Centene Corporation (CNC) Earnings Call Transcript & Summary

Hi, good afternoon, and welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the [indiscernible] analyst here at Barclays, and I'm pleased to be joined on screen here with Sarah London, CEO; Andrew Asher, CFO of Centene Corporation. Welcome.

Thanks, Andrew. Good afternoon.

Sarah, why don't I kick it off to you for opening remarks, and then we'll start Q&A.

Sounds good. First of all, thanks for having us. I'm sorry, we can't be in Sunny Florida, but we do very much appreciate the flexibility, I'm actually zooming in from D.C. today, where there are, as you can imagine, a lot of pretty important conversations going on. So we thought we would level set with a few updates and then turn it back to you for questions. First is, you all saw this morning, we were pleased to reiterate full year adjusted EPS floor for 2025 of greater than $7.25. We're only 2 months into the year, but we continue to feel good about the earnings power of the enterprise this year and also continue to feel good about our ability to unlock the embedded earnings power that we laid out at our December Investor Day over the next few years. We're also looking forward to what I think will be increased clarity relative to the policy landscape over the coming months. And I'm sure we'll talk more about that. But on that front because it's relevant, I would just say that I've had the chance to meet with numerous lawmakers over the last few months and have found all of them to be really well informed and thought about the importance of access to affordable health care and aware of the fact that whether it is through Medicaid, Medicare or the individual marketplace that health insurance is a critical and stabilizing benefit for the millions of Americans that they represent as well as the economic agenda that the administration is advancing for the communities that they represent. And so from my point of view, that is a very strong and shared platform that we have heading into the reconciliation process that's ahead of us. So a couple of high-level updates. I'll turn it over to Drew for some updates on the quarter, and then we can jump into questions.

Yes. Thanks, Sarah. As she said, I'm very pleased that we can reaffirm the greater than $7.25 with 2 months under our belt now. As far as Q1 specifically, it's understandable that it's hard for the sell side to perfectly predict the sloping of quarterly EPS, especially in a year where the Inflation Reduction Act had some changes coming into 2025. So just for clarity, we expect -- we are targeting mid- to high 2s in terms of adjusted EPS for Q1 versus consensus, which is around $2.20. There's no change to the full year outlook of greater than $7.25. On the topic of sloping, one of the factors you may recall from our Q4 call is that our Medicare segment, HBR sloping is essentially inverted compared to 2024, meaning a lower HBR in the beginning of the year and then moving up throughout 2025. So that's something to think through as you adjust in Q1 and the rest of the year. Another seasonal item that you've been asking about broadly is flu season. You can see from the CDC data, it's elevated in Q1, and we are no exception. For example, our January and February flu and ILI, influenza-like illness, costs are about $130 million more than we expected in our Medicaid business. But to be clear, our Q1 in the mid- to high 2s adjusted EPS and our full year greater than $7.25, they both incorporate this elevated Q1 flu costs. Andrew, I turn it over to you.

Got it. Thanks for all the updates. A lot to unpack there. But if I could summarize you're targeting mid- to high 2s EPS, that's above consensus. It sounds like the sell side might have been mismodeled on Part D seasonality, which is driving some upward pressure to that number. And you're seeing some incremental flu cost putting some downward pressure, but all in reiterating the EPS guide for 2025.

Well summarized.

Got it.

And if I break that down, the incremental flu cost, just trying to understand how that relates back to the Medicaid MLR and the progression there, like how should we be thinking about Medicaid MLR specifically. I think it was 93.4% in Q4. I think a lot of us were expecting a sequential improvement in that number. Any directional help you can give us on Medicaid MLR, and then how to process the flu incremental cost?

Yes. So the $130 million, that's all excess cost in Medicaid. The other 2 lines of business weren't anywhere near that in terms of relativity to forecast. But we still think we're going to improve throughout the year. And so the second half, HBR and Medicaid, we expect to be better than the first half of 2025 HBR.

Got it. Understood. Sarah, you mentioned you're meeting with numerous lawmakers in the opening remarks and that the lawmakers were well informed. What exactly did you mean by that comment, and hoping you could provide a little bit more color on how those conversations are progressing in D.C.?

Yes, happy to. A couple -- obviously, health care is a big topic of conversation. Interestingly, more because of it's a potential pay for than any real core desire to, I think, drive fundamental reform or benefit disruption. And so talking to lawmakers about both enhanced subsidies as well as they're thinking about Medicaid reform, just a thoughtful understanding of the different elements. And more importantly, I think what the impact could be to folks, again, in their states, in their districts, many of whom are Republican voters and how important health care is as a core benefit and how important it is as an underpinning, again, of the sort of broader economic agenda that I think is much more kind of squarely in focus for the administration. So obviously, there's been a lot of conversations around things like work requirements, and there have been discussions around per capita caps and FMAP. I think we heard from the speaker that they had moved away from things like per capita caps. I think FMAP is a very complicated thing to think about creating sort of equitable impact if you were to drive reform there. So work requirement is still in -- very much in the conversation, and again, we -- across 31 states, we have states that have implemented work requirements and those who haven't, and those who thought through the process. So we're really just trying to be kind of a thought partner as they work through the design of some of those elements and think about where there may be savings that don't ultimately really disrupt core benefit.

Great. And when you have those conversations with -- on the ACA enhanced subsidies or potential Medicaid reform, is there one area that you think is gaining more traction or resonating more with lawmakers?

Well, what's interesting actually is what I think is gaining more momentum over the last couple of weeks, and you've probably heard about it kind of in broader dialogue is the concept of policy-based benchmark budget framework. And that really changes the conversation a little bit. And it allows lawmakers to think about -- in some ways, it's exactly how we think about our own business, right? So spending is spending, you sort of roll it forward. And the same way that the tax cuts, the Trump tax cuts would be in that baseline. So would be enhanced APTC and obviously, current Medicaid spending. And so then it's really about looking at where can you where can you identify opportunities where federal spend that is not actually driving directly to the benefit. And that's why you hear about things like fraud, waste and abuse, in the conversation as well. But it allows a discussion to focus more on where you can create deficit savings from those reforms rather than trying to do sort of a strict pay for on the tax cuts. So I think that's going to be a very interesting one to watch here once we get into the reconciliation process once we get through the continuing resolution.

Great. And if we think about potential Medicaid reform FMAP reductions, particularly for the expansion population is one area that Republicans seem to be focused on. Maybe to help frame that risk for investors, can you share your Medicaid expansion premiums today?

Yes. I mean -- so when you think about how work requirements will actually -- if they are implemented, if they are upheld, how they actually drop down into states. Again, if we look at how states like Arkansas and Georgia have them in place, other states that have tried to put them in place, so much depends on what the design is that you've got to actually see what the framework would be, how they're going to get implemented at the state level to understand what, if any, the impact would be of those. So it's really sort of a state-by-state modeling, but we don't know enough yet, about the design. The reality is, if you look at the data, a significant portion of the Medicaid expansion population already works. And so it's really about making sure that you're defining the program correctly, and then you're supporting members to meet the eligibility criteria to then get their benefits.

Got it. Okay. There's still a lot of debate around the potential impact of the new failure to reconcile rules and agent of record lock rules on effectuated enrollment. I think you were expecting to see a peak 1Q membership on the exchanges slightly over 5 million. Can you give us an update on effectuated enrollment and how that's performing against expectations?

Yes. So we came in just over 5 million in January, which we shared on our Q4 call. Both enrollment and effectuations in February came in slightly better than expectations. So we'll give an update on sort of where we land on membership as we get through Q1. But as we said previously, we put a very healthy assumption for the impact of FTR in our guidance. And the view that, that will probably play out more to the extent that it plays out in the April and May time frame as we get to that final filing deadline. So all of that is already baked into the guidance. It's part of why we have the membership trajectory that we do throughout the full year.

Got it. And related to the conversation around integrity, there was a new proposed rule released yesterday on affordability and integrity. Just curious to get your initial thoughts on that rule and broader strokes what the administration is thinking around program integrity for the ACA.

Yes. I mean a lot of the conversation around program integrity, I think, has sort of jumped off the loosening of some of the guidelines as we were going through the pandemic. And so for us, a lot of this is actually sort of just going back to what the core operating model was for the marketplace before we went into COVID. And then we've also been -- as we've talked about before, we've really been leaning in relative to things like broker fraud. We pioneered the agent of record lock before anybody else did last January. We actually took our membership hit in Q1 of last year because we were inoculating ourselves early on that. So from our perspective, it's a really good thing for these programs to have a high degree of program integrity for there not to be fraud, waste and abuse. We're very active in terms of looking at broker activity relative to some of the things that came out on Monday, our view is that, that's really just trying to put stronger checks and balances around processes that are already in place. And if you're following those processes correctly, if you're working with good brokers that know how to do -- know how to file the right information, it shouldn't really have a material impact. And the stronger that program is, the more that -- again, we feel like the dollars are actually flowing to benefits for members, which is what everybody wants.

Great. And sticking on the ACA back at your Investor Day, you provided a useful framework for how to think about the potential earnings risk if those subsidies enhanced subsidies go away and size up to $1 in a downside scenario. When we look at your markets, we see pretty strong product positioning, particularly in the silver tier, where you're the low-cost offering, I think, in 2/3 of your counties given that, do you think you're in a position to take market share should we see some sort of shopping event on the exchanges?

Well, it's a little early to comment on '26 OE. But I think you're right that we have the #1 market position obviously overall in the market and more than a decade of experience and all of the -- through all of the policy changes that have happened during that time and frankly, all the data about what has happened to the market and consumer behavior, broker behavior during that time. And then a track record, I think, of putting out competitive products and knowing how to position them. So all of that taken together, plus the fact that we saw stronger retention coming through this year, which again is, I think, is important as you go through regardless of how the landscape evolves. I think all of that bodes well for our ability to put out competitive products and maintain a really strong market position. And that's certainly what we're scenario planning for.

Let me add on that topic. It's also important to think through the process by which payers will formulate the bids for 2026. You asked about enhanced APTCs, because we currently don't have visibility, so we have to assume the law of the land. And so we're working with the departments of insurance in all of our states on the process whereby they will accept 2 sets of rates, one, reflecting the law of the land, meaning the sunsetting of enhanced APTCs, and one, to the extent that they're renewed by August or so that they can sort of pivot to that alternative sets of rates. But filings actually start in late April. And then there's a bolus of filings in May, the rest throughout June and some into July. And on the 2 filing process, if you look at independent actuary studies, the impact of expiring enhanced APTCs could average mid- to high single-digit percentage rate increase, and that would be on top of the normal trend increases that you would have in a normal course. So we want the industry to be on the same page in terms of the process. That's why we're working with the departments of insurance. And then we'll see what visibility we get, hopefully, by August. Otherwise, the pricing will reflect the sunsetting of enhanced APTCs, which is the law of the land.

Got it. Okay. Let's shift to Medicaid. I think the 2025 guidance implies about 100 basis points of Medicaid MLR improvement in 2025. Drew, earlier you mentioned that the second half MLR is likely to see much more meaningful improvement versus the first half. Can you help us provide a little bit more clarity on the cadence we might see here? Does that mean that the first half MLR is going to be relatively flat versus the second half of last year?

No. We expect that -- we still expect the first half HBR to be better than the second half of 2024. Though, we're watching the flu, what I gave you earlier was a 2-month variance. And so to the extent that -- and you could see flu data dissipating, at least the pharmacy data we're looking at real-time dissipating into March. And that variance obviously gets very diluted as you apply it to a half year or even a full year. So we'll provide more update on the Q1 call into more granular sort of guidance elements. But yes, that's certainly still the goal.

Got it. Understood. And if we think about the Medicaid rates, I think you had 4% to 5% composite net rate updates for 1/1 renewals. How did that line up with the actual trend experienced exiting the year? And can you share how conversations have progressed for rate updates on 4/1 and 7/1 renewals?

Yes, I can hit at a high level just the nature of the conversations continue to be very constructive. We have the benefit. We were in talking with our counterparts in the Medicaid agencies and their actuarial teams. As we've talked about, long before redetermination started, that's been a consistent dialogue with refresh data throughout the last 2 years. And last year, as we saw that dislocation between rate and acuity in the population start to grow, got in very quickly and brought forward fresh data. And I think the rate movement that we were able to help influence in the back half of the year, is pretty notable relative to how recent that was in terms of the kind of trends that we were seeing. So the openness of the states and the actuarial teams to understand that this was sort of an abnormal event and therefore, not always anchoring on a 2- or a 3-year look back, but understanding that the fresh data mattered. Now we're almost a full year into that experience and therefore, can bring forward even more complete data to prove both that those were the right moves and that in some cases, as we've shared, we might need a second bite at the apple. So that just makes it an even stronger kind of database conversation. But I don't know, if Drew, if there's anything you want to add on 1/1?

Yes, no, just with respect to your trend question, still have opportunities to manage behavioral health and/or get those programmatic changes worked into the rates. We've mentioned home health before. And then there's a little bit of specialty pharma. When you get to these gene and therapies, one that hit the market late last year [indiscernible], which seems very curious and inconsistent with the affordability of health care, but regardless managing through that. But we've got a huge population and expect some of those types of costs.

With the fourth quarter earnings, you also noted that you didn't receive a few retro premium increases that you're expecting in the fourth quarter. Were those retro rates from states separate from the 1/1 cohort? And is there still a chance that they're realized in 2025?

They are separate. So the -- what we told you about 1/1 is pure relative to those 2 potential retros. And we're not betting on those. And so there's always a chance, but we're most focused on getting the go-forward rates set consistent with the acuity of the population. And then if we can make the argument that we should have sort of grown into that rate increase, maybe there's some retro opportunities, but we're not betting on those.

Great. Let's move on to Part D. You mentioned earlier that the Part D MLR line will invert. Should we be thinking about the same slope? If we think about historical MLR trends in Part D, I think we would think 100% to start the year and a very strong downward sloping curve to maybe end around 60% or so. Like -- so you're saying now it's going to invert, but is that slope still as strong as it was historically?

Well, the Medicare segment is now about half MAPD and half PDP, so $16 billion, $16.5 billion each. So that helps contain the slope if you look at last year's performance. And I don't know that it will exactly invert with the same exact degree slope line, but I wanted to give you guys that insight as you think about when we report Q1 and having something to compare that against that was more useful.

Great. Okay. And I think within the Part D business, the stand-alone Part D business, you're guiding to 1% margins while still growing PDP membership around 15% or so. How do you get comfortable underwriting accelerating specialty drug trend while taking on more risk in Part D due to the IRA changes?

Well, we certainly put in an assumption when the maximum amount of pocket goes to 2,000, not just with member behavior but pharma behavior. And so we're seeing that. We're seeing an uptick in specialty pharma within PDP, and there's control mechanisms. Obviously, we're not 100% on the hook, like 60% for the last phase, the catastrophic phase, but then also the demos provide a pretty good backstop. Those are really smart for the administration to put those in place, so that when you make major changes like the roll forward of the IRA into '25. So we'll be tracking that. But the one thing interesting on the demos that the narrow risk corridor, we'll need to know -- payers will need to know from CMS that whether or not that's going to get renewed as a component of the multiyear demo that we signed up for before the bids are due. Otherwise, the industry is going to have to assume that, that additional protection, which is 50-50 at a 2.5% pharmacy trend pick -- pharmacy medical expense PMPM pick, there's 50-50 protection. So we'll need to know that otherwise, the industry should assume that, that piece of that will not be renewed.

Great. And you ended 2024 above your 1% target, I think, in PDP margins. What do you think drove that outcome and outperformance? And how does that help to build confidence in your pricing for 2025?

Yes, certainly a good thing. Not everything in 1 year is transferable to the next with respect to drivers, because effectively, you're rebidding every year and you're setting the bids. But some of that was cost structure outperformance, which gives us a little bit of -- a little bit more confidence coming into '25 and some other things were more specific to 2024?

Great. Maybe last question here on our side. On the Medicare Advantage side, the preliminary rate notice for 2026 came in at 2.2%, which is the best rate we've seen in a few years. How do you feel about that level of funding for the Medicare program? And do you have any expectations for the final rate at this point?

Yes. I mean I think we're all in wait and see on the final rate. It was obviously the rate that came in, as you said, was certainly better than we saw for the last 2 years. And I think if there is a roll forward of the underlying data that would argue for maybe a little bit of increase. But I think that was the same last -- same -- it was true last year, and we didn't see that. So TBD, as we think about our path to breakeven for 2027, one of the things we've tried really hard to do is sort of dislocate any dependence on either rate or STARS. And obviously, we've made really strong progress in STARS last year, but we don't want to have to be dependent on any one thing. So having rate as a lever having STARS and continued improvement there over time and really thinking through clinical initiatives and SG&A, as we've talked about really derisks that path for us. And so looking for 2026 to be a good positive step in the direction of that 2027 breakeven goal.

Great. And with that, we are out of time. So Drew, Sarah, thank you so much for joining us here today and carving out time of your busy schedules.

Thanks, Andrew.

Thank you. Please enjoy the rest of your conference.