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Edited Transcript of WCG earnings conference call or presentation 5-Feb-19 2:30pm GMT

Q4 2018 WellCare Health Plans Inc Earnings Call

TAMPA Feb 7, 2019 (Thomson StreetEvents) -- Edited Transcript of WellCare Health Plans Inc earnings conference call or presentation Tuesday, February 5, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Lynn Asher

WellCare Health Plans, Inc. - Executive VP & CFO

* Beau Garverick

WellCare Health Plans, Inc. - VP

* Kenneth Alan Burdick

WellCare Health Plans, Inc. - CEO & Director

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Conference Call Participants

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* Anagha A. Gupte

SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst

* David Howard Windley

Jefferies LLC, Research Division - Equity Analyst

* Gary Paul Taylor

JP Morgan Chase & Co, Research Division - Analyst

* Justin Lake

Wolfe Research, LLC - MD & Senior Healthcare Services Analyst

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Matthew Richard Borsch

BMO Capital Markets Equity Research - Managed Care and Providers Analyst

* Mei Shang

Nephron Research LLC - Research Analyst

* Michael Anthony Newshel

Evercore ISI Institutional Equities, Research Division - Associate

* Peter Heinz Costa

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Sarah Elizabeth James

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Scott J. Fidel

Stephens Inc., Research Division - MD & Analyst

* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Steven J. James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the WellCare Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

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Beau Garverick, WellCare Health Plans, Inc. - VP [2]

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Thank you, Andrea, and thank you all for joining us this morning for a discussion of WellCare's 2018 fourth quarter results.

Today, we'll be making forward-looking statements including, but not limited to, our 2019 financial guidance and outlook. Various risks and uncertainties such as those described in our SEC filings may materially impact those statements. While these risks and uncertainties may cause our future results to differ from today's statements, we are not undertaking any obligation to update or revise any forward-looking statement.

Certain financial information that we will discuss today include adjustments to expenses that we believe are not indicative of long-term business operations. Please refer to our news release published this morning and available on our website at www.wellcare.com for a reconciliation of financial measures determined under generally accepted accounting principles to our adjusted measures. We will identify measures that have been adjusted.

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

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

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [3]

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Thank you, Beau. Good morning, everyone, and thank you for joining us today as we review our fourth quarter and full year 2018 results.

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

This morning, I'll highlight some of our accomplishments from 2018 and discuss how we are well positioned for continued success across the enterprise, then Drew will review our financial results in more detail and provide some commentary on our outlook for 2019.

We finished 2018 on a strong note, with full year adjusted earnings per diluted share of $11.03, an increase of nearly 30% as compared to 2017. Adjusted net income for the full year 2018 was 2.6%, a 30 basis point improvement year-over-year. Total revenue of $20.4 billion increased by 20% driven by our acquisition of Meridian and organic growth in our Medicaid and Medicare lines of business.

While we are pleased with our performance this past year, we're even more enthusiastic about the future. We enter 2019 with momentum and are increasing our full year 2019 adjusted earnings per diluted share guidance to a range of $13.25 to $13.50, reflecting our strong finish in 2018 and higher-than-expected enrollment in our Medicare PDP segment.

Turning to a review of our business segments. Our Medicaid Health Plans segment continues to perform well. At the end of the year, we served over 3.9 million Medicaid members, which represent an increase of over 44% versus a year ago. Our adjusted Medicaid premium revenue grew by more than 18%, driven by our midyear acquisition of Meridian as well as organic growth in Illinois and Arizona.

Beginning December 1, 2018, we began the implementation of our new and expanded managed Medicare assistance contract and our new long-term care and serious mental illness contracts in Florida. While the implementation is still in its early days, it remains on schedule, and we look forward to providing multiyear benefits to our members, providers and state partners by facilitating cost-effective, high-quality care. This expanded presence will increase our Florida Medicaid revenue by approximately $1.9 billion.

On January 1, as expected, our legacy Harmony Health Plan Medicaid members in Illinois were consolidated into our Meridian Health Plan. With the consolidation of these members into 1 contract, we expect to drive improved operational and financial performance over the next several years. Additionally, our overall Meridian integration continues to progress well. More recently, on February 1, we began the implementation of the Children's Medical Services contract in Florida. As a reminder, this statewide program serves over 60,000 children with extremely complex physical and behavioral needs and is completely new to managed care. While the program just started, we are leveraging our expanded presence in Florida to engage with these children, their families, providers and state partners to effectively transition our members to a managed care program.

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

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

Moving to our Medicare Health Plan segment. The premium revenue grew by nearly 19% year-over-year, driven by a combination of organic growth and our acquisition of Meridian. Through January, we served over 561,000 Medicare Advantage members across 22 states.

Our Medicare PDP business posted strong financial results in 2018 that exceeded our expectations. Driven by our new Value Script product, our enrollment was over 530,000 net new members in 2019. With the addition of new members on January 1, 2020, from the recently closed Aetna PDP divestiture, we expect to see further earnings contribution from our PDP segment in 2020.

Regarding the Aetna PDP transaction, we have already begun to work on ensuring an effective transition of these members for January 1, 2020. With the addition of these PDP members, we estimate that our total 2020 pharmacy spend across all of our lines of business will be approximately $15 billion to $20 billion.

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

The recent North Carolina results, coupled with our #1 score in the most recent Florida RFP, are a validation of the years of investments into improving our capabilities and our solutions and are a testament to the effective execution by our 12,000 WellCare associates.

In closing, 2018 was a very good year for WellCare. We exited the year with continued momentum and line of sight to multiple earnings levers ahead of us. While we focus on the execution of our near-term commitments, we are also seeking out additional opportunities to drive further growth. The results of these efforts will provide further benefits to our members, providers, partners and shareholders. It's an exciting time for WellCare, and we look forward to the next few years.

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [4]

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Thanks, Ken. I'm going to provide you with a wrap-up of 2018, including the fourth quarter highlights, and then focus on 2019 and beyond.

As Ken mentioned, 2018 was another very good year for WellCare with meaningful growth in revenue and earnings. But our best accomplishments were the actions we took in 2018 to drive business improvements growth in earnings in 2019 and beyond. We ended 2018 at $11.03 of adjusted EPS, above the top end of our prior 2018 guidance. This represents nearly 30% adjusted EPS growth year-over-year.

With respect to the fourth quarter, our adjusted EPS was $1.63, which was a slightly better result than we had forecasted, driven largely by continued PDP outperformance due to an MBR that came in below the low end of our prior guidance. Certainly, a good way to exit 2018.

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

In Medicaid, our adjusted MBR ended up 10 basis points above the top of our prior guidance range as we establish the appropriate level of reserves for new business and revenue streams, including Meridian, Arizona and Florida. Absent reserve build, our Medicaid performance was right on track in the quarter. On that topic, days in claims payable was 52.2 days, slightly higher than the 51.9 days as of the end of 2017. Favorable prior year development was $28.6 million in the fourth quarter, bringing the full year to $244 million. This compares to $225 million in 2017, good consistency.

Fundamentally, we are pleased with how we ended 2018 and entered 2019 with medical trends stable and in line with our expectations. So, good metrics that give us confidence as we start 2019.

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

A few other highlights from our 2019 guidance. Revenue's growing nearly 30%, net income is growing 30% at the midpoint, adjusted EPS is growing 21% year-over-year, and all 3 of our business segments are showing meaningful organic growth year-over-year.

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

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

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

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

As Ken mentioned, we are thrilled to be 1 of 4 statewide awardees for the State of North Carolina's Medicaid program. We'll be focused on execution as we work with the state on launching the new statewide contract as early as November 1, 2019, for certain regions. As we're able to gain more information around this award, we will update investors regarding its projected financial impact.

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

Operator, we can now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Sarah James of Piper Jaffray.

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [2]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [3]

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

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Operator [4]

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

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Matthew Richard Borsch, BMO Capital Markets Equity Research - Managed Care and Providers Analyst [5]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [6]

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

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Matthew Richard Borsch, BMO Capital Markets Equity Research - Managed Care and Providers Analyst [7]

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If I could sneak in just one more. Do you have a line of sight on what -- where you think the national Medicaid managed care penetration stands today?

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [8]

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

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Operator [9]

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

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [10]

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Can you explain sort of the range in your guidance for our expend of $15 billion to $20 billion? A $5 billion range is pretty big. Can you talk about what puts to the higher end of that? Maybe talk about sort of what could Aetna be in terms of revenues, and what puts you at the bottom end of that spend target?

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [11]

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Yes. There's a number of components, part of which is what portion do we end up migrating over to our own PBM, MeridianRx. But you're right to point out, I mean, we don't yet know what we're going to retain as of 1/1/20, as we seek to move the Aetna business into WellCare products. So that's a swing factor. As well as seeing sort of where our new PDP volumes sort of ultimately lands us in terms of pharmacy spend. So $15 billion to $20 billion, either one of those numbers is a huge number that should be very attractive for third-party PBMs.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [12]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [13]

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

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [14]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [15]

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What triggered the decision? Well, I guess, you'd start with the fact that we had an acquisition, and that we had an acquisition where we have sort of a zero-sum settlement with the prior owners, sort of a prudent way to protect the company from the closing balance sheet, which also means then we've got to rebuild reserves. And as you know, reserves are largely represented by the last 3 to 4 months of incurred claims expense, and we've happened to own Meridian for 4 months in 2018. I'm not sure if that's what you're getting at. But did it help?

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [16]

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And then, I guess, if you saw some differing trend than you expected relative to Meridian, or if you saw something else that triggered that, perhaps, in your overall business.

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [17]

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

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Operator [18]

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Our next question comes from Ana Gupte of Leerink Partners.

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Anagha A. Gupte, SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [19]

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

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [20]

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Sure, Ana. It's Ken. First, I wanted -- I want to point out that we're completely onboard with the notion that we need to find ways to lower the cost of prescription drugs to consumers throughout the U.S. Secondly, we believe that more pricing transparency is in everyone's best interest. So having stipulated that those 2 things are attractive, important and we're fully supportive of, the devil now lies in the details in terms of how to best accomplish that. So we're in the process of reviewing the various proposals. As you know, there's going to be a 60-day comment period, which hasn't even started yet. But we're formulating our responses, and yes, we expect to be very engaged on multiple levels with the administration, with elected officials and through our various trade association groups.

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Anagha A. Gupte, SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [21]

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And just to follow up. Actuaries have told us that the risk sharing being increased is more likely to be positive than negative for plans. So would you assume that you'd do that from a voluntary basis, assuming you get to a point where you like what you see in the final rule?

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [22]

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Yes, are you talking about the pilot opportunity...

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Anagha A. Gupte, SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [23]

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The risk sharing in the corridor, which, I think -- the insurance, which tends to be something you'll probably get some benefit from over the year.

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [24]

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

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [25]

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And we do believe, we like the idea that there's some new ideas to create some flexibility. And I think you're referencing maybe the voluntary Part D model, which is a 2-sided risk, makes a lot of sense. And so we are assessing that as we speak.

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Operator [26]

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Our next question comes from Steve Tanal of Goldman Sachs.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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Just wanted to follow up on the Medicaid MBR. As I think guidance probably did include some assumptions for Meridian, Arizona and Florida, if we're not mistaken, so if you can just confirm that. And if so, we're trying to make some assumptions about the impact of each of these. And it seemed like the underlying core Medicaid business ex those items is still run a bit higher than at least we were modeling. So any comments on kind of the underlying MBR in the balance of the Medicaid book? And maybe if you'd be willing to size those 3 pieces, Meridian, Arizona, Florida, that could be helpful as well.

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [28]

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

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [29]

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

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [30]

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

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Operator [31]

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Our next question comes from Justin Lake of Wolfe Research.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [32]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [33]

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

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [34]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [35]

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

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Operator [36]

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Our next question comes from David Windley of Jefferies.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [37]

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I think, in your prepared remarks, you commented that guidance does not include any impact from North Carolina. Wanted to understand if that also means no kind of incremental business expansion or onboarding cost. Or maybe another way to ask it is, for the 2 months that you would have part of this, would this be accretive or dilutive to your guidance, if you were to add it in?

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [38]

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

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [39]

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

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [40]

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Yes. David, right now, the focus is on beginning the implementation for the phase-in with 2 sections: 1 will be November 1 of this year; with the next wave, February 1 of '19. Certainly, there has been some very early on discussions over the past -- oh, year about bringing more complex populations in. And for those of you that aren't familiar, this current award covers TANF, CHIP and ABD with some very select nonwaiver LTSS membership. So behind David's question is this notion that by winning this, we're pretty enthusiastic about our opportunity as they add some additional more complex populations in the years to come. But there have been no commitments made by Secretary Cohen or anybody else in North Carolina as it relates to the timing. But we're just thrilled with this award because it -- again, it falls in that line of what we've seen recently, a very thoughtful, rigorous program, a highly competitive procurement process, and the philosophy, the underpinnings behind this program are all about integration of physical, behavioral and pharmacy as well as an extremely strong emphasis on the social determinants of health, including food and security, stable housing, transportation, domestic violence, et cetera, so very forward-looking program. And we're committed to doing a great job, and we're all going to advance our gain by virtue of participating in this program.

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Operator [41]

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Our next question comes from Josh Raskin of Nephron Research.

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Mei Shang, Nephron Research LLC - Research Analyst [42]

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It's Mary, on for Josh today. My question is just around Medicaid. And what are you seeing in terms of in-contract or in-state membership changes there? Are you staking more aggressive around calling the roles? Just any commentary on the drivers as Medicaid membership declines in some markets.

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [43]

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

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Operator [44]

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Our next question comes from Steven Valiquette of Barclays.

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Steven J. James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [45]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [46]

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

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Steven J. James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [47]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [48]

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

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Operator [49]

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Our next question comes from Gary Taylor of JPMorgan.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [50]

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Just want to return to North Carolina for a moment. I think there's been a trend in some of the new contracts lately or certainly, states that have or obtained new populations where the initial profitability is less or even de minimis that the anticipation would move as the contract approves. So I know in North Carolina, you didn't bid on rates, but you did get to see rates by rate sell in region that the state had established. So given what you've seen and whatever other actuarial data the state may have shared, is this a state where you would anticipate a similar sort of setup? Or do you have an ability to say with some confidence the rates look entirely adequate? Just looking for some color there.

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [51]

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Yes, Gary. Probably, at this juncture, we wouldn't go so far as to say that the rates look entirely adequate. As we move through the process, they look reasonable. But we fully expect that as with any greenfield type of implementation, transition of care issues, et cetera, that in the early year, for sure, and perhaps, a year or 2, we'll see less than our target margins in North Carolina. But we don't see anything that's obviously flawed and the assumptions that were used to build the rate. So we take some comfort in that. But having said that, certainly, as we move this population into a managed care setting, we expect that we will be building into our target margins over a multiyear time frame.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [52]

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2 other quick ones. So Illinois -- Michigan and Illinois Medicaid enrollment slipped a little sequentially. Is that anything outside of just improving economy basically or of changes or even too small to even characterize it as that?

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [53]

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

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [54]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [55]

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

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [56]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [57]

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

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Operator [58]

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Our next question comes from Michael Newshel of Evercore ISI.

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Michael Anthony Newshel, Evercore ISI Institutional Equities, Research Division - Associate [59]

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So last night, CVS provided some revenue and earnings disclosures in its Part D business. So I just want to see if there's anything incremental that you're able to share on what the new baseline is for 2019. So like the revenue number for the first 3 quarters implies a run rate of $1.7 billion, plus there's enrollment growth of 15% at least in the CMS status. So is that closer to $2 billion now? Or is there anything you could say about what the revenue run rate is?

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [60]

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

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Michael Anthony Newshel, Evercore ISI Institutional Equities, Research Division - Associate [61]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [62]

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Yes. They're about 2 -- they grew a little bit. They're about 2.3 million members, excluding the employer group business, which is not part of the transaction. And so yes, we're going to stay away from giving 2020 guidance when we got a lot to execute on and sort of nail a retention rate in the 2020 in enrollment period.

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Michael Anthony Newshel, Evercore ISI Institutional Equities, Research Division - Associate [63]

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So for like 2019, I think you talked about $1.5 billion revenue number. Is that closer to $2 billion now in 2019?

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [64]

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It's probably a good question. You should ask that in the CVS. Since they own the economics of that business for 2019, we're not going to give an estimate for 2020.

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Michael Anthony Newshel, Evercore ISI Institutional Equities, Research Division - Associate [65]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [66]

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

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Operator [67]

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Our next question comes from Scott Fidel of Stephens.

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Scott J. Fidel, Stephens Inc., Research Division - MD & Analyst [68]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [69]

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

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Scott J. Fidel, Stephens Inc., Research Division - MD & Analyst [70]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [71]

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

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Operator [72]

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Our next question comes from Kevin Fischbeck of Bank of America.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [73]

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

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [74]

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

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [75]

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

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Andrew Lynn Asher, WellCare Health Plans, Inc. - Executive VP & CFO [76]

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Rough number, like the absolute? I mean, it was like $340 million was what we wired to the IRS in September of '18. So that we haven't sort of worked through all the bid maps. You're probably referring to the relevance in Medicare Advantage. Clearly would be a headwind in a vacuum inside of a bid that has a collection of headwinds and tailwinds. And we'd have to see where the final rates came out first from CMS, how our trends were running and then what initiatives we can have to help pay for some of that ACA fee should it come back.

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Kenneth Alan Burdick, WellCare Health Plans, Inc. - CEO & Director [77]

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

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Operator [78]

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