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    CNC
    Earnings call· Dec 2024(Q4 FY24)

    CENTENE Q4 FY24 earnings call CNC

    Feb 4, 2025 Source

    Executive summary

    Centene Q4 FY24 — Strong Finish, Raised Revenue Guidance, and Strategic Momentum

    Centene concluded FY24 with strong adjusted EPS and raised its FY25 revenue guidance by $4 billion, reflecting better-than-expected Medicare enrollment and Medicaid program expansion. The company is focused on operational improvements, including AI deployment, and expects improved Medicaid rate alignment and continued Medicare Advantage progress towards breakeven in 2027. While early in the year, management expressed confidence in its strategic trajectory and embedded earnings power.

    Highlights

    5

    • Reported Q4 adjusted diluted EPS of $0.80 and full year 2024 adjusted diluted EPS of $7.17, exceeding previous guidance.

    • Full year 2025 revenue guidance lifted by $4 billion to $158B-$160B, driven by better-than-expected Medicare AEP results and Medicaid program expansion.

    • Achieved a mid-4% composite rate adjustment for 1/1/25 Medicaid effective rates, supporting a return to target margins.

    • 55% of Medicare members are now associated with 3.5 Star plans or better, up from 23% last year, indicating significant quality improvement.

    • Marketplace effectuated enrollment is slightly above 5 million members, stronger than anticipated, with retention in line with historical norms.

    Concerns

    3

    • Operating cash flow was only $154 million for the full year 2024, driven by timing of pharmacy rebate collections and shifts in receivables/payables.

    • Medicaid HBR for full year 2024 was 92.5%, temporarily high due to redeterminations, though expected to improve.

    • Two expected late-year 2024 Medicaid retro adjustments did not materialize by year-end, impacting Q4 Medicaid HBR.

    Guidance & targets

    11
    CategoryTargetConfidence
    Full-year 2025 Revenue
    $158 billion to $160 billion
    high materiality
    High
    Full-year 2025 Adjusted Diluted EPS
    greater than $7.25
    high materiality
    High
    Full-year 2025 Medicaid Composite Rate Adjustment
    3% to 4%
    medium materiality
    Medium
    Medicare Enrollment
    low to mid-900,000s
    medium materiality
    High
    Medicare Part D Revenue
    approximately $16 billion
    medium materiality
    High
    Medicare Part D Target Margin
    1%
    medium materiality
    High
    Medicare Advantage Breakeven
    breakeven
    high materiality
    Medium
    Marketplace Peak Membership
    slightly above 5 million members
    medium materiality
    High
    Marketplace Year-End Membership
    mid-4 million
    medium materiality
    High
    Medicare 2026 Preliminary Rate Change
    low to mid-3s
    medium materiality
    High
    Share Repurchase
    $2 billion
    high materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Medicaid
    Q4 HBR was up 30 bps from Q3 due to expected retro adjustments not materializing. Full year HBR was temporarily high due to redeterminations, but 1/1/25 rate adjustments are strong. Membership settled in the targeted zone.
    HBR: 93.4% (Q4)HBR: 92.5% (FY24)Membership: 12.9 million to 13 million (FY24 end)1/1/25 Composite Rate Adjustment: mid-4%
    		————
    Medicare
    Segment performance was strong in Q4, driven by PDP. Significant improvement in STARS results. Medicare Advantage footprint pruned for 2025. Part D is positioned for larger business in 2025. Q4 PDR-related costs in Medicare Advantage were consistent with expectations.
    Members in 3.5 Star plans or better: 55% (up from 23% last year)Duals mix: around 40%Part D Membership: over 7.5 million (entering 2025)Part D Revenue: ~$16 billion (FY25 expectation)
    		————
    Commercial
    Results were strong in Q4 due to the CSR settlement. Marketplace open enrollment showed very good execution and stronger-than-expected effectuated enrollment. Demographics show a trend of slightly younger membership and a shift towards silver plans.
    CSR settlement: $0.29 net benefit (Q4 EPS)Marketplace Peak Membership: slightly above 5 million (Q1 FY25 expectation)Marketplace Year-End Membership: mid-4 million (FY25 expectation)Marketplace Member Demographics: ~51% female, average age 39.4Marketplace Silver Plan Membership: nearly 75% (FY25 expectation)
    		————

    Operational metrics

    17
    Adjusted SG&A expense ratio
    8.9%down from 9.7% last year
    Q4 FY24

    Reflects a continued blend of business mix and discipline.

    Cash flow provided by operations
    $154 million
    FY24

    Driven by timing of pharmacy rebate collections, reduction in risk adjustment payables, and buildup of state premium payments receivable. Expected to normalize in future periods.

    Unregulated and unrestricted cash on hand
    $248 million
    Q4 FY24

    At quarter end.

    Shares repurchased
    14.4 million
    Q4 FY24

    Part of ongoing share repurchase program.

    Shares repurchased
    42 million
    FY24

    Total for the full year 2024.

    Total shares taken out
    over 100 million
    past few years

    Reflects significant capital return to shareholders.

    Medical claims liability
    $18.3 billion
    Q4 FY24

    Compared to 51 days in Q3 2024 and 54 days in Q4 2023. Meaningful growth in PDP in 2025 is expected to lower consolidated DCP by a few days.

    Medicaid HBR
    back half should be better than the front half
    FY25

    Expected trend for the year.

    Medicare HBR
    start out lower and slope up through the year
    FY25

    Driven by PDP's increasing revenue share and IRA changes.

    Commercial HBR
    start low and tick up throughout the year
    FY25

    Consistent with past trends as members satisfy deductibles.

    PDP Margin
    higher than 1%
    FY24

    Strong performance in Q4 contributed to full year results, exceeding initial expectations for 2024.

    Marketplace Margin
    well into the 5% to 7.5% range
    FY25

    Reaffirmed target range for the marketplace business.

    Medicaid Members
    13 million
    Q4 FY24

    Across Centene's Medicaid portfolio.

    Medicare Duals Mix
    around 40%
    entering 2025

    Reflects the membership mix carried into 2025.

    Marketplace Member Demographics
    51%
    FY25 expectation

    Expected demographic for effectuated membership.

    Marketplace Member Demographics
    39.4continuing a year-over-year trend of slightly younger membership
    FY25 expectation

    Expected demographic for effectuated membership.

    Marketplace Silver Plan Membership
    nearly 75%
    FY25 expectation

    Shifted slightly towards silver plans, consistent with earlier years of the program.

    Industry KPIs

    10
    MetricValueDetails
    Utilization trendsstable
    Stars rate environment55%%
    Medical loss care ratio89.6%%
    Client retention new winsstrong
    Pharmacy scripts specialtyover 7.5 millionmembers
    Payer mix supplemental paymentsaround 40%%
    Membership covered lives by line13 millionmembers
    Segment revenue operating income$158 billion to $160 billionUSD
    Adjusted EPS EBITDA leverage guidance$7.17USD
    Medical cost trend vs pricing assumptionmid-4%%

    Deals & partnerships

    1
    Alan SilverLeadership team addition

    Alan Silver joined as President of Ambetter Health Solutions, focusing on ICHRA (individual coverage health reimbursement arrangements). He previously led retiree medical and ICHRA initiatives at Willis Towers Watson.

    Risks & headwinds

    4
    Timing of Medicaid retro adjustmentsQ4 FY24

    Two expected late-year 2024 retro adjustments did not come in by year-end, impacting Q4 Medicaid HBR.

    Mitigation: Not counting on these in 2025; any materialization would be a benefit. Positive movement in 1/1/25 rates is linked.

    Program integrity changes impact on Marketplace membershipQ1 and Q2 FY25

    Potential longer tail impact from Failure to Report (FTR) process and agent of record lock, despite muted impact seen so far.

    Mitigation: Closely monitoring effectuation rates, voluntary member terminations, and other trends. Built in assumptions around impact and are letting it play out.

    Potential expiration of enhanced APTCsFuture (post-2025)

    Could result in a 20% to 30% membership hit to the book without major mitigation efforts.

    Mitigation: Running scenarios for various iterations of APTC changes, considering buydown implications, product designs, and price sensitivities. Preparing for potential scenarios, including filing two sets of bids.

    Medicaid protest outcomesRemainder of 2025

    Texas issue will continue through legislature and courts through remainder of 2025 (minor impact to 2025). Georgia protest is in process and expected to take months for feedback.

    Mitigation: Monitoring legal and legislative processes; potential impact to 2025 was minor for Texas.

    What to watch in Q1 FY25

    4

    Marketplace effectuated membership

    Q2 FY25
    CurrentSlightly above 5 million (peak Q1 FY25 expectation)
    TargetStabilization after FTR process

    Why it matters

    The full impact of program integrity changes, particularly the Failure to Report (FTR) process, is expected to play out in Q1 and Q2, influencing full-year membership and revenue.

    We still think that there is potential membership impact that will play out in Q1 and Q2. And so we're continuing to hold our view relative to impact on effectuated enrollment, but we're going to need to see how that plays out.

    Q&A highlights

    7

    Clarify expectations for total exchange market growth in 2025 and the mechanics/timing of the subsidy verification process (FTR).

    CMS reported 13% enrollment growth, but effectuated membership is the key metric due to program integrity changes. Centene's effectuation rates are in line with historical norms, leading to slightly above 5 million members. However, the FTR process, tied to tax filing and reconciliation, may have a longer tail, with potential impacts playing out in Q2. Management is monitoring closely.

    “What we're seeing in January is a more muted impact of those program integrity checkpoints. And so the effectuation rates, which are in line with historic norms for us are slightly higher than what we had been expecting. That's leading to the 5 million -- slightly above $5 million peak that we're expecting.”

    asked by Josh Raskin · answered by Sarah London

    2 min read6 chapters

    Detailed Narrative

    01

    Medicaid Stability and Rate Adjustments

    Centene serves 13 million Americans in its Medicaid portfolio, and the post-COVID redeterminations process is concluding. The company anticipates improved membership stability and a gradual return to equilibrium for rates and member risk profiles in 2025. Centene achieved a mid-4% composite rate adjustment for 1/1/25 effective rates, contributing to a full-year 2025 expectation of 3% to 4% composite rate adjustment. Management expects a return to target Medicaid margins over the next couple of years, with the back half of 2025 showing better HBR than the front half.

    02

    Medicare Advantage Progress and STARS Ratings

    The Medicare business is making material progress, with 55% of members now in 3.5 Star plans or better, a significant increase from 23% last year. This improvement is attributed to enhanced processes, HEDIS rates, and medication adherence. The company pruned its MA footprint for 2025 to align with Medicaid presence, resulting in better-than-expected enrollment during AEP, with Medicare enrollment now projected in the low to mid-900,000s. Centene remains on track for Medicare Advantage breakeven in 2027.

    03

    Marketplace Open Enrollment and Program Integrity

    Ambetter delivered strong performance in its 12th open enrollment period, with January effectuated enrollment slightly above 5 million members, exceeding initial outlook due to strong retention. The demographic mix remains similar to 2024, with 51% female and an average age of 39.4, and a shift towards 75% silver plans. While program integrity changes (FTR, agent of record lock) had a more muted impact than initially expected, management is monitoring for potential longer-tail effects in Q1 and Q2, particularly around tax filing and reconciliation.

    04

    Part D Growth and IRA Impact

    Medicare Part D (PDP) presented a significant growth opportunity in 2024 due to the Inflation Reduction Act (IRA) changes, with Centene executing well. PDP is positioned for larger revenue and membership in 2025, with expected revenue of approximately $16 billion and a target margin of 1%. The company ended 2024 with 6.9 million PDP members and entered 2025 with over 7.5 million, driven by product positioning and value for members.

    05

    Strategic Investments and Capital Allocation

    Centene is evaluating opportunities for investment in capabilities, particularly in ICHRA (Individual Coverage Health Reimbursement Arrangements), viewing it as the future of health insurance for working Americans. The company announced the addition of Alan Silver to lead Ambetter Health Solutions, focusing on ICHRA initiatives. Capital allocation priorities include share repurchases, with approximately $2 billion embedded in 2025 guidance, and continued surveillance for inorganic growth and M&A opportunities.

    06

    Operational Improvements and AI Deployment

    The company is modernizing its platform and automating administrative processes through AI deployment to create insights, improve healthcare quality, and transform the healthcare system. Examples include distributing tablets for prenatal/postpartum telehealth in rural Nevada and a 'food-as-medicine' program for hypertension in Illinois. These initiatives aim to deliver better health outcomes and support long-term program sustainability.

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