Item 1. Financial Statements.

107K 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)


	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:
Basic	539,535		573,961		546,374		580,277
Diluted	541,270		580,607		548,412		587,084

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net earnings	$	475	$	740	$	2,660	$	1,421
Change in unrealized gain (loss) on investments	(235)		(503)		(124)		(1,664)
Change in unrealized gain (loss) on investments, tax effect	56		120		29		397
Change in unrealized gain (loss) on investments, net of tax	(179)		(383)		(95)		(1,267)

Reclassification adjustment, net of tax	57		3		61		12
Foreign currency translation adjustments, net of tax	(22)		(101)		24		(216)
Net unrealized gain on cash flow hedge, net of tax	20		—		20		—
Other comprehensive earnings (loss)	(124)		(481)		10		(1,471)
Comprehensive earnings (loss)	351		259		2,670		(50)
Comprehensive (earnings) attributable to noncontrolling interests	(6)		(2)		(3)		(6)
Comprehensive earnings (loss) attributable to Centene Corporation	$	345	$	257	$	2,667	$	(56)

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 and Nine Months Ended September 30, 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
Comprehensive Earnings:
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
Comprehensive Earnings:
Net earnings (loss)	—	—		—		—		1,058		—	—		(3)		1,055
Other comprehensive loss, net of $(34) tax	—	—		—		(83)		—		—	—		—		(83)


Common stock issued for employee benefit plans	388	—		9		—		—		—	—		—		9
Common stock repurchases	—	—		—		—		—		6,099	(408)		—		(408)
Stock compensation expense	—	—		56		—		—		—	—		—		56



Purchase of non-redeemable noncontrolling interests	—	—		(3)		—		—		—	—		(24)		(27)

Balance, June 30, 2023	614,743	$	1	$	20,183	$	(998)	$	11,529	68,740	$	(5,044)	$	97	$	25,768
Comprehensive Earnings:
Net earnings	—	—		—		—		469		—	—		3		472
Other comprehensive loss, net of $(34) tax	—	—		—		(124)		—		—	—		—		(124)


Common stock issued for employee benefit plans	213	—		11		—		—		—	—		—		11
Common stock repurchases	—	—		—		—		—		11,620	(781)		—		(781)
Stock compensation expense	—	—		50		—		—		—	—		—		50
Purchase of non-redeemable noncontrolling interests	—	—		(1)		—		—		—	—		—		(1)



Balance, September 30, 2023	614,956	$	1	$	20,243	$	(1,122)	$	11,998	80,360	$	(5,825)	$	100	$	25,395

Three and Nine Months Ended September 30, 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
Comprehensive Earnings:
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
Comprehensive Earnings:
Net (loss)	—	—		—		—		(172)		—	—		(3)		(175)
Other comprehensive loss, net of $(106) tax	—	—		—		(428)		—		—	—		—		(428)


Common stock issued for employee benefit plans	519	—		10		—		—		—	—		—		10
Common stock repurchases	—	—		—		—		—		4,249	(349)		—		(349)
Stock compensation expense	—	—		59		—		—		—	—		—		59





Balance, June 30, 2022	606,444	$	1	$	19,899	$	(913)	$	8,816	25,320	$	(1,514)	$	141	$	26,430
Comprehensive Earnings:
Net earnings (loss)	—	—		—		—		738		—	—		(2)		736
Other comprehensive loss, net of $(120) tax	—	—		—		(481)		—		—	—		—		(481)


Common stock issued for employee benefit plans	487	—		24		—		—		—	—		—		24
Common stock repurchases	—	—		(200)		—		—		11,520	(1,043)		—		(1,243)
Stock compensation expense	—	—		51		—		—		—	—		—		51

Reclassification to redeemable	—	—		—		—		—		—	—		17		17



Balance, September 30, 2022	606,931	$	1	$	19,774	$	(1,394)	$	9,554	36,840	$	(2,557)	$	156	$	25,534

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)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net earnings	$	2,660	$	1,421
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization	978		1,079
Stock compensation expense	167		180
Impairment	478		1,739
(Gain) loss on debt extinguishment	—		(26)

Deferred income taxes	14		(682)
(Gain) loss on divestitures	(172)		(503)

Other adjustments, net	158		164
Changes in assets and liabilities
Premium and trade receivables	(2,329)		(1,274)
Other assets	(103)		152

Medical claims liabilities	401		1,976
Unearned revenue	1,878		1,964
Accounts payable and accrued expenses	3,127		686
Other long-term liabilities	583		863
Other operating activities, net	(4)		98
Net cash provided by operating activities	7,836		7,837
Cash flows from investing activities:
Capital expenditures	(576)		(771)
Purchases of investments	(4,729)		(5,118)
Sales and maturities of investments	4,373		2,842
Acquisitions, net of cash acquired	—		(1,457)
Divestiture proceeds, net of divested cash	690		1,362

Net cash (used in) investing activities	(242)		(3,142)
Cash flows from financing activities:
Proceeds from long-term debt	2,170		357
Payments and repurchases of long-term debt	(1,970)		(1,202)
Common stock repurchases	(1,602)		(1,663)
Proceeds from common stock issuances	32		62
Payments for debt extinguishment	—		(14)
Purchase of noncontrolling interest	(87)		—

Other financing activities, net	—		(5)
Net cash (used in) financing activities	(1,457)		(2,465)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	19		(37)
Net increase in cash, cash equivalents, and restricted cash and cash equivalents	6,156		2,193
Cash and cash equivalents reclassified from (to) held for sale	(36)		(192)
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	$	18,450	$	15,215
Supplemental disclosures of cash flow information:
Interest paid	$	496	$	462
Income taxes paid	$	759	$	448


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:
	September 30,
	2023		2022
Cash and cash equivalents	$	18,190	$	14,987
Restricted cash and cash equivalents, included in restricted deposits	260		228
Total cash, cash equivalents, and restricted cash and cash equivalents	$	18,450	$	15,215

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 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 product along with individual, small group, and large group commercial health insurance 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 divestiture. During the second quarter of 2023, the Company recognized a $15 million gain on the divestiture of the Centurion business reflecting additional proceeds for contingent consideration, partially offset by net working capital adjustments. The gain is included in investment and other income in the Consolidated Statements of Operations.

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.

On June 13, 2023, the Company completed the divestiture of its majority stake in Apixio. The Company recognized a pre-tax gain of $91 million, or $63 million after-tax, which is included in investment and other income in the Consolidated Statements of Operations.

During the second quarter of 2023, the Company recognized an additional $13 million expense related to the divestiture of its Spanish and Central European businesses, in addition to the previously recorded impairment charge of $163 million, or $140 million after-tax. The expense is included in investment and other income in the Consolidated Statements of Operations.

Circle Health Group Divestiture

On August 28, 2023, the Company signed a definitive agreement to sell Circle Health Group (Circle Health), one of the U.K.'s largest independent hospital operators, which is included in the Other segment. As of September 30, 2023, the assets and liabilities of Circle Health were considered held for sale resulting in $3,744 million of assets held for sale in other current assets and $2,947 million of liabilities held for sale in accounts payable and accrued expenses in the Consolidated Balance Sheet. The majority of the held for sale assets were previously reported as other long-term assets, goodwill and property, software and equipment. The majority of the liabilities were previously reported as debt and other long-term liabilities.

During the third quarter of 2023, the Company recorded an impairment charge related to goodwill associated with the pending divestiture of $251 million, or $269 million after-tax.

In order to manage the foreign exchange risk on the sale price associated with the pending divestiture of Circle Health, in August 2023 the Company entered into a foreign currency swap agreement for a notional amount of $931 million, to sell £740 million. The swap agreement was formally designated and qualified as a cash flow hedge. The swap expires on March 28, 2024. The gain or loss due to changes in the fair value of the foreign currency swap is recorded in other comprehensive income until the Circle Health divestiture closes, at which time the gain or loss will be recorded in earnings to the same line in the Consolidated Statement of Operations as the gain or loss on sale. The fair value of the swap agreement as of September 30, 2023 was $27 million, which was recorded in other current assets in the Consolidated Balance Sheet.

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):


	September 30, 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	$	421	$	—	$	(13)	$	408	$	695	$	—	$	(16)	$	679
Corporate securities	9,922		2		(750)		9,174		10,127		12		(778)		9,361
Restricted certificates of deposit	4		—		—		4		4		—		—		4
Restricted cash equivalents	260		—		—		260		256		—		—		256
Short-term time deposits	470		—		—		470		204		—		—		204
Municipal securities	3,931		1		(294)		3,638		4,055		6		(280)		3,781
Asset-backed securities	1,633		2		(52)		1,583		1,396		—		(70)		1,326
Residential mortgage-backed securities	1,475		—		(172)		1,303		1,165		2		(121)		1,046
Commercial mortgage-backed securities	1,100		—		(112)		988		961		—		(99)		862
Equity securities	2		—		—		2		5		—		—		5
Private equity investments	810		—		—		810		529		—		—		529
Life insurance contracts	178		—		—		178		169		—		—		169
Total	$	20,206	$	5	$	(1,393)	$	18,818	$	19,566	$	20	$	(1,364)	$	18,222

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. Private equity investments include direct investments in private equity securities as well as private equity funds. The Company's investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets with a 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 September 30, 2023, 99% of the Company's investments in rated securities carry an investment grade rating by nationally recognized statistical rating organizations. At September 30, 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 $144 million and $132 million at September 30, 2023 and December 31, 2022, respectively, and is included in other current assets in 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 AA+ and a weighted average duration of 4 years at September 30, 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):


	September 30, 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	$	(1)	$	161	$	(12)	$	247	$	(5)	$	342	$	(11)	$	184
Corporate securities	(76)		2,470		(674)		6,393		(340)		5,368		(438)		3,400
Municipal securities	(44)		1,308		(250)		2,211		(142)		2,437		(138)		995
Asset-backed securities	(7)		486		(45)		946		(29)		786		(41)		486
Residential mortgage-backed securities	(23)		517		(149)		786		(55)		629		(66)		352
Commercial mortgage-backed securities	(11)		228		(101)		748		(49)		513		(50)		330

Total	$	(162)	$	5,170	$	(1,231)	$	11,331	$	(620)	$	10,075	$	(744)	$	5,747

As of September 30, 2023, the gross unrealized losses were generated from 6,355 positions out of a total of 6,604 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):


	September 30, 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	$	2,121	$	2,091	$	537	$	534	$	2,207	$	2,179	$	534	$	532
One year through five years	7,421		6,906		531		496		7,651		7,147		524		490
Five years through ten years	3,931		3,501		312		282		4,066		3,613		224		195
Greater than ten years	123		113		32		31		135		129		—		—
Asset-backed securities	4,208		3,874		—		—		3,522		3,234		—		—
Total	$	17,804	$	16,485	$	1,412	$	1,343	$	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 substantially all of the securities included in the greater than ten years category listed above at amortized cost.

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 September 30, 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	$	18,190	$	—	$	—	$	18,190
Investments:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	81	$	—	$	—	$	81
Corporate securities	—		9,142		—		9,142
Municipal securities	—		2,918		—		2,918
Short-term time deposits	—		470		—		470
Asset-backed securities	—		1,583		—		1,583
Residential mortgage-backed securities	—		1,303		—		1,303
Commercial mortgage-backed securities	—		988		—		988
Equity securities	—		2		—		2
Total investments	$	81	$	16,406	$	—	$	16,487
Restricted deposits:
Cash and cash equivalents	$	260	$	—	$	—	$	260
U.S. Treasury securities and obligations of U.S. government corporations and agencies	327		—		—		327
Corporate securities	—		32		—		32
Certificates of deposit	—		4		—		4
Municipal securities	—		720		—		720
Total restricted deposits	$	587	$	756	$	—	$	1,343
Other current assets:
Foreign currency swap agreement	$	—	$	27	$	—	$	27
Total assets at fair value	$	18,858	$	17,189	$	—	$	36,047

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 $988 million and $698 million as of September 30, 2023 and December 31, 2022, respectively.

5. Goodwill and Intangible Assets

As discussed in Note 1. Organization and Operations, in the first quarter of 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
Divestitures	—		—		—		(933)		(933)

Impairments	—		—		—		(348)		(348)
Translation impact	—		—		—		27		27
Balance, September 30, 2023	$	10,198	$	1,592	$	5,424	$	344	$	17,558

The decrease in the Other segment goodwill in 2023 was primarily driven by the pending divestiture of Circle Health, which resulted in held for sale accounting and an impairment of $251 million as discussed in Note 2. Acquisitions and Divestitures, and an impairment of the Company's Operose Health business based on market indicators of fair value.

6. Medical Claims Liability

The following table summarizes the change in medical claims liability for the nine months ended September 30, 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	60,379		14,680		13,994		1,095		90,148
Prior years	(1,303)		(326)		(256)		(3)		(1,888)
Total incurred	59,076		14,354		13,738		1,092		88,260
Paid related to:
Current year	50,774		12,069		11,575		984		75,402
Prior years	8,517		2,452		1,376		136		12,481
Total paid	59,291		14,521		12,951		1,120		87,883
Balance, September 30, 2023, net	11,031		3,264		2,689		112		17,096
Plus: Reinsurance recoverable	4		—		41		—		45
Balance, September 30, 2023	$	11,035	$	3,264	$	2,730	$	112	$	17,141

The following table summarizes the change in medical claims liability for the nine months ended September 30, 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 and divestitures	—		—		—		249		249
Incurred related to:
Current year	57,074		14,624		10,609		2,150		84,457
Prior years	(966)		(22)		(193)		(15)		(1,196)
Total incurred	56,108		14,602		10,416		2,135		83,261
Paid related to:
Current year	47,481		11,603		9,046		2,175		70,305
Prior years	7,343		1,963		1,580		82		10,968
Total paid	54,824		13,566		10,626		2,257		81,273
Balance, September 30, 2022, net	11,106		3,322		1,804		225		16,457
Plus: Reinsurance recoverable	8		—		—		—		8
Balance, September 30, 2022	$	11,114	$	3,322	$	1,804	$	225	$	16,465

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 development within "Incurred related to: Prior years," the Company recorded $341 million and $121 million as a reduction to premium revenue in the nine months ended September 30, 2023 and 2022, respectively, for minimum health benefits ratio (HBR) and other return of premium programs.

Incurred but not reported (IBNR) plus expected development on reported claims as of September 30, 2023 was $11,661 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):


	September 30, 2023		December 31, 2022
Risk adjustment receivable	$	1,130	$	838
Risk adjustment payable	(2,312)		(780)
Minimum medical loss ratio	(90)		(103)

Cost sharing reduction payable	(104)		(99)

In June 2023, the Centers for Medicare and Medicaid Services (CMS) announced the final risk adjustment transfers for the 2022 benefit year. As a result of and subsequent to the announcement, the Company increased its risk adjustment net receivables by $244 million from December 31, 2022. After consideration of minimum MLR and other related impacts, the net pre-tax benefit recognized was approximately $198 million in the nine months ended September 30, 2023.

8. Debt

Debt consists of the following ($ in millions):


	September 30, 2023		December 31, 2022
$2,500 million 4.25% Senior Notes due December 15, 2027	$	2,395	$	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	15,675		15,673
Term Loan Facility	2,142		2,183
Revolving Credit Agreement	309		58
Finance leases and other	3		253
Debt issuance costs	(128)		(147)
Total debt	18,001		18,020
Less: current portion	(113)		(82)
Long-term debt	$	17,888	$	17,938

In May 2023, the Company entered into a first amendment to the Company's Fourth Amended and Restated Credit Agreement. The amendment removed and replaced the interest rate benchmark based on the London Interbank Offered Rate (LIBOR) and related LIBOR-based mechanics applicable to U.S. dollar borrowings under the Amended and Restated Credit Agreement with an interest rate benchmark based on the Secured Overnight Financing Rate (SOFR) (including a customary credit spread adjustment) and related SOFR-based mechanics. Additionally, the amendment removed certain provisions which required the Company to make certain mandatory prepayments of the Term Loan Facility.

9. Leases

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


	September 30, 2023		December 31, 2022
Assets

ROU assets (recorded within other long-term assets)	$	430	$	2,554

Liabilities
Short-term (recorded within accounts payable and accrued expenses)	$	170	$	180
Long-term (recorded within other long-term liabilities)	936		3,133
Total lease liabilities	$	1,106	$	3,313

The decrease in ROU assets and lease liabilities in 2023 was primarily driven by divestiture related activity as discussed in Note 2. Acquisitions and Divestitures. Specifically, as of September 30, 2023, Circle Health was considered held for sale and accordingly the associated ROU assets and lease liabilities were reclassified to other current assets and accounts payable and accrued expenses, respectively, in the Consolidated Balance Sheet.

Additionally, in conjunction with ongoing real estate optimization initiatives, the Company recognized $35 million and $37 million of ROU asset impairments for the three and nine months ended September 30, 2023, respectively. The remainder of the $85 million real estate optimization impairment charge for the nine months ended September 30, 2023 was related to property, software and equipment.

As of September 30, 2023, the weighted average remaining lease term for the Company was 20.3 years. The average remaining lease term of the Circle Health portfolio is 26.5 years. Excluding Circle Health, the Company's portfolio average remaining lease term is 8.3 years. The lease liabilities as of September 30, 2023, reflect a weighted average discount rate of 5.8%, or 3.2% excluding Circle Health.

Excluding Circle Health, the Company had $51 million remaining in lease payments for 2023 as of September 30, 2023. Lease payments over the next five years and thereafter are as follows ($ in millions):


	Lease Payments
2024	$	201
2025	176
2026	151
2027	133
2028	113
Thereafter	441
Total lease payments	1,215
Less: imputed interest	(160)
Total lease liabilities	$	1,055

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 September 30, 2023, the Company had a remaining amount of $1,256 million available under the stock repurchase program. In October 2023, the Company repurchased an additional 397 thousand shares for $27 million.

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


		Three Months Ended September 30,						Nine Months Ended September 30,
		2023			2022 (2)			2023			2022 (2)
		Shares	Cost		Shares	Cost		Shares	Cost		Shares	Cost
Share buybacks		11,609	$	773	11,486	$	1,040	22,489	$	1,550	15,674	$	1,384
Income tax withholding		11	1		34	3		778	52		941	79
Total share repurchases (1)		11,620	$	774	11,520	$	1,043	23,267	$	1,602	16,615	$	1,463

(1)	Excludes share repurchase excise tax of $10 million accrued as of September 30, 2023.
(2)	Includes 8.6 million shares delivered as part of an accelerated share repurchase (ASR) agreement, representing 80% of the $1,000 million notional amount. Remaining shares were delivered in the fourth quarter of 2022 upon the settlement of the ASR.

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

Earnings attributable to Centene Corporation		$	469	$	738	$	2,657	$	1,415

Shares used in computing per share amounts:
Weighted average number of common shares outstanding		539,535		573,961		546,374		580,277
Common stock equivalents (as determined by applying the treasury stock method) (1)		1,735		6,646		2,038		6,807
Weighted average number of common shares and potential dilutive common shares outstanding		541,270		580,607		548,412		587,084

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

(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 September 30, 2023 and 2022 excludes 1,313 thousand shares and 152 thousand shares, respectively, related to anti-dilutive stock options, restricted stock, and restricted stock units.

The calculation of diluted earnings per common share for the nine months ended September 30, 2023 and 2022 excludes 1,383 thousand shares and 193 thousand shares, respectively, related to anti-dilutive stock options, restricted stock, and restricted stock units.

12. Segment Information

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 September 30, 2023, is as follows ($ in millions):


		Medicaid		Medicare		Commercial		Other/Eliminations		Consolidated Total
Premium		$	21,619	$	5,430	$	6,451	$	366	$	33,866
Service		—		—		2		1,099		1,101
Premium and service revenues		21,619		5,430		6,453		1,465		34,967
Premium tax		3,075		—		—		—		3,075
Total external revenues		24,694		5,430		6,453		1,465		38,042
Internal revenues		—		—		—		3,978		3,978
Eliminations		—		—		—		(3,978)		(3,978)
Total revenues		$	24,694	$	5,430	$	6,453	$	1,465	$	38,042

Medical costs		$	19,607	$	4,462	$	5,089	$	321	$	29,479

Cost of services		$	—	$	—	$	—	$	856	$	856

Gross margin (1)		$	2,012	$	968	$	1,364	$	288	$	4,632

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

Segment information for the three months ended September 30, 2022, is as follows ($ in millions):


		Medicaid		Medicare		Commercial		Other/Eliminations		Consolidated Total
Premium		$	21,154	$	5,639	$	4,291	$	764	$	31,848
Service		—		—		1		1,877		1,878
Premium and service revenues		21,154		5,639		4,292		2,641		33,726
Premium tax		2,139		—		—		—		2,139
Total external revenues		23,293		5,639		4,292		2,641		35,865
Internal revenues		—		—		—		6,420		6,420
Eliminations		—		—		—		(6,420)		(6,420)
Total revenues		$	23,293	$	5,639	$	4,292	$	2,641	$	35,865

Medical costs		$	19,075	$	4,730	$	3,613	$	693	$	28,111

Cost of services		$	—	$	—	$	—	$	1,571	$	1,571

Gross margin (1)		$	2,079	$	909	$	679	$	377	$	4,044

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

Segment information for the nine months ended September 30, 2023, is as follows ($ in millions):


		Medicaid		Medicare		Commercial		Other/Eliminations		Consolidated Total
Premium		$	65,741	$	16,971	$	17,437	$	1,255	$	101,404
Service		—		—		2		3,351		3,353
Premium and service revenues		65,741		16,971		17,439		4,606		104,757
Premium tax		9,782		—		—		—		9,782
Total external revenues		75,523		16,971		17,439		4,606		114,539
Internal revenues		—		—		—		11,634		11,634
Eliminations		—		—		—		(11,634)		(11,634)
Total revenues		$	75,523	$	16,971	$	17,439	$	4,606	$	114,539

Medical costs		$	59,076	$	14,354	$	13,738	$	1,092	$	88,260

Cost of services		$	2	$	—	$	—	$	2,601	$	2,603

Gross margin (1)		$	6,663	$	2,617	$	3,701	$	913	$	13,894

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

Segment information for the nine months ended September 30, 2022, is as follows ($ in millions):


		Medicaid		Medicare		Commercial		Other/Eliminations		Consolidated Total
Premium		$	62,763	$	17,035	$	12,977	$	2,472	$	95,247
Service		(1)		—		2		6,678		6,679
Premium and service revenues		62,762		17,035		12,979		9,150		101,926
Premium tax		7,060		—		—		—		7,060
Total external revenues		69,822		17,035		12,979		9,150		108,986
Internal revenues		—		—		—		18,856		18,856
Eliminations		—		—		—		(18,856)		(18,856)
Total revenues		$	69,822	$	17,035	$	12,979	$	9,150	$	108,986

Medical costs		$	56,108	$	14,602	$	10,416	$	2,135	$	83,261

Cost of services		$	—	$	—	$	—	$	5,658	$	5,658

Gross margin (1)		$	6,654	$	2,433	$	2,563	$	1,357	$	13,007

(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 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.

Accellion

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 a no-fault settlement with the Ohio Attorney General regarding this matter and the complaint was dismissed.

The Company has reached no-fault settlement agreements with the Attorneys General in other states to resolve claims and/or allegations made by those states related to services previously provided by Envolve. 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.