Centene Stock

Good morning, everybody, and welcome to the DB Healthcare Summit. I'm George Hill. I'm the Health Care Technology and Services Analyst at DB. I cover the MCOs and a bunch of the health care technology stuff. I call it the stuff. I'm very happy to have with us this morning Centene CEO, Sarah London; and CFO, Drew Asher. Good morning, guys.

Thanks for coming back. Sarah, you guys reiterated your 2026 guidance this morning of at least $4.80. I thought I would kick it to you to start. I guess just talk to us about the reiterated guidance. Any other introductory comments that you want to make? And then for Sarah, Drew, if there's anything that you want to say as it relates to utilization or the moving pieces or if there's anything different, would love to hear what you guys have to say to kick it off.

Happy to provide a couple of updates on the quarter and then go deeper into any of it. Obviously, reiterated our full year adjusted diluted EPS guidance of greater than $4.80 this morning. I'm pleased with the trajectory of the business through 2 months of the quarter. We are in line with expectations. Trends that we're seeing in Q3 broadly across lines of business consistent with trends that we saw in Q2.

Some of the highlights per business line. So Medicaid rates are coming in, in line with expectations and consistent with that 5% composite full year outlook for rates overall. In addition to just continued focus on quality and affordability initiatives, our major focus is obviously working with our state partners as they are gearing up and in some cases, starting to implement work requirements. So that's taking more and more of the focus on the local level.

From a marketplace standpoint, we are through the pricing cycle, continue to be focused in that business on sustainable margin versus membership. We've also continued to engage with CMS on program integrity efforts across the ACA and believe that we've fully accounted for the potential impact of that work in our full year guidance. And obviously, thinking about where we were with that business at this time sitting here at this conference last year, very pleased with the recovery and still on track for that 4.5% to 5% margin for 2026.

Medicare also gearing up for major selling season. We talked a little bit about this on the Q2 call, but our focus in Medicare going into 2027 was really portfolio simplification and continuing to focus that portfolio and design explicitly around duals and complex populations and markets where we feel like we can be competitive, both because of our overlap with our Medicaid footprint and the ability to leverage those local resources to deliver a differentiated service model.

So I think that's what you'll see. Obviously, we'll have a more fulsome view of the competitive landscape in Medicare over the next month or so as we get the landscape filed, but really focused on building a platform there that will set us up for breakeven or better in 2027 and continued margin progression thereafter and continue to feel good about how that business is performing in 2026.

And last but not least, PDP. We're pleased to be below benchmark in all 34 of our regions going into 2027. We -- I think this news sort of came out after the Q2 call, but the discontinuation of the premium subsidies in the demo, we tend to take a conservative approach in terms of relying on the continuation of demo, not concerned about the impact of that in 2027 and continue to be on track for 3% plus margins in PDP. So all in all, feel good about where we are in the quarter and feel very good about where the business is year to date.

Okay. Sounds good. Drew, do you want to add to that?

No, that was a great summary.

Yes. Great summary. All right. Well, with that, I think we'll dive into some of the specifics. And given that it's one of your larger lines of business, I'll start with Medicaid. And maybe I'll just ask you to get a little bit more granular. Maybe update us on the outlook for segment profitability in '26. Maybe talk about cadence a little bit. And any parts of the business you'd call out as it relates to strength or weakness either from a rate perspective or utilization perspective?

Yes. Not much has changed since our view on the Q2 call. So obviously, came into the year aiming for the flat HBR 93.7% and then saw strength in Q1. So still on track for that 93.5%, so still showing margin improvement in year. We did talk about the fact that because some of our states are sort of tightening their processes around eligibility in preparation for work requirements and then some states are actually pulling forward components of the H.R. 1 implementation that we were expecting an increase in membership decline. So that's the target originally 6%, 8% to 9% at the end of the year. So still on track for that.

Trends that we're seeing in the quarter, very consistent with the trends that we've been tracking broadly. So behavioral health, home health, high-cost drugs. Those are the areas that we have really focused a number of our initiatives. So again, not a lot different. We are learning more about how states are approaching and planning to approach work requirements. So most states are leaning toward a monthly eligibility check, which will create a more gradual impact around the membership declines over '27 and '28.

And I think that will be very helpful both in terms of ensuring that members have the right support. We have the ability to deliver documentation, get them engaged in work opportunities and community engagement opportunities and that rates have a chance to keep pace with the membership and acuity shift. And then we have a couple of states that have already started implementation of work requirements. And so far, things are playing out in line with expectation, but very early smaller states, so not sort of a full extrapolation. But a lot of good data coming out of the back half of this year that I think will help us inform our view of how this is going to play out in '27 and '28.

Yes. Maybe I'll double-click on one of those points for a second. As it relates to your guys working with the states around work requirements and community engagement requirements, can you spend a second talking about what is Centene's role there? And what role do you play versus like how -- like where do you guys play a role in the process versus at what point does the -- I'll call it, either the state administrator or the state organization play a role in determining eligibility?

Yes. The -- well, eligibility is determined by the state in all cases. But we have an important role to play in terms of being able to provide data that we have. And if you think about what just recently came out from CMS in terms of the definition of medical frailty, which broadly defined categories for states, which provides a little bit more flexibility, but I think was actually helpful in terms of guiding states to leverage objective data that exists in systems and some of that is data that we have.

So one of our major areas of focus over the last couple of months has been building the data interfaces with states. So as they think about that automatic or ex parte determination of eligibility, we can help them be fully informed on that initial decision. And then the other big piece is really helping to make sure that members are educated about what information they need to provide, what process they need to go through in order to document the places that they're already engaged and therefore, eligible.

And we have a number of resources we have work programs in 17 states that we can leverage. We have great partnerships with nonprofits. We know a lot about how to get people engaged in work and in the community. And everything is a little bit different in terms of where they snap the line on that engagement. But broadly, they are looking for us and for the other community partners to create opportunities for members to be engaged and ultimately to be eligible.

And I said this before, but the goal of work requirements from a CBO standpoint was to create budget savings. But when you get down to the level of the Medicaid directors, really the goal -- and even CMS has this perspective, the goal is to get folks engaged and working and engaged in the community because we know that, that actually drives better health outcomes. So there is really good alignment on the ground around that.

That's fantastic. That's great color. You talked about the rates trending towards the 5% composite that you guys were targeting given that we're now 2 weeks into September. Drew, maybe I would kick it to you and ask kind of how did 9/1 rates develop? And did they develop in line with expectations? And maybe is there anything that you'd call out either from a state perspective or maybe from a retro perspective as to how rates are kind of developing as we think about the cadence of the year?

Yes, we've got visibility into both 9/1 and 10/1 rates. Some of them aren't final, final, but I think we're in the second round of one of our large states. So really consistent, as Sarah said, with that composite for the full year of 5%. So still not adequate to sort of recover and get to a margin that we want to be at in the long run. And you asked about margin before in Medicaid. We're actually sitting here with a positive margin.

Now it's inadequate, and it's not satisfying, and we've got work to do to match rates and acuity. But relative to a couple of our other peers, one of them says minus 1.1%. One of them says minus 1.75%. Like we're at a different starting point because we're actually -- we're positive in margin, pretax margin all in for Medicaid, but we need to get that back to sort of that long-term goal, and that's what we're going to be working on over the next couple of years.

I'll double-click on that for a second, too. As you look at the evolving political environment and the political climate and I'd even say like the economic environment, do you think about the long-term margin environment for Medicaid as kind of stable and in line with historical expectations? Or do you feel like that needs an adjustment at all?

I think we need to work through, obviously, near-term impacts of policy changes, but there's nothing that we've seen that suggests structurally long-term margins wouldn't get back to where they've been historically. And I think given -- again, if you think about the policy changes even that we went through and are now in the process of implementing, there was, I think, really good indication of the fact that there is bipartisan support for these programs, and it is important to make sure that they are appropriately funded.

I would also say what's interesting is as states are facing budget pressure, historically, and I would say we're seeing a little bit of this now is it opens up a different conversation about moving the 40-ish percent of dollars that are still in fee-for-service Medicaid into managed care because that budget certainty is a really important value proposition for the state.

Now it needs to come with quality outcomes. And so as we think about industry-leading cost structure, industry-leading health outcomes, that is an important value proposition and story to tell. But I think there's actually an opportunity for potentially more growth in managed care because of the value we bring in a budget compressed environment.

Yes, whenever we do our channel checks talking with state administrators, it always tends to be the budget challenges that force people to increasingly consider managed care.

Let me reinforce something that I think this gang already knows, but like the community rating aspect of Medicaid is such that the pool of data is aggregated each state from all the payers. And so there's a relativity. So the program as a whole needs to have some margin. And if you can outperform the average of that pool like we have historically, and we expect to prospectively, then that creates a nice opportunity to get back to margins, like Sarah said, towards our long-term goals. So it does matter how other people are performing relative to our performance given that community rating aspect.

Yes. Well, one thing I'll say a thesis that I work on that I'd like to just kind of bounce off you guys and maybe verify is that when we talk to state administrators or state representatives, they tend to be solving for a budget number as opposed to a PMPM number or an expense number. OB3 is going to change the math of their budget number probably by reducing enrollment significantly, which could create an opportunity for rate.

If membership is coming down, you're trying to solve for a number rate comes up. Is that a thesis that makes any sense? I'd say, am I just crazy? Or like I'd be interested in as you have conversations with state partners, how the enrollment versus rate discussion progresses, especially as you guys think about what is sustainable and rate not keeping up with trend in the last several years?

I mean to me, it's a direct derivative of the broader thesis that came through in redeterminations. And we did see that, right? We obviously had a disconnect between rate and acuity in the short term. But as we've seen strength in rates catch up, part of that has been the fact that the total budget reduced because membership reduced.

Now states are dealing with other budget pressures because of state-directed payment reductions and things like that. So I don't know that that's a one-to-one, but I do think the idea that the rates need to be actuarially sound and the states want to make sure that benefits are appropriately funded and there are dollars there from membership declines.

Again, we continue to see constructive conversations with our state -- counterpart state actuaries. And I think this process, we pointed to it before, but now as it's playing out, the discrete nature of the population and subpopulations where you can get to a very specific rate cell around this population, this subpopulation and do the math with more precision, I think, is helping in the rate conversation.

That's helpful. As enrollment has shifted as the year has gone, I guess, can you talk about questions before, I wanted to ask about how trend is developing year-to-date, just in the Medicaid population. I think you already highlighted drugs and other cost categories.

I'd just ask you to revisit again, anything running hotter or colder than expectations? Just I work with Pito and our team who covers the hospital space where the hospitals have seen challenges. Just be interesting if you wanted to go either by state or by disease category, if there's anything hotter or cold as it relates to trend.

I mean I think trends have been broadly developing in line with expectations. We've obviously deployed a myriad issues around initiatives around quality and affordability. And those areas that we've been watching and have been driving outsized trends, which are behavioral health, home and community-based services and high-cost drugs continue to be sort of the repeat offenders.

We did, and we talked about this a little bit on Q1 and Q2 call is sort of some year-over-year abatement relative to behavioral health, largely in the ABA space because people have really started to focus on both getting members to higher quality providers and just a wide array of fraud, waste, and abuse that we've cracked down on in that space. So I think we are seeing the fruits of our labor come through over the last 18 months. But nothing that's really become a new outlier for hotspot. In Q3, again, very much in line with what we saw in Q2.

And is there a way to quantify in any way like the impact of your efforts or how you quantify the impact of fraud waste and abuse and fraud waste and abuse reduction? I think about this like the corollary on the commercial side would be companies have called out the IDR impact in commercial. Is there a way to -- just because we've seen so many headlines about fraud waste and abuse in the Medicaid space, is there a way to kind of quantify what we've seen there?

Yes. I mean we can quantify specific situations. I think we called out a provider in New York that we finally got shut down through the court system late last year. And so absolutely, we can quantify that impact on our New York health plan as we towed up sort of our goals and initiatives internally. But yes, it goes into sort of the trend management overall. And every year, we've got to bend trend on behalf of our customers why we're hired and implement quality and affordability initiatives.

In the last 1.5 years, there's just been more incidents of fraud waste and abuse. And as you heard us -- heard Sarah say on the Q1 and Q2 call, like our -- the tools that we've developed, including using AI to promptly like very promptly identify -- we create a trust factor with, I think, 70 data points, and we're able to sort of shut down and pend claims while we do research like a lot faster than 1.5 years ago. So we're responding to like what we see in the market. But yes, that all goes into the management of net trend.

Okay. For Medicaid, I want to ask you to provide '27 guidance, and you talked a little bit about the community engagement and work requirements. But I guess at this distance, is there a way to paint in broad strokes how you see the impact of OB3 on the business in '27? And you kind of talked about the cadence of '27 to '28 monthly reverifications. But just kind of, I guess, whichever way you would like to characterize however you're thinking about the impact on Medicaid in '27 and '28.

Yes. I mean I think our goal continues to be to deliver margin progression in '27 despite what we know we are going to be some degree of headwind from the acuity shift and not having total visibility yet to whether rates will perfectly on time match to when those acuity impacts start to come through the business. But broadly speaking, again, if you think about the fact that our expansion business is, call it, 18% of our overall Medicaid book, anywhere in the range of the estimates out there of 25% to 40% of members that will become ineligible, that takes you down to sort of a mid-single-digit percentage and then you roll that out over 2 years.

And then you think about the fact that we're dropping 8% to 9% in 2026, and we're able to absorb the impact of that acuity shift with both rate and our own trend initiatives. And that's what makes us feel like we can manage through this. But it is going to take blocking and tackling. It is going to take good data-driven rate advocacy. It is going to take community engagement. And so that's all of the infrastructure that we're sort of steering up and prepared to do with the goal of continuing to deliver margin progression in '27, '28.

Okay. I'll quick -- Drew, you won't have to answer this question for me next year, but is there a way to characterize how we should think about the magnitude of margin progression maybe looking out over a multiyear basis?

I think we need some more data to see that. Obviously, that will be incorporated in guidance for '27 and when we give guidance for '27. But I think you're right. The goal is net progress. On the positive weight on the scale, the muscles that were built between payer and customer through the redetermination era have resulted in us getting a couple of states for 7/1 to pay us in the 7/1/26 rate, what the estimate is of the impact of OB3 and the rest of them for that 7/1 cohort agreeing to revisit 1/1 once they decide how they're actually going to implement and execute. So that's a lot different than coming out of the -- into, and then ultimately out of the redetermination era. So that's -- I think that will help us achieve that sort of net progression. We just don't have the specific magnitude at this point.

I haven't heard -- I have not heard Centene talk about this topic yet, but one of your peers talked about and started to execute upon market exists. And is that something that Centene would think about? And kind of how do you think about the framework for how you evaluate whether or not you continue to stay in or exit markets?

Yes. I mean our first priority is always to try to work with our state partners to navigate program reform and get to a place where we can deliver the level of service that we want at a sustainable margin. We are running a business. And so if we feel like long term, structurally, we aren't going to be able to get there, then we have evaluated markets. If you think about the decision we made on the Florida CMS program, that's an example of that.

We made a similar decision relative to programs in Hawaii. But we also balanced that with a really thoughtful look at, one, making sure the state program is strong enough, and we have a very measured approach to moving members and not overly impacting our members as we do that. So that's not a knee-jerk thing. It's a decision that is always made very, very carefully. And it's very much been the exception versus the rule. But we're always looking across all lines of business. We are looking at our portfolio to say where are the geographies where we can be successful long term and where are the geographies where maybe we can't.

Is kind of the Florida behavioral an example of that? Was that a piece of business where you guys chose to make an exit where it just didn't seem like it could be profitable? And maybe, Drew, if you could kind of remind us of the financial impact of the Florida ADA exit.

Yes. So it's really all about the new contract and what we would have had to agree to 10/1/26 and beyond. And there was a lot of pressure in 2025. Some of that is being corrected for '26, but then there are new changes go into place like a drop in margin and the addition of a withhold, supplemental benefits that were required and then just a multiyear guarantee by the payer of affordability initiatives and sort of bending trend that we looked at as a package and said. Now we're out. So that's probably -- that was more of the decision-making around that piece of business. But it's about -- for us, it's about $1.5 billion of revenue per quarter. So that'll be a pickup as we sort of head into '27.

I have to keep an eye on the clock because I think I've spent a ton of time on Medicaid and there's actually other topics I wanted to pick. You'll forgive my pop culture reference. I'm going to move on to Medicare Advantage. In the first rule of STARS Club seems to be you don't talk about STARS Club. But Plan Preview 2 has hit, and there's been a lot of chatter online about the cut points. I would ask at a high level, as you guys got your Plan Preview 2 and you're on your path to margin recovery in MA anything that is alarming or anything that is comforting in what you guys saw? And if you tell me that, George Hill, first rule of STARS Club is I'm not going to talk about STARS Club.

I will abide by STARS Club rules and so I'll answer at a high level and say everything we've seen in line with our expectations. And if you go back to kind of what we talked about on the Q2 call, we are still delivering raw improvement in quality measures. We have done a lot of work over the last couple of years to strengthen that program.

But we also, starting 2 years ago, I think, saw the writing on the wall in terms of the degree of program reform that was likely coming, as well as continued acceleration in the cut points. And the fact that our focus on duals is at some level dissonant with the fact that the program does not case mix adjust sufficiently. So again, we've talked repeatedly about a lot of work to sort of create a buffer around that.

And so we came into this year, again, expecting to drive improvement, expecting to see some pressure in our results because of the cut points and because of the program changes from last year, but having built the appropriate buffer for that. So our view is still very confident in breakeven or better in '27, and then setting the book up for continued margin progression. And we continue to advocate with CMS for STARS reform relative to focusing on those complex duals members and taking into account sort of what is realistic expectation, how do we actually measure quality for that membership. So we're running that play in parallel.

Okay. You mentioned duals and special need populations. I'll ask this question because it's kind of a hot button topic, which is one of your smaller peers called out that they were seeing, call it, a hotspot as it related to SNFs and institutional and some inpatient. I know I've asked this question several times. I'll ask it again. This is kind of specific to MA, but kind of any hotspots that you're seeing as it relates to MA? And do any of those things jump out to you guys as places that you're seeing?

No. I mean the trends in MA have been very consistent this year. And the places that are sort of, again, slight outside trend drivers, some of that outpatient, a little bit of high-cost drug, very consistent, same thing so far in Q3 and I continue to feel good about how that business is performing.

Yes, pretty pleased with the execution in Medicare Advantage this year. And to Sarah's earlier point, that sort of being a linchpin in being able to manage this business with the duals focus, even without really good STARS scores. So -- but really good stability and execution and feel good about that progression.

Am I remembering right, your duals penetration is in the low 50% range? Does that sound right?

40%.

Okay, 40% range.

For D-SNP.

For D-SNP. Maybe just stepping back for a second, could you remind us again about how you guys thought about your MA bid framework for 2027? It sounds like you guys are focused on that core D-SNP market. And I'd say a focus on margin enhancement versus growth. And maybe, I don't know if you could even spend a minute on talking about how that factors into -- I won't call it sub-components, but like benefits side. Are there -- like what are the wrinkles that you guys can do with benefit design to drive margin enhancement in MA and in the duals market?

Yes. So again, the focus was simplifying the portfolio, really focusing on markets and products where we feel like, again, aligned with sort of dual complex member focus, footprint overlap with Medicaid markets where we feel like we've been and can be competitive, places where we have strong network.

So in addition to just pure benefits, some of those other factors and then making sure that where we are making investments, we are leaning towards those benefits that we know really drive impact and outcome for those complex members. So all of those levers went into the process and thinking about 2027 bids. And then to your point, we've been laser-focused on getting to profitability in MA, less so on membership. And so I think you'll see that in the way that plays out in '27.

Are you able to talk about any of the assumptions that kind of underpin the bid process for 2027? And probably most importantly, there would be trends. Like how are you guys thinking about how trend persists in '27 versus '26?

Yes. I mean we have a view of trend over the last couple of years and sort of similar to coming into 2026, where while we're managing trend and it's consistent with our expectation, it's still high on a historical absolute basis, and we carried forward that perspective into 2027.

Okay. A question that I've been getting frequently from investors as it relates to margin expansion in MA is, 2026 appears to be a solid MA margin expansion year for most companies in the space given the backdrop of a very strong rate. The rate for 2027 will not be as robust.

But to your point, trend is expected to continue to still be high. What is the right way to think about year-over-year -- and I'll ask this both for Centene and Drew, be interested in how you think about space. What is the right way to think about year-over-year margin expansion opportunities in MA, given the trend is likely to be -- trend is likely to be durable, rate will be much less robust, but a lot of people are going to cut benefits where they can? I would just appreciate your thoughts there.

Yes. If you start macro and think about the attractiveness of Medicare Advantage, despite you hear about a few years of benefit cuts, but like benefits were loaded up earlier this decade. And the relativity is still 11%, 12%, 13% better than fee-for-service if you add in all the benefits, including MAPD, the Part D benefit embedded within MA.

And so I think it's still an attractive market. So it's really the degree of growth would be the debate given continued probable -- I mean, certainly for us, focused benefit decisions. But yes, I still think it's going to be an attractive market for a senior making a decision looking independently or maybe on an absolute basis relative to fee-for-service.

And of course, our margin progression is going to be getting to profitable or even better in 2027.

Right. I would ask you, you kind of brought up STARS. I'll ask a question about STARS reform, where we'll expect to see these technical notes will come around October 1. STARS reform seems to be a popular topic with most MA plans. A plan made the comment to me yesterday that we can't go in this litigation cycle forever as it relates to STARS reform.

I guess could you talk for a second about what you would expect to see in STARS reform? And I guess, how are you guys -- it would seem like you guys are preparing for that now or thinking about that now. I'd be interested in how you're thinking about Stars reform at a high level and kind of where you think it could and should go?

Yes. I mean part of our effort over the last couple of years was to, again, sort of derisk the impact of STARS because STARS reform is a big complicated thing, right? That is like -- I agree that running a prospective quality program through the course is probably not a sustainable way to do that.

And to be fair to the team at CMS, like that is a big complicated undertaking to figure out what does reform look like? Do you do a little bit? Do you do a lot? And what should success look like? I do think, interestingly, it is in line with broader discussions that are happening, not just in D.C., but across the country around how do you actually get to a more refined view of how to measure health outcomes and real quality impact of managed care in a way that is sustainable and where you can demonstrate progress and is aligned with long-term value for society, frankly.

And even in Medicaid, there are something like 170 measures if you take the super set of measures that we are responsible for across 30 states, and the idea that you're going to be able to invest dollars for bang for the buck outcomes across that many measurement details, all of which are different, this doesn't make sense.

So I think there's a great opportunity to just say what are the core set of clinical measures that really demonstrate health impact for the senior population, how do we think about what are reasonable targets given the complexity of members across the continuum and let's focus on everybody putting dollars towards that and then increasingly focus on a way of measuring that through data that is empirical as opposed to subjective and where there's no concern about people are gaming the system, just run the data digitally.

If you get your gap closed, you get your gap closed, if you get your clinical measure at the right spot, great. And that feels to me directionally like it would be good progress. But it's not a thing to take on lightly.

And when I think about timing of this, given where we are in the calendar, it seems unlikely that you could have -- it seems unlikely that you guys could see the financial impact of STARS reform before 2030, 2031, given that we'll be into 2027 soon. We haven't had -- right, there's no proposed rule. There's been no comment period. Does that -- would that kind of jive with your expectations?

From a process standpoint, I think, again, the idea that you've got people are making decisions today about investments against a measurement framework. And the idea that you would go -- you would change that mid-cycle, I think is really complicated. So I agree that I think it probably has an out-year look to it. But we've seen program changes. We've seen a lot of program changes in a short period of time.

So I think we're always sort of braced for some of that uncertainty. And again, it goes back to why we pull all of these other levers around value-based contracting, SG&A being really thoughtful about bids in order to maintain the profitable recovery trajectory of the business, somewhat agnostic of what the STARS reform looks like, obviously, wanting to continue to drive good quality outcomes regardless.

Okay. Let's pivot to the other side of the Medicare business for a second and talk about Part D. Is that fair -- can you still trending towards margins of greater than 3% for 2026?

Absolutely.

As somebody in the audience says earlier, what are you doing there? Like what -- talk to us about what's driving the strength. Talk to us a little bit about sustainability and kind of expectations for the balance of the year and how we think about '27.

Yes. So I mean, a big piece of it is cost structure, and I've said this a number of times, but I think us not owning a PBM actually benefits us. There's not an internal struggle or we're at a park margin. And so we can go out and procure the best cost structure available with the mechanisms that we have embedded in our contract and then have our members avail themselves of that cost structure for the product and then into a reasonable margin on that product as well. That's a piece of it.

I think the fact that we've built up know-how since 2006 -- some of you guys were around for DMA in 2006. That helps in all the data that we have. And we have a really good partner in CMS in terms of the program structure. And then just, I think the thoughtfulness of the bid team and the assumptions around -- like we're not betting on demos continuing.

So the sunsetting of some of those demos really we're okay with in terms of our 2027 bids. So it's a good business. Now it's a $25 billion, $26 billion business. And with the direct subsidy going up 27% next year, which was consistent in the zone of what we were forecasting, that should be some nice revenue growth there as well.

The margin, you have to think about a reset every year with the bid and where are you going to reset that to? And we're going to work on refining that for -- at the point in time when we give guidance for next year. But the body language you should read on us is that we're pretty pleased with our positioning for 2027 and probably tilt a little bit towards being in a better position than the rest of the industry, so maybe some growth, but we really need to see the landscape files to declare anything.

To declare victory. You brought up your PBM partner, and we were talking before we took the stage. You guys have had a lot of success working with your PBM partner. And I'll ask the question open-ended. How much opportunity is left for Centene financially as it relates to its relationship with PBM -- its PBM partner? Kind of how much more work is there to do there to squeeze cost out?

There's always work to do. And this partner is new to us as of 1/1/24. So there's other levers to be pulled. And while we have a really good relationship and there's been some strong execution in areas by our partner, there's other areas and there's some operational things that can improve.

And we're looking at our specialty drug cost structure with them and what can we do to sort of bend that curve. So there's definitely still opportunity for -- once again, for us doing our jobs to enable our members to avail themselves of the best cost structure out there and available. And we've got the contractual mechanisms as we've been through a number of rodeos where we can achieve that on behalf of our members.

Yes. I have this on my question list what you guys saw in advance is just the 340B question. I'm not going to ask how exposed are you guys to 340B, but the way I'll ask it is, is getting more 340B pricing in your book a cost opportunity given what your patient population looks like, right? Almost 50% of people are D-SNPs, high Medicaid population.

I would think most of your beneficiaries should be getting the best possible price on drugs. Is that kind of an avenue to -- like you guys should not be filling a lot of claims look like commercial claims should be filling a lot of claims to look like 340B claims. Like is that the right way to think about some of the opportunities there? Is that the right way to think about 340B and Centene?

Yes. I think on behalf of our members and our customers, we want 340B to work the way it was originally intended to support FQHCs and rural hospitals. And obviously, there's some gaming out there. We're sort of the second derivative of that. But we do see some impact, for instance, in rebate collection rates that we work with our PBM on to make sure we can get precise on that and that we're doing the best we can to make sure that we aren't getting gamed by some of that duplicative arm wrestling out there with other parts of the health care ecosystem. But largely, we're a downstream impact from that, but we watch that relative to our rebate yields.

Okay. I don't want to turn this into a PBM conversation. I want to keep this a Part D conversation. I know you just said that you're going to talk about this as you guys are going to give guidance for 2027. But is the right way to think about the margin framework in stand-alone D is that you guys will probably bid for a margin profile that looks like a '26 target and then the business performs as the business performs in 2027. I know a lot of investors are focused on what is the step down as it relates to the margin profile in Part D in '27.

Well, we're 3% plus now, and we came out of the chute at 2%. In the prior year, we came out of the chute, meaning original guidance at 1%, but that was artificially low because of the volatility caused by the Inflation Reduction Act, the IRA.

So I think as we get every year removed from that and get visibility into the non-low-income specialty trend and other drivers of costs, we can get more and more comfortable in that 3% zone in the long run, like average a bunch of future years. We still need to see landscape files and look at blocks of business and membership distribution to be able to actually set precision around where we guide to coming out of the chute in 2027. But I think that would be the right long-term way to think about this.

Okay. That's helpful. I keep my eye on the clock here, as we are now sub 4 minutes. I'm going to pivot to ACA. And you just updated us on the margin expectations for the product in 2026. It seems like pricing for 2027 is expected to be strong. You guys are going to run this business for margin versus growth. Program integrity came up a lot on the last call.

And I think it was shortly after you guys reported there was a talk of a bunch of beneficiaries in ACA without their security numbers and you continue to see the fraud waste abuse crackdown in that space. Would love to kind of hear how you guys saw and heard that and how it's impacting how you guys approach the business in the second half of the year?

Yes. It's been a very collaborative process with CMS because there's data on both sides that needs to be contemplated. And so -- and frankly, this is the case with all program integrity initiatives over many years with CMS. They have some data -- we have some data. We try to reconcile that to have a really good understanding of what to do next. We had good visibility to sort of the quantum around those initiatives as we thought about -- well, certainly, we gave guidance in the Q2 call and obviously reaffirming today.

So I feel like we believe we fully accounted for the 2026 impact of that, but also had enough visibility to think about what that might do to the market overall in terms of 2027, what degree of contraction that we might have expected in '27, somewhat getting pulled into '26. how all of that then plays into risk adjustment assumptions. So when we say sort of believe we fully accounted for, it's kind of the full view of not just membership and revenue in '26, but then what does that do to the relative of the risk pool?

Yes. Well, you bring up the other side of that is so you guys feel comfortable with what you forecast as it relates to enrollment. Do you feel the same level of comfort as it relates to acuity and kind of what you're seeing in the acuity change? And a wrinkle that I'm going to tack on to that is that as we come into the end of the year, I'll ask it as an effectuation question, like do you worry about members dropping at the end of the year?

I use the example of -- you'll have a member who uses that November premium payment to pay for their Thanksgiving travel expenses. And then they use the December payment to buy Christmas gifts because sometimes that's what that market looks like. Like how do you feel about the people? Like are you worried about how comfortable are that you forecast the deterioration in the back half of the year currently? Or is it anything that you see that we should...

We've been watching that very closely because I think there was a question coming into this year of how affordability pressures would impact behavior and if it would be any different, particularly given the size of membership shift because of the expiration of the eAPTCs. And so everything we've seen month-to-month, including some of those periods that we tend historically seasonally to see more pressure has largely developed in line with expectation.

And we did -- and we talked about this, we have forecasted membership attrition from peak through the end of the year. So -- and that included our view of the membership that might come out of the market because of the program integrity initiative. So all of that is really in that view that we will see lower membership toward the end of the year and nothing underlying any different than I think we were expecting.

Yes, I still feel really good about the 4.5% to 5% pretax margin that we guided to, inclusive of not just the clawback as Sarah referenced with the sort of the members that are deemed unauthorized enrollment, but also what we believe is a prudent forecast of the risk adjustment impact of that.

Only a few seconds left. I'll ask one corporate question. First, Drew, we're sorry to see you go. I think I speak for everybody who covers managed care that are strong, long-tenured CFOs in this space that are good are few and far between. So a personal well wishes, but sorry to see you go.

But in the last year, you're not the only person who has announced the departure. The company has done a couple of rounds of restructuring. Would love to just hear comments on morale. It's a cost structure question. It's a capabilities question. Do you have the right people to kind of continue to execute the business going forward? Do you have enough of those people? Would just love how you're thinking about corporate cost structure.

I mean we, as an industry and as a business, have gone through a lot of change in the last couple of years. And I think interestingly, I think -- and we have undertaken sort of the opportunity to redesign and transform the company in that moment, right, rather than just sort of hunkering down, I think it's really about to your question, what are the capabilities that we need and what talent do we need, and how do we think about delivering industry-leading health outcomes with an industry-leading cost structure?

And I think the organization has really rallied around that. And I think there's an excitement about where we're going and what we can do. And that doesn't mean change isn't hard. It's hard to say goodbye to colleagues. We've tried to be very transparent about that consistent with our culture. But I think people are really geared up about what this next phase could look like for the organization, the impact that we can have on members.

And I think sort of the mantra internally is the thing that isn't changing is our mission. And that, to me, is very real and very tangible every day. So I'm also very sad to see Drew go, but he's not allowed to go anywhere until the end of 2027. And he has been an incredible thought partner and is helping to make sure we have the right people in the right seats, and they have the benefit of all of the knowledge of this organization as we go forward.

This was a planned like long runway intentional, so that we have almost 1.5 years. And I've already worked really closely with Chris Neczypor. I think you guys are going to love him. He comes in for 4 months without having to be the CFO, but like being able to dive in, like he's off to the races internally. And then flip the CFO keys to him as of 1/1.

But as Sarah said, like I'm going to have my paw prints working with our actuarial wizards on the 2028 bids, still helping to support the company throughout 2027. And that will get me to my 60th birthday in 2028 and the ability to actually go do some things that my wife and I have just never been able to do because these jobs are...

Because I'm always calling you.

Very consuming. So thank you.

Well, we're a little bit over. But guys, I greatly appreciate the time. Thank you very much.

Thank you.

Thanks.

Good day, and welcome to the Centene Corporation 2026 Second Quarter Conference Call. [Operator Instructions]

Please note, today's event is being recorded.

I'd now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our second quarter 2026 earnings results conference call. Sarah London, Chief Executive Officer; and Drew Asher, 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. Specifically, our commentary on our full year 2026 outlook, including the drivers of such outlook, are forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our second quarter 2026 press release and other public SEC filings, which are available on the company's website under the Investors section.

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 second quarter 2026 press release.

With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Thanks, Jen, and thanks, everyone, for joining us on the call. This morning, we will review our second quarter results and provide details around our improved full year 2026 financial guidance.

Q2 adjusted diluted earnings per share of $2.51 exceeded our previous expectations, with outperformance driven by the underlying business strength and a more fully informed view of our marketplace risk adjustment positioning. Thanks to strong first half results, we now expect full year 2026 adjusted diluted earnings per share of greater than $4.80, up from our prior outlook of greater than $3.40 provided during our April update. We are excited by the positive momentum we have built and remain focused on our goal of delivering industry-leading health outcomes with an industry-leading cost structure.

Now let's talk about the business. Starting with Medicaid. Medicaid results were in line with our expectations for the quarter, driven by disciplined execution against our operational and financial goals. We ended the quarter with just over 12 million members, a slightly larger step-down in membership than anticipated. While some of this was driven by state-specific program changes, we also saw an uptick in activity around enrollment and eligibility in certain states.

As we look at core medical cost drivers in the quarter, the big rocks remained consistent with past quarters, with behavioral health, home health and [ high cost ] among the top contributors. We did see a slight uptick in acuity from the expansion population directly consistent with the increased attrition in the quarter but we were able to absorb that given the strength of our execution across quality and affordability initiatives.

Rates remain a critical lever and continue to develop positively, with 7/1 rates coming in better than expected. This improves our full year 2026 composite rate forecast from roughly 4.5% to roughly 5%. The tone and tenor of our state rate conversations remains constructive and rate [ event ] continues to be supported by the incorporation of more current data.

As you think about our guidance, we are now expecting lower year-end membership than our previous outlook, with the increased enrollment and eligibility activity as we move through the back half of the year. As is typical, we assume that additional attrition will impact acuity and have set guidance to account for that possibility in the second half of 2026.

As you would imagine, we are heavily engaged with our state partners as they prepare for OB3 implementation, and we are working hard to minimize unnecessary membership disruption. This includes investing in near real-time data exchange with states to form ex parte member eligibility, exemption validation and member outreach. We are also activating a nationwide playbook, building on the work programs we already have in place across our states to help members identify community engagement, education and workforce opportunities. And we are engaging with state actuaries about the best approach to OB3-related rate adjustments.

Given recent cost pressures in the business, we haven't talked as much about quality, but it is worth sharing that, behind the scenes, we have been systematically driving improved quality performance across our Medicaid markets. Over the last 3 cycles, through expanded data capture, scalable member engagement programs and targeted provider incentives, we have delivered improvement in more than 90% of our core clinical measures, ensuring Centene members receive more complete and better quality care each year. And in this cycle, we are targeting more than 75% of our Medicaid health plans NCQA quality ratings to be at or better than 3.5 stars. Ultimately, the value of Medicaid managed care is ensuring high-quality outcomes at lower costs, and we are building tangible momentum around both.

Turning to Medicare. Our Medicare segment once again delivered outperformance in Q2, with continued strength in both our PDP and our Medicare Advantage businesses. PDP benefited in the quarter from the true-up of certain prior-period items, but the results also reflect fundamental favorability. While we continue to see elevated levels of specialty drug trends, they remain lower than our original expectations through the first half of the year.

As a result, we now expect PDP to deliver a pretax margin greater than 3% in 2026 versus the 2% we guided to at the beginning of the year. Our PDP team once again took a thoughtful approach to the 2027 bid process, prioritizing sustainable profitability. As this business hits post IRA stability, we look forward to delivering consistent margin on what is now roughly $25 billion of premium revenue and successfully leveraging our greater than $60 billion in pharmacy spend through our partnership with ESI to deliver industry-leading cost structure to our state customers and members across lines of business.

Solid execution from the Medicare Advantage team led to outperformance once again this quarter. Medical costs remain elevated when compared to historical averages, but year-to-date trend is running modestly favorable to expectations. Key medical cost drivers were stable quarter-over-quarter. D-SNP members now represent approximately 40% of our Medicare Advantage portfolio, and that cohort continues to perform favorably. Looking ahead to 2027, we plan to further simplify our Medicare Advantage footprint, focusing our benefits increasingly on the duals population where our deep expertise in Medicaid allows us to deliver a local, integrated and differentiated experience to these members.

On the STARS front, we are once again seeing year-over-year improvement in raw performance, supported by the full range of quality initiatives we have deployed over the last 3 years. That said, we, along with the industry, are facing headwinds from artificial [ cut point ] increases and overall STARS program methodology changes, not to mention uncertainty around the future of the program overall. As you'll recall, the company took steps coming into 2025 to derisk STARS's results more broadly as we considered our Medicare Advantage strategy of focusing on lower income complex populations in the face of a STARS program that fails to effectively risk-adjust for these members. Thanks to these actions, including portfolio optimization, strong operational execution and SG&A management and strategic duals growth, we are seeing accelerated margin improvement, and we are confident in our plan to deliver breakeven or better results in 2027 and margin improvement thereafter.

Overall, we are pleased with the momentum building in our Medicare segment thus far in 2026 and look forward to leveraging that strength as we prepare for 2027.

Last, but certainly not least, Marketplace delivered excellent Q2 results after more than a year's worth of focused execution to achieve meaningful margin recovery in that business. Recall that we moderated our pretax margin expectations for the Marketplace at the end of Q1. Our 3% pretax guidance at the time accounted for elevated utilization patterns we observed in Q1, largely driven by our Silver tier members, and did not fully reflect the corresponding risk adjustment offset we anticipated given the level of observed membership acuity, a posture that we felt was prudent in advance of receiving the first full weekly report, which includes the first view of overall market acuity.

Rolling those assumptions forward to Q2, first, we continued to see higher utilization patterns among our Silver tier members, but these moderated over the quarter compared to what we assumed in our guidance. At the same time, a thorough analysis of the highly anticipated June Wakely report not only confirmed our hypothesis about the relative acuity of our population, but has also allowed us to revise our view of full year performance for the Marketplace business. And finally, we received favorable development on our final 2025 CMS risk adjustment reconciliation to the tune of $180 million in the quarter.

In light of the aggregate first half results, we now expect to deliver a pretax margin between 4.5% and 5% for the Marketplace business for the full year, an improvement compared to our previous guidance as well as our initial guidance issued in February.

While the year is not finished, it feels important to pause and reflect on the strength of these results, and I would be remiss if I did not take this opportunity to very publicly acknowledge and thank our Marketplace team for the exceptional leadership and discipline they demonstrated over the last year to get us to this point. They saw and called a market-wide issue first. They leveraged more than a decade of experience and the breadth and depth of data that comes with operating in 29 markets to comprehensively diagnose the issue at hand, quickly translate that into actionable insights, execute in a very tight window to appropriately reprice our business for 2026, while correctly and conservatively planning for how 2025 would ultimately unfold. I am humbled by their expertise and grateful to have them guiding this business through an unprecedented year of turbulence and uncertainty.

Looking to the rest of 2026, we are jumping off a Q2 membership of roughly 3.5 million members, slightly better than previous expectations, with metal tier distribution, age and other key demographics largely unchanged from our Q1 results. We continue to expect membership to decline as we move through the rest of the year, consistent with the return to more regular seasonality, and our guidance has accounted for membership impacts related to various ongoing CMS program integrity efforts.

As a leader in this market, we will continue to push for and promote transparency and policy stability as we believe that, regardless of the origin story you give it, the individual [ market is ] a compelling future-proof platform that can deliver access to high-quality health care for hard-working Americans and small business owners and increasingly serve as a flexible, portable and affordable alternative to employer-provided insurance options.

Overall, we are very pleased to deliver a quarter of solid performance and year-over-year progress in each of our business lines. While this dynamic health care operating landscape has presented challenges, it has also provided important opportunities at the enterprise level to enhance the way we do business. And we are taking advantage of this moment to lean in and transform our organization to better serve the needs of our members, state partners and stakeholders. This includes thoughtfully reviewing our portfolio to position each business for long-term earnings growth, maximizing our [ temp ] bench, organizing our teams in a way that even more fully leverages our scale and, of course, deploying data, technology and AI to streamline our service delivery and improve our member experience.

While we have made progress across all of these categories, I'd like to touch briefly on our AI strategy. You've heard us reference examples over the last few quarters of high-value AI-enabled use cases, including integrating AI into our forecasting processes to improve precision and the always-on suite of fraud waste and abuse algorithms that learn from our inbound claims data every day. And there are others. Even our legal department has several high-ROI agentic use cases in production, including one agent that reviews invoices from outside counsel firms and now saves us 1.5 points in our legal bills every month. We view these early successes as proof points for a much larger opportunity to head.

As we look to the next phase of our AI strategy, our focus is increasingly shifting from individual use cases to the underlying capabilities that make AI scalable across the enterprise. As a Medicaid-first company, operating in a margin-conscious environment, we take a deliberate approach to where we invest. That means prioritizing investments in foundational capabilities such as trusted data products, dynamic context management and open standards that keep business knowledge reusable and portable as the technology evolves.

We believe long-term differentiation will increasingly come from proprietary data and context as model technology becomes more commoditized. This disciplined approach positions us to unlock the full potential of AI while maintaining a relentless focus on ROI. It also provides a governed, predictable foundation for AI, which is critical in a regulated environment where consistency, auditability and compliance are nonnegotiable.

This work, like all of our transformation efforts, is designed in service of delivering industry-leading outcomes with an industry-leading cost structure, fulfilling our mission and ultimately supporting our ambition to not just manage care but to power health for the communities we serve.

In closing, we are making meaningful progress on our path to margin restoration while advancing the platform and processes that will modernize and improve the way we do business. This momentum is visible in our strong second quarter results and our increased earnings outlook for 2026. With our members at the center of every strategic decision we make, we see significant opportunity to reshape the health care experience for millions of Americans.

With that, I'll turn it over to Drew to provide more details on the quarter and our updated full year outlook.

Thank you, Sarah. Today, we reported very strong second quarter 2026 results, including $44.4 billion in premium and service revenue and adjusted diluted earnings per share of $2.51. As you evaluate Q2 in the context of a baseline for 2027, we had approximately $0.50 of earnings in the quarter that were linked to settlements of 2025 items in amounts that we wouldn't expect to recur in 2027. About $180 million related to Marketplace final 2025 risk adjustment net favorability relative to our prior guidance. And about $160 million in our Medicare segment largely favorable PDP 2025 risk adjustment and quality settlements. These items took strong execution by the team, but we wanted you to understand these drivers since the $0.50 will be a reconciling item when we provide a bridge from 2026 to 2027 in a couple of quarters.

That aside, any way you slice it, this was a fantastic quarter. Our consolidated HBR was 89.6% for Q2, down from 93% in Q2 of 2025.

Let's dig into each segment. In Medicaid, at a 93.9% HBR, we are right on track with our prior forecast and are still expecting a full year HBR of around 93.5%. This is down from our original expectation of 93.7% as we covered on the Q1 call. Consistent with our prior commentary, we expect Q2 and Q3 Medicaid HBRs to be higher than Q1 and Q4. As we look ahead to Q3, our 7/1 rate cohort, which represents about 20% of our membership, came in strong. This 7/1 cohort provides a nice sequential benefit from Q2 to Q3 to make progress toward matching rate and cost. Overall, we now expect the full year 2026 rate impact to be approximately 5%, up from 4.5%, with no change in our view of fundamental trend of mid-4s for the year.

As some of you have written about, we did continue to see attrition in our Medicaid membership, ending Q2 with 12.1 million members, and we expect some states to continue to trim Medicaid roles leading up to any OB3 implementation in 2027. So for now, we are holding the incremental 50 basis point benefit of the rate improvement to account for a little higher membership attrition in the back half of the year, including the associated acuity impact.

To be more specific, we expect full year Medicaid membership to be down 8% to 9% compared to 12/31/25 versus our prior view of being down 6%. Overall, Medicaid was right on track in Q2 with good signs of medical expense execution coupled with progress on rates, and there's more work to do over the next couple of years to restore margin.

Medicare segment results were strong in the quarter, including an HBR at 89.5%, inclusive of the 2025 item discussed a minute ago. PDP, with good visibility once you get through 2 quarters, is having another strong year, and we now expect a full year pretax margin of greater than 3%, compared to original guidance of 2%. Strong execution by the team coupled with varied product positioning and being another year removed from the inception of the Inflation Reduction Act have all contributed to the improvement in our 2026 PDP forecast.

Medicare Advantage, representing a little over 40% of segment revenue, continued to perform well, getting closer to breakeven for full year 2026 performance.

The Commercial segment, led by Marketplace, had a very strong quarter with an HBR of 79.2%, compared to prior year 90.6%, driven by the conversions of 3 positive factors. One, a strong end to 2025 as discussed a minute ago. Two, confirmation of 2026 market acuity, and particularly our relative risk adjustment position being better than reflected in our prior guidance. And three, tapering medical trend, driving better-than-expected Q2 medical costs.

While we were optimistic after seeing the new Wakely March demographic report that we helped initiate, as discussed on the Q1 call, as you know, we are waiting to see corroboration from the first Wakely claims reports received in late June. This data helps us understand our acuity relative to the market. Essentially, the data confirmed we took the correct swift actions in the summer of 2025 when we refiled 2026 rates with the visibility we had at the time of last year's major market shift.

Accordingly, we now expect a Marketplace pretax margin of 4.5% to 5% in 2026, back on track after a temporary industry detour in 2025. As you can see, Marketplace membership was reasonably stable compared to Q1 at 3.5 million members, and we continue to expect a little more attrition as eligibility verifications may step up in the back half of the year. While we are still vigilant about pricing for risk shifts due to program integrity measures and changes affecting eligibility prospectively, we would expect the Marketplace to be a more stable business for Centene as we look out over the next couple of years, compared to the prior periods of abrupt program changes and the expiration of EAP TCs.

Our adjusted SG&A expense ratio was 6.9% in the second quarter, compared to 7.1% last year, reflecting continued discipline and scale as well as product mix. As Sarah referenced, we are taking actions as part of an enterprise optimization to drive efficiencies and support the affordability of health care in 2027 and beyond. These actions, including further digitization, more ubiquitous use of technology and AI, and improvements in the customer experience alongside operational efficiencies, should help us not just adapt to volume changes in our business but also drive margin restoration over the next few years. Q2 is initial evidence of that momentum.

We ended the quarter with $715 million of cash available for general corporate use. During the second quarter of 2026, we repurchased $260 million of senior notes in our continued effort to delever to create capacity to seize future opportunities. Accordingly, we ended the quarter with a debt-to-cap ratio of 41.6%, down from 46.5% at year-end.

Our medical claims liability totaled $20.3 billion and represents 47 days in claims payable, a decrease of 1 day as compared to the first quarter of 2026, driven by timing of state-directed payments.

Cash flow provided by operations was $8 billion year-to-date and $3.6 billion for Q2, primarily driven by net earnings and the net impact of temporary pass-through payment receipts, state premium payments and marketplace-related payments to CMS. As a heads-up in Q3, we expect to pay out over $3 billion of Medicaid pass-through payments that are sitting on our balance sheet at the end of Q2. As you've seen in our disclosure definitions, pass-through payments merely go through premium tax revenue and premium tax expense on our P&L and do not impact any key operating metrics like HBR, SG&A rate or DCP.

Overall, given the strength of the quarter, we now expect greater than $4.80 of adjusted EPS in 2026 inclusive of the $0.50 that we wouldn't expect to recur in 2027. This increase from prior guidance of greater than $3.40 is primarily driven by an improved Marketplace pretax margin of 4.5% to 5% and PDP margin of greater than 3%. Our Medicaid HBR forecast is consistent with prior guidance, and the forecasted enterprise adjusted SG&A rate for 2026 is better by 10 basis points.

Total revenue was up $6 billion from prior guidance, but only $2 billion of that is actually premium and service revenue, with $1.5 billion attributable to Marketplace and $0.5 billion for Medicaid. The remaining $4 billion is merely premium tax pass-through revenue.

While we have reported year-to-date adjusted EPS of $5.88, we expect a little above breakeven in Q3 and a loss in Q4 due to the seasonal sloping of our Medicare Part D and Commercial products. This second half trajectory is consistent with prior year and commentary we provided on the Q1 call.

You can see other guidance elements that were modified in our guidance table. Our workforce and enterprise optimization is expected to drive an estimated [ $480 million ] midpoint of SG&A costs in 2026 and that are part of GAAP guidance and highlighted in the reconciliation table in the press release. We look forward to showing continued progress toward restoration of earnings as we look ahead.

For those of you who hung in with us through 2025 industry turbulence, joined us since or thinking about joining in, we thank you for your interest in Centene. Rocco, let's open it up for questions.

[Operator Instructions] And today's first question comes from John Stansel at JPMorgan.

I wanted to ask about Medicaid enrollment. Just firstly, as you think about the high acuity population stepping down, any particular areas that are driving that? And then just as we think about overall acuity shifting in the population within 2026, how you view that with a bridge to next year? Are you seeing this as a pull forward? Or is this kind of incremental to anything we think about for OB3 impact next year?

Yes, John. So as we said, we did see slight incremental attrition compared to expectation in Q. Mostly that was in the expansion population. Some of it was driven by specific changes, but I think more of the uptick, as you pointed out, in terms of the enrollment and eligibility activity in certain states that are starting to tighten in general, consistent with what we've seen over the last year or so, but also starting to think about and prepare for OB3.

So we saw a slight uptick acuity in Q2 around that attrition. Obviously, we're able to absorb that given the strength of execution on initiatives. And as Drew talked about, as we think about guidance for the back half of the year, we're for now holding back that 50 basis points of favorability in the rate in order to see how the additional membership attrition, so the move from 6% to 8% to 9% impact acuity in the back half of the year.

If we take a big step back, I think your question is exactly right, which is, to what extent is this sort of not just a preparation, potentially a pull forward of some of the activity. Again, obviously not formal implementation of OB3. But states starting to tighten those criteria and starting to prepare and sort of categorize populations and, in some ways, I think, probably prevent enrollment that would otherwise have had to go through a work requirements process.

So I think it's possible that that will end up being some degree of pull forward. Again, we're accounting for that as we think about guidance for the back half of the year. And then as I mentioned, we are very, very deep in the planning process with all of our states and thinking about how they're going to go through, not just the ex parte process, trying to maximize the data they have for that so that we ensure that folks who are eligible today and have clear data behind that don't face any coverage disruption. And then where there's opportunity for us to lean in and leverage all of the work we've done in terms of building out networks of community engagement, job programs for our members, we already had those in 17 states coming into this year. And so that's given us a fantastic blueprint to build out and obviously have the latitude from CMS guidance to really help members through that process.

And so as we think about this process compared to the broader redetermination process, it's obviously very different in terms of scope and scale. It's a much more targeted population. We have a much higher degree of impactability than we had during that process in terms of being able to support members who want to be eligible and who need avenues for engagement. And then continue to have very constructive conversations with our state partners about the right way to implement rates that will account for the acuity shift that we would expect as part of the Medicaid expansion population moves.

Our next question today comes from Ann Hynes at Mizuho.

I get a lot of questions just on the Medicaid margin progression given all the OBBB changes. And I know it's a little too early to provide 2027 guidance, but would you expect margins in Medicaid to expand just given the dynamic environment with all the regulatory changes?

Yes, Ann. I'll go back to sort of where I just landed in John's question and expand that a little bit as we think about our, first of all, overarching commitment to continued margin progression in Medicaid. And that includes this year and moving from the 93.7% to 93.5% and continuing to hold ourselves to a high standard of execution, and certainly going to try to improve that the rest of this year.

But if we think about the number of different policy changes that are going to collide for states next year, it is certainly impactful. And so it is not something that we can or should hand-wave. But that again, I'll sort of tick through a couple of things that I think are helpful to think about and the things that we're thinking about as we approach kind of planning for '27, guiding for '27, that give us a sense of confidence in terms of, again, that goal of continued margin progression through the headwinds of OB3.

So first is that point about scope and scale. Obviously, a very different population than what we went through with the broader redeterminations PHE unwind. Some data points for context. We came into the year with our expansion population as 25% of the -- sorry, 20% of the Medicaid portfolio. We will end the year with that being roughly 18%. And so if you just take some of the rough estimates that have been put out there, whether it's RWJ or CBO, of, call it, 25% to 40% of that, that may roll off, you're talking either way sort of mid-single-digit attrition. And that would be over '27, '28, possibly '29, if some states delay. So think about that number in the context of the fact that we just said what we anticipate an 8% to 9% membership drop this year and are still committed to margin progression.

The second piece is this point about impactability. And so as you think about the cohorts that the expansion members are going to fall in, one is going to be that ex parte eligible where there's very clear data, whether they're claims data, run through the frailty algorithm, they're automatically eligible. You have a bigger cohort that is what I would sort of describe as practically eligible, right? So they are engaged in community activities, they are going to school, they are serving as a caregiver. And all that needs to happen is they need to appropriately document that. And so that's a cohort that, again, we can support and make -- and we're trying to maximize all the sources of data around that. But that's a population that we would want to see maintain their eligibility because they're doing all of the right things relative to the legislative guidance.

And then the third cohort are folks who are not currently eligible, but again, they can become eligible. And so that's part of the playbook to offer them opportunities to engage in the community, workforce opportunities, job training. And if you separate for just a second kind of the perspective on the legislation as being sort of a pay for, when you get down to the state level, even in some of the more ambitious Red states, the goal is really for people to be engaged in their own care and their own sort of forward-looking trajectory, not necessarily to keep people from getting health care coverage. And so I think we're talking about a very different kind of impactability to this overall program than [ we sell with PHE ].

And then the last thing, quickly, is just rate. And the fact that coming out of the PHE, we did not have, I don't know if you should ever call trend a tailwind, but we did not have the tailwind of having heavy trend in that look back base period like we do, if you think about the trend that we've been managing in '24 and '25 and '26 as we roll into '27, so that's a little bit of a difference in terms of air cover to the degree there is a dislocation between rate and acuity. But we also didn't have the explicit guidance that CMS has given in terms of mid-cycle and retro rate adjustments. We didn't have the need for states to document the OB3 rate considerations as they set rates up to certification. And so we just have a different set of tools at our disposal as we think about managing this over the next couple of years. All of which is to say, again, you cannot hand-wave it, but we do think it is a more manageable effort than what we went through with redeterminations, and our goal remains margin recovery for the Medicaid business even through the OB3 headwinds over the next year or 2.

Our next question today comes from Justin Lake at Wolfe Research.

I had a few questions on the exchanges quickly. First, your 10-Q indicates the 2025 risk adjustment settlement benefited the company by $481 million for the year. You talked about $180 million in the quarter. Just wanted to get the delta there, what's driving that, and how we should think about that versus that nonrecurring benefit you talked about, Drew, in the -- for the year? And then what are you assuming for the full year '26 risk adjustment in the exchanges? And lastly, maybe just a quick comment on the lower cost trend in 2Q and what's driving that.

Sure. I'll hit those in reverse order and let Drew walk through sort of the mechanics of the '25 risk adjustment. So first, in terms of overall utilization, we did see that moderate in Q2 from Q1 expectations. And again, if you think about how we set guidance on the Q1 call, we saw that uptick in utilization in Q1, initially called it out around specialty drugs. And our hypothesis at the time was that we had retained and attracted a higher acuity Silver membership and the utilization was consistent with that hypothesis. But we didn't yet have the full view of the market acuity from the Wakely data. And so what we essentially assumed in guidance was a continuation of that step-up and did not sort of give full credit for the risk adjustment offset.

So what we saw in Q2 was a moderation from Q1 expectations and utilization patterns that are very consistent with the higher acuity Silver membership that we do, in fact, have as confirmed by the Wakely data. And if you just look at disease states and the drug categories, again, consistent with what we called out in March around chronic conditions, anti-inflammatory, oncology, these are conditions and drugs that have high [ HCC ] coding and, therefore, have pretty robust risk adjustment associated with them. So all of that really came together essentially as we expected it to, maybe even a little bit better than expected in Q2. And then for year 2026, we are now assuming a meaningful receivable in our 2026 risk adjustment position.

And then I'll turn it over to Drew to walk through the mechanics of the 2025 reconciliation.

Yes, Justin, so you're right, the $481 million is in the Q. That's an absolute number. And then you may recall, every year we have explicit margin on these estimates that gets released and then reestablished largely the same amount. So that's about $250 million, that doesn't benefit the P&L relative to our prior guidance because that's expected to roll each year. And so that gets you down to about $230 million. And then there's about $50 million of other deducts, [ BBC], we had a little bit of a refinement in Q1, which leaves $180 million better than our previous guidance.

Our next question today comes from Andrew Mok at Barclays.

Given the increased visibility into this year's ACA acuity and higher full year margin outlook, can you share how you're thinking about pricing for 2027 and the balance between further margin recovery versus membership growth next year? And at this point, do you expect the ACA market as a whole to grow?

Yes, Andrew. So as usual, we are taking a state-by-state approach to pricing. And the goal is competitive and balanced portfolio. There has obviously been some movement in the market in terms of market exits, sort of the competitive landscape has changed slightly. Our brand strategy has not changed as we think about 2027. And so it's a little bit too early to say, we're still sort of in the pricing process. We'll get visibility into our competitive positioning as we get into Q3. But you can imagine our goal has been margin restoration for that business, and that will continue to be our focus and has underpinned the strategy relative to 2027 pricing.

Relative to overall market growth, I think our view is that once we got through the implementation of various policy changes, that this market would return to normalized growth. It continues to be a popular product and, in many geographies, is increasingly sort of the only point of access for folks to affordable health care. We do -- we are watching some of the lawsuits that are out there and the different rules that may impact membership right now. All of those have either been vacated and are on appeal or have been stayed. And so that would probably mute some of the membership impacts that those would otherwise have, but we need to see how those going to play out as we step into open enrollment. We'll obviously be able to give you a better viewpoint on that on the Q3 call.

Our next question today comes from Kevin Fischbeck at BofA.

Great. I want to follow up on some of the other conversations about Medicaid rates and acuity, because I think that is a concern that people have is that rates will catch up, but then the acuity keeps shifting, making it hard to fully recapture the margin. I would have thought that we would start to see a little bit more progress in 2026 relative to that. Is there a time period where you feel like the data really does inflect and that we should be seeing it in whatever it is, the Jan 1 rates next year, the kind of midyear rate next year? Is there a time period where you kind of say, yes, mathematically, this is the time we should be expecting it?

And then is there anything that you think about as far as the risk -- the data points you gave about the risk pool rolling off was very helpful. But is there anything that you think about as far as like impact of that risk pool relative to the MLR impact of the membership that has already dropped? Is there a reason to believe that work requirements will be better or worse, neutral relative to the overall risk pool?

Kevin, on your last point, do you mean relative to those 2 dropped during redeterminations or those who have already rolled off in some of the sort of early attrition, if you will?

Well, yes, I guess, versus the comparison period that we're looking at. Because I guess, if you have 1 million people drop off, 1 million people drop off in each period, is the 1 million dropping off now sicker, healthier than the 1 million you dropped off a year or 2 ago and now in the base data?

Got it. Okay. So let me talk a little bit about sort of overarching arc. As we come into 2026, obviously, we've been very focused in the last year on sort of the multi-tenant program in terms of execution and discipline on cost trend. We, as you know and everyone knows, we have incrementally every quarter, we have more and more of the trend that we've seen in that base period. And that's why I think we continue to see strength in the development of the rates.

And I think what we are seeing a little bit now and what we're at least accounting for in the back half of '26, and frankly, to some degree, what we've seen in that kind of 1 point to 1.5 points of membership attrition that we originally accounted for, obviously, it's a little bit higher now, I do think is some degree of pull forward of the OB3 impact.

And so those things are sort of colliding, if you will, in the back half of this year. And we're able to demonstrate that we're still powering through that. Again, with some degree of benefit from the tailwind of the rates, and not necessarily with the explicit input into the rates of the OB3 impact that we believe were to come.

And so if you think about the 7/1 rate cohort, a few of those states did put in explicit factors for the OB3 implementation, but all of them have committed to looking at those rates 1/1/27 and thinking about mid-cycle adjustments as we step into the year when those impacts are going to come.

So again, in terms of that delta between when do we see the impact, when do we get rate for it, it continues to feel as we look at OB3 that there's going to be a tighter coordination between states, knowing that these impacts are going to come, actually being able to calculate what those will be and then accounting for those in the rates ahead of time. Again, to the extent that there's a dislocation, I think we have the tailwind of strength in rates from trend.

All of that said, and I think this is exactly what you're getting at in your point, I do think that that will mute the full potential of margin recovery that we would want to see from our efforts as we think of back half of '26 and part of '27. And once we get back half of '27, I think what we will start to see is the ability to impact underlying trend, have the benefit of the tailwind of rates from the base period and then the benefit of explicit adjustments in the forward-looking rates relative to OB3. And that's when I think we start to get acceleration on margin recovery. But again, our goal is to continue to drive margin improvement regardless.

And then maybe, Drew, do you want to talk just a little bit about sort of the relative acuity of the populations that are -- have been rolling off sort of quarter-over-quarter, if we see any changes there?

Yes. I think to reinforce something Sarah said earlier, really important to understand this in the context, I know Kevin, you do, but for the broad audience. The expansion population, historically, about 20% of our membership, as of June 30, 19%, we expect within our guidance and our forecast down to 18%. So it is an isolated population that we can track the data on, which gives us comfort with what we've seen so far in terms of acuity moves as that population is slowly shrinking with the pull forward, that we've got that covered in our guidance, inclusive of the benefit that Sarah covered on the 7/1 rates. Pleased with the discussions with our state partners, as she said, in terms of the acknowledgment -- explicit acknowledgment in terms of adding into the rates for a few of the states, but the acknowledgment that once those states decide how they're going to implement OB3 or any pull forward of expansion membership verifications, that the rates would be reconsidered at that interim point in 1/1, really before much of the impact were to occur.

So there's a lot to execute on, but we're sort of all over it with that isolated population really focused in the expansion population.

Our next question then comes from Stephen Baxter at Wells Fargo.

Just a couple of more clarifications on the improvement in the exchange outlook. Is the out-of-period 180 basis points included in the margin revision that you gave? So I think it's worth about 50 basis points of the improvement. And then if we think about the other improvement that you're seeing, I think you're saying both the risk adjustment is improving versus the -- I think it was a slight receivable before now a meaningful receivable, and cost trend is a little bit favorable to what you previously assumed? So as we think about the remaining 125 basis points of improvement, I guess how should we think about the relative contribution of those 2 factors?

Yes, you're right. We're going from a 3% pretax margin in prior guidance to 4.5% to 5%, midpoint 4.75%. And yes, I think you got the math right, the $180 million is about 60 basis points on the full year. But there's some additional improvement in there, both from -- and you sort of have to look at these in tandem, both from the improvement relative to prior guidance in our relative risk position. I mean we had the hypothesis, as you may have -- you may remember from the Q1 call with the early Wakely demographic data, that report that we helped drive for the first time this year, and we got the corroboration and the actual claims data, 4 months of claims data in the June Wakely. So you have to look at that in the context of cost trend. But both of those things were positive drivers in the quarter and for the full year.

And we're also being thoughtful in our guidance about we increased the sloping of the HBR in terms of thinking through the benefit plan rollout, especially with a higher Bronze population for us, and we were thoughtful about any potential revenue reconciliations relative to eligibility verifications as we thought about making sure we're covered for in that 4.5% to 5% for any potential aberrations in the back half of the year, though Q2 looked pretty good in terms of a jumping-off point for Q3.

And our next question today comes from A.J. Rice at UBS.

I know you're undertaking some initiatives to just impact the overall company cost structure. I think you instituted some employee buyouts in the quarter. Drew is also talking about the technology and AI investments you're making. Can you just comment on how [ that ] in and of itself, regardless of what's happening with the cost trend, impact your cost structure, maybe your G&A ratio and how you think about how that may improve going forward?

Yes, A.J. So coming out of sort of back half of '25 and into '26, you heard us talk about our focus on multiyear margin restoration for the business, and also view that there was an opportunity in this moment for a lot of different reasons to really optimize enterprise for what we see in the future. And that has taken a number of different shapes and forms, including simplifying the organization, simplifying our operating model ways of working, really thinking about how to even further leverage the size and scale of the organization for the benefit of member experience and, obviously, being sort of good stewards of taxpayer dollars.

Really simplifying our interaction with members and providers and then, again, leveraging data and AI to modernize our operations overall. So we touched on a couple of those. I think we'll continue to share the impacts of those and the different opportunities. But it is -- it really is in service, as I've said a couple of times, of delivering industry-leading health outcomes. So really thinking about the quality impact to our members, making sure they have access to high-quality care, that they are actually sort of seeing improvements overall, which impact the HBR, but also doing that with an industry-leading cost structure.

And so that's something that we're focused on. I think you see good SG&A results this year. We're going to continue to focus on that as we go forward because we believe that there is opportunity in that area. And that's part of the goal that we've set out for ourselves over the long term.

And our next question today comes from Lance Wilkes of Bernstein.

Can you talk a little bit about your ICHRA business and in particular, kind of size the membership, sales outlook margin performance and the types of clients that are interested in that thus far?

And maybe just 2 quick cleanup clarifications. One would be, what are you seeing as far as low utilizers over in Medicaid? I think you've commented on that previously. Maybe you could just update us on how that is looking. And in the note or in the press release, you talked about particular areas of medical cost management that you were performing well in. Maybe if you could just highlight what those were within Medicaid.

Yes, sure. So Medicaid, in terms of medical cost, fundamental trend drivers were consistent with past quarters. So we've talked about behavioral health, home health, high-cost drugs. We did see a second quarter of year-over-year moderation in behavioral health, particularly in ABA, and I think that's a direct result of our focus in the space and the work that we've talked about and done really over the last 12 to 18 months in terms of everything from member outreach, educating providers on standard of care, influencing policy, and then, of course, aggressive fraud waste and abuse in such a fragmented provider network. So that is a space that we really are seeing the impact of our efforts.

There are other places that we made progress in the quarter. One example around payment integrity, is really in those areas that are susceptible to more of the AI up-coding. We've talked a bit about sepsis and the fact that we started to see an uptick on that as well as it's showing up on lower duration stays and showing up as a diagnosis code without the underlying clinical documentation to support the level of acuity that that diagnosis would suggest. And so we made great progress in the quarter in terms of implementing algorithms, and some of that is the AI I talked about, but also kind of clinical conversations and making sure that we're actually paying correctly for the care that's delivered. So those are the 2 areas. And then as we talked about, we have a pretty robust pipeline.

Let me just talk quickly about ICHRA and then I'll turn it over to Drew to talk about the low utilizers in Medicaid. Our ICHRA business is roughly 50,000 members today. That's a 2.5x growth since last year. So great growth rates, small numbers. But I would say that there is no shortage or abatement in the interest and energy around ICHRA as an alternative. And that is -- some of that is driven by the fact that employers, were among those, are seeing the pressures cost drivers going up and those getting passed through to us. But it's also the fact that in the number of geographies, the options for small group are deteriorating.

So we think there is -- continue to believe that there is a great opportunity there, as I think many know, we offered ICHRA as a benefit to some of our employees and have used that to get a really good sense of the benefits that that can give employees as an alternative in terms of choice and portability and frankly, greater affordability. So we continue to be bullish about that. It's obviously a much smaller portion of our portfolio, but we think it's a great option for the future. And then over to Drew on low utilizers.

Yes. So Lance, yes, we track low utilizers in all of our lines of business. And as you understand, in an insurance business, you have sort of this gamut of high utilizers and you always have a cohort of low and 0 utilizers.

When you look at that for Medicaid specifically, you're right, we've seen a drop in those low utilizers, 0 utilizers from the PHE, public health emergency, period, as you would expect, making our way towards pre-PH. And interestingly, which ties back to our discussion about the expansion population and the slight acuity shift that we're noticing and we're planning for, it's the most pronounced, the drop is most pronounced in the Medicaid expansion population as a subset of our overall Medicaid portfolio.

And our next question today comes from George Hill at Deutsche Bank.

And I'm going to ask Steve's question, but from the PDP perspective. If we back out the PDP adjustment, it looks like that's about 60 basis points, if I'm doing the math right. The margin expansion is going from -- expectations going from 3% versus 2%. So I guess I would ask, like, is that like 50 basis points of like real margin expansion versus the prior expectation? And kind of how do you think about the risk and the balance of the year as those beneficiaries hit their moves? And do we see like a step-up in utilization in the back half of the year? So just how we're thinking about this to the organic margin expansion.

Yes. Good questions around PDP, and a business that's performing well. Once you get through the second quarter, George, you have a pretty good sense -- since it's a pharmacy benefit only, while it's complex. It's a pharmacy benefit only. You've got a pretty good read on the year. But you're absolutely right, tracking through the maximum amount of pocket moves through the year and then having visibility of the prior years that were impacted by the Inflation Reduction Act and, quite frankly, triggering some additional utilization in specialty, as we covered about a year ago. So that's performing well.

You may have noticed we said greater than 3%, not just 3%. And so we're bullish about sort of our positioning for this year. We're sitting on greater than 3% right now. And you're right on your math in terms of the benefit that we had in the quarter for the settlement of prior-year risk adjustment and quality items that we wanted to make sure you understood as you think about rolling this year into 2027.

Our next question today comes from Sarah James at Cantor Fitzgerald.

I wanted to drill a little bit into the AI investments and G&A. So in AI, your shift and focus to platform-related items, trusted data products, dynamic context management, can you help us understand on the more practical level, what that means? And is it a platform build or a vendor relationship?

And then second, in the Q, you guys mentioned that you're considering early adoption of ASU 2025-06. So if you do that, how meaningful of a tailwind could it be to G&A? And is any of that overlapping with the $480 million enterprise optimization of G&A? Or is it a separate lever?

Yes, Sarah. So my comments were to go a little bit deeper on strategy. Less so a shift, but more to point out that there we've made good products in terms of high ROI use cases and deployment of AI. It is still early. And it's a little bit more of a philosophy, which is, I think it's easy to get on an earnings call and say, we're doing AI everywhere and we've got all these great partnerships. But our view is that for -- there is also a risk of spending a lot of money on AI and getting no return for it. And that's not something that we can afford to do as a Medicaid-first company in a margin-compressed environment.

And so we are really strategically thinking of this around, first, the greatest value that will come from all of this and sort of the ability to maximize AI is really predicated on the command you have of your data, the ability to build differentiated data products and to maintain and own the context layer. And if you think about being the largest Medicaid managed care, the largest government-sponsored programs company in the market with 25 years of history and context, that's really where we are focusing in terms of the foundational work.

And so while we'll continue to highlight places where we're then leveraging that to deploy use cases, are also holding ourselves to an extraordinarily high bar in terms of the ROI. We aren't just going to deploy AI to talk about AI. We're going to deploy it where there is very clear, tangible return on that investment. And we think the way to do that is by this foundational focus on data and context in the short term. So more to come on that, but it was really just trying to sort of click down and give folks a sense of our philosophy and how we're being prudent about investments in that space.

Yes. And as far as the early adoption of that internally developed software pronouncement, that's not going to be material to the company. What you're seeing in SG&A is sort of real true, substantive execution and action. And as you heard from Sarah, and as we look ahead, we're very optimistic about our ability to deliver an industry-leading cost structure, including the SG&A element on behalf of state and federal customers and, ultimately, taxpayers.

And our next question comes from Scott Fidel with Goldman Sachs.

Wanted to just tack on -- I know there's been already a couple of questions about the out-year dynamics in Medicaid with OBBBA. I feel like one area that the work requirements get a lot of attention, and rightfully so, but the other regs seem to get a lot less attention in the discussion in terms of the Medicaid [ SVPs ] and the provider tax reform and then the budget neutrality of the [ 1115 ] waivers and just effectively around how much more limitation on the states that's going to create on their funding as the Feds look to sort of bring the sort of the mapping back down in ballast where it used to be more traditionally. So just would be interested in your thoughts there in terms of ultimately how do you think the funding environment may evolve with the states and how that sort of intersects with your efforts to get rates back up above cost trends and then continue with margin recovery, more looking out sort of into FY '28, '29 and '30.

Yes, Scott. And you're right to point out sort of what I referenced before that there are kind of multiple components of this that are colliding that aren't just work requirements. What's interesting is -- and it goes back to kind of what is the value of managed care. One of the biggest values that we deliver to the states is being able to help them contain their budget and have budget predictability. And so what we have found is that when states go through periods of budget pressure, it actually creates strength in the partnership.

And it's part of why we've talked -- you've seen over the last year a different level of engagement and movement in terms of program changes and benefit changes. And a lot of that is because states look to us for ideas and for opportunities to maintain the fidelity of the benefits that they want to offer to the Medicaid population, but doing so within a more budget-constrained environment. It's also a time where we've seen much more movement of specialty populations into managed care.

And so the states are absolutely sort of wrangling all of those pieces at the same time. But we actually think it's an opportunity to have productive conversations about where they can get savings without further cutting into the Medicaid program. Think about carving in more population. So it actually could be a period of potential further growth. You're seeing a little of that come through in the RFP cycle. And so again, it's certainly going to be a number of things that we've got to work with them on over the next couple of years, but I think it's a much more balanced view than just feeling like all of these policy changes are going to create pressures ultimately on rates. I think they need to fund the programs. And I think we've got great ideas about how they can do that and have the opportunity to -- and are engaging with them on that front already.

And our final question today comes from Michael Ha at Baird.

I just wanted to follow up on Kevin and Lance's question, just ask it in a different way, just looking for more granularity since it's such an important topic. So I understand, Drew, you said the remaining low, no utilizer Medicaid members much lower now than the last few years, and you only expect a very modest acuity shift into next year. That said, I know this year, a bit higher member attrition [indiscernible] rate cushion on the table for back half acuity shifts potentially, I was wondering if you could provide just more granularity around what you mean by low utilizer today, specifically, like what MLR range would you even consider a lower utilizer? And how is the distribution members across these buckets changed in your expansion book since redetermination first began in 2023?

Yes. So we take a look, we can slice the data in so many different ways. And then you also have to think about we're only 6 months into the year and factor that into the cohort you're looking at because, obviously, you have to compare that to like periods. But like if you step up and look at fundamentally, as you would expect, the, let's say, 0 utilizing population is down from that PHE time period, as I said before, and the med expansion population where we are seeing slight -- I mean I'm talking slight acuity in terms of what we expect this year, which the 50 basis points should more than cover in terms of the back half of the year. But we're being thoughtful about there is an impact when you shed lower utilizing members when states may not adopt OB3 early, but some states are explicitly taking action, effectively pulling forward some of that impact. And that actually gives us really good data to be able to share with other states.

I mean there's one state, as you know, that adopted the OB3 provisions early. So we're getting early data on that state. It's pretty immaterial, but it's data nonetheless.

So we're confident we can manage through this. But it's good to be able to have these discussions with our state partners to acknowledge that when actions are taken on the expansion population, which is not in all of our states, but those actions will have rate consequences. And we're already seeing traction, not just in discussions, but in actual rates being provided in advance in 7/1 in a few states.

So we're optimistic we can roll through this, and it's really good to have the muscles that have been built both on the payer side, but also on the [indiscernible] in terms of the acknowledgment of what acuity shifts mean in Medicaid.

And that concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks.

Thanks, Rocco. Just to wrap up, obviously, we feel great about the progress so far this year on our margin restoration agenda and feel like we have a prudent posture as we look at the back half of the year.

Just want to thank everyone for joining us this morning, for your interest in Centene. And a big thank you, as always, to the CenTeam. It is an honor to be on this mission with you. Have a great day.

Thank you, ma'am. This does conclude our conference call for today. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Good day, and welcome to the Centene Corporation's 2026 First Quarter Earnings Report. [Operator Instructions] Please also note today's event is being recorded. I'd now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our first quarter 2026 Earnings Results Conference Call.

Sarah London, Chief Executive Officer; and Drew Asher, 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. Specifically, our commentary on our full year 2026 outlook, including the drivers of such outlook, are forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our first quarter 2026 press release and other public SEC filings, which are available on the company's website under the Investors section.

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.

I 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 first quarter 2026 press release.

With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Thanks, Jen, and thanks to everyone for joining us. This morning, we reported first quarter adjusted diluted EPS of $3.37, exceeding our previous expectations for the period. The strength of our first quarter performance enables us to increase our full year 2026 adjusted EPS outlook to greater than $3.40, up from our previous expectation of greater than $3. We are pleased to be off to a strong start this year as increased visibility and operational improvements are yielding positive momentum and lifting our overall financial performance.

Results in the quarter included excellent progress within our Medicaid business as we continue to drive margin improvement through targeted and increasingly scaled initiatives to modernize and standardize processes to better manage medical cost trend. Our Medicare segment results were ahead of expectations with outperformance from both Medicare Advantage and PDP offerings. And finally, our commercial segment, the vast majority of which is made up of Marketplace performed in line with expectations on a pretax margin basis as a slightly higher-than-expected HBR in the period was offset by favorability in segment SG&A.

As everyone knows, it is early. So while we are off to a great start, we are taking a prudent outlook for the balance of 2026 as we continue to gain visibility into key factors that will influence the remainder of the year. With that, let's dig into the results.

Medicaid results in the quarter were ahead of our previous projection, outperforming our HBR expectation in the period. Within that, we experienced a flu season that was lighter than our original forecast and saw a slight utilization benefit from weather events. That said, we were pleased to also deliver solid fundamental outperformance in the quarter, thanks to continued focus and disciplined execution on trend management initiatives across the portfolio.

[ Kavrell ] Health remains the largest driver of trend with other categories like home health and high-cost drugs continuing to be consistent contributors. That said, we are beginning to see pockets of deceleration across this cohort largely in line with our expectations for how trend would mature from 2025 into 2026.

At the same time, we continue to strengthen and scale the multipronged trend program we deployed in the back half of 2024 and ramped significantly in the face of elevated trend in 2025. This includes standardizing best practices on utilization management across our markets, the addition and further expansion of successful clinical programs ongoing data-driven network optimization to ensure our members have access to the highest performing providers, advocacy around program reform with our state partners and increasingly aggressive efforts to stamp out fraud, waste and abuse.

We've discussed here at some length the work we've done around ABA, but with the benefit of more than a year's worth of data under our belt, we are seeing stabilizing year-over-year ABA trends that we believe are a direct result of the actions we have taken to ensure appropriate high-quality care for ABA members across the country.

We continue to strengthen our identification of outlier providers who exhibit suspect or fraudulent billing patterns. At the same time, we continue to advocate for the ability to more fully address fraud, waste and abuse in a standardized prevention-focused posture across Medicaid programs. We recently highlighted several potential reforms in response to an RFI from CMS, including allowing proactive payment suspensions, creating safe harbors and improving 2-way data sharing. We look forward to partnering with CMS in the states we serve to better protect taxpayer dollars and strengthen overall program integrity.

Looking to the remainder of the year, our guidance assumes net trend, defined as medical costs net of these trends management initiatives, remains in the mid-4% range, and we continue to execute with the goal of outperforming that target. Rates are, of course, the other major contributor to our margin restoration agenda, and we continue to work closely with our state partners to ensure alignment between program revenue and member acuity.

With respect to the full year outlook, we continue to track in line with our expectation for a composite rate yield of roughly 4.5%. Conversations with Medicaid departments remain constructive, and we continue to present refreshed data and in many instances, programmatic solutions for challenges our state partners are facing as they look to balance costs and benefits within the Medicaid program. It is still early, we are pleased with the momentum we are seeing across the Medicaid portfolio and we continue to see opportunity for advancement in 2026 and beyond.

Our Medicare segment also delivered strong results in the quarter. Both Medicare Advantage and PDP exceeded expectations, producing an HBR of 84.9%, better than our previous forecast and contributing nicely to the first quarter adjusted EPS B. Medicare Advantage, we continue to strategically align our membership with our Medicaid footprint and made great progress on our path to positive earnings. While trend continues to be elevated versus historical baseline, it is so far consistent with what we planned for in our bids with slight favorability in Q1.

Thanks to strong execution during both AEP and OEP, we are seeing a slightly more favorable membership mix and our decent membership is now at 40% of our overall portfolio. We are also seeing stronger year-over-year member retention, the continuation of a now multiyear theme, reinforcing the value of investments made over the last few years to redesign our sales and onboarding experience. This durable member base gives us the opportunity to deploy differentiated care models and drive both quality and health outcomes for members over the long term.

Business also continues to make solid progress on our value-based care strategy. The team has built a disciplined, performance-driven model that is tightly integrated with network strategy, clinical execution and cost management. We have simplified our contract structure and focused the portfolio to a partner ecosystem that we believe can truly move the needle on quality and cost outcomes.

We're also deploying innovative total cost of care models against high-cost specialties such as oncology, chronic kidney disease and behavioral health. These are part of a broader portfolio of initiatives designed to build critical momentum as we look to return the business to profitability.

Our PDP business ended the quarter with just over 8.7 million members, thanks to the team's once again, thoughtful and data-driven approach to bid design and positioning. While it is still early, fundamental outperformance in the quarter was driven by slightly lower-than-assumed specialty drug trend, which gives us increased confidence in the trajectory of the business for the year. We are pleased that our Medicare members will have the opportunity to participate in the CMS Bridge program, and we support the goal of expanded GLP-1 access for more seniors.

As the largest stand-alone Part D provider in the country, we've also been actively engaged in dialogue around the balance model and remain committed to partnering with the administration to leverage data, best practices and lessons learned from the Bridge program to position balance for success in the future.

Looking ahead, we are encouraged that the finalized 2027 Medicare Advantage rates showed improvement compared to the advanced rate notice. While the final rate remains below observed medical cost trend, we continue to see a path to delivering breakeven financial results next year. Medicare Advantage and PDP programs play a vital role, providing access to care for millions of Americans, including some of the most vulnerable of our nation, and we look forward to working with the administration to identify new and important ways to fortify this program and strengthen the safety net overall.

Finally, Marketplace. We ended the quarter with just under 3.6 million members, consistent with our previous commentary about post grace period membership. Metal tier distribution and age stayed consistent with patterns we reported on in early March with just under half of our members in silver, roughly 35% of members in Bronze and the remainder in Gold. Other member demographics like age and gender remain consistent with expectations and with recent years' results.

Marketplace results were in line for the quarter with a slightly higher HBR offset by outperformance in SG&A. Within these results, the Q1 HBR was driven by higher than originally expected utilization isolated in our Silver tier membership, a dynamic we foreshadowed in early March. With the benefit of additional visibility, including the new March Wakely report and more complete claims experience, we now view this utilization as consistent with the acuity of the Silver members we enrolled, and we expect this membership to receive a meaningful risk adjustment offset as we look to the balance of the year.

Let me talk about the additional insight we have gained since March. After last year's unexpected volatility, Centene committed to finding ways to create additional and earlier visibility into this market to support long-term stability. Last fall, we reached out to many of our peers, all of whom are receptive to submitting earlier data on membership demographics. Wakely, the independent actuarial firm that calculates interim risk transfer estimates for the market throughout the year, agreed to aggregate and publish that data at the end of March.

As a result of that collaboration, the industry has more visibility than it has ever had at this time of the year about overall market dynamics. Having received this demographic data from almost all of our 29 markets, we are pleased to see that the market overall behaved in line to slightly favorable to our expectations despite 2026 being a year of unprecedented change.

First, the overall market contracted as expected in a post APTCs environment. That said, market-by-market membership loss was in almost every market, less than we expected, which suggests that more healthy members stayed in the market in aggregate and that our pricing was appropriate relative to the overall market morbidity. Second, the Wakely data confirmed a meaningful market-wide shift from Silver members into Bronze and to a lesser degree, Gold, consistent with our expectations and with a directional shift in our own metal distribution.

Finally, and perhaps most importantly, this data, when combined with our final Q1 paid membership and a full quarter's worth of claims experience, strongly supports the view that Ambetter retains Silver membership with higher acuity relative to the market and that this membership will ultimately receive a meaningful risk adjustment offset.

Within our Silver tier, 75% of our members were renewals, giving us a high degree of visibility into year-over-year risk score capture. Through Q1, risk scores tracked closely in line with what we would expect given our claims experience in the period. Wakely data further allowed us to see a strong, consistent correlation between markets where we lost share due to price action and an increase in the overall acuity of our Silver population. Both of these data points strongly support the mix shift hypothesis.

Looking to the rest of the year, we have taken what we believe to be a prudent posture relative to our forecast for the business, not reflecting the full suggested risk adjustment offset for this population within our new greater than $3.40 guidance. The June Wakely data, which consists of claims and risk score data across the market, will be key to allowing us to further refine this assumption. We continue to believe in our ability to deliver meaningful margin recovery in the Marketplace business and look forward to updating our full year view with the benefit of the June data.

Stepping back, we are pleased that the disciplined execution this quarter yielded solid financial results. As we strengthen the fundamental operations of each of our businesses, we are increasingly well positioned to deliver tangible progress against our margin recovery goals. For this work, we announced an evolution of our leadership structure earlier this month. We are pleased that Dan Finke joined the organization to serve as our Group President, overseeing the Medicaid and Commercial businesses, and we were pleased to elevate Michael Carson to Group President, overseeing our Medicare PDP and Specialty businesses.

Their collective experience will be instrumental as we continue to strengthen performance across the portfolio and deliver sustainable profitable growth.

I'd like to close by calling out two additional bright spots from Q1. First is progress at Centene and the entire industry have made against our prior authorization commitments, including additional commitments announced last week that will make the prior authorization process faster, easier and less expensive. In our view, this work is not about self-regulating, it's about self disrupting. Industry leadership has worked closely together over the last 1.5 years, not because it is easy, but because it is the right thing to do for our members and for the health care system overall.

I'd like to thank my peers for their awesome partnership and acknowledge the many team members at those organizations who, along with the CenTeam, are committed to transforming our systems and the system overall through an unprecedented level of collaboration and transparency.

Finally, I'd like to close by congratulating the entire CenTeam for being named to the Forbes Best Employers for company culture list for the second year in a row, jumping more than 150 spots from our inaugural ranking last year into the top 50 employers in the country this year. While I'm pleased we delivered strong results in Q1, I'm even more pleased by how we delivered those results, collaborating as one CenTeam, living our values and behaviors and staying focused on our mission of transforming the health of the communities we serve one person at a time.

With that, I'll turn it over to Drew to provide more details on the quarter.

Thank you, Sarah. Today, we reported a strong first quarter, including $44.7 billion in premium and service revenue and adjusted diluted earnings per share of $3.37. This was just under $0.50 better than our expectations, largely driven by outperformance in Medicaid and Medicare segment HBRs. Our consolidated HBR was 87.3% for Q1.

Starting with Medicaid, we ended Q1 with 12.4 million members, slightly down from year-end. More importantly, we demonstrated continued progress in the HBR with Q1 at 93.1%, an improvement of 50 basis points from the first quarter of 2025. As Sarah indicated, our slate of initiatives on both revenue and medical expense are bearing fruit as we continue to navigate an elevated behavioral health and high-cost drug environment.

While we have a ways to go to get back to a reasonable Medicaid margin, this is the third consecutive quarter of progress toward that goal. We expect continued momentum as states reflect base trend in acuity data in rates and work with us to shape successful and sustainable programs.

Medicare segment results were better than expected, including an HBR at 84.9%, demonstrating outperformance in both MA and PDP for Q1. Medicare Advantage, this gives us more confidence about the path to breakeven for 2027. And in PDP, it's always instructive to see how pharmacy trends start the year relative to expectations. To be clear, medical and pharmacy trends are still historically high in those businesses, though, were not as high as what we had built into our forecast as we actively manage cost and set bids accordingly.

PDP high trends and high 2025 baseline cost, especially in specialty pharmacy will be factored into the 2027 bids. This, coupled with the mere mechanic of a risk model that's calibrated based upon pre IRA claims data and therefore, still insufficient to address non-low income trend, should push the direct subsidy up quite a bit again in 2027. In the meantime, we are pleased with the strong start to 2026 in both MA and PDP.

Marketplace pretax earnings were on track in Q1 with a slightly higher-than-expected HBR in the quarter offset by strong SG&A management in the product. Consistent with what we told you at the March conference, our Silver metal tier members had higher than originally forecast gross medical cost in Q1 before any incremental 2026 risk adjustment benefit. We are very pleased with the early insights gained from the March Wakely data and reports.

Sarah took you deeper into those observations, but suffice to say that the market size and share shifts when coupled with the metal tier distribution and our observed risk score trends are consistent with meaningful risk adjustment offsets for the higher Silver tier gross claims trends. In our current guidance, we have calibrated these factors in our membership distribution such that our forecasted year-end risk transfer assumption is for a slight receivable versus a prior payable forecast.

Let me simplify all this in terms of guidance. We thought it would be prudent to embed in our current guidance a pretax margin for Marketplace around 3% for now, compared to our original forecast of approximately 4%. And as you heard from Sarah, this does not reflect the full potential risk adjustment offset suggested by the data we currently have as we await the June Wakely data.

I'd also like to thank my industry peers for being receptive to this new Q1 process and recognizing an opportunity to gain visibility earlier in the year and most importantly, for timely submission of useful data to Wakely. This not only helps with 2026 forecasting, it will also give others earlier visibility of their potential risk transfer position when formulating 2027 pricing.

One more thing on Marketplace. We ended the quarter with 3.58 million members right around where we told you we expected to be after navigating sign-ups, payments and effectuation. Consistent with our original guidance, we expect a little attrition throughout the remainder of the year, ending 2026, a little over 3 million members.

Consolidated adjusted SG&A expense ratio was 7.6% in the first quarter compared to 7.9% last year, reflecting continued discipline and product mix.

We ended the quarter with $437 million of cash available for general corporate use. During the first quarter of 2026, the company sold $1 billion of our stand-alone 2025 Part D risk share receivables and proceeds were used to repurchase $1 billion of senior notes that when coupled with strong Q1 earnings, resulted in a debt-to-cap ratio of 43.2%, down from 46.5% at year-end.

Medical claims liability totaled $20.6 billion and represents 48 days in claims payable, an increase of 2 days as compared to the fourth quarter of 2025. As we look ahead, due to seasonal PDP sloping and the 2026 proportion of PDP to the total company, we would expect this faster completing business to drive down DCP a day or two as the year progresses.

Cash flow provided by operations was $4.4 billion for Q1, primarily driven by strong net earnings, partial 2025 CMS PDP receivable sale and timing of other net payments and receipts.

As we look to the rest of 2026, we are pleased to increase full year adjusted EPS guidance to greater than $3.40. Press release table, you can see we added $1 billion of premium revenue to our prior range, largely driven by Texas Medicaid. We expect overall Medicaid membership to be down about 6% from year-end to year-end. We continue to be on track and expect the Medicaid composite rate yield around 4.5%. We also adjusted our consolidated SG&A guidance range down by 10 basis points and added $50 million to expected investment income, and no change to our HBR full year range of 90.9% to 91.7%.

One final topic, within finance, we are deploying advanced analytics and selective AI-enabled tools across forecasting, medical economics and payment integrity. Today, these capabilities are used as an independent validation layer alongside our traditional forecasting process, bringing more timely data into how we evaluate emerging medical trend. Also helping us identify fraud, waste and abnormal claims behavior earlier, supporting better prioritization of resources and more disciplined cost management on behalf of state and federal tax payers.

We are pleased with a great start to 2026 and look forward to continuing to drive the margin recovery opportunity. Thank you for your interest in Centene and Rocco, we can open it up for questions.

[Operator Instructions] And today's first question comes from Andrew Mok at Barclays.

I wanted to follow up on the higher acuity in the ACA Silver tier. Can you help us understand why you believe you attracted that higher acuity cohort for this year? And it sounds like you're currently accruing for a partial risk adjustment offset and 3% pretax margins. If you did ultimately get the full risk adjustment offset, what sort of margin would that imply for the full ACA year?

Yes, thanks, Andrew. So let me sort of take a step back and sort of anchor on the biggest thing that changed in 2026 for everybody, which is really the expiration of the enhanced APTCs, and thanks to the new Wakely report with earlier data, we can confirm that, that, as expected, drove a significant number of consumers out of the market. It also, as we've seen, as our peers have said and as the data confirms, drove a shift across the market from Silver membership into Bronze products as consumers looked for more affordable plants. And so as a result, the Silver tier remaining membership really follows the golden rule of risk pools that when it strengths, it becomes more and more bid.

And so given our market size, our Silver footprint and, frankly, our intentional decision not to go as hard at Abram strategy, which we still very much stand by, we were positioned to retain and attract more Silver members who are now more acute in that overall post-APTC environment.

Now important to note that in other insurance markets, the concept of adverse selection can be scary, but that's not actually the case in Marketplace because, as you know, the risk adjustment mechanism is specifically designed to counteract adverse selection. And often, it can actually be a profitable strategy to care for sicker members in this market. And that's really based on our view, with more than a decade of experience in the market.

So as we think about the additional visibility that we have since March by virtue of the Wakely data, which has really confirmed that unlike last year, the market is behaving the way we would expect in a number of cases, actually favorable to our expectations, and then the additional quarter of claims experience for our paid membership where we're seeing those risk scores year-over-year track directly in line with the claims experience that we observed. That gives us confidence in the view that we have a higher acuity Silver membership that will attract and get a risk adjustment receivable.

As you heard from both my remarks and Drew's, we have not accounted for the full range of what that receivable could be in the updated guidance, but that range does wrap around our original 4% target margin for 2026 in Marketplace and frankly, higher than that at the top end. And so we're -- bottom line, we believe that what we've incorporated into guidance is a prudent posture for now in advance of getting the June Wakely data, and we still feel very good about delivering meaningful margin improvement for the business in 2026.

And our next question today comes from A.J. Rice at UBS.

So I think coming into the year, you basically in Medicaid, were forecasting a cost trend of about 4.5%, mid-4s and the rate updates being at 4.5%. It sounds like the rate updates are coming in consistent. The -- maybe the MLR and Medicaid is trending a little better. Is that primarily due to the flu and weather that you're calling out? Or are you seeing underlying performance improved there? And does that put you on a glide path if the trend is a little better versus the rate updates to get back to sort of a target margin for Medicaid next year?

Yes, thanks, A.J. So you're right. We came into the year with an assumption of a flat HBR year-over-year and really, the idea that rate in that mid 4.5% will be matched by net trend, which is obviously overall trend netted against our medical cost initiatives of 4.5%. We obviously saw a better performance in Q1. A bigger piece of that was flu, a little bit of weather, but there was still fundamental solid outperformance on Medicaid HBR driven by the business. And that really is a result of that consistent sort of multi-tenet program that we've deployed over the last 1.5 years and pulling levers around network optimization, further scaling clinical programs, obviously, all the work we're doing around payment integrity and fraud, waste and abuse.

We're also seeing increasing momentum from states around program changes and starting to see states even more receptive. We've called out a number of examples of those in the past, whether it be around formulary management or clarifying some of the benefits. We're now seeing states start to directly intervene on providers themselves around fraud, waste and abuse. And so those conversations are continuing to roll forward. So very pleased with the idea that part of the outperformance in Medicaid in the quarter was driven by delivering on the planned initiatives and also the fact that some of that pipeline of 2026 additional initiatives developed a little bit earlier than expected.

Obviously, in the forecast for the rest of the year, we're not betting or counting on that outperformance to continue, but given sort of the fundamental drivers of that. It obviously leans positive. And that would mean that we would come in at HBR, call it, 15 or 20 basis points ahead of that 93.7%. As you heard me say before, I would be disappointed if we didn't beat 93.7% given where we stand today, I will reiterate that I will be disappointed if that's all we can do.

As we look ahead to 2027, our goal is to continue to drive margin improvement forward. And we obviously have work requirements and a number of policy changes that we're looking ahead to. But as we are strengthening the core operations of the business, we are doing that with a mind to and a goal to continue to drive progressive margin improvement through 2027.

And our next question today comes from Justin Lake at Wolfe Research.

Just a couple of follow-ups. One, you talked to the exchanges, and you talked to -- like you're talking to booking a receivable on risk adjustment, not just to the magnitude that you think it might actually come in. Is that true for the -- am I right there? And is that true for the whole book or just for the Silver's business? And then you gave us margins on Medicaid and exchanges, which we appreciate. Can you give us the same on Part D and Medicare Advantage in terms of margins, where you see them now versus coming into the year?

Sure. So first, you are correct that we moved our position to expecting a slight receivable in Marketplace. That is across the whole book because it is, as you know, just important to remember that risk adjustment is agnostic of metal tier. And so it takes into account the relative acuity of the population that you enroll regardless of where they sit between Silver, Bronze and Gold. So that receivable accounts for the entire population. And again, we did not book the full amount that the data suggests with that range, both wrapping around our original target margin and outpacing that, frankly.

And then in Medicare, again, we're not reflecting continued outperformance in quarters 2, 3 and 4 in either PDP or Medicare Advantage, but as Drew and I both talked to, the fundamental drivers of those make us feel very good about the trajectory of those businesses. And so that would suggest that both of those -- the segment margin for the full year would come in slightly better.

Our next question today comes from Ann Hynes at Mizuho Securities.

I want to focus on the balance sheet. It looks like that you paid off about $1 billion of senior notes that were due in 2027 by selling some receivables. And based on our calculation, you have another $1.2 billion due in 2027, and another $2.3 billion in 2028. So just for modeling purposes, should we assume that you'll have to refinance that at higher rates? Or do you hope to pay some of that debt down?

Yes. Good question, Ann, thanks for paying attention to the balance sheet, like we do. So yes, we're acutely aware that we've got some maturities coming up in December 2027 and then the summer of '28. And so we would look to refinance those or maybe to your point, part of those at least a year out or so as we prepare for sort of rolling those into additional senior notes.

So we're taking a look at our cash position and has improved quite a bit in the last 6 to 12 months, not just because of the PDP receivable sale. And we still have, as you can read in the last K and the Q, sort of the ability to sell more of that '25 receivable. But ultimately, we'll collect that, we think, no later than October from CMS. And then as we establish, let's say, a new receivable for the 2026 year, if that's where we end up in that position. then we'll think about that as well.

So really pleased with the cash generation of the business. You saw that in the cash flow from operations this quarter. And we'll evaluate sort of continued modification of debt balances. As we think about the volatility of this business over the last couple of years and think about what's the right debt load for the company to open up other avenues for deployment of capital.

And our next question today comes from John Stansel at JPMorgan.

I want to talk about rate development in Medicaid. I know the CMS rate development guide kind of alludes to the idea of like the work requirements. And as we kind of enter the back half of this year, you're going to have states giving rate base that will have to contemplate or could contemplate work requirements impacting the acuity of the valuation. I guess, how are you thinking about those discussions when you go talk to states? And I know we've got Nebraska kicking up work requirements, I guess, what, on Friday. How have your state discussions gone as we start full some implementation of work requirements?

Yes. Thanks for the question. So you are right that we've got Nebraska that's going to kick off earlier than others, although they're a 7-1 state. And really, they're the only state that has pulled forward into 2026 so far. But given that we operate in that state, I think that will be instructive. As we step into rate conversations this year, we are, as you noted, very conscious of the fact that some of those member months will carry into 2027. And depending at the rate and pace with which states roll out or implement the work requirements, and obviously, CMS has given them some flexibility around that, the need to incorporate any anticipated acuity shifts in those rates.

And so we're absolutely bringing that forward into the conversation. As I said earlier, those conversations continue to be constructive. Just as we think about the kind of backward-looking experience, we are seeing more of 2025 data and frankly, the back half of 2024 data, which had that -- the major acuity shift from redeterminations in it. And then the trend that we saw in 2025 really make their way into the base period. And so that's supportive of having rates that match overall acuity and trend.

And then very appreciative, as you mined out in the fine print, a really important set of guidance that CMS provided to states relative to when they come to seek certification on rates, being very explicit about how they have incorporated the impact of the OB3 and work requirements and what that might mean in terms of an acuity shift. So we think that is very helpful in terms of creating a level of consciousness and guardrail around that and sort of expectation management as those rates come up to CMS.

There was also, I think, a really helpful set of guidance around the fact that in these kinds of instances, media rates and retros are also warranted. And so broadly, what I think we are seeing is the system flex the muscles that we built during the redetermination process. And so again, increasingly, actuaries not being hard tied to retro periods, but thinking about material program changes that may come and how they need to account for that.

And then broadly, I would say that the flexibility that has been given to the states, the fact that this is on balance, a smaller, more focused population, we're seeing states actually get really precise a lot earlier in the process. I was talking to one state in particular that has already run their frailty definition on their population, has a very clear view of what the at-risk pool is, actually probably smaller than you would expect. And already thinking hard about, okay, what does that mean in terms of making sure that members who are eligible because they are correctly engaged or they are in that ex parte population get coverage and then how do we support the others to find opportunities.

So all of that, I think, gives us confidence. Now it's certainly a policy change and there's implementation and therefore, there is likely to be some degree of risk pool impact. But I think the way it's being rolled out is much more thoughtful, much more informed by data, much more aligned relative to our work, the state's work, CMS's work. And so I think that makes us look at 2027 and 2028 as something that we feel confident that we can manage through.

And our next question today comes from Erin Wright at Morgan Stanley.

Kind of more of a modeling question, but just the quarterly progression in terms of MLR and earnings from here. I know there's some moving pieces in unknowns and some assumptions you're making in Marketplace as well. But what is your guidance right now [indiscernible]? Or can you give us anything in terms of that quarterly cadence around MLR and earnings that we should be embedding in the model just given some of the maybe mismatch in terms of relative to your expectations this quarter and whether the Street wise, would like to get that right?

Yes. Thanks, Erin. So overall, EPS progression follows the same arc that we described coming into the year, but I'll let Drew go into a little bit more detail and then click down into the specific lines of business.

Yes, the EPS sloping, just like we said last quarter, we expect a step down in earnings from Q1 to Q2, still profitable. Q3 around breakeven and then Q4 at a loss position, given the seasonality of the business. And then maybe, Erin, more importantly, underneath that, what's driving that underlying sloping, in Medicaid, obviously, we had a good first quarter. We would expect Q2, Q3 HBRs to be higher than average and then Q1 and Q4 to be lower this year, lower than average.

And then think about the traditional sloping of commercial businesses, including Marketplace, that's like a steady uptick of HBR throughout the year given the benefit plan designs and seasonality of deductibles. Medicare similarly, largely driven by PDP, so you can see a steady march of HBR increase throughout the year. The slope line should be tilted a little bit higher this year just because of the mathematical impact of PDP being a larger proportion of the Medicare segment.

So think about that as you're modeling the Medicare segment, HBR throughout the rest of the year. And then SG&A, you go back multiyears, always the heaviest in Q4 given open enrollment and preparing for the 1/1 season. So that helps drive that -- us into a loss position for Q4.

Our next question today comes from George Hill at Deutsche Bank.

And I've kind of an esoteric question, Sarah, which is as we think about your guys' initiatives in fraud, waste and abuse in particular, in ABA, as we've had conversations with like state representatives, when those issues get addressed, they tend to come out of the rate from a state perspective. So actually, fixing fraud, waste and abuse ends up being a headwind to rate from a state perspective. I want to know is that something that you guys see? And is that a headwind that you guys navigate? And would just love to understand how those conversations go on with your state counterparts.

Yes, absolutely. So I think there are probably two components to that. So one is where we see excess use or fraudulent behavior. And unfortunately, we have seen a lot of that, both in terms of -- and I think we went into quite a bit of detail on this on the last call. But as an example, providers who were just prescribing the maximum number of hours every single week for every single patient. And so within that and then -- and frankly, sort of all the way down the continuum to more fraudulent behavior, that is a real opportunity to save taxpayer dollars and make sure that the fidelity of the rates that are in place for ABA are actually going to the right care.

And then I think similarly, making sure that whether with units per utilizer or the number of utilizers are getting correctly prescribed the right therapy path and getting the right amount. So a lot of what we've been focusing on is what I would call sort of excess trend and then to your point, ultimately, if there is a tightening of the benefit design that would then allow for some degree of savings in rates. But I think we've got a ways to go before we get to that point. And it's really making sure that the state is paying for the right therapy for the right members at the right level. And that's all good, right?

That is exactly what we want to have happen. But our focus has been in what we consider that kind of excess trend domain. And frankly, we're also seeing states, as I mentioned earlier, take more direct action and intervention on some of these suspect or fraudulent ABA providers, not even relying on the MCOs, but actually doing that directly because of an acknowledgment of, I think, the drag that, that is creating on the system overall.

And our next question today comes from Stephen Baxter at Wells Fargo.

Actually, another balance sheet question. It looks like the net payable for risk adjustment is up by, I think, over $300 million sequentially versus year-end. And I think you're obviously not speaking to a receiver position. So is that just more about how you booked Q1 versus how you're now thinking about the rest of the year in terms of guidance? And then if we think about basically the range around the potential upside and downside on the risk adjustment change that you're discussing in the potential benefit if it fully comes to a point estimate, is it right to think that like the downside scenario, if you go back to the original assumption is similar in terms of order of magnitude?

Yes, Stephen, no, an astute observation in the Q that we filed this morning. Yes, different thought process for what we actually book in the first quarter. And waiting to see, say, corroboration from the June Wakely data in terms of the accounting around that, which then think about our forecast, we forecast by year-end to be in that slight receivable position. So that's sort of the difference when you're evaluating that table in the Q.

And then as Sarah said, in the range of upside and downside, yes, you're always thinking about -- and believe me, as we raised guidance in Q1, we're thinking about what could swing either way in all of our businesses and feel pretty good about what we think is a cautious prudent stance at a Marketplace margin around 3%, pretax embedded in current guidance. And as Sarah said, with the opportunity to the extent we get the corroboration that the data that we're seeing currently supports, then that would present some degree of upside to that current guidance.

And I would just add, maybe specifically to sort of the downside scenario that again, emphasizing everything you said that we feel like we've anchored in a conservative point and that the downside would not be going back to where we started in terms of the meaningful payable assumption that went into the initial guidance for the year because I think that was maybe embedded in the question.

And our next question today comes from Dave Windley at Jefferies.

I wanted to come back to the fraud, waste and abuse topic, and a follow-up to George's question. We've heard some consultants suggest that like fraud targets in state rate development can actually create, air quotes, a go get for the plans in terms of savings that you need within -- again, within the rate development. I wonder if you see any of that, Sarah. And then same topic, but in the Marketplace, I'm wondering what, if any, additional, I'll call them, generally program integrity measures you're expecting to be applicable in '27 that are not applicable in '26?

Yes, thanks. So if I take a big step back on fraud, waste and abuse, we haven't -- I don't think we've explicitly seen the dynamic you're describing where states are kind of holding back on rate and saying, instead, you can make up the difference in fraud, waste and abuse. But frankly, I don't think we would be against that, right? The idea that states can -- would let us operate more fulsomely against our mandate, which is literally to preserve program integrity, there are a lot of places where I think we are handcuffed on a relative basis and where we could, I think, again, preserving all of the right benefits and the quality and the member experience preserve taxpayer dollars.

And so that's a dialogue that I think we would be open to. And I think as states start to think about ways to make program changes that don't necessarily require more rate changes, that's a perfect example of one. And we feel like -- I mean, we've hit this a couple of times, but we feel like this is a place where we have really, really focused where we are applying the fact that we've got 30 states worth of data. We aggregate that data, not just to look at best practices, but frankly, to find fraudulent providers who hang out a shingle and then get kicked out of a program and show up in another state.

And so we uniquely have an ability to get ahead of that. Drew talked about that in his remarks as well in terms of where we're deploying AI and some of those daily algorithms that we run. So again, I do think there is opportunity for program reform that doesn't necessarily create a rate headwind, but creates overall continued margin improvement opportunity and stronger program integrity for our state partners.

And then relative to Marketplace, we are seeing a cleaner membership base as a result of the program integrity measures that went into place last year and those that rolled forward into this year. Obviously, some of those were stayed, and those are part of a court case that we estimate may see some resolution as we get through the summer, may not. And so it's possible that some of those roll forward then into 2027, and we're taking that into account as we think about 2027 pricing and what slight additional impact that may or may not have on the membership base and the risk pool as we roll forward.

As I'm sure you're aware that we have a shortened open enrollment period for 2027, so we're preparing for that according to those rules.

Our next question today comes from Kevin Fischbeck at Bank of America.

I wanted to dig in a little bit more to some of the comments about Medicaid. I guess you said that you were seeing pockets of deceleration in some areas of trends. So could you just talk a little bit about that a little bit more? But then also, what are you seeing around acuity? I guess there's been a lot of risk pool shifts on the Medicaid side and some of your competitors are talking about stabilization there. I would love to hear how you're thinking about how the risk pool has been trending the last few quarters?

Absolutely. So we've talked about behavioral health, home health, high-cost drugs as three of sort of the top tier trend drivers for over a year now. And behavioral health has been and continues to be sort of the primary driver. of that. But we go deep and look at how we think trend is evolving in each of those areas, whether that be a PMPM impact, whether that be, as I mentioned earlier, sort of overall utilizers, units per utilizer depending on the domain that you're looking at. So as we look across that cohort, we are seeing some pockets of deceleration, particularly around sort of units per utilizer in the behavioral health space.

I think that is probably partly an indicator of are state partners getting more sophisticated about defining the benefit and the provider community getting stronger in terms of articulating evidence-based guidelines. And obviously, that is in strong partnership with the work we're doing. ABA is a subset of that. And you heard me talk about the fact that we are seeing sort of more stabilization in that trend. Those trends are still elevated from past years, but we are seeing a year-over-year relative stabilization, again, in our view, a direct result of all of the work that we've done over the past year.

So it's not necessarily some huge abatement. It's really sort of a trend lapse. We're not seeing the continued year-over-year steps that we've seen over the last couple of years, and we believe that a lot of the actions that we've taken are actually having an impact.

And then from an acuity standpoint, we talked last year about overall trend, roughly 6.5%. Embedded in that was an assumption of continued attrition in the member base based on tightening redeterminations at the state level and that the corresponding acuity shift, I think it was 1 point, 1.5 points of membership a quarter, was embedded in that 6.5%. And so as we looked at 2026, similarly embedded in the net 4.5% trend assumption is an ongoing view of quarterly attrition for that redeterminations work and any risk pool shift that goes along with that.

And our next question today comes from Lance Wilkes with Bernstein.

A couple of questions on Medicaid as well. Can you talk a little bit about kind of the net trend impact? And so really looking at kind of your utilization management, network management efforts? And what is the impact of those that kind of brings you from gross to net? And maybe within that, is there a component of state benefit design changes and maybe if you could quantify that? And then kind of rolling that forward, as you're looking in interacting with the states, what are they looking at from an RFP perspective and a pipeline perspective in terms of types of areas of focus, new business they might put out and/or how they're responding to the federal pressures they're seeing?

Thanks. Let me sort of take those in reverse order. So it is after really the bolus of RFP catch-up that I feel like we saw in the post-COVID years, this 2026 is a little bit of a later year. We've got only a small number of larger states that are either in or planning an RFP process. In general, I would say that we're starting to see states better align the RFP process for different programs. And so Indiana, for example, is going to reprocure the entirety of their program all at once where they were historically on sort of an off-cycle schedule relative to the core program versus LTSS. And so that, I think, is a good thing in terms of opportunity for us because of the strength in the core program, the ability to actually expand membership through those processes.

I think similarly, we're seeing states consider whether this is an opportunity to move additional higher acuity membership cohorts into managed care because they are looking at budget pressures as a result of OB3 and just overall economic pressure. And so having kind of that stable view of cost is this is an opportunity to think about what other populations they might roll into the RFP process. So we're tracking that very closely and feel like we're very well positioned for that.

Relative to net trend, we haven't really quantified growth trend, but I do think that the levers that we've talked about pretty consistently around network, clinical programs, payment integrity, fraud, waste and abuse, all of that really drives us down to that net 4.5%. And again, as you saw in Q1, outperformance from that. We have a really strong pipeline of those initiatives as we think about the rest of the year, which gives us confidence in our ambition to outperform even sort of the current run rate.

And as I mentioned, there are a number of places where states are leaning into program changes, again, not necessarily specific to rate impact, but thinking about where they can get clearer about benefit design and where they can allow the MCOs to apply our data-driven approach to finding the highest quality, lowest cost care and procuring that on behalf of the state in order to improve margin profile and ultimately give them a little bit of relief on the need to continue to drive rates up as the solution to the problem.

And our next question comes from Sarah James at Cantor.

If I put together the moving pieces on HBR total company withheld, Medicaid, Medicare, the rest of the year, Marketplace up 100 bps, it kind of implies that Medicare 1Q beat your expectations by about 370 bps. Is that the right way to think about it? Or did your consolidated HBR move within the range? And then I get that there's a program change between '25 and '26, but the implied slope on Part D and blended Medicare is significant. To me looks like it's 1,100 bps. So can you give us a little bit more detail on how your confidence that the slope will be so steep on Part D HBR?

Yes, no, good questions. Let me take those in reverse order. Yes, you're right, the sloping of our Medicare segment HBR, should be steeper this year, but that's really a function of PDP being a higher proportion, a $25 billion of revenue or so of that segment. And we've got data going back to the inception of Part D in 2006 in terms of the impact of benefit changes and how to slope that. So I feel really good about our start to the year in PDP. And that parlays into your question about Medicare segment HBR as a whole. There was a beat. Certainly, we beat in Q1, not to the extent that you calculated but we're pleased with both Medicare Advantage and PDP contributing to the outperformance in Q1.

And then as Sarah said, we sort of assumed that we revert back to our previous assumptions for Q3 -- Q2, Q3 and Q4, although obviously, we're going to continue to drive that -- both of those businesses to outperform even the current guidance. So hopefully, that helps with the context of the quarter.

And our final question today comes from Scott Fidel at Goldman Sachs.

I wanted to just ask maybe on Part D. And if you can drill a little bit more on the LAS versus the non-LAS and maybe first, just what the membership mix was at the end of the first quarter. And here, one thing we've been tracking has just been the sort of the variation in the specialty pharmacy sort of spending trends and utilization trends between utilization in LAS versus non-LAS since IRA and then how sort of the risk scores may get updated for that from CNS? And just curious as we sort of roll forward now into the first quarter, how much of that dynamic have you been seeing? Are you seeing some convergence between the two around those spending trends? Or is -- are they still pretty far divergent and then how the risk scores are sort of play underneath that?

Yes. Good questions relative to our PDP business. So we're about 1/3 in our basic product, which is essentially the low-income subsidy, the LIS at about 1/3 and the enhanced product about 2/3 which is largely non-low income. And you're right, the motivations of the IRA and the applicability of maximum amount of pockets, we saw different behaviors in the non-low income population versus the low-income subsidy population that have always been essentially fully [indiscernible] protected.

So those trends continue to be very high in not-low income. I mean essentially, members taking advantage of and quite frankly, pharma taking advantage also of that $2,000 maximum out of pocket. Now the good news is we saw that in 2025, we managed through that, still produced margin and pretax margin in the 3s, but then had that data to set bids and, quite frankly, set forecasts for 2026, assuming a continuation of a very high non-low income trend, especially in specialty pharmacy.

And so that's reflected in our forecast. It was reflected in our bids. It's still a very high trend. We've been able to curtail it to some degree, but it's still a very high absolute number, just not as high as what we assumed in our forecast. So you're right on the model change, we proposed that the model accelerates the recognition of the impact of the IRA, especially on the non-low income population. That suggestion was not taken. It will naturally -- that data will naturally work its way into the risk model, but it won't for 2027.

And that's why we think that direct subsidy is going to go up quite a bit again as we think about 2027. So good 2026 performance so far, and we're optimistic about continuing to deliver on PDP and believe that we're well prepared for 2027.

And that concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for any closing remarks.

Thanks, Rocco, and thank you all for joining us this morning and for your interest in Centene. We are out of the gate in 2026 with solid momentum, and we look forward to updating you on how the business progresses over the coming months. My Centene colleagues, thank you for setting the tone. I'm excited to see what we can deliver for our members, our customers and our shareholders this year and going forward. Thank you all.

Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Hi. Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Facilities and Managed Care Analyst here at Barclays. I'm pleased to join with me on stage, Sarah London, CEO; and Drew Asher, CFO of Centene. Welcome.

Thank you.

Maybe to kick it off, Sarah, I think you have some remarks on the current state of the business coming out of the quarter.

Sure. Thanks for having us. Good morning, everyone. Just a couple of framing comments, and then we can jump into questions. As you saw from the 8-K this morning, we are reaffirming our greater than $3 of adjusted EPS for 2026. It is obviously still early in the year. So we have January and a preliminary look at February, but results for all 3 of our core business lines are on track so far.

Medicaid is on track, and we are feeling good about what we're seeing in terms of execution and impact of the ongoing trend initiatives that we've been working on Medicare and PDP are tracking nicely with forecast. And as you know, our Medicare Advantage business is set up this year to take another step in 2026 toward our 2027 goal of breakeven. Marketplace still has a number of moving parts, but we have additional visibility as we move through the quarter. So maybe a couple of points there.

One, around paid and effectuated membership. So that trajectory is still in line with expectations and consistent with what we talked about on our Q4 call. So as a reminder, we were at 5.5 million members in December. That stepped down to 4.6 million members in January. We are now at 3.6 million members as of February. So again, on track for that roughly 3.5 million members by the end of the quarter with still some movement as we work through the grace period of March.

From a metal tier perspective, still largely consistent with what we shared in early February with mid-30s percent in bronze, high teens in gold and then just under 50% of those members in silver, which is obviously lower for us than it has been in past years. And then based on early data without any risk adjustment offset, we are seeing some higher utilization patterns in specialty pharmacy really isolated into that silver tier. So obviously, what really matters for that business is the relative risk across the industry, which is what we will see when we get the first set of claims from Wakely in June. But we are tracking an earlier milestone this year for the first time, which is a Wakely report that is due out at the end of this month, which will give us a view of what actually happened to the total market.

And in this case, the level -- total level of contraction, the distribution of metal tiers across the competitive set, so not just ours, but how membership tracked across those tiers for everybody, the statewide average premiums, which are important inputs to the risk adjustment calculation and some other data in terms of stayer and lever risk score. So not the totality of what we'll need to make risk adjustment assumptions, but some directional indicators that I think will be very helpful and that we haven't had before.

The other major milestone we are tracking along with everybody else is the final CMS rates. And so we gave comments to CMS on the advanced rate notice. We are hopeful the final rates will more accurately reflect the level of medical trend that the industry has seen over the last couple of years. But in the meantime, we continue to build our path to breakeven for Medicare Advantage in 2027. So still early, but obviously pleased to have all 3 of our core businesses on track so far and looking forward to some of these additional inputs that will come over the next few months and give us increased visibility across the portfolio.

Great. A lot to unpack there. But let's start with the ACA. Based on your membership comments and guidance, I think you're expecting year-end ACA to be down close to 40%, whereas I think previously, you were expecting industry attrition in the high teens to mid-30s. So how should we think about that difference? Is industry attrition tracking worse than initially expected? Or are you losing modest market share? Or is it some combination of the 2?

Sure. So our view was that the market would shrink somewhere between the high teens and the mid-30s. But we were pretty consistent in a view that we would be at the higher end of that and possibly higher than the top end of that, partly because of our FPL mix and partly because of the pricing actions that we took coming into the year and our focus on margin over membership.

So the membership trajectory is actually tracking, as we just talked about, very nicely in line with our expectations, including that big step down from January to February. So we feel good about that view of, again, roughly 3.5 million members at the end of Q1 and then modest attrition throughout the rest of the year, which is really just a function of a return to more normal seasonality in that product line.

Great. And with the overall membership decline, metal tier mix, you noted is also shifting pretty meaningfully this year. I think bronze is expected to increase from low-20s percent to over 30%. Do you expect these newer bronze members to behave more like traditional bronze members or more like the silver members there -- silver tier that they're transitioning from?

We do see it as more of a mixed metal, if you will. So not the bronze tier of 5 years ago pre-EAPTC, which were largely younger, healthier members. But as you noted, there are a number of members who have bought down into bronze because they don't want to walk away from coverage, but they are looking for more affordable options.

And so that was something we anticipated and really underwrote that business with that in mind that we wouldn't just have the same profile as the past. But it's also why we're watching that cohort pretty closely as we came through open enrollment in these early months just to understand kind of the behavior patterns and the blend. So I would say not the bronze tier of the past because you will have some mix. We are seeing some of that traditional bronze behavior in there. So it's not a total silver, but it is definitely more of a blend than we've seen in the past.

Moving on to risk adjustment. You're expecting to be in a net payable position for 2026. You just noted the new Wakely data you're expecting soon. Can you provide more color on what you're anticipating from that Wakely update and walk us through any changes you're making to your risk adjustment approach this year?

Sure. So I would describe the report that's coming as valuable and necessary, but insufficient. So in the past, to have an understanding of how the overall market moved, there was a reliance on the sign-up data. And what we learned -- we all learned painfully last year was that the sign-up data is not an accurate way of understanding what members ultimately effectuate and pay. And so particularly this year, given the anticipated market contraction and the magnitude of that, having a view of what the total market size is this early in the year will definitely be helpful.

We also get that distribution of metal tier. So understanding what the choice patterns were of members in terms of the metal tiers they selected and how our metal distribution compares to competitors. There are obviously data points out there from other public companies who shared, but seeing the totality of that and then understanding in each market, how that played out is very helpful as is getting that statewide average premium information. You need to have the full claims data in order to really understand the relative risk. So we will have some pockets. I think we'll get risk of renewing members. Is that right? There are some additional...

Risk scores on renewing members and members that left each carrier, but we won't be getting risk scores on members that are new to each carrier. So it's something, as Sarah said, it's not the panacea of being able to like precisely know your relative positioning, but all of those things added up will be an enhancement from last year in terms of having some degree of visibility and signaling with that data, then we'll supplement that with the data that we all get in June, which are page through April, which is the true medical cost relativity.

And as you can imagine, given the experience of last year, we're going to be very conservative about risk adjustment changes until we actually see the full [ Monte ] data set.

Right. And on that note, you noted higher specialty utilization within the silver tier. How do you take that observation and run it through your risk adjustment? Like do you assume the rest of the industry is also experiencing that? Like how do you decipher those trends?

In a conservative posture, you assume nothing, but track that and understand and look at what are the therapeutic classes and what are the disease states that are sitting around that to understand what may have a natural risk adjustment offset. But again, until you see the full data, you can sort of -- you can do math, but you're not going to change any assumptions. I don't know, if you want to talk a little bit about some of those categories that we're seeing.

Yes. So for instance, the anti-inflammatory cohort for both GI issues and dermatological indications. So there's some concentration of the risk, which sort of ties into potential future risk adjustment. But to Sarah's point, like until we know that there's an offset, we're going to play that pretty conservative, but nonetheless, so we're just giving you insights into what we're seeing in the data. Nonetheless, through February, our results are on track in Marketplace.

Right. Understood. For -- let's move on to Medicaid. For 2026, you're expecting rate and trend to both track in the 4.5% range. First, can you give us a sense of where medical cost trend exited the year in Q4? And second, can you share how composite Medicaid rates developed for 1/1 renewals and comment how they're tracking for upcoming cycles such as 4/1 and 7/1?

Sure. So overall, Medicaid trend in 2025 was mid-6s. And obviously, that was higher for us in the first half than the second. So we had that nice progression as we came through Q3 and Q4. And then, yes, to your point, our assumption is 4.5% net trend in 2026. So think about all of the initiatives that we put in place through the course of 2025 annualizing in 2026 and then a pipeline of additional sort of trend vendors, if you will.

1/1 rates came in, in line with our expectation, in line with that framework. And we are, at this stage, still early. We have one state at 4/1 and then that 7/1 cohort and don't yet have visibility to any of those, I don't think.

Yes, we don't yet and including the -- we have got a small piece of the 4/1 rates, but we don't yet have visibility into the majority -- the vast majority of that state for our 4/1 cohort. So that's a decent sized swing factor in terms of the achievement of that mid-4s on the rate side.

Great. I'd love to talk a little bit more about these trend vendors that you just mentioned. You've been discussing efforts to weed out fraud, waste and abuse in Medicaid for several quarters and recently brought that to life for us with the ABA task force. If we take a step back, what's the scope of these fraud, waste and abuse initiatives? And what's the response you get from your state partners when you engage on these issues?

Well, if you take the DOJ numbers, their estimate is that 10% of all health care spending is fraud, waste and abuse. And I would -- and that is presumably inclusive of the actions that MCOs take to stem that. But it is a big portion of what we do. And I would say until recently, it's not been talked about as much, but it is a huge part of program integrity and why states choose managed care organizations to help them run the programs.

And because of that, we spend a lot of time focusing on it. You heard on the Q4 call, we talked about the fact that we have 75 algorithms that run on a daily basis on the millions of claims that flow through our system. And what that reflects is that we spend a lot of time working on the sophistication of those algorithms so that when we are pulling out suspect claims and those sit along a continuum, right?

So you can have -- if you think about fraud, waste and abuse, those are different categories. And you can have providers that are just sloppy in their coding and it's not ill intended at all, but it is actually creating waste for the system if we are overpaying for something that care that was not delivered or not delivered at the right level of acuity. And then you certainly have bad actors. And we've called out the fact that in one state, there was an ABA provider that was costing the program $10 million a month in fraudulent billing.

So these are -- these can be pretty significant cases. So we spend a lot of time tuning our algorithms, leveraging AI to do that suspecting and to do it in a thoughtful way because if we spend time running down one of those patterns and it's not real, that's also a waste. So this is something we focus on a lot.

I would say what's been interesting about the last couple of years is that with all of the other macro program pressures and then, frankly, in the last 12 months with a heightened dialogue around the fact that fraud, waste and abuse is an appropriate part of managing these taxpayer dollars, we have had increasingly constructive conversations with the states around allowing us to take actions and to be thoughtful in terms of intercepting, investigating.

You probably saw the letter that we sent to the administration in response to the RFI relative to places, where MCOs can lean in and actually do more work in this space and have greater data sharing so that when you see -- we have seen fraudulent providers, who will set up shop in one state and we shut them down and then they pop up in the state next door and then in the state, one to the north.

And so having a more robust national data sharing framework, we actually think is pretty important. So again, I think the conversations with the states have gotten more constructive. And when you can bring them data and show them objectively, empirically what's happening, it is ultimately the right thing for the program, but it's also the right thing for members because if those Medicaid members aren't actually getting good care, they're not getting care at the level that is being reported, it's not a good outcome.

Right. And some of these efforts have been underway for over a year are core to the program. So can you walk us through the typical time line from detection to intervention to financial impact?

Sure. The reality is every case is a little different and every state is a little different. But in Medicaid, each state has a typical engagement framework where when you suspect a provider of -- so again, let me sort of break it out, right, because waste and abuse are slightly different and the ability there to have a robust provider engagement framework, where you see a provider who is billing in sort of an outlier pattern.

One of the first things we do is go and actually sit down with the provider face-to-face, the benefit of being local. And sometimes it's just a matter of educating, and that's the best case scenario. When you have a truly fraudulent provider, then there are processes to bring that data forward to the state.

There's usually a stated process framework that you need to follow before you can take action. And those actions all have, again, state-by-state sort of different tails to them and the contractual relationships with providers have different tails to them. So it's a widespread effort, and there is some natural delay in terms of detection to action. And then the financial impact will often have a longer tail than that.

Yes, yes. I mean -- and you saw the letter that we sent to Dr. Oz. What we're asking for is sort of relief in some of those limitations of actually getting to take action. And usually, those limitations are embedded in Medicaid. And so you got to clear those and then sometimes you can see the spigot go off quickly thereafter or it's a ramping benefit in the financials. But to your point, we're working on this stuff 6, 9, 12 months ago, and some of it is just showing up in the financials in Q4 and then rolling into Q1.

Great. Let's move on to Medicare and Part D. We saw individual PDP industry growth accelerate from about 1% in 2025 to it looks like close to 3% this year. You also continue to perform well in that product and are taking share again in 2026. So can you talk -- can you share your thoughts around the drivers of the industry growth and comment on your own strategic considerations to continue to grow in that market?

Yes, there's a little bit of an inverse relationship between attractiveness of Medicare Advantage and then either growth or shrinkage in the fee-for-service market, which then is the purchaser of a stand-alone PDP product. So I think there's that natural toggle relationship, which you're right, has resulted in either less shrinkage or maybe a little bit of growth in that PDP market, but we continue to take share given our positioning, I think our cost structure.

I think the fact that we don't own a PBM actually really helps because there's no temptation to have the economics anywhere other than embedded in the product to the benefit of the member or to achieve a reasonable target margin. So yes, pretty pleased and on track through February in that PDP business as well.

Great. And from a margin perspective, you ultimately outperformed your initial Part D margin expectations in 2025 after calling out some early pressure or early corridor pressure in the first quarter. What drove the favorability in the back half of the year? And how did the slope of the Part D MLR curve ultimately develop as the year progressed?

Yes, it's a pretty steep slope that will ramp-up throughout the year. I mean, quite frankly, similar to commercial businesses, including marketplace, where you've got a sloping HBR. And that's why we described on our earnings call, this Q4 earnings call, the sloping of earnings as well throughout the year for the enterprise as a whole. But yes, we outperformed last year and set that with the bids to target a margin of around 2% this year, on track for that, which is good through February because pharmacy data completes pretty quickly. So you have a decent indication a couple of months in of the run rate, the mix of business. There's still 10 months to play out, but it's at least started off on the right foot and look forward to seeing if we can beat that 2%.

Great. And stepping into the mechanics a bit, did any of the Part D plans you called out or otherwise finish the year in the corridor at the end of the year?

Yes, most of them would have been in the risk corridor last year.

Okay. On the MAPD side, you're expecting another year of membership contraction as you prioritize margins. Can you share where your MA margins exited 2025 and how we should think about the cadence of margin recovery over the next 2 years as you work towards your breakeven target in 2027?

Sure. So 2025 margins were obviously negative. We've said in 2026, they're going to be slightly below breakeven. And then in '27, the goal is to get to breakeven. So we've been working on initiatives internally around medical management, SG&A, stars, all of that has sort of built the path to get to breakeven in 2027 and obviously, thinking about how to do that with a number of different scenarios ahead of seeing the final Medicare rates, but certainly hopeful that those rates are a little bit more reflective of the underlying trend.

Right. And maybe on that point, can you talk a little bit about the dialogue you've had with CMS, particularly on those rates? Anything on trend assumptions, the risk model calibration, just what arguments are resonating with the administration?

Yes. I think we really focused around the underlying trend assumption and feeling like that was low compared to what we've seen, but also a view that there were some issues with some of the risk adjustment factors and thought that they may want to layer those in more thoughtfully or over time to make sure that they're complete. I don't know if there's anything...

Yes. For instance, they were proposing to use a 5-year rolling average, including 2021, which was a COVID year. So we made the argument like you should really kick that out of the data. It's not indicative of current. And then back to Sarah's point, using the most recent objective claims data and trend data, there's just an inconsistency between the reality of Medicare -- fundamental Medicare trend going back to Q2 of 2023 and forward and where the rates came out. And then maybe more unique to us asking for continued and enhanced visibility on what they might do on the Part D demo.

Great. Moving on to capital deployment. You're assuming no share repurchase in your 2026 guidance. What milestones do you need to achieve in order to turn share repurchase back on?

Well, one of them we put in the 8-K this morning, which is we're doing a partial redemption of our '27 notes, $1 billion, and we expect to execute that by the end of this quarter. So that's another step towards a delevering effort to sort of recalibrate our debt load with not today's earnings level, but as we look over the next few years.

So we're excited about that, and that's on the heels and you guys stayed up late and read our K a couple of weeks ago. We talked about a master receivable sales agreement we entered into with a syndicate of banks. And so the source of funding for that $1 billion of redemption of partial redemption of notes is selling a receivable, our PDP receivable, a piece of that so that we actually collect that early as opposed to waiting until October. So I think some pretty good financial engineering to lower -- take a big bite out of debt and get out ahead of our December 2027 maturity.

So just sort of normal course things, we're always thinking about how do we generate more cash and monetize assets. So that's the priority now. And then we'll see -- most of our dividends from subs, as you guys know, come in the back half of the year. We'll see sort of when we want to step into other methods of deploying capital.

Great. Maybe in the last minute here, I would love to circle back to Medicaid and sort of the forward view on some of the policy. Medicaid membership has declined modestly over the past 2 years following redeterminations and certain states are going to expand this tightening of the eligibility more broadly to the national level, right? With OB3, can you share any preliminary thoughts on how membership levels and margins might evolve through that transition?

Sure. So one piece of it is the assumption in 2026 of continued sort of slight attrition to your point that we've seen just with states being tighter on that reverification process because of what everybody went through over the last couple of years with redeterminations.

In terms of the overall impact of OB3 and work requirements, that, to me, is really sort of a back half of '26 in terms of getting more visibility because it is state by state, right? So states that have expanded Medicaid versus those who haven't. We're getting increasing guidance from CMS. You all probably saw the note recently in terms of giving states the option to either run the work requirements eligibility verification on a date certain versus on the anniversary date of eligibility. And so that's going to play a meaningful role in terms of what the impact would be at the state level, if they try to do it all at once versus doing it over a 12-month period.

And then the additional criteria that we expect over the next couple of months in terms of the definition of different populations like frailty, what are the different work programs, what latitude will the states have to leverage MCOs and other community organizations to help with that.

And so we've got about 20% of our population that is -- our Medicaid population that is expansion and then looking through that and saying, okay, as that gets overlaid to the various states, where do we think there will be the most impact, the most potential contraction. All of that is calculus that I think plays out as we get closer to states making those actual decisions. We have a task force that's been set up to track those on a state-by-state basis. The other thing that I would just point out to wrap-up that I think has been helpful was the recent guidance that also came out from CMS to the states on rate setting and the fact that as those Medicaid rates get set at the state level and sent up to be certified by CMS, they need to be explicit about how they've accounted for the OB3 provisions and impacts, which I think is a good signal in terms of at least CMS paying attention to the fact that there needs to be both forward and potentially retro risk adjustment to account for where there may be risk will shift as a result of this.

Great. Well, we're just about out of time. So let's end it there. Sarah Drew, thank you so much for joining, and please enjoy the rest of the conference.

Thank you.

Thank you.

Good day, and welcome to the Centene Corporation Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our fourth quarter and year-end 2025 Earnings Results Conference Call. Sarah London, Chief Executive Officer; and Drew Asher, 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. .

Also, guidance slides can be found on our website alongside the webcast. 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. Specifically, our commentary on 2026, including drivers of adjusted diluted earnings per share for 2026 are forward-looking statements.

Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our fourth quarter and year-end 2025 press release and 2026 guidance presentation filed this morning and other public SEC filings, which are available on the company's website under the Investors section.

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 fourth quarter and year-end 2025 press release and 2026 guidance presentation. With that, I would like to turn the call over to our CEO, Sarah London. Sarah?

Thank you, Jen, and thanks, everyone, for joining us. This morning, we reported a fourth quarter adjusted diluted loss per share of $1.19, contributing to our full year 2025 adjusted diluted EPS of $2.08. While 2025 was undeniably challenging, disciplined execution enabled us to close the year slightly ahead of the expectations we outlined on our third quarter call. .

Medicaid profitability improved, strengthening the trajectory of our largest business. Underlying medical cost trend within marketplace and across the Medicare segment was in line to slightly favorable as we closed out Q4 and both segments delivered 2026 enrollment results consistent with our expectations, creating a solid foundation for next year's earnings power.

As we look to 2026, we are positioned to deliver meaningful margin improvement and renewed adjusted EPS growth. We expect full year 2026 adjusted EPS to be greater than $3, representing more than 40% year-over-year growth and marking important progress toward restoring the enterprise's embedded earnings power. This outlook incorporates Medicaid margin stability, significant margin recovery within our marketplace business, and continued progress towards our goal of breakeven in Medicare Advantage.

Now let's take a look at our business lines, beginning with Medicaid. As an organization, we have been laser-focused on restoring our Medicaid business to sustainable profitability while maintaining our focus on quality outcomes for our members and the communities we serve.

As a result of strong cross-enterprise execution, we demonstrated significant progress on this mission in the back half of 2025 with continued momentum through Q4. Our fourth quarter health benefits ratio of [ 930 ] was consistent with expectations we set for investors in October, representing 40 basis points of sequential improvement and 190 basis points of improvement from Q2 levels.

While flu drove significant national media coverage, flu and influenza-related illness cost within Medicaid were consistent with the elevated expectations we had incorporated into our financial outlook. Trend patterns remained largely consistent in Q4 compared to Q3 with behavioral health still driving roughly half of excess trends in both home health and high-cost drugs as secondary pressure points.

As we head into 2026, we continue to organize around the key levers that will drive improvement in the Medicaid business, including optimizing our networks for cost and quality performance thoughtful implementation of new and enhanced clinical programs, rate advocacy and collaboration with our state partners on program reform, increasing vigilance in our detection and reduction of unnecessary utilization and a more aggressive approach to fraud within the provider ecosystem in service of our mandate to protect Medicaid program integrity.

Our applied behavioral analytics or ABA task force established in Q2 of 2025 is a perfect example of how we have pulled critical levers to manage costs on behalf of our state partners while improving the quality of member care at the same time. Leveraging Centene's scale and reach, the team analyzed our ABA data across our 29-state footprint.

What we found were consistent patterns of outlier providers with volume versus outcomes-driven care patterns, where the maximum number of hours are prescribed for every patient instead of an individualized care plan. We found children who had been in therapy for 5 to 10 years, where clinical evidence suggests the optimal duration is 2 to 3 years as well as those enrolled in 40 hours per week of therapy instead of balanced school integrated care.

And we saw a lack of appropriate board-certified oversight of registered behavior technicians. These dynamics drive cost in the system, but far more importantly, they are red flags relative to the quality of patient care for a very vulnerable population.

Centene's approach has been data-driven and multipronged. We engage directly with providers on gaps we see and focus our networks on providers who follow evidence-based best practices. We meet directly with our state partners to share data inform program design and reduce outlier payments. And we launched an ABA specific engagement program to support members, their parents and their providers.

These programs are developed and led by PhD-level Board-certified behavioral analysts who are still practicing so this is not algorithmic or theoretical for us. It is about being responsible stewards of taxpayer dollars and transforming the health of the communities we serve 1 at a time in this case.

Rates continued to be another powerful and important tool to ensure program sustainability. On this front, we closed 2025 with a composite rate adjustment of approximately 5.5% above 2024 levels, consistent with our prior commentary. 1/1 final rates were in line with our expectation and as the underlying data naturally rolls forward, we believe rate decisions will increasingly be made on data that reflects the acuity and trend dynamics we have experienced in Medicaid over the last 2 years.

We will continue to be proactive in our engagement and data sharing as we move through 2026 and prepare for 2027 program changes. Standing here today, we have greater visibility into the drivers of our core business and command of the levers needed to drive earnings recovery in Medicaid over the next few years, while maintaining and improving the quality of our care our members receive.

Turning to Marketplace. Fundamental medical cost trend for our marketplace business came in slightly better than expectations in Q4. In December, we also received an updated view of the 2025 Wakely data, which showed favorable development relative to our reserve. We experienced 2 out-of-period items in the quarter, including a 2023 CMS reconciliation and costs related to no surprises at disputes.

This prompted us to add an accrual for further NSA development related to 2025 dates of service, which ultimately pushed the segment HBR up by roughly 100 basis points versus our original expectations. We have accounted for estimated 2026 MSA costs in our guidance. While the No Surprises Act was designed to protect consumers, it has increasingly become weaponized by market participants looking to extract profits from the system through the independent dispute resolutions or IDR process.

We are vocal in advocating for NSA reform. And in the meantime, we'll be taking a more proactive litigious posture as necessary. As an example, earlier this week, we filed a multimillion-dollar lawsuit against the New York provider alleging fraudulent manipulation of in-network and out-of-network claims.

We will continue to take aggressive action to protect the system from fraudulent and abusive exploitation of NSA loopholes. Turning to 2026. The Marketplace team executed incredibly well over the last few months in a dynamic open enrollment period, investing in additional operational support to care for a customer base navigating significant change and uncertainty.

In the absence of congressional intervention enhanced advanced premium tax credits expired at the end of 2025. As a reminder, we accounted for this assumption and the impact it would have on the market risk pool and cost in our 2026 pricing. And better membership developed in line with expectations, and we are on track for first quarter ending membership of roughly 3.5 million members as compared to our December membership of $5.5 million.

While market sign-ups are being reported publicly, this isn't the most helpful indicator of true market dynamics. Now that we are into February, paid membership is the most important metric for planning and forecasting. Through the end of January, and better paid rates while below historical levels are right in line with our expectations in a post-EAPTC environment.

Relative to member demographics, our membership is more notably enrolled in Bronze plans for 2026 compared to prior years, with many of those members still able to access 0 premium products. Broad's membership will represent a little over 30% of our marketplace enrollment this year compared to a range of 19% to 24% over the past 4 years. Age and gender demographics remain consistent with recent years.

Risk adjustment was obviously a source of significant deviation from our financial plans last year. As you think about the expectations incorporated into our 2026 plan, we anticipate being in a meaningful payable position for the 2026 plan year at this time.

Consistent with other years, we will reassess our risk adjustment position and assumptions as we move through the year and receive additional data. To that end, in an effort to drive additional visibility at an industry level, we are pleased to have worked closely with Wakely, the independent actuarial firm to support publication of a new report reflecting market-wide paid membership metallic tier distribution and statewide average premium set to be released towards the end of Q1 in order to help market participants better inform risk adjustment assumptions going forward.

While 2025 was a difficult year for the Marketplace business, we believe the actions we took in the back half of 2025 set us up to navigate 2026 with increased visibility and confidence. We continue to advocate for program reform that will drive affordability and further stabilize the individual marketplace overall as an alternative to employer-sponsored insurance and a solution for small business owners and other hard-working Americans and their families.

Finally, Medicare. Our Medicare segment delivered strong results throughout 2025. Fourth quarter fundamental Medicare Advantage performance was in line with our expectations, setting us up with a solid jump-off point for 2026. We completed a review of our provider contract portfolio in the quarter and adjusted certain receivables accordingly, which drove the slightly elevated HBR compared to expectations.

Overall, we continue to look for opportunities to position the business for improved profitability in 2026 on the way to our goal of breakeven Medicare Advantage results in 2027, an important enterprise milestone. Our Medicare Advantage product positioning yielded the intended results for 2026 membership and we expect to end the first quarter with a decline in MA membership consistent with our strategy to refine our footprint and fine-tune our value proposition for Medicaid beneficiaries.

PDP ended Q4 with some additional favorability thanks to slightly moderating trend, and that team deserves a well-earned shout out for having managed the business expertly through significant program changes.

As we look ahead to 2026, Part D enrollment is tracking to high single-digit percentage growth at the end of the first quarter compared to year-end 2025, with member mix across the products aligning well with program and formulary design. This year provides an important opportunity to build on the meaningful progress we've made in Medicare Advantage and further strengthen the platform that will most effectively serve Medicare beneficiaries as well as dual eligible membership.

We continue to focus on Starz improvement, clinical engagement and overall SG&A efficiencies.

And at the same time, we launched a redesigned duals operating model, leveraging insights from our deep experience managing complex populations to enhance our service and member experience for a decent member base that now accounts for roughly 40% of our Medicare Advantage business. Last week's 2027 advanced notice, at least initially suggests a more pressured view of rates than industry expectations, but it does not change our focus on returning our Medicare book to profitability, aligning closely with our key Medicaid markets, and continuing to invest in quality programs and benefits that support our core member base.

We expect rates to be finalized in early April, consistent with prior years. Taking a step back, our long-term goal across our businesses is to deliver industry-leading outcomes at an industry-leading cost structure. As we create the road map to harvest Centene's full potential earnings power, there is no question that data, technology and artificial intelligence will be a critical lever and accelerant to this work.

Over the last few years, we have been building the necessary data foundation and systematically integrating AI into our operations, resulting in proof points around accelerated prior authorization approvals, improved call center operations enhanced member navigation and engagement experiences and advanced analytics capabilities that support our medical economics work and our payment integrity operations.

As an example of the latter, we currently score our claims data against 75 different algorithms designed to triangulate potential fraud. Alerts are triggered and sent to a group of cross-functional experts for immediate review and intervention. As we step into 2026, we are closely tracking the inflection of Gen AI and accelerating our integration of Agentic capabilities into our core operations to drive automation and efficiency and using it as a catalyst to reimagine and elevate the experience we deliver to our members, partners and other stakeholders.

You should expect to hear more on this in the quarters ahead. 2025 challenged us but it also made us stronger. Amid continued landscape volatility and with the benefit of enhanced visibility across lines of business as we move through the back half of the year, we took the opportunity as an organization to reassess and refresh our views of both existing and emerging headwinds and tailwinds.

We have prudently positioned our 2026 outlook, incorporating an expectation that policy-related variability will continue to influence our core business lines. We are confident in our ability to execute against the outlook we have provided today building on the positive momentum we have generated in recent months. And we see continued opportunity for margin expansion in the months and years ahead, while keeping our members at the center of everything we do.

As I have said before and feel only more strongly after the year we have navigated the SEN team is an incredibly powerful engine. They are fired up and focused on the opportunity ahead and committed to the hard work necessary to deliver margin that will power our mission. With that, I will turn it over to Drew to provide more details about the quarter and our view of 2026.

Thank you, Sarah. Today, we reported fourth quarter and full year 2025 results, including $174.6 billion in premium and service revenue and adjusted diluted earnings per share of $2.08. The fourth quarter GAAP diluted loss per share of $2.24 includes a $389 million net loss prompted by a Q4 definitive agreement to divest the remaining Magellan business.

Recall, we previously divested the Magellan pharmacy and specialty businesses at gains over the past few years. From an adjusted earnings standpoint, we are pleased that the underlying fundamentals in Q4 are tracking our prior forecasted full year adjusted diluted EPS of greater than $2 and this sets us up well for our 2026 guidance that we'll cover in a minute.

Starting with Medicaid. We saw continued progress and improvement in the HBR with Q4 improving to 93.0% while we have a lot further to go in Medicaid to achieve a reasonable HBR and margin, the back half of 2025 was a good start with 2 consecutive quarters of HBR improvement. Our 1/1 net rates are supportive of our 2026 guidance of a stable Medicaid HBR with an assumed full year 2026 net rate impact of mid-4s and the corresponding mid-4s 206 net trend expectation.

As expected, we continue to see slight attrition in membership closing out 2025 at 12.5 million members. We continue to drive quality and affordability health care initiatives and work with our state partners on the optimal program structures and associated rates. While certain areas are still elevated, behavioral, home health and high-cost drugs, we can see tangible progress in the business.

Overall, this is another quarter of good progress in Medicaid. Our Commercial segment HBR in Q4 was about 1 point higher than our forecast with a few items moving in both directions, but the elements that matter most for 2026 were positive. Importantly, the current period medical costs and trends were slightly better than our expectations in the fourth quarter.

So we feel good about Q4 fundamentals as we turn the calendar into 2026. Another positive sign in the quarter was a favorable change in our view of 2025 relative morbidity or risk adjustment based upon the third round of Wakely data. This was a couple of hundred million worth of net P&L outperformance in the quarter, which also bodes well for our 2026 pricing assumptions.

So what more than offset this good news, 2 items. A 2023 revenue reconciliation with CMS that has no bearing on 2026 and increases in cost and accruals related to the No Surprises Act that Sarah covered. Those 2 items drove the net 1% higher than planned HPR in Q4, which otherwise would have been quite favorable.

Consistent with our Q3 commentary and now bolstered by Q4 insights, we expect our marketplace pricing actions to adequately capture the 2025 and 2026 market shifts 2026 trends and policy changes in place during the open enrollment period, all of which support meaningful pretax margin expansion in 2026 compared to losing approximately 1% in 2025.

In our Medicare segment, we executed well in 2025, including the fourth quarter. In our growing PDP business, we delivered strong 2025 performance, including Q4 and despite the headwinds and uncertainties created by the Inflation Reduction Act. This is a testament to our experience, cost structure and market positioning in PDP.

In our Medicare Advantage business in 2025, we progressed nicely toward our goal of breakeven in 2027. Q4 fundamentals were on track and the reported results include a write-off of some older provider receivables. As Sarah covered, we like our 2026 positioning as we wrapped up the annual enrollment period.

We will provide CMS comments on the disappointing 2027 advanced notice Medicare rate, which will likely cut into seniors benefits and product selection. And as we construct the 2027 bids over the next few months, we will do so with the same goal to solve for breakeven performance in 2027. Our Q4 adjusted SG&A expense ratio of 7.5% brings our full year to 7.4% and which is 110 basis points lower than 2024, reflecting continued discipline and scale.

We ended the year with about $400 million of cash available for general corporate use. We reduced debt by $189 million in the quarter and ended up with a debt-to-cap ratio of 46.5%. Our medical claims liability totaled $20.5 billion and represents 46 days in claims payable, a decrease of 2 days as compared to the third quarter of 2025 and driven by payouts of state-directed payments and the elimination of the Medicare premium deficiency reserve in Q4, which is corroboration of the progress we are making in Medicare Advantage for 2026.

That's a wrap on 2025, a strong finish to a rough year. Let's move to 2026 and associated guidance elements, including a few slides we posted on our website. We expect premium and service revenue of $170 billion to $174 billion. As you can see in the bridge, Medicaid premium revenue is down a couple of billion including some member attrition in 2026, partially offset by rate increases.

We expect Medicaid member months down 5% to 6% in 2026. We expect Marketplace revenue to be down about $8 billion, driven by policy and market impacts, including the expiration of the enhanced APTCs net of rate increases designed to increase yield and improve margin.

To give you some membership magnitude, as Sarah outlined, we expect around 3.5 million marketplace members as of the end of Q1 and slight attrition thereafter, though we are still in the payment grace periods, which could swing membership somewhat during Q1. We expect the Medicare segment to grow premium revenue approximately $7.5 billion, driven by our Medicare PDP business, the majority of which is from the premium yield increase, which we'll touch on in a moment.

Coupled with growth in membership, which sits at about $8.7 million coming out of open enrollment. Medicare Advantage revenue is projected to be essentially flat from '25 to '26 with membership down intentionally and yields up. The forecasted 2026 revenue split in the Medicare segment is approximately 41% Medicare Advantage and 59% PDP.

We expect the consolidated HBR of 90.9% to 91.7% in 2026 at the midpoint, down 60 basis points from 2025. That's driven by an expected recovery in marketplace, as you can see in the bridge.

Consistent with previous commentary, we initially expect a flat Medicaid segment HBR in 2026 and compared to 2025's 93.7%. And in the Medicare segment, we expect improvement in the Medicare Advantage and a higher PDP HBR driven by 2 things: one, we are initially assuming a 2026 pretax margin around 2%, down from a good year in the 3s and two, there was a meaningful increase in the direct subsidy from $143 to $200 and reflecting industry pricing for higher pharmacy trends due to the IRA.

So think about a rise in premium and pharmacy expense without any need to increase SG&A. This drives a higher mathematical HBR. That's factored into our initial 2% pretax margin forecast for PDP. You can see the other guidance elements, including stability in the SG&A rate, continued pay down of debt and associated impact on interest expense, reduced investment income from assumed Fed fund rate cuts an adjusted tax rate of 26% to 27%, slightly higher than a normal statutory rate given the mix and level of earnings forecasted for 2026.

No share buyback reflected in guidance. We will continue to assess the field of capital deployment opportunities as we generate excess cash. With respect to seasonality of earnings, as we sit here today, we expect the majority of 2026 adjusted EPS in Q1, stepping down in Q2 and further to around breakeven in Q3 with a loss in Q4. This is driven by the seasonality and benefit design of marketplace and PDP products, both with lower HBRs in the beginning of the year and higher at the end of the year.

Our EPS outlook of greater than $3 reflects a meaningful forecasted turnaround of marketplace margins, Medicaid stabilization, continued Medicare Advantage progress a prudent PDP margin assumption and lower interest expense from continued deleveraging.

I'm sure you are too, but we are pleased to turn the page on 2025 and with 2026 one step towards restoration of earnings for Centene. Thank you for your interest in Centene and Rocco, please open it up for questions.

[Operator Instructions] And today's first question comes from Ann Hynes at Mizuho.

On your great expectation from Medicaid or 4.5% I would think that would be higher just given trend has been so elevated over the past couple of years. Can you just give us more details what's happening on the state level and you view that as conservative? Would you be able to get the midyear rate increases? Any color would be great.

Sure. Thanks, Ann, for the question. So a couple of things. One, as we said, throughout 2025, the conversation with our state partners continue to be constructive. I think we also have the benefit of the fact that as we step into this rate cycle we have a full 2 years of both the acuity dynamics and the step-up in trend and the data.

And so we think that is important and helpful to inform rate decisions. So again, we're starting with a prudent assumption around that 4.5% for 2026. I would point to the fact that our 2025 rates matured favorably from where we started at the beginning of 2025 and ended with that composite rate at roughly 5.5%.

And then balanced against that obviously is all of the work that we've done over the back half of '25 to really bend trend, which is what's driving the assumption of the flat HBR year-over-year.

Thank you and our next question today. Justin Lake with Wolfe Research. Please go ahead.

I wanted to kind of follow up on Ann's question here. First, you talked about trend in 4.5% in 2026 for Medicaid curious what that trend was in 2025? And maybe you can help us understand first half versus second half, just to get the run rate kind of coming out of the year versus that 4.5% assumption next year.

And then to Ann's question on the rates, your rates were 5.5% last year, your rates are 4.5% this year. I'm just curious how the states justify that, given when you have your conversations with them given what's going on in the market, what's going on with trend and acuity, et cetera? And maybe you could just tell us how 1/1 looks versus the 4.5 linger.

Sure. Lots of pieces there. So 1/1 rates, were consistent with expectations. Let's go back to trend. So 2025 trend was in that mid-6s, which I think we talked about on the Q3 call. And then the view of 2026 around mid-4s is really a net trend assumption.

And so again, important to think about the fact that we are jumping off of an elevated baseline that included that 94.9% in Q2. And all of the aggressive action that we took in the back half of the year, obviously, coming Q4 with a [ 930. ] So equally important is sort of the assumption around the proof points that we have in terms of bending trend in the back half of the year as well as bankable proof points around actions that we took in Q3 and Q4 that don't take effect until 2026.

So that's part of what gives us a view of sort of that mid-4s net trend assumption. And then relative to rates, to your point, we ended the year with that composite of 5.5%. We started the year lower than that. So I believe that we've sort of taken a prudent view of rates in the mid-4s for 2026, and we'll continue to work with the states as we have all along to make sure that they have the most recent trend data. Again, we have the benefit of that sort of trailing 2 years now, which we've been working our way up to. And then also talking to states about places where in the absence of feeling like they can push rate, they can also make program changes. And we've called out a number of those.

But if I just think about the back half of 2025 we have proof points around states carving out high-cost drugs. They have clipped ABA outlier providers who are overbilling. We've seen PBM control and formulary control, sort of shift further back to us around CCBHC.

So lots of, I think, thoughtful program decisions that are sort of a proxy for addressing trend without having to do it explicitly through rate. So just net-net, we're obviously for a flat HBR year-over-year. And I will say, as I have said before, if that is all we deliver, I will be very disappointed, and I know the team will too.

And our next question today comes from Kevin Fischbeck with BoA.

Great. I guess moving to the exchanges. Can you talk a little bit about the confidence and the visibility? Obviously, the exchange members have changed dramatically. You gave a little bit of color there.

But I guess in particular, you talked about the shift to your shifting. I kind of remember brand not being a great plan historically, and now it seems to be growing overall. So I just want to make sure that we're not going to be caught offsides by this metal tier shift that you're going to be seeing next year?

And any other additional color you can give about why you feel comfortable in margin improvement on exchanges this year.

Yes. Thanks, Kevin. So let's go all the way back to Q3 as we kind of read and reacted to the 2025 weekly data and a much improved visibility over the baseline morbidity that we would be carrying into 2026. And just incredible execution by the team, demonstrating agility and depth of expertise to reprice and reposition the entirety of the book in that short period of time.

And taking into account, again, baseline morbidity trend assumptions, the risk pool impacts of both 2025 and anticipated 2026 program integrity measures as well as the expiration of the enhanced APCs, all of which netted out to that 30% pricing increase for 2026. So part of the confidence comes from, I think, the work that we did and sort of the assumptions that we made coming into the year.

Then as we stepped into open enrollment, really watching membership progress through kind of effectuation and down into paid membership where we sit here today in early February, we actually have a very good view of sort of that paid membership base.

And given our history, a view of how that paid membership matures through the February, March time frame, where there's still a little bit of administrative opportunity and sort of grace period to get worked out, and that's where we get to that 3.5 million member estimate by the end of Q1.

So I feel like standing here where we are today, I feel like we have pretty good visibility into how open enrollment played out and then the tail of that will continue to shake out. To your point, the distribution of metal tiers is different this year than in past years. So we're a little over 30% in bronze, which is up from that 19% to 24% range we talked about in past years.

We do see stability in core demographics around gender distribution and average age has not changed. And then to your question about how Bronze has operated historically, the bronze products operated differently pre-EAPTCs than they did during the EA/PTC period. And again, one of the benefits of having been in the market for as long as we have, is that we have all of that data, and we had all of that data back in Q3 when we went through and sort of reunderwrote all of our assumptions relative to 2026.

We did that across metal tiers, and we're thoughtful about what the impact might be. And I think what you would see year-over-year is also sort of a reduction in the footprint where we are a low-cost bronze player.

So again, just trying to leverage not just the increased visibility that we had from the data, but just the depth of experience and data we have from sort of end-to-end the tenure of the program to give us a view of where we're sitting today.

And also, I would just add, have the benefit of having set 2026 guidance with full visibility into how 2025 and the vast majority of open enrollment played out. So all of that goes into why we feel confident that we will be able to deliver meaningful margin improvement in this business in 2026.

Our next question today comes from Stephen Baxter of Wells Fargo.

I wanted to come back to the Medicaid moving cases. I guess I just a little bit better of a sense of maybe how much incremental decline in membership. I think the membership months were guided down 5% or 6%, but I think a good deal that would be explained by basically what you saw in 2025.

And as you think about the acuity impact, to the extent that you continue to see disenrollment at pace closer to what you saw this past quarter, so down like 1.5%. Does that place any weight on the acuity assumptions that you have during the guidance at this point in time?

Steel hit this at a high level and then ask you to add any color. So what we talked about member months, we talked about attrition in Q1 that there was an assumption for continued attrition consistent with what we've seen, for example, through 2025 in terms of states tightening the eligibility and normal reverification process coming out of COVID.

And then we also have a couple of program changes that we know about, including, for example, the Florida CMS program rolling off 10 as well as sort of a probability-weighted bucket of member puts and takes that we track state-by-state and I think if you were to unpack that, you would find that we're pretty prudent in our assumptions around membership there with an eye to what the additional acuity impact might be and all of that is sort of considered in guidance.

But I don't know if there's any other additional pieces you want to call out?

Yes, right. You mentioned, Stephen, the 5% to 6% member months reduction through the year. The full year would be higher than that in terms of the membership attrition. And I think about it in 2 buckets, as Sarah indicated, one would be sort of a -- maybe a little over a point per quarter of continued attrition.

And we saw that basically throughout 2025, and then the Children's Medical Services business that we expect to roll off 10.1 and then as Sarah mentioned, sort of a pool of other sort of RFP-related probability-weighted membership items.

The only other thing to think about is there's very few impacts of OBI in terms of membership in 2026, but 1 of those is I think, around 7.1 a subset of the New York essential plan will be rolling off due to sort of an OP3 provision. That's about 140,000 or so members for us. So that's also in the $88 billion midpoint of guidance, the 5% to 6% member months reduction and the -- a little bit higher than that full year absolute membership attrition.

Our next question today comes from Sarah James of Cantor.

Can you help us understand the mechanics of the actuarial soundness look-back process? Like how far back are they looking now? How long of a lag does that typically take to come to an agreement on what trends actually were.

And as we move forward into continued periods of disruption through work requirements or additional redeterminations. How are you thinking about being able to shorten that period or move forward to rate adjustments in a faster pace?

Yes. Thanks, Sarah. It's a great question. The short answer is that we are very focused on trying to shorten the period and maximize the amount of sort of most recent data that's being included in the actuarial process but this is not a new thing, right? That has really been what we have been working on since the back half of 2024 as we started to see that dislocation between rate and acuity from and then the step-up in trend that we saw in 2025.

And so, as we've said, we continue to very proactively engage with the states. We're obviously not alone in doing that. So our peers are also part of that conversation. Bringing forward most recent data direct correlation to the program changes.

If I take a step back, I think that perhaps the silver lining of what has been a bit of a painful process to watch these rates lag is the fact that we have now sort of proof points that you can actually have a significant forward-looking trend in ABA unlike anything the actuaries had ever seen before.

We do have the proof points of states actually bringing forward more recent data and making in your adjustments, again, the Florida CMS contract in Q3 of last year is a great example of that. That was a very quick turnaround time between observed behavior and rate correction.

And so all of those lessons learned, we carry into the work that we're going to want to do in 2026 to try to preempt the changes that may come in 2027 and 2028 and make sure that we have appropriate rates as we think about what the impact of work requirements are going to be.

It's also why I keep pointing back to the fact that as time rolls forward our need to push for that more recent data of being included is just happening organically. And so now those acuity shifts in '24, the rate -- sorry, the trend impact in '25 is now basically sitting in the middle of that 2-year look-back period, which is probably the more conservative look back period or standard starting point for the actuarial process.

But it is -- it's a dynamic process. It's why it has been really important for us to build and continue to have really strong relationships with our states and to lean in and help them as they're going through that process by bringing forward very specific data.

And then the last thing I would say is, just to go back to Justin's question is the idea that in the absence of rates and the states are thinking about what budget pressures they may be facing, it's also a great moment to talk about where there are program refinement opportunities that back into sort of a reasonable cost of care that doesn't just come through the rate.

And so we're finding those conversations to be really productive and seeing again some of those bankable proof points in the back half of 2025 that we think will bear fruit in 2026.

And our next question today comes from Josh Raskin of Nephron.

Could you just give a little more specifics on your actual segment margins that are implied in the 2026 guidance? And then maybe remind us what your long-term margin targets are by segment in case anything has changed there. And should I be reading into no PDR in Medicare Advantage, meaning that you may be closer to breakeven in 2026, a little ahead of 2027.

Yes. So I think, obviously, a lot of stuff has changed across the business. So it's probably premature to talk about long-term margin targets for each business while policy is still shaking out.

But the bottom line there is certainly that we do see prior margin improvement in all lines of business and meaningful margin improvement across the enterprise over the next couple of years. But let me turn it over to Drew to walk through the specific margin assumptions by line of business in 2026 guidance and then talk through the PDR.

Yes, sure. I'd express Medicaid margins in terms of a stable HBR year-over-year. The commercial segment, which is largely marketplace, we were at minus one last year. You could do the math on the HBR guidance slide and get to something around 4% pretax for 2026 in marketplace. And then the Medicare segment, as I said in my remarks, PDP around 2% would be our target. We think that's a prudent starting place relative to well into the 3s for 2025.

And then Medicare Advantage within that segment, not quite a breakeven yet, but you're right to recognize no PDR in 2026 means that on the margin, it's not losing money, but there are things that aren't incorporated in the accounting of the PDR such that it's still operating at a slight loss on a fully allocated basis for 2026.

Our next question comes from A.J. Rice, UBS.

We still are trying and I still get this question a lot, maybe an unfair one to ask you guys, but I'll do it anyway. If you look at your national peers in Medicaid, 2 are still forecasting pretty significant drops in margin in '26 versus 25. One, who was more optimistic has now sort of come in line with you with their comments today.

And we all struggle to think about how can the company see such a different outlook. Do you think geographic footprint explains the difference? Or is there anything else there? And specifically, in your case, I wanted to ask about the PBM contract because you haven't said a lot about it -- but your vendor, your PBM partner has said that they have renegotiated your contract among a couple of other big ones and that it's a drag to them this year, presumably you're on the receiving end of that and benefiting.

And I wondered if that might be accounting for some of the difference or maybe that's helping you in other business lines, but any comment on that as well would be helpful.

Yes. Thanks, A.J. So let me hit Medicaid, and then I'll turn it over to Drew to talk about our bespoke contract with our PBM partner. So sort of going all the way back to where we're starting, which I think is really important.

So Again, it's important to remember that we are dumping off an elevated baseline. So as you think about trying to foot relativity with peers, just absolute, we are dumping off that elevated baseline in 2025 that included a 94.9% in Q2. We also have, again, proof point sort of rates that matured favorably as we -- in 2025. So that's an important thing to think about relative to that mid-4s rate assumption. And then we have aggressive execution through the back half of the year that played out with that sequential improvement in HBR in Q3 and in Q4, getting to that 930 as the jump off as we step into 2026.

And so that momentum I think, is really important. And the fact that we laid out sort of the key levers that we were going after and again, executed on those really well in Q3 and Q4, but also took action and influence decisions in Q3 and Q4 are effective, for example, until 1126. And so just as a reminder, right, in some of those proof points, rate, obviously, an important one.

The favorable maturation of the 2025 composite, the fact that came in line with our expectation. The fact that we saw in year rate correction like Florida, the second biggest lever is network. And again, you heard me talk about the ABA example, but really making sure that we focus our network on the highest performing, highest quality providers.

The introduction of clinical management programs hitting transitions of care and member engagement program reform. I talked about a bunch of those ongoing provider engagement, payment integrity and really addressing opportunities where that we're seeing pressure on coding from providers. And then again, a more aggressive stance in fraud, waste and abuse.

And you heard us talk about a provider that we termed in New York back in Q3 around ABA, but really leveraging that suspect list to go after bad actors. So a lot of proof points that did actually hit the P&L in the back half to 25% and are teed up for 2026. So that's where I think our view is that we've taken a prudent assumption around rates that the net trend assumption of 4.5% in 2026 takes into account sort of the work that we've done relative to trend vendors and being able to see additional those actions bear additional fruit in 2026.

And I will say it again because I will just keep saying it, both internally and externally. If all we do is deliver a 93/7 in Medicaid, I will be very disappointed. But with that, I will let Drew talk about our PBM relationship.

Yes, A.J., thanks for the question. Over the last, really, decade plus, we've had a tailored transparent and flexible contract with like our current PBM, even our predecessor PBM. So we had those provisions before they were cool and before they were legislatively dictated. .

I think we benefit by having $60 billion of pharmacy spend and not owning our own PBM. In other words, every ounce of the economic benefit that PBM arrangement and how we collaborate with our partner to go to the market together, whether it's pharma or network or other decisioning around formulary benefit plan designs we've got immense flexibility in how we work with our partner.

And that goes into the cost structure of our products and our margin targets. So all of that is captured in our insurance risk business in our 3 segments and pleased with what we talked about last quarter in terms of the continued collaboration with our partner, and we will continue to fight for affordability in health care including other parts of the ecosystem that have margins, including what I saw on CNBC the other day, boasting about a 40% margin in his pharma business.

So we will continue to drive affordability on behalf of our low-income and medically complex members, alongside with our PBM partner.

Our next question comes from Scott Fidel with Goldman Sachs.

Help if you maybe just sort of drill in a little bit more into Part D. And walk us through the book in terms of some of the dynamics through around the versus the non-LIS populations and what you're seeing in the market trends. Obviously, your book of business is heavily weighted towards the LIS.

And in particular, just some of the underlying inputs like risk scores and economics in terms of the LIS business post IRA versus the non-LIS and then how you position the business to grow and be profitable, clearly through '25 and expect to continue to do that in '26.

Yes, really good question and questions, especially around the impact of the IRA in '25, which they were shifting sands. So the good news in '25 is the industry we had that expanded or more protective risk corridor that then reverted the statutory risk corridor that's been in place since the inception of the Part D program.

But that gave us some, let's say, breathing room in terms of navigating pretty severe non-low-income specialty trend when the maximum amount of pocket dropped to $2,000. And so we got through that, executed really well. That's in the rearview mirror. And now we and the rest of the industry had that data going into the bids in the summer of '25 as we set them for 2026 with eyes wide open in terms of the impact of the IRA on that non-low income population that was availing themselves of a much lower maximum amount of pocket.

So we can look at our January data. And you're right, we're growing the revenue growth is largely driven by that yield increase because the direct subsidy increase. But we're still growing membership from about $8.1 million to around $8.7 million across both the low-income population or the Ottawa signs and the non-low income population.

So I feel pretty good about the mix of business we got -- we like both populations. You can have earnings on both populations and provide a really great value proposition for the senior giving them access to a great drug program.

So that in conjunction with the answer to the last question in terms of cost structure is an important leg of the stool, the underwriting acumen, you're having great actuaries to support and business teams to support that product, which is now a $26 billion product for us with a good margin as well.

So we're pretty pleased with that business, our positioning. And maybe most importantly, what we're able to do for seniors to have an affordable product in the open market.

Our next question today comes from Lance Wilkes with Bernstein.

I want to talk a little on Medicaid. And if you could, could you walk through Medicaid trends kind of '25 contrast with '26 in a couple of different ways because there's so many different moving elements. I was interested in your views as to how much risk shift had impacted '25. And if you saw any continued impacts in '26 with that, and whether you're seeing any impacts, either negative or positive from states making benefit design changes.

And then I'm kind of assuming that the remainder would be sort of core trend. And so then in core trend, you could kind of describe what's your experience with categories inpatient outpatient and/or units and cost inflation?

And maybe as a tag on to that, if you could just talk a little bit about what you're seeing as far as competitive dynamics in states given the margin pressures in Medicaid. Are you seeing any issues with small plans not being able to fulfill obligations or any lack of folks stepping back up to try to renew contracts?

Yes. Thanks, Lance. I'll hit that at a high level and have Drew chime in as well. So as we said, we did continue to see sort of a low level of continued membership attrition through 2025 as states were getting tighter with their eligibility criteria, which I think naturally put some on trend relative to core trends, the drivers are really consistent with what we called out throughout Q2 and rolling forward in terms of behavioral health, home health and high-cost drugs.

Those do not materially shift over the course of the last 3 quarters of the year with behavioral health really driving sort of 50% of that excess trend, ABA being sort of a primary underpinning of that. Home health and home and community-based services being another and then those high-cost drugs.

Relative to impact, those, particularly those excess trend areas were kind of how we chalk the field in terms of organizing and looking to mitigate that trend. And so lots of proof points back half of 2025 in terms of actually being able to intervene and help sort of moderate that trend, which is what contributed at least in part to ending the year at 93%.

So again, feel good where we stand today in terms of having really solid visibility into the various forms of trends that are influencing the business and being organized around the levers that impact them. relative to competitive dynamics, we are seeing that continued rate pressure is having an impact on different markets and certainly some of the smaller nonprofit plans.

And frankly, that is an important input into states thinking about making sure that they're funding the program sufficiently so that they have a competitive marketplace and that members have the quality of services that they want and they deserve. And I think over time, it's something that we would watch relative to potential membership growth if competitors choose to exit any of those geographies.

Just 2 quick things to add to that. Interesting facts relative to your question, Lance. In patient looks good in Medicaid. And then if you isolate our TANF population, the continuous TANF population, which is like 5 million members. So it's a statistically valid cohort. And you set aside behavioral health, that trend looks fine, looks normal like it would historically.

So that enables us to sort of 0 in on, as Sarah said, both those areas that we started talking about and recognizing in Q2 of '25 as well as policy and product and benefit changes with our state partners to really 0 in on what we need to do to pull those levers.

And our next question comes from Andrew Mok at Barclays

When I look at the segment MLR components embedded in guidance, the ACA improvement and Medicaid stability looked consistent with prior commentary, but the guide seems to imply incremental pressure within Medicare Advantage beyond the PDP reset.

So first, is that correct? And second, can you help us understand the sources of that pressure and what that means for your target to achieve breakeven in 2027?

Yes. I think you'd have to understand bifurcating under Medicare. We absolutely expect progression in Medicare Advantage, meaning improvement in that HBR. PDP yes, there's a piece of going from well into the 3s pretax margin to 2%, and that's HBR related.

But also think about the math on the direct subsidy going from $143 to $200 million and as I said in my script, roll that through a P&L and the yield impact where you need 0 incremental admin for that. So you're increasing premium revenue, you're increasing medical cost that has a mathematical impact on the HBR.

That's embedded in that 35 basis points segment impact on the consolidated HBR as well. So I think that might be the missing piece Andrew, of what you're trying to achieve?

And our final question today comes from Dave Windley at Jefferies.

I wanted to come back to exchange. Bronze, I think Bronze margins have been a little more volatile or MLRs have been more volatile in the past. You're seeing trade down as I think a lot of people expected. I'm wondering if you have enough data so far to see whether the utilization patterns of those buy down Bronze members are meeting your expectations?

Are they -- is there gross medical cost declining because the individual bears more of the cost and brands, things like that? I'm just wondering what that trade down profile looks like.

Yes. Thanks, Dave. So I would say, in general, sort of what we're seeing in terms of trade down again, sort of largely consistent with what we would have expected. We expect that it's probably a market dynamic as well and was contemplated as we thought about overall pricing.

And then taking into account not just how the Bronze products have operated over the last years, but what they did pre-COVID and making -- or sorry, pre-candmaking sure that, that was part of the calculus. It's obviously very, very early. We have not closed January yet. But I would say, based on a very early look nothing alarming relative to utilization patterns.

This concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for closing remarks.

Thanks, Rocco. Thank you all for your time and interest this morning. Despite the challenges of 2025, we entered 2026 with increased visibility and important momentum. I believe that we are well positioned to drive margin improvement in 2026 and over the next few years while ensuring access to high-quality, affordable health care for the members and communities we serve.

And finally, to my Centene colleagues, I just want to say thank you for your incredible resilience and commitment I am excited to see what we can deliver this year. And in the words of my legendary hometown quarterback, let's go. Back to you, Rocco.

Thank you. Everyone, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Well, hello, everyone. Welcome to our next session. I'm A.J. Rice, the healthcare service analyst here at UBS, and we're very pleased to have Centene Corporation, Sarah London, Chief Executive Officer; and Drew Asher, Chief Financial Officer. I think you guys were going to make a little bit of an opening comment.

Yes, just a couple of updates. And then we've got lots of questions. So first of all thanks for having us. Thanks, everybody, for taking the time to tune in. I think as all of you know, we recently reported our Q3 results, which came in better than expectations against the July forecast. But included in that, we're pleased with the fact that we're starting to make progress on -- sequential progression in Medicaid HBR and then ultimately raised our full year outlook to at least $2. We just closed October, so our results continue to track in line with that full year expectation.

A couple of quick highlights on the business or just updates, starting with Medicaid. So we recently -- and I'm sure many of you know, got notified that we were not awarded the CMS Florida contract -- sole-source contract that we've been serving for the last 6 years. We obviously know that population very, very well, which was evidenced in a very strong RFP response by the team. You guys can see that in the data. Unfortunately, in the final negotiations, we were not able to get comfortable with some of the terms of the go-forward contract, consistent with our strategy of having sustainable margins so that we can appropriately invest in the kind of high-quality and complex care that, that population needs.

So we do not intend at this time to protest that award and instead are very focused on a seamless transition of those members. In Medicare, we're obviously in the middle of annual enrollment, so far so good on that front. As we said in previous years, we're more focused on margin versus membership. Also pleased with how the PDP products are competitively positioned and do expect growth there. And then I'm sure we'll talk about, but we're just over a week into open enrollment. So it's a little -- for the marketplace product, a little bit early to talk about trends there. But we are obviously tracking very closely. There's a lot of moving parts to that, so making sure that we are appropriately supporting members who are asking questions, seeking to understand what some of the rate changes mean for them.

So, so far, so good on that front. And then obviously, very active discussion as we speak around the enhanced subsidies and whether over the next couple of weeks, Congress can come together and find a path forward for these tax credits, which we continue to believe have a material impact for hard-working Americans. So a lot more still to play out there. We're tracking that very closely and prepared for a variety of scenarios in terms of what may or may not happen by the end of the year. So all in, very consistent with where we were as we came out of Q3, obviously continue to be extremely focused on driving margin improvement and building momentum as we close out '25 and turn into '26 with that same mandate.

No, that's great. I know you haven't given guidance for next year at this point and you often don't talk about specific contracts, but is there any way to size the impact of that Florida decision?

Yes. So this year, it's about a $5 billion revenue stream. Next year, we expect it to be about a $4.5 billion through 9/30. That's the contract end date. And under this year's construct, including the rate increase, the substantial rate increase we just got, it is a very-low-single-digit pretax margin, and that's before all of the changes that were promulgated in the new contract and what we were requested to do in the BAFO which we declined.

Yes. And so the runoff will really be in '27 that you'll feel the bulk of it. Is that right? The other thing you didn't mention, but your vendor mentioned was this new PBM contract or extended, I guess, PBM contract. That wasn't up for renewal. It sounds like they came to you and asked for an extension through the end of the decade. What are the implications of that? It sounds like at least if you hear what they're saying, you must have gotten some concessions, incremental concession. So it sounds like a positive. Give us a flavor for what happened there and what the implications of that might be.

We've been very pleased with the partnership thus far, but I'll let Drew talk a little bit about those details. It's not our first rodeo.

Yes. You'd be disappointed if we didn't renegotiate that every year. Wouldn't you, A.J.? Good partner. We're constantly working together with Express Scripts to work on cost of goods sold, to keep health care affordable and to put our products in the most competitive position possible. So yet another good partnership. And yes, we had to negotiate some things. this year, not all economic, some operational, some cash flow. So we're pleased with how that relationship and contract is going so far.

Did you have the information about this new contract when you did the PDP bids and so forth, did you know that? Or is that something that's happened since then?

We've been working on it all year. So there was quite a bit we had visibility into, even though the final touches weren't on the signatures.

And you said that Medicaid will be consistent in margin next year versus this year. That's a little bit different than what we're hearing from some of the others. Is this new PBM contract, a factor in that? Is that a meaningful reason why you have more confidence than maybe some of your peers?

I think our view is that 1 starting point matters, right? So again, we are coming off a very high HBR in Q2 and looking for sequential improvement. And I think there are a number of levers that go into our view, not the least of which is just continuing to push for improvement in all the levers that we can pull. So whether that's -- obviously, rate negotiations is a big piece of that, appropriate utilization management and getting as efficient as we can there. We've talked a lot about fraud, waste and abuse. We've talked about working with the states on clinical program changes. We've seen states make some important policy decisions around high-cost drugs and GLP-1s that we know will go into effect in '26. And so that has an impact and a lot of that information and data obviously comes from our experience working through what now close to $50 billion in pharmacy spend and the outcomes that we see across our membership base.

So it all goes into the soup. Our view is we're at a better trajectory than we were coming out of Q2, which is why we've sort of guided to kind of consistent profitability next year. As I've said before, I would be disappointed if that's all we can deliver. But it's a question of what are the levers you can pull and feeling like we have been doing that for almost a year and have good momentum around that and then continued momentum around states bringing forward appropriate rates.

Okay. Okay. I want to drill down on a bunch of those comments there. But maybe just to tie up the PBM discussion last thing. They're talking -- Cigna is going to Express Scripts to a rebate-free model. On your exchange business in '28 when they are going to say that's completely in place, are you planning on going to that rebate-free model? Or is that still under discussion?

Yes. We've got -- since the inception of our relationship with Express Scripts, 100% pass through, 100% transparency. We go to the market together, whether it's manufacturers, whether it's network solicitations. So we're getting the benefits of a completely transparent deal. We'll always look at their product creativity and figure out what's the best, like low net cost for the member. So we'll, I'm sure, look at that, but we don't need that to get the transparency, which I think is some of the intent behind that product.

Okay. Okay. We are -- just to maybe talk a minute about marketplace. So we're 1.5 weeks into it. So as you say, you probably don't have that much information, but we're just trying to understand how much confusion is there because of these premium -- are you getting your call centers overloaded with people trying to figure out what happened here? Or is the reaction not that significant? How -- we can read in the press, 24 million people are going to lose coverage. But what's the reality on the ground? Do you have a sense of that at this point?

We've definitely seen an uptick in call volume, which we were prepared for. So we're not overloaded, but it is consistent with what we expected in terms of members shopping, trying to understand what the changes mean, looking for rate relief in terms of who's sitting in those low-cost silver positions. So still very, very early. But I think the need to be engaging members, helping them understand the changes, helping them understand options. We're obviously very engaged with the broker community as well because they're going to need to be trusted navigators for members. So very, very early, but I think the uptick in communication -- bi-directional communication is consistent with a membership base that's trying to, to your point, understand changes and then also tracking sort of this macro conversation that's happening around the enhanced subsidies and how that may or may not impact them.

And we had this debate about, well, a lot of people are going to trade down to bronze and they can still have a 0 premium. But obviously, maybe they don't really understand what that means from an actuarial value versus just dropping off. Is -- I know it's early. But every week, we'd like to have a little more information. Have you got any sense of how people are trending? Are they making the decision to trade down? Are they -- are you seeing people disenroll? I think at 1 point, there's an estimate it could be as low as mid-teens disenrollment, the high end seems like people thinking 30s-percent enrollment.

Yes. So we put the bands between sort of high teens and mid-30s with the idea that even if the final rule stays stayed and those program integrity measures don't go into place for this open enrollment, and if the enhanced subsidies were to be extended, that they're still high-teens degree of breakage in the market just from the level of confusion and the fact that members are getting letters today that say 1 thing that may change and they may not come back and make a second decision. So we do anticipate there to be market contraction regardless -- almost regardless of any scenario. And then -- and then in that upper bound, is that sort of high 30s and that is if sort of the full impact rolls through and we don't have the subsidies extended. It's still super early, right? So even if you try to look at the find signal in the noise of the data, you've got a lot of folks who are getting sort of auto-reenrolled in the plan that they're in, and we won't actually see if they make a different choice until they make that choice or until we get to effectuation data and understand who's actually paying the change premium. So watching the data very, very closely and trying to understand how the choices are being made. Frankly, a lot more of that information comes out anecdotally through conversations with brokers. And again, that's where we're hearing about more active shopping and to sort of seeking rate relief if and as they get those letters and those numbers compared to whoever sitting in that lower cost over position has changed.

I know you guys have been actively engaged with Congressman's Senators, State Governors on the issue of extending the subsidies. I think the reaction in the market was this doesn't look good based on what happened over the weekend. What's your updated thought about it all?

Well, I think it is valuable that we are on the verge of the government reopening. I'm not sure that we were going to get to a deal in the paradigm that had been set up. So I think getting through that and getting a little bit more sort of stability and folks kind of having a clean playing field to have the conversation. We're obviously up against a very tight deadline. So the question of what could get done, can something get done. We are still optimistic. I think the question is going to be, and you're sort of seeing it in the conversation that's rolled through the last 48 hours or so, is a desire for one, I think real bipartisan acknowledgment that the tax credits are benefiting working Americans and that, that's a very important base regardless of which way you vote to support. I think you're also seeing a desire from the Republican party to reform some of the current policies in the ACA and particularly around these tax credits.

And so the question is how much of that can get done in a short period of time versus creating some extension to then have deeper conversations in 2026 about reform. And I think that's the question is sort of there are probably 3 tracks. One is that they expire. One is that you get maybe a 1-year extension so that they can actually work through reform. And then perhaps there's enough alignment around sort of the highest value items relative to reform that, that could come together quickly. But we've obviously just as a reminder, we said this before, but we obviously built up our pricing for 2026 in the event that the [indiscernible] expire in the event that the final rule were to come into place with those program integrity measures.

So we feel well positioned and well protected relative to how this may play out. But obviously, trying to bring forward data and perspective to help those conversations in the hopes that something gets done to support these folks.

If -- I mean, there have been an assumption that a lot of the people that would drop off would be the sort of younger healthiers that were not paying very much with the enhanced subsidies. If there is some sort of an extension, how easy is it to get in touch with those people and get them to resign up? Are they mostly working with brokers at this point? Do you have to go direct to them? Are they going on healthcare.gov? Just do you have any sense about that?

So it is broadly a very broker engaged population. So we have very close ties to the broker community. That would be a huge leverage point in terms of communication. But really sort of multimodal outreach would be the goal, and frankly, sort of above brand marketing, just that there's a level of awareness if we got there for people to come back. Some of that depends on whether there is a special enrollment period that gets attached to an extension. So TBD on that front. But it's part of why we talked about sort of rolling some of that SG&A favorability into Q4 so that if there is a need to educate more broadly or reach out to those members and bring them back, that we have some flexibility to do that.

And you said your pricing envisioned the possibility of the enhanced tax credits just go away. So is that pricing sufficient given your assumptions about risk profile, et cetera, et cetera, to get you back to profitability on the exchanges next year? I know maybe it won't be the high -- mid- to high-single digits is a long-term target, but at least to the low-single digits? Is that the thought?

So we talked about the goal in putting together the pricing was to account for the really sort of the 4 major building blocks. So one was the significant uptick in baseline morbidity that we saw in 2025 through the Wakely data. The second was trend. The third was the enhanced subsidies and then the last was the collection of program integrity rules. And so you can imagine sort of if we're accounting for all of those and saying the goal in pricing was meaningful margin improvement, you could sort of infer where we were headed with that. But the idea that these things are literally still playing out as we speak, is that will obviously inform and where a bunch of that lands as we get to late January, early February will inform a more specific view for '26.

Okay. And just technically, you had had some cushion in there for the back half of the year and an uptick in utilization, and then you had absorbed some of that in the third quarter, but then you added to the number. Maybe talk a little bit about what you did there and why you think that is enough actually because a lot of it happened in September. And if you sort of annualize or quarterize, what you saw in September, it might even be a little more than what you the $200 million that you're taking in and maybe like more like a $225 million run rate. But anyway, I don't want to get bogged down too much into the numbers, but just maybe comment on what you're thinking there with those -- that adjustment.

Yes. I mean I'll comment at a high level, and then Drew can talk a little bit about sort of the calculus. But in general, we see an uptick in marketplace as we go through the fourth quarter and folks are kind of using services as they get to the end of the year, I think the view -- and frankly, our hypothesis all year has been that some of the uptick in utilization that we have been seeing has been driven by this concern from the population that they are going to lose the subsidies. And for some, as information has become more complete as we got closer to open enrollment, this idea that they may, in fact, not be able to afford health insurance next year. So part of our thinking was that we may have more of an uptick in Q4 even than we normally do, which is, I think, sort of what drove the decision out of prudence. But you want to talk a little bit?

Yes. Yes. So we did see in September and 1 month usually doesn't make a trend, but we had other favorable elements of Q3 so that we figured we'd top off and put another $75 million into the Q4 forecast for marketplace. And as you heard earlier, we got October now closed as of last night under our belt, consistent with the forecast that we laid out for the company on the Q3 call.

Okay. Okay. Maybe to switch over to Medicaid. There is a little bit of a differential view. It sounds like you think some of that's geography, some of it is starting point, where you're looking for consistency next year, others, 2 of your big peers are saying they're going to be down. One of your peers maybe is actually still thinking they'll be up. Help us rationalize all that. I know it's hard to comment on your peers, but...

Well, what I'd love you to do is actually get our peers Medicaid HBR, and then we could actually compare and we would really know who's going up, who's going down. But in the absence of that, yes, I mean, I'm not sure that others have a 94.9% in their base period, which was our Q2 HBR or 94.2% for the first half of the year. So I would think about it more as our guidance for Q4 Medicaid HBR is at 93.0%. You can get there through all the math and the data and the actual numbers that we've provided.

So we're exiting at 93.0% and we're saying we're going to be consistent in the zone of that 93.7%, which is the full calendar year 2025 as we look at 2026. And a lot of the things, as Sarah mentioned, the levers that we pulled, the annualization of that benefit, the fact that we saw this quickly in Q2 in terms of behavioral health, home health, high-cost drugs. I already see a little bit of relief in high-cost drugs, including policy improvements for 1/1/26. So all of that goes into the formula of thinking that, that's sort of the appropriate place at this early time frame to establish for what we believe 2026 will look like.

And when you think about being consistent, is the rate update next year sort of -- that you're expecting, consistent with the trend and you're just not catching up. Is that the way to think about it? Or are you still finding that the trend is going to be above the rate update and there's other levers you're pushing to get there?

Well, trend would be above the rate update, but the actions we're taking to contend with trend and policy improvements. There's another state. We've mentioned this before that enabled the payers to reestablish management of the PBM effective 10/1/25, so you get the annualization of that. And so yes, we'll have more details on the Q4 call when we give all the guidance elements for 2026, but think that, that's a good, reasonable and, call it, prudent position to look at a starting point of 93.7% for 2026.

You made a comment on the third quarter call that half of the above baseline trend is related to behavioral. How much is behavioral as a percentage of your overall spend? And are states looking at that and saying, "Hey, because this is part of our costs, we have to do something, change benefit design or whatever," what's happening around behavioral if it's such a pressure point?

Yes. I mean I think part of -- the answer is yes, relative to the states' behavior but not even specific just to behavioral health, right? The areas that we've called out, behavioral health, home health, home and community-based services and the high-cost drugs, all of those areas that are pushing trends are obviously top of mind for states because they're looking at what the drivers are. And the idea that those -- some of those trends are being driven -- some of these trends are controllable by either policy design or kind of network design. And so 1 of the things that we spend a lot of time doing because of our relationships with the states is bringing forward that data and then bringing forward alternative ways to look at either benefit design or how stringent they want to be around provider requirements.

We pointed a couple of times to states that have looked for the right reasons to expand access, but in doing so, have actually invited in quite a bit of fraud, waste and abuse. And so it is top of mind for the states because at some point, you can't just continue to increase rates. They have to have a balanced budget. They have to have actuarially sound rates. So the question is what else can we do? Are there ways to optimize the program to optimize the benefit that don't ultimately impact outcomes? And that, again, we pointed to a number of those examples. I think one I mentioned on the Q3 call was that states -- some of the states who are newly considering the CCBHC model and sort of these community behavioral health clinics, we were able to show them data about how that created significant cost in other states if you don't put the appropriate guardrails in ahead of time. And so they are listening and they are making those changes in more of a preventative measure. But I think overall for behavioral health, I think our numbers are pretty consistent with the rest of the industry. It's roughly 20%.

Yes, around 20% of the medical PMPM of Medicaid and obviously, a growing percentage of that pie driven by outpatient.

One last thing maybe on Medicaid. You all seem pretty sanguine about the work requirements and the impact that's going to have on your business primarily in '27, but some states are thinking about doing it early. I don't know if any will really get it done. Maybe just give a little bit of thoughts on how you see that playing out? And is that a whole many redeterminations again that we've got to go through for that expansion population? Or what's your thinking there?

Well, I certainly wouldn't want to give the impression that we're -- that it's no big deal, right? But I think what we've been trying to project is preparedness and the idea that we learned a lot to your point, going through a much larger redetermination process about how the process will go state by state where there are sort of points of friction, right, or points of inefficiency and how can we step in and support states and support members. And frankly, we have a good partner in CMS in this. Their goal is to try to leverage data, to leverage technology and digital connections to try to sort of overlay where some of the inefficiencies were in a broader redetermination process as we look at this population.

So there's still a lot to play out. We're waiting for guidance from CMS that probably won't come until the summer. And so to your point, harder for states to mobilize around that until they have clear understanding of what is the definition of able-bodied, where will there be exceptions? What other populations might states have flexibility to carve in from an eligibility perspective. So we've got a whole team that's been tracking this for 6 months now at this point. And again, leveraging everything we've learned in the redetermination process, but also the fact that part of our mandate in most states is actually to help people graduate off of Medicaid. And so we have work programs in 17 states. We fund scholarships. We train Medicaid members to be community health workers, duals, peer counselors. We are a convener in many places of community organizations where members can get access to community service opportunities.

To me, the big thing is going to be around the data. So not just thinking about where is their data that we as MCOs have, that the state can use for ex-parte eligibility, but what are the other data sources and other players that can come in and help to make sure that we're maximizing eligibility for those who are actually eligible. I think just sizing the impact, the expansion population is roughly 20% of our membership today and so the question is, how do you define able bodied? What is the impact to that population, obviously, a little bit different state by state, depending on how they take up the guardrails of the program.

Which means it will be a lot more focused than the broad redetermination effort obviously, just on the expansion states and then within that cohort, which I think that plus the learnings of the states from the redetermination and the actuaries getting used to ingesting more recent data and seeing the impact of that, I think, will help in those states where you're targeting the non-able bodied or the able bodied portion of the population that doesn't -- that doesn't qualify for all of the exceptions.

Right. Okay. Maybe to pivot over to Medicare and MA quickly. Obviously, again, we're early in open enrollment. I know your target is to get to breakeven by '27. Can you comment on what you've seen? What are some of the building blocks that you need to put in place to get to that breakeven? What's sort of the interim '26 look like?

So still early, but so far, so good on AEP. I think when we think about delivering margin improvement in '26 and then sort of that next step to '27, there are a couple of key components that we've called out consistently. Obviously, having sufficient rates has been helpful as we think about '26, and so we'll want to see what the rate environment looks like for '27. But relative to things in our control, we look at stars improvement, SG&A and then clinical initiatives. And the team has done a really good job, I think, making progress on all 3 of those. We've had a multiyear progression from a star standpoint, came out with slightly better-than-expected 4-star results this year, which then help '27. But really thoughtful about how to, as efficiently as possible, run the Medicare business within the larger organization. And over the last couple of years have really moved from what had originally been as WellCare came into Centene more of a kind of push to decentralize bringing that back together in a centralized organization.

We talked about this a lot in the context of quality, but it was really sort of more of a macro operating model move. And the idea that we leverage the local knowledge, the local relationships with key providers, value-based providers, but we get the efficiency of operating the book nationally at scale. So I think that has helped from an SG&A standpoint, we still think there's opportunity there. So the team is very focused on that as we move into '26. And then obviously, the value of providers who can help with stars results, can help with total cost of care, thinking about them as partners in the clinical initiative work that we're doing. So that's a couple of things that we've pointed to are really leaning into those value-based models. And then also the clinical interoperability that we think will help make that data exchange more seamless and the ability to partner most closely for providers to intervene on those members.

Are you finding it challenging to find providers? I mean we've had a lot of providers that have struggled that have taken on risk arrangements. Are you having to rework your deals with them? And give them some concessions? Or what are you finding out there on those value-based arrangements?

We still think there's opportunity. We've been looking at those contracts over the last couple of years. The 1 thing I will say is, in the past, historically, Centene was not as focused on that value-based framework. So call it, 3, 4 years ago. And so the team has done a lot of really good work in terms of aligning our membership to the highest-performing providers and then over time, making sure that those contracts are structured in a way that you're either working directly with providers who know how to operate in a value-based -- in a value-based way or you're sort of stepping them through that progression of upside to upside and downside risk.

So it is an ongoing set of work. To your point, there have been provider groups that have sort of come into the space and moved out of the space. So we're constantly looking to optimize. And it's part of why we've said that it doesn't -- we don't think it makes sense for us to own providers because that gives us the flexibility to align in any given geography to the highest quality, highest performing providers.

I know it's early for you to comment on your own enrollment situation, but there has been this debate about the overall MA enrollment trend. I mean CMS put out some stuff thinking it's going to be flat year-to-year. Do you have any early view on where the overall industry is? One of your peers said no, they think it's sort of in the 4% to 5% range similar to this year. But any thoughts on that at this point?

I don't think we have a macro view. I mean our focus has been margin over membership. So we're not looking to grow. It's hard to imagine, given sort of just the competitive dynamics. I think our view would be it's probably somewhat similar to what we've seen over the last 2 years.

Okay. obviously, some noise around GLP-1s in the last 48 hours or so? Or what -- have you been able to assess that? Do you have any view on whether the plans are going to be asked to take that on midyear? Would you get the protections of the high-cost thresholds. What's your thought on that?

Still early. I think we're in conversation with the administration to understand design for that. We're obviously the largest PDP participant. I think there's an opportunity. The general view, I think we have partners who are cognizant of what it means to introduce changes post bids and thinking about that for 2026. So we're interested to learn more about what that's going to look like driven out of CMMI relative to a demonstration on the opt-in and then what that's going to look like as we roll forward into 2027. I don't know if you...

Yes. We just need more data information from the administration. We're picking up pieces from pharma, from peers and through the general discussions with our governmental partners but need to see the real details on what's the '26 set of rules and then probably more importantly, the '27 set of rules, so we can prepare for that, if necessary, in our '27 bids.

Right, right. I mean, do you get the sense that they understand that changing post bids is a very challenging thing.

They do understand that. They do. And then as you referenced in Medicare Advantage, you have that the introduction of, what, 0.1% new drug gets carved out into fee-for-service. And it sounds like what we heard in GLP-1s is moving towards the demo -- voluntary demo position, but we'll have to see for '26.

Okay. On the capital structure, you're 45% -- 45.5%, I think, in the quarter, debt-to-total cap. Any comments on capital priorities real quick? And what is your goal? Where would you be comfortable? A lot of guys talk about 40%, but I think you've always run a little bit higher. What's the thought on that?

Yes. That's really driven by our noncash goodwill charge. And we would like to be lower than the 45.5% and rest below that 40% for the purpose of seizing opportunities. So not just for the sake of metric, but to be nimble to seize opportunities. So you'll probably see us trim debt a little bit over the next year or 2, but we're generating cash, and we look forward to -- I mean, we hope to add an acquisition here or there along the way. And we'll look at all the methods to deploy capital.

And just maybe finally, because we've had 2 unusual years. When you think about the long-term growth algorithm, we get on the other end of this, what does that look like for Centene, you think when we come out the other end of this?

Well, to your point, the world has changed a lot since we originally put out that algorithm. I think what has not changed is our conviction in the value of the platform and the fact that being positioned in focus on government-sponsored programs is a growth area that there's obviously quite a bit of embedded earnings power in the platform as we stand here today and short-term margin improvement opportunity, but I think also longer term, not just organic growth, but really interesting disruptive opportunities around things like ICRA. So we are laser focused in the short term on mining as much of that value out of the margin improvement work, but also with an eye on further growth in Medicaid in the duals opportunity. And then as marketplace stabilizes, I think a real opportunity to talk about disrupting employer-sponsored insurance with ICRA.

Okay. That's great. Well, I appreciate the management from Centene or participating. I would just note for people in the room that Sarah is going to do a panel this afternoon on women and healthcare. So take note of that. It should be a good group and a lot of interest in that. And thanks, everyone, for participating.

Thank you.

Good day, and welcome to the Centene Corporation 2025 Third Quarter Financial Results Conference Call. [Operator Instructions] Please note today's event is being recorded.

I would now like to turn the conference over to Jennifer Gilligan, Senior Vice President, Investor Relations. Please go ahead, ma'am.

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our third quarter 2025 earnings results conference Call. Sarah London, Chief Executive Officer; and Drew Asher, 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. Specifically, our discussion today of our expectations were the drivers of adjusted diluted earnings per share for 2025 and any commentary on expected adjusted diluted earnings per share for 2025 are forward-looking statements. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our third quarter 2025 press release, Centene's most recent Form 10-Q filed this morning and its 10-K filed on February 18, 2025. Additionally, other public SEC filings, which are available on the company's website under the Investors section.

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. While we'll 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 2025 press release.

With that, I will turn the call over to our CEO, Sarah London. Sarah?

Thanks, Jen, and thanks, everyone, for joining us to review our third quarter 2025 financial results and updated full year outlook. We are driving significant progress against the milestones we provided to investors in July, yielding a better-than-expected adjusted EPS result in the period. This morning, we reported third quarter adjusted EPS of $0.50, ahead of our previous expectation. In these results, our Medicaid business delivered anticipated HBR improvement in the period that was further aided by a positive 2025 retroactive revenue adjustment in our Florida business. SG&A and performance within our noncore segment were both slightly favorable. Net investment income was stronger than we previously expected, and we experienced a lower effective tax rate in the quarter than originally forecasted. .

Marketplace experienced additional medical cost pressure in the last month of the quarter, but the segment still produced an on-track result for the period. In our Medicare segment, including MA and PDP performed in line with expectations we shared on our second quarter call. With 3 quarters of the year complete, we are increasing our adjusted EPS forecast to at least $2 up from our previous forecast of $1.75 per share. When we came to you in July with recalibrated earnings expectations, we laid out 6 key assumptions that bridged us from our April outlook to the $1.75 per share forecast. We'd like to take a moment to update you on how those 6 factors evolve during the quarter and are now treated within our new adjusted EPS outlook of at least $2.

One, relative to Marketplace morbidity and its corresponding impact on risk adjustment assumptions, we received the second tranche of Wakely data in September, improving our visibility with industry-level paid claims through July. We are pleased this data was consistent with our previous estimates, and we have, therefore, made no changes to our original full year assumption of a $2.4 billion pretax earnings impact within this new forecast. As a reminder, the next update from Wakely is expected in December.

Two, also in the forecast was $200 million we added to account for additional Marketplace medical spend in the back half of the year. Marketplace delivered an in-line result for the quarter, but given the uptick in utilization we saw in September, we are holding the remaining $125 million of this provision in Q4 and are adding another $75 million given the volatility around eAPTCs. While we may not need this cover as of now, we believe this to be a prudent posture given the landscape uncertainty that remains.

Three, in July, we pointed to a 2025 Medicaid composite rate of roughly 5% based on the rates in hand at the time. With all scheduled rate adjustments now finalized, we expect the 2025 composite rate adjustment to be roughly 5.5%.

Four, in July, we were targeting a second half Medicaid HBR of 93.5. Our third quarter Medicaid HBR was 93.4, which included $150 million in Florida Children's Medical Services program revenue, of which $90 million or 40 basis points was retro. As a result, we are now on a trajectory for a back half HBR of approximately 93.2.

Five, we continue to expect the Medicare segment to deliver $700 million of pretax favorability relative to our April full year forecast. Medicare Advantage and PDP results in the quarter were consistent with our outlook, so no change to this expectation.

Sixth, we are also still on track to deliver $500 million in pretax benefit from SG&A. In fact, we performed slightly better than expected with administrative expense reduction in Q3. However, given the fluid nature of Marketplace open enrollment and the potential for additional enrollment activities surrounding eAPTC decisions, we are keeping the full year SG&A assumptions unchanged for the last quarter as of now.

In addition to those items from our Q2 bridge, we want to highlight investment income and tax rate performance in the quarter and how they impact our expectations for the remainder of the year. As mentioned earlier, Q3 investment income was stronger than expected. Gains were largely driven by onetime items and therefore are not expected to recur. We believe there may be opportunity to take some investment losses in the fourth quarter to improve the trajectory of investment income in 202. and we are providing flexibility in the guidance to do so if the opportunity arises.

Tax favorability in the quarter was driven by a lower tax rate, which was purely a matter of timing. Our view of the full year tax rate remains unchanged. While we continue to track and pull levers to address Medicaid cost trend and are similarly watching Marketplace utilization dynamics closely in this uncertain environment, we are pleased with the overall performance of the business in the quarter.

With that, let's take a closer look at the performance and trajectory of each core business line, starting with Medicaid. We were pleased to deliver 150 basis points of sequential improvement in our Medicaid HBR this quarter. While this was aided by improved revenue from the Florida Children's Medical Services contract, it also reflects fundamental improvement that is a direct result of the actions we described on our Q2 call, including rate advocacy, program changes, clinical management, network optimization and more aggressive fraud waste and abuse interventions, among others. Those efforts yielded tangible proof points in Q3.

During our second quarter call, we identified 2 states, Florida and New York, where we were experiencing outsized Medicaid medical cost pressure. In Florida, you'll recall, we saw significant trend pressure in the CMS population as members receiving [ ABA ] services were transitioned into that sole-source contract. We engaged in constructive dialogue with the state and shared real-time data throughout the summer. In September, the state moved to address the underfunding of that program going back to February 1. Additionally, the state provided a rate update for the coming year that better reflects the underlying medical demand within that population.

In New York, we made real progress on the fraud, waste and abuse front, particularly in the behavioral health space. [ Fidelis ] team was able to terminate a provider group that engaged in suspicious billing practices and drove sizable excess medical costs at the expense of New York tax payers. The state has simultaneously taken several serious actions against the same provider. It's a great example of the confidence our state partners in [ Albany ] have in Centene. Through these and other performance improvement efforts, the New York team is currently on track to deliver meaningful HBR improvement in the back half of the year compared to Q2 results.

We continue to see trend in Medicaid with the same drivers we described in Q2, namely behavioral health with ABA, a primary contributor, home and community-based services with home health, the major driver and high-cost drugs. Though high-cost drug trend did show slight moderation in the period. As you heard on the Q2 call, we have organized enterprise-wide to address these dynamics and saw solid momentum in the quarter on those initiatives. A few examples. We've been actively working with states on solutions to address high-cost drugs and have seen multiple states make movements over the last quarter to implement drug-specific carve-outs and revised formulary decisions including 2 states who have reversed course on GLP-1s.

Additionally, our ABA Task Force successfully leveraged our multistate experience and unique breadth of data to drive important policy advancements with our state partners. One state established increased precision in ABA clinical service definition as well as more stringent supervisory and caregiver engagement requirements. This drove a 45% reduction to outlier payment rates which results in tangible financial improvement for the state's program and aligns members to higher-quality services. We are pleased to be making real progress on our Medicaid margin improvement agenda, but we are certainly not declaring victory.

With behavioral health still driving 50% of above baseline trend, we continue to aggressively pull levers internally to appropriately manage medical costs and advocate for rates that reflect the medical demand in the ecosystem. All part of returning Medicaid margins to a more normalized long-term levels. Despite the challenges we have navigated over the last few years, our commitment to serving low-income and underserved populations has never been stronger. We are pleased to be making progress against our financial goals and making good on our commitment to be responsible stewards of state taxpayer dollars, all while continuing to provide high-quality care and access to vital health care services for our members.

Turning to Marketplace. From a membership standpoint, we ended the quarter with roughly 5.8 million members, slightly better than expectations. As you heard earlier, the business produced an in-line result inclusive of medical cost pressure in September. Given what we saw in September and the reality that we are supporting a population staring down eAPTC expiration and potentially the wholesale loss of affordable health care coverage next year. We felt it was prudent to provide for additional coverage in Q4 against a potentially more pronounced year-end utilization push.

In the meantime, we have been laser-focused on positioning our Marketplace book for 2026 margin expansion, and Q3 was the critical window for that effort. We were data-driven in the buildup of our revised rates, which ultimately averaged in the mid-30s, taking into account increased 2025 baseline morbidity, a prudent assumption for year-over-year churn and the combined risk pool impacts of expiring eAPTCs and program integrity measures. Consistent with what we shared in September, we were able to reprice our products for 2026 in states that cover 95% of our current membership and where we were not able to fully reflect the expected morbidity in the rates we took additional actions to minimize margin impact for the remaining membership. Those rates have now been officially approved and absent any late-breaking policy changes will drive open enrollment as it launches this weekend.

Congressional dialogue around eAPTCs has obviously gained traction in recent weeks. The outcome remains uncertain. While our products are priced to support year-over-year margin improvement in the scenario where eAPTCs expire, we believe these tax credits offer critical support for hard-working Americans, small business owners and rural health care infrastructure, and we are hopeful Congress can find a path forward. In the meantime, we are ready to open enrollment with strengthened digital tools and well-trained call center personnel to aid members during this time of uncertainty. Regardless of the outcome, we remain confident in the long-term importance and viability of the individual health insurance market as a critical coverage solution for millions of Americans. As we move beyond this moment of policy evolution, we continue to see a greater role for this platform to support a more affordable, portable, individual insurance experience that we are excited to lean into and lead forward.

Finally, Medicare. Both of our Medicare segment businesses performed well during the quarter, producing results consistent with our updated outlook provided this summer. Our reported Medicare segment HBR was 94.3, reflecting typical cost of care patterns within Medicare Advantage as well as the inverted seasonality of pharmacy costs within PDP, owing largely to changes related to the IRA. Note that these dynamics are even more pronounced now that PDP is half of our Medicare segment revenue. Medicare Advantage medical cost trend remains elevated compared to historic levels, but was consistent with our expectations for the quarter. PDP performance was consistent with our previous view and is now largely contained by risk corridors, providing for increased visibility into the fourth quarter as the corridor serves to narrow the band of outcomes through downside protection for the product.

AEP is live, and we are actively enrolling members in our 2026 Medicare products. Margin recovery once again took priority over membership as we constructed Medicare Advantage bids but we are pleased with both the value proposition we are offering beneficiaries as well as our competitive positioning. We continue to invest in our member experience, providing enhanced digital tools and resources for members and prospective members. Dual eligible populations are a strategic focus for Centene, and we recently launched the first phase of our enhanced integrated duals model across 8 states as part of the broader transition of MMPs to integrated [ D-SNP ] effective January 1, 2026. We look forward to the opportunity to serve these beneficiaries as their needs and our capabilities continue to align and evolve.

Earlier this month, CMS released 2026 Star ratings that impact 2027 financial results, and we are pleased to have generated another year of progress. During this cycle, we elevated our performance despite continued cut point headwinds to 60% of members in plans at or above 3.5 stars versus 55% from the prior year with roughly 20% of members in 4-star plans. These results demonstrate a true one Centene effort with the initiatives being planned and executed at every level of the organization and provide us with increased confidence in our ability to achieve breakeven pretax margin in 2027. We are proud of the Medicare Advantage Star score advancements we have achieved over the last 3 years but remain focused on the opportunity for continued improvement. In the near term, we are leaning into provider interoperability, multimodal member engagement and advanced BBC partnerships as levers for the future.

Overall, we are pleased to have maintained strong Medicare segment results, including positioning PDP well to achieve results better than the 1% pretax margin guidance we began the year with and putting Medicare Advantage on an even stronger path to achieve breakeven in 2027. As we reflect on the quarter, we are pleased to have made material and necessary progress on Medicaid profitability and delivered solid results across the balance of the business. It is a testament to the resilience and discipline of this entire organization that we are able to raise the outlook today. And while a tremendous amount of work remains ahead of us, we intend to harness the positive momentum we have generated here in the third quarter to help power the balance of the year.

Looking ahead, given that we will not be hosting an Investor Day in December, our plan is to provide detailed 2026 guidance on our Q4 earnings call in early February. In the meantime, we wanted to offer some initial comments on the major building blocks of our 2026 plan. In Marketplace, as we've shared, we were able to successfully take actions to account for baseline morbidity trend eAPTC expiry and program integrity impacts for 2026 across 95% or more of our membership. While the policy landscape remains uncertain, based on what we know today, we believe we have positioned the portfolio well for meaningful margin improvement in 2026.

As a result of thoughtful bid construction and disciplined management, we believe our Medicare Advantage business is also well positioned for margin improvement in 2026. PDP continues to outperform in 2025 and but you can assume we would not guide to a similar level of outperformance as we step into 2026, making this a year-over-year headwind as we set initial guidance. In Medicaid, in light of our now better-than-expected full year trajectory, we believe a prudent posture for 2026 is profitability consistent with our current full year outlook in 2025. Additionally, you should assume that a lower tax rate environment makes net investment income headwind and that our tax rate increases.

Overall, we remain focused on driving margin improvement across the enterprise and delivering EPS growth in 2026. The current dynamic policy landscape has presented significant challenges in 2025 but also offers meaningful opportunity in the months and years to come. We have incredible runway ahead of us in the form of operational improvements, efficiency gains and margin expansion, all in service of our dual mandate to ensure quality health outcomes and serve as responsible stewards of taxpayer dollars. None of this would be possible without the tireless work of more than 60,000 Centeners across the nation serving and supporting our nearly 28 million members. Thank you once again for showing up day in and day out in service of our mission.

With that, I'll turn it over to Drew.

Thank you, Sarah. Today, we reported third quarter 2025 results, including $44.9 billion in Premium and Service revenue and adjusted diluted earnings per share of $0.50. The GAAP loss per share of $13.50 was the direct result of a $6.7 billion noncash goodwill impairment charge recorded in the quarter, more on that in a minute. Within the $0.50 of adjusted EPS, we had a temporarily low adjusted effective tax rate in the quarter, which contributed about $0.1, compared to an expected full year 2025 adjusted tax rate of 20% to 21%.

Let's go through the drivers for the quarter and then map that to the full year. Starting with Medicaid. We are pleased to report a Q3 HBR of 93.4%, better than we expected for the quarter and heading in the right direction. Of the 3 previously discussed high-trending areas, Medicaid high-cost drug trends settled a little in the quarter and we successfully advocated for much improved revenue in our Florida Children's Medical Services or CMS business, where we've seen very high ABA costs. As Sarah covered, we received a net $150 million positive revenue adjustment in Q3 for the Florida CMS program for the 2/1 February 1 to September 30, 2025 period, of which about $90 million was retro to Q1 and Q2 2025. Retro piece was worth about 40 basis points on the Q3 Medicaid HBR.

We also made some progress in New York, but there's more work to do to further improve performance. Overall, given the Q3 result and momentum we are seeing from actions we have taken in 2025 we're a little ahead of our back half Medicaid HBR goal. On the rate front, the 9/1 to 10/1 cohort that represents about 28% of annualized premium averaged in the mid-5s consistent with the full year 2025 composite rate. We are focused on 1/1 and 4/1 rates, representing about half of our 2026 annualized premium revenue, and that advocacy is in process. Medicaid membership is at $12.7 million, and we would expect slight attrition over the next few quarters. Stepping back, we are pleased with the sequential progress in Medicaid with opportunity for improvement ahead.

In our Commercial segment, our HBR was on track for Q3 at 89.9%. Sarah indicated, in September, we received and evaluated the second run of marketplace Wakely data, which represents updated claims through July. Our review of this data is consistent with the $2.4 billion forecast change we described on the Q2 call. Also, our previous guidance had accounted for a pickup in Marketplace trend in the back half of the year, especially given the level of public discourse around the eAPTCs. We did see a pickup in utilization in September, including ER. As we assess risks and opportunities for Q4, we added another $75 million to our prior Marketplace medical expense forecast.

The more critical activity during Q3 was focused on 2026 rate filings and eAPTC education and advocacy. We sit here today based upon our rate filings in 29 states. We have priced for our estimates of one 2025 baseline correction; plus two 2026 forecasted trend; plus three, the impact of program integrity rules implemented in 2025 and those announced for 2026; and four, the sunset of eAPTCs. Unlike 2025, which is expected to run at a slight loss, we expect these pricing actions to support margin expansion in our Marketplace business in 2026.

Our Medicare segment was also on track in the quarter. Medicare Advantage continues to show progress toward our 2027 goal of breakeven and we were pleased with the progress with the October Stars announcement as Sarah covered. Within PDP, while trends are still high in the non-low-income PDP population, they weren't as high as we had planned for in Q3. That's good for cash flow and forward forecasting, but is largely offset against the risk corridor receivable for current earnings purposes. As we discussed at a webcast conference during Q3, we are pleased with our 2026 PDP product positioning relative to the relevant benchmarks and direct subsidy estimates. More to come on the Medicare segment after AEP.

Our adjusted SG&A expense ratio continues to be strong at 7.0% in the third quarter compared to 8.3% last year and 7.3% year-to-date compared to 8.3% year-to-date last year. This is largely due to growth in 2025 PDP revenue and continued leveraging of expenses over higher revenues coupled with good discipline. Given the amount of activity expected in Q4 with open enrollments and member communications, we are assuming for now that we will spend any remaining Q3 SG&A outperformance in Q4. You will notice investment and other income is up $79 million in Q3 compared to Q2. We had a few gains in the quarter plus temporarily higher cash balances than expected.

As we think about Q4, we may harvest some unrealized losses like we did a couple of years ago in Q4 as we think about reinvesting in higher yielding instruments for 2026 and beyond. So for now, we are assuming that Q3 investment and other income outperformance will be earmarked for that purpose. Overall, the fundamental business performance was good in Q3 relative to our July forecast. Our GAAP results, you can see a reduction or a write-down of about 38% of our goodwill during Q3. As we covered on the Q2 call, the drop in market cap required us to accelerate our annual goodwill evaluation into Q3.

After going through an accounting promulgated and detailed review of our goodwill, we took a onetime noncash charge of $6.7 billion in our GAAP results. This has no impact on statutory capital, cash or adjusted EPS results. Our sole credit facility financial covenant is a debt to cap limit at 60%, and we sit at 45.5% on 9/30/25 after this write-down. The topic of the balance sheet, we had 0 drawn on our $4 billion revolver that has a duration until 2030. We also had a strong cash quarter with cash flow provided by operations of $1.4 billion in Q3, primarily driven by net earnings and the net timing of pass-through and other payments. Unregulated cash on hand at quarter end was $357 million.

As you can see in the 10-Q, we expect to receive net $200 million in dividends from subsidiaries in Q4. Medical claims liability totaled $21.5 billion and represents 48 days in claims payable, an increase of 1 day as compared to the second quarter of 2025. If we look at the full year 2025, we are increasing our 2025 adjusted EPS forecast from the previous $1.75 to at least $2 driven by early execution on the improved Florida CMS revenue. In 2026, we look forward to providing 2026 guidance on our next quarterly call in early February, once we have closed out 2025. But as you heard from Sarah, we look forward to growing adjusted EPS in 2026.

Thank you for your interest in Centene, and we can -- Rocco, we can open it up for questions.

[Operator Instructions] And today's first question comes from Josh Raskin with Nephron Research.

I guess my question really would be how do you get comfortable that you are getting ahead of trend in the exchanges? And do competitor exits make the pool less stable for 2026? And is there a point where this adverse selection spiral causes you to rethink certain markets or maybe even the segment entirely?

Yes. Thanks, good morning, Josh. Thanks for the question. Let me hit utilization and trend in marketplace, both as we think about the back half of 2025 and then how we thought about it for 2026. So as we said, we saw a slight uptick in utilization in September, primarily outpatient ED. It correlated from a time standpoint with the direct uptick in dialogue nationally around both rate increases for 2026 and the eAPTC discussion at the congressional level. So not a perfect correlation or causation, I guess, but sort of correlation there. And as we thought about Q4 and thought about sort of that $200 million provision, pushing the remainder of the $125 million into Q4 and then adding another $75 million was really based on taking what we saw in September, extrapolating that out and assuming that given just the volatility in the landscape and the fact that some folks are going to be concerned about their ability to access health care next year, we may see more of an uptick than we normally do in terms of that Q4 utilization. So we feel like we've put prudent coverage in Q4 as we run out the year.

Relative to 2026, we obviously did a lot of work and I just want to call out again, the Marketplace team jumping on top of the Wakely data in July really through that and understanding the drivers of what we were seeing and the fact that there were indicators in that data of what the extrapolated morbidity shifts would be above and beyond what we're seeing in '25 or '26. So what we built into the revised rates that we talked about filing across 95% of membership were 4 major components.

One was that adjusted 2025 baseline morbidity. And obviously, the fact that the September Wakely data came in consistent with our extrapolation off the July data is a strong reinforcing data point. So that's one. Two, is a healthy provision for trend as we step in year-over-year trends as we step into 2026. Three, is the assumption of the expiration of eAPTCs because that is current law of the land and what that will do to risk pool shifts. And then the last is a sort of composite view of the additional risk pool shifts that would be driven by both the continuation of the 2025 program integrity measures and sort of enrollment hurdles that were put in place as well as those hurdles that are -- were in the final rule and also in [ OB 3 ].

And so all of that was loaded as part of that revised rate. And that gives us confidence that an average step-up, as I mentioned, in the 30s really with a focus on margin over membership sets us up well for meaningful margin recovery in '26. Now there are multiple pieces that are still moving, right? Obviously, we don't know where eAPTCs will land. The payment, program integrity measures that were in the final rule have been stayed in the courts. And our view is it's unlikely that those move ahead of Saturday and possibly not even through at least the original planned open enrollment period. And so we need to see where those land. But the bottom line is that our pricing took into account sort of all of those actually being in place during the open enrollment period.

Lastly, just relative to your comment on overall stability, we do feel like there is still a competitive market. We feel like peers were thoughtful about '26 in terms of understanding the risk pool shifts. And we do think that sort of the fundamental construction of the market with those advanced premium tax credits prevents any kind of sort of death spiral, but we've been cautious as we constructed our view of 2026.

And our next question comes from A.J. Rice at UBS.

Maybe just follow up on that and then maybe ask something on Medicaid as well. On -- so presumably, the open enrollment people -- the open enrollment that enrollees are going to see will reflect the loss of these tax credits, and there may well be a move by Congress to extend them in some form or fashion. Do you have the ability to quickly reengage people to get them to sign up? I assume the people that are sicker and dealing with the health system through their providers will get prompted to re-sign, but I'm thinking about those that are younger healthier and have less frequent context, many of those still use in the exchanges. How easy is it to notify them that now it may make sense to re-sign up and what efforts do you have in place for that?

And then just quickly on your comment about stable margins or stable contribution in Medicaid next year. There's a lot of discussion about some states trying to adopt work rules early and also putting in place program integrity measures on that side of the business. How are you thinking about that when you think about your outlook for Medicaid next year? And is that a meaningful swing factor?

Yes. Thanks, A.J. Great questions, witty question. So let me hit Marketplace first. And you're right, sort of what we are navigating through is the idea that traditional open enrollment launches on Saturday. The eAPTC discussion is we assume live as we speak with the possibility that there may be action before the end of the year. And so I think what you're really asking about is sort of breakage. So even if we got eAPTC extension, are we able to go and recapture folks who maybe got an initial letter, made a decision about the affordability of their insurance based on that data point and don't actually reengage or return on their own volition to understand how that landscape may change. So that is something that we are paying a lot of attention to.

And in fact, if you think about our commentary about rolling forward some of the SG&A favorability that we saw in Q3 because of this idea that we may be going through sort of a multilayered enrollment process. We may find ourselves with a special enrollment period or an extension may want to be putting forward additional marketing efforts, obviously, mobilizing our broker relationships to go and find those members if and as the landscape changes midstream. Our view is that there will still be some degree of breakage. And so even if the eAPTCs are extended in the middle of the cycle and you go forward, for example, with an additional 60-day special enrollment period. Our view of market contraction for 2026 is in the high teens to mid-30s range.

So again, that's based on sort of all of the different factors that could be at play but it tells you that even that bottom end where, for example, the program integrity rules remain stayed and eAPTCs are extended, that there is going to be some degree of market contraction. And again, some of that is the roll-through of '25 program integrity enrollment hurdles, but also a view that there will be some abrasion and breakage on members who get that initial letter and don't come back. But we are certainly prepared to do everything we can to go find those members and help them understand in the event of an extension that they do have access to affordable insurance and certainly have done all of the work kind of both mathematically and administratively to be prepared, frankly, for any of these scenarios so that we can help be a good partner, both to the administration as they navigate through this but also supportive of our member base. So that's Marketplace.

Medicaid, so a couple of things embedded there. Relative to work requirements, we saw some movement over the summer for states that we're putting in waivers and thinking about potential early start, call it, 7/1/26 implementation of work requirements. As of now, those states that were sort of early in that have all moved back to a 1/1/27 start date. So we don't have any firm data points of states that all have our intent or have explicitly pinned the 7/1/26 start date. There's also quite a bit of important guidance that is still from CMS that is not scheduled to come down in rulemaking until the summer. And those are really important provisions relative to state flexibility, how to define able-bodied what additional population start states may be able to carve out what the data capture and reporting requirements are going to be, what the frequency is of all of this.

So states can certainly and it should be, and we are working very closely with them to plan ahead, but there's a lot about what this is actually going to look like that. It's not even scheduled to become clear until the summer, which means that 2027 and for some states beyond that is going to be the more rational sort of implementation time frame of that. And then what, therefore, the impact as we think about '26 we don't see a huge impact in '26 relative to work requirements as we think about the overall sort of margin profile and our ability to retain as we said, sort of initial view of '26 sort of consistent profitability and then the program integrity measures. Similarly, we are expecting some degree of membership attrition next year just as we're seeing states get better at the reverification process, but we don't see that as a huge swing factor.

And our next question today comes from Justin Lake at Wolfe Research.

First, just a quick follow-up on the exchanges. I appreciate you sharing your thoughts on the market contraction potential. I wanted to hear your view on competitive positioning for '26 versus '25 and would you expect your growth overall to be in line with that market or better, worse and by how much? And then maybe, Drew, any color you could share with us in terms of how much of that $700 million of Part D upside we should think about unwinding next year?

Yes. Thanks, Justin. So a little bit about market competitive position. So again, sort of a slightly refined view of overall market contraction in that sort of high teens to mid-30s. Obviously, it depends on sort of which scenario lands, and we need to see how open enrollment, which may be extra complex plays out. But it's possible that we end up slightly on the higher end of that range. However, relative to our competitive positioning and sort of the landscape relativity, we had 55% of our portfolio in the low-cost silver positions in '25 and 42% in '26. So not a huge change, but a change that I think reflects the fact that we were very focused on margin recovery over membership as we stepped into those 2026 pricing decisions, and then I'll kick it over to Drew on PDP.

Yes, PDP. Good question, Justin. So as Sarah said in her remarks, PDP is now about half of our $37 billion of full year '25 Medicare segment revenue. So you can keep that in mind on the impact on the full segment. And then underneath that, PDP think about it this way. We're running -- we expect to run in the 3s in terms of pretax margin in 2025. And while we're still constructing all the elements of the plan, and we need to see how open enrollment plays out, we would probably come out of the gate something less than that as we think about initial guidance that we will give in February for 2026.

And our next question today comes from Andrew Mok at Barclays.

Last quarter, you expressed confidence in margin improvement across all business lines, including Medicaid. Now it sounds like you're not expecting much improvement in Medicaid profitability. First, was that comment framed through the lens of earnings dollars or margins because I think there might be some pressure on the revenue line from disenrollment and contract losses. And second, was there a change in underlying performance across the broader portfolio when excluding some of the idiosyncratic events in Florida?

Yes. So let me talk to step through Medicaid, and I'll take your last question or last piece of the question first and just reinforce that first, obviously, very pleased to be delivering sequential HBR improvement quarter-over-quarter. And the fact that what we delivered is reflective of the improvement that we were expecting in the July guidance. It was further aided by the $150 million in Florida, which actually, I think, is a great proof point of the fact that rate advocacy is an important lever. And that while in Medicaid, we don't set the rates, we can influence the rates, and those rates are ultimately data driven.

So what influences our view of '26 now versus July, the biggest shift is really that we're on a better-than-expected trajectory than we were in July. But a couple of factors as you think about how we're looking at the progression. And important to note that regardless, we are not taking our foot off the gas on HBR improvement overall as an organizational focus. But we were jumping off a very high starting point in Q2 and in the first half HBR of 94.2. So we're going -- we're expecting to have a lower HBR in Q4, even than Q3, which was lower than Q2. We have the benefit of solid rates at 5.5% composite, which is sitting in that sort of back half cohort annualizing into 2026. We'll also have -- be lapping the acceleration of trend. And so does trend step up at the same accelerated rate. Our belief is that it is more likely to moderate to some degree. But that is also something that we are very focused on controlling where we can.

And so a big proof point for us in Q3 was the fact that we were able to put points on the board against every one of those major levers that we talked about. So rate advocacy catches in Florida, but the fact that the 10/1 rates materialize better-than-expected, clinical policy design in states, and I talked about a couple of those examples where we are influencing states to change their approach to high-cost drugs. And in fact, some of those changes that I described are effective 1/1/26. So we have hard data points about how states are making changes. We've got another great example of the states that are adding [ CCBHCs ] to their program and the fact that we have experienced where that can drive unintended high cost in states from other parts of our portfolio have been able to inform states about what could happen if you don't put those in place with the right guardrails and so they're stepping into those program changes in the right way in the first instance.

Network optimization, I talked about some examples of that, not just from a fraud-based abuse perspective, but we have a great program called Partnerships in Care when we go out to outlier providers and provide them with data and really talk about -- sometimes it's just a question of education about a better path of care for members. And then, of course, stamping out fraud-based abuse. So really strong proof points of that work in the quarter and the fact that we've been at this now for almost a year. So good visibility into additional opportunities and additional tactical efforts that are out their head and will manifest in '26.

We also have almost 40% of the membership that rerates in the 1/1 cohort. So our view as we stand here today, sitting on a better-than-expected trajectory with important dates in 2025 still to play out, which will tell us a lot about Q4 trends, will tell us about sort of the right jump-off point for next year. We only have about visibility into 50% of 1/1 rates, and those are only draft. So if asked what point for '26, we believe it's prudent to say consistent profitability and margin as we go from '25 to '26. I will tell you that I will be disappointed if that's all we can deliver. But we think that, that is a prudent assumption at this time given where we stand and what we know and also what we don't yet know. But we absolutely look forward to giving much more detailed perspective and formal guidance on the Q4 call.

And our next question today comes from Ann Hynes with Mizuho.

Just on your main businesses, Medicaid, Medicare health exchanges, can you tell us what you had that initial 2026 outlook, what you're assuming the trend is in each segment? And then with Medicaid, can you tell us what your initial thoughts are for the composite rate increase?

Yes. So thanks, Ann. Let's start with Medicare. Medicare trend has been running high single digit to even maybe 10 plus for the last couple of years. And so we're assuming that, that continues. If you composite with respect to our bids and what's baked into that progression towards breakeven, that would be low double digits. And at some point, that's going to start being reflected in the fee-for-service rates that we all get as an industry. So we look forward to getting an advanced notice in February and seeing what that looks like. .

In Marketplace, you have to think of the 4 buckets that I laid out in my remarks because they flip to like a mid-30s average rate increase. And certainly fundamental trends a component of that, but probably even more important than trend in Marketplace is the expected risk pool shift. And we learned -- and back to an earlier question, we learned a lot in 2025, which we talked about in the Q2 call, like what happens to risk pools when program integrity measures are put in place and it was fortuitous that we were able to see that and learn that before we undertook the repricing effort that was largely successful as Sarah indicated. So you've got to add a bunch of things up to get to that mid-30s, but that would include 1 of the 4 pieces is the fundamental trend.

And then in Medicaid, if you think about this year, our HBR is up probably 120 basis points from 2024, and we got mid-5s rates. And as Sarah said, 30% of that will roll into next year in 2026 in terms of the annualization of what we got in 7/1 and 9/1 and 10/1. And then we have a little bit of visibility into the 1/1 cohort. And jumping off of a high baseline, including a service of like a 94.9 in Q2, a 94.2 for the first half of the year. And then with the levers we've been able to pull, a couple of things -- so to mentioned in her script, the 2, maybe even 3 states rolling back on GLP-1s for weight loss, high-cost drug pools being formed, carve-outs of high-cost drugs like [ Zolgensma ], Elevidys, [ Ligenia ].

And so examples of where we're able to pull levers impacting the trajectory of even then home health with private duty nursing management and behavioral health with the -- what we're being able to do with the task force we think we're taking sort of a bite out of forward trends. So we'll give more details on the components. But all of that goes into the formula where we consider today once again, with the visibility we have and the visibility we don't have about 2026 and feel like stability in that HBR relative to 93.7, if you do the math on 2025 expecting to be able to maintain that in 2026 as the starting point of our forecasting for 2026.

And our next question comes from Kevin Fischbeck at Bank of America. .

I was wondering if you could talk a little bit about Medicaid margins, obviously, flat next year. Are you guys expecting that 2026 is going to be basically more of a trough year and that you should be expecting to build on that in '27? It sounds like you're assuming where requirement is more of an issue in '27. Is that enough of a risk pool shift to offset the catch-up of prior rates? Or is it clear from this point that probably '26 is where you think the low point will be?

Yes. Thanks, Kevin. It's a fair question. And as we look out over the next couple of years. Our goal continues to be to drive back to more normalized Medicaid margins. As Drew walked through and I referenced, I think we've got a lot of momentum as we think about stepping into 2026 and our view of flat profitability, again, is sort of a prudent posture. As I said, I will be disappointed if we don't do better than that because I think that the enterprise is really organized around pulling the levers that we are in control of and those that we can influence.

2027 and 2028, to your point, is where we will start to see I think the real introduction of impacts of OB 3 and what that means for work requirements within the expansion population there is a lot, as I mentioned, a lot still there to play out, including how much of that programmatic change actually takes root and how it manifests state by state. And so the way that we're approaching that is really leveraging lessons learned from the redeterminations process, leaning into state conversations, we've got a formal team that has already been organized around this over the last 6 months and starting to plan again at the enterprise level coordinating with each one of our boots on the ground health plan teams to understand how the states are thinking about this where we can step in and leverage the data that we have as an MCO and the expertise to help make sure that every member who is eligible and who is contributing to their community and who is working has access to coverage.

So we feel like we are preparing very well for that. We also feel like we have the precedent now of states incorporating more recent data and also understanding that as there are seminal program shifts, they need to make different decisions in terms of how the risk pools are going to shift prospectively. And so bringing forward a very concrete view of the expansion population, the specific rate that they're getting what we think the shift is going to be, so the states think about the '27 rate setting process as early as 2026, back half of '26 that we're having those conversations as well. So we obviously can't guarantee that states are going to perfectly nail the rate relative to what that shift will be. And so we're thinking about how that will play through in '27 and '28, but doing everything we can to set up the organization to continue to drive consistent margin improvement over the next couple of years to get to a place where we're back at long-term margins in Medicaid.

Our next question today comes from George Hill at Deutsche Bank.

I guess this is more for Drew. I guess, Drew, can you talk about any of the assumptions that underpin the margin stability for Medicaid in '26. In particular, does that include the Florida retro and which changed in New York. And I'd be interested if you'd be able to talk about the contribution of benefit cuts or benefit design changes you called out the high-cost drug carve-outs as it relates to margin stability in '26?

Yes, George, thanks for the question. So if you think about -- you ask about the retro, that's actually not retro to a prior year. It's just retro, the Florida retro was retro to Q1 and Q2. So when you look at the full year once again, around 93.7, you guys could do the math, some I will tell you, 93.7 is sort of what we're forecasting for 2025 and stability, the goal of stability in that. And I agree with Sarah, like that's our initial goal, but we'd be disappointed if we don't move that down a little. But 93.7 -- some of the things I covered with Ann, including the levers that we're pulling, you mentioned high-cost drugs.

And so yes, those would get -- in 1 case, in 1 large state, they're going to do a carve-out in another state, there's a kick pool, kick payment pool for those payers that have those encounters. And there's other examples of well-run reinsurance pools that other states are considering because of the lumpiness of some of those high-cost drugs. So that's just -- that's 1 example of sort of the hand-to-hand combat we have to go through in terms of managing care and creating affordability for our state partners and our members. So I won't repeat everything I went over the end, but those were some of the levers we thought about when we contemplate being able to have stability as we go into 2026.

Our next question for today comes from Erin Wright at Morgan Stanley.

Great. You're still very committed to the business. I know last week, I think there, you were at an industry conference talking about ICHRA, [indiscernible] compelling area. But how do you just think about some of the longer-term dynamics across the exchange business, the longer-term margin targets and growth profile of that business? I guess a lot is dependent on the regulatory changes, right? But just given your level of commitment, how confident are you in some of those targets? And then -- and just what would potentially make you change your commitment to that as well?

Yes. Thanks, Erin. So we haven't changed our commitment, obviously, to this product and not -- we haven't really changed our view of what philosophically we should be able to price for long term. And as we said, -- so the work that we did for 2026 was really designed with the intention to make a meaningful step forward in margin recovery in 2026. But I think to your point, sort of longer-term stability, you're absolutely right. First of all, a fair amount to patents, although not ultimately, but some short term, it certainly depends on what plays out relative to policy changes. eAPTCs, I think, is probably the biggest swing factor just in terms of getting to a really, really stable base so that we can think about building on the platform.

There are still millions and millions of Americans even if the eAPTCs go away that rely on the individual marketplace for coverage that have the backstop of the eAPTCs, and so we believe that this product stabilizes. We still think there is growth or millions of Americans who are still uninsured. And actually, I think the way that this administration is thinking about at least in conversations, the possibility of getting creative about different product design and different ways to drive affordability in this market is really encouraging. We obviously think that the individual market is a compelling chassis as we consider the future of insurance and a view that individuals are going to want more agency, they're going to want more affordability.

And as I mentioned last week in the conference, it's really hard to take a small number of benefit options across for Centene, 60,000 employees and feel like you're really customizing to each individual's needs. I use the example of the fact that I'm a 45-year-old healthy woman. And I didn't go to the doctor until last Saturday. And so I am definitely paying more for health insurance Centene than I need. And so we continue to be excited and lean into ICHRA. We're hopeful that this administration is also very interested in ICHRA because it is -- a lot of the legislation is legacy of Trump's first term and we have leaders in the administration who have spent careers thinking about how this could be a way to sort of reinvent individual coverage.

So we are going through policy transition on the base, and we feel very confident that we will get through that. We're thinking about ways to drive additional transparency and stability in the core business. And so how can we partner with CMS? How can we partner with the DOIs, how can we partner with our peer set and actually do a better job of sharing data as we step through each year so that the risk adjustment conversation itself is sort of incrementally derisked but we're not backing off sort of the view that we can design benefits that drive high value and price for that value on the exchange and that this is a platform for future individual growth that I think we are investing in and positioned well to help capture.

Our next question today comes from Stephen Baxter at Wells Fargo.

I just wanted to ask about the kind of the rate mechanics in Florida. It's obviously good to hear that CMS, the population there, Florida's sole reason on the rates but just in terms of the cadence, it looks like in the third quarter, obviously, you got trued up on your performance there. So if we're thinking about the Florida rate update, does Florida actually improve sequentially in the fourth quarter now, which is normally what you would expect when you see those rate updates come in? Or should we think about the Q3 performance effectively showing that you got the rate year-to-date rather than getting it in Q4? Hopefully, that makes sense.

Yes. No, good question on the progression. And so the way I'd probably look at it is we put up a 93.4 in the quarter. And the $150 million, if you sort of take that out and you want to sort of judge the progression into Q4, that's 60 bps, the full $150 million, of which $40 million of that related to prior periods. So you're jumping off at 94.0. And then, yes, you can evaluate, call it, mid-5s in terms of the 9/1, 10/1 cohort and Florida was slightly above that in terms of the mix between CMS, MMA and the long-term care population. And so yes, we expect a sequential lift going from Q3 to Q4 given the cohort of 9/1 and 10/1 rates, and that will be a contributor to the improvement that we expect in Q4.

And then obviously, we have trend as well as a pretty soft November in terms of the day count. If you look at November, it looks more like a February in terms of the number of business days and the holidays. So that all goes into the formula of how we can get -- how we expect to get to around 93 for Q4 which then when you add to all the other numbers you know would get us to the 93.7 for the full year that we would jump off of and seek to maintain for 2026.

And our final question today comes from Lance Wilkes of Bernstein.

Great. Yes. Could you give some maybe additional color on the resetting environment at the states. So what I was interested in is, what sort of variability are you seeing across states in rates? And then as you're looking at the budget outlook, for fiscal '26, '27, how is that budget, the '25, '26 fiscal year and then the '26, '27 kind of conversations that you're seeing impacting the potential for future rate increases. And as a result of these things, are you seeing any smaller competitors that are looking to either exit contracts or not rebidding in any of the states you participate in?

Yes. Thanks, Lance. So every state is a little bit different. So there's certainly variability in the actual absolute rates, but I would say that what we have seen consistent across the states and consistently now for more than 18 months is very constructive, collaborative dialogue around rates. The integration of more recent data, we've obviously now got for the 1/1 rates, the benefit of a full 12 months with sort of the step-up in trend drivers that we're seeing and then 18 months with the [ inquity ] impact from redeterminations. And again, I think this increased sort of cadence and reflex around leveraging more recent data both at sort of the baseline period, but also being able to better anticipate what should may be prospectively into the future period.

Obviously, Florida is a great example of that because they had to use '25 rates to make the '25 adjustment. But again, that has become sort of normal course. And it's how we think about what we expect to see in the 1/1 cohort and going forward. The budget outlook for the states there are obviously concerned that with the changes in legislation, there will start to be budget impacts in '26 as states need to balance their budgets and go through those legislative sessions. One of the things that I would point to, and we've said this before, but I think this is really a moment where we will start potentially to see this play out because we're seeing it play out from a program design standpoint is this is a moment where we -- our partnership with the state can really drive value.

And coming to us and saying we've got a balanced budget, we've got tighter sort of guardrails how can we think about continuing to deliver the core benefits that we want to and continuing to drive health outcomes but make adjustments where we can to optimize the program. And Drew and I have both given a bunch of examples of that. But we think there are -- there's definitely a runway on that front. But then also states thinking about carving in fee-for-service populations, where if you have a state that has ABA and a fee-for-service disposition over the last 12 months, they are struggling right now.

And so there's opportunity as they go through upcoming procurement cycles to think about aligning some of those fee-for-service populations into kind of the core procurement we started to see some opportunity for net new program adds in the RFP pipeline in '26. And so yes, we do expect there will be budget pressures. But in our world, that's actually an opportunity to help them think about managing care and therefore, managing taxpayer dollars. And that's really kind of the business that we're in.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Sarah London for closing remarks.

Thanks, Rocco. Thanks, everyone, for the questions and for your time and interest in Centene this morning. 2025 has definitely been a challenging year, but I firmly believe that the Centene is stronger for it. And I just want to take a moment to thank my teammates for being unwavering in your focus on and commitment to our mission. We look forward to continuing to provide updates on these key inputs and milestones and then obviously provide formal guidance for 2026 on our Q4 call. Thanks, everybody.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Good morning, everybody. Welcome to day 2 of the DB Healthcare Summit. I'm George Hill. I think everybody here knows me. I'm the health care technology and services analyst. Very happy to have with us to kick off day 2 with Centene; Sarah London, CEO; Drew Asher, CFO. Guys, thank you very much.

Thanks for having us.

Sarah, I know that you wanted to start off with some prepared comments before we get into the Q&A. So why don't you kick off?

Yes. Good morning. One of the things we talked about on the Q2 call obviously laid out our view of the back half of '25 and some key milestones. And wanted to just provide a couple of headline updates on those, and I'm sure we'll dive into a lot of the detail underneath them in your questions. But at the highest level, obviously, you saw this morning that we reaffirmed our full year forecast adjusted 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. So pleased with that. We've obviously been very focused on the refiling process for 2026 Marketplace rates. As of today, we've been able to successfully refile in states covering 95% of our membership. Those are obviously going through an approval process that usually wraps up at the end of this month. But so far, we have the substantial majority of those approved. So again, 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. So we're expecting year-over-year improvement in Stars and actually slightly better 4-star percentage. So relative to overall revenue results, it adds confidence to our view that we will hit breakeven in Medicare Advantage in 2027.

So good progress in a short period of time. Obviously, a lot that we're still paying attention to. I know we'll dive into that, but feel good about what we've been able to accomplish just in the last couple of months.

I mean that sounds like all great news. I haven't heard anything that we kind of put a bone with yet. I think we'll kind of pull them apart topic by topic, and maybe we'll start with Marketplace. On the Q2 call, you guys have 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 reduced utilization that you guys have called out as headwinds. I mean you guys reiterated your guidance this morning. I guess I would ask, do those estimates still hold? And is there a chance that those estimates could prove conservative? I would probably even focus on like the $200 million part. I'll kind of let you dig into that.

Yes. So as of now, the estimates still hold. We are seeing pretty steady utilization in Marketplace. We had called out the fact that [ SBR ], 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. And then the $2.4 billion is really contingent on seeing the next tranches of weekly data. And so the next set of data there won't come in until the end of this month. So if there are updates on that estimate, we would be in a position to give that on the Q3 call.

Okay. And then I guess 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? And then like how should we think about sufficiency as we look forward as you guys kind of roll forward to '26?

Yes, I'll hit that at a high level, and Drew should weigh in, been very closely involved in that process. So 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 -- well, we bid to the law of the land. So enhanced APTCs are expected to expire at the end of the year. Sure we can talk about where we think those are going. But we assume those will go away, and then needed to adjust for a view of the 2025 morbidity that we saw in the Wakely 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.

So obviously, every state is a little bit different. But in general, in every state, we were looking for a step-up in rates. And I think, again, we're able to successfully get rates that we feel address the morbidity, both in 2025 as a run rate going into '26 and what we expect will shift across 95% of the population. But in some cases, we also look 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. But maybe give a little bit more detail.

Yes. Really pleased with the visibility that we gained in late June and then obviously resulted in the press release on July 1, but that gave us 3 or 4 really good weeks during the month of July. We actually met every night from like 5 to 9 p.m. going through every single product in every single state, making the judgments, and then to Sarah's point, getting them filed. And so 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, 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 2 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 areas. So it should be substantially less than 5% in 2026. So all things considered, pretty good. I'm glad we got the visibility when we did, and we're able to assimilate that Wakely data. Obviously, as ugly as it was at that point in time, it really hopefully will contain this to a 1-year issue.

Okay. And then as we think about the profitability of this product segment, you guys had indicated on the Q2 call that you were expecting below breakeven in this year versus the target margins of 5% to 7.5%. I guess how should we think about -- we think 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 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 '26? Or is there kind of a step in the middle between where we are now and kind of the target margin profile?

Yes. 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 '26 from a margin standpoint. But obviously, margin improvement is the major focus in all of our business lines. So we'll get more information over the next couple of weeks just in terms of kind of peer filings and obviously going through open enrollment. I think that will give us better visibility as to how much of that will recover in '26.

And I imagine with the -- I'm sure everybody here knows how we do this. Like I tried to give these guys some questions in advance. But 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? And I would almost kind of ask the question is like without the subsidies, is this a sustainable market? Or if without the subsidies, do you kind of lose the low utilizing numbers to kind of pass up the risk pool? I just kind of love your high-level thoughts on that.

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 will obviously be a smaller membership base, but we had a very successful business with 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 Marketplace more. And so 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. And 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 '26 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. And 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. So 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, but there's quite a bit of interesting opportunity on this side as well.

Yes. 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 like the government seems to have driven some of the instability with things like the enhanced subsidies. There's kind of -- like the changing in 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. And 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. I would love to hear you talk about margins and maybe by utilization kind of what's coming in better, what's coming in worse, if anything at all, if everything is coming in line. But kind of what have we learned like in the last 6 or 8 weeks as it relates to Medicaid?

Sure. So 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. I think if you go back to the framework that we laid out on the Q2 call, sort of what were the underlying drivers, what have been the underlying drivers and what sort of 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 that we called out Florida and New York in particular. So if you think about the things that have improved and sort of what has rolled forward, obviously, 7/1 rates, which came in consistent with that 5% composite that we're seeing for '25. So 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. And so those will layer in this month and then in Q4.

And then in Florida, as I mentioned on the Q2 call, starting in June, rather, we were able to actually apply managed care principles to the ABA population. And so making sure that we have the right in-network, highest quality providers that those kids are getting therapy that is evidence-based and best-in-class. And so we saw a sequential impact from that coming into the Q2 call and continuing to see, I think, the rightsizing of sort of program application there.

And then we actually, in New York 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. And so really just thinking through each of those areas, as I mentioned, we're organized at an enterprise level, 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, again, with evidence-based practice. So I think all of that is contributing, and we hope is that, 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.

That was comprehensive.

That was very comprehensive. Maybe just a second topic that some of your peers have called out has been the impact of coding. And have you guys seen an increase in coding severity? And is that something that you feel like has impacted your business from a profitability perspective, I guess, from an acuity perspective? And is that something that you feel like you can challenge in the Medicaid business?

Yes. I think coding manifests in a couple of different ways. So obviously, there's coding that sits in sort of a fraud, waste and abuse bucket. And I think we've gotten increasingly organized around that, leveraging AI for early detection on things like that, cycling those sort of 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. So there are some of those pockets. But again, there is enough detection in place on our side that as we see that, we're able to intervene. And I think just continuing to be really thoughtful about how our program integrity rules and the underlying technology keeps pace with what's coming at us from the provider side. There are other examples.

Yes. 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, but we're going to catch up to that.

That seems to be -- as somebody who's covered the technology space in health care long term, that seems to be a cycle where 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 is how are your conversations with your state partners going about rate increases versus coverage versus benefit design changes?

For Medicaid?

Medicaid, yes.

So 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. And I think we're seeing -- we just continue to see good constructive conversation. I think folks -- again, our view on 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- or 36-month look back.

And so I think some of the rates that we're seeing continue to be reflective of this idea that, one, we were coming through redeterminations, there needed to be a correction, then there was a step-up in these trend areas, and there needs to be a correction for that. So I think continue to be constructive, continue to see more recent data more readily influencing the rates. And again, 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. And I think we have, what, 40% of our book?

40%, 1/1.

Three rates, 1/1. So again, supportive of our view that we want to continue to improve the Medicaid margin as we head into 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.

Yes. While they're addressing most of this through rate, 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're going to have all this rebate dollar in the general fund and are realizing that the aggregate picture is not -- it was much worse than what the payers could deliver. So 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. So that should take effect actually next month if it stays on track in that one state.

Another example is state had moved to GLP-1s for weight loss, and they put a capitation in. So they had an estimate, they're truing up the estimate, and they're looking at the escalating cost. And 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.

How closely are you guys monitoring like proposed 1/1 rate increases? And I guess 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. And I guess kind of would love -- 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 '26. And a topic of conversation amongst investors is that like it might be difficult to get rate multiple consecutive years. Would love to hear you kind of talk about the history of getting rate updates from states in challenging environments.

Well, you probably have better visibility to exactly where we are with 1/1. But I would say, we've had now 2 years of very healthy rate increases, for example, in our 9/1 cohort. So 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.

Yes. Plus you have to remember, in a lot of states, their aggregate Medicaid budget has -- because the roles have -- they're down 15%, 20%, 25% in some states due to redetermination. So the aggregate dollars are there. And before you guys even mine out the first view of what are draft rates, which you really can't hit your wagon to because they often change a fair amount between draft and final, we're in with our actuaries months and months ahead of time. And we've been in this consistent process that Sarah described, where states, I think they're appreciative and they're more in tune with sort of the flow of med cost data than, let's say, 2 years ago.

So 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, 3 years ago. So yes, look, Medicaid is a tough business. It's hand-to-hand combat in terms of convincing your partner through data and what the run rate is, but feel confident that we're still on track to improve Medicaid going into 2026 from a margin standpoint off of our 2025 guidance.

Okay. 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 OB3. So you get a lot of credit for putting OB3. I hadn't heard that since you mentioned on the Q2 call, pulling forward the OB3 requirements into '26. And I guess, how are you -- I'd love you to talk about the learnings of the redeterminations process as we ended the public health emergency as to how you guys think about the OB3 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.

Yes. It's in some ways sort of microcosmic implementation of the same thing we did with redeterminations. Maybe just stepping back. So what we've seen is there are a handful of states, maybe 6 or 7, that have waivers in 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. And so 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 6 months in, they will do a check and then they will do a check every 6 months.

Others have sort of the gatekeeper methodology and 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. And so 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. So 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 '26, because the lift on this is going to be non-trivial. And so 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 line of executing on that is at least what we're seeing so far.

Now may that accelerate? It might. But again, 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. The one state that's actually -- if somebody doesn't qualify, they want to match them up with a success coach. And so the question of is that a service that we could provide, what does that look like, right? The idea is really to get people to a place where they're eligible and working and then ultimately, they graduate off Medicaid.

So we've got work programs in place in 17 of our states already. That's just something we normally do. And 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, like 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 members today. And so as those folks roll off and there is a need to fund the risk pool differently, there are dollars in the state budgets to do that. It's going to be important to try to get them to get as ahead as possible on those rate adjustments.

And 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. And so it's really just about estimating what the impact will be. But 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 redetermination process.

Maybe just 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 driving the rearview mirror, like they're great at telling you what happened in the last 24, 48, 36 months in 1Q that the Board could project. How receptive do you find them to those conversations? I know the population is going to change a lot, the rate needs to change. Like is that...

I think it would have been different like 2 years ago, but the number of times they've seen the population change through the front windshield is a little different now.

Yes. I mean, look, actuaries are always going to want as much data as possible. But yes, it's almost like they've been retrained to ingest more recent data because of the redetermination process over the last 2 to 3 years. So 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.

So there's receptivity, but it's a balance, and they're going to want to see some data as well. But 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. So 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. So I think there'll be more receptivity certainly than there would have otherwise been.

Yes. 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. So you consistently -- it's kind of a chicken and an egg thing from your perspective, I guess. How do we think about -- everybody is kind of focused on '26 right now, and I know that you guys don't have '26 guidance out there. But how do you think about the cumulative impact of OB3 and maybe the staging of '26 versus '27 versus -- I'll call it, '26 versus beyond? Have you guys thought about if you were to bucket impact kind of by year '26 and then call it beyond '26, how do you guys think about that?

So it slightly depends on which components of the bill we're talking about, but the Marketplace final rule, a lot of which got baked into the bill in order to drive consistency in order for CBO to get the savings for those provisions obviously would implicate 2026 open enrollment. Now that rule has been stayed by the court. So there's a question of how much of that will actually get implemented for 2026 open enrollment versus being pushed to '27. So I think that is something we're watching very closely.

And then, obviously, all of the Medicaid provisions are mostly '27 and '28. So the question is, do some of those pull forward to some degree? As I said, we're watching that closely. We're seeing movement, but 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. So based on how it sits today, I think you would expect the majority impact of that to hit in '27, part of '28.

Again, some states may file to push if they're sort of making good faith efforts, they can push to 2028 or beyond. So I think you'll see 2027 and then some tail probably into 2028. But again, coming through '26 and into '27, the big thing for us is the administrative work aligning with our states to make sure that we're supporting those members and whatever efforts the state needs us to be trailing relative to eligibility and things like that and then the rate conversation. And so trying to get ahead of that in '26 and then make sure that we're matching that as we go through 2027.

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 $175 million is the guidance for this year, but is that like the right jumping off point?

So we wouldn't be doing this job if he didn't ask for 2026.

I wouldn't be doing my job, as I said, if we're not doing it.

But we can talk about directional and we did on the Q2 call about we expect, call it, our 3 core lines of business: Medicaid, Medicare Advantage and Marketplace margin improvement in '26. We still feel like that today, having 2 more months under our belt, which is really important as we think about launching off the back half of this year. So yes, the magnitude, TBD. We need to see landscape files. We see all of the competitor data for some of those businesses and more visibility on sort of the benefit of the levers we're pulling in Medicaid in some tough areas like behavioral health, home health, private duty nursing, ABA services.

So I feel like we've got pretty good momentum coming off of these 2 months. And 2 months don't make a half year, but we're 1/3 of the way there in terms of the back half of this year. But yes, we're definitely focused on '26 and beyond to drive margin improvement.

Well, that's great. If I think about the call-outs from the 2Q call, and I would probably like to talk about the $2.4 billion in Marketplace. Should we think of that as that 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 benefits? Like is that something that you can basically price back? I'm trying to figure out like how should we adjust the $175 million as the jumping off point for 2026? And what I'm really focused on is like which of the things that were called out in Q2 should be thought of as kind of onetime things that will not repeat versus which should we bake kind of -- which should be fully embedded in the earnings going forward?

Maybe look at it like this, we said we were slightly below breakeven 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. And so we all need to see what the size of that market is and therefore, our positioning. And then as Sarah said earlier, what step are we going to make towards a fully recovered margin. And we'll have to see, once again, based upon our positioning of product in the marketplace. But we went in to the bid process or the rate filing process, margin, margin, margin, because we're not going to run a business at a loss. So we've got to recover that. And we'll just need to see where the membership shakes out.

Okay. Do you guys have any early thoughts on how, I'll call it, your membership at a macro level will evolve in that business in '26?

In Marketplace? Yes. 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 2 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. But a lot of it does depend on -- and honestly, like even if enhanced APTCs were to get extended, the question of when those get extended, like there are a bunch of sort of moving parts there. But if you just take it purely as it sits today, I think those 2 are sort of compounding in terms of what they'll drive in market contraction.

Kind of when and for how long, I guess, if they get extended? Like there's talk of extending these?

You're talking about market contraction? Quickly. So I would say, there's been a significant uptick in the dialogue around enhanced APTCs just in the last couple of weeks. And I think a different level of on the record receptivity from the Republican party around how important these subsidies are for their voting base. And as they think about 2026, I think that's really front of mind. Our question is really sort of what's the vehicle.

So I think there are 3 potential options. One would be a continuing resolution where you actually need -- you're going to need bipartisan support. And I think the enhanced APTCs are very, very, very high on the list of priorities for Democrats. And so 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 OB3 that folks are really interested in seeing come forward. So that would be another vehicle, sort of intermediate vehicle.

And then the last would be the at the end of the year. If 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. But as of now, sort of we, again, have priced to law of the land. And so unclear what would then happen if enhanced APTCs were extended relative to those bids.

Okay. Pivot to Medicare for a second. Great to hear that Medicare continues to outperform. Great to hear the 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? And any early thoughts on how the Part D market will shape up in '26?

Yes, I'll let Drew cover Part D. I think Medicare, we've been really thoughtful. Obviously, we're in margin recovery mode. We're very focused on marching to breakeven. 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, starts as a component of that improvement.

And so I think just being thoughtful about what we baked into bids in terms of trend, obviously, had that step-up in '23, and we've continued to watch that step-up and continue to make those assumptions in our bids. So it's a bit of sort of strategic bidding and then managing the product well and continue to expect improvement in '26 on the path to breakeven in '27, which, again, we feel incrementally confident about based on some of those 4-star results that we saw just recently. Do you want to talk about Part D?

Yes. PDP as a business, 7.8 million members. We're 8 months through, got 2 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, team did a really good job again estimating the national benchmarks and the direct subsidy, which came in at $200 and change. So 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. So that was good news, as you think about the stability of that cohort versus the non-low-income cohort, which had the accelerated specialty trends. So 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.

We'll shift kind of to maybe balance sheet and cash flow as it relates to the company. Drew, you had 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 would be interested to think about, are there any derivative impacts of the goodwill write-down just because I know some of the company's debt covenants are based on debt to capital. But we've had questions around whether or not there's downstream impacts of a potential goodwill write-down.

Yes. No, those are good questions. So every year, we go through a goodwill valuation. We usually do it in the fourth quarter. This year, we accelerated it to Q3 because of the market cap drop. I mean 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. And so the only downstream impact, and I know there's been a lot of, I don't know, chatter or handwringing about statutory subs. All the goodwill sits at the corporation. None of it is down in statutory subs. So there's really no stat sub implication for any noncash goodwill or intangible write-down.

And the only -- we redid our credit facility fortuitously. I mean, when money is available, you go get money. And we did that with our credit facility in Q1, which is untapped as of 06/30, $4 billion credit facility with one covenant, which is debt to cap at 60%. We're at 39% debt to cap as of 06/30. Plenty of room. So yes, we're going to go through the process and evaluate goodwill, and 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.

Okay. That's a comprehensive response. And then let's talk about just, I guess, does any of that change about how you guys think about excess capital and capital deployment and kind of update us on the company's capital deployment priorities?

So 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 sort of the most efficient cost structure just in how we operate. And then I think looking at as we get through the back half of this year and have a better view of cash flow, we would 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. So no significant change.

And I guess 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 '26 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 as the business changes?

Well, we've been doing a lot of work on that over the last couple of years. I think, maybe $600 million.

$500 million in the Q2 call.

Yes, in SG&A. So 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. And so 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.

And I guess just -- 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 3 lines of business that you guys principally operate in. And 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 3 operating segments.

Yes. I mean I think OB3 has -- and some of the recent regulatory changes in MA, I think we've got to see how those land over the next couple of years, and if that impacts sort of, to some degree, structural long-term margin. But I think our view is we've got a big margin improvement opportunity ahead of us in all 3 lines of business and the ability to sort of 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.

So I think we'll want to see how OB3 plays through in the implementation. But 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.

That's all you get from me. I appreciate the time. Thank you.

Thank you.

Thank you.