Good day, and welcome to the Centene Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead, ma'am. .

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our second quarter 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.

Ken Fasola, Centene's President, will also be available as a participant during Q&A. 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.

Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-K filed on February 21, 2023, and other public SEC filings. 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 2023 press release, which is available on the company's website under the Investors section.

The company is unable to provide a reconciliation of certain 2024 measures to the corresponding GAAP measures without unreasonable efforts due to the difficulty of predicting the timing and amounts of various items within a reasonable range. With that, I would like to turn the call over to our CEO, Sarah London.

Sarah?.

a 27% reduction in year-over-year call volumes resulting from a redesigned member onboarding process that features digital outreach and member self-service; consistent 4-star performance in our core admin and ops metrics; call center service levels for members, providers and brokers at or above target with first call resolution in the mid-80s; year-to-date member provider and broker satisfaction scores in the mid-90s; and the addition of 24,000 new physicians across our Medicare network year-to-date as we look to ensure robust access options for our members.

Medicare Advantage provides Centene with an important opportunity to serve low-income and medically complex seniors. It also represents a significant long-term earnings opportunity as we strengthen the overall performance and trajectory of our program. Moving to Marketplace. Our Ambetter Health franchise continues to outperform.

This truly differentiated asset creates a unique growth opportunity for Centene, both near and long term. We ended the quarter with 3.3 million Marketplace lives exceeding our previous projections. Our strong membership results were driven by strategic product design, long-standing and differentiated broker relationships and overall market growth.

Our large and growing Marketplace platform is well positioned to provide coverage to beneficiaries losing Medicaid eligibility from redeterminations, and we are leveraging our networks and engagement tools to support members during this transition.

Where states allow, we are educating our Medicaid members about Marketplace options and are working to proactively communicate with members who we predict will likely be eligible for Marketplace in order to preserve continuity of coverage.

During just May and June, Ambetter Health successfully outreached to potential members with more than 160,000 digital touch points via e-mail or SMS as part of our redetermination efforts. We expect this dynamic will continue to fuel growth in Marketplace throughout the remainder of the year and into 2024.

Finally, our value-creation initiatives are advancing well. We continue to take a rigorous approach to streamlining core SG&A as we focus and fortify the organization for the future. This includes additional work to standardize our operating model, while maintaining the hyper local care that differentiates Centene in the market.

The implementation of our new PBM contract remains on track, as we've achieved all first half 2023 milestones and look forward to our first go-live dates in early 2024. Our portfolio review work also continues. And in June, we closed the divestiture of Apixio to New Mountain Capital.

We structured the transaction to maintain an ownership position as well as a long-term contract because of our view that Apixio's proven artificial intelligence tools are uniquely positioned for this moment in healthcare technology.

We believe that partnering with New Mountain will allow Apixio to innovate rapidly through continued investment, while we continue as an influential customer and minority owner. This is a great example of our thoughtful efforts to maximize long-term value as we reposition noncore assets.

In parallel, as our value-creation efforts create operating bandwidths, we continue to build our M&A pipeline and look forward to diversifying our capital deployment as strategic opportunities for inorganic growth emerge.

Overall, Centene delivered another quarter of solid financial results, while executing against a robust list of transformative initiatives to move our company forward.

With half of 2023 in the books, we are excited to leverage our positive momentum as we work to support our state partners throughout the duration of redeterminations, maintain our leadership position in Marketplace, and strategically realign our Medicare Advantage business, building momentum around Star and positioning our products for long-term growth and profitability.

Centene's improved earnings power in 2023 is a direct result of the focus and hard work that our organization is demonstrating every single day across our markets.

We remain confident in our ability to achieve greater than $6.60 of adjusted earnings per share in 2024 as we continue to execute against our strategic framework, creating value for members, customers and shareholders alike. With that, I'd like to turn the call over to Drew to review the quarter and our financial outlook in more detail.

Drew?.

Thank you, Sarah. Today, we reported second quarter 2023 results of $35 billion in premium and service revenue and adjusted diluted earnings per share of $2.10, up over 18% from $1.77 in Q2 of 2022. Our Q2 consolidated HBR was 87.0%, consistent with our expectation and on track with our full year guidance range.

Medicaid at 88.9% was a little favorable from the item that we mentioned on the first quarter call, and so far so good on matching rates with acuity, though it is still early in the redetermination process.

Medicare at 86.2% was a little higher in the quarter than planned as we also saw May outpatient incurred claims higher than the January through April period, largely in outpatient surgery. With respect to progression, May outpatient trend was higher than April, then it came down in June. July so far is steady with June.

Inpatient was on track, and our previous guidance already assumed a Q1 Medicare HBR favorability would not continue. The commercial HBR of 81% was consistent with our expectations, inclusive of continued strong Marketplace growth of 200,000 members in the quarter.

Recall that special enrollment period members start with a lower margin profile and therefore, higher HBR than full year members, due in part to risk adjustment mechanics, where the shorter duration doesn't get full credit for health conditions. Though if retained for the following year, the SEP cohort has proven to be attractive.

Our guidance contemplates growth to a peak of approximately 3.6 million members in Q4. On the topic of Marketplace risk adjustment, 2022 was recently finalized by CMS, and we received our first view of the 2023 risk adjustment from the Wakely data in June and July. Overall, no surprises in Marketplace risk adjustment.

And as of June 30, we have lowered our booked risk adjustment revenue estimates by a cumulative $314 million given the financial condition of a couple of Marketplace competitors.

Though we have made this prudent adjustment to our revenue over each of the past five quarters, we plan on fully asserting our rights to collect what we are owed for risk adjustment.

To be clear, we have already absorbed this $314 million hit, and this was the biggest reconciling item between the CMS published amount owed to us for 2022 and what was on our books prior to June of 2023. Moving to other P&L and balance sheet items.

Our adjusted SG&A expense ratio was 8.6% in the second quarter compared to 8.2% last year, consistent with our updated mix of business. Cash flow provided by operations was $2.5 billion in the second quarter, primarily driven by net earnings and the timing of premium payments from our state partners.

Our domestic unregulated and unrestricted cash on hand at quarter end was $200 million. During the second quarter and through July, we repurchased 10.5 million shares of our common stock for $700 million. Year-to-date, we have repurchased 15.4 million shares for $1.08 billion.

We also reduced debt by $300 million in the quarter and achieved debt to adjusted EBITDA of 2.9x. Our medical claims liability totaled $17 billion at quarter end and represents 52 days in claims payable compared to 54 in Q1 of '23 and 55 in Q2 of '22.

The decrease was driven by state-directed payments that we collected over prior quarters and paid out in a lump sum in Q2, the largest related to California Hospital and Prop 56 payments, representing $713 million or 2.2 days sequentially.

Outside of adjusted earnings, during the second quarter, divestiture activity produced a net $0.11 gain in the quarter, and we also recognized additional real estate impairments of $0.02, consistent with our ongoing real estate optimization initiatives. Now let's turn to the full year of 2023.

We are pleased with the performance of the company in the first half of the year and are increasing our outlook to at least $6.45 of adjusted EPS for 2023.

We are increasing 2023 premium and service revenue by $1.8 billion to reflect an additional $800 million of state-directed payments as well as refinement in Medicaid and Marketplace premium revenue progression throughout the year.

Our 2023 guidance continues to include an approximate $200 million Premium Deficiency Reserve for Medicare, as we discussed on the Q1 call. The PDR would be recorded in Q4 of 2023. 2023 guidance also includes a little over $1 billion in investment income, excluding divestiture gain and losses.

To go a little bit deeper in Medicaid for 2023, during our first quarter call, we discussed many of our assumptions related to redeterminations that supported our forward projections. We have continued to monitor the actual member data against our projections by state and subpopulation.

And as of July, we are tracking consistent with that updated forecast that we provided in April. The matching of rates to acuity continues to be a very important lever for the company as we navigate the redeterminations process. 14 of our 30 states provide rate updates between 7/1 and 10/1 each year.

12 of those have provided us rates, all of which include acuity adjustments. The other two are still working on rate updates. And based upon discussions, we expect those also to include acuity adjustments.

Beyond 2023, we are continually assessing our positioning for 2024, whether analyzing redetermination data and rate actions, assessing our 2024 bid assumptions in Medicare against current data, or examining our continued growth and performance of Marketplace.

Accordingly, we continue to have confidence in our 2024 adjusted EPS floor of greater than $6.60. To give you a little bit more color on 2024, that $6.60 has an embedded forecasted ballpark $0.80 loss from Medicare Advantage. In other words, if we were merely breakeven in Medicare Advantage in 2024, that $6.60 would be approximately $7.40.

Let me close by addressing some of the concerns I've heard over the past few months. Number one, redeterminations. Our early results are playing out well compared to our assumptions, and states understand that in order to have actuarial soundness, acuity adjustments are necessary. Still plenty of execution ahead, but being on track is a good start.

Number two, Medicare trend. We came into the year assuming double-digit outpatient trend, and did so again for 2024. And as you know, our Medicare business is under construction for 2024, as we are investing in certain products and pulling back in others.

Based upon current forecasts, we expect our Medicare segment to produce approximately 14% of our premium and service revenue in 2024 compared to 16% in the current quarter. And any change in our view of 2024 margin in Medicare, better or worse by the time we get to the fourth quarter of 2023, merely flexes the PDR we booked in 2023 up or down.

Number three, growth. We couldn't be more pleased with our performance in the Oklahoma RFP for both broad Medicaid and foster care, and we look forward to the State of North Carolina implementing Medicaid expansion.

We continue to execute well in Marketplace, where our industry-best overall position has enabled us to grow Marketplace membership 62% year-over-year. And while yes, we have to get through the rest of redeterminations, we still have value creation initiatives to execute upon and we have years of work ahead on Stars, there's a lot to like here.

So while the market trades us at 10x to 11x earnings, we'll keep on executing, buying Centene shares and building up our M&A pipeline to acquire as we create operational capacity. Thank you for your interest in Centene. Operator, Rocco, you can open the line up for questions. .

[Operator Instructions] Today's first question comes from Stephen Baxter at Wells Fargo. .

I still think there's maybe a little bit of confusion out there about the adjustments you're talking about on the exchanges in the quarter. Maybe you could break down those adjustments a little bit further, just so we can really assess core performance.

I guess potentially, what was the benefit related to the 2022 plan year that you saw in the quarter? And then you're also talking about lowering booked revenue, I think, related to the financial conditions of some of the potential payers in the market.

Is that related to 2022, or 2023, or some combination of both? I guess just trying to understand the underlying components of that $350 million figure you cited a little bit better?.

Stephen, thanks for the question. I appreciate it. This is obviously an important dynamic to understand.

I'll let Drew walk through the mechanics and address your question, but there's one important point and takeaway that I do want to make sure we don't lose, which is that it is a testament to strength and experience of our Ambetter team, that were not only demonstrating tremendous growth, but ensuring that growth is profitable through prudent risk adjustment planning.

And I think that's sort of the overlay to all of this, but let me make sure that Drew walks through all of the mechanics. .

Yes, Stephen. And understandably, it's a little complicated. And it's difficult to define some of these numbers with public information heretofore. So let me try to make it clear. So let's start with 2022 risk adjustment. The CMS final announcement was that we were owed $648 million.

And as you did and others, you could look back at our 10-K and see that we had $58 million on our books at year-end. So it's a $590 million difference. You heard the $300 million-plus item, that's almost completely related to the 2022 year.

We have a little bit of that for '23 as one of those competitors was in the exchanges in certain markets for about half a year this year and appeared to be out now. So 300 -- over 300 is the largest reconciling item. And then similar to what you heard yesterday from one of my peers, there is margin on estimates.

Just like in IBNR, you put margin on estimates because you never want to book to an exact 50-50 outcome. And so that margin rolls every year. That's about $100 million. So that doesn't drop to the bottom line. It gets reestablished. And then breakage for minimum MLRs where we're really performing well in some of our contracts. We have RADV accruals.

And so you get through all of that, you get down to $39 million would have been the P&L benefit for -- recognized in '23 for the final issuance of what we are owed by CMS, and that was recognized over first and second quarter. Now let me jump to 2023. 2023, you can see we've shifted -- we've got about $300 million on our books for 2022 receivable.

We've shifted to about $1.5 billion net payable for 2023, which demonstrates the strength of the acuity of the population and our estimates, partially informed by the Wakely data we got in June and July of where we expect to be relative to our peers.

And we also booked that with some margin consistently year-to-year, and we'll see how that shakes out. But we see that as a good sign. And you always have to look at that in tandem with the acuity of the population, including our excellent growth this year. .

And our next question today comes from Josh Raskin at Nephron Research. .

Just looking at 2024 and adjusting for the PDR, EPS next year would be -- if you sort of moved it from this year to next year, EPS would be down, call it, mid-single digits. Can you just help us bucket broad strokes? How much is Medicaid headwind from redeterminations? How much is MA? I think you sized the loss there.

How much is earnings from exchanges? Is that going to rise? I'm sure there's a benefit from lower G&A dollars. There's a share buyback.

Just any directional commentary to help us understand sort of the puts and takes? And then, just lastly, help us understand the PDR and why that doesn't cover the entirety of the loss for Medicare Advantage next year?.

Yes, let me start. Thanks, Josh. Let me start with your last question. Yes, it's the accounting rules around PDRs. You really only pick up -- think of it as like the marginal loss and direct cost necessary to administer the contract, including distribution costs, but there's a lot you can't pull into a PDR in that SG&A.

So that's why we still have an $0.80 loss -- the ballpark of $0.80 loss embedded in that $6.60 in 2024, despite the fact we're rolling a projected $200 million or, call it, $0.27 or so PDR into '24.

If you step back and think about -- and we've given a number of these elements of '24, even though, typically, we give '24 guidance at Investor Day in December of '23. But we've given a lot of information, so let me try to summarize some of that. Medicaid, about a $7 billion incremental revenue headwind.

We've all known that for a while, and that's built into the figures we gave out in Q1. About a $77 billion Medicare revenue premium stream in 2024. So a little bit of a headwind there in terms of volume.

And then if you'll recall the bridge that we walked through in Q1 of HBR, going from a projected 89.8 in '23 to 90.1, inclusive of an allowance for some potential pressure and a mismatch between acuity and rates as well as some benefit from our PBM arrangement. So there's a couple of headwinds in Medicaid.

Obviously, we talked about the $0.80 headwind, which is not just the $0.80, but it's -- we're making a little bit Medicare this year, we expect to. So it's that swing. Marketplace, you're absolutely right.

Not just the continued push on margin in Marketplace, but the growth this year and how that matures into next year, the sophomore year of special enrollment period members is attractive, as I mentioned in the script. And then you're right, we've got other elements like the annualization of this year's share buybacks.

So those are the pieces that get you to the $6.60, inclusive of the $0.80 headwind that's embedded in that, which we expect to recover over the next couple few years. .

And our next question today comes from Justin Lake at Wolfe Research. .

I've got a few, hopefully, simple number of questions, I'll rattle off to you here and we'll see what you can answer. The first one is, I've got you at about 3 -- or I should say, 20% of your Medicare Advantage members right now in 3.5 star plans. So I appreciate you've given the 85% for '26.

I was hoping you might be able to give us a '25 ballpark there where you expect to be in October for 3.5 star plans? Then Drew, you said 14% of Medicare revenue -- 14% of revenue in Medicare.

What does that imply for MA membership next year? And then just lastly, on the rate increases you're getting in the third quarter, how are the overall rates coming in versus typical 1% to 2% that I think you guys talked about?.

Thanks for the questions, Justin. I'll take the first one, and then turn it over to Drew. We're still a little bit early relative to cut points.

So again, that 85% target for October of '25, then to your point, revenue year '26, we're seeing really solid improvement as I pointed to in terms of 2/3 of our membership moving in contract improvement year-over-year.

Directionally and again, it's still -- the numbers are not final, but just to give you a sense, if we -- this year, we're sitting in about 50% of plans that are in 3 star or above. We expect that to be around 90% of members in 3-star or better come October.

And so the exact numbers that fall in 3 or 3.5 really depends on those cut points that we don't have yet, but just so you understand sort of the magnitude of directional improvement that we're tracking. .

Justin, I tried to give you all the inputs, but let me do some math to you -- for you. So last quarter, we said $128 billion for next year's revenue. Obviously, we'll refine that as we get through the year. So if you multiply that by 14%, that's $18 billion. Our Medicare segment includes MA and PDP, PDPs in the zone of a couple of billion.

So you can get down to about $16 billion of MA revenue. And if you did the same exercise for this year, we'd be in the zone of $20 billion in MA revenue. And then part 3 was the third quarter rates. Yes, they're sort of -- they're consistent with our expectation.

They're all over the board because when we're -- if you're deep into a payable risk corridor in a state, then ultimately, they're going to recalibrate the rates to that. Although there's no net impact to the company if we're in the corridor. So it's not that instructive to go through, and we never go state by state.

But let me just step up to a higher level and say we've been working well with our states. And the typical back and forth with states on the non-acuity parts of rates and call that normal course. .

And our next question today comes from Lance Wilkes with Bernstein. .

Great. Just a couple of questions on kind of capital deployment and raising capital.

As far as the MA business, could you talk a little bit about variability of profitability by geography? And obviously, part of that would be, are there opportunities to maybe sell off portions of that business, lower performing portions or whatnot? And I guess related in the other direction is, you mentioned M&A pipeline.

Just interested in what the priorities are as you're looking at deploying capital?.

Yes. Thanks, Lance, for the question. So relative to Medicare Advantage, I think our view is, to your point, we take a geography-by-geography approach to looking at that portfolio. Our lens is through big construction as we look at '24 and '25 and where there are less profitable products that we've put out there.

And we talked about this on the Q1 call, but we've been very focused as we constructed '24 bids on this idea that there are less profitable or less aligned products, and that's where we are sort of aggressively pruning.

So directionally aligned, but not through the lens of divestiture, more through the lens of rightsizing and realigning the MA book overall to create that solid platform for growth and the synergy that it provides with the focus on lower income and complex members to our Medicaid footprint.

And then for the M&A pipeline, again, we continue to be focused on opportunities that are -- we consider sort of right down the fairway, relative to our three core business lines, that being our primary focus, but also acknowledging that we have two strong and important retail businesses, which is how we think about Marketplace and Medicare and the platform that we think Marketplace provides in terms of long-term growth relative to what we're seeing from gig workers, contract workers, ICRA and sort of burdening individual Marketplace, what are some of the capabilities that we think are going to be important to own those distinctive competencies.

And so those are also part of the consideration in the overall M&A pipeline. .

And our next question today comes from A.J. Rice at Credit Suisse. .

Just to circle back to couple of things on the Medicaid reverifications. Obviously, it's sort of a herculean task for the states to go through this process. It seems like everyone involved.

Is it having any impact? It doesn't seem like it -- but I'll ask the question on either RFPs working through the system or RFPs that are being awarded, be it stood up? Have you seen any spillover impact on any of that? And then just a follow-up on Drew’s comment on the acuity adjustments.

Just give us the latest thinking on how quickly those acuity adjustments may happen as data rolls in? And are there any states that are saying, "Hey, we'll help you out prospectively anticipating some change?".

Yes. Thanks, A.J. I'll let Drew talk about the rates, but it is important just to -- as a reminder, that we saw -- we have a number of states that had a 7/1 renewal and had very constructive conversations. All of those states have included acuity adjustments. And we're seeing that trend carry forward, but I'll let him get specific on that.

Relative to the overall Medicaid redeterminations landscape, you are right that this is sort of an unprecedented scale of effort. And we've been really pleased with the level of partnership that we've seen the states and in general, a trend that states are leaning in to the value of public-private partnership that we offer.

But Ken's been out talking with our Medicaid directors and our governors very closely over the last weeks and months. So I'll let him provide a little bit more color on that, and then kick it over to Drew to just talk a bit about the rate discussions. .

Yes. Thanks, A.J. In fact, we were with nearly 14 governors last week, had an opportunity to spin through the Republican Governors Association.

And in every conversation we had, redeterminations came up with an eye towards, one, what are we seeing by virtue of the view we have across multiple markets, best methods and genuine appreciation for opportunity that's available to provide more informed counsel to members throughout reach.

Sarah mentioned the millions of interactions that we've had, the collaboration with the departments, clearly an eye towards doing the best to give members a chance to make an informed decision.

And when there's procedural disenrollments to move quickly to provide the opportunity to get those folks either into the right spot, whether it's in Medicaid or we're seeing opportunities in the Marketplace.

Finally, to your point about whether it's going to slow the pipeline, there's no indication of that with respect to procurement and reprocurements.

Drew?.

Yes, A.J., on acuity, over the -- really, over the past year, we've been putting data in front of our state partners and working collaboratively with them and their actuaries in anticipation of the commencement of redeterminations.

So often, really on behalf of all the payers in the Marketplace in Medicaid, we're working with the state and the associations to influence for what we think is appropriate in terms of not just rates, but the acuity component within rates.

And then by definition, the 7/1 rate increases, and we sold two outstanding between 7/1 and 10/1, but the 12 that we've gotten so far, all of which have had acuity adjustments with a focus on the redetermination impact. By definition, those are prospective, except for maybe the couple of months that we have under our belt so far in redeterminations.

So pretty pleased with the partnership with our state partners. And plenty of work to do, A.J., but it's a good start. .

And our next question today comes from Kevin Fischbeck, Bank of America. .

I want to follow up on the comment that redetermination is going as expected. It seems like when you read some of the news articles that things are going -- fielding kicked off faster. Obviously, the administration is stepping in, which implies that things are going maybe a little bit faster.

We'd love just to kind of hear how you're thinking about it? What it exactly means to have this delay? Would you expect the pace to change dramatically? Or have you changed your view about the pace of enrollment losses through the year? And is this slowdown of the administration is pushing? Is it more about the timing of how things go the rest of this year? Or do you think that ultimately, it will change that the number of people who get redetermined to often see enrollment?.

Thanks, Kevin. Yes, we had always anticipated upfront bolus of redeterminations just because of the fact that there were certain states that were moving faster than others and others that had taken a more ratable approach. So I think the idea that there is a big amount of upfront data is helpful, but not unexpected.

And then that has also given us some visibility into where there may be data issues that are causing -- or sort of the procedural disenrollments are higher than the states might have originally been expecting. In aggregate, though, as we said, our membership is on track with our expectations.

We are recapturing members who fell off, but still have eligibility. And because of all of the outreach efforts we're making, we're able to bring those members back on and track the fact that we're able to successfully reenroll them. And again, we do expect that number to grow over the course of the program.

Relative to the CMS intervention, our view is that CMS has provided great flexibility for the states to go a little bit slower. Obviously, in recent weeks, they've taken a bit of a stronger stance relative to a certain cohort of states, but it's still too early to see whether that will have a major impact on the slope.

Obviously, they've asked certain states to pause for a month in other states, they're looking to extend the grace period relative to members replying to enrollment requests.

And so again, hard to say whether that's a slowdown to make sure that states are getting the process right, so that they can continue at pace or whether for those states that quick out of the gate, it slows them down overall and what that does to the slope line, but that's something we're obviously going to be tracking very closely over the next couple of months.

.

Yes. And then just one last data point. The ultimate sort of roll-off of redeterminations, our view hasn't changed. Still about 65% of what we grew since the onset of the pandemic. 3.6 million members would have been the growth.

So 65% of that rolling off would be 2.3 million to 2.4 million members, about $9.5 billion to $10 billion of cumulative revenue. So that's already factored into the numbers we gave in Q1, the $77 billion, for instance, of forecasted Medicaid premium. .

And our next question today comes from Scott Fidel with Stephens. .

I appreciate all the details that you gave us on some of the dynamics in the Marketplace.

May be helpful to just to bring it up to sort of the high level if you wanted to share, what type of commercial MLR you're now sort of embedding in the 2023 guide and then in the 2024 floor of at least $6.60? And then inside of that, definitely appreciate the conservatism around some of these receivables from some of these plants out there that are in a tough condition.

Would you be willing to maybe just give us a little insight into how you sort of develop that $350 million reduction in terms of sort of, I guess, how that breaks down between Friday and bright? Or just how your methodology works is it just sort of a general level of conservatism that you're building in there?.

Yes, the team -- thanks, Scott. The team does a lot of work to mine out balance sheet positioning and statutory capital of our peers that are in potential financial difficulty, looking at what assets are backing reserves on their balance sheets.

And then you're right, hopefully taking a conservative approach on that and doing that different depending on the carrier situation. So we'll see how that plays out. I hope to get every nickel of that $314 million, but trying to be realistic and prudent, but we will fight for it because that's shareholder money. On the HBR for commercial.

Commercial includes both Marketplace, and we've got about $3 billion of commercial group business, which runs sort of meaningfully higher structurally than our Marketplace business. And we still expect to do a little bit better than last year. Last year, commercial, we posted an 81.1.

But thinking about the SEP membership rolling in, with a little bit higher HBR, now that's not for a full year. So you have to sort of slope that through.

But from a progression standpoint because the deductible natures of the commercial business, you should expect like an ongoing tick up of that total commercial HBR, but it's sort of on track to what we expect. .

And again, just important to remember that the performance of the core business and Marketplace is allowing us to absorb that SEP growth. And those members tend to become more profitable in their sophomore year. So assuming good retention, the book that we're building this year will have incremental contribution next year. .

And our next question today comes from Michael Ha with Morgan Stanley. .

Maybe just quickly first on Medicaid acuity adjustments.

Wondering where these adjustments assumed are embedded in your 1.4% composite rate increase guide for '23? Or are you now tracking better than that for '23? Trying to understand if these mid-year renewals actually represent upside to your guide? And then on Star, I believe you're originally targeting 20% of members in 4-STAR+PLUS plans at your Investor Day? Now that came down to about 14% to 18% last quarter, and now 0%.

I'm trying to understand what exactly changed since last quarter? It sounds like you might not have received cut points yet, or maybe I'm wrong, you did, and they're far more difficult.

Was it driven by the two key outlier deletion? I'm just trying to get some more insight on what changed from last quarter to now? And does that even influence your '24 MA growth assumptions?.

Yes. So let me hit Stars and sort of rebate. So we did -- at Investor Day, we were looking at 20% in 4 stars.

On the Q1 call, because of what we saw in terms of the overall Medicare rate environment, some of the changes that we had made coming into the year, relative to a focus on duals and what we were planning to do for 2024 bid construction and going forward, we walked through the fact that for our target population, right, which is increasingly going to be low-income complex and duals members, that 3.5 stars is the more appropriate focal point for our Star strategy.

And so that is really how, over the next 3 to 4 cycles, we're looking at success in Star.

And so I also on that call, pointed out that we were seeing 4-star progress in the measures that we had visibility into at that point, which were those core admin and ops and pharmacy measures, which is our focus in this first cycle, but that we had a number of contracts that were on the bubble and that we were taking a conservative approach and actually assuming minimal progress.

So the takeaway from the Q1 call was minimal progress in 4-star off that 2.7% baseline. What we're saying today is with additional view of HEDIS and CAHPS and some degree of sort of case mix, that there's a little bit more pressure in that 4-star.

Again, it's too early to say because we don't have cut points, but we want to be very transparent, and we used very conservative assumptions.

This does not impact 2024, right, because we already know the revenue for 2024, but it certainly was an input as we looked at 2024 bid construction, relative to what we thought about in terms of 2025, 2026 and sort of the multiyear performance targets for the Medicare book.

And again, important to note that we are seeing really solid underlying improvement in the program and really taking a chapter by chapter approach to moving up all of our underperforming contracts into that 3.5 star band, which is where we start to get important economics.

Drew pointed this out on the Q1 call as well that there's -- folks know the economics associated with the 4-star, but there's a 3% to 6% economic lift that comes with moving into that 3.5 star band.

And when you combine that with the profile of largely or heavily dual-based population, those economics actually work very well relative to the performance we're looking for. .

And Michael, on the 1.4% composite forecasted rate that we laid out at Investor Day in December of '22, that would have partially reflected our view at the time of what we thought might be necessary for acuity adjustments.

But the reason I say partially is because you'll remember, we basically pulled forward sort of a lot of the forecasting for the next couple of years of acuity as we got into the first quarter of 2023.

So what we know now would push that number up, but there's also a counterbalance to that as we continue to perform well, especially in states with paybacks, where we're forecasting for 2023 sort of the calendar year of 2023 to be in paybacks to the tune of about $1.3 billion in Medicaid.

That would be a counterbalance to that because states ultimately adjust the rates by looking at the pool of participants in Medicaid and their positioning in risk corridor payback. So it's sort of a stale number at this point, but those are two factors that would push and pull up that number. .

And our next question today comes from Sarah James at Cantor Fitzgerald. .

I was wondering if you could quantify what the redetermination impact was in the quarter? And then if we're thinking about the sort of April and May cohort, especially April is coming up towards the end of their 90- to 120-day response period, and I know you guys only have a couple of states in that cohort.

But could you talk a little bit about what sort of information you get? Do you know who is responding of your members? And have you gotten any information on what a success rate looks like for that April cohort?.

Yes, Sarah, on the question about the impact, you can look at the sort of the membership progression. We're down 263,000 members from 3/31/23 in Medicaid, and that's sort of right on track with what we expected in terms of the impact. And then on what we can look at -- so it's a good question.

I'm looking at each of those monthly cohorts independently, but we could actually see sort of the members boomeranging back at a much higher rate with April because, to your point, we're a few months out from that incurred month as opposed to July, which would be a lower number because there's still some runway there for members to boomerang back.

But so far, that month is in the 20s in terms of percentage of members who lost eligibility that have now regained it without -- importantly, 85% of which without any break in coverage period. There are some members, the other 15% of what we're seeing are being reinstated back to maybe a month or two after they lost eligibility. But it's very early.

There's not a lot of redetermination activity in April. So it will be interesting over the next few months to see that dynamic of members getting reinstated. .

And our next question today comes from Gary Taylor with Cowen. .

I have two questions for you. One, a couple of your competitors mentioned that the second quarter results bore -- for not immaterial MLR headwind from the California court settlement related to COVID costs out of period.

So just wondering if your quarter did -- this quarter did reflect that or if you had already booked that? And then secondly, just sort of coming back to Scott's question, I just want to ask about commercial MLR again. And looking at this year-over-year, just to exclude sort of the deductibility seasonality.

But in the first quarter, your commercial MLR was down 290. This quarter, it's up 350. A small portion of that is SEP. A small portion of that, I think, is the smaller year-to-year RAF accrual true-up.

So it really did seem to deteriorate, but I know you're saying, I think you felt it was in line, and you think the year is still going to come where you expect to land on commercial MLR.

So I just wanted to understand that movement between 1Q and 2Q a little better from your view?.

Yes, on SB 510 in California, we booked that in Q1 when we got that information, which is -- I think we explained this on the Q1 call also is why we were a little bit high at 90.0, and then we had a really good quarter in Q2. So year-to-date, we're looking good in Medicaid. And then you're right on commercial.

You've got the dynamic of Q2 '22, having a really sort of a good guy. We didn't have any insolvency issues from the '21 calendar year. And so that wasn't chipping away at the final settlement from CMS like it is over the last five quarters, including this quarter as well. So that's sort of the swing item.

And our growth was excellent last year, it is tremendous this year. And while that puts a little bit of pressure on the near term, we're thrilled that with our #1 market position, leveraging the Ambetter brand. We're able to grow a lot this year, which will give us earnings power for 2024 and beyond.

But that does show up in the current period, HBR a little bit. .

And our next question today comes from Calvin Sternick with JPMorgan. .

Just a clarification. In terms of the Medicaid retention rate, I know about 1/3 you expect to end up with.

But in terms of timing, just given that we have these 90, 120-day sort of reenrollment windows, do you expect to land at that 1/3 number, I guess, second quarter of '24? Or is there going to be sort of a couple of month lag where maybe it will take another quarter before you end up planning that 1/3?.

Well, part of that depends on whether or not people finish in that 14-month time period. And who knows what might be going on by the time we get to Q1 or Q2 of 2024. So tough to predict exactly when each state will end.

But we think that's -- the numbers we gave, without trying to predict exactly the month we hit that, we think that's the ultimate outcome, and that hasn't changed. .

And again, all those outreach efforts that I mentioned are designed to try to minimize the span between someone who's dropped eligibility, but is still eligible in the recapture.

And that includes, obviously, the direct outreach, but also relying on primary care physicians and providers in general, so that we're not recapturing folks when they're showing up at an emergency department. And so I think that outreach has also proven to be successful, at least in these early months. .

And our next question today comes from Steven Valiquette with Barclays. .

Maybe just to shift gears on the Medicare side for a moment, and your comments around the cost trends were definitely helpful.

There's still a lot of different theories out there as to why Medicare is seeing elevated cost trend in '23 specifically, particularly in outpatient, while Medicaid and commercial are not really seeing the same elevated trends.

So I was just curious to get your thoughts and any additional color on why you think this is happening in Medicare specifically this year?.

Yes, I mean it's tough to speculate here and don't plan on it, but you could probably think about the composition of our members. 49% of our members in Medicaid are under 19 years old. So there's probably not a lot of cardiac, or ortho, or cataract, which is what we're seeing on the Medicare side.

Other than that, I can't really explain other than saying what we're seeing in Medicaid and Marketplace is pretty stable relative to the pop we saw in May, which is not alarming, but figured it would be a helpful commentary for you guys, given some of the noise around the industry and the fact that our Medicare HBR was a little bit higher than we expected in the second quarter.

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And our next question today comes from Nathan Rich at Goldman Sachs. .

Just a couple of clarifications. Maybe just sticking on that last question.

Drew, I'd be curious if you could maybe frame the magnitude of this kind of step down that you saw in June when you're thinking about kind of monthly cadence? And how you're expecting that to play out over the back half of the year? And then a quick follow-up on the Marketplace margins and expectations for next year.

Given both the growth you're seeing, the SEP enrollment, as well as kind of pricing plans for '24, what type of margin improvement you'd expect to see in the commercial business next year just as we think about progression into '24?.

Well, we definitely have priced for and expect margin progression as we get into 2024. We'll have to give you more of an update as we get towards the end of the year at Investor Day for more specific '24 guidance elements that detailed.

And then on your '23 question related to trend, as Sarah said in her script, we've got accommodation in our at least $6.45 adjusted EPS guidance for some continuation of this.

Although to your point, we did see a step down, not all the way back to April, but a step down in June and sort of that holding in July with respect to the relativity from what we saw with May incurred through their second month of development. .

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks. .

Thanks, Rocco, and thanks, everyone. We appreciate the interest and all the great questions. We look forward to providing additional updates on our progress as we move through the back half of '23. I hope you all have a great day. .

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day..