Good day, and welcome to the Centene Corporation second quarter 2020 earnings call. All participants will be in listen- only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Head of Investor Relations. Please go ahead.
Thank you, Jason, and good morning, everyone. Thank you for joining us on our second quarter 2020 earnings results conference call. Michael Neidorff, Chairman, President, and Chief Executive Officer, and Jeff Schwaneke, 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.
Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-Q, filed today, July 28th, and Form 10-K, dated February 18th, 2020, and other public SEC filings, including the risks and uncertainties described with respect to the potential impacts of COVID-19 on our business and results of operations. Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2020 press release, which is available on the company's website at centene.com under the investor section.
Additionally, please mark your calendars for our third quarter earnings release, which is expected to take place on October 27th, 2020. With that, I would like to turn the call over to our Chairman, President, and CEO, Michael Neidorff. Michael?
Thank you, Jennifer. Good morning, thank you for joining Centene's second quarter's earnings call. We hope all of you and your families are staying safe and well. There's a lot to discuss today, especially as the environment around us continues to rapidly evolve. I'll start by reiterating our confidence in the strength of our business. Centene was built to endure and manage through times of uncertainty. We have a strong balance sheet with ample liquidity. We have experience with crises. We have emerged from prior recessions with strong growth, and we see opportunities for continued growth today. With our scale, our diversity, our systems, and our impact, we are confident in the strength of our business and our ability to continue to lead through this crisis.
You have heard me say we make decisions based on the facts as they are today, and never has this been more true or appropriate as we manage our business in this pandemic environment. I stated several months ago that we expect the environment and our financial results to be choppy from quarter- to- quarter, and I want to reemphasize nothing can be truer than that today. It is increasingly clear that we are going to be living with this pandemic for some time and probably well into next year. We are planning our business with that in mind. I'll remind you about the assumptions we made in June about what to expect in the development of this virus. At that time, we expected the initial spring peak would be followed by smaller spikes during the summer and a potential second wave in the fall.
However, the current trajectory shows the infection rates are rising significantly across a number of key states, and case counts continue to go up, which differs from what we expected only a few weeks ago. With this trend in mind, we will continue to provide you with transparent updates and give you our best estimates as to how we see things at a particular point in time. First, utilization. Utilization returned to more normalized levels towards the end of the second quarter. Volume began to return in May, and June was virtually a normal month relative to prior years. With the recent surge in the virus, we are seeing some decline in utilization in July. Note that this data is preliminary and includes COVID-related costs.
While we believe hospitals are better prepared to manage COVID cases after learning from the experience of the initial outbreak, there are indications that some hospitals are reverting back to delaying elective procedures if necessary, based on a regional infection rate. COVID-related costs. Centene has the capability and bandwidth to navigate ongoing COVID-related expenses. Based on the facts as we see them today, we are seeing COVID-related expenses increasing, which is offsetting decreased utilization. Again, as I stated, these are not normal times, and we continue to expect the environment to remain dynamic. Case in point is our membership and revenue expectations. You will recall in April, we raised our 2020 revenue guidance by $6 billion, including $4 billion in COVID-related membership growth. Which included the expectation that new membership would peak in August.
Based on recent COVID-related membership trends, we now expect new membership to peak in November, resulting in a $500 million reduction in revenue against what we had forecasted only a short time ago. Membership is coming in at lower rates than initially anticipated and below what was expected based on unemployment trends. This is driven by an assumption that unemployment may be temporary and by enhanced unemployment benefits and federal rates, which are all contributing to lower application rates. The trajectory of our membership growth for the remainder of the year will continue to be influenced by various external factors, which may shift our revenue expectations up or down. However, to put the impact of membership growth in context, we still expect to add a total of $3.5 billion in COVID-driven revenue to 2020 as compared to the original guidance we provided in March.
Our earnings guidance for 2020 remains consistent with what we provided at our Investor Day. At our scale, the earnings impact of $500 million in reduced revenue can be offset. We recognize and are prepared to continue with the uncertainty based on what we know today. Our earnings guidance continues to be our most reliable baseline and remains our best estimate based on our revenues as well as utilization and COVID-related costs, among other factors. We remain comfortable with our current range. With that as the backdrop, let me turn to our second quarter results. Our results were in line with our guidance, which underscores the effect of the shelter in place policies on our diversified membership platform, as well as our team's solid execution in a challenging operating environment. We reported second quarter revenue of $27.7 billion, an increase of 51% over the second quarter of 2019.
Adjusted diluted earnings per share was $2.40 compared to $1.34 last year. This represents growth of 79%. Our membership was approximately 25 million at the quarter end. This represents sequential growth of 3% and year-over-year growth of 64%. Due to the uniqueness of today's environment, we expect 2020 earnings per share to be front-half loaded. Applying the midpoint of our guidance, first half earnings per share of $3.31 would represent approximately 68% of our full-year EPS. Overall, these results were solid. Looking ahead at the remainder of the year, the intensity and duration of the pandemic remains a primary driver of uncertainty. We are built for uncertainty and believe we are in a strong position to continue to execute against our strategy and grow our business. We continue to hire talented and diverse individuals who contribute to our focus on improving the member and provider experience through technology.
Over the past few years, I've spoken about our ambition to transform Centene into a technology company that does healthcare. Recognizing the critical role of technology in providing extraordinary member and provider experiences to 25 million individuals. That's nearly one in 15 Americans. We have made significant investments in modernizing our systems, and earlier last month, we announced an investment in our new East Coast headquarters, which will be our hub for technology talent. Today, I'm pleased to announce yet another step forward in achieving our technology aspiration through the hiring of additional talent to that already present in our organization. Adding to current management, we are pleased to welcome Sarah London and Bryan Sivak to our technology team. Sarah most recently served as Partner for Optum Ventures, working closely with portfolio companies on product strategy and expansion.
Bryan most recently served as Managing Director for Kaiser Permanente Ventures, where he led investments in healthcare-focused organizations and transformative efforts. Both Sarah and Bryan will help accelerate innovation, modernization, and digitalization across the enterprise. In addition, since March, we have hired over 3,800 individuals, and we will continue to invest in our talent to enhance the value we deliver to our members and communities. At the same time, we continue to operate in a remote work environment, but I am generally pleased with the levels of productivity and engagement across our business. We have made the required investments in our office environments to ensure the safety of our people when it is appropriate for them to return. For example, we have installed plexiglass between cubicles, temperature scanners, and automatic doors. We also continue to have courageous conversations within our company about racial and social justice.
Centene has a diverse workforce at every level of the company, including our board of directors. We continue to recruit and develop diverse talent. Knowing that everyone hired at Centene is hired because they are the right person for the job. Let me now comment on discussions we're having with our states. As states move to reopen, we are working closely with our state and federal partners to develop solutions that address the cost dynamics states are facing. Excuse me. With state budgets under constraint, the role of managed care companies like ours, which maximize member outcomes and cost savings, has never been more important. While we do expect some short-term pressure on rates, these rates have to be actuarially sound. Our 2020 guidance incorporates what we know at this time, and the majority of our conversations with states have been highly constructive.
We are encouraged by ongoing budget discussions in Congress and the review of expanded FMAPs. Longer term, we continue to believe that additional states will consider managed care as a solution to their healthcare needs. For example, in Oklahoma, the state has announced its intent to release an RFP in the Fall of 2020. Excuse me. We are in active discussions with our state partners to ensure we are taking a holistic view on rates beyond 2020. Taking into consideration a return or normalized utilization and COVID costs, as well as appropriate risk-sharing mechanisms. Centene has risen to the occasion by delivering on our mission of providing high-quality, low-cost healthcare to the most vulnerable populations during this time. We are confident in the strength of our business.
As I said, our balance sheet is strong, we have ample liquidity, and we continue to see significant opportunities for future growth as we apply our all products, all markets strategy. The RFP process slowed during the pandemic, but is now picking up in our Medicaid business. Our Medicare Advantage business remains a strong untapped opportunity. As we have mentioned before, we have emerged out of recessions with strong growth in membership and new state contracts in the past. We continue to believe that we are well-positioned to execute on both our short and long-term growth strategy. Finally, I again want to thank and recognize our employees - excuse me, for their commitment and dedication. I could not be more proud of how we work together to serve our members.
Before I turn the call over to Jeff, let me apologize for my allergies acting up in my voice. With that, let me turn it over to Jeff, who will provide our financial details.
Thank you, Michael, and good morning, everyone. First, I will provide comments around the quarterly results. Then I will offer more detail around the key variables that Michael just discussed. Finally, I'll walk through our updated full-year guidance. This morning, we reported second quarter revenues of $27.7 billion, an increase of 51% over the second quarter of 2019. Adjusted diluted earnings per share was $2.40 this quarter, compared to $1.34 last year. These numbers were in line with the guidance that we provided at Investor Day in mid-June. As expected, our earnings for the second quarter of 2020 were uniquely impacted by the COVID-19 pandemic through muted medical utilization and increased membership.
Total revenues grew by approximately $9.4 billion over the second quarter of 2019, primarily as a result of the acquisition of WellCare, membership growth in Medicaid and the Health Insurance Marketplace business, and expansions in new programs in many of our states. Our HBR or health benefits ratio was 82.1% in the second quarter, compared to 86.7% in last year's second quarter, and 88% in the first quarter of 2020. As anticipated and highlighted at our Investor Day, the HBR was low by historical measures, and the decline was primarily driven by a reduction in medical utilization as a result of the COVID-19 pandemic, partially offset by increased costs associated with COVID-19 claims. Utilization was down across all of our business lines. The majority of the reduction in volume was driven by ER claims and other non-inpatient costs, including fewer elective procedures, PCP visits, and specialist visits.
Utilization declines were partially offset by COVID-related medical costs, including inpatient and ICU admissions, testing, and treatment. In terms of monthly trends, utilization deferrals experienced during April and May largely reversed in the month of June. June claims activity was near the historical norm. Cash flow provided by operations was $3.7 billion in the second quarter or 3.1x earnings. The cash provided by operating activities in the second quarter of 2020 increased due to the net earnings growth, $1.4 billion in collections of previously delayed capitation payments, and an increase in other long-term liabilities driven by the recognition of the risk adjustment payable for Health Insurance Marketplace in 2020. We continue to maintain a strong liquidity position of $1.1 billion in unregulated cash on our balance sheet at quarter end. During the quarter, we utilized $500 million of our unregulated cash to pay down our revolving credit facility.
Debt at quarter end was $16.8 billion, which includes $89 million of borrowings on our revolving credit facility. Our debt to capital ratio was 39.7%, excluding our non-recourse debt, compared to 41.9% in the first quarter of 2020. Our debt to capital ratio would have been 38.1% when netting our unregulated cash with our debt at quarter end. Our medical claims liability totaled $11.4 billion at quarter end and represents 51 days in claims payable, compared to 47 days in the first quarter of 2020. DCP was impacted by the timing of medical expense during the quarter, with lower medical costs primarily in April, contributing to the metrics increase. A quick update on the WellCare integration. In July, we successfully integrated the WellCare business to the Centene financial and HR systems. The integration continues to be on track, and we remain comfortable with our synergy capture efforts.
Turning now to our 2020 expectations and our updated assumptions regarding the key dynamics and variables we continue to monitor closely, which are informed by additional data since our Investor Day and month-end. The midpoint of our year-end unemployment expectation continues to be 10.3%, which is consistent with what we provided at our Investor Day. We now expect peak membership growth of 1.4 million members to occur during the fourth quarter. This represents a change from the projection of 1.9 million new members provided at our Investor Day, which was forecasted to incur in August. As Michael mentioned earlier, new membership has enrolled more slowly than previously expected. We believe the temporary nature of some of the unemployment, enhanced unemployment benefits, and employers furloughing rather than terminating employees has all contributed to lower application rates than what is implied by overall unemployment levels.
For example, in California, we have not seen significant membership growth since the onset of the pandemic. In terms of utilization trends in the back half, we continue to expect normalization as the economy recovers and our members go back to visiting doctor's offices and receiving treatment. Our early look into our July claims shows a slight step down in utilization compared to June as a result of the regional infection spikes occurring across the nation. This trend may or may not last, depending on the spread of the virus in various states. Again, the numbers we are seeing from our July claims are very preliminary. Through the end of June, we have paid approximately $550 million associated with COVID claims. This compares to $221 million we discussed at our Investor Day.
One thing to highlight, the cost we have categorized as COVID costs include all the claim codes consistent with CDC guidelines. This includes costs that are not associated with confirmed positive cases and may include costs that are not related to COVID at all. I'll translate these factors into our updated 2020 financial guidance. We now expect revenue to be within the range of $109 and $111.4 billion. This is $500 million lower at the midpoint than our previous guidance, driven by the previously mentioned membership expectations. As Michael mentioned earlier, we are providing our estimates based on where we are today. Ultimately, how membership continues to increase for the remainder of the year will affect our revenues. Just to add some perspective, our revenue guidance continues to be $5 billion higher than our original March guidance at the beginning of this year.
This is a higher baseline from which we can continue to grow into the future. We are maintaining our adjusted diluted earnings per share guidance of $4.76 and $4.96, driven by our overall updated projections of medical costs and revenues. With respect to rates, we continue to work with our state partners on various risk-sharing mechanisms and advocate for actuarial soundness. We have included a reasonable amount of rate actions in our guidance today. However, there continue to be a lot of unknowns, and the majority of our state partners are focused on 2020. It is our understanding that a majority of the proposals received to date have not been approved by CMS. Additionally, there continues to be discussions in Congress of additional support that would provide relief to state budgets and affect any potential changes being contemplated by the states.
As we think about earnings progression for the balance of the year, we expect third quarter adjusted diluted earnings per share to be approximately 20% of the full year 2020 EPS. A quick note on quarterly versus full year modeling. As a result of the WellCare acquisition closing in the first quarter, the full year weighted average share count is substantially lower than the second through fourth quarters. We anticipate continued choppiness as a result of the unpredictable nature of utilization trends at this time. The scope, duration, and intensity of additional COVID-19 infection spikes could have a material impact on the results for the rest of the year. I'll conclude my remarks by reiterating our confidence in the strength of our business. Our balance sheet remains strong, and we have ample liquidity to meet our operational and strategic needs.
We remain focused on executing against our strategic plans and are committed to delivering shareholder value. That concludes my remarks, and operator, you may now open the line for questions.
We will now begin the question- and- answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Please limit yourself to one question and one follow-up. If you have further questions, you may reenter the question queue. The first question comes from Josh Raskin from Nephron. Please go ahead.
Hi, thanks. Good morning.
Good morning, Josh.
Morning, Michael. First question, just around the rate proposal conversation that Jeff was mentioning. I think you said that some of the rate proposals at the state level have not yet been approved by CMS, and you continue to talk about advocating for actuarial soundness. I just want to understand, are these proposals, what you're seeing in the states, is that what's incorporated into guidance as you sort of mentioned that you're including a lot of this in guidance? Is there a risk that those state proposals are actually approved and that is not consistent with actuarial soundness or something like that would change your guidance? I'm sorry, but the second question would just be on the vaccine potential. Are you assuming that states will cover the cost of a vaccine, whether that's later this year, hopefully, or if not, into next year?
Maybe how would you like to see the vaccine reimbursement work?
Okay. Let me start off personally, and Jeff can add to that.
Pardon me. It appears we have been disconnected with the main speaker line. Please hold while we get in touch with the speaker.
Okay.
Thank you for your patience. We're getting reconnected with the speaker as we speak right now.
Is it not letting me on?
Josh, can you hear me now?
We have the speaker on the conference now.
Okay, Josh, are you able to hear me now?
Yeah, absolutely. You want me to repeat?
I don't know what happened.
Did you get it?
We'll start over. I don't know where I stopped. On the rates. States can adjust them under the super regs by 1.5%, subject to programmatic changes approved by CMS. CMS has been very consistent with the need for actuarial soundness. There have been some states earlier in the year that tried to get them to waive it, they said no. We'll continue to work with them. The guidance does include those things we know that make sense to do, have agreed to with the states, and maintain actuarial soundness. We'll continue to keep you informed, there's no draconian things taking place that we see at this point in time. The FMAP, the Congress is now talking about extending the existing 6% one, there's some talk about expanding it.
You may recall at our Investor Conference, where the prior Medicaid director from Arizona talks about the need to set a date, where we've been talking to congressional representatives about the need to put a date certain in, so states have a better basis to plan for it. We continue to work through it, and it's something we've done ever since we've been in this business. Jeff, anything you want to add on that?
No, I think as Michael mentioned, they did extend the FMAP enhancement to 90 days. I think the biggest point here that we keep advocating with states, that there's just a lot of variables to go on between now and the end of the year, right? You have the COVID costs, you have utilization, you have potential federal stimulus. I would just say, if you package all that up, it's very fluid at this moment.
The second question.
Vaccine thought.
The vaccine. We haven't had a lot of discussions. We don't know what the cost is going to be or how we're going to do it, and we still have to see the vaccine. As this unfolds, if I approach states on that now, they're going to say they have more current issues, Josh, really. Historically, that would be a requirement once again to keep things sound. When things like hep C came out, we had no trouble, which were very expensive. I've even heard some talk where the government, for public policy reasons or political reasons, is talking about making vaccines available for nothing. We'll let that one play out a little bit.
Understood. Thanks.
Thank you.
The next question comes from Ralph Giacobbe from Citi. Please go ahead.
Thanks. Good morning.
Good morning.
Just on the rates again.
Morning.
Just on the rates again, you did note some near-term or short-term pressure, and it sounded like you embedded some of that in guidance. I guess just hoping to get a little sense of magnitude, the short-term nature, like what is that duration and end, if the revenue reduction at all relates to any of these pressures?
Yeah, thanks, Ralph. This is Jeff. Again, as Michael mentioned, we're currently in active discussions with our states. The starting point is rarely the ending point or ending result. It really isn't constructive for us to publicly discuss our individual state expectations or an aggregate number. That being said, we continue to believe that we're on a path in many states towards finding actuarially sound solutions to the budgetary strain. We would like to also point out that at this point, again, just a reminder of the potential for federal stimulus.
I guess what I'd say is we've included, I think, a reasonable assumption of rate adjustments from now to the end of this year, and the out of bounds, I would say that's what we're pushing to make sure doesn't happen, is that we find rates that are actuarially sound, and I think that's what Michael just talked about.
Let me help in one other regard. The states initially, when they saw the reduced utilization, they said, "Oh, you're saving all this money." Well, they now understand that utilization will come back in the second half of the year had it followed that path. They also see, as we reported in July, while utilization may be down in elective procedures, that's being offset by COVID costs. They're now understanding that there's no windfall over the course of the full year. We've told them that you really have to look at these things on a rolling four-quarter basis or six-quarter basis because we're experiencing things that nobody's experienced, and they're starting to understand that.
Okay. That's helpful. If I could just follow up on that point there, in terms of utilization, I think in the release you talked about it being sort of regionally driven. Can you help in terms of the patterns maybe you saw in areas that were early hotspots like New York and where utilization is there now versus some of the more recent hotspots in the South?
Yeah
Where that utilization is? Thanks.
I can tell you what we saw last night when we eventually went to sleep after getting our scripts done. Florida had higher utilization through COVID-19 and more ICU than did New York. We have to be so careful how we say this, because as somebody opens up, we see it jumping. Missouri, they just announced they're going to roll back some of the things they opened up. Restaurants can now go back to 25%. Bars are closing at 10:00. They're talking about virtual school. Honestly, it's shifting. Arizona was very low for while it's high. Texas was incredibly high. It's starting to back off a little bit. It's a variable from day to day. It's very hard to give you any kind of really specific, well-grounded statement. Hope you understand that.
That's what we're talking about, the dynamic of this thing and making decisions based on how things are right now at this moment.
Okay. Fair enough. Thank you.
Our next question comes from Charles Rhyee from Cowen. Please go ahead.
Yeah, thanks for taking the question. Sorry, just one more follow-up on the rates. Is there any deadline in terms of when CMS has to make a decision on approving the state's proposals? Could these kind of stretch into next year and just be retroactive?
Well, I'm not aware of any deadline. I think it's just more process-oriented than anything. Just it takes time to get the information to the government, and obviously there could be some back and forth if they have questions. I don't think there's any hard and fast deadline, but sometimes that process just takes a while. I guess what I would say is. It's not like every state has come and said, "Oh, we need to make rate adjustments." There's a lot of states that we operate in that are just taking a wait and see approach.
We get some rate increases.
Yes. I guess what I would say is, I think it's just going to depend on how this plays out the rest of this year on utilization and COVID costs. It's just a handful of states that are thinking about some risk-sharing mechanisms. A lot of our states already had risk-sharing mechanisms in place, and they're good with those. I think there's just more to come.
I think also there was a case, in some cases, they're taking what the providers have paid down and passed that. I think New Mexico was.
Yeah, Nevada was one of them where they-
Yesterday.
Yeah
it was a fee schedule change effectively, so which is primarily neutral for us. Another option that obviously states have.
Great. If I just follow up, you've kind of touched on it in terms of we're starting to see things pick up in like Florida and Texas. How are you thinking about, are you treating this as a second peak in infections or part of the first peak? If that's the case, are you still assuming maybe then a third one as we get into the fall, winter again?
I think, also the epidemiologists I'm speaking with, I'll be very honest and very candid, we told employees we'll give them 30 days notice before we reopen. I said to them, "I think maybe I don't see us reopening fully." We'll open up, some of us in the office right now, but until after January 1. He said to me, one of them said, "I don't think you'll regret that." What we're saying is, it's so fluid and so dynamic that it's just moving along. Now, what I mean, let's talk about what I'm concerned about. None of this affects the performance of this company. It's just recognizing these things are there, so you deal with it ahead of time and create the right expectations. If we have a bad flu season, that combined with COVID, could be a very serious combination.
We're working very hard. Now, I want to get this commercial, and we're doing a PSA to help people understand it. Everybody's telling us, until we have a vaccine, the next best thing to do is wear your mask and encourage others. I'm going to take some poetic license and tell you what one of my epidemiologists told us. A couple. In Japan, there's 127 million people, and a lot of you know the Asian culture is mask for years. Going back in the 1980s, if somebody thought they have a cold, you wear a mask not to offend somebody. During the time that we had 100,000 deaths, they had 832. In Hong Kong, very congested, during that same period of time, with 7 million people, they had four people die because they wore masks.
It depends, if people start to realize what they can do to help themselves and choose some good judgment, that can impact it. We're doing all we can, as I am right now, trying to help people understand it. I am hopeful that we will start to mitigate the intensity of the COVID until we have a vaccine. I'm also hopeful that we have a treatment, which will be very important, and I was watching on one of the stations today, there's some talk about that. They hope to have some of that. It's something we've never experienced, but I'm comfortable that we have the expertise, the capabilities to deal with it.
The next question comes from Kevin Fischbeck from Bank of America. Please go ahead.
Great. Thanks. Just wanted to ask about the revenue decline. You mentioned lower enrollment. Is there anything particular you'd spike out as to, was it more Medicaid enrollment or exchange enrollment that was coming in lower?
Yeah, Kevin, thanks. It's on the Medicaid side, and I think what's interesting is, it's sporadic. It's different by state. We saw good growth in Florida, but hardly any growth in California. I think what you're seeing is just the dynamics of the unemployment market.
Yeah.
In general, effectively, the membership's coming in slower than we would anticipated, and really looking at historical crises, financial crises, and trying to align membership growth with unemployment is not spot on at this time. We effectively lowered the membership expectations, and that's what the half a billion's for.
It's still strong growth.
Oh, yeah.
Kevin, I can't emphasize that enough.
I guess the other question I have would be on the exchanges. You guys mentioned that the margins on the exchanges are kind of coming back to normal. I just want to understand how you're thinking about that comment. With COVID putting downward pressure on volumes, I would think the margins would be higher, but then you're also, I guess, giving some waivers on premiums. How are you basing that comment and where are all the puts and takes in there?
Kevin, thanks for the question. I think what I would say is we've kind of included COVID into one line item, right? You're backing it out of all the product performance, and then you're looking at, okay, absent COVID, what does it look like? I think that's what we would have expected for this year. Again, in the exchange business, we've talked about margins normalizing, I think that's in line with what we were thinking. I would say as far as the COVID impact, the way we looked at it is we tried to do our best to put COVID into one line item and then look at performance.
Okay, thanks.
The next question comes from Scott Fidel from Stephens. Please go ahead.
Hi. Thanks. Good morning. Actually, just wanted to follow back up on the exchange topic as well. Just interested in terms of what I know it's still pretty early here, but what the enrollment mix is trending like post-pandemic in terms of what you're seeing in terms of acuity and folks coming in possibly from previously being employed. Then sort of rolling that forward, I know it's a challenge, but how you're approaching pricing for the exchange business for 2020.
Yeah. I think it's still a little early, but I don't think we've seen anything that would indicate the acuity is different than the larger book. I guess what I would say is, the majority of the customers had previously had health insurance. The other thing is, we've actually got our proportionate percentage, our market share percentage of the growth. The other thing that's also happened is we've held onto members longer because of the premium assistance effectively. Really, you're talking about holding onto members that we've already had, and then you have the new enrollment. The mix is, I would say, more weighted towards retaining the enrollment that we had at the beginning of the year.
Okay. Just a follow-up question just on one of the stats. For Medicare Advantage, it looked like the PMPMs were down sequentially by around 4.5%, and just want an update on sort of what drove that. Was it just changing your accruals on things like risk adjustment, just given the lower utilization that you've been seeing, or anything else going on there that you can flag for us?
Yeah, I can't think of anything unusual that would've impacted the PMPM. It could be mix, but I don't have the specific setting here with me right now.
Okay. All right. Thanks.
The next question comes from Ricky Goldwasser from Morgan Stanley. Please go ahead.
Hi. Good morning.
Morning.
First question is on the comment that you made, Michael. I think you talked about taking a holistic view on rates beyond 2020. You can elaborate a little bit about what does the holistic encompass?
I'm sorry, the COVID rates, you said? I missed part of that, Ricky.
When you talked about state rates and Medicaid rates, you said you're taking a more holistic view on rates beyond 2020 as you think about next year.
Yeah, I think we continue to work with them, and I have no reason to be concerned. I'm just saying it's something that we'll have to continue to work with through them. I'm trying to tell them that they can't look at the rates just in one quarter, the results, the utilization, but you need to be thinking about how it rolls forward, and what we anticipate is going to be happening on a going forward basis. My comment was, in essence, a positive comment that we're engaging the state now so they understand it. As we said, while we haven't announced it as such, so the state's giving us rate increases now, and we're working through that with them, and when it's finalized, we'll announce that as well.
The only comment was, expect this to continue, the discussions to continue going forward, and that's in a very positive sense that they want to talk about.
Shifting away from COVID, obviously you brought in a couple of interesting hires, and you highlight kind of like the tech aspect of the business. What areas on the digital side do you see represent the most immediate opportunities to implement and impact costs?
Well, I think they'll be on board in the next three, four weeks. We're talking about what they can do to help with the provider experience, the member experience. There'll be various things there that, for competitive reasons, I'm not going to get too specific, but there are some things there that we think we can do that can move us into a real leadership position in that area. They have the talent and the capability added to what we have. We have a lot of great people here doing a lot of that here right now. It just recognizes where it's moving to, and they have the talent to recognize when there are systems and capability that need to be brought in and bolted on, and they'll be working aggressively in that area.
The next-
Hope that helps.
The next question comes from Lance Wilkes from Bernstein. Please go ahead.
Yeah, good morning.
Morning.
Just wanted to get maybe a historical context. Obviously, this isn't the first recession that states have encountered. If you could just give us some perspective on maybe contrasting the factors in this situation versus maybe the 2008 recession. Our assessments have been that we did see some rate decreases in the 2008 recession, but in general, those are more like an aggregate 1%-3% kind of declines in premium PMPMs and some declines in medical cost PMPMs, so MLRs weren't as compressed. Obviously, that's looking at an aggregate basis. Maybe if you could just kind of put some context so we could understand maybe the scope and scale we should be considering here.
Okay. I'll let Jeff pick up on some of this, but let me just start off.
The difficulty or the issue here, and we're dealing with it well, I believe, is that in economic downturns, there's some historic precedent for what happens. In what we're dealing with this pandemic, it's something, I guess the last pandemic they said was in 1918, the Spanish one. The issue here is we projected minor spikes in the summer, and that's not what happened. As we talk to the states, we're helping them understand that the COVID expense is offsetting the reduction in utilization. That's the counterbalance to what they saw in savings. Jeff, what do you think?
Yeah, Lance, again, I think back then, we were probably, and I was here, we're probably having the same conversations around actuarial soundness. If you go back in time and look at our financial performance, I think you'd see it was very consistent during that time period. I think the other thing to highlight is if you go back to the crisis back in 2008, 2009, that's when a lot of organic growth accelerated for us, and really driven by states moving to managed care in order to help solve their budget problems. We believe, when states have budget challenges, we're part of the solution because we can help manage costs and have higher quality outcomes. Obviously that's some of the activity we're seeing here.
It's complicated by a lot of politics in the middle of this whole thing, too. Everybody recognizes that. I'm just saying what people recognize.
Yeah, certainly. Are you seeing any differences? I noted that in the expansion population seemed to have a little higher growth quarter-over-quarter for you. Are you seeing differences in behavior as far as at a state level, where you're seeing the growth, expansion, TANF, and public exchange?
No, I think the difference that I would call out, and I think I mentioned this before, was really some states are growing and some states aren't. That dynamic is really interesting, and I think that just has to deal with the underlying unemployment situation in each individual state. We've had certain states, and obviously you guys I know go out and download some of the data from the states on Medicaid enrollment, but we've had certain states that have grown 5%, 6%, 7% since March, and we have others in the 1%-2% range. I find that dynamic interesting and obviously different than what we have experienced historically if you go back to the 2008, 2009 recession.
Thanks.
The next question comes from Justin Lake from Wolfe Research. Please go ahead.
Thanks. Good morning. Can you talk to how WellCare Group is performing relative to expectations both overall, and then give us an update there, and then also maybe talk to some of the specific businesses in terms of Medicare Advantage and Part D?
Yeah. I would say WellCare is performing in line with expectations. Obviously, we have the pandemic here, a little bit harder to sort through that. From our perspective, performing in line with expectations and achieving our synergy targets that we've laid out, and I think I mentioned in my prepared remarks, that we're still comfortable with our synergy plan and being able to hit those targets that we set out there. As far as Medicare Advantage, their Medicare Advantage continues to grow. I think if you look at this year and you look at our overall combined Medicare Advantage growth, I would say it's been very strong on the WellCare side. You have to remember back in December on the Centene-only side, we had a provider termination and an EGWP contract that we lost.
If you adjust for those, we've actually seen pretty strong growth this year in Medicare Advantage, and obviously looking forward to having the WellCare team run the Centene side of the business and looking for good growth next year.
Great. Then just a follow-up on membership growth. Can you tell us how much you've got this new COVID-19 membership, I think of 1.4 million. How much of that is coming from lack of churn due to federal FMAP rules and of not allowing disenrollment anymore versus new membership sign-ups being greater? Does the guide still assume that federal emergency ends at the end of September and states can then start disenrolling members again?
Good question. I would say when I look at the quarter end March membership compared to June 30th, we're up about 812,000 at-risk members. I would say the majority of that, from our perspective, is due to the suspension of the redetermination. I think we mentioned that at our June Investor Day. That's why we've delayed our peak membership from August into November. Because it appears that there's just been a slower take-up rate for the unemployment side versus the eligibility redeterminations. Right now, we have assumed that the eligibility redetermination, the suspension of that, goes through the end of this year, because they pushed out the enhanced FMAP for another 90 days. Hope that helps. Again, our new expectations is up 1.4 in November, 1.4 million peak members in November versus our previous was 1.9 in August.
The next call is from A.J. Rice from Credit Suisse. Please go ahead.
Hi, everybody. Just two quick areas of questions. First, on the public exchanges, it looks like in the 10-Q that you've had a $94 million adjustment for the risk adjuster payable. I just want a true-up. Is that in line with what you had originally factored into your guidance earlier in the year, and is there any comment about the footprint, and whether you'll expand it for the public exchanges next year? I'll go on and ask my other question, which was about the PBM. There were some things you were doing this year. I know WellCare extended the CVS contract. You had some other things you were doing with legacy Centene. Have those played out as expected, and is there anything about the COVID crisis that's materially impacting either what you're seeing in script trends or utilization of specialty drugs in the higher acuity population?
Well, there's a lot in there, A.J., so I may have to refresh my memory on the first ones. On the PBM side, I think things are playing out as expected and as we anticipated in both the synergy and the transaction. Again, we're using the combination of all the PBM assets to get the most value there. I think your other question, refresh my memory on your first question that you had.
Just the $94 million risk adjustment-
Yeah
the here.
Yeah. That's usually one of the first topics out of the gate here, but given the unusual circumstances, it's here at the end. I would say, if you recall, roughly 10%, we would've expected $95 million, that would be a net P&L benefit after RADV adjustment, et cetera. I think if you look at the Q, it came in roughly at $63, something like that. Again, if you go back to our Q1 earnings call, we talked about the fact that because of the crisis hit in March, we weren't able to really do a lot of the coding efforts that we do, we expected that risk adjustment to be a little bit short, and, in fact, it was. As far as Marketplace, I think you talked about expansion. Obviously, we're looking to continue to grow into next year.
Yeah. Okay, thanks.
I think you raised on the pharmacy, the one thing I will add on the pharmacy, you'll recall earlier in the pandemic, we authorized people to get a multiple-month supply, things of that nature, to accommodate their fears and concerns. There are things that, once again, it makes it a little lumpy and choppy, but it all works out over the period of time.
Okay. Thanks a lot.
The next question comes from Steven Valiquette from Barclays. Please go ahead.
Great. Thanks. Good morning, everybody.
Good morning.
Morning.
You guys commented that the slightly lower utilization in July versus June was primarily related to the spike of cases in certain key states. You also mentioned some hospitals were maybe voluntarily cutting back on some of the elective procedures. Now it's hard to get too granular on this, but I guess I'm also curious if there's a dynamic that maybe June saw a stronger utilization as deferred care was rescheduled and performed, maybe July had less of that. Just on deferred care specifically, I guess I'm curious how we should think about any remaining deferred care being performed in the back half of the year as we think about these overall trends. I know it's a lot in there, but just curious to get an extra thought on that.
Yeah. If somebody's deferred, you can't be certain who's deferred what. It was obvious when you saw the reduced trends in April that things were being delayed, and we saw it in talking to various hospitals, larger institutions, they said they're starting to bring it back in. There's two elements to that. The hospital being prepared to do it, and the person being prepared to go to the hospital, because there's that variable. As it relates to July, in talking with the hospitals, some of them we know were starting to defer care now. We have to assume that some of those patients were ours because we have a big membership. What percent of that, it's early. We don't have the details as we sit here at this point. It's still July, and we haven't closed.
As we said to you, we're going to try and be transparent and tell you what we see as we see it. There was some indication of that. There were some hospitals done it, and it's going to vary. That moves from day to day. That's a big problem. The hospitals in Georgia or in Florida, they may have just decided yesterday afternoon it's time to defer, and we hear about it. How long that stays, that's the difficulty of this pandemic. It's just so dynamic and changing. I wish I could be more granular for you, but the moment I do that, I'm going to mislead you.
Okay. All right. I appreciate the extra color. Thanks.
The next question comes from Gary Taylor from JP Morgan. Please go ahead.
Hi, good morning.
Morning.
Two questions. The first is, I believe, Michael, in your prepared commentary, I think I wrote it down correctly, that you had said, RFP activity was picking up, if I got that correctly. Was just hoping for a little more detail, if you have any. Is that primarily complex populations? Would that most likely be 2022 potential revenue impact? My second question is just looking for some guidance, Michael, from you, and sort of thinking about the HEROES Act, that bump up to a 14% FMAP, a half a trillion dollars of state funding.
How stingy the details appear to be leaking out of where the Senate is right now, and where ultimately you think we may land with respect to state relief.
Let me start off on the RFP front. We told you Oklahoma has said they're going to do it. There are several states that have talked to us about who they might consult with, what outside consultants, because they're looking at expanding their marketplace. They may if they don't have SSI or long-term care, but I'm not going to disclose who they are because it's not certain, and as they probably ask other companies inside us who they think the consultants are. It's a clear indication, Gary, that they are looking to start to save the money by expanding into those areas. They really understand that. I have to leave it there. I wish I could be more granular, but I really don't want to mislead somebody. The second part of the question was?
About the-
Yeah,
HEROES.
Oh, yeah.
Yeah, sure. Absolutely.
Yep.
Yeah. Okay, we know that the House put out two months ago a $3 trillion bill. The Senate was really delaying it. They have about $1 trillion. It's not going to be either. It's going to be somewhere in the middle. Now, the only thing I know with any certainty is I don't think that they will get the $600. This is my guess. If I'm right, you could say how smart I am. If I'm wrong, you can kid me about it the rest of my life. I don't think they're going to get the $600 because they realize some people were making more being unemployed than being employed. That rubbed, on both sides of the aisle, people a little bit the wrong way. We'll see that change. The FMAP and state support, that's in the middle of negotiations now.
I think the FMAP has a chance because they recognize that. Our counsel is put a date certain on, as I said earlier. Relative to specific state support, that's going to be hard. It's an election year, which really complicates this whole thing, and there is a little politics being played out there. I'm comfortable saying I expect it's going to be somewhere between $1.5 trillion-$2 trillion. I think we'll see some FMAP. I'm hoping there's some improvement there. We're going to see the unemployment, you're going to see another check go out to people, some of those things. You're going to see, if somebody hasn't paid their rent, being displaced, you're going to see that probably extended, that type of thing. I think they're going to be playing around the fringes, Gary.
Okay. Thank you.
The next question comes from Sarah James from Piper Sandler. Please go ahead.
Thanks. I have a clarification about 2Q MLR, and then I wanted to talk about technology. I want to understand the basis of 2Q MLR. At Investor Day, you talked about getting claims two days slower, and we were estimating that that assumption is MLR 45 basis points. When you closed the second quarter, was the assumption that claims are still coming in two days slower, and is that how you're looking at July as well?
Yeah. Good question. I think a couple things. If you see the DCP, the days in claims payable on our press release, we've given an explanation down there, what is driving some of that days in claims payable. I'd say there's two components, but the majority is just the actual mathematical calculation, which is what we tried to highlight in the press release.
May I interrupt as well? Because of timing, we're going to take probably two or three more questions, and I have to shut it. I learned a long time ago, when the board's waiting for their meeting, if you're not there, instead of talking to you, they talk about you, so. We're trying.
Okay. I'll try to be quick with this one then. You've made some pretty impressive technology hires. Does that indicate a strategy to enhance external sales of your technology products?
Technology.
Yeah.
The hires and whether or not we're going to sell externally.
I think that's to be determined. We're not trying to be like some of our peers that have products that they sell outside. We're going to focus on what serves our growing population, our growing business first. Well, we've had some products historically we've sold, but that decision I'm going to be leaving up to the senior management as they come on board, and we see how it affects our competitive position.
Thank you.
Thank you.
The next question comes from Dave Windley from Jefferies. Please go ahead.
Hi, good morning. It's Dave Windley. How does your revised membership view, both the peak in timing and the peak in number, affect your view of your 2021 revenue?
Let me be consistent on what we've said other years at this point. Please take it the right way, but we will talk about 2021 at our December Investor Day. To try and front-run our own meeting this far ahead is something we have always historically avoided. I'm going to defer that question and be non-responsive, so to speak.
Okay.
All right. I'll ask another one .
As you saw claims getting back, it sounds like got back to normal toward the end of June. Clearly, we're having some spikes here that kind of deflect the normal course of that line. I guess I'm wondering what you did see or what you anticipate seeing in the healthcare system in terms of its ability to operate at or even above 100% if we're able to get to a relatively normal environment. Maybe you can speak to that from a regional standpoint where regions are in a normal environment now.
What's normal today, sure there are some regions in the Northwest that may be more normal now, they've settled down. We see the South picking up, and we thought Missouri and the Midwest were settling down, and now we see Missouri, Ohio, and other states starting to pick up again. It seems to come in waves, and that's the big issue. That's why I say you have to make your decisions as it is today because it's so dynamic, and we've never seen anything like it. The risk, there are offsets, puts and takes. I expect Arizona should start to calm down. They're taking all the tough things they need to do. Florida, I think the governor realizes what he has to do is shut some things down, and they're trying to do that.
There's no one place that I can say has it fully under control today. It's how it pops up and where. Once it gets a little bit under control, they start to say, "Oh, we can lighten up on the restrictions," and then it pops up again. The only place I can talk with any confidence is some of the European countries, where they had a complete shutdown for a couple of months, and they seem to really have brought it down.
The next question comes from Matthew Borsch from BMO Capital Markets. Please go ahead.
Well, thanks for squeezing me in. I'll just ask one very short, narrow, possibly dumb question, which is on the risk adjusters that you talked about coming in at a lower level for the exchanges. Because of the disruption that delayed your coding, isn't that something that would be industry-wide and therefore, given the sort of zero-sum game that you have with the funding there that you would possibly do as well as you would've without those issues?
Yeah, Matt, this is Jeff. Good question. In theory, you would be correct. However, based on the data that we have, we are an outperformer in that area. Part of that, if you recall, a couple of investor days ago, maybe a year or two ago, it was one of our Centene Forward programs that we put together. Due to the fact that we're an outperformer to the good of coding efficiency between January and April, before you had to send in the data to the EDGE server, we are disproportionately impacted.
Oh, got it. Okay. Thank you.
Let's take one more, then we have to shut it down because we are running late. Anybody that didn't get their question asked, if you let Jennifer know, we'll try and find a way to get you your response. Anyone ?
Okay, last question is from George Hill from Deutsche Bank. Please go ahead.
Hey, guys. Thanks for squeezing me at the end, and I'll also try to be brief. You guys talked about Medicaid enrollment being in slower in some states than in others, with California being slower. I guess, aside from what we think of as kind of the employment demographic, is there anything that you see as kind of driving the difference in the slowdown? I guess anything that, like, what do they have in common, I guess, besides the infection rates? As we think about the peak enrollment later in the year, is the expectation more that California accelerates or kind of that Florida continues at a faster pace?
I think even some of the states I don't think have the answer for why the members haven't shown up. There was an article the other day about California specifically that I saw where they're trying to figure out the dynamic as well. I don't think there's been any common denominator, is what I would say. From our perspective, we haven't seen anything that's common across the ones that have grown versus the ones that haven't. Our assumption is that we continue to see growth, and there will be, I would say, a lagging unemployment application growth, and there would be some more in California, but not to the magnitude that we've seen in other states. Again, I think, as I mentioned, we're just going to have to see how this plays out.
We're sitting on 800,000 member growth today, and getting to 1.4 by November doesn't seem impossible, and I think that's a reasonable place for us to put the guidance.
Helpful. Thank you.
Yep.
This concludes our question- and answer session. I'd like to turn the conference back over to Michael Neidorff for any closing remarks.
I want to thank everybody, and we look forward to the third quarter conference call. Hopefully, we'll have some more clarity on vaccines and other things that will give us a little more certainty as to where things are. Rest assured, we're going to continue to deal with this as we're confronted with it. Stay well, stay healthy, and wear your mask. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.