Centene Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY2021. Centene is a managed-care and healthcare-services company, with 27.1 million members at year-end. Managed Care and Specialty Services represented 93% and 7% of external revenue, respectively.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total revenue | $144.5 billion | $126.0 billion | +15% |
| Premium and service revenue | $135.5 billion | $118.0 billion | +15% |
| Operating earnings | $1.32 billion | $1.78 billion | -26% |
| Net earnings attributable to Centene | $1.20 billion | $1.35 billion | -11% |
| Diluted EPS | $2.07 | $2.28 | -9% |
| Adjusted diluted EPS (non-GAAP) | $5.78 | $5.15 | +12% |
| Operating cash flow | $6.26 billion | $4.21 billion | +49% |
The health benefits ratio (HBR) was 87.7%, versus 87.8% in 2021. The SG&A ratio rose to 8.6% from 8.1%; adjusted SG&A ratio rose to 8.4% from 7.9%. The company attributed higher SG&A ratios partly to the Magellan and Circle Health businesses, Medicare marketing, and value-creation investments. Adjusted EPS is a non-GAAP measure and excludes specified items.
Cash and cash equivalents were $12.1 billion at year-end. Working capital was $1.7 billion, down from $2.7 billion. Total debt was $18.0 billion, including $15.7 billion of senior notes; debt-to-capital was 42.7%, compared with 41.2%. Centene reported compliance with debt covenants. Regulated subsidiaries held $16.4 billion of statutory capital and surplus against $8.0 billion of required minimums; approximately $8.0 billion was unavailable for dividends or return of capital.
Material changes and unusual items
- Revenue growth reflected Medicaid membership growth during suspended eligibility redeterminations, Medicare growth, Magellan’s acquisition, and North Carolina contract commencements. Year-end membership increased 5% to 27.1 million.
- GAAP operating earnings included $2.3 billion of impairment charges, principally $1.6 billion related to real-estate optimization, plus impairments associated with divestitures and the loss of the TRICARE contract. The real-estate initiative is expected to reduce domestic leased space by about 70% and generate more than $200 million in annualized lease savings.
- Centene acquired Magellan Health for approximately $2.5 billion in January 2022. It sold PANTHERx and Magellan Rx, recognizing gains of $490 million and $269 million, respectively, and divested its Spanish and Central European businesses. Magellan Specialty Health, Centurion, and HealthSmart divestitures closed in January 2023.
- The company repurchased $3.0 billion of common stock and $318 million of senior notes in 2022. It had $2.8 billion remaining under its $6.0 billion stock-repurchase authorization at year-end.
- Substantially all PBM business transitioned to a third party effective January 1, 2023; a multi-year Express Scripts contract is expected to commence in 2024. Centene continues pharmacy administration for certain government programs.
- For 2023, Centene adopted a new reporting structure: Medicaid, Medicare, Commercial, and Other segments.
Outlook, risks, and contingencies
- Medicaid eligibility redeterminations were expected to begin April 1, 2023, with the process running through May 2024. Management anticipated membership reductions and said Ambetter Marketplace coverage could help retain members transitioning from Medicaid; the extent of offset is uncertain.
- Centene expected approximately $2.1 billion in net dividends from regulated subsidiaries and about $845 million in capital expenditures during 2023. Management said available cash, investments, operating cash flow, and revolving-credit capacity should fund operations and capital expenditures for at least 12 months. The filing provides no specific 2023 EPS guidance in the supplied text.
- The Department of Defense did not award Health Net Federal Services the next TRICARE managed-care contract; the existing contract runs through early 2024. A $233 million impairment was recorded in 2022.
- Only 3% of year-end 2022 Medicare Advantage membership was in a plan rated at least 4.0 stars for rating year 2023. Lower ratings may constrain quality bonuses and competitiveness; management described a multi-year quality-improvement effort.
- Medical-cost estimates, utilization, risk-adjustment settlements, provider costs, Medicaid redeterminations, government rates and contract renewals, and investment-market movements are significant uncertainties. A 1% change in estimated medical claims liability would have affected 2022 net earnings by approximately $103 million.
- Centene recorded a $1.25 billion reserve in 2021 for claims and potential claims involving historical Envolve PBM services. It had reached no-fault agreements with several states and was discussing resolution elsewhere; additional claims or investigations could exceed the reserve. Other legal and regulatory matters are described, but the filing says accrued amounts were not material apart from the PBM reserve estimate.
- A hypothetical immediate 1% rise in market interest rates was estimated to reduce the fair value of fixed-income investments by approximately $583 million. The company also disclosed substantial lease, medical-claims, debt, and contingency obligations.
Key facts for investors to verify
- Whether Medicaid redeterminations cause membership and revenue declines, and how much transitioning enrollment Ambetter captures.
- Medical-cost and claims-reserve development, including the substantial year-end claims liability and risk-adjustment estimates.
- Progress and financial effects of Medicare Star-rating improvement and the TRICARE contract transition.
- Final outcomes and adequacy of the PBM-related reserve, including potential additional state or federal claims.
- Realization of projected real-estate savings, completion and proceeds of divestitures, and the effects of the new PBM arrangement.
- Debt, liquidity, restricted subsidiary capital, and the pace of share repurchases relative to operating and investment needs.
The financial statements received an unqualified audit opinion from KPMG; the auditors identified medical-claims liability and ACA risk-adjustment accrual estimates as critical audit matters.