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, committed to helping people live
healthier lives, with an established expertise in lower-income and medically
complex populations. We provide access to high-quality healthcare, innovative
programs, and a wide range of health solutions that help families and
individuals get well, stay well, and be well. We believe that our local approach
enables us to provide accessible, quality, culturally sensitive healthcare
coverage to our communities.
Results of operations depend on our ability to manage expenses associated with
health benefits (including estimated costs incurred) and selling, general and
administrative (SG&A) costs. We measure operating performance based upon two key
ratios. The health benefits ratio (HBR) represents medical costs as a percentage
of premium revenues, excluding premium tax revenues that are separately billed,
and reflects the direct relationship between the premiums received and the
medical services provided. The SG&A expense ratio represents SG&A costs as a
percentage of premium and service revenues, excluding premium taxes separately
billed.
Value Creation Plan
We established our Value Creation Plan to drive margin expansion by leveraging
our scale and generating sustainable, profitable growth. In addition to creating
shareholder value, this plan is an ongoing effort to modernize and improve how
we work in order to propel our organization to new levels of success and elevate
the member and provider experiences. During the first quarter of 2023, we
completed the following key milestones in our Value Creation Plan:
•Completed the divestitures of Magellan Specialty Health , Centurion, our prison
healthcare business, and HealthSmart, our third-party health plan administration
business.
•Completed $377 million of common stock repurchases in the first quarter of 2023
through our stock repurchase program, which were funded through divestiture
proceeds and free cash flow generated from operations. In addition, in April
2023 , we completed an additional $200 million of common stock repurchases.
•Completed operating model changes initiated in 2022, including streamlining
call center management and utilization management.
•Initiated standardization of our pharmacy operating model.
•Launched our cloud-based, next-gen clinical population health platform.
Segments Update
In early 2023, and in conjunction with our updated strategic plan, executive leadership realignment, and corresponding 2023 divestitures, we have revised the way we manage the business, evaluate performance, and allocate resources, resulting in an updated segment structure comprised of (1) a Medicaid segment, (2) a Medicare segment, (3) a Commercial segment and (4) an Other segment. We began reporting under this new segment structure in 2023. Prior year information has been adjusted to reflect the change in segment reporting.
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. 18 -------------------------------------------------------------------------------- Table of Contents In contrast to previous executive and legislative efforts to restrict or limit certain provisions of the Affordable Care Act (ACA), the American Rescue Plan Act (ARPA), enacted inMarch 2021 , contained provisions aimed at leveraging Medicaid and theHealth Insurance Marketplace to expand health insurance coverage and affordability to consumers. The ARPA authorized an additional$1.9 trillion in federal spending to address the COVID-19 public health emergency (PHE), and contained several provisions designed to increase coverage of certain healthcare services, expand eligibility and benefits, incentivize state Medicaid expansion, and adjust federal financing for state Medicaid programs, the ultimate impact of which remain uncertain. The ARPA initially enhanced eligibility for the advance premium tax credit for enrollees in theHealth Insurance Marketplace , which was extended through the 2025 tax year by the Inflation Reduction Act, enacted inAugust 2022 .
In
family glitch in the ACA, which relates to determining who is eligible for
premium subsidies. We see this as a significant step in making Marketplace more
affordable for working families.
The COVID-19 pandemic has impacted and may continue to affect our business. The Families First Coronavirus Response Act, enacted inMarch 2020 , increased federal matching rates for state Medicaid programs with a requirement that states suspend Medicaid redeterminations throughout the PHE. As a result, since the onset of the PHE, our Medicaid membership has increased by 3.5 million members (excluding new statesNorth Carolina andDelaware and various state product expansions or managed care organization changes). The Consolidated Appropriations Act, 2023, signed into law onDecember 29, 2022 , delinked the Medicaid continuous coverage requirements from the PHE and, as a result, states began Medicaid disenrollments onApril 1, 2023 . Per the Act, redeterminations related to the PHE should be initiated within 12 months, byMarch 31, 2024 , and conclude during the second quarter of 2024. We are taking decisive action to help ensure individuals take the state agency requested action to confirm eligibility in their Medicaid coverage or find other appropriate coverage that is best for themselves and their families. 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. Although Medicaid continuous coverage requirements were decoupled from the PHE, we are working to prepare for other provisions still tied to the end of the PHE which expiresMay 11, 2023 , including COVID costs and coverage requirements, various other payment structures and electronic prescribing of controlled substances. We have more than three decades of experience, spanning seven presidents from both sides of the aisle, in delivering high-quality healthcare services on behalf of states and the federal government to under-insured and uninsured families, commercial organizations, and military families. This expertise has allowed us to deliver cost-effective services to our government partners and our members. While healthcare experts maintain a focus on personalized healthcare technology, we continue to make strategic decisions to accelerate the development of new software platforms and analytical capabilities. We continue to believe we have both the capacity and capability to successfully navigate industry changes to the benefit of our members, customers, and shareholders.
First Quarter 2023 Highlights
Our financial performance for the first quarter of 2023 is summarized as
follows:
•Managed care membership of 28.5 million, an increase of 2.2 million members, or
8% year-over-year.
•Total revenues of
•Premium and service revenues of
year-over-year.
•HBR of 87.0%, compared to 87.3% for the first quarter of 2022.
•SG&A expense ratio of 8.6%, compared to 8.0% for the first quarter of 2022.
•Adjusted SG&A expense ratio of 8.5%, compared to 7.7% for the first quarter of
2022.
•Operating cash flows of
•Adjusted diluted earnings per share (EPS) of
first quarter of 2022.
19
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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 March 31,
2023 2022
GAAP diluted EPS attributable to Centene $ 2.04 $ 1.44
Amortization of acquired intangible assets 0.33 0.34
Acquisition and divestiture related expenses 0.04 0.16
Other adjustments (1) (0.09) -
Income tax effects of adjustments (2) (0.21) (0.11)
Adjusted diluted EPS $ 2.11 $ 1.83
(1) Other adjustments include the following pre-tax items:
2023:
(a)
share (
share (
2022:
(b) Costs related to the PBM legal settlement of
(
(2) The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment. In addition, the three months endedMarch 31, 2023 , includes a one-time income tax benefit of$69 million , or$0.13 per share, resulting from the distribution of long-term stock awards to the estate of the Company's former CEO.
Current and Future Operating Drivers
The following items contributed to our results of operations as compared to the
previous year:
Medicaid
•In
contract awarded by the
members with quality healthcare, coordinated services, and benefits.
•In
for the statewide Medicaid managed care programs.
•InJanuary 2023 , our subsidiary,Louisiana Healthcare Connections , commenced the Medicaid contract awarded by theLouisiana Department of Health to continue administering quality, integrated healthcare services to members across the state. •InJanuary 2023 , our subsidiary,Managed Health Services , commenced the contract awarded by theIndiana Department of Administration to continue serving Hoosier Healthwise and Health Indiana Plan members with Medicaid and Medicaid alternative managed care and care coordination services.
•In
the state's transition from managed care to a single pharmacy benefits
management (PBM).
•InJuly 2022 , our subsidiary,Home State Health , commenced the MO HealthNet Managed Care General Plan and Specialty Plan contracts. Under the General Plan,Home State Health continues to serve multiple MO HealthNet programs includingChildren's Health Insurance members and the state's newly implemented Medicaid expansion population, across all regions ofMissouri . Additionally, as the sole provider of the newly awarded Specialty Plan,Home State Health now serves approximately 53,500 foster children and children receiving adoption subsidy assistance. •Beginning in 2020, the federal government issued a PHE which suspended Medicaid eligibility redeterminations. The ongoing suspensions, which were extended toApril 2023 , have driven increased membership. 20
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Medicare
•Medicare membership declined year-over-year due to lower annual enrollment.
Commercial
•In 2023, ourHealth Insurance Marketplace product,Ambetter Health , expanded intoAlabama and extended its footprint by more than 60 counties across 12 existing states. In total, the Marketplace plan is available in more than 1,500 counties across 28 states. Additionally, Marketplace membership increased year-over-year due to the expanded footprint, strong product positioning and open enrollment results, as well as overall market growth.
Other
•In
Centurion, our prison healthcare business, and HealthSmart, our third-party
health plan administration business.
•In
of the
•InNovember 2022 , we completed the divestiture of our ownership stakes in our Spanish and Central European businesses, includingRibera Salud , Torrejón Salud, andPro Diagnostics Group .
•In
We expect the following items to impact our future results of operations:
Medicaid
•InApril 2023 , eligibility redeterminations related to the PHE began. These redeterminations will extend over a 14-month period and are expected to conclude in the second quarter of 2024. In addition to delinking the Medicaid continuous enrollment provision from the PHE, the year-end spending bill also outlines key coverage expansion provisions, includingChildren's Health Insurance Program (CHIP) coverage. The provision requires states to provide 12 months of continuous coverage for children under Medicaid and CHIP effectiveJanuary 2024 and made the state option to extend coverage for postpartum women for up to 12 months permanent.
•In
Expansion, presenting a growth opportunity in our existing market.
•InDecember 2022 , our subsidiary,Health Net of California , was selected by theCalifornia Department of Health Care Services for direct Medicaid contracts in 10 counties, includingLos Angeles (in which a portion will be subcontracted). The contracts are anticipated to begin inJanuary 2024 . •InSeptember 2022 , our subsidiary, Nebraska Total Care, was awarded theNebraska Department of Health and Human Services statewide Medicaid managed care contract. Under the new contract, Nebraska Total Care will continue serving the state's Medicaid Managed Care Program, known asHeritage Health . The new contract term is five years and includes the option for two, one-year renewals. The contract is anticipated to begin inJanuary 2024 , subject to the resolution of third-party protests. •InSeptember 2022 , our subsidiary,Superior HealthPlan (Superior), was awarded a new, six-year contract by theTexas Health and Human Services Commission to continue providing youth in foster care with healthcare coverage through the STAR Health Medicaid program. Superior has been the sole provider ofSTAR Health coverage since the program launched in 2008. The contract is anticipated to begin inSeptember 2023 . •InAugust 2022 , our subsidiary,Magnolia Health Plan (Magnolia), was awarded theMississippi Division of Medicaid contract. Under the new contract, Magnolia will continue serving the state's Coordinated Care Organization Program, which will consist of the Mississippi Coordinated Access Network and theMississippi CHIP. The contract is anticipated to begin inJuly 2023 , subject to the resolution of third-party protests. 21 -------------------------------------------------------------------------------- Table of Contents •InAugust 2021 , our subsidiaries,Carolina Complete Health and WellCare ofNorth Carolina , were selected to coordinate physical and/or other health services with Local Management Entities/Managed Care Organizations under the state's new Tailored Plans. The Tailored Plans, which are expected to launch inOctober 2023 , are integrated health plans designed for individuals with significant behavioral health needs and intellectual/developmental disabilities.
Medicare
•InOctober 2022 , theCenters for Medicare and Medicaid Services (CMS) published updatedMedicare Star quality ratings for the 2023 rating year, which impacts the 2024 revenue year. The decrease in Star quality ratings is driven by the expiration of certain disaster relief provisions as well as deterioration in select metrics. Over the past year, our leadership team launched a multi-year plan to build and improve quality across the enterprise with a strong focus on enhanced patient experience and access to care. We expect to begin to see the results of these efforts with the 2024 rating year (2025 revenue year).
Other
•We continue to execute on Value Creation Plan initiatives including the award
of the new PBM contract commencing in 2024, portfolio review, real estate
optimization, stock and debt repurchases, along with an ongoing focus on quality
improvement actions. We expect these actions will drive future margin expansion,
create shareholder value, and improve the experience for our members and
providers.
22
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MEMBERSHIP FromMarch 31, 2022 toMarch 31, 2023 , we increased our managed care membership by 2.2 million, or 8%. The following table sets forth our membership by line of business: March 31, 2023 December 31, 2022 March 31, 2022 Traditional Medicaid (1) 14,521,100 14,264,800 13,590,100 High Acuity Medicaid (2) 1,801,200 1,710,000 1,682,800 Total Medicaid (4) 16,322,300 15,974,800 15,272,900 Commercial Marketplace 3,093,600 2,076,100 2,031,000 Commercial Group 437,200 441,100 449,700 Total Commercial 3,530,800 2,517,200 2,480,700 Medicare (3) (4) 1,343,800 1,511,100 1,452,500 Medicare PDP 4,459,300 4,226,000 4,169,700 Total at-risk membership 25,656,200 24,229,100 23,375,800 TRICARE eligibles 2,799,300 2,832,300 2,862,400 Total 28,455,500 27,061,400 26,238,200
(1) Membership includes Temporary Assistance for Needy Families (TANF), Medicaid Expansion,
(2) Membership includes Aged, Blind, or Disabled (ABD), Intellectual and Developmental Disabilities (IDD), Long-Term Services and
Supports (LTSS), and Medicare-Medicaid Plans (MMP) Duals.
(3) Membership includes Medicare Advantage and Medicare Supplement.
(4) Membership includes 1,323,000, 1,291,300, and 1,231,500 Dual Eligible Special Needs Plans (D-SNP) beneficiaries for the periods
ending
23
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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 months endedMarch 31, 2023 and 2022, prepared in accordance with generally accepted accounting principles inthe United States (GAAP).
Summarized comparative financial data for the three months ended
and 2022 is as follows ($ in millions, except per share data in dollars):
Three Months Ended March 31,
2023 2022 % Change
Premium $ 33,825 $ 31,889 6 %
Service 1,127 2,343 (52) %
Premium and service revenues 34,952 34,232 2 %
Premium tax 3,937 2,953 33 %
Total revenues 38,889 37,185 5 %
Medical costs 29,434 27,838 6 %
Cost of services 870 1,988 (56) %
Selling, general and administrative expenses 3,011 2,745 10 %
Depreciation expense 142 156 (9) %
Amortization of acquired intangible assets 183 199 (8) %
Premium tax expense 4,011 3,006 33 %
Impairment 20 - n.m.
Earnings from operations 1,218 1,253 (3) %
Investment and other income 353 52 n.m.
Debt extinguishment - 3 n.m.
Interest expense (180) (160) (13) %
Earnings before income tax 1,391 1,148 21 %
Income tax expense 261 296 (12) %
Net earnings 1,130 852 33 %
(Earnings) loss attributable to noncontrolling interests - (3) n.m.
Net earnings attributable to
$ 849 33 % Diluted earnings per common share attributable to Centene Corporation $ 2.04$ 1.44 42 % n.m.: not meaningful 24
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Three Months Ended
Total Revenues
The following table sets forth supplemental revenue information for the three
months ended
2023 2022 % Change
Medicaid $ 26,164 $ 24,076 9 %
Commercial 5,252 4,132 27 %
Medicare (1) 5,876 5,757 2 %
Other 1,597 3,220 (50) %
Total Revenues $ 38,889 $ 37,185 5 %
(1) Medicare includes Medicare Advantage, Medicare Supplement, D-SNPs, and Medicare Prescription Drug Plan
(PDP).
Total revenues increased 5% in the three months endedMarch 31, 2023 over the corresponding period in 2022, driven by 52% membership growth in the Marketplace business due to strong product positioning and open enrollment results, as well as overall market growth; organic Medicaid growth, primarily due to the ongoing suspension of eligibility redeterminations; and increased Medicaid premium tax revenue. The decrease in Other revenue was driven by recent divestitures.
Operating Expenses
Medical Costs/HBR
The HBR for the three months endedMarch 31, 2023 , was 87.0%, compared to 87.3% in the same period in 2022. The HBR for the first quarter of 2023 was favorably impacted by continued disciplined Marketplace pricing and lower utilization in Medicare, partially offset by updated Medicaid return of premium payable revenue estimates related to prior periods.
Cost of Services
Cost of services decreased by$1.1 billion in the three months endedMarch 31, 2023 , compared to the corresponding period in 2022. The cost of service ratio for the three months endedMarch 31, 2023 , was 77.2%, compared to 84.8% in the same period in 2022. The decreases were driven by recent divestitures.
Selling, General & Administrative Expenses
The SG&A expense ratio was 8.6% for the first quarter of 2023, compared to 8.0% in the first quarter of 2022. The adjusted SG&A expense ratio was 8.5% for the first quarter of 2023, compared to 7.7% in the first quarter of 2022. The increases were driven by growth in the Marketplace business, which operates at a higher SG&A ratio. Impairment During the first quarter of 2023, we recorded impairment charges of$20 million for additional impairments related to our ongoing real estate optimization initiatives, consisting of leased and owned real estate assets and related fixed assets. 25 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense)
The following table summarizes the components of other income (expense) for the
three months ended
2023 2022
Investment and other income $ 353 $ 52
Debt extinguishment - 3
Interest expense (180) (160)
Other income (expense), net $ 173 $ (105)
Investment and other income. Investment and other income increased by $301
million in the three months ended March 31, 2023 compared to the corresponding
period in 2022, driven by increased interest rates and the $79 million Magellan
Specialty Health divestiture gain.
Debt extinguishment. During the first quarter of 2022, we recognized an
immaterial gain related to the redemption of Magellan's outstanding Senior
Notes.
Interest expense. Interest expense increased by$20 million in the three months endedMarch 31, 2023 , compared to the corresponding period in 2022. The increase was driven by increased interest rates.
Income Tax Expense
For the three months endedMarch 31, 2023 , we recorded income tax expense of$261 million on pre-tax earnings of$1.4 billion , or an effective tax rate of 18.8%. The effective tax rate for the first quarter of 2023 reflects the tax effects of the distribution of long-term stock awards to the estate of the Company's former CEO as well as theMagellan Specialty Health gain. For the first quarter of 2023, our effective tax rate on adjusted earnings was 24.3%. For the three months endedMarch 31, 2022 , we recorded an income tax expense of$296 million on pre-tax earnings of$1.1 billion , or an effective tax rate of 25.8%. For the first quarter of 2022, our effective tax rate on adjusted earnings was 25.1%.
Results of Operations and Financial Condition – Form 8-K
Report of the Supervisory Board for the financial year 2021
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