Centene Corporation (CNC) Earnings Call Transcript & Summary

All right. Great. I want to thank everyone for joining us to our virtual health care conference. It's my pleasure to introduce Centene. Centene's the largest Medicaid managed care company, but also an exchange company but also has a growing Medicare business as well. Represented today with Michael Neidorff, who is the Chairman, President and CEO of the company. And I think we're going to spend most of the time doing a fireside chat. I think Michael has a few prepared comments. So I turn over to you.

Thank you. Thank you, Kevin. I'm pleased to be here today, and I'd like to start with a couple of opening remarks, and we use this opportunity to address a few items far in our recent earnings announcement. We delivered a strong first quarter performance provided us with confidence to raise our guidance for full year revenue. We added $4 billion to our revenue guidance for 2021 due to the factors including ongoing suspension of the Medicaid [indiscernible] redetermination. Currently expected it will last until August 1 but I might add that we follow the government guidelines. We -- realistically, we expect it to continue in the end of the year. But we built in August 1 because that's as far as we go [indiscernible]. This could be extended throughout the end, but our current guidance remains conservative and in line with [ the current market ]. The delay in the carve-outs, California pharmacy services in July 1, New York pharmacy services, 2022. Also, the Marketplace special enrollment curve, which exceeds our expectations is in [indiscernible]. And recent Oklahoma contract, we're pleased with our ability to continue to build its top line, and we expect our revenue to be in the range of $120 million to $122 million in 2021. Looking ahead, we're focused on growing margins and emphasizing as part of our commitment to transparency. Our upcoming June investor event, we will be providing more color on our margin expansion plans. Moving ahead, you can expect to have a clear understanding of the performance of our diversified business line, very important to have that transparency. Today, I want to touch on some of the principal factors incorporated in our [indiscernible]. As you will recall, we raised our HBR guidance of 50 basis points. Half of the increase, 26 basis points was based on the -- including the physician fee schedule, which is over $200 million impacted for the full year and the $40 million impact from the retroactive New York business. The majority of the remainder of the HBR increase, 24 basis points came from first quarter performance with the Marketplace utilization came in higher than our expectations. And a shift in revenue mix including Medicaid redetermination during additional Medicaid growth, which runs higher than Centene's overall portfolio and onboarding of Oklahoma. As you know, it is our practice for a new plan to book a run rate of mid-90s for the first full year. Of course, we are pleased with our new contract. There's always is some near-term impact as we ramp them up. We believe utilization was largely driven by a broad-based return to physicians given the substantial pent-up demand with testing and annual checkups as well as routine health. We have seen this return to the doctor continue in April, with utilization staying relatively flat. Looking ahead, we continue to focus on creating innovative medical management solutions to provide our members with the highest quality care at the lowest cost. We will share more detail about these efforts in June. Looking ahead, we continue to monitor headwinds and tailwinds. As I mentioned on the first quarter earnings call, we believe that various factors such as redetermination, Marketplace special enrollment period balanced in our favor as we look through the rest of the year. Overall, started the year off strong. We continue to see attractive opportunities to expand coverage to our underserved, and we are operating in a positive policy environment, including recent investments in the market. But there's still uncertainty in nature, particularly as COVID concerns remain. But we are positioning our business for long term up and importantly, bottom line. As I mentioned, we continue to develop a medical and management technology capability, which we believe will further support our long-term margin expansion pool. Also, by the way, we grew our Medicare business by 41% in Q1 compared to the first quarter of 2020, which is about $1.1 billion in revenue. Finally, I'm pleased that as part of our executive rotation program, last week, we appointed Drew Asher as CFO and Jeff Schwaneke, as Executive Vice President, HealthCare Enterprises. Drew brings tremendous leadership and finance experience to the role. Many of you will be meeting with him in the weeks ahead. With that, Kevin, I'm ready to take any questions.

Sure. Yes, absolutely. You addressed a lot of the questions that we had but I wanted to dig a little bit deeper into the commentary on the MLR bridge. It sounded like half of the MLR was, I guess, I understand the fee schedule and the New York rate cut. The other half, though, I think you were saying that it was due to the higher MLR, particularly with the exchange business that was there. And it sounded like you were kind of thinking that was onetime cover. Just maybe explain a little bit more of your -- that component.

We've added 250,000, 300,000 lives in the beginning of the year. And that was -- that's a big bonus. It took us back to ahead of where we were what we had lost in the fourth quarter. By the way, I'm quick to emphasize shows that not joining the race to the bottom as benefit. But having said that, I think when you get that kind of bonus in new business, and you don't have the same deductibles and other things that we'll be doing in this environment, you could have a higher medical loss ratio until you start to manage in [indiscernible]. And we also saw -- the first part, we saw an increase in the COVID business, the January and part of February. And then we saw some normal utilization kicked in second half of February and March.

Okay. Would you say it's more about higher MLR on the existing exchange business or about a higher MLR on the new enrollment coming through the special enrollment period?

I think it's going to be choppy, as I've said, just because of the COVID and how it's coming together. And a new business is stabilizing come in [indiscernible] just the timing is a little bit different as the way they have -- the way it's set up.

Okay. And I think everything else you said makes sense as far as Oklahoma coming in higher, that's the way you always do it. I guess one thing that kind of caught my ear, though, you've mentioned that the redeterminations have a higher MLR than the overall business, which, as I think about it, I guess, does make sense. I guess, we were thinking about redeterminations being a relatively high-margin business, but that's more because of the fixed cost leverage, right? You're saying the MLR is higher than exchanges, and that's why it ended up bringing up the MRR. It's a high -- Medicaid MLRs are high in general.

Yes. That's why going forward, we'll talk more about how we're going to be doing it. We going to have to spend some time talking about it at our June conference. We need to start to explain how we're going to be driving towards more transparency by product line. We think that's really important. We think you and analysts and investors could see that, something in that [indiscernible] all the way to -- you talk to -- we operate them. I'm not going to say trying to allocate taxes and other overheads, we'll be talking more about that and what makes sense and how we plan to do it going into the end of the year or next year.

Yes. No. That would actually be really helpful. So I appreciate that. And not to steal too much thunder from your June conference, but you did mention that you're going to be focusing on margin expansion and outlining how you're going to do it. Is there any kind of broad strokes? Where do you see your margins versus the peers today? And where do you see the biggest delta?

I'm not going to front row my comments to start to give additional guidance. I fairly understand that. But I think there is an opportunity. We're going to give you -- we're going to have goals with margins going out over the [indiscernible]. It's not a cliff. But -- and we haven't proved much [indiscernible]. And I'm not going to just look at what competition does. I outsource everything and I do some things, and they can short term improve margins. But we have core competencies. It's going to build a very strong business going forward. It's not to manage just 1 quarter or 2 quarters. But we believe you deserve some insight into the past we see over the next several years to get to where it should be by product.

Okay. That's helpful. And so then...

And by the way, it's going -- I think people will see they have a plan in place proved to be worth it.

Okay. I guess when we think about the redeterminations, to your point, you have them in through August is probably going to be extended through the end of the year. But I guess, how should we think about the potential headwind that creates, obviously, keeping them longer is obviously a good thing. But eventually, they're likely to go away. How do you think about what's in the business or the guidance today that is at risk? And am I right in thinking that if that does go away, it's a little bit higher-margin business leaving because of the fixed cost nature of it?

I think we have a very much a long-term opportunity and benefit. We have a broader network that's [indiscernible]. So not the broadest of [indiscernible] in our marketplace. I think it is -- a lot of it's the same network, most of it as we have in the Medicaid. And we also know that subsidies will come at -- in some cases, they came permanent in the market. I can see where they can keep the same doctor, same group in our Marketplace. but they lose eligibility in Medicaid. So -- and that's why I think when we get to the point we start to talk about margins by product becomes important, we'll help you see where the opportunity is. So I think the redetermination with the balance and the approach this administration is taking could prove to be a tailwind. Again, still yet to be decided to work on things in Congress and permanency of it, et cetera. But what's so important, beyond what you asked, but what's so important, there is the attitude that we've always described that health care is a right.

Yes. Okay. That will be helpful. You mentioned that Biden might take these subsidies permanent on the exchanges. How will that impact what a successful strategy is on the exchange? And I guess, we've certainly seen some competition come on the market companies who are going public, raising lots of money and basically underwriting to losses -- basically underwriting to what they expect their medical management to deliver over a certain period of time rather than what they're actually delivering today. So how does -- I guess, how has that impacted your membership this year, but then does that dynamic change of just coming in and undercutting pricing if and when the subsidies are made permanent?

I think you adopt and we saw it had an impact on Q4 where we ended up in the market. But we also have seen since January 1, that we -- the opportunity, especially on [indiscernible] . We've had a long [indiscernible]. We've picked up everything we lost and then we'll [indiscernible] that we're seeing that we're getting -- we learned to believe whatever public is or everybody at. We are the -- we were ahead, adding more than anybody else in this special period. So this is our strategy, the network, maintaining the -- of the attitude has to be profitable. How [ well will everybody ] be? All boats rise. It's a big category. So not trying to take toss but -- so some of the companies, they offer everything to reinsure capitalization. And then you have G&A and other things on top of that. That's not where we're at. I mean we are public, we had to be profitable. Some people remember those things. If you didn't have probably 6, 8 quarters of profitability, you're going to think about going out. So that's okay. We've done well in that environment. We're growing, and we have the ability now to leverage ourselves, to improve margin. So I'm not at the point of saying that I'm going to start to make money in the X number of years. I'm talking about moving the money we're already making for the next few years.

Okay. All right. That's helpful. Yes. I guess, a data point that you're picking up at least your share of the special enrollment, I guess, bodes well for how that -- how your plans are going to be perceived if subsidy stay in...

I say this a lot, for those of us who are play or offer to try to play along. I learned a long time ago, you play against yourself. If I'm a handicap and a person I'm playing has it. If I say I'm going to beat him, I'm going to lose. But I say, okay, guess my handicap in my game, the odds are really [indiscernible]. We're going to play our game, the way we've been successful, just continue to do it. We adjust tactics where it makes sense for us.

Yes. And I guess maybe just building on that. I mean, we've seen these disruptive names come in to have different angles and may be successful over time. But we're also seeing more established players get back into the exchanges as well. I mean, do you think that increased competition is going to put margin pressure on that business or make it harder to grow?

Well, I think I've typically seen with the people that are coming in, the additional players, they're going to be very responsible on how they go at it. And they -- it creates more excitement in the category, the category grows and everybody grows. So we have our plans, our strategy, our marketing that what we're doing as agent. When you're the leader, as we are clearly the leader in the Marketplace, and that gives you a certain measure, we're going to maintain that leadership to try and come in and get some. Remember, some of these same players came in once in a quarter and we ended up being the last one standing. I'm not saying that's going to happen again, but it says we understand how to compete.

Okay. That makes sense. And then how would you characterize the Medicaid rate environment today? Are rates actuarially sound? And you indicated that you thought that the rate corridors might start to expire in the coming months. Any color or visibility there?

Well, I still think that the -- we'll start to see them expire. There's one who is -- if we had 1 in 2 that -- in the quarter that [indiscernible] retro adjustment. But I think they're going to start to expire. The states are doing well financing, much better than we do. They have the money that they're getting from the [ government ]. If states when they expand, they're going to get that 5% across all their businesses, so I think the rate environment will be okay. It's been a good environment.

I guess one of the things that happened in 2019. Under Trump, it seems like states are getting more aggressive on redeterminations and giving more flexibility to drop people off the enrollment. And many of the companies indicated that, that was putting pressure on rates and that states really didn't reflect or -- update the rates reflect the fact that the risk pool just got worse when people came off the enrollment. Is that a risk as we go over the next year? So not only is there just a membership, but there's potentially rate pressure?

I think you may recall that in our case, we said that because we have real-time information, I'm not taking a 3-month old data that -- we went to the states and said, look, you're leaving us with a secular population. As a result, our costs are higher. And we got rate increases. And there may have been a trailing 2 months, 3 months or some period of time. But sometimes they want retro. So we find an environment when you have the data we have. And we're able to go to states to say the rates we have no longer actually [indiscernible].

Okay. So -- yes. Actually, going back a little bit to the -- it seems like the company is looking to provide a lot more transparency. I don't know whether it has anything to do with -- Drew also coming to be the CFO. Is there anything, I guess, else that you might say? I mean I don't want to put words in Drew's mouth, but is there anything that him being CFO is going to allow you to do or help you to do versus...

Yes. I think there is a couple. One, the financing has always been strong. Jeff had a strong financing. I never lost sleep at night. I think we -- again and again, we were never surprised with risk adjustment. We've always had the right numbers. [ Taxes ], the rebates and things we have, we're always right. So they're not saying enough about it and Drew has [ his words. ] Drew has had the benefit. He will tell you, he's told me that overseeing in the last 15 months or so the pharmacy operations has really helped his perspective. This will be even a strong [indiscernible] , that we're doing the same thing. You have to give him a chance to be wrong in an operating sense. So I think with Drew, the benefit of rotation is first, perspective. That's not a commentary about his performance. When I was in consumer package, he is in [indiscernible] And so as, let's say, [indiscernible]. Every couple of years, we bring all the product management. The guy had [ alpha ] will say -- surprise me to say, you take it over back to [indiscernible] to a location responsibility. He got a fresh perspective. They no longer knew everything that couldn't be done. That's why we do that. I'll give you 1 more quick example. Shannon Bagley, who's our Chief Administrator Officer, started off an internal audit with the total risk management, went out and started doing plan start-up, ran a [indiscernible] and back in an HR now moved up to oversee all in state of activity. And that's an example where you can help people broaden out and learn from it. She's in the room now [indiscernible], who was in our audit and finance, now Chief of Staff involved with more thing than she could there in a different way. In some day, [ we made a great operator ] with the experience she had.

No. That's definitely helpful. We set the companies [ who's best or do better ] the management around. That definitely does seem to help.

One more quick comment. I think it was a time everybody would look and hire somebody from another company. You're using a big one in this. That's not the same case here. We have to develop our own talent.

Yes. I guess to your point about -- yes, external. The company has consistently supplement its organic growth with M&A. I guess, where do you think that, that next dollar of capital is likely to be spent? You've got a lot of different businesses today. Where do you see the greatest opportunity?

I -- we have the priorities that we're going to. Everybody talks about priority. First priority is with funding statutory capital is risk based capital, you start-up on 2 plans and the independent ones a joint venture. Oklahoma. That takes capital, so you're using business cash flow. The second thing we want to do is pay off debt. In our debt-to-EBITDA and those measures on continuing strong now that the cap will be in the $37 million range, $38 million range. That's where halfway to be an IG. And we think as we expect cost of money will go up, be in a full IG and that's a clear target for our bondholders. And that's a good application of cash flow. We've been selling through it. And we just sold $2 billion in bonds at 2.5% but we're kind of selling through not being [indiscernible] but let's get -- we can do the boards. The new applications, some M&A, but I'm not looking -- I don't get a big M&A right now. If something came along, we're looking at the technology side and some things. Like you have [indiscernible] it's not expensive, but it was expensive for some people would say, I don't want to say the people who sold it at a fair price. But there's some of that, that needs to be done. Our focus has always been at least half of our organic. And typically, that's what it's been. Then we filed a 10b5 filing. That's when you do an acquisition, you can buy a stock back into the market, our ethical program. And the Board authorized $1 billion. So the stock gets also given price. Very quickly becomes buying back. And if we don't find things new, we'll buy back. Yes. That's -- the priorities for -- will be there. And the return of capital to the shareholders is something we take very serious.

Okay. That's helpful. And I guess, with the current administration, do you think that M&A is going to be harder to do? Or do you think that you're still going to be able to kind of do that third to half year growth from deals?

I think it rebalanced. I think if you were in the right M&A the right way, I mean, we got an Hart-Scott approval on Magellan deal, $2 plus billion. So -- and they ask the right questions, they move through the process. And I think if we try to acquire a given business where we have a big share market, I expect they'll be very different. You can have balance.

And I guess, in general, if you think about how you guys are thinking about the pace and timing of volume rebounding, it kind of sounded like it's starting to get back to normal in April. But how do you think about the pace of utilization through the rest of this year?

We've said that we expect in the second half to see return to normal build, a little bit more [ 5 months ]. I've seen nothing that changed.

And do you think there will be a period of above-average growth or excess utilization as a bolus of pent-up demand comes through? Or are we not likely to see that play out?

In terms of medical expense, you talking? No, it's going to be -- it's for some time. It's going to be choppy. You're going to have some regions where you're going to see COVID really had to go up and not vaccinating for whatever reason. So you're going to have some choppiness, but we've demonstrated long of last year and even this year, we were dealing with the choppiness. And it says that it may not be as clear path, very simple path, but it's where you end up as we reach out. And we think we're in open strong positions with our products and our earnings and the turn of capital things is a very broad-based [ program ].

And we're getting close to the end here, but I was wondering if you can just give an outlook. What does the RFP pipeline look like right now within Medicaid? Any key ones that you're looking at as an opportunity to grow and anyone that you're looking at as key reprocurements?

There's some expansion within markets where they don't have SSI, they may be doing it, some of that, but I'm not going to talk about those who we working quietly on. I would assume lead procurements but that's not adding [indiscernible] as an undertaking on how we do a pretty good job. We see some opportunities for new ones and expansion in markets we're in.

I guess that's all we have time for. So want to thank you for joining us and looking forward to doing this in person in Vegas next year.

Well, as you know, I enjoy the biggest conference.

Yes. It's always a great event.