Good day, and welcome to the Centene First Quarter 2024 Financial Results Conference Call. 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 first 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 can also 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 20, 2024, 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 first quarter 2024 press release, which is available on the company's website under the Investors section. With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Thanks, Jen, and thanks, everyone, for joining us as we discuss our first quarter 2024 results. This morning, we reported first quarter adjusted EPS of $2.26, ahead of our previous expectations for the period. As a result of this strong start to the year, we are increasing our full year 2024 adjusted EPS guidance to greater than $6.80. Drew will cover the quarter and our updated financial outlook in further detail in a few moments. While there is still more work to do, we are pleased with the first quarter results, and we'll look to harness the positive momentum we are generating in our core businesses as we move through the balance of the year. In 2024, Centene's focus remains on our work to streamline and modernize the underlying infrastructure of our company and to assemble the people, processes, and tools necessary to deliver best-in-class experiences to our members, providers, regulators and state partners. Let me share a couple of examples of progress here. During the first quarter, we completed an important initiative to simplify our prior authorization process by automating our real-time source data. This simplification improves the timeliness of authorization decisions, ensuring our members get the care they need quickly and removing friction from the process overall for both members and providers. Q1 also saw the accumulation of months of thoughtful and thorough go-live preparation in Oklahoma. Our team obtained perfect scores in our readiness review from the state, and we are thrilled to be serving Oklahomans statewide as of April 1. Finally, our improved operational agility also allowed Centene to mobilize quickly in support of our members and provider partners in the wake of the Change Healthcare cybersecurity incident. This included launching a national provider outreach campaign that spans Centene's provider network across all products, Medicaid, Medicare, and Marketplace, and has included targeted efforts to support those disproportionately impacted by the outage, including FQHCs, safety net hospitals, rural health clinics, and behavioral health providers. We appreciate the focus on and support for last-mile providers from HHS and CMS throughout this process as these clinicians represent a critical component of the infrastructure through which our members access high-quality healthcare. Now on to our business lines. We are roughly 90% of the way through redeterminations, and our Medicaid franchise continues to demonstrate resilience as we navigate the complexities of this unprecedented process. As you can see from today's release, our first quarter membership tracked slightly higher than our expectation at Investor Day in December. Overall, we continue to be well guided with respect to membership and rate by the projection model we built state by state more than a year ago and that we continue to refine as we move through the redeterminations process. As we've noted before, 2024 represents an important year for blocking and tackling through acuity shifts and corresponding rate discussions with our state partners to ensure we are positioned to provide high-quality services for our members. We are actively engaged in that process and are seeing solid results thus far with opportunities still ahead. As we move through the remainder of the year, we expect these discussions to increasingly represent the regular dialogue we maintain with our state partners in the normal course of managing the dynamics around each individual Medicaid program we serve. At the same time, we have been executing on important reprocurements, and the early months of 2024 delivered notable data points. Most of the key RFP results are now public, positioning us well to generate continued Medicaid growth in a post-redeterminations world. Centene reprocured one of our largest contracts with the recent announcement of intended awards by the state of Florida. Although the protest period is ongoing, Centene is well positioned based on Florida's determination that Sunshine Health is among those that will provide best value to the state. In Michigan, we were thrilled to be selected to continue serving the vast majority of our existing membership with some opportunity to grow. And we look forward to our continued collaboration with the state. In Texas, our protest remains ongoing. We are honored to have served Texans for 25 years and intend to defend Superior Health's ability to provide access to affordable and high-quality healthcare for our members in the Lone Star state. We are proud of the way our health plans and business development team have delivered so far during this critical cycle of reprocurements. The Centene value proposition remains a powerful one, built on more than 4 decades of experience serving Medicaid communities, an unwavering local approach and a commitment to innovation in the services and support we bring to our members. We are honored to provide access to care as well as community-based support to improve the lives of those we serve in 31 states across the country. Moving to Medicare, the Medicare Advantage macro landscape remains challenging. Consistent with our prior view, we see final 2025 funding levels as insufficient with respect to general medical cost trend expectations. Drew will provide some early commentary around our strategy to navigate Medicare in 2025 as a result. Medicare Advantage STAR ratings remain the single most powerful lever to drive performance in this vital business and continue to represent a top priority across the organization. As we drive to our goal of 85% of members in 3.5 STAR contracts by October of 2025, we continue to see improved progress and stability in our performance and expect those to be reflected in our results come October. We are tracking year-over-year improvements in our core operations as well as in the ways we support our members as they receive care. And we are carrying forward this positive momentum into 2024 as our teams are clearly focused and aligned on quality. Longer term, Medicare Advantage remains an important business for Centene. The strategic link between Medicare and Medicaid has only become more explicit since our last earnings call. Recent CMS rule-making included final requirements to better coordinate dual special needs plans, or D-SNP, participation with important milestones beginning in 2027. By the end of the decade, a Medicaid footprint will be a prerequisite to D-SNP growth. Centene is perfectly positioned to gain positive momentum from this growing bond between Medicare and Medicaid. Finally, Marketplace. This business continues to represent a unique and powerful growth segment for Centene, and our teams are executing well against the opportunity. With approximately 4.3 million Marketplace lives at the end of the first quarter, Centene's Marketplace membership has more than doubled in size compared to just 2 short years ago. This exceptional growth has been accompanied by consistent margin expansion as our deep product knowledge and staying power in the market enable us to forecast pretax margins well within our targeted range of 5% to 7.5% for 2024. We are pleased with the traction our Ambetter health products are generating and see additional room to expand the reach of Health Insurance Marketplace offerings overall. In 2024, the source of our membership growth is widely diversified. Based on a survey we conducted following open enrollment, nearly 40% of new members identify as previously uninsured. Approximately 25% joined us from another Marketplace carrier, and approximately 10% chose Ambetter after losing access to an employer-sponsored plan. This is in addition to those members who selected Ambetter after losing Medicaid coverage. As we look to the future of Marketplace, we expect new member growth to be driven by an increasingly addressable and accessible uninsured population and the evolution occurring as employers consider alternative options for providing employer-sponsored insurance. Centene has been rapidly evolving as an organization over the last 2 years. We have been resolute in creating focus, trimming the organization down to the core strategic assets that give us the strongest platform for future growth. We are executing against our strategic plans, fortifying and modernizing our infrastructure and successfully delivering access to affordable, high-quality healthcare for millions of Americans. Our strong first quarter results demonstrate the power of our diversified earnings drivers as we deliver on our financial commitments, maintain our posture of disciplined capital deployment, and continue to invest to support long-term growth. As always, we want to thank our nationwide workforce of nearly 60,000 for showing up every day committed to improving the lives of our members and transforming the health of the communities we serve. This CenTeam is the engine that ultimately powers our results and amplifies our impact. With that, let's turn the call over to Drew for more details around our performance in the first quarter and our updated financial outlook for 2024. Drew?

Thank you, Sarah. Today, we reported first quarter 2024 results, including $36.3 billion in premium and service revenue and adjusted diluted earnings per share of $2.26 in the quarter, 7% higher than Q1 of 2023. This result was better than our expectations, and we are increasing full year 2024 adjusted EPS guidance by $0.10 to greater than $6.80. This quarter is a good example of the benefit of a diversified business with multiple levers to drive results. Our Q1 consolidated HBR was 87.1%, which is right on track for our full year guidance. Here's an example of the benefit of that diversification since we provide you with transparency into the line of business components. Medicaid at 90.9% was a little higher in the quarter than we expected as we continue to work through the appropriate matching of rates and acuity in the short term. Redeterminations are certainly front and center in the acuity rate match process, but getting the right match for other circumstances such as states changing pharmacy programs or behavioral health practices are also important initiatives in a handful of states. On the other hand, our commercial HBR at 73.3% was a little better than we had planned in the quarter driven by the continued strength of our Marketplace business. And our Medicare segment at 90.8% was right on track in the quarter. All of this netting out to 87.1%, a good result. Going a little bit deeper into each of our business lines, Medicaid membership at 13.3 million members was slightly better than the 13.2 million members we forecasted for Q1 as of our Investor Day. Drivers of membership for the remainder of the year include, one, new wins such as Oklahoma and Arizona LTSS; two, the return of slight growth in markets once redeterminations are complete, plus the rejoiners dynamic; net of, three, the substantial wind-down of redeterminations over the next 3 to 4 months. Upon reforecasting the sloping of membership and revenue for 2024, including Q1 membership being a little bit higher than planned, we added $1 billion of Medicaid premium revenue to our 2024 guidance. The overall composite rate is running a little above the 2.5% we last referenced, and we have over 75% member month rate visibility into the 2024 calendar year. Regardless of the temporary work to match rates and acuity, our long-term goal remains to return to the high 89s HBR as we look out over the 2025 and 2026 time frame. All things considered, we are pretty pleased with the performance of our Medicaid business 1 year into a very complex redetermination process. And as Sarah covered, we cannot be more pleased with our performance in recent Florida and Michigan Medicaid RFPs. The Texas protest process still needs to play out. Our commercial business performed very well in the quarter in terms of both growth and HBR. Consistent with previous comments, we grew from 3.9 million Marketplace members at year-end to 4.3 million at the end of Q1. For the past 2 years, we have consistently delivered a combination of growth, coupled with improving margin. Our guidance assumes that we stay at 4.3 million Marketplace members for the rest of 2024. If we can grow during the special enrollment period, which we've been able to do in the past 2 years, there would be upside to our premium and service revenue guidance. So stay tuned. Our current 2024 guidance assumes about $16 billion of Medicare Advantage revenue, representing 12% of total premium and service revenue guidance, and approximately $4 billion of PDP revenue. I previously mentioned at a conference that Medicare inpatient authorizations were higher than expected in January and February. March authorizations ended up being lower than February, though still elevated from Q4. And Medicare outpatient trend continues at the elevated level we first saw in Q2 of 2023, though reasonably steady. Nonetheless, the performance in the quarter for the Medicare segment was in line with our expectations, and our full year view has not changed. We had good performance with our new pharmacy cost structure and executed well on other operating levers. As we look ahead, I feel like we are making 2025 decisions with our eyes wide open: inpatient and outpatient trends, complex pharmacy changes from the Inflation Reduction Act, an insufficient 2025 rate environment based upon the final rate notice, and a risk model being phased in beginning in 2024 that is punitive to partial and full duals. It also seems like many of our peers should have more insight into setting benefits at sustainable levels given these headwinds. I'll repeat what I said at a conference in March: to accomplish our strategic goals with our Medicare Advantage business, it doesn't matter if we ultimately level off at $14 billion, $15 billion, or $16 billion of Medicare Advantage revenue. What is strategically important is the alignment with Medicaid and those complex populations we want to serve, especially given where the regulations are heading with duals and Medicaid coming closer together. We're still in the process of making 2025 county-by-county decisions, and we'll finalize and submit Medicare bids in early June. So we'll provide you with more 2025 Medicare commentary on our Q2 call. We expect Medicare to be a good business for us in the long run, and it's an important part of our overall portfolio. We need to deliver on STARS improvements, clinical levers and SG&A actions over the next few years, and those efforts remain on track. Going to other P&L and balance sheet items, our adjusted SG&A expense ratio was 8.7% in the first quarter, consistent with our updated mix of business, including growth in Marketplace. Cash flow used in operations was $456 million for Q1, primarily driven by net earnings, more than offset by the timing of risk corridor payments, a delay in March's premium payment from one of our large state partners subsequently received in early April, and slower receipt of pharmacy rebates as we transitioned to a new third-party PBM in January of 2024. From January 1 through mid-April, we repurchased 3.4 million shares of our common stock for $251 million. Our share repurchase goal for 2024 is unchanged at $3 billion to $3.5 billion. Our debt to adjusted EBITDA was 2.9x at quarter end, consistent with year-end. And during Q1, we were pleased to maintain our S&P BBB- rating under the updated S&P rating model. Our medical claims liability at quarter end represented 53 days in claims payable, down 1 day from Q1 and Q4 of 2023. DCP was actually up due to Change Healthcare claims receipt delays, then back down due to an acceleration of state-directed payments to providers and lower pharmacy invoices outstanding at quarter end. You'll see in the reserve table that our 2024 Medicare Advantage PDR is up $50 million in the quarter. This progression in the 2024 PDR was expected and planned for due to quarterly seasonality in Medicare Advantage. Though it's early in the year, we are comfortable adding $1 billion of premium and service revenue and $0.10 of adjusted EPS to our 2024 guidance. You'll also see some mechanical changes to total revenue driven by pass-through premium taxes and the GAAP effective tax rate due to the Circle divestiture. We also expect investment income to be a little bit above our previous forecast of $1.4 billion while still providing for a few rate cuts in 2024. Q1 was a quarter of momentum. We put another quarter of redeterminations behind us. We reprocured one of our largest contracts and are well positioned in Florida. We executed well in the Marketplace annual enrollment period and put up a strong quarter of both growth and margin. We delivered on the January 1 PBM conversion, and our businesses and customers are benefiting from an improved cost structure. We continue to advance our multiyear operational improvements, and Centene continues to attract talent. And all of this resulted in strong Q1 results and increased 2024 guidance. While there is plenty more to achieve, we are off to a good start in 2024.

Thank you for your interest in Centene. Rocco, please open the line up for questions.

I wanted to discuss your margin comments regarding the exchanges because, from our perspective, the results were a bit better than expected. This area appears to be the fastest-growing segment of your business, which could complicate the visibility into claims receipts. Additionally, you were undergoing changes at the same time. So, how confident are you in the sustainability of the MLR outperformance? What indicators do you look for to ensure that this performance is genuine and lasting, rather than a result of rapid membership growth or ongoing disruptions?

Yes. Thanks, Kevin. I think 2 important points there. One is just the confidence in the overall HBR. And I think as we look back over the last 2 cycles, we have seen rapid growth in the market overall and, obviously, growth in our book. It's more than doubled in the last 2 years. And I think we've tracked very well to the HBR implications of that. So understanding where SEP growth may have pressured margins in year, but then the fact that the sophomore effect of that growth that we accumulated last year starts to play out this year is consistent with our expectations. So again, I think the team has demonstrated a really solid ability to track the moving parts, which gives us confidence in the performance of that book. We've also, as we've talked about in the past, implemented a really strong program around clinical initiatives. And so that has continued to mature, which I think also helps overall management of the book. And then relative to the visibility on change, maybe I'll just hit that sort of broadly because I think that question probably applies across lines of business, and as I said in my remarks, just incredibly proud of how the teams mobilized here in our response, demonstrating operational agility prioritizing member access to care and then a huge push around getting out to providers and finding every way possible to get them reconnected as fast as possible so that they could get paid and they can support our members, which is priority #1. And then, of course, we can have the visibility that we need. And on that point, throughout that process, we had very solid visibility from an inpatient perspective because operational procedures were not disturbed at any point during that process. Centene also has a long-standing practice of using received claims, not paid, which Drew has talked about before. And so outpatient visibility was good coming into that incident on a relative basis and then being able to catch up quickly as a result of providers reconnected. So at the highest point, we were missing mid-teens percentage of our claims. So by the time we closed the quarter, the impact was very modest, and we accounted for that in our financial processes.

I wanted to ask about the revised premium and service revenue guidance first. It seems like based on what you saw in the first quarter that you'd annualize to something closer to around $145 billion versus the revised guidance of $137 billion. So wondering if there's anything we should be keeping in mind. Just as another kind of call out, the Medicaid premiums in the quarter were well above our model. So I don't know if there's anything there that's influencing it. And then from the Medicaid MLR perspective, how are you thinking about Medicaid MLR progression through the year from the starting point and the factors that are influencing that?

Yes, in the first quarter, we experienced a significant amount of state-directed payments. Some states, we believe, accelerated these payments in response to the Change incident. This had an approximate 20-basis-point effect on our Q1 Medicaid HBR compared to our expectations for a typical level of state-directed payments, which was reflected in our premium revenue. Therefore, it's not possible to directly annualize Q1 figures. We anticipate a slight increase in redetermination attrition through the second quarter and possibly into the third quarter. However, we also expect some growth. This outlines the expected progression of Medicaid revenue for the remainder of the year. Regarding Medicare, we expect a bit more attrition throughout the year as we prepare for our 2025 bids and make decisions about where to focus or scale back on products, PBPs, states, and age contracts for 2025. Consequently, we plan for some additional attrition in Medicare Advantage as expected during the year. These are important points to consider.

First, I wanted to ask where you anticipate your exchange margins will land this year compared to your 5% to 7.5% target. Additionally, regarding your PDP strategy, there are numerous changes coming in 2025. Drew, I would like to understand how you view the various considerations for 2025. Could you clarify if you will be taking on significantly more liability, which may require you to adjust pricing due to factors like bad debt? Even if your membership remains constant, how much additional premium do you expect to have? Specifically, what is your anticipated premium for 2024, and what do you project for 2025 in terms of Part D premium? This would help us grasp the scale of the changes with stable membership.

Thanks, Justin. Yes, as we said before, our expectation for Marketplace is that we will be well within our target 5% to 7.5% range in 2024. That has not changed. And then I'll let Drew get into the details on PDP.

Yes, I discussed PDP at the Barclays conference, where a replay is available. Let me provide more details because it's a great question. You are correct about the impact of the Inflation Reduction Act; we experienced some effects this year in 2024. However, the significant changes will occur in 2025. For 2024, the direct subsidy increased for the first time since 2010, going from $2 to $29. This increase will enhance revenue yield since the federal government pays providers based on their bids. Looking ahead to 2025, now that we have received risk scores by member since the March conference, we can analyze the cost-sharing mechanics and how quickly members reach their maximum out-of-pocket costs. We estimate an increase of more than $100 to that $29 figure, driven by the catastrophic phase changing from 20% to 60%. We are currently underwriting this, and given our experience in this business since 2006, we have the necessary data to manage the associated risks. Additionally, we need to consider member behaviors and potential bad debt. It is important to recognize the MPPP program, which allows members to manage their cost share smoothly. Yes, we expect some bad debt, and we are utilizing data from our Marketplace business to inform our bidding process. We also have to factor in how manufacturers may respond to the changes brought by the IRA, which will influence the bidding process and likely lead to a significant increase in the direct subsidy, further boosting yield. We will need to balance membership retention in PDP as this business is expected to grow considerably in revenue due to the rising direct subsidy.

I wanted to go back to Medicare Advantage and 2025 bid strategy with an understanding you're not going to submit your bids for another couple of months here. But would that allusion to $14 billion, $15 billion or $16 billion a suggestion that you would expect membership to be sort of flat to down based on what you know today? And then do you expect to book another PDR in terms of where you think margins would be for next year? And then lastly, I heard some commentary. I don't think we've heard this before, sort of depending the idea that Medicare Advantage is still an important segment. But is there a scenario where MA is not a core operating business for Centene? I understand the advantage with the Medicaid footprint becoming more important. But is there a scenario where just contribution to earnings and even revenues is not large enough to justify the infrastructure?

Thank you, Josh. I'll address the last question first. When we examine the current landscape, the connection between Medicare and Medicaid presents a significant long-term growth opportunity that we find very promising. We continuously assess how this landscape evolves, and we remain dedicated to strengthening our Medicare franchise, specifically targeting low-income complex members, which will help drive growth across both business lines. We do see potential for earnings contribution and long-term growth in this area. Looking ahead to 2025, we recognize that the rate environment is certainly more challenging than many anticipated. However, our focus is on building a robust and sustainable franchise that will enable us to adapt as the landscape changes. What remains constant for us are the factors we can control, such as STARS, which Drew mentioned as a key driver of performance improvement in Medicare, alongside our commitments to SG&A and clinical initiatives, which we are actively pursuing and remain on track with.

Just wanted to follow up on the Medicare MLR. And just given the strong growth in PDP combined with the strong MLR seasonality of that business, can you give us a sense for underlying trends there and how that's supposed to impact the balance of the year on the Medicare MLR?

Yes. You're right on seasonality of the PDP business in our Medicare segment. So unlike a commercial business where you got deductibles in the beginning of the year and your HBR goes up through the year, it's the opposite in PDP. So we still feel good about the range around 90% for our Medicare segment HBR for the full year. Underneath that trend, outpatient still elevated but consistent with that higher level since Q2 of 2023. And we've got assumptions of that perpetuating throughout '24 embedded in our forecast. Inpatient, as I said earlier, a little bit of a tick-up in authorizations in January, February. It's good to see a little bit of relief in March relative to February, but still elevated relative to Q1. So we've thought about that going forward as well. And then we've got good performance in Medicare. There's other clinical initiatives that we've been able to execute on and getting paid the right amount of revenue as well that have helped sort of curtail some of that inpatient authorization. So I feel pretty good about Q1 and expect that to sort of carry on through the year.

I wanted to focus on Medicare Advantage. It seems that about one-third of your membership consists of duals, and you've noted the opportunity there. Can you provide insight into the current margins for that population compared to nonduals? Additionally, if you are considering changes to bid design for 2025, how are you planning to address this population with a long-term perspective?

Yes, Nathan, thank you for your question. Earlier this year, we deliberately entered the 2024 cycle by redesigning our product offerings with the duals population, particularly the low-income, complex population, in mind. We are very pleased with how the team performed during the Annual Enrollment Period. This includes product design as well as being thoughtful about which distribution channels effectively reach these members, creating experiences that foster loyalty within this group. We observed an increase in the concentration of duals within our overall population during this AEP, aligning with our expectations. This suggests that our team understands this population well and can leverage local knowledge, along with the synergy between Medicaid and Medicare, to serve these members effectively and utilize local community resources to enhance health outcomes. Overall, I believe this positions us well to design products as we prepare for the 2025 cycle and to focus our efforts on that population, allowing us to continue to attract those members for whom we can deliver the best long-term value.

I wanted to go back to Medicare. So given where rates came out and your evolving strategy around overlapping footprint, do you still think the couple of hundred basis points of SG&A leverage on Medicare is the goal point? I think you guys rolled that out at I-Day. And then how do you think about the SG&A framework for your Medicare business overall? Because typically, I think about it being a couple of percent higher than Medicaid, but given the scale that you're targeting, is that still a fair ballpark for where the overhead costs would run for that business unit?

We need to reduce at least 200 basis points of SG&A over the next few years to achieve our goals in Medicare Advantage, and we are on track to do that. When WellCare joined the Centene combination, it had less than 1 million members but was operating effectively at scale. We are not worried about scale issues in Medicare, even though we anticipate some attrition as we focus on aligning our strategic goals in Medicare and its connection to Medicaid. We prioritize margin recovery over the next few years, driven mainly by STARS and other factors like SG&A and clinical initiatives. The SG&A ratio for Medicare is notably higher than Medicaid due to distribution and open enrollment costs. Additionally, Marketplace has a slightly higher SG&A rate than Medicare. Therefore, we are not concerned about being subscale in Medicare Advantage. Our intention is for this business to complement our Medicaid operations, enabling us to capture future opportunities, despite potential attrition as we progress through 2025.

I wanted to follow up on that last comment for a moment. We're seeing a 12% decrease in total employees sequentially, which amounts to 8,000. I was considering the implications of this for the second and third quarters in terms of G&A, and some of these employees might be in medical support within the Medicare line. My second question is to clarify whether the additional $50 million PDR for Medicare reflected in the 10-Q affects the P&L this quarter, thereby impacting the reported EPS and influencing the reported Medicare MLR this quarter.

Yes, good questions. Most of the change in the employee base is the divestiture of Circle. That was pretty employee-intensive in Great Britain. So that was a result of the divestiture. Although we are constantly managing the right amount of resources, it's our job to, on behalf of taxpayers and the federal and state governments, manage efficiently, matching resources with the business that we have and trying to do that effectively. But that big move was due to divestiture. And you're right, the $50 million, while we expected it as we mapped out the seasonality of Medicare during the year, and that has the PDR pushing up a little bit in Q2, maybe a little bit more in Q3, and then being relieved completely relative to the 2024 policy year in Q4, that $50 million did hit the P&L. It did make its way into the loss ratio for the Medicare segment. But it was exactly as planned, so it wasn't a surprise to us.

I have a couple of points for clarification. First, regarding Medicaid, did you experience fewer disenrolled members than expected during the quarter, or was there a higher reconnect rate? I'm interested in understanding the factors that contributed to the increased membership this quarter and how you predict those will evolve throughout the remainder of the year in relation to the 13.6 million membership figure you previously mentioned. Secondly, concerning the Medicaid composite rate of 2.5%, could you clarify whether this reflects the core performing better than anticipated, or is the 2.5% inclusive of the accelerated state payments?

Yes. On membership, we still expect to be in that mid-13s by year-end. And so I think 100,000-member difference on 13.3 million, some may call rounding, but luckily, it's rounding in the right direction. But it's probably more timing of precision around redeterminations, and some of that will carry into Q2. And there are even a few states that will tail off into Q3 as they've stretched out the redetermination process. But all of that is in the mid-13s estimate of membership by year-end, which includes a couple of nice growth opportunities too that we seized, Oklahoma, which commenced on 4/1. And as you heard in Sarah's remarks, that went really well operationally. And then subject to protest, the Arizona LTSS win, low membership but high revenue. And then your question on composite rate, the 2.5%, yes, we're a little bit above that. And that's sort of an all-in view of a composite rate, whether the rate relates to acuity, whether the rate relates to redeterminations or just general trend.

Just had a couple of modeling questions that would be helpful. One, just on investment income, if you can sort of walk us towards what you view as sort of the run rate for the second quarter and for the balance of the year. I know there were a few gains included in the first quarter investment income. And then also on operating cash flow, obviously, that was noisy in the first quarter for the reasons you mentioned. If you wouldn't mind just giving us an update on the full year CFFO expectation and then how you're thinking maybe about the second quarter given that you did get that state payment in early April.

Yes. Investment income, excluding gains, amounted to just over $400 million in the quarter, which we have disclosed in our recent filing. However, you can't simply multiply that figure by four. We anticipate the full year will exceed $1.4 billion, the guidance provided on Investor Day. The difference between that projection and annualizing involves several rate cut scenarios included in our forecast, which the Federal Reserve will ultimately determine. Additionally, we reduced a significant amount of payables this quarter and accelerated state-directed payments for our providers. Therefore, relieving payables while increasing pharmacy rebate receivables will influence investment income as well. We are optimistic about exceeding the $1.4 billion target. Regarding operating cash flow, it can fluctuate significantly; for example, if a large state pays us on April 2 instead of March 31, it greatly affects the quarterly results. Factors affecting cash flow include the timing of pharmacy rebate receivables and payable invoices, making it challenging to predict quarter-to-quarter. What truly matters are the dividends from subsidiaries and the cash flow not only in terms of GAAP but also the cash transferred from subsidiaries to the parent company for capital deployment. We expect this to increase over the next few quarters, which will facilitate our future capital deployment strategy for share buybacks and debt reduction. That is what we are looking forward to.

I would like to mention a couple of quick points. I appreciate the confirmation of the long-term target in the high 89s for your Medicaid HBR. I'm curious if you believe you are mostly done with redeterminations in the second quarter, along with any disenrollments and a few remaining in the third quarter. When do you think you will have clear visibility on how this entire process has affected the risk pool? Also, I recall you mentioned at Investor Day that you expected to see a 30 basis points improvement in margin for 2024 and 2025 in Medicaid. Is that still your expectation at this time?

Yes, thank you, A.J. You're correct. We're almost done with the redeterminations related to membership. The cumulative effect of member months does lag a bit, and we expect that the remaining membership changes will extend into the second and third quarters, with most being finalized by then. The positive aspect is that we haven't had to wait long to observe changes in the risk pool. We've been monitoring that closely, which was part of the preparation our team undertook over a year ago. This allowed us to engage in proactive modeling discussions with our state partners during last year's rate cycles. We're applying the same approach as we navigate the rate updates between July 1 and October 1. We're working on managing any discrepancies between rate adjustments and acuity during that period while also acknowledging that some margin benefits will gradually arise in 2025, possibly extending into 2026. This is where we anticipate a recovery in margin basis points.

So just maybe a brief one on that last comment, last point. On the rate visibility, I think you called out 75%. You talked about matching acuity which, Sarah, you just commented on. Is the matching of acuity and getting those payments squared up, should we think about that being in the remaining 25% that you don't have rate visibility on yet? Or are you expecting some amount of catch-up from states where you actually have already had rate discussions? And just kind of understanding the mix of that is what I'm hoping to do.

Yes, okay.

The 75% represents our understanding of member months for the 2024 calendar year, while the 25% pertains to the rates as of July 1, which remain unknown. We are also unsure about the rates for September 1 and October 1, but their influence on the 2024 calendar year is limited. On a broader scale, we ultimately need rates to align with acuity, and we anticipate that this will develop over time. It may not be perfectly aligned in this rate cycle, which suggests that we might return to the high 89s around 2025 or 2026 based on our current business mix. There may be some retrospective adjustments since different companies have varying definitions of what that entails. We are currently only anticipating a few retroactive adjustments. States may realize discrepancies with their actuaries and decide to correct them moving forward. However, we're still expecting several retros, as we mentioned during Investor Day and on our Q1 call. The key focus is getting the rates right and aligning them with acuity in the future. This is why we do not expect to return to the high 89s immediately; it may take another rate cycle. Nonetheless, this presents an opportunity for margin expansion. For a company performing well on a consolidated basis, it actually allows us some capacity for margin expansion in Medicaid as we look ahead to 2025 and 2026.

Yes. And the only thing I would add is just that as we've watched the team sort of work through the complexity of this process where we have encountered those targeted dislocations, I've just been really impressed with how our teams have stepped up to that dialogue. There is clarity on the drivers. It's a very data-driven approach. They've clearly built solid collaborative dialogue with our state partners and are really solutions-oriented in how they step into those conversations. And so I think building credibility with our state partners as we work through this process has been consistent throughout and, I think, again sort of creates the framework to get back to a matching state and get that tailwind opportunity.

Just 2 quick ones for me. I guess as you talked about the progress and the STARS goals for 2025, I would just love, at a high level, if you could talk about kind of the strategy and the progress towards achieving that goal. And Drew, as you were talking about kind of all the changes to Part D for 2025, I didn't hear you talk about the new Part D risk model. I would just be interested if you could make quick comments on how you think the new risk model in Part D impacts the ability to drive revenue in that part of the business.

Sure. Thanks, George. So quality, obviously a top priority for the organization regardless of line of business. But we remain very focused on STARS because of the impact it has for the Medicare trajectory. Very pleased with the work underway, engagement across the organization. We're leveraging a comprehensive governance process, and that has given us great visibility in terms of progress on initiatives at a detailed level. Based on what we know today, we believe that we have maintained last year's progress and made additional advancements on admin and ops programs and metrics, which, you'll remember, was sort of the focus in the first cycle. And then in this past cycle, HEDIS and CAHPS were most in focus for us. We're in the middle of those processes. Those will wrap up in the next 30 to 60 days. We also have TTY that's still in flight. So those are the last pieces that will land here towards the end of Q2 and then allow us to rerun projections with a higher degree of confidence as we look to October. And so expect more detail in terms of what we're looking for in October on the Q2 call. But overall, just really pleased with how the team continues to show up, and again, alignment across the organization that this is a critical priority.

Yes, you're correct. The difference in the risk model between PDP and MAPD is also something that needs to be considered in the bidding process. I mentioned that we could analyze risk scores for each member and how that interacts with not just the risk scores but also the timing of members with cost sharing and reaching the maximum out-of-pocket limit. These are all significant factors to consider. Therefore, it's important to be cautious about bidding for PDP in 2025.

This concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks.

Thanks, Rocco, and thanks, everyone. Appreciate the time and interest this morning. Overall, we are pleased with how we're powering through a dynamic landscape and with the progress that we've demonstrated so far. So appreciate you joining us, and we'll see you next quarter.

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.