Centene Corporation (CNC) Earnings Call Transcript & Summary

Hi. Good morning. My name is Andrew Mok. I'm the Facilities and Managing Care Analyst at Today's Barclays Global Healthcare Conference. With me on stage, I'm pleased to welcome Sarah London, CEO; and Andrew Asher, CFO. Before we get started, I think Sarah has some opening remarks.

Thank you, thanks for having us. Good morning. I'm sorry, I just give a quick fly over before we get started. I'm sure we'll go deeper into all of these topics. But as you saw from the 8-K yesterday, we remain confident in our 2024 adjusted EPS guidance is greater than $6.70. And our major focus areas have not really changed. So from a Medicaid standpoint, we are working through the back half of redetermination. As of March, we'll have 9 of our states substantially through the unwinding process, and that includes some of our bigger states. We remain on track from a membership standpoint through that work, headed towards that 13.2 roughly million member low that's targeted for the end of Q1. We are seeing rejoiners tick up a little bit. So those mature months are now starting to average out around 30% in terms of the rejoining rate. And then you heard on the Q4 call that we're tracking the rates coming in from states sort of in that -- towards the higher end of that composite range that we gave of 2% to 2.5% at Investor Day. So overall, continuing to track through that process from a redetermination standpoint. In Medicaid, we're tracking, as you all know, a number of RFPs, Florida, which is still on track as far as we know, to notice by the end of this month. We were disappointed by the early news that came out of Texas last week. Our teams are in the process of working through and reviewing all of that documentation. We have a number of concerns based on that. And so we fully intend to protest there. But I would say the biggest concern for the program overall is the idea that the results are going to force 1.8 million Medicaid members in Texas, which is a state that has a very high choice rate to choose a different plan. And we don't think that's the right thing for the Medicaid population in Texas. So more to come there. In Medicare, we're obviously in the early process of thinking about 2025 and bid -- we've provided our feedback as have many others in the industry, I think, along pretty consistent lines to the administration. We are -- hopefully we will take that feedback into account as they think about the final rate and general concern about the impact to benefit for seniors in terms of 2 consecutive years of pressure on those rate relative to overall utilization. And then from a marketplace standpoint, that still continues to be a great story. As we said, we landed at the end of January at 4.3 million members, which was higher than our expectations going through the open enrollment period, and we still expect to get into our -- well into our target margin range even with that growth. So really [ allied ] guardrails around that growth disciplined pricing and how the team thought about our region-by-region approach in terms of balancing the portfolio. So we still feel really good about what we're seeing relative to the marketplace story. And then underneath it all, we continue to focus on returning the organization from an operating discipline and execution standpoint. And I'll give you 1 example, a little bit off the beaten path, but just really pleased with how our team pulled together and the level of responsiveness organizing in the face of a change cyber attack. Everything from within days shipping, medications out of our specialty pharmacy at risk to members to make sure that there was no disruption in their access to critical care and then mobilizing our entire field team and additional resources to get out and work directly with providers to help them find additional connections from a Clearinghouse standpoint and then escalate whether issues with that providers might be dealing with financial solvency or challenges there, and we can step in and help. So this is the degree to which across the organization, including at the local level, the teams were able to organize, all of that, I think, speaks to the progress that we've made as a company can improve those overall operating maturity. I don't know, if there's anything you want to add, given where we are in the quarter.

Yes. For an Investor Day, we told you and promised that we would update you along the way. Once we got through AEP and OEP and the progression of earnings through the year. So you saw this morning or last night, we reaffirmed at [indiscernible]. And Investor Day we said it would be 60-40, 60% first half of the year earnings, 40% back half, which is always good to have more earnings sooner in a year. We also said that the first 3 quarters, there wouldn't be a whole lot of variation, so you guys could actually rip that through an algebraic model and figure out that the first 3 quarters would be right around $2, $2, $2 and then the fourth quarter is $0.70. So lock ranges around that, but that's the general sort of progression of earnings now that we've got a couple of months under our belt, we're looking at how we're going to get through 2024.

Maybe we can just stick on Texas for a minute, and I'm not sure how much you can share at this point, but would love to better understand what you know? Have you [ DEI ] released any scoring for the RFP yet? And what does the appeals process look like? Does that start right now even though the announcement a new plan to avoid?

Yes. So we have scoring details. We've requested additional information from the state. We have a window that does start now to put in a protest. So that's what the team is working for as we speak. And so looking at the scoring information we have the additional confirmed people will give us a sense of how the process unfolded internally. But I think, if you take a step back, we have a [ true ] record of delivering high-quality outcomes in Texas for 25 years with our superior team. We have a really strong team on the ground. We have resisted high-quality scores and again, Texas is a high choice rate to 7 out of 10 Medicaid members in Texas actually actively use their plan versus being at something. And so sort of voting with their feet, and the strong presence that we have in Texas is a result of overall performance. And so all of that, in addition to sort of what we've seen so far in this scoring is part of what will underpin our protest.

Understood. As we look ahead to some of these other RFPs, Florida, Georgia, what gives you confidence at this point that Centene would be able to defend or even take market share in those states. What's your latest on just your overall standing and position in that state and [indiscernible]?

Yes. I mean, we've shared this in the past, but as we think about kind of what the important factors are as we go into a process. The first is making sure that we have a strong team on the ground, and then we have a well-performing plan and all of the work that we've done over the last 2 years, and there's certainly more work to do, but around making sure that we are delivering on the basics that we are strong operationally that we're demonstrating high quality and quality improvement. Those are the key underpinning factors and then making sure we understand what the state is trying to achieve in the RFP process, a number of times, states will use rightly so, the RFP process to really think about the next wave of innovation? Or what are the critical factors that they see in the population that they want to push the MCO which will address it in a different way. So really interested at seeing, what are the troubles, what is the definition of [indiscernible] the program. And then we combine a team that's very experienced team that works on procurement that sort of has the benefit of the national view with the local team embedded and months inwards and months in advance in preparation to make sure that we're being responsive to our team and engaging with the state in the right way. And then in general, ensuring that we have the right relationships and the investment and commitment to the community, which, again, is sort of bread and butter for house and team operates locally. So that's the major part of our scorecard going into any RFP and there are different factors in each state that changed the strategy a little bit, but always making sure that we have a core piece in place that is sort of where we start.

Got it. Let's move on to the exchanges, Heading into the year, you talk about your goals of delivering on target margins, you're outperforming on membership expectations to start the year. How are you thinking about your ability to deliver on those targets? Is that extra membership help you achieve those goals this year?

The extra membership gives us more earnings power, which is actually really important to think about '25 and '26 and beyond. And we're -- as Sarah said in her opening remarks, feel really good about delivering well into that 5% to 7.5% pretax range. So pleased if we could continue to grow our guidance right now, our revenue guidance at $30.5 billion for commercial, which $27.5 billion of that is marketplace. That's predicated on holding the $4.3 million. But if we keep on growing through the back 3 quarters of the year, there'll be some upside there.

Are you able to share where the exchange enrollment and did open enrollment period? I think you shared some stats through January. Any incremental update from there?

Yes, we held at the [ $4.3 million ].

Got it. And then as we look ahead with the enhanced subsidies potentially expiring at the end of 2025, how are you thinking about the likelihood of that? And how does your business evolve in that scenario?

Well, we don't see it as a binary event, which we think is important and not necessarily dependent on who ends up winning the election. So for those of you who tuned into the state of the union, I think you all heard where Biden plans on the subsidy from the desire to make those permanent. I think some of the interesting points that we've noted in the past as you think about under Republican administrations, it actually a significant majority of marketplace members are rural Americans and largely Republican votes. So there is a lot of support out of the base or what the subsidies provided in terms of access to care. And then the knock-on benefits of that is economic stability and mobility in that population because of the ability that exist in health care and health offers in terms of job stability and then overall economic growth within the community. So there is a lot to like on both sides of the aisle about the impact of the subsidies have had. We've heard a lot of support from Republican governors, who understand how important these subsidies are in terms of providing healthcare to their constituents and so I think there are a number of factors in play in terms of the question of potentially capping the subsidies, right? They are sort of different levers that could be pulled. The biggest 1 to note is that they expire coincident with the Trump tax cuts and so the prevailing view that the Republicans are going to -- want to make those permanent that intentionally brings both sides of the table together for a conversation. So again, don't see it as a binary event. We think that the subsidies in general, have done a lot for Americans on both sides of the aisle. And we also think there's a really interesting conversation that extends off of capacity as impact before relative to HRAs and therefore, kind of the extra horizon in terms of how employers wants an insurance evolve.

Great. Let's move on to government margins. Drew, you have a strong track record of improving margins, particularly in the government sector. Can you walk us through the unique margin opportunities and improvement that you potentially see in this sector over the next 2, 3 years?

Yes. First of all, I'm the guy, who just can come up and talk about it, there's a lot of talented people behind serving ourselves, making things happen. The opportunities across our 3 lines of business. We've talked about Medicaid of 2025, 2026 time period, settling back into that high 89 zone in terms of the HBR relative to our current year guidance, mid [indiscernible]. So there's a little bit of margin expansion opportunity there. Medicare is a big opportunity. It will take a while, as we've talked about over the back half of the decade. But I think there's nowhere to go but improving margins of -- of the exit duration for 2024. So that's a pretty big lever for the company as we think about the next 3 to 5 years. With the goal of trying to sort of hold in that $14 billion, $15 billion, $16 billion range as we power through the period, where we don't yet have the Starz revenue support positive market and the marketplace is sort of holding in that zone, getting into that, well into that 5% to 7.5% zone and then holding and growing. The overlay on top of that would be leveraged as we continue to grow on SG&A. And so that's why our long-term growth algorithm, we have 1% to 2% of margin expansion. Medicare over the next 5-plus years, it's also leverage on growth.

On the Starz point, I think you're targeting 85% of members by the October announcement this year. Can you talk about 2025. Can you talk about some of the initiatives underway to deliver on that target?

Yes. So that's a major focus area for the company, obviously, not us, and again, we've said this before, not just to drive Stars performance, because quality is really important in all our lines of business. And it's actually a great area, where we can invest and get a high degree of synergy to make some investment to support the Stars agenda, but it actually accrues to Medicaid HEDIS performance and then the emerging focus on quality performance to marketplace as well, which we see is coming. We did a lot of work in the first cycle on the core admin and ops areas, right? Those that were in our control and frankly, were kind of ground 0 for the Stars issue that we inherited and are working through and now we've shifted our focus and added to the focus around this and caps, which are those chapters that are really focused on making sure that members are getting access to providers. They're being seen for wellness business. They're being seen for chronic care. And then the result of that high degree of correlation between members getting access and then feeling good about the business that we as a healthcare has delivered and that's where CAP comes in. So that's been a big focus in '23. And in '24 we talked a little bit about some of the initiatives on the Q4 call in terms of again, mobilizing field resources to get our members connected to providers, to get members in for wellness visit, some of those intentional quality initiatives that -- that we did in Q4. We redesigned the onboarding experience for every single 1 of our Medicare members, who came through [indiscernible] from personalized welcome to you to direct phone calls to make sure that they understand the benefit. We understand who their [indiscernible] provider that we're proactively making those connections. We did a lot of work behind the scenes on data connectivity because the supplemental files the chart coming in are a really critical piece of getting credit for the work that everybody is doing. So 600,000 additional digital provider connections completely that work to get maybe really important in terms of supplemental charts and some of the things that would play out over Q1 and Q2 as we start to get visibility into the results for this October and then still targeting that 85% of numbers and 3.5 [indiscernible] in '25.

Great. And as you look to improve margins in Medicare, you took the PDR in fourth quarter of 2023, can you help us understand the mechanics of that PDR a little bit how that's going to impact reported margins in '24 and '25 address that against the performance margins for the business.

Yes. So the PDR, the $250 million in the fourth quarter of 2023 essentially carries into '24 and acts as sort of a smoother HBR in Medicare throughout 2024. And I said this on the Q4 call most of that outlines in the fourth quarter. So it does carry through the year we reevaluated at the end of each quarter, thinking about the next 3 quarters, 2 quarters, 1 quarter as we get through the year. And then that would be fully unwound by the time we get to the calendar year end of 2024.

Got it, from a reported margin perspective, it might today relatively flat, but your underlying performance will improve over that 2024, '25?

Yes, for '25, I mean -- first, we need to see where the final rates come out and think about the degree to which we and I suppose, the industry as well, and that's what situation, but we certainly need to cut benefits to some degree to very thoughtful about where and how and which products to emphasize or deemphasize, but the macro picture I think for most of the industry as well as some what financial issues they are talking, but the grade will lead to trend benefits, which frankly, will make the products less attractive or senior still quite attractive relative to future service, but on a relative basis, but common in this company this year.

Understanding that those companies are in that positioned with it, you're likely to prioritize margins. It still seems like there's a wide expectations so far this year in 2024 utilization an environment, particularly within the Medicare business. Why do you expect there's so much [indiscernible] in that business in the industry?

I think there are 3 components and then you can maybe talk a little bit about kind of what we're seeing, but there is core utilization that is for most of us and what most of us have said, very consistent in terms of what started in Q2 of last year, what's come through the end of the year, what we're seeing so far in Q1, then that needs to be adjusted based a little bit based on the member mix in each company's book and where the other is focused, whether you can more dual members or you're dealing with the MA numbers and then I think we get back or is that needs to be further vested by internal expectations. And so when you compound those 3 things, I think that's where you get the range of the [ top-track ] -- but I don't know that I think there'll be a huge variation in terms of the underlying trends, where those are and generally how those have developed in the last 10 to 11 months or so, but update on what we're seeing.

Yes. I need to remind you again, we just reaffirm that greater than 670, so this is sort of digging a couple of layers into the detail that'll give you some insights to how each of the business lines are moving. So Medicare coming into the year, we had noted back in Q2 a 23 elevated level of non-end patients, so largely outpatient. But that elevated level held for the year '24. We look at [ Ops ] authorizations in the most recent periods to make judgments and so our Ops were not disrupted through the change not scared. And Ops are up a little bit in January and February. We'll see how that plays out, do those Ops make it to add make it to our actual claims. But the Ops do look up a little bit.

Great. I'll shift on to Part D. Centene is growing a lot in Part D, while other companies [indiscernible] going back in that market. What's driving that differentiated strategy in Part D? And how are you thinking about the upcoming IRA in this Part D.

Yes. So we've been in this -- there's no sense to -- Edema in 2006. So we've got a lot of data, right, coming into the IRA change, that the IRA took effect for 2024, but reasonably modest changes in the 2024 policy year. That's been fine so far pleased with that business. Strategically, it gives us promising stat, we've got north of $45 million of pharmacy spend that we manage, and you guys have seen the benefits of that when they go to RFP, PBM services. And then also, it's a great feeder for down the road with our Medicare products are more competitive in some cases or even today where we've invested in some of our [indiscernible] plan. So great business strategically, but it's going to stand on it's own marriage. So fast forward to 2025, knowing that we just reaffirmed 2024, so far, so good, although it's early. 2025, there's a lot to think about. And so pretty major changes with the IRA. The direct subsidy, let me give you the granularity that the direct subsidy in 2024 went from $2 to $29 that's pretty big jump, right? The big changes are coming in 2025. So there's reasons for cautiousness as we approach the bids for a number of reasons. One is the catastrophic phase of that benefit plan we, the payer goes from 15% in 2023 to 20% in 2024 and jumping to 60% in 2025. So we're more underwritten risks by the payers. #2, we really have to think about member behavior because they're out of pocket is coming back, which is a great benefit for seniors, but you have to think about member behavior as we're operating that. There's also a new program called NPPP, which effectively enables the members to elect in to smooth their copayments, so there will be some bad debt there. It's another factor to think about -- and then speculating on manufacturer behavior, drug manufacturers response to IRA. So a bunch of things. We love the complexity of that product and pretty well with it over the years. But thinking about the impact on the direct subsidy, it could go up $100 or so up $29. So a jump in the direct subsidy to $29, could go up quite a bit more. And that is the revenue that's paid by the government to the payers. So there's a lot of interesting moving parts to the IRA and EP business, and that also applies to NLPD another reason why we think there's going to be cautiousness, the benefit structure on the medical side of it.

Do you think that increases the value proposition of Medicare [indiscernible] broadly and that will accelerate the industry growth potentially? The changes to PDP.

Well, the senior can access either a stand-alone PDP like through WellCare, our product or through the MAPD benefit, still think, even with I think the cautiousness going into '25 underwriting, it's still a great proposition for seniors.

Great. Well, we're just about out of time. So why don't we end there? Thanks, everyone, for joining us, and please enjoy the rest of the conference.