Good day, and welcome to the Centene Corporation Third Quarter Earnings Release. All participants will be in listen-only mode. Please note, today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Finance and Investor Relations. Please go ahead.

Thank you, Rocco and good morning, everyone. Thank you for joining us on our third quarter 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, will also be available as a participant 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 Centene's most recent Form 10-K filed on February 21, 2023, and other public SEC filings. 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 2023 press release, which is available on the company's website under the Investors section. The company is unable to provide a reconciliation of certain 2024 measures to the corresponding GAAP measures without unreasonable efforts due to the difficulty of predicting the timing and amounts of various items within a reasonable range. Finally, we would like to highlight our upcoming Investor Day scheduled for December 12th in New York City. This event will also be available via webcast. With that, I would like to turn the call over to our CEO, Sarah London, Sarah.

Thank you, Jen and thanks everyone for joining us. This morning we reported very strong third quarter 2023 results including adjusted EPS of $2, outperforming our internal expectations by approximately $0.20. Strong fundamentals and excellent marketplace growth and performance contributed to the strength in the quarter, as well as our improved outlook for 2023. We now expect full year 2023 adjusted earnings per share of at least $6.60, representing over 14% year-over-year growth. With my time this morning I'll hit on key focus areas including Medicaid redeterminations, upcoming RFPs, marketplace performance, and recent Medicare Advantage Stars results, and then provide a brief update on the operational progress we have made over the last few months. Then I'll turn it over to Drew to provide details on the quarter, an additional commentary relative to our increased financial guidance for 2023. Let's start with Medicaid. We are now over 40%, or approximately 1,000,000 members through redeterminations and we continue to track in line with our expectations for membership and acuity changes as well as our assumed sloping of overall timing. As we closely monitor Medicaid membership transitions, rejoining our data remains instructive as we think about the net membership impact of redeterminations and coverage continuity. We are now seeing April through August cohorts consistently experiencing rejoining rates in the mid 20% range. Importantly, the 90-day grace period in most states means that the majority of these members have no break in coverage as they return to the Medicaid program. CMS has obviously been playing an important role with respect to the oversight of the Medicaid redeterminations process, including recent intervention to pause redeterminations in certain states as well as the effort to reinstate children and individuals who are incorrectly dropped from coverage due to system issues. We are seeing some of the impact of these reinstatements come through in our rejoiner data and continue to monitor the impact these changes will have on the timing of expected membership shifts over the coming months. That said, we have not changed our view that the ultimate impact of redeterminations would be 2.3 million to 2.4 million members. And based on our view of recent CMS actions and our ongoing conversations with state partners, we still expect the overwhelming majority of redeterminations to be completed by May of 2024. We continue to track in line with our expected 200,000 to 300,000 members moving from Medicaid into the marketplace as a result of the redetermination process. We have partnered with an increasing number of states to make auto enrollment a more seamless process for Medicaid members losing eligibility and are pleased to be able to leverage our market leading and better platform to maximize coverage continuity for members of the communities we serve. Our rate discussions continue to be constructive as well. The consistent trend we saw in 7/01 and 10/01 cohorts has continued so far as the first wave of 1/1/24 draft rates have been released. We are working through an incomplete 401 retro rate as Drew will discuss further but continue to have constructive discussions there as well. We appreciate the thoughtful and data-based collaboration with our state partners as they acknowledge the importance of matching rates with acuity in order to maintain the strength and effectiveness of each Medicaid program. Overall, we are encouraged by the progress that states are making with respect to Medicaid redeterminations and pleased to be moving through the process with operational stability and results that are consistent with our modeling. Turning to growth, in North Carolina we are preparing for Medicaid expansion that will go live in December. North Carolina is the 41st state to expand Medicaid and by passing this legislation with a joint leadership of a Democratic governor and a Republican supermajority legislature, they demonstrate the increasing bipartisan support for this program. We expect this trend to continue as states look to provide improved access to quality care for their citizens. In RFP news, our Sunshine Health team officially submitted our response to the Florida ITN this week. I want to give a nod to the Sunshine Health team, to our exceptional business development team, and the many teammates who contributed to this effort. I'm proud of the work they did to prepare this response and proud of the long-standing partnership we have established in serving the communities of Florida. In general, we are seeing an increase in RFP activity and momentum around states considering the addition of new populations into a managed care model. Notably, the recently released Georgia RFP includes for the first time the state's aged, blind, and disabled population. As we look ahead to our procurement pipeline, we feel good about the opportunity to leverage our incumbent position and our differentiated depth of expertise in managing complex populations to defend and grow our Medicaid footprint. In support of this work, I'm happy to share that we have officially appointed Wade Rakes as Centene's Chief Growth Officer. Wade will take on this responsibility in addition to continuing to serve as the CEO of our Peach State Health Plan as he leads our incredibly strong Georgia teams through their procurement, remaining at the helm through the conclusion of that process. Wade will bring valuable experience as both a local and enterprise leader for Centene as he helps to drive execution around our growth strategy. Turning to Marketplace, our Ambetter franchise continues to outperform this year, outpacing our growth expectations in the quarter and reaching just under 3.7 million members as of September 30th. This means added earnings power for the remainder of 2023 as well as the potential earnings tailwind for 2024 as our retained special enrollment period members become more profitable in their sophomore year with Ambetter. Ambetter's unique individual market density, consistent performance, and market-leading brand recognition have enabled us to build attractive and efficient networks and to foster productive relationships with a vast array of distribution partners. This has driven our impressive growth in 2023 and positions us well to continue to serve this large and expanding addressable market. We'll have an opportunity to dive more deeply into the future growth drivers of this business during our Investor Day in December and remain excited by the growth and earnings potential of the individual market in both the short-term and the long-term. Finally, Medicare. This is an important time of year for our Medicare Advantage business as 2024 enrollment begins to take shape through the annual enrollment period which kicked off on October 15th. As you'll recall, the 2024 bid cycle represents a pivot point for our Medicare Advantage products as we reposition our offerings to better serve low-income and complex lives. Touching on the important topic of stars, we received the final Star rating results along with the rest of the industry two weeks ago. The final Stars results for this cycle were consistent with our July and September commentary, where we expected two thirds of our membership associated with contracts showing year-over-year raw score improvement. That result was approximately 73%. We also said we are expecting roughly 90% of our membership to be associated with contracts rated 3 stars or higher, and that final result was 87%. While we delivered Stars results in line with our Q2 expectations, these results certainly do not reflect the ambition of this organization. They do, however, represent an important step on our journey to improve quality scores and restore Medicare Advantage earnings power. Relative to our ongoing work to strengthen Medicare execution overall, we continue to see improvement in our operating metrics which are important indicators for member experience and ultimately Star scores. Our first call resolution has improved year-over-year and quarter-over-quarter as have our customer satisfaction scores. We are still tracking a roughly 40% reduction in member complaints year-over-year and consistently delivering service levels in the high 90%. And we continue to build out our network including adding 6100 new providers in the quarter and moving more than 12,000 members into new value-based agreements. Medicare Advantage remains an integral part of our portfolio of businesses, strategically aligned with our Medicaid and marketplace platforms and a long-term driver of both earnings and growth. We remain committed to and focused on the work necessary to improve overall performance and quality on behalf of our Medicare members. Before I turn it over to Drew, let me touch briefly on our value creation work. We continue to make progress against the many initiatives that will focus and fortify our enterprise to support robust long-term growth. As our first wave of operational redesign work matures, we are evolving our focus for those initiatives to optimizing and automating workflows as we look to support more efficient and effective service for our members and providers. For the initial installations of our new telephony system, we are now layering on additional features that are driving month-over-month improvement in service. Over the last few months within our now centralized utilization management teams, we have been focused on reducing provider abrasion by expanding the use of our proprietary tool that automates the approval of authorizations for clinically appropriate procedures using AI technology we developed in collaboration with Apixio. Speaking of technology, I'm particularly excited about the data work we have accelerated over the last few quarters as we look to aggressively build out an integrated data fabric across Centene to support our long-term technology strategy. One of the benefits of taking this work on now is that we can leverage the most modern technology and design our infrastructure to account for the ways in which we foresee both traditional AI and generative AI being deployed in our environments to automate administrative support, more seamless provider collaboration, and optimize clinical insights that will transform our member’s health journeys across lines of business. One quick milestone from this work, over the last three quarters we have significantly increased the number of digital clinical sources flowing into our Clinical Data Hub where we hold a longitudinal health record for our members. The expansion of clinical data from digital sources is expected to reduce the overall cost and improve the accuracy and timeliness of information we can use to solve for gaps in care, understand member risk and acuity, and support predictive modeling for care management interventions. There are a number of other operational and digital initiatives in flight across our value creation portfolio, and we look forward to providing updates and proof points for those as we move into and through 2024. But it is important to note that increasingly this work is carrying momentum, not because of the Value Creation Score Card but because it is simply part of the disciplined operating DNA we are building across the company. From a portfolio review standpoint, we were pleased to reach a definitive agreement to divest Circle Health earlier this quarter. Circle is an excellent asset with a strong management team and we took our time to find the right partner who will continue to support the good work Circle is doing to serve communities in the UK. We continue to expect this deal to close in Q1 of next year and to be $0.03 to $0.04 accretive to 2024. There are a few remaining assets we continue to evaluate and reposition, but we are now in the final innings of this work and expect that as we get to mid-2024 we will be focused on building around our solid strategic and streamlined core business. Finally, I want to touch on our PBM migration, given its importance to our 2024 financial targets but more importantly, given the value we expect it will drive for our customers and members. The teams have put in an enormous amount of work over the last few months and continue to make great progress against our key milestones. In fact, earlier this month we got to see an early but important proof point of how well these teams are working together on behalf of our customers due to a 10/01 migration of one of our health plans from a legacy platform over to EFI. Thanks to thoughtful planning and testing ahead of time and strong collaboration and communication during the cutover, this was a very successful transition and we believe it sends a great signal about the health of this project as we move into Q4. Overall, Centene continues to generate positive momentum. We are making important strides operationally, fortifying the foundation of the business, and increasingly leveraging our size and scale to better serve our customers. Strategically, as you've seen through our divestitures, we have sharpened the focus of the enterprise on our three core business lines and continue to work hard to preserve the unique innovation engine of our local health plans. These advancements, along with our 2023 outperformance give us confidence that we will exceed our 2024 earnings goal of $6.60 and continue to demonstrate improved member and provider experiences. With that I'll turn it over to Drew.

Thank you, Sarah. Today we reported third quarter 2023 results of $35 billion in premium and service revenue and adjusted diluted earnings per share of $2, up over 50% from $1.30 in Q3 of 2022. This represents a $0.20 beat to our internal forecast that we tried to recalibrate you to in early September. Our Q3 consolidated HBR was 87%, a little bit better than our expectation driven by the commercial segment. This keeps us right on track with our full year HBR guidance range. Medicaid at 90.7% was fundamentally on track other than one of our states providing a draft and incomplete rate update retroactive to 04/01/2023. This was worth about 40 basis points in the quarter relative to our expectations. Other than that unique item, which we would expect to be a timing matter with a favorable future resolution, we continue to be on track in Medicaid, including relative to our acuity estimates that we've been tracking since the recommencement of redeterminations on April 01, 2023. As you can see in the membership tables, we are down 1.1 million Medicaid members since 03/31/2023 right on track with our forecast that includes redetermination estimates. That 1.1 million includes Iowa reshuffling of about 83,000 members effective July 01st as expected. To update a statistic we previously provided, 13 of our 14 states in the 7/01 to 10/01 cohort have included acuity adjustments in our rates. One is still outstanding and so far seven of our 01/01/2024 states have provided draft rates that include acuity adjustments overall, consistent with our estimates. Our view of 2024 Medicaid performance is unchanged other than revenue looks to be a little stronger than the $77 billion we outlined on our Q1 call. At Investor Day we will provide more detail on 2024 guidance. Medicare was on track at 82.2%, an improvement of 170 basis points from Q3 of 2022. Similarly, our view of Medicare 2024 performance is consistent with what we shared previously. And as you finish modeling 2023, make sure you factor in the Q4 2023 Medicare HBR step up, including the previously discussed premium deficiency reserve. The commercial HBR at 78.9% in Q3 continues to be strong and better than expected. Simultaneously, we are also capturing growth from both redeterminations and the special enrollment period. We said on a Q2 call that we expected to hit 3.6 million members this year, and we accomplished that as of the end of Q3. You may recall that last quarter, we grew 200,000 members. This quarter, we grew 386,000 members. This continued growth and HBR performance in 2023 sets us up well to achieve our previously stated goal of growing marketplace by at least $3 billion of revenue in 2024 while also expanding margin. Moving to other P&L and balance sheet items, our adjusted SG&A expense ratio was 8.6% in the third quarter compared to 8.3% last year, consistent with our mix of business. Cash flow provided by operations was $1 billion in the third quarter, primarily driven by net earnings. Our domestic unregulated and unrestricted cash on hand at quarter end was $231 million. During the third quarter, we repurchased 11.6 million shares of our common stock for $773 million. Year-to-date, we have repurchased 22.9 million shares for $1.58 billion, a little over our goal of $1.5 billion for 2023. Our debt to adjusted EBITDA ticked down to 2.8 times. Our medical claims liability totaled $17.1 billion at quarter end and represents 53 days in claims payable, up one day from Q2 of 2023. Outside of adjusted earnings, during the third quarter, we announced the divestiture of Circle, our UK hospital company, which triggers a non-cash write-down of goodwill. We also adjusted the carrying value of our UK physician business. You can see these and other items in the table in our press release. We are pleased with the performance of the company in the first three quarters of the year and are increasing our outlook to at least $6.60 of adjusted EPS for 2023. As Sarah mentioned, this puts us at greater than 14% adjusted EPS growth in 2023 after posting 12% in 2022, two pretty good years. The press release table has other 2023 guidance elements, including no change in HBR or SG&A ranges and $0.5 billion more in premium revenue. We also still forecast investment income of a little over $1 billion, excluding divestiture gains and losses. As we are almost at 2024, which we will go into more detail at our Investor Day in a little over six weeks, we continue to have confidence in our 2024 adjusted EPS floor of greater than $6.60. In fact, the strength of this quarter is another data point that increases our confidence. While I do spend a lot of my time talking about and driving margin, let me close by talking about growth because Centene is a combination of margin expansion and growth investment opportunity. On growth, Medicaid expansion is coming to North Carolina late this year. Our Oklahoma win in both broad Medicaid and Sole Source Foster Care is on track to commence 4/1/24, and there's a pipeline of complex populations expected to come into managed care over the next few years, one example being the recent Georgia RFP as Sarah referenced. Marketplace has proven to be an excellent franchise and asset for this company. This business today produces more revenue than our Medicare Advantage business, and that will widen in 2024. Even our PDP business, which may be small in relative revenue, should grow meaningfully in 2024; these members produce pharmacy spend and are potential MAPD candidates down the road. We're excited about the future and our ability to power through 2024 and come out the other side post divestitures, post redeterminations, and on our way to fixing Medicare, a better company than in 2021. On the other side of 2024, we look forward to driving a 12% to 15% long-term adjusted EPS compound annual growth rate. Thank you for your interest in Centene. Rocco, we will take questions now.

Thank you. Today's first question comes from Kevin Fischbeck with BoA. Please go ahead.

Great, thanks. Just wanted to maybe dig into the exchange performance in the quarter because obviously, whenever you have 75% membership growth in your marketplace, it is always a little bit unusual, particularly because in the past, we've seen SEP enrollment come in with MLR pressure. So can you just talk a little bit more about what's driving that outperformance, and as you grow membership faster than you were thinking, what gives you comfort around the medical loss ratios coming in better than people have been forecasting? Thanks.

Yes. Thanks, Kevin. Good morning. Thanks for the question. As I talked about in my script, so let me hit on sort of what’s driving the growth, which I think has a lot to do with the fact that we have an established franchise. We have number one brand recognition in the market, a differentiated distribution network, and just a lot of experience executing. And we foresaw the growth that was going to come because of the additional awareness and affordability that was created not just through CMS spend on marketing and navigators, but really the sentinel effect of the extension of the enhanced APTCs. Turning to performance. We're obviously pleased not only with the growth but the fact that we sustained the performance of that business in 2023 and done so exactly as you say, despite having significant SEP membership growth, which in past years has created pressure, not just because of the risk adjustment effect but also like we saw in 2021 through pent-up demand. So when we think about the factors that are contributing to overall performance and what's giving us comfort, the first is just what we're seeing in terms of underlying growth and performance of the core business that came in during open enrollment period. The second is the fact that we are not seeing the pent-up demand in the SEP membership like we saw in 2021 partly due to the fact that some of those members are coming in for Medicaid, where they had coverage, and others would have been eligible for coverage in previous years. So the belief is that they weren't carrying a lot of unaddressed acuity into the market. The other factor is, and we pointed to this in the past, but in general, when we see this level of market growth, it drives a healthier overall risk pool, and we're seeing some of that in the performance. But I think the bigger piece is probably just execution from the team, really solid pricing discipline coming into the year as we've been on a margin progression with this product, execution on clinical initiatives, and really thoughtful risk adjustment calculations. Again, just the expertise of having a team that's been doing this for a decade is really showing in what you're seeing in terms of performance this year.

The only thing I would add numerically is just we've been through two rounds of Wakely data. So you have to think about the claims cost matched against the risk profile of the population. And so we've adjusted our risk adjustment payable actually up to $1.8 billion from $1.5 billion from Q2 to Q3, consistent with the feedback in the data from Wakely, and we're still holding the allowance on the insolvent peers or those that were waiting to get paid through CMS. And so that $314 million that actually went up by $9 million in the quarter because one of those peers is still operating at least for the first half of this year. So it wasn't the bring down of that reserve that helped the quarter.

Thank you. And our next question today comes from Stephen Baxter at Wells Fargo. Please go ahead.

Yeah, hi, thanks. I appreciate the commentary you made on acuity running in line with your expectations so far. I guess how do you think the higher level of procedural disenrollment that we're seeing across the industry has impacted that? Are you able to comment yet on what you're seeing in terms of utilization on the rejoiner population, especially maybe in the earlier cohorts? And then I appreciate you flagging kind of this unusual item on the rate side. I guess how should we think about the path to the Medicaid MLR that you just reported this quarter to what you're targeting for 2024, that 90.1? Thank you.

Thank you, Stephen. Let me address the first part of the question regarding our leavers and stayers. As expected, we are observing that our leavers have a higher HBR compared to stayers. Interestingly, our last update on the rejoiner rate in April showed rates in the mid 20% range, and we expected a reasonable distribution as we progressed through the months. In the past month or so, we've seen the rejoiner rate from April to August average about 25%. This indicates that the rate of rejoining has increased somewhat. We believe this is partly due to the CMS interventions. Importantly, 70% of these members have no gaps in coverage, and 95% have gaps of less than two months, which gives us confidence that there aren’t significant negative impacts on acuity within the rejoiner cohorts. Drew, would you like to discuss the underlying Medicaid MLR?

Yes, right. And as Sarah said, the leavers have a lower HBR than the stayers consistent with our expectations. But actually, the rejoiners are right around the same HBR as the stayers. So that's looking good as well relative to our forecast. And then, yes, we're on track for the metrics we gave out, including the 90.1% target for 2024. As we get 1/1 rates, and I mentioned that we've gotten 7 that include acuity adjustments so far for 1/1 in the form of draft rates. That's just another positive weight on the scale of giving us confidence as we turn the page into 2024.

Thank you. And our next question today comes from Josh Raskin with Nephron Research. Please go ahead.

Hi, thanks. Good morning. Just a clarification first. I think I heard 20% now maybe going to 25% of redeterminations are coming back. I'm assuming those were Centene lives coming back to Centene plans. And I think you said 10%-ish or so are moving to exchanges. I'm curious about are you taking share from other plans when they're seeing redeterminations and you're getting their members into your exchanges? And then you mentioned through the big growth in PDP. I guess just a question on sort of strategy; it seems like a little de-emphasis in terms of network or catchment points to the Medicare Advantage program, switching the PBM already. So I'm just curious on what the idea is around the low-priced products for the PDP next year?

Yes. Thanks, Josh. Let me clarify those points before handing it over to Drew. On average, we are observing a 25% rejoin rate from the April to August cohort. This has stabilized from a declining trend to a consistent 25% rejoining rate. Our expectations for recapture are around 10% to 15%, which aligns with our estimate of 200,000 to 300,000 members that we are tracking. We are gaining market share from competitors and keeping a close watch on members transitioning from our plans, as well as those coming from other Medicaid programs.

Yes, Josh. And then on PDP, and you'll remember this business going back 10 years, which was a legacy WellCare asset and business. The strategy there is as much about corralling and managing pharmacy spend and having a future feeder for MAPD than it is about generating earnings on what's this year, $2.5 billion of revenue. So I think it was fortuitous that our change and improvement in cost structure or change to a new PBM and a meaningful improvement in cost structure occurred right when there are a number of rule changes impacting PDP like the elimination of the member cost share in the catastrophic phase, the cap on insulin. We are able to leverage that cost structure and make it affordable for our members while the direct subsidy went up meaningfully. And so we are expected to receive that direct subsidy from the government. So it was actually a good alignment of opportunities for us to continue to leverage that business to actually help our other businesses in terms of pharmacy cost structure.

Thank you. And our next question today comes from Justin Lake with Wolfe Research. Please go ahead.

Good morning. I have a quick question and a follow-up. Regarding the exchange business, can you provide some insight into the exceptional membership growth in the third quarter? How did that compare to your expectations and how does it set the stage for 2024? Specifically about 2024, my estimate suggests that your guidance assumes margins will lean towards the higher end of the 5% to 7.5% target range, is that correct? Additionally, concerning the retro, can you elaborate on why you believe it was incomplete? I haven't encountered the term incomplete regarding a rate update before and what reassures you that it will be reversed? Is there any information from the state that you can share regarding your confidence and the timeline? Thank you.

Alright, first on the growth in the quarter and marketplace, you're right, that was outstanding growth. Now, you may remember, we said that we expected to get to 3.6 million members this year, and we're just above 3.6 million this quarter. So most of that was sort of embedded in our forecast as we saw the momentum from Q2. But you're right, it is a good indicator and sort of momentum builder for 2024. On margin, we are still just this year. We are in marketplace. We're still just below our target range of 5 to 7.5, and that's not because of HBR, it's actually because of all the growth and the year-one commission that comes along with that. So it's a real good reason to be just below your target range, which means there is capacity as expected and as we forecasted into 2024 to expand margin into that 5 to 7.5 zone. And so I'll just leave it at that. We expect to pierce zone and be well into that range for 2024, and our forecasts are on track for that. We price for that, and that's what we expect. Regarding – probably not going to get too much into a single state negotiation, but yes, that was a 40 basis point push in the quarter that pushed our HBR up a little bit higher in Medicaid. And just based upon the back and forth and the construction of that incomplete and maybe rushed retro rate, we expect a favorable future outcome maybe in Q4, but it could drag into 2024.

Thank you. And our next question today comes from A.J. Rice at UBS. Please go ahead.

Thanks. Hi, everybody. Two quick areas of question. On the marketplace comments, I know traditionally that product, you hit a deductible potentially in the fourth quarter and your utilization rate upticks. Are you expecting that? Do you think you have a good visibility on all these new members and how they might act in the fourth quarter, and maybe to what degree have you reflected that? And then as you think about that population, we sort of talked around it with a couple of the other questions, moving into next year you mentioned the commission dynamic, potentially better risk scoring, and so forth. How much of a margin tailwind will this population represent for you as you look into next year? I know the churn rates in that population were high historically, but I think they've come down, and I don't know if that's the same for you, but maybe any comment along those lines as well?

Yes, A.J., you're right that particularly in that SEP membership, we're seeing more retention industry-wide, which is, I think, logical just given the insulation and the extension of the enhanced APTCs and the increased affordability of the product. And as you said, the sophomore effect of that membership, in particular, the fact that we'll have a full year of risk adjustment, and we'll have moved through any sort of early utilization, we think provides a tailwind for the retained part of that SEP population. And as Drew said, our focus going into 2024 is really retaining the tremendous growth that we've had in 2023 and then continuing our progress on pricing discipline in order to expand margin and pierce into that 5% to 7.5% range.

Yes. Regarding your comment on Q4, you're absolutely correct. If you examine the trend lines of deductibles diminishing over the course of the year, we anticipate a significant increase in HBR. We have planned for this in our commercial sector, including marketplace businesses and Medicare, which typically sees an increase in HBR. Additionally, we must consider the PDR on top of that. These are important factors to consider for Q4, along with the expected high SG&A expenses, which are typical in this quarter as you adjust your models for 2023 to wrap up the year.

Thank you. And our next question today comes from Nathan Rich at Goldman Sachs. Please go ahead.

Great, thanks for the questions. I wanted to ask about the Medicare business. Is there any change to how you're thinking about MA enrollment and revenue relative to the initial expectations now that you have a fuller view of the competitive environment? And just for clarification, are you still planning the $200 million premium deficiency reserve in Q4? And then kind of bigger picture, could you talk about the path to getting 85% of members into 3.5 star plans by October of 2025 and the areas that you're investing in and any incremental investments that you're maybe planning for 2024 in that respect? Thank you.

Yes. Thanks, Nathan. So with the competitive landscape and additional information we have not changed our view that we would be down $4 billion in 2024 in the Medicare business. Again, our focus is really on narrowing to that lower-income complex population that was part of how we constructed the bids and certainly how we crafted our strategy going into AEP. And then relative to Stars, we're obviously pleased to have delivered results in line with our expectations beginning in Q2, but there's still work to do. This next cycle will be an important additional step to that ultimate goal of 85% of members in 3.5 stars. Our focus really continues to be on rebuilding the operational capacity and the infrastructure to support sustainable programmatic improvement, demonstrated by moving again 53% of our membership from sub 3 to 87% of our membership at or above 3 in this first step. We'll need to continue to pull up underperforming contracts. We'll need to move contracts and members from the 3 across that 3.5 star threshold. A lot of that is again, why we've tried to create visibility into some of the underlying operational metrics that we're tracking internally around our overall customer satisfaction metrics and around call center metrics and our ability to answer questions for members and provide them a good member experience, getting them connected to physicians, getting them aligned to value-based providers so that those incentives are aligned to close gaps in care, which ultimately accrues not just to HEDIS but to cap. So those are all the things that we're really focused on. We've got a very robust governance structure in place. As we've said before, we've got incentives aligned from top to bottom in the organization. There is no confusion that this is a priority, and we continue to be focused on making incremental improvements and holding steady on those improvements that we've made to date.

You asked whether our view on the PDR has changed. Our current guidance indicates we have capacity for PDR in the mid-200s, but the accounting calculations in December will determine the exact number.

Thank you. And our next question today comes from Lance Wilkes with Bernstein. Please go ahead.

Thanks. Just wanted to do a quick deeper dive on a couple of the items that you've talked to. One would be on Medicaid redetermination. If you can just talk a little bit about for leavers, any sort of double coverage analysis you've done to see what percentage of those were maybe 0% MLR? And then for this more complex population focus in MA going forward, do you know what the kind of percentage target margin would be for that as you think about that being a sustainable business going forward? And if you wanted to give any update on your PBM cost saving, obviously, $500 million, I think, was the category cost savings for gross margin improvements. It seems like you may have upside to that, so I would love to hear any further color.

Yes, back in January we outlined several factors before we had real data on redeterminations, and now that we have actual data, it supports our earlier hypotheses leading up to April 2023. We noted that the percentage of Medicaid members with duplicative coverage from other insurance, identified through COB claims, increased from 2.7% in 2019 to 3.4%. This information helped us create our forecast discussed on the Q1 call. The good news is we are on track with those forecasts now that we are well into redeterminations, with over 40% processed according to our estimates. Regarding the PBM, we are also on track, as Sarah mentioned, and the expected economics are aligning. As you would expect from us, many of these aspects are backed by guarantees from our PBM. Thus, we are on track to achieve contributions exceeding $660 million from the PBM economics.

And then just relative Lance to your question on the complex populations. Obviously, the reimbursement for those populations can be higher, but you're dealing with higher acuity and more complex care within that cohort. Our view is that because that aligns with our expertise in managing Medicaid members, we have the opportunity through value-based arrangements for that to be a profitable cohort but also to drive differential outcomes for that population. If you take a step back and look at segments of the Medicare population, the lower-income complex members are the fastest-growing segment. That is part of why we have focused on that membership, not just for this cycle but as part of our long-term fundamental strategy.

Thank you. And our next question today comes from Gary Taylor with Cowen. Please go ahead.

Hi, good morning. Two quick ones on Medicare. The first is, as we're thinking about Medicare enrollment in 2024 and looking at some of the reductions across OTC and Flex Benefits and SSBCI, it looks like those hit pretty evenly across both individual MA and D-SNP. I know you're talking about focusing on more complex care next year, and I think D-SNP's actually been growing this year. Just wondering how we should think about individual retail MA versus D-SNP if we should see similar trends? My second question on MA is I still get a lot of questions from folks trying to do the EPS bridge. I know you said $0.80 loss from Medicare next year. I'm just wondering if you could give us just an updated figure for Medicare this year, including the PDR?

Yes. Sometimes it is tough to glean from public data exactly what we did with benefits or what any payer does with benefits. You can get directional. If you sort of got into our bids and product set that's being sold out there in the market today, you'd see that we heavily trimmed our Part B giveback and PPO plans, but we invested in D-SNP. With the supplemental benefits, we actually combined a number of supplemental benefits into a simple spendables card. So think Flex, OTC, grocery. That simplifies it for the member, and you may not actually be able to define that from some of the landscape files. But yes, as we said earlier, we haven't changed our view on sort of our forecast for 2024 in terms of approximately $16 billion of Medicare Advantage revenue down about $4 billion.

Thank you. And our next question comes from Scott Fidel with Stephens. Please go ahead.

Hi, thanks. Wanted to just ask about two salient points relative to medical costs. First, just maybe an update on the behavioral utilization that you've been seeing earlier in the year and how that's been getting factored into the rates and sort of comfort with that in 2024, particularly for the big Magellan behavioral book? Second would just be definitely curious in your thinking just around the new California minimum wage law for healthcare workers and similar types of legislation and how you sort of are thinking about that factoring into unit costs and into your pricing looking out over the next several years? Thanks.

Yes. Relative to California, that does not apply to MCOs, but we're obviously tracking that for potential pass-through costs from providers. Again, keeping an eye on that. Relative to behavioral, that's still a component of underlying utilization. It's not creating quite as much pressure as we were seeing before. But certainly, within the marketplace population in general is sort of an industry-wide trend, substance use and opioid use disorder continues to be something that the whole industry is focused on. To your point about Magellan, the increased focus on integrating medical care with behavioral is something that we hear very consistently when we're out with our state partners, every single Governor that we have talked to this year rates behavioral health and mental health as a number one issue in their state. Whether that's staffing shortages, access, or supporting ways to provide additional behavioral health to their membership, and it has actually created really nice tailwinds relative to our Magellan business. So maybe, Ken, if you want to talk about some of the recent wins that Magellan has experienced as a result of this focus.

Yes. Thanks, Sarah, and good morning, Scott. We realized success in the state of Idaho, which I think is a forbearer to opportunities to work with other states as they think about the point that Sarah made. I think she and I met over 30 Governors in the last six months. Every one of them mentioned behavioral health as a top three priority. So we're working with a number of states. I won't mention them specifically, but behind the scenes to cultivate opportunities to capitalize on this growing interest among governors in supporting the needs of their Medicaid members with behavioral health. The point about the integrated offerings like Magellan is a long-standing distinctive competency. It's a business that we will leverage as we think about combined offerings moving forward. Really excited about our prospects, and with Wade's appointment, Zane and the team that runs business development here, we have a lot to like about the future.

Thank you. And our next question today comes from Sarah James at Cantor Fitzgerald. Please go ahead.

Thank you. So circling back to your comments on the leavers having a higher HBR than the stayers and 7 out of 21 states adjusting for acuity. Is there any way to give us more color on that sizing, the range of the leaver versus stayer HBR differential, or how meaningful the acuity adjustments are to rates overall?

Yes, it's consistent with our expectations and as you might imagine, it really varies by state to state and subpopulation to subpopulation. And you're right, with the 1/1 rates, 7 of them in, all including acuity adjustments, feel pretty good about the matching of rates so far with a couple of exceptions, but in the aggregate, matching of the rates with our acuity forward estimates.

I just want to add one clarification; I know this is what you meant, but I just want to be sure that what we're tracking is that the leavers' HBR is less than the stayers. And that is what was expected. One of the things we talked about in the past leading into the redeterminations process was identifying those members that we would have predicted would roll off, and then we could subset those populations and run the differential HBR. Those are the inputs that went into our model that we talked about on the Q1 call as we build up what both rate and acuity we would want across each state and then roll up to the portfolio, and we are tracking as we are in line with expectations going into 2024.

Thank you. And our next question today comes from Michael Ha with Morgan Stanley. Please go ahead.

Thank you. Just first quickly, regarding exchange sequential membership growth, the 386,000, how much of that 386,000 is purely best recapture Medicaid redetermination? Number two, regarding MA, I'm curious to hear your thoughts on what transpired in California, the star ratings decline disruption there across a number of market-leading plans, whether that might positively impact your MA growth assumptions in California? Lastly, on star ratings improvement, I understand in 2Q, you had about 47% of your MA lives in value-based care arrangements. It grew about 3% year-to-year, but what was the percentage change of lives in downside arrangements? I'm curious because I understand if this metric improves, so does the overall consumer experience, which could help organically generate improvement in quality, consumer experience metrics, so I'm trying to understand how much tailwind that could be for next year.

Yes. Thanks, Michael. So of the 386,000 in the quarter, it's not a perfect science to figure out exactly which are coming through pure enrollment growth versus those coming over from redeterminations. We track those who are moving from a Centene plan to a Centene plan. Then we extrapolate based on the data that we are seeing based on the data that CMS is publishing, and in cases where we can specifically identify members that are coming over from a competitor. It's not entirely clear that we can dissect that membership as you talked about. In California, what we're seeing is consistent with the broader country, if you take a step back and the fact that the two key cut points put in place this year were tougher in those middle ranges of star ratings and particularly trimmed the outliers, as we all know. That was part of what happened in California. But it's too early to see the impact that will have in terms of overall competitive outcomes through the AEP process because we're only about 10 days into that; we'll look forward to updating everybody on that at Investor Day. Relative to stars and value-based arrangements, again, we're still in that high 40% range from a value-based care standpoint, and it is a mix of upside-only and upside downside risk. As we move members into more downside risk arrangements, we get tighter alignment between us and the providers. This leads to better HEDIS outcomes in terms of getting members in addressing gaps in care. We know there's a direct correlation between members who access care and their ultimate CAP scores. This has been a huge focus for us, obviously, a leverage point where we can use our provider partnerships to help accelerate that work, particularly on our stars improvement journey.

Thank you. And today's final question comes from Calvin Sternick with J.P. Morgan. Please go ahead.

Thanks for the questions. A couple of clarifications. So first, on the 1/1/2024 rate update, I think you said so far some of the states are including acuity adjusters. Just to be clear, is the expectation that the rest of that 1/1 cohort will also provide acuity adjusters? And then second, I think in the past, you've talked about the percent of 0 and low utilizers being up only marginally. Does that fully normalize back to the historical range, or is there still some room for that to work its way down? Thanks.

Yes. We do expect. Other than one state where we're only LTSS, which is an exception, obviously, relative to redeterminations, the answer is yes to your first question. As you're right, we're still shifting during this intermediate time period of getting to a post-redetermination environment from the pre-redetermination environment. The 0 utilizers were up for the expansion population. They're actually down in CHIP and TANF, as you're recalling correctly, and were flat. We are moving through that process, refreshing data. We're in between the pre and the post redetermination phase, so that will shift throughout that time period.

Thank you. And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks.

Thanks, Rocco. As we close out this morning, I'd just like to thank our more than 66,000 employees for delivering excellent results this quarter and year-to-date. As a company, we remain focused on our mission and on creating value for our members, our stakeholders, and our shareholders. We appreciate the time and interest this morning and look forward to continuing this discussion at our upcoming Investor Day in December. Thanks, everybody.

Thank you. 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.