Centene Corporation (CNC) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the DB Healthcare submit. I'm George Hill. I'm the health care technology and services analyst at DB. I cover the MCOs and a bunch of the health care technology stuff. I call it the stuff -- very happy to have with us this morning, Centene, CEO, Sarah London and CFO, Drew Asher. Good morning, guys. Thanks for coming back. Sarah, you guys reiterated your 2026 guidance this morning I thought I would kick it to you to start. I guess, just talk to us about the reiterated guidance. Any other introductory comments that you want to make -- and then for Sarah, Drew, if there's anything that you want to say as it relates to utilization or the moving pieces or if there's anything different, I would love to hear what you guys have to say to kick it off.

I'm happy to provide a couple of statements on the quarter and then go deeper into any of it. Obviously, reiterated our full year adjusted diluted EPS guidance of greater than $4.80 this morning. I'm pleased with the trajectory of the business through to months of the quarter. We are in line with expectations, trends that we're seeing in Q3 broadly across lines of business consistent with trends that we saw in Q2. Some of the highlights for business lines to Medicaid rates are coming in, in line with expectations and consistent with that 5% composite full year outlook for rates overall. -- in addition to just continued focus on quality and affordability initiatives, our major focus is obviously working with our state partners as they are gearing up and in some cases, starting to implement work requirements. So that's taking more and more of the focus on the local level. From a marketplace standpoint, we are through the pricing cycle, continue to be focused in that business on sustainable margin versus membership -- we've also continued to engage with CMS on program integrity efforts across the ACA and believe that we've fully accounted for the potential impacts of that work in our full year guidance. And obviously, thinking about where we were with that business at this time, sitting here at this conference last year, very pleased with the recovery and still on track for that 4.5% to 5% margin for 2026. Medicare also gearing up for major selling season. We talked a little bit about this on the Q2 call, but -- our focus in Medicare going into 2027 was really portfolio simplification and continuing to focus that portfolio and design explicitly around duals and complex populations and markets where we feel like we can be competitive both because of our overlap with our Medicaid footprint and the ability to leverage those local resources to deliver a differentiated service model. So I think that's what you'll see. Obviously, we'll have a more fulsome view of the competitive landscape in Medicare over the next month or so as we get the landscape. Files, but really focused on building a platform there that will set us up for breakeven or better in 2027 and continued margin progression thereafter and continue to feel good about how that business is performing in 2026. And last but not least, PDP, we're pleased to be below benchmark in all 34 of our regions going into 2027. And -- we -- I think this new sort of came out after the Q2 call, but the discontinuation of the premium subsidies in the demo, we tend to take a conservative approach in terms of relying on the continuation that concerned about the impact of that in 2027 and continue to be on track for 3% plus margins in PDP. So -- all in all, I feel good about where we are in the quarter. We feel very good about where the business is year-to-date.

Drew [indiscernible]

No, that was a great summary. .

Very great summary. All right. Well, with that, I think we'll dive into some of the specifics and given that it's 1 of your larger lines of business, I'll start with Medicaid. And maybe I will just ask you to get a little bit more granular, maybe update us on the outlook for segment profitability in '26. Maybe talk about cadence a little bit. And any parts of the business you'd call out as it relates to strength or weakness, either from a REIT perspective or utilization perspective?

Yes. Not much has changed since our view on the Q2 call. So obviously came into the year aiming for the flat HBR 937 and then saw strength in Q1. So still on track for that 93.5%. So still showing margin improvement in year. We did talk about the fact that because some of our states are sort of tightening their processes around eligibility in preparation for work requirements and then some states are actually pulling forward components of the HR1 implementation that we were expecting an increase in membership decline. So that's the target originally 6% and 8% to 9% at the end of the year. So still on track for that. Trends that we're seeing in the quarter, very consistent with the trends that we've been tracking broadly to behavioral health, home health high-cost drugs. Those are the areas that we have really focused a number of our initiatives. So again, not a lot different. We are learning more about how states are approaching and planning to approach work requirements. So most states are leaning toward a monthly eligibility check, which will create a more gradual impact around the membership declines over '27 and '28. And I think that will be very helpful both in terms of ensuring that members have the right support. We have the ability to deliver documentation, get them engaged in work opportunities and community engagement opportunities and that rates have a chance to keep pace with the membership and acuity shift. And then we have a couple of states that have already started implementation of work requirements. And so far, things are playing out in line with expectation, but very early smaller states, so not sort of a full extrapolation. But a lot of good data coming out of the back half of this year that I think will help us inform our view of how this is going to play out in '27 and '288.

Yes. But maybe I'll double-click on one of those points for a second. As it relates to you're guys working with the states around work requirements and community engagement requirements. Can you spend a second talking about what is Centene's role there and what role do you play versus like how can you -- like where do you guys play a role in the process versus at what point does the I'll call it either the state administrator or the state organization play a role in determining eligibility?

Yes. The -- well, eligibility is determined by the state in all cases. But we have an important role to play in terms of being able to provide data that we have. And if you think about what just recently came out from CMS in terms of the definition of medical frailty, which broadly defined categories for states, which provides a little bit more flexibility, but I think was actually helpful in terms of guiding states to leverage objective data that exists in systems and some of that is data that we have. So one of our major areas of focus over the last couple of months has been building the data interfaces with states. So as they think about that automatic or ex parte determination of eligibility, we can help them be fully informed on that initial decision. And then the other big piece is really helping to make sure that members are educated about what information they need to provide the process they need to go through in order to document the places that they're already engaged and therefore eligible. And we have a number of resources -- we have work programs in 17 states that we can leverage. We have great partnerships with nonprofits. We know a lot about how to get people engaged in work and in the community. And everything is a little bit different in terms of where they snap the line on that engagement. But broadly, they are looking for us and for the other community partners to create opportunities for members to be engaged and ultimately to be eligible. And I've said this before, but the goal of requirements from a CBO standpoint was to create budget savings. But when you get down to the level of the Medicaid directors, really the goal and even from CMS has this perspective, the goal is to get so engaged and working and engage in the community because we know that, that actually drives better health outcomes. So there's really good alignment on the ground around that.

No. That's fantastic. That's great color. You talked about the rates trending towards the 5% composite that you guys were targeting, given that we're now 2 weeks into September. Drew, maybe I would kick it to you and ask kind of how did 91 rates develop? And did they develop in line with expectations? And maybe is there anything that you'd call out either from a state perspective or maybe from a retro perspective as to how rates are kind of developing as we think about the cadence there?

We've got visibility into both 91 and 101 rates. Some of them aren't final, final, but I think we're in the second round of 1 of our large states. So really consistent, as Sarah said, with that composite for the full year of 5%. So still not adequate to sort of recover and get to a margin that we want to be in the long run. And you asked about margin before Medicaid. We're actually sitting here with a positive margin. . Now it's inadequate and it's not satisfying and we've got work to do to match rates of acuity. But relative to a couple of our other peers, one of them says minus 1.1%, one of them says minus 1.75%. And like we're in a different starting point because we're actually -- we're positive in margin, pretax margin all-in for Medicaid, but we need to get that back to sort of that long-term goal and that's what we're going to be working on over the next couple of years.

Yes. I'll double-click on that for a second, too. As you look at the evolving political environment and the political firemen, and I'd even say like the economic environment, do you think about the long-term margin environment for Medicaid as kind of stable and in line with historical expectations? Or do you feel like that needs an adjustment at all?

I think we need to work through, obviously, near-term impacts of policy changes, but there's nothing that we've seen that suggest structurally long-term margins wouldn't get back to where they've been historically. And I think given -- again, if you think about the policy changes even that we went through and are now in the process of implementing, there was, I think, really good indication of the fact that there is bipartisan support for these programs, and it is important to make sure that they are appropriately funded. I would also say what's interesting is as states are facing budget pressure, historically, and I would say we're seeing a little bit of this now is it opens up a different conversation about moving the 40-ish percent of dollars that are still in fee-for-service Medicaid into managed care. -- because that budget certainty is a really important value proposition for the states. Now it needs to come with quality outcomes. And so as we think about industry-leading cost structure, industry-leading health outcomes, that is an important value proposition and story to tell. But I think there's actually an opportunity for potentially more growth in managed care because of the value we bring in a budget compressed environment.

Yes, that -- whenever we do our channel checks talking with state administrators, it always tends to be the budget bunch of challenges that force people to increasingly consider managed care .

Let me reinforce something that I think the skin already knows, but like the community rating aspect in Medicaid is such that the pool of data is aggregated each state from all the payers. And so there's a relativity. So the program as a whole needs to have some margin. And if you can outperform the average of that pool like we have historically, and we expect to prospectively then that creates a nice opportunity to get back to margins, like Sarah said, towards our long-term goals. So it does matter how other people are performing relative to our performance given that community rating aspect.

Yes. One thing I'll say a thesis that I work on that, I'd like to just kind of bounce if you guys maybe verify that when we talk to state administrators or state representatives, they tend to be solving for a budget number as opposed to a PMPM number or an expense number. OB3 is going to change the math of their budget number probably by reducing enrollment significantly, which could create an opportunity for rate if membership is coming down, you're trying to solve for a number rate comes up. Is that a thesis that makes any sense, I'd say my just crazy? Or like I'd be interested in as you have conversations with state partners, how the enrollment versus rate discussion progresses, especially as you guys think about what is sustainable and rate not keeping up with the trend in the last several years?

Yes. I mean to me, it's a direct derivative of the broader thesis that came through in redeterminations. And we did see that, right? We obviously had a disconnect between rate and acuity in the short term. But as we've seen strength in rates catch up, part of that has been the fact that the total budget reduced because membership reduced. Now states are dealing with other budget pressures because of state-directed payment reductions and things like that. So I don't know that that's a one-to-one. But do you think the idea that the rates need to be actuarially sound. And the states want to make sure that benefits are appropriately funded and there are dollars there from membership declines Again, we continue to see constructive conversations with our state counterpart state actuaries and I think this process, we pointed to it before, but now it's just playing out the discrete nature of the population and subpopulations where you can get to a very specific rate sell around this population, this subpopulation and do the math with more precision, I think, is helping in the rate conversation.

That's helpful. As enrollment has shifted as the year has gone on, I guess, can you talk about I take the other question too far. I wanted to ask about how trend is developing year-to-date just in the Medicaid population. I think you already highlighted drugs and other cost categories. I'd just ask you to revisit again anything running hotter or colder than expectations. Just I work with Peter and our team who covers the hospital space where the hospitals have seen challenges. Just be interesting if you wanted to go either by state or by disease category, if there's anything hot or cold as it relates to trend?

I mean I think trends have been broadly developing in line with expectations. We've obviously deployed a myriad issues around initiatives around quality and affordability. And those areas that we've been watching and have been driving outsized trend, which are behavioral health, home and community-based services and high cost drugs continue to be sort of the repeat offenders. We did -- and we talked about this a little bit on Q1 and Q2 call is sort of some year-over-year abatement relative to behavioral health, largely in the ABA space because people have really started to focus on both getting members to higher-quality providers and just a wide array of fraud basin of use that we've cracked down on that space. So I think we are seeing the fruits of our labor come through over the last 18 months. But nothing -- it's really become a new outlier for hotspot. And Q3, again, very much in line with what we saw in Q2.

Is there a way to quantify in any way, like the impact of your efforts or how you quantify the impact of faster was base reduction. I think about this like the corollary on the commercial side would be companies have called out the IDR impact in commercial. Is there a way to -- just because we've seen so many headlines about fraud waste and abuse in the Medicaid space is there a way to kind of quantify what we've seen there?

Yes. I mean we can quantify specific situations. I think we called out a provider in New York, we finally got shut down through the court system late last year. And so absolutely, we can quantify that impact on our New York health plan, as we towed up sort of our goals and initiatives internally. But yes, it goes into sort of the trend management overall. And every year, we've got to bend trend on behalf of our customers why we're hired and implement quality and affordability initiatives. In the last 1.5 years, there's just been more incident of fraud, waste and abuse. And as you heard us -- you heard Sarah say on that Q1 and Q2 call, like our the tools that we've developed, including using AI to promptly very promptly identify, we create a trust factor with, I think, 70 data points and we're able to sort of shut down and pen claims while we do research like a lot faster than 1.5 years ago. So we're responding to like what we see in the market. But yes, that all goes into the management of net trend.

Okay. For Medicaid, I want to ask you to provide '27 guidance and you talk a little bit about the community engagement and the work requirements. But I guess for at this distance, -- is there a way to paint in broad strokes how you see the impact of OB3 on the business in '27? And you kind of talked about the cadence of '27 to '28 monthly reverifications. We're just kind of dig in to whichever way you would like to characterize however you're thinking about the impact on Medicaid in '27 and '28.

Yes. I mean I think our goal continues to be to deliver margin progression in despite what we know are going to be some degree of headwind from the acuity shift and not having total visibility yet to whether rates will perfectly on time match to when those acuity impacts start to come through the business. But broadly speaking, again, if you think about the fact that our expansion business is a, call it, 18% of our overall Medicaid book anywhere in the range of the estimates out there of 25% to 40% of members that will become ineligible -- it takes you down to sort of a mid-single-digit percentage and then you roll that out over 2 years. And then you think about the fact that we're dropping 8% to 9% in 2026, and we're able to absorb the impact of that acuity shift with both rate and our own trend initiatives. And that's what makes us feel like we can manage through this. But it is going to take blocking and tackling. It is going to take good data-driven rate advocacy. It is going to take community engagement -- and so that's all of the infrastructure that we're sort of gearing up and prepared to do with the goal of continuing to deliver margin progression in '27, '28.

Okay. I'll quit -- Drew, you won't have to answer this question for me next year, but is there a way to characterize how we should think about the magnitude of margin progression maybe looking out over a multiyear basis?

I think we need some more data to see that. Obviously, that will be incorporated in guidance for '27 when we give guidance for '27. But I think you're right, the goal is net progress on the positive wait on the scale, the parcels that were built between payer and customer through the redetermination era have resulted in us hitting a couple of states for 71 to pay us in the 7126 rate. what the estimate is of the impact of OB3, and the rest of them for that 71 cohort agreeing to revisit 1/1 once they decide how they're actually going to implement and execute. So that's a lot different than coming out of the -- into and then ultimately out of the redetermination era. So that's -- I think that will help us achieve that sort of net progression. We just don't have a specific magnitude at this point.

I haven't heard -- I have not heard Centene talk about this topic here, but 1 of your peers talked about and started to execute on the market and -- and is that something that Centene would think about? And kind of how do you think about the framework for how you evaluate whether or not you continue to stay in our exit markets?

Yes. I mean our first priority is always to try to work with our state partners to navigate program reform and get to a place where we can deliver the level of service that we want at a sustainable margin. We are running a business. And so if we feel like long term structurally, we aren't going to be able to get there, then we have evaluated markets. If you think about the decision we made on the Florida CMS program. That's an example of that. We made a similar decision relative to programs in Hawaii. But we also balance that with a really thoughtful look at: one, making sure the state program is strong enough, and we have a very measured approach to moving members and not overly impacting our members as we do that. So that's not a new jerk thing. It's a decision that is always made very, very carefully, and it's very much been the exception versus the rule. But we're always looking across all lines of business. We are looking at our portfolio to say where the geographies where we can be successful long term and where are the drug geographies where maybe we can.

Is kind of the Florida behavioral an example of that? Was that a piece of business where you guys chose to make an exit where it just didn't seem like it could be profitable? And maybe, Drew, if you could kind of remind us of the financial impact of the Florida ADI exit?

Yes. So it was really all about the new contract and what we would have had to agree to 10/1, '26 and beyond and there was a lot of pressure in 2025. Some of that is being corrected for 26. But then there are new changes go into place, like a drop in margin and the addition of a withhold supplemental benefits that were required and then just a multiyear guaranteed by the payer of affordability initiatives and sort of bending trend that we looked at as a pack, as you said, now we're out. So that's probably -- that was more of the decision-making around that piece of business. But it's about -- for us, it's about $1.5 billion of revenue per quarter. So that will be that will be a pickup as we sort of head into '27.

I have to keep an eye on the clock because I think I spent a ton of time on Medicaid, and there's actually other topics I wanted to pick. You'll forgive my pop culture reference. I'm going to move on to Medicare Advantage. -- in the first rule of STARS Club seems to be you don't talk about STARS Club. But plan preview to has hit, and there's been a lot of cater online about the cut points I would ask at a high level as you guys got your planned preview to your -- on your past margin recovery in M&A. Anything that is alarming or anything that is comforting in what you guys saw? And if you tell me to Georgina. -- first start clones.

I will abide by STARS Club rules and so I'll answer at a high level and say everything we've seen in line with our expectations and if you go back to kind of what we talked about in the Q2 call, we are still delivering rough improvement in quality measures have been a lot of work over the last couple of years to strengthen that program. But we also starting 2 years ago, I think, saw the writing on the wall in terms of the degree of program reform that was likely coming as well as continued acceleration in the cut points. and the fact that our focus on duals is at some level dissonant with the fact that the program does not case mix adjust sufficiently. So again, we've talked repeatedly about a lot of work sort of create a buffer around that. And so we came into this year, again, expecting to drive improvement, expecting to see some pressure in our results because of the cut points and because of the program changes from last year. but having built the appropriate buffer for that. So our view is still very confident in breakeven or better in '27 and then setting the book up for continued margin progression. And we continue to advocate with CMS for stars reform relative to focusing on those complex tools members and taking into account sort of what is a realistic expectation. How do we actually measure quality that membership. So we're running that play in parallel.

Okay. You mentioned duals, the special needs population, I'll ask this question because it's kind of a hot-button topic, which is 1 of your smaller peers called out that they were seeing called a hotspot as it related to SNFs and institutional and some inpatient. I know I've asked this question several times. I'll ask it again, this is kind of specific to MA. But kind of any hotspots that you're seeing as it relates to MI and do any of those things jump out to you guys as places that you're seeing?

No. I mean the trends in MA has been very consistent this year. and the places that are sort of, again, slight outside trend drivers, some of that outpatient a little bit of high-cost drug, very consistent, same thing so far in Q3 and continue to feel good about how that business is performing.

Yes, pretty pleased with the execution in Medicare Advantage this year and to Sarah's earlier point, that sort of being a linchpin in being able to manage this business with a dual focus even without really good star scores. So but really good stability and execution and feel good about the progression.

Am I on your dual penetration is in the low 50% range somewhere?

40% .