Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including those set forth under Part I, Item 1A."Risk Factors" of this Form 10-K. The following discussion and analysis does not include certain items related to the year ended December 31, 2017, including year-to-year comparisons between the year ended December 31, 2018 and the year ended December 31, 2017. For a comparison of our results of operations for the fiscal years ended December 31, 2018 and December 31, 2017, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 19, 2019.

EXECUTIVE OVERVIEW

General

We are a leading multi-national healthcare enterprise that is committed to helping people live healthier lives. We take a local approach - with local brands and local teams - to provide fully integrated, high-quality, and cost-effective services to government-sponsored and commercial healthcare programs, focusing on under-insured and uninsured individuals.

Results of operations depend on our ability to manage expenses associated with health benefits (including estimated costs incurred) and selling, general and administrative (SG&A) costs. We measure operating performance based upon two key ratios. The health benefits ratio (HBR) represents medical costs as a percentage of premium revenues, excluding premium tax and health insurer fee revenues that are separately billed, and reflects the direct relationship between the premiums received and the medical services provided. The SG&A expense ratio represents SG&A costs as a percentage of premium and service revenues, excluding premium tax and health insurer fee revenues that are separately billed.

Our insurance subsidiaries are subject to the Affordable Care Act annual health insurer fee (HIF), absent a HIF moratorium. The Affordable Care Act (ACA) imposed the HIF in 2018, however the HIF was suspended in 2019. In 2018, we recognized revenue for reimbursement of the HIF, including the "gross-up" to reflect the non-deductibility of the HIF. Collectively, this revenue is recorded as premium tax and health insurer fee revenue in the Consolidated Statements of Operations. For certain products, premium taxes, state assessments and the HIF are not pass-through payments and are recorded as premium revenue and premium tax expense or health insurer fee expense in the Consolidated Statements of Operations. Due to the size of the HIF fee, one of the primary drivers of the year-over-year variances discussed throughout this section is related to the moratorium in 2019.

WellCare Acquisition

On January 23, 2020, we acquired all of the issued and outstanding shares of WellCare Health Plans, Inc. (WellCare) (the WellCare Acquisition). The transaction is valued at approximately $19.6 billion, including the assumption of $1.95 billion of outstanding debt. Consideration for the acquisition consisted of Centene common shares valued at $11.4 billion (based on Centene's stock price of $66.76), $6.08 billion in cash, and $95 million related to the fair value of replacement equity awards associated with pre-combination service. Each WellCare share was converted into 3.38 of a validly issued, fully paid, non-assessable shares of Centene common stock and $120.00 in cash. In total, 171 million shares of Centene common stock were issued to the WellCare stockholders. The cash portion of the acquisition consideration was funded through the issuance of long-term debt in December 2019. We issued approximately $1.0 billion 4.75% Senior Notes due 2025 (the Additional 2025 Notes), $2.5 billion 4.25% Senior Notes due 2027 (the 2027 Notes), and $3.5 billion 4.625% Senior Notes due 2029 (the 2029 Notes). The net proceeds of the 2027 Notes and the 2029 Notes and a portion of the net proceeds of the Additional 2025 Notes were used to finance the cash consideration.

The WellCare Acquisition brings a high-quality Medicare platform and further extends our robust Medicaid offerings. The combination enables us to provide access to more comprehensive and differentiated solutions across more markets with a continued focus on affordable, high-quality, culturally-sensitive healthcare services.

Immediately prior to the closing of the WellCare Acquisition, Anthem, Inc. acquired WellCare's Missouri Medicaid health plan, a WellCare Missouri Medicare Advantage health plan, and WellCare's Nebraska Medicaid health plan. CVS Health Corporation acquired portions of Centene's Illinois Medicaid and Medicare Advantage health plans as part of previously announced divestiture agreements.

Fidelis Care Acquisition

On July 1, 2018, we acquired substantially all of the assets of New York State Catholic Health Plan, Inc., d/b/a Fidelis Care New York (Fidelis Care) for approximately $3.6 billion of cash consideration, including a working capital adjustment. Due to the size of the acquisition, one of the primary drivers of the year-over-year variances discussed throughout this section for the year ended December 31, 2019, is related to the acquisition of Fidelis Care.

International

In Spain, in June 2019, we purchased an additional 40% ownership in Ribera Salud from Banco Sabadell for $54 million, bringing our total ownership to 90%. In December 2019, our Spanish subsidiary, Ribera Salud, acquired 93% of Hospital Povisa, S.A., a private hospital in the Vigo region of Spain.

Regulatory Trends and Uncertainties

The United States government, politicians, and healthcare experts continue to discuss and debate various elements of the United States healthcare payment model. From the constitutionality of the Affordable Care Act, to Medicare for All (single payer), to pharmacy pricing structures, all areas of healthcare are being challenged to assure adequate healthcare is delivered to all segments of the population.

During this time of deliberation, we remain focused on the promise of delivering access to high quality, affordable healthcare to all of our members and believe we are well positioned to meet the needs of the changing healthcare landscape. We have more than three decades of experience, spanning six presidents from both sides of the aisle, in delivering high-quality healthcare services on behalf of states and the federal government to under-insured and uninsured families, commercial organizations and military families. This expertise has allowed us to deliver cost effective services to our government sponsors and our members. While healthcare experts maintain focus on personalized healthcare technology, we continue to make strategic decisions to accelerate development of new software platforms and analytical capabilities. We continue to believe we have both the capacity and capability to successfully navigate industry changes to the benefit of our members, customers and shareholders.

For additional information regarding regulatory trends and uncertainties, see Part I, Item 1 "Business - Regulation" and Item 1A, "Risk Factors."

2019 Highlights

Our financial performance for 2019 is summarized as follows:

•	Year-end managed care membership of 15.2 million, an increase of 1.1 million members, or 8% over 2018.

•	Total revenues of $74.6 billion, representing 24% growth year-over-year.

•	HBR of 87.3% for 2019, compared to 85.9% for 2018.

•	SG&A expense ratio of 9.3% for 2019, compared to 10.7% for 2018.

•	Adjusted SG&A expense ratio of 9.2% for 2019, compared to 10.0% for 2018.

•	Diluted EPS of $3.14 for 2019, compared to $2.26 for 2018.

•	Adjusted Diluted EPS of $4.42 for 2019, compared to $3.54 for 2018.

•	Operating cash flows of $1.5 billion, or 1.1 times net earnings, for 2019.

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":

	Year Ended December 31,
	2019				2018
GAAP diluted EPS attributable to Centene	$	3.14			$	2.26
Amortization of acquired intangible assets	0.47				0.41
Acquisition related expenses	0.19				0.81
Other adjustments (1)	0.62				0.06
Adjusted Diluted EPS	$	4.42			$	3.54

(1)	Other adjustments include the following items:

•	2019 - non-cash goodwill and intangible asset impairment of $271 million or $0.57 per diluted share, net of an income tax benefit of $0.08 and debt extinguishment costs of $30 million or $0.05 per diluted share, net of an income tax benefit of $0.02; and

•	2018 - the impact of retroactive changes to the California minimum medical loss ratio (MLR) of $30 million of expense or $0.06 per diluted share, net of an income tax benefit of $0.02.

The 2018 results include the following items, which in the aggregate had no net effect on diluted EPS:

•	During the year ended December 31, 2018, we received 2014-2017 cost reconciliation information related to the California Medicaid in-home support services (IHSS) program, which ended December 31, 2017. As a result, our 2018 results include an estimated pre-tax benefit of $140 million related to the IHSS program reconciliation.

•

On September 30, 2018, our contract to provide health care coordination services to the U.S. Department of Veterans Affairs under the Patient-Centered Community Care and Veterans Choice Programs expired. In connection with the conclusion of the contract, during the year ended December 31, 2018, we recorded a pre-tax charge of $110 million for negotiated settlements and severance costs. We will continue to provide close out and transition services through 2021.

•	During the year ended December 31, 2018, we recorded pre-tax expense of $30 million associated with a contribution commitment to our charitable foundation.

The following items contributed to our revenue and membership growth in 2019:

•	Arizona. In October 2018, our Arizona subsidiary, Health Net Access, began providing physical and behavioral health care services under a new integrated contract through the Arizona Health Care Cost Containment System Complete Care program in the Central and Southern regions.

•	Arkansas. In February 2018, our Arkansas subsidiary, Arkansas Total Care, began managing a Medicaid special needs population comprised of people with high behavioral health needs and individuals with developmental/intellectual disabilities. Arkansas Total Care assumed full-risk on this population in March 2019.

•	CMG. In March 2018, we completed the acquisition of CMG, an at-risk primary care provider serving Medicaid, Medicare Advantage, and Health Insurance Marketplace patients in Florida.

•

Correctional. In July 2019, Centurion began operating under a contract to provide comprehensive healthcare services to inmates housed in Arizona's state prison system, and also began operating under a re-awarded contract to continue the provision of mental and dental health services to the Georgia Department of Correction's state prison facilities. In February 2019, Centurion began operating under a new contract to provide comprehensive healthcare services to detainees of the Metropolitan Detention Center located in Albuquerque, New Mexico. In December 2018, Centurion began operating under a new contract to provide comprehensive healthcare services to detainees of Volusia County detention facilities located near Daytona, Florida. In July 2018, Centurion began operating under a contract to provide healthcare services for correctional facilities in Pima County, Arizona. In April 2018, we completed the acquisition of MHM, a national provider of healthcare and staffing services to correctional systems and other government agencies. Under the terms of the agreement, Centene also acquired the remaining 49% ownership of Centurion, the correctional healthcare services joint venture between Centene and MHM. In addition, during 2018, Centurion's contracts for correctional facilities were reprocured in New Hampshire and Tennessee.

•	Fidelis Care. In July 2018, we completed the acquisition of substantially all of the assets of Fidelis Care for $3.6 billion of cash consideration, making Fidelis Care Centene's health plan in New York State.

•	Florida. In December 2018, our Florida subsidiary, Sunshine Health, began providing physical and behavioral healthcare services through Florida's Statewide Medicaid Managed Care Program under its new five year contract which was implemented for all 11 regions by February 2019.

•

Health Insurance Marketplace. In January 2019, we expanded our offerings in the 2019 Health Insurance Marketplace. We entered Pennsylvania, North Carolina, South Carolina, and Tennessee, and expanded our footprint in six existing markets: Florida, Georgia, Indiana, Kansas, Missouri, and Texas. In January 2018, we expanded our offerings in the 2018 Health Insurance Marketplace. We entered Kansas, Missouri and Nevada, and expanded our footprint in the following six existing markets: Florida, Georgia, Indiana, Ohio, Texas, and Washington.

•	Health Net Federal Services. In January 2018, our subsidiary, Health Net Federal Services, began operating under the TRICARE West Region contract to provide administrative services to Military Health System eligible beneficiaries.

•	HealthSmart. In May 2019, we acquired HealthSmart, a third party administrator providing customizable and scalable health plan solutions for self-funded employers, universities and colleges, and Native American Tribal Enterprises. Services include plan administration, care management and wellness programs, network, casualty claim, and pharmacy benefit solutions.

•	Illinois. In January 2018, our Illinois subsidiary, IlliniCare Health, began operating under a state-wide contract for the Medicaid Managed Care Program. Implementation dates varied by region and the contract was fully implemented statewide in April 2018.

•	Interpreta. In March 2018, we acquired an additional 61% ownership in Interpreta, a clinical and genomics data analytics business, bringing our total ownership to 80%.

•	Iowa. In July 2019, our Iowa subsidiary, Iowa Total Care, Inc., began operating under a new statewide contract for the IA Health Link Program.

•	Kansas. In January 2019, our Kansas subsidiary, Sunflower Health Plan, continued providing managed care services to KanCare beneficiaries statewide under a new contract.

•	Medicare. In January 2019, we expanded our Medicare offerings, entering Illinois and New Mexico. In January 2018, we expanded our offerings in Medicare. We entered Arkansas, Indiana, Kansas, Louisiana, Missouri, Pennsylvania, South Carolina, and Washington and expanded our footprint in Ohio.

•	New Hampshire. In September 2019, our New Hampshire subsidiary, NH Healthy Families, began operating under a new five-year contract to continue to provide service to Medicaid enrollees statewide.

•	New Mexico. In January 2019, our New Mexico subsidiary, Western Sky Community Care, began operating under a new statewide contract in New Mexico for the Centennial Care 2.0 Program.

•	Pennsylvania. In January 2018, our Pennsylvania subsidiary, Pennsylvania Health and Wellness, began serving enrollees in the Community HealthChoices program as part of the statewide contract that was fully implemented in January 2020.

•	QualChoice. In April 2019, we completed the acquisition of QCA Health Plan, Inc. and QualChoice Life and Health Insurance Company, Inc. The acquisition expands our footprint in Arkansas by adding additional members primarily through commercial products.

•

Spain. In December 2019, our Spanish subsidiary, Ribera Salud, acquired 93% of Hospital Povisa, S.A., a private hospital in the Vigo region of Spain. In June 2019, Primero Salud, acquired additional ownership in Ribera Salud, increasing our ownership in the Spanish healthcare company from 50% to 90%. In December 2018, Primero Salud acquired 89% of Torrejón Salud, a public-private partnership in the Community of Madrid.

•

Washington. In January 2018, our Washington State subsidiary, Coordinated Care of Washington, began providing managed care services to Apple Health's Fully Integrated Managed Care beneficiaries in the North Central Region. This integration continued into 2019 with the addition of the Greater Columbia, King and Pierce Regions going live January 2019, followed by the North Sound Region in July 2019.

•	In addition, we realized the full year benefit in 2019 of acquisitions, investments, and business commenced during 2018.

The growth items listed above were partially offset by the following items:

•	Beginning January 1, 2019, Health Net of Arizona, Inc. began discontinuing and non-renewing all of its Employer Group plans for small and large business groups in Arizona. The effective date of coverage termination for existing groups is dependent on remaining renewals; however, coverage is no longer provided to any group policyholders and/or members as of December 31, 2019.

•	In 2018, we were successful in reprocuring our contracts in Mississippi, New Hampshire and Washington. However, the Medicaid programs were expanded to include additional insurers, which has reduced our market share.

•	We no longer serve Medicaid and correctional members in Massachusetts.

•	Effective October 2018, we no longer provide health care coordination services to veterans under the Patient-Centered Community Care and Veterans Choice Programs.

•	Beginning in January 2018, the State of California no longer includes costs for IHSS in its Medicaid contracts.

We expect the following items to contribute to our revenue or future growth potential:

•	We expect to realize the full year benefit in 2020 of acquisitions, investments, and business commenced during 2019, as discussed above.

•	In February 2020, we began operating in Illinois under the first phase of an expanded contract for the Medicaid Managed Care Program. The expanded contract includes children who are in need through the Department of Children and Family Services/Youth Care by the Illinois Department of Healthcare and Family Services and Foster Care.

•

In January 2020, we completed the WellCare Acquisition. The WellCare Acquisition brings a high-quality Medicare platform and further extends our robust Medicaid offerings. The WellCare Acquisition is a key part of our growth as we become one of the nation's largest sponsors of government health coverage. The transaction is valued at approximately $19.6 billion, including the assumption of $1.95 billion of outstanding debt.

•	In January 2020, we expanded our offerings in the Health Insurance Marketplace in ten existing markets: Arizona, Florida, Georgia, Kansas, North Carolina, Ohio, South Carolina, Tennessee, Texas and Washington.

•

In January 2020, our Louisiana subsidiary, Louisiana Healthcare Connections, began operating under a one-year emergency contract extension in response to protested contract awards. Louisiana's state procurement officer overturned the Louisiana Department of Health's plan to award Medicaid contracts to four health plans, excluding our Louisiana subsidiary. According to the chief procurement officer, the state health department failed to follow state law or its own evaluation and bid guidelines in its award.

•

In November 2019, our Texas subsidiary, Superior HealthPlan, was awarded by the Texas Health and Human Services Commission a contract to continue to provide healthcare services to enrollees in the state's STAR+PLUS program. The contract is expected to be effective on September 1, 2020, and will allow Superior HealthPlan to offer coverage in two new service areas, for a total of nine service areas.

•

In October 2019, our North Carolina joint venture, Carolina Complete Health, was awarded an additional service area to provide Medicaid managed care services in Region 4. With the addition of this new Region, Carolina Complete Health will provide Medicaid managed care services in three contiguous regions: Region 3, 4 and 5. The new three-year contract is expected to commence in the second half of 2020.

•	In October 2018, CMS published updated Medicare Star quality ratings for the 2019 rating year. Our Star ratings returned to a 4.0 Star parent rating. The 2019 rating year will positively affect quality bonus payments for Medicare Advantage plans in 2020.

The future growth items listed above are partially offset by the following items:

•	In January 2020, in connection with the WellCare Acquisition, we completed the divestiture of certain products in our Illinois health plan, including the Medicaid and Medicare Advantage lines of business.

•	Effective December 2019, we no longer serve under the state-wide correctional contract in New Mexico.

•	In October 2019, CMS published updated Medicare Star quality ratings for the 2020 rating year. Approximately 46% of our Medicare members are in a 4 star or above plan for the 2021 bonus year, compared to approximately 86% for the 2020 bonus year. Our quality bonus and rebates may be negatively impacted in 2021.

•

In July 2019, our Oregon subsidiary, Trillium Community Health Plan, was notified by the Oregon Health Authority (OHA) of its intent to award Trillium Community Health Plan an expanded contract to serve as a coordinated care organization for six counties in the state; however, an additional competitor was added to Lane County. As a result, our membership is expected to decrease. Pending successful completion of OHA's readiness review and additional contract negotiations, the contract is expected to begin July 2020.

MEMBERSHIP

From December 31, 2018 to December 31, 2019, we increased our managed care membership by 1.1 million, or 8%. The following table sets forth our membership by line of business:

	December 31
	2019			2018
Medicaid:
TANF, CHIP & Foster Care	7,528,700			7,356,200
ABD & LTSS	1,043,500			1,002,100
Behavioral Health	66,500			36,500
Total Medicaid	8,638,700			8,394,800
Commercial	2,331,100			1,978,000
Medicare (1)	404,500			416,900
International	599,800			151,600
Correctional	180,000			151,300
Total at-risk membership	12,154,100			11,092,600
TRICARE eligibles	2,860,700			2,858,900
Non-risk membership	227,000			219,700
Total	15,241,800			14,171,200
(1) Membership includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and Medicare-Medicaid Plans (MMP).

The following table sets forth additional membership statistics, which are included in the membership information above:

	December 31
	2019			2018
Dual-eligible (2)	639,200			598,200
Health Insurance Marketplace	1,805,200			1,459,100
Medicaid Expansion	1,346,700			1,262,100
(2) Membership includes dual-eligible ABD & LTSS and dual-eligible Medicare membership in the table above.

From December 31, 2018 to December 31, 2019, our membership increased as a result of:

•	membership growth in our Health Insurance Marketplace business;

•	international acquisitions; and

•	expansions and new programs in many of our states.

RESULTS OF OPERATIONS

The following discussion and analysis is based on our Consolidated Statements of Operations, which reflect our results of operations for years ended December 31, 2019, and 2018, respectively, prepared in accordance with generally accepted accounting principles in the United States ($ in millions, except per share data in dollars):

	2019				2018				% Change 2018-2019
Premium	$	67,439			$	53,629			26	%
Service	2,925				2,806				4	%
Premium and service revenues	70,364				56,435				25	%
Premium tax and health insurer fee	4,275				3,681				16	%
Total revenues	74,639				60,116				24	%
Medical costs	58,862				46,057				28	%
Cost of services	2,465				2,386				3	%
Selling, general and administrative expenses	6,533				6,043				8	%
Amortization of acquired intangible assets	258				211				22	%
Premium tax expense	4,469				3,252				37	%
Health insurer fee expense	—				709				n.m.
Goodwill and intangible impairment	271				—				n.m.
Earnings from operations	1,781				1,458				22	%
Other income (expense):
Investment and other income	443				253				75	%
Debt extinguishment costs	(30		)		—				n.m.
Interest expense	(412		)		(343		)		(20	)%
Earnings from operations, before income tax expense	1,782				1,368				30	%
Income tax expense	473				474				—	%
Net earnings	1,309				894				46	%
Loss attributable to noncontrolling interests	12				6				100	%
Net earnings attributable to Centene Corporation	$	1,321			$	900			47	%
Diluted earnings per common share attributable to Centene Corporation:	$	3.14			$	2.26			39	%

n.m.: not meaningful

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Total Revenues

The following table sets forth supplemental revenue information for the year ended December 31, ($ in millions):

	2019				2018				% Change 2018-2019
Medicaid	$	50,404			$	39,427			28	%
Commercial	14,747				12,391				19	%
Medicare (1)	5,675				5,093				11	%
Other	3,813				3,205				19	%
Total Revenues	$	74,639			$	60,116			24	%
(1) Medicare includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and MMP.

Total revenues increased 24% in the year ended December 31, 2019, over the corresponding period in 2018, primarily due to the acquisition of Fidelis Care, growth in the Health Insurance Marketplace business, and expansions and new programs in many of our states in 2018 and 2019, particularly Arkansas, Illinois, Iowa, New Mexico and Pennsylvania. These increases were partially offset by the health insurer fee moratorium in 2019. Total revenues also increased due to at-risk, state directed and pass through payments of approximately $825 million from the State of California and pass through payments of approximately $531 million from the State of New York. During the twelve months ended December 31, 2019, we received Medicaid premium rate adjustments which yielded a net 2% composite change across all of our markets.

Operating Expenses

Medical Costs

Results of operations depend on our ability to manage expenses associated with health benefits and to accurately estimate costs incurred. The HBR represents medical costs as a percentage of premium revenues, excluding premium tax and health insurer fee revenues that are separately billed, and reflects the direct relationship between the premiums received and the medical services provided.

The HBR for the year ended December 31, 2019 was 87.3%, an increase of 140 basis points over the comparable period in 2018. The HBR increase was primarily attributable to the Health Insurance Marketplace business where margins have normalized, as expected, from the favorable performance in 2018 and the health insurer fee moratorium. Also, the 2018 HBR benefited from the recognition of the IHSS program reconciliation.

Cost of Services

Cost of services increased by $79 million in the year ended December 31, 2019, compared to the corresponding period in 2018. The cost of service increase is primarily attributable to the operations of newly acquired businesses, partially offset by the Veterans Affairs contract expiration, effective October 2018.

The cost of service ratio for the year ended December 31, 2019 was 84.3%, compared to 85.0% in 2018. The decrease in the cost of service ratio was primarily due to the Veterans Affairs contract expiration.

Selling, General and Administrative Expenses

SG&A increased by $490 million in the year ended December 31, 2019, compared to the corresponding period in 2018. The SG&A increase was primarily attributable to the acquisition of Fidelis Care, expansions, new programs, and growth in many of our states in 2019, including growth in the Health Insurance Marketplace business, partially offset by a decrease in acquisition related costs.

The SG&A expense ratio was 9.3% for the year ended December 31, 2019, compared to 10.7% for the year ended December 31, 2018. The year-over-year decrease was primarily due to $336 million of lower acquisition related expenses. The Adjusted SG&A expense ratio was 9.2% for the year ended December 31, 2019, compared to 10.0% for the year ended December 31, 2018. Both ratios decreased due to the acquisition of Fidelis Care, which operates at a lower SG&A expense ratio, the Veterans Affairs contract expiration in 2018, and lower variable compensation costs in 2019.

Health Insurer Fee Expense

As a result of the health insurer fee moratorium, which suspended the health insurance provider fee for the 2019 calendar year, we did not record HIF expense for the year ended December 31, 2019, compared to $709 million for the year ended December 31, 2018.

Goodwill and Intangible Impairment

In 2019, we recorded $271 million, or $0.57 per diluted share, of non-cash goodwill and intangible asset impairment. Substantially all of the impairment is associated with our USMM physician home health business and was identified as part of our third quarter review procedures, which included an analysis of new information related to our shared savings demonstration programs, slower than expected penetration of the physician home health business model into our Medicaid population, and the related impact to revised forecasts. The business continues to generate positive cash flows and plays an important role in care management; however, it has fallen short of our overall performance expectations.

Other Income (Expense)

The following table summarizes the components of other income (expense) for the year ended December 31, ($ in millions):

	2019				2018
Investment and other income	$	443			$	253
Debt extinguishment costs	(30		)		—
Interest expense	(412		)		(343		)
Other income (expense), net	$	1			$	(90	)

Investment and other Income. Investment and other income increased by $190 million for year ended December 31, 2019 compared to 2018. The increase in investment income in 2019 reflects higher investment balances over 2018, including the proceeds of our $7.0 billion senior note issuance related to the planned financing for the cash consideration for the WellCare Acquisition and the impact of higher investment balances as a result of the Fidelis Care acquisition. The increase also reflects higher interest rates, the Ribera Salud acquisition gain of $16 million, and improved performance associated with our deferred compensation investment portfolio, which fluctuates with its underlying investments. The earnings from our deferred compensation portfolio were substantially offset by increases in deferred compensation expense, recorded in SG&A expense.

Debt Extinguishment costs. In October 2019, we redeemed the outstanding principal balance on the $1,400 million 5.625% Senior Notes due February 15, 2021, plus applicable premium for early redemption and accrued and unpaid interest through the redemption date. We recognized a pre-tax loss on extinguishment of $30 million on the redemption of the $1,400 million 5.625% Senior Notes, including the call premium, the write-off of unamortized debt issuance costs and a loss on the termination of the $600 million interest rate swap agreement associated with the notes.

Interest expense. Interest expense increased by $69 million in the year ended December 31, 2019, compared to the corresponding period in 2018. The increase is driven by a net increase in borrowings related to the issuance of an additional $7.0 billion in senior notes in December 2019, intended primarily to finance the cash consideration of the WellCare Acquisition, and increased borrowings in May 2018 related to the financing of the Fidelis Care acquisition.

The net impact of the $7.0 billion senior notes issued in preparation of the WellCare acquisition was approximately $13 million.

Income Tax Expense

For the year ended December 31, 2019, we recorded income tax expense of $473 million on pre-tax earnings of $1.8 billion, or an effective tax rate of 26.5%, which reflects the impact of the health insurer fee moratorium, partially offset by the non-deductibility of a portion of our non-cash goodwill and intangible impairment recorded in the third quarter of 2019. For the year ended December 31, 2018, we recorded income tax expense of $474 million on pre-tax earnings of $1.4 billion, or an effective tax rate of 34.6%, which reflects the impact of the non-deductibility of the health insurer fee.

Segment Results

The following table summarizes our consolidated operating results by segment for the year ended December 31, ($ in millions):

	2019				2018				% Change 2018-2019
Total Revenues
Managed Care	$	71,379			$	57,099			25	%
Specialty Services	13,781				12,506				10	%
Eliminations	(10,521		)		(9,489		)		(11	)%
Consolidated Total	$	74,639			$	60,116			24	%
Earnings from Operations
Managed Care	$	1,806			$	1,310			38	%
Specialty Services	(25		)		148				(117	)%
Consolidated Total	$	1,781			$	1,458			22	%

Managed Care

Total revenues increased 25% in the year ended December 31, 2019, compared to the corresponding period in 2018, primarily due to the acquisition of Fidelis Care, growth in the Health Insurance Marketplace business, and expansions and new programs in many of our states in 2018 and 2019, particularly Arkansas, Illinois, Iowa, New Mexico and Pennsylvania. These increases were partially offset by the health insurer fee moratorium in 2019. Total revenues also increased due to at-risk, state directed and pass through payments of approximately $825 million from the State of California and pass through payments of approximately $531 million from the State of New York. Earnings from operations increased $496 million between years primarily as a result of the acquisition of Fidelis Care and lower acquisition related expenses, partially offset by the health insurer fee moratorium in 2019.

Specialty Services

Total revenues increased 10% in the year ended December 31, 2019, compared to the corresponding period in 2018, resulting primarily from increased services associated with membership growth in the Managed Care segment and acquisitions, partially offset by the previously mentioned Veterans Affairs contract expiration. Earnings from operations decreased $173 million between years primarily due to the previously discussed non-cash goodwill and intangible impairment and our transition to transparent pharmacy pricing, partially offset by higher costs recognized in 2018 associated with our Veterans Affairs contract expiration. The transparent pricing decrease was offset by higher earnings in our Managed Care segment and reflects our commitment to transparency and more closely aligns the costs of care within each segment.

LIQUIDITY AND CAPITAL RESOURCES

Shown below is a condensed schedule of cash flows for the years ended December 31, 2019 and 2018, used in the discussion of liquidity and capital resources ($ in millions).

	Year Ended December 31,
	2019				2018
Net cash provided by operating activities	$	1,483			$	1,234
Net cash used in investing activities	(1,532		)		(4,585		)
Net cash provided by financing activities	6,832				4,612
Effect of exchange rate changes on cash and cash equivalents	(2		)		—
Net increase in cash, cash equivalents, and restricted cash and equivalents	$	6,781			$	1,261

Cash Flows Provided by Operating Activities

Normal operations are funded primarily through operating cash flows and borrowings under our credit facility. Cash flows from operating activities for 2019 were $1.5 billion, or 1.1 times net earnings, compared to $1.2 billion in 2018. The cash provided by operations in 2019 was primarily due to net earnings and an increase in medical claims liabilities, primarily resulting from growth in the Health Insurance Marketplace business and the commencement or expansion of the Arkansas, Iowa, New Mexico, and Pennsylvania health plans. Operating cash flows were partially offset by an increase in premium and trade receivables due to the timing of payments from our state customers, as discussed below.

The cash provided by operations in 2018 was primarily due to net earnings and an increase in medical claims liabilities, primarily resulting from growth in the Health Insurance Marketplace business. Cash flows were partially offset by an increase in premium and trade receivables of $1.2 billion, due to growth in the business. Additionally, cash flows from operations were negatively affected by the repayment of approximately $1.0 billion of Medicaid expansion rate overpayments and Medicaid expansion minimum MLR rebates in California, which were previously accrued.

Cash flows from operations in each year were impacted by the timing of payments we received from our states. States may prepay the following month premium payment, which we record as unearned revenue, or they may delay our premium payment, which we record as a receivable. We typically receive capitation payments monthly; however, the states in which we operate may decide to adjust their payment schedules which could positively or negatively impact our reported cash flows from operating activities in any given period.

	Year Ended December 31,
	2019				2018
(Increase) decrease in premium and trade receivables	$	(1,076	)		$	(1,173	)
Increase (decrease) in unearned revenue	(9		)		(52		)
Net increase (decrease) in operating cash flow	$	(1,085	)		$	(1,225	)

Cash Flows Used in Investing Activities

Investing activities used cash of $1.5 billion for the year ended December 31, 2019 and $4.6 billion in 2018. Cash flows used in investing activities in 2019 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 capital expenditures.

We spent $730 million and $675 million in the years ended December 31, 2019 and 2018, respectively, on capital expenditures for system enhancements and market and corporate headquarters expansions.

As of December 31, 2019, our investment portfolio consisted primarily of fixed-income securities with a weighted average duration of 3.2 years. We had unregulated cash and investments of $7.2 billion at December 31, 2019, reflecting the net proceeds from our $7.0 billion senior note issuance in advance of the closing of the WellCare Acquisition, compared to $478 million at December 31, 2018. Unregulated cash and investments include private equity investments and company owned life insurance contracts.

Cash flows used in investing activities in 2018 primarily consisted of the Fidelis Care and other acquisitions, 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.

Cash Flows Provided by Financing Activities

Our financing activities provided cash of $6.8 billion in 2019, compared to providing cash of $4.6 billion in 2018. Financing activities in 2019 and 2018 are discussed below.

2019

During 2019, our net financing activities primarily related to the proceeds from the issuance of $7.0 billion of senior notes in December 2019 in preparation of the WellCare Acquisition.

2018

During 2018, our net financing activities primarily related to our offering of $2.8 billion in shares of common stock, par value $0.001 per share, approximately $1.8 billion of 5.375% senior notes at par due 2026, and additional borrowings on our Revolving Credit Facility. Proceeds from both offerings were used to fund the Fidelis Care acquisition which closed on July 1, 2018, to pay related fees and expenses, and for general corporate purposes, including the repayment of outstanding indebtedness.

Liquidity Metrics

Our credit agreement, dated as of September 11, 2019, by and among Centene, Wells Fargo Bank, National Association, as administrative agent, and the lenders from time to time party thereto, provides for (i) a $2.0 billion unsecured multi-currency revolving credit facility (the Revolving Credit Facility) which includes a $300 million sub-limit for letters of credit and a $200 million sub-limit for swingline loans and (ii) a $1.450 billion unsecured delayed-draw term loan facility (the Term Loan Facility, together with the Revolving Credit Facility under the credit agreement, as amended, the Company Credit Facility). Borrowings under our Revolving Credit Facility bear interest, at our option, at LIBOR, EURIBOR, CDOR, BBR or base rates plus, in each case, an applicable margin based on the total debt to EBITDA ratio. Borrowings under the Term Loan Facility bear interest, at our option, at LIBOR or base rates plus, in each case, an applicable margin based on the total debt to EBITDA ratio. Our Revolving Credit Facility will mature on May 7, 2024. The Term Loan Facility will mature on September 11, 2022.

In October 2019, we borrowed $1,450 million under the Term Loan Facility. We also redeemed the outstanding principal balance on the $1,400 million 5.625% Senior Notes due February 15, 2021, plus applicable premium for early redemption and accrued and unpaid interest through the redemption date. We recognized a loss on extinguishment of debt of $30 million on the redemption of the notes in the fourth quarter of 2019, including the call premium, the write-off of unamortized debt issuance costs, and a loss on the termination of the $600 million interest rate swap agreement associated with the note.

In October 2019, our Board of Directors approved a $500 million increase to our Company's stock repurchase program. Under the increased stock repurchase program, we will have flexibility to repurchase shares or pay down debt with the proceeds from divestitures related to the WellCare acquisition.

In December 2019, in connection with the planned financing of the WellCare Acquisition, we issued approximately $1.0 billion 4.75% Senior Notes due 2025 (the Additional 2025 Notes), $2.5 billion 4.25% Senior Notes due 2027 (the 2027 Notes), and $3.5 billion 4.625% Senior Notes due 2029 (the 2029 Notes). The net proceeds of the 2027 Notes and the 2029 Notes and a portion of the net proceeds of the Additional 2025 Notes were used to finance the cash consideration.

The credit agreement underlying our Revolving Credit Facility and Term Loan Facility contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios and maximum debt-to-EBITDA ratios. We are required to not exceed a maximum debt-to-EBITDA ratio of 3.5 to 1.0. As of December 31, 2019, we had $93 million in borrowings outstanding under our Revolving Credit Facility and $1,450 million in borrowings outstanding under our Term Loan Facility and we were in compliance with all covenants. As of December 31, 2019, there were no limitations on the availability under the Revolving Credit Facility as a result of the debt-to-EBITDA ratio.

We have a $200 million non-recourse construction loan to fund the expansion of our corporate headquarters. The loan bears interest based on the one month LIBOR plus 2.70% and matures in April 2021 with an optional one-year extension. The agreement contains financial and non-financial covenants aligning with our Company Credit Facility. We have guaranteed completion of the construction project associated with the loan. As of December 31, 2019, we had $140 million of borrowings outstanding under the loan.

We had outstanding letters of credit of $68 million as of December 31, 2019, which were not part of our Revolving Credit Facility. We also had letters of credit for $27 million (valued at the December 31, 2019 conversion rate), or €24 million, representing our proportional share of the letters of credit issued to support Ribera Salud's outstanding debt, which are a part of the Revolving Credit Facility. Collectively, the letters of credit bore weighted interest of 0.9% as of December 31, 2019. In addition, we had outstanding surety bonds of $611 million as of December 31, 2019.

The indentures governing our various maturities of senior notes contain restrictive covenants of Centene Corporation. As of December 31, 2019, we were in compliance with all covenants.

At December 31, 2019, we had working capital, defined as current assets less current liabilities, of $7,391 million, compared to $27 million at December 31, 2018, reflecting the net proceeds from our $7.0 billion senior note issuance in advance of the closing of the WellCare Acquisition. We manage our short-term and long-term investments with the goal of ensuring that a sufficient portion is held in investments that are highly liquid and can be sold to fund short-term requirements as needed.

At December 31, 2019, our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 52.0%, compared to 37.8% at December 31, 2018. Excluding $194 million of non-recourse debt, our debt to capital ratio was 51.7% as of December 31, 2019, compared to 37.4% at December 31, 2018. At December 31, 2019, excluding non-recourse debt and the senior notes issued to fund the WellCare Acquisition in advance of closing, our debt to capital was 34.3%. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.

We have a stock repurchase program authorizing us to repurchase common stock from time to time on the open market or through privately negotiated transactions. Based on the closing stock price of $66.76 on December 31, 2019, we have 14.2 million available shares remaining under the program for repurchases as of December 31, 2019. No duration has been placed on the repurchase program. We reserve the right to discontinue the repurchase program at any time. We did not make any repurchases under this plan during 2019 or 2018.

During the year ended December 31, 2019 and 2018, we received dividends of $713 million and $475 million, respectively, from our regulated subsidiaries.

2020 Expectations

During 2020, we do not expect to make any material net capital contributions to our insurance subsidiaries and expect to spend approximately $775 million in additional capital expenditures primarily associated with system enhancements and market and corporate headquarters expansions. These amounts exclude any contributions or capital expenditures related to our newly acquired WellCare subsidiaries. Capital contributions and capital expenditures are expected to be funded by unregulated cash flow generation and borrowings on our Revolving Credit Facility and construction loan. However, 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 opportunities to extend maturities and/or improve terms of our indebtedness if we believe such opportunities are favorable to us.

In February 2020, we issued $2,000 million 3.375% Senior Notes due 2030 (the 2030 Notes). We intend to use the net proceeds from the 2030 Notes, together with available cash on hand, to redeem our outstanding $1,000 million 4.75% Senior Notes due 2022 and outstanding $1,000 million 6.125% Senior Notes due 2024, including all premiums, accrued interest and costs and expenses related to the redemption. In connection with this refinancing, we terminated the remaining $2,100 million interest rate swap agreements.

On January 23, 2020, we acquired all of the issued and outstanding shares of WellCare Health Plans, Inc. (WellCare, and such acquisition, the WellCare Acquisition). Total consideration for the acquisition was $17.6 billion, consisting of Centene common shares valued at $11.4 billion (based on Centene's stock price of $66.76), $6.1 billion in cash, and $95 million related to the fair value adjustment to stock based compensation associated with pre-combination service. Each WellCare share was converted into 3.38 of a validly issued, fully paid, non-assessable shares of Centene common stock and $120.00 in cash. In total, 171,225 thousand shares of Centene common stock were issued to the WellCare stockholders. The cash portion of the acquisition consideration was funded through the issuance of long-term debt in December 2019. We issued approximately $1.0 billion 4.75% Senior Notes due 2025 (the Additional 2025 Notes), $2.5 billion 4.25% Senior Notes due 2027 (the 2027 Notes), and $3.5 billion 4.625% Senior Notes due 2029 (the 2029 Notes). The net proceeds of the 2027 Notes and the 2029 Notes and a portion of the net proceeds of the Additional 2025 Notes were used to finance the cash consideration.

In connection with the WellCare Acquisition, in January 2020, we completed an exchange offer for 5.25% Senior Notes due 2025 and 5.375% Senior Notes due 2026 (collectively, the WellCare Notes) issued by WellCare and issued $1,146 million aggregate principal amount of 5.25% Senior Notes due 2025 and $747 million aggregate principal amount of 5.375% Senior Notes due 2026.

Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our Company Credit Facility will be sufficient to finance our general operations and capital expenditures for at least 12 months from the date of this filing.

CONTRACTUAL OBLIGATIONS

The following table summarizes future contractual obligations. These obligations contain estimates and are subject to revision under a number of circumstances. Our debt consists of borrowings from our senior notes, Revolving Credit Facility, Term Loan Facility, mortgages and capital leases. The purchase obligations consist primarily of software purchases and maintenance contracts. The contractual obligations and estimated period of payment over the next five years and beyond are as follows ($ in millions):

	Payments Due by Period
	Total				Less Than 1 Year				1-3 Years				3-5 Years				More Than 5 Years
Medical claims liability	$	7,473			$	7,473			$	—			$	—			$	—
Debt and interest	17,833				669				3,797				2,108				11,259
Lease obligations	1,176				190				330				218				438
Purchase obligations	260				132				93				23				12
Other long-term liabilities (1)	—				—				—				—				—
Total	$	26,742			$	8,464			$	4,220			$	2,349			$	11,709

(1) Our Consolidated Balance Sheet as of December 31, 2019, includes $1,732 million of other long-term liabilities. This consists primarily of long-term deferred income taxes, liabilities under our deferred compensation plan, liabilities related to certain undertakings, reserves for uncertain tax positions and retirement benefit obligations. These liabilities have been excluded from the table above as the timing and/or amount of any cash payment is uncertain.

Commitments

As part of the regulatory approval process in connection with the Fidelis Care Acquisition, we entered into certain undertakings with the New York State Department of Health. These undertakings contain various commitments by us that were effective upon completion of the Fidelis Care Acquisition. One of the undertakings includes a $340 million contribution by us to the State of New York to be paid over a five-year period for initiatives consistent with our mission of providing high quality healthcare to vulnerable populations within New York State. The present value of the contribution to the State of New York, approximately $328 million, was expensed during 2018, and $136 million has been paid through 2019.

In addition, in connection with obtaining regulatory approval of the Health Net acquisition from the California Department of Insurance and the California Department of Managed Health Care, in 2016 we committed to certain undertakings (the California Undertakings). The California Undertakings included, among other items, operational commitments around premiums, dividend restrictions, minimum Risk Based Capital (RBC) levels, local offices, growth, accreditation, HEDIS scores and other quality measures, network adequacy, certifications, investments and capital expenditures. Specifically, we agreed to, among other things:

•	invest an additional $30 million through the California Organized Investment Network over the five years following completion of the acquisition; of which we have invested $13 million through 2019;

•	build a service center in an economically distressed community in California, investing $200 million over 10 years and employing at least 300 people, of which we have incurred $24 million through 2019;

•	contribute $65 million to improve enrollee health outcomes ($10 million over five years), support locally-based consumer assistance programs ($5 million over five years) and strengthen the healthcare delivery system ($50 million over five years), of which we have contributed $20 million through 2019, and;

•	invest $75 million of its investment portfolio in vehicles supporting California's healthcare infrastructure, of which we have invested $27 million through 2019.

The California Undertakings require significant investments by us, may restrict or impose additional material costs on our future obligations and strategic initiatives in certain geographies, and subject us to various enforcement mechanisms.

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. As of December 31, 2019, our subsidiaries had aggregate statutory capital and surplus of $8,725 million, compared with the required minimum aggregate statutory capital and surplus requirements of $3,407 million. During the year ended December 31, 2019, we received $18 million of net dividends from our regulated subsidiaries. For our subsidiaries that file with the National Association of Insurance Commissioners (NAIC), we estimate our RBC percentage to be in excess of 350% of the Authorized Control Level.

Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended ("Knox-Keene"), certain of our California subsidiaries must comply with tangible net equity (TNE) requirements. Under these Knox-Keene TNE requirements, actual net worth less unsecured receivables and intangible assets must be more than the greater of (i) a fixed minimum amount, (ii) a minimum amount based on premiums or (iii) a minimum amount based on healthcare expenditures, excluding capitated amounts. In addition, certain of our California subsidiaries have made certain undertakings to the DMHC to restrict dividends and loans to affiliates, to the extent that the payment of such would reduce such entities' TNE below the required amount as specified in the undertaking.

Under the New York State Department of Health Codes, Rules and Regulations Title 10, Part 98, our New York subsidiary must comply with contingent reserve requirements. Under these requirements, net worth based upon admitted assets must equal or exceed a minimum amount based on annual net premium income.

The NAIC has adopted rules which set minimum risk-based capital requirements for insurance companies, managed care organizations and other entities bearing risk for healthcare coverage. As of December 31, 2019, each of our health plans was in compliance with the risk-based capital requirements enacted in those states.

As a result of the above requirements and other regulatory requirements, certain of our subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to their parent companies. Such restrictions, unless amended or waived or unless regulatory approval is granted, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends that can be paid by our insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus. As of December 31, 2019, the amount of capital and surplus or net worth that was unavailable for the payment of dividends or return of capital to us was $3,407 million in the aggregate.

RECENT ACCOUNTING PRONOUNCEMENTS

For this information, refer to Note 2. Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements, included herein.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements which have been prepared in accordance with GAAP. Our significant accounting policies are more fully described in Note 2. Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere herein. Our accounting policies regarding intangible assets, medical claims liability and revenue recognition are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. As a result, they are subject to an inherent degree of uncertainty. We have reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.

Goodwill and Intangible Assets

We have made several acquisitions that have resulted in our recording of intangible assets. These intangible assets primarily consist of customer relationships, purchased contract rights, provider contracts, trade names and goodwill. Key assumptions used in the valuation of these intangible assets include, but are not limited to, member attrition rates, contract renewal probabilities, revenue growth rates, expectations of profitability, and discount and royalty rates. We allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Goodwill is generally attributable to the value of the synergies between the combined companies and the value of the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset. At December 31, 2019, we had $6,863 million of goodwill and $2,063 million of other intangible assets.

Intangible assets are amortized using the straight-line method over the following periods:

Intangible Asset		Amortization Period
Purchased contract rights		5 - 21 years
Provider contracts		4 - 15 years
Customer relationships		3 - 15 years
Trade names		7 - 20 years
Developed technologies		2 - 7 years
Other intangibles		2 - 5 years

Our management evaluates whether events or circumstances have occurred that may affect the estimated useful life or the recoverability of the remaining balance of goodwill and other identifiable intangible assets. If the events or circumstances indicate that the remaining balance of the intangible asset or goodwill may be impaired, the potential impairment will be measured based upon the difference between the carrying amount of the intangible asset or goodwill and the fair value of such asset. Our management must make assumptions and estimates, such as the discount factor, future utility and other internal and external factors, in determining the estimated fair values. While we believe these assumptions and estimates are appropriate, other assumptions and estimates could be applied and might produce significantly different results.

Goodwill is reviewed annually during the fourth quarter for impairment. In addition, an impairment analysis of intangible assets would be performed based on other factors. These factors include significant changes in membership, financial performance, state funding, medical contracts and provider networks and contracts.

In January 2017, the Financial Accounting Standards Board issued an Accounting Standards Update (ASU) simplifying the test for goodwill impairment. During the third quarter of 2019, we adopted the new guidance. The amendments in the ASU eliminated step 2 from the quantitative goodwill impairment test while still allowing management to first perform the qualitative assessment to determine if a quantitative assessment is necessary. If the quantitative assessment is required, the impairment test under the new ASU is performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value. The impairment charge under the new ASU is limited to the total amount of goodwill allocated to that reporting unit. We first assess qualitative factors to determine if a quantitative impairment test is necessary. We generally do not calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. However, in certain circumstances, such as recent acquisitions, we may elect to perform a quantitative assessment without first assessing qualitative factors. During the third quarter of 2019, we recorded $271 million of non-cash goodwill ($259 million) and intangible asset ($12 million) impairment, substantially all associated with our U.S. Medical Management (USMM) physician home health business in the Specialty Services segment. The impairment was identified as part of our quarterly review procedures, which included an analysis of new information related to its shared savings demonstration programs, slower than expected penetration of the physician home health business model into its Medicaid population, and the related impact to revised forecasts. We utilized the income approach in the analysis, which derives the fair value of the intangible assets and goodwill based on the present value of discounted expected cash flows.

Medical Claims Liability

Our medical claims liability includes claims reported but not yet paid, or inventory, estimates for claims incurred but not reported, or IBNR, and estimates for the costs necessary to process unpaid claims at the end of each period. We estimate our medical claims liability using actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. These actuarial methods consider factors such as historical data for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services and other relevant factors.

Actuarial Standards of Practice generally require that the medical claims liability estimates be adequate to cover obligations under moderately adverse conditions. Moderately adverse conditions are situations in which the actual claims are expected to be higher than the otherwise estimated value of such claims at the time of estimate. The claims amounts ultimately settled will most likely be different than the estimate that satisfies the Actuarial Standards of Practice. We include in our IBNR an estimate for medical claims liability under moderately adverse conditions which represents the risk of adverse deviation of the estimates in our actuarial method of reserving.

We use our judgment to determine the assumptions to be used in the calculation of the required estimates. The assumptions we consider when estimating IBNR include, without limitation, claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, healthcare service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes, changes to fee schedules, and the incidence of high dollar or catastrophic claims.

We apply various estimation methods depending on the claim type and the period for which claims are being estimated. For more recent periods, incurred non-inpatient claims are estimated based on historical per member per month claims experience adjusted for known factors. Incurred hospital inpatient claims are estimated based on known inpatient utilization data and prior claims experience adjusted for known factors. For older periods, we utilize an estimated completion factor based on our historical experience to develop IBNR estimates. The completion factor is an actuarial estimate of the percentage of claims that have been received or adjudicated as of the end of a reporting period relative to the estimate of the total ultimate incurred costs for that same period. When we commence operations in a new state or region, we have limited information with which to estimate our medical claims liability. See "Risk Factors - Failure to accurately estimate and price our medical expenses or effectively manage our medical costs or related administrative costs could negatively affect our financial position, results of operations and cash flows." These approaches are consistently applied to each period presented.

Additionally, we contract with independent actuaries to review our estimates on a quarterly basis. The independent actuaries provide us with a review letter that includes the results of their analysis of our medical claims liability. We do not solely rely on their report to adjust our claims liability. We utilize their calculation of our claims liability only as additional information, together with management's judgment, to determine the assumptions to be used in the calculation of our liability for claims.

Our development of the medical claims liability estimate is a continuous process which we monitor and refine on a monthly basis as additional claims receipts and payment information becomes available. As more complete claims information becomes available, we adjust the amount of the estimates, and include the changes in estimates in medical costs in the period in which the changes are identified. In every reporting period, our operating results include the effects of more completely developed medical claims liability estimates associated with previously reported periods. We consistently apply our reserving methodology from period to period. As additional information becomes known to us, we adjust our actuarial models accordingly to establish medical claims liability estimates.

The paid and received completion factors, claims per member per month and per diem cost trend factors are the most significant factors affecting the IBNR estimate. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by changes in these factors based on December 31, 2019 data:

Completion Factors: (1)							Cost Trend Factors: (2)
(Decrease) Increase in Factors			Increase (Decrease) in Medical Claims Liabilities				(Decrease) Increase in Factors			Increase (Decrease) in Medical Claims Liabilities
			(in millions)							(in millions)
(1.00	)%		$	430			(1.00	)%		$	(112	)
(0.75	)		321				(0.75	)		(84		)
(0.50	)		214				(0.50	)		(56		)
(0.25	)		107				(0.25	)		(28		)
0.25			(106		)		0.25			28
0.50			(212		)		0.50			56
0.75			(317		)		0.75			84
1.00			(421		)		1.00			112
(1) Reflects estimated potential changes in medical claims liability caused by changes in completion factors.
(2) Reflects estimated potential changes in medical claims liability caused by changes in cost trend factors for the most recent periods.

While we believe our estimates are appropriate, it is possible future events could require us to make significant adjustments for revisions to these estimates. For example, a 1% increase or decrease in our estimated medical claims liability would have affected net earnings by $55 million for the year ended December 31, 2019, excluding the effect of any return of premium, risk corridor, or minimum MLR programs. The estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our providers and information available from other outside sources.

The change in medical claims liability is summarized as follows (in millions):

	Year Ended December 31,
	2019				2018				2017
Balance, January 1,	$	6,831			$	4,286			$	3,929
Less: reinsurance recoverable	27				18				5
Balance, January 1, net	6,804				4,268				3,924
Acquisitions	59				1,204				—
Less: acquired reinsurance recoverable	—				8				—
Incurred related to:
Current year	59,539				46,484				38,225
Prior years	(677		)		(427		)		(374		)
Total incurred	58,862				46,057				37,851
Paid related to:
Current year	52,453				41,161				34,196
Prior years	5,819				3,556				3,311
Total paid	58,272				44,717				37,507
Balance, December 31, net	7,453				6,804				4,268
Plus: reinsurance recoverable	20				27				18
Balance, December 31,	$	7,473			$	6,831			$	4,286
Days in claims payable (1)	45				48				41
(1) Days in claims payable is a calculation of medical claims liability at the end of the period divided by average expense per calendar day for the fourth quarter of each year.

Medical claims are usually paid within a few months of the member receiving service from the physician or other healthcare provider. As a result, the liability generally is described as having a "short-tail," which causes less than 5% of our medical claims liability as of the end of any given year to be outstanding the following year. We believe that substantially all the development of the estimate of medical claims liability as of December 31, 2019 will be known by the end of 2020.

Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. Additionally, as a result of minimum HBR and other return of premium programs, approximately $49 million, $25 million and $1 million of the "Incurred related to: Prior years" was recorded as a reduction to premium revenues in 2019, 2018 and 2017, respectively. Further, claims processing initiatives yielded increased claim payment recoveries and coordination of benefits related to prior year dates of service. Changes in medical utilization and cost trends and the effect of population health management initiatives may also contribute to changes in medical claim liability estimates. While we have evidence that population health management initiatives are effective on a case by case basis, these initiatives primarily focus on events and behaviors prior to the incurrence of the medical event and generation of a claim. Accordingly, any change in behavior, leveling of care, or coordination of treatment occurs prior to claim generation and as a result, the costs prior to the population health management initiative are not known by us. Additionally, certain population health management initiatives are focused on member and provider education with the intent of influencing behavior to appropriately align the medical services provided with the member's acuity. In these cases, determining whether the population health management initiative changed the behavior cannot be determined. Because of the complexity of our business, the number of states in which we operate, and the volume of claims that we process, we are unable to practically quantify the impact of these initiatives on our changes in estimates of IBNR.

The following are examples of population health management initiatives that may have contributed to the favorable development through lower medical utilization and cost trends:

•	Appropriate leveling of care for neonatal intensive care unit hospital admissions, other inpatient hospital admissions, and observation admissions, in accordance with InterQual or other criteria.

•	Management of our pre-authorization list and more stringent review of durable medical equipment and injectibles.

•	Emergency department program designed to collaboratively work with hospitals to steer non-emergency care away from the costly emergency department setting (through patient education, on-site alternative urgent care settings, etc.).

•	Increased emphasis on case management and clinical rounding where case managers are nurses or social workers who are employed by the health plan to assist selected patients with the coordination of healthcare services in order to meet a patient's specific healthcare needs.

•	Incorporation of disease management which is a comprehensive, multidisciplinary, collaborative approach to chronic illnesses such as asthma.

•	Prenatal and infant health programs utilized in our Start Smart For Your Baby outreach service.

Revenue Recognition

Our health plans generate revenues primarily from premiums received from the states in which we operate health plans, premiums received from our members and CMS for our Medicare product, and premiums from members of our commercial health plans. In addition to member premium payments, our Marketplace contracts also generate revenues from subsidies received from CMS. We generally receive a fixed premium per member per month pursuant to our contracts and recognize premium revenues during the period in which we are obligated to provide services to our members at the amount reasonably estimable. In some instances, our base premiums are subject to an adjustment, or risk score, based on the acuity of its membership. Generally, the risk score is determined by the State or CMS analyzing submissions of processed claims data to determine the acuity of our membership relative to the entire state's membership. We estimate the amount of risk adjustment based upon the processed claims data submitted and expected to be submitted to CMS and record revenues on a risk adjusted basis. Some contracts allow for additional premiums related to certain supplemental services provided such as maternity deliveries.

Our contracts with states may require us to maintain a minimum HBR or may require us to share profits in excess of certain levels. In certain circumstances, including commercial plans, our plans may be required to return premium to the state or policyholders in the event profits exceed established levels. We estimate the effect of these programs and recognize reductions in revenue in the current period. Other states may require us to meet certain performance and quality metrics in order to receive additional or full contractual revenue. For performance-based contracts, we do not recognize revenue subject to refund until data is sufficient to measure performance.

Revenues are recorded based on membership and eligibility data provided by the states or CMS, which is adjusted on a monthly basis by the states or CMS for retroactive additions or deletions to membership data. These eligibility adjustments are estimated monthly and subsequent adjustments are made in the period known. We continuously review and update those estimates as new information becomes available. It is possible that new information could require us to make additional adjustments, which could be significant, to these estimates.

Our Medicare Advantage contracts are with CMS. CMS deploys a risk adjustment model which apportions premiums paid to all health plans according to health severity and certain demographic factors. The CMS risk adjustment model pays more for members whose medical history would indicate that they are expected to have higher medical costs. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from hospital inpatient, hospital outpatient, physician treatment settings as well as prescription drug events. We and the healthcare providers collect, compile and submit the necessary and available diagnosis data to CMS within prescribed deadlines. We estimate risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS and record revenues on a risk adjusted basis.

Our specialty services generate revenues under contracts with state and federal programs, healthcare organizations and other commercial organizations, as well as from our own subsidiaries. Revenues are recognized when the related services are provided or as ratably earned over the covered period of services. For performance-based measures in our contracts, revenue is recognized as data sufficient to measure performance is available. We recognize revenue related to administrative services under the TRICARE government-sponsored managed care support contract for the DoD's TRICARE program on a straight-line basis over the option period, when the fees become fixed and determinable. The TRICARE contract includes various performance-based measures. For each of the measures, an estimate of the amount that has been earned is made at each interim date, and revenue is recognized accordingly.

Some states enact premium taxes, similar assessments and provider pass-through payments, collectively premium taxes, and these taxes are recorded as a separate component of both revenues and operating expenses. Additionally, our insurance subsidiaries are subject to the Affordable Care Act annual HIF. The ACA imposed the HIF in 2014, 2015, 2016 and 2018 and is imposing the HIF in 2020. The HIF was suspended in 2017 and 2019. If we are able to negotiate reimbursement of portions of these premium taxes or the HIF, we recognize revenue associated with the HIF on a straight-line basis when we have binding agreements for such reimbursements, including the "gross-up" to reflect the HIFs non-tax deductible nature. Collectively, this revenue is recorded as premium tax and health insurer fee revenue in the Consolidated Statements of Operations. For certain products, premium taxes, state assessments and the HIF are not pass-through payments and are recorded as premium revenue and premium tax expense or health insurer fee expense in the Consolidated Statements of Operations.

Some states require state directed payments that have minimal risk, but are administered as a premium adjustment. These payments are recorded as premium revenue and medical costs at close to a 100% HBR. We have little visibility to the timing of these payments until they are paid by the state.