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Centene CEO on medical loss ratio: it was a 'product mix issue' due to additional COVID costs

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Yahoo Finance’s Brian Sozzi, Julie Hyman, and Myles Udland break down Centene’s latest earnings report and outlook for the healthcare industry with Centene CEO, Michael Neidorff.

Video Transcript

JULIE HYMAN: Health care insurer Centene reported its numbers yesterday. And while if you look at the overall numbers, it doesn't necessarily tell the story. You got to look at the medical loss ratio. That's the percentage of claims that are paid out for costs. That came in a little bit worse than some analysts had predicted and that sent the shares down.

So let's get a little more color around that and a little more information. Michael Neidorff is with us now. He is the CEO of Centene. Michael, it is always a pleasure to see you.

So talk us through the medical loss ratio. As you saw, obviously, the reaction on the street was not great. What kind of insight can you give us into what the trajectory is and what was behind that number?

MICHAEL NEIDORFF: Thank you. Welcome the opportunity and thank you for having me on. We said it was a product mix. We said clearly that we had a lot of people to the marketplace. We recouped everything that we had lost last December and then some.

And we said that there was some additional COVID costs, which we know are not something goes on every time. And when you're insuring 25 million people, plus one out of every 15, and you have one line item as a little bit out, but our GNA was down. You know and that can happen.

And it really surprised me that people reacted on one metric, which can move around based on what the health conditions are out there in the marketplace. And it's conservative, what we booked. And I just-- I just don't really understand it. We had a great quarter.

Everything was positive. This was simply a matter of a product mix issue that came up. And it doesn't mean that it's going to be ongoing. We're great at minutely managing these things. But when you have COVID, things could be lumpy at times, and we've said that from the beginning.

JULIE HYMAN: And so you said it's not necessarily an ongoing issue, but what kind of clarity do you have around that? What kind of predictability do you have around your costs right now? Is that something that is going to potentially happen again?

And I think you're referring, what? There was a delay in premium payments from New York state, right? Have you communicated with them and other states to see if--

MICHAEL NEIDORFF: Oh yeah.

JULIE HYMAN: --things are going to be back on track?

MICHAEL NEIDORFF: And those things out those things work out as a cash flow. So it's $40 million on that $30 billion quarter. OK?

So once again, states sometimes we'll move it from one quarter or the next just for their own cash flow purposes and their budgets. So as we said that-- we said through the next quarter, that medical loss ratio could stay up. But it doesn't necessarily.

We tell people we control costs and influence medical expense. And we have a lot-- we have a lot of influence on it. Through contracting, medical management, et cetera. COVID is a little bit different. And we've said all along, that can create the lumpiness that you don't typically see.

And it's just a product mix issue. And I don't see it as an ongoing issue. We brought GNA down. We've more than offset it. We're head on consensus, apparently. I don't look at the consensus.

I look at our earnings, our revenue. I mean, it's-- all the metrics were good. I'm very proud of the results we had that quarter. I look at year over year, quarter over quarter. I don't get it.

MYLES UDLAND: So you know, Michael, it's interesting to talk with you about this, this one time COVID impact on the downside here for the business. Because we're talking through tech earnings and everyone's saying, well, we had a pull forward of all this growth and we don't really know how to think about it. So if you take out some of these one time issues, what right now as we sit here April 2021, are the main drivers for the business as you guys look out over the next three and five years, both from a mix perspective on your policies and where you guys think Federal policy, state policy is headed as well?

MICHAEL NEIDORFF: Yeah. I think very importantly, the current administration wants people insured. They've added to the navigators for marketplace. We seen a significant growth there. We see this especially enrollment period, which is good.

We're seeing they're talking about continuing the subsidies on a permanent basis, things of that nature. We think that's going to be a very strong product. We've had great results with that and we anticipate that continuing.

We see there's some expansion in Medicaid. There's states moving to other forms, not just the TENA, but they're looking at SSI, long term care, knowing that's how we can save the most money. We have an international business is doing very well and growing and profitable. So I mean, just across the mix, you know, when you're the size we are and the scale we have and the number of states.

We have 450 different product lines across the different states and contracts. You could-- it's no different an investor. They can have in their portfolio one stock that's not doing well, but they have things that offset it. And that's what happened here.

You know, the medical loss ratio was off a little bit. There are a lot of offsets in there and how we did it and Medicaid revenue. I mean, we increased guidance on the year.

I mean, it's baffling. But long term, I'm very comfortable in this business. I think we'll continue to do-- Well, we have new products I can't talk about yet.

That will continue the growth. Medicare, where we had significant-- $1 billion increase in Medicare, 41% increase over the year before. So I mean, all the metrics were-- I was very-- I'm very proud of what we did.

BRIAN SOZZI: Michael, at a high level, what's your outlook for health care cost inflation as we round the corner of the pandemic?

MICHAEL NEIDORFF: I think we'll see normal utilization returning in the second half. And by the fourth quarter, it could well be back to a normal situation. We anticipate rate increase by 1.7% on a consolidated basis. I think that's more than enough and it's adequate to cover our costs.

So I think we'll see costs coming down. I think as they get over the pandemic, that's been the big driver right now. We see things like ER, emergency room and that. I don't think it's going to return to historic levels.

So I'm looking forward to June when we give the forecast on revenue for '22. And then at our practice year end, we'll give guidance for the full year of '22. I'm very bullish on the balance of this year. The tailwinds are outpacing the headwinds and I think we'll see a lot of that carry into '22.

JULIE HYMAN: And you referred there to your June investor day. I believe, Michael, we're going to hear about those new products then too, just quickly?

MICHAEL NEIDORFF: Well, you're going to hear a lot about what we're doing technology wise. But we have the strong-- the [INAUDIBLE] we have the strongest team and the best technologies you've ever seen. We are now moving to where we will pre-authorize approval of things in less than a second.

Imagine a doctors sitting there and saying, I have to get this pre-authorized. Oops, it's done. And that--

JULIE HYMAN: Yeah. That would--

MICHAEL NEIDORFF: --let's you know that we have a human reason. I mean, there's things we'll be talking about that I think people are going to see we're way ahead. And it's going to reduce costs, but end up with a more delighted provider and recipient. I mean, it's-- the company's never been in better shape.

JULIE HYMAN: Michael, always good to see you and look forward to continuing to get those updates. Michael Neidorff is CEO of Centene. Thanks so much.

MICHAEL NEIDORFF: Thank you. Thank you and stay safe.