Centene Corporation (NYSE:CNC) Q1 2025 Earnings Call Transcript

Centene Corporation (NYSE:CNC) Q1 2025 Earnings Call Transcript April 25, 2025

Centene Corporation beats earnings expectations. Reported EPS is $2.9, expectations were $2.52.

Operator: Good day. And welcome to the Centene Corporation First Quarter 2025 Conference Call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note today’s event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Investor 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, and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning’s call, which also can be accessed through our website at centene.com. 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 our first quarter 2025 press release, Centene’s most recent Form 10-K filed on February 18, 2025, and other public SEC filings, which are available on the company’s website under the Investors section.

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

Sarah London: Thanks, Jen, and thanks everyone for joining us as we review our first quarter results and updated full-year 2025 outlook. This morning, we reported first quarter adjusted diluted EPS of $2.90, consistent with the expectations we shared with investors last month. Our full-year 2025 adjusted EPS expectations remain unchanged at greater than $7.25. We have increased clarity on the components of our $7.25 floor and have moved some of the underlying metrics as a result. Drew will cover these and other details of the quarter in a moment. Uncertainty and change are not new to Centene. And we are managing the business well while navigating a dynamic policy landscape. Relative to the active national dialogue around health care policy reform, we believe a few things are important to note.

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 in 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, we believe that large-scale benefit cuts and significant policy changes would present challenges for the reconciliation process. Second, there is growing bipartisan recognition in Congress that the expiration of the enhanced premium tax credits must be addressed before they expire at the end of the year. A recent survey conducted by leading Republican pollsters found that 78% of swing voters support extending health care premium tax credits for working families.

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 the individual marketplace to serve as a platform for ICRA growth, has taken root for many Republican congressional leaders. Congress is scheduled to return from recess next week, and we expect activity focused on driving the contours of a reconciliation bill as the first order of business. Republican lawmakers are targeting Memorial Day for a reconciliation bill, but much will depend on the consensus-building process. Beyond 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.

Amid this backdrop, we continue to execute on our strategic initiatives while advocating for sound health care policy. We’ve demonstrated the ability to be successful under multiple administrations and expect nothing less as we navigate the next four years. Turning to the core business, we took important steps forward in the quarter as we continue on our path of margin recovery, including better alignment of rates and member acuity in more geographies. 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 4.5%. These rates contributed to underlying improvement in the performance of the book. However, the full impact of this improvement was masked in the quarter by a more active flu season than we anticipated.

Medicaid, flu, and ILI drove $130 million of incremental medical expense in the quarter beyond our initial expectations, largely offsetting the underlying MLR improvement we experienced. 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 redeterminations process. We continue to believe that Medicaid will ultimately return to pre-pandemic margin levels as we work through the coming rate cycles and engage with our members to deliver high-quality, low-cost outcomes. 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.

Centene was selected by the state of Illinois to continue providing Medicare and Medicaid services for dually eligible members through a fully integrated D-SNP. The D-SNP program will provide services and support statewide for members who qualify for both Medicare and Medicaid as well as dually eligible MLTSS members. In 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. 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. These wins are testimony to Centene’s expertise in both high and low acuity populations, making us a partner of choice in states across the nation.

Our Medicare segment performed in line as we advanced our Medicare Advantage business on a path toward breakeven in 2027 and managed the evolution of Medicare Part D amid significant program changes due to the Inflation Reduction Act. 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. 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. As we plan for 2026, we were pleased to see the inclusion of more recent claims data in the final 2026 Medicare Advantage rate calculation, resulting in rates that better reflect the medical cost trend we’ve seen in MA over the last two years.

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. In addition to rates, the critical lever we are pulling to drive to breakeven in Medicare Advantage are STARZ results, value-based clinical initiatives, and operational efficiency through SG&A reductions. On the stars front, we continue to see momentum. While a number of components remain outstanding, we are projecting underlying improvement across chapters. That said, we are conscious of the fact that cut points or the relationship between absolute scores and corresponding star ratings become more difficult due to recent methodology changes and variability in competitor performance.

With that in mind, we took on the challenge to de-risk our STARS outcome in 2027 and to build a plan that supports our 2027 breakeven trajectory across the range of projected outcomes expected this October. 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. 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.

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. The impact we experienced relative to the which more muted in the period than we originally forecasted contributing to better than expected member retention. This membership strength is reflected in the full-year revenue increase we issued earlier this morning. Recent CMS guidance suggests that ultimate 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. In other 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.

We are engaging with CMS on these policy proposals and working to model the potential impact of each component. The only major provision that would impact 2025 would be the discontinuation of the continuous SEP for members below 150% of the FPL. The rest, depending on what gets finalized, would influence market and membership dynamics beginning in 2026. With respect to enhanced ABTCs, 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 establish plans for marketplace pricing and product positioning in 2026. While there are a number of factors that could impact the marketplace operating landscape over the next year, as a category leader in this business, we look forward to navigating the near-term dynamic from a position of strength and recalibrating our book with a focus on margin and long-term profitable growth.

Stepping back, as we survey the performance of our diversified portfolio, we are pleased to reiterate our full-year 2025 adjusted EPS outlook of greater than $7.25 amid sector volatility that is unmatched in recent history. 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. 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 team that is mobilized in executing against these opportunities. We are committed to delivering value to our shareholders and to transforming the health of the communities we serve, one person at a time.

With that, I’ll turn it over to Drew to cover the quarter and full-year view in more detail.

Drew Asher: Thank you, Sarah. Today, we reported first quarter 2025 results, including strong premium and service revenue of $42.5 billion and adjusted diluted earnings per share of $2.90 in the quarter. A good start to 2025. While we manage the company as a diversified portfolio, let’s go segment by segment for some insights into how we’ve been able to manage various tailwinds and headwinds to yield a strong aggregate result so far in 2025. Medicaid membership was stable and right in line with our expectation of 12.9 to 13 million members. The Medicaid HBR, excluding excess influenza-related costs, was approximately 93%, showing some progress compared to 93.4 in Q4 of 2024. You’ll see the print at 93.6, including about $130 million of Q1 influenza-related costs above our expected.

At a conference in March, we had also cited $130 million of excess influenza costs through February. And consistent with CDC data, influenza settled down as we got into March. Fundamentally, we continue to make progress matching rates and acuity, the keyword being progress, not completion. For instance, a 4/1 rate cycle representing about 11% of Medicaid revenue yielded an approximate 5% rate increase, though still inadequate for that 4/1 cohort. In areas such as MLTC, home and community-based services, and emerging high-cost drugs. So progress, but more work to do as we get through 2025 and into 2026. On our entire Medicaid book, we are projecting a full-year composite rating increase at 4% plus. Medicare Advantage and PDP both outperform on membership.

We retained more membership than expected during the Medicare Advantage open enrollment period, which bodes well for long-term earnings power. This is contributing $1 billion to our 2025 premium and service revenue guidance increase. EDP ended the quarter at 7.9 million members, strong growth from 2024. Medicare segment HBR 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. So a lower Medicare second HBR and higher earnings early in the year and higher HBR and lower earnings later in the year. Within the Medicare segment, both Medicare Advantage and PDP businesses were on track in the quarter. And you’ll see an intra-year increase in the Medicare Advantage PDR, premium deficiency reserve, that was planned for and is solely related to the sloping of earnings during 2025.

So no change in our view of Medicare Advantage earnings for 2025. Commercial membership was very strong in the quarter, not just during open enrollment for 1/1, but also in February and March. Q1 commercial segment HBR at 75.0% was a little higher than last year’s 73.3, driven by 1.9 million new marketplace members in Q1. 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. We’ll know more when we get the first weekly file in late June, early July. 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 revenue to 2025 guidance related to the marketplace.

Moving to other consolidated P&L and balance sheet items. Our adjusted SG&A expense ratio was 7.9% in the first quarter, compared to 8.7% last year, which decreased due to continued leveraging of expenses over higher revenues and good discipline. Cash flow provided by operations was $1.5 billion for Q1, primarily driven by net earnings. Our debt to adjusted EBITDA was 2.8 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 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 plus business in 2025, versus $5.2 billion last year.

As I’m sure you know, pharmacy claims complete much faster than medical claims, causing the mix-related mathematical reduction to DCP. Looking at the full year, we are pleased to reiterate greater than $7.25 of adjusted diluted EPS. 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. We are also recalibrating the consolidated HBR to reflect this growth and a couple of other items. Fifty basis points is driven by one, incremental Q1 growth in the marketplace, with that growth assumed for now to be at a lower than average margin level. Two, a full-year Medicaid HBR in the mid to high 91s, inclusive of flu from Q1, and three, very high utilization of specialty drugs in non-low-income PDP members.

While most of this is covered by the PDP demo risk corridor, some of it makes it to our P&L. When coupled with SG&A outperformance in PDP, we are still on track for a PDP pretax margin in the one percents. We’re also lowering the consolidated adjusted SG&A ratio midpoint by 45 basis points given strong performance in Q1 and based upon our 2025 growth and mix of business. And we lowered investment income by $100 million as we reforecast cash balances and calibrated potential rate cuts. So on track for 2025 at this early point in the year, with a very strong top line creating attractive long-term earnings power. Now a few educational comments on 2026. Since much of what we do in 2025 sets us up for success in 2026. On the marketplace, there are two items that, if finalized, would impact the 2026 market size and risk pool that need to be reflected in 2026 pricing.

Potential expiration of the APTCs is one that we’ve discussed heretofore. The second item, as Sarah mentioned, is the new marketplace integrity and affordability proposed rule released in March with provisions that would impact 2026. Looking at actuarial studies, these two items combined may cause high single-digit price increases, and that’s before any baseline trend adjustments, pricing forward trend for 2026, and potential tariffs. While the proposed rule changes seem likely to get implemented, we are still optimistic about lawmakers seeing the merits of continuing EAPTCs. And over half of our states have agreed to accept two sets of rates, one with enhanced APTCs and one without, in case there’s clarity by July. So rest assured, we are on top of adequately pricing for these matters.

EDP, the high specialty drug trend, being partly driven by pharmacy industry behavior, 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. And we’ll also be thinking about potential tariff impacts when making bid decisions. Remember our discussions last year about the PDP direct subsidy substantially rising in 2025, due to forecasted IRA dynamics that landed right where we thought it would. Oh, we expect another year of a large direct subsidy increase, maybe to over $200 compared to this year’s $142. Because of the intentional and maybe unintentional cost consequences of the IRS. So, again, we are focused on making adequate pricing moves coupled with a higher PMPM yield as we think about being responsible in our 2026 decisions being made in the next month or two.

We are very pleased to deliver a strong Q1 and more earnings power for the future. Thank you for your interest in Centene, Rocco, we’ll open the line up for questions.

Q&A Session

Operator: Yes, sir. As a reminder, if you’d like to ask a question, please press star then one at this time. If your question has already been addressed, you like to remove yourself from queue. Please press star then two. Our first question today comes from Josh Raskin with 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 cost that you cited, specifically if you’re seeing more physician visits, I’m assuming primary care and maybe even a specialty. And how confident are you that these are flu-related and not, you know, related to some uptick in trend that could lead to down utilization. And I want to make sure all of that was contained in Medicaid. You’re not seeing any of that in the Medicare book. Correct?

Sarah London: Hey, Josh. Good morning. Thanks for the question. So the $130 million that we saw above expectations in Q1 in Medicaid is a result of very closely tracking. So we have a clear and consistent definition for flu and what we call ILI or influenza-like illnesses. And that is what drove the $130 million. Again, it’s a consistent code set that we’ve used over the last eight years. We also look at sort of flu-related illnesses. We don’t include that in the calculation, but it does support the view that obviously CDC reported this was the most acute flu season in the country seen in the last fifteen years. And we saw, you know, both in sort of core 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 the marketplace and in Medicare, but not the same as the $130 million that we saw in Medicaid and then obviously saw that trail consistent with the national trajectory pretty hard down in March, and so we think that is isolated to a Q1 item.

Josh Raskin: Gotcha. And I get to sneak in. I didn’t hear a commentary around the long-term embedded or earnings. I think you’ve talked about three to four dollars in the past. I just wanted to make sure that was consistent, especially in light of your comments around, you know, MA getting to breakeven even without the STARS improvement.

Drew Asher: Yeah. No. Clearly, there’s still opportunity to expand Medicaid margins. That’s clear. Based upon the current HBR and what we’re forecasting for this year. Still excited about and even actually probably more optimistic about the ability to get to breakeven and, you know, depending on the levers we can pull, the stars results and then the 2027 Medicare revenue, maybe even beyond that. So that still holds. And then PDP, we’re still on that one percent-ish area in pretax for this year. Even with a little bit of pressure or a fair amount of pressure, in non-low-income specialty cost, we’re making that up in SG&A. So that still presents an opportunity for margin expansion. On top of that, we just added $6 billion more in revenue, which is exciting to think about the earnings power of that over the next few years.

Operator: Thank you. And our next question today comes from A.J. Rice of UBS. Please go ahead.

A.J. Rice: Hi, everybody, and thanks for the question. Maybe just ask a couple of the Washington-related questions. I know at the Investor Day, you guys had sized your estimate of what the headwind would be if the public exchange subsidies, enhanced subsidies were to go away at about a dollar a share. You’ve mentioned some new things today. And I really wasn’t clear whether the tariff comment was related to public exchanges somehow. But is that dollar still a good number, or how’s 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 wondered just conceptually how to think about that. If plans are asked to be the ones that sort of get the attestations about whether people are adhering to the work rules, etcetera, work rule requirements, etcetera. How much of a burden would that be, and how impact would something like that be on the business you think?

Sarah London: Yeah. Thanks, AJ. Great questions. So the dollar is still good relative to the view of enhanced APTCs. We’re working through the process of sizing the elements that came out in the proposed rule for the marketplace and obviously interfacing with CMS and providing feedback. So as we see what gets finalized and for what periods it’s time, I think we can provide an update on the interplay of those provisions with the enhanced APTCs. Obviously, we’ll have hopefully increased visibility on what’s gonna happen with the enhanced APTCs as we get into Q2 and Q3 time frame. Based on 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 both the potential impact and the interplay.

Relative to work requirements, these, as you know, are not new. We have work requirements in some of our states today. We’ve also seen them come 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 able-bodied adults, what the carve-outs are, and so we really would expect a high degree of 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 different levels of dependency or expectation relative to MCO’s 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 healthcare resources. So our teams are already at work on that process in anticipation of what may or may not come on the work requirements run.

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

Justin Lake: Thanks. Good morning. Just talking on the exchanges. The risk adjustment numbers have been bouncing around for a lot of your peers. I believe weekly just gave an update there. Curious what, you know, how weekly’s numbers kind of look versus yours. Were you able did you move your risk adjustment around much in the quarter versus year-end for 2024? And then, you know, that number does look kinda different than what it did in the end of 23 versus 24. Just curious, you know, how your risk how you see your risk pool changing.

Drew Asher: Looks like your payable was down pretty meaningful. 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 24 versus where we ended up at Q1 and the weekly data that we get continual updates on relative to the 2024 year, was very consistent with our estimates. So you know, good nothing sort of for where we think we’re gonna end up out of line in the quarter relative to our estimates at year-end for 2024. So pleased with that. Yeah. The real question is gonna be, the utilization we’re seeing in our new business, our 1.9 million members, you know, some of that does look consistent with what should show up in 2025 risk adjustment. We think we’re being prudent, sort of waiting to see if that’s gonna 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 weekly data dump for the industry.

Operator: Thank you. And our next question comes from Ed Haines with Mizuho Securities. Please go ahead.

Ed Haines: Good morning. Thank you. I know you gave original guidance for Medicaid rates the second half. You assumed, I believe, around the 2.5% rate increase. Is that still the case? And do you have increased visibility on how those negotiations are going for the second half? That would be my first question. And then maybe secondly, with Medicaid, besides the flu, is anything running hotter than you expected when you first when you gave original guidance?

Sarah London: Thanks, Anne, 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 7/1 cohort, which is the next cycle, we will start to get visibility into that as we get in later into Q2. 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 state partners. And the fact that as we roll forward we have further completion data behind us in terms of the acuity pattern that started to emerge in Q2 right around this time last year. So that helps bolster the conversation in terms of supporting the actuarial calculus. And I think helps in conversations with the state.

So, obviously, looking to that 7/1, 9/1, and 10/1 cohort, to contribute to the back half of the year. Then I think you asked about Medicaid utilization beyond flu. And so we continue to see largely the same themes, but, Drew, maybe you wanna click into a few of those.

Drew Asher: Yeah. No. Clearly, we had the flu of $130 million in Q1. That’s transitory. Behavioral health continues to be a trend item. We’ve mentioned that probably for the last six quarters. We’ve got initiatives to tackle that and working with our state partners things like applied behavioral analysis, I guess, no surprise coming out of, you know, the pandemic era. There’s pockets of home health. We’ve mentioned that before, things like attended services, that where we can tighten do some audits. And then probably the area of uptick is high-cost drugs. An example might be a Levitus. Which curiously is a $3.2 million single treatment drug that, you know, if you read the JAMA articles, it’s, you know, questionable in terms of the efficacy.

And looking at we’re all trying to keep health care affordable. That seems quite extreme for a cost of a single treatment for a 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 us as a payer. So that’s one thing we’re watching, and we thought about that as we lifted the Medicaid HBR into the mid to high 91s, from our previous guidance.

Operator: 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 that you could help us understand a little bit better how you’re thinking about progression of Medicaid LR throughout the balance. So do you know you mentioned that, I think, you have 11% of your rate in the second quarter and a decent rate update there. But it looks like you have a lot of work to do to get even the exit rate MLR down the level that you’ve now guided to for the full year. So just trying to understand the progression and why we should be able to think about getting from 93 on the core in the first quarter to something probably in the 90 to 91 range by the fourth quarter to kinda make this all fit together. Thank you.

Sarah London: 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 assumptions, both, 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 tenure of 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 you look quarter over quarter over quarter in terms of those rates coming in to start to address the acuity dislocation. The other lever is obviously what we can do internally relative to 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.

And so we have, you know, maximum effort on that that has, you know, always in 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, Jude, do you wanna talk more specifically about rates and progression?

Drew Asher: Yeah. Sure. And I’m sure you know this, but, you know, we’ve sort of made the company as a diversified portfolio. So our goal is to hit the 88.9 to 89.5 consolidated HBR yes, we provide details underneath that. And we are driving to a mid to high 91s for full year. And you’re right. That takes some improvement progression. 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, our full year is actually 4% plus. That’s our full year goal for rates. That would you could 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 to 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, you know, tried an experiment and it didn’t work. And there’s other levers where we’re working on behavioral health and home health and things I mentioned for the 4/1 cohort. So that together should give 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.

Operator: Thank you. And our next question today comes from Dave Wendly at Jefferies. Please go ahead.

Dave Wendly: Hi. Thanks for taking my questions. I wanted to ask just to clarify Justin’s question. Drew, in your answer, you talked about risk adjustment and where you think it would go. I think I know what you mean, but I just wanted to I don’t wanna assume. So do you think it should go 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 per is fully subsidized and if that was different during this first quarter SEP lift? If you could comment on that too, please.

Drew Asher: Yeah. On the risk adjustment yeah. Thanks for asking the clarification. Always welcome that. If you look at our queue, we didn’t really book our net payable or receivable didn’t change from year-end. In other words, we’re not booking a big receivable on 2025 risk adjustment in the first quarter. Even though we see diagnosis codes and utilization on that new membership. That should, 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 sort of betting on that with what we booked in Q1. Given it’s so early in the year. And then no issues with 2024 risk adjustment coming into this year.

Sarah London: And relative to membership, you know, the vast majority of our membership is subsidized, which is consistent, always has been, consistent with our focus on really serving the lowest income marketplace members seen as a sister population to Medicaid and sort of the natural hedge and synergistic services that serving those two populations affords us, we did not see any major shift in the percentage of subsidized population coming into this OE and what we saw in Q1 in terms of strong growth.

Operator: Thank you. And our next question today comes from Sarah James at Cantor Fitzgerald. Please go ahead.

Sarah James: 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 trended to normal margins yet, or is there something in the acuity or claims data that makes you think these new lives might be a higher MLR or lower margin outside of the traditional ramp. And how are you thinking about the fluctuation rate and where enrollment could end at the end of the year for exchanges?

Sarah London: Yeah. Sure. So let me start with so effectuation rate 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, meaningfully higher renewal rates this year, which is awesome. That’s a result of focused effort from our Ambetter team. And so really pleased to see those results. We are still projecting the same trajectory of membership. So 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 the assumptions around FTR and a return to more 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 baked into the outlook. As Drew said, we are seeing utilization in that new member cohort. Our renewal members 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 adjustment. So think about PC and chronic care visits. And, you know, given that we won’t see the weekly data until late Q2, we’re taking a prudent posture on that population, but we have accounted for that level of utilization in our full-year outlook.

Operator: Thank you. And our next question today comes from Andrew Mok of Barclays. Please go ahead.

Andrew Mok: Hi. Good morning. Wanted to follow-up on the Part D commentary. You called out that you’re still targeting Part D pretax margins of 1%, but you reference that you might be in the risk corridor, which suggests a lower margin. 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 performance some of which will be in the risk corridor, but you still net out to 1% pretax margins. Thanks.

Drew Asher: Yeah. No. Good question, Andrew. Part of it, we’re making up in SG&A, but there is a it’s a nice mechanism that CMS, I think, was smart to put in place given the IRA changes. So when you get to 2.5% and this is important, relative to the bid assumption, of pharmacy cost. Which is not relative to guidance, but relative to the bid assumption and the mechanics of the bids, then there’s a 50/50 split 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 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 have otherwise been pharmacy assistant and patient assistant programs.

But, nonetheless, we’ve got cover because of that risk corridor. And that’s what we’re thinking about for 2026. As a payer, we can’t assume that that risk corridor will get reinstated at that same level unless CMS clarifies that in advance, and so that will be reflected in our bids. So, yeah, that all adds up to 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 $2,000.

Operator: Thank you. And our next question today comes from Lance Wilkes at First Name. Great. Thanks. I wanna focus in a little more on the specialty trends.

Lance Wilkes: Can you talk a little bit about what trend level you’re seeing for specialty and how it differentiates between maybe PDP, MAPD, and Medicaid. And then more just to better understand it over in the RD 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, like, dollar value of that? And maybe just clarification on that three items for the HBR guide lift. Could just give us, like, a proportion of each of those two. Thanks a lot.

Sarah London: Sure. Thanks, Lance. Let me hit the Medicaid piece, and then I’ll turn it over to Drew for PDP. So one of the things that’s important to note and Drew touched on this but just so sort of firm in everyone’s mind that ultimately, 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 out how to put programs in place around some of these specialty drugs that are particularly high cost. That can take some time for them to figure out whether they’re gonna do that as a carve-out or how they’re gonna manage through it. One of the things that we can uniquely do, and this actually goes back to Steven’s question about sort of why you 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 a big piece in Medicaid is just timing. Again, that will get baked into the rates through a couple of different potential program changes. And then, Drew, if you wanna talk about the PDP specialty drug dynamics.

Drew Asher: Yeah. Lance, it’s most prevalent in the non-low-income PDP members. So not as prevalent in low because they’ve always been cost-share protected. And it does relate to the change in the maximum out of pocket going down to $2,000. We thought about that. In fact, we thought about pharma behavior. We thought about, you know, member behavior as we priced our PDP business. We didn’t expect things like patient assistant programs, barriers to be put up for patients, to push them over to the PDP program as severe as what’s happening. It’s a pretty high trend in areas. I’ll give you some, you know, categories, asthma, eczema, inflammatory, members all of the sudden having, for instance, a Dupixent script on 1/1 and figuring out that that member used to be in a patient assistant program.

So the good news is we can absorb that. We can think about that in our 26 bids. The backstop of the federal government. Which effectively is shifting, you know, pharma costs over to the federal government. Because of the risk corridor. That’s in place this year. So 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 bids and why we think that direct subsidy is gonna be lifted again which increased the cost of the program. So we’re good at predicting that stuff and, you know, getting that into the bids. And we’ll do that for 2026.

Operator: Thank you. And our next question today comes from John Stansell with JPMorgan. Please go ahead.

John Stansell: Great. Thanks for taking the question. To kind of follow-up on the part D side, you know, 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 theme here, it sounds like based on the kind of the wording and the final rate notice, and what you’re I wouldn’t hear that you think that the demo risk corridors might be dialed back in 26. Do you think that’s an industry consensus that everyone expects and will design their bids in that way? Is there a concern that that might not necessarily be the way that people approach this, the 26 bid cycle given all the moving parts?

Drew Asher: On 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 we could tell you what we’re gonna do, and you know, buyer beware for the rest of the industry. But industry’s usually been pretty good about thinking through the elements of what impacts PDP. So look, that’s a great business for us. Sixteen billion of plus of revenue. We’ve been, you know, we’ve been able to manage that well through the years, and through the changes, including the IRA. And so the point is to, you know, just to showcase what’s going on underneath the covers even though we still believe we’re gonna hit that 1% plus margin this year and we’ll be pricing prudently for next year as well.

Sarah London: Thank you. And our next question today comes from Joanna Gaju with Bank of America.

Joaquin Vergara: Hey. This is Joaquin Vergara on for Joanna. Could you talk about any changes to your current outlook within MA? And have been discussions around group MA. So have you been seeing anything unusual your group business in terms of utilization?

Sarah London: Yeah. We were, as Drew said, pleased with the membership outperformance. The overall segment is on track, and MA. We’re right in line with expectations. So I don’t know if there’s anything Drew, you wanna add underneath that?

Drew Asher: No. No. Really pleased with the performance of Medicare stability. Obviously, we saw the uptick in outpatient in Q2 of 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 in Medicare Advantage.

Operator: Thank you. And our next question today comes from George Hill at Deutsche Bank. Hey, Please go ahead.

George Hill: Yeah. Good morning, guys. Thanks for taking the question. Drew, I want to another clarifying question. I think I know what you mean, but I want to double check. You said that you guys were seeing pharmacy pricing pressure as it related to PDP looking at the 26. I wanna make sure that you meant pharma pricing pressure versus pharmacy pricing pressure. And then I guess, should we think of the PDP target margins looking out to the 26 bid process as flat? And maybe could you talk about what initiatives you guys feel like you can take outside of the bid process to expand margins in that space?

Drew Asher: 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 to 3% plus. And, you know, we’ll seek to do that over the next few years. Too early to specify exactly what we think for 2026. And you’re right. We’re actually seeing pressure in, once again, non-low-income members utilization of specialty drugs that are now showing up in PDP some of which were previously in pharmacy assistant program. So not pharmacy, caused pressures, utilization of specialty drugs in largely in the asthma, eczema, and inflammatory areas.

Operator: Thank you. And our next question today comes from Ryan Langston at TD Cowen. Please go ahead.

Ryan Langston: 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 state’s 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. So I guess what are the conversations like with those with your states and, you know, where are they at on being both to fund those improvements? Thanks.

Sarah London: Yeah. Thanks for the question. So I think one of the things you’re raising a good point. I think it’s important to keep in mind that through the redeterminations process the states shed a significant number of members, which means they were coming into rerating with overall budget savings. And I think that that has helped the conversations in these early cycles. 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 tailwind relative to states starting to think about moving additional populations that may not be in a 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 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 have circled relative to driving, you know, long-term growth for us as well as margin expansion in Medicaid. So we are, you know, very experienced at navigating these conversations. I think we have the benefit now of, you know, years of data relative to moving through the redeterminations process, a full year of data relative to the acuity shifts and I think, you know, can help states think about where to find savings if and as they feel budget pressure.

Operator: Thank you. And are there question comes from Michael Hall with Baird. Please go ahead.

Michael Hall: Hi. Thank you. Regarding the exchanges, So firstly, I’m having a little bit of trouble bridging to your expected $5 billion of additional revenue. If I take your roughly half a million more lives, $550 revenue PMPM, I’m still getting to only about three to four billion. I know you’re still assuming the same in your attrition cadence. So I was wondering if you could help me bridge that gap in case I’m missing something. And then I understand you’re assuming incremental exchange growth in one Q 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, about the magnitude of, you know, potentially millions of fraudulent lives and the exchanges and the risks that might pose to you next year.

I’m just curious to hear your general thoughts, overall level of confidence that this most barricade scenario that’s swirling around won’t actually happen. Thank you.

Sarah London: Yeah. Thanks for the question. So 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 rampant broker fraud or ghost members in the population. I think it’s important to note that the movement to drive additional program integrity, which was understandably loosened 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 past. 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 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 we track very closely the levels of complaints 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, you know, what we would expect. So I think we have accounted for things like the failure to reconcile in our full-year outlook. Again, the timing of that has shifted, but the team is pretty experienced at, you know, understanding the dynamics in the membership. Obviously, the new utilizers that we have where we’re seeing utilization is frankly a good sign because it’s hard for ghosts to utilize the system. And we feel like we have, you know, we have all the data we need to account for what how this will play out both through the remainder of this year and in 2026.

I think you asked about sort of the level of margin for the new member cohort. Overall, we still expect to be in the 5 to 7.5% margin range for the marketplace. And as I said, we’ve encountered for 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. And then

Drew Asher: Yeah. And then on your first question, the ten so we put up $10.1 billion of commercial premium in Q1. And if you do the math on our guidance, 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 that sort of hangs together.

Operator: Thank you. And ladies and gentlemen, this concludes our question and answer session. I’d like to turn the conference back over to Sarah London for closing remarks.

Sarah London: 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 we manage the business from a position of strength.

Operator: Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. May disconnect your lines and have a wonderful day.