Centene Corporation (CNC) Earnings Call Transcript & Summary

Good morning. Welcome to Oppenheimer's 31st Healthcare Conference. I'm Michael Wiederhorn, I cover the payers and provider space. Presenting today is Centene, and we have Chairman, President and CEO, Michael Neidorff; President of Health Care Enterprises, Sarah London; and EVP of Government Relations, Jonathan Jon Dinesman. Thank you. I will now turn it over to Michael.

Thank you, Michael, and good morning. I am pleased to be joining you and hope that the next time we'll be able to be together in person. Today, I will be discussing the underlying strengths of Centene's business as well as our forward-looking strategy. Overall, we continue to be enthusiastic about our business and the opportunities ahead. I've also asked Sarah London, President of Health Care Enterprises and Executive Vice President of Advanced Technologies; and Jon Dinesman, Executive Vice President, Government Relations, to join us today. Sarah will provide an update on the Magellan integration, discuss the capabilities we continue to develop within our health care enterprise portfolio and share additional details about our ongoing digitalization efforts. Jon will provide an update on the evolving political landscape, including the reconciliation bill recently signed by President Biden. As you will see, Centene has an exceptionally strong management. And I look forward to meeting more of them, more of this team, in the coming months. Centene is a mission-driven health care enterprise. We believe that purpose-driven organization have the greatest longevity because they deliver tangible value to the people they serve. The value we provide was well demonstrated in 2020 when we successfully managed through multiple crises while providing quality care to our members and generating strong top and bottom line growth. Centene serves more than 25 million members, 1 in 15 Americans. And I will discuss today, we have a strong leadership position across products and geographic markets. 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 see opportunity for growth across our portfolio. In Medicaid, we continue to add new contracts and are participating in an active RFP pipeline. We are pleased to have been selected for 2 state-wide managed care contracts in Oklahoma, including a sole source contract for Foster Care. Following the WellCare combination, we have national scale in Medicare. And over the short term -- short to medium term, we expect to deliver above-market growth with significant additional opportunities for value creation. And in the marketplace, we are currently enrolling new members through the special enrollment period, and we are encouraged by the results we have seen thus far. As Jon will discuss further, we believe the subsidies and the Reconciliation Act will go a long way towards mitigating consumer price sensitivity. We remain confident in our strategy of not competing in a price-related race to the bottom, and we anticipate those looking to compete on price alone could be at a disadvantage moving forward. In line with our strategy, we will continue to grow the business and provide our members with access to consistent and quality care across a broad network. We also intend to meet our reasonable and sustainable margin objectives as we work to pursue our commitment to shareholders for margin expansion and the creation of value through offering high-quality, cost-effective health care. In addition to growth across products, we are also focused on investing in technology and enhancing our capabilities to provide quality, integrated care for our members. The proposed acquisition of Magellan is a prime example of how we're expanding our capabilities to better serve the most complex and vulnerable populations. I'm pleased to note that we are making strong progress on the transition and transaction and we hope have started to receive approvals on our Form As. You'll hear more about that in subsequent discussions. The combination with Magellan will support Centene's ability to care for the whole person by making us a leader in behavioral health while developing meaningful scale and expertise. Importantly, it will also create additional opportunities for patient engagement and ultimately improved outcomes as those growth opportunities will be exceptional efforts in the advancements we are making in our technology capabilities. As Sarah will discuss in more detail today, to better meet the needs of our members and providers, we are transforming our health care model to be a leader in the health care revolution that is overdue in our system. We're cementing the organization -- the organizational structure of our health care. Care enterprises and the platform so associated to create an environment that fosters innovation. For example, Apixio and Interpreta are collaborating on a comprehensive, predictive infrastructure that will serve as a foundation for future innovation. Before I turn it over to Jon, I'd like to touch on 3 items. First, we would like to emphasize our viewpoint that the lawsuit filed by the Ohio Attorney General last week is unfounded. Envolve's pharmacy contracts with Buckeye were reviewed by the state who did not express any concern before they went into effect and all health brands in Ohio are paid the same computation rate. So Buckeye does not receive any more or less from the state based on how we contract with pharmacy. Envolve intends to aggressively defend the integrity of the pharmacy services provided to the state of Ohio. Moving forward, we will likely not comment much further on the matter. We see no benefit to create a situation where the matter receives more airtime than it deserves in the current political environment. Second, as a reminder, our capital deployment priorities include funding risk-based capital and health plans, retiring debt and ensuring we are fully investment-grade rated, potential acquisitions as we were still a growth company and stock buyback when accretive. And of course, lastly, today, we are again reiterating our 2021 financial guidance. You will remember that our last earnings call, we highlighted key headwinds and tailwinds, and we believe we will impact the operating landscape. As these factors begin to come into focus, I anticipate we will be in a position to update guidance at our next earnings call and no later than Q2. Today, I will just say that we continue to see the same headwinds and tailwinds, and we believe the Reconciliation Bill will enhance the anticipated tailwind. In summary, we will continue to drive growth with products and geographic expansion, and we will continue to find innovative solutions to provide our members and providers with a delightful experience. With that, I will hand it over to Jon.

Thank you, Michael, and good morning, everybody. I first wanted to start with the backdrop in terms of where we were at and where we are today. Elections have consequences. And even though we did very well under a Trump administration, there were some differences. Under the Trump administration, they were looking at potentially doing a repeal and replace. They also eliminated CSRs from the marketplace. And they also looked at ways to limit Medicaid growth and, obviously, in terms of not doing things that would expand the marketplace. When President Biden won the White House, things have changed rather significantly. And if we could go to the next slide. President Biden has really been focused on access and affordability. And one of the key things that many of you all may not have noticed was a letter went out from the Acting HHS Secretary to all the governors telling them that the public health emergency will likely go through the end of 2021. That is critical because now states will be able to budget for that 6.2% FMAP enhancement that was included as well as they will now know that, that maintenance of EFRA provision will continue in place. In addition, there's been some health executive orders that have also increased growth. There's a special enrollment period that has gone on from February 15 to May 15, and there are even discussions today that they may -- that may be extended a little bit longer. But last but not least, when you look at the executive orders as a whole, the main thing that they're focused on is what are things that could potentially make it difficult for people to enroll in Medicaid and Marketplace and eliminate those barriers. I would also be remiss if I didn't mention just late last week, the Supreme Court granted the administration's request to no longer hear the work requirements case. We have always been supportive of work requirements with the focus on making sure that it wasn't a way to impede people that were eligible for Medicaid to join in. If you go to the next slide, please. So as Michael mentioned that the reconciliation package has significant provisions in it that are going to be very helpful to Centene. The biggest are the enhanced APTCs for the marketplace. This is critical, as Michael mentioned, is it's going to eliminate the price sensitivity that was there for those that have been looking at entering the market, especially for those at the range from 100% to 150% of the federal poverty level. The other key significant component of it is now individuals will not be more than 8.5% of their income, and they also eliminate the 400% federal poverty level cap. So it provides a lot more opportunity for people that couldn't receive subsidies before to now receive subsidies. Now this enhanced APTC will go on from 2021 as well as 2022. Now for the remainder of 2021, there's also a provision that will allow those that get unemployment benefits to be able to access the marketplace coverage, and they will get that coverage at 150% of the federal poverty you level. The other thing I want to focus on is we always talk about state budgets and in terms of how states can make sure that as we're getting out of a pandemic that they have the funding to move forward. This bill included $350 billion in state funding, and we believe that, that will also help relieve some of the pressure points when it comes to protecting health safety nets. Two states, and we're working with others, are looking at the CHIP postpartum coverage will enable states to allow moms who have just had babies instead of just 60 days coverage to now have a full year. We see that as an exciting opportunity. And last but not least, I'd highlight when it comes to the FMAP expansion, the Reconciliation Bill provides more opportunity for states that have not expanded to look to do so moving forward. And if you can go to the next slide, please. So a couple of key takeaways. Number one, this is a very different administration with a very different approach to health care. President Biden will continue to look at ways to leverage Medicaid in the marketplace to expand coverage. And there's already discussions in terms of with the enhanced APTCs, looking at ways to see how that could be made permanent. Second, Georgia matter without a doubt. We wouldn't have seen a $1.9 trillion reconciliation package pass and we wouldn't be expecting a second package to be moving forward, which we expect more than likely the second half of the year. Lastly, slim majorities in the House and Senate make it very unlikely that health reform changes are going to move forward. We talked a lot about the Senate being 50-50, but we also need to recognize that the House is a 222 to 213 majority for the Democrats. It is quite slim and it only takes 5 preferred legislation not to pass. So after these 2 reconciliation packages that we see going through, we see it unlikely that we're going to see major health reform after that up until the upcoming elections in 2022. And with that, I'd like to pass it to Sarah London.

Great. Thank you, Jon, and good morning. First, as Michael mentioned, I'll share a brief update on Magellan. We are moving ahead on the transaction approval process and last week received our first Form A from Arizona. At the end -- very end of last week, we also had the time period for HSR review by the Justice Department expire. So we're able to move ahead. We're working closely with the regulators in California as well as in our other shared present states with Magellan. And to date, nothing out of the norm has been requested by any regulator teams. If we could go to the next slide. We also continue to make solid progress on integration planning so that we can be prepared to create value from the partnership day 1 post close. And as we've gotten 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 care model at every level of acuity. We absolutely see opportunity in the strategic expansion of the specialty portfolio. And we believe that the combined scale of the pharmacy platform similarly integrated into the care continuum will be a differentiated offering for Centene health plans in addition to Magellan's third-party customers. I should also note that our planning work in Magellan has made it clear how much talent is in that organization. This is a team that is passionate about integrated whole person care and focused on bringing industry-leading products to serve their growing customer base. We're very exciting -- excited about the opportunity to collaborate with them. Next slide, please. As we've said, Magellan will sit within Health Care Enterprises post close. 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. To this end, the HC portfolio is structured and governed with independence as critical. Within HC today, we implement and enforce rigorous technical firewalls and administrative controls that ensure no cross contamination of data or intellectual property between Centene health plans and the HC portfolio companies. Similarly, we've now created an independent Board of Directors for HCE, who, among other things, are responsible for ensuring the Centene ownership of these companies creates no competitive disadvantage for their third-party customers. So by positioning Magellan within HCE, it will allow them to take advantage of Centene's size and scale as a platform for growth, but retain operating control and all the protections necessary to continue to serve as a trusted partner for their broader customer base. Next slide. Switching gears, Michael also asked that I share a bit more about the work we are doing to automate and digitize core functions within Centene. Across the organization, our business and technology teams are identifying areas where we can make our internal processes and our member facing experiences more seamless. A couple of examples of this. Within our Ambetter marketplace product, we're committed to a low click and user-friendly web and app-based member experience, adding the ability to quickly search for a provider and access telehealth in real time, among other things. Within our internal operations group, we are upgrading our call center platform to increase our digital interactions with members and optimize internal workflow. And across the board, we are consistently looking for ways to reduce manual steps and leverage digital data to drive automation. One example of this is our acquisition of Apixio. We've talked already about the work Apixio does to read and codify unstructured data within electronic health records in support of risk adjustment efforts. And while that work continues, I wanted to make concrete the value the Apixio platform has in our broader digital efforts. To make the technical process real, this next slide is an example and, frankly, a pretty clean example of what we often see in the risk adjustment or quality process. This is an example of a handwritten chart, and somewhere in that scribble at the bottom is documentation of a chronic condition. The Apixio platform is able with high degrees of accuracy and precision to make those scribbles computable as structured data. And once the data is structured, we can then drop it into our broader data ecosystem and use it to power the administrative algorithms behind not just quality and risk adjustment, but care management and other patient-centric efforts. The same technology can be applied to processing the millions of paper claims we receive or to reading documentations submitted for prior authorizations. In the latter example, this drastically reduces the time required for human to decipher the scribbles and, therefore, the turnaround time for that authorization. Incidentally, this last example is one that has come up as an interesting opportunity to explore post close between Magellan and Apixio, reinforcing the potential for cross-pollination within the HCE portfolio. 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, Michael, I'll give it back to you.

Thank you. Thank you, everyone, for joining us. We're pleased to be able to share not just what we've achieved, but where we're going, what we're doing and what we'll be bringing to shareholders now and going forward. So thank you. And as we said before, by wording, next time in person. Thank you, Michael.

Thank you. Thank you, Michael, and thank you, Centene, for presenting today. We appreciate your participation. And we look forward to being back in person next year, hopefully. And everyone, enjoy the rest of the conference. Thank you.