Centene Corporation

Good morning and welcome to the Centene Corporation Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Finance and Investor Relations. Please go ahead, ma

'am. Thank you, Rocco, and good morning, everyone. Thank you for joining us on our Second Quarter 2025 Earnings Results Conference Call. Sarah London, Chief Executive Officer, and Drew Asher, Executive Vice President and Chief Financial Officer of Centene will host this morning's call, which also can 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. Specifically, our discussion today of our expectations for the drivers of Adjusted EPS for 2025 and any commentary on Expected Adjusted EPS for 2025 are forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our Second Quarter 2025 press release, Centene's most recent Form 10Q filed this morning and its 10K filed on February 18, 2025, and other public SEC filings, which are available on the company's website under the Investor section. 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 Second Quarter 2025 press release. We are unable to reconcile our commentary on Expected Adjusted EPS for 2025 to the corresponding GAAP measures due to the difficulty of predicting the timing and amounts of various items within a reasonable range. Finally, following the call, the team's prepared remarks will be posted on the Investor section of our website. With that, I would like to turn the call over to our CEO, Sarah London.

Sarah? Thanks, Jen, and thanks everyone for joining us. We have a lot to cover this morning, so let me start by outlining a few key elements of my prepared remarks. First, I'll provide more detail on the Marketplace Risk Adjustment Challenge we previewed earlier this month, including what happened and what actions we're taking to mitigate the financial impact with an eye to restoring the book to profitability in 2026. Second, I will address the elevated medical cost trend that drove our higher Q2 Medicaid HBR result, how we are addressing it, and an updated view on the positive progression of Medicaid rates. Third, I'll review our updated outlook for 2025. And finally, I'll share our perspective on how the policy landscaped in the wake of the One Big Beautiful Bill Act, or OB-3, and how that informs our view of 2026 and beyond. Before we jump in, let's level set with what we printed this morning. We reported second quarter results for 2025 inclusive of an adjusted per share loss of $0.16. We are disappointed by this performance and frustrated to have fallen short of the financial goals we set at the start of the year. Our primary focus is restoration of our earnings trajectory, and the entire team is unified behind that goal, operating with a sense of urgency and discipline as we work to improve performance across the portfolio and drive results that will generate tangible shareholder returns. As you will hear, we are aggressively taking actions to put our marketplace business on a path to recovery and enhanced profitability for 2026. In Medicaid, we have clear line of sight into what is driving our trend, and we are actively pulling the levers necessary to correct our trajectory. And finally, our Medicare Advantage business is achieving significant operational progress, saving our path to break even in 2027 and profitability in the years to follow. With that, let's dig in, beginning with marketplace. We reported second quarter marketplace membership of 5.9 million members as the book continued to grow, driving more than 10 billion of commercial premium and service revenue in the period. Revenue in the quarter was negatively impacted by the previously disclosed shortfall in projected 2025 risk adjustment transfer revenue, generating a drag of approximately 1.2 billion in pre-tax for the segment. In addition to the risk adjustment challenge, the underlying performance of our marketplace business was impacted by higher levels of utilization. We have incorporated this elevated utilization into our full year 2025 outlook, which we will address in a few moments. Now let's talk about the risk adjustment challenge in a bit more detail. On July 1st, we announced that with information on approximately 72% of our membership, we were tracking to earnings pressure of 1.8 billion in 2025 as a result of a change in marketplace risk adjustment transfer assumptions. This was based on data from Wakely, an independent actuarial firm that aggregates market growth and morbidity information on behalf of carriers on the individual marketplace. Since this announcement, we have received our additional files and spent meaningful time reviewing the findings. Based on the complete data set, we now expect full year 2025 marketplace earnings to be pressured by 2.4 billion, which represents 100% of the membership impact. Analysis of the full data confirmed a significant shift in the marketplace risk pool in 2025, which we now believe is primarily being driven by three things. First, a higher than expected percentage of healthy and or low utilizing members left the marketplace during open enrollment, which was likely the result of program integrity measures that were introduced after 2024 pricing was finalized and implemented for the 2025 open enrollment cycle. Second, new signups to the market had higher morbidity, likely reflecting changes in the underlying member mix for redeterminations and those same program integrity guardrails deterring new healthy signups in 2025. And third, a step up in marketplace utilization more broadly, combined with more aggressive provider coding, is likely driving higher in-year documented morbidity. Together, these dynamics have shifted the morbidity of the market in some states as much as 16 to 17% year over year. Ultimately, Ambetter was underpriced for this morbidity shift. As a result, we now expect the product to run slightly below breakeven for the remainder of 2025 instead of within our target margin range of 5 to 7.5%. This is obviously a disappointing outcome, but we are not taking it standing still. We immediately turned our focus to mitigating the impact of this pricing miss with the goal of returning the business to profitability in 2026. As of this morning, we have already filed 2026 pricing in 17 states. We expect to submit adjusted pricing files in up to 12 additional states within the next week and anticipate state certification of rates over the next month. Based on what we know today, we continue to believe that we will be able to reprice the 2026 portfolio to account for a substantial majority of our marketplace membership, and our goal is to reprice 100% of the book. Importantly, our 2026 pricing adjustments account for the morbidity shifts we observed in the 2025 data, but they also account for shifts we now expect to see in certain markets in 2026, informed by the scale of our data and our unique ability to see correlations across the 29-state footprint. As a reminder, initial 2026 pricing was already set to current law of the land, which means we have accounted for the potential expiration of EAPTCs. In addition to addressing pricing, we are actively looking at ways to leverage our position in the market to create more transparency around market dynamics earlier in the year. We are also engaged with the administration as they prepare to implement the next wave of program integrity measures to ensure the mechanics for Open Enrollment 2026 both achieve their goals and ensure that eligible members can readily access high-quality, affordable health insurance on the federal exchange. While the individual marketplace will be absorbing the impact of regulatory changes for at least one more cycle, it does not change the fact that millions of Americans rely on this critical infrastructure to access health care coverage. We remain committed to supporting our almost 6 million members in getting the care they need to keep themselves and their families healthy, and as we do so, we are focused on returning our marketplace portfolio to profitability in the short term and sustainable, profitable growth over the long term. Turning to Medicaid. Our Medicaid portfolio also fell short of expectations in the second quarter, producing an unanticipated and unacceptable health benefits ratio of 94.9. Driving this underperformance was a step up in medical cost trend in three areas, behavioral health, home health, and high-cost drugs. Behavioral health was the most significant driver of the -over-quarter increase with ABA or Applied Behavioral Analysis as an accelerating pressure point across a number of our markets. In response, we have formed enterprise-wide behavioral health and ABA task forces to further support our markets in aggressively managing this trend. Together, they are focused on aligning members to high-quality providers, educating state partners around evidence-based clinical guidelines, advocating for behavioral health-specific rate adjustments, and rooting out fraud, waste, and abuse in service of better member outcomes. Within the underlying ABA trend, the largest concentration of pressure was isolated to a year. We inherited the ABA population in Florida within the Children's Medical Services contract, for which we are the sole source provider. That population transitioned with inadequate rates and with a continuity of care provision limiting the use of managed care strategies to effectively manage services and associated costs. This provision lifted as of June 1st, and we are already seeing the impact of clinical and administrative interventions. At the same time, we are also advocating with our state partner to address the underlying rate gap, both retroactively and prospectively. Home Health was the next largest contributor to trend across markets in Q2, with Home and Community-Based Services, or HCBS, related to complex populations as the top driver. Here, too, we are leveraging a cross-enterprise approach to select high-quality and high-integrity providers in this space and ensure states have sufficient data to inform both rate and policy decisions. We saw HCBS pressure manifest in an outsized way in New York in Q2 due to rate insufficiency and state-driven program changes. As we saw this emerge, we deployed additional leadership resources to the New York market and are executing against a very clear roadmap to correct the overall trajectory, which is showing good progress as we move into Q3. High-cost drugs were the final driver of the Q2 step-up, with cancer drugs and gene therapies among the major categories contributing pressure. In addition to working with our partners to ensure clinical appropriateness for these treatments, we have also been ramping up efforts to educate our states on a sustainable cost containment, including through corridors or carve-outs. This is another place where the benefit of a 30-state Medicaid footprint means we can readily source best practices to inform solutions, and we are seeing states moving more quickly to make policy and program changes to better regulate this cost driver. In addition to pulling these more direct levers, we are hyper-focused on securing rates that reflect current trends in order to deliver meaningful margin improvement for the Medicaid business. As a reminder, 88% of our Medicaid franchise gets re-rated between 7125 and 1126. Over the last 18 months, we have demonstrated the ability to secure outsized rate increases and engage constructively with our state partners to infuse more real-time data into the process. We are activating that same playbook in light of this recent step-up in trend to push for faster rate correction. Our 7-1 and 9-1 rates have materialized better than our previous expectation, and we now expect a 2025 composite rate adjustment of 5% We have important rate updates upcoming in our 10-1 states, including Florida, and we are already feeding current trend data to those states who will update rates 1126 for 40% of our membership. Despite the current dislocation, we remain confident in our ability to secure rates that are sufficient to address the current acuity and healthcare demand within the Medicaid population and support sustainable margins over the long term. Turning to Medicare, PDP membership ended the quarter at 7.8 million members, roughly flat on a sequential basis. Our performance in this product exceeded our expectation in the period, allowing us to improve our outlook for full-year results in PDP. The PDP program absorbed a number of regulatory changes in 2025, and with half the year behind us, we are now more comfortable with the assumptions we made around the impact of some of these changes. While our outlook for the product remains prudent, PDP is providing some earnings upside relative to our previous outlook. Meanwhile, Medicare Advantage is making important progress on its path to margin recovery, thanks to effective 2025 pricing, an optimized footprint, and continued operating discipline. To date, the book is running slightly favorable to expectations, and we continue to closely monitor components of costs such as outpatient surgery and pharmacy to ensure that we appropriately manage any evolving pressure. Relative to STARS, we are pleased with our continued performance improvements across multiple categories, and particularly with gains we have seen in our clinical measures for members with chronic illnesses. We are still waiting for CAPS results and final cut points from CMS, but based on the data we have today, we still anticipate year over year progress in STARS. But challenging cut points may make our 85% target difficult to hit. As a reminder, we anticipated cut point headwinds coming into 2025 and have built a path to our 2025 break-even target that does not rely on further STARS improvement. Based on our performance in 2025 to date, as well as the advancements we have made and expect to continue to make relative to clinical interventions, SG&A, and value-based care alignment, we feel good about our path to break even in 2027 for Medicare Advantage and are pleased with the consistent progress we are making turning around this business. As we think about the road ahead, our current forecast calls for a full-year adjusted diluted EPS of approximately $1.75. The following six items can help you bridge from our previous full-year 2025 adjusted EPS guidance of $7.25, representing $4.55 billion of pre-tax to the $1.75. One, as I mentioned earlier, we now estimate that the marketplace morbidity shift relative to our previous 2025 forecast will create a $2.4 billion full-year headwind to the 2025 pre-tax earnings. Two, also in marketplace, we have built in an additional $200 million in pre-tax margin pressure from expected back half utilization, including the impact of members seeking care in advance of the expiration of EAPTCs. Three, in Medicaid, we have reflected the rate increases we know for 7-1 and 9-1, but have been balanced about our assumptions for the 10-1 cohort. Four, we have also assumed that we will continue to have trend pressuring the back half of the year, such that the Medicaid HBR in the second half is approximately 93.5. The overall change in full year Medicaid HBR represents an approximate $2.1 billion headwind on pre-tax earnings compared to our prior forecast. Five, we expect the Medicare segment to deliver approximately $700 million in largely driven by PDP, but supported by better Medicare Advantage results as well. Embedded in this $700 million is the expectation of continued specialty trend in PDP and slight outpatient pressure in MA. And finally, through continued aggressive SG&A management and natural leverage on growth, we expect to deliver an approximate net $500 million in pre-tax earnings in the buildup to $1.75 compared to our prior forecast. As we think about variation to that forecast, we believe the largest swing factor that could pressure the $1.75 would be a further acceleration of Medicaid trend in the back half of the year. To frame the downside for you, if we made no progress on HBR in the back half of the year compared to the first half, that could push the $1.75 as low as $1.25. With respect to upside to the $1.75, we have tangible momentum in Medicaid on rate updates and policy changes, progress on clinical interventions and network design, and increasingly effective initiatives to stamp out fraud, waste, and abuse. The impact of that work could lead us to a better result than 93.5 in the back half of the year. And as a reminder, every 10 basis points of back half HBR improvement is $45 million in pre-tax. In Marketplace, we will get updated market morbidity data at the end of September and December, which could indicate we don't need the full $2.4 billion change in the Marketplace forecast. As the next few months progress, we will also have a better view on whether the additional $200 million provision for Marketplace trend was necessary. And finally, we will continue to pursue strategic SG&A opportunities as we look to right size the business for 2026. All of these factors could drive results higher than $1.75. There are a number of very near term milestones that will better inform our view of the full year outlook, including July and August results, 10-1 rate updates, and the next tranche of weekly data, all of which are expected by the end of September. We look forward to providing updates on our outlook as we gain additional visibility into these key inputs. With that, let me take a moment to talk about 2026. We fully expect to deliver margin improvement in our three core lines of business in 2026 relative to the current 2025 forecast. Let's dig into that in more detail. We believe we are on track to reprice our Marketplace business for meaningful margin improvement in 2026. While the last month has been incredibly challenging for this business, the team has far more clarity on the trend and market morbidity dynamics of 2025, as well as the insights embedded in that data that foreshadow 2026 dynamics. We have integrated this view into our 2026 refiling decisions and are making excellent progress against our goal to reprice 100% of the Marketplace book. In Medicaid, we now have far more transparency about the drivers of cost and trend across our portfolio and are in command of the levers to correct our HBR trajectory as we head into 2026 and beyond. With 88% of the book re-rating over the next six months, momentum around policy changes, and enterprise-aligned execution on key initiatives, we are confident we can meaningfully move the Medicaid HBR in the right direction over the next 12 to 18 months. And finally, armed with strong rates and operating discipline, our Medicare Advantage business will continue to make solid progress in 2026 on its path to breakeven in 2027. Our industry is always evolving, and it is our job as a business to evolve with it. We have spent the last three years fortifying our platform, and over the coming months, we will pressure test each of our markets for the future conditions necessary to support sustainable, profitable growth. We will harvest additional synergies across the platform, lean harder into places we can leverage our unique size and scale, and work to ensure we have the strongest and most resilient platform to support the new normal that lies ahead. To that end, a comment on the policy and legislative landscape. We view OB3 as having established a new and stable policy floor for our programs, and we are actively developing a multi-year implementation strategy. Many of the Medicaid provisions include runway for implementation, allowing us to leverage the strong partnerships we have at the state level to help maximize the impact of taxpayer dollars and maximize coverage for vulnerable members. On the marketplace side, as you heard, we have the benefit of an early look at program integrity impacts and are baking that into our revised 2026 pricing. While we expect to see a contraction of the individual market heading into 2026, regardless of what happens with EAPTCs, just on the other side of that is a more stable market for individual and family coverage. Medicare likely has another wave of policy changes coming from CMS aimed at maximizing efficiency and integrity across the program, and we are tracking those closely as we build back that business. This clarity allows us to firmly plan for the future, and our confidence in the staying power of Medicaid, Medicare, and the individual marketplace is as strong as it has ever been. By staying focused and delivering on our mission of transforming the health of the communities we serve one person at a time, we believe we can command a durable, and differentiated position in a key market and deliver meaningful value to our members, our stakeholders, and our shareholders. With that, let me turn it over to Drew for some additional detail on the financial results.