Good day, and welcome to the Centene Corporation Third Quarter Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Head of Investor Relations. Please go ahead, ma'am.

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our third quarter 2024 earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com. Ken Fasola, Centene's President, 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 our third quarter 2024 press release, which is available on the company's website under the Investors section. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter 2024 press release. Please mark your calendars for our upcoming Investor Day being held on December the 12th in New York City. 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 as we review our third quarter 2024 financial results. Given the recent market volatility impacting managed care, let's start with the bottom line up front. The overall outlook for our business remains consistent with our updates in the quarter. We remain confident in our full year 2024 adjusted diluted EPS guidance of greater than $6.80 and our view of headwinds and tailwinds as we look to 2025 are largely unchanged from what we have previously shared. We still believe that we will grow adjusted EPS next year, and we still believe that we have a unique and powerful platform from which to drive long-term EPS growth of 12% to 15% in a normalized environment. Specific to the quarter, we are reporting third quarter adjusted diluted EPS of $1.62, a stronger result than our most recent expectation for the period with the upside driven in part by anticipated tax items shifting forward into the third quarter. Within our core business lines, Medicare and Marketplace performance was consistent with expectations in the quarter, and Medicaid performance ended up a little better than our mid-quarter commentary, aided by movement in rates we saw as a result of refreshed data and effective advocacy. In general, we are encouraged by progress we saw throughout the quarter relative to our ongoing dialogue with state partners to align Medicaid rates with the acuity of our post-redeterminations book of business. We have spent the better part of 2024 offering a significant level of transparency into our business during a year of unprecedented change. We are pleased that this transparency positions us today with a stable outlook for 2024. With that, let's get into the details, starting with Medicaid. As you know, our largest business has undergone significant transformation over the last 18 months as a result of the nationwide return of eligibility determinations. Since the start of this process, millions of Americans have been transitioned out of managed Medicaid across the country, materially shifting the Medicaid risk pool in a way that requires action by our state partners to right-size program rates to reflect the post-redeterminations member base. During the third quarter, our state partners continued to work through the tail of their respective redeterminations processes. And as we sit here today, the vast majority of the 30 states in which we operate are now through their respective backlogs. We closed the period with roughly 13 million members and are seeing evidence of membership leveling as we move into the fourth quarter. Since this process began, you have heard a consistent message from us in terms of our boots on the ground support for our members and, equally, our proactive data-driven dialogue with our state partners to ensure rate discussions throughout this period are fully informed and benefit from the most current data. All of our states have acknowledged the need to match rates with acuity, and all of our states have now taken action with respect to acuity adjustments in some form. While there is still work to do with respect to the sufficiency of rate adjustments, our conversations continue to be productive and we are encouraged by the engagement and the incremental movement we saw as the quarter unfolded. We now expect our back half composite adjustment rate to be in the 4.5% to 5% range. As state-by-state experience matures, we are still seeing just over 30% of members who were initially dropped from Medicaid eligibility ultimately return to us. Less than half these rejoiners are reinstated with retroactive coverage. The majority experience a coverage gap, creating a corresponding premium gap. As we have discussed previously, this creates temporary pressure on the Medicaid MLR. However, a close look at the rejoiner trend suggests it is starting to slow. This incremental lessening of pressure as we move through Q4 and evidence of a return to a more normal churn rate across the Medicaid book offers a natural tailwind as we move into 2025. We continue to track the data closely and provide regular and detailed updates to our state counterparts. We believe the solid foundation of data-driven advocacy we have built over the last six quarters has served us well and will continue to do so as we advocate for appropriate 2025 rates and mid-cycle acuity adjustments. Overall, the movement we have seen in rates over the course of 2024 reinforces our view that what we are experiencing is a temporary dynamic and that state Medicaid programs will ultimately return to actuarially sound rates that match acuity. While redeterminations have captured much of the attention over the last few quarters, it should not go unnoticed that Centene has been equally busy delivering strong RFP results and positioning our Medicaid business for long-term growth. In August, the team at Pennsylvania Health and Wellness reprocured our long-term support services business in that state, reinforcing the strength of this organization and serving low-income members with complex support needs. In September, we successfully reprocured our statewide presence in Iowa in a highly competitive process, and then earlier this month, Centene's Meridian Health Plan in Michigan won yet another 2024 RFP, this time providing integrated Medicare and Medicaid services for dually eligible members. In short, we are making progress against rate and acuity alignment, and our best-in-class business development team continues to effectively articulate our value proposition. Throughout it all, our teams have worked tirelessly to advance our Medicaid quality results, deliver operational and compliance improvements, and innovate through local partnerships as we serve the most underserved communities across the country. Turning to the rest of the business, our Medicare segment continued to perform in line with expectations during the quarter. As we look ahead, Medicare Advantage remains a strategically important pillar of our platform and represents significant opportunity for margin expansion as we continue to improve Stars, reduce SG&A, and advance our clinical programs. To this end, our 2025 star ratings, released earlier this month, which have financial implications for 2026, represent a meaningful step forward on the journey to margin recovery. These results demonstrate our ability to effectively identify areas of potential improvement and methodically execute on delivering those enhancements. During this cycle, we elevated our performance with 46% of members and plans at or above 3.5 stars versus 23% from the prior year, despite higher-than-industry-anticipated cut-point changes. Our Stars results represent strong overall improvement in our core operations and continued focus on quality for our members. Consistent with what we previewed on the Q2 call, we used 2025 bids as an opportunity to further focus on lower-income seniors and tighten the alignment between our Medicare Advantage business and our Medicaid footprint. We exited six states, while strengthening our offerings in key counties and regions within our existing footprint. As a planned byproduct of this work, we were able to streamline our contract portfolio, creating more balanced membership across our contracts and enabling greater focus and impact in our program investments going forward. These adjustments position us for a preliminary view of 2025 Medicare Advantage revenue in the range of $14 billion to $16 billion. As we have shared previously, this implies down membership year-over-year but represents progress on our path to breakeven in this business. Within our Medicare portfolio, our Part D business will generate a more sizable revenue contribution in 2025, owing in part to significant changes adopted as a result of the Inflation Reduction Act. Though it is early, we are pleased with our preliminary view of product positioning, and we expect Part D revenue to grow significantly next year with potential for membership growth as well. In light of recent policy changes that make Centene's industry-leading Medicaid footprint a competitive advantage as we look to serve more dual-eligible Medicare members, we remain focused on the compelling opportunity our Medicare platform provides for both margin expansion and growth long-term as we turn around and stabilize this business. Finally, our Marketplace business continues to perform well in 2024. Our results in the quarter were in line with our most recent expectations as we capitalize on more than a decade of experience to effectively serve now 4.5 million members. Looking to 2025, we believe our Marketplace products are well positioned relative to our strategy. Open enrollment will not begin for another week, but our early expectation is that we will be able to achieve pre-tax margins well within our targeted range of 5% to 7.5%. Centene demonstrated our thought leadership in Marketplace earlier this year by implementing an agent of record lock policy, which was subsequently implemented market-wide by CMS in July. In addition, CMS has introduced program integrity processes in line with both Centene advocacy and pre-pandemic era policy that will further improve controls on exchange enrollment during this open enrollment cycle. These types of policies improve the member experience as well as the quality of our book, but we do expect they will create a moderating effect on overall market growth in 2025. As a result, our membership growth expectation for this year's Marketplace open enrollment remains modest. Continued migration of commercial small group enrollment into the exchanges, expanding access and affordability initiatives, as well as the program integrity enhancements, net out to a view of mid-single-digit macro market growth in 2025. Ultimately, we are pleased with the performance of our marketplace business and believe this market, which now serves a strong bipartisan base of more than 20 million Americans, can be a powerful platform to expand affordable health care coverage and access for individuals across the country. As we close out year three of our value creation plan, we're pleased with the progress we have made but even more pleased with the second-order opportunities we see ahead as we continue to drive operational improvements and mine efficiencies in our business model. This quarter, we advanced work on a project some of you have heard me speak about, namely the use of AI to automate and optimize our management of provider contracts. By deploying AI within our provider operations, we can reduce the amount of manual labor associated with the installation of new contracts, as well as the significant maintenance required for the tens of thousands of existing provider agreements within our portfolio. Additionally, AI will allow us to produce considerably stronger analytics on provider performance, an important lever for advancing initiatives such as value-based care across our business. The team's diversified portfolio continues to allow us to navigate unprecedented landscape challenges and build for the future. Our quality team kept the gains from last year's Medicare Advantage Star scores and built on them, strengthening our Medicare platform. Our health plan and business development teams defended existing contracts and won new ones, expanding the reach of our leading Medicaid franchise. Marketplace continues to deliver value for our members and earnings power for our enterprise, generating important returns and creating a compelling platform to support growth in the individual market. And we continue to find opportunities to get better at the basics and innovate in how we show up to support our members, providers, and regulators. With the election now 10 days away, I'll highlight again that our product and government relations teams have been preparing for months for the many post-election scenarios that may emerge. No matter the results on November 5th, Centene is well positioned as an industry thought leader for maintaining coverage and affordability for Americans across each of our product lines. The momentum across this enterprise is palpable, and it is a direct result of the efforts of our more than 60,000 employees, committing their time and energy and talent to improving the health of the communities we serve. To this end, I want to recognize those who showed up to support our members and fellow employees who were impacted by Hurricane Helene and Milton. Centene took immediate and urgent action, including Centene foundation efforts to deploy much-needed financial support to key nonprofit partners in impacted states, headquarters teams coordinating the shipments of over-the-counter medicine and other hard-to-find supplies to our communities in North Carolina and Florida, and colleagues opening their homes to fellow employees impacted by the storm. You went above and beyond for our members and each other and showed what it means to be part of Centene. Thank you. With that, I'll turn it over to Drew.

Thank you, Sarah. Today we reported third quarter 2024 results, including $36.9 billion in premium and service revenue and adjusted diluted earnings per share of $1.62. Q3 performance was ahead of our previous expectations and keeps us on track to deliver adjusted diluted earnings per share in excess of $6.80 in 2024. As you saw in our press release this morning, the adjusted diluted EPS for the third quarter includes $0.10 associated with a marketplace premium tax benefit that we previously expected in the fourth quarter of 2024, so merely a timing shift. The quarter also includes about $0.4 of accelerated income tax benefit. Even without those two favorable timing items, we were still a little ahead for the quarter. Our consolidated HBR was 89.2% for Q3, which brings us to 87.9% year-to-date. Consistent with our previous public commentary, our Medicaid membership was just over 13 million, and our Q3 Medicaid HBR at 93.1% was a little above Q2. While there are still very small pockets of redetermination activity occurring, we largely expect stability in our Medicaid membership around that 12.9 million to 13 million mark as we close out 2024. With every month that goes by, we continue to make progress with our state partners and their actuaries in our efforts to match rates with acuity. As Sarah mentioned, now 100% of our states have acknowledged and acted. So it's just a matter of sufficiency of rates, state-by-state, program-by-program. We remain confident that this is not a matter of if, but when we get back to equilibrium between rates and acuity. We are pleased and encouraged by the progress since our last call, but there's more to address with our state partners, supported by the data we provide. The commercial HBR of 80% was right on track for Q3, and we showed a little bit more growth with 4.5 million Marketplace members at quarter end, a 22% growth from a year ago. We continue to be pleased with the execution in our Marketplace business. While the open enrollment period hasn't yet started, we believe we can grow during open enrollment and achieve our margin goals in 2025. Medicare results in the quarter were consistent with our expectations, including a segment HBR of 88.0%. Good execution in 2024 in both our Medicare Advantage and PDP businesses enables us to enter 2025 right on track. As you saw with the landscape file, we continue to take Medicare Advantage actions designed for the long run, consistent with our strategy focused on low income and dual eligible. We exited six of our smaller states that didn't quite match our Medicaid footprint, and we administratively reduced our number of H contracts by about 30%. While we have much of the annual and open enrollment periods yet to play out, as Sarah covered, we are still targeting $14 billion to $16 billion of Medicare Advantage revenue in 2025. We are still targeting results for 2025 that would be consistent with an approximate $125 million of premium deficiency related expense that would be recorded in Q4 of 2024. Overall, no major changes to our Medicare Advantage game plan. Similarly, our Stars game plan is on track at 46% and 3.5 stars for the 2026 payment year, as we covered in our October 11th 8-K. As we've talked about for the last couple of quarters, we expect meaningful revenue growth in our PDP business in 2025, largely driven by the Inflation Reduction Act mechanics. Furthermore, our bids positioned us well, anchored by our outstanding pharmacy cost structure, which, when coupled with the CMS demonstration, facilitates very low cost and attractive products for seniors. For 2025, we are pleased to again be below the auto-assigned benchmark in 33 out of 34 regions. Our zero premium product, inclusive of the federal demo subsidy, is available to seniors in 43 out of 50 states. We think our reported premium yield will more than double in 2025 compared to 2024 due to the IRA, and we should be able to grow membership as well, subject to the annual enrollment period that just started. We are targeting a 2025 PDP margin of around 1% that we will look to edge up over time, and that is on a much higher revenue base for 2025. Our adjusted SG&A expense ratio was 8.3% in the quarter, a good result contributing to a slightly better view for 2024. Cash flow used in operations was $1 billion for Q3, driven by a few normal course balance sheet items: one, the settlement of marketplace risk adjustment payables for the 2023 benefit year, with the corresponding collection of over $800 million of 2023 receivables expected in Q4; two, Medicaid rate increases not yet collected; and three, an increase in Part D receivables. Unregulated cash on hand at quarter end was $266 million. During the third quarter plus October, we deployed approximately $1.6 billion on Centene shares for a year-to-date total of $2.4 billion. Our debt to adjusted EBITDA was 2.9 times at quarter end. Our medical claims liability at quarter end represented 51 days in claims payable, down three days sequentially and down two days compared to Q3 of 2023. If it weren't for a higher level of state-directed payments in Q3, we would have been at 53 days. We have updated our 2024 guidance elements to help with your modeling as we look towards wrapping up 2024. Our full year premium and service revenue is $2 billion higher than previous guidance, which gives us more earnings power for the future. Our consolidated 2024 HBR guidance of 88.3% to 88.5% reflects the Medicaid insights and updates we have provided you at the last couple of investor conferences. We continue to expect Q3 2024 to be the high watermark for our Medicaid HBR. 2024 SG&A guidance midpoint of 8.6% is slightly down due to cost management and revenue growth. To round out a couple of other metrics, we expect investment income of over $1.7 billion, excluding gains and losses on divestitures, and depreciation expense in the zone of $550 million. Importantly, we are still on track for greater than $6.80 of adjusted diluted EPS in 2024. Q3 represents another quarter of good progress, from another divestiture to cost management, revenue growth, Stars, and wins in Iowa Medicaid, Pennsylvania LTSS, and Michigan. Execution in our diversified portfolio enables us to reaffirm our 2024 adjusted diluted EPS guidance of greater than $6.80, despite the temporary Medicaid rate acuity mismatch that we've been briefing you on since May. As we make forward progress quarter after quarter, we still expect to grow adjusted diluted EPS in 2025 and beyond. Thank you for your interest in Centene. Rocco, let's open it up for questions.

Thank you. Today's first question comes from Stephen Baxter at Wells Fargo. Please proceed.

Hi. Thanks. I was hoping for the Medicaid MLR, you could potentially provide a little bit of commentary about where you're expecting the fourth quarter to land and any bridging items maybe we should consider, including maybe whether there are any retroactivity in the third quarter, either positive or negative. And then, I guess, just a follow-up would be, I'd love to hear you talk about the total level of cost growth that you're seeing in the Medicaid business and where that sits in the second half, trying to understand how much margin impact we should think about the composite rate update you discussed producing. Thank you.

Sure. Thanks, Stephen. So let me tell you a little bit about what we saw in the quarter and what that means for us as we sort of look into Q4 and 2025. It is a result of the groundwork that we laid out over the last 18 months and what we've shared with you in terms of the proactive dialogue with the states. We saw the inflection around the dislocation between rate and acuity start to pick up in Q2, and we were very early to call that out. We were very early to bring that to our state partners to show the data and then to continue to refresh that data on an ongoing basis. That became an important input if you think about the 14 states that have rate updates between July 1st and October 1st. One state that we've been waiting for to get an adjustment back to 2023, one of our smaller states, did come through, demonstrating their willingness to make adjustments. All of that nets out to the commentary around the composite rate adjustment being in the high 4s to 5% as we think about the year. We're encouraged by the momentum that we saw in the quarter and how we think about that influencing the conversations around not just 2025 rates, but continuing to push for mid-cycle acuity adjustments. As you heard from Drew, there's still work to do. But bringing that data forward, leveraging the strong relationships that we have at the state level and being able to push those productive conversations to drive results is what we stand on. I don't know if there's anything you want to add in terms of cost trend or anything.

Yes, Stephen, as you think about the progression from Q3 to Q4, just think about Q3 in Medicaid HBR being the high watermark, as I said in my remarks. We've got one pretty big state with a September 1 renewal and three states with October 1 renewals and rate updates that obviously will impact Q4 more so than Q3. If you step back and think about the HBR in the aggregate, Q4 is typically higher in the Medicare and commercial segments. Commercial typically ticks up during the year, and then in Medicare, usually Q1 and Q4 are a little bit higher than Q2 and Q3. So that rounds out as you think about your modeling from Q3 to Q4 in the context of the aggregate guidance that we provided.

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

Hi. Thanks. Good morning. Just a follow-up on that. Could you speak to core Medicaid utilization trends outside of the acuity shifts? What you're seeing in terms of same-store utilization trends? Maybe specifically comment on behavioral health and the areas you talked about in early September. And then separately, you said the reverification process is complete in your states. I mean, are you back to the normal procedures around reverifications, and how does that change the conversation with the states? Does that have any impact on how you're advocating for rates? Thanks.

Yes. Thanks, Josh. There's nothing new to add relative to the trend conversation from the updates we gave in Q2 and then throughout Q3. The major driver of HBR in Medicaid is the mismatch of rate and acuity. We have the ability to isolate underlying continuous member cohorts to validate the fact that there is no sort of massive trend sitting in that continuous member book. There are pockets of trend consistent with what we've called out previously: behavioral health, home health, and program-specific issues where a state may have changed the program and needs to give us rate to account for that. In an environment where you have redetermination pressing down on the whole book, those issues become more visible. Think about adding GLP-1s to the preferred drug list, changing rules around behavioral health access and changes to prior authorization on our side, and cost management techniques. Those are again consistent with what we've been saying throughout the quarter. We didn't see any new changes as we came out of the quarter. As for the rate conversations, they are really aggregate data-based. We're seeing states get through the tail of the administrative process. Understanding the impact of those administrative changes in terms of the remaining population and the resultant acuity is helping us to advocate effectively.

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

Hi, everyone. I want to clarify what you've mentioned compared to what some of our competitors have stated. If your composite rate increases fall between 4.5% and 5%, and this is the lowest point for the medical loss ratio, it seems that with rate adjustments, improvements are possible. Could you break down the rates you're receiving by program versus composite updates? What kind of rate adjustments do you think you need? We've heard from others that they're looking for high single-digit adjustments, and one mentioned possibly low double-digit adjustments. What amount do you require to achieve your goal of demonstrating consistent improvement in the medical loss ratio moving forward?

Yes. Thanks, A.J. The answer varies state-by-state. We have seen some states making outsized adjustments relative to what would be normal. This gives us the encouraging view that states understand the need to make up the difference between where their rates are standing for a specific state or specific program versus actual experience. Drew, do you have anything to add?

Yes. We've received rates in the high single-digit range in very small states. So don't get too excited; we got 10%. That just gives you the indication that states are looking at the data we're providing and trying to balance that into their actuarial process. We're making progress here and still have work to do throughout 2025.

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

Thanks. Good morning. I'll just follow up on some of the questions. First on rates, can you tell us specifically what period the 4% to 5% composite covers? Is that for the year? Is that for the second half? Could you share what cost spread compares to that 4% to 5% that you're seeing now? And lastly, you've seen a significant pickup in Medicaid pass-through payments. Just want to confirm, is that 4% to 5% including pass-through payments, or does it net those out?

Yes, thanks, Justin. So the 4.5% to 5% is the back half rate, a more recent time period. We'll look at that as net rates, so pass-throughs would be excluded from that as would programmatic changes if benefits were adjusted. We're looking at that as a net fundamental rate, although gross rates are often a little higher depending on the unique state program. I would think about it less in terms of cost trend and more about pegging that exit medical expense PMPM as we exit the redetermination period and matching the rates against that exit rate. As Sarah indicated, when we look down into our book of business and look at continuous members, millions of them, there isn't a lot of trend. There's some typical trend in high-acuity populations, reasonable levels of trend, and it's pretty flat in TANF. So match rates against that exit run rate PMPM over the next couple of cycles.

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

Thank you. Is there a way to size up the pent-up demand portion of trend that would slow as rejoiners slow versus the acuity mix that would continue? And on the GLP-1 topic, can you size how much pressured trend that is for states that cover it, and whether there is a corresponding adjustment in rates or if there's a lag for catching up?

Yes. So relative to rejoiners, we called out that dynamic where we're seeing 30% of members coming back. As we move through this process, there's an increasing gap in how long it takes for them to come back, which puts them out of the retroactive reinstatement window. That contributes to the HBR pressure that you've seen in the last two quarters. The more of that we work through over the last couple of quarters means that should create a natural tailwind as we turn into 2025. Regarding GLP-1s, Drew, maybe you want to discuss the states that have put those on formulary and how we share that data with them.

Actually, we've had states with GLP-1s available for the weight loss indication for a while. We have good data there. We take it to other states contemplating if they should put it on their formulary and share that data with them, which helps shape the rate discussion for states considering the ramping of that product. One state recently added GLP-1s, and we're sharing data monthly with them to ensure that their PMPM rate estimate upon the product's commencement aligns with the uptake we're seeing.

Thank you. And our next question comes from Andrew Mok with Barclays. Please go ahead.

Hi, good morning. Last quarter, you categorized Medicaid HBR improvement as a tailwind for 2025. With a modest setback in Medicaid MLR in the quarter, is it still fair to characterize Medicaid MLR as a tailwind for next year? What visibility do you have into January 1 rate updates at this point?

Yes. Medicaid HBR improvement is still a tailwind for 2025. As you heard Drew say, we've started to get some of those January 1 rates, and we'll have much more visibility and can update you on 2025 overall at our Investor Day in December. I still believe we'll be able to grow adjusted EPS, and those headwinds and tailwinds in the aggregate that we've shared previously remain the same.

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

Great. I was hoping you could give a little more detail to help our understanding on some of the rates and rejoiner aspects. With rate increases, are states doing that by program or at a composite level? When you think about rejoiners, do you have cohorts that are there long enough that you can see a normalization in utilization patterns? Thanks.

Yes. Relative to rates, we get a composite rate, which reflects a buildup of the underlying sub-programs. They take into account the variety of programs we manage. Regarding rejoined data, we do have cohorts long enough that we can see normalization in utilization patterns. Those rejoiners are coming back because they need services. Had we been receiving premiums for those members while they were out, it would have normalized the HBR more than what we're seeing. All of that confirms the view of artificial pressure creating MLR uptick.

Thank you. And our next question comes from Adam Ron with Bank of America. Please go ahead.

Hi, I appreciate the question. I was wondering if we could get a little more color on the Part D business. You mentioned you expect a 1% margin next year. How does that compare to this year? One of your peers mentioned that due to IRA changes, they saw a greater utilization shift in specialty drugs because the member cost sharing went down. Are you seeing that, and does it pose a risk for 2025, or does the voluntary program help minimize the downside? Any color around all that would be helpful. Thanks.

Yes, thanks, Adam. We're pleased with our positioning in PDP. Starting with 2024, we're right on track. We've thought about the member change in behavior that will be different in 2025 compared to 2024, but we made sure to factor that in. We're pleased to expect a degree of consistency between margins for 2024 and 2025. Our positions are strong, and we're below benchmarks in 33 out of 34 regions. We're targeting a 2025 PDP margin of around 1% and will look to edge that up over time.

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

Hi, thanks. Good morning. I was hoping to circle back on Sarah's comment about expected exchange market growth for next year at mid-single digits. One of your large ex-market-focused peers mentioned mid-teens growth expectation for next year. Given a few regulatory changes for you, could you walk us through your gross Marketplace growth outlook versus the net growth?

Yes, Scott. Long-term, we're very bullish on growth in Marketplace, but we want to provide context about the drivers of this year's growth. Coming off the tailwinds from redetermination creates a natural step down to a moderated growth rate. The program integrity policies being reintroduced create downward pressure this cycle. We anticipate normal marketplace seasonality, leading to mid-single-digit growth. One of those policies is the agent of record lock, which stabilizes enrollment, and more importantly, we believe we will still grow during open enrollment.

Thank you. And our next question comes from Michael Ha with Baird. Please go ahead.

Hi, thank you. Just wanted to quickly confirm, on your modest exchange growth expectations, does that imply Centene can grow higher than market, to higher than mid-single digit for next year? What level of cost trend are you assuming for fourth quarter? Directionally, is it fair to assume your guidance implies the 4Q Medicaid trend is higher sequentially?

Yes. Drew covered the seasonality of HBR, but to summarize, we're expecting Q3 to be the high watermark for Medicaid HBR. While we expect typical trends across the board, we're navigating out of the redetermination era at elevated medical expense levels. We're looking forward to seeing the benefit of the September and October rates in Q4. As for Marketplace growth, while we haven't quantified our target expansion, we believe we can grow higher than the mid-single digits.

Thank you. And our next question comes from Dave Windley with Jefferies. Please go ahead.

Hi, good morning. Thanks for taking my question. I was going to switch topics to G&A. Sarah, you mentioned AI. Can you quantify any of the AI benefits you might expect to see and if any of those projects are shovel-ready? Regarding G&A, are there timing-related spending items that we should consider for 2024 versus 2025? Thanks.

Yes. I'll let Drew cover timing more broadly. Just know that SG&A naturally goes up in Q4 due to selling periods for Marketplace and Medicare. Broadly, we've created momentum as we think about closing out year three. The AI product I mentioned is shovel-ready. We have been layering in AI across different parts of the business, and the results reflect how we've standardized our processes. This enables us to automate processes and leverage data to drive improvements in efficiency. We're focused on opportunities to extract EPS improvement through various enhancements to our operational efficiency.

We'll bridge you off of the midpoint of 2024, which is 8.6% at Investor Day. Adjusting for similar timing on business mix, which ultimately coats Marketplace and Medicare carries a higher SG&A load than Medicaid.

Thank you. And our final question comes from George Hill with Deutsche Bank. Please go ahead.

Hi, thanks. This is Maxi filling in for George. I appreciate you taking my question. The Medicaid PMPM appears to have increased significantly faster than your competitors this quarter. Can you share how much of this is due to rate adjustments? Are there any other primary factors influencing it besides rate adjustments? What is the sustainability of the PMPM growth at this rate moving forward? Thank you.

Yes, there’s an interplay with cash flow and state-directed payments impacting it. There's a fair amount of increase in state-directed payments in the quarter. The high 4s to 5% composite back half rate is helping as well.

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

Thanks, Rocco. I'll close out by emphasizing what you heard this morning. Our business objectives and expected 2024 earnings power remain unchanged. We are pleased to be making progress matching Medicaid rates with acuity and generating positive momentum on RFP wins in the meantime. Relative to Medicare, we are marking gains on important strategic initiatives there, and we continue to lead in our marketplace business, which is where our depth of experience and execution is unparalleled. We still have work to do and many opportunities ahead, and I look forward to updating you at our upcoming Investor Day in December. Thank you for your interest in Centene, and have a great weekend.

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 weekend.