Centene Corporation (CNC) Earnings Call Transcript & Summary

Here we are. Welcome, everyone. Appreciate your joining in on this presentation. I'm A.J. Rice, the health care services analyst at Crédit Suisse, and we're very pleased to have next up, Centene. We have Michael Neidorff, Chairman, President and CEO of Centene; and Jennifer Gilligan, SVP, Finance and Investor Relations.

I thought maybe, Michael, just to start it off, you guys reported earnings about 2 weeks ago. Were there 1, 2, 3 things that you were hoping that people would be left with coming out of that earnings report to think about for the company going forward?

Yes. I think, first of all, I think I want people to recognize that the underlying business is very strong, doing well. Two, that we demonstrated we have the systems, the manpower, the individuals who could deal with the pandemic and to make the adjustments necessary to provide care when we moved 66,000 people home in 3 days. Didn't miss a beat, okay? We have redone the offices so when we can come back, it's a safe environment. And I think the third thing I want to understand is we want to level set for '21, that '21 is off to a good year, but there were things that -- pandemic and other adjustments that occurred in this past year that may not be replicated. So we created that, an initial of what's known so we could all be on one good solid base getting started going into the Investor Day.

Okay. No, that's great. Obviously, we've been living the pandemic for the last 6 to 8 months. When we come out the other end of it, how do you think it will impact the business? Are there aspects of the business that are fundamentally changed as a result of this? Or do we go back to sort of status quo normal when we're done?

Well, I think we have enhanced a lot of systems at a faster rate, predictive modeling and other things that we'll benefit from longer term. I think the fundamental business model won't change. I think our employees understand that they will come back to work because it's the only way in a high-growth company to help people develop, and that's very important. You don't develop, you give me the opportunity to develop, and being in the office allows for that. So I think it will start to revert back to the norm over time, but we're going to do it in a very safety-oriented way. So those people at high risk will be the last ones asked to come back. Those that have children that have not protected -- are not protected by day care or some alternative will also be -- we will give them more time to get back. So I mean, those things like that would change. But I think that I'm counting on returning more to a normal-type situation. That may take 18 months. But I tell people if you don't know where you're going, you don't want to end up somewhere else and do that quickly.

Right, right. Obviously, a key part of your business dealing with the states is to be close to those states to understanding what their concerns are as they think about RFPs and so forth. How has the pandemic impacted that? Has it been harder? Is that -- I'm sure state workers sometimes working remotely, your employees are working remotely. It seems like it may have slowed down some of the RFP processes. I don't know if you would agree with that, but just throw that out on the table.

Yes. I think, A.J., some of the RFPs have been -- were delayed initially. And I mean, I expect that. I mean that's -- a lot of things were delayed. Why? Because until people make the adjustment. But now we know Oklahoma and other states are moving ahead. So I think that we picked up the -- we come and told you some time ago that the WellCare acquisition and integration is well done except for Florida and Georgia. And the only thing there is the 2 plans. The state asked us to delay putting them together because they weren't ready to do the things they had to because of people out. But we're ready. They say, push the button today, it's ready to go. So we've made good use of that time. And once again, our strong technology base has allowed us to not miss a beat.

Right. Do you -- have you gotten any word from those 2 states and when they might let you go ahead and integrate the plans?

Yes. I have. We have some preliminary dates. It will be early to mid-'21.

Okay, okay.

But they also know that we're ready when they are.

Right, right. The other thing that's out there is, obviously, this last COVID relief package and when -- or whether we get that. Has that impacted discussions with states around rate setting? Do you see some of the New Yorks, the Californias or whatever, Illinois, because they're hoping they might actually get some help out of that? Are they being a little slower in their rate discussions until they get clarity on that? Or is that not really a factor?

No. We're having really solid great discussions. I think on our call, I highlighted Texas and, I guess, Florida, as few states where we had some -- we've already been notified at some, and we're working toward. We're working with New York right now in a very positive way. They've given us some preliminary draft things to think about. And my answer would be, while it's not there, it's workable. There's some risk adjusters and other things in there that make it workable. So we'll work with them to get it right before it's final. But we have a real advantage, in my opinion. I've talked a lot about our systems being real time. So I can show them what the trend is through last Friday night. So I'm not taking 3-month-old data and trending it, and they know that. So when we -- when our people and our actuary sit down with their actuaries, it's very constructive discussions. Now as it relates to the pandemic relief, we are very effective and engaged Washington office, works on both sides of the aisles. And we're having discussions about additional relief packages, what it should look like that if they decide to some FMAP expansion there, what that should look like and what protection should go in there, as to how it's used. I mean it's -- what's really nice is having developed the scale we have in government services. They really want to talk to us about it. They know we have good data.

Right. Right. One of the things that's been a topic this year of discussion and the rate -- retroactive rate adjustments. And I think you guys have talked about be about a $500 impact -- $500 million impact this year. The question is, if you look ahead to next year, does the $500 million bear anything? Or is it just you start each -- whatever happens, happens in the given year and it's really hard to extrapolate the $500 million at any way?

We don't expect it to be -- we don't expect another $500 million in '21. I think we explained that the $500 million we covered because it was reduced utilization. I mean that it's -- we have to deal with it. We're working with individuals. We're working on the rate, and there's a discussion of what the starting point is. We've made it clear. It's not any reduced rate. So once again, that's where you fall back on your data. And it's real time, and it's not a lot of extrapolation saying, "This is where it's at." And some people were talking about '18, '19. So when you look at that, it show you what changes have occurred in that time frame. So we have a long term really good actuaries and internal index. Once again, it's a fact-based discussion. It's not an opinion.

Right. Right. So it seems like on the whole risk-sharing programs and the retroactive rate adjustments, they sort of whatever happened in 1 year, you can't really tie that into the next year. It's going to be based on the information that then becomes available in the next year or so.

Yes. And the other thing I want to highlight, at any -- I've told this to our investors. At any given time, you didn't have an issue with one state or one product, something. But we're in 37 states, 3 foreign countries, we have over 300 different products in the states. One -- it's still different investor that has a stock that's not before. Well, they have a lot of others. The diversification makes a difference. So -- and there was a long-term strategy going back to the beginning there. We diversified, and no one person could hurt us.

Right. Another thing that's got a lot of discussion this year is around the redeterminations, reverifications, they've been put on hold. And a lot of the growth that we've seen in Medicaid membership, the companies and including you, I think, have put more on that than they have on the economy. One question that's come up is well, one of the reasons you have a headwind from a redetermination or reverification is people get jobs, and they're not eligible anymore. In this environment, some of those people that would -- if we were doing reverifications maybe fall off, maybe they don't have a job because the unemployment rate is higher. Do you think we're maybe overestimating what the adverse impact of a reverification, reinstitution would be if the economy stays?

You know what, I don't think so. I think one, there is a bifurcation there. We did pick up additional membership because of the COVID. We highlight what that is. I said, we'll probably peak at 1.7 million. Some of it is redetermination, but some of it is just very directly COVID-driven. And the states are not going to touch redetermination to probably next May. I think that's the -- that's when it's scheduled. And we're still talking about is that too early? That's something that should be determined. But typically, when redetermination is done right, we end up with a higher acuity, but the states haven't adjusted our rates accordingly. So I've never seen redetermination as anything but appropriate with when it's done right. And we work with the states to keep it constructive.

Right. And you mentioned when we might relaunch that redetermination. That's dependent upon when the administration declares the pandemic to be over, I guess it would be one of the drivers of that. With the new -- potentially new President here, he might -- I mean, I've heard people speculate that he might be more inclined to keep the pandemic certification in place a little longer. Do you have any early view with all of your Washington insights there?

Well, what we're doing is we, as I said, we are asking, suggesting they extend it. But we've also said this idea that when we declare the emergency over is not a good way to do it. We think that they should put a date certain on, which allows states to do planning. You may recall our last Investor Day, we had a former Medicaid Director from Arizona. And he said, "The toughest thing is when you don't know when something is going to expire. How do you plan for it?" So we're pushing and saying, "Put a date on some of that." End of the year, June of '22, whatever it would take you, it turns out we agree is best. But we're in those discussions and we need to make some appointments to make it very fruitful to talk to and transition to.

Okay. On the -- other thing with the new administration might take a different posture toward the public exchanges. Obviously, it looks like we may still end up with a split Congress. I guess that remains to be seen. But on the administration side, presumably, a Biden administration would do things on a regulatory side, administrative side to try to support the exchanges maybe a little more than we've seen in the previous administration. What are some things in your mind that you guys would like to see done to improve the exchanges? Whether they do them or not remains to be seen, but what could be done administratively to make the exchanges strong?

Or they could -- I mean, they could do a lot of things in terms of eligibility and things of that nature. There's a lot that could be done. I think they have a commitment to it. I want to be clear. I think we've demonstrated we can be very effective regardless of who's in office. The last 4 years, we've done very well, and we'll do very well with President Biden and that administration. So -- because we deal with fact, we don't -- we stay away from opinion. And we recognize we're being bipartisan. But I think that he has a clear commitment, supposed to tell us, I think, today, what some of his thoughts are on the ACA. And we know that now, I like the divided Congress. I think we get better legislation, and you get more checks and balances in that environment. And I've talked to some very serious, very senior politicians who have agreed with me that it forces a compromise versus a just jam it down. And so I think the ideal position would be -- and as I said, we can work in any environment. But if it turns out with one House and the Presidency in one party and the Senate in another, that's something we can work with and we may end up with better legislation. People have to cooperate.

Understood. Any early commentary on the open enrollment season on the public exchange, the offerings that you're seeing that are out there and...

As you said, it's very early.

Right.

And I will say, I have no reason to get concerned at this point. I'm careful not to get too enthusiastic too early. I want to be very balanced and careful. But I think we'll have some news for you on our Investor Day coming in. What do you think?

Right, right. How big -- did you expand your geographic footprint on the public exchange or offering?

Yes, we did. Yes, we did. We have 400 counties or so where we're -- it's -- I think we went into 400. And it's a good...

400 counties and 2 new states.

Two new states. And what's important on it is the retention, the way we tend to retain 80%, 90% of the previous years.

And when you do -- when you make that expansion, do you typically get to your steady-state share quickly? Does it take a year -- a couple of years to get to the percentage you have in the markets you've been in for a while?

I think -- once again, it's going to vary by market and the position of the base company in that market. So you'll see some would very quickly get there, others just takes a year or 2. So there's no -- one has to stay flexible and deal with the facts as they are in a particular market.

Right, right. How about on the Medicare Advantage side of the business? I'm looking to see what was your geographic extension there? Around how much did you expand?

Yes. We have extended it and expanded it in a reasonable, responsible way. And once again, this is not going to be a hockey stick. I mean I don't like hockey sticks. I like it where it's methodical, predictable, sustainable. And I think you guys see us really starting to grow the company in Medicaid -- Medicare in a very sustainable way.

And I think one of the priorities at Medicare Advantage is to get Star ratings in a place where they need to be. What are some of the key areas where you need to improve? And what's your confidence in getting them?

There's a couple of areas of surveys from respondents and providers we have to get there. Some we will be worth then more than a few basis points of 4 stars because when you get to 3.75, they round. WellCare, we're working with them to help them get theirs up. And so -- and it's a long-term thing. You don't instantly change it because it has to show sustained changes. So I'm comfortable that over the next 24 months, we'll -- you'll see us moving to where we should be.

Right. And Medicare...

Well, I'm not satisfied with just 4. When you reach to this size, you don't get a handful on one.

Yes, exactly. Exactly. But do you think in terms of growth for next year, is growing in Medicare Advantage in line with the market, which I guess people are forecasting high single digit sort of growth? Does that seem like a reasonable target?

So this is -- I would start there if I were you.

Okay, okay. Medicare Part D was a big focus for WellCare. And it seems like some of the other companies have talked about how they've restructured their offering significantly, CVS, Aetna, Humana. What are you seeing there as you move into the open enrollment season? Is there anything you can comment on?

So we're doing the necessary restructures and the adjustments to it. Drew Asher is overseeing our total pharmacy, some of our specialty companies. And very capable senior guy that is -- I'm glad to believe he's enjoying what he's doing, was that CFO? And just a great business man that's driving that process very effectively. And when people talk about how good the Part D is, I have a member of my Board named Tommy Thompson, who is responsible for putting that in place. So it thrills him, and we're all like happy Board members, don't we?

Right. Exactly. I think on the WellCare deal, the target was to get to $500 million in synergies by year 2. Obviously, you have the 2 states you mentioned have held you up a little bit. But alternative, it seems like you were doing -- you might get there anyway in your target. Is that -- do you think there's upside to those synergy numbers?

I think we're tracking really well. We're tracking on the numbers that we gave you. There has been a little delay because of the COVID as more states driven ours. But on our systems, our financial systems, our HR systems, New York wanted us to convert very quickly. That happened seamlessly. Everybody is pleased with that. The other plans are coming together. WellCare in '22 will become the name of our Medicare brand as opposed to -- that's the only way in which it will exist. There's no legacy WellCare as it's -- we always believe you convert that very quickly.

Right, right. As you mentioned earlier, you did sort of lay out at least the preliminary thoughts about next year. And I guess it looks like to me, the consensus has moved down from $5.75 to $5.50 to reflect at least a little bit more conservative starting point. It's not a subtle way to ask the question. Does that get the consensus in line with the commentary? Because there was a little bit of debate about what was the company trying to fully communicate in direction. And I know a lot more is coming on the Investor Day. But I'm wondering if we've made the adjustment that the company was looking for us as a body of analysts to make.

Let me answer this way. One, I never comment on consensus. But two, have you ever seen anybody in our side of the business that thought consensus was low enough? Okay. So let me leave it at that.

Okay. All right. I mean there's a lot of variables that -- and we've talked about some of the redetermination, the risk sharing. Obviously, the rebound in utilization, I guess, is an open question of whether it will continue to be deferred, deferrals and so forth, the vaccine, the -- potentially. What -- when you look at that next year, what are the biggest unknowns in your mind out there?

The flow of the pandemic, though the vaccines will take some time. Now what I'm encouraged by is -- are these that people are now talking about wearing them at the leadership level. And I know it sounds political, but I have a advisers, epidemiologists and others, and they've said, there's nothing better than to wear the vaccine than this. Japan has 127 million people, very congested. Hong Kong, 7.5 million people, highly congested. But they've always had a mask mentality. During the period of time that we lost our first 100,000 people, Japan lost 831, Hong Kong, 4, because they wore the masks. So I think if we get that going and people start to use some common sense, I mean, we put in place that if somebody's been traveling outside of or day trip to one above, but they have to stay home for 2 days, self-quarantine for a couple of days. There's things like that, that are important. So I think there are ways to reduce the impact of the pandemic. And we've seen where the holiday impacts and things, we have to deal with that. The vaccine, it's hopeful. I come out of pharma. I want to see long-term side effects. And I think they have some algorithms that the highest-risk people in nursing homes and frontline workers in that and hospitals actually get it first and then start to move down to older people like you and me, A.J.? That's it. That's it. Okay.