Good day, and welcome to the Centene Corporation First Quarter Earnings Conference Call.
All participants will be in listen
only mode. Please note this event is being recorded. I would now like to turn the conference over to Ed Kroul, Senior Vice President, Finance and Investor Relations. Please go ahead.
Thank you, Nicole, and good morning, everyone. Thank you for joining us on our Q1 2019 earnings results conference call. Michael Neidorff, Chairman and Chief Executive Officer and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene will host this morning's call, which can also be accessed through our website atcentene.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-three seventeen-eighty eight. The playback code for both of those dial ins is 10,129,281. 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 these forward looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10 Q filed today, April 23, 2019, and the Form 10 ks dated February 19, 2019, and other public SEC filings. 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 Q1 2019 press release that we released this morning, which is also available on the company's website at centene.com under the Investors section. Finally, a reminder that our next Investor Day will be on Friday, June 14, 2019 in New York City. And with that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff.
Michael?
Thank you, Ed. Good morning, everyone, and thank you for joining Centene's Q1 2019 earnings call. During the course of this morning's call, we will discuss our Q1 financial results and provide update on Centene's markets and products. We will also provide commentary around the regulatory and legislative environment and our recently announced agreement to acquire WellCare. I want to emphasize, while we have an experienced team working on the WellCare integration, our main focus continues to be the results of the core business.
This includes executing on our transformation project Centene Forward. Let me begin with Q1 2019 financials. We are pleased to begin 2019 with another strong quarter, marked by solid top and bottom line growth and robust operating cash flows. Membership at quarter end was 14,700,000 recipients. This represents an increase of 1,800,000 beneficiaries over the Q1 of 2018.
1st quarter revenues increased 40% year over year to $18,400,000,000 The HBR increased 140 basis points year over year to 85.7. This was primarily due to Fidelis Care, which we noted when we announced the acquisition operates at a higher HBR as well as the impact of the HIF moratorium in 2019. We reported adjusted 1st quarter diluted earnings per share of $1.39 compared to $1.09 in the same period last year. This represents 28% growth year over year. We are pleased to report our adjusted net earnings margin improved 40 basis points year over year.
This improvement was due to better network management, leveraging our scale and enhanced medical management efforts. We continue to see opportunity for further improvement. Lastly, operating cash flows came in at $1,300,000,000 or 2.5 times net earnings, above the high end of our previously stated range of 1.5x to 2x net earnings. Jeff will provide further financial details, including increased 2019 guidance in his prepared remarks. A quick comment on medical costs.
Medical costs remain stable and in line with our expectations of low single digits. Moving on to markets and product updates. First, we'll discuss recent Medicaid activity. Our Medicaid book of business performed well in the Q1. On March 31, we had 8,600,000 recipients, representing a year over year growth of 1,500,000 or 21%.
As we have previously mentioned, we see an opportunity to continue to improve our overall Medicaid margins. Now on to state updates. New Hampshire, in March we successfully reprocured our statewide Medicaid contract in New Hampshire. The new program covers 180,000 recipients. The new contract is expected to commence September 1, 2019.
At March 31, we served 83,000 beneficiaries in the state. North Carolina, I remind you that we won 2 large regions in the recent RFP and have an active appeal process for the balance of the state. We remain cautiously optimistic regarding the appeal. Iowa, on July 1, 2019 Centene will commence operations under Iowa's managed Medicaid program. The state is moving from 3 to 2 plans and beneficiaries will be split equally between the 2.
We are confident the state is committed to operating a sustainable Medicaid Managed Care program. I remind you, we book a higher HBR in the initial quarters of any and all new Medicaid Managed Care contracts and Iowa is no different. As our medical management efforts gain traction over time, we will attain experience and knowledge with respect to our new members. It is at this point that margins will begin to normalize. We fully expect Iowa to match this pattern and believe we will be able to succeed in this program.
Next, Medicare. At March 31, we served 394,000 Medicare and MMP beneficiaries across 20 states. This represents a year over year increase of over 50,000 recipients. On a sequential basis, membership declined by approximately 23,000 as previously projected. This is due to the repositioning of Fidelis to get back its 4 star rating.
We continue to expect 2019 MA revenue membership to be flat compared to 2018. We believe as previously discussed, 2020 will be an inflection point for our Medicare Advantage book Ascension Ascension and the addition of WellCare's top performing MA platform to accelerate profitable growth as previously suggested in the 2020s and beyond. Now, health insurance marketplace. The marketplace business put up another strong quarterly performance consistent with our expectations. At March 31, we served approximately 2,000,000 exchange members across 20 states.
This represents a sequential increase of 510 1,000 beneficiaries or 35% on a year over year basis. Membership increased by 365,000 beneficiaries or 23%. The key demographics of these members remain consistent with prior years. Approximately 90% are enrolled in silver tier plans and greater than 90% receive subsidies. Additionally, we see a slightly higher retention rate compared to last year, which is reflected in our updated guidance.
We expect to have another strong year of operations as the national leader of exchange products. Next, I'll provide an update on healthcare legislation and regulatory environment. At this time, we believe there is little appetite in Washington to revisit comprehensive healthcare reform. With the political class turning its attention to the 2020 presidential and congressional elections, we welcome the discussion on ways to improve and expand government health programs. States and federal government continue to seek private sector solutions to enhance quality and lower cost of health care.
This is evidenced by 68% of Medicaid beneficiaries and 34% of Medicare recipients in private managed care plans. Centene will continue to work with both parties on a bipartisan solution that strengthens the nation's healthcare delivery system. We are pleased to see bipartisan efforts put forth on reducing prescription drug costs. Centene will continue to advocate for greater price transparency. This includes moving towards net pricing.
We stressed these things in our recent response to the draft rule on PBM rebates. We have been ahead of the curve with our equity interest in RxAdvance. This is a national full service cloud based PBM that manages standard and specialty drug benefits with unmatched compliance and transparency. Thus far Centene has successfully migrated 2 states into the RxAdvance platform, Mississippi and Nebraska. The implementation went seamlessly.
We expect the rollout of Centene's Medicaid and Exchange states to be completed by the end of 2020. We commend the administration's efforts on giving states greater flexibility via waivers. This was most recently exemplified with CMS approval of Utah's waiver for partial Medicaid expansion. Centene believes in allowing states to expand their Medicaid population up to 100% of the federal poverty level. This would enable every American below 100% of the federal poverty level to obtain coverage through Medicaid.
Americans above 100 percent of the FPL would continue to be able to purchase affordable, comprehensive coverage through the marketplace with the help of advanced tax. We look forward to working with the states that are on the front line and making sure all their citizens have access to affordable high quality healthcare. I'd like to remind you with over 3 decades of experience Centene and its predecessor companies have demonstrated the ability to adapt and adjust to political and regulatory changes at any given time. I would now like to make a few comments about our recently announced agreement to acquire WellCare. This combination is expected to bring together 2 top performing companies creating a premier healthcare enterprise focused primarily on government sponsored programs.
The addition of WellCare will bolster and diversify our product offering, significantly increase our scale and provide access to new markets. WellCare has developed a strong portfolio of Medicare assets, which is expected to provide Centene additional Medicare capabilities, including both Medicare Advantage and Part D. WellCare's Part D offering will significantly enhance and increase our scale in pharmacy. On a combined basis, our pro form a annual drug spend will be approximately $30,000,000,000 and growing. We also believe the addition of WellCare's Medicare expertise creates significant opportunities across Centene's existing markets as it can both strengthen and accelerate the growth of our existing MA portfolio.
WellCare's approach to Medicare Advantage is complementary to Centene's strategy. Both companies focus on providing high quality low cost healthcare to low income seniors. It is important to note that substantial opportunity this approach presents for the combined company. More than 10,000 people a day in the U. S.
Turn 65 and 65% of seniors are at or below 4% of the federal poverty level, our target market. The combination will also further extend Centene's robust Medicaid offerings. Additionally, it will benefit from Centene's growing exchange presence as we will be able to leverage our exchange platform in new markets. Planning WellCare, we will expand our footprint from 32 to 50 states. The combined company will provide healthcare services to 22,000,000 recipients in the U.
S. This consists of over 12,000,000 Medicaid and 5,000,000 Medicare beneficiaries including Part D plans. We will also be serving individuals on the exchanges and those enrolled in the TRICARE program. The addition of WellCare will extend our position as the largest Medicaid managed care organization in the country. We will remain the largest provider of exchange offerings and we become the 4th largest Medicare company.
We are already working on integration planning and believe our similar values including both companies local approach and integrated care models will help ensure we achieve a seamless transition. We expect to hit the ground running when we close. Our integration priorities include delivering values for members, capturing synergies and retaining and attracting the best seller. We have experienced integration leaders in both companies and are confident in the accretion and synergy targets that we outlined when we announced the transaction. We believe Centene's leading technology platform will be essential to our success as a combined company as it provides a competitive advantage.
We will apply our data analytic tools such as interpreter to further enhance the quality of care with a combined company's recipients. We will continue to invest in cutting edge technology, systems and capabilities. This will significantly enhance our ability to scale, coordinate and better manage care while leading to lower costs. Further, the integration of Centene's specialty platform across WellCare's membership base should also enhance quality and cost effectiveness. We recognize the importance of network adequacy.
We want to ensure access to high quality, cost effective providers. We also want to ensure that these providers are appropriately and adequately compensated. We have initiated appropriate preliminary regulatory discussions at the federal level with the Department of Justice. We will describe these discussions as constructive and have laid out a timetable for submission. At the state level, 5 FormAs have been filed and others are in the process of being filed.
Some preliminary discussions with appropriate regulatory authorities in our largest states have taken place. It is our opinion these processes will protect recipients, providers and states. As I have commented previously, there may be some form of divestitures in Nebraska, Missouri. Based on our actions thus far, we continue to maintain our internal timelines for approval of the transaction. The combined company will have estimated pro form a 2019 revenues of approximately $100,000,000,000 and pro form a EBITDA of $5,000,000,000 The pro form a revenue mix consists of 65% for Medicaid, 15% for Medicare and 15% for Exchanges.
We are confident the combination will provide significant value to our collective shareholders, members, state partners and other stakeholders. We look forward to providing updates as we move through the transactions process. A quick note on Fidelis, we continue to be very pleased with the performance of Fidelis. Approximately 10 months since the close of transaction, integration has been smoothly. We have remained on track to realize our synergies and accretion targets.
Shifting gears to our rate outlook, we continue to expect a composite Medicaid rate adjustment of an increase of approximately 1.5% for 2019. Separate, CMS recently issued the 2020 final Medicare Advantage Rate Notice and rates came in better than expected. In summary, our strong first quarter results set the stage for us to maintain positive momentum throughout 2019 and beyond. Our pipeline of opportunities across all lines of business remains robust. We believe the additional scale and diversification that the WellCare acquisition provides will enhance the sustainability of Centene's long term growth.
We are optimistic about our future and ability to extend Centene's leadership position in government sponsored healthcare. As Ed reminded you, our Investor Day is June 14 in New York City. We look forward to seeing you there. We thank you for your continued interest in Centene. I will now turn the call over to Jeff.
Thank you, Michael, and good morning. This morning, we reported strong Q1 2019 results. 1st quarter revenues were $18,400,000,000 an increase of 40 percent over the Q1 of 2018 and adjusted diluted earnings per share was $1.39 this quarter compared to $1.09 last year. Before I get into the details, I want to remind everyone that the company stock split was distributed on February 6, 2019 to stockholders of record as of December 24, 2018. Now let me provide additional details for the Q1.
Total revenues grew by approximately $5,300,000,000 year over year, primarily as a result of the acquisition of Fidelis Care, growth in the health insurance marketplace business, expansions and new programs in many of our states in 2018 2019, including the Illinois contract expansion, another region going live for the Pennsylvania LTSS program and the beginning of operations in New Mexico and approximately $500,000,000 of pass through payments from the State of California and approximately $435,000,000 of pass through payments from the State of New York. This growth was partially offset by the health insurer fee moratorium in 2019. Moving on to HBR, our health benefits ratio was 85.7% in the Q1 this year compared to 84.3% in last year's Q1 and 86.8% in the Q4 of 2018. The increase was primarily due to the acquisition of Fidelis Care, which operates at a higher HBR and the impact of the health insurer fee moratorium in 2019. These items contributed to 130 basis points in the increase from last year.
Sequentially, the 110 basis point decrease in HBR from the Q4 of 2018 is primarily due to the performance and seasonality in the health insurance marketplace business, partially offset by the impact of the health insurer fee moratorium in 2019. The marketplace business continues to perform well and membership remains strong as we ended the quarter with approximately 2,000,000 members. We continue to expect pre tax margins for the year to be within our stated 5% to 10% range. Now on to SG and A. Our adjusted selling, general and administrative expense ratio was 9.5% in the Q1 of this year compared to 10.3% last year and 9.9% in the Q4 of 2018.
The year over year decrease was primarily driven by the acquisition of Fidelis Care, which lowered the ratio by 70 basis points. The sequential decrease is primarily due to seasonal open enrollment costs associated with the health insurance marketplace and Medicare businesses that were recognized in the Q4 of 2018. Additionally, we spent $0.02 per diluted share on business expansion costs during the Q1. Investment income was $99,000,000 during the Q1 compared to $41,000,000 last year $67,000,000 last quarter. The increase year over year is due to higher investment balances mainly associated with the Fidelis acquisition, higher interest rates on short term investments and improved performance associated with our deferred compensation investment portfolio, which fluctuates with its underlying investments.
The earnings from our deferred compensation portfolio were substantially offset by increases in deferred compensation expense, which is recorded in SG and A. Sequentially, investment income increased due to the previously mentioned improved earnings from our deferred compensation portfolio as well as higher average investment balances and higher interest rates on short term investments. Interest expense was $99,000,000 for the Q1 of 20 and higher interest rates on our debt associated with our interest rate swaps. And higher interest rates on our debt associated with our interest rate swaps. Our effective tax rate for the Q1 was 24.2% compared to 34.1% in the Q1 of 2018.
The lower tax rate was driven by the health insurer fee moratorium in 2019 and lower tax expense associated with a favorable outcome of a federal tax audit with respect to R and D tax credits. This favorable outcome accounted for 150 basis points of the reduction in the Q1 2019 tax rate. Now on to the balance sheet. Cash and investments totaled $14,800,000,000 at quarter end, including five $7,000,000 held by unregulated subsidiaries. Our risk based capital percentage for NAIC filers continues to be in excess of 3 50% of the authorized control level.
Debt at quarter end was $6,800,000,000 which includes $357,000,000 of borrowings on our revolving credit facility at quarter end. Our debt to capital ratio was 36.5%, excluding our nonrecourse debt compared to 40.3% last year and 37.4% at the Q4 of 2018. Our medical claims liability totaled $7,400,000,000 at quarter end and represents 48 days in claims payable, which is consistent with the Q4 of 2018. We continue to expect the DCP to be in the mid-forty range on a run rate basis with the inclusion
of Fidelis.
Cash flow provided by operations was $1,300,000,000 in the Q1 or 2.5x net earnings. The cash provided by operating activities in 20 19 was due to net earnings, an increase in medical claims liabilities, primarily resulting from growth in the health insurance marketplace business and the commencement or expansion of the Arkansas, Florida, Pennsylvania and New Mexico health plans and an increase in other long term liabilities driven by the recognition of the risk adjustment payable for the health insurance marketplace business in 2019. Cash flow from operations were partially offset by an increase in premium and trade receivables of $662,000,000 primarily due to a delay in payment from one of our state customers, which was received in early April. Before I discuss our revised guidance, let me make a few comments on the WellCare acquisition. As Michael commented, we are working through the regulatory approval process and have begun integration planning activities.
While it is still early in the integration planning and regulatory approval process, we continue to be comfortable with the synergy and accretion targets we communicated at the transaction announcement. As we progress through this process, we look forward to keeping you updated. Now on to guidance. We updated our 2019 annual guidance for the following items. First, we are increasing the total revenue guidance at the midpoint by $2,500,000,000 primarily driven by $1,000,000,000 of additional pass through payments in New York and California, dollars 700,000,000 associated with the health insurance marketplace driven business, driven by a combination of higher than expected member retention and risk adjustment and $500,000,000 due to the proposed changes in the Iowa contract award.
2nd, we are decreasing our full year effective tax rate by 50 basis points to reflect the lower tax expense recognized in the Q1 associated with the favorable audit results. Lastly, we are increasing our adjusted diluted earnings per share guidance at the midpoint by $0.13 per share. This is the 2nd increase so far this year and is driven by the Q1 results, dollars 0.05 per diluted share for higher expected investment income and $0.05 per diluted share associated with increased health insurance marketplace revenue I previously mentioned. These increases are partially offset by increased business expansion costs of $0.02 per diluted share. In summary, our full year updated 2019 guidance is as follows: total revenues of $72,800,000,000 to $73,600,000,000 GAAP diluted earnings per share of $3.67 to $3.84 adjusted diluted earnings per share of $4.24 to $4.44 and HBR of 86.5 percent to 87 percent an SG and A ratio of 9.4 percent to 9.9 percent an adjusted SG and A ratio of 9.3 percent to 9.8 percent and effective tax rate of 24.5 percent to 26.5 percent and diluted shares outstanding of 421000000 to 422000000 shares.
Overall, we had a good start to the year with good performance across all of our business segments. We believe the continued growth in revenue provides opportunity for future earnings growth. 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. Our first question comes from Josh Raskin of Nephron Research. Please go ahead.
Hi, good morning. Thanks.
Good morning.
Good morning, Michael. So my question just, it sounded like a little bit more excitement around the Medicare opportunity for next year, talking about the inflection point. And so I was wondering if you could help sort of flesh out what gives you that confidence, how you guys are thinking about your bids with a month and a half to go on that? And then was there any thought as to waiting for the WellCare acquisition to close and giving yourself a little bit more time and information and management expertise and Part D plans, etcetera? Or is it sort of now we've got the 4 stars for Centene and that's all we need?
And then just one quick one on the WellCare progress. I understood the integration started, etcetera. Any more updated thoughts on combined management team? I think that'd be helpful as well.
Josh, I'll start off on the Medicare and others can jump in here. But On the Medicare, we've said that the 2020 will be the year where it comes together. We've been testing things. We're re contracting with providers on risk based contracts and the things that create successful Medicare products. So we will continue to move ahead on our own recognizing that until we close, we can't work with WellCare on it.
Once we do close, they have a strong platform. We have some we've added some real talent here and through the integration process, we'll be putting those two talents together. And I think 2020 will be a very strong year for Medicare and that basis. On the organization, I'm not going to comment, I think before I say too much on a call like this, first the Centene people and as well as then the WellCare people need to know what the new organization will look like. And we're not going to get into that till we get closer to the knowing it's closing.
Simply, we have as I said earlier, everybody focused on their respective businesses and then we'll move through that. I'm sure you're going to see how you think about it. That's a better place to be. But senior, I will add this much, just that we are working with some of the senior management at WellCare and have some very important responsible positions that they'll be able to move in as into this new $100,000,000,000 company.
That's helpful, Michael. And just one quick follow-up on the Medicare comment 2020, you've talked about Medicare contributing as much as 20% of growth in future years. Is 2020 that year where we start thinking about as much as 20% of the growth coming from Medicare?
Well, I think I said during the course of the decade. So I mean, we'll start there, Josh, and then you'll see it continue to ramp up. It's not going to be a cliffside. Thanks.
Sure. Fair. Thanks.
Thank you.
Our next question comes from Kevin Fischbeck of Bank of America. Please go ahead.
Great, thanks. I wanted to ask a question on the WellCare deal. It sounds like you've already started the process with the states and again you've identified a couple states where you expect there to be divestitures. Is it safe to say that based upon the conversations with the other states where you have above average pro form a market share, you still feel confident that divestitures will not be required? And then I guess how do you think about the sustainability of a state where you have pro form a 50% market share?
What's what how did you factor in the potential risk that in 2 years during the reprocurement the state might add a new player in to replace the fact that you've consolidated WellCare?
I would say this, Kevin, I think we try to plan ahead and we've thought through those kinds of issues and looking at this particular transaction. I'm not going to front run the states with a lot of discussion as to our discussions with them. They are very constructive and I would go this far and say that we share a shared focus on worrying about the recipients and what's best for them. Then we look at the provider networks ensuring that they are well taken care of in terms of providing for in this situation and protected and then the status customers. So we are focused on all three of those things.
As far as divestitures are concerned, those are subject to discussion and even in Missouri and Nebraska we're in discussions as to what if anything they want us to do. I mentioned that as we had talked about in the past that's where there are 3 and 2 of the 3 are WellCare and Centene. So we're working through and seeing what they want to do there and go from there.
I guess in the past you've talked about the accretion and synergy numbers assuming a prudent amount of divestitures. Does it take into account potential issues a couple of years down the road when you give that 2 year accretion number? Does that also factor in any kind of loss of membership if states were to
be here? Yes, sure. It factors in a conservative position on that. So we're absolutely. Okay.
And if I could just ask one more question. You mentioned that the Medicaid margins have room for improvement. Where how do we think about where we are in that process? Is this a multi year process? Where are we versus your target margins and how long do you think it takes to get there?
Thanks.
Well, we'll never personally from a management standpoint, Jeff and all of us here, Chris, we'll never take the pressure off improving margins because the moment you stop trying to improve, they're going to bounce up. So it's an ongoing process and but we want to do it in a way that's sustainable. It's not we don't want a short term big huge improvement and then have something come up. So what we're working on is the network, the contracts with various providers that keep it balanced for them because we view them as part of our product. We don't want to you never want to hurt your product, you want to maintain it.
So it's a total process we're going through and we're moving more and more to risk based management where the providers can do very well when they work with us and manage it. So it's a longer term thing, but I think what's important is that we see it on a sustained basis. Hope that helps.
Yes, thanks.
Our next question comes from Sarah James of Piper Jaffray. Please go ahead.
Thank you. I wanted to drill down on the services line. It looked like cost of services increased about 2 50 basis points year over year and we're estimating that was about a $0.04 headwind, which implies the underlying health plan results were strong. So on the services line, I know there were some revenue
and
gross
margin on that product going forward?
I'm going to punt revenue and gross margin on that product going forward?
I'm going to punt that one to Jeff. Thanks, Michael.
Obviously, I think a couple of things. First, I think you hit the nail on the head there, Sarah. I think a few things is it's a different mix of business than we had in the Q1 of last year. So I guess what I would say is I would bridge from the Q4 to the Q1. I think that's more appropriate given the fact that we had the VA business that's no longer part of that line.
And then you also have a couple of acquisitions we made that are changing the mix profile of that business. And so I guess what I would say is, I would look at the Q4 of last year bridging to Q1, and I think that's pretty consistent. And I think that's what you would expect to see for the remainder of the year. There is some lumpiness in those because there are certain like for example, the home health business has some contract reconciliations that are normal and occur every year either in the 3rd or Q4. So it doesn't mean every quarter is going to have a consistent cost of service percentage.
But for the full year, we would expect it to look similar to the Q4, maybe a little bit lower.
Got it. And one clarification here on guidance. Last quarter, you guys talked about 60% one half, 40% second half. And last year, you talked about a 10% or so historical average for the risk adjuster true up, which based on today's Q would be about $93,000,000 benefit to 2Q 2019. So just want to make sure on those two aspects that's still what guidance assumes as a sixty-forty seasonality split and about a 10% risk adjusted true up benefit in 2Q?
Yes. The sixty-forty is consistent with what we said. The true up piece, you just have to make sure that when you do the true up, it's really based on last year's it's on 20 18 business, right. You can't roll in the Q1 of 20 nineteen's risk adjustment in order to calculate the 10%. So it's a state by state calculation that's really based on the business activity in the 2018 year.
Thank you.
Our next question comes from Peter Costa of Wells Fargo. Please go ahead.
Nice quarter guys. Good
morning. Thanks. Can you
tell us a little bit about what you're thinking about with the PBM at this point? You had a couple of states now convert to Rx Advance. You're starting to see how that's performing. Is that performing up to your expectations at this point? Do you think you can do better by looking at what WellCare is doing, given that WellCare has the buying power of much bigger CVS behind it than what RxAdvance has, which maybe doesn't matter in the Medicaid space, but certainly matters in the Medicare space?
I think one, the first part, the RxAdvance has been flawless in the implementation. I expect that as we continue to enroll more states, we'll continue to find ways to improve and always do better. 2, I think we're going to find that RxAdvance will provide some really useful tools to the WellCare and what they're doing with the purchasing they're doing. As this is really a very modern day PBM type thing with a lot of transparency, a lot of great information, Peter, that I think is going to serve everybody well. So the combination of the 2 will help.
And Jesse, you want to add something?
Yes. Thanks, Michael. So I think just to your point, Peter, I think this as we're looking at the combined business, we do recognize the importance of pharmacy cost management on the MA and PDP businesses. And we think, as Michael referenced, that the combination will certainly have the ability to leverage some of the capabilities from the WellCare team and their experience.
So are you talking about
some kind of a combination of RxAdvance and what WellCare is doing currently
with CVS? Yes, we're working through the integration now and we'll determine what part each one should play in it. So you're probably about 2 months ahead of us, but it's a good question, Peter.
All right. And this is just the last question. The Q3 of last year, you had some reconciliation benefit from the California in home services and sports program ending and you talked about perhaps getting some more of that reconciliation completed in 2019. Was there any of that in this quarter? And do you expect any for the remainder of the
year? There was not any of that in this quarter. And as you're well aware, typically what happens, you're waiting for the final reconciliation and the state notifies you. So we don't have any of that included in our guidance and more to come. I guess we're waiting to see what the results are.
And you do expect that to be positive when it happens?
I mean, we've made our best estimate. So it could go either way, but we've had a history of making relatively conservative estimates. So I guess I'll leave it at that.
Okay. Thank
you. Our next question comes from Scott Fidel of Stephens. Please go ahead.
Thanks. Good morning. First question, just interested in your assessment on the 2020 exchange reg that came out late Thursday. Then just specifically also whether you think the subsidy tweak that CMS made will have any impact on exchange market fundamentals or is just you don't see it being particularly material?
Kevin, do you want
to comment on that? Sure. Hi, Scott. I think in general, we're pretty much supportive of the new final rule. We think the lower user fee is definitely appropriate.
We support the fact that there's no change in either the silver loading or the automatic reenrollment. We also are supportive of the exclusion of the manufacturer coupons for patient cost sharing, which we think is going to actually incent members to take more attractive generics. And we think some of that offset that you're some of that headwind that you're talking about could be offset both by the lower user fee as well as the fact that manufacturer rebate change or manufacturer coupon change that I talked about is also going to create more incentives for people to take generics. So we think some of that projected $980,000,000 less APTC, which I think is what you're referring to, will be offset by those two items.
Got it. So net net, when you look at all the different variables, would you actually view the final exchange rule as more of a neutral to slightly positive overall?
That's our view.
Okay. And then just had a follow-up question. Just actually wanted to tack on to Sarah's question just about some of the moving pieces in the specialty segment. I just noticed in the Q, you guys mentioned how in the 2Q, we'll probably see more of a noticeable shift from earnings from specialty over to managed care as you continue to implement the new Rx pricing model. Jeff, interested if you can maybe just walk us through sort of functionally how that plays out within the 2 P and Ls.
Is it basically you have a lower gross margin in the specialty segment and it benefits the MLR in the managed care segment or just interested in the exact mechanics of how that works out? Thanks.
Yes. You're exactly right. That's what we previewed. We included that language in our 10 ks. You're exactly right.
There would be a lower gross margin in the segment results for the specialty that would in turn directly benefit the health plan results. And just to make sure I clarify for everybody, that's only in the segment disclosure and that's intercompany items. So that gets eliminated in the consolidation. So for we're not talking about the cost of service line, for example, that's reported on the GAAP financials. Okay.
All right. Thanks.
Yes.
Our next question comes from Dave Windley of Jefferies. Please go ahead.
Hi, thanks. Good morning. I wanted to ask a follow-up in pharmacy. Michael, I believe I caught you saying in your prepared remarks that Centene would be supportive of a move to net pricing. And if I'm interpreting that right, elimination of rebates and a reduction of manufacture price to net.
If I'm interpreting that correctly, I'm curious what mechanism you would see as the governor to pharmaceutical price increases after that happens?
Well, I think one, I said some time ago that that's something I believe we work very hard and try to move to. And if we're successful in it, the governor on price increases will obviously be the competitive world and we will be a we will have the critical mass in drug purchasing that all the pharmaceutical companies will have to take it seriously. We said that $30,000,000,000 we see as a growing number. And as that continues to grow and as Rx advance, information becomes ever more credible, I think we'll have the data we need to encourage competitive pricing.
Got it. Thanks. If I come back to medical costs, appreciate the reconciling items that you provided. I'm curious if there's any difference year over year in the contribution or lack thereof from flu. And with a relatively, I guess, in line expectation after those adjustments, if there were other moving parts if flu was better this year, for example, were there other moving parts as an offset?
I'll let Jeff answer that. I'll cover the flu initially. But I want to remind you, the flu, we had a flu season that looked like 2 years ago, not last year. But when you have the scale and size, it will be a $70,000,000,000 enterprise this year before HealthNet. The medical costs are such that the flu is really not a major factor as part of the total medical cost.
So that's something that we plan for, we book for, but a variation will not have a material effect. Jeff?
Yes. Thanks, Michael. Dave, I think Michael is spot on. We're obviously calling out the large drivers, the largest drivers, obviously, which being Fidelis and the health insurer fee moratorium are the 2 largest pieces. I would say we did see a lighter flu than we did in the Q1 a year ago, but we also had, I'd say, a lot of new businesses starting up, including the Pennsylvania LTSS, New Mexico.
And as Michael mentioned, we record a higher level of HBR in those because you're also building margin at the inception. And then we had new members in both Illinois and Florida. And so I think those were smaller drivers on an absolute basis, but you add all that together and they're kind of offsetting. Great. Very helpful.
Thank you.
Our next question comes from Matt Borsch of BMO Capital. Please go ahead.
Yes. Maybe you could talk about the Iowa situation and how you expect that to unfold and what gives you confidence that unlike the peer companies that exited the market, you can reach a mutually workable rate arrangement?
Well, I think, one, we've had discussions over a long period of time at the most senior levels of the state and in the regulatory environment. And we have a real comfort in their commitment to have a very successful managed care program. It's very obvious. Historically, we've been offered contracts and have turned them down rather than end up taking a new contract and filing a PDR before you even have your first member. That's something we try to avoid.
So we but this time we looked at our actuaries looked at it. The state just the legislature just voted additional 150 $1,000,000 available to help sustain the program and improve it. So everything we looked at said that this will be a successful program. And I know some peers have exited. It was a different time.
If I had entered when they did, I might have a different feeling than I do coming in now with a new administration in place the past year or so and very aggressively looking at how they can have a successful program.
Michael, if I could just follow that with one question partly related, which is do you have a view on the optimal number of participants in a given state? I know the question isn't quite as simple as that because you've got small states and large states. But are 2 plans sufficient for some states like the size of Iowa?
Yes. Let me put it this way. Regardless of the size of the state, I think the optimum is just us. Okay. Okay.
Now, happy moving beyond that. You kind of hit on it. I think in Iowa, the size and scale, 2 is appropriate. If it was 3, you can deal with that. We saw Georgia go from 3 to 4 years ago and that rate did not have much of an impact.
And that's fine because you have choice and when you have the it always starts off with choice and we have the network we have and the reputation we have in most of these states, we tend to do well with this choice. So we deal with it as it is. In Florida, there's some counties, I think, the eight counties may have as many as 6 plans in it and that's okay. But the way the algorithms work on auto assigns it, as a member of the families in and other members get assigned to that plan, I think it's the states that have been doing it for a while, understand and get it right. And obviously, when you look at the growth we've had and how we're doing, we're very comfortable with the way it is.
And so you hit you really hit on It's going to be a function of the size of the state as to how many.
Okay. All right. Thank you very much.
Thank you.
Our next question comes from Charles Rhyee of Cowen. Please go ahead.
Yes. Thanks for taking the question. I'd like to go back to pharmacy a little bit and you talked on this idea of going to of supporting greater price transparency. When it comes to pharmacy, my understanding generally speaking, right, states have tended to like the current rebate model in part because rebates don't necessarily have to be from a back to healthcare and can be used for general sort of budget purposes. As you see the market moving maybe towards greater transparency and maybe even towards the net pricing model, how do you see states moving towards this as well?
And how do you see them sort of operating within this kind of this new world, I guess, as we think about the way pricing starts to evolve and sort of how you how do you think this would impact your pharmacy business, particularly as you try to roll out our Advanced Products? Thanks.
I think that's where they are right now. They are pushing more and more for transparency on where it is for pass throughs of the pricing and how they're doing it. So they really have moved away from just the pure rebate type model. And we're hearing more and more at the federal level about rebates at point of sale and that type of thing. So that whole it's just all in transition.
It's in flux right now. And I think the things we can do and if we can move to a net price type thing that everybody can do much better with the transparency, the competitive bidding, etcetera. So you're not playing with discounts and rebates and volumes and things. Here's the drug cost and it's particularly important in specialty pharma. So this is something that can apply to both.
So I think the states are really adapting to it and have been in their own way moving more towards it on an ongoing basis.
And then maybe following up on thanks. And maybe following up on Dave's question in terms of sort of the governor for price increase in the future. You talked about price competition from transparency. But what about in many cases, right, a lot of these, particularly in specialty, a lot of these drugs are the only drug in their class, so there's really no competition. How do you look to manage costs in those particular drugs where there is little to no competition?
Well, you manage it through effect by managing the utilization effectively. I mean, if you have only one drug and it's a curative drug, you negotiate the best that you can, but rebates aren't going to help you there one way or the other. I mean, it's you're not saying it's rebates or the other. They're going to be the same. So what you do is you manage the utilization and ensure that people getting a specialty pharma drug, whether you use Genome and other things, it's going to be supportive and helpful for them.
If it's curative, you're going to get it for them and that's what's important. When the hep C drugs first came out, they were expensive and it didn't take long before a second one showed up. So it's not usually not very long. I used to be in pharma side with Miles and eventually for a real time buyer. And we learned very quickly, if you take your margins up too high, you're just leaving room for somebody to come in under you.
And so, you're going to get competition very quickly if the pricing gets too abusive. Does that help any?
Our next question comes from Steve Tanal of Goldman Sachs. Please go ahead.
Good morning, guys. Thanks for taking the question.
I guess the I wanted to follow-up on just sort of the HBR, the new programs and then talk about DCPs for a second. So I guess, the way I'd come at this is flattish HBR, ex Fidelis and HIF looks like a pretty solid outcome when you've expanded or entered into new programs in 4 new states. So I guess I'd first ask how those programs are shaping up in the early days, but it seems like the numbers would suggest quite good. And so maybe the real question is around Jeff's comment on DCPs returning to the mid-40s. From 47.9 at the end of the first quarter, 2.9 days, 3 days to get to 45, let's say, it's sort of like $450,000,000 of excess reserves using Q1 claims per day.
So does that math sound right? Is it fair to think about that as an excess or are there seasonal fluctuations around marketplace or otherwise we should be thinking of? And just finally, is there anything you could tell us about sort of the path and timeline to returning to mid-40s if that's the right level? Thank you, guys.
Yes, certainly, Steve. A lot in that question. But I'll start with the DCP in the first. I mean, what we're saying is that's our range. That doesn't mean by the end of this year.
There's a couple of things with the Fidelis on the cash timing that we're still working through that could reduce that sometime this year. So think of it as more like a day, maybe 2 by the end of this year. And ultimately, when you look at DCP, a lot of that has to do with timing of payments, right? It's really a timing of payment measure, not necessarily how your reserves are. We look at reserves differently as a percentage of medical expense, which we've been very consistent over the since the last 5, 10 years, had a very consistent reserving methodology.
So
I guess what I would say is it's more timing related to anything. The other thing is, we have obviously some risk based contracts with some providers. Those accruals are in the IBNR balance. Some of those accruals are in the IBNR balance. And when those get paid, the IBNR goes down.
So those are the things that we're dealing with and why we call out timing of payments from a quarter to quarter perspective.
Perfect. Very helpful. And just any comments on those on the new state programs, Florida, Illinois, New Mexico, Pennsylvania?
Yes, sure. On the HBR side, I guess what I would say is it's in line with our expectations. You have to remember the Pennsylvania is an LTSS award. So it's going to be in the 90% -plus range from an HBR. So it's really a mix of business that obviously impact on the total HBR of the company.
But in general, those programs are and the expansions are running exactly in line with our expectations. And as Michael mentioned before, a lot of times there's continuity of care periods and obviously you have to build margin on that additional new business and that impacts the HBR early in the program, but nothing outside of our expectations.
I think if I may just add that in a new plan, you don't have we use a date receipt methodology for calculating and it's proved to be a very accurate way to do it versus paid claims. But you need the history of quarters, 2, 3 quarters to be able to do the accurate accounting of it. I think we'll never say never, but we're proud of the fact you don't see a lot of prior period adjustments. And so it works. So rather than take the chance, we typically will book it at 90% for the 1st 3 quarters or so, just not knowing if it's where it is and that has typically served us well.
So that's the approach we take to it.
Perfect. Thank you.
Our next question comes from Ana Gupte of SVB Leerink. Please go ahead.
Yes, thanks. Good morning. Appreciate you taking the question. On the deal again, as you're having conversations with the DOJ, which I'm assuming will be the arbiter here in the States, as you have like a broad platform now across Medicaid exchanges and Medicare, do they view that in a favorable context? And what types of what type of feedback are you getting from the DOJ and states, if any?
And how does that dovetail with kind
of this
integrated not integrated duals, but states looking for players to be in Medicaid to participate in these special needs plans and so on in places like Florida.
I think the states recognize that we're a leader. They recognize the systems and the capability we have to really improve outcomes and control costs on a very fair balanced basis. So that goes a long way. Now there has not been this kind of Medicaid acquisition going back, I think they said it was, I guess Amerigroup was the last one that occurred. And so there is some new they are reestablishing the grounds.
But when you look at this, it's a different form of competition. You have state setting rates, you have things of that nature. So it's working through and talking about all these elements. And I don't want to get ahead of them, but we're finding that their questions are really the kind one should expect in this kind of transaction. And it's constructive.
And as I said, it's really focused in 3 areas. 1, bear to first what's best for the recipient As we're dealing with a fragile population, we emphasize that. And it's important to think about them to the provider network. This is not just gaining critical mass against them, but how do you get the kind of size and scale that allows you to do the risk based contracting so many of them want and we show the data and what we can do, how we do that. And thirdly, the state, how we're able to obtain costs and how the benefit of large numbers everybody wins.
So it's and it's been an enlightening process. And I think I'll add one other thing and we've done other deals, but I'm finding that we have a lot of very smart regulators at the state level and they're asking the right questions, they understand it and they're able to think through it. I find that positive. And I think we're finding that the Justice Department is in the federal level, they're equally trying to get this right. And so I'm very encouraged just by the right question.
That doesn't guarantee the absolute maximum outcome. I'm not trying to further on that, but I feel good about where it is at this point in time.
Thanks for the update. And then one more on the Texas and the Louisiana re procurements, any updates there?
Well, the Louisiana, that just went in.
Yes. Louisiana, I think, is due to be submitted next week and no update on the Texas timeline other than what we've previously discussed, I think, May or June timeframe.
Got it. Thanks so much. Appreciate it.
Our next question comes from A. J. Rice of Credit Suisse. Please go ahead.
Yes. Hi, everybody. First on the public exchange comments, you highlight member retention being better and favorable risk adjustment. I wonder if you could flesh those out a little more what you're talking about there. And I think last call when the or maybe it was in the Investor Day when you gave guidance about the exchanges this year, you said you'd be in the 5% to 10% range as last year, but down slightly in margin within that range.
Is that still your thinking? Or have you changed in the way you think about what the margin looks like this year versus last year?
Jeff? Yes. Thanks, A. J. It's Jeff.
Yes, no, nothing different than what we said in our previous guidance with respect to exchange. Yes, we do expect it to be a little bit down from 2018 more similar to 2017, 2016, 2015, the margin that we had there. As far as the retention, I think we have a normal retention rate that we've assumed based on our historical experience, meaning how long a member stays with us and pays premiums. Obviously, you can go back and look at the historical retention rate from beginning to end, and we've been obviously tracking that. And what we're seeing is that members are actually staying and paying premiums longer, which is obviously a good thing, and that's driving, I guess, the additional revenue that we added to the guidance today.
The other piece is risk adjustment. And on the risk adjustments side, we have certain geographical areas where we've got a lot of scale. We've grown the business very successfully. And as you continue to grow and capture a larger percentage of that market, you do see a little bit of a return to the mean on the risk scores, nothing significant, but obviously that was the other piece of the guidance increase on the revenue line.
Okay. And then just taking a quick glance at your 10 Q, I hope I have this right. It looks like you're up about $230,000,000 in prior year development this year's Q1 versus last. And I know that's a gross number. Is that a function of the Fidelis and the exchange, new exchange volume?
Or is it what's driving that and any comment about that?
Yes, that's pretty much all related to Fidelis. We put a note actually in the table of our press release kind of highlighting that the press release has a 12 month roll forward, which does not include the Fidelis business because that transaction happened July 1 last year. So the development is not included in that 12 month roll forward. But in the 10 Q, that is a 3 month roll forward from December's number, which obviously does include Fidelis. And so that's the difference there.
Okay.
All right. Thanks a lot.
Our next question comes from Justin Lake of Wolfe Research. Please go ahead.
Thanks. Good morning. A couple of follow ups here. 1 on the PBM side, the when you've looked at now that you've had some conversations, I assume some greater conversations with WellCare Group on their ability to drive cost savings and they've talked a lot about how much they've been able to save with CVS and use their scale. Is there any comparison you've been able to kind of make versus your kind of cost of goods on the PBM side of Centene?
Is and is it comparable? Is WellCare Group greater? Are you guys greater? Any kind of color you can give us there?
Yes. Justin, this is Jesse. So I think just obviously there's a limited amount that we can comment on with respect to relative pricing on those things. I mean that's obviously we went through an appropriate process on that in the diligence phase. And I think as we said as part of the announcement of the deal that there are net synergies anticipated on the pharmacy front.
So I don't think it would be appropriate to go into too much more detail than that at this point.
Okay. And then just following up on the risk adjustment side. Can you give us an idea of how big you expect that risk adjustment payable to be at this point, given the kind of shift in the risk pool you're talking about here? And any impact or kind of update you can give us on margins that you're seeing kind of as you get a full look at the book?
Yes. A couple of things, Justin. I would say risk adjustment, obviously, we continually update that estimate every single quarter and so that changes. But I would say over $800,000,000 is what we're anticipating on a risk adjustment payable for the year. On the margin side, it was right in line with our expectations.
And obviously, we expected and we're expecting for the year a little bit lower in our margin range compared to last year. So nothing out of the ordinary there. The Exchange business performed well and it was right in line with our expectations for the quarter.
Okay, great. Thanks for the color.
Our next question comes from Ralph Giacobbe of Citi. Please go ahead.
Thanks. Good morning. I want to go back to Iowa quickly. I think in your prepared remarks, you said that those UNH lives would be split equally. But the $500,000,000 boost in your guide for the back half seems a little bit lighter as I thought the United business was closer to a $3,000,000,000 annualized number.
So is that related to mix? Is it maybe timing? Just hoping you can maybe reconcile that.
Yes. No, I mean, I think if you look at United, they had a larger percentage of the business. They didn't have just half. And so we've previously given a range of membership, I think, of 180,000 to 200,000 members. So we've updated that to half the market and obviously you're only getting half the year.
So nothing unusual other than the mathematics behind that.
Okay. And
then you said you assume a higher MLR in new business as you've talked about, which would certainly make sense. For this, just remind us though, are you assuming a loss in year 1 or more breakeven? And if it is assuming of a lot breakeven?
It's breakeven, sorry. Yes, more breakeven, which is why you didn't see any earnings flow through on the increase in the revenue line for the 6 months. And we're not talking about 2020. So just for the 6 months in 2019, we're assuming breakeven.
Okay. That's helpful. Thank you.
Our next question comes from Gary Taylor of JPMorgan. Please go ahead.
Hi, good morning. Good morning. Just three clarifications, nothing original at this point and all financials. So sorry, Michael, I'm going to go to Joe.
I understand financials too.
That's fair. Well, you can take a shot at this. Just on days claims payable and I appreciate the comments about timing. And in fact, when I look at the roll forward for the Q1 in the Q, it does look like the ratio of current paid versus incurred slipped about 300 basis points year over year from about 64 to 61. So a lot of that a lot of the impact on days claims payable does look like it's sort of timing related.
Is there anything to call out in that or is this just illustrating the point that you were making earlier?
Yes. No, nothing to call out. I mean, I would say that this is a 3 month roll forward that's in the 10 Q. And so that number, I mean, we've only had 3 months of run out on those medical claims from December. So that number will all things being considered would, in theory continue to grow.
So you have to it's only 3 months out and usually in the press release it's a full year roll forward. So that number will continue to change, I guess is what I would say. But no, nothing unusual, which is I mean from our view, it's consistent. It's consistent on a percentage of medical costs. That's how we track it.
We show this information to our audit committee and board every single quarter. It's been very consistent for a long period of time. The methodology hasn't changed, so we're comfortable where it
is. Got you. And just trying to understand on the investments, I caught what you said about little bit higher balances and higher rates, but the investment income more than doubled year over year and about a 12% year over year increase in the investment balance. You called out a little better investment income in the quarter, but you also guided for that continuing for the year and part of the guidance raise. So is there any extra color on how you're doing so much better on investment income versus the growth in management?
Yes, sure. Good question. 2 things Fidelis. So you have the impact of Fidelis. We have their investments.
We didn't have those at the Q1 or Q2 of last year. So you get the full effect of the Fidelis investments. The other thing is on the health insurer fee, we had received payments for the last year's health insurer fee reimbursement from a lot of our states earlier than we have historically. So think of that number to $300,000,000 to $400,000,000 that we have earlier in the year than we've had in the past. And so you're earning investment income on that.
And then obviously, we had a strong cash flow generation for the quarter and a lot of that cash goes to the balance sheet and we earn a short term interest rate on it. So ultimately, you add up all those three things and that's really driving the increase on a year over year
basis. Okay. And then final one was, I think Scott had mentioned the 10 ks disclosure about move starting in the Q2 seeing some of the specialty earnings moving to MCO, intra company in the elimination. Is the effect of that or is what's driving that merely less retained rebate at the PBM, more going to the health plan? Or what's the dynamic that drives that?
No, it's nothing other than internal dynamics as far as the margin on as we move to transparent pricing, there used to be a margin there that's no longer going to be there. There's going to be a small piece really on an administrative front, but the margin just moves into the health plan segment. So nothing other than, I would say, internal company activity.
Okay. Thank you.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Michael Neidorff for any closing remarks.
No, just thank you for your questions, your attention, your participation. We're off to a strong start and looking forward to the Investment Day and future quarter reports. So have a good day. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.