Jennifer Gilligan:

Thank you, Jamie and good morning everyone. Thank you for joining us on our second quarter 2024 earnings release conference call. Sarah London, Chief Executive Officer, Andrew Asher, Executive Vice President and Chief Financial Officer of Centene will host this morning’s call, which also can be accessed through our website at centence.com. Ken Fasola, Centene's President and Jon Dinesman our Head of External Affairs will also be available as participants during Q&A. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the Safe-Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our second quarter 2024 press release, which is available on the company's website under the Investor section. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2024 press release. With that, I'd like to turn the call over to our CEO, Sarah London. Sarah?

Andrew Asher:

Thank you, Sarah. Today we reported second quarter 2024 results including $36 billion in premium and service revenue and adjusted diluted earnings per share of $2.42, up 15% from Q2 of 2023. Results in the quarter, as previewed earlier in the week, were consistent with the dynamics we described intra-quarter in the May 29th 8-K. The quarter serves as yet another example of the benefits of a diversified enterprise allowing for varying degrees of performance among the many parts of our business. This Q2 result keeps us on track to deliver adjusted diluted earnings per share in excess of $6.80 in 2024. Our consolidated HBR was 87.6% for Q2 and 87.3% year-to-date. This positions us to achieve the high end of our previous full year guidance range around 87.9%. As previewed in the May 8-K, Medicaid medical expense was higher in Q2 largely due to the acuity of membership that remains as redeterminations wrap up. You may recall about a year ago we talked about needing from our state partners, one acknowledgement, two action, and three sufficiency regarding matching rates with acuity. All states have acknowledged the need and intent to match rates and acuity. All but one have taken action. We are still working on the sufficiency with more visibility now that we're largely through redeterminations. The acuity of the population that remains, the stayers plus the rejoiners, is now more clear to us and our state partners than when we were working through large membership shifts of Q4 2023 and Q1 2024. We continue to have constructive conversations with our state partners on the sufficiency and the timing of rates as we present them with updated data from the latter part of the redetermination process. Pursuant to these efforts, we now expect the back half of 2024 Medicaid composite rates to be 4% plus relative to our original forecast of 2% to 2.5%. This 7/1 to 10/1 rate cycle will impact about half of our Medicaid premium. So this will help the trajectory of the HBR in the back half of the year compared to Q2's 92.8%. While we certainly have more work to do on rates in 2024 and 2025, we have no change in our long-term view of the ultimate proper matching of rates and acuity in our Medicaid business. Meanwhile, our marketplace business continues to perform well, not just as we wrapped up 2023 risk adjustment with great execution, but also in our 2024 positioning and performance, including a little more growth in 2024 with 4.4 million members at quarter in. Let me hit the highlights of Tuesday's 8-K. In the past decade, we've gotten pretty good at operating the marketplace business, including accumulation and submission of data to get paid the right revenue to match the acuity of our marketplace population. The result of that execution, which improved year-over-year, was a better-than-expected result as we wrapped up the Edge server process in May and estimated the value of our submissions as we referenced in the May 8-K. This was subsequently corroborated by weekly data, then ultimately CMS's final notice published this past Monday. The result was a net favorable pickup expected in our 2024 P&L of approximately $600 million as outlined in Tuesday's filing. Again, great execution in Marketplace. Our Medicare segment continues to be on track with our expectations for 2024, and we look forward to continue to improve that business over the next few years as Star scores improve and we get the requisite revenue to drive better performance. And despite redeterminations and divestitures, this company continues to outperform in premium revenue. You can see that in the year-to-date reported revenue. Accordingly, we increased the 2024 full-year premium and service revenue guidance by $5 billion compared to our April 2024 earnings release. Approximately $1 billion in Medicaid, $2 billion in commercial, and $2 billion in Medicare segment revenue to a range of $141 billion to $143 billion. That bodes well for the future, exiting 2024 with a higher revenue base upon which to drive EPS growth in 2025 and beyond. One other guidance update, we now expect over $1.55 billion of investment income in 2024, excluding gains on divestitures. Our adjusted SG&A expense ratio is 8.0% in the second quarter on track with our full-year guidance. Cash flow provided by operations was $2.2 billion in Q2. Unregulated cash on hand a quarter end was $217 million. Consistent with previous comments, we expect the majority of deployable cash to be available during the second half of the year. The first half of the year, we deployed $851 million on Centene shares. Our debt to adjusted EBITDA was 2.8 times at quarter end. Our medical claims liability at quarter end represented 54 days in claims payable up one day sequentially and up two days compared to Q2 of 2023. The diversified portfolio of Centene performed well as a whole in the first half of 2024. And while we expect some continued pressure on our Medicaid HBR in the second half of the year compared to our original goal, we expect Medicaid HBR improvement relative to Q2 given the second half rate action. Further rate action into 2025 would continue the improvement. On the topic of 2025, it's much too early to give 2025 guidance, but we can walk you through the tailwinds and headwinds that we believe today relative to 2024. In the category of 2025 tailwinds, we currently forecast, one, HBR improvement in Medicaid as we expect to make continued progress on rates throughout 2025. Two, a return to Medicaid growth post-redeterminations. Three, growth in the overall marketplace market and in our membership. Four, the absence of a Medicare PDR in 2025. Recall we have a 125 million PDR P&L hit embedded in our current 2024 guidance. Five, revenue growth in PDP. Six, capital deployment in 2024 annualizing into 2025 and capital deployment in 2025. Seven, continued progress on improving operational efficiency and SG&A execution. 2025 headwinds would include, one, the annualization of the first half of 2024 final redetermination impact on 2025 premium revenue. Two, we wouldn't expect to repeat the $600 million prior year marketplace risk adjustment benefit. And three, Federal Reserve rate actions gradually impacting investment income. We will provide more insight as we get through 2024, and we expect to provide formal 2025 guidance at our investor day in December. Looking ahead, we are clearly focused on influencing our state partners to match rates with acuity, improving Stars, continuing to position our marketplace products to produce strong margins, improving Stars, continuing to position our marketplace products to produce strong margins, and we are planning to deliver on our 2024 adjusted diluted EPS guidance of greater than $6.80 and grow adjusted EPS thereafter. Thank you for your interest in Centene, and we can open it up for questions.

Stephen Baxter:

Yes, hi. Thanks for all the color. I was hoping that you could tell us what you're expecting for Medicaid MLR in the back half of the year and any kind of bridging assumptions we should use to get there. And I guess as we're thinking about the magnitude of MLR improvement that you get on a 4% plus composite rate, that would also be something that's helpful to know. And then if you could give us a sense of, for the states that have updated your rates inside that composite rate, where does this leave you in terms of normalized profitability? Is there still more work to do on the second half rate states? Or do you think this brings you back basically closer to in line with your targeted level of profitability? Thanks.

Operator:

Our next question comes from Sarah James. Please go ahead with your question.

Sarah London:

Yes, let me hit this at a high level and then I think it'd be good for Drew to walk through some of the data that underpins our viewpoint on this. But the bottom line, as we both said in our remarks, is that the primary driver of the HBR pressure is the increased acuity of the membership post-redeterminations and that mismatch between rates and acuity, which is, we're confident is a temporary and fixable dynamic. As we've said before, there are always pockets of trend that we watch. We called out behavioral health. Obviously, you heard from my remarks that we're very active in terms of developing programs to manage outcomes for that population. And then here and there, state by state dynamics, if there's a change to the preferred drug list or something like that. So, again, very consistent with what we've called out in the past. I think stuff that we're watching and actively managing, but the predominant driver was really in that acuity shift. And then Drew, maybe you can talk about how we're able to isolate the underlying cohorts to support our view on that.

Sarah London:

Well, and I would just add, it's a dynamic that we can include in the data that we're sharing with states. And so, again, this was a dynamic we've anticipated all along, which is precisely why we took an early and often approach to data sharing. And I think that has served us well throughout the process, but particularly in this quarter as we're able to bring forward the data on these different dynamics. And obviously that has favorably influenced the second half rates.

Justin Lake:

Thanks. Good morning. A couple of questions. First on MLRs, I'm just wondering if you might update us on your MLRs by segment versus the original guidance that's going to get you to the 87.9, maybe even throughout some second half MLR seasonality between 3Q and 4Q. And then on Part D, there's a lot of changes going on here. This has been a pretty big part of your book. I'm curious if you could help us understand how you think we should look at this year-over-year. It looks like it should be a big increase in premium given the federal subsidy is going to increase significantly. Is this profitable for you in 2024? How do you think about the risk reward of how investors should approach it in 2025 given all the changes there? Thanks.

Andrew Asher:

Yes. So on the MLR by segment, I think we do, we're pretty disclosive. We give you guys a lot of disclosure, including the actual by segment. Not all our large peers do that. Hopefully you enjoy seeing that detail. But we're not going to give detailed guidance by segment. Though the 87/9, I think you could probably do some math and piece together what we've told you historically to figure out the zone of each of those. And once again, it's a diversified portfolio. That's how we manage the business. The seasonality is such that typically commercial, you'd see tick up throughout the year. Obviously, we had the benefit in Q2 that kept it sort of flat to Q1. And then, deductible wear off in the commercial business, you'd see that tick up. So that's one thing to take into account. And then just one more follow-up comment on Part D or PDP. I said multiple times, Q1 at the conference in March, just trying to explain the fact that we expected the direct subsidy to go up over $100 on top of the $29 direct subsidy this year. So obviously, that goes into the yield, largely goes into the yield. So as Sarah said, that'll be a pretty big step up in premium yield. We'll have to see where the membership shakes out. We'll know a little bit more next Monday about where we stand. But we won't know competitive positioning until the landscape files come out in September.

Josh Raskin:

Hi, thanks. Good morning. Why do you think the risk adjuster on the exchange has developed so much better than you expected? The payable was $1.3 billion less than you thought. And what are the changing dynamics there? And I guess more importantly, Drew, I appreciate the headwinds, tailwinds for 2025. But, if you think about sort of the $0.80 hurdles that you've got to get over and I know you get back some from the PDR. But, if you think about the consensus sitting at $7.53, I'd just be curious to get your perspectives on, is that directionally in the right spot or, should we be thinking about something different?

Operator:

Our next question comes from A.J. Rice from UBS. Please go ahead with your question.

Sarah London:

Yes, thanks, A.J. You're right. There's sort of a natural look back in the process on Medicaid rates. But I think if you look at what we've seen, frankly, in the rate updates that we've had starting from the beginning of redeterminations, it would have been easy in a normal course for us to have a full normal complement of data. And so we saw early moves. I think we're seeing a continuation of that trend with maybe even a little bit more favorability relative to the speed of reaction to what we saw in Q2 materializing in the back half rates. And so from here, really what we're saying is that we have even more supporting data as we go forward. And so the active dialogue with the states and I think our positioning relative to making sure that we have full sufficiency in terms of matching rate and acuity gets better and better each bite at the apple as we go through. So I think that accelerating momentum is something we feel. I think you're seeing it in the rates, and we would expect and hope to continue that as we get through 1/1. And then if there's additional work we need to do for second half next year. And then, Drew, do you maybe want to talk about exchange performance?

Operator:

Our next question comes from Kevin Fishback from Bank of America. Please go ahead with your question.

Sarah London:

Yes. So relative to Medicare, we I think the team has done a really good job in terms of thoughtfully defining the 25 bids consistent with the long-term strategy, even in a challenging rate year. But also, as I as I mentioned, we've been thinking about how to streamline that book and further align it with our Medicaid footprint, because that's where the puck is going. And so as a result of that, you will see us exit a handful of states with that longer term strategy in mind.

Operator:

Our next question comes from Scott Fidel from Stephens. Please go ahead with your question.

Andrew Asher:

Yes. On cash flows, it's not really one of our guidance elements because, to your point, exactly in this business, they can swing from the last day of the quarter to the first day of the next quarter based upon when states want to pay us. But I think you can look at the first half of the year, and we were negative $400 million or so in Q1. We've got $2.2 billion positive in Q2. The first half of the year, you can look at that. That's a reasonable depiction. But you're right, it's sort of a fool's errand to predict cash flow quarter-to-quarter because of the government programs dynamic. What's important, though, is getting cash out of the subsidiaries and dividends up to the subs and then capital deployment. So we're excited about capital deployment in the back half of the year. That's consistent with what we've said here before. And even in the first half of the year, we're able to do $850 million of share repurchase. On the margins on marketplace, or let's stick to commercial segment. I think going back to the discussion that we just had with A.J., sort of the -- excluding the $600 million being on track for what we said originally well into that 5% to 7.5% pretax margin. And then obviously, the $600 million would be on top of that. So just good sound performance and excited about our product positioning for next year. We'll learn more and more as we get further into 2024 about our positioning, and expect that the market to grow. And the 10 years of experience of the marketplace team and all their supporting shared service partners across this entire company, we expect to have another good year in marketplace in 2025.

David Windley:

Hi, good morning. Thank you. Your G&A ratio was favorable in the quarter, some benefit from the exchange risk adjustment that you called out, but even with that would have been below your full year range. Wondering what other benefits you might have seen if those are sustainable? And if you might direct us to a subrange in the range for the full year.

David Windley:

Alright. Thank you.

Lance Wilkes:

Great. I wanted to ask about the outlook for Medicaid growth. And in particular, I wanted to get kind of an update on pipeline. What you're seeing as far as where you're being more successful and less successful RFP scoring? And what your rejoiner outlook is? And maybe as just a little clarification. Over in the Part D book, can you also just give us a little background and description of the demographics of that book? Kind of what's the age cohorts you've got going through there? And how much is LIS, which I imagine is most? But if you could describe that as well, that would be helpful.

Andrew Asher:

Yes. PDP, we're number one position in 2024. That's a strategic business for us. I think we've said this before, but we've got about $50 billion of pharmacy spend across the company that we control. And about half of that is driven by the PDP business, and we'll see how that shifts in 2025 and beyond. But that means we've got a leading position in auto-assigns. So we've got three products, a low premium product and then a higher premium product. And we've been thoughtful about, as I mentioned in the Q1 call, all of the changes that are coming for the IRA, the second year of the inflation Reduction Act for next year. And to the extent if you want, we can slice and dice data a number of ways. We can get with you afterwards for any of that demographic or the buckets of the actual membership data.

Andrew Mok:

Hi, good morning. Just wanted to make sure I follow the Medicaid margin progression from here. It sounds like you're saying this is peak Medicaid pressure this quarter with the 92.8% MLR. And when I pair that with an SG&A of, say, 7% or so, that suggests Medicaid is running close to 0% margin right now. Then you're getting 4% rate on half of your book in the second half. So that should put you closer to 2% margin at year-end, with the balance recovered in 2025. Is that the right way to think about the margin path on the Medicaid business?

Operator:

Our next question comes from Michael Ha from Baird. Please go ahead with your question.

Sarah London:

Yes, thanks for the question. So on Stars, as you heard, bottom line is we're very pleased with the progress and the momentum we're seeing internally. We are tracking year-over-year improvements in each of the key chapters. Relative to the results in October, we don't yet have those final cap scores and obviously don't have cut points yet. So there's a range in our projection. But we feel good about that entire range and are tracking very nicely with internal expectations. And as I said, expect a meaningful step up in the results in October. And all of this is really the result of the continued work by the team, our enterprise-wide governance process, awareness and activation across the organization, more different line alignment, the quality is a top priority, and all of the investments that you've heard us talk about along the way and things like member outreach call centers. We've organized differently around provider partnerships. We've done a lot of work under the hood relative to digital data and efforts to make our member onboarding experience best-in-class. And so that also then accrues to visibility in terms of momentum in 2024. So think about the fact we're halfway through 2024 dates of service that will drive the 2025 results and feel good about what we're seeing there. It's important to note as well that this work is accruing not just to Stars improvement but the quality score improvement in our other lines of business and in Medicaid in particular quality scores are really important factors. We think about RFP success and how we are viewed by the state in terms of being able to deliver value to them and to members. So all in, feel really good about the fact that we will be able to deliver sustainable programmatic improvement not just in Stars but in quality overall as we go forward.

Operator:

Our next question comes from Ryan Langston from Cowen. Please go ahead with your question.

Andrew Asher:

Yes, we've said before we expect to shrink in 2025 as we think about what business is going to serve this company well in the long run. We think about the convergence of Medicaid and Medicare with the duals and Heidi and Fidei opportunities, so said a couple of times publicly, 14, 15, 16 billion, somewhere in that zone of revenue for 2025. And then I did mention in the tailwinds the fact that the PDR that we're booking this year is actually half of the PDR we booked last year and then we don't expect to have a PDR booked into the 2025 PNL for 26. So, first we've got to chip away at the degree of run rate negative margin and push towards break even and then we can talk about what the margin opportunity is in Medicare. So mathematically it is a tailwind or expected to be a tailwind and excited about the Stars progress that Sarah referred to and where that's going to go to lead us over a multiyear view.

George Hill:

Yes. Good morning, guys. Two quick ones for me if you don't mind. I guess Drew on the exchange business you mentioned the well into 7.5% long-term margin. I guess is that the sustainable run rate or is it prudent to kind of price for the midpoint in 2025? And then my follow-up would be is there's a lot of changes in Part D for 2025. Are you guys making any significant changes to the Part D product and really what I’m most focused on is how you guys are thinking about pharmacy networks?

Andrew Asher:

Yes. Then on PDP, you can go pull the Q1 transcript went really deep there but let me hit the highlights. Obviously we as payers are thinking about the underwriting of the catastrophic phase going from 20% to 60%. These are all IRA changes. The member out of pocket going down and therefore it's hit earlier. Thinking about manufacturer behavior, thinking about the MPPP, effectively the member smooth and cost share program and we're always thinking about how to optimize network and balance access and cost of goods sold. So that continues as we prepare for 2025.

Sarah London:

Thank you. Thanks everyone for the interest this morning and the great questions. As we wrap up the call, I really just want to emphasize our excitement around the opportunities that lay ahead for this business. We are as an organization making significant progress, strengthening and modernizing the enterprise. We feel really good about the performance of the core business. As a leadership team we're also really energized by the markets we serve and the room we have to grow profitably as we go forward. So appreciate again the time this morning and your interest in Centene and look forward to future updates.

Kevin Fischbeck:

I just wanted to go into your margin commentary on the exchanges because, I guess, from our expectations too, it came in a little bit better. I guess that's the fastest-growing part of your business, which always potentially lowered the visibility into claims receipts. And obviously, you had a change going on at the same time. So I mean, I guess, how comfortable are you -- or what points do you look at to give you comfort that, that MLR outperformance is true and durable rather than potentially some issue around rapid membership growth or change disruption?

Stephen Baxter:

I wanted to ask about the revised premium and service revenue guidance first. It seems like based on what you saw in the first quarter that you'd annualize to something closer to around $145 billion versus the revised guidance of $137 billion. So wondering if there's anything we should be keeping in mind. Just as another kind of call out, the Medicaid premiums in the quarter were well above our model. So I don't know if there's anything there that's influencing it.

Andrew Asher:

Yes, Stephen, in Q1, we did have a fair amount of state-directed payments. In fact, some states, we believe, in response to the Change incident, accelerated a number of those. That actually also had about a 20-basis-point impact on our Q1 Medicaid HBR relative to our expectations of a normal level of state-directed payments. So that also showed up in our premium revenue. So you can't quite annualize Q1.

Operator:

And our next question today comes from Justin Lake with Wolfe Research.

Joshua Raskin:

I wanted to go back to Medicare Advantage and 2025 bid strategy with an understanding you're not going to submit your bids for another couple of months here. But would that allusion to $14 billion, $15 billion or $16 billion a suggestion that you would expect membership to be sort of flat to down based on what you know today? And then do you expect to book another PDR in terms of where you think margins would be for next year?

Sarah London:

Yes. Thanks, Josh. Maybe I'll take the last question first and say that as we look at the landscape today the -- again, the tie between Medicare and Medicaid and what that produces in terms of long-term growth opportunity, we see as very compelling. And so we're always evaluating how the landscape changes, but we're very committed to rebuilding our Medicare franchise focused on the low-income complex members and using that to drive growth across both lines of business. Obviously see opportunity for earnings contribution and then longer-term growth in that business.

Andrew Mok:

Just wanted to follow up on the Medicare MLR. And just given the strong growth in PDP combined with the strong MLR seasonality of that business, can you give us a sense for underlying trends there and how that's supposed to impact the balance of the year on the Medicare MLR?

Operator:

And our next question today comes from Nathan Rich at Goldman Sachs.

Sarah London:

Yes, Nathan, thanks for the question. So we -- and we talked about this a little bit earlier this year, but we intentionally came into the 2024 cycle redesigning our product offerings with the duals population, again, low-income complex population more broadly in mind. And we're really pleased with how the team executed during AEP. And that is inclusive of product design, but it's also being really thoughtful about what distribution channels best reach those members and the experience that really drives loyalty among that population.

Sarah James:

I wanted to go back to Medicare. So given where rates came out and your evolving strategy around overlapping footprint, do you still think the couple of hundred basis points of SG&A leverage on Medicare is the goal point? I think you guys rolled that out at I-Day. And then how do you think about the SG&A framework for your Medicare business overall? Because typically, I think about it being a couple of percent higher than Medicaid would run. But given the scale that you're targeting, is that still a fair ballpark for where the overhead costs would run for that business unit?

Gary Taylor:

Actually, I just kind of wanted to follow up, I guess, on that last comment for just a second. We're just looking at total employees down 12% sequentially, 8,000 sequentially. I was just trying to think through what the implications are sequentially into 2Q, 3Q in terms of G&A or even some of those employees might be medical support in the [ MedEx ] line.

Andrew Asher:

Yes. Good questions. Most of the change in the employee base is the divestiture of Circle. That was pretty employee-intensive in Great Britain. So that was a result of divestiture. Although we are constantly managing the right amount of resources, it's our job to, on behalf of taxpayers, on behalf of the federal and state governments, managing efficiently, matching resources with the business that we have and trying to do that efficiently and effectively. But that big move was due to divestiture.

Operator:

And our next question today comes from Cal Sternick with JPMorgan.

Scott Fidel:

Just had a couple of modeling questions that would be helpful. One, just on investment income, if you can sort of walk us towards what you view as sort of the run rate for the second quarter and for the balance of the year. I know there were a few gains included in the first quarter investment income. And then also on operating cash flow, obviously that was noisy in the first quarter for the reasons you mentioned. If you wouldn't mind just giving us an update on the full year CFFO expectation and then how you're thinking maybe about the second quarter given that you did get that state payment came in, in April.

Operator:

And our next question today comes from A.J. Rice at UBS.

Sarah London:

Yes. Thanks, A.J. You're right. So we're 9 -- roughly 90% of the way through redeterminations from a membership standpoint. Obviously, the cumulative member months impact sort of trails that a little bit. And we do think that the tail of membership will run through Q2 and Q3 and sort of largely be complete by that point.

David Windley:

So just maybe a brief one on that last comment, last point. On the rate visibility, I think you called out 75%. You talked about matching acuity which, Sarah, you just commented on. Is the matching of acuity and getting those payments squared up, is -- should we think about that being in the remaining 25% that you don't have rate visibility on yet? Or are you expecting some amount of kind of retro catch-up from states where you actually have already had rate discussions? And just kind of understanding the mix of that is what I'm hoping to do.

Andrew Asher:

Okay. Sorry. The 75% is a member month view of what we know for the 2024 calendar year member months, and the 25% would be there's 7/1 rates we don't know. We certainly don't know 9/1 or 10/1 rates, but they have a limited impact on the 2024 calendar year. To the macro point, we need -- ultimately, we're going to need to have rates match acuity, and that -- we expect that to shake out. It may not be perfect in this rate cycle, which means sort of the 2025, 2026 time period is when we would expect to get back into the high 89s based upon today's mix of business.

Operator:

And our next question today comes from George Hill with Deutsche Bank.

Sarah London:

Sure. Thanks, George. So quality, obviously a top priority for the organization regardless of line of business. But we remain very focused on STARS because of the impact it has for the Medicare trajectory. Very pleased with the work underway, engagement across the organization. We're leveraging a comprehensive governance process, and that has given us great visibility in terms of progress on initiatives at a detailed level.

Operator:

And our next question comes from Lance Wilkes with Bernstein.

Sarah London:

Thanks, Lance, for the question, mostly because I don't think I can brag enough about our pharmacy team and the phenomenal job they did in such a massive undertaking. We've talked before about how well that went, January 1. But I think everybody who's been through something that significant knows that you don't just drop the mic the next day. And so these folks have continued to work tirelessly over the last couple of months to make sure that, that process just gets smoother and smoother for our members. We've had great collaboration with ESI. And so trajectory on that front just continues to be really positive.

Andrew Asher:

Yes. So we didn't want to wait for economics. So we do have a stairstep benefit on behalf of our state and federal customers and our members as of 1/1/24. But we're constantly working with our partner at ESI to figure out ways to deliver value to our customers and manage costs. So we expect sort of normal course improvements from that point forward, and we'll continue to try to drive efficiencies in the pharmacy ecosystem.

Operator:

And this concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks.

Operator:

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Jenn Gilligan:

Thank you Rocco and good morning everyone. Thank you for joining us on our fourth quarter and full year earnings results conference call. Sarah London, Chief Executive Officer, and Drew Asher, Executive Vice President and Chief Financial Officer of Centene will host this morning’s conference call, which also can be accessed through our website at centene.com. Ken Fasola, Centene’s President will also be available as a participant during Q&A. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene’s most recent Form 10-K filed on February 21, 2023 and other public SEC filings. Our Form 10-K for 2023 will be filed in coming weeks. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. This call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most direct comparable GAAP measures can be found in our fourth quarter 2023 press release, which is available on the company’s website under the Investor section. The company is unable to provide a reconciliation of certain 2024 measures to the corresponding GAAP measures without unreasonable effort to due to the difficulty of predicting the timing and amounts of various items within a reasonable range. With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Drew Asher:

Thank you Sarah. Today, we reported fourth quarter 2023 results, including $35.3 billion in premium and service revenue and adjusted diluted earnings per share of $0.45 in the quarter. For the full year, we reported $6.68 of adjusted EPS, growth of over 15% compared to 2022, including a 5.5% beat to our original 2023 guidance, and that’s on the heels of growing adjusted EPS 12% in 2022 compared to 2021. Our Q4 consolidated HBR was 89.5% while our full year consolidated HBR was 87.7%, both in the range of our expectations. Medicaid at 90.0% for the full year was slightly higher than our expectations. As of Q3, we were 89.9% year-to-date and we posted 90.6% in the fourth quarter. As we mentioned at our investor day in December, there were some open Medicaid retro rate adjustments. At year end, had we received those adjustments, our full year 2023 Medicaid HBR would have been about 10 basis points better. All things considered, over nine months into redeterminations, our original forecasts for membership, acuity and rates were very close. As you can see in the membership tables, we were at 14.47 million Medicaid members at year end, consistent with the 14.4 million we were forecasting, as shared in the investor day appendix. That reflects an approximate 1.9 million Medicaid member reduction since 3/31/23 due to redeterminations, as expected. To reiterate what we laid out at investor day, our 2024 guidance reflects a low point of 13.2 million Medicaid members at 3/31/24 and year-end 2024 membership of approximately 13.6 million. That all ties to our 2024 midpoint of $80.5 billion of Medicaid premium revenue, so no changes to our 2024 view of Medicaid revenue, membership or HBR. Medicare full year HBR was 87.1%, which includes the $250 million premium deficiency reserve recorded in the fourth quarter that we first discussed with you back in April of 2023. On Medicare trend, we continue to see steady but elevated levels of outpatient trend consistent with what we began to see in Q2 and consistent with our forecasts. We also saw a pick-up of COVID costs in December, as we mentioned in early January, though not alarming compared to prior COVID cycles. We thought about the current level of trend when we booked the 2024 PDR and continue to believe our forecasts are consistent with delivering our 2024 Medicare segment guidance elements outlined at investor day. To help you with some math, the $250 million premium deficiency reserve lifted the fourth quarter Medicare segment HBR by approximately 475 basis points, and the full year Medicare HBR by approximately 110 basis points. The commercial HBR at 79.8% for the full year continues to be strong. Simultaneously in Q4, we were also capturing growth from both redeterminations and the special enrolment period, and we were up to 3.9 million marketplace members as of year end - that is the source of the strong premium growth in the fourth quarter. As you heard from Sarah, we couldn’t be more pleased with the growth that continued into January 2024, up to approximately 4.3 million members. This continued growth and HBR performance in 2023 sets us up very well to achieve our 2024 marketplace goals. Moving to other P&L and balance sheet items, our adjusted SG&A expense ratio was 9.7% in the fourth quarter compared to 9.3% last year, consistent with our updated mix of business along with Medicare distribution costs. Cash flow provided by operations was $8.1 billion for the full year, representing 2.2 times adjusted net earnings. This was primarily driven by net earnings, and increase in risk adjustment payable for marketplace, and the timing of pass-through payments. Our unregulated and unrestricted cash on hand at year end was approximately $200 million. During the fourth quarter, we repurchased 397,000 shares of our common stock for $27 million. For the full year 2023, we repurchased 22.9 million shares for $1.58 billion, a little over our goal of $1.5 billion. Our debt to adjusted EBITDA was 2.9 times at year end. Our medical claims liability totaled $18.0 billion at year end and represents 54 days in claims payable compared to 53 in Q3 of 2023, and 54 in Q4 of 2022. Looking back at 2023, it was a very good year of execution. We beat original adjusted EPS by 5.5%. We bought back 4% of the company’s shares for a cumulative total of over 10% since Q1 of 2022. We continue to execute on divestitures. We completed five divestitures in 2023, closed the divestiture of Circle in January of 2024, and received approximately $850 million in net proceeds in January. In total, we have completed 10 divestitures and are close to wrapping up that successful phase of value creation. On January 1, 2024, as Sarah mentioned, we successfully executed on our PBM conversion. RFPing and moving PBMs has become one of our core competencies, and as a result of that, we have improved our pharmacy cost structure on behalf of our members and customers, and we’ve doubled marketplace membership since year-end 2022 and fortified Ambetter’s number one position. 2023 - pretty good year! We had provided detailed 2024 financial guidance elements at our December investor day. Since then, we’ve gained some additional clarity around the AEP and OEP results in Medicare and marketplace. Medicare enrolment is tracking right in line with our expectations relative to both volume and product mix. I give the Medicare team credit for precision in sales, disenrollment and membership product mix forecasts, as well as execution in a challenging year. While Medicare Advantage is only a $16 billion revenue stream for us, it represents a meaningful margin expansion opportunity as we improve stars over the next few years and begin to have that reflected in revenue in 2026 and beyond. To reinforce Sarah’s comments on the 2025 advance notice, we are in the process of preparing our feedback with questions so far around the adequacy of fee for service trend and a new method for normalization that further reduced the rate. For us, the rate change as it sits today is approximately minus-1.3% before risk coding trend, and the new risk model introduced last year and that’s being phased in still has a disproportionate negative effect on partial and full duals, the most vulnerable populations in Medicare. Our marketplace chassis continues to be well positioned for both growth and margin. Marketplace growth is running ahead of our previous expectations, allowing us to raise our full year 2024 consolidated premium and service revenue guidance by $2.5 billion, which takes our guidance to a midpoint of $136 billion Appetite for marketplace products continues to be strong as these offerings successfully provide both healthcare access and affordability for millions of beneficiaries. At this very early point in the year, we are reiterating our 2024 adjusted EPS guidance of greater than $6.70. As we turn the page from 2023, we can quickly reflect back on our second strong year of execution from this management team and positive progression of the company. I couldn’t be more excited to drive success with this team and provide affordable access to healthcare for our members in 2024 and beyond. Thank you for your interest in Centene. Rocco, you can open the line up, please.

Stephen Baxter:

Yes, hi. Thanks for the question. I was hoping you could expand a little bit on the Medicare outlook embedded in your guidance. It’s certainly a concern that cost in the fourth quarter could be coming in higher than expected, and you certainly reported in MLR that it was a bit above consensus, even ex- the PDR. That would seem to suggest, too, I think most that your Medicare assumptions for 2024 would be pressure, but you’re saying that’s not the case, so hoping you can expand on why that wouldn’t be, and maybe some of the underlying trend assumptions that you factored into your guidance here. Thank you.

Operator:

Thank you. Our next question today comes from Josh Raskin with Nephron Research. Please go ahead.

Sarah London:

Yes, thanks Josh. We were, as Drew said, very pleased with the way the Medicare team executed in AEP and precision across all of the dimensions that you talked about, again largely in line with expectations. We took an intentional refocus in the ’24 bid strategy to try to align to those lower income, more complex members, as well as the duals and the DSNP population, and successful in terms of what we’re seeing relative to the concentration of duals coming out of AEP, so pretty pleased with where we intentionally focused, what the impact looked like, and again that was really a function of the team going PBP by PBP and building up a strategy where we could invest in those members that we wanted to retain, and in those members that we feel like we’re going to provide the greatest long term value to. Ken, I don’t know if you want to talk a little bit about some of the calibration we did on distribution as part of that effort overall?

Operator:

Thank you. Our next question today comes from Kevin Fischbeck with BofA. Please go ahead.

Sarah London:

Yes, thanks Kevin. Great question. On the marketplace front, it’s really just acknowledging that we’re very early in the year, and then I think you point out a really important point relative to the mechanics of the PDR and how that positioned us with the ability to look at full year trend in ’23. I’ll let Drew talk a little bit more about those mechanics.

Operator:

Thank you. Our next question today comes from Justin Lake of Wolfe Research. Please go ahead.

Drew Asher:

Yes, let me try to parse that out. The line item of HCC model changes, which includes the risk score normalization that you pointed out, was about a point--in our evaluation of the advance notice, it was about a point worse than last year, and part of that is the normalization change and calculation in going to a regression model versus omission of a base period. That’s probably a deep as we’d want to go on an earnings call. But if you foot up all of the elements, it’s about a 1.3% on an absolute basis current as we stand today impact on rates. Now, that’s before risk score trend - obviously that would push it into the positive zone, and we’re going to push on some of the mechanics and then we will--you know, we’re in the position of not trying to grow Medicare Advantage, we’re trying to ultimately recover margin back half of the decade, and so we’ll just adjust the bids accordingly, and the products may be a little bit less attractive for seniors from an industry standpoint if we don’t make a lot of progress on the final rates.

AJ Rice:

Thanks. Hi, everyone. Just want to pivot over to Medicaid for minute. Obviously you mentioned the retro adjustments, you didn’t get the marginal headwind, I guess. You’ve also talked about some states being proactive and giving you acuity adjustments ahead of time, and then you’ve got your normal rate cycle with the state. I wonder if there’s any updated thoughts on where you land for ’24 in terms of your Medicaid margin, and I think you had talked about the fact that coming out of redeterminations, you saw potential for improvement in Medicaid margins going into ’25. Just wondered if there was any updated thoughts on any of that.

Operator:

Thank you. Our next question today comes from Scott Fidel with Stephens. Please go ahead.

Drew Asher:

Yes, thanks Scott. As Sarah said, at a high level, inpatient was pretty steady throughout 2023, and you go a couple clicks below that, we looked at case mix, admits per thousand, obs per thousand, we didn’t see a Q4 uptick in inpatient. If you look at observation days, we saw no meaningful shift in observation days. We all know the two midnight rule doesn’t start until 1/1/24, but we’ve been on top of that, preparing for that, thinking through that as we formulated our forecasts for 2024, and we think we’ve got that captured. Obviously the industry, we can still do medical necessity on that, but yes, we’ll be observing that two midnight rule beginning in January.

Lance Wilkes:

Great. Could you talk a little bit about the pipeline and the upcoming bids with respect to Medicaid, some of the upcoming RFP awards? Then more broadly, Sarah, if you could talk a little bit to as you’ve gone through some of the recent wins and as you’re looking at satisfaction scores within states, what are areas of strength that are helping you with either retention or new wins, and are there particular areas of opportunity and what are some of the plans to address some of those areas? Thanks.

Operator:

Thank you. Our next question today comes from Cal Sternick with JP Morgan. Please go ahead.

Sarah London:

Thanks Cal for the question. As you’ve heard, the demographics for the population that came in during OEP for us were pretty consistent with our expectations, and the distribution of tiers between silver, gold and bronze, also pretty consistent. We still have the majority of our members in that silver tier, so the demographics have not shifted materially. One of the things that I think is interesting - this may just be the data geek in me - but if you look at what we’re seeing, not just in our book but overall in the market, there are some interesting small shifts in the demographics overall that I think tell us a lot about what’s actually driving the underlying growth, above and beyond just what we know in terms of affordability and awareness from the enhanced [indiscernible] and the additional marketing dollars going into navigators and the broker channel. We’re seeing year-over-year-over-year, age coming down slightly, which I think supports our view that we’re seeing a younger pool, we’re seeing a healthier pool, and we’re seeing some of those gig workers coming in. We’re seeing the distribution in gender between male and female shift a little bit, so more men coming into the marketplace, which we see as a signal of digging deeper into that uninsured population, because women tend to move sooner out of that population. Then we’re also seeing the gold tier as an industry pick up a little bit, which we see as supporting our view that there’s small group migration coming into the market - obviously we’ve got anecdotal evidence around that, but that’s true in our book, that’s true in the overall industry, and again I think very consistent with what we think is driving 31% overall market growth, but pleased as well with the fact that within that growth, we were able to grow our market share within footprint. The relative to ICRA, obviously that’s still very much a nascent market. The Indiana pilot is very new. I’m happy to say that we sold our first customer in January, so good early proof point; but the goal there for us is really to test and learn and gather data, and we’re pretty confident that we’re going to be incrementally smarter about how that market is evolving as we go throughout the year.

Gary Taylor:

Hey, good morning. One clarification and one question. I just want to clarify, Drew, on the negative 1.3% ’25 advance notice for Centene, does that exclude stars or basically for Centene no different stars impact than the negative 15 basis points that CMS sized for the industry? Then my question is, I just wanted to see if you could just balance these very diverse views on MA. Your MA MLR first nine months was down 110 basis points year-over-year, fourth quarter was up 310 excluding the entire PDR, and you only boosted the PDR by $50 million or 30 basis points on ’24. You said your MA outlook looks unchanged, so there’s two camps this quarter

Operator:

Thank you. Our next question comes from George Hill with Deutsche Bank. Please go ahead.

Sarah London:

Yes, I mean, I certainly prefer our narrative, and I think about it really specific to Centene, so I appreciate the need to try to harmonize what different companies are seeing, but we remain focused on what we’re seeing in our population, the idea that we saw some of this trend in Q2, that we accounted for it in our 2024 bids, we feel sufficiently--we had a second bite at the apple at the end of the year with the benefit of the full year’s visibility of utilization. The assumptions that we’ve made in 2024, how we feel about our ability to apply clinical initiatives, leverage our value-based relationships and manage through the trend that we’re seeing, that’s really our focus, less so worrying about what others are saying.

Dave Windley:

Hi, thanks for taking my question. I wanted to clarify and then ask a question. Drew, you mentioned--you’ve actually both mentioned a second bite at the apple a couple of times. I wanted to make sure I understood that that was a second bite opportunity kind of up to the end of the year, or does that mean if things develop in a way that causes you to have a different view of 2024 currently, that you could go back and revise your estimate for PDR, so wanted to clarify that. Then my question, rotating over to SG&A, is where are you related to head count rationalization, real estate rationalization, other things kind of on the basic cost cutting, value creation plan list to take out SG&A, where do you stand in that evolution? Thank you.

Sarah London:

Yes, I would echo that and just say that a lot of great execution in the first two years, we’re going to realize that in 2024, but we haven’t stopped. You’ve heard us talk about building the pipeline for 2025 and beyond in terms of additional opportunities. Obviously our long term algorithm has 1% to 2% of margin expansion built in, and we do see additional opportunities to drive efficiency in the business as we standardize our workflows, the ability to then automate that with technology, so really pleased not just with the execution thus far and the discipline to get us here. We’re really thinking about how we do work going forward. We do see opportunity for continued efficiency in the future.

Sarah James:

Thank you. Could you remind us what the margin progression looks like on exchanges, like how many quarters it takes for you to get to run rate? Then just a mechanics clarification on the PDR - are you guys booking that as the delta between where you view costs and target margin, where it would roll over kind of flat at target margin from ’24 to ’25, or is that you’re booking at as the view of costs to break even? Just if you can give us the context of that, thanks.

Sarah London:

On that point, I would just note that we’re seeing increase year-over-year in retention of SEP members, which means that we’re poised to capture the benefit of that sophomore effect from that heavy growth we had in SEP last year, so that’s a really nice trend that we’ve been watching and seeing that retention grow year-over-year.

Nathan Rich:

I’ll ask one on the Medicaid business. I wanted to--you know, it sounds like the HBR so far as redeterminations have played out has been in line with expectations. The ’24 guidance has that 50 basis point headwind that was, I think, put in place for any sort of timing mismatch as it relates to acuity. I just wanted to clarify if that’s something that you’re seeing currently, and so reiterating your expectations for ’24, you feel like what you’ve seen play out so far requires that 50 basis points, or if the timing between the rate updates and the costs you’re seeing in the underlying book, if that timing has actually been matched up better than you had anticipated.

Drew Asher:

Yes, so you also have to remember, we’ve got PBM savings rolling into that, and we’ve targeted that at 20 basis points, so that’s sort of a nice lever that we’ve factored into getting down to the 90.1. Then as we think about a question from earlier, ’25, 2026, we would expect to get back into the high 89s on a same mix basis. From a risk corridor standpoint, while it’s imperfect in terms of a buffer, depending on where you have trend or rate pressure, we’re still at--we’re about $1.8 billion in payback for the 2023 year, so we’re still in a pretty heavy payback position for our Medicaid risk corridors and minimum MLRs. It’s not across every state, but it’s spread across a number of states, and that is something else to think through as we think about the future rate action and matching acuity with rates.

Sarah London:

Great, thanks Rocco, and thanks everyone for your time and interest this morning. We look forward to providing updates as we move deeper into 2024.

Jennifer Gilligan:

Thank you, Rocco and good morning, everyone. Thank you for joining us on our third quarter earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene will host this morning's call, which also can be accessed through our website at centene.com. Ken Fasola, Centene's President, will also be available as a participant during Q&A. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-K filed on February 21, 2023, and other public SEC filings. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures, with the most directly comparable GAAP measures, can be found in our second quarter 2023 press release, which is available on the company's website under the Investors section. The company is unable to provide a reconciliation of certain 2024 measures to the corresponding GAAP measures without unreasonable efforts due to the difficulty of predicting the timing and amounts of various items within a reasonable range. Finally, we would like to highlight our upcoming Investor Day scheduled for December 12th in New York City. This event will also be available via webcast. With that I would like to turn the call over to our CEO, Sarah London, Sarah.

Drew Asher:

Thank you, Sarah. Today we reported third quarter 2023 results of 35 billion in premium and service revenue and adjusted diluted earnings per share of $2, up over 50% from $1.30 in Q3 of 2022. This represents a $0.20 beat to our internal forecast that we tried to recalibrate you to in early September. Our Q3 consolidated HBR was 87%, a little bit better than our expectation driven by the commercial segment. This keeps us right on track with our full year HBR guidance range Medicaid at 90.7% was fundamentally on track other than one of our states providing a draft and incomplete rate update retroactive to 04/01/2023. This was worth about 40 basis points in the quarter relative to our expectations. Other than that unique item which we would expect to be a timing matter with a favorable future resolution, we continue to be on track in Medicaid, including relative to our acuity estimates that we've been tracking since the recommencement of redeterminations on April 01, 2023. As you can see in the membership tables, we are down 1.1 million Medicaid members since 03/31/2023 right on track with our forecast that include redetermination estimates. That 1.1 million includes Iowa reshuffling of about 83,000 members effective July 01st as expected. To update a statistic, we previously provided 13 of our 14 states in the 7/01 to 10/01 cohort have included acuity adjustments in our rates. One is still outstanding and so far seven of our 01/01/2024 states have provided draft rates that include acuity adjustments overall, consistent with our estimates. Our view of 2024 Medicaid performance is unchanged other than revenue looks to be a little stronger than the 77 billion we outlined on our Q1 call. At Investor Day we will provide more detail on 2024 guidance. Medicare was on track at 82.2%, an improvement of a 170 basis points from Q3 of 2022. Similarly, our view of Medicare 2024 performance is consistent with what we shared previously. And as you finish modeling 2023, make sure you factor in the Q4 2023 Medicare HBR step up, including the previously discussed premium deficiency reserve. The commercial HBR at 78.9% in Q3 continues to be strong and better than expected. Simultaneously, we are also capturing growth from both redeterminations and the special enrollment period. We said on a Q2 call that we expected to hit 3.6 million members this year, and we accomplished that as of the end of Q3. You may recall that last quarter, we grew 200,000 members. This quarter, we grew 386,000 members. This continued growth and HBR performance in 2023 sets us up well to achieve our previously stated goal of growing marketplace, at least $3 billion of revenue in 2024 while also expanding margin. Moving to other P&L and balance sheet items, our adjusted SG&A expense ratio was 8.6% in the third quarter compared to 8.3% last year, consistent with our mix of business. Cash flow provided by operations was $1 billion in the third quarter, primarily driven by net earnings. Our domestic unregulated and unrestricted cash on hand at quarter end was $231 million. During the third quarter, we repurchased 11.6 million shares of our common stock for $773 million. Year-to-date, we have repurchased 22.9 million shares for $1.58 billion, a little over our goal of $1.5 billion for 2023. Our debt to adjusted EBITDA ticked down to 2.8 times. Our medical claims liability totaled $17.1 billion at quarter end and represents 53 days in claims payable up one day from Q2 of 2023. Outside of adjusted earnings, during the third quarter, we announced the divestiture of Circle, our UK hospital company, which triggers a noncash write-down of goodwill. We also adjusted the carrying value of our UK physician business. You can see these and other items in the table in our press release. We are pleased with the performance of the company in the first three quarters of the year and are increasing our outlook to at least $6.60 of adjusted EPS for 2023. As Sarah mentioned, this puts us at greater than 14% adjusted EPS growth in 2023 after posting 12% in 2022, two pretty good years. The press release table has other 2023 guidance elements, including no change in HBR or SG&A ranges and $0.5 billion more in premium revenue. We also still forecast investment in other income, a little over $1 billion, excluding divestiture gains and losses. As we are almost at 2024, which we will go into more detail at our Investor Day in a little over six weeks, we continue to have confidence in our 2024 adjusted EPS floor of greater than $6.60. In fact, the strength of this quarter is another data point that increases our confidence. While I do spend a lot of my time talking about and driving margin, let me close by talking about growth because Centene is a combination, margin expansion and growth investment opportunity. On growth, Medicaid expansion is coming to North Carolina late this year. Our Oklahoma win in both broad Medicaid and Sole Source Foster Care is on track to commence 4/1/24 and there's a pipeline of complex populations expected to come into managed care over the next few years, one example being the recent Georgia RFP as Sarah referenced. Marketplace has proven to be an excellent franchise and asset for this company. This business today produces more revenue than our Medicare Advantage business, and that will widen in 2024. And even our PDP business, which may be small in relative revenue should grow meaningfully in 2024, these members produce pharmacy spend and our potential MAPD candidates down the road. We're excited about the future and our ability to power through 2024 and come out the other side post divestitures, post redeterminations, and on our way to fixing Medicare a better company than in 2021. On the other side of 2024, we look forward to driving a 12% to 15% long-term adjusted EPS CAGR. Thank you for your interest in Centene. Rocco, we will take questions now.

Kevin Fischbeck:

Great, thanks. Just wanted to maybe dig into the exchange performance in the quarter because obviously, whenever you have 75% membership growth in your [indiscernible] it is always a little bit unusual, particularly because in the past, we've seen SEP enrollment come in with MLR pressure. So can you just talk a little bit more about what's driving that outperformance, and as you grow membership faster than you were thinking, what gives you comfort around the MR [ph] coming in better than people have been forecasting? Thanks.

Drew Asher:

The only thing I would add numerically is just we've been through two rounds of Wakely data. So you have to think about the claims cost matched against the risk profile of the population. And so we've adjusted our risk adjustment payable actually up to $1.8 billion from $1.5 billion from Q2 to Q3, consistent with the feedback in the data from Wakely, and we're still holding the allowance on the insolvent peers or those that were waiting to get paid from through CMS. And so that $314 million that actually went up by $9 million in the quarter because one of those peers is still operating at least for the first half of this year. So it wasn't the bring down of that reserve that helped the quarter.

Stephen Baxter:

Yeah, hi, thanks. I appreciate the commentary you made on acuity running in line with your expectations so far. I guess how do you think the higher level of procedural disenrollment that we're seeing across the industry has impacted that, are you able to comment yet on what you're seeing in terms of utilization on the rejoiner population, especially maybe in the earlier cohorts? And then I appreciate you flagging kind of this unusual item on the rate side. I guess how should we think about the path to the Medicaid MLR that you just reported this quarter to what you're targeting for 2024, that 90.1? Thank you.

Drew Asher:

Yes, right. And as Sarah said, the levers have a lower HBR than the stayers consistent with our expectations. But actually, the rejoiners are right around the same HBR as the stayers. So that's looking good as well relative to our forecast. And then, yes, we're on track for the metrics we gave out, including the 90.1% target for 2024. As we get 1/1 rates, and I mentioned that we've gotten 7 that include acuity adjustments so far for 1/1 in the form of draft rates. That's just another positive weight on the scale of giving us confidence as we turn the page into 2024.

Joshua Raskin:

Hi, thanks. Good morning. Just a clarification first. I think I heard 20% now maybe going to 25% of redeterminations are coming back. I'm assuming those were Centene lives coming back to Centene plans. And I think you said 10%-ish or so are moving to exchanges. I'm curious about are you taking share from other plans when they're seeing redeterminations and you're getting their members into your exchanges? And then you mentioned through the big growth in PDP. I guess just a question on sort of strategy, it seems like a little de-emphasis in terms of network or catchment points to the Medicare Advantage program, switching the PBM already. So I'm just curious on what the idea is around the low-priced products for the PDP next year?

Drew Asher:

Yes, Josh. And then on PDP, and you'll remember this business going back 10 years, which was a legacy WellCare asset and business. The strategy there is as much about corralling and managing pharmacy spend and having a future feeder for MAPD than it is about generating earnings on what's this year, $2.5 billion of revenue. So I think it was fortuitous that our change and improvement in cost structure or change to a new PBM and a meaningful improvement in cost structure occurred right when there are a number of rule changes impacting PDP like no pharmacy DIR elimination of the member cost share in the catastrophic phase, the cap on insulin. And so we are able to leverage that cost structure and make it affordable for our members while the direct subsidy went up meaningfully. And so we'll be getting paid that direct subsidy by the government. So it was actually a good alignment of opportunities for us to continue to leverage that business to actually help our other businesses in the terms of pharmacy cost structure.

Justin Lake:

Thanks, good morning. A quick question and a follow-up. So the questions on the exchange business. Just can you give us some color in terms of how that membership growth was pretty exceptional in the third quarter. How did that look versus your expectations and how does that kind of educate 2024? And then specifically on 2024 with the margins there, my kind of back of the envelope, Drew, is that your kind of guidance for next year assumes margins towards the higher end of that 5% to 7.5% target range, is that right? And then just a follow-up on the retro, can you give us any more color in terms of the -- why you think that was incomplete that just sounds something -- I've never heard the word incomplete on a rate update and what gives you the confidence that they're going to reverse that, is there any kind of color from the state that you could share with us on the confidence and the timing? Thanks.

Operator:

Thank you. And our next question today comes from A.J. Rice at UBS. Please go ahead.

Sarah M. London:

Yes, A.J., you're right that particularly in that SEP membership, we're seeing more retention industry-wide, which is, I think, logical just given the insulation and the extension of the enhanced APTCs and the increased affordability of the product. And as you said, the sophomore effect of that membership, in particular, the fact that we'll have a full year of risk adjustment, and we'll have moved through any sort of early utilization, we think, provides a tailwind the retained part of that SEP population. And as Drew said, our focus going into 2024 is really retaining the tremendous growth that we've had in 2023 and then continuing our progress on pricing discipline in order to expand margin and pierce into that 5 -- sorry, 5% to 7.5% range.

Operator:

Thank you. And our next question today comes from Nathan Rich at Goldman Sachs. Please go ahead.

Sarah M. London:

Yes. Thanks, Nathan. So with the competitive landscape and additional information we have not changed our view that we would be down $4 billion in 2024 in the Medicare business. Again, our focus is really on narrowing to that lower income complex population that was part of how we constructed the bids and certainly how we crafted our strategy going into AEP. And then relative to Stars, we're obviously pleased to have delivered results in line with our expectations beginning in Q2, but there's obviously still work to do. And so this next cycle will be an important additional step to that ultimate goal of 85% of members in 3.5 Stars. And our focus really continues to be on rebuilding the operational capacity and the infrastructure to support sustainable programmatic improvement, and that was really demonstrated by moving again 53% of our membership from sub 3 to 87% of our membership at or above 3 in this first step. So we'll need to continue to pull up underperforming contracts. We'll need to move contracts and members from the 3 across that 3.5 star threshold. And a lot of that is again, why we've tried to create visibility into some of the underlying operational metrics that we're tracking internally around our overall CTMs and around call center metrics and our ability to answer questions for members and provide them a good member experience, getting them connected to physicians, getting them aligned to value-based providers so that those incentives are aligned to close gaps in care, which ultimately accrues not just to HEDIS but to cap. So those are all the things that we're really focused on. We've got a very robust governance structure in place. As we've said before, we've got incentives aligned top to bottom in the organization. There is no confusion that this is a priority, and we continue to be focused on making incremental improvements and holding steady on those improvements that we've made to date.

Operator:

Thank you. And our next question today comes from Lance Wilkes with Bernstein. Please go ahead.

Drew Asher:

Yes, back at -- I think in the January conference we outlined, as we talked about a number of the factors before we had any real data on redeterminations and now we've actually got real data, which sort of trumps all the hypotheses that we were going through leading up to April of 2023. We had indicated that as we look through our data, we could see through COB claims, the other insurance coverage where members that had duplicative coverage had gone from 2.7% of the Medicaid population in 2019 to 3.4%. So made sense at the time, we sort of triangulated that with a bunch of other things to come up with our forecast that we outlined on the Q1 call. And the good news is we're right on track with those forecasts now that we've got -- we're well into redeterminations and over 40% according to our estimates through redeterminations. On the PBM that's right on track, as Sarah mentioned, and the economics as well that we're expecting. And as you would expect from us, many of those are in the form of guarantees that our PBM underwrote. So we're on track for the contribution to the greater than 660 from the PBM economics.

Operator:

Thank you. And our next question today comes from Gary Taylor with Cowen. Please go ahead.

Drew Asher:

Yes. So sometimes, it is tough to glean from public data exactly what we did with benefits or what any payer do with benefits. You can get directional. But if you sort of got into our bids and now our product set that's being sold out there in the market today, you'd see that we heavily trimmed our Part B giveback and PPO plans, but we invested in D-SNP. And with the supplemental benefits, we actually combined a number of supplemental benefits into a simple spendables card. So think Flex, OTC, grocery. And so that simplifies it for the member and you may not actually be able to define that from some of the landscape files. But yes, as we said earlier, we haven't changed our view on sort of our forecast for 2024 in terms of about $16 billion of Medicare Advantage revenue down about $4 billion.

Scott Fidel:

Hi, thanks. Wanted to just ask about two salient points relative to medical costs. And first, just maybe an update on the behavioral utilization that you've been seeing earlier in the year and how that's been getting factored into the rates and sort of comfort with that in 2024, I guess, particularly for the big Magellan behavioral book? And then second would just be definitely curious in your thinking just around the new California minimum wage law for health care workers and similar types of legislation and how you sort of are thinking about that factoring into unit costs and into your pricing looking out over the next several years? Thanks.

Ken Fasola:

Yes. Thanks, Sarah, and good morning Scott. We realized success in the state of Idaho, which I think is a forbearer to opportunities to work with other states as they think about the point that Sarah made. I think she and I met over 30 Governors in the last six months. Every one of them mentioned behavioral health is top three. So we're working with a number of states. I won't mention them specifically, but behind the scenes to cultivate opportunities to capitalize on this growing interest among governors and supporting the needs of their Medicaid members with behavioral health. And then the point about the integrated offerings, our public sector, Magellan business, this is a long-standing distinctive competency. It's a business that will power and leverage as we think about combined offerings moving forward. And really excited about our prospects. And with Wade's appointment, Zane and the team that runs business development here, leveraging the Magellan asset, a lot to like about the future.

Sarah James:

Thank you. So circling back to your comments on the levers having higher HBR than the stayers and 7 out of 21 states adjusting for acuity. Is there any way to give us more color on that sizing the range of the lever versus stayer HBR differential or how influential -- how meaningful the acuity adjustments are to rates overall?

Sarah M. London:

And I just want to add one clarification, I know this is what you meant, but I just want to be sure that what we're tracking is that the levers HBR is less than the stayers. And that is what was expected. And so one of the things that we've talked about in the past that we did leading into the redeterminations process was identifying those members that we would have predicted would roll off as we look forward into the redetermination process, and then we could subset those populations and run the differential HBR. And those are the inputs that went into our model that we talked about on the Q1 call as we build up what both rate and acuity, we would want across each state and then rolled up to the portfolio in order to be tracking as we are in line with expectation going into 2024.

Michael Ha:

Thank you. Just first quickly, regarding exchange sequential membership growth, the 386,000, how much of that 386,000 is purely best recapture Medicaid redetermination? Number two, regarding MA, I'm curious to hear your thoughts on what transpired in California, the star ratings decline disruption there across a number of market-leading plans, whether that might positively impact your MA growth assumptions in California? And then lastly, on Star ratings improvement. I understand in 2Q, you had about 47% of your MA lives in value-based care arrangements. It grew about 3% year-to-year, but what was the percentage change of lives and downside arrangements, I'm curious because I understand if this metric improves, so does the overall consumer experience, which could help organically generate improvement in quality, consumer experience metrics, so I'm trying to understand how much tailwind that could be for next year? Thank you.

Operator:

Thank you. And today's final question comes from Calvin Sternick with J.P. Morgan. Please go ahead.

Drew Asher:

Yes. We do expect. Other than one state where we're only LTSS which is an exception, obviously, relative to redeterminations, the answer is yes to your first question. And then you're right, we're still shifting during this intermediate time period of getting to a post redetermination environment from the pre and the pre-redetermination environment, the 0 utilizers were up for the expansion population. They're actually down and CHIP and TANF, as you're recalling correctly, was flat. So we're moving through that process, refreshing data. But that's sort of -- we're in between the pre and the post redetermination phase, so that will shift throughout that time period.

Sarah M. London:

Thanks, Rocco. As we close out this morning, I'd just like to thank our more than 66,000 employees for delivering excellent results this quarter and year-to-date. As a company, we remain focused on our mission and on creating value for our members, our stakeholders, and our shareholders. We appreciate the time and interest this morning and look forward to continuing this discussion at our upcoming Investor Day in December. Thanks, everybody.

Jennifer Gilligan :

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our second quarter earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Ken Fasola, Centene's President, will also be available as a participant during Q&A. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-K filed on February 21, 2023, and other public SEC filings. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures, with the most directly comparable GAAP measures, can be found in our second quarter 2023 press release, which is available on the company's website under the Investors section. The company is unable to provide a reconciliation of certain 2024 measures to the corresponding GAAP measures without unreasonable efforts due to the difficulty of predicting the timing and amounts of various items within a reasonable range. With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Drew Asher:

Thank you, Sarah. Today, we reported second quarter 2023 results of $35 billion in premium and service revenue and adjusted diluted earnings per share of $2.10, up over 18% from $1.77 in Q2 of 2022. Our Q2 consolidated HBR was 87.0%, consistent with our expectation and on track with our full year guidance range. Medicaid at 88.9% was a little favorable from the item that we mentioned on the first quarter call, and so far so good on matching rates with acuity, though it is still early in the redetermination process. Medicare at 86.2% was a little higher in the quarter than planned as we also saw May outpatient incurred claims higher than the January through April period, largely in outpatient surgery. With respect to progression, May outpatient trend was higher than April, then it came down in June. July so far is steady with June. Inpatient was on track, and our previous guidance already assumed a Q1 Medicare HBR favorability would not continue. The commercial HBR of 81% was consistent with our expectations, inclusive of continued strong Marketplace growth of 200,000 members in the quarter. Recall that special enrollment period members start with a lower margin profile and therefore, higher HBR than full year members, due in part to risk adjustment mechanics, where the shorter duration doesn't get full credit for health conditions. Though if retained for the following year, the SEP cohort has proven to be attractive. Our guidance contemplates growth to a peak of approximately 3.6 million members in Q4. On the topic of Marketplace risk adjustment, 2022 was recently finalized by CMS, and we received our first view of the 2023 risk adjustment from the Wakely data in June and July. Overall, no surprises in Marketplace risk adjustment. And as of June 30, we have lowered our booked risk adjustment revenue estimates by a cumulative $314 million given the financial condition of a couple of Marketplace competitors. Though we have made this prudent adjustment to our revenue over each of the past five quarters, we plan on fully asserting our rights to collect what we are owed for risk adjustment. To be clear, we have already absorbed this $314 million hit, and this was the biggest reconciling item between the CMS published amount owed to us for 2022 and what was on our books prior to June of 2023. Moving to other P&L and balance sheet items. Our adjusted SG&A expense ratio was 8.6% in the second quarter compared to 8.2% last year, consistent with our updated mix of business. Cash flow provided by operations was $2.5 billion in the second quarter, primarily driven by net earnings and the timing of premium payments from our state partners. Our domestic unregulated and unrestricted cash on hand at quarter end was $200 million. During the second quarter and through July, we repurchased 10.5 million shares of our common stock for $700 million. Year-to-date, we have repurchased 15.4 million shares for $1.08 billion. We also reduced debt by $300 million in the quarter and achieved debt to adjusted EBITDA of 2.9x. Our medical claims liability totaled $17 billion at quarter end and represents 52 days in claims payable compared to 54 in Q1 of '23 and 55 in Q2 of '22. The decrease was driven by state-directed payments that we collected over prior quarters and paid out in a lump sum in Q2, the largest related to California Hospital and Prop 56 payments, representing $713 million or 2.2 days sequentially. Outside of adjusted earnings, during the second quarter, divestiture activity produced a net $0.11 gain in the quarter, and we also recognized additional real estate impairments of $0.02, consistent with our ongoing real estate optimization initiatives. Now let's turn to the full year of 2023. We are pleased with the performance of the company in the first half of the year and are increasing our outlook to at least $6.45 of adjusted EPS for 2023. We are increasing 2023 premium and service revenue by $1.8 billion to reflect an additional $800 million of state-directed payments as well as refinement in Medicaid and Marketplace premium revenue progression throughout the year. Our 2023 guidance continues to include an approximate $200 million Premium Deficiency Reserve for Medicare, as we discussed on the Q1 call. The PDR would be recorded in Q4 of 2023. 2023 guidance also includes a little over $1 billion in investment income, excluding divestiture gain and losses. To go a little bit deeper in Medicaid for 2023, during our first quarter call, we discussed many of our assumptions related to redeterminations that supported our forward projections. We have continued to monitor the actual member data against our projections by state and subpopulation. And as of July, we are tracking consistent with that updated forecast that we provided in April. The matching of rates to acuity continues to be a very important lever for the company as we navigate the redeterminations process. 14 of our 30 states provide rate updates between 7/1 and 10/1 each year. 12 of those have provided us rates, all of which include acuity adjustments. The other two are still working on rate updates. And based upon discussions, we expect those also to include acuity adjustments. Beyond 2023, we are continually assessing our positioning for 2024, whether analyzing redetermination data and rate actions, assessing our 2024 bid assumptions in Medicare against current data, or examining our continued growth and performance of Marketplace. Accordingly, we continue to have confidence in our 2024 adjusted EPS floor of greater than $6.60. To give you a little bit more color on 2024, that $6.60 has an embedded forecasted ballpark $0.80 loss from Medicare Advantage. In other words, if we were merely breakeven in Medicare Advantage in 2024, that $6.60 would be approximately $7.40. Let me close by addressing some of the concerns I've heard over the past few months. Number one, redeterminations. Our early results are playing out well compared to our assumptions, and states understand that in order to have actuarial soundness, acuity adjustments are necessary. Still plenty of execution ahead, but being on track is a good start. Number two, Medicare trend. We came into the year assuming double-digit outpatient trend, and did so again for 2024. And as you know, our Medicare business is under construction for 2024, as we are investing in certain products and pulling back in others. Based upon current forecasts, we expect our Medicare segment to produce approximately 14% of our premium and service revenue in 2024 compared to 16% in the current quarter. And any change in our view of 2024 margin in Medicare, better or worse by the time we get to the fourth quarter of 2023, merely flexes the PDR we booked in 2023 up or down. Number three, growth. We couldn't be more pleased with our performance in the Oklahoma RFP for both broad Medicaid and foster care, and we look forward to the State of North Carolina implementing Medicaid expansion. We continue to execute well in Marketplace, where our industry-best overall position has enabled us to grow Marketplace membership 62% year-over-year. And while yes, we have to get through the rest of redeterminations, we still have value creation initiatives to execute upon and we have years of work ahead on Stars, there's a lot to like here. So while the market trades us at 10x to 11x earnings, we'll keep on executing, buying Centene shares and building up our M&A pipeline to acquire as we create operational capacity. Thank you for your interest in Centene. Operator, Rocco, you can open the line up for questions.

Stephen Baxter :

I still think there's maybe a little bit of confusion out there about the adjustments you're talking about on the exchanges in the quarter. Maybe you could break down those adjustments a little bit further, just so we can really assess core performance. I guess potentially, what was the benefit related to the 2022 plan year that you saw in the quarter? And then you're also talking about lowering booked revenue, I think, related to the financial conditions of some of the potential payers in the market. Is that related to 2022, or 2023, or some combination of both? I guess just trying to understand the underlying components of that $350 million figure you cited a little bit better?

Drew Asher:

Yes, Stephen. And understandably, it's a little complicated. And it's difficult to define some of these numbers with public information heretofore. So let me try to make it clear. So let's start with 2022 risk adjustment. The CMS final announcement was that we were owed $648 million. And as you did and others, you could look back at our 10-K and see that we had $58 million on our books at year-end. So it's a $590 million difference. You heard the $300 million-plus item, that's almost completely related to the 2022 year. We have a little bit of that for '23 as one of those competitors was in the exchanges in certain markets for about half a year this year and appeared to be out now. So 300 -- over 300 is the largest reconciling item. And then similar to what you heard yesterday from one of my peers, there is margin on estimates. Just like in IBNR, you put margin on estimates because you never want to book to an exact 50-50 outcome. And so that margin rolls every year. That's about $100 million. So that doesn't drop to the bottom line. It gets reestablished. And then breakage for minimum MLRs where we're really performing well in some of our contracts. We have RADV accruals. And so you get through all of that, you get down to $39 million would have been the P&L benefit for -- recognized in '23 for the final issuance of what we are owed by CMS, and that was recognized over first and second quarter. Now let me jump to 2023. 2023, you can see we've shifted -- we've got about $300 million on our books for 2022 receivable. We've shifted to about $1.5 billion net payable for 2023, which demonstrates the strength of the acuity of the population and our estimates, partially informed by the Wakely data we got in June and July of where we expect to be relative to our peers. And we also booked that with some margin consistently year-to-year, and we'll see how that shakes out. But we see that as a good sign. And you always have to look at that in tandem with the acuity of the population, including our excellent growth this year.

Joshua Raskin :

Just looking at 2024 and adjusting for the PDR, EPS next year would be -- if you sort of moved it from this year to next year, EPS would be down, call it, mid-single digits. Can you just help us bucket broad strokes? How much is Medicaid headwind from redeterminations? How much is MA? I think you sized the loss there. How much is earnings from exchanges? Is that going to rise? I'm sure there's a benefit from lower G&A dollars. There's a share buyback. Just any directional commentary to help us understand sort of the puts and takes? And then, just lastly, help us understand the PDR and why that doesn't cover the entirety of the loss for Medicare Advantage next year?

Operator:

And our next question today comes from Justin Lake at Wolfe Research.

Sarah London :

Thanks for the questions, Justin. I'll take the first one, and then turn it over to Drew. We're still a little bit early relative to cut points. So again, that 85% target for October of '25, then to your point, revenue year '26, we're seeing really solid improvement as I pointed to in terms of 2/3 of our membership moving in contract improvement year-over-year. Directionally and again, it's still -- the numbers are not final, but just to give you a sense, if we -- this year, we're sitting in about 50% of plans that are in 3 star or above. We expect that to be around 90% of members in 3-star or better come October. And so the exact numbers that fall in 3 or 3.5 really depends on those cut points that we don't have yet, but just so you understand sort of the magnitude of directional improvement that we're tracking.

Operator:

And our next question today comes from Lance Wilkes with Bernstein.

Sarah London :

Yes. Thanks, Lance, for the question. So relative to Medicare Advantage, I think our view is, to your point, we take a geography-by-geography approach to looking at that portfolio. Our lens is through big construction as we look at '24 and '25 and where there are less profitable products that we've put out there. And we talked about this on the Q1 call, but we've been very focused as we constructed '24 bids on this idea that there are less profitable or less aligned products, and that's where we are sort of aggressively pruning. So directionally aligned, but not through the lens of divestiture, more through the lens of rightsizing and realigning the MA book overall to create that solid platform for growth and the synergy that it provides with the focus on lower income and complex members to our Medicaid footprint. And then for the M&A pipeline, again, we continue to be focused on opportunities that are -- we consider sort of right down the fairway, relative to our three core business lines, that being our primary focus, but also acknowledging that we have two strong and important retail businesses, which is how we think about Marketplace and Medicare and the platform that we think Marketplace provides in terms of long-term growth relative to what we're seeing from gig workers, contract workers, ICRA and sort of burdening individual Marketplace, what are some of the capabilities that we think are going to be important to own those distinctive competencies. And so those are also part of the consideration in the overall M&A pipeline.

A.J. Rice :

Just to circle back to couple of things on the Medicaid reverifications. Obviously, it's sort of a herculean task for the states to go through this process. It seems like everyone involved. Is it having any impact? It doesn't seem like it -- but I'll ask the question on either RFPs working through the system or RFPs that are being awarded, be it stood up? Have you seen any spillover impact on any of that? And then just a follow-up on Drew’s comment on the acuity adjustments. Just give us the latest thinking on how quickly those acuity adjustments may happen as data rolls in? And are there any states that are saying, "Hey, we'll help you out prospectively anticipating some change?"

Ken Fasola:

Yes. Thanks, A.J. In fact, we were with nearly 14 governors last week, had an opportunity to spin through the Republican Governors Association. And in every conversation we had, redeterminations came up with an eye towards, one, what are we seeing by virtue of the view we have across multiple markets, best methods and genuine appreciation for opportunity that's available to provide more informed counsel to members throughout reach. Sarah mentioned the millions of interactions that we've had, the collaboration with the departments, clearly an eye towards doing the best to give members a chance to make an informed decision. And when there's procedural disenrollments to move quickly to provide the opportunity to get those folks either into the right spot, whether it's in Medicaid or we're seeing opportunities in the Marketplace. Finally, to your point about whether it's going to slow the pipeline, there's no indication of that with respect to procurement and reprocurements. Drew?

Operator:

And our next question today comes from Kevin Fischbeck, Bank of America.

Sarah London :

Thanks, Kevin. Yes, we had always anticipated upfront bolus of redeterminations just because of the fact that there were certain states that were moving faster than others and others that had taken a more ratable approach. So I think the idea that there is a big amount of upfront data is helpful, but not unexpected. And then that has also given us some visibility into where there may be data issues that are causing -- or sort of the procedural disenrollments are higher than the states might have originally been expecting. In aggregate, though, as we said, our membership is on track with our expectations. We are recapturing members who fell off, but still have eligibility. And because of all of the outreach efforts we're making, we're able to bring those members back on and track the fact that we're able to successfully reenroll them. And again, we do expect that number to grow over the course of the program. Relative to the CMS intervention, our view is that CMS has provided great flexibility for the states to go a little bit slower. Obviously, in recent weeks, they've taken a bit of a stronger stance relative to a certain cohort of states, but it's still too early to see whether that will have a major impact on the slope. Obviously, they've asked certain states to pause for a month in other states, they're looking to extend the grace period relative to members replying to enrollment requests. And so again, hard to say whether that's a slowdown to make sure that states are getting the process right, so that they can continue at pace or whether for those states that quick out of the gate, it slows them down overall and what that does to the slope line, but that's something we're obviously going to be tracking very closely over the next couple of months.

Operator:

And our next question today comes from Scott Fidel with Stephens.

Drew Asher:

Yes, the team -- thanks, Scott. The team does a lot of work to mine out balance sheet positioning and statutory capital of our peers that are in potential financial difficulty, looking at what assets are backing reserves on their balance sheets. And then you're right, hopefully taking a conservative approach on that and doing that different depending on the carrier situation. So we'll see how that plays out. I hope to get every nickel of that $314 million, but trying to be realistic and prudent, but we will fight for it because that's shareholder money. On the HBR for commercial. Commercial includes both Marketplace, and we've got about $3 billion of commercial group business, which runs sort of meaningfully higher structurally than our Marketplace business. And we still expect to do a little bit better than last year. Last year, commercial, we posted an 81.1. But thinking about the SEP membership rolling in, with a little bit higher HBR, now that's not for a full year. So you have to sort of slope that through. But from a progression standpoint because the deductible natures of the commercial business, you should expect like an ongoing tick up of that total commercial HBR, but it's sort of on track to what we expect.

Operator:

And our next question today comes from Michael Ha with Morgan Stanley.

Sarah London :

Yes. So let me hit Stars and sort of rebate. So we did -- at Investor Day, we were looking at 20% in 4 stars. On the Q1 call, because of what we saw in terms of the overall Medicare rate environment, some of the changes that we had made coming into the year, relative to a focus on duals and what we were planning to do for 2024 bid construction and going forward, we walked through the fact that for our target population, right, which is increasingly going to be low-income complex and duals members, that 3.5 stars is the more appropriate focal point for our Star strategy. And so that is really how, over the next 3 to 4 cycles, we're looking at success in Star. And so I also on that call, pointed out that we were seeing 4-star progress in the measures that we had visibility into at that point, which were those core admin and ops and pharmacy measures, which is our focus in this first cycle, but that we had a number of contracts that were on the bubble and that we were taking a conservative approach and actually assuming minimal progress. So the takeaway from the Q1 call was minimal progress in 4-star off that 2.7% baseline. What we're saying today is with additional view of HEDIS and CAHPS and some degree of sort of case mix, that there's a little bit more pressure in that 4-star. Again, it's too early to say because we don't have cut points, but we want to be very transparent, and we used very conservative assumptions. This does not impact 2024, right, because we already know the revenue for 2024, but it certainly was an input as we looked at 2024 bid construction, relative to what we thought about in terms of 2025, 2026 and sort of the multiyear performance targets for the Medicare book. And again, important to note that we are seeing really solid underlying improvement in the program and really taking a chapter by chapter approach to moving up all of our underperforming contracts into that 3.5 star band, which is where we start to get important economics. Drew pointed this out on the Q1 call as well that there's -- folks know the economics associated with the 4-star, but there's a 3% to 6% economic lift that comes with moving into that 3.5 star band. And when you combine that with the profile of largely or heavily dual-based population, those economics actually work very well relative to the performance we're looking for.

Operator:

And our next question today comes from Sarah James at Cantor Fitzgerald.

Drew Asher:

Yes, Sarah, on the question about the impact, you can look at the sort of the membership progression. We're down 263,000 members from 3/31/23 in Medicaid, and that's sort of right on track with what we expected in terms of the impact. And then on what we can look at -- so it's a good question. I'm looking at each of those monthly cohorts independently, but we could actually see sort of the members boomeranging back at a much higher rate with April because, to your point, we're a few months out from that incurred month as opposed to July, which would be a lower number because there's still some runway there for members to boomerang back. But so far, that month is in the 20s in terms of percentage of members who lost eligibility that have now regained it without -- importantly, 85% of which without any break in coverage period. There are some members, the other 15% of what we're seeing are being reinstated back to maybe a month or two after they lost eligibility. But it's very early. There's not a lot of redetermination activity in April. So it will be interesting over the next few months to see that dynamic of members getting reinstated.

Gary Taylor :

I have two questions for you. One, a couple of your competitors mentioned that the second quarter results bore -- for not immaterial MLR headwind from the California court settlement related to COVID costs out of period. So just wondering if your quarter did -- this quarter did reflect that or if you had already booked that? And then secondly, just sort of coming back to Scott's question, I just want to ask about commercial MLR again. And looking at this year-over-year, just to exclude sort of the deductibility seasonality. But in the first quarter, your commercial MLR was down 290. This quarter, it's up 350. A small portion of that is SEP. A small portion of that, I think, is the smaller year-to-year RAF accrual true-up. So it really did seem to deteriorate, but I know you're saying, I think you felt it was in line, and you think the year is still going to come where you expect to land on commercial MLR. So I just wanted to understand that movement between 1Q and 2Q a little better from your view?

Operator:

And our next question today comes from Calvin Sternick with JPMorgan.

Drew Asher:

Well, part of that depends on whether or not people finish in that 14-month time period. And who knows what might be going on by the time we get to Q1 or Q2 of 2024. So tough to predict exactly when each state will end. But we think that's -- the numbers we gave, without trying to predict exactly the month we hit that, we think that's the ultimate outcome, and that hasn't changed.

Operator:

And our next question today comes from Steven Valiquette with Barclays.

Drew Asher:

Yes, I mean it's tough to speculate here and don't plan on it, but you could probably think about the composition of our members. 49% of our members in Medicaid are under 19 years old. So there's probably not a lot of cardiac, or ortho, or cataract, which is what we're seeing on the Medicare side. Other than that, I can't really explain other than saying what we're seeing in Medicaid and Marketplace is pretty stable relative to the pop we saw in May, which is not alarming, but figured it would be a helpful commentary for you guys, given some of the noise around the industry and the fact that our Medicare HBR was a little bit higher than we expected in the second quarter.

Nathan Rich :

Just a couple of clarifications. Maybe just sticking on that last question. Drew, I'd be curious if you could maybe frame the magnitude of this kind of step down that you saw in June when you're thinking about kind of monthly cadence? And how you're expecting that to play out over the back half of the year? And then a quick follow-up on the Marketplace margins and expectations for next year. Given both the growth you're seeing, the SEP enrollment, as well as kind of pricing plans for '24, what type of margin improvement you'd expect to see in the commercial business next year just as we think about progression into '24?

Operator:

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks.

Operator:

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Jennifer Gilligan:

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first quarter earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene will host this morning’s call, which can also be accessed through our website at centene.com. Ken Fasola, Centene’s President; and Jim Murray, our Chief Operating Officer, will also be available as participants during Q&A. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene’s most recent Form 10-K filed on February 21, 2023, and other public SEC filings. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first quarter 2023 press release, which is available on the company’s website under the Investors section. The company is unable to provide a reconciliation of certain 2024 measures to the corresponding GAAP measures without unreasonable effort due to the difficulty of predicting the timing and amounts of various items within a reasonable range. With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Drew Asher:

Thank you, Sarah. This was a very good quarter, as you can see in the press release. Adjusted EPS of $2.11 was ahead of our expectations and a good start to the year. Let me hit a few key items for Q1 and then spend most of my time on the remainder of 2023 and 2024. Premium and service revenue at $35 billion was strong in Q1. The HBR was on track at 87% and adjusted SG&A at 8.5% was consistent with our updated mix of business. DCP was 54 days, consistent with Q4 and up one day from Q1 last year. During the quarter, the Medicaid HBR of 90.0% was on track as well and reflects two items; one, a delay in a 2022 rate increase from one of our largest states, which we expect to favorably impact our Q2 2023 Medicaid HBR; and two, Senate Bill 510 in California, dealing with prior period COVID claims. Those two items pushed up the Medicaid HBR over 40 basis points in the quarter. The Medicare HBR at 85.2% was a little better than expectations. Marketplace revenue was stronger than expected, while the commercial HBR at 76.3% was in line with our internal forecast. Q1 cash flow from operations was strong, even when excluding a few out-of-period items such as early Medicare premiums. Overall, this was another good quarter with sound fundamentals. In the last 1.5 months, we've gone through a rigorous process, not just to refine the forecast for the remainder of 2023 in our typical three plus nine process but we also accelerated what we could to develop a more detailed forecast for 2024. Let's tackle 2023 and then get to 2024. For the full year of 2023, premium and service revenue is coming in stronger than our last midpoint of $132.5 billion driven by Medicaid and Marketplace. Medicaid revenue improvement is largely due to the refinement of timing of redeterminations in 2023 versus 2024. As an example, as we entered April, one of our largest states provided updated clarity around foster care redeterminations, moving the start date from April 1st to September 1st. And they also clarified the timing of other populations, resulting in the start date one month later than we had planned, resulting in more Medicaid member months in 2023. In Marketplace, we are very pleased to be leveraging our number one market position to not only seize market growth but also increase market share. We finished the open enrollment period strong and that carried into the Special Enrollment Period, or SEP, with 3.1 million members at quarter end. We expect to continue to grow the rest of the year. To draw a distinction, the 2021 SEP during COVID was wide open for all eligibles and had pent-up demand with a different acuity profile than the SEP enrollees in 2022 or today. Though we have found that partial year SEP members profitability is below that of open enrollment members, largely due to risk adjustment mechanics, the ability to renew those same members on 1/1/24 will set us up well for 2024. Consistent with what we shared on the Q4 earnings call, the demographic data including subsidy eligibility and product mix continues to look encouraging. Product positioning and distribution execution are also strong. The overall individual market has grown more than expected this year, and this macro growth is a positive factor when considering risk pools. Overall, we are able to absorb this additional growth in 2023 and this should provide an earnings tailwind for 2024 to help offset other areas of headwind. We are lifting the 2023 consolidated premium and service revenue, another $3.7 billion to a midpoint of approximately $136 billion driven by Medicaid and Marketplace. Our revised 2023 HBR reflects an overall 10 basis point improvement to a range of 87.1% to 87.7%. This is driven by a few net items. First of all, there's a slight shift in mix due to growth in Marketplace, which has a structurally lower HBR. And as we'll talk about in a minute, we now expect a 10 basis point improvement in Medicaid in 2023 versus previous guidance. A revised HBR also reflects a specific nuance for Medicare. I mentioned on the February earnings call that we expect to lose money in Medicare Advantage in 2024. Based upon our latest underwriting estimates, we have reflected in 2023 guidance an approximate $200 million Premium Deficiency Reserve or PDR, which we would expect to record in the fourth quarter of 2023. Other than that, our fundamental HBR is good in Q1 and on track for 2023. This PDR will be refined as we finalize bids and get further into 2023. To be clear, we are absorbing this premium -- this Medicare premium deficiency reserve into our revised 2023 HBR and adjusted EPS guidance, demonstrating the current strength of the business. On the flip side, growth in marketplace with more than 2.5 times the SG&A rate of Medicaid due in part to distribution costs and exchange fees, changes the mix for SG&A. When coupled with investments in quality and other key areas Sarah mentioned, our adjusted SG&A guidance for 2023 is up to a midpoint of 8.9%. Let me demonstrate the impact to mix. Someone recently asked why our SG&A rate is in the low 7s. Actually, if you pro forma our 2023 revenue mix as if we were 80% Medicaid, we would be in the low sevens. Of course, in addition to our number one position in Medicaid, we like having the number one marketplace franchise, the number two PDP franchise and the Medicare Advantage business with over one million members across 36 states. Investment in other income was strong in Q1, and we expect that to continue for the remainder of the year at a midpoint of $975 million. We have bought back $577 million of shares since the beginning of the year, including $300 million post the Q4 call toward our approximate $1.5 billion goal for 2023. We expect to continue the majority of our health plan dividends to come late in the year. As of today, we have an approximate diluted share count of 550 million shares. As we generate cash at the parent, we plan to deploy it to buy back our shares. For instance, in April, we were able to monetize the stock consideration we received at the closing of our sale of Magellan Specialty. We seized this opportunity so that we could deploy to share buyback. Overall, for 2023, inclusive of the items we just covered, we are lifting our 2023 adjusted EPS guidance to at least $6.40, the top of our original guidance range. Let's move to 2024. On 2024, while we were previously targeting $7.15 of adjusted EPS, we are reducing that to greater than $6.60 based upon more visibility on key 2024 drivers. While we are determined to do better than $6.60, based upon what we know today, we believe this is a prudent target for our 2024 earnings. And we believe this is the right jump-off point to apply our long-term growth algorithm, CAGR of 12% to 15% for the back half of the decade, consistent with what we shared with you at December Investor Day. Let me outline our approach and key assumptions to this revised 2024 target. Starting with Medicaid. The first redeterminations just started April 1st, but what has transpired over the past 1.5 months has enabled us to gain more clarity on each state's process in terms of timing and approach to the sequencing of populations. As Sarah mentioned, we have also been able to refine acuity projections, state-by-state, subpopulation by subpopulation, as well as the anticipated degree and timing of projected rate actions. Acuity projections, in many cases, are based upon specific data from the state and their actuaries. For instance, a number of our states shared files with us for those they expect to redetermine in April, May and/or June. And we are using this information to calculate the acuity of stayers versus levers. On the other side of acuity, the rate change projections are state-by-state, subpopulation by subpopulation, and they are often based upon direct conversations with the Medicaid departments and their actuaries, including many verbal acknowledgments of the potential need for rate actions as redeterminations unfold. We've had very constructive discussions with our state partners about redeterminations, not just in terms of process, but also the rate implications. We have also thought about the RFP cycle as we forecast the timing of future rate actions. While we are still early in the redetermination cycle, which we expect will last into Q2 of 2024, we have developed more confidence in our estimates of the net impact on 2023 and 2024 with the benefit of the claimant [ph]. One more relevant fact for 2022, we were approximately $2 billion in payback -- payable back to certain states for risk corridors or minimum MBR profit sharing mechanisms. That's important to factor in relative to any expected acuity shifts in those specific states. Finally, with each state putting a stake in the ground with respect to timing and approach we are better able to refine our forecasted premium revenue for both 2023 and 2024. Ultimately, we expect the rates provided by our states to match the acuity of the population as has historically been the case, though this is expected to ebb and flow through the redetermination process. In other words, if there's a mismatch between acuity and rates, we expect it to be temporary. Now let's get to some numbers. To provide some of our assumptions embedded in our updated 2024 target, we expect approximately $77 billion of Medicaid premium revenue in 2024 relative to approximately $84 billion in 2023. The premium revenue drop in 2024 is largely driven by redeterminations continuing and annualizing into 2024. There are also some other puts and takes in the revenue, including market share shifts, as we have previously discussed, the California contract renewal and the projected potential county shifts in Texas Star Plus as well as the added North Carolina expansion population. With respect to the Medicaid HBR, as you will recall, we were originally expecting to be around 89.9% in 2023. Our latest forecast is slightly better than that at approximately 89.8%. For 2024, based upon the process I just described, we have now built in 50 basis points of HBR increase to be prudent for redeterminations and the potential temporary mismatch of timing between acuity change and rate. That would put us at approximately 90.3%. Then we expect approximately 20 basis points of benefit from a new PBM contract and other initiatives to yield an estimated 2024 Medicaid HBR of approximately 90.1%. In Medicare and Marketplace, we are still refining our bids that are due this summer. So we're going to be a little guarded with getting too granular with bid assumptions for each of those lines of business. In Marketplace, our first quarter results were on track. And while one quarter doesn't make the year, we are so far pleased with the Marketplace positioning not just for 2023 but also the longer-term benefit from strengthening our number one market position. We look forward to getting more insight into 2023 Marketplace performance as the year unfolds, including when we get the first view of the Wakely risk adjustment data in late June, early July. Suffice to say, we are bullish about growth and margin potential in our marketplace positioning and business for 2023, 2024 and beyond and, more importantly, the chassis for seizing individual market opportunities ahead. In Medicare, we received the final 2024 rates and risk model clarity on March 31. The 2024 final rate was less negative for us by approximately 1.25% relative to the advanced notice but still an inadequate rate relative to trend. Some of the final rate change will accrue to our provider partners and some we will work into our bids. We continue to forecast a pre-tax loss in 2024, which is embedded in our revised 2024 target inclusive of the 2024 amortization of the PDR, we expect to record in 2023. As we indicated on the Q4 2022 call, underperformance in Medicare growth and earnings is a temporary dynamic, which we will -- while we balance the preservation of a base of membership with trough 2024 Stars revenue and expectations of improvement in Star scores now geared towards our low income and dual strategy Sarah described. While it's widely known that moving from 3.5 to 4 stars comes with, on average, 5% more revenue. There's also a meaningful economic benefit of moving from 3 to 3.5 stars that averages the equivalent of 3% to 6% depending on the contract. Given we have approximately 80% of our current membership and contracts below 3.5 stars from last October scoring, our focus now is to first maximize 3.5, especially as our membership will be shifting and tilting more towards low income and D-SNP in 2024 and beyond. So while you might consider our Medicare business is temporarily under construction for 2024, we believe Medicare Advantage will be a margin expansion and growth driver for the back half of the decade. Once again, we haven't yet submitted bids for these products. So for external consumption, we're going to combine the Medicare and commercial 2024 forecasted revenue for this discussion. Together, we expect approximately $46 billion of premium revenue from Medicare and commercial segments in 2023 and $45 billion in 2024. Directionally, we expect to grow marketplace throughout the rest of 2023 and into 2024. On the other hand, we expect to rationalize certain Medicare plan benefit packages, or PBPs, in 2024, which will result in lower Medicare membership, but membership composition will be more consistent with the strategy Sarah outlined. When we add our other businesses, which represent approximately $6 billion in premium and service revenue, subject to additional divestitures, we expect total premium and service revenue midpoints of approximately $128 billion in 2024 compared to about $136 billion in 2023. We will issue formal 2024 guidance with a full table of details later in the year, but we thought it would be helpful to review some of the underlying assumptions that we believe support an adjusted EPS target of greater than $6.60. By powering through 2024, Medicare challenges and getting to the other side of redeterminations, this company will be stronger to seize the opportunities in the back half of the decade. Finally, while we are disappointed that we are lowering our outlook, this revised 2024 target reflects our updated view informed by an accelerated 2024 forecast, process and recent insights in Medicaid, Marketplace and Medicare. And it is a target we have confidence in delivering. This perspective also gives us the flexibility to make the right decisions for 2025 and beyond. We will do our best to exceed $6.60 in 2024 without sacrificing anything for 2025 and beyond. Operator, let's go to Q&A.

A.J. Rice:

Hi, everybody. Thanks for all the information. Just maybe to drill down a little further on what you're thinking with respect to Medicaid redeterminations. I guess, it sounds like you're reflecting in your outlook for 2024 a little more caution on acuity and potentially how quick that gets picked up in rate adjustment. I wonder if you could give us a sense, are you falling more on just thinking there is a little bit of lag in the period in which the rate adjustments get updated, or are you seeing anything that's indicating to you that the acuity itself will be worse than what you were thinking three or six months ago? And I wonder just granular as we start to get into this, as you're talking to somebody that's getting a redetermination, do you give them the notification? Does the state give them the notification? And as you talk to them about their options to sign up on the public exchanges, are they -- do you have a sense of whether they're going to do that immediately? Is there going to be a lag in the way they think about that before they immediately go and sign up. Any updated color on that as well.

Operator:

Thank you. And our next question today comes from Josh Raskin at Nephron Research. Please go ahead.

Drew Asher:

Good questions, Josh. The PDR, no, we expect to fully amortize that in 2024. It's a one-year contract for Medicare members, as you know. And so we don't expect that to bleed into 2025. And so if that number is 200, that's what we've built into our guidance for 2023. But we will refine that as we get the bids final, see the rollout of the annual enrollment period beginning in December, and that will dictate the specific amount that we record from accounting rules and then that would be reevaluated at the end of each quarter of 2024 and adjust it accordingly. So that's how the PDR would work mechanically. On statutory capital, it's a good question. We modified the management fees. We think we improved the management fee structure this year with more precision, and that has the result of trapping more capital into our regulated subs, which is why we expect to only do $1.5 billion share buyback this ear, which will be largely late in the year. We've got $300 million under our belt already. And then we expect that to step up to about $3 billion, which we mentioned on the last earnings call for 2024. So we've got a certain level we like to maintain, but we certainly don't need to have excess capital sitting in our subs. And we'll go after that through the dividend process back half of this year and into 2024. Our debt to EBITDA is right around three times. We're content with that. It will probably move up or down a little bit around that three times, but that's our target. We love the fact that we're investment grade now. And I think as we look at our debt stack over the next decade that will serve the company well.

Justin Lake:

Thanks. Good morning. First, a quick follow-up on A.J.'s question. Drew, is there any way you can delineate for us the impact of redeterminations on the risk pool versus what you expect to make up on pricing? Meaning maybe you could tell us -- if states pushed off pricing completely for a year, how much of a negative impact do you now think just changes in the risk pool would have on your MLR for 2024? And then my question is on Medicare Advantage. One, do you still expect to lose money in Medicare Advantage despite the $200 million PDR? Meaning ex the PDR, are you still losing money in 2024? And if so, maybe how much? And then I appreciate the color on the Stars at 4 Stars for 2024. But as you said, 3.5 Stars is really important as a first step. Any color on how you expect to improve 3.5 Stars in 2020 -- for 2025, I should say, versus the 20% you're at today? Thanks.

Sarah London:

And then on the Stars piece, I do want to be clear that we're obviously not taking our eye off the goal of maximizing 4-Star membership, but the previous target of 60% in 4 Star or three cycles is really no longer relevant for two reasons. One is our adjusted 2024 bid strategy and the intentional decision to double down on our core membership, which is inherently more complex from a quality standpoint. And then the second is change the rules. And so introducing the Health Equity Index adjustment, which we are very supportive of, will actually help account the management of that complexity over time. But we need to make sure that we invest in the short-term around the health equity program in those contracts where that's going to matter in order to have that lift take those contracts to 4 Star in the long term. And so in some ways, we're sort of slowing down speed up and the near-term objective of getting more of those contracts into 3.5 Star is really based primarily on operational execution and some of the investments that we talked about around not just HEDIS but also the customer experience, which will influence caps. But let me let Jim Murray talk a little bit more because he is watching this day to day.

Operator:

Thank you. And ladies and gentlemen, our next question comes from Stephen Baxter at Wells Fargo. Please go ahead.

Drew Asher:

Well, states, they want a successful program, and they want payers such as Centene to deliver quality and savings, quite frankly, help them manage their budgets as well, especially with the complex populations. And so I wouldn't dug out going back in time, to get to the essence of your question, what was the HBR for both WellCare and Centene over an extended time period, meaning you don't sort of -- any year, you can have a little bit of a mismatch in trend and rate. But over an extended time, and let me just read you how consistent this has been. WellCare 2015, 89.8; 2016, 89.5; 2017, 88.8; 2018, 88.9. Centene, 2015, 89.5; 2016, 89.8, 2017, 89.3, 2018, 89.5, really consistent. And so we expect -- if we tick up into the, let's say, low 90s, we would expect to get that mismatch that we're building into guidance for 2024 sort of back into that high 89s. Obviously, mix of business will adjust that to some degree with complex populations having a little bit higher HBRs and lower SG&A. But we think that's the sweet spot, and that's what we expect to be able to achieve as we look out over the back half of the decade.

Nathan Rich:

Great. Thanks for the question. Going back to the Medicare business there, you had talked about fully membership growth to focus on your core members. I'm curious how that impacts your view of Medicare revenue growth longer term relative to the high single-digit to 10% revenue growth guidance you laid out at the Analyst Day. And on margins for that business, can you maybe talk about the investments that you're making in 2024 and how significant those are? And is there any change to the way you're thinking about the longer-term margins for that business? Thank you.

Operator:

Thank you. And our next question today comes from Scott Fidel at Stephens. Please go ahead.

Drew Asher:

Thanks, Scott. Trends look stable in the quarter. We look back to pre-COVID time periods largely back to normalized utilization. For instance, screenings are fully back or a little bit soft on cervical, but they changed the -- I think they changed the guidance on that in 2020. We keep on looking for signs of acuity increase and aren't finding any. Looking at the first few months after initial cancer diagnosis or the cost per cancer diagnosis, those are all in check, so pretty stable. Mean there's always watch items. Specialty pharmacy, obviously, is always a watch item. It has been for probably the last decade. We're watching behavioral health costs. They're up a little bit year-over-year with some substance abuse. And some of that's the waivers or the -- some of the prior auth rules that were curbs were put in during the COVID era. But really, really pretty stable trend as we look at the quarter. And a little bit positive, as I mentioned in my script in Medicare. Some of that was the flu was more heavily weighted Q4 versus Q1 and inpatient is slightly better, probably a Venn diagram with the flu, less inpatient flu, but as a whole is a little bit better than Q1 of last year.

Sarah James:

Thank you. I wanted to understand your updated Marketplace assumptions for 2024. so you're assuming some of the low acuity falls off on the Medicaid, I'm wondering if you're assuming any of that risk profile evolved in the Marketplace as a whole in 2024? And then based on some of the recent implementation changes by the states that seem to increasingly favor keeping people insured in some form, what do you have built into your new 2024 revenue guide for the overall Marketplace market size?

Drew Asher:

Yeah. So really pleased with the growth in the overall market. And as we've looked at data historically, as the market grows, the risk pool improves as well. I think the fortification of the enhanced APTCs, the Advanced Premium Tax Credits, was really helpful in solidifying this as sort of a market that's going to be strong for many years. So I think that's helped the risk pool. For us specifically, we're growing well beyond the market. Obviously, there was a couple of competitor exits. Those members got first in the free market, and we picked up a fair amount of those, but those came in at our pricing, our clinical programs, our network construct, our products as if they were new members sort of off the street. And then we're also gaining market share. So we expect actually to be in a pretty large payable position for risk adjustment, and we're accruing accordingly. And obviously, we will true that up once we get the first look of Wakely data in late June, early July. But pleased with some of the elements you look for. When you're growing a lot, you look for signals and through the data. The percentage of subsidized population is up, up 3% year-over-year to 95%. That's a good sign, we believe, for risk pools. And we can look at stairs versus levers. We had a 75% renewal rate into 2023. Those –the stayers are equaling the levers. So we're cautiously optimistic on that business and the risk pool for 2023. And as Sarah mentioned, we did layer in a couple of hundred thousand of redetermined members coming into the Marketplace later in the year. And so the member months aren't that significant of a driver. And we factored in some variance around that into our revenue guidance already.

Kevin Fischbeck:

Great, thanks. I wanted to understand the long-term EPS guidance a little bit because it was just a little bit confusing to me because you're taking down this year's say, next year's EPS number, still talking about 12% to 15%. But I think, Sarah, you said that your view about the earnings power hasn't changed. Does that mean that you think you'd be growing more like 15% off of this lower base, or is 12% to 15% the right way to be thinking about it? And then just to put a point on this PDR because the PDR is essentially taking whatever it is $0.25, $0.30 of losses from next year and booking it this year. So your $6.60 million guidance, is it right to think that that's more like a fixed whatever that is $6.35 kind of real earnings base that you have to then overcome to grow 12% to 15% off of $6.60. So just trying to reconcile how you're thinking about long-term earnings power in particular the PDR and how that affects growth into 2025. Thanks

Sarah London:

Yes. Thanks for the question. And totally appreciated. When we think about the long-term, and I'll roll back to even in the beginning value creation plan, we had a lot of confidence that there was more earnings power in this organization than we were delivering back to shareholders then. I think that confidence a year ago had only grown. The difference between then and now, I think, is a really more complete understanding of what it's going to take to fully unlock that value and so we still have total confidence in that 12% to 15% long-term CAGR. I think our view is that we need to make some of these short-term both explicit and implicit investments in our business in order to make sure that we are set up with the most strength against that long-term algorithm. And as Drew said, we see the $6.60 or greater than $6.60 floor as the right jump-off point for that 12% to 15% adjusted EPS in the long-term.

Gary Taylor:

Hey, good morning. Two quick questions. The first is I appreciate your commentary about receiving new data state files from the states to update your margin assumptions around Medicaid. So the question is, is that largely complete? Have you received updated state or lever files from all your states, or is it really more from the states that are very imminently beginning the redeterminations and we should maybe expect more material updates on that state information to come over the course of the year? The second is just on the IBNR days and dollars down a bit sequentially. I know there's some other items in that line. Just wondering if there's anything else through the call-out impacting that line on the balance sheet? Thanks.

Drew Asher:

Yeah. On the balance sheet, liabilities are up a fair amount from year-end 12/31/22. The accounts payable and accrued expenses are up, but that's $1.3 billion of state pass-throughs. So our pass-throughs, the pure pass-throughs actually don't go through medical claims liability. They go through premium revenue and -- or sorry, premium tax revenue and premium tax expense sort of outside the IBNR process. So they don't really impact DCP Now there are state directed payments embedded within medical claims liability, and we define those terms in our press release and we've had for a while. But IBNR is $17.5 billion or medical claims liability up from $16.7 million. You saw the DCP relatively flat. So feel good about the consistency of our reserving process.

Lance Wilkes:

Yes. With the $0.55 decline in 2024, I think you've kind of sketched out how much of that is due to the conservatism and redetermination. Could you talk a little bit about how much is from the targeted investments in MA bids for MA in your bid strategy there? And how much is investment in infrastructure and of the investments in infrastructure. Could you talk a little more about the components of that? And how much of that is necessary for the Medicaid business and the core businesses as contrasted with Medicare Advantage?

Drew Asher:

Yeah. On the numbers, we've talked about the $200 million PDR. I know that hits 2023, so it's not part of the $0.55, but you really need to think about that as a conscious investment. We don't take lightly spending shareholder money, but we think it's the right investments, targeting the right members, thinking about the long-term attractiveness of the Medicare market, especially in the populations that we will emphasize going forward. And then getting to the $0.55, which is in 2024, 60% of that is the 30 basis points in Medicaid and the remaining 4%, about $150 million, plus or minus is the investments that Sarah just covered.

Calvin Sternick:

Thanks. Just a couple of clarifications. I know you're being conservative on the Stars assumption for next year. And you do get minimal improvement for 2025? Is the expectation that, that comes back to you in 2026 such that you keep it that 20202 ramp that you talked about over the next three years? And then on Medicaid, I know you mentioned having more member months this year and a little more visibility into the timing of when members could roll off. Just wondering if there's anything you're anticipating in terms of HBR or earnings seasonality. Thanks.

Drew Asher:

Yeah. On earnings seasonality, we expect to be pushing about 65% of adjusted EPS for 2023 in the first half of the year, so maybe 35% or slightly under 35% for the back half of the year. That back half does include the fourth quarter assumption around the PDR. And I think you're also referring to HBR seasonality in Medicaid. Think of it as like a check mark. So we expect to be down a little bit in Q2 relative to the 90.0 and then rising in the back half of the year.

Sarah London:

Thank you. I just want to close out by reiterating Drew's comments and my own that we don't take the change in the 2024 lightly, but it's not something that we would be doing if we didn't firmly believe that it was the right thing for Centene in the long-term. So I appreciate the great questions. Appreciate everyone joining us today and look forward to updating you as we continue to execute in 2023 and build momentum for 2024 in the long-term. Thanks so much.

Jennifer Gilligan:

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our fourth quarter and full year 2022 earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which can also be accessed through our website at centene.com. Ken Fasola, Centene's President; and Jim Murray, our Chief Operating Officer, will also be available as participants during Q&A. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-K filed on February 22, 2022; and other public SEC filings. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our fourth quarter 2022 press release, which is available on the company's website under the Investors section. The company is unable to provide a reconciliation of certain 2023 and 2024 measures to the corresponding GAAP measures without unreasonable efforts due to the difficulty of predicting the timing and amounts of various items within a reasonable range. With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Andrew Asher:

Thank you, Sarah. Today, we reported fourth quarter 2022 results, including $35.6 billion in total revenue, an increase of 9% compared to the fourth quarter of 2021, and adjusted diluted earnings per share of $0.86 in the quarter. For the full year, we reported $5.78 of adjusted EPS, a 7% beat over our original 2022 guidance and growth of over 12% compared to 2021. Let's start with revenue details for the quarter. Total revenue grew by $3 billion compared to the fourth quarter of 2021, driven by strong organic growth throughout the year in Medicaid, primarily due to the ongoing suspension of eligibility redeterminations; strong Medicare membership growth; and the January 2022 acquisition of Magellan, partially offset by divestitures. Our Q4 consolidated HBR was 88.7%, a little bit better than our expectations, and 87.7% for the full year. Medicaid at 89.6% for the full year was right in line with our expectation of an HBR in the 89s for 2022. Medicare at 86.2% for the full year was 90 basis points better than 2021, driven by execution of clinical initiatives. And on commercial, recall, we originally promised a 500 basis point reduction in the HBR in 2022. How did we do? We were down 550 basis points for the full year. This was driven by disciplined pricing actions, initiatives executed in 2022, and as expected, a reduction in COVID and pent-up demand costs compared to 2021. Moving to other P&L and balance sheet items. Our adjusted SG&A expense ratio was 9.3% in the fourth quarter compared to 8.7% last year, driven by the inclusion of Magellan and the sale of PANTHER as well as increased Medicare marketing and value-creation investment spending in the quarter, given the overall company outperformance. Cash flow used in operations was minus $1.6 billion in the fourth quarter. You may recall, in the third quarter, we had an early receipt of $2.9 billion of CMS payments pertaining to the fourth quarter, which is driving down our reported Q4 operating cash flow. Cash flow provided by operations was $6.3 billion for the full year, representing 5.2x net earnings or 1.9x adjusted net earnings. This was driven by earnings before charges, including real estate and divestiture-related impairments and an increase in medical claims liabilities. Our domestic unregulated and unrestricted cash on hand was $793 million at year-end, though after making some planned pass-through payments in early January, that amount is closer to 0. From January of 2022 through today, we repurchased 39.1 million shares of our common stock for $3.3 billion. Debt at quarter end was $18 billion, down approximately $800 million from prior year-end, driven by senior note repurchases of $318 million, a repayment of our $180 million construction loan and repayments of over $100 million in revolver and term loan borrowings. Our debt-to-adjusted EBITDA came in right at 3.0x, down from 3.5x a year ago. Days in claims payable was 54 in Q4 of 2022 compared to 54 in Q3 of 2022 and 52 in Q4 of 2021. GAAP earnings during the quarter include impairments related to several divestitures that were completed or pending as of December 31, as well as an impairment of our federal services business, partially offset by a gain on the sale of MagellanRx. Looking back at 2022, it was a very good year of execution during some notable changes for Centene. Sarah hit on some of the highlights, but let me remind you of a few. We beat original adjusted EPS guidance by 7%. We bought back almost 7% of the company's shares, including January 2023 repurchases. We reduced debt-to-adjusted EBITDA to 3x and got upgraded to investment grade by Fitch. We continue to execute on divestitures. Since Q4 of 2021, we've completed 7 divestitures for gross proceeds of over $3.5 billion. We improved the discipline of the company in many areas while strengthening DCP by a couple of days, and we picked up 2 very strong operators, Fasola and Murray, along the way. All right, enough on the rearview mirror. Let's talk about what really matters today and tomorrow, starting with 2023. We gave detailed guidance elements at Investor Day, but a few things have happened since then, including more clarity of the timing of the restart of redeterminations, a couple more Centene divestitures, a very strong Marketplace annual enrollment period and softer Medicare Advantage enrollment as we mentioned at the recent investor conference in San Francisco. My bias when we haven't yet closed the first month of 2023 is not to touch 2023 guidance until we have some actual results, but there are a few things that will help you understand how we are starting out of the gates compared to what we outlined at December Investor Day. Our 2023 premium and service revenue should be approximately $2 billion higher than the range provided at Investor Day. Let me bridge that for you

Joshua Raskin:

I wanted to start on the weaker MA start in the selling season. And maybe you could talk a little bit about was that due to changes by competitors? I heard something -- I heard a lot about the distribution channel changes that you made, but any specifics would be helpful. And then any benefit design changes that you made that you think contribute to some of that lost membership would be helpful as well.

Kenneth Fasola:

Yes. Thanks, Josh. The CMS data, which is readily available, demonstrates. So I think you've seen where members have moved. For our part, we rotated towards margin improvement, recognizing going in that, that would probably be at the expense of some member gains in very targeted markets. But I think the insight that we've gained this past year, both with respect to the comments Sarah made about the distribution mix and the really overperformance from owned and more captive channels, along with, I think, a greater insight with respect to the characteristics of the kind of members that are likely more responsive to both our product and network mix, I think, gives us really the opportunity to be vastly more precise as we move into the new year. And I think you'll see that as we move, not just through our product design positioning for the coming year, but the way we allocate and optimize distribution, resources and the marketing, now that we've all -- and we've moved marketing internally. We had some of that subcontracted, I think, is going to create a strong platform for the achievement of the guidance we've provided.

James Murray:

This is Jim. Absolutely. Sarah and Ken both reference the focus on proprietary distribution channels. In past lives, I've seen that creating a relationship -- and we talked a little bit about in New York, creating a relationship with those members goes a long way towards some of the things that are measured in STARS. For example, complaints. If you have a relationship and you bring the member in and explain to the member the benefits that they are going to get and how to use the system, obviously the complaints to CMS are significantly reduced. We're beginning to see that, frankly, in 2023 in the first 1.5 months of results. Disenrollments are much lower as a result of using proprietary channels. The other thing is that because of the stability of the existing membership, we expect that we're going to see some improvement in STAR scores as well as RAF scores going forward, which will help our overall margin profile going forward. So we feel really good about that. So focusing on relationships and how long we keep a member used to more of a 7- to 8-year member retention, and we need to begin to build that kind of stability going forward. And a lot of steps that we've taken around STARS are starting to see some favorable results. So feeling good about that.

Justin Lake:

First, I want to appreciate the color on '23 and '24. Just wanted to get a little bit more detail, of course. So it looks like you're at 2.7% net income margins for 2023, give or take. From there, Drew, you mentioned Medicare Advantage margins go lower, it sounds like, year-over-year. I think the market certainly expects pressure on the risk pool in Medicaid year-over-year. So curious in terms of what gets better in 2024. I know one of the big buckets is Jim is working on those cost-cutting. Maybe you can share, for instance, how much cost-cutting benefit you expect to get from '23 to '24 as well as kind of your thoughts on that Medicaid margin in general and any other moving parts we might have missed.

Justin Lake:

And just to put a bow on it, anything on update on the 3.3% net income margin target at North Star for 2024, how you view that?

Operator:

And our next question today comes from Stephen Baxter at Wells Fargo.

Andrew Asher:

No, you're right. We outperformed. That was probably the biggest contributor to our sort of overall slight outperformance on HBR, but commercial continues to be strong. And I'd chalk that up more to execution and the momentum that we've gained over the last, call it, 5 quarters in that Marketplace business, implementing clinical initiatives, the interplay with the value-creation office, not just for SG&A, but also for trend vendors and HBR initiatives that drive both quality and the affordability of health care. So those are some of the drivers that helped the commercial business, and we feel pretty good about that heading into 2023. We do disclose that the roll-forward tables, I think one of them is in the press release, the rest will be in the 10-K, last year. So 2021 saw a higher favorable development of the 12/31/2020 reserves. That's understandable with sort of the chaos of practice patterns and claims patterns during the 2020 year of COVID, but still consistent reserve methodologies and a pretty strong showing of development during 2022 off of the 12/31/2021 reserves.

A.J. Rice:

A couple of things, if I could. First, on the Marketplace. I know -- I appreciate the comments about the demographics of the people you've seen through the open enrollment period. There's also been some questions about what are the demographics going to be of people that reverified off of Medicaid and go on the exchanges. I know the current exchange population has very diverse health needs. Do you think those redetermined Medicaid people that end up on the exchanges will pull up the risk pool? Pull down the risk pool? How are you thinking about that, first off?

A.J. Rice:

Okay. if I could slip in another one on your Medicare comments for next year. I know on the RADV, you said, "This is what we like. This is what we don't like." When you think about the rate notice, it sounds like there's places where you think the industry can comment to CMS and potentially ask, maybe look at it in a different way or something. Could -- are you willing to talk about where some of those points of discussion, at least between the industry at large and CMS might be? And in terms of your strategy, it sounds like you're talking about a potential negative margin. So that must mean you're going to try to stabilize benefits year-to-year in a growing market. I'm wondering, is it conservative to say we're going to have stable benefits, but not have growth on the enrollment side?

Operator:

And our next question today comes from Gary Taylor at Cowen.

Operator:

Pardon for the interruption, everybody. This is the operator. Mr. Taylor, your line is breaking up very badly. It looks like we have a bad connection. I would ask that you please disconnect and dial back in or pick up your speaker phone, if that's the case.

Operator:

That's much better. Thank you, sir.

Andrew Asher:

Yes. So it's a good question. The demographics of what's coming in looks very similar to -- and actually, the subsidy eligibility has gone up a little. So nothing really alarming in all the attributes we can look at what we know today. Obviously, the proof is going to be in the med cost. And you're right, in Marketplace, it's a zero-sum game concurrent risk adjustment process for 2023. So that's something we'll be watching. There's also 2 less competitors out there. And so we thought about that as we not only booked our 2022 risk adjustment receivables, but also as we forecast into 2023, we'll get the first Wakely data in June this year, and we'll have to take a look at that. But we've thought about that as we forecasted and as we closed out 2022.

Nathan Rich:

I wanted to follow up on the Medicare business. Drew, could you help us think about the magnitude of the step down that you are thinking for Medicare margins in 2024, just given the comments that you made about pricing for a negative margin and trying to keep benefit stable maybe relative to the margin that you're targeting for 2023? And then I guess outside of plan design, are there any offsets that you think you can leverage to try to mitigate some of this impact in 2024?

Sarah London:

One other thing I would add when we think about levers in 2024 is the breadth and depths of our value-based care relationships, which is something that I think we are -- we're already planning on, but have the runway to accelerate in 2023 in order to be in an even stronger position. And as many of you know that, that was -- we have a good set of relationships with a number of the sort of leading value-based care providers, but I think we have been not as aggressive in that in the past, and so in 2022 started to turn our focus there. Our organizing around that internally brought in some great talent to help accelerate. So that will be a focus in 2023 that I think will give us some benefit in 2024 and then obviously beyond that as well.

Michael Ha:

I just wanted to ask a bit more about redeterminations and expectations. Appreciate all the color on the 30 bps of Medicaid MLR pressure in '23. I recall hearing at your Investor Day that your state composite rate increase, improved about 50 bps. So I'm just curious, how did that compare to your original expectations? I think there's originally been some concern that state rate increases may not go into effect until a couple of quarters after redeterminations were underway, but 50 bps improvement feels pretty strong, pretty positive, quite high. And I think -- and if I think about the messaging around just most states expecting to complete redeterminations likely later in '23, then in that scenario, you're entering '23 strong rate increase, couple that with a very slow rollout of redetermination. It seems like a recipe that could present some earnings upside this year. Is that a fair way to think about how redeterminations might develop?

Sarah London:

Maybe just to add a little bit of color on the process. To your point about sort of the methodical approach that we were expecting, with the certainty of the year-end bill, we started to get updated information obviously from each 1 of our states and are -- continue to be in regular contact with them. And I would say that in general, we are seeing that methodical approach hold with the vast majority of our states sitting in a 9- to 14-month bucket in terms of the time frame that they expect redetermine redeterminations to play out under, and some of them indicating that they won't start April 1, they'll start closer to summer time. So as you think about sort of the start date shift, overall, nothing that suggests overall slope line will shift materially. And we are seeing continued positive momentum from our states and being open to and encouraging our support in outreach and communication education efforts to members. So in general, I feel like the industry is aligning and organizing around an approach that will minimize or seek to minimize member abrasion in the process and are allowing us to run alongside our state partners, all of which is positive from our perspective.

Scott Fidel:

Wanted to just drill in a little bit more, especially given possibly the importance of the buybacks. Just if you can walk us through your updated sources and uses of cash for 2023 and how much you think you can have for deployable excess capital for buybacks. And then, Drew, I'm not sure if you've given us 2023 operating cash flow guidance yet. So if you do have that, I would appreciate that, too.

Operator:

And our next question today comes from Kevin Fischbeck of Bank of America.

Sarah London:

Yes. So relative to the redetermining members into Marketplace, we do -- again, as I said earlier, we do expect that on balance, they probably have slightly higher acuity. But at a minimum, pardon me, your point about the fact that we don't have them for the full year means that they turn to profitability as we move into 2024. And again, this is something that the team had visibility to throughout 2022 and coming into the year and baked into our guidance, and I think will be -- have the offset of our expectation that a number of those members who are coming into the pool will be healthier to offset that overall and are coming in with a 1/1 start date. So we have the full benefit of their 2023 risk adjustment. And then relative to the 200,000 to 300,000, that continues to be our estimate that is baked into guidance. And a lot of that is of a belief that the vast majority of members who redetermine off will first go to the commercial book. And again, we just need to see how the data starts to play out and whether there are any adjustments to that as we see folks coming over on to the marketplace products.

Steven Valiquette:

Really just a quick confirmation questions around potential impact [indiscernible] for the changes [indiscernible] for '23. [indiscernible] feel like they should be an as higher or greater to be offset by [indiscernible].

Steven Valiquette:

Is that better?

Calvin Sternick:

First, a quick clarification on MA. I think I heard a comment about lower disenrollment. Was that for this AEP? Or is that more of a go-forward comment? And then second, it sounds like MA has got a margin expansion beyond 2025. Just curious how you're thinking about the overall level of membership growth once you start getting -- you get past the STARS [indiscernible].

Operator:

And ladies and gentlemen, our next question today comes from George Hill at Deutsche Bank.

Andrew Asher:

No. My bullishness is ESI and Centene working together to deliver what we anticipated when we inked the deal a couple of months ago or a month or so ago. One more thing. Let me -- on share buyback, let me clarify something that I said earlier. I was answering a 2024 question. The $3 billion is our placeholder for 2024. The 2023 back half of the year share buyback is about $1.5 billion. And that's because we've got a little bit of trapped capital that we'll have to get out over the following year or so. So the $3 billion I mentioned is the forecast for 2024, absent any acquisitions.

Sarah London:

Thanks, Rocco, and thanks, everyone, for your time this morning. Please reach out to Jen with any follow-up questions, and we look forward to talking to you throughout the rest of the quarter.

Jennifer Gilligan:

Thank you, Jamie, and good morning, everyone. Thank you for joining us on our third quarter 2022 earnings results conference call. Sarah London, Chief Executive Officer; Brent Layton, President and Chief Operating Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene will host this morning's call, which also can be accessed through our website at centene.com. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors including those discussed in Centene's most recent Form 10-K filed February 22, 2022 and other public SEC filings. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures within those directly comparable GAAP measures can be found in our third quarter 2022 press release, which is available on the company's website under the Investors section. Company is unable to provide a reconciliation of its 2023 and 2024 adjusted diluted EPS targets to corresponding GAAP measures without unreasonable efforts due to the difficulty of predicting the timing and amounts of various items within a reasonable range. Finally, please mark your calendars for our upcoming Investor Day on December 17 at New York City. Invitations and necessary registration information will be send out shortly. With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Brent Layton:

Thank you, Sarah, and good morning. We are pleased to have made so much progress in 2022 both organizationally and operationally. While some of the benefits will take time to materialize externally, the internal advancements are tangible. There in the third quarter, we received results from several RFPs. In August, we received mixed results in California as we are were awarded contracts in nine counties including San Diego. We have also been awarded a sole source contract in Imperial County. As Sarah mentioned, we've appealed the state's notice of awards, and we'll provide updates on the process as appropriate. In August, we were also informed of our successful bid to continue to serve the state of Mississippi's Medicaid managed care program, including entry into the chip program. We've been a part of the Medicaid program since its inception and are pleased to continue our relationship with the state. In another of our longstanding markets, we reprocured the Star Health Medicaid program at Texas. We've held this contracts since 2008, when in collaboration with the Texas Health and Human Service Commission and the Department of Family and Protective Services. Our health plan Superior became the first managed care organization in the country to provide statewide sole source Medicaid coverage to children in foster care. To round out the quarter, we were fortunate to win the reprocurement of our statewide managed care contract in Nebraska. We look forward to continue to serve our membership in the Heritage Health program. In our existing Medicaid business, membership has increased to 15.7 million members at the end of third quarter and we continue to see an uptick in our fee activity. As the PHE has been extended to February, our Medicaid growth continues to be aided by the ongoing suspension of eligible redeterminations. As you heard me say before, whenever the PHE comes to a close, we'll continue to work with our state partners to support member transition and believe we are well-positioned to attract membership to our marketplace products. Our Ambetter product ended the quarter with 2.1 million members and remains on track to meet its margin goal for 2022. As the marketplace leader, we continue to ensure that Americans have financially affordable options for coverage, especially during times of disruption, such as the recent announcement of market exits by some of our competitors. We are working closely with our state partners to ensure these members have access to affordable coverage. We also see the extension of the enhanced advanced premium tax credits as fuel for additional growth during 2023 open enrollment period, which will begin in a few days. Consistent with our strategy and better health, we'll continue to pursue margin expansion through strategic membership growth and thoughtful pricing discipline. As we look to 2023, we've expanded our marketplace offerings to the state of Alabama, bringing this to 28 states. Additionally, we've added more than 60 new counties bringing this to over 1,500, which is over half the counties in the United States. We're also looking forward to the expansion of our Ambetter Health virtual access product, which we first launched here in 2022 open enrollment. This product supports affordable and convenient access to licensed virtual primary care providers as well as access to specialists and other support services. We will offer virtual access in nine new states for the upcoming open enrollment period bringing the product to 13 states in total. Our geographic and product expansion sale strategy, stable pricing, product offerings and operational strengths allow us to be optimistic about our positioning for 2023 open enrollment. In Medicare, we ended the quarter with over 1.5 million members. We have strong geographic growth for 2023 with WellCare product offerings available to 80% of the eligible Medicare population. We feel like 2023 products are in line with the expectations to support our low to mid single-digit growth expectations and continue to focus on member retention. Look forward to telling you more about our '23 outlook in December. In short, our core products continue to perform well. With that, let me turn the call over to Drew.

Operator:

And our first question today comes from Josh Raskin from Nephron Research. Please go ahead with your question.

Sarah London:

Yes, thanks, Josh. So, first, I would say that we were very pleased with how competitive the process turned out to be and the fact that we had in multiple very good options. As we said, we were able to achieve savings exceeded expectations without feeling like we were sacrificing quality and execution. And we carried forward into the process all of the criteria that we talked about in earlier calls in terms of operational execution, level of partnership, a sense of quality performance, innovation. We have ahead of us significant operational undertaking, but I have to give major credit to our team for spending a lot of the time during the RFP process doing preparation work in order to give us maximum optionality in the consideration. So we're feeling good about moving forward with core services and the ability to continue to expand the relationship, if that makes sense.

Joshua Raskin:

Okay. Understood. Thanks.

Stephen Baxter:

Yes. Hi. Thank you for the question and all the color. I think you said you'll be targeting 60% of your Medicare Advantage membership in four star or better contracts. Apologies if I missed it, but what was the timeframe you think it will realistically take to get there? And assuming that it is a multiyear process, do you think it's reasonable to expect most of the improvement to be concentrated in the next cycles and some of those metrics are still in front of you to be measured? How do you think we should think about maybe more even pacing on that? Thank you very much.

Brent Layton:

Jamie, next question.

Justin Lake:

Thanks. Good morning. Just a couple of things here. First, I appreciate your comments on 2024. Can you be -- just give us a little bit more color in terms of when you say the $0.20 to $0.25 to $0.50 of headwinds potentially, does that assume -- is that net of everything? Meaning, like, for instance, if I were to think about your guidance in 2024 there's some -- looked like there was some conservatism just in terms of the buildup when you gave it initially, plus the tailwinds minus the headwinds. Are you saying when you add all of that together, if everything happens the way it looks today, meaning the appeal is not successful, for instance, that number would be $0.25 to $0.50 too high. First. And then secondly, can you just give us an update on California in terms of the timing? My understanding is the state has to make a decision or the arbiter has to make a decision on the appeal. And then there's also a lawsuit that are in place that a judge would need to roll on. So maybe you can give us a color on that timing. Thank you.

Sarah London:

And then in terms of timing on the appeal, the department is currently considering all of the appeals that have been submitted across RFP respondents. And the next step is what we consider to be a fairly procedural ruling. And then from there, we would move into the courts with a lawsuit.

Lance Wilkes:

Yes. See, I just wanted to get a clarification on the PBM, the kind of expected timing of the savings, if they're all hitting in '24 if you're getting a portion of that in '24 and more in '25. And then just understanding the length of contracts on that. And then if there's anything to tell us about mitigation strategies on the Star ratings, like any opportunity to shift people to other if you have dual plans in the state or anything like that, that would be helpful, too. Thanks.

Sarah London:

And then on Stars, I would say there are probably three ways to think about mitigation. The first and most important is making sure that we position 2023 bids in order to maximize benefit stability across 2023 and 2024. And given that we had early visibility into headwind, we were able to do that. The second, of course, is creating the important tailwinds in 2024 in order to make up for the revenue hit. And then the most important one is making sure that our performance in Stars dates of service of 2022 as strong as possible so that we're creating maximum tailwinds for the Stars revenue as we head into 2025, as Drew referenced. And again, on that latter point, having the strong predictive data that allowed us to see the impending impact of the 2021 issue is equally giving us visibility to meaningful improvement in our operational performance on Star in 2022 so far.

A.J. Rice:

Thanks. Just first one cleanup on the PBM contract. I know this is one of the biggest contracts, it's changed [indiscernible] in a while. And sometimes, historically, when there's been a big contract change, the customer gets some help on the transition period. Is there any support that you're going to get from your new PBM on next year that impacts the results as you make the transition? And then my more meaningful long-term question is on the reverifications. Obviously, there's been another delay in the -- or extension of the PAG since I think you last time updated your thoughts on reverifications. There's also the chatter about the economy slowing down. Maybe give us your updated thoughts about how much of the reverifications you might absorb next year versus slipping into '24, if you have any updated thoughts.

Sarah London:

And I would just …

Sarah London:

Sorry, I was just going to add quickly on the recession point. It's hard to estimate exactly what the impact of that will be partly because we are still watching that trend. But in general, during a recession, more folks rely on the health safety net and managed care growth. And so that may be an input as we see what the overall impact of redeterminations is as they unfold.

Operator:

And our next question comes from Kevin Fischbeck from Bank of America. Please go ahead with your question.

Andrew Asher:

Yes. In Florida, they never put in a COVID era risk corridor. And so I'm sure that was a consideration for them. But believe me, we pushed back on that. We didn't think that the minus 4.5% on behalf of the participants, the industry in Florida was appropriate. And the good news with Florida is historically they're very good listeners, and it's our job to show data. And if we can show the data mid cycle or certainly by 10/1/23, we get another buy at the Apple and Florida has been a great partner for us and really expect to have a continuing strong and economically viable arrangement in Florida in the long run.

Andrew Asher:

Yes. If you go back, let me frame the answer in terms of what we shared with you at Investor Day, the 1.3% is what we had built in is our composite rate into the 2022 plan that we shared with you in December of 2021. That's closer to 0.9% to 1%, and most of that difference is Florida. So the rest of the portfolio is sort of in the zone of right on track.

Scott Fidel:

Thanks. Good morning. Wanted to just maybe flesh out the exchange marketplace a bit more for 2023. As you mentioned, obviously, some pretty major competitive changes in the marketplace, particularly with Bright exiting and looks like Friday is exiting at least Texas as well. So maybe walk us through how meaningful you think, I guess, the jump ball on membership could be. And then also, your comfort just with your pricing, if you do end up getting a big bolus [ph] of members from some of these other carriers, whether you're confident that your pricing is positioned to still achieve your targeted exchange markets. Thanks.

Brent Layton:

There is no doubt that there is a great opportunity for us here. We've been in the exchange program from day 1. We've never exited. We've continued to provide strong provider networks, good customer service and very stable pricing with good distribution. So we do see this as an opportunity from the standpoint. At the same time, we think that there's; one, the membership that would potentially come over from some of our competitors were exiting, but also just overall growth as we head into the upcoming open enrollment. So we feel positive about the opportunities. We've spent many, many years working very closely with our state regulators, which have given us an opportunity to work through this challenge that they face as people have exited, but that partnership allows us also to continue to work on a daily basis of getting strong customer service.

Calvin Sternick:

Yes, hi. Good morning. Maybe ask one just on utilization. Can you give us a little color on utilization trends in the quarter by product line and how those sort of compared to pre-pandemic levels, and I guess, whether you've seen any notable shifts quarter-over-quarter?

Calvin Sternick:

If I could just ask on the Medicare and commercial side. Are you seeing any change from inflation on consumers' willingness to sort of access care?

Operator:

And our next question comes from Michael Ha from Morgan Stanley. Please go ahead with your question.

Andrew Asher:

All right. Let me see if I can remember all three questions. Almost all of it is the answer to your last question. We have about $40 billion plus or minus of gross spend and almost all of that is with Caremark. On Medicaid, yes, we are right on the nose. We are right at our expectation, both in our plan as well as our six plus six forecast, which is that midyear reforecast. So right on track on Medicaid. And in Medicare, pleased with the performance. There's a whole slate of clinical initiatives and call them sort of initiatives to help improve quality and the affordability of health care. And so it could be anything from clinical initiatives or provider contracting or execution on chart chase for risk adjustment. So it's sort of like the nuts and bolts execution that we've got a whole slate of initiatives that will continue to drive into all of our businesses. We just happen to do really well in Medicare so far this year.

Operator:

And our next question comes from Nathan Rich from Goldman Sachs. Please go ahead with your question.

Andrew Asher:

Yes. We will talk a lot more at Investor Day about capital deployment. But yes, the third bucket of our value creation plan is always contemplated heavy deployment of share buyback, but debt management as well as you saw this quarter. We bought back 370 [ph] million face of our bonds for $300 million and cut out some future interest expense along the way. But we'll cover more of capital deployment at Investor Day. So the answer to your first question is yes, it's contemplated in that -- in the 2024 macro view I provided. And then, I guess, since we've already sort of bless the current consensus. The answer to your second question, which is we've contemplated investments necessary to drive performance in our 2023 buildup, and we still expect margin expansion in Medicare for 2023.

Operator:

Our next question comes from Gary Taylor from Cowen. Please go ahead with your question.

Andrew Asher:

Okay. The answer to your first question, it's really the beauty of having a very broad portfolio of multiple lines of business, being in 30 states now for Medicaid. I mean that helps a lot. So you're not ultra, ultra dependent on any single state, although Florida is a pretty big one for us. So I think it's the execution of the value creation plan and the levers that the team is pulling that has enabled us to power through that isolated item. And in the portfolio, there's things that are going to be better than you expected and things that won't come in exactly where you had expected. So we're pretty pleased to be able to still be targeting that low sixes zone for 2023. On redeterminations, we continue to look at the data, sort of nothing different than what we've said in past earnings calls at our June Investor Day. I don't want to minimize that as an important lever that we will be tracking. It's our job to educate states and provide data to the extent that a rate modification would be necessary in a post redetermination world. So there's work to do in there, but we are ready to do so. I think I described on the prior call, we've got -- we've actually developed a common template across all of our health plans. We've got the data sources available and we are ready to go in and make the arguments and we've warmed up our state partners to acknowledge that it's going to be something that they are going to track also. So I don't want to minimize that as either a risk or something that we really have to work hard to execute on, but we are ready, and our state partners are generally good listeners.

Steven Valiquette:

Great. Thanks. Good morning, everybody. So just a follow-up on the utilization trends. I think if I heard you right, you mentioned that you're not really seeing any notable pent-up demand of traditional non-COVID utilization in '22 versus what you saw in '21. So I guess as we just sort of think about the puts and takes for utilization for '23, do you still factor in the possibility of pent-up demand utilization in any cost categories for next year, whether it's led to procedures or other areas? Or do you just think the Canopy, this is just not going to happen now, and it's all in the rearview mirror as far as the whole notion of pent-up demand? Thanks.

Steven Valiquette:

Okay, got it. Okay. Thanks.

George Hill:

Hey, good morning and I appreciate you guys sneaking me in. Drew, just two things I wasn't clear on is, number one, is there any recourse left for the Florida rate cut or is that decision final? I was just a little confused by the commentary as to whether or not we are done there or something goes forward. And maybe just I had a quick -- I will do PBM for [indiscernible] well I will ask. Can you provide any color on kind of what was kind of the incremental thing that drove the decision change from CVS to ESI? And I typically try to rank order these things like price, service, access formulary. Just would love to know kind of what was the needle mover in the [indiscernible]? Thank you.

Andrew Asher:

And then on Florida, yes, the cake is baked for the 10/1 sort of rate change. But my reference was we are constantly reviewing data with not just the state representatives but also their actuaries and we will continue to do so over the next year. And then we expect the renewal of that rate no later than 10/1/23. One question you didn't ask, but we've got a couple of notes coming in on just to be clear on the $0.25 to $0.50 is net of the tailwinds that I laid out. So that was a macro overall view of 2024, where this team, we are committed to driving to the $7.50 plus, but we also have -- we don't have perfect information, including California. And that view is net of tailwinds, but it includes headwinds such as Star.

Operator:

And ladies and gentlemen, that will conclude our question-and-answer session. At this time, I'd like to turn the floor back over to Sarah London for any closing remarks.

Operator:

And ladies and gentlemen, the conference has now concluded. We do thank you for joining today's presentation. You may now disconnect your lines.

Jennifer Gilligan:

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our second quarter 2022 earnings results conference Call. Sarah London, Chief Executive Officer; Brent Layton, President and Chief Operating Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Any remarks that San team may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors including those discussed in Centene's most recent Form 10-K filed on February 22, 2022, and other public SEC filings. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures can be found in our second quarter 2022 press release, which is available on the company's website under the Investors section. Please mark your calendars for our next earnings conference call scheduled for October 25. With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Brent Layton:

Thank you, Sarah, and good morning. I'm happy to talk about the performance of our core business lines during the second quarter. Centene is the leader in Medicaid Managed Care, and I'm pleased to say we continue to grow. Earlier this month, we were honored to be notified by the state of Delaware of an intent to award Centene contract to serve a statewide Medicaid managed care program. Beginning January 1, 2023, Centene's Health Plan Delaware First Health, will provide integrated services for physical and behavioral health and long-term services and supports through the Diamond State Health Plan and Diamond State Health Plan Plus programs. This is Centene's 30th Medicaid state. It's quite an achievement, and we look forward to this tremendous opportunity in Delaware. In addition to our new estate, earlier in the quarter, we were successful in the reprocurement of our Missouri contract serving TANF, Chip and expansion membership. We were also awarded the sole source specialty plant for children and foster care in Missouri. These contracts began July 1, and we're serving nearly 50,000 foster children and children receive an adoption subsea assistance in the state. This is our industry-leading fifth sole source and specialty contract serving children and young adults involved with the child welfare system. We are incredibly proud of our innovative programs and outcomes for this membership. In our existing Medicaid membership has increased to 15.4 million members at the end of the second quarter. Medicaid growth continues to be aided by the ongoing suspension of eligibility redeterminations. As you're all aware, that PHE is now extended to at least mid-October. As states consider their programs and budgetary needs post redetermination, several states beginning to process to transition new populations into managed care. The state of Indiana has recently released an RFP for long-term services and supports, and we have recently responded to an RFI in Georgia, where the Medicaid agencies asking MCOs about their ability to serve more medically complex populations. Whenever the PHE comes to a close, we'll continue to work with our state partners to support member transition. We remain confident in our ability to attract eligible membership to our marketplace products in 25 states where we have both Medicaid and exchange membership. Speaking of our exchange product, we entered the quarter at over 2 million members. Halfway through 2022, we remain the leader and the marketplace product. The quality and consistency of our product offerings and operations has led to continued membership growth and the ability to partner closely with our providers. We continue to monitor the situation in Washington, in regards to enhance advanced premium tax credits and remain cautiously optimistic on the movements of this reconciliation bill. We feel confident in our submitted bids for 2023, and we look forward to targeted geographic expansion and thoughtful expansion of new products that we began to offer in 2022 open enrollment. In Medicare, we ended the quarter at nearly 1.5 million members and are pleased with our continued membership growth of over 18% year-to-date. Utilization continues to be steady, and we're seeing the benefit of our focused clinical initiatives. As we look towards annual enrollment, we are concentrated on margin and network expansion and the further penetration of existing states and markets. We continue to see deals as an area of growth for our company as our core capabilities position us well to serve this complex population. Midway through 2022, our core products continue to perform well. With that, let me turn the call over to Drew.

Operator:

[Operator Instructions]. Today's first question comes from Josh Raskin with Nephron Research.

Andrew Asher:

Yes, Josh, thanks for the question. I'd say probably the lion's share of the improvement in what we disclose as Medicare HBR is actually in our PDP business. Though, to your point, the Medicare Advantage book is doing a little bit better year-over-year. We priced -- or the company priced 2022, for stability in HBR back when those bids were filed right around June of 2021. But for 2023, we expect a meaningful move in margin expansion. We actually have Stars revenue in 2023. And we're going to balance that with more modest growth. You heard Brent at Investor Day mentioned low to mid-single digits. Medicare Advantage growth, which, quite frankly, I think is a good balance when you're pushing margin going into 2023. And then obviously, 2024, we've got a headwind to contend with that we have to think through the structure of the bids for that year with a recovery in Star scores in 2025.

Andrew Asher:

PDP is doing quite well. There is some of this coming from Medicare Advantage and its clinical initiatives. The metrics we look at, we're -- Jim Murray mentioned this at Investor Day, sort of having dashboards that enable you to react and execute. I mean, that's something we've we're not yet at where we want to be, but we've gotten a lot better at that. And connecting organized clinical initiatives from a centralized body across our health plans and then tracking the cost benefit of those initiatives, that's also something that we've gotten better at over the past, call it, 9 or 12 months.

A.J. Rice:

Hello, everybody. Thanks. Maybe I'll just ask a similar question but directed toward the marketplace, public exchanges. I know this quarter, the reported MLR looks quite low, but I think that's getting benefit from the risk adjustment true-up. Can you just give us a flavor for where you're at, you think, this year in your margin and your normalized HBR. And then is this a jumping off point that's sustainable? Do you think you'll give some of that back next year? How do you think about the long-term trajectory of the margins on the exchanges.

Operator:

Our next question comes from Matthew Borsch at BMO Capital Markets.

Andrew Asher:

Yes. Once again, we're pulling levers this year that we expect to bear fruit not just as we pull those levers in '22, but that will set us up for '23, '24 and beyond. But specifically, if you think about the progression, we're sort of in the mid-5s, a little bit, mid-5s plus right now to that low 6s range that we've been targeting for the last 6 or 9 months as we laid that out. Our tailwinds -- thinking back to the Investor Day slide, if you can picture that, we had $300 million plus of SG&A towards our $700 million bucket. Obviously, the real estate execution, that's $200 million of that $300 million on a run rate basis. And then there's other initiatives, as Jim and Sarah laid out at Investor Day sort of giving us that tailwind. Gross margin, we just talked about a little bit more move. We made a big move in margin in '22, and that's going well. There's a little bit more we can get in '23, and that's how we constructed the bids. We just talked about Medicare margin. That should be a decent-sized advancement tailwind. Then you go over to that third bucket of the value creation plan, the $0.50 bucket -- we'll get the -- we've talked about share buyback. We get the annualization, the benefit of some of that share buyback this year. We've divested a couple of businesses. Those are largely in the neutral zone even though we're deploying those proceeds to both share buyback and to reduce interest expense and debt load, investment income would be another element in that $0.50 bucket. But then there are some headwinds, too. Redeterminations. We talked about it at Investor Day, that's a run rate, $7 billion to $7.5 billion revenue headwind at some point when that annualizes depending on the timing of the commencement of redeterminations, Enhanced APTCs are still outstanding. Jen can probably -- when one of you guys ask that, John can answer that a little bit later. And we're always tracking carve-outs of pharmacy in the Medicaid business. And then there's the ever-present Medicaid rates and trend that could go either way. So obviously, it's our job to influence and manage those.

Justin Lake:

I wanted to ask you about the Medicaid MLR. Over the last couple of years, you've talked about paying about $1 billion of COVID-related margin corridors back to the states. Wanted to hear what you're seeing here year-to-date and expecting for the year overall, both in terms of the number of states they'll have in these in place and how you expect that to trend going forward? Reason I'm asking is just your MLR is up over 100 basis points year-to-date. I'd assume you'd have to eat through on a year-over-year basis, a lot of that $1 billion at the state level before your own MLR will be impacted. So just trying to figure out what's going on there.

Justin Lake:

And that $1.3 billion compares to what last year, Drew, in total?

Justin Lake:

So Drew, I guess the point is you're at $1.3 billion of what you're paying back. So by definition, I would think your at max margin in all those states where you're paying back. So how is your own MLR up 100 basis points when you're still paying back $1 billion. I would assume your couldn't have changed at all in those states? Or am I thinking about this small?

Operator:

And our next question today comes from Kevin Fischbeck of Bank of America.

Andrew Asher:

Yes. I don't know that anyone would characterize or try to minimize losing $7 billion to $7.5 billion of revenue in the associated margin. So that's clearly a headwind. What I pointed out a number of times is that as we exit the fact that if you look at our growth since the first time we actually gave a preview of 2022 revenue, we've grown well beyond that $7 billion to $7.5 billion. So when we exit, we'll actually be a bigger company than we originally expected, even though sequentially at some point, we're going to be giving back $7 billion to $7.5 billion of run rate revenue. As to the risk pool underneath that, we spent some time at Investor Day going through a bunch of the analysis because I agree with the hypothesis, but as we look at the data, we looked at the 0 utilizers. And I mean the Medicaid expansion population was actually down from a base period of 2018 and 2019. That was pleasantly surprising. TANF was up a little but there was really nothing alarming, and we jumped to the, okay, let's look at the 0 to 25% HBR population. And that was up slightly to your point, but not alarming, especially in the context of being in payback in some states. So yes, being in the payback position is not a panacea, but it's one of many factors you look at when you assess all right, what could the impact be on this population? And that's sort of -- as we sit here today before we have any data, that's our best assessment.

Kevin Fischbeck:

Maybe just a follow-up on that point, though, I guess, a little more time. The fact that the risk hasn't gotten worse, I guess, redeterminations are suspended, then helping people and sick people stay on the roles. In theory when redeterminations get reimplemented, the healthy people will drop off because they know how to qualify because they got jobs or they don't qualify for the other classifications. But the sick people stay on. So I guess, why is that the risk pool hasn't changed a whole lot necessarily mean that it won't change a whole lot, respectively.

Operator:

And our next question today comes from Lance Wilkes of Bernstein.

Andrew Asher:

Yes. On the pricing side, we're constantly sharing data with our state partners. I mean we're still in '22, and we still need to get some finality on rates in the back half of the year. So sort of not -- don't yet have visibility on what our forecast will be for 2023 rates will we usually give out that number at the December Investor Day. But the discussions are constructive. The states are thirsting for data. That's one of the keys of being able to sort of influence and convince your state partners of what's necessary. Not a lot of movement yet on inflation. I mean we're not seeing a lot yet but we're vigilant there. And once again, forewarning our state partners that to the extent we see those pressures, that's going to have to be reflected in the rates.

Lance Wilkes:

And just a quick follow-up on that. For the recession, and this might be more of a policy question for you, but would a recession require something different than the existing FMAP increases in the current COVID bill and tied to the PHE or is that really kind of equivalent to what one might normally see during a recession?

Operator:

And our next question comes from Scott Fidel from Stephens.

Andrew Asher:

Yes. So we reduced our premium and service revenue by $1 billion for the back half of the year. Panther was a little over $2 billion, although it's growing quickly. And the Central and Spain assets were about $700 million in annualized revenue. And we don't expect to close Magellan Rx until late this year, really, I guess, late this year is our best estimate. So it wouldn't impact 2022.

Andrew Asher:

I was just going to add, and when we announced that in conjunction with Panther, think of it as neutral to slightly accretive, the combination of those 2 assets, so minimal, if any, impact on earnings.

Sarah London:

Yes. Thanks for the question. We're obviously pleased with the progress to date. We got a lot done in the second quarter, but we still have the broader portfolio of non-health plan assets, and we're sort of methodically working through those so if you think about the assets that historically have sat within health care enterprises, and some of our other non-health plan businesses, all of those are going through a consistent process. And we're looking to prioritize that work where we're going to have the greatest impact. So there is still a lot of work going on, and you should expect to hear additional announcements about that. But again, and I've hit this a couple of times. The answer in all cases, not necessarily divestiture. In some cases, these are very strategic assets that can be positioned to actually strengthen the core. And so that's part and parcel of the conversation, too, particularly as we think about positioning the company for growth in 2025 and beyond.

Nathan Rich:

Drew, you had talked about taking price actions in the marketplace business for '23 as you work back toward target margins in that segment. I think across the market, it looks like average premiums will be up in the neighborhood of 10%. I guess like when you think about your business and enrollment for next year, how are you expecting the consumer to react to type of price increases, I guess, in the current environment? And do you have any kind of preliminary view on what you think enrollment in that business could look like?

Brent Layton:

Marketplace, we do not see as kind of a generic national approach. We view it very much local like Medicaid. It's a market to market. And we had mentioned earlier that of our 29 states for [indiscernible] to be 30 with Delaware, 25 of those states we actually have an overlap of exchange. And so the relationship between provider and potential future insured or insured distribution and knowing the markets I think will play well for us and it actually played out quite well in 2022.

Andrew Asher:

Yes, right, right. At Investor Day, I was pretty explicit that the first half, we expected 64%. I guess that's now 63% now that we printed because we lifted the full year by $0.05 and that $0.05 to your point, it's actually a dime of benefit early benefit on the real estate run rate, minus $0.05 of investment Delaware is one example, but there's other ROI-based investments we're making in the value creation plan that we intend to make in the back half of the year. So that's why we increased guidance to net nickel. But otherwise, it's the normal progression, HBRs in like the commercial business and marketplace, those sort of rise throughout the year. And it's sort of a normal cadence thereafter.

George Hill:

Yes is another follow-up on the redetermination process. And I guess I don't know if it will be national or if it's state by state. I guess, could you talk about like the cadence for expectations for redeterminations once the PHE ends? Do you expect a lot of these lives to just kind of be dropped at once and then go through the paperwork process -- or will you guys -- or will these lives effectively stay on the Medicaid roles and then you'll go through the process of determining eligibility. I'm trying to think about the slope as I think about modeling redeterminations.

Brent Layton:

And well said, it is definitely state by state. And at the end of the day, all states are waiting to see when the PHE ends, and they're planning from that standpoint. Some states will take many months and that and some will be much faster. And it really depends both on how the state ultimately sees health care coverage and how they want to proceed in their state. But nonetheless, every state are having working groups and meetings and approaches through communication, through education and really trying to help everybody understand the options they have from that standpoint.

Operator:

Our next question today comes from Michael Ha of Morgan Stanley.

Andrew Asher:

It's obviously a big contributor. We expect that every Q2 so the swing was pretty dramatic because if you'll recall, we actually had a -- we missed our expectation in marketplace in Q2 of 2021. So it's an anticipated driver because that's the quarter in which you get first [indiscernible] data and then the final CMS data. So -- but we outperformed that as evidenced by the 1,250 basis point year-over-year improvement.

Calvin Sternick:

I wanted to circle back to the Medicare HBR comments you made, specifically on I guess how much of the PDP performance -- outperformance there is intentional in the way the business versus how much is coming in maybe a little bit better than expected? And then how are you thinking about the sustainability of those PDP margins in 2023?

Operator:

And our next question today comes from Gary Taylor at Cowen.

Andrew Asher:

So yes, on investment income with $400 million. I think we were $94 million or so year-to-date first half. That includes we sort of wrote down the fuel investments, we cleaned up some things that hit other income and investment income in the first half of the year. And we had some equity investments that obviously took a hit with the equity markets. But yes, we expect around $400 million for full year. So I don't know if it will exactly be $150 million a quarter because there's a ramping up of the Fed rates, obviously, embedded in that. But you're correct there. And your first question DCP. Yes, the state-directed payments element, I would expect that. That's literally we're getting cash from our state, and we've got to push it out to hospitals. That typically happens the next quarter. It may take a couple of quarters depending on sort of the detail around that, but that's pretty much in and out. Pharmacy invoices are tough to predict. I mean we don't manage to a DCP. It's actually an output. It's interesting. I'm always looking to see where it came out when we closed the books. But often, there are balance sheet elements that impact that, that are just timing, things have stretched over the quarter. But fundamentally, I do believe in strength of reserves and that is a measure, an imperfect one, but it is a measure of the strength of reserves.

Benjamin Flox:

I apologize if this was asked already, but I wanted to follow up on Star scores for plan year 2024 revenues. Our understanding is the industry as a whole is going to face some headwinds as some COVID era factors run off. So was the point in the prepared remarks that you kind of expect to underperform that industry headwind? And then can you just give us a bit more color on the key pressures you're expecting?

Sarah London:

Yes. Maybe just to quickly at Wave top sort of rehash the history lesson that we went through at Investor Day on the why. And again, the time period that Drew is pointing to is really that back half of '20 and early part of 2021. And those 21 days of service are what impacted revenue anticipated from Starz in 2024. And so early 2020, we brought Centene and WellCare together a couple of things happen, right? We tripled the Medicare book overnight. We brought 2 different parts together that we're operating in fundamentally different models. One was centralized at WellCare and one was decentralized very hard to run an enterprise quality program at our level of size and scale in a decentralized model. And then we send everybody home for COVID. And so what we saw was the degradation of operations and performance in the back half of '20 and first half of '21, which again will impact '24 caught that in the middle of '21 and added new leadership to the quality program in the back half of last year, tuck them under the value creation office in order for that to be sort of unified prioritized initiative. And then this management team, which is different from the past has committed to quality performance is a priority for the whole company, and we've baked it into our short-term incentive for every single employee. And so all of the work that Jim Murray talked about at Investor Day in terms of how we're watching operational performance for 2022 dates of service. The executive team watches those on a weekly basis because that is what is telling us that we can be looking for a meaningful rebound in revenue year 2025.

Operator:

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Jennifer Gilligan give for any closing remarks.

Operator:

Thank you, ma'am. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Jennifer Gilligan:

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our First Quarter 2022 Earnings Results Conference call. Sarah London, Chief Executive Officer; Brent Layton, President and Chief Operating Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-K filed on February 22, and other public SEC filings. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures, can be found in our first quarter 2022 press release, which is available on the company's website under the Investors section. Additionally, please mark your calendars for our upcoming Investor Day scheduled for June 17. This meeting will be hosted in a virtual format available via webcast. With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Brent Layton:

Thank you, Sarah. Good morning, everyone. Before I jump in, I'd like to build on Sarah's remarks. I had the pleasure of working with Michael Neidorff for 21 years. His impact on this company is undeniable, and I will continue to be thankful for the opportunity he gave me. I'd also like to take a moment to recognize this is Sarah's first earnings call as our CEO. And Sarah, I couldn't be more pleased to continue to work with you in your new role. And I think I speak for the entire team here at Centene when I say we're excited about what the future holds for us as an organization under your leadership. Now back to the business today. I'm happy to talk about the performance of our core business lines during the first quarter. In the first quarter, we have seen HBR in line with expectations across each of our core products. Our Medicaid business remains strong with membership increasing to nearly 15.3 million members at the end of the first quarter and contract reprocurement wins in Louisiana and Indiana. As I'm sure you've all gotten -- got used to me saying, our Medicaid growth continues to be aided by the ongoing suspension of redeterminations. As Drew will explain further, we anticipate the return of redeterminations in August. We continue to work with our state partners to better understand how we can support this transition and are confident in our ability to retain and attract membership to our exchange products into 25 states where we have both Medicaid and Marketplace. As states begin to transition back to redeterminations, I believe we will begin to see new opportunities for Medicaid managed care programs as we move past the pandemic, and states look to improve health outcomes and make Medicaid programs more efficient. In our exchange product, following a strong open enrollment, we ended the quarter at over 2 million members. We are pleased with both our member retention and our new member enrollments. As I discussed at the fourth quarter call, we introduced 3 new product offerings for the exchange in 2022. These products designed to meet the evolving needs of our members, have performed in line with our expectations, served as both a tool for our member retention and attraction as a means to provide member engagement and manage utilization. While we're pleased with the performance of these products, our core and better product offerings remain the foundation of our exchange offerings. We continue to monitor the administration's adjustment to the exchange market, including efforts to close the family glitch, which could allow an additional 5 million people to use tax credits to purchase Marketplace plans. In Medicare, we ended the quarter following annual enrollment with more than 1.4 million members across 36 states. Overall, we are very pleased with our strong growth of Medicare, yielding 200,000 net new members and 16% membership growth year-over-year 2021. We've managed well through another COVID variant at the top of the year as well. As we continue into 2022 and beyond, we see significant opportunity in Medicare. Our focus continued to be margin enhancement through clinical initiatives, network expansion and value-based contracting. Overall, 2022 is off to a solid start across all 3 core products. With that, let me turn the call over to Drew.

Operator:

[Operator Instructions] Today's first question comes from Justin Lake at Wolfe Research.

Drew Asher:

Okay. Thanks, Justin. Yes. So ripping through the HBRs by our lines of business, Medicaid was right on track in the quarter. And we sort of expect that to tick up during the year and then the fourth quarter would come down a little bit. That's the progression throughout the year. You're right. On our commercial business, we expect about 500 basis points year-over-year improvement. We got 420 in the first quarter. That's right on track with our expectation. Last Q2 was pretty ugly for commercial. So you'll see a wider gap there or improvement there, and we expect that to continue on for the rest of the year. So we're right on track. Commercial and Medicare was a little bit better than expectation due to the PDP business not only in HBR, but I'm actually pleased with that business. We had to collapse 6 of our products down to 3. Remember, we acquired Aetna's business a few years ago. And after a few years, you have to get down to the 3 products, and we had great retention based on some programs that were implemented so not just an HBR benefit, but also really good retention performance on that business. And then the sunsetting of the risk corridors, that continues. We're still down to about half a dozen COVID era risk corridors, and therefore, the paybacks we're seeing have diminished quite a bit from last year, and those discussions continue to be constructive.

Joshua Raskin:

So I just wanted to draw on Sarah's comments earlier about the provider network. And how are you thinking about sort of network development? And specifically curious about potential impacts from providers that are seeing pressure on labor cost inflation. And then maybe any specifics around the changes with respect to value-based care in 2023 and beyond.

Brent Layton:

We're spending a great deal of time working with providers on value base. And when I talk about value-based, I'm talking about risk both up and downside. And I would say that, in Medicare, we've continued a very strong effort. So we've always been very focused on value-based true risk in Medicare, and we're continuing that and accelerating that. Medicaid, though, is really discussions, as we moved into the pandemic and now coming out of the pandemic, have allowed us to really be a very high percentage for the Medicaid product. And I think you'll continue to see tremendous growth for risk within Medicaid. And right now, we're looking for the best approach within the exchange. So we're very focused and value-based and there's a tremendous amount of effort and very excited where, ultimately, our conversations, relationships with providers are going and where they're at today.

Scott Fidel:

And first of all, I just wanted to send my condolences on Michael's passing to the Centene team. And then on the question, I was hoping maybe you can give us a little more insight just to some of the policy dynamics that are playing out here around the exchange market. And Brent, I know that you had touched on one of those with the administration looking to try to address the family glitch. We've also obviously got the temporary subsidies that were in place from the ARPA bill, and those may or may not expire. So just interested on how you're thinking about some of these policy sort of developments playing out and how much flexibility the administration will have to implement these just through executive actions or will there need to be a legislative vehicle to address some of these and if you see one of those actually emerging here at this point in time.

Kevin Counihan:

Thanks. We're very pleased with the administration's policy decision on the family glitch. As you folks probably know, we've been advocating for this for quite some time, and it's really a long overdue. So it's a very welcome change. As mentioned, there clearly are some issues related in the draft final rule that we're working very collaboratively with CMS in terms of addressing. So much of health care policy is about -- should be about simplicity and making things easier and simpler for individuals and families to access affordable coverage. We believe the spirit of the family glitch provision attempts to do that, but I also believe that there's opportunities for refinement. And as I said, we're working very aggressively with CMS and constructively to address those.

Matt Borsch:

I was hoping you could help us think about the headwinds from the drop -- expected drop in STAR revenues going into 2023 and how you may have anticipated and incorporated that into your bid for 2023. I know that's confidential, but maybe just some sense directionally you can give us on that.

Sarah London:

Matt, I was just going to add a little bit more detail, and Drew touched on this in his comments, but sort of as we look forward, right, because it is a multiyear effort, our ability to focus on it and make it a tier 1 initiative right now is very important to making that sort of meaningful rebound. So we think we've talked about this before, but we hired a Chief Quality Officer in Q4 of last year. are making real investment in processes and systems with a focus on the member experience. But I would also highlight this is another great motivator for alignment in value-based contracts with providers because that's the best way to improve member experience, make sure we're closing those gaps in care.

Adam Ron:

This is Adam Ron on for Kevin. It seems like you were largely able to improve your exchange margins and hit the enrollment targets that you outlined. So I'm wondering after the open enrollment experience that you had, if you noticed any increased price competition and if you would expect that to continue and how you think about growing off the space setting aside the expiration subsidies.

Brent Layton:

Yes. I mean, we actually raised our premium. We increased it, but yet we were still able to grow and be successful in our markets from the standpoint. And some of that has to do with the new products that we developed. One of the products was more of a clinic focused in South Florida and in Texas and also more of a tailored network approach we use, and that helped us retain members. We've been also not only grew, we retained a great deal of our members year-over-year, which we're excited about. In fact, last year, we grew a great deal through the Biden -- and we've actually been able to retain 69% of those from '21 into '22. So retain growth and being able to very much bring new product that really helped us retain and keep our membership and actually grow even if we raise premiums.

Operator:

Our next question today comes from Gary Taylor at Cowen.

Brent Layton:

Let me hit the mechanical question first. You're right. Last year, we sort of whipsawed quarter-to-quarter in our commercial performance. Now part of that is COVID variants coming at us. And so I'll say everything else equal, Gary, we expect a steady tick-up based upon the benefit plan designs in the commercial business, as you would expect throughout the year, so a steady rise to get to our goals.

Brent Layton:

I'll add one thing. Obviously, California is a very important state to Centene, but we are very fortunate to have many years of experience in California, and we're honored to be in California. And we have a lot of preparation for this RFP. We've been preparing for a very long time, and we strive every day to be the best health plan in California. And that is our goal, and that's what we want to attain and will be.

Nathan Rich:

Sarah, I wanted to follow up on some of your comments on the value creation plan to start. You mentioned putting the pharmacy RFP out. I guess could you maybe at a high level talk about the key elements of that RFP and what you're looking for in a partner and kind of where you see the biggest opportunities for cost improvement in your pharmacy book? And then maybe a bit longer term, but you talked about refreshing the long-term strategy to drive growth. I know you'll get into more detail in June, but could you maybe just talk about some of the key areas that you're looking at when you look at the business in terms of where you see the opportunity?

Drew Asher:

I think you hit on the key word, which is partner. I don't want to have to arm wrestle every other month on issues and really want someone in tandem thinking about how we can deliver the most value to our state and federal customers and our members. So pretty pleased with the level of engagement so far.

Operator:

And ladies and gentlemen, our next question comes from A.J. Rice at Credit Suisse.

Sarah London:

Sure. Thanks, A.J. I will just clarify relative to Medicare, the focus is absolutely on margins, still preserving slight growth but really starting to turn the dial on margin expansion. And it's -- as Drew has said before, it's a multiyear journey, but it starts in 2023. Drew, do you want to talk about utilization?

Operator:

And our next question today comes from Michael Ha with Morgan Stanley.

Sarah London:

So the best person to answer that question and the answer to your second question is Brent.

Operator:

And ladies and gentlemen, our next question today comes from George Hill with Deutsche Bank.

Brent Layton:

Yes. We need a partner that can handle the size and scale of $40 billion of spend and the complexity of a multiline business. So that does limit the field to some degree, but there's still adequate competition out there. And I mean each of the parties has their own unique opportunities to impress us.

Operator:

And our next question today comes from Steven Valiquette with Barclays.

Brent Layton:

Yes. Let me answer it this way. We've grown -- if you go back to March of 2020, the inception, the onset of the pandemic, we've grown 2.8 million members since then in Medicaid, excluding adds like North Carolina or Missouri expansion business, which was sort of an organic win. So we expect a little over half of those members to attrit through the redetermination process, granted, it's an estimate. But it's a very -- it's a very complex estimate that we've assessed over picking slope lines based upon direct conversations with the state. And Brent and Dave Thomas' team have done a really good job engaging with states and actually preparing for the [Catchersmed] opportunity in marketplace. But sticking with your question in Medicaid, so we expect a little over half of that 2.8 million members, which gets you to the $6 billion of revenue to attrit largely by the end of '23. I guess some of it could go into '24, depending on the states that really want to stretch out redeterminations, but I'd say largely by the end of 2023.

Calvin Sternick:

Yes. A couple of related questions here on the redeterminations and the exchanges. I guess, first, with so many members coming to market, either late this year or even into the first half of next year, do you anticipate any meaningful uptick in marketing spend to try to capture these members and just sort of how you think that would compare to historical spending levels? And then second, can you just remind us what programs or initiatives you have in place to try to capture Medicaid members as their income moves up and down to sort of retain the Centene products?

Brent Layton:

So the 29 states where we have Medicaid health plans, we have the exchange or our Ambetter product in 25 of them. So we're able to overlap the counties and in a lot of ways, overlap the provider network, first and foremost. Second, we spent a great deal of time with the states. And absolutely both at the federal level and the state level absolutely want people to have coverage. And both government entities are working very closely with us. In regards to the states, it's about communication. How can we actually communicate with our members in what way through texting and so forth to let them know what their options and opportunities are to work with them. and the exact same on the federal level from that standpoint? In regards to your question about marketing spend and so forth, another component is exactly when does the PHE in, number one. And number two, every state will work at a different time. Some will want to move fast, some not so fast, and that will impact it. But no matter what it is, we will absolutely focus on distribution. We've gotten very good distribution for the exchange, and we'll continue to do that.

Benjamin Flox:

Just wanted to follow up on redeterminations, specifically on the impact of the Medicaid risk pool. We've took some state program leaders indicate they're going to make an effort to keep the 6 members on the roles as long as possible, which seems like it could front-end load some of the margin risk. Can you just provide an update on your thinking about managing through redetermination if and when those 2 begin?

Sarah London:

And I would just touch back on Brent's comments as well that the benefit of being so conversant with our states and helping them to even think about what the right strategy is going into redeterminations and what the impacts might be is that we have line of sight to how each one of the states is thinking, and some of that thinking is shifting. So we have states that started off thinking that they could through the roles in 3 months and I think then better digested the fact that it was probably if coverage continuity and voter abrasion was important that, that's more like a 12-month plan, but we're seeing states everywhere from 5 months, which I think is probably the most aggressive all the way to 17 months. And again, just the fact that we're in those conversations gives us line of sight to plan and then, as Drew said, also be able to bring forward data that make sure that the rates are actuarially sound based on the impact we think we'll incur.

Sarah London:

Thanks, Rocco, and thanks, everyone, for joining us this morning. Please feel free to reach out to Investor Relations with any follow-up calls, and we'll talk to you soon.

Jennifer Gilligan:

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our Fourth Quarter 2021 Earnings Results Conference Call. Michael Neidorff, Chairman and Chief Executive Officer; Sarah London, Vice Chairman; Brent Layton, President and Chief Operating Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-Q filed on October 26, 2021, and other public SEC filings, including the risks and uncertainties described with respect to the potential impacts of COVID-19 on our business and results of operations. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our fourth quarter 2021 press release, which is available on the company's website under the Investors section. With that, I would like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Operator:

Yes, sir.

Operator:

Loud and clear, sir.

Sarah London:

Great. Thank you, Michael, and good morning, everyone. As Michael noted, we delivered a strong fourth quarter performance creating positive momentum as we start the new year and successfully executed on key operational objectives, including the introduction of new Marketplace products for the 2022 open enrollment period, repositioning that business for success in a constantly evolving landscape, the delivery of another strong annual enrollment period in Medicare Advantage, as the value we provide for beneficiaries continues to resonate in the market and continued progress on our value creation plan, including refining margin expansion opportunities and advancing the execution of our highest priority initiatives. On today's call, Brent will comment on our core businesses, including how we are carrying our Q4 momentum forward into 2022. Then Drew will provide details on our fourth quarter performance and financial outlook. Before I turn it over to them, let me provide a brief update on the value creation progress. From a structural perspective, we have added important talent and leadership to our value creation office. As we announced in early January, Jim Murray, who served as Magellan's President and COO, has transitioned to take on the new role of Chief Transformation Officer, leading the day-to-day management of the VCO. Jim brings experience in operating discipline and a track record for successful execution, adding another important layer of accountability to our value creation program. We are thrilled to have him on board. Now to the details. As we mentioned at our December Investor Day, 2022 is largely a year of foundational execution, and we plan to provide guideposts on our operational progress, incremental though some may seem, as a way of bringing you on the journey with us and offering a view into the work underway. And while we are only 1 month into Q1, we have already made progress on some of those key guideposts. First, our pharmacy platform consolidation project. As a reminder, the strategy here is to outsource administrative PBM functions to an external partner, thereby allowing us to reduce our 3 PBM platforms down to 1 and to focus that technology on the clinical, member and provider engagement capabilities that are most important to differentiating the overall member experience. This will drive SG&A savings across the technology footprint and allow for more efficient investment in process automation. Coming into 2022, we had 8 remaining state-specific programs that had not yet been consolidated on our external PBM platform. We successfully migrated 3 of these on January 1 and another on February 1 as planned. We are targeting the fourth migration for March 1 and the remaining 3 are scheduled for later in Q2. Overall, we are on track to be fully consolidated in time to issue our planned PBM RFP against our full $38 billion of pharmacy spend. I am pleased to say that work is well underway to prepare for the RFP release this summer, and we look forward to maximizing value for the enterprise through that process. Since December, we have also made good progress on the efforts we outlined around standardizing and rationalizing core operations. We initiated Phase 1 of our call center standardization, including process mapping as well as beginning the formal enterprise transition of our telephony infrastructure to the cloud. As we mentioned before, this will offer more convenient ways for our members to interact with us and get the information they need. We are starting with our Medicare and Marketplace products and expect this work to be completed in early Q3. We also kicked off Phase 2 of our utilization management work, which involves building an enterprise shared services function to serve all 3 major product lines with a primary focus on enhancing quality and productivity. We completed the Medicare transition and now have the Marketplace transition in motion. Lastly, back in October, we formally updated our work-at-home policies, as we have learned how to deliver the same level of productivity and service to our members in a more flexible workplace environment. The shift to work at home and enhanced flexibility will have a meaningful impact on our ability to recruit and retain talent, but it also means we need to reevaluate our real estate footprint, something Drew mentioned during the December Investor Day. We have already evaluated approximately 25% of our facility locations and see opportunities for material downsizing of our footprint, expect updates on that work as we get through the full real estate portfolio. Finally, I want to touch on the capital allocation pillar of our value creation plan and particularly the portfolio review process. Closing out the story on USMM, we used the proceeds from that majority divestiture to execute $200 million in share repurchases in December. We are aggressively working our way through the noncore portfolio with a consistent, rigorous and strategic evaluation process. We will continue to provide updates on this work as it progresses. While the value creation work is critically important, it is also complex. Let me assure you that we have full organizational commitment to our value creation objectives and are laser-focused on leveraging Centene's size and scale to unlock significant value for our stakeholders. But let me also take this opportunity to thank our leaders and our teams throughout the organization from our local market CEOs and operational leaders to frontline staff and clinical experts for their enthusiasm, agility and willingness to think differently and work differently in service of our members. Overall, our businesses are performing well. We are building on the strength of our core business lines, and we are making meaningful progress on our commitment to margin expansion, all while delivering for our members, state partners, employees and shareholders. I'd now like to turn the call over to Brent for some insights on our core business line performance during Q4.

Andrew Asher:

Thank you, Brent. This morning, we reported fourth quarter 2021 results, including $32.6 billion in revenue, an increase of 15% compared to the fourth quarter of 2020 and adjusted diluted earnings per share of $1.01 in the quarter and $5.15 for the full year. These results are at the top end of our 2021 adjusted earnings guidance provided at our December Investor Day. Let's start with revenue for the quarter. Total revenue grew by $4.3 billion compared to the fourth quarter of 2020, primarily due to strong organic Medicaid and Medicare membership growth during 2021. Total membership increased to $26.6 million, up 4% compared to a year ago. Our Q4 consolidated HBR was 87.9%, consistent with our expectations. As promised, beginning with today's earnings release and each quarter going forward, you will be able to see the HBR components that drive the overall consolidated HBR, commercial, Medicaid and Medicare HBRs. In commercial, you can see the high HBRs in the Q2 and Q3 time frame, driven by the risk adjustment items we covered at our June Investor Day and the Delta variant in the third quarter, as we discussed on the Q3 call. Structurally, Medicaid in the high 80s has the highest absolute HBR of the 3 business lines. And Medicare, inclusive of our Medicare Advantage and PDP businesses, posted the 2021 HBR in the mid- to high 80s. As we've said before, we believe there's an opportunity to lower the Medicare HBR as we look to 2023 and beyond. At an investor conference on January 10 this year, we provided insights about the Omicron variant and related COVID inpatient authorizations rising in the back half of December. As an update for January, COVID inpatient authorizations continue to climb and peaked, at least for now, in mid-January. Interestingly, with the Delta variant, Marketplace was the highest peak of our 3 business lines and Medicare was the lowest. With Omicron, Medicare was the highest peak and Marketplace was the lowest. But fortunately, the acuity, and therefore, severity we are seeing with Omicron is lower than the Delta variant, and measures like average length of stay and resulting cost per admit are lower than during prior variants. This seems consistent with the lower acuity seen in the national data. One more item on trend, influenza cases, so far, continue to be very low compared to a typical year. Moving to other P&L and balance sheet items. Our adjusted SG&A expense ratio was 9.2% in the fourth quarter compared to 9.7% last year. This was in line with our expectation that our SG&A rate would be the highest in the fourth quarter of the year because of open enrollment spending in both Medicare and Marketplace. Year-over-year improvement reflects leveraged expenses over higher revenues. Some of you have asked about our SG&A rate and our mix of businesses. So let me give you some perspective relative to the midpoint of adjusted 2022 SG&A guidance of 8.05%. First of all, it's important to remember that we have and will continue to calculate our SG&A rate and margin metrics off of premium and service revenue, which excludes the forecasted $6 billion of pass-through revenue. And as we covered at our Investor Day, we're breaking out depreciation from SG&A in 2022 and reporting it on a separate income statement line. We expect depreciation to run a little under $700 million for 2022. On an absolute basis, Magellan increases our SG&A rate by approximately 20 basis points. Our international businesses increased by a little over 30 basis points and our other health care enterprise businesses increased it by about 10 basis points, meaning the midpoint of our adjusted SG&A rate for 2022, excluding those businesses would be in the mid-7s, and our value creation plan is focused on driving that lower over time. Cash flow provided by operations was $675 million in the quarter, primarily driven by net earnings. We continue to maintain a strong liquidity position of $2.3 billion of domestic unregulated cash on our balance sheet at quarter end. Furthermore, we closed our $2.6 billion Magellan transaction right after year-end, which used our available unregulated cash. Our goal continues to be to build cash at parent beginning in the back half of 2022 for additional share buybacks and debt paydown. On that topic, as Sarah mentioned, during the fourth quarter, we repurchased approximately $200 million of our stock using proceeds from the sale of our majority stake in U.S. Medical Management. Debt at quarter end was $18.8 billion. Our debt-to-cap ratio was 40.9%, excluding our nonrecourse debt. Our medical claims liability totaled $14.2 billion at quarter end and represents 52 days in claims payable compared to 51 in Q3. Our balance sheet remains strong, and we expect it to strengthen even further as we improve margins and generate cash flow. As we begin 2022, we're building on the positive momentum from our fourth quarter results as well as our organizational commitment to the value creation plan. We are reiterating our full year 2022 financial guidance, including expectations for adjusted earnings per share of $5.30 to $5.50. As you think about the seasonality of 2022 earnings, it looks like consensus is about 58% of adjusted EPS in the first half of the year and 42% in the back half, and that's a pretty good proxy for our estimates. And as you heard from Brent, we are pleased with our execution in the annual enrollment periods for Medicare and Marketplace and are well positioned to achieve our 2022 membership expectations. Overall, our 2021 performance demonstrates the strength and agility of our organization. As Sarah touched on, we have a lot of work in motion to drive our multiyear financial commitments in the value creation plan. We look forward to updating you on our progress as we move through the year. Thank you for your interest. Operator, Rocco, can you please open the line for questions?

Josh Raskin:

I just wanted to follow up on the process around potential divestitures and noncore assets, and I understand the complexities, Sarah, that you mentioned. I think I'm specifically interested if there's an opportunity to include certain PBM assets as part of this RFP process that you're starting, and then if you could just remind us on thoughts on international as well?

Josh Raskin:

Great. And just a quick follow-up. Can you just remind us any RFPs that are coming up in the next year or 2 where Centene is the incumbent?

Operator:

And our next question today comes from Stephen Baxter at Wells Fargo.

Andrew Asher:

Yes, sure. Thanks. Q3, as I said in my remarks, that's when we got hit with the Delta variant largely, sort of, peaking in August. And Marketplace, which is the vast majority of that commercial line item, sort of took at the hardest in terms of the relative peaks compared to prior variants. And it was the opposite of that with the Omicron variant, which started in the back half of December. So I think that's the -- largely the Q3 to Q4 progression that you're observing in that table, nothing else notable in terms of prior period development. We seek to reestablish at similar levels based upon consistent reserve methodology. So I think that was the driver that caused that.

Kevin Fischbeck:

Just wondering if you could talk a little bit about the exchange environment of one of your competitors, scaling back pretty significantly kind of highlighting irrational pricing on the exchanges. So I think you talked about being able to improve margins this year. Can you just kind of help us -- remind us where your margin target is for this year versus that long-term target? And how much of getting to that long-term target is based upon what you have in control or whether some of that is based upon -- if you agree that some people are rational, that pricing, broadly speaking, kind of returning to a normalized rate?

Operator:

Our next question today comes from A.J. Rice at Crédit Suisse.

Brent Layton :

A.J., I'll start, and then I'll kick it over to Drew. In regards to, I think, the announcement you're talking about is Kaiser Permanente, we do not subcontract with Kaiser Permanente in California. So it does not change our RP strategy or any of our approach in the procurement that will be forthcoming. I'll turn it over to you, Drew.

Operator:

And our next question today comes from Scott Fidel with Stephens.

Brent Layton :

Yes, absolutely. In fact, pointing you back to the Investor Day slide where we gave a specific bridge by major line of business of HBR progression from 2021 to 2022. And so if you do the math, that shows the impact on the entire HBR. So if you sort of divide that by the percentage that, that business represents, you get to the 500 basis points in commercial. Medicare, we expect around flat. Once again, we didn't price to improve nor do we think it will degradate in 2022, and that creates an opportunity for '23 and beyond in Medicare. And then in Medicaid, we talked about the last few times, we were in public forums talking about a reversion to the mean and utilization returning to a more normalized HBR in Medicaid, which would be up about 130 basis points year-to-year. You see that represented in that waterfall from our Investor Day slides at 90 basis points, but that applies to the entire HBR. It's 130 if you just isolate Medicaid itself. And then with the advanced notice, I think what it does demonstrate is bipartisan support for the Medicare program and agree those rates and elements so far we expect to be workable for next year.

Justin Lee:

I actually want to follow up through on your comments around Medicaid specifically. When you talked about margin normalization, 130 basis point move is pretty significant in Medicaid. Can you give us an idea where those margins were in '21 and where you expect them to kind of normalize in '22 to start off?

Justin Lee:

Okay. Maybe -- again, I don't want to pin you down on the 10 basis points. But for instance, one of your peers talked about making margin target closer to 4%. Most of the others talk about kind of a midpoint closer to 3%. Maybe you can help us just kind of orient to that in terms of what you think normal is.

Operator:

And our next question today comes from Matt Borsch of BMO.

Andrew Asher:

I'll tackle the first piece, and then Brent is really close to this on a daily basis, and competition can follow up. I think, Matt, by definition, if we're going to be seeking to expand margin, obviously, there's a trade-off there. You shouldn't expect this to grow 30% like we did last year in terms of membership, which was just a phenomenal, top line result. But now we've got to convert some of that to deliver on margins. So yes, by definition, we will be pushing margin harder in '23, '24 and '25 bids than we did in the '21 and '22 bids, and that's just sort of the opportunity that stands in front of us.