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CENTENE CORP – 10-K – Management'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, including those set forth under Part I, Item 1A."Risk Factors" of this Form 10-K. The following discussion and analysis does not include certain items related to the year endedDecember 31, 2019 , including year-to-year comparisons between the year endedDecember 31, 2020 and the year endedDecember 31, 2019 . For a comparison of our results of operations for the fiscal years endedDecember 31, 2020 andDecember 31, 2019 , see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onFebruary 22, 2021 . EXECUTIVE OVERVIEW General
We are a leading multi-national healthcare enterprise that is committed to
helping people live healthier lives. We take a local approach - with local
brands and local teams - to provide fully integrated, high-quality, and
cost-effective services to government-sponsored and commercial healthcare
programs, focusing on under-insured and uninsured individuals.
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 and health insurer fee (HIF) 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 tax and health insurer fee revenues that are separately billed. Prior to 2021, before the Affordable Care Act (ACA) health insurer fee repeal was effected, our insurance subsidiaries were subject to the HIF. We recognized revenue for reimbursement of the HIF, including the "gross-up" to reflect the non-deductibility of the HIF. Collectively, this revenue was recorded as premium tax and health insurer fee revenue in the Consolidated Statements of Operations. For certain products, premium taxes, state assessments and the HIF were not pass-through payments and were recorded as premium revenue and premium tax expense or health insurer fee expense in the Consolidated Statements of Operations. Due to the size of the health insurer fee, one of the primary drivers of the year-over-year variances discussed throughout this section is related to the repeal of the HIF in 2021.
Magellan Acquisition
OnJanuary 4, 2022 , we acquired all of the issued and outstanding shares ofMagellan Health, Inc. (Magellan). Total consideration for the acquisition was approximately$2.6 billion , consisting of$2.5 billion in cash ($95.00 per share) and an estimated$67 million related to the fair value replacement equity awards associated with pre-combination service. The Magellan acquisition enables us to provide whole-health, integrated healthcare solutions to deliver better health outcomes at lower costs for complex, high-cost populations.
Acquisitions and Divestitures
In
independent operators of hospitals. The initial 40% investment was accounted for
as an equity method investment. In
interest of
consolidate 100% of
In the fourth quarter of 2020, we acquired PANTHERx andApixio . PANTHERx is one of the largest and fastest-growing specialty pharmacies inthe United States specializing in orphan drugs and treating rare diseases. PANTHERx and its management team operate independently as part of our Envolve Pharmacy Solutions business unit.Apixio is a healthcare analytics company offering artificial intelligence technology solutions.Apixio remains an operationally independent entity as part of ourHealth Care Enterprises group, bringing value to its clients and the industry, while also realizing the benefits of enhanced scale.
One of the primary drivers of the year-over-year variances discussed throughout
this section are related to the acquisitions of
In
(USMM) and recognized a pre-tax gain of
positions USMM to expand its reach and impact while helping us to deliver on our
Value
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Creation Plan. We used proceeds from the divestiture of USMM and cash on hand to
repurchase 2.4 million shares of
Value Creation Plan
As introduced inJune 2021 , the Value Creation Plan is designed to drive margin expansion by leveraging our scale and generating sustainable profitable growth. In order to execute the Value Creation Plan, we created the Value Creation Office, which includes members of executive leadership. The three major pillars of 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, will be achieved through 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 share repurchases, portfolio optimization and debt and investment management.
COVID-19 Trends and Uncertainties
The COVID-19 outbreak has created unique and unprecedented challenges. In 2020, we saw significant decreases in traditional utilization as stay-at-home orders were put in place, partially offset by COVID-19 treatment costs. As stay-at-home orders were lifted and vaccinations became available in 2021, utilization has returned in varying degrees. As a result, one of the primary drivers of the year-over-year variances discussed throughout this section is related to COVID-19. In 2021, we launched several initiatives which encourage our health plan members, as well as all Americans, to receive the COVID-19 vaccine. 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 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. FromMarch 31, 2020 throughDecember 31, 2021 , our Medicaid membership has increased by 2.5 million members (excluding the newNorth Carolina membership). In addition, the pandemic has and continues to have the potential to impact the administration of state and federal healthcare programs, premium rates and risk sharing mechanisms. We continue to have active dialogues with our state partners to ensure our rates are actuarially sound. Medical utilization continues to lack consistency and will be influenced by the intensity of additional waves of the pandemic. 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.
Regulatory Trends and Uncertainties
The United States government, politicians, and healthcare experts continue to discuss and debate various elements ofthe 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. 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 effective services to our government sponsors and our members. While healthcare experts maintain focus on personalized healthcare technology, we continue to make strategic decisions to accelerate 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.
For additional information regarding regulatory trends and uncertainties, see
Part I, Item 1 "Business - Regulation" and Item 1A, "Risk Factors."
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2021 Highlights
Our financial performance for 2021 is summarized as follows:
•Year-end managed care membership of 26.6 million, an increase of 1.1 million
members, or 4% over 2020.
•Total revenues of
•Premium and service revenues of
year-over-year.
•HBR of 87.8% for 2021, compared to 86.2% for 2020.
•SG&A expense ratio of 8.6% for 2021, compared to 9.5% for 2020.
•Adjusted SG&A expense ratio of 8.4% for 2021, compared to 8.9% for 2020.
•Diluted EPS of
•Adjusted Diluted EPS of
•Operating cash flows of
A reconciliation from GAAP diluted EPS to Adjusted Diluted EPS is highlighted
below, and additional detail is provided under the heading "Non-GAAP Financial
Presentation":
Year Ended December 31,
2021 2020
GAAP diluted EPS attributable to Centene $ 2.28 $
3.12
Amortization of acquired intangible assets 1.00 0.95 Acquisition related expenses 0.24 0.86 Other adjustments (1) 1.63 0.07 Adjusted Diluted EPS$ 5.15 $ 5.00
(1) Other adjustments include the following items:
2021:
(a) legal settlement expense and related legal fees of
per diluted share, net of an income tax benefit of
(b) debt extinguishment costs of
of an income tax benefit of
(c) severance costs due to a restructuring of
share, net of an income tax benefit of
(d) a reduction to the previously reported gain due to the finalization of the working capital adjustment related to the divestiture of certain products of ourIllinois health plan of$62 million , or$0.08 per diluted share, net of an income tax benefit of$0.02 ; (e) non-cash gain related to the acquisition of the remaining 60% interest ofCircle Health of$309 million , or$0.52 per diluted share, net of income tax expense of$0.00 ;
(f) non-cash impairment of our equity method investment in RxAdvance of
million
(g) gain related to the divestiture of
million
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2020:
(a) debt extinguishment costs of
an income tax benefit of
(b) gain related to the divestiture of certain products of ourIllinois health plan of$104 million , or$0.10 per diluted share, net of income tax expense of$0.08 ; and
(c) non-cash impairment of
income tax benefit of
The following items contributed to our revenue and membership growth in 2021:
•Apixio. InDecember 2020 , we acquiredApixio Inc. , a healthcare analytics company offering artificial intelligence technology solutions. With this transaction, we intend to continue to digitize the administration of healthcare and accelerate innovation.
•Circle Health. In
method investment in
operators of hospitals.
•Correctional. InJuly 2021 , Centurion commenced a contract with theIndiana Department of Corrections . InOctober 2021 , Centurion commenced a contract with theIdaho Department of Corrections . InNovember 2021 , Centurion commenced a contract with theMissouri Department of Corrections . InJuly 2020 , Centurion commenced a two-year contract with theKansas Department of Administration to provide healthcare services in theDepartment of Corrections' facilities. InApril 2020 , Centurion began providing medical services, behavioral healthcare, and substance abuse treatment within four prisons and six community corrections centers across the state ofDelaware . •Hawaii. InJuly 2021 , we began operating under two new statewide contracts inHawaii to continue administering covered services to eligible Medicaid andChildren's Health Insurance Program (CHIP) members for medically necessary medical, behavioral health, and long-term services and support and to continue administering services through the Community Care Services program in partnership with theHawaii Department of Human Services' Med-QUEST Division . •Health Insurance Marketplace. InJanuary 2021 , we expanded our offerings in theHealth Insurance Marketplace . We expanded our Marketplace product, branded Ambetter, in nearly 400 new counties across 13 existing states. In addition,Ambetter-branded Marketplace products are now offered in two new states,New Mexico andMichigan .Centers for Medicare and Medicaid Services (CMS) extended theHealth Insurance Marketplace special enrollment period untilAugust 15, 2021 , which resulted in membership growth. •Illinois. InJuly 2020 ,Meridian Health Plan of Illinois, Inc. (Meridian) began serving Medicaid members inCook County, Illinois , as a result of a member transfer agreement under which Meridian was assigned 100% ofNextLevel Health Partners, Inc.'s approximately 54,000 members who access benefits from theIllinois Department of Healthcare and Family Services' HealthChoice Illinois Program . InFebruary 2020 , we began operating inIllinois under the first phase of an expanded contract for the Medicaid Managed Care Program. The expanded contract includes children who are in need through theDepartment of Children and Family Services/Youth Care byIllinois Department of Healthcare and Family Services andFoster Care . •North Carolina. InJuly 2021 , WellCare ofNorth Carolina commenced operations under a new statewide contract inNorth 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 inNorth Carolina through our provider-ledNorth Carolina joint venture,Carolina Complete Health .
•PANTHERx. In
fastest-growing specialty pharmacies in
drugs and treating rare diseases.
•Spain. In
remaining 65% interest in
partnership in
•TRICARE. InJanuary 2021 , we began administering the Buckley Prime Service Area Pilot in theDenver, Colorado area, which is a TRICARE pilot program for value-based payment arrangements not currently an option in the fee-for-service T2017 reimbursement model. 45
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•WellCare. OnJanuary 23, 2020 , we completed the WellCare Acquisition. The WellCare Acquisition brings a high-quality Medicare platform and further extends our robust Medicaid offerings. The WellCare Acquisition is a key part of our growth as we become one of the nation's largest sponsors of government health coverage. •In addition, revenue growth was significantly driven by Medicaid membership increases resulting from the ongoing suspension of eligibility redeterminations as well as Medicare membership growth.
The growth items listed above were partially offset by the following items:
•Effective
management services program in
•Effective
contract in
•In
rating year. Approximately 30% of our Medicare members are in a 4.0 star or
above plan for the 2022 bonus year compared to 46% for the 2021 bonus year.
•InSeptember 2020 , ourOregon subsidiary, Trillium Community Health Plan, began operating under an expanded contract serving as a coordinated care organization for six counties in the state; however, an additional competitor was added toLane County . As a result, our membership decreased.
•Effective
Life Counseling Program contract.
•Effective
correctional contract in
•In
divestiture of certain products in our
Medicaid and Medicare Advantage lines of business.
•We experienced a decrease in our 2021Health Insurance Marketplace membership driven primarily by a reduction of members in the state ofFlorida , resulting from price competition in three highly populated counties.
•Beginning in the second quarter of 2020, we experienced Medicaid state premium
rate reductions and risk corridor actions as a result of the COVID-19 pandemic.
We expect the following items to contribute to our future results of operations:
•We expect to realize the benefit in 2022 of acquisitions, investments, and
business commenced during 2021, as discussed above.
•InFebruary 2022 , ourLouisiana subsidiary,Louisiana Healthcare Connections was awarded a Medicaid contract by theLouisiana Department of Health to continue administering quality, integrated healthcare services to members across the state. The contract is expected to commence inJuly 2022 . •InJanuary 2022 , we acquired all of the issued and outstanding shares of Magellan for a total purchase price of approximately$2.6 billion . The Magellan acquisition enables us to provide whole-health, integrated healthcare solutions to deliver better health outcomes at lower costs for complex, high-cost populations. •InJanuary 2022 , ourNevada subsidiary,SilverSummit Healthplan, Inc. , commenced the contract awarded from theNevada Department of Health and Human Services - Health Care Financing and Policy to continue providing managed care services for its Medicaid Managed Care program in bothClark andWashoe Counties. •InDecember 2021 , we converted our equity method investment in RxAdvance, a pharmacy benefit manager, into a secured note receivable. This conversion was consistent with our focus on the simplification of our pharmacy operations. •InOctober 2021 , CMS published updatedMedicare Star quality ratings for the 2022 rating year. Over 50% of our Medicare members are in a 4.0 star or above plan for the 2023 bonus year, compared to approximately 30% for the 2022 bonus year. This increase in Star quality ratings is primarily due to certain disaster relief provisions, which we do not expect to be applicable in future years. As a result, we expect to experience a meaningful decrease to our Star ratings for the 2023 Star rating year, which impacts the 2024 bonus year, followed by a subsequent increase to our Star 46
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ratings for the 2024 Star rating year, which impacts the 2025 bonus year.
•In
for 2022. Our Medicare plans expect to operate in 1,575 counties across 36
states in 2022, a 26% increase in counties and three new states compared to
2021.
•InAugust 2021 , we announced that ourNorth Carolina subsidiaries,Carolina Complete Health and WellCare ofNorth 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 inDecember 2022 , are integrated health plans designed for individuals with significant behavioral health needs and intellectual/developmental disabilities.
•In
Medicaid contract by the
members with quality healthcare, coordinated services, and benefits. The
contract is expected to commence in
•We expect Medicaid eligibility redeterminations to begin in 2022.
•The anticipated and previously disclosed carve out ofCalifornia pharmacy services inJanuary 2022 in connection with the state's transition of pharmacy services from managed care to fee for service. •The anticipated carve out ofOhio pharmacy services inJuly 2022 in connection with the state's transition of pharmacy services from managed care to a single pharmacy benefit manager.
•Potential Medicaid state rate actions and risk corridor mechanisms as a result
of the COVID-19 pandemic.
In addition, inDecember 2021 , we sold a majority stake in USMM, our physician home health business. We believe this best positions USMM to expand its reach and impact while helping to deliver on our Value Creation Plan. MEMBERSHIP FromDecember 31, 2020 toDecember 31, 2021 , we increased our managed care membership by 1.1 million, or 4%. The following table sets forth our membership by line of business: December 31, 2021 2020 Traditional Medicaid (1) 13,328,400 12,055,400 High Acuity Medicaid (2) 1,686,100 1,554,700 Total Medicaid 15,014,500 13,610,100 Commercial 2,602,600 2,633,600 Medicare (3) 1,252,200 955,400 Medicare PDP 4,070,500 4,469,400 International 597,600 597,700 Correctional 194,500 147,200 Total at-risk membership 23,731,900 22,413,400 TRICARE eligibles 2,874,700 2,877,900 Non-risk membership 4,000 231,600 Total 26,610,600 25,522,900
(1) Membership includes TANF, Medicaid Expansion, CHIP,
(2) Membership includes ABD, IDD, LTSS and MMP Duals.
(3) Membership includes Medicare Advantage and Medicare Supplement.
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The following table sets forth additional membership statistics, which are
included in the membership information above:
December 31,
2021 2020
Dual-eligible (4) 1,178,000 1,066,800
Health Insurance Marketplace 2,140,500
2,131,600
Medicaid Expansion 2,468,100
2,181,400
(4) Membership that is eligible for both Medicaid and Medicare benefits.
RESULTS OF OPERATIONS
The following discussion and analysis is based on our Consolidated Statements of
Operations, which reflect our results of operations for years ended December 31,
2021 , and 2020, respectively, prepared in accordance with generally accepted
accounting principles in the United States ($ in millions, except per share data
in dollars):
2021 2020 % Change 2020-2021
Premium $ 112,319 $ 100,055 12 %
Service 5,664 3,745 51 %
Premium and service revenues 117,983 103,800 14 %
Premium tax and health insurer fee 7,999 7,315 9 %
Total revenues 125,982 111,115 13 %
Medical costs 98,602 86,264 14 %
Cost of services 4,894 3,303 48 %
Selling, general and administrative expenses 10,166 9,867 3 %
Amortization of acquired intangible assets 770 719 7 %
Premium tax expense 8,287 6,332 31 %
Health insurer fee expense - 1,476 n.m.
Goodwill and intangible impairment 229 72 218 %
Legal settlement 1,250 - n.m.
Earnings from operations 1,784 3,082 (42) %
Other income (expense):
Investment and other income 819 480 71 %
Debt extinguishment costs (125) (61) 105 %
Interest expense (665) (728) (9) %
Earnings before income tax expense 1,813 2,773 (35) %
Income tax expense 477 979 (51) %
Net earnings 1,336 1,794 (26) %
Loss attributable to noncontrolling interests 11 14 (21) %
Net earnings attributable to
(25) % Diluted earnings per common share attributable to Centene Corporation:$ 2.28 $ 3.12 (27) % n.m.: not meaningful 48
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Year Ended
Total Revenues
The following table sets forth supplemental revenue information for the year
ended
2021 2020 % Change 2020-2021
Medicaid $ 84,139 $ 74,785 13 %
Commercial 16,956 17,071 (1) %
Medicare (1) 17,512 14,379 22 %
Other 7,375 4,880 51 %
Total Revenues $ 125,982 $ 111,115 13 %
(1) Medicare includes Medicare Advantage, Medicare Supplement and Medicare PDP.
Total revenues increased 13% in the year endedDecember 31, 2021 , over the corresponding period in 2020, primarily due to Medicaid membership growth resulting from the ongoing suspension of eligibility redeterminations, membership growth in the Medicare business, our acquisitions ofPANTHERx and Circle Health in 2021 and the commencement of our contracts inNorth Carolina , partially offset by the repeal of the health insurer fee. During the twelve months endedDecember 31, 2021 , we received premium rate adjustments which yielded approximately a net 2.5% composite increase across all of our markets. Operating Expenses Medical Costs The HBR for the year endedDecember 31, 2021 was 87.8%, an increase of 160 basis points over the comparable period in 2020. The HBR for 2021 was negatively impacted by higher traditional medical utilization in the Marketplace business, higher testing and treatment costs associated with COVID-19, and the repeal of the health insurer fee. The HBR in 2020 was favorably impacted by the ACA risk corridor receivable settlement from the federal government based on theSupreme Court ruling in 2020. Cost of Services Cost of services increased by$1.6 billion in the year endedDecember 31, 2021 , compared to the corresponding period in 2020, primarily attributable to the acquisitions ofPANTHERx and Circle Health , which was partially offset by the expiration of the pharmacy contract with our previously divestedIllinois health plan. The cost of service ratio for the year endedDecember 31, 2021 was 86.4%, compared to 88.2% in 2020. The decrease in the cost of service ratio was driven by the acquisition of theCircle Health business, which operates at a lower cost of service ratio.
Selling, General & Administrative Expenses
The SG&A expense ratio was 8.6% for the year endedDecember 31, 2021 , compared to 9.5% for the year endedDecember 31, 2020 . The Adjusted SG&A expense ratio was 8.4% for the year endedDecember 31, 2021 , compared to 8.9% for the year endedDecember 31, 2020 . The SG&A ratios in 2021 benefited from leveraging of expenses over higher revenues as a result of increased membership and the acquisition of PANTHERx, partially offset by addition of theCircle Health business, which operates at a significantly higher SG&A ratio due to the nature of the business. The SG&A expense ratio in 2021 also benefited from lower acquisition related costs. The SG&A expense ratios in 2020 were negatively impacted by the$275 million charitable contribution to our foundation.
Health Insurer Fee Expense
As a result of the repeal of the health insurer fee, we did not have health
insurer fee expense for the twelve months ended
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Impairment
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. Specifically, during the third quarter, we made a strategic decision to transition from using the RxAdvance platform and consolidate our business on an alternative external platform. During the fourth quarter of 2021, we converted our equity method investment in RxAdvance into a secured note receivable. During the first quarter of 2020, we recorded$72 million of non-cash impairment of our third-party care management software business.
Legal Settlement
During the second quarter of 2021, we recorded a legal settlement reserve of$1.25 billion (inclusive of the nine states with which we have reached no-fault agreements) related to services provided byEnvolve , our pharmacy benefits manager subsidiary, essentially during 2017 and 2018.
Other Income (Expense)
The following table summarizes the components of other income (expense) for the
year ended
2021 2020
Investment and other income $ 819 $ 480
Debt extinguishment costs (125) (61)
Interest expense (665) (728)
Other income (expense), net $ 29 $ (309)
Investment and other income. Investment and other income increased by $339
million for year ended December 31, 2021 compared to 2020. The increase in
investment income in 2021 was due to a gain related to the acquisition of the
remaining 60% interest of Circle Health of $309 million and a gain related to
the divestiture of USMM of $150 million , partially offset by a $62 million
reduction related to the gain due to the finalization of the working capital
adjustment related to the divestiture of certain products of our Illinois health
plan recorded for the year ended December 31, 2021 compared to the previously
reported $104 million gain recorded in the year-ended 2020. The increase was
also partially offset by lower interest rates.
Debt extinguishment costs. 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, accrued
interest and costs and expenses related and recognized a pre-tax loss on
extinguishment of approximately $79 million . The loss includes the call premium
and the write-off of the unamortized premium and debt issuance costs, and
expenses related to the redemption.
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.
In October 2020 , we redeemed all of the $1.0 billion 4.75% Senior Notes due 2022
(the 2022 Notes) and the $1.2 billion 5.25% Senior Notes due 2025 (the 2025
Notes). We recognized a pre-tax loss on extinguishment of $17 million on the
redemption of the 2022 Notes and the 2025 Notes in the fourth quarter of 2020,
including the call premiums and write-off of unamortized debt issuance costs.
In February 2020 , we redeemed all of our outstanding $1.0 billion 6.125% Senior
Notes, due February 15, 2024 (the 2024 Notes) and recognized a pre-tax loss on
extinguishment of $44 million . The loss includes the call premium, the write-off
of unamortized debt issuance costs and the loss on the termination of the $1.0
billion interest rate swap associated with the 2024 Notes.
Interest expense. Interest expense decreased by $63 million in the year ended
December 31, 2021 , compared to the corresponding period in 2020. The decrease
was driven by our senior note refinancing actions.
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Income Tax Expense
For the year endedDecember 31, 2021 , we recorded income tax expense of$477 million on pre-tax earnings of$1.8 billion , or an effective tax rate of 26.3%. The effective tax rate for the year endedDecember 31, 2021 reflects the repeal of the health insurer fee, the non-taxable gain related to the acquisition of the remaining 60% interest inCircle Health , the partial non-deductibility of the legal settlement reserve, and the gain on the sale of our majority stake in USMM. For the year endedDecember 31, 2020 , we recorded income tax expense of$979 million on pre-tax earnings of$2.8 billion , or an effective tax rate of 35.3%, which reflects the tax impact associated with theIllinois divestiture and the reinstatement of the health insurer fee in 2020, partially offset by a favorable tax settlement. Segment Results
The following table summarizes our consolidated operating results by segment for
the year ended
% Change
2021 2020 2020-2021
Total Revenues
Managed Care $ 120,125 $ 106,867 12 %
Specialty Services 18,652 14,994 24 %
Eliminations (12,795) (10,746) n.m.
Consolidated Total $ 125,982 $ 111,115 13 %
Earnings from Operations
Managed Care $ 1,789 $ 3,031 (41) %
Specialty Services (5) 51 (110) %
Consolidated Total $ 1,784 $ 3,082 (42) %
n.m.: not meaningful
Managed Care
Total revenues increased 12% in the year ended December 31, 2021 , compared to
the corresponding period in 2020, primarily due to Medicaid membership growth
resulting from the ongoing suspension of eligibility redeterminations,
membership growth in the Medicare business, our recent acquisition of Circle
Health and the commencement of our contracts in North Carolina , partially offset
by the repeal of the health insurer fee. Earnings from operations decreased $1.2
billion between years primarily due to a legal settlement reserve of $1.25
billion related to services provided by Envolve , higher utilization in the
Marketplace business in 2021, the repeal of the health insurer fee in 2021 and
an unfavorable 2020 risk adjustment in 2021. These decreases were partially
offset by lower acquisition related expenses and a full twelve months of
WellCare results.
Specialty Services
Total revenues increased 24% in the year endedDecember 31, 2021 , compared to the corresponding period in 2020, resulting primarily from newly acquired businesses, including PANTHERx, increased services associated with membership growth in the Managed Care segment and newly awarded contracts in our correctional business. These increases were partially offset by the expiration of the pharmacy contract with our previously divestedIllinois health plan. Earnings from operations decreased$56 million between years. The decline in earnings from operations was negatively affected by the previously discussed impairment of our equity method investment in RxAdvance, a pharmacy benefits manager, partially offset by favorable results related to the shared savings programs in our physician home health business. Earnings from operations in 2020 was negatively affected by the previously discussed$72 million impairment related to our third-party care management software business. 51
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LIQUIDITY AND CAPITAL RESOURCES
Shown below is a condensed schedule of cash flows for the years ended December
31, 2021 and 2020, used in the discussion of liquidity and capital resources ($
in millions).
Year Ended December 31,
2021 2020
Net cash provided by operating activities $ 4,205 $ 5,503
Net cash used in investing activities (3,299) (6,955)
Net cash provided by financing activities 1,362 260
Effect of exchange rate changes on cash and cash equivalents (11) 18
Net increase in cash, cash equivalents, and restricted cash and
equivalents $ 2,257 $ (1,174)
Cash Flows Provided by Operating Activities
Normal operations are funded primarily through operating cash flows and borrowings under our Revolving Credit Facility. In 2021, operating activities provided cash of$4.2 billion , or 3.1 times net earnings, compared to$5.5 billion in 2020. Cash flow provided by operations in 2021 was due to net earnings before the legal settlement reserve, the majority of which is expected to be paid in future periods, an increase in state risk sharing payables, partially offset by risk adjustment and minimum MLR payments for theHealth Insurance Marketplace 2020 plan year. Cash flows provided by operations in 2020 was primarily due to net earnings, an increase in medical claims liabilities from growth and expansions, and an increase in other long-term liabilities related to minimum MLR payables and a delay in employer payroll tax payments related to the COVID-19 extensions to payment deadlines.
Cash Flows Used in Investing Activities
Investing activities used cash of$3.3 billion for the year endedDecember 31, 2021 and$7.0 billion in 2020. Cash flows used in investing activities in 2021 consisted of the net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments), capital expenditures, and acquisition and divestiture activity primarily related to the acquisition of the remaining 60% interest ofCircle Health for$705 million , offset by proceeds received related to the sale of our majority interest in USMM.
We spent
2020, respectively, on capital expenditures for system enhancements, market
growth, and corporate headquarters expansions.
As ofDecember 31, 2021 , our investment portfolio consisted primarily of fixed-income securities with a weighted average duration of 3.6 years. We had unregulated cash and investments of$3.4 billion atDecember 31, 2021 , including$538 million in our International subsidiaries, compared to$1.9 billion atDecember 31, 2020 . Unregulated cash and investments include private equity investments and company owned life insurance contracts. Cash flows used in investing activities in 2020 were driven by our acquisitions of WellCare, PANTHERx andApixio , partially offset by divestiture proceeds. Cash flows used in investing activities in 2020 also consisted of net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments) and capital expenditures.
Cash Flows Provided by Financing Activities
Our financing activities provided cash of$1.4 billion in 2021, compared to$260 million in 2020. During 2021, our net financing activities were primarily related to the issuance of$1.8 billion 2.45% Senior Notes due 2028 (the 2028 Notes) to fund a portion of cash consideration for the Magellan Acquisition, which closed inJanuary 2022 , and a$750 million increase to our unsecured term loan facility. This was partially offset by the repayment and refinancing of senior notes, resulting in a net decrease in debt of$800 million , along with common stock repurchases, including the repurchase of$200 million of common stock through our stock repurchase program. 52
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During 2020, our net financing activities were primarily driven by net proceeds from the issuance and refinancing of senior notes resulting in a net increase in senior debt of$1.0 billion , offset by common stock repurchases, including the repurchase of$500 million of common stock through our stock repurchase program.
Liquidity Metrics
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 ofDecember 31, 2021 , we had$149 million of borrowings outstanding under our Revolving Credit Facility,$2.2 billion of borrowings outstanding under our Term Loan Facility, and we were in compliance with all covenants. As ofDecember 31, 2021 , there were no limitations on the availability of our Revolving Credit Facility as a result of the debt-to-EBITDA ratio. InOctober 2017 , we executed a$200 million non-recourse construction loan to fund the expansion of our corporate headquarters. Until the final completion of the project, which occurred inJuly 2021 , the loan bore interest based on the one month LIBOR plus 2.70%, which reduced to LIBOR plus 2.00% at the time construction completed. The agreement contains financial and non-financial covenants similar to those contained in our Credit Facility. We guaranteed completion of the construction project associated with the loan. InApril 2021 , we finalized the one year extension of the construction loan maturing inApril 2022 . As ofDecember 31, 2021 , we had$184 million in borrowings outstanding under the loan, which is included in the current portion of long-term debt. We had outstanding letters of credit of$128 million as ofDecember 31, 2021 , which were not part of our Revolving Credit Facility. The letters of credit bore weighted interest of 0.6% as ofDecember 31, 2021 . In addition, we had outstanding surety bonds of$1.3 billion as ofDecember 31, 2021 . The indentures governing our various maturities of senior notes contain limited restrictive covenants. As ofDecember 31, 2021 , we were in compliance with all covenants. AtDecember 31, 2021 , we had working capital, defined as current assets less current liabilities, of$2.7 billion , compared to$1.8 billion atDecember 31, 2020 . Unregulated cash was substantially reduced inJanuary 2022 upon the closing of the Magellan Acquisition for the purchase price payment and corresponding closing costs. 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
by the sum of total debt and total equity, was 41.2%, compared to 39.3% at
capital ratio was 40.9% as of
others, of our leverage and financial flexibility.
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. We have$800 million remaining under the program for repurchases as ofDecember 31, 2021 . No duration has been placed on the repurchase program. We reserve the right to discontinue the repurchase program at any time. In 2021, we used proceeds from the divestiture of USMM to repurchase 2.4 million shares ofCentene common stock for$200 million through our stock repurchase program. In 2020 we used proceeds from divestitures to repurchase 8.7 million shares ofCentene common stock for$500 million through our stock repurchase program.
During the year ended
2022 Expectations
During 2022, we expect to receive net dividends of approximately$1.1 billion from our regulated subsidiaries and expect to spend approximately$1.1 billion in capital expenditures primarily associated with system enhancements and the completion of our offices inCharlotte, North Carolina . InFebruary 2021 , our Board of Directors approved an increase in our existing share repurchase program for our common stock. With the increase, we are authorized to repurchase up to$1.0 billion of shares of our common stock, inclusive of the previously approved stock repurchase program. We have$800 million remaining under the program for repurchases as ofDecember 31, 2021 . No duration has been placed on the repurchase program.
On
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acquisition was approximately$2.6 billion , consisting of$2.5 billion in cash ($95.00 per share) and an estimated$67 million related to the fair value replacement equity awards associated with pre-combination service. InJanuary 2022 , we paid off Magellan's debt of$535 million acquired in the transaction using Magellan's cash on hand.
We have material debt, lease, contingencies and short-term medical claims
obligations. Refer to Note 10. Debt, Note 11. Leases, Note 18. Contingencies and
Note 8. Medical Claims Liability, respectively, for further information. In
addition, we have material commitments as a result of our
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.
In addition, 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 share repurchases, portfolio optimization and the evaluation of
refinancing opportunities.
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.
As of December 31, 2021 , our subsidiaries had aggregate statutory capital and
surplus of $14.0 billion , compared with the required minimum aggregate statutory
capital and surplus requirements of $6.7 billion . During the year ended
December 31, 2021 , we received $1.5 billion of net dividends from our regulated
subsidiaries. For our subsidiaries that file with the National Association of
Insurance Commissioners (NAIC), we estimate our Risk Based Capital (RBC)
percentage to be in excess of 350% of the Authorized Control Level.
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 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 risk-based capital requirements for
insurance companies, managed care organizations and other entities bearing risk
for healthcare coverage. As of December 31, 2021 , each of our health plans was
in compliance with the risk-based capital 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. As of December 31, 2021 , the amount of capital
and surplus or net worth that was unavailable for the payment of dividends or
return of capital to us was $6.7 billion in the aggregate.
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RECENT ACCOUNTING PRONOUNCEMENTS
For this information, refer to Note 2. Summary of Significant Accounting
Policies, in the Notes to the Consolidated Financial Statements, included
herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements which have been prepared in accordance with GAAP. Our significant accounting policies are more fully described in Note 2. Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere herein. Our accounting policies regarding intangible assets, medical claims liability and revenue recognition are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. As a result, they are subject to an inherent degree of uncertainty. We have reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.
We have made several acquisitions that have resulted in our recording of intangible assets. These intangible assets primarily consist of purchased contract rights and customer relationships, provider contracts, trade names, developed technologies, and goodwill. Key assumptions used in the valuation of these intangible assets include, but are not limited to, member attrition rates, contract renewal probabilities, revenue growth rates, expectations of profitability, and discount and royalty rates. We allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill.Goodwill is generally attributable to the value of the synergies between the combined companies and the value of the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset. AtDecember 31, 2021 , we had$19.8 billion of goodwill and$7.8 billion of other intangible assets.
Intangible assets are amortized using the straight-line method over the
following periods:
Intangible Asset
Amortization Period
Purchased contract rights and customer relationships 3 - 21 years Provider contracts 4 - 15 years Trade names 7 - 20 years Developed technologies 2 - 7 years Our management evaluates whether events or circumstances have occurred that may affect the estimated useful life or the recoverability of the remaining balance of goodwill and other identifiable intangible assets. If the events or circumstances indicate that the remaining balance of the intangible asset or goodwill may be impaired, the potential impairment will be measured based upon the difference between the carrying amount of the intangible asset or goodwill and the fair value of such asset. Our management must make assumptions and estimates, such as the discount factor, future utility and other internal and external factors, in determining the estimated fair values. While we believe these assumptions and estimates are appropriate, other assumptions and estimates could be applied and might produce significantly different results.Goodwill is reviewed annually during the fourth quarter for impairment. In addition, an impairment analysis of intangible assets would be performed based on other factors. These factors include significant changes in membership, financial performance, state funding, medical contracts and provider networks and contracts. If a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. We first assess qualitative factors to determine if a quantitative impairment test is necessary. We generally do not calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. However, in certain circumstances, such as recent acquisitions, we may elect to perform a quantitative assessment without first assessing qualitative factors. We do not believe any of our reporting units are currently at risk for impairment. However, as part of our Value Creation Plan, we are completing a portfolio review and may identify changes in strategic focus, which could result in future impairments of goodwill or intangibles based on market indicators at that time. 55
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Medical Claims Liability
Our medical claims liability includes claims reported but not yet paid, or
inventory, estimates for claims incurred but not reported, or IBNR, and
estimates for the costs necessary to process unpaid claims at the end of each
period. We estimate our medical claims 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.
Actuarial Standards of Practice generally require that the medical claims
liability estimates be adequate to cover obligations under moderately adverse
conditions. Moderately adverse conditions are situations in which the actual
claims are expected to be higher than the otherwise estimated value of such
claims at the time of estimate. The claims amounts ultimately settled will most
likely be different than the estimate that satisfies the Actuarial Standards of
Practice. We include in our IBNR an estimate for medical claims liability under
moderately adverse conditions which represents the risk of adverse deviation of
the estimates in our actuarial method of reserving.
We use our judgment to determine the assumptions to be used in the calculation
of the required estimates. The assumptions we consider when estimating IBNR
include, without limitation, claims receipt and payment experience (and
variations in that experience), changes in membership, provider billing
practices, healthcare service utilization trends, cost trends, product mix,
seasonality, prior authorization of medical services, benefit changes, known
outbreaks of disease or increased incidence of illness such as influenza,
provider contract changes, changes to fee schedules, and the incidence of high
dollar or catastrophic claims.
We apply various estimation methods depending on the claim type and the period
for which claims are being estimated. For more recent periods, incurred
non-inpatient claims are estimated based on historical per member per month
claims experience adjusted for known factors. Incurred hospital inpatient claims
are estimated based on known inpatient utilization data and prior claims
experience adjusted for known factors. For older periods, we utilize an
estimated completion factor based on our historical experience to develop IBNR
estimates. The completion factor is an actuarial estimate of the percentage of
claims that have been received or adjudicated as of the end of a reporting
period relative to the estimate of the total ultimate incurred costs for that
same period. When we commence operations in a new state or region, we have
limited information with which to estimate our medical claims liability. See
"Risk Factors - Failure to accurately estimate and price our medical expenses or
effectively manage our medical costs or related administrative costs could have
a material adverse effect on our results of operations, financial position and
cash flows." These approaches are consistently applied to each period presented.
Additionally, we contract with independent actuaries to review our estimates on
a quarterly basis. The independent actuaries provide us with a review letter
that includes the results of their analysis of our medical claims liability. We
do not solely rely on their report to adjust our claims liability. We utilize
their calculation of our claims liability only as additional information,
together with management's judgment, to determine the assumptions to be used in
the calculation of our liability for claims.
Our development of the medical claims liability estimate is a continuous process
which we monitor and refine on a monthly basis as additional claims receipts and
payment information becomes available. As more complete claims information
becomes available, we adjust the amount of the estimates, and include the
changes in estimates in medical costs in the period in which the changes are
identified. In every reporting period, our operating results include the effects
of more completely developed medical claims liability estimates associated with
previously reported periods. We consistently apply our reserving methodology
from period to period. As additional information becomes known to us, we adjust
our actuarial models accordingly to establish medical claims liability
estimates.
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The paid and received completion factors, claims per member per month and per diem cost trend factors are the most significant factors affecting the IBNR estimate. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by changes in these factors based onDecember 31, 2021 data: Completion Factors: (1) Cost Trend Factors: (2) Increase Increase (Decrease) (Decrease) in (Decrease) (Decrease) in Increase Medical Claims Increase Medical Claims in Factors Liabilities in Factors Liabilities (in millions) (in millions) (1.00) % $ 718 (1.00) % $ (188) (0.75) 537 (0.75) (141) (0.50) 357 (0.50) (94) (0.25) 178 (0.25) (47) 0.25 (177) 0.25 47 0.50 (354) 0.50 94 0.75 (529) 0.75 141 1.00 (703) 1.00 188 (1) Reflects estimated potential changes in medical claims liability caused by changes in completion factors. (2) Reflects estimated potential changes in medical claims liability caused by changes in cost trend factors for the most recent periods. While we believe our estimates are appropriate, it is possible future events could require us to make significant adjustments for revisions to these estimates. For example, a 1% increase or decrease in our estimated medical claims liability would have affected net earnings by$105 million for the year endedDecember 31, 2021 , excluding the effect of any return of premium, risk corridor, or minimum MLR programs. The estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our providers and information available from other outside sources. The change in medical claims liability is summarized as follows (in millions): Year Ended December 31, 2021 2020 2019 Balance, January 1,$ 12,438 $ 7,473 $ 6,831 Less: reinsurance recoverable 23 20 27 Balance, January 1, net 12,415 7,453 6,804 Acquisitions - 3,856 59 Incurred related to: Current year 100,385 86,765 59,539 Prior years (1,783) (501) (677) Total incurred 98,602 86,264 58,862 Paid related to: Current year 87,427 78,838 52,453 Prior years 9,370 6,320 5,819 Total paid 96,797 85,158 58,272 Balance, December 31, net 14,220 12,415 7,453 Plus: reinsurance recoverable 23 23 20 Balance, December 31,$ 14,243 $ 12,438 $ 7,473 Days in claims payable (1) 52 51 45
(1) Days in claims payable is a calculation of medical claims liability at the end of the period divided by
average expense per calendar day for the fourth quarter of each year.
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Medical claims are usually paid within a few months of the member receiving service from the physician or other healthcare provider. As a result, the liability generally is described as having a "short-tail," which causes less than 5% of our medical claims liability as of the end of any given year to be outstanding the following year. We believe that substantially all the development of the estimate of medical claims liability as ofDecember 31, 2021 will be known by the end of 2022. Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. Additionally, as a result of minimum HBR and other return of premium programs, approximately$492 million ,$86 million and$49 million of the "Incurred related to: Prior years" was recorded as a reduction to premium revenues in 2021, 2020 and 2019, respectively. Further, claims processing initiatives yielded increased claim payment recoveries and coordination of benefits related to prior year dates of service. Changes in medical utilization and cost trends and the effect of population health management initiatives may also contribute to changes in medical claim liability estimates. While we have evidence that population health management initiatives are effective on a case by case basis, these initiatives primarily focus on events and behaviors prior to the incurrence of the medical event and generation of a claim. Accordingly, any change in behavior, leveling of care, or coordination of treatment occurs prior to claim generation and as a result, the costs prior to the population health management initiative are not known by us. Additionally, certain population health management initiatives are focused on member and provider education with the intent of influencing behavior to appropriately align the medical services provided with the member's acuity. In these cases, determining whether the population health management initiative changed the behavior cannot be determined. Because of the complexity of our business, the number of states in which we operate, and the volume of claims that we process, we are unable to practically quantify the impact of these initiatives on our changes in estimates of IBNR. The following are examples of population health management initiatives that may have contributed to the favorable development through lower medical utilization and cost trends: •Appropriate leveling of care for neonatal intensive care unit hospital admissions, other inpatient hospital admissions, and observation admissions, in accordance with InterQual or other evidence based criteria or clinical policy. •Management of our pre-authorization list, monitoring for over utilized services, and stringent review of durable medical equipment and injectables. •Emergency department program designed to collaboratively work with hospitals and members to steer non-emergent care to a more appropriate and cost effective setting (through patient education, on-site alternative urgent care settings, etc.). •Increased emphasis on care management and clinical rounding where nurse or social worker care managers assist selected high risk members with the coordination of healthcare services in order to meet a patient's specific healthcare needs. •Incorporation of disease management which is a comprehensive, multidisciplinary, collaborative approach to chronic illnesses such as asthma. •Prenatal and infant health programs utilized such as our Start Smart For Your Baby program. Revenue Recognition Our health plans generate revenues primarily from premiums received from the states in which we operate health plans, premiums received from our members and CMS for our Medicare product, and premiums from members of our commercial health plans. In addition to member premium payments, our Marketplace contracts also generate revenues from subsidies received from CMS. We generally receive a fixed premium per member per month pursuant to our contracts and recognize premium revenues during the period in which we are obligated to provide services to our members at the amount reasonably estimable. In some instances, our base premiums are subject to an adjustment, or risk score, based on the acuity of our membership. Generally, the risk score is determined by the State or CMS analyzing submissions of processed claims data to determine the acuity of our membership relative to the entire state's membership. We estimate the amount of risk adjustment based upon the processed claims data submitted and expected to be submitted to CMS and record revenues on a risk adjusted basis. Some contracts allow for additional premiums related to certain supplemental services provided such as maternity deliveries. Our contracts with states may require us to maintain a minimum HBR or may require us to share profits in excess of certain levels. In certain circumstances, including commercial plans, our plans may be required to return premium to the state or policyholders in the event profits exceed established levels. We estimate the effect of these programs and recognize reductions in revenue in the current period. Other states may require us to meet certain performance and quality metrics in order to receive additional or full contractual revenue. For performance-based contracts, we do not recognize revenue subject to refund until data is sufficient to measure performance. 58
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Revenues are recorded based on membership and eligibility data provided by the states or CMS, which is adjusted on a monthly basis by the states or CMS for retroactive additions or deletions to membership data. These eligibility adjustments are estimated monthly and subsequent adjustments are made in the period known. We continuously review and update those estimates as new information becomes available. It is possible that new information could require us to make additional adjustments, which could be significant, to these estimates. Our Medicare Advantage contracts are with CMS. CMS deploys a risk adjustment model which apportions premiums paid to all health plans according to health severity and certain demographic factors. The CMS risk adjustment model pays more for members whose medical history would indicate that they are expected to have higher medical costs. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from hospital inpatient, hospital outpatient, physician treatment settings as well as prescription drug events. We and the healthcare providers collect, compile and submit the necessary and available diagnosis data to CMS within prescribed deadlines. We estimate risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS and record revenues on a risk adjusted basis. For qualifying low income PDP members, CMS pays for some, or all, of the member's monthly premium. We receive certain Part D prospective subsidy payments from CMS for our PDP members as a fixed monthly per member amount, based on the estimated costs of providing prescription drug benefits over the plan year, as reflected in our bids. Approximately nine to ten months subsequent to the end of the plan year, or later in the case of the coverage gap discount subsidy, a settlement payment is made between CMS and our plans based on the difference between the prospective payments and actual claims experience. Our specialty services generate revenues under contracts with state and federal programs, healthcare organizations and other commercial organizations, as well as from our own subsidiaries. Revenues are recognized when the related services are provided or as ratably earned over the covered period of services. For performance-based measures in our contracts, revenue is recognized as data sufficient to measure performance is available. We recognize revenue related to administrative services under the TRICARE government-sponsored managed care support contract for theDoD's TRICARE program on a straight-line basis over the option period, when the fees become fixed and determinable. The TRICARE contract includes various performance-based measures. For each of the measures, an estimate of the amount that has been earned is made at each interim date, and revenue is recognized accordingly. Some states enact premium taxes, similar assessments and provider pass-through payments, collectively premium taxes, and these taxes are recorded as a separate component of both revenues and operating expenses. Additionally, our insurance subsidiaries are subject to the Affordable Care Act annual HIF. The ACA imposed the HIF in 2014, 2015, 2016, 2018 and 2020. The HIF was suspended in 2017 and 2019. Beginning in 2021, the HIF was permanently repealed. If we are able to negotiate reimbursement of portions of these premium taxes or the HIF, we recognize revenue associated with the HIF on a straight-line basis when we have binding agreements for such reimbursements, including the "gross-up" to reflect the HIFs non-tax deductible nature. Collectively, this revenue is recorded as premium tax and health insurer fee revenue in the Consolidated Statements of Operations. For certain products, premium taxes, state assessments and the HIF are not pass-through payments and are recorded as premium revenue and premium tax expense or health insurer fee expense in the Consolidated Statements of Operations. Some states require state directed payments that have minimal risk, but are administered as a premium adjustment. These payments are recorded as premium revenue and medical costs at close to a 100% HBR. We have little visibility to the timing of these payments until they are paid by the state. 59
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ASSURANT, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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