Q2 2022 Centene Corp Earnings Call
Good day.
Welcome to the Centene Corporation second quarter 2022 earnings Conference call.
All participants will be in listen only mode.
We need assistance, please signal exalting specialists by pressing the star followed by zero.
After today's presentation there'll be an opportunity to ask questions.
So asking a question you May press Star then one on your Touchtone phone.
If you're using a speaker probably as you. Please pickup your handset before pressing the keys.
Your question. Please press Star then two.
Please note today's event is being recorded.
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 second quarter 2022 earnings results conference call.
They're a 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 dotcom.
Any remarks that Centene may make about future expectations plans and prospects constitute forward looking statements for the purposes 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 factor.
Including those discussed in Centene is most recent Form 10-K filed on February 22nd of 2022, and other public SEC filings.
<unk> 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.
We'll 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 2022 press release, which is available on the company's website under the investors section.
Mark Your calendars for our next earnings conference call scheduled for October 25th with that I would like to turn the call over to our CEO , Sarah London Sara.
Jen and thank you everyone for joining us this morning.
Centene entered 2022 with a focus on value creation.
As a reminder value creation at Centene means, becoming a better partner by simplifying and strengthening our operations, making it easier for our members and providers to work with us.
It means focusing on our core business and leveraging trusted local relationships to fuel disciplined growth.
And it means allocating capital to innovation that delivers better outcomes.
Value creation is not measured solely in earnings per share, but importantly in the impact that we have on the members we serve and the communities we support.
Over the last six months our value creation program has gained momentum and scale with efforts that span our local health plans and enterprise wide functions at.
At the same time the team is executing well on our day to day objectives.
And doubling down on our work to define the long term trajectory of the organization for 2025 and beyond with a focus on sustainable growth and market leadership.
This morning, I'll provide headlines of our quarterly performance and cover a few more recent value creation updates.
Before handing the call over to Brent for an update on product line performance I'd also like to touch briefly on what I've observed over my first few months as CEO about send team's ability to differentiate in the marketplace.
Start with the quarter.
Second quarter results were directly in line with the guidance, we provided at our June Investor Day.
Thoughtful product positioning across lines of business initiatives to enhance medical management and a more balanced approach to capital allocation all contributed to our strong first half performance, which provides an excellent foundation to build from as we look to the balance of the year.
Today, we once again increased guidance with our full year adjusted EPS outlook now at $5 60 to $5 75, which represents a cumulative 20 cent increase since Q1.
You will hear more details about the quarter and this improved full year outlook from drew shortly.
On the value creation front, we are full steam ahead, you've now heard quite a bit about the myriad inflight initiatives, Jim Murray and his team are tracking and supporting in close partnership with our business leaders.
We continue to see solid progress on our operating model redesign efforts as well as our work to optimize key process driven functions like quality and utilization management.
Our plan to establish a pharmacy center of excellence across the health plans continues to advance and the P. B M. RFP process remains on track.
And the handful of weeks since our June Investor Day, we completed the Panther divestiture closing out another key milestone in our portfolio review work as previously.
We announced a majority of the net proceeds from the sale will be used to repurchase stock and the balance to reduce debt.
Yesterday, we announced another important portfolio action with the signing of a definitive agreement to divest our Spanish and central European assets to Vivaldi Santo <unk>, which is the third light's largest private hospital company in France.
We believe have Aldo saute is well positioned to invest in and grow Ribera Salud taught aon and pro diagnostics group, while ensuring they continue to provide high quality care for patients across Europe .
Across the remainder of our non health plan portfolio. The review process remains very active and the team is leveraging our evolving long term strategic framework to ensure that we position these assets either through investment partnership or divestiture to deliver maximum strategic benefit moving forward.
Consistent with our capital deployment plans. It is worth highlighting that we repurchased $450 million of our common stock since the beginning of Q2 in part leveraging proceeds from other minor asset sales in the quarter.
On the real estate front. We previously described the comprehensive exercise to evaluate our leased and owned real estate portfolio.
Today, we took an important step towards the achievement of run rate savings related to that exercise recognizing a charge, reflecting a material reduction in the company's real estate footprint.
This allows us to capture savings associated with the space rationalization beginning in Q3.
We continue to expect approximately $200 million of run rate savings for 2020 three and beyond.
This initiative reflects the high value we place on evolving centene to meet the needs of our incredible workforce, but it should also serve as a proof point that we will look to pull forward the benefits of our work wherever possible as we progress on this value creation journey.
As you can see value creation work streams are delivering tangible progress and measurable results.
As we move into the second half of the year, we will continue to provide updates on major operational milestones and keeping with our commitment to transparency and to prove that we are building the momentum necessary to carry us through the rest of this year and help us deliver meaningful financial results in 2023, and 'twenty 'twenty four.
<unk> ability to grow deliver and transform all at the same time is made possible by our most valuable asset our 80000 diverse and innovative employees.
They're mission driven dedication to our members powers everything we do in this organization.
I've spent quite a bit of time on the actual and virtual road since taking on this new role meeting with our health plan leaders renewing connections with our key state partners and listening to team members at the front lines of our market operations.
And I want to report back to you that my conviction regarding the power of Centene local approach has never been greater.
Local matters when it comes to growth as our unparalleled business development team proved yet again with a recent win in the state of Delaware.
Years of boots on the ground personal visits relationship building and deep market knowledge were key to securing a contract award in Centene, 30th Medicaid State.
Local makes the difference when it comes to outsize impact as I saw in my visits to our silver Summit Health plan in Nevada.
Our team members realized how many of our new mothers didn't have access to transportation and.
So they partner with an organization called babies bounty to create a diaper van they could deliver baby essentials diapers and wipes directly to southern Nevada is tiniest and most vulnerable residents.
Local also makes a difference when it comes to innovation as I experienced firsthand on our recent trip to New Hampshire.
Combating the effect of rapidly rising food prices and knowing the risk food and security presents to our Medicaid members our team at New Hampshire healthy families Jumpstarted their green to go program distributing locally sourced fruits and vegetables from food advanced strategically positioned across the granite state.
But let me tell you where local really makes a difference.
Local makes a difference when it comes to carry the kind of deep personal carrying that comes when your customer is also your neighbor.
On may 14th when shots rang out in the aisles of our neighborhood grocery store in downtown Buffalo are extraordinary colleagues and Fidelis care in New York State sprang into action.
No one from headquarters had to call them and tell them what to do they knew what to do because they were there inside the community because they were local.
Within 24 hours Fidelis employees mobilized to distribute food and needed supplies into a community who's only grocery store with surrounded in police tape.
And with the neighborhood pharmacy inside that tops grocery store suddenly closed are locally based team identified and called every one of our 373 members who would fill their prescriptions at that pharmacy in recent months.
Within 72 hours each of those 373 members received a personal call from our Fidelis care employee checking in on them.
During their supply of medication was in order and assisting them in identifying additional pharmacy resources in the area.
Nabors, engaging and simple, but profound acts of human carrying that's the power of local.
We are proud of the progress and the financial performance of Centene year to date, and we are proud of the work that our team members do everyday Val.
Value creation for members leads to value creation for shareholders and we will continue to focus on this alignment in the coming months and years as we execute on both value creation and our long term strategic plan for 2025 and beyond.
With that I'd like to pass the call to Brent for more detail on our core business line performance during the quarter Brent.
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 or in a tier two award Centurion a contract to serve a statewide Medicaid managed care program.
Beginning January one 2023, Centene health plan, Delaware, Burstow 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 30th Medicaid State, it's quite an achievement and we look forward to this tremendous opportunity in Delaware and.
In addition to our newest state earlier in the quarter. We were successful in the re procurement apart, Missouri contract, serving TANF chip and expansion membership.
We were also awarded the sole source specialty plan for children in foster care in Missouri.
These contracts began July 1st.
And we're serving nearly 50000 foster children and children receive an adoption subsidy assistance in the state.
This is our industry, leading fifth sole source and specialty contract serving children and young adults involved with a child welfare system.
We are incredibly proud of our innovative programs and outcomes for this membership.
And our existing Medicaid membership.
Increased to $15 4 million members at the end of the second quarter Mehdi.
In Medicaid growth continues to be aided by the ongoing suspension of eligibility redetermination as you're all aware the phe has now extended to at least mid October .
States consider their programs and budgetary needs post redetermination. Several states are beginning the process to trends 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 RFID in Georgia, where the Medicaid agencies, asking Ncos about their ability to serve more medically complex populations whenever the phe comes to a close we will 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 ended the quarter at over 2 million members halfway through 2022 we remain the leader in 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 the bats premium tax credits and remain cautiously optimistic on the movements of this reconciliation bill.
We feel confident in our submitted bids for 'twenty two 'twenty three and we look forward to targeted geographic expansion and thoughtful expansion of new products that we began to offer in 'twenty to 'twenty two open enrollment.
In Medicare we ended the quarter nearly one and a half million members and are pleased with our continued membership growth of over 18% year to date utilization.
Utilization continues to be steady and we're seeing the benefit of our focused clinical initiatives as we look towards annual enrollment we were concentrated on margin and network expansion and the further penetration of existing states and markets. We continue to see duals as an area of growth for our company as our core capabilities position us well to serve this complex.
<unk> me.
Midway through 2022 are core products continue to perform well.
With that let me turn the call over to drew.
Thank you Brent. This morning, we reported second quarter 2022 results of $35 9 billion in total revenue an increase of 16% compared to the second quarter of 2021, 11% was organic with 5% from M&A.
We reported adjusted diluted earnings per share of $1 77 in the quarter up 42% from a Buck 25 in Q2 of 2021 overall I'd characterize this as a strong quarter consistent with the update we provided you at Investor Day on June 17th.
Let's start with revenue for the quarter.
Total revenue grew by 4.9 billion compared to the second quarter of 2021, driven by strong organic growth throughout the last year in Medicaid primarily due to the ongoing suspension of eligibility redetermination.
Strong Medicare membership growth during the annual enrollment period, the acquisitions of Magellan and circle and the commencement of contracts in North Carolina total membership increased to $26 4 million up 7% compared to a year ago.
Our Q2 consolidated H B R was 86, 7%.
Medicaid at 89, 1% was a little better than expectations Medicare at 85, 6% was right on track and our commercial business continued to make progress toward our margin goals aided by the results of risk adjustment, which in marketplace as zero sum across the industry and tens.
To settle out pretty quickly in the following year.
Given the risk adjustment headwind, we experienced in Q2 of 2021, we expect the big year over year improvement in H B R and we got more than we expected.
The commercial H B R. A 77, 5% improved 250 basis points year over year also driven by pricing actions and a return to more normalized utilization compared to the second quarter of 2021.
When we look at our consolidated data our Q2 Covid costs were down about two thirds from Q1, which included the omicron variant.
Utilization has largely returned to a more normalized cadence as we are encouraged and facilitated our members to access health care, including preventative care.
Okay.
Furthermore, throughout 2022 providers seem to be more resilient to managing COVID-19 and non COVID-19 simultaneously. There are still a few areas that appear to be suppressed compared to 2019, such as non emergent ER visits we believe telehealth and improve primary care connectivity have played a role here.
Moving to other P&L and balance sheet items.
Our adjusted SG&A expense ratio was eight 2% in the second quarter compared to seven 3% last year.
On a combined basis, the inclusion of Magellan and circle increased the ratio by approximately 40 basis points compared to the year ago quarter.
Additionally, we incurred increased risk adjustment and member engagement cost that accompany the commercial H b our out performance.
Higher Medicare broker commissions as we continue to grow and increased variable compensation.
We expect our value creation plan to drive SG&A lower over the next few years, though there will be ROI based investments along the way.
On the topic of the value creation plan during the second quarter of 2022, we recorded an impairment charge of 1.45 billion related to the reduction in the company's real estate footprint, consisting of $744 million related to leased real estate and $706 million related.
Two owned real estate assets. This was the lion's share of the charge we discussed at Investor Day in June with approximately 200 million more expected to come over the next couple of quarters related to real estate optimization.
Cash flow provided by operations was very strong at $3 4 billion in the second quarter, primarily driven by earnings before the real estate charge and a reduction in receivables partially due to the receipt of state directed payments.
Our domestic unregulated and unrestricted cash on hand at quarter end was $483 million.
During the second quarter, we repurchased $344 million of our common stock through our share repurchase program.
As a result of the value creation plan year to date, we have repurchased $450 million, including 106 million executed in July .
Furthermore, on July 14th we completed the divestiture of Panther and expect to recognize an after tax gain of approximately 400 million in Q3. The majority of the net proceeds of approximately 1.3 billion will be used to repurchase stock and reduce debt as mentioned earlier by <unk>.
Sarah.
We are working to close the Magellan Rx transaction by the end of the year estimated net deployable proceeds on that transaction would be in the zone of 1.1 billion.
And we were pleased to announce the sale of a few of our international businesses yesterday.
Debt at quarter end was relatively flat at $18 8 billion, our debt to cap ratio was 41, 3% temporarily pushed up from the real estate charge.
We continue to target a high thirties debt to capitalization ratio longer term.
Our debt to adjusted EBITDA came in at 3.1 times pretty close to the milestone we are seeking of three times or less or.
Our medical claims liability totaled $16 6 billion at quarter end.
It represents 55 days in claims payable compared to 53 in Q1 of 2022 and 48 in Q2 of 2021.
The sequential increase was largely driven by the timing of pharmacy payments and state directed payments received but not yet paid.
As a reminder, on June 17th we lifted our adjusted EPS range by <unk> 15 cents to a range of $5 55 to $5 70 today, we're adding another five cents to guide to a range of $5 60 to 575, largely driven by some of the real estate benefit to be realized in the back half.
Half of the year net of some investment spending such as the Delaware win.
In aggregate since issuing initial 2022 guidance in December we have increased our full year adjusted EPS outlook by 28 cents or 5% at the midpoint.
GAAP EPS guidance has been adjusted to reflect the real estate charge and the gain on the sale of Panther.
We've also updated the components of guidance and I know some of you have models to build so let me touch on some of the other P&L metrics full year premium and service revenue was down $1 billion and cost of services is down approximately 100 basis points due to the divestiture of Panther.
We also adjusted our share count and expect interest expense around 660 million factoring in the deployment of Panther proceeds.
We have ticked down H B R by 10 basis points to reflect performance in Q2 and have lifted adjusted SG&A by 20 basis points APA.
Approximately one third of that lift is due to Panther, which has a high cost of services ratio, but a very low SG&A rate the.
The remainder reflects the SG&A items, I mentioned earlier slightly offset by the nickel net SG&A benefit in guidance.
For the full year, we would expect investment in other income in the zone of $400 million, excluding the Panther game and depreciation in the low to mid six hundreds and we still assume a November 1st commencement of Redetermination and guidance.
Overall I'm pleased with the tangible results we are showing today, both in terms of performance and value creation, but to be balanced there are areas that we still need meaningful improvement such as Medicare stars.
Though we have referenced this multiple times, we wanted to make sure. We are explicitly transparent the star scores that come out in the fall of 2022 called rating ear 2023 star scores that drive 'twenty 'twenty four Medicare revenue are going to be disappointing and unacceptable to this management team.
<unk>.
At Investor Day June touch Investor.
Investor Day in June Sarah touched on the why.
We've been rebuilding governance, fortifying operational areas and making the appropriate investments in people process and technology over the past nine months and that will continue.
Execution in 2022 will drive star scores to be released in the fall of 2023, which drive 2025 revenue and we expect will create a meaningful rebound from the rating. Your 2023 star scores the senior management team and value creation plan are all over this.
While we've made great progress in the first half of this year. This company has plenty of opportunity to improve which will create long term value for our members providers state and federal customers and shareholders.
That's what we're excited about our journey is on track and thank you for being part of it.
Operator, you May now open the line for questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Arizona Speakerphone, please pick up your handset before pressing the keys.
Your question. Please press Star then two today.
First question comes from Josh Raskin of Nephron Research. Please go ahead.
Thanks, Good morning, I wanted to stay on a Medicare advantage, where you ended up through and you know if I look at it your revenues are up I know you've got a bunch of products in there, but I'm guessing M. A is probably up in the low 30% range. The MLR was down I think about 150 basis points for the first half of the year and you know that can be a typical so I'm curious you know what do you think is drive.
The MLR improvement, especially when a quarter of the book is new members. What metrics are you watching more closely to confirm that MLR and then lastly is 2023 still a year, where you're targeting further M. A margin improvement or are you getting some of that this year already.
Yeah, Josh Thanks for the question I'd say I'm, probably the lion's share of the improvement and what we disclose is Medicare H B R 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 'twenty 'twenty.
Two for stability and H B R back when those bids were filed you know right around June of 2021, but for 2023, we expect a meaningful move in margin expansion. We actually have stars revenue and in 2023, and you know we're going to balance that with more modest growth you heard Brendan.
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 <unk>.
<unk> scores in 2025.
Yeah that all makes sense, but just the PDP business I'm, assuming as you know roughly 110th the size of your M. A book just from a revenue perspective, so are we talking about.
The rest of the housing about 1000 basis points of PDP improvement as it is it that big is that what we're looking at.
PDP is doing quite well there is some of this coming from Medicare advantage in its clinical initiatives.
You know 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've where we were not yet where we wanted to be but we've gotten a lot better at that and connecting them 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 nine or 12 months.
Alright, that'll make sense. Thanks.
I'm a J rice.
Please go ahead.
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 this year end.
In your margin and your.
Normalized.
H B R. And then is this a jumping off point that sustainable do you think you'll get some of that back next year. How do you think about the long term trajectory of the.
Margins on the exchanges.
Yeah.
I'm really pleased with the execution around member engagement physician engagement.
You know sort of the risk adjustment process, which is a lot of nuts and bolts execution and so that's something I think we can carry forward into future periods and continue to leverage our better execution, we're not quite at the the stated pre tax goal of five to seven 5% in marketplace. This year.
And we expect to push into that next year as we are.
You know look at the momentum we have in execution and you know financially and then.
Think about sort of the right pricing and making sure we maintain competitiveness sort of balancing all of those things as we submitted the bids for next year. So we expect a little bit of an advancement in margins.
Even with the improved performance in Q2.
Alright, Thanks, a lot.
And our next question today comes from Matthew Borsch it'd be almost have no Morris. Please go ahead.
Yes, I was hoping you could maybe just give side.
Another walk through as you see it.
Today on 2023, I know, you're not guiding yet, but can you talk about your latest thinking in terms of what youre seeing as headwinds in tailwind going into next.
Next year, you're obviously quite a few areas.
The margin improvement that you've made this year, what's your what can be your jumping off point for 2023.
Yeah. Once again, we you know we're pulling levers this year that we expect to bear fruit you know not just as we pull those levers in 'twenty, two but that will set us up for 'twenty three 'twenty four and beyond but specifically if you think about the progression were sort of in the mid <unk> mid fives, a little bit mid <unk>.
<unk> plus right now to that low sixes range that we've been targeting.
You know for the last six or nine months as we lay that out our tailwind I'm thinking back to the Investor day slides. If you can picture that we had 300 million plus of SG&A towards our $700 million bucket.
Obviously with the real estate execution, that's 200 million of that $300 million on a run rate basis, and then there's other you know.
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 of a move we made a big big move in margin in 'twenty, two and that's going well, there's a little bit more we can get in 'twenty three and that's how we constructed the bids.
Are we just talked about Medicare margin that should be a a a decent sized advancement tailwind then you go over to that third bucket of the value creation plan the 50 cent bucket.
You know we've talked about share buyback, we get the <unk> 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 city San bucket, but then there are some headwinds to our redetermination.
We talked about at Investor Day, you know, that's a run rate $7 7 billion to seven 5 billion revenue headwind.
Headwind at some point when that annualized is depending on the timing of the commencement of Redetermination.
Enhanced Apt's CS are still outstanding John can probably if one of you guys asked 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 in trend that could go either way. So obviously, it's our job to influence and manage those.
Oh, thank you.
And the next question today comes from Justin Lake with Wolfe Research.
Okay.
Thanks, Good morning, 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 corridor is back to the states.
I 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 still having these in place and how you expect that to trend going forward. The 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 O&M or larvae impacted so just trying to figure out what's going on.
Yeah, No. That's a good question I think you know the Covid era and those previous disclosure really isolated the the new risk corridor is largely that popped up in some acuity adjustments that popped up during the Covid era.
That's down to a couple of few hundred million as expected because the sunsetting of those risk corridors, but maybe what's more relevant to your question is the total amount by which we expect to be into a risk corridor paybacks other mechanisms whether they.
As in the Covid era or not and that's we expect to be at about 1 billion three in payback this year across our portfolio of 29 states.
And that 1 billion three compares to what last year drew in total.
Well a couple of billion because the COVID-19 piece of that with the Covid era risk corridors, where more present in 2020, one and they began sunsetting and 22. Some some are still out there.
But that was more like a couple of billion.
So drew I guess the point is you're at 1 billion three of what you're paying back. So by definition I would think you're right Max margin in all those states, where you're paying back. So how is your own MLR up 100 basis points. When you start paying back a 1 billion I would assume your MLR couldn't have changed at all in those states.
Thinking about the small.
Yeah, it's not it's not sort of all or nothing when you get into risk corridors, there's different stair steps, there's grades of of core doors and we're not at Max.
And all of our states. There's many states. They are states that are underperforming that we need rate action and to improve them over the next couple of years.
It's the benefit of having a portfolio.
Okay. Thanks.
The next question today comes from Kevin Fischbeck Bank of America.
Go ahead.
Great. Thanks, maybe just building on that question for a little bit different angle.
I guess one of the reasons.
Why companies I've kind of said that Redetermination is won't necessarily be a headwind to margins has been kind of these risk corridor dynamics.
And I guess just.
I struggled with a little bit of thought when companies say things like the risk pool hasn't gotten better during redetermination. So.
No it shouldn't get worse, when we can always come back in that risk quarter thing and that leaves me a little bit questioning that because if you're at kind of Max margin in a number of states.
Then doesn't that speak to somehow the risk pool being better than average.
And so then what why won't that be a headwind again more broadly either because of the dynamic you mentioned, where it's not all or nothing or then be the dynamics that you mentioned, where you're not every quarter and every state just trying to understand the MLR implications of Redetermination to look better.
Yeah, I don't know that anyone who would characterize or trying to minimize losing seven to seven 5 billion of revenue and the associated margin.
So that's clearly a headwind what what I've pointed out a number of times is that as we exit the fact that if you look at our growth.
The first time, we actually gave a preview of 2022 revenue we've grown well beyond that seven to seven 5 billion. So when we exit will actually be a bigger company than we originally expected even though sequentially at some point, we're gonna be giving back seven to seven $5 billion of run rate revenue as.
As to the risk pool underneath that we spent some time at Investor day, I'm going throw off a bunch of the analyses because I agree with the hypothesis, but as we look at the data and we looked at the zero utilizes and I mean are the Medicaid expansion population was actually.
Down from a base period of 2018 in 2019 that was pleasantly surprising.
<unk> was up a little but there was really nothing alarming and we jumped to the okay. Let's look at the zero to 25% H B R. A population and that was up slightly to your point, but not alarming, especially in the context of being and payback in some states. So yeah being in a payback physicians not a panacea, but.
But it's one of many factors you look at when you assess alright, what could the impact be on this population and you know that's that's sort of as we sit here today before we have any data.
That's our best assessment.
And I would just add I think the jury's point it doesn't change all the work that we are doing to prepare for the redetermination process and that includes bringing forward that data in conversations with state partners because I think as we said at Investor Day, We believe that it's manageable, but that still creates the mandate for us to manage it in partnership with our with the states and supported by.
Data.
Sure.
And maybe just on that point, though I guess, one more time to the fact that the risk of it hasn't gotten worse, I guess redetermination or suspended than healthy people and sick people stay on the rolls in theory, when Redetermination is giving me implemented the healthy people will drop off because they no longer qualify because they got jobs, where they don't qualify for the <unk>.
Other classifications of 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 prospectively.
Yeah.
Well I mean, you're talking a theory and I'm looking at data so I mean, we're.
We're not going to declare that there won't be any difference whatsoever between the pools of stairs and leavers, but when we look at you know the zero utilize when you look at sort of the minimal utilizes its just not that it's not that concerning the other mitigating factor is that.
At 88% of our membership is in states that we that we believe not based upon some Kaiser study, but we believe based upon our boots on the ground in the local presence that Sarah talked about that those states will take 10 or more months to re determine and therefore, that's why we've got.
Sort of this amped up right process in place, where we're working with the states sort of for warning them and then we're gonna be prepared if there is a differential in the risk pool that we need to get compensated for that.
And our next question today comes from Lance Wilkes.
Please go ahead.
Yeah could you talk a little bit about.
When do you get to 'twenty, two 'twenty, three and 'twenty 'twenty form Medicaid pricing how are the states looking at inflation and I guess in discussions you're having with the states. If you could also talk a little about in addition to redetermination, what's sort of recession planning or the states starting to engage in thanks.
Yeah on the pricing side, you know, we're constantly sharing data with our state partners I mean, we're still in 'twenty, two and we still need to get some finality on our 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 will we usually give out that number then 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 you know sort of influence and and you know 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 you know we're vigilant.
Alan there and once again for warning our state partners to the extent, we see those pressures.
That's gonna have to be reflected in the rates.
I mean budgets right now are are stable and I would say is as stable as we've seen for many many years and the states are focused on phe when it ends and ultimately states actually want their citizens to have access to health care and health insurance.
And most of our time is working with the states and he'll planning for whenever the phe ends and all the pay offs. So that their citizens can have health coverage, whether it's commercial or the exchange or Medicaid waiver they qualify.
So the recession planning I would say is not there yet, but where the planning is around the phe and making sure people have coverage.
And just a quick follow up on that for the recession.
Might be more of a policy question for you but.
Would a recession requires something different than the existing.
Yes, Matt the increases in the current Covid Bill and tied to the P. T or is that really kind of equivalent to what one might normally see during a recession.
Yeah.
They stayed at the point as far as getting the federal match in the time of a recession, which would be different than the public health emergency would be whatever their normal state matches between the state and the federal government.
Got it thanks.
And our next question today comes from Scott Fidel with Stephens. Please go ahead.
Hey, Thanks, good morning, all.
Obviously, theres going to be a few different moving pieces to modeling revenue impact from the divestiture. So thought it may be helpful. If you could maybe just walk us through the incremental annualized revenue you know when we think about.
Incremental from Panther than the sale of Magellan, our action and the sale of.
The European assets that you talked about yesterday really trying to figure out sort of what is now reflected in the updated revenue guidance versus how we should think about modeling the impact of divestitures you know when we look about annualized out to 2023.
Yeah, So we we reduced.
Our premium and service revenue by 1 billion for the back half of the year Panthers, a little over 2 billion, although it's growing quickly.
And the central and Spain assets.
We're about 700 million in annualized revenue and then we don't expect to close Magellan Rx until you know.
Late this year early you know I guess late this year is our best estimate so it wouldn't impact 2022.
Okay, and then just a related.
Gotcha.
Just going to add in when we announced that in conjunction with Panther I think of it as neutral to slightly accretive the combination of those two assets. So minimal if any impact on earnings.
Got it and just a related follow up I.
I think Sarah had mentioned in the prepared comments that you're still pretty actively reviewing the portfolio and looking at other potential.
Divestitures or sort of opportunities for value creation, I know that you've now announced a number of the sort of signature assets that you had identified initially to us as you know sort of potentially noncore just interested maybe if you can just give us an update on sort of what else may maybe we'd be thinking about you know what.
Where you're focused on now where there may still be some continued divestitures. Thanks.
Yeah.
Yeah. Thanks, Thanks for the question and you know we're we're obviously pleased with the progress today, we got a lot done in the second quarter and but we still have a you know that brought our portfolios of non health plan assets and we're sort of methodically working through those and so if you think about the assets that historically have sat within health care.
Prizes and some of our other non health plan businesses all of those are going through a consistent process.
And we're you know we're looking to prioritize that work, where we're gonna have the greatest impact so and there is still a lot of work going on and you should expect to hear additional announcements about that but again and I've said. This a couple of times you know the the answer and in all cases is 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 to particularly as we think about positioning the company for growth in 2025 and beyond.
Thank you.
Thank you. Our next question today comes from Nathan Rich Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for the questions do you had talked about a you know taking price actions in the marketplace business for 23 as you work back toward target margins in that segment, you know 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 and enrollment for next year.
How are you expecting the consumer to route to those type of price increases I guess in the current environment and do you have any kind of preliminary view on what do you think enrollment in that business could look like.
Yeah, there's a number of moving parts still we have to see how the enhanced a P. D. CS end up before the August recess, because that's a pretty decent size swing factor.
We also have to see the timing of the commencement of Redetermination because that's another swing factor in then to the extent that the you know the family glitch if that gets improved so that it's it's a you know.
Sort of better replicability to to marketplace or too many things moving around at this point and you know we're still waiting on a congress on the enhanced a P. D C. So can't really predict.
Whether it'll be up a little down a little or flat.
The pricing, we made a pretty big pricing move coming into 2022 it wasn't quite as high as you referenced in the aggregate on a composite basis. So maybe that's a good thing that we didn't have to increase our rates, 10% on a composite basis and we still are achieving meaningful margin expansion. This year and next year I'm not.
As big of a move in terms of margin expansion, because you know we need to peers into that five to seven and a half, whereas we were jumping off.
Pretty.
Quite frankly pretty lousy performance in 'twenty, 'twenty, one and in a marketplace financially.
Marketplace, we do not see as kind of a generic national approach Ah we view it very much local like Medicaid, it's a market to market.
And we had mentioned earlier that our 29 states for today's soon to be 30, with Delaware 25 of those states, we actually have an overlap of exchange and so the relationship between provider potential future insured or insured distribution and knowing the markets are I think will play well for us and it actually played out quite well in 2022.
Okay.
Great can I just ask a quick follow up on just the cadence of earnings for the back half of the year.
You know Joe you highlighted the outperformance in the first half I think you had previously expected 40% of earnings in the back half. It seems like that's gone down a little bit could you maybe just talk about like the big drivers for the back half of the year, obviously of the Panther divestiture, but it sounded like some real estate savings would come through so any other major moving pieces, we should be thinking about.
Yeah right right at the Investor Day, I was pretty explicit that the first half we expect a 64% I guess, that's now 63 now that we've printed because we lifted the full year by a nickel and that nickel to your point, it's actually a dime of benefit.
Early benefit on the real estate run rate minus a nickel of investment you know Delaware is one example, but there's other ROI based investments, we're making and the value creation plan that we intend to make in the back half of the year. So that's why we increased guidance the net nickel, but otherwise is that it's the normal progression you know H b.
As in like the commercial business and marketplace those sort of rise throughout the year.
And its sort of a normal cadence thereafter.
Thank you and all of those questions. When it comes from George Hill with Deutsche Bank. Please go ahead.
Yeah.
Good morning, guys and I. Appreciate you taking the question another follow up on the Redetermination process and I guess I don't know if it'll be national or if it's state by state I guess could you talk about like the cadence for expectations for Redetermination once the P. G and 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 and then you'll go through the process.
Germany eligibility I'm trying to think about the slope as I think about modeling redetermination.
It's definitely a state by state process a brand maybe you want to talk about what we're seeing operationally.
Then well said it is definitely state by state and at the end of the day that all states are waiting to see when the P. A cheap and in their planning from that standpoint, some states will take many months and some will be a much faster and it really depends both on how the state ultimately sees health care coverage or how they want to proceed and their state, but nonetheless every state.
Our having working groups and meetings and approaches to communication through education, and really trying to help everybody understand the options they have from that standpoint one.
One thing I would add that we're tracking are pretty closely are the ex parte numbers that each state is accumulating which are those numbers that would be automatically either dropped our renewed and that states are at very different levels of maturity relative to the volume numbers that could go through an automated process, but it's actually a helpful proxy for us.
To understand what would happen in early months verses as Bren said most of the states that are going to take a more measured approach and in order not to create member abrasion and and also reflective of the fact that and you know the states had staffing issues and want to make sure that they they have enough support for the process overall.
Thank you. Our next question today comes from Michael Hall of Morgan Stanley . Please go ahead.
Thanks Scott.
Just a quick clarification, calling up an agent question, how much exactly did the favorable 2021 risk adjustment benefit your exchange MLR this quarter.
It is obviously a big contributor we expect that every Q2, so the swing was pretty dramatic because if you'll recall you know we actually had a we we missed our expectation in marketplace in Q2 of 2021. So it's it's an emphasis it's an anticipated driver because that's.
The quarter in which you get first the Wakely data and then the final CMS data.
So, but we outperformed that as you know.
As evidenced by the 250 basis point year over year improvement.
Thank you and our next question today comes from Calvin stomach with JP Morgan. Please go ahead.
Thanks wanted to circle back to the Medicare H B R comments, you made specifically on PDP, yes, how much of the PDP performance outperformance there is intentional and the way you price the business versus how much is coming in maybe a little bit better than expected and then how are you thinking about the sustain.
The ability of those PDP margins in 2023.
Most of the year over year improvement.
Was planned for in the bids and plus.
Each year as the yield drops because of the shifting of the responsibility and sort of the benchmarking that's unique in PDP I mean, it's a very low yielding product. So the H b R has to be low because you have a certain amount of admin to reflect I think the yield is sort of in the 35.
Five to $45 P. M P M range, depending on the product.
And then there's a little bit to your point, there's a little bit of outperformance on top of that but most of that was planned.
Thank you and our next question today comes from Gary Taylor of Cowen. Please go ahead.
Hey, good morning appreciate the way you keep a frustrating that it may stores. So everybody's on the same page with respect to that had a couple smaller niche that night.
That one enforced a little bit the first would just be on days claims.
Table, you talked about a couple of factors that temporarily pushed that up this quarter did those reverse right back out next quarter. Just so we should be anticipating a couple of days at least sequentially on.
D C. P and then the second one would be investment income so to hit your guide.
Is that going to be running $150 million a quarter in the back half just so we're anticipating higher investment income contribution to earnings in the back half.
So yes on investment income of $400 million I think we were $94 million or so year to date first half that includes we we sort of wrote down a few old investments, we cleaned up some things that hit our other income and investment income in the first half of the year and we have.
We have 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'll exactly be 150, 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.
C P. Yeah. 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 you know pharmacy invoices are tough to predict I mean, we don't manage to a D. C. P. It's actually an output it's interesting I'm always looking to see where it came out when we close the books, but often there are balance sheet elements that impact that that are just timing.
You know things that stretch over the quarter, but but fundamentally I do believe and strength of reserves and that.
That is a measure an imperfect one but it is a measure of the strength that reserves.
Thank you and our next question comes from Benjamin the floor.
Please go ahead.
Okay.
Hi, there.
Apologize if this was asked already but I wanted to follow up on star scores for plenty of 'twenty three 'twenty 'twenty four revenues our understanding is the industry as a whole is going to face some headwinds as some COVID-19 era factors run off so was the point in the prepared remarks that you kind of expect to underperform the industry headwind and then can you just give us a bit more color on the key pressure.
As you're expecting thanks.
The answer is yes, and if you go back to first time, we started talking about this Q3 of 2021, you're absolutely right. There's an industry factor and we benefited from that probably I'm thinking an outsized amount relative to peers, but for the plan year 2022, So the 'twenty 'twenty three Rev.
We're just over 50% as an example, we're just over 50% of our membership enforced star that would be less than half of that absent the disaster relief.
Provision, but on top of that as we started to see operational execution and indicators from.
The the end of 'twenty 'twenty and then into the first half of 2021, and then look at results throughout 2021 and now some of that's into 2022 in terms of that that rating you're twenty-three you're talking about are we we believe we're going to underperform and Oh, you know what.
We're driving now is what we can control. This management team can control, which is execution in 2022 and beyond which will drive rating here.
2024 Star scores that result in 2025 revenue and those are the star scores, you'll get publicly in the fall of 'twenty three hopefully attract me there.
Yeah, maybe just to quickly at wave type sort of rehash. The 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 'twenty and early part of 'twenty 'twenty. One and then there's 21 data service are what impacted the revenue anticipated for.
Stars in 2024, and so early 2020, we brought a centene and Wellcare together a couple of things happen right. We tripled the Medicare book, you know overnight, we brought two different partner departments together that we're operating in fundamentally different models, one with centralized our wellcare homeless decentralized.
Hard to run an enterprise quality program that 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 the operations and performance in the back half of 'twenty and first half of 'twenty, one, which again will impact 'twenty four caught that in the middle of 'twenty one.
And added new leadership to the quality program and in the back half of last year. It took them under the value creation office in order for that to be a sort of a unified prioritized initiatives and then this management team, which is different from the past is committed to quality performance is a priority for the whole company and we've baked it into.
Our short term incentive program for every single employee and until 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, though it's on a weekly basis because that is what is telling us that.
That we can be looking for a meaningful rebound in revenue year of 2025.
Let me add one more thing I know this is a long answer to a short question but.
We are still committed to driving and pulling levers to achieve our multi year plan. So while this is.
Gonna be a headwind for an isolated 'twenty 'twenty four year, and it'll turn around and be a nice tailwind for 2025 based upon our execution.
Our compensation is still tied to the targets we laid out as you saw on the proxy and this organization is going to drive towards executing on the multi year game plan that we laid out for you.
Thank you ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to Jennifer Gilligan for any closing remarks.
We want to thank everyone for joining us this morning, and if there are any follow up calls please feel free to reach out thanks very much.
Thank you Ma'am. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.