Business context and reporting period
Centene Corporation is a managed-care and specialty-services company focused primarily on government-sponsored healthcare programs. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are with the same 2020 periods unless otherwise noted.
Financial and operating performance
- Third-quarter revenue: $32.4 billion, up 11%. Premium and service revenue was $30.5 billion, also up 11%.
- Third-quarter earnings: Operating earnings were $545 million, down 37%; net earnings attributable to Centene were $584 million, up 3%; diluted GAAP EPS was $0.99, versus $0.97. Adjusted diluted EPS, a non-GAAP measure, was $1.26 in both periods.
- Nine-month performance: Revenue was $93.4 billion, up 13%; operating earnings were $1.18 billion, down 61%; net earnings attributable to Centene were $748 million, down 59%; diluted GAAP EPS was $1.27, versus $3.16. Adjusted diluted EPS was $4.14, versus $4.56.
- Medical costs and expenses: The health benefits ratio (HBR) was 88.1% in Q3, compared with 86.4%; for nine months it was 87.7%, compared with 85.5%. The Q3 SG&A expense ratio improved to 8.8% from 9.1% (adjusted: 8.6% from 8.9%).
- Cash flow: Operating cash flow was $3.53 billion for the first nine months, versus $2.52 billion. Investing activities used $2.44 billion and financing activities provided $1.60 billion. Cash, cash equivalents and restricted cash totaled $13.63 billion at quarter-end.
- Liquidity and debt: Current assets were $28.1 billion and current liabilities $25.0 billion, giving working capital of $3.0 billion. Total debt was $18.84 billion; the debt-to-capital ratio was 41.5%, up from 39.3% at year-end 2020. Centene reported compliance with debt covenants and no restriction on revolving-credit availability from its leverage ratio.
- Membership: Managed-care membership was 26.5 million, up 5% year over year, including 14.8 million Medicaid members.
Material changes and unusual items
- Revenue growth reflected Medicaid membership increases during the suspension of eligibility redeterminations, Medicare growth, acquisitions and new contracts. Growth was partly offset by the repeal of the health insurer fee (HIF), which also changed year-over-year comparisons.
- Higher medical utilization, COVID-19 testing and treatment costs, and the HIF repeal contributed to the higher HBR. The 2020 comparison benefited from a federal ACA risk-corridor settlement.
- For the nine months, operating earnings included a $1.25 billion reserve for Envolve pharmacy-benefit-management-related claims and settlements, recorded in Q2. Centene had agreed to pay $88 million to Ohio, $55 million to Mississippi, $15 million to Arkansas and $57 million to Illinois; it was discussing resolution of similar concerns elsewhere. The company cautioned that further claims or costs could exceed the reserve.
- Q3 included a $229 million non-cash impairment of the RxAdvance investment, following a decision to move to another pharmacy platform, and a $309 million non-cash gain from acquiring the remaining 60% of Circle Health. Debt refinancing produced $79 million of Q3 extinguishment costs. Adjusted earnings exclude specified items and are not GAAP results.
- Centene acquired the remaining Circle Health interest for $705 million in July. The acquisition added substantial lease obligations; reported lease liabilities rose to $3.86 billion from $1.54 billion at year-end 2020.
Outlook, commentary and risks
- Centene expected to close its approximately $2.2 billion Magellan Health acquisition in Q4 2021, subject to one remaining state regulatory approval and customary conditions. The company said financing was not contingent on closing and expected to use cash and debt proceeds.
- Management stated available cash, investments, operating cash flow and revolving-credit capacity were expected to fund general operations and capital expenditures for at least 12 months from the filing date. For the remainder of 2021, it expected about $235 million in net dividends from insurance subsidiaries and about $220 million in additional capital expenditures.
- Management expected Medicaid eligibility redeterminations to begin in 2022, which could affect membership. It also cited planned California and Ohio pharmacy-service carve-outs, possible state rate actions, and continued uncertainty in medical utilization and COVID-19 effects.
- Other key risks include medical-claims and risk-adjustment estimation, government contract renewals and payment rates, Medicare Star ratings, regulatory and litigation exposure, acquisition integration and leverage. The filing reported 54% of Medicare members in plans rated four stars or higher for the 2023 bonus year, up from approximately 30% for the 2022 bonus year; the increase was primarily attributed to disaster-relief provisions.
Important facts for investors to verify
- Whether the $1.25 billion Envolve reserve is adequate and whether additional state, federal or shareholder claims arise.
- How medical utilization, COVID-19 costs and the HBR develop, including the effects of Medicaid redeterminations and rate adjustments.
- Whether Magellan closed on the expected terms and timing, and whether anticipated acquisition benefits are realized.
- Whether reported liquidity remains available after regulatory restrictions, routine pharmacy payments and acquisition funding needs.
- The composition of adjusted EPS and the effect of one-time items: Q3 adjusted EPS equaled the prior year despite higher GAAP EPS, while nine-month adjusted EPS declined.