Categories Earnings Call Transcripts, Health Care

Centene Corp. (CNC) Q3 2020 Earnings Call Transcript

CNC Earnings Call - Final Transcript

Centene Corp. (NYSE: CNC) Q3 2020 earnings call dated Oct. 27, 2020

Corporate Participants:

Jennifer Gilligan — Senior Vice President, Finance & Investor Relations

Michael Neidorff — Chairman, President, and Chief Executive Officer

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Analysts:

Kevin Fischbeck — Bank of America — Analyst

Justin Lake — Wolfe Research — Analyst

Ralph Giacobbe — Citi — Analyst

A.J. Rice — Credit Suisse — Analyst

Matthew Borsch — BMO Capital Markets — Analyst

Sarah James — Piper Sandler — Analyst

Josh Raskin — Nephron Research — Analyst

Charles Rhyee — Cowen — Analyst

Ricky Goldwasser — Morgan Stanley — Analyst

Stephen Tanal — SVB Leerink — Analyst

Gary Taylor — J.P. Morgan — Analyst

Scott Fidel — Stephens — Analyst

Lance Wilkes — Bernstein — Analyst

Presentation:

Operator

Good morning. Welcome to Centene Corporation’s Third Quarter 2020 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Jennifer Gilligan. Please go ahead.

Jennifer Gilligan — Senior Vice President, Finance & Investor Relations

Thank you, Kate, and good morning everyone. Thank you for joining us on our third quarter 2020 earnings results conference call. Michael Neidorff, Chairman, President and Chief Executive Officer and Jeff Schwaneke, 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. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in Centene’s most recent Form 10-Q filed today October 27, and Form 10-K, dated February 18, 2020 and other public SEC filings, including the risks and uncertainties described with respect to the potential impacts of COVID-19 on our business and results of operations.

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 third quarter 2020 press release, which is available on the company’s website at centene.com under the Investors section. Additionally, please mark your calendars for upcoming — for our upcoming Virtual Investor Day, which will take place on December 18, 2020.

Finally, in connection with this morning’s earnings release, we have shared some illustrative exhibits. These slides are available on our website under the Investors section.

With that, I would like to turn the call over to our Chairman, President and CEO, Michael Neidorff. Michael?

Michael Neidorff — Chairman, President, and Chief Executive Officer

Thank you, Jennifer. Good morning and thank you for joining Centene’s third quarter earnings call. We all hope you and your families are safe and well. On today’s call, I will review our strong third quarter performance and discuss the operating environment as we see it today. I will also provide perspective on how Centene is positioned for continued growth and success, including some thoughts on 2021, and an update on the WellCare integration.

I’m pleased with our third quarter results, which demonstrates the strength of our underlying business and diversified platform, as well as our team’s solid execution. We reported third quarter revenues of $29.1 billion, an increase of 53% from the third quarter of 2019. Adjusted diluted earnings per share was $1.26 or $0.97 when accounting for the one-time items referenced in our press release. This is consistent with previous guidance. I remind you that on our second quarter earnings call, we shared that in this COVID environment, we expected 68% of our income to be received in the first half of the year. We also advise that the third quarter would amount to roughly 20% of the year’s earnings, which happens to be $0.97.

We delivered strong organic membership growth driven by new programs, the initiatives across many of our states, as well as some COVID-related membership growth. Membership was approximately 25.2 million at the quarter end. This represents a sequential growth of 2% and a year-over-year growth of 65%, largely driven by the addition of WellCare. Membership growth remains in line with the guidance provided in July, and we continue to expand 2020 membership to peak in November with 1.4 million new members.

Our earnings benefited from a number of one-time items, which will be reinvested back into the business. As you all know, Centene is now a $110 billion enterprise — healthcare enterprise. At our size and scale, we expect there will be impacts to our earnings on a quarter-to-quarter basis. We are utilizing this quarter settlement to reinvest in growth initiatives. In addition, we have allocated a portion of the settlement towards making a significant one-time contribution to the Centene charitable foundation, the earnings of which will be used towards public programs and medical research that support the communities we serve. In this environment, we continue to take a leading role in accelerating our approach to community care with programs that address social determinants of health, such as improved access to virtual care and support for individuals experiencing food insecurity.

Turning now to the operating environment and how we view the rest of the year. If you exclude the $0.12 increase to reflect the favorable tax settlement in the third quarter, our earnings guidance for 2020 remains consistent with what we provided at our June Investor Day. Our business is strong and we remain confident in our ability to lead in today’s operating landscape.

State partnerships continue to present opportunities for constructive relationships. The discussions that have taken place with our state counterparts this year underscore the strength of our partnerships, as well as the value we provide to our state partners. The typical rate-setting process has continued throughout the year, including a 5.3% rate increase in Texas effective September 1, and approximately 1.5% increase in Florida, effective October 1. We continue to hold discussions with our state partners related to rate-setting and risk adjustment mechanism.

We also have certain states that, outside the normal process, have put additional risk-sharing mechanism in place related to COVID-19. These are specific to the pandemic, and we expect them to be short term in nature. Overall, we continue to navigate the evolving landscape together with our state partners as we work to provide our members with access to critical care.

Other key factors include membership growth, and medical utilization continues to track in line with our expectations. While there is continued uncertainty, including the intensity and duration of the pandemic and the outcome of next week’s election, we believe we have the scale and size to deliver results as the environment continues to evolve. We manage the business based on the facts as we see them today, and we are well-positioned to continue to grow and execute against our strategy. We also continue to provide you with transparent updates and give you our best estimates as to how we see things at a particular point in time. With that in mind, Jeff will provide you with some factors to consider when thinking about our 2021 earnings power.

As is our practice, we provide details at our December Investor Day. However, in these unusual times, we want to ensure that with the factors unknown, you are considering them for your models. I’ll highlight here that we continue to see attractive opportunities for growth, both organically driven, and by an uptick in RFP pipeline, and through delivering on the WellCare deal accretion. In addition, we see potential opportunity for investment, consistent with our disciplined M&A process.

The WellCare integration remains on track and is progressing well. Our finance and HR systems are integrated seamlessly and a New York planned integration was completed timely in line with the state’s expectations. Routine integration activities will continue throughout 2021.

At our upcoming Virtual Investor Day, we look forward to sharing more detail regarding our outlook, as well as our strategy to transform Centene into a healthcare technology enterprise.

In summary, we are pleased with our third quarter results, which demonstrate the strength of our underlying business and diversified platform. We intend to demonstrate solid growth in 2021, driven by WellCare deal accretion and organic growth. And we continue to see significant opportunities for growth longer term as additional states look to Managed Care as a solution for their healthcare needs. While some uncertainty remains, at our size and scale and with our unsurpassed capabilities, Centene is well-positioned for continued success.

Before I hand over the mic to Jeff, I again want to thank and recognize the continued commitment and dedication of our employees. It is because of their relentless focus that we have been able to continue to serve our members during these times, while also accelerating programs that support our communities. The value of the systems and people we are investing in, continues to prove themselves. Stay safe, wear your mask and stay well.

With that, let me turn it over to Jeff.

Jennifer Gilligan — Senior Vice President, Finance & Investor Relations

Hi, there. This is Jennifer Gilligan. We’re going to ask folks on the line to just hold one moment, while we make some sound checks with the webcast link. Back to you in two. Hi, this is Jen. We’ll have Jeff go ahead and start his remarks. There was trouble with the webcast link. What we will do is following the call, we will post the transcript of Michael’s comments in the event that there were folks on the webcast who missed any portion. With that, I think, Jeff, you can take it away.

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Okay, great. Thank you, Jen. Thank you, Michael. And good morning everyone. This morning I will start off with a review of the quarterly results and I’ll offer some details around our updated 2020 financial outlook. And finally I’ll walk through some factors to consider when thinking about our 2021 earnings trajectory.

Overall, we delivered strong third quarter results with revenues at $29.1 billion, an increase of 53% over the third quarter of 2019, and adjusted diluted earnings per share of $1.26 compared to $0.96 last year. Our adjusted diluted earnings per share included a net favorable impact of $0.29 from the three non-operational items that are outlined in our press release. When excluding these items, specifically, receipt of the risk corridor settlement, a charitable contribution commitment to our foundation and an unrelated tax benefit, adjusted diluted earnings per share totals would have been $0.97.

Total revenues grew by approximately $10.1 billion over the third quarter of 2019, primarily as a result of the acquisition of WellCare, membership growth in Medicaid and the Health Insurance Marketplace businesses and expansions in new programs in many of our states. Total membership increased to 25.2 million in the quarter, up 65% compared to Q3 last year. Since the pandemic began in March, we have added a total of 1.3 million Medicaid and Health Insurance Marketplace members, consistent with our expectations when we issued guidance in July, largely attributable to COVID-19.

Our HBR or Health Benefits Ratio was 86.4% in the third quarter compared to 88.2% in last year’s third quarter and 82.1% in the second quarter of 2020. The HBR for the quarter was impacted by the receipt of the risk corridor settlement. When adjusting the HBR ratio for this revenue of approximately $400 million, our HBR in the quarter was 87.8%. The HBR was also aided by lower traditional utilization, largely offset by the higher costs associated with testing and treatment of COVID, as well as retroactive state premium adjustments and risk-sharing programs.

Utilization in the third quarter trended toward normalized levels in most geographies. This rebound included a combination of traditional utilization and COVID-related medical costs.

Cash flow used in operations was approximately $950 million in the third quarter. The cash used in operating activities in the third quarter of 2020 was due to a $1.6 billion health insurer fee payment and a $1.2 billion risk-adjustment payment associated with the Health Insurance Marketplace business, which both occurred in the third quarter this year. With cash flow from operations of $2.5 billion through the first nine months of 2020, we expect 2020 cash flow from operations of between 1 and 1.5 times net earnings.

We continue to maintain a strong liquidity position of $1.1 billion in unregulated cash on our balance sheet at quarter-end. Debt at quarter end was $16.8 billion, which includes $93 million of borrowings on our revolving credit facility. The borrowings on the revolver are denominated in euros to hedge our international investments. Our debt-to-capital ratio was 39.1%, excluding our non-recourse debt, compared to 39.7% in the second quarter of 2020. Our debt-to-capital ratio was 37.4% when netting our unregulated cash with our debt at quarter end, which represents a 150 basis point decrease since March.

Our medical claims liability totaled $12.9 billion at quarter end and represents 52 days in claims payable compared to 51 days in the second quarter of 2020. DCP was impacted by the COVID pandemic, pass-through payments received at the end of the quarter, which were paid out in early October, membership growth, and the timing of payments.

On WellCare, as Michael mentioned earlier, we continue to make significant progress with the integration. The integration continues to be on track and we remain comfortable with our synergy capture efforts.

Turning now to our 2020 expectations. For the full year, we now expect revenue to be in within a range of $109.8 billion and $111.4 billion. This is $400 million higher than our previous guidance midpoint, predominantly reflecting the risk corridor settlement recorded this quarter. Our revised adjusted diluted earnings per share guidance of $4.90 and $5.06, up from a range of $4.76 to $4.96 represents a $0.12 increase at the midpoint, driven by the tax benefit that we recognized during the third quarter. A reconciliation of our changes to guidance is provided in our press release issued this morning.

Our 2020 financial guidance reflects the strong year-to-date performance from our major business lines, as well as the impact of the non-operating items previously mentioned that occurred during the third quarter. We previously outlined a number of COVID-related factors that influenced our full year guidance. These remain unchanged. We continue to expect peak membership growth of 1.4 million by November of this year.

In terms of utilization trends, we continue to expect trends to gradually increase during the fourth quarter, depending on regional infection spikes and local government responses. Through the end of September, we have paid approximately $2 billion associated with COVID claims. This compares to $550 million we discussed on our second quarter call. Our third quarter figure applies consistent methodology and includes all of the COVID-related claim quotes consistent with CDC guidelines.

With respect to rates, as Michael has already touched on, we continue to have active dialog with our state partners and the risk-sharing mechanisms and rate adjustments received continue to be in line with our 2020 expectations. A quick note on quarterly versus full-year modeling. As a result of the WellCare acquisition closing in the first quarter, the full-year weighted average share count is substantially lower than the second through fourth quarters. This will impact modeling of fourth quarter EPS with respect to full-year adjusted earnings per share guidance. In short, the quarterly results will not sum to the full-year guidance range.

And last, a few comments on our 2021 earnings trajectory. As we have done historically, we will provide our 2021 full-year guidance at our December Investor Day. However, in light of the significant uncertainty in this environment, we want to provide as much visibility as we can and give you a few items to consider as you begin to model 2021. In order to facilitate the discussion, we have included a slide on our website at centene.com. We are still in the early stages of our planning process and going forward, we intend to return to our typical practice.

First, you may recall that on March 3, 2020, we provided initial guidance for 2020 with a midpoint of $4.66 from an adjusted diluted earnings per share basis. There have been a lot of moving parts this year, including higher membership and revenues, the significant reduction in medical utilization in April and May, the continuing incremental costs for COVID testing and treatment, and the effective risk-sharing programs implemented by our states, just to name a few. If you exclude the $0.20 net benefit from the pandemic, and the $0.12 tax benefit recorded this quarter, our guidance for 2020 adjusted diluted earnings per share reflects where we began in March, $4.66.

Second, as we look forward to 2021, we expect to continue our long history of top and bottom-line growth from here. There are a lot of moving parts and I will highlight a few that are included in the supplemental slide we are sharing today. As we commented earlier, the WellCare integration and the underlying operations remain on track and we are confident in our ability to generate the mid-to-upper single-digit accretion from the transaction as we have previously indicated.

Third, we anticipate solid year-over-year organic growth generated through new programs and the expansions of existing programs such as Medicare and Marketplace that will contribute to our earnings trajectory.

Fourth, we expect some of the Medicaid rate adjustments and risk-sharing mechanisms to carry over into next year.

And, finally, COVID and traditional utilization represents a number of unknowns dependent on the trajectory of the pandemic. We’ll be better positioned to provide more clarity around these factors during our December Investor Day.

I’ll conclude my remarks by reiterating our confidence in the strength of our business. We’re pleased with the significant growth we’ve achieved this year. Our balance sheet remains strong and we believe we have ample liquidity to meet our operational and strategic needs. We remain focused on executing against our strategic plans and are committed to delivering shareholder value. We look forward to providing a comprehensive outlook for the next year when we virtually meet in December.

That concludes my remarks. And operator, you may now open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Kevin Fischbeck from Bank of America. Go ahead.

Kevin Fischbeck — Bank of America — Analyst

Okay, great, thanks. Just wanted to follow up on the Medicaid rate commentary. I think, and I guess, first, could you quantify maybe what you’ve kind of built into your guidance so far for this year as far as the rate pressures? And then, Michael, I think in your comments you mentioned that you thought that some of these risk corridors and things might be temporary in nature. So I just wanted to understand, kind of, if we should be thinking about these as kind of one-time type issues or are these kind of the way that you would expect states to be building rates prospectively? Thanks.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Yeah, I think, it’s some of both, depends on the state and the negotiations we’ve had. Some are building some temporary risk corridors and that we’ve negotiated and agreed with. Others, as you’ve seen, has given us rate increases and are comfortable with where we are. And it’s really just a give-and-take process right now, Kevin. And Jeff can give you some more specific numbers. So I’ll turn it over to him, and he can give you a sense of what would — what we’ve dealt with and how we’ve been able to deal with it because there’s two factors to our rates, but there’s also the COVID expense that we’ve had, and the reduced utilizations and other things. Jeff, you want to…

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah, Kevin, this is Jeff. I think a couple of things. The traditional rate-setting process where we’re using counters and develop the rates to move forward, that process has, I would say, continued as it always has. What’s been, in addition to that are these risk-sharing mechanisms and risk corridors that states have considered. So for our full-year, we expect that number to be around $500 million is what we’ve got in our guidance, and I think so far this year, you’ve heard us say and make comments that it’s really been in line with our expectations. So we’ve had that estimate in there for some time.

On the quarter, that number was roughly $265 million. So that definitely impacted the HBR from that perspective. And then again as we look forward to next year, we expect that to be lower than the $500 million as we head into next year because some of these programs do expire. I think the reason why they carry forward to next year is a lot of them are driven by the state fiscal years, which as you’re aware, are not January through December. So it’s not a calendar year.

Michael Neidorff — Chairman, President, and Chief Executive Officer

And I might just indicate that where we’ve seen the utilization reduced, we worked with the states, and if it hasn’t reduced then the states recognize the rates have to be actuarily sound. So it’s a case of really a lot of give-and-take and it’s been very constructive work. Obviously, with us maintaining the guidance, we are pleased with where it worked out.

Kevin Fischbeck — Bank of America — Analyst

Okay, great. And then maybe second question being around the guidance. You have — I appreciate the color about kind of setting the stage for what the base EPS is, but, I guess, you guys also had some guidance around the time you did the WellCare transaction. I don’t know if there’s any way to maybe give kind of a headwinds and tailwinds to maybe the guidance that you provided at the time of the WellCare transaction, I don’t know of anything else you would highlight as positive or negative and how to think about that.

Michael Neidorff — Chairman, President, and Chief Executive Officer

I think, we’d say this, it’s consistent with the guidance we gave at that time.

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah, yeah. Kevin, are you specifically referring to the guidance that we provided kind of right after we closed the deal in March?

Kevin Fischbeck — Bank of America — Analyst

Yeah, exactly. So you guys talked about the accretion and from that I guess you’re saying that hasn’t changed at all. So I just was wondering if there is anything else around the core business plus or minus that you highlighted headwinds or tailwinds to kind of how you would have thought about the business back in March.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Yeah, I think, I’ll start off, and Jeff can add to that, I think it’s proven to be very consistent. The integration has gone on schedule, it’s been seamless. The — some of it was delayed as we highlighted in the past, that Georgia and Florida, not because of anything we had, because of their issues, delayed the culmination of plan until 2021 and that’s all working out well, where we still recognize the accretion from it. We were pleased with their support and what their capabilities are in the Medicare program. So, I mean, it’s — at every level it’s met the expectations and we’re comfortable calling it where it is.

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah, yeah, Kevin, I agree with Michael. I think, the transaction is exactly in line with what we expected. I think the variables are the other things, right? The variables are COVID state rates, redeterminations, all those things. I think from the transaction perspective, it’s exactly in line with what we anticipated.

Kevin Fischbeck — Bank of America — Analyst

Okay, thanks.

Operator

Our next question is from Justin Lake from Wolfe Research. Go ahead.

Justin Lake — Wolfe Research — Analyst

Thanks, good morning.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Hi.

Justin Lake — Wolfe Research — Analyst

Just wanted to first follow-up on the 2021 discussion here. Specifically, I also appreciate you giving us the $4.66 starting point. The only thing we all have to kind of go back and tie to is the S-4. And the S-4, I think, had about 11% earnings growth on a standalone basis and plus the accretion. So with the starting point being different, is it reasonable just to assume that about the same level of EPS growth that was in the S-4 for next year 11% plus the accretion gets me to about $5.50 [Phonetic]? Would that be a reasonable ballpark to be starting at or the [Indecipherable] the only thing you want me to think about beyond that 11% number?

Michael Neidorff — Chairman, President, and Chief Executive Officer

I’m going to let Jeff respond to it. But keep in mind, we’re trying to give you some sense but guidance the full — the real number, we’ll give you the bridge and everything on December 18, Justin. So I mean there’s a balance we’re trying to strike here and not letting people get ahead of themselves or us, but we’re not trying to find what the guidance is at this point. So, Jeff, you want to…

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah, yeah, Michael, I think you’re right. I mean, what we’re just trying to do here is just give you some key factors to consider to think about as you bridge from 2020 into 2021. I think the challenges with the S-4, I certainly appreciate that people could go back and try to use that number. The challenges that was pre-COVID and it was also pre-New York rate changes and built over a year and a half ago. So I think from our perspective, we believe bridging from this year is a more appropriate place to start.

Justin Lake — Wolfe Research — Analyst

Okay. Maybe…

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Go ahead.

Justin Lake — Wolfe Research — Analyst

Go ahead, Jeff. No, please.

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

The full numbers — we’ll have the full numbers for you in our December Investor Day.

Justin Lake — Wolfe Research — Analyst

Is it fair to say that maybe the consensus number around $5.75 [Phonetic] might be optimistic relative to the starting point without specific number?

Michael Neidorff — Chairman, President, and Chief Executive Officer

We’re not — hey, I appreciate what you’re — where you’re trying to get to, but we’re in the early stages of our ALP. And I’m not — we have a cadence and when we — but we did say, because of this year, we tried to give you more. We’re not trying to tell you what the range of the guidance is. That’s — for as long as we’ve been public, we’ve done that in December, Justin. So let’s recognize what we have given you as a starting point, but come December, you’ll have the full bridge.

Justin Lake — Wolfe Research — Analyst

All right. Thank you very much.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question is from Ralph Giacobbe from Citi. Go ahead.

Ralph Giacobbe — Citi — Analyst

Thanks, good morning. Just wanted to go back, Jeff, and make sure I got the numbers. Any way to split out sort of the third quarter impact of the higher COVID costs versus the premium rate adjustment and then the risk-sharing that you cited? If you could break out those three buckets.

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah. When you mean the premium, the risk corridor we quantified is $400 million. The state premium and risk adjustment changes, the number I gave was $265 million. So that had an impact on the HBR. And, I guess, the way I would think about it is, you have to take all these items into account, lower investment income, the state take-backs, lower overall, I would say, utilization was slightly below historical perspective, really driven by the COVID pandemic. We have to take all those into account when you look at the quarter. So hopefully that gives you what you need.

Ralph Giacobbe — Citi — Analyst

Okay, all right, fair enough. And then just a quick follow-up. You noted sort of investments you’re making in the fourth quarter around MA and HICS. Just if you can give us a sense of how you’re thinking about sort of enrollment growth for maybe both those segments in 2021. I know the landscape fly was just recently out for essentially both in exchange, I think, just yesterday. Thanks.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Well, we have a expanded geographic footprint that we’ve highlighted and it’s the earliest stages of enrollment. And I think it’s at a point, I’m not going to speculate based on a few points we have to this point in time. But as we’ve said, we’re comfortable with the capabilities of WellCare in this area and I’m looking forward to the results.

Ralph Giacobbe — Citi — Analyst

Okay.

Operator

Our next question is from A.J. Rice from Credit Suisse. Go ahead.

A.J. Rice — Credit Suisse — Analyst

Hi, everybody.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Good morning.

A.J. Rice — Credit Suisse — Analyst

Not to beat a dead horse here, but I have two areas — two quick questions. But first of all relates to the 2021 outlook. I sort of end up at about the same place as I think Justin was saying and you started $4.66, you add about $0.38 for the midpoint of the WellCare accretion — incremental accretion for next year get’s you into the $5, $5.05 range and then you add 10% to 11% for organic growth, $5.55. So, you — but relative to your slide then you’ve dealt with the WellCare accretion and the organic growth.

I guess the open questions where you’re — which you’re highlighting is state rates, risk-sharing and potential return of redeterminations. On the redeterminations, is it still your thought that that’s about a $1 billion revenue headwind on an annualized basis and we can figure out how that might come in over the course of the year? And then is there any way to put your arms around your comment around state rates and risk-sharing? I guess that’s annualizing some of the stuff you’ve seen next year plus anticipating any incremental pressure. Anyway to bracket that?

Michael Neidorff — Chairman, President, and Chief Executive Officer

Let me give you one more variable that influences everything you just said, and that’s any continuing stimulus they do that affects FMAP that freezes redetermination. There is still some undefined things out there and recognizing that — those things we hope to have a better view on come the December Investor Day will actually be behind us, hopefully. And we’ll understand what some of the policies are. So everything you said, I can understand what you’re saying but there are other factors that affect redetermination, affects rates, affects a lot of things. So we try to give you enough that you don’t get ahead of yourselves and us. But we also said we will have a clearer view come December 18.

A.J. Rice — Credit Suisse — Analyst

Okay. On the — my other question relates to what you’re seeing in enrollment. So I think second quarter call, you guys had said you thought you’d get to about 1.4 million incremental lives versus where you were at Q1, and that you’d see that peak in November. I just want to confirm that you still think you’ll see the peak in November and the ultimate peak is going to be the incremental 1.4 million. It sounds like you think you are on track.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Yes, we are.

A.J. Rice — Credit Suisse — Analyst

And then there’s also a dip in the exchange — and there’s a dip in the exchange enrollment. Is that consistent with what you thought you would see at this point?

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yes, yeah, it is. We’re still saying 1.4 million by November and yes the exchange attrition is consistent with our expectations.

Michael Neidorff — Chairman, President, and Chief Executive Officer

As we see every year.

A.J. Rice — Credit Suisse — Analyst

Okay, thanks a lot.

Operator

Our next question is from Matthew Borsch from BMO Capital Markets. Go ahead.

Matthew Borsch — BMO Capital Markets — Analyst

Yes. Maybe you could just comment on what you’re — how you’re thinking about the exchanges for next year? Did they — or you think you’re going to go in with margins normalized for the back half of this year? Obviously, the first half of this year was disrupted. And, what, if anything, do you see in terms of the competitive environment?

Michael Neidorff — Chairman, President, and Chief Executive Officer

Yeah, I’ll start with the last part first. We like competitive environments. I think I’ve said that many times. It really helps grow the space. When you’re the largest and the others are very small [Indecipherable], it’s incumbent on you to really do all the work to grow it. But you get competitive environments, it grows and in that environment, the leader tends to grow very well. And, I mean, I’ve seen that all my business life in much more competitive areas, consumer packaged goods. So we’re comfortable that we’re well positioned competitively for growth and we’ll work to — we’re in the planning stages and we see normalized margins.

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah. Yeah, I think it’s — obviously, it’s hard to compare 2021 to ’20. We’re still obviously in the early cycle of our annual planning process as far as what we expect utilization to be looking into next year because obviously we’re still going to be with COVID and have that going into next year. So that’s part of why we’re just trying to give you directionally today where we think things are going to land, and then we’ll have full details for you in December. And again, as Michael mentioned earlier, we’re still in the early stages of the enrollment and so I think once we get better data on that, which we’ll have for you in December, we’ll have more comments.

Matthew Borsch — BMO Capital Markets — Analyst

If I could just ask one more on the enrollment outlook for this year. When you talk about the peak enrollment in Medicaid for next month, November, what gives you that confidence that — or why are you so sure that’s a peak in November? Why does it keep on increasing?

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah, I mean, certainly, the extension of the enhanced FMAP helps. So what’s happened is, it’s really been driven by the suspension of the eligibility redeterminations of the bulk of it. And so we’ll see. I mean, I think we’re just comfortable holding the 1.4 million in November, I think we’ll get there. That’s our expectation. And could it go higher? It’s certainly possible if they continue to extend the stimulus, but we’ll have to see.

Michael Neidorff — Chairman, President, and Chief Executive Officer

And the numbers we gave you were tracking on 1.4 million.

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

That’s right.

Matthew Borsch — BMO Capital Markets — Analyst

Yeah. Okay, thank you.

Operator

Our next question is from Sarah James from Piper Sandler. Go ahead.

Sarah James — Piper Sandler — Analyst

Thank you. So I’ve been looking at the year-to-date fall off in HICS. And if I go back a couple of years, it was about 5%, last year was 3%, this year it’s almost flat. And last time you guys had lower HICS churn, it compressed margins. Is it having the same effect this year?

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah, I think, first of all, I think the — keeping the members longer this year was due to intentional actions that we took in order to extend grace periods as a result of the COVID pandemic. And so I think you really can’t compare year-to-year from an attrition perspective. And then the other thing I would comment on is again with the COVID pandemic, it’s hard really to judge profitability of that extension this year versus any other year. We’re just in a unique environment.

Sarah James — Piper Sandler — Analyst

Okay. And then thinking about the exchanges, the overhead leverage and operational structure there, you guys just announced going into 400 more counties in existing states, you’re getting pretty dense in the states that you operate in. How do you think about that impacting overhead leverage? Is that density moving the needle for you guys?

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah, I mean, I think we’re — I mean, number one, I think we’re always focused on overhead leverage and that business is scaled. And so we continue to try to find ways in order to get efficiencies in the exchange platform. I think there is still more work that we can do there to get the efficiencies with the scale of that business, and that’s what we’re focused on heading into 2021.

Michael Neidorff — Chairman, President, and Chief Executive Officer

I think, yeah, I think it’s fair to say that every budget meeting I sat in on, we’re talking about scale, not just there but in every one of our businesses, when you look at our growth in the market with time we start to realize the benefits of it.

Sarah James — Piper Sandler — Analyst

Thank you.

Operator

Our next question is from Josh Raskin from Nephron Research. Go ahead.

Josh Raskin — Nephron Research — Analyst

Thanks, good morning.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Good morning.

Josh Raskin — Nephron Research — Analyst

Good morning, Michael. Taking a step back, it seems like Medicaid has obviously been a major growth factor for the company for a long time. It feels like the future may rest a little bit more on Medicare as a larger part of that growth going forward. And, I know, you’ve commented on that in the past. So can you talk about your competitive positioning and what you can do to improve your Star ratings and what you’re seeing from other competitors in the market.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Yeah. We were within a couple of basis points in getting the star rates we wanted. We have a very aggressive program, Josh, that we expect will increase. As you know, it’s measured over a longer period of time. So it takes a little time to get there. But the people responsible for improving it clearly understand that there is no excuse for not achieving it going forward. So there is a continued emphasis and pressure on that.

I — I’ve talked in the past about the Medicare, that it is a growth driver for us longer term. I think WellCare had a good record of growth in Medicare. That’s translating well for our business. We’re moving to the number four position in total on a combined basis. We’re pushing 1 million lives and [Indecipherable] to give you critical mass from which to grow. We’re doing a lot of recontracting with providers, which we think will be beneficial.

So it’s — we’re in the — and the open enrollment just started basically. So it’s a little early to comment on it. But I am cautiously optimistic that it will finally achieve some of the growth that I’ve been looking for and we’ve been looking for.

Josh Raskin — Nephron Research — Analyst

Okay, perfect. And…

Michael Neidorff — Chairman, President, and Chief Executive Officer

And I might add profitable. I might also add profitable growth.

Josh Raskin — Nephron Research — Analyst

Got you. And cautiously optimistic was a comment around 2021 in terms of starting to realize some of that growth?

Michael Neidorff — Chairman, President, and Chief Executive Officer

Yes.

Josh Raskin — Nephron Research — Analyst

Got you. And then just second question, as you’re thinking about headwinds tailwinds for 2021 and I’ll stay away from the conversation on consensus, but what do you think medical utilization trends in 2021? Do you think — and maybe more specifically, are the states recommending rate actions that indicate that continued trend below sort of pre-pandemic levels or are states assuming a more back-to-normal environment?

Michael Neidorff — Chairman, President, and Chief Executive Officer

Well, I think, I don’t know right now that they are assuming either and with what the pandemic’s doing, it’s pretty hard to have that discussion. But we really have seen that there were some elective procedures have fallen off, obviously. Pandemic costs have gone up, so it tends to — one tends to balance out the other. The one area that’s in the interest of transparency that has fallen off for obvious reasons and has not been quick to bounce back is in the emergency room. Okay? So I mean there are some aspects that have dropped off and are staying low. They say they will rebuild over time when the pandemic is gone. But that single biggest issue in talking to the states right now is it’s reaching new all-times high, and this is going into the winter. And I could be as far out and talk about when it’s going to fall off, but that’s not the purpose of this call.

Josh Raskin — Nephron Research — Analyst

Got it. Thank you.

Operator

Our next question is from Charles Rhyee from Cowen. Go ahead.

Charles Rhyee — Cowen — Analyst

Yeah, thanks for taking the question. Michael, maybe I can ask a slightly different question here. As we think about potential for vaccine approvals, can you talk about sort of what the logistics means for Centene in terms of how you would think about ensuring that your members get access to it or is that really a function of the state making decisions and logistics with pharma manufacturers? Maybe give us a sense on how that process kind of works?

Michael Neidorff — Chairman, President, and Chief Executive Officer

I think there’s a couple of issues. One, I have some pharmaceutical background from my former Miles/Bayer AG. And Phase 1 and 2, you can do some computer modeling that helps you to accelerate it. But Phase 3 is long-term side effects that takes a given amount of time and I think what we’re hearing is that the scientists are saying to look forward in very late ’20 but more likely the first half of 2021. Okay? Now I have had some discussions at very senior political levels in Washington and some of them that are talking to the scientists have made investments and said we will give you the money to build a 100 million doses even before it’s proven. Okay? So when if it does prove we have that vaccine.

Now, I believe that when that vaccine becomes available and I’m anticipating the late Q2, maybe Q3 of next year we’ll really have something that people are confident with. And I’ll throw in something parenthetically here. We were doing some PSAs to ensure that parents and others are still giving the normal vaccines saying that has nothing because we’re worried people were starting to have doubts about those. And that would not be good for the trial.

So we’re doing some other things there. But I think what will happen is we’ll have it and we’re going to work very hard to ensure that people that need it most get it early, the people at higher risks, the people that are working in the healthcare environment, okay, treating people, that type of thing. That’s — so that it will be an orderly transition to it, and I think a lot of our population are individuals at risk because of the nature of it and we are pushing hard to ensure they have the vaccine when they need it. So, it’s a kind of a work in progress. I don’t mean to be so long-winded but I want to give you a sense that we’ve thought a lot about this, and there is a clear plan working with the scientist, the responsible scientists on how do you — and the manufacturers and others how to get it done. I mean, we’re a huge purchaser now of pharmaceuticals and that gives us an opportunity to talk to them. Does that help?

Charles Rhyee — Cowen — Analyst

And just a follow — yeah, it does. And if I could just follow up, should we think about that kind of pathway in terms of sort of the timelines that you just discussed as we think about ’21 as — when we think about some of the factors? Is it fair to assume that you’re going to build in that kind of conservatism as we think about next year as well? Because it kind of suggests your thoughts also on COVID itself, right, the pace of COVID as we go into ’21.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Yeah, I think, I mean the — well, I think there’s two issues here. The pace of the vaccine and then the pace of COVID. Now, what actually — if I were doing it, I would be working very aggressively on the treatment, the therapeutic that treat the COVID, while we are developing the vaccine. I will give you a sense of our thought, we worked with epidemiologist, just I want to be transparent on this one as I can be. We have announced to our employees not to expect to come back before the end of spring break which is April of next year. Okay? And we’re working very effectively at home and I have all kinds of reports I get regularly on the productivity and people do want to get back to work. I’ve also said it’s possible it may not happen until June. So — and we have spent, as you know, a lot of money putting the plexiglass in the offices, the temperature monitoring when people walk in, so we’re ready to bring people back on a planned relief basis that people — others are just starting to emulate.

But the development of the — how the pandemic unfolds, it’s still very unusual. So I will — and I don’t want to sound political, but it will sound that way. Masks make a difference. And our epidemiologists has said, if you look at Japan with 127 million people, and Hong Kong with 7.5 million people, and we know that in the Asian markets, there’s always been a mask mentality, goes back to the ’70s, ’80s when I was there. If somebody had a cold, they put one on. During the time that we lost the first 100,000 lives, Japan lost 831, and Hong Kong, four — literally, four. Let’s say they understated it by 200%. So they lost 12. The masks make a difference. So if we get — if we can get that mentality going here and all the scientists are saying, if we — if you wore masks, we’d save a 100,000 lives. So I think that has a lot to do with where we’re going.

Charles Rhyee — Cowen — Analyst

I certainly agree with you. Thanks.

Michael Neidorff — Chairman, President, and Chief Executive Officer

You hit a hot — in case you can’t tell, you just hit a hot button toward me.

Operator

The next question is from Ricky Goldwasser from Morgan Stanley. Go ahead.

Ricky Goldwasser — Morgan Stanley — Analyst

Yeah, hi, good morning.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Good morning.

Ricky Goldwasser — Morgan Stanley — Analyst

Michael, in the past, you were very confident about the Supreme Court ACA ruling. How do you think about the potential outcomes now?

Michael Neidorff — Chairman, President, and Chief Executive Officer

Well, I think I’m still relatively confident. I think there’s two things. I said if you look at it, there is one — there’s this one factor that they’re considering right now, and that’s if — can — does the one really eliminate everything. Now even the Supreme Court — not [Indecipherable] the other one, Kavanaugh, in some cases, has agreed that severability is a factor. Severability used to be written in the Congress, congressional acts, but it’s become such a practice now that it’s more normal.

I suspect that — at one point, I thought it would be 7-2 when Justice [Indecipherable] was still around and others. But I said it could go to 6-3. It still could be 5-4. Now I also want to remind you that depending on what happens on the election, that if they want to make the case moot, they just have to put one line in, that says the penalty for not participating is $1, and it makes the whole case moot.

So I’m still very comfortable with it. I think — I don’t believe when push comes to shove, they really want to put all these people during the height of a pandemic on the street with no insurance.

Ricky Goldwasser — Morgan Stanley — Analyst

Thank you for that. And then just as follow-up on the COVID cost. It sounded like $2 billion in direct COVID costs. That’s meaningfully high than Q2. I think it implies about $1.5 billion in Q3. So can you talk about what drove that increase just in terms of acuity or versus hospitalization? Because we’re hearing so much about the therapies and about shorter hospital stays and lower acuity than before, but it seems that you’ve seen a different impact on your books business. So maybe some color on that and how you think about these costs into Q4, given what we’re seeing in terms of increase in cases? Thank you.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Maybe you want to start? We can have Jeff come on and any thoughts that you can…

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah, yeah, I think the first thing is to talk about the number. Number one, that’s paid dollars. And so you have to remember at the inception of the pandemic, obviously, we wouldn’t have had a lot of paid dollars because there’s usually a 30 to 45-day delay between when the inpatient stay happens and when we actually pay the dollars to the provider. And so I think that’s why you’ve seen, I guess, and what you’re stating is an acceleration of the dollars. It’s really just, I think, a timing effect from that perspective.

So — but what Michael has stated and what we’ve talked about in our Investor Day and in the quarters that we’ve reported is that we have seen lower traditional utilization, higher COVID expense. And when you aggregate those two, utilization from an expense perspective is just slightly below the historical average, and that’s certainly what we’ve seen.

Operator

Our next call — our next question is from Stephen Tanal from SVB Leerink. Go ahead.

Stephen Tanal — SVB Leerink — Analyst

Thanks for the question, guys. I guess I just wanted to clarify, on the 2021 initial outlook slide, you guys showed state rates or risk-carrying programs as a negative. But Jeff, I think you’d said in your prepared remarks that you expected less than the $500 million rate headwind impact that’s embedded in ’20. Just wanted to see if you could clarify sort of what’s assumed in the outlook and how that’s different from the comment you made on the $500 million item.

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah, I think — I mean, obviously, those are reductions of revenue. I think that’s the point, right, is that they’re still negatives on revenue as you head into next year. And you’re correct, what I said was our expectations were $500 million this year. And our expectation sitting here today is that it would be something less than that in 2021.

But again, I think if you look at this year, we’ve obviously had a multitude of factors, including state rate changes, lower overall medical expense. We had utilization that was significantly lower in April and May. So there were a lot of other factors offsetting all these items to effectively get back to our initial guidance back, that we gave out back in March.

Stephen Tanal — SVB Leerink — Analyst

Got it. Okay, that’s helpful. Then utilization, so earlier in the year, you guys had produced a chart that implied 3Q would sort of run above normal. I think it’s a data chart. It doesn’t sound like that’s occurred. But I’m wondering how you sort of frame what actually happened in Q3 and how you’re thinking about Q4. Do you guys still expect sort of a deferred care bolus here that put you in excess of normal levels in Q4 and into ’21?

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah. Obviously, I think what I mentioned just a little bit ago on the COVID cost is that what we’ve seen is lower traditional utilization, higher COVID cost. The net of that is a little bit below, not much, a little bit below historical utilization. And in my prepared remarks, what I indicated is that we would expect utilization to increase in Q4 versus Q3 slightly. So that’s what we continue to expect as utilization continues to trend back towards normal on a total basis, right?

The mix is different. The mix is lower traditional and higher COVID, but in total, again, trending back to historical levels in the fourth quarter.

Stephen Tanal — SVB Leerink — Analyst

Okay. And maybe if I could sneak one last follow-up and just the whole idea of peak enrollment growth in November. I guess I would just ask you how you see enrollment playing out from that peak by line of business and why. So Medicaid looks — how do you see that trending? Thanks, guys.

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah. I mean, obviously, there’s an open enrollment for both Medicare and Marketplace. So that obviously changes things as you look at the January 1 amount. That’s why we’re early in that cycle, and we haven’t given any commentary on that.

As far as the Medicaid is concerned, I think the extension of the FMAP enhancement helps. But ultimately, we’re going to have to see how long that gets extended or what happens with that with a second stimulus potential as we head into next year. And that’s why we said we’ll have more information for you at our December investor Day.

Michael Neidorff — Chairman, President, and Chief Executive Officer

I mean we’re dealing with things that we’ve not seen. I mean the pandemic has reached a new height, far more than March. So I mean that’s why we have to think of things on a very gross basis. And the more granular we try to get, the less accurate it’s going to be in this kind of — because it’s not something that we have experience with. In another 100 years, the next group may have some more background. Ask me then.

Operator

Our next question is from Gary Taylor from J.P. Morgan. Go ahead.

Gary Taylor — J.P. Morgan — Analyst

Hi, good morning.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Good morning.

Gary Taylor — J.P. Morgan — Analyst

I just wanted to do a couple of things. I wanted to revisit your expectation on fourth quarter MLR. I didn’t take the opportunity yet to pull up the slide deck from the summer. But I think with the implied earnings guidance — is your estimate now is that for fourth quarter MLR would be higher year-over-year?

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah. Number one, I don’t think we provided a fourth quarter MLR estimate. I guess from — just from what we’ve given today, what I would look at is kind of where we thought we were going to be before, and then you have the $0.17, right? We talked about the $0.17 benefit that we had this quarter that we’re going to reinvest in the fourth quarter. So that obviously would be a direct reduction to the previous fourth quarter number.

Gary Taylor — J.P. Morgan — Analyst

Yeah. I was just thinking about that one line chart you had in your deck that showed your expectation on COVID cost and sort of recovering deferred care. I thought they maybe intersected in the fourth quarter, but I can revisit…

Michael Neidorff — Chairman, President, and Chief Executive Officer

Well, I think, as I recall, we talked, Gary, about various peaks and how many peaks we would have during the course of the year. And I’ll tell you this peak we’re getting now is early — a little bit earlier and more severe than what I originally thought.

Gary Taylor — J.P. Morgan — Analyst

My other question, just going back to the state rates and risk-sharing, I guess, help me with my thinking a little bit. When we look at the state rates, we’ve seen state budget performance improve dramatically from where it was in the spring. If we look at some of the state — latest state numbers versus their budgets, almost back to par versus those deep holes in the spring. So that seems to be getting better. Of course, perhaps, the economy could get worse next year, but it seems like that’s getting better.

You mentioned your — two of your largest states, decent rate increases on a combined basis, so that seems to be relatively stable and on the risk-sharing, with deferred care starting to normalize and COVID costs in the near term moving higher would seem like the risk-sharing liability would be sort of diminishing. So I guess the question maybe is more on the state-rate side. Is there any possible risk that some of these state rate updates get reassessed during their fiscal year or you’re just leaving room for what might happen in July for the back half of ’21?

Michael Neidorff — Chairman, President, and Chief Executive Officer

I think we’re looking at it in totality, but we’re also talking to states, Gary, about new products, so expanding. They don’t have SSI, they don’t have long-term care or the things that save them significant money. So I mean there’s so many different factors that I’m counting on having a little more visibility come December 18. And we should just because of the lapse of time, the more experienced and [Indecipherable]

So I think to try and speculate what’s going to happen in the back half of ’21, right now, it’s really still in the dark versus having the benefit of the AOP we’re working on in the various markets with 37 states, so it takes time to collect that on. It won’t be the same in all of them. So give us until December 18, we’ll have more visibility on it.

Gary Taylor — J.P. Morgan — Analyst

No, that’s fair. I just — in my mind, I thought maybe that line was maybe more of a plus/minus question mark and you guys have it as a minus. And I just wanted to try to understand that a little better, but…

Michael Neidorff — Chairman, President, and Chief Executive Officer

What I’m trying to understand is the COVID and the timing, but some of it’s the politics and what approach they take too, Gary.

Gary Taylor — J.P. Morgan — Analyst

Right. Understood. Thank you.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question is from Scott Fidel from Stephens. Go ahead.

Scott Fidel — Stephens — Analyst

Hi, thanks, good morning. First question, just on the different pieces on enrollment and as it relates to the COVID impacts. So it seems like really the vast majority of the growth that you and others have talked about has just been from the suspension of the redetermination. And the one piece of the puzzle that really hasn’t seemed to play out much has been just the impact from the rising unemployment yet.

So just interested if you guys can give us some thoughts on sort of so far during the crisis, how much enrollment you’ve seen in Medicaid that’s just from rising unemployment. Obviously, that’s been coming down though more recently, so how you’re thinking about that piece of the puzzle sort of trending in 4Q and into 2021.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Well, I’ll start. It’s been bouncing low on, because eventually, you had people on furlough, where they kept some benefits. And as things continue, there’s more layoffs, and we’ve seen that, where they’re not getting the benefits and then they’re moving to Medicaid, if they have the wherewithal, they’re going into Marketplace. So it’s just such a swinging variable. And there’s so many factors, it’s hard to be too granular. I’m not trying to be evasive, but I’m just trying to give you the things that we look at day in and day out, trying to sort it out.

Scott Fidel — Stephens — Analyst

No, I get it definitely. That’s why I was asking the question, too. And then just a second question as well and just sort of getting back to the rate discussion. So you’ve given us a few pieces of the puzzle. You’ve talked about how in Texas and Florida, you do have rate increases. Then you talked about a number of the states that have the risk corridor in play. Just interested, sort of the third piece, just in terms of states that have actually implemented cuts for FY ’21. If you could just give us some visibility into that because we have seen a number of your states where the headlines read as cuts haven’t been implemented. I just want to understand whether those are actual cuts to the base rates or does that reflect more of these risk corridor dynamics that you’ve discussed?

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yeah, I think we’ve kind of aggregated all of those. I guess what I would say is — what I mentioned before is the traditional rate setting process where you gather encounter data and trend that forward, etc., etc. That is still — that process continues to go on like normal. I would say the additional factor is some of these risk-sharing mechanisms, etc., etc., or the 1.5% rate reductions that some states have done. And so in general, we’ve accumulated all that and that’s contained in the $500 million that I mentioned that we had in our guidance for this year.

Scott Fidel — Stephens — Analyst

Okay. All right. Got it. So the rate cuts are inclusive within that $0.5 billion headwind?

Jeffrey A. Schwaneke — Executive Vice President and Chief Financial Officer

Yes.

Scott Fidel — Stephens — Analyst

Okay, thanks.

Operator

Our next question is from Lance Wilkes from Bernstein. Go ahead.

Lance Wilkes — Bernstein — Analyst

Yeah. I wanted to ask a question kind of focused on the provider contracting side of the situation. If you could just talk to a couple of items there. One would be near term, what’s the contracting opportunity if there are rate pressures in risk corridors, given the financial status of providers? It seems like with a lot of the bailout money, they should be in a stronger position to maybe be seared back in 1Q, 2Q.

And then secondarily, if you could talk a little more long term on your value-based care initiatives, as well as instances where you’re perhaps getting in care delivery or dabbling at it to see how that’s looking for a long-term aspect of a contracting strategy?

Michael Neidorff — Chairman, President, and Chief Executive Officer

I think on the value-based, some providers are — like it if there’s a capitation rate so that way their cash flow is strong. And when we had a couple who asked if we had a three-month basis, we said no, that’s not how it works. So I understand it. I think there was some trepidation trying to understand what it all means going forward. I think they look good now. But I think as we work through it, we are having success in introducing value-based contracting. And we also know that as we introduce some and they become successful and their provider relations work with them to be successful, others will want it. So we’re trying to do it in a very responsible way that we can support with the reports. So we have real-time reports on how we can support it with. So we see it growing, and we see providers starting to value it.

Relative to our getting involved in care delivery, it’s limited to our model in Florida that has some capability. We’re not into a great deal of that. If there’s a market that has an absence of OB/GYNs, let’s say, or something, we do have the capability to put a clinic in there to help the population get the appropriate access. So it’s a case-by-case basis, but we are not out there grossly trying to buy a lot of providers.

Lance Wilkes — Bernstein — Analyst

And just on the contracting with providers kind of in this COVID environment, are you finding that you’re able to push back on provider rates if you’re getting rate cuts at a state level? Or is the financial situation of the providers still tenuous at this point?

Michael Neidorff — Chairman, President, and Chief Executive Officer

Well, what we’ve done is we’ve waived copays and things because they may not be able to collect it from their members. So we’re doing things to support them. But all those things figure into what we — the calculations we give to states. And as our results is demonstrating, we’re able to continue down that program, support providers. And we do want to support them and help them become more successful, and we have systems that do that. We have a system now that can — it’s in test that — where preauthorization was 18 minutes, we can do it now in three seconds. So we have things like artificial intelligence, and digitalization gets a real focus. That’s going to be moving things ahead for the providers, streamlining what they can do and how fast they can do it. So there’s more than one way to help them.

Lance Wilkes — Bernstein — Analyst

Got you, thanks.

Michael Neidorff — Chairman, President, and Chief Executive Officer

Thank you.

Operator

This concludes the question-and-answer session. I would now like to turn the conference back over to Michael Neidorff for closing remarks.

Michael Neidorff — Chairman, President, and Chief Executive Officer

We thank you. We encourage everybody to stay safe, wear your masks. And I think you can see that we have, as an enterprise, the wherewithal to continue to do well. And — but I’d say we’ll meet reasonable expectations. It’s — one has to recognize the environment we’re still working in, and we want to do it the right way. So stay well. Thank you.

Operator

[Operator Closing Remarks]

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