Centene Corp (CNC) 2021 Q3 法說會逐字稿

Good day, and welcome to the Centene Corporation Third Quarter 2021 Earnings Conference Call.

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

I would now like to turn the conference over to Jen Gilligan, Senior Vice President, Finance and Investor Relations.

Please go ahead, ma'am.

Thank you, Rocco, and good morning, everyone.

Thank you for joining us on our third quarter 2021 earnings results conference call.

Michael Neidorff, Chairman and Chief Executive Officer; Sarah London, Vice Chairman; and Drew Asher, 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.

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-Q filed today and the Form 10-K dated February 22, 2021, and other public SEC filings, including the risks and uncertainties described with respect to the potential impacts of COVID-19 on our business and results of operations.

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 third quarter 2021 press release, which is available on the company's website under the Investors section.

Additionally, please mark your calendars for our upcoming 2022 guidance meeting to be held on December 10.

We will invite sell-side analysts to participate in person in New York and ask others to participate virtually.

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

Michael?

Thank you, Jennifer.

Good morning, and thank you for joining Centene's Third Quarter Earnings Call today.

As you will notice today, we are evolving our presentation format to a streamline version and with essential facts and commentary.

I'm pleased to have Sarah London and Drew Asher joining me today.

Brent Layton has a conflict that could not be avoided, but you can expect him to join us on future calls.

First, on the quarter.

We were pleased with the results and the fact that the matrix were straightforward with minimum noise.

In the quarter, we generated revenue of $32.4 billion, an HBR of 88.1% and adjusted earnings per share of $1.26.

Drew will provide additional context.

Overall, the numbers reflect a return towards normal utilization, while still covering reasonable amounts of COVID costs, which seemed to have peaked in August.

Importantly, our performance provides a strong foundation for our value creation plan, and we remain committed to our margin goals.

Further supporting our strategic progress during the quarter, we announced a series of organizational changes, including appointing Sarah London as Vice Chairman of the Board of Directors and Brent Layton as the company's President and Chief Operating Officer.

I would also like to acknowledge that David Steward, an 18-year veteran of our Board of Directors, retired to pursue personal business interest.

We do not plan to replace his position as we continue to work on refreshing and streamlining the Board to a size of 9 to 13 members.

Turning to the current landscape.

Overall, the portfolio is performing well.

We delivered a strong membership increase in Medicaid, our position for continued growth in Medicare, and we continue to stay the course in the marketplace.

Sarah will provide further details.

We are working closely with states on the timing of redetermination, which has so far been extended until January with the opportunity for additional extensions 3 months at a time.

As redeterminations do resume, I would like to remind you that not all states will be doing so at the same time.

In addition, we look forward to offering members who no longer qualify for Medicaid the opportunity to enroll in our marketplace product.

We expect that advanced premium tax credits will keep costs in line for these members, and we value the opportunity to support continuity of care and preserve provider relationships, which, in the long term, leads to higher quality of care, which is much more cost effective.

Looking ahead to 2022, there are several additional factors we continue to monitor and evaluate.

These include the pace of the RFP pipeline, ongoing growth in Medicare, the opportunity for improvement in marketplace launches as well as the COVID landscape overall.

We will provide full detail on these factors and their potential impact as headwinds and tailwinds at our Investor Day in December.

In addition, we are committed to achieving an investment-grade rating and a disciplined capital allocation framework that takes into consideration our priorities, including investing in our business, debt management and share repurchases.

Before I close, I would like to highlight the importance of vaccine mandates in stopping the transmission of COVID and protecting those who cannot yet safely receive inoculations, particularly the immunologically compromised and young children for whom vaccine access is getting closer, but still pending.

Centene has been a leader on this critical issue mandating vaccinations as a condition of employment.

We also continue to support our members in assessing the vaccine to national outreach and campaigns and creative participation, such as the Pro Football Hall of Fame and NASCAR.

I would also like to remind you that this platform for vaccines has been in development for the past 25 years, and scientists are indicating it's likely one of the safest vaccines ever developed.

In closing, we are pleased with our third quarter results and the sustained momentum across the enterprise.

We remain focused on executing across the value creation playbook we have in place.

As always, we intend to continue to provide transparent updates as we progress through our initiatives, and I look forward to seeing many of you at our December Investor Day.

Finally, I'd like to thank all our employees for their unwavering commitment and service throughout this unprecedented times.

Thank you for your continued interests in Centene, and I would turn the call over to Sarah.

Thank you, Michael.

Good morning, everyone.

I'm going to provide highlights of our product line performance before touching on the early progress we are making around our value creation plan.

During the quarter, we continued to build on our market-leading position and are experiencing solid growth and good outcomes.

In Medicaid, our business continues to perform well.

Membership increased to 14.8 million, aided by continued suspension of redeterminations and the go-live of our business in North Carolina.

In Marketplace, with more than 90% of our membership receiving some form of subsidy, we maintained our low income focus and our commitment to providing health care access and affordability to our members.

At the end of the third quarter, our Marketplace membership was 2.2 million, and we are pleased with the progress of our clinical initiatives as we head into the fourth quarter.

Looking ahead, our 2022 Marketplace offerings reflect the diverse and evolving needs of end better consumers.

We are introducing a group of new products designed to optimize flexibility, access and affordability.

In addition, we plan to grow our coverage map by entering 5 new states with Marketplace products.

As we continue to monitor policies and plans around the return of Medicaid redeterminations, we believe that our enhanced footprints within both Medicaid and Marketplace position Centene well to support our members with options for coverage continuity.

In Medicare Advantage, we continue to see a compelling growth opportunity for the company.

We are expanding Centene's footprint to reach 48 million Medicare-eligible adults across the country, which is more than 75% of eligible beneficiaries.

Today, Centene serves more than 1.2 million Medicare Advantage members across 33 states.

Beginning in 2022, the company expects to offer plans in 327 new counties, representing a 26% increase and 3 new states, including Massachusetts, Nebraska and Oklahoma.

Now turning to our value creation plan.

As we outlined this past June, we have embarked on our strategy to leverage Centene's size and scale and drive margin expansion through SG&A efficiencies, medical management initiatives and strategic capital deployment.

We are focused on generating sustained growth and margin expansion.

And although it is still very early, seeing the enterprise-wide commitment from the outset has given me confidence that we are on the right track to achieve our goal.

Brent, Drew and I are leading this effort, and we believe we now have an organizational structure in place to drive this forward across our business and functions.

On the SG&A front, we have identified opportunities across the company where we believe we can be more efficient.

This isn't about cost-cutting, it's about positioning the company for long-term success.

For example, we piloted new technology within our call centers for use by Centene employees.

This technology trial yielded significant reductions in cycle times and now will be rolled out enterprise-wide.

Another opportunity we've mentioned as a value creation target is pharmacy.

As we alluded to in June, we are now taking steps toward consolidating down to a single PBM platform and rationalizing those platforms we view as nonessential.

We began this work in Q3 and look forward to providing more detail around this overall program in December.

In addition, we are progressing on the review and potential sale of certain non-core assets as part of our portfolio optimization process, which has taken on an increased focus as part of the value creation plan.

Again, we are in the very early stages and as we continue to leverage our size and scale to our benefit, these are just a few of the many levers we are pulling to achieve our adjusted net income margin target of at least 3.3%.

Let me remind you that as we progress through these and other initiatives, particularly in 2023 and 2024, we anticipate seeing a greater impact pushing us toward our goal.

Before handing the call over to Drew, let me provide a quick update on the Magellan transaction.

We are still awaiting one final regulatory approval in California and continue to expect the deal to close by the end of 2021.

We continue to work with the regulators to move the transaction to completion.

Now let me turn the call over to Drew to provide more details on our third quarter performance and our updated outlook.

Thank you, Sarah.

This morning, we reported third quarter 2021 results, including $32.4 billion in revenue, an increase of 11% compared to the third quarter of 2020 and adjusted diluted earnings per share of $1.26.

Revenue grew by $3.3 billion compared to the third quarter of 2020 and total membership increased to 26.5 million, up 5% compared to a year ago.

Our Q3 consolidated HBR was 88.1%, right on track with our full year guidance.

At a webcast presentation in mid-September, we provided insights into the first 2 months of the quarter.

As a reminder, in July, we saw subsidence in pent-up demand in our Marketplace business, followed in August by a spike in COVID cost due to the Delta variant.

Consistent with national data, our COVID cost peaked in late August, dropped throughout September and the sharp drop of COVID cost continues in October.

While the Delta variant had a higher peak, as measured in authorizations compared to January 2021, it peaked and fell rather quickly.

With our diversified enterprise, we were able to manage through this given our steady performance in Medicaid and Medicare.

Accordingly, we are maintaining the midpoint of our consolidated HBR range for 2021, just shrinking the width of the range since we're 3/4 through the year.

Our adjusted SG&A expense ratio was 8.6% in the third quarter, with higher short-term variable incentive compensation costs compared to Q2 given the positive trajectory of the business.

While we are getting some SG&A leverage on our growth in 2021, there's a lot more to come over the next few years as we execute on the value creation plan.

One item to point out from a mix standpoint, Circle, a well-positioned ASC like hospital enterprise in England has an SG&A rate in the 30s on service fee revenue of approximately $1.4 billion.

This has an approximate 30 basis point mathematical impact on our consolidated SG&A rate for Q3 2021 and going forward.

Continuing on highlights of the quarter.

Cash flow provided by operations in the third quarter was strong at $1.8 billion.

With respect to unregulated cash, we had $2.7 billion at quarter end, which includes the $1.8 billion we borrowed to partially fund the Magellan transaction.

We expect to need approximately $2.3 billion of unregulated cash to close Magellan in the fourth quarter.

Debt at quarter end was $18.8 billion.

Our debt-to-cap ratio was 41.2%, inclusive of Magellan financing and excluding our nonrecourse debt.

Our medical claims liability totaled $14.1 billion at quarter end and represents 51 days in claims payable compared to 48 in Q2.

This 3-day increase was driven by the timing of state-directed payments, claims payments and state fee schedule changes.

You'll see a couple of items in our GAAP to adjusted EPS reconciliation, a $309 million onetime gain as a result of our acquisition of the remaining 60% of Circle in early July 2021 and a write-down of our investment in RxAdvance of $229 million in the quarter as we are simplifying our pharmacy operations.

Both of these are noncash items.

Before we get to updated 2021 guidance, I want to comment on the recently announced rating year 2022 Star scores.

This will drive 2023 Medicare revenue.

We are certainly pleased with over 50% of membership and 4-star contracts and our first 5-star contract.

Rating year 2022 benefited from the continuation of disaster provisions due to COVID with an expectation of those provisions sunsetting and upon reviewing the in-process results of our quality program, we expect rating year 2023 scores to drop followed by a subsequent jump in rating year 2024 scores.

This essentially has the effect of providing some fungible investment dollars for calendar year 2023.

We've updated our full year 2021 outlook, including a narrowed adjusted EPS guidance range of $5.05 to $5.15.

This outlook incorporates revenues within a range of $125.2 billion to $126.4 billion, increased by the inclusion of Circle and expected state-related pass-through payments of $500 million.

It includes an expected HBR of 87.6% to 88.0% and an SG&A ratio of 8.2% to 8.6%, 20 basis points higher than the prior guidance, with the largest driver being the mixed math on Circle as we just discussed.

While we still have a quarter to go to finish 2021, the strength of our diversified enterprise has enabled us to manage through the volatility of COVID, pent-up demand and resulting 2021 Marketplace pressure.

This enterprise strength will only improve as we execute on the value creation plan over the next few years.

With regards to 2022, consistent with our public comments in September, we continue to expect modest adjusted EPS growth next year.

We look forward to providing more details around 2022 expectations and going more in depth into the long-term value creation drivers during our December 10 Investor Day.

Thank you for your interest, and operator, you can now open up the line for questions.

(Operator Instructions) Today's first question comes from Josh Raskin at Nephron Research.

Question on sort of 2022 top line.

And I know the June Investor Day, I think you talked about $124 billion, a pretty stale number at this point.

But I'm curious, specifically as to sort of how you think about that top line just directionally next year?

And specifically, as we're starting to see a little bit of the competitive environment for both MA and exchanges in the open enrollment period for next year?

I will give you the bridge on Investor Day to walk you across to the full results.

But as Drew and others in this room have indicated today, we see continued strength in our Medicare product, Medicaid and we see -- we think we're holding our own and doing better in the Marketplace.

So on balance, we see growth in the top line, obviously, and some modest growth in the bottom line coming from that.

Got you.

And just a follow-up.

So if we thought about that as sort of mid-single-digit top line growth and something very similar on the bottom line, is that kind of what you guys are talking about in terms of modest growth?

I think that's a good place to be right now.

Yes.

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

Yes, I was just hoping maybe you could sort of revisit the headwinds and tailwinds for next year?

I'm not looking, obviously, guidance isn't going to come until your December 10 event.

And maybe if there's a particular focus there, sort of the magnitude at least directionally of the headwind you expect from the Medicaid redeterminations?

Yes.

I'll start, and Sarah and some others can jump in.

But we've said that we saw there's a headwind there, but we're not sure of the timing.

It will vary by state.

And depending on the state of the economy and where things are, it could be continued 3 months at a time, so we're not going to be precised on the timing.

But we see it mitigated by the fact that with the advanced tax credits and things supporting the Marketplace that individuals will be able to move over to our Marketplace as well as maintain their network, their relationships with physicians, which will be a mitigating factor.

And as we get closer, we see how it's all developing.

In December, we hope to be able to give you additional detail.

It appears our next question today will come at A.J. Rice at Crédit Suisse.

I would just be curious, you guys have talked now for 2 quarters about this idea of reviewing non-core assets as well as today, you've got more explicit commentary about the pharmacy benefit management restructuring.

I know you're probably not going to say what you're looking at doing on the non-core assets, but do we have a sense of timing?

Is that something that will happen over the near to intermediate term?

Or is that more of a long-term review?

And on the PBM restructuring, is that -- I think before you talked about maybe 23 relevant contracts were coming up for renewal.

Is something based on your announcement today making that a more near-term opportunity to realize savings?

Or is this still sort of something that will impact '23 and '24?

I'll start, and Drew and others can jump in, Sarah, but the evaluation and what we're doing with non-core assets to start at any time.

It's an ongoing thing, it's not something in the future, but I expect as we achieve the expected results from what we're doing and you can stay tuned, you'll see it starting to happen sooner than later.

And -- but once again, we're not -- it's not how fast, it's how well.

And we're sure that we get -- we maximize the value and protect the individuals involved in it.

So -- but it's something that -- it's not -- we're not talking to look for this in '23, '24.

It could be -- you should expect some indications of what's happening sooner.

Sarah, do you want to add something?

I would just echo that we're actively in the process and as Michael said, I think there will be more information coming both in the short term and on an ongoing basis because this is part of the discipline of looking at the portfolio overall.

On the pharmacy front, I would say, we're very focused short term on logical consolidation as we talked about as well as rationalization of non-core platforms.

And as we've said before, we have an RFP launching in 2022 that's more focused on the long term.

This, I think, is a great example and sort of microcosm of the value creation opportunity.

And so our plan is to actually go through this in detail in a case study in December, so that you can understand all of the moving parts.

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

If I understand what you've been saying so far around utilization, it sounds like the Medicare and Medicaid businesses have been performing relatively well, but the exchange businesses are still seeing pressure.

Can you comment a little bit more about what exactly you're seeing from an MLR and cost structure perspective?

And then how you feel like your pricing for next year would reflect that?

Have you caught everything?

Should we expect normal margins next year?

Or is there a reason to believe that it hasn't been fully reflected yet?

Thanks, Kevin.

This is Drew.

We certainly expect to make progress towards our 5 to 7.5 pretax long-term goal for marketplace next year, and we sort of price to sort of move in that direction.

With respect to the quarter, as I mentioned, we saw subsidence in pent-up demand in July, which was good to see.

Actually, Marketplace took it the hardest in terms of the August spike in the Delta variant of COVID, but it retreated pretty quickly.

So there was still pressure in the quarter on Marketplace.

But you're right, the strength of Medicare and Medicaids were carried through the portfolio as a whole.

And we look forward to the expansion that Sarah mentioned in Marketplace and some of the new products that will address some of the competition.

And we expect to make margin expansion progress in Marketplace next year as one of the tailwinds going into 2022.

Yes, I guess one of your competitors signaled that there was maybe lower visibility than normal in the risk adjustment on the exchanges this year because of the special enrollment period.

I guess how do you feel about that this quarter and your visibility into that this year and next?

Yes, you're right.

We managed and we sort of tracked the 4 cohorts of the Marketplace business, the renewal cohort, the new cohort in AEP, the SEP, special enrollment period pre-May and then the SEP May plus, when the subsidies, the enhanced APTCs were in place.

And so we can track the med cost drivers.

And you're right, because it's a partial year for those new members, you have a more limited risk adjustment opportunity, both in terms of having the acuity reflected in risk adjustment and then just the calendar of having them less than 12 months.

But we expect them to roll into next year with the full year of that opportunity.

There's also some COVID-related costs that were not subject to risk adjustment.

So that has an impact on it as well.

So it's not a typical year.

It was really atypical in a lot of ways.

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

First, a quick follow-up on Kevin's question.

Drew, can you -- I think you had talked about the fact that at least at the high end of the MLR range, you're assuming that exchanges might be kind of breakeven this year?

Can you give us an update there?

And then one thing I noticed on the accruals for medical cost payable.

Looks like your reserves grew pretty significantly in the quarter relative to premiums.

Is that just trying -- Drew, you kind of take over -- taken a little bit more conservative view on kind of how you set that?

Or was there something mechanical there?

Yes.

On the last point, it was a little bit more mechanical.

I mean, clearly, reserve strength is an important factor of running a good business.

But we outlined the 3-day increase sequential as there's pass-through payments that are sitting on our balance sheet that need to get to their ultimate homes.

And then there's some timing of pharmacy invoices and other things, sort of mechanical that's driving that 3-day increase sequentially.

And then on Marketplace, you're right, we priced for margin expansion off of this year.

As Michael said, look, this is a choppy and difficult year in Marketplace with the various COVID impacts, including the pent-up demand in Q2 and the risk adjustment changes that CMS made earlier this year.

But the good news is we maintained our HBR guidance.

We've got a great portfolio, a diversified portfolio across the businesses.

So we were able to withstand those headwinds in 2021 that we expect to flip into tailwinds going into 2022 in the Marketplace business.

And our next question today comes from Randy Giacobbe with Citi -- I'm sorry, Ralph Giacobbe with Citi.

Again, just to Justin's question.

Can you give us a sense of exchange margins and where they are this year, I guess, first?

And then second, you talked about redetermination, both in terms of sort of timing around sort of the PHE.

Just want to understand that a little bit more in terms of state discretion around that, I guess.

And then the last piece of it, can you give us a sense of how you view profitability between Medicaid and HiCCs generally?

So if you do recapture those lives, how we should think about the economics of that?

Yes.

On the margin question, we're below our target.

That's obvious this year, and we need to make progress towards that in 2022 with respect to Marketplace.

And then you're right, there is an opportunity.

We're sort of pegging the redetermination timing.

We mentioned this in that September conference that was webcast in the summertime of 2022.

That's consistent with the CBO's baseline update in July.

But thereafter, as Michael mentioned, it's going to be a state-by-state sort of determination of the duration of that redetermination process, but it's great to have an expanded footprint in Marketplace.

And you're right, we need to sort of price for those members in 2023 to come into the marketplace business and make sure we're -- we've got attractive products for them.

I just want to add to one question in terms of -- I'm not going to try and guess how a state will determine when they're going to do something.

We have enough experience to know that it's not that predictable, and it could be a new director besides that to do it now.

There's just so many different variables, it's just an individual judgment that -- it's not a science that we can hang our hat on.

Our next question today comes from Scott Fidel at Stephens.

I wonder if you can talk a bit about the current staffing pressures in the broader health care market?

And whether that's having any impact on any of your businesses?

And then how that's influencing provider contracting and whether you need to make any adjustments for that?

And then just as a follow-up, just wanted to clarify on Josh's question.

Michael, I think you did say that you think that mid-single-digit revs and EPS is a good placeholder for now.

Just want to -- actually for 2022, just wanted to clarify that -- actually your view on that, yes?

I'll take part and others can jump in.

Yes, that's a good place to start for a placeholder now until we get together in December.

Relative to staffing, yes, we're feeling pressures.

We have some -- we think some solutions that will work for us and we're making work, but I'm not going to, for competitive reasons, disclose it all.

And the other thing it's done is -- we're accelerating our use of AI and we're updating our systems and capabilities so that we're becoming more efficient, which will have the benefit also longer term of contributing to our margin expansion.

And so using some of these techniques that Sarah and others have developed and the team, it's freeing up nurses and others to do higher-value activities and case management.

So we're facing some of the same issues.

Just we're fortunate to have the size, scale and versatility to be able to deal with it.

On the 2022 question, once again, it's probably best to wait for that bridge because Magellan will be a piece of it, the annualization of Circle.

So probably better to wait and see all of the pieces rather than to make a broad estimate of 2022.

And then once again, I want to mention -- I mentioned one of the tailwinds being improvement of Marketplace margins.

In fairness, I want to remind you guys of what we said in past conferences on a couple of the headwinds, Medicaid reversion to the mean on MBR, on HBR as well as pharmacy carve-outs in a couple of our states, which are not insignificant in terms of the revenue and bottom line impact.

So those are all factored into our assessment of modest adjusted EPS growth for next year.

And our next question comes from Lance Wilkes at Bernstein.

Yes.

I had a question for you, Sarah, and it was really related to strategic investment spending as kind of a component of the margin improvement plan.

And I was just interested in maybe the overall implications for CapEx expenditures, for strategic investments like digital and value-based care.

What would be your priorities and the magnitude of investment?

And then on the non-core divestitures, are the benefits of that proceeds, then you can use for something?

Or are the benefits of that getting rid of sort of money losing or lower-margin businesses?

Yes.

Thanks, Lance.

Great question.

So as we think about the value creation plan, as Michael has already touched on, a big piece of it is driving efficiency in our operations.

And so obviously, focused on agility and data and working towards leveraging Artificial Intelligence, automation we've talked a lot about, that's a huge priority and we think there's a lot of low-hanging fruit there.

So making sure that we have the right talent and we have the right tools.

Obviously, Apixio is a piece of that, but we think there are others.

There are pieces of that, that we are developing ourselves.

So that, I think, is a real foundational piece of all of this.

And then being able to reinvest the savings that we get from those efficiencies to continue sort of the flywheel of value creation is also part of the plan.

And then relative to the divestitures, I think the answer varies -- will vary on a case-by-case basis.

And in some cases, that has to do with positioning assets in such a way that we think they will be beneficial to longer-term strategy in different areas, whether that's around provider enablement further domains that we think are important as we move to value-based arrangements or core tools that we think will have a greater benefit to the broader industry.

So it really is on a case-by-case basis.

And as we get through those, our intention would be to provide a broader rationale for all of that decision-making.

I'm going to give you one example on AI and things that I've been talking about to some extent.

And we're rolling this out.

It takes a nurse 18 minutes to go through a chart to preauthorize on average.

We now have AI and systems in place that, that same decision approving it can be done in 1 second.

Think about that.

And think about the fact that we will have a satisfied member who's sitting there.

The doctors who's saying, "My goodness, it was approved before I could finish typing the request."

Now if it's a no, there will still be human intervention because we're not going to have that.

But I think we were talking yesterday in technology.

Probably 2/3 of these cases are approved using the AI.

We've rolled it out to 5 or 6 states now.

So it's well tested.

But that's an example.

So all of a sudden, we now have the ability to take a nurse and move her from the routine -- from the monotonous reading charts to doing things in case managing, and that creates a much more productive environment.

I just used that as an example that makes it real as to how we're overcoming the labor issues.

Our next question today comes from Ricky Goldwasser at Morgan Stanley.

Sir, couple of follow-up questions here.

First one, just for clarification.

Drew, I heard you both say 2022 EPS growth is going to be modest, but then I also heard you say mid-single digits.

So I just wanted to make sure we're thinking about it correctly.

To me, modest is low single digit versus mid.

Secondly, on the PBM and consolidation into a new platform, I'm assuming that, that CVS that you work with in the past.

But I think I also heard Sarah, you're saying that you're going to launch an RFP in 2022.

So just want to clarify that and what would be the time line for that?

And then the new question is just if you can give us examples of the new products that you're introducing in the Marketplace?

I think you've been talking about some exciting new things that you're putting in the market.

If you can give us some details around that?

Ricky, this is Drew.

Let me start with your first question.

The modest adjusted EPS growth next year takes into account everything we know sitting here today.

I think you're referring to the mid-single-digit reference was -- goes back to our June Investor Day, that's on the revenue.

That's sort of long-term organic revenue mid-single digits.

And I think a question was asked earlier that maybe conflated the 2. On the PBM opportunity, Sarah?

Yes.

So as I said, in the short term, we've been focused on consolidating with our existing external vendor.

And then you are correct, we are launching an RFP in 2022 that would award 1/1/2023.

And so the goal there is to make sure that we are staying sharp relative to our external partners and getting the greatest economic benefit where we are leveraging an external partner for our core capability.

Let me jump in because I'm the guy who loves doing these RFPs for PBM services.

Yes, we would launch sometime in 2022 for the -- our contract ends at the end of '23 for 1/1/24, and that's going to be a huge opportunity for an external PBM.

On the new products, I'm going to be a little tight lift on it until it hits the Marketplace.

But I'd say, it takes advantage of our systems capability, the broad and effective networks we have, I think will put us in a competitive place without following the joint race to the bottom.

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

I wanted to follow up on the exchange discussion for 2022.

So obviously, a lot of data has become available in the past couple of days.

It seems like you're consistent with your comments, much more focused on margin, perhaps more so than others in the Marketplace.

I was hoping you could discuss what you're seeing across the market at this stage?

And whether you think there's a conclusion that you reached about the outlook for membership growth as you think about 2022?

Yes, you're right to point out that we tilted a little bit more towards margin than we have in the past in terms of our pricing posture, but we're still well positioned in a number of markets.

And it's -- look, we're just in the AEP now.

It's too tough to call whether we'll grow a little or shrink a little.

But the important thing is to maintain the base and drive margin expansion as we roll out and test some of these new products and provide what we think is an excellent value proposition to the growing population eligible for exchanges, thanks to the special enrollment period and the enhanced advanced premium tax credits.

We did well doing this special enrollment period, very well, in fact.

And I remind you that the advanced tax credits have tended to minimize the pricing advantage that we may have.

And so, on balance, I'll say I want to be cautiously optimistic that we'll be -- that people will be pleased with the results we achieve.

And just a quick related follow-up.

I just wanted to ask about the recent announcement that you launched a virtual-first plant and the exchanges in partnership with Teladoc.

Any sense you can give us on the longer-term strategy there?

And maybe also talk a little bit about the cost difference that provides you versus traditional offerings?

May I ask Kevin to go ahead?

Kevin Counihan, you're on the call.

Kevin, are you there?

We have 2 virtual care products.

First, we have -- in the Marketplace, we have our Ambetter virtual access product that we're piloting in 4 states.

And the second one, which I think you're referring to, is the virtual-first product that we're piloting for employers.

The things that they have in common is 24/7 access for urgent care, prevention, screenings, and care management, $0 cost for virtual care via the Teladoc network and also access to our in-network providers, as needed.

So we're -- there's a lower price point for each of these products, and we're excited about their introduction.

Our next question today comes from Gary Taylor at Cowen.

Just had a couple of questions.

Thinking about the potential headwind from the Medicaid MLR normalizing or returning to mean, Drew.

How do we think about the year-to-date sort of retro state adjustments you called out?

I think beginning of the year was kind of thinking that would be $400 million.

I think, last quarter, it was up to $675 million.

We know some of those are expiring like in Michigan, but do we just -- I guess the conclusion is just that the underlying Medicaid medical expense benefit to you this year is still larger than those retro adjustments?

Yes, those are starting to tail off.

You're right.

It was $675 million in Q2.

At the end of Q3, our full year forecast is $820 million.

And while some of those risk corridors carry into the first half of next calendar year because it coincides with the state's fiscal year, those, we expect largely to sunset the COVID era risk corridors and other mechanisms.

So you're right.

That's been the governor on the underlying stronger utilization performance in Medicaid during the pandemic and coming out of it.

So obviously, that mutes the forward impact.

But we still do think there'll be sort of a reversion to a little bit higher HBR as we look ahead in Medicaid.

I think it's responsible to assume that.

And would you say the same -- not to the same degree, but when we look at year-to-date performance and Medicare Advantage across the industry and some of the deferred care there, that also seems like a potential place where you could see some resetting or normalization of MLR?

Is that something you contemplate in your '22 outlook also?

Not so much in terms of Medicare Advantage.

That's -- if you look at the delta COVID -- the delta COVID impact in the quarter, because the high vaccination rate of seniors, actually the peak in Medicare Advantage was actually below the January, whereas Medicaid and Marketplace were above that January peak.

So I'd look for more steadiness in Medicare Advantage, we expect to grow that business.

And then as I stated, I think at the June Investor Day and on the Q2 call, that becomes a margin expansion opportunity for '23 and '24 as we can impact those bids, looking at those future calendar years.

Yes.

I don't want to (inaudible).

But we don't want to get too far ahead of ourselves.

These are the kinds of things we like to talk about at our Investor Day, and we'll have much more clarity, we would hope, over the next couple of months, we can give you some really good information for your models.

Well, I was going to ask about 2024 guidance next, but I guess I won't because...

Thank you for not asking because I wanted to say the same thing again.

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

I guess, one, I wanted to follow up on Ricky's questions about the PBM RFP.

And I don't know if you would be willing to frame any kind of sense of magnitude around the savings opportunity, the margin expansion opportunity that you see there?

That's question one.

And then I guess, just a very quick follow-up for Drew, would just be the free cash flow performance in the quarter.

It was great, Drew.

I guess do you just see this as kind of a catch-up?

Or can you talk about maybe what's sustainable here?

Or if there's kind of to be a free cash flow reversion below net income that we should look forward to?

Yes.

On the PBM RFP, we've stated a number of times, we've got well over $30 billion in pharmacy spend across our products.

And obviously, that's grown as the business grows.

And you're right to point out, and actually, if you look at our slides from the conference in September, it's certainly one of the value creation opportunities with sort of a stair-step benefit 1/1/24, despite the fact that every year we push on pharmacy costs and do market checks to improve the performance of the business.

So we'll have to wait and go through that process to see the value.

Yes.

And when you look at the combined basis, the scale of our PBM purchases, the drug purchases.

Yes.

And I would just add.

And again, I think we'll go through this in great detail in December.

But when you think about potential savings, it's not just from that RFP process, right?

It's also the fact that we're streamlining in terms of a vendor partner that we are rationalizing non-core platforms, which will result in SG&A savings.

We've got operating model opportunities there that we'll go through, and then a lot of process automation opportunities within the PBM space.

So when you think about the value that the PBM work can drive to the value creation program, it's -- I think it obviously is inclusive of the RFP, but it goes beyond that.

And then on the cash flow statement -- sorry, go ahead.

I wanted to jump in with a quick PBM follow-up and maybe phrase it in a different way.

I say besides cost, what other factors are going to be important to you guys as you think about the process on the RFP?

Well, quality is always at the top of the list.

Execution, the complexity of operating sort of a complex customer such as Centene, I mean, that's pretty critical as well.

And then on the cash -- sorry, I was going to head to the cash flow question.

The cash flow obviously is driven by changes in the balance sheet.

And so there are some things on the balance sheet represented by that 3-day increase in DCP that will be paid out in the future.

So you have to take that into consideration when you take a look at our cash flow statement.

Thank you.

And ladies and gentlemen, this concludes our question-and-answer session.

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

Thank you.

Yes, I have -- a member of the team here has indicated I misspoke when I said we're going to be dropping the Board from 9 to 13.

That number is actually 9 to 11, down from the current 13 , which is a 12 now.

So I wanted to clarify that.

So I thank the people for -- we look forward to our Investor Day in December when we can answer more of the questions with more detail and certainty.

And stay healthy, and have a good quarter.

Thank you.

Thank you, sir.

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.