Centene Corporation (CNC) Earnings Call Transcript & Summary

Good morning. This is Lance Wilkes. I'm the health care services analyst for Bernstein. And appreciate everybody joining us bright and early this morning, especially as you move west in the country. Let me just go through some really quick logistics, then I'm going to hand it over to Michael Neidorff to give some kind of introductory remarks and frame the company for everybody. But introductory -- or my logistics, we're using Pigeonhole for questions. So anybody who wants to submit questions, it should be on the side of your screen there. In addition, if you're having any difficulties with that, just send questions into me at lance.wilkes@bernstein.com. And we're going to go through a fireside chat this morning. We're going to populate that with questions as we get those in. And before that, what I'd like to do is turn it over to Michael, both to give an introduction of himself and to kind of give introductory remarks on the company and set the stage for everyone. So Michael, thanks so much for being with us this morning, and let me turn it over to you.

Thank you, Lance. By way of introduction, as most of you know, I'm the one warn that if anything goes wrong at Centene, it's my fault. So -- and everybody else when it goes right, it's what they do. Thank you, Lance. I am pleased to be here today. I will start with some opening remarks and we'll ask -- and we'll use the time to provide an overview of Centene and our focus areas for the future. Today, Centene provides health care coverage for -- to more than 25 million across the United States in the country. We are at #24 as of yesterday on the Fortune 500, having moved up from 42, and have forecasted this year revenues of over $120 billion, up from about $111 billion last year. Both Centene and our members benefit from our scale and the deep industry expertise. Centene is the largest Medicaid provider in the country and care organization. We are a leader in Marketplace in -- such places as California, Florida, New York and Texas, the 4 largest Medicaid states. Centene is also the national leader in the managed care -- a national leader, I should say, in long-term care, the LTSS business. We also are #1 in Health Insurance Marketplace, and have been for a long time, and continue to be. In fact, in the first quarter, I think we've added 350,000, 400,000 lives. And we're looking forward to our Investor Day coming up where we'll give an update. Centene's Medicare platform has -- now in the position we have hoped for, for some time. We've added about 20% in just the first quarter alone, over 1 million lives. And we're getting to critical mass that makes a difference in that kind of market. So that's really important. And we see us continue to grow it through market expansion, in the markets as well. So both organically in the markets we're in as well as some additional new markets. I want to indicate that our international business has grown very well. It's profitable. We're doing a couple of things. We're learning things there that have application here. Our Ribera Salud, Spanish company has some techniques and things that have value everywhere, and people are calling from around the world for some help. The U.K., we're among the largest private insurers. And we're learning things and we're helping them with technology, which is making a very big difference. So this health care expertise is taking us a long way. Lastly, our health care enterprise, as you know, is where we put our portfolio companies. We have an independent Board, independent directors, so we can sell products to others knowing that there's no cross-contamination. But I might add, we are not trying to create a subsidiary like another large peer has. That's not our intent. This is just very limited things we need for ourselves that, in some cases, when we make an acquisition, they have external customers. We're not going to be disruptive of that. We think that's just part of how we like to do business. So you take all these assets together, it's a very diverse company. And we think that's important. As we look ahead, the path ahead, we have some really great opportunities to expand the margins, and that's really the focus now. And you've heard me talk about it, and you'll hear more about it in a week or so at our Investor Day. But that's a -- it's now time to leverage the size and scale that we've had. Technology will make a significant contribution towards those margins. And you'll hear this probably several times during the course of this morning. But by example, we now have a system that we're testing in Florida very successfully. It takes about 18 minutes for a nurse to go through a file prior to pre-authorizing certain procedures. Using artificial intelligence in our new systems, it can be done in 1 second. Now if it turns out, no, we have a nurse go through it to confirm it. But think about that. Think of a doctor entering stuff on his computer and getting a yes before he finishes it. You end up with a very satisfied and a delighted provider and recipient when they know they can move ahead, not to mention the cost impact and how you can now turn those nurses loose on things that make a difference in helping to manage care and improve quality. So those are just some of the examples of why we're making an investment in technology and what you can expect. It's going to be very significant. Our data fluidity and artificial intelligence is growing and will have real meaningful opportunities as we go forward. Now we look forward to sharing more of the details of growth on the margins, and Drew has a lot of more detail on it on June 16. I don't want to front run our own Investor Day. I'm sure you understand that, Lance. No, that's not an issue. So in closing, I just want to say that we are pleased with the political highlight, the landscape. It continues to work. We're looking at the subsidies for the health plans. The fact that the administration wants to see people have access to insurance and doing everything they can to do it, we think it's really important. The Marketplace footprint, they want to see it grow. It is growing. We believe that things are moving in the right direction with COVID. We've been doing a lot ourselves. You'll be hearing more about in that area to encourage people to get inoculations and the COVID vaccines, very important. But look, I want to emphasize, I said probably 18 months ago and more, things are going to be choppy. And there's still some choppiness we're going through right now as we see COVID in some months, and it started to dissipate and utilization is starting to come back. And importantly, I was talking with some very senior oncologists, and the sad part is some people held off on what would have been an earlier diagnosis of some cancers that now probably are a little bit worse so will take a little more intensity. So -- but these are things that are, I view, as onetime events. I don't -- we hope that we will never have another COVID in our lifetime. But we'll get through this. And we -- I think, I'm proud of how this company has demonstrated its capability to do that and work its way through it. And if I may, just a little commercial, Lance, I look forward -- we look forward to seeing you all virtually on the 16th. We're going to look forward to seeing you in person on December. And Lance, I look forward to doing this again next year in person. Thank you.

Yes. I would agree with that. I look forward to getting to see everybody in person. It will be a big change and nice return to normality. So I've got a list of questions here. I'm already getting questions in from the audience, which is great. A lot of my questions do focus in on your initial comments on margin expansion being the focus. Maybe just a step before that, just to frame a little context. Obviously, the company has grown tremendously over the last 5 and 10 and going back a number of years, over the last 5 years, in particular, through acquisition as well as organic growth. I'm interested in understanding from your perspective and the, again, the highlights of you being the largest Medicaid player, the largest in the Marketplace, and now having a more sizable Medicare Advantage business as well, what's the vision -- what's your view of the destination for the company 5 years from now. Is it roughly the same composition? Are there other areas that you expect to either grow faster or to add to?

Yes. I think there's a -- there are still opportunities in those 3 categories. So we will continue to take advantage of that. And it will be mostly organic. The -- our focus on M&A has shifted more to technology and tuck-ins and things, the large acquisitions. It's now time to leverage what we have acquired. So going forward, expect more of that. I mean if something comes along that's exceptional and very accretive, of course, we're going to do it. But -- so, from that standpoint. But we see a shift mix. You'll see more Medicare. We've said that for some time that in this decade, you'd see more of our growth coming from Medicare. I remind people that 2/3 of it is at 400% of the federal poverty level and below, and that's our sweet spot. That's where our networks and things are. And people can keep their doctors, et cetera. So we see that happen. We have 3 new health plans in Medicaid going live in '21. And Oklahoma has what, I view, as a delay. There's some politics playing, but I think we have the capability to work through that over time. The governor is committed to it and a very strong individual. So as we look at that now, I have some other new products that we're working on that will probably see the light of day late '22, early '23, that I believe will become significant. But I -- for competitive reasons, I obviously don't want to talk a lot about it. But I think if you think about the vision, it's -- take this company -- and forgive me for saying. I have to get used to saying, it's in the Fortune 25 now, joined a couple of other health care companies to it. But that gives us assets and capabilities and awareness in state legislatures in Washington and elsewhere, that we can start to influence things, how they're done, and start to leverage that size to create a more economical, more complete health care system. And that's really the vision. How do we continue to improve quality using some of the things we've talked about.

Great. And then another broad question, and then we'll dive into some of the more specifics and probably wrap up on public policy, which you guys are always so expert on. But the -- next broad question will be, just understanding from a management progression at the company. Obviously, you just appointed Drew Asher as CFO. And so just trying to understand what it is you're looking for in senior leaders in the company? What's your view on succession? How the Board looks at kind of management process and culture in the company? I think it'd be really helpful for everyone.

Well, I'd like to -- I'll start off this way. When I -- when we lived -- when I was running Miles international, I saw an apple cart one day -- so that's from Elkhart, Indiana. I used to say if I walked in front of a horse-drawn wagon -- because they had those and not buses there. I'd say business will continue because I have an organization that can do it. Well here, we have buses, and not horse-drawn wagons, so I'll say -- we may have wagons, I don't know. But if I walked in front of a bus today, we have an organization that would continue as if I was sitting at this desk. That's the strength management has been working a long time. The Board and I have spent a lot of time on succession and they have several choices to make at the right time. And we have managed the company as what I call a partnership, while it's a C corp. And we sit down, a small group of us, and we talk about the business in totality. And while we all have portfolios -- theoretically, I'm the managing partner. And if I wanted to do it tomorrow, I could say, I'm going to run international and somebody else could be managing partner as they do in partnerships. And that's kind of the attitude we have. And I think the fact that we've run -- I had some surgery back 8, 9 years ago. And the place went on like I was here. I was gone for a month. And that's what it's all about. And that's -- I feel very responsible to ensure that that's there. And we're working now, as you'll see in Investor Day, more and more exposure. So we've heard investors talk about that, that they're going to have a chance to hear and ask questions to the people. Although we're not going to set up a situation that you can call anybody any time they want. That's Jen's job to talk to investors, and she'll bring Drew or myself in as necessary, okay. But -- because we want people doing their jobs. And -- but succession is something we take very seriously. We look at people's ability to communicate. We look at their critical thinking. We look at their judgment. And we look at their overall intelligence, their management skills, their ability to be flexible and learn new things. We don't want rigidity. We look at agility. And it's okay to make small mistakes. What do you do about it? We look at individuals who look at -- and who can make a mistake, learn from it and say, here's what I'm doing about it. So we look at a whole series of things of that nature, that we believe will create the kind of executives we have here running this company.

Got you. And just one follow-up on kind of the management process and culture in the company. And just trying to get a better understanding with how large you've grown. In my experience, yes, there are some executives that are more entrepreneurial, have more direct responsibility in some companies and work well in that sort of position. There are other executives that I think of as matrix. They're very good at connecting things within an organization. Obviously, you need both. But within your culture, as you kind of create the organization over such a -- $120 billion now, how do you divvy this up? How much is sort of centralized or matrixed versus decentralized?

The matrix is where there's standardization. There are certain things that have to be standardized just from sheer size. What I -- there was a time we could give providers any kind of contract they want to do, workarounds, et cetera. We're too big for that now. So we have standardized contracts. We standardized quality programs, things of that nature. But we are very decentralized on the execution, and we think that's really important. And we tell individuals in this company, you have the responsibility, the accountability, and the authority. And by decentralized to the extent we are, we have been able to grow explosively without exploding, and we think that's really important. We expect the individuals to be business leaders and obviously, there are some corporate jobs that you're not going to get a lot of entrepreneurial flare. But we want people to feel free to make the right decision. You heard me talk about critical thinking and judgment and things of that nature. A successful executive in this company, the senior level, demonstrates those skills and those -- when to apply them and when to be standardized. And we have a lot of discussions about that. So I'd say it's a can-do culture and a willingness to do whatever it takes ethically, legitimately and honestly to get it done. We are hell on wheels when it comes to compliance and things of that nature. I mean if you're going to take a hit, take it. But we have no patience for anybody who does not come forward when there's an issue.

Got you. Let me shift over to your comment on margin expansion being the focus and leveraging what you've built. I think that's really interesting there. I'm going to start off with some longer-term and broader questions, but we're getting questions coming in on specifics on acuity and public exchange I'll get to in a moment. But just starting off, can you just frame sort of the current margin levels of the business? And long term, what are the opportunities to retain margin versus having to just share that back with your customers or clients? And then what would be the major drivers? So kind of how big do margins get? And what would drive you there?

I'm going to let Drew, on the 16th, let everybody know our targets, and we have very defined targets that he'll be able to talk to, okay? And it's something we focus on. And let's face it, I mean, we have 2 elements: We have G&A and we have medical expense. You heard some of the things. We're using technology in both areas. And we're not saying it's one or the other. I tell people you can control your costs, but you influence your medical expense, and you influence that when you have information systems and technology. And that's where we're headed, okay? And then we also are focused on what should be core competencies of this company. It's not carving out and outsourcing. It's what are the things that build value in the company because there are core competencies? And so you'll hear more about that kind of thing as well. But as we look forward, we see opportunities for more transparency, and that, Drew will talk about, so people understand what we're doing. We've been kind of margin-bound in the 2.5%, 2.7% net margin. And that's not an acceptable level. Now it's not -- this is not necessarily a real hockey stick, and it's not something where it's going to jump up more. I -- we worry about sustainable growth, sustainable margin expansion. And you will hear more about that on that day. And I'm comfortable with talking about it and saying, I believe we're going to be able to achieve, over the coming months and years, our investors' expectations. We've heard them. It's bothered us. I've not been happy with how we've leveraged this growth. Growth can hide a lot of things. I'll give you one example. I mean I went through and -- in our legal department, we've cut it in half and have better results. And Chris Koster, our General Counsel, he's gone through it and he's pruned the number of legal firms we've done. We've negotiate better deals. It's that kind of thing where you need fresh ideas to come in and do it. We're rotating management. We're getting fresh ideas in some of these areas. So there's a lot of opportunity. And as I said, if this was the 17th, I could talk more about what I had already told on the 16th. But if I start to front run this too much, Jen Gilligan will have my throat, and she should.

Understand, and appreciate you participating in this just so close to your Investor Day. So thanks a lot. Let me then get into some more segment level sort of questions on margins, and some of these have been coming in via questions. Again, appreciate anybody who's submitting via Pigeonhole and if you're having an issue there, which looks like it's working well, but I'm also getting e-mails, lance.wilkes@bernstein.com with those. First question, and I think we can frame this more broadly and just talk about the Marketplace. Let me lay out the 3 questions, which are sort of here. One is, what is the current impact of the policies that the administration has put in place from more of a growth perspective? And I'll hold the next one on margin and just let you kind of go through each one individually. But are you seeing much impact as far as adoption of the new COVID bill expansion of public exchange subsidies, expansion of eligibility?

Sure. One, their policies, the open enrollment period, when we've added -- we gained everything that we had lost plus already in December. And it kind of ratified our approach of not chasing the business to the bottom on price and other things. I mean we -- I think, that's clear because with the subsidies now, there's no -- there's not that same price advantage. But we have a broader network and capabilities that keep in-network the medical care versus out of network, which is non-controlled. So there's things of that nature. So they want to see people insured. And we subscribe to that, not just for business reasons, but it is an entitlement -- and as a -- and the expansion. As a business person, we -- if somebody does not have insurance and they go to the ER, they get care. And that cost gets cost shifted to the employee population and our costs go up. So it's much better to have it where it's being managed, and people want that card. And as we get more people treated, we've always said, in our business, a new member who's not had care is more expensive. But over time, that care gets controlled, managed, their health conditions improve, and the cost goes down. So we see that as a significant advantage. And when you look at the impact of the policies and what they're doing, the things such as the subsidies, now they're going to continue through '22. And we expect redetermination to come back in first, second quarter of '22. And as it does so, people will be able to move from the Medicaid to the Marketplace and keep the same doctors and things in our network. But they'll have the coverage and the subsidies won't be that expensive for them. So we see all this as improving the continuity of care, which long term, we need. And from a public policy standpoint, someone said for a long time, you have to be healthy before you can work. And I'm in the, at times, an enviable position of having studied economics and political science which, over the last couple of years, is a little scary at times. But having said that, as we see people getting healthy, we need employable people. Population growth is down, things of that nature. So this all fits what I believe will be very important for the balance of this decade going into the next. I hope that answers your question.

Yes. That's helpful. And talking about the new entrants. Obviously, you had some new entrants in -- for this year that caused a little bit of a disruption. And we certainly had other MCOs announced that they're planning on broadening their footprint or entering the space in 2022. One of the questions that came in on Pigeonhole here was around margins. And the question is, why will health exchange margins not decline sustainably down to a mid-single-digit level as more competitors reenter it? So I guess the question both -- is interested in, what are long-term margins outlook for this? And then how impactful will the new entrants be?

Yes. I think there's a couple of things. One, some of the new entrants you saw this past year, I'm not going to make a lot of comments. It was a different world where you enter a market and say, I'm not going to make a profit for 5 years. I was told when we did our IPO, you better have a couple of years of profit under your belt before you think about going out. So it's a different world, and we'll let them do it their way, and we're continuing to demonstrate we can be successful doing it our way. And essentially, I remind people we have that critical mass I've talked about. It gives us systems and capabilities far exceeding things that people have seen out there. Two, the margins we've said is going to be 5% to 10% in the Marketplace. We said it could be at the lower end but still profitable. And as we bring in this technology and the medical management and things we have, that's how you develop margins. You see, when you depend on pricing alone -- I come out of consumer packaged goods. And I learned a long time ago, that when you're first in the market, you have a leadership position. The only way somebody can come in under you is on price. But when you have a trademark, a brand and technical capabilities to produce a better product at less cost, you're going to win, long term. And we're applying those same principles right now today. And I think you're going to continue to see us demonstrate that.

And then just to kind of give some more understanding of who it is who's in the Marketplaces, can you just talk for a moment on what you experienced as far as retention rates and/or how long somebody is in the public exchange products, I guess?

We've had a history of renewing about 80% or more of our Marketplace people from year-to-year and growing it. And people tend to stay in much longer. There was one phenomenon that I'm anxious to see how it unfolds this year. There are individuals, and we -- our medical economics people are looking at it. As they get into the October, November period maybe drop it because the year is almost over, and they don't see it -- that they're feeling good. They don't have any health condition and say, I can sign up again in January, okay. And they do. They reenroll. But in this case, with the new subsidies we have, there's no incentive to do that. And so, I'm anxious to see how that impacts it, Lance. And I think it's going to have a positive impact on us. I mean we, at this time of the year, have more membership than we've ever had in the business. Normally, it starts up very high in December. And now we had this open enrollment, special open enrollment period, but that says something. Normally, we get your December membership that falls off. I've told you we added, in the first quarter, 350,000 lives as special enrollment, which was far exceeds what others have done in that same period.

Yes. Let me broaden this out again on the margin comment. We've got a couple of questions on your comment on acuity and outlook for acuity level. So maybe if you could frame the question a little bit with, what are you seeing right now as far as the return of utilization from kind of -- as we hopefully move out of COVID. And then what are your views and expectations with respect to changes in acuity?

Yes. Look, I think what we've said on the last investor quarter call was that we still saw COVID in March. And then we've seen it. Now where we see the return to normalized utilization, and there's some pent-up demand there. And as I said, there's some higher acuity return, and that's anecdotal, right? I know the head of the WashU cancer center and some other physicians we maintain relationships with, whether it be on the golf course or over breakfast, lunch, dinner, what have you. And we talk about these things, it's anecdotal that people are getting back to their primary care doctors, which we want, and they're making diagnosis that maybe are a little more severe than what they may have been otherwise. Because we all know some of these things, early detection, and we encourage it, is important. Now I'm going to be saying on our Investor Day, I'll give you a footnote, a preview is, look, we have to treat -- I'm treating 2021 as kind of a onetime event with the COVID. And when you go to build models and things for 2022, we're trying to help in that. But we're seeing things -- I said it was choppy. I expect to see a normalization grow throughout the second half of the year. We get back to more normalized utilization by the fourth quarter if things continue to project. And we're working hard with the administration and others to get people in our population inoculated. We're ensuring 1 out of 15 people in this country, and we're doing things with the Gold Jackets, NFL. We announced today a press release we're doing. We'll be calling to all 25 million members in conjunction with the administration, that if somebody has not had the test, they press 2, and the doctor will call them and encourage them to do it. So these things will get us back to an organization, redetermination of those things. So as you look at it, expect '22 to start to normalize in the second half of the year.

So that makes sense. As you as you're looking at '22 pricing, can you talk a little bit about what -- and this is just more like a general for -- as you go through your pricing process. What are you able to factor in with respect to things like pent-up demand, recapture of that demand and/or changes in acuity as you move forward?

Yes, we have -- and Drew has -- is currently finalizing, doing a lot of work on that with his medical economics team and his -- all his various finance personnel. There's a lot of them. But the pricing we're doing for '22 on all our products reflects the environment in which we anticipate operating in '22 and more normalized utilization with probably a little pent-up demand in the first half type thing. So I'm not going to front run that either, but he will have some details for you.