Centene Corporation (CNC) Earnings Call Transcript & Summary

All right. Great. I want to thank everyone for joining us to our -- at our virtual health care conference here at BofA. It's my pleasure to introduce Centene. Centene is the largest Medicaid managed care company, the largest health care exchange managed care company, one of the largest Medicare Advantage companies in the country and also has a global presence as well. Presenting today, we have Michael Neidorff, who's the Chairman, President and CEO. And Jennifer Gilligan from the Investor Relations is also on the line as well. And we're going to do some Q&A here. But maybe, Michael, do you want to start off with any prepared remarks before we jump in. I

I think Erica Silver may be on as well. But I want to first -- I want to thank you, Kevin. And I want to welcome Jennifer to her first investor conference with us as Vice President of Finance and IR. So I ask you to join me in welcoming her. We just continue to hope that everybody on the phone and your loved ones and you are safe and healthy. And we're thankful for all the work that the essential workers are doing in the frontline in this very unusual time. Last month, we reported what we believe to be a very solid Q1 results, not greatly influenced by the pandemic. But it's reflecting on our operational stability. In fact, we have an incredibly strong balance sheet, a lot liquidity during the time of real uncertainty. It's also important that these things like this, that organizations like Centene, we're really well positioned for it and can play the role that's critical and important. We're serving members, providers, helping them to be successful and our state partners. All important, we do this with the highest of quality and maintaining reasonable costs. And I want to look at this year and say that, as I've said for some time now, going back probably to February, it's going to be choppy like nothing we've ever seen. And we left our guidance intact, but we know that -- we believe that can be achieved. We know at this point, it could be that we will change it. And -- but at the same time, it creates a baseline that we can see the movements from. And there's going to be wide swing based on the state of the pandemic and the utilization and how that's affected by it. We're going to focus and work with actual soundness, maintaining the rates that are appropriate and support the federal government with the FMAP. It's being supportive. It's 6% now, and there's talk of it going to 12%. We continue to work to make sure that they have the funding to maintain the actuarial soundness. The expertise, capabilities we have, I think, are clearly understood, and they work in both good and bad times. So as we noted on our earnings call, we believe we're in a strong financial position. We have a solid balance sheet, and we have more than abundant liquidity. So with that, Kevin, I'll turn it over for any questions.

Sure. I guess maybe just to start off, going back to the Q1 results. I guess MLR, I'd say, in general, was probably a little bit higher than industry expectations. You mentioned that COVID wasn't a big impact. But I think the market kind of assumed that there would be some benefit from it. And so is there any way for you -- it's hard from The Street because this is the first quarter where you had WellCare. You didn't have it in for the full quarter. But is there any way that you can help us kind of bridge maybe why MLR was higher than what The Street was expecting in Q1?

Sure. I think we -- one, it came in, in relation to the guidance we had given on March 2, there are multiple factors. We said that the marketplace would move up in that 5% to 10% range. And it would be a little lower than we've seen more to where at appropriate levels. We have new businesses, high acuity businesses like the LTSS in Philadelphia area, the eastern region of Pennsylvania where you can't touch or do anything to affect change for 6 months for continuity of care. You have the PDP business which has a higher utilization, higher cost in Q1. But we had laid out all these different things that exist that would drive that MLR higher. So there no one factor. There's nothing endemically wrong with the business. It's just the timing and the way things come together in the businesses that we have. And we have the new businesses, as I said, that impacted. It was to be expected. That's why we gave the guidance we did. We gave guidance that said we would be in the total on EPS -- I know we're talking MLR, but on EPS, we said high $0.80s to low $0.90 in the second quarter. We came in really at $0.91 when you add back in the $0.05 that the reduced income from our investments because of the epidemic and what the interest rates did. So I mean it was -- I view it as a very strong successful quarter.

Okay. So from your perspective, the MLR and everything else in Q1 was basically in line with how you thought about it at the beginning of March?

Right. Yes. The only thing we saw in the pandemic, it was the last 2 weeks when it really started to heat up, and that's when it really got hot in the middle of March. We saw our dental business and our optical business fall off. That's a small percentage of the total.

Okay. And so I guess one of the things that you mentioned in your prepared remarks was around the state budgets. That's one of the questions that we get a lot is, how comfortable and confident are you that you're going to be getting appropriate rates even as the states are facing significant budget shortfall. I know actuarial soundness is something that we kind of rely on to get to the appropriate rates, but does that leave room for rates to be lower year-over-year and still technically be "actuarially sound?"

I think some states may trim a little bit here and there. And -- but most of them are not because they know the actuarial soundness. But the one thing that we're really focusing with the states is that as they look at risk corridors, look at -- we have to look at it over a 2- year period. Because I mean when you look at what you anticipate in Q2, it's not going to be a typical Q2 quarter. But as utilization picks up, we'll see it. So you can't look at it on a 1-year basis. I think they have to look at it on a 2-year basis. This should help them on how they look at the rates. Also, they are getting the FMAP money, so that they can help maintain the rates. And as I said in my remarks, it's already at 6%, and they're trying to move it to 12% increase. So they should have adequate funding.

Okay. I guess we saw New York see some rate pressure even before kind of COVID came in. Is there any other states that you're kind of specifically worried about?

I can't say that I'm worried about states. We have conversations. Some states are talking, maybe I think it's up to rates and percent or something and be actuarial sound, we say, well, let's do -- let's test that. But the biggest issue and what we have to have the states help the states understand and the bigger states get it. You can't look at Q2 and say, "Oh, look how well you're doing." Because what we realized in Q2 will dissipate in our belief in Q3 and Q4 when utilization picks up again and those surgeries and those elective procedures that have been delayed are scheduled.

Yes. So I guess maybe to build on that point, what are you seeing right now as far as utilization? I mean are you guys -- I always credit, your dashboard is giving good insights into utilization. I mean, what are you seeing right now?

Well, the non-inpatient is, as we expected, is way down. I mean ER utilization is a lot less. But the non -- other non-inpatient services are down significantly, but that was all anticipated. But I'm not taking that to the bank, Kevin. That will be used in Q3 and Q4. That's why I think it's so important to have had a guidance out there on the year, so we can talk about how it's impacted over the course of the year. It's going to be -- I can't use the word enough, choppy. I'm not worried. I am looking on the year and not the quarter, but I think we also -- just if we're going to be smart about it, we're going to be thinking about '21. Because quarter-to-quarter, '20 to '21 will not be comparable if we, in fact, see the pandemic through vaccines and other things resolved. And so we're trying to -- we have to take a long view -- right now, in any business, we got to take a long view of this.

Yes. And I guess you've talked about the choppiness of the quarter. I mean, in the year, Q2 being lower, Q3, Q4 higher. I mean, how much of the volume that was kind of deferred in this first half of the year do you think ultimately will come back? And does it come back all this year? Or do you think it bleeds into next year?

I think that's to be determined when we see what happens next. We need some experience. So we thought -- we didn't expect to see much. But now I am beginning to believe we're going to start to see some at the end of May and early June, since hospitals are trying to open up. The hospitals, as we know, need the non-COVID-19 business to maintain their operations. So I think at the end of Q2 and as we get into Q3, we'll have a better sense of that. And we also have increased enrollment, which we talked about. And I'm not going to give any numbers because it's not appropriate at this time, but we did say we expect -- we increased the revenue guidance by $4 billion to $6 billion, but $2 billion was the original passthrough. There's another $4 billion, which is about an $8 billion annual run rate if you figure on 6 months that we're going to see in both marketplace and Medicaid as a result of unemployment. And there, I'm getting a little verbose. If Jennifer wants to add something, she can. But we modeled it at 10%, 15% and 20% unemployment. Some people are talking about, it could go to 25%. But I think what's important is unemployment will not drop off. And in Q1, Q2, I expect it could still be in high single digits to low double digits.

Yes. I guess maybe to that point, the last couple of years, you guys have managed through it pretty well, but some of your competitors have complained about redeterminations and how that brought healthy people off the enrollment and created kind of an MLR/rate inadequacy issue. How do you think about the volume coming back on now? I mean, is it just the opposite? Are you going to get good risk coming back on? Is that going to be a positive to MLR? Or is it going to be, I guess, during the last recession, we saw new enrollment come in at higher MLR for the first 6, 9 months before you were able to connect it.

I am of the belief, and this is a hypothesis. You need more than one point to plot something. So if you don't have 2 points to project, it becomes speculation. We only have one point so far barely. But I am speculating that there's a lot of people who have had coverage through their employment that are now coming on and who choose marketplace and other things. So that there won't be a lot of very super sick people signing up, but these are people who have families who want to maintain coverage and find this better than the standard continuation in the employed community.

And you think that's going to be true for both the exchange and Medicaid?

I think so. I think so. I -- but that's yet to be proven as it unfolds. So there's so many variables. State by state, there's different levels of [ come in, move it ]. And so as you look at it, we're in 37, 40 states with PDP and everything in all 50. These things -- that's what makes it so difficult. The -- despite some peaks of variable and we're kind of going with actuals day-to-day. So we -- I have statistics that's going over yesterday or day before that showed how much slower some of the claims seem to have come in. So we have normal number of days from date serviced to date received. That's how we do it on claims [ payments ] and that's increased, but I also say, how many people just aren't submitting claims because their staffs at home, don't have the capability to do it. These are variables that are -- you can't -- I don't know how to begin to speculate on. So what I'm saying is, I think it's appropriate to believe we're going to achieve our annual guidance and don't try to figure out how we're going to get there quarter-to-quarter.

Yes. Yes, it's definitely unprecedented times. I guess when we think about -- you mentioned that you took up your revenue guidance this year by $4 billion. And it sounded like at the time that it was really more about some of the redetermination slowing down than it was about necessarily seeing a lot of new enrollment on the exchanges or unemployment flowing through. I guess, is there some model that you guys think about that if unemployment increases 1% and Medicaid enrollment and exchange enrollment should be up at a certain amount?

We have models that talk about what the unemployment could be and not be, but we have another issue. And Jennifer, jump in here at any point if you think there's things I'm not covering. But the state's ability to enroll these people, some of their enrollment intermediaries were in trouble and were virtually shut down for a while. So now we're working with states on how to direct enroll. So timing and how people come onboard is a factor. The variables was significant. And the redetermination, as you said earlier, is something we always said, we've always said, we're not victims, we're managers. We've always managed well in the states on these kinds of issues because of the data we have, real-time data in a typical normal world. And so we had the White House conference. I -- we made the point on balanced billing and redetermination, and they are dealing with that at the federal and state level.

Yes. I've seen at least one analysis, which was forecasting that exchange enrollment wouldn't rise all that much during this recession because people will be coming on to the exchanges for sure, but then people would also be dropping off the exchanges as they lost jobs, they couldn't afford their share of the premium. Are you -- do you think there'll be growth in both? Or do you think that it is kind of going to be much more heavily weighted [ growth]?

Remember, when we -- we're at the lower socioeconomic level, and they still have a lot of subsidies from the government. So that -- and we're working on that. It's not a case that I'm having to afford it. It's -- they'll have subsidies where they'll be able to stay enrolled. And I'm even hopeful that some people have joined when they've lost their health insurance to their employer because the employer maybe goes under or something. And some may stay, and see this as a very viable alternative to what they historically have had. Now that's just -- that -- you talk about pure speculation, Kevin. I wouldn't take that to the bank.

Maybe we can pivot away from COVID and the recession and maybe move towards just kind of the core strategy. You guys obviously did a large transaction buying WellCare. And with obviously, many advantages of doing that, but one of them was to improve the Medicare Advantage positioning. I guess, you tried to do that through Health Net, that didn't work. Why is buying WellCare the right solution to kind of jump-start the MA growth?

Well, I think, I mean, WellCare brought us a lot of other things. But they had a very successful program in multi-states in the Medicare. And they have some models and systems that work. They have a sales capacity that has a lot of strength even in times of like now, where it's more telephonic. So from a standpoint of Medicare, we think they have a capability that far outpaces what we thought we saw in Health Net and to the extent that a few months means anything, we're seeing that we were right.

And I guess, how do you think about pricing that business into next year? I guess, WellCare is losing some stars. You got the HIF tailwind. And then you don't really have a good base about what costs are this year because COVID has disrupted everything. So how do you think about growing MA next year as [ you cut down ] margin with [ growth ]?

I think while there's an expansion in the service areas, and that's still to be -- we're working on that and we finally jointly obviously, Centene and WellCare, the Star issue we're dealing with them and Centene is proven and knows how to correct Star issues, and we're working with them to correct it. So I see that as a 1-year issue and not 2 and 3. So it's not the end of the world. But I think based on what we're seeing, I'm not going to get into pricing, obviously, for all the competitive reasons. I think we will have a competitive product. We're going to have the right networks that they've developed and the different -- there's more than one product that they'll be able to offer. That puts them in a strong competitive position. And then they do very well where they are, Florida and elsewhere.

Okay. And then I guess, as part of the guidance, you guys did say that you're probably going to not be able to hit the year 1 synergy on WellCare. Some of it, I guess, largely that's COVID-related, some of it imposed by states restricting your ability to do certain things. But what gives you the confidence that you did kind of reiterate the long-term ability to get to those synergy increasing targets. So what gives you confidence there?

Everything that's within our control, we're hitting. We're meeting and beating, okay? The reason we said some of the things, we saw Georgia asked us to delay by a year, putting the 2 brands together. Now that is not a fundamental problem with the synergies or with putting together, it's just they said with all this going on, and they wanted to do [ readiness and use and things]. Wait 1 year. In New York, they delayed the small business a few months. But there are states that have delayed some of it because of just the COVID and the fact they can't be distracted by these other things. That does not change the ability to gain those synergies, it could just affect the timing. And we're still saying the first year when we talk about breakeven type capability. So it's -- it's on track, in our mind, subject only to the variables that are not self-induced. I mean, if we had said, we're going to get X from pharmacy and the pricing and things didn't come in to where we thought, that's a different situation, Kevin. That's not what happened here.

Yes. How do you think about -- obviously, there's some nice synergies from being able to consolidate 2 plans into one in the states. But how do you think about reprocurement risk in a state like Georgia? Georgia went from 3 plans to 4 plans a few years ago, and now they're back to 3. I mean, when they reprocure that business, what is the risk that they invite a fourth plan back and you lose some of that membership that you got from buying WellCare?

No, I think that's always an opportunity. We'll have a higher base. But we have the highest quality scores in the state. And in most states, we have -- when you look at the results, we have the highest scores. We have the highest member and provider satisfaction. And that's what stands today. When we went to -- when they added a plan in Georgia last time, it wasn't that material. Still doing very well in Georgia. So there are things that happen. There's some plans that -- there are some states that -- Iowa's reduced the number of plans from 3 to 2. So there's always offsets. And what's really important, and I try to emphasize, when you're as large as we are now, we'll do $112 billion this year. It's the latest guidance, in that range, that's the high end. And you're in the number of states we are, with the number of products we have in the states, that diversity. It's no different than your investors with their diverse portfolio. So they could have a stock that gives them problems, but they have a lot of others that are doing well. I will acknowledge at any given time, we could have an issue of some state with one of our products. But we have others that will offset it. And that's the mentality you have to bring to it. That was our original strategy to be as diverse as we are. Our international operations. I think there was an article in The Economist, I'm trying to get it translated from Spain. They just said how it is the finest example of how things should be done in a pandemic by a hospital group. [indiscernible]. There's lot of process.

Yes. I guess maybe another question. You kind of alluded to the or you mentioned pharmacy savings as part of the WellCare deal. And you guys have been rolling out your own pharmacy. You buy WellCare who've been using CVS and then you enter into a new CVS contract. Since I guess, pharmacy savings are part of the synergy over time from that deal. How do you think about the timing and pace of that? And why didn't you kind of push ahead and use your internal solution there more quickly?

Well, once again, I keep telling people, it's not how fast, but how well. And I want them to get it really right before we push ahead. And -- so when we did the deal, we had the group in Michigan, has a pharmacy solutions who we were looking at. So it increased the variability of a number of things that are out there, Kevin. So we're going to achieve with how we're doing it, the accretion numbers we want or the synergy numbers on pharmacy. And we're working well with CVS, Walgreens, Walmart in the various markets that they influence. And so we said, let's not get real super disruptive. And then when the COVID came in, it said, "Boy, we're smart to go with this very methodically." And I tell people, be methodical, be sustainable. Everything we want we do, and I think we've demonstrated it over the years. It has to be sustainable. It has to be profit -- appropriately profit-driven in a sustainable way.

All right. And I guess when we think about growth versus growth during a recession, how do you think about all the puts and takes? You've already talked about a $4 billion increase in revenue, $8 billion annualized so far from the recession. But I guess you also kind of talked about states slowing down things. So is there an offset from RFPs not coming through? We've talked about actuarial down this and potential rate pressures. I mean, do you think that you grow EPS faster net-net during a recession? Or is it similar during recession, not during recession, how do you think about the trajectory?

I think this is not a typical recession. I was -- you're talking about a depression with the level of unemployment of 14% and it could go to 20%. Some people think it's higher than 14% now. So that's not something that we thank God have lived through. And hopefully, this one is short-lived. But I think we'll continue to see growth in our businesses. I think you will continue to have the systems and capability to maintain, control costs, ensure access for members to the cure they need. And that all goes well for top and bottom line growth at a responsible level. I'm not sure -- we're not trying to be wild and wonderful and show unbelievable margins. We want to just do it once again, sustainable at levels that states and customers understand. We've said, we like -- if we can continue to deliver 3% to 5% pretax, we've been looking at margin expansion the last year or 2. We're going to continue to try and do that. I think that's a very responsible approach for the business we're in.

And then we're coming up on the time period here. But just one question I ask all the companies. Is there anything that you're doing today -- when you think about the long-term implications of COVID, is there anything that you're doing operationally benefits access to health care that is happening and changing today because of COVID? Do you think it's going to be more permanent and that we'll see it continue even after COVID's behind us?

If you look and there's press releases out there, what we've been doing, when you look at what we've done for the FQHCs, what we're doing to protect physicians on co-payments and things of that nature. But if you look at just what we said we announced yesterday at our Prison Health system, where we're working really hard to ensure that, that population, that incarcerated population has the protection and the things they need that we can continue to provide good care there. So if anything, it's giving us a chance to show how well we're positioned and that these are the types of things where a company like ours excels because we have always looked at the most holistic approach in treating our members. And so I think what we're -- it's doing now is giving us a chance to demonstrate the states and recipients, general public investors that we can cover this at multiple levels, and we have an incredible subsystems. We moved 66,000 employees home in 3 days. And our service levels are being maintained. Productivity is close to normal. I'll share, I mean, we had to buy about $4 million in laptops in 1 day, and ensure we had the ability to train the people on how to do it. So I think we look at all these things that says how well we -- how we've just been prepared for it. And I don't want to sound braggadocious, but I get to talk about it, but we have all these employees that are doing it. But I think it's done with a commitment to the work that we're in. The commitment to helping among the most vulnerable population this country has. I think every employee has a sense of responsibility to ensure they have the highest quality and access.

Right. I'm going to try and squeeze one last question in. I mean, you guys have really grown pretty dramatically over time. I think people weren't accepting Health Net, then Fidelis, and now WellCare. I mean is there some next stage that you look at and say, yes, we're still not where we need to be in X, Y the service or segments that we should be expecting you to kind of target next?

Well, I'll answer it this way. Yes, I mean, I have a sign on my desk that says, "I want it all and I want it delivered." And but -- I mean, all kidding aside, I think we have a -- we've demonstrated capability to integrate companies and we're going to continue to look at where there are opportunities to build core competencies in the company.

All right. Well, that is all we have time for. So thank you very much for joining us, and I very much look forward to doing this in person next year in Vegas.

It's always more fun, and I look forward to speaking with investors today. I know Joe -- Jen and I do, but I look forward to seeing in person next year. Just be safe and be healthy everyone that's on the phone, please.

Thank you.

Thank you. Goodbye.