Centene Corp

NYSE:CNC

Earnings Call Analysis

Strong Q2 Performance and Positive Future Growth

Centene reported an adjusted diluted EPS of $2.42 for Q2 2024, up 15% year-over-year. The marketplace segment performed strongly, and Medicaid faced pressures due to redeterminations. Despite these challenges, consolidated Health Benefits Ratio (HBR) stood at 87.6%. Premium and service revenue projections for the year now range from $141 to $143 billion. The company anticipates adjusted diluted EPS over $6.80 for 2024, supported by improving Medicaid rates and continued marketplace growth, signaling a positive outlook for 2025 and beyond.

Solid Financial Performance Amidst Challenges

Centene reported second-quarter adjusted diluted EPS of $2.42, a 15% increase from the previous year. This result was bolstered by strong execution in their marketplace segment despite pressures from Medicaid due to redeterminations .

Medicaid Redeterminations: A Temporary Setback

Medicaid redeterminations led to an unusually high membership shift, putting pressure on Medicaid rates and resulting in higher medical expenses. The company anticipates that this pressure is temporary and is actively working with state partners to adjust rates accordingly .

Business Diversification and Marketplace Success

The marketplace business, known as Ambetter Health, demonstrated robust performance and margin growth in 2024, capturing in-year membership growth and contributing significantly to the increase in full-year premium and service revenue expectations .

Adjusted Annual Guidance and Revenue Growth

Centene raised its 2024 full-year premium and service revenue guidance by $5 billion, bringing it to a range of $141 billion to $143 billion. The increase was spread across Medicaid, commercial, and Medicare segments .

Operational Efficiency and Cash Flow

Centene reported $2.2 billion in cash flow from operations in Q2 and maintained an adjusted SG&A expense ratio of 8.0%. The company remains positioned to execute a strong capital deployment strategy in the second half of the year .

Medicare and Marketplace Positioning for 2025

Centene plans to focus on improving Medicare margins and expects the Medicare segment to continue its improvement trajectory. Ambetter Health is expected to grow and maintain its strong margins, continuing to provide a natural hedge against Medicaid dynamics .

Strategic Innovations and Program Developments

Centene continues to innovate in its Medicaid segment with initiatives like the HALO program, which supports recovery for substance use disorder patients. This focus on improving health outcomes is aimed at reducing medical costs and driving better results for members and state partners .

Leadership Transitions

Dave Thomas, CEO of Markets and Medicaid, will be leaving later this year, with Nathan Landsbaum set to take on a leadership role. These changes are part of the company’s strategy to fuel its next phase of growth and innovation .

Looking Ahead: Tailwinds and Headwinds

For 2025, Centene expects improvement in Medicaid HBR, growth in marketplace memberships, and no repeat of the prior year's $600 million marketplace risk adjustment benefit. This sets a solid foundation for EPS growth in 2025 and beyond .

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone, and welcome to the Centene Corporation 2024 Second Quarter Financial Results Conference Call.

[Operator Instructions]

Please also note, today's event is being recorded.

At this time, I'd like to turn the floor over to Jen Gilligan, Head of Investor Relations. Ma'am, please go ahead.

[Jennifer Gilligan, executive]

Thank you, Jamie, and good morning, everyone. Thank you for joining us on our second quarter 2024 earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Ken Fasola, Centene's President; and Jon Dinesman, our Head of External Affairs, will also be available as participants during Q&A.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our second quarter 2024 press release, which is available on the company's website under the Investors section.

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 second quarter 2024 press release.

With that, I'd like to turn the call over to our CEO, Sarah London. Sarah?

[Sarah London, executive]

Thank you, Jen, and thanks, everyone, for joining us as we review our second quarter 2024 financial results. This morning, we reported second quarter adjusted diluted EPS of $2.42, a stronger than previously anticipated result. Our earnings power in the period was supported by mixed results in our core business line, with strong execution in marketplace, partially offset by pressure in Medicaid resulting from redeterminations. Medicare continues to perform in line with our expectations.

Taking a step back from the moving pieces of the quarter, our diversified platform continues to enable us to deliver earnings power consistent with our previous expectations as we navigate a dynamic healthcare landscape.

Given the importance of redeterminations to the Q2 results, let's start there. As many of you know and as we have been reporting on for well over a year now, this process has played out at an unprecedented scale and has driven a similarly unprecedented membership shift that we knew would require the rebalancing of rates to account for the acuity of the members we continue to serve on behalf of our state partners.

While we are disappointed with the magnitude of the disconnect between Medicaid rate and acuity that we saw materialized in the quarter, our underlying analysis continues to suggest this is largely due to the mix shift of the population and is therefore a temporary and addressable dynamic and one that we are already actively addressing.

The dialogue we established with each state's regulatory and actuarial counterparts early on in the lead-up to redeterminations have in this phase, allowed us to profile the shifts we are seeing as they emerge and resulted in rates for the second half of the year that are very much a step in the right direction. As you'll hear from Drew, this momentum is evidenced by an uptick in our expectation for the annualized composite rate adjustment.

Ultimately, we still anticipate the Medicaid business will return to a steady state pre-pandemic HBR range once we are fully beyond the redeterminations impact. And each month and each rate cycle gets us closer to a more normalized operating dynamic.

In addition to rightsizing rates, we continue to improve on the underlying Medicaid operations and to innovate as we look to drive health outcomes. One example of this is our new HALO program, which leverages peer-to-peer counseling to support recovery for members diagnosed with a substance use disorder. Innovations like this are well within our span of control and can help reduce medical costs for our state partners, while driving improved outcomes for our members.

As we work through an historic redetermination process, we have not lost sight of the opportunities for long-term growth in Medicaid, which is dependent on our ability to successfully procure and reprocure contracts at a state level. On this front, our business development team and local state teams continue to deliver, with previously discussed wins in critical geographies like Florida, Kansas and Michigan.

We have reviewed the recently announced actions taken by the state to finalize our new Florida contract and feel good about the outcome. We look forward to implementing that contract and to launching our new Arizona LTSS business, with a targeted start date in Q4 this year.

The strength of our local markets has been a key priority under the leadership of Dave Thomas, our CEO of Markets and Medicaid, who will be leaving Centene later this year after 25 years with the organization. Throughout that time, Dave has been influential in the company's success and has helped to build and support a team of exceptional, mission-driven market leaders.

As we position the organization for our next chapter of growth and innovation in Medicaid, we will leverage one of those leaders, as Nathan Landsbaum, who many of you now know from his role in Florida, prepare us to take a leadership role across the markets later this year. Nate has been with the organization for more than 18 years, and brings extensive experience ranging from corporate positions to health plan leadership roles in multiple markets.

I want to thank Dave for the significant contribution he has made to our organization, and we look forward to working with Nate and our market CEOs to harness the power of incumbency and serve more members in more programs.

Turning to marketplace. Centene's Ambetter Health demonstrated once again it is not only the undisputed leader in the individual market, but also serves as a strategic complement to our Medicaid business, providing coverage continuity for members and a natural hedge as we navigate mix and acuity shifts from redeterminations. Ambetter is delivering strong performance in the core business and delivering on margin expansion in 2024.

At the same time, the business has been able to capture in-year membership growth, contributing to this morning's increase in our full year premium and service revenue expectations. And to date, through the redetermination process, has exceeded expectations for serving members transitioning for Medicaid.

From a macro perspective, the marketplace landscape continues to shift positively in our direction. With heightened awareness among consumers and the migration of micro and small commercial groups to the individual market, we see an increasingly accessible addressable market, giving us exciting room to run in this business. By executing well in the first half of 2024, we are harnessing the positive momentum we continue to gain with our members, providers and distribution partners.

As we look to 2025 and scenarios around the enhanced advanced premium tax credits, we believe the benefits of enabling access to affordable healthcare for more than 20 million Americans are clear. Coverage has been a critical driver of economic stability for rural communities across the country, particularly in states like Texas, Florida and Georgia, and mass adoption has finally made a long-envisioned, robust individual marketplace a reality. Rhetoric aside, we believe there is bipartisan alignment around the promise of this chassis, and that Centene is well positioned to build on this foundation to drive growth in 2025 and beyond.

To this end, we continue to track momentum around affordable, customized and portable coverage for individuals in the form of [indiscernible]. While this market is still very early, we believe it represents a compelling alternative to employer-sponsored coverage. And as the thought leader in this space, with the #1 brand in the individual market and without a commercial group business to protect, we see this as fertile, organic hunting ground that can create upside to our story.

Meanwhile, Centene's Medicare platform delivered an on-plan financial performance in the quarter and continues to make significant operational progress. We are, as many of you know, approaching an important milestone for this business, as we prepare for new Medicare Advantage STAR ratings to be unveiled in October. The pending STAR announcement represents a critical step towards our previously established 3-year goal of achieving 85% of our Medicare Advantage membership enrolled in plans rated 3.5 stars or better as published in the fall of 2025. We are pleased with the operational progress that we have made year-to-date and remain on track to deliver steady progress compared to the 19% achieved by last year's efforts, recently updated to 23% by CMS.

Let me give you a sense for what has tangibly improved. At this time, we have good visibility into results related to admin and ops. Consistent with prior updates, in this cycle, we were able to hold on to the gains we achieved last year and build upon them. Our performance continues to improve with the processing of appeals, CTMs and health risk assessments and focused work by our call center and claims teams has driven improvements we would expect to see as part of scoring in October.

On the HEDIS front, the significant increase in member outreach that you heard about in Q3 and Q4 drove improved physician access and successfully closed gaps in care for many of our members. These are important lead indicators for improvement in our HEDIS scores.

We continue to invest in and strengthen these programs as we move through 2024, consistent with our commitment to and focus on quality enterprise-wide. We do not yet have final caps results or cut points, but as we sit here today, we are pleased with the progress against our internal expectations and expect this October 2024 milestone to be a meaningful step to our ultimate goal.

Relative to 2025 Medicare bids, we remain focused on our product strategy of serving lower-income complex seniors and despite a challenging rate environment, I'm proud of the work our team did to integrate a data-driven health equity lens into our supplemental benefits design. We also took the opportunity in this bid cycle to simplify our contractual footprint, all part of a multiyear strategy to build back to a high-quality, high-performing and profitable Medicare business aligned for growth.

As we approach November, we are certainly keeping a close eye on election dynamics at every level and scenario planning for key policy themes across our states and lines of business. As we have said before, at Centene, we focus on policy, not politics, and we operate day in and day out in a politically diverse ecosystem. We have demonstrated success over the past 25 years across multiple Republican and Democratic administrations. This is because we focus on our mission first and thoughtfully partner at both the state and federal level on solutions that work best for each community we serve.

In this role, I've had the honor of meeting with lawmakers across the country, including governors, senators, congressmen and women, state legislators and regulators and leaders of major federal policy committees. And while they have different views on many topics, there is one thing they all want, to improve the health of the communities they serve. This is Centene's mission, and it is a vision we firmly believe has bipartisan support regardless of the electoral outcome in November.

We are now more than halfway through 2024, and we are making good progress moving the organization beyond real but temporary headwinds, including Medicaid redeterminations and a well-documented Medicare Advantage STARs revenue challenge. At the same time, we are still hard at work strengthening the underlying business, modernizing our processes and infrastructure, adding exceptional talent and investing in innovation.

We believe Centene's focus on government-sponsored healthcare positions us very well for profitable growth as we go forward, and we remain confident that we can deliver value to our shareholders by delivering value to our members and keeping them at the center of all that we do. We are pleased to reiterate our outlook for adjusted diluted EPS of greater than $6.80 during a dynamic year and look forward to furthering our progress in 2025 and beyond.

With that, I'll turn it over to Drew.

[Andrew Asher, executive]

Thank you, Sarah. Today, we reported second quarter 2024 results, including $36 billion in premium and service revenue and adjusted diluted earnings per share of $2.42, up 15% from Q2 of 2023. Results in the quarter, as previewed earlier in the week, were consistent with the dynamics we described intra-quarter in the May 29 8-K. The quarter serves as yet another example of the benefits of a diversified enterprise, allowing for varying degrees of performance among the many parts of our business. This Q2 result keeps us on track to deliver adjusted diluted earnings per share in excess of $6.80 in 2024.

Our consolidated HBR was 87.6% for Q2 and 87.3% year-to-date. This positions us to achieve the high end of our previous full year guidance range of around 87.9%. As previewed in the May 8-K, Medicaid medical expense was higher in Q2, largely due to the acuity of membership that remains as redeterminations wrap-up.

You may recall about a year ago, we talked about needing from our state partners: one, acknowledgment; two, action; and three; sufficiency regarding matching rates with acuity. All states have acknowledged the need and intent to match rates and acuity, all but one have taken action. We are still working on the sufficiency with more visibility now that we're largely through redeterminations.

The acuity of the population that remains, the stayers plus the rejoiners, is now more clear to us and our state partners than when we were working through large membership shifts of Q4 2023 and Q1 2024. We continue to have constructive conversations with our state partners on the sufficiency and the timing of rates as we present them with updated data from the latter part of the redetermination process.

Pursuant to these efforts, we now expect the back half of 2024 Medicaid composite rates to be 4% plus, relative to our original forecast of 2% to 2.5%. This 7/1 to 10/1 rate cycle will impact about half of our Medicaid premium. So this will help the trajectory of the HBR in the back half of the year compared to Q2's 92.8%. While we certainly have more work to do on rates in 2024 and 2025, we have no change in our long-term view of the ultimate proper matching of rates and acuity in our Medicaid business.

Meanwhile, our Marketplace business continues to perform well, not just as we wrapped up 2023 risk adjustment with great execution, but also in our 2024 positioning and performance, including a little more growth in 2024 with 4.4 million members at quarter end.

Let me hit the highlights of Tuesday's 8-K. In the past decade, we've gotten pretty good at operating the Marketplace business, including accumulation and submission of data to get paid the right revenue to match the acuity of our marketplace population. Result of that execution, which improved year-over-year, was a better-than-expected result as we wrapped up the edge server process in May and estimated the value of our submissions as we referenced in the May 8-K. This was subsequently corroborated by Wakely data, then ultimately, CMS' final notice published this past Monday. The result was a net favorable pickup expected in our 2024 P&L of approximately $600 million, as outlined in Tuesday's filing, again, great execution in Marketplace.

Our Medicare segment continues to be on track with our expectations for 2024, and we look forward to continue to improve that business over the next few years as STAR scores improve and we get the requisite revenue to drive better performance.

And despite redeterminations and divestitures, this company continues to outperform in premium revenue. You can see that in the year-to-date reported revenue. Accordingly, we increased the 2024 full year premium and service revenue guidance by $5 billion compared to our April 2024 earnings release, approximately $1 billion in Medicaid, $2 billion in commercial and $2 billion in Medicare segment revenue, to a range of $141 billion to $143 billion. That bodes well for the future, exiting 2024 with a higher revenue base upon which to drive EPS growth in 2025 and beyond.

One other guidance update, we now expect over $1.55 billion of investment income in 2024, excluding gains on divestitures. Our adjusted SG&A expense ratio was 8.0% in the second quarter, on track with our full year guidance. Cash flow provided by operations was $2.2 billion in Q2. Unregulated cash on hand at quarter end was $217 million. Consistent with previous comments, we expect the majority of deployable cash to be available during the second half of the year.

In the first half of the year, we deployed $851 million on Centene shares. Our debt to adjusted EBITDA was 2.8x at quarter end. Our medical claims liability at quarter end represented 54 days in claims payable, up 1 day sequentially and up 2 days compared to Q2 of 2023.

The diversified portfolio of Centene performed well as a whole in the first half of 2024. And while we expect some continued pressure on our Medicaid HBR in the second half of the year compared to our original goal, we expect Medicaid HBR improvement relative to Q2, given the second half rate action. Further rate action into 2025 would continue the improvement.

On the topic of 2025, it's much too early to give 2025 guidance, but we can walk you through the tailwinds and headwinds that we believe today relative to 2024. In the category of 2025 tailwinds, we currently forecast, one, HBR improvement in Medicaid as we expect to make continued progress on rates throughout 2025; two, a return to Medicaid growth post redeterminations; three, growth in the overall marketplace market and in our membership; four, the absence of a Medicare PDR in 2025. Recall, we have a $125 million PDR P&L hit embedded in our current 2024 guidance. Five, revenue growth in PDP; six, capital deployment in 2024 annualizing into 2025 and capital deployment in 2025; seven, continued progress on improving operational efficiency and SG&A execution.

2025 headwinds would include: one, the annualization of the first half of 2024 final redetermination impact on 2025 premium revenue; two, we wouldn't expect to repeat the $600 million prior year marketplace risk adjustment benefit; and three, federal reserve rate actions gradually impacting investment income. We will provide more insight as we get through 2024, and we expect to provide formal 2025 guidance at our Investor Day in December.

Looking ahead, we are clearly focused on influencing our state partners to match rates with acuity, improving stars, continuing to position our marketplace products to produce strong margins and we are planning to deliver on our 2024 adjusted diluted EPS guidance of greater than $6.80 and grow adjusted EPS thereafter.

Thank you for your interest in Centene, and we can open it up for questions.

[Operator]

[Operator Instructions]

Our first question today comes from Stephen Baxter from Wells Fargo.

[Stephen Baxter, analyst]

I was hoping that you could tell us what you're expecting for Medicaid MLR in the back half of the year? And any kind of bridging assumptions we should use to get there? And I guess as we're thinking about the magnitude of MLR improvement that you get on a 4% plus composite rate, that would also be something that's helpful to know.

And then if you could give us a sense of for the states that have updated your rates inside that composite rate, where does this leave you in terms of normalized profitability? Is there still more work to do on the second half rate states? Or do you think this brings you back basically closer to in line with your targeted level of profitability?

[Andrew Asher, executive]

Yes. Thanks, Stephen. So I think you could take the -- we guided to effectively the top end -- around the top end of our HBR consolidated range of 87.9% and come up with some estimates. I think you actually did in a report last Tuesday.

To come up with some estimates on where that Medicaid HBR might land, certainly, we expect improvement relative to what we printed in Q2. And if you think about 4% plus in the back half of the year, and we do have half, just about half of our premium revenue in the back half of the year, you can sort of figure out the math of what in isolation that would benefit us from.

And of course, we've got trend built-in. We've got seasonality depending on month-to-month. So those are other factors to consider. But as we've said before, we think this will take into '25 for sure, to sort of get back to equilibrium. We've got 1/1 rates, which we don't currently have visibility on, but that's about 35%. 4/1 is in the zone of 15%, and then another bite at the 7/1 to 10/1 apple in 2025.

So we've got multiple rate cycles to continue to influence here to get back, which we fully expect to sort of get back to that equilibrium of rates in acuity.

[Operator]

Our next question comes from Sarah James.

[Sarah James, analyst]

Can you help us get a sense of what your, like, core stayer book MLR looks like for Medicaid so far this year? So it's the full uptick in the first half '24 versus '23. Just related to what's going on with redetermination and rates, are there other factors in there?

[Sarah London, executive]

Yes. Let me hit this at a high level, and then I think it would be good for Drew to walk through some of the data that underpins our viewpoint on this. But the bottom line, as we both said in our remarks, is that the primary driver of the HBR pressure is the increased acuity of the membership post redeterminations and that mismatch between rates and acuity, which is we are confident is a temporary and fixable dynamic.

As we've said before, there are always pockets of trend that we watch. We called out behavioral health. Obviously, you heard from my remarks that we're very active in terms of developing programs to manage outcomes for that population. And then here and there state-by-state dynamics, if there's a change to the preferred drug list or something like that.

So again, very consistent with what we've called out in the past, I think stuff that we're watching and actively managing, but the predominant driver was really in that acuity shift. And then, Drew, maybe you can talk about how we're able to isolate the underlying cohorts to support our view on that.

[Andrew Asher, executive]

Yes, Sarah, you're right. And Sarah James, you're right. Stayer -- we can isolate stayers, leavers, rejoiners and then the new members. And we can go one step deeper on stayers as we look for, is there a trend here? Or is this really the remaining mix of business that we're left with post redeterminations?

We can actually go into the continuous members. And so when we go into continuous members, which is a subset of the stayers, trend looks pretty stable. And so lifting back up to stayers versus leavers and rejoiners, the spread between stayers and leavers, that has widened, largely, we believe, due to a handful of states that went deeper.

You can see that in our membership. We're a little bit lower than we expected around 13.1 million members. Therefore, they were pushing out more lower utilizers out of Medicaid, and you saw that in the administrative terminations.

And then the other dynamic in one of those cohorts, the rejoiners, that's a growing population for us, which is good ultimately. But obviously, that's tilting towards those that are seeking care. So that's contributing to the higher HBR as well, including, and this is an interesting dynamic, a widening eligibility gap in coverage where we're not getting premium for a number of months, and that's widening. It used to be 70%-plus, had no break in coverage. Now we're under 50% with no break in coverage. And the number of months we're not getting premium for those ultimate rejoiners is impacting the results as well. And that will wash out over the next year, but that's another dynamic that's pushing on the reported HBR.

[Sarah London, executive]

Well, and I would just add, it's a dynamic that we can include in the data that we're sharing with states. And so again, this was a dynamic we've anticipated all along, which is precisely why we took an early and often approach to data sharing. And I think that has served us well throughout the process, but particularly in this quarter as we're able to bring forward the data on these different dynamics. And obviously, that has favorably influenced the second half rates.

[Operator]

Our next question comes from Justin Lake from Wolfe Research.

[Justin Lake, analyst]

Couple of questions. First, on MLRs. I'm just wondering if you might update us on your MLRs by segment versus the original guidance that's going to get you to the PDP of 7.9, maybe even for out some second half MLR seasonality between 3Q and 4Q?

And then on Part D, there's a lot of changes going on here. This has been a pretty big part of your book. I'm curious if you could help us understand how you think we should look at this year-over-year. It looks like it should be a big increase in premium given the federal subsidy is going to increase significantly.

Is this profitable for you in 2024? How do you think about the risk/reward of how investors should approach it in 2025 given all the changes there?

[Sarah London, executive]

Yes. Maybe let me hit PDP, and then Drew can talk about seasonality of HBR. We're obviously not at a stage we can give specific 2025 guidance but you heard from -- the PDP revenue is that 2025 tailwind. I think the team has taken a really thoughtful approach to the bid process, leveraging frankly, decades of experience and data that we have and expect to see a first set of data from CMS next week.

But whether volume aesthetic or down, premium will increase, as you said, just in with the changes from the IRA. And as we've said before, we view this as a product line that has to be able to stand alone from a profitability standpoint.

[Andrew Asher, executive]

Yes. So on the MLR by segment, I think we do -- we're pretty disclosive. We give you guys a lot of disclosure, including the actual by segment, not all our peers do that. Hopefully, you enjoy seeing that detail. But we're not going to give detailed guidance by segment, though the 87.9%, I think you could probably do some math and piece together what we've told you historically to figure out the zone of each of those.

And once again, it's a diversified portfolio. That's how we manage the business. The seasonality is such that typically commercially, you'd see tick up throughout the year. Obviously, we had the benefit in Q2 that kept it sort of flat to Q1. And then deductible wear off in the commercial business, you'd see that tick up. So that's one thing to take into account.

And then just one more follow-up comment on Part D or PDP. I said multiple times Q1 at the conference in March, just trying to explain the fact that we expected the direct subsidy to go up over $100, on top of the $29 direct subsidy this year. So obviously, that goes into the yield -- largely goes into the yield.

So as Sarah said that will be a pretty big step-up. In premium yield, we'll have to see where the membership shakes out. We'll know a little bit more next Monday about where we stand, but we won't know competitive positioning until the landscape files come out in September.

[Operator]

Our next question comes from Josh Raskin from Nephron Research.

[Joshua Raskin, analyst]

Why do you think the risk adjuster on the exchange has developed so much better than you expected the payable was $1.3 billion less than you thought? And what are the changing dynamics there? And I guess more importantly, I appreciate the headwinds, tailwinds for 2025. But if you think about sort of that $0.80 hurdle that you've got to get over, and I know you get back some from the PDR, but as you think about the consensus sitting at [ 7.53% ], I'd just be curious to get your perspectives on is that directionally in the right spot? Or should we be thinking about something different?

[Andrew Asher, executive]

Yes, on the risk adjustment. So at year-end, we're sitting there every year trying to estimate not just where we sit for the current, let's say, 2023, at 12/31/23, not just what we believe the acuity of the population is in marketplace at that point in time, we also have to estimate what we're going to get done over the next 4 months, and then get submitted into the edge server. And that's all the data, acuity data, claims run out, encounter data from sometimes providers, sometimes vendors. And so a lot of data that we've got to accumulate and execute on and get that into the edge server.

So there are estimates that go into that year-end reserve. We've got some data from Wakely throughout the year to know at least, at that point, the relativity. But I'd say we just executed really strong. We get better every year at that. We have to estimate the relativity. It's a zero-sum game in the industry. So you're estimating what other people are going to do as well.

We try to be conservative but realistic with assumptions since it is a zero-sum game. And while I would expect maybe a little bit of favorability, because we don't always book to a 50-50 proposition, this was good news. And I would thank the -- our teams here for really strong execution.

On consensus, yes, we're not going to opine on consensus or give guidance this early. Hopefully, the headwinds and tailwinds helped. You could sort of take some of that color on the execution part of risk adjustment and getting paid the appropriate amounts for the acuity of our population and marketplace as you think through rolling from year to year. And hopefully, that's pretty good color for now.

[Operator]

Our next question comes from A.J. Rice from UBS.

[Albert Rice, analyst]

I guess I have 2 questions. One, on the public exchange trends. I think if you ex out -- tells a little bit on what your assumptions are in the back half of the year. But if you ex out the risk adjustment true-up, I know your official guidance was for MLR to be in the 78.5% to 79.5% range this year on the public exchanges.

It sounds like maybe you're pretty close to that. I want to just confirm that. And you didn't call that out as any headwind or tailwind. So whatever you're at on public exchange margin this year, you seem to think you can carry that ex the risk adjustor true-up difference for next year. Is that the way to think about it?

And then maybe just on Medicaid real quick. The rate updates you're seeing, there's been some discussion about how long state actuaries have to look back, and they look back to full 12 months. Or do they make adjustments based on a shorter period of time?

Are you assuming that the July 1 update this year, then the October, then the January and then next year's July that things get progressively better? Each one of those updates on average as they get the information? Or are you assuming they have enough information? Those rate adjustments are all about the same.

[Sarah London, executive]

Yes. Thanks, A.J. You're right. There is sort of a natural look back in the process on Medicaid rates. But I think if you look at what we've seen, frankly, in the rate updates that we've had, starting from the beginning of redeterminations, it would have been easy in a normal course for the state teams to say we're going to wait until we see a full normal complement of data.

And so we saw early moves. I think we're seeing a continuation of that trend with maybe even a little bit more favorability relative to the speed of reaction to what we saw in Q2 materializing in the back half rates. And so from here, really, what we're saying is that we have even more supporting data as we go forward.

And so the active dialogue with the states, and I think our positioning relative to making sure that we have full sufficiency in terms of matching rate and acuity gets better and better each bite at the apple as we go through.

So I think that accelerating momentum is something we feel. I think you're seeing it in the rates, and we would expect and hope to continue that as we get through 1/1. And then if there's additional work we need to do for second half of next year.

And then Drew, you may want to talk about exchange performance?

[Andrew Asher, executive]

Yes. So A.J., you're right. We originally guided to midpoint of 79%. On the full commercial book, that's now $32.5 billion of revenue with the updated guidance. So despite sort of growing -- yes, we're generally on track, excluding the $600 million benefit. So that's good.

And as we think about 2024 risk adjustment, I mean we're always trying to be prudent with how we approach that. So that's also something to think about. But really pleased with the execution marketplace team, not just the 2023 benefit sitting in Q2, but the 2024 year as well, and that incurred year is tracking nicely.

[Operator]

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

[Adam Ron, analyst]

This is Adam Ron on for Kevin. One of your peers appear to be saying they're insulated from some of these Medicaid pressures due to having been pretty deep into risk corridors. And I believe that's something you've also called out as a benefit at some point.

So could you help size what the gross amount before these corridors in trend that you're seeing that's higher versus what you thought and how it compares to the 4% composite rate you mentioned? And then if I could also ask one quick clarification. You mentioned in Medicare now the business submitted, you'd be optimizing your footprint. So wondering if that includes market exits? And if you could help size the membership in those markets?

[Sarah London, executive]

Yes. So relative to Medicare, we -- I think the team has done a really good job in terms of thoughtfully defining the 25 days consistent with the long-term strategy even a challenging late year but also as I mentioned, being thoughtful about how to streamline that book and further align it with our Medicaid footprint because that's where the puck is going. And so as a result of that, you will see us exit a handful of states with that longer-term strategy in mind.

[Andrew Asher, executive]

Yes. And risk corridor is a sort of a part of our business. They come in a few different forms, whether it's a true risk corridor, a minimum MLR, profit sharing, depending on the state. I would say those peak during COVID, the COVID era, and now are more in a steady state.

And just to give you a number, if you look at our balance sheet, you wouldn't be able to pick it out of the balance sheet necessarily. But for Medicaid specifically, we've got $2.3 billion as a payable on our balance sheet at Q2. That's split between the line items, return to premium payable and current liabilities and part of it is in other long-term liabilities, but that spans multiple years as there's run outs, there's years, sometimes it takes years for states to ultimately go through the machinations to collect and retrieve that.

[Operator]

Our next question comes from Scott Fidel from Stephens.

[Scott Fidel, analyst]

Just wanted to first just ask on the exchange margins. Obviously, given a few different moving pieces here with the risk adjuster, how would you just sort of suggest that we think about sort of what's embedded in guidance now for your pretax margin for the marketplace when thinking against that 5% and up to 7.5% long-term target?

And then just separately, it would be helpful if -- obviously, there's been a lot of moving pieces to operating cash flow year-to-date across the industry and for Centene as well. I know there's been a lot of sort of timing dynamics with certain states with Medicaid. So Drew, maybe if you had sort of some visibility that you could give us into your expectations for full year operating cash flow, that would be helpful as well.

[Andrew Asher, executive]

Yes. Cash flows, it's not really one of our guidance elements because, to your point, exactly in this business, they can swing from the last day of the quarter to the first day of the next quarter based upon when states want to pay us. But I think you can look at the first half of the year, and we were negative $400 million or so in Q1. We've got $2.2 billion positive in Q2. The first half of the year, you can look at that. That's a reasonable depiction. But you're right, it's sort of a fool's errand to predict cash flow quarter-to-quarter because of the government programs dynamic.

What's important, though, is getting cash out of the subsidiaries and dividends up to the subs and then capital deployment. So we're excited about capital deployment in the back half of the year. That's consistent with what we've said here before. And even in the first half of the year, we're able to do $850 million of share repurchase.

On the margins on marketplace, or let's stick to Commercial segment, I think going back to the discussion that we just had with A.J., sort of the -- excluding the $600 million being on track for what we said originally well into that 5% to 7.5% pretax margin. And then obviously, the $600 million would be on top of that.

So just good sound performance and excited about our product positioning for next year. We'll learn more and more as we get further into '24 about our positioning, and expect the market to grow. And the 10 years of experience of the Marketplace team and all their supporting shared service partners across this entire company, we expect to have another good year in Marketplace in '25.

[Operator]

Our next question comes from David Windley from Jefferies.

[David Windley, analyst]

Your G&A ratio was favorable in the quarter, some benefit from the exchange risk adjustment that you called out, but even with that would have been below your full year range. Wondering what other benefits you might have seen if those are sustainable? And if you might direct us to a subrange in the range for the full year.

[Andrew Asher, executive]

Yes, David, we're -- it was right on track in the quarter, the SG&A ratio. And I'd say we're still right on track for that 8.4 to 9.0 range that we previously provided. So that midpoint being 8.7. So it typically ramps up during the year. Q4 is always the highest with all the open enrollment cost.

You're right, we were aided a little bit in the quarter by having more revenue in the denominator because of the settlement from 2023 risk adjustment in marketplace. So I'd say we're right on track and pleased with the execution. And -- but there's more to come. There's more we can do.

I've said before, we got to take a couple of hundred basis points of SG&A out of our Medicare business. And our leadership in Medicare is working on that, in conjunction with the rest of the company. And just multiyear initiatives that we set out to achieve when we launched the original value creation plan, and now that's sort of part of the fiber of the company. So we're not satisfied with that -- with what we're expecting to achieve this year in SG&A, but we're on track. So that's good. We need to do more, and we will over the next few years.

[Operator]

Our next question comes from Lance Wilkes from Bernstein.

[Lance Wilkes, analyst]

Great. I wanted to ask about the outlook for Medicaid growth. And in particular, I wanted to get kind of an update on pipeline. What you're seeing as far as where you're being more successful and less successful RFP scoring? And what your rejoiner outlook is?

And maybe as just a little clarification. Over in the Part D book, can you also just give us a little background and description of the demographics of that book? Kind of what's the age cohorts you've got going through there? And how much is LIS, which I imagine is most? But if you could describe that as well, that would be helpful.

[Sarah London, executive]

Yes. Thanks, Lance. Let me hit RFPs. I can give you a little bit of an update on the rejoiners, maybe some of the numbers that are underneath what Drew was talking about in terms of trend. But obviously, RFP results, we put some great results on the board in the last quarter, including Florida, where we're very pleased to maintain our statewide presence and expect enrollment changes to the new contract to be very stable as well as Michigan and Kansas.

I think this performance really bodes well as we look ahead to what we think are really exciting organic growth opportunities for Medicaid. And we've talked about these cohorts before, but think about new states, new markets, new programs and then various expansion opportunities.

And I think we've also demonstrated our ability in the last 24 months to capture these opportunities. Oklahoma is a new state. Delaware was a new market for Centene. Arizona, a new long-term care opportunity for us, and then recent expansion opportunities in North Carolina, both Medicaid expansion and the tailored plan.

So I think we're really confident in our ability to leverage that local approach as a differentiator, the power of the experience that this organization has and our local teams have and the access that we have by virtue of our incumbency to really understand the direction that the states want to take the programs, the priorities of the state leader and again, I think a unique ability to work with each community to design solutions that work for the health of those members. And I think we see that time and time again comes out in the RFP results.

So feeling really good about the pipeline. We think the pipeline is active and continues to activate as we get through, obviously, the pandemic and now through redeterminations, there's even more bandwidth for the state Medicaid offices. So a lot of interesting opportunities there.

Relative to rejoiners, again, Drew touched on this dynamic and how that's sort of playing through all of the numbers. But the rejoiner rate continues to tick up. It's now, for most mature states, in the low 30%. And again, he shared that, that started with the vast majority of those members having no gap in coverage. We're now down to less than 50% of those having continuous coverage, which is creating that premium spread.

And then, Drew, do you want to talk about demographics for PDP?

[Andrew Asher, executive]

Yes. PDP, we're #1 position in 2024. That's a strategic business for us. I think we've said this before, but we've got about $50 billion of pharmacy spend across the company that we control. And about half of that is driven by the PDP business, and we'll see how that shifts in '25 and beyond.

But that means we've got a leading position in auto-assigns. So we've got 3 products, a low premium product and then a higher premium product. And we've been thoughtful about, as I mentioned in the Q1 call, all of the changes that are coming for the IRA, the second year of the Inflation Reduction Act for next year.

And to the extent if you want, we can slice and dice data in a number of ways. We can get with you afterwards for any of that demographic or the buckets of the actual membership data.

[Operator]

Our next question comes from Andrew Mok from Barclays.

[Andrew Mok, analyst]

Just wanted to make sure I follow the Medicaid margin progression from here. It sounds like you're saying this is peak Medicaid pressure this quarter at 92.8% MLR. And when I pair that with an SG&A of, say, 7% or so, that suggests Medicaid is running close to 0% margin right now.

Then you're getting 4% rate on half of your book in the second half. So that should put you closer to 2% margin at year-end, with the balance recovered in 2025. Is that the right way to think about the margin path on the Medicaid business?

[Andrew Asher, executive]

I think, certainly, we expect the peak at 92.8% to be Q2. And then you'd have to allocate our SG&A out, which is probably lower than that on Medicaid. It's lower. We've got -- you have to remember our commercial business is pretty heavy with distribution and broker costs. I mean that's embedded in the cost of goods sold of the products that we price. So you have to think about the distribution of our business.

Medicare is well above Medicaid as well because there's distribution costs there as well. So think about that when you look at our aggregate SG&A in the high 7s. So yes, we expect to do better in the back half of the year as we continue to execute in Medicaid and get that 4%-plus rate impact on about half of our revenue and then carry that into '25 with more work to do.

[Operator]

Our next question comes from Michael Ha from Baird.

[Hua Ha, analyst]

Just a quick one, and then a real question. So one of your peers called out negative retro rate adjustment from California. Just curious how much does that impact your second quarter Medicaid MLR? And then the real question, on MA star ratings, it sounds like you have more complete program data and a stronger sense on how you're progressing.

So with all the information, you have an admin of [ curious ] build items sound strong. But how much of a swing factor do you expect to have some toughness would still be from now to October? And how much actual visibility right now do you actually have tax resumption? Any early thoughts on potential top line update, no surprise that you expected there?

[Sarah London, executive]

Yes, thanks for the question. So on STARs, as you heard, bottom line is we're very pleased with the progress and the momentum we're seeing internally. We are tracking year-over-year improvements in each of the key chapters.

Relative to the results in October, we don't yet have those final CAP scores and obviously don't have cut points yet. So there's a range in our projection. But we feel good about that entire range and are tracking very nicely with internal expectations. And as I said, expect a meaningful step-up in the results in October.

And all of this is really the result of the continued work by the team, our enterprise-wide governance process, awareness and activation across the organization, more different line alignment, the quality is a top priority, and all of the investments that you've heard us talk about along the way and things like member outreach call centers.

We've organized differently around provider partnerships. We've done a lot of work under the hood relative to digital data and efforts to make our member onboarding experience best-in-class. And so that also then creates the visibility in terms of momentum in 2024.

So think about the fact we're halfway through 2024 dates of service that will drive the 2025 results and feel good about what we're seeing there. It's important to note as well that this work is accruing not just the stars improvement, but the quality score improvement in our other lines of business.

And in Medicaid, in particular, quality scores are really important factors. We think about RFP success and how we are viewed by the state in terms of being able to deliver value to them and to members.

So all in, we feel really good about the fact that we will be able to deliver sustainable programmatic improvement, not just in stars, but in quality overall as we go forward.

[Andrew Asher, executive]

Yes. And then on your question, first, let me make sure I was crystal clear on SG&A in the last question. Our current guidance is 8.4% to 9%, so call that the high 8s. And then once again, Medicare and Marketplace or Commercial as a whole are sort of into the double digits in terms of -- think about that as in terms of the relativity of SG&A as you think about Medicaid.

And then, yes, we operate in the same state as what was referred to yesterday. At our size, there's pluses and minuses in every quarter. So we didn't feel the need to call that out.

[Operator]

Our next question comes from Ryan Langston from Cowen.

[Ryan Langston, analyst]

Appreciate the headwinds and tailwinds for 2025. I don't think I heard anything on Medicare Advantage, unless I missed it. I would assume the priority would be to have some margin improvement year-on-year. But can you maybe just refresh us on your view on that versus, say, growth in enrollment into 2025, even if it's just broadly or directionally?

[Andrew Asher, executive]

Yes. We've said before, we expect to shrink in 2025. As we think about what business is going to serve this company well in the long run, we think about the convergence of Medicaid and Medicare with the duals and [indiscernible] opportunities.

So said a couple of times publicly, $14 million, $15 million, $16 million, somewhere in that zone of revenue for 2025. And then I did mention in the tailwinds, the fact that the PDR that we're booking this year is actually half of the PDR we booked last year, and then we don't expect to have a PDR booked into the 2025 P&L for '26.

So first, we've got to chip away at the degree of run rate negative margin and push towards breakeven, and then we can talk about what the margin opportunity is in Medicare. So mathematically, it is a tailwind, or we expect it to be a tailwind. And excited about the Stars progress that Sarah referred to, and where that's going to lead us over a multiyear view.

[Operator]

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

[George Hill, analyst]

Two quick ones for me, if you don't mind. I guess, Drew, on the exchange business, you mentioned you're well into 7.5% long-term margin. I guess, is that the sustainable run rate? Or is it prudent to kind of price for the midpoint in 2025? And then my follow-up would be is there's a lot of changes in Part D for 2025. Are you guys making any significant changes to the Part D product? And really what I'm most focused on is how you guys are thinking about pharmacy networks?

[Sarah London, executive]

Yes. On the Marketplace side, maybe I'll just jump in. I think what we've said is we're well into the 5% to 7.5% range. And as we think about positioning for 2025, we do expect to grow. We expect the overall market to grow, but we have positioned for margin in 2025, and a view that the marketplace product can continue to deliver strong profitable growth.

[Andrew Asher, executive]

Yes. Then on PDP, you can go pull the Q1 transcript went really deep there, but let me hit the highlights. Obviously, we as payers are thinking about the underwriting of the catastrophic phase going from 20% to 60%. These are all IRA changes, the member out-of-pocket going down, and therefore, it's hit earlier, thinking about manufacturer behavior, thinking about the MPPP, the member -- effectively the member smooth and cost share program. And we're always thinking about how to optimize network and balance access and cost of goods sold. So that continues as we prepare for 2025.

[Operator]

And ladies and gentlemen, at this time, we'll conclude our question-and-answer session. I'd like to turn the floor back over to Sarah London for closing remarks.

[Sarah London, executive]

Thank you. Thanks, everyone, for the interest this morning and the great questions. As we wrap up the call, I really just want to emphasize our excitement around the opportunities that lay ahead for this business. We are, as an organization, making significant progress strengthening and modernizing the enterprise, and we feel really good about the performance of the core business.

As a leadership team, we're also really energized by the markets we serve and the room we have to grow profitably as we go forward. So appreciate, again, the time this morning and your interest in Centene, and look forward to future updates.

[Operator]

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.