Centene Corporation (CNC) Earnings Call Transcript & Summary

I'm Steve Valiquette, the health care services analyst here at Barclays. Welcome to our next session with Centene. With us from the company, we have Sarah London, company's CEO; and also Drew Asher, CFO, as well; and Jen Gilligan from IR in the audience here. So this will be a fireside chat. So I guess with that, we'll just kick right off here. Welcome, first of all.

Thank you.

All right. Great. So I guess just starting around the redeterminations. Obviously, that's going to be top of mind for a lot of investors right now. And also, I think, some debate around the overall MLR impact related to redeterminations. I think on the one hand, you have some members enrolled in commercial exchange plans typically generate higher PMPMs and Medicaid members. There's also some debate regarding the potential higher acuity risk on the pool remaining within Medicaid. So a lot to unpack within that on the first question, but maybe I'll just start with that, just give your current view on those variables as we're evolving further into 2023.

Yes. Happy to, and I'll let you talk a little bit about the buffer that we have built in as we think about the potential shifting of the risk pool, but maybe sort of taking a step back because we are -- redeterminations are upon us. They are about to begin. And we've been doing a lot of work over -- now almost 18 months to prepare for this. We are -- we only have 3 states that are going to start redeterminations on April 1, and the rest of our states are actually pretty evenly distributed in May, June and July time frame. And we're also seeing -- we talked a bunch about the sort of 9- to 14-month time frame. We are seeing our states fall into about a 50-50 split between an anniversary-based approach versus a population-based approach. But even those states like Florida that's taking more of a population-based approach are thinking about how to stage those populations over the course of the 12 months, so that the overall process is more manageable. And so I think -- as we think about the question of what the impact may be to the risk pool, it's really -- I think the question that you should be asking is, are we prepared in the conversations with the states? Are we being proactive? Are we gathering the data? Do we have a really good ground game around that? And have we already teed up those conversations with our state partners? Because it's really about the event in which there may be a dislocation between the risk pool impact and a rate adjustment in some of those states where we're not into risk, I think the answer to that across the board is yes. But maybe you can talk a little bit about the buffer we have.

Yes, you're absolutely right. The game plan is for us to minimize any breakage, any temporary timing difference between shifting in risk pool, if there is? And then I suspect there won't be in every state, but in some states there may be. And then the timing of having rates calibrate to that. And Sarah is right. That's exactly what we've been working with state representatives on, the administrations of the states, the Medicaid departments, their actuaries, our actuaries and going through scenarios and it varies by state on what could happen and getting some receptivity to an acknowledgment that, okay, let's see how this plays out, and we may need to do a mid-cycle rate increase or we may need to sort of address this in your next rate cycle. So all the states that are interested as we are in the actual data, we'll start getting that a little bit of it in April. But as Sarah said, with that staged, call it, 4-month initiation period, it will take some time to get that data and see where we might need some quicker rate action than others.

Okay.

[indiscernible]

Let's repeat the question so that...

Yes, I'm not sure, I could even hear the question actually.

Or 2024. Whether or not we're going to see any what?

In 2024, Medicare book. Is that the biggest swing factor in terms of any earnings growth for that year? I'm not asking for guidance, just your...

So any earnings growth, as we said on the Q4 call, based upon the initial rates we saw from CMS, we would expect to underwrite that at a loss as well as shrink to some degree. We've still got to see what the final outcome is from CMS. We're pushing on that as an industry. Quite frankly, there are some surprising elements of the risk model change, including some pretty punitive elements for partial duals, which arguably are more vulnerable than duals, partial duals don't have the 100% cost share protection like duals do and duals are also harmed in the new risk models. So the industry has got a bunch of questions in CMS. So obviously, the final rate will help dictate how we set the bids. But you're right. Medicare for us, as we've indicated on the Q4 call, in 2024, we'll be under construction. And then we'll come out of 2024, we'll have a little bit smaller Medicare business, but 1 that then we can expand margin and grow off of. Meanwhile, with a great marketplace chassis that's seen some excellent growth this year and continued ability to sort of generate margin there. That's a nice complement to a business that we've got to do some things to fix, including STARS, but that will be sort of a back half of the decade grower.

Okay. Great. I think overall, we'll save the audience questions towards the end of the session, if we have some time at the end. Let me just toggle back to Medicaid for a few more minutes here, and then we'll hit on some of those Medicare questions as well. So just back on Medicaid, Yes. I think if you read some of the trade articles, there's been kind of mixed articles out there on just the level that the industry is able to kind of do outreach initiatives around some of the Medicaid members as far as retention or steering them to your own exchange books, et cetera. Maybe just give us your insights, latest traction on that as far as outreach initiatives on your members and that strategy to help just have better retention. Tackle that for a moment.

Yes. So it absolutely varies state by state, and that is part of why we've been working with states for the last 12 months to figure out what their approach is going to be. We have seen increasing appetite and interest in the states partnering not only with us but with providers, with other community-based organizations to get outreach out to members to get awareness out there, you're starting to see over the last month or 2 ads on TV to help people understand that this is coming. And again, willingness to rely on the MCOs to educate our members about the process. That is true in almost every state. But we are also, in many states now able to reach out, and we have designed a program to do so and in some cases, are already doing that in an omnichannel approach. So whether we're calling, whether we're e-mailing, obviously, the FCC guidance recently about being able to text members is a watershed moment, I think, not just for this process, but overall for the Medicaid program, CMS shows that view as well. And there's a belief that the more that we can meet members where they are. We're leveraging a lot of data that we have internally. We built a predictive model around members who are likely to redetermine off so that we can focus on them as priority in the communications. And then in some states, we're able to educate them not just about the redetermination process, but about other options that are available to them, whether they are other state-based options or whether there are subsidized marketplace products. And again, we have some states that have set that transition process up to be as seamless as possible. They'll even sort of automatically enroll you in a subsidized plan that the -- that your Medicaid MCO sponsors which is probably the most sort of progressive version of it. But this has been sort of the major operational focus of our Medicaid team for the last 6 months is gearing up for the contact and the outreach that's already started.

Okay. Great. All right. So sticking with Medicaid and maybe kind of moving away from redeterminations for a moment. The -- as far as the RFP awards over the last 6, 12 months or so, I think it's been a little more of a kind of a mixed bag of results for Centene. But maybe just give us any additional color you have on the RFP pipeline for '23, which upcoming award you think you see the greatest opportunity for Centene?

Yes. So certainly, starting with a look back into '22, we had a really strong set of RFP results, but we also had things that didn't go our way. While we won the direct contracts in California, we did lose market share in L.A. County. And I think the recent Indiana LTSS result was certainly not what we were hoping for. But I will say that the organization across all of our lines of business, I think, has an increased discipline around looking at where things don't always go the way we want them to and pulling out valuable lessons learned, asking how we can show up in the best way possible for each one of these processes. So there is a continuous improvement muscle in the organization that I think is important to call out, especially as we look ahead to Florida, which will -- should drop this shortly, sort of imminently. And then we're expecting Georgia as well later this year. And given the RFI that went out, we're hopeful that they will include the ABD population in that. Recently, many of you probably saw that North Carolina announced that they are going to move forward with Medicaid expansion that, that will pass with the budget. Over the summer, we obviously have 2 health plans in North Carolina. So that's a nice pickup for us. Also looking at some potential additional programs in North Carolina that may come up for discussion in the back half of the year.

Okay. Great. Okay. Yes. You mentioned California, the Medi-Cal RFP now finalized after the appeals process. it's kind of a done deal of that. Maybe just walk us through just the feedback from the state kind of in the final decision on the changes during the appeal. What were the deciding factors for them as far as giving you part of LA County back but also losing San Diego, it's probably unexpected, but just curious in the aftermath of all that. Just any more color around that? And also, I can't remember now, but can you -- I think it's a done deal, right? So you're not going to appeal the appeal or basically done the way to...

Yes. So California throughout the RFP, so the appeal process doesn't hold and they move to this direct contracting method that they had available to them through recent legislation. So if I -- if we step back from that process overall, I think what the state was ultimately trying to do with RFP process was to drive innovation in Medi-Cal. And they have started to do that through the CalAIM program, and then the RFP was meant to help sort of structurally adjust to accelerate that program. I think what became clear through the process of the RFP was the level of administrative disruption that the results were going to create to millions of Medi-Cal members and that, that was probably more sort of cross ways in terms of progress the innovation program that they wanted to roll forward. So I think what they came to actually was a fairly elegant solution in terms of having strong partners in each region that could carry forward their program goals. We've obviously -- Health Net has been in LA County for decades, had invested a lot in the community a lot with provider partners in terms of accelerating electronic submission of data and some of these more modern program tenants. And so just allowing that to continue to move forward without the abrasion that the process was going to create -- felt to me like a big deciding factor in how they changed course in the overall process. And I would say, from our perspective, the process of working with the state of California to resolution on that procurement was actually a really solid partnership, and I think something that bodes very well for Centene in the long term in California.

Okay. Great. All right. So I think now if we shift gears to Medicare. I think, obviously, for investors, this is pretty topical right now, especially around 2024. I think part of it was your comments on the last quarterly call about the margins could potentially be negative in '24, just given the softer preliminary rate notice and also kind of your Star scores as well. But maybe just walk us through now how you're balancing pricing versus STARS impact. I know it's kind of earlier, we not talking about benefit design to at this stage for '24. But anything you can share just around kind of build on those comments you made in the last quarterly call around that margin outlook.

Yes, you hit on the right word balance. And so there's a lot of things we've got to balance thinking about not just 2024, but 2025 and beyond because with the STARS pressure once again, based upon some poor decisions that were made in 2020 that we've got to live with and then fix going forward. There's going to be pressure there and then the disappointing advanced notice rate, disappointing, not just for us but for the industry, quite frankly, for providers also, the advanced providers, the value -- value-based providers that are taking risk, especially in places like Florida and California, Texas, Louisiana, Illinois. I mean there's some impacts from that advanced notice that hopefully get partially rectified. But nonetheless, that creates a pressure point for the attractiveness of the benefit package as well. So we're going to be balancing those things, thinking about the long run, not just what to do for 2024, but we want to make decisions like what's best for Centene for the back half of the decade, which then leads us to being in a position where we expect to be underwriting at a loss. I mean, we need to see the final rates as this gentleman was asking about. But those are the things we've got to think about balance the run rate, what levers we can pull. It's our job to create levers in managed care, our clinical initiatives. We've got to keep on pushing on SG&A. All these things go into the bid process. So that will culminate in the first Monday of June, and we're still going through that. but we have some open questions, especially with the advanced notice and exactly what actions we will or won't take for '24. But believe me, we'll be thinking about what's best for that block of business and serving the members in Medicare Advantage for the back half of the decade regardless of '24.

Maybe I could just add operationally because Drew referred to the fact that we think of Medicare sort of under construction, I think it's worth knowing that it takes time, but we know what to do, and we have folks in the organization who are very experienced at this and have done it before. And so if you think about and Jim Murray referenced this on the Q4 call, sort of a 5-point plan around STARS, and we're not starting -- sorry, not STARS, Medicare, and we're starting -- not starting now, right? So first one is STARS. We started doing that work 18 months ago. because of what we saw coming relative to legacy decisions that have been made in 2020. The second one the distribution channels, and you saw us start to recalibrate that in the most recent annual enrollment period. The third one is around member experience. Again, you heard on the Q4 call, we spent a lot of time focused on that in 2022, and we're starting to see the fruits of that labor relative to reduced CTMs as well as increased service levels in the call centers for both members and providers. The full duals, which again, we started to refocus on in the AEP, and we'll continue to do so. And then the last is around value-based contracting, making sure that we have the right network, the right innovative partnerships that we're bringing data and provider enablement into that space. And we just recently brought in a new leader in that area under Jim Murray, who are really excited about to sort of harness and accelerate the good work that's already been going on in the organization. And so again, it takes time, but it's important to note that we're not starting on that now, right? This is a journey that we've been on for, in some cases, 18 months and will continue to power through over the next couple of years.

And then you always want a part of your portfolio to be an opportunity going forward. So we wouldn't wish the position we're on in Medicare for 2024, but if we can achieve our goals, and we're still going to press, I know you're going to ask about are we still going to press for $7.15? Yes. We're going to press for $7.15. Is that a guarantee? No. There's a bunch of moving parts, but we are going to press for that. And if we can achieve that with a business that is losing money, but a really good business for the long haul. What a great expansion opportunity that becomes for the back half of the decade. So we're dealing with the cards we're dealt, but Medicare is going to be a good business in the back half of the decade. We just need to improve STARS and sort of execute on that 5-point plan that Sarah laid out.

Okay. Great. I know we talked about the '24 preliminary rate. I think based on history, when you think about the proposed rate versus the final rate for MA, it hasn't really deviated much more than 100 basis points in either [ direction ], at least over the last maybe 5, 10 years or so. But I'm just wondering if there's any schedule from either trade organizations that maybe there could be a chance for a larger revision between proposed versus final for this year. I don't know if you guys have any expectations for that, but maybe -- just any insights on whether you're expecting any move -- material move, let's call it, on final rate versus the proposed rate based on history?

I would say there's a lot of -- to touch on this, there's a lot of concern across the industry about the disproportionate impact that the rates would have on partial duals and on the momentum around value-based care because of the impact of providers and quite frankly, on really good progress on health equity and access initiatives. It's not clear where CMS will land on that. I think the other thing that's worth calling out is as you unpack the risk model, the complexity in there and sort of the maybe greater than first blush impact for the industry baked into that and what they do in terms of phasing a rollout of that risk model in versus starting in '24.

Okay. Great. Also after all the buildup on RADV going into that outcome, the stock's acted pretty well across managed care overall in the day after that ruling came out. But then obviously, the '24 [ rate ] that came out the day after that, that kind of reversed everything. So it's hard for us to gauge perfectly how comfortable investors were with the final outcome around RADV. But just to tackle that for a moment again. Obviously, the -- there was a lot of discussion rooted and the concern around the rule of the fee-for-service adjuster, and just lack of clarity surrounding these statistical methods that would have been used for extrapolation with that 2018 payment year. So maybe just as that has a little more time as evolved since that came out, what options do you have on the table to respond to that final ruling? And what are you guys doing now relation and all that?

Yes. So the final rule kind of is what it is. We are certainly talking to our industry partners about what the overall response may be. If the impact is what CMS has guided to, I think that's manageable. But absent an understanding of what the approach is going to be and the details around that it's hard to say for sure. So we're still evaluating.

Okay. Okay. I think also on Medicare here. The -- I mean, I guess just for '23, with the overall AEP results coming in a little bit softer than the expectations you focused on the margin stabilization over membership growth for '23 as well. Coming out of that AEP, does that give you any different thoughts on how you're going to approach things going forward from there. So I guess, what were the learnings from the '23 AEP based on how you guys set up your strategy?

Yes. Again, our focus was on more on margins, but broadly on stabilizing the foundation of that business, and we made some of those, what I would call, long-term trade-offs in terms of starting to rebalance the distribution channels. And the competitive environment overlaid on to that, I think, is largely what led to the softer-than-expected enrollment. But again, those are decisions that are right for the long-term reconstruction of the business. And I think, again, we'll have a positive impact on STARS and member experience in year, which create tailwinds for STARS. So we've talked a bunch about that. I don't think that changes how we look at '23. And again, it's sort of a multiyear journey to make sure that we feel like that business is solid for the long term as possible.

Okay. Got it. Okay. And we still got a few minutes left here. Maybe we'll just jump to some questions that impact more of the overall enterprise. I don't know if you're in a position where you can talk about utilization trends and how things are shaping up so far in 2023, but maybe you want to pick your brain on any insights you might be able to share on that. If you can't, I understand as well, but curious if you got any thoughts.

Yes. I mean we came into '23 -- we ended '22 with strong momentum, not just financially, but I would say, operationally and culturally as well, and we've carried that into -- on the Q4 call, we raised revenue guidance by $2 billion and pointed to the top half of our EPS range of $6.25 to $6.40 for the year. January and February looked good. Flu seems to be subsiding early as the data was suggesting it was going to. I don't know if there's anything else you want to add.

No. just update inter-quarter update, January and February look.

Good. Okay. That's helpful. One or two more questions here. Obviously, Centene has made a number of divestitures as part of the ongoing portfolio review, a lot of announcements around all that. Just remind us right now kind of where you are to use the sports analogy of an ending on what quarter we're in, not on the whole process. But maybe just if you could frame it that way to -- most of that is kind of behind us now? Or is there still some more wood to chop around all that?

I think we're probably in the seventh inning stretch to pick up the metaphor. We did a lot of good work in late '21 and '22, 7 major divestitures. And I think what remains in the portfolio sits in the bucket of more strategic and more complex in terms of getting to the right endpoint. But there's still work underway there, and we'll obviously continue to update as we work through that.

Okay. And final question, Drew, you're right, I will come back to the $7.15 number for 2024. I mean. So tying a lot of the things together that we talked about today, and also since more time has passed since you announced the PBM contract award, maybe just share with us whether or not you're still feeling just as confident, if not more confident on those PBM savings as part of the EPS algorithm for next year, but also just again, it sounds like you're reiterating your ability to hit $7.15 number, but just wanted to try to confirm that as well.

Well, we're certainly reiterating our desire to hit that number and constructing a plan and there's a path to get there. Obviously, you got harder with the CMS advanced notice, but the PBM savings are on track. That still looks good. Investment income continues to be strong. Don't underestimate or quite frankly, undervalue the Marketplace franchise. That's a bigger franchise. It's heading in the direction to be a bigger franchise than our Medicare business, which is $20 billion and we'll take a step back. So Marketplace being a strong contributor, not just to '23, but to '24 as well. So we've got a lot of, like you said, wood to chop and execution, probably another divestiture or 2, as Sarah mentioned, being in the seventh inning. But we've got sort of the road map to continue to execute but we will be making decisions based upon the back half of the decade and what's best for this company in the long run as we still charge towards short-term targets.

Okay. Great. With that, I think we're out of time. So I want to thank Sarah and Drew for their time today, and enjoy the rest of the conference.

Thank you.

Thank you.