Centene Corporation (CNC) Earnings Call Transcript & Summary

Introducing Centene. Centene is the largest provider of managed care in the Medicaid as well as the exchange business, also has a growing Medicare business. Presenting today, we have Sarah London, who is the CEO; as well as Drew Asher, CFO; Jennifer Gilligan from IR is in the audience as well. So with that, I think, it'd be fair -- you told me you wanted to make a couple of prepared remarks before we jump into Q&A.

Yes. Thank you. Well, first, thanks for having us. I know we'll cover a lot of ground in Q&A, and we obviously reported earnings 2 weeks ago. And so pleased with how 2022 is shaping up so far. But I just wanted to highlight 2 announcements that came out late last week in case folks missed them because I think they are important relative to themes as we go forward in 2022 and beyond. So the first is that we found out last week that we successfully reprocured our Medicaid business in Missouri. And I think this is just a testament to the work we do to build really strong relationships with our state partners, but also the strength of our RFP team and the work they do on the ground with our local health plans to really understand the evolving needs of our state partners and our members in the state so that we can be evolving to meet those needs. But what's really notable, I think about the announcement is that we were also awarded a sole source Foster Care population, and that's a new population for Missouri. And so as we look at how the RFP pipeline is starting to reactivate as we're hopefully moving through the pandemic, we are not just seeing reprocurements. We are seeing states start to contemplate adding new populations to managed care model. And we think Centene is really well positioned to be able to support those conversations because of how much work we do with some of those specialized populations. So this will be the fifth state that we are sole source for Foster Care and we take care of Foster Care populations in 19 states. So again, as we think about sort of managing and defending sort of our core business, but also starting to look at organic growth opportunities in Medicaid, I think that was a really nice signal. And then the other, of course, was the major announcement that we made around divestitures. And so the divestiture of MagellanRx, which is Magellan's PDM and PDA business as well as Panther, which is a rare drug, specialty pharmacy that Centene acquired in late 2020. And I would say, these are obviously 2 major milestones in our portfolio review process that we talked a lot about and accrued to the value creation plan. But more than anything, I would hope that it's also a signal of this management team's focus on transparent execution. So last year, we said we were going to focus on our core business. We were going to look at all of our nonhealth plan assets with a clear eye, no sacred cows and be disciplined and strategic in figuring out what the right disposition was for each of those assets, and that is exactly what we did in both these cases. So Magellan Rx and Panther are both great businesses, we think they will be able to maximize their inherent value better with a different owner. In exchange, we will harvest capital that we can deploy against our value creation goals. And that is really sort of a perfect example of how that portfolio review process is supposed to work. So we're not done with that, and we'll certainly share other updates as we move along in that process. And as I said before, the sort of end state of those interrogations is not always a divestiture. But I think, all in all, the combination of those announcements, hopefully, sort of sends a signal that this is a team that is really focused on executing against the core business, but also putting significant points on the board relative to our value creation agenda. So with that, I will stop hogging the mic and then turn it back over to you.

That's excellent. I was going to ask a couple of questions on those things. I guess maybe first on the divestiture side of things. How should we think about those proceeds? I guess we were trying to do some math and it seemed like you were making money on the deal. Is that -- if you think about what you kept from Magellan versus what you sold? I mean is a breakeven type thing just will be focused on the core business? Or is this actually a net kind of add from an enterprise value perspective?

I was very pleased with the valuations. We basically, on a cash basis, paid about $2.2 billion for Magellan. Now the pharmacy business was a little over half of Magellan. So sort of squares in that zone. And as far as gain or loss, you sort of recalibrate the goodwill and the intangibles in that 1-year window. So those largely match up. But thrilled with the transaction that we announced there. And then with Panther. That was actually something I advocated for 18 months ago in my old role, and we paid $925 million enterprise value for that. So getting $1.4 billion for that, pretty pleased with. That's a great business. It's a fantastic business, and it will, I'm sure, do extremely well under the private equity ownership. So that one will have obviously a book gain on and deploy those proceeds into a combination majority in the share buyback, as we said in the press release, some debt repayment as we're trying to sort of balance those 2 things. And so it's very difficult to get -- if you have transactions that are accretive on the way in, it's difficult to have them be accretive on the way out, but we were able to, with those valuations, get sort of a neutral to slightly accretive zone for the combination of those 2 assets. So that was another win in the process.

Okay. Great. And then, I guess, just generally speaking on the turnaround, is there any kind of update how you guys feeling about the progress and the outlook there?

Well, it's a overall strategy in value creation. Yes. I mean I think we have a really solid strategy in the short term. And obviously, I think the company was right a year ago to recognize the need to recalibrate and put more discipline around a focus on margin and earnings growth. And Drew and team came up with a really durable framework that has become the backbone of the value creation plan, and we brought in skilled operators from across the organization. We brought some folks in new talent from external. Obviously, Jim Murray came over from Magellan and they put together a really substantial body of work and are executing against that. So I don't think any change to that strategy. Our focus right now is really making sure that what we're doing relative to the value creation agenda aligns with where we want to go long term so that we don't make any decisions in the short term that are prohibitive of that long-term strategy. And then we're also making the right investments in the short term that are going to enable what we want to do in the long term. And so we've talked about sort of sharing more of that long-term view over the next couple of months, but no change to a real focus on executing against those value creation goals.

And I guess from the outside, when we look at companies that have gone through what you're trying to accomplish, whether it's WellCare or Molina, it seemed like those turnarounds happened in about 2 years. You guys have kind of outlined this like 3.5-year kind of turnaround. Is there a reason to think that that's the right period of time? Or is there a reason to think that you built in any kind of conservatism on that? How should we think about the timing of this? Is there something in 2024 that is a catalyst for significant improvement that we kind of just have to wait for to get there?

Yes. I mean sort of every situation is different. If you go back to WellCare, we had a 0.7% net income margin in 2014. So investors are pretty pleased when we push that up to a 2% margin here, we started with a reasonable position, and there's just a lot of opportunity to improve that. So different situation, multiyear period. There are some things that will get the momentum in '24. There's things that will take us into '25 and beyond, which, quite frankly, provide earnings lift beyond this 3-year time period with '22, '23, '24. So though there'll be annualization of things that we finished in 2024, some of these are complex structural business model changes that we want to make sure we execute very well on. And then we have the PBM RFP that our contract ends 12/31/23. So that's a '24 item. So yes, I'm pretty pleased with how it's gone so far. The levers that we have pulled, the ones that we're pulling that you'll see the fruits of that labor over the next 1.5 years. And the infusion of talent, taking some of the legacy Centene talent, but then also guys, as probably most of you know Jim Murray from his Humana days, sort of seasoned execution, operating focused executive to help us drive that as well. So I'm really happy with what the future looks like.

And then, Sarah, I guess, kind of to your point about the RFP picking up, like I guess, obviously, you have big shoes to fill with Michael being the CEO for forever. And I guess, one, is there anything you think about is kind of how you might put your imprint on the company? And then, two, I think one of the things that investors do get concerned about a little bit of Michael not was involved [indiscernible] in everything and that he knew everybody. And you mentioned winning the RFP. So like can you talk a little more -- expand a little bit more on your earlier comment about the positioning to win and what the biggest opportunities maybe are on the RFP side?

Yes, absolutely. So I think one of the realities of COVID, we all lived was just a different level of interaction, right, and being able to be out with our state partners. One of the byproducts of that was that our core team and Brent Layton, who's our President and COO, but obviously has led BD function for almost 20 years. He and his team had to provide a different level of on-the-ground support for those relationships. And as a result -- and quite frankly, alongside Michael, Brent has cultivated a lot of those senior-level state relationships. So I think I was talking to him yesterday, I think he's met with 15 governors in 2022 alone. So really, really strong relationship net between his team as well as our GR team. And to Michael's credit, I think he was sort of -- wanted to make sure that we all had those relationships as he was transitioning. So I don't have any concerns about the local relationships with governors. We have a really strong, again, GR team that's tracking all of those all of the sort of federal dynamics. So feeling pretty good about that. And again, our RFP team is incredibly strong. So we're in the middle of the California bid. When I joined Centene, that team was already starting to do work on the California RFP 18 months ahead of time, right? So there's just a discipline built into the organization around that. And then I think relative to, I guess, what imprint I might put on the organization, there is no replacing Michael. And I think in some ways, the fact that the organization grew up with 25 years under a single founder, part of what is important, I think, as we go forward, is having a really strong bench and a really strong team. And that's part of the logic of the talent that we have, the talent we brought in, but also making sure that we're harvesting all of the best ideas and leadership from across the organization. And so more than anything, I think it's tapping the talent and the potential that is already native in the organization and really allowing that to kind of drive us forward.

And can you talk a little bit about the RFPs that kind of like California and Texas. I mean, you guys already have a large presence in a lot of these things. Are you thinking about these are opportunities to hold serve and show that you can keep business? Or do any of these things have opportunity to win?

Well, so Missouri is a great example. I think there are others that are out there that as states are going through the reprocurement process, it's a natural time to assess whether there are other populations they want to bring into the fold. So I would definitely say that we are seeing an uptick in that. And then, of course, we're always looking at new opportunities, right? There are 10 states that are in a managed Medicaid model that we're not in. And so we're always assessing those as net new opportunities.

And how should we think about that growth? Because often type of companies do that repositioning towards margin. There's always kind of maybe more disciplined view about bidding for price or what contract makes sense, what the margins could potentially be. So I guess we're kind of used to seeing slower growth with margin turnarounds. If you're kind of saying we think we can be both. I don't know, is there -- am I interpreting that right? Or is there some finer points to how you think about topline versus bottom line growth?

It's definitely a combination story. I mean the great news about Centene is that we're so well positioned in the growth part of managed care. So you show up, you're going to grow. Now you've got to execute as well, but the inherent growth in Medicare, even though we'll be focusing on margin more so than growth. So yes, we're not going to grow -- we've grown over 50% in the last 24 months, 5-0 in Medicare Advantage. So to me, that's astounding. And so that gives us a much bigger base upon which to apply margin expansion principles too. So yes, we'll slow the growth in Medicare naturally. But because it's still a robust penetration opportunity, we expect continued growth. For instance, in '23, we expect we're pushing for margin expansion in our biz, but we're also trying to balance that with a little bit of growth. Marketplace, we hit it pretty hard. I mean you guys know that we are seeking to improve our commercial HBR 500 basis points compared to last year. That's a pretty big move. Not all pricing, some of it execution, some of it the absence of some of the items that hit us in '21, but decent sized move in pricing. And we sort of held serve that over 2 million members. There's pockets that we are growing underneath the marketplace umbrella. So look, we've got redeterminations coming at us over the next, call it, 18 months or so, depending on it can -- keeps on getting kicked. We've got to see if the enhanced APTCs get re-upped. If not, that will sort of clip us a little bit in growth in terms of marketplace, but we fully intend on growing as we exit this turnaround or margin expansion time period. But we'll seek out pockets in the meantime, where we can grow our core businesses.

And so I guess, particularly on the Medicare. So I'll start on the Medicare side. The Medicare rate update seemed relatively strong. Does that change your view at all about how well you can grow Medicare while still pushing for margin? Or does that just trend and it doesn't really impact?

No, it certainly -- I mean, some of it is trends that are covering trend, especially as we think about the impacts of inflation going forward, which we did contemplate as we sort of still had our bids outstanding, thought about where there might be a little bit of push on inflation. But yes, I mean, that was a, call it, I'll say, publicly a reasonable rate update for 2023, and that's a lever that we think about in terms of, all right, how can we balance pushing margin along knowing that we've got a headwind in 2024 with STARS that we've talked about a number of times. So what decisions do we want to make today in 2022 as we think about a 3-year strategy, '23, '24, '25 in Medicare Advantage. So those things line up pretty well for '23, and we'll have to see beyond that.

And then you mentioned on the exchange side of things, you've got the subsidies going away, at least as of right now. What do you think the outlook is on potentially keeping those?

Next -- where are we now, the next 8 weeks, I think, are going to be very important. So between now and when we get to sort of July 4 recess, is the prime window for there to be some actionable legislative vehicle that the Democrats put forward for that. There's broad support to say the very least. And I think of all of the health care items that could end up in legislation, the enhanced APTCs are probably at the top of everybody's list. So we're certainly helpful because I think it's been a really positive vehicle in terms of broadening access to affordable health care, but the Democrats really need to figure out how to move something forward.

Yes. And I guess assuming that it doesn't happen because often that's the right thing to assume with the government. Then what do you think the exchange business looks like? Like is that -- the exchange is going to be down next year from an enrollment perspective?

So if the enhanced APTCs are not renewed or extended, it would impact about 10% to 15% of our membership. So those folks who came into the exchanges because of those subsidies. But one of the interesting questions that we've been tracking are again, in a world where we're moving into election season, there is broad support on both sides of the aisle for coverage continuity. What are other actions and other policies that could sort of mitigate the impact of that? And so some of those are even on a state-by-state basis. There are states who are looking at what they have sitting in their budgets and trying to figure out if they can actually move policy at the state level that would catch some of those numbers. And so we sort of look at it from a policy and advocacy perspective as a yes and, right? We want to be -- we want to advance sort of the view that the enhanced APTCs are an important vehicle to push forward a couple more years. But in the absence of that, how can we help support the states in thinking about alternatives.

And I mean, we think about that 10% to 15%, it seems like you often talk about the woodwork effect on Medicaid, like you probably keep some of that 10% to 15% that people who didn't even realize how good a deal. Okay. Well, now let's pay $25, now pay $50, but it's still a good deal, I'll pay $50. Is there -- do you think you can use that 10% to 15%? Or do you think that half or is there some way to think about that? And then how do you think of redetermination is kind of playing at the time? Because in theory, people are losing Medicaid are coming on to the exchanges. And then I think you talked about the family glitch, potentially being fixed, and so that should bring people on. So there's a lot going on here, and I can envision this an area where movement is up next year on the exchanges. But I don't know, when you put all that together in the plot, what does that look like?

Yes. The 10% to 15% is 200,000 to 300,000 members. We have just over 2 million today. And you're right, there are tailwind opportunities once again, isolated in the marketplace, the catcher's mitts for redeterminations. Once again, it depends on sort of the speed and the uptake of redeterminations. You sort of -- you don't -- just to win on marketplace, you sort of wouldn't wish that on Medicaid, but it's certainly nice to have 25 of our 29 states, really well positioned to be there, not just for our redetermined Medicaid members but others as well. So yes, that would be a potential offset as well as the family glitch that needs a little bit more help in terms of the policy aspects of it to make it as effective as it can be, that I think Kevin mentioned that, Kevin Counihan mentioned that on our earnings call. But yes, there's other drivers, and we expect to be able to continue to penetrate that market. So I don't know how that will shake out, not prepared to give '23 guidance on that item. But in a vacuum, it is a headwind. If the EA APTCs do not get renewed, and we will fight hard to find other growth sources.

Well, I think to your point, one of the interesting questions will be exactly how much price sensitivity is the primary driver of the folks who came into the exchanges because of the subsidy. So it's an obvious assumption, but the question of once you've been socialized to the security of having access to coverage and care, do you think differently on the margin about the trade-off of that cost. So I think that remains to be seen.

Yes. And I guess one of the things that I'm actually increasingly worried about when it comes to exchange dynamic because I think some companies have said, hey, we went from 11 million to 14 million people. So we could go back to 11 million people. But if you fix the family glitch, maybe that adds 5 million people might qualify for that, you get 1 million back. And then if redeterminations, you can be back to 14 million people, but we have a risk pool change. In theory, anyone coming off Medicaid and buying insurance is going to be sicker. Anybody who comes off of the exchanges would probably only getting it because it was free, not because they were sick and value the coverage. So like how do you think about the potential of pricing into that potentially large mixed pool into next year?

Well, I would add. I mean, I'll let weigh on this, but I think the other dynamic that you pointed out is this family glitch population, which, again, needs a little bit of, I think, help from a policy perspective in terms of the sort of the ability for us to advocate, right, and reach those members and help them understand what their options are, but that is actually a pool that will be coming essentially out of the commercial population, the other way, right? So there are puts and takes in multiple different directions. So I think hard to say exactly what the net impact to the risk pool be.

Yes. And then to your question on sort of those members that are redetermined, we're contemplating that in our pricing today before we submit it for 2023 as well as the law of the land with respect to enhanced APTCs. Now some of that population was rough coming in. As we talked about last year, we explained the 4 cohorts. There was about 25% in that May forward -- or 25% of our membership in that may forward cohort, which we saw pressure initially when they came in and then they're performing okay now. But -- so we're factoring all that in, thinking about where things may land for next year into the big process.

And how do you think about the competitive environment right now? It seems like a lot of the smaller guys are being forced to focus on profitability. Does that change your view about where market share can be or the ability to price conservatively and still grow?

Yes. I mean, I think I said this on the earnings call, at some point, you've actually got to make cash earnings in this industry, right? This is -- at the heart of it, we're taking care of members, but we're an insurance enterprise, insurance company. You actually have to be value ultimately on the present value of the future cash streams. So yes, I think some of that is setting in to some of our competitors who wanted to sort of jump-start their growth through pricing actions. So yes, I would expect a little bit of hardening of the market because at least those sort of fringe players and that would only obviously help the seasoned companies that have the wherewithal to stick it out in that market.

Well, I think we've touched on this a couple of times before, but I think it was helpful to go through not saying it over, but that cycle of having sort of disruptors in the mix and some of the increased competition because I think it forced us to look at our products and stay at or ahead of the market in terms of innovation. We introduced 4 new products last year, starting to think differently about narrow network products and digital-first and telehealth-first product and then really leveraging sort of the local knowledge that we have. And so we have geographies where we actually, despite competition, going up by 3x, we gained market share, and we increased margin. And so I think it was a great experience for our marketplace team. They did a tremendous job in a very short amount of time to drive a lot of innovation. And then again, I point to this, I think, is sort of a leading indicator of our ability to grow profitably and really balance those 2 things as we're thinking about what the Medicare journey is going to look like over the next couple of years.

Can you remind me where your exchange margin is today versus your target margin and will it be at target next year?

Not giving next year guidance yet, but this year, a little bit below the target pretax of 5% to 7.5%. If we achieve our guidance.

Okay. But there's no reason to believe that you would -- your goal is to make progress every year on.

Yes. A big jump was this year, but there's still more to go because we want to get sort of into that zone and stay in that zone.

And I guess the same thing on the Medicare side, but the disruptors there are also seem to be pivoting towards margin. I mean I guess you're almost in that same bucket as far as someone is growing really rapidly now going towards margin, but does that help you at all think about actually growing M&A potentially next year?

Yes, absolutely. That -- with the rate update you mentioned and the levers that we've been pulling on clinical initiatives and those compound into the forward years. So a lot of levers to think about as we look at the prospect of a decent size move in Medicare Advantage from a margin standpoint, but then also having a little bit of growth next year.

And the divestiture program, I think it makes a lot of sense every time you see a company looking to focus on margins, focus on what you do best, get rid of things that you may not operate as well, but it kind of -- it's counter to what a lot of the mainstream companies are doing right now. They're getting into these other business lines. Is it because getting into more services makes sense, the more Medicare-focused you are, and that's where the intersection of providers and managed care makes the most sense? Or is there some other reason why services [indiscernible] we can improve margin capture 2 to 4x what we do in core. So why is this pivot the right thing long term? I can see why it might help in the short term, but why is it the right long-term strategy too?

Well, it's asset-specific. So I mean, we made a conscious decision. We don't want to be in the PBM business. And so that's different than looking at our CMG, Community Medical Group asset and how that provider group as a service business can actually help our core businesses succeed like the Marketplace product, as Sarah mentioned. So it's really asset specific. Panther, great business for us, it was more of a nice to have than have to have. Now we own a carrier, a specialty pharmacy. It's pretty helpful owning that asset and understanding the flows of the pharmacy ecosystem and the procurement aspect that sort of makes us smarter and we know what to push on with our external PBM. So that's a different sort of strategic consideration. So that's how we're going through each of the assets. So there will be a number of services businesses that we conclude that it's really important strategically to have that in our portfolio. Why? Because it makes us better in our Medicare, our marketplace, commercial, our Medicaid businesses.

Yes. I mean I think that's the sort of key north star of the calculus, right, is that focus on the core business and these other businesses are -- the math is done based on the enterprise value. So the value that they can drive to the core business as opposed to looking at them really as sort of stand-alone assets, right? I mean Panther was a great growth engine, but it wasn't necessarily driving enterprise value on the whole the way that we would want it to. And so again, I think we'll talk more about long-term strategy over the next couple of months. But I think for us, really focusing on the core, getting disciplined about that. I think we -- I know we believe that there's quite a bit of opportunity growing out of that core. And so don't want to get distracted from that over the next couple of years. And I think it is, at times, when you're bringing in businesses that have completely different operating models and require -- I grew up at Optum, like a totally different DNA to run, you can get distracted about your core business. And I think that's -- you don't want to do that right now. We want to get really solid at that foundation because we believe that's where the growth is going to come from. And then, again, I think where there's enterprise value, we will make those strategic choices.

So that might be the answer to the follow-up question was going to be, which is why the cash you're bringing in is for debt pay down and share repurchase. It's not for building out maybe the capability, we don't really see you investing anything else even though everyone else seems to be that's the reason that it's just a distraction from the core business. There's enough growth in the core, no need to do anything else right now.

I mean we're looking at smaller opportunistic acquisitions that would help us with our core business. So like a health plan that was in an attractive market that either we wanted to enter or we want to bolt on, we would still consider that. So we haven't ruled out acquisition. We've rolled out mega acquisitions. We've done a lot of those. We now have some opportunity, a good opportunity to integrate those better. But we'll look at opportunities. So we're not out of the M&A game.

Well, and even just investing, as Drew said, right, investing in some of those assets that we think are strategic. So TMG has been, I've talked about before, has been a really important provider partner in South Florida for our Sunshine Health plan and sort of a key part of the Ambetter marketplace strategy in Florida. And we bought them about 5 years ago and just this year, decided to invest to expand them because of the value-based work that they do across all 3 lines of business, we think is a model that we can take to other geographies. So we haven't really flash news about those investments, but we are, like I said at the very beginning, we are making sure that we are making targeted investments that are going to matter for how we want to go forward.

All right. And then maybe just sneak one last one in because I probably would get electric shock if ask a question about trends in MLR. So how are you thinking about how costs are developing across your business lines? And how did Q1 go in and how you think about the guidance?

Yes. I mean our HBRs are right in line and actually slightly tilting positive in Q1. A lot of that was PDP performance, but pretty pleased with a lot of the initiatives we've put in place that we're starting to see traction. So yes, sort of a good quarter and a good quarter exiting as well. The progression from February, March is always higher from a non-inpatient standpoint, but it was not as steep as the progression from February '21 to March '21. So the indicators are looking fine. It's tough to guarantee that going forward, but I think we've got even a better program at Centene to arrest trend and to influence it positively. And we'll continue to get better at that.

All right. Great. That's all we have time for. Thank you very much.

Thank you.