Centene Corporation (NYSE:CNC) Q1 2023 Earnings Call Transcript

Centene Corporation (NYSE:CNC) Q1 2023 Earnings Call Transcript April 25, 2023

Centene Corporation beats earnings expectations. Reported EPS is $2.11, expectations were $2.09.

Operator: Good day and welcome to the Centene Corporation First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask question. Please note, today’s event is being recorded. I would like to turn the conference call over to Jennifer Gilligan, Senior Vice President, Finance and Investor Relations. Please go ahead.

Jennifer Gilligan: Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first quarter earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene will host this morning’s call, which can also be accessed through our website at centene.com. Ken Fasola, Centene’s President; and Jim Murray, our Chief Operating Officer, will also be available as participants during Q&A. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene’s most recent Form 10-K filed on February 21, 2023, and other public SEC filings.

Centene 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 first quarter 2023 press release, which is available on the company’s website under the Investors section. The company is unable to provide a reconciliation of certain 2024 measures to the corresponding GAAP measures without unreasonable effort due to the difficulty of predicting the timing and amounts of various items within a reasonable range.

With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Sarah London: Thank you, Jen, and thank you all for joining us this morning as we review our first quarter 2023 results and update both our 2023 guidance and 2024 EPS floor. Centene’s first quarter results were strong, reflecting continued positive momentum operationally and the beginning of another year of disciplined execution against our strategic framework. We reported $2.11 of adjusted diluted EPS for the quarter and lifted our premium and service revenue forecast by another $3.7 billion. We also moved our full year 2023 adjusted EPS guidance to at least $6.40, the top of our original range. At the same time, as you saw from the press release, we have updated our 2024 adjusted EPS floor to greater than $6.60. Given the focus on 2024, let me start there by providing more detailed commentary on our insights and current thinking.

Then I’ll come back to 2023 and our recent progress. A year ago, when I stepped into this role, we were in the early stages of executing against a three-year value creation plan. We saw no reason to change that plan as its basic pillars were rock solid, streamline the company by focusing on our core businesses, price our products for profitable growth, modernize our business processes and tools and deploy capital in a disciplined manner to create enterprise and shareholder value. After 13 months in this role, I am even more convinced that this organization has the capacity to deliver substantially more value to our customers and shareholders. This team has a clear vision for how we intend to execute and transform in a sustainable way as we set ourselves up for the long-term, and we are confident in our long-term growth algorithm.

We also have the benefit of a far more complete view of the near-term dynamics we will need to navigate and the investments required to ensure Centene is positioned for market leadership. That combined insight is the underpinning of our revised 2024 earnings floor. I’ll outline the major drivers of our decision, and Drew will walk through the numbers and mechanics in more detail. The first and most significant driver is Medicaid redeterminations. Over the last 1.5 months, with the benefit of finalized implementation plans and early data feeds from our state partners, we have refreshed our state-level models and projections to inform an updated view of the potential impact to membership and acuity of the redeterminations process across our 31 health plans.

Based on that analysis, 2023 progression looks slightly better, but we now believe it is prudent to build in a more conservative view of the potential disconnect between rates and acuity that could manifest in some of our states in 2024. As a reminder, we view any disconnect as a temporary one. We fully expect that states will ultimately provide sufficient rate adjustments to reflect any changes in acuity of the Medicaid population, but we are building a provision in our 2024 target in case there is a gap in timing in some of our states. We remain committed to ensuring that the most vulnerable members of our communities have ongoing access to high-quality healthcare, and we are empowering our local teams to navigate the redeterminations process in a way that strengthens the partnership with our state customers given their critical importance to our long-term success in Medicaid.

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The second major driver of our revised 24 outlook is based on our 2024 Medicare bid strategy. As we evaluated the final 2024 CMS rates, our view of potential 2025 program dynamics and the strength we saw in 2023 performance, we decided to use 2024 as an opportunity to more aggressively rightsize our membership and focus on our core member base. This will move us away from some of the membership that resulted from a growth at all cost pricing mentality during the 2021 and 2022 annual enrollment periods and create a solid foundation from which to drive earnings power in the back half of the decade. At the same time, we see an opportunity to make targeted investments in Medicare that enhance our ability to reach and serve these members. These include own distribution capacity, provider enablement tools to support value-based care and the acceleration of digital capabilities that will truly differentiate the WellCare member and provider experiences going forward.

Given the fundamental impact this strategy will have on member mix, as well as the changes CMS recently announced to the Stars program, we are also resetting our multiyear quality target, given that we will be managing members who are naturally more complex from a quality standpoint. Our focus over the next few years will be to maximize contracts that reach the 3.5 Star threshold and to begin laying the groundwork for the Health Equity index adjustment that CMS will measure starting in 2024 and 2025. Drew will walk through the mechanics, but given our target populations, we believe of near-term focus on maximizing 3.5 star plus results when combined with an adjustment from the Health Equity Index when implemented, will most efficiently provide both the long-term quality profile and the economics necessary for WellCare to be competitive in our segment.

For the upcoming October results, we are trending pre-caps between 14% and 18% membership in 4-star plans. But we have one large contract on the bubble that represents 10% of our members. For those still watching that metric, we are conservatively assuming the downside scenario and therefore, expect minimal 4-star progression year-over-year but we expect to see solid overall contract improvement reflecting the operational progress we have made, and we have baked a conservative view of these results into our overall assumptions. Ultimately, we believe that returning to WellCare’s roots in serving lower income, diverse and complex seniors is an anchoring position in what will be the fastest-growing sub-segment of the Medicare Advantage market and one that aligns perfectly with our local community integrated model and our Medicaid footprint.

We are investing today to protect and enhance this business because we firmly believe it will be a powerful earnings and growth engine for Centene in the long-term. The final major driver of our revised 2024 outlook is the recognition that we need to invest in specific infrastructure that will allow us to innovate at scale. As we work to consolidate systems and simplify our technology ecosystem, we see an opportunity to future proof our target architecture, expand and modernize our data layer and build a digital operating structure centered around our customer relationships. Done correctly, this work will accelerate our transformation, allowing us to tap into the power of Centene’s unique local data footprint, automate more of our core functions, drive innovative clinical models and deliver market leading customer experiences across all three of our businesses.

We recognize the significance of increasing near-term investments at the expense of adjusted earnings per share. Ultimately, we are confident these investments will fortify the foundation of the enterprise and accelerate capabilities that will position us well against our long-term growth thesis. Let me close out this portion of the 2024 discussion by emphasizing a few final points. One, we do not intend to update this number between now and our annual Investor Day in December. Two, our goal is to provide you with as much detail and transparency as we possibly can about our assumptions without compromising our competitive strategy during the bid cycle. This includes the improved segment reporting you can find beginning this quarter in our 10-Q.

And three, this is a number we are confident in. As some of you have been correct to point out, a floor is not a finish line, and $6.60 for 2024 is not our finish line. This is a number that we intend to meet and beat. Before I turn it over to Drew, I want to comment briefly on progress in 2023 because performance this year presents an opportunity to strengthen the position from, which we navigate through 2024, and we are executing well in 2023 thus far. Our local teams were fully mobilized to support the beginning of redeterminations on April 1st. Although by the time planning was complete, only two of our states chose the start date. The remaining 28 states are evenly distributed across May, June and July start dates. In general, states are pursuing a balanced mix of population based and time based approaches.

Recent changes to implementation plans have biased to later start dates, reflecting the unprecedented scale of the undertaking for many states. Our focus from the beginning has been maximizing coverage continuity, both for Medicaid eligible and for marketplace potential members, and we are executing well against that goal. We have robust multichannel communications in place for every state. In states where we have already commenced with early member communications, we are seeing positive early indicators, including low opt-out rates for text messages and higher engagement than normal in outbound live call campaigns. In all but five of our states, we have either already received membership files or have a clear model established for data exchange with the state once their process begins.

Where we have already received member files, we are using them to refine the analytics driving our outreach campaigns and to inform productive discussions with state actuaries and our regulator partners. Leveraging Centene’s local approach, we have deployed community-based provider education and engagement campaigns with a focus on educating our FQHC partners as well as key provider partners in every region. So our members have the benefit of multiple trusted sources of information as they navigate this process. For members losing eligibility, we have launched both direct and indirect outreach campaigns to educate them about their marketplace options. Across all 25 states where we have an overlap between our Medicaid and Ambetter footprints, we have activated our unique and comprehensive Ambetter broker network, so they are prepared to support members transitioning to the marketplace.

And we are working closely with states where we are able to do direct outreach to members to facilitate warm handoffs in the enrollment process. In short, our teams are hard at work supporting members and continuing to build positive momentum with our state partners. Turning to Marketplace. As we’ve discussed, Centene’s Ambetter product line experienced incredible growth during the 2023 open enrollment. This positive momentum continued during the first quarter, and we closed the quarter with more than 3 million Marketplace members. As we move through 2023, we continue to monitor new member demographics and overall claims data consistent with the rigorous tracking that occurred during the first quarter. As I mentioned earlier, the proven breadth and depth of Ambetter’s broker network, a clear driver of OEP success, will also be a key differentiator as we look to maximize the catcher’s mitt opportunity.

Overall, we continue to view the marketplace as a durable coverage vehicle and Ambetter as the market leader in this space continues to represent a powerful organic growth opportunity for Centene. From a Medicare standpoint, while we are working through a strategic rebuild, it is important to note the strong underlying operational improvements we are seeing that align with our five-point plan. Examples include a new center of excellence for Medicare calls that has reduced per member per month calls by almost 25%. The implementation of new AI-based call sentiment technology, resulting in real-time performance improvement, a 20% reduction in voluntary disenrollment and a 47% reduction in CTMs year-over-year. We have added almost 1,400 new clinics under value-based contracts, and most importantly, we are seeing member, provider and broker satisfaction scores in the mid-90s year-to-date.

We are on a journey, but there is tangible improvement, and we continue to build operating momentum as we progress through 2023. Finally, a quick update on our value creation initiatives, which remain front and center as we work to fortify the foundation of the business. Overall, we are tracking ahead of our SG&A goals, excluding the additional investments I mentioned earlier, our slate of SG&A initiatives is progressing well against key milestones. We continue to streamline the organization through portfolio rationalization, closing three transactions in January and more work is underway. And finally, importantly, our PBM implementation is on track across all work streams. In short, 2023 is shaping up to be another strong year of execution and earnings performance, and we expect to gather further momentum as we progress through the year that will help us to power through our updated 2024 floor.

And while we are changing our earnings past two and through 2024, something we certainly don’t take lightly, we have not changed our focus, our strategy or our confidence in the ultimate earnings power of this organization and its long-term growth potential. We are not just building a company for 2024. We are making the decisions today that will enable us to deliver 12% to 15% adjusted EPS growth in the back half of the decade and ensure Centene is the market leader in government sponsored programs for years to come. With that, I’ll hand it over to Drew to walk through the details of Q1 and the interplay between 2023 and a new prudent floor for 2024 that we will work to beat. Drew?

Drew Asher: Thank you, Sarah. This was a very good quarter, as you can see in the press release. Adjusted EPS of $2.11 was ahead of our expectations and a good start to the year. Let me hit a few key items for Q1 and then spend most of my time on the remainder of 2023 and 2024. Premium and service revenue at $35 billion was strong in Q1. The HBR was on track at 87% and adjusted SG&A at 8.5% was consistent with our updated mix of business. DCP was 54 days, consistent with Q4 and up one day from Q1 last year. During the quarter, the Medicaid HBR of 90.0% was on track as well and reflects two items; one, a delay in a 2022 rate increase from one of our largest states, which we expect to favorably impact our Q2 2023 Medicaid HBR; and two, Senate Bill 510 in California, dealing with prior period COVID claims.

Those two items pushed up the Medicaid HBR over 40 basis points in the quarter. The Medicare HBR at 85.2% was a little better than expectations. Marketplace revenue was stronger than expected, while the commercial HBR at 76.3% was in line with our internal forecast. Q1 cash flow from operations was strong, even when excluding a few out-of-period items such as early Medicare premiums. Overall, this was another good quarter with sound fundamentals. In the last 1.5 months, we’ve gone through a rigorous process, not just to refine the forecast for the remainder of 2023 in our typical three plus nine process but we also accelerated what we could to develop a more detailed forecast for 2024. Let’s tackle 2023 and then get to 2024. For the full year of 2023, premium and service revenue is coming in stronger than our last midpoint of $132.5 billion driven by Medicaid and Marketplace.

Medicaid revenue improvement is largely due to the refinement of timing of redeterminations in 2023 versus 2024. As an example, as we entered April, one of our largest states provided updated clarity around foster care redeterminations, moving the start date from April 1st to September 1st. And they also clarified the timing of other populations, resulting in the start date one month later than we had planned, resulting in more Medicaid member months in 2023. In Marketplace, we are very pleased to be leveraging our number one market position to not only seize market growth but also increase market share. We finished the open enrollment period strong and that carried into the Special Enrollment Period, or SEP, with 3.1 million members at quarter end.

We expect to continue to grow the rest of the year. To draw a distinction, the 2021 SEP during COVID was wide open for all eligibles and had pent-up demand with a different acuity profile than the SEP enrollees in 2022 or today. Though we have found that partial year SEP members profitability is below that of open enrollment members, largely due to risk adjustment mechanics, the ability to renew those same members on 1/1/24 will set us up well for 2024. Consistent with what we shared on the Q4 earnings call, the demographic data including subsidy eligibility and product mix continues to look encouraging. Product positioning and distribution execution are also strong. The overall individual market has grown more than expected this year, and this macro growth is a positive factor when considering risk pools.

Overall, we are able to absorb this additional growth in 2023 and this should provide an earnings tailwind for 2024 to help offset other areas of headwind. We are lifting the 2023 consolidated premium and service revenue, another $3.7 billion to a midpoint of approximately $136 billion driven by Medicaid and Marketplace. Our revised 2023 HBR reflects an overall 10 basis point improvement to a range of 87.1% to 87.7%. This is driven by a few net items. First of all, there’s a slight shift in mix due to growth in Marketplace, which has a structurally lower HBR. And as we’ll talk about in a minute, we now expect a 10 basis point improvement in Medicaid in 2023 versus previous guidance. A revised HBR also reflects a specific nuance for Medicare.

I mentioned on the February earnings call that we expect to lose money in Medicare Advantage in 2024. Based upon our latest underwriting estimates, we have reflected in 2023 guidance an approximate $200 million Premium Deficiency Reserve or PDR, which we would expect to record in the fourth quarter of 2023. Other than that, our fundamental HBR is good in Q1 and on track for 2023. This PDR will be refined as we finalize bids and get further into 2023. To be clear, we are absorbing this premium — this Medicare premium deficiency reserve into our revised 2023 HBR and adjusted EPS guidance, demonstrating the current strength of the business. On the flip side, growth in marketplace with more than 2.5 times the SG&A rate of Medicaid due in part to distribution costs and exchange fees, changes the mix for SG&A.

When coupled with investments in quality and other key areas Sarah mentioned, our adjusted SG&A guidance for 2023 is up to a midpoint of 8.9%. Let me demonstrate the impact to mix. Someone recently asked why our SG&A rate is in the low 7s. Actually, if you pro forma our 2023 revenue mix as if we were 80% Medicaid, we would be in the low sevens. Of course, in addition to our number one position in Medicaid, we like having the number one marketplace franchise, the number two PDP franchise and the Medicare Advantage business with over one million members across 36 states. Investment in other income was strong in Q1, and we expect that to continue for the remainder of the year at a midpoint of $975 million. We have bought back $577 million of shares since the beginning of the year, including $300 million post the Q4 call toward our approximate $1.5 billion goal for 2023.

We expect to continue the majority of our health plan dividends to come late in the year. As of today, we have an approximate diluted share count of 550 million shares. As we generate cash at the parent, we plan to deploy it to buy back our shares. For instance, in April, we were able to monetize the stock consideration we received at the closing of our sale of Magellan Specialty. We seized this opportunity so that we could deploy to share buyback. Overall, for 2023, inclusive of the items we just covered, we are lifting our 2023 adjusted EPS guidance to at least $6.40, the top of our original guidance range. Let’s move to 2024. On 2024, while we were previously targeting $7.15 of adjusted EPS, we are reducing that to greater than $6.60 based upon more visibility on key 2024 drivers.

While we are determined to do better than $6.60, based upon what we know today, we believe this is a prudent target for our 2024 earnings. And we believe this is the right jump-off point to apply our long-term growth algorithm, CAGR of 12% to 15% for the back half of the decade, consistent with what we shared with you at December Investor Day. Let me outline our approach and key assumptions to this revised 2024 target. Starting with Medicaid. The first redeterminations just started April 1st, but what has transpired over the past 1.5 months has enabled us to gain more clarity on each state’s process in terms of timing and approach to the sequencing of populations. As Sarah mentioned, we have also been able to refine acuity projections, state-by-state, subpopulation by subpopulation, as well as the anticipated degree and timing of projected rate actions.

Acuity projections, in many cases, are based upon specific data from the state and their actuaries. For instance, a number of our states shared files with us for those they expect to redetermine in April, May and/or June. And we are using this information to calculate the acuity of stayers versus levers. On the other side of acuity, the rate change projections are state-by-state, subpopulation by subpopulation, and they are often based upon direct conversations with the Medicaid departments and their actuaries, including many verbal acknowledgments of the potential need for rate actions as redeterminations unfold. We’ve had very constructive discussions with our state partners about redeterminations, not just in terms of process, but also the rate implications.

We have also thought about the RFP cycle as we forecast the timing of future rate actions. While we are still early in the redetermination cycle, which we expect will last into Q2 of 2024, we have developed more confidence in our estimates of the net impact on 2023 and 2024 with the benefit of the claimant . One more relevant fact for 2022, we were approximately $2 billion in payback — payable back to certain states for risk corridors or minimum MBR profit sharing mechanisms. That’s important to factor in relative to any expected acuity shifts in those specific states. Finally, with each state putting a stake in the ground with respect to timing and approach we are better able to refine our forecasted premium revenue for both 2023 and 2024.

Ultimately, we expect the rates provided by our states to match the acuity of the population as has historically been the case, though this is expected to ebb and flow through the redetermination process. In other words, if there’s a mismatch between acuity and rates, we expect it to be temporary. Now let’s get to some numbers. To provide some of our assumptions embedded in our updated 2024 target, we expect approximately $77 billion of Medicaid premium revenue in 2024 relative to approximately $84 billion in 2023. The premium revenue drop in 2024 is largely driven by redeterminations continuing and annualizing into 2024. There are also some other puts and takes in the revenue, including market share shifts, as we have previously discussed, the California contract renewal and the projected potential county shifts in Texas Star Plus as well as the added North Carolina expansion population.

With respect to the Medicaid HBR, as you will recall, we were originally expecting to be around 89.9% in 2023. Our latest forecast is slightly better than that at approximately 89.8%. For 2024, based upon the process I just described, we have now built in 50 basis points of HBR increase to be prudent for redeterminations and the potential temporary mismatch of timing between acuity change and rate. That would put us at approximately 90.3%. Then we expect approximately 20 basis points of benefit from a new PBM contract and other initiatives to yield an estimated 2024 Medicaid HBR of approximately 90.1%. In Medicare and Marketplace, we are still refining our bids that are due this summer. So we’re going to be a little guarded with getting too granular with bid assumptions for each of those lines of business.

In Marketplace, our first quarter results were on track. And while one quarter doesn’t make the year, we are so far pleased with the Marketplace positioning not just for 2023 but also the longer-term benefit from strengthening our number one market position. We look forward to getting more insight into 2023 Marketplace performance as the year unfolds, including when we get the first view of the Wakely risk adjustment data in late June, early July. Suffice to say, we are bullish about growth and margin potential in our marketplace positioning and business for 2023, 2024 and beyond and, more importantly, the chassis for seizing individual market opportunities ahead. In Medicare, we received the final 2024 rates and risk model clarity on March 31.

The 2024 final rate was less negative for us by approximately 1.25% relative to the advanced notice but still an inadequate rate relative to trend. Some of the final rate change will accrue to our provider partners and some we will work into our bids. We continue to forecast a pre-tax loss in 2024, which is embedded in our revised 2024 target inclusive of the 2024 amortization of the PDR, we expect to record in 2023. As we indicated on the Q4 2022 call, underperformance in Medicare growth and earnings is a temporary dynamic, which we will — while we balance the preservation of a base of membership with trough 2024 Stars revenue and expectations of improvement in Star scores now geared towards our low income and dual strategy Sarah described.

While it’s widely known that moving from 3.5 to 4 stars comes with, on average, 5% more revenue. There’s also a meaningful economic benefit of moving from 3 to 3.5 stars that averages the equivalent of 3% to 6% depending on the contract. Given we have approximately 80% of our current membership and contracts below 3.5 stars from last October scoring, our focus now is to first maximize 3.5, especially as our membership will be shifting and tilting more towards low income and D-SNP in 2024 and beyond. So while you might consider our Medicare business is temporarily under construction for 2024, we believe Medicare Advantage will be a margin expansion and growth driver for the back half of the decade. Once again, we haven’t yet submitted bids for these products.

So for external consumption, we’re going to combine the Medicare and commercial 2024 forecasted revenue for this discussion. Together, we expect approximately $46 billion of premium revenue from Medicare and commercial segments in 2023 and $45 billion in 2024. Directionally, we expect to grow marketplace throughout the rest of 2023 and into 2024. On the other hand, we expect to rationalize certain Medicare plan benefit packages, or PBPs, in 2024, which will result in lower Medicare membership, but membership composition will be more consistent with the strategy Sarah outlined. When we add our other businesses, which represent approximately $6 billion in premium and service revenue, subject to additional divestitures, we expect total premium and service revenue midpoints of approximately $128 billion in 2024 compared to about $136 billion in 2023.

We will issue formal 2024 guidance with a full table of details later in the year, but we thought it would be helpful to review some of the underlying assumptions that we believe support an adjusted EPS target of greater than $6.60. By powering through 2024, Medicare challenges and getting to the other side of redeterminations, this company will be stronger to seize the opportunities in the back half of the decade. Finally, while we are disappointed that we are lowering our outlook, this revised 2024 target reflects our updated view informed by an accelerated 2024 forecast, process and recent insights in Medicaid, Marketplace and Medicare. And it is a target we have confidence in delivering. This perspective also gives us the flexibility to make the right decisions for 2025 and beyond.

We will do our best to exceed $6.60 in 2024 without sacrificing anything for 2025 and beyond. Operator, let’s go to Q&A.

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Q&A Session

Operator: Thank you. Today’s first question comes from A.J. Rice with Credit Suisse. Please go ahead.

A.J. Rice: Hi, everybody. Thanks for all the information. Just maybe to drill down a little further on what you’re thinking with respect to Medicaid redeterminations. I guess, it sounds like you’re reflecting in your outlook for 2024 a little more caution on acuity and potentially how quick that gets picked up in rate adjustment. I wonder if you could give us a sense, are you falling more on just thinking there is a little bit of lag in the period in which the rate adjustments get updated, or are you seeing anything that’s indicating to you that the acuity itself will be worse than what you were thinking three or six months ago? And I wonder just granular as we start to get into this, as you’re talking to somebody that’s getting a redetermination, do you give them the notification?

Does the state give them the notification? And as you talk to them about their options to sign up on the public exchanges, are they — do you have a sense of whether they’re going to do that immediately? Is there going to be a lag in the way they think about that before they immediately go and sign up. Any updated color on that as well.

Sarah London: Yes, good morning. Thanks, A. J. It’s a great question. So relative to redeterminations, we’ve, over the last couple of weeks of states have been approaching the April 1 start date. We’ve gotten a lot of good information. Some of it is from them finalizing their implementation plans. And as we noted, some of those have shifted in the final hours as they contemplate sort of the scope of this work. And some of it is states who have actually given us data files that allow us to update our models more formally. We have used that to refresh a really comprehensive multivariate model that we have across 31 states that takes into account all of the different dimensions that Drew talked about and allows us to project where membership shifts may happen and where acuity shifts may disconnect and then how all of that plays out over time, with things like the risk quarters with things like rate mechanisms, rate calendars and then really an overarching view of what is the agenda of the state and are there other things going on like procurement and things like that.

And so as a result of that, what we’re really trying to do is build in a little bit more conservatism in 2024, where we see the potential in some states for a temporary disconnect between rate and acuity. And again, we see this as temporary. In the long term, rate has always equaled acuity in Medicaid. But it allows our local teams to have the flexibility to navigate not just the redeterminations process but those conversations with the states in a way that really prioritizes our customer relationship because of how critical we know those relationships are to our long-term success in Medicaid. So that’s really sort of the driving factor behind additional conservatism in 2024. And then to your question about how the tactical rollout is going.

The answer really depends state-b-state. There’s obviously official notification in every state that goes out from the state to the members who they need to take through the redetermination process and then time lines in terms of those members being able to respond. CMS has done a really nice job of making sure states are following the guidelines in terms of multiple outreaches to members and the time lines in order to ensure that we don’t have folks dropping through the cracks because of process. And then we have lined up, as I mentioned, those sort of multichannel communication plans as well as activating local providers and our broker networks where we’re allowed to so that we have direct conversations either with members either through their providers where they can get more information or in those states where we can direct educate and outreach to members who are qualified for exchange products.

We actually have marketing campaigns specifically around that. And finally, your point about sort of the speed with which members are being responsive. Again, I think it’s going to depend. But one of the dynamics that we’re seeing in Marketplace special enrollment period and actually overall Marketplace growth is a result of combined awareness and affordability that has come from investments in broker marketing as well as, obviously, the enhanced APTCs, and so we think that particular, the broker community is really well-mobilized against moving those members over to marketplace as quickly as possible.

Operator: Thank you. And our next question today comes from Josh Raskin at Nephron Research. Please go ahead.

Josh Raskin: Hi, thanks. Good morning. Just a quick clarification and then my question. But did I hear the PDR is expected to amortize partially in 2024, meaning MA profitability is supposed to be — expected to be negative in 2025 as well? And then my question is maybe could you provide a little more color on your thoughts around statutory capital especially as you see some of these revenue headwinds? You seem to screen this holding a little bit more capital than the peers. And I guess, how you think about that relative to debt to cap and share buybacks would be a strategic enough reason to maybe increase your leverage above your debt-to-cap targets?

Drew Asher: Good questions, Josh. The PDR, no, we expect to fully amortize that in 2024. It’s a one-year contract for Medicare members, as you know. And so we don’t expect that to bleed into 2025. And so if that number is 200, that’s what we’ve built into our guidance for 2023. But we will refine that as we get the bids final, see the rollout of the annual enrollment period beginning in December, and that will dictate the specific amount that we record from accounting rules and then that would be reevaluated at the end of each quarter of 2024 and adjust it accordingly. So that’s how the PDR would work mechanically. On statutory capital, it’s a good question. We modified the management fees. We think we improved the management fee structure this year with more precision, and that has the result of trapping more capital into our regulated subs, which is why we expect to only do $1.5 billion share buyback this ear, which will be largely late in the year.

We’ve got $300 million under our belt already. And then we expect that to step up to about $3 billion, which we mentioned on the last earnings call for 2024. So we’ve got a certain level we like to maintain, but we certainly don’t need to have excess capital sitting in our subs. And we’ll go after that through the dividend process back half of this year and into 2024. Our debt to EBITDA is right around three times. We’re content with that. It will probably move up or down a little bit around that three times, but that’s our target. We love the fact that we’re investment grade now. And I think as we look at our debt stack over the next decade that will serve the company well.

Operator: Thank you. And our next question today comes from Justin Lake of Wolfe Research. Please go ahead.

Justin Lake: Thanks. Good morning. First, a quick follow-up on A.J.’s question. Drew, is there any way you can delineate for us the impact of redeterminations on the risk pool versus what you expect to make up on pricing? Meaning maybe you could tell us — if states pushed off pricing completely for a year, how much of a negative impact do you now think just changes in the risk pool would have on your MLR for 2024? And then my question is on Medicare Advantage. One, do you still expect to lose money in Medicare Advantage despite the $200 million PDR? Meaning ex the PDR, are you still losing money in 2024? And if so, maybe how much? And then I appreciate the color on the Stars at 4 Stars for 2024. But as you said, 3.5 Stars is really important as a first step. Any color on how you expect to improve 3.5 Stars in 2020 — for 2025, I should say, versus the 20% you’re at today? Thanks.