My name is Cal Sternick. I'm the Managed Medicaid and Facilities Analyst here at JP Morgan. I'm pleased to have with us here, Centene CEO, Sarah London, and CFO, Drew Asher, for Fireside Chat this morning. I'm gonna turn it over to Sarah for a few introductory remarks, and then we'll move on to Q&A. Sarah?
Awesome. Thanks, Cal. Good morning. Happy New Year. Glad to be back, kicking off the year at JP Morgan. We obviously had our Investor Day just a few weeks ago in December and covered quite a lot of ground there, including, reaffirming our 2023 guidance of at least $6.60, and then sharing 2024 guidance of greater than $6.70. So with that as a backdrop, I thought I might just provide a few updates since then, and then we can dive into questions. So one of the things we talked about at Investor Day was that we were planning for one of our major value creation milestones at the end of 2023.
While many of you may have been watching the ball drop in New York on New Year's Eve, the Centene Pharmacy Services team was live in Tampa at our command center, making sure that no balls dropped, as we formally cut over our PBM systems at midnight on 1/1. It's obviously early days, but pleased to report that that work is going well. We've processed, as of end of day yesterday, 9 million claims, seeing really good collaboration between the Centene and the ESI teams.
And again, still early, but feel good about how that's progressing and wanted to just take the opportunity to give a huge shout-out to our team, who has worked tirelessly for more than a year, and sacrificed many vacations and holidays, including the most recent ones, in order to make sure that that has started off on the right foot. So very pleased about that. Relative to core business, we continue, obviously, in Medicaid, to be focused on the redeterminations process, with Q4 being a heavy roll-off in terms of membership, which we talked about. So we still expect to end the year at roughly 14.4 million Medicaid members, which is consistent with what we pointed to at Investor Day. We're still in the process of working with states.
We have three states outstanding in terms of acuity adjustments, and then some states that we're in conversation with about retro rate adjustments. I think that is gonna be normal course as we go into 2024 and just continue to work on that collaboration with our state partners to ensure that the acuity adjustments that we are receiving are matching what we observe in the member experience. From a Medicare standpoint, we came in right on track for annual enrollment period. We still expect to be down roughly $4 billion in revenue and mid-teens+ in membership, but very pleased with how that team executed on our strategy, including an uptick in the percentage of duals in the membership base, which was consistent with our plan and our stated strategic focus with that book of business.
Marketplace is in the home stretch on their open enrollment. We've got another week or so to go there. Very pleased with how that team has executed, continued to execute, and the focus that they've had on price, continued pricing discipline, as well as member retention in this cycle. You've all probably tracked the news coming out of the White House and CMS about strong market growth, so we continue to expect the possibility of some membership upside there, but we'll provide a more comprehensive update on the Q4 call in just a couple of weeks. Overall, feel like we're coming into 2024 with solid momentum.
We've got a great team, and we're continuing to add talent and up-level talent, against the work that we have, teeing up another year of really focused execution so that we can be sure to exceed our $6.70 of EPS guidance, and position the business for 2025 and beyond.
Great. So, thank you for all the membership commentary, and I think that's a really good place to start. So, you know, California came out and said, you know, they're gonna provide coverage to, I think, they estimated about 700,000 undocumented immigrants. How many members are you expecting from that? Do you have a sense for what the rates could look like there, and is that something that was contemplated in your 2024 outlook?
Yeah, California has actually done a really nice job, so I can cover sort of the overall program dynamics. They've done a really nice job of actually staging the phase-in of that population over the last couple of years. And so we've been able to bake that into our expectations and annual operating plan in California relative to the different subsegments of the population there.
Mm-hmm.
I don't know if there's anything else you want to add.
No, just it's the 26-49 cohort coming in.
Right.
But as Sarah said, the last couple of years, the over 49 and then the under 26, they've staged it out well, so-
Mm-hmm
... predictable, and it was embedded in our forecasts.
Great. So then when we think about redeterminations, I think that's played out pretty consistently with your expectations so far, and appreciate all the membership commentary you gave there. You know, as we think about the rejoiner rate that's been in that mid-20% range, how are you thinking that evolves over the course of the year? Are you thinking that should tick up, you know, just the membership attrition slows?
Yeah, so a couple of dynamics there. One is just taking a step back and thinking about the fact that the way that states kind of in aggregate approached the redeterminations process was more front-loaded-
Mm
... which is why we expected that heavier membership roll-off in Q2 and, you know, obviously, starting in April, but, you know, predominantly Q2 and Q3, and why we're where we are relative to the overall membership roll-off coming out of 2023. So some of it is that that front-loading states that either went aggressively at it or put sort of the bolus ex parte population right up front. The other thing that we've been obviously watching and sharing around the rejoiner rates is that they are coming in sort of consistently or had been coming in consistently in that mid-20s range, but also a little bit of incremental uptick as the backfill of the states and the sort of subsequent months fill in. So we're starting to see that kind of 25-ish % tick up a little bit, not much.
So we continue to watch that. If it feels like we're getting to kind of a Pareto on that, and it will continue to be something that we watch over the next quarter.
Mm-hmm. And what about the acuity piece when we think about redeterminations? I mean, you got the 2%-2.5% composite rate increase, so, you know, well above historical levels. Is that the delta all acuity adjusters or something in the baseline rates to call out? And I know that you guys take a portfolio approach to the way you talk about rates, but are there any key states to call out where rates were either, you know, particularly positive or negative?
So the answer to the first question is, it's largely the acuity adjustments that are driving that. And then, you know, we've shared a lot of detail around the fact that, in all but three states, we've received those acuity adjustments and feel like we're, we feel good about the kind of the degree to which the states are collaborative in those conversations. They're continuing to look at data and calibrate that as we go forward, so that we're not seeing what have historically been sort of binary decisions or conversations. It's really, we're gonna start here, we're gonna see whether we need to increase or decrease as experience plays out.
It's part of why we talked about some of those retro rates that we're in dialogue with states, at Investor Day, that some of those states are realizing that their sort of historical experience in 2023, that they want to go address. So we expect it to continue to be an iterative process as we go through 2024.
Mm-hmm. And I guess those three states you're still waiting on, do you have visibility on when you expect them to make a decision?
Oh, states often work on their own time schedule.
Mm.
I'm thrilled that 27 out of the 30 were in good shape with visibility. So no surprise, there's a few stragglers, but good, healthy, constructive conversations, as Sarah said, and hopefully we'll get visibility soon on those. One is notorious for taking their time.
Mm-hmm. And I guess the, the other part about when we think about acuity here, I mean, looking at your guidance, you guys have given very point-specific guidance for the Medicaid HBR in 2024, and, you know, compared to your other product lines, you're guiding to more of a range. So what are you seeing that gives you confidence in giving such specific estimates for Medicaid?
Well, it sort of goes back to as we are crosswalking past years to the forecast for 2023 and 2024, really wanting to give the transparency into what we were targeting. Of course, you should draw a bell-shaped curve around that, but, you know, every 10 basis points in Medicaid HBR is about a dime of earnings. So it's pretty meaningful that, you know, we'll try our best to sort of hit it on the nose, but you should draw a very tight, bell-shaped curve around that in the diversified business that we have.
I guess what, besides utilization, which obviously can always drive HBR shifts in a given year, I mean, what's the risk or opportunity that you see Medicaid coming in better or worse than expected, and, and why is that likely or not at this point?
I think ultimately, as Sarah indicated, it's, it's sort of matching rates and acuity, and over time in Medicaid, that does happen, and we've proven it out many, many years. So it's often a timing mismatch if a state's either, you know, late in providing an acuity adjustment or they want to see more data. But ultimately, we have no concerns about the opportunity to match rate and acuity, so sometimes it's just a matter of timing if you're measuring a calendar year versus a state fiscal year.
Mm-hmm. I know you've talked about the 50 basis point impact from redeterminations for this year, and that being a bit of a cushion, the way you're thinking about MLR, to an extent. I mean, so is the right way to think about a range, like, sort of like 90.1% being the high end and, you know, you have 86.6% sort of on the lower end? Is that the... Sorry, 89.6% in the lower end, the right way to think about it?
Well, if you go back to our Q1 call, I rattled off-
Mm-hmm
... all of the years for both WellCare and Centene, leading up to the onset of the pandemic, and if you average them out, Centene, the five years leading up was 89.6%, and WellCare was 89.5%. And really there was some deviation around that mean year to year, as you would expect, but not wide swings. So we, as we said at Investor Day, we would expect, I mean, that's sort of a margin expansion opportunity if you think about 2025, 2026 to get back into that, call it, high 89%s from the 90.1% that we are targeting for 2024.
Mm-hmm.
Yeah, I think just to emphasize sort of that, the concept of the cushion is really to address the potential timing dislocation, right?
Mm-hmm.
As we look at the data with the states and make those adjustments, obviously feeling good about the disengagement with the states and sort of the more fluid dialogue around that, but it's, it's more of a, you know, as we get through the redeterminations process in 2024, a margin expansion opportunity-
Mm-hmm
... as we level out back to steady state.
Mm-hmm. And how are we thinking about the underlying utilization dynamics for Medicaid, right? Like, I know we've seen what's happened in Medicare this year. Commercial obviously bounced back fastest from the pandemic. Can you just talk about what you're seeing for underlying utilization trend there, and on the HBR for the leavers versus stayers, are you expecting that to be roughly consistent still?
Yeah. So, we just reiterated our $6.60, so that's good news, just like we did at Investor Day, at least $6.60 for 2023. We haven't closed the books yet, but tonight we close the books on December. Medicaid utilization has come back through the year. I'd say it's back to sort of pre-pandemic normal, with some minor variations, but not, not that meaningful. We did see COVID tick up in the quarter, as you've probably read, you know, more publicly, and, not alarming, but a noticeable uptick, especially into December. We plan for these things in our, guidance and forecasts, so, largely sort of a normal return to utilization.
Mm-hmm. In terms of what you're seeing in the fourth quarter, because that's come up a few times over the last couple of days, everything still trending more or less in line with your expectations?
Yeah, we just reiterate you guys?
Yep.
So, yeah, once again, COVID uptick, you know, consistent with what public data is out there. Medicare, as expected, but still at that elevated level that we saw sort of tick up in May. We talked about that on the Q2 call. So we saw that tick up in May. It hasn't subsided. It seems like a more steady level. Luckily, we planned for that in our forecasts and in our bids for 2024.
Got it. Okay, so maybe switching gears to the marketplace for a bit. You talked about adding 200,000-300,000 members from redeterminations, and, you know, I realize it's tough to bifurcate what's attributable to redeterminations versus, you know, what, you know, the underlying growth is there. But do you have any sense for how many you've added so far relative to that 200,000-300,000 number?
Yeah, we're tracking well against that original goal. As you said, attribution precision and attribution is difficult other than our own members moving from Medicaid into marketplace, 'cause there's no place on the application form to say kind of where you're coming from. But we've sort of triangulated the external data and what we're seeing from CMS and extrapolated, so still on track for that 200-300. I, you know, I think we'll probably be closer to the 200 by the time we close the year, and then maybe closer to the higher end of that once we get through redeterminations, but at this point, we're still in that target zone.
Mm-hmm. And I, you know, obviously, the last couple of years have been a little wonky with the SEPs and everything, but are you expecting that when we get to the back half and get past the bulk of redeterminations, we get to more normal membership seasonality for the marketplace business, where you get some attrition in the back half?
That's a good question because you have multiple factors going on. Probably the most meaningful one is just the absolute growth of the market, so that sort of is overshadowing what might otherwise be peaking earlier in the year and then tailing off, going back to patterns from years ago. So couldn't be more pleased with the execution, as Sarah said, of marketplace, the growth potential. We indicated at Investor Day there could be some upside to that membership and revenue. That's playing out. We need to close out the open enrollment period next week, and then report, you know, report Q4. We'll give you some more insights on that, but really pleased with the positioning of our products, and what that means for the earnings stream going forward.
And what about looking ahead to 2025? I know you guys have talked about the expectation that the enhanced subsidies will, you know, remain in place, but what do you think that looks like? Is it they get made permanent? Are we looking at another temporary extension? What's your best guess at this point?
Yeah, I mean, I think frankly, the market growth that we're seeing right now is one of the best defense mechanisms, because it means we're adding millions of Americans, and providing access to care and coverage. It also, as we've talked about before, the timing was not by accident. It was designed to coincide with the expiration of the Trump tax cuts, which is a mechanism by which to bring both sides to the table to have this conversation. It's also, I think, important to... So two things are important: one, this is not as partisan as I think some would like to believe or would believe, relative to Democrats love it, Republicans hate it.
There's a lot embedded, and if you look at just what the Republicans have done relative to legislation in 2023 around HRAs, the idea that the marketplace chassis is a very interesting infrastructure for the individual market and sort of principles for coverage that I think align with, you know, a Republican view, and obviously is, you know, resonates with access to care and coverage that is sort of principal to the current Democratic platform. There's just a lot there to like, regardless of what side of the aisle you sit on. The other thing that I think is important to understand is that it's not necessarily, and you pointed this out in your question, it's not necessarily like they're there or they're not, right? 'Cause one of the things that happened in the extension was the expansion of coverage to different levels of the FPL.
One question is, does it continue to go as, you know, sort of uncapped, or do you think about a cap that brings it down to a different FPL level in the 300 or 400 range, which, you know, is actually minimal overlap with our core population, but may provide some relief? There are other ways to think about extending it versus making it permanent, and sort of what are the gives and takes of that. So that's sort of the entire kind of dimensionality of the opportunity that we look at when we say you've got millions of Americans who are getting additional care and coverage. Those are all gonna be voters. They're all gonna be vocal. Some of the strongest marketplace markets that we see are in rural communities in Republican states.
Mm-hmm.
And so again, there's a level of acknowledgement that there is value in this product and in this chassis that is on both sides of the aisle, and we think that's gonna help, you know, get us to a place where this continues to be strong infrastructure to build, you know, for future individual products.
Do you think the outcome of the elections are gonna matter for what, I guess, you know, the second version of this enhanced subsidy sort of looks like? Like, does it look dramatically different under a Democratic White House, look different under a Republican White House, or more or less the same regardless?
Well, as I said, I think there's an opportunity. There's middle ground here that is defined not by politics, but by policy.
Mm-hmm.
The idea that there is good policy in the overlapping Venn that sits down on top of the subsidies and frankly, sort of what the subsidies have done to stabilize the marketplace overall.
Mm-hmm
A nd to drive the market growth we're seeing and to drive the conversations we're seeing around, you know, a safety net for the small group market that is struggling, conversations around ICHRA. And so, you know, it's not gonna be a perfect match, but I think that there is space to play regardless of what the outcome of the election is.
Mm-hmm. And you mentioned ICHRA, so that's a great segue into my next question. Can you talk about the expected growth that you see in that business over the next couple of years? And do you see it being a meaningful portion of the business longer term?
It's still very early days, and as evidenced by the fact that, you know, when we talk about our long-term growth algorithm, we have not baked ICHRA consideration into that. We're gonna learn a lot this year through the pilots that we're doing in Indiana and some other kind of experimentation that we're doing to really understand what we think the rate and pace will be in terms of adoption in specific kind of sub-segments of the market. So I think we'll know more, the same way we know a lot more right now than we did 12 months ago, about how this is gonna evolve, where it's going to see adoption sooner.
If you think about sort of the most direct analogs, once all of the right pieces were in place, sort of the pension to 401 moved in five-ish years, you know, HSAs, 10-ish years. So, like, you know, there's probably a range there.
Mm-hmm.
But again, it's not sort of okay, the whole, you know, group market just goes to ICHRA.
Mm-hmm.
It's really thinking about what are those employer populations where this makes a lot of sense, and where you can drive adoption first, and then build momentum.
What are some of the challenges in getting employers to switch to this type of benefit design?
Some of it's just awareness, understanding that it is an option, understanding the math around it. And then making sure that for employers who either haven't provided coverage to their employees before and want to do so through this mechanism, or for those who have been providing it through a different mechanism, that there's the right sort of support, and wraparound, and education for their employees, to sort of take them through that process. The other thing that I think we've observed that's interesting is, this is, you know, very likely to be like all the other sort of retail products, supported by the broker community. But, you know, as Ken Fasola would say, "Brokers tend to choose a major," and this is sort of a new major.
Mm-hmm.
And so, you know, figuring out how to take brokers who are used to selling one by one, and those who are used to selling in large groups, and kind of creating this blended model, I think is another opportunity. And there are folks who are coming into this space, who are already in this space. The company that we're partnering with in Indiana, I think is a good example. And that kind of support structure is gonna be important for the market to build in order for adoption to accelerate over the long term.
And so when you guys, when either you or the brokers are pitching this idea of switching to, like, a defined contribution to employers, which aspect of it is really, you know, generating the most traction with them? Like, why are they getting excited about it?
So this is one of the things that we wanna test and learn for ourselves, but based on all of the conversations we've had, there are. It sort of depends. So some of it is, for the employers, there's a degree of kind of budget certainty, right? So instead of trying to manage self-insuring, I understand exactly how much I'm going to set aside, and I understand what the tax mechanisms for that are, and that is set, and it doesn't change. That is in all cases a nice-to-have. The question of whether it's the driving force or not depends. In some markets, it actually is an opportunity for the employer to offer choice that may not be available through, relative to who's providing small group coverage.
Hmm.
They may be in a geography where there's essentially a monopoly in the group coverage partnership, and this is a chance to offer their employees a wider variety of choice based on what exchange products end up being offered. That's an appealing factor in feeling like they're able to give their employees a chance to better customize and match what they're paying for relative to their needs. There are a number of different dimensions that we are hearing, and often they kind of come together to ultimately drive the decision to try the ICHRAs as an alternative.
Mm-hmm. And so when we think about your commercial book, I mean, one of the things that doesn't really come up very often is the group book that you guys do have. I know you guys did the whole strategic review as part of the value creation plan. Was the group book included as part of that? And can you talk about how that fits into your longer-term strategy and view for the company? And maybe just a couple of comments on how the commercial group book's been performing.
Yeah, well, and that's part of the answer. So we have done the review of all of the assets, so we have a view of what we see as core and non-core. And then the question of, you know, what and when relative to repositioning non-core is all about making sure that we find the right endpoint. So obviously, looking forward to closing the Circle acquisition this month, but that is one where we knew very early on that that was non-core, but we waited to find the right partner and the right positioning for that. So you're right. The California commercial book, you know, is not sort of right down the fairway of core business.
But it actually integrates really nicely with the overall California business and makes sense in terms of that sort of comprehensive ecosystem and is performing well, so there's not urgency around changing that at this point.
Mm-hmm. Okay. If we switch to Medicare for a second. So, you know, the 2024 repositioning, that was really focused on growing duals and increasing your duals mix as a percent of total. And I think that sees a low- to mid-30% range. Do you have a target for, you know, where you'd like that to be over the next three to five years? And you mentioned, like, the AEP went well. How are you seeing the duals mix evolve 1/1, relative to what you had anticipated?
Yeah, so the short answer is we wanna continue to increase that percentage. We don't have a pinpoint estimate, you know, over the next couple of years, because we're obviously continue to reposition that book and figure out kind of how the next couple of years are gonna play out in terms of you know in terms of denominator. And the focus on that population, AEP, played out well, and so we're seeing an increase. Again, we gotta see how OEP plays out, but we are seeing an increase from that low 30% per membership mix in this year, closer to sort of high 30s, which is great, and exactly sort of what we targeted.
So that tells us that we understand that population, we understand how to reach that population, how to design products that are attractive to that population, and we think that bodes well as we move through the next couple of years and continue to put that population, sort of the adjacent low income, you know, more complex populations as well, further in focus in the book.
Mm-hmm. And on the margin side of things, I mean, Stars are probably the biggest lever on that. But, you know, at the investor, you also talked about a few hundred basis points of SG&A opportunity for Medicare as well. So can you just give a little more color on what the big opportunity is there? How much of that is really on the revenue side versus how much, you know, there are cost efficiencies you think you can extract over the next couple of years?
Yeah, Stars is certainly the biggest lever. I don't know if you wanna talk about some of the clinical initiatives and other SG&A specific opportunities.
Yeah, you're right. As over the next few years, Stars being the biggest obvious lever to for margin recovery, which is a goal to do that, and then start mixing in some growth over the next few years. But beyond that, you're right. At Investor Day, I said we have at least 200 basis points of SG&A that we need to get after. Some of that's direct to Medicare, but some of it is the work we're doing, and what we used to call the value creation plan, but now it's sort of built into the fiber of the company, to really sort of reduce cost across the company, that then impacts the allocations down to our businesses.
So it's not just Medicare-specific costs, it's IT infrastructure, it's, you know, sort of getting more efficient in operations and ultimately, you know, migrating off certain platforms. So all of those costs that we expect to take out over the next few years would then benefit each of our products. In addition to that, clinical initiatives, I mean, the maturity we had pretty good maturity bringing in the WellCare business, and there's always opportunity to continue to hone the clinical initiatives and the execution around medical management. UM and CM are certainly opportunities, site of care opportunities. So not just completely reliant on stars to improve Medicare, but that is the lion's share of the opportunity.
And on that, I mean, you talked about getting back to 85%, three and half-star plans for, you know, October of this year. So-
October of next year.
October of next year, right. Can you talk about some of the improvement initiatives that are giving you confidence that you can get back there? And I think, you know, one of the other big tailwinds is gonna be potentially the Health Equity Index. So do you have any visibility yet on what some of the measures CMS is looking to track, and, you know, how are you preparing for that coming in?
Sure. So our focus in the sort of first turn around Stars was on the admin and ops measures, because that was where, frankly, we had the original issue, that caused our Stars problem. And so it's part of w e've been sharing kind of metrics around that in terms of, service levels, in terms of customer satisfaction scores, really focused on CTMs, appeals, and grievances. So feel good about how that tracked through the first year and continuing to hold progress on that front, and then shifting our focus in this cycle really to HEDIS and CAHPS, and making sure that our members are getting in to see their providers, that those gaps in care are getting closed so that those HEDIS measure numbers tick up.
There's a very high correlation between members seeing their doctors and then responding positively on the CAHPS survey. So you get a twofer if you focus on that. And we have significantly upped our resources around member outreach, around our provider engagement, to make sure that folks are getting in to see their providers, enhanced our network, so that wherever we had network gaps, where we got that feedback in previous CAHPS surveys, that we've really attacked that. And as we've talked about before, just continuing to have the level of rigor, added talent around that work. Our Susan Smith, our new COO, obviously, has a lot of history around Stars turnaround, and so we just continue to sort of bolster and buttress the focus on that. And really, the idea that quality is not just a Medicare issue or opportunity.
It accrues to all of our lines of business. HEDIS is very important in Medicaid. Increasingly, Marketplace is gonna start focusing on quality, and so we get the value of the investments that we're making in data. So a huge push around supplemental data, around digital data, which was frankly, a place when I joined Centene, that we were behind. We've come a long way in terms of our EMR connectivity, in terms of bringing in digital charts, harvesting that data where we pull it in for risk adjustment, making sure that we're also doing that for quality, that we're also embedding it in care management. So we can have those conversations one time with a member and sort of hit the coverage opportunity in terms of, how to get them healthy, and then make sure that, we're getting credit for that.
So feeling good about the comprehensive nature of the work there. And then to your question about the Health Equity Index, dates of service in 2024 start to build the baseline period for that. And the we don't yet have, as far as I know, the last time I checked, which was in December, so it may have come in over the new year, but the data from CMS to start modeling that, we don't yet have, but we obviously are prepared to sort of bake that in. The big focus is really predominantly around those HEDIS measures. Like, are you good at taking more complex populations who are sometimes harder to reach, sometimes harder to get in for care, and getting them the care they need, getting care to them?
And so, again, I think our focus in general actually aligns really nicely with where we need to be performing to ultimately get the benefit of the Health Equity Index for the more complex population that we've chosen to serve.
Mm-hmm. And, so if we think about the, you know, everything in totality, right? Health Equity Index for 2027, the SG&A opportunity you just talked about, I mean, if you're able to execute on all those things, and I realize, you know, a lot has to play out for that to happen, but I guess, is the expectation then that you get Medicare margins back to sort of your target range by [2026], 2027, 2028?
There's a lot we don't know yet.
Mm-hmm.
So I'm not here to give 2027 or 2028 guidance. Clearly, the goal is to drive towards that. We need to keep on pushing even beyond the 85% and three and half, hopefully getting some of that into four-star, which should happen naturally as we're pushing, you know, all the programs, as Sarah described. Don't know what the rates are gonna be for the next few years. Obviously, we have the Risk Model. I said to the investor today it's about a 1.3% headwind for each of the next two years, amortized in over a three-year period. Year one's already in our bids for 2024. So, still a lot to play out there, but you can look for those proof points each year as we report each quarter and update you on the levers we're pulling.
And, I mean, to that point, like, there does seem to be a lot more focus lately on what the Medicare Advantage TAM ultimately is, with all the regulatory scrutiny, with the risk model changes, and with penetration where it is. Do you have a sense for where penetration might ultimately max out?
We still see room to run. Obviously, the factors that you pointed out will play into that, and the question is sort of how and over what period of time? But, I mean, specifically, as we reposition our book, we still see real opportunity for growth in that business in the long term.
Mm-hmm.
It's a great value proposition for seniors. I mean, like, economically, it should be, it should be really high-
Mm
... and the industry's done a great job pushing it from 20 to now 50-ish. So there's a lot more room to run Medicare Advantage.
Mm-hmm. And what about Part D? Cause, I mean, that's an area where you guys are growing pretty aggressively this year, but I think that's somewhere where you're seeing a lot of other competitors start to pull away a little bit. So can you talk about what you're seeing and why you're looking to grow so much in Part D?
Yeah, I'd say it's more the members deciding what's the best value proposition for them versus the company deciding whether or not they're gonna focus on it or not. So the members will find their way to the best value proposition. Fortuitously, as CMS started changing some of the rules from the IRA, that corresponded with a new cost structure that just commenced 1/1/2024 for us. So we knew that obviously going into the bid process. We also thought about the opportunity as 2025. So the catastrophic phase, as you know, and some of the audience probably knows, goes... This is the catastrophic phase of the benefit plan, where payers currently have, in 2023, had 15% of that risk. The rest was between the member and CMS.
That's going to 20% for 2024, so you'll see a little bit of a yield pop in the PDP business because of that, and then it goes to 60%. So a pretty big step up. It's data that we've had since 2006, so we'll underwrite it, but that becomes another revenue opportunity with now a larger enterprise, or larger PDP business for us. So as a business, we've liked this business since 2006. What we really like about it, on a, you know-- so that's on a standalone basis.
What we really like about it is the strategic value that it brings us in managing our cost structure for the rest of our business, and that is evident in the fact that, you know, we can RFP PBM services and get a much better outcome for our customer, for our members, and for the company, in terms of the cost structure, by having that claims throughput. So it's that, plus the feeding ground, the captive audience we have. We're over 6 million members, as of 1/1/2024 in PDP. Revenue about $4 billion, but 6 million members that should be future MA members down the road. It'll take effort and maybe time to convert some of those, but, we love that business, and we're thrilled that others are choosing to focus less on it.
What does the conversion rate look like for PDP? Like, when you look at, you know, how many members you're adding this year, how do you think about how many MA members that could turn into over the next couple of years? Like, what, what is the conversion rate?
It's varied from year to year, and obviously, the positioning of your product has a lot to do with it, so it's less of an opportunity while we're in turnaround mode. Down the road, it becomes a larger opportunity, but it's varied over time.
Mm-hmm. How do you think about positioning the book for 2025? Obviously, you know, a lot of growth this year. I think when we think about growing so much, obviously, that has, you know, HBR and margin implications, right? So would you be looking to grow it aggressively again in 2025, or maybe, you know, moving more towards the balance between margin and membership?
In PDP?
Yeah.
We would expect to advance the margin along. I mean, you have the same year-one dynamics, where you're paying enhanced, you know, year-one broker commissions. That wears off after year two. But we'll, you know, we price it based upon cost, and so, as long as we continue to drive top-tier cost structure and pharmacy for our customers, and the federal government, and the members, then we should have a strong showing in the PDP business.
I want to touch on value-based care for a second. So, it's something you guys mentioned at your investor day, and obviously driving more penetration there. How are states looking at value-based care in Medicaid? Is it something that factors into the RFP evaluation process right now? Is it something they're considering, and is it something that you think they will look to weight more heavily in the future?
Yeah, we're seeing it more as a point of dialogue and interest in kind of the innovation category in the RFPs. Some states have leaned in harder, and actually created kind of guardrails or expectations around the degree to which the MCOs will create value-based arrangements. Obviously, we need to have good, willing partners, but it is- you are seeing states kind of realize that this is an opportunity, that they have the lever of the RFP to encourage that. And so, you know, all of that is good news, relative to the fact that we've been very focused on that, even pre-pandemic. And the penetration that we've seen, and the fact that, you know, 60% of our value-based arrangements in Medicaid are upside and downside, so we're taking real risk with these providers.
Starting to think about how to integrate the social determinants of health, drivers of health, as a factor in that, and really picking those providers that are, you know, the most sort of engaged and sophisticated. But also figuring out where we can actually coach providers to take on more risk, and think about things like, you know, the FQHC networks to share best practices around that. So we're pleased with how much work we've done to get reps on that, and have kind of good, partnership and a model for how to do that, as it becomes interesting to states going forward.
What does the population mix look like for value-based care in Medicaid? Is it mostly TANF? Is it mostly high acuity? Is it a mix?
It runs the gamut.
Mm-hmm.
Yeah. So there's an opportunity in all of those subpopulations for thinking about kind of more comprehensive care and the direct relationship they have with their provider. What are the additional resources we can bring to bear? So there's an opportunity for value-based care, you know, whether you're talking about, you know, moms and kids, or you're talking about more acute populations.
Great. So we've got about a minute left. We always like to end with this question. So, you know, Sarah, when we're sitting here next year, what are you hoping that investors are gonna appreciate about Centene that they don't today?
That we're cheap today. So two things. One is the value of continued operating discipline, and that is... You know, roll forward a year, that is fully embedded in our DNA as a company. It's, you know, it's taken a couple of years. We've made great progress, but that is just how we're gonna operate going forward. And the other is that, you know, in my view, Centene, in our view, Centene is a yes, and story. So you can clean things up, you can focus on margin, and you can still grow, and you can operate and innovate at the same time, and that's what we're working on.
Great. Thank you very much for joining us.