Centene Corporation

Greetings and welcome to the Magellan Health, Inc. second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Darren Laring, Chief Investor Relations Officer, Thank you. You may begin.

Good morning, and thank you for joining Magellan Health's second quarter 2020 earnings call. With me today are Magellan's CEO, Ken Fasola, and our CFO, John Rubin. The press release announcing our second quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion through August 28, 2020. The numbers to access the replay can be found 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, July 29, 2020, and have not been updated subsequent to the initial earnings call. During our call, we will make forward-looking statements, including statements related to our 2020 outlook. Listeners are cautioned that these statements are subject to certain 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 in our Form 10-K, filed on February 28, 2020, as well as in our Form 10-Q to be filed today. In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results. please refer to the tables included with this morning's press release, which is available on our website for a reconciliation of GAAP financial measures to the corresponding non-GAAP financial measures. Finally, on this call, we will be reviewing Magellan Health's results, which now reflect Magellan Complete Care as discontinued operations in our financial statements as a result of the planned divestiture to Molina Healthcare. All references to Magellan Health's results in this call unless noted otherwise, will be presented to exclude Magellan Complete Care from continuing operations. I will now turn the call over to our CEO, Ken Fasola. Ken?

Thank you, Darren, and good morning, everyone. I'd like to take this opportunity to welcome Darren, who joined us as Chief Investor Relations Officer earlier this month before joining Magellan. Darren served as Senior Vice President, Strategy and Investor Relations for American Reno Associates Holdings Incorporated for the past five years. Prior to this role, his career spanned 17 years as an equity research analyst for several leading Wall Street investment banks covering healthcare services companies. We're excited to have Darren on board to lead our full-time efforts to build a more active dialogue with investors and analysts. I'd also like to thank Joe Bogdan for guiding the investor relations team for over three years. He led the IR function along with other responsibilities as a key member of our senior finance team. Joe will continue to lead the actuarial and underwriting teams and has also assumed additional leadership responsibility for medical economics and analytics in support of Magellan's strategic priorities and growth initiatives. The first half of 2020 has represented a tumultuous time for our country. and there remains considerable uncertainty in this environment. I continue to be pleased with how quickly and effectively our team has responded to the needs of our members and clients to help them deal with the COVID-19 pandemic and the repercussions from this health crisis, despite challenges many of our associates may face in their own homes. Whether operating a hotline for first responders and medical professionals serving on the front lines, or offering webcasts or digital tools for dealing with anxiety, depression, and uncertainty, or making sure the needed services are delivered on time, the professionalism and can-do attitudes of the Magellan team are inspiring and give me confidence that our ambitious vision for Magellan is achievable. Like many other organizations, we closely evaluate our diversity, equity, and inclusion efforts within Magellan and throughout the communities we serve. Within Magellan Health, we're committed to advancing a diverse and inclusive workplace, and are proud that our company's demographics demonstrate this commitment. Our workforce of approximately 10,000 associates is comprised of 75% female associates and 40% minority associates. Among our leadership position hires of manager or above over the past 12 months, 64% have been female and 35% have been minority. We recognize that there's still more work to do, as we advance diversity inclusion within Magellan, and we will strengthen our resolve around this business imperative moving forward. Further, as a company with a long history of managing complex specialty and behavioral health services across commercial and public sector markets, we play a leading role in bringing solutions that improve health equity within minority communities. Our organization possesses distinctive capabilities to lead in this area, given how much we already do to help members Families and communities manage the burdens of mental health, stress, and anxiety. We're committed to seeing that Magellan remains a leader in helping Americans at this difficult time while modeling the behaviors necessary to move us all forward. Magellan remains focused on the valuable work we accomplish each day and the resulting positive impact we have on the people and the communities we serve. As we report our results midway through the 2020 fiscal year, I'd like to update you on our near-term priorities. Earlier this year, I stated our four key priorities were delivering on our existing commitments, lowering our operating cost structure, strengthening our capabilities through innovation, and improving our ability to capitalize on growth opportunities. Let me share some of the highlights of our second quarter results to showcase our focus on delivering on these commitments. For the second quarter of 2020, Magellan reported revenue of $1.1 billion and segment profit of $57 million. While revenue was down slightly year over year, segment profit increased, primarily due to lower utilization trends in our healthcare segment, partially offset by some largely non-recurring items within our pharmacy segment. For full year 2020, we now anticipate continuing operations, which exclude Magellan CompleteCare, will generate revenue in the range of 4.4 billion to 4.6 billion and segment profit in the range of 145 million to 165 million. This updated guidance continues to assume that we'll return to more normal utilization trends during the second half of the year. Please note that this updated segment profit guidance includes approximately 25 million to 30 million of stranded overhead costs that were previously allocated to MCC but are required to be reclassified to continuing operations in accordance with GAAP. Post-closing, we expect the stranded overhead cost to be mostly offset by planned cost reductions, and for a period of time, revenue from the Molina Transition Services Agreement. John will provide more details around the quarterly results and updated guidance later in the call. Now, let me share a progress update on our transformation initiatives, which we expect to drive lower operating costs while also enhancing our competitive position. We continue to expect these transformation initiatives to yield 30 million of net savings in 2021, and we expect the net savings to reach 75 million during 2022. Our transformation team has prioritized over one dozen administrative work streams that are focused on four categories, process improvement, human capital, worksite strategy, and vendor management. Category one is process improvements. That's the largest category in terms of savings. This represents the opportunity to automate manual processes, streamline clinical work streams, digitize communications, consolidate systems, improve claims adjudication, and optimize non-critical functions. We expect approximately 60% of our total net savings by 2022 will result from process improvements with the balance split somewhat evenly among the remaining three categories. The second category is human capital. Aligning our human capital, our associates, to our business strategy is critical to our future success. That is why we're investing in innovation, clinical leadership, data analytics, business development and transformation to drive future growth and savings. We're also streamlining our administrative model to reduce layers and increase the pace of decision-making. Third category is worksite strategy. The COVID-19 pandemic has taught us that our business can thrive in a virtual environment where many associates can work remotely. Before the pandemic, approximately 40% to 50% of our workforce was working on a remote basis. Even as the number of Magellan associates working remotely has grown considerably in recent months, we've proven we can maintain a vibrant and engaged workforce. We're currently assessing Magellan's perspective real estate footprint as we anticipate transitioning many more of our associates to work from home or a more agile, flexible office setting on a more permanent basis. We've already taken some initial steps to rationalize our real estate footprint and recognized a special charge in our second quarter financial results relating to planned lease terminations. We intend to take additional real estate actions throughout the remainder of this year. Finally, through vendor management, or category four, we've begun a review of our vendor and supplier contracts to drive more favorable terms and identify re-procurement opportunities where available. Next, let me move on to innovation. We're making real progress, advancing our innovation agenda to develop new product offerings and build enhanced capabilities that will strengthen our competitive position. We've previously discussed that there's an addressable market in excess of $400 billion for patients with comorbid behavioral and physical health conditions, and there are gaps in how these complex patients are managed. The impact of COVID-19 has made abundantly clear the existing and growing societal need to address the behavioral health of individuals. A recently published Kaiser study showed that 36.5% of adults in the United States reported symptoms of anxiety or depressive disorder up from 11% in 2019. As we drive innovation with our product offerings, we see opportunities to create a more integrated physical and behavioral health experience for the people we serve and to address this growing need. We're already making progress with our innovation lab, which we've officially launched as Magellan Health Studio. We've assembled a remarkable team that brings significant health plan experience and an expert clinical leadership team led by our Chief Medical Officer, Dr. Caroline Carney. This expertise will be complemented by customer feedback and external clinical advisors who will provide critical insights to fuel our vision to create whole person health solutions and experiences. This well-rounded team will collaborate and reimagine the physical and behavioral health experience for the people we serve through the design and development of integrated solutions powered by transformational capabilities. Our reimagined product portfolio will include features to drive a differentiated value proposition, including leading-edge digital capabilities that support optimal experience and outcomes. That means more accessible digital tools for screening, wellness, and awareness, allowing customers to self-direct and become more engaged in their health, and advanced analytics and AI capabilities that will predict identify, and connect data so that our solutions can better support rising population health demands. We'll drive these innovations across our behavioral, physical health, and pharmacy businesses to strengthen coordination in our go-to-market strategies and accelerate our whole person approach to address the needs of complex populations. We expect to begin launching parts of this new product suite in 2021. To that end, I'm pleased with the progress we're making to aggregate important claims and medical data to segment and target markets for clinical intervention. We're enhancing our analytical capabilities to strengthen the clinical value of our integrated offerings. We've also worked extensively in recent months to develop a virtual care platform strategy. This planning exercise identified capability requirements across the care continuum and resulted in a plan of action for us to build by or partner to achieve our objectives. Our business and corporate development teams are actively pursuing these objectives as well as evaluating relationships with various organizations best suited to enable this strategy. It's important to recognize that our innovation efforts will include both organic investments, partnership and necessary acquisitions to accelerate our existing capabilities. We're committed to a disciplined approach as we deploy capital towards identified opportunities And we're excited about the physical space we're developing to showcase the newly launched Magellan Health Studio. The studio will be adjacent to our executive offices in Frisco, Texas, where we intend to research, design, and share the next generation of care management solutions with and for our customers. In the end, actions speak louder than words, and you will see how our innovation initiatives will manifest in our reimagined product suite in 2021 and beyond as we extend the breadth and reach of services across new and existing disciplines to increase the value to our customer base and elevate the member experience. Finally, the rebuild of our growth engine is well underway through the leadership of Tim Lacey, who joined Magellan earlier this year. In connection with our work to drive an enterprise-level business and product development infrastructure, we've begun the implementation of enhanced sales standards across each of our businesses. The early focus of this standardization includes consolidating CRM for capturing client relationships that span across our businesses and centralizing product innovation via our new Magellan Health Studio. We've also completed market availability reviews across our targeted customer seconds and identified the need to add sales resources to reach more of the opportunities within these addressable markets. The results of these initiatives prompted a significant expansion of our team with a planned investment in over 30 new business development associates, including senior sales executives, sales managers, and player coaches. These additional feet on the street will allow us to build a deeper sales pipeline and manage the various sales cycles within our customer segments. We're confident that our transformation efforts will improve our effectiveness and expand our margins. We also recognize that investments in innovation and business development are critical to the long-term strategy of Magellan, and we believe these investments will yield a differentiated portfolio and position us well within a large addressable market serving complex patient populations. Let me now provide you an update on Magellan CompleteCare. We remain on track with the previously announced sale of MCC to Molina Healthcare for $850 million in cash. We believe the regulatory approvals are falling into place, putting the deal on pace for its targeted close by the end of the first quarter of 2021. We continue to estimate taxes and fees associated with the transaction to be between 80 million and 85 million. Magellan will also receive an amount equal to any excess capital above regulatory requirements and Magellan Complete Care subsidiaries at closing. At June 30, 2020, This excess capital was approximately $160 million, up from $94 million at March 31, 2020. Our transition team and Melina have been working very collaboratively to execute on the commercial agreements that we're entering into in connection with the sale of MCC. We expect these agreements to contribute $125 million to $150 million of incremental revenue, annualized once these services have been implemented in Molina markets by mid-year 2021. These new services reinforce Magellan's value proposition in pharmacy, behavioral, and specialty health care, and we remain very excited about the opportunity to roll out a unique integrated behavioral health model in Virginia, an innovation proof point that we expect will open doors in other Molina markets and with additional managed care customers over time. Aside from this MCC divestiture update, I also wanted to confirm that we're on track with our Medicare Part B exit plans, which we expect to be completed by January 1, 2021. Obviously, there's much to come this year that will impact our nation. We're tracking case trends for COVID in our markets and are adjusting our service delivery as needed. We feel confident in the processes we develop to meet our clients' needs and keep our associates healthy. We believe that many of our service improvements, such as telehealth, will bring value in the post-pandemic world. We also recognize that a national election brings new and sometimes old ideas to the forefront of our national conversation. Because of the unique personal nature of healthcare, we expect that this issue will again be front and center in presidential politics. The administration's recently issued executive orders on drug pricing, for example, included in order to eliminate rebates from the Medicare Part D program. While we plan to exit the Part D program in 2021, we believe that there are many open questions about how this and other executive orders may move forward without raising costs to Medicare beneficiaries or disrupting innovation in the pharmaceutical industry. We're closely tracking policy and legislative proposals like this one at both the national and state levels, and where appropriate, advocating for positive changes to the healthcare system, and will continue to serve as a thought leader while healthcare remains in focus through the elections and into 2021 and beyond. Let me now turn over the call to John Rubin for a financial review. John?