Centene Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Centene provides managed healthcare coverage and related services, principally through Medicaid, Medicare, Commercial and Other segments.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $38.9 billion | $37.2 billion | +5% |
| Premium and service revenue | $35.0 billion | $34.2 billion | +2% |
| Operating earnings | $1.218 billion | $1.253 billion | -3% |
| Net earnings attributable to Centene | $1.130 billion | $849 million | +33% |
| Diluted GAAP EPS | $2.04 | $1.44 | +42% |
| Adjusted diluted EPS | $2.11 | $1.83 | +15% |
| Operating cash flow | $4.269 billion | $1.151 billion | Higher |
- Margins and costs: Health benefits ratio (medical costs as a percentage of premium revenue) was 87.0%, versus 87.3%. SG&A ratio was 8.6%, versus 8.0%; adjusted SG&A ratio was 8.5%, versus 7.7%. Management attributed higher SG&A ratios mainly to Marketplace growth, which carries a higher SG&A ratio.
- Segment trends: Revenue increased 9% in Medicaid, 27% in Commercial and 2% in Medicare; Other revenue fell 50%, primarily due to divestitures. Gross margin rose 5% overall, with Medicaid gross margin down 5%, Medicare up 22%, Commercial up 45%, and Other down 36%.
- Membership: Total managed care membership was 28.5 million, up 2.2 million, or 8%, year over year. Marketplace membership grew 52%; Medicare membership declined year over year.
Liquidity, debt and capital
- At March 31, 2023, cash and cash equivalents were $15.9 billion; short-term investments were $2.1 billion and long-term investments were $15.8 billion. Working capital was $2.2 billion, compared with $1.7 billion at year-end 2022.
- Total debt was $18.3 billion, including $18.2 billion long-term debt. Debt-to-capital was 42.1%, versus 42.7% at December 31, 2022. Centene reported compliance with debt covenants and no revolving-facility availability limits from its debt-to-EBITDA ratio.
- Q1 operating cash flow benefited from timing-related items: early CMS payments of approximately $2.8 billion and pass-through payments of $1.2 billion, partly offset by a $1.1 billion delay in premium payments from a state partner. The company cautions that these items affected working capital and cash flows.
- Centene repurchased $377 million of stock under its program in Q1 and had $2.429 billion remaining authorized at quarter-end. It repurchased another $200 million in April.
Material changes, outlook and risks
- Centene completed divestitures of HealthSmart, Centurion and Magellan Specialty Health during Q1. Magellan Specialty Health generated a reported pretax gain of $79 million; its stock consideration was sold in April for $245 million in cash. Centene may receive up to an additional $150 million tied to 2023 performance and up to $35 million tied to certain Centurion contract reprocurements, subject to realization.
- Adjusted EPS excludes specified items. Q1 included a $79 million divestiture gain and $26 million of real estate impairments; GAAP EPS also benefited from a one-time $69 million tax benefit related to distribution of the former CEO’s long-term stock awards. Adjusted diluted EPS was $2.11 versus GAAP diluted EPS of $2.04.
- Medicaid eligibility redeterminations began April 1, 2023 and are expected to run through the second quarter of 2024. Centene expects membership and market effects as states resume eligibility reviews; management said it is working to help members retain or transition coverage. Management also expects Medicaid redeterminations to be a key operating factor.
- Management expects approximately $2.0 billion of net dividends from insurance subsidiaries and approximately $620 million of additional capital expenditures during the rest of 2023. It believes available cash, investments, operating cash flow and revolving-credit capacity will fund general operations and capital expenditures for at least 12 months. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- CMS Star rating declines are expected to affect Medicare revenue in 2024; management expects improvement efforts to begin showing results with the 2024 rating year, affecting 2025 revenue. Other key risks include medical-cost estimation and utilization, government payment or contract changes, competition, and regulatory or legal proceedings.
- Centene retains a $1.25 billion reserve estimate related to historical PBM matters, including settlements and rebates. Further claims, investigations or settlements could exceed the reserve or be resolved on unacceptable terms. The filing says other accrued legal and regulatory amounts were not material; it also describes ongoing California tax litigation and data-breach class actions.
- A hypothetical immediate 1 percentage-point rise in market interest rates would reduce the fair value of fixed-income investments by approximately $617 million. Management states that the company does not intend, and is not likely to be required, to sell debt securities in unrealized-loss positions before recovery.
Important facts for investors to verify
- How Medicaid redeterminations affect membership, premium rates, risk mix and medical costs as the process progresses through 2024.
- Whether Q1 cash generation normalizes after the disclosed timing effects in CMS, pass-through and state premium payments.
- Medical claims reserve development, including prior-year favorable development and the adequacy of the $11.271 billion IBNR and expected-development estimate.
- Progress resolving PBM-related state matters and whether total exposure remains within the $1.25 billion reserve.
- Whether Marketplace growth and Medicare quality improvement translate into durable margins, and how buybacks and divestiture proceeds affect capital and per-share results.