Centene Corporation (CNC) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Barclays Healthcare Conference. I'm Dan Aaronson, Healthcare Desk Analyst, Barclays. Next up, we have Centene. I'm pleased to introduce Michael, Jonathan and Sarah. Thanks, again, Michael, for doing this, and joining the conference, so much.

Thank you, Dan. I'm pleased to be joining you today and look forward to pulling you back to sunny Florida, hopefully next year. I'm going to use our time today to review Centene's strengths and forward-looking strategy. We continue to be enthusiastic about our business and the opportunities ahead. In addition to my comments, I thought it would be helpful for you as investors to understand more about the current political environment in Washington and the potential impact of the reconciliation bill that was recently passed by the Senate, and will now go to the house tomorrow. For that reason, I've asked Jon Dinesman, Centene's Executive Vice President of Government Relations, to provide us with an update on the evolving political landscape. John is one of the most respected government relations professionals in Washington and has variable relationships across parties, agencies and the administration. I also thought it important for you to have an opportunity to hear from him, meet with him, as will be the case with Sarah London, as I've also asked Sarah to join us. She is President of Health Care Enterprises and an Executive Vice President of Advanced Technologies. I've asked her to provide an update on the Magellan integration and to discuss the capabilities we continue to develop within our Health Care Enterprise portfolio. But most importantly, she will provide an update on our digitalization efforts as we work to digitize key parts of our organization on an accelerated basis. Centene is a mission-driven health care enterprise. And we believe that purpose-driven organizations have the greatest longevity because they deliver tangible value to the people they serve. This was proven again when we successfully navigated the choppy waters of 2020 by providing quality care to our members while generating strong top and bottom line growth. We have a strong leadership position across products and geographic markets, which I will discuss in more detail today, and we now serve more than 25 million members. I'm also proud of the growing strength of our already exceptional management team. Overall, we are well positioned for the next stage of growth. In 2020, we delivered on our financial commitments, growing revenue to $111 billion, and increasing adjusted earnings per share by 13%. We also closed the WellCare transaction in 2020, which contributed to membership growth of more than 60%. We continue to add new Medicaid contracts to our portfolio and are pleased to have been selected for 2 statewide managed care contracts in Oklahoma, including a sole source contract in foster care. With the WellCare combination, we have national scale in our Medicare business. And over the short to medium term, we expect to deliver above-market growth with significant additional capabilities and opportunities. In Marketplace, we are currently enrolling new members through the special enrollment period, and we are encouraged by the results we have seen in the first few weeks. We believe the subsidies and the reconciliation act will go a long way towards mitigating consumer pricing sensitivity, reaffirming our strategy of not competing in a price-related race to the bottom. Looking ahead, price will not be a driving advantage for those looking to compete on price alone. Following this strategy, we will continue to grow the business, provide our members with access to quality care across our broad network and meet our reasonable margin objectives for the product. We will continue to work to pursue our commitments to shareholders for margin expansion and creating value through offering high-quality, cost-effective health care. We are also focused on bringing new members across our products and enhancing our capabilities to provide quality and integrated care for the vulnerable populations we serve. The proposed acquisition of Magellan is a prime example of how we are expanding our capabilities to better serve the most complex populations. Sarah London will share more about the transaction shortly at a high level. The combination will support Centene's ability to care for the whole person by making us a leader in behavioral health with meaningful scale and expertise. Behavioral health is one of the most underserved areas in the population today. Through the planned addition of Magellan, we are investing in our specialty care capabilities while also improving the integration of behavioral and physical health, resulting in a better patient outcome at lower costs. We are making material advancements in our technology capabilities and transforming our health care model to meet the needs of our most vulnerable members. Equally important, we are cementing the organizational structure of our Health Care Enterprise platform which is creating an environment to foster the revolutionary change that is overdue in our health care system. For example, Apixio and Interpreta are collaborating on a comprehensive, predictive infrastructure that will serve as a foundation for future innovation. Today, Sarah will provide additional detail about this organizational structure and why we expect other companies will be comfortable using the services provided by this independent entity. In closing, I would like to remind you of 2 things. First, the outline of our capital deployment priorities, which include funding risk-based capital and health plans; retiring debt and enhancing and ensuring our full IG position -- credit position; potential acquisitions as we still see a growth -- and still are a growth company; stock buyback when accretive. Second, at our last earnings call, we highlighted key headwinds and tailwinds that we believe will impact the operating landscape. We continue to see the same headwinds and tailwinds today but believe soon-to-be-enacted reconciliation bill will enhance our anticipated tailwinds. Today, we are reiterating the 2021 financial guidance and expect that we will be in a position to update guidance based on anticipated headwinds and tailwinds at our next earnings call, but clearly have a clear picture by the end of the second quarter. Looking ahead, we will continue to drive growth through product and geographic expansion, and we will continue to find innovative solutions to provide our members and providers with a delightful experience. Our model ensures our members have full access to high-quality care and providers when they need them and allows us to avoid excessive out-of-network utilization. We are enthusiastic about the path ahead and look forward to our June Investor Day, where we will provide additional information and detail on our digitalization and innovative activity. With that, I'm going to hand it over to Jon, who will give you some additional information on his background and experience as will Sarah, when she takes the microphone. Thank you for joining us.

Thank you, Michael. As Michael mentioned, I am Jon Dinesman, Executive Vice President of Government Relations for Centene, where I have been now for 11 years. Prior to that, I worked 5 years as the senior adviser to 3 speakers at the Arizona Health of Representatives, and then to UnitedHealthcare, where I oversaw their Medicaid government relations program. How I want to start is exactly what Michael said in that is what a year it has been. When you look a year ago, you had legislators that were reacting to shutdowns, a significant budget shortfall as well as trying to figure out what to do in terms of how to get money to providers and things of that nature. You also had an administration that was looking at ways at providing access, but -- by not leveraging Medicaid as well as the Marketplace. Now you go to today and it is a stark difference in terms of what happened a year ago. So when -- I first want to go to the next slide, please. I first want to talk about the Biden administration and where this administration is focused at. And one of the first key things that was done was the Acting Secretary of Health and Human Services sent a letter to all the governors that informed them that they would be extending the public health emergency through 2021. The reason why that is so important is state legislatures were not able to account for the 6.2% FMAP in their budgets. Now they can do so to the end of 2021, which will help state budgets. At the same time, they found out that the maintenance of effort provision will remain in place at least through the end of the year and this administration has promised that they will give states at least 60 days notice before a change in that PAG. It's also important to note that as we focus on some of the legislative activities being done at the state and as well as in Washington, that there's critical things being done by this administration that could be done without legislative action. The first thing that we saw from President Biden was the extension of a special enrollment period that is now in place that started February 15 and will go to May 15. He's also directed agencies -- his agencies to review policies to ensure that they strengthen and continue to stabilize the ACA Marketplace. So some of the things that the agencies have now been instructed to do: number one, look at ways that Medicaid and the ACA may reduce coverage and eliminate those. One of the things that they're looking at is work requirements. They also want to review any policies that undermine the health insurance markets. Another key provision is that HHS and CMS are to look at policies that make it difficult to enroll in Medicaid and the ACA. And one area that I think is important that we're going to be looking at as the Biden administration moves forward, deals with the family glitch and that is looking at right now, when it comes to the ACA and who's eligible for subsidies, it's based on the individual versus the entire family. So if there's one member of that family working, it is based on that current person's eligibility for the subsidy. We believe that they're looking at fixing the family glitch, where they will look at the family as a whole, which could add millions more to potential ACA access. So if we can go to the next slide. As Michael mentioned, there have been significant provisions that have now passed the Senate when it comes to the most recent reconciliation package. There are 2 key components that I want to highlight. First is the enhanced Marketplace advanced premium tax credits. This now makes it more affordable for all those that have been eligible for advanced premium tax credits. In addition, one of the most important provisions in the entire piece of legislation is individuals who pay no more than 8.5% of income. It used to be close to 10%. And in doing that, what they've done is they removed the cap of 400%. So for all those people, 400% or above from the federal poverty level, they will now have access to subsidies, so long as they're at that 8.5%. A huge, huge change. In addition, there's been a change in terms of for those that are unemployed. Those that receive unemployment benefit will now be eligible for 2021 for the Marketplace, and they will be eligible for the fully subsidized ACA coverage at 150%. So as one of the things that Mike will talk about in terms of we have looked at things from a holistic standpoint, including the politics in play. So when you look at instead of focusing on chasing membership in a shrinking ACA, we're in a very different environment now. So as we have always focused on that value proposition we bring, now there's going to be millions of more Americans that have access to affordable coverage via the ACA, which we are trying to take advantage of. In addition, the states are now going to -- that have not expanded Medicaid, have an opportunity to expand with a 5 percentage point FMAP increase. This is incredibly generous because this 5% FMAP increase, not only would it be on top of that 90% that you would get for the FMAP -- or for the expansion population, but the 5% is across the state's entire traditional Medicaid program. Now it's too early to tell right now which states are going to look at it. But one of the things that I think is really important to mention is Medicaid continues to be an incredibly popular program. And every state that Medicaid expansion has gone to a ballot initiative, it has passed. So these states and these governors are going to have to look at the fact, number one, do they want it to go to a ballot initiative that they can't control or can they look at leveraging this and actually creating a way and doing it earlier, which would give them significantly more money. In addition, states now will have access to $350 billion of more state and local funding. And on top of that $350 billion, the Senate bill added $10 billion specifically for capital projects, such as broadband infrastructure. What's so important when you look at these dollars is this is on top of everything that has occurred in terms of the previous stimulus packages as well as what we see in this American rescue plan. So when you look at states that continue to -- have been dealing with budget challenges, we do believe, moving forward, this will help stabilize the health safety net and ensure that states can move towards more actuarial sound rates. In addition, Medicaid CHIP postpartum coverage has now been extended. So for those moms that have just had a child, they used to have coverage for only 60 days. Now it could be expanded for 12 months. It is a bit early to see what the overall impact could be, but we do see upside with this as we've already seen 2 states in their state budget -- include this in their state budget proposal, and we've been working with other states in terms of this opportunity. And when it comes to home and community-based services, there's now a 10% FMAP increase that is on top of the 6.2% enhancement. Now this is only applies for 1 year, but once again, this is a significant bump for home and community-based services. And of note, I would want to highlight that COBRA subsidies have been increased to 100%. Now it's important to remember when you look at this that the COBRA subsidy will go from when the legislation passes through September, which is different than the Marketplace APTCs, which are for 2 years and they will actually be retroactive to January 1. And then when you look at the Marketplace unemployment APTC enhancement, that may start upon the President's signature. But what's important to remember is that we'll go through the remainder of all of 2021, which also sets up the glide path for 2022. So if we could go to the next slide, please. So I want to provide 3 key takeaways for you all this morning. First, this is a very different administration with very different approach to health care. President Biden has been focused on leveraging Medicaid and the Marketplace to expand coverage and affordability. Election matter, and we've seen a significant shift just in the 2 months that this administration has been put in place. Also, the incredible impact in terms of the Georgia election, Georgia matter. The one thing we could have expected with or without and how Georgia would have played out another, what I would say, COVID package. But because the Senate was at 50-50, we are now looking and expecting a $1.9 trillion reconciliation package to pass which has done so much in terms of not only strengthening the ACA, but providing so much more affordability and access to members via Medicaid and via the Marketplace. And then lastly, I think it's important to remember that there are very slim majorities in the House and Senate, which are going to make major health reform changes unlikely over the next 2 years. We fully expect that there's going to be a second reconciliation package. We know that it's been a focus on climate, on infrastructure. We'll see if they look at additional health care changes but I think what's really important to remember is there's been so much focus on the Senate being 50-50, but let's also not forget that the House is 222 to 213. And with that, it means it only takes 5 democrats in the house to stop legislation. And we see many democrats that come from rural or conservative areas so the House is very much a challenge, kind of like what we see in the Senate. So with that, we don't see a lot of major reform after these next 2 reconciliation packages over the next few years. But what that doesn't limit is what this administration can do via regulatory means, and that's why I focused in the beginning in regards to some of the things that President Biden has instructed its agency. So with that, I would like to pass it to Sarah London.

Thank you, Jon. Good morning. As Michael said, I am the President of Health Care Enterprises, and I lead Advanced Technology here at Centene. I've been here for almost exactly 6 months. And by way of background, I spent the last 2 years in venture capital with Optum Ventures and about 15 years before that, in different operating roles in health care, all focused on data and technology. So I thought I would first share a brief update on Magellan. As Michael mentioned, we are moving ahead on the transaction approval process and have made solid progress on integration planning so that we can be prepared to create value from this partnership day 1 post close. As we've gone to spend more time with the Magellan team, we remain very enthusiastic about the potential of this combination. We're looking forward to advancing a model for managed care that leads with behavioral health, expands access to care and promotes an integrated model at every level of acuity. We see real opportunity in the expansion of the specialty portfolio and we believe the combined scale of the pharmacy platform, similarly integrated into the care continuum, will create a differentiated offering not just for Centene health plans, but also from Magellan's third-party customers. I should also note that our planning work with the Magellan team has made it clear how much talent is in that organization. Ken and his team are really passionate about integrated whole person care, and are also very focused on bringing industry-leading products to serve a growing customer base. If we jump to the next slide. As we've talked about before, post close, Magellan will sit within Health Care Enterprises. And as many of you know, Health Care Enterprises was established a number of years ago as a vehicle for companies owned by Centene who also serve third-party customers. The HCE portfolio is structured and governed with independence is critical, and that has been a major focus of our integration planning with Magellan. So within HCE today, we implement and enforce rigorous technical firewalls and administrative controls to ensure that there is no cross-contamination of data or intellectual property between Centene health plans and the HCE portfolio companies. We've also created an independent Board of Directors for HCE, and their role, among other things, will be to be responsible for ensuring that Centene ownership of these companies creates no competitive disadvantage for their third-party customers. So positioning Magellan within HCE will allow them to take advantage of Centene's size and scale as a platform for growth, but also it -- retain the operating control and all the protections necessary so they can continue to serve as a trusted partner for their broader customer base. Switching gears. And if we can jump forward 2 slides, if you don't mind. Michael also asked that I share a bit more about the work we are doing to automate and digitize core functions within Centene. And across the organization, there are myriad examples of this, but I'll give you a couple that are in-flight right now. One is within our -- aimed at our Marketplace product. We've worked very hard to make the member enrollment process low click and user-friendly. We've added the ability to quickly search for a provider, so members can find doctors quickly and can also access telehealth in real time. Within our internal operations group, we're in the process of implementing a call center platform that will allow us to increase our digital interactions with members and optimize internal workflow. And across the board, we're looking for opportunities to automate. And so I'll give you one example of this that's leveraging the HCE portfolio, which is Apixio. And you've all heard about the acquisition that we did late last year. Apixio's core business originally was to read and codify unstructured data within electronic health records, focused on supporting risk adjustment efforts. And so that -- while that work continues, I wanted to make a little bit more concrete the value we see in the Apixio platform overall as part of our broader digital efforts. So to make this very real, what you're seeing here is an example, and quite frankly, a pretty clean example of what we often see in the risk adjustment or quality documentation process. So if you look at this, this is an example of a patient chart. Somewhere in that scribble at the bottom of the document is evidence of a chronic condition. So what the Apixio platform is able to do with a high degree of accuracy is to make those scribbles computable as structured data. And once that data is structured, we can drop that into our broader data ecosystem, use it to power the administrative algorithms behind quality, risk adjustment, care management and a number of other efforts. And we see the same technology is applicable to processing the millions of paper claims we receive every month to reading documentation submitted for prior authorizations and building, ultimately, a patient phenotype, so we can understand in real-time the acuity of our members. And I will just note that the prior auth example is a perfect one in terms of some of the opportunities that have come up in the Magellan integration planning around cross-pollination within the HCE portfolio. So in closing, we look forward to sharing more about these digitization efforts and our progress on the Magellan transaction at our June Investor Day. And with that, I will give it back to Michael.

Our investors that are tuned in got insight into the progress that has been made in so many different areas, the talent that's on board here, and we'll continue to give you exposure to more and more of our senior management. So we wish you well. We wish you all stay safe and I have to get off of my mask, I have them everywhere, and stay well.