Centene Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Dollar amounts are in U.S. dollars; financial figures are in millions unless otherwise noted.
Business context
Centene provides managed healthcare coverage, principally through Medicaid, Medicare and commercial plans, with additional pharmacy, clinical, behavioral health and international operations. It reported 28.0 million members at quarter-end, up 5% year over year. Membership growth was led by the Marketplace business; Medicaid membership was lower than at year-end as redeterminations began.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Change / context |
|---|---|---|---|
| Total revenue | $38.0 billion | $35.9 billion | Up 6%; includes premium-tax revenue |
| Premium and service revenue | $35.0 billion | $33.7 billion | Up 4% |
| Operating earnings | $735 million | $476 million | Up 54% |
| Net earnings attributable to Centene | $469 million | $738 million | Down 36% |
| Diluted EPS | $0.87 | $1.27 | Down 31% |
| Adjusted diluted EPS | $2.00 | $1.30 | Non-GAAP measure |
| Health benefits ratio (HBR) | 87.0% | 88.3% | Lower ratio reflects Marketplace mix and pricing/execution |
| SG&A expense ratio | 8.7% | 8.4% | Adjusted ratio: 8.6% versus 8.3% |
For the first nine months, revenue was $114.5 billion, up 5%; net earnings attributable to Centene were $2.66 billion versus $1.42 billion, and diluted EPS was $4.85 versus $2.41. Adjusted diluted EPS was $6.21 versus $4.90. The filing attributes much of the year-over-year GAAP earnings comparison to differing impairments and divestiture-related items.
Q3 segment revenue: Medicaid $24.7 billion, up 6%; Commercial $6.5 billion, up 50%; Medicare $5.4 billion, down 4%; and Other $1.5 billion, down 45%, principally reflecting divestitures. Marketplace membership increased 76% year over year.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $7.84 billion, essentially unchanged from 2022. Q3 operating cash flow was $1.0 billion.
- Cash and cash equivalents were $18.19 billion at September 30, 2023, versus $12.07 billion at December 31, 2022. Working capital was $4.6 billion versus $1.7 billion.
- Total debt was $18.0 billion, including $17.9 billion long-term debt. Debt-to-capital was 41.5%, down from 42.7% at year-end 2022. The company reported compliance with debt covenants.
- Centene repurchased $1.6 billion of stock in the first nine months; approximately $1.26 billion remained authorized at quarter-end.
- Management stated available cash, investments, operating cash flow and revolving-credit availability should fund operations and capital expenditures for at least 12 months from the filing date.
Material changes, outlook and risks
- Nonrecurring items: Q3 included $440 million of impairment charges: $251 million related to the pending Circle Health sale, $142 million for Operose Health, and $47 million for real estate. Investment and other income fell to $214 million from $692 million, including a $75 million realized investment-sale loss; Q3 2022 included a $490 million PANTHERx sale gain. These items help explain why adjusted EPS rose while GAAP EPS declined.
- Portfolio actions: Centene completed several divestitures in 2023, including Magellan Specialty Health, Centurion, HealthSmart and its majority stake in Apixio. It agreed to sell Circle Health, classified as held for sale at quarter-end, with closing expected in Q1 2024 subject to customary conditions and regulatory approvals.
- Operating outlook: Medicaid redeterminations began in April 2023 and were expected to continue into Q2 2024, potentially longer in some states. Management identified Marketplace expansion, new and renewed government contracts, operational improvements and portfolio optimization as business drivers. No full-year earnings guidance figure is stated in the provided filing text.
- Medicare: Management expected lower 2023 Star ratings to adversely affect 2024 Medicare revenue. October 2023 ratings showed approximately 87% of membership in contracts rated 3.0 stars or better, compared with 53% in the prior year.
- Legal contingency: Centene maintains a $1.25 billion reserve estimate for historical Envolve PBM matters, including state settlements and rebates. Additional claims or investigations could exceed the reserve; other accrued legal and regulatory matters were described as not material.
- Other risks: Medical utilization and claims-reserve estimates, Medicaid rates and eligibility changes, contract awards, regulatory actions, Medicare quality ratings, investment losses and interest-rate exposure could affect results. A hypothetical immediate 1% rise in rates would reduce fixed-income investment fair value by approximately $601 million.
Important facts for investors to verify
- Whether the $1.25 billion PBM reserve is sufficient to resolve remaining state, federal or shareholder claims.
- Circle Health sale timing, proceeds and any additional impairment or closing adjustments.
- The pace and financial effects of Medicaid redeterminations, including membership retention and Marketplace transitions.
- Whether lower HBR and stronger Marketplace growth persist, and how the higher SG&A ratio affects margins.
- The effect of Medicare Star ratings on 2024 revenue and the company’s progress on quality improvement.
- The sustainability of operating cash flow and capital returns given investment, debt and regulatory-capital requirements.