Centene Corporation (CNC) Earnings Call Transcript & Summary

Good morning. My name is Cal Sternick. I'm the managed Medicaid and facilities analyst here at JPMorgan. I'm pleased to have with us here, Centene's CEO, Sarah London; and CFO, Drew Asher; for a fireside chat this morning. I'm going to turn it over to Sarah for a few introductory remarks, and then we'll move on to Q&A. Sarah?

Thanks, Cal. Good morning. Happy New Year. Glad to be back kicking off the year at JPMorgan. We obviously had our Investor Day just a few weeks ago in December and covered quite a lot of ground there, including reaffirming our 2023 guidance of at least $6.60 and then sharing 2024 guidance of greater than $6.70. So with that as a backdrop, I thought I might just provide a few updates since then, and then we can dive into questions. So one of the things we talked about at Investor Day was that we were planning for one of our major value creation milestones at the end of 2023. And so while -- many of you may have been watching the ball drop in New York on New Year's Eve, the Centene pharmacy services team was live in Tampa at our command center, making sure that no balls dropped as we formally cut over our PBM systems at midnight on 1/1. And so it's obviously early days, but pleased to report that, that work is going well. We've processed as of end of day yesterday, 9 million claims, seeing really good collaboration between the Centene and the ESI teams. And again, still early, but feel good about how that's progressing and wanted to just take the opportunity to give a huge shout out to our team, who has worked tirelessly for more than a year and sacrificed many vacations and holidays, including the most recent ones, in order to make sure that, that has started off on the right foot. So very pleased about that. Relative to core business, we continue, obviously, in Medicaid to be focused on the redeterminations process, with Q4 being a heavy roll off in terms of membership, which we talked about. So we still expect to end the year at roughly 14.4 million Medicaid members, which is consistent with what we pointed to at Investor Day. We're still in the process of working with states. We have 3 states outstanding in terms of acuity adjustments and then some states that we're in conversation with about retro rate adjustments. I think that is going to be normal course as we go into 2024 and just continue to work on that collaboration with our state partners to ensure that the acuity adjustments that we are receiving are matching what we observe in the member experience. From a Medicare standpoint, we came in right on track for annual enrollment period. We still expect to be down roughly $4 billion in revenue and mid-teens plus in membership, but very pleased with how that team executed on our strategy, including an uptick in the percentage of duals in the membership base, which was consistent with our plan and our stated strategic focus with that book of business. And then Marketplace is in the home stretch on their open enrollment. We've got another week or so to go there. Very pleased with how that team has executed, continued to execute, and the focus that they've had on price, continued pricing discipline as well as member retention in this cycle. You've all probably tracked the news coming out of the White House and CMS about strong market growth. So we continue to expect the possibility of some membership upside there, but we'll provide a more comprehensive update on the Q4 call in just a couple of weeks. So overall, I feel like we're coming into 2024 with solid momentum. We've got a great team, and we're continuing to add talent and up-level talent against the work that we have, teeing up another year of really focused execution. So that we can be sure to exceed our $6.70 of EPS guidance and position the business for 2025 and beyond.

Great. So thank you for all the membership commentary. And I think that's a really good place to start. So California came out and said they're going to provide coverage to, I think they estimate about 700,000 undocumented immigrants. How many members are you expecting from that? Do you have a sense for what the rates could look like there? And is that something that was contemplated in your 2024 outlook?

Yes. California has actually done a really nice job. So I can cover sort of the overall program dynamics. They've done a really nice job of actually staging the phase-in of that population over the last couple of years. And so we've been able to bake that into our expectations and annual operating plan in California relative to the different subsegments of the population there. I don't know if there's anything else you want to add.

No, just as the 26 to 49 cohort coming in. But as Sarah said, the last couple of years, the over 49 and then the under 26, they've staged it out well. So it's predictable, and it was embedded in our forecast.

Great. So then we think about redeterminations, I think that's played out pretty consistently with your expectations so far, and I appreciate all the membership commentary you gave there. As we think about the rejoiner rate that's been in that mid-20% range, how are you thinking that evolves over the course of the year? Are you thinking that should tick up as just the membership attrition slows?

Yes. So a couple of dynamics there. One is just taking a step back and thinking about the fact that the way that states kind of in aggregate approach to the redeterminations process was more front loaded, which is why we expected that heavier membership roll off in Q2 -- obviously, starting in April, but predominantly Q2 and Q3 and where we are relative to the overall membership roll off coming out of 2023. So some of it is that front-loading states that went -- either went aggressively at it or put sort of a bolus ex-parte population right up front. The other thing that we've been obviously watching and sharing around the rejoiner rates is that they are coming in sort of consistently or had been coming in consistently in that mid-20s range, but also a little bit of incremental uptick as the backfill of the states and the sort of subsequent months fill-in. So we're starting to see that kind of 25-ish percent tick up a little bit, not much. So we continue to watch that, but it feels like we're getting to kind of a pareto on that, and it will continue to be something that we watch over the next quarter.

And what about the acuity piece when we think about redeterminations, I mean you got the 2%, 2.5% composite rate increase, so well above historical levels. Is that the delta all acuity adjusters or something in the baseline rates to call out? And I know that you guys take a portfolio approach to the way you talk about rates, but are there any key states to call out where rates were either particularly positive or negative?

So the answer to the first question is it's largely the acuity adjustments that are driving that. And then we've shared a lot of detail around the fact that in all the 3 states, we've received those acuity adjustments and feel like we're -- we feel good about the kind of the degree to which the states are collaborative in those conversations. They're continuing to look at data and calibrate that as we go forward, so that we're not seeing what have historically been sort of binary decisions or conversations. It's really we're going to start here. We're going to see whether we need to increase or decrease as experience plays out. It's part of why we talked about some of those retro rates that are in -- we're in dialogue with states at Investor Day that some of those states are realizing that there's sort of historical experience in '23 that they want to go address. So we expect it to continue to be an iterative process as we go through 2024.

And I guess those 3 states you're still waiting on, do you have visibility on when you expect them to make a decision?

States often work on their own time schedule. I'm thrilled that 27 out of the 30. We're in good shape with visibility. So no surprise. There's a few stragglers, but good healthy constructive conversations, as Sarah said, and hopefully, we'll get visibility soon on those. One is notorious for taking their time.

And I guess the other part of that, when we think about acuity here, I mean looking at your guidance, you guys have given very point specific guidance for the Medicaid HBR in 2024. And compared to your other product lines, you're guiding to more of a range. So what are you seeing that gives you confidence in giving such specific estimates for Medicaid?

Well, it sort of goes back to the -- as we are cross walking past years to the forecast for '23 and '24, I really wanted to give the transparency into what we were targeting. Of course, you should draw a bell-shaped curve around that. But every 10 basis points in Medicaid HBR is about a dime of earnings. So it's pretty meaningful that we'll try our best to sort of hit it on the nose, but you should draw a very tight bell-shaped curve around that in the diversified business that we have.

And I guess what besides utilization, which obviously can always drive HBR shifts in a given year? I mean what's the risk or opportunity that you see in Medicaid coming in better or worse than expected? And why is that likely or not at this point?

I think ultimately, as Sarah indicated, it's sort of matching rates and acuity. And over time, in Medicaid, that does happen, and we've proven it out many, many years, so it's often a timing mismatch if states either late in providing an acuity adjustment or they want to see more data. But ultimately, we have no concerns about the opportunity to match rate and acuity. So sometimes it's just a matter of timing if you're measuring a calendar year versus a state fiscal year.

And I know you've talked about the 50 basis point impact from redeterminations for this year and that being a bit of a cushion in the way you're thinking about MLR to an extent. I mean, so it was the right way to think about a range, like sort of like 90.1% being the high end and you have 86.6% sort of in the lower end. Is that the -- sorry 89.6% in the lower end, is that right way to think about it?

Well, if you go back to our Q1 call, I rattled off all of the years for both WellCare and Centene leading up to the onset of the pandemic. And if you average them out, Centene, the 5 years leading up was 89.6%, and WellCare was 89.5%. And really, there wasn't -- there was some deviation around I mean year-to-year, as you would expect, but not wide swings. So we -- as we said at Investor Day, we would expect -- I mean, that's sort of a margin expansion opportunity if you think about '25, '26 to get back into that, call it, high 89s from the 90.1% that we are targeting for 2024.

Yes. I think just to emphasize sort of that. The concept of the cushion is really to address the potential timing dislocation, right, as we look at the data with the states and make those adjustments obviously feeling good about the engagement with the states and sort of the more fluid dialogue around that. But it's more of -- as we get through the redeterminations process in '24 margin expansion opportunity as we level out back to steady state.

And how are you thinking about the underlying utilization dynamics for Medicaid, right? Like I know we've seen what's happened in Medicare this year. Commercial obviously bounced back fastest from the pandemic. Can you just talk about what you're seeing for underlying utilization trend there and on the HBR for the leavers versus stayers, are you expecting that to be roughly consistent still?

Yes. So we just reiterate our $6.60. So that's good news, just like we did at Investor Day, at least $6.60 for 2023. We haven't closed the books yet, but tonight we close the books on December. Medicaid utilization has come back through the year. I'd say it's back to sort of pre-pandemic normal with some minor variations, but not that meaningful. We didn't see COVID tick up in the quarter as you've probably read more publicly and not alarming, but a noticeable uptick, especially into December. We plan for these things in our guidance and forecast. So largely sort of a normal return to utilization.

In terms of what you're seeing in the fourth quarter because that's come up a few times over the last couple of days, everything still trending more or less in line with your expectations?

Yes, I would just reiterate you -- so yes, once again, COVID uptick, consistent with what public data is out there. Medicare as expected, but still at that elevated level that we saw sort of tick up in May. We talked about that on the Q2 call. So we saw that tick up in May. It hasn't subsided. It seems like a more steady level. Luckily, we planned for that in our forecast and in our bids for 2024.

Got it. Okay. So maybe switching gears to the Marketplace for a bit. You talked about adding 200,000 to 300,000 members from redeterminations, and I realize it's tough to bifurcate what's attributable to redeterminations versus what the underlying growth is there. But do you have any sense for how many you've added so far relative to that 200,000 to 300,000 number?

Yes, we're tracking well against that original goal. As you said, precision and attribution is difficult other than our own members moving from Medicaid into Marketplace because there's no place on the application form to say kind of where you're coming from. But we've sort of triangulated the external data and what we're seeing from CMS and extrapolated. So still on track to that 200,000 to 300,000. I think we'll probably be closer to that 200,000 by the time we close the year and then maybe closer to the higher end of that once we get through redeterminations. But at this point, we're still in that target zone.

And obviously, the last couple of years have been a little wonky with the SEPs and everything. But are you expecting that when we get to the back half, we get past the bulk of redeterminations, we get to more normal membership seasonality for the Marketplace business, where you get some attrition in the back half?

That's a good question because you have multiple factors going on. Probably the most meaningful one is just the absolute growth of the market. So that's sort of overshadowing what might otherwise be peaking earlier in the year and then tailing off going back to patterns from years ago. So I couldn't be more pleased with the execution, as Sarah said, in Marketplace, the growth potential. We indicated at Investor Day, there could be some upside to that membership and revenue that's playing out. We need to close out the open enrollment period next week and then report Q4, we'll give you some more insights on that. But really pleased with the positioning of our products and what that means for the earnings stream going forward.

And what about looking ahead to 2025? I know you guys have talked about the expectation that the enhanced subsidies will remain in place. But what do you think that looks like? Is it they get mid permanent? Are we looking at another temporary extension? What's your best guess at this point?

Yes. I mean, I think, frankly, the market growth that we're seeing right now is one of the best defense mechanisms because it means we're adding millions of Americans and providing access to care and coverage. It also, as we've talked about before, the timing was not by accident. It was designed to coincide with the expiration of the Trump tax cuts, which is a mechanism by which to bring both sides to the table to have this conversation. It's also, I think, important to -- so 2 things are important. One, this is not as part as in as I think some would like to believe or would believe relative to Democrats love it, Republicans hate it. There's a lot embedded if you look at just what the Republicans have done relative to legislation in 2023 around HRAs. The idea that the marketplace chassis is a very interesting infrastructure for the individual market and sort of principles for coverage that I think aligned with a Republican view and obviously resonates with access to care and coverage that is sort of principal to the current Democratic platform. There's just a lot there to like regardless of what's side of the aisle you sit on. The other thing that I think is important to understand is that it's not necessarily -- and you pointed this out in your question, it's not necessarily like they're there or they are not, right? Because one of the things that happened in the extension was the expansion of coverage to different levels of the FPL. And so one question is, does it continue to go as sort of uncapped? Or do you think about a cap that brings it down to a different FPL level in the 300 to 400 range, which is actually minimal overlap with our core population, but may provide some relief. There are other ways to think about extending it versus making it permanent and sort of what are the gives and takes of that. So -- that's sort of the entire kind of dimensionality of the opportunity that we look at when we say you've got millions of Americans who are getting additional care and coverage, those are all going to be voters. They're all going to be vocal. Some of the strongest marketplace markets that we see are in rural communities in Republican states. And so again, there's a level of acknowledgment that there is value in this product and in this chassis that is on both sides of the aisle, and we think that's going to help get us to a place where this continues to be strong infrastructure to build for future individual products.

Do you think the outcome of the elections are going to matter for what, I guess, the second version of this enhanced subsidy sort of looks like? Like does it look dramatically different under a Democratic White House, look different under Republican White House, or more or less the same regardless?

Well, as I said, I think there's an opportunity. There's middle ground here that is defined not by politics, but by policy. And the idea that there is good policy in the overlapping then that sits down on top of the subsidies and frankly, sort of what the subsidies have done to stabilize the marketplace overall. And to drive the market growth we're seeing and to drive the conversations we're seeing around a safety net for the small group market that is struggling conversations around ICRA. And so it's not going to be a perfect match, but I think that there is space to play regardless of what the outcome of the election is.

And you mentioned ICRA, so that's a great segue into my next question. Can you talk about the expected growth that you see in that business over the next couple of years? And do you see it being a meaningful portion of the business longer term?

So it's still very early days. And as evidenced by the fact that when we talk about our long-term growth algorithm, we have not baked ICRA consideration into that. We're going to learn a lot this year through the pilots that we're doing in Indiana and some other kind of experimentation that we're doing to really understand what we think the rate and pace will be in terms of adoption in specific kind of subsegments of the market. So I think we'll know more. The same way we know a lot more right now than we did 12 months ago about how this is going to evolve, where it's going to see adoption sooner. If you think about sort of the most direct analogs, once all of the right pieces were in place, sort of the pension to 401(k) moved in 5-ish years, HSAs 10-ish year. So like there's probably a range there. But again, it's not sort of, okay, the whole group market just goes to ICRA. It's really thinking about what are those employer populations where this makes a lot of sense and where you can drive adoption first and then build momentum.

What are some of the challenges in getting employers to switch to this type of benefit design?

Some of it is just awareness, understanding that it is an option, understanding the math around it and then making sure that for employers who either haven't provided coverage to their employees before and want to do so through this mechanism or for those who have been providing it through a different mechanism that there's the right sort of support and wrap around and education for their employees to sort of take them through that process. The other thing that I think we've observed that's interesting is this is very likely to be like all the other sort of retail products supported by the broker community. But as Ken Fasola would say, brokers tend to choose a major. And this is sort of a new major. And so figuring out how to take brokers who are used to selling one by one and those who are used to selling in large groups and kind of creating this blended model, I think, is another opportunity. And there are folks who are coming into the space who are already in this space. The company that we're partnering with in Indiana, I think, is a good example. And that kind of support structure is going to be important for the market to build in order for adoption to [ accelerate ] over long term.