Centene Corporation (CNC) Earnings Call Transcript & Summary

Hi, I'm A.J. Rice, the health care services analyst at Credit Suisse. And thanks, everyone, for participating. Next up, we have Centene Corporation. We're very happy to have, representing the company today, Sarah London, Vice Chairman; Brent Layton, President and Chief Operating Officer; and Drew Asher, Chief Financial Officer. As an introductory thing, I will mention that if you want to ask a question to the company, I can ask it on your behalf, if you will e-mail me at [email protected]. In the meantime, we'll jump in here. I think Sarah is going to make some opening comments, and then we'll fire away a few questions. Thank you guys for participating once again.

Terrific. Thanks, A.J. I really appreciate you having us. Thanks to you and the whole Credit Suisse team. So we, at Centene, we're coming off solid Q3 earnings results, which I think really demonstrated the power of our underlying business, especially to withstand unprecedented environment and dynamics around COVID as an example. But I also think it proves the value of the focus that Centene has had over the last 5 years on reaching size and scale in this business. And you've heard Michael say this before, but having size and scale in health care is incredibly important in terms of providing degrees of freedom and portfolio flexibility to navigate, again, unprecedented times, but also as we think about the strategy for the future. We are now providing high-quality, low-cost and local health care services to 26.5 million Americans. That makes us the largest managed Medicaid organization in the country. We are #1 in marketplace, and one of the fastest-growing participants in Medicare. And we have Brent here who can speak to the great progress that we've made in each of those business lines. But as we came into 2021, our focus as an organization really started to shift, from building the size and scale, to starting to leverage that size and scale. And you heard from Drew at Investor Day in June that we have established a value creation plan, and that is our #1 focus going forward. So we have 3 major pillars of that plan. One is SG&A savings. The second is medical management opportunity, and the third is strategic capital deployment. So I know we will, I'm sure, touch on a number of topics in each one of those buckets today. But the progress that we've made since announcing that plan in June is, first and foremost, to put a structure in place across the organization to manage that as an enterprise program, because there will be a lot of change management, portfolio review, a number of moving parts to get that going. And while we will see the more material P&L impact of that work in '23 and '24, as Drew has said, we have milestones that we are looking to put on the points on the board in 2022 and in fact, before that. So I know we'll probably talk a little bit today about things like the USMM decision, which I think is a great example of a number of the different pillars of value creation coming to play into a single decision. And we've talked before about pharmacy being another example of that. So we've started to make real progress against a number of opportunities. We think that there is some significant low-hanging fruit within that plan. And then there are initiatives that are going to take a couple of years to progress, but I think we're really well positioned to run at that. So looking forward to answering questions on all of that today, but also we'll plan to provide much more fulsome updates on quantifying the buckets of the value creation plan and getting more deeply into some of those operating use cases a month from today at our investor conference. With that, I will turn it back to you, A.J., for questions.

That's a great overview in a nut. And I do want to focus on all those fundamental questions. I sort of feel like I should at least provide an open forum for whatever you want to say about the news last week that there was an activist that took up $900 million stake in the company asking Centene to consider what it is terming as a Board refresh. They've identified a couple of individuals they were putting forth. Any thoughts, reactions or comments you'd like to make with respect to that? I know there's probably not much you can say, but at least give you a forum to do that if you want to.

Yes. No, totally fair, and appreciate it. I think obviously, our focus today is going to be on questions around the core business. But I will say that we believe that it is incredibly important to engage with all shareholders, and so we see this as no different. The refresh of the Board is something that we have been working on. We added 4 new directors in the last 2 years, 3 of them independent. And we're actively underway in additional Board refresh discussions. So I think our biggest focus as an organization is on the value creation plan, and that doesn't change in light of any of these conversations.

Okay. Great. I think on the Q3 call, the company set the expectations, or probably even going back to the summer for modest EPS growth in '22. And it sounded like the clarification was that, that's sort of in the 3% to 5% range on a good versus this year. First of all, we'll get Drew here. I'll just confirm, is that against the jumping off point of the midpoint of guidance of 5 10, which would be your current range? Or is there another -- you need to make adjustments of that when you think about the 3% to 5%?

I think jumping off the 5 05 to 5 15. And you're right, pick a midpoint, there's a logical jumping off point for that modest EPS growth going into next year. Before then, we accelerate it into '23 and '24.

Right. And when you guys think about that, we always ask you about headwinds and tailwinds, but around those headwinds and tailwinds, there's variability. Some headwinds are really quantifiable today, and you know them. But I'm interested in when you think about putting that together, what are the unknowns for you? I'm sure COVID would be right at the top of the list, but are there inputs or metrics that have quite a bit of variability on them in your mind? Or are most of the puts and takes pretty firmly established at this point?

No, there's some variability. You mentioned COVID, obviously and future strains. And we're in the job -- we're in the business of making forward estimates on trend. And estimates, not just on COVID, but I've talked before about the perpetuation of pent-up demand, the marketplace product, and we had to put estimates in the bids for 2022. Another thing, redeterminations. Obviously, that's a moving target. I mean the zone is sort of in that April to September time frame. But the pace at which those recommence, depending on the House Bill, to the extent that, that makes it through, looking somewhat like it does today or we were previously looking at CBO scoring on an estimate of the acceleration of the redeterminations. And then all of that fits into what I characterized previously as a headwind, which is a reversion to a mean in the Medicaid HBR and the pace at which that goes and redeterminations are an aspect of that. The pharmacy carve-outs are not insignificant. I've mentioned that before, and including California. And so those things are all factored into the modest adjusted EPS growth for next year.

Okay, okay. One of the things that's been impacting the ability to show upside in the core Medicaid business this year has been these corridors that states have put in place. It sounded like as you move forward into next year, you're thinking a number of the states might move away from that. Do you think that presents opportunity to show margin improvement in the core Medicaid franchise? And what is the latest on where all of those corridors stand with respect to the different key states for you?

Yes. I mean, obviously, it's state by state. Some of our largest states already have mechanisms. They've had mechanisms in place for profit sharing and sort of corridors, Florida, Texas come to mind. But some of the COVID era corridors that were put into place, there's a few that we know so far that -- and it's a few of our smaller states that will continue through the first half of '22 to synchronize with the state's fiscal year through June 30. But we don't think there'll be a big factor going forward. And look, those were there to serve as a governor during the COVID era to the volatility and utilization patterns. So I think we're going to power through the sunset of those.

Do you think that creates -- to some extent, some of those sunset, does that create margin opportunity for you in the Medicaid business? Or not, I guess?

Well, I mean, they were meant to serve during a time period where there was underutilization. And so they served their purpose and their time has come and passed. So as normalcy sort of makes it through this year and into 2022, more normal utilization patterns, then that will sort of balance -- counterbalance the sunsetting of those corridors.

I guess there's just been some discussion and maybe it's not right, but that if you've made operational improvements, so you've naturally done better. You haven't been able to realize that because you get eaten up by a risk corridor. You would not put a lot of emphasis on that, it sounds like.

Yes. I mean that's -- we've definitely got state by state -- Brent and I and Sarah as well, met with all 30 of our health plans over the course of the last 3, 4 weeks. And any opportunities like you're citing are sort of factored into what we're looking at for next year.

I don't know if you want to talk about this, but I know having line of sight to the fact that there may be a reversion to the mean in Medicaid, I think we've done a lot of work in the last year on clinical programs, to your point, A.J., making sure that we understand the utilization that will likely come back and perhaps come back in a bit more of a spike because it's been -- there's been sort of -- it's been pressurized over the last year. So I think we feel prepared for what's to come. But, Brent, you should speak to that.

Yes. I think we've used our time wisely as we prepared. We realized, when you see the [ merchant ] department go down 20%, which the ER is the gateway to call us to Medicaid, you seem to have a decline. You know eventually it's going to come back up to some extent. As you see ancillary costs, like dental and therapies and so forth, then outpatient behavior will go down, you know it's going to come back up. So we spent our time in a few ways. Number one, we've been working closely with our highest-performing docs in regards to quality and cost and so forth. We focus very heavily at working toward kind of a standardization of UM across Medicaid. And also, we've really focused very strongly on value-based reimbursement. And when I talk about that, not solely upside for bonuses, but truly being a partner with our providers and capitation. And I think today, we're probably the leader in value-based. And the one thing that COVID did do is that the discussion for value-based capitation in Medicare has been around for many, many years now. But that discussion has not been in Medicaid. And of course, we've always wanted to facilitate with our partnership providers. Last spring, as providers saw utilization go down, as they had many financial issues, they said, "Can we talk about that now?" And today, we have more value-based reimbursement contracts than I would have ever dreamed up, and has really propelled us to kind of go into the next level as we go into 2022 and help us be more prepared.

Interesting. Okay. Do you -- I mean there's been some debate about that decline in emergency room and a lot of Medicaid enrollees have historically used the emergency room as their source for primary care. Do you think what we've seen there is permanent? I mean have they now opened up the idea that I can go to a clinic or I can go to an urgent care center for that care and maybe that won't go back to the emergency room, and that might be a permanent positive adjustment for your business for you guys? Is there any way to get your arms around that?

I don't think we believe there's going to be a permanent 20% decline, but we do think it will be a permanent decline.

Okay.

And just as you had laid out, A.J., is that as we work ultimately with our members, we're showing them different areas or different paths to be able to get care. And again, we've spent our time very wisely there and COVID trying to make sure this happen.

Right, right. And is there any opportunity in the Medicaid population? We don't think of it as readily as we maybe think about the commercial population to use virtual as a means for dealing with some of that primary care utilization.

I think about in April of 2019, we did well less than 5,000 telehealth visits in the month of April of 2019. Fast forward, the height -- at the beginning of COVID, excuse me, it was multiples and multiples, multiples of that. And what we found, it was mostly around behavioral health, but additionally for people with high acuity on the physical health. As we come out of COVID, we're seeing clearly the behavioral health cost and substance use and so forth has definitely increased. And we are finding that very much the need that people get care, and telehealth is definitely very much a part of that. And so overall, primary care, hopefully, and we're using that in rural areas, and we're using that impact even in some of our offerings on the exchange today. And we'll continue to push that. But at the end of the day, I think a lot of people coming out of COVID, with behavioral health overall is truly increasing and to be able to use telehealth and technology to do that is key, and that's what we're doing.

Do you think there's variability on that behavioral health question between the population, the Medicaid population, the -- I don't know how much data you have on the commercial population, but certainly the senior and the marketplace population? Is one move more in the COVID environment, in terms of behavioral health needs and utilization, are they all up relative to where they were pre-pandemic?

True but what we have seen, it's definitely more in Medicaid and exchange versus Medicare Advantage.

Interesting. Interesting. You guys have talked about pricing to see margin improvement next year in the public exchange marketplace business. As you had a better chance to maybe assess what others are doing in the market, starting to see early indications, any updated thoughts on how that looks as you move into next year on the public -- on your opportunity to get the margin improvement? You're thinking at -- it doesn't sound like you think you'll be at target margins next year, I should probably confirm that. It sounds like you feel like you'll move toward target margins or probably get there in '23 or '24. Is that the right way to think about it?

Yes, that's a good characterization. Making progress towards that 5% to 7.5% of pretax zone, that is the ultimate, we believe, sustainable landing spot for marketplace margins. And we sort of leaned into that in May and June of this year to make progress towards that. And I think we're good with our positioning. I'll let Brent give you an update on what we're seeing so far.

I mean we're roughly a week into the open enrollment period, which will run...

The answer is a week in, right?

We've got everything in now, we've got everything. But we've realized, look, there's a tremendous amount of competition that has entered the exchange market. And so as we look, we are the leader in exchange, and we want to maintain being the leader in the exchange, both in growth, but more importantly, in profitability, and that's what we focused on. But what we've seen is that we have to focus on not a national approach, not even a state approach, but a market-by-market approach through provider contracting, through provider offering, through distribution, through overall impact to our members. And I think that how we're approaching Atlanta is different than how we're approaching Miami; how we're approaching Miami is different than how we're approaching Houston. And with that, we think that we can be successful. And we -- at the same time, as we -- 2021, we saw COVID raging at the start of the year. And as Drew said, we had pent-up demand show up in the second quarter. And we saw this crazy 7-week spike of Delta in August and September. And now we're seeing the beginning of, hopefully, normalization as we move into next year. And so we think to our product offerings, our provider approach and really, by the discipline of pricing, realized that COVID has not gone away. So we've had to price that. And there will be something of demand, we feel good about our situation.

And I just want to highlight, underscore something that Brent said that I think is really important is sort of this realization that marketplace is less of a national product and it really is hyper local. And if you think about the differentiating approach that Centene has taken from the very beginning because of our Medicaid routes in terms of understanding local markets and being able to be agile at a local level and then roll that up to a national view, I think we are really well positioned given that historical strength to approach the way that the marketplace is starting to play out as a product line.

Okay. Yes, I think it is hard to completely get your arms around the dynamics of the marketplace environment because as an outsider, it looks like there's a lot of churn in that market and a lot of turnover and probably the least loyal customer base. But I know that a big part of that is just people going back and forth between Medicaid and all. Have you been able -- I mean you've been the leader now for a while. Do you think there's a level of customer loyalty? Do you see as long as people remain eligible for marketplace subsidies and the coverage that you can get persistency with those populations? Or is this, indeed, a high-turnover, high-churn population that you've sort of got to go after pretty aggressively every year?

Well, when the enhanced Advanced Premium Tax Credits came about, they were clearly a game changer. I mean the price compression that a person will pay for an exchange product has obviously declined dramatically. So that's having a major impact, and we saw that as we went through the [ SEP ] this year, because we were able to grow during this SEP, and be able to see that from that standpoint. But we do focus on retention. And I appreciate the question because I just literally had a meeting this morning on all the things we're doing to retain our membership. Because at the end of the day, this is still insurance and it's still risk management 101. You want to be able to keep your members as long as you can, and you do that through service, through the network and through different product offers to meet their needs. And so you're right, in the past, there has been a tremendous amount of churn. But we saw a lot of people that we lost in 2020 coming into 2021, come back to us during the SEP last year. So I think over time, and again, I think the game -- the ultimate game changer is the enhanced Advanced Premium Tax Credits, that there is going to be more and more retention down the road, some in '22, but as you go to '23, '24, then you're going to see more and more of it.

Right. And when you think about the extended open enrollment SEP that we had this year, a lot of attention was placed on the fact that there was a perception of adverse selection that led to a lot of the providers in that market that have a presence saying we underperform -- we're underperforming our margin this year because we got this average selection. It makes me wonder how -- if we picked up 2 million members this year on the public exchanges, is that a onetime thing because they got sick and they had a chance to just go out and sign up? Or do you think those people will maintain coverage next year? Will we see the overall marketplace sort of stable or could it even grow? Or do you think it's just going to inherently decline?

First of all, I think it helps to have an administration that, at the end of the day, their goal is for people to have coverage. And they're doing everything they can through the exchanges, through legislation, through funding and so forth to ultimately grow the exchange. So it's a much different environment on that. At the same time, I think if you kind of look at February 15 when the stuff began to really May 1, when you enhanced Advanced Premium Tax Credit kicked in, clearly, there was a huge difference in the membership and the growth and even the acuity of the population. Drew, you can add to that.

A.J., we track -- among other things, we track into the 4 buckets, the 4 cohorts, which is the renewal group, the new group that was sold during the open enrollment period, as Brent mentioned, the SEP sort of pre-enhanced Premium Tax Credits, which is pre-May 1. That's only 7% of our population and then the SEP population post. Actually, you're right, there was a selection issue with that pre-May population, only 7%. The remaining SEP population, the med cost is coming in right around the new business, which is actually not bad. But you don't have a full year for risk adjustment. And it's a population that's a little bit younger, so -- on average. So the -- with a full year, we expect and hope to carry a lot of them into next year. Then you get a full year, you've got a full year risk adjustment where you're not diluted by the calendar. And it's a population we expect to retain and do better on.

Okay. I mean, one of the big open questions, like you mentioned, is the whole dynamic around reverifications on the Medicaid side and when that's implemented and how quickly it's ramped up and ultimately, how many people end up losing coverage. Obviously, you have a footprint with the marketplace business to be able to pick up, hopefully, a fair number of those people, if not a high percentage of them. Is that something -- can you sort of facilitate that? People don't give up coverage until they have to, so I'm assuming people aren't proactively going to give up their Medicaid coverage until the reverification happens. But can you be in a position to make sure that if they're eligible for the exchange subsidies and the coverage that you can pick them up? Talk about that. And have you factored in, in your talk about next year's outlook the ability to pick up some of those reverification, attrition on Medicaid in the public exchange side?

Well, the Congress a legislative framework that was shown a few weeks ago. It talked about that states need to work to ensure that ultimately, the person has access to coverage. So that's an overriding component to that standpoint. And I say that because there's only 4 of our Medicaid states that we do not have an exchange in the same state, right? And so we are -- today, we are in 26 states that we have both Medicaid and exchange there. And we've been working with our state partners to do just that to make sure that people have coverage, whether it's Medicaid or whether it's exchange. And we've been preparing for this, in constant meetings with the states for communication on how to ensure people keep coverage. PHE, I mean there's a lot to be determined on the date, to be determined on how it's rolled out, the freedoms the states have versus the federal and so forth, well, it's all to be determined. But nonetheless, we believe that we -- just as you said, A.J., that we're set up to be as successful as you can be, whether it is from the standpoint of really having the mass of a Medicaid plan to an exchange plan in the same state. Essentially the same network and benefits that make sense for these members.

Yes, yes. Great. On the Medicare Advantage side, I think the company is growing counties by 26% in '22. You now cover about 76% of the eligible Medicare lives. How much does that tailwind -- how much does that create a tailwind for growth next year or '22 in your enrollment expectations? And is that expansion something that really takes a couple of years to realize the full benefit of that -- ramp up the program?

We clearly have had strong growth in 2021 through our Medicare Advantage WellCare. And we're roughly a month into the open enrollment there for Medicare Advantage now. And we're off to a good start, and we have every belief that it will continue as we go into next year. And we, again, think about the geography. We're in roughly about 75% of the country for Medicare Advantage members. We're not really looking to be in 100% everywhere in this country. What we're looking at is to ultimately offer products where -- that we can grow and be profitable. And that's really what we're focusing on right now, and things around offerings and ultimately benefits and, of course, our network. That's what you're going to see more from us -- I'm sorry, Drew.

And I would add to that, think about the value creation plan. And so we're going to strike a better balance between margin and volume in the '23 and '24 bids. The '22 bids obviously baked, we're selling in the open enrollment period right now. And I guess the good news with the unbelievable growth, I mean, growing, pushing 30% at our base, that's pretty darn impressive. That gives us sort of volume and earnings power as we look at '23 and '24. I think we'll have another good growth year. Nothing -- we're not expecting to replicate 2021 in terms of growth. That might have been a onetime shot, but expect continued growth. And then when we get to the '23 and '24 bids, we will balance that more so -- it's a growth business. We still expect to grow it, but there is a margin expansion opportunity in Medicare Advantage, which is a lever for '23, '24, and quite frankly, '25 too, as we think about STARS and doing really well for the '23 calendar year and then coming down in '24, then shooting back up in '25.

Okay. And when you think about next year in your assumptions around the Medicare Advantage book, historically, if you had an outsized year growth this year, you didn't realize the full benefit of that until you got all the risk scoring done. And then it was sort of in the second year where you get that benefit. I know there's some stuff going on with the STARS as well, but is -- can we assume that you'll see a pretty nice uptick in margin next year because of -- as that book that you signed this year matures?

What I said on the earnings call was more stability in that margin. Once again, can't impact the bids until 2023, where we can harvest some of that margin. But you're right, mechanically, the further you get out from that first year, the more you have the opportunity to engage in clinical management and risk scores and things like that.

Okay.

We've got new population coming in as well. So there's a counterbalance.

Right, right. You're -- I mean the long-term goal on where you hope to get the margin to in '23 and '24, it sounds like some of the key building blocks are, a, the G&A leverage, getting the true leverage of the growth of the business that you have done, making sure that you rightsize there. It sounds like the PBM dynamics that you're talking about are a part of that. Is there a way to parse out a little more of as one building block really, that's a key element to us getting to that margin target? You haven't really sized how much benefit you might get from going to one vendor on the PBM, but I could envision that that's a big chunk of it, but maybe I'm wrong. Can you give us any more flavor for the building blocks to get to that margin versus where you're at today?

Well, we want you guys to tune in for Investor Day. So we want to see...

You're just among friends here, so you can give us something...

It's just us, A.J., right?

We are going to frame out the large buckets. We talked about it conceptually. We're actually going to have some specific case study examples to instill confidence that we're pulling levers today. And you're right, there are some levers that we know we're going to pull, but you can't pull them until a date is certain. You mentioned the PBM opportunity, not just -- as Sarah has outlined a few times, the operating benefit and the efficiency benefit from exiting internal platforms and getting down onto a single PBM platform, but layer on top of that, the RFP opportunity for 1/1/24 recontracting. Above and beyond what we do every year to generate savings, work with our PBM partners to address clinical opportunities and generic substitution opportunities and so on. That's sort of bread and butter, but we have a bite of the apple to take a stair step and get some value for 1/1/24.

On the PBM, just to press that a bit more. You've got one vendor that has the legacy WellCare, the legacy Health Net business, and has also worked with other health plans in a significant way. I can understand waiting until the contract is up and doing the bid to make sure you get the sense of where everybody else would bid for that business, which I'm sure they would bid aggressively. But there's also the opportunity to go to that one vendor and say, "Hey, you've already got the contract. How much would you give us before you go out -- before we go out and test the waters?" And they might actually give you quite a good deal. Is there any chance in your mind that we might see that PBM situation dealt with sooner rather than later?

You never know how an RFP is going to go. And obviously, the incumbent knows what their position is, but we want to test the market. It's time to test the market, and we'll start doing that in 2022 because in our experience, we actually have generated or built a core competency in switching PBM platforms. It's an interesting core competency, but it's one that is pretty important when you're serious about driving the best value for your customer, the federal government, our state partners and members for cost sharing purposes. So we'll go that over the next 2 years.

Yes. And I would just, again, extrapolate that paradigm as we talk about kind of where we want to be focused and what things we want to do internally versus where we would partner, that the discipline that Drew was talking about in terms of not testing the market, making sure we're able to deliver the best economics both for the business and for our state partners. And then also having platform and partner migration as a core competency, that is how we're going to be able to run around that portfolio of supplemental services that we need and optimize the overall value creation.

And I did want to pivot over and ask you because the company has been talking about several quarters now potentially pruning noncore assets, where we define noncore assets, I guess. And I think the question is, is this more of a capital redeployment that you're looking at doing? Is it a streamlining of a strategic focus in the company? What is prompting the look at these potentially pruning the portfolio a bit? And what do you hope to accomplish? I mean you probably won't articulate what assets you're divesting other than what's already been mentioned with USMM. But what's the objective there?

Yes. I mean I think you touched on a number of the core objectives. I think the first piece of it is focus, right, and making sure that we are disciplined in focusing and executing on our core business. The framework that we have -- are applying when we look -- and I would say just in general, right, again, having the discipline to be asking ourselves constantly the question of, are we in the right businesses? Are we focused on the right things? Are we deploying our time, energy and dollars against the highest and best use? But if you think about that portfolio review, sort of taking all of the noncore assets through a process to say, how does this contribute to our margin target? And if it doesn't today, what would it take for it to be contributive? And is that the highest and best use of the next capital dollar? So that's obviously a key question. The next question is, how does it fit with our short-term or long-term strategy? Is there something here that is really important to how we want to grow one of our core service, one of our core business lines? And then the third question is, are we the best owner of this? And I think the announcements we made last week around USMM is a great example because it actually hits more than one pillar of the value creation plan and reflects having gone through the process of asking and answering all of those questions. So that was an asset that we felt would be more contributive to margin by putting it in an independent disposition. We do feel like home care is an important part of the long-term strategy. So we maintain not just a minority stake in the company, but we expanded our commercial relationship with them, and we feel like they'll actually be able to better serve our most frail elderly homebound Medicare and Medicaid patients under the leadership that they have with Adam and his team and the capital that they have to infuse towards innovation. And then we get the benefit of redeploying the capital from the proceeds to kick off, as we said, sort of a material share repurchase program that we'll talk more about in December. But it was sort of a [ threefer ], and I think represented the disciplined approach that we're taking to all of the different pieces that we have in the portfolio.

Okay. I did have an e-mail question specifically about USMM. Can you ask Centene how big the USMM business is today, and how much they're getting in proceeds? I'm not sure you'll want to disclose that, but if you would. It looks like they paid $200 million for 68% back in 2014, and it was doing $220 million to $240 million in revenues at that time, but that was a while back. Anything more you can share on that at this point?

Yes. So we haven't disclosed the financials around that transaction. Again, I think we'll talk more about the stake in the ground that USMM provides against the broader share repurchase program in December. But I will say, again, we see that as an asset that is serving both our Medicare and Medicaid businesses in multiple states. And we think they have the opportunity now to grow in terms of their own size and scale and then their ability to service even more of our footprint.

Okay. I've got someone else asking me, are you -- not me, is Centene going to update the targets they previously gave, margin percentages and time line at the Investor Day next month? Is there an opportunity to do better in 2022 or 2023 than you previously communicated?

We'll be giving formal guidance for the first time for 2022 at Investor Day. So we will shape our modest adjusted EPS growth target into an actual range or numbers. And then, yes, we'll be talking about and reinforcing our goal of at least 3.3% adjusted net income margin for 2024.

Right. Another question I'm getting asked and it's interesting, but it's probably worth it, given your comment to me beforehand. It says, was Michael originally going to participate in the session? Why isn't he here today? I guess, given the early question, it's probably worth you guys clarifying what he had shared with me earlier.

Yes. So Michael was originally planning to join us today. He's dealing with a low-acuity medical issue. And so I think he will try to pop back in with us for some of our later sessions, but unfortunately, had to bow out this morning.

Yes, yes. The company indicated that 7% of their pre-May 1 is where most of the average selection was. They want to clarify that in the marketplace. Is there a sense that excluding these members' MLR would have been in line with original expectations?

No, there was -- no, there is still, as we talked about in June, the risk adjustment elements, the $175 million or so during Q2. There were still the Delta variant that was not just unique to that cohort in the August time frame. So no, we would not have been on track absent that slice of 7%. And we've got an opportunity. And that will be one of the tailwinds going into next year. To counterbalance some of that pressure, we expect in sort of normalization -- or towards normalization of Medicaid HBR. That's one of the tailwinds that we took action on through the bids. And we expect that better performance, working our way towards that 5% to 7.5% pretax in marketplace.

Right. And maybe just to wrap up, I'll just ask you for any update on the Magellan transaction. I know you hope -- you're hoping to close that by year end. Are you still thinking it's going to be accretive in -- and what about leverage within the context? I understand the redeploying of the capital on some of the prune portfolio and so forth to share repurchase. But is leverage -- are you going to need to pay down leverage post this transaction? Or -- what's the thought on that and its call on capital?

Yes. So I can touch on Magellan certainly. So we have -- I think as we've said before, we have all of the approvals, except for one. We're still waiting for California, working very closely with the regulators out there. I was actually out there yesterday, and still very much anticipating that it will close by the end of the year. And then relative to accretion, I think we are -- all of our integration planning work is done. So we are at day 1 readiness. I think we feel really solid about the plan synergies there. Drew, I don't know if you want to talk about capital deployment against leverage?

Yes. On that accretion, we said slightly accretive in year 1. That's factored into our adjusted EPS growth in the modest zone. So that's a component of that, that we're expecting. And on the leverage, yes, we've actually issued the debt already. We did that at a very low attractive interest rate. So that's behind us. We just need to close a transaction. And our leverage will be in the high 3s, debt-to-EBITDA. And so I'd rather grow EBITDA than pay down debt, but I think we're going to need to do both to sort of work our way towards 3. That would be part of the balanced deployment goals as we seek investment-grade ratings.

All right. Well, we covered a lot of the waterfront there. I appreciate you guys bearing with all that. And we thank you for participating, once again, in our conference. Hopefully, next year, we'll be doing it in person. We aspire to that. And I wish you guys a great Thanksgiving, and thanks, everyone, for dialing in.

Thank you.

Sure. Thanks very much for having us.

Thanks, A.J.

Take care.