Centene Corporation discussed its financial performance, market risk adjustment challenges, medical cost trends, updated 2025 outlook, and the impact of policy environment on 2026 and beyond during the earnings conference call in the second quarter of 2025. The meeting also highlighted the measures taken by the company to address risk adjustment challenges and restore profitability, as well as expectations for profit capability in 2026. In addition, it mentioned the increase in medical costs and corresponding strategic adjustments due to policy changes.

The company faced an adjusted loss of $0.16 per share in the second quarter of 2025, falling short of the financial targets set at the beginning of the year. The main focus is on restoring profit growth, with the team taking urgent and disciplined actions to improve overall business performance and create value for shareholders. For the market business, proactive measures are being taken to achieve recovery and strengthen profitability in 2026; in the Medicaid business, the reasons for the performance trends have been identified and necessary corrective actions are being taken; and for the Medicare Advantage business, significant operational progress is being made with a projected break-even in 2027 and subsequent profitability. In addition, a detailed analysis of market risk adjustments and their impact on performance, as well as pricing adjustments and market strategies to address these challenges, has been conducted. Despite the challenges, the company remains committed to supporting its members in obtaining necessary health insurance coverage, while focusing on restoring the profitability of the market portfolio in the short term and achieving sustainable profit growth in the long term.

Medical cost trends are significantly increasing in the three areas of behavioral health, family health, and high-cost medications, with behavioral health, especially the application of Applied Behavior Analysis (ABA), being the main driver of quarterly cost increases. In response, the company has established a dedicated task force focused on improving member alignment with high-quality service providers, educating state-level partners to follow clinical guidelines, advocating for behavioral health-specific rate adjustments, and combating fraud, waste, and abuse. Additionally, pressures on Home and Community-Based Services (HCBS) in New York State due to insufficient rates and state policy changes have increased, and the company is actively adjusting to improve trends. High-cost medications, such as cancer drugs and gene therapy, are also driving cost increases, and the company is closely collaborating with partners to ensure the clinical appropriateness of treatments and educate state agencies on implementing sustainable cost control strategies. The company is actively seeking rate adjustments that reflect current trends to achieve meaningful marginal improvements in the Medicaid business.

In the 2025 Medicare insurance plan, the number of PDP members stabilized at 7.8 million, exceeding expectations, leading to an improvement in annual performance outlook. Despite facing regulatory changes, the company remains cautious about the outlook for PDP, but still expects profit growth. At the same time, Medicare Advantage has made significant progress in restoring profitability, benefiting from effective pricing, optimized coverage areas, and ongoing operational discipline. Business performance slightly exceeded expectations, with the company emphasizing improvements in clinical indicators for chronic disease patients. Despite challenges, the company is confident in reaching the goal of balancing Medicare Advantage revenues and expenses by 2027, and does not rely on further star rating improvements.

The company's adjusted earnings forecast for 2025 is $1.75 per share, influenced by six main factors including changes in market health conditions, increased medical insurance utilization, adjustments in medical subsidy rates, changes in the ratio of medical subsidy to health insurance, favorable changes in the medical insurance sector, and positive control of operating expenses. These factors collectively led to the adjustment of the original forecast from $7.25 per share to $1.75 per share. It is worth noting that changes in market health conditions resulted in a headwind of $2.4 billion in full-year pre-tax earnings, while changes in the medical subsidy to health insurance ratio led to approximately $2.1 billion in pre-tax earnings headwinds. At the same time, the company expects to achieve approximately $700 million in pre-tax earnings improvement in the medical insurance field. The biggest risk for forecast volatility lies in accelerated trends in medical subsidies, while potential positive factors include updates in medical subsidy policies, advancements in clinical interventions, and the effectiveness of anti-fraud, waste, and abuse measures. The company will closely monitor market dynamics and key data points in the coming months to further clarify the full-year outlook.

The company is expected to achieve margin improvements in its three core businesses by 2026 compared to the forecast for 2025. Specifically, it plans to make significant margin improvements in its market business through repricing, while using market trends and data insights to guide decisions. Additionally, through policy changes and the implementation of key initiatives, the company is confident in significantly improving the health insurance loss ratio in the medical subsidy business in the next 12 to 18 months. For the health insurance advantage business, continuous improvement is expected in 2026, with a projected break-even point in 2027. The company is adapting to industry evolution by stress testing market conditions, exploring platform synergies, and strengthening economies of scale to ensure sustainable and profitable growth.

In the second quarter of 2025, the company reported $42.5 billion in premium and service revenue, but experienced a disappointing adjusted loss of 16 cents per share. Despite facing challenges, the company is actively developing multi-year implementation strategies to address changes in the policy and legislative environment, particularly establishing a new stable foundation for projects under the OB 3 policy. The company is leveraging strong partnerships with state governments to maximize the impact of tax revenue and enhance coverage for vulnerable members of the market. Although the individual market is expected to shrink before 2026, the company is confident in the stability of the future of Medicaid, Medicare, and the individual market. At the same time, the company is closely monitoring potential policy changes from CMS to improve efficiency and project integrity. By focusing on the company's mission of transforming community health through individual health improvement, the company believes it can establish a lasting and unique position in this critical market, creating tangible value for members, stakeholders, and shareholders.

The dialogue delved into the analysis of 2025 health insurance market data, particularly focusing on observations of the federal exchange market and state exchange market, revealing the correlation between changes in high-risk pools and adjustments in insurance premiums. It was pointed out that the integrity requirements of insurance plans in 2025 led to a decrease in low or zero utilization members, thereby affecting the composition of the risk pool, which is expected to have a significant impact on health insurance premiums in the 2026 market. As of now, 17 re-adjusted rates have been submitted, and the adjustments for the remaining states are expected to be completed in the next week, with approval expected in August. This data significantly impacts the pricing strategy for 2026.

The dialogue elaborated on the trend driving factors of the medical insurance business in the second quarter of 2025, especially the accelerating development of behavioral health services, such as the application of Applied Behavior Analysis (ABA) and other related counseling therapies. The discussion also touched upon collaboration with state partners to adjust rates and drive policy improvements, particularly in addressing shortcomings in risk adjustment mechanisms and enhancing healthcare affordability. In addition, it mentioned cash flow, operational improvements, and forecasts for adjusted earnings per share for the full year of 2025, emphasizing the need for in-depth analysis of business operations, trend driving factors, and management costs.

The company estimates that the adjusted tax rate for the full year of 2025 will be approximately 19%, which may be subject to change due to actual pre-tax income. Due to changes in market capitalization and the passing of specific regulations, the company will conduct goodwill evaluations and tests in the third quarter, resulting in the inability to provide equivalent data for adjusted earnings per share (EPS) under Generally Accepted Accounting Principles (GAAP). It is projected that premium and service revenue in 2025 will reach around 172 billion, with 89 billion coming from the medical subsidy portion, 41 billion from the commercial portion, 37 billion from the medical insurance portion, and 5 billion from other portions. Despite potential unexpected changes in the market risk pool in 2025, regulatory changes in 2026 and beyond, and the misalignment between current medical subsidy rates and medical costs, the company emphasizes the long-term improvement potential and importance of its business, aiming to provide value for economically disadvantaged and medically complex members and government partners. The company is committed to demonstrating future improvement results.

During the discussion, the company detailed its capital plans for the second half of 2023, expecting to inject a net capital of $300 million into its subsidiaries. It also mentioned the updated $4 billion credit facility and its current debt to capital ratio of 39%, well below the 60% contractual limit. The company also noted that although expected dividends will be lower than previously anticipated, it has sufficient capital headroom and is focused on improving operational efficiency and increasing profitability levels for 2026.

The conversation delved into a discussion on the risk adjustment, market truth, and strategic planning for the public health insurance exchange market in 2025, as well as for 2026. It mentioned the member attrition, market contraction, and resulting health risk transfer issues caused by measures to ensure program integrity in the market. Additionally, it discussed the expectations for 2026, including enhancing profitability, adjusting target profit margins, and re-pricing strategies in response to changes in the market environment. It also mentioned how factors such as the expiration of expected enhanced advanced premium tax credits (APTs) policy, overall market contraction, would affect their market strategy and re-pricing process.

The discussion on the company's expectations to achieve higher earnings in 2026 was held, highlighting the marginal improvements that will be achieved in all business lines. At the same time, questions regarding the second quarter healthcare business report were addressed, explaining the company's expected 140 basis points improvement in healthcare business in the second half of the year compared to peers.

The dialogue delved into the performance of Medicaid in the second quarter, particularly dissatisfaction with 949, and the main factors contributing to this result, including behavioral health, family health, and high-cost drugs. Mention was made of accelerating trends in specific states such as Florida and New York, and targeted measures taken for these areas, including appropriate utilization management and helping state governments understand and optimize clinical policy guidelines.

The conversation focuses on discussing strategies to improve healthcare efficiency by optimizing networks, improving provider quality, effectively aligning members with high-quality providers, and actively combating fraud, waste, and abuse. It emphasizes taking action and making progress in addressing fraud issues, particularly in the behavioral health field. Specific policies tailored to different states, such as Florida and New York, have been implemented to combat fraud and support health rate updates. The overall strategy aims to drive continuous improvement and efficiency in the healthcare system, laying a solid foundation for achieving meaningful marginal benefit improvements in the next 4 to 6 years.

The conversation revolved around membership trends in the health insurance market, market size, and expected member attrition and market contraction. It was mentioned that market growth was lower than expected, and the market may have actually contracted during the 2025 open enrollment period, with membership expected to decrease from 5.9 million to 5.4 million by the end of the year. The discussion also touched on the impact of failure reports, program integrity measures on member attrition, and predictions for market trends in the coming years.

Discussed were the risk adjustment strategies for health insurance for the year 2026 and beyond, emphasizing adjustments in product structure, network partners, and market strategy to optimize long-term sustainable marginal profits. At the same time, measures were mentioned to use market size and influence to promote market transparency and stability, including providing demographic data in advance and collaborating with administrative departments to ensure policy changes are clear before pricing, to promote the stability and sustainable development of the health insurance market.

The discussion focused on the current pressure on Medicaid, expectations for the next 12 to 18 months, and how to restore target margins. The speakers pointed out that despite the pressures of cost trends and changes in risk pools, as well as possible reductions in membership, improvements in Medicaid margins are expected in the next 4 to 6 years, starting in 2027, through proactive dialogue with state governments, real-time data integration, and more forward-looking strategies. In particular, adjusting rate setting methods to adapt to rapidly changing environments is necessary given recent challenges and expected policy changes (such as work requirements and verification requirements), and some states have already begun adopting mid-term rate cycles to respond to real-time trend changes.

In the discussion, the health insurance company detailed its expectations of achieving a Net Loss Ratio (NLR) of 93.5% in the second half of the year, emphasizing strategies in controlling costs, optimizing networks, and enhancing clinical policy efficiency to address the accelerating trends. Additionally, the company discussed its strategies for the Affordable Care Act (ACA) market, planning to achieve the goal of recovering profitability from slightly below breakeven in 2025 to profitability in 2026 by focusing on profit margins rather than membership numbers. The company stated that although the specific range of profit margin improvement for 2026 is currently difficult to determine, it is aiming to achieve a meaningful increase in profit margins through prudent pricing strategies and continuous observation of market dynamics.

The conversation discussed the performance of the Medicare Part D department, mentioning approximately 7 million pre-tax income and the DNA leverage effect in business progress. The discussants expressed satisfaction with the profit margin of the Part D business, which is higher than the previous 1% target, and mentioned the upcoming national bidding. They also discussed the outlook for the Part D business in 2026, considering the impact of continuing the demonstration project (demo). Additionally, it was mentioned that the Medicare department's stable membership throughout the year and the expected upward trend due to the impact of the IRA (possibly referring to individual retirement accounts in the US or the Inflation Reduction Act).

The discussion delved deeper into the health insurance market, particularly focusing on the progress of the marketplace and exchanges, as well as potential changes in the risk pool observed in Queens. The conversation pointed out that the biggest influencing factor was the shift in disease rates, while also noting a more significant trend in new member utilization compared to renewing members. Additionally, an interesting hypothesis was mentioned that due to the possibility of Congress canceling health insurance, coupled with macroeconomic uncertainty, there has been a shift in behavior when using the healthcare system. The discussion also explored the proactive billing and coding behaviors of healthcare providers when faced with the risk of decreasing income, and the resulting increase in system utilization. Looking ahead, the conversation mentioned trends forecasts for the second half of the year that take these factors into account, and highlighted the potential for early demand before subsidies expire.

The conversation discussed the phenomenon of increasing medical coding intensity observed in the insurance industry, which is mainly driven by revenue cycle activities in hospital systems. Facing this change, insurance companies are utilizing AI to enhance payment integrity, in order to address possible waste, fraud, and abuse, while ensuring the reasonable use of taxpayer funds. Additionally, with more members using medical services, it is expected that a higher disease burden will be recorded, requiring insurance companies to adjust their strategies to accurately capture and respond to market changes.

This conversation delved into the expected changes in the health insurance market in the second half of the year, including member attrition, utilization, and the issue of duplicate registrations identified by CMS (the Centers for Medicare & Medicaid Services). The discussion mentioned the potential impacts of risk pools, especially in handling work requirements, reconfirmations, or procedural cancellations, emphasizing the best practices and strategies that need to be taken to avoid unnecessary pressure and risks. Additionally, the discussion also focused on addressing future challenges through scaling and efficiency improvements, including digital enrollment and re-enrollment, and how to leverage policy changes to promote digital interactions with members to ensure eligible members can access necessary coverage.

At this meeting, the company's leaders thanked the team for their hard work and contributions to the healthcare industry, emphasizing the significant progress the team has made in organizational transformation over the past three years. Despite facing challenges currently, the leaders are confident in the team and believe they can continue to drive transformation in community health services, fulfilling the mission of providing health support for everyone.