Centene Corporation (CNC) Earnings Call Transcript & Summary

Okay. Great. Good morning, and welcome to the virtual version of the Barclays Global Healthcare Conference. I'm Steven Valiquette, the healthcare services analyst here at Barclays. And first off, I want to thank everyone for their flexibility during this challenging situation, but I also hope that everyone remains safe in relation to the overall coronavirus outbreak. Our first company today is Centene. And my understanding is at the last minute this morning, CEO Michael Neidorff's been called down to Washington D.C. as I think several managed care executives are meeting with Vice President Mike Pence today. So we have Ed Kroll from Investor Relations on the line. He's going to handle the fireside chat today. So Ed, good morning.

Good morning, Steve. Thanks for having us, and looking forward to this virtual conference with you today.

All right. Great. So since coronavirus is certainly top of mind for probably most investors right now, let's start with a couple of questions related to that. Last week on your conference call, you guys sort of articulated, there has not really been any big uptake in utilization, at the time, as a result of coronavirus, and it was essentially business as usual, I think, was the -- like the general phrasing. But the world is kind of evolving pretty rapidly here day by day. And I think as people in many parts of the U.S. now are focusing on, let's call it, personal conservatism. I'm curious if you're seeing any signs that maybe there's less utilization of the U.S. health care system overall? Maybe we'll just start high level there.

Well, it's still early, Steve. I know you know that, and we're still in a process of -- we're ready, we're reaching out to the various constituencies. I think as we said last week, we feel like we're well positioned for a situation like this, given the local approach that Centene has always had to managing its populations in the markets we participate in. So I would say, again, prefacing it by saying, it's still early. We haven't seen a change from the comments we made last week on the March 4 call, where we did the 2020 guidance. And we -- I'll just throw a couple of the other data points out there that we highlighted last week on this topic. Greater than 80% of the cases that have been out there so far on the coronavirus are mild. And as far as populations go, the older ones seem to be the more vulnerable at Centene, which includes WellCare. We've got 94% of our combined population -- patient -- membership population, 94% younger than 70 years of age and 45% is less than 20, given our big participation, #1 market share in Medicaid, especially the TANF and the CHIP populations.

Okay. That's helpful. So normally, I would never ask you the questions around utilization in such a short time period. So obviously, this is kind of a unique circumstance. We figured we would just try to get a little more color. Also, as we kind of think about this overall situation, now that the company has had a little more time to reflect on this, are there any prior situations that you think would be most comparable to this? I mean whether it's SARS, swine flu, MERS, Ebola, you name it. I mean are there any pattern changes from those historical situations that investors should maybe anticipate in the U.S. system? And are you comparing coronavirus so far to any one of those more than others?

Well, we use all of our past experiences, some of the ones you just rattled off there. The SARS, the H1N1, and we're used to dealing with flu on an annual basis. So we've got a lot of historic data, and we'll muster all our resources to deal with this situation. And again, part of that includes the experience we've had with these other outbreaks over the years. And again, the normal situation, we're very used to dealing with the flu season every year.

Okay. Now in a potential severe outbreak, I don't know how much time you had focus on this yet. But we're curious maybe what sort of reinsurance arrangements would Centene have in place to protect against the big unexpected move in medical costs related to a pandemic or maybe some other sort of official definition that might trigger some reinsurance. Curious to get your thoughts around that.

We do have reinsurance, of course, and it kicks in at various levels. So you -- we would still -- as you see us do in some of the more severe flu seasons we've had over the years, you can see the impact at the medical cost line, the HBR ratio. But ultimately, we're capped from catastrophic cases, either in an aggregate or on an individual case basis. But of course, the price points or the levels where the reinsurance kicks in, that's managed by us to kind of balance the risk, which we're -- that's one of the skills we have is managing risk, underwriting risk. So you want to balance the cost of the reinsurance with capping your risk. It would be prohibitively expensive to have reinsurance that kicked in at very low levels. So we do have that protection. It's -- I can't really quantify it for you at any particular level. But we do feel like we're adequately covered on that front.

Okay. Actually, just to kind of follow-up on that. I mean when is the last time that, that was triggered or that kicked in? I mean it sounds like maybe that happens in a lot of the flu season. Is that something that's happened recently where that's been triggered? Or do you know off the top of your head when that's been triggered last for Centene?

I don't actually. It's been a while since we've had a very severe flu season. So I really -- I don't have that off the top of my head.

Okay. Last question around this, and again, it's -- probably you may not have any insights on this. But do you -- I mean how do you think Centene stacks up versus the overall managed care industry in relation to reinsurance? Do you think every company is sort of on the same page? Or do you think you're an outlier one way or the other in terms of your reinsurance coverage?

Well, I think we view ourselves as balance sheet managers. You hear Michael used that term often. So I think when it comes to risk such as this, underwriting risk, we're one of the leaders in the industry, I would say. And there are a lot of good companies in our industry. So I don't know that we're necessarily a standout. But certainly, I would say, you've got some really good companies in our industry that know how to manage these types of risks.

Okay, great. Okay. Last question that I have around coronavirus is that I kind of mentioned in the opening comments that Neidorff and some other managed care executives are meeting with Mike Pence down in D.C. today. I don't know if you're at liberty to give any high-level color on what the primary objective of the meeting is supposed to be. Is it just insurance coverage determinations around coronavirus? Or are there other key factors? I'm curious if you have any insights just at least into the agenda or the objective of the meeting today.

Yes. I don't. But the Vice President has been meeting with executives from various industries that would be involved in the situation like the airlines. I think you met with the lab people as well. So beyond that, I would say just stay tuned. Let's see what comes out of that later today.

Okay, great. Okay. Let's shift gears here a little bit to the Centene-WellCare merger. Given that the deal was just completed now about 1.5 months ago in late January, what are you seeing now as the lowest hanging fruit in relation to the integration? And is there any early change or update on how you're feeling about the synergy targets?

Things are going well, so no change in those targets. We've mentioned the $500 million in net synergies in year 2, ultimately, the $700 million net run rate synergies. So things are going well. We did a lot of preplanning. Michael told the team to be ready to go with the integration on January 1, and we closed on January 23, so we hit the ground running. And there's a lot of collaboration in markets where we overlap, for example, places like Florida, Georgia, where the teams are working on combining forces. And we've mentioned the Medicare sinking up for the filings that come due in every June. So I would say those are just a couple of things. But all the things are going well with the integration and those synergy numbers are -- we're on track.

Okay, great. Now for the combined company, without stating the obvious, obviously, Medicaid, the major focus, you've highlighted on recent calls and meetings, just given the footprint is fairly obvious, but maybe just to dive in a little bit deeper on that and kind of remind investors where do you see the greatest opportunities for growth in Medicaid from here for the combined company. Is it more about winning in new states versus -- or greater market share in existing states? Or are you focused more so on product expansions for growth? Just curious to kind of talk about -- just a little more color on Medicaid growth drivers for the merged company.

Yes. I would say all of those things, Steve, that you just mentioned, new geographies, more products in existing geographies, the higher acuity populations in Medicaid, still lots of runway there for future growth and then also seeing states continue to -- not in large groups but still seeing states pursuing the Medicaid expansion under the ACA. So I think it's all of the above where we look -- we have #1 market share, of course, and we have a win rate of 80% on the RFPs that we go after. So we're optimistic about the future growth opportunities for our company in Medicaid.

Okay. Does any one of those stick out more than the others as far as greatest opportunity? Or is it just too hard to predict that right now because some of it is just out of your control based on new awards and et cetera?

Yes, it is -- it does move around, if you will, based on the RFP flow at any given time. We've also had reprocurements where we can pick up some market share, so that's another source of future growth for us. But again, it depends on the flow of RFPs, at any given point in time, what the most prominent opportunities are at any given time.

Okay. And do you have any additional updates or latest thoughts and states for your protesting or appealing results in maybe Louisiana, in particular? Any updates there?

Well, we were pleased that on the -- our protest filing that was upheld. And there's a -- the contracts for the incumbents like us were extended. So we're still up and running there as this protest continues to play out. And I think we're supposed to hear something this month on that follow-up protest, the protest of the protest, if you will. So we should hear something later this month on that.

Okay. All right. Great. Shifting gears here a little bit to exchanges or marketplace membership, whatever you want to call it. Now the combined company has about 2.2 million members. And obviously, Centene now has some additional geographic opportunities post the WellCare merger close. Are you able to discuss which new markets you're currently viewing as the greatest opportunities? Or are you just unable to disclose that right now for competitive reasons? Just curious if you're able to kind of talk about where you see the greatest opportunity on exchange expansion post merger.

Yes, I think for competitive reasons, we wouldn't want to name names at this point. But suffice it to say that as a combined company with the track record that Centene has, the leadership position that Centene has in the -- in the marketplace. I think getting into some additional states through the WellCare acquisition and the fact that -- for them, exchange was not a big product line. They, of course, did very, very well in Medicaid and in Medicare. So I think we definitely have opportunities to continue to grow on the exchange. And as Centene did this year, you don't necessarily have to enter new states to grow on the exchanges. We can enter new markets, new ZIP codes in existing states, as we did for 2020 and put up some very strong growth numbers to enhance our national leadership position.

Okay. Also in regard to the exchanges. After 1 or 2 years, there's some pretty big price increases, market got a little more competitive for 2020. So as you kind of look back over the enrollment period for 2020, do you think Centene hit the right balance of pricing versus membership growth versus margin and obviously margin relative to the MLR floors and everything else? Or if you had to redo the 2020 enrollment season, what would you have done differently, if anything?

I think we struck the right balance. We hit our target for enrollment growth. If you think back to the -- when we first unveiled that target, 150,000 to 250,000 adds back in December, and that's -- we pretty much hit the midpoint of that when all was said and done in January. So we've got -- we've talked about the pretax margin in the 5% to 10% range for this product line, and I think our team struck the right balance. And there was talk of higher competition, more players wanting to participate. But I think as the leader, we've been well established in our markets. And I think you see our retention levels continuing to increase, especially last year. And I think that's a sign that these members are stickier than a lot of people maybe previously had thought. So I feel like we did -- we struck the right balance there for 2020.

Okay, perfect. Now regarding the initial 2020 guidance from last week, our view was that it was essentially in line, except for the New York rate reduction. Feel like the market sort of took everything in stride, although the stocks are so volatile and so many new factors over the past [ week ] so it's hard to know that for sure, but that was kind of our view anyway. But just regarding the initiatives to maybe mitigate a portion of that potential New York rate reduction that you guys talked about, are you able to discuss whether these pertain more to maybe renegotiating provider contracts? Or is it more related to just reducing administrative costs on the Centene side when you talk about the ability to offset some of that?

Yes, I would say it's both. When you find yourself in a position like that, you look for the offsets everywhere. Now you look to all potential areas, whether it's at the medical expense line or the SG&A line. So I would say it's a combination of both.

Okay. Okay. And with everything going on, I didn't have time to go back and do the deep dive on this myself over the past week or so. But just regarding what prompted that lower-than-expected rate in New York, I mean, you guys mentioned last week, it's primarily related to budget issues. But I'm just -- I didn't have time to look at this, but are the budget issues in New York more severe this year than prior years? And why do you think the big rate cut came this year, in particular? And are there may be other political factors at point? Just curious if any more color or thoughts around that whole dynamic.

Well, I think the budget is -- they've got a shortfall bigger than I've seen, I live in New York, and bigger than I've seen in the last years. And I think that's why they're looking for savings, not just in Medicaid, but other significant line items as well. And it was unfortunate that, that quality program took a hit. We -- Michael Neidorff, our CEO, always likes to say, the highest quality care's the most cost effective. So to pull back on something that rewards high quality and initiatives that generate high quality, that's unfortunate. And hopefully, we can make our case and get that rolled back.

Okay. Okay. Also from that call last week, there's some focus on the PBM services. And in relation to the timing of converting some of that outsourced PBM services to RxAdvance, you guys mentioned you're slowing down the process to make sure you're doing it right. And you also want to prioritize the WellCare integration instead. So I just got a couple of follow-up questions in relation to that. First, I guess, in relation to the business that has been converted to RxAdvance so far, I mean, are you getting all the savings that you hoped for. So I just want to make sure that maybe -- if that was not generating the savings you wanted, maybe that was a reason to slow it down. Actually, the bangs of the buck wasn't quite as dynamic as you thought it was going to be. I guess I'm curious to hear about the level of savings you were getting from what has been converted. And are you happy with it?

Yes. I think we're hitting the expected targets on the admin savings from that shift. And Michael and Jeff on our guidance call last week, I mean, they were talking about the integration of WellCare, as you just mentioned, being a priority, something we want to absolutely make sure we get right. And there's also -- from the WellCare acquisition, there's some optionality that we now have relative to their extension, the WellCare extension with CVS. And Michael mentioned that Drew Asher, very senior executive for us now that came over on the WellCare deal, he's working on making sure we optimize our pharmacy spend. So we'll probably have more to say on this either at our Investor Day in June or possibly on the first quarter earnings call next month.

Okay. Somewhat tied into that last comment then. So obviously, on the WellCare side, there was that PBM contract renewal with the CVS for another 3 years. And I guess regardless whenever Centene might convert that legacy WellCare PBM business onto AdvanceRx, whether it's 2 years, 3 years, 4 years from now or maybe never, I don't know. But I guess the question would just be do you expect that to be a material source of savings for Centene, if you do move that WellCare business in-house relative to the new rate and new pricing that were just renegotiated with CVS Health for that book? That question makes sense? I was kind of long winded...

Yes. It does make sense. But I'm going to defer, I think, until Drew's project is concluded. And I would say that we've said from the beginning that pharmacy would be part of the synergies that we've been talking about. And I think this optionality that -- as we described it is a good thing, and let's just wait until we have more complete information to talk in more detail about it.

Okay. Last quick question, just back on Medicare for a moment. So obviously, before the WellCare acquisition, Centene was really only in the early stages of trying to increase your Medicare growth profile and wasn't necessarily a top priority. But maybe now that the acquisition's closed on WellCare, I mean, how critical is Medicare Advantage growth now for -- as far as priorities for the merged company, especially given that the legacy WellCare team will now run the operations for the combined entity?

It's a product line that we are very focused on. We want to grow it. We want to grow it the right way profitably and the WellCare brand in addition to their team, managing the Medicare business for us, for the combined company. It's very important, but so is Medicaid and the exchanges, where we absolutely have leadership positions. And -- but Medicare, I think, is complementary to those other products, and we intend to grow all 3.

Okay, great. All right. With that, I think we're out of time. So I'd like to thank Ed for his time today and enjoy the rest of the virtual conference.

Thanks, again, Steve, for having us.

Okay, great. Thanks.