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    Centene Corp (CNC)

    Business Description

    Centene Corporation is a leading provider of government-sponsored healthcare services, focusing on improving health and healthcare for low-income, complex populations. The company operates through various segments, offering a range of healthcare programs and services, including Medicaid, Medicare, Commercial health insurance, and other healthcare-related services . Centene provides access to healthcare for nearly 1 in 15 individuals nationwide, emphasizing a local approach to delivering healthcare services .

    1. Medicaid - Offers programs such as Temporary Assistance for Needy Families (TANF), Medicaid Expansion, and the Children's Health Insurance Program (CHIP), among others.
    2. Commercial - Includes the Health Insurance Marketplace and various commercial health insurance products.
    3. Medicare - Covers Medicare Advantage, Dual Eligible Special Needs Plans (D-SNPs), and Medicare Prescription Drug Plans (PDPs).
    4. Other - Encompasses pharmacy operations, vision and dental services, and behavioral health, among others.

    Q3 2024 Summary

    Initial Price$66.31July 1, 2024
    Final Price$73.94October 1, 2024
    Price Change$7.63
    % Change+11.51%

    What went well

    • Improving Medicaid Health Benefit Ratio (HBR) expected in Q4 and beyond as rate increases take effect, with Q3 being the high watermark for Medicaid HBR. Centene anticipates that the benefit of 9/1 and 10/1 rate updates will positively impact Q4 more than Q3. This suggests margin improvement in their largest business segment moving forward.
    • Significant revenue growth expected in the Part D business in 2025, largely driven by the Inflation Reduction Act mechanics. Centene is pleased with its positioning, expecting to grow membership during the annual enrollment period. They are targeting a 2025 PDP margin of about 1% on a much higher revenue base, which provides upside potential for earnings.
    • Progress in aligning Medicaid rates with increased patient acuity, with all states acknowledging the need to match rates with acuity and taking action, leading to expected margin improvements. Centene has received rate increases in the high 4% to 5% range for the back half of the year, and they remain confident in further adjustments to achieve rate sufficiency.

    Q&A Summary

    1. Medicaid MLR and Rate Adjustments
      Q: What Medicaid rate increases do you need for MLR improvement?
      A: Rate needs vary by state; we've seen high single-digit increases in small states ( , ). States acknowledge the need to align rates with acuity. Our composite rate adjustment is in the high 4% to 5% range for the back half of the year, excluding pass-throughs ( , , ). We continue to advocate for adequate rates to improve MLR going forward.

    2. Medicaid Utilization Trends and Rejoiners
      Q: How are Medicaid utilization trends and rejoiners impacting costs?
      A: Core utilization trends are stable, with pockets of increased behavioral and home health services ( ). Rejoiners return needing care, creating artificial MLR pressure since we didn't receive premiums during their coverage gap ( , ). This dynamic is slowing, which should be a tailwind into 2025 ( ).

    3. 2025 Earnings Growth Visibility
      Q: Is Medicaid MLR still a tailwind for 2025 earnings growth?
      A: Yes, Medicaid HBR improvement is a tailwind for 2025 ( ). We expect to grow adjusted EPS, and our headwinds and tailwinds remain as previously shared ( ).

    4. Marketplace Growth Expectations
      Q: What is your outlook for Marketplace growth next year?
      A: We expect mid-single-digit growth in the Marketplace due to stabilization post-redetermination and reinstated program integrity policies ( ). We remain bullish long-term and aim to deliver margins within our 5% to 7.5% pretax target ( , ). We'll provide more details at our Investor Day ( ).

    5. Part D Business and IRA Impact
      Q: How will the IRA changes affect your Part D margins?
      A: We're on track with PDP performance, anticipating a 1% margin next year, consistent with this year ( ). We accounted for IRA changes in our pricing and don't expect significant impact from specialty drug utilization shifts ( ).

    6. GLP-1 Drugs Impact on Trends
      Q: How are GLP-1 drugs affecting Medicaid cost trends?
      A: A few states cover GLP-1s for weight loss; we're sharing data to ensure rates reflect utilization ( ). This helps align rates with the cost of these medications ( ).

    7. Use of AI for Operational Efficiency
      Q: Can you quantify AI benefits and are projects ready?
      A: Our AI initiatives are shovel-ready and part of ongoing efficiency efforts ( ). While we can't quantify benefits yet, AI helps automate processes, driving EPS improvement from 1% to 2% margin enhancement over time ( ).

    8. G&A Expenses and Timing
      Q: Are there timing-related G&A spending items to note?
      A: SG&A naturally rises in Q4 due to selling periods for Marketplace and Medicare ( ). We'll bridge the 2024 midpoint SG&A of 8.6% at Investor Day, considering business mix and PDP revenue growth ( ).

    9. State-Directed Payments Effect
      Q: How do state-directed payments affect Medicaid PMPM growth?
      A: Increased state-directed payments contributed to Medicaid PMPM growth this quarter ( ). Our composite rate adjustment of high 4% to 5% also supports PMPM growth ( ).

    10. California Retroactive Rate Adjustment
      Q: Have you seen significant retroactive rate adjustments in California?
      A: Yes, we received adequate information to record a negative retroactive adjustment in Q2 results ( ).

    11. Visibility into 1/1 Rate Updates
      Q: What visibility do you have into January 1 rate updates?
      A: We've started receiving some 1/1 rates and will update on 2025 outlook at our December Investor Day ( ).

    12. Normalization of Rejoiner Utilization
      Q: Do rejoiners' utilization patterns normalize over time?
      A: Yes, after rejoining, utilization normalizes, confirming the artificial MLR pressure due to coverage gaps ( ).

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Medicaid26,16424,66524,69425,236100,75925,53024,11326,440
    - Premium Revenue-----406-488
    - Service Revenue-----785-759
    Medicare5,8765,6655,4305,2922,2615,9355,9785,643
    Commercial5,2525,7346,4537,40624,8457,7518,5358,693
    Other1,5971,5441,4651,5286,1341,1911,2101,247
    Managed Care Segment--------
    Specialty Services Segment--------
    Eliminations--------
    Total Revenue38,88937,60838,04239,46153,99940,40739,83642,023
    Revenue by Geography - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Medicaid--------
    Medicare--------
    Commercial--------
    Other--------
    Total Revenue38,889---153,99940,407--
    KPIs - Metric / QuarterFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Managed Care Membership Increase2,2002,0001,200---3366670
    Health Benefits Ratio (%)87.087.087.089.5-87.187.689.2
    Cost of Service Ratio (%)77.278.077.779.9-82.881.688.3
    Risk Adjustment Receivable8871,0881,130893-1,1242,0471,805
    Risk Adjustment Payable1,5562,3032,3122,553-3,2663,4751,705
    Cost Sharing Reduction Receivable-22--181210
    Cost Sharing Reduction Payable8987104114-11311168
    IBNR plus Expected Development on Claims11,27111,36011,66111,135-12,31112,33712,654
    Premium Deficiency Reserve--200250-300335245

    Executive Team

    NamePositionStart DateShort Bio
    Sarah M. LondonChief Executive OfficerMarch 2022Sarah M. London has been serving as the Chief Executive Officer of Centene Corporation since March 2022. She previously held roles such as Vice Chairman and President, Centene Health Care Enterprises .
    Andrew L. AsherExecutive Vice President, Chief Financial OfficerMay 2021Andrew L. Asher has served as the Executive Vice President, Chief Financial Officer of Centene Corporation since May 2021. He was previously the CFO of WellCare .
    Katie N. CassoSenior Vice President, Corporate Controller and Chief Accounting OfficerApril 2021Katie N. Casso has served as the Senior Vice President, Corporate Controller and Chief Accounting Officer at Centene Corporation since April 2021. She was previously Vice President, Assistant Controller .
    Kenneth J. FasolaPresidentDecember 2022Kenneth J. Fasola has served as the President of Centene Corporation since December 2022. He joined Centene following the acquisition of Magellan Health, where he was CEO .
    Christopher A. KosterExecutive Vice President, Secretary and General CounselDecember 2021Christopher A. Koster has served as the Executive Vice President, Secretary and General Counsel of Centene Corporation since December 2021. He was previously Missouri Attorney General .
    Susan R. SmithChief Operating OfficerJanuary 2024Susan R. Smith has served as the Chief Operating Officer of Centene Corporation since January 2024. She joined the company in June 2023 and held various senior positions at Humana Inc. .
    Thomas R. GrecoBoard of Directors MemberAugust 9, 2024Thomas R. Greco was appointed to the Board of Directors of Centene Corporation, effective August 9, 2024. He was later assigned to the Governance Committee and the Compensation and Talent Committee .

    Questions to Ask Management

    1. Could you elaborate on the sufficiency of the Medicaid rate adjustments you've received so far, and what steps are you taking if rates are still misaligned with the higher acuity of your post-redeterminations member base?
    2. Given the continued pressure on Medicaid margins from the mismatch of rates and acuity, how confident are you in your ability to grow adjusted EPS next year, and what are the key levers to achieve this growth?
    3. With the Medicare Advantage business expecting down membership in 2025 but aiming for margin recovery, can you explain how the recent changes in Star ratings and contract portfolio will translate into financial improvement?
    4. In your Marketplace business, you mentioned expectations for modest membership growth and mid-single-digit macro market growth; can you discuss the potential risks to achieving your target pretax margins given the program integrity enhancements and agent of record lock policies?
    5. Regarding the underlying utilization trends in Medicaid, especially in areas like behavioral health and home health, are you seeing any new pressures or emerging trends that could impact your medical loss ratio beyond what you've previously disclosed?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateNovember 2005
    End Date/DurationNo specific end date
    Total additional amount$10.0 billion
    Remaining authorization amount$3.2 billion as of September 30, 2024
    DetailsThe program includes regular open-market purchases and may involve Rule 10b5-1 and accelerated share repurchases. The company reserves the right to discontinue the program at any time.

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted Diluted EPS: Greater than $6.80 .
      2. Premium and Service Revenue: $141 billion to $143 billion .
      3. Investment Income: Over $1.7 billion .
      4. Depreciation Expense: $550 million .
      5. SG&A Expense Ratio: Midpoint 8.6% .
      6. Health Benefits Ratio (HBR): 88.3% to 88.5% .
      7. Medicaid Membership: 12.9 million to 13 million .
      8. Medicare Advantage Revenue: $14 billion to $16 billion for 2025 .
      9. Medicare Advantage Stars Ratings: 46% of members in plans at or above 3.5 stars for 2026 .
      10. PDP Revenue Growth: Expected growth in 2025 .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Premium and Service Revenue: $141 billion to $143 billion .
      2. Investment Income: Over $1.55 billion .
      3. Adjusted SG&A Expense Ratio: 8.4% to 9.0% .
      4. Cash Flow from Operations: $2.2 billion in Q2 .
      5. Debt to Adjusted EBITDA: 2.8x .
      6. Medical Claims Liability: 54 days in claims payable .
      7. Health Benefits Ratio (HBR): 87.6% for Q2, 87.3% year-to-date .
      8. Adjusted Diluted EPS: Greater than $6.80 .
      9. Medicaid Composite Rates: 4% plus .
      10. Marketplace Risk Adjustment Benefit: $600 million .
      11. Medicare PDR: $125 million PDR P&L hit .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EPS: Greater than $6.80 .
      2. Premium and Service Revenue: Added $1 billion of Medicaid premium revenue .
      3. Medicare Advantage Revenue: About $16 billion .
      4. PDP Revenue: Approximately $4 billion .
      5. Marketplace Membership: 4.3 million members .
      6. Investment Income: Above $1.4 billion .
      7. Share Repurchase: $3 billion to $3.5 billion .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: N/A
    • Guidance: The documents do not provide information about the guidance metrics from the Q4 2023 earnings call.