Q3 2024 Earnings Summary
- 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.
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Adjusted SG&A Expense Ratio | Q3 2024 | 8.4% – 9.0% | 7.3% (Calculated from SG&A of 3,057Divided by total revenue of 42,023) | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Medicaid rate adequacy and alignment with higher-acuity populations | Emphasis on temporary mismatch (Q2), with all but one state adjusting; ~4%+ rate increase for 2H24. Q1 noted longer-term alignment possibly into 2025-2026. | All states acknowledge need to align rates with acuity; ~4.5%-5% composite rate adjustment for 2H24. Progress continues, though sufficiency varies by state. | Continued progress; states increasing rates to match acuity, improving alignment over time. |
Medicaid margin improvement and HBR trends | Q2: Peak Medicaid pressure at 92.8% HBR, with improvement expected from a 4%+ rate increase. Q1: Focused on long-term HBR target in high 89s by 2025-2026. | Q3 Medicaid HBR of 93.1%, expected to improve in Q4. Near-term headwinds from rate-acuity mismatch but rate updates provide optimism for margin recovery. | Improving trend as updates take effect; Q3 viewed as high watermark, further improvement seen into 2025. |
Marketplace membership growth and changing margin outlook | Q2: Continued strong Marketplace performance, captured in-year membership growth. Q1: Membership at 4.3M, doubling over two years, with pretax margins of 5%-7.5%. | 22% year-over-year growth, reaching 4.5M members. Margins remain in the 5%-7.5% range for 2025. | Sustained growth; margins remain on track despite moderate membership expectations. |
The $600 million prior-year Marketplace risk adjustment | Q2: Discussed as a one-time $600M favorable pickup, confirmed by CMS final notice; excluded from long-term margin guidance. No mention in Q1 [—]. | Not mentioned in Q3. | No longer mentioned; previously addressed in Q2. |
Part D revenue growth in 2025 driven by the IRA but with low expected margins | Q2: Expected premium revenue increase from IRA changes but caution on profitability; fosters thoughtful approach to bids. Q1: Anticipated increase in direct subsidy due to catastrophic phase shift; mindful of bad debt and manufacturer behavior. | Expects significant revenue growth in 2025 but 1% margin target on a higher revenue base. Positioned below benchmarks in 33/34 regions, with zero-premium products in most states. | Expanded Part D revenue via IRA mechanics; near-term margin modest, with goal to improve over time. |
Medicare Advantage membership shrinkage, STAR ratings, and near-breakeven profitability | Q2: Anticipated membership shrinkage prioritizing margin over growth; aiming for 85% in ≥3.5-star plans by 2025. Q1: Focused on improving STAR ratings as primary lever to drive profitability; membership attrition aligned with focus on margin. | Year-over-year MA membership decline for 2025 due to exiting six states. 46% of members now in ≥3.5-star plans, up from 23%. Targeting near-breakeven by 2025 with $14B-$16B revenue. | Continued emphasis on quality, margin improvements; some membership loss, but better STAR progress and breakeven goal. |
Elevated outpatient and inpatient utilization trends impacting medical costs | Q1: Elevated outpatient trends since mid-2023; tick-up in inpatient authorizations in early 2024. Q2: No mention. | No mention in Q3. | Topic not discussed after Q1; previously noted high utilization in early 2024. |
Potential regulatory impacts in 2025, including the IRA and new Medicare Part D risk model | Q2: Monitoring catastrophic phase changes from 20% to 60% share; mindful of manufacturer and member behavior. Q1: Discussed IRA complexities and new Part D risk model; cautious about 2025 bidding. | Significant IRA-driven changes expected, boosting Part D premium yield. Maintaining a 1% margin goal for 2025 on a larger revenue base. | Continued focus on IRA and risk model changes; preparing for 2025 shifts to profitability and coverage dynamics. |
Future impact of ongoing state rate adjustments for Medicaid profitability | Q2: Expecting 4%+ composite rate in 2H24, with further increases in early 2025. Q1: Engaged with states; full alignment may extend into 2025-2026. | All states have taken steps to match rates with acuity; 4.5%-5% composite increase for 2H24. Tailwind for 2025 as states continue mid-cycle adjustments. | Ongoing gains in rate alignment expected to improve Medicaid margins through 2025. |
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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. -
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 ( ). -
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 ( ). -
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 ( ). -
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 ( ). -
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 ( ). -
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 ( ). -
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 ( ). -
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 ( ). -
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 ( ). -
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 ( ). -
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 ( ).