Centene Corporation (CNC) Earnings Call Transcript & Summary

Hi, everyone. Good morning, Steve Baxter, Health Care Services Analyst here. We're pleased to have Centene with us. Centene is the largest provider of government-sponsored health coverage with a focus on Medicaid and exchanges. From the company, we have CEO, Sarah London; CFO, Drew Asher. So thanks again for being here. Did you guys want to make any opening remarks? Or should we just go right into the questions?

Yes, I can -- we can give a quick update on the business. And then we can go wherever you want to in terms of questions. So at a high level, I think Q3 so far is evolving thematically very similar to what you heard from us throughout Q2. We are still on track for our adjusted EPS full year of greater than $6.80. We are still seeing pressure in Medicaid, largely driven by the unprecedented redeterminations process that we're now almost 18 months into. And that continues to be offset by a strong performance in our Marketplace business as well as in SG&A and investment income. And then across the business, continue to make good progress. So recent results from an RFP standpoint, Medicaid growth, we saw a positive result in Pennsylvania, defending our LTSS business there last week, and then we got results out of Iowa yesterday. We reprocured our business in that state as well. And that is all part of, I think, great momentum that the local teams and the business development team have put on the board in 2024. In addition to strong performance in Marketplace for '24, we feel really good about our pricing strategy for 2025, a continued focus on margin in that business. Also pleased with the fact that CMS recently adopted the agent of record lock, which is something that our Ambetter team actually pioneered earlier this year, and we believe will create a more stable purchasing experience for the Marketplace membership. From a Medicare standpoint, the teams did a really good job anticipating direct subsidies and benchmarks for both PDP and Medicare Advantage, and we are on track for our 2025 bids in both of those businesses. One last sort of example, we ended up being below the benchmark for auto-assigns in 33 out of 34 regions, and so able to continue to offer attractive low premium products aided by the CMS demo, which we decided to opt into. One important thing to note on PDP, partly because of the IRA changes and then final rate notice provisions at the time that we filed bids, we made the difficult decision to eliminate broker commissions this year for PDP only. We have not made any changes. We'll continue to pay full commissions in Medicare Advantage and obviously work very closely with the broker community to support the work they do to support our members. And then lastly, Star. So we got CAHPS results, which is sort of that final chapter that we are waiting for over the last couple of weeks. Those came in, in line with expectations and improvement year-over-year, which is, again, consistent with what we saw across most chapters for Star this year. So working on an internal range because [ CAHPS ] points don't come out for another couple of weeks, continue to feel very good about that range and demonstrating meaningful progress in our ultimate Star goal for October of 2025. With that, maybe I'll turn it over to Drew just to give a little bit more on the underlying dynamics for back half.

So drilling a little bit deeper into, we've got 1 month closed, month of July is closed. We've got preliminary data on August. We don't close August until day 6, which is next week. But as Sarah said, thematically similar to what you heard us say on Q2, though we still are continuing to get Medicaid pressure. Largely -- once again, similar to what we saw in the Q2 call, largely driven by redeterminations. And so you might ask, all right, what's changed in the last 1.5 months. Membership continues to attrit slightly. So we think we're going to level off around 13.0 million, maybe 12.9 million members. And recall back at Investor Day, we thought we'd level off around 13.2 million members and then grow back to 13.6 million by year-end. We think we're going to settle out around 13.0 million members. And you guys understand the dynamic between stayers versus leavers, that does put pressure on the Medicaid HBR. In addition, continued theme around rejoiners where you have a lot of administrative terminations, about 30% still are making their way back to us. But that time period where there's a gap in coverage continues to sort of widen a little bit. And that's the time period where we're not getting premium. And then obviously, the members finding their way back into the Medicaid health care system, typically because they've got an event, they want to get covered or they have a script to fill. So that's putting pressure on the Medicaid HBR in the quarter, in addition. So that's largely the biggest driver. We've also talked about program changes in states where either it's a new program or the state did something wonky with the pharmacy benefit, whether they carved it out to a single PBM or maybe they added GLP-1s. And so those program changes we've got to get paid for as well. So that continues to be a pressure point. And then third, we're always looking for pockets of trend, and we're isolating continuous members. And so what we're seeing there is similar to what we've said really for the last 1.5 years, pockets of behavioral health in a post-pandemic environment, a little bit of home health. So all of that said, we expect the Q3 Medicaid HBR actually to be a little bit higher than the Q2 Medicaid HBR. On the flip side, as Sarah said, the benefit of having a diversified enterprise where Medicaid is just under 60% of our revenue stream, continued strong performance in Marketplace. We expect that to continue into Q4. Things that we can control more like SG&A, I think the company has done a good job with SG&A this year. There's always more opportunity ahead, and then investment income continues to be strong. So you put all that together in a diversified enterprise, that enables us to reaffirm our greater than $6.80 goal for this year. And then one more thing real quick. Understandably, it's difficult with redeterminations and the sell side trying to predict perfectly the quarterly flows within that greater than $6.80. If you look at consensus for Q3, we would take $0.20 to $0.30 out of Q3 and put it into Q4, just to slope out the timing of when we expect to earn in the back half of the year. So I thought that would be a useful update. And hopefully, we didn't take away from all of your good questions.

Well, I think we just throw the questions out the window. I'll come back to some of the discussion here. Okay. So then just to make sure that we fully understand the contract, it seems like before this update and maybe some of the trends on membership and maybe the July sort of closed month that you have, you would have been expecting MLR to improve in the back half of the year as a result of the rate updates that you're getting in your second half states. When we think about what's changing here, like do you still think that, at least for the states where you're getting rate updates, like do you think economics there continue to improve? Or do you think that this is enough that the rate updates that you're seeing in the back half of the year now are now producing a level of margin improvement even specifically for those contracts?

Yes. So the rate update. So we still believe the back half of this year, where we have most visibility, we've got one draft rate left for our 10/1 rates that we're working on with the state, but we're still at 4% plus. So that hasn't changed, to your point. Some of the 7/1 rates, I mean -- and we need more than the 4% plus. So that was -- we never thought that that would be the panacea and the solution to get us back to where the long-term -- the long-term landing spot for Medicaid. So we continue to have healthy discussions with the states productive. We just need to get through a few more rate cycles. We've got a 9/1, a strong 9/1 rate coming that will help Q4 more than Q3. We're working on our 10/1 rate with another large state and then bite at the apple 1/1, 4/1 and then 7/1 to 10/1 next year as well as we continue to share data, especially the emerging rejoiners data which continues to sort of mature and develop sharing that with our state partners.

Okay. So at this point, you still characterize the issues as being related to largely acuity and membership either lost or rejoining versus underlying pocket utilization. Like when you study [indiscernible] you called out behavioral is something that you're watching. When you look at same-store utilization on the stayers, like what do you feel like you're seeing there as you continue to study the data?

Yes, we can talk about this before. We can isolate. We got all the data. We've got the stayers, the leavers, the rejoiners, the new joiners, but then we can isolate not just within the stayers, members that have been continuous members for the last 2 years and then really isolate what trend dynamics are within that population. And just like we've noted for the last 1.5 years, 2 years, pockets of behavioral health pressure. Sometimes, that's when the state decides, hey, we're going to increase access or they tell the payers you're no longer allowed to do prior auth. And then we just -- we need to get paid for that. And so there are states where we're lobbying the state and explaining with data outside of redeterminations where they've -- a few states have put GLP-1s and for the weight loss indication. That's sort of normal course work with the Medicaid agencies. But yes, this is largely driven by redeterminations.

Okay. And then obviously, this is unprecedented thing the industry has gone through redeterminations with the number of people that are involved in the process and how big of an impact it's having on your business. I guess as you step back now and look at where we sit, obviously, it's played out quite differently across a number of aspects. How do you feel in terms of the conservatism that you're now implying in the back half outlook here? Do you still think there's opportunities of risk here? Or do you think you've now set the back half conservatively enough that there's more likely to things develop positively for you versus negatively?

Yes. I mean I think if you look at to your point, we're now 18 months into this, and I think state by state, it's played out a little bit differently, I think on the whole, we actually did a pretty good job of estimating kind of where membership was going to land. The 30% rejoiner dynamic is not something I think anybody could have anticipated fully, partly because some of that was driven through system issues at the state level. And then this idea that the rejoiner dynamic, which is effectively sort of a churn dynamic that Drew described, where you've got folks who we're not getting premium for, right, who are still eligible for the program. So that's something that we're working with the states as part of advocacy to say this should be included in an acuity adjustment because it's sort of a programmatic issue for these folks who were eligible and we're not done. And then I think as we look to the back half, for us, in general, trying to be conservative in our estimates and also where we are front-footed, full-throated in advocacy, but also looking at where there are levers internally that we can pull in order to offset and just manage the business through what is an unprecedented time. So doing anything we can. I've met with half of our governors in the last 4 weeks. And then, again, internally saying where are there decisions that we can make to make sure that we've got stability in the program as we work through those rate changes.

Okay. And then as you think about how this impacts potentially the trajectory that you set out for 2025, I think you made some comments on the last quarter's call, do you still expect to be able to grow adjusted EPS? I guess on one hand, just because Medicaid is troughing lower, it doesn't mean it couldn't be back in the same place theoretically in 2025 as you initially expected it to be. How do you think about things like, hey, the exchanges seem like they're taking another step higher in terms of performance this year? I guess like how would you maybe reframe the commentary on 2025 you made on the last earnings call in light of what you're talking about today?

Yes. I think we'd have a similar view. Now obviously, the jump off matters but view of trying to -- and feeling like there's a path to grow adjusted EPS in '25. We'll see that as it develops through the year. We give guidance -- anticipate giving more formal guidance at our December Investor Day. But that's certainly the goal. And we think as we sit here today, at least, that's achievable, how much is going to be the question.

Okay. So then when we think about kind of the rate updates and the timing to getting some of this more recent trend factored into it, I guess when you say like, hey, there needs to be a lag in data before states view it as credible, like how are you thinking about the rate update that you'll get in the early part of next year, like January 1 rate? Like do you think they are reflective of the emerging trends that we're seeing? Do you think there will be enough data at that point? I guess, how do we think about the timing lag to get in these unforeseen issues factored into rates?

I think by the time -- if you think about the 1/1 rate cycle, even just the cycles that we're in now, I would say -- well, let me go all the way back, right? We started a year before redeterminations began having these conversations state by state with actuarial counterparts and running scenarios. And then we've continued to layer in data as it has developed over the last 18 months which helped the fact that starting 7/1 last year, we got prospective rate adjustments, right? So Drew walked through that framework of acknowledging, acting and then are the rates sufficient. So every state has acknowledged this is an issue, all but one has acted and the one that hasn't has committed to acting. So they're just working on the adjustment. And then the question is efficiency. So starting 7/1 last year all the way through the cycle, we have had states make adjustments. And I think right now, our conversations, again, continue to be productive. And include the most recent data that was coming out of Q2. So if you think about the 1/1 rate adjustments, we're going to have that much more data to demonstrate completion factors and sort of what the underlying experience is. And so that should all help in terms of the runway and the advocacy to make another sufficiency adjustment in that 1/1 cycle.

And the level of urgency for all of our peers, not just public peers, but like the note you put out or the book you put out about the industry, there's a lot of not-for-profit Medicaid players that are really hurting. So the fortitude at which we collectively approach the states has, I'd say, improved in the last 2 to 3 quarters. And so the noise level is high. The states are listening. We just need that last step like this efficiency as Sarah noted like the cycle of convincing them with data that they've got to recalibrate the rates. And they're doing that to some degree, obviously, not quick enough and fast enough for us to contain that pressure on the HBR, but we expect to improve Q4 and beyond as we get those rates in. There's levers we can pull. We can get tougher in certain areas and we will, controlling medical costs, but this is largely getting the states to act when the Association of Health Plans goes to them as a collective group that makes those arguments.

Yes. So it makes sense that it's choppy in the near term. If we go out a little further on the calendar, like the fact that you're seeing more pressure now impact where you think you would be, say, January 1, 2026, like do you think that's the same place because that's a pretty big amount of time between now and then. I guess how are we thinking about like is there now more time required to get to more normalized margins as a result of the starting point being worse or not?

That will have to play itself out in 2025. I mean, obviously, for 1/1 '26, we'll have 2 bites at the 1/1 apple. So if 1/1 is not sufficient enough, then we've got another one for 1/1 '26. So we'll really have to get the 4/1 '25 and then the 7/1 to 10/1 '25 is right in order to sort of hit that ultimate glide path, which we don't think has really shifted in terms of the ultimate landing spot getting back to our target HBR, which rounds up to right around 90%. We think that's achievable. It's just difficult to perfectly predict which quarter we're going to hit that and then stay thereafter.

And I think that's consistent with what our view was even sort of at this time last year, which is that those changes may annualize into '26 because it sometimes takes multiple bites especially that 31 states, right, in the tail.

In terms of kind of to pivot to the offsets a little bit, like exchange performance, my understanding of it was coming out of the second quarter exchange performance was good and improving year-on-year, but wasn't something that you thought about as a level of margin that might need to moderate going into 2025, but given the outperformance that you've seen since, I know they were pretty much like now passed the window for pricing for 2025. But how are you thinking about the sustainability of exchange performance this year into next year?

Well as we called out in the Q2 call, we had the $600 million benefit going back to the '23 risk adjustment, we're in '24, so sort of setting that aside, feel good about the strength in that business, the momentum. The competition has been pretty healthy. I mean we don't mind competing as to our large peers that generally are responsible and thoughtful with their pricing, maybe not perfect, but generally responsible with their pricing position. And in fact, many of them are likely trying to protect margin stream on a small group business. So I think the underwriting thought of that goes into their approach, I believe it goes into their approach for the Marketplace. So we'll have to see where we exit with the HBRs of all of our businesses, but I feel pretty good about the strength of the Marketplace business, the execution of the team. And as Sarah said in her opening remarks, as we learn things about -- through the broker community or through other means about the positioning of our peers, we feel good about what we know today about how our benefits and our products will be sitting in 2025.

Okay. So you don't think maintaining or coming close to maintaining this year's performance requires you to be at risk of market share based on what you noted. I guess, like your competitive dynamics is early. But do you feel like there's something specific that you're trying to call out?

I mean I think the team has demonstrated the ability to grow margin and frankly, grow market share over the last 3 years pretty consistently. So -- and we've talked about this before, but they take a very rigorous county-by-county approach and think about sort of how to balance across the portfolio. strategically, the focus for next year continues to be on preserving margin. And again, we don't have the full view yet, but from early intel, I feel good how the team executing that strategy.

And then in terms of -- I think you mentioned SG&A, I think it was a notable outperformance in the second quarter there, continues to look like to perform quite well. Like where are the savings on the SG&A front coming from?

Well, certainly, the growth in revenue, we added $5 billion of revenue to our guidance last quarter. So we can manage the SG&A for that incremental revenue, but then just continued automation and, quite frankly, getting some really good people on the bus and that can execute well and...

Yes. I mean we are in year 3 of the value creation plan. We sort of stopped using that as the framework, but it's very much front and center in the mentality within the organization. Lots of initiatives that started over the last 2 years that are starting to really ramp everything from streamlining procurement, again, making sure that we've got the best talent, which means you can have fewer, better people doing things, automation, processes are getting more streamlined, more consistent. So those are -- all the things that we've basically been working on for the last 2 years are really starting to build momentum. I don't think we're done there. I actually am excited about sort of the foundation we've created that the team is going to be building on. But I think some of it is just the discipline of what we've started to put in place in terms of operational execution across the business.

Okay. In terms of you mentioned there's Medicaid improvement opportunities that go beyond just kind of waiting for the rates to come to you, can you talk a little bit about what those are? I mean one thing we've notice as we've analyzed the data is at the level of payback states that you guys have seen in your portfolio, it seems to trail some of the other larger organizations in the space, which would seem to suggest that you have an opportunity to maybe rise to their level of performance in some aspects. Like how do you guys think about the opportunity to improve the base business ex rates?

Yes, there's a number of pockets we spent a lot of time with our businesses, our health plans, ripping through opportunities, sharing best practices across our 30 states. And so whether it's, call it, network sculpting -- in behavior health, especially. In fact, there's 1 state that effectively opened up the floodgates for new behavioral health providers in the name of access, which is great, but there's some cost containment that has to be employed. So having the right network, there's UM dials that we can turn in home health, managing the hours of private duty nursing, sort of some blocking and tackling opportunities always persist in the managed care business because you're -- it's very rare that you're humming on all cylinders across the entire portfolio. So there's areas that we can do better and we will and the management of cost as we get the right revenue to match, where there's been program changes, a couple of states that went to a single PBM and maybe they're sucking rebates off into the general fund. And so getting the right rates commensurate with some of those programmatic changes. But you're right, pulling managed care -- doing our job, pulling managed care levers in the meantime is another opportunity.

To come back to the -- you mentioned the Part D changes kind of at the top, the companies had kind of a bit of the shipment strategy. I mean, you've grown a lot and now in a position where I know you've mentioned the commission changes you're making effective for 2025. I guess what impact do you think this is going to have, both in terms of the membership that you guys see, the financial profile of that membership? And just any comments maybe just regards to like whether there's been any change in your view of underwriting for that business as you move through this year and have a chance to expand that more?

Well, it certainly got a lot tougher with the IRA changes. And so I think we were collectively a little bit nervous about picking the direct subsidy, I mean going from like $2 or $3 in 2023 to $29 in 2024 to now $143 and change in 2025. Getting that -- those estimates close and quite frankly, helping to move the market to make those estimations and think about some of the programs related to the IRA that are complex that are built into Part D and the PDP business. So pleased, as Sarah said, very pleased with how the team navigated and estimated the direct subsidies, the benchmark positioning, we're 33 out of 34 under the benchmark for auto assign. So that was a win preserving that part of our PDP business, we'll have low premium products. I mean we took the like -- I assume everyone did, but took the demo, which creates an opportunity to have low premium products in most of our regions. So I feel pretty good about that. But yes, very complex. And quite frankly, we set our bids to the rules that were promulgated in the final rate notice, including the rules around broker commissions for PDP and by the time a Texas judge issue to stay, we couldn't change our bids. So thinking about all those changes that the government made on the PDP program related to the Inflation Reduction Act and then adapting to those, I feel pretty good about our PDP positioning. And obviously, there'll be quite a bit of revenue increase because of what the payers are stepping into in terms of the risk assumption going from 20% to 60% of the catastrophic phase.

Okay. Yes. And just to come back to like what it means for 2025. I know when you were listing headwinds and tailwinds in the second quarter call, one of the things you listed was PDP, but I think specifically PDP revenue. I guess what does that mean in terms of the incremental dollars that you're now underwriting? I guess how do you think about them in your 2025 initial thought process? And I guess, longer term, how do you guys think about like what a reasonable margin is on the incremental risk for PDP, what's the right margin for PDP over a multiyear horizon?

I think stepping into the IRA. There were changes in '24, but the large changes came for 2025. There was a reason for caution. I think we did once again a good job constructing the bids around the rules that were promulgated at the time. I think if '25 is a low margin, positive but low margin, but a big increase in revenue because we're adding pharmacy expense and we're adding premium revenue in our bids. So mathematically, the HBR will go up. We think it will be a low single-digit margin. And then over time, to your point, that's a much larger revenue stream, we'll have to push that margin into a more target range, which would be higher than a low single-digit margin.

Okay. And now as you probably have a better sense of your actions that you're taking in Medicare Advantage for 2025, give us any updates on how you guys are thinking about membership markets, plans that you might be exiting and potentially how to think about where you think membership could shake out at this early stage?

Yes. So again, we talked about this on the Q2 call, but feel very good about how the team approached the '25 bids. Again, we don't have landscape files that have some intel. Our strategy was really to continue to focus the book aligned with the more complex members leveraging kind of the synergy with our local presence, our Medicaid expertise. And we knew that that would likely lead to membership shrinking. We also made the decision to exit a handful of states where we didn't have scale or strategically was not aligned with sort of where we wanted to go in terms of that Medicare, Medicaid alignment which actually was part of also kind of this broader look at Star being the biggest lever to getting to profitability in general in the Medicare book roughly sort of 2/3. How could we reduce complexity and therefore, focus our efforts and get a greater lift on what we are doing from a quality standpoint across the book. And so reducing -- I think at one point, we had close to 100 each contracts. We took out a number of those as part of the reduction of the book as part of the state exit. And all of that is just administrative simplicity concentrating membership, making sure, again, those quality efforts sort of create return and bang for the buck. And so as we said, I think the expectation is without seeing everything yet that we would shrink membership as part of the path to a sustainable, profitable business that aligns really nicely with a market leading Medicaid footprint.

And in terms of just thinking about the progression of shrinking the losses to eventually get into that profitably position, like what's the latest thinking on the amount of progress you can make shrinking the book and shrinking losses before seeing like a real material improvement in Star rating?

Again, Stars is the biggest lever. There are others like SG&A and just in general, thinking about sort of performance of the book overall. And so what we're trying to balance is we'll have a meaningful step towards our ultimate goal of 85% of members with 3.5 Stars or more by October of '25, which is then [ 27 ] revenue. And without knowing sort of how the rates are going to shake out that sort of the zone, we're trying to figure out through sort of the biggest lever of continuing to drive sustainable quality improvement and then making sure that the book that we have, which is scale now and certainly really beautifully scaled for managing more complex members that that's really what we want to be kind of getting to profitability and growing against.

Obviously, we'll have a lot of focus on the elections coming off in a couple of months. As you guys look at the exchange business, obviously, the growth there has been phenomenal for you. The enhanced subsidies seem like they've been an incredibly important driver of that. As you guys step back and think about the range of outcomes there and on the membership side, specifically, if we were to see enhanced subsidies not be extended, any updated thinking on how you think that could impact industry membership levels? And then to the extent that there is any kind of membership drawdown, what's the right way to think about the incremental margin performance to that? Do you think that's a book average? Do you think you can manage to that? Do you think there's fixed cost deleverage into I guess any updated thoughts on how you're thinking about exchange sensitivity to the election?

Yes. I mean, again, we don't see it as sort of a binary issue, and we see a lot of support, bipartisan support particularly given -- and if you just look at the numbers, the number of recipients of the enhanced subsidies that are in rural communities that are in red states, there is an overwhelming constituency there that I think it would be hard to abandon. That said, there are also really interesting levers that you can pull relative to product design. You can think about -- and this is sort of the work that the team has already been doing is thinking about how you leverage state-based exchanges as well. So there are all these different layers of how this becomes even in a world where the enhanced subsidies were somehow not extended at all, where it's not what CMS said, which is sort of roughly mid-20s percent of the market. That, I think, is sort of a black and white, not thinking about where the incentive would be for states that have all of these recipients and voters to leverage data exchange state dollars, federal matches to think differently about something that's feeding small businesses in their community that's really supporting members in a fundamentally different way. So that -- all of that is work that we're doing to prepare but again, also the conversations we're having from an advocacy standpoint suggest that it's more around something like capping at 400% sort of adjusting the program. And there's increasing awareness that the enhanced subsidies have stabilized that platform and that the possibility of ICHRA for small businesses which again is sort of very consistent with the Republican policy foundation is a pretty compelling platform for them. So to your question, though, I think one of the things that we would think hard about is making product adjustments leveraging some of these other alternatives to maintain that book in its target, reduce margin range and sort of leaning that way over membership, but we've got plan B, C, D and E out there that we're working on in parallel.

And then just maybe a quick question and last one on the exchanges would just be on the ICHRA side. I guess, as you continue to invest in that business, how are you guys thinking about the growth opportunity for the next couple of years? I guess, what do you feel like you're seeing to the extent you're monitoring the market this year in terms of adoption for next year, any kind of read on how the growth in that market continues?

I mean, the market continues to grow robustly. Again, it's a small denominator so, but there's a lot of active dialogues. There's a lot of interest. If you talk to some of the big brokers, a lot of people are asking about this partly because if you think about the pressures that are out there, employers trying to figure out whether they're going to cover GLP-1s, I mean, every CEO I talk to is like, "You're an insurance company, what should we do about GLP-1," right? So the cost pressure that's out there, everything you're seeing in terms of states approving small business premiums, like there's just a lot of pressure out there. Our view is that it's a market that's going to grow bottom-up, not unlike the way Marketplace adopted sort of Medicaid up. And it's really about the fact that it's a beautiful solution for small businesses and some of these rural communities, the ability to offer health insurance as a benefit in a sustainable way for the first time. And so that's where we see the adoption happening, which again is sort of beautifully aligned with the fact that we have boots on the ground local approach, we know those small business owners. And that, it will still be just sort of a watch and wait over the next year or 2 to see how quickly the market develops. But I don't -- I think, again, it's sort of aligned with our ethos in terms of sort of bottom-up growth.

Awesome. I think we're out of time. Thanks for the discussion today. Really appreciate you coming to the conference.

Thank you.

My pleasure.