Centene Corporation (CNC) Earnings Call Transcript & Summary

Hey, everyone, and thank you for joining us today. I'm Ricky Goldwasser, health care services analyst. And before we get started, please note that for -- the webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only, and this webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. And for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com research disclosures. And if you have any questions, please reach out to your Morgan Stanley sales rep. And with that out of the way, we're really pleased to have Michael Neidorff, CEO of Centene, here with us today. Obviously, the Medicaid and exchange markets are seeing significant growth as COVID continues to make its mark. And Centene has done a really fantastic job in a very challenging time. With that also, there's a lot of rhetoric around fiscal state pressures and election, it creates some volatility and pressured stock performance of late. So definitely, we have a lot to unpack in the next 30 minutes. Before we get into that, I'm going to hand it off to Michael for some prepared remarks, and then we'll dive into questions.

Thank you, Ricky. It's great to be here virtually. We thank you and Morgan Stanley for putting us all together. I have to tell you that based on the one-on-ones and other things we had earlier, technologically, it's been superb. So we've been good. A couple of people I may try and hire but we'll see, I'm joking. Yes. They're doing really great. Good morning, everyone, and I'm glad to have a few minutes with you. I think I want to make it kind of at the beginning, I'm very proud of how we're doing. I'm very confident in what this company is going to be delivering this year and next year into the future. I want to give you a brief overview. Late July, we reported second quarter results that were uniquely impacted by the COVID-19. And we kind of told you that would be coming. And at that time, we maintained our 2020 earnings per share guidance, and we provided additional color on our expectations for the balance of the year. We also said it would be lumpy, but look, we have to focus on the whole year, not just 1 particular quarter. The business continues to perform well. Today, we reaffirmed our 2020 guidance, which was increased $0.20, you may recall. I don't think -- I think we were on when we did that. And I will also provide a few key updates on membership, utilization and discussion with states. First, membership. From March 31 to August 31, our membership has increased approximately 1.3 million lives, which leaves us on track for the 1.4 million in November. It's consistent with the expectations shared with you last July. There were some changes in the rated growth and that affected a number of us, but we made that adjustment of $500 million last year. But it's still very significant in the last quarter. Many of these individuals joined our program as a result of having lost their jobs. And we're extremely focused to ensure that they get high-quality care and have a positive experience in a very difficult side. Second, utilization for July and August started to return an increase. We didn't see the full increase to historic levels, but the COVID expenses are in there. So kind of on a combined basis, the 2 of them are delivering the level of utilization one would expect. So it's a combination of the 2, which is important. The final comment is that our discussions with state are working well. We're working on risk adjustments with them. They understand the actuarial soundness, and we've given you some guidance that says, well, we've talked to the states and there's some rate adjustments coming, they can adjust 1.5% under the super regs as long as CMS signs off on the problematic changes that they're doing to get there. So we're very comfortable with where we are and continue to be in the active dialogue with the states, which is very important. Additionally, we have announced plans to expand our offering in the 2021 health insurance marketplace. We will serve nearly 400 new counties across 13 existing states. We'll be adding 2 new states. So it puts us to a total of 22. So it's really a very positive. And we know how to do it. And we welcome competitors so this just makes everybody stronger and helps expand the market. Our leadership team and organization continue to execute at a very high level. We have added some incredible technology expertise to the team. And you'll hear more about that on the Investor Day going forward. In fact, 2 of them have actually reported to work today, and we're very -- CEOs can't be excited, but we can be enthusiastic about it. So we're very enthusiastic about it. Now I also want to make the point that consistent with previous years, we'll provide 2021 guidance at our December Investor Day. I don't want to get ahead of ourselves on that. But we have a number of exciting developments that we'll be sharing with you here. I also -- one other comment that is, there's been some speculation on some people's part that the election is better for us if 1 party or 1 person wins or the other. It's been -- they've said, well, if Biden wins, it's good for you; if Trump wins, it's not. Well, I think the last 4 years of the Trump administration have not been bad for this company. This is a company that works across all party lines and can work on both sides of the isle feasibly and effectively. With that, Ricky, I'll go back to you.

Great. Thank you, Michael. And there's a lot there in your commentary that I want to dig in a little bit into. I'm just starting it. So to your point, you published today your modified 8-K, talking about Medicaid enrollment trend. You're saying that you're on track for the 1.4 million. You cited total membership at 1.1 million. Can you talk a little bit about the splits between the different products, i.e., in this membership between Medicaid, exchange and commercial?

I don't have the exact split, but I can get it for you. But the performance is in the Medicaid, but there has been some significant growth in Medicare as well and margin price as well. Medicare, of course, it's an annual enrollment. We're seeing some growth through the dual eligibles, which can enroll all year on. So it's balanced growth, it's against our expectations.

And when you think about the utilization, there's a couple of weeks left before the end of the quarter. You talked about the increased utilization, but then the COVID cost. When we think about the trend that you're seeing versus your earlier expectation, how do they fare? And also, what we know today about behavior patterns and how individuals resumed back the consumption of health care, do you still think that by the end of the year, we're going to be at that kind of like 75% to 80% of baseline?

Back do you mean normal, sorry?

Yes.

Yes, I can't be that precise. I think it may be, let's say, 65% to 80% at a wider range because we don't know. I'm just being very cautious, more cautious than normal because we don't know what other peaks we're going to see in COVID. And export we're seeing in the field, we're still going to see more peaks this year. So we're going to have a labor day peak everybody feels in the next couple of weeks. And so that's going to impact the return. We also -- it's interesting, I saw some published articles on it and our experiences. Some people have postponed some procedures, and they're not quick to reinstate them. We don't want to understand it if it's an endoscopy, colonoscopy and other things that tend to be more invasive. They can put them off, they'll put them off as long as they can. So there's some of that taking place, too.

And then when we think about -- you referred to it in your prepared remarks and obviously, investors are very focused on the rates in the conversation with the states. How do you -- what approach are you taking when you think about risk scoring, when you think about rates for next year, this is such an abnormal year. Can you kind of like help us in, I think, how have you -- how are you approaching it?

Well, we're dealing with this year. And we're saying that any concessions this year should not necessarily carry in the next year, which is an entirely different avenue. And when -- it takes a variety. Some of it is missed quarters. Some of it is negotiating the actual amount. But there's also multiple states that realize that the best way to balance their budget is introduce new products. So they're talking about the SSI they don't have. They're talking about long-term there. Talking about foster care, things that allow us to higher the acuity in what we see and the more we improve the quality of outcomes. We're having some serious discussions about that. Now I'll give you an example that I'm comfortable talking about. Missouri voted to expand Medicaid and when -- the governor I was talking with him, and I said, did you do it in August because you thought maybe less chance will be passed than in November? He said, no. He said, I need as much time as I can to plan to find the funds to pay for it, $170 million, $270 million. I said to him, Dave, let's get through it and discuss it with the election. We're going to sit down and show him. I have a whole list of things we can do with other products that will deliver that $270 million he's looking for. So my message here is it's not just cutting rates. It's not just -- there are other things we can do to help them. And then there's, I believe they'll be in the next build, some future and increased FMAP as well.

So there are 2 follow-ups here. And one actually relates to a question that we already got on the webcast, and thank you for submitting your questions on the webcast. And just as a reminder, if you have any questions for Michael, please just type it into your portal and I'll relay it. And the question is really about the state's budget situation. And the way the question is framed is why shouldn't we be concerned about state's budget and when it comes to renegotiating contracts. And to your point, in your conversation with the government of Missouri, there seemed that there are opportunities around value-based care. So can you maybe kind of like elaborate a little bit of how you think about that and how you think about that versus kind of like rate cuts and the time lines on those?

Well, we are introducing more value-based contracts. A lot of them go into effect in January, but it's not an instant pull up the curtain, it's all this value based. There's a few you start with, the doctors get positively experienced, others hear about it, and then it starts to roll out fairly quickly. So we try to do in a very methodical way to ensure the success of the program that puts the doctor, that aligns the doctors and ourselves on rates because they get a percentage of the rate at the premium, okay? So there's that as well. But the states, as they look at it, they have to be actuarially sound. As I said earlier, there's no choice on that. Some states try to get CMS to waive that requirement during the COVID and they said, no, we will maintain actual sound rates. That can be done in multiple ways. But then they'll be saving their budget. Education expenses are down because of reduced education. They have other things that have impacted the FMAP section. So we have to work with them and help them through it. And it's -- and there's a reality that we're not a charity, we're a business, and they understand that. And they also understand that we have to be statutorily sound in their state. And so we do regulate. You have the Medicaid to partner that deals with rates, but the division of insurance looks at the statutory reports and your salaries. The last thing they want to do is to create an unsound situation. It's then they have to -- it gets very expensive for them. So there's a lot of mitigating effects on this. And we've seen it before. We're seeing the same concerns. We kind of work through it.

So when you think about whether it's rate cuts or the initial days of value based is as we think is refrain kind of like next year, should we expect to see some margin pressure as it relates to it? How should we be thinking about that? And that's, again, another question that we got online.

Yes. Well, I think I'm not going to -- we've had a very consistent policy. We don't talk about the next year until December investment meeting to call because I don't want to front-run my own. I would tell you we're still what you're going to see is sort to be in close company. We said that this year that the marketplace had some normalization of margins. We're still very focused on margin expansion. We're working with the states on appropriate rates. We're working at the federal level very effectively on the future of FMAP. We've worked with the states on costs relative to redetermination if you end up with a sicker population as a result of that. So we will just do more of the same, Ricky. And just continue working. I want to also add one other thing. We're in 37 states. And I've told investors all days, it's a little bit like if you have a stock that's not performing well in your portfolio, you'll probably have some that are offsetting it. And so we have that balance of over 300 different contracts within our 37 states. We have a growing, a viable and vital international business, it's doing really well in Spain and England, okay? So it's become a real enterprise. It's going to $112 billion this year, up from $74 billion last year. We're 42 and approaching -- moving to 30 next year, probably 28 based on this year's revenue. So within that total mix, that's part of the projection. Yes, there'll be 1 state that's going to give us some trouble, oh, I'm sure. Why? You have that many -- you're going to have a new governor, you're going to have something that happens, but you deal with it.

So then let me ask you about the FMAPs. Back at the Analyst Day, it was really, really helpful, right, because you provided a number of scenarios for subsidies. Today, you reiterated your confidence that we're going to see more subsidies coming. From where we are standing today, given there is this standstill for now CARES 2, do you think that -- do you expect subsidies will be extended past September?

They talked about extending it as long as yet because the COVID is still there, I think it will be at least until the end of the year. But I think we'll have a new bill that will probably maybe increase, it could go as high as 11%, 12% over the 6-plus now. So they're aware that states have to balance their budgets. And I don't see them giving just hand out some things but I see things like FMAP and that being impacted. We're dealing with the election cycle now where people want to think about policy to think about politics.