Centene Corporation (NYSE:CNC) Q4 2022 Earnings Call Transcript

Centene Corporation (NYSE:CNC) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Good day, and welcome to the Centene Fourth Quarter Earnings Conference Call. . Please note, today’s event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President of Investor Relations. Please go ahead, ma’am.

Jennifer Gilligan: Thank you, Rocco, and good morning, everyone. Thank you for joining us on our fourth quarter and full year 2022 earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning’s call, which can also be accessed through our website at centene.com. Ken Fasola, Centene’s President; and Jim Murray, our Chief Operating Officer, will also be available as participants during Q&A. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene’s most recent Form 10-K filed on February 22, 2022; and other public SEC filings.

Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our fourth quarter 2022 press release, which is available on the company’s website under the Investors section. The company is unable to provide a reconciliation of certain 2023 and 2024 measures to the corresponding GAAP measures without unreasonable efforts due to the difficulty of predicting the timing and amounts of various items within a reasonable range.

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

Sarah London: Thank you, Jen, and thanks, everyone, for joining us this morning as we review our fourth quarter and full year 2022 results and provide our updated outlook for 2023. First, let’s close out the year. 2022 was a dynamic and productive year for Centene. We took on many challenges, including a leadership transition, transforming our organizational structure, modernizing our approach to corporate governance, focusing on our core business, improving operations and quality and delivering on our financial commitments along the way. This morning, we reported fourth quarter adjusted EPS of $0.86 and full year 2022 adjusted EPS of $5.78. These strong results came in above the top end of our most recently issued 2022 guidance and were 7% higher than the midpoint of our initial outlook for the year.

Looking back over 2022, our 3 core business lines performed well. In Marketplace, we materially improved the profitability of our Ambetter product line through advancements in our clinical programs and strategic product positioning, delivering more than the 500 basis points in margin improvement we promised while continuing to show solid growth and market expansion. This provided Ambetter with a strong jumping off point to achieve our long-term target margin and profitable growth goals in 2023. In our Medicare Advantage business, Centene generated outsized growth in 2022, ending the year with 21% more members compared to year-end 2021. Our focus throughout the year was on strong clinical program performance, quality improvement, which you’ve heard a lot about; expanded value-based care relationships; and providing enrollees with a more seamless member experience.

In 2022, the strength of WellCare’s underlying performance was demonstrated through year-over-year HBR improvement. And we’re confident in our increasingly disciplined approach to quality operations will provide an important lever as we move through 2023 and work to improve WellCare’s profitability on its expanded scale. Our local markets also performed well throughout the year, serving more Medicaid members in more geographies than ever before. Our Delaware go-live, as well as a significant number of successful reprocurements and program expansions, including in Louisiana, Nebraska, Texas and Missouri, to name just a few, bolstered our market presence and leadership position in Medicaid managed care. In California, Centene was ultimately selected to serve the state through direct contracts in 10 key markets, including Los Angeles and Sacramento Counties.

We are working towards readiness for the 1/1/24 start date of the new California contracts, and we look forward to our continued partnership with the state to improve the medical health care delivery system and advance the state’s innovative programming. 2022 also marked the first full year of execution on our value-creation plan, and it was by every measure of success. We hit all major milestones, including redesigning our UM function across the enterprise; successfully negotiating a new PBM partnership, reducing our real estate footprint by 70% to accommodate new workforce flexibility, itself an important cultural evolution for the company; and making important investments in data and digital tools that will make it easier for our members, our providers and our employees to work with us.

We exit 2022 not only well positioned to achieve our $400 million in targeted SG&A savings in 2023, but also having added $300 million in new SG&A opportunities to our longer-term backlog. In addition to achieving these value-creation milestones, we made meaningful progress on our portfolio review process. We closed 3 divestitures in 2022 and announced a fourth. Notably, in the first weeks of 2023, we closed the previously announced sale of Magellan Specialty as well as the sales of Centurion and HealthSmart, bringing our total number of divestitures since Q4 of 2021 to 7. This disciplined execution has streamlined our enterprise, reduced distraction and allowed us to increase our focus on our core business lines. It has also powered significant and timely share repurchases during 2022 and year-to-date in 2023.

Finally, in December, we aligned the enterprise around a long-term strategic plan, inclusive of a commitment to 12% to 15% long-term adjusted EPS growth. With our senior leadership team in place and the company’s demonstrated progress against our strategic and financial goals in 2022, we are well positioned to capitalize on the momentum of the past year and successfully continue our value-creation journey for shareholders and members in 2023. With that, let’s talk about 2023 so far. Centene’s Marketplace products yielded exceptional growth during this year’s open enrollment, outpacing even the robust growth of the total market itself. This year’s OEP performance only reinforces our view of the increasing durability of the Marketplace as a coverage vehicle and Ambetter’s leadership position within this market.

To harness this growth opportunity, our Ambetter team applied a portfolio approach to pricing and product positioning, decisively leveraging our local expertise and strong broker relationships on a market-by-market basis to attract and retain membership across our Marketplace footprint. While it is still early days with respect to claims experience, we want to share a few observations about Ambetter’s strong OEP growth and provide some performance expectations given the team’s outperformance on membership. Approximately 70% of our 2023 membership is enrolled in a Silver Plan compared to approximately 72% in 2022. Silver plans have consistently represented the majority of our membership year after year, and 2023 is no different. Similar to previous plan years, the majority of our 2023 membership selected our core product.

At the same time, we are pleased with the continued uptake we are seeing in our newer products, demonstrating the value of flexibility and plan design for our members. Key membership demographics like gender, age, geography and subsidy levels are consistent with what we experienced last year. Most importantly, these factors are also consistent with the pricing assumptions we used for 2023 product positioning. We continue to expect our Marketplace business to achieve margins within the long-term targeted range of 5% to 7.5% during 2023. And we are pleased to have the opportunity to serve so many Marketplace members as the reach of that product continues to expand. As we highlighted for investors last month, Medicare Advantage enrollment results for 2023 developed softer than expectations we provided at Investor Day in December.

Our goal for the 2023 AEP was to foundationally align our Medicare offerings for long-term margin recovery, product stability and overall quality, capitalizing on the scale we achieved through outsized growth in 2021 and 2022. In our effort to better control the overall member experience, which requires operational stability and contributes directly to quality results, we made the decision to change our distribution strategy and focus more on proprietary channels. Near-term sales and retention were more significantly impacted by our distribution strategy than expected, particularly in light of competitor investment in channels we deprioritized. That said, several of the channels we prioritize performed better than expected, reinforcing our long-term view of an optimal go-to-market strategy for Medicare Advantage and dual eligible members.

Despite the soft membership results relative to expectations, we continue to expect 100 basis points of Medicare HBR improvement in 2023. Importantly, we are already seeing positive operational impact for members and brokers, with strong service levels, improved customer satisfaction and a 30% reduction in overall calls compared to this time last year. Turning to more recent Medicare news. Regarding the finalization of the RADV rule, we are supportive of CMS’ decision to limit the scope of historical audits. CMS’ decision in this regard avoids significant cost and abrasion for our provider partners. That said, the lack of fee-for-service adjustment and the as-yet undefined sampling and extrapolation methodology leaves a number of open questions as to the viability of the final approach.

We are working in collaboration with our industry partners to determine the best path forward. Regarding last week’s preliminary rate notice, 2024 initial rates are less favorable than recent years and below our internal expectation for funding. We will fully exercise our ability to provide feedback to CMS during the comment period and look forward to collaborating with the agency as we work towards rate finalization in April. That said, we see a path to achieving Medicare Advantage results that meet member needs and support our 2024 financial goals. Finally, as we all know, 2023 will be an important year for the Medicaid business. In December, Congress passed the Federal Consolidated Appropriations Act for 2023, which ends a continuous coverage provision on March 31.

This tees up redeterminations to begin this spring, an event we have been working to prepare for throughout 2022. As we approach the redetermination process, we are focused on 3 things: first, optimizing the verification process for members. We are working closely with our state partners and our network of community partners in each market to facilitate member transition and coverage continuity. In the last month, we’ve deployed internal and external training designed to maximize each member touch point and our ability to support beneficiaries as their eligibility is reviewed. Leveraging Centene’s unique and powerful data, we’ve launched eligibility likelihood modeling across our Medicaid footprint in order to prioritize and customize member outreach.

And we’ve launched enhanced reporting and membership dashboards for clear tracking of redeterminations-related activities across the enterprise. Second, we are focused on ensuring that state program rates reflect any shifting of the risk pool created by membership changes. We recognize the dynamics in each market are different, so we are leveraging our data to support early collaborative discussions with our state partners. And third, we are focused on maximizing the opportunity to provide coverage continuity to members who are no longer eligible for Medicaid, but who are eligible for subsidized coverage on the Marketplace. Given the strong overlap of our Medicaid and Marketplace footprint in 25 states, we continue to size the opportunity for our Marketplace products at 200,000 to 300,000 lives throughout the duration of redeterminations.

In 15 of the 25 states, where we have both Medicaid and Marketplace products, we will reach out to our current members directly with educational information regarding the enrollment process as well as with Marketplace plan options. We expect that state count to grow as we advance through the redeterminations process, and we have a robust, scalable plan in place to support this communication and education effort. Finally, I’d like to highlight some important news that came just a few weeks ago. In late January, the FCC issued guidance to improve member communication opportunities related to maintaining Medicaid and other governmental health care coverage. We view this as an incredibly important step, not only relative to supporting a seamless verification process, but also a meaningful step forward in modernizing the industry’s overall approach to Medicaid member engagement.

We are working closely with states to integrate this guidance into our redetermination strategy and to prove the value of digital engagement in reducing cost and improving member outcomes. On balance, when you take into account our more informed view of open enrollment for 2023, the updated timing of redeterminations and recently closed divestitures, we are well positioned to achieve the top half of our full year 2023 adjusted EPS guidance. Drew will provide greater detail on our outlook in just a moment. As we look ahead, 2023 promises to be another transformative year for the enterprise and one in which we will need to navigate notable market dynamics across our product lines from redeterminations to Medicare positioning to fast-growing Marketplace products.

This is not new for Centene, and we are better equipped to manage through this change than we ever have been before, thanks to the work we have done over the last 18 months to focus and fortify our operations and to align the organization around value-creation principles. As we look downfield, we continue to see tremendous opportunity for all 3 of our core businesses, including complex Medicaid populations and dual eligibles, Marketplace adjacencies and STAR score improvement. We continue to track well against our long-term goals and look forward to executing against our strategic plan, driving strong results and delivering value to members and shareholders. With that, I will turn it over to Drew to review our results and outlook in more detail.

Andrew Asher: Thank you, Sarah. Today, we reported fourth quarter 2022 results, including $35.6 billion in total revenue, an increase of 9% compared to the fourth quarter of 2021, and adjusted diluted earnings per share of $0.86 in the quarter. For the full year, we reported $5.78 of adjusted EPS, a 7% beat over our original 2022 guidance and growth of over 12% compared to 2021. Let’s start with revenue details for the quarter. Total revenue grew by $3 billion compared to the fourth quarter of 2021, driven by strong organic growth throughout the year in Medicaid, primarily due to the ongoing suspension of eligibility redeterminations; strong Medicare membership growth; and the January 2022 acquisition of Magellan, partially offset by divestitures.

Our Q4 consolidated HBR was 88.7%, a little bit better than our expectations, and 87.7% for the full year. Medicaid at 89.6% for the full year was right in line with our expectation of an HBR in the 89s for 2022. Medicare at 86.2% for the full year was 90 basis points better than 2021, driven by execution of clinical initiatives. And on commercial, recall, we originally promised a 500 basis point reduction in the HBR in 2022. How did we do? We were down 550 basis points for the full year. This was driven by disciplined pricing actions, initiatives executed in 2022, and as expected, a reduction in COVID and pent-up demand costs compared to 2021. Moving to other P&L and balance sheet items. Our adjusted SG&A expense ratio was 9.3% in the fourth quarter compared to 8.7% last year, driven by the inclusion of Magellan and the sale of PANTHER as well as increased Medicare marketing and value-creation investment spending in the quarter, given the overall company outperformance.

Cash flow used in operations was minus $1.6 billion in the fourth quarter. You may recall, in the third quarter, we had an early receipt of $2.9 billion of CMS payments pertaining to the fourth quarter, which is driving down our reported Q4 operating cash flow. Cash flow provided by operations was $6.3 billion for the full year, representing 5.2x net earnings or 1.9x adjusted net earnings. This was driven by earnings before charges, including real estate and divestiture-related impairments and an increase in medical claims liabilities. Our domestic unregulated and unrestricted cash on hand was $793 million at year-end, though after making some planned pass-through payments in early January, that amount is closer to 0. From January of 2022 through today, we repurchased 39.1 million shares of our common stock for $3.3 billion.

Debt at quarter end was $18 billion, down approximately $800 million from prior year-end, driven by senior note repurchases of $318 million, a repayment of our $180 million construction loan and repayments of over $100 million in revolver and term loan borrowings. Our debt-to-adjusted EBITDA came in right at 3.0x, down from 3.5x a year ago. Days in claims payable was 54 in Q4 of 2022 compared to 54 in Q3 of 2022 and 52 in Q4 of 2021. GAAP earnings during the quarter include impairments related to several divestitures that were completed or pending as of December 31, as well as an impairment of our federal services business, partially offset by a gain on the sale of MagellanRx. Looking back at 2022, it was a very good year of execution during some notable changes for Centene.

Sarah hit on some of the highlights, but let me remind you of a few. We beat original adjusted EPS guidance by 7%. We bought back almost 7% of the company’s shares, including January 2023 repurchases. We reduced debt-to-adjusted EBITDA to 3x and got upgraded to investment grade by Fitch. We continue to execute on divestitures. Since Q4 of 2021, we’ve completed 7 divestitures for gross proceeds of over $3.5 billion. We improved the discipline of the company in many areas while strengthening DCP by a couple of days, and we picked up 2 very strong operators, Fasola and Murray, along the way. All right, enough on the rearview mirror. Let’s talk about what really matters today and tomorrow, starting with 2023. We gave detailed guidance elements at Investor Day, but a few things have happened since then, including more clarity of the timing of the restart of redeterminations, a couple more Centene divestitures, a very strong Marketplace annual enrollment period and softer Medicare Advantage enrollment as we mentioned at the recent investor conference in San Francisco.

My bias when we haven’t yet closed the first month of 2023 is not to touch 2023 guidance until we have some actual results, but there are a few things that will help you understand how we are starting out of the gates compared to what we outlined at December Investor Day. Our 2023 premium and service revenue should be approximately $2 billion higher than the range provided at Investor Day. Let me bridge that for you: $1.5 billion more of Medicaid premium revenue from a higher starting point in 2023 and an additional 2 months until redeterminations recommence April 1; plus an additional $3 billion of commercial premium revenue from an outstanding marketplace open enrollment period; minus $0.5 billion of Medicare revenue as we were off in the annual enrollment period, down high single digits versus down mid-single digits; and minus approximately $2 billion of divested revenue previously in guidance, Magellan Specialty, Centurion and HealthSmart.

Let me go a little deeper on 2 2023 topics. On the additional Medicaid broad growth of $1.5 billion, we expect to give about 2/3 of that back in the redetermination process. So our previous estimate of $8 billion of ultimate run rate revenue give back goes up to $9 billion. By April 1, we expect to have grown by 3.4 million Medicaid members since the onset of the pandemic, excluding new markets and we expect to lose approximately 2.2 million of those members in the redetermination process over the next 1.5 years. In other words, about 65% of that growth. The 2023 portion is baked into the new revenue guidance. The remaining 2024 portion would be about $6 billion of the $9 billion. And I know a number of you have asked about our early read of attributes related to our growth in Marketplace.

As Sarah outlined, based upon a review of the demographics, metal tiers, product types, subsidy eligibility and distribution sources of our new membership, we don’t see any signs of alarm. The proof will ultimately being the claims data, but all of this Marketplace growth, even membership from carriers who have exited, comes in at our product design, our network construct, our pricing and into our clinical models. While we aren’t changing our adjusted EPS guidance range at this very early stage for 2023, all of this recent insight, including the higher revenue base, biases us to the top half of our adjusted EPS range of $6.25 to $6.40. And of course, once we see from data — once we see some data from Q1, we will refine all the underlying elements for you no later than our Q1 earnings call, suffice to say that we ended 2022 strong, and that looks to be continuing into 2023.

As we look out to 2024, we remain committed to our previously provided adjusted EPS floor of at least $7.15. While we’re 10 months away from giving formal 2024 guidance, let me give you some updated color on recent events that are included in this assessment. First of all, on the positive side, 2023 looks to be a little stronger out of the gate as we just discussed. Second, we completed California renegotiations in late January and are pleased with the outcome. Third, our Marketplace business is $3 billion larger than we had previously assumed, and we expect performance in the target margin zone in both 2023 and 2024. Four, investment income continues to grow, including the recent 25 basis point Fed rate increase in early February. Five, share count is down further, and with the stock price lower, we will strive to accelerate planned share repurchases earlier in the year.

That’s a pretty good collection of tailwinds. On the headwind side, though, Medicare is going to be challenging for us in 2024. We knew it was going to be tough given the cards we were dealt in STAR scores, stemming from poor decisions in 2020. And the impact of a disappointing advanced notice on 2024 rates does not help. We will most certainly be pricing for a negative margin in Medicare Advantage in 2024 temporarily. And we don’t expect to grow Medicare Advantage in 2024 and likely will shrink a little. We have a lot of work between now and the first Monday in June when the bids are due to refine our estimates and products further. And obviously, the industry will be asking a lot of questions about the components of the advanced notice in anticipation of final rates in a couple of months.

But here is the silver lining. If we can achieve at least $7.15 of adjusted EPS in 2024, with a meaningfully underperforming Medicare business embedded in that result, that becomes a margin expansion and growth opportunity in the back half of the decade as we improve STARS and pull other levers over the next few years. We know what needs to be done. It just takes time, especially in STARS. We can now turn the page from a very good 2022, the first year of execution from this management team and an important foundational year for multiyear improvement as we look ahead and ultimately getting to our long-term growth and earnings algorithm we shared with you at Investor Day. Thanks for being part of our journey. Operator, Rocco, you may now open the line for questions.

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Q&A Session

Operator: . Today’s first question comes from Josh Raskin at Nephron Research.

Joshua Raskin: I wanted to start on the weaker MA start in the selling season. And maybe you could talk a little bit about was that due to changes by competitors? I heard something — I heard a lot about the distribution channel changes that you made, but any specifics would be helpful. And then any benefit design changes that you made that you think contribute to some of that lost membership would be helpful as well.

Sarah London: Yes. Thanks, Josh. Happy to hit that at a high level and then have Ken weigh in as well. So as I mentioned in my remarks, our major focus in the selling season was on operational stability, and on the fundamental underpinnings, that would contribute to quality results because we continue to take long-term view in Medicare. And so in order to achieve those results, we started rebalancing our distribution channels with a bias towards more proprietary channels where we feel we could control the member experience better. And so that was part of what impacted the softer results because, as you pointed out, we also had the competitive dynamics, investments from competition, not just in the market, but in those — some of those channels that we deprioritized. But Ken, if you want to weigh in a little bit on benefits as well.

Kenneth Fasola: Yes. Thanks, Josh. The CMS data, which is readily available, demonstrates. So I think you’ve seen where members have moved. For our part, we rotated towards margin improvement, recognizing going in that, that would probably be at the expense of some member gains in very targeted markets. But I think the insight that we’ve gained this past year, both with respect to the comments Sarah made about the distribution mix and the really overperformance from owned and more captive channels, along with, I think, a greater insight with respect to the characteristics of the kind of members that are likely more responsive to both our product and network mix, I think, gives us really the opportunity to be vastly more precise as we move into the new year.

And I think you’ll see that as we move, not just through our product design positioning for the coming year, but the way we allocate and optimize distribution, resources and the marketing, now that we’ve all — and we’ve moved marketing internally. We had some of that subcontracted, I think, is going to create a strong platform for the achievement of the guidance we’ve provided.

Joshua Raskin: And just a quick follow-up. Do you have visibility or any insights into the changes in membership, whether that’s helpful from a quality improvement, STARS improvement perspective? Do you know the members that have lapsed relative to the members that you’ve retained? Does that feel like you’re moving more towards the right direction on STAR improvement?

James Murray: This is Jim. Absolutely. Sarah and Ken both reference the focus on proprietary distribution channels. In past lives, I’ve seen that creating a relationship — and we talked a little bit about in New York, creating a relationship with those members goes a long way towards some of the things that are measured in STARS. For example, complaints. If you have a relationship and you bring the member in and explain to the member the benefits that they are going to get and how to use the system, obviously the complaints to CMS are significantly reduced. We’re beginning to see that, frankly, in 2023 in the first 1.5 months of results. Disenrollments are much lower as a result of using proprietary channels. The other thing is that because of the stability of the existing membership, we expect that we’re going to see some improvement in STAR scores as well as RAF scores going forward, which will help our overall margin profile going forward.