The Centene Second Quarter 2023 Earnings Conference Call was opened by Jennifer Gilligan, Senior Vice President of Investor Relations. Sarah London, Chief Executive Officer and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host the call, with Ken Fasola, Centene's President, available for questions. Any remarks made about future expectations, plans, and prospects constitute forward-looking statements. Non-GAAP measures will be discussed and a reconciliation of these measures with the most directly comparable GAAP measures can be found in the company's second quarter 2023 press release.

Centene reported strong financial results for Q2, increasing their 2023 premium and service revenue forecast by $1.8 billion and their adjusted EPS forecast by $0.05. Their balanced portfolio of core businesses performed well, with Medicaid and Marketplace growth running slightly ahead of expectations. Centene has also been actively engaging with members to provide education around the redetermination process, making 9 million outreach attempts and 15,000 community events to recapture members.

The company is actively tracking the percentage of members that they are recapturing post-procedural disenrollment and expects it to increase. They have seen ebbs and flows from month to month as states continue to refine their processes. CMS has required certain states to pause redeterminations and reinstate members, and the company is tracking any potential impacts. They are also monitoring rate, acuity and membership, and their expectation around member acuity for 2023 remains unchanged. They have also chalked a new business win in Oklahoma to provide managed care for two programs.

Centene won a Sole Source Foster Care contract, and their Medicaid business had strong results in the second quarter. Their Medicare Advantage membership was 1.3 million, with 47% of them being in value-based care arrangements. They have adjusted their EPS guidance to account for possible higher Medicare utilization in the back half of the year. They expect minimal progress in 4-star plans, but anticipate solid overall contract improvement due to operational investments.

Centene is expecting solid contract progression, but could end the cycle with no 4-star contracts. The company is focusing on improving admin, ops, and pharmacy measures in order to pull up underperforming contracts. Centene has reset its quality strategy to maximize contracts that reach the 3.5-star threshold in order to serve complex and dual-eligible members. The company has set a revised target of reaching 85% of members in 3.5 star plans by October of 2025 and is closely monitoring in-year Star metrics to ensure sustained improvement.

Centene has seen a 27% reduction in year-over-year call volumes, 4-star performance in core admin and ops metrics, service levels for members, providers and brokers at or above target, and mid-90s satisfaction scores. Additionally, 24,000 new physicians have been added to the Medicare network. Centene's Ambetter Health franchise is outperforming and has 3.3 million Marketplace lives. To preserve continuity of coverage, Centene is proactively communicating with members who are predicted to be eligible for Marketplace, and has reached 160,000 potential members through digital touch points in May and June.

Centene achieved all first half 2023 milestones and will go-live in early 2024, and closed the divestiture of Apixio to New Mountain Capital while maintaining an ownership position and long-term contract. Centene is also continuing to streamline core SG&A and build its M&A pipeline in order to maximize long-term value. The company has delivered another quarter of solid financial results while executing against a list of transformative initiatives.

In the second quarter of 2023, Centene reported $35 billion in premium and service revenue and an adjusted diluted earnings per share of $2.10, an 18% increase from the same period in 2022. The consolidated HBR was 87.0%, with Medicaid at 88.9% and Medicare at 86.2%. May outpatient trend was higher than April, then it came down in June, and July is steady with June. Inpatient was on track. Centene is confident in their ability to reach their goal of $6.60 of adjusted earnings per share in 2024.

In the second quarter, the commercial HBR was consistent with expectations, including a growth of 200,000 Marketplace members. The 2022 Marketplace risk adjustment was finalized by CMS and the 2023 risk adjustment was received in June and July. The adjusted SG&A expense ratio was 8.6%, cash flow provided by operations was $2.5 billion, and domestic unregulated and unrestricted cash on hand was $200 million. Additionally, 10.5 million shares of common stock were repurchased for $700 million.

In the second quarter of 2023, the company achieved a $300 million debt reduction and had a medical claims liability of $17 billion. Additionally, divestiture activity produced a net gain of $0.11 and additional real estate impairments of $0.02 were recognized. For the full year of 2023, the company has increased its outlook to at least $6.45 of adjusted EPS and increased its premium and service revenue by $1.8 billion, including an approximate $200 million Premium Deficiency Reserve for Medicare. The company is also tracking consistent with its updated forecast for Medicaid redeterminations.

This paragraph discusses the rate updates that have been provided for 14 of the 30 states, which all include acuity adjustments. It also outlines the company's confidence in their 2024 adjusted EPS floor of greater than $6.60, which has an embedded forecasted ballpark $0.80 loss from Medicare Advantage. The paragraph also addresses some of the concerns that have been brought up over the past few months, such as redeterminations, Medicare trend, and growth.

Centene is pleased with their performance in the Oklahoma RFP and have seen growth in Marketplace membership. They are trading at 10-11x earnings and are continuing to execute value creation initiatives and acquire operational capacity. Sarah London is addressing Stephen Baxter's question about the adjustments related to the 2022 plan year and lowering booked revenue related to the potential payers in the market.

In the CMS final announcement, Ambetter was owed $648 million, and had $58 million on their books at year-end, resulting in a $590 million difference. This was mostly related to the 2022 year, with a little bit of it related to the 2023 year as one of their competitors was in certain markets for half the year. There is also a margin of $100 million that gets reestablished every year, as well as breakage for minimum MLRs and RADV accruals. Ultimately, the P&L benefit for what Ambetter was owed by CMS was $39 million, which was recognized over the first and second quarters of 2023.

Drew Asher explains that the PDR (Payment Differential Request) does not cover the entirety of the loss for Medicare Advantage in 2024. He states that the PDR only covers the marginal loss and direct cost necessary to administer the contract, including distribution costs, but does not include SG&A expenses. The $6.60 EPS for 2024 includes a projected loss of $0.80, despite the $200 million or $0.27 PDR.

In Q1, Medicaid had a $7 billion revenue headwind, Medicare had a $77 billion revenue premium stream, and the $0.80 headwind was due to a mismatch between acuity and rates. In addition, there was a headwind from the Marketplace, growth from the special enrollment period members, and the annualization of this year's share buybacks. Currently, 20% of Medicare Advantage members are in 3.5 star plans, and the goal is to reach 85% by 2026.

Sarah London and Drew Asher answer a question about the expected October '25 membership in 3.5 star plans, and the revenue from Medicare. London states that they are still early relative to cut points, but they expect 90% of members to be in 3 star or better plans. Asher then provides the math to show that the Medicare segment is expected to have $16 billion in MA revenue for next year, which is in line with their expectations.

Sarah London explains that when it comes to their Medicare Advantage business, they take a geography-by-geography approach to portfolio management. They are focused on aggressively pruning any less profitable or less aligned products in order to create a solid platform for growth and the synergy it provides with their focus on lower income and complex members in their Medicaid footprint.

Sarah London discusses the impact of Medicaid reverifications on RFPs and states, and Drew will talk about acuity adjustments and how quickly they may happen. She also notes that many states have included acuity adjustments in their 7/1 renewals.

Ken Fasola and A.J. discussed the value of public-private partnerships and the positive response they have received from states. Ken had the opportunity to talk to nearly 14 governors about redeterminations and the best methods to provide members with informed counsel. Drew Asher has been putting data in front of state partners and working collaboratively with them and their actuaries to influence appropriate rates and acuity components.

Sarah London explains that the administration's delay in redeterminations was expected, as some states moved faster than others. The upfront data has given visibility into potential data issues causing procedural disenrollments, but in aggregate, their membership is still on track with expectations.

The company is attempting to recapture members who fell off and still have eligibility. CMS has provided flexibility for states to go slower, and has asked certain states to pause or extend grace periods. The company expects the number of members to grow over the course of the program. 65% of the growth since the onset of the pandemic is expected to roll off, which is factored into the $77 billion forecasted Medicaid premium.

Drew Asher explains that the team does a lot of work to analyze the balance sheets and statutory capital of potential financial difficulty peers and takes a conservative approach on that depending on the carrier situation. He hopes to get every penny of the $314 million, but is realistic and prudent. He then explains that the commercial business includes both Marketplace and group business, which runs higher structurally than Marketplace. He expects to do better than last year, with a higher HBR due to the SEP membership rolling in, and an ongoing tick up of the total commercial HBR.

Sarah London discussed how the company's original goal to have 20% of members in 4-STAR+PLUS plans at their Investor Day changed to a target of 3.5 stars for their target population of low-income complex and duals members due to changes in the Medicare rate environment and their focus on duals. She also discussed how this change affects their bid construction for 2024.

On the Q1 call, the takeaway was minimal progress in 4-star off the 2.7% baseline. However, with additional view of HEDIS, CAHPS, and case mix, there is more pressure in 4-star. This does not impact 2024 revenue, but it was an input for 2024 bid construction. There is a 3-6% economic lift when moving into the 3.5 star band, and the economics work well with the performance goals for a heavily dual-based population. The 1.4% composite forecasted rate in December of 2022 partially reflected the view of what may be necessary for acuity adjustments.

The impact of redeterminations on membership was in line with expectations, with 263,000 members lost from 3/31/23 in Medicaid. When looking at the April and May cohorts, there is limited information available, but it is known that there are only a few states in the cohort and that the success rate is unknown.

In this paragraph, the speaker talks about the boomerang effect of members who have lost eligibility regaining it without any break in coverage, as well as the redetermination activity in April. They also address a question from Gary Taylor about the California court settlement related to COVID costs and commercial MLR between the first and second quarters.

Drew Asher explains that the company is doing well in terms of Medicaid retention rate, with no insolvency issues in 2021. The company is leveraging their #1 market position and Ambetter brand to grow a lot this year, which will give them earnings power for 2024 and beyond. However, it is difficult to predict when each state will end their 90-120 day reenrollment windows, but the company believes that the 1/3 retention rate they expect to end up with is the ultimate outcome.

Drew Asher provided an explanation as to why Medicare is experiencing elevated cost trends in the year 2023, while Medicaid and commercial are not. He attributed this to the composition of their members, as 49% are under 19 years old, and therefore not likely to be having cardiac, ortho, or cataract surgeries. Asher also noted that the trends in Medicaid and Marketplace are stable and not alarming.

Drew Asher discussed the decrease in monthly cadence seen in June and expectations for the back half of the year. He also discussed the margin improvement expected in the commercial business in 2024. Sarah London concluded the call by thanking everyone for their interest and questions and looking forward to providing updates on progress in the back half of the year.

This summary was generated with AI and may contain some inaccuracies.