Centene Corp (CNC) — Q2 2022 Earnings Call Transcript

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our second quarter 2022 earnings results conference call. Sarah London, Chief Executive Officer; Brent Layton, President and Chief Operating 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 the Centene team 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 these forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-K filed on February 22, 2022, 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 can be found in our second quarter 2022 press release, which is available on the company's website under the Investors section. Please mark your calendars for our next earnings conference call scheduled for October 25. With that, I would like to turn the call over to our CEO, Sarah London.

Thanks, Jen, and thank you, everyone, for joining us this morning. Centene entered 2022 with a focus on value creation. As a reminder, value creation at Centene means becoming a better partner by simplifying and strengthening our operations, making it easier for our members and providers to work with us. It means focusing on our core business and leveraging trusted local relationships to fuel disciplined growth, and it means allocating capital to innovation that delivers better outcomes. Value creation is not measured solely in earnings per share, but importantly, in the impact that we have on the members we serve and the communities we support. Over the last six months, our value creation program has gained momentum and scale with efforts that span our local health plans and enterprise-wide functions. At the same time, the team is executing well on our day-to-day objectives and doubling down on our work to define the long-term trajectory of the organization for 2025 and beyond with a focus on sustainable growth and market leadership. This morning, I'll provide headlines of our quarterly performance and cover a few more recent value creation updates. Before handing the call over to Brent for an update on product line performance, I'd also like to touch briefly on what I've observed over my first few months as CEO about Centene's ability to differentiate in the marketplace. Let's start with the quarter. Second quarter results were directly in line with the guidance we provided at our June Investor Day. Thoughtful product positioning across lines of business, initiatives to enhance medical management, and a more balanced approach to capital allocation all contributed to our strong first half performance, which provides an excellent foundation to build from as we look to the balance of the year. Today, we once again increased guidance with our full year adjusted EPS outlook now at $5.60 to $5.75, which represents a cumulative $0.20 increase since Q1. You will hear more details about the quarter and this improved full year outlook from Drew shortly. On the value creation front, we are full steam ahead. You've now heard quite a bit about the myriad in-flight initiatives Jim Murray and his team are tracking and supporting in close partnership with our business leaders. We continue to see solid progress on our operating model redesign efforts as well as our work to optimize key process-driven functions like quality and utilization management. Our plan to establish a pharmacy center of excellence across the health plans continues to advance, and the PBM RFP process remains on track. In the handful of weeks since our June Investor Day, we completed the Panther divestiture, closing out another key milestone in our portfolio review work. As previously announced, a majority of the net proceeds from the sale will be used to repurchase stock and the balance to reduce debt. Yesterday, we announced another important portfolio action with the signing of a definitive agreement to divest our Spanish and Central European assets to Vivaldo Sante, which is the third largest private hospital company in France. We believe Vivaldo Sante is well positioned to invest in and grow Ribera Salud, Totan and Pro Diagnostics group while ensuring they continue to provide high-quality care for patients across Europe. Across the remainder of our non-health plan portfolio, the review process remains very active, and the team is leveraging our evolving long-term strategic framework to ensure that we position these assets either through investment, partnership, or divestiture to deliver maximum strategic benefit moving forward. Consistent with our capital deployment plans, it is worth highlighting that we repurchased $450 million of our common stock since the beginning of Q2, leveraging proceeds from other minor asset sales in the quarter. On the real estate front, we previously described the comprehensive exercise to evaluate our leased and owned real estate portfolio. Today, we took an important step towards the achievement of run rate savings related to that exercise, recognizing a charge reflecting a material reduction in the company's real estate footprint. This allows us to capture savings associated with the space rationalization beginning in Q3. We continue to expect approximately $200 million of run rate savings for 2023 and beyond. This initiative reflects the high value we place on evolving Centene to meet the needs of our incredible workforce, but it should also serve as a proof point that we will look to pull forward the benefits of our work wherever possible, as we progress on this value creation journey. As you can see, value creation work streams are delivering tangible progress and measurable results. As we move into the second half of the year, we will continue to provide updates on major operational milestones in keeping with our commitment to transparency and to prove that we are building the momentum necessary to carry us through the rest of this year and help us deliver meaningful financial results in 2023 and 2024. Centene's ability to grow, deliver, and transform all at the same time is made possible by our most valuable asset, our 80,000 diverse and innovative employees. Their mission-driven dedication to our members powers everything we do in this organization. I've spent quite a bit of time on the actual and virtual road since taking on this new role, meeting with our health plan leaders, renewing connections with our key state partners, and listening to team members at the front lines of our market operations. And I want to report back to you that my conviction regarding the power of Centene's local approach has never been greater. Local matters when it comes to growth as our unparalleled business development team improved yet again with the recent win in the state of Delaware. Years of boots on the ground, personal visits, relationship building, and deep market knowledge were key to securing a contract award in Centene's 30th Medicaid state. Local makes the difference when it comes to outsized impact, as I saw on my visit to our Silver Summit Health Plan in Nevada. There, team members realized how many of our new mothers didn't have access to transportation, and so they partnered with an organization called Babies Bounty to create a diaper van that could deliver baby essentials, diapers, and wipes directly to Southern Nevada's tiniest and most vulnerable residents. Local also makes a difference when it comes to innovation, as I experienced firsthand on a recent trip to New Hampshire. Combating the effect of rapidly rising food prices and knowing the risk food insecurity presents to our Medicaid members, our team at New Hampshire Healthy Families jumpstarted their Green to Go program, distributing locally sourced fruits and vegetables from food vans strategically positioned across the Granite State. So let me tell you where local really makes a difference. Local makes a difference when it comes to caring, the kind of deep personal caring that comes when your customer is also your neighbor. On May 14, when shots rang out in the aisles of a neighborhood grocery store in downtown Buffalo, our extraordinary colleagues at Fidelis Care in New York State sprang into action. No one from headquarters had to call them and tell them what to do. They knew what to do because they were there inside the community, because they were local. Within 24 hours, Fidelis employees mobilized to distribute food and needed supplies into a community whose only grocery store was surrounded by police tape. And with the neighborhood pharmacy inside that top grocery store suddenly closed, our locally based team identified and called every one of the 373 members who had filled their prescriptions at that pharmacy in recent months. Within 72 hours, each of those 373 members received a personal call from a Fidelis Care employee checking in on them, assuring their supply of medication was in order, and assisting them in identifying additional pharmacy resources in the area. Neighbors engaging in simple but profound acts of human caring. That's the power of local. We are proud of the progress and the financial performance of Centene year-to-date, and we are proud of the work that our team members do every day. Value creation for members leads to value creation for shareholders, and we will continue to focus on this alignment in the coming months and years as we execute on both value creation and our long-term strategic plan for 2025 and beyond. With that, I'd like to pass the call to Brent for more detail on our core business line performance during the quarter.

Thank you, Sarah, and good morning. I'm happy to talk about the performance of our core business lines during the second quarter. Centene is the leader in Medicaid Managed Care, and I'm pleased to say we continue to grow. Earlier this month, we were honored to be notified by the state of Delaware of an intent to award Centene a contract to serve a statewide Medicaid managed care program. Beginning January 1, 2023, Centene's Health Plan Delaware First Health will provide integrated services for physical and behavioral health and long-term services and supports through the Diamond State Health Plan and Diamond State Health Plan Plus programs. This is Centene's 30th Medicaid state. It's quite an achievement, and we look forward to this tremendous opportunity in Delaware. In addition to our new state, earlier in the quarter, we were successful in the reprocurement of our Missouri contract serving TANF, CHIP, and expansion membership. We were also awarded the sole source specialty plan for children and foster care in Missouri. These contracts began July 1, and we're serving nearly 50,000 foster children and children receiving adoption subsidy assistance in the state. This is our industry-leading fifth sole source and specialty contract serving children and young adults involved with the child welfare system. We are incredibly proud of our innovative programs and outcomes for this membership. Our existing Medicaid membership has increased to 15.4 million members at the end of the second quarter. Medicaid growth continues to be aided by the ongoing suspension of eligibility redeterminations. As you're all aware, that PHE is now extended to at least mid-October. As states consider their programs and budgetary needs post-redetermination, several states are beginning the process to transition new populations into managed care. The state of Indiana has recently released an RFP for long-term services and supports, and we have recently responded to an RFI in Georgia, where the Medicaid agencies are asking MCOs about their ability to serve more medically complex populations. Whenever the PHE comes to a close, we'll continue to work with our state partners to support member transition. We remain confident in our ability to attract eligible membership to our marketplace products in 25 states where we have both Medicaid and exchange membership. Speaking of our exchange product, we entered the quarter at over 2 million members. Halfway through 2022, we remain the leader in the marketplace product. The quality and consistency of our product offerings and operations have led to continued membership growth and the ability to partner closely with our providers. We continue to monitor the situation in Washington regarding enhanced advanced premium tax credits and remain cautiously optimistic on the movements of this reconciliation bill. We feel confident in our submitted bids for 2023, and we look forward to targeted geographic expansion and thoughtful expansion of new products that we began to offer in the 2022 open enrollment. In Medicare, we ended the quarter at nearly 1.5 million members and are pleased with our continued membership growth of over 18% year-to-date. Utilization continues to be steady, and we're seeing the benefit of our focused clinical initiatives. As we look towards annual enrollment, we are concentrating on margin and network expansion and the further penetration of existing states and markets. We continue to see deals as an area of growth for our company as our core capabilities position us well to serve this complex population. Midway through 2022, our core products continue to perform well. With that, let me turn the call over to Drew.

Thank you, Brent. This morning, we reported second quarter 2022 results of $35.9 billion in total revenue, an increase of 16% compared to the second quarter of 2021 and 11% organic with 5% from M&A. We reported adjusted diluted earnings per share of $1.77 in the quarter, up 42% from $1.25 in Q2 of 2021. Overall, I'd characterize this as a strong quarter consistent with the update we provided to you at Investor Day on June 17. Let's start with revenue for the quarter. Total revenue grew by $4.9 billion compared to the second quarter of 2021, driven by strong organic growth throughout the last year in Medicaid, primarily due to the ongoing suspension of eligibility redeterminations, strong Medicare membership growth during the annual enrollment period, the acquisitions of Magellan and Circle, and the commencement of contracts in North Carolina. Total membership increased to 26.4 million, up 7% compared to a year ago. Our Q2 consolidated HBR was 86.7%, and Medicaid at 89.1% was a little better than expectations. Medicare at 85.6% was right on track, and our commercial business continued to make progress toward our margin goals aided by the results of risk adjustment, which in the marketplace is zero-sum across the industry and tends to settle out pretty quickly in the following year. Given the risk adjustment headwind we experienced in Q2 of 2021, we expected a big year-over-year improvement in HBR, and we got more than we expected. The commercial HBR of 77.5% improved 1,250 basis points year-over-year, also driven by pricing actions and a return to more normalized utilization compared to the second quarter of 2021. When we look at our consolidated data, our Q2 COVID costs were down about 2/3 from Q1, which included the Omicron variant. Utilization has largely returned to a more normalized cadence as we have encouraged and facilitated our members to access health care, including preventative care. Furthermore, throughout 2022, providers seem to be more resilient to managing COVID and non-COVID simultaneously. There are still a few areas that appear to be suppressed compared to 2019, such as non-emergent ER visits; we believe Telehealth and improved primary care connectivity have played a role here. Moving to other P&L and balance sheet items. Our adjusted SG&A expense ratio was 8.2% in the second quarter compared to 7.3% last year. On a combined basis, the inclusion of Magellan and Circle increased the ratio by approximately 40 basis points compared to the year-ago quarter. Additionally, we incurred increased risk adjustment and member engagement costs that accompany the commercial HBR outperformance, higher Medicare broker commissions as we continue to grow, and increased variable compensation. We expect our value creation plan to drive SG&A lower over the next few years, though there will be ROI-based investments along the way. On the topic of the value creation plan, during the second quarter of 2022, we recorded an impairment charge of $1.45 billion related to the reduction in the company's real estate footprint consisting of $744 million related to leased real estate and $706 million related to owned real estate assets. This was the lion's share of the charge we discussed at Investor Day in June, with approximately $200 million more expected to come over the next couple of quarters related to real estate optimization. Cash flow provided by operations was very strong at $3.4 billion in the second quarter, primarily driven by earnings before the real estate charge and a reduction in receivables, partially due to the receipt of state-directed payments. Our domestic unregulated and unrestricted cash on hand at quarter-end was $483 million. During the second quarter, we repurchased $344 million of our common stock through our share repurchase program. As a result of the value creation plan year-to-date, we have repurchased $450 million, including $106 million executed in July. Furthermore, on July 14, we completed the divestiture of Panther and expect to recognize an after-tax gain of approximately $400 million in Q3. The majority of the net proceeds of approximately $1.3 billion will be used to repurchase stock and reduce debt as mentioned earlier by Sarah. We are working to close the Magellan Rx transaction by the end of the year. Estimated net deployable proceeds on that transaction would be in the zone of $1.1 billion. We were pleased to announce the sale of a few of our international businesses yesterday. Debt at quarter-end was relatively flat at $18.8 billion. Our debt-to-cap ratio was 41.3%, temporarily pushed up from the real estate charge. We continue to target a high 30s debt-to-capitalization ratio longer term. Our debt to adjusted EBITDA came in at 3.1x, pretty close to the milestone we are seeking of 3x or less. Our medical claims liability totaled $16.6 billion at quarter-end and represents 55 days in claims payable compared to 53% in Q1 of 2022 and 48 in Q2 of 2021. The sequential increase was largely driven by the timing of pharmacy payments and state-directed payments received but not yet paid. As a reminder, on June 17, we lifted our adjusted EPS range by $0.15 to a range of $5.55 to $5.70 million. Today, we're adding another $0.05 to guide to a range of $5.60 to $5.75, largely driven by some of the real estate benefits to be realized in the back half of the year net of some investment spending, such as the Delaware win. In aggregate, since issuing initial 2022 guidance in December, we have increased our full year adjusted EPS outlook by $0.28 or 5% at the midpoint. GAAP EPS guidance has been adjusted to reflect the real estate charge and the gain on the sale of Panther. We've also updated the components of guidance, and I know some of you have models to build, so let me touch on some of the other P&L metrics. Full year premium and service revenue is down $1 billion in cost of services is down approximately 100 basis points due to the divestiture of Panther. We also adjusted our share count and expect interest expense around $660 million, factoring in the deployment of Panther proceeds. We have ticked down HBR by 10 basis points to reflect performance in Q2 and have lifted adjusted SG&A by 20 basis points. Approximately 1/3 of that lift is due to Panther, which had a high cost of services ratio but a very low SG&A rate. The remainder reflects the SG&A items I mentioned earlier, slightly offset by the $0.05 net SG&A benefit in guidance. For the full year, we would expect investment in other income in the zone of $400 million excluding the Panther gain and depreciation in the low to mid-600s, and we still assume a November 1 commencement of redeterminations and guidance. Overall, I'm pleased with the tangible results we are showing today, both in terms of performance and value creation. But to be balanced, there are areas that we still need meaningful improvement, such as Medicare Stars. Though we have referenced this multiple times, we want to make sure we are explicitly transparent. The star scores that come out in the fall of 2022, called rating year 2023 Star scores that drive 2024 Medicare revenue will be disappointing and unacceptable to this management team. At Investor Day, Sarah touched on the why. We've been rebuilding governance, fortifying operational areas, and making the appropriate investments in people, process, and technology over the past nine months, and that will continue. Execution in 2022 will drive Star scores to be released in the fall of 2023, which drive 2025 revenue, and we expect will create a meaningful rebound from the rating year 2023 Star scores. The senior management team and value creation plan are all over this. While we've made great progress in the first half of this year, this company has plenty of opportunities to improve, which will create long-term value for our members, providers, state and federal customers, and shareholders. That's what we're excited about. Our journey is on track, and thank you for being part of it.

I wanted to stay on Medicare Advantage where you ended up, Drew. And if I look at it, your revenues are up. I know you've got a bunch of products in there, but I'm guessing MA is probably up in the low 30% range. The MLR is down I think, about 150 basis points for the first half of the year, and that can be atypical. So I'm curious, what do you think is driving the MLR improvement, especially when a quarter of the book is new members? What metrics are you watching more closely to confirm that MLR? And then lastly, is 2023 still a year where you're targeting further MA margin improvement? Or are you getting some of that this year already?

Thank you for the question, Josh. Most of the improvement we report as Medicare HBR is coming from our PDP business. However, the Medicare Advantage segment is also performing slightly better year-over-year. The company set its pricing for 2022 to ensure stability in HBR when the bids were filed around June 2021. For 2023, we anticipate a significant increase in margin expansion, especially with Stars revenue coming in. We'll aim for a balance with more modest growth. Brent mentioned during Investor Day that we could see low to mid-single digits growth in Medicare Advantage, which I believe is a good strategy while focusing on margin growth for 2023. Looking ahead to 2024, we will face some challenges that will require us to reconsider our bidding structure, but we expect to see improvements in Star scores by 2025.

Hello, everybody. Thanks. Maybe I'll just ask a similar question but directed toward the marketplace, public exchanges. I know this quarter, the reported MLR looks quite low, but I think that's getting benefit from the risk adjustment true-up. Can you just give us a flavor for where you're at, you think, this year in your margin and your normalized HBR? And then, is this a jumping-off point that's sustainable? Do you think you'll give some of that back next year? How do you think about the long-term trajectory of the margins on the exchanges?

Yes. I mean I'm really pleased with the execution around member engagement, physician engagement sort of risk adjustment process, which is a lot of nuts and bolts execution. And so that's something I think we can carry forward into future periods and continue to leverage better execution. We're not quite at the stated pretax goal of 5% to 7.5% in marketplace this year, and we expect to push into that next year as we look at the momentum we have in execution and financially and then think about sort of the right pricing and making sure we maintain competitiveness, sort of balancing all those things as we submitted the bids for next year. So we expect a little bit of an advancement in margins even with the improved performance in Q2.

Yes. I was hoping you could maybe just give us another walk through as you see it today on 2023. I know you're not guiding yet, but can you talk about your latest thinking in terms of what you're seeing as headwinds and tailwinds going into next year? You're obviously looking at a few areas of margin improvement that you've made this year. What's your jumping-off points for 2023 if you could?

Yes. This year, we are implementing strategies that we believe will yield results, not only in 2022 but also set us up for 2023, 2024, and beyond. Currently, our performance is in the mid-5s, slightly above that, and we are aiming for the low 6s range that we have targeted for the past six to nine months. Referring back to our Investor Day presentation, we saw over $300 million in SG&A contributing to our $700 million goal. Out of that, real estate execution accounts for $200 million on a run-rate basis, along with other initiatives, as Jim and Sarah discussed at Investor Day, providing us with additional support. We have made significant progress in gross margin in 2022, and we expect to improve further in 2023, which is how we structured our bids. We also mentioned the Medicare margin, which should serve as a meaningful advantage. Regarding our value creation plan, we anticipate benefits from share buyback, and we've seen some annualization from that this year. We have divested a couple of businesses, which are generally in the neutral zone, but we are channeling those proceeds into share buybacks and reducing interest expenses and debt. Investment income will also play a role in our value creation plan. However, we are facing some challenges, such as redeterminations, which we discussed at Investor Day. This could create a revenue headwind in the range of $7 billion to $7.5 billion, depending on when redeterminations commence. Additionally, we are monitoring enhanced APTCs, and Jen or John can address those questions later. We are also consistently tracking carve-outs of pharmacy within the Medicaid business, along with the ongoing uncertainties regarding Medicaid rates and trends that may fluctuate. It is our responsibility to influence and manage these factors.

I wanted to ask you about the Medicaid MLR. Over the last couple of years, you've talked about paying about $1 billion of COVID-related margin corridors back to the states. Wanted to hear what you're seeing here year-to-date and expecting for the year overall, both in terms of the number of states they'll have in these in place and how you expect that to trend going forward? Reason I'm asking is just your MLR is up over 100 basis points year-to-date. I'd assume you'd have to eat through on a year-over-year basis a lot of that $1 billion at the state level before your own MLR will be impacted. So just trying to figure out what's going on there.

Yes, that's a good question. The COVID period in earlier disclosures really highlighted the new risk corridors and acuity adjustments that arose during that time. As anticipated, this has decreased to a few hundred million due to the expiration of those risk corridors. However, what might be more pertinent to your question is the total amount we expect to face in risk corridors, paybacks, and other mechanisms, regardless of whether they stem from the COVID period. We anticipate around $1.3 billion in payback this year across our portfolio of 29 states.

Building on that question from a slightly different perspective, one reason companies have indicated that redeterminations won't negatively impact margins is due to the dynamics of risk corridors. However, I find it challenging to reconcile this with the idea that the risk pool hasn’t improved during redetermination, so it shouldn’t decline when the terms are reinstated. The concept of risk corridors raises doubts because if companies are at maximal margins in several states, it suggests that the risk pool is actually better than average. Therefore, why wouldn’t this pose a broader challenge, either because of the dynamics you mentioned where it’s not an all-or-nothing situation or due to the fact that you're not in risk corridors in every state? I’m just trying to gain a clearer understanding of the Medical Loss Ratio implications or the effects of redeterminations.

Yes, losing $7 billion to $7.5 billion in revenue and associated margin is significant and cannot be downplayed. However, I have mentioned several times that since our initial revenue preview for 2022, we have grown significantly beyond that $7 billion to $7.5 billion. Therefore, when we finish this period, we will be a larger company than initially anticipated, despite temporarily losing that amount of revenue. Regarding the risk pool, we discussed our analysis during Investor Day, and I share the concern you raised. Evaluating the data on zero utilizers, we found that the Medicaid expansion population decreased compared to the base period of 2018 and 2019, which was a positive surprise. Although TANF increased slightly, there were no major concerns. Looking at the 0 to 25% high-risk population, there was a small increase, but it was not alarming, especially considering the payback situation in some states. While being in a payback position does not solve all issues, it is one of many factors we consider when assessing the potential impact on this population. As of now, this is our best assessment without additional data.

What I would just add, I think to Drew's point, it doesn't change all the work that we are doing to prepare the redetermination process, and that includes bringing forward that data in conversations with state partners because I think as we said at Investor Day, we believe that it's manageable, but that still creates the mandate for us to manage it in partnership with the states and supported by data.

Maybe just a follow-up on that point, though, I guess, a little more time. The fact that the risk hasn't gotten worse, I guess, redeterminations are suspended, then helping people and sick people stay on the roles. In theory when redeterminations get reimplemented, the healthy people will drop off because they know how to qualify because they got jobs or they don't qualify for the other classifications. But the sick people stay on. So I guess, why is that the risk pool hasn't changed a whole lot necessarily mean that it won't change a whole lot, respectively?

Well, I mean, you're talking a theory, and I'm looking at data. So I mean, we're not going to declare that there won't be any difference whatsoever between the pools of stayers and levers. But when we look at the utilizers. We look at sort of the minimal utilizers, it's not that concerning. And the other mitigating factor is that 88% of our membership is in states that we believe, not based upon some Kaiser study, but we believe based upon our boots on the ground and the local presence that Sarah talked about that those states will take ten or more months to redetermine and therefore, that's why we've got sort of this amped-up rate process in place where we're working with the states sort of forewarning them and then are going to be prepared if there is a differential in the risk pool that we need to get compensated for that.

Yes. Can you talk a little bit about 2023 and 2024 Medicaid pricing, how are the states looking at inflation? And I guess in discussions you're having with the states, if you could also talk a little about, in addition to redetermination, what sort of recession planning are the states starting to engage in?

Yes. We are continuously sharing data with our state partners regarding pricing. Since we are still in 2022, we need to finalize rates for the latter half of the year. Therefore, we do not have clear visibility on our forecast for 2023 rates, which we usually announce at the December Investor Day. However, the discussions have been positive. The states are eager for data, which is crucial for influencing and convincing them about what is needed. Currently, we haven't seen much movement on inflation, but we are keeping a close eye on it. We are also advising our state partners that if we observe inflationary pressures, those will need to be factored into the rates.

Budgets right now are stable. And I would say it's as stable as we've seen for many, many years. The states are focused on PHE when it ends, and ultimately, states actually want their citizens to have access to health care and health insurance. Most of our time is working with the states and help planning for whenever the PHE ends and all the paths so that their citizens can have health coverage, whether it's commercial or the exchange or Medicaid or wherever they qualify. So the recession planning, I would say, is not there yet, but where the planning is, is around the PHE and ensuring people have coverage.

Obviously, there's going to be a few different moving pieces to modeling revenue impact from the divestiture. So I thought it may be helpful if you can maybe just walk us through the incremental annualized revenue when we think about incremental from Panther, then the sale of MagellanRx and the sale of the European assets that you talked about yesterday, really trying to figure out sort of what's now reflected in the updated revenue guidance versus how we should think about modeling the impact of divestitures when we think about annualized out to 2023.

Yes. So we reduced our premium and service revenue by $1 billion for the back half of the year. Panther was a little over $2 billion, although it's growing quickly. And the Central and Spain assets were about $700 million in annualized revenue. And we don't expect to close Magellan Rx until late this year; really, I guess, late this year is our best estimate. So it wouldn't impact 2022. I was just going to add, and when we announced that in conjunction with Panther, think of it as neutral to slightly accretive, the combination of those two assets, so minimal, if any, impact on earnings.

Yes. Thanks for the question. We're obviously pleased with the progress to date. We got a lot done in the second quarter, but we still have the broader portfolio of non-health plan assets, and we're sort of methodically working through those so if you think about the assets that historically have sat within healthcare enterprises, and some of our other non-health plan businesses, all of those are going through a consistent process. We're looking to prioritize that work where we're going to have the greatest impact. So there is still a lot of work going on, and you should expect to hear additional announcements about that. But again, and I've hit this a couple of times, the answer in all cases is not necessarily divestiture. In some cases, these are very strategic assets that can be positioned to actually strengthen the core. And so that's part and parcel of the conversation, too, particularly as we think about positioning the company for growth in 2025 and beyond.

Drew, you had talked about taking price actions in the marketplace business for '23 as you work back toward target margins in that segment. I think across the market, it looks like average premiums will be up in the neighborhood of 10%. I guess like when you think about your business and enrollment for next year, how are you expecting the consumer to react to those types of price increases, I guess, in the current environment? Do you have any kind of preliminary view on what you think enrollment in that business could look like?

Yes, there are several factors still in play. We need to wait and see how the enhanced APTCs play out before the August recess, as that could significantly impact us. The timing of redeterminations is another critical factor. Additionally, if the family glitch improves and becomes more applicable to the marketplace, that could also influence things. There are too many variables at this moment, and we are still awaiting Congress's decision on the enhanced APTCs, so I can't definitively forecast if the outcome will be slightly up, slightly down, or unchanged. Regarding pricing, we made a substantial pricing adjustment heading into 2022. It wasn't as high as you mentioned in the overall composite. Perhaps it's fortunate we didn't have to raise our rates by 10% on a composite basis while still achieving significant margin growth this year. Next year, we won't see as much margin expansion since we need to target a range of 5% to 7.5%, especially compared to the pretty poor performance we experienced in 2021 in the marketplace financially.

We do not view the marketplace as a generic national approach; instead, we see it very locally, similar to Medicaid. It varies from market to market. Earlier, we mentioned that out of our 29 states, soon to be 30 with Delaware, we have an overlap of exchange in 25 of those states. The relationship between providers and potential insured individuals, as well as our understanding of the markets, will benefit us and has already shown positive results in 2022.

Yes, right, right. At Investor Day, I was pretty explicit that the first half, we expected 64%. I guess that's now 63% now that we printed because we lifted the full year by $0.05 and that $0.05 to your point, it's actually a dime of benefit early benefit on the real estate run rate, minus $0.05 of investment Delaware is one example, but there's other ROI-based investments we're making in the value creation plan that we intend to make in the back half of the year. So that's why we increased guidance to net nickel. But otherwise, it's the normal progression, HBRs in like the commercial business and marketplace, those sort of rise throughout the year. And it's sort of a normal cadence thereafter.

Yes, I would like to follow up on the redetermination process. I'm not sure if this will be handled nationally or on a state-by-state basis. Can you elaborate on the timeline for redeterminations after the PHE concludes? Do you anticipate that a significant number of these cases will be resolved at once, followed by the paperwork process? Alternatively, will these individuals remain on Medicaid while you assess their eligibility? I'm considering how this will affect my modeling of redeterminations.

It's definitely a state-by-state process. So Brent, maybe you want to talk about what we're seeing operationally.

And well said, it is definitely state by state. At the end of the day, all states are waiting to see when the PHE ends, and they're planning from that standpoint. Some states will take many months and some will be much faster. And it really depends both on how the state ultimately sees health care coverage and how they want to proceed in their state. But nonetheless, every state are having working groups and meetings and approaches through communication, through education, and really trying to help everybody understand the options they have from that standpoint.

One thing I would add that we're tracking pretty closely are the ex parte numbers that each state is accumulating, which are those members that would be automatically either dropped or renewed at very different levels of maturity relative to the volume of members that could go through an automated process, but it's actually a helpful proxy for us to understand what would happen in early months versus, as Brent said, the states that are going to take a more measured approach in order not to create member abrasion and also reflective of the fact that the states have staffing issues and want to make sure that they have enough support for the process overall.

Firstly, just a quick clarification regarding A.J.'s question. How much did the favorable 2021 risk adjustment benefit your exchange in that quarter?

It’s clearly a significant factor. We anticipate this every Q2, and the change was quite striking because, as you may remember, we fell short of our expectations in the marketplace during Q2 of 2021. Therefore, it’s a forecasted contributor since this is when we receive initial data and later the final CMS data. However, we exceeded that, as demonstrated by the 1,250 basis point improvement year-over-year.

I wanted to revisit the comments you made about the Medicare HBR, particularly regarding how much of the PDP performance exceeding expectations is intentional versus how much is a result of better-than-expected results. Additionally, how are you planning to maintain those PDP margins throughout 2023?

Most of the year-over-year improvement was planned for in the bids. And plus each year, as the yield drops because of the shifting of the responsibility and sort of the benchmarking that's unique in PDP. I mean it's a very low-yielding product. So the HBR has to be low because you have a certain amount of admin to reflect. I think the yield is sort of in the $35 to $45 PMPM range depending on the product. And then there's a little bit, to your point, there's a little bit of outperformance on top of that, but most of that was planned.

I appreciate how you keep highlighting the MA stars, ensuring everyone is aligned on that. I have a couple of smaller questions I'd like to address. First, regarding days claims payable, you mentioned a few factors that temporarily increased that this quarter. Will these factors reverse next quarter, meaning we should expect a decrease in days claims payable? Secondly, concerning investment income, to meet your guidance, should we expect it to be around $150 million per quarter in the latter half of the year, as we anticipate higher contributions to earnings from investment income during that period?

So yes, on investment income with $400 million. I think we were $94 million or so year-to-date first half. That includes we sort of wrote down the fuel investments, we cleaned up some things that hit other income and investment income in the first half of the year. And we had some equity investments that obviously took a hit with the equity markets. But yes, we expect around $400 million for the full year. So I don't know if it will exactly be $150 million a quarter because there's a ramping up of the Fed rates, obviously, embedded in that. But you're correct there. And your first question DCP. Yes, the state-directed payments element, I would expect that. That's literally we're getting cash from our state, and we've got to push it out to hospitals. That typically happens the next quarter. It may take a couple of quarters depending on sort of the detail around that, but that's pretty much in and out. Pharmacy invoices are tough to predict. I mean, we don't manage to a DCP. It's actually an output. It's interesting. I'm always looking to see where it came out when we closed the books. But often, there are balance sheet elements that impact that, that are just timing, things have stretched over the quarter. But fundamentally, I do believe in strength of reserves and that is a measure, an imperfect one, but it is a measure of the strength of reserves.

I apologize if this was asked already, but I wanted to follow up on Star scores for plan year 2024 revenues. Our understanding is the industry as a whole is going to face some headwinds as some COVID era factors run off. So was the point in the prepared remarks that you kind of expect to underperform that industry headwind? And then can you just give us a bit more color on the key pressures you're expecting?

The answer is yes. And if you go back to the first time we started talking about this Q3 of 2021, you're absolutely right. There's an industry factor, and we benefited from that probably, I'm thinking an outsized amount relative to peers. But for the plan year 2022, so the 2023 revenue were just over 50%. As an example, we're just over 50% of our membership in Forestar that would be less than half of that, absent the disaster relief provision. But on top of that, as we started to see operational execution and indicators from sort of the end of 2020 and then into the first half of 2021 and then look at results throughout 2021 and now some of that's into 2022 in terms of that rating year '23, you're talking about, we believe we're going to underperform. What we're driving now is what we can control; this management team can control, which is execution in 2022 and beyond, which will drive rating year 2024 STAR scores that result in 2025 revenue and those are the Star scores you'll get publicly in the fall of '23, hopefully attract me there.

Yes. Maybe just to quickly at Wave top sort of rehash the history lesson that we went through at Investor Day on the why. And again, the time period that Drew is pointing to is really that back half of '20 and early part of 2021. And those 21 days of service are what impacted revenue anticipated from Starz in 2024. And so early 2020, we brought Centene and WellCare together; a couple of things happened, right? We tripled the Medicare book overnight. We brought two different parts together that were operating in fundamentally different models. One was centralized at WellCare, and one was decentralized, very hard to run an enterprise quality program at our level of size and scale in a decentralized model. And then we sent everybody home for COVID. And so what we saw was the degradation of operations and performance in the back half of '20 and first half of '21, which again will impact '24 caught that in the middle of '21 and added new leadership to the quality program in the back half of last year, tuck them under the value creation office in order for that to be sort of unified prioritized initiative. And then this management team, which is different from the past, has committed to quality performance, is a priority for the whole company, and we've baked it into our short-term incentive for every single employee. And so all of the work that Jim Murray talked about at Investor Day in terms of how we're watching operational performance for 2022 dates of service. The executive team watches those on a weekly basis because that is what is telling us that we can be looking for a meaningful rebound in revenue year 2025.

Let me add one more thing on that. This is a long answer to a short question, but we are still committed to driving and pulling levers to achieve our multiyear plan. So while this is going to be a headwind for an isolated 2024 year, and it will turn around, it will be a nice tailwind for 2025 based upon our execution. Our compensation is still tied to the targets we laid out, as you saw in the proxy, and this organization is going to drive towards executing on the multiyear game plan that we laid out for you.

We want to thank everyone for joining us this morning. And if there are any follow-up calls, please feel free to reach out. Thanks very much.