Good day, and welcome to the Centene First Quarter 2024 Financial Results 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, Finance and Investor Relations. Please go ahead. .

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first quarter 2024 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 20, 2024 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 first quarter 2024 press release, which is available on the company's website under the Investors section. .

With that, I would like to turn the call over to our CEO, Sarah London.

Sarah?.

Thanks, Jen, and thanks, everyone, for joining us as we discuss our first quarter 2024 results. .

This morning, we reported first quarter adjusted EPS of $2.26, ahead of our previous expectations for the period. As a result of this strong start to the year, we are increasing our full year 2024 adjusted EPS guidance to greater than $6.80. Drew will cover the quarter and our updated financial outlook in further detail in a few moments.

While there is still more work to do, we are pleased with the first quarter results, and we'll look to harness the positive momentum we are generating in our core businesses as we move through the balance of the year. .

In 2024, Centene's focus remains on our work to streamline and modernize the underlying infrastructure of our company and to assemble the people, processes and tools necessary to deliver best-in-class experiences to our members, providers, regulators and state partners. Let me share a couple of examples of progress here. .

During the first quarter, we completed an important initiative to simplify our prior authorization process by automating our real-time source data. This simplification improves the timeliness of authorization decisions, ensuring our members get the care they need quickly and removing friction from the process overall for both members and providers. .

Q1 also saw the accumulation of months of thoughtful and thorough go-live preparation in Oklahoma. Our team obtained perfect scores in our readiness review from the state, and we are thrilled to be serving Oklahomans statewide as of April 1. .

Finally, our improved operational agility also allowed Centene to mobilize quickly in support of our members and provider partners in the wake of the Change Healthcare cybersecurity incident.

This included launching a national provider outreach campaign that spans Centene's provider network across all products, Medicaid, Medicare and Marketplace, and has included targeted efforts to support those disproportionately impacted by the outage, including FQHCs, safety net hospitals, rural health clinics and behavioral health providers.

We appreciate the focus on and support for last-mile providers from HHS and CMS throughout this process as these clinicians represent a critical component of the infrastructure through which our members access high-quality health care. .

Now on to our business lines. We are roughly 90% of the way through redeterminations, and our Medicaid franchise continues to demonstrate resilience as we navigate the complexities of this unprecedented process. As you can see from today's release, our first quarter membership tracked slightly higher than our expectation at Investor Day in December.

Overall, we continue to be well guided with respect to membership and rate by the projection model we built state by state more than a year ago and that we continue to refine as we move through the redeterminations process. .

As we've noted before, 2024 represents an important year for blocking and tackling through acuity shifts and corresponding rate discussions with our state partners to ensure we are positioned to provide high-quality services for our members. We are actively engaged in that process and are seeing solid results thus far with opportunities still ahead.

As we move through the remainder of the year, we expect these discussions to increasingly represent the regular back-and-forth dialogue we maintain with our state partners in the normal course of managing the dynamics around each individual Medicaid program we serve. .

At the same time, we have been executing on important reprocurements, and the early months of 2024 delivered notable data points. Most of the key RFP results are now public, positioning us well to generate continued Medicaid growth in a post-redeterminations world.

Centene reprocured one of our largest contracts with the recent announcement of intended awards by the state of Florida. Although the protest period is ongoing, Centene is well positioned based on Florida's determination that Sunshine Health is among those that will provide best value to the state. .

In Michigan, we were thrilled to be selected to continue serving the vast majority of our existing membership with some opportunity to grow. And we look forward to our continued collaboration with the state. .

In Texas, our protest remains ongoing. We are honored to have served Texans for 25 years and intend to defend Superior Health's ability to provide access to affordable and high-quality health care for our members in the Lone Star state. .

We are proud of the way our health plans and business development team have delivered so far during this critical cycle of reprocurements.

The Centene value proposition remains a powerful one, built on more than 4 decades of experience serving Medicaid communities, an unwavering local approach and a commitment to innovation in the services and support we bring to our members.

We are honored to provide access to care as well as community-based support to improve the lives of those we serve in 31 states across the country. .

Moving to Medicare. The Medicare Advantage macro landscape remains challenging. Consistent with our prior view, we see final 2025 funding levels as insufficient with respect to general medical cost trend expectations. Drew will provide some early commentary around our strategy to navigate Medicare in 2025 as a result. .

Medicare Advantage STAR ratings remain the single most powerful lever to drive performance in this vital business and continue to represent a top priority across the organization.

As we drive to our goal of 85% of members in 3.5 STAR contracts by October of 2025, we continue to see improved progress and stability in our performance and expect those to be reflected in our results come October. .

We are tracking year-over-year improvements in our core operations as well as in the ways we support our members as they receive care. And we are carrying forward this positive momentum into 2024 as our teams are clearly focused and aligned on quality. .

Longer term, Medicare Advantage remains an important business for Centene. The strategic link between Medicare and Medicaid has only become more explicit since our last earnings call. Recent CMS rule-making included final requirements to better coordinate dual special needs plans, or D-SNP, participation with important milestones beginning in 2027.

By the end of the decade, a Medicaid footprint will be a prerequisite to D-SNP growth. Centene is perfectly positioned to gain positive momentum from this growing bond between Medicare and Medicaid. .

Finally, Marketplace. This business continues to represent a unique and powerful growth segment for Centene, and our teams are executing well against the opportunity. With approximately 4.3 million Marketplace lives at the end of the first quarter, Centene's Marketplace membership has more than doubled in size compared to just 2 short years ago.

This exceptional growth has been accompanied by consistent margin expansion as our deep product knowledge and staying power in the market enable us to forecast pretax margins well within our targeted range of 5% to 7.5% for 2024. .

We are pleased with the traction our Ambetter health products are generating and see additional room to expand the reach of Health Insurance Marketplace offerings overall. In 2024, the source of our membership growth is widely diversified.

Based on a survey we conducted following open enrollment, nearly 40% of new members identify as previously uninsured. Approximately 25% joined us from another Marketplace carrier, and approximately 10% chose Ambetter after losing access to an employer-sponsored plan.

This is in addition to those members who selected Ambetter after losing Medicaid coverage. .

As we look to the future of Marketplace, we expect new member growth to be driven by an increasingly addressable and accessible uninsured population and the evolution occurring as employers consider alternative options for providing employer-sponsored insurance. .

Centene has been rapidly evolving as an organization over the last 2 years. We have been resolute in creating focus, trimming the organization down to the core strategic assets that give us the strongest platform for future growth.

We are executing against our strategic plans, fortifying and modernizing our infrastructure and successfully delivering access to affordable, high-quality health care for millions of Americans.

Our strong first quarter results demonstrate the power of our diversified earnings drivers as we deliver on our financial commitments, maintain our posture of disciplined capital deployment and continue to invest to support long-term growth. .

As always, we want to thank our nationwide workforce of nearly 60,000 for showing up every day committed to improving the lives of our members and transforming the health of the communities we serve. This CenTeam is the engine that ultimately powers our results and amplifies our impact. .

With that, let's turn the call over to Drew for more details around our performance in the first quarter and our updated financial outlook for 2024.

Drew?.

Thank you, Sarah. Today, we reported first quarter 2024 results, including $36.3 billion in premium and service revenue and adjusted diluted earnings per share of $2.26 in the quarter, 7% higher than Q1 of 2023. This result was better than our expectations, and we are increasing full year 2024 adjusted EPS guidance by $0.10 to greater than $6.80.

This quarter is a good example of the benefit of a diversified business with multiple levers to drive results. .

Our Q1 consolidated HBR was 87.1%, which is right on track for our full year guidance. Here's an example of the benefit of that diversification since we provide you with transparency into the line of business components.

Medicaid at 90.9% was a little higher in the quarter than we expected as we continue to work through the appropriate matching of rates and acuity in the short term.

Redeterminations are certainly front and center in the acuity rate match process, but getting the right match for other circumstances such as states changing pharmacy programs or behavioral health practices are also important initiatives in a handful of states. .

On the other hand, our commercial HBR at 73.3% was a little better than we had planned in the quarter driven by the continued strength of our Marketplace business. And our Medicare segment at 90.8% was right on track in the quarter. All of this netting out to 87.1%, a good result. .

Going a little bit deeper into each of our business lines. Medicaid membership at 13.3 million members was slightly better than the 13.2 million members we forecasted as of Q1 -- for Q1 as of our Investor Day.

Drivers of membership for the remainder of the year include, one, new wins such as Oklahoma and Arizona LTSS; two, the return of slight growth in markets once redeterminations are complete, plus the rejoiners dynamic; net of, three, the substantial wind-down of redeterminations over the next 3 to 4 months.

Upon reforecasting the sloping of membership and revenue for 2024, including Q1 membership being a little bit higher than planned, we added $1 billion of Medicaid premium revenue to our 2024 guidance.

The overall composite rate is running a little above the 2.5% we last referenced, and we have over 75% member month rate visibility into the 2024 calendar year. .

Regardless of the temporary work to match rates and acuity, our long-term goal remains to return to the high 89s HBR as we look out over the 2025, 2026 time frame. All things considered, we are pretty pleased with the performance of our Medicaid business 1 year into a very complex redetermination process.

And as Sarah covered, we cannot be more pleased with our performance in recent Florida and Michigan Medicaid RFPs. The Texas protest process still needs to play out. .

Our commercial business performed very well in the quarter in terms of both growth and HBR. Consistent with previous comments, we grew from 3.9 million Marketplace members at year-end to 4.3 million at the end of Q1. For the past 2 years, we have consistently delivered a combination of growth, coupled with improving margin.

Our guidance assumes that we stay at 4.3 million Marketplace members for the rest of 2024. If we can grow during the special enrollment period, which we've been able to do in the past 2 years, there would be upside to our premium and service revenue guidance. So stay tuned. .

Our current 2024 guidance assumes about $16 billion of Medicare Advantage revenue, representing 12% of total premium and service revenue guidance, and approximately $4 billion of PDP revenue. I previously mentioned at a conference that Medicare inpatient authorizations were higher than expected in January and February.

March authorizations ended up being lower than February, though still elevated from Q4. And Medicare outpatient trend continues at the elevated level we first saw in Q2 of 2023, though reasonably steady. .

Nonetheless, the performance in the quarter for the Medicare segment was in line with our expectations, and our full year view has not changed. We had good performance with our new pharmacy cost structure and executed well on other operating levers. .

inpatient and outpatient trends, complex pharmacy changes from the Inflation Reduction Act, an insufficient 2025 rate environment based upon the final rate notice and a risk model being phased in beginning in 2024 that is punitive to partial and full duals.

It also seems like many of our peers should have more religion in setting benefits at sustainable levels given these headwinds. .

I'll repeat what I said on the mic at a conference in March. To accomplish our strategic goals with our Medicare Advantage business, it doesn't matter if we ultimately level off at $14 billion, $15 billion or $16 billion of Medicare Advantage revenue.

What is strategically important is the alignment with Medicaid and those complex populations we want to serve, especially given where the puck is heading with regulations pulling duals and Medicaid closer together. We're still in the process of making 2025 county-by-county decisions, and we'll finalize and submit Medicare bids in early June.

So we'll provide you with more 2025 Medicare commentary on our Q2 call. .

We expect Medicare to be a good business for us in the long run, and it's an important part of our overall portfolio. We need to deliver on STARS improvements, clinical levers and SG&A actions over the next few years, and those efforts remain on track. .

Going to other P&L and balance sheet items. Our adjusted SG&A expense ratio was 8.7% in the first quarter, consistent with our updated mix of business, including growth in Marketplace.

Cash flow used in operations was $456 million for Q1, primarily driven by net earnings, more than offset by the timing of risk corridor payments, a delay in March's premium payment from one of our large state partners subsequently received in early April and slower receipt of pharmacy rebates as we transitioned to a new third-party PBM in January of 2024.

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From January 1 through mid-April, we repurchased 3.4 million shares of our common stock for $251 million. Our share repurchase goal for 2024 is unchanged at $3 billion to $3.5 billion. Our debt to adjusted EBITDA was 2.9x at quarter end, consistent with year-end.

And during Q1, we were pleased to maintain our S&P BBB- rating under the updated S&P rating model. .

Our medical claims liability at quarter end represented 53 days in claims payable, down 1 day from Q1 and Q4 of 2023. DCP was actually up due to Change Healthcare claims receipt delays, then back down due to an acceleration of state-directed payments to providers and lower pharmacy invoices outstanding at quarter end.

You'll see in the reserve table that our 2024 Medicare Advantage PDR is up $50 million in the quarter. This progression in the 2024 PDR was expected and planned for due to quarterly seasonality in Medicare Advantage. .

Though it's early in the year, we are comfortable adding $1 billion of premium and service revenue and $0.10 of adjusted EPS to our 2024 guidance. You'll also see some mechanical changes to total revenue driven by pass-through premium taxes and the GAAP effective tax rate due to the Circle divestiture.

We also expect investment income to be a little bit above our previous forecast of $1.4 billion while still providing for a few rate cuts in 2024. .

Q1 was a quarter of momentum. We put another quarter of redeterminations behind us. We reprocured one of our largest contracts and are well positioned in Florida. We executed well in the Marketplace annual enrollment period and put up a strong quarter of both growth and margin.

We delivered on the January 1 PBM conversion, and our businesses and customers are benefiting from an improved cost structure. We continue to advance our multiyear operational improvements, and Centene continues to attract talent. And all of this resulted in strong Q1 results and increased 2024 guidance. .

While there is plenty more to achieve, we are off to a good start in 2024. .

Thank you for your interest in Centene. Rocco, please open the line up for questions. .

[Operator Instructions] Today's first question comes from Kevin Fischbeck with Bank of America. .

I just wanted to go into your margin commentary on the exchanges because, I guess, from our expectations too, it came in a little bit better. I guess that's the fastest-growing part of your business, which always potentially lowered the visibility into claims receipts. And obviously, you had a change going on at the same time.

So I mean, I guess, how comfortable are you -- or what points do you look at to give you comfort that, that MLR outperformance is true and durable rather than potentially some issue around rapid membership growth or change disruption?.

Yes. Thanks, Kevin. I think 2 important points there. One is just the confidence in the overall HBR. And I think as we look back over the last 2 cycles, we have seen rapid growth in the market overall and, obviously, growth in our book. It's more than doubled in the last 2 years. And I think we've tracked very well to the HBR implications of that.

So understanding where SEP growth may have pressured margins in year, but then the fact that the sophomore effect of that growth that we accumulated last year starts to play out this year is consistent with our expectations. .

So again, I think the team has demonstrated a really solid ability to track the moving parts, which gives us confidence in the performance of that book. We've also, as we've talked about in the past, implemented a really strong program around clinical initiatives.

And so that has continued to mature, which I think also helps overall management of the book. .

And then relative to the visibility on change, maybe I'll just hit that sort of broadly because I think that question probably applies across lines of business, and as I said in my remarks, just incredibly proud of how the teams mobilized here in our response, demonstrating operational agility prioritizing member access to care and then a huge push around getting out to providers and finding every way possible to get them reconnected as fast as possible so that they could get paid and they can support our members, which is priority #1.

And then, of course, we can have the visibility that we need. .

And on that point, throughout that process, we had very solid visibility from an inpatient perspective because [ OPPS ] were not disturbed at any point during that process. Centene also has a long-standing practice of using received claims, not paid, which Drew has talked about before.

And so outpatient visibility was good coming into that incident on a relative basis and then being able to catch up quickly as a result of providers reconnected. So the highest point, we were missing mid-teens percentage of our claims.

So by the time we closed the quarter, the impact was very modest, and we accounted for that in our financial processes. .

And our next question comes from Stephen Baxter at Wells Fargo. .

I wanted to ask about the revised premium and service revenue guidance first. It seems like based on what you saw in the first quarter that you'd annualize to something closer to around $145 billion versus the revised guidance of $137 billion. So wondering if there's anything we should be keeping in mind.

Just as another kind of call out, the Medicaid premiums in the quarter were well above our model. So I don't know if there's anything there that's influencing it. .

And then from the Medicaid MLR perspective, how are you thinking about Medicaid MLR progression through the year from the starting point and the factors that are influencing that?.

Yes, Stephen, in Q1, we did have a fair amount of state-directed payments. In fact, some states, we believe, in response to the Change incident, accelerated a number of those. That actually also had about a 20-basis-point impact on our Q1 Medicaid HBR relative to our expectations of a normal level of state-directed payments.

So that also showed up in our premium revenue. So you can't quite annualize Q1. .

And there could be a little bit more -- we expect a little bit more redetermination attrition through Q2, maybe a little bit into Q3. But then on the flip side, we've got some growth coming in as well. So that would be the progression of Medicaid revenue throughout the rest of the year. .

Medicare, probably a little bit more attrition throughout the year as we prepare for our 2025 bids and the bid decisions we're going to make in terms of where we want to emphasize, where we want to deemphasize products, PBPs, states, age contracts for '25.

So we will probably have a little bit more attrition in Medicare Advantage as planned throughout the year. So those are some of the things to think through. .

Marketplace, we're assuming flat at 4.3 million members. Hopefully, there is some upside there, to your point, in premium and service revenue if we can grow during the SEP. But we just didn't want to bet on that in guidance. .

You also asked about Medicaid HBR. Yes, so we came in at 90.9% for the quarter. We definitely expect 20 of that sort of being pressed on by the state-directed payments above our expectations. But we've got some work to do. We've got initiatives to drive down the HBR from the Q1 level.

Remember that half of our rates -- about half of our rates show up in that 7/1 to 10/1 time frame. I think that's a little bit higher distribution than the industry broadly in Medicaid. But so far, so good there in a number of cases. .

And there's always states where we've got to make sure that we're presenting the data, whether it's a PBM carve-out or behavior health costs and changes in state practices that we're getting paid for that, but that's more normal course stuff. So we do expect to drive down that 90.9% throughout the rest of the year. .

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

First, I just wanted to ask given your update here, where do you expect your exchange margins to come in this year relative to your 5% to 7.5% target? And then more broadly, on your PDP strategy, right, they're getting a lot of questions here. There's a ton of changes coming in 2025. .

Drew, would love to understand kind of how you see the moving parts for 2025. And maybe you could just tell us if you're going to take on a lot more liability, you're going to have to price up for things like bad debt.

Can you tell us if -- even if your membership didn't change, how much more premium would you have? Like, how much premium do you have in '24? And then how much would you have in 2025 in terms of Part D premium? Just so we could think about the order of magnitude at flat membership. .

Thanks, Justin. Yes, as we said before, our expectation for Marketplace is that we will be well within our target 5% to 7.5% range in 2024. That has not changed. .

And then I'll let Drew get into the details on PDP. .

Yes. So PDP, and I hit this at the Barclays conference, which -- for which the replay is available. But let me go over more of this because it's a really good question. And you're right, the impact of the Inflation Reduction Act, we had some of that this year in '24 -- 2024. But the real larger change is coming '25, to your point, Justin.

So for '24, the direct subsidy went up for the first time since 2010, and it went from $2 to $29. And to your point, that drives revenue yield because the direct subsidy is what the federal government pays to the payer based upon all the payers' bids. .

And so for '25, we actually think, now that we've gotten risk scores by member since that March conference, we can rip through the mechanics of cost share and the changes around how quickly the members can get to the maximum amount of pocket, it's likely more than $100 increase to that $29.

And that's driven by, to your point, the catastrophic phase going from 20% to 60%. So we're underwriting that now. And the good news is we've been in this business since 2006. We've got all the data. So we're just taking a slice of risk that we've been administering anyhow. .

I mentioned the member out of pocket. You had to think through that and any behavior changes in the members. Very good point on the bad debt. Hopefully, people are thinking about that, the MPPP program, where the members can essentially smooth out the cost share. You do have to assume, yes, some bad debt.

We've got data from our Marketplace business that we're using to triangulate where we think that should be bid. And then manufacturer behavior with all the changes to the IRA impacting manufacturers, thinking about what they might do with some of their behaviors. .

So you're right, all of that goes into the bid process, and it should drive the direct subsidy up significantly, which will drive the yield up. And we will think about the balance between membership retention in PDP because you're right.

Naturally, that business is going to grow a fair amount from a revenue standpoint based upon the direct subsidy going up. So thanks for asking about that. .

And our next question today comes from Josh Raskin with Nephron. .

I wanted to go back to Medicare Advantage and 2025 bid strategy with an understanding you're not going to submit your bids for another couple of months here.

But would that allusion to $14 billion, $15 billion or $16 billion a suggestion that you would expect membership to be sort of flat to down based on what you know today? And then do you expect to book another PDR in terms of where you think margins would be for next year?.

And then lastly, I heard some commentary. I don't think we've heard this before, sort of depending the idea that Medicare Advantage is still an important segment. But is there a scenario where MA is not a core operating business for Centene? I understand the advantage with the Medicaid footprint becoming more important.

But is there a scenario where just contribution to earnings and even revenues is not large enough to justify the infrastructure?.

Yes. Thanks, Josh. Maybe I'll take the last question first and say that as we look at the landscape today the -- again, the tie between Medicare and Medicaid and what that produces in terms of long-term growth opportunity, we see as very compelling.

And so we're always evaluating how the landscape changes, but we're very committed to rebuilding our Medicare franchise focused on the low-income complex members and using that to drive growth across both lines of business. Obviously see opportunity for earnings contribution and then longer-term growth in that business. .

Relative to 2025, certainly a more challenging rate environment than I think most might have expected. But again, we're really focused on building a high-quality sort of durable franchise that will allow us to remain agile as the landscape shifts.

What hasn't changed for us is -- and the things that we can control are STARS, as Drew said, the biggest lever being 2/3 of performance improvement for Medicare and then SG&A and clinical initiatives, which we remain focused on and are on track. .

Obviously, too early, as you said, to discuss bid strategy. But we do continue to see volume as the lever as we sharpen the focus of the book, position to support those quality improvement efforts and make county-by-county decisions to improve profitability.

I think it's also too early to weigh in on a PDR, but we're obviously taking into account all of the factors as we think about the guidance that we set and sort of the balance of the year as we come through finalizing those decisions over the next 6 to 8 weeks. .

And our next question today comes from Andrew Mok with Barclays. .

Just wanted to follow up on the Medicare MLR.

And just given the strong growth in PDP combined with the strong MLR seasonality of that business, can you give us a sense for underlying trends there and how that's supposed to impact the balance of the year on the Medicare MLR?.

Yes. You're right on seasonality of the PDP business in our Medicare segment. So unlike a commercial business where you got deductibles in the beginning of the year and your HBR goes up through the year, it's the opposite in PDP. So we still feel good about the range around 90% for our Medicare segment HBR for the full year. .

Underneath that trend, outpatient still elevated but consistent with that higher level since Q2 of '23. And we've got assumptions of that perpetuating throughout '24 embedded in our forecast. Inpatient, as I said earlier, a little bit of a tick-up in authorizations in January, February.

It's good to see a little bit of relief in March relative to February, but still elevated relative to Q1. So we've thought about that going forward as well. .

And then we've got good performance in Medicare. There's other clinical initiatives that we've been able to execute on and getting paid the right amount of revenue as well that have helped sort of curtail some of that inpatient authorization. So I feel pretty good about Q1 and expect that to sort of carry on through the year. .

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

I wanted to stick on Medicare Advantage. I guess, I think duals are about 1/3 of your membership right now, and obviously, you highlighted the opportunity there.

I guess could you give us a sense of maybe where margins are currently on that population relative to nonduals and when -- if you're thinking about changes that need to be made in terms of bid design for 2025, how you're approaching that population given the prioritizing and serving this population longer term?.

Yes, Nathan, thanks for the question. So we -- and we talked about this a little bit earlier this year, but we intentionally came into the 2024 cycle redesigning our product offerings with the duals population, again, low-income complex population more broadly in mind. And we're really pleased with how the team executed during AEP.

And that is inclusive of product design, but it's also being really thoughtful about what distribution channels best reach those members and the experience that really drives loyalty among that population. .

And so saw an uptick in the concentration of duals in our overall population in this AEP, consistent with what we were looking for.

And I think that bodes well in terms of our team's ability to really understand that population to leverage the local knowledge that we have and that synergy across the Medicaid and Medicare population in serving these members, those local community resources that matter in terms of driving health outcomes. .

So all that is to say, I think it bodes well in terms of being able to design products as we go into the 2025 cycle and drive further focus in the book on that population to continue to yield those members to whom we feel like we're going to deliver the best value over the long term. .

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

I wanted to go back to Medicare. So given where rates came out and your evolving strategy around overlapping footprint, do you still think the couple of hundred basis points of SG&A leverage on Medicare is the goal point? I think you guys rolled that out at I-Day.

And then how do you think about the SG&A framework for your Medicare business overall? Because typically, I think about it being a couple of percent higher than Medicaid would run.

But given the scale that you're targeting, is that still a fair ballpark for where the overhead costs would run for that business unit?.

Yes. So you're right. We need to take out, I said, at least 200 basis points of SG&A over the next few years to be -- to get to sort of where we want to get to in Medicare Advantage. And the plans are on track to do that.

Think about -- WellCare had well below 1 million members, well below 1 million members when WellCare came into the Centene combination. And WellCare was at scale and operating effectively and efficiently.

So the scale -- we're not really concerned about scale issues with Medicare even as we expect a little bit more attrition as we prioritize the strategic goals of being in Medicare and the tie-in to Medicaid, to your point, the footprint matching up as well as prioritizing margin recovery over the next few years, driven predominantly by STARS but other levers like SG&A that we're talking about here and clinical initiatives.

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So it's certainly a much higher SG&A ratio than Medicaid because you've got distribution costs and open enrollment costs and things like that. And Marketplace is actually a little bit higher than Medicare itself. So that does mechanically work its way into our SG&A rate. So we're not concerned about being subscale in Medicare Advantage.

We want that business to sit side by side with our Medicaid business to seize the opportunities of the future later on in the decade, and we'll power through 2025, even if that means some attrition. .

And our next question today comes from Gary Taylor at TD Cowen. .

Actually, I just kind of wanted to follow up, I guess, on that last comment for just a second. We're just looking at total employees down 12% sequentially, 8,000 sequentially.

I was just trying to think through what the implications are sequentially into 2Q, 3Q in terms of G&A or even some of those employees might be medical support in the [ MedEx ] line. .

And then just my second question would be just to clarify on the -- when we see the $50 million additional PDR for Medicare in the 10-Q, is that an additional $50 million that ran through the P&L this quarter and impacted the reported EPS and weighed on the reported Medicare MLR this quarter?.

Yes. Good questions. Most of the change in the employee base is the divestiture of Circle. That was pretty employee-intensive in Great Britain. So that was a result of divestiture.

Although we are constantly managing the right amount of resources, it's our job to, on behalf of taxpayers, on behalf of the federal and state governments, managing efficiently, matching resources with the business that we have and trying to do that efficiently and effectively. But that big move was due to divestiture. .

And you're right, the $50 million, while we expected it as we mapped out the seasonality of Medicare during the year, and that has the PDR sort of pushing up a little bit in Q2, maybe a little bit more in Q3 and then being relieved completely relative to the 2024 policy year in Q4, that $50 million did hit the P&L.

It did make its way into the loss ratio for the Medicare segment. But it was exactly as -- it was as planned, so it wasn't a surprise to us. .

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

I had a couple of clarifications.

First, on Medicaid, did you see fewer disenrolled members than you anticipated in the quarter? Or was there a higher reconnect rate? Just curious if you could give a little more color on what the drivers of the higher membership were in the quarter and how do you see those developing over the rest of the year relative to that 13.6 million membership number you previously guided to.

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And then second, on the Medicare -- on the Medicaid composite rate, the 2.5%, just want to clarify, is that the core is running a little bit better than you expected? Or is that 2.5% inclusive of the accelerated state payments?.

Yes. On membership, we still expect to be in that mid-13s by year-end. And so I think 100,000-member difference on 13 point -- to 13.3 million, some may call rounding, but luckily, it's rounding in the right direction, right? But it's probably more timing of precision around redeterminations, and some of that will carry into Q2.

And there's even a few states that will tail off into Q3 as they've stretched out the redetermination process. But all of that is in the mid-13s estimate of membership by year-end, which includes a couple of nice growth opportunities too that we seized, Oklahoma, which commenced 4/1.

And as you heard in Sarah's remarks, that went really well operationally. And then subject to protest, the Arizona LTSS win, low membership but high revenue. .

And then your question on composite rate, the 2.5%, yes, we're a little bit above that. And that's sort of an all-in view of a composite rate, whether the rate relates to acuity, whether the rate relates to redeterminations or just general trend. .

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

Just had a couple of modeling questions that would be helpful. One, just on investment income, if you can sort of walk us towards what you view as sort of the run rate for the second quarter and for the balance of the year. I know there were a few gains included in the first quarter investment income.

And then also on operating cash flow, obviously that was noisy in the first quarter for the reasons you mentioned. If you wouldn't mind just giving us an update on the full year CFFO expectation and then how you're thinking maybe about the second quarter given that you did get that state payment came in, in April. .

Yes. Investment income, if you peel away gains, we disclosed those throughout the Q, which we just filed. So understandably, you haven't ripped through that yet. You get a little bit over $400 million in the quarter. But you can't just multiply that by 4.

We expect the full year to be above -- a little bit above the $1.4 billion that we guided to at Investor Day. But the difference between that and just annualizing is we've got multiple rate cut scenarios built into our forecast. Maybe those play out to be conservative, but the Federal Reserve will decide that. .

You also saw that we had a lot of payables. Look at our balance sheet, we relieved a lot of payables in the quarter. We accelerated state-directed payments on behalf of our providers. So obviously, when you relieve payables and you're building up pharmacy rebate receivables, that has an impact on investment income as well.

But pleased that we're going to come in -- we expect to come in a little bit above that $1.4 billion. .

On the operating cash flow, as you know, in this business that bounces around quite a bit. A large state decides pay us on 4/2 versus 3/31, and you have a big flip between quarters. Just mentioned some things that impact cash flow as well, the timing of pharmacy rebate receivables or payable invoices.

So it's sort of maybe a fool's errand to try to predict that quarter-to-quarter in terms of how that will play out. What really matters in this business is the dividends from subs, the cash flow, not only GAAP cash flow statement but the cash that comes from subsidiaries to parent such that we can deploy capital.

And we expect that to pick up, as you'll see in the Q, over the next few quarters. And that will drive our capital deployment later in the year for share buyback and some debt -- a little bit of debt reduction as well. So that's what we're looking forward to. .

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

A couple of quick things here. Appreciate the reiteration of the long-term target of the high 89s for your Medicaid HBR.

I wondered, if you think you're finishing up on redeterminations largely in the second quarter, the disenrollments and maybe a little spills in the third quarter, when do you think you get visibility once and for all on how that whole process has impacted the risk pool? And are you still thinking -- I think at Investor Day, you said that you could get 30 basis points of margin improvement '24 and '25 in Medicaid.

Is that still your thought at this point?.

Yes. Thanks, A.J. You're right. So we're 9 -- roughly 90% of the way through redeterminations from a membership standpoint. Obviously, the cumulative member months impact sort of trails that a little bit. And we do think that the tail of membership will run through Q2 and Q3 and sort of largely be complete by that point. .

I would say the nice thing is that I don't think that we have seen -- we've not had to wait to see sort of the shifting risk pool.

We've been watching that really closely, and that's part of the preparation of the team did leading into this process over a year ago, which allowed us to have those proactive modeling conversations with our state partners through the rate cycles in the last year.

And we're mirroring that same process as we move through the rate updates that Drew talked about between 7/1 and 10/1. .

And so really sort of trying to address the bolus of any dislocation between rate and acuity in that cycle, but obviously leaving open, as we said before, the idea that some of that tailwind of margin will get picked back up in '25 and possibly trailing a little bit into '26.

And that's where we see the recovery in terms of that basis point on the margin. .

And our next question today comes from Dave Windley with Jefferies. .

So just maybe a brief one on that last comment, last point. On the rate visibility, I think you called out 75%. You talked about matching acuity which, Sarah, you just commented on.

Is the matching of acuity and getting those payments squared up, is -- should we think about that being in the remaining 25% that you don't have rate visibility on yet? Or are you expecting some amount of kind of retro catch-up from states where you actually have already had rate discussions? And just kind of understanding the mix of that is what I'm hoping to do.

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Yes -- okay. .

Okay. Sorry. The 75% is a member month view of what we know for the 2024 calendar year member months, and the 25% would be there's 7/1 rates we don't know. We certainly don't know 9/1 or 10/1 rates, but they have a limited impact on the 2024 calendar year.

To the macro point, we need -- ultimately, we're going to need to have rates match acuity, and that -- we expect that to shake out. It may not be perfect in this rate cycle, which means sort of the 2025, 2026 time period is when we would expect to get back into the high 89s based upon today's mix of business. .

So there might be a couple of retros. It seems like different companies have different definitions of retro. We're only waiting on a couple of retros. There might be adjustments going forward where the state realizes and their actuaries, "Hey, we missed the mark last time.

Let me fix this going forward." But we are still expecting a couple of retros as we talked about at Investor Day and on the Q1 call. .

But it's largely getting the rates correct and matching acuity going forward. And that's why we're not expecting to move into the -- back into the high 89s immediately. It may take a rate cycle or so. But that does remain a margin expansion opportunity.

On a company that's performing well on a consolidated basis, actually that creates some capacity for margin expansion in Medicaid as we look at '25, '26. .

Yes. And the only thing I would add, which is just that as we've watched the team sort of work through the complexity of this process where we have encountered those targeted dislocations, I've just been really impressed with how our teams have stepped up to that dialogue. There is clarity on the drivers. It's a very data-driven approach.

They've clearly built really solid collaborative dialogue with our state partners and are really solutions-oriented in how they step into those conversations.

And so I think building credibility with our state partners as we work through this process has been consistent throughout and, I think, again sort of creates the framework to get back to a matching state and get that tailwind opportunity. .

And our next question today comes from George Hill with Deutsche Bank. .

Just 2 quick ones for me. I guess as you talked about the progress and the STARS goals for 2025, I would just love, at a high level, if you could talk about kind of the strategy and the progress towards achieving that goal.

And Drew, as you were talking about kind of all the changes to Part D for 2025, I didn't hear you talk about the new Part D risk model. I would just be interested if you could make quick comments on how you think the new risk model in Part D kind of impacts the ability to drive revenue in that part of the business. .

Sure. Thanks, George. So quality, obviously a top priority for the organization regardless of line of business. But we remain very focused on STARS because of the impact it has for the Medicare trajectory. Very pleased with the work underway, engagement across the organization.

We're leveraging a comprehensive governance process, and that has given us great visibility in terms of progress on initiatives at a detailed level. .

Based on what we know today, we believe that we have maintained last year's progress and made additional advancements on admin and ops programs and metrics, which, you'll remember, was sort of the focus in the first cycle. And then in this past cycle, HEDIS and CAHPS were most in focus for us. We're in the middle of those processes.

Those will wrap up in the next 30 to 60 days. We also have TTY that's still in flight. .

So those are the last pieces that will land here towards the end of Q2 and then allow us to sort of rerun projections with a high degree of -- higher degree of confidence as we look to October. And so expect more detail in terms of what we're looking for in October on the Q2 call.

But overall, just really pleased with how the team continues to show up, and again, alignment across the organization that this is a critical priority. .

Yes. And you're absolutely right. The risk model bifurcation between PDP and MAPD, that's a factor as well that needs to be worked into the bid cycle.

And I think I did mention that we were able to run risk scores by member and the mechanics and how that rips through the -- not just the risk scores but also the timing of members with cost share and getting to the maximum out of pocket, or the MOOP. Those are all important things to think about.

And really, the message is -- that's why there's reason for cautiousness for the industry in bidding PDP for 2025. .

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

Can you talk a little bit about the PBM migration? And in particular, I was interested in if all the savings levers turned on, on January 1, if there should be a ramp of that over the course of the year with things like formulary alignment, et cetera, and if any of that might spill into '25.

And maybe then as a broader question, just on your ongoing dialogues with states, how are they looking at GLP-1s and kind of adding coverage to that?.

Thanks, Lance, for the question, mostly because I don't think I can brag enough about our pharmacy team and the phenomenal job they did in such a massive undertaking. We've talked before about how well that went, January 1. But I think everybody who's been through something that significant knows that you don't just drop the mic the next day.

And so these folks have continued to work tirelessly over the last couple of months to make sure that, that process just gets smoother and smoother for our members. We've had great collaboration with ESI. And so trajectory on that front just continues to be really positive. .

And then I'll let Drew talk a little bit about the step-up in the economics and some of the GLP-1 activity. .

Yes. So we didn't want to wait for economics. So we do have a stairstep benefit on behalf of our state and federal customers and our members as of 1/1/24. But we're constantly working with our partner at ESI to figure out ways to deliver value to our customers and manage costs.

So we expect sort of normal course improvements from that point forward, and we'll continue to try to drive efficiencies in the pharmacy ecosystem. .

On GLP-1s, not a lot of uptake yet by states. There's a couple of states where -- have decided to allow GLP-1s for the weight loss indication. Obviously, GLP-1s for the diabetes indication, we could see the volume coming through there.

But for the weight loss indication, there's only a couple, and we're quick to go share the data with them to show them what it's costing them, but it's not that material to the company as a whole. And that's where the states control the formulary, the preferred drug list and make the decisions that we then administer and take risk for.

And we just need to make sure that the states have the data so they can match rates with the cost that they choose to allow in their benefit plans. .

And 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. Appreciate the time and interest this morning. Overall, we are pleased with how we're powering through a dynamic landscape and with the progress that we've demonstrated so far. So appreciate you joining us, and we'll see you next quarter. .

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..