Centene Corporation — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. The filing is an annual report, not a standalone fourth-quarter earnings report. Centene provides managed care and specialty healthcare services, principally through government-sponsored programs. Managed Care represented 95% of external revenue; membership totaled 26.6 million at year-end.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $126.0 billion | $111.1 billion | +13% |
| Premium and service revenue | $118.0 billion | $103.8 billion | +14% |
| Net earnings attributable to Centene | $1.35 billion | $1.81 billion | -25% |
| Diluted EPS | $2.28 | $3.12 | -27% |
| Adjusted diluted EPS | $5.15 | $5.00 | +3% |
| Operating cash flow | $4.21 billion | $5.50 billion | -24% |
| Health benefits ratio (HBR) | 87.8% | 86.2% | +160 basis points |
| SG&A expense ratio | 8.6% | 9.5% | -90 basis points |
Adjusted EPS is a non-GAAP measure. FY2021 adjustments include acquired-intangible amortization, acquisition costs, a $1.25 billion legal settlement reserve, debt-extinguishment costs, restructuring costs, and gains and impairments. Adjusted results should be considered alongside GAAP results.
- Medical costs were $98.6 billion, up 14%. Management attributed the higher HBR to increased Marketplace utilization, COVID-19 testing and treatment costs, and the health insurer fee repeal; FY2020 HBR also benefited from an ACA risk-corridor settlement.
- Operating earnings were $1.78 billion, down 42%. The $1.25 billion Envolve-related legal reserve was a major driver of the decline.
- Year-end cash and cash equivalents were $13.1 billion; working capital was $2.7 billion, versus $1.8 billion in 2020. The filing reported $3.4 billion of unregulated cash and investments before the Magellan purchase.
- Total debt was $18.8 billion, versus $16.8 billion; debt-to-capital was 41.2%, versus 39.3%. Centene reported compliance with debt covenants. Approximately 15% of debt was variable-rate.
- Capital expenditures were $910 million. Centene repurchased $200 million of shares during 2021, with $800 million remaining under its authorized program at year-end.
Material changes and business developments
- Managed care membership increased by 1.1 million, or 4%, to 26.6 million. Medicaid growth was supported by the suspension of eligibility redeterminations; Medicare membership also increased. Commercial revenue declined 1%, while Medicare revenue rose 22%.
- Revenue growth also reflected new and expanded contracts, the 2020 WellCare acquisition, acquisitions of PANTHERx and Apixio, and consolidation of Circle Health from July 2021. Centene sold a majority stake in USMM in December 2021.
- The health insurer fee was permanently repealed effective 2021. This reduced certain revenue and expenses and affected year-over-year comparisons.
- On January 4, 2022, after the reporting period, Centene acquired Magellan Health for approximately $2.6 billion, including about $2.5 billion in cash. The acquisition was funded in part by debt issued during 2021; Centene also repaid $535 million of Magellan debt using Magellan cash.
Outlook, risks and unusual items
- Management expected 2022 net dividends of approximately $1.1 billion from regulated subsidiaries and capital expenditures of approximately $1.1 billion. It stated available resources should fund operations and capital needs for at least 12 months from the filing date; unregulated cash was substantially reduced by the January 2022 Magellan closing.
- Medicaid eligibility redeterminations were expected to resume in 2022 and reduce membership. Management also identified possible state rate actions, COVID-related risk corridors, and California and Ohio pharmacy-service carve-outs as factors affecting future results.
- Management expected a meaningful decline in Medicare Star ratings for the 2023 rating year, affecting 2024 bonus payments, because some FY2022 rating improvements reflected disaster-relief provisions not expected to recur; it anticipated a subsequent improvement for the 2024 rating year.
- The $1.25 billion reserve related to Envolve pharmacy-benefit-management matters covered no-fault agreements with nine states and identified rebates. Centene said additional claims or investigations could arise and settlement costs could exceed the reserve. The Ohio litigation was dismissed following settlement.
- Other notable FY2021 items included a $229 million non-cash RxAdvance impairment, a $309 million non-cash gain on acquiring the remaining Circle Health interest, a $150 million USMM divestiture gain, and $125 million of debt-extinguishment costs.
- Key risks include medical-cost and claims-reserve estimation, risk-adjustment and encounter-data reviews, government contract renewals and reimbursement, COVID-19 utilization variability, regulation and litigation, cybersecurity, substantial indebtedness, and acquisition integration. CEO Michael Neidorff stated his intent to retire in 2022 and was expected to serve as Executive Chairman for the remainder of that year.
Important facts for investors to verify
- Whether medical utilization, HBR, and claims reserves develop as expected; the $14.2 billion year-end medical claims liability is a significant estimate and an audit critical matter.
- Whether the Envolve reserve proves sufficient and whether any further state, federal, or shareholder claims emerge.
- Final ACA risk-adjustment settlements: the filing reported $522 million of receivables and $536 million of payables at year-end, with final 2021 settlement still pending.
- Magellan’s post-acquisition performance, integration costs, debt and cash effects, and realization of expected benefits.
- Effects of Medicaid redeterminations, state premium rates, pharmacy carve-outs, and Medicare Star-rating changes on membership, revenue, and margins.
- Debt maturities, covenant headroom, cash available outside regulated subsidiaries, and the funding implications of planned capital expenditures and share repurchases.