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Joseph Zubretsky

Thank you, Jeff, and good morning. Today, I will discuss several topics, our reported financial results for the first quarter, our growth initiatives and the related increase to embedded earnings and our full year 2025 guidance, which we reaffirm at $42 billion of premium revenue and at least $24.50 in earnings per share. Let me start with our first quarter performance.
Last night, we reported adjusted earnings per share of $6.08 on $10.6 billion of premium revenue, supported by strong operating metrics across all lines of business. Our 89.2% consolidated MCR reflects strong medical cost management and an improving rate environment.
We produced a 3.9% adjusted pretax margin or 3% after tax, a very strong results. In Medicaid, the business produced an MCR of 90.3% in the quarter, which was in line with our expectations. As contemplated in our initial guidance, medical costs increased moderately due to continued utilization of LTSS, high-cost drugs and behavioral health services as well as seasonal illnesses, the impacts of which were mostly offset by updates in the new rate cycle.
In Medicare, we reported a first quarter MCR of 88.3%, which was in line with our expectations. Medical cost trend was as expected, and was adequately captured by rates and risk adjustment.
Our strategy of leveraging our existing Medicaid footprint to serve high-acuity, low-income Medicare beneficiaries is working well. In Marketplace, the first quarter MCR was 81.7% and was higher than expected.
This was the result of prior year items related to final risk adjustment and membership reconciliations as well as a higher new store MCR related to the first quarter results of our ConnectiCare acquisition. Excluding these items, the normalized MCR was approximately 77.7%, more in line with our expectations. Turning now to our growth initiatives.
We continued our successful track record of winning RFPs in the quarter. In Medicaid, we successfully defended our position in Nevada as we were awarded a contract to serve Medicaid beneficiaries in the 2 largest urban areas in the state. In our Medicare dual-eligible business, we were awarded a contract in Illinois to provide a fully integrated dual-eligible special needs plan.
This win completes the full transition of our existing MMP members to an integrated DSNP product in all of our MMP states for January 1, 2026. We project incremental annual premium revenue of approximately $800 million from this new contract and have added $0.50 per share to our embedded earnings.
This contract win also moves us closer to achieving our premium revenue target of $46 billion in 2026 and at least $52 billion, which is the low end of our target range for 2027. With respect to M&A activity, our acquisition pipeline continues to contain many actionable opportunities as we remain opportunistic in deploying capital to accretive acquisitions.
Embedded earnings have now increased from approximately $7.75 to $8.65 per share. This represents approximately 1/3 of our current EPS, and serves to support our target future growth rate. Turning now to our 2025 guidance.
Full year 2025 premium revenue guidance remains unchanged at approximately $42 billion. We also reaffirm our full year 2025 adjusted earnings per share guidance of at least $24.50 or 8% year-over-year growth. Mark will discuss a few of the changing components within our EPS guidance, a major point of which will be that full year 2025 Medicaid rates are projected to be slightly higher than previously expected as states reflect recent cost trends in on- and off-cycle rate updates.
Given that known fact, we also increased our outlook for cost trend, reflecting some conservatism at this early point in the year. Our 2025 guidance is a strong foundation off of which to grow and to realize the embedded earnings power of the opportunities we have already secured.
Turning now to the political and legislative landscape. In Medicaid, we continue to believe that any changes to the Medicaid program in the near term will be marginal. The general perception is that Congress and the current administration will implement Medicaid program changes through possible combinations of various funding reduction approaches in order to meet federal spending targets.
There are many credible estimates of the potential impact of these various approaches. We continue to believe that any impacts to membership volume or the acuity of the risk pool will be manageable and will not disrupt the earnings trajectory of our business.
You are all well aware of the complex legislative process, which will ensue over the coming months to reconcile the Senate and House resolutions to a final bill. While we await a definitive legislative framework, we continue to believe that neither side of the aisle wants to see an increase in the number of uninsured, a significant reduction in benefits for those relying on government assistance or the inevitable related impact to providers.
In Medicare, we are pleased with the recent CMS final rate notice for Medicare Advantage. In addition, the early read on states promoting the integration of Medicaid and Medicare bodes well for us having a significant Medicaid footprint and a competitive DSNP offering.
Finally, in marketplace, we remain confident in the stability of our membership and the outlook for the business despite the various program integrity initiatives and a final decision on the enhanced subsidies, which would impact marketplace enrollment in 2026.
Any impacts to membership have been contemplated in current year guidance and our future year revenue outlook. States have also communicated a willingness to allow market participants to update rates for 2026 based on the final resolution of the enhanced subsidies, which would substantially mitigate any related pricing risk.
Our first quarter results and reaffirmed full year 2025 guidance reflect our team's disciplined approach to medical cost management in an improving rate environment. Our revenue growth and pretax margin profiles across all segments remain consistent with our long-term targets, and we continue to harvest and replenish embedded earnings. As we take an early look into 2026, we are confident in the process for actuarial soundness and the adequacy of Medicaid rates.
In reviewing publicly available information state by state, we believe that the broad Medicaid market appears to need 200 to 300 basis points of rate in excess of trend to obtain some level of program equilibrium. If rate updates were to be made at that level, recognizing that all market participants obtain the same rate, Molina should be soon returned to performing at 89% or better, perhaps also while paying into the corridors.
Our businesses, while not immune to external forces, have been resilient in the face of many uncertainties over the past many years. The redetermination process is behind us. Any legislative changes to the Medicaid program are likely to be marginal, and health care is generally less sensitive to economic cycles.
Our 2025 earnings and growth profiles are solid, and therefore, we remain very confident in our ability to achieve our 13% to 15% long-term earnings per share growth target. 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 first quarter performance, the balance sheet and our 2025 guidance. Beginning with our first quarter results. For the quarter, we reported approximately $11 billion in total revenue and $10.6 billion of premium revenue with adjusted EPS of $6.08. Our first quarter consolidated MCR was 89.2% and reflects strong medical cost management and an improving rate environment.
In Medicaid, our first quarter reported MCR was 90.3% and in line with our expectations. As we expected, medical costs increased moderately due to the continued utilization of LTSS, high-cost drugs and behavioral health services as well as seasonal illness. These were largely offset by the first quarter rate cycle, which came in as expected. In Medicare, our first quarter reported MCR was 88.3%, in line with our expectations. We remain confident in the pricing and benefit adjustments we implemented for 2025.
The reported MCR also reflects the improvement related to our decision to exit MAPD in 13 states. In Marketplace, our first quarter reported MCR was $81.7. The MCR was higher than expected and driven by 2 prior year items, lower final risk adjustment and member reconciliation adjustments. Also note that the initial new store, MCR of ConnectiCare, is, as expected, running higher than target early on. Altogether, these 3 nonrecurring items accounted for approximately 400 basis points in the quarter.
Excluding these items, the normalized Marketplace MCR was approximately 77.7% and reflects seasonality that was more in line with our expectations. Our adjusted G&A ratio for the quarter was 6.8%, driven by operating discipline and the continued benefit of operating leverage. Turning to the balance sheet. Our capital foundation remained strong. In the quarter, we harvested approximately $110 million of subsidiary dividends our parent company cash balance was approximately $190 million at the end of the quarter.
Our operating cash flow for the first quarter was $190 million. During the quarter, we repurchased approximately 1.7 million shares at a total cost of $500 million. Debt at the end of the quarter was 2x trailing 12-month EBITDA, and our debt-to-cap ratio was about 47%. We continue to have ample cash and access to capital to fuel our growth initiatives. Days payable at the end of the quarter was 46, lower than normal.
While our reserving policies remain consistent, the timing of payments can have quarter-to-quarter impact on reported reserves as it did this quarter as we had one additional claim payment cycle. We remain confident in the strength of our reserves. Next, a few comments on our 2025 guidance. As Joe mentioned, we continue to expect full year premium revenue to be approximately $42 billion. Within that number are a few moving pieces.
We expect higher organic growth in our Marketplace and Medicaid segments to offset the midyear loss of our Virginia contract. Recall, we previously guided for this contract to county through year-end, but now we expect our membership to be reallocated to other MCOs mid-year.
Our full year consolidated MCR is now 88.8%. Within Medicaid, the full year MCR is unchanged at 89.9%. We are seeing rate increases slightly higher than we had previously expected as our state partners continue to update their actuarial data.
These rate increases are offset by our outlook on full year trend, which is now slightly higher and reflects our conservatism at this point in the year. Together, full year rates and trends are both higher by 50 basis points and result in no change to the MCR guidance.
Our MCR guidance on Medicare also remains unchanged at 89%. We remain confident in the performance of our Medicare duals and integrated product business. In Marketplace, we are increasing our full year MCR guidance from 79% to 80%, which is the upper end of our long-term target range.
This 100-basis-point increase reflects the unfavorable nonrecurring impacts in the quarter I discussed earlier. The Marketplace MCR trajectory for the rest of the year is largely unchanged from our prior view. We continue to expect this segment to produce mid-single-digit pretax margins.
Effectuation rates remained strong through the first quarter, and we are encouraged by early performance of new members added through the open enrollment and special enrollment periods. Our year-end outlook on membership increases by 40,000 to approximately 620,000 members and includes the estimated impact from income verifications and program integrity initiatives.
We now expect the full year G&A ratio to be approximately 6.9%, better than previously guided by 10 basis points as we continue to drive efficiencies in our operations. We reaffirm our full year EPS guidance of at least $24.50 per share. Within that number are a few moving pieces.
Our EPS guidance now includes a $0.40 benefit from share repurchases in the first quarter, $0.30 from higher volumes in our Medicaid and Marketplace segments and $0.30 commensurate with the improved G&A ratio. These favorable items offset a $0.60 headwind attributable to the higher Marketplace MCR guidance and $0.40 loss from the midyear termination of our Virginia contract.
We continue to expect earnings to be evenly distributed throughout the year. Turning to embedded earnings. Our new store embedded earnings are now approximately $8.65 per share, up $0.90 from our prior outlook of $7.75. This increase includes $0.50 from the recent duals contract win in Illinois and an additional $0.40 as we are now recognizing half of the Virginia contract loss in current year guidance rather than next year, as previously expected. We expect 1/3 of this new store embedded earnings to emerge in 2026, giving us high confidence in our 13% to 15% long-term growth rate.
This concludes our prepared remarks. Operator, we are now ready to take questions.

Question and Answer Session

Operator

(Operator Instrutions)
Stephen Baxter - Wells Fargo.

Stephen Baxter

Hey, good morning, Just wanted to start on the exchanges. I was hoping, first, you could expand what you saw on risk adjustment and also this member reconciliation dynamic. I guess specifically, with number reconciliation, what exactly are you describing there and trying to understand better why we should think about that as a nonrecurring item?
And then just thinking about the rest of the year guidance on the MLR line, the exchanges, obviously, you called out in kind of 400 basis points of variance than the first quarter, you're taking up the full year, I think, by now 100 basis points. So yes, rest of the year, it feels like it's relatively unimpacted.
Just trying to understand kind of the continuing elements of what you saw in the first quarter, and how much of that we need to think about continuing for the rest of the year?

Joseph Zubretsky

Stephen, the Marketplace story is a very positive one. We did have nonrecurring items in the first quarter, which elevated the MCR by 400 basis points. I'll kick it to Mark in a minute for more detail. Membership reconciliations, members that were not authorized to be in the plan, but we were servicing last year because they were in their membership rules. That was a scrub by CMS to eliminate members who lacked authorization, a onetime item.
The other onetime item was a true-up to 2024 risk adjustment. The final piece, as typical for an acquisition, the MCR will be operating at the inherited MCR, which, for ConnectiCare, is in the mid- to high 80s. We're still confident in bringing that down to our target to produce the full $1 of earnings accretion that resides in our embedded earnings.
The Marketplace story is very positive for the end of the year with 620,000 members, mid-single-digit margins and still operating within our long-term range, albeit an increase from our previous guidance of 79% now to 80%. Mark, anything to add?

Mark Keim

Add? Yeah, Joe, I think you got it. Let me just break that down a little further. The 400 basis points is about $40 million, and that breaks down pretty much 1/3, 1/3, 1/3 on the things that Joe talked about. I'll add a little color to them. On the final prior year risk adjustment, I'm sure you're aware, in Marketplace risk adjustment is on a relative basis, not an absolute basis like Medicare.
So it's right about now that we find relative to the other players, exactly how we scored last year, and we were just a little bit less than we thought on risk adjustment when the final numbers came in. These are the weeklies.
So that's a nonrecurring normal function of how we settle up risk adjustment. On member reconciliation, this is not FTR. This is members that were on the books last year that when they get their tax filings realized they had a policy and didn't know it.
Sometimes that's administration issues, sometimes it's broker issues. But right about now is when we see those because that's when the tax filings come due. We're pretty confident in that number, and that's a pretty final number for last year.
The good news is, with all the integrity stuff going on, you're going to see a lot less of that going forward. And then lastly, as Joe mentioned, on the new store impact of ConnectiCare, that ran in the high 80s initially.
We'll pull that down quick with the Molina playbook, but there's a little bit of noise in there that certainly pulls our reported MCR up. Roll those together, that's the 400 bps we talked about.

Operator

Andrew Mok from Barclays.

Andrew Mok

Hi, good morning. In the prepared remarks, you called out higher assumptions for both rates and cost trends. Cost trend -- it sounds like the rate is on the Medicaid side. It sounds like the cost trend is on the ACA side. Do I have that right? And what exactly are you seeing on each of those items that is informing that updated assumption? Thanks.

Joseph Zubretsky

Andrew, I'll give you a high-level answer and then kick it to Mark. I want to be very clear on what we forecasted for the Medicaid business. We received rate updates in the first quarter $150 million, which equates to 50 basis points on a full year basis. Those will nearly entirely impact Qs two, three and four and did not have an impact in Q1. So states are obviously recognizing certain cost pressures and updating rates both on-cycle and off-cycle to compensate for.
The only reason we increased our trend estimate for the year is, at this early stage in the year, reflecting appropriate conservatism, we were not going to improve our Medicaid MCR by 50 basis points at this early stage.
So rather than those rate increases drop through to our guidance, we offset them with a topside adjustment, if you want to call it, to medical cost trend until we see more in the second quarter. So still holding serve on our 89.9% MCR estimate in Medicaid for the year, but the rates are moving in the right direction. Mark, anything to add?

Mark Keim

That's exactly right, Joe. So on a full year basis, Medicaid guidance unchanged at 89.9%. The only thing that's different is our rate assumption is now 5% versus 4%.
For the full year. And our trend assumption is 5% versus 4.5% for the full year. And again, this is all a function of the known rates we've received going forward.

Andrew Mok

Got it. Okay. So it sounds like your forward expectations on forward rates has remained unchanged, is that right?

Mark Keim

No, our forward rates are slightly better, so we're raising our full year guidance from 4.5% to 5%.

Andrew Mok

Right. But that's the rates you've already received and have visibility into. So are the forward rate expectations also higher? The ones that haven't been finalized?

Joseph Zubretsky

We know we know rates on 85% of our -- when we gave initial guidance, we knew about rates on about 75% of our revenue. That's now 85%. So yes, there is an estimate in for the September and October rate adjustments that is still having at a very modest level. So the 5% annual rate increase includes 85% known rates for the year.

Andrew Mok

Got it. Understood. And you called out seasonal illness in Medicaid, which sounds like flu. Can you tell us the impact that, that had on the quarter? Thanks.

Mark Keim

Yeah, We've sort of moved to the ILI definition that a lot of people have, which is largely flu at this point. We've not really given a normalized number, but I think the more helpful thing for you is we probably ran $10 million to $15 million hot versus what we might call normal. But again, we had that in our guidance. So that really wasn't a surprise to us.

Operator

Josh Raskin with Nephron Research.

Josh Raskin

Hi, thanks, I just want to ask on the exchanges. So just taking a step back, can you help us understand where the marketplace fits in your long-term strategies? I know you went through this at the Investor Day, but are there synergies or other -- with the other two segments or value that comes beyond the gross margin contribution? And I understand medical margin dollars were actually up 20% in 1Q. But is there a desire to sort of bid to think differently about the annual volatility in that book at some point?

Joseph Zubretsky

Josh, as we said at Investor Day, the product line is completely synergistic with our pure-play, government-sponsored managed care theme to our strategy. As people income up and down from Medicaid into Medicaid expansion into highly subsidized marketplace, people are moving in and out of life circumstances often frequently.
And having a product where we can capture the member for their lifetime or as long as they're in government assistant across a broad range of products is totally synergistic. In fact, when they turn 65, which 50,000 members of ours do every single year, we have a DSP offering that captures the agents. So very, very synergistic.
And a attractive contributor to the profile of the business. We were earning nearly double-digit pretax margins in the last two prior years. We consciously invested that excess margin in membership growth while still targeting mid-single-digit pretax margins.
We will grow the business at a rate that allows us to hit mid-single-digit pretax margins for the reasons you articulated that it can be followable. When you bring on new membership, not knowing their cost profile and not having the benefit of risk adjustment means there is a cost to growth, and we want to manage that volatility. Mark, anything to add?

Mark Keim

No, I think that's well summarized. Joe, you've sometimes referred to it as a residual market because when other things in the economy go up and down, it sort of captures the excess. Therefore, there is more volatility, Josh. And what we've always been very clear about is it's a relatively small part of our portfolio, we will price for margin and let the volume fall where it does.

Operator

A.J. Rice from UBS.

A.J. Rice

Hi, everybody. Thanks for the question. When you step back, you mentioned a nod to the Washington backdrop of all this chatter about Medicaid cuts adjustments or whatever. I wonder is that -- are you seeing that in any way impact the discussions with states around rate updates or RFP processes are -- is what's going on in Washington and any uncertainty that creates having any impact on any of that?

Joseph Zubretsky

No, A.J. I would say not. The rate discussions are actuary to actuary, looking at the actuarial data. And the real positive news about rates is the cost pressures are coming from cost categories that are very discrete and prominent in the rate models. LTSS rated separately, behavior usually viewed separately as well as high-cost drugs, including GLP-1s.
So the cost pressures that the industry is experiencing are very highly profiled in the rate development environment. That is -- it's a debate about cost trend. It's a debate about what's a credible baseline and a trend off that baseline purely has nothing to do with the Washington debate about how far to pull back Medicaid. Same thing with the RFP cycle. The RFP cycle right now is actually at a low point.
It was at a high point in the last two years, where we did really, really well as advertised. It is $50 billion from 2025 to 2028 in total contract value. We have our eyes on a couple of very attractive opportunities. And the reprocurement cycle is actually at a low point as well, where we don't have a lot of reprocurements coming up in the next 24 months. But no, the dialogue in Washington is not causing any state to really rethink either the rate development process or when they reprocure their program.

Operator

Justin Lake with Wolfe Research.

Justin Lake

Thanks, good morning. Question on effectuation rates, Joe. Can you remind us what you're seeing there? And then can you give us a ballpark on what the MLR looks like for those members versus the overall book?

Joseph Zubretsky

Sure. I'll give you a high-level answer and then hand it to Mark. But we've had a very successful open enrollment period in Marketplace, a very successful special enrollment period early on where we're sitting here with 660,000 members having ended last year at 400,000. Our effectuation rates seem to be better or higher than many of our competitors for a variety of reasons. Mark, do you want to elaborate?

Mark Keim

Yeah, good morning, Justin, we are actually seeing pretty good effectuation rates, and you might be comparing that to what others have said in the market, and I can't really talk to their results. But I think we mentioned last time around we're either 1 or 2 in about 50% of our footprint. And part of the effectuation is people rolling into the new cycle and seeing that their payments are maybe different than they were last year, which is a function of pricing. So some of the folks that might be losing might be at different points on the pricing scale.
And I think people, through effectuation, are staying with Molina or in the case of SEP coming to Molina. So we're seeing good results on both SEP and effectuation. Now on the MLR, it's really too soon this early in the year to getting them on that because 50% of the book is new, which is not an unusual phenomenon. But we'll have to see how that develops. And if you ask that question in the second quarter, I'll be able to give you a pretty specific view.

Operator

John Stansel from JPMorgan.

John Stancil

Great. Last quarter, you spoke to G&A being a little bit more front loaded as you take on the IT costs for the $1 implementation cost in '25. I think G&A came in nicely in the quarter. I guess how are we thinking about progression for G&A this year, and how we get to kind of 10 basis points lower than your initial expectation?

Joseph Zubretsky

John, the G&A story is a very positive one for us. We focus on it with the same discipline and rigor that we focus on every dollar of medical costs. We've broken through the 7.0% barrier. We've broken through that. And I'm going to talk on a mix equivalent basis because, obviously, mix matters to the G&A ratio.
But on a mix equivalent basis, we're comfortably in the high 6s. We think over time, as we grow to the $55 billion of 2027 revenue target with our discipline over fixed cost leverage, we can move that down on a mix equivalent basis into the mid-6s, perhaps even in low sites 6s.
It's a very positive part of the story that's either going to improve margins over time in our investment thesis or serve to act as a hedge to any MCR pressure we might see over the long term. Mark, on the short term?

Mark Keim

Yeah, John, if you're looking to model the rest of the year, I expect a pretty flat G&A trajectory across the year. We had a 6.8% year in the first quarter. We'll have a 6.9% in our guidance, which implies pretty flat across the full year. What's maybe driving that?
We talked about more of the implementation costs upfront in the year, and that's true. It's a little more front-end loaded. But the back-end loaded part is always some of the marketing costs around the OEP within Medicare and Marketplace that usually drive up G&A. So you've got some different things going on, but I think a pretty flat G&A story through the year.

Operator

Sarah James from Cantor Fitzgerald.

Sarah James

Thank you. One clarification and then a HICS question. So just to clarify, when you moved up the Medicaid cost run 50 basis points, was that pure conservatism? Or did you see trend data above your prior expectations? And then on exchanges, do you think that the pricing and benefit design changes or the new member mix could change your MLR seasonality on the HICS business?

Joseph Zubretsky

Sarah, you heard my prepared remarks correctly. In the Medicaid business, we absolutely received rate updates of $150 million, which caused us to increase our full year rate update from previous guidance of 4.5% to 5%.
As I said, in our member month mix, 85% of rates on our member month are known at this point in time, only 15% is an estimate. That -- those rate updates will impact quarters two, three and four. Having known that, we then said, do we let that drop through to our guidance and drop our MCR guidance by 50 basis points?
At this early stage and in this environment, we decided not to. We saw no empirical evidence in the first quarter, which caused us to increase trend. The increase in trend from 4.5% to 5% to be commensurate with rates was entirely due to early in the year of conservatism.
We'd like to see how the second quarter experience emerges before making a final call on updating the Medicaid MCR for the full year. Your second question on HICS, can you repeat it, please?
Or do you have it, Mark?

Mark Keim

I'll take that one. Sarah, on the full year trajectory of Marketplace MLR, we're a little flatter than normal this year or at least in prior years. First of all, we've got more new membership in SEP this year. So we're a little more conservative in our initial picks. But the other thing is, you'll see ConnectiCare improving through the year as new stores typically do. And then lastly, we've got a lower bronze mix this year and bronze tends to be a much more seasonal product, so a little bit flatter on the trajectory if you're modeling it.

Operator

Joanna Gajuk from Bank of America.

Joanna Gajuk

Hey, good morning. Thanks so much for taking the question. So if I may, given the discussions around trend by product I don't think I heard you talk about M&A. I know you said that in the quarter, it sounds like MLR was in line with tons. So can you talk about anything that's maybe happening in your Medicare Advantage book? And are you still expecting same trend for the year? I think you had said on the last quarter, an increase of 2.7% for the year. Thank you.

Mark Keim

Yeah, I'll take that one. So far, Medicare playing out much like we expected. We had guided to 89%, and we're still quite confident in an 89%. You're right in remembering the build, trend was about 2.7% in our original number and rates were just a little bit less than that. So far, I'm seeing utilization, B-28, all of those matters as well as the Part D under the IRA, all of those matters pretty much coming in as we anticipated.
And remember, that's a much smaller part of our book.

Operator

Ryan Langston from TD Cowen

Ryan Langston

Thanks.I want to go back to A.J.'s question. I guess on M&A, with sort of the backdrop uncertainty reconciliation and hand subsidies, et cetera., I guess is that impacting the willingness of potential M&A targets to engage on a potential deal? Or is it having any impact on the potential multiples just given we don't know where everything is going to shake out? Thanks.

Joseph Zubretsky

On the M&A front, the pipeline is still replete with opportunities. Obviously, the last one we announced was the ConnectiCare acquisition. But the pipeline is full. Our M&A team is actively engaged in analyzing core products, core markets and attractive prices.
If the businesses are underperforming and in this environment, as you know, performance is a challenge in this environment, some of these smaller single-state, single-geography companies are struggling.
So no, I would say that the -- it's not casting a pall over the M&A activity. In fact, it might even be increasing some of the flow as some of these single-state operators have seen how difficult it is to run a business. We have the benefit of 22 state diversification, single-state single geography companies don't.
So I would say it's almost quite the opposite. The pipeline is full of opportunities, and we hope to fulfill the commitment we made that 1/3 of our forward growth rate, as we said at Investor Day, is likely coming from M&A.
Bearing in mind that we're already at our $52 billion estimate for 2027, which is the low end of our range. We've got 18 to 24 months to fill that other $3 billion. And while nothing to lay up in this business, I'm highly confident we're going to do it.

Operator

Lance Wilkes from Bernstein.

Lance Wilkes

Great, thanks. Could you talk a little bit about network contracting? Interested in how supplemental payments have been impacting hospitals and whether that's impacted kind of the growth and access with hospitals in your network? And then also, what are you seeing as far as, and what are you doing in the form of value-based care contracting? Do you see any subcomponents of that do you feel you're going to need to own or partner? And maybe as you're doing that, if you can just kind of clarify on utilization, if there are any unusual puts and takes between categories like hospital, behavioral drugs, etc? Thanks.

Joseph Zubretsky

Lance, I'll let me take the second part of your question first on value-based care and value-based contracting. As you know, in the past five years, most of the activity on VBC has been aimed at Medicare Advantage. That's where the lives are. That's where the premium was. And that's where a lot of the activity.
It is coming to Medicaid. It is coming to Medicaid more slowly. There are regulatory definitions of how much of your medical cost needs to go through a VBC arrangement. We are fully compliant with the minimum requirements. Now it's about, can you manage your cost structure and risk adjustment based on your relationships?
We're getting there. We have a -- our national networking unit has a VBC arm. They are actively engaged in working with our major provider partners where we have membership density to work on value-based care arrangements. Again, over the next two or three years, we will increase our penetration. Right now, we are fully compliant with the regulatory rules.
On your other question about supplemental payments, let me kick it to Mark and let him take that one.

Mark Keim

Right. What you're calling supplemental payments, I think, we call directed payments, and they're certainly a very big part of the formula. They're getting a little bit more attention, it seems these days. But that's business as usual for us. We don't run them for the most part through the P&L.
So they're not an aberration in our economics. We sometimes refer to them as pass-through because they could come from us -- from the government and go right to providers. And they're targeted for situations where providers need enhanced funding.

Joseph Zubretsky

And the policy question you're getting to with that question has to do with one of the situations that we've profiled. When you're talking about cuts to the Medicaid budget, you're really talking about enrollment reductions, better reductions or payments to providers.
And this is one source of payments to providers and a provider would tell you that they're not supplemental, meaning they're enhancing their margins, they're helping them make their margins. So this is a big policy question in terms of whether the providers can bear Medicaid-related cuts of any time, either in fee schedule or supplemental payments. I don't have a point of view on that, but that is much of a raging debate in the policy discussions.

Operator

Michael Hall from Baird

Michael Hall

Alright, thank you. On the exchange MLR pressure, I understand you're confident into next year, these issues are nonrecurring. But as you continue to test the gas pedal on exchange growth and thinking about risk adjustment specifically, have you implemented any new internal work streams to sort of help bolster this process for this year? And what gives you confidence on that? And then, Joe, I believe you mentioned the early read on MA Medicaid integration is boding well so far. Are you hearing or I guess, seeing anything new from states that gives you this incremental confidence?
Any early behavior change from states at all about how they might approach future Medicaid RFPs. And just for context, I heard some speculation that states might even open up Medicaid RFPs to include more plans because of this. So just curious to hear what your seeing or hearing that gives you more confidence. Thank you.

Joseph Zubretsky

Well, we've heard some of those same things. But here are the facts as we know them sitting here today. Three very large states in the MMP program, which is really the only true integration program that existed, Ohio, Illinois and Michigan, we just ran the table, a very, very complex RFP submissions, intensity around true integration, 1 membership card, 1 phone number, 1 set of integrated benefits.
You can't run 1 side off your Medicare platform and the other side off your Medicaid platform. And we're investing heavily and making sure that we're able to handle those populations.
The discussion on exclusively aligned enrollment is there. Whether most of the states settle there or not and allow DSNP only plans in, we'll see. But the early discussions bode well for a company that has a very broad and deep Medicaid footprint like Molina and also has a competitive DSNP offering. We're situated quite well. And yes, we've heard the chatter that you're referencing about allowing more plans in.
We'll see. We continue to believe that our integrated offering will be highly competitive, our broker relationships are great and the platform being truly integrated from a clinical and operational perspective is key and we're well on our way to being there. Mark?

Mark Keim

On the Marketplace question, Michael, just so we're sending the right message. It's not growth for the sake of growth in Marketplace. As I said earlier, marketplace is -- given a little bit of volatility in the space is, first on margin and the volume will fall where it does. So we've enjoyed a nice run of growth here, but that's because we believe the market has allowed that given what's going on. As we move forward, if the cycle changes, we won't necessarily grow in a meaningful way.
Separately, as you well know, the subsidies are potentially a headwind in the new year. So again, we'll price for margin and the volume is going to fall where it does.

Operator

George Hill with Deutsche Bank.

George Hill

Yeah, good morning, Joe. I have Kind of a big picture question. And if I heard your comments right, you said that like State Medicare needs 200 to 300 basis points in advance of trend. I imagine you guys are seeing mid- to high single-digit trends like everybody else. So that's basically telling the state that you need a high single-digit or better rate increase. Like what's the conversation at the macro level given that 45 or 50 states are in a budget deficit situation?
And I imagine they can't look around, but the answer is Medicaid costs are going to be up 8.5% or 9% in the next couple of years. Like what is the ask of the plans as it relates to keeping a cap on costs? And like I'm interested in like the state perspective.
I understand all the actuarial sound this stuff, but like the states just can't afford high single digit spending increases in Medicaid, I'd kind of love to hear the big picture conversations that you guys are having at the state level.

Joseph Zubretsky

Yeah, Certainly, the strength of state budgets is a concern. But we've actually analyzed this over very long periods of time. There is very little correlation between the strength of rates and whether a state is deep red, deep blue or purple.
There is very little correlation between the strength of rates and whether there's a rainy day fund or not or whether the budget is running a surplus or a deficit.
That -- those are just the facts. Agreed that the more stress the state budget becomes, logic would tell you that the rate conversation might be more difficult, not from an actuarial soundness perspective, but from an affordability perspective.
We are confident that based on our analysis, the broad market, and as you know, the market sets the rate with its cost structure. We appear to be operating 200 to 300 basis -- even though we're 100 basis points off the top end of our long-term range, we appear to be operating 200 to 300 basis points better than the broad market. The broad market needs that to come back to some semblance of program equilibrium.
When that occurs, and we're confident it will, we should be comfortably back at 89% or better and paying into the corridors once again. So yes, should that be kind of a big picture concern? Absolutely. But history has shown us that the actual soundness concept works particularly over the intermediate term, not necessarily in any 1 quarter, but it works over time, and we're confident that the market will get what it needs, and therefore, it would be comfortably back into our long-term range at 89% or better here in the foreseeable future.

Operator

Dave Windley with Jefferies.

Dave Winley

Hi, good morning. Thank thanks for taking my questions. I wanted to ask another one on exchange. On the member reconciliations, if I understand, Mark, what you described, these are essentially the people that were unknowingly enrolled in a product. So several questions -- sorry for this, but several questions. Were the -- so these are 100% subsidized people. Were the subsidies clawed back, back to the beginning of their enrollment?
Second, how -- you mentioned you think this is over. How comprehensive was the -- was CMS' review of this, such that we should think that this wouldn't bleed over into '25? And then as these low-risk people -- low utilizer people are coming out of the pool, how does this make you think about your risk adjustment assumptions for 2025? Thank you.

Mark Keim

Great. Dave, thanks for all that. So as you described it, that's largely the case. In some cases, there is broker fraud. And in some cases, it's just people signing up for things and not being aware they did it.
The way they find out about it generally is in their 2024 tax filing, they hear from the government that they made too much money to qualify for whatever subsidies they got. Therefore, they owe the government back some money. They say, Well, gee, I never signed up for that product. We look and there were no claims, so they didn't use the product. So the government will claw back the subsidized premiums that they gave us. So those are revenue headwinds.
Now to size that, I told you there was about 40 bps or $40 million of adjustment in Marketplace from prior year, 1/3 of that is this phenomenon we're talking about. Now we're pretty much at the end of the tax season. Could we see a little bit more? Sure, but it would be a fraction of what we saw in the first quarter, which is becoming de minimis. Now on a go-forward basis, you might recall that the integrity rules increased quite a bit for OEP just a few months ago.
And one of the biggest things was the agent of record lock, which made it a whole lot harder for brokers to switch people and actually made the market a lot more sticky, you didn't see the churn that you normally see. So will these kind of situations go away 100%? Of course, not. But do the new integrity rules go a long way to stop churn and maybe some fraudulent activity? I think so.
So we really consider this a onetime, and I think it's largely behind us.

Joseph Zubretsky

And to be very clear, when we receive a membership file that has a member on it, we have no reason to believe they're either not authorized or authorized, we have to service them as informed by CMS.

Operator

And to be very clear, when we receive a membership file that has a member on it, we have no reason to believe they're either not authorized or authorized, we have to service them as informed by CMS.