Good day, and welcome to the Centene Corporation First Quarter 2021 Earnings Conference Call. [Operator Instructions] After today's presentation, there'll be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President of Finance and Investor Relations. Please go ahead, ma'am.

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first quarter 2021 earnings results conference call. Michael Neidorff, Chairman, President and Chief Executive Officer; and Jeff Schwaneke, 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 Centene's most recent Form 10-Q filed today, and the Form 10-K dated February 22, 2021, and other public SEC filings, including the risks and uncertainties described with respect to the potential impacts of COVID-19 on our business and results of operation. 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 2021 press release, which is available on the company's website under the Investors section. Additionally, please mark your calendars for our upcoming Investor Day to be held virtually on June 16, 2021. With that, I would like to turn the call over to our Chairman, President and CEO, Michael Neidorff. Michael?

Thank you, Jennifer. Good morning and thank you for joining Centene's first quarter earnings call. Today -- on the call today, I will review our first quarter performance, provide an update on our markets and products, and discuss how we are positioned to sustain our momentum in the ongoing pandemic environment. While we have made great progress in working our way out of the pandemic, nationally, as we have seen recently, it is not yet over. We are off to a strong start in 2021, with solid revenue and earnings growth. It was a good quarter. Our teams continue to execute well, generating revenue of $30 billion, an increase of 15% compared to the first quarter of 2020. Membership was $25.1 million at the quarter end. This represents an increase of $1.3 million compared to the year ago quarter. Adjusted diluted earnings per share of $1.63 compared to $0.86 in the prior year quarter, representing an increase of 90%. Overall, we are pleased with our first quarter performance and the trajectory of our business. And today, we are updating our full year guidance. This is primarily driven by several tailwinds. These include first, continued Medicaid membership growth, amid suspended eligibility redeterminations. Our current guidance anticipates the suspension continuing to at least August 1, based on the fact that is renewed 90 days at a time. Second, the marketplace special enrollment period, which I will discuss in more detail shortly. And third, the hold on the Medicare sequestration. Our results to date also reflect a decrease in normal utilization, offset by COVID-19 expenses and stake recoupment of premiums, which Jeff will provide additional detail on shortly. As we have done throughout pandemic, we continue to monitor the headwinds and tailwinds, we anticipate will impact our operating landscape for the remainder of…

Thank you, Michael, and good morning, everyone. This morning, we reported first quarter 2021 results and what was a good start to the year. First quarter revenues were $30 billion, an increase of 15% compared to the first quarter of 2020, and adjusted diluted earnings per share was $1.63, compared to $0.86 last year. As a result of the strong first quarter performance, we increased our full year 2021 adjusted EPS guidance by $0.05 per share to a range of $5.05 to $5.35. I will provide further comments related to our updated financial guidance shortly. First, let me provide additional details for the first quarter. Total revenues grew by $4 billion over the first quarter of 2020 due to a full quarter of contribution from WellCare and the ongoing suspension of Medicaid Eligibility Redeterminations, partially offset by an overall decrease in marketplace membership, state rate and risk-sharing actions and the repeal of the health insurer fee in 2021. Our marketplace membership decline in the quarter was less significant than previously expected as a result of membership gains achieved during the special enrollment period. Total membership increased to 25.1 million in the quarter, up 5% compared to a year ago. Since the pandemic began in March of 2020, we have added a total of two million Medicaid members. Our HBR was 86.8% in the first quarter, compared to 88% in the first quarter of 2020. The HBR benefited from lower overall medical utilization trends due to COVID pandemic and lower costs associated with the flu. This was partially offset by COVID-related costs, state risk-sharing mechanisms and higher COVID and traditional utilization in the marketplace business. Our adjusted selling, general and administrative expense ratio was 8.1% in the first quarter this year compared to 8.6% last year and 9.7% in the fourth…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Josh Raskin with Nephron Research. Please go ahead.

Thanks. Good morning.

Good morning.

I think I'm still trying to -- good morning, Michael. I'm still trying to process an Investor Day on a Wednesday, not a Friday. So I'm a little off. My real question is Medicare revenues 41% in the quarter. I know some of that was anniversarying of WellCare. But MA lives were up 19% sequentially. It sounds like the outlook for the year closer to 20%. So that's up from previous expectations. So can you break out how much of that revenue growth was organic in the quarter? Maybe a sense of what revenues will do this year? And where are you seeing that success in terms of geographies and products from competitors or fee-for-service?

Yes, I'll start off. We -- I think the growth is very balanced across our various markets. There's no one market contributing. We've been expanding into new markets very successfully. And as we have -- as we said, when we went into the WellCare deal, we felt that they had some competencies in this area that we could build on. We also have a national presence as a total Centene Corporation. And so we've just been building out it organically basically. It is -- there's some -- obviously, you take some from competition and just -- some of it is just from the fee-for-service. But it's very balanced across all the potential elements we grow. There's no one contributing more than another.

And just as a follow-up, I know the stars has been a big focus, and you guys are looking for improvement. Should we think about 2022 is an improvement here and not necessarily looking for another 20% growth here? But just in terms of positioning and margin, et cetera, do you feel like sort of better results, better competitive positioning going forward as well?

Yes. I think -- well, first of all, I'm going put a number on the growth until June. But I like significant growth. I think people know it. So we -- we'll be working against that. Relative to the stars, we were within a few basis points last year, being at 4 stars and we have very aggressive programs. And as you know, it takes time to achieve that. They look -- it's a one or two-year look back. So on the stars front, we can -- we believe, we'll continue to make progress on it. And we tell the Medicare people, it's not just 4 Stars, but 4.5 and beyond. So we're reaching for the stars, so to speak. And so, it's very balanced in that way, Josh.

Perfect. Thanks.

And our next question today comes from Kevin Fischbeck with Bank of America. Please go ahead.

Great. Thanks. Just wanted to see how to think about the guidance and how much we should be thinking about as being a good base. First, we're thinking about future growth. It sounds like most of the revenue guide is one-time in nature. Is that fair? I guess, you're waiting for the Oklahoma contract, but most of the other things, whether it's sequestration or redeterminations or maybe even a special enrollment period, might be things that we wouldn't necessarily flow through to the future year. And I guess, similar type question, but on MLR. It sounds like some of the MLR guidance is on items that are happening this year, but maybe you wouldn't expect to be in the baseline for next year, just how do we think about those two dynamics?

Yes. And Kevin, I'll start. I -- we'll give you more guidance in June at our Investor Day, which is our practice, particularly on the top line. These are unusual years. We think that the redetermination will continue throughout the balance of the year, but we'll report a quarter -- 90 days at a time, as the federal government does it. And that's in the interest of being reasonably conservative. So we're being cautious there. Marketplace, where we've demonstrated this past quarter, with the growth that we've had, that we are the leader in the field and are in a very strong position to continue that growth. And we're going to continue it through the balance of this year, as we see it. And we see some upside there. I think what's also important, as it relates to the redetermination. If they do drop off the redetermination, people who maybe lose Medicaid coverage could pick up the marketplace, because once again the cost structure is such with the tax allowances that they can do that without any cause. And so, I think, we're going to see -- I'm now hearing a bird somewhere in the background. I'm hearing.

Yes.

So, I think, we will see growth continue. But as we said, governmental policies do have something to play, and it is a fluid situation, and we work very well both sides, as we've talked about in the past. We're working with them now in various policies and approaches. And as that unfolds, I think, between now and June, I hope to have more insight than we do as to what it will mean for the balance of this year and going into 2022. The essence is positive.

Maybe just a quick follow-up there. You mentioned that some rate corridor may expire. When would you get visibility on that?

Pardon me. Just in terms of -- the states have just been not talking about adding to them what we have talked about -- the attitude is things seem to be stabilizing. And so I'm trying to give you a sense of where we are today and what we're seeing. And I'm not saying, which specific ones because it's who we are. We only had one adjustment this past quarter, which is a very positive sign. So once again, I'm trying to give you just some insight as we see it together.

All right, great. Thanks.

And our next question today comes from Justin Lake with Wolfe Research. Please go ahead.

Thanks. Good morning.

Good morning.

A couple of questions on the quarter. First, the PYD looked pretty strong relative to last year, I was wondering if you could parse out the impact that had on the quarter? And then you talked about the -- a little bit higher cost on the marketplace business. Any more color there you can give us in terms of what you're seeing there, any geographies? And then where margins end up for this year given that cost pressure? Thanks.

Jeff, do you want to take those?

Yes, sure, Justin. As we look at development, we obviously track this from quarter-to-quarter. We're looking for consistency, in our view it's very consistent with what we've seen in the past. Now you have to, obviously, account for the acquisition of WellCare, but roughly around that 1% range of prior year medical cost. So I would say nothing unusual on the development front from our perspective, which is, I think we've had a consistent practice over a long number of years. On the marketplace business, on the cost side, what we did see was just a little bit higher inpatient authorizations on COVID, specifically in January. And then a little higher non-inpatient, really just compared to our expectations. So it doesn't really change the margin profile for the year. I would just say a tad higher than versus what we had modeled in Q1.

That could have a positive impact on this adjustment for us.

That's right. The other thing we're tracking is the acuity of our membership. So -- and obviously, the SEP members as well. So that's all going to factor into the risk adjustment calculation. And that's relative to your competition, and the data on that doesn't come out until really the end of Q2, so more to come on that.

Great. Thanks for the color.

And our next question today comes from A.J. Rice at Credit Suisse. Please go ahead.

Thanks. Hi, everybody. I was interested in Michael's comments about the marketplace or the public exchanges and the narrow network competition. I think when you guys -- obviously, you've been a big leader there. The last few years, one of the secret sauces that we had was to approach it with a more limited network approach relative to some of the guys that came out as a traditional commercial product. Now it sounds like maybe some other competitors are leapfrogging and doing even more in that area. I'm wondering if you think about the membership and what's happening with the membership, I know it's a membership that's prone to switch, but it's not driven by premiums because there's a lot of subsidies. Is it mainly networks that are driving people to pick and choose on the exchanges in your view at this point? Are there other things that are factors in driving how people choose and the strategy involved to...?

I think what's important is, we did see some significant pricing in the end of last year that cost us the membership. As we said, and that's because they had an now network, and we're able to do that. We opted not to join that race to the bottom and keep -- maintain our broader networks. But I'm going to ask Brent to oversee this business to pick it up. Brent?

During the Special Enrollment Period, what we are seeing is really a focus on strong provider network, so not narrow networks. We're also seeing a commitment to customer service from enrollees. We're hearing this everywhere. That at the end of the day, people that left us in 2020, today in 2021, what they're finding is true commitment to a strong provider network and really focus on the customer. And that's really fueling our growth. When you have a supportive administration, you have a Special Enrollment Period that's now going for 180 days. You have the enhanced tax credits being implied on April 1. And really, at the same time, we really have a commitment to a strong distribution strategy. This is leading to our growth.

Okay. All right, thanks. Maybe just, Jeff, the 90-day PH, Public Health Emergency, if that were to get extended to year-end, what would that mean for you guys?

I'll give you a little flavor on the membership. I think we expect our membership to peak roughly 2.2 members -- 2.2 million members since the pandemic began roughly in July. And if it got extended, we think that go up to 2.4 million [ph]; so we'd top out at 2.4 million [ph] before the end of the year.

Okay. All right, thanks a lot.

What that really means is, we recouped what we -- we have recouped to date plus from what we lost in the last quarter of last year, and we see it continuing to grow significantly. Yes.

Thanks.

And our next question today comes from Matt Borsch with BMO Capital Markets. Please go ahead.

Yes. Hi, good morning.

Yes. Hi, good morning.

Maybe I could ask you to talk about the -- what you're seeing in terms of your profitability in Medicare Advantage? I'm asking the question just in the context of the impressive growth that you've shown there, but wondering if some of that has come at the expense of margin, and maybe that was planned.

Well, we have not gotten specific by product line. I want to assure you, Matt, that everything we do, it will be driven by profit and with a view to expanding margins. And I think we have a clear-cut approach to it.

Okay.

Yes. Matt, this is Jeff. A couple of things. Obviously, as Michael mentioned, it's a unique year. Well, we had the Medicare fee schedule cut. So that's not helping. And then obviously, we have a lot of room for margin expansion in the future years based on stars performance. So, I think as you look at this year in isolation, I would say, margin expansion opportunities going forward, primarily from eliminating the cut and then obviously, performing better on stars, which is one of the important tasks that we're focused on.

If I could ask a different question on the Medicaid redeterminations. If we get into that, whether it's later this year or at the beginning of 2022, has your thinking in terms of the impact changed at all versus maybe what we had discussed. I'm thinking back in the December Investor Day?

Well, I think -- sort of, I think it's important to say, we're going to have a better view of that come the June Investor Day. I mean, that's typically what we talk about it. I did comment, though, that our position in the marketplace, that if there is redetermination, if people lose Medicaid coverage, we believe that we will be in a position to where they will flip into our marketplace because it's the same network and things of that nature, that would be a good incentive and their costs are subsidized. So I think that it's a matter of where that membership goes.

Got it, thank you.

And our next question today comes from Scott Fidel with Stephens. Please go ahead.

Hi, thanks. Good morning.

Good morning.

First question, just would be interested if you have any clarity for us on what you're learning just about the New York rates being updated, if at all, just obviously, a lot of developments there in the New York budget more broadly after the art [ph] bill was passed, so interested if -- I know you guys called out the risk corridor, the retroactive one that was put in place, but any updates to like -- because I know there had been a 3% assumed caught previously in the budget, if you got an update on that? And then also just on the quality payments in New York as well, which I know has been a dynamic for you guys, just where things are trending there as well?

Yes, Scott. This is Jeff. I mean I think it's just too early to tell. We don't necessarily -- when these things aren't finalized, they have a tendency to move late in the game, as we've seen in the past. And so I guess from my perspective, I would say it's just too early to tell where it's going to land. But we're comfortable, obviously, with what we have in the numbers for this year.

Okay. And then, just a follow-up question. I saw that you guys have your updated view in the revenue guidance on the start date of the carve-out of the Medical PBM contract. I know the state had announced that they were going to be conducting a review just around the Magellan acquisition and looking at some things. Just interested at this point, has that review concluded and you've now gotten visibility from the state, or is that still ongoing? And if there has been any feedback so far on any changes that the state would be requiring as part of the Magellan acquisition? Thanks.

Sarah, do you want to make a comment on that? You worked hard.

Yes, happy to. Magellan is working very closely with DHCS and California Department leadership on a conflict avoidance plan that is still in process, but progressing well. We don't yet have clarity from the department on when the program would be kicked off, but we're hoping to have a sense within the next month or so of the resolution of that conflict as planned [ph].

Okay. So that stated, do you have in the updated revenue guidance that's just that sort of an estimate at this point. Okay, thanks.

And our next question today comes from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Yes, hi, good morning. A question on the utilization and the acuity level. So Michael, you said that you are tracking acuity closely. What are you seeing to date in terms of the calculation that's coming back, what's the acuity levels on the core ex-COVID? And then, when we think about you're saying utilization is below baseline, I assume that relates to core utilization as well, but maybe you can give us a little bit more color on how it's trending per market? And do you think because you're now seeing sort of the mix towards more of an MA population that's impacting sort of utilization trends you're seeing versus Medicaid in the market?

I think Jeff just comment that in the marketplace we saw some incremental increase in utilization when that's offset some in Medicaid. Jeff, why don't you tell the numbers?

Yes, on the utilization front, a lot packed into that question, so I'm not sure I heard the final piece of that, but we really haven't seen a change in the acuity outside of our expectations. Specifically, just take the Marketplace business, we knew our acuity was going to change based on the open enrollment, and that's why we commented that we think our risk adjustment payable will go down substantially this year. So far, I would say we haven't seen any acuity change in our base membership other than what we've expected. So that I hope that answers part of your question. And if it doesn't, what was the second part?

Yes. So to your point, no change in acuity versus your expectation. So to add in that, what is embedded into guidance by year-end, are you assuming unchanged acuity or higher acuity? And then the second part of the question was under-utilization, you said no change, I'm trying to understand how did look for the Medicare population versus Medicaid?

Yes, two things. What I would say is, we know the acuity of the members we have, right. And we have projected that in our guidance, and if you go to our prepared remarks, what we've said is we expect utilization to stay below the historical baseline for the first half trending towards normal by the end of the year. So I hope that helps. And yes, there is a difference in behavior between, I would say, Medicaid marketplace and Medicare, the demographics of those members are extremely different from an age perspective. So there are different utilization patterns. But we obviously incorporate that into our guidance.

Next question today comes from Lance Wilkes with Bernstein. Please go ahead.

Yes, good morning. Could you talk a little bit about your long-term strategic growth outlook at this point? And in particular, I was interested in how do you look at your major priorities beyond Medicaid and marketplace and how much of the growth longer term do you think you're going to come from those areas like Medicare, Health Care Enterprise, or value based care? Thanks.

I appreciate the question. I think we will get into more detail on 2022 growth, give you some sense of where it's coming from in June, which is our practice. We still see ourselves very much as a growth company. We see balanced growth and plus all the product lines, we demonstrated growth in Medicare. We've talked about that being a growth engine for us. We think marketplace will continue to be a growth engine, as well as Medicaid. We have a government in place now that believes that people should be insured. And so, we will work. Now, if we come up with the numbers for you that are reasonable, we will give you in June. But we see us growing across all our products and growing responsibly with expanding margins and containing costs and improving quality. So it's a balance that we're trying to strike and we have a couple of new products that we're working on, that I'm not going to talk about for confidentiality reasons.

And just to clarify on the healthcare enterprise and some of the things with value-based care delivery that maybe you're doing in Florida or places like that, how material are they to growth prospects over the next one, two, three years?

Well, I think it's going to see that those things put in place for long-term growth, and now we have some technology you're going to hear about at the June Investor Day that will drive growth and will drive demand for our products because of what it can do for the quality and as systems utilizing talk about the provider and recipients to light.

Got it. And just to be clear, to put the technology, are those mainly drivers of the managed care business or do you think those are standalone enablement business, like kind of in line with Magellan supporting other health plans?

No, I think what this is with the systems it's going to drive improvement in quality and reduce costs. So you have higher performance, quality standpoint, improved quality, but it's going to significantly reduce our costs.

And our next question today comes from Robert Jones of Goldman Sachs. Please go ahead.

Great, thanks for the questions. Actually just wanted to go back to A.J's question about the competitive landscape, Michael, in the marketplace. You've mentioned a few times, obviously, end of last year that you saw some more competitive pricing behaviors from some of the players there. I was wondering if maybe during the special enrollment period, you've seen any of those competitors change behavior or continue with a more aggressive pricing strategy? And I think, within that, just curious how widespread has this been, is it really kind of contained to a state or two, or are you seeing it more broadly?

So I think we will focus on ourselves and how we do things. As we said at the time, we're not going to join that race to the bottom, and we know that's not something we're going to do and it couldn't be sustained in my opinion. So what we've done is we maintain our network. We have the subsidies that are necessary. They have really taken price off the table in my opinion, where people will look at the quality of the service that Brent talked about, and that's what we're seeing the growth in return of membership to us, as well as the incremental new membership. And so, I think what we really focus on is how to continue to grow it, and I know your long time as online in consumer packaged goods. When you trying to go in against some ways, that's a clear leader in the marketplace, which we were earlier in a category, the only way you can hope to try and come in is on price. And so, I think we had a strategic positioning that the people everything membership land price in a COVID environment as we come out of it. As I think we've demonstrated in the first quarter of this year, we've recouped all we lost and then some, and we'll be giving you guidance in June, and it shows continued growth.

Got it. That's helpful. And maybe just one quick follow-up, Jeff, I know at the Analyst Day, you talked about the cadence of earnings maybe being a little bit more front-half weighted, like 65%. Any updated thoughts, as you got one quarter under the belt now, as far as how you're seeing earnings play out for the year?

Yes, yes, I think in a 60% percent front half would be where I would direct you to, and again, if you just think about the utilization kind of assumptions that we have, that gives you the reason why there is more earnings in the front half of the year.

And our next question today comes from George Hill with Deutsche Bank. Please go ahead.

Yes, good morning, and thanks for taking the questions. Jeff, just kind of a simple one, can you talk about the vaccine initiatives and the uptake that you're seeing in the managed Medicaid population? And then, my quick follow up would be, as I know that we've seen a continued suspension of the redeterminations, but we continue to see smatterings of press releases, as it relates to raising barriers to access like increased use of prior off and step that it's coming out of various states. I'm wondering if you're seeing this and is it having impact on utilization or might be too early to tell?

So your first one was on the vaccine take-up rate, obviously part of what some of the initiatives that Michael had mentioned where we're trying to stratify our membership population for those that are most at risk, and trying to get the vaccination to them. I think some of the challenges we've had on the data side is that potential members could get vaccinations from alternative sites. So that's not within our ecosystem. But we are tracking that data as best we can, and trying to obviously get our high-risk members to get vaccinated. And the second question again, I didn't catch that last part?

Yes, just re-subscribe grew like all the state Medicaid agency press release distribution lists, and we're starting to see a smattering of data flow around state agencies wanting to raise barriers to access, so reinstituting prior authorizations with care delivery reinstituting step edits, I'm just wondering if you're seeing any of this, if you expect it to impact utilization, will it be meaningful not seeing it? Any commentary on that.

I'd say it's early, we haven't seen -- I'm not aware if we've seen anything at this point in time, and that's something that we'll obviously be continuing to watch.

I want to add one thing about the vaccine. Well, our focus has really been with the goal jackets from the Hall of Fame and others is to help people that in our population that may be hesitant, for various historic reasons, to not take the vaccine, to say it's okay and having people that are well-respected in sports and other areas. We had Bob Costas way back doing a Public Service announcer wearing a mask. So it's a matter of getting people that are respected, encouraging, and providing an incentive. And what we're trying to really focus on is they're not doing this for themselves, but they're doing it for their loved ones. They're doing it for their parents, children, spouses, other members of the family. And what's really important is just encouraging. So that's why we spent a lot of time, energy and work with government officials to try and demonstrate that we're being responsible in that area.

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 final remarks.

We thank you and we look forward to Investor Day in the second quarter as I said earlier. I believe we have the momentum to continue the positive impact we'll have in the marketplace. So stay safe everybody. Thank you.

Thank you Sir, 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.