Molina Healthcare, Inc. (MOH) Earnings

Management highlights

- Overall Q2 2026 Financial Performance * Reported adjusted EPS of $1.51 on $10.2 billion of total premium revenue * Consolidated MCR of 92.2% and 1% adjusted pre-tax margin for the quarter, 1.3% year-to-date * Adjusted G&A ratio for Q2 was 6.5%, reflecting continued operating cost discipline * Capital position remains strong: parent company cash balance was $290 million at end-Q2, debt-to-cap ratio was 47%, first half 2026 operating cash flow was $788 million; projected year-end parent cash of ~$600 million and debt-to-cap ratio of 44% - Contract and Growth Updates * Retained a $2 billion managed Medicaid contract in Illinois and renewed a regional contract in Wisconsin that supports growth in integrated duals business; re-procurement contract win rate now exceeds 90% * Acquisition pipeline holds multiple actionable opportunities; management remains opportunistic about deploying capital for accretive acquisitions, noting the current operating environment is pushing smaller, less diverse health plans to explore strategic options * Confirmed the long-term 2029 target of $64 billion in total premium revenue remains on track * New Florida CMS contract build-out is progressing as planned, with initial rate discussions showing encouraging results - Political and Regulatory Landscape * CMS's interim final rule on Medicaid work requirements and biannual re-verifications does not change management's long-term view of gradual 2-3% annual membership reductions over three years and only minor acuity shifts; key details (medical frailty definition, self-attestation rules) remain ambiguous with ongoing legal challenges, and Molina is working with state partners to meet administrative requirements * Recent STARS court rulings are not expected to have a material impact on Molina's Medicare business or product offerings * The 300 basis point aggregate underfunding of the broader managed Medicaid market is not sustainable, and management expects state actuaries will incorporate higher trend observations into 2027 rate updates, with 55% of Molina's Medicaid premium scheduled for rate updates on January 1, 2027 - Strategic Priorities * Medicaid and Medicare duals are identified as Molina's flagship business segments and core of the company's future; these segments are currently delivering strong results * Management is actively reducing footprint and volume in the Marketplace segment to minimize exposure to unfavorable acuity mix and adverse selection, exiting the underperforming MAPD product at the end of 2026 * Discipline on G&A costs remains a core priority: half of current G&A is fixed (grows only at inflation) and half is variable (grows with revenue), with expected G&A ratio leverage from premium growth projected to bring the full-year G&A ratio below 6% by 2029; AI-driven administrative efficiency gains are expected to provide upside to current projections, which do not yet include these savings

Guidance

- Full-year 2026 total premium revenue guidance is unchanged at approximately $42 billion, with total year-end membership projected to reach 5 million - Full-year 2026 adjusted EPS guidance was increased by 25 cents to at least $5.25 per share, driven by better-than-expected first-half performance in Medicaid * Medicaid full-year MCR guidance of 92.9%, 4% annual rate increase and 5% medical cost trend guidance are unchanged; the imbalance between Medicaid rates and medical cost trend has stabilized * Non-recurring 2026 losses from the Florida CMS contract implementation ($1.50 per share) and exiting MAPD product ($1 per share) total $2.50 per share; excluding these items, 2026 adjusted earnings power is at least $7.75 per share * G&A ratio guidance for 2026 is unchanged at 6.4% - Preliminary 2027 outlook: * Total 2027 premium outlook is revised to ~$46.5 billion (11% year-over-year growth), down from the prior $48 billion investor day projection; the $1.5 billion reduction reflects planned Marketplace footprint reduction (~$1 billion) and California's transition of undocumented members from managed Medicaid to fee-for-service (~$500 million) * Aggregate adjusted EPS building blocks for 2027 sum to more than $10 per share, before including any MCR improvement in Medicaid * The Marketplace segment is expected to reach at least break-even pre-tax margins in 2027 as footprint is reduced, adding 75 cents per share to EPS relative to 2026's 75 cent loss * The non-recurring 2026 implementation losses for Florida CMS and MAPD will reverse in 2027, contributing ~$4.50 per share from embedded earnings * California's member transition is expected to have a de minimis EPS impact due to existing risk corridor protections that limit margin exposure for this population * 90 basis points of aggregate MCR improvement for Medicaid between 2026 and 2029 is still projected, with improvement expected to begin in 2027 - Long-term 2029 targets of $64 billion in total premium revenue and $25 adjusted EPS are reaffirmed, unchanged from prior investor day guidance

Segment performance

1. Medicaid: Q2 2026 MCR (Medical Cost Ratio) was 92.7%, in line with management expectations. Medical cost trend remained stable at 5% year-to-date, consistent with full-year guidance. The segment is expected to produce a 1.2% pre-tax margin in 2026, contributing approximately $5.75 per share to adjusted EPS. Excluding non-recurring implementation costs for the new Florida CMS contract, Medicaid is projected to deliver a 1.6% pre-tax margin and contribute $7.25 per share to 2026 adjusted EPS. Revenue contribution is the largest of Molina's three core segments, representing the majority of the firm's $42 billion 2026 full-year premium revenue guidance. 2. Medicare: Q2 2026 MCR was 90.7%, significantly better than management expectations, driven by stronger-than-anticipated performance in the company's duals products. Full-year 2026 MCR guidance was updated to 92.2%, a 180 basis point improvement from prior guidance. The full-year 2026 Medicare segment is expected to contribute 25 cents per share to adjusted EPS: Medicare duals (exiting the MAPD product) is projected to deliver a 1.4% pre-tax margin and contribute $1.25 per share, while the exiting MAPD product is expected to lose $1 per share. Full-year 2026 Medicare premium revenue is projected to be ~$6 billion, with ~$5 billion coming from duals products. 3. Marketplace: Q2 2026 MCR was 88.9%, above management expectations due to unfavorable prior year risk adjustment and member reconciliation items, plus unfavorable current year member acuity mix. Excluding prior year items, the normalized Q2 MCR was 87.3%. Full-year 2026 MCR guidance was increased from 85.5% to 90%; excluding prior year items, full-year MCR guidance is 88%. The Marketplace segment is expected to produce a full-year 2026 adjusted loss of 75 cents per share, a $1.50 downward revision from prior guidance. 2026 full-year premium revenue for the segment is ~$2.5 billion with approximately 280,000 members.

Risks & headwinds

- The Marketplace segment faces ongoing adverse selection risk as the business is deliberately downsized: high-acuity members with expensive drug therapies (HIV, oncology, etc.) tend to remain with Molina even after significant price increases, leading to an unfavorable member acuity mix that has outpaced the pricing adjustments built into 2026 rates - The underfunding of the broader managed Medicaid market (estimated at 300 basis points) creates sustained margin pressure, and new federal regulatory changes tightening state Medicaid funding levers (1115 waiver budget neutrality requirements, state-directed payment reform, new provider tax rules) could slow the pace of rate increases needed to close the funding gap - There is remaining ambiguity and legal uncertainty around key provisions of the new CMS Medicaid work requirement rule, including the definition of medical frailty and eligibility verification rules, which could create unanticipated administrative and membership impacts - Gradual Medicaid membership reductions from new eligibility redetermination rules could result in greater-than-expected acuity shifts, though management expects this impact to be minor - New product launches (including the converted Medicare duals products and Florida CMS contract) could face higher-than-expected implementation or operating costs, though early performance has been better than forecast

Analyst Q&A

• Q: What is the breakdown of 2026 Marketplace EPS guidance changes between prior year items and current year performance? /

  A: Full-year 2026 guidance for Marketplace is a 75 cent loss, which includes $1 in losses from prior year items and a 25 cent gain from the current year book of business, netting to the full-year loss. Of the $1.50 downward guidance revision from prior forecasts, 50 cents comes from adverse prior year items (split evenly between risk adjustment true-ups and program integrity items) and $1 comes from a weaker outlook for the current year membership. Molina deliberately priced for a smaller footprint with an average 30% rate increase for 2026, but the resulting adverse acuity shift was larger than the pricing increment accommodated.

• Q: What dynamics drove the worse-than-expected acuity mix in Marketplace, and what can Molina change to fix this for 2027? /

  A: As Molina deliberately shrinks its Marketplace footprint, high-utilization members with expensive ongoing therapies stay on the plan even with large price increases, because they prefer the certainty of covered drugs from their existing provider. This creates an imbalance where medical utilization is higher than the corresponding revenue from HCC risk adjustment scores. For 2027, Molina will further reduce its footprint (targeting a $1 billion premium reduction, concentrating membership in ~6 states instead of a broader footprint) and set pricing to reflect the current observed acuity skew, expecting high-acuity members will eventually move to lower-priced competitors at a certain price threshold.

• Q: How will new Medicaid regulatory changes impact the expected margin recovery from the current 300 basis point market underfunding? /

  A: While new federal rules do create funding headwinds for states, the underlying underfunding of the market is irrefutable: public and private managed care plans are already reporting unacceptably low or negative margins. Managed care delivers 10-15% savings to state budgets and is core to state Medicaid programs, so rates will have to adjust to bring the market back to sustainable margins. Molina only needs 90 basis points of MCR improvement to hit its long-term target, while the market needs 300 basis points, making it very likely Molina will hit its target even if the market only partially closes the gap.

• Q: What drove the better-than-expected performance in Medicare duals, and what is the source of the upside versus prior guidance? /

  A: Management deliberately took a conservative forecasting approach for the first year of the newly converted MMP products and incremental RFP win premium, initially projecting 6% medical cost trend. Actual trend is tracking closer to 4%, in line with broader market trends, with better-than-expected results across all cost categories (inpatient, pharmacy, outpatient, professional services, LTSS). The entire $1.50 upward EPS guidance revision for the Medicare segment comes from the duals business, while the exiting MAPD product remains on track to lose $1 per share as previously guided. Early first-year performance of 1.4% pre-tax margin puts Molina ahead of schedule to reach its long-term 2.5% margin target for the duals segment.