Centene Corporation (CNC) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to day 2 of the DB Healthcare Summit. I'm George Hill. I think everybody here knows me. I'm the health care technology and services analyst. Very happy to have with us to kick off day 2 with Centene; Sarah London, CEO; Drew Asher, CFO. Guys, thank you very much.

Thanks for having us.

Sarah, I know that you wanted to start off with some prepared comments before we get into the Q&A. So why don't you kick off?

Yes. Good morning. One of the things we talked about on the Q2 call obviously laid out our view of the back half of '25 and some key milestones. And wanted to just provide a couple of headline updates on those, and I'm sure we'll dive into a lot of the detail underneath them in your questions. But at the highest level, obviously, you saw this morning that we reaffirmed our full year forecast adjusted diluted EPS of $1.75. Underneath that, the Medicaid results for July and August were supportive of the HBR improvement trajectory that we're looking for in the back half of the year. So pleased with that. We've obviously been very focused on the refiling process for 2026 Marketplace rates. As of today, we've been able to successfully refile in states covering 95% of our membership. Those are obviously going through an approval process that usually wraps up at the end of this month. But so far, we have the substantial majority of those approved. So again, I'm pleased with the progress there and the ability to better reflect the acuity of the population that we're seeing and the acuity that we're anticipating for 2026 in those rates. The Medicare segment continues to be on track for the roughly $700 million of improvement that we talked about on the Q2 call. Based on preliminary data for Stars, that came in, in line with our expectations and with our previous commentary. So we're expecting year-over-year improvement in Stars and actually slightly better 4-star percentage. So relative to overall revenue results, it adds confidence to our view that we will hit breakeven in Medicare Advantage in 2027. So good progress in a short period of time. Obviously, a lot that we're still paying attention to. I know we'll dive into that, but feel good about what we've been able to accomplish just in the last couple of months.

I mean that sounds like all great news. I haven't heard anything that we kind of put a bone with yet. I think we'll kind of pull them apart topic by topic, and maybe we'll start with Marketplace. On the Q2 call, you guys have both called out there was the $2.4 billion of risk adjustment headwind that you guys were dealing with, and there was the $200 million of kind of back half pressure. I think a lot of us think of that as reduced utilization that you guys have called out as headwinds. I mean you guys reiterated your guidance this morning. I guess I would ask, do those estimates still hold? And is there a chance that those estimates could prove conservative? I would probably even focus on like the $200 million part. I'll kind of let you dig into that.

Yes. So as of now, the estimates still hold. We are seeing pretty steady utilization in Marketplace. We had called out the fact that [ SBR ], which we had originally anticipated was going to play out during open enrollment, had been delayed. We saw those numbers starting to come in for August. Those came in, in line with our expectations. And then the $2.4 billion is really contingent on seeing the next tranches of weekly data. And so the next set of data there won't come in until the end of this month. So if there are updates on that estimate, we would be in a position to give that on the Q3 call.

Okay. And then I guess I would then ask you to provide a little more color, if you can, maybe at a high level on the rate adjustments. You said about 95% of the lives have been covered. Is there any way to kind of quantify what's been asked for, what level you expect to be accepted? And then like how should we think about sufficiency as we look forward as you guys kind of roll forward to '26?

Yes, I'll hit that at a high level, and Drew should weigh in, been very closely involved in that process. So obviously, as we built up the rate estimates and what we felt like we were going to need from a refiling standpoint, we looked at the fact that we still expect -- well, we bid to the law of the land. So enhanced APTCs are expected to expire at the end of the year. Sure we can talk about where we think those are going. But we assume those will go away, and then needed to adjust for a view of the 2025 morbidity that we saw in the Wakely data and then extrapolated view of what the morbidity shifts will be based on some of the program integrity rules that are slated to go in place for the 2026 open enrollment. So obviously, every state is a little bit different. But in general, in every state, we were looking for a step-up in rates. And I think, again, we're able to successfully get rates that we feel address the morbidity, both in 2025 as a run rate going into '26 and what we expect will shift across 95% of the population. But in some cases, we also look to pull additional levers where pure rate didn't quite get us where we felt like we needed to be. We were really thoughtful about footprint, product mix and things like that. But maybe give a little bit more detail.

Yes. Really pleased with the visibility that we gained in late June and then obviously resulted in the press release on July 1, but that gave us 3 or 4 really good weeks during the month of July. We actually met every night from like 5 to 9 p.m. going through every single product in every single state, making the judgments, and then to Sarah's point, getting them filed. And so actually really pleased with the receptivity of the Departments of Insurance and having our actuaries engage with their actuaries such that subject to the final approval process, which should be through this month, feel like 95% of our current membership is covered with rates that we think are sufficient and appropriate. The other 5%, to Sarah's point, there were 2 states where we didn't get the rate we wanted. That represents this year's membership, 5%. We took action. We pulled products. We reduced service areas. So it should be substantially less than 5% in 2026. So all things considered, pretty good. I'm glad we got the visibility when we did, and we're able to assimilate that Wakely data. Obviously, as ugly as it was at that point in time, it really hopefully will contain this to a 1-year issue.

Okay. And then as we think about the profitability of this product segment, you guys had indicated on the Q2 call that you were expecting below breakeven in this year versus the target margins of 5% to 7.5%. I guess how should we think about -- we think there's pricing, how you guys have changed product. How do we think about what the margin progression looks like or the march back towards normalized margin progression in 2026? Are we in a situation where you feel like you can get all the way back or most of the way back in '26? Or is there kind of a step in the middle between where we are now and kind of the target margin profile?

Yes. I mean we feel obviously very good about being able to get that substantial majority of the population back to sufficiency from a rate standpoint. I think it's a little bit early to say exactly where we'll land in '26 from a margin standpoint. But obviously, margin improvement is the major focus in all of our business lines. So we'll get more information over the next couple of weeks just in terms of kind of peer filings and obviously going through open enrollment. I think that will give us better visibility as to how much of that will recover in '26.

And I imagine with the -- I'm sure everybody here knows how we do this. Like I tried to give these guys some questions in advance. But the reiteration of the guidance, I would assume then that the margin expectations in the segment for this year kind of stay where they are, given that the guidance has been reiterated. I guess, do you guys have an early view on what you think this market looks like from an enrollment perspective in 2026? And I would almost kind of ask the question is like without the subsidies, is this a sustainable market? Or if without the subsidies, do you kind of lose the low utilizing numbers to kind of pass up the risk pool? I just kind of love your high-level thoughts on that.

I mean our view is it is definitely a sustainable market even if the enhanced subsidies go away, because the advanced premium tax credits will still be in place. It will obviously be a smaller membership base, but we had a very successful business with 2 million members, and there's still 10 million members who sit in those uninsured populations. I think there's also a lot of interesting interplay as states think about the Medicaid expansion population and some of the waivers that are out there around work requirements are making states think about whether there's a play to leverage the Marketplace more. And so I think there's still profitable growth in that business even if we get to the other side of program integrity rules and the enhanced APTCs. And I think there's still a bit to play out on both of those fronts in terms of how much of that actually hits in '26 and what sort of the sustainability of those guardrails are. We obviously are also very interested and focused on ICRA and defined contribution as another place to bring unsubsidized members into that product and broaden the risk pool, which will improve premiums, will improve the cost of subsidies. And I think that's something that's actually very aligned with this administration and folks in CMS who are really interested in pushing that agenda. So we're watching both sides of that, because I think the core product will get back to sort of a baseline and still be able to penetrate the market from there, but there's quite a bit of interesting opportunity on this side as well.

Yes. I hear, I guess, from the Washington side or from the policy side, there's a lot of criticism of how the government has handled the Marketplace, because like the government seems to have driven some of the instability with things like the enhanced subsidies. There's kind of -- like the changing in the risk pools hasn't been your fault or your problem. It's been policy changes that have impacted kind of what the population in that group looks like. I thought we could now shift to Medicaid for a second, talk about the HBR ratio. And I guess I would just start off with again, it feels like a question we've touched on a little bit is, do the margin expectations for 2025 still hold? You talked about the business basically trending in line with expectations. I would love to hear you talk about margins and maybe by utilization kind of what's coming in better, what's coming in worse, if anything at all, if everything is coming in line. But kind of what have we learned like in the last 6 or 8 weeks as it relates to Medicaid?

Sure. So as I said, the results for July and August were supportive of the HBR improvement trajectory that we're looking for in the back half of the year. I think if you go back to the framework that we laid out on the Q2 call, sort of what were the underlying drivers, what have been the underlying drivers and what sort of drove the peak in HBR in Q2 was really behavioral health with a major focus on ABA, home health and home and community-based services and then high-cost drugs. We also had outsized impact in those areas in a couple of states that we called out Florida and New York in particular. So if you think about the things that have improved and sort of what has rolled forward, obviously, 7/1 rates, which came in consistent with that 5% composite that we're seeing for '25. So that helps us take a step down. We've got 9/1 and 10/1 rates. 10/1 rates are not final, but that cohort is also consistent with that 5% composite. And so those will layer in this month and then in Q4. And then in Florida, as I mentioned on the Q2 call, starting in June, rather, we were able to actually apply managed care principles to the ABA population. And so making sure that we have the right in-network, highest quality providers that those kids are getting therapy that is evidence-based and best-in-class. And so we saw a sequential impact from that coming into the Q2 call and continuing to see, I think, the rightsizing of sort of program application there. And then we actually, in New York have had some good success. We called out fraud, waste and abuse, particularly in the ABA population as a concern. We've had some recent success with providers that were having outsized impact in New York. And so really just thinking through each of those areas, as I mentioned, we're organized at an enterprise level, got task forces looking at these and making sure that we've got the right providers that we're looking at fraud, waste and abuse. We've had success with different states in terms of helping to influence clinical policy so that the program guidelines are consistent, again, with evidence-based practice. So I think all of that is contributing, and we hope is that, that continues to drive improvement as we look through the rest of the year. I don't know if there's anything you want to add.

That was comprehensive.

That was very comprehensive. Maybe just a second topic that some of your peers have called out has been the impact of coding. And have you guys seen an increase in coding severity? And is that something that you feel like has impacted your business from a profitability perspective, I guess, from an acuity perspective? And is that something that you feel like you can challenge in the Medicaid business?

Yes. I think coding manifests in a couple of different ways. So obviously, there's coding that sits in sort of a fraud, waste and abuse bucket. And I think we've gotten increasingly organized around that, leveraging AI for early detection on things like that, cycling those sort of early warning signals out to our plans, so that they can really interact with the provider and figure out, is it just a need for education, or is there something else going on there that requires intervention? I think we've also seen, in pockets, an acceleration of coding if you think about hospital revenue cycle management systems. There have been some of these pockets where folks coming into the emergency department with a fever, all of a sudden all have sepsis. So there are some of those pockets. But again, there is enough detection in place on our side that as we see that, we're able to intervene. And I think just continuing to be really thoughtful about how our program integrity rules and the underlying technology keeps pace with what's coming at us from the provider side. There are other examples.

Yes. I mean I've talked to a couple of my peers where it does seem like the hospitals have gotten better organized around the application of AI for coding than payers, but we're going to catch up to that.

That seems to be -- as somebody who's covered the technology space in health care long term, that seems to be a cycle where kind of the providers get smarter and then the payers get smarter and then the providers get smarter. I'm not quite sure how long the cycle is, but that tends to be how it works. To distinctly separate -- I kind of want to distinctly separate rates in Medicaid from rates in exchange. You said that the rate environment that you're seeing for, we'll call it, 1/1 looks pretty supportive. I guess, at a broad level, can you talk about the interplay between what you're seeing in rates versus states that want to do benefit cuts versus plan design changes? I guess what I'm really interested is how are your conversations with your state partners going about rate increases versus coverage versus benefit design changes?

For Medicaid?

Medicaid, yes.

So we don't have visibility to 1/1. We've got 9/1 and 10/1 rates. Final rates in 9/1 still, I think, all draft in 10/1. And I think we're seeing -- we just continue to see good constructive conversation. I think folks -- again, our view on working hypothesis has been that over the last 18 to 24 months now, we've been in a cycle with states where they have, because the circumstances are unusual on a relative basis, needed to incorporate more recent data into the rates as opposed to being tethered to a 24- or 36-month look back. And so I think some of the rates that we're seeing continue to be reflective of this idea that, one, we were coming through redeterminations, there needed to be a correction, then there was a step-up in these trend areas, and there needs to be a correction for that. So I think continue to be constructive, continue to see more recent data more readily influencing the rates. And again, we would expect that as we get to the 1/1 cohort, you have even more data in arrears to support what we would need. And I think we have, what, 40% of our book?

40%, 1/1.

Three rates, 1/1. So again, supportive of our view that we want to continue to improve the Medicaid margin as we head into year. We are seeing different program changes as well. I don't know if you want to talk about some of the structural changes, PBM, things like that.

Yes. While they're addressing most of this through rate, good collaborative discussions with states. Let me give you a couple of examples. In one state, they had moved to a single PBM. They thought that was a great idea. They thought they're going to have all this rebate dollar in the general fund and are realizing that the aggregate picture is not -- it was much worse than what the payers could deliver. So actually, with a lot of education and data and influencing, we led the charge to convince them to move back to let the payers through our PBMs manage that cost and hold us accountable for it. So that should take effect actually next month if it stays on track in that one state. Another example is state had moved to GLP-1s for weight loss, and they put a capitation in. So they had an estimate, they're truing up the estimate, and they're looking at the escalating cost. And I would bet that they're probably going to move away from GLP-1s for weight loss given sort of the economic picture and the rates that they have to provide for the core business, but also some of these sort of unique decisions.

How closely are you guys monitoring like proposed 1/1 rate increases? And I guess as we monitor it, we kind of find some of the numbers, like they're largely positive, but a little underwhelming given what trend looks like. And I guess kind of would love -- I would imagine that you guys follow the projections the same way that we do and kind of would love your early thoughts on where you see states proposing 1/1 rates and whether or not those numbers look like they're sufficient for '26. And a topic of conversation amongst investors is that like it might be difficult to get rate multiple consecutive years. Would love to hear you kind of talk about the history of getting rate updates from states in challenging environments.

Well, you probably have better visibility to exactly where we are with 1/1. But I would say, we've had now 2 years of very healthy rate increases, for example, in our 9/1 cohort. So I think the idea that states won't take multiple significant bites of the apple is not holding up if you look at how the data is actually playing out.

Yes. Plus you have to remember, in a lot of states, their aggregate Medicaid budget has -- because the roles have -- they're down 15%, 20%, 25% in some states due to redetermination. So the aggregate dollars are there. And before you guys even mine out the first view of what are draft rates, which you really can't hit your wagon to because they often change a fair amount between draft and final, we're in with our actuaries months and months ahead of time. And we've been in this consistent process that Sarah described, where states, I think they're appreciative and they're more in tune with sort of the flow of med cost data than, let's say, 2 years ago. So one of the benefits coming out of the redetermination era is their level of engagement and willingness and ability to ingest more recent data has, I'd say, vastly improved from, call it, 3 years ago. So yes, look, Medicaid is a tough business. It's hand-to-hand combat in terms of convincing your partner through data and what the run rate is, but feel confident that we're still on track to improve Medicaid going into 2026 from a margin standpoint off of our 2025 guidance.

Okay. That's super helpful. It's great that you brought up redeterminations, Drew, because I think one of the things a lot of us think about is you're starting to see states selectively pull forward the OB3. So you get a lot of credit for putting OB3. I hadn't heard that since you mentioned on the Q2 call, pulling forward the OB3 requirements into '26. And I guess, how are you -- I'd love you to talk about the learnings of the redeterminations process as we ended the public health emergency as to how you guys think about the OB3 implementation and the states that are trying to pull that forward. How do you think it impacts membership? How does it impact states? How does it impact state finances? How does it impact how you guys relate with the states? Would love to hear kind of how you guys are thinking about that.

Yes. It's in some ways sort of microcosmic implementation of the same thing we did with redeterminations. Maybe just stepping back. So what we've seen is there are a handful of states, maybe 6 or 7, that have waivers in CMS. If you sort of look under -- it's interesting, when you look under the hood of those, the construction of -- true to Medicaid, the construction of each of those is different. And so you have some states that are going to -- that aren't actually going to do an eligibility check. They will let the expansion population be eligible for Medicaid. And then 6 months in, they will do a check and then they will do a check every 6 months. Others have sort of the gatekeeper methodology and the definition of sort of able bodied and where the priorities of the states are. You can just see from looking through it, it's all a little bit different. And so we take the same approach that we did with redeterminations, which is tracking this on a state-by-state basis, staying very close to the Medicaid agencies, tracking the legislation that went through in 2025. So a number of states put legislation through that would then catalyze work requirements. We aren't yet seeing indications of more than really one state trying to actually implement in '26, because the lift on this is going to be non-trivial. And so I think the idea that states are trying to get themselves to a place where they have a program framework in place by the end of this year and then have 12 months to execute on that for those states that are sort of on the front line of executing on that is at least what we're seeing so far. Now may that accelerate? It might. But again, we're in sort of very regular contact with our Medicaid agencies in each of those states to understand what they're going to do, how they're going to implement it, how they may rely on us. The one state that's actually -- if somebody doesn't qualify, they want to match them up with a success coach. And so the question of is that a service that we could provide, what does that look like, right? The idea is really to get people to a place where they're eligible and working and then ultimately, they graduate off Medicaid. So we've got work programs in place in 17 of our states already. That's just something we normally do. And I think leveraging that infrastructure, understanding what the states are trying to do, figuring out what technology solutions may end up getting endorsed by CMS, like all of that stuff is in flight right now. Relative to the impact, I think it's important to note what Drew just said around redeterminations is the same dynamic in this case, which is states are paying for all of these expansion members today. And so as those folks roll off and there is a need to fund the risk pool differently, there are dollars in the state budgets to do that. It's going to be important to try to get them to get as ahead as possible on those rate adjustments. And the only other thing I would add is, I think, different from redeterminations where it was a very broad swath, there were lots of different cohorts that were being redetermined. And it was a lot harder to track sort of who might precisely roll off. With the expansion population in most states, it's a single rate cell. We know who those members are. And so it's really just about estimating what the impact will be. But the calculation and being able to get in front of the actuaries and say, if it's 30%, if it's 50%, if it's 10%, what's your assumption, we can actually do the math, I think, with a lot more clarity than we could through the redetermination process.

Maybe just big enough point you just made there. What is the state actuaries, I'll call it, their level of receptiveness to that forward-looking conversation versus, I think of actuaries driving the rearview mirror, like they're great at telling you what happened in the last 24, 48, 36 months in 1Q that the Board could project. How receptive do you find them to those conversations? I know the population is going to change a lot, the rate needs to change. Like is that...

I think it would have been different like 2 years ago, but the number of times they've seen the population change through the front windshield is a little different now.

Yes. I mean, look, actuaries are always going to want as much data as possible. But yes, it's almost like they've been retrained to ingest more recent data because of the redetermination process over the last 2 to 3 years. So a few years ago, if work requirements would have been dropped on us, absent what we've learned over the last few years, I think there might be more of a delayed process. So there's receptivity, but it's a balance, and they're going to want to see some data as well. But even in the redetermination process, we got a number of states to sort of make estimates and bake them in, in advance of them even commencing redetermination. So I think we're just going to improve off of that as we think about forecasting the impact of, to Sarah's point, what proportion of already a slice of our business, like the expansion population and then the able bodied part of the expansion population. And then those that can't get qualified through those, a number of vehicles that we do currently in 17 states. So I think there'll be more receptivity certainly than there would have otherwise been.

Yes. I mean, you kind of crystallized it perfectly. It's like you want to get the rate ahead of the change and the actuary wants to see the data to justify the rate. So you consistently -- it's kind of a chicken and an egg thing from your perspective, I guess. How do we think about -- everybody is kind of focused on '26 right now, and I know that you guys don't have '26 guidance out there. But how do you think about the cumulative impact of OB3 and maybe the staging of '26 versus '27 versus -- I'll call it, '26 versus beyond? Have you guys thought about if you were to bucket impact kind of by year '26 and then call it beyond '26, how do you guys think about that?

So it slightly depends on which components of the bill we're talking about, but the Marketplace final rule, a lot of which got baked into the bill in order to drive consistency in order for CBO to get the savings for those provisions obviously would implicate 2026 open enrollment. Now that rule has been stayed by the court. So there's a question of how much of that will actually get implemented for 2026 open enrollment versus being pushed to '27. So I think that is something we're watching very closely. And then, obviously, all of the Medicaid provisions are mostly '27 and '28. So the question is, do some of those pull forward to some degree? As I said, we're watching that closely. We're seeing movement, but we're not seeing concrete data points that suggest you're going to have a lot of states that are in flight yet in 2026. So based on how it sits today, I think you would expect the majority impact of that to hit in '27, part of '28. Again, some states may file to push if they're sort of making good faith efforts, they can push to 2028 or beyond. So I think you'll see 2027 and then some tail probably into 2028. But again, coming through '26 and into '27, the big thing for us is the administrative work aligning with our states to make sure that we're supporting those members and whatever efforts the state needs us to be trailing relative to eligibility and things like that and then the rate conversation. And so trying to get ahead of that in '26 and then make sure that we're matching that as we go through 2027.

That's helpful. I guess, Drew, I wouldn't be doing my job if I didn't start to ask, from this view, thinking about 2026 earnings, I kind of wanted to start with how are you guys thinking about what is the -- I know $175 million is the guidance for this year, but is that like the right jumping off point?

So we wouldn't be doing this job if he didn't ask for 2026.

I wouldn't be doing my job, as I said, if we're not doing it.

But we can talk about directional and we did on the Q2 call about we expect, call it, our 3 core lines of business: Medicaid, Medicare Advantage and Marketplace margin improvement in '26. We still feel like that today, having 2 more months under our belt, which is really important as we think about launching off the back half of this year. So yes, the magnitude, TBD. We need to see landscape files. We see all of the competitor data for some of those businesses and more visibility on sort of the benefit of the levers we're pulling in Medicaid in some tough areas like behavioral health, home health, private duty nursing, ABA services. So I feel like we've got pretty good momentum coming off of these 2 months. And 2 months don't make a half year, but we're 1/3 of the way there in terms of the back half of this year. But yes, we're definitely focused on '26 and beyond to drive margin improvement.

Well, that's great. If I think about the call-outs from the 2Q call, and I would probably like to talk about the $2.4 billion in Marketplace. Should we think of that as that something that you get back next year through pricing changes that you guys have implemented at the state level in exchange, I'll say, net of population change, net of benefits? Like is that something that you can basically price back? I'm trying to figure out like how should we adjust the $175 million as the jumping off point for 2026? And what I'm really focused on is like which of the things that were called out in Q2 should be thought of as kind of onetime things that will not repeat versus which should we bake kind of -- which should be fully embedded in the earnings going forward?

Maybe look at it like this, we said we were slightly below breakeven this year in Marketplace. That includes the $2.4 billion change that we laid out in the Q2 call. First, you have to recalibrate to a smaller market given the program integrity efforts. And so we all need to see what the size of that market is and therefore, our positioning. And then as Sarah said earlier, what step are we going to make towards a fully recovered margin. And we'll have to see, once again, based upon our positioning of product in the marketplace. But we went in to the bid process or the rate filing process, margin, margin, margin, because we're not going to run a business at a loss. So we've got to recover that. And we'll just need to see where the membership shakes out.

Okay. Do you guys have any early thoughts on how, I'll call it, your membership at a macro level will evolve in that business in '26?

In Marketplace? Yes. I mean if you assume that enhanced APTCs go away, if you assume the final rule gets implemented, we would absolutely expect market contraction and sort of compounding market contraction from those 2 factors together. I think, again, people have put out estimates anywhere between like 15% and 50%. I think we're probably sort of right in the middle of that. But a lot of it does depend on -- and honestly, like even if enhanced APTCs were to get extended, the question of when those get extended, like there are a bunch of sort of moving parts there. But if you just take it purely as it sits today, I think those 2 are sort of compounding in terms of what they'll drive in market contraction.

Kind of when and for how long, I guess, if they get extended? Like there's talk of extending these?

You're talking about market contraction? Quickly. So I would say, there's been a significant uptick in the dialogue around enhanced APTCs just in the last couple of weeks. And I think a different level of on the record receptivity from the Republican party around how important these subsidies are for their voting base. And as they think about 2026, I think that's really front of mind. Our question is really sort of what's the vehicle. So I think there are 3 potential options. One would be a continuing resolution where you actually need -- you're going to need bipartisan support. And I think the enhanced APTCs are very, very, very high on the list of priorities for Democrats. And so does that bring the conversation together an independent health care bill, where there are a couple of things I know that didn't get into OB3 that folks are really interested in seeing come forward. So that would be another vehicle, sort of intermediate vehicle. And then the last would be the at the end of the year. If the continuing resolution would be very interesting in that it would happen sooner. And so being able to adjust for expectations in open enrollment for members. But as of now, sort of we, again, have priced to law of the land. And so unclear what would then happen if enhanced APTCs were extended relative to those bids.

Okay. Pivot to Medicare for a second. Great to hear that Medicare continues to outperform. Great to hear the Stars performance seems to come in a little bit better than you guys have expected. I guess I would ask, can you provide an update on what's driving the Medicare outperformance? How should we think about MAPD versus how you guys are doing very well in Part D? And any early thoughts on how the Part D market will shape up in '26?

Yes, I'll let Drew cover Part D. I think Medicare, we've been really thoughtful. Obviously, we're in margin recovery mode. We're very focused on marching to breakeven. We've been very focused on strategic thoughtful bids. We did a lot of work to refine our footprint and reduce our age contracts to make sort of the administration of that product more efficient. We've been working on clinical initiatives, SG&A, obviously, starts as a component of that improvement. And so I think just being thoughtful about what we baked into bids in terms of trend, obviously, had that step-up in '23, and we've continued to watch that step-up and continue to make those assumptions in our bids. So it's a bit of sort of strategic bidding and then managing the product well and continue to expect improvement in '26 on the path to breakeven in '27, which, again, we feel incrementally confident about based on some of those 4-star results that we saw just recently. Do you want to talk about Part D?

Yes. PDP as a business, 7.8 million members. We're 8 months through, got 2 more months under our belt, still performing well in PDP, better than what we had originally guided to as evidenced by a big piece of that $700 million that we talked about on our Q2 call. As we look ahead, team did a really good job again estimating the national benchmarks and the direct subsidy, which came in at $200 and change. So that was right in line with our expectation. That's really important as you think about relativity to benchmarks. We're successfully below the benchmark for the low-income population for the auto assigns in 34 out of 34 regions for 2026. So that was good news, as you think about the stability of that cohort versus the non-low-income cohort, which had the accelerated specialty trends. So plowing through it, managing through it, looking forward to another good year in 2026. Based on the preliminary results, we need to see where our peers came out to predict 2026.

We'll shift kind of to maybe balance sheet and cash flow as it relates to the company. Drew, you had mentioned a potential goodwill write-down on the second quarter call. I guess, have you guys made any further determinations as it relates to the goodwill write-down? I would be interested to think about, are there any derivative impacts of the goodwill write-down just because I know some of the company's debt covenants are based on debt to capital. But we've had questions around whether or not there's downstream impacts of a potential goodwill write-down.

Yes. No, those are good questions. So every year, we go through a goodwill valuation. We usually do it in the fourth quarter. This year, we accelerated it to Q3 because of the market cap drop. I mean others may have to do the same in terms of just the normal process of retesting goodwill and looking at the present value of your businesses and the goodwill attached to that. And so the only downstream impact, and I know there's been a lot of, I don't know, chatter or handwringing about statutory subs. All the goodwill sits at the corporation. None of it is down in statutory subs. So there's really no stat sub implication for any noncash goodwill or intangible write-down. And the only -- we redid our credit facility fortuitously. I mean, when money is available, you go get money. And we did that with our credit facility in Q1, which is untapped as of 06/30, $4 billion credit facility with one covenant, which is debt to cap at 60%. We're at 39% debt to cap as of 06/30. Plenty of room. So yes, we're going to go through the process and evaluate goodwill, and we'll probably have an answer on the Q3 call, but not concerned about any downstream impacts to the extent that there is a goodwill write-down.

Okay. That's a comprehensive response. And then let's talk about just, I guess, does any of that change about how you guys think about excess capital and capital deployment and kind of update us on the company's capital deployment priorities?

So our priorities haven't changed in that our top priority is obviously funding the business and organic growth opportunities and making sure that we're driving sort of the most efficient cost structure just in how we operate. And then I think looking at as we get through the back half of this year and have a better view of cash flow, we would go through the same process always of looking at debt, looking at the opportunity for share repurchase, still looking at M&A opportunities as they present themselves. So no significant change.

And I guess last question for me would be just thinking about discretionary costs and discretionary spend inside of the business, given potential changes that could occur in '26 and beyond in some of the company's key markets. I guess, how much flexibility do you feel like you have in the discretionary cost profile to scale up or scale down as the business changes?

Well, we've been doing a lot of work on that over the last couple of years. I think, maybe $600 million.

$500 million in the Q2 call.

Yes, in SG&A. So that has become a muscle in the organization. Obviously, thinking a lot about that as we think about potential contraction in membership across our businesses and making sure that we're scaling down to efficiently serve those populations. I think this has also catalyzed us to look at sort of across the portfolio and say, where are there further opportunities to -- our goal is really to deliver market-leading outcomes with a market-leading cost structure. And so are there further opportunities to drive standardization, centralization? That, again, has been an ongoing drumbeat and something that I think we'll continue to organize around as we move into 2026.

And I guess just -- I keep saying last one. Last one would just be, I guess, just from where you sit right now, a question we constantly get is kind of thinking about the long-term margin structure of the 3 lines of business that you guys principally operate in. And it sounds like from this vantage point, there's kind of no real changes about how you guys think about the long-term margin potential of the 3 operating segments.

Yes. I mean I think OB3 has -- and some of the recent regulatory changes in MA, I think we've got to see how those land over the next couple of years, and if that impacts sort of, to some degree, structural long-term margin. But I think our view is we've got a big margin improvement opportunity ahead of us in all 3 lines of business and the ability to sort of build back as efficiently as possible so that we can perform at the top end of industry margins in each of those lines of business. So I think we'll want to see how OB3 plays through in the implementation. But we still feel like we've got a really solid portfolio. There's really nice synergy in the portfolio, obviously, significant margin improvement opportunity in the portfolio, and then organic growth still to mine in each of those lines of business.

That's all you get from me. I appreciate the time. Thank you.

Thank you.

Thank you.