends is very good. We're holding about $300 million of cash at the parent currently; I expect that to rise to about $600 million by year-end on additional dividends. Operating cash flows in subsidiaries come and go; dividends to the parent are the critical element.
Maybe on Medicare, nice performance in that line of business. In the prepared remarks, you mentioned several cost categories driving better expected performance for duals versus non-duals members. Can you elaborate on those specific categories and any insight why there's such a difference between MA duals and nonduals?
Thanks for recognizing the performance in Medicare. We're really pleased. To be clear, when converting the $2 billion of MMP premium to new products and adding premium from RFP wins, we were conservative in forecasting medical cost trend, which we initially picked at 6%. Our new forecast is 4%, more in line with the Medicare market. Everything came in better across categories — pharmacy, inpatient, outpatient, ancillary. None of it is a single trend driver; trend is coming in where the rest of the market is reporting and we're comfortable with our 4% projection. That $1.25 duals contribution is significant — a 1.4% pretax margin in the first year of launch. Our Investor Day target is 2.5%, which makes us confident we'll reach it sooner. The duals market is growing at 12% and as states deliver aligned enrollment that benefits those with a wide Medicaid footprint. This out-of-the-gate performance gives us a lot of confidence that the duals segment is a flagship for the enterprise.
Yes. Just a reminder, on our Medicare segment for the full year, we're projecting $6 billion of revenue, with $5 billion in duals. As Joe mentioned, trend is lower in almost all categories for duals. We raised our full year guidance for the Medicare segment by $1.50 and all of it is attributable to the duals segment. MAPD continues where we thought and is still expected to lose $1 for the year; that component goes away in 2027. The $1.50 improvement for the segment is entirely attributable to duals.
Regarding Marketplace, Joe, you commented about high-utilizing members that do not drive commensurate HCC scores. Is this something related to seasonality of utilization where risk code capture is incomplete earlier in the year and shows up later? If so, why would that be happening? Some more color would be helpful.
I think it's merely a case of scale and mix. When you're 1% of the market — about 280,000 members in a 20 million-member market — mix effects can be dramatic. We're not a representative sample of the market. Our internal data suggests it's possible to have high-utilizing members that do not have enough HCCs to drive enough revenue to produce target margins. We included a load in our pricing — the 30% average increase we put on in 2026 included a load for attracting higher-cost members who would stay with us. We underestimated the number that stayed, and that's what's dragging on earnings this year.
Joe, that's well summarized. Not all medical expense is risk-adjustable. What we're seeing is in the declining Marketplace book there's more skew of medical expense that is not risk-adjustable. That will play out across the year as Wakely evolves, but our current insight is a lot of the medical expense in this membership is not risk-adjustable, which results in the guidance we've given.
Maybe just on the Florida CMS contract. Can you give us a sense on how that $1.50 headwind is spread over 2026? Obviously it's predominantly in the fourth quarter, but how much of that G&A within the $1.50 is already hit year-to-date and expected to hit in the third quarter before the contract goes live? And you also mentioned potential upside for Florida CMS as a lever for second half upside. How could that develop? Is there a propensity for better rate development ahead of the contract start?
We're pleased with the build-out of the Florida CMS program. It's going to be a $6 billion annual program at full run rate. The build is going fine. The financial information from the state, both for rates and costs, suggests we're inheriting a financially viable program. We're in the middle of rate discussions for the new program year and the early read is encouraging. Some of the $1.50 drag is hiring people in advance of revenue, some is margin conservatism and some is an initial conservative outlook for a new program.
At its simplest, the $1.50 breaks into three roughly equal parts of $0.50 each. About $0.50 is G&A we carry in the third quarter before we get revenue — you need to put people in place before revenue starts. Another $0.50 is in the fourth quarter: for new business we book initial margins conservatively and there are IBNR reserve considerations that create a one-time margin drag. The final $0.50 is a conservatively higher MLR we expect in the initial period as the new network and members stabilize. The good news is the additional revenue in the fourth quarter helps overall G&A leverage, and the first two pieces are nonrecurring and should reverse next year.
Two quick ones. One, Mark, on Medicare, can you bucket what drove the upside in Medicare versus expectations — care delivery perspective or disease state? And two, in Marketplace, do you think any impact from the IDR process is driving increased MLR in that space, or is this simply utilization and acuity?
On the IDR process, yes, we have impacts where it's applicable and where the industry believes the construct is flawed, and that does increase costs in our medical line in some states. But it's not outside our expectations. The primary driver in Marketplace is the acuity mix and utilization dynamics we've discussed. On Medicare upside, the duals performance is broad-based across categories and not one isolated item — pharmacy, inpatient, outpatient and professional services all trended better than our conservative initial picks.
George, on Medicare, MAPD is performing where we expected; trend was pretty much in line there. The duals portion, which is about $5 billion of the $6 billion segment, saw trend a little lower in almost every category. Inpatient and pharmacy were down meaningfully, outpatient and ER were not an issue, and professional office visits and LTSS saw some favorability. So it's across the board. We may have been a bit conservative in our first-year picks for these newly converted products, but a 4% trend is what we now believe for the year and it's across categories.
And that concludes our question-and-answer conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.