Good day, and welcome to the Centene Corporation Second Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note, today's event is being recorded. I would now like to turn the conference over to Michael Neidorff, Chairman, CEO and President. Please go ahead, sir.
Gentlemen, I'm Michael.
This is Jen. Thank you, Rocco, and good morning, everyone. Thank you for joining us on our Q2 2021 earnings results conference call. Michael Neidorff, Chairman, President and Chief Executive Officer and Drew Asher, Executive Vice President and Chief Financial Officer Centene will host this morning's call, which also can be accessed through our website atcentene.com. Any remarks that Centene may make about future expectations, plans and prospects constitute forward looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by those forward looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10 Q filed today and the Form 10 ks dated February 22, 2021 and other public SEC filings, including the risks and uncertainties described with respect to the potential impacts of COVID-nineteen on our business and results of operation. Centene anticipates that subsequent events and developments may cause its estimates to change. While the company may elect To update these forward looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our Q2 2021 press release, which is available on the company's website under the Investors section.
Additionally, please mark your calendars for our Q3 earnings conference call to be held on Tuesday, October 26. With that, I would like to turn the call over to our Chairman, President and CEO, Michael Neidorff.
Thank you, Jennifer. Good morning and thank you for joining Centene's 2nd quarter earnings call. You've heard me say, we make decisions based on the facts as they are today. And today, With the continued rise in the highly virulent delta strain of COVID-nineteen, I must open our call with similar comments to those made this time last year. The environment has changed again in just the last week or so, And the Delta variant is causing a new wave of pandemic.
It's a pandemic of the unvaccinated. According to a leading epidemiologist our team has been working with for the past 18 plus months, the Delta variant has 1260 times greater concentration in respiratory material than the original variant. An individual infected with the delta strain can spread the virus to an average of 5 to 8 individuals, up from an average of 2.4 individuals from the original screen. 83% of the COVID cases today in the U. S.
Are Delta, up from 10% just a month ago. Hospitalizations are up 57% in the last month. The deaths have increased by 19% in the last week alone. And importantly, 97% People currently hospitalized for COVID-nineteen are unvaccinated and 99.5% as the COVID related deaths are among the unvaccinated. Our additional concern because of the high concentration In respiratory droplets, this variant seems to be transmissible or transmissible among children and is more dangerous than the original virus.
It is clear that one of the issues we must address is vaccine hesitancy to stop the transmission of this virus and to protect those who cannot safely receive the inoculation, including our young children. The variant is real and we are taking it very seriously. You have seen us execute strongly throughout the pandemic and that will not change, especially as it remains clear that the pandemic is not over and the environment could remain choppy for the balance of the year. Turning to our 2nd quarter performance, Results met our expectations and were consistent with the update we provided in mid June. We generated revenue of $31,000,000,000 an increase of 12% compared to the year ago quarter.
Adjusted diluted earnings per share was $1.25 versus $2.40 last year. As a reminder, Last year's utilization rate in the Q2 was significantly lower as a result of the pandemic. We ended the quarter with membership of 25,400,000 as several tailwinds we have previously discussed remain in place. These include the suspension of redetermination, which we expect will continue into 2022, and we are aware of the sessions extending beyond that into 2023. We continue to participate and an active RFP pipeline.
In addition, we are pleased that the Missouri Supreme Court unanimously upheld the will of the people and that Medicaid will be expanded in Missouri. We have been preparing for expansion for months and are fully prepared to bring healthcare access to 100 of 1000 of citizens here in our home state of Missouri. Additionally, yesterday, North Carolina announced the winners of the Tailored Health Plan Awards. We are pleased that our provider led entity Carolina Complete Health with the North Carolina Medical Society was Selected to work with 2 of the LMEs and our health plan WellCare North Carolina was selected to work with 3 of them. In Medicare, we delivered another quarter of healthy growth with membership growing approximately 25% since the beginning of the year.
In addition, preparations are well underway for open enrollment beginning this fall. In Marketplace, We added a net 110,000 lives since the beginning of the year. While typically we would have lost members during this period, This represents 6% growth. To this point, Medicaid and Medicare are performing very well and are continuing to normalize in line with our expectations. We talked last month about the dynamics in the marketplace business where we are witnessing continuing COVID related costs and increased non COVID utilization, which we believe is still largely driven by some pent up demand.
Drew will provide additional details on non COVID utilization. Although this is impacting our margins in the short term, we continue to view this environment as transitory, driven by the various dynamics of the pandemic. Importantly, where possible, these trends have been factored into our pricing and strategy for 2022. Overall, we remain confident in the long term opportunity of our marketplace business. We expect to continue to offer a competitive product and to be in a strong position as the leading provider.
And as you look at the Healthy growth across our portfolio today. You can see we have the size, scale and strength to continue to execute on our objectives. With the first half of the year behind us, we are maintaining our full year 2021 adjusted EPS. This reflects the underlying strength of our business and our demonstrated ability to manage through a dynamic environment. We will continue to provide you transparent updates as the second half of the year unfolds.
We remain focused on our business and we continue to make progress against the margin expansion goals we outlined last month. While we are at the beginning of this process, I am encouraged to see strong alignment across our enterprise and initial transit Traction towards these goals as Drew will discuss. We are also making progress on the Magellan acquisition and remain on track to close on the deal in the second half of twenty twenty one, having received Justice Department approval and approval in all but one state. Before I hand the call over to Drew to discuss our results in more detail, I'd like to reiterate a few points that I touched on today. First, the delta wave of the COVID-nineteen pandemic Is creating a new set of dynamics, particularly for the unvaccinated.
We are taking this very seriously and watching the short term impact on our business. As a healthcare company, our absolute priority It's to ensure our members, employees and communities are healthy and we are making every effort to provide our members and workforce with opportunities to receive the COVID-nineteen vaccines. We have made outreach phone calls to nearly 9,500,000 members to support them in accessing the vaccine, created PSAs that will air on 160 TV stations across the country and directly participated in over 80 vaccination events. In addition, our teams have formed innovative partnerships with organizations including NASCAR, the Pro Football Hall of Fame, Walmart, Lyft and the White House to increase awareness and accessibility of the vaccine. We also continue to evaluate when we can safely return to in person work and are ensuring that our office return to work timeline gives employees sufficient time to receive the COVID-nineteen vaccine.
I want to make you aware that this still may not be enough And if we do not effectively manage this strain, the next one could be even worse. And there may be a need for vaccination requirement implementation by government and industry. As we have done for the past year and a half, We will continue to manage through the dynamic landscape and will provide you with transparent updates based on the information as we see and know it. Our size and scale enable us to navigate an evolving environment as we pursue growth and most importantly margin expansion. Together with our margin expansion goals, Our capital allocation priorities discussed and our June Investor Event remain in place.
Thank you for your continued interest and support of Centene. I will now hand the call over to Drew.
Thank you, Michael. This morning, we reported Q2 2021 results of $31,000,000,000 in revenue, An increase of 12% compared to the Q2 of 2020 and adjusted diluted earnings per share of 1.25 Before I get into the Q2 earnings drivers and insights, let's start with revenue. Total revenue grew by $3,300,000,000 compared to the Q2 of 2020 due to Medicaid membership growth resulting from the ongoing suspension of eligibility redeterminations, Strong membership growth in the Medicare business and our late 2020 acquisition of Panther. Total membership increased to $25,400,000 up 3% compared to a year ago. While I will touch on all of our major business The primary topic to cover for the quarter and the full year outlook is the marketplace business.
Call, we gave an update at our June Investor Day regarding a few of the negative drivers in April May for this line of business. Our Q2 consolidated HBR was 88.3%, which was higher than our expectation driven by the marketplace business. Let me provide an update on the 3 marketplace pressure points we covered at Investor Day. Number 1, As a reminder, we incurred a $175,000,000 or $0.22 headwind compared to our prior expectations in the 2nd quarter related to the 2020 risk adjustment year. For the 2021 risk adjustment year, we received weekly data in June And it was largely consistent with our expectations of shifting from being in a large payable position for 2020 to a slight receivable position for 2021.
Number 2, COVID costs. We previously provided insight that while COVID costs were Following from Q1, they were still higher on an absolute basis from what we had forecasted in April May. We saw the COVID costs continue to decline in June, consistent with our expectation, but we will be Watching external trends closely as COVID costs could reverse course and increase based upon macro COVID trends as Michael indicated. Number 3, pent up demand. As previously disclosed, March April saw a slight utilization downtick in May.
We had expected a continued downdraft in June and the remainder of the year. Instead, June marketplace medical costs trended higher compared to May. We now expect pent up demand to subside at a Slower rate in the back half of twenty twenty one. The activity is in the area of outpatient services for continuing members as well as members who are new to WES in 2021 with a higher cost per claim due to mix of services as these member cohorts access healthcare. And though our SCP members only represent 20% of our membership, we are also Seeing higher non COVID related inpatient utilization for this cohort who now has access to healthcare due to the expanded SEP rules.
We expect these recently added SEP members to return to expected levels of utilization after initially accessing services. Our team has isolated the heavier utilizing cohorts through our real time data and is taking action where possible, including a slate of clinical initiatives designed to improve quality and curb trend. However, we do expect a higher HBR in marketplace to drive the consolidated 2021 HBR as we will cover in a minute. Since some of the deferred demand We'll just have to work its way through the system during 2021. The remainder of our business as a whole performed with our expectations in Q2.
In Medicaid, we're seeing strong performance and a steady march toward normalized utilization with this benefit largely offset by state rate actions and risk corridors. In Q1, we disclosed $550,000,000 of such actions for 2021. This annual view increased in Q2 to $675,000,000 In Medicare Advantage, we continue to grow during the year and we see a similar trend towards normal utilization. We have grown membership organically 25% since twelvethirty onetwenty twenty. Moving to other P and L and balance sheet items.
Our adjusted SG and A expense ratio was 7.7% in the 2nd quarter compared to 8.5% last year and 8.1% in the Q1 of 2021. The adjusted SG and A expense ratio benefited from lower short term Variable compensation costs and the leveraging of expenses over higher revenues due to increased Medicaid membership and recent acquisitions. This was partially offset by increased sales and marketing costs as a result of the marketplace SEP and growth in Medicare. Let me go deeper into the first item since it's important for you to understand drivers. Think of the HBR pressure Caused by our marketplace business and our short term variable compensation as somewhat offsetting toggles.
You'll also see this in our full year guidance elements. If the deferred demand bubble in marketplace causes us to land toward the high end of our We would be toward the low end of our SG and A range because of a reduction in our short term incentive plan for 2021. Think of this as a potential 35 basis point swing in those metrics. On the other hand, if pent up demand and high new member utilization Settles quickly and we come in toward the bottom of our HBR range, we would incur typical short term incentives, which would have a corresponding effect of putting us toward the top of our SG and A range and the outcome could be in between those bookend scenarios. While we recognize the current challenges in marketplace, we have implemented a slate of mitigating initiatives including operational, clinical and available pricing actions.
Current performance does not change our perspective as we look out to our long term margin goals. Continuing on highlights of the quarter, cash flow provided by operations was $1,700,000,000 in the 2nd quarter, primarily driven by net earnings before the legal settlement reserve, which is expected to be paid in future periods. We continue to maintain a strong liquidity position of $1,100,000,000 of unregulated cash on our balance sheet at quarter end. Approximately $700,000,000 of that was deployed on July 1 as we completed the acquisition of the remainder of Circle Health. Recall we acquired 40% of Circle in 2019 2020 with the intention to subsequently acquire the remaining portion.
Circle is a very well positioned and leading ambulatory surgery center business in the UK and comes with a strong management team. We expect Circle to be above our company targeted adjusted net income margin by 2023. Debt at quarter end was $16,800,000,000 Our debt to cap ratio was 38.9%, excluding our non recourse debt. Our medical claims liability totaled $12,800,000,000 at quarter end and represents 48 days in claims payable compared to 49 in Q1. DCP was mechanically impacted by the timing of state directed payments.
We updated a few of the 2021 guidance elements Based upon what we've seen through the Q2 and for the items we just discussed, while we are maintaining the same wide Adjusted EPS range of $5.05 to $5.35 you will notice some changes in the underlying metrics including Higher revenue from continued growth in Medicare Marketplace, delayed state pharmacy carve outs, higher state pass throughs approximately $1,000,000,000 and a continued suspension of redeterminations. A higher HBR range as we just discussed solely due to our marketplace business. A lower SG and A range due to the potential reduction of the short term incentive plan depending on how marketplace pent up demand plays out. But in addition, we are also getting some leverage on the higher revenue base. Overall, this continues to be a relatively wide range as we referenced at Investor Day given the choppiness in our marketplace product.
We still have 6 months of the year to play out, especially with varying scenarios around the subsidence of pent up demand and the unknowns with COVID. The guidance continues to exclude Magellan. It excludes our recent Magellan financing and Circle Health. We are determined to execute on our multiyear value creation plan laid out at the recent Investor Day and achieve our long term adjusted net income margin target of at least 3.3%. We have launched a formal program internally, Encompassing all aspects of the organization marching in unison toward pulling the necessary levers to achieve the value creation plan.
We have developed some of these muscles over the past couple of years, such as the Centene Forward program for discrete initiatives, Our HBR office for clinical quality and cost initiatives and the integration skills from past large acquisitions. As I said at Investor Day, this journey won't be a straight line and the fruits of our labor are expected to show up more so in 2023 in 2024 than in 2022. But we know how to do this and we are committed on taking the actions to deliver value creation to shareholders. What matters most is pulling the levers in the next 12 months to 18 months to bear fruit in 2023 2024. Our balance sheet remains strong and we expect it to strengthen even further as we improve margins and generate cash flow.
Thank you for your interest. Operator, you may now open the line for questions.
Thank you. We will now begin the question and answer Today's first question comes from Justin Lake at Wolfe Research. Please go ahead.
Thanks. Good morning. Appreciate all the detail. I wanted to touch on 2 questions. 1, Drew, at the Investor Day, you talked about EPS probably seemed to indicate you expected EPS to be closer to the low end of the range.
Can you from that 505 to535, can you reconfirm whether that's kind of The expectation for the Q2? And then can you talk to where the exchange margin profitability, I remember you've taken down the targets there, But where's the profitability coming out this year? And do you expect to get back to normalized exchange profitability next year? Thanks.
Yes. Thanks, Justin. So, at Investor Day, you're right, we revised the long term pretax margin to 5% to 7.5% for the marketplace business and that is unchanged even with a little bit of choppiness in the near term. Can't give you an exact date when we're going to get there and stay there, but we're below that now obviously with the pressure that we outlined in Q2 and some of the pent up demand. And then with respect to the guidance range, I'd say my comments are the same From Investor Day, we kept the range wide for a reason and there's clearly paths to get into that guidance range.
So we maintain that despite some of the pressure that we outlined for Q2.
And I might just add, Justin, that My focus upfront is we're going through what could be another real surge in the pandemic. And so to try and call it recognizing that which way it could go, We'll have an impact and we'll see how it plays out, but it's something we have to be very cognizant of.
Understood. Thanks.
And our next question today comes from Josh Raskin in Nephron Research.
So
I know we spoke a little about this at the Investor Day, but what gives you the confidence that these HICS Costs are just pent up demand issues, right? And not new members coming through the SEP or even old members that are using higher levels services now that they understand the benefits. And maybe you could help us what types of services were running above expectations, types of procedures, etcetera. And then lastly, I think last quarter you talked I think it's for the investor, you talked about, this could potentially positively impact the risk adjustment. So I wonder if there's any offset there?
I'll ask Drew to start it and then, Greg, you might add to it.
Okay. Let's start with risk adjustment. Like I said in the prepared remarks, the WakeMed data, that's that 3rd party actuarial firm that aggregates for most carriers. Data came in, that's date of service through April. That was consistent with our expectations and that largely represents, Josh, the members that rolled into this year and incurred claims during the 1st 4 months.
So that's consistent with our expectations. On the pent up demand, certainly it's the nature of the services, the outpatient nature. We've seen orthopedics, joint degeneration, Unfortunately, some psychiatry and chemical dependency drivers in marketplace and really the outpatient pressure coming into A little bit in March and then April May and then it popped in June. The SEP members, I think I mentioned this in my script as well, We're seeing them access inpatient services and then quickly while it's early, quickly returning to a more normalized utilization. It's early, so we're tracking that and we're sort of managing this in those 4 cohorts.
Got you. Do you know Drew if these members came from other plans or if these were Coming from different segments, Medicaid or uninsured, etcetera. And I'm just curious if those previously insured versus previously uninsured are acting differently.
Josh, this is Brent Layton. And the new members that we're seeing are the vast majority have been uninsured. There has been very few quote switchers. So this has been uninsured. And I'll echo what Drew said because that is what we're seeing in the separation and really the utilization that he talked about.
Thanks.
Thank you. Our next question today comes from Kevin Fischbeck of Bank of America. Please go ahead.
Hey, great. Thanks. Maybe just to follow-up on this concept of pent up demand. I mean, it's interesting because in general, It seems like the commercial utilization was less impacted during COVID than the other cohorts. Are you at all worried that There will be a similar, if yet potentially delayed type of pent up demand in Medicaid and Medicare over the next 12 to 18 months and if so, I guess how you're treating that from a pricing perspective?
I think Drew referred to before, We'll possibly build it into pricing, but particularly in Medicaid, we have a younger population and it's mostly children. And to date, they were not as affected, but to wait and see what this new COVID does, the delta, but they have not been affected. So we don't see a lot of Pan up demand there. Medicare, once again, they've been a little more sensitive to getting to their physician because of age and other health factors, so we don't see as much pent up demand there as we have in the marketplace, which had New members in it.
Okay. And I guess as far as the Medicaid days, you mentioned that the 675 of rate cuts. Is that something that's temporary? Does that reverse next year? Or should we be thinking this is you can get to normalized margins even with this new lower rate outlook?
I think, as Drew said, we anticipate returning to a normalized rate structure. I just want to add, all this has an overlay of What happens with this new delta, which is so much more contagious And with the unvaccinated population particularly. So I mean, that's why I put the emphasis upfront. And this could change how the whole dynamics of it, which we saw a year ago. So we're going to Thank you.
And our next question today comes from A. J. Rice of Credit Suisse. Please go ahead.
Thanks. Hi, everybody. I guess, two things. 1, I think in the prepared remarks, You mentioned that there's a possibility that redeterminations of holiday get extended into 2022. I know at the Investor Day, you gave a Got this range for on revenues for 2022, your current expectations.
Would the delay in re Determinations materially impact that revenue outlook if indeed that happened. And then the other thing I was going to just ask about is, As you're talking about this variation and because of the delta variant on your Risk corridors on the Medicaid side, are you well into those now so that if there's a little variation in utilization, it's
not going to really
Matter because you're sort of already at a point where you're giving back the state or those risk corridors, not really likely to Provide much protection in the back half of the year.
I think there's first, let me Let me deal with the redetermination. We just gave you some insight as to what some discussions are taking place. And I think the time to talk about The revenue and how it may or may not be impacted will be at the end of the year when we see where they are. And I'm just trying to give people an insight that these are things that it could be a tailwind, but we have to wait and see. On the Risk adjusted, some of them are starting to drop off and Drew can probably give you more detail on that.
Sure, A. J. Yes, you're right. In some states, we are into the risk corridors, even the standard ones or the minimum MBR, depending on state by state, Which you're right, that would give us a cover for increased costs, but not everywhere. It's sort of a Mixed bag across our portfolio.
Okay. Thanks.
Thank you. Our next question today comes from Matt Borsch with BMO Capital Markets. Please go ahead.
Yes. If I could just ask a question on the
marketplace dynamics.
So if you look at the medical costs And forgive me if you mentioned this, but can you give us a breakdown of how much is COVID, direct COVID care and how much is everything else and maybe how that compares this quarter to what you saw previously.
I'll take that one, Michael. So COVID the COVID cost going back to April May, we had budgeted or we had forecast Some, but it was on an absolute basis higher. And then with our revised view coming out of Investor Day, The June number continued to fall on an absolute basis and it was sort of right on our forecast. So COVID really wasn't while That pushed us based on our Investor Day discussion, there's really no major change in our view on that. Obviously, the elephant in the room is what happens going forward with the delta strain as Michael covered.
That's a much smaller component relative to sort of non COVID utilization, whether it's The outpatient utilization on the majority of our block or the inpatient utilization on sort of the 20% FEP membership?
So for now, this is all about pent up demand really. I mean, it could be about COVID if depending on how things develop, but for now it's about pent up demand?
Correct. Correct.
And I think I want to add one thing. I think you heard Drew talk about the cost per claim. Some of that pent up demand is where individuals delayed services and we see that in cancer treatments and diagnosis. So there's a little higher acuity. But once again, these are transitory things and not something that we see as Fundamental and something will continue unless the COVID really spikes again and people end up not going to the hospital and doctors as we Historically, so there are unknowns out there, hence some of the caution words more cautious approach we're taking until it becomes clear.
Great. Thank you.
And our next question today comes from Ricky Goldwasser with Morgan Stanley, please go ahead.
Yes. Hi, good morning. Good morning. So with Delta impacting the non population. Do you have a sense of what percent of your membership are vaccinated?
I want to say the last So I was somewhere around 50%.
Okay. So when we should think about kind of the risk there, we should think 50% of the membership. And then as we think about
Now remember, let me back up, a lot of them are children who are not eligible to be vaccinated. So I mean, the Medicaid is women and children. And so I need to clarify that.
So should we think about the 50% as 50% of eligible population and then you have the children?
No, that's total including the children. Okay,
Great. And then just when we think about sort of the delta variant from what you've experienced to date and you're seeing, Any sense of how to compare the hospitalization rates versus what we've seen earlier in COVID? And really as we think about kind of like your HBR assumption, Are you assuming that members might refrain from going back to Core utilization because of that delta risk, but then that the expenses that are related to COVID are lower than what we've seen at the beginning of this year Or end of 2020. Just trying to understand it by now.
I think the answer is, it's not clear. And that's what we're trying to say. That Those are things we're going to continue to monitor. We've demonstrated we can manage through COVID type issues. And so we have that positive Feeling up in terms of our ability to deal with it, but we wanted investors to understand that It is out there.
It's not business as usual as everybody had hoped. We wish everybody was vaccinated and We now see that even those who were not as forceful and encouraging are now moving to it. And so I think what always we want people to understand is COVID is not over. And I think for us to think it's just business as usual. I think that will be a mistake.
Now I'm not saying it's going to necessarily impact to the point that our Guidance changes, but we just maintained it, as I said in my prepared remarks, while we monitor it, keep you informed, how it unfolds And the impact it has on not just us, but everybody. I mean, it's just who how we return to work. We see them reinstating masks, things of that nature. So it's a variable.
Thank you.
Thank you.
And our next question today comes from Ethan Baxter of Wells Fargo. Please go ahead.
Hey, good morning. Thanks for the question. Just wanted to ask another one on the exchanges. Just hoping you can help A little bit with quantification as we can kind of think about what that means for your pricing next year. I guess how much higher was core medical costs relative to baseline in Q2?
Like how does that compare for the special enrollment population? And I guess then what does that mean for the non SEP membership? Thanks.
Drew? Sure. As I said at Investor Day, you might recall That with what we saw through April May, we are able to reflect that in pricing. So literally during those months Came in, made some adjustments to pricing, meaning push pricing to reflect what we thought would continue into 2022. Recall, we expect a lot of this to sort of settle out during 2021.
It's just during which month in 2021 is the question. With what we saw in June, we did have about half of our marketplace bids Open for various reasons and we could make judgments on what we wanted to change if anything and the other half though are Sort of submitted and baked.
Anything that you can add on just sort of on a relative basis, Like what Q2 was versus what you might have priced for? Is it 1% higher? Is it 3% higher? Anything like that?
Yes. I mean given the competitive nature of the marketplace and the fact that none of that's public, I think we'll keep our pricing decisions close to the vest.
Got it. Okay. Thanks.
And our next question today comes from Lance Wilkes with Bernstein. Please go ahead.
Yes. Just 2 more delta variant sort of questions. First one is on redetermination suspension and Just kind of if you can give some color into the mechanisms that could cause delay or push out that at a state or federal level? Then the second was just any further color on July utilization in outpatient and invasion, if you're seeing anything that's reflective of people slowing down use as a result of mask mandates or delta.
Yes, I want to be careful on that when we're talking about July. It's Still early and while we have good data in that, we don't want to get ahead of ourselves on that one. But As it relates to the delta and your concern there, It's real, but we don't know to what extent people are going to use their good senses and do what they can to protect against it. And so we have to kind of that's why we're calling it out to say, It's a variable and it's a less predictable variable, particularly when you look at the Intensity of it and it's so much stronger than the original. And the bad part is that we're trying to tell everybody who will listen That if we don't deal with this effectively and get vaccinated and the things that prevent it, the next one is even worse, our epidemiologist So this is something that continues to progress and it's not just the Centene population, it's everyone in total.
So That's why we're calling it out. We want to keep it in front of people. So everybody's aware that we're dealing with it. We're doing the PSAs. We're doing everything we can to get people vaccinated.
The phone calls, the robo calls and everything else. So It's not where you stand, but where you're moving in and we're working hard to be preemptive in it. And on
redeterminations, Is that just an extension of public health emergency that would be helping you or are there things that
are stable there?
Yes. I'm sorry. I was trying to yes, you're right. That's where we determine where we are with the COVID. It would just be an extension of Okay.
Thank you. Our next question today comes from Scott Fidel with Stephens. Please go ahead.
Hi. Thanks and good morning everyone. First question, just wanted to go back to Hicks again and just on the 20 22 pricing strategy and a couple of interesting dynamics in the Hix market because looks like utilization is certainly pretty hot in the market, but There's also some competitors out there, including some of these newer public companies that are pricing very aggressively and don't seem to have the same type of Margin targets that some of the more established companies traditionally have had in the market. So I'm interested if you're going to approach 2022 pricing Really sort of based on actual expected cost trends and you're willing to sacrifice membership if necessary to do that. With the risk adjustment, do you feel that that would be able to protect you against potential adverse selection that could occur?
Traditionally, when we think about A company pricing conservative, while others are pricing aggressively, there are some concerns around adverse selection. Just interested if you're comfortable that risk adjustment Could help offset that type of traditional risk.
Yes, I'll take that one. I think one, I'm not going into a great deal of detail on 2022, because that's we saved that for December. I think what Drew tried to cover was that We did take into consideration the extent we could and as we always do it, we're positive we took some steps. I will say the same thing that I said last year and it proved to be an appropriate way to do it. And we're not going to join any races to the bottom Because if you're losing on every member, you don't make enough on volume.
And so we're very sensitive to that particular approach. And we do believe that the risk adjustment, that's what it's there for. So somebody rushes in and they get adversely selected against because of it, Then that will provide protection for those that have the higher acuity patients. So I think That's about as much as we can say about it for now, but we're going to continue to stay the course, which we think we've demonstrated It's the appropriate course.
Okay. And then just had a follow-up. Just interested if you had any updates just on the Ohio situation and on the contract Renewal just post the PBM legal settlement with the state.
Yes. We continue to be very optimistic on and expect a resolution In the very near future, they wanted some additional data, which we've had our consultants provide them, analyzing that. And As we said with the settlement and the no harm and all court cases removed everything, There's no reason for them not to reinstitute our bid. We did come in number 2. And so I am very optimistic.
And our next question today comes from Mike Newshel with Evercore ISI. Please go ahead. Thanks. So CMS recently proposed a monthly special enrollment period on exchanges, but just for people below 150% of the poverty level. I'm just wondering if you're expecting any meaningful impact on your exchange business since you do focus on lower income and both from like an enrollment and revenue perspective and also Any potential adverse selection problems for margin?
Go ahead, Kevin.
Sure. Yes. Thanks for the question. First of all, as you know that that is a proposed policy change, as you underscored, and we're in the comment period right now. So I think it may be just a bit premature to say that this is going to be policy.
We do have some concerns about this With respect to potential adverse selection, particularly since there are some states where the APTC is not going to fully cover the cost of the premium. And in that instance, there's that risk of adverse selection. We think there are ways to ameliorate that in pricing As Drew has acknowledged and so we'll see how CMS ends up ruling.
I think that will be particularly adverse selection and for those that have the very low prices pushing to Gain membership and pricing.
Yes, that's true.
Thank you. And today's final question comes from George Hill at Deutsche Bank. Please go ahead.
Hey, good morning guys and thanks for taking the questions. I guess, Michael, just as you look forward to the closing of the Magellan transaction, I guess, can you talk about how you're thinking about the PBM in the pharmacy business both as it relates to the government businesses that you serve now and the opportunity to maybe enter some of the nongovernment businesses?
Yes. I'll ask Sarah to respond. She's close to it and working through it.
Yes. Thanks for the question. We've been making really good progress on our integration planning. And as we said at Investor Day, we're focused on the restructuring of our Envolve Pharmacy business to focus on member services and clinical operations and relying on an external PBM. And so the goal is to position Magellan Excuse me, as we've said before within Healthcare Enterprises, where it will remain independent and focus on its 3rd party business.
So, I think you should expect an update from us once we get through that transaction on how we're specifically thinking about the Magellan Rx business.
Maybe then as a quick follow-up, I guess, could you talk about how you feel about the segment's competitiveness ex the government business?
Sorry, it's a clarifying question, if you don't mind.
I said just How do you guys feel like you'll be positioned competitively once the transaction closes ex supporting the government business?
Well, we think the Magellan PBM business has a lot of opportunity for growth. We also think there is Really interesting synergies relative to our existing specialty pharmacy assets with their portfolio. So that's been the major focus of the integration planning.
Okay. Thank you.
And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Naidor for closing remarks.
I just want to thank you all and we'll continue to focus on our margin expansion and our capital allocations as we've talked about, While managing through could be a difficult pandemic, but we think we have what it takes to get through it. So We look forward to it and we maintain an optimistic attitude. So thank you very much.
And thank you, sir. This concludes today's conference call. We thank you all for pending today's presentation. You may now disconnect your lines and have a wonderful day.