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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, 2020 , including year-to-year comparisons between the year endedDecember 31, 2021 and the year endedDecember 31, 2020 . For a comparison of our results of operations for the fiscal years endedDecember 31, 2021 andDecember 31, 2020 , 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, 2021 , filed with theSEC onFebruary 22, 2022 . EXECUTIVE OVERVIEW Mission We are a leading healthcare enterprise, committed to helping people live healthier lives, with an established expertise in lower-income and medically complex populations. We provide 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 enables us to provide accessible, quality, culturally sensitive healthcare coverage to our communities. We feel we have a competitive advantage being on the ground, enabling us to establish strong relationships with our partners and providing us with first-hand knowledge, which allows us to provide the best possible care to our members. We have a commitment to the communities and people we serve to transform their health at the local level. In 2022, when members of theUvalde, Texas community faced unbelievable tragedy, we showed up to help serve their short-term needs and have since made an investment in a multipurpose community center in the city through our charitable foundation, just one example of our mission in action. Our record of organic growth and strategic acquisitions has given us the size, scale, and privilege of providing local high-quality and affordable health care to more than 27 million Americans. As ofDecember 31, 2022 , we were the largest Medicaid health insurer in the country, serving 16 million Medicaid recipients in 29 states. We were the largest Marketplace carrier, serving 2.1 million members across 27 states, and served 1.5 million Medicare members across 36 states, with the highest concentration of lower-income, medically complex members.
While we are transforming our operating model to take advantage of our national
scale, our commitment to remain local in the communities we serve will not
change.
General
Our 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
We established our Value Creation Plan 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 pillars of the Value
Creation Plan are: SG&A expense savings, gross margin expansion, and strategic
capital management.
As part of our Value Creation Plan, we are assessing 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. We continue to move
forward with our value creation initiatives including the streamlining of
certain operations, such as key call centers and utilization management, and
have begun early-stage platform consolidations. Building on that foundation, we
intend to drive sustainable, profitable growth and long-term value to our
members and shareholders.
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During 2022, we completed the following key milestones in our Value Creation
Plan:
•Initiated a reduction of our real estate footprint following a strategic review of our real estate portfolio resulting in a$1.6 billion impairment related to leased and owned real estate and related fixed assets. This represents an approximate 70% decrease in domestic leased space and is expected to result in annualized lease expense savings of more than$200 million . •Signed a multi-year contract withExpress 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.
•Completed the divestitures of PANTHERx Rare (PANTHERx), our Spanish and Central
European businesses, and Magellan Rx.
•Completed$3.0 billion of common stock repurchases,$318 million of senior note repurchases, repaid our$180 million construction loan, and repaid over$100 million in revolver and term loan borrowings. Common stock and debt repurchases were funded primarily through proceeds from divestitures and free cash flow generated from operations.
In addition, in
Specialty Health
Segments Update
In early 2023, and in conjunction with our updated strategic plan, executive leadership realignment, and corresponding 2023 divestitures, we have revised the way we manage the business, evaluate performance, and allocate 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. We will begin reporting under this new segment structure in 2023.
Acquisitions and Divestitures
InJanuary 2022 , we acquired all of the issued and outstanding shares ofMagellan Health, Inc. (Magellan). Total consideration for the acquisition was$2.5 billion , consisting of$2.4 billion in cash and$60 million related to the fair value of replacement equity awards associated with pre-combination service. In connection with our portfolio review and strategic plan to exit the PBM business, during 2022 we divested PANTHERx and Magellan Rx. We completed the divestiture of PANTHERx inJuly 2022 for$1.4 billion and recognized a gain of$490 million , or$382 million after-tax. InDecember 2022 , we completed the divestiture of Magellan Rx for$1.3 billion and recognized a gain of$269 million , or$99 million after-tax.
Additionally, as part of our review of strategic alternatives for our
international portfolio, in
our Spanish and Central European businesses and as a result recorded an
impairment charge of
The above-noted acquisitions and divestitures are significant drivers of the
year-over-year variances discussed throughout this section.
In
Centurion, our prison healthcare business, and HealthSmart, our third party
health plan administration business.
Regulatory Trends and Uncertainties
The United States government, policymakers, 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. 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 inMarch 2021 , contained provisions aimed at leveraging Medicaid and theHealth Insurance Marketplace to expand health insurance coverage and affordability to consumers. The ARPA authorized an additional$1.9 trillion in federal spending to address the COVID-19 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. 38
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The ARPA initially enhanced eligibility for the advance premium tax credit for enrollees in theHealth Insurance Marketplace , which was extended through the 2025 tax year by the Inflation Reduction Act, enacted inAugust 2022 .
In
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 inMarch 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 3.2 million members (excluding the newNorth Carolina andMissouri membership). The Consolidated Appropriations Act, 2023, signed into law onDecember 29, 2022 , delinked the Medicaid continuous coverage requirements from the PHE and, as a result, states can begin Medicaid disenrollments onApril 1, 2023 . All pending redeterminations must be initiated within 12 months, byMarch 31, 2024 , and be concluded byMay 31, 2024 . OurAmbetter 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. We remain agile in working with our state partners and are prepared to support our members and promote continuity of coverage when redeterminations resume. 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 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-effective services to our government sponsors 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.
For additional information regarding regulatory trends and uncertainties, see
Part I, Item 1 "Business - Regulation" and Item 1A, "Risk Factors."
2022 Highlights
Our financial performance for 2022 is summarized as follows:
•Year-end membership of 27.1 million, an increase of 1.2 million members, or 5%
over 2021.
•Total revenues of
•Premium and service revenues of
year-over-year.
•HBR of 87.7% for 2022, compared to 87.8% for 2021.
•SG&A expense ratio of 8.6% for 2022, compared to 8.1% for 2021.
•Adjusted SG&A expense ratio of 8.4% for 2022, compared to 7.9% for 2021.
•Diluted earnings per share (EPS) of
•Adjusted diluted EPS of
•Operating cash flows of
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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,
2022 2021
GAAP diluted EPS attributable to Centene $ 2.07 $ 2.28
Amortization of acquired intangible assets 1.40
1.31
Acquisition and divestiture related expenses 0.36
0.31
Other adjustments (1) 2.65
2.16
Income tax effects of adjustments (2) (0.70) (0.91) Adjusted Diluted EPS$ 5.78 $ 5.15
(1) Other adjustments include the following pre-tax items:
2022:
(a) real estate impairments of$1,642 million , or$2.82 per share ($2.08 after-tax); PANTHERx divestiture gain of$490 million , or$0.84 per share ($0.65 after-tax); impairments of assets associated with the divestitures of our Spanish and Central European, Centurion, and HealthSmart businesses of$458 million , or$0.78 per share ($0.60 after-tax); Magellan Rx divestiture gain of$269 million , or$0.46 per share ($0.17 after-tax);Health Net Federal Services asset impairment of$233 million , or$0.40 per share ($0.39 after-tax); gain on debt extinguishment of$27 million , or$0.04 per share ($0.03 after-tax); increase to the previously reported gain on the divestiture ofU.S. Medical Management (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$6 million , or$0.01 per share ($0.00 after-tax).
2021:
(b) PBM legal settlement expense of$1,264 million , or$2.14 per share ($1.76 after-tax); gain related to the acquisition of the remaining 60% interest ofCircle Health of$309 million , or$0.52 per share ($0.52 after-tax); impairment of our equity method investment in RxAdvance of$229 million , or$0.39 per share ($0.32 after-tax); gain related to the divestiture of USMM of$150 million , or$0.25 per share ($0.23 after-tax); debt extinguishment costs of$125 million , or$0.21 per share ($0.16 after-tax); reduction to the previously reported gain on divestiture of certain products of ourIllinois health plan of$62 million , or$0.10 per share ($0.08 after-tax); and severance costs due to a restructuring of$54 million , or$0.09 per share ($0.06 after-tax). (2) The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment. In addition, the year endedDecember 31, 2022 , includes tax expense of$107 million , or$0.18 per share, related to theMagellan Specialty Health divestiture and a$15 million , or$0.03 per share, tax benefit related to the RxAdvance impairment. 40
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Current and Future Operating Drivers
The following items contributed to our results of operations as compared to the
previous year:
Medicaid
•In
the state's transition from managed care to a single PBM.
•InJuly 2022 , our subsidiary,Home State Health , commenced the MO HealthNet Managed Care General Plan and Specialty Plan contracts. Under the General Plan,Home State Health continues to serve multiple MO HealthNet programs includingChildren's Health Insurance members and the state's newly implemented Medicaid expansion population, across all regions ofMissouri . Additionally, as the sole provider of the newly awarded Specialty Plan,Home State Health now serves approximately 52,100 foster children and children receiving adoption subsidy assistance.
•In
connection with the state's transition of pharmacy services from managed care to
fee-for-service.
•In
continue administering covered services to eligible Medicaid and
Health Insurance Program
behavioral health, and long-term services and support and to continue
administering services through the Community Care Services program in
partnership with the
•InJuly 2021 , our subsidiary, 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 . •Beginning in 2020, the federal government issued a PHE which suspended Medicaid eligibility redeterminations. The ongoing suspensions, which have been extended toApril 2023 , have driven increased membership.
Medicare
•In 2022, we experienced strong Medicare membership growth as a result of the 2022 annual enrollment period. We introduced WellCare into three new states, as well as expanded coverage to 327 new counties across existing states. We now serve members in 36 states across the country in 1,575 counties. We were negatively impacted by 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).
Commercial
•In 2022, ourHealth Insurance Marketplace product,Ambetter Health , was introduced into five new states, as well as expanded coverage to 274 new counties across 13 existing states. During 2022, we served Marketplace members in 27 states across the country in 1,480 counties. Additionally, we introduced three newAmbetter Health product offerings to address the growing needs of our members: Ambetter Value, Ambetter Select, and Ambetter Virtual Access.
Specialty and Other
•In
of the Magellan business acquired in
•InNovember 2022 , we completed the divestiture of our ownership stakes in our Spanish and Central European businesses, includingRibera Salud , Torrejón Salud, andPro Diagnostics Group .
•In
•In
Magellan.
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•In
business.
•In
investment in
hospitals.
We expect the following items to impact our future results of operations:
Medicaid
•In
contract awarded by the
members with quality healthcare, coordinated services, and benefits.
•In
for the statewide Medicaid managed care programs.
•InJanuary 2023 , our subsidiary,Louisiana Healthcare Connections , commenced the Medicaid contract awarded by theLouisiana Department of Health to continue administering quality, integrated healthcare services to members across the state. •InJanuary 2023 , our subsidiary,Managed Health Services , commenced the contract awarded by theIndiana Department of Administration to continue serving Hoosier Healthwise and Health Indiana Plan members with Medicaid and Medicaid alternative managed care and care coordination services. •InDecember 2022 , our subsidiary,Health Net of California , was selected by theCalifornia Department of Health Care Services for direct Medicaid contracts in 10 counties, includingLos Angeles (in which a portion will be subcontracted). The contracts are anticipated to begin inJanuary 2024 . •InSeptember 2022 , our subsidiary, Nebraska Total Care, was awarded theNebraska 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 asHeritage Health . The new contract term is five years and includes the option for two, one-year renewals. The contract is anticipated to begin inJanuary 2024 , subject to the resolution of third-party protests. •InSeptember 2022 , our subsidiary,Superior HealthPlan (Superior), was awarded a new, six-year contract by theTexas 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 ofSTAR Health coverage since the program launched in 2008. The contract is anticipated to begin inSeptember 2023 . •InAugust 2022 , our subsidiary,Magnolia Health Plan (Magnolia), was awarded theMississippi 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 theMississippi CHIP. The contract is anticipated to begin inJuly 2023 , subject to the resolution of third-party protests. •InAugust 2021 , our subsidiaries,Carolina Complete Health and WellCare ofNorth 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 inApril 2023 , are integrated health plans designed for individuals with significant behavioral health needs and intellectual/developmental disabilities. •We expect Medicaid eligibility redeterminations to begin inApril 2023 and extend over a 14-month period, concluding inMay 2024 . In addition to delinking the Medicaid continuous enrollment provision from the PHE, the year-end spending bill also outlines key coverage expansion provisions, including CHIP coverage. The provision requires states to provide 12 months of continuous coverage for children under Medicaid and CHIP effective January of 2024 and made the state option to extend coverage for postpartum women for up to 12 months permanent. 42
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Table of Contents Medicare •InOctober 2022 , theCenters for Medicare and Medicaid Services (CMS) published updatedMedicare 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).
Commercial
•InJanuary 2023 , ourHealth Insurance Marketplace product,Ambetter Health , expanded intoAlabama 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.
Specialty and Other
•In
Centurion, our prison healthcare business, and HealthSmart, our third party
health plan administration business.
•InDecember 2022 , theDepartment of Defense (DoD ) announced that the TRICARE Managed Care Support Contracts were not awarded to our subsidiary,Health Net Federal Services . Our current contract for health care delivery services is in place through early 2024. •We continue to execute on Value Creation Plan initiatives including the award of the 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. 43
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MEMBERSHIP
From December 31, 2021 to December 31, 2022 , we increased our managed care
membership by 1.2 million, or 5%. The following table sets forth our membership
by line of business:
December 31,
2022 2021
Traditional Medicaid (1) 14,264,800 13,328,400
High Acuity Medicaid (2) 1,710,000 1,686,100
Total Medicaid (4) 15,974,800 15,014,500
Commercial Marketplace 2,076,100 2,140,500
Commercial Group 441,100 462,100
Total Commercial 2,517,200 2,602,600
Medicare (3) (4) 1,511,100 1,252,200
Medicare PDP 4,226,000 4,070,500
Total at-risk membership 24,229,100 22,939,800
TRICARE eligibles 2,832,300 2,874,700
Total 27,061,400 25,814,500
(1) Membership includes Temporary Assistance for Needy Families
(TANF), Medicaid Expansion,
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) Medicaid and Medicare membership includes 1,291,300 and
1,178,000 dual-eligible beneficiaries for the
periods endingDecember 31, 2022 , andDecember 31, 2021 , respectively. 44
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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,
2022 and 2021, respectively, prepared in accordance with generally accepted
accounting principles in the United States (GAAP) ($ in millions, except per
share data in dollars):
2022 2021 % Change 2021-2022
Premium $ 127,131 $ 112,319 13 %
Service 8,348 5,664 47 %
Premium and service revenues 135,479 117,983 15 %
Premium tax 9,068 7,999 13 %
Total revenues 144,547 125,982 15 %
Medical costs 111,529 98,602 13 %
Cost of services 7,032 4,894 44 %
Selling, general and administrative expenses 11,589 9,601 21 %
Depreciation expense 614 565 9 %
Amortization of acquired intangible assets 817 770 6 %
Premium tax expense 9,330 8,287 13 %
Impairment 2,318 229 n.m.
Legal settlement - 1,250 n.m.
Earnings from operations 1,318 1,784 (26) %
Investment and other income 1,279 819 56 %
Debt extinguishment 30 (125) n.m.
Interest expense (665) (665) - %
Earnings before income tax expense 1,962 1,813 8 %
Income tax expense 760 477 59 %
Net earnings 1,202 1,336 (10) %
Loss attributable to noncontrolling interests - 11 n.m.
Net earnings attributable to
(11) % Diluted earnings per common share attributable to Centene Corporation$ 2.07 $ 2.28 (9) % n.m.: not meaningful 45
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Year Ended
Total Revenues
The following table sets forth supplemental revenue information for the year
ended
2022 2021 % Change 2021-2022
Medicaid $ 93,157 $ 84,139 11 %
Commercial 17,380 16,956 3 %
Medicare (1) 22,484 17,512 28 %
Other 11,526 7,375 56 %
Total Revenues $ 144,547 $ 125,982 15 %
(1) Medicare includes Medicare Advantage, Medicare Supplement, and Medicare prescription drug plan (PDP).
Total revenues increased 15% in the year ended
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 acquisition of Magellan, and the
commencement of our contracts in
Operating Expenses
Medical Costs
The HBR for the year endedDecember 31, 2022 was 87.7%, compared to 87.8% in 2021. The HBR for 2022 was positively impacted by disciplined Marketplace pricing and 2021 risk adjustment recorded in 2022, partially offset by a return to more normalized Medicaid utilization and higher flu costs compared to 2021. Additionally, 2021 was negatively impacted by unfavorable 2020 risk adjustment.
Cost of Services
Cost of services increased by$2.1 billion in the year endedDecember 31, 2022 , compared to the corresponding period in 2021, driven by the acquisition of Magellan. The cost of service ratio for the year endedDecember 31, 2022 was 84.2%, compared to 86.4% in 2021. The decrease in the cost of service ratio was driven by recent acquisitions and divestitures.
Selling, General & Administrative Expenses
The SG&A expense ratio was 8.6% for the year endedDecember 31, 2022 , compared to 8.1% for the year endedDecember 31, 2021 . The Adjusted SG&A expense ratio was 8.4% for the year endedDecember 31, 2022 , compared to 7.9% for the year endedDecember 31, 2021 . The increases were due to the additions of theMagellan 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, including annual enrollment, 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.
Impairment
During the year endedDecember 31, 2022 , we recorded total impairment charges of$2.3 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. Additionally, we recorded impairment charges associated with the divestitures of our Spanish and Central European, Centurion, and HealthSmart businesses of$458 million . We also recorded a$233 million impairment charge related toHealth Net Federal Services business as a result of theDoD's December 2022 announcement to not awardHealth Net Federal Services a TRICARE Managed Care Support Contract.
During the year ended
of our equity method investment in RxAdvance, a pharmacy benefit manager.
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Legal Settlement
During the second quarter of 2021, we recorded a legal settlement reserve estimate of$1.25 billion (inclusive of the states with which we have reached no-fault agreements) related to services previously provided byEnvolve Pharmacy Solutions, Inc. (Envolve ), which historically provided PBM and specialty pharmacy services, essentially during 2017 and 2018.
Other Income (Expense)
The following table summarizes the components of other income (expense) for the
year ended
2022 2021
Investment and other income
Debt extinguishment 30 (125) Interest expense (665) (665)
Other income (expense), net
Investment and other income. Investment and other income increased by$460 million for the year endedDecember 31, 2022 compared to 2021, driven by the$490 million PANTHERx divestiture gain, the$269 million Magellan Rx divestiture gain, and higher interest rates on larger investment balances. The 2021 investment income was driven by the gain related to the acquisition of the remaining 60% interest ofCircle Health of$309 million and the gain related to the divestiture of USMM of$150 million . Debt extinguishment. In 2022, we repurchased$95 million of our 4.25% Senior Notes due 2027 and$223 million of our 4.625% Senior Notes due 2029 through our senior note debt repurchase program, resulting in a pre-tax gain on extinguishment of$14 million . Additionally, we recognized a$13 million pre-tax gain on the extinguishment of debt related to the refinancing of debt for ourCircle Health subsidiary. The 2022 debt extinguishment also includes an immaterial gain related to the redemption of Magellan's outstanding Senior Notes inJanuary 2022 . In 2021, we redeemed all of our outstanding 5.375% Senior Notes due 2026 and allWellCare 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. Additionally, 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 for the year ended
million
Income Tax Expense
For the year endedDecember 31, 2022 , we recorded an income tax expense of$760 million on pre-tax earnings of$2.0 billion , or an effective tax rate of 38.8%. The effective tax rate for the year endedDecember 31, 2022 is driven by the tax effects of pending and completed divestitures and impairments associated with our ongoing portfolio review, including the Magellan Rx divestiture gain, the non-deductible impairment of ourHealth Net Federal Services business, and tax impacts related to the reclassification of theMagellan Specialty Health business to held for sale. 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%, which reflects 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. 47
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Segment Results
The following table summarizes our consolidated operating results by segment for
the year ended
2022 2021 % Change 2021-2022
Total Revenues
Managed Care $ 135,063 $ 120,125 12 %
Specialty Services 22,765 18,652 22 %
Eliminations (13,281) (12,795) 4 %
Consolidated Total $ 144,547 $ 125,982 15 %
Earnings from Operations
Managed Care $ 1,913 $ 1,789 7 %
Specialty Services (595) (5) n.m.
Consolidated Total $ 1,318 $ 1,784 (26) %
n.m.: not meaningful
Managed Care
Total revenues increased 12% in the year ended December 31, 2022 , compared to
the corresponding period in 2021, driven by organic Medicaid growth, primarily
due to the ongoing suspension of eligibility redeterminations, membership growth
in the Medicare business, and the commencement of our contracts in North
Carolina . Earnings from operations increased $124 million between years
primarily as a result of Medicaid and Medicare membership growth, favorable
Marketplace 2021 risk adjustment recorded in 2022, and lower traditional
utilization in the Marketplace business, partially offset by the $1.6 billion
pre-tax real estate impairment. Additionally, 2021 was negatively impacted by
the PBM legal settlement expense of $1.25 billion and higher utilization in the
Marketplace business in 2021.
Specialty Services
Total revenues increased 22% in the year ended December 31, 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 decreased $590 million between years, primarily due to divestitures
and impairments. The decrease was partially offset by favorable Magellan
operations and the prior year impairment of our equity method investment in
RxAdvance.
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LIQUIDITY AND CAPITAL RESOURCES
The following table is a condensed schedule of cash flows used in the discussion
of liquidity and capital resources ($ in millions):
Year
Ended
2022 2021
Net cash provided by operating activities $ 6,261 $ 4,205
Net cash (used in) investing activities (2,921) (3,299)
Net cash (used in) provided by financing activities (4,197) 1,362
Effect of exchange rate changes on cash, cash equivalents, and
restricted cash
(11) (11)
Net increase (decrease) in cash, cash equivalents, and
restricted cash and cash equivalents
$
(868)
Cash Flows Provided by Operating Activities
Normal operations are funded primarily through operating cash flows and borrowings under our Revolving Credit Facility. In 2022, operating activities provided cash of$6.3 billion , or 5.2 times net earnings, compared to$4.2 billion in 2021. Cash flows provided by operations in 2022 were driven by net earnings before the non-cash real estate and divestiture related impairment charges and an increase in medical claims liabilities driven by the timing of claims payments. Cash flows provided by operations in 2021 were due to 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 theHealth Insurance Marketplace 2020 plan year.
Cash Flows Used in Investing Activities
Investing activities used cash of$2.9 billion for the year endedDecember 31, 2022 and$3.3 billion in 2021. Cash flows used in investing activities in 2022 primarily consisted of net additions to the investment portfolio of our regulated subsidiaries and our acquisition of Magellan, partially offset by our PANTHERx and Magellan Rx divestiture proceeds.
We spent
2021, respectively, on capital expenditures for system enhancements, market
growth, and our corporate and regional buildings.
As ofDecember 31, 2022 , our investment portfolio consisted primarily of fixed-income securities with a weighted average duration of 3.4 years. We had unregulated cash and investments of$1.4 billion atDecember 31, 2022 . The majority of the excess unregulated cash and cash equivalents was utilized inJanuary 2023 to complete planned pass-through payments. AtDecember 31, 2021 we had unregulated cash and investments of$3.4 billion , which was substantially reduced inJanuary 2022 to fund the Magellan acquisition. Unregulated cash and investments include private equity investments and company owned life insurance contracts. Cash flows used in investing activities in 2021 primarily consisted of the 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 ofCircle Health , and capital expenditures, offset by proceeds received related to the sale of our majority interest in USMM.
Cash Flows (Used in) Provided by Financing Activities
Financing activities used cash of$4.2 billion in the year endedDecember 31, 2022 , compared to providing cash of$1.4 billion in the comparable period in 2021. Financing activities in 2022 were driven by stock repurchases of$3.0 billion , the redemption of Magellan's outstanding debt of$535 million assumed in the transaction using Magellan's cash on hand, senior note debt repurchases of$318 million , and the repayment of our construction loan. In 2021, financing activities were driven by increased borrowings offset by debt repayments. 49
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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 2022, in preparation for the closing of divestitures as well as planning for the future, the Company's Board of Directors authorized up to a total of$6.0 billion of repurchases under the program. In 2022, we repurchased a total of 35.7 million shares for$3.0 billion through our stock repurchase program, primarily funded through divestiture proceeds. A portion of the repurchases were completed through an accelerated share repurchase (ASR) agreement, which was executed inJuly 2022 . At inception, we received an initial delivery of approximately 8.6 million shares representing 80% of the$1.0 billion notional amount. InOctober 2022 , an additional 3.0 million shares were delivered upon settlement 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. We have approximately$2.8 billion remaining under the stock repurchase program as ofDecember 31, 2022 . No duration has been placed on the repurchase program. We reserve the right to discontinue the repurchase program at any time. Refer to Note 12. Stockholders' Equity for further information on stock repurchases. As ofDecember 31, 2022 , 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 limited restrictive covenants. As ofDecember 31, 2022 , 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 2022, the Company's Board of Directors also authorized a new$1.0 billion senior note debt repurchase program. During 2022, we repurchased$318 million of our par value senior notes for$300 million . As ofDecember 31, 2022 , there was$700 million available under the senior note debt repurchase program. Refer to Note 10. Debt for further information regarding the issuance and redemption of senior 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 ofDecember 31, 2022 , we had$58 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, 2022 , 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. InDecember 2022 , we paid off the outstanding balance of the construction loan. We had outstanding letters of credit of$217 million as ofDecember 31, 2022 , which were not part of our Revolving Credit Facility. The letters of credit bore weighted interest of 0.6% as ofDecember 31, 2022 . In addition, we had outstanding surety bonds of$1.3 billion as ofDecember 31, 2022 . AtDecember 31, 2022 , our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 42.7%, compared to 41.2% atDecember 31, 2021 . The debt to capital ratio increase was driven by stock repurchases in 2022. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility. AtDecember 31, 2022 , we had working capital, defined as current assets less current liabilities, of$1.7 billion , compared to$2.7 billion atDecember 31, 2021 . Working capital 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.
During the years ended
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2023 Expectations
During 2023, we expect to receive net dividends of approximately$2.1 billion from our regulated subsidiaries and expect to spend approximately$845 million in capital expenditures primarily associated with system enhancements.
We have material debt, short-term medical claims, lease, and contingencies
obligations. Refer to Note 10. Debt, Note 8. Medical Claims Liability, Note 11.
Leases, and Note 18. Contingencies, respectively, for further information.
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 stock repurchases, portfolio optimization, and the evaluation of
refinancing opportunities.
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REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS
Our operations are conducted through our subsidiaries. As managed care
organizations (MCOs), 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, 2022 , our subsidiaries had aggregate statutory capital and
surplus of $16.4 billion , compared with the required minimum aggregate statutory
capital and surplus requirements of $8.0 billion . During the year ended
December 31, 2022 , we received dividends of $1.6 billion from and made
$729 million of capital contributions to 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, MCOs, and other entities bearing risk for healthcare
coverage. As of December 31, 2022 , 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, 2022 , the amount of capital
and surplus or net worth that was unavailable for the payment of dividends or
return of capital to us was $8.0 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 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 condition 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 theAudit and Compliance 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, 2022 , we had$18.8 billion of goodwill and$6.9 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. 53
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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 (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 condition, and
cash flows." These approaches are consistently applied to each period presented.
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, 2022 data: Completion Factors: (1) Cost Trend Factors: (2) Increase (Decrease) in Increase (Decrease) in (Decrease) Increase Medical Claims (Decrease) Increase Medical Claims in Factors Liabilities in Factors Liabilities (In millions) (In millions) (1.00) % $ 1,077 (1.00) % $ (208) (0.75) 804 (0.75) (156) (0.50) 533 (0.50) (104) (0.25) 265 (0.25) (52) 0.25 (263) 0.25 52 0.50 (524) 0.50 104 0.75 (782) 0.75 156 1.00 (1,038) 1.00 208 (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$103 million for the year endedDecember 31, 2022 , excluding the effect of any return of premium, risk corridor, or minimum MLR programs. The estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our providers, and information available from other outside sources. The change in medical claims liability is summarized as follows (in millions): Year Ended December 31, 2022 2021 2020 Balance, January 1,$ 14,243 $ 12,438 $ 7,473 Less: reinsurance recoverable 23 23 20 Balance, January 1, net 14,220 12,415 7,453 Acquisitions 105 - 3,856 Incurred related to: Current year 112,896 100,385 86,765 Prior years (1,367) (1,783) (501) Total incurred 111,529 98,602 86,264 Paid related to: Current year 97,799 87,427 78,838 Prior years 11,336 9,370 6,320 Total paid 109,135 96,797 85,158 Balance, December 31, net 16,719 14,220 12,415 Plus: reinsurance recoverable 26 23 23 Balance, December 31,$ 16,745 $ 14,243 $ 12,438 Days in claims payable (1) 54 52 51
(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, 2022 will be known by the end of 2023. 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$198 million ,$492 million , and$86 million of the "Incurred related to: Prior years" was recorded as a reduction to premium revenues in 2022, 2021, and 2020, 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 programs 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.
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, in the form of a risk score or risk adjustment,
based on the acuity of our membership. Generally, the risk score or risk
adjustment is determined by the state or CMS analyzing submissions of processed
claims and medical record data to determine the acuity of our membership, often
relative to the respective program's membership. We estimate the amount of risk
score and risk adjustment based upon the processed claims and medical record
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 cost-savings 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 costs are below 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.
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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 prescription drug benefit members, CMS pays for some, or all, of the member's monthly premium. We receive certain Part D prospective subsidy payments from CMS for these 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 were previously subject to the ACA annual health insurer fee (HIF). Beginning in 2021, the HIF was permanently repealed. 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 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. In many instances, we have little visibility to the timing of these payments until they are paid by the state. 57
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