Centene Corporation

Welcome, and thank you for standing by for the third quarter 2019 earnings call. At this time, all participants are in a listen-only mode. During the question and answer session, please press star 1 on your touchtone phone. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Joe Bogdan. Thank you. You may begin.

Good morning, and thank you for joining Magellan Health's third quarter 2019 earnings call. Today, our Magellan CEO, Barry Smith, and our CFO, John Rubin. We're also fortunate to have our incoming CEO, Ken Fasola, on the call as well. While he won't be taking any questions today, his first day at Magellan will be November 14th, and he'll be on our 2020 guidance call in December. The press release announcing our third quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion of the call, December 1st. The numbers to access the replay are in the earnings release. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Friday, November 1st, 2019, and have not been updated subsequent to the initial earnings call. During our call, we'll make forward-looking statements, including statements related to our growth prospects and our 2019 outlook. Listeners are cautioned that these statements are subject risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the risk factors discussed in our press release this morning and and documents we filed with or furnished to the SEC. In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results. Specifically, refer to segment profit, adjusted net income, and adjusted EPS, which are defined in our SEC filings and in today's press release. Segment profit is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs, and other operating expenses, and includes income from unconsolidated subsidiaries but excludes segment profit from non-controlling interests held by other parties, stock compensation, special charges or benefits, as well as changes in the fair value of contingent consideration recorded in relation to acquisitions. Adjusted net income and adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, amortization of identified acquisitionables, as well as impairment of identified acquisition intangibles. Please refer to the tables included with this morning's press release which is available on our website, for a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures. I will now turn the call over to our CEO, Barry Smith.

Thank you, Joe. Good morning, and thank you all for joining us today. On our call this morning, I will comment on the financial results for the quarter and a reduction to 2019. I'll also highlight business and operational developments, including progress on our margin improvement initiatives. For the third quarter of 2019, we reported net revenue of $1.8 billion, net income of $21.3 million, and APS of $0.86 per share. Our adjusted net income was $30.2 million, or $1.23 per share, and we achieved a second profit of $72.2 million. Results for the quarter were solid in MCC and pharmacy, but we are lowering our 2019 earnings guidance primarily due to the following two factors. Cost of care pressure in our behavioral and specialty health business, and severance charges related to our operational improvement initiatives. As I'll discuss, these pressures are short-term in nature and should not affect progress towards our margin goal of at least 2% adjusted income by 2021. Later in the call, John will provide additional details on our quarterly financial results, our updated 2019 earnings guidance, and some initial commentary on our outlook for 2020. Now let me highlight some specific developments within our business during the third quarter and the progress we are making towards our margin approval plan. Within our Magellan Complete Care portfolio of managed Medicaid health plans, we continue to execute against our medical plans towards the goal of achieving industry competitive margins. In addition to reducing costs, our team remains focused on improving the quality and associated outcomes from the medical services provided to our members. In Virginia, I am pleased to report that our efforts to improve the cost of care continue to show progress. Our medical loss ratio for the quarter was in the low 90s. The focus of our medical action plans is not changing. We continue to drive value through the appropriate management of inpatient, outpatient, and personal care services, as well as claimed payment integrity reviews. For example, we've been successful in managing outpatient behavioral health services where we approach care coordination on a member-centric basis. The key is understanding what's best for the member and proactively connecting them to the appropriate care while avoiding waste and duplicates. These upfront interventions also prevent increases in inpatient hospitalizations and ER visits. While we still have work to do to reach our target margin in Virginia, we feel good about the continued progress we've made to date in 2019. Regarding our New York plan, we highlighted our second quarter earnings call that we were awaiting updated capitation rate per fiscal year. I'm pleased to report that we've received these new rates and they are largely in line with our expectations, including an update to our risk scores to reflect the increased acuity of our population. Now turning to our behavioral and specialty health business, we have experienced an increase in cost of care. particularly for inpatient admissions within our behavioral health business. We are currently working on action plans to mitigate the impact. I'd also note that our customer contracts allow for annual resetting of capitation rates to reflect emerging experience and anticipate a future trend. So while these cost pressures affect our 2019 earnings outlook, we do not expect a material ongoing impact in 2020. With respect to product development, we have recently deployed an industry-leading automated prior authorization solution called Decision Point. The tool will provide guidelines for determining the medical necessity of certain imaging procedures to inform providers and enable authorization determinations in real time through full integration at the point of care. Because providers are increasingly accountable for the cost of care of their patients, We see this as a new growth channel and are currently piloting the program with a number of provider groups. Now let me provide you with some quarterly operational highlights for Magellan. Throughout 2019, we have been actively working towards our strategic priority of lowering the cost of goods sold through negotiations with our network pharmacies, manufacturers, and wholesalers. I'm pleased to report that to date, We have renegotiated 98% of the supply chain, creating savings for our customers while also improving our gross margin. Our pharmacy team has also been broadening and deepening our Starvout services to retain existing and attract new customers. We continue to evaluate therapeutic classes of drugs where there is an increase in competition which enhances our opportunity to develop management strategies that create savings while maintaining or improving quality of care. The U.S. Food and Drug Administration has recently reported that biologics are the fastest growing class of therapeutics. Earlier this year, in response to the growing biologic spend, we expanded our formulary management program into therapeutic classes such as oncology biosimilars and medical management biologics medical benefit biologics to treat asthma. In preparation for the expanded market entry of oncology biosimilars, we have also expanded our medical pharmacy management program into a comprehensive solution that aims to educate consumers, customers, members, and providers. These expanded products and services are already gaining solid traction with our client base. In our PBM book of business, We continue to see traction with larger employer accounts in our core middle market employer business. We feel good about our prospects for 2020 organic growth and retention rate. We will share more details since our plan is finalized in early December. Any of you are pleased to share that Magellan RX Management was recently accredited by NCQA for Utilization Management. This recognition reflects the high quality of medical management that we provide to our customers and their members. In our Part D business, our bid rates were below the benchmarks in three out of four regions that we bid, and as a result, we estimate to retain 80% to 90% of our current membership in 2020. As we've mentioned in the past, our entry into EP business was primarily designed to gain the necessary experience to serve the managed care PBM market. One of the key elements to our multi-year margin improvement strategy is reducing our administrative costs. We continue to review and execute against opportunities to improve efficiency across all of our businesses through our efforts to consolidate platforms, remove redundancy, and right-size operations. At earlier, we plan to incur severance charges later this year, which reflect the anticipated 2020 implementation of several of these initiatives. Some of these savings will contribute to our future margin expansion target, and others will be used for funding investments for our business. We'll provide more details during our 2020 guidance call in December. Before turning the call over to John, I'd like to emphasize that the headwinds facing the year are short-term in nature and should not affect the pace of our margin improvement plan. We continue to see significant long-term opportunity for both growth and our healthcare and pharmacy businesses. And we remain focused on improving the adjusted mid-income margin for the company to at least 2% by 2021. Now I'll turn this call over to our Chief Financial Officer, John Rubin. John?