Centene Corporation (CNC) Earnings Call Transcript & Summary

All right. I want to thank everyone for joining us today. It's my pleasure to be introducing Centene. Centene is one of the largest managed care companies in the country. Presenting today, we have Sarah London who is the CEO; Drew Asher, who's the CFO. We also have Jennifer Gilligan from IR in the audience as well. So let's just jump right into Q&A.

I guess I made a very brief introduction about you guys as one of the largest managed care companies, but you guys focus on the low income population. So I just kind of want to understand the kind of level set for the audience here. Why is the low-income population in the right place? How you succeed? What gives you guys the right to succeed in that marketplace?

Yes. Great. Happy to level set. The low income focus really comes out of the genesis of Centene as a company overall. Centene was built on the Medicaid business. And as mentioned Medicaid in the U.S. grew, Centene grew and in a lot of ways, actually, was a market maker. Going into states and helping them understand that in what is often the largest line item in their budget by moving that into a managed model, they have budget certainty and can actually distribute that membership with a series of private partners and drive the overall better health outcomes at lower cost. So the premise that you can manage members in a high-quality low-cost disposition, particularly in the Medicaid population is really sort of the core proof point of our company. And so that then led Centene to be one of the first to enter marketplace when the Affordable Care Act was passed, and we're one of the few organizations that has never left that market. And that's why we are also the #1 leader in marketplace. And then in Medicare, which is sort of the third of the government-sponsored programs in the U.S., WellCare's focus was historically also on that lower income, more complex population. And so our sort of core 3 pillars, Medicaid marketplace, Medicare focus on the government-sponsored business, which is just under 40% of the overall health care market in the U.S. is the fastest-growing segment. And if you look at the remaining segments in the U.S. market, the uninsured population, which should, over time, move into a government-sponsored program or the employer-sponsored market, which has essentially been flat for the last couple of years. We actually believe that our platform is a really powerful platform from which to disrupt the rest of the market. And then to your point, the through line is really focusing on the lower income, more complex members. And if you think about the idea that if you can develop successful scalable solutions in the most underserved communities that have the most complex health issues and have the least access overall to resources, those scale up really nicely into segments of the population where the economics are better and the overall landscape is less complex. And so that's what we believe positions us not only to win in the government-sponsored space. But over the long term, to actually disrupt the rest of the market.

And maybe just a follow-up on that. So when you say disrupt the rest of the market, how would you be disrupting the commercial employer market?

So our belief is that the individual market over time will start to -- has already started to and will continue to take share from the employer-sponsored market. And this is something we've been watching really closely as the marketplace, our commercial product is marketplace as that has stabilized over the last 10 years and in particular, over the last cycle, with the extension of subsidy -- government-sponsored subsidies into that market. We saw huge growth over this last enrollment cycle. And as we look at the data underneath that, we've been tracking -- some of that growth is coming from small group coverage. And so smaller businesses that don't or can't afford to scalably provide health insurance for their employees or encouraging them to move over and purchase individually on the exchanges. Many of them are actually eligible for subsidies. So it's more affordable for both parties to consume in that way and then we're also seeing the emergence of gig workers and just the general dynamics of how younger workers are purchasing health insurance. They are interested in choice, they're interested in flexibility and so over time, we see that trend starting to actually grow the marketplace segment, disrupt small group. And then over the long term, we think the individual marketplace is going to be sort of a dominant way that consumers shop for health insurance.

And so you mentioned as part of that reason being the government subsidies, I guess we have subsidies through the IRA going through 2025. I mean what's the outlook for that? Is there a risk of -- you think Republican President, would they want to extend that? I mean it's different to take that away versus letting it expire, right? So it feels a little bit riskier than, say, the core subsidies going away. That's pretty solid, but that extra subsidy, is that at risk?

So it's certainly at risk in that it's currently set to expire in '25. We have the Trump tax credits that are also scheduled at that same time. So there's sort of a give and take there from a negotiating standpoint. What's interesting is the extension of the subsidies, I think, stabilized the marketplace, not just because of the existence of the subsidies themselves. But because it was seen by many as a signal that the repeal and replace, so the debate that's been going on between Republicans and Democrats to try to pull back the Affordable Care Act has died. And essentially, everybody believes that the marketplace is here to stay. And if you speak with top congressional leaders on both sides of the aisle, they believe that. And in general, what we're seeing. And actually, if you look at recent legislation that's been introduced we're starting to see as Republicans look at ICHRA and the health reimbursement accounts as a really interesting vehicle for their own health care platform. And so we believe that there is bipartisan momentum around marketplace. And in general, the growth that we've seen in the marketplace and the growth we continue to see -- for us, our view is that that's a tailwind as we get into '25 because then you have that many more people who are using this mechanism and who would be advocating for the continuation of it. And in general, in the U.S., when we -- once you have given it, it's hard to take it away. And so again, it would be naive to say there's no risk, but we think we have runway to create the right momentum to push that forward.

Okay. And so maybe we can turn it kind of back to Centene. You guys are in the middle of a turnaround for the company. So maybe you could just take a step back and kind of go over how we got to the point where we needed to do a turnaround? And then what are the main levers and drivers of this turnaround? How you're thinking about the ultimate earnings opportunity within the company?

Yes. So the history of the company for, call it, the 25 years before this management team stepped in was aggressive and impressive growth and what that also created, particularly in the last decade, I would say, was organizational complexity. So there were 3 really large acquisitions and that focus on growth and there wasn't as much focus on systems integration and on operating discipline overall in the organization. And so that's really the recognition that led in late 2021 to the pivot to what we described as the value creation plan and the belief that we had reached scale in each of the 3 core business lines, which was important. So that growth was actually strategic in terms of getting to a place where the overall portfolio can weather the fact that we operate in a government-sponsored business, policy changes, politics change, the health care landscape changes, COVID happens. And when you have the depth and breadth that we have, it allows us to actually manage through those dynamics. But the organization had not spent as much time really streamlining getting into a place where we could execute as efficiently as we could. So that is sort of the nature of the turnaround, if you will. And we're about 1.5 years into that and the principles have been: first, simplify and focus; and then fortify; and then really start to innovate and drive profitable growth. And so simplifying, we have divested 7 businesses in the last, call it, 1.5 years, just announced the plan to divest Circle Health, which is probably our largest international asset. Many of those were really good businesses. They just weren't businesses we felt like we needed to own and making sure that we found the right strategic owner for them. And we have been able to keep that divestiture portfolio neutral to accretive through that entire process. And then really doubling down on the core business and making sure that the underlying operations are solid, that we are excellent at the basics so that we can then earn the right to continue to grow where we think there's a lot of run in each line of business.

Okay. And so 18 months in, when is the turnaround going to be complete? And what is the earnings profile of the company look like at that point?

Yes. So our focus has really been getting through -- again, that 3 -- there's sort of 3-year value creation plan coming out of 2024 and certainly, things like the SG&A savings that we've been driving through, a multitude of initiatives really baked into the run rate coming out of 2024. So that's why I say we're a little more than halfway through that. And then we've described longer term post '24 and looking at sort of back half of the decade, CAGR driving 12% to 15% EPS growth over that long term. Again, a buildup different components, revenue growth, leverage on additional growth and margin expansion and then strategic capital deployment. And really nice like I said, opportunity in each core business line, we believe for further expansion.

Because I guess like the next couple of years, you guys have guidance for this year's EPS, next year's EPS. When we think about the 2025, it seems like everyone's expecting almost kind of a hockey stick kind of growth as we enter 2025 from an EPS perspective. I mean, how do we think about the bridge to that more normalized 2025 number?

Yes. If you take a look at our growth algorithm, which is really a CAGR over the back half of the decade, so years within that, call it, 5- or 6-year period, will have some variation. But 12% to 15% EPS CAGR, 4% to 5% of that is capital deployment. We expect to grow revenue 7% to 8% across our portfolio on a CAGR basis. And then we also have 1% to 2% in there for margin expansion. So Medicare will be a piece of that story. I'm sure we'll touch on Medicare here because that's a longer runway to get to effectively to have that turnaround largely driven by STARS improvement, which those of you that follow Medicare Advantage know that you can execute well today and you get the revenue for that or the economics in the STAR revenue for that 3 years from now. So we've got to get to the point where we're executing at a high level in Medicare Advantage and progressing STARS. So that would be a contributor, but also to the 1% to 2% margin expansion, but also the continuation of a lot of the initiatives, sure the value creation plan was sort of a 3-year snapshot, as Sarah alluded to, but there's things that we're going to continue to execute on like during '24 that will get annualization of '25 or longer-term structural improvement in our data layer or systems that our multiyear sort of benefits into that time period.

Okay. It's interesting this 3-year value creation plan, you guys are selling a lot of noncore assets. It's kind of the opposite of what seems like everyone else seems to be building in and going vertical. So how did you think about focusing more on the health plan? Is not going vertical trade a disadvantage for you in 5 years or 10 years?

We don't think so. We actually think -- and we talked about this at our Investor Day that our philosophy is partnership as a strategy. And some of that is because being the scaled player that does not own those assets allows us to leverage that purchasing power as we talk to not only service partners but also provider partners. And so a great example of where a lot of our peers are integrating is in the provider space. We have the unique footprint of having more than 60% of our business in Medicaid, and most Medicaid providers are federally qualified health centers, which you can't own privately in the U.S. And so the right way to think about moving into value-based for that large tranche of our population is by partnering with providers and enabling them, creating the right interoperability with data and building local provider engagement teams and really creating a contract and a partnership structure that allows them to help us manage the risk of the population. So if you're building that for more than 60% of your population, why wouldn't you just extend it across the other 2 lines of business. And that's a far more capital-light way of driving the same outcome. And then if you step back sort of broadly, our view is that we should be able to be the best integrators and disintegrators of technology and innovation. So as a provider in a market may not stay the highest performing provider in perpetuity. And if you own that provider, it's really hard to think about moving volume but we can continuously move volume to the highest-performing providers in any market because of our orientation, same thing with technology and with innovation in the space. And so our ability to actually match the pace at which our partners are innovating, I think, gives us an advantage in the long run. You see that in how we negotiated our PBM agreement and being able to, again, bring close to $45 billion in drug spend and negotiate between all 3 of the largest payers and get to really favorable economics and a strong partnership model with ESI, I think it's a perfect proof point of how we intend to take the strategy forward.

So I guess you started off by saying you're mostly Medicaid and the provider base is a little bit different there. Does that mean that if you were mostly Medicare or commercial, you might have a different answer? Or are you're saying that the capitalized strategy is equally effective across all products?

I wouldn't have a different answer if we were in Medicare, but I think the fact that we're in Medicaid, lens creates the idea that you can build a provider engagement model that is scalable across all 3 lines of business and actually drive more value-based arrangements. So we're the leader right now in driving value-based in Medicaid and then using that same construct across all 3 lines of business is super efficient.

Okay. So maybe it was just going to the 3 businesses for -- I mean on the Medicaid side, the big topic right now is redeterminations. So maybe just talk a little bit about how that's going? It seems like the companies are all saying it's coming in as long as expected, but the press article seem to be saying, it's happening faster or bigger. So can you tell us what you're seeing and maybe why there is a disconnect?

Yes. So -- so far, so good. All 50 states in the U.S. have kicked off the redeterminations process. We have turned over about 900,000 members as of August, which is just under 40% of our projected membership loss and so far, we're in line with expectations from a membership and an acuity standpoint, I think one of the reasons why there is a sense that -- in the sort of press data that things are going faster and members are falling off for procedural reasons. First and foremost is we knew that there was going to be a bolus of redeterminations upfront. And that's through the combination of states, some larger states that took a more aggressive posture and went after larger cohorts of members upfront. So their curve was always going to have a bolus at the beginning and then level out. And then the fact that in many states, there is an ex parte process, which means that they use data that they have to automatically process members. And as much as possible, states move members into that process because it's super efficient. So we had planned for more of that upfront bolus, and I think our peers probably had too, which is why the volume upfront is not quite as disconcerting but there's also a lot of conversation about procedural disenrollment. So members who are falling off because they haven't returned paperwork or for sort of pure administrative reasons. And one of the things we've been tracking as sort of an offset to that publicly reported dynamic are what we're calling rejoiners. So members who did roll off, but they rejoined within, call it, 90 to 120 days. And we're seeing about 15% of members that dropped, coming back on. But if -- that's sort of an average across the 5 months. If you look at April, which was the beginning of the process, April and May, those numbers are closer to mid- to high 20% and it ramps. So in other words, as each month goes by, we're seeing more members come back on. Not clear yet where that will exactly level out but it's part of why I think there's a lot of -- a sense that there are a lot of people falling off, but they are actually coming back on and the vast majority, so 3/4 of those members who come back on, come on without any gap in coverage. So their premiums pick back up for whatever the time period was that they dropped off and about 95% of them have 1 month or less coverage. So that's a dynamic we'll continue to track. But in terms of net membership, we are still on track with expectation. And then the acuity piece, which is perhaps the more important piece in terms of the profile, sort of medical loss profile of the members who stay versus leave and the expectation that, that membership pool would become higher risk and more complex. And so we are tracking stairs and levers and seeing that sort of expected difference. But the key is making sure that as we have conversations with our state partners, that they are accounting for that change in the risk pool in rates. And so we have about 50% of our business that renews rates between July and October. And we've got 13 of those 14 states, having finalized rates and 13 of 13 have included an adjustment for acuity to account for what they're anticipating the run rate impact of the redeterminations will be. So we won't know for a little while, whether those acuity investments were exactly right. Some may have over-clubbed, some may have underclubbed but the nature of the dialogue with the states is very productive. And the fact that those states included those acuity adjustments where, quite frankly, that early in the process, it would have been a lot easier for them to say, we don't have enough data come back to us. We think is a good sign, and some of those states have even said, look, if we didn't get this quite right. If we underclub this, we would be open to talking about a mid-cycle renegotiation around acuity. So Again, so far, so good. We still have a bit of a ways to go, but I think we have a lot more visibility now certainly than we did 4 or 5 months ago and feeling good about the way the teams are executing.

So just to be clear, this acuity component that are in these rates, this is beyond how some states always had an acuity factor. This is an additional acuity adjustment specifically for the redetermination process? Or is it a combination of what's always been there and new things?

It's a combination, but there's I mean we've been having these discussions with the states for about a year now. And it's gone from hypothetical us presenting data on, hey, here's what's happened with the 0 utilizers. Here's our view of through coordination of benefits, COB, who's got duplicative coverage. So we've been sharing that data with the states and preparing them for the time period as Sarah said, when 401 when redeterminations commence. So that now we have real data, although it's still in the immature phase because we've got to get through the rest of the redeterminations. And the states are very willing with our actuaries in tow and our actuaries and the relationships that have been built there, a decade plus in some states where there's explicit consideration and inclusion of part of the rate for redetermination related acuity.

Okay. Because I guess -- we've certainly been worried about this risk pool dynamic within the redetermination side of things and the concern being that, if you get a job, you will be redetermined off of Medicaid and a healthy person more likely get a job and be kicked off and a sick person is less likely to get a job and then stay on it, raises the overall acuity of the population. When you see what's happened so far, what kind of visibility do you have in claims because we'll get to Medicare in a little bit. But when some of your competitors talk about Medicare and what they're seeing in June, a lot of them were talking about claims in February and March as far as like what they knew about. So it's for you today, I kind of say we're not seeing it. Like are you saying, well, we know April and May, but we don't really know June and July yet? Or like -- how and when will you know? I guess, my concern is that Q4, Q1, you'll have a lot more information about claims. And then the second part of that would be, to your point, about rejoiners. It seems like people are being administratively lost, you'll lose healthy people and sick people, right? But then the rejoiners will disproportionately be sicker people, right, or should that you think they would be. So it would feel like the risk pool will get worse as the year goes on and you have a lag between you get claims, so you may not realize until Q4 or Q1. So I guess.

So unlike shifts in utilization where you're right, you're relying on -- and our systems as an industry are so much more advanced than 10 years ago, but you're relying on the completion of an incurred month. With redeterminations, we know exactly who left and who stayed. And so it's looking in the rearview mirror about the acuity or the claims cost of those members. So we know exactly what the difference between stairs and levers is without run out, right, because we've got the rearview mirror look for that segment of the population. And then we can compare that. So we've got membership estimates, which we're right on. We've got acuity in the vacuum for getting about rate for a second, acuity estimates that we're right on. And then the revenue side of the equation is what Sarah was talking about, where we've got 13 out of 13 states who have given us final rates for that 7-1 to 10-1 cohort just under 50% of our membership falls into that normal renewal cycle. The rest is 1-1 with New York being 4-1 of 24. So we know the adequacy of the rates initially. And the good thing about having a portfolio is, some may overshoot, some may undershoot. But we're 40% -- almost 40% into redeterminations in terms of the membership reduction and so far so good on the revenue side as well. So -- we can get to the Medicare question about utilization. But when you're talking about redeterminations, you've got that visibility and levers and stayers.

So your visibility and historical utilization of those people, but not necessarily in quarter utilization.

No. But the ones we're getting back, sometimes they went to fill a script, and sort of normal course activity or there's a lot of activity in Medicaid leading up to the school year starting with physical exams and immunizations. And so some of those things were the triggers of members realizing that they had lost coverage and didn't know it. So it's not as extreme as you might think, a car accident -- oh, let me reinstate my insurance given how widespread the rejoiners are, it's a pretty balanced risk pool.

Okay. So far, what you've seen on the rejoiners is not an elevated acuity relative to -- people are staying on or people who were kicked off?

Right. It's not alarming.

You guys have built in 50 basis points for and a lot of pressure for this?

Yes, 50. So we've given really specific guidance for the next 1.5 years on, for instance, Medicaid loss ratio or HBR. So you'll know you'll be able to track against that. So -- just for reference, 2022 was 89.6%. This year, we're targeting 89.8%, and we let that drift up 50 basis points for our 2024 guidance minus a 20 basis point benefit for new pharmacy cost structure improvements with ESI deals. So 90.1%. So there's a net 30 of, call it, a provision for the mismatch in timing if we don't perfectly get the rates in time to offset perfectly the acuity, we've got that net 30 or gross 50 basis point provision built into our greater than $6.60 of adjusted EPS guidance for 2024. So we think that will be sufficient. Time will tell. But every month that goes by, we get -- we're getting a lot more complete through the redetermination process.

So when you say that it's not alarming, it's relative to that 50 basis points that you've put in or relative to stable MLR?

It's relative to the 89.8% this year and the 90.1% next year.

Okay. So -- all right. So overall, you're still thinking there will be pressure but it's not any different than what you were.

We're still putting a provision. We're still leaving a provision in our guidance for that potential pressure and then good point because that, to me, and we believe that's a margin expansion opportunity that we've run, we being both Centene and WellCare independently ran Centene over the last 5 years prior to the pandemic, 89.6%, WellCare 89.5%, leading up to 2019. Obviously, there was some actually good performance during the pandemic, not sustainable and we're sort of back in that 89%. So by ticking up the 90.1% inclusive of a benefit, which is probably more unique to us than the pool of competitors in Medicaid. That we should get back into that mid- to high 89s, which becomes a margin expansion opportunity for '25 and maybe into '26.

Okay. Great. And then the other issue on Medicaid is the reprocurement dynamic is that -- if you like -- to us, to some degree, you're victim of your own success. You guys are so big everywhere that every time there's a reprocurement, you're fighting to keep share. But you have loss share in some of these more recent ones. Can you talk a little bit about what's happened? Is that just a function of just being big? Is there something at the company that's changed? How do you feel about being competitively positioned for the Texas, Florida, Georgia RFPs that are going to be coming?

Yes, we feel very good about the big upcoming, and we have a few smaller ones that are upcoming as well. But sort of looking back over the last, call it, 18 months to 2 years, overall, a very successful win rate, your point is actually really important, which is that we are now increasingly the incumbent unless we're bidding on a new state or a state that we haven't been in. And I think actually, the experience of going through California allowed us to take a step back and really sort of post more than that. There were structural issues in California. But again, I give the team a lot of credit for saying this is a moment to step back and say, what are our strengths? Where are the opportunities to get better? And I think honestly, some of the light bulb of realizing that we are an incumbent and that we are going to be bidding on promises kept, not promises made and that there's actually a huge power in that. Because when you're the incumbent, you can be in with your customer every day, right, every week and understanding what matters to them, how you're executing, where they want to innovate, and you can start well ahead of a procurement cycle to build the right partnership and to demonstrate the execution and again, the innovation that they're looking for. So that when you're writing to the RFP, you're actually able to demonstrate proof points, not just things you're going to do in the future. And so making sure that we have really strong leadership teams in the market making sure that we have really strong and continue to have which has always been the strength of the company, really strong relationships, top to bottom at the state level. You've heard us talk a lot in the value creation plan about being the best at the basics and so matching a really strong business development team and a really strong local team with really strong operational execution, which again had not always been the focus. That allows a lot of the noise to go away and then you can really focus on where there are unique differential value drivers at the local level. The other thing that came out of that process was a reinforcement that Centene's local approach is and continues to be a differentiator. And so the feeling that we have empowered CEOs in every market who can pick up the phone, talk to their department counterpart and move forward with something that they can be agile and responsive without needing to call corporate for permission. That's something that is seen as incredibly valuable to our customers. And so we've been gathering a lot of that feedback to inform where there are places we want to make investments or adjust. But we feel very good about the major procurements coming up, so Florida, which is due in October, really strong team. They've been working hard on the procurement, but they've also been really hard -- working really hard just executing in the state. Texas, the last 2 procurements went well, and those are good indicators of the core TANF procurement that we're in the middle of right now. Georgia, we're hoping to see in the next couple of months again, great team, great health plan, great relationships there. And we're hopeful that Georgia may include a complex population in that bid, which would create an opportunity for a really nice growth in that market. And so overall, we really think about it, as you said, as a portfolio. It doesn't mean we don't want to go in and win every single procurement and keep every single member that we serve because we do believe we're the best at serving them. But we also plan for the fact that there are states like Iowa, where we knew there were 2 players and they were going to add a third because that's fairly typical dynamic. And we have good runway because of our relationships in those states to know how the landscape is going to shift. And so baked into that long-term algorithm is an acknowledgment that there are going to be marginal market shifts but that there's overall really nice, healthy opportunity for growth that we'll continue to pursue. Oklahoma, I think, is a very nice proof point of moving a state. Tracking a state as they moved into the managed Medicaid model. We won the procurement. The first time the legislators turned that over at a programmatic level. They actually went back on managed care and then moved into that model as the governor took over the second term, we rebid that contract. We won. We won a sole source foster care contract as well. And the scoring is not public, but we feel really good about the proof point that, that offers in terms of the strength of the BD team, not just to continue to win new states but to protect the business we've got.

You mentioned [indiscernible] from 2 to 3. Is Georgia at risk of that? I mean Georgia went from 3 to 4. And then when you guys bought WellCare, you brought it back down to 3. Is there an expectation that that's going back to 4 or?

We don't have indication necessarily, but we just -- we have to sort of watch and see what happens when they bring -- because they have latitude certainly to do that. But again, we think there's -- if they include the complex population, we think there's a really nice net growth opportunity there regardless.

Okay. And then I guess on the exchanges, we talked about risk pool shifts in the Medicaid side, as redeterminations create the risk of risk pool shifts on the exchanges because it feels like in the past, during COVID when people were signing up during the year that created issues for MLR. Is that going to be a problem over the next few quarters?

So we're not seeing that same pent-up demand that happened during the 2021 special enrollment period. We don't get the benefit of a full year of risk adjustment of members who are coming in midyear, and there's still been really strong growth during 2023 because of that sort of continuous step that's going on. And there's a little bit more pressure from the G&A of acquiring those members. We're able to absorb that in the core performance of that business. So that's actually a really nice tailwind as we think about '24 because we'll carry that membership in and the sophomore year effect of having a full year risk adjustment is net positive for those members. So we're actually really pleased with the growth that we're seeing in '23. And then I think part of the reason we're not seeing pent-up demand and utilization of those members is partly because some of them are coming from Medicaid, where they had coverage. And then many of the rest are coming from essentially being uninsured, but otherwise eligible for free insurance because the subsidies have been in place now since 2021. And so they were essentially non-utilizers. So we're not seeing that same spike of coming in needing services consuming, and it hasn't created the same pressure.

Also I think with the maturation, the distribution channels, there's businesses, that private equity you're pumping money into and sort of like distribution, getting their sea legs in marketplace, they're able to go out and find members and educate them on -- especially if they're 100% to 150% of the federal poverty level in the U.S., this is free health care, essentially. It's fully subsidized through the enhanced APDC. So there they're getting better at sort of getting a more broad risk pool by proactively identifying eligibles that maybe didn't pay attention or didn't otherwise know that they were eligible for such strong subsidies.

Okay. And then on Medicare, some of the competitors have talked about elevated trend in that business. I guess what are you guys seeing from a trend perspective? And then -- maybe just comment trend broadly speaking, outside of Medicare?

So pretty stable, as we said last week and on the Q2 call in Marketplace and Medicaid. So there's always watch out items embedded in behavioral health and Medicaid and obviously, we're all over the GLP-1s. We're -- largely we control formularies. But -- so Medicare or Marketplace Medicaid just fine. Medicare, as we covered on the Q2 call and last week, saw some elevation of pop in outpatient in May. And then since then June is slightly below May and then July slightly below June. And that's sort of a fully developed estimated PMPM basis of comparison, as you would expect, thinking about those incurred months. So still a watch out item as we move forward. And if you dig down another click into that, it was surgeries. Some examples would be cardiac, cataract, some hips and knees. I mean, any one of these wasn't going to really move the entire needle, but there is an elevation of outpatient. If you look back at May from the first quarter, and it's slowly coming down, but we're watching it closely.

Okay. And then on STARS on Medicare, and that seems to be the thing that's maybe holding you back the most there. So -- why aren't you where you need to be on STARS? And can you get there? I think there's always been this concern that lower income populations are harder to get to 4 stars. Is that true? Or is that not true? And how do you think about your ability to improve that?

Certainly, complex populations can be harder to get to 4 stars. So I'll go back to how did we get here? In early 2020 through early 2021, as we are bringing together Centene and WellCare, we -- and quite frankly, in the middle of the pandemic, we took a STARS program that WellCare was running well, and we moved it into Centene, where at the time, the management view was everything should be distributed and local, partly because of the Medicaid heritage and the scale with which you need to operate a Medicare STARS program and the fact that STARS inherent -- Medicare inherently is less sort of state oriented, right, CMS as your major customer, should be run in a centralized manner. And so that, plus taking our entire workforce in trying to integrate 2 teams and then send them all home because of COVID, we underperformed, particularly in the admin and ops chapter. So think about systems, data processes of bringing those 2 together at the same time and things fell through the cracks. And so that is a -- unfortunately, STARS is the kind of thing, as Drew has described, where you can create a problem in 1 year, and it takes multiple years to fix it and then you don't get paid for fixing it for a couple of years after that. So we are on a journey of fixing stars, and it's probably the core part of sort of rebuilding the Medicare franchise for the company. And so our focus in this first cycle -- and to your point, because we are kind of refocusing in Medicare strategically on the more complex, the lower income really focusing on the duals population as part of that. We know that, that's going to be a harder population to move to 4 star. And it's part of why we reset our target from a star standpoint in -- on the Q1 call and then provide additional color on that on the Q2 call. In October of '25, our goal is to have 85% of membership in at least 3.5 star contracts. So we are -- each cycle for the next 3 cycles starting with this October moving on that journey and focus in this first cycle is really, one, about improving admin and ops. And the proof points that we pointed to for the market are overall programmatic improvement. So if you look across our 107 age contracts, are they improving year-over-year? Just think about like underlying raw score performance. Are you seeing movement and trajectory in the right direction, which proves to you we know how to move the program. And then the second was really pulling up underperforming contracts. And so we talked about getting to roughly 90% of members in contracts that are crossing that 3-star threshold. So that we can then, over the next 2 cycles, pick up the economic benefit of moving that, call it, high 80s to 90% of members into -- get to 85% in at least 3.5 stars. And some of those will naturally move to 4 as part of that process. But then we also pick up the added benefit of the Health Equity Index, which is ultimately going to account for the fact that it is harder in duals population to move from 3.5 to 4. And so it will essentially risk adjust those contracts that have a higher duals concentration into 4 stars, which was a new accommodation that CMS released in April, along with the rate notice. And I would just add, we've said last week, we were still tracking to those expectations. We got the next wave of cut points that came out late last week and still tracking to that view that this first cycle, the proof points are in programmatic improvement. And that 2/3 of members would be in contracts that showed stars score improvement. And that roughly 90% of members and contracts that pass the 3-star threshold.

Okay. Great. And maybe just to wrap up here. Just going back to the long-term growth algorithms, I think that's important. I think there's a turnaround that's happening. There's a margin improvement story that I think a certain amount of visibility. And I think I have less visibility into that long-term trajectory as you kind of laid it out, I guess, the thing I'd like to dig into is maybe the growth -- the revenue growth part of that. So as we think about Medicaid, think about exchange, think about Medicare, like are those -- how do you think about growing those businesses longer term?

Yes. So I'll start and then you should add in. But if you think about each line of business, so Medicaid, we see a lot of white space for growth there. So there are about 10 states that are not in managed Medicaid. There -- and roughly, there are about 9 or 10 states that are in a managed Medicaid model that Centene does not currently operate in. There are 10 states in the country that have not gone to Medicaid expansion, and we think there's actually interesting momentum there, partly triggered by North Carolina recently moving to Medicaid expansion. And then the biggest opportunity probably is the fact that there are a number of complex sort of specialized population. So think about LTSS, ABD -- aged, blind and disabled, even foster care, severe mentally ill. Those populations are smaller from a member number standpoint, but much bigger from a member-dollar PMPM standpoint. And so there's still about 40% of dollars that are still unpenetrated in the U.S. And then at the 60% that are not in -- that are in Medicaid managed model, there's still market share for us to take in that segment. So I think there's a lot of really nice runway from a Medicaid standpoint, Marketplace obviously grew significantly in this last cycle. I think it will be interesting to watch. I think the historic TAM for marketplace has just fundamentally changed. There was a belief that there was this sort of finite pool of members who you could get up to a certain point and then you were going to have a group that just was never going to come in the marketplace. And I think we're seeing that that's actually expanded into other segments. So small group, gig workers. And again, as I said, the long-term thesis there, I think, is that there are segments of the employer-sponsored market that we can actually push bottom up into. And then Medicare is going to be much more about margin recovery in the short term and then returning to growth. And so in the back half of the decade, that becomes more of a growth contributor, but we do need to fix stars in the short term. And then hopefully grow the duals population while we're underneath, but it's really about margin recovery in the short term, and then we start to add growth in the longer term. I don't know if there's anything you want to add.

That's good.

Yes. All right. Then maybe just last question. on the Medicare side, you said, you guys are losing money in Medicare for next year, you're already assuming that. Is it -- is that something you would ever get out of? Like in theory, if you got out of that business, [indiscernible] dollar of an earnings, if you were to do that tomorrow. So like -- is there a point where you say it's not important? Or is it really is core to the business and it's going to be part of the story for a long time?

So we are, first and foremost, we are stewards of shareholder value. And so we certainly have to ask ourselves that question. Our belief is that Medicaid -- the synergy between Medicare and Medicaid is very important. Medicare is fixable. We think it's a great business to grow in the long term, but we also think that the intersection in the lower income complex populations is important. And from a policy standpoint, will be increasingly important. So we want to be able to grow in the complex Medicaid and the duals population and having that footprint is really important. We also -- I mean, I would say, separating it is -- it sounds easy, but it's certainly complex to do, and we can get into why -- so it's not something that we would look at flippantly. And I do think that having these 3 core lines of business and being able to take the low-income complex population across an entire life cycle is a very compelling value proposition long term. But I think the question of trying to return that dollar how much do you do that in terms of managing the membership to earn the earnings profile over the next couple of years is a question we'll look really hard at.

All right. Great. I think that's all we have time for. Thank you very much for joining us.

Thank you.