Q4 2022 Centene Corp Earnings Call
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Good day.
Welcome to the <unk> fourth quarter earnings Conference call.
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I would now like to turn the conference over to Jennifer Julien Senior Vice President of Investor Relations.
Please go ahead ma'am.
Thank you Rocco and good morning, everyone. Thank you for joining us on our fourth quarter and full year 2022 earnings results Conference call.
They're a London, Chief Executive Officer, and drew Asher Executive Vice President and Chief Financial Officer of Centene will host this morning's call, which can also be accessed through our website at Centene com.
Ken Fasola, Seventeens, President and Jim Murray, Our Chief operating Officer will also be available as participants during Q&A.
Any remarks that Centene may make about future expectations plans and prospects constitute forward looking statements for the purpose of the safe Harbor provision under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by those forward looking statements as a result of various important factors, including those discussed in 17. Its most recent Form 10-K filed on February 22nd 2022 and other public SEC filings Centene anticipates that subsequent events and developments.
Cause its estimates to change while the company may elect to update these forward looking statements at some point in the future, we specifically disclaim any obligation to do so.
The call will also refer to certain non-GAAP measures a reconciliation of these measures with the most directly comparable GAAP measures can be found in our fourth quarter 2022 press release, which is available on the company's website under the investors section.
The company is unable to provide a reconciliation of certain 2023 and 'twenty 'twenty four measures to the corresponding GAAP measures without unreasonable effort due to the difficulty of predicting the timing and amounts of various items within a reasonable range.
With that I would like to turn the call over to our CEO Cerro Lindo Sara.
Thank you Dan and thanks, everyone for joining us this morning, as we review our fourth quarter and full year 2022 results and provide our updated outlook for 2023.
First let's close out the year 2022 was a dynamic and productive year for Centene, we took on many challenges, including a leadership transition transforming our organizational structure modernizing our approach to corporate governance, focusing on our core business, improving operations and quality and delivering on our financial.
It means along the way.
This morning, we reported fourth quarter adjusted EPS of <unk> 86 cents and full year 2022, adjusted EPS of $5.78. These.
These strong results came in above the top end of our most recently issued 2022 guidance and.
And were 7% higher than the midpoint of our initial outlook for the year.
Looking back over 2022 our three core business lines performed well in.
In marketplace, we materially improved the profitability of our EM better product lines through advancements in our clinical programs and strategic product positioning delivering more than 500 basis points in margin improvement, we promised while continuing to show solid growth and market expansion.
This provided them better with a strong jumping off point to achieve our long term target margin and profitable growth goals in 2023.
In our Medicare advantage business Centene generated outsize growth in 'twenty, and 'twenty to ending the year with 21% more members compared to year end 2020 one.
Our focus throughout the year. It was on strong clinical program performance quality improvement, which you've heard a lot about expanded value based care relationships and providing enrollees with a more seamless member experience.
In 2022, the strengths of Wellcare is underlying performance was demonstrated through year over year, H b or improvement.
We're confident our increasingly disciplined approach to quality operations will provide an important lever as we move through 2023 and work to improve wellcare is profitability on its expanded scale.
Our local markets also performed well throughout the year, serving more Medicaid members in more geographies than ever before.
Our Delaware go lives as well as a significant number of successful re procurement and program expansions, including in Louisiana, Nebraska, Texas, and Missouri to name just a few bolstered our market presence and leadership position in Medicaid managed care.
In California, Centene was ultimately selected to serve the state through direct contracts in 10 key markets, including Los Angeles in Sacramento counties.
We are working towards readiness for the one 124 start date of the new California contracts and we look forward to our continued partnership with the state to improve the medical health care delivery system and advance the state's innovative Cali and programming.
2022 also marked the first full year of execution on our value creation plan and it was by every measure of success, we had all major milestones, including redesigning our U M function across the enterprise successfully negotiating a new P. D M partnership.
Where do you think our real estate footprint by 70% to accommodate new workforce flexibility itself, an important cultural evolution for the company and making important investments in data and digital tools that will make it easier for our members our providers and our employees to work with us.
We exited 2022, not only well positioned to achieve our $400 million in targeted SG&A savings in 2023, but also having added $300 million in new SG&A opportunities to our longer term backlog.
In addition to achieving these value creation milestones, we made meaningful progress on our portfolio review process. We closed three divestitures in 2022 and announced a fourth notably in the first weeks of 2023, we closed the previously announced sale of Magellan and specialty as well as the sales of Centurion and Healthsmart, bringing our total number of <unk>.
Divestitures since Q4 of 2021 to seven.
This disciplined execution has streamlined our enterprise reduce distraction and allowed us to increase our focus on our core business lines. It is also powered significant and timely share repurchases during 2022 and year to date in 2023.
Finally in December we aligned the enterprise around our long term strategic plan inclusive of our commitment to 12% to 15% long term adjusted EPS growth.
Our senior leadership team in place and the company has demonstrated progress against our strategic and financial goals. In 2022, we are well positioned to capitalize on the momentum of the past year and successfully continue our value creation journey for shareholders and members in 2023.
With that let's talk about 2023, so far.
Sentience marketplace products yielded exceptional growth during this year's open enrollment outpacing even the robust growth of the total market itself.
This year's OUP performance only reinforces our view of the increasing durability of the marketplace as a coverage vehicle and am Buttars leadership position within this market.
The hardest this gross growth opportunity are in better team applied a portfolio approach to pricing and product positioning decisively leveraging our local expertise and strong broker relationships on a market by market basis to attract and retain membership across our marketplace footprint well.
While it is still early days with respect to claims experience, we want to share a few observations about an better strong OUP growth and provide some performance expectations given the team's outperformance on membership.
Approximately 70% of our 2023 membership is enrolled in our silver plan compared to approximately 72% in 2022.
Silver plans have consistently represented the majority of our membership year after year and 2023 is no different.
Similar to previous plan years, the majority of our 2023 membership selected our core product at the same time. We are pleased with the continued uptake we are seeing in our newer products demonstrating the value of flexibility and plan design for our members.
Key membership demographics like gender age geography, and subsidy levels are consistent with what we experienced last year. Most importantly. These factors are also consistent with the pricing assumptions, we used for 2023 product positioning.
We continue to expect our marketplace business to achieve margins within the long term targeted range of five to seven 5%. During 2023, and we are pleased to have the opportunity to serve so many marketplace members as the reach of that product continues to expand.
As we highlighted for investors last month Medicare advantage enrollment results for 2023 developed softer than expectations, we provided at Investor day in December .
Our goal for the 'twenty twenty-three AEP was to foundational align our Medicare offerings for long term margin recovery product stability and overall quality capitalizing on the scale, we achieved through outsized growth in 2020, one and 2022.
In our effort to better control the overall member experience, which requires operational stability and contributes directly to quality results. We made the decision to change our distribution strategy and focus more on proprietary channels.
Near term sales and retention were more significantly impacted by our distribution strategy than expected, particularly in light of competitor investment in channels, we de prioritized.
That said several of the channels, we prioritize performed better than expected reinforcing our long term view of an optimal go to market strategy for Medicare advantage and dual eligible members.
Despite the soft membership results relative to expectations. We continue to expect 100 basis points of Medicare H B our improvement in 2023 importantly, we are already seeing positive operational impact for members and brokers with strong service levels improve customer satisfaction and a 30% reduction in overall calls compared to this time last year.
Turning to more recent Medicare news regarding the Finalization of the rebate rule, we are supportive of Cms's decision to limit the scope of historical audits Cms's decision in this regard avoid significant cost and abrasion for our provider partners.
That said the lack of fee for service adjustment and the as yet undefined sampling and extrapolation methodology leaves a number of open questions as to the viability of the final approach.
We are working in collaboration with our industry partners to determine the best path forward.
Regarding last week's preliminary rate notice 'twenty 'twenty four initial rates are less favorable than recent years and below our internal expectation for funding, we will fully exercise our ability to provide feedback to CMS. During the comment period and look forward to collaborating with the agency as we work towards rate Finalization in April that said, we see it.
Path to achieving Medicare advantage results that meet member needs and support our 2024 financial goals.
Finally, as we all know 2023 will be an important year for the Medicaid business in December Congress passed the federal consolidated Appropriations Act for 'twenty, 'twenty, three which ends a continuous coverage provision on March 31st.
This tees up Redetermination to begin this spring and event, we have been working to prepare for throughout 2022.
As we approach the Redetermination process, we are focused on three things first optimizing the verification process for members.
We are working closely with our state partners and our network of community partners in each market to facilitate member transition and coverage continuity.
In the last month, we've deployed internal and external training designed to maximize each member touch point and our ability to support beneficiaries as their eligibility is reviewed.
Leveraging centene is unique and powerful data, we've launched eligibility likelihood modeling across our Medicaid footprint in order to prioritize and customize member outreach and we've launched enhanced reporting and membership dashboards for clear tracking a redetermination as related activities across the enterprise.
Second we are focused on ensuring that state program rates reflect any shifting of the risk pool created by membership changes we.
We recognize the dynamics in each market are different so we are leveraging our data to support early collaborative discussions with our state partners.
And third we are focused on maximizing the opportunity to provide coverage continuity to members who are no longer eligible for Medicaid, but who are eligible for subsidized coverage on the marketplace gives.
Given the strong overlap of our Medicaid and marketplace footprint in 25 States. We continue to size the opportunity for our marketplace products at two to 300000 lives throughout the duration of Redetermination.
In 15 of the 25 states, where we have both Medicaid and marketplace products, we will reach out to our current members directly with educational information regarding the enrollment process as well as with marketplace plan options, we expect that state count to grow as we advance through the Redetermination process and we have a robust scalable plan in place to.
Support this communication and education effort.
Finally, I'd like to highlight some important news that came just a few weeks ago in late January the FCC issued guidance to improve member communication opportunities related to maintaining Medicaid and other governmental health care coverage.
We view this is an incredibly important step not only relative to supporting a seamless verification process, but also a meaningful step forward in modernizing the industry's overall approach to Medicaid member engagement.
We are working closely with states to integrate this guidance into our redetermination strategy and to prove the value of digital engagement and reducing cost and improving member outcomes.
On balance when you take into account our more informed view of open enrollment for 2023, the updated timing of Redetermination and recently closed divestitures, we are well positioned to achieve the top half of our full year 2023, adjusted EPS guidance.
Drew will provide greater detail on our outlook in just a moment.
As we look ahead 2023 promises to be another transformative year for the enterprise and one in which we will need to navigate notable market dynamics across our product lines from redetermination to Medicare positioning to fast growing marketplace products. This is not new for Centene and we are better equipped to manage through this change than we ever have been before.
Thanks to the work we have done over the last 18 months to focus and fortify our operations and to align the organization around value creation principles.
As we look downfield, we continue to see tremendous opportunity for all three of our core businesses, including complex Medicaid populations and dual eligible marketplace Adjacencies and star score improvement.
We continue to track well against our long term goals and look forward to executing against our strategic plan driving strong results and delivering value to members and shareholders.
With that I will turn it over to drew to review our results and outlook in more detail.
Thank you Sarah.
Today, we reported fourth quarter 2022 results, including $35 6 billion in total revenue an increase of 9% compared to the fourth quarter of 2021 and adjusted diluted earnings per share of <unk> 86 cents in the quarter for the full year, we reported $5 78 of adjusted EPS of seven <unk>.
Sent beat over our original 'twenty to 'twenty, two guidance and growth of over 12% compared to 2021.
Let's start with revenue details for the quarter.
Total revenue grew by 3 billion compared to the fourth quarter of 2021, driven by strong organic growth throughout the year and Medicaid primarily due to the ongoing suspension of eligibility redetermination.
Strong Medicare membership growth and the January 2022 acquisition of Magellan, partially offset by divestitures.
Our Q4 consolidated H B R was 88, 7%, a little bit better than our expectations and 87, 7% for the full year.
Medicaid at 89, 6% for the full year was right in line with our expectation of an H B R and the 80 nines for 2022.
Medicare at 86, 2% for the full year was 90 basis points better than 2021, driven by execution of clinical initiatives and on commercial recall, we originally promised a 500 basis point reduction in the H B R. In 2022.
Did we do we were down 550 basis points for the full year. This was driven by disciplined pricing actions initiatives executed in 2022, and as expected a reduction in COVID-19 and pent up demand cost compared to 2021.
Moving to other P&L and balance sheet items, our adjusted SG&A expense ratio was nine 3% in the fourth quarter compared to $8 seven last year, driven by the inclusion of Magellan and the sale of Panther as well as increased Medicare marketing and value creation investment spending in the quarter given the overall.
All company outperformance.
Cash flow used in operations was minus 1.6 billion in the fourth quarter you may recall in the third quarter. We had an early receipt of $2 9 billion of CMS payments pertaining to the fourth quarter, which is driving down our reported Q4 operating cash flow cash.
Cash flow provided by operations was $6 3 billion for the full year, representing 5.2 times net earnings or 1.9 times adjusted net earnings.
This was driven by earnings before charges, including real estate and divestiture related impairments and an increase in medical claims liabilities.
Our domestic unregulated and unrestricted cash on hand was 793 million at year end, though after making some planned pass through payments in early January that amount is closer to zero.
From January of 2022 through today, we repurchased $39 1 million shares of our common stock for $3 3 billion.
Debt at quarter end was 18 billion down approximately 800 million from prior year end driven by senior note repurchases of 318 million repayment of our $180 million construction loan and repayments of over $100 million in revolver and term loan borrowings our debt to adjusted EBITDA came in right at three.
<unk> Oh times down from three five times a year ago days.
Days in claims payable was 54 in Q4 of 2022 compared to 54 in Q3 of 2022 and 52 in Q4 of 2021.
GAAP earnings during the quarter include impairments related to several divestitures that were completed or pending as of December 31, as well as an impairment of our federal services business, partially offset by a gain on the sale of Magellan Rx looking.
Looking back at 2022 was a very good year of execution during some notable changes for Centene.
Sarah hit on some of the highlights, but let me remind you of a few.
We beat our original adjusted EPS guidance by 7%.
We bought back almost 7% of the company's shares including January 2023 repurchases, we reduced debt to adjusted EBITDA of three times and got upgraded to investment grade by Fitch.
We continue to execute on divestitures since Q4 of 2021, we've completed seven divestitures for gross proceeds of over three and a half a billion.
We improved the discipline of the company in many areas, while strengthening D. C. P. By a couple of days and we picked up two very strong operators for solar and Murray along the way.
Alright enough on the rear view mirror, let's talk about what really matters today and tomorrow, starting with 2023.
We gave detailed guidance elements at Investor day, but a few things have happened since then including more clarity of the timing of the restart of Redetermination a couple more centene divestitures a V.
Very strong marketplace annual enrollment period, and softer Medicare advantage enrollment as we mentioned at the recent Investor Conference in San Francisco.
My bias when we Havent yet closed the first months of 2023 is not to touch 2023 guidance until we have some actual results, but there are a few things that will help you understand how how we are starting out of the gates compared to what we outlined at December Investor Day.
Our 2023 premium and service revenues should be approximately 2 billion higher than the range provided at Investor Day, Let me bridge that for you a billion and a half more of Medicaid premium revenue from a higher starting point in 2023 and an additional two months until Redetermination recommence April 1st.
Plus an additional 3 billion of commercial premium revenue from an outstanding marketplace open enrollment period.
Minus a half a billion of Medicare revenues, we were off in the annual enrollment period down high single digits versus down mid single digits and minus approximately $2 billion of divested revenue previously in guidance Magellan specialty Centurion and Healthsmart.
Let me go a little deeper on to 'twenty to 'twenty three topics.
On the additional Medicaid broad growth of 1 billion and a half we expect to give about two thirds of that back in the redetermination process. So our previous estimate of $8 billion of ultimate run rate revenue give back goes up to 9 billion.
By April 1st we expect to have grown by 3.4 million Medicaid members since the onset of the pandemic, excluding new markets and we expect to lose approximately $2 2 million of those members and the Redetermination process over the next year and a half in other words about 65% of that growth.
The 'twenty to 'twenty three portion is baked into the new revenue guidance. The remaining 'twenty 'twenty four portion would be about $6 billion of the $9 billion.
And I know a number of you have asked about our early read of attributes related to our growth in marketplace as Sarah outlined based upon our review of the demographics metal tiers product types subsidy eligibility and distribution sources of our new membership, we don't see any signs of alarm the proof ultimately being the claims day.
But all of this marketplace growth even membership from carriers, who have exited comes into our product design, our network construct or pricing and then do our clinical models.
While we arent changing our adjusted EPS guidance range at this very early stage for 2023 all of this recent insight, including the higher revenue base biases us to the top half of our adjusted EPS range of 625 to 640 and.
And of course once we see from data once we see some data from Q1, and we will refine all the underlying elements for you no later than our Q1 earnings call suffice to say that we ended 2022 strong and that looks to be continuing into 2023.
As we look out to 2024, we remain committed to our previously provided adjusted EPS floor of at least $7.15.
While we're 10 months away from giving formal 'twenty 'twenty four guidance, let me give you some updated color on recent events that are included in this assessment.
First of all on the positive side 2023 looks to be a little stronger out of the gate as we just discussed.
Second we completed California renegotiations in late January and are pleased with the outcome.
Third our marketplace business is $3 billion larger than we had previously assumed and we expect performance in the target margin zone in both 2023 and 'twenty 'twenty four.
For investment income continues to grow including the recent 25 basis point fed rate increase in early February .
Five share count is down further and with the stock price lower we will strive to accelerate planned share repurchases earlier in the year.
It's a pretty good collection of tail winds on the headwind side, though Medicare is going to be challenging for us in 'twenty 'twenty four we knew it was going to be tough given the cards. We were dealt in star scores stemming from poor decisions in 'twenty 'twenty.
And the impact of a disappointing advanced notice on 'twenty 'twenty four rates does not help.
We will most certainly be pricing for a negative margin in Medicare advantage in 'twenty 'twenty four temporarily and.
And we don't expect to grow Medicare advantage in 2024, and will likely will shrink a little.
We have a lot of work between now and the first Monday in June when the bids are due to refine our estimates and products further and obviously the industry will be asking a lot of questions about the components of the advance notice and anticipation of final rates in a couple of months, but here is the silver lining if we can achieve at least.
715 of adjusted EPS in 2024, with a meaningfully underperforming Medicare business embedded in that result that becomes a margin expansion and growth opportunity in the back half of the decade as we improve stars and pull other levers over the next few years, we know what needs to be done it just takes time.
Time, especially in stars.
We can now turn the page from very good 2022 the first year of execution from this management team.
And an important foundational year for multi year improvement as we look ahead and ultimately getting to our long term growth in earnings algorithm, we shared with you at Investor Day.
For being part of our journey operator, Rocco you May now open the line for questions.
Thank you.
I'd like to ask a question. Please press star one on your Touchtone phone.
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Today's first question comes from Josh Raskin of Nephron Research. Please go ahead.
Hi, Thanks, Good morning, I wanted to just start on the week or M. A start in the selling season and maybe you could talk a little about was was that due to changes by competitors I heard something I heard a lot about the distribution channel changes that you've made.
But any specifics would be helpful. And then any benefit design changes that you made that you think contribute to some of that lost membership would be.
Helpful as well thanks.
Yeah. Thanks, Josh Good morning, happy to hit that at a high level and then have a can weigh in as well so as I mentioned them in my remarks, our major focus in the selling season was on operational stability and on the fundamental underpinnings that would contribute to quality results. Because we continue to take a long term view in Medicare and so in order to.
To achieve those results, we started rebalancing our distribution channels with a bias towards more proprietary channels, where we feel we could control the member experience better and so that was part of what impacted the softer results because as you point out. We also had the competitive dynamics investments from.
Competition, not just in the market, but in the sum of those channels that we de prioritized, but Ken if you want to weigh in a little bit on benefits as well yeah I. Thanks, Josh.
The Oh, CMS data, which is readily available demonstrates so I think you've seen where members have moved you know for our part we.
Rotated towards margin improvement recognizing going in it that would probably be at the expense of some member gains in very targeted markets.
But I think the insights that we've gained this past year, both with respect to the comments were made about the distribution mix and the really over performance from our owned and more captive channels, along with I think a greater insight with respect to the characteristics of the kind of members that are likely more responsive.
To both our product and network mix I think gives us really the opportunity to be vastly more precise as we move into the new year and I think you'll see that as we move not just through our product design positioning for the coming year, but the way, we allocate and optimize the.
Distribution resources in the marketing now that we have all and we moved marketing internally.
Some of that sub contracted I think is going to create a strong platform for.
The achievement of the guidance we provided.
And just a quick follow up do you have visibility or any insights into the changes in membership whether that's helpful. From a you know quality improvements stars improvement perspective, do you know the members that have lapsed relative to the members that you've retained does that feel like you're moving more towards the right direction on star improvement.
This is Jim.
<unk> the.
And Ken both referenced the focus on for priority proprietary.
Distribution channels.
In past lives I've seen that creating a relationship and we talked a little about this in New York, creating a relationship with those members goes a long way towards some of the things that are measured in stars. For example complaints are if you have a relationship and you you bring the member in and explain to the member benefits that they are.
We're going to get and how to use the system.
Obviously, the complaints to CMS or significantly reduce we're beginning to see that frankly in 2023 and in the first month on a half of results Disenroll mints are much lower as a result of using proprietary channels. The other thing is that.
Because of the stability of the existing membership we expect that we're going to see some improvement in star scores as well as Ralph scores going forward, which will help our overall margin profile going forward. So we feel really good about that so focusing on relationships and how long we keep them remember.
Used to more of a seven to eight year member retention and we need to begin to build that kind of stability going forward and in a lot of steps that we've taken around stars are starting to see some favorable results. So feeling good about that.
Thanks.
Thank you gentlemen, our next question today comes from Justin Lake Wolfe Research. Please go ahead.
Thanks, Good morning first one so I appreciate the color on 23 and 'twenty four just wanted to get a little bit more detail of course. So it looks like you were a 2.7% net income margins for 2023 give or take premiere drew you mentioned Medicare advantage margins go lower it sounds like year over year.
That'd be the market certainly expect pressure on the risk pool in Medicaid year over year.
So curious in terms of what gets better in 2024, I know one of the big buckets as Jim is working on those those cost cutting maybe you could share for instance, how much how much cost cutting benefits you expect to get from 23 to 24 as well as kind of your thoughts on that Medicare and Medicaid margin in general and then the other moving part.
So we might have missed thanks.
Yeah sure. Thanks, Justin Yeah. Some of the tailwind for 2024 that are sort of baked into our forecast, obviously, a really meaningful tailwind from the P. P. M. RFP, that's sort of a stairstep benefit as we've talked about that commences, one 124, and where we're well on the integration period and the transition Perry work.
King working well with ESI and Cvs is both good partners. So we expect to yield that benefit across our entire book of business our.
Investment income continues to be strong and we expect that to continue into 2024 share buyback you see our share count as we disclose in our Investor day deck ended the year lower than we had anticipated. So we're able to bake that into our 2023 guidance and at these.
This is a well we'll be we'll be buying that's for sure marketplace will be a few billion larger than we originally anticipated in 2024, and we like our margin position there and we can probably make another step or we will make another step in 2024.
And then as you mentioned the overarching value creation plan, including a lot of the work that Jim and a lot of other people around the company are executing on pulling levers, we expect momentum as we get into really the third year of that value creation plan. So those are all the tailwind, but as I mentioned medicare's can.
Would be pretty significant headwind given stars as well as the <unk>.
Lack luster.
Advance notice.
You also asked about Medicaid so as I think about Medicaid and then now you've asked this a number of times with an hour on conference calls that's F. D compliant so I can answer.
Some of those question. So as we think about the progression going from 'twenty to 'twenty two to 'twenty to 'twenty. Three we ended the year at 89 six in 2022, and we've got about 30 basis points of pressure built into 2023 up to the very high 80, nines, but as we dice.
Second the 'twenty to 'twenty, two actuals and we look at things that we had to fortify or are unlikely to recur. That's another 10 to 20 basis points of nonrecurring called items embedded in the 2022 Medicaid H B R. So we think that gives us adequate.
With room for a little bit of pressure from Redetermination as we are working hard with our associations with the actuaries that represent or associations. The actuaries that represent the states our state regulators.
<unk> and really sort of warming them up for what may or may not be necessary, but to the extent that there is a risk pool shift we expect action.
Probably not as fast, but hopefully close to as fast as the action that was put in in the other direction with acuity changes.
During the Covid era. So we're prepared for that we've had a lot of time to prepare and this the elongated.
Process, a redetermination in the sloping will help us gather data and be able to manage that H b R. A N in the high 80 nines.
Thanks for all that through and just to put a bow on it anything on update on the three 3% net income margin target without North Star for 2020 for how you view that.
Yeah, well our target is at least $7 15 of EPS you know the interplay between operating.
Income and share buyback will sort of affect whether or not that three three is the absolute number that we hit for 2024, but that is our north star and we're going to keep on pushing for that and obviously the divestitures as we've talked about has some impact on the denominator there.
In terms of.
Both the margin and the dollars, but where we're going to fight hard to deliver that at least $757.15.
Even though we've got a pretty meaningful Medicare headwind in 2024.
Thank you Andrew.
Next question today comes from Stephen Baxter Wells Fargo. Please go ahead.
Hey, Thanks for all the color on a couple of questions on the quarter I wanted to ask about reserves in Q I D. D. C piece look good but trying to understand the magnitude is P. Y D. You experienced in the quarter better for a lot of other companies by the time, we get to the fourth quarter Peabody is pretty minimal it doesn't seem like that's necessarily the case here.
To understand what drove this quarter and what business was impacted and this might be the same answer but wondering why we didn't necessarily see the same typical Q4 MLR seasonality in commercial any color. There would also be appreciated. Thank you.
No you're right, we outperformed that was probably the biggest contributor to our sort of overall slight outperformance on H B R. But commercial continues to be strong and I chalk that up more to execution.
And the momentum that we've gained over the last call. It five quarters in that marketplace business implementing clinical initiatives the interplay with the value creation office not just for SG&A, but also for our trend benders and H B R initiatives that that drive both quality and the afore.
The ability of health care. So those you know those were some of the drivers that helped the commercial business and we feel pretty good about that heading into 2023, we do disclose the roll forward tables I think one of them is in the press release, the rest will be in the 10-K last year. So 2021 saw a high.
<unk> favorable development. After 12, 31, 2020 reserves, that's understandable with sort of the chaos of practice patterns and claims patterns. During the 2020 year of Covid, but still.
Consistent reserve methodologies and a pretty strong.
Showing of development during 2022 off of the 12 31 2021 reserves.
Thank you and our next question today comes from AJ Rice of Credit Suisse. Please go ahead.
Oh, hi, everybody.
Couple of things if I could first on the.
Marketplace I know I appreciate the comments about the demographics of the people you've seen through the open enrollment period. There's also been some questions about what are the demographics is gonna be people that you're reverified all for Medicaid and go on the exchanges I know the current exchange population is very diverse health.
Needs.
Do you think those re determined Medicaid people that ended up on the exchanges will.
Pull up the risk pool pull down the risk pool house, how are you thinking about that first off.
Yeah. Thanks, a J for the question. So if we think about the members who I read determining off and we do think that that those numbers are probably carrying a slightly higher acuity, but then you have to balance that with a view that with the growth that we've seen in the marketplace product and if you look back to historic periods of growth of this magnitude it tends to bring a.
Many more healthy members into the pool. So the net effect of those two dynamics, it's hard to say exactly where that equals out but our marketplace team is watching both of those cohorts pretty carefully and I think has obviously had visibility into the fact that redetermination, we're going to factor into 'twenty two 'twenty three in and took that into account in pricing.
Okay, if I could slip in another one on your Medicare comments for next year I know on the Rab to you says this is what we like this is what we don't like when you think about the rate notice. It sounds like Theres places, where you think the industry can comment to CMS and potentially you know as maybe look at it.
A different way or something are you willing to talk about where some of those points of discussion at least between the industry at large and and CMS might be and in terms of your strategy. It sounds like you're talking about a potential negative margin. So that must mean, you're going to try to stabilize benefits a year.
The year in a growing market I'm wondering is it conserve to say, we're gonna have stable benefits, but not have a growth on the enrolled.
Enrollments huh.
Yeah on the Medicare side, you know, we've said that's coming into even this year as we tried to design benefits in order to maximize stability as we move through 'twenty, three and 'twenty four and I think we will continue to do our best to keep benefits stable as possible taking that long term view that that stable operations optimizing for member experience improve.
Moving quality is the right thing to do and you know weathering. The twenty-four headwind may have an impact on margin as a result, but the goal would be to keep benefits stable as possible. So we're not website members and we are focused on building as longer term relationships as Jim talked about.
Relative to your first question you know the Radley role is sort of in final state and so there it's really about talking to our industry partners about how.
How we feel about the impact of the as yet undefined methodology and what what impact we think that may have on how comfortable we are with that and then you know the the 'twenty 'twenty four rate notice is is a regular cycle of conversations that we have with the agency in order to communicate what we believe the impact of the somewhat lack.
Cluster rates might be on the overall industry and the benefits to seniors.
Thank you.
Our next question today comes from Gary Taylor of Cowen. Please go ahead.
Okay.
Okay.
Expectations for them.
Okay.
Sure.
It's really much.
Sizable.
Enrollment growth.
Halloween.
It looks like.
The truth or.
Receivables from 2000.
Okay.
Uh huh.
Okay.
Even sort of positioning a lot of times we saw.
Pardon me.
The interruption of everybody. This is the operator with Shapiro. Your line is breaking up very badly it looks like we have a bad connection I won't ask you. Please disconnect the Belle by Kim.
Pick up your speaker phone if that's the case.
Is that better or not.
That's much better. Thank you Sir. Please proceed with your question again.
Apologize I just want to ask about expectations for HCA risk adjustment given the enrollment growth for them.
For 'twenty three.
When we've seen companies with really large enrollment growth in the HCA, sometimes they've been surprised it ended up being you know are increasing.
Payable on the HCA front, so it looks sort of like in this case.
You guys have generally been a receiver and now you're going to house.
A much larger population as your expectation that's fairly even or is there any material additional payable youre contemplating for 'twenty three.
Yeah. So it's a good question the demographics of what's coming in looks very similar to and then actually the subsidy eligibility has gone up a little so nothing really alarming and all the attributes we can look at what we know today, obviously the proof is going to be.
In the med cost and you're right in marketplace. It's a zero sum game concurrent risk adjustment process for 2023. So that's something we'll be watching there's also two less competitors out there and so we've thought about that as as we not only booked our 2022 risk adjustment receivables.
But also as we forecast into 2023.
We'll get the first wakely data.
As you know.
In June this year, and we'll have to take a look at that but we've thought about that as we forecasted and as we closed out 2022.
Thanks.
Thank you and our next question today comes from Nathan Rich Goldman Sachs. Please go ahead.
Hi, Good morning. Thanks for the question I wanted to follow up on the Medicare business.
Help us think about the.
Magnitude of the step down that you're thinking for Medicare margins in 2024, just given the comments that you made about pricing for a negative margin in and trying to keep benefits stable.
Maybe relative to the margin that you're targeting for 2023, and then you know I guess outside of plan design are there any offsets that you think you can leverage to try to mitigate some of this impact in 2024.
Yeah, we're always looking for whether it's.
Jim and the team the Medicare team are focused on SG&A, I think theres opportunity there, there's continuing maturity and trend vendors. So, yes, where we're gonna look for any possible offset you know other than benefits.
Chris I will try our best to keep.
Keep stability for our members, but we do expect at least at this early point to shrink a little bit in 2024, but the swing is pretty meaningful both in terms of stars and the very disappointing advanced notice with rates.
<unk> noticed for us.
Call it minus 1%, excluding starz because you know we made our own bed and stars, but we are expecting a positive low single digits. So that's a pretty meaningful swing every point is a couple of hundred million dollars a $20 billion business. So.
We've got to manage through that and it will be a pretty sizable drop cant give you an exact number yet we'll we'll definitely give you that in 10 months after we've.
Gone through the bids we've got the final rates and we've developed sort of that balance between margin degradation and stability in the product, but it'll be tough we'll power through it.
And 25 and beyond will be margin expansion and growth as well ramp up over the next few cycles of star results and it's.
Good to hear you know Jim convey to you guys that we're already seeing some elements of optimism that we're gonna be able to achieve that multiyear improvement that we're seeking one other thing I would add when we think about levers in 'twenty 'twenty four is the breadth and depth of our value based care relationships, which is something that I think we.
Our we're already planning on but has it have the runway to accelerate in 'twenty two 'twenty three in order to be in an even stronger position and as you know as many of you know that that was we have a good set of relationships with a number of the sort of leading value based care providers, but I think we have been not as aggressive.
And that in the past and so you know in 2022 started to turn our focus there are organizing around that internally brought in some great talent to help accelerate so that'll be a focus in 2023 that I think will give us some benefit in 2024, and then obviously beyond that as well.
Thank you and our next question today comes from Michael Hall with Morgan Stanley . Please go ahead.
Hi, Thank you just wanted to ask a bit more about redetermination expectations I appreciate all the color on the 30 bps.
Medicaid MLR pressure in 'twenty three I recall hearing at your Investor day that your composite rate increase improved about 50 bps. So I'm just curious how did that compare to your original expectations I think there's.
There's been some concern that they seek rate increases may not go into effect until a couple of quarters. After redetermination underway, but 50 bps and prevent feel pretty strong pretty positive quite high and I think and if I think about the messaging around just motivates expecting to complete redetermination likely later in 'twenty three then.
In that scenario youre entering twenty-three strong rate increase coupled that with a very slow rollout of redetermination.
It seems like a recipe that could present some earnings upside. This year is that a fair way to think about how redetermination terminations might develop.
Yes, so the composite rate that is embedded in our guidance as we as you properly pointed out we disclosed at Investor Day is one 4%. So I guess, yes compared to a meager 0.9% that that is a big jump, but its still on an absolute basis.
1.4%, let's say if I would think about that in context, but the reason why we were 0.9 relative to the 1.3 that we had baked into our 2022 guidance.
Florida was a pretty big piece of that and then we expect a recovery there this year as we demonstrate the need for rates.
So that'll be an ongoing process as we you know we go through the rate cycles, Luckily, they're distributed across the year, they're not all stacked on one one like the commercial business or the Medicare business.
They do you know we have we have slugs that renew throughout the year, which will help with the sloping of redetermination as well.
Maybe just to add a little bit of color on the process to your point about sort of the methodical approach that we were expecting with the certainty of the yearend Bill we started to get updated information obviously from each one of our states and are continue to be in regular contact with them and I would say that in general we are seeing that methodical approach hold with the vast majority of our.
State sitting in a nine to 14 month bucket in terms of the timeframe that the ex factory to terminate redetermination has to play out under and some of them, indicating that they won't start April one they'll start closer to summer time to cause you think about sort of the start date shift overall nothing that suggests the overall slope line will shift materially.
And we are seeing continued positive momentum from our seats and being open to an encouraging our support and outreach and communication and education efforts to remember so in general feel like you know the industry is aligning in organizing around an approach that will minimize our seek to minimize.
Remember abrasion and the process and are allowing us to run alongside our state partners all of which is is positive from our perspective.
Thank you and our next question today comes from Scott Fidel with Stephens. Please go ahead.
Thanks, Hi al.
Wanted to just drill in a little bit more, especially given possibly the importance of the buybacks. Just you can walk us through your updated <unk>.
<unk> and uses of cash for 2023, and how much you think you could have.
Four of deployable excess capital for buybacks and then drew I'm not sure. If you had given US 2023 operating cash flow guidance yet. So if you do have that would appreciate that Joe.
Yeah, so as you've seen we did quite a bit of a buyback in 2022 and even as we were in the seventies in January we were able to execute on a few hundred million more that was largely driven by divestiture proceeds. So we're continuing the portfolio review process or the timing of <unk>.
Back associated with.
Divestitures, you know will will vary based upon sort of that M&A process, but in the normal course, yeah. We expect late in the year a few billion of share buyback, we're going to see what we can pull forward, but we also have improved the allocation process and therefore.
The management fee process and that will travel a little bit of cash in the first half maybe the first three quarters of 2023. So that's why we back weighted as you look at our guidance for share buyback, we've sort of back weighted that share repurchase. So it won't have a meaningful impact on 'twenty, three but it'll roll into 'twenty four so we're gonna do.
Our best well, probably pay pay down a little bit of that as well as where if we sell off an asset that had EBITDA.
We'll pay off some debt as well to manage that and now when you actually you pay off debt you get a benefit with the with the interest rates higher so.
We're going to do our best to take advantage of where we're trading.
But we also need to do that with a balanced view of the capital structure.
Thank you and our next question today comes from Kevin Fischbeck with Bank of America. Please go ahead.
Great. Thanks, just wanted to make.
To make sure I understood I think you guys said that you expected to add 200 to 300000 lives on the exchanges from Redetermination I just wanted to make sure that that was now I guess in your guidance and then.
You talked a little bit about the risk pool on the exchanges really interested in that concept about the people who come on from.
The redetermination, because that's where I would guess it would look more like the S&P from prior years, where you only have them for six months, you don't have time to risk score and in theory there.
Thicker than average so we'd love to kind of hear how you're thinking about the risk pool of those members.
Yeah.
Yeah, so relative to the to the Redetermination members into marketplace and we do again as I said earlier, we do expect that on balance they probably have slightly higher acuity, but at a minimum minimum pardon me your point about the fact that we don't have them for the full year means that they turned to profitability as we move into two.
124, and again this is something that the team had visibility to throughout 2022 and coming into the year and baked into our guidance.
And I think we'll be have the offset of our expectation that a number of those members who are coming into the pool will.
We will be healthier too to offset that overall and are coming in with a one one start dates. So we have the full benefit of their 2023 risk adjustment and then relative to the two to 300000 that continues to be our estimate that is baked into guidance and a lot of that is because of our belief that the vast majority of members who read the terminal.
Well first go to the commercial book and and again, we just need to see how the data starts to play out and whether there are any adjustments to that as we see folks coming over onto the marketplace products.
Thank you and our next question today comes from Steven Valiquette.
With Barclays. Please go ahead.
Great. Thanks, guys.
Just a quick confirmation question is just around the potential impact from.
The changes in the Internet.
'twenty three.
Sure.
It is higher MLR for career, making them look bad.
Pardon me this is all I got.
Sir I apologize your line is very bad because actually we can we can pick up your handset.
Sure.
Uh huh.
Oh actually no its not coming through well at all so we're unable to understand what you're asking.
Would you be able to reconnect or possibly a reach out offline I apologize we have to move on we're not able to hear what you're saying.
Our next question today comes from Calvin stomach with J P. Morgan. Please go ahead.
Hey, good morning, Thanks for the question.
First a quick clarification and I think I heard a comment about lower just enrollment was that for this AEP or is that more of a go forward comments and then second it.
Sounds like M&A is that a.
Margin expansion beyond 2025.
Just curious how youre thinking about the overall level of membership growth. Once you start getting you get past the stars.
Thanks.
This is Jim I'll take the first part of your question.
We've been doing a lot during 2022 to address some of the issues that we have.
With stars.
A big driver of some of our poor stars results, who had been there the customer complaints called C. T EMS and Disenroll mints and where were obviously I like to look at things every day.
We're watching our C T EMS and dis enrollments for this past year and the amount that we're seeing is favorable to what we've seen in the past and so a lot of the steps that we've taken.
During the course of 'twenty two seem to be bearing some fruit those.
Our results will as drew mentioned Starz takes time will favorably impact our 2026 revenue. We're also in the process right now CMS comes out with cap surveys from March to May we're in the process of doing a number of procedures that have never done been done here.
[noise] before us as a consolidated centene to enhance our.
Cap scores as CMS does that survey.
So there's a lot of good things that are going on to.
Positively impact, where we think starz will be in the future I think when we were in New York together, we talked about a 20% for 2025 being in four plus star plans, 20% of our membership we want that to be at least 40% in 'twenty six and then we're targeting 60% and 27.
Thank you ladies and gentlemen, our next question today comes from George Hill Deutsche Bank. Please go ahead.
Yeah. Good morning, guys and thanks for taking the question I just wanted to circle back on the idea that you sounded pretty bullish on the opportunity on the P. B M transition just wanted to see if there are any changes to expectations our synergy targets.
As it relates to that.
No my Bullishness is ESI in and Centene working together to deliver what we anticipated when we inked the deal a couple of months ago or a month or so ago, one more thing let me.
On share buyback, let me clarify something that I said earlier I was answering a 'twenty 'twenty four question the $3 billion, our placeholder for 2024.
The 2023 back half of the year share buyback is about 1 billion and a half and that's because we've got a little bit of trapped capital that we'll have to get out over the following year or so so the 3 billion I mentioned is the forecast for 2024 absent any.
Any acquisitions.
Thank you.
This concludes today's question and answer session I would like to turn the conference over to Cerro Lindo for any closing remarks.
Thanks, Rocco and thanks, everyone for your time. This morning, please reach out to John with any follow up questions and we look forward to talking to you throughout the rest of the quarter.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation.
You may now disconnect your lines and have a wonderful day.