Item 1. Financial Statements.

93K characters. Original on sec.gov · Markdown

Item 1. Financial Statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except shares in thousands and per share data in dollars)


	March 31, 2023		December 31, 2022
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	15,853	$	12,074
Premium and trade receivables	15,210		13,272
Short-term investments	2,135		2,321
Other current assets	1,811		2,461
Total current assets	35,009		30,128
Long-term investments	15,833		14,684
Restricted deposits	1,313		1,217
Property, software and equipment, net	2,478		2,432

Goodwill	18,836		18,812
Intangible assets, net	6,730		6,911
Other long-term assets	2,783		2,686
Total assets	$	82,982	$	76,870
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS' EQUITY
Current liabilities:
Medical claims liability	$	17,504	$	16,745
Accounts payable and accrued expenses	10,781		9,525
Return of premium payable	2,077		1,634
Unearned revenue	2,398		478
Current portion of long-term debt	97		82
Total current liabilities	32,857		28,464
Long-term debt	18,223		17,938
Deferred tax liability	522		615
Other long-term liabilities	6,194		5,616
Total liabilities	57,796		52,633
Commitments and contingencies
Redeemable noncontrolling interests	20		56
Stockholders' equity:
Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at March 31, 2023 and December 31, 2022	—		—
Common stock, $0.001 par value; authorized 800,000 shares; 614,355 issued and 551,714 outstanding at March 31, 2023, and 607,847 issued and 550,754 outstanding at December 31, 2022	1		1
Additional paid-in capital	20,121		20,060
Accumulated other comprehensive earnings (loss)	(915)		(1,132)
Retained earnings	10,471		9,341
Treasury stock, at cost (62,641 and 57,093 shares, respectively)	(4,636)		(4,213)
Total Centene stockholders' equity	25,042		24,057
Nonredeemable noncontrolling interest	124		124
Total stockholders' equity	25,166		24,181
Total liabilities, redeemable noncontrolling interests and stockholders' equity	$	82,982	$	76,870

The accompanying notes to the consolidated financial statements are an integral part of these statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except shares in thousands and per share data in dollars)

(Unaudited)


	Three Months Ended March 31,
	2023		2022
Revenues:
Premium	$	33,825	$	31,889
Service	1,127		2,343
Premium and service revenues	34,952		34,232
Premium tax	3,937		2,953
Total revenues	38,889		37,185
Expenses:
Medical costs	29,434		27,838
Cost of services	870		1,988
Selling, general and administrative expenses	3,011		2,745
Depreciation expense	142		156
Amortization of acquired intangible assets	183		199
Premium tax expense	4,011		3,006

Impairment	20		—

Total operating expenses	37,671		35,932
Earnings from operations	1,218		1,253
Other income (expense):
Investment and other income	353		52
Debt extinguishment	—		3
Interest expense	(180)		(160)
Earnings before income tax	1,391		1,148
Income tax expense	261		296
Net earnings	1,130		852
(Earnings) loss attributable to noncontrolling interests	—		(3)
Net earnings attributable to Centene Corporation	$	1,130	$	849

Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share	$	2.05	$	1.46
Diluted earnings per common share	$	2.04	$	1.44

Weighted average number of common shares outstanding:
Basic	550,779		583,230
Diluted	553,845		590,658

The accompanying notes to the consolidated financial statements are an integral part of these statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)

(In millions)

(Unaudited)


	Three Months Ended March 31,
	2023		2022
Net earnings	$	1,130	$	852
Change in unrealized gain (loss) on investments	253		(715)
Change in unrealized gain (loss) on investments, tax effect	(61)		171
Change in unrealized gain (loss) on investments, net of tax	192		(544)
Reclassification adjustment, net of tax	2		2
Foreign currency translation adjustments, net of tax	23		(20)
Other comprehensive earnings (loss)	217		(562)
Comprehensive earnings	1,347		290
Comprehensive (earnings) loss attributable to noncontrolling interests	—		(3)
Comprehensive earnings attributable to Centene Corporation	$	1,347	$	287

The accompanying notes to the consolidated financial statements are an integral part of these statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In millions, except shares in thousands and per share data in dollars)

(Unaudited)

Three Months Ended March 31, 2023


	Centene Stockholders' Equity
	Common Stock									Treasury Stock
	$0.001 Par Value Shares	Amt		Additional Paid-in Capital		Accumulated Other Comprehensive Earnings (Loss)		Retained Earnings		$0.001 Par Value Shares	Amt		Noncontrolling Interest		Total
Balance, December 31, 2022	607,847	$	1	$	20,060	$	(1,132)	$	9,341	57,093	$	(4,213)	$	124	$	24,181

Net earnings	—	—		—		—		1,130		—	—		—		1,130
Other comprehensive earnings, net of $61 tax	—	—		—		217		—		—	—		—		217


Common stock issued for employee benefit plans	6,508	—		12		—		—		—	—		—		12
Common stock repurchases	—	—		—		—		—		5,548	(423)		—		(423)
Stock compensation expense	—	—		61		—		—		—	—		—		61



Purchase of redeemable noncontrolling interest	—	—		(12)		—		—		—	—		—		(12)

Balance, March 31, 2023	614,355	$	1	$	20,121	$	(915)	$	10,471	62,641	$	(4,636)	$	124	$	25,166

Three Months Ended March 31, 2022


	Centene Stockholders' Equity
	Common Stock									Treasury Stock
	$0.001 Par Value Shares	Amt		Additional Paid-in Capital		Accumulated Other Comprehensive Earnings (Loss)		Retained Earnings		$0.001 Par Value Shares	Amt		Noncontrolling Interest		Total
Balance, December 31, 2021	602,704	$	1	$	19,672	$	77	$	8,139	20,225	$	(1,094)	$	145	$	26,940

Net earnings (loss)	—	—		—		—		849		—	—		(1)		848
Other comprehensive loss, net of $(171) tax	—	—		—		(562)		—		—	—		—		(562)


Common stock issued for employee benefit plans	3,221	—		28		—		—		—	—		—		28
Fair value of unvested equity awards in connection with acquisition	—	—		60		—		—		—	—		—		60
Common stock repurchases	—	—		—		—		—		846	(71)		—		(71)
Stock compensation expense	—	—		70		—		—		—	—		—		70





Balance, March 31, 2022	605,925	$	1	$	19,830	$	(485)	$	8,988	21,071	$	(1,165)	$	144	$	27,313

The accompanying notes to the consolidated financial statements are an integral part of these statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions, unaudited)


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net earnings	$	1,130	$	852
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization	346		390
Stock compensation expense	61		70
Impairment	20		—
(Gain) loss on debt extinguishment	—		(3)

Deferred income taxes	(159)		12
(Gain) on divestiture	(79)		—

Other adjustments, net	7		22
Changes in assets and liabilities
Premium and trade receivables	(1,938)		(3,099)
Other assets	(315)		(299)

Medical claims liabilities	759		1,767
Unearned revenue	1,919		81
Accounts payable and accrued expenses	1,548		957
Other long-term liabilities	970		401

Net cash provided by operating activities	4,269		1,151
Cash flows from investing activities:
Capital expenditures	(225)		(242)
Purchases of investments	(1,619)		(1,700)
Sales and maturities of investments	1,148		1,047
Acquisitions, net of cash acquired	—		(1,504)
Divestiture proceeds, net of divested cash	443		—
Other investing activities, net	—		(2)
Net cash (used in) investing activities	(253)		(2,401)
Cash flows from financing activities:
Proceeds from long-term debt	287		100
Payments and repurchases of long-term debt	—		(526)
Common stock repurchases	(423)		(71)
Proceeds from common stock issuances	—		27
Payments for debt extinguishment	—		(27)
Purchase of noncontrolling interest	(58)		—

Other financing activities, net	11		(1)
Net cash (used in) financing activities	(183)		(498)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	2		33
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents	3,835		(1,715)

Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period	12,330		13,214
Cash, cash equivalents, and restricted cash and cash equivalents, end of period	$	16,165	$	11,499
Supplemental disclosures of cash flow information:
Interest paid	$	144	$	139
Income taxes paid	$	11	$	11


The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the Consolidated Balance Sheets to the totals above:
	March 31,
	2023		2022
Cash and cash equivalents	$	15,853	$	11,237
Restricted cash and cash equivalents, included in restricted deposits	312		262
Total cash, cash equivalents, and restricted cash and cash equivalents	$	16,165	$	11,499

The accompanying notes to the consolidated financial statements are an integral part of these statements.

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Operations

Basis of Presentation

The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements included in the Form 10-K for the fiscal year ended December 31, 2022. The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, footnote disclosures that would substantially duplicate the disclosures contained in the December 31, 2022 audited financial statements have been omitted from these interim financial statements, where appropriate. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of the interim periods presented.

Certain 2022 amounts in the consolidated financial statements and notes to the consolidated financial statements have been reclassified to conform to the 2023 presentation, including reclassifications related to the Company's new segment reporting structure as outlined below. These reclassifications have no effect on net earnings or stockholders' equity as previously reported.

Segment Reporting

In the first quarter of 2023, and in conjunction with the Company's updated strategic plan, executive leadership realignment, and corresponding 2023 divestitures, the Company has revised the way it manages the business, evaluates performance, and allocates 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.

The Medicaid, Medicare, and Commercial segments represent the government-sponsored or subsidized programs under which the Company offers managed healthcare services. Specifically, the Medicaid segment includes the Temporary Assistance for Needy Families (TANF) program, Medicaid Expansion programs, the Aged, Blind, or Disabled (ABD) program, the Children's Health Insurance Program (CHIP), Long-Term Services and Supports (LTSS), Foster Care, Medicare-Medicaid Plans (MMP), which cover beneficiaries who are dually eligible for Medicaid and Medicare, and other state-based programs. The Medicare segment includes Medicare Advantage, Medicare Supplement, Dual Eligible Special Needs Plans (D-SNPs), and Medicare Prescription Drug Plans (PDPs), also known as Medicare Part D. The Commercial segment includes the Health Insurance Marketplace along with individual, small group, and large group commercial healthcare products. The Other segment includes the Company's pharmacy operations, vision and dental services, clinical healthcare, behavioral health, international operations, and corporate management companies, among others.

Accounting Guidance Not Yet Adopted

The Company has determined that there are no recently issued accounting pronouncements that will have a material impact on its consolidated financial position, results of operations, or cash flows.

2. Acquisitions and Divestitures

On January 5, 2023, the Company completed the divestiture of HealthSmart, its third-party health plan administration business.

On January 10, 2023, the Company signed and closed on a definitive agreement to divest Centurion, its prison healthcare business. During 2022, the Company recorded impairment charges related to goodwill and other current assets associated with the pending divestitures. The Company could receive up to an additional $35 million in cash based on the reprocurements of certain Centurion contracts. The Company will recognize the appropriate amount of contingent consideration related to the additional $35 million when realized or realizable.

On January 20, 2023, the Company completed the divestiture of Magellan Specialty Health for approximately $646 million in cash and stock, including an estimated working capital adjustment and recognized a pre-tax gain of $79 million. The stock consideration was subsequently sold in April 2023 for cash proceeds of $245 million. The Company could also receive up to an additional $150 million in cash and stock in 2024 based on certain 2023 performance metrics. The Company will recognize the appropriate amount of contingent consideration related to the additional $150 million when realized or realizable.

3. Short-term and Long-term Investments, Restricted Deposits

Short-term and long-term investments and restricted deposits by investment type consist of the following ($ in millions):


	March 31, 2023								December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	489	$	—	$	(12)	$	477	$	695	$	—	$	(16)	$	679
Corporate securities	10,523		32		(668)		9,887		10,127		12		(778)		9,361
Restricted certificates of deposit	4		—		—		4		4		—		—		4
Restricted cash equivalents	312		—		—		312		256		—		—		256
Short-term time deposits	198		—		—		198		204		—		—		204
Municipal securities	4,131		15		(213)		3,933		4,055		6		(280)		3,781
Asset-backed securities	1,492		2		(57)		1,437		1,396		—		(70)		1,326
Residential mortgage-backed securities	1,187		4		(105)		1,086		1,165		2		(121)		1,046
Commercial mortgage-backed securities	1,067		1		(87)		981		961		—		(99)		862
Equity securities (1)	250		—		—		250		5		—		—		5
Private equity investments	540		—		—		540		529		—		—		529
Life insurance contracts	176		—		—		176		169		—		—		169
Total	$	20,369	$	54	$	(1,142)	$	19,281	$	19,566	$	20	$	(1,364)	$	18,222

(1) Investments in equity securities as of March 31, 2023 primarily consisted of shares received as part of the Magellan Specialty Health divestiture consideration. These shares were subsequently sold in April 2023.

The Company's investments are debt securities classified as available-for-sale with the exception of equity securities, certain private equity investments and life insurance contracts. The Company's investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities. The Company limits the size of investment in any single issuer other than U.S. treasury securities and obligations of U.S. government corporations and agencies. As of March 31, 2023, 99% of the Company's investments in rated securities carry an investment grade rating by nationally recognized statistical rating organizations. At March 31, 2023, the Company held certificates of deposit, equity securities, private equity investments, and life insurance contracts, which did not carry a credit rating. Accrued interest income on available-for-sale debt securities was $141 million and $132 million at March 31, 2023 and December 31, 2022, respectively, and is included in other current assets on the Consolidated Balance Sheets.

The Company's residential mortgage-backed securities are primarily issued by the Federal National Mortgage Association, Government National Mortgage Association, or Federal Home Loan Mortgage Corporation, which carry implicit or explicit guarantees of the U.S. government. The Company's commercial mortgage-backed securities are primarily senior tranches with a weighted average rating of AAA and a weighted average duration of 4 years at March 31, 2023.

The fair value of available-for-sale debt securities with gross unrealized losses by investment type and length of time that individual securities have been in a continuous unrealized loss position were as follows ($ in millions):


	March 31, 2023								December 31, 2022
	Less Than 12 Months				12 Months or More				Less Than 12 Months				12 Months or More
	Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	(2)	$	249	$	(10)	$	170	$	(5)	$	342	$	(11)	$	184
Corporate securities	(72)		2,755		(596)		5,683		(340)		5,368		(438)		3,400
Municipal securities	(18)		1,161		(195)		1,945		(142)		2,437		(138)		995
Asset-backed securities	(5)		310		(52)		928		(29)		786		(41)		486
Residential mortgage-backed securities	(10)		319		(95)		652		(55)		629		(66)		352
Commercial mortgage-backed securities	(8)		188		(79)		697		(49)		513		(50)		330

Total	$	(115)	$	4,982	$	(1,027)	$	10,075	$	(620)	$	10,075	$	(744)	$	5,747

As of March 31, 2023, the gross unrealized losses were generated from 6,109 positions out of a total of 6,936 positions. The change in fair value of available-for-sale debt securities is primarily a result of movement in interest rates subsequent to the purchase of the security.

For each security in an unrealized loss position, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual, or regulatory purposes. If the security meets this criterion, the decline in fair value is recorded in earnings. The Company does not intend to sell these securities prior to maturity and it is not likely that the Company will be required to sell these securities prior to maturity; therefore, the Company did not record an impairment for these securities.

In addition, the Company monitors available-for-sale debt securities for credit losses. Certain investments have experienced a decline in fair value due to changes in credit quality, market interest rates, and/or general economic conditions. The Company recognizes an allowance when evidence demonstrates that the decline in fair value is credit related. Evidence of a credit related loss may include rating agency actions, adverse conditions specifically related to the security, or failure of the issuer of the security to make scheduled payments.

The contractual maturities of short-term and long-term debt securities and restricted deposits are as follows ($ in millions):


	March 31, 2023								December 31, 2022
	Investments				Restricted Deposits				Investments				Restricted Deposits
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	2,011	$	1,981	$	570	$	569	$	2,207	$	2,179	$	534	$	532
One year through five years	8,008		7,556		546		518		7,651		7,147		524		490
Five years through ten years	4,131		3,821		245		224		4,066		3,613		224		195
Greater than ten years	144		140		2		2		135		129		—		—
Asset-backed securities	3,746		3,504		—		—		3,522		3,234		—		—
Total	$	18,040	$	17,002	$	1,363	$	1,313	$	17,581	$	16,302	$	1,282	$	1,217

Actual maturities may differ from contractual maturities due to call or prepayment options. Equity securities, private equity investments and life insurance contracts are excluded from the table above because they do not have a contractual maturity. The Company has an option to redeem at amortized cost substantially all of the securities included in the greater than ten years category listed above.

4. Fair Value Measurements

Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon observable or unobservable inputs used to estimate fair value. Level inputs are as follows:


Level Input:						Input Definition:
Level I						Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

Level II						Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.

Level III						Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following table summarizes fair value measurements by level at March 31, 2023, for assets and liabilities measured at fair value on a recurring basis ($ in millions):


	Level I		Level II		Level III		Total
Assets
Cash and cash equivalents	$	15,853	$	—	$	—	$	15,853
Investments:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	156	$	—	$	—	$	156
Corporate securities	—		9,853		—		9,853
Municipal securities	—		3,291		—		3,291
Short-term time deposits	—		198		—		198
Asset-backed securities	—		1,437		—		1,437
Residential mortgage-backed securities	—		1,086		—		1,086
Commercial mortgage-backed securities	—		981		—		981
Equity securities	248		2		—		250
Total investments	$	404	$	16,848	$	—	$	17,252
Restricted deposits:
Cash and cash equivalents	$	312	$	—	$	—	$	312
U.S. Treasury securities and obligations of U.S. government corporations and agencies	321		—		—		321
Corporate securities	—		34		—		34
Certificates of deposit	—		4		—		4
Municipal securities	—		642		—		642
Total restricted deposits	$	633	$	680	$	—	$	1,313
Total assets at fair value	$	16,890	$	17,528	$	—	$	34,418

The following table summarizes fair value measurements by level at December 31, 2022, for assets and liabilities measured at fair value on a recurring basis ($ in millions):


	Level I		Level II		Level III		Total
Assets
Cash and cash equivalents	$	12,074	$	—	$	—	$	12,074
Investments:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	366	$	5	$	—	$	371
Corporate securities	—		9,328		—		9,328
Municipal securities	—		3,165		—		3,165
Short-term time deposits	—		204		—		204
Asset backed securities	—		1,326		—		1,326
Residential mortgage backed securities	—		1,046		—		1,046
Commercial mortgage backed securities	—		862		—		862
Equity securities	3		2		—		5
Total investments	$	369	$	15,938	$	—	$	16,307
Restricted deposits:
Cash and cash equivalents	$	256	$	—	$	—	$	256
U.S. Treasury securities and obligations of U.S. government corporations and agencies	308		—		—		308
Corporate securities	—		33		—		33
Certificates of deposit	—		4		—		4
Municipal securities	—		616		—		616
Total restricted deposits	$	564	$	653	$	—	$	1,217



Total assets at fair value	$	13,007	$	16,591	$	—	$	29,598

The Company utilizes matrix-pricing services to estimate fair value for securities which are not actively traded on the measurement date. The Company designates these securities as Level II fair value measurements. In addition, the aggregate carrying amount of the Company's private equity investments and life insurance contracts, which approximates fair value, was $716 million and $698 million as of March 31, 2023 and December 31, 2022, respectively.

5. Goodwill and Intangible Assets

As discussed in Note 1. Organization and Operations, in 2023 the Company updated its segment structure. Prior year information has been adjusted to reflect the change in segment reporting.

The following table summarizes the changes in goodwill by operating segment ($ in millions):


	Medicaid		Medicare		Commercial		Other		Consolidated Total
Balance, December 31, 2021	$	10,194	$	1,592	$	5,424	$	2,561	$	19,771
Acquisition and purchase accounting adjustments	—		—		—		1,077		1,077
Divestitures	—		—		—		(1,533)		(1,533)
Reallocation	4		—		—		(4)		—
Impairments	—		—		—		(370)		(370)
Translation impact	—		—		—		(133)		(133)
Balance, December 31, 2022	$	10,198	$	1,592	$	5,424	$	1,598	$	18,812

Translation impact	—		—		—		24		24
Balance, March 31, 2023	$	10,198	$	1,592	$	5,424	$	1,622	$	18,836

6. Medical Claims Liability

As discussed in Note 1. Organization and Operations, in 2023 the Company updated its segment structure. Prior year information has been adjusted to reflect the change in segment reporting.

The following table summarizes the change in medical claims liability for the three months ended March 31, 2023 ($ in millions):


	Medicaid		Medicare		Commercial		Other		Consolidated Total
Balance, January 1, 2023	$	11,253	$	3,431	$	1,921	$	140	$	16,745
Less: Reinsurance recoverable	7		—		19		—		26
Balance, January 1, 2023, net	11,246		3,431		1,902		140		16,719

Incurred related to:
Current year	20,813		5,163		4,177		418		30,571
Prior years	(803)		(155)		(172)		(7)		(1,137)
Total incurred	20,010		5,008		4,005		411		29,434
Paid related to:
Current year	12,679		2,988		2,541		294		18,502
Prior years	6,834		2,145		1,063		132		10,174
Total paid	19,513		5,133		3,604		426		28,676
Balance, March 31, 2023, net	11,743		3,306		2,303		125		17,477
Plus: Reinsurance recoverable	9		—		18		—		27
Balance, March 31, 2023	$	11,752	$	3,306	$	2,321	$	125	$	17,504

The following table summarizes the change in medical claims liability for the three months ended March 31, 2022 ($ in millions):


	Medicaid		Medicare		Commercial		Other		Consolidated Total
Balance, January 1, 2022	$	9,845	$	2,286	$	2,014	$	98	$	14,243
Less: Reinsurance recoverable	23		—		—		—		23
Balance, January 1, 2022, net	9,822		2,286		2,014		98		14,220
Acquisitions	—		—		—		249		249
Incurred related to:
Current year	19,289		5,098		3,423		751		28,561
Prior years	(514)		(52)		(149)		(8)		(723)
Total incurred	18,775		5,046		3,274		743		27,838
Paid related to:
Current year	12,022		2,674		2,012		690		17,398
Prior years	5,643		1,624		1,319		76		8,662
Total paid	17,665		4,298		3,331		766		26,060
Balance, March 31, 2022, net	10,932		3,034		1,957		324		16,247
Plus: Reinsurance recoverable	12		—		—		—		12
Balance, March 31, 2022	$	10,944	$	3,034	$	1,957	$	324	$	16,259

Reinsurance recoverables related to medical claims are included in premium and trade receivables. Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. Additionally, as a result of minimum health benefits ratio (HBR) and other return of premium programs, the Company recorded $159 million and $67 million as a reduction to premium revenue in the three months ended March 31, 2023 and 2022, respectively.

Incurred but not reported (IBNR) plus expected development on reported claims as of March 31, 2023 was $11,271 million. Total IBNR plus expected development on reported claims represents estimates for claims incurred but not reported, development on reported claims, and estimates for the costs necessary to process unpaid claims at the end of each period. The Company estimates its 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.

7. Affordable Care Act

The Affordable Care Act established risk spreading premium stabilization programs as well as a minimum annual medical loss ratio (MLR) and cost sharing reductions.

The Company's net receivables (payables) for each of the programs are as follows ($ in millions):


	March 31, 2023		December 31, 2022
Risk adjustment receivable	$	887	$	838
Risk adjustment payable	(1,556)		(780)
Minimum medical loss ratio	(176)		(103)

Cost sharing reduction payable	(89)		(99)

8. Debt

Debt consists of the following ($ in millions):


	March 31, 2023		December 31, 2022
$2,500 million 4.25% Senior Notes due December 15, 2027	$	2,393	$	2,393
$2,300 million 2.45% Senior Notes due July 15, 2028	2,303		2,303
$3,500 million 4.625% Senior Notes due December 15, 2029	3,277		3,277
$2,000 million 3.375% Senior Notes due February 15, 2030	2,000		2,000
$2,200 million 3.00% Senior Notes due October 15, 2030	2,200		2,200
$2,200 million 2.50% Senior Notes due March 1, 2031	2,200		2,200
$1,300 million 2.625% Senior Notes due August 1, 2031	1,300		1,300

Total senior notes	15,673		15,673
Term loan facility	2,169		2,183
Revolving credit agreement	359		58
Finance leases and other	260		253
Debt issuance costs	(141)		(147)
Total debt	18,320		18,020
Less: current portion	(97)		(82)
Long-term debt	$	18,223	$	17,938

Of the Company's total debt, approximately 12% is variable rate debt. Approximately 11% uses the London Interbank Offered Rate (LIBOR) as a reference rate pursuant to the terms of the Company Credit Facility and approximately 1% uses the Sterling Overnight Index Average (SONIA) as a reference rate. The debt agreements that may be impacted by the discontinuation of LIBOR have provisions included that are sufficient for the Company to transition from the existing LIBOR rates to the prevailing successor market rates as necessary. The document governing the Company Credit Facility includes provisions to convert from LIBOR to the Secured Overnight Financing Rate (SOFR) at the time LIBOR ceases to be published.

9. Leases

The following table sets forth the right-of-use (ROU) assets and lease liabilities ($ in millions):


	March 31, 2023		December 31, 2022
Assets

ROU assets (recorded within other long-term assets)	$	2,578	$	2,554

Liabilities
Short-term (recorded within accounts payable and accrued expenses)	$	177	$	180
Long-term (recorded within other long-term liabilities)	3,144		3,133
Total lease liabilities	$	3,321	$	3,313

As of March 31, 2023, the weighted average remaining lease term for the Company was 20.5 years. The average remaining lease term of the Circle Health portfolio is 27.0 years. Excluding Circle Health, the company's portfolio average remaining lease term is 8.5 years. The lease liabilities as of March 31, 2023 reflect a weighted average discount rate of 5.7%.

10. Stockholders' Equity

The Company's Board of Directors has authorized a stock repurchase program of the Company's common stock from time to time on the open market or through privately negotiated transactions. In 2022, the Company's Board of Directors authorized increases under the program including $3,000 million in June 2022 and an additional $2,000 million in December 2022. With these increases, the Company is authorized to repurchase up to $6,000 million, inclusive of past authorizations. As of March 31, 2023, the Company had a remaining amount of $2,429 million available under the Company's stock repurchase program. In April 2023, the Company repurchased an additional 3 million shares for $200 million.

The following represents the Company's share repurchase activity ($ in millions, shares in thousands):


	Three Months Ended March 31,
	2023			2022
	Shares	Cost		Shares	Cost
Share buybacks	4,852	$	377	—	$	—
Income tax withholding	696	46		846	71
Total share repurchases	5,548	$	423	846	$	71

Shares repurchased for income tax withholding are shares withheld in connection with employee stock plans to meet applicable tax withholding requirements. These shares are typically included in the Company's treasury stock.

11. Earnings Per Share

The following table sets forth the calculation of basic and diluted net earnings per common share ($ in millions, except per share data in dollars and shares in thousands):


	Three Months Ended March 31,
	2023		2022

Earnings attributable to Centene Corporation	$	1,130	$	849

Shares used in computing per share amounts:
Weighted average number of common shares outstanding	550,779		583,230
Common stock equivalents (as determined by applying the treasury stock method) (1)	3,066		7,428
Weighted average number of common shares and potential dilutive common shares outstanding	553,845		590,658

Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share	$	2.05	$	1.46
Diluted earnings per common share	$	2.04	$	1.44

(1) The reduction in common stock equivalents is primarily driven by the distribution of long-term stock awards to the estate of the Company's former CEO during the first quarter of 2023, which were fully dilutive prior to their distribution.

The calculation of diluted earnings per common share for the three months ended March 31, 2023 and 2022 excludes 1,606 thousand shares and 923 thousand shares, respectively, related to anti-dilutive stock options, restricted stock, and restricted stock units.

12. Segment Information

In early 2023, and in conjunction with the Company's updated strategic plan, executive leadership realignment, and corresponding 2023 divestitures, the Company has revised the way it manages the business, evaluates performance, and allocates 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. Prior year information has been adjusted to reflect the change in segment reporting.

The Medicaid, Medicare, and Commercial segments represent the government-sponsored or subsidized programs under which the Company offers managed healthcare services. The Other segment includes the Company's pharmacy operations, vision and dental services, clinical healthcare, behavioral health, international operations, and corporate management companies, among others.

Factors used in determining the reportable business segments include the nature of operating activities, the existence of separate senior management teams, and the type of information presented to the Company's chief operating decision-maker to evaluate all results of operations. The Company does not report total assets by segment since this is not a metric used to allocate resources or evaluate segment performance.

Segment information for the three months ended March 31, 2023, is as follows ($ in millions):


	Medicaid		Medicare		Commercial		Other/Eliminations		Consolidated Total
Premium	$	22,227	$	5,876	$	5,252	$	470	$	33,825
Service	—		—		—		1,127		1,127
Premium and service revenues	22,227		5,876		5,252		1,597		34,952
Premium tax	3,937		—		—		—		3,937
Total external revenues	26,164		5,876		5,252		1,597		38,889
Internal revenues	—		—		—		3,867		3,867
Eliminations	—		—		—		(3,867)		(3,867)
Total revenues	$	26,164	$	5,876	$	5,252	$	1,597	$	38,889

Medical costs	$	20,010	$	5,008	$	4,005	$	411	$	29,434

Cost of services	$	—	$	—	$	—	$	870	$	870

Gross margin (1)	$	2,217	$	868	$	1,247	$	316	$	4,648

(1) Gross margin represents premium and service revenues less medical costs and cost of services.

Segment information for the three months ended March 31, 2022, is as follows ($ in millions):


	Medicaid		Medicare		Commercial		Other/Eliminations		Consolidated Total
Premium	$	21,121	$	5,757	$	4,132	$	879	$	31,889
Service	—		—		—		2,343		2,343
Premium and service revenues	21,121		5,757		4,132		3,222		34,232
Premium tax	2,953		—		—		—		2,953
Total external revenues	24,074		5,757		4,132		3,222		37,185
Internal revenues	—		—		—		6,450		6,450
Eliminations	—		—		—		(6,450)		(6,450)
Total revenues	$	24,074	$	5,757	$	4,132	$	3,222	$	37,185

Medical costs	$	18,775	$	5,046	$	3,274	$	743	$	27,838

Cost of services	$	—	$	—	$	—	$	1,988	$	1,988

Gross margin (1)	$	2,346	$	711	$	858	$	491	$	4,406

(1) Gross margin represents premium and service revenues less medical costs and cost of services.

13. Contingencies

Overview

The Company is routinely subjected to legal and regulatory proceedings in the normal course of business. These matters can include, without limitation:

periodic compliance and other reviews and investigations by various federal and state regulatory agencies with respect to requirements applicable to the Company's business, including, without limitation, those related to payment of out-of-network claims, submissions to the Centers for Medicare and Medicaid Services (CMS) related to risk adjustment payments, or the False Claims Act, the calculation of minimum MLR and rebates related thereto, submissions to state agencies related to payments or state false claims acts, pre-authorization penalties, timely review of grievances and appeals, timely and accurate payment of claims, cybersecurity issues, including those related to the Company's or the Company's third party vendors' information systems, and the Health Insurance Portability and Accountability Act of 1996 and other federal and state fraud, waste and abuse laws;
litigation arising out of general business activities, such as tax matters, disputes related to healthcare benefits coverage or reimbursement, putative securities class actions, and medical malpractice, privacy, real estate, intellectual property and employment-related claims; and
disputes regarding reinsurance arrangements, claims arising out of the acquisition or divestiture of various assets, class actions, and claims relating to the performance of contractual and non-contractual obligations to providers, members, employer groups and others, including, but not limited to, the alleged failure to properly pay claims and challenges to the manner in which the Company processes claims, claims related to network adequacy and claims alleging that the Company has engaged in unfair business practices.

Among other things, these matters may result in awards of damages, fines or penalties, which could be substantial, and/or could require changes to the Company's business. The Company intends to vigorously defend itself against legal and regulatory proceedings to which it is currently a party; however, these proceedings are subject to many uncertainties. In some of the cases pending against the Company, substantial non-economic or punitive damages are being sought.

The Company records reserves and accrues costs for certain legal proceedings and regulatory matters to the extent that it determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. While such reserves and accrued costs reflect the Company's best estimate of the probable loss for such matters, the recorded amounts may differ materially from the actual amount of any such losses. In some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal and regulatory proceedings, which may be exacerbated by various factors, including but not limited to, they may involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; involve a large number of parties, claimants or regulatory bodies; are in the early stages of the proceedings; involve a number of separate proceedings and/or a wide range of potential outcomes; or result in a change of business practices.

As of the date of this report, amounts accrued for legal proceedings and regulatory matters were not material, except for the reserve estimate as described below with respect to claims or potential claims involving services provided by Envolve Pharmacy Solutions, Inc. (Envolve), as the Company's pharmacy benefits management (PBM) subsidiary. It is possible that in a particular quarter or annual period the Company's financial condition, results of operations, cash flow and/or liquidity could be materially adversely affected by an ultimate unfavorable resolution of or development in legal and/or regulatory proceedings, including as described below. Except for the discussion below, the Company believes that the ultimate outcome of any of the regulatory and legal proceedings that are currently pending against it should not have a material adverse effect on financial condition, results of operations, cash flow, or liquidity.

California

On October 20, 2015, the Company's California subsidiary, Health Net of California, Inc. (Health Net California), was named as a defendant in a California taxpayer action filed in Los Angeles County Superior Court, captioned as Michael D. Myers v. State Board of Equalization, Dave Jones, Insurance Commissioner of the State of California, Betty T. Yee, Controller of the State of California, et al., Los Angeles Superior Court Case No. BS158655. This action is brought under a California statute that permits an individual taxpayer to sue a governmental agency when the taxpayer believes the agency has failed to enforce governing law. Plaintiff contends that Health Net California, a California licensed Health Care Service Plan (HCSP), is an "insurer" for purposes of taxation despite acknowledging it is not an "insurer" under regulatory law. Under California law, "insurers" must pay a gross premiums tax (GPT), calculated as 2.35% on gross premiums. As a licensed HCSP, Health Net California has paid the California Corporate Franchise Tax (CFT), the tax generally paid by California businesses. Plaintiff contends that Health Net California must pay the GPT rather than the CFT. Plaintiff seeks a writ of mandate directing the California taxing agencies to collect the GPT, and seeks an order requiring Health Net California to pay GPT, interest and penalties for a period dating to eight years prior to the October 2015 filing of the complaint. This lawsuit is being coordinated with similar lawsuits filed against other entities (collectively, Related Actions). In March 2018, the Court overruled the Company's demurrer seeking to dismiss the complaint and denied the Company's motion to strike allegations seeking retroactive relief. In August 2018, the trial court stayed all the Related Actions pending determination of a writ of mandate by the California Court of Appeals in two of the Related Actions. In March 2019, the California Court of Appeals denied the writ of mandate. The defendants in those Related Actions sought review by the California Supreme Court, which declined to review the matter. Upon the return of the matter to the Los Angeles County Superior Court, motions for summary judgment were scheduled. Health Net California's motion for summary judgment was heard by the Court in March 2020. In March 2020, the Court granted Health Net California's motion for summary judgment. In September 2020, the plaintiff appealed the Court's decision. The Company intends to continue its vigorous defense against these claims; however, this matter is subject to many uncertainties, and an adverse outcome in this matter could potentially have a materially adverse impact on the Company's financial condition, results of operations and cash flows.

Beginning in April 2021, several lawsuits have been filed against the Company and its subsidiaries, alleging that the defendants failed to prevent Health Net members' personal and health data from being exposed in connection with a data breach involving Accellion's File Transfer Appliance. The Company denies any wrongdoing, and at a mediation in September 2021, the Company reached a settlement with plaintiffs in three of the pending class actions which, if approved by court, should resolve most or all of the pending litigation related to this matter. In addition, claims related to these lawsuits are anticipated to be covered in part by the Company's insurance carrier. As a result, while these matters are subject to many uncertainties, the Company does not believe that an adverse outcome in these matters is likely to have a materially adverse impact on the Company's financial condition, results of operations and cash flows.

Pharmacy Benefits Management Matters

On March 11, 2021, the State of Ohio filed a civil action against the Company and the Company's subsidiaries, Buckeye Health Plan Community Solutions, Inc. and Envolve, in Franklin County Court of Common Pleas, captioned as Ohio Department of Medicaid, et al. v. Centene Corporation, et al. The complaint alleged breaches of contract with the Ohio Department of Medicaid relating to the provision of PBM services and violations of Ohio law relating to such contracts, including among other things, by (i) seeking payment for services already reimbursed, (ii) not accurately disclosing to the Ohio Department of Medicaid the true cost of the PBM services and (iii) inflating dispensing fees for prescription drugs. The plaintiffs sought an undisclosed sum of money in damages, penalties, and possible termination of the contract with Buckeye Health Plan.

The Company has reached no-fault agreements with the Attorneys General, including Ohio, to resolve claims and/or allegations made by the states related to services previously provided by Envolve. As a result of the settlement, the Ohio Attorney General's litigation against the Company was dismissed. Additionally, the Company is in discussions to bring final resolution to similar concerns in other affected states. Consistent with those discussions, the Company recorded a reserve estimate of $1,250 million in the second quarter of 2021 related to this issue, inclusive of the above settlements and rebates that the Company determined in the course of the matter are payable across products. Additional claims, reviews or investigations relating to the Company's historical PBM business across products may be brought by other states, the federal government, or shareholder litigants, and there is no guarantee the Company will have the ability to settle such claims with other states within the reserve estimate the Company has recorded and on other acceptable terms, or at all. This matter is subject to many uncertainties, and an adverse outcome in this matter could have an adverse impact on the Company's financial condition, results of operations and cash flows.

Previous: Cover and table of contents · Next: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.