Sarah M. London
Chief Executive Officer at Centene
Thank you, Jen, and thanks, everyone, for joining us as we review our second quarter 2024 financial results.
This morning, we reported second quarter adjusted diluted EPS of $2.42, a stronger than previously anticipated result. Our earnings power in the period was supported by mixed results in our core business line with strong execution in Marketplace, partially offset by pressure in Medicaid resulting from redeterminations. Medicare continues to perform in line with our expectations. Taking a step back from the moving pieces of the quarter, our diversified platform continues to enable us to deliver earnings power consistent with our previous expectations, as we navigate a dynamic healthcare landscape.
Given the importance of redeterminations to the Q2 results, let's start there. As many of you know and as we have been reporting on for well over a year now, this process has played out at an unprecedented scale and has driven a similarly unprecedented membership shift that we knew would require the rebalancing of rates to account for the acuity of the members we continue to serve on behalf of our state partners. While we are disappointed with the magnitude of the disconnect between Medicaid rate and acuity that we saw materialize in the quarter, our underlying analysis continues to suggest this is largely due to the mix-shift of the population and is therefore a temporary and addressable dynamic and one that we are already actively addressing.
The dialogue we established with each state's regulatory and actuarial counterparts early on in the lead-up to redeterminations have in this phase allowed us to profile the shifts we are seeing as they emerge and resulted in rates for the second half of the year that are very much a step in the right direction. As you'll hear from Drew, this momentum is evidenced by an uptick in our expectation for the annualized composite rate adjustment. Ultimately, we still anticipate the Medicaid business will return to a steady-state pre-pandemic HBR range once we are fully beyond the redeterminations impact. And each month and each rate cycle gets us closer to a more normalized operating dynamic.
In addition to rightsizing rates, we continue to improve on the underlying Medicaid operations and to innovate as we look to drive health outcomes. One example of this is our new HALO program, which leverages peer-to-peer counseling to support recovery for members diagnosed with a substance use disorder. Innovations like this are well within our span of control and can help reduce medical costs for our state partners while driving improved outcomes for our members.
As we work through a historic redeterminations process, we have not lost sight of the opportunities for long-term growth in Medicaid, which is dependent on our ability to successfully procure and re-procure contracts at a state level. On this front, our business development team and local state teams continue to deliver with previously discussed wins in critical geographies like Florida, Kansas, and Michigan. We have reviewed the recently announced actions taken by the state to finalize our new Florida contract and feel good about the outcome. We look forward to implementing that contract and to launching our new Arizona LTSS business with a targeted start date in Q4 this year.
The strength of our local markets has been a key priority under the leadership of Dave Thomas, our CEO of Markets and Medicaid, who will be leaving Centene later this year after 25 years with the organization. Throughout that time, Dave has been influential in the Company's success and has helped to build and support a team of exceptional mission-driven market leaders.
As we position the organization for our next chapter of growth and innovation in Medicaid, we will leverage one of those leaders, as Nathan Landsbaum, who many of you now know from his role in Florida, prepares to take a leadership role across the markets later this year. Nate has been with the organization for more than 18 years and brings extensive experience ranging from corporate positions to health-plan leadership roles in multiple markets. I want to thank Dave for the significant contribution he has made to our organization, and we look forward to working with Nate and our market CEOs to harness the power of incumbency and serve more members in more programs.
Turning to the Marketplace, Centene's Ambetter Health demonstrated once again it is not only the undisputed leader in the individual market but also serves as a strategic complement to our Medicaid business, providing coverage continuity for members and a natural hedge as we navigate mix and acuity shifts from redeterminations. Ambetter Health is delivering strong performance in the core business and delivering on margin expansion in 2024. At the same time, the business has been able to capture in-year membership growth, contributing to this morning's increase in our full-year premium and service revenue expectations, and to date through the redeterminations process has exceeded expectations for serving members transitioning from Medicaid.
From a macro perspective, the Marketplace landscape continues to shift positively in our direction. With heightened awareness among consumers and the migration of micro and small commercial groups to the individual market, we see an increasing -- an increasingly accessible addressable market, giving us exciting room to run in this business. By executing well in the first half of 2024, we are harnessing the positive momentum we continue to gain with our members, providers, and distribution partners.
As we look to 2025 and scenarios around the enhanced advanced premium tax credits, we believe the benefits of enabling access to affordable health care for more than 20 million Americans are clear. Coverage has been a critical driver of economic stability for rural communities across the country, particularly in states like Texas, Florida and Georgia, and mass adoption has finally made a long-envisioned robust individual Marketplace a reality.
Rhetoric aside, we believe there is bipartisan alignment around the promise of this chassis and that Centene is well-positioned to build on this foundation to drive growth in 2025 and beyond. To this end, we continue to track momentum around affordable, customized, and portable coverage for individuals in the form of ICHRAs. While this market is still very early, we believe it represents a compelling alternative to employer-sponsored coverage. And as the thought leader in this space with the number one brand in the individual market and without a Commercial group business to protect, we see this as a fertile organic hunting ground that can create upside to our story.
Meanwhile, Centene's Medicare platform delivered an on-plan financial performance in the quarter and continues to make significant operational progress. We are, as many of you know, approaching an important milestone for this business as we prepare for new Medicare Advantage Star ratings to be unveiled in October. The pending Star's announcement represents a critical step towards our previously established three-year goal of achieving 85% of our Medicare Advantage membership enrolled in plans rated 3.5 stars or better as published in the Fall of 2025. We are pleased with the operational progress that we have made year-to-date and remain on track to deliver steady progress compared to the 19% achieved by last year's efforts, recently updated to 23% by CMS.
Let me give you a sense for what has tangibly improved. At this time, we have good visibility into results related to admin and ops. Consistent with prior updates, in this cycle, we were able to hold on to the gains we achieved last year and build upon them. Our performance continues to improve with the processing of appeals, CTMs and health risk assessments, and focused work by our call center and claims teams has driven improvements we would expect to see as part of scoring in October.
On the HEDIS front, the significant increase in member outreach that you heard about in Q3 and Q4 drove improved physician access and successfully closed gaps in care for many of our members. These are important lead indicators for improvement in our HEDIS scores. We continue to invest in and strengthen these programs as we move through 2024, consistent with our commitment to and focus on quality enterprise wide. We do not yet have final caps results or cut points, but as we sit here today, we are pleased with the progress against our internal expectations and expect this October 2024 milestone to be a meaningful step to our ultimate goal.
Relative to 2025 Medicare bids, we remain focused on our product strategy of serving lower-income complex seniors. And despite a challenging rate environment, I'm proud of the work our team did to integrate a data-driven health equity lens into our supplemental benefits design. We also took the opportunity in this bid cycle to simplify our contractual footprint, all part of a multi-year strategy to build back to a high-quality, high-performing, and profitable Medicare business aligned for growth.
As we approach November, we are certainly keeping a close eye on election dynamics at every level and scenario planning for key policy themes across our states and lines of business. As we have said before, at Centene, we focus on policy, not politics, and we operate day in and day out in a politically diverse ecosystem. We have demonstrated success over the past 25 years across multiple Republican and Democratic administrations. And this is because we focus on our mission first and thoughtfully partner at both the state and federal level on solutions that work best for each community we serve.
In this role, I've had the honor of meeting with lawmakers across the country, including governors, senators, congressmen and women, state legislators and regulators, and leaders of major federal policy committees. And while they have different views on many topics, there is one thing they all want, to improve the health of the communities they serve. This is Centene's mission, and it is a vision that we firmly believe has bipartisan support regardless of the electoral outcome in November.
We are now more than halfway through 2024 and we are making good progress moving the organization beyond real but temporary headwinds, including Medicaid redeterminations and a well-documented Medicare Advantage Stars revenue challenge. At the same time, we are still hard at work strengthening the underlying business, modernizing our processes and infrastructure, adding exceptional talent, and investing in innovation.
We believe Centene's focus on government sponsored healthcare positions us very well for profitable growth as we go forward, and we remain confident that we can deliver value to our shareholders by delivering value to our members and keeping them at the center of all that we do. We are pleased to reiterate our outlook for adjusted diluted EPS of greater than $6.80 during a dynamic year and look forward to furthering our progress in 2025 and beyond.
With that, I'll turn it over to Drew.
