Centene CEO Michael Neidorff will retire as head of the nation's largest Medicaid carrier next year amid a leadership shake up and formal agreement with activist investor Politan Capital Management, the company announced Tuesday.
Neidorff has served as chief executive of the $32.4 billion company for a quarter of a century and his $25 million compensation package represents the highest among health insurer CEOs. Neidorff will remain as executive chairman until the end of next year. The 77-year-old advised the board of his plans to leave over summer, according to the company. Centene intends to have a new CEO in place by the end of 2022.
"I am confident our company is well positioned to ensure a smooth transition," Neidorff said in a news release. "With the value creation plan in place, the governance enhancements announced today, and our strong leadership team, I have never been more confident in the future success of this company."
Centene also is reconstituting and expanding its board of directors in advance of the leadership search.
Politan Capital Management, which acquired a $900 million stake in the company this year, flexed its muscles and gained partial authority over the board's makeup. The insurer and the hedge fund have entered into a formal cooperation agreement, Centene also announced Tuesday.
Given how the company's stock price has underperformed compared with other insurers, the fraud allegations faced by Centene's now-defunct pharmacy benefit manager and recent acquisitions of WellCare and Magellan Health, the company was likely forced to make leadership and operational changes, said Blake Madden, a healthcare analyst at VMG Group. Investors seemed to applaud Neidorff's retirement, with Centene stock Tuesday reaching its highest point in at least 20 years, he said.
"They very much seem as if the whole operation is in transition, from recent acquisitions and their value creation proposal on multiple fronts," Madden said.
As part of the arrangement with Politan Capital Management, Centene will appoint five new board members in early January and require board members to retire when they reach 75 years old, the company disclosed to the the U.S. Securities and Exchange Committee Tuesday. Three board members will retire immediately and another three will depart at some point over the next two years.
Centene also is growing its board from 13 members to 14. As of Jan. 5, four new board members will take seats: Ken Burdick, the former head of WellCare, a Medicare and Medicaid insurer Centene bought for $17.3 billion in 2019; Christopher Coughlin, former chief financial officer of Tyco; former Anthem executive and executive board chairman of Surgery Partners Wayne DeVeydt; and Theodore Samuels., former president of Capital Guardian Trust Company investment management firm.
Centene and Politan Capital Management will mutually choose a fifth new board member.
Current director James Dallas will become lead independent director immediately and assume the independent chair by the end of next year.
"The scope of the changes embraced by Centene demonstrates a true commitment to improved corporate governance and constructive engagement," Politan Capital Management Managing Partner Quentin Koffey said in a news release.
Along with the new five appointments come six retirements, including Neidorff. Robert Ditmore, John Roberts and Tommy Thompson will leave from the board next year, and Orlando Ayala and Richard Gephardt will not stand for reelection at the company's 2023 annual meeting or will retire before then.
Five executives will also join the company's value creation plan steering committee, which is in charge of charting growth for the company. Centene plans to grow adjusted net income margins 3.3% by 2024 by automating call center and provider engagement operations and reevaluating its real estate footprint.
The insurer expects these moves, along with plans to implement artificial intelligence for prior authorization requests and ink more value-based contracts, to save $700 million in general and administrative costs, Madden said. The insurer also believes it could save $500 million through more disciplined management of medical spending, he said.
Because Centene operates in government markets, its margins are low but its revenue base is huge, meaning that any basis point improvement in margin leads to a large increase in profitability, Madden said.
"This type of transformation is something that all insurers will eventually have to go through," he said, comparing Centene's shifting strategy to CVS Health's moves to more fully integrate the insurer Aetna into its operations and UnitedHealth Group's plan to make its Optum health services subsidiary consumers' first point of contact with the company, as opposed to its UnitedHealthcare insurer arm.
"Value-based care providers are pushing the traditional healthcare giants to innovate internally, and Centene is doing the same to cut costs, streamline its experience and be more consumer-facing," Madden said. "It's all good for the industry and I hope the patient experience continues to improve dramatically over the next several years."
Centene has also been on a selling spree as of late.
Last week, Centene announced it is seeking a buyer for its $2 billion international business. The month before, the company sold a majority stake in home health provider U.S. Medical Management to a group of private equity firms. Centene also paid $229 million during the third quarter to transition from using the RxAdvance automated drug pricing tool.
The company is exiting the PBM space and has budgeted $1.25 billion to settle allegations its now-defunct Envolve PBM overcharged state Medicaid departments for drugs. It has so far paid out $246.4 million to Arkansas, Illinois, Kansas, Mississippi and Ohio. And a shareholder sued Centene, demanding information about how much senior executives knew about its former PBM's Medicaid activities.