Centene Corporation (CNC) Earnings Call Transcript & Summary

Good morning, everybody. Thanks for joining the 41st Annual JPMorgan Healthcare Conference. I'm pleased to be here this morning. Unfortunately, it has to be virtual, but it's the nature of the times. [Operator Instructions] It's my pleasure this morning to have a conversation with Michael Neidorff, who is the President, Chairman and CEO of Centene. Centene, as most of you know, is a multiline health insurance company that's oriented towards government-sponsored programs. The company will generate over $110 billion of revenues in 2020 with total health enrollment of over $22 million across Medicaid exchanges, Medicare and commercial group. So Michael, welcome to the JPMorgan Healthcare Conference. Glad to have you. Good to see you.

Good to see you, too.

And I think you were going to make just a few introductory comments, and then we're going to proceed with kind of a fireside chat format with questions. So welcome and take it away.

Thank you, Gary, and I want to compliment you and JPMorgan on the manner which you're handling this virtual meetings as professional as anything could be. So I think it's very well done. Good morning, everyone, and thank you for joining us. You have heard me talk and give several presentations in recent weeks between our Investor Day in December and our announcement of the Magellan Health acquisition last week. So today, I'm going to provide some brief remarks before we go into the Q&A session. In a pandemic environment, 2020 was a year of significant execution and progress for Centene. By staying true to our mission, we supported our employees, members, state partners, providers as they faced extraordinary challenges. We really demonstrated to ourselves how agile we can be. At the same time, we executed well and are on track to deliver strong top and bottom line growth, and we ended the year with approximately 25 million members. Our underlying business remains strong, and we expect to deliver meaningful revenue and earnings growth in 2021 and beyond. In Medicaid, we are positioned for continued success. We expect membership growth with respect to the pandemic to peak at the end of -- in April of 2021 with over 91.9 million new members primarily in Medicaid. We also look forward to serving our new members in North Carolina and continue to participate in an active RFP pipeline. In Marketplace, we saw a meaningful membership growth in 2021 across our broad geographic footprint. However, we experienced membership loss in selected counties as a result of aggressive pricing competition. We have seen these dynamics before, and our strategy has always been not to participate in a race to the bottom on price. We learned that if you're losing money on every member, you don't make it up on volume. By doing so, we have grown to be an experienced leader in Marketplace, and we remain confident in continued growth in this business. We now operate at a national scale and are starting to see the benefits of that scale in our performance. We expect our 2021 Medicare Advantage membership growth rate to be ahead of and above industry averages with a full year target in the mid-teens and a long way -- and a very long runway ahead of us. In addition to opportunities across our core business segments, we are leveraging our size and scale to prepare Centene to continue to lead in an evolving health care environment. To this end, technology and the expansion of our whole health and specialty capabilities are the key focus areas for us. We can talk more about that later. We have recently enhanced our technology leadership team, and we'll continue to make prudent investments in technology to create a delighted and a delightful experience for members and providers, develop innovative solutions and improve operational efficiencies. Over the past several weeks, we have also announced key acquisitions that will enhance our technology capabilities and our whole health and specialty capabilities. These companies will be part of our growing health care enterprise platform, an independent group that serves as a vehicle for companies building innovative technologies and serving models -- service models. What they do is it has this independent Board, independent Chairman. There are firewalls on the systems to protect the integrity of it for other users so that other individuals can use these services and feel comfortable doing so. Our recent announcement to acquire Magellan Health aligns with this whole health approach. Our aim is -- with this combination is to deliver improved health outcomes at lower total medical costs through the better integration of behavioral health capabilities and physical health services. Magellan Health will sit, as I said, an independent within our health care enterprise platform and will be focused on serving the Centene members as well as existing customers. As we look at 2021 and beyond, we are enthusiastic about our path ahead. Our core businesses are differentiated to our whole health approach. And with a new presidential administration entering, we believe the opportunities are only growing. Thank you, Gary, for a chance to make those comments. And I'll be happy to take your questions.

Great. You touched on a lot of topics that I want to ask a little bit more about. Let's start with one of the most obvious ones, just the pandemic. Clearly, we've seen a real ramping of hospital census in the last couple of months. By our count, there's 15x the number of COVID patients in the hospitals nationally today as we typically see a kind of a normal flu season. So in a vacuum, that's a clear expense headwind. On the other side, there's deferred medical care that's creating some tailwinds. So maybe can you just give us an update on how that net math is shaping right now? Your fourth quarter MLR still seems to reflect kind of a modest net tailwind, I think, because I think there's also some state redetermination dollars in there. So is that how investors should still be thinking of this? Is that you're still seeing greater amount of deferred care than direct COVID expenses even though we've seen such a substantial ramp in those expenses?

Yes. I think what I expect to see, Jeff talked a little bit about it on Investor Day, I think we're going to see that utilization for the quarter will be normalized, but the mix will be different where we're going to have more COVID, but less elective procedures and somebody like to perceive, what we say, ER utilization as a way out, for one. And so that you won't get back in the next quarter or so. We're also finding that some of the things delayed are in colonoscopies and some of those diagnostic things that people almost gratefully hear that they move into the next cycle. So I think I expect the first half of the year to be normal utilization total, but the mix will be different. And then I'm hopeful that as the vaccines get administered and things start to happen, we start to see it move into -- the general trend continues to get better as we move into the second half of the year.

Is there any particular concern that COVID expenses could become high enough that they could exceed the amount of deferred care? Or as you're sitting here now, almost a year into this, 10 years into a pandemic where we've seen 3 different waves, have you just had this consistent experience where when COVID picks up in a certain market, it tends to coincide with less other medical care and more deferred medical care and that's just been a pretty consistent relationship through all 3 of these waves?

Yes. It's very consistent. The variable is the intensity of the COVID could impact us all, and that's yet to be seen. If the more people will go on ventilators, things of that nature, that's a higher cost, okay? So there's limited amount for that, too. But hospitals, they are filled up with COVID. And so they've now isolated some units. If somebody has a heart attack or something, that can't be delayed. But they are not doing any elective procedures. So I'm anticipating what would really be a very wide brush on this one. I mean you have to be -- that we expect it to be maintained at about the current level. There could be a little swing one way or the other but depending on the number of ven cases or something. But part of what we have is kind of the benefit of our size. You have 25 million lives. You're in 31 states or so, going 32. So there's enough diversity. And hopefully, that will also provide some insulation.

Is there anything important to say about, again, this net math we're talking about between Medicare and Medicaid? I think there's a market perception that it's -- the Medicare population is most inclined to sort of defer things that can be deferred. But I'm not sure that's entirely true. I think inside of some of the Medicaid loss ratios are also some state recoupment. So it's not sort of this direct indicator that maybe there isn't as much care being deferred. So do you agree with that? Do you think it's fairly similar in both of those government populations? Are you seeing there's more in Medicaid than Medicare?

I think Medicare have an older population. And we know that, that is a factor in this COVID. We are dealing with an underserved population, they're very vulnerable populations. And our task is to ensure they're getting the care as they need to. We're working with first-line providers, help very qualified health centers and others and making sure that people get into care. And that's -- they tend to have more exposure to it. So it's hard to say one is greater than the other areas. It depends, once again, geographically and things of that nature. So that's pretty balanced.

Got you. I want to move just to quickly just sort of a state update. And again, you guys did a good job in kind of going into detail in your Investor Day. But when we think about sort of state budget environment, what they're doing in terms of 2021 pricing, sort of net of some of the recoupments for underutilization in 2020, is there anything new or impactful to say there? I think from my observation, state budgets aren't great, but they're infinitely better than we feared back in March or April of 2020, how the economy might play out. And it does seem like in Florida and Texas, some of your larger states, you've had positive rate increases heading into next year. Is there anything else to add on a state budget update?

Well, it's kind of interesting. A couple of states we've had conversations with, they see that Medicaid kind of like growing. And they're now looking at the savings they can achieve with the SSI, the long-term care and the higher acuity cases. And so they're now -- and I'm not at a point, but hopefully, in the next couple of months, we can tell you. But we have several states that we expect will accelerate the introduction of those other products that they've avoided up to this point in time just because of the savings will offset the incremental cost they have. But there's also the FMAP and our Asian offices working closely as is the industry with the new administration to expand FMAP as a way to ensure that vulnerable populations and get coverage. And as the previous one was 6%, 6.5%, it may go to 12% to 12% plus. And we're also talking that in that, it should be stipulated that the money has to go against the Medicaid population. And they can't cut other rates and use that as an offset. So I think that will help that budget item. And Social Services is -- that and Education, the 2 large line items in any state budget. So we're working with the states, and we're working with risk adjusters and other things that I think can make a difference.

You said a couple of things there I'd like to segue into. I'll pick maybe the most impactful one. We've -- our view has been, if you look at the Democratic administration, you look explicitly at what Biden has talked about supporting, with the exception of public option, which seemed to be off the table with how slim the majorities are, everything else he's really talked about, which seemed to be pretty -- would be a tailwind for Centene, more money in Medicaid, more money in ACA exchanges, more state and local relief. Obviously, the House over the summer passed the HEROES bill, $3.5 trillion with additional, I think, 8 points of FMAP. So maybe starting with just your outlook for a stimulus package. Early in Biden's term, you're alluding to being hopeful around FMAP, we would think that's pretty plausible as well. But generally, I've told investors, if the Democrats won, you probably get something like HEROES and whatever state budget concern, rate concern you had around Medicaid, it really should be off the table. Do you think that's the right view? Do you think that's too bullish? How would you characterize that?

Well, I want to -- I want to just -- I want to emphasize that we have -- I think over the years in the industry, we work well with both sides of the area. I do believe that in our conversations we've had with the incoming administration that they do want, they really do want to see actual refocus strengthening of the ACA. And that requires FMAP and things of that nature. That's clearly part of it. Given the pandemic, the increased momentum for another FMAP is there. I mean -- and we see that. I think they're not going to be -- they will be more willing to do the $1 trillion, $2 trillion, whatever is necessary to get things back to where they need to be. And we'll pay the price at some point. We have to. There's some -- we've -- there's some new economic thought that deficits were okay.

Yes.

But I'm still a classical, a more classical economist. So I feel like they have to be paid for it somewhere. But I think we'll see better funding. We'll see more outreach. The abrogators of things that have been eliminated historically by the Trump administration will come back. So on balance, I think it's going to be very positive. And if we had a -- I am still very confident that the court case will retain it. But if it didn't, they passed a 1 Linux with $1 penalty and we know when we get passed in both Houses very quickly. So I think from a health care and a -- the uninsured, that's clearly going to be much better with this administration. I think we'll be able to work with them and -- to the benefit of everybody.

Yes. You've been very bullish on the outlook for the Texas versus Azar at the Supreme Court for a couple of years now. I share that assessment. Do you think -- and I agree with sort of the concept of sort of this $1 fix to the financial penalty. The Senate certainly seems like they can use budget reconciliation and pass that with 51 votes. Do you think there will be an attempt to do something like that proactively in front of a court decision or wait and see in what seems to be the very unlikely event that the court were to rule against the ACA than do it then? Do you think something needs to be done proactively? Or...

In all honestly, we just haven't been that granular with them.

Yes.

We've been dealing with the big issues in conversations, FMAP and -- navigate those return, how to expand the company, 8 million people, which we were talking about it at one on one, there's a -- looking at the subsidies for $50, they could sign up for the Medicaid -- or the market price. And so there's a lot of things that we're doing at that level. If I had to guess, I don't think they'll deal with that case until they have to. Because if the court rule today, they're not going to throw it out as of that moment.

Right.

And so they would have some time to write that one line and get it done. And that's just -- that's a swag.

Yes. Yes. I don't -- yes. I think it will be a move to, I think, given what the court is likely to do. [Operator Instructions] One other thing on COVID policy before we move on. There's a real investor sense that a Democratic administration would hold just inherent animus against the Medicare Advantage program simply I think because of institutional memory back to 2010 as part of the ACA Medicare Advantage was cut. Medicare Advantage wasn't a big part of Centene back in 2010. It's a much larger part and sort of the fastest-growing part of the company today. Do you think that's a fair characterization that the Democrats would inherently have negative views about the role of Medicare Advantage?

No. I think Medicare Advantage is a different product today. Its funding is very differently positioned. It's modernized, it's Medicare Advantage. It's been possible through the Medicare, we're providing beneficiaries with the kind of benefits they need. I mean it has the donor at it that, that was done by the previous administration of Tommy Thompson. Some of that group for the pharmaceutical coverages, it's been growing dramatically in popularity. I mean you've seen the growth there. We've seen it ourselves. And we're just encouraged by the preliminary 2020 enrollment that we're seeing and where it's going forward. So I think it's a different time, a different product, Gary, and a different way when people are looking at it for different reasons.

I'm going to back up my list just a little bit. I skipped it ahead because you had provided a nice segue, but I want to back up just a little bit and go back to the complex care, RFPs, this has been a really significant part of the long-term bull case, total addressable market for managed care and Medicaid for a number of years. It does feel like that pipeline has slowed to some degree and some of the Medicaid directors that we've talked to over the course of the year have just said, "Look, this year has been 100%-hands-on-deck deal with the pandemic and all the implications of that." So on your earlier comment, you kind of alluded to the fact that maybe that pipeline isn't dormant after all and maybe not just coming back, but potentially maybe even coming back a little bit faster. Without going into any of the details on anything that might be imminent or nonpublic, can you just touch on that a little bit more? Do you think as we exit post-pandemic, is it pure economic savings opportunity? Is that a multiyear sort of sustainable acceleration of this complex care pipeline? Or are there any other reasons why that opportunity to us seems to have been a little slower in the last year or 2?

Yes. I think we'll see it picking up. There's -- well, the 24 managed care programs include the long-term care, for example, and so states are going back over the SSI long-term care, other products. There's been very successful outcomes on the ABD programs where they're seeing reduced costs at higher quality, which has been important to them. So I think in managed care now, there's 41 managed care programs in the country, only 3 states, in addition of Columbia, don't include the ABD. So I -- but I do think those that don't have some of the other higher-acuity products will. And there's other things we can do. There's very specialized care in very specific categories. So I -- it's -- sure, there's a big chunk of the markets being covered, but it's not done yet. We still have a runway for the next couple of years. So then, by the way, just -- I mean just look at Oklahoma. So they're now going on this year also. So that's just another example.

Going back to the health care exchanges for a moment. What kind of trend that's -- think through what your outlook is there. As that market has stabilized, we've seen now established, multiline players coming back into exchanges and limited geographies. You're certainly seeing some sort of start-up companies looking at that market as maybe a lower barrier to entry avenue of growth. You're seeing the Blues, to some degree, start to become more competitive as well. And so it certainly seems like a market that's poised for lower price competition. And we're not -- when we think about Centene historically, you've been successful in that market. From the very beginning, you built that as a lower price, government network type of benefit. So sort of your low-price network offering is now being outpriced, how does this line of business improve? How is the -- your market share margin enrollment outlook improve over the next couple of years?

A couple of things. Last year, we saw a surge in some markets, people coming in on a price basis, anything with -- from membership this long -- this year now return to -- Jeff made some comments that in the prior markets, I'm not -- I presumably thought about it, but we're going to see about $800 million of risk adjustment come our way, and that's based on a statewide pricing, not just the local market. And what they've done with the low price and their very tight networks, they admittedly have taken some of the healthier members into thinking about the doctor. But that also says that when it comes to risk adjustment, we're anticipating an $800 million improvement on that for us. So -- just in those markets. So from -- we are very comfortable with our pricing strategy. We think the pandemic influenced some of it. People looking for lower costs this year because of their fear of wet money. But I think it's going to return to normal. And we saw historically, the big players tried to come in on price. And they -- I'm not worried about the big multiline product players. They understand, you don't make it up. When you lose at every member, you don't make it up on a volume, I've said that several times today. And so our strategy has worked for us in the past. We're going to continue. We're going to focus on being a reasonably cost spend, subsidized. And we'll get to a point where for $50 a month, that person could have a much better network on top of the subsidies. That was at $600 a year. Once we're past the pandemic and people are working again, they're going to offer the broader network. So our...

So your -- yes.

Our position is you're going to have the doctor you need when you need him.

Is your thought that some of these players might underestimate what they end up going on risk adjustment? As I think back, I think there were some -- there definitely were some of your competitors early in the exchanges that really underestimated the risk adjustment payment they would ultimately end up paying into the pool. Are you -- you're suggesting maybe some of the competitors have underestimated what that -- how that would impact them this year?

I think so. I mean I...

Okay.

They may have. I know it was an ill for anybody, but I think -- I look at some of these plans, and they haven't turned $1 dollar of profit yet and some have been out there for a while. And they're going to reach a point that when is enough enough?

Got it.

I'm not going to do anything that -- I'm not doing anything that would really jeopardizes the margin beyond what's acceptable.

Fair enough. So let's talk about your Magellan acquisition of the behavioral and pharmacy business there that you announced last week. Just help us sort of think through -- and I know you did a call last week and you talked about this. But maybe just a little more on -- it seems like in Medicaid, the trend has been more to carve in the behavioral benefit. It seemed to us that your existing Medicaid health business with your own behavioral business was sort of standing in line to benefit from the carve-in coming in your direction. So let's delve into that a little bit more. Is that a consistent trend or maybe not a consistent trend? And so you take Magellan, which kind of has a carve-out behavioral business, talk about how that business works on its own stand alone and how that adds to your capabilities given the trends in the marketplace.

Yes. Behavioral is something we looked at for a long time. And then I have at one time, I looked at resources, value options and others. The issue is I like carve-in, that should be in the game. And the example I've been using a lot the last week in talking to people is, if I were a newly diagnosed diabetic, I want the case manager maybe as I leave the endocrinologist's office to say, "I think you should go see a psychologist and help them understand -- to help you understand how to deal with this." And you're going to end up with a higher quality outcome when you do that. And the highest quality is the lowest cost, shorter and longer term. You have a family that has a newly diagnosed cancer of some kind, wouldn't it be nice if they can go right to the psychologist and be able to deal with it? And with that, Magellan has a very effective large network that's being combined with some virtual capabilities in behavioral health. And clearly, it's a growing segment, and there's a need for that integration. And they give us that capability now because I was on a call out West and -- with a large university that Health Net had. They love the planet, does a very effective job from cost management, quality management. The only complaint they had was it was difficult to get a behavioral health appointment. So we ended up hiring 6 to 8 people just to make sure they get work on getting behavioral health appointments for them. Well, this is going to enhance our capability there. And I think that's really important. And they have in this a group that knows how to manage it. We have a large behavioral health internally so that we can, over time, combine and get those synergies. But I think having the network they have, the capabilities they have, they have a EPA, a large EPA platform, which is another entry into behavioral health. And I'm glad to say that having a behavioral issue is no longer something that somebody is not willing to admit. And they want help. And I mean this enhances our ability to do that, integrate the care of the total person. And we're very enthusiastic about it.

Do you share the assessment that, that behavioral market is really primarily moving to the integrated model? Or do you still see...

Yes.

Okay. Can we talk about a couple of other recent acquisitions? And it's always difficult from the outside looking in. We look at Centene as a company that has a lot of capabilities, technology-wise, pharmacy-wise, et cetera, and then we'll see you announce a transaction. These aren't huge transactions, but it's not always obvious from the outside looking in what new capability that's bringing that maybe Centene doesn't already have. So maybe a 30- or 60-second sound bite on PANTHER and then Apixio and just sort of from the CEO's chair, why you do those transactions?

Okay. PANTHER is just an addition to our specialty pharma. We have a growing presence in that, going back to Arcadia when we did some other things. So that's just a clear strategy. We defined that probably 5, 6 or more years ago, knowing that more than 50% of the drugs were quickly headed to the specialty side, and we want to have capabilities there. So that was this -- that's where that's going. And it's -- they have a great product, great management. Apixio is really one that's interesting that we were looking at. We use them. We use them on risk adjustment, they're going to look at files in ways that others can't. We have an interpreter that's predictive modeling. We've talked a lot about that. We have all the claims data on files. Well, Apixio can take electronic records and read them and include them in the patient's file, has the artificial intelligence. And so now when a doctor sees a patient, he's going to have the protective model side say, hey, these tests show this, that here's the claims record of the issues they've had the last 5 years. And here is the -- is what the different physician files show. So they now have the most complete picture they've ever had of a patient when they see him for the first time. I think that's going to do incredible things to raise the quality. And that's really good. Also, Darren, who headed that up and established this company 10 years ago, he's going to -- he's taking over our advanced technology group, which is looking at what are we going to need 3, 5 and 10 years out. And he has a team of people that can do that. So Apixio was -- fits in very nicely with PANTHERx. That's the 90-second version of it.

And how do you -- how are you disseminating that sort of data down to the physician? There's a lot of companies now that talk about building point-of-care tools or basically websites with the position of Logan. Theoretically, as you're seeing the patient, is -- do you envision anybody who's seeing a Centene patient is going to go to that? Or you're trying to push some of that data into the EMRs that the doctor is already using or both?

I would say both. So there's no one that -- what I want to do is get the total picture in front of the doctor. But I want to do some other things, just another 30 seconds with artificial intelligence. When somebody has had something pre-authorized and the claims comes in, they have to go through and make sure that the criteria were met. It takes the notice of a case manager about 18 minutes to do it. We have artificial intelligence that can get to a yes in 3.5 seconds. But now if it's a no, I want them to review it again just manually, just -- because I think that's important for the -- if I was the patient, I want to know that it's not just artificial intelligence, but a physician or a nurse looking at it. But that's just another example of where you can move through and get efficiencies better and quicker responses using that kind of data.

Shifting gears a little bit. Michael, you'll certainly remember the growth in the advent of the physician practice management industry in the '90s and the capitated models, most of which were oriented towards the commercial market. As we sit here today, capitated medical group models is maybe one of the most topical ideas inside the Medicare population. Inside Medicare Advantage, there's been a few public companies, there's a lot of private companies being formed and seemingly a lot of interest of MA plans of using these capitated groups. What about Medicaid? It's not really been a market where you've seen physician capitation historically. There's companies, private companies like Citibots that are out there now trying to do that. Do you think Medicaid is a market that could be fruitful to move physicians to a capitated model or not?

I've done -- so we've done some of that very successfully, historically, and we're doing it now. But I think once again, it's the training you have to give the physician in their offices to make it work. But you also have to be willing to take a call at night, that's the same you are and do things of that nature. But it's -- there's a very long answer to it, but yes, it can be done. And we have done it. We call it model 1.

Got it. With that, we are almost at time, I think just a few seconds left here. So I won't try to jam another question in. I want to thank everybody for joining us. I want to thank Michael for giving us this time this morning. And just -- well, hold on 1 second. I want to take a queue from our producer to make sure I'm ending this properly since it's our first one. So Michael, just keep smiling and assume that we're still...

I just want you and everyone to stay safe, healthy and joyous to the extent you can in the new year.

Great. Thank you very much.

Thank you. Be well.

Thanks, everyone.