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CENTENE CORP – 10-Q – 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.
EXECUTIVE OVERVIEW
General
We are a leading 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 revenues that are separately billed,
and reflects the direct relationship between the premiums received and the
medical services provided. The SG&A expense ratio represents SG&A costs as a
percentage of premium and service revenues, excluding premium taxes separately
billed.
Value Creation Plan
As introduced in June 2021 , our Value Creation Plan is designed to drive margin
expansion by leveraging our scale and generating sustainable profitable growth.
In addition to creating shareholder value, this plan is an ongoing effort to
modernize and improve how we work in order to propel our organization to new
levels of success and elevate the member and provider experiences. The three
major 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, relates to
initiatives including bid discipline, clinical initiatives, quality improvement,
and pharmacy cost management. The third pillar, strategic capital management,
focuses on value-creating capital deployment activities such as stock
repurchases, portfolio optimization, and debt and investment management.
From an operational perspective, we continue to move forward with our value
creation plan, including the streamlining of certain operations, such as key
call centers and utilization management, evaluating our real estate footprint
and seeking opportunities for platform consolidation. 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.
In the second quarter of 2022, following a strategic review of our real estate
portfolio and the adoption of a more modern, flexible work environment, we
initiated a reduction of our real estate footprint and incurred a charge of
$1.45 billion related to the impairment of leased and owned real estate and
related fixed assets. We incurred impairments of $706 million related to owned
real estate, $521 million related to leased real estate, and $223 million
related to associated fixed assets. We anticipate additional future charges of
approximately $200 million related to real estate optimization. This represents
an approximate 70% decrease in domestic leased space and is expected to result
in annualized lease expense savings of approximately $200 million .
Additionally, during the second quarter of 2022, our Board of Directors
authorized a $3.0 billion increase to our stock repurchase program and a new
$1.0 billion debt repurchase program. During 2022, we have repurchased $450
million of our common stock through our stock repurchase program, entered into
definitive agreements to sell Magellan Rx as well as our ownership stakes in our
Spanish and Central European businesses as part of our ongoing portfolio review,
and completed the divestiture of PANTHERx Rare (PANTHERx). We intend to utilize
the majority of the proceeds from these divestitures to repurchase additional
shares and the balance to reduce debt.
COVID-19 Trends and Uncertainties
The impact of COVID-19 on our business in both the short-term and long-term is
uncertain and difficult to predict. The outlook for the remainder of 2022
depends on future developments, including but not limited to: the length and
severity of the outbreak
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(including new variants, which may be more contagious, more severe or less
responsive to treatment or vaccines), the effectiveness of containment actions,
the timing and effectiveness of vaccinations and achievement of herd immunity,
and the timing and rate at which members return to accessing healthcare. The
pandemic and these future developments have impacted and will continue to affect
our membership and medical utilization. From the onset of the pandemic in March
2020 , our Medicaid membership has increased by 2.9 million members (excluding
the new North Carolina membership). The public health emergency (PHE) extension
for COVID-19 has been extended to October 2022 with redeterminations eligible to
begin in November 2022 . However, the PHE may be extended beyond October 2022 .
Our Ambetter product covers the majority of our Medicaid states, and we believe
we are among the best positioned in the healthcare market to capture those
transitioning coverage through redeterminations. Our execution plan is
well-thought out and we remain agile in working with our state partners and are
prepared to support our members and promote continuity of coverage when
redeterminations resume.
We continue to watch external trends closely, as COVID-19 costs could increase
based upon macro trends. New variants and additional waves of the pandemic could
create new dynamics and uncertainties around our expectations.
We are confident we have the team, systems, expertise and financial strength to
continue to effectively navigate this challenging pandemic landscape.
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 Act, enacted onMarch 11, 2021 , contained provisions aimed at leveraging Medicaid and theHealth Insurance Marketplace to expand health insurance coverage and affordability to consumers. The American Rescue Act authorized an additional$1.9 trillion in federal spending to address the COVID-19 PHE, and contained several provisions designed to increase coverage of certain healthcare services, expand eligibility and benefits, incentivize state Medicaid expansion, and adjust federal financing for state Medicaid programs, the ultimate impact of which remain uncertain. The American Rescue Act enhanced eligibility for the advance premium tax credit for certain enrollees in theHealth Insurance Marketplace currently expires onDecember 31, 2022 , and if it is not extended, ourHealth Insurance Marketplace membership would likely be reduced. Recently, theBiden Administration has made efforts to address the family glitch in the ACA, which relates to determining who is eligible for premium subsidies. We see this as a significant step in making Marketplace more affordable for working families. 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.
Second Quarter 2022 Highlights
Our financial performance for the second quarter of 2022 is summarized as
follows:
•Managed care membership of 26.4 million, an increase of 1.8 million members, or
7% year-over-year.
•Total revenues of
•Premium and service revenues of
year-over-year.
•HBR of 86.7%, compared to 88.3% for the second quarter of 2021.
•SG&A expense ratio of 8.2%, compared to 7.4% for the second quarter of 2021.
•Adjusted SG&A expense ratio of 8.2%, compared to 7.3% for the second quarter of
2021.
•Operating cash flows of
22 -------------------------------------------------------------------------------- Table of Contents •Diluted loss per share of$(0.29) , compared to$(0.92) for the second quarter of 2021. The second quarter loss was driven by a pre-tax real estate impairment charge of$1.45 billion ($1.80 per share after-tax), related to the reduction in our real estate footprint. The diluted loss per share in 2021 was driven by the recording of a legal settlement reserve estimate of$1.25 billion ($1.78 per share after-tax).
•Adjusted diluted earnings per share (EPS) of
second quarter of 2021.
A reconciliation from GAAP diluted earnings (loss) per share to adjusted diluted
EPS is highlighted below, and additional detail is provided above under the
heading "Non-GAAP Financial Presentation":
Three
Months Ended
2022 2021
GAAP diluted earnings (loss) per share attributable to
$ (0.29) $ (0.92) Amortization of acquired intangible assets 0.34 0.33 Acquisition and divestiture related expenses 0.04 0.07 Other adjustments (1) 2.45 2.23 Income tax effects of adjustments (2) (0.77) (0.46) Adjusted diluted EPS $ 1.77$ 1.25
(1) Other adjustments include the following pre-tax items:
(a) for the three months endedJune 30, 2022 : real estate impairments of$1,454 million , or$2.46 per share ($1.80 after-tax), gain on debt extinguishment of$13 million , or$0.02 per share, and costs related to the pharmacy benefits management (PBM) legal settlement of$4 million , or$0.01 per share; (b) for the three months endedJune 30, 2021 : PBM legal settlement expense of$1,250 million , or$2.12 per share ($1.78 after-tax), a reduction to the previously reported gain on divestiture of certain products of ourIllinois health plan of$62 million , or$0.10 per share, severance costs of$2 million , or$0.00 per share, and the$0.01 impact of 8 million diluted shares in the calculation of adjusted diluted EPS. (2) The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment. The three and six months endedJune 30, 2022 also include a$0.03 per share increase to the tax benefit on the previously reported non-cash impairment of our equity method investment in RxAdvance.
The following items contributed to our results of operations in the current
year:
•Circle Health. In
method investment in
operators of hospitals.
•Commercial. In 2022, we introduced Ambetter into five new states, as well as expanded coverage to 274 new counties across 13 existing states. We now serve members in 27 states across the country in 1,480 counties. Additionally, we introduced three new Ambetter product offerings to address growing needs of our members: Ambetter Value, Ambetter Select, and Ambetter Virtual Access. •Eligibility Redeterminations. Revenue growth was driven by organic Medicaid growth due to the ongoing suspension of eligibility redeterminations as well as Medicare membership growth during the annual enrollment period. •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 .
•Magellan Health, Inc. (Magellan). In
issued and outstanding shares of Magellan for approximately
23 -------------------------------------------------------------------------------- Table of Contents •Medicare Advantage. We experienced strong Medicare membership growth during the 2022 annual enrollment period. In 2022, 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. •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 . In addition, we have been negatively impacted by the previously disclosed carve out ofCalifornia pharmacy services effectiveJanuary 2022 , which occurred in connection with the state's transition of pharmacy services from managed care to fee for service, and the decrease in the number of our Medicare members in a 4.0 star or above plan for the 2022 bonus year.
We expect the following items to impact to our future results of operations:
•InJuly 2022 , as part of our previously announced review of strategic alternatives for our international portfolio, we signed a definitive agreement to sell our ownership stakes in our Spanish and Central European businesses, includingRibera Salud , Torrejón Salud, andPro Diagnostics Group . The transaction is expected to close by the end of 2022.
•In
divestiture illustrates our continued progress on the Value Creation Plan.
•InJuly 2022 , we announced our subsidiary,Delaware First Health , was awarded contracts for the statewide Medicaid Managed Care programs. The new contracts are anticipated to beginJanuary 1, 2023 . •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 will continue serving multiple MO HealthNet programs includingChildren's Health Insurance (CHIP) 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 now serves approximately 50,000 foster children and children receiving adoption subsidy assistance. •InMay 2022 , we signed a definitive agreement to sell Magellan Rx as part of our ongoing portfolio review. The transaction is expected to close by the end of 2022. •InMarch 2022 , we announced our subsidiary,Managed Health Services , was selected by theIndiana Department of Administration to continue serving HoosierHealthwise and Health Indiana Plan members with Medicaid and Medicaid alternative managed care and care coordination services. The new contract is anticipated to beginJanuary 1, 2023 . •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 inJanuary 2023 . •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. •InOctober 2021 ,Centers for Medicare and Medicaid Services (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 ratings for the 2024 Star rating year, which impacts the 2025 bonus year. •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. 24
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•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
although it could be extended into early 2023.
•We will be negatively impacted by the anticipated carve out ofOhio pharmacy services in the second half of 2022 in connection with the state's transition of pharmacy services from managed care to a single PBM.
•We may be negatively impacted by potential Medicaid state rate actions and risk
corridor mechanisms as a result of the COVID-19 pandemic.
•We may be negatively impacted by the expiration of the enhanced Advanced
Premium Tax Credits (eAPTC) which, if not extended by the end of September, will
expire in
MEMBERSHIP
From June 30, 2021 to June 30, 2022 , we increased our managed care membership by
1.8 million, or 7%. The following table sets forth our membership by line of
business:
June 30, December 31, June 30,
2022 2021 2021
Traditional Medicaid (1) 13,758,000 13,328,400 12,492,600
High Acuity Medicaid (2) 1,688,000 1,686,100 1,531,000
Total Medicaid 15,446,000 15,014,500 14,023,600
Commercial Marketplace 2,033,300 2,140,500 2,040,900
Commercial Group 448,700 462,100 479,500
Total Commercial 2,482,000 2,602,600 2,520,400
Medicare (3) 1,483,900 1,252,200 1,182,900
Medicare PDP 4,165,500 4,070,500 4,064,500
Total at-risk membership (4) 23,577,400 22,939,800 21,791,400
TRICARE eligibles 2,862,400 2,874,700 2,881,400
Total 26,439,800 25,814,500 24,672,800
(1) Membership includes TANF, Medicaid Expansion, CHIP,
(2) Membership includes ABD, IDD, LTSS and MMP Duals.
(3) Membership includes Medicare Advantage and Medicare Supplement.
(4) Membership includes 1,252,600, 1,178,000, and 1,131,900 dual-eligible beneficiaries for the periods ending
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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 the three and six months endedJune 30, 2022 and 2021, prepared in accordance with generally accepted accounting principles inthe United States . Summarized comparative financial data for the three and six months endedJune 30, 2022 and 2021 is as follows ($ in millions, except per share data in dollars): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 % Change 2022 2021 % Change Premium$ 31,510 $ 27,627 14 %$ 63,399 $ 54,560 16 % Service 2,458 1,235 99 % 4,801 2,416 99 % Premium and service revenues 33,968 28,862 18 % 68,200 56,976 20 % Premium tax 1,968 2,163 (9) % 4,921 4,032 22 % Total revenues 35,936 31,025 16 % 73,121 61,008 20 % Medical costs 27,312 24,389 12 % 55,150 47,780 15 % Cost of services 2,099 1,107 90 % 4,087 2,155 90 % Selling, general and administrative expenses 2,800 2,139 31 % 5,545 4,373 27 % Depreciation expense 164 134 22 % 320 267 20 % Amortization of acquired intangible assets 199 188 6 % 398 383 4 % Premium tax expense 2,041 2,236 (9) % 5,047 4,164 21 % Impairment 1,450 - n.m. 1,450 - n.m. Legal settlement - 1,250 n.m. - 1,250 n.m. Earnings (loss) from operations (129) (418) 69 % 1,124 636 77 % Investment and other income 42 39 8 % 94 142 (34) % Debt extinguishment 13 - n.m. 16 (46) 135 % Interest expense (162) (163) 1 % (322) (333) 3 % Earnings (loss) before income tax (236) (542) 56 % 912 399 129 % Income tax expense (benefit) (65) (7) n.m. 231 237 (3) % Net earnings (loss) (171) (535) 68 % 681 162 320 % (Earnings) loss attributable to noncontrolling interests (1) - n.m. (4) 2 (300) % Net earnings (loss) attributable to Centene Corporation $ (172)$ (535) 68 % $ 677$ 164 313 % Diluted earnings (loss) per common share attributable to Centene Corporation$ (0.29) $ (0.92) 68 %$ 1.15 $ 0.28 311 % n.m.: not meaningful 26
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Three Months Ended
Total Revenues
The following table sets forth supplemental revenue information for the three
months ended
2022 2021 % Change
Medicaid $ 22,458 $ 20,797 8 %
Commercial 4,556 4,110 11 %
Medicare (1) 5,639 4,464 26 %
Other 3,283 1,654 98 %
Total Revenues $ 35,936 $ 31,025 16 %
(1) Medicare includes Medicare Advantage, Medicare Supplement and Medicare PDP.
Total revenues increased 16% in the three months endedJune 30, 2022 over the corresponding period in 2021, driven by organic Medicaid growth, primarily due to the ongoing suspension of eligibility redeterminations, 25% membership growth in the Medicare business (19% growth sinceDecember 31, 2021 ), our recent acquisitions ofMagellan and Circle Health , and the commencement of our contracts inNorth Carolina . Operating Expenses Medical Costs The HBR for the three months endedJune 30, 2022 , was 86.7%, compared to 88.3% in the same period in 2021. The HBR for the second quarter of 2022 was positively impacted by favorable performance in Marketplace driven by pricing actions and a return to more normalized utilization compared to the second quarter of 2021. Additionally, the second quarter of 2021 was negatively impacted by unfavorable 2020 risk adjustment, while the second quarter of 2022 was favorably impacted by 2021 risk adjustment.
Cost of Services
Cost of services increased by$992 million in the three months endedJune 30, 2022 , compared to the corresponding period in 2021, primarily attributable to newly acquired businesses, includingMagellan and Circle Health . The cost of service ratio for the three months endedJune 30, 2022 , was 85.4%, compared to 89.6% in the same period in 2021. 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 8.2% for the second quarter of 2022, compared to 7.4% in the second quarter of 2021. The adjusted SG&A expense ratio was 8.2% for the second quarter of 2022, compared to 7.3% in the second quarter of 2021. The increases were due to the additions of theMagellan and Circle Health businesses, which operate at higher SG&A expense ratios due to the nature of their respective businesses along with increased costs associated with risk adjustment improvement efforts, Medicare broker commissions 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 second quarter of 2022, we recorded an impairment charge of
billion
leased and owned real estate assets and related fixed assets.
Legal Settlement
During the second quarter of 2021, we recorded a legal settlement reserve estimate of$1.25 billion (inclusive of theOhio andMississippi settlements) related to services provided byEnvolve Pharmacy Solutions, Inc. (Envolve ), our PBM subsidiary, essentially during 2017 and 2018. 27 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense)
The following table summarizes the components of other income (expense) for the
three months ended
2022 2021
Investment and other income $ 42 $ 39
Debt extinguishment 13 -
Interest expense (162) (163)
Other income (expense), net $ (107) $ (124)
Investment and other income. Investment and other income increased by $3 million
in the three months ended June 30, 2022 compared to the corresponding period in
2021.
Debt extinguishment. In May 2022 , we recognized a $13 million pre-tax gain on
the extinguishment of debt related to the refinancing of debt for our of Circle
Health subsidiary.
Interest expense. Interest expense decreased by
ended
Income Tax Expense
For the three months endedJune 30, 2022 , we recorded income tax benefit of$65 million on pre-tax loss of$236 million , or an effective tax rate of 27.7%. For the second quarter of 2022, our effective tax rate on adjusted earnings was 27.1%. For the three months endedJune 30, 2021 , we recorded an income tax benefit of$7 million on a pre-tax loss of$542 million , or an effective tax rate of 1.3%. The effective tax rate for the second quarter of 2021 reflects the partial non-deductibility of the legal settlement reserve. For the second quarter of 2021, our effective tax rate on adjusted earnings was 26.3%.
Segment Results
The following table summarizes our consolidated operating results by segment for
the three months ended
2022 2021 % Change
Total Revenues
Managed Care $ 33,189 $ 29,590 12 %
Specialty Services 5,975 4,559 31 %
Eliminations (3,228) (3,124) (3) %
Consolidated Total $ 35,936 $ 31,025 16 %
Earnings from Operations
Managed Care $ (130) $ (415) 69 %
Specialty Services 1 (3) 133 %
Consolidated Total $ (129) $ (418) 69 %
Managed Care
Total revenues increased 12% in the three months ended June 30, 2022 , compared
to the corresponding period in 2021. The increase was due to organic Medicaid
growth, partially due to 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 . Earnings from
operations increased $285 million between years primarily as a result of
Medicaid and Medicare membership growth, 2021 risk adjustment in 2022, lower
traditional utilization in the Marketplace business, profitability growth in the
PDP business, offset by the $1.45 billion pre-tax real estate impairment. 2021
was negatively impacted by a legal settlement reserve estimate of $1.25 billion
related to services provided by Envolve .
Specialty Services
Total revenues increased 31% in the three months endedJune 30, 2022 , compared to the corresponding period in 2021, resulting primarily from our recent acquisition of Magellan as well as from our specialty pharmacy businesses. Earnings from operations increased$4 million in the three months endedJune 30, 2022 , compared to the corresponding period in 2021. 28 -------------------------------------------------------------------------------- Table of Contents Six Months EndedJune 30, 2022 Compared to Six Months EndedJune 30, 2021
Total Revenues
The following table sets forth supplemental revenue information for the six
months ended
2022 2021 % Change
Medicaid $ 46,534 $ 40,988 14 %
Commercial 8,688 8,008 8 %
Medicare (1) 11,396 8,803 29 %
Other 6,503 3,209 103 %
Total Revenues $ 73,121 $ 61,008 20 %
(1) Medicare includes Medicare Advantage, Medicare Supplement and Medicare PDP.
Total revenues increased 20% in the six months endedJune 30, 2022 over the corresponding period in 2021 primarily due to Medicaid membership growth resulting from the ongoing suspension of eligibility redeterminations, membership growth in the Medicare business, our recent acquisitions ofMagellan and Circle Health , and the commencement of our contracts inNorth Carolina , and additional premium tax revenue and retroactive state directed payments.
Operating Expenses
Medical Costs
The HBR for the six months endedJune 30, 2022 was 87.0%, compared to 87.6% in the same period in 2021. The HBR for 2022 was positively impacted by favorable performance in Marketplace driven by pricing actions and a return to more normalized utilization compared to the second quarter of 2021. Additionally, the second quarter of 2021 was negatively impacted by unfavorable 2020 risk adjustment, while the second quarter of 2022 was favorably impacted by 2021 risk adjustment. Cost of Services Cost of services increased by$1.9 billion in the six months endedJune 30, 2022 , compared to the corresponding period in 2021, primarily attributable to newly acquired businesses, includingMagellan and Circle Health . The cost of service ratio for the six months endedJune 30, 2022 , was 85.1%, compared to 89.2% in the same period in 2021. 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 for the six months endedJune 30, 2022 was 8.1%, compared to 7.7% for the corresponding period in 2021. The adjusted SG&A expense ratio for the six months endedJune 30, 2022 was 7.9%, compared to 7.4% for the six months endedJune 30, 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 along with increased risk adjustment costs, Medicare broker commissions and variable compensation. These impacts were partially offset by the leveraging of expenses over high revenues as a result of increased membership as well as reduced restructuring charges compared to 2021. Impairment
During the second quarter of 2022, we recorded an impairment charge of
billion
leased and owned real estate assets and related fixed assets.
Legal Settlement
During the second quarter of 2021, we recorded a legal settlement reserve estimate of$1.25 billion (inclusive of theOhio andMississippi settlements) related to services provided byEnvolve , our PBM subsidiary, essentially during 2017 and 2018. 29
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Other Income (Expense)
The following table summarizes the components of other income (expense) for the
six months ended
2022 2021
Investment and other income $ 94 $ 142
Debt extinguishment 16 (46)
Interest expense (322) (333)
Other income (expense), net $ (212) $ (237)
Investment and other income. Investment and other income decreased by $48
million in the six months ended June 30, 2022 compared to the corresponding
period in 2021, driven by decreases in the performance of our deferred
compensation investment fund portfolio, which fluctuate with their underlying
investments. The losses from our deferred compensation portfolio were
substantially offset by decreases in deferred compensation expense, recorded in
SG&A expense. These decreases were partially offset by higher interest rates.
Debt extinguishment. In May 2022 , we recognized a $13 million pre-tax gain on
the extinguishment of debt related to the refinancing of debt for our of Circle
Health subsidiary. The 2022 debt extinguishment also includes an immaterial gain
related to the redemption of Magellan's outstanding senior notes in January
2022 . In February 2021 , we tendered or redeemed all of our outstanding $2.2
billion 4.75% Senior Notes, due 2025 and recognized a pre-tax loss on
extinguishment of approximately $46 million . The loss includes the call premium
and the write-off of unamortized premium and debt issuance costs.
Interest expense. Interest expense decreased by $11 million in the six months
ended June 30, 2022 , compared to the corresponding period in 2021, driven by our
2022 and 2021 refinancing actions.
Income Tax Expense
For the six months endedJune 30, 2022 , we recorded income tax expense of$231 million on pre-tax earnings of$912 million , or an effective tax rate of 25.3%. For the six months endedJune 30, 2022 , our effective tax rate on adjusted earnings was 26.1%. For the six months endedJune 30, 2021 , we recorded income tax expense of$237 million on pre-tax earnings of$399 million , or an effective tax rate of 59.4%, which reflects the partial non-deductibility of the legal settlement reserve. Segment Results
The following table summarizes our consolidated operating results by segment for
the six months ended
2022 2021 % Change
Total Revenues
Managed Care $ 67,710 $ 58,193 16 %
Specialty Services 12,090 8,826 37 %
Eliminations (6,679) (6,011) (11) %
Consolidated Total $ 73,121 $ 61,008 20 %
Earnings from Operations
Managed Care $ 1,107 $ 541 105 %
Specialty Services 17 95 (82) %
Consolidated Total $ 1,124 $ 636 77 %
30
-------------------------------------------------------------------------------- Table of Contents Managed Care Total revenues increased 16% in the six months endedJune 30, 2022 , compared to the corresponding period in 2021, driven by organic Medicaid growth, partially due to the ongoing suspension of eligibility redeterminations, membership growth in the Medicare business, our recent acquisition ofCircle Health , the commencement of our contracts inNorth Carolina , along with premium tax revenue and retroactive state directed payments. Earnings from operations increased$566 million between years primarily as a result of Medicaid and Medicare membership growth, 2021 risk adjustment in 2022, lower traditional utilization in the Marketplace business, profitability growth in the PDP business, and the acquisition ofCircle Health , partially offset by the$1.45 billion pre-tax real estate impairment. 2021 was negatively impacted by the legal settlement reserve estimate of$1.25 billion related to services provided byEnvolve and higher utilization in the Marketplace business in 2021.
Specialty Services
Total revenues increased 37% in the six months endedJune 30, 2022 , compared to the corresponding period in 2021, resulting primarily from our recent acquisition of Magellan as well as from our specialty pharmacy businesses, increased services associated with membership growth in the Managed Care segment, and new contracts in our correctional business. Earnings from operations decreased$78 million in the six months endedJune 30, 2022 , compared to the corresponding period in 2021, primarily due to declining operations in our PBM business, the shift of margin to our managed care segment for our internal dental and vision businesses, as well as a non-recurring item in our federal services business. Decreases in operations were partially offset by the Magellan Acquisition. LIQUIDITY AND CAPITAL RESOURCES
Shown below is a condensed schedule of cash flows used in the discussion of
liquidity and capital resources ($ in millions).
Six
Months Ended
2022 2021
Net cash provided by operating activities $ 4,505 $ 1,728
Net cash used in investing activities (3,145) (1,420)
Net cash used in financing activities (984) (46)
Effect of exchange rate changes on cash and cash equivalents (9) (24)
Net increase in cash, cash equivalents, and restricted cash and
cash equivalents $ 367 $ 238
Cash Flows Provided by Operating Activities
Normal operations are funded primarily through operating cash flows and borrowings under our revolving credit facility. Operating activities provided cash of$4.5 billion in the six months endedJune 30, 2022 compared to providing cash of$1.7 billion in the comparable period in 2021. Cash flows provided by operations in 2022 was driven by net earnings before the non-cash real estate impairment charge and an increase in medical claims liabilities partially due to timing of state directed payments. Cash flows provided by operations in 2021 were due to net earnings before the legal settlement reserve, an increase in state risk adjustments and risk sharing mechanism payables, partially offset by the timing of payments from our state customers.
Cash Flows Used in Investing Activities
Investing activities used cash of$3.1 billion in the six months endedJune 30, 2022 , and$1.4 billion in the comparable period in 2021. Cash flows used in investing activities in 2022 primarily consisted of our acquisition of Magellan and net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments). 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) and capital expenditures.
We spent
2021, respectively, on capital expenditures for system enhancements, market
growth, and our corporate and regional buildings.
31 -------------------------------------------------------------------------------- Table of Contents As ofJune 30, 2022 , our investment portfolio consisted primarily of fixed-income securities with an average duration of 3.6 years. We had unregulated cash and cash equivalents of$782 million atJune 30, 2022 , including$299 million in our international subsidiaries (a material portion of which is expected to be used to satisfy contractual obligations), compared to$2.7 billion atDecember 31, 2021 , including$430 million in our international subsidiaries. Unregulated cash was substantially reduced inJanuary 2022 upon the closing of the Magellan Acquisition for the purchase price payment and corresponding closing costs. Unregulated cash and investments include private equity investments and company owned life insurance contracts.
Cash Flows Used in Financing Activities
Financing activities used cash of$984 million in the six months endedJune 30, 2022 , compared to using cash of$46 million in the comparable period in 2021. Financing activities in 2022 were driven by the redemption of Magellan's outstanding debt of$535 million acquired in the transaction using Magellan's cash on hand and stock repurchases of$344 million . In 2021, net financing activities were driven by to costs associated with our debt refinancing, offset by increased borrowings. Liquidity Metrics InJune 2022 , our Board of Directors approved an increase to the existing stock repurchase program forCentene's common stock by$3.0 billion . We have approximately$3.5 billion remaining under the program for repurchases as ofJune 30, 2022 . From time to time, we raise capital through the issuance of debt in the form of senior notes or make decisions to repurchase shares or reduce debt as part of our capital allocation strategy. As ofJune 30, 2022 , we had an aggregate principal amount of$16.0 billion of senior notes issued and outstanding. The indentures governing our various maturities of senior notes contain restrictive covenants. As ofJune 30, 2022 , we were in compliance with all covenants. Refer to Note 8. Debt for further information regarding the issuance and redemption of senior notes and Note 10. Stockholders' Equity for information on stock repurchases. 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 ofJune 30, 2022 , we had$129 million of borrowings outstanding under our Revolving Credit Facility,$2.2 billion of borrowings under our Term Loan Facility, and we were in compliance with all covenants. As ofJune 30, 2022 , there were no limitations on the availability of our Revolving Credit Facility as a result of the debt-to-EBITDA ratio. We had outstanding letters of credit of$172 million as ofJune 30, 2022 , which were not part of our revolving credit facility. The letters of credit bore weighted interest of 0.6% as ofJune 30, 2022 . In addition, we had outstanding surety bonds of$1.4 billion as ofJune 30, 2022 . AtJune 30, 2022 , we had working capital, defined as current assets less current liabilities, of$3.3 billion , compared to$2.7 billion atDecember 31, 2021 . The increase as ofJune 30, 2022 was driven by the reclassification of PANTHERx assets and liabilities held for sale. 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. AtJune 30, 2022 , our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 41.5%, compared to 41.2% atDecember 31, 2021 . Excluding$181 million of non-recourse debt, our debt to capital ratio was 41.3% as ofJune 30, 2022 , compared to$184 million and 40.9% atDecember 31, 2021 . We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.
2022 Expectations
During the remainder of 2022, we expect to receive net dividends from our insurance subsidiaries of approximately$610 million and spend approximately$550 million in additional capital expenditures primarily associated with system enhancements and the completion of our office inCharlotte, North Carolina . InJuly 2022 , we made$106 million in additional purchases through our stock repurchase program and intend to utilize the majority of the proceeds from the recently completed PANTHERx sale to repurchase additional shares and the balance to reduce debt.
If the previously announced divestitures of Magellan Rx or our Spanish and
Central European operations close in 2022, we would have additional proceeds to
utilize for additional share repurchases and debt reduction.
32 -------------------------------------------------------------------------------- Table of Contents Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our Revolving Credit Facility will be sufficient to finance our general operations and capital expenditures for at least 12 months from the date of this filing. While we are currently in a strong liquidity position and believe we have adequate access to capital, we may elect to increase borrowings on our Revolving Credit Facility. From time to time we may elect to raise additional funds for these and other purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. In addition, we may strategically pursue refinancing or redemption opportunities to extend maturities and/or improve terms of our indebtedness if we believe such opportunities are favorable to us. We intend to continue to evaluate strategic actions in connection with our Value Creation Plan, targeting initiatives to improve productivity, efficiencies and reduced organizational costs, as well as capital deployment activities, including stock repurchases, portfolio optimization and the evaluation of refinancing opportunities. In addition to creating shareholder value, this plan encompasses a larger organizational mission to enhance our member and provider experience, improve outcomes for our members, and to initiate new ways of doing business that makeCentene a great partner in all aspects of our operations. 33
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REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS Our operations are conducted through our subsidiaries. As managed care organizations, most of our subsidiaries are subject to state regulations and other requirements that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to us. Generally, the amount of dividend distributions that may be paid by a regulated subsidiary without prior approval by state regulatory authorities is limited based on the entity's level of statutory net income and statutory capital and surplus. Our regulated subsidiaries are required to maintain minimum capital requirements prescribed by various regulatory authorities in each of the states in which we operate. During the six months endedJune 30, 2022 , we received dividends of$500 million from and made$428 million of capital contributions to our regulated subsidiaries. For our subsidiaries that file with theNational Association of Insurance Commissioners (NAIC), the aggregate risk-based capital (RBC) level as ofDecember 31, 2021 , which was the most recent date for which reporting was required, was in excess of 350% of the Authorized Control Level. We intend to continue to maintain an aggregate RBC level in excess of 350% of the Authorized Control Level during 2022. Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended (Knox -Keene ), certain of ourCalifornia subsidiaries must comply with tangible net equity (TNE) requirements. Under these Knox-Keene TNE requirements, actual net worth less certain unsecured receivables and intangible assets must be more than the greater of (i) a fixed minimum amount, (ii) a minimum amount based on premiums or (iii) a minimum amount based on healthcare expenditures, excluding capitated amounts. Under the New York StateDepartment of Health Codes, Rules and Regulations Title 10, Part 98, ourNew York subsidiary must comply with contingent reserve requirements. Under these requirements, net worth based upon admitted assets must equal or exceed a minimum amount based on annual net premium income.
The NAIC has adopted rules which set minimum RBC requirements for insurance
companies, managed care organizations and other entities bearing risk for
healthcare coverage. As of
compliance with the RBC requirements enacted in those states.
As a result of the above requirements and other regulatory requirements, certain
of our subsidiaries are subject to restrictions on their ability to make
dividend payments, loans or other transfers of cash to their parent companies.
Such restrictions, unless amended or waived or unless regulatory approval is
granted, limit the use of any cash generated by these subsidiaries to pay our
obligations. The maximum amount of dividends that can be paid by our insurance
company subsidiaries without prior approval of the applicable state insurance
departments is subject to restrictions relating to statutory surplus, statutory
income and unassigned surplus.
34
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CENTENE CORPORATION REPORTS SECOND QUARTER 2022 RESULTS
health Even well-intended laws can’t protect us from inaccurate provider directories
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