CENTENE CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Medicaid Transformation: The nationwide return of eligibility determinations led to member shifts. States are working through redeterminations, with most states now through backlogs. Back half composite adjustment rate expected 4.5%-5%.
• Medicare Progress: Medicare Advantage results showed improvement in Stars ratings. Exited six states and adjusted contract portfolio. Part D business poised for growth due to IRA.
• Marketplace Outlook: Well-positioned for 2025 with open enrollment approaching. Program integrity policies may moderate growth but expect to meet margins.
• AI Initiative: Use of AI to automate provider contract management, reducing manual labor and enhancing analytics.
• Hurricane Response: Centene took action to support members and employees affected by hurricanes, including financial support and supply shipments.

Segment Performance

• Medicaid: As of the third quarter, Centene had roughly 13 million members. The back half composite adjustment rate is expected to be in the 4.5% to 5% range. Q3 Medicaid HBR was 93.1%, a bit above Q2. The Medicaid risk pool has shifted due to redeterminations, and states are working on rate adjustments to match acuity.
• Medicare: Medicare segment performance was in line with expectations. 2025 Medicare Advantage revenue is targeted in the range of $14 billion to $16 billion. Part D business is expected to generate significant revenue growth in 2025 due to the Inflation Reduction Act. Stars ratings improved, with 46% of members and plans at or above 3.5 stars.
• Marketplace: Continued to perform well in 2024 with 4.5 million members. Expected pre-tax margins for 2025 are within the targeted range of 5% to 7.5%. Program integrity policies may moderate market growth in 2025.

Guidance

• Full year 2024 adjusted diluted EPS guidance greater than $6.80.
• Expect adjusted EPS growth in 2025.
• 2025 Medicare Advantage revenue targeted $14B-$16B.
• Marketplace expected pre-tax margins 5%-7.5% in 2025.
• 2024 consolidated HBR guidance 88.3%-88.5%.

Risks

• Medicaid redetermination process still requires work for rate sufficiency.
• Marketplace growth may be moderated by program integrity policies.
• Uncertainty around state Medicaid rate adjustments and their sufficiency.

Question and Answer

Q: Stephen Baxter at Wells Fargo asked about Medicaid MLR and cost growth.

A: Sarah London and Andrew Asher responded that the back half composite rate is 4.5%-5%, and Q4 seasonality affects HBR with Medicare and commercial segments typically higher.

Q: Josh Raskin at Nephron Research inquired about Medicaid utilization trends and reverification process.

A: Sarah London stated there's no new trend, and states are through backlogs, but rate advocacy continues based on data.

Q: A.J. Rice at UBS asked about rate updates and how they compare to peers.

A: Sarah London and Andrew Asher mentioned states are making progress with data-driven rate adjustments, though work remains.

Q: Justin Lake with Wolfe Research asked about rate period and pass-throughs.

A: Andrew Asher explained the back half rate is net, excluding pass-throughs, and focuses on pegging exit med-expense PMPM.

Q: Sarah James at Cantor Fitzgerald asked about pent-up demand and GLP-1s.

A: Sarah London discussed rejoiners slowing and GLP-1s' impact on rates with states using data.

Q: A.J. Rice at UBS followed up on rate updates.

A: Andrew Asher reiterated states are using data to adjust rates, with progress seen in small states.

Q: Adam Ron with Bank of America asked about Part D margins.

A: Andrew Asher stated Part D is well-positioned, expecting 1% margin in 2025 with revenue growth from IRA.

Q: Scott Fidel with Stephens asked about Marketplace growth and California.

A: Sarah London discussed moderated growth due to program integrity policies and no significant California retroactive rate adjustments like peers.

Q: David Windley with Jefferies asked about AI benefits and G&A.

A: Sarah London said AI is shovel-ready, and G&A has timing considerations with SG&A typically higher in Q4.

Q: Unidentified Analyst asked about Medicaid PMPM growth.

A: Andrew Asher mentioned state-directed payments and back half rate contributing to PMPM growth.