Centene Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparison is with the three months ended March 31, 2020. Centene provides managed care and specialty healthcare services, primarily through government-sponsored programs. The 2021 quarter includes a full quarter of WellCare results, while Q1 2020 included WellCare only from its January 23 acquisition date.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $29.983 billion | $26.025 billion | Up 15% |
| Premium and service revenue | $28.114 billion | $24.172 billion | Up 16% |
| Operating earnings | $1.054 billion | $188 million | Up 461% |
| Net earnings attributable to Centene | $699 million | $46 million | GAAP diluted EPS was $1.19 vs. $0.08 |
| Adjusted net earnings / diluted EPS | $960 million / $1.63 | $476 million / $0.86 | Non-GAAP; excludes specified adjustments |
| Health benefits ratio (HBR) | 86.8% | 88.0% | Lower, reflecting reduced utilization and flu costs, partly offset by COVID-19 costs and other factors |
| SG&A expense ratio | 8.4% | 9.9% | Adjusted ratio: 8.1% vs. 8.6% |
| Operating cash flow | $43 million | $(240) million | Q1 2021 affected by approximately $910 million in delayed New York state premium payments |
Total operating expenses were $28.929 billion, including $23.391 billion of medical costs. Premium and trade receivables were $11.601 billion and medical claims liabilities were $12.842 billion at March 31, 2021. The filing reports $8.630 billion of IBNR plus expected development on reported claims.
Cash, cash equivalents and restricted cash totaled $10.304 billion at quarter-end, including $9.627 billion of cash and cash equivalents. Working capital was $2.2 billion. Total debt was $16.757 billion, including $16.695 billion of long-term debt; debt-to-capital was 38.8%. The company reported compliance with debt covenants and no revolving-credit availability limitation from its leverage ratio.
Material changes versus the prior period
- Revenue growth reflected a full quarter of WellCare, increased Medicaid membership during the suspension of eligibility redeterminations, and acquired and expanded businesses. Medicaid revenue rose 16% and Medicare revenue rose 41%; commercial revenue fell 5%.
- Managed care membership was 25.1 million, up 5% year over year. Medicaid membership increased by about 2.0 million year over year, while Marketplace membership declined.
- Operating earnings improved substantially, aided by lower acquisition-related expenses, lower medical utilization and flu costs, and the absence of the $72 million impairment recorded in Q1 2020. The 2021 quarter also had no health insurer fee expense, compared with $345 million in Q1 2020 following the fee’s repeal effective 2021.
- Q1 2021 results included $46 million of debt-extinguishment costs and $56 million of restructuring severance costs. Adjusted results also exclude acquired-intangible amortization and other specified items. In Q1 2020, adjustments included acquisition expenses, an Illinois divestiture gain, an impairment and debt-extinguishment costs.
- Cash from operations turned positive, but cash generation remained modest and was substantially affected by the delayed state premium payment.
Outlook, commentary and risks
- Management expected available cash, investments, operating cash flows and revolving-credit availability to fund general operations and capital expenditures for at least 12 months from the filing date. It expected approximately $2.2 billion of net dividends from insurance subsidiaries and approximately $700 million of additional capital expenditures during the remainder of 2021.
- No full-year earnings or EPS guidance is provided in the supplied filing text. Management expected Medicaid eligibility redeterminations to begin August 1, 2021, potentially reducing membership. Other anticipated offsets included California’s planned pharmacy-services carve-out and state rate or risk-corridor actions.
- Centene agreed to acquire Magellan Health for $95 per share, with an enterprise value of approximately $2.2 billion. Closing was expected in the second half of 2021, subject to regulatory approvals and other conditions; the company intended to fund it primarily with debt.
- COVID-19 continued to make medical utilization, treatment costs, membership, state program administration and premium rates uncertain. Management noted that utilization remained inconsistent and could change with further pandemic waves.
- Medicare Star ratings are a concern: approximately 30% of Medicare members were in plans rated four stars or above for the 2022 bonus year, versus 46% for the 2021 bonus year and 86% for the 2020 bonus year.
- The State of Ohio filed a lawsuit alleging contract and legal violations in pharmacy benefit management services and seeks unspecified damages, penalties and possible contract termination. Ohio deferred a decision on a related managed-care contract bid pending further consideration. The company disputes the allegations and intends to defend itself.
- Putative class actions filed in April 2021 allege exposure of Health Net customer and health data in a third-party vendor’s data breach. The company stated it did not expect the matters to have a material adverse effect, but outcomes remain uncertain. Other significant risks include claims-estimate and risk-adjustment uncertainty, government contract and rate changes, acquisition integration and financing, and investment-value sensitivity to interest rates.
Important facts for investors to verify
- Whether and when the approximately $910 million delayed New York premium payment was received, and how state payment timing affects subsequent operating cash flow.
- Medical utilization trends, COVID-19 costs, claims-reserve development and the adequacy of premium rates and risk-adjustment estimates.
- Medicaid membership and premium trends as eligibility redeterminations resume, alongside Marketplace membership and Medicare Star-rating performance.
- Developments in the Ohio litigation and contract award, the data-breach claims, and related regulatory or financial exposure.
- Magellan acquisition approvals, financing, closing timing, integration costs and expected benefits, including the effect of additional borrowing on leverage and liquidity.