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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. As a result, in 2022 we have
incurred $1.6 billion related to the impairment of leased and owned real estate
and related fixed assets. We incurred impairments of $763 million related to
owned real estate, $574 million related to leased real estate, and $237 million
related to associated fixed assets. We anticipate additional future charges of
approximately $100 million related to real estate optimization. This represents
an approximate 70% decrease in domestic leased space and is expected to result
in annualized lease expense savings of approximately $200 million .
Additionally, as part of our ongoing portfolio review, during 2022 we completed
the divestiture of PANTHERx Rare (PANTHERx) and entered into definitive
agreements to sell Magellan Rx as well as our ownership stakes in our Spanish
and Central European businesses. In preparation for these transactions as well
as planning for the future, our Board of Directors authorized a $3.0 billion
increase to our stock repurchase program and a new $1.0 billion debt repurchase
program during the second quarter of 2022.
During the nine months ended September 30, 2022 , we have repurchased $1.4
billion of Centene common stock through the stock repurchase program, exclusive
of the $200 million unsettled portion under the ASR, and $259 million of our
senior notes through the debt repurchase program. As of September 30, 2022 , $2.2
billion was available under the stock repurchase program and $753 million was
available under the debt repurchase program.
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During the fourth quarter of 2022, we signed a multi-year contract with Express
Scripts, Inc. to provide our pharmacy benefit services, commencing in 2024. The
new pharmacy benefits management (PBM) contract is expected to drive significant
value in 2024 and beyond.
COVID-19 Trends and Uncertainties
The impact of COVID-19 on our business in both the short-term and long-term is uncertain and difficult to predict. The outlook for the remainder of 2022 depends on future developments, including but not limited to: the length and severity of the outbreak (including new variants, which may be more contagious, more severe or less responsive to treatment or vaccines), the effectiveness of containment actions, the timing and effectiveness of vaccinations and achievement of herd immunity, and the timing and rate at which members return to accessing healthcare. The pandemic and these future developments have impacted and will continue to affect our membership and medical utilization. From the onset of the pandemic inMarch 2020 , our Medicaid membership has increased by 3.0 million members (excluding the newNorth Carolina andMissouri membership). The public health emergency (PHE) extension for COVID-19 has been extended toJanuary 2023 with redeterminations eligible to begin inFebruary 2023 . However, the PHE may be extended beyondJanuary 2023 . 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. 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 . The Inflation Reduction Act, enacted onAugust 16, 2022 , extended the enhanced eligibility for the advance premium tax credit for Marketplace members through the 2025 tax year.
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.
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.
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Third Quarter 2022 Highlights
Our financial performance for the third quarter of 2022 is summarized as
follows:
•Managed care membership of 26.8 million, an increase of 1.2 million members, or
5% year-over-year.
•Total revenues of
•Premium and service revenues of
year-over-year.
•HBR of 88.3%, compared to 88.1% for the third quarter of 2021.
•SG&A expense ratio of 8.4%, compared to 8.3% for the third quarter of 2021.
•Adjusted SG&A expense ratio of 8.3%, compared to 8.1% for the third quarter of
2021.
•Operating cash flows of
•Adjusted diluted earnings per share (EPS) of
third quarter of 2021.
A reconciliation from GAAP diluted EPS to adjusted diluted EPS is highlighted
below, and additional detail is provided above under the heading "Non-GAAP
Financial Presentation":
Three Months Ended September 30,
2022 2021
GAAP diluted EPS attributable to Centene $ 1.27 $ 0.99
Amortization of acquired intangible assets 0.36 0.34
Acquisition and divestiture related expenses 0.05 0.09
Other adjustments (1) (0.38) 0.01
Income tax effects of adjustments (2) - (0.17)
Adjusted diluted EPS $ 1.30 $ 1.26
(1) Other adjustments include the following pre-tax items:
(a) for the three months endedSeptember 30, 2022 : PANTHERx divestiture gain of$490 million , or$0.84 per share ($0.65 after-tax), the impairment of assets associated with the pending divestiture of the Spanish and Central European businesses of$165 million , or$0.28 per share ($0.23 after-tax), real estate impairments of$127 million , or$0.22 per share ($0.16 after-tax), an 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 ($0.01 after-tax), gain on debt extinguishment related to the repurchases of senior notes of$10 million , or$0.02 per share ($0.01 after-tax), and an adjustment to the costs related to the PBM legal settlement of$1 million , or$0.00 per share ($0.00 after-tax); (b) for the three months endedSeptember 30, 2021 : non-cash gain related to the acquisition of the remaining 60% interest ofCircle Health of$309 million , or$0.52 per share ($0.52 after-tax), non-cash impairment of our equity method investment in RxAdvance of$229 million , or$0.38 per share ($0.35 after-tax), debt extinguishment costs of$79 million , or$0.13 per share ($0.10 after-tax), PBM legal settlement expense of$11 million , or$0.02 per share ($0.01 after-tax), and severance costs due to a restructuring of$1 million , or$0.00 per share ($0.00 after-tax).
(2) The income tax effects of adjustments are based on the effective income tax
rates applicable to each adjustment.
Current and Future Operating Drivers
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 ourHealth Insurance Marketplace product,Ambetter Health , into five new states, as well as expanded coverage to 274 new counties across 13 existing states. We now serve members in 27 states across the country in 1,480 counties. Additionally, we introduced three newAmbetter Health product offerings to address growing needs of our members: Ambetter Value, Ambetter Select, and Ambetter Virtual Access. 24
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•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
•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. •Missouri. 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 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 51,000 foster children and children receiving adoption subsidy assistance. •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 . •Ohio. InOctober 2022 ,Ohio pharmacy services were carved out in connection with the state's transition of pharmacy services from managed care to a single PBM.
•PANTHERx. In
The divestiture illustrates our continued progress on the Value Creation Plan.
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 2021 rating year (2022 revenue year).
We expect the following items to impact to our future results of operations:
•We have continued to execute on key Value Creation Plan initiatives including the award of the new PBM contract commencing in 2024, the portfolio review, real estate optimization, stock and debt repurchases, along with ongoing focus on quality improvement actions. We expect these actions will drive future margin expansion, create shareholder value, and improve the experience for our members and providers. •InOctober 2022 , we announced that ourHealth Insurance Marketplace product,Ambetter Health , will expand intoAlabama and extend its footprint by more than 60 counties across 12 existing states in 2023. We also announced our updated brand name,Ambetter Health , reflecting our commitment to putting better health at the forefront of our mission. In total, the Marketplace plan will be available in more than 1,500 counties across 28 states in 2023. •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). 25 -------------------------------------------------------------------------------- Table of Contents •InSeptember 2022 ,Centene's Nebraska 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 ,Centene's Texas 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 , we announcedCalifornia Department of Health Care Services awarded our subsidiary,Health Net of California , contracts to continue serving members in nine counties acrossCalifornia . However,Health Net of California was not awarded contracts inLos Angeles ,Sacramento andKern counties. We are actively protesting the decision to protect our members and their access to quality healthcare. The contracts are anticipated to begin inJanuary 2024 , subject to the resolution of the protest process. •InAugust 2022 ,Centene's Mississippi 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 the Mississippi Children's Health Insurance Program. The contract is anticipated to begin inJuly 2023 , subject to the resolution of third-party protests. •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. •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 begin inJanuary 2023 . •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, pending regulatory approvals. •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 begin inJanuary 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 . •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 inApril 2023 , are integrated health plans designed for individuals with significant behavioral health needs and intellectual/developmental disabilities.
•In
Medicaid contract by the
members with quality healthcare, coordinated services, and benefits. The
contract is expected to commence in
•We expect Medicaid eligibility redeterminations to begin in
although it could be further extended.
•We may be negatively impacted by potential Medicaid state rate actions and risk
corridor mechanisms as a result of the COVID-19 pandemic.
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MEMBERSHIP FromSeptember 30, 2021 toSeptember 30, 2022 , we increased our managed care membership by 1.2 million, or 5%. The following table sets forth our membership by line of business: September 30, December 31, September 30, 2022 2021 2021 Traditional Medicaid (1) 14,000,100 13,328,400 13,202,500 High Acuity Medicaid (2) 1,698,100 1,686,100 1,566,000 Total Medicaid 15,698,200 15,014,500 14,768,500 Commercial Marketplace 2,087,800 2,140,500 2,177,000 Commercial Group 439,800 462,100 468,500 Total Commercial 2,527,600 2,602,600 2,645,500 Medicare (3) 1,517,900 1,252,200 1,248,300 Medicare PDP 4,186,200 4,070,500 4,064,400 Total at-risk membership (4) 23,929,900 22,939,800 22,726,700 TRICARE eligibles 2,832,300 2,874,700 2,874,700 Total 26,762,200 25,814,500 25,601,400
(1) Membership includes Temporary Assistance for Needy Families (TANF), Medicaid Expansion,
(CHIP),
(2) Membership includes Aged, Blind, and Disabled (ABD), Intellectual and Developmental Disabilities (IDD), Long-Term Services and
Supports (LTSS), and Medicare-Medicaid Plans (MMP) Duals.
(3) Membership includes Medicare Advantage and Medicare Supplement.
(4) Membership includes 1,285,600, 1,178,000, and 1,168,400 dual-eligible beneficiaries for the periods ending
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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 nine months endedSeptember 30, 2022 and 2021, prepared in accordance with generally accepted accounting principles inthe United States . Summarized comparative financial data for the three and nine months endedSeptember 30, 2022 and 2021 is as follows ($ in millions, except per share data in dollars): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 % Change 2022 2021 % Change Premium$ 31,848 $ 28,876 10 %$ 95,247 $ 83,436 14 % Service 1,878 1,638 15 % 6,679 4,054 65 % Premium and service revenues 33,726 30,514 11 % 101,926 87,490 17 % Premium tax 2,139 1,892 13 % 7,060 5,924 19 % Total revenues 35,865 32,406 11 % 108,986 93,414 17 % Medical costs 28,111 25,430 11 % 83,261 73,210 14 % Cost of services 1,571 1,355 16 % 5,658 3,510 61 % Selling, general and administrative expenses 2,846 2,537 12 % 8,391 6,910 21 % Depreciation expense 150 147 2 % 470 414 14 % Amortization of acquired intangible assets 211 198 7 % 609 581 5 % Premium tax expense 2,211 1,965 13 % 7,258 6,129 18 % Impairment 289 229 26 % 1,739 229 n.m. Legal settlement - - n.m. - 1,250 n.m. Earnings from operations 476 545 (13) % 1,600 1,181 35 % Investment and other income 692 424 63 % 786 566 39 % Debt extinguishment 10 (79) n.m. 26 (125) n.m. Interest expense (169) (170) 1 % (491) (503) 2 % Earnings before income tax 1,009 720 40 % 1,921 1,119 72 % Income tax expense 269 139 94 % 500 376 33 % Net earnings 740 581 27 % 1,421 743 91 % (Earnings) loss attributable to noncontrolling interests (2) 3 n.m. (6) 5
n.m.
Net earnings attributable to Centene Corporation$ 738 $ 584 26 %$ 1,415 $ 748 89 % Diluted earnings per common share attributable to Centene Corporation$ 1.27 $ 0.99 28 %$ 2.41 $ 1.27 90 % n.m.: not meaningful 28
-------------------------------------------------------------------------------- Table of Contents Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 Total Revenues
The following table sets forth supplemental revenue information for the three
months ended
2022 2021 % Change
Medicaid $ 23,293 $ 21,624 8 %
Commercial 4,292 4,383 (2) %
Medicare (1) 5,639 4,322 30 %
Other 2,641 2,077 27 %
Total Revenues $ 35,865 $ 32,406 11 %
(1) Medicare includes Medicare Advantage, Medicare Supplement, and Medicare Prescription Drug Plan (PDP).
Total revenues increased 11% in the three months endedSeptember 30, 2022 over the corresponding period in 2021, driven by organic Medicaid growth, primarily due to the ongoing suspension of eligibility redeterminations, 22% membership growth in the Medicare business, and our acquisition of Magellan, partially offset by the PANTHERx divestiture.
Operating Expenses
Medical Costs/HBR
The HBR for the three months endedSeptember 30, 2022 , was 88.3%, compared to 88.1% in the same period in 2021. The HBR for the third quarter of 2022 was unfavorably impacted by a return to more normalized Medicaid utilization compared to the third quarter of 2021. The increase is partially offset by the impact of Marketplace and Medicare healthcare affordability initiatives as well as disciplined Marketplace pricing.
Cost of Services
Cost of services increased by$216 million in the three months endedSeptember 30, 2022 , compared to the corresponding period in 2021, driven by the Magellan business, partially offset by the PANTHERx divestiture. The cost of service ratio for the three months endedSeptember 30, 2022 , was 83.7%, compared to 82.7% in the same period in 2021. The increase in the cost of service ratio was driven by recent acquisitions and divestitures.
Selling, General & Administrative Expenses
The SG&A expense ratio was 8.4% for the third quarter of 2022, compared to 8.3% in the third quarter of 2021. The adjusted SG&A expense ratio was 8.3% for the third quarter of 2022, compared to 8.1% in the third quarter of 2021. The increases were due to the addition of Magellan, which operates at a higher SG&A expense ratio due to the nature of its business, and the PANTHERx divestiture. Increases were also driven by costs associated with Medicare marketing and value creation investment spending, partially offset by savings due to real estate optimization efforts and the leveraging of expenses over higher revenues as a result of increased membership.
Impairment
During the third quarter of 2022, we recorded impairment charges of$289 million , including a$165 million charge related to assets associated with the pending divestiture of the Spanish and Central European businesses and$124 million of additional impairments related to our ongoing real estate optimization initiatives, consisting of leased and owned real estate assets and related fixed assets. During the third quarter of 2021, we recorded a$229 million non-cash impairment of our equity method investment in RxAdvance, a pharmacy benefit manager. The impairment was the result of our focus on simplification of our pharmacy operations. 29 -------------------------------------------------------------------------------- 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 $ 692 $ 424
Debt extinguishment 10 (79)
Interest expense (169) (170)
Other income (expense), net $ 533 $ 175
Investment and other income. Investment and other income increased by $268
million in the three months ended September 30, 2022 compared to the
corresponding period in 2021, driven by the $490 million PANTHERx divestiture
gain and higher interest rates. 2021 included a $309 million gain related to the
acquisition of the remaining 60% interest of Circle Health .
Debt extinguishment. In the third quarter of 2022, we repurchased $83 million of
our 4.25% Senior Notes due 2027 and $176 million of our 4.625% Senior Notes due
2029 through our debt repurchase program, resulting in a pre-tax gain on
extinguishment of $10 million .
In August 2021 , we redeemed all of our outstanding 5.375% Senior Notes due 2026
and all of WellCare Health Plans, Inc.'s outstanding 5.375% Senior Notes due
2026, including all premiums and accrued interest. We recognized a pre-tax loss
on extinguishment of $79 million , including the call premium, the write-off of
the unamortized premium and debt issuance costs, and expenses related to the
redemptions.
Interest expense. Interest expense decreased by
ended
Income Tax Expense
For the three months endedSeptember 30, 2022 , we recorded income tax expense of$269 million on pre-tax earnings of$1.0 billion , or an effective tax rate of 26.6%. For the third quarter of 2022, our effective tax rate on adjusted earnings was 26.3%. For the three months endedSeptember 30, 2021 , we recorded an income tax expense of$139 million on a pre-tax earnings of$720 million , or an effective tax rate of 19.3%. The effective tax rate for the third quarter of 2021 reflects the non-taxable gain related to the acquisition of the remaining 60% interest ofCircle Health . For the third quarter of 2021, our effective tax rate on adjusted earnings was 24.5%.
Segment Results
The following table summarizes our consolidated operating results by segment for
the three months ended
2022 2021 % Change
Total Revenues
Managed Care $ 33,724 $ 30,889 9 %
Specialty Services 5,407 4,727 14 %
Eliminations (3,266) (3,210) (2) %
Consolidated Total $ 35,865 $ 32,406 11 %
Earnings from Operations
Managed Care $ 527 $ 699 (25) %
Specialty Services (51) (154) 67 %
Consolidated Total $ 476 $ 545 (13) %
Managed Care
Total revenues increased 9% in the three months ended
compared to the corresponding period in 2021. The increase was due to organic
Medicaid growth, partially due to the ongoing suspension of eligibility
redeterminations and
30 -------------------------------------------------------------------------------- Table of Contents membership growth in the Medicare business. Earnings from operations decreased$172 million between years primarily as a result of the previously discussed asset impairments and a return to more normalized Medicaid utilization compared to the third quarter of 2021.
Specialty Services
Total revenues increased 14% in the three months endedSeptember 30, 2022 , compared to the corresponding period in 2021, primarily due to our acquisition of Magellan, partially offset by the divestiture of PANTHERx. Earnings from operations increased$103 million in the three months endedSeptember 30, 2022 , compared to the corresponding period in 2021, primarily due to the prior year impairment of our equity method investment in RxAdvance, a pharmacy benefit manager, in addition to favorable Magellan operations.
Nine Months Ended
2021
Total Revenues
The following table sets forth supplemental revenue information for the nine
months ended
2022 2021 % Change
Medicaid $ 69,827 $ 62,612 12 %
Commercial 12,980 12,391 5 %
Medicare (1) 17,035 13,125 30 %
Other 9,144 5,286 73 %
Total Revenues $ 108,986 $ 93,414 17 %
(1) Medicare includes Medicare Advantage, Medicare Supplement, and Medicare PDP.
Total revenues increased 17% in the nine months endedSeptember 30, 2022 , over the corresponding period in 2021 primarily due to Medicaid membership growth resulting from the ongoing suspension of eligibility redeterminations, membership growth in the Medicare business, our acquisitions ofMagellan and Circle Health , the commencement of our contracts inNorth Carolina , additional premium tax revenue and retroactive state directed payments, partially offset by the PANTHERx divestiture. Operating Expenses Medical Costs/HBR The HBR for the nine months endedSeptember 30, 2022 was 87.4%, compared to 87.7% in the same period in 2021. The HBR for 2022 was positively impacted by Marketplace and Medicare healthcare affordability initiatives as well as disciplined Marketplace pricing. These impacts were partially offset by a return to more normalized Medicaid utilization compared to 2021.
Cost of Services
Cost of services increased by$2.1 billion in the nine months endedSeptember 30, 2022 , compared to the corresponding period in 2021, driven by the Magellan business, partially offset by the PANTHERx divestiture. The cost of service ratio for the nine months endedSeptember 30, 2022 , was 84.7%, compared to 86.6% in the same period in 2021. The decrease in the cost of service ratio was driven by recent acquisitions and divestitures. 31 -------------------------------------------------------------------------------- Table of Contents Selling, General & Administrative Expenses The SG&A expense ratio for the nine months endedSeptember 30, 2022 was 8.2%, compared to 7.9% for the corresponding period in 2021. The adjusted SG&A expense ratio for the nine months endedSeptember 30, 2022 was 8.1%, compared to 7.7% for the nine months endedSeptember 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. Increases were also driven by costs associated with Medicare marketing, value creation investment spending, and variable compensation. These impacts were partially offset by the leveraging of expenses over higher revenues as a result of increased membership and reduced restructuring charges compared to 2021.
Impairment
During the nine months endedSeptember 30, 2022 , we recorded total impairment charges of$1.7 billion primarily driven by$1.6 billion associated with our ongoing real estate optimization initiative, consisting of leased and owned real estate assets and related fixed assets, along with a$165 million charge related to assets associated with the pending divestiture of the Spanish and Central European businesses.
During the third quarter of 2021, we recorded a
of our equity method investment in RxAdvance, a pharmacy benefit manager.
Legal Settlement
During the second quarter of 2021, we recorded a legal settlement reserve estimate of$1.25 billion (inclusive of the 13 states with which we have reached no-fault agreements) related to services provided byEnvolve Pharmacy Solutions, Inc. (Envolve ), our PBM subsidiary, essentially during 2017 and 2018.
Other Income (Expense)
The following table summarizes the components of other income (expense) for the
nine months ended
2022 2021
Investment and other income $ 786 $ 566
Debt extinguishment 26 (125)
Interest expense (491) (503)
Other income (expense), net $ 321 $ (62)
Investment and other income. Investment and other income increased by $220
million in the nine months ended September 30, 2022 , compared to the
corresponding period in 2021, driven by the $490 million PANTHERx divestiture
gain and higher interest rates on larger investment balances, partially offset
by decreases in the performance of our deferred compensation investment fund
portfolio, which fluctuate with their underlying investments. The losses from
our deferred compensation portfolio were substantially offset by decreases in
deferred compensation expense, recorded in SG&A expense.
Debt extinguishment. In the third quarter of 2022, we repurchased $83 million of
our 4.25% Senior Notes due 2027 and $176 million of our 4.625% Senior Notes due
2029 through our debt repurchase program, resulting in a pre-tax gain on
extinguishment of $10 million . In May 2022 , we recognized a $13 million pre-tax
gain on the extinguishment of debt related to the refinancing of debt for our of
Circle Health subsidiary. The 2022 debt extinguishment also includes an
immaterial gain related to the redemption of Magellan's outstanding Senior Notes
in January 2022 .
In August 2021 , we redeemed all of our outstanding 5.375% Senior Notes due 2026
and all of WellCare Health Plans, Inc.'s outstanding 5.375% Senior Notes due
2026, including all premiums and accrued interest. We recognized a pre-tax loss
on extinguishment of $79 million , including the call premium, the write-off of
the unamortized premium and debt issuance costs, and expenses related to the
redemptions. In February 2021 , we tendered or redeemed all of our outstanding
$2.2 billion 4.75% Senior Notes, due 2025 and recognized a pre-tax loss on
extinguishment of approximately $46 million . The loss includes the call premium
and the write-off of unamortized premium and debt issuance costs.
Interest expense. Interest expense decreased by $12 million in the nine months
ended September 30, 2022 , compared to the corresponding period in 2021, driven
by our 2022 and 2021 refinancing actions.
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Income Tax Expense
For the nine months ended September 30, 2022 , we recorded income tax expense of
$500 million on pre-tax earnings of $1.9 billion , or an effective tax rate of
26.0%. For the nine months ended September 30, 2022 , our effective tax rate on
adjusted earnings was 26.2%. For the nine months ended September 30, 2021 , we
recorded income tax expense of $376 million on pre-tax earnings of $1.1 billion ,
or an effective tax rate of 33.6%, which reflects the partial non-deductibility
of the legal settlement reserve.
Segment Results
The following table summarizes our consolidated operating results by segment for
the nine months ended
2022 2021 % Change
Total Revenues
Managed Care $ 101,434 $ 89,082 14 %
Specialty Services 17,497 13,553 29 %
Eliminations (9,945) (9,221) (8) %
Consolidated Total $ 108,986 $ 93,414 17 %
Earnings from Operations
Managed Care $ 1,634 $ 1,240 32 %
Specialty Services (34) (59) 42 %
Consolidated Total $ 1,600 $ 1,181 35 %
Managed Care
Total revenues increased 14% in the nine months ended September 30, 2022 ,
compared to the corresponding period in 2021, driven by organic Medicaid growth,
partially due to the ongoing suspension of eligibility redeterminations,
membership growth in the Medicare business, our recent acquisition of Circle
Health , the commencement of our contracts in North Carolina , along with premium
tax revenue and retroactive state directed payments. Earnings from operations
increased $394 million between years primarily as a result of Medicaid and
Medicare membership growth, 2021 risk adjustment in 2022, lower traditional
utilization in the Marketplace business, profitability growth in the PDP
business, and the acquisition of Circle Health , partially offset by the $1.7
billion pre-tax real estate impairment. 2021 was negatively impacted by the
legal settlement reserve estimate of $1.25 billion related to services provided
by Envolve and higher utilization in the Marketplace business in 2021.
Specialty Services
Total revenues increased 29% in the nine months endedSeptember 30, 2022 , compared to the corresponding period in 2021, resulting primarily from our acquisition of Magellan, increased services associated with membership growth in the Managed Care segment, and new contracts in our correctional business. Earnings from operations increased$25 million in the nine months endedSeptember 30, 2022 , compared to the corresponding period in 2021, primarily due to favorable Magellan operations and the prior year impairment of our equity method investment in RxAdvance, a pharmacy benefit manager, partially offset by declining operations in our PBM business and a non-recurring item in our federal services business. LIQUIDITY AND CAPITAL RESOURCES
Shown below is a condensed schedule of cash flows used in the discussion of
liquidity and capital resources ($ in millions).
Nine
Months Ended
2022 2021
Net cash provided by operating activities $ 7,837 $ 3,530
Net cash used in investing activities (3,142) (2,442)
Net cash (used in) provided by financing activities (2,465) 1,597
Effect of exchange rate changes on cash and cash equivalents (37) (8)
Net increase in cash, cash equivalents, and restricted cash and
cash equivalents $ 2,193 $ 2,677
33
-------------------------------------------------------------------------------- Table of Contents Cash Flows Provided by Operating Activities Normal operations are funded primarily through operating cash flows and borrowings under our revolving credit facility. Operating activities provided cash of$7.8 billion in the nine months endedSeptember 30, 2022 , compared to providing cash of$3.5 billion in the comparable period in 2021. Cash flows provided by operations in 2022 were driven by net earnings before the non-cash real estate impairment charge, an increase in medical claims liabilities, and increases in unearned revenue and accounts payable due to the early receipt of payments from CMS. 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$3.1 billion in the nine months endedSeptember 30, 2022 , and$2.4 billion in the comparable period in 2021. Cash flows used in investing activities in 2022 primarily consisted of net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments) and our acquisition of Magellan, partially offset by our PANTHERx divestiture proceeds. 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. We spent$771 million and$662 million in the nine months endedSeptember 30, 2022 and 2021, respectively, on capital expenditures for system enhancements, market growth, and our corporate and regional buildings. As ofSeptember 30, 2022 , our investment portfolio consisted primarily of fixed-income securities with an average duration of 3.4 years. We had unregulated cash and cash equivalents of$436 million atSeptember 30, 2022 , including$49 million in our international subsidiaries, 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.
Cash Flows Used in Financing Activities
Financing activities used cash of$2.5 billion in the nine months endedSeptember 30, 2022 , compared to providing cash of$1.6 billion in the comparable period in 2021. Financing activities in 2022 were driven by stock repurchases of$1.6 billion through our stock repurchase program, the redemption of Magellan's outstanding debt of$535 million assumed in the transaction using Magellan's cash on hand, and senior note debt repurchases of$259 million . In 2021, net financing activities were driven by costs associated with our debt refinancing, 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 , for a total$4.0 billion . We have approximately$2.2 billion remaining under the program for repurchases as ofSeptember 30, 2022 . InJuly 2022 , we remitted$1.0 billion upon entering into an accelerated share repurchase (ASR) agreement to repurchase our common stock under our stock repurchase program using a portion of the proceeds from the PANTHERx divestiture. At inception, we received an initial delivery of approximately 8.6 million shares representing 80% of the$1.0 billion notional amount. InOctober 2022 , an additional 3.0 million shares were delivered upon settlement of the ASR based upon the volume-weighted average price (VWAP) over the term of the agreement, less a discount. In total, 11.6 million shares were purchased through the$1.0 billion ASR. During the quarter, we also repurchased an additional 2.9 million shares of common stock for$240 million under the stock repurchase program and repurchased$259 million of our par value senior notes, for$247 million , under the debt repurchase program. 34 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 30, 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 restrictive covenants. As ofSeptember 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 ofSeptember 30, 2022 , we had$120 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 ofSeptember 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$211 million as ofSeptember 30, 2022 , which were not part of our revolving credit facility. The letters of credit bore weighted interest of 0.6% as ofSeptember 30, 2022 . In addition, we had outstanding surety bonds of$1.4 billion as ofSeptember 30, 2022 . AtSeptember 30, 2022 , we had working capital, defined as current assets less current liabilities, of$1.9 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. AtSeptember 30, 2022 , our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 41.8%, compared to 41.2% atDecember 31, 2021 . Excluding$181 million of non-recourse debt, our debt to capital ratio was 41.6% as ofSeptember 30, 2022 , compared to$184 million and 40.9% atDecember 31, 2021 . The debt to capital ratio increase was driven by stock repurchases in the quarter. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.
2022 Expectations
During the remainder of 2022, we expect to receive net dividends from our insurance subsidiaries of approximately$511 million and spend approximately$300 million in additional capital expenditures. InOctober 2022 , we made additional purchases of$66 million through our stock repurchase program and$58 million of our par value senior notes for$53 million through our debt repurchase program. If the previously announced divestiture of Magellan Rx closes in 2022, we would have additional proceeds to utilize for additional stock repurchases and debt reduction. Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our Revolving Credit Facility will be sufficient to finance our general operations and capital expenditures for at least 12 months from the date of this filing. While we are currently in a strong liquidity position and believe we have adequate access to capital, we may elect to increase borrowings on our Revolving Credit Facility. From time to time we may elect to raise additional funds for these and other purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. In addition, we may strategically pursue refinancing or redemption opportunities to extend maturities and/or improve terms of our indebtedness if we believe such opportunities are favorable to us. We intend to continue to evaluate strategic actions in connection with our Value Creation Plan, targeting initiatives to improve productivity, efficiencies and reduced organizational costs, as well as capital deployment activities, including stock repurchases, portfolio optimization and the evaluation of refinancing opportunities. In addition to creating shareholder value, this plan encompasses a larger organizational mission to enhance our member and provider experience, improve outcomes for our members, and to initiate new ways of doing business that makeCentene a great partner in all aspects of our operations. 35
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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 nine months endedSeptember 30, 2022 , we received dividends of$773 million from and made$627 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.
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