Centene Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 24, 2023

Key Takeaways

  • Q3 2023 adjusted EPS of $2.00 beat internal expectations by $0.20 and prompted a raise to full-year 2023 guidance to at least $6.60, representing over 14% year-over-year growth.
  • Marketplace membership reached nearly 3.7 million in Q3, outperforming growth forecasts and positioning Ambetter to drive over $3 billion in revenue growth and expanded margins in 2024.
  • Medicaid redeterminations are on track with over 40% completed, an anticipated net loss of 2.3–2.4 million members and 200,000–300,000 expected to shift into Marketplace plans, as states engage constructively on rate setting.
  • Medicare Advantage achieved 73% of membership with year-over-year raw STAR score improvement and 87% of members in plans rated 3 stars or higher, reflecting progress on quality initiatives ahead of Annual Enrollment Period.
  • Definitive agreement to divest Circle Health in the UK is expected to close in Q1 2024 and contribute $0.03–$0.04 of accretion to 2024 adjusted EPS.
AI Generated. May Contain Errors.
Earnings Conference Call
Centene Q3 2023
00:00 / 00:00

There are 14 speakers on the call.

Operator

Good day, and welcome to the Centene Corporation Third Quarter Earnings Release. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Finance and Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Rocco, and

Speaker 2

good morning, everyone. Thank you for joining us on our Q3 earnings results conference call. Sarah London, 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 atcentene.com. Ken Fazola, Centene's President, will also be available as a participant during Q and A. 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.

Speaker 2

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 ks filed on February 21, 2023 and other public SEC filings. 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 Q3 2023 press release, which is available on the company's website under the Investors section.

Speaker 2

The company is unable to provide a reconciliation of certain 2024 measures to the corresponding GAAP measures without unreasonable effort due to the difficulty of predicting the timing and amounts of various items within a reasonable range. Finally, we'd like to highlight our upcoming Investor Day scheduled for December 12 This event will also be available via webcast. With that, I would like

Speaker 1

to turn the call over to our CEO, Sarah London. Sarah? Thank you, Jen, and thanks everyone for joining us. This morning, we reported very strong Q3 2023 results, Including adjusted EPS of $2 outperforming our internal expectations by approximately $0.20 Strong fundamentals and excellent marketplace growth and performance contributed to the strength in the quarter as well as our improved outlook for 2023. We now expect full year 2023 adjusted earnings per share of at least $6.60 representing over 14% year over year growth.

Speaker 1

With my time this morning, I'll hit on key focus areas, including Medicaid redeterminations, upcoming RFPs, Marketplace performance and recent Medicare Advantage STARS results and then provide a brief update on the operational progress we have made over the last few months. Then I'll turn it over to Drew to provide details on the quarter and additional commentary relative to our increased financial guidance for 2023. Let's start with Medicaid. We are now over 40% or approximately 1,000,000 members through redeterminations And we continue to track in line with our expectations for membership and acuity changes as well as our assumed sloping of overall timing. As we closely monitor Medicaid membership transitions, rejoinder data remains instructive as we think about the net membership impact of redeterminations and coverage continuity.

Speaker 1

We are now seeing April through August cohorts consistently experiencing rejoining rates in the mid-twenty percent range. Importantly, the 90 day grace period in most states means that the majority of these members have no break in coverage as they return to the Medicaid program. CMS has obviously been playing an important role with respect to the oversight of the Medicaid redeterminations process, including recent intervention to Pause redeterminations in certain states as well as the effort to reinstate children and individuals who are incorrectly dropped from coverage due to system issues. We are seeing some of the impact of these reinstatements come through in our rejoinder data and continue to monitor the impact these changes will have on the timing of expected membership shifts over the coming months. That said, we have not changed our view that the ultimate impact of redeterminations would be 2,300,000 to 2,400,000 members.

Speaker 1

And based on our view of recent CMS actions and our ongoing conversations with state partners, we still expect the overwhelming majority of redeterminations to be completed by May of 2024. We continue to track in line with our expected 200,000 to 300,000 members moving from Medicaid into marketplace as a result of the redeterminations process. We have partnered with an increasing number of states to make auto enrollment a more seamless path for Medicaid members losing eligibility And are pleased to be able to leverage our market leading Ambetter platform to maximize coverage continuity for members of the communities we serve. Our rate discussions continue to be constructive as well. The consistent trend we saw in 7.1 and 10.1 rate cohorts has continued so far as the first wave of oneone 24 draft rates have been released.

Speaker 1

We are working through an incomplete fourone retro rate as Drew will discuss further, but continue to have constructive discussions there as well. We appreciate the thoughtful and data based collaboration with our state partners as they acknowledge the importance of matching rates with acuity in order to maintain the strength effectiveness of each Medicaid program. Overall, we are encouraged by the progress that states are making with respect to Medicaid redeterminations I'm pleased to be moving through the process with operational stability and results that are consistent with our modeling. Turning to growth. In North Carolina, we are preparing for Medicaid expansion that will go live in December.

Speaker 1

North Carolina is the 41st state to expand Medicaid and by passing this legislation with The joint leadership of a Democratic governor and a Republican super majority legislature, they demonstrate the increasing bipartisan support for this program. We expect this trend to continue as states look to provide improved access to quality care for their citizens. In RFP news, our Sunshine Health team submits our response to the Florida ITN this week. I want to give a nod to the Sunshine Health team, to our exceptional business development we have established in serving the communities of Florida. In general, we are seeing an increase in RFP activity and momentum around states considering addition of new populations into a managed care model.

Speaker 1

Notably, the recently released Georgia RFP includes for the first time the States aged, blind and disabled population. As we look ahead to our procurement pipeline, we feel good about the opportunity to leverage our incumbent position And our differentiated depth of expertise in managing complex populations to defend and grow our Medicaid footprint. In support of this work, I'm happy to share that we have officially appointed Wade Rapes as Centene's Chief Growth Officer. Wade will take on this responsibility in addition to continuing to serve as the CEO of our Peach State Health Plan as he leads our incredibly strong Georgia team through their procurement, Remaining at the helm through the conclusion of that process. Wade will bring valuable experience as both a local and enterprise leader Centene as he helps to drive execution around our growth strategy.

Speaker 1

Turning to marketplace, our Ambetter franchise continues to outperform outpacing our growth expectations in the quarter and reaching just under 3,700,000 members as of September 30. This means added earnings power for the remainder of 2023 as well as a potential earnings tailwind for 2024 as our Special Enrollment Period or SEP members become more profitable in their sophomore year with Ambetter. Ambetter's unique individual market density, Consistent performance and market leading brand recognition have enabled us to build attractive and efficient networks and to foster productive relationships With a vast array of distribution partners. This has driven our impressive growth in 2023 and positions us well to continue to serve this large and We'll have an opportunity to dive more deeply into the future growth drivers of this business during our Investor Day in December And remain excited by the growth and earnings potential of the individual market in both the short term and the long term. Finally, Medicare.

Speaker 1

This is an important time of year for our Medicare Advantage business as 2024 enrollment begins to take shape through the annual enrollment period, which kicked off on October 15. As you'll recall, the 2024 bid cycle represents a pivot point for our Medicare Advantage products as we reposition our offerings to better serve low income and complex lives. Touching on the important topic of stars, We received the final star rating results along with the rest of the industry 2 weeks ago. The final stars results for this cycle were consistent with our July September commentary we expected 2 thirds of our membership associated with contracts showing year over year raw score improvement. That result was approximately 73%.

Speaker 1

We also said we are expecting roughly 90% of our membership to be associated with contracts rated 3 stars or higher and that final result was 87%. While we delivered STAAR's results in line with our Q2 expectations, these results certainly do not reflect the ambition of this organization. They do, however, represent an important step on our journey to improve quality scores and restored Medicare Advantage earnings power. Relative to our ongoing work to strengthen Medicare execution overall, we continue to see improvement in our operating metrics, Which are important indicators for member experience and ultimately star scores. Our first call resolution has improved year over year and quarter over quarter as have our customer satisfaction scores.

Speaker 1

We are still tracking a roughly 40% reduction in member complaints year over year and consistently delivering service levels in the high 90 And we continue to build out our network, including adding 6,100 new providers in the quarter And moving more than 12,000 members into new value based agreements. Medicare Advantage remains an integral part of our portfolio of businesses, Strategically aligned with our Medicaid and marketplace platforms and a long term driver of both earnings and growth. We remain committed to and focused on the work necessary improve overall performance and quality on behalf of our Medicare members. Before I turn

Speaker 2

it over to Drew, let

Speaker 1

me touch briefly on our value creation work. We continue to make progress against the many initiatives that will focus and fortify our enterprise to support robust long term growth. As our first wave of operational redesign work matures, we are evolving our focus for those initiatives to optimizing and automating work system, we are now layering on additional features that are driving month over month improvement in self-service. And over the last few months, Within our now centralized utilization management teams, we have been focused on reducing provider abrasion by expanding the use of our proprietary tool, CATA, Which automates the approval of authorizations for clinically appropriate procedures using AI technology we developed in collaboration with Apyxio. Speaking of technology, I'm particularly excited about the data work we have accelerated over the last few quarters as we look to aggressively build out an integrated data fabric Across Centene to support our long term technology strategy.

Speaker 1

One of the benefits of taking this work on now is that we can leverage the most modern technology And design our infrastructure to account for the ways in which we foresee both traditional AI and generative AI being deployed in our environments To automate administration, support more seamless provider collaboration and optimize clinical insights that will transform our members' health journeys across lines of business. One quick milestone from this work, over the last three quarters, we have significantly increased the number of digital clinical sources flowing into our clinical data hub, where we hold a longitudinal health record for our members. The expansion of clinical data from digital sources is expected to reduce the overall cost And improve the accuracy and timeliness of information we can use to solve for gaps in care, understand member risk and acuity And support predictive modeling for care management interventions. There are a number of other operational and digital initiatives in flight across our value creation portfolio And we look forward to providing updates and proof points for those as we move into and through 2024. But it is important to note that increasingly this work is Caring momentum not because of the value creation scorecard, but because it is simply part of the disciplined operating DNA we are building across the company.

Speaker 1

From a portfolio review standpoint, we were pleased to reach a definitive agreement to divest Circle Health earlier this quarter. Circle is an excellent asset with a strong management team and we took our time to find the right partner who will continue to support the good work Circle is doing to serve communities in the UK. We continue to expect this deal to close in Q1 of next year and to be $0.03 to $0.04 accretive to 2024. There are a few remaining assets we continue to evaluate and reposition, but we are now in the final innings of this work And expect that as we get to mid-twenty 24, we will be focused on building around our solid, strategic and streamlined core business. Finally, I want to touch on our PBM migration.

Speaker 1

Given its importance to our 2024 financial targets, But more importantly, given the value we expect it will drive for our customers and members. The teams have put in an enormous amount of work over the last few months and continue to make great progress against our key milestones. In fact, earlier this month, we got to see an early but important proof point of how well these teams are working together on behalf of our customers due to a tenone migration of one of our health plans from a legacy platform over to ESI. Thanks to thoughtful planning and testing ahead of time and strong collaboration and communication during the cut over, this was a very successful transition and we believe it sends a great about the health of this project as we move into Q4. Overall Centene continues to generate positive momentum.

Speaker 1

We are making important strides operationally, fortifying the foundation of the business and increasingly leveraging our size and scale to better serve our customers. Strategically, as you've seen through our divestitures, we have sharpened the focus of the enterprise on our 3 core business lines and continue to work hard To preserve the unique innovation engine of our local health plans. These advancements along with our 2023 outperformance Give us confidence that we will exceed our 2024 earnings floor of $6.60 and continue to demonstrate improved member and provider experiences. With that, I'll turn it over to Drew.

Speaker 3

Thank you, Sarah. Today, we reported Q3 2023 results $35,000,000,000 in premium and service revenue and adjusted diluted earnings per share of $2 up over 50% from 1 $0.30 Q3 of 2022. This represents a $0.20 beat to our internal forecast that we tried to recalibrate you to in early September. Our Q3 consolidated HBR was 87%, a little bit better than our expectation, driven by the commercial segment. This keeps us right on track with our full year HBR guidance range.

Speaker 3

Medicaid at 90.7% was fundamentally on track Other than one of our states providing a draft, an incomplete rate update retroactive to 4onetwenty 3. This was worth about 40 basis points in the quarter relative to our expectations. Other than that unique item, which we would expect to be a timing matter with a favorable future resolution. We continue to be on track in Medicaid, including relative to our acuity estimates that we've been tracking since the recommencement of redeterminations on April 1, 2023. As you can see in the membership tables, We are down 1,100,000 Medicaid members since threethirty onetwenty 3 right on track with our forecasts that include redetermination estimates.

Speaker 3

That 1,100,000 includes Iowa reshuffling of about 83,000 members effective July 1, as expected. To update a statistic we previously provided, 13 of our 14 states in the 7.1 to 10.1 cohort have included Acuity adjustments in our rates, one is still outstanding. And so far, 7 of our 1-one-twenty 4 cohort states have Provided draft rates that include acuity adjustments overall consistent with our estimates. Our view of 2024 Medicaid performance is unchanged. Other than revenue looks to be a little stronger than the $77,000,000,000 we outlined on Medicare was on track at 82.2%, an improvement of 170 basis points from Q3 of 2022.

Speaker 3

Similarly, our view of Medicare 2024 performance is consistent with what we shared previously. And as you finish modeling 2023, make sure you factor in the Q4 2023 Medicare HBR step up, including the previously discussed premium deficiency reserve. The commercial HBR at 78.9% in Q3 Continues to be strong and better than expected. Simultaneously, we are also capturing growth from both redeterminations and the special enrollment period. We said on the Q2 call that we expected to hit 3,600,000 members this year, and we accomplished that as of the end of Q3.

Speaker 3

You may recall that last quarter we grew 200,000 members. This quarter we grew 386,000 members. This continued growth and HBR performance in 2023 sets us up well to achieve our previously stated goal of growing marketplace At least $3,000,000,000 of revenue in 2024, while also expanding margin. Moving to other P and L and balance sheet items. Our adjusted SG and A expense ratio was 8.6% in the 3rd quarter compared to 8.3% last year, consistent with our mix of business.

Speaker 3

Cash flow provided by operations was $1,000,000,000 in the 3rd quarter, primarily driven by net earnings. Our domestic unregulated and unrestricted cash on hand at quarter end was 231,000,000 During the Q3, we repurchased 11,600,000 shares of our common stock for $773,000,000 Year to date, we have repurchased 22,900,000 shares for 1,580,000,000 for 2023. Our debt to adjusted EBITDA ticked down to 2.8 times. Our medical claims liability totaled $17,100,000,000 at quarter end and represents 53 days in claims payable, up one day from Q2 of 2023. Outside of adjusted earnings, during the Q3, we announced The divestiture of Circle, our U.

Speaker 3

K. Hospital company, which triggers a non cash write down of goodwill. We also adjusted the carrying value of our U. K. Physician business, you can see these and other items in the table in our press release.

Speaker 3

We are pleased with the performance of the company in the 1st three quarters of year and are increasing our outlook to at least $6.60 of adjusted EPS for 2023. As Sarah mentioned, this puts us at greater than 14% adjusted EPS growth in 2023 after posting 12% in 2022, 2 pretty good years. The press release table has other 20 We also still forecast investment and other income a little over $1,000,000,000 excluding divestiture gains and losses. As we are almost to 2024, which we will go into more detail at our Investor Day in a little over 6 weeks, We continue to have confidence in our 2024 adjusted EPS floor of greater than $6.60 In fact, the strength of this quarter is another data point that increases our confidence. While I do spend a lot of my Time talking about and driving margin.

Speaker 3

Let me close by talking about growth, because Centene is a combination Margin expansion and growth investment opportunity. On growth, Medicaid expansion is coming in North Carolina late this year. And there's a pipeline of complex populations expected to come into managed care over the next few years. One example being the recent Georgia RFP as Sarah referenced. Marketplace has proven to be an excellent franchise and asset for this company.

Speaker 3

This business today produces more revenue than our Medicare Advantage business and that will widen In 2024. And even our PDP business, which may be small and relative revenue should grow meaningfully in 2024, These members produce pharmacy spend and are potential MAPD candidates down the road. We're Excited about the future and our ability to power through 2024 and come out the other side post divestitures, Post redeterminations and on our way to fixing Medicare, a better company than in 2021. On the other side of 2024, we look forward to driving a 12% to 15% long term adjusted EPS CAGR. Thank you for your interest in Centene.

Speaker 3

Rocco, we'll take questions now.

Operator

Thank you. We will now begin the question and answer session.

Speaker 4

Great. Thanks. I just wanted to maybe dig into the exchange performance in the quarter because obviously whenever You have 75% membership growth and you're being in MLR. It's always a little bit unusual, particularly because in the past we've seen, you know, SET enrollment Come in with MLR pressure. So can you just talk a little bit more about what's driving that outperformance?

Speaker 4

And as you grow membership faster than you were thinking, what gives you comfort around the MLR coming in better than people have been forecasting? Thanks.

Speaker 1

Yes. Thanks, Kevin. Good morning. Thanks for the question. As I talked about in my script, so let me hit on sort of what's driving the growth, which I think has a lot To do with the fact that we have an established franchise, we have number 1 for brand recognition in the market, a differentiated distribution network And just a lot of experience executing, and we sort of foresaw the growth that was going to come because of the additional awareness and affordability that was Not just through CMS spend on marketing and navigators, but really the sentinel effect of the extension of the enhanced ABTCs.

Speaker 1

Turning to performance, we're obviously pleased not only with the growth, but the fact that we sustained performance of that business in 2023 And done so exactly as you say despite having significant SEP membership growth, which in past years has created pressure Not just because of the risk adjustment effect, but also like we saw in 2021 through pent up demand. So when we think about the factors that are Contributing to overall performance and what's giving us comfort. The first is just what we're seeing in terms of underlying growth and performance of the core business that came in, In OEP. The second is the fact that, we are not seeing the pent up demand in the SEP membership like we saw in 2021, Partly due to the fact that those members some of those members are coming in from Medicaid where they had coverage and others would have been eligible for coverage in previous years. So belief is that they weren't carrying a lot of unaddressed acuity into the market.

Speaker 1

The other factor is and we pointed to this in the past, but In general, when we see this level of market growth, it drives a healthier overall risk pool and we're seeing some of that in the performance. But I think the bigger piece is probably just execution from the team, really solid pricing discipline coming into the year as we've been on a margin progression with this product, Execution on clinical initiatives, really thoughtful risk adjustment calculations, and again, just the having a team that's been doing this for a decade, I think is really showing in what you're seeing in terms of performance this year.

Speaker 3

Only thing I would add numerically is just we've been through 2 rounds of Wakely data. So you have to think about the claims cost matched against the risk profile of The population and so we've adjusted our risk adjustment payable actually up to $1,800,000,000 from 1,500,000,000 from Q2 to Q3, consistent with that feedback in the data from Wakely. And we're still holding The allowance on the insolvent peers or those that were Waiting to get paid from through CMS. And so that $314,000,000 that actually went up by $9,000,000 in the quarter, Because one of those peers is still operating at least for the first half of this year. So it wasn't the bring down of that reserve that helped the quarter.

Operator

Thank you. And our next question today comes from Stephen Baxter at Wells Fargo. Please go ahead.

Speaker 5

Yes. Hi, thanks. I appreciate the commentary you made on Acuity running in line with your expectations so far. I guess, how do you think the higher level of Disenrollment that we're seeing across the industry have impacted that or able to comment yet on what you're seeing in terms of utilization On the rejoiner population, especially maybe in the earlier cohorts. And then appreciate you flagging kind of this unusual item on the rate side.

Speaker 5

I guess, how should we think about the path To the Medicaid MLR that you just reported this quarter to what you're targeting for 2024 that 90.1? Thank you.

Speaker 1

Thanks, Stephen. Yes, so let me hit on the first part of the question relative to what we're seeing in levers and sayers. Obviously, overall, we're Our levers HBR less than stay as we had expected. What's interesting about the rejoiner rate, the last time that we updated on this, We were looking at April rates in that sort of mid-twenty percent range and then sort of reasonable Pareto as you move through The ensuing months, what we've seen in the last month or 6 weeks or so is really that April to August cohort all filling up Into what averages out at about 25%, which tells me that we're seeing a rate of rejoining that has picked up a little bit. Again, we think part of that is being driven by The CMS interventions and given the fact that 75% or sorry, 70% of those members have no gap in coverage and 95% of them have less than 2 months gap in coverage.

Speaker 1

We feel good about the fact that there aren't significant laggard impacts to Acuity in terms of what we're seeing in those rejoiner cohorts. And then maybe Drew, do you want to talk about the underlying Medicaid MLR?

Speaker 3

Yes, right. And Sarah said the levers Have a lower HBR than the stayers consistent with our expectations, but actually the rejoiners are right around the same HBR as the stayers. So That's looking good as well relative to our forecast. And then, yes, we're on track for the metrics we gave out, including the 90 1% target for 2024. As we get oneone rates and I mentioned that we've gotten 7 that include adjustments so far for oneone in the form of draft rates, that's just another positive weight on the scale of giving us confidence as we Turn the page into 2024.

Operator

Thank you. And our next question today comes from Josh Raskin with Nephron Research. Please go ahead.

Speaker 6

Hi, thanks. Good morning. Just a clarification first. I think I heard 20% now maybe going to 25% of Changes, I am curious about are you taking share from other plans when they're seeing re determinations and you're getting their members into your exchanges? And then you mentioned through the big growth in PDP.

Speaker 6

I guess just a question sort of strategy, it seems like a little de emphasis in terms of network Or catching points to the Medicare Advantage program, switching the PBM already. So I'm just curious on what the idea is around The low price products for the PDP next year.

Speaker 1

Yes. So thanks, Josh. Let me hit those points and then I'll turn it over to Drew. So what we are seeing on average across the April to August cohorts is a 25% rejoiner rate On average. So those again have sort of filled up from what had been a Pareto decreasing Pareto to pretty consistent 25% rejoining rate.

Speaker 1

And then our expectations, again, just mathematically, we're about that 10% to 15% recapture, which Leads the 200,000 to 300,000 member expectation that we're still tracking in line with. We are pulling share from other Players and trying to track pretty closely, obviously, members that are coming from our plans. And then to the extent we can identify Specifically those members that are coming from other Medicaid programs.

Speaker 3

Yes, Josh. And now PDP and you'll remember This business going back 10 years, which was a legacy WellCare asset and business, the strategy there is as much about Corralling and managing pharmacy spend and having a future feeder for MAPD than it is about Generating earnings on what's this year $2,500,000,000 of revenue. So I think it was fortuitous that our Change and improvement in cost structure or change to a new PBM and a meaningful improvement in cost structure occurred right when There are a number of rule changes impacting PDP like no pharmacy DIR, elimination of the member traffic phase, the cap on insulin. And so we are able to leverage that cost structure and make it affordable for our members, While the direct subsidy went up meaningfully, and so we'll be getting paid that direct subsidy by the government. So it was actually a good alignment Of opportunities for us to continue to leverage that business to actually help our other businesses in the terms of pharmacy cost structure.

Operator

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

Speaker 7

Thanks. Good morning. Quick question and a follow-up. So the questions On the Exchange business, just can you give us some color in terms of how that that membership growth was pretty exceptional in the Q3. How did that look versus your expectations?

Speaker 7

And how does that kind of educate 2024? And then specifically on 2024 with the margins there, My kind of back of the envelope, Drew, is that your kind of guidance for next year assumes margins Towards the higher end of that 5% to 7.5% target range, is that right? And then just a follow-up On that, the retro, can you give us any more color in terms of the Why you think that was incomplete? That just sounds something I've never heard the words incomplete on a rate update. And What gives you the confidence that they're going to reverse that?

Speaker 7

Is there any kind of color from the state that you could share with us on the confidence and the timing? Thanks.

Speaker 3

All right. First on the growth in the quarter in marketplace, you're right, that was outstanding growth. Now you may remember we Said that we expected to get to 3,600,000 members this year and we're just above 3,600,000 this quarter. So Most of that was sort of embedded in our forecast as we saw the momentum from Q2. But you're right, it is a good indicator and Sort of momentum builder for 2024.

Speaker 3

On margin, we are still just this year, we are in marketplace. We're still just below Our target range of 5 to 7.5. And that's not because of HBR, it's actually because of all the growth in the year one commission that comes along with that. So it's It's a real good reason to be just below your target range, which means there is capacity as expected and as we have forecasted into 2024 to Span margin into that 5% to 7.5% zone. And so I'll just leave it at that we expect to pierce that zone and be well into that range For 2024 and we our forecasts are on track for that.

Speaker 3

We price for that and that's what we expect. Regarding probably not going to get too much into a single state, call it, negotiation. But yes, that was a 40 basis point Push in the quarter that pushed our HBR up a little bit higher in Medicaid. And just based upon the back And the construction of that incomplete and maybe rushed retro rate, we expect a favorable future outcome maybe in Q4,

Operator

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

Speaker 8

Thanks. Hi, everybody. Two quick areas of question on the marketplace Comments, I know traditionally that product, you hit a deductible potentially in the Q4 and your utilization rate upticks. Are you Expecting that you think you have a good visibility on all these new members and how they might act in the Q4 and maybe to what degree have you reflected that? And then as you think about that population, we sort of talked around it with a couple of the other questions.

Speaker 8

Moving into next You mentioned the commission dynamic potentially better risk scoring and so forth. How much of a margin tailwind Will this population represent for you as you look into next year? I know the churn rates And that population were high by historically, but I think they've come down and I don't know if that's the same for you, but maybe any comment along those lines

Speaker 1

Yes, A. J, you're right, that particularly in that SEP membership, we're seeing more retention industry wide, which is, I think, logical just given the installation and the extension of the enhanced APTCs and the increased affordability of the product. And as you said, the sophomore effect of that membership in particular, the fact that we'll have a full year of risk adjustment And we'll have moved through any sort of early utilization, we think provides a tailwind for the retained part of that population. And as Drew said, our focus going into 2024 is really retaining the tremendous growth that we've had in 2023 and then continuing our progress on pricing discipline In order to expand margin and peers into that 5% to 7.5% range.

Speaker 3

Yes. And on your Q4 comment, you're absolutely right. Sort of if you look at the slope lines of the deductible wear off throughout the year, we do expect a healthy tick up in HBR. We plan for that in our commercial including marketplace businesses. And also in Medicare, normally a step up in HBR, but then you add the PDR on top of that.

Speaker 3

So those are some of the things to think about for Q4, as well as heavy SG and A As expected, as typical in Q4, which is as you're calibrating your models for 2023 to finish out the year.

Operator

Thank you. And our next question today comes from Nathan Rich at Goldman Sachs. Please go ahead.

Speaker 9

Great. Thanks for the questions. I wanted to ask on The Medicare Business. I guess, is there any change to how you're thinking about MA enrollment And revenue kind of relative to the initial expectations now that you have a fuller view of the competitive environment. And just for clarification, are you still planning the $200,000,000 PDR in 4Q?

Speaker 9

And then kind of bigger picture, could you talk about the path to getting The 85% of members into 3.5 star plans by October of 2025 and the areas that you're investing in and Kind of any incremental investments that you're maybe planning for 2024 in that respect? Thank you. Yes.

Speaker 1

Thanks, Nathan. So with the competitive landscape and additional information, we have not changed our view that we would be down $4,000,000,000 in 20 20 in the Medicare business. Again, our focus is really on narrowing to that lower income complex population that was part of how we constructed the bids and certainly how we Crafted our strategy going into AEP. And then relative to Starz, we're obviously pleased to have delivered results in line with our Patients beginning in Q2, but there's obviously still work to do. And so this next cycle will be an important additional step to that goal of 85% of members in 3.5 stars.

Speaker 1

And our focus really continues to be on rebuilding the operational capacity and the infrastructure to Support sustainable programmatic improvement, and that was really demonstrated by moving again 53% of our membership from sub-three 87% of our membership at or above 3 in this first step. So we'll need to continue to pull up underperforming contracts. We'll To move contracts and members from the 3 across that 3.5 star threshold, and a lot of that is, Again, while we've tried to create visibility into some of the underlying operational metrics that we're tracking internally around our overall CTMs, Around call center metrics and our ability to answer questions for members and provide them a good member experience, getting them connected to physicians, Getting them aligned to value based providers, so those incentives are aligned to close gaps in care, which ultimately accrues not just to HEDIS, but to CAP. So Those are all the things that we're really focused on. We've got a very robust governance structure in place.

Speaker 1

As we've said before, we've got incentives aligned top to bottom in the organization. There is no Fusion that this is a priority, and we continue to be focused on making incremental improvements and holding steady on those improvements that we've made to date.

Speaker 3

And you asked about the our view on the PDR has that changed. Our current guidance gives us capacity for a PDR in the mid-two 100s. But the accounting calculations in December will dictate that precise number.

Operator

Thank you. And our next question today comes from Lance Wilkes with Bernstein. Please go ahead.

Speaker 7

Thanks. Just want to do a quick deeper dive on a couple of the items that you've talked to. One would be on Medicaid redetermination. If you can just talk a little bit about For levers, any sort of double coverage analysis you've done to see like what percentage of those were maybe 0% MLR? And then for this more complex Population focus and MA going forward.

Speaker 7

Do you know what the kind of percentage target margin would be for that as you think about that as a sustainable business Going forward and if you wanted to give any update on your PBM cost save, obviously $500,000,000 I think was the category cost For gross margin improvements, it seems like you may have upside to that. So we'd love to hear any further color. Thanks.

Speaker 3

Yes. Back at I think in the January conference, we outlined, as we talked about a number of the factors Before we had any real data on redeterminations and now we've actually got real data, which sort of trumps all the hypotheses that we were Going through leading up to April of 2023, we had indicated that as we look through our data, We could see through COB claims, the other insurance coverage where members had duplicative coverage had gone from 2.7% of the Medicaid population in 2019 to 3.4%. So, made sense at the time. We sort of triangulated that with a bunch of other things to come up with our forecast that we outlined on the Q1 call. And the good news is we're right on track with those forecasts.

Speaker 3

Now that we've got Yes, we're well into redeterminations and over 40% according to our estimates through redeterminations. On the PBM, that's right on track as Sarah mentioned and the economics as well that we're expecting. And As you would expect from us, many of those are in the form of guarantees, that are PBM underwrote. So we're on track for The contribution to that greater than 660 from the PBM economics.

Speaker 1

And then just relative Lance to your question On the complex populations, obviously the reimbursement for those populations can be higher, but you're dealing with a higher acuity And more complex care within that cohort. And so our view is that because that aligns with our in managing Medicaid members that we have the opportunity through value based arrangements for that to be a profitable cohort, but also to drive Differential outcomes for that population. And if you take a step back and look at the segments of the Medicare population, the lower income complex members Are the fastest growing segment and that is part of why we have focused on that membership not just for this cycle, but as part of our long term fundamental strategy.

Operator

Thank you. And our next question today comes from Gary Taylor with Cowen. Please go ahead.

Speaker 10

Hi, good morning. Two quick ones on Medicare. The first is as we're thinking about Medicare enrollment in 2024 and looking at some of the reductions across OTC and Flex Benefits and SSBCI, Looks like those hit pretty evenly across both individual MA and, BSNP. And I know you're talking about focusing on more complex care next year and I think DSNP has actually been growing this year. So just wondering how we should think about Individual retail MA versus DSNP, if we should see similar trends.

Speaker 10

And then just my second question on MA is, I still get a lot of questions from folks Trying to do the EPS bridge, I know you said $0.80 loss from Medicare next year. Just wondering if you could give us just an updated Figure for Medicare this year, including the PDR?

Speaker 3

Yes. So sometimes it is tough to glean From public data exactly what we did with benefits or what any payer do with benefits, you can get directional. But if you sort of got into our bids And now our product set that's being sold out there in the market today, you'd see that we heavily trimmed our Part B give back and PPO plans, but we invested in DSNP. And with the supplemental benefits, we actually combined a number of supplemental benefits into a Simple Spendables card. So think Flex, OTC, Grocery.

Speaker 3

And so that simplifies it for the member. And you may not actually be able to divine that from some of the landscape files. But yes, as we said earlier, We haven't changed our view on sort of our forecast for 2024 in terms of about $16,000,000,000 of Medicare Advantage revenue down about

Operator

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

Speaker 6

Hi, thanks. I wanted to just ask about 2 salient points relative to medical costs. And first, just maybe an update on The behavioral utilization that you've been seeing earlier in the year and how that's been getting factored into the rates and comfort with that in 2024, I guess, particularly for the big Magellan behavioral book. And then second would just Be definitely curious in your thinking just around the new California minimum wage law for healthcare workers and similar types of All legislation and how you sort of are thinking about that factoring into unit costs and into your pricing Looking out over the next several years? Thanks.

Speaker 1

Yes. So relative to California, that does not apply to MCOs, But we're obviously tracking that for potential pass through costs from providers. So again, keeping an eye on that. Relative to behavioral, that's still a component of underlying utilization. It's not creating Quite as much pressure as we are seeing before, but certainly within the marketplace, population in general, Wide trend, substance use and opioid use disorder continues to be something that the whole industry is focused on.

Speaker 1

And to your point about Magellan, The increased focus on integrating medical care with behavioral and one of the things that we hear very consistently when we are out with our state partners, almost every single governor that we have talked to this year rates behavioral health and mental health as a number one issue in their And whether that's staffing shortages, access, thinking about broadband in order to increase telehealth, they are all focused on ways that they can support providing additional behavioral health to their membership. And it has actually created really nice tailwinds relative to our Magellan business. So Maybe, Ken, if you want to talk about some of the recent wins that Magellan has experienced as a result of this focus.

Speaker 11

Yes. Thanks, Sarah and good morning, Scott. We realized success in the state of Idaho, which I think is Forebear to opportunities to work with other states as they think about the point that Sarah made. I think she and I have met over 30 governors in the last 6 months. Every one of them mentioned behavioral health is top 3.

Speaker 11

So we're working with a number of states. I won't mention them specifically, but behind the scenes to cultivate to capitalize on this growing interest among governors in supporting the needs of their Medicaid members with behavioral health. And then the Point about the integrated offerings, our public sector Magellan business has this is a long standing distinctive competency. It's a business That will power and leverage as we think about combined offerings moving forward and really excited about our prospects. And with Wade's appointment, Zane and the team that runs business development here leveraging the Magellan asset, a lot to like about the future.

Operator

Thank you. And our next question today comes from Sarah James at Cantor Fitzgerald. Please go ahead.

Speaker 12

Thank you. So circling back to your comments on the levers having higher HBR than the stairs and 7 out of 21 states adjusting for acuity. Is there any way to give us more color on that sizing the range of the Lever versus Steyr HBR differential or how influential, how meaningful the acuity adjustments are to rates overall?

Speaker 3

Yes, consistent with our expectations. And as you might imagine, it really varies by state to state, Subpopulation to subpopulation and you're right with the oneone rate 7 of them in all including Acuity adjustments feel pretty good about the matching of rates so far With a couple of exceptions, but in the aggregate matching of the rates with our acuity forward estimates.

Speaker 1

And I just want to add one clarification, Sarah. I know this is what you meant, but I just want to be sure that what we're tracking is that the levers HBR is Less than the stayers, and that is what was expected. And so one of the things that we've talked about in the past that we did leading into the redeterminations process was Identifying those members that we would have predicted would roll off as we look forward into the redetermination process, and then we could Subsect those populations and run the differential HBR, and those are the inputs that went into our model that we talked about on the Q1 call As we build up what both rate and acuity we would want across each state and then rolled up to the portfolio in order to be tracking as we are In line with expectation going into 2024.

Operator

Thank you. And our next question today comes from Michael with Morgan Stanley. Please go ahead.

Speaker 13

Thank you. Just first quickly regarding exchange sequential membership growth, the 386,000, much of that 386 is purely just recapture Medicaid redetermination live? Number 2, regarding MA. I'm curious to hear your thoughts on what transpired in California, the star ratings decline disruption there across a number of market leading plans, whether that might positively impact your Growth assumptions in California. And then lastly on star ratings improvement.

Speaker 13

I understand in 2Q, you had about 47% of your MA lives Value based care arrangement, it grew about 3% year to year, but what was the percent of change of lives and downside arrangements? I'm curious because I understand that this metric improves, so does the overall consumer experience, which could help organically generate improvements in Quality consumer experience metrics. So I'm trying to understand how much curtailment that could be for next year? Thank you.

Speaker 1

Yes. Thanks, Michael. So of the 386,000 in the quarter, it's not a perfect science to figure out exactly what you're coming through pure Enrollment growth versus those coming over from redeterminations. We're obviously able to track those who are moving from a Centene plan to a Centene plan, And then we extrapolate based on the data that we are seeing, based on the data that CMS is publishing, and then in cases where we can specifically identify which of members are coming over from a competitor. So not entirely clear, that we can again sort of dissect that membership as you talked about.

Speaker 1

In California, I think what we're seeing in California is actually consistent with what you see across the entire country if you take a step back and the fact that Two key cut points that were put in this place in place this year were tougher in those middle ranges of Star ratings and particularly trimmed the outliers as we all know. And so that was part of what happened in California. But I think it's too early to see what Impact that will have in terms of overall competitive outcomes through the AEP process, so we're only about 10 days into that, but Certainly look forward to updating everybody on that at Investor Day. And then relative to Starz and value based arrangements, again, we're still in that high forty range from a value based care standpoint, and it is a mix of upside only and upside downside risk. And you're right that as we move members into More downside risk arrangements, we get tighter alignment between us and the providers.

Speaker 1

We lead to better HEDIS outcomes in terms of getting members addressing gaps in care. And we know that there's a direct correlation between members who access care and their ultimate CAHPS scores. And so that has been a huge focus for us In general, but obviously a leverage point where we can use our provider partnerships to help

Operator

And today's final question comes from Calvin Stimac with JPMorgan. Please go ahead.

Speaker 5

Thanks for the question. A couple of clarifications. So First, on the oneonetwenty four rate updates, I think you said so far 7 of the states are including acuity adjusters. Just to be clear, is the expectation that the rest of that oneone cohort will also provide acuity adjusters? And then second, I think in the past you've talked about the percent of 0 and low utilizers being up only marginally.

Speaker 5

Does that fully normalize back to the historical there's still some room for that to work its way down? Thanks.

Speaker 3

Yes, we do expect other than one state where We're only LTSS, which is an exception obviously relative to redeterminations. The answer is yes to your first question. And then you're right, we're still shifting during this intermediate time period of getting to a post redetermination environment from the pre. And the pre redetermination environment, the 0 utilizers were up for the expansion population. They're actually down in ChIP And TANF, as you're recalling correctly, was flat.

Speaker 3

So we're moving through that process, refreshing data, but that's sort of We're in between the pre and the post redetermination phase, so that will shift throughout that time period.

Operator

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Sarah London for any closing remarks.

Speaker 1

Thanks, Rocco. As we close out this morning, I'd just like to thank our more than 66,000 employees for delivering excellent results this quarter year to date. As a company, we remain focused on our mission and on creating value for our members, our stakeholders and our shareholders. We appreciate the time and interest morning and look forward to continuing this discussion at our upcoming Investor Day in December. Thanks everybody.

Operator

Thank you. 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.

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