Centene Corporation (CNC) Earnings Call Transcript & Summary

Okay. Good morning, everybody. I appreciate everybody is up and ready for the kickoff of our first inaugural Bernstein Operating Decision Conference. And so this is a supplement to our Strategic Decision Conference, which happens in the spring and really takes the opportunity across industries to talk with CEOs about big strategic decisions they're making in their businesses. In the Operating Decision Conference, what we're doing is focusing it a bit more either on -- in my instance, on the most thematic and important areas in the health care system and other industries, might be looking at particular operating issues within those industries and things like that. We're going to be talking with Centene and their CEO, Michael Neidorff. Just as background, Centene's been our top pick this year. We're really excited about the long-term opportunities associated with the safety net opportunities in the U.S. and the shift in government. And with that, what I'd like to do is hand it over to Michael for an introduction of himself, the company and some opening remarks. And then we'll just walk into a fireside chat. And so Michael, thanks so much for joining us this morning, and let me turn it over to you.

It's great to be here, and it's always nice to be first on your inaugural conference. I mean it's -- that makes it double special. So thanks, Lance. Been looking forward to this. I'm going to make a couple of general opening comments so that we kind of level set and set the table. But Centene is really a multinational, large health care enterprise. We'll do about $112 billion this year. That's up from $70 billion last year. Part of that's organic. And I'll give you some history. It goes back -- when I joined in 1996, we ended that year doing $40 million. So as they like to say in the music world, it's been a good gig. And -- but what's really interesting about it is it has a long way to go, and we still consider ourselves very much a growth company. We've had -- and when we grow, it's typically 50% organic and 50% inorganic or through acquisitions, and that's been the history over the last few years and we continue to see that. There's a lot of organic growth opportunities. Importantly, the integration with WellCare, we once again demonstrated we know how to integrate large companies effectively. As our CFO has indicated on earnings calls, we're delivering on these synergies as they were expected, and WellCare is really integrated. The states of Florida and Georgia, the state asked us to hold up until March of next year or May, in that time frame, because they weren't ready. Because of the COVID, they had some staffing issues. But as soon as they say push the button, we're ready to go. We've already integrated New York. They asked us to do that in a matter of months. And we did it on our accounting systems, our financial systems, our HR systems, e-mail, all that. So it's fully integrated. WellCare at this point is simply just going to be a brand name for our Medicare going forward in '22. So as an entity, it's active, it's pooling -- it's fully integrated. We don't talk about legacy WellCare legacy -- it's all one Centene this point. As I said, we're in 37 states. Across those 37 states, we have over 300 contracts. So no one contract, no one state can really significantly or materially hurt us. It can have an impact, but it's no different -- I compare it to portfolio managers. So they have a multiplicity of stocks in their portfolios. And there's always a time when one can go bad, but they have others that are offsetting it, and that's pretty much where we are. So I think the last point I would like to make this morning is the higher the acuity of the business, the more we save the states, and they've started to realize that. So at a time of COVID, when they have budget issues, that's a good time for them to add some of the higher-acuity membership if they don't have it. So thereby, we save a lot of money, and later during our discussion, as time permits, I can give you an example or 2. With that, Lance, I'll open up to any questions you have.

Yes. Well, I think there's a host of questions, and in a moment, I'll start off probably top-down and walk through kind of future vision of the company and things like that. But I'm sure top of mind for everybody watching this, this morning is going to be what's going on with COVID? What are you seeing as far as impacts on utilization? And just trying to get a quick kind of update on the status and the outlook associated with that.

We said early in the year that it's going to be very lumpy. I said that over a year ago, I probably said it. With the COVID and what's happening, I expect it to be very lumpy. We saw we had an incredibly strong second quarter, but it was because of reduced utilization and people had not yet started to get COVID treatments. And we put in place a lot of things to ensure that people got the care they needed, and the doctors got paid what they needed and to keep things going, and that's paid dividends. We've said at the time that 68% of our earnings would be in the first half of the year, and we were right on the numbers for the third quarter on our forecast. We've said that we would add about 1.4 million lives, and we'll be there. We're actually there about now, but we'll be there for November 1. And we'll give more color on that on our fourth quarter earnings call. So that's -- at our Investor Day coming up June 18, I think, Jen? So that's all very good.

December 18, yes, you got it.

I think going forward, Lance, it's going to be lumpy. I expect to -- I think there's a chance, I will be talking with out finance people, that the fourth quarter could look like the second quarter. I'm hearing hospitals are starting to defer elective procedures, some as many as 6 to 8 weeks. But I want to be careful generalizing from 1 or 2 specifics. It's going to be very regional. But it's also -- we're also 6 weeks away and the holiday period tends to be a slower utilization period anyway. So I would say that it's -- COVID's here. It's -- I don't see it dissipating short term. I don't think we're going to have -- and I heard the early morning news about the Moderna vaccine, but we still have to get it in production, get it out there and understand it. And so I don't think we're going to see a big change until the spring. I think we're going to have high -- the fact that we haven't used masks for so long, I think it's going to have a significant impact on us. We're buckling down. We said some time ago, the earliest we had opened is after the spring break first when kids get home. But I'm thinking now it may be June-July before this office opens fully. But I'm not sure that helps you a lot.

No, that's very helpful, especially the commentary on fourth quarter could look like second quarter. I think that's -- obviously, that really brings it home as far as what could happen here. Let me ask you, one...

I want to emphasize, I don't -- I can't guarantee it at this point. I'm not saying that. I'm only saying -- and that just pushes things back. And we have to see what -- it has to play out a little bit.

Well, and that's just regarding typical utilization, right? Now in -- the difference between fourth quarter and second quarter would be that we have seen a material ramp in the costs and the testing related to COVID, which tend to offset some of that dissipation of the typical utilization.

Thanks, Jen.

Appreciate that. So -- and the one other kind of related question before we get into the broader points on future direction would be, well, we just finished the election, kind of. And be interested in your perspectives. Obviously, you guys are, I think, the sharpest place with respect to insights on policy, given your experience, given your Board. What are you expecting as far as a Biden administration policy towards Medicaid, Medicaid reimbursement to states during the recession? And then obviously, any broader perspective on, if you have a Biden administration or a Republican Senate, maybe how you're thinking about that?

I think, first -- and there's a very good chance we will have a divided government, and that's okay. I think you -- sometimes with a divided government, you end up with better legislation because it's compromise, discussion. And I can go back over history, we can point to it. Bush, in his first 2 years, had Kennedy writing his education bill. So you see that type of thing. I think that as it relates to the businesses, it's no longer -- nobody is going to be upset because it's called Obamacare, that he wants to change it to Bidencare. I think we're going to continue to see expansion of it. I think he recognizes the importance of Medicaid. We've been working quietly with both sides of the aisle and some modifications to both with more emphasis on marketplace because we're teaching people how to fish rather give them a fish. We've got to teach them how to use insurance. So we see good opportunities there. Just talk with them on how to do reinsurance and things of that nature. So I think we'll see that. I suggested to him personally on an occasion that he consider in Medicare, allowing somebody who retired at 65 but has a spouse that's somewhere between 60 and 65, to allow them to sign up for Medicare because their employer may not cover them anymore once the person retired. So there are things we can do to ensure that individuals have access to health care. And I think everything I know of our President and Vice President-elect, they're very focused on that. And I expect it to be very good for the population. It'll be done in a very responsible way, and I think they'll work very hard. We'll hear more about it today on the additional support that everybody needs right now, the states and the FMAP, et cetera. So I think the change is coming at the right time. And by the way, I do want to emphasize that regardless of who's been in power, this company works with both sides of the aisle very effectively. And we do well no matter who's in that administrative seat.

I appreciate that. And just with respect to the FMAP, just be interested in your perspective on what sort of the -- given, obviously, it's no typical recession. But given the current recession outlook for the insurance side of the world, at least in people's coverage, what do you think is sort of necessary FMAP increases or duration of an FMAP increase to help states get through this time period? And are we already at that? Or is that something that it needs to be regulated?

I think we're talking, we think it should be increased to 12%. And that's kind of -- I picked that point. It could be a little bit either side of it. But importantly, Medicaid regulators are telling us don't say until -- as far -- as long as the emergency lasts. Put a time certain on it. Say it will be there through June 30, 2022, or maybe December 31, 2020 -- I'm sorry, 2021, okay? So put a time certain on it, through the end of next year, so that regulators can plan accordingly and not now wake up every morning saying, is it going to disappear today? So I think that's the 2 elements. I think that kind of percentage increase, with the requirement that states put it into the program, not cut back their contributions in other areas. Because that's not the intent, to allow them to expand their coverages because people need this health insurance more than ever.

Makes sense. And then the last kind of real topical question here before we get into maybe the broader questions. As we've seen a focus on social justice, police reform, other items like that, just interested in how you see that interacting with health care policy. And obviously, there's things like social determinants and racial disparities. But also just from funding levels, I've been interested in how you see Medicaid funding pressures kind of overlapping with these focuses on some of the systemic issues in society.

Well, I think it's important to focus on it. I say that as an immediate past Chairman this past year of the National Urban League Board, where we work on social justice as well as health care disparities. I think it's really important that we ensure that they have that kind of coverage and have access to it. And we're doing some things here with the FQHCs, which are the last defense on it and working with individuals like that just to ensure they have the resources, the PPE and other things they need to be successful. So I think absolutely, we have to continue to focus on the Medicaid and the things that help that population. Because when we come out of this, we're going to need a population that can go to work and being healthy is part of it. And I just -- I really believe that I'm going to be pushing at multiple levels, Lance. I believe we have to focus on livable wages and get that to where it needs to be. We need to have the right kind of health care, and we have to have education. There's -- too many intercity students are not getting the education they need, and I'm going to be very focused on that as well. So it's a combination of things. You put that all together, we can turn things around in this country. It doesn't happen overnight. It will take several years, but I think there's ways to do it. And health care disparities, it starts there.

Appreciate that. For everybody in the audience, I'm going to now turn to kind of more of my prepared questions. But I do want to offer to everyone, we've got Pigeonhole open. So if you want to submit questions or add your vote to another question that's in there, I'll certainly be looking at that and weaving those into the fireside chat here. So please send in any questions. If for some reason you can't get into that, lance.wilkes@bernstein.com, I'll certainly... But -- so let me ask you this. This is a broader question. And interested in both the future vision of Centene, but also just your perspective. You've obviously been leading in this industry for a long time. Where do you see the role of managed care organizations and particularly government managed care organizations now 5, 10, 15 years down the line? Like how should portfolio managers who are on this call be thinking about what this industry is?

I think you're going to see us continue to lead the way on ensuring there's access available and we'll shift more and more to the market-type product at affordable cost and in a way that we'll be bringing the cost down and improving the quality. And we're putting a -- and we'll talk a lot about it during our Investor Day. We're putting a lot of effort into digitalization, artificial intelligence and things of that nature that are making a material difference. And I'll give you one example. If we want to -- and we just tested it in Florida, a pre-authorization system. Normally, if somebody has something that has to be pre-authorized -- and this is commercial as well as us. We do it. It takes 18 minutes on average for the medical professional going through the file and making a determination. We've put together algorithms and AI, it's done in 3.5 seconds. And if -- so you look at it -- and the new people we've brought on board in artificial intelligence as well as our CIO have explained we now have delighted recipients and delighted providers. Now if it's a no, then they have to go through the whole filing and reconfirm it. So I think you're going to see more and more things that are elevating the quality of care. And it's going to be incumbent on managed care and individuals like us to do it and to ensure that the government services side kind of almost leads the way in that, I think, and has an opportunity to do so.

Yes. With efforts like that, and thinking about it more broadly beyond just the prior auth system, but digitization and reengineering the system, is the big payoff there in operating expenses? Or is that something that really impacts outcomes and medical costs?

It's a combination. One more example is when a company that's bought -- has the capability to read electronic records, so qualitative side, match it with Interpreta, which is predictive and the -- and the claims file and give the doctor a whole picture of this person, real time. So what we ended up doing is -- and it can get to a point where even it suggests alternative things that could be wrong, okay? So what we're really doing is elevating the care, reducing the costs, eliminating waste. So it's a combination of all those things. If we do it right -- but in our mind, it first starts with quality of care. The highest quality is the lowest cost. Do it right the first time. And I think this is just going to elevate the whole system.

From time to time, you've referred to Centene, and I'm going to get the terming a little bit off, but as a health care technology company. And obviously, just did the acquisition of Apixio just a couple of days ago. Can you just talk a little bit about what you mean as far as a health care technology company? And how -- whether that is what you are today? Or that's the vision of where you're going?

Well, I think we're becoming a technology company that does health care. We're not there yet. So it's a process, it's not a point in time. And some of the examples I just gave you are really part of it. I mean you think about it, Interpreta can look at all 25 million medical files which have a 5-year history in 3.5 minutes every night. And if somebody's potassium has increased, the example I always use, it shoots an e-mail to the doctor saying, you may want to check this to ensure there's no potential cardiac event, okay? So when you start doing that, you're becoming a technology company that's enhancing health care and what people get, and that's our focus. And we just hired some people to work -- we have -- really a whole platform now. We have a great CIO here that works on the new generation of its systems, implementation of them, keeping the lights on. And we have a whole group designing out in San Diego that will be working on what things will look like 3, 5 and 10 years out. So there's a real emphasis on that. And we'll talk about -- I don't want to front run too much Jen's December 18 meeting, but we're going to talk a lot about that there. It's the future of health care.

Let me ask you kind of a couple of other questions in this like long-term strategy and then zero in a little more on current operating sort of questions. From a strategic capital deployment, as you said, you had a lot of growth inorganically historically. Be interested in understanding maybe priorities going forward. Is it more of entry into particular markets, additional different capabilities, international expansion? What are some of the -- how do you look at your priorities right now?

It's kind of all the above. I mean we are an acquisitive company. And WellCare is under -- is now fully integrated. So we -- and so we're able to -- we have been -- where it is, we can now look at other deals. We're looking at that. We're adding capabilities. We're making investments in systems and things and the one we've talked about where we can continue to build on the technology side. And we're expanding internationally. Our international business is doing incredibly well. We're now probably the -- one of the leading health care companies in Spain and in the U.K. in hospitals and physician practices and things. And we're talking with the most senior people in their system on how to bring the technology in to make it work. And this is something that grows, and countries are calling us asking us to do it. So the other thing we have done though is we're filing 10b5s. So if the stock drops to a given level, it automatically starts to purchase stock. As you know, when you're as acquisitive as we are at times, you can't just go in the open market and buy stock any more than the senior staff can buy or sell stock in the open market. It's all done on 10b5s. So we'll be doing that because there could be a point in time where the stock reaches a -- when we did that after we sold some of our products, we did go back in and buy some stock. And so it's a function of what's in the best interest of our shareholders, and it's a combination. But we still see ourselves as very much a growth company.

Yes. That's helpful. Just last question on that one. As you start to add in that purchases of stock complementing uses of stock and/or just growth, have you thought of dividends? And what's your perspective on dividend?

Well, first, I'd like to also mention we have a focus on expanding margins, not big jumps; small, sustainable increases over time. And dividends is something we keep talking about, and I know there will be a day we do it. But right now, we have such use for cash that I think our investors are better with our application in the growth side of the story. And it's just like the 10b5s, the stock would have to drop to -- significantly before that will kick in. And I'm not sure -- I'll do a lot to help shareholders, but I'll never facilitate a pullback.

That makes sense. So let me ask -- shift over a little bit into the WellCare deal and to some more near-term strategic. But after the experience of WellCare and obviously the Fidelis and Healthnet right before that, do you like the large-scale M&A more? Or do you see the landscape such that you'd be more likely to do a number of smaller deals? So Apixio would be an example of that.

Yes. There's not a lot of large deals left out there. There's tuck-ins and things we can do. I think we like the mix. It's what's the strategic fit, Lance. It can be large or small. Now Healthnet and WellCare has given us really critical mass. And we believe that strategically, you have to have that kind of scale to afford the investments we're making in systems. And when you have the size and scale, and you're one of the top health care companies, you're not buying the services outside. And probably, they'll ask you, you're developing core competencies inside, and that scale gives you that capability.