Yahoo Finance Centene Corporation (NYSE:CNC) Q1 2024 Earnings Call Transcript
Centene Corporation (NYSE:CNC) Q1 2024 Earnings Call Transcript April 26, 2024
Centene Corporation beats earnings expectations. Reported EPS is $2.26, expectations were $2.09. Centene Corporation 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 First Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice-President, Finance and Investor Relations. Please go ahead.
Jennifer Gilligan: Thank you, Rocco, and good morning, everyone. Thank you for joining us on our First Quarter 2024 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. 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 20th, 2024, and other public SEC filings.
Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first-quarter 2024 press release, which is available on the company's website under the Investors section. 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 discuss our first quarter 2024 results. This morning we reported first quarter adjusted EPS of $2.26, ahead of our previous expectations for the period. As a result of this strong start to the year, we are increasing our full year 2024 adjusted EPS guidance to greater than $6.80. Drew will cover the quarter and our updated financial outlook in further detail in a few moments. While there is still more work to do, we are pleased with the first-quarter results and will look to harness the positive momentum we are generating in our core businesses as we move through the balance of the year. In 2024, Centene's focus remains on our work to streamline and modernize the underlying infrastructure of our company and to assemble the people, processes and tools necessary to deliver best-in-class experiences to our members, providers, regulators and state partners.
Let me share a couple of examples of progress here. During the first quarter, we completed an important initiative to simplify our prior authorization process by automating our real-time source data. This simplification improves the timeliness of authorization decisions, ensuring our members get the care they need quickly and removing friction from the process overall for both members and providers. Q1 also saw the accumulation of months of thoughtful and thorough go-live preparation in Oklahoma. Our team obtained perfect scores in our readiness review from the state, and we are thrilled to be serving Oklahomans statewide as of April 1. Finally, our improved operational agility also allowed Centene to mobilize quickly in support of our members and provider partners in the wake of the Change Healthcare cybersecurity incident.
This included launching a national provider outreach campaign that spans Centene's provider network across all products, Medicaid, Medicare and Marketplace and has included targeted efforts to support those disproportionately impacted by the outage, including FQHCs, safety net hospitals, rural health clinics and behavioral health providers. We appreciate the focus on and support for last-mile providers from HHS and CMS throughout this process as these clinicians represent a critical component of the infrastructure through which our members access high-quality healthcare. Now on to our business lines. We are roughly 90% of the way through redeterminations and our Medicaid franchise continues to demonstrate resilience as we navigate the complexities of this unprecedented process.
As you can see from today's release, our first-quarter membership tracks slightly higher than our expectation at Investor Day in December. Overall, we continue to be well guided with respect to membership and rate by the projection model we built state-by-state more than a year ago and that we continue to refine as we move through the redeterminations process. As we've noted before, 2024 represents an important year for blocking and tackling through acuity shifts and corresponding rate discussions with our state partners to ensure we are positioned to provide high-quality services for our members. We are actively engaged in that process and are seeing solid results thus far with opportunities still ahead. As we move through the remainder of the year, we expect these discussions to increasingly represent the regular back-and-forth dialog we maintain with our state partners in the normal course of managing the dynamics around each individual Medicaid program we serve.
At the same time, we have been executing on important reprocurements and the early months of 2024 delivered notable data points. Most of the key RFP results are now public, positioning us well to generate continued Medicaid growth in a post-redeterminations world. Centene reprocured one of our largest contracts with the recent announcement of intended awards by the State of Florida. Although the protest period is ongoing, Centene is well-positioned based on Florida's determination that Sunshine Health is among those that will provide best value to the state. In Michigan, we were thrilled to be selected to continue serving the vast majority of our existing membership with some opportunity to grow, and we look forward to our continued collaboration with the state.
In Texas, our protest remains ongoing. We are honored to have served Texans for 25 years and intend to defend superior health stability to provide access to affordable and high-quality healthcare for our members in the Lone Star State. We are proud of the way our health plans and business development team have delivered so far during this critical cycle of reprocurements. The Centene value proposition remains a powerful one, built on more than four decades of experience serving Medicaid communities, an unwavering local approach and a commitment to innovation in the services and support we bring to our members. We are honored to provide access to care as well as community-based support to improve the lives of those we serve in 31 states across the country.
Moving to Medicare. The Medicare Advantage macro landscape remains challenging. Consistent with our prior view, we see final 2025 funding levels as insufficient with respect to general medical cost trend expectations. Drew will provide some early commentary around our strategy to navigate Medicare in 2025 as a result. Medicare Advantage Star Ratings remain the single most powerful lever to drive performance in this vital business and continue to represent a top priority across the organization. As we drive to our goal of 85% of members in 3.5 star contracts by October of 2025, we continue to see improved progress and stability in our performance and expect those to be reflected in our results come October. We are tracking year-over-year improvements in our core operations, as well as in the ways we support our members as they receive care.
And we are carrying forward this positive momentum into 2024 as our teams are clearly focused and aligned on quality. Longer-term, Medicare Advantage remains an important business for Centene. The strategic link between Medicare and Medicaid has only become more explicit since our last earnings call. Recent CMS rulemaking included final requirements to better coordinate Dual Special Needs Plans or D-SNP participation with important milestones beginning in 2027. By the end-of-the decade, a Medicaid footprint will be a prerequisite to D-SNP growth. Centene is perfectly positioned to gain positive momentum from this growing bond between Medicare and Medicaid. Finally, Marketplace. This business continues to represent a unique and powerful growth segment for Centene, and our teams are executing well against the opportunity.
With approximately 4.3 million Marketplace lives at the end of the first quarter, Centene's Marketplace membership has more than doubled in size compared to just two short years ago. This exceptional growth has been accompanied by consistent margin expansion as our deep product knowledge and staying power in the market enable us to forecast pre-tax margins well within our targeted range of 5% to 7.5% for 2024. We are pleased with the traction our Ambetter Health products are generating and see additional room to expand the reach of health insurance marketplace offerings overall. In 2024, the source of our membership growth is widely diversified. Based on a survey we conducted following open enrollment, nearly 40% of new members identify as previously uninsured.
Approximately 25% joined us from another marketplace carrier and approximately 10% chose Ambetter after losing access to an employer-sponsored plan. This is in addition to those members who selected Ambetter after losing Medicaid coverage. As we look to the future of Marketplace, we expect new member growth to be driven by an increasingly addressable and accessible uninsured population and the evolution occurring as employers consider alternative options for providing employer-sponsored insurance. Centene has been rapidly evolving as an organization over the last two years. We have been resolute in creating focus, trimming the organization down to the core strategic assets that give us the strongest platform for future growth. We are executing against our strategic plans, fortifying and modernizing our infrastructure and successfully delivering access to affordable, high-quality healthcare for millions of Americans.
Our strong first-quarter results demonstrate the power of our diversified earnings drivers as we deliver on our financial commitments, maintain our posture of disciplined capital deployment and continue to invest to support long-term growth. As always, we want to thank our nationwide workforce of nearly 60,000 for showing up every day committed to improving the lives of our members and transforming the health of the communities we serve. This [CEN] (ph) team is the engine that ultimately powers our results and amplifies our impact. With that, let's turn the call over to Drew for more details around our performance in the first quarter and our updated financial outlook for 2024. Drew?
Andrew Asher: Thank you, Sarah. Today, we reported first-quarter 2024 results, including $36.3 billion in premium and service revenue and adjusted diluted earnings per share of $2.26 in the quarter, 7% higher than Q1 of 2023. This result was better than our expectations and we are increasing full-year 2024 adjusted EPS guidance by $0.10 to greater than $6.80. This quarter is a good example of the benefit of a diversified business with multiple levers to drive results. Our Q1 consolidated HBR was 87.1%, which is right on track for our full-year guidance. Here's an example of the benefit of that diversification since we provide you with transparency into the line-of-business components. Medicaid at 90.9% was a little higher in the quarter than we expected as we continue to work through the appropriate matching of rates and acuity in the short term.
Redeterminations are certainly front and center in the acuity rate match process, but getting the right match for other circumstances, such as states changing pharmacy programs or behavioral health practices are also important initiatives in a handful of states. On the other hand, our commercial HBR at 73.3% was a little better than we had planned in the quarter, driven by the continued strength of our marketplace business and our Medicare segment at 90.8% was right on track in the quarter, all of this netting out to 87.1%, a good result. Going a little bit deeper into each of our business lines, Medicaid membership at 13.3 million members was slightly better than the 13.2 million members we forecasted as of Q1 -- for Q1 as of our Investor Day.
Drivers of membership for the remainder of the year include: one, new wins such as Oklahoma and Arizona LTSS; two, the return of slight growth in-markets once redeterminations are complete, plus the rejoiners dynamic, net of three, the substantial wind-down of redeterminations over the next three to four months. Upon re-forecasting the sloping of membership and revenue for 2024, including Q1 membership being a little bit higher than planned, we added $1 billion of Medicaid premium revenue to our 2024 guidance. The overall composite rate is running a little above the 2.5% we last referenced, and we have over 75% member-month rate visibility into the 2024 calendar year. Regardless of the temporary work to match rates and acuity, our long-term goal remains to return to the high 89s HBR as we look out over the 2025-2026 time frame.
All things considered, we are pretty pleased with the performance of our Medicaid business one year into a very complex redetermination process. And as Sarah covered, we cannot be more pleased with our performance in recent Florida and Michigan Medicaid RFPs. The Texas protest process still needs to play out. Our commercial business performed very well in the quarter in terms of both growth and HBR. Consistent with previous comments, we grew from 3.9 million marketplace members at year-end to 4.3 million at the end of Q1. For the past two years, we have consistently delivered a combination of growth coupled with improving margin. Our guidance assumes that we stay at 4.3 million marketplace members for the rest of 2024. If we can grow during the special enrollment period, which we've been able to do in the past two years, there would be upside to our premium and service revenue guidance.
So stay tuned. Our current 2024 guidance assumes about $16 billion of Medicare Advantage revenue, representing 12% of total premium and service revenue guidance and approximately $4 billion of PDP revenue. I previously mentioned at a conference that Medicare inpatient authorizations were higher-than-expected in January and February. March authorizations ended up being lower than February, though still elevated from Q4. And Medicare outpatient trend continues at the elevated level we first saw in Q2 of 2023, though reasonably steady. Nonetheless, the performance in the quarter for the Medicare segment was in line with our expectations and our full-year view has not changed. We had good performance with our new pharmacy cost structure and executed well on other operating levers.
As we look ahead, I feel like we are making 2025 decisions with our eyes wide open, in-patient and out-patient trends, complex pharmacy changes from the Inflation Reduction Act, an insufficient 2025 rate environment based upon the final rate notice and a risk model being phased-in beginning in 2024 that is punitive to partial and full duals. It also seems like many of our peers should have more religion in setting benefits at sustainable levels given these headwinds. I'll repeat what I said on the mic at a conference in March. To accomplish our strategic goals with our Medicare Advantage business, it doesn't matter if we ultimately level off at $14 billion, $15 billion or $16 billion of Medicare Advantage revenue. What is strategically important is the alignment with Medicaid and those complex populations we want to serve, especially given where the puck is heading with regulations pulling duals and Medicaid closer together.
We're still in the process of making 2025 county-by-county decisions and will finalize and submit Medicare bids in early June. So we'll provide you with more 2025 Medicare commentary on our Q2 call. We expect Medicare to be a good business for us in the long run and it's an important part of our overall portfolio. We need to deliver on STAR's improvements, clinical levers and SG&A actions over the next few years, and those efforts remain on track. Going to other P&L and balance sheet items. Our adjusted SG&A expense ratio was 8.7% in the first quarter consistent with our updated mix of business, including growth in Marketplace. Cash flow used in operations was $456 million for Q1, primarily driven by net earnings, more than offset by the timing of risk corridor payments, a delay in March's premium payment from one of our large state partners subsequently received in early April and slower receipt of pharmacy rebates as we transition to a new third-party PBM in January of 2024.
From January 1st through mid-April, we repurchased 3.4 million shares of our common stock for $251 million. Our share repurchase goal for 2024 is unchanged at $3 billion to $3.5 billion. Our debt-to-adjusted EBITDA was 2.9 times at quarter-end, consistent with year-end. And during Q1, we were pleased to maintain our S&P BBB minus rating under the updated S&P rating model. Our medical claims liability at quarter-end represented 53 days in claims payable, down one day from Q1 and Q4 of 2023. DCP was actually up due to change healthcare claims receipt delays, then backed down due to an acceleration of state-directed payments to providers and lower pharmacy invoices outstanding at quarter-end. You'll see in the reserve table that our 2024 Medicare Advantage PDR is up $50 million in the quarter.
This progression in the 2024 PDR was expected and planned for due to quarterly seasonality in Medicare Advantage. Though it's early in the year, we are comfortable adding 1 billion of premium and service revenue and $0.10 of adjusted EPS to our 2024 guidance. You'll also see some mechanical changes to total revenue driven by pass-through premium taxes and the GAAP effective tax rate due to the Circle divestiture. We also expect investment income to be a little bit above our previous forecast of $1.4 billion, while still providing for a few rate cuts in 2024. Q1 was a quarter of momentum. We put another quarter of redeterminations behind us. We reprocured one of our largest contracts and are well-positioned in Florida. We executed well in the marketplace annual enrollment period and put up a strong quarter of both growth and margin.
We delivered on the January 1st PBM conversion and our businesses and customers are benefiting from an improved cost structure. We continue to advance our multi-year operational improvements and Centene continues to attract talent. And all of this resulted in strong Q1 results and increased 2024 guidance. While there's plenty more to achieve, we are off to a good start in 2024. Thank you for your interest in Centene. Rocco, please open the line-up for questions.
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