Q4 2025 Earnings Call Transcript

Good day. And welcome to the Centene Corporation Fourth Quarter and Full Year 2025 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions.

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, 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. We 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 93 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 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 trend and 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 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 five to ten years, clinical evidence suggests the optimal duration is two to three years, as well as those enrolled in forty hours per week of therapy instead of balanced school-integrated care.

And we saw a lack of appropriate board-certified oversight of 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 multi-pronged. We engage directly with providers on gaps we see and focus our network 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 one kiddo 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. One one 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 two 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 weekly data, which showed favorable development relative to our reserve.

We experienced two out-of-period items in the quarter, including a 2023 CMS reconciliation and costs related to No Surprises Act 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 a 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 a 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 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 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. Ambetter membership developed in line with expectations, and we are on track for first-quarter ending membership of roughly 3,500,000 members as compared to our December membership of 5,000,000. 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 January, Ambetter 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. Bronze membership will represent a little over 30% of our marketplace enrollment this year compared to a range of 19 to 24% over the past four 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. 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 peer distribution, and statewide average premium set to be released toward the '1 in order to help market participants better inform adjustment assumptions going forward.

While 2025 was a difficult year for the Marketplace business, we believe the actions we took in the 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 hardworking 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. EDP 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 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. Continue to focus on STARS improvement, clinical engagement, and overall SG and A efficiencies. 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 advance 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 roadmap 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 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 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 GenAI and accelerating our integration of AgenTek capabilities into our core operations to drive automation and efficiency and using it as a catalyst to reimagine and elevate the we deliver to our members, partners, and other stakeholders. You should expect to hear more on this in the quarters ahead. 2025 challenged us 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 emergent 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 Send 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 Gaines over the past few years. From an adjusted earnings standpoint, we are pleased that the underlying fundamentals in Q4 are tracking our prior forecast full year adjusted diluted EPS of greater than $2, and this sets us up well for our 2026 guidance we'll cover in a minute.

Starting with Medicaid. We saw continued progress and improvement in the HBR with Q4 improving to 93%. We have a lot further to go in Medicaid to achieve a reasonable HBR and margin, but 2025 was a good start with two consecutive quarters of HBR improvement. Our one-one net rates are supportive of our 2026 guidance of a stable Medicaid HBR with an assumed full year 2026 net rate impact of mid-fours and the corresponding mid-fours 2026 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 programs 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 a 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 cost and trend 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 weekly data. This was a couple hundred million worth of net P and L outperformance in the quarter which also bodes well for our 2026 pricing assumptions.

So what more than offset this good news? Two items. 2023 membership recon revenue reconciliation with CMS has no bearing on 2026. And increases in cost and accruals related to the No Surprises Act that Sarah covered. Those two items drove the net 1% higher than planned H HBR 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, 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'd like our 2020 positioning as we wrapped up the annual enrollment period. We will provide CMS comments on the disappointing 2027 advance notice Medicare rate which will likely cut into seniors benefits and product selection. 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 and A expense ratio of 7.5% brings our full year 7.4% which is a 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 forty-six days in claims payable, a decrease of two days. As compared to the 2025, driven by payouts of state-directed payments and the elimination which is corroboration of the Medicare premium deficiency reserve in Q4, 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 to $174 billion. As you can see in the bridge, Medicaid premium revenue is down a couple billion, including some member attrition in 2026. Partially offset by rate increases. We expect Medicaid member months down five 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. 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 on 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 forecast to 2026 revenue split in the Medicare segment is approximately 41% Medicare Advantage and 59% PDP. We expect a 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 compared to twenty twenty five's 93.7%, In the Medicare segment, we expect improvement in the Medicare Advantage and a higher PDP HBR driven by two things. One, we are initially assuming a 2026 pretax margin around 2% down from a good year in the threes, And two, there was a meaningful increase in the direct subsidy a $143 to $200 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 and 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 and A rate, continued pay down of debt and associated impact on interest expense, reduced investment income from assumed Fed fund rate cuts, and 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 PD 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 forecast to 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 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.

Thank you. We will now begin the question and answer session. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. Please press star then 2. At this time, we'll pause for just a moment to assemble our roster. And today's first question comes from Ann Hynes at Mizuho. Please go ahead.

On your rate of application for Medicaid for four and a half percent, 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 view that as conservative would you be able to get some midyear rate increases Any color would be great. Thank you. 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. We also have the benefit of the fact that as we step into this rate cycle, we have a full two years of both the acuity dynamics and the step up in trend encapsulated in the data.

And 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 2025 and ended with that composite rate at you know, roughly five and a half percent. 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. Our next question today comes from Jessica Lake of Wolfe Research. Please go ahead.

Thanks. I wanted to kinda follow-up on Anne's question here. First, you talked about trend in 4.5%. In 2026 for Medicaid.

Curious what that trend was in 2025, and maybe 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 your rates were five and a half last year. Your rates are four and a half percent 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, etcetera? And maybe you could just tell us how one one looks versus the four and a half one year. Thanks.

Sure. Lots of pieces there. So so one one rates were consistent with expectations. Let's go back to trends.

So 2025 trend was in that mid six which I think we we talked about on the Q3 call. And then the view of 2026 around mid-fours 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 ninety-four nine in Q2. And all of the aggressive action that we took in the back half of the year, obviously, coming through Q4 with a 93. Equally important is sort of the assumption around the proof points that we have in terms of vending trend in the back half of the year. As well as bankable proof points around actions that we took in Q3 and Q4 four that don't take effect until 2026. That's part of what gives us a view of sort of that mid-fours net trend assumption.

And then relative to rates, to your point, we ended the year with that composite of five and a half. We started the year lower than that, so believe that we've sort of taken a prudent view of rates in the mid-fours for 2026, and we'll continue to you know, work with the states as we have all along to make sure that they have the most recent trend data. Again, a full we have the benefit of that sort of trailing two years now, which we've been working our way up to. And then, you know, 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 a number of those, but if I just think about the 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. Guardrails around CCBHCs.

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, you know, we're we're obviously calling for flat HBR year over year. And I will say, as I have said if that is all we deliver, I will be very disappointed, and I know the team will too. Thank you.

Our next question today comes from Kevin Fischbeck with BIA.

Great. Thanks. 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 know, you talked about the shift tier shifting. I kinda remember bronze not being a great plan historically. And and now it seems to be growing overall.

So I just wanna make sure that, you know, we're not gonna be caught off sides by this know, metal tier shift that you're gonna be seeing next year. And then any other additional color you give about why you feel comfortable in margin improvement on exchanges this year? Thanks.

Yeah. 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 team demonstrating agility and depth of expertise to reprice and reposition the, you know, the entirety of the book in that short period of time and taking into account the baseline morbidity, trend assumptions, the risk pool impacts of both 2025 and anticipated 2020 program integrity measures as well as the expiration of the enhanced APCs, all of which netted out to that mid-30s percent rate, you know, 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, you know, 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 3,500,000, member estimate by the '1. So feel like standing here where we are today, feel like we have, pretty good visibility into how open enrollment played out, and then we'll you know, 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 has operated historically, the bronze products operated differently pre EAPTCs than they did during the EAPTC 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, we had all of that data back in Q3 when we went through and sort of re underwrote all of our assumptions relative to 2026. We did that across metal tiers. And were 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 you know, again, just trying to leverage not just 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, you know, 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.

Thank you. Next question today comes from Steven Baxter of Wells Fargo. Please go ahead.

I wanted to come back to the the Medicaid moving pieces. I guess I just love a little bit better of a sense of maybe how much incremental decline in membership. I think the membership months were guided down. Five or 6%, but I think a good deal of that would be explained by basically what you saw in 2025. And if 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, a percent and a half, does that place any weight on the acuity assumptions that you had in the guidance at this point in time?

Thanks.

Yeah. Thanks, Steven. I'll hit this at a high level and then ask Drew to add any color. So what we talked about member months, we talked about flight 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 tenone, as well as sort of a probability weighted bucket of member puts and takes that we track state by state If you were to unpack that, 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. I don't know if there's any other additional pieces you wanna call out.

Yeah. Right. The you mentioned, Steven, the five 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 two buckets, as Sarah indicated. One, would be sort of a you know, maybe a 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 ten one. 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 OB three in terms of membership in 2026. But one of those is I think, around seven one, then a subset of the New York essential plan will be rolling off know, due to sort of an o b three provision.

That's about a 140,000 or so members for So that's also in the 88,000,000,000 midpoint of guidance, the 5% to 6% member months reduction and the little bit higher than that full year absolute membership attrition.

Thank you. Our next question today comes from Sarah James of Cantor. Please go ahead.

Thank you. 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 a faster pace? Yeah, thanks, Terry. 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 most recent data that's being included in the actuarial process. But this is not a new thing. Right? That has that has really been what we have been working on since the 2024 as we started to see that dislocation between rates and acuity from redeterminations 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 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 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 you know, a significant forward looking trend in ABA unlike anything the actuaries had ever seen before. We do have the proof point of states actually bringing forward more recent data and making your adjustments, again, the Florida CMS contract, 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, you know, that more recent data of being included is just happening organically. And so now those those acuity shifts in '24, the rate the sorry.

The trend impact in '25 is now basically sitting you know, in the middle of that two-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 get us back into sort 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 2025 that we think will bear fruit in 2026.

Thank you. And our next question today comes from Josh Raskin of Nephron. Please go ahead.

Could you just give a little more specifics on your actual segment margins that are in 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, you know, a little ahead of 2027?

Yeah. 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 opportunity for 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?

Yeah. 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, you know, 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, you know, well into the threes 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 know, 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.

Thank you. Our next question today comes from AJ Rice at UBS. Please go ahead.

Thanks. Hi, everybody. You know, 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, two are still forecasting pretty significant drops in margin in '26 versus twenty-five One who was more optimistic, is 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 or is there anything else there? And I specifically, in your case, 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 had renegotiated your contract among a couple other big ones. And then it's a 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.

Yeah. Thanks, AJ. 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 jumping off an elevated baseline. As you think about trying to foot relativity with peers, just absolute, we are dropping off that elevated baseline in 2025. We also have, again, proof points sort of Included a 94.9 in Q2. rates that matured favorably in 2025, so that's an important thing to think about relative to that mid-fours rate assumption. And then we have aggressive execution through the back half of the year, that played out, you know, with that sequential improvement in HBR in Q3 and in Q4, getting to that 93 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 the key levers that we were going after, and again executed on those really well in Q3 and Q4, but also took action and influenced decisions in Q3 and Q4 that aren't effective, for example, until oneonetwenty six. And so just as a reminder, right, in some of those proof points, rate, obviously, an important one. The the, you know, favorable maturation of the 2025 can composite the fact that oneone came in line with our expectation, fact that we saw in year rate correction like Florida, 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, you know, hitting transitions of care and member engagement, Program reform, I I talked about a bunch of those. Ongoing provider engagement, payment integrity, and really addressing opportunities where 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 and L in the back half to '25 and are teed up for 2026. So that's where I think, you know, our view is that we've taken a prudent assumption around rates. That the net trend assumption of four and a half in 2026 takes into account sort of the work that we've done relative to trend vendors and being able to see additional 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.

Yeah. AJ, 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 legislatively dictated.

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 of 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. 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 three segments. And, pleased with, you know, pleased with what we talked about last quarter. In terms of the continued collaboration with our partner. And we will continue to to fight for affordability in health care, you know, 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 we we will continue to drive affordability on behalf of our low income and medically complex members alongside with our PBM partner.

Thank you. Our next question today comes from Scott Fidel with Goldman Sachs. Please go ahead.

Hi, thanks. Good morning. Was that helpful if you maybe just sort of drill in a little bit more into Part D and and walk us through the book in terms of some of the dynamics, Drew, around the LIS versus the non-LIS populations and what you're seeing. In the market trends.

Obviously, your book of business heavily weighted towards the LIS. And in particular, just, you know, some of the underlying inputs like risk scores and and '25 and and expect continue to do that in '26. Thanks.

Yeah. Really good question and special questions especially around the impact of the IRA in '25, which there were, you know, shifting sands. So the good news in '25 is the industry we had that expanded or more protective risk corridor that then reverted in '26 back to the statutory risk corridor 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 out of pocket dropped.

To $2,000. And so we got through that, 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 '25 as we set them for 2026. With, you know, eyes wide open in terms of the impact of the IRA on that non-low-income population that, you know, was availing themselves of a much lower maximum out of pocket. So we can look at our January data you're right.

We're growing, you know, the 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 to around 8.7 million. Across both the low-income population or the auto assigns and the non-low-income population. So 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, you know, to a great drug program. So that in conjunction with the answer to the last question in terms of, you know, cost structure is an important leg of the stool. The underwriting acumen, having great actuaries, to support, and business teams to support that product, which is now know, a $26 billion product for us. With a, with a good margin as well.

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

Thank you. Our next question today comes from Lance Wilkes with First Please go ahead.

Great. Thanks. Wanna talk a little on Medicaid and if you could, could you walk through Medicaid trends kinda 25 contrast with 26 in a couple different ways? Because so many different moving elements.

So 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 if in core trend, could kind of describe, oh, what's your your experience with categories, you know, inpatient, outpatient, and or units and and cost inflation.

And maybe as a tag onto 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? Thanks.

Yeah. Thanks, Lance. I'll 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 pressure on, on trend relative to core trend.

The the drivers were really consistent with what we called out throughout, you know, Q2 and rolling forward in terms of behavioral health, home health, and high-cost drugs, those did not materially shift over the course of the last 350% 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 you know, particularly the those excess trend areas were kind of how we chalked the field in terms of organizing and and looking to to mitigate that trend. And so lots of proof points in the back half of 2025 in terms of actually being able to intervene, and help moderate that trend, which is what contributed at least in part to ending the year at a 93%.

So again, feel feel good where we stand today in terms of having really solid visibility into the various forms of trend that are influencing the business and being organized around the levers that impact them. Relative to competitive dynamics, we are seeing continued rate pressure is having an impact on different markets and certainly some of the the smaller, nonprofit plans. And, frankly, that's that is an important input into states thinking about making sure that they're funding the programs to sufficiently so that they have a competitive marketplace and that members have the quality of services that they that they want and they deserve.

And and I think over time, you know, it it's something that we would watch relative to potential membership growth, if competitors choose to exit any of those geographies.

Yeah. Just two quick things to add to that. Interesting facts relative to your question, Lance. Inpatient 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 zero in on, as Sarah said, both those areas that we started talking about and recognizing in '25 as well as policy, and product and benefit changes with our state partners to really you know, zero in on what we need to do to pull those levers.

Thank you. And our next question today comes from Andrew Mok at Barclays. Please go ahead.

Hi, good morning. When I look at the segment MLR components embedded in guidance, the ACA improvement and Medicaid stability look 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?

Thanks.

Yeah. I think you'd have to understand bifurcating under Medicare, we absolutely expect progression in Medicare Advantage, meaning in improvement, in that HBR PDP, yes, there's a piece of going from, you know, well into the threes pretax margin to 2%, and that's HBR related. But also think about the math on the direct subsidy going from a $143 to 200, And as I said in my script, you know, roll that through a p and l and the yield impact where you need zero 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.

Thank you. Our final question today comes from David Windley at Jefferies. Please go ahead.

Thanks for squeezing me in. 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 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, those you know, buy down bronze members are meeting your expectations.

Are they you know, is their gross medical cost declining because the individual bears more of the cost in bronze, things like that. I'm just wondering what that trade down profile looks like. Thank you.

Yeah. Thanks, Dave. So I would say, in general, sort of the the 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, you know, with contemplated as we thought about overall pricing. And then taking into account not just how the bronze products have operated over the last you know, five years, but what they did pre-COVID and making or sorry, pre-EAPTCs and pre-COVID, and making 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 a very early look, nothing alarming relative to utilization patterns.

Thank you. 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. Finally, to my son team colleagues, just wanna 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.