Centene to cut more than half of its leased real estate footprint

Centene Corp. will shed more than half of its U.S. leased real estate space as part of its ongoing “value creation plan.”

More than 90% of the company’s workforce has worked remotely during the pandemic and last year, Centene expanded its permanent and hybrid remote work options after receiving positive feedback from employees, the company previously said.

During the insurer’s first-quarter earnings call Tuesday, CEO Sarah London said the plan to cut more than half of its leased space followed those trends.

“Given our commitment to increased work from home and flexible work models we are in the process of determining the necessary square footage to support our employees moving forward and anticipate a significant downsizing of our current leased space,” London said.

It was London’s first earnings call since succeeding longtime CEO Michael Neidorff in March. Neidorff had announced his retirement before dying earlier this month.

In its annual report filed in December, the company said it expected to pay $389 million in lease operating expenses in 2022, a slight decrease from the $390 million it paid in such expenses last year, according to its annual report filed with the U.S. Securities and Exchange Commission. Real estate and equipment costs make up the bulk of Centene’s these expenses. Centene recorded a total lease liability at the end of last year of $3.8 billion.

Regulators require Centene to have offices in every service area it operates. Centene generally leases space in the states where its health plans, specialty companies and claims processing facilities do business, Centene said in the annual report.

The insurer did not respond to an interview request about what locations and job functions would be affected, or about the financial impact of its plan.

“We expect to reduce over half of our domestic leased real estate footprint,” Brent Layton, president and chief operating officer, said during the call. “Though there will be a one-time cost to this, which we will frame for you in Q2, the run rate benefit will be a nice contributor to our value creation goals.”

Cutting its real estate footprint represents one part of Centene’s plan to increase its adjusted net income margins by 3.3% by 2024. During the earnings call, executives said automating call center operations, consolidating IT services, divesting non-core business lines, and investing in member experience and value-based care initiatives to boost its Medicare STARS ratings were part of this strategy.

The insurer announced a value creation plan in November 2021 after its comparatively low profit margins attracted the attention of activist investor Politan Capital Management, which took a $900 million stake in the insurer. Since then, Politan has focused on growing Centene’s value by selling certain subsidiaries and overhauling the company’s leadership and board.

The company’s first-quarter earnings call brought more changes to its leadership structure. London announced the office of the CEO was expanded to include Jim Murray, chief transformation officer, and Ken Fasola, head of its Magellan Health subsidiary who also oversees Centene’s non-insurance healthcare services arm.

The inclusion of the former Magellan Health leader to Centene’s office of the CEO comes three months after the pharmacy platform took over management of the nation’s largest Medicaid prescription drug program. Magellan Health’s $302 million annual contract to manage California’s Medi-Cal Rx system went live at the start of the year.

As soon as the contract went live, patients and providers began complaining of delays processing prior authorization requests, with some individuals waiting on hold with Magellan’s call centers for eight hours at a time. California state regulators withheld $3.8 million from January contract over the delays.

The state’s Department of Health Care Services is investigating Centene over allegations the company overcharged the California Medicaid department for drugs. The insurer has reached no-fault agreements with nine states to settle similar allegations, and reserved $1.25 billion for these deals.

Centene receives the majority of its revenue from Medicaid managed-care contracts, and California represents its largest market with 2.14 million enrollees. The state accepted new bids to run its Medicaid managed-care program until April 11, and will announce winners in August.

Centene has submitted a bid to continue to run California’s Medicaid managed-care program and does not expect complaints about Magellan Health to influence state regulators contract decision, London said during the call.

“There were challenges out of the gate, but I think the team recovered incredibly well,” she said. “You’d have to ask California, but the signals we’re getting from them is that they’re very happy with the collaboration and the partnership.”

Growth in the company’s core Medicaid business helped Centene increase first-quarter net income by 21% year-over-year, to $849 million, and revenue by 24%, to $37.1 billion. Centene is the largest Medicaid carrier in the nation, with more than half of the company’s 26.2 million members coming from the public health program. The continued suspension of eligibility reviews during the public health emergency helped propel Centene’s growth.

As part of the pandemic relief effort, states paused removing people from Medicaid during the public health crisis, even if changes to their income or residency meant they no longer qualified. Centene expects states to begin re-evaluating members’ Medicaid eligibility in August.

The insurer expects half of the 2.8 million lower-income adults and children it gained during the redetermination suspension period to no longer be eligible for the public health program and, as a result, to lose $6 billion in revenue, executives said during the call.

To mitigate the loss, Centene is focused on transitioning those individuals to its marketplace plans by working with states to market their options to their members. The company expanded its exchange products to 25 of its 29 Medicaid states in 2022, increased its premiums to capture more silver members and is working with providers and state regulators to pre-emptively identify and market to Medicaid members who it expects will no longer be eligible for the public health program, Layton said during the call. In some instances, Layton said the insurer is texting prospective marketplace members about their options.

The Biden administration’s move to close the family glitch, as well as the sunset of exchange subsidies at the end of this year, could also affect the insurer’s exchange membership. Fifteen percent of Centene’s 2 million marketplace members rely on enhanced tax credit subsidies, he said.

“We’ve gotten very good distribution for the exchange and we’ll continue to do that,” Layton said.