Centene Corporation (CNC) Earnings Call Transcript & Summary

Hi, good morning. I am Cal Sternick. Thank you all for joining us for the JPMorgan Healthcare Conference. I'm pleased to have with me here this morning from Centene, CEO, Sarah London; and CFO, Drew Asher. So before we get to Q&A, I'm going to turn it over to Sarah and Drew for some brief introductory remarks.

All right. Thanks, Cal. Good morning. Can you all hear me okay? All right. Good morning. We're excited to be here with everyone in person and to kick off the conference. For those of you who are newer to the Centene story, I thought I might provide a little bit of background. For those of you who've been following us, this may be repeat. But Centene is one of the largest managed care organizations in the country, serving more than 26 million Americans. We focus on government programs and have a deep expertise in serving lower income and medically complex populations. Today, we are #1 in Medicaid with more than 15 million members in 30 states across the country. We are also the #1 carrier on the health insurance marketplace, having been in that product line since its inception. And over the last couple of years, we have significantly grown our Medicare footprint and now operate in 36 states and have a unique concentration of dual eligible members. For the last year or so, Centene has been on a value creation journey. Part of that is -- the goal of that is really to leverage the size and scale of the organization that I just described to operate more efficiently, to improve quality across our business lines and, ultimately, to deliver enhanced value to our members, to our government partners and to our shareholders. We had our Investor Day in December and talked about the fact that this value creation journey is really the bedrock of our long-term strategy. And we believe that by focusing on our core business and investing to be easy to work with, as well as leveraging the unique local approach that Centene takes and building on trusted partnerships to drive innovation that we will be able to deliver on our short-term EPS targets between now and 2024 and then deliver 12% to 15% EPS growth over the long term. So we just finished out the first year of that value creation agenda. 2022 was a very busy and successful year. We had strong earnings performance. We delivered on all of our major operational milestones. We had a successful procurement year. We also divested a number of our noncore assets as part of focusing on our core business. We deployed capital in a strategic fashion against that value creation framework, including material share buybacks. And at the very end of the year, we installed a new leadership team at the top of the organization to reflect the depth of managed care experience that we have within Centene. So very excited about 2022, coming into '23 with solid momentum. And as you can imagine, given our footprint, we've been very focused on the Marketplace and Medicare enrollment periods. Still a little too early to know exactly how those are going to play out, but we are seeing soft membership in Medicare as a result of our decision to focus on proprietary distribution channels, which is consistent with our strategy in Medicare this year and setting up for the long term, focusing on margin, product stability and overall quality. We're also seeing very strong performance in Marketplace, consistent with our belief that the market stabilized coming into this enrollment period and created a positive environment for profitable growth. So our earnings guidance for 2023 remains $6.25 -- $6.25 to $6.40, and we have a few more weeks to shake out. And then we'll revisit revenue guidance if needed, which will likely skew to an increase net of divestitures. So more to come on all of that, and I will turn it over to you, Cal, for questions.

Thanks, Sarah. So maybe just to touch on guidance in a minute. But I think the first thing I wanted to ask is, you've been in the CEO role for now almost a year. Can you talk about what surprised you the most so far?

Yes. I think I knew this, having been part of the organization, but what is most interesting and surprising is just how mission-driven Centene is. So from the top of the organization all the way through to our frontline employees, we have 70,000 people -- more than 70,000 people who show up every single day, deeply committed to the mission of transforming health of our members and communities. And while that is and sounds like a feel good, it's also, in many ways, a super power. Because when you are asking an organization to go through tremendous change, fundamentally changing our operating model and starting to transform for the future, the fact that our employee base is so committed to doing the right thing for our members means that they can absorb that change and get enthusiastic about it. And I think that has been part of why we were so successful in 2022 and created sort of an engine for transformation and impact going forward.

Great. So you mentioned that soft MA membership, very strong Marketplace. And I think that was reflected in the guidance you gave at your Investor Day last month. Has anything come in a little bit differently than what you expected? And when we look for the guidance increase, I think, probably with fourth quarter, right, I think will that also include the impact of Medicaid redeterminations and the timing shift there?

Yes. Do you want to cover that?

Yes. So when we talk about soft MA membership, it is relative to what we said at Investor Day. Also, strong Marketplace membership relative to the high teens that we laid out at Investor Day. So meaningfully stronger than that already strong result. And so that will shake out likely in a revenue increase. We've got to get through the enrollment period for Marketplace, which ends January 15, or for some state exchanges, it actually goes to January 31. Look at the data and then at the earliest on the fourth quarter call in early February, we'll be able to give an update there, just how the open enrollments shook out.

Got it. So maybe just to start on redeterminations, I mean we now have some clarity there. It's like April 1 is when things are going to start and the states have 12 months to complete the redetermination process. I think even prior to the spending bill coming out and then shortening the time line there, there were questions about whether or not states could realistically get this done within the 14-month time frame. Can you give some color just on state readiness to complete redeterminations? And in your view, is 12 months an achievable or realistic time line here?

Yes. So one of the benefits of the fact that we were all preparing for redeterminations at this time last year is that it has allowed the entire industry more than a year to think about what is the right administrative approach, what is the right collaboration structure in order to maximize coverage continuity and minimize member abrasion, which is in every state that we talk to, regardless of budget, state or political leaning, that is a priority. Twelve months does feel very realistic to get that done. Certainly more realistic than I think where some states started in the 6-month range. And what we saw over the course of last year was that most states started to move into that 10-plus month zone. So across our membership base, we have 88% that were in states that were signaling at least 10 months to get the work done. And I think there are a number of different operational approaches. If you think about just -- going through the eligibility check on the anniversary that make it logical to run through in a 12-month period. There were definitely some positives for us that came out of the legislation in terms of making sure that we could help the states in reaching out to members. They loosened some of the structures around direct member communication, which I think is important for the industry going forward. And then also the public reporting of data so that we can all monitor what progress the states are making and ensure that they aren't going too fast and, in fact, creating a suboptimal experience for members.

So -- I mean, I think you said, if I heard you correctly, 88% of your states are sort of in that 10-month time zone.

Ten months or more, yes.

Ten months or more, okay. So are there any like particular states that you could highlight that are suggesting they could move faster or slower?

It's hard to say, given the current legislation where the thinking has changed. I think there was probably only one major state that was in the sub-10 month time frame. And again, I think as the states have gotten their heads around the work it's going to take to do this, they are all leaning later in the time line process.

Got it.

And you probably saw the bulletin that came out Friday, which actually enables -- it clarified for states that, "Hey, you can take 14 months if you want to or need to." so that was a good clarification.

And so -- I mean is there any impact to managed care plans if redeterminations take longer than expected? I mean does CMS have any sort of recourse against the states?

It's a good question. I think they'll all try to comply. Obviously, they get the enhanced FMAP, which steps down over the 4 quarters in 2023. But if they took longer than 14 months, it would go -- that would be well into 2024. So TBD. We're just going to work with our states to make sure that we've got the ability to reach out to members. There's been a lot more leniency. Some of it has been promulgated in the regulations. For the first time, leniency in contacting, in the modes of contacting members so that we can make sure there's continuity of care. States, regardless of how conservative or aggressive they plan on being with the timing of redeterminations, they all want continuity of care for their members. So we can help there with our Marketplace products. We're -- like Sarah said, we've been sitting here waiting and preparing and glad that we had all of this time to prepare for redeterminations and now it's going to be here, for one. It will be really interesting to see, just from a personnel and execution standpoint, the preparedness of states, but we're there to help them. They're our partners. And you guys know the numbers. It's still about $8 billion of revenue that we expect to give back. That's out of growing $13 billion. So net-net, it's been good for the company, even as we exit redeterminations. And we're focused, obviously, on the mix of membership. And so we weren't asked at Investor Day and somebody were like, we didn't get any fresh data on the data that we look at to look at the mix of business and 0 utilizers has been a question over the past 6 months. So an update there was, if you recall, what we said previously, TANF was actually up relative to our prepandemic period. That's now about flat relative to prepandemic. The expansion population curiously was down in recent periods relative to prepandemic. That's actually now up, which is a little bit logical. So it's up a little bit. And then CHIP previously was flat. CHIP is children's programs. That's actually now down relative to prepandemic. These are 0 utilizers. Once again, none of these metrics is a panacea to predict what's going to happen in the future. But we sort of weigh these things as we look at what rate increases we may need in certain places and not in others. There's a lot of talk before the break on other insurance coverage, so duplicative coverage. That's always in the baseline. And so if we look at those that we absolutely know had duplicative coverage, so therefore, there was a COB, Coordination of Benefits, event in the baseline prepandemic, about 2.7% of our members. And so think about that, that's always in the baseline and rates sort of reflect that mix. That happens in insurance. You've got a distribution of those who use a lot of services and those who use very few, some of which have double coverage. That's -- the 2.7% is up to 3.4%, so modestly up but not alarming. So these are some of the things we're looking at and presenting to our states, even in advance of redeterminations, so that to the extent we do need rate relief, if risk pools shift. And you're right, the longer it takes, the more steady and measured it is, the more we can balance getting into the state with data and getting rate changes, if necessary, probably won't be necessary everywhere. That's what we're prepared for. And we've been preparing for that for a year, and we're ready to roll.

So is the way to think about it, I guess, I know you have a portfolio of states here, right? Is it sort of ratable the way redeterminations are going to roll off? Or do you think it will be more back-end loaded?

Well, before the extension -- our assumption had been February 1. At Investor Day, admittedly, we said it's likely to get pushed. I think others had predicted May 1. I'm glad we didn't set our guidance on May 1. But the extra 2 months will modify the revenue reduction in '23, which you may recall the waterfall we showed at Investor Day, it was minus $4.5 billion of that $8 billion. So a little bit less in '23. So some of that will push into '24 as that 2 months get shifted.

Great. So maybe switching gears a little bit. California, that was obviously -- that's a big state for you guys, and that outcome, I think, was a little bit better than you guys had anticipated or certainly than we had anticipated. Can you talk about the subcontractor relationship with Molina. That's a little unique. And I think the state's original goal was to only have one commercial plan serving Los Angeles. So I guess, looking forward to the next RFP cycle, how do you think the state sort of evaluates each of your performances given this unique relationship?

Sure. So we were very pleased with where California ended up and believe that the way that the department made decisions was consistent with our view of prioritizing the best interests of Medi-Cal members. We remain the prime commercial contract holder in L.A. County as we are today. So it's actually important to point out that this is not really a unique or a different arrangement. We are the prime carrier in L.A. County today, and we will remain the prime carrier. We subcontract to Molina today, and we will continue to subcontract to Molina going forward. And so that means that we are responsible for ensuring that the quality of the programming and it gets delivered to Medi-Cal members across that entire member base, including those members that are subcontracted to Molina, is as high as possible. But it's not really a different relationship for us with the state. And I think it actually provides wonderful continuity in terms of a tremendous amount of work that Health Net has done to advance the Medi-Cal program and really sort of bring forward the next generation of Medicaid care in California and allows us to continue that momentum very much as we have been.

Great. And so going back to MA here, I know you said a little bit softer than you had initially guided for. Can you talk about in retrospect, how you think Centene's benefit offering is compared to what was in the Marketplace? What were some areas where you guys were maybe a bit more competitive than you anticipated? And where you guys were perhaps a little bit less competitive?

Yes. So -- I mean at a high level, again, just to go back in time and level set, right, over the last 2 years, coming into this year, Centene grew our Medicare Advantage book by 50%. And so our goal coming into this year was really to focus on overall product stability because we know that we have Stars headwind next year. And so we constructed the benefit design in order to avoid whipsawing members between this year and next year as well as focusing on margin expansion, which had not been the focus previously, and making operational decisions that we felt were important to drive quality outcomes because obviously, that's a major focus for us coming out of '24 and into '25. And so the benefit design was really, again, with that eye to stability between this year and next year. And then one of the things that we did was to rebalance our distribution channels and really focus more on proprietary channels, which we think are going to be important for us in the long term, have a positive impact for us in terms of quality and also important relative to our stated focus pushing into the duals population.

And so as we think about that growth rate going forward, how should we think about growth going into 2024 with the Stars headwind? And then into 2025 as you start to make some improvements and progress towards that 60-percent plus goal?

Yes. So all things equal, and there are a bunch of things we don't know yet, right? We still haven't seen the initial or final rates. The goal is to really hold serve through 2024 on the population. And again, that's part of why we designed the benefits the way that we did and started to rebalance the distribution channel. So we felt solid carrying through 2024 and then turning back into growth mode in 2025 and beyond.

And any thoughts on what the initial rate environment could look like for 2024?

I don't...

Yes. I mean we don't want to speculate. So it's obviously been healthy the last couple of years. We're just going to have to wait and see. But the industry will calibrate the attractiveness of benefits around the edges with respect to the rate.

Okay. I think the other big issue for Medicare right now is obviously RADV and we're all expecting that to come out next month. Can you talk about what you're expecting when the final rule drops?

Well, there could be a range of outcomes. Obviously, there's 3 big issues that the industry has, and we're pretty aligned in sort of going way back. So retro far back, in some cases, being asked to find charts on claims that were submitted, not supplemental files, but claims that were submitted by providers a decade ago and often the provider office doesn't exist anymore. So that's one issue the industry has, extrapolation and the statistical soundness around that. And then probably the most meaningful factor is making sure it's calibrated properly with fee-for-service. So we'll see where those things come out. I think the industry stands to respond if it's not a fair and equitable approach. But at least for us, the processes that we employ, the rigor on double checking and looking in both directions is pretty strong relative to, let's say, I remember 4 companies ago, 15 years ago, where we were scrambling just to make sure the vendors were actually storing our charts. And so I think the industry has really done a good job in vendor management, I know we have, but compared to 15 years ago.

And just mechanically, I mean how does it work if CMS finalizes the rule? I'm assuming everybody is going to come out and sort of protest against this. Is it something that will implement? Or is it something that will have sort of a stay put on it until all of the appeals are finalized?

Well, it depends. Really, it depends on all the open audits from 2011 to 2013. There are open audits even beyond that. There are non-statistically sound audits where they were looking at specific diagnosis codes. So it really depends on what comes out. And you're right, it's going to be reasonably complex on what it impacts and where, where is it going forward, what the process is going to be. But like I said, I think the industry is probably -- at least the large participants in the industry have done a good job making sure we've got sound processes.

And I guess, how have MA coding practices changed over the years? Is there anything you've noticed or observed in the industry because RADV, the headlines around that have gotten larger and larger over time. I think there are concerns about the growth of Medicare Advantage relative to fee-for-service. Have you seen coding practices in the industry change at all or pretty much just status quo?

I think it's the rigor and the documentation knowing that there could be scrutiny. And the alignment with providers, that's really what's changed to the good in the last, call it, 15 years. And making sure that provider -- advanced providers, partnerships, value-based contracting that there's alignment and data sharing between the payer and the provider, which is actually good for the member, ultimately. So that's probably one area that's gotten a lot more sophisticated, which only helps you in the documentation that's necessary regardless of what rules come out.

I would just add related to that, I think the advent of digital data, right? So getting digital clinical files and then there has been a huge uptick in the technology to be able to process that data. So Apixio is an example, right, being able to harvest out of the unstructured data. And I think we've also observed that those vendors have applied increasing rigor around, for example, looking not just at codes that can be added, but also making sure that all of that machine learning and AI is going back and checking for deletes as well, right? So the pace of the technology innovation, I think, has stayed aligned with the regulation. And I think that's a positive signal going forward.