Centene 10-Q 2023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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FORM 10-Q

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(Mark One)

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

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Commission file number: 001-31826

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CENTENE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware									42-1406317
(State or other jurisdiction of									(I.R.S. Employer
incorporation or organization)									Identification Number)
7700 Forsyth Boulevard
St. Louis,			Missouri						63105
(Address of principal executive offices)									(Zip Code)

Registrant's telephone number, including area code: (314) 725-4477

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class			Trading Symbol(s)			Name of Each Exchange on Which Registered
Common Stock $0.001 Par Value			CNC			New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer			☒			Accelerated filer			☐
Non-accelerated filer			☐			Smaller reporting company			☐
						Emerging growth company			☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 20, 2023, the registrant had 534,201 thousand shares of common stock outstanding.

CENTENE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

						PAGE
Part I
Financial Information
Item 1.			Financial Statements			1
			Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022			1
			Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)			2
			Consolidated Statements of Comprehensive Earnings (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)			3
			Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)			4
			Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (unaudited)			6
			Notes to the Consolidated Financial Statements (unaudited)			7
Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			40
Item 4.			Controls and Procedures			40
Part II
Other Information
Item 1.			Legal Proceedings			41
Item 1A.			Risk Factors			41
Item 2.			Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities			42
Item 6.			Exhibits			43
Signatures						44

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements. Without limiting the foregoing, forward-looking statements often use words such as "believe," "anticipate," "plan," "expect," "estimate," "intend," "seek," "target," "goal," "may," "will," "would," "could," "should," "can," "continue," and other similar words or expressions (and the negative thereof). Centene Corporation and its subsidiaries (Centene, the Company, our or we) intends such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. In particular, these statements include, without limitation, statements about our future operating or financial performance, market opportunity, value creation strategy, competition, expected activities in connection with completed and future acquisitions and dispositions, our investments, and the adequacy of our available cash resources. These statements may be found in the various sections of this filing, such as Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Part II, Item 1. "Legal Proceedings."

These forward-looking statements reflect our current views with respect to future events and are based on numerous assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, business strategies, operating environments, future developments, and other factors we believe appropriate. By their nature, forward-looking statements involve known and unknown risks and uncertainties and are subject to change because they relate to events and depend on circumstances that will occur in the future, including economic, regulatory, competitive, and other factors that may cause our or our industry's actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions.

All forward-looking statements included in this filing are based on information available to us on the date of this filing. Except as may be otherwise required by law, we undertake no obligation to update or revise the forward-looking statements included in this filing, whether as a result of new information, future events, or otherwise, after the date of this filing. You should not place undue reliance on any forward-looking statements, as actual results may differ materially from projections, estimates, or other forward-looking statements due to a variety of important factors, variables, and events including, but not limited to:

• our ability to design and price products that are competitive and/or actuarially sound including but not limited to any impacts resulting from Medicaid redeterminations;

• our ability to maintain or achieve improvement in the Centers for Medicare and Medicaid Services (CMS) Star ratings and maintain or achieve improvement in other quality scores in each case that can impact revenue and future growth;

• our ability to accurately predict and effectively manage health benefits and other operating expenses and reserves, including fluctuations in medical utilization rates;

• competition, including our ability to reprocure our contracts and grow organically;

• the timing and extent of benefits from our value creation strategy, including the possibility that the benefits received may be lower than expected, may not occur, or will not be realized within the expected time periods;

• our ability to manage our information systems effectively;

• disruption, unexpected costs, or similar risks from business transactions, including acquisitions, divestitures, and changes in our relationships with third parties;

• impairments to real estate, investments, goodwill, and intangible assets;

• changes in senior management, loss of one or more key personnel or an inability to attract, hire, integrate and retain skilled personnel;

• membership and revenue declines or unexpected trends;

• rate cuts or other payment reductions or delays by governmental payors and other risks and uncertainties affecting our government businesses;

• changes in healthcare practices, new technologies, and advances in medicine;

• increased healthcare costs;

• inflation;

• changes in economic, political, or market conditions;

• changes in federal or state laws or regulations, including changes with respect to income tax reform or government healthcare programs as well as changes with respect to the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act (collectively referred to as the ACA) and any regulations enacted thereunder;

• tax matters;

• disasters or major epidemics;

i

• changes in expected contract start dates;

• changes in provider, state, federal, foreign, and other contracts and delays in the timing of regulatory approval of contracts, including due to protests;

• the expiration, suspension, or termination of our contracts with federal or state governments (including, but not limited to, Medicaid, Medicare, TRICARE, or other customers);

• the difficulty of predicting the timing or outcome of legal or regulatory proceedings or matters, including, but not limited to, our ability to resolve claims and/or allegations made by states with regard to past practices, including at Centene Pharmacy Services (formerly Envolve Pharmacy Solutions, Inc. (Envolve)), as our pharmacy benefits manager (PBM) subsidiary, within the reserve estimate we previously recorded and on other acceptable terms, or at all, or whether additional claims, reviews or investigations will be brought by states, the federal government or shareholder litigants, or government investigations;

• challenges to our contract awards;

• cyber-attacks or other privacy or data security incidents;

• the exertion of management's time and our resources, and other expenses incurred and business changes required in connection with complying with the terms of our contracts and the undertakings in connection with any regulatory, governmental, or third party consents or approvals for acquisitions or dispositions;

• any changes in expected closing dates, estimated purchase price, or accretion for acquisitions or dispositions, including due to the timing of regulatory approval for the pending sale of Circle Health Group (Circle Health);

• losses in our investment portfolio;

• restrictions and limitations in connection with our indebtedness;

• a downgrade of the credit rating of our indebtedness;

• the availability of debt and equity financing on terms that are favorable to us; and

• foreign currency fluctuations.

This list of important factors is not intended to be exhaustive. We discuss certain of these matters more fully, as well as certain other factors that may affect our business operations, financial condition, and results of operations, in our filings with the Securities and Exchange Commission (SEC), including our annual report on Form 10-K, other quarterly reports on Form 10-Q and current reports on Form 8-K. Due to these important factors and risks, we cannot give assurances with respect to our future performance, including without limitation our ability to maintain adequate premium levels or our ability to control our future medical and selling, general and administrative costs.

ii

Non-GAAP Financial Presentation

The Company is providing certain non-GAAP financial measures in this report as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company's operations and measure the Company's performance more consistently across periods. The Company uses the presented non-GAAP financial measures internally in evaluating the Company's performance and for planning purposes, by allowing management to focus on period-to-period changes in the Company's core business operations, and in determining employee incentive compensation. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

Specifically, the Company believes the presentation of non-GAAP financial information that excludes amortization of acquired intangible assets, acquisition and divestiture related expenses, as well as other items, allows investors to develop a more meaningful understanding of the Company's core performance over time.

The tables below provide reconciliations of non-GAAP items ($ in millions, except per share data):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
GAAP net earnings attributable to Centene			$	469					$	738					$	2,657					$	1,415
Amortization of acquired intangible assets			180						211						542						609
Acquisition and divestiture related expenses			16						30						52						149
Other adjustments (1)			472						(222)						345						1,225
Income tax effects of adjustments (2)			(55)						(2)						(190)						(521)
Adjusted net earnings			$	1,082					$	755					$	3,406					$	2,877
GAAP diluted earnings per share (EPS) attributable to Centene			$	0.87					$	1.27					$	4.85					$	2.41
Amortization of acquired intangible assets			0.33						0.36						0.99						1.04
Acquisition and divestiture related expenses			0.03						0.05						0.09						0.25
Other adjustments (1)			0.87						(0.38)						0.63						2.09
Income tax effects of adjustments (2)			(0.10)						—						(0.35)						(0.89)
Adjusted diluted EPS			$	2.00					$	1.30					$	6.21					$	4.90

(1) Other adjustments include the following pre-tax items:

2023:

(a) for the three months ended September 30, 2023: Circle Health impairment of $251 million, or $0.46 per share ($0.50 after-tax), Operose Health impairment of $142 million, or $0.26 per share ($0.24 after-tax), real estate impairments of $47 million, or $0.09 per share ($0.09 after-tax), severance costs due to a restructuring of $22 million, or $0.04 per share ($0.03 after-tax), and a reduction to the previously recorded gain on the sale of Magellan Rx of $10 million, or $0.02 per share ($0.00 after-tax);

(b) for the nine months ended September 30, 2023: Circle Health impairment of $251 million, or $0.46 per share ($0.49 after-tax), Operose Health impairment of $142 million, or $0.26 per share ($0.24 after-tax), real estate impairments of $92 million, or $0.17 per share ($0.15 after-tax), gain on the sale of Apixio of $91 million, or $0.17 per share ($0.12 after-tax), gain on the sale of Magellan Specialty Health of $79 million, or $0.14 per share ($0.12 after-tax), severance costs due to a restructuring of $22 million, or $0.04 per share ($0.03 after-tax), gain on the previously reported divestiture of Centurion of $15 million, or $0.03 per share ($0.02 after-tax), an additional loss on the divestiture of our Spanish and Central European businesses of $13 million, or $0.02 per share ($0.01 after-tax), and a reduction to the previously recorded gain on the sale of Magellan Rx of $10 million, or $0.02 per share ($0.00 after-tax).

iii

2022:

(a) for the three months ended September 30, 2022: gain on the sale of PANTHERx Rare (PANTHERx) of $490 million, or $0.84 per share ($0.65 after-tax), impairment of assets associated with the divestiture of our Spanish and Central European businesses of $165 million, or $0.28 per share ($0.23 after-tax), real estate impairments of $127 million, or $0.22 per share ($0.16 after-tax), increase to the previously reported gain on the divestiture of U.S. Medical Management (USMM) due to the finalization of working capital adjustments of $13 million, or $0.02 per share ($0.01 after-tax), gain on debt extinguishment related to the repurchases of senior notes of $10 million, or $0.02 per share ($0.01 after-tax), and an adjustment to the costs related to the PBM legal settlement of $1 million, or $0.00 per share ($0.00 after-tax);

(b) for the nine months ended September 30, 2022: real estate impairments of $1,581 million, or $2.69 per share ($1.98 after-tax), gain on the sale of PANTHERx of $490 million, or $0.83 per share ($0.65 after-tax), impairment of assets associated with the divestiture of our Spanish and Central European businesses of $165 million, or $0.28 per share ($0.23 after-tax), gain on debt extinguishment of $23 million, or $0.04 per share ($0.03 after-tax), increase to the previously reported gain on the divestiture of USMM due to the finalization of working capital adjustments of $13 million, or $0.02 per share ($0.02 after-tax), and costs related to the PBM legal settlement of $5 million, or $0.01 per share ($0.01 after-tax).

(2) The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment. In addition, the nine months ended September 30, 2023, include a one-time income tax benefit of $69 million, or $0.12 per share, resulting from the distribution of long-term stock awards to the estate of the Company's former CEO. The nine months ended September 30, 2022, also include an $18 million, or $0.03 per share, increase to the income tax benefit on the previously reported non-cash impairment of our equity method investment in RxAdvance.

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
GAAP selling, general and administrative expenses			$	3,048					$	2,846					$	9,075					$	8,391
Less:
Acquisition and divestiture related expenses			16						28						52						149
Restructuring costs			22						—						22						—
Costs related to the PBM legal settlement			—						1						—						5
Real estate optimization			—						3						7						7
Adjusted selling, general and administrative expenses			$	3,010					$	2,814					$	8,994					$	8,230

iv

PART I

FINANCIAL INFORMATION

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

			September 30, 2023						December 31, 2022
			(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents			$	18,190					$	12,074
Premium and trade receivables			15,503						13,272
Short-term investments			2,241						2,321
Other current assets			5,471						2,461
Total current assets			41,405						30,128
Long-term investments			15,234						14,684
Restricted deposits			1,343						1,217
Property, software and equipment, net			2,004						2,432
Goodwill			17,558						18,812
Intangible assets, net			6,277						6,911
Other long-term assets			560						2,686
Total assets			$	84,381					$	76,870
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS' EQUITY
Current liabilities:
Medical claims liability			$	17,141					$	16,745
Accounts payable and accrued expenses			15,081						9,525
Return of premium payable			2,160						1,634
Unearned revenue			2,356						478
Current portion of long-term debt			113						82
Total current liabilities			36,851						28,464
Long-term debt			17,888						17,938
Deferred tax liability			577						615
Other long-term liabilities			3,649						5,616
Total liabilities			58,965						52,633
Commitments and contingencies
Redeemable noncontrolling interests			21						56
Stockholders' equity:
Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at September 30, 2023 and December 31, 2022			—						—
Common stock, $0.001 par value; authorized 800,000 shares; 614,956 issued and 534,596 outstanding at September 30, 2023, and 607,847 issued and 550,754 outstanding at December 31, 2022			1						1
Additional paid-in capital			20,243						20,060
Accumulated other comprehensive (loss)			(1,122)						(1,132)
Retained earnings			11,998						9,341
Treasury stock, at cost (80,360 and 57,093 shares, respectively)			(5,825)						(4,213)
Total Centene stockholders' equity			25,295						24,057
Nonredeemable noncontrolling interest			100						124
Total stockholders' equity			25,395						24,181
Total liabilities, redeemable noncontrolling interests and stockholders' equity			$	84,381					$	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 September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Revenues:
Premium			$	33,866					$	31,848					$	101,404					$	95,247
Service			1,101						1,878						3,353						6,679
Premium and service revenues			34,967						33,726						104,757						101,926
Premium tax			3,075						2,139						9,782						7,060
Total revenues			38,042						35,865						114,539						108,986
Expenses:
Medical costs			29,479						28,111						88,260						83,261
Cost of services			856						1,571						2,603						5,658
Selling, general and administrative expenses			3,048						2,846						9,075						8,391
Depreciation expense			148						150						436						470
Amortization of acquired intangible assets			180						211						542						609
Premium tax expense			3,156						2,211						10,021						7,258
Impairment			440						289						478						1,739
Total operating expenses			37,307						35,389						111,415						107,386
Earnings from operations			735						476						3,124						1,600
Other income (expense):
Investment and other income			214						692						992						786
Debt extinguishment			—						10						—						26
Interest expense			(181)						(169)						(542)						(491)
Earnings before income tax			768						1,009						3,574						1,921
Income tax expense			293						269						914						500
Net earnings			475						740						2,660						1,421
(Earnings) attributable to noncontrolling interests			(6)						(2)						(3)						(6)
Net earnings attributable to Centene Corporation			$	469					$	738					$	2,657					$	1,415
Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share			$	0.87					$	1.29					$	4.86					$	2.44
Diluted earnings per common share			$	0.87					$	1.27					$	4.85					$	2.41
Weighted average number of common shares outstanding:
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The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties.

EXECUTIVE OVERVIEW

General

We are a leading healthcare enterprise, committed to helping people live healthier lives, with an established expertise in lower-income and medically complex populations. We provide access to high-quality healthcare, innovative programs, and a wide range of health solutions that help families and individuals get well, stay well, and be well. We believe that our local approach enables us to provide accessible, quality, culturally sensitive healthcare coverage to our communities.

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

Value Creation Plan

We established our Value Creation Plan to drive margin expansion by leveraging our scale and generating sustainable, profitable growth. In addition to creating shareholder value, this plan is an ongoing effort to modernize and improve how we work in order to propel our organization to new levels of success and elevate the member and provider experiences. During the nine months ended September 30, 2023, we completed the following key milestones in our Value Creation Plan:

• Completed the divestitures of Magellan Specialty Health, Centurion (our prison healthcare business), HealthSmart (our third-party health plan administration business), and our majority stake in Apixio. In addition, in the third quarter of 2023, we entered into a definitive agreement to sell Circle Health Group (Circle Health).

• Completed $1.6 billion of common stock repurchases through our stock repurchase program, which were funded through divestiture proceeds and free cash flow generated from operations. In October 2023, we completed an additional $27 million of common stock repurchases.

• Completed operating model changes initiated in 2022, including streamlining call center management and utilization management.

• Initiated standardization of our pharmacy operating model and completed an RFP for pharmacy benefits management (PBM) services.

• Launched our next-gen clinical population health platform.

Segments Update

In the first quarter of 2023, and in conjunction with our updated strategic plan, executive leadership realignment, and corresponding 2023 divestitures, we revised the way we manage the business, evaluate performance, and allocate resources, resulting in an updated segment structure comprised of (1) a Medicaid segment, (2) a Medicare segment, (3) a Commercial segment and (4) an Other segment. We began reporting under this new segment structure in 2023. Prior year information has been adjusted to reflect the change in segment reporting.

Regulatory Trends and Uncertainties

The United States government, policymakers, and healthcare experts continue to discuss and debate various elements of the United States healthcare model. We remain focused on the promise of delivering access to high-quality, affordable healthcare to all of our members and believe we are well positioned to meet the needs of the changing healthcare landscape.

In contrast to previous executive and legislative efforts to restrict or limit certain provisions of the Affordable Care Act (ACA), legislation and regulations at the federal level over the last few years have contained provisions aimed at leveraging Medicaid and the Health Insurance Marketplace to expand health insurance coverage and affordability to consumers. The American Rescue Plan Act (ARPA), enacted in March 2021, initially enhanced eligibility for the premium tax credit for enrollees in the Health Insurance Marketplace, which was extended through the 2025 tax year by the Inflation Reduction Act, enacted in August 2022.

In addition, federal regulators for the Centers for Medicare & Medicaid Services (CMS) have finalized some regulations enhancing opportunities for beneficiaries dually enrolled in Medicare and Medicaid to receive integrated care through Medicare Advantage (MA) Dual Eligible Special Needs Plans (D-SNPs). Centene is positioned well given our overlapping Medicaid and MA footprints.

The COVID-19 pandemic has impacted and continues to affect our business as it relates to Medicaid eligibility changes and vaccines and treatments. The Families First Coronavirus Response Act, enacted in March 2020, increased federal matching rates for state Medicaid programs with a requirement that states suspend Medicaid redeterminations throughout the public health emergency (PHE). As a result, since the onset of the PHE through March 2023, our Medicaid membership increased by 3.6 million members (excluding new states North Carolina and Delaware and various state product expansions or managed care organization changes). The Consolidated Appropriations Act, 2023, signed into law on December 29, 2022, delinked the Medicaid continuous coverage requirements from the PHE and, as a result, some states began Medicaid disenrollments on April 1, 2023. Per the Act and clarifying CMS guidance, redeterminations related to the PHE should conclude during the second quarter of 2024. Redeterminations in certain states may move at a slower pace due to CMS compliance action to pause and/or complete corrective action prior to disenrolling beneficiaries. Some states could see redeterminations extend past the second quarter of 2024 given CMS compliance actions.

We are actively engaged to help ensure individuals take the state agency requested action to confirm eligibility in their Medicaid coverage or find other appropriate coverage that is best for themselves and their families. Our Ambetter Health product covers the majority of our Medicaid states, and we believe we are among the best positioned in the healthcare market to enroll those transitioning coverage through redeterminations. Although Medicaid continuous coverage requirements were decoupled from the PHE, we are working to address provisions that were tied to the end of the PHE which expired on May 11, 2023, including COVID costs related to vaccines and treatments, coverage requirements, and various other payment structures.

We also closely monitor state legislation across our markets and are advocating for and seeing adoption of coverage expansions for Medicaid adult populations (e.g. North Carolina), postpartum, foster care, children, among others, as well as mitigating adverse legislation addressing pharmacy, prior authorization, and other issues.

We have more than three decades of experience, spanning seven presidents from both sides of the aisle, in delivering high-quality healthcare services on behalf of states and the federal government to under-insured and uninsured families, commercial organizations, and military families. This expertise has allowed us to deliver cost-effective services to our government partners and our members. With trends in the personalization of healthcare technology, we continue the use of data and analytics to optimize our business. We continue to believe we have both the capacity and capability to successfully navigate industry changes to the benefit of our members, customers, providers, and shareholders.

Third Quarter 2023 Highlights

Our financial performance for the third quarter of 2023 is summarized as follows:

• Managed care membership of 28 million, an increase of 1.2 million members, or 5% year-over-year.

• Total revenues of $38.0 billion, representing 6% growth year-over-year.

• Premium and service revenues of $35.0 billion, representing 4% growth year-over-year.

• HBR of 87.0%, compared to 88.3% for the third quarter of 2022.

• SG&A expense ratio of 8.7%, compared to 8.4% for the third quarter of 2022.

• Adjusted SG&A expense ratio of 8.6%, compared to 8.3% for the third quarter of 2022.

• Operating cash flows of $1.0 billion for the third quarter of 2023.

• Diluted earnings per share (EPS) of $0.87, compared to $1.27 for the third quarter of 2022.

• Adjusted diluted EPS of $2.00, compared to $1.30 for the third quarter of 2022.

A reconciliation from GAAP diluted EPS to adjusted diluted EPS is highlighted below, and additional detail is provided above under the heading "Non-GAAP Financial Presentation":

			Three Months Ended September 30,
			2023						2022
GAAP diluted EPS attributable to Centene			$	0.87					$	1.27
Amortization of acquired intangible assets			0.33						0.36
Acquisition and divestiture related expenses			0.03						0.05
Other adjustments (1)			0.87						(0.38)
Income tax effects of adjustments (2)			(0.10)						—
Adjusted diluted EPS			$	2.00					$	1.30

(1) Other adjustments include the following pre-tax items:

2023:

(a) Circle Health impairment of $251 million, or $0.46 per share ($0.50 after-tax), Operose Health impairment of $142 million, or $0.26 per share ($0.24 after-tax), real estate impairments of $47 million, or $0.09 per share ($0.09 after-tax), severance costs due to a restructuring of $22 million, or $0.04 per share ($0.03 after-tax), and a reduction to the previously recorded gain on the sale of Magellan Rx of $10 million, or $0.02 per share ($0.00 after-tax).

2022:

(b) gain on the sale of PANTHERx Rare (PANTHERx) of $490 million, or $0.84 per share ($0.65 after-tax), impairment of assets associated with the divestiture of our Spanish and Central European businesses of $165 million, or $0.28 per share ($0.23 after-tax), real estate impairments of $127 million, or $0.22 per share ($0.16 after-tax), increase to the previously reported gain on the divestiture of U.S. Medical Management (USMM) due to the finalization of working capital adjustments of $13 million, or $0.02 per share ($0.01 after-tax), gain on debt extinguishment related to the repurchases of senior notes of $10 million, or $0.02 per share ($0.01 after-tax), and an adjustment to the costs related to the PBM legal settlement of $1 million, or $0.00 per share ($0.00 after-tax).

(2) The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment.

Current and Future Operating Drivers

The following items contributed to our results of operations as compared to the previous year:

Medicaid

• In September 2023, our subsidiary, Superior HealthPlan (Superior), commenced a new, six-year contract awarded by the Texas Health and Human Services Commission to continue providing youth in foster care with healthcare coverage through the STAR Health Medicaid program. Superior has been the sole provider of STAR Health coverage since the program launched in 2008.

• In April 2023, eligibility redeterminations related to the PHE began. We expect that these redeterminations will extend over a 14-month period, with the majority concluding in the second quarter of 2024. Eligibility suspensions from the onset of the PHE drove increased membership through March 2023.

• In April 2023, the state of New York removed pharmacy services for certain of our managed care contracts in connection with the state's transition of pharmacy services to Medicaid fee-for-service.

• In February 2023, our subsidiary, Buckeye Health Plan, commenced the Medicaid contract awarded by the Ohio Department of Medicaid to continue servicing members with quality healthcare, coordinated services, and benefits.

• In January 2023, our subsidiary, Delaware First Health, commenced its contract for the statewide Medicaid managed care programs.

• In January 2023, our subsidiary, Louisiana Healthcare Connections, commenced the Medicaid contract awarded by the Louisiana Department of Health to continue administering quality, integrated healthcare services to members across the state.

• In January 2023, our subsidiary, Managed Health Services, commenced the contract awarded by the Indiana Department of Administration to continue serving Hoosier Healthwise and Health Indiana Plan members with Medicaid and Medicaid alternative managed care and care coordination services.

• In October 2022, the state of Ohio removed pharmacy services in connection with the state's transition from managed care to a single PBM.

• In July 2022, our subsidiary, Home State Health, commenced the MO HealthNet Managed Care General Plan and Specialty Plan contracts. Under the General Plan, Home State Health continues to serve multiple MO HealthNet programs including Children's Health Insurance members and the state's newly implemented Medicaid expansion population, across all regions of Missouri. Additionally, as the sole provider of the newly awarded Specialty Plan, Home State Health now serves approximately 49,300 foster children and children receiving adoption subsidy assistance.

Medicare

• Medicare membership declined year-over-year due to lower enrollment during both the annual and open enrollment periods.

Commercial

• In 2023, our Health Insurance Marketplace product, Ambetter Health, expanded into Alabama and extended its footprint by more than 60 counties across 12 existing states. In total, the Marketplace plan is available in more than 1,500 counties across 28 states. Additionally, Marketplace membership increased year-over-year due to the expanded footprint, strong product positioning and open enrollment results, as well as overall market growth.

Other

• In June 2023, we completed the divestiture of Apixio, repositioning the business with a financial partner that can continue to invest in it. We maintain a close relationship with, and a minority interest in, the business.

• In January 2023, we completed the divestitures of Magellan Specialty Health, Centurion (our prison healthcare business), and HealthSmart (our third-party health plan administration business).

• In December 2022, we completed the divestiture of Magellan Rx, which was part of the Magellan Health, Inc. (Magellan) business acquired in January 2022.

• In November 2022, we completed the divestiture of our ownership stakes in our Spanish and Central European businesses, including Ribera Salud, Torrejón Salud, and Pro Diagnostics Group.

• In July 2022, we completed the divestiture of PANTHERx Rare (PANTHERx).

We expect the following items to impact our future results of operations:

Medicaid

• In July 2023, our subsidiary, Superior, announced it entered into a contract to continue to provide healthcare coverage to the aged, blind, or disabled (ABD) population in the state's STAR+PLUS program. The contract is anticipated to begin in September 2024 for a six-year term with a maximum of three additional two-year extensions.

• In June 2023, our subsidiary, Oklahoma Complete Health, was selected by the Oklahoma Health Care Authority for statewide contracts to provide managed care for the SoonerSelect and SoonerSelect Children's Specialty Plan programs. The contracts are anticipated to begin in April 2024 for a one-year term with five, one-year renewal options.

• In March 2023, the state of North Carolina passed legislation for Medicaid Expansion. We expect the program to commence in December 2023.

• In December 2022, the federal government's year-end spending bill was passed, including key coverage expansions for Medicaid and the Children's Health Insurance Program (CHIP). The provisions require states to provide 12 months of continuous coverage for children under Medicaid and CHIP effective January 2024 and made the state option to extend coverage for postpartum women for up to 12 months permanent.

• In December 2022, our subsidiary, Health Net of California, was selected by the California Department of Health Care Services for direct Medicaid contracts in 10 counties, including Los Angeles (in which a portion will be subcontracted). The contracts are anticipated to begin in January 2024.

• In September 2022, our subsidiary, Nebraska Total Care, was awarded the Nebraska Department of Health and Human Services statewide Medicaid managed care contract. Under the new contract, Nebraska Total Care will continue serving the state's Medicaid Managed Care Program, known as Heritage Health. The new contract term is five years and includes the option for two, one-year renewals. The contract is anticipated to begin in January 2024, subject to the resolution of third-party protests.

• In August 2022, our subsidiary, Magnolia Health Plan (Magnolia), was awarded the Mississippi Division of Medicaid contract. Under the new contract, Magnolia will continue serving the state's Coordinated Care Organization Program, which will consist of the Mississippi Coordinated Access Network and the Mississippi CHIP. The contract is anticipated to begin in July 2024, subject to the resolution of third-party protests.

• In August 2021, our subsidiaries, Carolina Complete Health and WellCare of North Carolina, were selected to coordinate physical and/or other health services with Local Management Entities/Managed Care Organizations under the state's new Tailored Plans. The Tailored Plans are integrated health plans designed for individuals with significant behavioral health needs and intellectual/developmental disabilities. The Tailored Plans are expected to commence no later than July 2024.

Medicare

• In October 2023, CMS issued 2024 Medicare Advantage Star Ratings on the Medicare Plan Finder. Based on the data, approximately 73% of membership is associated with contracts showing year-over-year unrounded score improvement, and approximately 87% of membership is associated with contracts rated 3.0 stars or better - compared to 53% in the prior year. While we have work to do to improve star scores, this demonstrates the first step towards our multi-year goals.

• We expect that the decrease in Star quality ratings in the 2023 rating year, which CMS published in October 2022, will adversely impact our 2024 Medicare revenue. The decrease in Star quality ratings is driven by the expiration of certain disaster relief provisions as well as deterioration in select metrics. Over the past year, our leadership team launched a multi-year plan to build and improve quality across the enterprise with a strong focus on enhanced patient experience and access to care.

Other

• In August 2023, Centene signed a definitive agreement to sell Circle Health Group, one of the U.K.'s largest independent hospital operators. The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close in the first quarter of 2024.

• We continue to execute on Value Creation Plan initiatives including the award of the new PBM contract commencing in 2024, portfolio review, real estate optimization, stock and debt repurchases, along with an ongoing focus on quality improvement actions. We expect these actions will drive future margin expansion, create shareholder value, and improve the experience for our members and providers.

MEMBERSHIP

From September 30, 2022 to September 30, 2023, we increased our managed care membership by 1.2 million, or 5%. The following table sets forth our membership by line of business:

						September 30, 2023						December 31, 2022						September 30, 2022
Traditional Medicaid (1)						13,470,900						14,264,800						14,000,100
High Acuity Medicaid (2)						1,769,600						1,710,000						1,698,100
Total Medicaid (4)						15,240,500						15,974,800						15,698,200
Commercial Marketplace						3,681,600						2,076,100						2,087,800
Commercial Group						424,200						441,100						439,800
Total Commercial						4,105,800						2,517,200						2,527,600
Medicare (3) (4)						1,310,600						1,511,100						1,517,900
Medicare PDP						4,539,800						4,226,000						4,186,200
Total at-risk membership						25,196,700						24,229,100						23,929,900
TRICARE eligibles						2,773,200						2,832,300						2,832,300
Total						27,969,900						27,061,400						26,762,200
(1)			Membership includes Temporary Assistance for Needy Families (TANF), Medicaid Expansion, Children's Health Insurance Program (CHIP), Foster Care, and Behavioral Health.
(2)			Membership includes Aged, Blind, or Disabled (ABD), Intellectual and Developmental Disabilities (IDD), Long-Term Services and Supports (LTSS), and Medicare-Medicaid Plans (MMP) Duals.
(3)			Membership includes Medicare Advantage and Medicare Supplement.
(4)			Membership includes 1,311,500, 1,291,300, and 1,285,600 Dual Eligible Special Needs Plans (D-SNP) beneficiaries for the periods ending September 30, 2023, December 31, 2022, and September 30, 2022, respectively.

RESULTS OF OPERATIONS

The following discussion and analysis is based on our Consolidated Statements of Operations, which reflect our results of operations for the three and nine months ended September 30, 2023 and 2022, prepared in accordance with generally accepted accounting principles in the United States (GAAP).

Summarized comparative financial data for the three and nine months ended September 30, 2023 and 2022 is as follows ($ in millions, except per share data in dollars):

			Three Months Ended September 30,																		Nine Months Ended September 30,
			2023						2022						% Change						2023						2022						% Change
Premium			$	33,866					$	31,848					6		%				$	101,404					$	95,247					6		%
Service			1,101						1,878						(41)		%				3,353						6,679						(50)		%
Premium and service revenues			34,967						33,726						4		%				104,757						101,926						3		%
Premium tax			3,075						2,139						44		%				9,782						7,060						39		%
Total revenues			38,042						35,865						6		%				114,539						108,986						5		%
Medical costs			29,479						28,111						5		%				88,260						83,261						6		%
Cost of services			856						1,571						(46)		%				2,603						5,658						(54)		%
Selling, general and administrative expenses			3,048						2,846						7		%				9,075						8,391						8		%
Depreciation expense			148						150						(1)		%				436						470						(7)		%
Amortization of acquired intangible assets			180						211						(15)		%				542						609						(11)		%
Premium tax expense			3,156						2,211						43		%				10,021						7,258						38		%
Impairment			440						289						52		%				478						1,739						(73)		%
Earnings from operations			735						476						54		%				3,124						1,600						95		%
Investment and other income			214						692						(69)		%				992						786						26		%
Debt extinguishment			—						10						n.m.						—						26						n.m.
Interest expense			(181)						(169)						(7)		%				(542)						(491)						(10)		%
Earnings before income tax			768						1,009						(24)		%				3,574						1,921						86		%
Income tax expense			293						269						9		%				914						500						83		%
Net earnings			475						740						(36)		%				2,660						1,421						87		%
(Earnings) attributable to noncontrolling interests			(6)						(2)						n.m.						(3)						(6)						50		%
Net earnings attributable to Centene Corporation			$	469					$	738					(36)		%				$	2,657					$	1,415					88		%
Diluted earnings per common share attributable to Centene Corporation			$	0.87					$	1.27					(31)		%				$	4.85					$	2.41					101		%
n.m.: not meaningful

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Total Revenues

The following table sets forth supplemental revenue information for the three months ended September 30, ($ in millions):

						2023						2022						% Change
Medicaid						$	24,694					$	23,293					6		%
Commercial						6,453						4,292						50		%
Medicare (1)						5,430						5,639						(4)		%
Other						1,465						2,641						(45)		%
Total revenues						$	38,042					$	35,865					6		%
(1)			Medicare includes Medicare Advantage, Medicare Supplement, D-SNPs, and Medicare Prescription Drug Plan (PDP).

Total revenues increased 6% in the three months ended September 30, 2023, over the corresponding period in 2022, driven by membership growth in the Marketplace business due to strong product positioning as well as overall market growth. The revenue growth was partially offset by recent divestitures.

Operating Expenses

Medical Costs/HBR

The HBR for the three months ended September 30, 2023, was 87.0%, compared to 88.3% in the same period in 2022. The decrease is primarily attributed to growth in the Marketplace business, which runs at a lower HBR and strong performance from pricing discipline and execution.

Cost of Services

Cost of services decreased by $715 million in the three months ended September 30, 2023, compared to the corresponding period in 2022. The cost of service ratio for the three months ended September 30, 2023, was 77.7%, compared to 83.7% in the same period in 2022. The decreases were driven by recent divestitures.

Selling, General & Administrative Expenses

The SG&A expense ratio was 8.7% for the third quarter of 2023, compared to 8.4% in the third quarter of 2022. The adjusted SG&A expense ratio was 8.6% for the third quarter of 2023, compared to 8.3% in the third quarter of 2022. The increases were driven by growth in the Marketplace business, which operates at a meaningfully higher SG&A ratio as compared to Medicaid.

Impairment

During the third quarter of 2023, we recorded total impairment charges of $440 million, including a $251 million charge related to assets associated with the pending divestiture of Circle Health, a $142 million charge related to assets associated with our Operose Health business based on market indicators of fair value, and additional impairments of $47 million related to our ongoing real estate optimization initiatives.

During the third quarter of 2022, we recorded total impairment charges of $289 million, including a $165 million charge related to assets associated with the divestiture of our Spanish and Central European businesses and $124 million related to the reduction of our real estate footprint consisting of leased and owned real estate assets and related fixed assets.

Other Income (Expense)

The following table summarizes the components of other income (expense) for the three months ended September 30, ($ in millions):

			2023						2022
Investment and other income			$	214					$	692
Debt extinguishment			—						10
Interest expense			(181)						(169)
Other income (expense), net			$	33					$	533

Investment and other income. Investment and other income decreased by $478 million in the three months ended September 30, 2023, compared to the corresponding period in 2022. The three months ended September 30, 2023 included a $75 million realized loss on the sale of investments from rebalancing a portion of our portfolio with a focus on higher interest rate investments. The three months ended September 30, 2022 included a $490 million gain on the sale of PANTHERx.

Debt extinguishment. During the third quarter of 2022, we repurchased $83 million of our 4.25% Senior Notes due 2027 and $176 million of our 4.625% Senior Notes due 2029 through our debt repurchase program, resulting in a gain on extinguishment of $10 million.

Interest expense. Interest expense increased by $12 million in the three months ended September 30, 2023, compared to the corresponding period in 2022. The increase was driven by higher interest rates on variable rate debt.

Income Tax Expense

For the three months ended September 30, 2023, we recorded income tax expense of $293 million on pre-tax earnings of $768 million, or an effective tax rate of 38.2%. The effective tax rate for the third quarter of 2023 reflects the tax effects of impairments as well as the pending divestiture of Circle Health. For the third quarter of 2023, our effective tax rate on adjusted earnings was 24.2%.

For the three months ended September 30, 2022, we recorded an income tax expense of $269 million on pre-tax earnings of $1.0 billion, or an effective tax rate of 26.6%. For the third quarter of 2022, our effective tax rate on adjusted earnings was 26.3%.

Segment Results

The following table summarizes our consolidated operating results by segment for the three months ended September 30, ($ in millions):

						2023						2022						% Change
Total Revenues
Medicaid						$	24,694					$	23,293					6		%
Medicare						5,430						5,639						(4)		%
Commercial						6,453						4,292						50		%
Other						1,465						2,641						(45)		%
Consolidated total						$	38,042					$	35,865					6		%
Gross Margin (1)
Medicaid						$	2,012					$	2,079					(3)		%
Medicare						968						909						6		%
Commercial						1,364						679						101		%
Other						288						377						(24)		%
Consolidated total						$	4,632					$	4,044					15		%
(1)			Gross margin represents premium and service revenues less medical costs and cost of services.

Medicaid

Total revenues increased 6% in the three months ended September 30, 2023, compared to the corresponding period in 2022. Gross margin decreased $67 million in the three months ended September 30, 2023, compared to the corresponding period in 2022, driven by an increase in total revenue, offset by a retroactive rate decrease from one state.

Medicare

Total revenues decreased 4% in the three months ended September 30, 2023, compared to the corresponding period in 2022 driven by lower membership. Gross margin increased $59 million in the three months ended September 30, 2023, compared to the corresponding period in 2022, driven by product offerings designed to improve HBR.

Commercial

Total revenues increased 50% in the three months ended September 30, 2023, compared to the corresponding period in 2022. Gross margin increased $685 million in the three months ended September 30, 2023, compared to the corresponding period in 2022. Increases were primarily driven by 76% membership growth in the Marketplace business, resulting from strong product positioning and overall market growth.

Other

Total revenues decreased 45% in the three months ended September 30, 2023, compared to the corresponding period in 2022. Gross margin decreased $89 million in the three months ended September 30, 2023, compared to the corresponding period in 2022. Decreases were primarily due to recent divestitures.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Total Revenues

The following table sets forth supplemental revenue information for the nine months ended September 30, ($ in millions):

						2023						2022						% Change
Medicaid						$	75,523					$	69,822					8		%
Commercial						17,439						12,979						34		%
Medicare (1)						16,971						17,035						n.m.
Other						4,606						9,150						(50)		%
Total revenues						$	114,539					$	108,986					5		%
(1)			Medicare includes Medicare Advantage, Medicare Supplement, D-SNPs, and Medicare PDP.
			n.m.: not meaningful

Total revenues increased 5% in the nine months ended September 30, 2023, over the corresponding period in 2022 driven by 76% membership growth in the Marketplace business due to strong product positioning as well as overall market growth. The revenue growth was partially offset by recent divestitures.

Operating Expenses

Medical Costs/HBR

The HBR for the nine months ended September 30, 2023 was 87.0%, compared to 87.4% in the same period in 2022. The decrease is primarily attributed to growth in the Marketplace business, which runs at a lower HBR and strong performance from pricing discipline and execution.

Cost of Services

Cost of services decreased by $3.1 billion in the nine months ended September 30, 2023, compared to the corresponding period in 2022. The cost of service ratio for the nine months ended September 30, 2023 was 77.6%, compared to 84.7% in the same period in 2022. The decreases were driven by recent divestitures.

Selling, General & Administrative Expenses

The SG&A expense ratio for the nine months ended September 30, 2023 was 8.7%, compared to 8.2% for the corresponding period in 2022. The adjusted SG&A expense ratio for the nine months ended September 30, 2023 was 8.6%, compared to 8.1% for the nine months ended September 30, 2022. The increases were driven by growth in the Marketplace business, which operates at a meaningfully higher SG&A ratio as compared to Medicaid.

Impairment

During the nine months ended September 30, 2023 we recorded total impairment charges of $478 million, including a $251 million charge related to assets associated with the pending divestiture of Circle Health, a $142 million charge related to assets associated with our Operose Health business based on market indicators of fair value, and additional impairments of $85 million related to our ongoing real estate optimization initiatives.

During the nine months ended September 30, 2022, we recorded total impairment charges of $1.7 billion, primarily driven by $1.6 billion related to the reduction of our real estate footprint consisting of leased and owned real estate assets and related fixed assets. The nine months ended September 30, 2022 also included a $165 million charge related to assets associated with the divestiture of our Spanish and Central European businesses.

Other Income (Expense)

The following table summarizes the components of other income (expense) for the nine months ended September 30, ($ in millions):

			2023						2022
Investment and other income			$	992					$	786
Debt extinguishment			—						26
Interest expense			(542)						(491)
Other income (expense), net			$	450					$	321

Investment and other income. Investment and other income increased by $206 million in the nine months ended September 30, 2023, compared to the corresponding period in 2022, driven by higher interest rates on larger investment balances, a $91 million gain on the sale of Apixio, a $79 million gain on the sale of Magellan Specialty Health, and a $15 million gain on the sale of Centurion, partially offset by a $75 million realized loss on the sale of investments from rebalancing a portion of our portfolio with a focus on higher interest rate investments, an additional loss on the sale of our Spanish and Central European businesses of $13 million, and a $10 million reduction to the previously recorded gain on the sale of Magellan Rx. The nine months ended September 30, 2022 included a $490 million gain on the sale of PANTHERx.

Debt extinguishment. During the third quarter of 2022, we repurchased $83 million of our 4.25% Senior Notes due 2027 and $176 million of our 4.625% Senior Notes due 2029 through our debt repurchase program, resulting in a gain on extinguishment of $10 million. In May 2022, we recognized a $13 million gain on the extinguishment of debt related to the refinancing of debt for our Circle Health subsidiary. The 2022 debt extinguishment also includes an immaterial gain related to the redemption of Magellan's outstanding Senior Notes in January 2022.

Interest expense. Interest expense increased by $51 million in the nine months ended September 30, 2023, compared to the corresponding period in 2022. The increase was driven by higher interest rates on variable rate debt.

Income Tax Expense

For the nine months ended September 30, 2023, we recorded income tax expense of $914 million on pre-tax earnings of $3.6 billion, or an effective tax rate of 25.6%. The effective tax rate for 2023 reflects the tax effects of the distribution of long-term stock awards to the estate of the Company's former CEO, divestiture gains, impairments as well as the pending divestiture of Circle Health. For the nine months ended September 30, 2023, our effective tax rate on adjusted earnings was 24.5%.

For the nine months ended September 30, 2022, we recorded income tax expense of $500 million on pre-tax earnings of $1.9 billion, or an effective tax rate of 26.0%. For the nine months ended September 30, 2022, our effective tax rate on adjusted earnings was 26.2%.

Segment Results

The following table summarizes our consolidated operating results by segment for the nine months ended September 30, ($ in millions):

						2023						2022						% Change
Total Revenues
Medicaid						$	75,523					$	69,822					8		%
Medicare						16,971						17,035						n.m.
Commercial						17,439						12,979						34		%
Other						4,606						9,150						(50)		%
Consolidated total						$	114,539					$	108,986					5		%
Gross Margin (1)
Medicaid						$	6,663					$	6,654					n.m.
Medicare						2,617						2,433						8		%
Commercial						3,701						2,563						44		%
Other						913						1,357						(33)		%
Consolidated total						$	13,894					$	13,007					7		%
(1)			Gross margin represents premium and service revenues less medical costs and cost of services.
			n.m.: not meaningful

Medicaid

Total revenues increased 8% in the nine months ended September 30, 2023, compared to the corresponding period in 2022. Gross margin increased $9 million in the nine months ended September 30, 2023, compared to the corresponding period in 2022 primarily driven by net rate increases, partially offset by higher utilization.

Medicare

Total revenues were flat in the nine months ended September 30, 2023, compared to the corresponding period in 2022. Gross margin increased $184 million in the nine months ended September 30, 2023, compared to the corresponding period in 2022 driven primarily by product offerings designed to improve HBR.

Commercial

Total revenues increased 34% in the nine months ended September 30, 2023, compared to the corresponding period in 2022. Gross margin increased $1.1 billion in the nine months ended September 30, 2023, compared to the corresponding period in 2022. Increases were primarily driven by 76% membership growth in the Marketplace business, resulting from strong product positioning and overall market growth.

Other

Total revenues decreased 50% in the nine months ended September 30, 2023, compared to the corresponding period in 2022. Gross margin decreased $444 million in the nine months ended September 30, 2023, compared to the corresponding period in 2022. Decreases were primarily due to recent divestitures.

LIQUIDITY AND CAPITAL RESOURCES

Shown below is a condensed schedule of cash flows used in the discussion of liquidity and capital resources ($ in millions).

			Nine Months Ended September 30,
			2023						2022
Net cash provided by operating activities			$	7,836					$	7,837
Net cash (used in) investing activities			(242)						(3,142)
Net cash (used in) financing activities			(1,457)						(2,465)
Effect of exchange rate changes on cash and cash equivalents			19						(37)
Net increase in cash, cash equivalents, and restricted cash and cash equivalents			$	6,156					$	2,193

Cash Flows Provided by Operating Activities

Normal operations are funded primarily through operating cash flows and borrowings under our revolving credit facility. Operating activities provided cash of $7.8 billion in the nine months ended September 30, 2023, compared to $7.8 billion in the comparable period in 2022. Cash flows provided by operations in 2023 were driven by net earnings and increases in unearned revenue and accounts payable driven by the early receipt of payments from CMS.

Cash flows provided by operations in 2022 were primarily driven by net earnings before the non-cash real estate impairment charge, an increase in medical claims liabilities, and increases in unearned revenue and accounts payable due to the early receipt of payments from CMS.

Cash Flows Used in Investing Activities

Investing activities used cash of $242 million in the nine months ended September 30, 2023, and $3.1 billion in the comparable period in 2022. Cash flows used in investing activities in 2023 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, partially offset by divestiture proceeds.

In 2022, cash flows used in investing activities primarily related to net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments) and our acquisition of Magellan, partially offset by our PANTHERx divestiture proceeds.

We spent $576 million and $771 million in the nine months ended September 30, 2023 and 2022, respectively, on capital expenditures the majority of which was driven by system enhancements and computer hardware.

As of September 30, 2023, our investment portfolio consisted primarily of fixed-income securities with an average duration of 3.5 years. We had unregulated cash and investments of $1.0 billion at September 30, 2023, compared to $1.4 billion at December 31, 2022.

Cash Flows Used in Financing Activities

Financing activities used cash of $1.5 billion in the nine months ended September 30, 2023, compared to using cash of $2.5 billion in the comparable period in 2022. Financing activities in 2023 were driven by stock repurchases of $1.6 billion.

Financing activities in 2022 were driven by stock repurchases of $1.6 billion through our stock repurchase program, the redemption of Magellan's outstanding debt of $535 million acquired in the transaction using Magellan's cash on hand, and senior note debt repurchases of $259 million.

Liquidity Metrics

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. In 2022, the Company's Board of Directors authorized up to a cumulative total of $6.0 billion of repurchases under the program.

During the quarter, we repurchased 11.6 million shares of common stock for $773 million under the stock repurchase program. We have approximately $1.3 billion remaining under the program for repurchases as of September 30, 2023. No duration has been placed on the repurchase program. We reserve the right to discontinue the repurchase program at any time. Refer to Note 10. Stockholders' Equity for further information on stock repurchases.

As of September 30, 2023, we had an aggregate principal amount of $15.7 billion of senior notes issued and outstanding. The indentures governing our various maturities of senior notes contain restrictive covenants. As of September 30, 2023, we were in compliance with all covenants.

As part of our capital allocation strategy, we may decide to repurchase debt or raise capital through the issuance of debt in the form of senior notes. In 2022, the Company's Board of Directors also authorized a $1.0 billion senior note debt repurchase program. No repurchases were made during the quarter ended September 30, 2023. As of September 30, 2023, there was $700 million available under the senior note debt repurchase program.

The credit agreement underlying our Revolving Credit Facility and Term Loan Facility contains customary covenants as well as financial covenants including a minimum fixed charge coverage ratio and a maximum debt-to-EBITDA ratio. Our maximum debt-to-EBITDA ratio under the credit agreement may not exceed 4.0 to 1.0. As of September 30, 2023, we had $309 million of borrowings outstanding under our Revolving Credit Facility, $2.1 billion of borrowings under our Term Loan Facility, and we were in compliance with all covenants. As of September 30, 2023, there were no limitations on the availability of our Revolving Credit Facility as a result of the debt-to-EBITDA ratio.

We had outstanding letters of credit of $212 million as of September 30, 2023, which were not part of our revolving credit facility. The letters of credit bore weighted interest of 0.7% as of September 30, 2023. In addition, we had outstanding surety bonds of $892 million as of September 30, 2023.

At September 30, 2023, our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 41.5%, compared to 42.7% at December 31, 2022. The debt to capital ratio decrease was driven by net earnings partially offset by year-to-date stock repurchases. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.

At September 30, 2023, we had working capital, defined as current assets less current liabilities, of $4.6 billion, compared to $1.7 billion at December 31, 2022. 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.

2023 Expectations

During the remainder of 2023, we expect to receive net dividends from our insurance subsidiaries of approximately $340 million and spend approximately $180 million in additional capital expenditures. In October 2023, we made additional purchases of $27 million through our stock repurchase program.

Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our Revolving Credit Facility will be sufficient to finance our general operations and capital expenditures for at least 12 months from the date of this filing. While we are currently in a strong liquidity position and believe we have adequate access to capital, we may elect to increase borrowings on our Revolving Credit Facility. Our long-term liquidity position is stable, with our senior notes maturing between December 2027 and August 2031, and our Revolving Credit Facility maturing in August 2026. From time to time we may elect to raise additional funds for working capital and other purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. In addition, we may strategically pursue refinancing or redemption opportunities to extend maturities and/or improve terms of our indebtedness if we believe such opportunities are favorable to us.

We intend to continue to evaluate strategic actions in connection with our Value Creation Plan, targeting initiatives to improve productivity, efficiencies and reduced organizational costs, as well as capital deployment activities, including stock repurchases, portfolio optimization and the evaluation of refinancing opportunities. In addition to creating shareholder value, this plan encompasses a larger organizational mission to enhance our member and provider experience, improve outcomes for our members, and initiate new ways of doing business that make Centene a great partner in all aspects of our operations.

REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS

Our operations are conducted through our subsidiaries. As managed care organizations, most of our subsidiaries are subject to state regulations and other requirements that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to us. Generally, the amount of dividend distributions that may be paid by a regulated subsidiary without prior approval by state regulatory authorities is limited based on the entity's level of statutory net income and statutory capital and surplus.

Our regulated subsidiaries are required to maintain minimum capital requirements prescribed by various regulatory authorities in each of the states in which we operate. During the nine months ended September 30, 2023, we received dividends of $1.8 billion from and made $261 million of capital contributions to our regulated subsidiaries. For our subsidiaries that file with the National Association of Insurance Commissioners (NAIC), the aggregate risk-based capital (RBC) level as of December 31, 2022, which was the most recent date for which reporting was required, was in excess of 350% of the Authorized Control Level. We intend to continue to maintain an aggregate RBC level in excess of 350% of the Authorized Control Level during 2023.

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 certain unsecured receivables and intangible assets must be more than the greater of (i) a fixed minimum amount, (ii) a minimum amount based on premiums or (iii) a minimum amount based on healthcare expenditures, excluding capitated amounts.

Under the New York 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 RBC requirements for insurance companies, managed care organizations and other entities bearing risk for healthcare coverage. As of September 30, 2023, each of our health plans was in compliance with the RBC requirements enacted in those states.

As a result of the above requirements and other regulatory requirements, certain of our subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to their parent companies. Such restrictions, unless amended or waived or unless regulatory approval is granted, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends that can be paid by our insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus.

CRITICAL ACCOUNTING ESTIMATES

Please see "Critical Accounting Estimates in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2022 Annual Report on Form 10-K for a description of our Critical Accounting Estimates.

INVESTMENTS AND DEBT

As of September 30, 2023, we had short-term investments of $2.2 billion and long-term investments of $16.6 billion, including restricted deposits of $1.3 billion. The short-term investments generally consist of highly liquid securities with maturities between three and 12 months. The long-term investments consist of municipal, corporate and U.S. Treasury securities, government-sponsored obligations, life insurance contracts, asset-backed securities, and equity securities, and have maturities greater than one year. Restricted deposits consist of investments required by various state statutes to be deposited or pledged to state agencies. Due to the nature of the states' requirements, these investments are classified as long-term regardless of the contractual maturity date. Substantially all of our investments are subject to interest rate risk and will decrease in value if market rates increase. Assuming a hypothetical and immediate 1% increase in market interest rates at September 30, 2023, the fair value of our fixed income investments would decrease by approximately $601 million.

We have a foreign currency swap for a notional amount of $931 million with a creditworthy financial institution to manage foreign exchange risk related to the pending Circle Health divestiture. As a result, the fair value of the swap varies with foreign exchange rate fluctuations. Assuming a 1% increase in the Great British Pound to US Dollar foreign exchange rate at September 30, 2023, the fair value of our swap would decrease by approximately $9 million. An increase in the US Dollar to Great British Pound foreign exchange rate decreases the fair value of the swap and conversely, a decrease in the foreign currency exchange rate increases the value. We do not hold or issue any derivative instruments for trading or speculative purposes.

For a discussion of the interest rate risk that our investments are subject to, refer to our 10-K for the fiscal year ended December 31, 2022, Part 1, Item 1A, "Risk Factors – Our investment portfolio may suffer losses which could materially and adversely affect our results of operations or liquidity."

Evaluation of Disclosure Controls and Procedures - We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the filing of this Form 10-Q, management evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.

Changes in Internal Control Over Financial Reporting - No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

A description of the legal proceedings to which the Company and its subsidiaries are a party is contained in Note 13. Contingencies to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

There have been no material changes to the risk factors disclosed in our 2022 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

In November 2005, the Company's Board of Directors announced a stock repurchase program, which was most recently increased in December 2022. The Company is authorized to repurchase up to $6.0 billion, inclusive of past authorizations.

The stock repurchase program is effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1 and accelerated share repurchases), the amounts and timing of which are subject to the Company's discretion as part of its capital allocation strategy, and may be based upon general market conditions and the prevailing price and trading volumes of its common stock. No duration has been placed on the repurchase program. The Company reserves the right to discontinue the repurchase program at any time.

Issuer Purchases of Equity Securities Third Quarter 2023 (Shares in thousands)
Period									Total Number of Shares Purchased (1)						Average Price Paid per Share (2)						Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs						Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ($ in millions) (3)
July 1, 2023 - July 31, 2023									4,549						$	66.02					4,545						$	1,729
August 1, 2023 - August 31, 2023									2,986						67.05						2,984						1,529
September 1, 2023 - September 30, 2023									4,085						66.88						4,080						1,256
Total									11,620						$	66.59					11,609						$	1,256
(1)			Includes 11 thousand shares relinquished to the Company by certain employees for payment of taxes.
(2)			Average price paid per share excludes accrued share repurchase excise tax of $7 million.
(3)			A remaining amount of approximately $1.3 billion is available under the stock repurchase program as of September 30, 2023.

EXHIBIT NUMBER									DESCRIPTION
31.1									Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended.
31.2									Certification of Executive Vice President and Chief Financial Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended.
32.1									Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2									Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101									The following materials from the Centene Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Earnings (Loss); (iv) the Consolidated Statements of Stockholders' Equity; (v) the Consolidated Statements of Cash Flows and (vi) related notes.
104									Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of October 24, 2023.

			CENTENE CORPORATION
			By:			/s/ SARAH M. LONDON
						Chief Executive Officer (principal executive officer)

			By:			/s/ ANDREW L. ASHER
						Executive Vice President, Chief Financial Officer (principal financial officer)

			By:			/s/ KATIE N. CASSO
						Senior Vice President, Corporate Controller and Chief Accounting Officer (principal accounting officer)