Q3 2021 Centene Corp Earnings Call
Good day and welcome to the Centene Corporation third quarter 2021 earnings Conference call.
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I would now like to turn the conference over to Jen Gilligan Senior Vice President Finance and Investor Relations. Please go ahead ma'am.
Thank you Rocco and good morning, everyone. Thank you for joining us on our third quarter 2021 earnings results conference call.
Michael <unk>, Chairman and Chief Executive Officer.
Sarah London, Vice Chairman.
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 Dot 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. Its most recent Form 10-Q filed today and our Form 10-K dated February 22nd 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 third quarter 2021 press release, which is available on the company's website under the investors section.
Additionally, please mark your calendars for our upcoming 2022 guidance meeting to be held on December 10th we will invite sell side analysts to participate in person in New York and ask others to participate virtually.
With that I would like to turn the call over to our chairman and CEO, Michael Neindorf, Michael Thank you Jennifer and good morning.
Thank you Jordan.
Third quarter earnings call.
Yeah.
As you noticed today, we are evolving our presentation format to a streamlined version with essential facts and commentary.
I'm pleased to have zero, London, and drew Asher joining me today, Brent Layton hasn't conflict that could not be avoided but you can expect him to join us on future calls.
First on the quarter, we were pleased with the results and the fact that the matrix with straightforward with minimum noise.
In the quarter, we generated revenue of $32 $4 billion.
H B R 88, 1%.
And adjusted earnings per share of $1 26.
To provide additional context.
Overall, the numbers reflect a return towards normal utilization, while still covering reasonable.
Amounts, it's cool because we seem to have peaked in August.
Importantly, our performance provides a strong foundation for our value creation plan and we remain committed to our margin goals.
Excuse me.
Further supporting our strategic progress during the quarter, we announced a series of organizational changes, including appointing Terra London as Vice Chairman of the board of directors and Brent Layton Who's the company's President and Chief operating Officer.
I would also like to acknowledge that David showed an 18 year veteran of our board of directors retiring to pursue personal business interests.
We do not plan to replace his position as we continue to work on refreshing and streamline the boy to a size of nine to 13 members.
Turning to the current landscape overall the portfolio is performing well.
We delivered a strong membership increase in Medicaid well positioned for continued growth in Medicare and we continue to stay the course and marketplace.
We will provide further details.
We are working closely with states under timing Redetermination, which has so far had been extended until January with the opportunity for additional extensions three months at a time.
As we determinations to resume I would like to remind you that not all states will be doing so at the same time.
In addition, we look forward to offering members, who no longer qualifying for Medicaid the opportunity to enroll in a marketplace for us.
We expect that advanced premium tax credits will keep costs in line for these members and we value the opportunity to support continuity of care and preserve provider relationships within the long term needs of higher quality care, which is much more cost effective.
Yeah.
Looking ahead to 2022.
Additional factors, we continue to monitor and evaluate these include the pace of the RFP pipeline ongoing growth in Medicare the opportunity for improvement marketplace washes as well as the Covid landscape overall.
We will provide full details on these factors and their potential impact.
The headwinds and tailwind.
Investor Day in December.
In addition, we are committed to achieving an investment grade rating and a disciplined capital allocation framework that takes into consideration our priorities, including investing in our business that management and share repurchases.
Before I close I'd like to highlight the importance of vaccine mandates and stopping the transmission of Covid.
Protecting those who cannot yet safely received inoculations to check.
The image logically compromised and young children for whom vaccine access is getting closer but still pending.
Centene has been a leader on this critical issue mandating vaccinations in addition, and importantly.
We also continue to support our members and assessing.
The vaccine to a national outreach campaign and creative participation such as the pro Football Hall of Fame and that's cool.
I would also like to remind you that this platform flu vaccines has been in development for the past 25 years and scientists are indicating is likely one of the safest vaccine every though.
In closing we were pleased with our third quarter results and the sustained momentum across the enterprise, we remain focused on executing across the value creation playbook.
We have in place.
As always we intend to continue to provide transparent updates as we progress through our initiatives and I look forward to seeing many of you and how December Investor day.
Finally, I'd like to thank all our employees for their unwavering commitment and service throughout this unprecedented times.
Thank you for your continued interest in something and I would turn the call over to Sue.
Thank you Michael Good morning, everyone I'm going to provide highlights of our product line performance before touching on the early progress we are making around our value creation plan.
During the quarter, we continued to build on our market, leading position and are experiencing solid growth and good outcomes.
In Medicaid our business continues to perform well.
Membership increased to $14 8 million aided by continued suspension of Redetermination and the go live of our business in North Carolina.
In marketplace with more than 90% of our membership receiving some form of subsidy, we maintain our low income focus and our commitment to providing health care access and affordability to our members.
At the end of the third quarter, our marketplace membership was $2.2 million and we are pleased with the progress of our clinical initiatives as we head into the fourth quarter.
Looking ahead, our 2022 marketplace offerings reflect the diverse and evolving needs of our EM better consumers.
We are introducing a group of new products designed to optimize flexibility access and affordability.
In addition, we plan to grow our coverage map by entering five new states with marketplace products.
As we continue to monitor our policies and plans around a return of Medicaid Redetermination, we believe that our enhanced footprints within both Medicaid and marketplace position centene well to support our members with options for coverage continuity.
In Medicare advantage, we continue to see a compelling growth opportunity for the company. We are expanding seventeens footprint to reach 48 million Medicare eligible adults across the country, which is more than 75% of eligible beneficiaries.
Today Centene serves more than 1.2 million Medicare advantage members across 33 states.
Beginning in 2022, the company expects to offer plans in 327, new counties, representing a 26% increase and three new states, including Massachusetts, Nebraska and Oklahoma.
Now turning to our value creation plan.
As we outlined this past June we have embarked on our strategy to leverage centene size and scale and drive margin expansion through SG&A efficiencies medical management initiatives and strategic capital deployment.
We are focused on generating sustained growth and margin expansion and although it is still very early seeing the enterprise wide commitment from the outset has given me confidence that we are on the right track to achieve our goal.
Brent drew and I are leading this effort and we believe we now have an organizational structure in place to drive the sport across our business and functions.
On the SG&A front, we have identified opportunities across the company, where we believe we can be more efficient.
This isn't about cost cutting it's about positioning the company for long term success.
For example, we piloted new technology within our call centers for use by Centene employees.
This technology trial yielded significant reductions in cycle times, and now will be rolled out enterprise wide.
Another opportunity we've mentioned as a value creation target is pharmacy.
As we alluded to in June we are now taking steps toward consolidating down to a single P. B M platform and rationalizing those platforms. We view as nonessential. We began this work in Q3 and look forward to providing more detail around this overall program in December.
In addition, we are progressing on the review and potential sale of certain noncore assets as part of our portfolio optimization process, which has taken on an increased focus as part of the value creation plan.
Again, we are in the very early stages and as we continue to leverage our size and scale to our benefit. These are just a few of the many levers we are pulling to achieve our adjusted net income margin target of at least three 3%.
Let me remind you that as we progress through these and other initiatives, particularly in 2020, three and 'twenty 'twenty four we anticipate seeing a greater impact pushing us toward our goal.
Before handing the call over to drew let me provide a quick update on the Magellan transaction. We are still awaiting one final regulatory approval in California and continue to expect the deal to close by the end of 'twenty 'twenty. One we continue to work with the regulators to move the transaction to completion.
Now, let me turn the call over to drew to provide more details on our third quarter performance and our updated outlook.
Thank you Sarah this morning, we reported third quarter 2021 results, including $32 4 billion in revenue an increase of 11% compared to the third quarter of 2020 adjusted diluted earnings per share of $1 26.
Revenue grew by $3 3 billion compared to the third quarter of 2020 in total membership increased to 26, and a half million up 5% compared to a year ago.
Our Q3 consolidated H B R was 88.1% right on track with our full year guidance.
A webcast presentation in mid September we provided insights into the first two months of the quarter. As a reminder, in July we saw subsidence and pent up demand in our marketplace business followed in August by a spike in Covid costs due to the Delta variant consistent with National data, our Covid costs peaked in late <unk>.
Just drop throughout September and the sharp drop of Covid costs continues in October.
While the Delta variant has a higher peak as measured in authorizations compare to January 2021, It peaked in fill rather quickly.
With our diversified enterprise, we were able to manage through this given our steady performance in Medicaid and Medicare.
Accordingly, we are maintaining the midpoint of our consolidated H B, our range for 2020, one just shrinking the width of the range since we're three quarters through the year.
Our adjusted SG&A expense ratio was eight 6% in the third quarter with higher short term variable incentive compensation costs compared to Q2, given the positive trajectory of the business.
While we were getting some SG&A leverage on our growth in 2020, one there's a lot more to come over the next few years as we execute on the value creation plan.
One item to point out from a mix standpoint circle are well positioned ASC like hospital enterprise in England has an SG&A rate in the thirties on service fee revenue of approximately $1 4 billion.
This has an approximate 30 basis point mathematical impact on our consolidated SG&A rate for Q3, 2021 and going forward.
Continuing on highlights of the quarter cash flow provided by operations in the third quarter was strong at 1.8 billion.
With respect to unregulated cash we had $2 7 billion at quarter end, which includes the 1 billion eight we borrowed to partially fund the Magellan transaction.
We expect to need approximately $2.3 billion of unregulated cash to close Magellan in the fourth quarter.
Debt at quarter end was $18 8 billion, our debt to cap ratio was 41, 2% inclusive of Magellan financing and excluding our non recourse debt or.
Our medical claims liability totaled $14 1 billion at quarter end and represents 51 days in claims payable compared to 48 in Q2.
This three day increase was driven by the timing of state directed payments claims payments and state fee schedule changes.
You'll see a couple of items in our GAAP to adjusted EPS reconciliation of 309 million one time gain as a result of our acquisition of the remaining 60% of circle in early July 2021.
And a write down of our investment in Rx advance of $229 million in the quarter as we are simplifying our pharmacy operations. Both of these are noncash items.
Before we get to update that 2021 guidance I wanted to comment on the recently announced rating your 2022 star scores. This will drive 2023 Medicare revenue.
We are certainly pleased with over 50% of membership in four star contracts in our first five star contract.
Reading your 2022 benefited from the continuation of disaster provisions due to Covid.
With an expectation of those provisions sunsetting and upon reviewing the in process results of our quality program. We expect rating are 'twenty 'twenty three scores to drop followed by a subsequent jump and rating year 'twenty 'twenty four scores. This essentially has the effect of.
Adding some fungible investment dollars for calendar year 2023.
We've updated our full year 2021 outlook, including a narrowed adjusted EPS guidance range of five O five to $5 15.
This outlook incorporates revenues within a range of $125 2 billion to $126 4 billion increased by the inclusion of circle and expected state related pass through payments of $500 million.
It includes an expected H b R of 87, 6% to 88.0%.
And then SG&A ratio of eight 2% eight 6% 20 basis points higher than the prior guidance with the largest driver being the mix math on circle as we just discussed.
While we still have a quarter to go to finish 2021 the strength of our diversified enterprise has enabled us to manage through the volatility of Covid pent up demand and resulting 2021 marketplace pressure.
This enterprise strength will only improve as we execute on the value creation plan over the next few years.
With regards to 2022 consistent with our public comments in September.
We continue to expect modest adjusted EPS growth next year.
We look forward to providing more details around 2022 expectations and going more in depth into the long term value creation drivers during our December 10th Investor Day.
And for your interest and operator, you can now open up the line for questions.
Thank you we will now begin the question and answer session.
That's a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the.
Keys to withdraw your question. Please press Star then two.
Today's first question comes from Josh Raskin of Nephron Research. Please go ahead.
Hi, Thanks, and good morning, everyone.
Good morning, Mike a question on sort of 2022 top line and I know you know the June Investor Day, I think you talked about 124 billion and see a pretty stout number at this point, but I'm curious you know specifically is doing sort of how you think about that topline just directionally next year and specifically you know us.
We're starting to see a little bit of the competitive environment for both M. A C is in the open enrollment period for next year.
But we'll give you the the.
The bridge in Investor days. The walk you were close to the full results, but as a draw and others. In this room have indicated today, we see continued strength in our medical product.
Medicaid and we see we think we're holding our own and doing better in the marketplace. So unbalanced.
We see a we see growth in the top right, obviously and some modest goes to the bottom line coming from that.
Yeah.
Got you and just a follow up so if we thought about that as sort of mid single digit top line growth and you know if something very similar on the bottom line is that does that kind of what you guys are talking about and sometimes I think that's a good that's.
That's a good place to be right now, yes, okay perfect. Thanks.
Yeah.
Thank you and next question today comes from Matt Borsch.
Please go ahead.
Yes.
I was just hoping maybe you could sort of revisit the headwinds and tailwind for next year I'm not looking up she guidance isn't going to come until December 10th event.
And maybe if there's a particular focus there and sort of the magnitude.
At least directionally of the headwind do you expect from D. A Medicaid redetermination.
Outside of this and so there's some others can jump in but.
We've said that we saw there is a.
A headwind there.
We're not sure of the timing.
Vary by state and depending on the state of the economy, and where things are it could be continued three months at a time, so we're not going to be precise on the timing.
But we see it mitigated by the fact that with the advanced tax credits and things supporting marketplace.
That individuals will be able to move.
Move over to our marketplace, maintaining their network their relationships with physicians.
Which will be a mitigating factor.
As we get closer we see how it's all developed and in December we hope to be able to give you additional detail.
Yeah.
Okay. Thank you. It appears our next question today will come from.
A J rice. Please go ahead.
Thanks, Hi, everybody I would just be curious.
Guys have talked now for two quarters about this idea of reviewing noncore assets as well as today, you've got more exposed to the commentary about the.
The pharmacy benefit management.
Restructuring.
I know, you're probably not going to say what youre looking at doing on the non core assets, but do we have a sense of timing is that something that will happen over the near to intermediate term or is that more of a long term review and on the P. P. M. A restructuring is that.
I think before you talked about maybe 23 relevant contracts are coming up for renewal is something based on your announcement today.
That are more near term opportunity to realize savings or is this still sort of something that will impact 'twenty three 'twenty four.
I'll start and others can jump in too but the.
Evaluation, and what we're doing with noncore assets.
So at any time, it's an ongoing thing it's not something in the future, but I expect as we achieve the.
The expected results from what we're doing and you can stay tuned you'll see you saw it happen sooner than later.
And but once again, we're not it's not how fast it's how well are we.
Sure, we'd get to maximize the value and protect the.
The individuals involved in it so but it's something that.
It's not we're not talking to look for this in 'twenty three 'twenty four there could be.
You should expect some indications.
Indications whats happening soon so you want to add something.
I go that we're actively in the process and as Michael said I think there there will be a you know more information coming both in the short term and on an ongoing basis. Because this is part of the the discipline of looking at the portfolio overall on the pharmacy front I would say you know, we're very focused short term on logical consolidation as well.
Talked about as well as rationalization of noncore platforms and as we've said before we have an RFP launching in 2022, that's more focused on the long term.
I think is a great example, and then sort of microcosm of the value creation opportunity and so our plan is to actually go through this in detail in a case study in December. So you can understand all of the moving parts.
Yeah.
Okay, great. Thanks, a lot.
And our next question today comes from Kevin Fischbeck Bank of America. Please go ahead.
Great. Thanks.
I understand what you've been saying so far around utilization it sounds like the Medicare and Medicaid businesses have been performing relatively well, but the exchange businesses are still seeing pressure can you comment a little bit more about what exactly youre seeing from an MLR and cost structure perspective, and then how you feel like your pricing.
For next year would reflect that have you caught everything should we expect normal margins next year or is there reason to believe that it hasn't been.
Fully reflected yet.
Thanks, Kevin This is drew a we certainly expect to make progress towards our five to seven and a half pretax you know long term goal for marketplace next year, and we sort of price to sort of move in that direction with respect to the quarter.
As I mentioned, we saw subsidence and pent up demand in July which was good to see actually marketplace took it the hardest in terms of the August spike and the Delta variant of Covid, but it retreated pretty quickly.
So there is still pressure in the quarter on marketplace, but youre right the strength of Medicare and Medicaid sort of carried through the portfolio as a whole and we look forward to the expansion that Sarah mentioned in marketplace and some of the new products that will address some of the competition in and we.
To make margin expansion progress in marketplace next year is one of the the tailwind going into 2022.
I guess one of your competitors.
Ignore that there was maybe lower visibility than normal and the risk adjustment on the exchanges this year, because especially the former period I guess, how do you feel about that this quarter your visibility into that this year.
Yeah, Youre right, we manage and we sort of track to four cohorts of the marketplace business the renewal cohort the new cohort in AEP.
The F C. P special enrollment period pre May and then the F. C. P. You know may plus when the subsidies the enhanced a P. T C. As were in place and so we can track the med cost drivers and you're right because it's a partial year for those new members you have a more limited risk adjustment opportune.
Both in terms of having the acuity are reflected in risk adjustment and then just the the the calendar of having them less than 12 months, but we expect them to roll into next year.
With a full year of of that that opportunity is also there was also some COVID-19 related costs that were not subject to risk adjustment so that.
That has an impact on it as well so it's a.
It's on a typical year it was really a typical and a lot of it.
A lot of ways.
Okay, great. Thanks.
And our next question today comes from Justin Lake Wolfe Research. Please go ahead.
Thanks.
First a quick follow up on Kevin's question drew can you you know I think you had talked about the fact that at least at the high end of the MLR range.
I mean that exchanges might be kind of breakeven. This year can you give us an update there and then one thing I noticed on the on.
The accruals for our medical costs payable, what's like your reserves grew pretty significantly in the quarter relative to premiums is that just a you know try and do it.
He's going to take over taking a little bit more conservative view and kind of how you set out or was there something mechanical there. Thanks.
Yeah on the last point I was a little bit more mechanical I mean, clearly reserve strength is an important factor of running a good business, but we we outlined the three day increase sequential as there's pass through payments that are sitting on our balance sheet that need to get to their ultimate homes and.
And then there was some timing of pharmacy invoices and other things sort of mechanical that's driving that three day increase sequentially.
And then you know on marketplace.
We price for margin expansion off of this year as Michael said look this is a this is a choppy and difficult year of marketplace with the various COVID-19 impacts, including the pent up demand in Q2 and the the the risk adjustment changes that CMS made.
You know earlier this year, but the good news is we maintained our H b our guidance, we've got a great portfolio diversified portfolio across the businesses. So we were able to withstand those headwinds in 2021 that we expect to flip into tailwind going into 2022 in the marketplace business.
<unk>.
Thank you and our next question today comes from Randy just said.
<unk> Citi. Please go ahead, I'm, sorry, Ralph Jacoby with Citi. Please go ahead.
Thanks, Good morning, again, just to Justin's questions can you give us a sense of exchange margins and where they are this year I guess first and then.
Second you talked about Redetermination, both in terms of sort of timing around sort of the phe just want to understand that a little bit more in terms of state discretion around that I guess and then the last piece of it can you give us a sense of how you view profitability between Medicaid and Hicks generally so if.
Do recapture those lives how we should think about the economics of that.
Yeah and on the margin question, where we're below our target that's obvious this year and we need to make progress towards that in 2020, you 2022 with with respect to marketplace.
And then you're right there is an opportunity.
We're sort of pegging the Redetermination timing, we mentioned this in that September conference that was webcast in the summertime of 2022, that's consistent with the C. B O's baseline update in July.
But thereafter as Michael imagine, it's gonna be a state by state sort of determination of of the duration of that redetermination process, but it's great to have an expanded footprint in marketplace and and you're right. We need to you know if we need to sort of price for those members in two.
<unk> thousand 23.
To come into the marketplace business and make sure. We're we've got attractive products for them.
I just want to add to your one question in terms of.
I'm not going to try and guess how states will determine when they're going to do something.
We have enough experience to know that it's not that predictable and it could be a new director decides that Stuart now there's just so many different variables will assist in individuals' judge.
But it's not it's not a science that we can hang our hat on.
Yeah.
Okay fair enough. Thank you.
Thank you next question today comes from Scott Fidel with Stephens. Please go ahead.
Hi, good morning.
And I Wonder if you can talk a bit about the current staffing pressures and the broader health care market and.
Whether that's having any impact on any of your businesses and then how how that's influencing.
Minor contracting and whether you need to make any adjustments for that.
Just as a follow up just wanted to clarify on <unk> question. Michael I think you did say that you think that mid single digit rents and Etfs is a good placeholder for now just want to actually for 'twenty 'twenty. Two just wanted to clarify that that actually get you on that.
I'll take part of this always can jump in yeah. So that's a good place to start for a placeholder until we get together in December relative to staffing, yes, we're feeling pressures we have some we think some solutions that are.
We will work for us and we're making work, but I'm not going to for competitive reasons disclose at all.
And the other thing that's done is it's we're accelerating our use of AI and AR.
Outdated systems and capabilities so that we.
We're becoming more efficient, which will have the benefit also longer term, it's contributing to our margin expansion.
And so using some of these techniques and so and others are developing in the team.
It's freeing up nurses and others to do higher value.
Activities.
And case management, so well well we're facing the same issues is just we're fortunate to have the size scale and versatility to be able to deal with it.
On the 2022 question you know once again, it's probably best to wait for that bridge, because you know Magellan there'll be a piece of it the annualized nation of circle. So.
You know probably better to wait and see all of the pieces rather than to make a broad estimate of of 2022 and then once again I want to mention you know I mentioned, one of the tailwind being improvement of marketplace margins in fairness wanted to remind you guys of what we said in past conferences on a couple of the head.
<unk>.
Medicaid reversion to the mean on N b are on H B R as well as pharmacy carve outs and a couple of our states, which are not insignificant in terms of the revenue and bottom line impact. So those are all factored into our assessment of modest adjusted EPS growth for next year.
Yeah.
Thank you.
So that comes from Lance Wilkes.
Please go ahead.
Yeah, Yeah, Yeah, I had a question for you Sarah and it was really related to strategic investment spending is kind of a component of the margin improvement plan and I was just interested in maybe the overall implications for Capex expenditures for street strategic investments like digital and value based care would be you.
Our priorities in the magnitude of investment and then on the noncore divestitures.
Are the benefits of that proceeds there than you've been used for something or the benefits of that getting rid of sort of money, losing them are lower margin businesses. Thanks.
Yeah. Thanks, a lot. It's great question. So as we think about the value creation plan as Michael has already touched on a big piece of it is driving efficiency in our operations.
And so you know obviously focused on our agility in data and working towards leveraging artificial intelligence automation, we've talked a lot about that's a huge priority and we think theres a lot of low hanging fruit there so making sure that we have the right talent and we have the right tools, obviously, a picture with a piece of that but we think there are others out there.
There are pieces of that that we are developing ourselves. So that I think is a real foundational piece of all of this and then being able to reinvest the savings that we get from those efficiencies to continue sort of the flywheel of value creation. As are also part of the plan and then relative to the divestitures I think they you know the answer very well very.
On a case by case basis.
And and in some cases that has to do with positioning assets are in such a way that we think they will be beneficial to longer term strategy and in different areas, whether that's around provider enablement, rather domains that we think are important.
We move to value based arrangements or core or tools that are that you know, we think well have a greater benefit to the to the broader industry and so it really is it is on a case by case basis soon as we get through those.
Our our intention would be to provide a broader rationale for all of that decision, making I'm going to give you. One example, on AI and things that I've been talking about some extent and it will go into south.
It takes the nurse 18 minutes to go through a trial to Preauthorize something on average we now have AI and systems in place at that same decision approving it can be done in one second.
Thinking about that and thinking about the fact that we will have a satisfied.
Remember who is sitting there the doctor and say my goodness. It was approved before I said finished typing request, how if it's a no there will still be human intervention, because we're not going to have that but I think we were talking yesterday technology, probably two thirds of these cases are approved using the AI, we've rolled it out to five or six.
So it's well tested but that's an example, so all of a sudden we now have the ability to taken those and move them from the routine.
Monotonous reading charts to doing things in case, managing and that creates a much more productive environment. So I just use as an example that makes it real it's how we're overcoming the labor issues.
Did you want everything.
Thank you I was Washington comes from Ricky Goldwasser with Morgan Stanley. Please go ahead.
Yeah, Hi, good morning.
A couple of follow up questions here first one just a clarification.
Do I heard you both say 2022 EPS growth is going to be modest. But then also heard you say mid single digits. So just wanted to make sure we're thinking about it correctly to be modest as low single digits versus mid.
Secondly.
On the P. P M and consolidation into our new platform I'm, assuming that that Cvs that you work with in the past.
I think I also heard say right, you're saying that you would've launched an RFP in 2022.
Wanted to clarify that it would be the timeline for that.
And then the new question is just if you can give us examples of the new products are doing introducing into the marketplace. I think you've been talking about some exciting new things that you are putting in the market. If you could give us some details around that.
Hey recognizes journey, let me start with your first question. The you know the the modest adjusted EPS growth next year takes into account everything we know sitting here today I think you're referring to the mid single digit reference was it goes back to our June Investor Day, that's on the revenue that's sort of long term organic revenue.
Mid single digits and I think a question was asked earlier that may be conflated there too.
On the P B M opportunity Sir.
Yeah, So as I said that in the short term we've been focused on consolidating with our existing external vendor and then and you are correct. We are launching an RFP in 2022 that would award a 112023.
And so the goal there is to make sure make sure that we are you know staying sharp relative to our external partners and then getting the greatest economic benefit where we are leveraging an external partner for our core capability, let me jump in and says I'm. The Guy loves doing these rfps for P. B M services, Yeah, we would launch some.
Time in 2022 for the contract ends at the end of 'twenty three for one 124, and that's going to be a huge opportunity.
For for an external P B M.
On the new products.
I'm going to be a little tight lipped on it till it hits the marketplace, but I'd say it takes advantage of a systems capability.
The broad and effective networks, we have and I think will put us in a.
Our competitive placed without a fall in the Oh, joining a race to the bottom.
Thank you.
The next question today comes from Stephen Baxter at Wells Fargo. Please go ahead.
Hey, Thanks wanted to follow up on the exchange discussion for 2022, it's obviously a lot of data has become available in the past couple of days.
It seems like you're you know consistent with your comments are much more focused on margin, perhaps more so than others in the marketplace. I was hoping you could discuss what you're seeing across the market at this stage and what do you think there's a conclusion that we reached about the outlook for membership growth do you think about plans right. So thanks.
Yeah, you're right to point out that we tilted a little bit more towards margin than we have in the past in terms of our pricing posture, but we're still well positioned in a number of markets and it's you know look we're just in the AEP now its too tough to call, whether we'll grow a little or shrink a little but the important thing is to maintain the base.
<unk> and drive margin expansion as we roll out and test some of these new products and and provide what we think is an excellent value proposition to the growing population eligible for exchanges. Thanks to the special enrollment period and the enhanced advanced premium tax credits, but we did well.
During the special enrollment could go along with that and I remind you that the Oh.
Advanced tax credits have a.
Tended to minimize the prices down and somebody may have and so on balance Oh, I'll say I want to be cautiously optimistic that will be.
I know people will be pleased with the results.
Thanks.
A quick related follow up just wanted to ask about the recent announcement deal bumps in virtual first plan makes changes in partnership with Teladoc.
Any sense you can give us on the longer term strategy, there and maybe also talk a little bit about the cost difference that provides you versus traditional offerings.
Yes.
Right.
Kevin Coen, a hand here on the call.
Kevin Please have.
To virtual care products.
First we have and are in the marketplace. We have our am better virtual access product that we're piloting in four states and the second one which I think you're referring to is the virtual first product they were piloting for employers.
The things that they have in common is 24 seven axis urgent care.
Prevention screenings care management.
Zero dollar costs for virtual care via the Teladoc network and also access to our in network providers as needed. So we're there there's a lower price point for each of these products and are and we're excited about about their introduction.
Thank you. Our next question today comes from Gary Taylor of Cowen. Please go ahead.
Hey, good morning, just had a couple of questions thinking about the potential.
Potential headwind from the Medicaid MLR nor.
Normalizing our returning to mean.
Drew how do we think about.
The year to date sort of retro state adjustments you you called out I think I think beginning of the year was kind of thinking that would be $400 million I think last quarter.
It was up to $675 million, we know some of those are expiring like in Michigan, but do we just I.
I guess the conclusion is just that the.
The underlying Medicaid medical expense.
Benefit to you this year is still larger than those than those retro adjustments.
Yeah, those are starting to tail off you're right. It was $675 million in Q2 at the end of Q3, our full year forecast is $820 million and while some of those risk corridor is carry into the first half of next calendar year, because it coincides with the state's fiscal year, those we expect largely to sunset.
The Covid era.
Risk corridor is another mechanisms so you're right that's been the governor on the underlying you know stronger utilization performance in Medicaid during the pandemic and coming out of it.
So obviously that mutes the forward impact, but we still do think.
There'll be.
Sort of a reversion to a little bit higher H B R. As we look ahead in Medicaid I think it's responsible to assume that.
And would you say the same.
Not to the same degree, but when we look at year to date performance in Medicare advantage across the industry and some of the deferred care. There that also seems like a potential place where you could see some resetting our normalization of MLR or is that something you contemplate in your 22 outlook also.
And that's not so much in terms of Medicare advantage. That's you know that that's there.
You look at the Delta Covid, the the Delta Covid impact in the quarter because of the high vaccination rate of seniors actually the peak and Medicare advantage was actually below the January whereas Medicaid and marketplace, we're above that January peak.
So I'd look for more steadiness in Medicare advantage, we expect to grow that business and then as I stated I think at the June Investor Day, and on the Q2 call that becomes a margin expansion opportunity for 'twenty, three and 'twenty four.
As we can impact those bids looking at those future calendar years, Yeah, I wanted to I don't want to caution everybody. We don't want to get too far ahead of ourselves.
These are the kinds of things likes to talk about our Investor day, and we'll have much more clarity we would hope so.
Over the next couple of months. So he can give you some really good information for your models.
Well I was going to ask about 2024 guidance next but I guess I guess how long.
Because that thanks for the time thanks.
Thanks for the comments and thank you for not asking that went up to say the same thing again [laughter].
And our next question today comes from George Hill of Deutsche Bank.
Oh, Hey, good morning, guys and I. Appreciate you taking the question I guess, what I wanted to follow up on Ricky's question is about the <unk> RFP and I don't know if you would be willing to frame any kind of sense of magnitude around the savings opportunity to get the margin expansion opportunity that you see there. That's question one and then I guess just a very quick follow up would really just be the free cash flow performance in the quarter.
Great Drew I guess do you just see this as kind of a catch up or can you talk about maybe what's sustainable here or if there's going to be a free cash flow version.
Below net income that we should look forward too.
Yeah on the P. B M. RFP you know we've stated a number of times, we've got well over 30 billion are.
In pharmacy spend across our products and obviously that has grown as the business grows.
And you're right to point out and actually if you look at our slides from the conference in September. It's certainly one of the value creation opportunities with sort of a stair step benefit.
One 124, despite the fact that every year, we push on pharmacy cost to do market checks to improve the performance of the business. So well have to wait and go through that process to see the value in use.
The combined basis the scale of our.
P P M.
Purchases of drug purchases.
Yeah, and I would just add and again, we'll I think we'll go through this in great detail in December but when you think about the potential savings. It's not just from that RFP process right. It's also the fact that we're streamlining in terms of a vendor partner that we are rationalizing noncore platforms, which will result in SG&A savings and we've got operating model.
Opportunities there that will go through and then a lot of process.
Automation opportunities within the P. P M space. So when you think about the value that the P. B M work can drive to the value creation program. It's I think it obviously is inclusive of the RFP, but it goes beyond that.
And then on the cash flow state.
Sorry go ahead.
Wanted to jump in with a quick follow up then maybe phrase it a different way I think besides cost what other factors are going to be important to you guys. As you think about the process on the off take.
Well if quality is always at the top of the list execution.
The complexity of operating.
You know sort of a complex customers such as Centene I mean, that's pretty critical as well.
Thank you.
And then gentlemen.
So the cash flow question.
The cash flow, obviously is driven by changes in the balance sheet and so there are some things on the balance sheet represented by that three day increase in D. C. P that will be paid out in the future. So you have to take that into consideration when you take a look at our cash flow statement.
Yeah.
Thank you ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to Michael for any closing remarks. Thank you, yes, I have a member of the team who has indicated I misspoke. When I said, we're gonna be dropping the board for nine to 13 that number's actually nine to 11.
Down from the current 13 wishes at 12 now so I wanted to clarify that so I think the people for we look forward to our Investor day in December when we can answer more of the questions with more.
<unk> uncertainty.
Stay healthy.
And have a good quarter. Thank you.
Thank you Sir 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.
Yeah.