Centene Q3 2021 Earnings Call Transcript

Participants

Corporate Executives

• Jennifer Gilligan, Senior Vice President, Finance of Investor Relations
• Michael F. Neidorff, Chairman and Chief Executive Officer
• Sarah London, Vice Chairman
• Drew Asher, Executive Vice President and Chief Financial Officer
• Kevin J. Counihan, Senior Vice President of Products

Analysts

• Joshua Raskin, Nephron
• Matthew Borsch, BMO Capital Markets
• A.J. Rice, Credit Suisse Group AG
• Kevin Fischbeck, Bank of America Co.
• Justin Lake, Wolfe Research
• Ralph Giacobbe, Smith Barney Citigroup
• Scott Fidel, Stephens
• Lance Wilkes, Sanford C. Bernstein
• Ricky Goldwasser, Morgan Stanley
• Stephen Baxter, Wells Fargo & Company
• Gary Taylor, Cowen & Co.
• George Hill, Deutsche Bank Aktiengesellschaft

Presentation

[Operator]

Good day, and welcome to the Centene Corporation Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the call Jenn Gilligan, Senior Vice President, Finance and Investor Relations. Please go ahead ma'am.

[Jennifer Gilligan, Senior Vice President, Finance of Investor Relations at Centene]

Thank you, Rocco, and good morning everyone. Thank you for joining us on our third quarter 2021 earnings results conference call. Michael Neidorff, Chairman and Chief Executive Officer, Sarah London, Vice Chairman and Drew Asher, Executive Vice President and Chief Financial Officer of Centene will host this morning's call, which can also 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 third quarter 2021 press release, which is available on the Company's website under the Investors section.

Additionally, please mark your calendars for our upcoming 2022 guidance meeting to be held on December 10. We will invite sell-side analysts to participate in person in New York, and ask others to participate virtually. With that, I would like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Thank you, Jennifer. Good morning, and thank you joining Centene's Third Quarter Earnings call. As you will notice today, we are evolving our presentation's format to a streamline version and with essential facts and commentary. I'm pleased to have Sarah London and Drew Asher joining me today. Brent Layton has a conflict that could not be avoided, but you can expect him to join us on future calls. First, on the quarter, we were pleased with the results and the fact that the matrix was straightforward with minimum noise. In the quarter, we generated revenue of $32.4 billion and HBR of 88.1% and adjusted earnings per share of $1.26. Drew, provide additional context.

Overall, the numbers reflect a return to a normal utilization while still covering reasonable amounts of COVID costs which seem to have peaked in August. Importantly, our performance provides a strong foundation for our value creation plan and we remain committed to our margin goals. Further supporting our strategic progress during the quarter, we announced a series of organizational changes including a point Sarah London as Vice Chairman of the Board of Directors and Brent Layton as the company's President and Chief Operating Officer.

I would also like to acknowledge that David Steward, an 18-year veteran of our Board of Directors retire to pursue personal business interests. We do not plan to replace his position, as we continue to work on refreshing and streamline the Board to a size of 9 to 13 members. Turning to the current landscape. Overall, the portfolio is performing well. We delivered a strong membership increase in Medicaid are positioned for continued growth in Medicare and we continue to stay the course in marketplace. Sarah, will provide further detail. We are working closely with states and the timing redetermination, which has so far been extended until January with the opportunity for additional extensions three months at a time.

As redeterminations to resume, I would like to remind you that not all states will be doing so at the center. In addition, we look forward to offer members who will no longer qualify for Medicaid, the opportunity to enroll in our marketplace for us. We expect that advanced premium tax credits will keep costs in line for these members, and we value the opportunity support continuity of care and preserve, provide relationships which in the long-term leads to higher quality care, which is much more cost effective.

Looking ahead of 2022, there are several additional factors we continue to monitor and evaluate. These include the pace of the RFP pipeline, ongoing growth in Medicare, the opportunity for improvement in marketplace license, as well as the COVID landscape overall. We will provide full details on these factors and their potential impacts, as headwinds and tailwinds at our Investor Day in December.

In addition, we are committed to achieving an investment grade rating and a disciplined capital allocation framework that takes into consideration our priorities including investing in our business debt management and share repurchases. Before I close, I would like to highlight the importance of vaccine mandates in stopping the transmission of COVID and protecting those who cannot yet safely receive inoculations, particularly the immunologically compromised, and young children for whom vaccine access is getting closer, but still pending.

Centene has been a leader on this critical issue mandating vaccinations, as an additional employment. We also continue to support our members in assessing the vaccine to a national outreach and campaigns and creative participation such as the Pro Football Hall of Fame NESCO. I would also like to remind you that this platform for vaccines has been in development for the past 25 years and scientists are indicating is likely, one of the safest vaccines ever developed. In closing, we are pleased with our third quarter results and has the same momentum across the enterprise. We remain focused on executing across the value creation playbook, we have in place. As always, we intend and continue to provide transparent updates, as we progress through our initiatives and I look forward to seeing many of you at our December Investor Day. Finally, I would like to thank all our employees for their unwavering commitment and service throughout this unprecedented time. Thank you for your continued interest in Centene, and would turn the call over to Sarah.

[Sarah London, Vice Chairman at Centene]

Thank you, Michael. Good morning, everyone. I'm going to provide highlights of our product line performance before touching on the early progress we are making around our value creation plan. During the quarter we continue to build on our market leading position and are experiencing solid growth and good outcomes. In Medicaid our business continues to perform well, membership increased to $14.8 million aided by continued suspension of redeterminations and the go-live of our business in North Carolina. In marketplace with more than 90% of our membership receiving some form of subsidy we maintain our low income focus and our commitment to providing healthcare access and affordability to our members.

At the end of the third quarter our marketplace membership was $2.2 million, and we are pleased with the progress of our clinical initiatives as we head into the fourth quarter. Looking ahead, our 2022 marketplace offerings reflect a diverse and evolving needs of our Ambetter consumers. We are introducing a group of new products designed to optimize flexibility, access and affordability. In addition, we plan to grow our coverage map by entering five new states with marketplace products. As we continue to monitor policies and plans around the return of Medicaid redeterminations we believe that our enhanced footprints within both Medicaid and marketplace positions Centene well to support our members with options for coverage continuity.

In Medicare Advantage, we continue to see a compelling growth opportunity for the company. We are expanding Centene's footprint to reach $48 million Medicare eligible adults across the country, which is more than 75% of eligible beneficiaries. Today, Centene serves more than 1.2 million Medicare Advantage members across 33 states. Beginning in 2022, the company expects to offer plans in 327 new counties, representing a 26% increase and three new states including Massachusetts, Nebraska and Oklahoma. Now turning to our value creation plan.

As as we outlined this past June, we have embarked on our strategy to leverage Centene's size and scale and drive margin expansion through SG&A efficiencies, medical management initiatives and strategic capital deployment. We are focused on generating sustained growth and margin expansion. And although it is still very early seeing the enterprise-wide commitment from the outset has given me confidence that we are on the right track to achieve our goal. Brent, Drew and I are leading this effort and we believe, we now have an organizational structure in place to drive this forward across our business and functions.

On the SG&A front, we have identified opportunities across the company where we believe we can be more efficient. This isn't about cost cutting, it's about positioning the company for long-term success. For example, we piloted new technology within our call centers for use by Centene employees. This technology trial yielded significant reductions in cycle times, and now will be rolled out enterprise-wide. Another opportunity we've mentioned is a value creation target is pharmacy. As we alluded to in June, we are now taking steps toward consolidating down to a single PBM platform, and rationalizing those platforms we view as non-essential. We began this work in Q3, and look forward to providing more detail around this overall program in December.

In addition, we are progressing on the review and potential sale of certain non-core assets, as part of our portfolio optimization process, which has taken on an increased focus as part of the value creation plan. Again, we are in the very early stages, and as we continue to leverage our size and scale to our benefit these are just a few of the many levers we are pulling to achieve our adjusted net income margin target of at least 3.3%. Let me remind you that as we progress through these and other initiatives, particularly in 2023 and 2024, we anticipate seeing a greater impact pushing us toward our goal.

Before handing the call over to Drew, let me provide a quick update on the Magellan transaction. We are still awaiting one final regulatory approval in California, and continue to expect the deal to close by the end of 2021. We continue to work with the regulators to move the transaction to completion. Now, let me turn the call over to Drew, to provide more details on our third quarter performance and our updated outlook.

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Thank you, Sarah. This morning we reported third quarter 2021 results including $32.4 billion in revenue an increase of 11% compared to the third quarter of 2020 and adjusted diluted earnings per share of $1.26 revenue grew by $3.3 billion compared to the third quarter of 2020 and total membership increased to $26.5 million, up 5% compared to a year ago. Our Q3 consolidated HBR was 88.1%, right on track with our full year guidance. At a webcast presentation in mid-September, we provided insights into the first two months of the quarter, as a reminder, in July we saw subsidence in pent-up demand in our marketplace business followed in August by a spike in COVID costs due to the delta variant. Consistent with national data our COVID costs peaked in late August, drop throughout September and the sharp drop of COVID costs continues in October.

While the delta variant has a higher peak, as measured in authorizations compared to January 2021, it peaked and fell rather quickly. With our diversified enterprise we were able to manage through this given our steady performance in Medicaid and Medicare. Accordingly, we are maintaining the midpoint of our consolidated HBR range for 2021 just shrinking the width of the range since we're three quarters through the year. Our adjusted SG&A expense ratio was 8.6% in the third quarter with higher short term variable incentive compensation costs compared to Q2 given the positive trajectory of the business.

While we are getting some SG&A leverage on our growth in 2021, there is a lot more to come over the next few years, as we execute on the value creation plan. One item to point out from a mix standpoint circle, a well positioned ASC like hospital enterprise and England has an SG&A rate in the '30s on service fee revenue of approximately $1.4 billion. This has an approximate 30 basis point mathematical impact on our consolidated SG&A rate for Q3 2021 and going forward. Continuing on the highlights of the quarter, cash flow provided by operations in the third quarter was strong at $1.8 billion. With respect to unregulated cash we had $2.7 billion at quarter end, which includes the $1.8 billion we borrowed to partially fund the Magellan transaction. We expect to need approximately $2.3 billion of unregulated cash to close Magellan in the fourth quarter.

Debt at quarter end was $18.8 billion, our debt to cap ratio was 41.2% inclusive of Magellan financing and excluding our non-recourse debt. Our medical claims liability totaled $14.1 billion at quarter end and represents 51 days in claims payable compared to 48 in Q2. This three-day increase was driven by the timing of state-directed payments, claims payments and state fee schedule changes. You will see a couple of items in our GAAP to adjusted EPS reconciliation, a $309 million one-time gain as a result of our acquisition of the remaining 60% of circle in early July 2021 and a write-down of our investment in RxAdvance of $229 million in the quarter, as we are simplifying our pharmacy operations, both of these are non-cash items.

Before we get to updated 2021 guidance I wanted to comment on the recently announced rating year 2022 star scores. This will drive 2023 Medicare revenue. We are certainly pleased with over 50% of membership in 4-star contracts and our first 5-star contract, rating year 2022 benefited from the continuation of disaster provisions due to COVID with an expectation of those provisions sunsetting and upon reviewing the in-process results of our quality program we expect rating year 2023 scores to drop, followed by a subsequent jump in rating year 2024 scores. This essentially has the effect of providing some fungible investment dollars for calendar year 2023. We've updated our full-year 2021 outlook including a narrowed adjusted EPS guidance range of $5.05 to $5.15. This outlook incorporates revenues within a range of $125.2 billion to $126.4 billion increased by the inclusion of Circle and expected state-related pass through payments of $500 million. It includes an expected HBR of 87.6% to 88.0% and then SG&A ratio of 8.2% to 8.6% 20 basis points higher than the prior guidance with the largest driver being the mix math on Circle as we just discussed.

While we still have a quarter to go to finish 2021, the strength of our diversified enterprise has enabled us to manage through the volatility of COVID, pent-up demand and resulting 2021 marketplace pressure. This enterprise strength will only improve, as we execute on the value creation plan over the next few years. With regards to 2022, consistent with our public comments in September, we continue to expect modest adjusted EPS growth next year. We look forward to providing more details around 2022 expectations and going more in-depth into the long-term value creation drivers during our December 10 Investor Day. Thank you for your interest, and operator you can now open up the line for questions.

Questions and Answers

[Operator]

[Operator Instructions] Today's first question comes from Josh Raskin at Nephron Research. Please go ahead.

[Joshua Raskin, Analyst at Nephron]

Hi, thanks, and good morning everyone.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Good morning.

[Joshua Raskin, Analyst at Nephron]

Good morning, Michael. A question on sort of 2022 top-line, and I know the June Investor Day, I think you talked about $124 billion and a pretty stale number at this point. But I'm curious specifically as sort of how you think about that line just directionally next year? And specifically, as we're starting to see a little bit of the competitive environment for both MA and exchanges in the open enrollment period for next year?

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Well, we'll give you the bridge on Investor Day that walk you across to the full results. But as Drew and others in this room have indicated today, we see continued strength in our Medicare product, Medicaid and we see, we think, we're holding our own and doing better in the marketplace. So on balance, we see growth in the top line, obviously, and some modest closed in the bottom line coming from that.

[Joshua Raskin, Analyst at Nephron]

Got you and just a follow-up. So if we thought about that is sort of mid-single digit topline growth and something very similar on the bottom line, is that kind of what you guys were talking about in terms of modest growth?

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Hey, Josh, that's a good place to be right now. Yes.

[Joshua Raskin, Analyst at Nephron]

Okay, perfect. Thanks.

[Operator]

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

[Matthew Borsch, Analyst at BMO Capital Markets]

Yes. I was just hoping, maybe you could sort of revisit the headwinds and tailwinds for next year. I'm not looking obviously guidance isn't going to come until your December 10 event. And maybe if there is a particular focus there it's sort of the magnitude at least directionally of the headwind you expect from the Medicaid redeterminations.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Yes. Outside and Sarah and some others can jump in, but we've said that, we saw there is a a headwind there, but we're not sure of the timing, it will vary by state. And depending on let's say the economy and where things are it could be continued three months at a time, so we are not going to be precise on the timing. But we see it mitigated by the fact that with the advanced tax credits and things supporting marketplace that individuals will be able to move over to our marketplace as far as maintain their network, their relationships with physicians which will be a mitigating factor. And as we get closer, we see how it's all developed and in December, we hope to be able to give you additional detail.

[Matthew Borsch, Analyst at BMO Capital Markets]

Okay. Thank you.

[Operator]

Okay, thank you. It appears our next question today will come from A.J. Rice at Credit Suisse. Please go ahead.

[A.J. Rice, Analyst at Credit Suisse Group]

Thanks. Hi, everybody. I would just be curious you guys have talked now for two quarters about this idea of reviewing non-core assets, as well as today you've got more explicit commentary about the pharmacy benefit management restructuring. I know you're probably not going to say what you're looking at doing on the non-core assets, but do we have a sense of timing? Is that something that will happen over the near to an intermediate term or is that more of a long-term review? And on the PBM restructuring, is that, I think before you talk about maybe '23 relevant contracts were coming up for renewal is something, based on your announcement today making that a more near-term opportunity to realize savings or is it still sort of something that will impact '23 and '24?

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

I'll start and Drew and others can jump in, Sarah. But the evaluation and what we're doing with non-core assets to say that any time it's an ongoing thing. It's not something in the future, but I expect, as we achieve we expect the results from what we're doing and you can -- stay tuned and you will see it starting to happen sooner than later. But once again, we're not, it's not how fast it's how well and we understood that we get to maximize the value and protect the individuals involved in it. So, but it's something that it's not, we're not talking to look for this in '23, '24, it could be, you should expect some indications of what's happening sooner. Sarah, you want to add some?

[Sarah London, Vice Chairman at Centene]

I would just echo that we're actively in the process, and as Michael said, I think, there will be more information coming, both in the short term and on an ongoing basis, because this is part of the discipline of looking at the portfolio overall. On the pharmacy front, I would say, we're very focused short term on logical consolidation, as we talked about, as well as rationalization of non-core platforms. And as we said before, we have an RFP launching in 2022 that's more focused on the long-term. This I think is a great example and then sort of microcosm of the value creation opportunity, and so our plan is to actually go through this in detail in a case study in December, so you can understand all of the moving parts.

[A.J. Rice, Analyst at Credit Suisse Group]

Okay, great, thanks a lot.

[Operator]

And our next question today comes from Kevin Fischbeck of Bank of America. Please go ahead.

[Kevin Fischbeck,, Analyst at Bank of America]

Great, thanks. If I understand what you've been saying so far around utilization, it sounds like the Medicare and Medicaid businesses have been performing relatively well, but the exchange businesses are still seeing pressure. Can you comment a little bit more about what exactly you're seeing from an MLR and cost structure perspective? And then how you feel like your pricing for next year would reflect that? Have you caught everything? Should we expect normal margin next year or is there a reason to believe that it hasn't been fully reflected yet?

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Thanks, Kevin, this is Drew. We certainly expect to make progress towards our 5% to 7.5% pre-tax long-term goal for marketplace next year and we sort of price to sort of move in that direction. With respect to the quarter, as I mentioned, we saw subsidence in pent-up demand in July, which was good to see. Actually marketplace took at the hardest in terms of the August spike in the delta variant of COVID, but it retreated pretty quickly. So there is still pressure in the quarter on marketplace. But you're right, the strength of Medicare and Medicaid's were carried through the portfolio as a whole, and we look forward to the expansion that Sarah mentioned in marketplace and some of the new products that will address some of the competition, and we expect to make margin expansion progress in marketplace next year as one of the tailwinds going into 2022.

[Kevin Fischbeck,, Analyst at Bank of America]

Yes. I guess, one of your competitors signaled that there was maybe lower visibility than normal in the risk adjustment on the exchanges this year because of the special enrollment period. I guess how do you feel about that this quarter you visibility into that this year and that?

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Yeah, you're right. We manage and we sort of track to four cohorts of the marketplace business. The renewal cohort, the new cohort in AEP, the SEP, special enrollment period pre-May, and then the SEP may plus when the subsidies, the enhanced APTCs were in place. And so, we can track the MedCost drivers, you're right. Because it's a partial year for those new members you have a more limited risk adjustment opportunity both in terms of having the acuity reflected in risk adjustment, and then just the calendar of having them less than 12 months. But we expect in the roll into next year with a full year of that opportunity.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

There Is also some COVID-related costs that were not subject to risk adjustment, so that has an impact on it as well. So it's not a typical year, it was really a typical in a lot of ways.

[Kevin Fischbeck,, Analyst at Bank of America]

Great, thanks.

[Operator]

Our next question today comes from Justin Lake at Wolfe Research. Please go ahead.

[Justin Lake, Analyst at Wolfe Research]

Thanks. First a quick follow-up on Kevin's question. Drew, can you. I think you'd talked about the fact that at least at the high end of the MLR range you're assuming that exchanges might be kind of breakeven this year, can you give us an update there. And then, one thing I noticed on the accruals for medical cost payable it looks that your reserves grew pretty significantly in the quarter relative to premiums. Is that just trying, Drew, as you kind of take over taking a little bit more conservative view on kind of how you set that or is there something mechanical there? Thanks.

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Yeah, on the last point it was a little bit more mechanical. I mean, clearly, reserve strength is an important factor of running a good business, but we outlined a three-day increase sequential as there is pass-through payments that are sitting on our balance sheet that need to get to their ultimate homes, and then there is some timing of pharmacy invoices and other things sort of mechanical that's driving that three-day increase sequentially. And then on marketplace you are right. We priced our margin expansion off of this year. As Michael said, look, this is a choppy and difficult year in marketplace with the various COVID impacts, including the pent-up demand in Q2 and the risk adjustment changes that CMS made earlier this year. But the good news is, we maintained our HBR guidance, we've got a great portfolio, diversified portfolio across the businesses, so we were able to withstand those headwinds in 2021 that we expect to flip into tailwinds going into 2022 in the marketplace business.

[Operator]

Thank you. And our next question today comes from Randy Giacobbe with Citi. I'm sorry, Ralph Giacobbe with Citi. Please go ahead.

[Ralph Giacobbe, Analyst at Smith Barney Citigroup]

Thanks, good morning. Again just to Justin's questions, can you give us a sense of exchange margins, and where they are this year? I guess, first. And then second, you talked about redetermination both in terms of sort of timing around sort of the PHA. Just want to understand that a little bit more in terms of state discretion around that, I guess, and then the last piece of it. Can you give us a sense of how you view profitability between Medicaid and HECS generally. So if you do recapture those lives, how we should think about the economics of that? Thanks.

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Yeah, on the margin question, we're below our target, that's obvious this year, and we need to make progress towards that in 2022 with respect to marketplace. And then you're right, there is an opportunity. We're sort of pegging the redetermination timing, we mentioned this in that September conference that was Webcast in the summer time of 2022 that's consistent with the CBO's baseline update in July. But thereafter, as Michael mentioned, it's going to be a state by state sort of the termination of the duration of that redetermination process, but it's great to have an expanded footprint in marketplace.

And you're right, we need to sort of price for those members in 2023 to come into the marketplace business, and make sure, we've got attractive products for them.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

And I just want to add to you one question. In terms of I'm not going to try and guess how a state will determine when they're going to do something. We have enough experience to know that it's not that predictable, and it could be a new direct to decide that still now. There is just so many different variables, as well as just an individual judgment that it's not a science that we can hang our head on.

[Ralph Giacobbe, Analyst at Smith Barney Citigroup]

Okay. Fair enough. Thank you.

[Operator]

Thank you. And our next question today comes from Scott Fidel for Stephens. Please go ahead.

[Scott Fidel, Analyst at Stephens]

Hi, good morning.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Good morning.

[Scott Fidel, Analyst at Stephens]

Interested if you can talk a bit about the current staffing pressures in the broader healthcare market? And whether that's having any impact on any of your businesses? And then how that's influencing provider contracts and whether you need make any the adjustments for that? And then just as a follow-up just wanted to clarify on Josh's question. Michael, I think you did say that you think that mid-single digit revs and EPS is a good placeholder for now. Just want to ask you for 2020 if you just wanted to clarify that, that actually if you want that fast?

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

I'll take first, others can jump in. Yes, that's a good place to start for placeholder now until we get together in December. Relative to staffing, yes, we're feeling pressures. We have some, we think some solutions that will work for us, and we're making work, but I'm not going to, for competitive reasons disclose at all. And the other thing it's done is, it's we're accelerating our use of AI and we're updating our systems and capabilities so that we're becoming more efficient which will have the benefit, also longer term of contributing to our margin expansion. And so, using some of these techniques and Sarah and others are developing in the team it's freeing up nurses and others to do higher value activities and case management. So we look bases on the same issues of just we are fortunate to have the size, scale and versatility to be able to deal with it.

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

On the 2022 question. Once again, it's probably best to wait for that bridge because Magellan will be a piece of it. The annualization of Circle, so probably better to wait and see all of the pieces rather than to make a broad estimate of 2022. And then, once again I want to mention one of the tailwinds being improvement of marketplace margins in fair. And I just want to remind you guys of what we said in past conferences on a couple of the headwinds Medicaid reversion to the mean on MBR and HBR, as well as pharmacy carve-outs in a couple of our states, which are not insignificant in terms of the revenue and bottom line impact, so those are all factored into our assessment of modest adjusted EPS growth for next year.

[Operator]

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

[Lance Wilkes, Analyst at Sanford C. Bernstein]

Yeah. I had a question for you, Sarah. And it was really related to strategic investment spending is kind of a component of the margin improvement plan. I was just interested in maybe the overall implications for Capex expenditures for strategic investments like digital and value-based care who would be your priorities and the magnitude of investment. And then on the non-core divestitures, are the benefits of that proceeds that then you can use for something or the benefits of that getting rid of sort of money-losing ton of our lower margin businesses? Thanks.

[Sarah London, Vice Chairman at Centene]

Yeah, thanks. That's great question. So as we think about the value creation plan, as Michael has already touched on, a big piece of it is driving efficiency in our operations, and so obviously focused on agility and data and working towards leveraging artificial intelligence automation. We've talked a lot about, that's a huge priority and we think there's a lot of low hanging fruit there. So making sure that we have the right talent and we have the right tools obviously Apixio was a piece of that, but we think there are others. And there are pieces of that that we are developing ourselves. So that I think is a real foundational piece of all of this.

And then, being able to reinvest the savings that we get from those efficiencies to continue serves a flywheel of value creation is are also part of the plan. And then, relative to the divestitures I think the answer varies, will vary on a case-by-case basis. And in some cases, that has to do with positioning assets in such a way that we think they will be beneficial to longer term strategy in different areas, whether that's around provider enablement for other domains that we think are important as we move to value-based arrangements or core tools that we think will have a greater benefit to the broader industry. So it really is on a case-by-case basis. And as we get through those our intention would be to provide broader rationale for all of that decision making.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

I'm going to give you one example on AI and things I've been talking about some extent, and we're rolling this out. It takes almost 18 minutes to go through a chart to pre-authorize on average. We now have AI and systems in place and that same decision approving it can be done in one second about that. Then think about the fact that we will have a satisfied member who is sitting there, the doctor sitting say my goodness it was approved before I could finished typing the request. Now, if it's a no, there will still be human intervention, because we're not going to do all that, but I think we were talking yes, in technology, probably two-thirds of these cases are approved using the AI, we've rolled it out to 5 or 6 phase now, so it's well tested, but that's an example.

So all of a sudden, we now have the ability to taken those and move from the routine from the monotonous within shorts to doing things in case managing and that creates a much more productive environment. I just used it as an example, that makes it real to how we're overcoming the labor issues. Because you were asking.

[Lance Wilkes, Analyst at Sanford C. Bernstein]

Great, thanks.

[Operator]

Thank you. Our question today comes from Ricky Goldwasser at Morgan Stanley. Please go ahead.

[Ricky Goldwasser, Analyst at Morgan Stanley]

Yeah. Hi, good morning.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Good morning.

[Ricky Goldwasser, Analyst at Morgan Stanley]

So, a couple of follow-up questions here. First one, just for clarification. Do I heard you both say 2022 EPS growth is going to be modest. but then also heard you say mid-single digits. So just wanted to make sure, we're thinking about it correctly, to be modest is low-single digit versus mid? Secondly, on the PBM and consolidation into new platform, I'm assuming to talk CVS that you work with in the past, but I think I also heard Sarah, you're seeing that you are going to launch an RFP in 2022. So just want to clarify that. And what would be the timeline for that?

And then the new question is just if you can give us examples of the new products that you're introducing in the marketplace? I think you've been talking about some exciting new things that you're putting in the market, if you can give us some details around that?

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Hey, Ricky, this is Drew, and let me start with your first question. The modest adjusted EPS growth next year, takes into account everything we know sitting here today. I think you're referring to the mid-single digit reference was goes back to our June Investor Day that's on the revenue, that's sort of long-term organic revenue mid-single digits. And I think a question was asked earlier, that may be conflating the two. On the PBM opportunity, Sarah.

[Sarah London, Vice Chairman at Centene]

Yeah, so as I said, in the short term we've been focused on consolidating with our existing external vendor. And then you are correct, we are launching an RFP in 2022 that would award 11 2023. And so the goal there is to make sure, that we are staying sharp relative to our external partners and getting the greatest economic benefit where we are leveraging an external partner for our core capability.

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Let me jump in, so as I'm the guy who loves doing these RFPs for PBM services. We would launch sometime in 2022 for the -- our contract ends at the end of '23 for a 11 '24 and that's going to be a huge opportunity for an external PBM.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

On the new products. I'm going to be a little lift on it to till it hits the marketplace, but I'd say it takes advantage of our systems' capability. The broad and effective networks, we have I think will put us in a competitive place without following the or joining the race to the bottom.

[Ricky Goldwasser, Analyst at Morgan Stanley]

Thank you.

[Operator]

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

[Stephen Baxter, Analyst at Wells Fargo & Company]

Hey, thanks. Wanted to follow-up on the exchange discussion for 2022. It's obviously a lot of data has become available in the past couple of days. It seems like you're consistent with your comments, much more focused on margin perhaps more so than others in the marketplace. I was hoping you could discuss what you're seeing in across the market at this stage. And what do you think there is a conclusion to be reached about the outlook for membership growth, if you think about 2022? Thanks.

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Yeah, you're right to point out that we tilt it a little bit more towards margin than we have in the past in terms of our pricing posture, but we're still well positioned in a number of markets. And it's look, we're just in the AEP now it's too tough to call whether we'll grow a little or shrink a little. But the important thing is to maintain the base and drive margin expansion as we roll out and test some of these new products and provide what we think is an excellent value proposition to the growing population eligible for exchanges. Thanks to the special enrollment period and the enhanced advanced premium tax credits.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

We did well during the special enrollment period very well. And I remind you that the advanced tax credits have tended to minimize the pricing advance certainly may have. And so on balance, I'll say, I want to be cautiously optimistic that we will be pleased with the results for each.

[Stephen Baxter, Analyst at Wells Fargo & Company]

Thanks, and just as a quick-related to follow-up. Just wanted to ask about the recent announcement deal launched in Virtual First plans and the exchanges in partnership with Teladoc. Any sense you can give us on the longer term strategy there? And maybe also talk about the cost difference I provides you versus traditional offerings? Thanks.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Yes, Kevin, go ahead.

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Kevin Counihan, you are on the call.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Kevin, are you here? Kevin?

[Kevin J. Counihan, Senior Vice President of Products at Centene]

We have two virtual care products. First, we have in the marketplace. We have our Ambetter Virtual Access product that we're piloting in four states. And the second one, which I think you're referring to is the Virtual First product that we're piloting for employers. The things that they have in common is 24/7 access for urgent care, prevention, screenings, care management, a zero dollar cost for virtual care via the Teladoc network and also access to our in-network providers as needed. So we're there is a lower price point for each of these products, and we're excited about about their introduction.

[Operator]

Thank you. Our next question today comes from Gary Taylor at Cowen. Please go ahead.

[Gary Taylor, Analyst at Cowen & Co.]

Hi, good morning. Just had a couple of questions. Thinking about the potential headwind from the Medicaid, MLR normalizing or returning to mean, Drew, how do we think about the year-to-date sort of retro state adjustments you have called out? I think, beginning of the year was kind of thinking that before $100 million. I think, last quarter it was up to $675 million, we know some of those are expiring like in Michigan. But do we just I guess the conclusion is just that the underlying Medicaid medical expense benefit to you this year is still larger than those than those retro adjustments?

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Yeah. Those are starting to tail off. You're right, it was $675 million in Q2, at the end of Q3 our full year forecast is $820 million. And while some of those risk corridors carry into the first half of next calendar year because it coincides with the state's fiscal year those we expect largely to sunset the COVID era risk corridor and other mechanisms. So, you're right, that's been the governor on the underlying stronger utilization performance in Medicaid during the pandemic, and coming out of it. So obviously that mutes the forward impact, but we still do think there'll be sort of a reversion to a little bit higher HBR, as we look ahead in Medicaid. I think it's responsible to assume that.

[Gary Taylor, Analyst at Cowen & Co.]

And would you say the not to the same degree, but when we look at year-to-date performance in Medicare Advantage across the industry and some of the deferred care there that also seems like a potential place where you could see some resetting or normalization of the MLR, is that something you contemplate in your '22 outlook also?

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Not so much in terms of Medicare Advantage. That's if you look at the delta COVID, the delta COVID impact in the quarter because of the high vaccination rate of seniors. Actually the peak and Medicare Advantage was actually below the January whereas, Medicaid and Marketplace we're above that January peak. So I'd look for more steadiness in Medicare Advantage, we expect to grow that business. And then as I stated, I think at the June Investor Day and on the Q2 call, that becomes a margin expansion opportunity for '23 and '24 as we can impact those bids looking at those future calendar years.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Yeah, I wanted to caution, by we don't want to get too far ahead of ourselves. These are the kinds of things we like to talk about at our Investor Day and we'll have much more clarity. We would hope over the next couple of months we can give you some really good information for your models.

[Gary Taylor, Analyst at Cowen & Co.]

Well, I was going to ask about 2024 guidance next. But I guess I won't because.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Thank you.

[Gary Taylor, Analyst at Cowen & Co.]

Thanks for the count.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

And thank you for not answering because we don't have to say the same thing again.

[Operator]

And our next question today comes from George Hill of Deutsche Bank. Please go ahead.

[George Hill, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, good morning guys, and I appreciate you taking the question. I guess, one I wanted to follow-up on Ricky's questions about the PBM, RFP. And I don't know if you would be willing to frame any kind of sense of magnitude around the savings opportunity or the margin expansion opportunity that you see there. That's question one. And then I guess, just a very quick follow-up for Drew, would just be the free cash flow performance in the quarter was great, Drew. I guess, do you just see this as kind of a catch up or is can you talk about maybe what's sustainable here or if there is going to be a free cash flow reversion swing below net income that we should look forward to?

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Yeah. On the PBM, RFP we've stated a number of times. We've got well over $30 billion in pharmacy spend across our products, and obviously that's grown as the business grows. And you're right to point out. And actually if you look at our slides from the conference in September it's certainly one of the value creation opportunities with sort of a stair-step benefit 11, '24 despite the fact that every year we push on pharmacy cost and do market checks to improve the performance of the business. So we'll have to wait and go through that process to see the value.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

And when you look at the combined basis the scale of our PBM purchases, the drug purchases.

[Sarah London, Vice Chairman at Centene]

Yeah, and I would just add. And again, I think we'll go through this in great detail in December. But when you think about the potential savings it's not just from that RFP process. It's also the fact that we're streamlining in terms of vendor partner that we are rationalizing non-core platforms, which will result in SG&A savings. We've got operating model opportunities there that will go through, and then a lot of process automation opportunities within the PBM space. So when you think about the value that the PBM work can drive to the value creation program, it's I think, obviously is inclusive of the RFP, but it goes beyond that.

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

And then on the cash flow statement. Sorry go ahead.

[George Hill, Analyst at Deutsche Bank Aktiengesellschaft]

I wanted to jump in with a quick PBM follow up then maybe phrase it a different way. I think besides cost, what other factors are going to be important to you guys as you think about the process on the RFP?

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Well, if quality is always at the top of the list execution, the complexity of operating sort of a complex customers such as Centene, I mean, that's pretty critical as well.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Thank.

[Operator]

And ladies and gentleman.

[Drew Asher, Executive Vice President and Chief Financial Officer at Centene]

Sorry, I think it was a cash flow question. The cash flow obviously is driven by changes in the balance sheet, and so there are some things on the balance sheet represented by that three-day increase in DCP that will be paid out in the future. So you have to take that into consideration when you take a look at our cash flow statement.

[Operator]

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Michael Nidorff for any closing remarks.

[Michael F. Neidorff, Chairman and Chief Executive Officer at Centene]

Thank you. Yes, I have a member of the team who has indicated, I misspoke when I said we're going to be dropping the Board from 9 to 13 that number is actually 9 to 11 so down from the current 13, which is a 12 now, so I wanted to clarify that. So I thank the people for. We look forward to our Investor Day in December when we can answer more of the questions, and with more detail and certainty. And stay healthy, and have a good quarter. Thank you.

[Operator]

[Operator Closing Remarks]