Good day, and welcome to the Centene Corporation 2025 Third Quarter 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, Investor Relations. Please go ahead, ma'am.

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our third quarter 2025 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. 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. Specifically, our discussion today of our expectations for the drivers of adjusted diluted earnings per share for 2025 and any commentary on expected adjusted diluted earnings per share for 2025 are forward-looking statements. 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 2025 press release, Centene's most recent Form 10-Q filed this morning and its 10-K filed on February 18, 2025. Additionally, other public SEC filings, which are 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. This 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 2025 press release. With that, I will turn the call over to our CEO, Sarah London. Sarah?

Thanks, Jen, and thanks, everyone, for joining us to review our third quarter 2025 financial results and updated full-year outlook. We are driving significant progress against the milestones we provided to investors in July, yielding a better-than-expected adjusted EPS result in the period. This morning, we reported third quarter adjusted EPS of $0.50, ahead of our previous expectation. Within these results, our Medicaid business delivered anticipated HBR improvement in the period that was further aided by a positive 2025 retroactive revenue adjustment in our Florida business. SG&A and performance within our non-core segment were both slightly favorable. Net investment income was stronger than we previously expected, and we experienced a lower effective tax rate in the quarter than originally forecasted. Marketplace experienced additional medical cost pressure in the last month of the quarter, but the segment still produced an on-track result for the period. And our Medicare segment, including MA and PDP, performed in line with expectations we shared on our second quarter call. With 3 quarters of the year complete, we are increasing our adjusted EPS forecast to at least $2, up from our previous forecast of $1.75 per share. When we came to you in July with recalibrated earnings expectations, we laid out 6 key assumptions that bridged us from our April outlook to the $1.75 per share forecast. We'd like to take a moment to update you on how those 6 factors evolved during the quarter and are now treated within our new adjusted EPS outlook of at least $2. One, relative to marketplace morbidity and its corresponding impact on risk adjustment assumptions, we received the second tranche of Wakely data in September, improving our visibility with industry-level paid claims through July. We are pleased this data was consistent with our previous estimates, and we have, therefore, made no changes to our original full-year assumption of a $2.4 billion pretax earnings impact within this new forecast. As a reminder, the next update from Wakely is expected in December. Two, also in the forecast was $200 million we added to account for additional Marketplace medical spend in the back half of the year. Marketplace delivered an in-line result for the quarter. But given the uptick in utilization we saw in September, we are holding the remaining $125 million of this provision in Q4 and are adding another $75 million given the volatility around eAPTCs. While we may not need this cover, as of now, we believe this to be a prudent posture given the landscape uncertainty that remains. Three, in July, we pointed to a 2025 Medicaid composite rate of roughly 5% based on the rates in hand at the time. With all scheduled rate adjustments now finalized, we expect the 2025 composite rate adjustment to be roughly 5.5%. Four, in July, we were targeting a second half Medicaid HBR of 93.5%. Our third quarter Medicaid HBR was 93.4%, which included $150 million in Florida Children's Medical Services program revenue, of which $90 million or 40 basis points was retro. As a result, we are now on a trajectory for a back half HBR of approximately 93.2%. Five, we continue to expect the Medicare segment to deliver $700 million of pretax favorability relative to our April full-year forecast. Medicare Advantage and PDP results in the quarter were consistent with our outlook, so no change to this expectation. Six, we are also still on track to deliver $500 million in pretax benefit from SG&A. In fact, we performed slightly better than expected with administrative expense reduction in Q3. However, given the fluid nature of marketplace open enrollment and the potential for additional enrollment activities surrounding eAPTC decisions, we are keeping the full-year SG&A assumptions unchanged for the last quarter as of now. In addition to those items from our Q2 bridge, we want to highlight investment income and tax rate performance in the quarter and how they impact our expectations for the remainder of the year. As mentioned earlier, Q3 investment income was stronger than expected. Gains were largely driven by one-time items and therefore, not expected to recur. We believe there may be opportunity to take some investment losses in the fourth quarter to improve the trajectory of investment income in 2026, and we are providing flexibility in the guidance to do so if the opportunity arises. Tax favorability in the quarter was driven by a lower tax rate, which was purely a matter of timing. Our view of the full-year tax rate remains unchanged. While we continue to track and pull levers to address Medicaid cost trend and are similarly watching marketplace utilization dynamics closely in this uncertain environment, we are pleased with the overall performance of the business in the quarter. With that, let's take a closer look at the performance and trajectory of each core business line, starting with Medicaid. We were pleased to deliver 150 basis points of sequential improvement in our Medicaid HBR this quarter. While this was aided by improved revenue from the Florida Children's Medical Services contract, it also reflects fundamental improvement that is a direct result of the actions we described on our Q2 call, including rate advocacy, program changes, clinical management, network optimization and more aggressive fraud, waste and abuse interventions, among others. Those efforts yielded tangible proof points in Q3. During our second quarter call, we identified 2 states, Florida and New York, where we were experiencing outsized Medicaid medical cost pressure. In Florida, you'll recall we saw significant trend pressure in the CMS population as members receiving ABA services were transitioned into that sole-source contract. We engaged in constructive dialogue with the state and shared real-time data throughout the summer. In September, the state moved to address the underfunding of that program going back to February 1. Additionally, the state provided a rate update for the coming year that better reflects the underlying medical demand within that population. In New York, we made real progress on the fraud, waste and abuse front, particularly in the behavioral health space. The Fidelis team was able to terminate a provider group that engaged in suspicious billing practices and drove sizable excess medical costs at the expense of New York taxpayers. The state has simultaneously taken several serious actions against the same provider. It's a great example of the confidence our state partners in Albany have in Centene. Through these and other performance improvement efforts, the New York team is currently on track to deliver meaningful HBR improvement in the back half of the year compared to Q2 results. We continue to see trend in Medicaid with the same drivers we described in Q2, namely behavioral health with ABA being a primary contributor, home and community-based services with home health as the major driver and high-cost drugs, though high-cost drug trend did show slight moderation in the period. As you heard on the Q2 call, we have organized enterprise-wide to address these dynamics and saw solid momentum in the quarter on those initiatives. A few examples. We have been actively working with states on solutions to address high-cost drugs and have seen multiple states make movements over the last quarter to implement drug-specific carve-outs and revised formulary decisions, including 2 states who have reversed course on GLP-1. Additionally, our ABA task force successfully leveraged our multistate experience and unique breadth of data to drive important policy advancements with our state partners. One state established increased precision in ABA clinical service definition as well as more stringent supervisory and caregiver engagement requirements. This drove a 45% reduction to outlier payment rates, which results in tangible financial improvement for the state's program and aligns members to higher quality services. We are pleased to be making real progress on our Medicaid margin improvement agenda, but we are certainly not declaring victory. With behavioral health still driving 50% of above-baseline trend, we continue to aggressively pull levers internally to appropriately manage medical costs and advocate for rates that reflect the medical demand in the ecosystem, all part of returning Medicaid margins to a more normalized long-term levels. Despite the challenges we have navigated over the last few years, our commitment to serving low-income and underserved populations has never been stronger. We are pleased to be making progress against our financial goals and making good on our commitment to be responsible stewards of state taxpayer dollars, all while continuing to provide high-quality care and access to vital health care services for our members. Turning to Marketplace. From a membership standpoint, we ended the quarter with roughly 5.8 million members, slightly better than expectations. As you heard earlier, the business produced an in-line result inclusive of medical cost pressure in September. Given what we saw in September and the reality that we are supporting a population staring down eAPTC expiration, and potentially the wholesale loss of affordable health care coverage next year, we felt it was prudent to provide for additional coverage in Q4 against a potentially more pronounced year-end utilization push. In the meantime, we have been laser-focused on positioning our marketplace book for 2026 margin expansion, and Q3 was the critical window for that effort. We were data-driven in the buildup of our revised rates, which ultimately averaged in the mid-30s, taking into account increased 2025 baseline morbidity, a prudent assumption for year-over-year trend and the combined risk pool impacts of expiring eAPTCs and program integrity measures. Consistent with what we shared in September, we were able to reprice our products for 2026 in states that cover 95% of our current membership and where we were not able to fully reflect the expected morbidity in the rates, we took additional actions to minimize margin impact for the remaining membership. Those rates have now been officially approved and absent any late-breaking policy changes will drive open enrollment as it launches this weekend. Congressional dialogue around eAPTCs has obviously gained traction in recent weeks; the outcome remains uncertain. While our products are priced to support year-over-year margin improvement in a scenario where eAPTCs expire, we believe these tax credits offer critical support for hard-working Americans, small business owners and rural health care infrastructure, and we are hopeful Congress can find a path forward. In the meantime, we are ready to open enrollment with strengthened digital tools and well-trained call center personnel to aid members during this time of uncertainty. Regardless of the outcome, we remain confident in the long-term importance and viability of the individual health insurance market as a critical coverage solution for millions of Americans. As we move beyond this moment of policy evolution, we continue to see a greater role for this platform to support a more affordable, portable individual insurance experience that we are excited to lean into and lead forward. Finally, Medicare. Both of our Medicare segment businesses performed well during the quarter, producing results consistent with our updated outlook provided this summer. Our reported Medicare segment HBR was 94.3%, reflecting typical cost of care patterns within Medicare Advantage as well as the inverted seasonality of pharmacy costs within PDP, owing largely to changes related to the IRA. Note that these dynamics are even more pronounced now that PDP is half of our Medicare segment revenue. Medicare Advantage medical cost trend remains elevated compared to historic levels, but was consistent with our expectations for the quarter. PDP performance was consistent with our previous view and is now largely contained by risk corridors, providing for increased visibility into the fourth quarter as the corridor serves to narrow the band of outcomes through downside protection for the product. AEP is live, and we are actively enrolling members in our 2026 Medicare products. Margin recovery once again took priority over membership as we constructed Medicare Advantage bids, but we are pleased with both the value proposition we are offering beneficiaries as well as our competitive positioning. We continue to invest in our member experience, providing enhanced digital tools and resources for members and prospective members. Dual eligible populations are a strategic focus for Centene, and we recently launched the first phase of our enhanced integrated duals model across 8 states as part of the broader transition of MMPs to integrated D-SNPs effective January 1, 2026. We look forward to the opportunity to serve these beneficiaries as their needs and our capabilities continue to align and evolve. Earlier this month, CMS released 2026 Star ratings that impact 2027 financial results, and we are pleased to have generated another year of progress. During this cycle, we elevated our performance despite continued cut point headwinds to 60% of members in plans at or above 3.5 stars versus 55% from the prior year with roughly 20% of members in 4-star plans. These results demonstrate a true One CenTeam effort with the initiatives being planned and executed at every level of the organization and provide us with increased confidence in our ability to achieve breakeven pretax margin in 2027. We are proud of the Medicare Advantage Star score advancements we have achieved over the last 3 years but remain focused on the opportunity for continued improvement. In the near term, we are leaning into provider interoperability, multimodal member engagement and advanced VBC partnerships as levers for the future. Overall, we are pleased to have maintained strong Medicare segment results, including positioning PDP well to achieve results better than the 1% pretax margin guidance we began the year with, and putting Medicare Advantage on an even stronger path to achieve breakeven in 2027. As we reflect on the quarter, we are pleased to have made material and necessary progress on Medicaid profitability and delivered solid results across the balance of the business. It is a testament to the resilience and discipline of this entire organization that we are able to raise the outlook today. And while a tremendous amount of work remains ahead of us, we intend to harness the positive momentum we have generated here in the third quarter to help power the balance of the year. Looking ahead, given that we will not be hosting an Investor Day in December, our plan is to provide detailed 2026 guidance on our Q4 earnings call in early February. In the meantime, we wanted to offer some initial comments on the major building blocks of our 2026 plan. In Marketplace, as we've shared, we were able to successfully take actions to account for baseline morbidity, trend, eAPTC expiry and program integrity impacts for 2026 across 95% or more of our membership. While the policy landscape remains uncertain, based on what we know today, we believe we have positioned the portfolio well for meaningful margin improvement in 2026. As a result of thoughtful bid construction and disciplined management, we believe our Medicare Advantage business is also well positioned for margin improvement in 2026. CP continues to outperform in 2025, but you can assume we would not guide to a similar level of outperformance as we step into 2026, making this a year-over-year headwind as we set initial guidance. In Medicaid, in light of our now better-than-expected full-year trajectory, we believe a prudent posture for 2026 is profitability consistent with our current full-year outlook in 2025. Additionally, you should assume that a lower tax rate environment makes net investment income a headwind and that our tax rate increases. Overall, we remain focused on driving margin improvement across the enterprise and delivering EPS growth in 2026. The current dynamic policy landscape has presented significant challenges in 2025, but also offers meaningful opportunity in the months and years to come. We have incredible runway ahead of us in the form of operational improvements, efficiency gains and margin expansion, all in service of our dual mandate to ensure quality health outcomes and serve as responsible stewards of taxpayer dollars. None of this would be possible without the tireless work of more than 60,000 Centene employees across the nation, serving and supporting our nearly 28 million members. Thank you once again for showing up day in and day out in service of our mission. With that, I'll turn it over to Drew.

Thank you, Sarah. Today, we reported our results for the third quarter of 2025, which include $44.9 billion in premium and service revenue and adjusted diluted earnings per share of $0.50. The GAAP loss per share of $13.50 was primarily due to a $6.7 billion non-cash goodwill impairment charge recorded this quarter. We will discuss this further shortly. The $0.50 adjusted EPS number includes a temporarily low adjusted effective tax rate for the quarter, contributing approximately $0.10 against an expected full-year adjusted tax rate of 20% to 21%. Let’s review the quarter's drivers and how they relate to the full year. Starting with Medicaid, we are happy to report a Q3 Health Benefits Ratio (HBR) of 93.4%, which is better than we anticipated and shows positive momentum. Among the previously mentioned high trending areas, the Medicaid high-cost drug trends showed some settlement this quarter, and we successfully advocated for significantly improved revenue in our Florida Children's Medical Services business, which has faced very high Applied Behavior Analysis costs. As Sarah mentioned, we received a net positive revenue adjustment of $150 million in Q3 for the Florida CMS program covering the period from February 1 to September 30, 2025, of which around $90 million was retroactive to Q1 and Q2 2025. This retroactive adjustment accounted for about 40 basis points on the Q3 Medicaid HBR. We also made some progress in New York, but more work is needed to enhance performance. Overall, considering the Q3 results and the momentum from actions taken in 2025, we are slightly ahead of our Medicaid HBR goal for the latter half of the year. Regarding rates, the cohort from September 1 to October 1, which comprises about 28% of our annualized premium, averaged in the mid-5s, aligning with the full-year composite rate for 2025. We remain focused on the rates for January 1 and April 1, which represent about half of our annualized premium revenue for 2026, and that advocacy is ongoing. Medicaid membership stands at 12.7 million, and we expect slight attrition in the coming quarters. In summary, we are pleased with the sequential progress in Medicaid, with opportunities for further improvement ahead. In our Commercial segment, the HBR for Q3 was on track at 89.9%. As Sarah noted, in September, we assessed the second run of marketplace weekly data, which reflects updated claims through July. This assessment aligns with the $2.4 billion forecast change previously discussed on the Q2 call. Our earlier guidance had anticipated an uptick in marketplace trends in the latter half of the year, particularly due to the public conversation surrounding the enhanced APTCs. We observed an increase in utilization in September, including in emergency room visits. As we analyze risks and opportunities for Q4, we have added another $75 million to our previous forecast for medical expenses in the marketplace. The key focus during Q3 was on submitting 2026 rate filings and advocacy related to APTC education. Currently, we have submitted rate filings in 29 states, which account for our estimates of: a baseline correction for 2025, projected trends for 2026, the impact of 2025 program integrity rules and those proposed for 2026, as well as the sunset of enhanced APTCs. Unlike 2025, which is expected to yield a slight loss, we anticipate that these pricing strategies will foster margin expansion in our Marketplace business in 2026. Our Medicare segment also performed well in the quarter. Medicare Advantage continues to make headway toward our 2027 breakeven goal, and we were satisfied with the announcement of October Stars, as detailed by Sarah. In terms of the PDP sector, while trends remain high in the non-low-income PDP demographic, they were not as elevated as we had anticipated for Q3. This is beneficial for cash flow and future forecasting but is mostly offset by the risk corridor receivable for current earnings purposes. As we mentioned during a webcast conference in Q3, we are pleased with how our 2026 PDP product is positioned against applicable benchmarks and direct subsidy estimates. More information will follow regarding the Medicare segment after the Annual Enrollment Period. Our adjusted selling, general, and administrative expense ratio remains strong at 7.0% for the third quarter, down from 8.3% last year, and 7.3% year-to-date, compared to 8.3% for the same period last year. This reduction is mainly due to the growth in 2025 PDP revenue and effective expense management in light of increased revenues. Considering the expected activities in Q4, particularly regarding open enrollments and member communications, we are currently assuming that we will utilize any remaining Q3 SG&A outperformance in Q4. You may have noted that investment and other income rose by $79 million in Q3 compared to Q2, thanks to several gains during the quarter and unexpectedly higher cash balances. As we approach Q4, we might realize some unrealized losses, similar to what we did a couple of years ago, in preparation for reinvesting in higher-yielding instruments for 2026 and beyond. For now, we plan to allocate the outperformance in Q3 investment and other income for that purpose. Overall, our fundamental business performance was solid in Q3 compared to our July forecast. Our GAAP results show a write-down of about 38% of our goodwill during Q3. As discussed on the Q2 call, the decrease in market capitalization led us to expedite our annual goodwill assessment into Q3. After a thorough accounting review, we reported a one-time non-cash charge of $6.7 billion in our GAAP results, which does not impact statutory capital, cash, or adjusted EPS outcomes. Our sole credit facility covenant involves a debt-to-cap limit of 60%, and we stand at 45.5% as of September 30, 2025, after this write-down. Regarding our balance sheet, we had no drawn amounts on our $4 billion revolving credit facility, which remains available until 2030. Additionally, we experienced a strong cash quarter with operational cash flow of $1.4 billion in Q3, primarily driven by net earnings and the timing of pass-through and other payments. Unrestricted cash at the end of the quarter was $357 million. According to our 10-Q, we expect to receive a net $200 million in dividends from subsidiaries in Q4. Our medical claims liability totaled $21.5 billion, representing 48 days in claims payable, an increase of one day compared to Q2 2025. Looking at the full year 2025, we are raising our adjusted EPS forecast from the previous $1.75 to at least $2, primarily due to early execution on improved revenue from Florida CMS. For 2026, we look forward to providing guidance on our next quarterly call in early February once we have concluded 2025. However, as Sarah indicated, we are optimistic about growing adjusted EPS in 2026. Thank you for your interest in Centene, and we can now open the floor for questions.

And today's first question comes from Josh Raskin with Nephron Research.

I guess my question really would be, how do you get comfortable that you are getting ahead of trend in the exchanges? And do competitor exits make the pool less stable for 2026? And is there a point where this adverse selection spiral causes you to rethink certain markets or maybe even the segment entirely?

Josh, thank you for your question. I want to address both utilization and market trends as we look towards the latter part of 2025 and our projections for 2026. In September, we noticed a slight increase in utilization, mainly in outpatient services, which coincided with a national rise in discussions regarding rate increases for 2026 and the eAPTC topic at the congressional level. While not a perfect correlation, there is a connection. As we plan for Q4 and consider the $200 million provision, we are moving the remaining $125 million into Q4 along with an additional $75 million. This decision is based on the trends we observed in September, extrapolating that data while acknowledging the volatility in the landscape and the concerns some people may have about accessing healthcare next year. Therefore, we anticipate a higher than usual increase in Q4 utilization and have incorporated prudent coverage as we close out the year. For 2026, we conducted extensive analysis, and I want to highlight the marketplace team's work with the weekly data starting in July. They examined the factors influencing our observations and identified indicators within that data predicting morbidity shifts beyond what we expect for 2025 or 2026. We built four major components into the revised rates we're filing for 95% of our membership. First, we adjusted the 2025 baseline morbidity. The consistency of the September weekly data with our extrapolated July data strengthens our confidence in this adjustment. Second, we accounted for a healthy trend provision as we move into 2026. Third, we factored in the expiration of eAPTCs since that is currently how the law stands, and we considered its impact on risk pool shifts. Lastly, we included a comprehensive view of additional risk pool shifts stemming from the ongoing 2025 program integrity measures and the enrollment barriers established in the final rule and OB-3. All these elements informed the revised rate, giving us confidence in an average step-up in the 30s, while keeping a focus on margin improvement. However, it's important to note that many factors are still uncertain. We don’t yet know the final status of eAPTCs or how the payment program integrity measures will proceed in court. It seems unlikely those will be resolved before Saturday or even during the originally scheduled open enrollment period. Our pricing considerations assumed all of these elements would be in place during that period. Regarding overall market stability, we believe there remains a competitive landscape, and our peers have been strategic about planning for 2026 by understanding risk pool shifts. We think that the fundamental structure of the market, supported by advanced premium tax credits, mitigates the risk of a death spiral, but we took a cautious approach in shaping our outlook for 2026.

And our next question comes from A.J. Rice at UBS.

I want to follow up on that and also ask about Medicaid. The open enrollment that enrollees will experience will likely reflect the loss of tax credits, and there might be a move by Congress to extend them in some way. Do you have the ability to quickly re-engage people to encourage them to sign up? I assume that those who are sicker and interacting more with the health system through their providers will be prompted to re-enroll, but I'm concerned about the younger, healthier individuals who have less frequent interactions and are still utilizing the exchanges. How easy is it to notify them that it could be beneficial to re-sign up, and what efforts are in place to facilitate that? Additionally, regarding your comment about stable margins or contributions in Medicaid for next year, several states are discussing adopting work requirements and implementing program integrity measures. How are you considering that in your Medicaid outlook for next year, and could it be a significant factor?

Yes. Thanks, A.J. Great questions, easy question. So let me hit marketplace first. And you're right. So what we are navigating through is the idea that traditional open enrollment launches on Saturday. The eAPTC discussion is, we assume live as we speak with the possibility that there may be action before the end of the year. And so I think what you're really asking about is sort of breakage. So even if we got eAPTC extension, are we able to go and recapture folks who maybe got an initial letter, made a decision about the affordability of their insurance based on that data point and don't actually re-engage or return of their own volition to understand how that landscape may change. So that is something that we are paying a lot of attention to. And in fact, if you think about our commentary about rolling forward some of the SG&A favorability that we saw in Q3 because of this idea that we may be going through sort of a multilayered enrollment process. We may find ourselves with a special enrollment period or an extension. We may want to be putting forward additional marketing efforts, obviously mobilizing our broker relationships to go and find those members if and as the landscape changes midstream. Our view is that there will still be some degree of breakage. And so even if the eAPTCs are extended in the middle of the cycle and you go forward, for example, with an additional 60-day special enrollment period, our view of market contraction for 2026 is in the high teens to mid-30s range. So again, that's based on sort of all of the different factors that could be at play. But it tells you that even that bottom end where, for example, the program integrity rules remain stayed and eAPTCs are extended that there is going to be some degree of market contraction. And again, some of that is the roll-through of '25 program integrity enrollment hurdles, but also a view that there will be some abrasion and breakage on members who get that initial letter and don't come back. But we are certainly prepared to do everything we can to go find those members and help them understand in the event of an extension that they do have access to affordable insurance and certainly have done all of the work kind of both mathematically and administratively to be prepared, frankly, for any of these scenarios. so that we can help be a good partner both to the administration as they navigate through this, but also supportive of our member base. So that's Marketplace. Medicaid, so a couple of things embedded there. Relative to work requirements, we saw some movement over the summer for states that were putting in waivers and thinking about potential early start, call it, 7/1/26 implementation of work requirements. As of now, those states that were sort of early in that have all moved back to a 1/1/27 start date. So we don't have any firm data points of states that have our intent or have explicitly pinned 7/1/26 start date. There's also quite a bit of important guidance that is still to come from CMS that is not scheduled to come down in rule-making until the summer. And those are really important provisions relative to state flexibility, how to define able-bodies, what additional population states may be able to carve out, what the data capture and reporting requirements are going to be, what the frequency is of all of this. So states can certainly and it should be, and we are working very closely with them to plan ahead, but there's a lot about what this is actually going to look like that is not even scheduled to become clear until the summer, which means that 2027 and for some states beyond that is going to be the more rational sort of implementation time frame of that. And then what, therefore, is the impact as we think about '26, we don't see a huge impact in '26 relative to work requirements as we think about the overall sort of margin profile and our ability to retain, as we said, sort of an initial view of '26 sort of consistent profitability. And then the program integrity measures, similarly, we are expecting some degree of membership attrition next year just as we're seeing states get better at the reverification process, but we don't see that as a huge swing factor.

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

First, just a quick follow-up on the exchanges. I appreciate you sharing your thoughts on the market contraction potential. I wanted to hear your view on competitive positioning for '26 versus '25. And would you expect your growth overall to be in line with that market or better or worse and by how much? And then maybe, Drew, any color you could share with us in terms of how much of that $700 million of Part D upside we should think about unwinding next year?

Yes. Thanks, Justin. So a little bit about market competitive position. So again, sort of a slightly refined view of overall market contraction in that sort of high teens to mid-30s. Obviously, it depends on sort of which scenario lands, and we need to see how open enrollment, which may be extra complex plays out. But it's possible that we end up slightly on the higher end of that range. However, relative to our competitive positioning and sort of the landscape relativity, we had 55% of our portfolio in the low-cost silver positions in '25 and 42% in '26. So not a huge change, but a change that I think reflects the fact that we were very focused on margin recovery over membership as we stepped into those 2026 pricing decisions. And then I'll kick it over to Drew on PDP.

Yes, that's a good question, Justin. As Sarah mentioned, PDP now represents about half of our $37 billion projected revenue for the Medicare segment in 2025. This context is important for understanding the overall segment impact. Regarding PDP, we expect to achieve a pretax margin in the 3% range for 2025, although we are still finalizing all aspects of our plan and need to observe how open enrollment unfolds. Initially, our guidance for 2026 may be slightly below that margin when we provide our forecasts in February.

And our next question today comes from Andrew Mok at Barclays.

Last quarter, you expressed confidence in margin improvement across all business lines, including Medicaid. Now it sounds like you're not expecting much improvement in Medicaid profitability. First, was that comment framed through the lens of earnings dollars or margins? Because I think there might be some pressure on the revenue line from disenrollment and contract losses. And second, was there a change in underlying performance across the broader portfolio when excluding some of the idiosyncratic events in Florida?

Yes. Let me explain Medicaid, starting with your last question. I'm pleased to report a sequential HBR improvement quarter-over-quarter, which aligns with our July guidance. The $150 million in Florida supports this, illustrating that rate advocacy is a key factor. While we don’t set Medicaid rates, we can influence them, and they are primarily data-driven. The main difference in our outlook for 2026 compared to July is that we're following a better-than-expected trajectory. It’s important to note that we will continue to focus on HBR improvement overall. We began with a high starting point in Q2 and a first-half HBR of 94.2%. For Q4, we expect an HBR lower than Q3, which was already lower than Q2. We benefit from solid rates at a 5.5% composite, which will contribute to the annualizing process into 2026. Additionally, we will be reflecting on the acceleration of trends. We believe these trends will likely moderate somewhat, but we are focused on managing them where possible. In Q3, we successfully made gains across all major levers we discussed, such as rate advocacy—notably in Florida—where the rates that became effective on October 1 were better than anticipated. We also worked on clinical policy design in various states to address high-cost drugs, with some changes effective January 1, 2026. We have concrete examples of how states are implementing these changes, including the addition of CCBHCs to their programs. We've learned from past experiences in our portfolio about the potential for high costs when implementing such changes without proper controls in place. We’ve also been optimizing our network, not only from a fraud, waste, and abuse standpoint but also through initiatives like Partnerships in Care, where we engage with outlier providers to improve care paths. Our efforts to combat fraud, waste, and abuse are showing strong results. We've gained significant visibility into more opportunities and strategies as we approach 2026. Almost 40% of our membership is set to re-rate in the January cohort. Today, we find ourselves on a better-than-expected path, with key decisions in 2025 yet to come that will inform Q4 trends and the starting point for next year. We currently have visibility into only 50% of the January rates, and those are still in draft form. As for our outlook for 2026, we believe a consistent margin and profitability is a prudent expectation as we move from 2025 into 2026. Ideally, we hope to exceed that, but it seems reasonable given our current knowledge and uncertainties. We look forward to providing more detailed insights and guidance during the Q4 call.

And our next question today comes from Ann Hynes with Mizuho.

In your primary businesses, including Medicaid and Medicare health exchanges, could you share your 2026 outlook and what trend assumptions you have for each segment? Additionally, regarding Medicaid, what are your initial thoughts on the composite rate increase?

Thank you, Ann. Let's begin with Medicare. The Medicare trend has been consistently in the high single digits, potentially reaching over 10% for the past few years. We expect this trend to continue. When we analyze it concerning our bids and the progress towards breakeven, it indicates a low double-digit increase. Eventually, this will impact the fee-for-service rates we all receive in the industry. We are looking forward to receiving advanced notice in February regarding this. In the Marketplace, consider the four categories I mentioned earlier, which correspond to an average rate increase in the mid-30s percentage. While the fundamental trend contributes to this rate increase, the anticipated shift in the risk pool is likely even more significant. From our experiences in 2025, as discussed in the Q2 call, we observed the effects on risk pools when program integrity measures are implemented. It was fortunate that we could learn this before our successful repricing effort, as indicated by Sarah. To reach the mid-30s average rate, we need to consider all aspects, with the fundamental trend being one of the four components. Regarding Medicaid, this year, our Health Benefits Ratio (HBR) is expected to increase by approximately 120 basis points from 2024, leading to mid-5s rates. According to Sarah, 30% of this will carry over into next year and into 2026 based on the annualization of what we obtained on July 1, September 1, and October 1. We also have some visibility into the January 1 cohort. Building off a high baseline, we achieved a 94.9% HBR in Q2 and 94.2% for the first half of the year. Additionally, we are leveraging various initiatives, such as the two or three states withdrawing coverage for GLP-1 medications for weight loss, the emergence of high-cost drug pools, and the carve-outs for expensive drugs like Zolgensma and Elevidys. These efforts have positively influenced our management of costs in areas like home health and behavioral health. We believe we are effectively moderating forward trends. We will provide further details on these components. Overall, with the information we have and what we don't have concerning 2026, we feel confident about the stability of our HBR, projected at 93.7% for 2025, and we aim to maintain that momentum into 2026 as we forecast for that year.

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

I was wondering if you could talk a little bit about Medicaid margins, obviously flat next year. Are you guys expecting that 2026 is going to be basically more of a trough year and that you should be expecting to build on that in '27? It sounds like you're assuming work requirements more of an issue in '27. Is that enough of a risk pool shift to offset the catch-up of prior rates? Or is it clear from this point that probably '26 is where you think the low point will be?

Thank you, Kevin. That's a valid question. As we look ahead to the next few years, our aim is to return to more typical Medicaid margins. We feel optimistic as we approach 2026, and our projection of stable profitability is a cautious stance. I would be disappointed if we don't exceed that projection because our team is well-positioned to implement the strategies we can control and influence. From 2027 and 2028 onward, we anticipate seeing the real effects of program changes, particularly concerning work requirements within the expanded population. There's still much to unfold, including how these changes will be adopted and how they will vary from state to state. We are approaching this by applying the insights gained from the redeterminations process and engaging in discussions with the states. We have established a formal team dedicated to this for the past six months and are coordinating with our health plan teams to understand state perspectives and identify ways to utilize our data and expertise to ensure that all eligible members who contribute to their communities have access to coverage. We believe we are well-prepared for this. Additionally, we see that states are increasingly using more recent data, and as significant program changes occur, they will need to make different decisions regarding how risk pools will change in the future. We are focusing on providing a clear picture of the expansion population, including the specific rates they receive and the expected shifts, so that states can consider this in their rate-setting processes for 2027 as early as the latter half of 2026. While we cannot guarantee that states will perfectly align the rates with these shifts, we are planning how this will play out in 2027 and 2028, while doing everything possible to position the organization for consistent margin improvement over the next couple of years to achieve long-term Medicaid margins.

Our next question today comes from George Hill at Deutsche Bank.

I guess this is more for Drew. I guess, Drew, can you talk about any of the assumptions that underpin the margin stability for Medicaid in '26? In particular, does that include the Florida retro and what's changed in New York? And I'd be interested if you'd be able to talk about the contribution of benefit cuts or benefit design changes you called out, the high-cost drug carve-outs, as it relates to margin stability in '26.

Yes, George, thank you for the question. Regarding the retro, it's not retroactive to a prior year; it's just retro. The Florida situation applies to Q1 and Q2. When considering the full year, we are forecasting around 93.7% for 2025, which reflects our goal for stability. While that's our initial target, we would be disappointed if we didn't manage to reduce it slightly. The 93.7% forecast includes factors I discussed with Ann, like high-cost drugs. In one large state, there will be a carve-out, and in another state, there's a payment pool for those payers involved. Other states are also looking into well-managed reinsurance pools to address the unpredictability of certain high-cost drugs. This is one example of the challenges we face in managing care and ensuring affordability for our state partners and members. I won’t revisit everything I discussed with Ann, but those were some strategies we considered to maintain stability as we approach 2026.

And our next question for today comes from Erin Wright at Morgan Stanley.

So you're still very committed to the business. I know last week, Sarah, you were at an industry conference discussing the ICHRA as a compelling area. How do you view the longer-term dynamics of the exchange business, including margin targets and growth profile? A lot seems to hinge on regulatory changes. Given your commitment, how confident are you in achieving those targets? What factors could potentially change your commitment to this area?

We haven't altered our commitment to this product and our long-term pricing philosophy remains the same. The work we did for 2026 aimed to significantly improve margin recovery. However, achieving longer-term stability largely depends on policy changes, particularly regarding eAPTCs, which is a key factor for establishing a stable foundation for our platform. Millions of Americans rely on the individual marketplace for coverage, even if eAPTCs were to be eliminated, and we believe there is still potential for growth among uninsured individuals. The current administration's consideration of innovative product designs and affordability initiatives is very promising. We view the individual market as a strong foundation for the future of insurance, with individuals desiring more control and affordability. As I mentioned previously, it’s challenging to offer limited benefit options for our 60,000 employees, as individual needs vary greatly. For instance, as a 45-year-old healthy woman who rarely visits the doctor, I find myself paying for more insurance than I actually need. We are enthusiastic about ICHRA and are optimistic that the administration shares this interest, given its historical connections to prior legislation. We are undergoing a policy transition and are confident in our ability to navigate it. We're exploring strategies to enhance transparency and stability in our core business, seeking collaborations with CMS, state regulatory bodies, and our peers to improve data sharing and address risk adjustment conversations more effectively. We remain committed to designing valuable benefits and pricing them accordingly in the exchange, positioning ourselves well for future individual growth opportunities.

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

I just wanted to ask about the kind of the rate mechanics in Florida. It's obviously good to hear that CMS, the population there, Florida saw reason on the rates. But just in terms of the cadence, it looks like in the third quarter, obviously, you got trued up on your performance there. So if we're thinking about the Florida rate update, does Florida actually improve sequentially in the fourth quarter now, which is normally what you would expect when you see those rate updates come in? Or should we think about the Q3 performance effectively showing that you've got the rate year-to-date rather than getting it in Q4? Hopefully, that makes sense.

Yes, that's a good question regarding the progression. For the quarter, we achieved a 93.4%. If we exclude the $150 million, which accounts for 60 basis points with $40 million relating to prior periods, we're starting from a 94.0%. You can consider mid-5s for the 9/1 and 10/1 cohort, with Florida slightly above that when looking at the mix of CMS, MMA, and long-term care population. We anticipate a sequential improvement from Q3 to Q4, influenced by the rates from the 9/1 and 10/1 cohorts, which will contribute to the anticipated better performance in Q4. Additionally, there are trends to consider, along with a softer November due to fewer business days and holidays, making November resemble February in terms of day count. All these factors play into our expectations for reaching around 93% in Q4, ultimately leading to a full-year target of 93.7% that we aim to maintain for 2026.

And our final question today comes from Lance Wilkes of Bernstein.

Great. Yes. Could you give some maybe additional color on the resetting environment at the states? And what I was interested in is what sort of variability are you seeing across states in rates? And then as you're looking at the budget outlook for fiscal '26, '27, how is that budget, the '25, '26 fiscal year and then the '26, '27 conversations that you're seeing impacting the potential for future rate increases? And as a result of these things, are you seeing any smaller competitors that are looking to either exit contracts or not rebidding in any of the states you participate in?

Every state has its own unique circumstances, leading to differences in absolute rates. However, for over 18 months, we've observed a positive trend in collaborative discussions about these rates. We're now utilizing a full year of data for the 1/1 rates, which reflects current trends and the effects of redeterminations over the past year and a half. This growing emphasis on recent data helps us better foresee potential inflation. A notable example is Florida, which had to use '25 rates for adjustments. This has become a typical approach as we plan for the upcoming 1/1 cohort and beyond. Looking at the budget outlook for states, there are concerns regarding legislative changes that may impact budgets in '26 as states work to balance their finances. There's a significant opportunity for our partnership with states to create value. They are approaching us with balanced budgets and tighter constraints, seeking ways to maintain essential benefits and health outcomes while optimizing their programs. We've provided numerous examples of this collaboration and see considerable potential. Additionally, states are considering including fee-for-service populations in core procurement cycles, particularly those struggling with ABA services in the past year. We notice prospects for new program additions in the RFP pipeline for '26. While we expect budget challenges, we view these as chances to assist states in managing care and taxpayer dollars effectively, aligning with our core business objectives.

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. Thanks, everyone, for the questions and for your time and interest in Centene this morning. 2025 has definitely been a challenging year, but I firmly believe that Centene is stronger for it. And I just want to take a moment to thank my teammates for being unwavering in your focus on and commitment to our mission. We look forward to continuing to provide updates on these key inputs and milestones and then obviously provide formal guidance for 2026 on our Q4 call. 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.