Centene Corporation (CNC) Earnings Call Transcript & Summary

Delighted to have you join us, and we are delighted to be welcoming Centene to our 2020 conference, represented by the longtime Chairman and CEO, Michael Neidorff; along with Jen Gilligan, Head of Investor Relations.

Maybe we'll probably just start out with whether there are -- I know, well, you just gave us a lot of information, very comprehensive virtual Investor Day 2 weeks ago. But with that in the backdrop, it's always a fast-moving environment. Are there any recent changes or anything you would update in that short period of time since then?

So the only thing I would add is I've been -- we've heard more and more chatter out of Washington doing talk and other sources where as the states ask for more funding, asking the questions or they say they want some certainty that the funds have gone where they intended to. One of the things they've said is, "So we gave you extra money for Medicaid. Is that where it's being used?" So I see that as a real positive. It shows the focus on it and the need for us. That's the only new news I can give you.

That makes sense. Yes. Okay. Great. And I think actually, maybe this morning, you got approval on -- sorry, the -- Circle Health United Kingdom, your acquisition there.

Yes.

I know you have a lot going on in many different markets. I'm just curious if there's anything to touch on there.

No, I just -- it's a process we went through. This, I think, in Bath, one of the places, a hospital that we have to divest, it is stable. But it's all part of a very methodical, carefully thought out European strategy. Ribera Salud, incredible. I mean recognized across the continent for what it does. So now that we will move in the U.K. and other markets -- and so we're moving up the ranks as a large systems operator in Europe effectively and well, and we're proud of that. And it's just all part of a diversification we're been talking about as a strategy for a long time.

Right. Okay. And maybe turning back to your home market and what you're seeing today. Can you give us any update on the -- on your current trends in terms of how the pandemic is continuing to influence the patterns of utilization that you can see? And where you think that's going to continue to go?

Yes. At this point, I'm going to stick with what we said at our investor conference last week that 68% of our income, we expect, will occur in the first half of the year. We do see it coming back, the utilization, as we expected. We also stated, we believe, based on the epidemiologists and other public health officials we work with, that there would be several small spikes during the summer as people will try to come back too soon, and there's maybe a larger one in November. The answer is we think our numbers will be met. You know they'll be met. But any increase is going to be a function of going into next year. Is it because the COVID continues and increases? Or if it does slow down, we're going to see more and more RFPs. States are talking to us about that. So the -- it's still a very positive, and a very comfortable position.

Right. And how do you -- how are you handling regulators and program administrators who might be saying, well, the plans are having this good period in terms of a financial tailwind from the fact that there's been so much avoidance of the health care system. I realize that very reason. And certainly, there are extensive COVID cases. But are you seeing some suggest that rates should be reduced because there's been this, I realize a short period, but a short period of lower utilization?

Well, we've said -- and that's why I've said 68%, but we've said -- we increased guidance for the incremental revenue, normal margins. But we said that it's going to come back. It's going to come back into next year. And what we've been advocating, and some states are starting to understand it, you can't look at it quarter-to-quarter. It's going to be choppy as hell. And what we're going to do is you have to look at almost over a 2-year period just to get some kind of sense of it. And you went -- and CMS has been very good because they said, okay, you didn't -- you allowed under the [ federal orders ] 1.5%, but you need programmatic changes to accompany that. They're being very careful on what they will allow them to do. That takes approval. So there's -- I'm very comfortable with that. The other thing I want to add is people forget we are regulated by 2 groups. Health and Human Services in the state and the insurance division. And the insurance division wants to know we're solvent. They want to see us earning 3% to 5% pretax. Because they know that if, for some reason, we have bad experience or the reserves start to get affected by it, they could end up having to take it, not us, but some companies over, and then it really gets expensive.

Right. I think I remember that from Ohio, 20 years ago or it was more than 20 years ago, where all the plans went belly up. But that's obviously in much longer ago days and early in these type of programs. But...

But the principles still exist. They still look for statutory soundness.

Right. Okay. Very good point. So maybe I could touch on the enrollment trends that you've been seeing. I know this is a fast-developing area. But given the span of your businesses, you're able to see that a lot. And certainly, Medicaid, Medicare. You're in group insured by virtue of -- mostly from the Health Net acquisition 4 years ago. How much are you seeing in terms of -- admittedly, it's West Coast-based mostly, but disenrollment from group insured and enrollment pickup in Medicaid? And then what about the exchanges?

With group insurers that's university basically out there. You're not seeing wide swings there. We're not with the big, major companies. The university setting over there, it's a little different setting. I'm not -- it's not been called out to me. When you are our size, you manage by exception and nothing's been called out. Medicaid, we've said it's growing. We said it's growing to -- it could peak, but -- and come down based on what happens to the COVID. But the states have now got to the point that things are getting their systems split away where they can get the enrollment and they're having trouble with that. We're working with some large states with direct enrollment to help them because their intermediaries had employees out or are having trouble getting that done. That's their marketplace, we think, and we've seen people staying with us longer. We always talk about how it is a peak period. They're staying longer. And we think we're going to have a strong marketplace position going forward. And we like the fact that...

[indiscernible] sorry, go ahead. I'm sorry.

No, I'd just say, we like the fact that competitors will come in because that creates more excitement or noise in the market, and it's not just incumbent on us to grow the categories, which should all be very positive.

Well, and if I could, turning to a different question. And I realize I'm unlikely to get a prediction from you on the outcomes here, but as we look ahead to the November election, there's a lot of moving parts there. I do want to just share with you, we had a call with the former Senator Max Baucus last week. And with regard to the Biden administration, he made a couple of points. One is -- I'm sorry, the Biden -- if there's a Biden administration, in his view, because, of course, while he's pretty centrist, he does favor Biden. He suggested that there would be a very strong commitment to shoring up Obamacare, both in Medicaid and the exchanges. So I wanted to ask you what you would anticipate coming out of this election, any on how it breaks.

I have to call out one thing, if I may. I know Max Baucus, and he is a great citizen, a great legislator. And when Bush's administration was going back and forth, who actually controlled the Senate, he and Grassley agreed nothing would go forward unless they both agreed. And I mean it was a bipartisanship. I know everybody longs for it, the 2 of them, and he was part of it. So excuse me if I sidetracked. He's -- he was settled in Montana when we opened up our Great Falls, and he was just sensational. I think he -- no question, Biden is part of the -- he would -- will be a fan of the ACA. He knows it. He understands that. I've had conversations with him about it. We've talked about things that can be done to strengthen it. And it's -- it has great success. People like it, and that's why he retained the people who do it. He understands that. I think they recognize the need for Medicaid and covering the most vulnerable. But I think though, he has some ideas there on how we can strengthen that, too, and that's important. So nothing should stay the same, it has to be modernized as things went by. That's for another day to talk about. If the current administration stays in, I expect us to see more of the same. You're going to have some gridlock. But they -- most of the Republicans I talk to can see that they're not going to gain the House and they may even lose a senator or 2, seeing their senator or 2. Sure, that happens, then it's going to be an interesting time. That's a kind -- somebody told me that's an Asian curse that you live in interesting times.

That's right. And I guess that's how the saying goes. Well, actually, just on that, so if we did have an outcome where the Democrats were stronger and Biden were to win and perhaps they even took Congress. And maybe this isn't the thing that would make a difference, but I wanted to ask, what do you think the prospects are for the remaining states that have stayed out of the Medicaid expansion opting into it? And whether a political shift in November, one way or the other, would make a difference there?

Well, I think the department -- groundwork is there to do it, and it's going to be much driven by -- I mean, I think about Utah, a very conservative state, where the population voted to expand. We have it on the ballot here in Missouri in August election and primary and I'll say -- and I'll be happy and Jen can say, there's a new study just came out, out of Washington University School of Public Health, where it shows that in a expanded market, the state saves a lot of money over what it is now. So I think it's going to be state by state. I think it's going to continue. There are going to be some very hard [indiscernible], as they say, individuals who say no way. But I want to see -- if I could take a minute.

Yes, please.

We have been talking about reducing the expansion from 138% to 100%. But taking the ACA from 100% of the federal property level to 400%, that would cost something like $6 billion or $7 billion only to that. But -- and that would have the effect of teaching people to fish rather than giving them those fish. So there may be some things we can do. But those that are the below 100%, bringing them up in Medicaid. So there's different alternatives. We can talk to the responsible individuals after the election. And we're going to work hard to put these things on the table and come up with a really solid compromise. That's our goal. And as a leader in the field, people are starting to pay more attention to us.

Right. They certainly should. Let me ask you just on the study that you cited, very interesting that states are actually saving money from expanding Medicaid, although I just want to make sure I understand. Is that because the federal government, on the one hand is kicking up 90% of the cost of the expansion, and then on the other hand, the state is saving from the people who otherwise wouldn't have coverage and then are following into the publicly-supported hospital system as the sort of tattered safety net, if you will?

It's kind of all of the above, Matt.

Okay.

You talk to most people who don't have coverage, they say, they have a primary care everywhere, all the emergency room. That is expensive care in. Those have emergency rooms, hospitals aren't always happy with it because then they don't get to the cases they need to. So it's all of the above. I think there are things we can do to modernize. They get more effective and more efficient across the [indiscernible].

Michael, if I could shift gears just a little bit to ask about the -- I know you're not giving guidance for 2021. But you are -- you have established a record now for several years of being the first to give us a real glimpse of next year with the revenue target that you announced at the conference 2 weeks ago. And your success has been tremendous. Of course, everybody is always looking forward, what have you done for me lately? A lot, I realize. But the growth rate is -- looks low initially, and I know that's an initial target. But does that reflect the fact, at least partly, that when you have the Medicaid growth opportunities, a lot of them, you don't know about until you get into the year in question.

No, and let's look at the numbers. I have a sheet. Across the way in my office, I have a sheet that really lays it out. But if we had not had the COVID, our revenue number for this year was $105 billion, okay? But COVID changed it. It changed the choppiness and how it's going to unfold. So you see it -- you saw it to go to $112 billion. Now you also have the -- if payment and others coming back out and the past dues, a couple of billion dollars. So when you look at it, at this stage, we're -- it's really where it should be. And if we had not been for the -- if we were a company at $105 billion or $112 billion, you wouldn't be saying the same thing. But the baseline got changed. And we'll take it and we'll work from there. And as Brent Layton did a good job in laying out, this is early. And it has -- it doesn't have the expansion. It doesn't have any new RFPs in there. That's still [indiscernible]. And it doesn't have any of the M&A that we might do. So it's an earlier number that was affected more by the base shifting dramatically by circumstance, not because we were done. I want to add, I've told people, we're being very successful with the growth this year, but it's not the way we want to do it. We want to do it the old-fashioned way, fundamentally deliver services, help the states, help the recipients, the vulnerable population.

Right. Okay. Thank you for those points. They're very important to bear in mind as we're looking at the revenue trajectory this year and into next year. Sort of on that same topic, with the pandemic and with the recession, do you have a sense for how you think that might affect states in their decisions with regard to the timing and with the populations to try to shift into Medicaid managed care and whether there might be more eagerness or less to do that?

I have -- the only thing I've heard, some several states that are planning to move to the higher acuity membership in the next year or 2. They know that -- what we call the SSI and the long-term care, those populations, they can save a lot of money. The higher the acuity, the more we're able to save them money, but also improve the quality of the outcome. So we're talking to the states right now. The ones that really think it through are willing to talk about that and do it. So I'm not going to front run them. It's up to them to talk as if, go through the legislative session.

And do you think that, that...

This business is on such solid footing. They had such opportunity. It's going to be choppy, how it unfolds. But if you trend it, I really believe it -- it's my belief it's where we want to be.

Absolutely. And certainly, that's consistent with your track record. Do you think that the current economic environment is encouraging that to move forward more rapidly? Or is that hard to say?

Well, it's hard to say. I mean some states want to do it, but -- just like RFPs and things of that nature. But they're distracted and they're worried about having the internal energy with people not working from home and other things to do the readiness reviews and things they have to do. So it's getting them comfortable on what they can do. So it's not if but when.

Okay. If I could pivot back to the marketplace and the exchanges. I'm curious, it seemed that at the recent Investor Day, you took a fairly conservative approach to projecting growth there in light of what we would believe could be a substantial number of people coming out of the employer-covered landscape and possibly onto the exchanges if they don't qualify for Medicaid. And certainly, that's a less expensive opportunity than continuation of coverage under COBRA. Are you -- is that because you're taking a wait-and-see stance there?

Yes. We want -- Matt, we kind of pride ourselves on finding abundance of conservatism. I think we've used those words in almost every presentation we make at some point. And they're talking about the federal government funding COBRA. They're talking about many different things. So I'm satisfied that we have a growth trajectory. We're still very much a growth company. Some people like to go out there and say, I'm going to be X and Y, and they tell you precisely how many members they're going to get in a market or something. No, we're going to give you the sense of this trajectory we're on, give you the issues we're dealing with. And I can tell you that we're still very much a growth company.

And somewhat relatedly, do you have a sense for how the competitive landscape or the exchanges in the marketplace may be shifting going into 2021? What's the time frame for your visibility on competitor actions there?

Well, we're hearing about -- but see, I like that. People have to understand, I come out of consumer packaged goods. And I used S.O.S. soap pads. I used [indiscernible] with Alka-Seltzer. One of the S.O.S [indiscernible] and I ran international. In Canada, we had 3 brands. We had S.O.S, Jets and private label. Now in the U.S. they just had S.O.S and a [indiscernible]. So it was incumbent on them to grow the market. Now in Canada, S.O.S was advertised, it was a blue pad. Jets was made on the same machines, but it was a red pad, okay? And it was promoted, not advertised. We had a private label that was a red pad, but all -- it had more -- it had less rust than [indiscernible]. I remember watching a woman try to decide what to take and to talk about it, and the activity and growing the category. And I said to her -- I wanted to say her, take the cheapest. They're all the same. But the point is we grew the category because of that competitive activity. And if we have good competitors out there -- there was a -- in California last year, that was a -- one of the companies, one of our peers was going to be a major competitor. We grew and they didn't. I just saw some other people come up for us.

I think you've got a very quick glimpse of Anthem, which, obviously, we're not trying to start a multicompany forum here, but I think they were just testing the video feed. So there we go. And actually, we are just about out of -- sorry, Michael, go ahead.

I think, Matt, I think you're going to find that -- I mean, I find that competitive situation a positive. I -- there's nothing more competitive than analgesics, antacids, cough, cold products. We usually get a 10 per share gain. We're bringing cowbells, shouting, yay. I think I am really not worried about that aspect.

Well, I just want to tell you, we didn't use S.O.S at home. So...

We use it at home.

All right. Well, this has been fantastic, Michael. Maybe we have time for one more question, which is, how do you feel about how -- Medicare Advantage really now for the first time is a major product for you, where it hasn't been in the past. How do you feel about how the 2020 season has unfolded?

I've said to you historically, I've not been happy with it. And with [indiscernible] and the WellCare, WellCare is now going to be the name of the brand. We've told everybody that. We are a Medicare brand. I am -- I've seen their plans. I think they are appropriately conservative. And I'm very confident that we're going to be able to take what they've done so successfully and translate that into additional growth in other markets. Because once again, it's also a category that's expanding and growing. And I think competition there just creates more excitement, more interest, gives consumers a choice, which they like. And I think we're going to end up being a very viable choice.

Well, this has been a fantastic comprehensive discussion. Thank you, Michael, thank you, Jen Gilligan, for bringing Centene to us this year, and we hope that we can host you in person next year. Have a great rest of the week.

Just stay safe and keep your mask. That's the best protection anybody could have right now.

Got it. We will. Thank you.

Thanks, Matt.

Thank you.