Molina Healthcare Inc (MOH) Q4 2018 Earnings Conference Call Transcript
Molina Healthcare Inc (NYSE: MOH)Q4 2018 Earnings Conference CallFeb. 12, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Molina Healthcare Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Ryan Kubota, Vice President of Investor Relations. Mr. Kubota, please go ahead.
Ryan Kubota -- Vice President, Investor Relations
Thank you, operator. Hello, everyone and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter ended December 31, 2018. The Company issued its earnings release, reporting fourth quarter 2018 results last night after the market closed. And this release is now posted for viewing on our company website.
On the call with me today are Joseph Zubretsky, our President and Chief Executive Officer; and Tom Tran, our Chief Financial Officer. After the completion of our prepared remarks, we will open the call to take your questions. (Operator Instructions)
Our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors and could cause our actual results to differ materially.
A description of such risk factors can be found in our earnings release, and our reports filed with the Securities and Exchange Commission, including our Form 10-K Annual Report, our Form 10-Q quarterly reports and our Form 8-K current reports. These reports can be accessed under the Investor Relations tab of the company's website or on the SEC's website. All forward-looking statements made during today's call, represent our judgment as of February 12, 2019 and we disclaim any obligation to update such statements, except as required by the securities laws.
This call is being recorded and a 30 day replay of the conference call will be available at our company's website molinahealthcare.com. I would now like to turn the call over to our Chief Executive Officer, Joseph Zubretsky.
Joseph Zubretsky -- President and Chief Executive Officer
Thank you. Ryan, and thank you all for joining us this morning. Last night, we reported earnings per diluted share for the fourth quarter of $3.01 and $10.61 for the full-year ending December 31, 2018. For the full year 2018, we produced pre-tax earnings of $999 million and after-tax earnings of $707 million, resulting in pre-tax and after-tax margins of 5.3% and 3.7% respectively on a reported basis.
As these results indicate, we have accomplished much over the last year, as we executed the first phase of our margin recovery and sustainability plan. The rapid improvement in our operating margin profile, has allowed us to shift our focus to driving our profit improvement initiatives for continued margin expansion, while we are quickly pivoting to achieving top-line revenue growth.
The quarter itself was very strong, with pure performance earnings per share of $3.82 and an after tax margin of 5.4%, continuing the momentum we established early in the year. All-in-all, we are very pleased with the results for the quarter. The scope of our prepared remarks today will focus primarily on the margin expansion success we have already achieved and our confidence in sustaining it. However, to be clear, we are equally focused on and already invested in top-line revenue growth and are very attractive lines of business. Medicaid, Medicare and marketplace, as well as our existing and potential new geographies. We plan to showcase this growth plan at our Investor Day in May.
Now returning to our financial results. In order to provide the context for our 2019 guidance, it is best to focus much of our commentary, on recapping the full-year 2018, a year in which we produced, pure performance earnings per share of $10.83 far surpassing our initial and revised guidance. This result includes on a consolidated basis, a pure performance MCR of 86.3% and a G&A ratio of 7.1%, both of which enabled, a pure performance after tax margin of 3.8%.
Now commenting on 2018, by line of business. The Medicaid business with $13.7 billion, in pure performance premium revenue ended the year with an 89.4% pure performance medical care ratio and a pure performance after tax margin of 2.8%, which is within our revised long-term target margin range. Several factors contributed to this result. We were able to skillfully manage medical costs, all against a backdrop of a reasonable and rational rate environment.
And, we were successful in executing on a variety of profit improvement initiatives, including network contracting, front-line utilization control and retaining increased levels of revenue at risk for quality scores. Our $2.1 billion Medicare business, comprising our D-SNP and MMP products, also delivered favorable results in 2018.
Managing to a medical care ratio of 84.5%, we produced an after tax margin of 4.8%. Specifically on Medicare, we have proven, we are adept at managing high acuity members, who have complex medical conditions and comorbidities. We have also proven to be proficient at managing approximately $2 billion of long-term services and supports benefits, an important and fast growing benefit, across all of our products.
And the risk scores of our members continued to improve, resulting in increased revenue that is more commensurate with the acuity of our population. Finally, our marketplace business was a significant contributor to this year's favorable results, with $1.9 billion in 2018 pure performance premium revenue and exceptional margins. If you recall in 2017 in prior, this business was severely challenged and at that time, we set a corrective 2018 pricing action of nearly 60% was warranted.
With that, as the backdrop, the business produced a pure performance MCR of 65% and then after tax margin of 11.4% in 2018. Several factors contributed to this result. Our prices in the market, although they increased significantly over 2017, we're still very competitive and thus we are able to retain a membership profile that could be adequately scaled. Many of the core and routine managed care fundamentals applicable to our other businesses, also helped to produce favorable results in the marketplace business.
Our ability to capture and forecast adequate risk scores has improved dramatically, and our differentiated strategy of serving the highly subsidized working core produced the right acuity mix and the right metallic tier mix, all of which worked well within our pricing parameters. Now commenting on 2018, through the lens of our locally operated health plans. We vastly improved the performance and balance of our health plan portfolio during 2018.
Our largest health plans, Ohio, Texas, California, Washington and Michigan, continued to perform well, and established themselves as worthy of winning reprocurements. The underperforming aspects of our portfolio, which we described at the beginning of the year, were much improved in 2018. One year ago, we said that 25% of our revenue, was in plans that were not profitable. In 2018, all of those plans were profitable. Florida and New Mexico were challenges for obvious reasons, but performed admirably, as they faced the run-off of large portions of business. And Washington staged their recovery midway through the year, it is now well-positioned to return to target margins on its expanded revenue base.
In summary, the health plan portfolio is in excellent shape. Now, to recap the full-year 2018, from the perspective of the operational improvements we implemented and the operating efficiencies we gained. From a pure efficiency perspective, we continue to improve our G&A profile, managing to a ratio of 7.1% for the full-year 2018.
We reduced our headcount by more than 800 FTEs, or nearly 7% from the beginning of the year. More importantly, we continue to invest in the business. We improved the performance of our core processes, claims, payment integrity, member and provider services and a host of others, all of which create lasting affect. And finally, in 2018, we set the stage for on-going improvement by making significant progress on a variety of outsourcing initiatives, from recently announced, which benefit 2019 and beyond.
Turning now to addressing the 2018 improvements to our balance sheet and capital structure. Our improved operating performance, allowed us to dividend, approximately $300 million to the parent company. This augurs well for producing excess cash flow in the future and we deployed approximately $1.2 billion to retire highly volatile and expensive convertible debt and repay the outstanding amount drawn on our revolving line of credit. This reduced earnings per share volatility and lowered our debt-to-cap ratio to approximately 47%.
In summary, for 2018 across all of our product lines, health plans, operating metrics and with respect to capital management, we are very pleased with our 2018 performance. Now, I will address our 2019 earnings guidance. We are establishing our initial earnings per share guidance for 2019, in the range of $9.25 to $9.75. As Tom will describe later, this is on the basis of GAAP reporting. The headline for 2019, is continued margin strength and sustainability, despite the previously announced revenue decline, all without the benefit of anticipating any prior year reserve development. On 2019 revenues, overall, we expect premium revenue to come in at approximately $15.8 billion in 2019. A decrease of approximately 10%, due to the contract losses in Florida and New Mexico and the membership attrition, as a result of the conservative approach, we have taken to marketplace pricing.
Despite these revenue challenges, we are encouraged by multiple new revenue foundations we laid in 2018, that will carry into 2019. Specifically, within Medicaid, we invested heavily in new business development, winning three RFPs, the largest being Washington, but also Puerto Rico and Mississippi CHIP. We also submitted what we believe to be a winning proposal in the Texas STAR+ program. The Washington reprocurement award expanded membership in regions, where we bested the competition in the consolidation of health plans and also enabled us to participate in the carve-in of behavioral health services.
In Florida, we were able to recapture a third of our Medicaid contract and retain approximately $500 million of revenue, positioning us well for Medicare and marketplace expansion. In Illinois and Mississippi, we will benefit from membership gains in 2018, which will achieve full-year run rate revenue in 2019. And for the 2020 marketplace price filing in early 2019, we will equally focused on growing membership, while maintaining profitability.
We are forecasting the continued strength and sustainability of margins in 2019. The following points are relevant to that forecast. First, given the significant operating leverage in the managed care business, a 10% decline in the premium revenue base, is difficult to overcome, from a margin expansion perspective, but we are forecasting being successful in doing so.
Second, we have taken a cautious view and forecasting the impact of our profit improvement initiatives in our 2019 guidance, although, we maintain a high degree of confidence that we will capture them. And third, while the 2018 results included significant prior year reserve development as a matter of policy, we do not forecast any prior year reserve development in our guidance, although we maintained a consistent reserving policy throughout the year. Taking these points into account, the after-tax margins in each of our lines of business will remain strong in 2019. Medicaid margins remained flat at approximately 2.8%.
Medicare margins are up approximately 20 basis points to 5% and MarketPlace margins are down slightly, but still in double digits at 10.8%. Taken together, we expect a consolidated medical cost ratio between 86.7% and 87%. A consolidated after tax margin in the range of 3.7% to 3.9%, a net income in the range of $600 million to $630 million. The margin improvement trajectory, we've experienced is consistent with both our prior disclosures and the discussion of the profit improvement opportunities we have identified. Recall, in 2018, of the original $500 million projection, we harvested $200 million, which is now embedded in our run rate earnings.
Earlier this year, we increased our projection of opportunities by $250 million to a total future improvement opportunity of $550 million. Our 2019 guidance, includes harvesting over $200 million of the revised profit improvement opportunity, which is more than offsetting the slightly negative spread between trend and yield of approximately $80 million. These ongoing profit improvement initiatives, help create nearly $2 of earnings per share benefit in our 2019 guidance. Overall, our margin recovery efforts have been successful to-date and our margin sustainability plan is well-established.
While we will remain focused on further margin improvement throughout 2019, we have simultaneously pivoted to growth. We are carefully evaluating new geographic opportunities, as well as the adjacent product and benefit carve-in opportunities in our existing geographies. With such a successful year now behind us, I would like to take a few moments to acknowledge the people who have made all of this happen. The executive leadership team we have assembled, have proven their ability to successfully execute on the first phase of our turnaround plan, instilling confidence that they will likewise, be able to execute on the next phase and a special note of gratitude to the 11,000 plus associates on the front-lines every day, caring for our members and delivering high quality service. In conclusion, we are very pleased with our 2018 results and the strong foundation we have built. There is still significant opportunity for creating value and we are excited for the future and what awaits us in 2019 and beyond. I look forward to sharing more about our future growth plans and longer-term strategy at our next Investor Day on May 30, in New York City.
With that I will turn the call over to Tom Tran for more detail on the financials. Tom?
Thomas Tran -- Chief Financial Officer
Thank you, Joe, and good morning. As described in our earnings release, we report fourth quarter earnings per diluted share of $3.01 and adjusted earnings per diluted share of $3.07, excluding the amortization of intangible assets. We reported full-year 2018 earnings per diluted share of $10.61 and full-year 2018 adjusted earnings per diluted share of $10.86, excluding the amortization of intangible assets.
First, I will highlight the non-recurring items that occurred in the quarter, resulting in fourth quarter pure performance earnings per diluted share of $3.82. It is important to note that, these items are included in the fourth quarter GAAP reported numbers that we cited in the earnings release. Specifically, we recorded a $52 million pre-tax loss on the sale of our Pathways subsidiary. $8 million of restructuring expenses, primarily related to costs associated with our ongoing IT restructuring plan. A $3 million gain as part of the repurchase of the 2020 convertible notes and related embedded call option termination and a $24 million pre-tax expense for a retroactive risk corridor adjustment, for the California expansion business, primarily related to the state fiscal year ended June 30, 2018.
Next I would like to make some comments on the fourth quarter earnings beat up over $130 million pre-tax or approximately $1.90 per diluted share on a pure performance basis, relative to the top-end of our pure performance guidance range. The beat can be attributed primarily to the following four items. First, we had prior period development of approximately $90 million in the quarter, most of which is intra-year development and therefore is accounted for in our pure performance result for the full year.
Second, our marketplace product continue to perform exceptionally well. The seasonal increase in medical costs we have historically seen did not materialize in the fourth quarter and member retention was better than expected. Third, administrative costs were lower than expected, despite increased sales and marketing costs associated with open enrollment in Medicare and the marketplace. Lower labor cost, was a primary driver of this favorable G&A ratio.
And fourth, as a result of our improved fourth quarter performance and tax benefits, on the loss related to the sale of Pathways, the effective tax rate for full-year 2018 at 29.2%, was lower than we expected, which results in a fourth quarter benefits of approximately $20 million. Turning to our balance sheet, cash flow and cash position for the quarter and the full-year. Our reserve approach is consistent with prior quarters and our position remains strong. We continue to have favorable intra-year reserve development and as we have stated in the past, we intend to include that same level of conservatism in the quarter and reserve balances.
Days and claims payables remained flat sequentially at 53 days, while operating cash flow was strong throughout the year, it was negative in the quarter, primarily due to our payment of the health insurer fee on October 1st. As of December 31 2018, the company had unrestricted cash and investments of approximately $170 million at the parent company. The reduction to parent cash, from the end of the third quarter of 2018 primarily related to the purchase of the 2020 convertible debt.
As of December 31, 2018, our health plans had aggregated statutory capital and surplus of approximately $2.4 billion, which represent approximately 400% of risk based capital. I will now quickly discuss capital actions. We have continued to look for opportunities for deleverage the balance sheet. Our action in the quarter, reduced average diluted share outstanding to $66.6 million at year-end from $67.9 million at the end of the third quarter.
Finally, while not related to 2018, we recently complete a new $600 million term-loan to finance the repurchase, conversion and redemptions, about 2020 convertible notes that are currently in the money and eligible for early conversion. This is a temporary facility, which allow us to keep our $500 million revolver capacity undrawn. Shifting to 2019 guidance. I will add some detail to bridge our 2018 performance to our 2019 pure performance guidance of $9.50 per diluted share at the midpoint. First, converting 2018 full-year reported result to pure performance, the significant items that we call-out in our earnings release, added $0.22 to our 2018 reported earnings per diluted share of $10.61.
For pure performance earnings per share of $10.83 for the full-year 2018.
Second prior year development, which we do not include in our 2019 guidance, positively impact 2018 earnings per share by approximately $1.55 per diluted share. Third, we believe that the stranded overhead and resulting negative operating leverage, related to the loss contracts in New Mexico and Florida, negatively impacts the earnings trajectory by approximately $0.75 per diluted share.
Fourth, the negative spread between trend and yield in Medicaid is projected to impact 2019 by approximately $0.90 per diluted share and fifth our projected net profit improvement is forecast to increase full-year earnings per diluted share by $1.87. Combined, we arrive at our guidance midpoint of $9.50.
The following points are also important relative to our 2019 guidance. First, 2019 guidance assumes consolidated net margins, will remain flat at the midpoint. Specifically, we expect Medicaid remained flat. Medicare to improve approximately 20 basis points and marketplace to decline slightly but remain in the double-digits of our 2018 pure performance based which include prior year development.
Second our G&A ratio increased 50 basis points to 7.6% in our 2019 guidance. This increase is primarily driven by the incremental G&A costs incurred to realize the profit improvement initiatives that will benefit our medical care ratio and result in an overall net profit improvement and the stranded overhead costs, due to the revenue loss in New Mexico and Florida. And third, 2019 guidance does not assume any impact from prior year development, positive or negative. All things being equal, if we have favorable development as we did in 2018, our forecast result will be higher and conversely, if development is unfavourable, our forecasted result would be lower. You should note that our reserve methodology has been consistently applied. Finally, in conjunction with our earnings release last night, we include a supplemental presentation, with additional detail on our financial results and 2019 guidance.
Going forward, we plan to provide this additional detail, alongside future earnings release, as a way of providing further insight into the business. This concludes our prepared remarks. Operator, we are now ready to take questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session (Operator Instructions). The first question today comes from Josh Raskin with Nephron Research. Mr. Raskin, please go ahead.
Josh Raskin -- Nephron Research -- Analyst
Hi, thanks, good morning guys. Wanted to ask a little bit more about the revenue bridge and sort of backing up to the Investor Day, where you guys started with the $15.6 billion of premiums. And I know, you got $500 million back in Florida, you've talked about I think, Mississippi being about $300 million and then Illinois, Ohio some other growth et cetera. I guess, what are the offsets you know, it looks like only $200 million higher. So it sounds like some stuff is add, I don't know how much of that is asset sales versus the exchanges. And then, you know, I think last quarter you guys were a little bit more optimistic about potential growth in the marketplace. And so, just wanted to hear a little bit, I guess within that answer, what changed there?
Joseph Zubretsky -- President and Chief Executive Officer
Well, Josh, on the revenue bridge, very clearly Florida and New Mexico was the major component of the decline of $2.2 billion. We also note that if you're looking at total revenue, you always have to adjust for the half of $400 million. And yes, the service businesses that we divested in 2018. MMS and Pathways had $400 million in revenue, which effectively disappears in 2019, guidance. But we did pick-up $900 million of organic growth and you cited all the reasons, Mississippi, Illinois full-year run rate of increase membership, climbed back to $500 million in Florida certainly helped Washington, as we bested certain competitors in various of the regions, we all have increased Medicaid membership and the behavioral carve-in. So all-in-all, $900 million of organic growth embedded and what was a disappointing year of contract losses, certainly bodes-well for our revenue pickup in the future.
Josh Raskin -- Nephron Research -- Analyst
Got it, got it. And then Just a quick question on the outsourcing, you guys announced recently. Could you just walk through a little bit more of the specific functions that were outsourced and maybe how much of that savings is in guidance?
Joseph Zubretsky -- President and Chief Executive Officer
The contract we just signed, the outsourcing arrangement with Infosys, related to our IT infrastructure, datacenters, user services et cetera, set of the hardware, I think of it as the hardware. It will result in rebadging certain employees to Infosys, that will result in a certain number of position eliminations. But we also have increased the effectiveness of the operation, better up times, better response times and just more effective operations. That agreement has already incepted, there is a 90 to 120 day transition period. So the outsourcing won't actually occur to about -- until about the middle of the year. And so the savings in 2019 guidance is modest, but will ramp to full run rate in 2020.
Josh Raskin -- Nephron Research -- Analyst
Perfect, thanks.
Operator
The next question comes from Matthew Borsch with BMO Capital Markets. Please go ahead.
Matthew Borsch -- BMO Capital Markets -- Analyst
Hi, thank you and congratulations. And thank you for all the disclosure. So can you just help us think about, where you would like to get to in terms of a run rate on the operating cost ratio, if that's even the right way to think about it, I mean, I know that there are structural differences depending on how much you grow the various parts of the business. But I'm just trying to look at your mid-sevens guidance for 2019 relative to the low-sevens that you achieved in 2018. And then the stranded overhead in the G&A that you're spending to achieve savings?
Joseph Zubretsky -- President and Chief Executive Officer
Sure, Matt. Well, we're not giving a forecast for 2020 and beyond. We certainly believe there is more upside to our G&A ratio than downside risk. So you're right about the puts and takes in 2019, painful reminder of how the operating leverage works in this business, the stranded fixed costs, the loss contribution margin from New Mexico and Florida, put 30 basis points to 40 basis points of pressure on that ratio. But more importantly, we're investing $90 million to $100 million in raw G&A to invest in medical cost improvements and other improvements to our core business.
I believe in the future, we will as we grow, we'll get positive operating leverage, we'll continue to invest in the business and of course you cited the mix effects that you're likely to get, depending on how big the marketplace business in the future. So, we believe that the G&A ratio has room for improvement going forward, while we're not giving a forecast more room for upside and downside.
Matthew Borsch -- BMO Capital Markets -- Analyst
Thank you.
Operator
The next question comes from Justin Lake with Wolfe Research. Please go ahead.
Justin Lake -- Wolfe Research -- Analyst
Thanks, good morning. So the focus shifts to top-line growth, I was hoping you could walk us through any kind of early view of your exchange strategy for 2020, as well as any key RFPs or opportunities for state membership of transitions that could fuel revenue growth into next year?
Joseph Zubretsky -- President and Chief Executive Officer
Sure, Justin. On the exchanges, as we said in a public forum, just about a month ago, we plan to grow this business. We actually think, we can double its size and still have a proportional relationship between our exchange business and our Medicaid business in the states in which we do business. Obviously that won't all come in one year and the interesting thing about this business, as you know, where your prices are in relation to the competitors, so we've done a very exhaustive price elasticity study. We know where our prices are too rich against the competition.
We plan for 2020 to ease up on price, we certainly are going to price to 15% pre-tax margins and 10% after-tax margins. But we believe we can grow the business, have the MCR move up from the mid '60s to 70%, maybe even into the low '70s, maintain a high single-digit margin without ever-tripping the minimum MLR.
So we're feeling really good about the growth prospects of this business and the ability to grow it. Produced a high single-digit margin and have the pool of profits grow over time.
Justin Lake -- Wolfe Research -- Analyst
Any Medicaid opportunities?
Joseph Zubretsky -- President and Chief Executive Officer
Right now, the early lead, I can give you on growth for 2020 beyond would be in Medicaid and Medicare. In D-SNP, we plan to file a notice of intent to play, in 170 additional counties in D-SNP alone. Two states of which would be brand new Ohio and South Carolina. With respect to Medicaid, there are $30 billion of opportunities coming into the market, in our estimation over the next three years.
Wave one, Louisiana, Minnesota, Hawaii, Kentucky and possibly Pennsylvania. Wave two Tennessee, West Virginia and Indiana. We have a newly developed business development team, a revamped RFP team. We're on the ground, and many of these geographies doing a feasibility study, the regulatory environment, strength of the competitors, our ability to build networks. So we're actively at work, working on the growth phase of this turnaround.
Justin Lake -- Wolfe Research -- Analyst
Thanks.
Operator
The next question comes from Ana Gupte with SVB Leerink. Please go ahead.
Ana Gupte -- SVB Leerink -- Analyst
Hi, thanks, good morning. Congrats on 2018, great performance. And just wanted to question about, what you put out in January, which I thought was a very nice logical presentation on your opportunities for growth. But when you kind of look at the Medicaid, If you start with Medicaid benchmarking against, the commentary and performance we're seeing from the key national competitors, doesn't look like it's that easy to you know to expand margins, and neither United or Wellcare or Centene has -- have shown great performance on margin expansion there and trend yield spread, as you say, has brought some pressure. And while I can look at all of your margin expansion drivers, and they all make sense. I mean, is there any read across or you know why does it look like you can do so much better than yourself and others, I guess, on the trajectory?
Joseph Zubretsky -- President and Chief Executive Officer
Well, I think, Ana, I think the first thing, I'd like to remind folks is that the cost structure that is built into the rating structures is the entire market. And so that, if you can create a cost structure both your G&A profile and your medical cost profile that is better than your competitors. You get the lift in rates from the market cost structure. And then you can operate at a more efficient structure and produce best-in-class margins. Now, whether it's sustainable or not, we have to prove that. But to your point about Medicaid, we broke through the 90% barrier on pure performance Medicaid for the year at 89.4%. But I would remind everybody that ABD is still at 91%, that's $5.5 billion of premium in 2018 alone.
So I do believe there still is room for modest improvement in our Medicaid line, which obviously is a $13 billion line of business for us.
Ana Gupte -- SVB Leerink -- Analyst
Okay, all right. And then just following up on the earlier question related to marketplaces and margins and growth. If it's going to go from low double to very high-single. And this year you're not growing into '19 and margins look like they're a bit under pressure. The overall exchange book is down a bit year-over-year and their policy changes and competitive forces at play. Do you think that will remain a big growth driver? I mean, looking at '19, it seems challenging to me to see that happening.
Joseph Zubretsky -- President and Chief Executive Officer
Well, I think, our market niche is very differentiated. We are servicing as I mentioned in my prepared remarks the working core. 20% of our membership are fully subsidized another, 70% are partially subsidized. We get to leverage our medicaid network, not only the network itself, but the cost structure in the network to give us very, very competitive cost structure. So look, for 2019 at this time last year, we were compelled nearly to put trend into the market on top of our 2018 rates.
We didn't know at this time last year that 2018 would have turned into a 15% pre-tax year. So we put trend into the market on top of what were already very rich rates. And we're paying for it on the membership line coming into '19. That is not going to be the phenomenon in '19 for '20. We now know exactly where we sit with our membership, we know their acuity, obviously the churn of members is very low. So 80% of these members we have in the prior years.
So we're feeling really good about the stability of our book of business. Our ability to now put a more reasonable price point in the market to begin growing again.
Ana Gupte -- SVB Leerink -- Analyst
Thanks, Joe for the color, very helpful.
Joseph Zubretsky -- President and Chief Executive Officer
You're welcome.
Operator
Your next question comes from Scott Fidel with Stephens Inc. Please go ahead.
Scott Fidel -- Stephens Inc -- Analyst
Hi, thanks. Good morning. Just a first question, just wanted to get a little more detail on the negative spread that you discussed that you're building in for 2019 in Medicaid, and maybe just can you call out which markets in particular where you're seeing rate of cost spread upside down? Is it just a few markets, or are you seeing that more widespread?
Joseph Zubretsky -- President and Chief Executive Officer
Yes, Scott, we don't really like to talk about rates, and the strength of rates in individual markets, but I would tell you that it's marginal across all markets, 20 basis points here, 50 basis points there. You're always having debates about trend components, how is pharmacy trending. Sometimes when benefits are carved in and carved out? how much premium is a state taking away on a carved out benefit and how much premium are they putting in on a carved in benefit. So I'm just say, all-in-all, these are the normal puts and takes of the rating environment. And right now at -- about a 100 basis points of negative spread this year. It's very stable and very rational. And we'll always have profit improvement initiatives, always have an inventory of profit improvement initiatives of 150 basis points to 200 basis points of premium. That is the way, you need to run this business. To make sure that in a year where we are presented with a negative spread, we can offset it and keep our margins whole.
Scott Fidel -- Stephens Inc -- Analyst
Okay. And then just had -- just one follow-up. Just interested in, -- and what you can update us at this point, just around some of the recent headlines coming out of Ohio on them discussing potentially rebidding the Medicaid contract. And just given some of the even -- sort of above average scrutiny of the PBM servicing the Medicaid plans in that market?
Joseph Zubretsky -- President and Chief Executive Officer
Sure. We were fully expecting Ohio to reprocure -- to drop in RFP perhaps late in '19 for an effective date in '20. So we're fully prepared for that. The new administration, always when there is a change in administration, you never know what the new plan would be. The new administration in Ohio does seem to be prepared for reprocuring the Medicaid program. So we're fully prepared to deal with that and given the scope of our business, our market share and the way we perform, we're extremely confident of prevailing and perhaps even growing in that reprocurement.
With respect to PBM and pharmacy, Ohio has been particularly scrutinizing the pharmacy industry. Look, the pharmacy trends are what they are they putting pressure on costs and everybody knows that. I would say this, we have enough flexibility in our contract with CVS Caremark that if -- whatever Ohio decides they want for a pharmacy benefit carved-in, carved-out, separate PBM carved in PBM. We would be able to deal with it and put a proposal that would satisfy their requirements, both for medical and for PBM.
Scott Fidel -- Stephens Inc -- Analyst
Okay, thanks.
Operator
Your next question comes from Dave Windley with Jefferies. Please go ahead.
Dave Windley -- Jefferies -- Analyst
Hi, good morning. Thanks for taking my question. Joe, you mentioned that the emphasis contract, it sounds like will ramp through the balance of the first half of this year and not generate a lot of savings for '19. I wondered, if you could put a ballpark number on what you expect the total savings to be over time.
And is that part of the remaining kind of overall cost savings, bogey that you've laid out recently or is that somehow separate from that? Thanks.
Thomas Tran -- Chief Financial Officer
Hi, David, this is Tom. Yeah, we're not going to disclose specific cost saving with the Infosys contract, but it would be fair to say that is quite significant, compared to our current base of expenses. And that -- it's really a multi-year contract. So, you should expect to see that to be lasting over a number of years and it is embedded in the $550 million of savings that we had put out at the last JPM conference.
Dave Windley -- Jefferies -- Analyst
Okay, thank you.
Thomas Tran -- Chief Financial Officer
Yes.
Operator
The next question comes from Steve Tanal, to now with Goldman Sachs. Please go ahead.
Stephen Tanal -- Goldman Sachs Group -- Analyst
Good morning, guys. Just two questions from me. I think, on the first one, just thinking about sort of the thought processes around tax reform and Medicaid rates last year. I think, it all suggested that the tax reform benefits would find their way back into Medicaid rates. But just want to get your updated thoughts on that or are you seeing any actions from the states in that front that may be partly related to the trend discussion or how are you all thinking about that now?
Joseph Zubretsky -- President and Chief Executive Officer
Now the discussions about the tax regime rarely enters into rate discussions. As I said, most of the discussions are around debates about different cost components, how they're trending and the rate take up or take out for benefit carve-in and carve-outs. But very rarely, if ever, is there a discussion specifically about taxes.
Stephen Tanal -- Goldman Sachs Group -- Analyst
Great. Okay. So, probably more sustainable now. And I guess, just the other one that I had, was I'm wondering if you could give us a little more specificity on sort of the savings that are baked into '19 versus '20. So in the slides for the call, it looks like you're stating there is a portion of the $550 million of remaining profit improvement opportunity. If you can maybe size, what you expect to sort of book in '19 in the context of the guide? And maybe give us some clarity on what do you expect to drive your sort of annual G&A run rate down by about that amount sort of exiting '19 and into '20?
Joseph Zubretsky -- President and Chief Executive Officer
Sure. If you look at the -- the $1.87 of earnings per share, we put in the guidance bridge, just to pull that apart, it's about a $150 million pre-tax. That number is $250 million of gross profit improvements, offset by $90 million to $100 million of higher G&A cost to produce them. And the first thing, I would say is, we were very exact by including all of the costs to produce those benefits, but very cautious in forecasting the benefits that will actually emerge in the P&L. So the $150 million of net profit improvement is $250 million of gross profit improvement, offset by a $100 million of the higher cost to produce them. We still consider that conservative and that will build into the run rate that we will project forward into 2020.
Scott Fidel -- Stephens Inc -- Analyst
Perfect. Great. Thanks for the clarity.
Joseph Zubretsky -- President and Chief Executive Officer
You're welcome.
Operator
The next question comes from Sarah James with Piper Jaffray. Please go ahead.
Sarah James -- Piper Jaffray -- Analyst
Thank you. So, great guidance for 2019, obviously a very impressive margin profile. Can you help us understand or break-out parts of that -- that may be unsustainable, help us understand what part of that is in different products or various lines? Thank you.
Joseph Zubretsky -- President and Chief Executive Officer
As we look at Sarah. As we look at the margin guidance, let's -- to keep it simple, after-tax margin is probably the easiest metric to look at. So we are not adjusting for all the puts and takes of HIFs and things like that. We are maintaining a 3.8% after tax margin consolidated in an environment where revenues are declining by 10% and an environment where the 2018 margins included $137 million pre-tax or a $1.55 of favorable development.
So the question of sustainability is an interesting one. But to maintain that level of margin in that environment, particularly compared to 2018, we think is a really good, solid forecast to project forward. 2.8% Medicaid, 5% in Medicare and still double-digit in marketplace is a very attractive margin profile and really in this environment, we think that's a very good start to the year.
Sarah James -- Piper Jaffray -- Analyst
Okay. Just to clarify there. So, if we take those segment margin profile that you talked about and the 3.8% in 2019, are you saying that this is a sustainable net margin profile for the company? So I'm thinking back to I Day, there was the 2.3% to 2.7% laid out for 2020, but as you have move through some of the cost saving initiatives, is this where the company looks like it's going to be going forward?
Joseph Zubretsky -- President and Chief Executive Officer
We think high 2s for Medicaid, is certainly sustainable. We think that mid-single digits for Medicare is certainly sustainable and as we described previously, we believe that as we grow our marketplace business, the margin will drop from low-double digit to high-single digit, a conscious effort to move the MCR up from the mid '60s to 70 or even low '70s, not trip the minimum MLR and grow the profit pool rather than focusing just on the percentage margin.
Sarah James -- Piper Jaffray -- Analyst
Thank you.
Operator
The next question comes from Kevin Fischbeck with Bank of America. Please go ahead.
Kevin Fischbeck -- Bank of America -- Analyst
Great, thanks. So related to that exchange comment, is that transition to that new margin profile expected to happen in 2020 or is just like a multi-year move for you?
Joseph Zubretsky -- President and Chief Executive Officer
It's a analysis of the elasticity, the pricing elasticity of the product and how much growth you think you can put on the books, for the level of margin that you're willing to give up to do it. And it's market by market, geography by geography, we know, where our competitors sit. We certainly know their strategy for the metallic tiers. They know ours as well. But with our new marketplace management team and now that we have a book of business that is 80% repeating. We think, we have a very, very good visibility on our marketplace business, to grow it at high single-digit rates and never trip the minimum MLR. So it's all a question of how fast we want to grow. It is a multi-year effort, you'd never like to grow any book of business too quickly. So it's probably a multi-year effort.
Kevin Fischbeck -- Bank of America -- Analyst
Okay. And then you mentioned that I guess you still have $350 million of cost savings out of the $550 million beyond 2019. How should we think about the ramp of and the progression of those savings over the next few years?
Joseph Zubretsky -- President and Chief Executive Officer
Well, we're just -- we're just now getting by the point where we planned for 2019, we'll probably give the market a view of that at our Investor Day, in May, which will also give a glimpse of the 2020 growth rate as well. So if we can wait another month or so -- couple of months until May, try to give you a forward look of how the profit improvement will emerge over the next couple of years and also how the top-line will growth over the next couple of years, but it's there. We certainly, we put it out there for public disclosure. So we certainly understand it. We have models that I won't say prove it, but are strongly suggested that it's real and tangible and actionable and it can offset a lot of rate erosion in the marketplace and also help sustain our margins.
Kevin Fischbeck -- Bank of America -- Analyst
And I guess you probably, I think, you just basically said it, you will answer this question in May as well. But you mentioned kind of two waves of Medicaid RFPs over the next few years. You've already talked a little bit just about exchange membership and then expanding Medicare into next year. Do you think, that you're going to actually grow better in 2020 than -- you top-line than you did in 2019, excluding the contract losses that we're just going to put those aside, is '20 (ph) FY, going to be a year, showing that growth? Or is 2020 is still, you've got so many things investing that's really 2021 before we see the top-line growth?
Joseph Zubretsky -- President and Chief Executive Officer
Well, I think just to give us the next few months, we are in the middle of our three-year strategic planning process, which is culminating in mid-April, shared with our Board in May and showing to the marketplace in late May. So if you could just indulge us and wait to that point in time, we'll give you a good view of 2020 at that time.
Kevin Fischbeck -- Bank of America -- Analyst
All right. Fair enough. Thank you.
Operator
The next question comes from Zach Sopcak from Morgan Stanley. Please go ahead.
Zach Sopcak -- Morgan Stanley -- Analyst
Thanks, good morning and congrats on a great 2018. I want to ask about the $1.55 prior year development. Just so, I'm clear, it sounds like your reserving methodology is similar for 2019. Is there anything in that $1.55, we should think about is unusual as we think about 2019 might progress?
Joseph Zubretsky -- President and Chief Executive Officer
I wouldn't say there's anything unusual from a sense that our reserve methodology has been very consistently apply, quarters-over-quarters. And so we started that development coming out and we have the same approach going through 2019. So we're not predicting any favorable and unfavorable development. But certainly, if you follow that methodology, then you can draw your own conclusion. While we also see in the first quarter so far is that flu effect has been somewhat tame, low compared to prior year. So that certainly can be a positive sign for potentially a mild seasonal effect of a seasonal high medical costs that you see in the winter.
Zach Sopcak -- Morgan Stanley -- Analyst
Okay, that's helpful. Thank you. And that bears into my second question on seasonality. So, you seem in 2018, a kind of bunked traditional seasonality, probably given you have a lot of different things going on with the profit improvement opportunities. Is there any way you can help us think about seasonality for 2019, given you'll also be harvesting additional opportunities or any other way to think about kind of progression throughout the year?
Joseph Zubretsky -- President and Chief Executive Officer
Medicare and Medicaid books are pretty evenly distributed from a seasonality perspective. Marketplace is generally back-end loaded, as to medical costs, but last year in 2018, it wasn't. We think we had more chronic members that doesn't mean they were necessarily bad members, but they were just chronic members that were utilizing services throughout the year. So I think this year, you'll see a pretty even seasonality pattern. Marketplace could be a little bit backloaded but Medicare and Medicaid, should be pretty evenly distributed.
Zach Sopcak -- Morgan Stanley -- Analyst
Okay, great. Thank you.
Operator
Next question comes from Gary Taylor with JPMorgan. Please go ahead.
Gary Taylor -- JPMorgan -- Analyst
Hi, good morning. Two-part question one, you provided GAAP guidance without amortization of intangibles, which I think, was roughly $0.30 last year, I know a little bit of that goes away with the Pathways deal. So do you have a updated estimate for 2019?
Thomas Tran -- Chief Financial Officer
We disclosed in a table in our earnings release, the amortization of intangibles for '18. For 19, you're right, it's going to be lower and we estimate that to be in our neighborhood of about $0.20 EPS.
Gary Taylor -- JPMorgan -- Analyst
Thank you. And the second part of my question, can you help us understand a little bit so the exchange enrollment down for 2019, you talked about that the effect of your pricing essentially. Can we talk about Florida little bit and what is the impact on your cost structure in Florida, your big strategy in Florida. And maybe could you just talk about enrollment exchanges in Florida, but just -- did the impact of having to withdraw from a portion of the state from the Medicaid perspective have impacts on the Florida exchange enrollment?
Thomas Tran -- Chief Financial Officer
Yeah so, Florida for the -- obviously the Medicaid contract that we had lost in certain region. The state started to transition in the fourth quarter, late fourth quarter. So when you look at membership that we disclosed in the table, in the earnings release, you would see that TANF membership declined quarter-over-quarter. And the big chunk of that is really from the Florida market decline as membership transitioned to the region that we will exit.
From a viewpoint of impacting on exchange, the two really doesn't have that much effect -- It's not really related. In fact, we do see membership growth for the fixed membership in the State of Florida.
Gary Taylor -- JPMorgan -- Analyst
Okay. So which states would have been the largest exchange decline for 2019?
Thomas Tran -- Chief Financial Officer
The largest membership, we have in the exchanges really in the state of Texas. So we do see decline in State of Texas from '18 into ' 19. So there are fluctuation in many different states, some gain, some loss. But certainly Texas has a major impact on the decline from '18 into 19.
Gary Taylor -- JPMorgan -- Analyst
Okay, thank you.
Operator
The next question comes from Steve Valiquette with Barclays. Please go ahead.
Steve Valiquette -- Barclays -- Analyst
Thanks. Good morning, everybody. So, Joe, I don't want to beat the exchange topic to death here, but just coming back to your investor presentation from last month. And again, that slide that shows Molina marketplace growth scenarios, where you talked about the Marketplace rates for Molin, growing to either $2.6 billion or $3.6 billion. You touched on the margin (ph) point on that slide already, but again just for the revenue side, just want to clarify whether those revenue numbers were intended to be actual targets for Molina? And what the timeframe is -- if there is one or again, was the revenue portion of that slide more just for illustrative purposes? Thanks.
Joseph Zubretsky -- President and Chief Executive Officer
It was for illustrative purposes and to be very clear, we are not giving a specific outlook or forecast until our Investor Day in May, but it was really to make the point that if we were to return the business to its original size, which was $4 billion, knowing what we know about our pricing competitiveness, knowing what we know about administrative cost leverage. Can we produce high single-digit margins and grow the business back to its original state.
So it was illustrative. We do believe it's doable over some period of time and how that manifests itself in our ongoing forecast, will be showcased at our Investor Day in May.
Steve Valiquette -- Barclays -- Analyst
Okay, got it. Thanks.
Operator
The next question comes from Michael Newshel with Evercore ISI. Please go ahead.
Michael Newshel -- Evercore ISI -- Analyst
Thanks. I know you touched on some specific states, but can you just break down the exchange enrollment results for the year, between same market declines versus gains you saw on new markets?
Joseph Zubretsky -- President and Chief Executive Officer
We're not going to go into specific state by state here but Michael -- and I mentioned before is that Texas wish were roughly about 55%- 60% of our membership in 2018, with did see decline there. So that's where really the main driver of the membership decline from '18 into '19. As you know, we have reentered into some new states. The former states -- that we exit, Utah and Wisconsin. We did see some level of membership there, nothing significant but the remaining market there are fluctuations up and down some we gained, some we loss. I mentioned before, Florida we gained some membership. Some markets were fairly stable for example, State of California fairly stable.
So overall, there is a decline, definitely from $3.60 (ph) at the end of '18 until January, right now we are somewhere around $3.25 to 3.30 (ph).
Michael Newshel -- Evercore ISI -- Analyst
Okay. How about -- can you size the impact of divestments that are in the bridge from '18 to '19. I think you said Pathways removes a loss, but MMS may have been a slight contributor is the net impact material at all there?
Thomas Tran -- Chief Financial Officer
Gary (ph) I would say that about $0.10.
Michael Newshel -- Evercore ISI -- Analyst
I'm sorry what's that? It's about a $0.10 headwind, the divestments net?
Joseph Zubretsky -- President and Chief Executive Officer
2018.
Michael Newshel -- Evercore ISI -- Analyst
Okay, thanks.
Operator
The next question comes from Peter Costa with Wells Fargo. Please go ahead.
Peter Costa -- Wells Fargo -- Analyst
Hi, guys. Good morning, congrats on the quarter. I really want to talk a bigger picture about what's going on with RFPs in Medicaid in general. You saw the North Carolina quality scores that came out and you know, you've seen other recent scores that have come out. Have you seen anything that is given you more positive or less positive views on your Texas bid. And in particular, beyond that, do you think there is something that you guys are missing or that you need to acquire to look better for some of these RFPs, opportunity favoring more population health and things like that?
Joseph Zubretsky -- President and Chief Executive Officer
No, Peter, we are still very optimistic based on everything we know about our RFP bid on STAR Plus in Texas. No news has emerged that makes us anymore or less confident. We've always been very, very confident in the outcome. We think our strategy on building capabilities internally and our rent to own strategy is the right balance.
We really don't believe you need to acquire the equity of a company in order to import and integrate its capability. And you've seen us announced the major partnerships with some world-class partners and you'll see more of that on esoteric and niche capabilities that we think couldn't possibly be scaled adequately or capably in order to deliver into our operating platforms for delivery into a service model.
So we're building capabilities internally on core capabilities. We're looking for co-sourcing partners on a rent to own strategy for esoteric capabilities and as long as they're fully integrated, we believe our products can win in the marketplace and continued to win RFPs. We have no reason to believe that they can't.
Peter Costa -- Wells Fargo -- Analyst
Okay, so not -- so we shouldn't expect any further acquisitions regarding specialty capabilities or anything like that?
Joseph Zubretsky -- President and Chief Executive Officer
Capability (ph) front I would always welcome an opportunity to look for bolt-on membership opportunity in our current state where we can get some good operating leverage, but no, not spending capital on EBITDA multiples for capability place.
Peter Costa -- Wells Fargo -- Analyst
Okay, thank you.
Operator
The last question today is a follow-up from Justin Lake with Wolfe Research. Mr. Lake please go ahead.
Justin Lake -- Wolfe Research -- Analyst
Thanks, good morning. So thanks for the extra question. Just wanted to ask the numbers question on investment income, it looked like you are guiding to about $195 million. I think, there might be other stuff in there besides divestment income, but big step up in that number. So just wanted to get some clarity on that? Thanks.
Thomas Tran -- Chief Financial Officer
Justin, the $70 million increase in investment and other revenue is due to two things. One is that higher investment income, I would say that roughly about 40% of that change. And the rest is really the full year effect of the ASO (ph) fee for the pharmacy benefit that were carve-out in the State of Washington whereby we're pay you know, -- an ASO fee to manage that program for the state. So, last year it was only half year and 2019 is really full-year. So I hope that clarify the change there.
Justin Lake -- Wolfe Research -- Analyst
Thanks for the color.
Thomas Tran -- Chief Financial Officer
You're welcome.
Operator
This concludes our question-and-answer session and also concludes our conference. Thank you for attending today's presentation. You may now disconnect.
Duration: 68 minutes
Call participants:
Ryan Kubota -- Vice President, Investor Relations
Joseph Zubretsky -- President and Chief Executive Officer
Thomas Tran -- Chief Financial Officer
Josh Raskin -- Nephron Research -- Analyst
Matthew Borsch -- BMO Capital Markets -- Analyst
Justin Lake -- Wolfe Research -- Analyst
Ana Gupte -- SVB Leerink -- Analyst
Scott Fidel -- Stephens Inc -- Analyst
Dave Windley -- Jefferies -- Analyst
Stephen Tanal -- Goldman Sachs Group -- Analyst
Sarah James -- Piper Jaffray -- Analyst
Kevin Fischbeck -- Bank of America -- Analyst
Zach Sopcak -- Morgan Stanley -- Analyst
Gary Taylor -- JPMorgan -- Analyst
Steve Valiquette -- Barclays -- Analyst
Michael Newshel -- Evercore ISI -- Analyst
Peter Costa -- Wells Fargo -- Analyst
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