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    CNC
    Earnings call· Mar 2025(Q1 FY25)

    CENTENE CORP CNC

    Apr 25, 2025 Source

    Executive summary

    Centene Q1 FY25 — Strong Revenue Growth and Reaffirmed EPS Outlook

    Centene delivered strong Q1 FY25 results, reaffirming its full-year adjusted EPS outlook of greater than $7.25 amidst a dynamic policy landscape. The company saw robust revenue growth driven by better-than-expected membership in Medicare Advantage and Commercial segments, while Medicaid continued its path toward margin recovery despite a higher-than-anticipated flu season. Management is actively navigating policy changes and recalibrating pricing for 2026 across its diversified portfolio.

    Highlights

    6

    • Adjusted diluted EPS of $2.90 in Q1 FY25, consistent with expectations.

    • Full-year 2025 adjusted EPS outlook reaffirmed at greater than $7.25.

    • Medicaid rates refreshed for 40% of revenue with an average 4.5% increase, contributing to underlying MLR improvement.

    • Medicare Advantage membership stronger than anticipated, adding $1 billion to 2025 revenue outlook due to improved retention.

    • Commercial segment grew nicely in Q1 FY25 with new enrollment and retention stronger than expected, adding $5 billion to 2025 premium revenue guidance.

    • Adjusted SG&A expense ratio decreased to 7.9% in Q1 FY25 from 8.7% last year, driven by leveraging expenses over higher revenues.

    Concerns

    5

    • Medicaid MLR improvement masked by a more active flu season, driving $130 million of incremental medical expense in Q1 FY25.

    • Medicaid rate increases (e.g., 5% for 4:1 cycle) still inadequate for certain areas like MLTC, home and community-based services, and high-cost drugs.

    • High utilization of specialty drugs in non-low-income PDP members, partly due to pharmacy industry behavior, impacting HBR.

    • Potential expiration of enhanced premium tax credits (APTCs) and new Marketplace integrity rules could cause high single-digit price increases for 2026.

    • PDP demo risk corridor not expected to be repeated at the same protective level in 2026, requiring pricing adjustments.

    Guidance & targets

    12
    CategoryTargetConfidence
    Full Year 2025 Adjusted EPS
    greater than $7.25
    high materiality
    High
    Full Year 2025 Premium and Service Revenue
    $165 billion
    high materiality
    High
    Medicare Advantage Breakeven
    breakeven
    high materiality
    High
    Medicaid Full Year Composite Rate Increase
    4% plus
    medium materiality
    Medium
    PDP Pretax Margin
    1%
    medium materiality
    High
    Full Year 2025 Consolidated HBR
    88.9% to 89.5%
    high materiality
    High
    Full Year 2025 Medicaid HBR
    mid- to high 90-ones
    medium materiality
    Medium
    Full Year 2025 Consolidated Adjusted SG&A Ratio
    lowered by 45 basis points
    medium materiality
    High
    Full Year 2025 Investment Income
    lowered by $100 million
    low materiality
    Medium
    Marketplace Pricing
    high single-digit price increases
    high materiality
    Medium
    Medicaid Rate Increase
    around 2.5%
    medium materiality
    Low
    Commercial Premium Revenue
    $39 billion
    high materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Medicaid
    Membership stable and in line with expectations. Underlying HBR showed progress, but Q1 was impacted by $130 million in flu-related costs. Rate increases are still inadequate for certain high-cost areas.
    Membership: 12.9 million to 13 million membersHBR (excluding excess flu costs): approximately 93%HBR (including flu costs): 93.6%Incremental medical expense from flu: $130 millionRefreshed rates (40% of revenue): 4.5% average increaseRate increase for 4:1 cycle (11% of revenue): approximate 5%
    		————
    Medicare
    Performed in line with expectations. Medicare Advantage and PDP businesses were on track. HBR expected to follow an inverted slope due to IRA changes, with lower HBR early in the year.
    HBR: 86.3%PDP members: 7.9 million
    		————
    Commercial
    Membership was very strong in Q1 due to new enrollment and retention. Q1 HBR was higher than last year's 73.3%, driven by new Marketplace members utilizing more.
    HBR: 75.0%New Marketplace Members in Q1: 1.9 million
    		————

    Operational metrics

    19
    Adjusted Diluted EPS
    $2.90
    Q1 FY25

    Consistent with expectations.

    Premium and Service Revenue
    $42.5 billion
    Q1 FY25

    Strong performance.

    Medicaid Incremental Medical Expense
    $130 millionabove initial expectations
    Q1 FY25

    Largely offset underlying MLR improvement.

    Medicaid Revenue with Refreshed Rates
    40%
    Q1 FY25

    Contributed to underlying MLR improvement.

    Medicaid Revenue from 4:1 Rate Cycle
    11%
    Q1 FY25

    Progress, but more work needed.

    PDP Revenue
    $16 billion plusversus $5.2 billion last year
    FY25

    Significant growth from 2024.

    Medicare Advantage PDR
    —
    FY25

    Intra-year increase was planned and solely related to the sloping of earnings during 2025. No change in view of 2025 earnings.

    Adjusted SG&A Expense Ratio
    7.9%compared to 8.7% last year
    Q1 FY25

    Decreased due to continued leveraging of expenses over higher revenues and good discipline.

    Cash Flow Provided by Operations
    $1.5 billion
    Q1 FY25

    Primarily driven by net earnings.

    Debt to Adjusted EBITDA
    2.8x
    Q1 FY25

    At quarter end.

    Medical Claims Liability
    $19.9 billion
    Q1 FY25

    Represents 49 days in claims payable.

    Days in Claims Payable
    49 daysdecrease of 4 days as compared to Q4 2024 and Q1 2024
    Q1 FY25

    Decrease was expected given the mix impact of the PDP business, as pharmacy claims complete faster.

    Consolidated HBR Recalibration
    50 basis points
    FY25

    Driven by growth and other items.

    PDP Pretax Margin
    3% plusfrom 1% zone
    long-term

    Element of earnings power laid out at Investor Day.

    Medicare Advantage Members in 3.5 Star Plans
    55%
    current

    Used as a baseline for breakeven trajectory.

    Marketplace Subsidized Membership
    vast majority
    current

    Consistent with focus on lowest income members.

    Marketplace Margin Range
    5% to 7.5%
    overall

    Expected for the overall Marketplace business.

    PDP Maximum Out-of-Pocket
    $2,000went down to
    current

    Change due to IRA program.

    PDP Direct Subsidy Increase
    $142compared to this year's
    2025

    Expected to rise to over $200 in 2026 due to IRA cost consequences.

    Industry KPIs

    9
    MetricValueDetails
    Utilization trends$130 millionUSD
    Stars rate environment55%%
    Medical loss care ratio93.6%%
    Client retention new winsstrong
    Pharmacy scripts specialty7.9 millionmembers
    Membership covered lives by line12.9 million to 13 millionmembers
    Segment revenue operating income$42.5 billionUSD
    Adjusted EPS EBITDA leverage guidance$2.90USD
    Medical cost trend vs pricing assumptionbetter reflect

    Deals & partnerships

    2
    State of IllinoisContinue providing Medicare and Medicaid services for dually eligible members through a fully integrated D-SNP.

    Program will provide services and support statewide for members who qualify for both Medicare and Medicaid, as well as dually eligible MLTSS members.

    State of Nevada (Silver Summit Health Plan)Selected by the Nevada Department of Health and Human Services to serve its Medicaid managed care program.

    For the first time, the program will include expansion of Medicaid managed care into rural and frontier service areas.

    Risks & headwinds

    7
    Higher-than-anticipated flu seasonQ1 FY25

    $130 million of incremental medical expense in Q1 FY25

    Mitigation: Isolated to Q1, underlying MLR improvement expected to continue.

    Medicaid rate increases still inadequate for certain high-cost areasongoing

    approximate 5% rate increase for 4:1 cycle still inadequate for MLTC, home and community-based services, and emerging high-cost drugs

    Mitigation: Continued constructive discussions with state partners, leveraging acuity data; internal clinical initiatives and operating model optimization.

    Very high utilization of specialty drugs in non-low-income PDP membersongoing

    partly driven by pharmacy industry behavior

    Mitigation: PDP demo risk corridor provides protective mechanism for 2025; SG&A outperformance; pricing adjustments for 2026 bids.

    Potential expiration of enhanced premium tax creditsend of 2025

    could cause high single-digit price increases for 2026 Marketplace

    Mitigation: Advocating for extension; preparing for range of outcomes; over half of states agreed to accept two sets of rates (with/without APTCs) for 2026.

    New Marketplace integrity and affordability proposed ruleinfluencing market and membership dynamics beginning in 2026

    could cause high single-digit price increases for 2026 Marketplace

    Mitigation: Engaging with CMS on policy proposals; modeling potential impact; preparing for range of outcomes.

    Assumption that the PDP demo risk corridor will not be repeated at the same protective level2026 bids

    null

    Mitigation: Reflecting this assumption in 2026 bids; focusing on adequate pricing moves and higher PMPM yield.

    Building momentum around work requirements within the expansion populationpotential future policy

    null

    Mitigation: Experienced in managing work requirements in various states; working with state partners to understand implementation and ensure member access to care.

    What to watch in Q2 FY25

    5

    Medicaid Rate Negotiations

    later into Q2
    CurrentFull year composite rate at mid-4s; 40% of revenue received 4.5% increase in Q1
    TargetVisibility into 7/1 cohort rates

    Why it matters

    Crucial for Medicaid MLR progression and achieving full-year targets, especially after Q1 flu impact.

    So composite rate for the full year, we're now seeing at mid-4s, and the rate negotiations relative to upcoming, so think about the 7/1 cohort, which is the next cycle, we will start to get visibility into that as we get in -- later into Q2.

    Q&A highlights

    6

    Seeking clarification on the nature and scope of flu-related costs, confidence in their flu-specific attribution, and whether Medicare was also impacted.

    Management confirmed the $130 million in Q1 Medicaid was specifically for flu/ILI using a consistent definition, noting it was isolated to Q1. Some flu was seen in Marketplace and Medicare but not to the same extent.

    “So the $130 million that we saw above expectations in Q1 in Medicaid, is a result of very closely tracking. So we have a clear and consistent definition for flu and what we call ILI or influenza-like illnesses and that is what drove the $130 million.”

    asked by Josh Raskin · answered by Sarah London

    3 min read5 chapters

    Detailed Narrative

    01

    Policy Landscape and Advocacy

    Centene is actively navigating a dynamic healthcare policy environment, including national dialogue around Medicaid reforms and the expiration of enhanced premium tax credits (APTCs). Management believes there is bipartisan recognition for extending APTCs, with 78% of swing voters supporting them. Congress is expected to address a reconciliation bill and government funding, which could serve as vehicles for healthcare policy changes. Centene is advocating for sound policies and preparing for various outcomes, including potential high single-digit price increases for Marketplace in 2026 if APTCs expire and new integrity rules are finalized, especially for members below 150% of the FPL.

    02

    Medicaid Margin Recovery

    The Medicaid segment is progressing towards margin recovery, with approximately 40% of revenue receiving refreshed rates averaging a 4.5% increase. However, Q1 FY25 saw a $130 million impact from an unexpectedly active flu season, largely offsetting underlying MLR improvement. The company continues constructive discussions with state partners, leveraging increasingly complete data on acuity shifts post-redeterminations to support actuarially sound rates. Management expects Medicaid to return to pre-pandemic margin levels as rate cycles progress, despite some rate increases still being inadequate for high-cost areas like MLTC and specialty drugs.

    03

    Medicare Advantage Path to Breakeven

    Medicare Advantage performed in line with expectations, with stronger-than-anticipated membership retention contributing an additional $1 billion to the 2025 revenue outlook. The company remains on track to achieve breakeven in 2027, supported by recent 2026 MA rate calculations that better reflect medical cost trends. Key levers include improving STARS results, value-based clinical initiatives, and SG&A reductions. Centene has increased confidence in its 2027 breakeven trajectory, even with current STAR ratings (55% of members in 3.5-star plans).

    04

    Commercial Segment Strength

    The Commercial segment, including the Marketplace business, experienced strong growth in Q1 FY25 due to robust new enrollment and retention. The impact of reintroducing integrity programs like 'failure to reconcile' (FTR) was more muted than expected, with full impact anticipated in Q3 FY25. This strength led to a $5 billion increase in 2025 premium revenue guidance for Marketplace. Centene is a category leader and is recalibrating its book with a focus on margin and long-term profitable growth, preparing for potential market dynamics influenced by proposed CMS rules and APTC decisions for 2026.

    05

    PDP Business Dynamics

    The Part D business saw strong growth, ending Q1 FY25 with 7.9 million members and projected to be a $16 billion plus business in 2025, up from $5.2 billion in 2024. The segment's HBR is expected to follow an inverted slope due to IRA program changes, with lower HBR and higher earnings early in the year. High utilization of specialty drugs in non-low-income PDP members is a notable trend, partly offset by the PDP demo risk corridor and SG&A outperformance, keeping the business on track for a 1% pretax margin in 2025. Management is preparing for 2026 bids, assuming the demo risk corridor may not be repeated at the same protective level and considering potential tariff impact🌐s, with the direct subsidy expected to rise to over $200 in 2026 from $142 in 2025.

    AI-generated summary of the company’s earnings call. Not investment advice.