Good day and welcome to the Centene Corporation Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Michael Neidorff, Chairman, CEO and President. Please go ahead, sir.

This is Jen. Thank you, Rocco and good morning everyone. Thank you for joining us on our second quarter 2021 earnings results conference call. Michael Neidorff, Chairman, President and 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 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 operations. 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 second quarter 2021 press release, which is available on the company’s website under the Investors section. Additionally, please mark your calendars for our third quarter earnings conference call to be held on Tuesday, October 26. With that, I would like to turn the call over to our Chairman, President and CEO, Michael Neidorff.

Thank you, Jennifer. Good morning and thank you for joining Centene’s second quarter earnings call. You have heard me say, we make decisions based on the facts as they are today. And today, with the continued rise in the highly virulent Delta strain of COVID-19, I must open our call with similar comments to those made this time last year. The environment has changed again in just the last week or so and the Delta variant is causing a new wave of pandemic. It’s a pandemic of the unvaccinated. According to a leading epidemiologist, our team has been working with for the past 18 plus months, the Delta variant has 1,260 times greater concentration in respiratory material than the original variant. An individual infected with the Delta strain can spread the virus to an average of 5 to 8 individuals, up from an average of 2.4 individuals from the original strain. 83% of the COVID cases today in the U.S. are Delta, up from 10% just a month ago. Hospitalizations are up 57% in the last month. The deaths have increased by 19% in the last week alone. And importantly, 97% of people currently hospitalized for COVID-19 are unvaccinated and 99.5% of the COVID-related deaths are among the unvaccinated. Our additional concern because of the high concentration in respiratory droplets, this variance seems to be transmissible or transmissible among children and is more dangerous than the original virus. It is clear that one of the issues we must address is vaccine hesitancy to stop the transmission of this virus and to protect those who cannot safely receive the inoculation, including young children. The variant is real and we are taking it very seriously. You have seen us execute strongly throughout the pandemic and that will not change, especially as it…

Thank you, Michael. This morning, we reported second quarter 2021 results of $31 billion in revenue an increase of 12% compared to the second quarter of 2020 and adjusted diluted earnings per share of $1.25. Before I get into the Q2 earnings drivers and insights, let’s start with revenue. Total revenue grew by $3.3 billion compared to the second quarter of 2020 due to Medicaid membership growth resulting from the ongoing suspension of eligibility re-determinations, strong membership growth in the Medicare business, and our late 2020 acquisition of PANTHER. Total membership increased to 25.4 million, up 3% compared to a year ago. While I will touch on all of our major business lines, the primary topic to cover for the quarter and the full year outlook is the Marketplace business. Recall, we gave an update at our June Investor Day regarding a few of the negative drivers in April and May for this line of business. Our Q2 consolidated HBR was 88.3%, which was higher than our expectation driven by the Marketplace business. Let me provide an update on the three Marketplace pressure points we covered at Investor Day. Number one, as a reminder, we incurred a $175 million or $0.22 headwind compared to our prior expectations in the second quarter related to the 2020 risk adjustment year. For the 2021 risk adjustment year, we received Wakely data in June and it was largely consistent with our expectations of shifting from being in a large payable position for 2020 to a slight receivable position for 2021. Number two, COVID costs. We previously provided insight that while COVID costs were falling from Q1, they were still higher on an absolute basis from what we had forecasted in April and May. We saw the COVID costs continue to decline in June, consistent…

Thank you. [Operator Instructions] Today’s first question comes from Justin Lake of Wolfe Research. Please go ahead.

Thanks. Good morning. Appreciate all the detail. Wanted to touch on two questions, one, Drew, at the Investor Day, you talked about EPS probably seemed to indicate you expected EPS to be closer to the low end of the range. Can you – of the – from a – from the $5.05 to $5.35. Can you reconfirm whether that’s kind of the expectation for the second quarter? And then can you talk to where the exchange margin profitability? I remember you’ve taken down the targets there. But where is the profitability coming out this year and do you expect to get back to normalized exchange profitability next year? Thanks.

Yes. Thanks, Justin. So at Investor Day, you’re right, we revised the long-term pretax margin to 5% to 7.5% for the Marketplace business. And that is unchanged even with a little bit of choppiness in the near-term. I can’t give you an exact date when we’re going to get there and stay there. But we’re below that now, obviously, with the pressure that we outlined in Q2 and some of the pent-up demand. And then with respect to the guidance range, I’d say my comments are the same from Investor Day. We kept the range wide for a reason. And there is clearly paths to get into that guidance range. So we maintain that despite some of the pressure that we outlined for Q2.

And I might just add that – My focus upfront is we’re going through what could be another real surge in pandemic. And so to try and call it, recognizing that which way it could go will have an impact, and we will see how it plays out. But it’s something we have to be very cognizant of.

Understood. Thanks.

And our next question today comes from Josh Raskin of Nephron Research. Please go ahead.

Thanks. Good morning. So I know we spoke a little bit about this at the Investor Day, but what gives you the confidence that these HICS costs are just pent-up demand issues, right and not new members coming through the SCP or even old members that are using higher levels of services now that they understand the benefits? And maybe you could help us what types of services we’re running above expectations, types of procedures, etcetera. And then lastly, I think last quarter, you talked – I think it was at the Investor Day, you talked about this could potentially positively impact the risk adjustment. So I wonder if there is any offset there.

I’ll ask Drew to start, and then Brad, you might add to it?

Okay. Let’s start with risk adjustment. Like I said in the prepared remarks, the Wakely data, that’s a third-party actuarial firm that aggregates for most carriers data came in. That’s date of service through April. That was consistent with our expectations, and that largely represents, Josh, the members that rolled into this year and incurred claims during the first 4 months. So that’s consistent with our expectations. On the pent-up demand, certainly, it’s the nature of the services, the outpatient nature. We’ve seen orthopedics, joint degeneration, unfortunately, some psychiatry and chemical dependency drivers in marketplace. And really, the outpatient pressure coming into a little bit in March and then April and May, and then it popped in June. The SCP members, I think I mentioned this in my script as well, we’re seeing them access inpatient services and then quickly – while it’s early, quickly returning to a more normalized utilization. It’s early, so we’re tracking that, and we’re sort of managing this in those four cohorts.

Got it. Do you know, Drew, if these members came from other plans or if these were coming from different segments, Medicaid or uninsured, etcetera and I’m just curious if those previously insured versus previously uninsured are acting differently?

Josh, this is Brent Layton. In the new members that we’re seeing, the vast majority have been uninsured. There is been very few called switchers. So this has been uninsured. And I’ll echo what Drew said because that is what we’re seeing in the separation and really of the utilization that he talked about.

Okay, thanks.

Thank you. Our next question today comes from Kevin Fischbeck of Bank of America. Please go ahead.

Great, thanks. Maybe just to follow-up on this concept of pent-up demand, I mean it’s interesting because in general, it seems like the commercial utilization was less impacted during COVID than the other cohorts. Are you at all worried that it will be a similar potentially delayed type of pent-up demand in Medicaid and Medicare over the next 12 to 18 months? And if so, I guess, how are you treating that from a pricing perspective?

I think Drew referred to before, where possible, we build it into pricing. But particularly in Medicaid, we have a younger population, and it’s mostly children. And to-date, they were not as affected, but the way to see with this new COVID as the Delta, but they have not been affected, so we don’t see a lot of pent-up demand there. Medicare, once again, they have been a little more sensitive to getting to their position because of age and other health factors. So we don’t see as much pent-up demand there as we have in the Marketplace, which had new members in it.

Okay. And I guess as far as the Medicare days, you mentioned that the 6 75 of rate cuts, is that something that’s temporary? Does that reverse next year? Or should we be thinking this as you can get to normalized margins even with this new lower rate outlook?

Well, I think as Drew said, we anticipate returning to a normalized rate structure. I just want to add, all this has an overlay of what happens with this new Delta, which is so much more contagious than with the unvaccinated population, particularly. So I mean that’s why we put the emphasis upfront. This could change how the whole dynamics of it, as we saw a year ago. So we’re going to continue to watch and monitor and manage through it as we have historically.

Thanks.

Thank you.

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

Thanks. Hi everybody. I guess two things. One, I think in the prepared remarks, you mentioned that there is a possibility that redeterminations, holiday get extended into 2022. I know at the Investor Day, you gave a guidance range for – on revenues for 2022, your current expectations. Would the delay in redeterminations materially impact that revenue outlook if indeed that happened? And then the other thing I was going to just ask about is, as you’re talking about this variation, and because of the Delta variant, on your risk corridors on the Medicaid side, are you well into those now so that if there is a little variation in utilization, it’s not going to really matter because you’re sort of already at a point where you’ve given back to the state or those risk corridors not really lengthy to provide much protection in the back half of the year?

I think there is – first, let me do with the redetermination. We just gave you some insight as to what some discussions are taking place. And I think the time to talk about the revenue and how it may or may not be impacted will be at the end of the year when we see where they are. And I’m just trying to give people an insight that these are things that it could be a tailwind, but we have to wait and see. On the risk adjusted, some of them are starting to drop off, and Drew can probably give you more detail on that.

Sure, A.J. Yes, you’re right. In some states, we are into the risk corridors, even the standard ones or the minimum MBR depending on state-by-state, which you’re right, that would give us a cover for increased costs, but not everywhere. It’s sort of a mixed bag across our portfolio.

Okay, thanks.

Thank you. Our next question today comes from Matt Borsch with BMO Capital Markets. Please go ahead.

Yes. Thank you. If I could just ask a question on the Marketplace dynamics, so if you look at the medical costs, and forgive me if you mentioned this, but can you give us a pickup of how much is COVID, direct COVID care and how much is everything else? And maybe how that compares this quarter to what you saw previously?

I’ll take that one, Michael.

Go ahead.

So COVID, the COVID costs going back to April and May, we had budgeted or we had forecast some, but it was on an absolute basis higher. And then with our revised view coming out of Investor Day, the June number continued to fall on an absolute basis, and it was sort of right on our forecast. So COVID really wasn’t – while that pushed us based on our Investor Day discussion, there is really no major change in our view on that. Obviously, the elephant in the room is what happens going forward with the Delta strain, as Michael covered. That’s a much smaller component relative to sort of non-COVID utilization, whether it’s the outpatient utilization on the majority of our block or the inpatient utilization on sort of the 20% SCP membership.

So for now, this is all that pent-up demand really? I mean it could be about COVID if – depending on how things develop. But for now, it’s not a pent-up demand?

Correct.

And I think I want to add one thing. I think you heard Drew talk about the cost for claim. Some of that pent-up demand is where individuals delayed services. And we see that in cancer treatments and diagnosis. So, there is a little higher acuity. But once again, these are transitory things and not something that we see as fundamental and something will continue. And that’s the COVID really spikes again and people end up not going to hospital and doctors as we historically saw. So, there are unknowns out there. Hence, some of the caution or more cautious approach we are taking until it becomes clearer.

Great. Thank you.

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

Yes. Hi, good morning. So, with Delta impacting the non-vaccinated population, do you have a sense of what percent of your membership are vaccinated?

Boy, it’s – I want to say the last I saw was somewhere around 50%.

Okay. So, when we should think about kind of the risk there, we should think 50% of the membership and then as we think about…

Now remember, let me back up, a lot of them are children who are not eligibly vaccinated. So, I mean the Medicaid is women and children. And so I need to clarify that.

So should we think about the 50% as 50% of eligible population and then you have the children?

No, that’s total, including the children.

Okay, great. And then just when we think about sort of the Delta variant, from what you have experienced to-date and you are seeing, any sense of how to compare the hospitalization rates versus what we have seen earlier in COVID? And really, as we think about kind of like your HBR assumption, are you assuming that members might refrain from going back to core utilization because of that Delta risk, but then the expenses that are related to COVID are lower than what we have seen at the beginning of this year or end of 2020, just trying to understand the dynamic?

I think – I know I think the answer is it’s not clear, and that’s what we are trying to say. That’s – those are things we are going to continue to monitor. We can assure we can manage through COVID-type issues. And so we have that positive feeling of in terms of our ability to deal with it, but we wanted investors to understand that it is out there. It’s not business as usual as everybody had hoped. We wish everybody was vaccinated. And we now see that even those who were not as forceful and encouraging are now moving to it. And so I think what – always we want people to understand is COVID is not over. And I think for us, I think it’s just business as usual. I think that will be a mistake. Now, I am not saying it’s going to necessarily impacted the point that our guidance changes, but we just maintained it, as I said in my prepared remarks, while we monitor it, keep you informed, how it unfolds and the impact it has on not just us, but everybody. I mean, it’s just how we return to work. We see them reinstating masks things of that nature. So, it’s a variable.

Thank you.

Thank you.

And our next question today comes from Stephen Baxter of Wells Fargo. Please go ahead.

Hey, good morning. Thanks for the question. Just wanted to ask another one in exchanges, just hoping you can help a little bit with quantification as we can kind of think about what that means for your pricing next year. I guess how much higher was core medical costs relative to baseline in Q2? Like how does that compare for the special enrollment population? And I guess then what does that mean for the non-SCP membership? Thanks.

Drew?

Sure. As I said at Investor Day, you might recall that with what we saw through April and May, we were able to reflect that in pricing. So literally, during those months, came in, made some adjustments to pricing, meaning pushed pricing to reflect what we thought would continue into 2022. Recall, we expect a lot of this to sort of settle out during 2021. It’s just during which month in 2021 is the question. With what we saw in June, we did have about half of our marketplace bids and pricing open for various reasons, and we could make judgments on what we wanted to change, if anything, and the other half, though are sort of submitted and baked.

Anything that you can add on just sort of on a relative basis, like what Q2 was versus what you might have priced for, is it 1% higher, is it 3% higher, anything like that?

Yes. I mean, given the competitive nature of the marketplace and the fact that none of that’s public, I think we will keep our pricing decisions close to the best.

Got it. Okay. Thanks.

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

Yes. Just two more Delta variant sort of questions, first one is on redetermination suspension. And just kind of if you can give some color into the mechanisms that could cause delay or push out that at a State or Federal level? And then the second was just any further color on July utilization in outpatient and invasion. If you are seeing anything that’s reflective of people slowing down use as a result of mask mandates or Delta?

Yes. I want to be careful now when we are talking about July, it’s still early. And while we have good data in that, we don’t get ahead of ourselves on that one. But as it relates to the Delta and your concern there, it’s real, but we don’t know to what extent people are going to use the – their good senses and do what they can to protect against it. And so we have to kind of – that’s why we are calling it out to say it’s a variable, and it’s a less predictable variable, particularly when you look at the intensity of it, and it’s so much stronger than the original. And the bad part is that we are trying to tell everybody who listen that if we don’t deal with this effectively and get vaccinated and the things that prevent it, the next one is even worse, our epidemiologists were telling us. So, this is something that continues to progress. And it’s not just the Centene population. It’s everyone in total. So, that’s why we are calling it out. We want to keep it in front of people, so that everybody is aware that we are dealing with it. We are doing the PSAs. We are doing everything we can to get people vaccinated, we – the phone calls, the robo calls and everything else. So, it’s not where you stand, but where you are moving in and we are working hard to be preemptive in it.

Redeterminations, is that just an extension of public health emergency that would be…

Yes. I am sorry. I was trying to – yes, you are right. That’s where we determine where we are with the COVID. It will just be an extension of it.

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

Hi. Thank you. Good morning everyone. First question, just wanted to go back to HICS again and just on the 2022 pricing strategy and couple of interesting dynamics in the HICS market because it looks like utilization is certainly pretty hot in the market, but there is also some competitors out there, including some of these newer public companies that are pricing very aggressively and don’t seem to have the same type of margin targets that some of the more established companies traditionally have had in the market. So, I am interested if you are going to approach 2022 pricing really sort of based on actual expected cost trends and you are willing to sacrifice memberships, if necessary to do that. With the risk adjustment, do you feel that, that would be able to protect you against potential adverse selection that could occur? Traditionally, when we think about a company pricing conservatively well, there is a pricing aggressively, there are some concerns around adverse selection. Just interested if you are comfortable that risk adjustment could help offset that type of traditional risk?

Yes. I will take that one. I think, one, I am not going into a great deal of detail on 2022 because that’s – we save that for December. I think what Drew tried to cover was that we did take into consideration to the extent we could, and as we always do and where positively, we took some steps. I will say the same thing that I said last year, and it proved to be an appropriate way to do it. And we are not going to do any races to the bottom because if you are losing on every member, you don’t make it up on volume. And so we are very sensitive to that particular approach. And we do believe that the risk adjusted, that’s what it’s there for. So, somebody rushes in and they get adversely selected against because of it, then that will provide protection for those that have the higher acuity patients. So, I think that’s about as much as we can say about it for now. But we are going to continue to stay the course, which we think we have demonstrated is the appropriate course.

Okay. And then I just had a follow-up on – just interested if you have had any updates just on the Ohio situation and on the contract renewal just post the PBM legal settlement with the state.

Yes. We continue to be very optimistic on it and expect a resolution in the very near future. They wanted some additional data, which we have had. Our consultants provide them, and they are analyzing that. And as we said, with the settlement and the no harm and all court cases, we moved everything. There is no reason for them not to reinstitute our bid. We did come in number two. And so I am very optimistic on it.

And our next question today comes from Mike Newshel with Evercore ISI. Please go ahead.

Thanks. So, CMS recently proposed a monthly special enrollment period on exchanges, but just for people below 150% of the poverty level. I am just wondering if you are expecting any meaningful impact on your exchange business since you do focus on lower income and then both from like an enrollment and revenue perspective and also any potential adverse selection problems for margin?

Go ahead, Kevin.

Sure. Yes. Thanks for the question. First of all, as you know that, that is a proposed policy change as you underscored, and we are in the comment period right now. So, I think it may be just a bit premature to say that this is going to be policy. We do have some concerns about this with respect to potential adverse selection, particularly since there were some states where the APTC is not going to fully cover the cost of the premium. And in that instance, there is that risk of that for selection. We think there are ways to ameliorate that in pricing, as Drew has acknowledged. And so we will see how CMS ends up ruling.

I think that would be particularly adverse selection and for those that have the very low prices pushing to gain membership on pricing.

Yes, that’s true.

Thank you. And today’s final question comes from George Hill at Deutsche Bank. Please go ahead.

Hey, good morning guys and thanks for taking the questions. I guess, Michael, just as you look forward to the closing of the Magellan transaction, I guess can you talk about how you are thinking about the PBM business and the pharmacy business, both as it relates to the government businesses that you serve now and the opportunity to maybe enter some of the non-government businesses?

Yes. I think I will ask Sarah to respond that. She is close to it of working through it.

Yes. Thanks for the question. We have been making really good progress on our integration planning. And as we said at Investor Day, we are focused on the restructuring of our involved pharmacy business to focus on member services and clinical operations and relying on an external PBM. And so the goal is to position Magellan, as we have said before, within healthcare enterprises, where it will remain independent and focus on its third-party business. So, I think you should expect an update from us once we get through that transaction and how we are specifically thinking about the Magellan Rx business.

Maybe then as a quick follow-up, I guess could you talk about how you feel about the segment’s competitiveness ex the government business?

Sorry. Can you repeat the question, if you don’t mind?

I said just like how do you guys feel like you will be positioned competitively once the transaction closes ex-supporting the government business?

Well, we think the Magellan PBM business has a lot of opportunity for growth. We also think there is really interesting synergies relative to our existing specialty pharmacy assets with their portfolio. So, that’s been the major focus of the integration planning.

Okay. Thank you.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Neidorff for closing remarks.

I just want to thank you all, and we will continue to focus on our margin expansion and our capital allocations, as we have talked about, while managing through what could be a difficult pandemic, but I would think we have what it takes to get through it. So, we look forward to it, and we maintain an optimistic attitude. So, thank you very much.

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.