Centene Corporation (NYSE: CNC) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparative period is Q1 2023. Centene provides government-sponsored healthcare coverage, principally Medicaid, Medicare and Marketplace plans. The statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change / context |
|---|---|---|---|
| Total revenue | $40.4 billion | $38.9 billion | Up 4% |
| Premium and service revenue | $36.3 billion | $35.0 billion | Up 4% |
| Operating earnings | $1.106 billion | $1.218 billion | Down 9% |
| Net earnings attributable to Centene | $1.163 billion | $1.130 billion | Up 3% |
| Diluted EPS | $2.16 | $2.04 | Up 6%; adjusted diluted EPS was $2.26 versus $2.11 |
| Health benefits ratio (HBR) | 87.1% | 87.0% | Higher medical costs as a share of premium revenue |
| SG&A expense ratio | 8.9% | 8.6% | Adjusted ratio was 8.7% versus 8.5% |
| Gross margin | $4.736 billion | $4.648 billion | Up 2% |
| Operating cash flow | $(456) million | $4.269 billion | Cash used in Q1 2024 |
Balance sheet at March 31, 2024: Cash and cash equivalents were $17.585 billion; current assets were $38.448 billion and current liabilities $32.784 billion, producing working capital of approximately $5.7 billion. Total debt was $18.0 billion, including $17.887 billion long-term debt; the debt-to-capital ratio was 40.0%. The company reported covenant compliance and $350 million drawn on its revolving credit facility.
Investing activities provided $852 million, mainly from divestiture proceeds; financing activities provided $23 million. Operating cash use reflected timing of experience rebate payments, a state premium payment received in April, and pharmacy rebate remittance timing during transition to a new PBM. Q1 share repurchases totaled $151 million, including $51 million under the repurchase program. Approximately $5.178 billion remained authorized at quarter-end.
Material changes and business drivers
- Marketplace growth drove revenue: Commercial revenue rose 48% and Commercial gross margin rose 66%, supported by 41% Marketplace membership growth and improved product margins.
- Medicaid revenue fell 2% and gross margin fell 12%, primarily due to membership losses from Medicaid redeterminations and higher member acuity. Total managed care membership was 28.4 million, down 33,000 year over year; Medicaid membership declined while Marketplace and Medicare PDP membership grew.
- Medicare revenue increased 1%, but gross margin declined 37%, reflecting lower Medicare Advantage revenue tied to Star ratings and continued elevated utilization. Medicare PDP membership rose 44% year over year.
- Other segment revenue declined 25% and gross margin 45%, largely reflecting divestitures, including Circle Health and Operose Health.
- Investment and other income rose to $545 million from $353 million. Q1 2024 included higher investment income and gains related to Magellan Specialty Health ($81 million), property ($24 million), Circle Health ($10 million) and HealthSmart ($7 million). Operating earnings nevertheless declined.
Outlook, risks and unusual items
- The filing does not provide a specific full-year earnings or EPS forecast. Management expects approximately $2.9 billion in net dividends from insurance subsidiaries and approximately $450 million in additional capital expenditures during the remainder of 2024. It expects available cash, investments, operating cash flow and credit-facility availability to fund operations and capital expenditures for at least 12 months from the filing date.
- Medicaid redeterminations were expected to be largely completed in Q2 2024, though some states could extend beyond that period due to CMS compliance actions. Management cited rate alignment with changing Medicaid acuity as an ongoing focus.
- A $300 million premium deficiency reserve was recorded for 2024 Medicare Advantage business, increased from $250 million in Q4 2023 to reflect seasonality. The company cited Star-rating impacts and elevated utilization; it is pursuing a multi-year quality improvement plan.
- Adjusted EPS excludes specified items and is non-GAAP. Q1 adjustments included acquired-intangible amortization, acquisition/divestiture costs and other items. GAAP results included divestiture-related gains, a $13 million Health Net Federal Services asset impairment following a final TRICARE contract ruling, $9 million restructuring severance costs, and an approximately $45 million net tax benefit associated with the Circle Health divestiture.
- Legal and regulatory matters include ongoing proceedings and reviews involving healthcare claims, government program compliance, privacy and other issues. The company disclosed settlements with the vast majority of states concerning past Envolve Pharmacy Solutions services; the ultimate outcome of remaining matters may differ from reserves. Management stated accrued amounts were not material except for the previously disclosed Envolve reserve.
- Key stated risks include medical cost and utilization estimation, Medicaid redeterminations and payment rates, Medicare quality ratings, contract awards and renewals, regulatory changes, litigation, cybersecurity, investment losses and interest-rate exposure. A hypothetical immediate 1% rise in rates would reduce fixed-income investment fair value by approximately $632 million. The filing reported no material change in risk factors from the 2023 Form 10-K.
Important facts for investors to verify
- Whether Medicaid redetermination effects, acuity and state rate adjustments continue to pressure membership and margins.
- Whether Medicare Advantage utilization, Star-rating recovery and the $300 million premium deficiency reserve develop as management expects.
- Whether Marketplace growth and margin gains can offset declines in Medicaid and pressure in Medicare.
- Whether operating cash flow normalizes after the stated rebate and premium-payment timing effects.
- Developments in Envolve-related settlements and other legal or regulatory proceedings, as well as contract outcomes and start dates.
- The composition and effects of non-GAAP adjustments, divestiture gains and investment income when assessing recurring earnings.