Centene Corp (CNC) 2018 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Centene Corporation First Quarter Earnings Results Conference Call.

(Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Ed Kroll, Senior Vice President of Finance and Investor Relations.

Sir, please go ahead.

Thank you, operator.

Good morning, everyone.

Thank you for joining us on our 2018 first quarter earnings results conference call.

Michael Neidorff, Chairman and Chief Executive Officer; and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which can also be accessed through our website at centene.com.

A replay will be available shortly after the call's completion, also at centene.com, or by dialing (877) 344-7529 in the U.S. and Canada or in other countries by dialing (412) 317-0088.

The playback code for both dial-ins is 10118311.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's most recently filed Form 10-Q dated today April 24, 2018, and our Form 10-K dated February 20, 2018, and other public SEC filings.

Centene anticipates that subsequent events and developments will 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.

This 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 2018 press release, which is available on the company's website, centene.com under the Investors section.

Finally, a reminder that our next Investor Day will be on Friday, June 15, in New York City.

With that, I would like to turn the call over to our Chairman and CEO, Michael Neidorff.

Michael?

Thank you, Ed.

Good morning, everyone, and thank you for joining Centene's First Quarter 2018 Earnings Call.

During the course of this morning's call, we will discuss our first quarter results and provide update on Centene's markets and products.

We will also provide commentary around the healthcare legislation and regulatory landscape.

Additionally, we will discuss recent acquisitions and investments, including an update on Fidelis.

I would like to begin by discussing Centene's position in today's ever-changing healthcare environment.

Centene is no longer just a Medicaid-focused company.

Through a combination of organic and strategic acquisitions and investments, we have evolved into a multinational, diversified healthcare enterprise.

We bring approximately 300 solutions to 30 states, covering 12.8 million U.S. citizens and approximately 900,000 individuals in 2 international markets.

Centene is the largest Medicaid-managed care organization in the country.

Upon the close of the Fidelis acquisition, we will be a leader in the 4 of the largest Medicaid states.

Centene is the largest provider of managed long-term support services.

And through our Ambetter product, we are also the largest provider in the Marketplace segment.

One of the chief benefits of our evolution is the scale we have gained.

This scale enhances our ability to maintain positive operating performance, despite transitory issues that can occur in any business.

We are positioning Centene for the future by continuing to invest in systems and capabilities.

This is to ensure that we can sustain our ability to provide the highest-quality healthcare at the lowest cost.

I would now like to go through our most recent acquisitions and investments.

Fidelis Care.

We are encouraged by the progress being made related to the regulatory approval process.

As we reported yesterday, we have received approval from the New York Department of Health and the New York Department of Financial Services.

We are actively working with the New York Attorney General to obtain the final approvals.

We believe this should be received relatively soon.

This helps to ensure a closing date no later than July 1. The integration planning is underway and going extremely well.

We will be able to hit the ground running upon the close of the transaction.

Earlier this month, Centene agreed to certain undertakings with the New York Department of Health.

These include a $340 million contribution to the state of New York to be paid over a 5-year period.

This contribution will be used for initiatives consistent with Centene's mission of providing high-quality healthcare to vulnerable populations within the state.

MHM Services.

In April, we completed the acquisition of MHM Services, a national provider of healthcare and staffing services to correctional systems and other governmental agencies.

Under the terms of the agreement, Centene also acquired the remaining 49% ownership in Centurion.

This is the correctional healthcare services joint venture between Centene and MHM.

MHM serves over 300,000 individuals in more than 300 facilities across the U.S. This acquisition adds 1 new state to Centene's portfolio.

It also expands our existing 7-state correctional footprint to 13 states.

We plan to leverage this larger platform to pursue additional opportunities in both new and existing states.

Community Medical Group.

In March, we completed the acquisition of Community Medical Group, a leading at-risk primary care provider in Miami-Dade County, Florida.

This transaction represents Centene's targeted approach towards vertical integration in healthcare.

It is a nice strategic fit as the company focuses on serving individuals enrolled in government-sponsored healthcare programs.

CMG covers approximately 70,000 Medicaid, Medicare Advantage and Marketplace recipients.

Importantly, CMG has a unique clinical care model.

In addition to primary care services, CMG provides access to specialty care, transportation and a suite of social and other support services.

This acquisition provides a platform for expansion of the model across Florida and potentially into other states, with a particular focus on areas where access may be limited.

RxAdvance.

In March, Centene made an equity investment in RxAdvance, a full-service pharmacy benefits manager.

RxAdvance is complementary to Centene's internal PBM.

We expect to use the company's cloud-based technology platform to significantly reduce administrative costs and avoidable drug-impacted medical costs.

This partnership includes both a customer relationship and a strategic investment in RxAdvance.

As part of the initial transaction, Centene has certain rights to expand its equity investment in the future.

Interpreta.

In March, we acquired an additional 61% ownership in Interpreta.

This brings Centene's total ownership to 80%.

Interpreta is an innovative health IT company, focused on clinical and genomic data as well as real-time analytics.

In summary, the net effect of these acquisitions and investments is that we continue to execute on our diversification strategy.

This enhances our position as a healthcare enterprise and a leader in government-sponsored healthcare.

Adding capabilities in the (inaudible) pharmacy and technology categories should provide growth and margin opportunities for Centene well into the future.

Next, I will provide an update on healthcare legislative and regulatory landscape.

We continue to believe it is unlikely that Congress will pass healthcare legislation in 2018.

We [see] any healthcare-related changes being done through regulation.

For example, in early April, CMS released its 2019 Final Payment Notice Rule for its changes.

We believe we can successfully navigate these changes as we have consistently done so in the past.

Now on to the first quarter of 2018 financials.

We are pleased to begin 2018 with another strong quarter marked by solid top and bottom line growth and robust operating cash flows.

Membership at quarter-end was 12.8 million recipients.

This represents an increase of 684,000 beneficiaries over the first quarter of 2017.

First quarter revenues increased 13% year-over-year to $13.2 billion.

The adjusted SG&A expense ratio increased 100 basis points year-over-year to 10.3%.

This was primarily a result of growth in our Marketplace business.

The HBR decreased 330 basis points year-over-year to 84.3%.

This is primarily related to growth in our Marketplace business, better Medicaid performance and the return of the health insurance fee.

We reported adjusted first quarter diluted earnings per share of $2.17 compared to $1.12 in the same period last year.

This represents growth in earnings of 94%.

Lastly, operating cash flows came in at $1.8 billion or 5.5x net earnings.

Jeff will provide further financial details, including updated 2018 guidance in his prepared remarks.

A quick comment on medical costs, including flu.

We saw an uptick in flu in the first quarter and it peaked in February.

The impact of flu on the first quarter HBR was approximately 40 basis points year-over-year.

As I mentioned earlier, we were able to absorb these costs through our diversity and scale.

Importantly, flu is just one component of our medical costs.

We view flu trends as episodic and not indicative of our ability to manage overall medical expense.

Finally, we continue to see as well as anticipate overall stable medical cost trends.

This is consistent with expectations in the low single digits.

Moving on to markets and product updates.

First, we'll discuss recent Medicaid activity.

Arizona.

Last month Centene was awarded a contract under Arizona's Medicaid program.

We will be providing physical and behavioral healthcare services to recipients in the Central region and Southern region of the state.

Centene currently serves beneficiaries in Maricopa County in Southern Arizona.

Under this new contract, we will be expanding the number of counties we serve in the Central region.

This new program is expected to commence on October 1, 2018, and cover 1.5 million beneficiaries.

Texas.

Late last year, Texas is 1 of 5 managed care plans, or Centene was 1 of 5 managed care plans, awarded a contract under the CHIP Rural Service Area Program.

This contract was set to commence September 1, 2018.

However, in April of 2018, the state announced the cancellation of these awards.

This was due to an error in the evaluation process.

As 1 of 2 incumbents, Centene will continue to provide CHIP coverage in this area until new contracts may be awarded.

Also in April, Texas released an RFP for its STAR and CHIP programs.

The state has now included the CHIP RSA program in this RFP.

All contracts are scheduled to commence on January 1, 2020.

Pennsylvania.

In January, we began serving beneficiaries enrolled in Pennsylvania's new Long-Term Care Program in the Southwest Zone.

At quarter's end, we served 22,400 beneficiaries, ahead of our expectations.

The Southeast Zone is set to begin on January of 2019.

The remaining zones are scheduled to commence on January 1, 2020.

Separately, the appeal of the Pennsylvania TANF contract was awarded -- has been upheld.

The state is in the process of determining the next steps.

Whichever path Pennsylvania chooses, we look forward to having the opportunity to demonstrate our value to the state.

Now onto Medicare.

In January, we began offering Medicare Advantage and D-SNP plans in 8 new Centene Medicaid states.

These plans were launched under our Allwell brand.

They are still eligible for a premium bonus under our 4-star parent rating in 2018.

At quarter-end, we served over 340,000 Medicare and MMP beneficiaries.

This represents a year-over-year increase of more than 15,000 members.

Upon the close of the Fidelis Care transaction, we will also be serving Medicare Advantage members in New York.

We remain focused on building a successful Medicare business over the long term.

We expect this business to be a significant driver of our annual growth rate.

Next, Health Insurance Marketplace.

The Marketplace business continued to perform well in the first quarter.

Ambetter is the national leader in the Health Insurance Marketplace.

We successfully navigated a difficult enrollment environment.

We gained market share and exceeded our growth targets.

We retained 80% of the 2017 exchange members.

Additionally, 90% of our total members are paid enrollees, surpassing prior years.

At March 31, we served over 1.6 million exchange members, ahead of our initial estimate of 1.3 million.

This compares to approximately 1.2 million beneficiaries in the same period last year, representing growth of 35%.

It is also important to note that key demographics of these members remain consistent with the comments we made at our December Investment day.

Closing -- the closing of the Fidelis Care transaction will put us in a position to offer exchange products in 16 states.

Shifting gears to our rate outlook.

We continue to expect a composite Medicaid rate adjustment of an increase of approximately 1% for 2018.

Separately, CMS recently issued a 2019 Medicare Advance Notice that rates came in better than our expectations.

In conclusion, our strong first quarter financial results sets the stage for -- to us to maintain positive momentum through 2018.

Centene has been and continues to be a growth company, whether through organic growth or strategic acquisitions.

We have proven our ability to acquire and effectively integrate acquisitions of all sizes.

We expect to grow both the top and bottom line by double-digit percentages.

We anticipate our margins will continue to expand as we maintain our focus on process efficiencies through automation and increasing our scale.

As Ed reminded you, our Investor Day is June 15 in New York City.

We look forward to seeing you then.

We thank you for your continued interest and support of Centene, and I will now turn the call over to Jeff.

Thank you, Michael, and good morning.

This morning I will cover the strong first quarter results, an update on the Fidelis acquisition and provide more color on the changes we made to our annual guidance as announced this morning.

As Michael mentioned, we had a good start to the year with strong first quarter results led by the growth and performance in our Marketplace business and year-over-year improvements in the performance of our Medicaid business.

This more than compensated for the additional flu costs we experienced in the first quarter.

I'll provide more details on that in a minute.

For the first quarter 2018, total revenues were $13.2 billion, an increase of 13% over 2017 and adjusted diluted earnings per share for the first quarter 2018 were $2.17, an increase of 94% over last year.

The first quarter adjusted diluted earnings per share were driven by membership growth and the associated profitability in the Health Insurance Marketplace business and the benefit of tax reform.

Additionally, the first quarter results were approximately $0.12 per diluted share higher than previous expectations due to the lower share count and lower interest expense associated with the delay in the financing for the Fidelis acquisition, which was included in our previous guidance on March 1.

Let me provide some more details for the quarter.

Total revenues grew by approximately $1.5 billion year-over-year, primarily as a result of growth in the Health Insurance Marketplace business, the expansion in new programs in many of our states in 2017 and 2018, including the expansion of the Missouri contract and the Pennsylvania LTSS program and the return of the health insurer fee in 2018.

This growth was partially offset by lower revenues in California associated with the removal of the in-home support services program from managed care.

Moving on to HBR.

Our health benefits ratio was 84.3% in the first quarter this year compared to 87.6% in last year's first quarter and 87.3% in the fourth quarter of 2017.

The decrease year-over-year is primarily driven by the growth in the Marketplace business and the effect of early enrollment compared to the prior year, lower costs in our Medicaid business and the reinstatement of the health insurer fee in 2018.

This was partially offset by new business, which initially operates at a higher HBR and additional flu costs year-over-year of approximately 40 basis points.

Sequentially, the 300 basis point decrease in HBR from the fourth quarter of 2017 is primarily attributable to growth in the Marketplace business, which seasonally has a lower HBR in the first quarter, the reinstatement of the health insurer fee and additional expense recorded in the fourth quarter of 2017 associated with the CSRs.

This was partially offset by increased flu costs compared to the fourth quarter of 2017.

Our adjusted selling, general and administrative expense ratio was 10.3% in the first quarter this year compared to 9.3% last year and 10.5% in the fourth quarter of 2017.

The increase in the ratio year-over-year is due to additional costs incurred during the first quarter to service the additional Marketplace membership.

The sequential decrease is due to increased costs associated with the open enrollment periods for both the Medicare and Marketplace businesses in the fourth quarter of 2017.

This was partially offset by increase of variable compensation expense related to earnings performance in the first quarter.

Additionally, we spent $0.05 cents per diluted share on business expansion costs during the first quarter, which is consistent with the prior year.

Our effective tax rate for the first quarter was 34.1% compared to 39.7% in the first quarter of 2017.

The lower tax rate was driven by the effect of income tax reform in 2018, partially offset by the return of the health insurer fee.

Now on to the balance sheet.

Cash and investments totaled $11.9 billion at quarter-end, including $452 million held by unregulated subsidiaries.

Our risk-based capital percentage for NAIC filers continues to be in excess of 350% of the authorized control level.

Debt at quarter-end was $5.2 billion, including $675 million of borrowings on our revolving credit facility.

Our debt-to-capital ratio was 40.3%, excluding our nonrecourse mortgage note, compared to 43% at Q1 last year and 40.3% at the end of 2017.

We continue to focus on deleveraging, and consistent with our past practice, we used equity as a significant component to fund various investments and acquisitions completed in the first quarter.

Although we increased our borrowings on our revolving credit facility, we ended the first quarter with a debt-to-capital ratio consistent with year-end.

Our medical claims liability totaled $4.8 billion at quarter-end and represents 43 days in claims payable compared to 41 days at the end of 2017.

The increase in DCP is the result of growth in the Marketplace business in the first quarter and the timing of payments.

Cash flow provided by operations was $1.8 billion in the first quarter or 5.5x net earnings.

Cash flow for the quarter benefited from growth in the claims reserves and the risk adjustment payable associated with the Marketplace business.

Before we discuss the changes to our 2018 annual guidance, let me spend a few minutes to update you on the Fidelis acquisition.

As Michael mentioned in his comments, we have revised the expected closing date for the Fidelis acquisition from April 1 to July 1, 2018.

The integration and synergy planning continues to go well, and we expect to hit the ground running.

As a result, we expect to achieve half of the $25 million of year 1 synergies in 2018.

Additionally, we continue to expect the transaction to deliver our previously communicated accretion targets.

We expect to fund the transaction with approximately $2.3 billion of equity and $1.6 billion of debt.

As we have indicated in our earnings release today, we have updated our annual guidance assumptions to reflect the equity and debt financing as of May 1. These are guidance assumptions and the ultimate timing of the debt and equity financing will be subject to market conditions.

Now onto our annual guidance.

Let me be direct here, there are a lot of updates.

So let me give you our perspective.

First, we had a good quarter that exceeded our expectations by $0.05 per diluted share after accounting for the timing of the Fidelis debt and equity financing.

We have increased our full year GAAP and adjusted diluted earnings per share expectations by the $0.05.

Second, as we stated earlier, Fidelis continues to perform in line with our expectations and the changes we are making to guidance are the result of the timing of the transaction, the associated financing and the undertakings.

The change in adjusted diluted earnings per share is the result of an additional month of overhang on the financing and removing a full quarter of Fidelis earnings.

Just to give you some perspective, if Fidelis and the associated financing transactions had been effective January 1, 2018, our full year adjusted earnings per share guidance would be $0.35 to $0.40 higher.

Third, we have closed several investments and acquisitions, and have included those in our updated guidance.

On an adjusted EPS basis, CMG and MHM are accretive transactions for 2018.

That accretion is being offset by strategic investments in RxAdvance and Interpreta that we believe will drive long-term growth and margin expansion.

In aggregate, these transactions are dilutive on a GAAP basis in 2018 due to transaction costs and intangible amortization.

In summary, our updated full year 2018 guidance for revenue and earnings per share is as follows: total revenues between $58.2 billion and $59 billion, GAAP earnings per share of $4.36 to $4.70 and adjusted diluted earnings per share of $6.75 to $7.15.

With the seasonality of the Marketplace business, we view the second and third quarters being relatively equal from an earnings perspective, with the fourth quarter being lower due to the open enrollment costs for the Marketplace and Medicare.

We are pleased with the strong performance in the first quarter and the addition of the acquisition and investments we completed that will continue to drive long-term growth and margin expansion.

That concludes my remarks.

And operator, you may now open the line for questions.

(Operator Instructions) Our first question today comes from Steve Tanal from Goldman Sachs.

Just a random one here.

Just thinking about Medicare Advantage Star scores of '19, in the final call notice, it seems like they decoupled the audit measures and related penalties from the BAPP score.

I know that was an issue for you guys.

Just trying to get a understanding of whether there's any implication for your '19 rate as Star scores or the appeal process is underway?

Well, we have the appeal process still underway and we continue to evaluate the alternatives, the crosswalk, et cetera, as appropriate.

And so we see minimizing any impact on the 2019 rates and income.

Got it.

And nothing maybe direct there.

Okay.

And just to help us kind of wrap our heads around the seasonality of the marketplace.

Is there any way you could frame or call out sort of the discreet upside to EPS on seasonality in Q1?

And relatedly, what kind of an offset we should be thinking about later in the year, like the 4Q?

I'll let Jeff go into that.

Yes.

Yes, a couple of things.

I would say, first, it's 2 things in the first quarter.

Number one, its higher membership; and two, a little bit better performance on a year-over-year basis from an HBR perspective.

So really, 2 things driving the phenomenon in the first quarter.

I'm not going to get into specifics, but I think I made commentary in the past that the Marketplace is close to breakeven by the fourth quarter.

So the majority of the earnings are in the first quarter, with the fourth quarter really being the offset.

And it really -- it starts to decline from the first quarter to the fourth quarter.

Got it.

Just last one for me real quick.

Just -- July 1 for Fidelis, it sounds like you're framing that as maybe a little bit more of conservatism than actual timing, given there's only one regulatory approval out there.

Is that a fair statement?

I think it's fair to say that we do everything with a certain abundance of conservatism.

But I want to be realistic, I don't want to end up saying something that there's not certainty in.

So I think saying no later than July 1 is probably the best way to represent it.

Our next question comes from Sarah James from Piper Jaffray.

If I look through the guidance updates, one of the areas that looked conservative to me was the SG&A.

And I was hoping maybe you could bridge the change in guidance for us.

I know we've got some Fidelis payments and strong (inaudible) growth, but it still just seem pretty conservative.

So maybe you can break out some of the investments you spoke about and any other moving pieces.

Yes, a couple of things.

I mean, a lot of the metrics are changing just because of the reblending of the Fidelis.

When you move Fidelis out a quarter, we've talked about before that they've had a lower G&A ratio compared to the Centene business as it stands today.

So when you adjust for that timing effectively, it changes all the metrics because of the reblending of the 2 companies for half a year.

I think that's the largest thing going on.

Obviously, we talked about -- a little bit about the investments -- some of the investments that we've made this morning as far as transactions and investments that we've already closed.

So obviously, those have effects on the ratio as well.

But the largest driver is really the reblending of the company when you move Fidelis out a quarter.

Got it.

And I think that Florida is expected to be announced today.

I know in the past you guys have talked about your ITNs, and I'm just wondering if there is any update that you can share with us on Florida?

Stay tuned like the rest of us.

We're waiting to hear, hopefully, later today.

There's nothing more I can say about that, Sarah.

It's just -- it's -- I would say, wait and see.

Our next question comes from Kevin Fischbeck from Bank of America.

Wanted to dive into the guidance a little bit as far as the $0.05 on the quarter outperformance.

You guys mentioned flu being up 40 basis points year-over-year, which I guess is about $0.20 to EPS.

So I just wasn't sure how you were thinking about that $0.05 of outperformance in the quarter.

Were you already assuming something like 40 basis for from flu or was that actually better and a little bit of an offset versus how you thought about your guidance?

Jeff, you want to take that?

Yes.

I guess, Kevin, the way I look at it is, when we -- the last guidance update we gave was February 6. So we had had indications that flu was a little bit higher.

So the way we view it is we were $0.05 ahead of our internal forecast.

And really, what I would do is I'd start with the $2.17 and obviously, back off the $0.12, which was just mathematics on the movement of the shares.

And then you have the $0.05 beat that we mentioned.

And then the commentary we made on February 6 was really that Q1 would be higher than Q2, and it's really driven by the Marketplace business and the early enrollment that I mentioned.

So I think if you do that, that's the number you'll come up with.

We're also ahead on our -- over the original estimate on the Marketplace, which was the contributor to it.

So it is a combination of things.

But what we tried to say earlier was that when you reach the scale we have, the flu is but one line on the medical expense.

Yes.

So I think everything, to Michael's point, is consistent with the commentary that we provided on February 6.

Okay.

So what was the actual kind of $0.05 outperformance in the quarter?

Because, I guess, if you beat it by $0.05 a quarter, the thought might be, well, then you raise guidance by $0.20 for the year.

Is there something kind of as an offset as you think about the rest of the year?

I think I'll start and you can pick it up.

But it's -- if you look at it and we said that some of it had to do -- a lot of it with the overperformance and the growth of the exchange and we also said that the earnings on the exchange starts to be reduced each quarter.

That's just the nature of deductibles and things of that nature.

That should help explain it.

Jeff, you want to add anything?

Yes.

I mean, again, I'll go back to -- this is $0.05 better than our expectations, right, not the Street consensus number.

And so we were always here.

I made commentary on February 6 that said, effectively, the 2018 is going to lay out similar to '17, which would imply something like 54% of the earnings are in the first half of the year.

And then Q1 was going to be higher than Q2.

So if you kind of do that math, I think that gets you to where we are right now, which is a $0.05 -- kind of $0.05 ahead of expectations.

And to Michael's point, it's really driven by performance in the HBR line and the revenue line with Marketplace, Medicaid and all those things that we've listed in the press release.

Okay.

And then, I guess, any color on Fidelis' actual performance so far?

Any updates there?

Yes.

I made comments in my prepared remarks that they are in line with expectations.

So I think, they continue to perform well.

And really all that we were talking about this morning is really outperformance in Q1 and the rest is really just timing of the transaction closing.

Our next question comes from Michael Newshel from Evercore.

So now that you have some of the claims experience, is there any change in how you're viewing exchange margins for the full year?

It sounds like in the first quarter at least that it's starting out a little bit higher than what you thought.

And also, since now you're developing rates for 2019, do you have any initial commentary there on what you're going to bake into rates and whether you're going to have a consistent footprint or expand or shrink?

I'll start off and let Jeff pick up.

But I think when we talk about the first quarter in Marketplace, I remind you that we had a increase in enrollment over our original expectations.

And we tend not to get too much into '19 until we do our guidance in December of the year.

It's kind of early to be talking about expectations and the way we do business on the Marketplace.

Jeff, any...

Yes.

No, I think, Michael's right.

It's really volume driven.

You'll notice in our filings we do have some minimum MLR payables.

So to some extent, we are projecting a full year of margin and that's what we're recording to.

So...

And what you're booking on risk adjustment, is that like consistent with what you did in prior years?

Are you still in that payer on risk adjustment?

Yes.

Yes, we're a net payer.

But obviously, the volume has grown because of the increase in the size of the business.

Got it.

And -- I mean -- and anything that's like recently happened on the policy front that changes any of your thinking on whether you might participate in 2019?

If the administration like tried to put some restrictions on silver loading or anything like that, would that change your approach at all?

Or do you think you'll -- basically, you'll take any changes and you can fully expect to participate?

Kevin...

Yes.

I think there's a couple of things.

Number one think that changes are going to be made by a regulation, as Michael said.

Number two is that the state flexibility that exists in the payment notice, we think actually could be a positive to us because, as Jeff said, we've been a payer.

And so state flexibility in that regard may actually help us.

The lower MLR going down is also going to be a positive.

So there's a number of things in the payment notice that we're encouraged by.

I might also add and I remind you that we're very decentralized.

So we're really structured to work on a state-by-state basis and see that as a plus.

Our next question comes from Dave Windley from Jefferies.

I just wanted to understand some of the pennies of movement here in the Fidelis timing.

So I think when you last updated us and pushed the timing from February to March, that was a $0.06 change and then the loss -- or the push from March out of the quarter is a $0.12 change.

And then you're funding 2 months ahead of when you anticipated to close in the second quarter.

So first, what's the difference between the $0.06 and the $0.12?

And then secondly, just for the full year, how much should we think about 2018 -- how much drag is 2018 carrying that will then not be present in 2019?

Yes.

So a couple of things.

The $0.12 you're mentioning is Q1, right?

The $0.12?

Well, I think you said in your prepared remarks that the $0.12 upside in the quarter was the result of delaying from March 1.

Yes.

Yes.

So that's $0.12 for Q1.

That would not be the case for the full year, right?

Because the first quarter share count is -- it would be 1/3 of the total shares for the quarter.

Versus on a full year, it gets diluted by the full year share count, right?

So the $0.12 is not the number for the full year, it's really the Q1 number.

So that's a little bit different there.

And what we've done is we've packaged up all of the movement of Fidelis, right, into one line item.

So we're moving from -- we had assumed the offerings in March.

We're moving those to May.

The transaction closing April, we're moving that to July.

That is all encapsulated in the $0.25 that's in the adjusted diluted EPS range.

Yes.

And so the advance -- I mean, is it possible to give me what the advance funding -- the 2 months of advance funding is?

Yes, the overhang -- yes, the overhang.

Sure.

Yes, the overhang is between $0.10 to $0.12.

Okay.

And then the second question, on Medicare Advantage, Michael, what would you describe to us as your learnings from the annual enrollment period this year and your positioning?

It looks like your membership pickup was kind of scattered across your various new entry states.

And I guess, I'm curious about how that influences your, kind of, competitive positioning and your desire for that to be a substantial driver of growth going forward?

Yes, I think, one of the things we've picked up, we will be adjusting our marketing approach as much as anything.

How we go at the open enrollment period.

So it's more of the direct approach to the consumer that we will fine tune and we expect to see continued improved results from.

Our next question comes from Matt Borsch from BMO Capital Markets.

If I could ask about a different topic.

The -- just give us your assessment of the group commercial market as you come into this year.

And I realize a lot of that or the vast majority is in California, but just like to hear what your update is on price competition and medical cost trends.

Sure.

I think we've stated we're committed to the commercial business in California we acquire.

And we believe it's going to perform very well for us, continue to grow it.

I personally got involved when we were doing some renewal work and they have a good product that's very well received out there.

And as I think about it, and this is not -- I'm just giving you as candid a statement as I can.

Over time, there may be additional opportunities working with state governments and things that is not just pure commercial assessment, more government related.

We're talking about that kind of things.

So we believe there's good learning coming out of the California model.

And as time and energy permits, we will consider alternatives to how it might be expanded.

Okay.

If I could ask just on a different area of business on the individual, can you just talk about retention -- the retention rate on ACA members?

And have you seen anything that might indicate that there is less retention this year as opposed to last year, whether it's for any real reason or just the awareness that the individual mandate is going away?

No.

I think we are not seeing -- but I'll let Kevin give you more details.

So we actually have not experienced that our effectuation -- excuse me, our persistency rate is remaining at 80%, which is above the national average by the way.

So we're actually encouraged by that.

What we're also particularly encouraged by is our effectuation rate is at 90%, which is about 10% higher than it was a year ago.

So that's something which, as you know, is very critical in terms of predicting future retention.

So we're encouraged by what we're seeing.

Now with respect to the individual mandate, it's kind of an interesting question, because when I was at CMS, I never really thought the individual mandate was all that powerful, and I'll tell you why.

Because number one, the dollar value for the penalty was not that significant, particularly compared to premium.

And number two is, there were so many opportunities for people to appeal, whether it was for affordability, for college education, for religious purposes and others.

So I think in a way, the new mandate is actually higher healthcare costs.

I think people want to have insurance coverage, they want to protect themselves and their families.

And I think we've seen with the enrollment going into 2018 how attractive these products are.

Our next question comes from A.J. Rice from Crédit Suisse.

First question, obviously the industry backdrop around pharmacy benefit is really evolving.

And you made an investment in RxAdvance.

I know you have your own PBM and you have legacy Health Net relationship with CVS.

Can you just give us any thoughts that you have on updated thinking around pharmacy benefit in light of what you're doing and what the industry is doing?

I'll just give you an open comment and ask Jesse to comment because he's been doing most of the work to this point from the M&A perspective.

But we see this as really the modernization and the direction that pharmacy benefits need to go.

And I'll let you pick it up.

Yes, A.J., I think obviously complicated, kind of a number of moving parts with respect to the topic.

But I think the starting point is, I think, as you've seen a lot of M&A from an industry perspective, is some things just need to change from the kind of the PBM model, if you will.

And I think there's a couple of dimensions of that, that are both tied into our investment in RxAdvance.

One is just the underlying technology opportunity for automation, cloud, et cetera.

And that brings both kind of administrative cost efficiencies that, I think, are important, number one.

But it also improves kind of the overall quality and experience and the ability to connect the interoperability of systems across, in our case, the payer landscape.

But the other thing, which I think is increasingly important, is everybody understands the benefit of having an internalized capability with respect to pharmacy management, how that ties to physical health and behavioral and the like.

As you all know, we've been focused on that from the beginning.

I think what we see now is the ability to marry the technology, marry the scale benefits that exist but also implement some new operating models, in particular the relationship for total cost of care and moving towards a value-based arrangement in pharmacy that has not existed in the past.

So I think that will address some of the transparency concerns that have been kind of embedded in the industry for a long time.

Okay, great.

And maybe one other follow-up.

You guys have done great at expanding your [hicks --] or Health Marketplace enrollment.

And now you're the largest player in the Marketplace, I think, nationwide with more than 10% of the market.

Is that -- as you've gotten these additional members, and it may be early in the year to figure this out, but if you had to make adjustments to your traditional provider networks because you're now picking up people that are outside of those geographies, one metric, I know Mike may measure that as out-of-network claims and so forth, any update on thinking around those issues?

Yes, I'll just make a comment.

I think though we're sticking with that traditional network, we deserve that support and that's the network our recipients wish, we've, of course, had to expand it with the increase in membership.

But there's not a strategic change there.

Okay.

Any thought about the -- whether your -- so that network expansion, you're not seeing a lot of out-of-network claims?

Or is it too early in the year to know whether you will?

I would say that it's pretty consistent with our historic experience.

There are -- anytime we see that is if we have a deficiency just because of the total increase in some of the markets.

We need to expand the network and there's a lot of energy being put into getting that network expanded.

So no, we're going to stick to our knitting, so to speak, to use an old cliché.

And we stick to 400% of federal poverty level and below.

And the majority is up 250% of the federal poverty level and below.

And that's our market.

We're not trying to be all things to all people.

Our next question comes from Peter Costa from Wells Fargo.

Getting back to the annual guidance again and sort of where the different numbers are, I'm just trying to understand a couple of different aspects of it.

First, you said if you had Fidelis for the whole year, your earnings would be $0.35 to $0.40 higher.

Yet you adjusted for the delay of potentially a quarter, your earnings by $0.25, so you took out more for the quarter.

Then your share count -- or I'm sorry, your share price is about 20% higher than when you announced the deal.

So in theory, the Fidelis Care is actually more accretive than it was before.

And then you mentioned the outperformances that you had in the quarter being $0.05.

But you didn't raise the guidance for the full year by anything more than what it was in the Q1 performance, despite some of the cost in flu being overcome.

I'm just trying to understand why your numbers are so conservative.

Is there something with Fidelis that is not performing or some changes from the conversion that you had not considered before that makes that deal less attractive?

There's -- okay, there's a lot in that question.

But I'll just start at the beginning here.

So the $0.25, you have to remember, that includes another month of overhang, right?

Compared to last guidance, that includes another month of both shares and the debt overhang.

So that number is probably larger than what you were expecting just because the additional month of overhang.

My second point would be I'd go to my prepared remarks, I think Fidelis is performing exactly what we expected, so -- and I reiterated the accretion targets there.

As far as the share price, we have updated, I would say, both -- 2 things compared to when we announced this transaction in September of last year, both the share price and interest expense.

So bond rates have moved against us, the share price has moved in our favor.

I would tell you we have what we believe are relatively conservative expectations.

But we haven't raised the capital sitting here today.

And I think that Jeff has a very important point.

Until it's done, it's not done.

So you want to be conservative until you see how those numbers come out.

And in terms of the synergies from Fidelis Care, you talked about $100 million.

Is that still the number that you're thinking about?

Or has that improved having looked at the business more?

We said $25 million in the first year.

I made a comment today that we're on target to get half of that in 2018.

We did say $100 million in year 2. We've always targeted a higher level of synergies.

But we felt comfortable with $100 million.

And that's where we are today.

I think what's really important is that every aspect of the deal has been very consistent.

And we're not seeing any changes in the original assumptions we made, and the management is as strong as we believe it is, it is engaged, we believe they were.

And they've managed through the delay incredibly well.

So it's a very strong team.

The regulators in New York.

We find just very -- we are able to work with them well.

They're very professional in all the things they do and their approach to it.

And we just see every aspect of the Fidelis deal being a positive one.

Our next question comes from Josh Raskin from Nephron Research.

I'm just going to beat the Fidelis horse one more time.

There's no impact in the first quarter.

Obviously, second quarter sounds like it's $0.12 dilutive at this point just from the financing overhang with no operations.

What's the Fidelis impact on the second half, right?

I'm just trying to figure out, is this an accretive deal for 2018?

Yes, Josh, and we've had this conversation before.

I think if you go back to the numbers that we said today, where if we had Fidelis for a full year, right, you would be increasing $0.35 to $0.40.

So if you just do that math, I think, and then assume a mid- to upper single-digit accretion as we've said, it is an accretive deal for the year, so -- and we're picking up half of that accretion in 2018.

Okay, got it.

And then just second question, just you guys mentioned obviously a much better MLR in the quarter and a lot of that was Marketplace.

But you did say there were some Medicaid MLR improvement.

I'm just curious, were there any specific states or geographies, any segments, any specific drivers of that Medicaid MLR that was better?

Yes, I think we saw improvement really driven by network and unit cost initiatives.

In addition to medical management, we did have some states that had favorable pay-for-performance metrics.

A certain part -- percentages of our contract are at risk based on meeting usually quality and performance metrics.

And some of those came in favorable, which we're pleased about.

So overall, it was across the board, I would say, generally a good performance to the Medicaid business.

Okay.

So those are 2017 performance metrics that get paid in the first quarter.

Is that the idea that may be part of the reason you're not expecting some of this to recur the rest of the year?

Yes, there's actually 2 things.

Number one, it's -- some of those are 2017 metrics, but it also changes your opinions on 2018 as well, right, meaning if you met the metric in a previous year, then you have more confidence that you'll meet the metric in the future year as well.

Our next question comes from Justin Lake from Wolfe Research.

A couple things.

First, on the pricing side, going into 2019 on the exchanges, obviously you're doing well and even better than expected.

There's been some chatter, and you can just look at the results.

I mean, the not-for-profits have been doing pretty well.

They all got tax benefits, just like you did.

And they're probably going to price some of it back.

And specifically, even some of the public comments they've made indicates that maybe a larger percentage of that pricing is going to come in the individual, the exchange market.

So I'm just curious in terms of your view of how competitive they are today and if they do get more competitive tomorrow, does that something you need to consider from a market share or pricing perspective for 2019?

Or do you feel like they're just so positively differentiated that even if they were to come price a little bit lower that you still keep your share and your margins?

Yes, Justin, it's Jeff.

I mean, I think as we mentioned before, we're not going to get into the details of 2019 pricing.

But I think all of those factors are factors that we would take into account when we're looking at the competitive dynamics of the Marketplace business and what our goals and objectives are for 2019.

I think also when you -- some of the systems and the capabilities we have, it helps, as we said, it's going to help drive cost in the right direction in '19 and forward.

So I think we'll continue to be very competitive in all our products going forward.

Got it.

I mean, can you give us an update?

I think at your Investor Day last, you had said you were above that 5% margin.

And I think people came away thinking 6% or 7%.

And on exchanges for 2018, is there -- and now it sounds like it's better.

Is there anything you can help us with?

I think we would be consistent in saying it's at the high end of our range there.

Yes, Justin, remember what we said was that the full year expectations aren't really any different here than what I would have communicated on February 6. We saw a little bit better performance in the first quarter.

But ultimately, for the full year, we think we're going to be consistent with what we previously communicated.

Got it.

And then just a follow-up on Fidelis, Michael, during your prepared comments, you were pretty definitive that the deal will close by July 1 and your new guidance assumes the equity and the debt are basically done by this time next week.

So just given your apparent increased certainty on the deal close, what should we assume on the equity issuance here in terms of timing?

Well, I think -- and I'll let Jeff add to it.

We said it's going to be a lot dependent on the market conditions.

And if market conditions continue to be strong, we will move forward with the equity deal.

So let's not presuppose a whole lot or presage something.

Because once again, we know we have a very volatile market.

It's nothing to do with us, it's just the total environment we're in.

So if you were to advise us, you'd probably say, "Take a look at the market and make your decision based on that." If it's a strong market, we can go out.

If there's uncertainty because of some global condition or something, then we have time and we'll be patient and do it when it's the right time to do it.

We always talked about it's not how fast but how well you do something.

You know that, we've talked about that, Justin.

So I'm not going to presage -- I'd like to do it as soon as reasonable.

Yes.

And Justin, this is Jeff.

Obviously, we had to pick a date for the guidance in order to revise the guidance, right?

So that's what that date reflects.

As Michael indicated, I think it's going to be based on market conditions.

Our next question comes from Lance Wilkes from Bernstein.

Just got a question on the vertical integration strategy in the deal obviously that you did.

Was interested in understanding kind of what your value proposition is in owning clinics or care centers in certain markets.

Is it more about access or the alignment of interest kind of value-based approach there?

And then also what percent of your Medicaid business today uses an urgent care clinic or retail clinic as its primary care provider?

I think one of the things -- what we tried to say is that this gives us an opportunity where we see access more limited -- and I'm not going to go into specific markets and tip that hand.

But there are some where access is more limited.

And we see this as having the scalability and capability to expand in some of those markets.

And they have a capability to deal with reasonable dispatch when it's necessary.

So that's very important.

The use of urgent care is somewhat limited in our approach.

We like individuals that have a primary care and we encourage that and push that.

And so we think that's very important.

And we have a quality committee that we work with, former deans of medical schools and deans of public health.

And they're consistent.

Urgent care -- urgent clinics are intended to be just that, an episodic-type thing.

And we have one here in our own facility for employees.

And if you go in there without a primary care for that position, when you come out, you will have one.

And so that's pretty much the approach that we follow in that.

Got you.

And as you're thinking about strategy beyond that one transaction going forward and you're thinking of potential partnerships with pharmacies or retailers that are getting into retail clinics or things like that, do you see that as being more episodic as well?

Or do you see that as potentially transforming into something that could replace primary care?

I don't see it replacing primary care.

I think we do have a very close relationship with and have a lot of confidence in is the federally qualified health centers.

And we work with them.

They -- we have one clinic that we set up in St.

Louis that's -- it's staffed by some of the nurses, so if they see something that needs a physician, they have the access to it to immediately refer it to that physician group.

So we have a very strong belief in supporting the primary care physicians and helping them to be more successful in our systems and capabilities.

And we're putting more and more emphasis on that than trying to support these more transitory operations.

There's a place for them.

Don't misread it.

If there's a -- if someone has a cold or something minor, that's great, use it once.

But you should have your own doctor you can call.

We want our recipients treated the way our children have been treated.

You call your pediatrician and take his advice.

Great.

And just one follow-up question would be, as you're looking at the Medicaid enrollment kind of market-by-market and contract-by-contract, how are you seeing the improving economy impacting kind of in-market growth or shrink?

And just interested in that.

And if it varies, not just by geography but by kind of product type there.

Yes, I think what we have found is that regardless of economic environment, we continue to have a fairly stable situation.

States will consider increasing coverage if their budgets become stronger because individuals need health care.

And when we were working with the Congress and others, we're encouraging that the Marketplace be expanded to allow for individuals that are working so that individuals start to learn how to use an insurance system.

So I mean, there's some public policy issues at play there that allow us to be fairly consistent.

Our next question comes from Steven Valiquette from Barclays.

So just from the 4 recent smaller acquisitions that closed in March, April, I think you mentioned that 2 are accretive, 2 are dilutive.

Just curious if that was always your expectation around those deals.

Or perhaps did anything -- did any trends change within any of those after closing that was maybe different than your prior expectations?

No, I would say nothing changed.

We recognized that in some of the system opportunities that they have a clear benefit and payout in the very near future.

But when you close at midyear, we're saying that in the -- the impact on '18.

But no, everything we do is very precise in that regard.

We don't pursue surprise.

If we see a surprise, we (inaudible) in things up to a point that the wire is sent and the money is in the other person's bank.

Okay, great.

One or 2 other quick ones, not sure if you quantified this or not.

Are you -- any chance you're able to quantify how much the return of the health insurer fee improved the medical benefits ratio in 1Q '18?

Jeff, you...

Yes, I think it's only the component that's in premium revenue.

So I think it's roughly between 20 to 30 basis points, something like that.

Okay.

Maybe just a final quick one, you mentioned you still expect medical cost inflation to remain in the low single digits.

Is there any high-level color you can provide just on 1Q trends on some of the bigger cost categories within that, whether it's inpatient, outpatient or pharmacy or physician, just any high-level trends?

Just as we said, it's been very stable.

Okay, just stable overall.

Okay.

Plus (inaudible).

Our next question comes from Zack Sopcak from Morgan Stanley.

I was wondering if first quarter, you saw anything unusual in your pharmacy utilization.

Eli Lilly, this morning, lowered their -- or sorry, increased their guidance based on expected lower Medicaid utilization for this quarter and the remainder of the year.

Have you seen anything along those lines?

No, I mean, this is Jeff.

The only thing we did see obviously was the flu, right?

So flu costs were higher than, I would say, average.

So we did see higher drug spend on the flu side.

And I'll remind you that some of these new systems that we're putting in place now would mitigate any upward trend.

Got it, understood.

One other question and back on your success in the Marketplace.

Given the shorter enrollment period and more of the investment into marketing came from you instead of from the government, any major learnings that you think will help as you go into the next enrollment period for next year?

Yes, I think what it taught us is we were wise to anticipate that we would have to pick up that slack, and we did.

And it was right -- and it was the right benefit.

We were able to enroll people directly and do the things that -- in fact, we had a bigger response and it includes overwhelming the enrollment system.

So if anything we learned from it is be prepared for more upside than what we expected going forward.

I mean, there's a high satisfaction as far as -- as Kevin talked about, our retention rate at 80% year-over-year.

That's pretty good for any kind of commercial product that's out there.

So it says that some things are being done right.

Our next question comes from Gary Taylor from JPMorgan.

Just a couple quick ones.

On the tax rate change, you didn't talk about that and why there wasn't an impact to EPS.

Is that just sort of tiering up or reconciling the HIF's nondeductibility?

Is that why the tax rate guidance went up a little bit?

No, again the tax rate guidance went up because of the reblending of Fidelis.

So in New York, they pay a premium tax versus a state income tax.

So if you take the -- post tax reform, they would be in a much lower rate than the Centene average.

So when you reblend the year after moving Fidelis a quarter, the rate goes up.

Got it.

On the exchange business, what's a good estimate of a full year G&A load in that business?

Is it as high as 15%?

Yes, that's a pretty good number.

That's close.

Okay.

And then last question, on Fidelis G&A, which is materially lower than your corporate average, can you just remind us why that's the case?

And I don't think, given the synergy...

I'll start a little bit there.

Some of their benefit plans are different.

Benefit, compensation structures, things of that nature can be impacted by it.

Yes, this is Jeff.

I think the other thing is that as we planned the acquisition, we've looked at actually investing more G&A dollars there to really get medical management savings.

And I think we mentioned that at the beginning of the transaction, that things like payment integrity, fraud, waste and abuse, all the analytic capabilities that we have here that we can support them with, case management system, et cetera, et cetera, we think more of the opportunity is in medical expense versus G&A.

And our final question today comes from Ana Gupte from Leerink Partners.

The first question was on Envolve.

I wanted to get a sense for how much you're actively marketing that suite of services outside.

Obviously, you're growing quite remarkably as you're rolling up the acquisitions, Health Net and then in the future, Fidelis.

But is that also targeted more beyond inside?

It's Kevin.

So we're actually going through a strategic planning process on Envolve at present.

And one of the things that we want to do is make sure that those products are refreshed in a way that reflect the opportunities of the Marketplace.

And let me just give you an example.

So one of the things that we're looking at is whether our EAP program can be reconfigured in a way to support social determinants in a way to get software that could actually have one of our members call in and be able to be directed to a housing shelter if they need shelter for that night or a food bank if they need access to food or other kinds of things.

So our real focus right now is making sure that the Envolve suite is meeting the needs of the current market.

Of your current internal market, in other words?

Correct.

Okay, all right.

Secondly, the growth is coming on both on Envolve as well as the base business with all the roll-ups.

And to what degree is there more white space on for-profit conversions, like you saw in Fidelis in New York?

Are there others in...

Well, I think, well, they're out there.

And I'm not going to talk too much about where we're going in that regard.

And I mean, it's for competitive -- obvious competitive reasons.

Okay, all right.

And then finally, on the worker requirements, it looks like Virginia is on the brink of Medicaid expansion.

What are your thoughts or what are you hearing around Florida or any of the other states?

We are supportive of the work requirements.

Back when Vice President Pence was governor of Indiana, was installing it, we were very supportive and helped him how to do it.

And I'll remind you, it's childless adults who don't have physical disabilities.

And we think that's good public policy.

And we will work very diligently with the states that want to do it to implement it in a very responsible way.

And ladies and gentlemen, at this time, we'll conclude today's question-and-answer session.

I'd like to turn the conference call back over to Mr. Neidorff for any closing remarks.

I just want to thank everybody.

As we said, it's -- this quarter had a lot of moving parts because of Fidelis and different issues.

But it was a solid quarter.

It was a stronger quarter than we originally had anticipated or planned for.

We're pleased with that.

We're pleased with how we think the year is going to unfold and looking forward to another very strong year.

So we thank you, and look forward to talking to you in subsequent calls.

Have a good day.

Thanks.

Ladies and gentlemen, today's conference has now concluded.

We do thank you for attending today's presentation.

You may now disconnect your lines.