Centene Corporation Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Adjusted EPS: Increased the adjusted EPS forecast to at least $2 from $1.75, driven by better-than-expected results in Medicaid, SG&A favorability, stronger net investment income, and lower effective tax rate.
• Medicaid Progress: Delivered 150 basis points of sequential HBR improvement, aided by Florida revenue adjustment and various levers like rate advocacy, clinical management, and fraud/waste/abuse interventions. High-cost drug trend showed slight moderation, and states are making movements on drug-specific carve-outs and formulary decisions.
• Marketplace: Repriced products for 2026 in 95% of membership, accounting for multiple factors, and ready for open enrollment with strengthened digital tools. Uncertainty around eAPTCs but confident in long-term viability of the individual market.
• Medicare: Both MA and PDP segments performed in line with expectations, PDP performance contained by risk corridors, and Medicare Advantage bids focused on margin recovery. Star ratings improved, positioning for 2026 margin improvement.

Segment Performance

• Medicaid: Third quarter Medicaid HBR was 93.4%, showing sequential improvement. Benefited from a $150 million positive revenue adjustment in Florida's Children's Medical Services program. The 2025 composite rate adjustment is expected to be roughly 5.5% instead of the earlier ~5% estimate. Medicaid membership is at $12.7 million with slight attrition expected.
• Marketplace: Ended the quarter with ~5.8 million members, producing an in-line result inclusive of September medical cost pressure. Repriced products for 2026 in 95% or more of membership, accounting for baseline morbidity, trend, eAPTC expiry, and program integrity impacts. Uncertainty remains around eAPTCs outcome.
• Medicare: Both MA and PDP segments performed in line with expectations. Medicare segment HBR was 94.3%, PDP performance contained by risk corridors, and positioned well for 2026 margin improvement. Medicare Advantage is on track for breakeven in 2027.

Guidance

• Adjusted EPS forecast increased to at least $2 from $1.75.
• Marketplace repriced products for 2026 across 95% or more of membership, positioning for margin improvement.
• Medicare Advantage well positioned for margin improvement in 2026, though CP won't guide to similar outperformance as 2025.
• Medicaid 2026 profitability expected to be consistent with 2025 full year outlook, with lower tax rate and net investment income as headwinds.

Risks

• Uncertain eAPTCs: Outcome of congressional dialogue on eAPTCs remains uncertain, impacting marketplace projections.
• Marketplace Utilization: Volatility in utilization, especially around eAPTC expiration, poses risks.
• Medicaid Cost Trend: Behavioral health continues to drive cost pressure, and work requirements/program integrity measures in Medicaid introduce uncertainties.
• Policy Landscape: Volatility in policy changes, including work requirements and program integrity measures, creates operational and financial risks.

Question and Answer

• Q: How do you get comfortable with being ahead of trend in the exchanges? And is there a risk of adverse selection spiral? A: Saw slight uptick in September utilization correlated with eAPTC discussion. Repriced products for 2026 accounting for multiple factors, and while uncertainty exists, pricing takes into account various elements to set up for margin recovery in 2026.
• Q: Thoughts on Medicaid work requirements and program integrity in 2026? A: States moved back work requirement start dates to 2027, and much guidance from CMS still pending. No huge impact on 2026 Medicaid profitability expected.
• Q: Medicaid margins flat in 2026, thoughts on trough year? A: Goal is to drive back to normalized margins, 2026 is a prudent posture, with 2027 and 2028 expected to see impacts from program changes, but preparing well for those.