Centene Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are to the corresponding 2022 periods. Amounts are in U.S. dollars.
Business context
Centene provides managed healthcare coverage, principally through Medicaid, Medicare and Commercial plans. It reported four segments: Medicaid, Medicare, Commercial and Other. During 2023 it completed divestitures of HealthSmart, Centurion, Magellan Specialty Health and its majority interest in Apixio, continuing portfolio changes under its Value Creation Plan.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $37.6 billion | $35.9 billion | $76.5 billion | $73.1 billion |
| Net earnings attributable to Centene | $1.058 billion | $(172) million | $2.188 billion | $677 million |
| Diluted EPS | $1.92 | $(0.29) | $3.96 | $1.15 |
| Adjusted diluted EPS, non-GAAP | $2.10 | $1.77 | $4.21 | $3.60 |
| Health benefits ratio (HBR) | 87.0% | 86.7% | 87.0% | 87.0% |
| SG&A expense ratio | 8.7% | 8.2% | 8.6% | 8.1% |
Q2 premium and service revenue rose 3%; total revenue rose 5%. For the first half, premium and service revenue increased 2% and total revenue increased 5%. Higher Medicaid and Marketplace business supported growth; lower Other revenue reflected divestitures. Q2 gross margin was $4.614 billion versus $4.557 billion. For the first half it was $9.262 billion versus $8.963 billion.
Operating cash flow was $2.5 billion in Q2 and $6.815 billion for the first half, compared with $4.505 billion in the first half of 2022. Management attributed first-half cash generation in part to net earnings and higher unearned revenue and accounts payable, including early CMS payments. First-half investing cash outflow was $677 million; financing cash outflow was $933 million, including $828 million of share repurchases.
At June 30, 2023, cash and cash equivalents were $17.170 billion; total debt was $18.006 billion, including $17.896 billion long-term debt. Working capital was $3.6 billion, versus $1.7 billion at year-end 2022. The debt-to-capital ratio was 41.1%, versus 42.7% at year-end. Centene reported compliance with debt covenants and stated it expected available resources to fund operations and capital expenditures for at least 12 months.
Material changes and unusual items
- Q2 GAAP earnings improved substantially from the prior-year loss, which included a $1.45 billion real estate impairment. Q2 2023 included $18 million of real estate impairment.
- Investment and other income was $425 million in Q2, versus $42 million, reflecting higher interest income on larger investment balances and gains on Apixio and Centurion, partly offset by an additional loss on the Spanish and Central European divestiture. First-half 2023 also included a $79 million gain on Magellan Specialty Health.
- Adjusted EPS is a non-GAAP measure. Q2 adjustments included acquired-intangible amortization, divestiture gains and losses, and real estate impairment. First-half adjusted results also reflected a $69 million one-time tax benefit related to distribution of long-term stock awards to the former CEO’s estate.
- Centene recorded a $196 million net pre-tax benefit in the first half related to 2022 ACA risk-adjustment transfers, after minimum medical loss ratio and related impacts.
- The first-half medical claims liability was $16.884 billion. Prior-year claims development reduced incurred claims by $1.554 billion; estimates of claims liabilities remain subject to actuarial uncertainty.
Outlook, commentary and risks
- Medicaid redeterminations began in April 2023 and were expected to continue through the second quarter of 2024. Management noted potential membership reductions, while positioning Marketplace plans to serve people transitioning coverage.
- Management expected approximately $1.2 billion of net dividends from insurance subsidiaries and approximately $400 million of additional capital expenditures during the remainder of 2023. It reported no specific full-year earnings guidance in the supplied filing text.
- Management cited Marketplace growth and planned contract commencements as opportunities. It also warned that lower Medicare Star ratings were expected to adversely affect 2024 Medicare revenue.
- Risks include medical utilization and cost trends, pricing and reserve estimation, Medicaid membership changes and government payment decisions, contract awards and renewals, regulatory changes, and legal proceedings. The company’s historical PBM matters carry a $1.25 billion reserve estimate; further claims or investigations may arise, and outcomes could exceed the reserve.
- Investment portfolios are exposed to interest-rate risk. Centene estimated that an immediate 1% increase in rates would reduce fixed-income investment fair value by approximately $616 million. The filing said it did not intend, and was not likely required, to sell securities in unrealized-loss positions before recovery or maturity.
Key facts investors should verify
- How Medicaid redeterminations affect membership, pricing, medical costs and Marketplace transitions through 2024.
- Whether Marketplace growth and medical-cost performance sustain margins, particularly given Q2 HBR deterioration and higher SG&A ratios.
- The effect of lower Medicare Star ratings on 2024 revenue and the progress of quality-improvement initiatives.
- The adequacy of the $1.25 billion PBM reserve and the status and potential costs of remaining state, federal or shareholder matters.
- The sustainability of operating cash flow, including the contribution from early CMS payments and increases in unearned revenue and payables.
- Divestiture proceeds, contingent consideration, buybacks and the continuing effects of portfolio changes on reported and adjusted earnings.