Centene Corporation (CNC) Earnings Call Transcript & Summary

Good morning, everyone. I'm Jennifer Gilligan, Senior Vice President of Finance and Investor Relations. Welcome to Centene's June Virtual Investor Day. We are pleased to have an opportunity to update the investor community and thank you for spending some time with us this morning. Please mark your calendars for our second quarter 2021 earnings call scheduled for Tuesday, July 27. Please note that various remarks we make today regarding future expectations, plans and prospects constitute forward-looking statements under U.S. securities laws. Actual results may differ materially from those indicated by these statements as a result of various important factors and risks, including those discussed in the slide you see in front of you and the risk factors contained in our most recent quarterly report and other SEC filings. Centene disclaims any obligation to update this forward-looking financial information in the future. Additionally, during this presentation, we will be discussing certain non-GAAP financial measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in today's slide presentation, which is available on our website at centene.com. I will now walk through some housekeeping items related to our virtual format, including instructions for Q&A. First, today's agenda as well as our slide presentation can be found on the Investor Relations page of centene.com. [Operator Instructions] Questions can also be submitted via e-mail. Feel free to send your questions to Libby Abelt at [email protected]. Finally, I'd like to highlight a few key themes that our management team will touch on during today's program: first, Centene's well-positioned asset base and the supportive policy landscape we continue to operate in; second, near- and longer-term opportunities for growth across our diverse portfolio of businesses; and third, our plan for value creation through both margin expansion and effective capital deployment. With that, I would like to introduce Chairman, President and Chief Executive Officer, Michael Neidorff. Michael?

Good morning, and welcome to Centene's June Investor Event. Over the past 25 years, we have transformed Centene from a health insurer in 3 counties across 2 states to a diversified international health care enterprise, with over $120 billion in projected revenues in 2021 and over $5 billion in adjusted EBITDA. We are now ranked #24 on the Fortune 500 list and provide health care coverage to more than 25 million members, 1 in 15 Americans. Centene today has leadership positions across major products and geographic markets. We are the largest provider of Medicaid managed care in the nation, the #1 carrier on the health insurance marketplace and believe we are well positioned for continued growth in Medicare with membership increasing approximately 20% in the first quarter of 2021. We have achieved tremendous growth, while maintaining our key strategy of business diversification. Today, we are in all 50 states, with approximately 500 products and presence in 3 international markets. Importantly, the diversity of our portfolio creates balance and allows for innovation across markets and products, as no one state can make or break the organization. With our growth and diversification, we have a tremendous foundation, and now is the time to start unlocking the full value of our enterprise. We have reached the size and scale that can be leveraged for meaningful margin expansion, and we are absolutely committed to doing so on a sustainable basis. We are digitizing and systematizing the organization using data-driven and innovative approaches to enhance efficiency, lower cost and drive better health care outcomes for our members and providers. Before I walk through the agenda today, I would like to take a moment to comment on the recently announced settlement regarding our PBM. The agreement addresses a situation from 2017 and 2018. The policies and practices that created the situation were changed in 2019, making the matter very much a thing of the past. With this agreement, Centene will be able to put the situation behind us in a timely manner. The payments will be made over 2 years and will have no impact on our adjusted EPS. Pursuing the matter in court could have involved litigation in 22 jurisdictions over the next 3 to 5 years, and we all know what legal reserves and expenses that could have generated. We have deep respect for our state partners and have addressed their concerns expeditiously, increasing the transparency of our pharmacy networks. I would like to reiterate that the matter addressed in the agreement is very much a thing in the past, and we are looking forward to bringing this to resolution as we move ahead and focus on delivering the highest quality of care to our members. With that, I'd like to take a few minutes to discuss the agenda for today. Today, we will hear from our executive team about the opportunity ahead to drive sustainable long-term growth and enhanced value creation and the specific initiatives we are putting in place to execute on this opportunity. Before I walk through the agenda for today, I would like to officially welcome Drew Asher as Centene's Chief Financial Officer. As part of Centene's executive rotation program, Drew was appointed to the position in May after gaining a year of operational experience. Today, Drew will provide more detail about our long-term margin targets and the efforts we are undertaking to achieve our margin expansion objectives. We are being very intentional in the targets we are setting for our organization, which we believe are both ambitious and achievable. Centene has been in a 2.6% to 2.7% adjusted net income margin bracket for far too long. Looking ahead, we have a longer-term goal of achieving at least 3.3% adjusted net income margin by 2024. Our entire organization, including the Board of Directors, is aligned towards this goal, and achieving our margin objectives will be incorporated as an important piece of long-term management incentive programs. In keeping with our commitment to transparency, we will provide regular updates on our progress against these goals and the initiatives that support them. Drew will also outline how we are thinking about capital allocation going forward. Our top priority remains investing in organic growth and supporting a risk-based capital required, and we will provide more color on how we intend to enhance shareholder value through our capital deployment over the intermediate long term. After you hear from Drew, Brent Layton, Executive Vice President of Markets, Products and International, will provide an overview of our company assets and the many avenues for growth across our business lines. We continue to participate in an active RFP pipeline and are pleased to be on track with our acquisition of Magellan Health. With Magellan Health in our HCE portfolio, we will be a leader in behavioral health, and we will continue to enhance specialty care coordination initiatives. To provide additional context, Sarah London, Executive Vice President of Advanced Technologies; and Dave Thomas, Executive Vice President, Markets, will discuss the initiatives we have in place to drive long-term value creation, including through the advancement of our technology platform and opportunities to drive operational efficiencies. We also believe that Centene is well positioned to benefit from the supportive political landscape. The current administration support of access to health care, including the continued investment in the health insurance marketplace, is highly encouraging. Jon Dinesman, Executive Vice President of Government Relations, will discuss this in more detail as well as the opportunities we see to continue to innovate with our government partners. An example is our recent partnership with the current administration to create public service announcements in support of COVID-19 vaccination efforts across the U.S. As you will see today, Centene is well positioned for future value creation, despite the near-term pressures presented by this ongoing pandemic environment, which remains very choppy. Drew will provide more details around the current trends and the impact on our expectations for the second quarter and full year, but I want to reiterate our view that these trends are transitory, and we are managing through them. We consider these short-term headwinds to be onetime in nature. Overall, our underlying business is strong, and we are taking further actions to position Centene for sustained and long-term success. As we continue to look to the future, we also know that an important driver of our success is the diversity of our workforce. I am more than pleased to share that Centene was recently named the #2 best company for diversity and inclusion by Fortune through its Measure Up rankings. Our commitment to diversity extends throughout the organization, including our Board of Directors. As some of you may know, we refreshed our Board with the addition of 3 new Directors: first, retired 4-star Air Force General, Lori Robinson; secondly, James Dallas, who joins us with more than 30 years of experience with information technology, including his tenure as Chief Information Officer of Medtronic; and then there's William Trubeck, who brings strong financial, audit and compliance expertise, including his experience as Chief Financial Officer of H&R Block and YRC Worldwide. In addition to refreshing our Board of Directors, we are evaluating our governance structure to ensure we are incorporating environmental, social and governance, or ESG, best practices. This includes our intention to move towards annual election of our Directors as well as the appointment of a designated Environmental and Social Responsibility Board Committee, which oversees our ESG initiatives. In closing, I would like to reiterate that we hope you will take away from this today and looking ahead that Centene is committed to sustainable margin expansion, and we have a long-term goal of achieving at least 3.3% adjusted net margin by 2024. In addition, we remain focused on disciplined and balanced capital deployment and aim to have strong cash flow to deploy over the coming years. As always, we will continue to provide you with transparent updates as we work towards our commitments. Centene is a strong company with a remarkable history of growth. As we move into the new phase, we are focused on long-term value creation and looking forward to the long runway ahead. Thank you for joining us today, and with that, I will turn it over to Drew.

Thank you, Michael. It's a pleasure to be in front of investors again now as the CFO of Centene. This is an exciting time for the company. As you will hear from Brent Layton in a few minutes, our growth prospects continue to be strong, and we continue to innovate to best serve our customers and seize opportunities, but you will also hear the growth guy mention 2 critical words: margin expansion. In fact, if you walk the halls of Centene, you would now hear that phrase as part of our everyday vernacular. That's because we have a value creation plan that is not just growth. It's also margin expansion. And it's not just margin expansion, we will accompany that with growth, and we will add some prudent and balanced capital deployment on top of that to round out our value creation plan. Our plan is simple and straightforward. The execution won't be easy, and the final result won't be immediate, but we know how to do it, and we have the market positioning, an incredible set of assets that Michael described, the managed care know-how and discipline to execute. So what is our North star? Where are we headed? And most importantly, how will we get there? As you can see, during a rapid growth phase over the past few years, we've been range-bound in the 2.6% to 2.7% adjusted net income margin zone. This is calculated as adjusted net income divided by premium and service revenue. While metrics like EBITDA, contribution to corporate and pretax margin all serve their purpose, our value creation plan is focused on expanding our adjusted net income margin. Our goal over the next 3 years is to drive that to at least 3.3% adjusted net income margin by 2024. This is approximately 4.4% on an adjusted pretax basis. Based upon our mix of businesses and the levers we plan to pull, we believe this is achievable with focus and discipline. As Michael stated, the entire company will be driving towards this goal and will also be a component of our long-term incentives. We plan on expanding margin while continuing to grow mid-single-digit organic revenue. And with a little bit of M&A, we expect to be in the mid- to high single-digit compound revenue growth rate zone. After all, we are very well positioned in the growth areas of managed care government programs. You guys can do the math. If we execute, this will deliver mid-double-digit compound EPS growth. I don't expect this to be a straight line. In fact, as we will cover in a minute, the short run has some choppiness, and the fruits of our labor will show up more so in 2023 and 2024 than in 2022. But this is doable, and we hope you take this ride with us. The operators who you will hear from in a minute will give you some more color, but let me provide a few of the levers we expect to pull to achieve our value creation plan. In the category of financial discipline, there are a host of opportunities. Bid discipline is one of those. The annual Medicare Advantage and Marketplace bid processes are complex, but can be rooted in some simple, disciplined precepts. We will be balancing growth and margin as we set forth to achieve the aggregate company adjusted net income margin target. Given our positioning in Medicare and Marketplace, both growth and margin can be accomplished over a multiyear time period. But as we make portfolio decisions across the 33 markets served by these products, our decisions will be rooted in the adjusted net income margin goals necessary to achieve the overall company goal. In another example of financial discipline, we plan taking a hard look at our portfolio of companies and capabilities and seeing if there are any that don't meet both the strategic and financial profile necessary to achieve our value creation plan. We plan on doing the same with real estate. While the company has delivered some SG&A leverage in recent years, there's more to come driven by increased financial discipline and our next broad category of operating maturity. Operating maturity will include improved standardization across our markets. Dave Thomas will touch on this in a minute, and this is tied into operating model maturity. After a few large transactions and many smaller ones over the past 5 years, there is an ongoing process to strike the right balance between leveraging our scale and scope, while continuing to deliver locally through our local-based health plans. We will continue to find opportunities to leverage scale in our national and regional presence to improve efficiency and execution. These past acquisitions have come with operating platforms that are slated for consolidation over the next 3-plus years. This is true not just of our claims operating platforms, but also in areas such as pharmacy. Platform consolidation will drive both improved consistency and cost savings. The third broad category spans clinical initiatives and using technology to improve both our HBR and SG&A. There are dozens of clinical initiatives from fundamental managed care principles, such as optimizing nurse to physician review rates and utilization management to leveraging enhanced behavioral health capabilities to finding more effective methods and partners to improve performance in various slices of medical expense like post-acute or oncology. These clinical initiatives are rooted in improving the quality and affordability of health care, as Dave will cover in a minute. In technology and digitization, Sarah's expertise will continue to play a pivotal role in member engagement and ensuring we are deploying our resources most efficiently to bend health care trend. While improving our SG&A rate. These are just a handful of the levers we intend to pull. Let's pivot to another pillar of our value creation plan: capital deployment. Michael mentioned this at the beginning of the Investor Day, our priorities. Suffice to say that our priority is to drive value creation. How will we execute on this? Priority #1 won't surprise you: supporting statutory capital and investments necessary to seize organic growth. Current examples would be Medicaid wins such as North Carolina or our robust Medicare Advantage growth. But on average, that shouldn't consume all of our free cash flow. We are estimating it will consume around 1/3 prospectively after satisfying current obligations. We expect the remaining approximate 2/3 of free cash flow at the parent to be a combination of capital management and M&A. Capital management will initially tilt towards debt management and a quest to achieve investment-grade ratings in the near term, then a pivot to share buyback. We believe it is in the best long-term interest of the company, bondholders and equity holders for Centene to be an investment-grade issuer. We are currently investment grade with S&P, and you may have seen the recent outlook change to positive by Fitch. So in the near term, we will lean a little bit more towards debt management, but in the midterm and long term, we are committed that share buyback will be part of a regular balanced capital deployment strategy no later than 2022. M&A will continue to be a capital deployment lever. Our last 2 large acquisitions, WellCare and Fidelis, have served this company and our shareholders well. While we never rule out anything in the M&A arena, we expect to be more focused on smaller tuck-ins, bolt-ons and critical capability acquisitions over the next couple of years. While we are focused on pulling the levers for the long-term value creation plan, we did want to provide an update on 2021. We are sitting here intra-quarter with 2 months under our belt, and we continue to see what we have previously characterized as choppiness in the Marketplace business. During the quarter, we continued to see pressure on our Marketplace results driven by 3 items. First, COVID inpatient. While we see this falling from Q1 levels, it's still a little higher in April and May than our forecast. We believe this will be transitory given the macro COVID slowdown. Second, non-COVID utilization that we saw in March continues into Q2. We believe this to be pent-up demand largely in the outpatient arena. We think most of this pent-up demand will subside, but some may continue as we look out a few quarters and into the first half of 2022. Importantly, this dynamic was observed before we submitted our Marketplace bids for 2022. Third, we received updated final data for the 2020 risk adjustment efforts, which will result in a $175 million or $0.22 per share headwind in the second quarter relative to our 2021 forecast. This was primarily driven by 2 dynamics related to the unique 2020 COVID-19 environment. First, our risk adjustment yield per chart was down due to the disruption in regular access to physician offices and outpatient services in 2020. And second, CMS recently decided to disallow the diagnosis code for hydroxychloroquine, which was about 1/4 of the $175 million impact. This was also observed before we submitted our Marketplace bids for 2022. The remainder of our business remains strong, including Medicaid, and we still believe the previous full year 2021 adjusted diluted EPS guidance range is achievable given the width of the range, despite the Marketplace items impacting Q2. We do expect 2021 adjusted earnings to exclude the settlement and cost of the pharmacy matter recently disclosed and other items to which we typically adjust on a non-GAAP basis. We will provide a more comprehensive review of 2021 guidance once we close the quarter and report Q2, but we wanted to provide this transparency of where we are at through the middle of the quarter. Speaking of transparency, in addition to providing you with more clarity on where we are headed as we turn the corner into 2022, we plan on disclosing reported HBR by managed care product, Medicaid, commercial and Medicare. As we get past 2021, a year with a number of transitory items, this will help provide you with more transparency into performance by product. And before I hand it to Brent, we wanted to provide you our customary early view of next year's revenue. Based upon what we see at this point, we are looking at about $124 billion of revenue in 2022. But importantly, that excludes Magellan or any new wins between now and the end of 2022. It also excludes Oklahoma. In the category of tailwinds, we have the 2022 annualization of North Carolina as well as continued overall growth in Medicaid leading up to 2022. On the headwind side of the ledger for Medicaid, a return to redeterminations anticipated in early 2022 will result in reduced Medicaid roles. Furthermore, the carve-out of pharmacy in states, such as California and Ohio, will also be a revenue headwind for 2022. Our Medicare growth is expected to be strong in 2022 given our market position and the overall growing Medicare Advantage market. And with the enhanced APTCs, we expect the Marketplace business to continue to grow. 2022 is the year we have to collapse 6 Medicare PDP products into 3 from a past acquisition, so we naturally expect some attrition in that business. As you can see overall, we expect continued growth even as we sit here over 6 months from the beginning of 2022. We are committed to long-term sustainable value creation. We are very well positioned in the growth part of managed care government programs, and we are committed to a more balanced deployment of capital over the next few years. But our laser focus on margin expansion will be the largest driver of the Centene value creation plan as we look out to 2024. As you will hear today, we are already pulling levers to achieve that goal, and we'll aggressively do so over the next 3 years. This is going to be fun. We welcome you on the bus. Let me now turn it over to Brent.

Thank you, Drew, and good morning. I'm excited to be here mask-free. We're certainly at a different point in the pandemic, and I hope to see you in person this December. Centene is proud to continue to enhance and grow our leadership position in Medicaid Managed Care. We are the largest Medicaid Managed Care organization, with leadership products like foster care and long-term services and supports; the #1 Marketplace carrier, and now that WellCare is here, we are showing great growth year-over-year in our Medicare Advantage product. Today, I would like to focus on our 3 main lines of business and tell you a bit about a large RFP that's been released. First, our health insurance marketplace product, Ambetter. We have shown membership growth in this product since its beginning in 2014, but we lost 270,000 members last January to maintain pricing discipline and margin. But I'm pleased to say that since the beginning of the year, we've had nearly 0.5 million individuals choose us, many of whom were previously uninsured. Much of this growth has been driven by the special enrollment period that began in mid-February and was further fueled by the American Rescue Act and the enhanced advance premium tax credits for 2021 and 2022 that began in April. Jon Dinesman will speak more about this shortly. These enhanced tax credits have encouraged over 1 million Americans to enroll in the Marketplace products since February 15, and Ambetter's share of this enrollment is outperforming our market share. Today, we are in 22 states and more than 1,200 counties. And when we meet later this year, we expect that our new footprint will show geographic expansion. While we continue to expand our geography, we also continue to offer strong core provider networks and great customer service to our members. But during our conversation in December, we will show you new product offerings as well, created to continue to compete, grow and increase profitability. Nobody knows Marketplace members better than Ambetter, and while the marketing competition continues to grow, nobody will be a stronger competitor than Ambetter. 2 years ago, the story of Medicare Advantage was not a great one for Centene. As investors, you ask, "Why do we make the investments that we do?" I'm here to say the investment in WellCare has absolutely paid off of Medicare Advantage. What a great deployment of capital. Here, you'll see that we are in 33 states in over 1,200 counties, and 2022 will bring a larger footprint. I'm proud to say, since the beginning of the year, we have grown our membership 23%. And today, we have an excess of 1 million Medicare Advantage enrollees. The WellCare acquisition brought us strength in Medicare Advantage, and with our acquisition of Health Net, we've entered a new line of business: military health care. Health Net Federal Services has facilitated care for TRICARE beneficiaries for over 30 years, and we're currently their plan administrator for TRICARE West. Since the beginning of the year, we have administered an innovative care management and quality pilot program in Colorado. This pilot is a fully insured program for discrete population of TRICARE beneficiaries and is similar in scope to the Defense Health Agency's T-5 RFP released recently for implementation in 2024. This RFP broadens DHA's focus beyond network management and plan administration to value-based contracting, quality care and outcomes, whole person health and member and provider satisfaction. We have been in Medicaid Managed Care since 1984, and you've known Centene as a growth company. And you just heard Drew Asher discuss our laser-sharp focus on margins, but I'm also glad to say we're still growing. 2021 continues to be a busy year. And in just a few weeks, we'll be entering North Carolina with our health plan, WellCare of North Carolina and supporting our partner, the North Carolina Medical Society and its provider-led organization, Carolina Complete Health. Early this year, we are fortunate enough to win a procurement in Oklahoma to help the state transition to managed care as well as a sole-source contract to serve the foster care population. Recently, the Oklahoma Supreme Court ruled that the Oklahoma Health Care Authority, OHCA, did not have the authority to issue or award contracts for the Medicaid Managed Care program. We are continuing our communication with officials in Oklahoma and have high hopes they'll continue their commitment to Medicaid Managed Care in the near future. Shortly, you're going to hear from Dave Thomas, who manages our health plans. One thing I like about working with Dave is that he and I both have a long history in managed care. And while we talk about our great investments and progress and with technology, there are still basics that have to be focused on to be successful and increase margins. We became a leader in the industry by understanding our customer. Our customers in state and federal governments and, in some cases, counties. Second, it's the providers, doctors, hospitals, behavioral health providers and on and on that we partner with to ensure our members receive the very best care. And most of all, it's the member. Everything we do at Centene is built around our members, and we do this by understanding all of our customers. While the pandemic brought countless challenges and changes, it provided time to talk with our providers and understand how we can leverage our technology, approaches with care management and ultimately figure out how to work together to provide better quality for our members. We want to make sure that our members work with the highest-quality providers. We are focused on using managed care principles and our technology to ensure that data and information is flowing both ways between health plans and our providers to deliver quality outcomes and ensure our members are getting all the care they should in proper settings. We believe this focus on the basics of managed care while leveraging technology will lead to margin expansion. Let me turn it over to Sarah London and Dave Thomas, who will walk through the specifics on how we can continue to bring value across our products.

Thank you, Brent, and good morning. It's good to be with you again. As you've heard from Michael, Drew and Brent, Centene today is a diversified enterprise with incredible scale. The solid foundation of our organization provides us with avenues for continued growth as well as enhanced value creation through a greater focus on margin expansion. There are multiple levers we can pull across our organization to drive our margin strategy, and our foundational technology capabilities sit at the core of many of those. The past 5 years can be characterized as our investment phase as we built a technology foundation robust enough to support a company of our size and scale and agile enough to evolve at the pace that we can innovate. Now we are focused on driving a cohesive long-term transformation built on a digital operating model, which aims to facilitate seamless interaction internally across our teams as well as externally with our partners across the ecosystem. Our real-time information-based approach to technology has multiple critical advantages and enables us to deploy solutions quickly and remain agile to changing business needs, maintain a diverse ecosystem of partners who can interoperate and help us innovate, integrate acquired partners faster and consolidate or eliminate systems, while minimizing operational abrasion and avoid being tied to legacy technology decisions. Ultimately, the foundation we have built allows us to lead as technology transforms this industry. But make no mistake. Centene's digital agenda is not technology for technology's sake. Ultimately, our digital agenda and strategies serve to support one goal: to deliver value, and we aim to do that in 3 ways: first, driving down administrative costs; second, improving member and provider satisfaction; and third, enabling efficient growth. Today, we wanted to provide some specific examples of our value creation in action. There are multiple initiatives in place and opportunities to drive efficiency and our margin. Dave Thomas will highlight areas that he and his team are driving, and I will touch on how Centene's technology platform is delivering value. Starting with organizational efficiencies, Centene's operations group has significantly expanded their use of robotics and workflow automation technology over the past year. We are currently using robotic process automation to automate more than 16 million claims annually, which will result in more than $12 million in annual savings. Within our clinical teams, we've invested in expanding the digital suite that supports care management in our core programs and within the LTSS populations. This will bring more than $10 million in G&A efficiencies over the next 2 years as we roll the systems out across our health plans. From a member experience perspective, our core product teams have focused on designing and deploying enhanced capabilities that will streamline and digitize the customer experience, increase satisfaction and deliver annual run rate administrative efficiencies. We've also made improvements in our member and provider self-service portals, enabling auto authentication and additional self-service tools to replace call volumes. Together, these enhancements have eliminated more than 12 million minutes of call time into our call centers and resulted in $7 million in G&A savings. To give you a sense of the impact this has had on the member experience, within the Ambetter Marketplace product in particular, we have seen the number of members who elect to log into the member website outpace those who pick up the phone to call by 40% for the last 7 consecutive quarters. What's more, members who use online self-service tools are now 2x less likely to call the call center at all. Meeting our members where they are and making it easier for them to get the information and care they need is critical to delivering real value and building brand loyalty. Those are just some of the examples of how we are going to be adding value as well as driving efficiencies across the organization from a technology perspective, as we all work toward the 3.3% adjusted net income margin target by 2024. But of course, we're not stopping there. To give you a sense of what's to come, I wanted to share an early project coming out of our advanced technology group. At the beginning of Q2, we set our sights on the automation of prior authorization, a required activity that can cause frustration for providers and members alike. Centene performs over 3.7 million outpatient prior authorization reviews over a 12-month period, with industry standard review time sitting at or above 48 hours. Leveraging Centene's data architecture and Apixio's data science capabilities, the advanced technology team designed a digital worker in just 5 weeks that could largely automate prior authorization for thousands of outpatient procedures. The digital coworker operates with a machine learning algorithm and can deliver a clinically validated authorization result in less than 1 second. Refining and deploying this technology has the potential to eliminate the time needed to process more than 75% of our prior authorizations, resulting in tens of millions of dollars in savings. Our vision is that providers can obtain instant notification of approvals when warranted without the typical burden or waiting period. No questionnaires, no request for medical charts. With this kind of careful clinically validated automation, we can drive higher margins and better service delivery for our providers and members. In summary, we have a clear strategy to improve the member and provider experience, deliver growth and drive savings across the board. We're excited about our path ahead, and our teams are energized around the opportunities we have to create value. Now let me turn it over to Dave Thomas, who will provide additional details into some of the operational and clinical initiatives we have to drive margins. Thank you.

Thanks, Sarah. The markets division is focused on achieving margin improvement by reducing both G&A and medical expense. To do this, we are focused on driving process improvements and implementing the types of technology enhancements Sarah just described. Specifically, we are leveraging our size and scale to implement initiatives to improve operational efficiency and medical management effectiveness. We have dozens of these initiatives underway. I want to use my time to drill down on just a few. With the support of the technology enhancements Sarah mentioned, we have increased our care manager-to-member ratio. As a result, we are now able to put a higher percentage of our member population in care management without a corresponding increase in staffing. We have also become more consistent in terms of clinical decision-making, which helps to ensure that our members receive the right care in the right setting. In terms of our operational processes, we have implemented load balancing within our regions, so that our markets can handle overflow work for one another. This allows for more efficient staffing levels. Technology enhancements are also contributing to greater staff productivity and operational efficiency in several areas, including our call centers as Sarah has mentioned. This has allowed the markets division to minimize headcount, while maintaining service levels. Other examples of the impact of technology include our TruCare cloud application, which allows for much more efficient management of our member care plans. We have numerous clinical initiatives underway that are improving health outcomes and lowering costs. I want to mention just a couple. We are using our analytics engine, Interpreta, to identify members with gaps in care. Our clinical staff then uses this data to proactively reach out to members to engage them in care. This is positively impacting both quality results and overall health outcomes. We are also proactively working to increase membership with our highest quality, most efficient providers. Again, we expect these efforts to improve quality, while reducing medical expense. We are also working with strategic partners, both internal and external, to drive margin improvement. For example, Sarah mentioned Apixio and the ability to utilize its data science capabilities as we continue to progress and build innovative solutions. Currently, we are using Apixio to identify risk adjustment-related chart data on an automated basis. This allows us to review charts more completely and much quicker than the traditional approach. We are also expanding our use of specialized vendors to better manage members with specific high-cost medical conditions, such as cardiac disease and cancer. And we are using phone- and web-enabled technology to engage members in care. This has been particularly helpful in managing members with significant mental health issues. Finally, we view the move towards value-based contracting as essential to our margin improvement efforts. Currently, more than 70% of our medical spend runs through value-based arrangements. More than 20% of this spend runs through arrangements that incorporate both upside and downside risk. Our goal over the next few years is to drive an even larger percentage of our medical spend through arrangements with a higher degree of risk sharing. This will better align plan and provider incentives, which will improve quality and lower medical expense. Overall, we're excited about the initiatives we are embarking on to drive efficiencies and margin improvements across our operations, which will deliver better service to our members as we continue to provide the highest quality care to the most vulnerable populations. Next, you will hear from my colleague Jon Dinesman, who will offer some color around the dynamics we are seeing in Washington and why we continue to see opportunity under the current policy landscape.

Thank you, Dave. When we last met in December, we were reflecting on a Trump administration that ran on a repeal and replace agenda. And when the political dynamics no longer made that a viable option, efforts centered on ensuring that Medicaid and the Marketplace would not grow via the Affordable Care Act. At the same time, the U.S. Senate makeup was an unknown due to the 2 open seats in Georgia. The Biden administration has a very different approach to health care. President Biden is focused on leveraging Medicaid and the Marketplace to expand coverage and affordability. Elections have consequences, and the 2020 election was quite consequential as it pertains to the ACA and a renewed focus on providing comprehensive and affordable coverage to all Americans. With the Biden administration and Democratic-controlled Congress, Washington's response to the COVID pandemic and focus on ensuring every American has access to health insurance has centered around strengthening the ACA and leveraging both the Medicaid and Marketplace chassis to provide that coverage. They accomplished this with the enhanced premium tax credits through 2022, which has enabled those below 150% of the federal poverty level to have access to $0 plans in the Marketplace and provide APTCs for those above 400% of the federal poverty level, so they pay no more than 8.5% of income. Additionally, those receiving unemployment benefits will have access to $0 plans in the Marketplace through 2021. The enhanced APTCs have in effect eliminated price sensitivity, especially for lower-income individuals and have broadened the pool of potential members above 400% of the federal poverty level that, for the first time, can receive premium tax credits to make Marketplace coverage affordable. These reforms, when combined with a 6-month Marketplace special enrollment period, facilitated Centene's enrollment of nearly 500,000 new members since the start of the year. On the Medicaid front, HHS sent a notice stating that the 6.2% enhanced FMAP and the maintenance of effort will likely remain in place through the remainder of the year. HHS will also provide a 60-day notification to the states prior to the public health emergency being eliminated. At the same time, the American Rescue Plan allows states to extend Medicaid and CHIP eligibility to women for 12 months postpartum and a 10% FMAP increase for 1 year for states to enhance home- and community-based services. As states slowly recover from the height of the COVID pandemic, we are pleased to see so many states going into the next budget cycle with a surplus. State budgets are poised to improve even more with an additional $350 billion in federal funding to states and local governments for COVID relief and recovery efforts. From this pool of additional federal funding, any of these dollars not spent by a state would be redistributed to the other states. We are hopeful that this influx of federal dollars helps relieve the states of any Medicaid budget pressures and allow states to more swiftly transition back to how Medicaid Managed Care programs were run and financed pre-COVID. As we move into the second half of 2021, we do see the opportunity for a reconciliation bill in September or October that includes social infrastructure improvements. We were pleased to see both the Biden administration and House leadership signal support for making the enhanced APTCs permanent and a potential $400 billion investment in Medicaid home- and community-based services and infrastructure. As the leader in MLTSS, we see this as a major opportunity to increase access to these services, greatly reducing state waiting lists and transitioning more individuals into the community. In addition, we will continue to work with members of Congress from both parties on coverage options for those Americans in non-expansion states that are below 100% of the federal poverty level and are not eligible for either Medicaid or the enhanced APTCs. With a slim Democratic majority in the House and a 50-50 Senate, we do not anticipate any major health reforms prior to the 2022 election. Prior to the 2020 election, some members advocated for lowering the Medicare age to 60 for a public option. Medicare expansion could have a mixed impact on premiums. And with the reforms that were made in the American Rescue Plan and CARES Act, the enhanced APTCs have made the Marketplace more affordable for many individuals aged 60 to 65 than what could be accomplished by lowering the Medicare age when you factor in premiums for Part B and D coverage and gap insurance. Proponents of a public option highlight the need for competition, which may have been true in 2010. But thanks to the strengthening of the ACA Marketplace, that is no longer the case. Healthcare.gov. enrollees with access to 2 or more issuers increased from 71% to 96% in 2021, and more than 3/4 of healthcare.gov enrollees have access to at least 3 issuers. In addition, on average, Marketplace rates have dropped year-over-year since 2019. In closing, the health care reforms that Congress and both the Trump and Biden administrations have passed over the last 12 months in a bipartisan fashion have stabilized the ACA and provided more Americans access to comprehensive and affordable health care insurance via Medicaid and the Marketplace than ever before. As the leader in both Medicaid and Marketplace, we believe we are well positioned for continued growth in these 2 areas.

Before we conclude and move to the question-and-answer period, I would like to reiterate what we hope you will take away from today. First, our absolute priority moving forward is margin expansion to 4% pretax and no less than 3.3% adjusted net income margin on a sustainable basis. Secondly, margin expansion. I just -- but we do want to underline and highlight our organizational focus on unlocking the underlying values of this organization. Three, we are focusing on disciplined and balanced capital deployment. Four, we remain committed to transparency. And as Drew mentioned, we do plan to share HBR by product line no later than the first quarter of 2022. And finally, fifth, looking ahead, we aim to have strong cash flow to deploy, including buyback of stock in 2022. Looking ahead, with all the strength of our business and the talent of our team, Centene has a strong foundation for our sustainable long-term success. I am confident in the next phase of growth for Centene and believe we have laid out the path today to unlocking greater value for our shareholders. Thank you. Let's now turn to Q&A.

Hello, everyone. As Michael noted in his video, we will now move to Q&A. [Operator Instructions] Our first question this morning comes from Lance Wilkes at Bernstein. Can you describe 2 aspects of the margin expansion plans? First, how much variability is there in managed care margins by geography that could lead to some profitability pullback -- or some profitable pullback, rather, by exiting some markets? So if we were to make some geographic changes, is that an opportunity for margin expansion? And this is a 2-parter, so second part. How much synergy and consolidation opportunity remains from transactions like WellCare and Fidelis?

I'll take one and take that one. Thanks, Lance, for the question. The good news is when we modeled, we modeled multiple scenarios to get to the 3.3% adjusted net income margin over the course of the next few years. And yes, there's still plenty of synergy from the WellCare transaction that will carry into the next couple of years and platform consolidation also, not just in the operating platforms from past acquisitions, but also from pharmacy. We'll be taking identifiable actions throughout the rest of 2021 and into 2022 that will build momentum as we get into 2023 and 2024. And if you do the math, obviously, it's a 70 basis point plus or minus expansion in net income margin with major contributions from both G&A as well as medical cost initiatives. And so as to not steal any thunder from Dave Thomas, how about we hit on a couple of those medical cost initiatives?

Yes. Drew, thank you. So yes, we brought together some large organizations over the last several years. And as you would expect, there has been some -- there were some significant operating model variation between those different organizations, and we've made a lot of progress harmonizing all of that over the last couple of years. I would say there's still significant opportunity in terms of improving the standardization across the margins -- I'm sorry, across the markets. Brent alluded to some of that before when he said getting back to basics. Again, a couple of examples of that would be on the clinical decision-making side. Very simple things like how much consistency do we have within markets and between markets in terms of what's referred from nurses to physicians. We still have more variation than we should have, both within markets and between markets. And so we've got a major, major focus on that, trying to eliminate that variation and get more consistency on our clinical decision-making across the entire division. So there's a lot of opportunity still there. I would say there's also opportunity in terms of improving staff productivity, and one good example of that is load balancing. So we have the advantage of having 30-some-odd plans across the country, and those plans can load balance with each other. In other words, they can handle overflow of work for each other, and that's particularly in areas like medical management and call center. And what that allows us to do is it prevents us from having to staff to peak volume levels, so it allows us to staff more efficiently. So that's just a couple of examples of where the opportunities are from a margin expansion perspective, both on the medical expense side and also on the G&A side. There's a lot more examples than that, and we're focused on driving all of them.

Thanks, both. Our next question comes from Scott Fidel at Stephens, and it relates to 2021. Given the updates Drew provided on 2Q headwinds, can you give us an updated view on expected adjusted EPS percentage weights between first half and second half? Also are you now more comfortable towards the low, midpoint or high end of the 2021 adjusted EPS guidance range?

Thanks, Scott, for the question. You are right to read into my comments on the second quarter, and especially knowing that we've got a $0.22 item that I described with risk adjustment from 2020. So as we model out the first half of the year, and this is based on what we know today, obviously, we still have June to come. We have risk adjustment updates from the actuarial firm Wakely that we'll be getting at the end of this month. So there's still some unknowns in the quarter. But based on what we know today, we'd be closer to 55-45 than 60-40.

Great. Thanks for that, Drew. Our next question, this will be one for Brent, I believe, and this relates to 2022. This question comes from Justin Lake at Wolfe Research. What gives the company confidence in exchange growth in 2022 given the need to price up for 2021 costs and continued competition? Is there any way to put numbers around the market expansion?

Thanks for the question. First of all, we're actually growing during the special enrollment period today, so we're actually growing, and we're seeing things. We -- in fact, we've seen 40,000 former Ambetter members come back to Ambetter, and that's because of customer service, and that's also because of strong core provider networks. And we'll continue to offer strong core provider networks. At the same time, we have developed a very strong approach in distribution. And with this, today, we are in 33 states and 1,200 counties. And when we meet in December, we're going to show an expansion, more states and more counties. But also in December, we're going to show new product offerings. So we absolutely have confidence that we can continue to grow, hit our margins and compete.

Thanks for that, Brent. Our next question comes from A.J. Rice at Credit Suisse, and this is related to risk adjustment. The company is saying today that the Marketplace 2020 risk adjustment to be recorded in Q2 will be a negative $0.22. Last December, the guidance offered the expectation was that the 2020 risk adjustment for Q2 would be breakeven this year. Despite this, CNC is maintaining its guidance range for the year of $5.05 to $5.35. Is the right way to think about all this that CNC is still confident it can be within the range, despite the less favorable risk adjustment, albeit perhaps at the lower half of this range?

Thank you. Yes, based on what we know today, we're able to reaffirm the guidance range. Obviously, in my comments, I mentioned that the width of the range helps that when we're sitting here intra-quarter. And obviously, we'll know a lot more when we close the quarter and give you sort of a full scale up and down the P&L updates on guidance. But yes, based upon what we know today, despite the pressure in Q2 from Marketplace for those 3 items that I outlined, we still have a path to get to the guidance range of $5.05 to $5.35.

Great. This next question comes from Matt Borsch at BMO and relates to 2022. Could you talk about the revenue outlook for 2022, including the impact of Magellan and other factors that could push to the upside as well as quantifying the expected impact from Medicaid redeterminations?

Sure. And obviously, the $124 billion is, as we sit here today, more than 6 months before the commencement of 2022, so it's the traditional early look. And obviously, there are opportunities to push beyond the $124 billion. You mentioned one, Magellan. We don't add that into any of our guidance elements until a transaction closes as our custom. And then with redeterminations, we have modeled -- as we're sitting here forecasting out quite a bit ahead, we have modeled about $2.7 billion of redetermined nation pressure net into that $124 billion of revenue.

Great. Thank you. We're going to stick to 2022. This company -- this question comes from Kevin Fischbeck of Bank of America. The company outlined mid-single-digit organic revenue growth with deals to get to mid-high single-digit growth, but you also mentioned redetermination starting in 2022, implying it will be a drag in 2023 when annualized and the potential to divest noncore assets. Will you be able to grow like this even with these headwinds? Or is the outlook separate from that?

I'll ask Brent to follow up to my intro to the answer, but that's a multiyear compound growth rate target. Yes, in certain years, there will be slight headwinds. But given the opportunities we see ahead that I'll have Brent cover, we do see a path to achieve that.

We spoke a moment ago about Ambetter, so we still have high hopes for growth there, number one. Number two, Medicare Advantage. We are growing quite well, and we continue to believe that we can continue that in the years to come. The RFP pipeline for Medicaid Managed Care is reopening. Yes, there's some reprocurements, but there's also new opportunities that we're looking at such as the state of Tennessee. And I even addressed what we're looking at with TRICARE. So we see many organic opportunities and many different ways to grow and have good confidence about our future.

If I could add to this as well. It's important to look at the political dynamics in play. As I mentioned in my comments earlier, it's a very different dynamic with the Biden administration and the Congressional makeup. This Congress and President are focused on utilizing Medicaid and Marketplace as the chassis to grow and make sure everybody has access to affordable coverage. It's been an incredible opportunity for us in 2021, and we expect that to continue, especially going into an election year where they will want to make sure that, that does not slide back.

Thanks, everyone. Our next question is a follow-up from A.J. Rice at Credit Suisse, and this relates to the pharmacy settlement. With the pharmacy-related settlement, is there any update on the company's status with respect to the Ohio Medicaid recently awarded reprocurement contract? Brent, do you want to take that one?

Yes. In that recent RFP, the awards that were made in March, we were deferred. We finished second in that RFP, so we're waiting to hear from ODM about next steps.

Great. Thanks, Brent. Our next question is sort of an ESG-related question related to the G, and this comes from Justin Lake at Wolfe. Michael indicated the Board will move to annual election. When do you expect that to occur?

I'll take that, Jen. We will have an election next April, where the shareholders will be asked to approve it. This past election, they indicated they want it on the ballot, and it will be subsequent to that, we will move to annual elections.

Great. Thank you for that, Michael. The next question comes from Dave Windley at Jefferies. And we've touched on redeterminations, but I just want to be sure that we hit this one specifically. Last expectation for deferred redeterminations was August, I believe. Does the change in timing to early 2022 change your guidance for 2021 revenue? And by how much?

Yes. We plan on updating once again up and down the P&L, including revenue, all of the elements that will result in sort of overall guidance to be updated once we close June and report Q2.

Perfect. Thank you. The next one comes from Stephen Baxter at Wells Fargo, and this is related to the Marketplace business. For the Marketplace business, it sounds like you were saying you caught these issues before bids were submitted. How should we be thinking about next year in the context of your historical 5% to 10% margin target? And it sounds like you will have to take a little more price than you otherwise were planning. How do you think that will flow through to your market share?

Well, the good news is we continue to grow, as Brent said, throughout this year. So we'll be entering '22 with some strength in volume compared to the cutover in January this year. And so, yes, we were pleased to observe a number of these elements before we finalize the bids across all of our Marketplace markets. Obviously, we expect COVID to largely maybe even completely dissipate as we think about 2022. But the pent-up demand was good to see, so we can make a judgment on what we should carry into the bids for 2022. As I said in my remarks, and Brent can follow on, given our positioning and our strength in Ambetter, we believe we can both grow and expand margin.

Ambetter has been around since 2014, and we've been able to continue to grow and been able to have strong core provider networks. We've really improved our distributions. We feel very good about both of these. And as I said a moment ago, when we meet in December, we're going to show you some new product offerings. And so with those product offerings, I think you're going to see that we can absolutely compete.

And if I could add to that, not only have we shown our ability to compete and do well with the additional competition, but with the strengthening of the ACA, the denominator continues to increase, which we also see as a huge positive.

Thanks, everyone. We have a few on margin, so we'll hit these straight away. This next question comes from Josh Raskin at Nephron. Can you give more color on the cadence of margin improvement? It sounds like 2022 may be challenged and unlikely to show any improvement. So what changes in 2023 and 2024 to accelerate that margin improvement?

Thanks, Josh. We certainly have more to play out in 2021 before we get to the point of pinpointing what we can achieve and what levers we're pulling today, and that we continue to pull into '22, that will actually bear fruit during the calendar year 2022. But you're right to point out that we think the momentum will start building. And then as we enter 2023 and 2024, we'll be getting a larger proportion of the fruits of our labor.

Thanks, Drew. This next question comes from Kevin Fischbeck of Bank of America. Does your margin target assumption have any business mix shift assumed over the next few years?

Yes. Like I said, we've modeled it a number of different ways. And obviously, certain of our products, we expect to have higher growth rates than others. And so the modeling brings us to that 3.3% net, and there's a number of different ways to get there. So yes, there is some differentiation. Obviously, Medicare Advantage having grown over 20% this year, we do expect that growth rate to be above, for instance, Medicaid as we look forward multiple years. And let me follow up on one of the questions that you're sort of asking that was asked prior. As we think about the margin profile of our businesses, and I know historically, we've said 5% to 10% pretax in Marketplace, we're zeroing in on 5% to 7.5% pretax Marketplace as a component to get to that net 3.3% adjusted net income target.

Perfect. We're sticking with margin expansion here. This question comes from Ralph Giacobbe at Citi. What's hindered margin expansion up to this point? And what's the visibility around margin improvement? How much is simply cost reduction versus the need to drive down medical costs? And how do we consider -- well, we just hit that mix implication, so we'll stick to what we have there. Cost reduction versus driving down medical costs. And why is now different?

This company has had an unbelievable and impressive growth run with some major strategic acquisitions. And so as we sit here today, we're now at the size and scale where we can get the value out of those past acquisitions and scale it across our entire national and now regional footprint. So we're really excited about the opportunity going ahead to leverage what we've done, and maybe have Sarah hit on a couple of the technology-related opportunities that have manifested in the last year or so.

Yes. And I think specifically to the question of whether it's a question of clinical initiatives and medical cost management versus pure cost reduction, we see it as a mix from a technology perspective. So in the near term, we're very focused on supporting value-based initiatives and the clinical programs that Dave talked about. Medium term, we think about taking out platform expense through consolidation and capitalizing on the size and scale that you talked about, and then longer term moving into a digital disposition and really driving automation as part of the long-term strategy. So the example I gave about the auto authorization project, I think, is a great example of that, and we will give you more details on all of that when we're together in December.

If I can add one thing. The pandemic has actually given us a chance to go back and to refocus and deploy technology, as Sarah is saying. So as we look at that and as we work with our partner providers, we've been able to deploy and focus on value-based contract and very specifically our proprietary approach model one. And this is helping us really put out a partnership in a way to work with providers in very unique ways, using technology, using different approaches on medical management and then ultimately aligning incentives directly. So we feel very strongly about it.

Thanks, everyone. This next question is around growth, and it comes from Ralph Giacobbe at Citi. You talked about mid-double-digit compound growth. Is that over the current EPS baseline this year to 2024? And does it include capital deployment and specifically share repurchase?

Yes and yes. So certainly, the mid-double-digit compound annual adjusted EPS growth rate based on the math that we provided, we expect that over the next few years based upon our current -- jumping off of our current guidance range. And then what was the follow-up question?

One sec.

Well, share buyback, I just remember it. Will share buyback be part of it? Yes, share buyback would be one of the levers. Debt repayment in the more near term would also be a lever to lower interest expense, and capital deployment on bolt-on tuck-in M&A could also be a lever to achieve that. The result of the 3.3% target as well as our revenue growth goals to achieve that mid-double-digit compound EPS growth rate looking out 3 years from now.

Saying things I'm doing okay and remembering them is like a whole other thing, so I'm glad that you have that one. These next questions are around pharmacy. One -- this question comes from A.J. Rice at Credit Suisse. Let's make sure we get him his credit. One area that there is often thought to be potential for savings is the pharmacy benefit arena. The company's business lines use different PBMs, for example, such as CVS, RxAdvance. Can you comment on potential opportunities in this area?

Yes. I'm happy to take that. And I think as we all know, Drew has spent a lot of time in the last year looking at the platform strategy overall. Our first priority is to fulfill the commitments that we've made to further simplify the delivery of pharmacy services to our state partners. But relative to the go-forward platform strategy, I think you nailed it. Our intention is to consolidate on a single external PBM platform, and that way, be able to leverage our size and scale for purchasing power and to drive better economics for our plans.

Thanks, Sarah. This next one comes from Ricky Goldwasser at Morgan Stanley. On the pharmacy carve-outs, you highlight California and Ohio as headwinds in 2022. Are there any other states where you see risk over time for similar types of carve-outs? And if so, what would be the impact to growth?

It's tough to predict what states will do in the long run, but we really do believe the comprehensive coordinated care of treating the whole member is the best solution for states. And we will continue to advocate for that, meaning the carve-in or the inclusion of pharmacy in the comprehensive Medicaid program. And so, yes, from time to time, the pendulum will swing back and forth. We've seen it swing out then back in, and so we'll deal with that as they come at us.

Perfect. And this is our last question and it relates to margin expansion, and it comes from Stephen Baxter at Wells Fargo. We've hit this in some ways, but I think the second part is fairly new. So bear with me, I'll read through the full question. On the margin improvement, can you talk about why the progress would be more weighted to 2023 and 2024? Is the incremental margin on lost redetermination revenue a factor here or Is about the lead time required for the initiatives you are putting into place? So I think the redeterminations piece is new.

Yes, yes and yes. I mean, there are multiple -- dozens and dozens of elements that go into the multiple scenarios leading us to that 3.3% net income adjusted target -- margin target. And so the lead time is a good observation because there's complexity often with clinical initiatives. We may implement a partner to help us manage a slice of medical expense as Dave Thomas outlined or Sarah's technology investments need some time to be implemented, and then there's a buildup and a ramp-up of the benefit. Same with synergies from past transactions and platform consolidation. So you're right. It's a large schematic where there's a building momentum as we sort of get into '22 and out of '22 and then go into '23 and '24. So thank you for all the margin expansion questions because we're excited about it.

Well, we want to thank everyone for their time this morning and their attention, and thanks to the folks from Centene here for being part of our event. For the folks out in TV Land, you know where to find us. If you have any follow-up questions, please feel free to reach out. And if there were any questions that weren't addressed that were sort of very similar to other questions asked, we'll be sure to follow up with you individually.