Centene at Deutsche Bank Summit: Strategic Growth and Challenges

On Thursday, 11 September 2025, Centene Corp (NYSE:CNC) took the stage at the Deutsche Bank Healthcare Summit to discuss its strategic outlook. CEO Sarah London outlined the company’s positive trajectory in Medicaid and Medicare segments, while addressing ongoing challenges in the Marketplace. The reaffirmation of the full-year EPS forecast at $1.75 was a highlight, alongside a promising $700 million improvement in the Medicare segment. However, the Marketplace faces a $2.4 billion risk adjustment headwind.

Key Takeaways

• Centene reaffirmed its full-year diluted EPS forecast of $1.75.
• The Medicare segment is on track for a $700 million improvement.
• Marketplace faces a $2.4 billion risk adjustment headwind.
• Medicaid results for July and August support expected HBR improvement.
• The company aims for break-even in Medicare Advantage by 2027.

Financial Results

• Full-year diluted EPS forecast remains at $1.75.
• A $700 million improvement is projected in the Medicare segment.
• Year-over-year improvement in STARS for Medicare is anticipated.
• The Marketplace segment is expected to perform below break-even this year.

Operational Updates

• Successfully refiled 2026 Health Insurance Marketplace rates covering 95% of membership.
• Implemented managed care principles for ABA populations in Florida.
• Addressed fraud, waste, and abuse in New York’s ABA population.
• Constructive discussions with states on Medicaid rate increases and benefit adjustments.

Future Outlook

• Focus on margin improvement across Medicaid, Medicare Advantage, and Marketplace.
• Break-even in Medicare Advantage targeted for 2027.
• Potential market contraction in the Marketplace segment if enhanced APTCs are withdrawn.

Q&A Highlights

• The $2.4 billion Marketplace risk adjustment is factored into 2026 pricing.
• The Marketplace is deemed sustainable without enhanced subsidies.
• Medicaid margins are expected to improve in 2026.
• OB-3 requirements and their impacts are being closely monitored.

Readers are encouraged to refer to the full transcript for an in-depth understanding of Centene’s strategic discussions at the summit.

Full transcript - Deutsche Bank Healthcare Summit:

George Hill, Healthcare Technology and Services Analyst, DB: Good morning, everybody. Welcome to day two of the DB Healthcare Summit. I’m George Hill. I think everybody here knows me. I’m the Healthcare Technology and Services Analyst. Very happy to have with us to kick off day two, Sarah London, CEO, Drew Asher, CFO. Guys, thank you very much.

Sarah London, CEO: Thanks for having us.

George Hill, Healthcare Technology and Services Analyst, DB: Sarah, I know that you wanted to start off with some prepared comments before we get into the Q&A. Why don’t you kick it off?

Sarah London, CEO: Yeah, good morning. One of the things we talked about on the Q2 call was obviously laid out our view of the back half of 2025 and some key milestones. I wanted to just provide a couple of headline updates on those. I’m sure we’ll dive into a lot of the detail underneath them in your questions. At the highest level, you saw this morning that we reaffirmed our full-year forecast, which is the diluted EPS of $1.75. Underneath that, the Medicaid results for July and August were supportive of the HBR improvement trajectory that we’re looking for in the back half of the year. I’m pleased with that. We’ve been very focused on the refiling process for 2026 Health Insurance Marketplace rates. As of today, we’ve been able to successfully refile in states covering 95% of our membership.

Those are going through an approval process that usually wraps up at the end of this month. So far, we have the substantial majority of those approved. I’m pleased with the progress there and the ability to better reflect the acuity of the population that we’re seeing and the acuity that we’re anticipating for 2026 in those rates. The Medicare segment continues to be on track for the roughly $700 million of improvement that we talked about on the Q2 call. Based on preliminary data for STARS, that came in in line with our expectations and with our previous commentary. We’re expecting year-over-year improvement in STARS and actually a slightly better four-star percentage. Relative to overall revenue results, it adds confidence to our view that we will hit break even in Medicare Advantage in 2027. Good progress in a short period of time.

There’s a lot that we’re still paying attention to. I know we’ll dive into that, but I feel good about what we’ve been able to accomplish just in the last couple of months.

George Hill, Healthcare Technology and Services Analyst, DB: I mean, that sounds like all great news. I haven’t heard anything that we kind of poke a bone with yet. I think we’ll kind of pull them apart topic by topic. Maybe we’ll start with Marketplace. On the Q2 call, you guys had both called out there was the $2.4 billion of risk adjustment headwind that you guys were dealing with, and there was the $200 million of kind of back half pressure. I think a lot of us think of that as induced utilization that you guys had called out as headwinds. I mean, you guys reiterated your guidance this morning. I guess I would ask, do those estimates still hold? Is there the chance that those estimates could prove conservative? I would probably even focus on like the $200 million part and kind of let you dig into that.

Sarah London, CEO: Yeah, as of now, the estimates still hold. We are seeing pretty steady utilization in Marketplace. We had called out the fact that FTR, which we had originally anticipated was going to play out during open enrollment, had been delayed. We saw those numbers starting to come in for August. Those came in in line with our expectations. The $2.4 billion is really contingent on seeing the next tranches of weekly data. The next set of data there won’t come in until the end of this month. If there are updates on that estimate, we would be in a position to give that on the Q3 call.

George Hill, Healthcare Technology and Services Analyst, DB: OK. I would then ask you to provide a little more color, if you can, maybe at a high level on the rate adjustments. You said about 95% of the lives have been covered. Is there any way to kind of quantify what’s been asked for, what level you expect to be accepted? How should we think about sufficiency as we look forward, as you guys kind of roll forward to 2026?

Sarah London, CEO: Yeah, I’ll hit that at a high level. Drew should weigh in because he’s been very closely involved in that process. Obviously, as we built up the rate estimates and what we felt like we were going to need from a refiling standpoint, we looked at the fact that we still expect, we bid to the law of the land. Enhanced APTCs are expected to expire at the end of the year. I’m sure we can talk about where we think those are going. We assume those will go away and then needed to adjust for a view of the 2025 morbidity that we saw in the weekly data and then extrapolated view of what the morbidity shifts will be based on some of the program integrity rules that are slated to go in place for the 2026 open enrollment. Obviously, every state is a little bit different.

In general, in every state, we were looking for a step up in rates. I think, again, we’re able to successfully get rates that we feel address the morbidity both in 2025 as run rate going into 2026 and what we expect will shift across 95% of the population. In some cases, we also looked to pull additional levers where pure rate didn’t quite get us where we felt like we needed to be. We were really thoughtful about footprint, product mix, and things like that. Maybe give a little bit more detail.

Drew Asher, CFO: Yeah, really pleased with the visibility that we gained in late June and then obviously resulted in the press release on July 1. That gave us three or four really good weeks during the month of July. We actually met every night from like 5:00 to 9:00 P.M. going through every single product in every single state, making the judgments, and then, to Sarah’s point, getting them filed. Actually really pleased with the receptivity of the Departments of Insurance and having our actuaries engage with their actuaries such that, subject to the final approval process, which should be through this month, I feel like 95% of our current membership is covered with rates that we think are sufficient and appropriate. The other 5%, to Sarah’s point, there were two states where we didn’t get the rate we wanted. That represents this year’s membership, 5%. We took action. We pulled products.

We reduced service area. It should be substantially less than 5% in 2026. All things considered, pretty good. I’m glad we got the visibility when we did and were able to assimilate that weekly data. Obviously, as ugly as it was at that point in time, it really hopefully will contain this to a one-year issue.

George Hill, Healthcare Technology and Services Analyst, DB: OK. As we think about the profitability of this product segment, you guys had indicated on the Q2 call that you were expecting below break even in this year versus the target margins of 5% to 7.5%. I guess how should we think about, you know, there’s pricing, how you guys have changed product. How do we think about what the margin progression looks like or the march back towards the normalized margin progression in 2026? Are we in a situation where you feel like you can get all the way back or most of the way back in 2026? Is there kind of a step in the middle between where we are now and the target margin profile?

Sarah London, CEO: Yeah, I mean, we feel obviously very good about being able to get that substantial majority of the population back to sufficiency from a rate standpoint. I think it’s a little bit early to say exactly where we’ll land in 2026 from a margin standpoint. Margin improvement is the major focus in all of our business lines. We’ll get more information over the next couple of weeks just in terms of kind of pure filings and obviously going through open enrollment. I think that’ll give us better visibility to how much of that we’ll recover in 2026.

George Hill, Healthcare Technology and Services Analyst, DB: I imagine with the, I’m sure everybody here knows how we do this. I tried to give these guys some questions in advance. The reiteration of the guidance, I would assume then that the margin expectations in the segment for this year kind of stay where they are, given that the guidance has been reiterated. I guess do you guys have an early view on what you think this market looks like from an enrollment perspective in 2026? I would almost kind of ask the question of, without the subsidies, is this a sustainable market? If without the subsidies, do you kind of lose the low utilizing numbers to kind of mess up the risk pool? I’d just kind of love your high-level thoughts on that.

Sarah London, CEO: I mean, our view is it is definitely a sustainable market even if the enhanced subsidies go away because the Advanced Premium Tax Credits will still be in place. It’ll obviously be a smaller membership base. We had a very successful business at 2 million members, and there’s still 10 million members who sit in those uninsured populations. I think there’s also a lot of interesting interplay as states think about the Medicaid expansion population and some of the waivers that are out there around work requirements are making states think about whether there’s a play to leverage the Health Insurance Marketplace more. I think there’s still profitable growth in that business even if we get to the other side of program integrity rules and the enhanced APTCs.

I think there’s still a bit to play out on both of those fronts in terms of how much of that actually hits in 2026 and what sort of the sustainability of those guardrails are. We obviously are also very interested and focused on ICRA and defined contribution as another place to bring unsubsidized members into that product and broaden the risk pool, which will improve premiums, will improve the cost of subsidies. I think that’s something that’s actually very aligned with this administration and folks in CMS who are really interested in pushing that agenda. We’re watching both sides of that because I think the core product will get back to sort of a baseline and still be able to penetrate the market from there. There’s quite a bit of interesting opportunity on the ICRA side as well.

George Hill, Healthcare Technology and Services Analyst, DB: Yeah, I hear, I guess from the Washington side or from the policy side, there’s a lot of criticism of how the government has handled the Marketplace because the government seems to have driven some of the instability with things like the enhanced subsidies. There’s kind of like the changing of the risk pools hasn’t been your fault or your problem. It’s been policy changes that have impacted kind of what the population in that group looks like. I thought we could now shift to Medicaid for a second, talk about the HBR ratio. I guess I would just start off with, again, it feels like a question we’ve touched on a little bit is, do the margin expectations for 2025 still hold? You talked about the business basically trending in line with expectations.

Would love to hear you talk about margins and maybe by utilization type kind of what’s coming in better, what’s coming in worse, if anything at all, if everything’s coming in in line. What have we learned in the last six or eight weeks as it relates to Medicaid?

Sarah London, CEO: Sure. As I said, the results for July and August were supportive of the HBR improvement trajectory that we’re looking for in the back half of the year. If you go back to the framework that we laid out on the Q2 call, what were the underlying drivers, what have been the underlying drivers, and what drove the peak in HBR in Q2 was really behavioral health with a major focus on ABA, home health, and home and community-based services, and then high-cost drugs. We also had outsized impact in those areas in a couple of states. We called out Florida and New York in particular. If you think about the things that have improved and what has rolled forward, obviously 7/1 rates, which came in consistent with that 5% composite that we’re seeing for 2025. That helps us take a step down. We’ve got 9/1 and 10/1 rates.

10/1 rates are not final, but that cohort is also consistent with that 5% composite. Those will layer in this month and then in Q4. In Florida, as I mentioned on the Q2 call, starting in June, we were able to actually apply managed care principles to the ABA population, making sure that we have the right in-network highest quality providers, that those kiddos are getting therapy that is evidence-based and best in class. We saw a sequential impact from that coming into the Q2 call and continuing to see the right sizing of program application there. In New York, we have had some good success. We called out fraud, waste, and abuse, particularly in the ABA population, as a concern. We’ve had some recent success with providers that were having outsized impact in New York.

Really just thinking through each of those areas, as I mentioned, we’re organized at an enterprise level. We’ve got task forces looking at these and making sure that we’ve got the right providers, that we’re looking at fraud, waste, and abuse. We’ve had success with different states in terms of helping to influence clinical policy so that the program guidelines are consistent with evidence-based practice. I think that all of that is contributing, and we hope that continues to drive improvement as we look through the rest of the year. I don’t know if there’s anything you want to add.

Drew Asher, CFO: That was comprehensive.

George Hill, Healthcare Technology and Services Analyst, DB: That was very comprehensive. Maybe just a second, a topic that some of your peers have called out has been the impact of coding. Have you guys seen an increase in coding severity? Is that something that you feel like has impacted your business from a profitability perspective, I guess from an acuity perspective? Is that something that you feel like you can challenge in the Medicaid business?

Sarah London, CEO: Yeah, I think coding manifests in a couple of different ways. Obviously, there’s coding that fits in sort of a fraud, waste, and abuse bucket. I think we’ve gotten increasingly organized around that, leveraging AI for early detection on things like that, cycling those early warning signals out to our plans so that they can really interact with the provider and figure out, is it just a need for education, or is there something else going on there that requires intervention? I think we’ve also seen in pockets an acceleration of coding. If you think about hospital revenue cycle management systems, there have been some of these pockets where folks coming into the emergency department with a fever all of a sudden all have sepsis. There are some of those pockets. Again, there is enough detection in place on our side that as we see that, we’re able to intervene.

I think just continuing to be really thoughtful about how our program integrity rules and the underlying technology keep pace with what’s coming at us from the provider side. I don’t know if there are other examples.

Drew Asher, CFO: Yeah, I mean, I’ve talked to a couple of my peers where it does seem like the hospitals have gotten better organized around the application of AI for coding than payers. We’re going to catch up to that.

George Hill, Healthcare Technology and Services Analyst, DB: Yeah, that seems to me, as somebody who’s covered the technology space in healthcare a long time, that seems to be a cycle that kind of the providers get smarter, and then the payers get smarter, and then the providers get smarter. I’m not quite sure how long the cycle is, but that tends to be how it works. To distinctly separate, I kind of want to distinctly separate rates in Medicaid from rates in exchange. You said that the rate environment that you’re seeing for, we’ll call it 1-1, looks pretty supportive. I guess at a broad level, can you talk about the interplay between what you’re seeing in rates versus states that want to do benefit cuts versus plan design changes? I guess what I’m really interested in is how are your conversations with your state partners going about rate increases versus coverage versus benefit design changes?

Sarah London, CEO: This is for Medicaid?

George Hill, Healthcare Technology and Services Analyst, DB: Medicaid, yeah.

Sarah London, CEO: We don’t have visibility to 1-1. We’ve got 9-1 and 10-1 rates, final rates in 9-1 still, I think, all draft in 10-1. I think we’re seeing, we just continue to see good constructive conversation. I think folks, again, our view and working hypothesis has been that over the last 18 to 24 months now, we’ve been in a cycle with states where they have, because the circumstances are unusual on a relative basis, needed to incorporate more recent data into the rates as opposed to being tethered to a 24, 36-month look back. I think some of the rates that we’re seeing continue to be reflective of this idea that, one, we are coming through redeterminations. There needed to be a correction. There was a step up in these trend areas. There needs to be a correction for that.

I think continue to be constructive, continue to see more recent data more readily influencing the rates. We would expect that as we get to the 1-1 cohort, you have even more data in arrears to support what we would need. I think we have what, 40% of our book?

Drew Asher, CFO: 40% 1-1.

Sarah London, CEO: Three rates, 1-1. Again, supportive of our view that we want to continue to improve the Medicaid margin as we head into next year. We are seeing different program changes as well. I don’t know if you want to talk about some of the structural changes, PBM, things like that.

Drew Asher, CFO: Yeah, while they’re addressing most of this through, right, there are good collaborative discussions with states. Let me give you a couple of examples. In one state, they had moved to a single PBM. They thought that was a great idea. They thought they were going to have all this rebate dollar in their general funds and are realizing that the aggregate picture is not, it was much worse than what the payers could deliver. Actually, with a lot of education and data and influencing, we led the charge to convince them to move back to let the payers through our PBMs manage that cost and hold us accountable for it. That should take effect actually next month if it stays on track in that one state. Another example, a state had moved to GLP-1s for weight loss. They put a capitation in. They had an estimate.

They’re truing up the estimate. They’re looking at the escalating cost. I would bet that they’re probably going to move away from GLP-1s for weight loss given sort of the economic picture and the rates that they have to provide for the core business, but also some of these sort of unique decisions.

George Hill, Healthcare Technology and Services Analyst, DB: How closely are you guys monitoring proposed 1-1 rate increases? As we monitor it, we kind of find some of the numbers like they’re largely positive, but a little underwhelming given what trend looks like. I would imagine that you guys follow the projections the same way that we do and kind of would love your early thoughts on where you see states proposing 1-1 rates and whether or not those numbers look like they’re sufficient for 2026. A topic of conversation amongst investors is that it might be difficult to hit rate multiple consecutive years. Would love to hear you kind of talk about the history of getting rate updates from states in challenging environments.

Sarah London, CEO: You probably have better visibility to the deck where we are with 1-1, but I would say we’ve had now two years of very healthy rate increases, for example, in our 9-1 cohort. I think the idea that states won’t take multiple significant bites of the apple is not holding up if you look at how the data is actually playing out.

Drew Asher, CFO: Yeah, plus you have to remember in a lot of states, their aggregate Medicaid budget has, because the rolls have, they’re down 15%, 20%, 25% in some states due to redetermination. The aggregate dollars are there. Before you guys even mine out the first view of what are draft rates, which you really can’t hitch your wagon to because they often change a fair amount between draft and final, we’re in with their actuaries months and months ahead of time. We’ve been in this consistent process that Sarah described where states, I think they’re appreciative. They’re more in tune with sort of the flow of med cost data than, let’s say, two years ago.

That was one of the benefits coming out of the redetermination era, is their level of engagement and willingness and ability to ingest more recent data has, I’d say, vastly improved from, call it, three years ago. Yeah, Medicaid’s a tough business. It’s hand-to-hand combat in terms of convincing your partner through data and what the run rate is. Feel confident that we’re still on track to improve Medicaid going into 2026 from a margin standpoint off of our 2025 guidance.

George Hill, Healthcare Technology and Services Analyst, DB: OK, that’s super helpful. It’s great that you brought up redeterminations, Drew, because I think one of the things a lot of us think about is you’re starting to see states selectively pull forward the OB-3. I’m sorry, you get a lot of credit for pointing OB-3. I hadn’t heard that since you mentioned it on the Q2 call. Pulling forward the OB-3 requirements into 2026. I guess how are you, I’d love you to talk about the learnings of the redeterminations process as we entered the public health emergency as to how you guys think about the OB-3 implementation and the states that are trying to pull that forward. How do you think it impacts membership? How does it impact states? How does it impact state finances? How does it impact how you guys relate with the states?

Would love to hear kind of how you guys are thinking about that.

Sarah London, CEO: Yeah, in some ways, it’s sort of microcosmic implementation of the same thing we did with redeterminations. Maybe just stepping back. What we’ve seen is there are a handful of states, maybe six or seven, that have waivers into CMS. If you sort of look under, it’s interesting, when you look under the hood of those, the construction of true to Medicaid, the construction of each of those is different. You have some states that are going to, that aren’t actually going to do an eligibility check. They will let the expansion population be eligible for Medicaid, and then six months in, they will do a check, and then they will do a check every six months. Others have sort of a gatekeeper methodology.

The definition of sort of able-bodied and where the priorities of the states are, you can just see from looking through it, it’s all a little bit different. We take the same approach that we did with redeterminations, which is tracking this on a state-by-state basis, staying very close to the Medicaid agencies, tracking the legislation that went through in 2025. A number of states put legislation through that would then catalyze work requirements. We aren’t yet seeing indications of more than really one state trying to actually implement in 2026 because the lift on this is going to be nontrivial.

I think the idea that states are trying to get themselves to a place where they have a program framework in place by the end of this year and then have 12 months to execute on that for those states that are sort of on the front lines of executing on that is at least what we’re seeing so far. May that accelerate? It might. We’re in sort of very regular contact with our Medicaid agencies in each of those states to understand what they’re going to do, how they’re going to implement it, how they may rely on us. There’s the one state that’s actually, if somebody doesn’t qualify, they want to match them up with a success coach. The question of, is that a service that we could provide? What does that look like?

The idea is really to get people to a place where they’re eligible and working, and then ultimately, they graduate off Medicaid. We’ve got work programs in place in 17 of our states already. That’s just something we normally do. I think leveraging that infrastructure, understanding what the states are trying to do, figuring out what technology solutions may end up getting endorsed by CMS, all of that stuff is in flight right now. Relative to the impact, I think it’s important to note what Drew just said around redeterminations is the same dynamic in this case, which is states are paying for all of these expansion numbers today. As those folks roll off and there is a need to fund the risk pool differently, there are dollars in the state budget to do that.

It’s going to be important to try to get them to get as ahead as possible on those rate adjustments. The only other thing I would add is I think different from redeterminations where it was a very broad swath. There were lots of different cohorts that were being redetermined, and it was a lot harder to track sort of who might precisely roll off. With the expansion population in most states, it’s a single rate cell. We know who those members are, so it’s really just about estimating what the impact will be. The calculation and being able to get in front of the actuaries and say, if it’s 30%, if it’s 50%, if it’s 10%, what’s your assumption? We can actually do the math, I think, with a lot more clarity than we could through the redeterminations process.

George Hill, Healthcare Technology and Services Analyst, DB: Maybe just a big enough point you just made there. What is the state actuaries, I’ll call it their level of receptiveness to that forward-looking conversation versus I think of actuaries just driving in the rearview mirror? They’re great at telling you what happened in the last 24, 48, 36 months and want to keep that forward project. How receptive do you find them to those conversations of, no, the population is going to change a lot. The rate needs to change to it.

Sarah London, CEO: I think it would have been different like two years ago. The number of times they’ve seen the population change to the front windshield is a little different now.

Drew Asher, CFO: Yeah, I mean, look, actuaries are always going to want as much data as possible. It’s almost like they’ve been retrained to ingest more recent data because of the redetermination process over the last two to three years. A few years ago, if work requirements would have been dropped on us, absent what we’ve learned over the last few years, I think there might be more of a delayed process. There’s receptivity. It’s a balance, and they’re going to want to see some data as well. Even in the redetermination process, we got a number of states to sort of make estimates and bake them in in advance of them even commencing redetermination.

I think we’re just going to improve off of that as we think about forecasting the impact of, to Sarah’s point, what proportion of already a slice of our business, like the expansion population and then the able-bodied part of the expansion population, and then those that can’t get qualified through those a number of vehicles that we do currently in 17 states. I think there’ll be more receptivity certainly than there would have otherwise been.

George Hill, Healthcare Technology and Services Analyst, DB: Yeah, I mean, you kind of crystallized it perfectly. It’s like you want to get the rate ahead of the change, and the actuary wants to see the data to justify the rate. You consistently, it’s kind of a chicken and an egg thing from your perspective, I guess. How do we think about, everybody’s kind of focused on 2026 right now. I know that you guys don’t have 2026 guidance out there, but how do you think about the cumulative impact of OB-3 and maybe the staging of 2026 versus 2027 versus, I’ll call it 2026 versus beyond? Have you guys thought about if you were to bucket impact kind of by year, 2026 and then call it beyond 2026? How do you guys think about that?

Sarah London, CEO: It slightly depends on which components of the bill we’re talking about. The Marketplace final rule, a lot of which got baked into the bill in order to drive consistency, in order for CBO to get savings for those provisions, obviously would implicate 2026 open enrollment. That rule has been stayed by the court. There is a question of how much of that will actually get implemented for 2026 open enrollment versus being pushed to 2027. I think that is something we’re watching very closely. Obviously, all of the Medicaid provisions are mostly 2027 and 2028. The question is, do some of those pull forward to some degree? As I said, we’re watching that closely. We’re seeing movement. We’re not seeing concrete data points that suggest you’re going to have a lot of states that are in flight yet in 2026.

Based on how it sits today, I think you would expect the majority impact of that to hit in 2027, part of 2028. Some states may file to push. If they’re sort of making good faith efforts, they can push to 2028 or beyond. I think you’ll see 2027 and then some tail probably into 2028. Again, coming through 2026 and into 2027, the big thing for us is the administrative work aligning with our states to make sure that we’re supporting those numbers and whatever efforts the state needs us to be trailing relative to eligibility and things like that. The rate conversation, trying to get ahead of that in 2026 and then make sure that we’re matching that as we go through 2027.

George Hill, Healthcare Technology and Services Analyst, DB: That’s helpful. I guess, Drew, I wouldn’t be doing my job if I didn’t start to ask, from this view, thinking about 2026 earnings, I kind of wanted to start with how are you guys thinking about what is the, I know $1.75 is the guidance for this year. Is that like the right jumping-off point?

Sarah London, CEO: You wouldn’t be doing this job if you didn’t ask for 2026 guidance.

George Hill, Healthcare Technology and Services Analyst, DB: You wouldn’t be doing it, right?

Drew Asher, CFO: I wouldn’t be doing my job if I said we’re not giving it.

George Hill, Healthcare Technology and Services Analyst, DB: Which is why I’m going to ask you about this.

Drew Asher, CFO: We can talk about directional. We did on the Q2 call about we expect, call it our three core lines of business, Medicaid, Medicare Advantage, and Marketplace margin improvement in 2026. We still feel like that today, having two more months under our belt, which is really important as we think about launching off the back half of this year. The magnitude, TBD. We need to see landscape files. We need to see all of the competitor data for some of those businesses and more visibility on the benefit of the levers we’re pulling in Medicaid in some tough areas like behavioral health, home health, private duty nursing, ABA services. I feel like we’ve got pretty good momentum coming off of these two months. Two months don’t make a half year. We’re a third of the way there in terms of the back half of this year.

We’re definitely focused on 2026 and beyond to drive margin improvement.

George Hill, Healthcare Technology and Services Analyst, DB: That’s great. If I think about the callouts from the Q2 call, I would probably like to talk about the $2.4 billion in Marketplace. Should we think of that as that’s something that you get back next year through pricing changes that you guys have implemented at the state level in Exchange? I’ll say net of population change, net of benefit design. Is that something that you can basically price back? I’m trying to figure out how should we adjust the 175 as the jumping-off point for 2026. What I’m really focused on is which of the things that were called out in Q2 should be thought of as kind of one-time things that will not repeat versus which should be fully embedded in your earnings going forward.

Drew Asher, CFO: Maybe look at it like this. We said we were slightly below break even this year in Marketplace. That includes the $2.4 billion change that we laid out in the Q2 call. First, you have to recalibrate to a smaller market given the program integrity efforts. We all need to see what the size of that market is and therefore our positioning. As Sarah said earlier, what step are we going to make towards a fully recovered margin? We’ll have to see once again based upon our positioning of product and the Marketplace. We went into the bid process or the rate filing process, margin, margin, margin because we’re not going to run a business at a loss. We’ve got to recover that. We’ll just need to see where the membership shakes out.

George Hill, Healthcare Technology and Services Analyst, DB: OK. Do you guys have any early thoughts on how that, on how I’ll just call it not your membership, but membership at a macro level will evolve in that business in 2026?

Sarah London, CEO: In marketplace?

George Hill, Healthcare Technology and Services Analyst, DB: Yeah.

Sarah London, CEO: I mean, if you assume that enhanced APTCs go away, if you assume the final rule gets implemented, we would absolutely expect market contraction and sort of compounding market contraction from those two factors together. I think, again, people have put out estimates anywhere between like 15% and 50%. I think we’re probably sort of right in the middle of that. A lot of it does depend on, and honestly, even if enhanced APTCs were to get extended, the question of when those get extended, there are a bunch of sort of moving parts there. If you just take it purely as it sits today, I think those two are sort of compounding in terms of what they’ll drive in market contraction.

George Hill, Healthcare Technology and Services Analyst, DB: Kind of when and for how long, I guess, too, if they get extended. The response of extending these.

Sarah London, CEO: Oh, I’m sorry. You’re talking about market contraction?

George Hill, Healthcare Technology and Services Analyst, DB: No.

Sarah London, CEO: Quickly. I would say there’s been a significant uptick in the dialogue around enhanced APTCs just in the last couple of weeks. I think a different level of on-the-record receptivity from the Republican Party around how important these subsidies are for their voting base. As they think about 2026, I think that’s really front of mind. Our question is really sort of what’s the vehicle? I think there are three potential options. One would be a continuing resolution where you actually need, you’re going to need bipartisan support. I think the enhanced APTCs are very, very, very high on the list of priorities for Democrats. Does that bring the conversation together? An independent health care bill where there are a couple of things I know that didn’t get into OB-3 that folks are really interested in seeing come forward would be another vehicle, sort of intermediate vehicle.

The last would be the omnibus at the end of the year. The continuing resolution would be very interesting in that it would happen sooner, and so being able to adjust for expectations in open enrollment for members. As of now, we, again, have priced to law of the land. It is unclear what would then happen if enhanced APTCs were extended relative to those bids.

George Hill, Healthcare Technology and Services Analyst, DB: Pivot to Medicare for a second. Great to hear that Medicare continues to outperform. Great to hear that STARS performance seems to come in a little bit better than you guys have expected. I guess I would ask, can you provide an update on what’s driving the Medicare outperformance? How should we think about MAPD versus how you guys are doing very well in Part D? Any early thoughts on how the Part D market will shape up in 2026?

Sarah London, CEO: Yeah, I’ll let Drew cover Part D. I think Medicare, you know, we’ve been really thoughtful. Obviously, we’re in margin recovery mode. We’re very focused on marching to break even. We’ve been very focused on strategic, thoughtful bids. We did a lot of work to refine our footprint and reduce our age contracts to make sort of the administration of that product more efficient. We’ve been working on clinical initiatives, SG&A. Obviously, STARS is a component of that improvement. I think just being thoughtful about what we baked into bids in terms of trend, obviously had that step up in 2023. We’ve continued to watch that step up and continued to make those assumptions in our bids.

It’s a bit of strategic bidding and then managing the product well and continue to expect improvement in 2026 on the path to break even in 2027, which again, we feel incrementally confident about based on some of those four-star results that we saw just recently. Do you want to talk about Part D?

Drew Asher, CFO: Yeah, PDP as a business, 7.8 million members. We’re eight months through, got two more months under our belt, still performing well in PDP, better than what we had originally guided to, as evidenced by a big piece of that $700 million that we talked about on our Q2 call. As we look ahead, the team did a really good job again estimating the national benchmarks and the direct subsidy, which came in at $200 and change. That was right in line with our expectation. That’s really important as you think about relativity to benchmarks. We’re successfully below the benchmark for the low-income population for the auto-assigns in 34 out of 34 regions for 2026. That was good news as you think about the stability of that cohort versus the non-low-income cohort, which had the accelerated specialty trend.

Plowing through it, managing through it, looking forward to another good year in 2026. Based on the preliminary results, we need to see where our peers came out to predict 2026.

George Hill, Healthcare Technology and Services Analyst, DB: We’ll shift kind of to maybe balance sheet and cash flow as it relates to the company. Drew, you’d mentioned a potential goodwill write-down on the second quarter call. I guess have you guys made any further determinations as it relates to the goodwill write-down? I’d be interested to think about, are there any derivative impacts of the goodwill write-down? Just because I know some of the companies’ debt covenants are based on debt to capital. We’ve had questions around whether or not there’s downstream impacts of a potential goodwill write-down.

Drew Asher, CFO: Yeah, no, those are good questions. Every year we go through a goodwill evaluation. We usually do it in the fourth quarter. This year, we accelerate it to Q3 because of the market cap drop. Others may have to do the same in terms of just the normal process of retesting goodwill and looking at the present value of your businesses and the goodwill attached to that. The only downstream impact, and I know there’s been a lot of, I don’t know, chatter or hand-wringing about statutory subs, all the goodwill sits at the corporation. None of it is down in statutory subs. There’s really no stat sub implication for any non-cash goodwill or intangible write-down. We redid our credit facility fortuitously. When money’s available, you go get money.

We did that with our credit facility in Q1, which is untapped as of 6/30, $4 billion credit facility with one covenant, which is debt to cap at 60%. We’re at 39% debt to cap as of 6/30. Plenty of room. We’re going to go through the process and evaluate goodwill. We’ll probably have an answer on the Q3 call, but not concerned about any downstream impacts to the extent that there is a goodwill write-down.

George Hill, Healthcare Technology and Services Analyst, DB: OK, that’s a comprehensive response. I guess, does any of that change how you guys think about excess capital and capital deployment, and kind of update us on the company’s capital deployment priorities?

Sarah London, CEO: Our priorities haven’t changed in that our top priority is obviously funding the business and organic growth opportunities and making sure that we’re driving the most efficient cost structure just in how we operate. I think looking at, as we get through the back half of this year and have a better view of cash flow, we go through the same process always of looking at debt, looking at the opportunity for share repurchase, still looking at M&A opportunities as they present themselves. No significant change.

George Hill, Healthcare Technology and Services Analyst, DB: The last question for me would be just thinking about discretionary costs and discretionary spend inside of the business, given potential changes that could occur in 2026 and beyond in some of the company’s key markets. I guess how much flexibility do you feel like you have in the discretionary cost profile to scale up or scale down business changes?

Sarah London, CEO: We’ve been doing a lot of work on that over the last couple of years. I think what are we, $600 million?

Drew Asher, CFO: $500 in the Q2 call?

Sarah London, CEO: Yeah, in SG&A. That has become a muscle in the organization. Obviously, thinking a lot about that as we think about potential contraction in membership across our businesses and making sure that we’re scaling down to efficiently serve those populations. I think this has also catalyzed us to look at sort of across the portfolio and say, where are there further opportunities to, our goal is really to deliver market-leading outcomes with a market-leading cost structure. Are there further opportunities to drive standardization, centralization? That, again, has been an ongoing drumbeat and something that I think we’ll continue to organize around as we move into 2026.

George Hill, Healthcare Technology and Services Analyst, DB: I keep saying last one. Last one would just be, I guess, just from where you sit right now, a question we constantly get is kind of thinking about the long-term margin structure of the three lines of business that you guys principally operate in. It sounds like from this vantage point, there’s kind of no real changes about how you guys think about the long-term margin potential of the three operating segments.

Sarah London, CEO: Yeah, I mean, I think OB-3 has, in some of the recent regulatory changes in Medicare Advantage, I think we’ve got to see how those land over the next couple of years and if that impacts, to some degree, structural long-term margin. I think our view is we’ve got a big margin improvement opportunity ahead of us in all three lines of business and the ability to build back as efficiently as possible so that we can perform at the top end of industry margins in each of those lines of business. I think we’ll want to see how OB-3 plays through in the implementation. We still feel like we’ve got a really solid portfolio. There’s really nice synergy in the portfolio, obviously significant margin improvement opportunity in the portfolio, and then organic growth still to mine in each of those lines of business.

George Hill, Healthcare Technology and Services Analyst, DB: All right, Drew, that’s all you get from me. I appreciate the time. Thank you.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.