Centene: Q1 2025 Centene Corp Earnings Call

In this article: Jennifer Gilligan; Senior Vice President, Investor Relations; Centene Corp Sarah London; Chief Executive Officer, Director; Centene Corp Andrew Asher; Chief Financial Officer, Executive Vice President; Centene Corp Josh Raskin; Analyst; Nephron Research LLC A.J. Rice; Analyst; UBS Securities LLC Justin Lake; Analyst; Wolfe Research, LLC Ann Hynes; Analyst; Mizuho Securities USA LLC Stephen Baxter; Analyst; Wells Fargo Securities, LLC Dave Windley; Analyst; Jefferies LLC Sarah James; Analyst; Cantor Fitzgerald & Co., Inc. Andrew Mok; Analyst; Barclays Capital Inc. Lance Wilkes; Analyst; Sanford C. Bernstein & Co., LLC John Stansel; Analyst; J.P. Morgan Securities LLC Joaquin Arriagada; Analyst; BofA Securities, Inc. George Hill; Analyst; Deutsche Bank AG Ryan Langston; Analyst; TD Securities (USA) LLC Michael Ha; Analyst; Robert W. Baird & Co. Incorporated Operator Good day, and welcome to the Centene Corporation first quarter 2025 conference call. (Operator Instructions). Please note today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Investor Relations. Please go ahead. Jennifer Gilligan Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first-quarter 2025 earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Any remarks that Centene may make about future expectations, plans, and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our first-quarter 2025 press release, Centene's most recent Form 10-K filed on February 18, 2025, and other public SEC filings, which are available on the company's website under the Investors section. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. While we also refer to certain non-GAAP measures, a reconciliation of these measures with the most directly comparable GAAP measures can be found in our first-quarter 2025 press release. With that, I would like to turn the call over to our CEO, Sarah London. Sarah? Sarah London Thanks, Jen, and thanks, everyone, for joining us as we review our first-quarter results and updated full year 2025 outlook. This morning, we reported first quarter adjusted diluted EPS of $2.90, consistent with the expectations we shared with investors last month. Our full year 2025 adjusted EPS expectations remain unchanged at greater than $7.25. We have increased clarity on the components of our $7.25 floor and have moved some of the underlying metrics as a result. Drew will cover these and other details of the quarter in a moment. Uncertainty and change are not new to Centene, and we are managing the business well while navigating a dynamic policy landscape. Relative to the active national dialogue around healthcare policy reform, we believe a few things are important to note. First, we do not see broad support for benefit cuts in Medicaid from either the White House or from Congress. In fact, over the last few months, we have witnessed an increase in bicameral Republican members objecting to major Medicaid reforms. While there is building momentum around work requirements within the expansion population and opportunities to drive better efficiency in the system for beneficiaries and the states, we believe that large-scale benefit cuts and significant policy changes will present challenges for the reconciliation process. Second, there is growing bipartisan recognition in Congress that the expiration of the enhanced premium tax credits must be addressed before they expire at the end of the year. Recent survey conducted by leading Republican pollsters found that 78% of swing voters support extending healthcare premium tax credits for working families. The criticality of these tax credits for Republican voters, small business owners, and our existing rural healthcare infrastructure as well as the potential of the even individual marketplace to serve as a platform for ICHRA growth has taken root for many Republican congressional leaders. Congress is scheduled to return from recess next week, and we expect activity focused on driving the contours of a reconciliation bill as the first order of business. Public and lawmakers are targeting Memorial Day for a reconciliation bill, but much will depend on the consensus building process. Beyond reconciliation, the next big order of business will be government funding due to expire at the end of Q3. We anticipate this could be another vehicle where healthcare issues are addressed. Amid this backdrop, we continue to execute on our strategic initiatives while advocating for sound healthcare policy. We have demonstrated the ability to be successful under multiple administrations and expect nothing less as we navigate the next four years. Turning to the core business. Medicaid took important steps forward in the quarter as we continue on our path of margin recovery, including better alignment of rates and member acuity in more geographies. As we noted back in February, approximately 40% of our Medicaid revenue received refreshed rates at the start of the quarter with an average increase of 4.5%. These rates contributed to underlying improvement in the performance of the book. However, the full impact of this improvement was masked in the quarter by a more active flu season than we anticipated. In Medicaid, flu, and ILI drove $130 million of incremental medical expense in the quarter beyond our initial expectations, largely offsetting the underlying MLR improvement we experienced. On the rate front, our discussions with state partners continue to be constructive and to benefit from increasingly complete data, demonstrating the acuity shift the industry has seen over the last year as a result of the tailing redetermination process. We continue to believe that Medicaid will ultimately return to pre-pandemic margin levels as we work through the coming rate cycles and engage with our members to deliver high-quality, low-cost outcomes. On the business development front, we delivered several key Medicaid contract wins since the start of the year, underscoring the strength and competitiveness of our unique service model. Centene was selected by the State of Illinois to continue providing Medicare and Medicaid services for duly eligible members through a fully integrated D-SNP. The D-SNP program will provide services and support statewide for members who qualify for both Medicare and Medicaid as well as duly eligible MLTSS members. The state of Nevada, our Silver Summit Health Plan has once again been selected by the Nevada Department of Health and Human Services to serve its Medicaid managed care program. For the first time, the program will include expansion of Medicaid managed care into rural and frontier service areas, allowing us to grow our footprint across the state. These wins are testimony to Centene's expertise in both high and low acuity populations, making us a partner of choice in states across the nation. Our Medicare segment performed in line with expectations during the quarter, as we advance our Medicare Advantage business on a path toward breakeven in 2027 and manage the evolution of Medicare Part D amidst significant program changes due to the Inflation Reduction Act. As you saw from this morning's press release, we have added $1 billion of annual revenue to our outlook for 2025 as Medicare Advantage membership is shaping up to be a little stronger than we previously anticipated. This better-than-expected membership is being driven by improved retention, and we are pleased to be able to attract and retain lives through our strengthening Medicare value proposition. As we plan for 2026, we were pleased to see the inclusion of more recent claims data in the final 2026 Medicare Advantage rate calculation, resulting in rates that better reflect the medical cost trend we've seen in MA over the last two years. There will still be gaps to close between rate and cost across certain geographies, but this step forward was important as we look to deliver valuable benefits to seniors and return our business to breakeven in 2027. In addition to rate, the critical levers we are pulling to drive to breakeven in Medicare Advantage are Stars results, value-based clinical initiatives and operational efficiency through SG&A reductions. On the Stars front, we continue to see momentum. And while a number of components remain outstanding, we are projecting underlying improvement across chapters. That said, we are conscious of the fact that cut points, or the relationship between absolute scores and corresponding star ratings have become more difficult due to recent methodology changes and variability in competitor performance. With that in mind, we took on the challenge to derisk our Stars outcomes for 2027 and to build a plan that supports our 2027 breakeven trajectory across the range of projected outcomes expected this October. Through the identification of cost-saving opportunities and operational levers, we have increased confidence in our ability to generate breakeven results in 2027 with our current Star ratings where 55% of members in 3.5-star plans, with improvements on those results giving us increased flexibility and potential upside in our breakeven path. As always, rates for 2027 will be an important input, and we will continue to advocate for program funding that supports the critical healt