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Centene Corp
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Good morning. Welcome to Centene Corporation Third Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Jennifer Gilligan. Please go ahead.
Thank you, Kate, and good morning, everyone. Thank you for joining us on our third quarter 2020 earnings results conference call. Michael Neidorff, Chairman, President and Chief Executive Officer; and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which also can be accessed through our website at centene.com.
Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-Q filed today, October 27, and Form 10-K dated February 18, 2020, and other public SEC filings, including the risks and uncertainties described with respect to the potential impacts of COVID-19 on our business and results of operations.
Centene anticipates that subsequent events and developments 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 third quarter 2020 press release, which is available on the company's website at centene.com under the Investors section. Additionally, please mark your calendars for upcoming - for our upcoming virtual Investor Day, which will take place on December 18, 2020.
Finally, in connection with this morning's earnings release, we have shared some illustrative exhibits. These slides are available on our website under the Investors section.
With that, I would like to turn the call over to our Chairman, President and CEO, Michael Neidorff. Michael?
Thank you, Jennifer. Good morning, and thank you for joining Centene's third quarter earnings call. We all hope you and your families are safe and well. On today's call, I will review our strong third quarter performance and discuss the operating environment as we see it today. I will also provide perspective on how Centene is positioned for continued growth and success, including some thoughts on 2021 and an update on the WellCare integration.
I'm pleased with our third quarter results, which demonstrate the strength of our underlying business and diversified platform, as well as our team's solid execution. We reported third quarter revenues of $2.29 - sorry, $29.1 billion, an increase of 53% from the third quarter of 2019.
Adjusted diluted earnings per share was $1.26 or $0.97 when accounting for the onetime items referenced in our press release. This is consistent with previous guidance. I remind you that on our second quarter earnings call, we shared that in this COVID environment, we expected 68% of our income to be received in the first half of the year. We also advised that the third quarter would amount to roughly 20% of the year's earnings, which happens to be $0. 97.
We delivered strong organic membership growth, driven by new programs being introduced across many of our states, as well as some COVID-related membership growth. Membership was approximately $25.2 million at the quarter end. This represents a sequential growth of 2% and a year-over-year growth of 65%, largely driven by the addition of WellCare.
Membership accruals remains in line with the guidance provided in July. And we continue to expect 2020 membership to peak in November with 1.4 million new members.
Our earnings benefited from a number of onetime items, which will be reinvested back into the business. As you all know, Centene is now a $110 billion enterprise, health care enterprise. At our size and scale, we expect there will be impacts to our earnings on a quarter-to-quarter basis.
We are utilizing the risk quarter settlement to reinvest in growth initiatives. In addition, we have allocated a portion of the settlement towards making a significant onetime contribution to the Centene Charitable Foundation. The earnings of which will be used towards public programs and medical research that support the communities we serve.
In this environment, we continued a leading at accelerating our approach to community care with programs that address Social determinants of health, such improved access to virtual care and support to individuals experiencing food insecurity.
Turning now to the operating environment and how we view the rest of the year. If you exclude the $0.12 increase to address the favorable tax settlement in the third quarter, our earnings guidance for 2020 remains consistent with what we provided at our June Investor Day. Our business is strong and we remain confident in our ability to lead in today’s operating landscape.
State partnership continues to present opportunities for constructive relationships. The discussions that have taken place with our stage counterpart this year, underscore the strength of our partnerships, as well as the value we provide to our state partners.
The typical rate setting process has continued throughout the year including a 5.3% rate increase in Texas, effective September 1 and approximately 1.5% increase in Florida, effective October 1. We continue to hold discussions with our state partners related to rate setting and risk adjustment mechanism.
We also have certain state [ph] that outside the normal process have put additional risk sharing mechanism in place related to COVID-19. These are specific to the pandemic and we expect them to be short term in nature. Overall, we continue navigate the evolving landscape with our state partners as we work to provide our members with access to critical care.
Other key factors include membership growth and medical utilization continue to track in line with our expectations. While there is continued uncertainty, including intensity and duration of the pandemic. And the outcome of next week's election. We believe we have the scale and size to deliver results as the environment continues to evolve.
We manage the business based on the facts as we see them today. And we are well positioned to continue to grow and execute against our strategy. We also continue to provide you with transparent updates and give you our best assessments as to how we see things at a particular point in time.
With that in mind, Jeff will provide you with some factors to consider when thinking about our 2021 earnings power. As is our practice, we provide details at our December day. However, in these unusual times, we want to ensure that we're the factors to known you are considering them for your models.
I'll highlight here that we continue to see attractive opportunities for growth, both organically driven, and by an uptick in RFP pipeline and through delivering on WellCare deal accretion.
In addition, we see potential opportunities for investment consistent with our disciplined M&A process. The WellCare integration remains on track and it's progressing well. Our finance and HR systems are integrated seamlessly and the New York plan integration was completed timely in line with the state's expectations.
Routine integration activities will continue throughout 2020. At our upcoming Virtual Investor Day, we look forward to sharing more detail regarding outlook, as well as our strategy to transform Centene into a healthcare technology.
In summary, we're pleased with our third quarter results which demonstrate the strength of our underlying business and diversified platform. We intend to demonstrate solid growth in 2021, driven by WellCare deal accretion [ph] and organic growth. So we continue to see significant opportunities for growth longer term, as additional things look to manage care as a solution to the healthcare needs. While some uncertainty remains at our size and scale, and with our capacity capabilities, Centene is well positioned for continued success.
Before I hand over the mic to Jeff, I, again want to thank and recognize the continued commitment and dedication of our employees. It is because of their relentless focus, that we have been able to continue to serve our members during these times, while also accelerating programs that support our communities. The value of the system and people who are investing in to continue and prove themselves. Stay safe, wear your mask and stay well.
With that, let me turn it over to Jeff.
[Technical Difficulty]
Hi, there is Jennifer Gilligan. We’re going to ask folks on the line to just hold one moment, while we make some time check with the webcast link. Back to you into.
Hi, this is Jen. We’ll have Jeff go ahead and start his remarks, there was trouble with the webcast link. What we will do is following the call, we will post the transcript of Michael’s comment in the event that there were folks on the webcast to missed any portion.
With that, I think Jeff you can take it away.
Okay, great. Thank you, Jenn. Thank you, Michael. And good morning, everyone. This morning, I will start off with the review of the quarterly results and offer some details around our updated 2020 financial outlook. And finally, I'll walk through some factors to consider when thinking about our 2021 earnings trajectory.
Overall, we've delivered strong third quarter results with revenues of 29.1 billion, an increase of 53% over the third quarter of 2019 and adjusted diluted earnings per share of $1 26 compared to $0.96 last year. Our adjusted diluted earnings per share included a net favorable impact of $0.29 from the three non-operational items that are outlined in our press release.
When excluding these items, specifically receipt of the risk corridor settlement, a charitable contribution commitment to our foundation and an unrelated tax benefit, adjusted diluted earnings per share totals would have been $0.97.
Total revenues grew by approximately $10.1 billion over the third quarter of 2019, primarily as a result of the acquisition of WellCare, membership growth in Medicaid and the health insurance marketplace businesses and expansions in new programs in many of our states.
Total membership increased to 25.2 million in the quarter, up 65% compared to Q3 last year. Since the pandemic began in March, we have added a total of 1.3 million Medicaid and health insurance marketplace members, consistent with our expectations when we issued guidance in July, largely attributable to COVID-19.
Our HBR, or health benefits ratio, was 86.4% in the third quarter compared to 88.2% in last year's third quarter and 82.1% in the second quarter of 2020. The HBR for the quarter was impacted by the receipt of the receipt of the risk corridor settlement. When adjusting the HBR ratio for this revenue of approximately $400 million, million, our HBR in the quarter was 87.8%.
The HBR was also aided by lower traditional utilization, largely offset by the higher costs associated with testing and treatment of COVID, as well as retroactive state premium adjustments and risk-sharing programs.
Utilization in the third quarter trended toward normalized levels in most geographies. This rebound included a combination of traditional utilization and COVID-related medical costs.
Cash flow used in operations was approximately $950 million in the third quarter. The cash used in operating activities in the third quarter of 2020 was due to a $1.6 billion health insurer fee payment and a $1.2 billion risk adjustment payment associated with the health insurance marketplace business, which both occurred in the third quarter of this year.
With cash flow from operations of $2.5 through the first 9 months of 2020, we expect 2020 cash flow from operations of between 1 and 1.5 times net earnings. We continue to maintain a strong liquidity position of $1.1 billion in unregulated cash on our balance sheet at quarter end.
Debt at quarter end was $16.8 billion, which includes $93 million of borrowings on our revolving credit facility. The borrowings on the revolver are denominated in euros to hedge our international investments.
Our debt-to-capital ratio was 39.1%, excluding our non-recourse debt, compared to 39. 7% in the second quarter of 2020. Our debt-to-capital ratio was 37.4% when netting our unregulated cash with our debt at quarter end, which represents a 150 basis point decrease since March.
Our medical claims liability totaled $12.9 billion at quarter end, and represents 52 days in claims payable compared to 51 days in the second quarter of 2020. DCP was impacted by the COVID pandemic, pass-through payments received at the end of the quarter, which were paid out in early October, membership growth and the timing of payments.
On WellCare, as Michael mentioned earlier, we continue to make significant progress with the integration. The integration continues to be on track, and we remain comfortable with our synergy capture efforts.
Turning now to our 2020 expectations. For the full year, we now expect revenue to be within a range of $109.8 billion and $111.4 billion. This is $400 million higher than our previous guidance midpoint, predominantly reflecting the risk corridor settlement recorded this quarter.
Our revised adjusted diluted earnings per share guidance of $4.90 and $5.06, up from a range of $4.76 to $4.96, represents a $0.12 increase at the midpoint, driven by the tax benefit that we recognized during the third quarter. A reconciliation of our changes to guidance is provided in our press release issued this morning.
Our 2020 financial guidance reflects the strong year-to-date performance from our major business lines, as well as the impact of the non-operating items previously mentioned that occurred during the third quarter.
We previously outlined a number of COVID-related factors that influenced our full year guidance. These remain unchanged. We continue to expect peak membership growth of $1.4 million by November of this year.
In terms of utilization trends, we continue to expect trends to gradually increase during the fourth quarter, depending on regional infection spikes and local government responses. Through the end of September, we have paid approximately $2 billion associated with COVID claims. This compares to $550 million we discussed on our second quarter call. Our third quarter figure applies consistent methodology and includes all of the COVID-related claim codes consistent with CDC guidelines.
With respect to rates, as Michael has already touched on, we continue to have active dialogue with our state partners and risk sharing mechanisms and rate adjustments received continue be in line with our 2020 expectations.
A quick note on quarterly versus full year modeling. As a result of the WellCare acquisition closing in the first quarter, the full year weighted average share count is substantially lower than the second to fourth quarters. This will impact modeling the fourth quarter EPS with respect to full year adjusted earnings per share guidance. In short, the quarterly results will not sum to the full year guidance range.
And last, a few comments on our 2021 earnings trajectory. As we have done historically, we will provide our 2021 full year guidance in our December Investor Day. However, in light of the significant uncertainty in this environment, we want to provide as much visibility as we can and give you a few items to consider as you begin to model 2021.
In order to facilitate the discussion, we have included a slide on our website at centene.com. We are still in the early stages of our planning process. And going forward, we intend to return to our typical practice.
First, you may recall, that on March 3, 2020, we provided initial guidance for 2020 with a midpoint of $4.66 from an adjusted diluted earnings per share basis. There have been a lot of moving parts this year, including higher membership and revenues, the significant reduction in medical utilization in April and May, the continuing incremental costs for COVID testing and treatment and the effective risk-sharing programs implemented by our states, just to name a we few.
If you exclude the $0.20 net benefit from the pandemic and the $0.12 tax benefit recorded this quarter, our guidance for 2020 adjusted diluted earnings per share reflects where we began in March, $4.66.
Second, as we look forward to 2021, we expect to continue our long history of top and bottom line growth from here. There are a lot of moving parts, and I will highlight a few that are included in the supplemental slide we are sharing today.
As we commented earlier, the WellCare integration and the underlying operations remain on track, and we are confident in our ability to generate the mid to upper single-digit accretion from the transaction, as we have previously indicated.
Third, we anticipate solid year-over-year organic growth generated through new programs and the expansions of the existing programs, such as Medicare and marketplace, that will contribute to our earnings trajectory.
Fourth, we expect some of the Medicaid rate adjustments and risk-sharing mechanisms to carry over into next year. And finally, COVID and traditional utilization represents a number of unknowns dependent on the trajectory of the pandemic. We'll be better positioned to provide more clarity around these factors during our December Investor Day.
I'll conclude my remarks by reiterating our confidence in the strength of our business. We're pleased with the significant growth we've achieved this year. Our balance sheet remains strong, and we believe we have ample liquidity to meet our operational and strategic needs.
We remain focused on executing against our strategic plans and are committed to delivering shareholder value. We look forward to providing a comprehensive outlook for the next year when we virtually meet in December.
That concludes my remarks. And operator, you may now open the line for questions.
[Operator Instructions] Our first question is from Kevin Fischbeck from Bank of America. Go ahead.
Okay, great. Thanks. Just wanted to follow up on the Medicaid rate commentary. I think, I guess, first, could you quantify maybe what you've kind of built into your guidance so far for this year as far as the rate pressures? And then, Michael, I think in your comments, you mentioned that you thought that some of these risk corridors and things might be temporary in nature. So just wanted to understand kind of if we should be thinking about these as kind of onetime type issues? Or is this kind of the way that you would expect state to be billing rates perspective? Thanks.
I think some of both. It depends on the state and the negotiations we've had. Some have built in contemporary risk corridors and that we've negotiated and agreed with. Others, as you've seen, have given us some rate increases that are comfortable with where we are, and it's really just a give-and-take process right now, Kevin.
And Jeff can give you some more specific numbers. And so I'll turn it over to him, and he can give you a sense of what we've dealt with and how we may be dealing with it, because there's two factors. There are rates, but there's also the COVID expense that we've had and the reduced utilization, some other things. Jeff, do you want to make that?
Yes, Kevin, this is Jeff. I think a couple of things. The traditional rate setting process, where we use encounters and develop the rates and move forward, that process has, I would say, continued as it always has. What's been, in addition to that of these risk-sharing mechanisms and risk corridors that states have considered, so for our full year, we expect that number to be around $500 million is what we've got in our guidance. And I think so far this year, you've heard us say and make comments that it's really been inline with our expectation. So we've had that estimate in there for some time.
On the quarter, that number was roughly $265 million. So that definitely impacted the HBR from that perspective. And again, as we look forward to next year, we expect that to be lower than the $500 million as we head into next year because some of these programs do expire.
I think the reason why they carry forward to next year is a lot of them are driven by the state fiscal years, which, as you are aware, are not January through December. So it's not a calendar year.
I might just indicate that where we've seen the utilization, we do as we work with the state. And if it hasn't reduced, then the states recognize the rates have to be accurately sound. So it's a case of really a lot of give and take and it’s been very constructive work. Obviously, without maintaining the guidance, we're pleased with where it worked out.
Okay. And then just maybe a second question being around the guidance. You have - I appreciate the color about kind of setting the stage for what the base EPS is. But, I guess, you guys also had some guidance around the time you did the WellCare transaction.
I don't know if there's any way to maybe give kind of the headwinds and tailwinds to maybe the guidance that you provided at the time of the WellCare transaction? I don't know if anything else you would highlight a positive and negative…
I think, as we said, that it's consistent with the guidance we gave at that time.
Yes. Kevin, are you specifically referring to the guidance that we provided kind of right after we closed the deal in March?
Yes, exactly. So you guys talked about the accretion and from that, I guess, you're saying that hasn't changed at all? So I just wonder if there's anything else around the core business plus or minus that you'd highlight as headwinds or tailwinds, to kind of how you would have thought about the business back in March?
I think I'll start off, and Jeff can add to it. I think it's proven to be very consistent. The integration is on schedule. It's been seen with the - some of it was delayed, as we highlighted in the past that Georgia and Florida, not because of anything we have because of their issues delayed the combination of plan until 2021, and that's all working out well.
But we still will recognize the accretion from it. We were pleased with the support and what the capability are in the Medicare program. So I mean, it's - at every level, it's not the expectations and we're comfortable calling it where it is.
Yes. Yes. Kevin, I agree with Michael. I think the transaction is exactly in line with what we expected. I think the variables are the other things, right. The variables are, COVID state rates, re-determinations all those things. I think from a transaction perspective, it’s exactly in line with what we anticipated.
Okay. Thanks.
Our next question is from Justin Lake from Wolfe Research. Go ahead.
Thanks. Good morning. I just wanted to first follow up on the 2021 discussion here, specifically – so appreciate you given us the 4.66 starting point. The only thing we all have to kind of go back and tie to is the S4. And S4 I think had about 11% earnings growth on a standalone basis and plus the accretion. So with the starting point being different, is it reasonable just to assume that about the same level of EPS growth that was in the S4 for next year? 11% plus the accretion gets me to about 5.30 [ph] Would that be a reasonable ballpark could we starting at? Or is there anything you want me to think about beyond that 11% number…
I am going to let Jeff respond to it. But keep in mind, we’ll try and give you some sense, but guidance - the full - the real number, we'll give you the bridge and everything on December 18. I mean, there is a balance we're trying to strike here, not letting people get ahead of themselves or us. But we’re not trying – we’re not trying to find what the guidance is at this point. So Jeff, do you want to…
Yes, Michael, I think you’re right. I mean, what we’re just trying to do here is just give you some key factors to consider to think about as you bridge from 2020 into 2021. I think the challenge is with the S4, I certainly appreciate that people can go back and try to use that number. The challenge is that with pre-COVID. And was also pretty New York rate changes and built over a year and half ago. So I think from our perspective we believe bridging from this year is more appropriate place to start.
Okay.
Go ahead. The full numbers, we’ll have the full numbers for you in our December Investor Day.
Is it fair to say that maybe the consensus number around 5.75 [ph] might be optimistic relative to the starting point with optimist specific number…
I appreciate what you trying to get to. But we’re in the early stages of our AOP. And I am not going to wait. We have a cadence and when we - we did say because of this year we tried to get in more, we’re not trying to tell you what the range of the guidance is. As long we probably – we’ve done that in December, Justin. So it’s worth not, so we have given you as a starting point, but come December you have the full bridge.
All right. Thank you very much.
Thank you.
Our next question is from Ralph Giacobbe from Citi. Go ahead.
Thanks. Good morning. Just wanted to go back, Jeff, make sure I got the numbers. Is anyway to split out sort of the third quarter impact of the higher COVID cost versus the premium rate adjustment, and then the risk sharing that you cited, if you could break out those three buckets.
Yes, when you mean the premium, the risk corridor we quantified as $400 million, the state premium and risk adjustment changes, the number I gave was 265. So that had an impact on the HBR. And I guess the way I would think about it is, you have to take all these items into account, lower investment income, the state take backs, lower overall, I would say utilization was slightly below historical perspective, really driven by, the COVID pandemic, you have to take all those into account when you look at the quarter. So hopefully that gets you what you need.
Okay, all right. Fair enough. And then just a quick follow up, you noted sort of investments you're making in the fourth quarter around MA and HIX [ph]. Just if you can give us a sense of how you're thinking about sort of enrollment growth for both, maybe both those segments in 2021. I know the landscape file was just recently out for essentially both in exchange, I think just yesterday? Thanks.
Well, we have a expanded geographic footprint that we've highlighted. And it's the earlier stages of enrollment. And I think it's at a point I'm not going to speculate, based on a few points we have to this point in time. But as we've said, we're comfortable with the capabilities of WellCare in this area, and I'm looking forward to the results.
Okay.
Our next question is from A.J. Rice from Credit Suisse. Go ahead.
Hi, everybody. Not to beat a dead seer [ph] But I have to two quick questions. But first of all relates to the 2021 outlook, I sort of end up at about the same place, as I think Justin was saying and started 466, you add about $0.38 for the midpoint of the WellCare accretion, incremental increase for next year gets into the 505 range. And then you add 10% to 11% for organic growth 555. Relative to your slide, then you've dealt with the WellCare accretion and the organic growth.
I guess the open questions are – or what you're highlighting is state rates, risk sharing, and potential return of re-determinations. On the re-determinations, it's still your thoughts that that's about a $1 billion revenue headwind on an annualized basis, and that we can figure out how that might come in over the course of the year?
And then is there any way to put your arms around your - arm and around state rates and risk sharing, I guess that's annualizing some of the stuff you've seen next year plus anticipating any incremental pressure, any way to crack it there…
Let me get one more variable, that influences everything you've just said. And that's any continuing stimulus they do that affects FMAP, that freezes re-determination is that there's still some undefined things out there. And recognizing that those things we hope to have a better view on come to December Investor Day it actually will behind us, hopefully, and we'll understand what some of the policies are.
So everything you said, I can understand what you're saying, but there are other factors that affect re-determination, effect rates, affects a lot of things. So we try to give you enough that you don't get ahead of yourselves, but we also said we'll have a clearer view come December 18.
Okay. On the – my other question relates to what you're seeing in enrollment. So I think second quarter call, you guys had said you thought you'd get to about 1.4 million incremental lives versus where you were at Q1. And that you'd see that peak in November. I just want to confirm that you still think you'll see the peak in November and the ultimate peak is going to be the incremental 1.4. It sounds like you think you're on track. And then there's also a dip in the - and there's a dip in exchange enrollment. Is that consistent with what you thought you would see at this point?
Yes. Yes, it is. We're still saying 1.4 by November. And yes, the exchange attrition is consistent with our expectations.
Okay, thanks a lot.
Our next question is from Matthew Borsch from BMO Capital Markets. Go ahead.
Yes, maybe you could comment on what your - how you're thinking about the exchanges for next year? You think you were going in with margins normalized for the back half of this year? Obviously, the first half of this year was disrupted? And what if anything, do you see in terms of the competitive environment?
Yes. So over the last five first, we like competitive environments, I think I've said that many times. It really helps grow the space. When you're the largest and the others are very small from you, [indiscernible] to really do all the work to grow it, but you get competitive environments, it grows. And in that environment, the leader tends to grow very well. And I've seen that all my business life and much more competitors, consumer packaged goods.
So we're comfortable that we're well positioned competitively to work. We're in the planning stages, and we see normalized margin.
Yes, I think it's, obviously, it's hard to compare, 2021 to ‘20. And we're still, obviously, in the early cycle of our annual planning process as far as what we expect utilization to be looking into next year, because obviously, we're still going to be with COVID, and have that going into next year. So that's part of you know why we're just trying to give you directionally today, where we think things are going to land, and then we'll have full details for you in December.
And again, as Michael mentioned earlier, we're still in the early stages of the enrollment. And so I think once we get better data on that, which we'll have for you in December, we'll have more comments.
If I could just ask one more on the enrollment, the outlook for this year, when you talk about the peak enrollment in Medicaid for next month, November, what gives you that confidence that - or why are you so sure that's a peak in November? Why does anything…
Yes, I mean, certainly the extension of the enhanced FMAP helps. So what's happened is it's really been driven by the suspension of the eligibility re-determinations for the bulk of it. And so we'll see, I mean, I think we're just comfortable holding the 1.4 in November. I think we'll get there. That's our expectation.
And could it go higher? It's certainly possible if they continue to extend the stimulus, but we'll have to see it.
And the numbers we gave you, we are tracking on the 1.4.
That's right.
Okay, thank you.
Our next question is from Sarah James from Piper Sandler. Go ahead.
Thank you. So I've been looking at the year-to-date fall off in HIX. And if I go back a couple of years, it was about 5%. Last year it was 3%, this year, it's almost flat. And last time you guys had lower HIX churn it compressed margins. Is it having the same effect this year?
Yes, I think first of all, I think keeping the members longer this year was due to intentional actions that we took in order to extend grace periods, as a result of the pandemic. And so I think you really can't compare year-to-year from an attrition perspective. And then the other thing I would comment on is, again, with the COVID pandemic, it's hard really to judge, profitability of that extension this year versus any other year. We're just in a unique environment.
Okay. And then thinking about the exchanges, overhead leverage and the operational structure there. You guys just announced going into 400 more counties and existing states you're getting pretty dense in the states that you operate in. How do you think about that impacting overhead leverage? Is that density moving the needle for you guys?
Yes, I mean, I think we're - I mean, number one, I think we're always focused on overhead leverage. And that business is scaled. And so we continue to try to find ways in order to get efficiencies and the exchange platform. I think there's still more work that we can do there to get the efficiencies of the scale of that business. And that's what we're focused on heading into 2021.
I think it's fair to say that every budget meeting, I said it on, we're talking about scale, not just there. But in every one of our businesses, if you look at our growth, and the market with time we start to realized the benefits of it.
Thank you.
Our next question is from Josh Raskin from Nephron Research. Go ahead.
Thanks. Good morning.
Good morning.
Morning, Michael. Taking a step back, it seems like Medicaid has obviously been a major growth factor for the company for a long time, it feels like the future may rest a little bit more on Medicare as a larger part of that growth going forward. And I know you've commented on that in the past. So can you talk about your competitive positioning and what you can do to improve your star ratings and what you're seeing from other competitors in the market?
Yes, we were within a couple basis points for getting the star rating, one, we have a very aggressive program, Josh, that we expect will increase it, it's measured over a longer period of time. So it takes a little time to get there. But the people responsible for improving it clearly understand that there is no excuse for not achieving it going forward. So that is a continued emphasis and pressure on that.
I am - I've talked in the past about the Medicare that it is a growth ladder for us longer term. I think WellCare had a good record of growth in Medicare. That's translating well for our business. We're moving to a number four position in total, on a combined basis. We're proportionately 1 million lives. And at us to give you critical mass from which to grow, we're doing a lot of re-contracting with providers, which we think was beneficial.
So it's - we're in the open enrollment just started basically. So it's a little early to comment on it. But I am cautiously optimistic that it will finally achieve some of the goals that I've been looking for, we’ve been looking for.
Okay, perfect.
And I might add, I might also add profitable growth.
Got you. And cautiously optimistic was a comment around 2021 in terms of starting to realize some of that growth?
Yes.
Got you. And then just second question, as you're thinking about headwinds, tailwind for 2021. And I'll stay away from the conversation on consensus. But what do you think medical utilization trends in 2021? Do you think and maybe more specifically, are the states recommending rate actions that indicate that continued trend below sort of pre pandemic levels were state's assuming a more back to normal environment?
Well, I think I don't know right now that they are assuming either and with what the pandemics doing, it's pretty hard to have that discussion. But we really have seen is that while some elective procedures have fallen off, obviously, pandemic costs have gone up. So it tends to - one tends to bounce out the other.
The one area that an interest of transparency, that has fallen off for obvious reasons, and has not been quick to bounce back is in the emergency room. Okay. So I mean, there are some aspects that has dropped off and are staying little they will rebuild over time when the pandemic is gone. But that single biggest issue in talking to the States right now is, it's reaching new all times high and this is going through the winter. And I could be as far out and talk about when it's going to fall off. But that's not the purpose of this call.
Got it. Thank you.
Our next question is from Charles Rhyee from Cowen. Go ahead.
Thanks for taking the question. Michael, maybe I can ask a slightly different question here. As we think about potential for vaccine approvals. Can you talk about sort of what the logistics means for Centene in terms of, how you would think about ensuring that your members get access to it or is that really a function of the state making decisions and logistics with pharma manufacturers? Maybe give us a sense on how this process kind of works?
I think there's a couple of, just one, I have some pharmaceutical background. My former [ph] miles biologic. And Phase 1 and 2, you can do some computer modeling that helps you accelerate. The Phase 3 is long term side effects. That takes a given amount of time. And I think what we're hearing is that the scientists are saying, they'll look forward in very late ‘20, but more likely the first half of 2021. Okay.
Now, I have had some discussions at very senior political levels in Washington. And some of them that are talking to the scientists have made investments and said, we will give you the money to build 100 million doses, even before it's proven. Okay. So whenever it does prove we have that vaccine.
Now, I believe that when that vaccine becomes available, and I'm anticipating the late Q2, maybe Q3 of next year, we'll really have something that people have confidence in. Our throwing some parenthetically here. We were doing some PSAs to ensure that parents and others are still giving the normal vaccines, saying that [indiscernible] people were starting to have doubts about those. And that would not be good for the chart. So we were doing some other things there.
But I think what will happen is, we'll have it, and we're going to work very hard to ensure the people that need it most, get it early, the people at higher risk, the people that are working in the healthcare environment, treating people that type of thing. That's - so there's there'll be an orderly transition to it. And I think a lot of our population or individuals at risk, because of the nature of it, and we're pushing hard to ensure they have the vaccine when they need it. So it's a kind of a work in progress. I don't mean to be so long winded. But I want to give you a sense, we've thought a lot about this. And there is a clear plan, working with the scientists, in the slots with scientists on how to enter manufacturers and others, how to get it done. I mean, we're a huge purchaser now of pharmaceuticals. And that gives us an opportunity to talk to them. Does that help?
Yes, it does. And if I could just follow an issue, we think about that kind of pathway in terms of, sort of the timelines that you just discussed. As we think about ‘21 is when we think about some of the factors. Is it fair to assume that you're going to build in that kind of conservatism as we as we think about next year as well, because it kind of suggests your thoughts also on COVID itself, right? The pace of the COVID is going to ‘21.
Yes, I think I mean, I think there's two issues. There is the pace of the vaccine and is the pace of COVID. Now, what - I mean, if I were doing it, I would be working very aggressively on the treatments, the therapeutics that treat the COVID, while we're developing the vaccine. I will give you a sense of our thought worked with epidemiologists, just I want to be transparent as far as I can be.
We've announced to our employees not to expect to come back before the end of spring break, which is April of next year. Okay. And we're working very effectively at home, when I have all kinds of reports I get regularly on the productivity and people do want to get back to work.
I've also said it's possible it may not happen till June. So we have spent as you know, a lot of money putting the Plexiglas in the offices, the temperature monitoring, and people walked in. So we're ready to bring people back on a planned release basis and people - others are starting to emulate. But the development of the - how the pandemic unfolds. It's still very new.
So I will - and I don't want to sound political. This will sound that way. Masks make the difference. And our epidemic - our epidemiologist has said, if you look at Japan with 127 million people, and Hong Kong was 7.5 million people and we know that in the Asian markets there's always been a match mentality, it goes back to 70s and 80s when I was in, so we had a cold [ph] they put one off, during the time that we lost the first hundred thousand lives. Japan lost 831 and Hong Kong 4.
Let's say they understated it by 200%, so they lost 12, the math makes a difference. So if we get - if we can get that mentality go here and all kinds of sustainably, people will massively save 100,000 lives. So I think that has a lot to do with where going.
Certainly agree with you. Thank you.
That mean you hit a hotkey in case you can't tell, you've just hit a hot button for it.
The next question is from Ricky Goldwasser from Morgan Stanley. Go ahead.
Yes. Hi, good morning. Michael, in the past, you're very confident about the Supreme Court ACA ruling. How do you think about the potential outcomes now?
Well, I think I'm still relatively confident. I think there is two things. If you look at it, there is one - there's one factor that they're considering right now. And that's [indiscernible] one really eliminate everything, even the Supreme Court, the other one, cabinet, and some cases has agreed that severability is a factor. Severability used to be written in the Congress congressional acts. But it's become such a practice now that it's more normal.
I suspected, and maybe at one point, I thought it would be seven to one, just as human resource piece were still around and others. But I said it could go to six weeks, it still could be five, four. Now, I also want to remind you that depending on what happens on the election, if they want to make the case means, they just have to put one line in that says the penalty for not participating is $1. And it makes the whole case mute.
So I'm still not very comfortable with it. I think, I don't believe when push comes to shove they really want to put all these people during the height of a pandemic on the street with no insurance.
Thank you for that. And then just a follow up on the COVID cost. It sounded like $2 billion in direct COVID costs. That's meaningfully high than Q2, I think it implies about $1.5 billion Q3. So can you talk about what drove that increase just in terms of acuity or versus hospitalization, because we're hearing so much about the therapies and about shorter hospital stays and lower acuity than before. But it seems that you've seen a different impact on your book of business. So maybe some color on that and how you think about these costs into Q4, given what we're seeing in terms of increased in cases? Thank you.
Maybe you want to start, you can have…
Yes, I think the first thing is to talk about the number, number one, that's paid dollars. And so you have to remember, at the inception of the pandemic, obviously, we wouldn't have had a lot of paid dollars, because there's usually a, 30 to 45 day delay between when the, the inpatient stay happens, and when we actually pay the pay the dollars to the provider. And so I think that's why you've seen, I guess, in what you're stating is an acceleration of the dollars. It's really just, I think, a timing effect from that perspective.
So - but what Michael has stated, what we've talked about in our Investor Day, and in the quarters that we've reported, is that we have seen lower traditional utilization, higher COVID expense, and when you aggregate those two, utilization, from an expense perspective is just slightly below the historical average. And that's certainly what we've seen.
Our next call - our next question is from Stephen Tanal from SVB Leerink. Go ahead.
Thanks for the question, guys. I was just want to clarify on the 2021 initial outlook slide, you guys showed state rates or risk programs as a negative. But, Jeff, I think you've said in your prepared remarks that you expected less than the $500 million rate headwind impact that's embedded in ‘20. Just wanted to see if you could clarify sort of what's assumed in the outlook and how that's different than the comment you made on the $500 million item?
Yes, I think, I mean, obviously, those are reductions of revenue. I think that's the point, right? Is it there's still negatives on revenue as you head into next year. And you're correct. What I said was our expectations were $500 million this year. And our expectation setting here today is it would be something less than that in 2021.
But again, I think if you look at, this year, we've obviously had a multitude of factors including state rate changes, lower overall medical expense, we had, utilization that was significantly lower in April in May. So there are a lot of other factors offsetting all these items to effectively get back to our initial guidance back that we gave out back in March.
Got it. Okay. That’s helpful. Then utilization, so early in the year you guys have produced a chart that implied 3Q and certain run above normal. I think it's a daily chart. It doesn't sound like that's occurred. But I'm wondering how you sort of frame what actually happened in Q3 and how you're thinking about Q4, do you guys still expect sort of the deferred care wallets here that deplete in excess of normal levels in Q4 and into ‘21?
Yes, obviously, I think what mention just a little bit ago on the COVID cost is that what we've seen is lower traditional utilization, higher COVID cost, the net that is a little bit below, not much, a little bit below historical utilization. And in my prepared remarks, what I indicated, we would expect utilization to increase in Q4 versus Q3 slightly. So that's what we continue to expect as utilization continues to trend back towards normal on a total basis, right. The mix is different. The mix is lower, traditional and higher COVID. But in total, again, trending back to historical levels in the fourth quarter.
Okay. And maybe if I could sneak one last follow up, and just the whole idea of peak enrollment growth in November, I guess I just asked you how you see enrollment playing out from that peak by line of business and why. So Medicaid…
Yes. I mean, obviously, there's an, an open enrollment for both Medicare and marketplace. So that obviously changes things as you look at January 1, amount. That's why we're early in that cycle. And we haven't given any, any commentary on that.
As far as the Medicaid is concerned, I think the extension of the FMAP enhancement helps. But ultimately, we're going to have to see how long that it gets extended, or, what happens with that with a second stimulus potential as we head into next year. And that's why we said we'll have more information for you to December Investor Day.
With the things that we've not seen in the pandemic it reached new heights for more than March, suddenly. That's why we have to think of things on a very gross basis. And it's the more granular we try to get, the less accurate, it's going to be. In this kind [indiscernible] another 100 years, we have some more background.
Our next question is from Gary Taylor from JPMorgan. Go ahead.
Hey, good morning. I just wanted to do a couple things. I wanted to revisit your expectation on fourth quarter MLR. I didn't take the opportunity yet to pull up the slide deck from the summer. But I think with the implied earnings guidance, is your – your estimate now is up for fourth quarter MLR would be higher year over year?
Yes, number one, I don't think we provided a fourth quarter MLR estimate, I guess from just from what we've given today, what I would look at is, kind of where we thought we were going to be before and then you have the $0.17, right. We talked about the $0.17benefit that we had this quarter, if we're going to reinvest in the fourth quarter. So that obviously would be a direct reduction to the previous fourth quarter number.
Yes, I was just thinking about that one line chart you had in your deck that showed your expectation on COVID costs and sort of recovering, deferred care I thought they intersected in the fourth quarter. But I can…
We talked Gary about various peaks and how many peaks we have during the course of the year. And I say this – this is people getting now a little bit earlier and more severe than what I originally thought.
Yes. My other question, just going back to the, the state rates and risk sharing, I guess, help me with my thinking a little bit. When we look at the state rates, we've seen state budget performance improve dramatically from where it was in the spring, if we look at some of the state's - latest state numbers, versus their budgets, almost back to par versus those peoples in the spring.
So that seems to be getting better. Of course, perhaps the economy could get worse next year. But it seems like that's getting better. You mentioned your two of your largest states, decent rate increases on a combined basis. So that seems to be relatively stable.
And on the risk sharing with deferred care starting to normalize and COVID costs in the near term moving higher would seem like the risk sharing liability would be sort of diminishing. So I guess the question maybe is more on the state rate side, is there is any plausible risks that some of these state rate updates get reassessed during their fiscal year or you're just leaving room for what might happen in July for the back half of ’21?
I think we’re looking at it in totality. But we'll also talking to state about new products, expanded, they don't have SSI. They don't run through things that save them significant money. So I mean, there's so many different factors that I'm counting on having a little more visibility come December 18. And we should just because that's the time, the more experienced and more clear.
So I think to try and speculate what's going to happen in the back half of ‘21 right now, it's really a drop in the dark, but versus having the benefit of the ALP we're working on and various markets we’re in, 37 states, so it takes time to collect that on. It won't be the same at all. So give us a December 18, we’ll have more visibility.
That's fair. I just - in my mind I thought maybe that line was maybe more of a plus minus question mark, and you guys have a minus. And I just wanted to try to understand that a little bit.
I'm trying to understand the COVID and the timing. But some of it – the politics and when I posted it to it.
Right. Understood. Thank you.
Thank you.
Our next question is from Scott Fidel from Stephens. Go ahead.
Hi, thanks. Good morning. First question just on the different pieces on enrollment and as relates to the COVID impacts. So it seems like really, the vast majority of the growth that you and others have talked about has just been from the suspension of the re-determinations. And the one piece of the puzzle that really hasn't seemed to play out much has been just the impact from the rising unemployment yet. So just interested, if you guys can give us some thoughts on, sort of so far during the crisis, how much enrollment you've seen in Medicaid, just from rising unemployment. Obviously, that's been coming down the more recently, so how you're thinking about that - that piece of the puzzle, sort of trending in 4Q and into 2021?
Well, I’ll start, it's been bouncing around. Because originally, you had people on furlough, where they kept some benefits. And then things continue, there's more layoffs. And we've seen that, where they're not getting the benefits, and then they're moving to Medicaid, if they have the wherewithal, they're going into the marketplace. So it's just such a swinging barrel. And so many factors, it's, it's hard to be too granular. I'm not trying to be evasive, but I'm just trying to give you the things that we look at day in and day out of trying to sort it out.
No, I get it, definitely. That's why I was asking the question too. And then just a second question as well, and just sort of get back to the rate discussion. So you've given us a few pieces of the puzzle, you talked about how Texas and Florida you do have rate increases, then you talked about a number of the states that have risk corridor in play. Just interested, sort of the third piece, just in terms of states that have actually implemented cuts for FY ‘21, if you could just give us some visibility into that. Because, we have seen a number of your states where the headlines read as cuts haven't been implemented. And I just want to understand whether those are actual, cuts to the base rates? Or does that reflect more of these risk corridor dynamics that you've discussed?
Yes, I think we've kind of aggregated all those. I guess what I would say is what I mentioned before is the traditional rate setting process where you gather encounter data and turn that board, et cetera, et cetera, that is still -- that that process continues to go on like normal. I would say the additional factor is some of these risk sharing mechanisms, et cetera, et cetera or the 1.5% rate reductions that some states have done. And so in general, we've accumulated all that, and that's contained in the $500 million, that I mentioned that we had in our guidance for this year.
Okay. All right. Got it. So, that the rate cuts are inclusive within that, that $0.5 billion headline...
Our next question is from Lance Wilkes from Bernstein. Go ahead.
Yes. I wanted ask a question kind of focused on the provider contracting side of the situation, if you could just talk to a couple items there. One would be near term. What's the contracting opportunity if there are rate pressures and risk corridors? Given the financial status of providers, it seems like with a lot of the bailout money, they should be in a stronger position to make [indiscernible] here back in 1Q, 2Q?
And then secondarily, if you could talk a little more long term on your value based care initiatives, as well as instances where you're, perhaps getting into care delivery or dabbling in it to see how that's looking for a long term aspect of a contracting strategy?
I think on the value based, some providers - like if there's a capitation rate, so that way, they're cash flow strong. And one day in a couple - we have a three month play through, you should know that how it works. I think there's some trepidation trying to understand what it all means going forward. It should look good now. But I think as we work through it, we are having success and introducing value based contracting. And we also know that as we introduce some, and they become successful, and the provider relations work with them to be successful, others will want it. So we're trying to do it in a very responsible way that we can support with the reports, we have real time reports now we can support it with. So we see it growing, and we see providers starting to value it, relative to our getting involved in care delivery, is limited to our model and charter [ph] that has some capability, we're not into a great deal there. It is a market that has a absence of OB-GYN or something. We do have the capability to put a clinic in there to help the population get the appropriate access. So it's a case by case basis, but we are not out there grossly trying to buy a lot of providers.
And just on the contracting with providers, kind of in this COVID environment. Are you finding that you're able to, push back on provider rates if you're getting rate cuts at a state level? Or is the financial situation of the providers, so tenuous at this point?
Well, what we've done is we've copays things because they, they may not be able to collect it from their members. So what we're doing things to support them. But all those things preview into what we - the calculations, we give the same. And so we – our results is demonstrating we're able to continue down that program, support providers. And we do want to support them, and help them become more successful.
We have systems that do that. Now we have a system now that can test that pre optimization was 18 minutes, we can do it now in three seconds. So we have things of artificial intelligence and the digitalization is the real focus, that's going to be moving things ahead for the providers streamlining what they can do and how fast they can do it. So there's more than one way to help them.
Got you. Thanks.
Thank you.
This concludes the question-and-answer session. I would now like to turn the conference back over to Michael Neidorff for closing remarks.
We thank you. We encourage everybody to stay safe, wear your mask. And I think you can see that we have as an enterprise the wherewithal to continue to do well and I say we’ll meet reasonable expectations. It's - one has to recognize the environment we should work in and we want to do it the right way. So stay well. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.