Centene Corporation (CNC) Q4 2021 Earnings Call Transcript

Centene Corporation  (NYSE: CNC) Q4 2021 Earnings Call dated Feb. 08, 2022

Corporate Participants:

Jennifer Gilligan — Senior Vice President, Finance and Investor Relations

Michael F. Neidorff — Chairman and Chief Executive Officer

Sarah M. London — Vice Chairman

Brent Layton — President and Chief Operating Officer

Drew Asher — Executive Vice President and Chief Financial Officer

Jonathan Dinesman — Executive Vice President, Government Relations

Analysts:

Joshua Raskin — Nephron Research LLC — Analyst

Stephen Baxter — Wells Fargo Securities, LLC — Analyst

Kevin Fischbeck — BofA Securities, Inc. — Analyst

A.J. Rice — Credit Suisse Securities (USA) LLC — Analyst

Scott Fidel — Stephens, Inc. — Analyst

Justin Lake — Wolfe Research LLC — Analyst

Matt Borsch — BMO Capital Markets Corp. (Canada) — Analyst

Ricky Goldwasser — Morgan Stanley & Co. LLC — Analyst

Steven Valiquette — Barclays Capital, Inc. — Analyst

Dave Windley — Jefferies & Company, Inc. — Analyst

Nathan Rich — Goldman Sachs & Co. LLC — Analyst

Gary Taylor — Cowen and Company LLC — Analyst

Calvin Sternick — JP Morgan Securities LLC — Analyst

George Hill — Deutsche Bank AG — Analyst

Presentation:

Operator

Good day and welcome to the Centene Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. [Operator Instructions]

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

Jennifer Gilligan — Senior Vice President, Finance and Investor Relations

Thank you, Rocco, and good morning, everyone. Thank you for joining us on our fourth quarter 2021 earnings results conference call. Michael Neidorff, Chairman and Chief Executive Officer; Sarah London, Vice Chairman; Brent Layton, President and Chief Operating Officer; and Drew Asher, EXECUTIVE VICE PRESIDENT and Chief Financial Officer of Centene will host this morning’s call, which also can be accessed through our website at centene.com.

Any remarks that Centene may make about future expectations, plans, and prospects constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. 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 on October 26, 2021, 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 fourth quarter 2021 press release, which is available on the company’s website under the Investors section.

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

Michael F. Neidorff — Chairman and Chief Executive Officer

Okay. I’ll start over. Good morning and welcome to our fourth quarter 2021 earnings call. I’m joined today by Sarah London, Brent Layton, and Drew Asher. We had a strong ending to 2021. Our portfolio is performing well as we executed across our three major product lines during the fourth quarter, building on our strong foundation and extending our market-leading position in government-sponsored healthcare. Our memberships grew 4% to 26.6 million individuals, driven by increases in Medicaid, strong growth in Medicare, and good performance in our marketplace business. We also welcomed the Magellan team to Centene earlier last month with the acquisition successfully closing exactly one year after we announced the transactions.

We are pleased to welcome the Magellan team led by Ken Fasola and Jim Murray. There is a dire need for mental health care in this country. Two years into it, this pandemic and the acquisition of Magellan will allow us to expand our reach to provide increased access to behavioral healthcare [Phonetic]. In addition, Magellan will give us the capabilities to innovate and reimagine behavioral healthcare significantly enhancing our ability to provide integrated physical and mental healthcare to all our members.

Also in January we welcome five new board members to our board as part of our board refreshment process who bring significant industry and various leadership experiences. Bob Ditmore, John Roberts, and Tommy Thompson have retired from the board, and I want to thank them for their many years of service and contributions to Centene.

As I look back on the onset of the pandemic, I am pleased with how we navigated the uncertainty served our members and grew the business of diversified healthcare enterprise. Just this year we have added $14 billion in America. We have accelerated our plans for our value creation and have a clear pathway ahead to expand our margins and deliver strong multi-year earnings growth. We have the right team and the right strategy with significant opportunities ahead. Finally, I want to thank all our employees who continue to step up and serve our members [Indecipherable] in the underground I couldn’t be prouder of the critical role that we have played in ensuring that our communities stay strong and healthy.

With the highest quality care, particularly during the Pandemic. As you probably hear, I have a little frog in my throat, so I’m going to turn this over to Sarah London who will help manage us through the question-and-answer period and I’ll participate as I want to. Sarah?

Sarah M. London — Vice Chairman

Great. Thank you, Michael, and good morning, everyone. As Michael noted, we delivered a strong fourth quarter performance creating positive momentum as we start the new year and successfully executed on key operational objectives, including the introduction of new marketplace products for the 2022 open enrollment period repositioning that business for success in a constantly evolving landscape, the delivery of another strong annual enrollment period in Medicare Advantage as the value we provide for beneficiaries continues to resonate in the market, and continued progress on our value creation plan including refining margin expansion opportunities and advancing the execution of our highest-priority initiatives.

On today’s call, Brent will comment on our core businesses, including how we are carrying our Q4 momentum forward into 2022, then Drew will provide details on our fourth quarter performance and financial outlook. Before I turn it over to them, let me provide a brief update on the value-creation progress. From a structural perspective, we have added important talent and leadership to our Value Creation Office. As we announced in early January, Jim Murray, who served as Magellan’s President and COO, has transitioned to take on the new role of Chief Transformation Officer, leading the day-to-day management of the VCO. Jim brings experience and operating discipline and a track record for successful execution, adding another important layer of accountability to our value creation program. We are thrilled to have him on board.

Now to the details. As we mentioned at our December Investor Day, 2022 is largely a year of foundational execution, and we plan to provide guideposts on our operational progress, incremental though some may seem, as a way of bringing you on the journey with us and offering a view into the work underway. And while we are only one month into Q1, we have already made progress on some of those key guideposts. First, our pharmacy platform consolidation project. As a reminder, the strategy here is to outsource administrative PBM functions to an external partner, thereby allowing us to reduce our three PBM platform down to one and to focus that technology on the clinical member and provider engagement capabilities that are most important to differentiating the overall member experience. This will drive SG&A savings across the technology footprint and allow for more efficient investment in process automation.

Coming into 2022, we had eight remaining state-specific programs that had not yet been consolidated on our external PBM platform. We successfully migrated three of these on January 1 and another on February 1 as planned. We are targeting the fourth migration for March 1 and the remaining three are scheduled for later in Q2. Overall, we are on track to be fully consolidated in time to issue our planned PBM RFP against our full $38 billion of pharmacy spend. I am pleased to say that work is well underway to prepare for the RFP release this summer, and we look forward to maximizing value for the enterprise through that process.

Since December, we have also made good progress on the efforts we outlined around standardizing and rationalizing core operations. We initiated phase one of our call center standardization, including process mapping as well as beginning the formal enterprise transition of our telephony infrastructure to the cloud. As we mentioned before, this will offer more convenient ways for our members to interact with us and get the information they need. We are starting with our Medicare and marketplace products and expect this work to be completed in early Q3. We also kicked off phase two of our utilization management work, which involves building an enterprise shared services function to serve all three major product lines with a primary focus on enhancing quality and productivity. We completed the Medicare transition, and now have the marketplace transition in motion.

Lastly, back in October, we formally updated our work-at-home policies, as we have learned how to deliver the same level of productivity and service to our members in a more flexible workplace environment. The shift to work-at-home and enhanced flexibility will have a meaningful impact on our ability to recruit and retain talent, but it also means we need to reevaluate our real estate footprint, something Drew mentioned during the December Investor Day. We have already evaluated approximately 25% of our facility locations and see opportunities for a material downsizing of our footprint. Expect updates on that work as we get through the full real estate portfolio.

Finally, I want to touch on the capital allocation pillar of our value creation plan and particularly the portfolio review process. Closing out the story on USMM, we used the proceeds from that majority divestiture to execute $200 million in share repurchases in December. We are aggressively working our way through the non-core portfolio with a consistent, rigorous, and strategic evaluation process. We will continue to provide updates on this work as it progresses.

While the value creation work is critically important, it is also complex. Let me assure you that we have full organizational commitment to our value creation objectives and are laser focused on leveraging Centene’s size and scale to unlock significant value for our stakeholders. But let me also take this opportunity to thank our leaders and our teams throughout the organization, from our local market CEOs and operational leaders to frontline staff and clinical experts, for their enthusiasm, agility, and willingness to think differently and work differently in service of our members.

Overall, our businesses are performing well. We are building on the strength of our core business lines, and we are making meaningful progress on our commitment to margin expansion, all while delivering for our members, state partners, employees, and shareholders.

I’d now like to turn the call over to Brent for some insights on our core business line performance during Q4.

Brent Layton — President and Chief Operating Officer

Thank you, Sarah. Good morning, everyone. I’m happy to be here today to talk about our performance of our core business lines. Over the past two years we’ve discussed how Centene’s size and scale and our ability to be nimble, has allowed us to manage through this pandemic. We remain well positioned to provide quality services in a pandemic environment or a return to more normalized utilization.

Government-sponsored healthcare continues to grow in the U.S. and Centene continues to gain momentum across all of our product lines. Our Medicaid business is still growing with membership increasing to $15 million as we closed out 2021. This growth was aided by the ongoing suspension of redeterminations, which I will talk about more in a moment. We continue to see success in our Medicaid business, such as our new contract in Nevada. In Medicare, we ended the year with more than 1.2 million members across 33 states. As we mentioned in last month, we experienced strong growth during the open enrollment period and remain on track to meet our 2022 expectations. We benefited from the combination of WellCare’s product expertise and Centene’s strong provider network and geographic footprint. In 2022, Centene offers plans in 327 new counties as well as three new states. We continue to see significant opportunity within Medicare as our expanding footprint makes Centene’s product offering available to more than 75% of the country’s eligible beneficiaries.

Finally, in Marketplace, membership was more than 2.1 million at the end of the year, and we are pleased with our open enrollment results. For 2022, we are excited about our product offerings, which have evolved to meet the demands of our members for greater flexibility, accessibility, and affordability. At the same time, we are further expanding our reach, offering Marketplace product in five new states. This year Ambetter is 49% of all counties in the U.S. This product and geographic expansion translated to solid growth during the open enrollment period. And what’s makes the sustained momentum in Marketplace more impactful is the fact that we never participated in a race to the bottom of our rates. We remain committed to returning Ambetter margins back to their long-term pre-tax target of 5% to 7.5%, and I think the initiatives we undertook in Marketplace in 2021 and the pricing discipline showed clear evidence of our ability to execute on our margin goals across all of our business lines.

Before handing the call over to Drew, I want to provide a quick update on our thinking of redeterminations. We continue to work closely with our state partners to understand the timing and how to best support the transition. Our current outlook continues to reflect the return of redeterminations in May, but again, this will not be universal, and the timing will vary state by state. The continuity of care of our members that roll off Medicaid remains a top priority. Our breadth of products and services provides Centene a great opportunity to deliver this continuity of care at a low cost through our Marketplace capabilities. We currently offer exchange products in 25 of our 29 Medicaid states. Overall, we’re pleased with our competitive position of our portfolio heading into 2022.

With that, let me turn the call over to Drew.

Drew Asher — Executive Vice President and Chief Financial Officer

Thank you, Brent. This morning we reported fourth quarter 2021 results, including $32.6 billion in revenue, an increase of 15% compared to the fourth quarter of 2020, and adjusted diluted earnings per share of $1.01 in the quarter and $5.15 for the full year. These results are at the top end of our 2021 adjusted earnings guidance provided at our December Investor Day.

Let’s start with revenue for the quarter. Total revenue grew by $4.3 billion compared to the fourth quarter of 2020, primarily due to strong organic Medicaid and Medicare membership growth during 2021. Total membership increased to 26.6 million, up 4% compared to a year ago. Our Q4 consolidated HBR was 87.9%, consistent with our expectations. As promised, beginning with today’s earnings release and each quarter going forward, you will be able to see the HBR components that drive the overall consolidated HBR: commercial, Medicaid, and Medicare HBRs.

In commercial, you can see the high HBRs in the Q2 and Q3 timeframe driven by the risk adjustment items we covered at our June Investor Day and the Delta variant in the third quarter, as we discussed on the Q3 call. Structurally, Medicaid in the high 80s has the highest absolute HBR of the three business lines. And Medicare, inclusive of our Medicare Advantage and PDP businesses, posted a 2021 HBR in the mid-to-high 80s. As we’ve said before, we believe there’s an opportunity to lower the Medicare HBR as we look to 2023 and beyond.

At an investor conference on January 10th this year, we provided insights about the Omicron variant and related COVID inpatient authorizations rising in the back half of December. As an update for January, COVID inpatient authorizations continued to climb and peaked, at least for now, in mid-January. Interestingly, with the Delta variant, Marketplace was the highest peak of our three business lines and Medicare was the lowest. With Omicron, Medicare was the highest peak and Marketplace was the lowest. But fortunately, the acuity and therefore severity we are seeing with Omicron is lower than the Delta variant and measures like average length of stay and resulting costs per admin are lower than during prior variants. This seems consistent with the lower acuity seen in the national data. One more item on trend. Influenza cases so far continue to be very low compared to a typical year.

Moving to other P&L and balance sheet items. Our adjusted SG&A expense ratio was 9.2% in the fourth quarter compared to 9.7% last year. This was in line with our expectation that our SG&A rate would be the highest in the fourth quarter of the year because of open enrollment spending in both Medicare and Marketplace. Year-over-year improvement reflects leveraging expenses over higher revenues. Some of you have asked about our SG&A rate and our mix of businesses. So let me give you some perspective relative to the midpoint of adjusted 2022 SG&A guidance of 8.05%.

First of all, it’s important to remember that we have and will continue to calculate our SG&A rate and margin metrics off of premium and service revenue, which excludes the forecasted $6 billion of pass-through revenue. And as we covered at Investor Day, we’re breaking out depreciation from SG&A in 2022 and reporting it on a separate income statement line. We expect depreciation to run a little under $700 million for 2022. On an absolute basis, Magellan increases our SG&A rate by approximately 20 basis points, our international businesses increase it by a little over 30 basis points, and our other healthcare enterprise businesses increase it by about 10 basis points, meaning the midpoint of our adjusted SG&A rate for 2022, excluding those businesses, would be in the mid-7s. And our value creation plan is focused on driving that lower over time.

Cash flow provided by operations was $675 million in the quarter primarily driven by net earnings. We continue to maintain a strong liquidity position of $2.3 billion of domestic unregulated cash on our balance sheet at quarter end. Furthermore, we closed our $2.6 billion Magellan transaction right after year-end, which used our available unregulated cash. Our goal continues to be to build cash at parent beginning in the back half of 2022 for additional share buybacks and debt paydown.

On that topic, as Sarah mentioned, during the fourth quarter, we repurchased approximately 200 million of our stock using proceeds from the sale of our majority stake in U.S. Medical Management. Debt at quarter end was $18.8 billion. Our debt-to-cap ratio was 40.9%, excluding our non-recourse debt. Our medical claims liability totaled $14.2 billion at quarter end and represents 52 days in claims payable compared to 51 days and Q3. Our balance sheet remains strong, and we expect it to strengthen even further as we improve margins and generate cash flow.

As we begin 2022, we’re building on the positive momentum from our fourth quarter results as well as our organizational commitment to the value creation plan. We are reiterating our full year 2022 financial guidance, including expectations for adjusted earnings per share of $5.30 to $5.50. As you think about the seasonality of 2022 earnings, it looks like consensus is about 58% of adjusted EPS in the first half of the year and 42% in the back half, and that’s a pretty good proxy for our estimates. And as you heard from Brent, we are pleased with our execution in the annual enrollment periods for Medicare and Marketplace and are well positioned to achieve our 2022 membership expectations. Overall, our 2021 performance demonstrates the strength and agility of our organization. As Sarah touched on, we have a lot of work in motion to drive our multi-year financial commitments in the value creation plan.

We look forward updating you on our progress as we move through the year. Thank you for your interest. Operator, Rocco, can you please open the line for questions?

Questions and Answers:

Operator

[Operator Instructions] [Operator Instructions] Today’s first question comes from Josh Raskin at Nephron Research. Please go ahead.

Joshua Raskin — Nephron Research LLC — Analyst

Hi, thanks. Good morning. I just wanted to follow up on the process around potential divestitures in non-core assets, and I understand the complexity, Sarah, that you mentioned. I think I’m specifically interested if there’s an opportunity to include certain PBM assets as part of this RFP process that you’re starting and then if you could just remind us on thoughts on international as well.

Sarah M. London — Vice Chairman

Yeah, absolutely. So as we’ve said, there are no exceptions to the portfolio review process. We’re being very clear-eyed about all those non-core assets. We really used USMM to codify that process and then we’ve been prioritizing the largest and most independent of the assets, which is why you heard an update on international. And as I’m sure you can appreciate, for specific updates on execution phase are not always going to be able to be shared incrementally, so we’ll definitely share updates with you that we can as we have them.

On the PBM front, our strategy there overall has not changed. And so the various PBM assets, including the inbound Magellan assets, are going through that portfolio review process and I think will be subject to the same criterias as all the other assets. So stay tuned for more updates on that.

Joshua Raskin — Nephron Research LLC — Analyst

Great. And just a quick follow-up. Can you just remind us any RFPs that are coming up in the next year or two where Centene is the incumbent?

Brent Layton — President and Chief Operating Officer

Well, first of all, we’re waiting to hear our award in Louisiana, so still waiting on that. No timetable or update, but waiting on Louisiana’s award. We are anticipating the California RFP to be released this month, and we’ve been preparing for that.

Joshua Raskin — Nephron Research LLC — Analyst

Okay, thanks.

Operator

Thank you. And our next question today comes from Stephen Baxter at Wells Fargo. Please go ahead.

Stephen Baxter — Wells Fargo Securities, LLC — Analyst

Hi, thanks. So the commercial MLR and the new disclosure has improved quite meaningfully versus Q3. So obviously that runs against the typical seasonality here. Appreciating the commentary on Omicron. I was hoping you could talk a little bit about how utilization versus baseline levels trended from Q3 into Q4 and then I guess also whether there’s any revenue impacts to consider since it looks like PMPMs were up a little bit. And then any impact from stuff like favorable developments you flagged. Just trying to understand the moving parts versus core utilization in the quarter. Thank you.

Drew Asher — Executive Vice President and Chief Financial Officer

Yeah. Sure, thanks. Q3, as I said in my remarks, that’s when we got hit with the Delta variant largely peaking in August. And Marketplace, which is the vast majority of that commercial line item, took it the hardest in terms of the relative peaks compared to prior variants. And it was the opposite of that with the Omicron variant, which started in the back-half of December. So I think that’s the — largely the Q3 to Q4 progression that you’re observing in that table. Nothing else notable in terms of prior period development. We seek to reestablish at similar levels based upon consistent reserve methodology. So I think that was the driver that caused that. Rocco?

Operator

Yes, sir. And our next question today comes from Kevin Fischbeck of Bank of America. Please go ahead.

Kevin Fischbeck — BofA Securities, Inc. — Analyst

Great, thanks. I was wondering if you could talk a little bit about the exchange environment. At least one of your competitor is scaling back pretty significantly highlighting irrational pricing on the exchanges. So I think you talked about being able to improve margins this year. Can you just help us remind us where your margin target is for this year versus that long-term target and how much of getting to that long-term target is based upon what you have in control or whether some of that is based upon if you agree that some people are irrational that pricing, broadly speaking, returning to a normalized rate?

Brent Layton — President and Chief Operating Officer

Yeah. Good questions, and they’re all around Marketplace. As we sat here over the summer of 2021 with new product development, we’re thinking about how to respond to competition, and continuing to hone our portfolio for Marketplace, coupling that with a more disciplined financial bid approach, at least for those bids that were still open in that timeframe. We expect meaningful movement in that HBR going from 2021 to 2022, I’ll walk you back to our Investor Day and the conference that we were at on January 10th, we expect about a 500-basis-point improvement year to year in our commercial. So that commercial line that we price for and expect to execute on a pretty meaningful improvement, which still won’t get us to our final destination that 5% to 7.5% pre-tax zone for Marketplace. So it’ll be a meaningful movement and, of course, there were some things that we got hit with in 2021 that won’t reoccur. That will be part of it, but we made conscious decisions on pricing, which is why we’re so pleased to be 2 million plus in terms of membership coming out of the open enrollment period.

Operator

Thank you. Our next question today comes from A.J. Rice from Credit Suisse. Please go ahead.

A.J. Rice — Credit Suisse Securities (USA) LLC — Analyst

Yes. Hi, everybody. Thanks for the question. I think in the prepared remarks it was mentioned that Medicare margins, HBR you think will improve in ’23 and beyond. I guess I just wonder if you could flesh out more what are the levers to allow that to happen. Is it an expectation about improvement in Star ratings? Is it an expectation of some of the rapid growth you’ve seen recently, some of those members maturing? Give us a little flavor for how you have the visibility in ’23 and beyond by improving. And maybe my follow-up would be just to flesh out, I know Brent mentioned the California RFP. There’s been some discussion in the press about potentially a preemptive deal with Kaiser and just any assessment of the RFP process, anything different about that that you’d like to call out or highlight or give us perspective on?

Brent Layton — President and Chief Operating Officer

A.J., I’ll start and then I’ll kick it over to Drew. In regards to I think the announcement you’re talking about is Kaiser Permanente. We do not subcontract with Kaiser Permanente in California. So it does not change our RFP strategy or any of our approach into procurement that will be forthcoming. I’ll turn over to you, Drew.

Drew Asher — Executive Vice President and Chief Financial Officer

Yeah. Then on Medicare, yeah, A.J., it’s a comprehensive project plan which touches a number of the areas you mentioned. So it’s not just pulling clinical initiatives, and we’ve got a slate of dozens of those initiatives that we’ve brought from other experiences and we’ve seen work in other places. It’s also the bid process and, quite frankly, having a little bit more of a discipline and a tradeoff between growth and margin. And what I’m pleased at is our base of business is 50% — will be 50% higher coming off of the 2021 and 2022 open enrollment period. So expect growth to slow considerably in Medicare, but that’s a heck of a base to then approach the margin expansion opportunity.

And so the bid process pushing towards margin, it’ll be a multi-year effort. We’re not going to try to go get it all in one year because we’ve got to balance the attractiveness of our products. You’re right to mention Stars. Stars will be a little bit more volatility over the next few years. The Star scores that were released in ’21 called the rating year ’22 which result in 2023 revenue looked good. Now we were aided by the disaster relief provisions. And between that and some other operational challenges, these Star scores that are released in October of 2022 called the rating year ’23 Star scores, which result in 2024 revenue, we expect, as I mentioned on the third quarter call, those to drop. And we’ve got a lot of work to do to improve our execution around Stars as we look at what we can impact today are essentially the rating year ’24 stars for revenue in ’25. So we’ll have to manage through those cycles, but there are a number of levers to pull in clinical initiatives. And just, as Brent mentioned earlier, harnessing the assets of the combined company and continuing to push for excellent operational execution.

Operator

Thank you. And our next question today comes from Scott Fidel with Stephens. Please go ahead.

Scott Fidel — Stephens, Inc. — Analyst

Hi, thanks. Good morning, everyone. Actually just quickly wanted to tack on to A.J.’s question just on the Medicare margin side, just wanted to get your initial thoughts on the advance notice that just came out for 2023 seemed pretty solid from my perspective, but just interested in how that reinforces your confidence on getting that margin improvement in MA. And then just as a follow-up just appreciate the color that you’ve given us on the year-over-year expected change in MLR for commercial. Just interested if there’s anything you’d want to call out for us in thinking about Medicare and Medicaid MLRs in 2022 versus 2021. Obviously, now we’re all going to be tracking those metrics closely now that you’re providing them. So just if there’s anything you want to call out ahead of time that would be helpful as well. Thanks.

Drew Asher — Executive Vice President and Chief Financial Officer

Oh yeah, absolutely. And in fact, to point you back to the Investor Day slide where we gave a specific bridge by major line of business of HBR progression from 2021 to 2022. And so if you do the math that shows the impact on the entire HBR. So if you divide that by the percentage that that business represents, you get to the 500 basis points in commercial. Medicare, we expect around flat. Once again, we didn’t price to improve, nor do we think it will degradate in 2022. And that creates an opportunity for ’23 and beyond in Medicare. And then in Medicaid, we talked about the last few times we were in public forums talking about a reversion to the mean and utilization returning to a more normalized HBR in Medicaid, which would be up about 130 basis points year to year. You see that represented in that waterfall from our Investor Day slides at 90 basis points. But that applies to the entire HBR is 130 if you just isolate Medicaid itself. And then the advance notice, I think what it does demonstrate is bipartisan support for the Medicare program and agree those rates and elements, so far, we expect to be workable for next year.

Operator

Thank you. And our next question today comes from Justin Lake at Wolfe Research. Please go ahead.

Justin Lake — Wolfe Research LLC — Analyst

Thanks. Good morning. I actually wanted to follow up, Drew, on your comments around Medicaid specifically. When you talked about margin normalization, 130-basis-point move is pretty significant in Medicaid. Can you give us an idea where those margins were in ’21 and where you expect them to normalize in ’22 to start off?

Drew Asher — Executive Vice President and Chief Financial Officer

I think you’ll have to orient yourself to the HBRs and track in that manner. And don’t forget, we also had pharmacy carve-outs in a couple of our states. So that was not insignificant, the impact of that, especially in California. So that was a progression — a mathematical progression right off the top. And then, yeah, we’re making forward estimates of — we see returning at least in like emergency room access for Medicaid on the emergent side, so things that are truly emergent, that has returned. The non-emergent we think there’s still an opportunity to keep some of that suppressed and redirect members to their PCPs and physicians. So it’s a culmination of forward estimates and a view into the rate — so the rate environment for Medicaid.

Justin Lake — Wolfe Research LLC — Analyst

Okay. Maybe — again, I don’t want to pin you down on the 10 basis points, but for instance one of your peers talked about Medicaid margin target closer to 4%. Most of the others talked about a midpoint, closer to 3%. Maybe you can help us just orient to that in terms of what you think normal is.

Drew Asher — Executive Vice President and Chief Financial Officer

Yeah. Going back to our June Investor Day where we first laid out our NorthSTAR margin goal of 3.3% after-tax and explained that’s 4.4% pre-tax. Medicaid is going to be a little bit below that, but it can’t be too far below that because it’s over 60% of our business. So maybe that helps you frame in your models the different businesses. Medicare would be above the average and then marketplace the highest of the three at the 5% to 7.5% pre-tax zone as far as long-term targets.

Operator

Thank you. And our next question today comes from Matt Borsch of BMO Capital Markets. Please go ahead.

Matt Borsch — BMO Capital Markets Corp. (Canada) — Analyst

Yes. Maybe if I could just continue on the Medicare Advantage product. Should we take as from what you’re saying that you’re going to be more conservative or you plan to be in your approach on bidding Medicare Advantage for 2023. And then associated with that, the follow-up, if you could just talk about the level or intensity of competition that you are seeing in Medicare Advantage today.

Drew Asher — Executive Vice President and Chief Financial Officer

I’ll tackle the first piece and then Brent, who’s really close to this on a daily basis and competition, can follow up. I think, Matt, by definition if we’re going to be seeking to expand margin, obviously there’s a trade-off there. You shouldn’t expect us to grow 30% like we did last year in terms of membership, which was just a phenomenal top line result. But now we’ve got to convert some of that to deliver on margins. So, yeah, by definition, we will be pushing margin harder in ’23, ’24 and ’25 bids than we did in the ’21 and ’22 bids, and that’s just sort of the opportunity that stands in front of us.

Brent Layton — President and Chief Operating Officer

There’s always going to be competition, whether it’s Medicare Advantage or whether it’s Marketplace. I would say though that the smaller players in Medicare Advantage really did not have a meaningful impact in regards to our results and our growth. We feel good about our positioning over ’22 and ongoing.

Operator

Thank you. And our next question today comes from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Ricky Goldwasser — Morgan Stanley & Co. LLC — Analyst

Yeah, hi. Good morning. So as we think about MA in 2022, from what we saw, you meaningfully invested into very rich benefits. So how should we think about Medicare margins in 2022? Maybe you can give us some baseline that we can think of as we’re thinking of that margin expansion opportunity in ’23 and beyond. And then if you can comment on just what you’re seeing for core utilization versus baseline and how is that factored into ’22 guidance in terms of just use of ER and acuity levels. Thank you.

Drew Asher — Executive Vice President and Chief Financial Officer

Yeah, Ricky. I think I’d ask you to orient to the Medicare HBR that we disclosed for 2021 and our expectation of that being in the zone of flat consistent ’21 to ’22. That, as we explained at Investor Day, it’s one of the pieces that our guidance is predicated on. And then, yeah, every — on utilization, every wave, Omicron or every COVID wave since the beginning, there’s a — the deferrable services are less and less impacted. Doesn’t mean we don’t think there are — channel checks tell us that there are surgeries that were being rescheduled for February that would have otherwise been done in January, but the providers are getting more and more resilient in terms of being able to manage both. So there’s been a continuing return to call it normal utilization over the past six to nine months. Some areas aren’t fully there. Like I mentioned, the non-emergent — emergency room, which is good, and hopefully that’s a structural change for the industry. We’re certainly working with our members and our physicians to try to get members to engage directly with their physicians for non-emergent services. But all that’s factored into the progressions of our HBRs that we laid out at Investor Day.

Operator

Thank you. And our next question today comes from Steven Valiquette with Barclays. Please go ahead.

Steven Valiquette — Barclays Capital, Inc. — Analyst

Great. Thanks. Good morning, everyone. So a question around Medicare Advantage. Obviously, the early CMS data looks promising for Centene’s MA membership growth for ’22. But just given the greater-than-average industry volatility in this year’s Medicare AEP, just curious if you can remind us just on Centene’s profile on how much of your typical MA membership growth is maybe driven by internal sales efforts versus reliance on external channels and do you expect any notable changes in that mix going forward just given some of the volatility that we’re seeing and other trends across the MA marketing efforts? Thanks.

Drew Asher — Executive Vice President and Chief Financial Officer

Yeah. We’re not really seeing that volatility you’re referring to. We’ve got multiple channels that the Medicare team over the past four, five years has developed multiple channels, the W-2 workforce going back a long ways back and then more recently the last three or four years tele-digital. We’ve got — we actually created our own direct-to-consumer proprietary internal capability. That’s another channel. We’ve got the brokerage channel which we honed probably a few years ago after the Universal American acquisition. So we’ve been working on this for a number of years and then the merger with Centene gave us, as Brent mentioned, access to a much broader footprint and quite frankly network to complement what WellCare had built along the way. So just to give you one data point. I think what you’re getting at is that distribution channel of tele-digital and telemarketing, it’s about half of our sales, but it was about half of our sales last year, too. So not a real change in the distribution of where we’re getting our growth from.

Operator

Thank you. And our next question today comes from Dave Windley at Jefferies. Please go ahead.

Dave Windley — Jefferies & Company, Inc. — Analyst

Hi, good morning. Thanks for taking my question. I was wondering in Medicaid, if you’re able to do analytics that would either tell you explicitly or give you hints as to which members were likely to be redetermined off when that turns back on, and if you can see that, what are the relative claims patterns of those people or the HBR on that subgroup versus the whole? Thanks.

Drew Asher — Executive Vice President and Chief Financial Officer

Yeah. No, obviously, we’ve been thinking about that. And while there are some characteristics, we don’t have good employment data on those that may have gotten employment since they originally qualified for Medicaid. There are some cohorts such as moms post-delivery in some states, depending on state eligibility rules, that they might have otherwise rolled off at a certain point postpartum. So we can look at some of that. But there’s not — it’s not like you’ve got a cohort that we’re getting with a rate sell that says, to be redetermined in the future, so we can make estimates of that. And we’ve seen over time the impact of eligibility going up and down the FPL scale. But we think we’re well prepared for that time when it comes we’ll see if it pushes out past our may first assumption, which our guidance is built on. And the teams are really focused on 25 out of 29 states being prepared. And I think Brent could probably add some color — some interesting color for you guys on our engagement with states on that topic.

Brent Layton — President and Chief Operating Officer

Yes. We have been in constant contact well into — starting last year with both the federal government and obviously our state partners. And, as Drew said, we’ve really built a platform between our exchange through to Medicaid and from that standpoint, whether it’s network, communication, and planning, we’re preparing for this. So whenever that date is, we believe that we have the ability to really be a solution as people want to — obviously, states want to make sure their citizens have health insurance coverage. We’ve been working with them and we’re preparing for it.

Operator

Thank you. And our next question today comes from Nathan Rich at Goldman Sachs. Please go ahead.

Nathan Rich — Goldman Sachs & Co. LLC — Analyst

Hi, good morning. Thanks for the questions. Drew, could you maybe just remind us whether the ’22 guidance includes any expected savings from the value creation plan? I think going back to the December Analyst Day, the SG&A bridge had 15 basis points of leverage on the core business, but I wasn’t sure if that included anything specifically from the program. And then it sounds like the company is tracking well against the early guideposts that you laid out, especially around pharmacy. I guess I’d just be curious is there a potential to see savings from some of those actions this year as we think about progression over the balance of the year.

Drew Asher — Executive Vice President and Chief Financial Officer

Yeah. It’s a really good question on the jump-off point, because we’re crystal clear internally also the midpoint of $5.40 for 2022 is a jump-off point upon which we will pull levers to get the $2 of opportunity, including the SG&A bucket, that $700 million of SG&A bucket that we laid out at Investor Days. So those should be incremental largely showing up in ’23 and ’24 but incremental to the jump-off point of the $5.30 to $5.50 guidance. And Sarah can give you an update on some of those activities.

Sarah M. London — Vice Chairman

Yeah. As you noted, we are making good progress. We are very focused on hitting those EPS targets for ’22, ’23, and ’24, and we’ll always look for upside. But I think the way we look at it, you don’t get to kick the extra point if you don’t score the touchdown first. So we’re staying really focused on our goals first and foremost in year.

Operator

Thank you. And our next question today comes from Gary Taylor at Cowen. Please go ahead.

Gary Taylor — Cowen and Company LLC — Analyst

Hi, good morning. Well, first, I just want to say hello to Michael and wish him well. But I did want to see if there was any updates.

Michael F. Neidorff — Chairman and Chief Executive Officer

Thank you. I’m still here listening. So thank you.

Gary Taylor — Cowen and Company LLC — Analyst

Oh thanks. Hi, Michael. Wondering if there’s any update on CEO search and process timing you can provide? Another five new board members in January. But is that likely a first half or second half announcement? And is there any visibility for investors outside of we’ll just wake up one day and we’ll see who the CEO is?

Michael F. Neidorff — Chairman and Chief Executive Officer

Let me start that, so there’s a process we’re going through that’s following good governance. We’re looking at various candidates. And we recognize that some time ago [Indecipherable] what was publicized I had talked about that. I’d spoken to the board about my desire to step down as CEO. And the process is in place. I don’t think I can say too much more than that. We’d be getting over our skis. So there’s a clear process and I hope to see it resolved between now and mid-year at the latest.

Operator

Thank you. Ladies and gentlemen, our next question today comes from Calvin Sternick with J.P. Morgan. Please go ahead.

Calvin Sternick — JP Morgan Securities LLC — Analyst

Yeah. Hi, good morning. Just wanted to ask on the exchanges and the enhanced subsidies and any update on legislation and timing for something to get done there and just any sense for the likelihood that something will get done there in 2022. Thanks.

Michael F. Neidorff — Chairman and Chief Executive Officer

Drew, you want to start…

Drew Asher — Executive Vice President and Chief Financial Officer

I’ll start and…

Michael F. Neidorff — Chairman and Chief Executive Officer

Brent, you want to start it and then let Brent pick up.

Drew Asher — Executive Vice President and Chief Financial Officer

Michael, I’ll start that, then I’ll let Jon Dinesman speak from there. It’s clearly a priority of the Biden administration. This has clearly had an impact. It’s clearly led to large enrollments from that standpoint. We do anticipate that there’ll be many efforts, and we anticipate future legislation. But Jon, I’ll let you add to that, sir.

Jonathan Dinesman — Executive Vice President, Government Relations

Yes. The one thing that’s important is it had strong support coming out of the house. Also maintained that strong support in the senate. So there’s a clear recognition, especially by the Democrats, that this was critical to strengthening the ACA and even the [Indecipherable] proposal included this. So anybody who guesses on timing is really doing a guess, but we still feel like confident that if there is a bill that passes that this will be included on.

Operator

Thank you. And our next question today comes from George Hill at Deutsche Bank. Please go ahead.

George Hill — Deutsche Bank AG — Analyst

Yeah. Hey, good morning, guys, and thanks for taking the question. Just on the PBM project. I guess as the project continues to press along, are you able to give us any more color maybe on which parts you feel like you want to insource versus you feel like outsource? Do you feel like this is a complete outsourcing project, or you guys hold on to higher-value projects like formulary, network management? Just as we think about the scope of the RFP and the outsourcing project, just what stays and what goes?

Sarah M. London — Vice Chairman

Yeah. It’s a great question. I would say, we have a pretty strong operating hypothesis going into the RFP about what pieces we want to partner for and what we want to keep in-house, but we’re also doing a pass at that work through the lens of value creation to make sure that we still feel like that hypothesis holds. And I think some of that will also be informed, quite frankly, by the conversations that we have with potential partners through the RFP process. But I would say, on balance, keeping those capabilities that allow us to create a differentiated experience for our members and providers is always going to be the priority.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to the management team for any final remarks.

Michael F. Neidorff — Chairman and Chief Executive Officer

Thank you. I want to thank everybody for joining us today, and we look forward over the course of the year to continue to report our results. Clearly, I believe we have a right product mix, the right strategy for those products, the margin expansion program is clear and everyone in the organization knows what has to be done. And most importantly, we have the right team working on these things to bring it home. So I’m really looking forward to the results for the balance of the year. Thank you for participating.

Operator

[Operator Closing Remarks]