Centene Corporation (CNC) Earnings Call Transcript & Summary

Next session will be with Centene. By the way, I'm Steven Valiquette, the health care services analyst here at Barclays. So welcome again, everybody, to day 1 of the conference. So with us from the company, we have Drew Asher, the CFO, and also Sarah London, Vice Chair. This will be a fireside chat, but I think Sarah wants to make some comments upfront. So I'll turn it to you.

Great. Thanks, Steve. Thanks for having us. Great to see everyone in 3 dimension. I thought I might just give a quick update as a level set and then turn it back over to you for questions. So as we said, Centene came into 2022 with strong momentum, thanks to good performance in the Medicare marketplace open enrollment periods, and that's really lined us up nicely against our membership targets. And then in the last 2 months, we've received RFP awards in Indiana and Louisiana, which I think speak to the differentiated value that we provide to our state Medicaid partners. So pretty happy about having hit those milestones. From an operational perspective, we continue to move forward with our value creation agenda, really leveraging the size and scale of the organization to drive operational efficiency. So we've talked about things like call centers, standardizing UM technology platform consolidation. But one of the things I think we found over the last couple of months is that value creation is a really great opportunity to engage a tremendously innovative and mission-driven workforce. And so we've seen the organization really starts to embrace value creation, not just as a discrete set of work, but really the beginning of a new way of thinking about how to create a better member and provider experience. And in general, just how to make it easier for all of our stakeholders to do business with us. Within value creation, there's been a lot of activity around portfolio review. We've provided some updates on assets where we're looking at strategic alternatives. But I would point out there that the role of the portfolio review, first and foremost, is to look at each one of our subsidiaries and ask how does it line up against our strategy. And then what's the potential for enterprise value. And so through that lens, the answer to some of that process is going to be, we have assets that we want to keep and invest in and grow. And a great example of that is CMG, which is a provider organization down in South Florida, that's been a really strategic partner for our marketplace business. And as we think about leaning more aggressively into risk in Medicaid and marketplace with providers, we think that's a model we can really grow. And then finally, I would just say, I think the value creation work has really forced us to get crisp on where we have strength and differentiation and start talking about how we want to amplify that. So having 29 health plans, we have been operating in a hyper local mode, great opportunity for operational efficiency, but there's also a tremendous amount of data and knowledge there about how to activate the entire community around our member base. And I think as we're all coming to understand the drivers of health are not sitting exclusively or even predominantly in the health care infrastructure, but in that community. So we see that as a pretty powerful platform for impact. So just net-net, I think we're feeling good about the value creation work, and we really see it not just as delivering short-term value, but really taking the organization on a journey, preparing for the next wave of growth and making sure that we are delivering value not just in the short term, but in the long term as well.

All right. Great. So maybe we'll kick things off. Obviously, Medicaid and exchanges are the bread and butter of the company. You mentioned the 29 plants or 29 states where you have Medicaid members. You're in exchanges in most of those states. But maybe as investors think about the Medicaid redetermination process, you could lose some numbers there, regain some in exchanges. Maybe just give us your latest thoughts on the -- sort of the potential to recapture members on the exchange side. I guess we'll start there and a few follow-up questions maybe around that same topic.

Yes. I think we've been very conservative in our assumptions in part because there are so many moving parts. So understanding how many of those members may be eligible for employer insurance, where they sit along the FPL. We have new proposed language around the family glitch, which may also change things. So I'll let Jim talk a little bit about how we've looked at the numbers. But it's hard to know exactly where that's going to fall out. But again, the alignment just between Medicaid and Marketplace for us has been deliberate and strategic.

Yes. Over the last couple of quarters, we've framed this for investors. If you go back to March of 2020 and look at the sort of the pure organic Medicaid growth, we've grown as of year-end, about 2.5 million members, excluding sort of the North Carolina wins and other populations that were new to Medicaid. And so as we sat back and frame that, and we did this for guidance purposes for 2022, but also thinking about 2023, we've woven in about half of those members, 1.25 million members, into this time frame of about a $5 billion headwind in revenue of which $2 billion of that is baked into the 2022 guidance and then another $2.5 billion to $3 billion would carry on and run rate into next year as our estimate currently of what redeterminations may look like. Now we haven't, on the flip side, to Sarah's point, baked in much, if any, on the marketplace side because that's still a fluid process. It would be very late in the year anyhow into 2022. So that's really more of a '23 opportunity in marketplace.

Okay. Great. Also just kind of thinking about migration to exchanges and really just whether it's the members added last year or this year, there's been -- we saw one of your competitors make some adjustments in their metal offering, if you will. So just curious how you think about the bias for members to select either the lowest tiered plans. And just remind us where Centene stands in terms of the exchange offerings and member breakdown by metal counterfeits, brown silver breakout or any data points you have around all that?

Yes. The marketplace consumers are definitely very price sensitive. But I think we found, and particularly this last year, that product design and network can be offsetting factors in those decisions. In terms of breakout, I would say, just under 80% of our members sit in the silver plan.

The other thing we -- and we've talked about this also, but not all of you listened to all of our webcast and earnings calls, but also introduced some new products this year, a value product, a select product where there's more of a sculpted network in one. There's a sort of a teledigital or a virtual-based product in terms of accessing health care. So we actually expanded the product portfolio this year, and pretty pleased with what we're seeing only a couple of months into this year, but like what we're seeing so far.

Okay. This next question is somewhat multipart, but you guys are now breaking out your MLR by book of business. That's certainly helpful. If all the members kind of added to Medicaid during the pandemic, I'm sure the COVID factor kind of skews this a little bit as far as just the population risk profile comparing that to commercial. But I guess, what are your thoughts around if members are in the commercial pool, historically lower MLR, how they're being picked up by Medicaid, how does that impact the risk profile? And probably more importantly, as members get reassessed and go from Medicaid back into commercial/exchanges, how does that change the risk profile of the remaining pool within Medicaid? I know it's kind of a lot to tackle all at once, but just curious to get your thoughts around it.

No. It's a good question because clearly, over time, we've seen, as eligibility migrates up and down the FPL ladder for Medicaid, there is sort of an HBR implication, and you're always all over that with our actuarial support. It's our job to get in front of the states ahead of time and sort of preview what changes in populations may do to rates, and we've, I think, been pretty good at that over time. But we've also guided this year to what I would call a more normalized Medicaid HBR. So that's sort of already in our guidance. That's an element of it. There was also some pharmacy carve-outs and just sort of the return of utilization factored into this year's Medicaid sort of HBR that we gave insights into over the last 3 months.

Okay. Since you mentioned the states, the potential willingness to take on larger populations, potentially, potentially not. I mean just given the pandemic's negative impact on state budgets, how do you think now about willingness to states to support larger allocations to their managed Medicaid programs? Are you seeing any early indications in RFPs where you expect maybe total spend to potentially be larger? Or is it going the other way? Just curious to get your thoughts around that topic.

Yes. So interestingly, I would say, we are seeing more states in a surplus position because of the COVID release dollars. And so the state budgets in general seem to be -- I mean you should weigh on this as well, it seemed to be pretty healthy. Now the question as to what extent that's going to correlate directly with Medicaid program funding, obviously, sort of on a state-by-state basis, so we're tracking all of that pretty closely.

Yes. Actually, when I jumped into this position last May and then went out and visited our businesses for midyear reviews last year, I was actually surprised at how healthy state budget positions were. And it was a combination, as Sarah said, on sort of the COVID sort of revenue flow, but also in some states, like the sales tax revenue cycle from large purchases. I was sitting with the CFO of the state of Florida about 9 months ago, and he was telling me about those sort of driving Florida's surplus. So yes, we've had really constructive dialogue with states. I mean, really, it's more around us trying to get COVID era risk corridor or sunset. And we expect that to basically largely tail off by the middle of this year, risk orders that were put in place sort of with that COVID era mindset, and we feel like we're getting past that.

Okay. Great. Okay. Well, let's shift gears here and maybe talk about Medicare Advantage for a few moments. So you guys have had growth well above the industry average in M&A over the last few years. Maybe you can just remind us how you plan to balance the growth versus margin profile moving forward when you think about benefit design, especially in the context of what looks like a potentially pretty favorable rate update for next year. Maybe just give us your kind of general strategy around all that as you're thinking about continued M&A growth.

The short answer is much better in terms of growth and margin. The longer answer is, it's always a balance, but we are where we are. And if you look at today compared to -- or 2022 compared to the jump off in 2020, we're going to have a 50%, 5-0, percent larger Medicare book than in 2020, which is like remarkable. Last year's growth, 2021's growth, just around 30% was unbelievable. This year, we're guiding, as you guys know, to mid-teens compounds to about 50%. And so I like the position of having a much larger base of business upon which to go apply margin expansion principles, too. And sure, that will retard our growth rate maybe meaningfully, looking at '23 and '24. But I think the value proposition for investors and in our members to be able to sort of have more sustainability in the margin of that business to create investment dollars for capabilities. That's sort of where our focus is going to be over the next couple of years. We still will hold ourselves to a growth standard. But as I've said to a number of investors, you almost shouldn't care, whether it's 0, 2%, 4%, pick a number, in 2023. And you're right, we've got the lever of a reasonable rate environment. It's really about the expansion of that margin and creating durability in both that margin and then the ability to grow thereafter once we expand that margin in Medicare, and it's a multiyear journey.

And I would just add, actually, back to the conversation about marketplace that, that can be sort of a leading indicator of our ability to rely on product design and innovation to guide through a recalibration around growth and margin. And so applying those same principles to Medicare, I think is going to be important through the next couple of years.

Okay. Great. It also kind of tied into the growth outlook for Medicare Advantage. I mean, obviously, every managed care company is trying to improve their Star scores. I think for you guys, for the scores to be released later on this year, may potentially go backwards a little bit. Maybe just talk about some of the dynamics around that and what you're doing to improve those scores going forward beyond that.

Taking a couple of major actions. One is just bringing new leadership in over that program. And we have the benefit of -- so we have a new leader in place. We also have the benefit of Jim Murray, who joined as Chief Transformation Officer, and has, I think, strong perspective about how to run a good quality program. And then really just focusing on our relationships with providers around caps and care focus, everything we're doing in value creation relative to improving the member experience should accrue to caps. So I think it's sort of just revitalizing and investing in that program under new leadership. And then I think the other thing is that we have made it a major enterprise-wide priority. So it is part of every single person's goals to perform against ours.

Okay.

Steve, you're right, if you think about -- and once again, I tried to be really clear on this is a headwind for '24 back in the Q3 earnings call. As we started to see some of the data from that time period of measurement as well as the expectation -- or actually, now it's actually true the fact that CMS is sunsetting the disaster relief provisions related to COVID, which, obviously, we expect it to happen at some point. So that will be a -- that's a rating year '23. So the STAR scores that come out in October of '22 are called rating year '23 STAR scores, which impact 2024 revenue. And you're right, we expect to take a step back based upon '21 and prior dates of service. What we could do today, as Sarah was describing in the governance process, and believe me, we're making some meaningful investments and shifting around existing dollars to spend dollars wiser. We can impact the 2022 dates of service that result in STAR scores that are published in October of '23, called the rating or '24 STAR scores, which result in revenue in 2025. So that's that 3-year cycle of taking action and making investments and getting the right people on the bus to drive stars sort of all the way to the revenue implication of that in 2025.

Okay. All right. At this point, I think it's been discussed probably ad nauseam as far as the -- some of the activities happening across different sales channels within Medicare Advantage. So including in your last conference call, you guys gave some color around your thoughts around this. Maybe just to reiterate a little bit as far as your breakdown of either your M&A members or membership growth each year that comes from external versus internal sources, sounds like you're pretty content with where things are right now. But I just want to hear about that and also your relationship with the external channel, obviously seems to be going pretty well, given your growth and maybe just spend a minute or 2 talking about some of those dynamics as well, that'd be helpful.

Do you want to talk about the channel breakdown?

Yes. So we actually have a pretty broad portfolio of distribution channels, and this goes back 4 or 5 years developing some of the teledigital channels. We actually built our own direct-to-consumer channel. So we own that and outreach and lead generation and then we partner with firms as well. We have the traditional broker channel. That's the one that seems to be getting more and more diluted. So they're the, I think the net loser, but still a very important channel that we try to cultivate. And then the real old school W-2 channel, which seems to be getting smaller and smaller as a relative portion of the pie. But about half of our sales this year, which is no different, maybe it's like 1 or 2 points more this year than -- or this AEP than the prior AEP. So there wasn't really this big shift that we heard some handwringing about are through that teledigital electronic marketing, Internet-based and then also call center-based channels. And we've got a cadre of vendors because you don't want to have all your eggs in 1 basket.

Yes. One of the things I think has been great about, and again, as Drew said, the use of the teledigital channel and really understanding and owning those relationships is something that came to the Centene family through WellCare, that discipline. And I think just the rigor that, that team brings to understanding the channel, to understanding cost of that customer acquisition, lifetime value. And then as you bring members through each channel, what are the different ways that you can really can shepherd them through the process and make them as sticky as possible. So it really, in many ways, I mean, it's a true sort of direct-to-consumer marketing mindset. And kind of the rigor around data and analytics there, I think, has helped us in the past. I think we'll continue to do so as we optimize those channels going forward.

Okay. All right. Let's talk about MLR for a moment here. Yes. So obviously, a lot happening already this year with the COVID medical costs probably being pretty high in January, then probably tapering off a lot in February and March. And then the [ non-coalization ] inverse relationship. We've seen one managed care company so far come out and talk about trends being better than expected but still above baseline. So maybe kind of -- could be a read for other companies may not be depending on how your guiding. So I guess for us, the question really is, how much can we still use 2019 as a proxy for your MLR cadence when thinking about this year just for your own experience and across all your books of business? Remind us what you may have said around this 1Q medical cost expectations is just at the stage for how things might shake out given all the reversal we've had around COVID and non-COVID.

Yes. It's tough to jump off of 2019 because Centene, we were $75 billion of revenue, and now we're midpoint $137 billion. So -- and '19, obviously, didn't have the big influx of the Medicare business. But let me sort of set the stage based upon major product line and progression of HBR because a number of you guys have asked that. And this -- so the answer is everything else equal. And so if you think about the impact of COVID and pent-up demand last year, I mean, you can never perfectly predict slopes. But commercial, largely marketplace, should slope up throughout the year. Think about the logic there with deductibility wear off. Medicaid actually typically slopes up, meaning lower in Q1, and slopes up during the year because of trend, but then we've got a fair amount of rate update in 9.1% and 10.1% with some of our large states, so maybe a dip down in Q4. And then Medicare, once again, historically, on a normalized basis, would have higher HBRs in Q1 and Q4 and a little bit lower in Q2, Q3. So that's sort of the sloping you should think about. As far as where we're sitting here today, and we have given updates. I mean, we're not going to get in the habit of every conference giving an intra-quarter, month-to-month update, but I think it's been instructive during COVID to provide insights into what we're seeing real time. And so with Omicron, you're right. We saw it spike up actually with inpatient offs actually higher than the Delta wave for Medicare and Medicaid, but much less severity, which was a good thing. And then a steep drop in the back half of January and into February. Marketplace wasn't as impacted with Omicron than Delta. It really Delta sort of hit our marketplace business pretty hard, but not so much for Omicron. So as we sit back and look at 2 months under our belt, we feel good about where we're at. We're on track with good performance.

Okay. Great. Okay. We've got a couple of minutes left here. We didn't talk too much around the company's margin expansion strategy and that being a major part of the growth going forward. I know there's been kind of an activist involved in the name. I probably can't say too much about that. But maybe just -- I want to take a moment just to reiterate kind of your confidence in hitting margin expansion targets. And just 1 of the 2 of the main levers you're pulling to achieve that might help. And then we'll flip into some audience response survey questions after that. So...

Yes. Sure. So we laid out -- Drew laid out the value creation framework back in June. And then I think we spent some time at the December Investor Day providing more detail. So there's 3 major buckets, right? SG&A, gross margin and then capital deployment. And I think we have created great infrastructure within the organization to start to execute against each one of those buckets. We're making good progress. And I would say relative to your question around activism, the one thing that has been very consistent throughout all conversations that we have had internally, externally with the Board, with investors of all sorts is real conviction that the value creation agenda is the right strategy for the company. And so we're now at a position where given all the governance changes and having sort of the plan in place and momentum within the organization that we can all just focus on executing. And I think we feel really good about the opportunity ahead of us.

We know the numbers we have to deliver, and we gave those to you guys intentionally and feel good about the road map to get there despite as we lay out what might be some headwinds or tailwinds along the way. We are -- the whole organization has rallied behind what we have to deliver. And quite frankly, that will ultimately benefit our constituents and able to redeploying investments.

Okay. Yes, that sounds great to hear, a reiteration of that. So we've got a few seconds left here. We've got 2 or 3 different ARS questions. Everybody in the audience, you got a pretty full house here. I want to grab the clicker in front of you so we could tee up the ARS questions in the back. So first question, just a simple yes or no, one. Again, this is the investors responding, just to be clear, for the transcript and for the webcast. Do you believe the company will hit its margin expansion targets over the next 2 or 3 years? One is yes, and two is no. So that's pretty simple yes or no question here. And we got a 10-second timer countdown here to give us our answer. [Voting]

95% yes, so that's very encouraging. All right. Great. Question #2, do you believe that the company will be acquired over the next 2 years? One is yes and two is no. And again, just to be clear, this the investor view in the audience. [Voting]

Well, 98% is saying, no, company will not be acquired. Only 2% saying yes. Interesting. Okay. And then question #3, I didn't intend this to be a negative question because there are some recapture opportunities. But the question is, what percent of the company's current Medicaid membership may be lost to redeterminations over the next 2 years. So #1 would be 10% of the Medicaid membership; #2 would be 20%; #3 would be 30%; and #4, 40%; #5, 50%. So a pretty wide range as far as...

It's really just a math test we're doing, because we already gave them the numbers. And we're not doing too well in the math, though. [Voting]

#1 answer is #2, 20% at about 38%.

I mean we got 50 million Medicaid members. That would be 3 million.

The least was 40% and only 10% of people thinking that. So it skews to heavily probably more like -- actually only 10%, 20% and not a greater number. So that's also encouraging. All right. So it seems like investors are viewing the company pretty favorably based on those ARS questions. So with that, I want to thank you guys for your time today. And thanks, everyone, for participating. Thank you.

Thank you.

Thank you.