Q3 2024 Centene Corp Earnings Call
Good day and welcome to the Centene Corporation third quarter results Conference call.
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Speaker Change: I would now like to turn the conference over to Jennifer Gilligan head of Investor Relations. Please go ahead ma'am.
Jennifer Gilligan: Thank you Rocco and good morning, everyone. Thank you for joining us on our third quarter 2024 earnings results Conference call.
Jennifer Gilligan: London, Chief Executive Officer, and drew Asher Executive Vice President and Chief Financial Officer of Centene will host this morning's call, which also can be accessed through our website at Centene com.
Jennifer Gilligan: So lot of Sentience President will also be available as a participant during Q&A.
Jennifer Gilligan: Any remarks that Centene may make about future expectations plans and prospects constitute.
Jennifer Gilligan: Forward looking statements for the purpose of the Safe Harbor provision.
Jennifer Gilligan: Under the private Securities Litigation Reform Act of 1995 actual results may differ materially from those indicated by those forward looking statements as a result of various important factors, including those discussed in our third quarter 2024 press release, which is available on the company's website under the investors section.
Jennifer Gilligan: <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.
The call will also refer to certain non-GAAP measures a reconciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter 2024 press release.
Jennifer Gilligan: Please mark your calendars for our upcoming Investor day being held on December 12 in New York City.
Speaker Change: With that I would like to turn the call over to our CEO Sarah Linda.
Speaker Change: Uh huh.
Sarah Linda: Thank you John and thanks, everyone for joining us as we review our third quarter 2024 financial results.
Sarah Linda: Given the recent market volatility impacting managed care, let's start with the bottom line upfront.
Sarah Linda: The overall outlook for our business remains consistent with our updates in the quarter. We remain confident in our full year 2024, adjusted diluted EPS guidance of greater than $6.80 and.
Sarah Linda: And our view of headwinds and tailwind as we look to 2025 are largely unchanged from what we have previously shared.
Sarah Linda: We still believe that we will grow adjusted EPS next year, and we still believe that we have a unique and powerful platform from which to drive long term EPS growth of 12% to 15% in a normalized environment.
Sarah Linda: Specific to the quarter, we are reporting third quarter adjusted diluted EPS of $1.62, a stronger result than our most recent expectations for the period was the upside driven in part by anticipated tax items shifting forward into the third quarter.
Sarah Linda: Within our core business lines, Medicare and marketplace performance was consistent with expectations in the quarter and Medicaid performance ended up a little better than our mid quarter commentary aided by movement in rates. We saw as a result of refresh data and effective advocacy.
Sarah Linda: In general we are encouraged by progress we saw throughout the quarter relative to our ongoing dialogue with state partners to align Medicaid rates with the acuity of our post Redetermination as book of business.
We have spent the better part of 2020 for offering a significant level of transparency into our business. During a year of unprecedented change. We are pleased that this transparency positions us today with a stable outlook for 2024.
With that let's get into the details starting with Medicaid.
Sarah Linda: As you know our largest business has undergone significant transformation over the last 18 months as a result of the nationwide return of eligibility determinations.
Sarah Linda: Since the start of this process millions of Americans have been transitioned out of managed Medicaid across the country materially shifting the Medicaid risk pool in a way that requires action by our state partners to rightsize program rates to reflect the post Redetermination member base.
During the third quarter, our state partners continue to work through the tail of their respective redetermination processes and as we sit here today. The vast majority of the 30 states in which we operate are now through their respective backlogs.
Sarah Linda: We closed the period with roughly 13 million members and are seeing evidence of membership leveling as we move into the fourth quarter.
Sarah Linda: Since this process began you have heard a consistent message from us in terms of our boots on the ground support for our members and equally our proactive data driven dialogue with our state partners to ensure rate discussions throughout this period, our fully informed and benefit from the most current data.
Sarah Linda: As we sit here today all of our states have acknowledged the need to match rates with acuity and all of our states have now taken action with respect to acuity adjustments in some form.
While there is still work to do with respect to the sufficiency of rate adjustments, our conversations continue to be productive and we are encouraged by the engagement and the incremental movement, we saw as the quarter unfolded.
We now expect our back half composite adjustment rate to be in the four 5% to 5% range.
Sarah Linda: As state by state experienced matures, we are still seeing just over 30% of members who were initially dropped for Medicaid eligibility ultimately returned to us.
Sarah Linda: Less than half. These re joiners are reinstated with retroactive coverage. The majority experienced the coverage gap, which means we experienced a corresponding premium gas.
Sarah Linda: As we've discussed previously this creates temporary pressure on the Medicaid MLR.
Sarah Linda: However, a close look at the rejoin our trends suggest that it's starting to slow.
Sarah Linda: This incremental lessening of pressure as we move through Q4 and evidence of a return to a more normal churn rate across the Medicaid book offers a natural tailwind as we move into 2025.
Sarah Linda: We continue to track the data closely and provide regular and detailed updates to our fate counterparts.
Sarah Linda: We believe the solid foundation of data driven advocacy, we have built over the last six quarters has served us well and will continue to do so as we advocate for appropriate 'twenty twenty-five rates and mid cycle acuity adjustments.
Overall the movement, we've seen in rates over the course of 2024. It reinforces our view that what we are experiencing is a temporary dynamic and that state Medicaid programs will ultimately return to actuarially sound rates that match acuity.
Well the redetermination of captured much of the attention over the last few quarters. It should not go unnoticed that centene has been equally busy delivering strong RFP results and positioning our Medicaid business for long term growth.
Sarah Linda: In August the team at Pennsylvania, Health and wellness re procured our long term support services business in that state reinforcing the strength of this organization and serving low income members with complex support needs.
In September we successfully re procured our statewide presence in Iowa in a highly competitive process and then earlier. This month Centene is meridian health plan in Michigan, one yet another 2024 RFT. This time, providing integrated Medicare and Medicaid services for duly eligible members as Michigan transitions their statewide program to our Heidi.
Sarah Linda: Yep.
Sarah Linda: In short, we are making progress against rate and acuity alignment and our best in class business development team continues to effectively articulate our value proposition.
Sarah Linda: Throughout it all our teams have worked tirelessly to advance our Medicaid quality results deliver operational and compliance improvements and innovate through local partnerships as we serve the most underserved communities across the country.
Sarah Linda: And so while the Redetermination process has been challenging it is nonetheless, mobilize us toward an operating discipline that is creating a stronger healthier platform from which to grow.
Turning to the rest of the business our Medicare segment continued to perform in line with expectations during the quarter.
Sarah Linda: As we look ahead Medicare advantage remains a strategically important pillar of our platform and represents significant opportunity for margin expansion as we continue to improve stars reduce SG&A and advance our clinical programs.
Sarah Linda: This and our 2025 star ratings released earlier, this month, which with financial implication for 2026 represent a meaningful step forward on the journey to margin recovery there.
Sarah Linda: The results demonstrate our ability to effectively identify areas of potential improvement and methodically execute on delivering those enhancements.
Sarah Linda: During the cycle, we elevated our performance with 46% of members and plans at or above three and a half stars versus 23% from the prior year, despite higher than industry anticipated cut point changes.
Sarah Linda: <unk> results represent strong overall improvement in our core operations and continued focus on quality for our members.
Sarah Linda: Consistent with what we previewed on our Q2 call. We use 2025 beds as an opportunity to further focus our franchise on lower incomes seniors and tightened the alignment between our Medicare advantage business and our Medicaid footprint.
Sarah Linda: We exited six states, while strengthening our offerings in key counties and regions within our existing footprint.
Sarah Linda: As a planned byproduct of this work we were able to streamline our contract portfolio, creating more balanced membership across our contracts and enabling greater focus and impact in our program investments going forward.
Sarah Linda: These adjustments position us for a preliminary view of 2025 Medicare advantage revenue in the range of $14 billion to $16 billion. As we've shared previously this implies down membership year over year, but represents progress on our path to breakeven in this business.
Sarah Linda: Within our Medicare portfolio, our part D business will generate a more sizable revenue contribution in 2025, owing in part to significant changes adopted as a result of the insulation reduction Act.
Sarah Linda: Though it is early we are pleased with our preliminary view of product positioning and we expect part D revenue to grow significantly next year with potential for membership growth as well.
Sarah Linda: In light of recent policy changes that makes centene has industry, leading Medicaid footprint, a competitive advantage as we look to serve more dual eligible Medicare members. We remain focused on the compelling opportunity. Our Medicare platform provides for both margin expansion and growth long term as we turn around and stabilize this business.
Sarah Linda: Finally, our marketplace business continues to perform well in 2024.
Sarah Linda: Our results in the quarter were in line with our most recent expectations as we capitalize on more than a decade of experience to effectively serve now four and a half million members.
Sarah Linda: Looking to 2025, we believe our marketplace products are well positioned relative to our strategy.
Sarah Linda: Open enrollment will not begin for another week, but our early expectation is that we will be able to achieve pre tax margins well within our targeted range of five to seven 5%.
Centene demonstrated our thought leadership in the marketplace earlier this year by implementing an agent of record lock policy, which was subsequently implemented market wide by CMS in July.
Sarah Linda: In addition, CMS has introduced program integrity processes in line with both Centene advocacy and pre pandemic era policy that would further improve controls on exchange enrollment during this open enrollment cycle.
Sarah Linda: These types of policies improve the member experience as well as the quality of our book, but we do expect they will create a moderating effect on overall market growth in 2025.
Sarah Linda: As a result, our membership growth expectations for this year's marketplace open enrollment remains modest.
Sarah Linda: Continued migration of commercial small group enrollment into the exchanges expanding access and affordability initiatives as well as the program integrity enhancements net out to a view of mid single digit macro market growth in 2025.
Sarah Linda: Ultimately we are pleased with the performance of our marketplace business and believe this market and now serves as strong bipartisan base of more than 20 million Americans can be a powerful platform to expand affordable health care coverage and access for individuals across the country.
Sarah Linda: As we close out year three of our value creation plan. We're pleased with the progress we have made but even more pleased with our second order opportunities. We see ahead as we continue to drive operational improvements and mine efficiencies in our business model.
Sarah Linda: This quarter, we advanced work on a project. Some of you have heard me speak about namely the use of AI to automate and optimize our management of provider contracts.
Sarah Linda: Deploying AI within our provider operations, we can reduce the amount of manual labor associated with the installation of new contracts as well as the significant maintenance required for the tens of thousands of existing provider agreements within our portfolio.
Sarah Linda: Additionally, I will allow us to produce considerably stronger analytics I'm provider performance, an important lever for advancing initiatives such as value based care across our business.
<unk> diversified portfolio continues to allow us to navigate unprecedented landscape challenges and build for the future our quality team kept the gains from last year's Medicare advantage star scores and built on them strengthening our Medicare platform.
Sarah Linda: Our health plan and business development teams defended existing contracts and one new ones expanding the reach of our leading Medicaid franchise.
Sarah Linda: Marketplace continues to deliver value for our members and earnings power for our enterprise generating important returns and creating a compelling platform to support growth in the individual market.
Sarah Linda: And we continue to find opportunities to get better at the basics and innovate and how we show up to support our members providers and regulators.
Sarah Linda: With the election, now 10 days away I'll highlight again that our product and government relations teams have been preparing for months for many post election scenarios that may emerge no matter. The results on November 5th Centene is well positioned as an industry thought leader for maintaining coverage and affordability for Americans across each of our product lines.
Sarah Linda: The momentum across its enterprise is palpable and it is the direct result of the efforts of our more than 60070, mers committing their time and energy and talent to improving the health of the communities we serve.
Sarah Linda: And I want to recognize those who showed up to support our members and fellow employees, who were impacted by Hurricanes Helena Milton.
Sarah Linda: The sudden team took immediate and urgent action, including Centene Foundation efforts to deploy much needed financial support to key nonprofit partners impacted states.
Sarah Linda: Headquarters teams coordinating the shipments of OTA over the counter medicine, and other hard to find supplies to our communities in North Carolina, and Florida and colleagues opening their homes to fellow employees impacted by the storm you went above and beyond for our members and each other and showed what it means to be part of the centene. Thank you.
Drew Asher: With that I'll turn it over to drew.
Drew Asher: Thank you Sarah.
Drew Asher: We reported third quarter 2024 results, including $36 9 billion in premium and service revenue and adjusted diluted earnings per share of $1 62, Q3 performance was ahead of our previous expectations and keeps us on track to deliver adjusted diluted earnings per share in excess of <unk>.
Drew Asher: $6.80 in 2024.
Drew Asher: As you saw on our press release. This morning, the adjusted diluted EPS for the third quarter includes 10 cents associated with a marketplace premium tax benefit that we previously expected in the fourth quarter of 2024, so merely a timing shift.
<unk> also includes about four cents of accelerated income tax benefit.
Drew Asher: Even without those two favorable timing items, we were still a little head for the quarter.
Drew Asher: Our consolidated H B R was 89, 2% for Q3, which brings us to 87, 9% year to date.
Drew Asher: Consistent with our previous public commentary, our Medicaid membership was just over $13 million and our Q3 Medicaid H B R. At 93, 1% was a little above Q2.
While there are still very small pockets of redetermination activity occurring we largely expect stability in our Medicaid membership around that 12.9 to 13 million Mark as we close out 2024.
Drew Asher: Every month that goes by we continue to make progress with our state partners and their actuaries and our efforts to match rates with acuity.
Speaker Change: Sarah mentioned now 100% of our states have acknowledged and acted so it's just a matter of sufficiency of rage state by state program by program.
Speaker Change: We remain confident that this is not a matter of if but when we get back to equilibrium between rates and acuity.
Speaker Change: We are pleased and encouraged by the progress since our last call, but theres more wood to chop with our state partners supported by the irrefutable data we provide.
The commercial H B R of 80% was right on track for Q3, and we showed a little bit more growth with $4 5 million marketplace members quarter, and 22% growth from a year ago.
Speaker Change: We continue to be pleased with the execution in our marketplace business and while the open enrollment period hasn't yet started we believe we can grow during open enrollment and achieve our margin goals in 2025.
Speaker Change: Medicare results in the quarter were consistent with our expectations, including a segment H B R of 88.0%.
Speaker Change: Good execution in 2024 in both our Medicare advantage and PDP businesses enables us to enter 2025 right on track.
Speaker Change: As you saw with the landscape vial, we continue to take Medicare advantage actions designed for the long run consistent with our strategy focused on low income and dual eligible.
We exited six of our smaller states that didn't quite match, our Medicaid footprint and.
Speaker Change: And we administratively reduced our number of H contract by about 30%.
Speaker Change: While we have much of the annual and open enrollment periods yet to play out as they recovered we are still targeting 14 to 16 billion of Medicare advantage revenue in 2025 and.
Speaker Change: And we're still targeting the same 2025 result that would be consistent with an approximate $125 million of premium deficiency related expense that would be recorded in Q4 of 'twenty 'twenty four so overall no major changes to our Medicare advantage game plan.
Speaker Change: Similarly, our stars game plan is on track at 46% and three and a half stars for the 20th 26th payment year as we covered in our October 11th 8-K.
As we've talked about for the last couple of quarters, we expect meaningful revenue growth in our PDP business in 2025, largely driven by the inflation reduction Act and mechanics.
Furthermore, our bids positioned us well anchored by our outstanding pharmacy cost structure that when coupled with the CMS demo facilitates very low cost and attractive products for seniors.
Speaker Change: For 2025, we are pleased to again be below the auto assign benchmark in 33 out of 34 regions and are zero premium products inclusive of the federal demos subsidy is available to seniors in 43 out of 50 states. So we think our reported premium yields.
Speaker Change: More than double in 2025 compared to 2024 due to the I R E and we should be able to grow membership as well subject to the annual enrollment period that just started.
Speaker Change: We are targeting a 2025 P. D P margin of 1% or so that we will look to edge up over time and that is on a much higher revenue base for 2025.
Speaker Change: Our adjusted SG&A expense ratio was eight 3% in the quarter a good result, contributing to a slightly better view for 2024.
Speaker Change: Cash flow used in operations was 1 billion for Q3, driven by a few normal course balance sheet items, one the settlement of marketplace risk adjustment payables for the 2023 benefit year with a corresponding collection of over 800 million of 'twenty to 'twenty three receivables expected.
Speaker Change: <unk> in Q4.
Speaker Change: Two Medicaid rate increases not yet collected and three an increase in part D receivables.
Speaker Change: Unregulated cash on hand at quarter end was 266 million during the third quarter plus of October we deployed approximately 1.6 billion on Centene shares for year to date total of $2 4 billion.
Speaker Change: Our debt to adjusted EBITDA was two nine times at quarter end, our medical claims liability at quarter end represented 51 days in claims payable down three days sequentially and down two days compared to Q3 of 2023.
Weren't for a higher level of state directed payments in Q3, we would've been at 53 days.
Speaker Change: We have updated our 2024 guidance elements to help with your modeling as we look towards wrapping up 2024 are.
Speaker Change: Our full year premium and service revenue was $2 billion higher than previous guidance, which gives us more earnings power for the future.
Our consolidated 2024, H B, our guidance of 88.3 to 88, 5% reflects the Medicaid insights and updates we have provided you with the last couple of Investor conferences.
Speaker Change: We continue to expect Q3 2024 to be the high watermark for our Medicaid H P. R.
Speaker Change: 2020 for SG&A guidance midpoint of eight 6% is slightly down due to cost management and revenue growth and to round out a couple of other metrics. We expect investment income of over $1 7 billion, excluding gains and losses on divestitures and depreciation expense in the zone of 550.
Speaker Change: Importantly, we are still on track for greater than $6.80 of adjusted diluted EPS in 2024.
Q3 represents another quarter of good progress from another divestiture to cost management to revenue growth to stars and wins in Iowa, Medicaid, Pennsylvania L. T S S and Michigan Heidi to boot.
Speaker Change: Execution in our diversified portfolio enables us to reaffirm our 2024 adjusted diluted EPS guidance of greater than six hours in any sense. Despite the temporary Medicaid rate acuity mismatch that we've been briefing you on since May.
As we make forward progress quarter after quarter, we still expect to grow adjusted diluted EPS in 2025 and beyond.
Speaker Change: Thank you for your interest in Centene Rocco, let's open it up for questions.
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Speaker Change: My question has already been addressed and you'd like to remove yourself from queue. Please press Star then two.
Speaker Change: Today's first question comes from Stephen Baxter of Wells Fargo. Please go ahead.
Hi, Thanks, I was hoping for the Medicaid MLR, you could potentially provide a little bit of commentary about where you expect the fourth quarter to land, but any bridging items, maybe we should consider including maybe whether there was any retroactivity in the third quarter either positive or negative.
Speaker Change: This is a follow up.
Speaker Change: Would love to hear you talking about the total level of cost growth that you're seeing in the Medicaid business, where that's a second half I'm trying to understand how much margin impact we should think about the composite rate update you discuss produce it. Thank you.
Speaker Change: Sure. Thanks Steven.
Speaker Change: So let me let me tell you a little bit about what we saw in the quarter and what that means for us as we sort of look into Q4 and 'twenty five and really it is a result of the groundwork that we laid out over the last 18 months and what we've shared with you in terms of the <unk>.
Speaker Change: Proactive dialogue with the states and I think also a result of being the largest Medicaid provider and being maniacal about data and so as we saw the inflection around the dislocation between rate and acuity you start to pick up in Q2, we were very early to call that out we were very early to bring that to our state.
Speaker Change: Partners to show the data and then to continue to refresh that data on an ongoing basis and that then became an important input. If you think about the 14 states that have rate updates are between seven one and 10, one and you also heard from both my Andrew's commentary that that one state that we've been waiting for.
Speaker Change: For them to get an adjustment back in 2023, and one of our smaller states, but that did come through them and therefore has universality in terms of states acknowledging that there's a need to get rates in acuity together and also demonstrating their willingness to do so so all of that nets out to the commentary around the composite rate adjustment being in the high fours.
Speaker Change: <unk> to 5% as we think about the year also informs the fact that we're encouraged by the momentum that we saw in the quarter and how we think about that influencing the conversations around not just 2025 rates by continuing to push for mid cycle acuity adjustments as you heard from drew Theres still work to do but.
Speaker Change: Again, the fact that you know, bringing that data forward leveraging the strong relationships that we have at the state level and being able to push those productive conversations to drive results I think is sort of what we stand on.
Speaker Change: I don't know if there's anything you want to add in terms of cost trend or anything yes, Steven as you think about the progression from Q3 to Q4, I'm just thinking about Q3, and Medicaid H B are being the high watermark is as I said in my remarks, and then we've got.
Steven: One one pretty big state with a nine one renewal in three states with 10, one renewals in rate updates that obviously will impact Q4, more so than Q3.
And then you didn't ask me about other lines of business, but if you step back and think about the H b or in the aggregate.
Steven: Setting aside Medicaid Q4 seasonally is higher in the Medicare and commercial segments commercial you're typically because of deductibility and seasonality sort of picks up during the year and then in Medicare, usually Q1, and Q4 or a little bit higher than Q2 and Q3. So.
Steven: That rounds out as you think about your modeling from Q3 to Q4 in the context of the aggregate guidance that we provided.
Speaker Change: Thank you.
Speaker Change: Josh Raskin.
Josh Raskin: Its own research. Please go ahead hi, thanks. Good morning, just to follow up on that could you speak to core Medicaid utilization trends sort of outside of the acuity shifts what you're seeing in terms of sort of same store.
Utilization trends, maybe specifically comment on behavioral health and maybe the areas you've talked about in early September and then separately.
It sort of the re verification process is sort of completing your states that you kind of back to that normal procedures around re verifications, how does that change the conversation with the states does that does that have any impact on sort of how you're advocating for rates.
Speaker Change: Yeah. Thanks, Josh there, there's nothing really new to add relative to the trend conversation from the updates that we gave in Q2 and then throughout Q3 and so obviously the major driver of H B R. In Medicaid is the mismatch of rate in acuity and as you know we've called out before we have the ability to.
Speaker Change: You saw a sort of underlying continuous member cohorts to validate the fact that there is no sort of massive trends sitting in that continuous member book. There are pockets of trend that are exactly the same as we've been calling out previously so behavioral health home health and then obviously at a state level. They are there.
Speaker Change: It is program specific issues, where estate makes a change to the program and you used to give us rate to account for that which is really normal course, blocking and tackling but in an environment, where you have redetermination sort of pressing down on the whole book those are issues to come a little bit more visible, but think about things like adding D. L. P ones to the preferred drug list teen.
Speaker Change: <unk> rules around behavioral health access and no changes to prior off you know ability on our side and sort of cost management techniques. So those are again very consistent with what we've been saying throughout the quarter. We didn't see any new changes as we came out of the quarter and then relative to your other occur.
Speaker Change: And you know we are again seeing states kind of get through the tail of the administrative process, but relative to the right conversations those really are sort of aggregate data based and so understanding that the the impact of what those administrative changes do in terms of the <unk>.
Speaker Change: Remaining population and then what the resulting acuity is all of that is.
Speaker Change: There's a there's a willingness and appetite by the state to look at that and it's pretty consistent with the actuarial process. Because there is a normal look back and so you know the fact that we're through again largely through that tail is not prohibitive relative to the advocacy work that we need to do to make sure that rates are matching what the acuity.
Speaker Change: Netting out too.
Thank you next question today comes from AJ Rice of UBS. Please go ahead.
AJ Rice: Oh, hi, everybody just.
AJ Rice: Trying to drill down to put a perspective on where you guys are saying versus what some of your peers have said so if your composite rate increases are in the 4.5% to 5% range and you know this is the worst for medical loss ratio and you can get better from here it sounds like rate update similar to that.
AJ Rice: You sort of parse out obviously, that's a blend of the states that didn't update as well as the states that have update updated presumably at higher rates what.
Speaker Change: What types of rate updates do you think you need I mean, we've heard others say they need high single digit update one even said maybe low double digit updates what how much you need major.
Speaker Change: A major goal of showing consistent MLR improvement going forward.
Speaker Change: Yeah. Thanks, a J I mean, the answer is obviously different state by state and as you know as we've said there's still work to do relative to sufficiency I think the fact that we've called this out before but you know we are in sort of an unprecedented time and so where we have seen them rate adjustments that are.
Speaker Change: Our outsized relative to what would be normal course, all lends itself to the sort of encouraging view that we have that states understand that they need to make up the difference between where the rates may stand for a specific state or a specific program and then what we're seeing in terms of the actual experience and I wonder if there's any.
Speaker Change: The thing you want to add you know, we'll just keep forging ahead I mean, we've gotten.
Speaker Change: Rates in the high single digit range in a very very small states. So don't get too excited we got to the 10%, but that just gives you the indication of the states are looking at the data that we're providing and looking at recent data as well I'm trying to balance that into their actual actuarial process, we're making progress here, we still have a word there.
Speaker Change: Job, we'll be working on that throughout 2025, when we have the one one cohort that we're starting to get visibility on.
Speaker Change: Recently.
Speaker Change: Then you know moving to four one where we have one big state and then almost half of our rage seven one to 10 one.
Thank you and then my question is where it comes from Justin Lake with Wolfe Research. Please go ahead.
Justin Lake: Thanks, Good morning, I'll, just follow up a couple of questions first of all on rates.
Justin Lake: The clarification can you can you tell us specifically what period.
Justin Lake: Think about that four to five per se composites hovering is that the year that second half and maybe you could share with us some of your peers.
Justin Lake: Kind of a baseline what's the core strategy that compares to about four to five as you see it now.
Justin Lake: Lastly are you seeing a significant pick up in Medicaid faster payments just want to make sure is that 4% to 5% you're talking about moving past the repayment or does it net those pass throughs out.
Justin Lake: Thanks.
Speaker Change: Yes, Thanks, Joseph for the question, so the four and a half or the high fours to 5% is the back half rates are more recent time period.
Speaker Change: Then we look at that as net rates and so pass throughs would be excluded from that as would programmatic changes.
Speaker Change: To the extent that benefits were adjusted so we're looking at that as sort of a net fundamental rate, even though the gross rates are often a little bit higher depending on the United State program.
Speaker Change: Think of it less as cost trend and more about trying to pick that exit med expense P. M. P. M. As we exit the Redetermination time period, and then matching the rates against that exit rate as Sarah indicated.
Speaker Change: When we look down into our book of business and look at continuous members and these are pretty big cohorts.
Speaker Change: With us I mean millions and millions of members. So statistically sound that have been with us for two years, there's not a whole lot of trend. There are some typical trend and the high acuity populations, you know reasonable levels of trend and.
And pretty flat and turn up so I would think of it more as like pegging that exit run rate P. M. P M matching rates against that that will be working on over the next couple of cycles.
Speaker Change: Thank you and our next question today comes from Sarah James of Cantor Fitzgerald. Please go ahead.
Thank you is there a way to size up the pent up demand portion of trend that would slow as rejoin us slow versus the acuity mix that would continue.
Speaker Change: And on the Jill P. One flag to size how much pressure the trend that is I think that cover it and whether there is a corresponding adjustment in rates or there's a lag there for catching up.
Speaker Change: Yeah, so relative to rejoin or as I think as we've called out that dynamic and that cohort in particular, where again is immature months. We're seeing you know 30% of members who are coming back and as this process has unfolded and an increasing gap in terms of how long it takes.
Speaker Change: For them to come back, which then puts them outside of that retroactive reinstatement window.
Speaker Change: Is part of what's been contributing to the H B R pressure and Delta that you've seen in the last two quarters and my commentary about the fact that that dynamic is slow thing I think is important because though is the rejoin us tend to come back and find their way back because they are in a in knee.
Speaker Change: Need of health care, and so again, they create sort of this artificial pressure, where they're using the system and we haven't received premiums for the time period that they werent enrolled even though they were eligible so the more of that that we worked through and have now worked through over the last couple of quarters.
Speaker Change: <unk> that that should create a natural tailwind as we turn into two.
Speaker Change: 2025, and then G. L. P ones drew maybe I want to talk about are the states that have put those on formulary in the data that we can present to them as they think about making sure we get paid for it yeah actually we've had a couple of states that have had G. L. P ones available for weight in the weight loss indication for a while so we've got good data.
Speaker Change: Then we take the other states that are you know maybe contemplating should they put it on their formulary should they not ensure that data with them. It also help shape the rate discussion.
Speaker Change: You know the ramping of that that we saw in those states that have been on it for over a year.
Speaker Change: So there was a handful of states the states can make those decisions and we administer them and then we share data. There was one state that recently added G. L. P ones I believe as of August and we're sure state data monthly with them to make sure that the rates that they loaded in the P. M. P M.
Speaker Change: Their estimate upon the commencement is consistent with the uptick that is being seen in that specific states.
Speaker Change: Two questions.
Speaker Change: Please go ahead.
Hi, Good morning last quarter, you categorized Medicaid H B R improvement as a tailwind for 2025 with a modest setback in Medicaid MLR in the quarter or is it still fair to characterize Medicaid MLR was a tailwind for next year and what visibility do you have into one one rate updates at this point. Thanks.
Speaker Change: Yeah, I would say yes.
Speaker Change: [noise] Cade H B, our improvement is definitely a tailwind for 2025 as you heard you say we've started to get some of those one one rates and well have a lot more visibility and obviously be able to update you on 2025 overall at our Investor day in December, but I'm still believe we'll be able to grow it.
Justin Lake: Justin E P S.
Justin Lake: And those those headwinds and tailwind in the aggregate that we've shared previously remain the same.
Speaker Change: Thank you next question today comes from Lance Wilkes with Bernstein. Please go ahead.
Justin Lake: Great.
Lance Wilkes: Hoping you could give a little more detail to help our understanding on.
Lance Wilkes: Some of the rate and rejoin her aspects in particular with rate increases as youre doing those are states doing that by program or at a composite level across programs and then when you're thinking about rejoinders and maybe any comments on labor leavers, who would also be interesting, but rejoinders do you have cohorts that are there long enough that.
Lance Wilkes: You can see a normalization in utilization patterns.
Lance Wilkes: Yeah.
Speaker Change: Yeah on the so first of all relative to rates states do we get sort of a composite rate, but it is a reflection of the buildup of the underlying sub programs that are in there and so they take into account and the the sort of variety of programs that that any of us.
Speaker Change: Individually are managing them, and then relative to sales and labors and rejoin US we do now have to your point Lance <unk>.
Join our data rejoin or run out data and being able to look at and confirm the view that again those we joiners are coming back because they are in need of services and then we see the normalization.
Speaker Change: Of their utilization patterns thereafter, and in fact are the idea that had we been receiving premiums for those members. During a time that we had the GAAP. It would have normalized their H b R them more than what we're seeing so that all of that again continues to confirm the view that it's sort of this artificial pressure that's crew.
Creating you know MLR uptick and then I don't know anything else on stairs and leavers as those continue to run out.
Speaker Change: So yeah. So it's still the same differences that we've been seeing them and all of that data gets put into them.
Speaker Change: You know the mix in our advocacy with state partners.
Speaker Change: Thank you next question today comes from Ottawa, Wednesday, who knows.
Speaker Change: Uh huh.
Speaker Change: Hey, I appreciate the question I was wondering if we could get a little more color on the part D. Business. You mentioned do you expect 1% margin next year wondering how that compares to this year and then also one of your peers mentioned that due to the I R. Array changes that partially took effect. This year they saw a greater utilization shift in.
Speaker Change: Some specialty drugs this year because of the member cost sharing went down and.
Speaker Change: That happened after they priced 2025, and so wondering if you were seeing that and if that had any risk for 2025 or if you know the voluntary program helps minimize some downside any color around all of that would be helpful. Thanks.
Speaker Change: Yeah. Thanks, Adam No, we're really pleased with our positioning in PDP, so starting with 'twenty 'twenty four we're right on track I mean, we sort of knew the rules of the IRA we thought about it.
Speaker Change: The member changing behavior, which will be different in 'twenty five in 'twenty four but we thought about it for 24, as well and any sort of manufacturer behavior changes that might be induced by the changing of the mechanics of the IRA. So we're right on track as you can see in our aggregate Medicare segment.
Speaker Change: Underneath that PDP is on track.
That same zone of margin for 24, so sort of expect a degree of consistency between 24 and 25 in the margin. Although the revenue will be a lot higher than 25 24. So.
Speaker Change: I'm pleased with the positioning the team did a really good job of estimating the direct subsidy, obviously that was a big risk.
Speaker Change: We talked about going back to Q1 of the conference in March and then on the Q1 call trying to make sure quite frankly that the industry was thinking through all of the elements that needed to be reflected in the bid and therefore driving that are the direct subsidies. So we would expect to grow.
Speaker Change: The open enrollment period, the annual enrollment period, given our positioning we're below the benchmark in 33 out of the 34 regions, which is a really good result, but consistent with where we've been in the past.
Speaker Change: And we continue to have zero premium products are in.
Speaker Change: And the majority of states in part thanks to the CMS demo, which brought down that premium by 15 Bucks. So pleased with the positioning not satisfied with the 1% margins give or take but I think that's the right area to.
Speaker Change: Target for 25, and then we'll look to edge that up over the following a couple of years.
Speaker Change: Thank you and our next question comes from Scott Fidel with Stephens. Please go ahead.
Speaker Change: Hi, Thanks, good morning.
Speaker Change: First question just was hoping to circle back on <unk> comment around the expected exchange market growth for next year at the mid single digits.
Speaker Change: You know one of your large.
Hicks market focused peers had talked more about.
Speaker Change: Mid teens growth expectation for next year, and I know you did sort of call out a few.
Speaker Change: Sort of regulatory changes for next year or so would be helpful. Maybe if you could maybe walk us through you know sort of how you would be thinking about like sort of I guess, the gross you know marketplace growth and then how some of these these regulatory changes may sort of bring that down to the mid single digits.
Speaker Change: And then just my follow up question would just be around.
Speaker Change: California.
Speaker Change: One of your peers has commented the last couple of quarters on a retroactive rate adjustment in Medicaid that's been pretty significant I know you guys haven't really call that out to nearly the same degree, but just curious on sort of what you've been seeing on that that that fund as well. Thanks.
Speaker Change: Yeah. Thanks, Scott for the question. So long term, we're still very bullish on our view of growth in marketplace, and we call that all of the drivers of that but sort of increased stability and broker infrastructure affordability awareness.
Speaker Change: As we think about this year, we think about the fact that we're coming off of the the tailwind from Redetermination. So that that creates sort of a natural step down to a more moderated growth rate just to begin with and then as you said exactly the program integrity policies that are being layered in and re.
Speaker Change: Really most of these are just policies that are being reintroduced that were sort of put on pause during the COVID-19 era.
Speaker Change: One of the new ones is this agent of record lock policy, which requires a member them to have a single broker throughout the enrollment period, which again, we think creates a more stable and enrollment experience its something that we put in place starting back in January so that's not really new for us, but maybe new for some folks in the industry.
And then two additional policies that are sort of reinstatement, which is the failed.
Speaker Change: Failure to report, which is sort of the IRS policy, making sure. The income level is correct relative to enrollment and the subsidies and then the flag for overlap between marketplace and Medicaid eligibility and so those the introduction of those our reintroduction of those relative to this open enrollment.
As part of what creates sort of that downward pressure in this cycle. The other thing that I think is important to note is that as we come through the Redetermination process. We also anticipate less.
Speaker Change: Less growth than we've seen in the past couple of years relative to the S. C. P period, and so think about returning to more normal marketplace membership seasonality, which means growth during open enrollment of peak sometime in Q1, and then sort of natural trailing of membership as you move through the rest of the year and so all of.
Speaker Change: That nets out to our view of you know mid single digit growth for the market and.
Speaker Change: Our view of a sort of more modest this year growth in open enrollment, but still believe that we will grow in open enrollment and based on what we've seen obviously up enrollment doesn't start for another week, but what would be seen in terms of the competitive landscape still feel very good about being able to execute our strategy relative to delivering.
Speaker Change: Well within our target margins of five to seven and a half per cent and then drew do you want to comment on the California dynamic Yeah, I'm never 100% sure exactly we're talking about the same thing, but similar to what you described we were able to get adequate information to get.
Drew Asher: A negative retro into our Q2 results.
Speaker Change: Thank you and our next question today comes from Michael Hall with Baird. Please go ahead.
Michael Hall: Alright. Thank you just wanted to quickly confirm on your modest change growth expectation does that imply it's interesting centrally can grow higher than Martin go higher than sort of mid single digit for next year and then I know there's been a few questions on Medicaid cost trends already but just curious what level of cost trend are you assuming for.
Fourth quarter Directionally is it fair to assume your guide sort of implies for Q Medicaid tracking is higher sequentially.
Speaker Change: Yeah. So I think drew you covered the seasonality of H B R. But maybe just hit that again in Medicaid Medicaid construct I think that the way to think about that Michael is that we expect Q3 to be the high watermark for Medicaid H B R and yeah every quarter, we assume that there's typical.
Michael Hall: And in our books of business across all the all the businesses.
Michael Hall: But essentially what we're doing is exiting the redetermination era.
The elevated medical.
Michael Hall: Medical expense P. M. P M relative to a year ago, obviously, and then you know trending on that going forward, which.
Michael Hall: Which we expect to.
Michael Hall: Have those Q4.
Michael Hall: Benefit in Q4 of the nine one in the 10 one rates.
Michael Hall: The benefit obviously is much greater in Q4 than Q3.
Michael Hall: And then just relative to marketplace growth. So we haven't quantified the target growth, but do believe that we will grow in marketplace, our focus and our strategy really for 2025 has been more about delivering margins well within that pretax range and so wanted to give some color on what we see as overall market growth.
Michael Hall: And then look forward to providing a more detailed update at our December investor day on that front.
Speaker Change: Thank you next question comes from Dave Windley with Jefferies. Please go ahead.
Dave Windley: Hi, Good morning, Thanks for taking my question I was going to switch topics to G&A.
Dave Windley: Barry you mentioned AI and I wondered.
Dave Windley: I guess, one if you would be in a position to quantify any of the AI benefits that you might expect to see a.
Dave Windley: Two are any of those projects shovel ready at this point and then three on on G&A are there any timing related.
Spending items that we should be thinking about excuse me on G&A thinking like all such to the higher Medicaid MLR things like that that we should think 24 versus 25 on G&A.
Speaker Change: Yeah, I'll, let him I'll, let you cover timing more broadly relative to year over year. The one thing I will call out, which you all know that SG&A naturally goes up in Q4, because we get into our selling periods for marketplace in Medicare. So just something to keep in mind keep in mind, but consistent with what you know you see every year.
Speaker Change: You know broadly relative to operational efficiency and I think we've delivered great results and created momentum as we think about kind of closing out year, three and as you've heard me say them sort of even more excited about the fact that we didn't you know just deliver on the low hanging fruit, but really starting to to get to the second and third.
Speaker Change: Are there opportunities, which I think reflects the fact that operational excellence is sort of increasingly baked into the DNA of the organization. The AI project I mentioned in particular is shovel ready, but it's you know this is not the beginning we've actually been layering in them. They they use of AI across different parts of that.
Speaker Change: Business as we've come through this value creation work and the benefit of doing so much work in terms of standardizing processes means. It means that you can then flip over to automating process and then you have access to the data allows you to layer in AI and really think about a different way to leverage the size and scale and the data of this organization.
Speaker Change: And to drive standardization in administrative processes that arent necessarily differentiating and then really focus the talent of the organization on those parts of the process that are differentiating so lots of additional non a high SG&A opportunities. You. Obviously, you heard us talk about that relative to Medicare that's going to be another great lever to derisk sorry.
Speaker Change: And drive the path to profitability in that business, but thinking about things like digital payments to providers vendor consolidation portal consolidation. All of these are things that are still ahead of us and so feel good about the ability to continue to extract UBS improvement frankly from that 1% to 2% that comes from.
Speaker Change: Our margin improvement over time.
Speaker Change: We'll bridge you off of the midpoint of 'twenty 'twenty four is 8.6 at Investor Day, and then it'll be somewhat dependent on the mix of business, obviously your marketplace and Medicare carry a much higher SG&A load then Medicaid and then we will have to we then the impact of the PDP revenue growth as well. So we'll we'll be sure to do that at Investor day.
Speaker Change: Good.
Speaker Change: Thank you.
Speaker Change: It comes from George Hill with Deutsche Bank. Please go ahead.
Matt: Hi, Thanks. This is Matt on for George Thanks for taking my question. The Medicare P. M. P. M seems to have grown much faster than your peers this quarter and.
Speaker Change: How much of it is driven by rate adjustment and any other main drivers beyond rate adjustments and how sustainable is the P. M. P. M growth I'd, just say going forward. Thank you.
Yeah. Thanks for the question is as you've heard us talking about cash flow is not what you asked about but it's it's there's an interplay here with the cash flows being impacted in the D. C. P being impacted by state directed payments that works its way into the yield that you're probably calculating off the face of the the disc.
Closures that we have so there's there's a fair amount of increase in state directed payments in the quarter.
Speaker Change: And but you're right the the the high fours to 5% composite back half rate is helping that as well.
Speaker Change: Thank you and this concludes our question and answer session I would like to turn the conference back to loosen.
Speaker Change: It works.
Speaker Change: Thanks, Rocco I'll, just close out by emphasizing what I think you've heard this morning, which is our business objectives and unexpected 'twenty 'twenty four earnings power remain unchanged. We are pleased to be making progress matching Medicaid rates with acuity and generating positive momentum on RFP wins in the meantime.
Speaker Change: Relative to Medicare, we are marking gains on important strategic initiatives, there and we continue to lead in our marketplace business, which is a product where I think our depth of experience and execution is unparalleled. So we still have work to do we still have a lot of opportunity ahead and look forward to updating you again at our upcoming Investor day in December.
Speaker Change: But in the meantime, thank you for your interest in Centene and I Hope you have a great weekend.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation.
Speaker Change: You may now disconnect your lines and have a wonderful weekend.
Speaker Change: [music].