Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties.

EXECUTIVE OVERVIEW

General

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

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

Value Creation Plan

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