Q1 2025 Centene Corp Earnings Call
Speaker Change: Good day, and welcome to the Centene Corporation first quarter 2025 conference call. All participants will be endless in only mode. Should you meet assistance, please signal conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star than one on your telephone keypad, and to withdraw your question, please press star than two. Please note, today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan in just relations. Please go ahead.
Jennifer Gilligan: Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first quarter 2025 earnings results conference call. Sarah London, Chief Executive Officer, Andrew Asher, Executive Vice President and Chief Financial Officer of Centene will host this morning's call, which also can be accessed through our website at centene.com.
Jennifer Gilligan: 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 Security's litigation reform act of 1995.
Jennifer Gilligan: including those discussed in our first quarter 2025 press release, Centene's most recent form 10k filed on February 18th, 2025, and other public SEC filings, which are available on the company's website under the investor section.
Speaker Change: Antique anticipates that subsequent events and developments may cause its estimates to change.
Speaker Change: The call will also refer to certain non-GAAP measures . A reconciliation of these measures, with the most directly comparable GAAP measures , can be found in our first quarter 2025 press release.
Speaker Change: With that, I would like to turn the call over to our CEO , Sarah London. Sarah?
Speaker Change: Our full year 2025 of adjusted EPS expectations remain unchanged at greater than $7 25.
Speaker Change: We have increased clarity on the components of our 725 floor and have moved some of the underlying metrics as a result.
Speaker Change: Drew will cover these and other details of the quarter in a moment.
Speaker Change: Uncertainty unchanged are not new to <unk>, and we are managing the business well, while navigating a dynamic policy landscape.
Speaker Change: Relative to the active national dialogue around health care policy reform, we believe a few things are important to note.
Speaker Change: First we do not see broad support for benefit cuts in Medicaid from either the white house or from Congress in fact over the last few months, we have witnessed an increase and bicameral Republican members objecting to major Medicaid reforms.
While there is building momentum around work requirements within the expansion population and opportunities to drive better efficiency in the system for beneficiaries and the states.
Speaker Change: We believe that large scale benefit cuts and significant policy changes will present challenges for the reconciliation process.
Speaker Change: Second there is growing bipartisan recognition in Congress that the exploration of the enhanced premium tax credits must be addressed before they expire at the end of the year.
Speaker Change: A recent survey conducted by leading Republican Pollsters, founded 78% of swing voter support extending healthcare premium tax credits for working families.
Speaker Change: The criticality of these tax credits for Republican voters small business owners and our existing rural health care infrastructure as well as the potential of even individual marketplace to serve as a platform for acre growth has taken root for many Republican congressional leaders.
Speaker Change: Congress is scheduled to return from resets next week and we expect activity focused on driving the contours of a reconciliation bill is the first order of business for <unk>.
Speaker Change: And lawmakers are targeting memorial day for a reconciliation bill, but much will depend on the consensus building process.
Speaker Change: Reconciliation the next big order of business will be government funding due to expire at the end of Q3, we anticipate this could be another vehicle where health care issues are addressed.
Speaker Change: Amid this backdrop, we continue to execute on our strategic initiatives, while advocating for sound health care policy.
Speaker Change: We have demonstrated the ability to be successful under multiple administrations and expect nothing less as we navigate the next four years.
Speaker Change: Turning to the core business Medicaid took important steps forward in the quarter as we continue on our path of margin recovery, including better alignment of rates and member acuity and more geographies.
Speaker Change: As we noted back in February approximately 40% of our Medicaid revenue received refreshed rates at the start of the quarter with an average increase of four 5%.
Speaker Change: These rates contributed to underlying improvement in the performance of the book.
Speaker Change: However, the full impact of this improvement was masked in the quarter by a more active flu season than we anticipated.
Speaker Change: And Medicaid flew in ili drove $130 million of incremental medical expense in the quarter beyond our initial expectations largely offsetting the underlying MLR improvement we experienced.
Speaker Change: On the rate front, our discussions with state partners continue to be constructive and to benefit from increasingly complete data demonstrating the acuity shifts the industry has seen over the last year as a result of the tailing redetermination process.
Speaker Change: We continue to believe that Medicaid will ultimately return to pre pandemic margin levels as we worked through the coming rate cycles and engage with our members to deliver high quality low cost outcomes.
Speaker Change: On the business development front, we delivered several key Medicaid contract wins since the start of the year underscoring the strength and competitiveness of our unique service model.
Speaker Change: Centene was selected by the state of Illinois to continue providing Medicare and Medicaid services for duly eligible members through a fully integrated D. SNP.
Speaker Change: The decent program will provide services and support statewide for members who qualify for both Medicare and Medicaid as well as duly eligible MLT S. S members.
Speaker Change: And the state of Nevada, Our Silver Summit Health plan has once again been selected by the Nevada Department of health and human services to serve its Medicaid managed care program.
Speaker Change: For the first time. The program will include expansion of Medicaid managed care into rural and frontier service areas, allowing us to grow our footprint across the state.
Speaker Change: These wins are testimony to send team's expertise in both high and low acuity populations, making us the partner of choice in states across the nation.
Speaker Change: Our Medicare segment performed in line with expectations during the quarter as we advance our Medicare advantage business on a path toward breakeven in 2027 and manage the evolution of Medicare part D. Amid significant program changes due to the inflation reduction Act.
Speaker Change: As you saw from this morning's press release, we have added $1 billion of annual revenue to our outlook for 2025 as Medicare advantage membership is shaping up to be a little stronger than we previously anticipated.
Speaker Change: This better than expected membership is being driven by improved retention and we are pleased to be able to attract and retain lives through our strengthening Medicare value proposition.
Speaker Change: As we plan for 2026, we were pleased to see the inclusion of more recent claims data and the final 2026, Medicare advantage rate calculation, resulting in rates that better reflect the medical cost trend we've seen in EMEA over the last two years.
Speaker Change: There will still be gaps to close between rate and cost across certain geographies, but this step forward was important as we look to deliver valuable benefits to seniors and return our business to breakeven in 2027.
Speaker Change: In addition to rate the critical levers, we are pulling to drive to break even in Medicare advantage. Our stars results value based clinical initiatives and operational efficiencies through SG&A reductions.
Speaker Change: On the Starz front, we continue to see momentum and while a number of components remain outstanding we are projecting underlying improvement across chapters.
Speaker Change: That said, we are conscious of the fact that cut points or the relationship between absolute scores and corresponding star ratings have become more difficult due to recent methodology changes and variability in competitor performance.
Speaker Change: With that in mind, we took on the challenge to Derisk. Our stars outcomes for 2027 and to build a plan that supports our 2027 breakeven trajectory across the range of projected outcomes expected. This October.
Speaker Change: Through the identification of cost saving opportunities and operational levers, we have increased confidence in our ability to generate breakeven results in 2027, with our current star ratings or 55% of members in three and a half star plans with improvements on those results, giving us increased flexibility and potential upside in our breakeven path.
Speaker Change: As always rates for 2027 will be an important input and we will continue to advocate for program funding that supports the critical health care needs of Medicare advantage beneficiaries across the country.
Speaker Change: Finally, our commercial segment, which includes our marketplace business grew nicely during the first quarter as new enrollment and retention were both stronger than previously anticipated.
Speaker Change: The impact we experienced relative to the reintroduction of integrity programs like failure to reconcile or S. T. R was more muted in the period than we originally forecasted contributing to better than expected member retention.
Speaker Change: This membership strength is reflected in the full year revenue increase we issued earlier this morning.
Speaker Change: Recent CMS guidance suggests that ultimate FTR notifications and actions won't be taken until this summer, suggesting we won't see the full impact of this membership until Q3 as a reminder, we have these and other seasonal member attrition already baked into our full year forecast.
Speaker Change: Another policy news CMS issued the marketplace integrity and affordability proposed rule last month, including standards for the health insurance marketplaces, as well as for health insurers brokers and agents, who connect millions of consumers to affordable individual coverage.
Speaker Change: We're engaging with CMS on these policy proposals and working to model the potential impact of each component.
Speaker Change: The only major provision that would impact 2025 would be the discontinuation of the continuous S. A pea for members below 150% of the S. P L.
Speaker Change: The rest depending on what gets finalized would influence market in membership dynamics beginning in 2026.
Speaker Change: With respect to enhance a P. T. CS we remain optimistic that legislators will act to preserve these tax credits given the value they create in health outcomes and market stability, but we are preparing for a range of potential outcomes as we established plans for marketplace pricing and product positioning in 2026.
Speaker Change: While there are a number of factors that could impact the marketplace operating in landscape over the next year as a category leader in this business. We look forward to navigating the near term dynamics from a position of strength and Recalibrating, our book with a focus on margin and long term profitable growth.
Speaker Change: Stepping back as we survey the performance of our diversified portfolio. We are pleased to reiterate our full year 2025 of adjusted EPS outlook of greater than $7.25 amid sector volatility that is unmatched in recent history.
Speaker Change: With three months under our belt, we are prudently guiding with an element of conservatism to acknowledge at this early stage in the year. The many moving parts we are managing.
Speaker Change: We remain excited by our long term trajectory, including the attractiveness of our end markets, our positioning to capture meaningful market share and the associated earnings power and the exceptional send team is mobilized and executing against these opportunities committed to delivering value to our shareholders and to transforming the health of the communities we serve.
Speaker Change: One person at a time.
Speaker Change: With that I'll turn it over to drew to cover the quarter and full year view in more detail.
Speaker Change: Sarah.
Speaker Change: We reported first quarter 2025 results, including strong premium and service revenue of 42, and a half a billion dollars and adjusted diluted earnings per share of $2 90 in the quarter a good start to 2025.
Speaker Change: While we manage the company as a diversified portfolio. Let's go segment by segment for some insights of how we've been able to manage various tier ones and headwinds to yield a strong aggregate result, so far in 2025.
Speaker Change: Medicaid membership was stable and right in line with our expectation of $12 nine to 13 million members. The Medicaid H B R. Excluding excess influenza related cost was approximately 93% showing some progress compared to 93 four in Q4 of 'twenty 'twenty four you'll.
Speaker Change: See the print at 93, six including about $130 million Q1 influenza related costs above our expectations.
Speaker Change: Conference in March we had also cited $130 million of excess influenza costs through February and consistent with CDC data influenza settle down as we got into March.
Speaker Change: Fundamentally we continue to make progress matching rates and acuity.
Speaker Change: Key word being progress not completion for instance, or for one rate cycle, representing about 11% of Medicaid revenue yielded an approximate 5% rate increase.
Speaker Change: Those still inadequate for that for one cohort in areas such as M. L. T C.
Speaker Change: And community based services and emerging high cost drugs, so progress, but more work to do as we get through 2025 and enter 2026.
Speaker Change: On our entire Medicaid book, we are projecting a full year composite rate increase at 4% plus.
Speaker Change: Medicare advantage and PDP, both outperformed on membership.
Speaker Change: We retained more membership than expected during the Medicare advantage open enrollment period, which bodes well for long term earnings power.
Speaker Change: This is contributing 1 billion to our 2025 premium and service revenue guidance increase.
Speaker Change: P D. P. It ended the quarter at $7 9 million members strong growth from 2024.
Speaker Change: The Medicare segment H B R was 86, 3% in the quarter, which as we covered in past discussions is expected to follow an inverted slope line compared to 2024 due to the inflation reduction Act program changes.
Speaker Change: So a lower Medicare second H B R and higher earnings early in the year and a higher H B R and lower earnings later in the year.
Speaker Change: Within the Medicare segment, both Medicare advantage and PDP businesses were on track in the quarter.
Speaker Change: And you'll see an entry year increase in the Medicare advantage P. D. Our premium deficiency reserve that was planned for and is solely related to the sloping of earnings during 2025.
Speaker Change: So no change in our view of Medicare advantage earnings for 2025.
Speaker Change: The commercial membership was very strong in the quarter not just during open enrollment for one one but also in February and March.
Speaker Change: Q1 commercial segment H B R. At 75.0% was a little higher than last year's 73.3, driven by $1 9 million new marketplace members in Q1.
Speaker Change: These members are utilizing a little more than last year's new members, but because it's so early in the year, we are not yet recognizing a matching offset for risk adjustment.
Speaker Change: We'll know more when we get the first wakely file in late June early July.
Speaker Change: Given top line performance in Q1, and even as we forecast net membership attrition throughout the rest of the year. We are adding 5 billion of premium revenues for 2025 guidance related to marketplace.
Speaker Change: Moving to other consolidated P&L and balance sheet items, our adjusted SG&A expense ratio was seven 9% in the first quarter compared to eight 7% last year, which decreased due to continued leveraging of expenses over higher revenues and good discipline.
Speaker Change: Cash flow provided by operations was $1 5 billion for Q1, primarily driven by net earnings our debt to adjusted EBITDA was two eight times at quarter end, our medical claims liability totaled $19 9 billion for Q1 and represents 49 days in claims payable a decrease of four days as compared.
Speaker Change: Paired to the fourth and first quarters of 2024, driven by significant revenue growth in the PDP business. The decrease in days was expected given the mix impact of our PDP business, which will be a 16 billion dollar plus business in 2025.
Speaker Change: <unk> 5.2 billion last year and as I'm sure you know pharmacy claims complete much faster than medical claims, causing the mix related mathematical reduction to D. C. P.
Speaker Change: Looking at the full year, we are pleased to reiterate greater than $7.25 of adjusted diluted EPS.
Speaker Change: As you've heard the theme of the quarter was strong premium revenue growth and stronger than expected membership. Accordingly, we are increasing premium and service revenue guidance to a midpoint of 165 billion up from 159 billion.
Speaker Change: We're also recalibrating the consolidated H B R to reflect this growth in a couple of other items.
Speaker Change: 50 basis points is driven by one incremental Q1 growth in marketplace with that growth assumed for now to be at a lower than average margin level.
Speaker Change: To a full year Medicaid H b are in the mid to high 90 one's inclusive of flu from Q1 and.
Speaker Change: And three very high utilization of specialty drugs and non low income PDP members.
Speaker Change: While most of this is covered by the PDP demo risk corridor some of it makes it through our P&L.
Speaker Change: When coupled with SG&A outperformance in PDP, we are still on track for a PDP pretax margin in the 1%.
Speaker Change: We're also lowering the consolidated adjusted SG&A ratio mid point by 45 basis points, given strong performance in Q1 and based upon our 2025 gross and mix of business and.
And we lowered investment income by 100 million as we re forecasted cash balances and calibrated potential rate cuts.
Speaker Change: <unk> on track for 2025 at this early point in the year with a very strong topline, creating attractive long term earnings power.
Speaker Change: Now a few educational comments on 2026 since much of what we do in 2025 sets us up for success in 2026.
Speaker Change: On marketplace. There are two items that if finalized would impact the 2026 market size and the risk pool that needs to be reflected in 2026 pricing.
Speaker Change: Potential exploration of EAP Tcs is one that we've discussed here to for the second item as Sarah mentioned is the new marketplace integrity.
Speaker Change: Hello. This is your operator, when you're speaking privately may have your first and last name. Please.
Speaker Change: Yeah.
Speaker Change: May be muted on your end.
Speaker Change: Because the operator may have your first and last name. Please.
Speaker Change: Yeah.
Yeah.
Speaker Change: You are now rejoining the main conference.
Speaker Change: While the proposed rule changes seem likely to get implemented we are still optimistic about lawmakers seeing the merits of continuing EAP tcs and over half of our states have agreed to accept two sets of rights, one with enhanced Apt's CS and one without.
Speaker Change: Case theres clarity by July.
Speaker Change: So rest assured we are on top of adequately pricing for these matters.
Speaker Change: And P D P. The highest specialty drug trend being partly driven by pharmacy industry behavior will.
Speaker Change: We will need to be reflected in 2026 bids along with the assumption that the demo risk corridor will not be repeated at the same protective level.
Speaker Change: And we'll also be thinking about potential tariff impacts when making bad decisions remember.
Speaker Change: You remember our discussions last year about the PDP direct subsidies substantially rising in 2025 due to forecasted IRA dynamics.
Speaker Change: That landed right, where we thought it would well we expect another year of a large direct subsidy increase maybe the over $200 compared to this year's 142.
Speaker Change: Cause of the intentional and maybe unintentional cost consequences of the Iraq.
Speaker Change: So again, we are focused on making adequate pricing moves coupled with a higher P. M. P. M yield as we think about being responsible in our 2026 decisions being made in the next month or two.
Speaker Change: We are very pleased to deliver a strong Q1 and more earnings power for the future. Thank you for your interest in Centene Rocco.
Speaker Change: You could open the lineup for questions.
Speaker Change: Yes, Sir as a reminder, if you'd like to ask a question. Please press Star then one at this time there was a question has already been addressed and like to remove yourself from queue. Please press Star then two.
Speaker Change: First question today comes from Josh Raskin of Nephron Research. Please go ahead.
Josh Raskin: Hi, Thanks. Good morning, I was wondering if you could just give some more details about the flu related costs that you cited specifically if youre seeing more physician visits I'm, assuming primary care and maybe being a specialty and how confident are you that these are flu related and not related to some uptick in trend that could lead to downs.
Josh Raskin: Dream utilization and I want to make sure all of that was contained in Medicaid youre not seeing any of that and in the Medicare book correct.
Speaker Change: Hey, Josh Good morning, Thanks for the question. So the 130 million that we saw above expectations in Q1 in Medicaid.
Speaker Change: As a result of very closely tracking so we have a clear and consistent definition for flu in what we call ili or influenza like illnesses and that is what drove the $130 million again, its a consistent code set that we've used over the last eight years. We also look at our sort of flu related illnesses. We don't include that in there.
Speaker Change: Alkylation, but it does support the view that obviously C. D. C reported this was most acute flu season. The country has seen in the last 15 years and we saw both in sort of core few flu utilization and then sort of knock on effects, but again that $130 million is isolated to our standard flu definition, we did see some flu in marketplace.
Speaker Change: And then Medicare, but not are not the same as $130 million that we saw in Medicare.
Speaker Change: Medicaid and then obviously saw that trail consistent with the national trajectory I'm pretty hard down in March and so we think that is isolated to a Q1 item.
Speaker Change: Got you and I could just sneak in I didn't hear a commentary around the long term embedded earnings I think you've talked about three to $4 in the past I just wanted to make sure that was consistent especially in light of your comments around M&A getting to breakeven even without the stars improvement.
Speaker Change: Yes, clearly theres still opportunity.
Speaker Change: And Medicaid margins Thats clear based upon the current H B R and what we're forecasting for this year still excited about and even actually probably be more optimistic about the ability to get to breakeven and you know depending on you know the.
Speaker Change: The levers we can pull the stars results and then the 2027.
Speaker Change: Medicare revenue, maybe even beyond that so that that still holds and then PDP, we're still in that 1% ish area and pre tax for this year, even with a little bit of pressure or a fair amount of pressure and non low income specialty cost were making that up in SG&A. So that still presents an opportunity for.
Speaker Change: Our margin expansion on top of that we've just added 6 billion more than revenue, which is exciting to think about the earnings power of that over the next few years.
Speaker Change: Thank you and our next question today comes from AJ Rice of UBS. Please go ahead.
AJ Rice: Oh, hi, everybody and thanks for the question.
Speaker Change: Maybe just ask a couple of the Washington related questions I know at the Investor Day, you guys had sized your estimate of.
AJ Rice: What the headwind would be if the public exchange subsidies.
AJ Rice: Subsidies were to go away at about a dollar a share you've mentioned some new things today I really wasn't clear whether the tariff kind of it was related to public exchanges somehow but.
AJ Rice: Is that dollar is still a good number or how has your thinking evolved on that if it has at all and then you also mentioned the work rules, which does seem to be something that a lot of these guys are talking about I wonder.
AJ Rice: Just conceptually how to think about that.
AJ Rice: Plans are asked to be the ones that sort of get the asset additions about whether people are adhering to the work rules et cetera work rule requirements et cetera, how.
AJ Rice: How much of a burden would that be and how how impactful would something like that would be on the business you think.
AJ Rice: Yeah. Thanks, great questions. So the dollar is still good relative to the view of the enhanced C. P. T fees and we're working through the process of sizing the elements that came out in the proposed rule for marketplace.
AJ Rice: And obviously interfacing with CMS and providing feedback so as we see what gets finalized and for what periods of time I think we can provide an update on the interplay of those provisions with the enhanced apt's. He's obviously, we'll have hopefully increased visibility on what's going to happen with the enhanced C. P. T. CS as we get into Q2 and Q3.
AJ Rice: Timeframe based on.
AJ Rice: Belief that either through reconciliation or through the government funding vehicles that Congress will act on the extension of those so more to come but we're obviously watching that closely and sizing, but what's the potential impact on the interplay relative to work requirements. These as you know are not new.
AJ Rice: We have work requirements in some of our states today, we've also seen them calm and frankly go in our states over the years and based on that experience really a lot depends on what the ultimate framework is and the definition of a of able bodied adults who bought the carve outs are and so we really would expect a high degree of.
AJ Rice: Variability in how they and if they settle out at the state level, which again is not new for US right. We operate in 31 states for Medicaid, which means the programs are all different we're very used to sort of tracking these changes on the horizon and then working closely with our state partners to understand how they would implement them.
AJ Rice: And we've seen different levels of dependency or expectation relative to Ncos involvement in that process. We think there's a great opportunity to lean in there and map out state by state ways that we can ensure that members continue to have access to critical health care resources. So our teams are already at work on that process.
AJ Rice: In anticipation of what may or may not come on the work requirements right.
Speaker Change: Thank you and our next question today comes from Justin Lake Wolfe Research. Please go ahead.
Justin Lake: Thanks, Good morning, just talking on the exchanges.
Justin Lake: The risk adjustment numbers have been bouncing around for a lot of your peers I believe we just gave an update there.
Justin Lake: Curious what what Hal.
Justin Lake: Weekly numbers kind of look versus yours, where you are.
Justin Lake: Did you move your risk adjustment around much in the quarter versus year end for 2024.
Justin Lake: And then.
Justin Lake: That number does look kind of different than what it did in the end of 'twenty three versus 24.
Speaker Change: Curious how you risk how you see your risk point J&J it looks like your payable was down pretty meaningful.
Speaker Change: Yeah actually if you I know it's early if you pull out the 10-Q, we just filed there's very good consistency almost exact consistency when you look at Q4 'twenty four versus.
Speaker Change: Where we ended up in Q1, and the wakely data that we'd get continual updates on relative to the 2024 year was very consistent with our estimates so I'm good.
Speaker Change: Nothing sort of.
Speaker Change: Out of line in the quarter relative to our estimates at year end for where we think we're going to end up for.
Speaker Change: For 2024.
Speaker Change: So so pleased with that the real question is going to be the utilization we're seeing.
Speaker Change: And our new business are $1 9 million members.
Speaker Change: Some of that does look consistent with what should show up in 2025 risk adjustment.
Speaker Change: Think we're being prudent sort of waiting to see if that's going to be the case when we get our first view of 2025 risk adjustment data, which comes at the end of June early July for that first wakely data dump for the industry.
Speaker Change: Thank you and our next question comes from Ann Hynes Mizuho Securities. Please go ahead.
Ann Hynes: Good morning. Thank you I know you gave original guidance from Medicaid rates in the second half you assumed I believe around the two 5%.
Ann Hynes: Rate increases that's still the case and do you have increased visibility on how those negotiations are going for the second half.
Ann Hynes: And that would be my first question.
Ann Hynes: And then maybe secondly, with Medicaid Besides the flu is anything running harder than you expected. When you first of all when you gave original guidance.
Speaker Change: Thanks Ann for the question so composite rate for the full year, we're now seeing at mid fours and the rate negotiations relative to upcoming so think about the seven one cohort which is the next cycle, we will start to get visibility into that as we get.
Speaker Change: In later into Q2, and so more to come on that front, but as you heard me say you know I think we're seeing good continued momentum in our discussions with our state partners and the fact that as we roll forward. We have further completion data behind us in terms of the acuity patterns that started to emerge in Q2 right around this time last year.
Speaker Change: So that helps bolster the conversation in terms of supporting the actuarial calculus, and I think helps and in conversations with the states. So obviously looking to that 7191 in 10, one cohort them to contribute to the back half of the year and then I think you asked about Medicaid utilization beyond flu.
Drew Asher: And so we continue to see largely the same themes for drew maybe you want to click into a few of those yeah. No clearly we had the flu of 130 million in Q1, that's that's transitory.
Drew Asher: Ill health continues to be a trend item, we'd mentioned that probably for the last six quarters, we've got initiatives to tackle that and working with our state partners. You know things like applied behavioral analysis, I guess, no surprise coming out of the pandemic era.
Drew Asher: There's pockets of home health, we've mentioned that before things like attended services that where we can tighten U M. Do some do some audits.
Drew Asher: And then probably the area of uptick as high cost drugs.
Drew Asher: An example might be elaborate us, which curiously as a $3.2 million single treatment drug.
Drew Asher: That.
Speaker Change: You've read the Jama article's, it's you know.
Speaker Change: Questionable in terms of the efficacy and looking at you know, we're all trying to keep health care affordable that seems quite extreme for a cost of a single treatment for.
Speaker Change: Newly approved drug last year. So that's an area of uptick that effectively is on the back of the federal and state governments and that was just the payers. So that's one thing we're watching and we thought about that as we lifted the Medicaid H B R into the mid to high 90 ones from our previous guidance.
Speaker Change: Yeah.
Speaker Change: Thank you and our next question today comes from Stephen Baxter at Wells Fargo. Please go ahead.
Stephen Baxter: Hi, Thanks, I was just hoping you could help us understand a little bit better how are you thinking about the progression of Medicaid MLR throughout the balance of the year I know you mentioned that you have.
11% of your rates in the second quarter at a decent rate update there, but it looks like you have a lot of work to do to get the exit rate MLR down the level that you have now guided to for the full year. So just trying to understand the progression and why we should be able to think about getting a problem.
Stephen Baxter: The three core in the first quarter to something probably in the 90 to 91 range by the fourth quarter to kind of a consultant together. Thank you.
Yeah. Thanks, Steven obviously, there are two key levers to the progression of the Medicaid MLR. The first is rates and so I'll, let drew talk a little bit about the assumption again sort of composite and then how that plays out in the back half, but to my comments earlier, you know a lot of it has to do with the tenor of.
Stephen Baxter: The conversations that we're having with the states and the fact that we have sort of empirical evidence of the acuity shifts and we continue to have momentum if you look quarter over quarter over quarter in terms of those rates coming in to.
Stephen Baxter: To start to address the acuity dislocation. The other lever is obviously, what we can do internally relative to our clinical initiatives and thinking about the right network partners and ways to ensure that we are consistently interrogating our operating model to ensure that we're delivering high quality, but we're doing so at low cost.
Stephen Baxter: And so we have you know.
Stephen Baxter: Maximum effort on that that as you know always and always in place, but I think you know picked up through the course of last year, making sure that we are you know on top of all of those levers that we can pull internally and the coordination of that is really what drives the ultimate outcome, but Judy you want to talk more specifically about rates and progression yes sure.
Judy: And I'm sure you know this but you know we sort of manage the company as a diversified portfolio. So our goal is to hit the 88 nine to 89 five consolidated H B R. Yes, we provide details underneath that and we are driving to a mid to high 90 ones for full year and you're right that takes some improvement progression.
Judy: You know the first half of this year being better than the second half of last year and then the second half of this year being better than the first half of this year, partly driven by rates. If you do the math.
Full year was actually 4% plus that's our full year goal for rates that are what you can do the algebra and figure out we're betting on mid threes, we'd probably be disappointed in the mid threes in the back half of the year, but that's what we're betting on and then there's a number of levers where we're working with our state partners too.
Judy: Not just for rates, but program changes actually there's one state where it's likely we're gonna get pharmacy management back after the state tried an experiment and it didn't work.
Judy: And there's other levers, where we're working on behavioral health and home health.
Judy: Things I mentioned for the four one cohort so that together should give.
Judy: Good lift in the back half of the year in Medicaid and you'll be able to see that given the detail that we report.
Speaker Change: Thank you and our next question today comes from Dave Windley of Jefferies. Please go ahead.
Speaker Change: Hi, Thanks for taking my questions I wanted to ask just a clarification to justin's question.
Speaker Change: Drew in your answer you talked about risk adjustment and where you think it would go.
Speaker Change: I think I know, what you mean, but I just wanted to I don't want to assume so do you think it should go at risk and the risk pool should go up is that what you were implying and then the second question I had was around your membership growth, which looks very attractive could you talk about what percentage of your exchange book.
Speaker Change: Is fully subsidized and if that was different during this first quarter S. P. Lift if you could comment on that too. Please.
Speaker Change: Yeah on the risk adjustment yeah, thanks for asking that clarification I always welcome that.
Speaker Change: The if you look at our Q, we didn't really book.
Our net our net payable or receivable didnt change from year end. So in other words, we're not booking a big receivable on 2020 five risk adjustment in the first quarter, even though we see diagnosis codes and utilization on that new membership that should.
Speaker Change: You know yield some risk adjustment offset so we'll get more information on that and hopefully there's that opportunity, but we're not betting on that with what we booked in Q1, given it's so early in the year and then no issues with 2020 for risk adjustment coming into this year.
Speaker Change: And then relative to membership.
Speaker Change: The vast majority of our membership is subsidized which is consistent always has been a consistent with our focus on.
Really serving the lowest income marketplace members. He athene is a sister population to Medicaid and sort of the natural hedge them and synergistic services that are serving those two populations affords us we did not see any major shift in the percentage of the subsidized population coming into this O E M and and what we saw in Q1.
In terms of strong growth.
Speaker Change: Thank you and our next question today comes from Sarah James with Cantor Fitzgerald. Please go ahead.
Speaker Change: Thank you I wanted to clarify when you talked about the new exchange lives coming on at a higher MLR are you talking about the dynamic of just new members not having tended to normal margins yet or is there something in the acuity of claims data that makes you think these new lives.
Speaker Change: B, a higher MLR really margin outside of the traditional ramp and how are you thinking about infatuation right in where we will make today at the end of the FX changes.
Speaker Change: Yeah sure. So let me start with so effectuate churn rates are in this in Q1 came in strong sort of at the higher end of our expected range, but generally in the same neighborhood as we as we normally see we actually saw a meaningfully higher renewal rates are this year, which is awesome. That's a result of a focused effort.
Speaker Change: From R M better team and so really pleased to see those results. We are still projecting the same trajectory of memberships at a strong Q1 growth means a slightly higher jump off point, but still expecting as drew talked about that attrition through the year, which incorporates all of the assumptions around FTR and a return.
Speaker Change: Tomorrow normal seasonality, but it means at the end of the year, we're projecting high fours versus that mid fours that we were talking about on the Q4 call. So nothing changed there just a slightly higher jump off point and everything is sort of they baked into the outlook. As drew said, we are seeing utilization in that new member cohort a renewal.
Speaker Change: Or are you know the experience there is as expected and that utilization is really consistent with care that informs acuity and typically flows through to risk adjustments I think about P. C. P and chronic care visits and you know given that we won't see the wakely data until late Q2, we're taking a prudent posture on that population.
Speaker Change: But we have accounted for that level of utilization in our full year outlook.
Andrew Marshall: Thank you and our next question today comes from Andrew Marshall of Barclays. Please go ahead.
Andrew Marshall: Hi, Good morning, I wanted to follow up on the part D commentary you called out that you're still targeting part D. Pre tax margins of 1%, but you referenced that you might be in the risk corridor, which suggests a lower margin can you help us understand how the risk corridor actually works is that applied at the contract level or plan level, such that we might see a wide range of underlying <unk>.
Andrew Marshall: Performance, some of which will be in the risk corridor, but you still net out to 1% pretax margins.
Andrew Marshall: Yeah No good question Andrew.
Andrew Marshall: Part of it we're making up in SG&A, but there is a it's a nice protective mechanism that CMS I think it was smart to put it in place given the IRA changes so.
Andrew Marshall: When you get to 2.5%.
Andrew Marshall: And this is important relative to the big assumption of pharmacy cost, which is not relative to guidance, but relative to the big assumption and the mechanics of the bids then there's a 50 50 split.
Andrew Marshall: If you're off to the bad more than 2.5%. So yes, we're into that risk corridor because of the very high specialty utilization.
Andrew Marshall: Like I said in my script, some of which is driven by pharma behavior pushing cost to the federal government and into the PDP program from what would've otherwise been a pharmacy assistant and patient assistant programs, but nonetheless, we've got cover because of that risk corridor and that's what we're thinking of it.
Andrew Marshall: For 2026, as a payer we can't assume that that risk corridor will get reinstated at that same level.
Andrew Marshall: CMS clarifies that in advance and so that will be reflected in our bids.
Andrew Marshall: So yeah that all adds up to is still being on track for a pretax margin the ones one because of the SG&A help but then also the protective mechanism, which was good to have in a year, where the maximum out of pocket went down to $2000.
Speaker Change: Thank you and our next question today comes from Lance Wilkes with Bernstein. Please go ahead.
Lance Wilkes: Great. Thanks.
Lance Wilkes: Wanted to focus in a little more on the specialty pharmacy trends could you talk a little bit about what would trend level youre seeing for especially and how it differentiates between maybe P. D. P. M. A P D S.
Lance Wilkes: In Medicaid and then more.
Lance Wilkes: Just to better understand it over in the part D area could you talk about are you seeing new prescriptions being written or is this just a higher like same number of units and unit assumptions, but a higher dollar value of that.
Lance Wilkes: And maybe just clarification on that three items for the each be our guide lift if you could just give us like a proportion of each of those two thanks a lot.
Drew Asher: Sure. Thanks, Lance let me hit the Medicaid piece, and then I'll turn it over to drew for P to P. So.
Drew Asher: One of the things that's important to note and you touched on this but just so it's sort of affirm in everyone's mind that ultimately the the Medicaid specialty drug utilization ends up being getting baked into the state rates. It is a process for that to happen and so one of the things that we're seeing is that states that are still trying to figure.
Drew Asher: Or out how to put programs in place around some of the specialty drugs that are particularly high cost that can take some time for them to figure out whether they are going to do that as a carve out or how they're going to manage through it one of the things that we can uniquely do and that's actually goes back to Steven's question about sort of why you.
Drew Asher: Can have confidence in the progression of the MLR is that we are able to bring to our states solutions for how to think about dealing with those high cost drugs. So I'm a big piece in Medicaid is just that timing again that will get baked into the rates through a couple of different potential program changes and then drew if you want to talk about.
Drew Asher: The P D P specialty drug dynamics, yeah, Lance it's most prevalent in the non low income PDP members, so not as prevalent in low income because they've always been cost share protected and it does relate to the change in the maximum out of pocket going down to 2000, and we thought about that in fact, we thought about pharma.
Drew Asher: Hazier, we thought about member behavior, as we priced our PDP business, but we didn't expect things like patient assistant programs barriers would be put up for patients to push them over to the PDP program as severe as what's happening. So it's a pretty high trend in areas I'll give you some cash.
Drew Asher: <unk> asthma eczema, Inflammatories, where we see same members all of a sudden having for instance, a depiction script on one one and figuring out that that member used to be in a patient assistant programs. So the good news is we can absorb that we can think about that and or 26 beds.
Drew Asher: Backstop of the federal government, which effectively are shifting you know pharma cost over to the federal government because of the risk corridor. That's in place this year. So we're.
Drew Asher: We're on track and we expect to be on track in PDP, just sharing some observations that need to make it into the 2026 beds and why we think that direct subsidy is going to be lifted again, which increased the cost of the program. So we are we're good at predicting that stuff and getting that into the bids.
Drew Asher: And we'll do that for 2026.
Speaker Change: Thank you and our next question today comes from John Stanfill with J P. Morgan. Please go ahead.
John Stanfill: Great. Thanks.
Speaker Change: Thanks for taking the question.
To kind of follow up on the part D side.
John Stanfill: Growth has been very strong.
This year have the new members behaved kind of consistent with your overall pool and then following up on the 26 team here it sounds like based on the kind of the wording in the final rate notice and what you're alluding to here that you think that the demo risk corridor is might be dialed back in 26 do you think that is an industry consensus that ever.
John Stanfill: One expects and well designed their bids in that way or is there a concern that that might not necessarily be the way that people approach. This then between six bid cycle given all the moving parts.
John Stanfill: Well in PDP I think it would be foolish not to assume that because obviously there'd be a lot more pressure in that specialty trend if that demo had not been in place. So.
John Stanfill: We can tell you what we're gonna do and you know buyer be aware for the rest of the industry, but the industry has usually been pretty good about thinking through the elements of what impacts PDP. So look that's a great business for $16 billion of plus of revenue. We've been you know we've been able to manage that well through the years and through the.
John Stanfill: Changes, including the Eir right and so the point is to you know just to showcase whats going on underneath the covers even though we still believe we're going to hit that 1% plus margin this year and will be pricing prudently for next year as well.
Speaker Change: Thank you and our next question today comes from Joanna <unk> with Bank of America. Please go ahead.
Speaker Change: Hey, this is what can you never got on for Julian could you talk about any changes to your trend outlook within a day and there have been discussions around group of May. So have you been seeing anything unusual in your group business in terms of utilization.
Speaker Change: So we were as drew said pleased with the membership out performance. The overall segment is on track and M. A were right in line with expectations. So I don't know if there's anything do you want to add underneath that no real no really pleased with the performance of Medicare stability I mean, obviously, we saw the uptick in outpatient in Q2.
Speaker Change: 2023, and we've been planning accordingly for let's say outsized trend in that area for the last couple of years, So really consistent good performance as we progress our way to breakeven and Medicare advantage.
Speaker Change: Thank you and our next question today comes from George Hill Deutsche Bank. Please go ahead.
Speaker Change: Yeah. Good morning, guys. Thanks for taking the question drew I wanted another clarifying question I think I know, what you mean, but I want to double check you said that you guys were seeing a pharmacy pricing pressure as it related to PDP looking at the 26 I want to make sure that you meant pharma pricing pressure versus pharmacy pricing pressure.
Speaker Change: And then I guess should we think of the PDP target margins looking out to the 26 bid process is flat and maybe could you talk about what initiatives do you guys feel like you can take outside of the bid process to expand margins in that space.
Speaker Change: Yes, certainly one of the elements of earnings power that we laid out at Investor day is to take that PDP margin from the 1% zone, two 3% plus.
Speaker Change: And we'll seek to do that over the next few years too early to specify exactly what we think for 2026 and Youre right where we're at.
Speaker Change: Actually seeing pressure in once again non low income members utilization of specialty drugs that are now showing up in P. D. P. <unk> some of which were previously and pharmacy assistant program, So not pharmacy.
Speaker Change: Cost pressures.
Speaker Change: Utilization of specialty drugs and largely in the asthma extra mountain inflammatory areas.
Ryan Lynch: Thank you and our next question today comes from Ryan Lynch at TD Cowen. Please go ahead.
Ryan Lynch: Hi, Thanks, maybe just a bigger picture question I know you mentioned, you're seeing some progress on the Medicaid rate side, but how do we think about states ability to actually fund the necessary improvements that the industry seems like it needs just given where state budgets are and obviously with the backdrop of these potential funding cuts I guess what are the conversations like with those.
Ryan Lynch: Your states and you know where are they add on being able to fund those those improvements. Thanks.
Ryan Lynch: Yeah. Thanks for the question. So I think one of the things in.
Ryan Lynch: You're raising a good point I think it's important to keep in mind that through the Redetermination process of states shed a significant number of members, which means they were coming into re rating with them overall budget savings and I think that that has helped the conversations in these early cycles.
Ryan Lynch: The other piece of it is obviously that you know the states legally need to have actuarially sound rates. So while there are always budget constraints that states think about ultimately sort of the math drives the day. The other thing I would say is that you know historically when we've seen state budget pressure, it's actually been a.
Ryan Lynch: Tailwind relative to states starting to think about moving additional populations that may not be in our managed care model into managed care because of the predictability of the budget and the savings opportunities that are there and we hear that time and time again, if you think about the states that have recently moved to managed care they can actually quantify.
Ryan Lynch: Significant savings that they have seen and that then sort of catalyzes the conversation about some of those more complex specialty populations, which is obviously the group that we havent circled relative to driving our long.
Ryan Lynch: Long term growth for us as well as margin expansion in Medicaid. So we are very experienced at navigating. These conversations I think we have the benefit now of you know years of data relative to moving through the Redetermination process, a full year of data relative to the acuity chefs and I think you know can help states think about where to.
Ryan Lynch: Find savings if and as they feel budget pressure.
Speaker Change: Thank you and our next question comes from Michael Hall with Baird. Please go ahead.
Michael Hall: Hi, Thank you regarding the exchanges.
Speaker Change: Personally I am having a little bit of trouble bridging to your expected 5 billion of additional revenue.
Speaker Change: If I take your roughly half a million more lives.
Speaker Change: The revenue P. M. P M and still getting told me about $3 billion to $4 billion and I know you're still assuming the same in your attrition cadence I was wondering if you could help me bridge that gap in case, I'm missing something and then.
Speaker Change: I understand you're assuming incremental exchange growth in <unk> to be lower margins. It sounds like it could be conservatism, but wondering what exact margin level, you're assuming on those lives and lastly, very quickly when you hear the most bearish concerns.
Speaker Change: About the magnitude of potentially millions of fraudulent lives on the exchanges and the risk that might pose to your next year I'm just curious to hear your general thoughts overall level of confidence that this most bear case scenario, that's swirling around one actually happen. Thank you.
Speaker Change: Yeah. Thanks for the question Anthony.
Speaker Change: So let me let me start with the last piece of that and we can sort of work our way backwards. There's obviously been a lot of concern about the idea that there is sort of ramping broker fraud or goes.
Speaker Change: In the population I think it's important to note that the movement to drive additional program integrity, which was understandably loosens during the pandemic started more than a year ago and a lot of the program integrity measures that are being put in place are things that we've operated with in the Pea.
Passed which means we have baseline and benchmark data around what some of these rates should be we were a pioneer in terms of implementing the agent of record lock them back in January of last year. We introduced that we were the first to put it in place and we're seeing the benefit of that and.
Speaker Change: We track very closely the levels of complaints that come in from members or where there are broker issues throughout you know throughout the year and can understand whether we're seeing upticks in that and anything different than what we would expect so I think we have a we have accounted for things like the failure.
Speaker Change: We are to reconcile in our full year outlook again, the timing of that has shifted them, but the team is pretty experienced at you know understanding the dynamics in the membership obviously the new utilizes that we have where we're seeing utilization is frankly, a good sign because it's time for go see utilize the system and we feel like we have you know we have.
Speaker Change: All the data we need to account for what how this will play out both through the remainder of this year and in 2026.
Speaker Change: I think you asked about sort of the level of margin for the new member cohort overall, we still expect to be in the five to seven 5% margin range for marketplace and as I said, we've encountered for a continued a continuation of the level of utilization, we're seeing in that new member base in the full year outlook. Our renewal members are as expected.
Speaker Change: And then on your first question. The 10, so we put up 10.1 billion of commercial premium in Q1, and if you do the math on our guidance Ah. It's 39 billion for the full year. So we are accounting for attrition throughout the rest of the year to end up in the high fours. So.
Speaker Change: That sort of hangs together.
Speaker Change: Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Central London for closing remarks.
Speaker Change: Thanks, Rocco and thanks, everyone for your time this morning and for your interest we look forward to continued updates as we move forward and as we manage the business from a position of strength.
Speaker Change: Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may disconnect your lines and have a wonderful day.
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