Centene Corporation (NYSE:CNC) Q4 2023 Earnings Call Transcript

Centene Corporation (NYSE:CNC) Q4 2023 Earnings Call Transcript February 6, 2024

Centene Corporation misses on earnings expectations. Reported EPS is $8.0E-5 EPS, expectations were $0.43. CNC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Centene fourth quarter and full year 2023 earnings results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note today’s event is being recorded. I would now like to turn the conference over to Jenn Gilligan, Head of Investor Relations. Please go ahead, ma’am.

Jenn Gilligan: Thank you Rocco and good morning everyone. Thank you for joining us on our fourth quarter and full year 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 conference call, which also can be accessed through our website at centene.com. Ken Fasola, Centene’s President will also be available as a participant 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.

Our Form 10-K for 2023 will be filed in coming weeks. 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. This call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most direct comparable GAAP measures can be found in our fourth quarter 2023 press release, which is available on the company’s website under the Investor section. The company is unable to provide a reconciliation of certain 2024 measures to the corresponding GAAP measures without unreasonable effort to 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: Thanks Jenn, and good morning everyone. Today, we reported a strong finish to a very productive 2023. Fourth quarter results include adjusted earnings per share of $0.45, generating full year 2023 adjusted EPS of $6.68. The quarterly and full year EPS results were slightly ahead of internal expectations and provide the organization with positive momentum as we head into 2024. We’ve been planning for and talking about 2024 for a while, and now that we’re here, we’re focused on positioning each of our lines of business for long term growth while continuing the important work to fortify our platform as we prepare for 2025 and beyond. Specifically, we are working through the tail of the redeterminations process, positing Centene to resume organic enrolment growth in Medicaid and to pursue new program opportunities from a position of strength.

We are solidifying our Medicare Advantage footprint thanks to an annual enrolment period that largely hit the mark with respect to our target membership, including sales, retention and dis-enrollments, and we are capturing a powerful growth opportunity and marketplace, demonstrated by the increased revenue guidance we issued this morning. We recognize that amid these opportunities, we still have valuable bottom line work to do, and we are approaching that work with the same focus and disciplined execution that has defined the first two years of this management team’s tenure. In fact, Centene wasted no time setting the tone for 2024 by successfully delivering what we believe to be the largest ever PBM platform migration and improving our pharmacy cost structure on behalf of our customers and members.

We have processed more than 40 million scripts so far through ESI and are pleased with the way this massive undertaking has rolled out. There is always a period of issue management after a change of this magnitude, and the teams have worked tirelessly and collaboratively to prioritize member access to care during this transition. We will continue to closely monitor end-to-end processing and customer service as we move through the year. Additionally in January, Centene closed the divestiture of Circle Health, the last of our international assets, and the company can now focus solely on our domestic core businesses. Circle marks the tenth divestiture since we began the portfolio review process in late 2021, and we are pleased to have purposefully streamlined our enterprise while keeping the portfolio of divestitures net accretive to earnings and generating cash for deployment.

In the broader context of value creation, our SG&A initiatives remain on track to exceed our original savings goals, and we continue to identify opportunities to drive operating efficiency through modernization and process improvement. Annual enrolment periods for both marketplace and Medicare also contribute to our confidence in Centene’s 2024 positioning. Continued pricing discipline in marketplace and the deliberate actions we took to align our 2024 Medicare bids with our strategic focus on lower income and complex members yielded the intended results on both fronts. Marketplace growth was more robust than anticipated, fueled by better than anticipated overall market growth as individual commercial offerings continued to gain traction with an expanding consumer set.

As such, we expect to deliver both growth and our planned margin expansion in marketplace in 2024. Together, these dynamics position us well to achieve our 2024 adjusted earnings per share guidance of greater than $6.70. With that, let’s dig deeper into each of our core business lines. Within Medicaid, we have delivered important proof points around the power of incumbency while navigating the unprecedented dynamics of redeterminations. In December, we were awarded the Arizona LTSS contract that will expand our footprint in serving complex populations in that state. That same month, we added approximately 90,000 members to our care and coverage through the successful go-live of Medicaid expansion in North Carolina, and in early January we successful re-procured our New Hampshire contract, earning the top score in the Granite State among competitors.

Our uniquely local footprint fosters important and trusted relationships with the communities and state partners we serve, and continues to differentiate us as we retain and grow our largest business. Turning to redeterminations, the process continues to track largely in line with our expectations. As of year end, we were approximately 80% of the way through the projected member transitions and, consistent with our modeling, we ended 2023 right around 14.4 million Medicaid members. Our health plan presidents along with our Medicaid actuarial teams continue to work in concert with our state partners to monitor the riskful impact of membership changes and calibrate rates to match acuity in the near term. To that end, we received some but not all of the outstanding 2023 retrospective rate adjustments we mentioned during our December investor day before year end, and we still feel good about our 2024 Medicaid guidance as we sit here in early February.

While Medicare has been a hot topic for the industry of late, we are pleased that the annual enrolment period played out largely as expected for Centene, and our 2024 financial projections for Medicare remain unchanged from investor day. Duals, or DSNP members have grown as a percentage of our Medicare enrolment as thoughtful benefit design changes allowed us to invest in and effectively refocus our book on members to whom we have the strongest ability to provide long term value. We expect DSNP members to represent more than 35% of our Medicare Advantage membership by year end, an important step relative to our strategic plan. As an organization, we remain laser focused on advancing our Medicare quality agenda. We made progress on a number of initiatives in 2023 that create positive momentum as we continue to execute in 2024.

This includes expanding our member outreach capacity, which ultimately allows us to conduct over 1.1 million preventive service outreach calls, reach 80% more members, and schedule 62 more appointments year-over-year. At the same time, we invested in digital data and provider connectivity, successfully deploying direct EMR connectivity to over 640,000 provider practices; and finally, we continue to drive core administrative and customer experience performance with service levels remaining in the high 90s through Q4. All of these efforts are important contributors to our long term stars performance goals. In 2024, as planned, we will continue to invest in this space with an obvious focus on Medicare Advantage star ratings, but with an approach that will drive benefit across lines of business.

With respect to Medicare utilization, as you heard from us in December, our 2024 bids incorporate a level of elevated medical trend related to non-inpatient services. To date, based on our full year and fourth quarter claims experience, we continue to view our pricing posture as adequate to support our 2024 Medicare outlook. Preliminary Medicare Advantage rates for 2025 were released last week. Bearing in mind the continued expectation for the multi-year phase-in of the risk adjustment model change that was finalized in 2023, we view the preliminary rates as insufficient with respect to general medical cost trend expectations. Drew will provide some additional thoughts on the preliminary rate in a moment. As this audience is well aware, we will receive final Medicare Advantage rates for 2025 in early April, and at the time of our first quarter call, we will have a better directional sense for bid strategy related to next year.

Finally, marketplace. As you’ve heard from us with increasing enthusiasm in recent months, marketplace presents Centene with a unique opportunity for simultaneous revenue growth and margin expansion in 2024. Overall, market growth was stronger than expected during this open enrolment period and we successfully capture our target market share of the expanded pie, netting to stronger than expected OEP results for the company. Within our 4.3 million member footprint as of January, our market share increased to roughly 26%, up from 23% previously, serving as another proof point of our leadership in the space. This strong enrolment result is driving the $2.5 billion increase to our full year 2024 premium and service revenue guidance. Membership mix continues to skew slightly younger, consistent with the year-over-year trend we saw last year, and distribution across middle tiers is consistent with our expectations with silver plans representing the majority of our enrolment.

One driver of overall marketplace growth has been members impacted by Medicaid redeterminations. On that front, we continue to trend towards the top half of our previously provided guidance range of 200,000 to 300,000 re-determined lives captured by Ambetter. Ultimately, the individual commercial market represents a strategic opportunity for Centene and we are excited to enable the expanding reach of these offerings as the demands of the market evolve. While the dynamic businesses Centene operates in continue to ebb and flow, the strength and diversification of our government-sponsored healthcare platform creates resiliency. We see tremendous opportunity for our core products, both near and long term. We will continue to execute against these opportunities to improve health outcomes for our members, generate profitable growth, and drive shareholder return.

Before I turn it over to Drew, I want to take just a moment to thank the entire Centene team for how you showed up in 2023 on behalf of our members and our partners. I am honored to work alongside you in 2024 as we make this company stronger every day and transform the health of the communities we serve one person at a time. With that, I will hand the call over to Drew for more details around our financial performance and 2024 outlook.

Drew Asher: Thank you Sarah. Today, we reported fourth quarter 2023 results, including $35.3 billion in premium and service revenue and adjusted diluted earnings per share of $0.45 in the quarter. For the full year, we reported $6.68 of adjusted EPS, growth of over 15% compared to 2022, including a 5.5% beat to our original 2023 guidance, and that’s on the heels of growing adjusted EPS 12% in 2022 compared to 2021. Our Q4 consolidated HBR was 89.5% while our full year consolidated HBR was 87.7%, both in the range of our expectations. Medicaid at 90.0% for the full year was slightly higher than our expectations. As of Q3, we were 89.9% year-to-date and we posted 90.6% in the fourth quarter. As we mentioned at our investor day in December, there were some open Medicaid retro rate adjustments.

At year end, had we received those adjustments, our full year 2023 Medicaid HBR would have been about 10 basis points better. All things considered, over nine months into redeterminations, our original forecasts for membership, acuity and rates were very close. As you can see in the membership tables, we were at 14.47 million Medicaid members at year end, consistent with the 14.4 million we were forecasting, as shared in the investor day appendix. That reflects an approximate 1.9 million Medicaid member reduction since 3/31/23 due to redeterminations, as expected. To reiterate what we laid out at investor day, our 2024 guidance reflects a low point of 13.2 million Medicaid members at 3/31/24 and year-end 2024 membership of approximately 13.6 million.

That all ties to our 2024 midpoint of $80.5 billion of Medicaid premium revenue, so no changes to our 2024 view of Medicaid revenue, membership or HBR. Medicare full year HBR was 87.1%, which includes the $250 million premium deficiency reserve recorded in the fourth quarter that we first discussed with you back in April of 2023. On Medicare trend, we continue to see steady but elevated levels of outpatient trend consistent with what we began to see in Q2 and consistent with our forecasts. We also saw a pick-up of COVID costs in December, as we mentioned in early January, though not alarming compared to prior COVID cycles. We thought about the current level of trend when we booked the 2024 PDR and continue to believe our forecasts are consistent with delivering our 2024 Medicare segment guidance elements outlined at investor day.

To help you with some math, the $250 million premium deficiency reserve lifted the fourth quarter Medicare segment HBR by approximately 475 basis points, and the full year Medicare HBR by approximately 110 basis points. The commercial HBR at 79.8% for the full year continues to be strong. Simultaneously in Q4, we were also capturing growth from both redeterminations and the special enrolment period, and we were up to 3.9 million marketplace members as of year end – that is the source of the strong premium growth in the fourth quarter. As you heard from Sarah, we couldn’t be more pleased with the growth that continued into January 2024, up to approximately 4.3 million members. This continued growth and HBR performance in 2023 sets us up very well to achieve our 2024 marketplace goals.

Moving to other P&L and balance sheet items, our adjusted SG&A expense ratio was 9.7% in the fourth quarter compared to 9.3% last year, consistent with our updated mix of business along with Medicare distribution costs. Cash flow provided by operations was $8.1 billion for the full year, representing 2.2 times adjusted net earnings. This was primarily driven by net earnings, and increase in risk adjustment payable for marketplace, and the timing of pass-through payments. Our unregulated and unrestricted cash on hand at year end was approximately $200 million. During the fourth quarter, we repurchased 397,000 shares of our common stock for $27 million. For the full year 2023, we repurchased 22.9 million shares for $1.58 billion, a little over our goal of $1.5 billion.

Our debt to adjusted EBITDA was 2.9 times at year end. Our medical claims liability totaled $18.0 billion at year end and represents 54 days in claims payable compared to 53 in Q3 of 2023, and 54 in Q4 of 2022. Looking back at 2023, it was a very good year of execution. We beat original adjusted EPS by 5.5%. We bought back 4% of the company’s shares for a cumulative total of over 10% since Q1 of 2022. We continue to execute on divestitures. We completed five divestitures in 2023, closed the divestiture of Circle in January of 2024, and received approximately $850 million in net proceeds in January. In total, we have completed 10 divestitures and are close to wrapping up that successful phase of value creation. On January 1, 2024, as Sarah mentioned, we successfully executed on our PBM conversion.

RFPing and moving PBMs has become one of our core competencies, and as a result of that, we have improved our pharmacy cost structure on behalf of our members and customers, and we’ve doubled marketplace membership since year-end 2022 and fortified Ambetter’s number one position. 2023 – pretty good year! We had provided detailed 2024 financial guidance elements at our December investor day. Since then, we’ve gained some additional clarity around the AEP and OEP results in Medicare and marketplace. Medicare enrolment is tracking right in line with our expectations relative to both volume and product mix. I give the Medicare team credit for precision in sales, disenrollment and membership product mix forecasts, as well as execution in a challenging year.

While Medicare Advantage is only a $16 billion revenue stream for us, it represents a meaningful margin expansion opportunity as we improve stars over the next few years and begin to have that reflected in revenue in 2026 and beyond. To reinforce Sarah’s comments on the 2025 advance notice, we are in the process of preparing our feedback with questions so far around the adequacy of fee for service trend and a new method for normalization that further reduced the rate. For us, the rate change as it sits today is approximately minus-1.3% before risk coding trend, and the new risk model introduced last year and that’s being phased in still has a disproportionate negative effect on partial and full duals, the most vulnerable populations in Medicare.

Our marketplace chassis continues to be well positioned for both growth and margin. Marketplace growth is running ahead of our previous expectations, allowing us to raise our full year 2024 consolidated premium and service revenue guidance by $2.5 billion, which takes our guidance to a midpoint of $136 billion Appetite for marketplace products continues to be strong as these offerings successfully provide both healthcare access and affordability for millions of beneficiaries. At this very early point in the year, we are reiterating our 2024 adjusted EPS guidance of greater than $6.70. As we turn the page from 2023, we can quickly reflect back on our second strong year of execution from this management team and positive progression of the company.

I couldn’t be more excited to drive success with this team and provide affordable access to healthcare for our members in 2024 and beyond. Thank you for your interest in Centene. Rocco, you can open the line up, please.

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Q&A Session

Operator: Thank you. [Operator instructions] Today’s first question comes from Stephen Baxter at Wells Fargo. Please go ahead.

Stephen Baxter: Yes, hi. Thanks for the question. I was hoping you could expand a little bit on the Medicare outlook embedded in your guidance. It’s certainly a concern that cost in the fourth quarter could be coming in higher than expected, and you certainly reported in MLR that it was a bit above consensus, even ex- the PDR. That would seem to suggest, too, I think most that your Medicare assumptions for 2024 would be pressure, but you’re saying that’s not the case, so hoping you can expand on why that wouldn’t be, and maybe some of the underlying trend assumptions that you factored into your guidance here. Thank you.

Sarah London: Sure, Stephen. Good morning, and thanks for the question. Yes, we still feel comfortable with how we’ve accounted for trend in the 2024 bids, and as you heard earlier, no change to 2024 Medicare guidance elements; but let me talk a little bit about what we saw throughout 2023 and underlying trends. Let’s talk macro first and then we can talk Q4. From in inpatient utilization standpoint, that was pretty consistent throughout 2023 – very little variation quarter over quarter. Where we did see a step up, as we pointed to multiple times throughout the back half of the year, was in Q2 in outpatient, and underneath that, the drivers were fairly consistent through the last three quarters of the year, so orthopedics with DME on either side of that, cardiac and cardiovascular as a subclinical category, so those were pretty consistent full year.

What was incremental in Q4, obviously the biggest item was taking a $250 million PDR. We also saw a COVID step-up between Q3 and Q4 and then sequentially month-over-month in the quarter. We also saw in Medicare only, ILI step up late in Q4. Both of those have come back down, as we’re seeing in January run-out data. We some RSV vaccine utilization in Q4, partly a function of our continued efforts to get seniors in for their preventative services visits – you heard me talk about that in my prepared remarks. That was also part of intentional investments we made in quality in Q4 as we prepared and positioned for 2024, which as you know is that critical third year in our cycle and our effort to get to 85% of members and 3.5 stars by October of 2025, so those are really the elements of both full year ’23 and then in Q4, and again still feel comfortable with how we’ve accounted for overall trend in the ’24 bids and no change to ’24 guidance for Medicare.

Operator: Thank you. Our next question today comes from Josh Raskin with Nephron Research. Please go ahead.

Josh Raskin: Yes, hi. Thanks. I was wondering if you could give us some color on the Medicare Advantage membership losses coming into the year. I’m looking specifically at geographic mix relative to expectations, meaning did you lose the members where you expected, and then also were the balance of new sales and sort of gross losses consistent with expectations, retention, was that in line? Just any color there would be helpful.

Sarah London: Yes, thanks Josh. We were, as Drew said, very pleased with the way the Medicare team executed in AEP and precision across all of the dimensions that you talked about, again largely in line with expectations. We took an intentional refocus in the ’24 bid strategy to try to align to those lower income, more complex members, as well as the duals and the DSNP population, and successful in terms of what we’re seeing relative to the concentration of duals coming out of AEP, so pretty pleased with where we intentionally focused, what the impact looked like, and again that was really a function of the team going PBP by PBP and building up a strategy where we could invest in those members that we wanted to retain, and in those members that we feel like we’re going to provide the greatest long term value to. Ken, I don’t know if you want to talk a little bit about some of the calibration we did on distribution as part of that effort overall?

Ken Fasola: Yes, it’s a really important add to Sarah and Drew’s comments. If you recall, in prior quarters we talked about the prior penetration with tele-digital brokers, and we made a conscious effort both in terms of owned assets and discipline with preferred partners that moved the mix to a balance that we’re really, really comfortable with, and our owned assets performed historically far better with respect both to retention and overall quality, and we’re seeing that now in preferred partners. I think the distribution system has responded to obvious opportunities to improve quality, persistency, and product mix, as Sarah said, is directly in line with what we were targeting, so the level of precision is both impressive, important and directionally where we’re going to go.

Operator: Thank you. Our next question today comes from Kevin Fischbeck with BofA. Please go ahead.

Kevin Fischbeck: Great, thanks. Just want to see–you raised the revenue guidance by $2.5 billion, but didn’t change the EPS guidance. Is there anything that you would highlight there as an offset on the EPS line, or is that just conservatism? Then just to make sure I understand the PDR, you’re saying that the rate’s not sufficient to cover trend. Does your PDR reflect the current rate update or does it assume something better, and if the rate update were to be reaffirmed, then the PDR might change? Thanks.

Sarah London: Yes, thanks Kevin. Great question. On the marketplace front, it’s really just acknowledging that we’re very early in the year, and then I think you point out a really important point relative to the mechanics of the PDR and how that positioned us with the ability to look at full year trend in ’23. I’ll let Drew talk a little bit more about those mechanics.

Drew Asher: Yes, so the PDR that we booked in the fourth quarter, that’s for the 2024 calendar year, and so you evaluate–in Medicare, you evaluate it on an annual basis, so ’25 really doesn’t come into play there because we still have the opportunity to adapt our bids accordingly and obviously we don’t have a final rate notice yet, we just have the advance notice that we’ve got some work to do. On the PDR, think back to even Stephen’s question, we certainly get another bite at the apple of evaluating forward trend because we set the PDR, and the accounting rules are such, you’re setting the PDR based upon your forward view of how you think ’24 to play out, so that was–you know, any trend considerations that we had were embedded in that PDR we booked in the fourth quarter.

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

Justin Lake: Thanks, good morning. Drew, appreciate all the color on Medicare Advantage rates. You mentioned that your rate is minus-1.3%. Given trends in the mid-2s, and you didn’t really have much star impact year-over-year, it sounds like the combination of the V28 model and the fee-for-service normalization is somewhere in the negative 3.5% range, so first, is that math right; and then second, if so, could you compare the negative 3.5% that you’re seeing for 2025, at least in the advance notice, versus how big a negative that was in 2024, so we can understand the year-over-year impact? Then if you can, break up the impact between V28 and the fee-for-service normalization on both the 2025 and a year-over-year basis, it’d be incredibly helpful to understand what’s going on there. Appreciate it.

Drew Asher: Yes, let me try to parse that out. The line item of HCC model changes, which includes the risk score normalization that you pointed out, was about a point–in our evaluation of the advance notice, it was about a point worse than last year, and part of that is the normalization change and calculation in going to a regression model versus omission of a base period. That’s probably a deep as we’d want to go on an earnings call. But if you foot up all of the elements, it’s about a 1.3% on an absolute basis current as we stand today impact on rates. Now, that’s before risk score trend – obviously that would push it into the positive zone, and we’re going to push on some of the mechanics and then we will–you know, we’re in the position of not trying to grow Medicare Advantage, we’re trying to ultimately recover margin back half of the decade, and so we’ll just adjust the bids accordingly, and the products may be a little bit less attractive for seniors from an industry standpoint if we don’t make a lot of progress on the final rates.

Operator: Thank you. Our next question today comes from AJ Rice at UBS. Please go ahead.

AJ Rice: Thanks. Hi, everyone. Just want to pivot over to Medicaid for minute. Obviously you mentioned the retro adjustments, you didn’t get the marginal headwind, I guess. You’ve also talked about some states being proactive and giving you acuity adjustments ahead of time, and then you’ve got your normal rate cycle with the state. I wonder if there’s any updated thoughts on where you land for ’24 in terms of your Medicaid margin, and I think you had talked about the fact that coming out of redeterminations, you saw potential for improvement in Medicaid margins going into ’25. Just wondered if there was any updated thoughts on any of that.

Sarah London: Yes, thanks AJ. Let me talk a little bit about the dynamic we saw in Q4 and then how we feel as we sit here in early February. Full year HBR for Medicaid in ’23 was really a function of Q4, and what we saw in Q4 was some of that timing dynamic that we’ve called out since the beginning of redeterminations is a dynamic that we were fully expecting to be managing through, the timing of matching rates with acuity as the risk pool shifts. Q4 was a heavy member roll-off quarter, as we talked about, and later in the quarter we saw some acuity pressure in the portfolio ahead of those 1/1 rates that had been designed to address that acuity clicking in. We also had some of those retro rates also designed to address the acuity coming in late in the year, and like we said, we got some of those before year end but not all, so continue to work on those.

That’s really what drove that lingering pressure in Q4. Then as we sit here today, we’ve got really solid visibility into the rate for our 2024 member month – it’s 63% of the book we’ve got visibility for. We’ve got those 1/1 rates now in place and they are in general coming in toward the higher end of that composite range that Drew mentioned at investor day of 2% to 2.5%, and then we’re still working on that handful of 2023 retro rates that would then come in, in ’24. If you take that all together, acknowledge it’s still early in the year, but that’s what makes us feel good about our 90.1 midpoint for the ’24 Medicaid HBR. Then to your point, as any of those timing dislocations shake out in ’24 and we continue to calibrate and match those up, then as we move into the roll-off of redeterminations in ’25 and beyond, that becomes a tailwind for the book overall.

Operator: Thank you. Our next question today comes from Scott Fidel with Stephens. Please go ahead.

Scott Fidel: Hi, thanks. Good morning. Just wanted to pivot back to Medicare. Interested if you could sort of talk through for us just on the inpatient side, it doesn’t seem like you saw anything unusual in the fourth quarter, but do want to confirm whether or not you did see any type of mix shift towards more short stay inpatient visits, a reduction in observation visits as mentioned by a large peer in Medicare. Then just sort of sticking on this potential theme, would love just your feedback and thoughts around the implementation of the two midnight rule for MA and how you’re factoring that into your 2024 outlook. Thanks.

Drew Asher: Yes, thanks Scott. As Sarah said, at a high level, inpatient was pretty steady throughout 2023, and you go a couple clicks below that, we looked at case mix, admits per thousand, obs per thousand, we didn’t see a Q4 uptick in inpatient. If you look at observation days, we saw no meaningful shift in observation days. We all know the two midnight rule doesn’t start until 1/1/24, but we’ve been on top of that, preparing for that, thinking through that as we formulated our forecasts for 2024, and we think we’ve got that captured. Obviously the industry, we can still do medical necessity on that, but yes, we’ll be observing that two midnight rule beginning in January.

Operator: Thank you. Our next question today comes from Lance Wilkes with Bernstein. Please go ahead.

Lance Wilkes: Great. Could you talk a little bit about the pipeline and the upcoming bids with respect to Medicaid, some of the upcoming RFP awards? Then more broadly, Sarah, if you could talk a little bit to as you’ve gone through some of the recent wins and as you’re looking at satisfaction scores within states, what are areas of strength that are helping you with either retention or new wins, and are there particular areas of opportunity and what are some of the plans to address some of those areas? Thanks.

Sarah London: Yes, thanks Lance for the question. As you pointed out, we’ve had some great positive momentum of late with New Hampshire, Arizona, North Carolina expansion, as well as Oklahoma, and that makes us feel good as we roll into what’s an active RFP season. We obviously have Florida in flight, and really proud of the sunshine team and the work they’re doing, as well as Georgia, and then Texas for later this year and 2025 go-live, so we continue to track that. We continue to have, I believe, the best BD team in the business, incredibly strong local teams that are being really thoughtful and incrementally forward looking in terms of, as we said at investor day, making sure that we’re competing on promises kept, not just promises made.

That, I think goes to the second part of your question, which is really what are we seeing in the market in terms of the investments we’ve made over the last two years around customer satisfaction and that local community partnership, and we’re really starting to see improvement in terms of partner satisfaction, provider relationships, as well as quality. If you look at our Medicaid quality scores year-over-year, you’re seeing really nice improvement there. Those have been things at the top of our list in terms of focus over the last two years, and I think starting to see those bear fruit, those are really important drivers as states think about who they want as partners relative to the managed Medicaid business. I would say the other major theme that we continue to hear and we continue to be focused on pretty organically, frankly, is health equity, and so the emergence of the 11/15 waivers and thinking about how to put dollars into things like housing, food, jobs, childcare that ultimately drive pretty significant healthcare outcomes, and that’s something that states are increasingly interested in partnering over.

Again, it’s something that Centene has been naturally focused on as a by-product of being local in our approach and having the strengths of those longstanding incumbent relationships. I think really good improvement in the places that we’ve focused and really good core strength in the areas that are going to matter going forward.

Operator: Thank you. Our next question today comes from Cal Sternick with JP Morgan. Please go ahead.

Cal Sternick: Yes, thanks for the question. I wanted to ask two on the marketplace. First, could you talk about the demographic trends of the incremental membership you got, so any insight on the acuity and metal mix of the extra members you added compared to what you initially anticipated? Then on ICRA [ph] and the Indiana pilot, how many members did you enroll in that product and what are some of the key milestones you’re looking to evaluate the pilot as you move through this year? Thanks.

Sarah London: Thanks Cal for the question. As you’ve heard, the demographics for the population that came in during OEP for us were pretty consistent with our expectations, and the distribution of tiers between silver, gold and bronze, also pretty consistent. We still have the majority of our members in that silver tier, so the demographics have not shifted materially. One of the things that I think is interesting – this may just be the data geek in me – but if you look at what we’re seeing, not just in our book but overall in the market, there are some interesting small shifts in the demographics overall that I think tell us a lot about what’s actually driving the underlying growth, above and beyond just what we know in terms of affordability and awareness from the enhanced [indiscernible] and the additional marketing dollars going into navigators and the broker channel.

We’re seeing year-over-year-over-year, age coming down slightly, which I think supports our view that we’re seeing a younger pool, we’re seeing a healthier pool, and we’re seeing some of those gig workers coming in. We’re seeing the distribution in gender between male and female shift a little bit, so more men coming into the marketplace, which we see as a signal of digging deeper into that uninsured population, because women tend to move sooner out of that population. Then we’re also seeing the gold tier as an industry pick up a little bit, which we see as supporting our view that there’s small group migration coming into the market – obviously we’ve got anecdotal evidence around that, but that’s true in our book, that’s true in the overall industry, and again I think very consistent with what we think is driving 31% overall market growth, but pleased as well with the fact that within that growth, we were able to grow our market share within footprint.

The relative to ICRA, obviously that’s still very much a nascent market. The Indiana pilot is very new. I’m happy to say that we sold our first customer in January, so good early proof point; but the goal there for us is really to test and learn and gather data, and we’re pretty confident that we’re going to be incrementally smarter about how that market is evolving as we go throughout the year.

Operator: Thank you. Our next question today comes from Gary Taylor at TD Cowen. Please go ahead.

Gary Taylor: Hey, good morning. One clarification and one question. I just want to clarify, Drew, on the negative 1.3% ’25 advance notice for Centene, does that exclude stars or basically for Centene no different stars impact than the negative 15 basis points that CMS sized for the industry? Then my question is, I just wanted to see if you could just balance these very diverse views on MA. Your MA MLR first nine months was down 110 basis points year-over-year, fourth quarter was up 310 excluding the entire PDR, and you only boosted the PDR by $50 million or 30 basis points on ’24. You said your MA outlook looks unchanged, so there’s two camps this quarter: there’s Centene and United saying the sharp fourth quarter MA MLR spike means nothing for ’24, and then there’s Humana, who said the sharp spike in the quarter is the new baseline heading into ’24.

It’s been a while since I’ve seen such divergent views across the industry, that all had sort of the same cost acceleration, so can you just explain again why you’re landing where you’re landing on 2024 MA?

Drew Asher: All right, so let me take the first one first. Of the 1.3–of the minus 1.3%, our star rating change is minus-0.5, so absent that we’d be at minus-0.8, so it’s a little bit heavier than the industry as a whole, which I believe CMS was at minus-0.2, so hopefully that helps with the math there. On Medicare, Sarah said look, we’re looking hard at our outpatient trend, which we’re not happy with but it’s steady at that elevated level relative to May-June timeframe, and that’s sort of what we’d built into the forecast, so that would be a change year-over-year. Inpatient, we talked about that – I mean, no uptick, as we said earlier. Maybe one of the elements that may be a little bit unique with us is that as we see the year developing, and there’s a dial we have on quality spend and initiatives, and there’s a lot of quality initiatives that we’re going to do regardless of what our aggregate EPS result is, but we really stepped that up in Q4 and that triggered a heavier level of office visits, which is a good thing, getting our members in to see their physicians.

It triggered RSV vaccines, which is a good thing, and we saw that coming through in December. As Sarah mentioned, we did have ILI. The only area of the business where ILI, an influenza-like illness, was heavier year-over-year was in Medicare, and obviously that’s transitory, it’s already come down in January, so those are the other elements that you should think about when evaluating Q4. But we feel good about our forecasts. We had another bite at the apple on the PDR, Gary. If we thought trend was going to be $50 million higher than the $250 million next year, the PDR would have been $300 million and we would have reported $6.61, or something like that, so feel good about our forecasts. We’ve got work to do in Medicare to improve the macro, but we’re ready to tackle 2024.

Operator: Thank you. Our next question comes from George Hill with Deutsche Bank. Please go ahead.

George Hill: Yes, good morning guys. I actually want to ask Gary’s question kind of a slightly different way and focusing on what seems to be two different narratives as it relates to the utilization trend. I guess asking it more broadly, and one is kind of the–it’s like there’s the seasonal utilization that’s come through that now needs to be–that now we’re referring to a baseline trend that is normal ex-the seasonality or the bolus, and there’s another narrative that trend is running below baseline, call it off [indiscernible] adjusted basis because of the impact of COVID, and now we have kind of a three-year heightened utilization trend to get back to baseline. Sarah, I guess I’d ask you if you kind of have a preferred utilization narrative that you guys are seeing, like are we kind of working through this short term backlog as it relates to utilization that should normalize, or are we running below a longer term trend that we need to return back to, likely [indiscernible] to your basis?

Sarah London: Yes, I mean, I certainly prefer our narrative, and I think about it really specific to Centene, so I appreciate the need to try to harmonize what different companies are seeing, but we remain focused on what we’re seeing in our population, the idea that we saw some of this trend in Q2, that we accounted for it in our 2024 bids, we feel sufficiently–we had a second bite at the apple at the end of the year with the benefit of the full year’s visibility of utilization. The assumptions that we’ve made in 2024, how we feel about our ability to apply clinical initiatives, leverage our value-based relationships and manage through the trend that we’re seeing, that’s really our focus, less so worrying about what others are saying.

Operator: Thank you. Our next question today comes from Dave Windley with Jefferies. Please go ahead.

Dave Windley: Hi, thanks for taking my question. I wanted to clarify and then ask a question. Drew, you mentioned–you’ve actually both mentioned a second bite at the apple a couple of times. I wanted to make sure I understood that that was a second bite opportunity kind of up to the end of the year, or does that mean if things develop in a way that causes you to have a different view of 2024 currently, that you could go back and revise your estimate for PDR, so wanted to clarify that. Then my question, rotating over to SG&A, is where are you related to head count rationalization, real estate rationalization, other things kind of on the basic cost cutting, value creation plan list to take out SG&A, where do you stand in that evolution? Thank you.

Drew Asher: Yes, so good questions around the PDR. Look – we don’t love being in the PDR position, but–you know, we’ve got work to do on Medicare, but it did give us an opportunity to re-evaluate the ’24 forecast as we got into January and closed the December books. What will happen mechanically throughout 2024 is that PDR will largely be released–forecasted to be released in Q4, because of the mechanics of the seasonality of earnings in Medicare throughout the year, but every quarter, we re-evaluate the sufficiency of that PDR relative to the ’24 policy and calendar year, and if we have to tweak it, we will, but that would be within the confines of 2024. On SG&A, still plenty of opportunity ahead. I mentioned at investor day that we’ve got at least a couple hundred basis points more in Medicare we’ve got to go after over the next few years.

On real estate, largely through that, probably some tweaks here and there but largely through, for instance, the charges around real estate, we’re through the bolus of that, and then we’ve got our slate of initiatives that we continue to tackle and plenty of efficiency opportunities.

Sarah London: Yes, I would echo that and just say that a lot of great execution in the first two years, we’re going to realize that in 2024, but we haven’t stopped. You’ve heard us talk about building the pipeline for 2025 and beyond in terms of additional opportunities. Obviously our long term algorithm has 1% to 2% of margin expansion built in, and we do see additional opportunities to drive efficiency in the business as we standardize our workflows, the ability to then automate that with technology, so really pleased not just with the execution thus far and the discipline to get us here. We’re really thinking about how we do work going forward. We do see opportunity for continued efficiency in the future.

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

Sarah James: Thank you. Could you remind us what the margin progression looks like on exchanges, like how many quarters it takes for you to get to run rate? Then just a mechanics clarification on the PDR – are you guys booking that as the delta between where you view costs and target margin, where it would roll over kind of flat at target margin from ’24 to ’25, or is that you’re booking at as the view of costs to break even? Just if you can give us the context of that, thanks.

Drew Asher: Yes, on your second question, it’s really neither of those. It’s sort of the accounting principal on the marginal loss, so it excludes things like marketing costs and certain investments, so think of it as the marginal loss that we’re pulling into the year in which we set the bids, so certainly it’s not booked–you know, it’s nowhere near target margins. We’ve got a lot of work to do to go from essentially a minus-3.5% expectation in 2024 to that 4% to 5% pre-tax zone as we look at later in the decade. Stars will probably two-thirds of that progression, and like I said, we still have SG&A and clinical initiatives. Isn’t it interesting we’re spending so much time on 12% of our revenue? $16 billion, an important lever, but we actually have some other pretty good businesses, like marketplace that you just asked about.

The margin progression, we expect–you know, it’s a sophomore year in which we pick up the benefit of the SEP – special enrolment period, members that come in for a couple of reasons. One is they’re typically utilizing some degree of services and they get out of the way and become more normalized in the following calendar year, and then also the risk adjustment, the mechanics are punitive to some degree if you’re only picking up a partial year, and then when you get a full calendar year, you have sort of the numerator and denominator matching up, so we expect to benefit members if we continue to grow SEP, which that’s not baked into our guidance yet, we’re just at 4.3 million members. But if we continue to grow during 2024, that will be an expected tailwind for 2025.

Sarah London: On that point, I would just note that we’re seeing increase year-over-year in retention of SEP members, which means that we’re poised to capture the benefit of that sophomore effect from that heavy growth we had in SEP last year, so that’s a really nice trend that we’ve been watching and seeing that retention grow year-over-year.

Operator: Thank you. Our next question today comes from Nathan Rich at Goldman Sachs. Please go ahead.

Nathan Rich: I’ll ask one on the Medicaid business. I wanted to–you know, it sounds like the HBR so far as redeterminations have played out has been in line with expectations. The ’24 guidance has that 50 basis point headwind that was, I think, put in place for any sort of timing mismatch as it relates to acuity. I just wanted to clarify if that’s something that you’re seeing currently, and so reiterating your expectations for ’24, you feel like what you’ve seen play out so far requires that 50 basis points, or if the timing between the rate updates and the costs you’re seeing in the underlying book, if that timing has actually been matched up better than you had anticipated.

Sarah London: I would say at a high level, we’re pretty pleased, just given the complexity of the portfolio and all of the state-by-state dynamics with the degree to which acuity and rate has matched up relative to timing. Obviously not perfect – we talk about what we saw in Q4, but across the entire portfolio, feeling pretty good about that, which is again part of why we’re still confident in that 90.1 midpoint. But maybe Drew, you can talk a little bit about risk corridors and other dynamics that we’re tracking relative to that 50 basis point buffer?

Drew Asher: Yes, so you also have to remember, we’ve got PBM savings rolling into that, and we’ve targeted that at 20 basis points, so that’s sort of a nice lever that we’ve factored into getting down to the 90.1. Then as we think about a question from earlier, ’25, 2026, we would expect to get back into the high 89s on a same mix basis. From a risk corridor standpoint, while it’s imperfect in terms of a buffer, depending on where you have trend or rate pressure, we’re still at–we’re about $1.8 billion in payback for the 2023 year, so we’re still in a pretty heavy payback position for our Medicaid risk corridors and minimum MLRs. It’s not across every state, but it’s spread across a number of states, and that is something else to think through as we think about the future rate action and matching acuity with rates.

Operator: Thank you. Ladies and gentlemen, this concludes our question and answer session. I’d like to turn the conference back over to the management team for any closing remarks.

Sarah London: Great, thanks Rocco, and thanks everyone for your time and interest this morning. We look forward to providing updates as we move deeper into 2024.

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