Good day, and welcome to the Centene Corporation first quarter 2020 financial results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. If your question has been answered and you wish to remove yourself from the queue, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Jen Gilligan. Please go ahead.
Thank you, good morning, everyone. Thank you for joining us on our first 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. A replay will be available shortly after the call's completion, also at centene.com, or by dialing 877-344-7529 in the U.S. and Canada, or in other countries by dialing 412-317-0088. The playback number for both dial-ins is 1014-1297. Any remarks that Centene may make about future expectations, plans, and prospects constitute forward-looking statements for purposes 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, April 28th, and the Form 10-K dated February 18th, 2020, and other public SEC filings, including the risks and uncertainty described with respect to the potential impact of COVID-19 on our business and results of operations. Centene anticipates that subsequent events or 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 first quarter 2020 press release, which is available on the company's website at centene.com under the investor section.
Additionally, I'd like to highlight Centene's upcoming Investor Day scheduled for Friday, June 12th, 2020. This will use a virtual format, and we will provide more information as we get closer to the date. With that, I would like to turn the call over to our Chairman, President, and CEO, Michael Neidorff. Michael?
Thank you, Jennifer. Excuse me. Good morning, and thank you for joining Centene's first quarter 2020 earnings call. I'd like to welcome Jennifer to Centene as Senior Vice President of Finance and Investor Relations. She has taken the reins from Ed Fall, who many of you know so well. We'd like to congratulate Ed on his retirement and thank him for his impactful contribution over the years. We look forward to celebrating him in person when gathering together is considered safe. Let me start by saying I hope you, your families, and loved ones are all staying safe and healthy. Our hearts go out to all that have been impacted by the crisis, and we are thankful to the essential workers on the front lines and the families supporting them for fighting the pandemic every day.
We believe we are in a strong financial position with a solid balance sheet and abundant liquidity. We have always been effective managers of our balance sheet, which has become more important than ever as it enables us to fund our priorities as well as respond to the pandemic. With that, let me start with our response to COVID-19 crisis. Our mission at Centene is clear. We have to provide accessible, high quality, affordable healthcare to our members, some of whom are among the nation's most vulnerable population. As we are seeing both a public health and an economic crisis of unprecedented nature and scale unfold, we are acutely aware of the vital role we must play. We have never been more resolute in serving our members as well as supporting our providers. We will maintain our approach, which focuses on our members' whole health, is exceptionally local, and provider-led.
Looking at these critical challenges in front of us, our priorities are as follows. First and foremost is the health and safety of our employees. We have taken significant steps to support our employees and are doing everything we can to protect their health and safety while ensuring continuity of our operations. To this end, we have implemented our business continuity plans and have taken actions to support our workforce. I am proud that we were able to transition approximately 90% of our workforce to work remotely within just three days. This allowed Centene to continue to operate as close to full capacity without disruption. I'd like to give a special thanks to the remaining 10%, whose roles are critical and cannot be performed outside the office. Second, it is critically important that we safeguard people's access to high-quality healthcare, especially the most vulnerable in our society.
It is with this in mind that we have taken important steps to support our members during the pandemic, including cost waivers for both testing and treatment, and increased access to telehealth services. We also announced a series of investments that build on the longstanding commitment to address broader social determinants of health. We continue to support initiatives that address hunger, connectivity, and increased demand for healthcare and educational supplies, to name just a few. For example, we are donating 1 million meals a month for 12 months to feed our neighbors and communities all over the country, and delivering 50,000 gift cards to be used to purchase essential healthcare and educational items. Our third priority is to support the organizations and our partners on the front lines. As a result of our exceptionally local provider-led approach, Centene has longstanding, deep relationships across our provider network.
We have initiated a broad range of efforts to support those on the front lines. These include provision of PPE and facilitation of additional medical personnel across virus hotspots, relaxation of administrative burdens for physicians, and access to financial resources. We will continue to be proactive in thinking through how we can best contribute as the situation evolves. To that end, let me touch on how we're thinking through the trajectory of this pandemic. We are preparing for a range of scenarios relating to the shape, intensity, and duration of the pandemic. We are in close contact with relevant health authorities, and we are closely tracking the data that organizations such as the Institute for Health Metrics and Evaluation, the CDC, and the World Health Organization are providing on an ongoing basis.
While it is difficult to predict precisely what future weeks and months will bring, we are prepared for various scenarios, which incorporate a number of key considerations, including the potential for multiple peaks as local, federal, and state governments balance the need to reopen economies with the risk of increased viral transmission. A return to normalization may take some time until we have widely available testing, effective medications, or a safe vaccine. Next, let me provide a brief overview of our performance in the first quarter. Overall, we delivered solid results, including adjusted diluted EPS of $0.86. First-quarter revenues were $26 billion, representing a 41% increase on the prior year, primarily driven by the acquisition of WellCare, organic growth from our Marketplace business, and the addition of new members through expansion and new programs across our states.
Our managed care membership now stands at 23.8 million, including 11.8 million in our Medicaid business, 2.2 million in Marketplace, and 5.4 million across our Medicare products. As I mentioned, our financial position is robust. We remain focused on ensuring we have the right capital structure and capital allocation policies in place that ensure we'll continue to effectively manage through this crisis. Now on our full year outlook. Our earnings trajectory remains consistent, as you can see from the unchanged adjusted EPS guidance range. That said, there will be some variability when it comes to how we get there. We expect our results to be choppy from quarter to quarter. Overall, we continue to view our prior guidance range as the most reliable baseline. Let me offer a few of the variables that we continue to monitor. First, membership.
We expect economic impact and resulting unemployment to drive increases to members. These increases will be partially reversed as and when the economy reaches the recovery stage. Second, utilization. There have been and are expected to be continued declines in general types of deferrable services, for example, dental and optical visits, that mostly in the second quarter. Large provider groups expect pent-up demand to return early in the third quarter and continue into our fourth quarter. We expect utilization to increase as restrictions are lifted and members return to more normal pre-pandemic behavior. Third, costs related to COVID-19. We expect to see an impact from the cost waivers for COVID-related testing and treatment during the second quarter, which could continue throughout the balance of the year. The way this dynamic materializes will be dependent on how the pandemic evolves.
We also expect costs to be significantly greater in the third and fourth quarter as the intensity of utilization rates increase, especially for members with chronic conditions and other medical needs, which may not have been met during this period of uncertainty. Fourth, intensity and duration of the pandemic. Working with leading epidemiologists, we continue to monitor closely the potential for multiple infection rate peaks. As we prepare for significant levels of seasonality and choppiness, we continue to work with our state partners and other stakeholders, including regulators such as CMS, to establish holistic ways to address these different cost dynamics. We continue to apply an abundance of conservatism to our outlook. We anticipate an increase in membership, but at the same time acknowledge the fluid nature of the employment landscape. It is prudent to recognize the various unknowns this operating environment creates.
We will continue to update you as the impact from the pandemic takes shape. If we see developments that materially change our guidance assumptions, we commit to updating you on those immediately, outside our regular calendar. Turning to WellCare. The integration remains a positive and important aspect of our operations. The team continues to focus on education and the execution of a seamless transition and delivery of synergies. While our view of the total run rate opportunity remains unchanged, the current operating environment could generate some variability in the timing of synergy capture. For example, in Georgia, the timeline to combine the two plans has been delayed from 2020 to 2021 by the state. Recognizing the economic environment and the difficulty of finding new positions, we are offering extended benefits to those impacted by the integration at such a daunting time for our nation.
Jeff will discuss these dynamics in further detail. In closing, our mission has never been more vital. To date, we have taken significant actions to ensure we serve the most vulnerable during this time of need. We are undergoing rigorous planning processes and will continue to be guided by the facts as we know them, while remaining flexible in this dynamic environment. Our organization is united in our focus to deliver for our members, providers, state partners, and shareholders as we face this pandemic together. As noted by our press release, we have raised our revenue guidance. We continue to make significant progress on the WellCare integration, and our balance sheet remains very strong. Now I'd like to turn the call over to Jeff, who will provide the financial details.
Thank you, Michael, and good morning. Let me just start by echoing Michael's comments. I hope you and your families are all staying safe and healthy. Today, I'd like to keep our discussion of the quarter's performance relatively brief, and we'll spend more time on our outlook in light of the extraordinary circumstances we are facing and provide you with more detail on our expectations for the year. Overall, it was a good start to the year. We reported first quarter revenues of $26 billion, an increase of $7.6 billion or 41% over the first quarter of 2019. As a reminder, we also closed the WellCare acquisition this quarter and completed several other capital structure items that are included in our first quarterly report as a combined company.
The closure of the acquisition and the inclusion of WellCare in the results beginning January 23rd has impacted a lot of the usual metrics. I'd also refer you to the detailed explanations in our press release. We reported adjusted diluted earnings per share of $0.86 compared to $1.39 last year. Both diluted earnings per share and adjusted diluted earnings per share for the first quarter were negatively affected by approximately $0.05, associated with lower investment income and higher interest expense. Our investment and other income was $167 million during the first quarter, compared to $99 million last year and $126 million last quarter.
The increase over last year reflects the gain on the divestiture of our Illinois business, as well as higher investment balances, partially offset by the sharp decline in interest rates in March, which negatively affected the fair values of some of our bond portfolios that flow through earnings and our deferred compensation investment portfolio, which fluctuates with its underlying investments. Interest expense was $180 million for the first quarter 2020, compared to $99 million last year and $113 million last quarter. The increase reflects a net increase in borrowings related to the issuance of an additional $7 billion in senior notes in December 2019 to finance the cash consideration of the WellCare acquisition and the $2 billion in senior notes issued in February 2020.
We decided to defer the redemption of the 2022 senior notes as a result of the COVID pandemic to maintain further flexibility. Operating cash flow used in operations was $240 million in the first quarter. Operating cash flow was negatively affected by a delay in premium payment in N.Y. of approximately $700 million, and the growth in the PDP business, which used working capital. Given that the COVID pandemic did not accelerate in the U.S. until the second half of March, we experienced a minimal impact during the quarter in terms of claims. We did experience a significant drop in dental and vision claims, which was offset by investments in our technology and employee infrastructure to support a work-from-home environment and higher COVID costs in our international operations, primarily in Spain, which was affected much earlier in March. Turning now to our outlook for 2020.
Broadly, we are maintaining our guidance for the bottom line, demonstrating our ability to navigate this environment. That said, the pandemic has impacted the various dynamics that affect our business. I want to take a few minutes and highlight the headwinds and tailwinds of the current environment on the top and bottom line to provide as much transparency as possible in terms of how we believe these dynamics could potentially play out through the remainder of the year. First, total revenues. Setting aside the effects of the pandemic, we are increasing our total revenue guidance by $2 billion at the midpoint. This is driven by an increase in pass-through payments of $1.3 billion and $700 million due to actual membership and premium changes as we exited the first quarter.
Second, as a result of the higher unemployment rate in the U.S., the suspension of eligibility redeterminations, and our product mix, we are increasing our total revenue guidance by an additional $4 billion at the midpoint, bringing our total guidance increase to $6 billion at the midpoint. We are also widening our guidance range, reflecting the lack of visibility with regard to the magnitude and duration of the high unemployment rate in the U.S. We have seen early evidence of membership growth in April, driven primarily by states suspending eligibility redeterminations and special enrollment periods for Marketplace businesses in some states. We are also conscious that some of these trends may lessen significantly as economic conditions improve. We now expect our total revenues for 2020 to be in the range of $110 billion-$112 billion. Next, GAAP and adjusted diluted earnings per share.
There are numerous items that affect the bottom line, and I'm going to highlight those that are most material. As I just discussed, the additional membership will be a tailwind to 2020 earnings, particularly in our Medicaid business, although we expect normalization of enrollment during the second half of the year as the economic recovery progresses. Next, utilization. While we saw a minor effect of lower utilization on the first quarter's results, we expect to see a significant impact of shelter-in-place policies on utilization rates during the second quarter. We also expect a potential reversal of these trends during the second half of the year.
While we cannot, at this stage, predict the exact scale and scope of normalization, as this will be highly dependent on where we will be in the economic recovery at that time, we expect that there will be pent-up demand for medical services in the back half of the year. We also expect that the deferral of medical services may lead to higher costs of treatment once members return to seeking medical care, as their health issues may have become more acute. In terms of the cost impact of COVID-19 and the waivers for tests and treatments, we expect the bulk of those costs to begin in the second quarter and continue through the second half of the year. We also expect lower investment income and higher interest expense due to the lower interest rates and maintaining the 2022 notes.
On another note, we expect our Marketplace risk adjustment efforts for 2019 to be lower than our previous expectations as a result of the current environment. Finally, while we continue to expect to achieve our run rate synergy target of $700 million associated with the WellCare acquisition, the timing of synergy capture will be affected due to shifting regulatory timelines and relaxed provider policies in the current environment. We expect our synergies to be lower than our previous expectations in year one. At this point, it is too early to predict the effect on synergies for 2021, but we continue to drive to the $500 million net synergy target. When you combine all these items, we continue to expect adjusted diluted earnings per share to be in the same range as our previous guidance.
We have a strong balance sheet and are well-positioned to meet our operational and strategic needs from a liquidity perspective. We have taken proactive measures to strengthen our liquidity even further in this environment. We had approximately $2 billion of unregulated cash on hand at the end of the first quarter and approximately $1.4 billion available on our revolving credit facility, creating almost $3.5 billion of immediate liquidity. The increase in leverage at quarter end was intentional, driven by the decision to defer the redemption of our 2022 senior notes. This increased our cash on hand and our debt by $1 billion each at quarter end, driving our debt-to-capital ratio to 41.9%, excluding our non-recourse debt. Our debt-to-capital ratio would be 38.9% when netting our unregulated cash with our debt at quarter end.
In addition, as we highlighted at our earnings guidance call in early March, we utilized $500 million of the divestiture proceeds to repurchase shares at a weighted average price of $57.66 during the quarter. As we progress through this year, we will continue to revisit our capital structure and adjust as appropriate. Overall, we had a good start to the year and have a strong balance sheet and liquidity position for the environment we are dealing with today. That concludes my remarks, and operator, you may now open the line for questions.
Thank you. We will now begin the question- and- answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We will pause for just one moment to assemble our roster.
Our first question today will come from Kevin Fischbeck with Bank of America. Please go ahead, sir.
Great. Thanks. I appreciate the EPS bridge that you guys walked through. I would love to get a little more color, though, about how much of what you're seeing as kind of an impact is going to flow through into next year. I guess, the expectation, if we assume that COVID-19 is basically back to normal next year, would you assume how much of that interest headwind is going to persist into next year versus paying it down? The synergy capture, do you get back to normal to a year two achievement, or does everything kind of get pushed back 6-12 months? I'd just love to go through those line items and kind of see which ones are kind of more this year versus maybe have an impact beyond 2020.
Kevin, I'll start off. I think the biggest issue we have is we've never seen it like this before. We have seen all the models. It's difficult to model when you have no prior experience. The biggest issue I see is, for example, unemployment. It could reach as high as 20%. It's right now around 15%. That's depression level. The forecast I see say that in the first quarter, first half of next year, you're not going to see a normalized return, even if they have the vaccine, because you're going to have probably 7%, 9% unemployment. What the various programs are, so while we would love to be able to say, "This is what it is," our planning assumptions have to be to take it quarter by quarter. That's why we thought it very important to maintain guidance, because we really believe that's achievable.
That's a baseline from which we can judge. When you have nothing out there, what's the baseline from which you compare and look at? I wish I could say what I think 2021 will be. I'm hoping for it to be improved. We don't even know how many peaks we're going to have this year. We're trying to return to work. We understand. I'm giving a long-winded answer. It's the things we talk about. I work with epidemiologists, and they keep telling me that the return to work, before we have, in a massive sort of way, the vaccine, it's unpredictable where this is going to go. I think the earliest we hear, hopefully vaccine sooner, but first half of next year is probably the earliest we'll see an effective well-tested vaccine.
I guess what I'm saying is, as we plan through this, we're going to do rolling quarters and try and get a sense as we look at the models of what unemployment is going to be and what's that mean to our business, what support the states will be able to provide. I wish I could be more definitive.
No, that's fair. Well, maybe, you mentioned the $4 billion of extra revenue. I guess, how do you think about the MLR on that business? I guess, the last time, if I remember correctly, there was some pent-up demand on the new Medicaid enrollment for the first six to nine months, and obviously on exchanges, you might get some of that COBRA membership that was high MLR jumping onto the exchanges. How do you think about the MLR of that new $4 billion?
Well, I think the MLR, from the new membership, I have to take the approach that it's fairly normalized, but at the same time, these are people who have just lost their jobs, and they may have had insurance previously. They may not have a lot of pent-up demand. There may be some. That's part of the variable we're dealing with. The biggest issue is, when do people return to work? Everybody believes that our visual planning was that the second quarter, we would see reduced utilization. The issue there is I'm talking to major hospitals right here in St. Louis, Washington University, Barnes and others. They're doing everything they can to get things back to normal today and get people back in because their income and everything's being affected by it. They don't want people to lose confidence in the hospital.
While I thought we may not see it until July, third quarter, we may now see it well in May and June starting to return, which means there'll be a more normalized MLR. We are typically, and Jeff can go into more detail, we are typically booking from historical levels expecting that. I'll give you one more big variable, and that was true when we looked at the first quarter. The submission of bills does not have a normal pattern because the people who do it in a physician or other offices who are working from home are not doing it. I've been on our lag tables, and we have the finest. I've had the greatest confidence in them. It's all predicated on data service to submission of bill. That's been thrown out of whack and will be for 12 months till it normalizes.
It's a long-winded answer again. This is the toughest thing. I think the MLRs will normalize. Jeff can talk about why the increase in Q1, which was anticipated, and we talked about it historically. Jeff, why don't you give a little more color on the MLRs?
I think we highlighted in the press release, obviously, the Q1 MLR and exchange normalization. Obviously, the addition of WellCare and the blending of the two companies. WellCare has a higher HBR in the first quarter because they don't have a significant Marketplace business.
Obviously, they had a lot of growth in the PDP business this year, and that's the highest MLR for the PDP businesses in Q1. We had new markets with the start of the LTSS in Pennsylvania, and obviously Iowa carrying over from last year. We had leap year, we had the effect of New York rates. I guess a lot of things that were driving MLR on a year-over-year basis higher. Part of that was offset by the health insurer fee.
I think what I'll just add is, I think we've talked, and people recognize our systems, and it's allowed us to be on top of it to the maximum extent possible. I think as we go through the quarters, we'll be able to be more clear. That's why I made the statement, because it's unusual to do that. This is so variable that if we see some trend develop that we have some confidence in, it's realistic and material, we're not going to wait till next earnings call to tell you. We'll issue the 8-K or whatever, set up a call, whatever, because that's the world we're living in. It requires a different approach, and you can count on us to continue to keep you informed as quickly as we know things.
Thank you. Our next question will come from Matthew Borsch of BMO Capital Markets. Please go ahead with your question.
As we try to better understand how the patterns of behavior and care have changed, is there anything you can spike out in terms of the care patterns that you're seeing between Medicaid, commercial, Marketplace, and Medicaid?
I'm not sure that there's a lot of differences right now. I think everybody is very much focused on the safety, home avoidance. The biggest issue we see right now is delayed services. I was very candid, Matt, what worries me is there are some, and I'll give you, just this is anecdotal, but I was talking to the head of pancreatic cancer at WashU, and a surgeon. He was saying how hospitals, and not so much them, they're doing surgery where it's emergent and necessary, but there are people that are saying in other locations, nonspecific, "Well, we have to do maybe chemo before we do the surgery because of the surgical suites and things." The patterns of care are going to be adjusted based on what the availability is of hospitals and the PPE, et cetera.
It's difficult, and I don't think we can call out a difference in the various populations because the pandemic kind of overrides it all.
Maybe just one more on pent-up demand. Some experience, maybe this is anecdotal, suggests that the delayed care doesn't necessarily flow through, that maybe more than half of it goes away. I realize we certainly don't have precedent for this experience, I'm just wondering if you could comment on that.
Well, I'll make two comments. One, I mean, there's things like ER utilization that when that's not spinning over the ER, that's gone, but that's a small percentage of it. Because there's still people going to the ER because they worry about the pandemic and that type of thing. I can't say that other care will not return. In other words, if somebody needs back surgery, today they may have delayed it and be doing exercise thing, but it's going to come back. There's a balance. There may be some cases that they say, "Well, I live with that, I could do without it." There's some that with the intensity, and they're probably more acute. As you summarize it, we've never lived this way. I always tell people, experience is the sum of experiences.
Nobody's had any experience in this to where they can rely on anything. It's your guess and my guess.
Right. Okay. Thank you.
Thank you.
Our next question will come from Josh Raskin of Nephron Research. Please go ahead with your question.
Hi. Thanks.
Hi.
Good morning. Good morning, Michael.
Good morning.
First question is just on the headwinds that you spoke about, I'm curious if we could get a little bit more color on the sizing. I know it's imperfect, and there's no experience, but even just relative magnitude of what's biggest versus smallest, et cetera, on the WellCare synergies, on the COVID costs, and maybe any color on if states are talking about direct reimbursements or the kick payments as they've done in the past. Then if you could just talk a little bit more about those risk adjustment initiatives. I'm not sure I fully understood that.
Okay. I'll let Jeff respond. I'll just talk a little bit, give you an example of the WellCare synergies. The state of Georgia, because of their capability to do the readiness and everything else, delayed the combination of two plans for a year. Fine. We can live with that, and it doesn't mean the synergies won't be there, they'll just be delayed. Another thing we've done, and I alluded to is, with the unemployment rate being what it is and individuals who were redundant just through the sheer combination, we've extended their severance pay. There are benefits. That's just the humanistic side of things. It's not their fault. They're very capable people. We've extended that, and that's a few million dollars here and there, but it's that type of thing. Jeff can comment on the others.
Yeah, Josh, this is Jeff. Just a couple of quick things. Obviously, we've sized the revenue piece in our revenue guidance. You can imagine, as with our income statement, the sizing of the categories is, revenue and cost would be from a dollar perspective, just because they're the largest dollar captions on the financial statement. Real quick on the risk adjustment initiatives, I mentioned in my prepared remarks around 2019 risk adjustment. As you may be aware, usually in the first half of 2020 or the first half of every year, there's a significant amount of chart chase effort that goes on. Even though risk adjustment is relative to your competition, we have data that would indicate that we're disproportionately affected because we do a better job of capturing codes. Because of what happened in March, that submission date goes through May.
Because of what happened in March, we think there's going to be an effect there on the 2019 risk adjustment. It's kind of hard to size the magnitude at this point, but you can think about it in that context. Delay in WellCare synergies. Again, I think we've mentioned in the past that the WellCare transaction was effectively break even without the share repurchase. I think we'd still be at break even, but you would include the share repurchase this year. I think from a transaction perspective, that can give you a relative size on the synergy shift. Again, we're still trying to capture those synergies, but as Michael mentioned, there's obviously some regulatory changes that will delay some of that capture.
Yeah, I think, Josh, I just want to make one other comment. We put in the press release some of the things that have impacted, the pluses and minuses, and we put the one place where we had the knowledge of the interest, we put the $0.17 a share. We wanted to give investors the sense that these are the things we're watching.
Yes.
The order of magnitude in this current environment is yet to be fully determined.
Are the states reimbursing for COVID treatment costs? Are you having discussions? I understand you're now in literally dozens and dozens of states, it's all sort of individual, but are you getting feedback the states are going to pay for those treatment costs?
Well, I mean, it's going to be within our premium. We have the premium, and we have to look to see where the whole total, we have to see how many of our members actually have the cost. If there's an issue, we'll sit down with the states, and that's going to vary state by state.
All right. I'm sorry, last one, just on the $4 billion of higher revenues, not the past or the actual higher revenues, how much of that is Medicaid versus exchanges in terms of the expected growth?
Josh, I mean, it's hard to bifurcate. I will tell you on the Medicaid piece, I would say the large portion of that's in the Medicaid side because the eligibility redetermination is suspension, right? In order for states to get the FMAP, the enhanced FMAP, they have to suspend the eligibility redetermination process. When I mention that we've already seen increases in April, part of that's because of the eligibility redetermination suspension.
Perfect. Thank you.
Thank you.
Our next question comes from Sarah James of Piper Sandler. Please proceed with your question.
Thank you. Can you provide us some color on your conversations with states around budget pressure and whether that could impact rates or program changes?
Obviously, states have budget pressures. I mean, municipalities, anything with reduced tax revenues. In our conversations, we remind them that the FMAP was 6%, and recent legislation, they're talking about moving it to 12%, so that their revenue and their cost of the sharing for these premiums will be absorbed more by the federal government. We have to work and see how it all plays out, but we're confident that the revenue will be there. Most states understand the cost and the need to still be, CMS has been very clear. Some states have asked for a waiver or change on actuarial soundness, CMS said clearly, "No." They understand that. The basic principles, Sarah, are still there, and that's where the strength of a balance sheet comes in handy, that we have the strength and wherewithal to work with them and get issues resolved.
Great. Can you just remind us from the last recession, I know that there's more actuarial soundness by a rate cell level protection that came in. There's other Obamacare protections that came in. If we went back to last time, were there program cuts, and would that even be possible this time, or is there too much for the states to lose?
Yeah. I don't really recall program cuts. I think the states are doing everything they can to normalize these types of things. I feel for them. Their biggest pressure right now is on the education system, more so than our system. Of course, schools are out of session, and there's that type of thing. I don't think we're at risk there. I think healthcare is something that needs there, and they realize that actions that reduce it and reduce the programs really come back to haunt them very quickly.
Thank you.
Thank you.
Our next question will come from Charles Rhyee of Cowen. Please proceed with your question.
Yeah, thanks for taking the question here. Just wanted to maybe touch on, you were talking about earlier, about potential for multiple peaks. Just kind of thinking about when you were thinking about your guidance here, particularly as we get to the end of the year, are you anticipating sort of a second wave for COVID-19 to recur? As you think about some of the delays you're expecting, particularly in WellCare synergies, et cetera, are you assuming that sort of COVID-19 is more of a regular occurrence as you kind of go forward? As we think about 2021, should we be thinking about sort of this recurring, and I'm also, it becomes more normalized, I guess. Thanks.
Well, I'll tell you the factors we're thinking about. Actually, I feel like I'm getting too verbose, but I'll try and keep it. The epidemiologists, I'll give you a factor I haven't heard much about. There is a factor that measures the intensity of the virus in somebody, and what people don't realize is that in the first three days that somebody's contracted the virus, it is at the highest acuity and intensity. You have people walking around that have the virus, who don't know they have it, and spreading it more. Remember, I think it was one person who came from China, got this whole thing started here. When we look at the peaks, what we worry about is that kind of factor, and to what extent people take the steps to protect themselves.
We're planning on, we've said, we're telling employees, letters going out today, that we expect that, we know we will not open before the end of May, and that may be pushed back another 30 days, just in the abundance of conservativism and caution. We're installing equipment that will measure employees' temperatures when they come through the turnstiles that go to work. We're working hard to get what we call sneeze partitions, these 6 ft high partitions in. We're working to figure out how we get random testing in. Those are the kinds of things that you do to try and minimize it. Somebody seems asymptomatic, send them home. We don't know. We are saying that if there is a second peak, we have to be ready for it in terms of PPE, what we're going to do, working at home.
We want to get people back in the office because it's more efficient, because you develop people more, and we're a high-growth industry. We have to be ready as we were last time. I'm very proud of the IS people. They, in three days, had 66,000 people working at home with the training and everything on iPad, just got it all set up. When we talk about planning for it, we plan to say, "Okay, what can we do to improve it?" To make it even more productive at home and protect those essential workers as they come. I don't have an answer. We just have to figure out what happens if we do, and what's our response going to be, and pray it doesn't, pray they have medicines that protect and cure this thing until we get a vaccine.
Thank you. Maybe if I could just add one more. To an earlier question, you talked about delays in the WellCare synergy capture. I think you previously indicated that synergies would be split between the sort of 50/50 between medical costs and SG&A. When you consider sort of delays that you're expecting now, does that skew the one or the other more so? Thanks.
Yeah, I would say the delay would skew more to the medical line, is what I would say. Not much, but a little bit.
Okay.
You also just said there's some offsets there, so that our break-even in the first 12 months-
Still break even.
is still there.
Great.
We tell people we like to think of ourselves as managers, not victims.
Great. Thank you.
Our next question will come from Scott Fidel of Stephens. Please proceed with your question.
Hi. Thanks. Good morning, everyone.
Morning.
First question, just interested if you could maybe help us just walk through some of the key dynamics that you're seeing in the New York market, just given obviously how much more disrupted the dynamics have been there. Specifically, obviously there were the delays in payments. What's the visibility you have on getting paid in New York? The final rate updates that you saw on the budget from New York, I think it ended up down 1.5%, but interested in what you're seeing there. Also just from the member perspective in terms of sort of COVID cost impacts and just what you're seeing with the membership base in New York.
Jeff, you want to start that?
Yeah, I'll start on a couple things. On the late payments, as you all may be aware, it's New York's fiscal year-end, it's not uncommon for states to delay their payment for a few days. At the end of their fiscal years, which is what happened, we've subsequently been paid. On the rates, the rates still aren't final, we really don't have any update, I would say that's with some finality compared to what we said on the March 3rd and March 4th when we gave guidance. There's no real change there from that perspective. What was your last one?
Just around the medical cost essentially, Jeff, just in terms of sort of COVID members being impacted, things like that.
Yeah, we've certainly seen some costs from New York as compared to our other states. In general, and this is no different than, I guess, what I've mentioned in the prepared remarks. As we sit here today, the amount of, I would call it, paid dollars associated with COVID has not been substantial. Right? There is obviously a delay from when the people seek services and when we obviously get the bills in-house. We haven't seen a large amount sitting here today.
Yeah, the normal submission patterns just aren't there right now, and that's part of the variables. I mean, it's things we haven't seen before.
Thank you. Our next question will come from Steve Valiquette of Barclays. Please proceed with your question.
Okay, great. Thanks. Good morning, everybody. A couple questions here. I guess, first from an actuarial perspective, I don't know how much you can dive into this or not, but I guess I'm curious if you're able to give a little more color just on how you've approached the medical reserve process for the full year calendar 2020 just in relation to COVID-19 medical costs. Was there any bias to potentially over-reserve, just out of an abundance of caution, and then we'll all just obviously see how the prior period reserve develops later this year and early next year.
Well.
I'm curious, just big picture, did medical reserves for the full year for COVID-19 have any material impact on the MLR that was reported in 1Q 2020 in particular, just to clarify that as well? Thanks.
I'll start off a little bit, and then let Jeff give you a little more color on it. We are looking at what is a normal reserve, and that's our starting point. Now, I will say that I've used the words abundance of conservatism. I would hope that we're going to be somewhat conservative in our bookings where there's all these variables, because I've often said, I'd much rather come back to you in 12 months, say, nine months, whatever, and say we had a prior period positive adjustment than a negative adjustment. Even that, it's just because these are things we've not seen before, submission patterns, so many variables here that we're using historic patterns, I think it's fair to say, Jeff, as a starting point, and trying to figure if there's any variable, but that's been the basic approach.
I don't know what you want to add to that.
Yeah. Just in general, just to maybe get a grounding point, the actuarial standards require reserving under moderately adverse conditions, and anytime there's uncertainty, generally you would add additional margin or additional cushion, if you will, because of the uncertainty of the environment you're in. Two things: we can only accrue for and record our best estimate of what we think our claims liability is going to be under the accounting standards. That best estimate would only be for claims that we believe have occurred prior to quarter, month, or year-end. At the end of the first quarter, that's what we did. To Michael's point, early in the first quarter, as we closed the books, we did not really see any difference in the claims submission patterns. It looked like the claims that we received were in line with our forecast.
We recorded a normal level of reserve. That's why we indicated that in the first quarter that COVID didn't really have an effect, and that's because in a normal month, we really only receive a very small percentage of the claims for the last two weeks of the month. Hopefully that gives you a little insight on Q1 and kind of how the reserving process works.
Okay, that's perfect. Yeah, appreciate the extra color. Thanks.
Our next question will come from Dave Windley of Jefferies. Please proceed with your question.
Hi there. Good morning. It's David Styblo in for Dave Windley. Just a follow-up on the first quarter MLR, and to understand, I think previously you guys had indicated that the MLR would be up year-over-year, and I think consensus maybe took that to be about 50 basis points, and obviously was up over 200 basis points. I just want to make sure that there weren't any other major differences that came up during the quarter that affected it, whether that would be a mix issue for more PDP lives in the WellCare book or some of the investments that you might have made in the quarter knowing that the lines were going to be a little bit lighter going forward, just to help understand the delta, again, between consensus and what you were previously talking about.
Yeah, I appreciate the difficulty in modeling the Q1 MLR, HBR. Obviously, we had a lot of moving parts, specifically with the closure of the WellCare transaction and the proration of their results. We also divested of three businesses, two legacy WellCare, one legacy Centene, and so it became challenging. We did not give a MLR Q1. What we did do was, in early March when we gave our guidance, we indicated that the high $0.80s to low $0.90 range from an adjusted earnings perspective and the way I would think about that is if you look at $0.86 we have $0.05 it was purely driven by what happen in the second half of March with interest rates. That was unknown to us at the beginning of March when we gave our guidance.
I guess from that perspective, we would view we were in line with what we told people at the beginning of the month, and obviously we said COVID costs were neutral. That's where we were from our perspective. We didn't give really any guidance on the Q1 MLR, and we appreciate it's higher, but a lot of the things that I think I highlighted earlier were really the drivers. We'd previously talked about exchange normalization. You have the addition of WellCare, which runs a higher MLR in the first quarter, and specifically, they did have a significant PDP growth, which it's the highest MLR for the quarter. New markets in Pennsylvania, we have leap year, and then of course the New York rate effect. I guess from our perspective, it was kind of where we thought it would be.
I'm going to jump in here.
Okay.
We have an annual meeting coming up in a few minutes, so I'm going to ask everybody to try and limit the questions because we're going to run out of time here in about 10 minutes. Please continue.
Thank you. Our next question will come from A.J. Rice of Credit Suisse. Please proceed with your question.
Hi, everybody. Just real quick, one point of clarification on the revenue increase. You referenced the special enrollment for the public exchanges and the lack of predeterminations. Does that count in your mind for the full $4 billion increase, or are you assuming as the year progresses, you'll see incremental Medicaid enrollment due to the weakness in the economy? Maybe split that out between what you actually have in hand now and what you're sort of anticipating as the year progresses. Then just real quick, any update on North Carolina or other states that are either in the RFP process or in the rollout phase of new business?
Yeah. A.J., you're spot on. It would include both our prediction on the higher unemployment as well. It's both components, eligibility, redetermination suspension, and higher unemployment. I'm not going to split those out at this point in time because I think as Michael mentioned, there's a lot of uncertainty here. We were comfortable with the number in aggregate, and I think that's what we're going to stick to at this point. As far as state updates, I'm not aware of any significant updates. I think we still have North Carolina in for 10/1. We'll have to see how that plays out.
Yeah, states right now are talking a lot about the rollouts of that. We were waiting to hear from several. Calling, saying, "What's new?" They're going to say, "Have you played cricket and we've just woken up?
Yeah. Okay.
Thanks, A.J.
Our next question will come from Justin Lake of Wolfe Research. Please proceed with your question.
Thank you. Good morning.
Good morning.
Just two things here. One quick follow-up on MLR question. The MLR for the full year, can you give us any color in terms of where you think about that directionally relative to the previous guidance of, I think it was 85.9%, 86.3%?
I guess here's what I would say, Justin. Obviously, there's a lot of uncertainty here with respect to the cost line and the pandemic and everything. I would say excluding the effect of the pandemic, our range would still hold. The real variable is going to be how the costs play out for the year, both the revenue and the costs play out for the year, associated with the pandemic here.
Sure. You took up the top line, took down investment income. I assume SG&A benefits a little bit, it's hit a little bit. In terms of the MLR, you're just saying we still think that number is good relative to the EPS guidance?
I'd say we-
Do you think it could be higher or lower?
It would still be within the range, but again, there's just a lot of uncertainty here.
There's so many plus and minus, Justin.
Yeah.
Your guess is
Yeah.
I don't know about that. Then just my question, just a quick follow-up on this FMAP and the redeterminations and the lack thereof. I'm curious, I know you don't want to delineate the exact revenue benefit from this, but can you share with us what the typical turnover is or churn rate is for redeterminations that's not going to happen now for some level, some period of time? On a monthly basis, I've heard numbers like 3%-5%. I'm just curious what you've experienced over time.
We had commented prior to all this that the redeterminations were tailing off because they'd gone through it. Redeterminations right now would be very difficult if they wanted to do it because of the number of people who've lost jobs and where we are. To try and put any percentage on it. When we had our White House meetings, we raised the redeterminations and balance billing as two things that the regulations had to deal with, and I guess they heard us.
Okay. Thanks for the color.
Thank you.
Thanks.
Our next question will come from Ricky Goldwasser with Morgan Stanley. Please proceed with your question.
Yeah. Hi, good morning and thank you for all the comments.
Hi, good morning.
A couple of questions here. First of all, obviously a lot of uncertainty, but MA bids are due soon in June. How are you thinking about those? The second one, Michael, more kind of.
I'm sorry, I missed that first one, Ricky. Could you repeat the first question? I didn't.
Yeah. The first one is just on the MA bids and how are you thinking about pricing for next year, given all the uncertainty. The second one, when you just think longer term, given this pandemic and the public health crisis, how do you think about expanded government role in healthcare as a result of this?
I think there's two aspects of it. One, on the bids, our group will continue to work through the normal process, and they have to go through and look at their, as they always do. I see no change there. Government's role, I don't think this is a time that politically, economically, socially, or any other way that I see a shift there. I think this is a time when you want to keep as much constant as you can because there's enough variables out there. I don't see any real shifts being taking place there.
Just lastly on the MLR, I know a lot of uncertainty, and thank you for the comment on what you're seeing in St. Louis and in terms of hospitals are actually starting to potentially go back to a more normalized environment or a new normal in May and June versus July. Within the MLR guidance that you provided, you said that obviously second quarter is going to be meaningfully below the second half. Should we think right now with current guidance that second half is going to be in line with what we've seen in the first quarter or higher than that? Just that we have some context.
I think I said that we anticipated the MLR would be low in the second quarter, but even that's now up for a change as people are trying to come back. I think all I can really say is it's going to be lumpy from quarter to quarter, and it's going to be very difficult to project it. As we see something that we can say, we'll tell you, but it's just going to be very lumpy, and tell me how it resurges. I don't want to predict something when the uncertainty is so great. We're just managing through it.
Yep.
Thank you. Our next question will come from Lance Wilkes of Bernstein. Please proceed with your question.
Morning. Just wanted to talk about kind of balance sheet impacts and the flow through on net investment income. Was just interested if you could talk to both what regulators are having you do and what you guys are doing with respect to premium payments from states, allowing delays in that, premium payments from individuals in public exchange, and then on the payable side, what you're doing as far as extending or accelerating payables, and what kind of impact that's having on that $0.17 for the full year impact on net investment income?
Yeah. This is Jeff. Just real quick, it's not really having an effect. The $0.17 is really just driven by the lower interest rates. Half of our investment portfolio is effectively set aside to pay claims, and it's invested in short-term, daily liquidity instruments. When you lower the short-term interest rate substantially, that just has an effect, right? The other piece of that number would be the higher interest cost. We were going to redeem our 2022 bonds. Instead, we've decided to defer that redemption and leave that cash on the books, and so there's a higher interest cost there, and those were 4.75% notes. That's really what's driving the $0.17. On the provider front, we have historically and continue to pay claims as fast as we can.
I think Michael historically has told stories of if a claim comes in today and it's a clean claim and it's automatically adjudicated, it's ready to be paid the next day. We've run it that way for a long time, so it hasn't had any impact, if you will, on the payable side.
Any impact on the receivable side, on the individual or anything?
No. Certainly, we've seen some members have delayed payments. We just haven't made it that far yet, right? It's been 30, 40 days here. We'll just have to see how that plays out.
Got you. Thanks.
Our next question will come from Mike Newshel of Evercore ISI. Please proceed with your question.
Thanks. I wanted to follow up on the Medicaid rate situation in New York. Earlier, Jeff, I think you were referring to the rate cuts that were already implemented in January, and again, there's still some discussion and still a possibility that will be adjusted. Is that right? In addition to that, for the Medicaid cuts in the budget for the new fiscal year, is there any update on where things stand with the redesign team that's figuring out the details there on whether premium cuts or other changes affecting you are in the mix of what they're considering?
Yeah. Thanks, Mike. I think that's the kind of the point I was making is that from our perspective, I think that's still open. We really are just waiting to get a final resolution there on what the effect is and then ultimately discuss that when it happens. Right now, I'd say they're still open at this point, and so more to come.
Just like, is it all very highly dependent the outcome here on just whether a federal funding bill comes through for the states, just when the states have a better idea of what the budget is going to be?
That could be a driver, but in general, I think it's just process related right now, meaning, I think the Medicaid review task force came out with recommendations, and I think we've had one meeting with the state since then, maybe so. There's a long way to go, I think, before those get finalized.
Yeah. Thank you very much.
Our next question will come from Ralph Giacobbe of Citi. Please proceed with your question.
Thanks. Good morning. Just a quick one from me. Can you just give us a sense of average claim cost of COVID on a Medicaid patient? Does the 20% higher Medicaid rate apply in Medicaid as well? Thanks.
Well, also, we have not seen enough claims. As you said, we don't know what degree is lack of claims or what degree is they haven't had time to submit them. We have not seen enough to see the average cost, but it has not been significant. It's been more the testing, and we haven't seen a lot of treatment. We know there's some treatment out there with the number of members we have, but we just haven't seen that. Jeff?
No, I think Michael's right. I mean, we've certainly paid some claims, but I would not want to give an average cost because we just don't have the volume yet to give a credible number is what I would say.
Fair enough. Just real quick, I may have misunderstood. Did you say you're assuming normal or normalized MLR on new HIX members? Why wouldn't it be higher just considering what could be adverse risks sort of coming on to the exchange? Thanks.
No, we didn't get into the specifics on the product level as far as going forward. Again, I think that's part of the uncertainty that we're dealing with.
I think what I said is, I'm not going to anticipate that these are all new members that have had no healthcare. These are people who have lost their jobs and maybe chose not to go through the other process to keep insurance with the company. It's not like it's somebody that's had no insurance at all. I'm just trying to give a balance, and give you a sense of how we're looking at it.
Got it. Okay. Fair enough. Thank you.
Our final question today will come from George Hill of Deutsche Bank. Please proceed with your question.
Hey, good morning, guys, and thanks for squeezing me in at the end. I guess, Mike and Jeff, if you think about the conversations that you're having around the various state program changes, are you seeing any changes that you think could become permanent after the crisis and means it could meaningfully impact the business?
We're not seeing that. The states right now are talking about things we can do to get their PPE for the state troopers and a lot of other things to just be supportive of the environment we're in. They're pleased with the coverage and what we're doing, and I don't see any major changes now or in the future.
Okay, thank you.
Well, I guess we're done with the questions. Just in closing, I want to help everyone understand that this business is as vital and viable as it's ever been. We are comfortable. We have the systems and capabilities to manage through the uncertainty. The key here is that while we at this point are confident on our guidance for the year, I cannot emphasize enough, it's going to be lumpy. It's not going to be a normal progression, depending on how people come back, how the intensity, how we services. These are the things we're managing through, and we have managed through in the past, and this past so far this year. Our employees are in sound working conditions. The business continuity is there. The growth is there. Our ability to work on the cost is there.
Going forward, we'll continue to keep you informed, and we're going at this with full confidence that we'll get through this and continue to be very successful for our shareholders. I thank you for your interest. Look forward to talking to you soon.
Today's conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.