Centene Corporation (CNC) Earnings Call Transcript & Summary

Okay. Well, thank you, everyone. Welcome. My name is Michael Ha. I managed care and health care services analyst at Morgan Stanley. And our next session is with Centene, one of the largest providers in Medicaid managed care, individual exchange as well as a growing Medicare Advantage business. I'm very pleased to have with us today, Chief Executive Officer and Vice Chairman, Sarah London; and Chief Financial Officer, Drew Asher. So maybe I'll start with the research disclosure, and then I'll pass it off for some introductory remarks. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So with that said, I'd like to turn it over to Sarah [indiscernible] remarks.

Great. Thanks, Michael, and good morning. Thanks for having us. I thought I might just sort of level set where we are in 2022. We're pleased with how the year is evolving. We posted 2 solid quarters and have raised guidance 5% at the midpoint since our original 2022 guidance at our December '21 Investor Day. We've shown strong growth in Medicare as well as good progress on our margin expansion agenda in marketplace. On the Medicaid side, we recently won our reprocurement in Mississippi. Hopefully, you guys can hear me. Okay. Just going on that a little bit. And also won our reprocurement in Missouri, and we're awarded a sole source Foster Care contract, which was an expansion business for us. And then we entered our 30th new state with a win in Delaware just about a month or so ago, which we're pretty excited about. I'm sure we'll talk more about it this morning, but we're surprised and disappointed with some of the results in a recent California RFP despite winning in 9 counties, we lost L.A. and Sacramento. So we can talk a little bit more about that, but we are in -- thank you. We are in active protest there along with others, and we'll really need to just see how that process plays out. In the meantime, we have hit all of our operational milestones from a value creation perspective, and that includes refactoring some of our core operating shared services business models, platform migrations. We have adjusted our entire real estate footprint to reflect the fact that we have a more flexible approach to hybrid work for our employees and are on track for a very important PBM RFP that I'm sure many of you are tracking closely with us. We've also made really great progress on our portfolio review, and we have announced intention to divest 2 of our pharmacy assets, PANTHER (sic) [ PANTHERx ], which already closed as well as Magellan Rx. And then our Central European and Spanish provider businesses. And that process continues and will continue. And we feel really good about the progress we're making there. All of this in 2022, so far, while we have been shepherding the organization through a leadership transition. And I think that has been a testament to the resilience and mission-driven focus of our people. So as we look to the rest of the year, continue to be focused on operational execution and value creation, continue to be focused on margin expansion as we head into open enrollment for marketplace and medicare here over the next months -- a couple of months, continue to focus on our portfolio review. And then perhaps, most importantly, the process of codifying our enterprise strategy, both for the near term and for the post-2024 horizon. I'm very much looking forward to sharing more about that at our upcoming December Investor Day. So with that, I will turn it back to you. We can dive in wherever you'd like.

Great. Thank you, Sarah. So maybe just kick things off, update on utilization. Just how is it trending so far in 3Q across your business lines relative to your expectations?

Yes. So we'll have to report that when we report Q3 at the end of October. But as we exited the second quarter, stability, a lot different than Q2 of 2021, where we had a fair amount of pent-up demand, especially in our marketplace business as we were sort of navigating various waves of COVID. So pretty stable. Obviously, we've got July under our belt. We're just in the process of closing August, but feel pretty good about the macro environment for utilization where we've got to watch that and we've got a lot of initiatives that we've built up over the past year, 1.5 years to put in place to do our job and manage trend like a managed care enterprise should be doing. So we've got a slate of initiatives that on behalf of our state and federal customers, manage trend.

Great. Great. Thank you. So let's get into Medicaid now. So with the California awards, like you mentioned, it was a bit of a surprise that, unfortunately, you lost Los Angeles. And I know you're undergoing the appeal process, but with scorecards now public, having had time to assess the awards and just where you may have scored lower. I was wondering if you could help us recap the assessment, anything notable, anything on the scorecard that may have surprised you? And are there any implications for your long-term earnings targets?

Yes. So as I said, we were surprised and disappointed by some of the results. I will point out that we did win awards in 9 counties as well as some significant expansion in San Diego. But given the long track record that Health Net has had in L.A. County, and I think sort of the tight band of the scoring as well as the strength of our provider relationships in that county, we were definitely surprised, by the way, that, that turned out. And then in Sacramento, that county actually ran what you might call sort of a practice round. They ran an RFI earlier this year ahead of the state process and Health Net scored first in that process. So also a little bit surprising about where the state process turned out as a result. But we continue to review the scoring and review the other submissions as part of the normal protest process, and that is again, we are sort of an active protest along with others. And there are range of outcomes to that. So we really just need to follow the steps and see where that plays out. I don't think -- our view is that there's not a broad RFP capability issue, right? I mean if you just look at the track record of reprocurements and [ net ] new procurements this year, right, we've shown really well in 2022 thus far and going back the last couple of years as well. And again, the 9 counties we won plus the expansion in San Diego doesn't point to some sort of structural issue in our business development team, which is incredibly strong, and that's why I think we need to go through and see how the protest process plays out.

Great. Great. That makes sense.

You -- just to not leave a hanging chat here, you ask about long-term forecast. So let me address -- in 2021 at both of our Investor Days, we laid out a multiyear game plan. And so we do that for you guys, to our investors. We do that for our employees, our management team to hang out what our goals are. Our goals aren't changing. We're still going to shoot for that. What we need to do is figure out as we approach '23, then '24, every year, you sort of accumulate the headwinds and tailwinds. We're optimistic about the protest, but obviously, losing L.A. County and Sacramento would be sort of a meaningful unanticipated headwind to that model. But there are other things we're working on. The PBM RFP that's actually going well. We need to wrap that up in the next couple of few months, see what value that delivers for 2024 and beyond for not just us but for our state and federal customers. We've got the value creation initiatives. We've got STARS on the flip side. We're going to get visibility on that very soon here in the next month that will become public. Where does that set us up for 2024? What tailwind then does that create for 2025? So this is -- there's a lot of give and take and pluses and minuses for us to manage through. But our goal is what we're shooting for is still the same.

Great. And just turning to the broader RFP pipeline for the past few years, I think everyone knows the RFP pipeline has been basically stalled -- halted not much going on. But now looking for -- there are bunch of reprocurements happening, some greenfield opportunities. I think [indiscernible] has pretty material exposure coming up just across Texas, Florida, Nebraska, Georgia and New Mexico, estimate around 10% annualized earnings exposure. So could you talk about how you're positioned in these upcoming contracts? And specifically for Sarah, I know it hasn't been long since you were appointed CEO, but I was wondering, have you had a chance to travel the established relationships with state leaders?

Yes. So the short answer, the easy answer to that one is yes. And I've spent an increasing amount of time over the last couple of months getting out and being in the market and connecting with our key state leaders. But I'm also not the only one that's doing that or that has been doing that, right? We believe it is important to look at the state relationships from sort of a multivariant perspective, right? And that's understanding who owns the relationship with the Medicaid agency, who owns a relationship with Department of Insurance, who owns a relationship with the governor, and we want to make sure we have multiple touch points. And as you said, particularly going into some of our larger states like Texas, Florida and Georgia and the uptick in activity broadly in the RFP pipeline. That has -- it has always been a focus. And actually, it's one that if you talk to our BD team, they didn't shut down during COVID. They were still out in the field having conversations, making sure that we had those touch points in whatever way that we could because our state relationships are a critical part of the business and making sure that we are seen as a really good partner. And I will say that in the conversations that I've been having with governors, I hear a lot of positive feedback about the way that Centene shows up as a partner in the market and really listens and tries to work closely with the state, but we can always improve there. And in fact, a big tenant of the value creation plan is not just about margin expansion, it's about being easier to do business with. And the idea that if we can be a seamless partner for the states, our conversations can be more focused on the innovation that we can bring or that we can collaborate on together. So particularly as we look forward into RFP pipeline, it's important for us to have that active dialogue to be making sure that we are tight in our operations, which is again part of all of this value creation work and then starting to think about what are some of the innovative programs that we can bring forward either into core products or to help really for those states that are thinking about expansion, right? So think about the RFI that came out in Georgia, which we responded to looking at more complex populations, Indiana is looking at an LTSS bid. And we are uniquely positioned among our peer group to actually have that conversation with states because we manage more of those medically complex populations. And so we have those proof points. We can actually be a thought partner in terms of how to design the program and make sure that they're successful. So all of that is that's sort of normal course for us and continue to be focused on it as the RFP pipeline ramps up.

Got it. Maybe just turning to Medicaid rates and with the end of the public health emergency coming up. We won't just have redeterminations resuming, but also the end of the increased FMAP as well as 100% FMAP on COVID vaccines and treatments. So granted state budgets are in a much better place, but with potentially impending recession not to mention providers are seeing inflationary pressures. How do you view all these spring factors playing into your view on Medicaid rates?

Well, macro, the Medicaid population and that line item in the state's budget is really important to the states. And managed care whether it's us or our peers delivering value for states, I mean that's something that's central to their ability to manage their budget and quite frankly, increase quality on behalf of Medicaid eligibles. So it's a big focus for the states, and there's largely -- there's a commitment to managed care, Medicaid where we are with our footprint. You're right. The budget situation in states, I don't think I've ever seen it better coming out of the pandemic. Some of that's obviously the federal funding, but also some of the sales tax revenue depending on the states. So that's a good weight on the scale in terms of a rate environment conducive to sort of actuarial soundness. So the best thing about -- the PHE is going to end at some point. Who knows? It's -- the can has been kicked a number of times, but it's going to end. And the redeterminations are going to recommence. The good news, we've had a lot of time to prepare for this, work with the states, develop even templates for all of our health plans to develop the data necessary to -- that may or may not be necessary to go in and convince the states that the population has shifted if it has, and it's going to be this ramping impact. I think we said in our last earnings call, 88% of our membership are in states that we believe, based upon our research in our discussions and our feet on the street will take 10 months or more for the redetermination process. So that gives us some ramp probably '23 into '24 to the extent that any of those states, there is a dislocation in terms of the risk pool. The data that we've looked at, we shared that at Investor Day in June and again on the earnings call, doesn't look alarming in terms of the mix of zero utilizers or HBR of cohorts at 0% to 25%. There's a number of ways we've looked at that data, but we're vigilant, and we're prepared. We've gotten our stage prepared to have those conversations. So we're ready, and we're ready with our [ catchers mid ] as well in marketplace, which is one of the great strategies that this company has had over the years of having that as members go up and down the federal poverty level ladder, that there's an option, an affordable option, especially with the enhanced APTCs getting re-up for 3 years. That was huge, and very important to the affordability of health care. So we're ready, and we're ready to execute.

Great. Great. Maybe just one more on Medicaid, particularly around risk corridors. I believe at the end of last quarter, you had around 10 live COVID era-risk corridors, in net payable positions, capturing your earnings outperformance. So my question is, does your guidance assume all 10 COVID era-risk corridors sunset this year? I'm trying to get a sense, basically, if corridors do sunset, utilizations continue to trend favorably, if that could give you opportunity for margin expansion in the back half of the year relative to what's currently in your numbers?

We expect most of those tend to sunset. I mean we thought some of them would sunset sooner. But once again, the PHE has been extended. There's not a direct linkage there, but I think there's an indirect linkage. So yes, we'll watch for that. We're not betting on some major shift in that risk corridor in our 2022 guidance.

Got it. Got it. And maybe just shifting gears to the exchanges. So sitting here today versus last month, clearly, a lot of change, inflation reduction at enhanced APTCs are extended. We have the potential family glitch fix, [indiscernible]. So even with the more conservative pricing stance just seemingly a lot of membership tailwind. So, if you were to add those pieces together, how do you think about membership growth heading into next year, all things considered?

Well, we're in the process right now of preparing, negotiating our annual operating plan, which is our budget for next year. And it's good to have visibility on the Inflation Reduction Act and the enhanced APTCs because that was going to be not an insignificant headwind had that sunset. And once again, more importantly, it's an excellent element for the affordability of health care for those who need it the most. So we're still working on that budget, and we'll roll out our formal 2023 guidance at Investor Day. But you're right to think about sort of the weights on the scale. The longer the PHE gets pushed back, good for Medicaid, sort of the opportunity to capture that doesn't start in marketplace until the PHE commences. So obviously, that's a future tailwind opportunity if you just isolate marketplace. And then in the pricing area, a little bit more rational behavior with some of the newer entrants, but not all. So we'll probably see that over the next couple of years play out. So on balance, a little bit more hardening of the market, but there's still a player or 2 that it will be interesting to see how they do with their pricing strategies. So we've powered through that before, and we've got a diverse portfolio and feel pretty good about our ability to execute the know-how that this company has developed and stayed with marketplace when others got weak in the knees, including myself, at other companies, but we have a really strong marketplace value proposition for both the states and consumer.

Great. And just sticking on the exchange pricing topic, presumably, when bids were submitted, they were assuming enhanced APTCs wouldn't continue. So now that, that's been extended, I understand a couple of states, I believe California and Georgia reopened their book to finalize rates. I just wanted to ask how many states have you seen that has actually reopened book to reestablish rates? And has there been an impact, like a noticeable impact?

Yes. So some -- it's state by state, but some states, while they didn't collect too explicit bid packages, they were able to identify the assumption, the toggle assumption for enhanced APTCs in or out. And so there was a couple of states that automatically adjusted everyone's rates with that assumption. There's one large state that sort of blended that and made those adjustments in people's rates and said, "You got to refile." So they directed the participants to do so. And then there are some states where there was an opportunity to tweak your rates should you choose if you wanted to, based upon that change in the assumption. And then there were some states that -- the rates were the rates you file, what you filed, and those didn't change. So it's sort of a popery across a pretty large footprint.

Got it. Got it. Maybe shifting gears from Medicare Advantage for a bit. Just wanted to start with D-SNP. And I mean, you're not surprised, D-SNP has been very successful over the past 5 years since it was established as a permanent program, industry growing at roughly 20% membership growth CAGR over that time. However, the integration requirements between Medicaid and MA have been loose as it's currently not mandatory to have to operate a Medicaid plan to operate a D-SNP. But with more and more states beginning to implement stricter requirements, I believe there are around 10 states now that require Medicaid contract to operate a D-SNP plan. My question is, do you see a future world where all states eventually require this integration requirement? And if so, how do you feel about the positioning of Centene and the attractiveness of Medicaid in that environment?

Yes, it's interesting. We were actually last week with all of our plan presidents, and this was one of the trends that they were calling out. So as you identified, there is a trend toward a tighter integration, I think with good logic to that, right, because you can sort of harness the power of the Medicaid network, the community-based resources and really create an integrated experience for that population. And so -- and then I think if that trend continues, it certainly suggests that having a strong Medicaid footprint is beneficial, and that would be a positive thing for us. But we are -- I did hear that actually last week qualitatively among some of our planned CEOs just in terms of the sort of gestalt of the dialogue that's coming out of the states. I don't know that we could say that every state will get there. I think the one thing that we've learned from being in 30 states is that those are 30 different points of view, but it has seemed beneficial to sort of tighten that linkage. And so that's something that we're watching pretty closely. I don't know if there's anything you want to add?

That's good.

Great. Great. And you've been very vocal about Medicare Advantage, low single digit to mid-single-digit growth next year, really transparent about the STARS headwind coming for payment year '24. So I know we're still some time away from 2024, but as we orient our jobs around the coming headwind, how should we think about the MLR impact to 2024 presumably a headwind, but how should we think about the magnitude that could come to play in '24?

Yes, we still need to get the final results. We've got the planned preview, but that's not public yet. So -- and we've laid this out, I believe, at Investor Day, if not the second quarter call. The earnings opportunity in Medicare for us is higher in '23 and 2025 than 2024. That's because of the STARS headwind that you point out, which is based on dates of service, 2021, actually goes back to the back half of 2020, some of the ops and admin measures as well. As the sunsetting of the disaster relief provisions. So we've got strong revenue for 2023 calendar year and midyear. And then we're going to have -- that will hurt the HBR for sure in 2024. That's sort of been in our planning, the severity of which will figure out soon. And then we expect the recovery going into '25 and '26 and thereafter because what we do today, what this management team can do today in 2022 will drive revenue in 2025. That's sort of this 3-year long STAR journey, and that is what it is. So we can't turn back the clock, but we can definitely impact today in the future. So we got a power through '24, and that's why we did some other levers to help cover that.

Great. That makes sense, and I'm sure we'll find out in about a month from now, I think, [indiscernible] out -- so maybe shifting gears to value-based care, a topic that I think when people associate with Centene, might not be as evident. I understand you've mentioned previously about 25% of your Medicaid membership is an upside, downside risk arrangements. So 2 questions on my end. Is there a target and how much higher you see that 25% progressing in the coming years? And two, is there a world where there can be full capitated risk for Medicaid?

Yes. So value-based care, I think you're right, historically may not have been a major focus for the organization. That shifted really during the pandemic. We made a big push, particularly in Medicaid, and we'll continue to make that push across lines of business. I think it's clear for us how to do that in Medicaid. I think the industry knows how to do that as do we in Medicare. Marketplace is still evolving because of the population churn and what's the right model. But we're starting explore that as well. And relative to a target, I don't know if there's a hard number, but more, right, in general, we've talked a bunch about our provider strategy and the idea that -- we believe across lines of business, having the strongest provider partners who know how to operate well in a value-based model. Who can help us drive positive outcomes for our members and good member experience is more important than owning providers. And so that discipline around selecting providers, constructing value-based arrangements that make sense to them. And really also what can we be doing from an enablement perspective to help providers on that journey. So we've been talking a lot about the investment in data and what kind of information and kind of ancillary services or support we can put around those key providers. I know we talked about at Investor Day, we have 1,700 FQHCs across the country that we contract with. A big portion of our Medicaid membership runs through them, and they sit at varying levels of sophistication relative to value-based models. So one of the things we're talking about, and I'm sure we'll talk more about in December is how do we actually help sort of mature those providers that are key clearing houses and partners for our population. We do have providers who -- to your second question, who operate in fully capitated Medicaid models today, not a [ ton ]. But I think there is an opportunity. And again, some of that is us selecting the right providers and then kind of narrowing our network to put more members into those models that are really focused on a positive patient experience and ultimately, the right health outcomes, which controls costs.

Right. And just on the topic of owning providers, Community Medical Group, CMG, you acquired back in 2018. At-risk [ PGP ] companies serving over 70,000 lives in one county, 5 years later, I guess, how has that been progressing? How many centers do they have? And what's the potential there? I know it's a 10-part question. But what percent of their members also aligned Centene members.

Yes. No, it's a good point. And CMG, we've talked about CMG, but it is sort of more the exception than the rule relative to the strategy, but we've owned them for about 5 years. They have grown nicely in that time. They're at 19 centers today in multiple counties in Florida. They are a great example, I think, of our view of the provider strategy along 2 dimensions, right? So the first is who are the right providers to partner with, and CMG started as a Medicaid provider with a really nice integrated model around drivers of health, right? So a number of their initial centers were co-located with Medicaid access centers. So they thought not just about the medical complexity of a member, but do they have access to transportation, are there food and security issues, are there job training or housing issues that we can address, and then also just that redetermination process, right? Can we make it easier for them to stay consistent as a member, so they have continuity of care. And so that was what originally attracted us to the model, and they've been able to grow that not only into an integrated model of care across all 3 lines of business, but take risk on that care model across lines of business. So it's been a really good sort of proving ground for us. And also, I think, has catalyzed good conversations internally about what do we need to show up with for provider partners to make them successful, right. As I said, in terms of data because we have that close dialogue, right, they have been able to help guide us in terms of how to help them. But -- and they've been very strategic for us in Florida relative to our Ambetter product that we rolled out, the select product that we rolled out last year. So we've aligned a tremendous amount of marketplace membership to them. But they are geography specific and important for our Sunshine plan. And I think they are the case where, again, sort of the second dimension, it's more the exception than the rule that we would feel the need to own a provider. In that case, very, very strategic in a specific geography for a specific reason. We have an example of that in Arizona with Bayless Health around behavioral as well, but that is not sort of the core model. It's more on an exception basis.

Great. Great. And I guess of the 40 seconds we have left. Over the past 20 years, Centene has significantly transformed from a pure-play Medicaid plan to a diversified health care tech platform. I guess, looking forward to the next 10 years, what are -- what's an underappreciated opportunity that has strong growth opportunity for Centene to come?

Yes. Well, I don't want to front run December too much, but it's funny because someone asked me this question yesterday about coming into the organization, did I sort of have a orthogonal view of what we should be focused on? And while I certainly came into the organization with perhaps more of an orthogonal background, right, the answer to what we should be focused on, I think, is pretty clear, which is I think we have a very strategic and enviable position in our core business lines. And I think that we -- in some ways, we're getting distracted by other things. But that core position and the strength we have there as a platform, both for expansion in additional complex populations in Medicaid, in D-SNP and thinking about where to focus in Medicare, I think that is all real opportunity. And then where the market is shifting broadly, I think our strength in marketplace and serving those individuals who increasingly rely on the Health Safety Net is another opportunity. And so it's more actually about doubling down on where we are and not being distracted by other things.

Great. Thank you. And I know we're over time. Thank you very much, Sarah. Thank you very much, [ Drew ], Jen as well. And thank you, everyone. Have a great day.

Thank you.