Q2 2024 Earnings Summary
- Strong performance and growth prospects in the Marketplace business: Centene's Marketplace segment continues to perform well, achieving margins well into the 5% to 7.5% pretax margin range. The company expects to grow membership and maintain strong margins in 2025, positioning the Marketplace products for continued profitable growth.
- Improving Medicaid margins through rate adjustments: Centene is actively working with state partners to adjust Medicaid rates to match the increased acuity of the remaining membership after redeterminations. The company expects Medicaid Health Benefit Ratios (HBR) to improve in the second half of 2024 due to rate actions, with further improvement anticipated into 2025 as additional rates align with acuity.
- Anticipated revenue growth in the Prescription Drug Plan (PDP) business: Centene forecasts significant growth in PDP revenue in 2025 due to changes from the Inflation Reduction Act, including an expected increase in the direct subsidy. The company is optimizing its PDP product to capitalize on these changes and views PDP as a tailwind for 2025.
- Centene is experiencing pressure on Medicaid margins, with the Medicaid Health Benefits Ratio (HBR) at 92.8% in Q2, running close to 0% margin currently, due to increased acuity from redeterminations and a mismatch between rates and acuity. Recovery to normal margins is expected to take into 2025, indicating prolonged margin pressure.
- The Medicare Advantage business faces challenges, with the company expecting to shrink in 2025, and currently having to chip away at negative margins, aiming to push towards breakeven before considering future growth opportunities. This indicates potential headwinds in the Medicare segment.
- Dependence on state actions to adjust Medicaid rates to match increased member acuity poses a risk. While all states have acknowledged the need to match rates with acuity, sufficiency and timing of rate adjustments remain uncertain, and the company continues to work on influencing state partners to achieve proper rate alignment, which may impact profitability.
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Medicaid MLR Expectations
Q: What is the outlook for Medicaid MLR this year?
A: Centene expects improvement in Medicaid Medical Loss Ratio (MLR) in the second half of the year, benefiting from a 4%+ rate increase on about half of their premium revenue. They anticipate that it will take until 2025 to return to equilibrium due to multiple rate cycles ahead. The peak MLR pressure was 92.8% in Q2, and they expect better performance in the back half. -
Exchange Business Margins
Q: Are exchange margins sustainable at current levels?
A: Centene is well within their long-term pretax margin target of 5% to 7.5% for the marketplace business, excluding a $600 million risk adjustment benefit recognized in Q2. They expect to maintain sound performance and have positioned for margin in 2025, anticipating market growth. -
Risk Adjustment Favorability
Q: Why was the exchange risk adjuster better than expected?
A: The risk adjuster on the exchange developed $1.3 billion better than expected due to strong execution and improved acuity data submission. Centene executed effectively in capturing acuity data, resulting in a favorable impact on the risk adjustment payable. -
Medicaid Rate Updates
Q: How do Medicaid rate updates affect profitability?
A: Rate updates, including the 4%+ composite rate increase, are expected to improve Medicaid profitability. Centene anticipates progressively better rates as more data supports rate adequacy, with rate cycles in 1/1, 4/1, and 7/1 to 10/1 in 2025. -
Part D Changes and Profitability
Q: How will Part D changes impact profitability?
A: Centene expects Part D premiums to increase significantly in 2024 due to a higher federal subsidy, with a projected increase of over $100 on top of the $29 direct subsidy this year. They believe the Part D product must stand alone profitably and have taken a thoughtful approach to the bid process. -
Medicare Advantage Strategy
Q: What is the plan for Medicare Advantage in 2025?
A: Centene expects to shrink their Medicare Advantage business in 2025, focusing on aligning it with their Medicaid footprint and optimizing margins. They anticipate reducing revenue to around $14-16 billion and do not expect to book a Premium Deficiency Reserve (PDR) into the 2025 P&L for 2026. -
Operating Cash Flow Expectations
Q: What are the expectations for operating cash flow?
A: Operating cash flow can vary due to timing of state payments. Centene had $2.2 billion positive cash flow in Q2, offsetting a negative $400 million in Q1, resulting in positive cash flow for the first half. They expect capital deployment in the back half of the year consistent with prior statements. -
SG&A Ratio Improvement
Q: Can SG&A ratio improvements be sustained?
A: The SG&A ratio was favorable and on track within the guidance range of 8.4% to 9.0%, with a midpoint of 8.7%. Centene continues to focus on cost reduction, aiming to take a couple hundred basis points out of their Medicare business over the next few years. -
Medicaid Growth and RFP Success
Q: What's the outlook for Medicaid growth and RFP pipeline?
A: Centene is optimistic about Medicaid growth opportunities, with recent RFP successes in Florida, Michigan, and Kansas. They foresee active pipeline opportunities, including new states, markets, programs, and expansions. -
MA Star Ratings Progress
Q: How is Centene progressing on MA Star Ratings?
A: Centene expects a meaningful step-up in MA Star Ratings in October, tracking year-over-year improvements in key chapters. They are confident in sustainable programmatic improvements, benefiting not just stars but overall quality scores.