CENTENE CORP Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Health Care Policy Commentary: No broad support for Medicaid benefit cuts; bipartisan recognition on addressing expiring premium tax credits; focus on reconciliation and government funding due by end of Q3.
• Core Business Execution: Progress in margin recovery with better rate and member acuity alignment. Key Medicaid contract wins in Illinois (continuing Medicare/Medicaid services for dually eligible members) and Nevada (expanding Medicaid managed care into rural areas). Medicare Advantage on track for breakeven in 2027, with focus on STARZ results, etc. Commercial segment strong Q1 growth with $5B added to marketplace revenue guidance.
• Financial Metrics: Adjusted diluted EPS $2.90 in Q1, full-year adjusted EPS >$7.25. Premium and service revenue guidance increased to midpoint $165B from $159B. SG&A expense ratio improved to 7.9% in Q1, down from 8.7% last year.

Segment Performance

• Medicaid: Membership stable at 12.9 to 13 million. ~40% of Medicaid revenue had refreshed rates with 4.5% average increase. However, a more active flu season led to $130M incremental medical expense, offsetting some MLR improvement. Full-year composite rating increase projected at 4% plus.
• Medicare: Medicare Advantage membership outperformed, adding $1B to 2025 revenue guidance. Medicare segment HBR was 86.3% in Q1. On track for breakeven in Medicare Advantage by 2027, focusing on STARZ results, value-based clinical initiatives, and SG&A reductions.
• Commercial: Grew nicely in Q1 with stronger new enrollment and retention. Marketplace business saw $5B increase in 2025 revenue guidance, with incremental growth assumed at lower margin levels.

Guidance

• Full-year 2025 adjusted EPS remains greater than $7.25.
• Premium and service revenue guidance raised to midpoint $165B from $159B.
• Recalibrated consolidated HBR considering Q1 growth, Medicaid HBR (mid to high 91s inclusive of flu), and specialty drug utilization.
• Lowered consolidated adjusted SG&A ratio midpoint by 45 basis points due to Q1 performance and 2025 growth/mix.
• Lowered investment income by $100M as cash balances and rate cuts were reforecasted.

Risks

• Health Care Policy Uncertainty: Potential changes in Medicaid work requirements and expiring premium tax credits pose risks.
• Specialty Drug Costs: Impact on Medicaid and Part D margins due to high-cost specialty drugs.
• Marketplace Dynamics: Program integrity issues and potential fraudulent activities in exchanges could affect margins.

Question and Answer

Q: Josh Raskin with Nephron Research asked about flu-related costs in Medicaid and Medicare.

A: Sarah London responded that the $130M flu-related cost in Medicaid is isolated to standard flu definition, with flu in Medicare and marketplace not as significant.

Q: A.J. Rice of UBS inquired about public exchange subsidies and work requirements.

A: Sarah London stated the dollar figure for enhanced APTCs remains relevant, and work requirements vary by state with teams already mapping state-by-state approaches.

Q: Justin Lake of Wolfe Research asked about risk adjustment in exchanges.

A: Drew Asher replied that risk adjustment data for 2024 was consistent with estimates, and new marketplace members' utilization is being monitored with first weekly data due end of June/early July.

Q: Ed Haines with Mizuho Securities asked about Medicaid rates and utilization beyond flu.

A: Sarah London mentioned full-year Medicaid composite rate projected mid-fours, with ongoing rate negotiations for upcoming cohorts; utilization beyond flu includes behavioral health, home health, and high-cost drugs.

Q: Andrew Mok of Barclays inquired about Part D risk corridors.

A: Drew Asher explained that Part D risk corridors provide protection, with specialty drug utilization pushing into risk corridor but still targeting 1% pretax margin.