Centene Corporation (CNC) Earnings Call Transcript & Summary

Welcome, everybody, Friday morning. Really appreciate everybody who's here in the room. And I imagine we have a fair audience out there for the Webcast too. I'm Lance Wilkes, health care services analyst for Bernstein. Really excited to have Centene here again this year. And so to kick things off, what I'd like to do is let me just let both you guys introduce yourself. We probably -- this conference has a lot of portfolio managers, I saw that Boeing canceled at the last minute. So we may have some extra portfolio managers here. So maybe just a quick introduction of yourself and the company and then kind of walk through some questions. Obviously, you've got the 8-K out, so we can kind of turn right into that, and then build to like the longer strategic questions.

Sure. Sounds good. Good morning. Thanks for joining us and for your interest, I am Sarah London, I'm the CEO of Centene. Drew Asher, the CFO. So for folks who are newer to the Centene story, we are 1 of the largest managed care organizations in the country. So we provide health insurance to more than 28 million Americans, primarily focused on government-sponsored programs. So Medicaid, Medicare and Marketplace. We take a very local approach to our work. We embed teammates in the states and in the communities that we serve, and really think about leveraging sort of the size and scale of the organization in delivering local care to our members. As you said, maybe I'll just turn in to the 8-K, because hopefully many of you read it, but if there are some newer folks again to the story, those who didn't, we put out an 8-K on Wednesday, and I'll hit some of the highlights of that, and maybe give a little bit of color and then I know we'll dig into a lot of it in the questions. So major points from the 8-K. First and foremost, we still feel good about our full year 2024 adjusted EPS guidance of greater than $6.80. We also still feel good about our consolidated HBR guidance range, which is 87.3 to 87.9. We are seeing pressure in our Medicaid book of business in April results. And that is largely due to the impact of this redeterminations process that we've been going through for more than a year now, and the shift in acuity of the underlying population that remains after the redeterminations process. So this is, the states were suspending the eligibility verification process for Medicaid members during the pandemic, and that restarted last April. We've been working through that over the last year plus now, and for context, we are about 95% of the way through the administrative part of that process. So redetermining the individual eligibility of Medicaid members state by state. And as of today, we have roughly 2/3 of our states completely done with that process. But there is a tail of a handful of states that will continue over the next couple of months for different reasons. But in other words, we're largely through the volume of membership that is shifting. The acuity starting to see pressure is largely a result of the timing. So think about the fact that the largest member shifts took place in Q4 of 2023 and Q1 of 2024, but then what you have is the compounding effect of the denominator getting smaller as we think about the overall metrics. Add to that this rejoiner dynamic that we've been talking about for a while, which is the fact that about 30% of members who rolled off in this redeterminations process, or fell off, fell off inappropriately. And it was partly due to administrative issues at the state level, system issues, things like that. We've been tracking that to be consistently now coming out to around 30% of those members who come back to us. So that also creates a delay in seeing how the underlying member mix and acuity is going to settle out. And so that is largely what we're seeing happening in the pressure in April. Good news about that is, roughly 50% of our rates, which is really how you account for that acuity, is by matching the rates to the acuity of the population with your state partners. Roughly 50% of our rates are set between July 1 and October 1. So we have that data to be able to bring forward into our advocacy and our conversations with the states. The other good news is we know how to do this. So this dynamic of redeterminations is unprecedented right now because of the scale. But matching rates to acuity in Medicaid is normal course. It's the blocking and tackling that this company has been doing for 25 years now. So our teams have been totally organized around this for more than a year, having very productive conversations with our state partners. As we see this acuity settle out, we will be having those conversations with the other MCOs in our states. And so there's consistent messaging, consistent data. And that's really this dislocation that we've been talking about, of timing that we're seeing manifest largely in the April results. At the same time, our Marketplace business continues to perform very well, including anticipated outperformance in risk adjustment. We're seeing strong investment income, our Medicare business is in line with expectations, and that includes our PDP business. And then, we didn't call this out in the 8-K. But as many of you know who've been tracking the story, we've been very focused on driving a different level of operating discipline and efficiency in the company, and so that continues to go really well. We're bringing awesome talent in and we're starting to see really good results there. And so when you put that all in, having a diversified portfolio allows us to absorb pressure in 1 of our lines of business, navigate a dynamic landscape and ultimately pleased to be able to reaffirm both the full year EPS guidance and the consolidated HBR guidance.

Great, well, let me just ask a couple of follow-up questions on that. First 1 would be just to kind of frame, and I think you've hit this now, but to frame the concept. As I read the 8-K, the key question to me was, okay, are we seeing a spike in utilization in Medicaid perhaps, because utilization in Medicaid is finally getting back to sort of a normal pre-COVID level? Or is this the concept of oh, you just estimated a certain MLR in the remainers, a certain MLR in the leavers. And as you're now observing what's really happening, there's slight, modestly different and the remainers are at a slightly higher MLR, which then leads into the rate thing. So if you could just kind of comment on it, like how much of it is any sort of utilization dynamic as opposed to just the acuity mix?

Yes. So it is largely the acuity mix. There are still some pockets of trend consistent with what we've called out over the last couple of quarters that we're watching, like behavioral health within Medicaid and within other lines of business as well. So those are -- there are always sort of pockets that you want to pay attention to, but it's largely the redeterminations acuity shift. And then in some of our states where there's a similar change if they did a PBM carve-out or a PDL change where, again, if you have a shift in the underlying acuity and the rate isn't accounting for programmatic changes. But I don't know if there's anything else you want to give color to?

Yes. I totally agree because we can track the stayers, the performance of the stayers, we know the performance of the leavers leading up to the point when they left, we can track the rejoiners. So those that left and then came back, as Sarah referred to earlier. And then also we track the new members. And so because we've got visibility into the performance of each of those cohorts, we can sort of triangulate that and attribute most of this to effectively the underlying shift of membership base due to redeterminations.

That's really helpful. And then that's obviously a really strong performance, both on keeping the EPS and keeping the MLR target. On the MLR target guide, is that -- should we be thinking of that as, well, you're being just conservative and so you're able to withstand a little pressure here? Or are there offsets in some of the other businesses that are offsetting some of the pressure you see in Medicaid?

Yes. First of all, it's a reasonably wide range, and we'll keep on looking at that as we get through the rest of the year. But the marketplace performance is effectively a partial offset to Medicaid. And then beyond that, as Sarah mentioned, Medicare is on track. We were able to afford $125 million premium deficiency reserve, which is attributable to the 2025 bids that we're just about to file. We've got investment income, that's trucking along at a higher run rate than we were planning. And our premium and service revenue as a whole, which we'll update again on the Q2 call, is stronger than we had previously guided to. Which is great, because that gives us long-term earnings power on a higher revenue base. So company as a whole, diversified enterprise is performing well. Understandably, we're not pleased either with sort of the, let's call it, the tightening or the worsening of the Medicaid HBR in the near term, but we've just got to go get that fixed through rates largely. And as Sarah mentioned, we've got about half of our rates between 7 1 and 10 1, and we're averaging a composite rate around 3%, so call it 3% plus, it's a little bit higher than the 2.5, over 2.5 that we referred to on the Q1 call, but we still need to go get more than that. And this most recent data, we'll be making the case to the state: thanks for the rate change, but look at the data, and we need to get topped off as we get into '25.

They're real helpful. And then just a couple of other like mechanics associated with this. From your prior commentary on how earnings might flow in during the course of the year. How do you see that changing, if at all, with this? I think previously you might have suggested like a 60-40 split with that. Does this have a change on that sort of impact?

Yes, we still feel good at that no less than 60% in the first half of the year. So 60-40, hopefully do a little bit better in the first half, so we can deliver earnings sooner in the year rather than later.

Got you. And then my last 8-K question in the strategic conversation, I'll then get to the longer-term ones, would be, how should we think about that PDR comment? And so like when I initially saw that, my reaction was oh, what they're signaling is they're able to absorb 125 within guide and they don't yet know what the PDR will be. But is it in fact that maybe you have a -- given your bid, you have a clear view as to what that PDR is going to be at this point?

Yes, it's an actual calculation based upon the bids. I mean, literally, we're filing bids right now and all the way through Sunday. Because you don't want to wait until the last day, which is Monday. When there's electronic submission involved, you're not completely in control.

You can't flip it under the professor's door. Exactly.

It gets time stamped. But because we've done all the work, I mean it's very complex. The culmination of the bid process across all of the different PBPs in Medicare Advantage and then our PDP bids. But the PDR relating to Medicare Advantage is the culmination of all that detail buildup, it's our best estimate based upon the membership we expect to retain during the annual enrollment period. And really, it's -- thank you, investors, for allowing us to spend our collective money, to preserve business we think will be very valuable in the long run. So we are going to be very disciplined about exiting certain states, certain counties, certain products that we don't think will bear the long-term value in conjunction with the, sort of the Medicaid and Medicare coming together, supported by recent legislation, the strategic value of that business and then business that's akin to the low-income and duals business that we want to serve in the long run. So that's sort of the nature of, spending some money today, backfill it with stars improvement over the next few years, and then have a really good Medicare business as we get to the back half of the decade.

Well, let's walk through the 3 major businesses and talk a little bit about them. I think 1 of the top questions that I've had and has been out there has been the kind of recent RFP activity. And so maybe if you can just, for the audience, comment on the activity that's taken place? And then what I'd be really interested in is, kind of your, postmortem your assessment of scoring that's been taking place out there, where you feel you're strong? Where you feel you have opportunities for improvement with that. And obviously, as part of that, any sort of updates on the Texas status and if you've seen anything with respect to Georgia?

Yes. So we've had a number of major states go through the RFP process, less of ours, in the last call it, 6 to 9 months, but some of the bigger states. So we just had great news in Florida, retaining our statewide presence there, given the recent ITN notification, good results in Michigan. Good results in Kansas, came in first in that RFP process. Still waiting on Georgia, we expect that sometime soon, sometime over the summer. A notable point there is that they've added complex populations to that bid, so that's an opportunity for not just retaining our market share in Georgia, but actually growing that program consistent with our long-term view of growth in Medicaid, which is at least partly driven by the addition of these complex populations: aged, blind and disabled, LTSS, foster care. We've had -- so for, all told, good results from an RFP standpoint. We did not have good results in Texas, but are protesting that and continue to be very concerned with what we saw there. There were a number of incumbents who got bounced out of regions in Texas, really sort of inconsistent with the data on the ground there. So they took out the top-performing quality player in 9 of 13 regions as a result of the scoring, including a number of the children's hospitals. But even more concerning is the fact that the department apparently released all of the RFP submissions to 1 of the submitters in the middle of the process. So that protest is ongoing, I don't know if you all are tracking that closely, but there's been a lot of noise in Texas around that. And so we continue to push and believe that, that should be reset. And it is the third time that the department has endeavored to procure that particular book of business. So some challenges there we continue to work through. But to your point about post-mortem, we -- since our results in California, really, which we're a couple of months into our tenure. We've taken a real continuous approach and mentality to the BD process because I think we have -- I still firmly believe that we have the best BD team in the business, but you can always be better. And what can we learn from the scoring, what's the feedback that we're getting, we consistently get positive feedback about the fact that we take a local approach. We are deeply tied into the community, which means we know who those community partners are and that sort of nontraditional provider network that drives health outcomes for our members, continue to focus on innovation, care management. And I think the big opportunity for us, which is, again, what we kind of put as our first priority starting 2 years ago, was operational excellence, and making sure that the underlying foundation, execution on the basics is seamless and as strong as it can be. So you can really focus on having some of those exciting conversations with the department about how they want to tackle health equity, how they want to tackle some of these 1115 waiver opportunities that are coming. And so our teams have started to have the oxygen to really lean into those conversations, because we're getting our arms around the operations of the company at the same time.

That's great. And again, because we've got a broad audience. One of the things that we've been really excited about for the sector and for you guys for a number of years, but particularly right now, is the growth potential that remains in Medicaid. And our thesis on that is, this more complex populations which aren't yet outsourced represents like 40-ish percent of spend and still can get outsourced. And then I have a view that there's just a consistent eligibility expansion in this country that will continue like, just like a demographic trend. It may not be right, but that's like my view. So I'd be interested in maybe if you could just spell out for folks, the backdrop has been redetermination. Everybody has been focused on redetermination. But underneath that, you've seen some expansions, you've seen the postmortem or the postpartum coverage. Could you just talk about like, what it is you're seeing as far as expansion at a state level, maybe broadly. Doesn't have to be exactly like just to Georgia, but what you see and maybe how that links into your Investor Day, long-term targets for growth in Medicaid.

Yes. Well, we completely agree with you, both relative to the fact that Medicaid continues to grow, and there is sort of an underlying, call it, 1% just sort of growth of eligibility in the country. If you look at the demographics of the -- socioeconomic demographics of the country, we're heading even more in that direction, unfortunately, right? But that is the member base, and low income and near low income is who we focus on. So embedded in our belief that there is still significant growth in Medicaid are all the components you've talked about. And that plays into the long-term algorithm, which is 7% to 8% revenue growth underneath that 6% to 7% Medicaid growth. And if you break down where that's coming from, so there are still roughly 10 states that have not moved to Medicaid managed care. So they're managing their Medicaid business in a fee-for-service disposition. There are a roughly equal number of states that are -- have moved into a managed Medicaid model that Centene does not operate in. So that is white space for us. There are 9 states, I think, that have not yet expanded Medicaid, but you just saw North Carolina do that. So proof point -- so actually, let me take each 1 of these. So we said -- roll back 2 years ago, we built our long-term algorithm. We said, okay, there are states that are not yet in managed Medicaid that are going to flip, Oklahoma did that last year. We now serve Oklahoma. There are states that are in managed Medicaid that we are not in, that -- Delaware is an example of that, we entered Delaware last year. There are states that have not yet expanded Medicaid. North Carolina just did that starting last December. So as we've been clicking through sort of the operational turnaround of the business and clicking through redeterminations, we've put proof points on the board at the same time as each 1 of the growth areas. And then the last and the biggest 1 is those more complex populations. And there's a mix in there of where the population is in the managed care model. So like Arizona LTSS, which we won in December, that Centene was not serving, now serving that. And then those populations that are -- we've seen increasing momentum of states moving them into the managed care model because of the level of service efficiency and oversight, and then sort of cost management that we can do in partnership with the state. And so again, the ABD bid in Georgia is an example of that. North Carolina added foster care in this most recent budget, and we are tracking each 1 of those opportunities state by state and also helping to influence that. Because we have the ability to go to the department and go to the legislature and say, this is how we've managed LTSS in Texas and in a number of other states. These are the outcomes, we can show you the data, we can share references with you, and it helps the states understand, not just what the opportunity is, but what it feels like on the other side of that opportunity.

That's really helpful. Okay. So let's turn to marketplace. And if you could just give kind of a sense as to what -- how is the performance in that business? Obviously, growth has been great. And then as you look at 2025, what's your sense of the opportunities for growth in margin kind of in either scenario: if there was some sort of impact to subsidies or if there's a continuation, kind of a trade on taxes and subsidies.

Yes. So the marketplace business is performing incredibly well over the last couple of years. And there are a number of tailwinds that have driven that. Some of it is redetermination. So members who no longer eligible for Medicaid are eligible for an individual product on the Marketplace. And because of the enhanced subsidies that went into effect 2 years ago, there's no cost to many of those members to signing up for a Marketplace plan. So we have been very focused on helping members make that transition. But there have also been other interesting tailwinds that we can, I'm sure, get into later. But if you look at the growth in marketplace, the biggest chunk of that has been from previously uninsured populations. So whether they are young gig workers or folks who didn't really trust sort of the stability of the marketplace, I think we've seen a kind of stabilization of that chassis and a belief that this kind of, we're not going to be subject to political whims. And that, plus the subsidies, the awareness that CMS created through advertising dollars, the fact that brokers have now flooded that space and realized that, that's an opportunity for them. We're seeing a lot more awareness, the feeling of affordability. So that's brought in the uninsured. And then we did a sample of our membership post OEP of the new membership and found that about 10% of those members were coming from their previous small group employer having offered insurance and no longer doing that. And so this dynamic that small group market and the smaller employers are actually migrating members into the marketplace organically, we've now proven out in the data, we've been watching that dynamic quite a bit. But overall, we've seen tremendous growth. We continue to expect to be well into our target margins of 5% to 7.5% this year. And then as we look to next year, thinking about the enhanced APTC, so again, for folks who may not be as fluent in all of this, this enhanced subsidy that the Biden Administration passed, that is set to expire coincident with the Trump tax cuts at the end of 2025, is a big question about what does that do to access affordability and membership within the marketplace product. Obviously is something we care a lot about and have been paying a lot of attention to. And we are seeing there's obviously -- Biden got up at the State of the Union and said if he's elected, he's going to make those permanent. What we are also seeing are a lot of interesting bipartisan data points, but also Republican data points around the idea that the marketplace chassis is an important 1 as you think about ICHRA and the idea of individual coverage as an option as we go forward. And so even most recently, some of the conversations in the Ways and Means Committee has been about this sort of breakpoint of the 400% FPL and the idea that the subsidies go above that. And so our belief has been that this is not a binary event, but that they may look to mitigate sort of the peanut butter effect of the subsidy, and say maybe we'll cap them at 400%. We have more than 90% of our membership is below 400% of the FPL. So that's sort of how we're looking at it. And again a lot of positive data points -- 2 things I'll put out and some of you have heard me say this before. But 1 is, a significant portion of our members and sort of the broad members in the marketplace are rural Americans who are Republican voters. And so some of the loudest voices supportive of the ACA, perhaps ironically, perhaps not, are Republican governors who understand what it means to provide access to care and what the knock-on effects are of that, including reducing credit card debt. Because a lot of that debt is driven by medical debt. The idea that you have job consistency, you have economic mobility as a result of that. There's a lot of amazing things that have come out of creating that access. The other point that's notable is rough numbers, the total cost of the Trump tax cuts in 1 year are around $200 billion, and it would take $200 billion to make the enhanced APTCs permanent forever, right? So the relativity, it's like $25 million per year versus $200 million and they are set to expire at the same time precisely so that if we have a divided government, there's a real opportunity to come to the table and negotiate.

Super helpful. And I think that demographics of your population, the fact that 90% are below the 400 is a really interesting data point. You've talked about APRA and just the concept of individual becoming sort of a vehicle for what I'd call kind of a siphoning out of employer and for people who are less familiar with the space, employer health insurance hasn't grown since the year 2000. Obviously employment has, safety net programs have grown tremendously over that time period, like someone like me, I would say, all that's been siphoning over to the expansion of safety net programs as a society for like 25 years now. But this is maybe more an opportunity to siphon away the core. What are you seeing as far as -- obviously, it's very early days with increment. But maybe if you can just spend a couple of minutes explaining kind of your experiences, what sort of uptake you're seeing in that sort of product today. And this is kind of like a defined contribution-ish product for anyone who's less familiar with that .

Yes. So think about the -- at least I think about sort of the shift from pension to 401(k) analogy for health insurance. So instead of your employer providing your health insurance, they give you a stipend, you can then go choose a product on the exchange that better fits you. And so you think about, we have 66,000 employees. I think we have 3 or 4 health insurance options, we're probably not like nailing it out of the park in terms of customizing those options to 66,000 employees. If you think about the idea that you can sort of choose the level of coverage that you want; that, that could be portable, it could travel with you. There's just a lot to like if you think about the generations of workers that are here, and continuing to come, and the fact that, that has been sort of the dynamic that has won in every other industry. This is part of why people, I think, are excited about what ICHRA could mean. It was sort of put into statute originally with the ACA, but then the tax law change that was needed in order to allow for the deduction from -- the employer deduction, took effect in 2018, I think. And then we went into COVID. So there was like this moment that there could have been momentum, and then no one was going to touch health insurance in the middle of a pandemic, but people are now starting to come back and talk about this idea, particularly as premiums have gotten -- have increased and employers are starting to think about their own desire for predictability in that line, is there another way. And so our hypothesis is, we've seen, and there are lots of sources that you can go look at in terms of how the market is growing. It continues to grow at a pretty significant clip, but again, denominator small. So big growth numbers, but it's still a nascent market. Lots of interesting conversations happening. We launched a pilot in Indiana this year that's allowed us to learn along with the market. Lots of again, really interesting organic conversations coming out of the dynamic I mentioned, of the organic small group migration that's already happening in Marketplace and what is driving that. And it is a combination of the CFO of an organization wanting to have predictability in what that spend is going to be, and the pull from an employee standpoint of, I want choice, and I want a little bit more agency in making those decisions. Now I think the rate-limiting factors to sort of the long-term adoption that you might hypothesize are some of those infrastructure pieces: So how do you make the administration easy? How do you make it feel like as an employer you're not a throwing your employees to the wolves, like how do you create a navigation and buying experience. The brokers need to think a little differently, because it's not really 1 shot to 60,000, but it's also not quite the 1 by 1 of Marketplace. So there's this in-between space that there's a lot of interesting activity stepping into to fill, and we're part of all those conversations. We do have -- how many ICHRA members do we have? A couple of ten thousand, right?