UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022March 31, 2023
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-31826
CENTENE CORPORATION
(Exact name of registrant as specified in its charter)
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| Delaware | | 42-1406317 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification Number) |
| | | |
| 7700 Forsyth Boulevard | | |
| St. Louis, | Missouri | | 63105 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’sRegistrant's telephone number, including area code: (314) 725-4477
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| Common Stock $0.001 Par Value | CNC | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large"large accelerated filer"filer", "accelerated filer""accelerated filer", "smaller"smaller reporting company"company", and "emerging"emerging growth company"company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Fileraccelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statement of the registrant included in the filing reflect the correction of an error to the previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b) ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 14, 2022,April 21, 2023, the registrant had 566,259,693548,769,258 shares of common stock outstanding.
CENTENE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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| Part I | |
| Financial Information | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Part II | |
| Other Information | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 6. | | |
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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements. Without limiting the foregoing, forward-looking statements often use words such as "believe," "anticipate," "plan," "expect," "estimate," "intend," "seek," "target," "goal," "may," "will," "would," "could," "should," "can," "continue""continue," and other similar words or expressions (and the negative thereof). Centene Corporation and its subsidiaries (Centene, the Company, our or we) intends such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. In particular, these statements include, without limitation, statements about our future operating or financial performance, market opportunity, value creation strategy, competition, expected activities in connection with completed and future acquisitions and dispositions, including statements about the impact of our recently completed acquisition of Magellan Health, Inc. (the Magellan Acquisition), other recent and future acquisitions and dispositions, our investments, and the adequacy of our available cash resources. These statements may be found in the various sections of this filing, such as Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Part II, Item 1. "Legal Proceedings."
These forward-looking statements reflect our current views with respect to future events and are based on numerous assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, business strategies, operating environments, future developments, and other factors we believe appropriate. By their nature, forward-looking statements involve known and unknown risks and uncertainties and are subject to change because they relate to events and depend on circumstances that will occur in the future, including economic, regulatory, competitive, and other factors that may cause our or our industry's actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions.
All forward-looking statements included in this filing are based on information available to us on the date of this filing. Except as may be otherwise required by law, we undertake no obligation to update or revise the forward-looking statements included in this filing, whether as a result of new information, future events, or otherwise, after the date of this filing. You should not place undue reliance on any forward-looking statements, as actual results may differ materially from projections, estimates, or other forward-looking statements due to a variety of important factors, variables, and events including, but not limited to:
•our ability to accurately predictdesign and effectively manage health benefits and other operating expenses and reserves,price products that are competitive and/or actuarially sound including fluctuations in medical utilization rates duebut not limited to the ongoing impact of COVID-19;any impacts resulting from Medicaid redeterminations;
•our ability to maintain or achieve improvement in the Centers for Medicare and Medicaid Services (CMS) Star ratings and maintain or achieve improvement in other quality scores in each case that can impact revenue and future growth;
•our ability to accurately predict and effectively manage health benefits and other operating expenses and reserves, including fluctuations in medical utilization rates;
•competition, including our ability to reprocure our contracts and grow organically;
•the timing and extent of benefits from our value creation strategy, including the possibility that the benefits received may be lower than expected, may not occur, or will not be realized within the expected time periods;
•our ability to manage our information systems effectively;
•disruption, unexpected costs, or similar risks from business transactions, including acquisitions, divestitures, and changes in our relationships with third parties;
•impairments to real estate, investments, goodwill, and intangible assets;
•the risk that the election of new directors, changes in senior management, and any inability to retain key personnel may create uncertainty or negatively impact our ability to execute quickly and effectively;
•uncertainty as to the expected financial performance of the combined company following the recent completion of the Magellan Acquisition;
•the possibility that the expected synergies and value creation from the Magellan Acquisition or the acquisition of WellCare Health Plans, Inc. (the WellCare Acquisition) or other acquired businesses will not be realized, or will not be realized within the respective expected time periods;
•disruption from the integration of the Magellan Acquisition or the WellCare Acquisition, unexpected costs, or similar risks from other acquisitions or dispositions we may announce or complete from time to time, including potential adverse reactions or changes to business relationships with customers, employees, suppliers or regulators, making it more difficult to maintain business and operational relationships;
•the risk that the closing conditions, including applicable regulatory approvals, for the pending dispositions of Magellan Rx and our Spanish and Central European businesses, may be delayed or not obtained;
•impairments to real estate, investments, goodwill and intangible assets;
•a downgrade of the credit rating of our indebtedness;
•competition;
•membership and revenue declines or unexpected trends;
•rate cuts or other payment reductions or delays by governmental payors and other risks and uncertainties affecting our government businesses;
•changes in healthcare practices, new technologies, and advances in medicine;
•increased healthcare costs;
•inflation;
•changes in economic, political, or market conditions;
•changes in federal or state laws or regulations, including changes with respect to income tax reform or government healthcare programs as well as changes with respect to the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act (collectively referred to as the ACA) and any regulations enacted thereunder that may result from changing political conditions, the current administration or judicial actions;
•rate cuts or other payment reductions or delays by governmental payors and other risks and uncertainties affecting our government businesses;
•our ability to adequately price products;thereunder;
•tax matters;
•disasters or major epidemics;
•changes in expected contract start dates;
•provider, state, federal, foreign, and other contract changes and timing of regulatory approval of contracts;
•the expiration, suspension, or termination of our contracts with federal or state governments (including, but not limited to, Medicaid, Medicare, TRICARE, or other customers);
•the difficulty of predicting the timing or outcome of legal or regulatory proceedings or matters, including, but not limited to, our ability to resolve claims and/or allegations made by states with regard to past practices, including at Centene Pharmacy Services (formerly Envolve Pharmacy Solutions, Inc. (Envolve)), as our pharmacy benefits manager (PBM) subsidiary, within the reserve estimate we previously recorded and on other acceptable terms, or at all, or whether additional claims, reviews or investigations relating to our PBM business will be brought by states, the federal government or shareholder litigants, or government investigations;
•the timing and extent of benefits from our value creation strategy, including the possibility that the benefits received may be lower than expected, may not occur, or will not be realized within the expected time periods;
•challenges to our contract awards;
•cyber-attacks or other privacy or data security incidents;
•the exertion of management's time and our resources, and other expenses incurred and business changes required in connection with complying with the undertakings in connection with any regulatory, governmental, or third party consents or approvals for acquisitions or dispositions;
•any changes in expected closing dates, estimated purchase price, andor accretion for acquisitions or dispositions;
•restrictions and limitations in connection with our indebtedness;
•a downgrade of the credit rating of our indebtedness;
•the availability of debt and equity financing on terms that are favorable to us;
•inflation; and
•foreign currency fluctuations.
This list of important factors is not intended to be exhaustive. We discuss certain of these matters more fully, as well as certain other factors that may affect our business operations, financial condition, and results of operations, in our filings with the Securities and Exchange Commission (SEC), including our annual report on Form 10-K, other quarterly reports on Form 10-Q and current reports on Form 8-K. Due to these important factors and risks, we cannot give assurances with respect to our future performance, including without limitation our ability to maintain adequate premium levels or our ability to control our future medical and selling, general and administrative costs.
Non-GAAP Financial Presentation
The Company is providing certain non-GAAP financial measures in this report as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company's operations and measure the Company's performance more consistently across periods. The Company uses the presented non-GAAP financial measures internally in evaluating the Company’sCompany's performance and for planning purposes, by allowing management to focus on period-to-period changes in the Company's core business operations, and in determining employee incentive compensation. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.
Specifically, the Company believes the presentation of non-GAAP financial information that excludes amortization of acquired intangible assets and acquisition and divestiture related expenses, as well as other items, allows investors to develop a more meaningful understanding of the Company's core performance over time.
The tables below provide reconciliations of non-GAAP items ($ in millions, except per share data):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | GAAP net earnings attributable to Centene | GAAP net earnings attributable to Centene | $ | 738 | | | $ | 584 | | | $ | 1,415 | | | $ | 748 | | GAAP net earnings attributable to Centene | $ | 1,130 | | | $ | 849 | | |
| Amortization of acquired intangible assets | Amortization of acquired intangible assets | 211 | | | 198 | | | 609 | | | 581 | | Amortization of acquired intangible assets | 183 | | | 199 | | |
| Acquisition and divestiture related expenses | Acquisition and divestiture related expenses | 30 | | | 54 | | | 149 | | | 141 | | Acquisition and divestiture related expenses | 23 | | | 97 | | |
Other adjustments (1) | Other adjustments (1) | (222) | | | 11 | | | 1,225 | | | 1,427 | | Other adjustments (1) | (53) | | | 2 | | |
| Income tax effects of adjustments (2) | Income tax effects of adjustments (2) | (2) | | | (102) | | | (521) | | | (455) | | Income tax effects of adjustments (2) | (114) | | | (67) | | |
| Adjusted net earnings | Adjusted net earnings | $ | 755 | | | $ | 745 | | | $ | 2,877 | | | $ | 2,442 | | Adjusted net earnings | $ | 1,169 | | | $ | 1,080 | | |
| | GAAP diluted earnings per share (EPS) attributable to Centene | GAAP diluted earnings per share (EPS) attributable to Centene | $ | 1.27 | | | $ | 0.99 | | | $ | 2.41 | | | $ | 1.27 | | GAAP diluted earnings per share (EPS) attributable to Centene | $ | 2.04 | | | $ | 1.44 | | |
| Amortization of acquired intangible assets | Amortization of acquired intangible assets | 0.36 | | | 0.34 | | | 1.04 | | | 0.98 | | Amortization of acquired intangible assets | 0.33 | | | 0.34 | | |
| Acquisition and divestiture related expenses | Acquisition and divestiture related expenses | 0.05 | | | 0.09 | | | 0.25 | | | 0.24 | | Acquisition and divestiture related expenses | 0.04 | | | 0.16 | | |
Other adjustments (1) | Other adjustments (1) | (0.38) | | | 0.01 | | | 2.09 | | | 2.42 | | Other adjustments (1) | (0.09) | | | — | | |
Income tax effects of adjustments (2) | Income tax effects of adjustments (2) | — | | | (0.17) | | | (0.89) | | | (0.77) | | Income tax effects of adjustments (2) | (0.21) | | | (0.11) | | |
| Adjusted diluted EPS | Adjusted diluted EPS | $ | 1.30 | | | $ | 1.26 | | | $ | 4.90 | | | $ | 4.14 | | Adjusted diluted EPS | $ | 2.11 | | | $ | 1.83 | | |
(1) Other adjustments include the following pre-tax items:
20222023:
(a) for the three months ended September 30, 2022: PANTHERx Rare (PANTHERx)Magellan Specialty Health divestiture gain of $490$79 million, or $0.84$0.14 per share ($0.650.12 after-tax), the impairment of assets associated with the pending divestiture of the Spanish and Central European businesses of $165 million, or $0.28 per share ($0.23 after-tax), real estate impairments of $127$26 million, or $0.22$0.05 per share ($0.160.04 after-tax), an increase to the previously reported gain on the divestiture of U.S. Medical Management (USMM) due to the finalization of working capital adjustments of $13 million, or $0.02 per share ($0.01 after-tax), gain on debt extinguishment related to the repurchases of senior notes of $10 million, or $0.02 per share ($0.01 after-tax), and an adjustment to the costs.
2022:
(b) Costs related to the PBM legal settlement of $1$2 million, or $0.00 per share ($0.00 after-tax);
(b) for the nine months ended September 30, 2022: real estate impairments of $1,581 million, or $2.69 per share ($1.98 after-tax), PANTHERx divestiture gain of $490 million, or $0.83 per share ($0.65 after-tax), the impairment of assets associated with the pending divestiture of the Spanish and Central European businesses of $165 million, or $0.28 per share ($0.23 after-tax), gain on debt extinguishment of $23 million, or $0.04 per share ($0.03 after-tax), an increase to the previously reported gain related to the divestiture of USMM due to the finalization of working capital adjustments of $13 million, or $0.02 per share ($0.02 after-tax), and costs related to the PBM legal settlement of $5 million, or $0.01 per share ($0.01 after-tax).
2021:
(a) for the three months ended September 30, 2021: non-cash gain related to the acquisition of the remaining 60% interest of Circle Health of $309 million, or $0.52 per share ($0.52 after-tax), non-cash impairment of our equity method investment in RxAdvance of $229 million, or $0.38 per share ($0.35 after-tax), debt extinguishment costs of $79 million, or $0.13 per share ($0.10 after-tax), PBM legal settlement expense of $11 million, or $0.02 per share ($0.01 after-tax), and severance costs due to a restructuring of $1 million, or $0.00 per share ($0.00 after-tax);
(b) for the nine months ended September 30, 2021: PBM legal settlement expense of $1,261 million, or $2.13 per share ($1.79 after-tax), non-cash gain related to the acquisition of the remaining 60% interest of Circle Health of $309 million, or $0.52 per share ($0.52 after-tax), non-cash impairment of our equity method investment in RxAdvance of $229 million, or $0.39 per share ($0.35 after-tax), debt extinguishment costs of $125 million, or $0.21 per share ($0.16 after-tax), a reduction to the previously reported gain on divestiture of certain products of our Illinois health plan of $62 million, or $0.11 per share ($0.08 after-tax), and severance costs due to a restructuring of $59 million, or $0.10 per share ($0.07 after-tax).
(2) The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment. The nineIn addition, the three months ended September 30, 2022 also include an $18March 31, 2023, includes a one-time income tax benefit of $69 million, or $0.03$0.13 per share, increaseresulting from the distribution of long-term stock awards to the tax benefit onestate of the previously reported non-cash impairment of our equity method investment in RxAdvance.Company's former CEO.
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
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| GAAP selling, general and administrative expenses | $ | 2,846 | | | $ | 2,537 | | | $ | 8,391 | | | $ | 6,910 | |
| Less: | | | | | | | |
| Acquisition and divestiture related expenses | 28 | | | 41 | | | 149 | | | 126 | |
| Restructuring costs | — | | | 1 | | | — | | | 59 | |
| Costs related to the PBM legal settlement | 1 | | | 11 | | | 5 | | | 11 | |
| Real estate optimization | 3 | | | — | | | 7 | | | — | |
| Adjusted selling, general and administrative expenses | $ | 2,814 | | | $ | 2,484 | | | $ | 8,230 | | | $ | 6,714 | |
| Note: Beginning in 2022, we have included a separate line item for depreciation expense on the Consolidated Statements of Operations, which was previously included in selling, general and administrative (SG&A) expenses. Prior period SG&A expenses have been conformed to the current presentation. |
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| 2023 | | 2022 | | | | |
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| GAAP selling, general and administrative expenses | $ | 3,011 | | | $ | 2,745 | | | | | |
| Less: | | | | | | | |
| Acquisition and divestiture related expenses | 23 | | | 99 | | | | | |
| Costs related to the PBM legal settlement | — | | | 2 | | | | | |
| Real estate optimization | 6 | | | — | | | | | |
| Adjusted selling, general and administrative expenses | $ | 2,982 | | | $ | 2,644 | | | | | |
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares in thousands and per share data in dollars)
| | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | (Unaudited) | | | | (Unaudited) | | |
| ASSETS | ASSETS | | | | ASSETS | | | |
| Current assets: | Current assets: | | | | Current assets: | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 14,987 | | | $ | 13,118 | | Cash and cash equivalents | $ | 15,853 | | | $ | 12,074 | |
| Premium and trade receivables | Premium and trade receivables | 13,770 | | | 12,238 | | Premium and trade receivables | 15,210 | | | 13,272 | |
| Short-term investments | Short-term investments | 2,191 | | | 1,539 | | Short-term investments | 2,135 | | | 2,321 | |
| Other current assets | Other current assets | 2,327 | | | 1,602 | | Other current assets | 1,811 | | | 2,461 | |
| Total current assets | Total current assets | 33,275 | | | 28,497 | | Total current assets | 35,009 | | | 30,128 | |
| Long-term investments | Long-term investments | 14,053 | | | 14,043 | | Long-term investments | 15,833 | | | 14,684 | |
| Restricted deposits | Restricted deposits | 1,205 | | | 1,068 | | Restricted deposits | 1,313 | | | 1,217 | |
| Property, software and equipment, net | Property, software and equipment, net | 2,479 | | | 3,391 | | Property, software and equipment, net | 2,478 | | | 2,432 | |
| | Goodwill | Goodwill | 20,040 | | | 19,771 | | Goodwill | 18,836 | | | 18,812 | |
| Intangible assets, net | Intangible assets, net | 7,523 | | | 7,824 | | Intangible assets, net | 6,730 | | | 6,911 | |
| Other long-term assets | Other long-term assets | 2,597 | | | 3,781 | | Other long-term assets | 2,783 | | | 2,686 | |
| Total assets | Total assets | $ | 81,172 | | | $ | 78,375 | | Total assets | $ | 82,982 | | | $ | 76,870 | |
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY | | | | |
| LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS' EQUITY | | LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS' EQUITY | | | |
| Current liabilities: | Current liabilities: | | | | Current liabilities: | | | |
| Medical claims liability | Medical claims liability | $ | 16,465 | | | $ | 14,243 | | Medical claims liability | $ | 17,504 | | | $ | 16,745 | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | 9,995 | | | 8,493 | | Accounts payable and accrued expenses | 10,781 | | | 9,525 | |
| Return of premium payable | Return of premium payable | 2,205 | | | 2,328 | | Return of premium payable | 2,077 | | | 1,634 | |
| Unearned revenue | Unearned revenue | 2,416 | | | 434 | | Unearned revenue | 2,398 | | | 478 | |
| Current portion of long-term debt | Current portion of long-term debt | 249 | | | 267 | | Current portion of long-term debt | 97 | | | 82 | |
| Total current liabilities | Total current liabilities | 31,330 | | | 25,765 | | Total current liabilities | 32,857 | | | 28,464 | |
| Long-term debt | Long-term debt | 18,084 | | | 18,571 | | Long-term debt | 18,223 | | | 17,938 | |
| Deferred tax liability | Deferred tax liability | 480 | | | 1,407 | | Deferred tax liability | 522 | | | 615 | |
| Other long-term liabilities | Other long-term liabilities | 5,678 | | | 5,610 | | Other long-term liabilities | 6,194 | | | 5,616 | |
| Total liabilities | Total liabilities | 55,572 | | | 51,353 | | Total liabilities | 57,796 | | | 52,633 | |
| Commitments and contingencies | Commitments and contingencies | | Commitments and contingencies | |
| Redeemable noncontrolling interests | Redeemable noncontrolling interests | 66 | | | 82 | | Redeemable noncontrolling interests | 20 | | | 56 | |
| Stockholders’ equity: | | | | |
| Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at September 30, 2022 and December 31, 2021 | — | | | — | | |
| Common stock, $0.001 par value; authorized 800,000 shares; 606,931 issued and 570,091 outstanding at September 30, 2022, and 602,704 issued and 582,479 outstanding at December 31, 2021 | 1 | | | 1 | | |
| Stockholders' equity: | | Stockholders' equity: | | | |
| Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at March 31, 2023 and December 31, 2022 | | Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at March 31, 2023 and December 31, 2022 | — | | | — | |
| Common stock, $0.001 par value; authorized 800,000 shares; 614,355 issued and 551,714 outstanding at March 31, 2023, and 607,847 issued and 550,754 outstanding at December 31, 2022 | | Common stock, $0.001 par value; authorized 800,000 shares; 614,355 issued and 551,714 outstanding at March 31, 2023, and 607,847 issued and 550,754 outstanding at December 31, 2022 | 1 | | | 1 | |
| Additional paid-in capital | Additional paid-in capital | 19,774 | | | 19,672 | | Additional paid-in capital | 20,121 | | | 20,060 | |
| Accumulated other comprehensive earnings | (1,394) | | | 77 | | |
| Accumulated other comprehensive earnings (loss) | | Accumulated other comprehensive earnings (loss) | (915) | | | (1,132) | |
| Retained earnings | Retained earnings | 9,554 | | | 8,139 | | Retained earnings | 10,471 | | | 9,341 | |
| Treasury stock, at cost (36,840 and 20,225 shares, respectively) | (2,557) | | | (1,094) | | |
| Total Centene stockholders’ equity | 25,378 | | | 26,795 | | |
| Treasury stock, at cost (62,641 and 57,093 shares, respectively) | | Treasury stock, at cost (62,641 and 57,093 shares, respectively) | (4,636) | | | (4,213) | |
| Total Centene stockholders' equity | | Total Centene stockholders' equity | 25,042 | | | 24,057 | |
| Nonredeemable noncontrolling interest | Nonredeemable noncontrolling interest | 156 | | | 145 | | Nonredeemable noncontrolling interest | 124 | | | 124 | |
| Total stockholders’ equity | 25,534 | | | 26,940 | | |
| Total liabilities, redeemable noncontrolling interests and stockholders’ equity | $ | 81,172 | | | $ | 78,375 | | |
| Total stockholders' equity | | Total stockholders' equity | 25,166 | | | 24,181 | |
| Total liabilities, redeemable noncontrolling interests and stockholders' equity | | Total liabilities, redeemable noncontrolling interests and stockholders' equity | $ | 82,982 | | | $ | 76,870 | |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except shares in thousands and per share data in dollars)
(Unaudited)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| Revenues: | Revenues: | | | | | | | | Revenues: | | | | |
| Premium | Premium | $ | 31,848 | | | $ | 28,876 | | | $ | 95,247 | | | $ | 83,436 | | Premium | $ | 33,825 | | | $ | 31,889 | | |
| Service | Service | 1,878 | | | 1,638 | | | 6,679 | | | 4,054 | | Service | 1,127 | | | 2,343 | | |
| Premium and service revenues | Premium and service revenues | 33,726 | | | 30,514 | | | 101,926 | | | 87,490 | | Premium and service revenues | 34,952 | | | 34,232 | | |
| Premium tax | Premium tax | 2,139 | | | 1,892 | | | 7,060 | | | 5,924 | | Premium tax | 3,937 | | | 2,953 | | |
| Total revenues | Total revenues | 35,865 | | | 32,406 | | | 108,986 | | | 93,414 | | Total revenues | 38,889 | | | 37,185 | | |
| Expenses: | Expenses: | | | | | | | | Expenses: | | | | |
| Medical costs | Medical costs | 28,111 | | | 25,430 | | | 83,261 | | | 73,210 | | Medical costs | 29,434 | | | 27,838 | | |
| Cost of services | Cost of services | 1,571 | | | 1,355 | | | 5,658 | | | 3,510 | | Cost of services | 870 | | | 1,988 | | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 2,846 | | | 2,537 | | | 8,391 | | | 6,910 | | Selling, general and administrative expenses | 3,011 | | | 2,745 | | |
| Depreciation expense | Depreciation expense | 150 | | | 147 | | | 470 | | | 414 | | Depreciation expense | 142 | | | 156 | | |
| Amortization of acquired intangible assets | Amortization of acquired intangible assets | 211 | | | 198 | | | 609 | | | 581 | | Amortization of acquired intangible assets | 183 | | | 199 | | |
| Premium tax expense | Premium tax expense | 2,211 | | | 1,965 | | | 7,258 | | | 6,129 | | Premium tax expense | 4,011 | | | 3,006 | | |
| | Impairment | Impairment | 289 | | | 229 | | | 1,739 | | | 229 | | Impairment | 20 | | | — | | |
| Legal settlement | — | | | — | | | — | | | 1,250 | | |
| | Total operating expenses | Total operating expenses | 35,389 | | | 31,861 | | | 107,386 | | | 92,233 | | Total operating expenses | 37,671 | | | 35,932 | | |
| Earnings from operations | Earnings from operations | 476 | | | 545 | | | 1,600 | | | 1,181 | | Earnings from operations | 1,218 | | | 1,253 | | |
| Other income (expense): | Other income (expense): | | | | | Other income (expense): | | |
| Investment and other income | Investment and other income | 692 | | | 424 | | | 786 | | | 566 | | Investment and other income | 353 | | | 52 | | |
| Debt extinguishment | Debt extinguishment | 10 | | | (79) | | | 26 | | | (125) | | Debt extinguishment | — | | | 3 | | |
| Interest expense | Interest expense | (169) | | | (170) | | | (491) | | | (503) | | Interest expense | (180) | | | (160) | | |
| Earnings before income tax | Earnings before income tax | 1,009 | | | 720 | | | 1,921 | | | 1,119 | | Earnings before income tax | 1,391 | | | 1,148 | | |
| Income tax expense | Income tax expense | 269 | | | 139 | | | 500 | | | 376 | | Income tax expense | 261 | | | 296 | | |
| Net earnings | Net earnings | 740 | | | 581 | | | 1,421 | | | 743 | | Net earnings | 1,130 | | | 852 | | |
| (Earnings) loss attributable to noncontrolling interests | (Earnings) loss attributable to noncontrolling interests | (2) | | | 3 | | | (6) | | | 5 | | (Earnings) loss attributable to noncontrolling interests | — | | | (3) | | |
| Net earnings attributable to Centene Corporation | Net earnings attributable to Centene Corporation | $ | 738 | | | $ | 584 | | | $ | 1,415 | | | $ | 748 | | Net earnings attributable to Centene Corporation | $ | 1,130 | | | $ | 849 | | |
|
| | | | | | | |
| | | | |
| Net earnings per common share attributable to Centene Corporation: | Net earnings per common share attributable to Centene Corporation: | | Net earnings per common share attributable to Centene Corporation: | |
| Basic earnings per common share | Basic earnings per common share | $ | 1.29 | | | $ | 1.00 | | | $ | 2.44 | | | $ | 1.28 | | Basic earnings per common share | $ | 2.05 | | | $ | 1.46 | | |
| Diluted earnings per common share | Diluted earnings per common share | $ | 1.27 | | | $ | 0.99 | | | $ | 2.41 | | | $ | 1.27 | | Diluted earnings per common share | $ | 2.04 | | | $ | 1.44 | | |
|
| |
| | |
| Weighted average number of common shares outstanding: | Weighted average number of common shares outstanding: | | Weighted average number of common shares outstanding: | | |
| Basic | Basic | 573,961 | | | 583,244 | | | 580,277 | | | 582,636 | | Basic | 550,779 | | | 583,230 | | |
| Diluted | Diluted | 580,607 | | | 590,702 | | | 587,084 | | | 590,154 | | Diluted | 553,845 | | | 590,658 | | |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(In millions)
(Unaudited)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| Net earnings | Net earnings | $ | 740 | | | $ | 581 | | | $ | 1,421 | | | $ | 743 | | Net earnings | $ | 1,130 | | | $ | 852 | | |
| Change in unrealized gain (loss) on investments | | Change in unrealized gain (loss) on investments | 253 | | | (715) | | |
| Change in unrealized gain (loss) on investments, tax effect | | Change in unrealized gain (loss) on investments, tax effect | (61) | | | 171 | | |
| Change in unrealized gain (loss) on investments, net of tax | | Change in unrealized gain (loss) on investments, net of tax | 192 | | | (544) | | |
| Reclassification adjustment, net of tax | Reclassification adjustment, net of tax | 3 | | | 1 | | | 12 | | | (16) | | Reclassification adjustment, net of tax | 2 | | | 2 | | |
| Change in unrealized gain (loss) on investments, net of tax | (383) | | | (47) | | | (1,267) | | | (125) | | |
| | Foreign currency translation adjustments | (101) | | | (17) | | | (216) | | | (20) | | |
| Foreign currency translation adjustments, net of tax | | Foreign currency translation adjustments, net of tax | 23 | | | (20) | | |
| Other comprehensive earnings (loss) | Other comprehensive earnings (loss) | (481) | | | (63) | | | (1,471) | | | (161) | | Other comprehensive earnings (loss) | 217 | | | (562) | | |
| Comprehensive earnings (loss) | 259 | | | 518 | | | (50) | | | 582 | | |
| Comprehensive earnings | | Comprehensive earnings | 1,347 | | | 290 | | |
| Comprehensive (earnings) loss attributable to noncontrolling interests | Comprehensive (earnings) loss attributable to noncontrolling interests | (2) | | | 3 | | | (6) | | | 5 | | Comprehensive (earnings) loss attributable to noncontrolling interests | — | | | (3) | | |
| Comprehensive earnings (loss) attributable to Centene Corporation | $ | 257 | | | $ | 521 | | | $ | (56) | | | $ | 587 | | |
| Comprehensive earnings attributable to Centene Corporation | | Comprehensive earnings attributable to Centene Corporation | $ | 1,347 | | | $ | 287 | | |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY
(In millions, except shares in thousands and per share data in dollars)
(Unaudited)
Three and Nine Months Ended September 30, 2022March 31, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Centene Stockholders’ Equity | | | | | |
| | Common Stock | | | | | | | | Treasury Stock | | | | | |
| | $0.001 Par Value Shares | | Amt | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive Earnings
(Loss) | | Retained
Earnings | | $0.001 Par Value Shares | | Amt | | Non-redeemable
Non-
controlling
Interest | | Total | |
| Balance, December 31, 2021 | 602,704 | | | $ | 1 | | | $ | 19,672 | | | $ | 77 | | | $ | 8,139 | | | 20,225 | | | $ | (1,094) | | | $ | 145 | | | $ | 26,940 | | |
| Comprehensive Earnings: | | | | | | | | | | | | | | | | | | |
| Net earnings (loss) | — | | | — | | | — | | | — | | | 849 | | | — | | | — | | | (1) | | | 848 | | |
| Other comprehensive loss, net of $(171) tax | — | | | — | | | — | | | (562) | | | — | | | — | | | — | | | — | | | (562) | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Common stock issued for employee benefit plans | 3,221 | | | — | | | 28 | | | — | | | — | | | — | | | — | | | — | | | 28 | | |
| Fair value of unvested equity awards in connection with acquisition | — | | | — | | | 60 | | | — | | | — | | | — | | | — | | | — | | | 60 | | |
| Common stock repurchases | — | | | — | | | — | | | — | | | — | | | 846 | | | (71) | | | — | | | (71) | | |
| Stock compensation expense | — | | | — | | | 70 | | | — | | | — | | | — | | | — | | | — | | | 70 | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balance, March 31, 2022 | 605,925 | | | $ | 1 | | | $ | 19,830 | | | $ | (485) | | | $ | 8,988 | | | 21,071 | | | $ | (1,165) | | | $ | 144 | | | $ | 27,313 | | |
| Comprehensive Earnings: | | | | | | | | | | | | | | | | | | |
| Net earnings (loss) | — | | | — | | | — | | | — | | | (172) | | | — | | | — | | | (3) | | | (175) | | |
| Other comprehensive loss, net of $(106) tax | — | | | — | | | — | | | (428) | | | — | | | — | | | — | | | — | | | (428) | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Common stock issued for employee benefit plans | 519 | | | — | | | 10 | | | — | | | — | | | — | | | — | | | — | | | 10 | | |
| Common stock repurchases | — | | | — | | | — | | | — | | | — | | | 4,249 | | | (349) | | | — | | | (349) | | |
| Stock compensation expense | — | | | — | | | 59 | | | — | | | — | | | — | | | — | | | — | | | 59 | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2022 | 606,444 | | | $ | 1 | | | $ | 19,899 | | | $ | (913) | | | $ | 8,816 | | | 25,320 | | | $ | (1,514) | | | $ | 141 | | | $ | 26,430 | | |
| Comprehensive Earnings: | | | | | | | | | | | | | | | | | | |
| Net earnings (loss) | — | | | — | | | — | | | — | | | 738 | | | — | | | — | | | (2) | | | 736 | | |
| Other comprehensive loss, net of $(120) tax | — | | | — | | | — | | | (481) | | | —�� | | | — | | | — | | | — | | | (481) | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Common stock issued for employee benefit plans | 487 | | | — | | | 24 | | | — | | | — | | | — | | | — | | | — | | | 24 | | |
| Common stock repurchases | — | | | — | | | (200) | | | — | | | — | | | 11,520 | | | (1,043) | | | — | | | (1,243) | | |
| Stock compensation expense | — | | | — | | | 51 | | | — | | | — | | | — | | | — | | | — | | | 51 | | |
| Reclassification to non-redeemable noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 17 | | | 17 | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2022 | 606,931 | | | $ | 1 | | | $ | 19,774 | | | $ | (1,394) | | | $ | 9,554 | | | 36,840 | | | $ | (2,557) | | | $ | 156 | | | $ | 25,534 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Centene Stockholders' Equity | | | | | |
| | Common Stock | | | | | | | | Treasury Stock | | | | | |
| | $0.001 Par Value Shares | | Amt | | Additional Paid-in Capital | | Accumulated Other Comprehensive
Earnings (Loss) | | Retained Earnings | | $0.001 Par Value Shares | | Amt | | Noncontrolling
Interest | | Total | |
| Balance, December 31, 2022 | 607,847 | | | $ | 1 | | | $ | 20,060 | | | $ | (1,132) | | | $ | 9,341 | | | 57,093 | | | $ | (4,213) | | | $ | 124 | | | $ | 24,181 | | |
| | | | | | | | | | | | | | | | | | |
| Net earnings | — | | | — | | | — | | | — | | | 1,130 | | | — | | | — | | | — | | | 1,130 | | |
| Other comprehensive earnings, net of $61 tax | — | | | — | | | — | | | 217 | | | — | | | — | | | — | | | — | | | 217 | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Common stock issued for employee benefit plans | 6,508 | | | — | | | 12 | | | — | | | — | | | — | | | — | | | — | | | 12 | | |
| Common stock repurchases | — | | | — | | | — | | | — | | | — | | | 5,548 | | | (423) | | | — | | | (423) | | |
| Stock compensation expense | — | | | — | | | 61 | | | — | | | — | | | — | | | — | | | — | | | 61 | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Purchase of redeemable noncontrolling interest | — | | | — | | | (12) | | | — | | | — | | | — | | | — | | | — | | | (12) | | |
| | | | | | | | | | | | | | | | | | |
| Balance, March 31, 2023 | 614,355 | | | $ | 1 | | | $ | 20,121 | | | $ | (915) | | | $ | 10,471 | | | 62,641 | | | $ | (4,636) | | | $ | 124 | | | $ | 25,166 | | |
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| | | | | | | | | | | | | | | | | | |
Three and Nine Months Ended September 30, 2021March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Centene Stockholders’ Equity | | | | |
| | Common Stock | | | | | | | | Treasury Stock | | | | |
| | $0.001 Par Value Shares | | Amt | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive Earnings
(Loss) | | Retained
Earnings | | $0.001 Par Value Shares | | Amt | | Non-redeemable
Non-
controlling
Interest | | Total |
| Balance, December 31, 2020 | 598,249 | | | $ | 1 | | | $ | 19,459 | | | $ | 337 | | | $ | 6,792 | | | 16,770 | | | $ | (816) | | | $ | 112 | | | $ | 25,885 | |
| Comprehensive Earnings: | | | | | | | | | | | | | | | | | |
| Net earnings (loss) | — | | | — | | | — | | | — | | | 699 | | | — | | | — | | | (5) | | | 694 | |
| Other comprehensive loss, net of $(49) tax | — | | | — | | | — | | | (161) | | | — | | | — | | | — | | | — | | | (161) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Common stock issued for employee benefit plans | 1,675 | | | — | | | 9 | | | — | | | — | | | — | | | — | | | — | | | 9 | |
| Common stock repurchases | (316) | | | — | | | (19) | | | — | | | — | | | 156 | | | (10) | | | — | | | (29) | |
| Stock compensation expense | — | | | — | | | 51 | | | — | | | — | | | — | | | — | | | — | | | 51 | |
| Contribution from noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9 | | | 9 | |
| | | | | | | | | | | | | | | | | |
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| Balance, March 31, 2021 | 599,608 | | | $ | 1 | | | $ | 19,500 | | | $ | 176 | | | $ | 7,491 | | | 16,926 | | | $ | (826) | | | $ | 116 | | | $ | 26,458 | |
| Comprehensive Earnings: | | | | | | | | | | | | | | | | | |
| Net earnings (loss) | — | | | — | | | — | | | — | | | (535) | | | — | | | — | | | (3) | | | (538) | |
| Other comprehensive earnings, net of $19 tax | — | | | — | | | — | | | 63 | | | — | | | — | | | — | | | — | | | 63 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Common stock issued for employee benefit plans | 390 | | | — | | | 9 | | | — | | | — | | | — | | | — | | | — | | | 9 | |
| Common stock repurchases | (10) | | | — | | | — | | | — | | | — | | | 60 | | | (4) | | | — | | | (4) | |
| Stock compensation expense | — | | | — | | | 36 | | | — | | | — | | | — | | | — | | | — | | | 36 | |
| Contribution from noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 21 | | | 21 | |
| | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | |
| Balance, June 30, 2021 | 599,988 | | | $ | 1 | | | $ | 19,545 | | | $ | 239 | | | $ | 6,956 | | | 16,986 | | | $ | (830) | | | $ | 134 | | | $ | 26,045 | |
| Comprehensive Earnings: | | | | | | | | | | | | | | | | | |
| Net earnings (loss) | — | | | — | | | — | | | — | | | 584 | | | — | | | — | | | (8) | | | 576 | |
| Other comprehensive loss, net of $(15) tax | — | | | — | | | — | | | (63) | | | — | | | — | | | — | | | — | | | (63) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Common stock issued for employee benefit plans | 720 | | | — | | | 9 | | | — | | | — | | | — | | | — | | | — | | | 9 | |
| Common stock repurchases | — | | | — | | | — | | | — | | | — | | | 222 | | | (15) | | | — | | | (15) | |
| Stock compensation expense | — | | | — | | | 40 | | | — | | | — | | | — | | | — | | | — | | | 40 | |
| Contribution from noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5 | | | 5 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Divestiture of noncontrolling interests | — | | | — | | | | | — | | | — | | | — | | | — | | | (10) | | | (10) | |
| Acquisition resulting in noncontrolling interests | — | | | — | | | | | — | | | — | | | — | | | — | | | 3 | | | 3 | |
| Balance, September 30, 2021 | 600,708 | | | $ | 1 | | | $ | 19,594 | | | $ | 176 | | | $ | 7,540 | | | 17,208 | | | $ | (845) | | | $ | 124 | | | $ | 26,590 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Centene Stockholders' Equity | | | | |
| | Common Stock | | | | | | | | Treasury Stock | | | | |
| | $0.001 Par Value Shares | | Amt | | Additional Paid-in Capital | | Accumulated Other Comprehensive
Earnings (Loss) | | Retained Earnings | | $0.001 Par Value Shares | | Amt | | Noncontrolling
Interest | | Total |
| Balance, December 31, 2021 | 602,704 | | | $ | 1 | | | $ | 19,672 | | | $ | 77 | | | $ | 8,139 | | | 20,225 | | | $ | (1,094) | | | $ | 145 | | | $ | 26,940 | |
| | | | | | | | | | | | | | | | | |
| Net earnings (loss) | — | | | — | | | — | | | — | | | 849 | | | — | | | — | | | (1) | | | 848 | |
| Other comprehensive loss, net of $(171) tax | — | | | — | | | — | | | (562) | | | — | | | — | | | — | | | — | | | (562) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Common stock issued for employee benefit plans | 3,221 | | | — | | | 28 | | | — | | | — | | | — | | | — | | | — | | | 28 | |
| Fair value of unvested equity awards in connection with acquisition | — | | | — | | | 60 | | | — | | | — | | | — | | | — | | | — | | | 60 | |
| Common stock repurchases | — | | | — | | | — | | | — | | | — | | | 846 | | | (71) | | | — | | | (71) | |
| Stock compensation expense | — | | | — | | | 70 | | | — | | | — | | | — | | | — | | | — | | | 70 | |
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| Balance, March 31, 2022 | 605,925 | | | $ | 1 | | | $ | 19,830 | | | $ | (485) | | | $ | 8,988 | | | 21,071 | | | $ | (1,165) | | | $ | 144 | | | $ | 27,313 | |
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The accompanying notes to the consolidated financial statements are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions, unaudited)
| | | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | | 2022 | | 2021 | | 2023 | | 2022 |
| Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
| Net earnings | Net earnings | $ | 1,421 | | | $ | 743 | | Net earnings | $ | 1,130 | | | $ | 852 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities | Adjustments to reconcile net earnings to net cash provided by operating activities | Adjustments to reconcile net earnings to net cash provided by operating activities |
| Depreciation and amortization | Depreciation and amortization | 1,178 | | | 1,098 | | Depreciation and amortization | 346 | | | 390 | |
| Stock compensation expense | Stock compensation expense | 180 | | | 127 | | Stock compensation expense | 61 | | | 70 | |
| Impairment | Impairment | 1,739 | | | 229 | | Impairment | 20 | | | — | |
| (Gain) loss on debt extinguishment | (Gain) loss on debt extinguishment | (26) | | | 125 | | (Gain) loss on debt extinguishment | — | | | (3) | |
| (Gain) on acquisition | (2) | | | (309) | | |
| | Deferred income taxes | Deferred income taxes | (682) | | | (143) | | Deferred income taxes | (159) | | | 12 | |
| (Gain) loss on divestitures | (503) | | | 62 | | |
| (Gain) on divestiture | | (Gain) on divestiture | (79) | | | — | |
| | Other adjustments, net | Other adjustments, net | 164 | | | (6) | | Other adjustments, net | 7 | | | 22 | |
| Changes in assets and liabilities | Changes in assets and liabilities | | | | Changes in assets and liabilities | | | |
| Premium and trade receivables | Premium and trade receivables | (1,274) | | | (1,723) | | Premium and trade receivables | (1,938) | | | (3,099) | |
| Other assets | Other assets | 152 | | | (124) | | Other assets | (315) | | | (299) | |
| | Medical claims liabilities | Medical claims liabilities | 1,976 | | | 1,661 | | Medical claims liabilities | 759 | | | 1,767 | |
| Unearned revenue | Unearned revenue | 1,964 | | | (169) | | Unearned revenue | 1,919 | | | 81 | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | 686 | | | 993 | | Accounts payable and accrued expenses | 1,548 | | | 957 | |
| Other long-term liabilities | Other long-term liabilities | 863 | | | 964 | | Other long-term liabilities | 970 | | | 401 | |
| Other operating activities, net | 1 | | | 2 | | |
| | Net cash provided by operating activities | Net cash provided by operating activities | 7,837 | | | 3,530 | | Net cash provided by operating activities | 4,269 | | | 1,151 | |
| Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
| Capital expenditures | Capital expenditures | (771) | | | (662) | | Capital expenditures | (225) | | | (242) | |
| Purchases of investments | Purchases of investments | (5,118) | | | (5,253) | | Purchases of investments | (1,619) | | | (1,700) | |
| Sales and maturities of investments | Sales and maturities of investments | 2,842 | | | 4,069 | | Sales and maturities of investments | 1,148 | | | 1,047 | |
| Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | (1,457) | | | (534) | | Acquisitions, net of cash acquired | — | | | (1,504) | |
| Divestiture proceeds, net of divested cash | Divestiture proceeds, net of divested cash | 1,362 | | | (62) | | Divestiture proceeds, net of divested cash | 443 | | | — | |
| | Net cash used in investing activities | (3,142) | | | (2,442) | | |
| Other investing activities, net | | Other investing activities, net | — | | | (2) | |
| Net cash (used in) investing activities | | Net cash (used in) investing activities | (253) | | | (2,401) | |
| Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
| | Proceeds from long-term debt | Proceeds from long-term debt | 357 | | | 9,247 | | Proceeds from long-term debt | 287 | | | 100 | |
| Payments and repurchases of long-term debt | Payments and repurchases of long-term debt | (1,202) | | | (7,411) | | Payments and repurchases of long-term debt | — | | | (526) | |
| Common stock repurchases | Common stock repurchases | (1,663) | | | (49) | | Common stock repurchases | (423) | | | (71) | |
| Proceeds from common stock issuances | | Proceeds from common stock issuances | — | | | 27 | |
| Payments for debt extinguishment | Payments for debt extinguishment | (14) | | | (157) | | Payments for debt extinguishment | — | | | (27) | |
| Debt issuance costs | — | | | (72) | | |
| Purchase of noncontrolling interest | | Purchase of noncontrolling interest | (58) | | | — | |
| | Other financing activities, net | Other financing activities, net | 57 | | | 39 | | Other financing activities, net | 11 | | | (1) | |
| Net cash (used in) provided by financing activities | (2,465) | | | 1,597 | | |
| Net cash (used in) financing activities | | Net cash (used in) financing activities | (183) | | | (498) | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (37) | | | (8) | | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 2 | | | 33 | |
| Net increase in cash, cash equivalents, and restricted cash and cash equivalents | 2,193 | | | 2,677 | | |
| Cash and cash equivalents reclassified from (to) held for sale | (192) | | | — | | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents | | Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents | 3,835 | | | (1,715) | |
| Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period | Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period | 13,214 | | | 10,957 | | Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period | 12,330 | | | 13,214 | |
Cash, cash equivalents, and restricted cash and cash equivalents, end of period | Cash, cash equivalents, and restricted cash and cash equivalents, end of period | $ | 15,215 | | | $ | 13,634 | | Cash, cash equivalents, and restricted cash and cash equivalents, end of period | $ | 16,165 | | | $ | 11,499 | |
| Supplemental disclosures of cash flow information: | Supplemental disclosures of cash flow information: | | | | Supplemental disclosures of cash flow information: | | | |
| Interest paid | Interest paid | $ | 462 | | | $ | 479 | | Interest paid | $ | 144 | | | $ | 139 | |
| Income taxes paid | Income taxes paid | $ | 448 | | | $ | 477 | | Income taxes paid | $ | 11 | | | $ | 11 | |
| | | The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the Consolidated Balance Sheets to the totals above: | The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the Consolidated Balance Sheets to the totals above: | The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the Consolidated Balance Sheets to the totals above: |
| | September 30, | | March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Cash and cash equivalents | Cash and cash equivalents | $ | 14,987 | | | $ | 13,423 | | Cash and cash equivalents | $ | 15,853 | | | $ | 11,237 | |
| Restricted cash and cash equivalents, included in restricted deposits | Restricted cash and cash equivalents, included in restricted deposits | 228 | | | 211 | | Restricted cash and cash equivalents, included in restricted deposits | 312 | | | 262 | |
| Total cash, cash equivalents, and restricted cash and cash equivalents | Total cash, cash equivalents, and restricted cash and cash equivalents | $ | 15,215 | | | $ | 13,634 | | Total cash, cash equivalents, and restricted cash and cash equivalents | $ | 16,165 | | | $ | 11,499 | |
The accompanying notes to the consolidated financial statements are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Operations
Basis of Presentation
The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements included in the Form 10-K for the fiscal year ended December 31, 2021.2022. The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, footnote disclosures that would substantially duplicate the disclosures contained in the December 31, 20212022 audited financial statements have been omitted from these interim financial statements, where appropriate. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of the interim periods presented.
Certain 20212022 amounts in the consolidated financial statements and notes to the consolidated financial statements have been reclassified to conform to the 2022 presentation. Beginning in 2022, the Company has included a separate line item for depreciation expense on the Consolidated Statement of Operations, which was previously included in selling, general and administrative (SG&A) expenses. Prior period SG&A expense ratios have also been conformed2023 presentation, including reclassifications related to the current presentation.Company's new segment reporting structure as outlined below. These reclassifications have no effect on net earnings or stockholders’stockholders' equity as previously reported.
Segment Reporting
On January 4, 2022,
In the first quarter of 2023, and in conjunction with the Company's updated strategic plan, executive leadership realignment, and corresponding 2023 divestitures, the Company acquired allhas revised the way it manages the business, evaluates performance, and allocates resources, resulting in an updated segment structure comprised of (1) a Medicaid segment, (2) a Medicare segment, (3) a Commercial segment, and (4) an Other segment.
The Medicaid, Medicare, and Commercial segments represent the issuedgovernment-sponsored or subsidized programs under which the Company offers managed healthcare services. Specifically, the Medicaid segment includes the Temporary Assistance for Needy Families (TANF) program, Medicaid Expansion programs, the Aged, Blind, or Disabled (ABD) program, the Children's Health Insurance Program (CHIP), Long-Term Services and outstanding shares of MagellanSupports (LTSS), Foster Care, Medicare-Medicaid Plans (MMP), which cover beneficiaries who are dually eligible for Medicaid and Medicare, and other state-based programs. The Medicare segment includes Medicare Advantage, Medicare Supplement, Dual Eligible Special Needs Plans (D-SNPs), and Medicare Prescription Drug Plans (PDPs), also known as Medicare Part D. The Commercial segment includes the Health Inc. (Magellan) (the Magellan Acquisition).Insurance Marketplace along with individual, small group, and large group commercial healthcare products. The acquisition was accounted for as a business combination. See Note 2. AcquisitionsOther segment includes the Company's pharmacy operations, vision and Divestitures for further details.dental services, clinical healthcare, behavioral health, international operations, and corporate management companies, among others.
Accounting Guidance Not Yet Adopted
The Company has determined that there are no recently issued accounting pronouncements that will have a material impact on its consolidated financial position, results of operations, or cash flows.
2. Acquisitions and Divestitures
Magellan AcquisitionOn January 5, 2023, the Company completed the divestiture of HealthSmart, its third-party health plan administration business.
On January 4,10, 2023, the Company signed and closed on a definitive agreement to divest Centurion, its prison healthcare business. During 2022, the Company acquired allrecorded impairment charges related to goodwill and other current assets associated with the pending divestitures. The Company could receive up to an additional $35 million in cash based on the reprocurements of certain Centurion contracts. The Company will recognize the issued and outstanding sharesappropriate amount of Magellan. Totalcontingent consideration related to the additional $35 million when realized or realizable.
On January 20, 2023, the Company completed the divestiture of Magellan Specialty Health for the acquisition was $2,491 million, consisting of $2,431approximately $646 million in cash and $60stock, including an estimated working capital adjustment and recognized a pre-tax gain of $79 million. The stock consideration was subsequently sold in April 2023 for cash proceeds of $245 million. The Company could also receive up to an additional $150 million in cash and stock in 2024 based on certain 2023 performance metrics. The Company will recognize the appropriate amount of contingent consideration related to the fair value of replacement equity awards associated with pre-combination service. The purchase price has been adjusted to reflect the net effective settlement of preexisting relationships between the Company and Magellan of $70 million. The Company recognized $8additional $150 million and $100 million of acquisition related expenses related to Magellan for the three and nine months ended September 30, 2022, respectively.
The Magellan Acquisition was accounted for as a business combination using the acquisition method of accounting that requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The significant areas of the assessment of fair value that remain preliminary include identifiable intangible assets and goodwill, premium and related receivables, medical claims liability, and income taxes, and accordingly, the Company has recorded provisional amounts which are subject to adjustment. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date.when realized or realizable.
The Company's preliminary allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of January 4, 2022 is as follows ($ in millions):
| | | | | | | | |
Assets acquired and liabilities assumed | | |
Cash and cash equivalents | | $ | 998 | |
Premium and related receivables | | 791 | |
Short-term investments | | 144 | |
Other current assets | | 194 | |
Long-term investments | | 43 | |
Restricted deposits | | 7 | |
Property, software and equipment | | 90 | |
Intangible assets (a)
| | 751 | |
Other long-term assets | | 50 | |
Total assets acquired | | 3,068 | |
| | |
Medical claims liability | | 247 | |
Accounts payable and accrued expenses | | 495 | |
Return of premium payable | | 53 | |
Unearned revenue | | 8 | |
Current portion of long-term debt | | 5 | |
Long-term debt (b)
| | 542 | |
Deferred tax liabilities (c)
| | 123 | |
Other long-term liabilities | | 69 | |
Total liabilities assumed | | 1,542 | |
Mezzanine equity | | 32 | |
Total identifiable net assets | | 1,494 | |
Goodwill (d)
| | 997 | |
Total assets acquired and liabilities assumed | | $ | 2,491 | |
The Company has made the following preliminary fair value adjustments based on information reviewed through September 30, 2022. Significant fair value adjustments are noted as follows:
(a) The identifiable intangible assets acquired are to be measured at fair value as of the completion of the acquisition. The fair value of intangible assets will be determined primarily using variations of the income approach, which is based on the present value of the future after-tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, will be considered in estimating the fair value. The identifiable intangible assets include purchased contract rights, trade names, provider contracts, and developed technologies. The Company has estimated the fair value of intangible assets to be $751 million with a weighted average life of 13 years. The Company adjusted its estimate of the identifiable intangible assets during the third quarter, resulting in additional amortization of $15 million.
The fair values and weighted average useful lives for identifiable intangible assets acquired are as follows:
| | | | | | | | | | | | | | |
| | Fair Value | | Weighted Average Useful Life (in years) |
| Purchased contract rights | | $ | 470 | | | 13 |
| Provider contracts | | 100 | | | 15 |
| Trade names | | 80 | | | 17 |
| Developed technologies | | 101 | | | 5 |
| Total intangible assets acquired | | $ | 751 | | | 13 |
| | | | |
(b) Debt is required to be measured at fair value under the acquisition method of accounting. The fair value of Magellan's Senior Notes and Credit Agreement assumed in the acquisition was $535 million. In January 2022, the Company paid off Magellan's debt acquired in the transaction using Magellan's cash on hand.
(c) The preliminary deferred tax liabilities are presented net of $116 million of deferred tax assets.
(d) Goodwill is estimated at $997 million and primarily relates to synergies expected from the acquisition and the assembled workforce of Magellan. The assignment of goodwill to the Company’s respective segments has not been completed at this time, but the majority of goodwill is expected to be allocated to the Specialty segment. The majority of the goodwill is not deductible for income tax purposes.
PANTHERx Rare Divestiture
On July 14, 2022, the Company completed the previously announced sale of PANTHERx Rare (PANTHERx) for $1,373 million. The Company recognized a gain of $490 million, or $382 million after-tax, which is included in investment and other income on the Consolidated Statements of Operations.
Spanish and Central European Divestiture
On July 25, 2022, as part of the Company’s previously announced review of strategic alternatives for its international portfolio, the Company announced it has signed a definitive agreement to sell its ownership stakes in its Spanish and Central European businesses, including Ribera Salud, Torrejón Salud, and Pro Diagnostics Group.
As of September 30, 2022, the assets and liabilities of the Spanish and Central European businesses were considered held for sale resulting in $666 million of assets held for sale in Other Current Assets and $582 million of liabilities held for sale in Accounts Payable and Accrued Expenses on the Consolidated Balance Sheet. The majority of the held for sale assets were previously reported as cash and cash equivalents, premium and trade receivables, and property, software and equipment. During the third quarter, the Company recorded an impairment charge primarily related to intangible assets and goodwill associated with the pending divestiture of $165 million, or $138 million after-tax.
3. Short-term and Long-term Investments, Restricted Deposits
Short-term and long-term investments and restricted deposits by investment type consist of the following ($ in millions):
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized Losses | | Fair
Value | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized Losses | | Fair
Value | | Amortized Cost | | Gross
Unrealized Gains | | Gross
Unrealized Losses | | Fair Value | | Amortized Cost | | Gross
Unrealized Gains | | Gross
Unrealized Losses | | Fair Value |
| Debt securities: | Debt securities: | | | | | | | | | | | | | | | | Debt securities: | | | | | | | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 666 | | | $ | — | | | $ | (18) | | | $ | 648 | | | $ | 642 | | | $ | — | | | $ | (2) | | | $ | 640 | | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 489 | | | $ | — | | | $ | (12) | | | $ | 477 | | | $ | 695 | | | $ | — | | | $ | (16) | | | $ | 679 | |
| Corporate securities | Corporate securities | 9,648 | | | 1 | | | (897) | | | 8,752 | | | 8,145 | | | 130 | | | (75) | | | 8,200 | | Corporate securities | 10,523 | | | 32 | | | (668) | | | 9,887 | | | 10,127 | | | 12 | | | (778) | | | 9,361 | |
| Restricted certificates of deposit | Restricted certificates of deposit | 4 | | | — | | | — | | | 4 | | | 4 | | | — | | | — | | | 4 | | Restricted certificates of deposit | 4 | | | — | | | — | | | 4 | | | 4 | | | — | | | — | | | 4 | |
| Restricted cash equivalents | Restricted cash equivalents | 228 | | | — | | | — | | | 228 | | | 96 | | | — | | | — | | | 96 | | Restricted cash equivalents | 312 | | | — | | | — | | | 312 | | | 256 | | | — | | | — | | | 256 | |
| Short-term time deposits | Short-term time deposits | 275 | | | — | | | — | | | 275 | | | 109 | | | — | | | — | | | 109 | | Short-term time deposits | 198 | | | — | | | — | | | 198 | | | 204 | | | — | | | — | | | 204 | |
| Municipal securities | Municipal securities | 3,980 | | | — | | | (320) | | | 3,660 | | | 3,398 | | | 85 | | | (15) | | | 3,468 | | Municipal securities | 4,131 | | | 15 | | | (213) | | | 3,933 | | | 4,055 | | | 6 | | | (280) | | | 3,781 | |
| Asset-backed securities | Asset-backed securities | 1,335 | | | — | | | (68) | | | 1,267 | | | 1,308 | | | 5 | | | (5) | | | 1,308 | | Asset-backed securities | 1,492 | | | 2 | | | (57) | | | 1,437 | | | 1,396 | | | — | | | (70) | | | 1,326 | |
| Residential mortgage-backed securities | Residential mortgage-backed securities | 1,154 | | | — | | | (135) | | | 1,019 | | | 850 | | | 10 | | | (7) | | | 853 | | Residential mortgage-backed securities | 1,187 | | | 4 | | | (105) | | | 1,086 | | | 1,165 | | | 2 | | | (121) | | | 1,046 | |
| Commercial mortgage-backed securities | Commercial mortgage-backed securities | 970 | | | — | | | (96) | | | 874 | | | 870 | | | 13 | | | (10) | | | 873 | | Commercial mortgage-backed securities | 1,067 | | | 1 | | | (87) | | | 981 | | | 961 | | | — | | | (99) | | | 862 | |
Equity securities (1) | Equity securities (1) | 6 | | | — | | | — | | | 6 | | | 326 | | | — | | | — | | | 326 | | Equity securities (1) | 250 | | | — | | | — | | | 250 | | | 5 | | | — | | | — | | | 5 | |
| Private equity investments | Private equity investments | 551 | | | — | | | — | | | 551 | | | 587 | | | — | | | — | | | 587 | | Private equity investments | 540 | | | — | | | — | | | 540 | | | 529 | | | — | | | — | | | 529 | |
| Life insurance contracts | Life insurance contracts | 165 | | | — | | | — | | | 165 | | | 186 | | | — | | | — | | | 186 | | Life insurance contracts | 176 | | | — | | | — | | | 176 | | | 169 | | | — | | | — | | | 169 | |
| Total | Total | $ | 18,982 | | | $ | 1 | | | $ | (1,534) | | | $ | 17,449 | | | $ | 16,521 | | | $ | 243 | | | $ | (114) | | | $ | 16,650 | | Total | $ | 20,369 | | | $ | 54 | | | $ | (1,142) | | | $ | 19,281 | | | $ | 19,566 | | | $ | 20 | | | $ | (1,364) | | | $ | 18,222 | |
| (1) Investments in equity securities as of December 31, 2021 primarily consisted of exchange traded funds in fixed income securities. | |
(1) Investments in equity securities as of March 31, 2023 primarily consisted of shares received as part of the Magellan Specialty Health divestiture consideration. These shares were subsequently sold in April 2023. | | (1) Investments in equity securities as of March 31, 2023 primarily consisted of shares received as part of the Magellan Specialty Health divestiture consideration. These shares were subsequently sold in April 2023. |
The Company's investments are debt securities classified as available-for-sale with the exception of equity securities, certain private equity investments and life insurance contracts. The Company's investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities. The Company limits the size of investment in any single issuer other than U.S. treasury securities and obligations of U.S. government corporations and agencies. As of September 30, 2022, 98%March 31, 2023, 99% of the Company's investments in rated securities carry an investment grade rating by nationally recognized statistical rating organizations. At September 30, 2022,March 31, 2023, the Company held certificates of deposit, equity securities, private equity investments, and life insurance contracts, which did not carry a credit rating. Accrued interest income on available-for-sale debt securities was $119$141 million and $96$132 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, and is included in other current assets on the Consolidated Balance Sheets.
The Company's residential mortgage-backed securities are primarily issued by the Federal National Mortgage Association, Government National Mortgage Association, or Federal Home Loan Mortgage Corporation, which carry implicit or explicit guarantees of the U.S. government. The Company's commercial mortgage-backed securities are primarily senior tranches with a weighted average rating of AAA and a weighted average duration of 4 years at September 30, 2022.March 31, 2023.
The fair value of available-for-sale debt securities with gross unrealized losses by investment type and length of time that individual securities have been in a continuous unrealized loss position were as follows ($ in millions):
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | | Less Than 12 Months | | 12 Months or More | | Less Than 12 Months | | 12 Months or More | | Less Than 12 Months | | 12 Months or More | | Less Than 12 Months | | 12 Months or More |
| | | Unrealized Losses | | Fair
Value | | Unrealized Losses | | Fair
Value | | Unrealized Losses | | Fair
Value | | Unrealized Losses | | Fair
Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | (14) | | | $ | 556 | | | $ | (4) | | | $ | 67 | | | $ | (2) | | | $ | 598 | | | $ | — | | | $ | 3 | | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | (2) | | | $ | 249 | | | $ | (10) | | | $ | 170 | | | $ | (5) | | | $ | 342 | | | $ | (11) | | | $ | 184 | |
| Corporate securities | Corporate securities | (562) | | | 6,737 | | | (335) | | | 1,975 | | | (66) | | | 4,209 | | | (9) | | | 209 | | Corporate securities | (72) | | | 2,755 | | | (596) | | | 5,683 | | | (340) | | | 5,368 | | | (438) | | | 3,400 | |
| Municipal securities | Municipal securities | (228) | | | 2,998 | | | (92) | | | 586 | | | (14) | | | 1,173 | | | (1) | | | 39 | | Municipal securities | (18) | | | 1,161 | | | (195) | | | 1,945 | | | (142) | | | 2,437 | | | (138) | | | 995 | |
| Asset-backed securities | Asset-backed securities | (57) | | | 1,094 | | | (11) | | | 166 | | | (5) | | | 770 | | | — | | | 33 | | Asset-backed securities | (5) | | | 310 | | | (52) | | | 928 | | | (29) | | | 786 | | | (41) | | | 486 | |
| Residential mortgage-backed securities | Residential mortgage-backed securities | (86) | | | 770 | | | (49) | | | 244 | | | (7) | | | 472 | | | — | | | 15 | | Residential mortgage-backed securities | (10) | | | 319 | | | (95) | | | 652 | | | (55) | | | 629 | | | (66) | | | 352 | |
| Commercial mortgage-backed securities | Commercial mortgage-backed securities | (59) | | | 650 | | | (37) | | | 218 | | | (8) | | | 380 | | | (2) | | | 32 | | Commercial mortgage-backed securities | (8) | | | 188 | | | (79) | | | 697 | | | (49) | | | 513 | | | (50) | | | 330 | |
| | Total | Total | $ | (1,006) | | | $ | 12,805 | | | $ | (528) | | | $ | 3,256 | | | $ | (102) | | | $ | 7,602 | | | $ | (12) | | | $ | 331 | | Total | $ | (115) | | | $ | 4,982 | | | $ | (1,027) | | | $ | 10,075 | | | $ | (620) | | | $ | 10,075 | | | $ | (744) | | | $ | 5,747 | |
As of September 30, 2022,March 31, 2023, the gross unrealized losses were generated from 6,6886,109 positions out of a total of 6,8476,936 positions. The change in fair value of available-for-sale debt securities is primarily a result of movement in interest rates subsequent to the purchase of the security.
For each security in an unrealized loss position, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual, or regulatory purposes. If the security meets this criterion, the decline in fair value is recorded in earnings. The Company does not intend to sell these securities prior to maturity and it is not likely that the Company will be required to sell these securities prior to maturity; therefore, the Company did not record an impairment for these securities.
In addition, the Company monitors available-for-sale debt securities for credit losses. Certain investments have experienced a decline in fair value due to changes in credit quality, market interest rates, and/or general economic conditions. The Company recognizes an allowance when evidence demonstrates that the decline in fair value is credit related. Evidence of a credit related loss may include rating agency actions, adverse conditions specifically related to the security, or failure of the issuer of the security to make scheduled payments.
The contractual maturities of short-term and long-term debt securities and restricted deposits are as follows ($ in millions):
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| | | Investments | | Restricted Deposits | | Investments | | Restricted Deposits | | Investments | | Restricted Deposits | | Investments | | Restricted Deposits |
| | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| One year or less | One year or less | $ | 2,053 | | | $ | 2,029 | | | $ | 521 | | | $ | 518 | | | $ | 1,390 | | | $ | 1,396 | | | $ | 368 | | | $ | 368 | | One year or less | $ | 2,011 | | | $ | 1,981 | | | $ | 570 | | | $ | 569 | | | $ | 2,207 | | | $ | 2,179 | | | $ | 534 | | | $ | 532 | |
| One year through five years | One year through five years | 7,296 | | | 6,752 | | | 518 | | | 482 | | | 6,212 | | | 6,294 | | | 460 | | | 457 | | One year through five years | 8,008 | | | 7,556 | | | 546 | | | 518 | | | 7,651 | | | 7,147 | | | 524 | | | 490 | |
| Five years through ten years | Five years through ten years | 4,077 | | | 3,496 | | | 241 | | | 205 | | | 3,647 | | | 3,681 | | | 244 | | | 243 | | Five years through ten years | 4,131 | | | 3,821 | | | 245 | | | 224 | | | 4,066 | | | 3,613 | | | 224 | | | 195 | |
| Greater than ten years | Greater than ten years | 95 | | | 85 | | | — | | | — | | | 73 | | | 78 | | | — | | | — | | Greater than ten years | 144 | | | 140 | | | 2 | | | 2 | | | 135 | | | 129 | | | — | | | — | |
| Asset-backed securities | Asset-backed securities | 3,459 | | | 3,160 | | | — | | | — | | | 3,028 | | | 3,034 | | | — | | | — | | Asset-backed securities | 3,746 | | | 3,504 | | | — | | | — | | | 3,522 | | | 3,234 | | | — | | | — | |
| Total | Total | $ | 16,980 | | | $ | 15,522 | | | $ | 1,280 | | | $ | 1,205 | | | $ | 14,350 | | | $ | 14,483 | | | $ | 1,072 | | | $ | 1,068 | | Total | $ | 18,040 | | | $ | 17,002 | | | $ | 1,363 | | | $ | 1,313 | | | $ | 17,581 | | | $ | 16,302 | | | $ | 1,282 | | | $ | 1,217 | |
Actual maturities may differ from contractual maturities due to call or prepayment options. Equity securities, private equity investments and life insurance contracts are excluded from the table above because they do not have a contractual maturity. The Company has an option to redeem at amortized cost substantially all of the securities included in the greater than ten years category listed above.
4. Fair Value Measurements
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon observable or unobservable inputs used to estimate fair value. Level inputs are as follows:
| | | | | | | | |
| Level Input: | | Input Definition: |
| Level I | | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. |
| | | |
| Level II | | Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date. |
| | | |
| Level III | | Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
The following table summarizes fair value measurements by level at September 30,March 31, 2023, for assets and liabilities measured at fair value on a recurring basis ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Level I | | Level II | | Level III | | Total |
| Assets | | | | | | | |
| Cash and cash equivalents | $ | 15,853 | | | $ | — | | | $ | — | | | $ | 15,853 | |
| Investments: | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 156 | | | $ | — | | | $ | — | | | $ | 156 | |
| Corporate securities | — | | | 9,853 | | | — | | | 9,853 | |
| Municipal securities | — | | | 3,291 | | | — | | | 3,291 | |
| Short-term time deposits | — | | | 198 | | | — | | | 198 | |
| Asset-backed securities | — | | | 1,437 | | | — | | | 1,437 | |
| Residential mortgage-backed securities | — | | | 1,086 | | | — | | | 1,086 | |
| Commercial mortgage-backed securities | — | | | 981 | | | — | | | 981 | |
| Equity securities | 248 | | | 2 | | | — | | | 250 | |
| Total investments | $ | 404 | | | $ | 16,848 | | | $ | — | | | $ | 17,252 | |
| Restricted deposits: | | | | | | | |
| Cash and cash equivalents | $ | 312 | | | $ | — | | | $ | — | | | $ | 312 | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | 321 | | | — | | | — | | | 321 | |
| Corporate securities | — | | | 34 | | | — | | | 34 | |
| Certificates of deposit | — | | | 4 | | | — | | | 4 | |
| Municipal securities | — | | | 642 | | | — | | | 642 | |
| Total restricted deposits | $ | 633 | | | $ | 680 | | | $ | — | | | $ | 1,313 | |
| Total assets at fair value | $ | 16,890 | | | $ | 17,528 | | | $ | — | | | $ | 34,418 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following table summarizes fair value measurements by level at December 31, 2022, for assets and liabilities measured at fair value on a recurring basis ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Level I | | Level II | | Level III | | Total |
| Assets | | | | | | | |
| Cash and cash equivalents | $ | 14,987 | | | $ | — | | | $ | — | | | $ | 14,987 | |
| Investments: | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 313 | | | $ | — | | | $ | — | | | $ | 313 | |
| Corporate securities | — | | | 8,721 | | | — | | | 8,721 | |
| Municipal securities | — | | | 3,053 | | | — | | | 3,053 | |
| Short-term time deposits | — | | | 275 | | | — | | | 275 | |
| Asset-backed securities | — | | | 1,267 | | | — | | | 1,267 | |
| Residential mortgage-backed securities | — | | | 1,019 | | | — | | | 1,019 | |
| Commercial mortgage-backed securities | — | | | 874 | | | — | | | 874 | |
| Equity securities | 4 | | | 2 | | | — | | | 6 | |
| Total investments | $ | 317 | | | $ | 15,211 | | | $ | — | | | $ | 15,528 | |
| Restricted deposits: | | | | | | | |
| Cash and cash equivalents | $ | 228 | | | $ | — | | | $ | — | | | $ | 228 | |
| Certificates of deposit | — | | | 4 | | | — | | | 4 | |
| Corporate securities | — | | | 31 | | | — | | | 31 | |
| Municipal securities | — | | | 607 | | | — | | | 607 | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | 335 | | | — | | | — | | | 335 | |
| Total restricted deposits | $ | 563 | | | $ | 642 | | | $ | — | | | $ | 1,205 | |
| Total assets at fair value | $ | 15,867 | | | $ | 15,853 | | | $ | — | | | $ | 31,720 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following table summarizes fair value measurements by level at December 31, 2021, for assets and liabilities measured at fair value on a recurring basis ($ in millions):
| | | | Level I | | Level II | | Level III | | Total | | Level I | | Level II | | Level III | | Total |
| Assets | Assets | | | | | | | | Assets | | | | | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 13,118 | | | $ | — | | | $ | — | | | $ | 13,118 | | Cash and cash equivalents | $ | 12,074 | | | $ | — | | | $ | — | | | $ | 12,074 | |
| Investments: | Investments: | | | | | | | | Investments: | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 171 | | | $ | — | | | $ | — | | | $ | 171 | | U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 366 | | | $ | 5 | | | $ | — | | | $ | 371 | |
| Corporate securities | Corporate securities | — | | | 8,170 | | | — | | | 8,170 | | Corporate securities | — | | | 9,328 | | | — | | | 9,328 | |
| Municipal securities | Municipal securities | — | | | 2,999 | | | — | | | 2,999 | | Municipal securities | — | | | 3,165 | | | — | | | 3,165 | |
| Short-term time deposits | Short-term time deposits | — | | | 109 | | | — | | | 109 | | Short-term time deposits | — | | | 204 | | | — | | | 204 | |
| Asset backed securities | Asset backed securities | — | | | 1,308 | | | — | | | 1,308 | | Asset backed securities | — | | | 1,326 | | | — | | | 1,326 | |
| Residential mortgage backed securities | Residential mortgage backed securities | — | | | 853 | | | — | | | 853 | | Residential mortgage backed securities | — | | | 1,046 | | | — | | | 1,046 | |
| Commercial mortgage backed securities | Commercial mortgage backed securities | — | | | 873 | | | — | | | 873 | | Commercial mortgage backed securities | — | | | 862 | | | — | | | 862 | |
| Equity securities | Equity securities | 324 | | | 2 | | | — | | | 326 | | Equity securities | 3 | | | 2 | | | — | | | 5 | |
| Total investments | Total investments | $ | 495 | | | $ | 14,314 | | | $ | — | | | $ | 14,809 | | Total investments | $ | 369 | | | $ | 15,938 | | | $ | — | | | $ | 16,307 | |
| Restricted deposits: | Restricted deposits: | | | | | | | | Restricted deposits: | | | | | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 96 | | | $ | — | | | $ | — | | | $ | 96 | | Cash and cash equivalents | $ | 256 | | | $ | — | | | $ | — | | | $ | 256 | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | U.S. Treasury securities and obligations of U.S. government corporations and agencies | 308 | | | — | | | — | | | 308 | |
| Corporate securities | | Corporate securities | — | | | 33 | | | — | | | 33 | |
| Certificates of deposit | Certificates of deposit | — | | | 4 | | | — | | | 4 | | Certificates of deposit | — | | | 4 | | | — | | | 4 | |
| Corporate securities | — | | | 30 | | | — | | | 30 | | |
| Municipal securities | Municipal securities | — | | | 469 | | | — | | | 469 | | Municipal securities | — | | | 616 | | | — | | | 616 | |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | 469 | | | — | | | — | | | 469 | | |
| Total restricted deposits | Total restricted deposits | $ | 565 | | | $ | 503 | | | $ | — | | | $ | 1,068 | | Total restricted deposits | $ | 564 | | | $ | 653 | | | $ | — | | | $ | 1,217 | |
| Other long-term assets: | | | | | | | | |
| Interest rate swap agreements | $ | — | | | $ | 15 | | | $ | — | | | $ | 15 | | |
| | | Total assets at fair value | Total assets at fair value | $ | 14,178 | | | $ | 14,832 | | | $ | — | | | $ | 29,010 | | Total assets at fair value | $ | 13,007 | | | $ | 16,591 | | | $ | — | | | $ | 29,598 | |
|
The Company utilizes matrix-pricing services to estimate fair value for securities which are not actively traded on the measurement date. The Company designates these securities as Level II fair value measurements. In addition, the aggregate carrying amount of the Company's private equity investments and life insurance contracts, which approximates fair value, was $716 million and $773$698 million as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
5. Property, SoftwareGoodwill and EquipmentIntangible Assets
Property, softwareAs discussed in Note 1. Organization and equipment consist ofOperations, in 2023 the Company updated its segment structure. Prior year information has been adjusted to reflect the change in segment reporting.
The following table summarizes the changes in goodwill by operating segment ($ in millions):
| | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| Computer software | $ | 2,211 | | | $ | 1,825 | | |
| Building | 641 | | | 1,116 | | |
| Furniture and office equipment | 407 | | | 753 | | |
| Leasehold improvements | 454 | | | 732 | | |
| Computer hardware | 648 | | | 617 | | |
| Land | 178 | | | 248 | | |
| Property, software and equipment, at cost | 4,539 | | | 5,291 | | |
| Less: accumulated depreciation | (2,060) | | | (1,900) | | |
| Property, software and equipment, net | $ | 2,479 | | | $ | 3,391 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Medicaid | | Medicare | | Commercial | | Other | | Consolidated Total |
| Balance, December 31, 2021 | $ | 10,194 | | | $ | 1,592 | | | $ | 5,424 | | | $ | 2,561 | | | $ | 19,771 | |
| Acquisition and purchase accounting adjustments | — | | | — | | | — | | | 1,077 | | | 1,077 | |
| Divestitures | — | | | — | | | — | | | (1,533) | | | (1,533) | |
| Reallocation | 4 | | | — | | | — | | | (4) | | | — | |
| Impairments | — | | | — | | | — | | | (370) | | | (370) | |
| Translation impact | — | | | — | | | — | | | (133) | | | (133) | |
| Balance, December 31, 2022 | $ | 10,198 | | | $ | 1,592 | | | $ | 5,424 | | | $ | 1,598 | | | $ | 18,812 | |
| | | | | | | | | |
| Translation impact | — | | | — | | | — | | | 24 | | | 24 | |
| Balance, March 31, 2023 | $ | 10,198 | | | $ | 1,592 | | | $ | 5,424 | | | $ | 1,622 | | | $ | 18,836 | |
During the second quarter of 2022, in connection with the adoption of a more modern, flexible work environment, the Company undertook a real estate optimization initiative to evaluate future real estate needs and downsize its real estate footprint for owned and leased properties. As a result of this evaluation, during the second quarter of 2022, the Company substantially changed the use or abandoned various properties and assessed for impairment. The Company engaged a third-party real estate specialist to determine the fair value of its owned properties. The valuation primarily considered comparable properties in each market as well as future cash flows.6. Medical Claims Liability
As a result of the optimization,discussed in Note 1. Organization and Operations, in 2023 the Company updated its segment structure. Prior year information has recognized impairment charges relatedbeen adjusted to owned real estate of $57 million and $763 million forreflect the three and nine months ended September 30, 2022, respectively. The Company also recognized impairment on fixed assets related to leased real estate of $14 million and $237 million for the three and nine months ended September 30, 2022, respectively. These impairments are primarily related to the Managed Care segment. The remainder of the $1,574 million charge relates to right-of-use (ROU) asset impairments, which is included within Other Long-term assets on the balance sheet, refer tochange in segment reporting.Note 9. Leases.
6. Medical Claims Liability
The following table summarizes the change in medical claims liability for the three months ended March 31, 2023 ($ in millions):
| | | Nine Months Ended September 30, | | Medicaid | | Medicare | | Commercial | | Other | | Consolidated Total |
| 2022 | | 2021 | |
| | Balance, January 1 | | $ | 14,243 | | | $ | 12,438 | | |
| Balance, January 1, 2023 | | Balance, January 1, 2023 | $ | 11,253 | | | $ | 3,431 | | | $ | 1,921 | | | $ | 140 | | | $ | 16,745 | |
| Less: Reinsurance recoverable | Less: Reinsurance recoverable | | 23 | | | 23 | | Less: Reinsurance recoverable | 7 | | | — | | | 19 | | | — | | | 26 | |
| Balance, January 1, net | | 14,220 | | | 12,415 | | |
| Acquisitions and divestitures | | 249 | | | — | | |
| Balance, January 1, 2023, net | | Balance, January 1, 2023, net | 11,246 | | | 3,431 | | | 1,902 | | | 140 | | | 16,719 | |
| | Incurred related to: | Incurred related to: | | Incurred related to: | |
| Current year | Current year | | 84,457 | | | 74,736 | | Current year | 20,813 | | | 5,163 | | | 4,177 | | | 418 | | | 30,571 | |
| Prior years | Prior years | | (1,196) | | | (1,526) | | Prior years | (803) | | | (155) | | | (172) | | | (7) | | | (1,137) | |
| Total incurred | Total incurred | | 83,261 | | | 73,210 | | Total incurred | 20,010 | | | 5,008 | | | 4,005 | | | 411 | | | 29,434 | |
| Paid related to: | Paid related to: | | | | | Paid related to: | | | | | | | | | |
| Current year | Current year | | 70,305 | | | 62,205 | | Current year | 12,679 | | | 2,988 | | | 2,541 | | | 294 | | | 18,502 | |
| Prior years | Prior years | | 10,968 | | | 9,344 | | Prior years | 6,834 | | | 2,145 | | | 1,063 | | | 132 | | | 10,174 | |
| Total paid | Total paid | | 81,273 | | | 71,549 | | Total paid | 19,513 | | | 5,133 | | | 3,604 | | | 426 | | | 28,676 | |
| Balance, September 30, net | | 16,457 | | | 14,076 | | |
| Balance, March 31, 2023, net | | Balance, March 31, 2023, net | 11,743 | | | 3,306 | | | 2,303 | | | 125 | | | 17,477 | |
| Plus: Reinsurance recoverable | Plus: Reinsurance recoverable | | 8 | | | 23 | | Plus: Reinsurance recoverable | 9 | | | — | | | 18 | | | — | | | 27 | |
| Balance, September 30 | | $ | 16,465 | | | $ | 14,099 | | |
| Balance, March 31, 2023 | | Balance, March 31, 2023 | $ | 11,752 | | | $ | 3,306 | | | $ | 2,321 | | | $ | 125 | | | $ | 17,504 | |
The following table summarizes the change in medical claims liability for the three months ended March 31, 2022 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Medicaid | | Medicare | | Commercial | | Other | | Consolidated Total |
| Balance, January 1, 2022 | $ | 9,845 | | | $ | 2,286 | | | $ | 2,014 | | | $ | 98 | | | $ | 14,243 | |
| Less: Reinsurance recoverable | 23 | | | — | | | — | | | — | | | 23 | |
| Balance, January 1, 2022, net | 9,822 | | | 2,286 | | | 2,014 | | | 98 | | | 14,220 | |
| Acquisitions | — | | | — | | | — | | | 249 | | | 249 | |
| Incurred related to: | | | | | | | | | |
| Current year | 19,289 | | | 5,098 | | | 3,423 | | | 751 | | | 28,561 | |
| Prior years | (514) | | | (52) | | | (149) | | | (8) | | | (723) | |
| Total incurred | 18,775 | | | 5,046 | | | 3,274 | | | 743 | | | 27,838 | |
| Paid related to: | | | | | | | | | |
| Current year | 12,022 | | | 2,674 | | | 2,012 | | | 690 | | | 17,398 | |
| Prior years | 5,643 | | | 1,624 | | | 1,319 | | | 76 | | | 8,662 | |
| Total paid | 17,665 | | | 4,298 | | | 3,331 | | | 766 | | | 26,060 | |
| Balance, March 31, 2022, net | 10,932 | | | 3,034 | | | 1,957 | | | 324 | | | 16,247 | |
| Plus: Reinsurance recoverable | 12 | | | — | | | — | | | — | | | 12 | |
| Balance, March 31, 2022 | $ | 10,944 | | | $ | 3,034 | | | $ | 1,957 | | | $ | 324 | | | $ | 16,259 | |
Reinsurance recoverables related to medical claims are included in premium and trade receivables. Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. The impact from COVID-19 on healthcare utilization and medical claims submission patterns continues to provide increased estimation uncertainty on the incurred but not reported liability. Additionally, as a result of minimum health benefits ratio (HBR) and other return of premium programs, the Company recorded $121$159 million and $438$67 million as a reduction to premium revenue in the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively.
Incurred but not reported (IBNR) plus expected development on reported claims as of September 30, 2022March 31, 2023 was $11,130$11,271 million. Total IBNR plus expected development on reported claims represents estimates for claims incurred but not reported, development on reported claims, and estimates for the costs necessary to process unpaid claims at the end of each period. The Company estimates its liability using actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. These actuarial methods consider factors such as historical data for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services, and other relevant factors.
7. Affordable Care Act
The Affordable Care Act established risk spreading premium stabilization programs as well as a minimum annual medical loss ratio (MLR) and cost sharing reductions.
The Company's net receivables (payables) for each of the programs are as follows ($ in millions):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Risk adjustment receivable | $ | 1,068 | | | $ | 522 | |
| Risk adjustment payable | (652) | | | (536) | |
| Minimum medical loss ratio | (69) | | | (196) | |
| Cost sharing reduction receivable | 10 | | | 69 | |
| Cost sharing reduction payable | (81) | | | (42) | |
In June 2022, CMS announced the final risk adjustment transfers for the 2021 benefit year. As a result of the announcement, the Company increased its risk adjustment net receivables by $403 million from December 31, 2021. After consideration of minimum MLR and other related impacts, the net pre-tax benefit recognized was approximately $368 million in the nine months ended September 30, 2022. | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Risk adjustment receivable | $ | 887 | | | $ | 838 | |
| Risk adjustment payable | (1,556) | | | (780) | |
| Minimum medical loss ratio | (176) | | | (103) | |
| | | |
| Cost sharing reduction payable | (89) | | | (99) | |
8. Debt
Debt consists of the following ($ in millions):
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| $2,500 million 4.25% Senior Notes due December 15, 2027 | $2,500 million 4.25% Senior Notes due December 15, 2027 | $ | 2,403 | | | $ | 2,484 | | $2,500 million 4.25% Senior Notes due December 15, 2027 | $ | 2,393 | | | $ | 2,393 | |
| $2,300 million 2.45% Senior Notes due July 15, 2028 | $2,300 million 2.45% Senior Notes due July 15, 2028 | 2,304 | | | 2,304 | | $2,300 million 2.45% Senior Notes due July 15, 2028 | 2,303 | | | 2,303 | |
| $3,500 million 4.625% Senior Notes due December 15, 2029 | $3,500 million 4.625% Senior Notes due December 15, 2029 | 3,324 | | | 3,500 | | $3,500 million 4.625% Senior Notes due December 15, 2029 | 3,277 | | | 3,277 | |
| $2,000 million 3.375% Senior Notes due February 15, 2030 | $2,000 million 3.375% Senior Notes due February 15, 2030 | 2,000 | | | 2,000 | | $2,000 million 3.375% Senior Notes due February 15, 2030 | 2,000 | | | 2,000 | |
| $2,200 million 3.00% Senior Notes due October 15, 2030 | $2,200 million 3.00% Senior Notes due October 15, 2030 | 2,200 | | | 2,200 | | $2,200 million 3.00% Senior Notes due October 15, 2030 | 2,200 | | | 2,200 | |
| $2,200 million 2.50% Senior Notes due March 1, 2031 | $2,200 million 2.50% Senior Notes due March 1, 2031 | 2,200 | | | 2,200 | | $2,200 million 2.50% Senior Notes due March 1, 2031 | 2,200 | | | 2,200 | |
| $1,300 million 2.625% Senior Notes due August 1, 2031 | $1,300 million 2.625% Senior Notes due August 1, 2031 | 1,300 | | | 1,300 | | $1,300 million 2.625% Senior Notes due August 1, 2031 | 1,300 | | | 1,300 | |
| | Total senior notes | Total senior notes | 15,731 | | | 15,988 | | Total senior notes | 15,673 | | | 15,673 | |
| Term loan facility | Term loan facility | 2,196 | | | 2,195 | | Term loan facility | 2,169 | | | 2,183 | |
| Revolving credit agreement | Revolving credit agreement | 120 | | | 149 | | Revolving credit agreement | 359 | | | 58 | |
| Construction loan payable | 181 | | | 184 | | |
| Finance leases and other | Finance leases and other | 258 | | | 493 | | Finance leases and other | 260 | | | 253 | |
| Debt issuance costs | Debt issuance costs | (153) | | | (171) | | Debt issuance costs | (141) | | | (147) | |
| Total debt | Total debt | 18,333 | | | 18,838 | | Total debt | 18,320 | | | 18,020 | |
| Less current portion | (249) | | | (267) | | |
| Less: current portion | | Less: current portion | (97) | | | (82) | |
| Long-term debt | Long-term debt | $ | 18,084 | | | $ | 18,571 | | Long-term debt | $ | 18,223 | | | $ | 17,938 | |
Of the Company's total debt, approximately 15%12% is variable rate debt tied todebt. Approximately 11% uses the London Interbank Offered Rate (LIBOR). as a reference rate pursuant to the terms of the Company Credit Facility and approximately 1% uses the Sterling Overnight Index Average (SONIA) as a reference rate. The debt agreements that may be impacted by the discontinuation of LIBOR includehave provisions included that are sufficient for the Company believes are sufficient to transition from the existing LIBOR rates to the prevailing successor market rates as necessary.
Senior Notes
In connection with the Magellan Acquisition in January 2022, The document governing the Company redeemed Magellan’s existing outstanding 4.4% Senior Notes due 2024 and paid offCredit Facility includes provisions to convert from LIBOR to the existing Credit Agreement using Magellan’s cash on hand. The Company recognized an immaterial net pre-tax gain on extinguishment including related fees and expenses andSecured Overnight Financing Rate (SOFR) at the write-off of the unamortized premium.time LIBOR ceases to be published.
During the third quarter of 2022, the Company utilized a portion of the proceeds from the PANTHERx divestiture to repurchase $83 million of its par value Senior Notes due 2027 and $176 million of its par value Senior Notes due 2029 through the Company’s debt repurchase program. The Company recognized a $10 million gain on the redemptions of the notes.
Foreign Currency Swap
In order to manage the foreign exchange risk associated with an intercompany note receivable related to the Circle Health acquisition, the Company entered into a foreign currency swap agreement for a notional amount of $705 million, to purchase £509 million. The swap agreement was formally designated and qualified as a fair value hedge. All gains and losses due to changes in the fair value of the foreign currency swap completely offset changes in the remeasurement of the intercompany note receivable within investment and other income in the Consolidated Statement of Operations, resulting in no net impact to the Consolidated Statement of Operations.
On March 31, 2022, the foreign currency swap settled in connection with its expiration, and the Company received cash proceeds of $35 million. The Company does not hold or issue any derivative instruments for trading or speculative purposes.
Circle Health Debt Refinancing
In May 2022, the Company refinanced certain debt agreements for its Circle Health subsidiary with a new £250 million credit facility maturing in May 2025. The Company recognized a $13 million pre-tax gain on the extinguishment of the existing debt. As of September 30, 2022, £180 million was drawn on the facility, which is included within Finance leases and other in the table above. The new facility is guaranteed by the Company and has similar borrowing rates and covenants to the Company's Revolving Credit Agreement.
Construction Loan
In October 2017, the Company executed a $200 million non-recourse construction loan to fund the expansion of the Company's corporate headquarters. Until final completion of the construction project, which occurred in July 2021, the loan bore interest based on one month LIBOR plus 2.70%, which reduced to LIBOR plus 2.00% at the time construction was completed. The agreement contains financial and non-financial covenants similar to those contained in the Company Credit Facility. The Company guaranteed completion of the construction project associated with the loan. As of September 30, 2022, the Company had $181 million in borrowings outstanding under the loan, which is included in the current portion of long-term debt.
In April 2022, the Company extended the term of the loan for an additional one year. The extension reduced interest on the loan to the Secured Overnight Financing Rate (SOFR) plus 1.85% and matures in April 2023.
Debt Repurchase Program
In June 2022, the Company's Board of Directors authorized a new $1,000 million debt repurchase program in preparation for future debt reductions as part of the Company’s strategic value creation initiatives. During the quarter ended September 30, 2022, the Company repurchased $259 million of its par value senior notes, as described above, for $247 million.
As of September 30, 2022, there was $753 million available under the program. In October 2022, the Company repurchased an additional $58 million of its par value senior notes for $53 million.
9. Leases
The following table sets forth the ROUright-of-use (ROU) assets and lease liabilities ($ in millions):
| | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| Assets | | | |
| | | |
| ROU assets (recorded within other long-term assets) | $ | 2,456 | | | $ | 3,566 | |
| | | |
| Liabilities | | | |
| Short-term (recorded within accounts payable and accrued expenses) | $ | 193 | | | $ | 204 | |
| Long-term (recorded within other long-term liabilities) | 3,038 | | | 3,619 | |
| Total lease liabilities | $ | 3,231 | | | $ | 3,823 | |
As part of the real estate optimization initiative as described in Note 5. Property, Software and Equipment, the Company vacated and abandoned various domestic leased properties. As a result, the Company assessed the ROU assets for impairment. The Company engaged a third-party real estate specialist to determine the recoverability of the leased properties. The valuation primarily considered comparable leased properties in each market and the assessment of potential future rental income that could be generated by the ROU assets.
As a result of the optimization, the Company recognized $53 million and $574 million of ROU asset impairments in the three and nine months ended September 30, 2022, respectively, primarily related to the Managed Care segment. The remainder of the $1,574 million charge was recorded within Property, Software and Equipment, refer to Note 5. Property, Software and Equipment. | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Assets | | | |
| | | |
| ROU assets (recorded within other long-term assets) | $ | 2,578 | | | $ | 2,554 | |
| | | |
| Liabilities | | | |
| Short-term (recorded within accounts payable and accrued expenses) | $ | 177 | | | $ | 180 | |
| Long-term (recorded within other long-term liabilities) | 3,144 | | | 3,133 | |
| Total lease liabilities | $ | 3,321 | | | $ | 3,313 | |
As of September 30, 2022,March 31, 2023, the weighted average remaining lease term for the Company was 20.120.5 years. The average remaining lease term of the Circle Health portfolio is 27.0 years. Excluding Circle Health, the company's portfolio average remaining lease term is 8.5 years. The lease liabilities as of September 30, 2022March 31, 2023 reflect a weighted average discount rate of 5.6%5.7%.
10. Stockholders' Equity
The Company's Board of Directors has authorized a stock repurchase program of the Company's common stock from time to time on the open market or through privately negotiated transactions. In June 2022, the Company's Board of Directors authorized increases under the program including $3,000 million in June 2022 and an additional $3,000 million to the Company’s existing stock repurchase program for its common stock, for a total $4,000$2,000 million in preparation for closing of the Magellan Rx and PANTHERx divestitures as well as planning for the future.
During the third quarter of 2022,December 2022. With these increases, the Company entered into an accelerated shareis authorized to repurchase (ASR) agreement with Bankup to $6,000 million, inclusive of America to purchase $1,000 million of the Company's common stock in aggregate under the Company’s stock repurchase program. In July 2022, 8.6 million shares were delivered to the Company, representing 80% of the notional amount under the ASR. In October 2022, an additional 3.0 million shares were delivered upon settlement of the ASR based upon the volume-weighted average price (VWAP) over the term of the agreement, less a discount. In total, 11.6 million shares were purchased through the $1,000 million ASR.
The Company also repurchased an additional 2.9 million shares for $240 million during the third quarter. The remaining common stock repurchases relate to the purchase of shares to satisfy tax withholding requirements in connection with employee equity awards.
During the nine months ended September 30, 2022, the Company has repurchased a total of 15.7 million shares of Centene common stock for $1,384 million, exclusive of the $200 million unsettled portion under the ASR.past authorizations. As of September 30, 2022,March 31, 2023, the Company had a remaining amount of $2,216$2,429 million available under the Company’sCompany's stock repurchase program.
In October 2022,April 2023, the Company repurchased an additional 828 thousand3 million shares for $66$200 million.
The following represents the Company's share repurchase activity ($ in millions, shares in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 | | |
| Shares | Cost | | Shares | Cost | | | |
| Share buybacks | 4,852 | | $ | 377 | | | — | | $ | — | | | | |
| Income tax withholding | 696 | | 46 | | | 846 | | 71 | | | | |
| Total share repurchases | 5,548 | | $ | 423 | | | 846 | | $ | 71 | | | | |
Shares repurchased for income tax withholding are shares withheld in connection with employee stock plans to meet applicable tax withholding requirements. These shares are typically included in the Company's treasury stock.
11. Earnings Per Share
The following table sets forth the calculation of basic and diluted net earnings per common share ($ in millions, except per share data in dollars and shares in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| | Earnings attributable to Centene Corporation | Earnings attributable to Centene Corporation | $ | 738 | | | $ | 584 | | | $ | 1,415 | | | $ | 748 | | Earnings attributable to Centene Corporation | $ | 1,130 | | | $ | 849 | | |
| | Shares used in computing per share amounts: | Shares used in computing per share amounts: | | | Shares used in computing per share amounts: | | | |
| Weighted average number of common shares outstanding | Weighted average number of common shares outstanding | 573,961 | | | 583,244 | | | 580,277 | | | 582,636 | | Weighted average number of common shares outstanding | 550,779 | | | 583,230 | | |
Common stock equivalents (as determined by applying the treasury stock method) | Common stock equivalents (as determined by applying the treasury stock method) | 6,646 | | | 7,458 | | | 6,807 | | | 7,518 | | Common stock equivalents (as determined by applying the treasury stock method) | 3,066 | | | 7,428 | | |
| Weighted average number of common shares and potential dilutive common shares outstanding | Weighted average number of common shares and potential dilutive common shares outstanding | 580,607 | | | 590,702 | | | 587,084 | | | 590,154 | | Weighted average number of common shares and potential dilutive common shares outstanding | 553,845 | | | 590,658 | | |
| | | | | | | | | | | | | |
| Net earnings per common share attributable to Centene Corporation: | Net earnings per common share attributable to Centene Corporation: | | Net earnings per common share attributable to Centene Corporation: | |
| Basic earnings per common share | Basic earnings per common share | $ | 1.29 | | | $ | 1.00 | | | $ | 2.44 | | | $ | 1.28 | | Basic earnings per common share | $ | 2.05 | | | $ | 1.46 | | |
| Diluted earnings per common share | Diluted earnings per common share | $ | 1.27 | | | $ | 0.99 | | | $ | 2.41 | | | $ | 1.27 | | Diluted earnings per common share | $ | 2.04 | | | $ | 1.44 | | |
| (1) The reduction in common stock equivalents is primarily driven by the distribution of long-term stock awards to the estate of the Company's former CEO during the first quarter of 2023, which were fully dilutive prior to their distribution. | | (1) The reduction in common stock equivalents is primarily driven by the distribution of long-term stock awards to the estate of the Company's former CEO during the first quarter of 2023, which were fully dilutive prior to their distribution. | |
The calculation of diluted earnings per common share for the three months ended September 30,March 31, 2023 and 2022 and 2021 excludes 1521,606 thousand shares and 111 thousand shares, respectively, related to anti-dilutive stock options, restricted stock, and restricted stock units.
The calculation of diluted earnings per common share for the nine months ended September 30, 2022 and 2021 excludes the impact of 193 thousand shares and 57923 thousand shares, respectively, related to anti-dilutive stock options, restricted stock, and restricted stock units.
12. Segment Information
Centene operatesIn early 2023, and in two segments: Managed Careconjunction with the Company's updated strategic plan, executive leadership realignment, and Specialty Services. corresponding 2023 divestitures, the Company has revised the way it manages the business, evaluates performance, and allocates resources, resulting in an updated segment structure comprised of (1) a Medicaid segment, (2) a Medicare segment, (3) a Commercial segment and (4) an Other segment. Prior year information has been adjusted to reflect the change in segment reporting.
The Managed CareMedicaid, Medicare, and Commercial segments represent the government-sponsored or subsidized programs under which the Company offers managed healthcare services. The Other segment consists of Centene'sincludes the Company's pharmacy operations, vision and dental services, clinical healthcare, behavioral health, plans, including all of the functions needed to operate them. The Specialty Services segment consists of Centene's specialtyinternational operations, and corporate management companies, offering auxiliary healthcare services and products. among others.
Factors used in determining the reportable business segments include the nature of operating activities, the existence of separate senior management teams, and the type of information presented to the Company's chief operating decision-maker to evaluate all results of operations. The Company does not report total assets by segment since this is not a metric used to allocate resources or evaluate segment performance.
Segment information for the three months ended March 31, 2023, is as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Medicaid | | Medicare | | Commercial | | Other/Eliminations | | | | Consolidated Total |
| Premium | $ | 22,227 | | | $ | 5,876 | | | $ | 5,252 | | | $ | 470 | | | | | $ | 33,825 | |
| Service | — | | | — | | | — | | | 1,127 | | | | | 1,127 | |
| Premium and service revenues | 22,227 | | | 5,876 | | | 5,252 | | | 1,597 | | | | | 34,952 | |
| Premium tax | 3,937 | | | — | | | — | | | — | | | | | 3,937 | |
| Total external revenues | 26,164 | | | 5,876 | | | 5,252 | | | 1,597 | | | | | 38,889 | |
| Internal revenues | — | | | — | | | — | | | 3,867 | | | | | 3,867 | |
| Eliminations | — | | | — | | | — | | | (3,867) | | | | | (3,867) | |
| Total revenues | $ | 26,164 | | | $ | 5,876 | | | $ | 5,252 | | | $ | 1,597 | | | | | $ | 38,889 | |
| | | | | | | | | | | |
| Medical costs | $ | 20,010 | | | $ | 5,008 | | | $ | 4,005 | | | $ | 411 | | | | | $ | 29,434 | |
| | | | | | | | | | | |
| Cost of services | $ | — | | | $ | — | | | $ | — | | | $ | 870 | | | | | $ | 870 | |
| | | | | | | | | | | |
Gross margin (1) | $ | 2,217 | | | $ | 868 | | | $ | 1,247 | | | $ | 316 | | | | | $ | 4,648 | |
| | | | | | | | | | | |
(1) Gross margin represents premium and service revenues less medical costs and cost of services. |
Segment information for the three months ended September 30,March 31, 2022, is as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Managed
Care | | Specialty
Services | | Eliminations | | Consolidated
Total |
| Total revenues from external customers | $ | 33,722 | | | $ | 2,143 | | | $ | — | | | $ | 35,865 | |
| Total revenues from internal customers | 2 | | | 3,264 | | | (3,266) | | | — | |
| Total revenues | $ | 33,724 | | | $ | 5,407 | | | $ | (3,266) | | | $ | 35,865 | |
| Earnings from operations | $ | 527 | | | $ | (51) | | | $ | — | | | $ | 476 | |
| | | | | | | |
Segment information for the three months ended September 30, 2021, is as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Managed
Care | | Specialty
Services | | Eliminations | | Consolidated
Total |
| Total revenues from external customers | $ | 30,888 | | | $ | 1,518 | | | $ | — | | | $ | 32,406 | |
| Total revenues from internal customers | 1 | | | 3,209 | | | (3,210) | | | — | |
| Total revenues | $ | 30,889 | | | $ | 4,727 | | | $ | (3,210) | | | $ | 32,406 | |
| Earnings from operations | $ | 699 | | | $ | (154) | | | $ | — | | | $ | 545 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Medicaid | | Medicare | | Commercial | | Other/Eliminations | | | | Consolidated Total |
| Premium | $ | 21,121 | | | $ | 5,757 | | | $ | 4,132 | | | $ | 879 | | | | | $ | 31,889 | |
| Service | — | | | — | | | — | | | 2,343 | | | | | 2,343 | |
| Premium and service revenues | 21,121 | | | 5,757 | | | 4,132 | | | 3,222 | | | | | 34,232 | |
| Premium tax | 2,953 | | | — | | | — | | | — | | | | | 2,953 | |
| Total external revenues | 24,074 | | | 5,757 | | | 4,132 | | | 3,222 | | | | | 37,185 | |
| Internal revenues | — | | | — | | | — | | | 6,450 | | | | | 6,450 | |
| Eliminations | — | | | — | | | — | | | (6,450) | | | | | (6,450) | |
| Total revenues | $ | 24,074 | | | $ | 5,757 | | | $ | 4,132 | | | $ | 3,222 | | | | | $ | 37,185 | |
| | | | | | | | | | | |
| Medical costs | $ | 18,775 | | | $ | 5,046 | | | $ | 3,274 | | | $ | 743 | | | | | $ | 27,838 | |
| | | | | | | | | | | |
| Cost of services | $ | — | | | $ | — | | | $ | — | | | $ | 1,988 | | | | | $ | 1,988 | |
| | | | | | | | | | | |
Gross margin (1) | $ | 2,346 | | | $ | 711 | | | $ | 858 | | | $ | 491 | | | | | $ | 4,406 | |
| | | | | | | | | | | |
(1) Gross margin represents premium and service revenues less medical costs and cost of services. |
Segment information for the nine months ended September 30, 2022, follows ($ in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | Managed Care | | Specialty
Services | | Eliminations | | Consolidated
Total |
| Total revenues from external customers | $ | 101,428 | | | $ | 7,558 | | | $ | — | | | $ | 108,986 | |
| Total revenues from internal customers | 6 | | | 9,939 | | | (9,945) | | | — | |
| Total revenues | $ | 101,434 | | | $ | 17,497 | | | $ | (9,945) | | | $ | 108,986 | |
| Earnings from operations | $ | 1,634 | | | $ | (34) | | | $ | — | | | $ | 1,600 | |
| | | | | | | |
Segment information for the nine months ended September 30, 2021, follows ($ in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | Managed Care | | Specialty
Services | | Eliminations | | Consolidated
Total |
| Total revenues from external customers | $ | 89,078 | | | $ | 4,336 | | | $ | — | | | $ | 93,414 | |
| Total revenues from internal customers | 4 | | | 9,217 | | | (9,221) | | | — | |
| Total revenues | $ | 89,082 | | | $ | 13,553 | | | $ | (9,221) | | | $ | 93,414 | |
| Earnings from operations | $ | 1,240 | | | $ | (59) | | | $ | — | | | $ | 1,181 | |
13. Contingencies
Overview
The Company is routinely subjected to legal and regulatory proceedings in the normal course of business. These matters can include, without limitation:
•periodic compliance and other reviews and investigations by various federal and state regulatory agencies with respect to requirements applicable to the Company's business, including, without limitation, those related to payment of out-of-network claims, submissions to CMSthe Centers for Medicare and Medicaid Services (CMS) related to risk adjustment payments, or the False Claims Act, the calculation of minimum MLR and rebates related thereto, submissions to state agencies related to payments or state false claims acts, pre-authorization penalties, timely review of grievances and appeals, timely and accurate payment of claims, cybersecurity issues, including those related to the Company's or the Company's third party vendors' information systems, and the Health Insurance Portability and Accountability Act of 1996 and other federal and state fraud, waste and abuse laws;
•litigation arising out of general business activities, such as tax matters, disputes related to healthcare benefits coverage or reimbursement, putative securities class actions, and medical malpractice, privacy, real estate, intellectual property and employment-related claims; and
•disputes regarding reinsurance arrangements, claims arising out of the acquisition or divestiture of various assets, class actions, and claims relating to the performance of contractual and non-contractual obligations to providers, members, employer groups and others, including, but not limited to, the alleged failure to properly pay claims and challenges to the manner in which the Company processes claims, claims related to network adequacy and claims alleging that the Company has engaged in unfair business practices.
Among other things, these matters may result in awards of damages, fines or penalties, which could be substantial, and/or could require changes to the Company's business. The Company intends to vigorously defend itself against legal and regulatory proceedings to which it is currently a party; however, these proceedings are subject to many uncertainties. In some of the cases pending against the Company, substantial non-economic or punitive damages are being sought.
The Company records reserves and accrues costs for certain legal proceedings and regulatory matters to the extent that it determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. While such reserves and accrued costs reflect the Company's best estimate of the probable loss for such matters, the recorded amounts may differ materially from the actual amount of any such losses. In some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal and regulatory proceedings, which may be exacerbated by various factors, including but not limited to, they may involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; involve a large number of parties, claimants or regulatory bodies; are in the early stages of the proceedings; involve a number of separate proceedings and/or a wide range of potential outcomes; or result in a change of business practices.
As of the date of this report, amounts accrued for legal proceedings and regulatory matters were not material, except for the reserve estimate as described below with respect to claims or potential claims involving services provided by Envolve Pharmacy Solutions, Inc. (Envolve), as the Company's pharmacy benefits managermanagement (PBM) subsidiary. It is possible that in a particular quarter or annual period the Company's financial condition, results of operations, cash flow and/or liquidity could be materially adversely affected by an ultimate unfavorable resolution of or development in legal and/or regulatory proceedings, including as described below. Except for the proceedings discusseddiscussion below, the Company believes that the ultimate outcome of any of the regulatory and legal proceedings that are currently pending against it should not have a material adverse effect on financial condition, results of operations, cash flow, or liquidity.
California
On October 20, 2015, the Company's California subsidiary, Health Net of California, Inc. (Health Net California), was named as a defendant in a California taxpayer action filed in Los Angeles County Superior Court, captioned as Michael D. Myers v. State Board of Equalization, Dave Jones, Insurance Commissioner of the State of California, Betty T. Yee, Controller of the State of California, et al., Los Angeles Superior Court Case No. BS158655. This action is brought under a California statute that permits an individual taxpayer to sue a governmental agency when the taxpayer believes the agency has failed to enforce governing law. Plaintiff contends that Health Net California, a California licensed Health Care Service Plan (HCSP), is an "insurer" for purposes of taxation despite acknowledging it is not an "insurer" under regulatory law. Under California law, "insurers" must pay a gross premiums tax (GPT), calculated as 2.35% on gross premiums. As a licensed HCSP, Health Net California has paid the California Corporate Franchise Tax (CFT), the tax generally paid by California businesses. Plaintiff contends that Health Net California must pay the GPT rather than the CFT. Plaintiff seeks a writ of mandate directing the California taxing agencies to collect the GPT, and seeks an order requiring Health Net California to pay GPT, interest and penalties for a period dating to eight years prior to the October 2015 filing of the complaint. This lawsuit is being coordinated with similar lawsuits filed against other entities (collectively, Related Actions). In March 2018, the Court overruled the Company's demurrer seeking to dismiss the complaint and denied the Company's motion to strike allegations seeking retroactive relief. In August 2018, the trial court stayed all the Related Actions pending determination of a writ of mandate by the California Court of Appeals in two of the Related Actions. In March 2019, the California Court of Appeals denied the writ of mandate. The defendants in those Related Actions sought review by the California Supreme Court, which declined to review the matter. Upon the return of the matter to the Los Angeles County Superior Court, motions for summary judgment were scheduled. Health Net California's motion for summary judgment was heard by the Court in March 2020. In March 2020, the Court granted Health Net California's motion for summary judgment. In September 2020, the plaintiff appealed the Court's decision. The Company intends to continue its vigorous defense against these claims; however, this matter is subject to many uncertainties, and an adverse outcome in this matter could potentially have a materially adverse impact on the Company's financial position,condition, results of operations and cash flows.
Beginning in April 2021, several lawsuits have been filed against the Company and its subsidiaries, alleging that the defendants failed to prevent Health Net members' personal and health data from being exposed in connection with a data breach involving Accellion's File Transfer Appliance. The Company denies any wrongdoing, and is seeking indemnification from Accellion for these claims. In Decemberat a mediation in September 2021, the Company reached a settlement with plaintiffs in three of the pending class actions filed a motion for preliminary approval of a settlement with the Company and its subsidiaries, which, if approved by the court, should resolve most or all of the pending litigation.litigation related to this matter. In addition, claims related to these lawsuits are anticipated to be covered in part by the Company's insurance carrier. As a result, while these matters are subject to many uncertainties, the Company does not believe that an adverse outcome in these matters is likely to have a materially adverse impact on the Company’sCompany's financial position,condition, results of operations and cash flows.
Pharmacy Benefits Management Matters
On March 11, 2021, the State of Ohio filed a civil action against the Company and the Company's subsidiaries, Buckeye Health Plan Community Solutions, Inc. and Envolve, in Franklin County Court of Common Pleas, captioned as Ohio Department of Medicaid, et al. v. Centene Corporation, et al. The complaint alleged breaches of contract with the Ohio Department of Medicaid relating to the provision of PBM services and violations of Ohio law relating to such contracts, including among other things, by (i) seeking payment for services already reimbursed, (ii) not accurately disclosing to the Ohio Department of Medicaid the true cost of the PBM services and (iii) inflating dispensing fees for prescription drugs. The plaintiffs sought an undisclosed sum of money in damages, penalties, and possible termination of the contract with Buckeye Health Plan.
The Company has reached no-fault agreements with the Attorney Generals in 13 states,Attorneys General, including Ohio, to resolve claims and/or allegations made by the states related to services previously provided by Envolve. As a result of the settlement, the Ohio Attorney General’sGeneral's litigation against the Company was dismissed. Additionally, the Company is in discussions to bring final resolution to similar concerns in other affected states. Consistent with those discussions, the Company recorded a reserve estimate of $1,250 million in the second quarter of 2021 related to this issue, inclusive of the above settlements and rebates that the Company determined in the course of the matter are payable across products. Additional claims, reviews or investigations relating to the Company's historical PBM business across products may be brought by other states, the federal government, or shareholder litigants, and there is no guarantee the Company will have the ability to settle such claims with other states within the reserve estimate the Company has recorded and on other acceptable terms, or at all. This matter is subject to many uncertainties, and an adverse outcome in this matter could have an adverse impact on the Company's financial position,condition, results of operations and cash flows.
Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties.
EXECUTIVE OVERVIEW
General
We are a leading healthcare enterprise, that is committed to helping people live healthier lives.lives, with an established expertise in lower-income and medically complex populations. We takeprovide access to high-quality healthcare, innovative programs, and a wide range of health solutions that help families and individuals get well, stay well, and be well. We believe that our local approach - with local brands and local teams -enables us to provide fully integrated, high-quality, and cost-effective servicesaccessible, quality, culturally sensitive healthcare coverage to government-sponsored and commercial healthcare programs, focusing on under-insured and uninsured individuals.our communities.
Results of operations depend on our ability to manage expenses associated with health benefits (including estimated costs incurred) and selling, general and administrative (SG&A) costs. We measure operating performance based upon two key ratios. The health benefits ratio (HBR) represents medical costs as a percentage of premium revenues, excluding premium tax revenues that are separately billed, and reflects the direct relationship between the premiums received and the medical services provided. The SG&A expense ratio represents SG&A costs as a percentage of premium and service revenues, excluding premium taxes separately billed.
Value Creation Plan
As introduced in June 2021,We established our Value Creation Plan is designed to drive margin expansion by leveraging our scale and generating sustainable, profitable growth. In addition to creating shareholder value, this plan is an ongoing effort to modernize and improve how we work in order to propel our organization to new levels of success and elevate the member and provider experiences. The three major pillarsDuring the first quarter of 2023, we completed the Value Creation Plan are: SG&A expense savings, gross margin expansion, and strategic capital management. The first pillar, SG&A expense savings, includes initiatives targeting improving productivity, driving efficiencies, and reducing costs throughout the organization, including real estate optimization. The second pillar, gross margin expansion, relates to initiatives including bid discipline, clinical initiatives, quality improvement, and pharmacy cost management. The third pillar, strategic capital management, focuses on value-creating capital deployment activities such as stock repurchases, portfolio optimization, and debt and investment management.
From an operational perspective, we continue to move forward withfollowing key milestones in our Value Creation Plan,Plan:
•Completed the divestitures of Magellan Specialty Health, Centurion, our prison healthcare business, and HealthSmart, our third-party health plan administration business.
•Completed $377 million of common stock repurchases in the first quarter of 2023 through our stock repurchase program, which were funded through divestiture proceeds and free cash flow generated from operations. In addition, in April 2023, we completed an additional $200 million of common stock repurchases.
•Completed operating model changes initiated in 2022, including the streamlining of certain operations, such as key call centerscenter management and utilization management, evaluatingmanagement.
•Initiated standardization of our real estate footprint, and seeking opportunities for platform consolidation. We are assessingpharmacy operating model.
•Launched our portfolio and are focused on making strategic decisions and investments to create additional value in the short term and to seek opportunities that position the organization for long-term strength, profitability, growth, and innovation.cloud-based, next-gen clinical population health platform.
Segments Update
In the second quarter of 2022, following aearly 2023, and in conjunction with our updated strategic review of our real estate portfolioplan, executive leadership realignment, and the adoption of a more modern, flexible work environment, we initiated a reduction of our real estate footprint. As a result, in 2022corresponding 2023 divestitures, we have incurred $1.6 billion related torevised the impairmentway we manage the business, evaluate performance, and allocate resources, resulting in an updated segment structure comprised of leased(1) a Medicaid segment, (2) a Medicare segment, (3) a Commercial segment and owned real estate and related fixed assets.(4) an Other segment. We incurred impairments of $763 million related to owned real estate, $574 million related to leased real estate, and $237 million related to associated fixed assets. We anticipate additional future charges of approximately $100 million related to real estate optimization. This represents an approximate 70% decreasebegan reporting under this new segment structure in domestic leased space and is expected to result in annualized lease expense savings of approximately $200 million.
Additionally, as part of our ongoing portfolio review, during 2022 we completed the divestiture of PANTHERx Rare (PANTHERx) and entered into definitive agreements to sell Magellan Rx as well as our ownership stakes in our Spanish and Central European businesses. In preparation for these transactions as well as planning for the future, our Board of Directors authorized a $3.0 billion increase to our stock repurchase program and a new $1.0 billion debt repurchase program during the second quarter of 2022.
During the nine months ended September 30, 2022, we have repurchased $1.4 billion of Centene common stock through the stock repurchase program, exclusive of the $200 million unsettled portion under the ASR, and $259 million of our senior notes through the debt repurchase program. As of September 30, 2022, $2.2 billion was available under the stock repurchase program and $753 million was available under the debt repurchase program.
During the fourth quarter of 2022, we signed a multi-year contract with Express Scripts, Inc. to provide our pharmacy benefit services, commencing in 2024. The new pharmacy benefits management (PBM) contract is expected to drive significant value in 2024 and beyond.
COVID-19 Trends and Uncertainties
The impact of COVID-19 on our business in both the short-term and long-term is uncertain and difficult to predict. The outlook for the remainder of 2022 depends on future developments, including but not limited to: the length and severity of the outbreak (including new variants, which may be more contagious, more severe or less responsive to treatment or vaccines), the effectiveness of containment actions, the timing and effectiveness of vaccinations and achievement of herd immunity, and the timing and rate at which members return to accessing healthcare. The pandemic and these future developments have impacted and will continue to affect our membership and medical utilization. From the onset of the pandemic in March 2020, our Medicaid membership has increased by 3.0 million members (excluding the new North Carolina and Missouri membership). The public health emergency (PHE) extension for COVID-192023. Prior year information has been extendedadjusted to January 2023 with redeterminations eligible to beginreflect the change in February 2023. However, the PHE may be extended beyond January 2023. Our Ambetter Health product covers the majority of our Medicaid states, and we believe we are among the best positioned in the healthcare market to capture those transitioning coverage through redeterminations. Our execution plan is well-thought out and we remain agile in working with our state partners and are prepared to support our members and promote continuity of coverage when redeterminations resume.
We continue to watch external trends closely, as COVID-19 costs could increase based upon macro trends. New variants and additional waves of the pandemic could create new dynamics and uncertainties around our expectations.
We are confident we have the team, systems, expertise, and financial strength to continue to effectively navigate this challenging pandemic landscape.segment reporting.
Regulatory Trends and Uncertainties
The United States government, policymakers, and healthcare experts continue to discuss and debate various elements of the United States healthcare model. We remain focused on the promise of delivering access to high-quality, affordable healthcare to all of our members and believe we are well positioned to meet the needs of the changing healthcare landscape.
In contrast to previous executive and legislative efforts to restrict or limit certain provisions of the Affordable Care Act (ACA), the American Rescue Plan Act (ARPA), enacted onin March 11, 2021, contained provisions aimed at leveraging Medicaid and the Health Insurance Marketplace to expand health insurance coverage and affordability to consumers. The American Rescue ActARPA authorized an additional $1.9 trillion in federal spending to address the COVID-19 PHE,public health emergency (PHE), and contained several provisions designed to increase coverage of certain healthcare services, expand eligibility and benefits, incentivize state Medicaid expansion, and adjust federal financing for state Medicaid programs, the ultimate impact of which remain uncertain.
The American Rescue ActARPA initially enhanced eligibility for the advance premium tax credit for certain enrollees in the Health Insurance Marketplace. TheMarketplace, which was extended through the 2025 tax year by the Inflation Reduction Act, enacted onin August 16, 2022, extended the enhanced eligibility for the advance premium tax credit for Marketplace members through the 2025 tax year.2022.
In October 2022, the Treasury Department issued a final rule to address the family glitch in the ACA, which relates to determining who is eligible for premium subsidies. We see this as a significant step in making Marketplace more affordable for working families.
The COVID-19 pandemic has impacted and may continue to affect our business. The Families First Coronavirus Response Act, enacted in March 2020, increased federal matching rates for state Medicaid programs with a requirement that states suspend Medicaid redeterminations throughout the PHE. As a result, since the onset of the PHE, our Medicaid membership has increased by 3.5 million members (excluding new states North Carolina and Delaware and various state product expansions or managed care organization changes). The Consolidated Appropriations Act, 2023, signed into law on December 29, 2022, delinked the Medicaid continuous coverage requirements from the PHE and, as a result, states began Medicaid disenrollments on April 1, 2023. Per the Act, redeterminations related to the PHE should be initiated within 12 months, by March 31, 2024, and conclude during the second quarter of 2024. We are taking decisive action to help ensure individuals take the state agency requested action to confirm eligibility in their Medicaid coverage or find other appropriate coverage that is best for themselves and their families. Our Ambetter Health product covers the majority of our Medicaid states, and we believe we are among the best positioned in the healthcare market to capture those transitioning coverage through redeterminations. Although Medicaid continuous coverage requirements were decoupled from the PHE, we are working to prepare for other provisions still tied to the end of the PHE which expires May 11, 2023, including COVID costs and coverage requirements, various other payment structures and electronic prescribing of controlled substances.
We have more than three decades of experience, spanning seven presidents from both sides of the aisle, in delivering high-quality healthcare services on behalf of states and the federal government to under-insured and uninsured families, commercial organizations, and military families. This expertise has allowed us to deliver cost effectivecost-effective services to our government sponsorspartners and our members. While healthcare experts maintain a focus on personalized healthcare technology, we continue to make strategic decisions to accelerate the development of new software platforms and analytical capabilities. We continue to believe we have both the capacity and capability to successfully navigate industry changes to the benefit of our members, customers, and shareholders.
ThirdFirst Quarter 20222023 Highlights
Our financial performance for the thirdfirst quarter of 20222023 is summarized as follows:
•Managed care membership of 26.828.5 million, an increase of 1.22.2 million members, or 5%8% year-over-year.
•Total revenues of $35.9$38.9 billion, representing 11%5% growth year-over-year.
•Premium and service revenues of $33.7$35.0 billion, representing 11%2% growth year-over-year.
•HBR of 88.3%87.0%, compared to 88.1%87.3% for the thirdfirst quarter of 2021.2022.
•SG&A expense ratio of 8.4%8.6%, compared to 8.3%8.0% for the thirdfirst quarter of 2021.2022.
•Adjusted SG&A expense ratio of 8.3%8.5%, compared to 8.1%7.7% for the thirdfirst quarter of 2021.2022.
•Operating cash flows of $3.3$4.3 billion for the thirdfirst quarter of 2022.2023.
•Adjusted diluted earnings per share (EPS) of $1.30,$2.11, compared to $1.26$1.83 for the thirdfirst quarter of 2021.2022.
A reconciliation from GAAP diluted EPS to adjusted diluted EPS is highlighted below, and additional detail is provided above under the heading "Non-GAAP Financial Presentation":
| | | Three Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | | 2023 | | 2022 | |
| GAAP diluted EPS attributable to Centene | GAAP diluted EPS attributable to Centene | $ | 1.27 | | | $ | 0.99 | | | GAAP diluted EPS attributable to Centene | $ | 2.04 | | | $ | 1.44 | | |
| Amortization of acquired intangible assets | Amortization of acquired intangible assets | 0.36 | | | 0.34 | | | Amortization of acquired intangible assets | 0.33 | | | 0.34 | | |
| Acquisition and divestiture related expenses | Acquisition and divestiture related expenses | 0.05 | | | 0.09 | | | Acquisition and divestiture related expenses | 0.04 | | | 0.16 | | |
Other adjustments (1) | Other adjustments (1) | (0.38) | | | 0.01 | | | Other adjustments (1) | (0.09) | | | — | | |
Income tax effects of adjustments (2) | Income tax effects of adjustments (2) | — | | | (0.17) | | | Income tax effects of adjustments (2) | (0.21) | | | (0.11) | | |
| Adjusted diluted EPS | Adjusted diluted EPS | $ | 1.30 | | | $ | 1.26 | | | Adjusted diluted EPS | $ | 2.11 | | | $ | 1.83 | | |
(1) Other adjustments include the following pre-tax items:
(a) for the three months ended September 30, 2022: PANTHERxMagellan Specialty Health divestiture gain of $490$79 million, or $0.84$0.14 per share ($0.650.12 after-tax), the impairment of assets associated with the pending divestiture of the Spanish and Central European businesses of $165 million, or $0.28 per share ($0.23 after-tax), real estate impairments of $127$26 million, or $0.22$0.05 per share ($0.160.04 after-tax), an increase to the previously reported gain on the divestiture of U.S. Medical Management (USMM) due to the finalization of working capital adjustments of $13 million, or $0.02 per share ($0.01 after-tax), gain on debt extinguishment related to the repurchases of senior notes of $10 million, or $0.02 per share ($0.01 after-tax), and an adjustment to the costs.
2022:
(b) Costs related to the PBM legal settlement of $1 million, or $0.00 per share ($0.00 after-tax);
(b) for the three months ended September 30, 2021: non-cash gain related to the acquisition of the remaining 60% interest of Circle Health of $309 million, or $0.52 per share ($0.52 after-tax), non-cash impairment of our equity method investment in RxAdvance of $229 million, or $0.38 per share ($0.35 after-tax), debt extinguishment costs of $79 million, or $0.13 per share ($0.10 after-tax), PBM legal settlement expense of $11 million, or $0.02 per share ($0.01 after-tax), and severance costs due to a restructuring of $1$2 million, or $0.00 per share ($0.00 after-tax).
(2) The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment. In addition, the three months ended March 31, 2023, includes a one-time income tax benefit of $69 million, or $0.13 per share, resulting from the distribution of long-term stock awards to the estate of the Company's former CEO.
Current and Future Operating Drivers
The following items contributed to our results of operations inas compared to the currentprevious year:
Medicaid
•Circle Health. In July 2021, we acquiredFebruary 2023, our subsidiary, Buckeye Health Plan, commenced the remaining interest in our equity method investment in Circle Health, oneMedicaid contract awarded by the Ohio Department of the U.K.'s largest independent operators of hospitals.Medicaid to continue servicing members with quality healthcare, coordinated services, and benefits.
•Commercial. In 2022, we introducedJanuary 2023, our subsidiary, Delaware First Health, Insurance Marketplace product, Ambetter Health, into five new states, as well as expanded coverage to 274 new counties across 13 existing states. We now serve members in 27 states acrosscommenced its contract for the country in 1,480 counties. Additionally, we introduced three new Ambetter Health product offerings to address growing needs of our members: Ambetter Value, Ambetter Select, and Ambetter Virtual Access.
•Eligibility Redeterminations. Revenue growth was driven by organicstatewide Medicaid growth due to the ongoing suspension of eligibility redeterminations as well as Medicare membership growth during the annual enrollment period.managed care programs.
•Hawaii. In July 2021, we began operating under two new statewide contracts in HawaiiJanuary 2023, our subsidiary, Louisiana Healthcare Connections, commenced the Medicaid contract awarded by the Louisiana Department of Health to continue administering coveredquality, integrated healthcare services to eligible Medicaid and Children's Health Insurance Program (CHIP) members for medically necessary medical, behavioral health, and long-term services and support and to continue administering services throughacross the Community Care Services program in partnership with the Hawaii Department of Human Services' Med-QUEST Division.state.
•Magellan Health, Inc. (Magellan). In January 2022, we acquired all2023, our subsidiary, Managed Health Services, commenced the contract awarded by the Indiana Department of the issuedAdministration to continue serving Hoosier Healthwise and outstanding shares of Magellan for approximately $2.5 billion.Health Indiana Plan members with Medicaid and Medicaid alternative managed care and care coordination services.
•Medicare Advantage. We experienced strong Medicare membership growth duringIn October 2022, the 2022 annual enrollment period. In 2022, we introduced WellCare into three new states, as well as expanded coveragestate of Ohio removed pharmacy services in connection with the state's transition from managed care to 327 new counties across existing states. We now serve members in 36 states across the country in 1,575 counties.a single pharmacy benefits management (PBM).
•Missouri. In July 2022, our subsidiary, Home State Health, commenced the MO HealthNet Managed Care General Plan and Specialty Plan contracts. Under the General Plan, Home State will continue servingHealth continues to serve multiple MO HealthNet programs including Children's Health Insurance members and the state's newly implemented Medicaid expansion population, across all regions of Missouri. Additionally, as the sole provider of the newly awarded Specialty Plan, Home State Health now serves approximately 51,00053,500 foster children and children receiving adoption subsidy assistance.
•North Carolina.Beginning in 2020, the federal government issued a PHE which suspended Medicaid eligibility redeterminations. The ongoing suspensions, which were extended to April 2023, have driven increased membership.
Medicare
•Medicare membership declined year-over-year due to lower annual enrollment.
Commercial
•In July 2021, WellCare2023, our Health Insurance Marketplace product, Ambetter Health, expanded into Alabama and extended its footprint by more than 60 counties across 12 existing states. In total, the Marketplace plan is available in more than 1,500 counties across 28 states. Additionally, Marketplace membership increased year-over-year due to the expanded footprint, strong product positioning and open enrollment results, as well as overall market growth.
Other
•In January 2023, we completed the divestitures of North Carolina commenced operations under a new statewide contract in North Carolina providing Medicaid managed care services. In addition, we also began operating under a new contract to provide Medicaid managed care services in three regions in North Carolina throughMagellan Specialty Health, Centurion, our provider-led North Carolina joint venture, Carolina Complete Health.prison healthcare business, and HealthSmart, our third-party health plan administration business.
•Ohio. In OctoberDecember 2022, Ohio pharmacy services were carved outwe completed the divestiture of Magellan Rx, which was part of the Magellan Health, Inc. (Magellan) business acquired in connection with the state's transition of pharmacy services from managed care to a single PBM.January 2022.
•PANTHERx.In November 2022, we completed the divestiture of our ownership stakes in our Spanish and Central European businesses, including Ribera Salud, Torrejón Salud, and Pro Diagnostics Group.
•In July 2022, we completed the previously announced saledivestiture of PANTHERx. The divestiture illustrates our continued progress on the Value Creation Plan.PANTHERx Rare (PANTHERx).
In addition, we have been negatively impacted by the previously disclosed carve out of California pharmacy services effective January 2022, which occurred in connection with the state’s transition of pharmacy services from managed care to fee for service, and the decrease in the number of our Medicare members in a 4.0 star or above plan for the 2021 rating year (2022 revenue year).
We expect the following items to impact to our future results of operations:
Medicaid
•We have continuedIn April 2023, eligibility redeterminations related to execute onthe PHE began. These redeterminations will extend over a 14-month period and are expected to conclude in the second quarter of 2024. In addition to delinking the Medicaid continuous enrollment provision from the PHE, the year-end spending bill also outlines key Value Creation Plan initiativescoverage expansion provisions, including Children’s Health Insurance Program (CHIP) coverage. The provision requires states to provide 12 months of continuous coverage for children under Medicaid and CHIP effective January 2024 and made the award of the new PBM contract commencing in 2024, the portfolio review, real estate optimization, stock and debt repurchases, along with ongoing focus on quality improvement actions. We expect these actions will drive future margin expansion, create shareholder value, and improve the experiencestate option to extend coverage for our members and providers.postpartum women for up to 12 months permanent.
•In OctoberMarch 2023, the state of North Carolina passed legislation for Medicaid Expansion, presenting a growth opportunity in our existing market.
•In December 2022, we announced that our subsidiary, Health Insurance Marketplace product, AmbetterNet of California, was selected by the California Department of Health will expand into Alabama and extend its footprint by more than 60Care Services for direct Medicaid contracts in 10 counties, across 12 existing states in 2023. We also announced our updated brand name, Ambetter Health, reflecting our commitment to putting better health at the forefront of our mission. In total, the Marketplace planincluding Los Angeles (in which a portion will be availablesubcontracted). The contracts are anticipated to begin in more than 1,500 counties across 28 statesJanuary 2024.
•In September 2022, our subsidiary, Nebraska Total Care, was awarded the Nebraska Department of Health and Human Services statewide Medicaid managed care contract. Under the new contract, Nebraska Total Care will continue serving the state's Medicaid Managed Care Program, known as Heritage Health. The new contract term is five years and includes the option for two, one-year renewals. The contract is anticipated to begin in January 2024, subject to the resolution of third-party protests.
•In September 2022, our subsidiary, Superior HealthPlan (Superior), was awarded a new, six-year contract by the Texas Health and Human Services Commission to continue providing youth in foster care with healthcare coverage through the STAR Health Medicaid program. Superior has been the sole provider of STAR Health coverage since the program launched in 2008. The contract is anticipated to begin in September 2023.
•In August 2022, our subsidiary, Magnolia Health Plan (Magnolia), was awarded the Mississippi Division of Medicaid contract. Under the new contract, Magnolia will continue serving the state's Coordinated Care Organization Program, which will consist of the Mississippi Coordinated Access Network and the Mississippi CHIP. The contract is anticipated to begin in July 2023, subject to the resolution of third-party protests.
•In August 2021, our subsidiaries, Carolina Complete Health and WellCare of North Carolina, were selected to coordinate physical and/or other health services with Local Management Entities/Managed Care Organizations under the state's new Tailored Plans. The Tailored Plans, which are expected to launch in October 2023, are integrated health plans designed for individuals with significant behavioral health needs and intellectual/developmental disabilities.
Medicare
•In October 2022, the Centers for Medicare and Medicaid Services (CMS) published updated Medicare Star quality ratings for the 2023 rating year, which impacts the 2024 revenue year. The decrease in Star quality ratings is driven by the expiration of certain disaster relief provisions as well as deterioration in select metrics. Over the past year, our leadership team launched a multi-year plan to build and improve quality across the enterprise with a strong focus on enhanced patient experience and access to care. We expect to begin to see the results of these efforts with the 2024 rating year (2025 revenue year).
•In September 2022, Centene's Nebraska subsidiary, Nebraska Total Care, was awarded the Nebraska Department of Health and Human Services statewide Medicaid managed care contract. Under the new contract, Nebraska Total Care will continue serving the state's Medicaid Managed Care Program, known as Heritage Health. The new contract term is five years and includes the option for two, one-year renewals. The contract is anticipated to begin in January 2024, subject to the resolution of third-party protests.
•In September 2022, Centene's Texas subsidiary, Superior HealthPlan (Superior), was awarded a new, six-year contract by the Texas Health and Human Services Commission to continue providing youth in foster care with healthcare coverage through the STAR Health Medicaid program. Superior has been the sole provider of STAR Health coverage since the program launched in 2008. The contract is anticipated to begin in September 2023.
•In August 2022, we announced California Department of Health Care Services awarded our subsidiary, Health Net of California, contracts to continue serving members in nine counties across California. However, Health Net of California was not awarded contracts in Los Angeles, Sacramento and Kern counties. We are actively protesting the decision to protect our members and their access to quality healthcare. The contracts are anticipated to begin in January 2024, subject to the resolution of the protest process.
•In August 2022, Centene's Mississippi subsidiary, Magnolia Health Plan (Magnolia), was awarded the Mississippi Division of Medicaid contract. Under the new contract, Magnolia will continue serving the state's Coordinated Care Organization Program, which will consist of the Mississippi Coordinated Access Network and the Mississippi Children's Health Insurance Program. The contract is anticipated to begin in July 2023, subject to the resolution of third-party protests.
•In July 2022, as part of our previously announced review of strategic alternatives for our international portfolio, we signed a definitive agreement to sell our ownership stakes in our Spanish and Central European businesses, including Ribera Salud, Torrejón Salud, and Pro Diagnostics Group. The transaction is expected to close by the end of 2022.
•In July 2022, we announced our subsidiary, Delaware First Health, was awarded contracts for the statewide Medicaid Managed Care programs. The new contracts are anticipated to begin in January 2023.
•In May 2022, we signed a definitive agreement to sell Magellan Rx as part of our ongoing portfolio review. The transaction is expected to close by the end of 2022, pending regulatory approvals.
•In March 2022, we announced our subsidiary, Managed Health Services, was selected by the Indiana Department of Administration to continue serving Hoosier Healthwise and Health Indiana Plan members with Medicaid and Medicaid alternative managed care and care coordination services. The new contract is anticipated to begin in January 2023.
•In February 2022, our Louisiana subsidiary, Louisiana Healthcare Connections, was awarded a Medicaid contract by the Louisiana Department of Health to continue administering quality, integrated healthcare services to members across the state. The contract is expected to commence in January 2023.
•In August 2021, we announced that our North Carolina subsidiaries, Carolina Complete Health and WellCare of North Carolina, will coordinate physical and/or other health services with Local Management Entities/Managed Care Organizations under the state's new Tailored Plans. The Tailored Plans, which are expected to launch in April 2023, are integrated health plans designed for individuals with significant behavioral health needs and intellectual/developmental disabilities.
•In August 2021, our Ohio subsidiary, Buckeye Health Plan, was awarded a Medicaid contract by the Ohio Department of Medicaid to continue servicing members with quality healthcare, coordinated services, and benefits. The contract is expected to commence in December 2022.Other
•We expect Medicaid eligibility redeterminationscontinue to begin in February 2023, although it could be further extended.
•We may be negatively impacted by potential Medicaid state rate actions and risk corridor mechanisms as a resultexecute on Value Creation Plan initiatives including the award of the COVID-19 pandemic.new PBM contract commencing in 2024, portfolio review, real estate optimization, stock and debt repurchases, along with an ongoing focus on quality improvement actions. We expect these actions will drive future margin expansion, create shareholder value, and improve the experience for our members and providers.
MEMBERSHIP
From September 30, 2021March 31, 2022 to September 30, 2022,March 31, 2023, we increased our managed care membership by 1.22.2 million, or 5%8%. The following table sets forth our membership by line of business:
| | | | | | | | | | | | | | | | | |
| | September 30,
2022 | | December 31,
2021 | | September 30,
2021 |
Traditional Medicaid (1) | 14,000,100 | | | 13,328,400 | | | 13,202,500 | |
High Acuity Medicaid (2) | 1,698,100 | | | 1,686,100 | | | 1,566,000 | |
| Total Medicaid | 15,698,200 | | | 15,014,500 | | | 14,768,500 | |
| Commercial Marketplace | 2,087,800 | | | 2,140,500 | | | 2,177,000 | |
| Commercial Group | 439,800 | | | 462,100 | | | 468,500 | |
| Total Commercial | 2,527,600 | | | 2,602,600 | | | 2,645,500 | |
Medicare (3) | 1,517,900 | | | 1,252,200 | | | 1,248,300 | |
| Medicare PDP | 4,186,200 | | | 4,070,500 | | | 4,064,400 | |
Total at-risk membership (4) | 23,929,900 | | | 22,939,800 | | | 22,726,700 | |
| TRICARE eligibles | 2,832,300 | | | 2,874,700 | | | 2,874,700 | |
| Total | 26,762,200 | | | 25,814,500 | | | 25,601,400 | |
| | | | | |
(1) Membership includes Temporary Assistance for Needy Families (TANF), Medicaid Expansion, Children's Health Insurance Program (CHIP), Foster Care, and Behavioral Health. (2) Membership includes Aged, Blind, and Disabled (ABD), Intellectual and Developmental Disabilities (IDD), Long-Term Services and Supports (LTSS), and Medicare-Medicaid Plans (MMP) Duals. (3) Membership includes Medicare Advantage and Medicare Supplement. (4) Membership includes 1,285,600, 1,178,000, and 1,168,400 dual-eligible beneficiaries for the periods ending September 30, 2022, December 31, 2021, and September 30, 2021, respectively. |
| | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
Traditional Medicaid (1) | 14,521,100 | | | 14,264,800 | | | 13,590,100 | |
High Acuity Medicaid (2) | 1,801,200 | | | 1,710,000 | | | 1,682,800 | |
Total Medicaid (4) | 16,322,300 | | | 15,974,800 | | | 15,272,900 | |
| Commercial Marketplace | 3,093,600 | | | 2,076,100 | | | 2,031,000 | |
| Commercial Group | 437,200 | | | 441,100 | | | 449,700 | |
| Total Commercial | 3,530,800 | | | 2,517,200 | | | 2,480,700 | |
Medicare (3) (4) | 1,343,800 | | | 1,511,100 | | | 1,452,500 | |
| Medicare PDP | 4,459,300 | | | 4,226,000 | | | 4,169,700 | |
| Total at-risk membership | 25,656,200 | | | 24,229,100 | | | 23,375,800 | |
| TRICARE eligibles | 2,799,300 | | | 2,832,300 | | | 2,862,400 | |
| Total | 28,455,500 | | | 27,061,400 | | | 26,238,200 | |
| | | | | |
(1) Membership includes Temporary Assistance for Needy Families (TANF), Medicaid Expansion, Children's Health Insurance Program (CHIP), Foster Care, and Behavioral Health. (2) Membership includes Aged, Blind, or Disabled (ABD), Intellectual and Developmental Disabilities (IDD), Long-Term Services and Supports (LTSS), and Medicare-Medicaid Plans (MMP) Duals. (3) Membership includes Medicare Advantage and Medicare Supplement. (4) Membership includes 1,323,000, 1,291,300, and 1,231,500 Dual Eligible Special Needs Plans (D-SNP) beneficiaries for the periods ending March 31, 2023, December 31, 2022, and March 31, 2022, respectively. |
RESULTS OF OPERATIONS
The following discussion and analysis is based on our Consolidated Statements of Operations, which reflect our results of operations for the three and nine months ended September 30,March 31, 2023 and 2022, and 2021, prepared in accordance with generally accepted accounting principles in the United States.States (GAAP).
Summarized comparative financial data for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 is as follows ($ in millions, except per share data in dollars):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change | | 2023 | | 2022 | | % Change | |
| Premium | Premium | $ | 31,848 | | | $ | 28,876 | | | 10 | % | | $ | 95,247 | | | $ | 83,436 | | | 14 | % | Premium | $ | 33,825 | | | $ | 31,889 | | | 6 | % | |
| Service | Service | 1,878 | | | 1,638 | | | 15 | % | | 6,679 | | | 4,054 | | | 65 | % | Service | 1,127 | | | 2,343 | | | (52) | % | |
| Premium and service revenues | Premium and service revenues | 33,726 | | | 30,514 | | | 11 | % | | 101,926 | | | 87,490 | | | 17 | % | Premium and service revenues | 34,952 | | | 34,232 | | | 2 | % | |
| Premium tax | Premium tax | 2,139 | | | 1,892 | | | 13 | % | | 7,060 | | | 5,924 | | | 19 | % | Premium tax | 3,937 | | | 2,953 | | | 33 | % | |
| Total revenues | Total revenues | 35,865 | | | 32,406 | | | 11 | % | | 108,986 | | | 93,414 | | | 17 | % | Total revenues | 38,889 | | | 37,185 | | | 5 | % | |
| Medical costs | Medical costs | 28,111 | | | 25,430 | | | 11 | % | | 83,261 | | | 73,210 | | | 14 | % | Medical costs | 29,434 | | | 27,838 | | | 6 | % | |
| Cost of services | Cost of services | 1,571 | | | 1,355 | | | 16 | % | | 5,658 | | | 3,510 | | | 61 | % | Cost of services | 870 | | | 1,988 | | | (56) | % | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 2,846 | | | 2,537 | | | 12 | % | | 8,391 | | | 6,910 | | | 21 | % | Selling, general and administrative expenses | 3,011 | | | 2,745 | | | 10 | % | |
| Depreciation expense | Depreciation expense | 150 | | | 147 | | | 2 | % | | 470 | | | 414 | | | 14 | % | Depreciation expense | 142 | | | 156 | | | (9) | % | |
| Amortization of acquired intangible assets | Amortization of acquired intangible assets | 211 | | | 198 | | | 7 | % | | 609 | | | 581 | | | 5 | % | Amortization of acquired intangible assets | 183 | | | 199 | | | (8) | % | |
| Premium tax expense | Premium tax expense | 2,211 | | | 1,965 | | | 13 | % | | 7,258 | | | 6,129 | | | 18 | % | Premium tax expense | 4,011 | | | 3,006 | | | 33 | % | |
| Impairment | | Impairment | 20 | | | — | | | n.m. | |
| | Impairment | 289 | | | 229 | | | 26 | % | | 1,739 | | | 229 | | | n.m. | |
| Legal settlement | — | | | — | | | n.m. | | — | | | 1,250 | | | n.m. | |
| Earnings from operations | Earnings from operations | 476 | | | 545 | | | (13) | % | | 1,600 | | | 1,181 | | | 35 | % | Earnings from operations | 1,218 | | | 1,253 | | | (3) | % | |
| Investment and other income | Investment and other income | 692 | | | 424 | | | 63 | % | | 786 | | | 566 | | | 39 | % | Investment and other income | 353 | | | 52 | | | n.m. | |
| Debt extinguishment | Debt extinguishment | 10 | | | (79) | | | n.m. | | 26 | | | (125) | | | n.m. | Debt extinguishment | — | | | 3 | | | n.m. | |
| Interest expense | Interest expense | (169) | | | (170) | | | 1 | % | | (491) | | | (503) | | | 2 | % | Interest expense | (180) | | | (160) | | | (13) | % | |
| | Earnings before income tax | Earnings before income tax | 1,009 | | | 720 | | | 40 | % | | 1,921 | | | 1,119 | | | 72 | % | Earnings before income tax | 1,391 | | | 1,148 | | | 21 | % | |
| Income tax expense | Income tax expense | 269 | | | 139 | | | 94 | % | | 500 | | | 376 | | | 33 | % | Income tax expense | 261 | | | 296 | | | (12) | % | |
| Net earnings | Net earnings | 740 | | | 581 | | | 27 | % | | 1,421 | | | 743 | | | 91 | % | Net earnings | 1,130 | | | 852 | | | 33 | % | |
| (Earnings) loss attributable to noncontrolling interests | (Earnings) loss attributable to noncontrolling interests | (2) | | | 3 | | | n.m. | | (6) | | | 5 | | | n.m. | (Earnings) loss attributable to noncontrolling interests | — | | | (3) | | | n.m. | |
| Net earnings attributable to Centene Corporation | Net earnings attributable to Centene Corporation | $ | 738 | | | $ | 584 | | | 26 | % | | $ | 1,415 | | | $ | 748 | | | 89 | % | Net earnings attributable to Centene Corporation | $ | 1,130 | | | $ | 849 | | | 33 | % | |
| Diluted earnings per common share attributable to Centene Corporation | Diluted earnings per common share attributable to Centene Corporation | $ | 1.27 | | | $ | 0.99 | | | 28 | % | | $ | 2.41 | | | $ | 1.27 | | | 90 | % | Diluted earnings per common share attributable to Centene Corporation | $ | 2.04 | | | $ | 1.44 | | | 42 | % | |
| | n.m.: not meaningful | n.m.: not meaningful | | n.m.: not meaningful | | |
Three Months Ended September 30, 2022March 31, 2023 Compared to Three Months Ended September 30, 2021March 31, 2022
Total Revenues
The following table sets forth supplemental revenue information for the three months ended September 30,March 31, ($ in millions):
| | | 2022 | | 2021 | | % Change | | 2023 | | 2022 | | % Change |
| Medicaid | Medicaid | $ | 23,293 | | | $ | 21,624 | | | 8 | % | Medicaid | $ | 26,164 | | | $ | 24,076 | | | 9 | % |
| Commercial | Commercial | 4,292 | | | 4,383 | | | (2) | % | Commercial | 5,252 | | | 4,132 | | | 27 | % |
Medicare (1) | Medicare (1) | 5,639 | | | 4,322 | | | 30 | % | Medicare (1) | 5,876 | | | 5,757 | | | 2 | % |
| Other | Other | 2,641 | | | 2,077 | | | 27 | % | Other | 1,597 | | | 3,220 | | | (50) | % |
| Total Revenues | Total Revenues | $ | 35,865 | | | $ | 32,406 | | | 11 | % | Total Revenues | $ | 38,889 | | | $ | 37,185 | | | 5 | % |
| (1) Medicare includes Medicare Advantage, Medicare Supplement, and Medicare Prescription Drug Plan (PDP). | |
(1) Medicare includes Medicare Advantage, Medicare Supplement, D-SNPs, and Medicare Prescription Drug Plan (PDP). | | (1) Medicare includes Medicare Advantage, Medicare Supplement, D-SNPs, and Medicare Prescription Drug Plan (PDP). |
|
Total revenues increased 11%5% in the three months ended September 30, 2022March 31, 2023 over the corresponding period in 2021,2022, driven by 52% membership growth in the Marketplace business due to strong product positioning and open enrollment results, as well as overall market growth; organic Medicaid growth, primarily due to the ongoing suspension of eligibility redeterminations, 22% membership growthredeterminations; and increased Medicaid premium tax revenue. The decrease in the Medicare business, and our acquisition of Magellan, partially offsetOther revenue was driven by the PANTHERx divestiture.recent divestitures.
Operating Expenses
Medical Costs/HBR
The HBR for the three months ended September 30, 2022,March 31, 2023, was 88.3%87.0%, compared to 88.1%87.3% in the same period in 2021.2022. The HBR for the thirdfirst quarter of 20222023 was unfavorablyfavorably impacted by a return to more normalized Medicaidcontinued disciplined Marketplace pricing and lower utilization compared to the third quarter of 2021. The increase isin Medicare, partially offset by the impactupdated Medicaid return of Marketplace and Medicare healthcare affordability initiatives as well as disciplined Marketplace pricing.premium payable revenue estimates related to prior periods.
Cost of Services
Cost of services increaseddecreased by $216 million$1.1 billion in the three months ended September 30, 2022,March 31, 2023, compared to the corresponding period in 2021, driven by the Magellan business, partially offset by the PANTHERx divestiture.2022. The cost of service ratio for the three months ended September 30, 2022,March 31, 2023, was 83.7%77.2%, compared to 82.7%84.8% in the same period in 2021.2022. The increase in the cost of service ratio wasdecreases were driven by recent acquisitions and divestitures.
Selling, General & Administrative Expenses
The SG&A expense ratio was 8.4%8.6% for the thirdfirst quarter of 2022,2023, compared to 8.3%8.0% in the thirdfirst quarter of 2021.2022. The adjusted SG&A expense ratio was 8.3%8.5% for the thirdfirst quarter of 2022,2023, compared to 8.1%7.7% in the thirdfirst quarter of 2021.2022. The increases were due todriven by growth in the addition of Magellan,Marketplace business, which operates at a higher SG&A expense ratio due to the nature of its business, and the PANTHERx divestiture. Increases were also driven by costs associated with Medicare marketing and value creation investment spending, partially offset by savings due to real estate optimization efforts and the leveraging of expenses over higher revenues as a result of increased membership.ratio.
Impairment
During the thirdfirst quarter of 2022,2023, we recorded impairment charges of $289$20 million including a $165 million charge related to assets associated with the pending divestiture of the Spanish and Central European businesses and $124 million offor additional impairments related to our ongoing real estate optimization initiatives, consisting of leased and owned real estate assets and related fixed assets.
During the third quarter of 2021, we recorded a $229 million non-cash impairment of our equity method investment in RxAdvance, a pharmacy benefit manager. The impairment was the result of our focus on simplification of our pharmacy operations.
Other Income (Expense)
The following table summarizes the components of other income (expense) for the three months ended September 30,March 31, ($ in millions):
| | | | 2022 | | 2021 | | 2023 | | 2022 |
| Investment and other income | Investment and other income | $ | 692 | | | $ | 424 | | Investment and other income | $ | 353 | | | $ | 52 | |
| Debt extinguishment | Debt extinguishment | 10 | | | (79) | | Debt extinguishment | — | | | 3 | |
| Interest expense | Interest expense | (169) | | | (170) | | Interest expense | (180) | | | (160) | |
| Other income (expense), net | Other income (expense), net | $ | 533 | | | $ | 175 | | Other income (expense), net | $ | 173 | | | $ | (105) | |
Investment and other income. Investment and other income increased by $268$301 million in the three months ended September 30, 2022March 31, 2023 compared to the corresponding period in 2021,2022, driven by increased interest rates and the $490$79 million PANTHERxMagellan Specialty Health divestiture gain and higher interest rates. 2021 included a $309 million gain related to the acquisition of the remaining 60% interest of Circle Health.gain.
Debt extinguishment. InDuring the thirdfirst quarter of 2022, we repurchased $83 million of our 4.25% Senior Notes due 2027 and $176 million of our 4.625% Senior Notes due 2029 through our debt repurchase program, resulting in a pre-taxrecognized an immaterial gain on extinguishment of $10 million.
In August 2021, we redeemed all of our outstanding 5.375% Senior Notes due 2026 and all of WellCare Health Plans, Inc.'s outstanding 5.375% Senior Notes due 2026, including all premiums and accrued interest. We recognized a pre-tax loss on extinguishment of $79 million, including the call premium, the write-off of the unamortized premium and debt issuance costs, and expenses related to the redemptions.redemption of Magellan’s outstanding Senior Notes.
Interest expense. Interest expense decreasedincreased by $1$20 million in the three months ended September 30, 2022,March 31, 2023, compared to the corresponding period in 2021.2022. The increase was driven by increased interest rates.
Income Tax Expense
For the three months ended September 30, 2022,March 31, 2023, we recorded income tax expense of $269$261 million on pre-tax earnings of $1.0$1.4 billion, or an effective tax rate of 26.6%18.8%. The effective tax rate for the first quarter of 2023 reflects the tax effects of the distribution of long-term stock awards to the estate of the Company's former CEO as well as the Magellan Specialty Health gain. For the first quarter of 2023, our effective tax rate on adjusted earnings was 24.3%. For the thirdthree months ended March 31, 2022, we recorded an income tax expense of $296 million on pre-tax earnings of $1.1 billion, or an effective tax rate of 25.8%. For the first quarter of 2022, our effective tax rate on adjusted earnings was 26.3%. For the three months ended September 30, 2021, we recorded an income tax expense of $139 million on a pre-tax earnings of $720 million, or an effective tax rate of 19.3%. The effective tax rate for the third quarter of 2021 reflects the non-taxable gain related to the acquisition of the remaining 60% interest of Circle Health. For the third quarter of 2021, our effective tax rate on adjusted earnings was 24.5%25.1%.
Segment Results
The following table summarizes our consolidated operating results by segment for the three months ended September 30,March 31, ($ in millions):
| | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | % Change |
| Total Revenues | | | | | |
| Managed Care | $ | 33,724 | | | $ | 30,889 | | | 9 | % |
| Specialty Services | 5,407 | | | 4,727 | | | 14 | % |
| Eliminations | (3,266) | | | (3,210) | | | (2) | % |
| Consolidated Total | $ | 35,865 | | | $ | 32,406 | | | 11 | % |
| Earnings from Operations | | | | | |
| Managed Care | $ | 527 | | | $ | 699 | | | (25) | % |
| Specialty Services | (51) | | | (154) | | | 67 | % |
| | | | | |
| Consolidated Total | $ | 476 | | | $ | 545 | | | (13) | % |
| | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | % Change |
| Total Revenues | | | | | |
| Medicaid | $ | 26,164 | | | $ | 24,074 | | | 9 | % |
| Medicare | 5,876 | | | 5,757 | | | 2 | % |
| Commercial | 5,252 | | | 4,132 | | | 27 | % |
| Other | 1,597 | | | 3,222 | | | (50) | % |
| Consolidated Total | $ | 38,889 | | | $ | 37,185 | | | 5 | % |
Gross Margin (1) | | | | | |
| Medicaid | $ | 2,217 | | | $ | 2,346 | | | (5) | % |
| Medicare | 868 | | | 711 | | | 22 | % |
| Commercial | 1,247 | | | 858 | | | 45 | % |
| Other | 316 | | | 491 | | | (36) | % |
| Consolidated Total | $ | 4,648 | | | $ | 4,406 | | | 5 | % |
| | | | | |
(1) Gross margin represents premium and service revenues less medical costs and cost of services. |
Medicaid
Total revenues increased 9% in the three months ended September 30, 2022,March 31, 2023, compared to the corresponding period in 2021.2022. The increase was due to organic Medicaid growth, partially due to the ongoing suspension of eligibility redeterminations and
membership growth in the Medicare business. Earnings from operationsredeterminations. Gross margin decreased $172$129 million between years primarily as a result of the previously discussed asset impairments and aupdated return of premium payable revenue estimates related to more normalized Medicaid utilization compared to the third quarter of 2021.prior periods.
Specialty ServicesMedicare
Total revenues increased 14%2% in the three months ended September 30, 2022,March 31, 2023, compared to the corresponding period in 2021, primarily due to our acquisition of Magellan, partially offset by the divestiture of PANTHERx. Earnings from operations2022. Gross margin increased $103$157 million in the three months ended September 30, 2022,March 31, 2023, compared to the corresponding period in 2021,2022. Increases were primarily due to the prior year impairment of our equity method investment in RxAdvance, a pharmacy benefit manager, in addition to favorable Magellan operations.
lower utilization.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Total Revenues
The following table sets forth supplemental revenue information for the nine months ended September 30, ($ in millions):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | % Change |
| Medicaid | $ | 69,827 | | | $ | 62,612 | | | 12 | % |
| Commercial | 12,980 | | | 12,391 | | | 5 | % |
Medicare (1) | 17,035 | | | 13,125 | | | 30 | % |
| | | | | |
| Other | 9,144 | | | 5,286 | | | 73 | % |
| Total Revenues | $ | 108,986 | | | $ | 93,414 | | | 17 | % |
| | | | | |
(1) Medicare includes Medicare Advantage, Medicare Supplement, and Medicare PDP. |
| | | | |
| | | | | |
Total revenues increased 17%27% in the ninethree months ended September 30, 2022, over the corresponding period in 2021 primarily due to Medicaid membership growth resulting from the ongoing suspension of eligibility redeterminations, membership growth in the Medicare business, our acquisitions of Magellan and Circle Health, the commencement of our contracts in North Carolina, additional premium tax revenue and retroactive state directed payments, partially offset by the PANTHERx divestiture.
Operating Expenses
Medical Costs/HBR
The HBR for the nine months ended September 30, 2022 was 87.4%, compared to 87.7% in the same period in 2021. The HBR for 2022 was positively impacted by Marketplace and Medicare healthcare affordability initiatives as well as disciplined Marketplace pricing. These impacts were partially offset by a return to more normalized Medicaid utilization compared to 2021.
Cost of Services
Cost of services increased by $2.1 billion in the nine months ended September 30, 2022,March 31, 2023, compared to the corresponding period in 2021,2022. Gross margin increased $389 million in the three months ended March 31, 2023, compared to the corresponding period in 2022. Increases were primarily driven by 52% membership growth in the MagellanMarketplace business, partially offset byresulting from strong product positioning and open enrollment results, overall market growth, and continued disciplined pricing.
Other
Total revenues decreased 50% in the PANTHERx divestiture. The cost of service ratio for the ninethree months ended September 30, 2022, was 84.7%,March 31, 2023, compared to 86.6%the corresponding period in 2022. Gross margin decreased $175 million in the samethree months ended March 31, 2023, compared to the corresponding period in 2021. The decrease in the cost of service ratio was driven by2022. Decreases were primarily due to recent acquisitions and divestitures.
Selling, General & Administrative Expenses
The SG&A expense ratio for the nine months ended September 30, 2022 was 8.2%, compared to 7.9% for the corresponding period in 2021. The adjusted SG&A expense ratio for the nine months ended September 30, 2022 was 8.1%, compared to 7.7% for the nine months ended September 30, 2021. The increases were due to the additions of the Magellan and Circle Health businesses, which operate at higher SG&A ratios due to the nature of their respective businesses. Increases were also driven by costs associated with Medicare marketing, value creation investment spending, and variable compensation. These impacts were partially offset by the leveraging of expenses over higher revenues as a result of increased membership and reduced restructuring charges compared to 2021.
Impairment
During the nine months ended September 30, 2022, we recorded total impairment charges of $1.7 billion primarily driven by $1.6 billion associated with our ongoing real estate optimization initiative, consisting of leased and owned real estate assets and related fixed assets, along with a $165 million charge related to assets associated with the pending divestiture of the Spanish and Central European businesses.
During the third quarter of 2021, we recorded a $229 million non-cash impairment of our equity method investment in RxAdvance, a pharmacy benefit manager.
Legal Settlement
During the second quarter of 2021, we recorded a legal settlement reserve estimate of $1.25 billion (inclusive of the 13 states with which we have reached no-fault agreements) related to services provided by Envolve Pharmacy Solutions, Inc. (Envolve), our PBM subsidiary, essentially during 2017 and 2018.
Other Income (Expense)
The following table summarizes the components of other income (expense) for the nine months ended September 30, ($ in millions):
| | | | | | | | | | | |
| | 2022 | | 2021 |
| Investment and other income | $ | 786 | | | $ | 566 | |
| Debt extinguishment | 26 | | | (125) | |
| Interest expense | (491) | | | (503) | |
| Other income (expense), net | $ | 321 | | | $ | (62) | |
Investment and other income. Investment and other income increased by $220 million in the nine months ended September 30, 2022, compared to the corresponding period in 2021, driven by the $490 million PANTHERx divestiture gain and higher interest rates on larger investment balances, partially offset by decreases in the performance of our deferred compensation investment fund portfolio, which fluctuate with their underlying investments. The losses from our deferred compensation portfolio were substantially offset by decreases in deferred compensation expense, recorded in SG&A expense.
Debt extinguishment. In the third quarter of 2022, we repurchased $83 million of our 4.25% Senior Notes due 2027 and $176 million of our 4.625% Senior Notes due 2029 through our debt repurchase program, resulting in a pre-tax gain on extinguishment of $10 million. In May 2022, we recognized a $13 million pre-tax gain on the extinguishment of debt related to the refinancing of debt for our of Circle Health subsidiary. The 2022 debt extinguishment also includes an immaterial gain related to the redemption of Magellan’s outstanding Senior Notes in January 2022.
In August 2021, we redeemed all of our outstanding 5.375% Senior Notes due 2026 and all of WellCare Health Plans, Inc.'s outstanding 5.375% Senior Notes due 2026, including all premiums and accrued interest. We recognized a pre-tax loss on extinguishment of $79 million, including the call premium, the write-off of the unamortized premium and debt issuance costs, and expenses related to the redemptions. In February 2021, we tendered or redeemed all of our outstanding $2.2 billion 4.75% Senior Notes, due 2025 and recognized a pre-tax loss on extinguishment of approximately $46 million. The loss includes the call premium and the write-off of unamortized premium and debt issuance costs.
Interest expense. Interest expense decreased by $12 million in the nine months ended September 30, 2022, compared to the corresponding period in 2021, driven by our 2022 and 2021 refinancing actions.
Income Tax Expense
For the nine months ended September 30, 2022, we recorded income tax expense of $500 million on pre-tax earnings of $1.9 billion, or an effective tax rate of 26.0%. For the nine months ended September 30, 2022, our effective tax rate on adjusted earnings was 26.2%. For the nine months ended September 30, 2021, we recorded income tax expense of $376 million on pre-tax earnings of $1.1 billion, or an effective tax rate of 33.6%, which reflects the partial non-deductibility of the legal settlement reserve.
Segment Results
The following table summarizes our consolidated operating results by segment for the nine months ended September 30, ($ in millions):
| | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | % Change |
| Total Revenues | | | | | |
| Managed Care | $ | 101,434 | | | $ | 89,082 | | | 14 | % |
| Specialty Services | 17,497 | | | 13,553 | | | 29 | % |
| Eliminations | (9,945) | | | (9,221) | | | (8) | % |
| Consolidated Total | $ | 108,986 | | | $ | 93,414 | | | 17 | % |
| Earnings from Operations | | | | | |
| Managed Care | $ | 1,634 | | | $ | 1,240 | | | 32 | % |
| Specialty Services | (34) | | | (59) | | | 42 | % |
| Consolidated Total | $ | 1,600 | | | $ | 1,181 | | | 35 | % |
Managed Care
Total revenues increased 14% in the nine months ended September 30, 2022, compared to the corresponding period in 2021, driven by organic Medicaid growth, partially due to the ongoing suspension of eligibility redeterminations, membership growth in the Medicare business, our recent acquisition of Circle Health, the commencement of our contracts in North Carolina, along with premium tax revenue and retroactive state directed payments. Earnings from operations increased $394 million between years primarily as a result of Medicaid and Medicare membership growth, 2021 risk adjustment in 2022, lower traditional utilization in the Marketplace business, profitability growth in the PDP business, and the acquisition of Circle Health, partially offset by the $1.7 billion pre-tax real estate impairment. 2021 was negatively impacted by the legal settlement reserve estimate of $1.25 billion related to services provided by Envolve and higher utilization in the Marketplace business in 2021.
Specialty Services
Total revenues increased 29% in the nine months ended September 30, 2022, compared to the corresponding period in 2021, resulting primarily from our acquisition of Magellan, increased services associated with membership growth in the Managed Care segment, and new contracts in our correctional business. Earnings from operations increased $25 million in the nine months ended September 30, 2022, compared to the corresponding period in 2021, primarily due to favorable Magellan operations and the prior year impairment of our equity method investment in RxAdvance, a pharmacy benefit manager, partially offset by declining operations in our PBM business and a non-recurring item in our federal services business.
LIQUIDITY AND CAPITAL RESOURCES
Shown below is a condensed schedule of cash flows used in the discussion of liquidity and capital resources ($ in millions).
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
| Net cash provided by operating activities | $ | 7,837 | | | $ | 3,530 | |
| Net cash used in investing activities | (3,142) | | | (2,442) | |
| Net cash (used in) provided by financing activities | (2,465) | | | 1,597 | |
| Effect of exchange rate changes on cash and cash equivalents | (37) | | | (8) | |
| Net increase in cash, cash equivalents, and restricted cash and cash equivalents | $ | 2,193 | | | $ | 2,677 | |
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| Net cash provided by operating activities | $ | 4,269 | | | $ | 1,151 | |
| Net cash (used in) investing activities | (253) | | | (2,401) | |
| Net cash (used in) financing activities | (183) | | | (498) | |
| Effect of exchange rate changes on cash and cash equivalents | 2 | | | 33 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents | $ | 3,835 | | | $ | (1,715) | |
Cash Flows Provided by Operating Activities
Normal operations are funded primarily through operating cash flows and borrowings under our revolving credit facility. Operating activities provided cash of $7.8$4.3 billion in the ninethree months ended September 30, 2022,March 31, 2023, compared to providing cash of $3.5$1.2 billion in the comparable period in 2021.2022. Cash flows provided by operations in 20222023 were driven by net earnings, before the non-cash real estate impairment charge, an increase in medical claims liabilities, and increases in unearned revenue and accounts payable due todriven by the early receipt of payments from CMS.CMS of approximately $2.8 billion, the timing of pass through payments of $1.2 billion, partially offset by a delay in premium payments from one of our state partners of $1.1 billion.
Cash flows provided by operations in 20212022 were due toprimarily driven by net earnings before the legal settlement reserve, an increase in state risk sharing mechanism payables, partially offset by risk adjustment and minimum medical loss ratio (MLR) payments for the Health Insurance Marketplace 2020 plan year.earnings.
Cash Flows Used in Investing Activities
Investing activities used cash of $3.1 billion$253 million in the ninethree months ended September 30, 2022,March 31, 2023, and $2.4 billion in the comparable period in 2021.2022. Cash flows used in investing activities in 20222023 primarily consisted of net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments) and our acquisition of Magellan,capital expenditures, partially offset by our PANTHERx divestiture proceeds.
CashIn 2022, cash flows used in investing activities in 2021 primarily consistedrelated to our acquisition of theMagellan and net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments), acquisition and divestiture activity primarily related to the acquisition of the remaining 60% interest of Circle Health, and capital expenditures..
We spent $771$225 million and $662$242 million in the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively, on capital expenditures primarily for system enhancements, market growth, and our corporate and regional buildings.enhancements.
As of September 30, 2022,March 31, 2023, our investment portfolio consisted primarily of fixed-income securities with an average duration of 3.43.5 years. We had unregulated cash and cash equivalentsinvestments of $436 million$1.0 billion at September 30, 2022, including $49 million in our international subsidiaries,March 31, 2023 compared to $2.7$1.4 billion at December 31, 2021, including $430 million in our international subsidiaries. Unregulated cash was substantially reduced in January 2022 upon the closing of the Magellan Acquisition for the purchase price payment and corresponding closing costs.2022.
Cash Flows Used in Financing Activities
Financing activities used cash of $2.5 billion$183 million in the ninethree months ended September 30, 2022,March 31, 2023, compared to providingusing cash of $1.6 billion$498 million in the comparable period in 2021.2022. Financing activities in 20222023 were driven by stock repurchases of $1.6 billion through our stock repurchase program, the redemption of Magellan's outstanding debt of $535$423 million, assumed in the transaction using Magellan's cash on hand, and senior note debt repurchases of $259 million. In 2021, net financing activities were driven by costs associated with our debt refinancing,partially offset by increased borrowings.borrowings on our revolving credit facility.
Liquidity Metrics
We have a stock repurchase program authorizing us to repurchase common stock from time to time on the open market or through privately negotiated transactions. In June 2022, ourthe Company's Board of Directors approved an increaseauthorized up to a total of $6.0 billion of repurchases under the existingprogram.
During the quarter, we repurchased 4.9 million shares of common stock for $377 million under the stock repurchase program for Centene’s common stock by $3.0 billion, for a total $4.0 billion.program. We have approximately $2.2$2.4 billion remaining under the program for repurchases as of September 30, 2022.March 31, 2023. No duration has been placed on the repurchase program. We reserve the right to discontinue the repurchase program at any time. Refer to Note 10. Stockholders' Equity for further information on stock repurchases.
In July 2022, we remitted $1.0 billion upon entering into an accelerated share repurchase (ASR) agreement to repurchase our common stock under our stock repurchase program using a portion of the proceeds from the PANTHERx divestiture. At inception, we received an initial delivery of approximately 8.6 million shares representing 80% of the $1.0 billion notional amount. In October 2022, an additional 3.0 million shares were delivered upon settlement of the ASR based upon the volume-weighted average price (VWAP) over the term of the agreement, less a discount. In total, 11.6 million shares were purchased through the $1.0 billion ASR.
During the quarter, we also repurchased an additional 2.9 million shares of common stock for $240 million under the stock repurchase program and repurchased $259 million of our par value senior notes, for $247 million, under the debt repurchase program.
From time to time, we raise capital through the issuance of debt in the form of senior notes or make decisions to repurchase shares or reduce debt as part of our capital allocation strategy. As of September 30, 2022,March 31, 2023, we had an aggregate principal amount of $15.7 billion of senior notes issued and outstanding. The indentures governing our various maturities of senior notes contain restrictive covenants. As of September 30, 2022,March 31, 2023, we were in compliance with all covenants.
As part of our capital allocation strategy, we may decide to repurchase debt or raise capital through the issuance of debt in the form of senior notes. In June 2022, the Company's Board of Directors also authorized a new $1.0 billion senior note debt repurchase program. No repurchases were made during the quarter ended March 31, 2023. As of March 31, 2023, there was $700 million available under the senior note debt repurchase program. Refer to Note 8. Debt for further information regarding the issuance and redemption of senior notes and Note 10. Stockholders' Equity for information on stock repurchases.notes.
The credit agreement underlying our Revolving Credit Facility and Term Loan Facility contains customary covenants as well as financial covenants including a minimum fixed charge coverage ratio and a maximum debt-to-EBITDA ratio. Our maximum debt-to-EBITDA ratio under the credit agreement may not exceed 4.0 to 1.0. As of September 30, 2022,March 31, 2023, we had $120$359 million of borrowings outstanding under our Revolving Credit Facility, $2.2 billion of borrowings under our Term Loan Facility, and we were in compliance with all covenants. As of September 30, 2022,March 31, 2023, there were no limitations on the availability of our Revolving Credit Facility as a result of the debt-to-EBITDA ratio.
We had outstanding letters of credit of $211$214 million as of September 30, 2022,March 31, 2023, which were not part of our revolving credit facility. The letters of credit bore weighted interest of 0.6% as of September 30, 2022.March 31, 2023. In addition, we had outstanding surety bonds of $1.4$1.0 billion as of September 30, 2022.March 31, 2023.
At September 30, 2022,March 31, 2023, our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 42.1%, compared to 42.7% at December 31, 2022. The debt to capital ratio decrease was driven by net earnings partially offset by stock repurchases in the quarter. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.
At March 31, 2023, we had working capital, defined as current assets less current liabilities, of $1.9$2.2 billion, compared to $2.7$1.7 billion at December 31, 2021. Working capital was substantially reduced in January 2022 upon the closing of the Magellan Acquisition for the purchase price payment and corresponding closing costs.2022. We manage our short-term and long-term investments with the goal of ensuring that a sufficient portion is held in investments that are highly liquid and can be sold to fund short-term requirements as needed.
At September 30, 2022, our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 41.8%, compared to 41.2% at December 31, 2021. Excluding $181 million of non-recourse debt, our debt to capital ratio was 41.6% as of September 30, 2022, compared to $184 million and 40.9% at December 31, 2021. The debt to capital ratio increase was driven by stock repurchases in the quarter. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.
20222023 Expectations
During the remainder of 2022,2023, we expect to receive net dividends from our insurance subsidiaries of approximately $511 million$2.0 billion and spend approximately $300$620 million in additional capital expenditures. In October 2022,April 2023, we made additional purchases of $66$200 million through our stock repurchase program and $58 million of our par value senior notes for $53 million through our debt repurchase program.
If the previously announced divestiture of Magellan Rx closes in 2022, we would have additional proceeds to utilize for additional stock repurchases and debt reduction.
Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our Revolving Credit Facility will be sufficient to finance our general operations and capital expenditures for at least 12 months from the date of this filing. While we are currently in a strong liquidity position and believe we have adequate access to capital, we may elect to increase borrowings on our Revolving Credit Facility. From time to time we may elect to raise additional funds for these and other purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. In addition, we may strategically pursue refinancing or redemption opportunities to extend maturities and/or improve terms of our indebtedness if we believe such opportunities are favorable to us.
We intend to continue to evaluate strategic actions in connection with our Value Creation Plan, targeting initiatives to improve productivity, efficiencies and reduced organizational costs, as well as capital deployment activities, including stock repurchases, portfolio optimization and the evaluation of refinancing opportunities. In addition to creating shareholder value, this plan encompasses a larger organizational mission to enhance our member and provider experience, improve outcomes for our members, and to initiate new ways of doing business that make Centene a great partner in all aspects of our operations.
REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
Our operations are conducted through our subsidiaries. As managed care organizations, most of our subsidiaries are subject to state regulations and other requirements that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to us. Generally, the amount of dividend distributions that may be paid by a regulated subsidiary without prior approval by state regulatory authorities is limited based on the entity's level of statutory net income and statutory capital and surplus.
Our regulated subsidiaries are required to maintain minimum capital requirements prescribed by various regulatory authorities in each of the states in which we operate. During the ninethree months ended September 30, 2022,March 31, 2023, we received dividends of $773$153 million from and made $627$87 million of capital contributions to our regulated subsidiaries. For our subsidiaries that file with the National Association of Insurance Commissioners (NAIC), the aggregate risk-based capital (RBC) level as of December 31, 2021,2022, which was the most recent date for which reporting was required, was in excess of 350% of the Authorized Control Level. We intend to continue to maintain an aggregate RBC level in excess of 350% of the Authorized Control Level during 2022.2023.
Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended (Knox-Keene), certain of our California subsidiaries must comply with tangible net equity (TNE) requirements. Under these Knox-Keene TNE requirements, actual net worth less certain unsecured receivables and intangible assets must be more than the greater of (i) a fixed minimum amount, (ii) a minimum amount based on premiums or (iii) a minimum amount based on healthcare expenditures, excluding capitated amounts.
Under the New York State Department of Health Codes, Rules and Regulations Title 10, Part 98, our New York subsidiary must comply with contingent reserve requirements. Under these requirements, net worth based upon admitted assets must equal or exceed a minimum amount based on annual net premium income.
The NAIC has adopted rules which set minimum RBC requirements for insurance companies, managed care organizations and other entities bearing risk for healthcare coverage. As of September 30, 2022,March 31, 2023, each of our health plans was in compliance with the RBC requirements enacted in those states.
As a result of the above requirements and other regulatory requirements, certain of our subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to their parent companies. Such restrictions, unless amended or waived or unless regulatory approval is granted, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends that can be paid by our insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
INVESTMENTS AND DEBT
As of September 30, 2022,March 31, 2023, we had short-term investments of $2.2$2.1 billion and long-term investments of $15.3$17.2 billion, including restricted deposits of $1.2$1.3 billion. The short-term investments generally consist of highly liquid securities with maturities between three and 12 months. The long-term investments consist of municipal, corporate and U.S. Treasury securities, government sponsored obligations, life insurance contracts, asset-backed securities, and equity securities, and have maturities greater than one year. Restricted deposits consist of investments required by various state statutes to be deposited or pledged to state agencies. Due to the nature of the states’states' requirements, these investments are classified as long-term regardless of the contractual maturity date. Substantially all of our investments are subject to interest rate risk and will decrease in value if market rates increase. Assuming a hypothetical and immediate 1% increase in market interest rates at September 30, 2022,March 31, 2023, the fair value of our fixed income investments would decrease by approximately $560$617 million.
For a discussion of the interest rate risk that our investments are subject to, refer to our 10-K for the fiscal year ended December 31, 2021,2022, Part 1, Item 1A, "Risk Factors – Our investment portfolio may suffer losses which could materially and adversely affect our results of operations or liquidity."
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures - We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the filing of this Form 10-Q, management evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022.March 31, 2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022.March 31, 2023.
Changes in Internal Control Over Financial Reporting - No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2022March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On January 4, 2022, we acquired Magellan. Management is currently in the process of evaluating the internal controls and procedures of Magellan and plans to integrate Magellan's internal control over financial reporting with our existing internal control over financial reporting. This integration may lead to changes in the internal control over financial reporting for us or the acquired Magellan business in future periods. Management expects the integration process to continue throughout the year and be completed during 2022.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
A description of the legal proceedings to which the Company and its subsidiaries are a party is contained in Note 13. Contingencies to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.
Item 1A. Risk Factors.
In additionThere have been no material changes to the risk factors set forthdisclosed in Part I - Item 1A - "Risk Factors" of our 2022 Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the "2021 Form 10-K"), investors should carefully consider the following risk factor, which has been updated to reflect the impairment charges related to our real estate portfolio evaluation. This risk should be read in conjunction with the risk factors set forth in the 2021 Form 10-K and the other information contained in this report and our other filings with the Securities and Exchange Commission.10-K.
An impairment charge with respect to our real estate portfolio, recorded goodwill and intangible assets could have a material impact on our results of operations.
In connection with the evaluation of our real estate portfolio, we are downsizing our leased space and have evaluated whether the carrying value of our owned real estate may be impaired. As a result, we have incurred a charge of $811 million related to leased real estate and associated fixed asset impairments and a charge of $763 million related to owned real estate impairments through the third quarter of 2022. We anticipate additional future charges of approximately $100 million related to real estate optimization. We also periodically evaluate our goodwill and other intangible assets to determine whether all or a portion of their carrying values may be impaired, in which case a charge to earnings may be necessary. Changes in business strategy, government regulations, or economic or market conditions have resulted and may result in impairments of our real estate portfolio, goodwill and other intangible assets at any time in the future. Our judgments regarding the existence of impairment indicators are based on, among other things, legal factors, market conditions, and operational performance. For example, the non-renewal of our health plan contracts with the state in which they operate may be an indicator of impairment. If an event or events occur that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill and other intangible assets, such revision could result in a non-cash impairment charge that could have a material impact on our results of operations in the period in which the impairment occurs.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In June 2022, ourNovember 2005, the Company's Board of Directors approved an additional $3.0 billion to the Company's existingannounced a stock repurchase program, for its common stock for a total $4.0 billion. which was most recently been increased in December 2022. The Company is authorized to repurchase up to $6.0 billion, inclusive of past authorizations.
The stock repurchase program is effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1 and accelerated share repurchases), the amounts and timing of which are subject to our discretion as part of our capital allocation strategy, and may be based upon general market conditions and the prevailing price and trading volumes of our common stock. No duration has been placed on the repurchase program. We reserve the right to discontinue the repurchase program at any time.
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Issuer Purchases of Equity Securities Third Quarter 2022 (shares in thousands) |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ($ in millions) (2) |
July 1, 2022 - July 31, 2022 (3) | | 9,841 | | | $ | 92.15 | | | 9,828 | | | $ | 2,350 | |
| August 1, 2022 - August 31, 2022 | | 7 | | | 93.52 | | | — | | | 2,350 | |
| September 1, 2022 - September 30, 2022 | | 1,672 | | | 81.00 | | | 1,658 | | | 2,216 | |
| Total | | 11,520 | | | $ | 90.53 | | | 11,486 | | | $ | 2,216 | |
(1) Shares purchased through a publicly announced plan or program and shares relinquished to the Company by certain employees for payment of taxes or option cost upon vesting of restricted stock units or option exercise. (2) In June 2022, the Company's Board of Directors approved a $3.0 billion increase to the Company's existing stock repurchase program for its common stock. A remaining amount of approximately $2.2 billion is available under the program as of September 30, 2022. (3) Includes shares repurchased through an accelerated share repurchase (ASR) and represents the spot price at inception but was subsequently settled based on the volume-weighted average price (VWAP) over the term of the agreement. See Note 10. Stockholders’ Equity for additional information. |
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Issuer Purchases of Equity Securities First Quarter 2023 (shares in thousands) |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ($ in millions) (2) |
| January 1, 2023 - January 31, 2023 | | 3,511 | | | $ | 79.44 | | | 3,485 | | | $ | 2,529 | |
| February 1, 2023 - February 28, 2023 | | 1,571 | | | 72.93 | | | 1,367 | | | 2,429 | |
| March 1, 2023 - March 31, 2023 | | 503 | | | 64.08 | | | — | | | 2,429 | |
| Total | | 5,585 | | | $ | 76.22 | | | 4,852 | | | $ | 2,429 | |
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(1) Includes 696 thousand shares relinquished to the Company by certain employees for payment of taxes; open market purchases of 6.8 thousand shares by Andrew Asher, the Company's CFO, at a weighted average price of $71.94 which was previously disclosed on Form 4 filed with the SEC on February 10, 2023; and an open market purchase of 30 thousand shares by Sarah London, the Company's CEO, at a price of $62.60 which was previously disclosed on Form 4 filed with the SEC on March 17, 2023. (2) A remaining amount of approximately $2.4 billion is available under the stock repurchase program as of March 31, 2023. |
Item 6. Exhibits.
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EXHIBIT
NUMBER | |
DESCRIPTION |
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3.110.1 | | | |
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| 10.2 | | |
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3.210.3 | | | |
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| 31.1 | | | |
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| 31.2 | | | |
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| 32.1 | | | |
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| 32.2 | | | |
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| 101 | | | The following materials from the Centene Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2022,March 31, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Earnings;Earnings (Loss); (iv) the Consolidated Statements of Stockholders’Stockholders' Equity; (v) the Consolidated Statements of Cash Flows and (vi) related notes. |
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| 104 | | | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of OctoberApril 25, 2022.2023.
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| | CENTENE CORPORATION |
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| | By: | /s/ SARAH M. LONDON |
| | Chief Executive Officer
(principal executive officer)
|
| | | | | | | | |
| | By: | /s/ ANDREW L. ASHER |
| | Executive Vice President, Chief Financial Officer
(principal financial officer)
|
| | | | | | | | |
| | By: | /s/ KATIE N. CASSO |
| | Senior Vice President, Corporate Controller and Chief Accounting Officer
(principal accounting officer)
|
| | |