莫里纳医疗 (MOH) 2026年第三季度业绩电话会议：2027年EPS构成基础突破9.50美元

核心要点

• 莫利纳医疗（Molina Healthcare）公布2026年第三季度保费收入为105亿美元，调整后每股收益（EPS）为0.89美元。综合医疗成本比率（MCR）为92.9%，调整后税前利润率为0.6%。
• 管理层重申2026年全年调整后每股收益指引为至少5.25美元，保费收入约为420亿美元。综合MCR指引维持在92.6%。
• 公司将2026年医疗补助（Medicaid）费率预期从4%上调至4.5%，并将医疗成本趋势预期从5%上调至5.5%。管理层表示，费率与成本趋势失衡的情况似乎已趋于稳定。
• 初步的2027年业绩构筑块显示，调整后每股收益将超过9.50美元，保费收入至少为450亿美元。这些假设未包含现有医疗补助业务MCR改善带来的收益。
• 莫利纳医疗预计2027年将释放约每股4美元的内含收益，包括消除MAPD亏损、佛罗里达州CMS合同的改善以及运营杠杆效应。
• 佐治亚州和德克萨斯州医疗补助合同延期使得此前2027年的保费预期减少了13亿美元。管理层仍对合同中标结果获得维持保持信心，但具体实施可能会在2027年晚些时候或2028年进行。

核心财务数据

业务与运营表现

医疗补助（Medicaid）

医疗补助业务第三季度MCR为93%，符合管理层预期。费率调整很大程度上弥补了医疗成本的上涨。长期服务与支持（LTSS）以及行为健康成本趋势仍处于高位但保持稳定，门诊服务和高成本药物支出则略有上升。

今年迄今，医疗补助参保人数下降了约4.5%。在纳入佛罗里达州CMS参保人数之前，莫利纳医疗仍预计全年参保人数将下降6%。

对于2026年，管理层预计医疗补助业务将贡献约每股5.75美元。现有医疗补助业务预计全年税前利润率为1.6%。管理层将当前的医疗补助利润率称为多年周期的可能底部，理由是近期费率调整力度更大，且医疗成本趋势出现见顶趋平迹象。

联邦医疗保险（Medicare）

联邦医疗保险业务第三季度MCR为93%。双重资格参保者（duals）业务表现良好，尽管专业就诊和LTSS成本有所偏高。

全年联邦医疗保险MCR指引维持在92.2%，预计贡献约每股0.25美元。在该板块内部，双重资格参保者业务预计实现1.4%的税前利润率和每股1.25美元的收益。在莫利纳医疗于2027年退出MAPD产品之前，该产品预计将每股亏损1美元。

健康保险市场（Marketplace）

健康保险市场业务第三季度MCR录得92.5%。CMS计划完整性举措在该季度仅产生了微弱影响。

全年健康保险市场MCR指引维持在90%，预计每股亏损约0.75美元。莫利纳医疗计划在2027年将其健康保险市场业务缩减至七个州，同时在每个市场保持足够的规模。管理层预计该业务明年将至少实现盈亏平衡。

佛罗里达州CMS合同

莫利纳医疗根据佛罗里达州CMS合同新增了115,000名参保人员，相当于60亿美元的年化保费运行率。管理层表示，在前22天里，运营和临床落地几乎无可挑剔。

第四季度展望包含了15亿美元的佛罗里达州CMS保费收入、约99%的MCR以及5%的税前亏损。该亏损中约200个基点反映了一次性准备金。管理层预计该合同将在2027年达到盈亏平衡或更好表现，改善过程可能会在全年循序渐进地展现。

管理层业绩指引

莫利纳医疗维持其2026年调整后每股收益至少5.25美元的指引。今年迄今的业绩意味着第四季度调整后每股收益约为0.50美元，其中包括佛罗里达州CMS项目落地带来的每股1美元拖累。

全年医疗补助MCR指引维持在92.9%。管理层将其医疗补助费率假设上调至4.5%，医疗成本趋势假设上调至5.5%，均较此前预期上调了50个基点。

对于2027年，管理层预计医疗补助费率总体上调约6%。莫利纳医疗已知全年初步预期医疗补助保费中70%的费率（包含1月1日的续约部分）。涵盖1月1日续约群体的80%已知费率平均上涨约7%。

管理层目前预计2027年医疗成本趋势为5.5%至6%，其中包含50个基点的保守考量。基于这些假设，费率增幅应至少与成本趋势相匹配，从而支撑现有医疗补助MCR保持平稳并具备潜在改善空间。

初步的2027年调整后每股收益构筑块包括：

• 来自2026年指引基数的每股至少5.25美元。
• 来自内含收益释放的约每股4美元。
• 若健康保险市场业务至少实现盈亏平衡，将贡献约每股0.75美元。
• 加利福尼亚州终止UIS计划带来的轻微不利因素。

管理层指出，医疗补助MCR每改善100个基点，相当于每股约5美元的收益，但2027年初步展望中尚未计入任何此类改善。

风险与关注焦点

• 医疗成本趋势居高不下，特别是在LTSS、行为健康和高成本药物领域。
• 医疗补助工作要求和每半年一次的资格重新认证可能会减少参保人数，并提高剩余人群的病情严重程度（acuity）。
• 莫利纳医疗2027年的初步假设包括医疗补助参保人数下降6%，以及医疗成本趋势中包含1%至1.5%的病情严重程度影响因素。
• 各州的实施方式有所不同。管理层表示，约80%的业务所在州似乎倾向于支持持续参保的政策，但许多细节仍未敲定。
• 佐治亚州和德克萨斯州的医疗补助中标结果仍取决于州法院的诉讼程序，这给合同起始日期和运营杠杆带来了不确定性。
• 佛罗里达州CMS合同存在执行风险，原因在于其规模庞大、参保群体病情严重度高以及初始99%的MCR假设。

分析师问答亮点

• 底层医疗补助业务改善：扣除佛罗里达州CMS，在费率调整和正常季节性因素支撑下，管理层预计第四季度现有医疗补助MCR将环比改善约50至60个基点。
• 工作要求：内布拉斯加州的早期实施对参保人数的影响比最初预期的更为温和。该州报告称，90%的续约会员已重新登记参保，其中20%是通过医疗虚弱豁免完成的。
• 病情严重度假设：管理层将2026年5.5%的趋势描述为2027年的合理起点。这包括约4.5%的核心趋势和1%的病情严重度转移，2027年预测范围的高端还包含了额外的保守考量。
• 费率充分性：有六个于1月1日调整的州已针对预期的工作要求和重新认定影响做出了明确的费率调整。管理层表示，大多数州的资金拨付仍略显不足，但近期费率制定的进展令人鼓舞。
• 医疗补助利润率轨迹：莫利纳医疗预计2026年医疗补助总税前利润率为1.2%（包含佛罗里达州CMS），而现有业务为1.6%。其长期目标是到2029年医疗补助利润率达到2.5%。
• 佛罗里达州CMS盈亏平衡路径：管理层预计一次性准备金的不再发生将带来至少200个基点的改善，其余改善主要来自MCR，其次来自G&A效率提升。

电话业绩会完整文字实录

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完整财报电话会议逐字稿

管理层陈述

Operator

Good day, and welcome to the Molina Healthcare Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Geyer.

Jeffrey Geyer

Good morning, and welcome to Molina Healthcare's Third Quarter 2026 Earnings Call. Joining me today are Molina's President and CEO, Joe Zubretsky; and and our CFO, Mark Keim. A press release announcing our third quarter 2026 earnings was distributed after the market closed yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, October 22, 2026 and have not been updated subsequent to the initial earnings call.

On this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in the earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2026 guidance and expected segment performance, rates and medical cost trend, the implementation and performance of the Florida CMS contract, our preliminary 2027 premium and earnings outlook and related building blocks, marketplace pricing, footprint and program integrity initiatives, Medicaid Stars and Duals performance, Medicaid work requirements and reverifications and associated medical costs, our RFP awards and implementation timing, our long-term financial targets and the amount and realization of embedded earnings.

Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Zubretsky. Joe?

Joseph Zubretsky

Thank you, Jeff, and good morning. Today, I will discuss several topics: our third quarter results, our reaffirmed full year 2026 guidance and our preliminary 2027 premium and earnings outlook. Let me start with our third quarter performance. Last night, we reported adjusted earnings per share of $0.89 on $10.5 billion of premium revenue. Our 92.9% consolidated MCR reflects solid operating performance as we continue to navigate a challenging medical cost environment. We produced a 0.6% adjusted pretax margin in the quarter and 1.1% year-to-date.

In Medicaid, the business produced an MCR of 93% in the third quarter. The result was in line with our expectations as rate updates largely offset a slight increase in medical costs. In Medicare, we reported a third quarter MCR of 93%. The Results were in line with our expectations as our duals business performed well, giving us a very positive start for our duals focused Medicare strategy. In Marketplace, the third quarter MCR was 92.5% and in line with our expectations. The result includes the impact of the latest CMS program integrity initiatives, which was not material.

Turning now to our 2026 guidance. Our full year 2026 premium revenue guidance remains approximately $42 billion. We also reaffirmed 2026 adjusted earnings guidance of at least $5.25 per share. Our full year guidance on the medical cost ratio and G&A ratio is unchanged. In Medicaid, our full year MCR guidance remains 92.9%, unchanged from our prior guidance. We increased our full year rate outlook from 4% to 4.5% due to the combination of off-cycle and on-cycle rate updates in the third and fourth quarters. We also increased our full year medical cost trend outlook from 5% to 5.5% to account for slightly elevated utilization and acuity shift throughout the year.

We are encouraged by states continuing to incorporate periods of high cost trend into the medical cost baseline used for rating. The imbalance between rates and trend appears to have stabilized, which supports our view that current Medicaid margins represent the trough in a multiyear cycle. With near-term rate increases, which we will speak to in a few moments, the temporary imbalance between rates and trend is gradually being corrected. Our Medicaid business is expected to contribute approximately $5.75 per share for the full year. The legacy Medicaid business is projected to achieve a 1.6% pretax margin for the full year, a strong result given the current rate environment.

In Medicare, full year MCR guidance remains 92.2%, and the segment is expected to contribute approximately $0.25 per share. Within the Medicare segment, the duals product is core to our Medicare strategy and expected to produce a pretax margin of 1.4% and earned $1.25 per share this year. We expect a loss of $1 per share in our MAPD business, which we are exiting for 2027. In Marketplace, full year MCR guidance remains 90%. This segment is expected to produce a loss of approximately $0.75 per share, a result which due to our reduced footprint and pricing strategy for 2027 and is not expected to recur.

Our embedded earnings, the earnings contribution from known backlog revenue remains at $9 per share. Now some updated commentary on the outlook for 2027. Our 2027 premium revenue is expected to be at least $45 billion. We now expect the new Medicaid contracts in Georgia and Texas to be delayed from our previously expected implementation dates, which delays $1.3 billion of premium. In Georgia, the various RFP protests were denied, and our award was twice upheld at the administrative review level. Now both the Georgia and Texas awards are being evaluated in state court. And these judicial proceedings are taking longer than originally expected.

We remain confident in both initial awards being upheld and the contracts commencing later in 2027 or in 2028. The preliminary 2027 earnings per share building blocks sum to more than $9.50 per share, from known items and do not yet assume any improvement in the legacy Medicaid or Medicare MCRs at this very early stage. Mark will elaborate more on the building blocks, but let me offer a few high-level comments on the Medicaid rate and trend environment. With respect to rates, our January 1 renewal cohort represents 55% of full year premium. We know raft rates on 80% of this cohort, and they average approximately 7%. When we combine those known January 1 rates with the carryover of rates from late 2026, we know the rates on 70% of our full year 2027 premium. These known rates, along with an estimation of rates we do not yet know provide an early indication that overall 2027 rate increases may approximate 6%.

Several dynamics give us confidence in the continuation of stronger rates. States will continue to incorporate more recent medical claims data into the baseline period when setting rates and states are expected to grant prospective rate adjustments in anticipation of acuity shifts caused by the implementation of work requirements. With regard to medical cost trend for 2027, we project medical cost trend in a range of 5.5% to 6%, which at this early stage includes 50 basis points of conservatism. Using the upper end of the trend range, we take the early view that rates should, at a minimum, capture trend for 2027 and our legacy Medicaid MCR should at least be flat year-over-year with the potential for margin improvement. We will update this view in our initial 2027 guidance in February.

In Medicare, our duals business is building on strong 2026 performance as we look to grow profitably. We are pleased with our 2027 bids and our supplemental benefits are competitive in most of our markets. In Marketplace, we will reduce our footprint to 7 states, but will maintain adequate scale in each market. This will ensure we enter 2027 with risk scores commensurate with the acuity of the retained population. Finally, we remain bullish on our RFP pipeline. Recall, we just implemented the $6 billion Florida CMS contract, which is off to a great start. Among the near-term prospects, we submitted a bid on the Texas STAR Kids program a process which is on hold in the state.

We have also submitted bids in Missouri and Arizona, and our bid for Indiana will be finalized very soon. In total, these RFPs represent approximately $26 billion of the $90 billion total opportunity that we highlighted at our Investor Day. We have great confidence in favorable RFP award outcomes. 2027 will also be the first year in which our industry is impacted by work requirements and biannual reverifications. States continue to prepare for the implementation of federal work requirements and more frequent eligibility verification. In Nebraska, an early adopter, the rollout of work requirements is in the very early stages, but progressing in line with our initial expectations.

We are working closely with all our state partners on readiness and administrative execution of work requirements. Most of our states are selecting policies that should limit this enrollment, such as the use of certain ex parte reviews, flexible medical or hardship exemptions and allowing self attestation. The ultimate timing and impact on membership will vary by state and the phased approach that states are taking will delay some disenrollments to 2028. We continue to expect membership reductions to emerge gradually and to produce a minor acuity impact, all of which is contemplated in our 2027 premium outlook and the 2029 targets we presented at our Investor Day.

In summary, we are pleased with our third quarter results in this challenging environment and reaffirm full year guidance of at least $5.25 per share. We are also pleased that without yet counting on any improvement in legacy Medicaid margins, our preliminary 2027 building blocks reached more than $9.50 per share of adjusted earnings. With the apparent plateauing of medical cost trend, which remains at elevated levels, and the strength of recent rate updates, we believe we are likely observing the beginning of the turn in Medicaid margins.

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

Mark Keim

Thanks, Joe, and good morning, everyone. Today, I'll discuss additional details on our third quarter performance, the balance sheet and reserves, our 2026 guidance and the building blocks for 2027. Beginning with our third quarter results. For the quarter, we reported approximately $10.5 billion of premium revenue with adjusted EPS of $0.89. Consolidated MTR was 92.9%, adjusted G&A ratio was 6.3% and adjusted pretax margin was 0.6%. In Medicaid, our third quarter MCR was 93%, in line with our expectations as rate updates were the offset trend. We saw another small decline in membership in the quarter with year-to-date membership now down about 4.5%, consistent with our full year 2026 expectation of a 6% decline before the addition of Florida CMS membership.

Trend in LTSS and behavioral health remained elevated, but stable, while outpatient and high-cost drugs were slightly higher. In Medicare, our third quarter MCR was 93%, also in line with our expectations. The result reflects normal seasonality and continued strong performance in our duals products. Trend is in line with expectations in most categories, but higher for professional office visits and LTSS. In Marketplace, our third quarter MCR was 92.5%, also consistent with our expectations. Within that result, with normal seasonality as well as a minor impact from statewide risk scores stemming from CMS program integrity efforts in the quarter.

Turning to the balance sheet. Our capital foundation remains strong. In the quarter, we harvested $185 million of subsidiary dividends and our parent company cash balance was approximately $600 million at the end of the quarter. Our operating cash flow for the first 9 months of 2026 was $629 million. At the end of the quarter, our net debt-to-cap ratio was 45%. We continue to have ample cash and access to capital to support our growth initiatives. Phasing claims payable at the end of the quarter were 44. We remain confident in the strength and consistency of our actuarial process and reserve position.

Turning to 2026 guidance. We continue to expect full year premium revenue of approximately $42 billion. Full year consolidated MCR guidance remains at 92.6% and adjusted G&A ratio at 6.4 and we reaffirm adjusted EPS guidance of at least $5.25. The year-to-date results imply fourth quarter adjusted EPS of $0.50, reflecting normal seasonality in our businesses, and a dollar drag due to the implementation of the Florida CMS contract. At the segment level, we expect fourth quarter Medicaid MCR of 93.6% and the full year MCR guidance of 92.9% is unchanged.

Excluding the new store impact of Florida CMS, we expect fourth quarter MCR of 92.5% and the full year MCR of 92.6%. With the first 3 quarters behind us, our outlook for full year 2026 rates and medical cost trend each increased by 50 basis points. Guidance now includes rates at 4.5% and trend at 5.5%. Our rate update is driven by improvements, some retrospective, some prospective in several states. We continue to see a willingness from states to discuss off-cycle rate adjustments as data develops, but we do not include speculative updates in our guidance.

Our updated view on full year trend increases from 5% to 5.5% and and reflects elevated utilization in several medical cost categories and a slight acuity shift throughout the year. In Medicare, we expect fourth quarter MCR of 94.7% in and the full year MCR guidance remains at 92.2%. Excluding MAPD, the full year Duals MCR is approximately 92%. The Medicare segment is expected to contribute $0.25 per share for the year. Within that result, tools are expected to contribute $1.25 per share while MAPD is expected to lose $1 before the product is discontinued for 2027.

In Marketplace, we expect fourth quarter MCR of 96.1%. The full year Marketplace MCR guidance remains at 90%, and the outlook results in a loss of $0.75 per share. We expect the fourth quarter G&A ratio to fall below 6% due to the impact of operating leverage on the additional Florida CMS revenue and disciplined cost management. The full year G&A ratio is unchanged, expected at approximately 6.4%.

Turning to embedded earnings. Embedded earnings remains approximately $9 per share. Recall, embedded earnings are the projected impact to future earnings that emerge from known strategic initiatives, including RFP wins and acquisitions. Embedded earnings do not include legacy business margin recovery. We now expect to harvest $4 per share of embedded earnings in 2027. The components include $1.50 of current year losses on the new Florida CMS contract, which we expect to run at breakeven or better next year. Also, $1 of current year MAPD losses, which will not recur in 2027 and higher revenues will drive $1.50 of operating leverage next year.

The amount we expect to harvest in 2027 is $0.50 lower than our prior estimate due to the potential timing of the full benefit of operating leverage on the Georgia and Texas contracts. As Joe discussed, our preliminary 2027 premium outlook is now at least $45 billion, lower than our prior outlook of $46.5 billion. The change reflects the delay of Georgia and Texas start ship. The building blocks to $45 billion include known tailwinds totaling $6 billion with several components.

First is modest growth in our current Medicaid segment as rate expectations should more than offset our initial view of Medicaid member attrition stemming from work requirements and semiannual reverifications. Second, strong growth in our Medicaid duals business, including state program changes in Ohio, Texas and California; and third, the annualization of the Florida CMS contract. Known headwinds total approximately $3 billion and include the MAPD exit, the reduction in our Marketplace footprint and the state's termination of the California UIS program.

Preliminary EPS building blocks for 2027 sum to more than $9.50 per share. To get there, we begin with full year 2026 guidance of at least $5.25 per share, add approximately $4 of known embedded earnings realization that I just outlined, then add $0.75, assuming Marketplace reaches at least breakeven next year. And finally, California's termination of the UIS program will be a slight headwind. These building blocks do not yet include any impact of the new rate cycle and trend on the legacy Medicaid MCRs. As

Joe mentioned, at this early stage, we project 2027 Medicaid rates will approximate 6%, and the trend will be in a range of 5.5% to 6%. Any improvement in legacy Medicaid MCR would be upside to our 2027 outlook as every 100 basis points of Medicaid MCR is worth approximately $5 per share. These building blocks position us well for profitable growth in 2027. This concludes our prepared remarks. Operator, we are now ready to take questions.

Operator

[Operator Instructions]

The first question today comes from Andrew Mok with Barclays.

分析师问答

Andrew Mok

If we exclude the dollar EPS burden from the new Florida contract in 4Q, it looks like underlying Medicaid MLR would improve sequentially and EPS would also be up sequentially. So can you walk us through what's driving the Medicaid MLR improvement and the stronger-than-usual 4Q EPS performance, particularly given the normal ACA seasonality?

Joseph Zubretsky

Sure. Your numbers are accurate. The underlying the or the legacy book of business is improving by 50 basis points in the quarter, a function of the recent rate updates, offset by or embedded by normal seasonality of the business. And as we indicated in our prepared remarks, the trend assumption for the full year at 5.5% is a good jumping off point for 2027. There is nothing going on in the fourth quarter that's unusual. It's a function of normal seasonality, a function of the rate updates and the fact that the underlying Medicaid MCR is improving by 50 basis points is a good fact.

Mark Keim

Andrew, I think you got it right. There's $1 of drag from CMS. So outside of that, you'd add $1 to the fourth quarter implied guidance. And just on the MCR exactly, as I think you applied, absent Florida CMS, we're 50 bps, 60 bps better in the fourth quarter just on the rate cycle and the seasonality that we expect. So you put those things together, it puts the $0.50 of implied guidance for the quarter in context. I think you got it right.

Operator

The next question comes from Kevin Fischbeck with Bank of America.

Kevin Fischbeck

Great. I guess, I think one of the big questions that investors have right now is just rates seem to be getting better, but there is an expected decline in enrollment from work requirements. I think your point about it probably ramping up through the year is a good one. But can you give any color about what you've seen so far in Nebraska as far as the acuity shift that's happening within the stayers versus the levers there because I think that is probably the biggest variable, I think, in people's minds. Like how should we think about what kind of acuity shift happens when that next leg of enrollment drops off?

Joseph Zubretsky

I think on balance, what we're seeing in Nebraska is an interpretation of the guidance given by CMS that leans more toward enrollment rather than disenrollment. The medical frailty exemption list is 300 pages long on diagnosis codes that qualify for medical frailty. We're seeing a very deliberate effort to find ex parte information to keep members enrolled. And not only are we seeing that in Nebraska, we're seeing that in 80% of our states have what I would say are more our interpretations of the guidance that lean more toward enrollment than disenrollment. .

But we're still projecting a 6% membership loss next year. Bear in mind that it only has a half year effect on revenue. And in our preliminary trend outlook for next year, or 5.5% at the bottom of the range, we're saying that 4.5% of that is core and 1% of that is due to the acuity shift. At this point in time, I have no reason to believe that that's not true that, that's not going to happen, but the states are leaning toward more liberal interpretations of the rules that promote enrollment rather than disenrollment. Mark, anything to add?

Mark Keim

No, I think that's right. Joe summarizing, I think we're seeing a more gentle interpretation of this. It's too soon to make that conclusion, but everything tells us there's a more gentle interpretation of this. Nebraska is so far, we're only a few months in, Nebraska so far, many of us are surprised the impact is rather moderate. What the state itself said is that 90% of renewing members are re-enrolled and within that, the one that caught my attention was 20% of them are for frailty, which is much more than you might otherwise have expected.

So I think, as Joe mentioned, most of our markets are taking a very gentle approach on this. We'll update our guidance in February. But I think a 6% assumption for next year on membership attrition is probably appropriate.

Joseph Zubretsky

And just to put a point on it, since the final tally on trend for 2026 is 5.5%, 4.5% of which is core and 1% acuity shift carrying that forward into next year to account for the acuity shift due to OB3 makes perfect sense to us. In fact, throwing into 50 basis points of conservatism because it's October, even gives us more comfort that we've got trend adequately captured both for core trend and for the potential for an acuity shift due to OB3.

Operator

The next question comes from John Stansell with JPMorgan.

Unknown Analyst

I just want to quickly touch on early days with the Florida CMS contract. Obviously, only been like 22 days, but -- as you look at that contract and kind of ramping it to breakeven over the next year, what are the levers that you have? How do you balance things like continuity of care, -- just what you're looking at as you kind of have gotten in and kind of fully ramped the program?

Joseph Zubretsky

We're very encouraged in the first 22 days of the program. The implementation was nearly the the operational and clinical implementation was nearly flawless. We took out 115,000 members a run rating at $6 billion of revenue, if you recall, -- it is -- these are challenged children with complex medical and behavioral conditions. But the operational implementation of the program, as I said, nearly flawless. Now our view of the program is that it is structurally intact that rates appear to capture the cost of the program. We have certain clinical protocols that are pursuant to the contract that we have to deliver. .

And nothing at this point tells us that the breakeven forecast for next year and full target margin in year or 2 of the contract, nothing tells us that, that can't be achieved. Off to a great start. Certainly, because it's a new program, we have to be cautious in our outlook. Mark will tell you that one of the reasons why we're a little cautious with our fourth quarter guide is -- it's a new program, $1.5 billion revenue comes in, 115,000 new members and you just have to be flexible at the start to know exactly what the early read will be from a financial perspective. Great program for us. We're really good at managing high acuity programs, and this will be a great contributor in the second full year of contract. Mark, anything to add?

Mark Keim

Yes. John, I'll just give you a couple of numbers, which I'll help you with your analysis. In the fourth quarter, our guidance includes Florida CMS for $1.5 billion revenue, which tracks to the $6 billion of full year run rate. But in the fourth quarter, I expect about a 99% MLR and a 5% pretax loss. Now to get the 5% pretax loss to 0 next year, I got to fight 500 bps at the least 200 basis points just comes from the onetime PFAD and LAE reserves I have to put up. I'm sure you're familiar from an accounting perspective, when you put on new revenue, you have to put up onetime reserves. .

So 2% of our 99% MOR is just the onetime reserves, which needs -- I need to find another 300 basis points. And I think between G&A and MOR as we settle in and get our operations in run rate conditions, that's high confidence on that. I would expect most of it to come from MOR, some of it from G&A, but that's the path from a 5% pretax loss to breakeven or better next year.

Operator

The next question comes from Justin Lake with Wolfe Research.

Justin Lake

Just a couple of numbers questions here. First, on the Florida G&A, can you talk about the third quarter versus the fourth quarter, meaning does the fourth quarter have incremental G&A versus 3Q? Or did you have to ramp up, and therefore, it's kind of similar in both periods? And then secondly, on cost trend, going from 5% to 5.5% in the back half of the year, mathematically, it would imply that the back half is actually 6%. Is that the right way to think about it in terms of that's the run rate going into next year? And if so, now you're assuming improvement, just want to kind of dig through that. .

Joseph Zubretsky

I'll answer the second part first, and then I'll kick it to Mark on the Florida G&A question. Now the 5.5% for the full year is the right way of looking at the jump off point into next year. The increase was spread throughout the year, some of the fourth, but the first and second quarters restated slightly. The 50 basis point increase was half due to core trend and half due to a reestimate of the acuity shift. So I would think about the 5.5% as being throughout the year, a good jumping off point for 2027. There's nothing going on in the back half that would cause you to think about a higher jump-off point and therefore, putting more pressure on 2027. Mark, anything to add to that? And for the G&A question.

Mark Keim

I would just repeat, Joe, what you said is that increase in trend isn't necessarily a back-end weighted concept. It's fairly spread through the year. We're seeing pretty even trends quarter-to-quarter. On the first part of your question, Justin, if you back into the numbers, I just ran through, you'll see we had about $100 million expense in the fourth quarter on the Florida CMS. There was very little expense before that. We had suggested, remember that of the $1.50 of loss this year, that $1 was in the fourth quarter and $0.50 was roughly in the prep, Q2 and Q3 as we've ramped up. So you can probably put some numbers around that to better answer your question. .

Operator

The next question comes from A.J. Rice with UBS.

Albert Rice

Hi, everybody. I was thinking if you're making -- if you're in a pretax margin of roughly 1.6% now, that's significantly better than what some of your major peers are talking about, when you think about margin recovery from here, is it relatively concentrated in a subset of your portfolio? Or is the opportunity still pretty broad-based across most states in your portfolio?

Joseph Zubretsky

Thanks for asking the question. And that is the right context. Now we say that our relative performance needs to be taken in context of in this 2026 trough where 3 straight years of medical cost trend and rates lagging behind it. In this trough, we are producing a 1.6% pretax margin on our same-store Medicaid book context. So now when it comes to improvement, think about Investor Day and us projecting forward to margins that get to 2.5% in 2029, 90 basis points of improvement, 30 basis points a year for 3 years, the market needs 300 to get back to actuarial soundness, and we only need a fraction of that to get back to our target.

So the context of the starting point is very important. I would say that in the portfolio, most states are slightly refunded some more than others, and we have rate adequacy efforts that we engage in, along with our competitors and through state associations. But for the most part, I would say that most states are slightly underfunded. But the good news is when you look at the rating dynamics that created a 7% rate increase on the ones we know about, key data point what happened. 2025 year starting to be introduced to the baseline, number one; two, acuity shifts being recognized, including specifically waiting for a prospective acuity shift due to OB3 that has entered the rating dialogue.

And third, as I've said many times, what are the cost pressures on medical cost trend, high-cost drugs, LTSS and behavioral. Those are discrete rating components, very transparent in the rating methodology and those are being rated up to account for the recent cost inflection in those 3 categories.

So all in, I would say that the rate cycle, we are very encouraged by what we're seeing for the 1/1 rate cycle. Most states are underfunded to some extent, and we're very encouraged by what we see. Mark, anything to add?

Mark Keim

Yes. I'd just build on that. variations among our states that we're seeing are less about specific outliers and more just about the timing of the rate cycle. As Joe mentioned, we're very encouraged by what we're seeing for January 1 with an aggregate 7% on the ones we know about, which, of course, is much better than the ones back in '26 on the midyear, which somewhat disappointed us. So the variation is more about the timing of the rate cycle, very encouraged about January 1. .

Operator

The next question comes from Stephen Baxter with Wells Fargo.

Stephen Baxter

I wanted to come back to the early 2027 assumptions for Medicaid cost trend. But I guess I'm trying to understand, as you're thinking about it, like why the acuity assumption holding that stable is a conservative point of view. I guess I'm trying to understand whether any of the current or sort of like nonwork requirement, acuity shift is expected to continue into 2027 in you're thinking? Or is essentially that going to go to 0? And then the 1% that you have is entirely driven by the upcoming work requirements. I guess how should we think about the balance of the 1% acuity shift and what comes from work requirements versus maybe like legacy contribution.

Joseph Zubretsky

Well, I think in the contextual statement is being October, in this environment, we are being conservative and forecasting medical cost trend for next year. But a little bit of history is actually really important here. In the last 3 years, '24, '25 and '26 if memory serves me correct, Medicaid trend was 6.5%, 7.5% and 5.5%. Core trend during that period ranged from 4% to 5% and the acuity shift range from 1% to 2.5%. Now the recent data point where core trend is 4.5% and the acuity shift is 1% seem to be not just out of convenience, but a very good jumping off point. You go in and parse all your cost categories, you look at where the costs are high-cost drugs are certainly elevated, but they've plateaued. Certain cost categories seem to have plateaued.

And so we're very comfortable at this early stage saying that '27 trend at the lower end of the range of 5.5% is consistent with 2026. And because it's October and because we were hesitant to call any Medicaid MCR improvement for next year at this early stage, we put in 50 basis points of additional conservatism for the vagaries of medical cost trend. We will give a refined estimate when we give February guidance. But the early indicators, both on rate and trends are very positive.

Mark Keim

And the only thing I'll add is just repeat the numbers. We're tracking in 2026 to a 6% same-store membership decline trend. We're estimating at 5.5%, of which we think roughly 1% is acuity shift. Looking forward to 2027, my best pick on membership attrition at this early stage is another 6%. So rolling the same core trend of 4.5 forward and acuity of 1 to 1.5, just to be conservative is a range that gets us to the numbers we told you. I think that's a fair accounting for what we might see on the membership loss next year, essentially more like this year with a little bit of a conservative range put on it. .

Operator

The next question comes from Scott Fidel with Goldman Sachs.

Scott Fidel

I was hoping maybe we could just go back to the Medicaid trajectory question and just trying to include the whole business and not carving out any sort of new blocks of business because you guys are looking to be a growth company, you always have new sort of blocks of business that are more dilutive. So just I thought it would be helpful just to sort of frame sort of the trajectory of your Medicaid margins and especially because you talked about some higher trends in the first half of this year.

Joe and Mark, maybe if you want to sort of walk us through like your adjusted pretax margin for the overall Medicaid business in the first half and then in the third and the fourth quarter, and then how you're setup that you're talking about, what that implies for the adjusted pretax margin into 2027. I think for the whole Medicaid business, that would be really helpful.

Joseph Zubretsky

I'll kick it to Mark, but Scott, I'll give you a context of why we did what we did and we talked about it the way we do. And you're right. we're going to be successful, winning 500 million contracts here, $1 billion worth of contracts there. And at the end of the day, that's the cost of growth when they start out running higher than your normal run rate. But bear in mind, $6 billion of revenue new coming in on a $30 billion base and a high acuity population is a very unusual growth phenomenon. One, by the way, we're enjoying a lot, but a very unusual growth phenomenon. So if there is ever a reason to call out a new contract, this is it due to the materiality of it. And due to the complexity of the program and the acuity of the population.

Mark, do you want to go through the tail tape on the Medicaid trajectory.

Mark Keim

Absolutely. so just to repeat what Joe said, the magnitude of that contract coming in isn't business as usual. That's $1.5 billion on top of what normally would be $8 million, $8.5 million. So at a 99% MOR, that's certainly a skew for the quarter. So we called out, and I think appropriately so. On Medicaid total, we'll report a pretax margin of 1.2% barring the 99% on the Florida contract that would be at 1.6%. Now looking into next year, we're not ready to give you guidance, but what Joe said in his prepared remarks is you can see a scenario where trend is at least equal to -- maybe equal to rates maybe a little bit better. So assuming we hold rates equal to trend, expect a flat MLR year-over-year. But even with that, we're pointing out the G&A leverage that we'll add because of the growth next year. and the building blocks help you with that. I'm sure we'll get to that a little bit later in the call.

But I think if there's optimism on rates versus trend, you can start to model in a benefit on MOR, but we're not quite ready to guide you there. That's something we'll tell you in February.

Operator

The next question comes from Sarah James with Cantor Fitzerald.

Sarah James

I appreciate the comments that you've made around 27 Medicaid enrollment and the slower pace assumed in your '27 commentary for the work requirement losses. But I just wanted to see if we could put a finer point on that. So when you say slower, are you talking about second half being more losses than first half? Or are you talking about the mix between '27 and '28 because there are some self-attestation teams that come in, in '28 and put some pressure. So how do you think about the pacing of the losses from work requirement as you've built it into your '27 guidance assumptions.

Mark Keim

So thanks for the question, Sarah. What we said earlier is that cumulatively, we can see about a 10% loss over the next bunch of years. At Investor Day, we actually said an applied 3% CAGR over the next 3 years. So call it, 9%, 10% total from work requirements and semiannual reverification. What we're suggesting today is our initial pick for year 1, 2027. And is a 6% impact to membership, which implies most of it's in '27 with a little more in '28 and maybe even '29. That's our best guess right now. And I think, consistent with many outside data points. Does that help? .

Operator

The next question comes from Dave Windley with Jefferies.

David Windley

I wanted to ask around the comment -- your comments on some prospective rate adjustment for Acuity. The 2 things that we consistently hear from folks in the Medicaid space are that state actuaries want to base rates on completed claims data with as much as 6 months of run out; and two, the state budgets are under a lot of pressure general revenue, snap error rates, Medicaid, et cetera. So I'm interested in a little more detail around what form those prospective rate bumps for acuity are taking? How are those conversations going? And who are the ones or how are the ones that are able to or seem to be wanting to give a prospective rate bump? How are they coming up with that money?

Joseph Zubretsky

A handful of states have specifically included an allowance of prospective rating adjustment for the potential for an acuity shift. A handful of other states have said that while they may not put it in initial rates, they would certainly entertain a mid-cycle review, and they have history. Stayers leavers, joiners, it's not a real, it's not a difficult model to come to grips with. You have stayers, leavers and joiners, and we have 3 straight years where the acuity shift, not related to OB3 obviously, on what it means when people leave the program with lower than portfolio average MCRs means to the program. So the data does exist on levers stayers and joiners, and that's what they're using to put in adjustments for the prospective nature of an acuity shift due to disenrollment. So we're encouraged by what we see. And we'll obviously look how membership goes and we'll be reporting during the year on what we're seeing, Mark, anything to add?

Mark Keim

When we talked about the prospective and retrospective in Q3, Q4, most of those rate updates were more about the existing gap of underfunding. When we move to the Jan 1, that's where there's been explicit assumptions on next year's work requirements and redeterminations. And I will tell you, 6 of our states on January 1 have built in explicit adjustments for what they're expecting on work requirements and redeterminations. So I think that's very encouraging.

Joseph Zubretsky

And in the latest rating bulletin put out by CMS, they strongly encouraged state actuaries to anticipate and capture the effects of acuity shift due to disenrollment.

Operator

The next question comes from Ryan Langston with TD Cowen.

Ryan Langston

On the Florida Kids contract, I understand it's early and the expectation to hit breakeven overall next year, but any insight into how the underlying performance of that contract might pace through '27. Is there any reason to think the seasonality is different versus the legacy business just in terms of building up to that sort of full year breakeven for the year?

Mark Keim

The nature of the membership base is less about seasonality because this is kind of continual month-to-month programs in regularly scheduled appointments. So I think the seasonality of the underlying business is less of a driver, given that we're expecting to go from a minus 5% pretax in the fourth quarter to break even, you might expect there to be a linear progression through the year as we kind of settle into our MCR G&A. I'm not ready to give you a quarter-to-quarter outlook, perhaps we'll do that in February. But you can expect some linear improvement throughout the year. .

Operator

The next question comes from Lance Wilkes with Bernstein.

Lance Wilkes

Great. Could you talk a little bit about puts and takes with respect to 3Q MCR in particular, in Medicaid. I'm just interested in if the acuity shift hit all represented in 3Q MLR and how prior period development impacted 3Q?

Joseph Zubretsky

Mark? .

Mark Keim

Sure. What you had in 3Q was pretty much normal trend. We had, as Joe mentioned, a little bit of prior period development, not meaningfully. I saw a couple of the analysts commented on prior year development being a bigger contributor this year. I think that's probably somewhat misguided compared to last year, that's true. But as you know, last year, prior year development was significantly lower than it normally would be. So a normal contribution from prior year development first, second and third quarters progression of trend.

What Joe made clear was that moving trend from 5% to 5.5% was not a Q3 or Q4 specific item, but more our observation of development of Q1, Q2 and our expectations for Q3 and Q4, both on the underlying core trend, but the acuity of the membership losses that we are seeing. So I don't think anything particularly notable to observe other than a little bit of a creep on core and just an expectation that acuity is just maybe a little bit higher than we thought.

Operator

The next question comes from Michael Ha with Baird.

Michael Ha

With the California Medicaid asset limit being lowered starting in July of next year, I think the limit for 1 person falling over something like over 80%. How are you thinking about the impact as composed to your Medicaid membership? Do you have any data on asset limits? How much your Medicaid members own? how many of those lives and all your D-SNP lives could be exposed above the threshold? And then also a quick 1 in California. Could you also help us understand your remaining downside exposure under the corridors, if costs were to the deteriorate further, how much of that incremental pressure would be absorbed by quarter offsets versus flowing through to earnings?

Joseph Zubretsky

Michael, can you please repeat the first part of your question? Mark and I want to make sure we understand it and we could be responsive. Can you repeat the first part of your question, please?

Michael Ha

Yes, of course. With the California Medicaid asset limit being lowered, starting in July of '27. I think the asset limit for 1 person is falling over 80%. I think it's like what you can own from 130,000 down to something like 20,000. Just wondering if you have any thoughts about how that might impact your Medicaid and even your step lives if they fall above that threshold?

Joseph Zubretsky

I know I understand your question. Any eligibility rules in any state. This is built bottoms up. This is not a top down. When we give outlooks and forecasts and guidance and membership projections, everything is built, bottoms-up. Anything that happens within a state with respect to eligibility requirements, is fully contemplated in our outlook. So yes, the asset limitations were fully complemented. Now on the corridors, I would just say that our corridor accounting we've gotten pretty good at this quarter have been introduced in many states, including California. We are -- we conservatively account for quarters. I'll take it to Mark here. But I wouldn't expect anything unusual. We account for it as experience emerges. And if experience changes, we adjust the accounting. .

Mark Keim

The only thing I'll add is on current year membership, we've seen most of our membership declines in 3 states which is -- one of them is California. I would expect our modeling for next year will be similar, where we'll probably see disproportionate declines in memberships in a handful of states. California being one of them. So that will partly reflect the matter you just raised Other than that, I don't see a meaningful impact for MLR. .

Operator

The next question comes from George Hill with Deutsche Bank.

George Hill

Joe, you talked a little bit about the implementation of work requirements, community engagement requirements in Nebraska. I guess can you talk about I want to think about like the range of outcomes in the other states that you guys participate in. And I'm kind of thinking about this on like reflecting A.J.'s question, like Nebraska, seems to be a pretty benign implementation. I guess can you talk about the range of what you're seeing across the states from where the implementations look like they're more arduous and could have a greater impact versus where they'll have a lesser impact.

Joseph Zubretsky

All right. At this early stage, I mean, it's fair to say, as of 10 days ago, when I last checked, many of the states haven't even decided on their Tier 1 definitions of medical frailty, which are the diagnosis codes that by themselves would constitute medical frailty. So some of these things haven't even been decided yet. But as we work with our states and look at the range of possibilities, the range of flexibility that states have in interpreting CMS guidelines, I would say that on balance, 80% of our states are leaning toward policies that promote enrollment rather than disenrollment. Whether it comes to how hard are we going to look for information that determines an ex parte eligibility, are we going to accept self attestation or not? And medical frailty and the other types of exemptions within a range of possible outcomes are we going to be more conservative and more liberal. So I would say it's leaning toward promoting enrollment rather than disenrollment, but we've learned nothing in the process that causes us to change our 6% outlook next year for reduction in membership and the acuity shift impact that we put into our trend assumption of 1%.. .

In Nebraska, I would say that the results here to date have actually been lower disenrollment than anybody forecast. And in fact, on renewal enrollments, I think that 90% of the applications have been upheld on people that are already in the program are up for renewal run them through the process, 90% of them renewed, which is far greater than anybody anticipated.

Mark Keim

And within that 20% for frailty, which is significantly higher than most of us thought.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.