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 provider of government-sponsored healthcare. We provide access to quality healthcare for more than 1 in 15 individuals nationwide through government-sponsored programs, including Medicaid, Medicare and the Health Insurance Marketplace. Our focus is on improving health and health care for low-income, complex populations.

Our 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.

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.

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. The enhanced eligibility extended by the Inflation Reduction Act, enacted in August 2022, expires at the end of 2025. We continue to advocate for legislation and regulations aimed at leveraging Medicaid and the Health Insurance Marketplace to maintain health insurance coverage and affordability for consumers.

In addition, newly finalized Centers for Medicare & Medicaid Services (CMS) regulations will require beneficiaries dually enrolled in Medicare and Medicaid who receive integrated care through Medicare Advantage Dual Eligible Special Needs Plans (D-SNPs) to have aligned enrollment with their Medicaid Managed Care Organization beginning in 2027, which may restrict our product offerings in some geographic service areas. We believe we are positioned well given our overlapping Medicaid and Medicare Advantage footprints and are committed to navigating evolving regulations.

The COVID-19 pandemic impacted and continues to affect our business as it relates to Medicaid eligibility changes. 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 were largely intended to conclude during the second quarter of 2024. However, redeterminations in certain states moved at a slower pace due to CMS compliance action to pause and/or complete corrective action prior to disenrolling beneficiaries and some states have seen redeterminations extend past the second quarter of 2024. Since March 31, 2023, redeterminations are the primary driver of our Medicaid membership decline. While some states are still concluding the redetermination process for certain populations of members, we anticipate that any remaining reductions will be limited as the majority of states have substantially completed their unwinding processes as of October 2024. We continue to work with our state partners to match rates to acuity post-redeterminations.

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.

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. The Consolidated Appropriations Act, 2023 outlined key coverage expansion provisions, which went into effect in January 2024, requiring states to provide 12 months of continuous coverage for children under Medicaid and the Children's Health Insurance Program (CHIP). The year-end spending bill also made the state option to extend coverage for postpartum women for up to 12 months permanent.

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 2024 Highlights

Our financial performance for the third quarter of 2024 is summarized as follows:

• Managed care membership of 28.6 million, an increase of 670 thousand members, or 2% year-over-year.

• Total revenues of $42.0 billion, representing 10% growth year-over-year.

• Premium and service revenues of $36.9 billion, representing 6% growth year-over-year.

• HBR of 89.2%, compared to 87.0% for the third quarter of 2023.

• SG&A expense ratio of 8.3%, compared to 8.7% for the third quarter of 2023.

• Adjusted SG&A expense ratio of 8.3%, compared to 8.6% for the third quarter of 2023.

• Operating cash flows used cash of $1.0 billion in the third quarter of 2024.

• Diluted earnings per share (EPS) of $1.36, compared to $0.87 for the third quarter of 2023.

• Adjusted diluted EPS of $1.62, compared to $2.00 for the third quarter of 2023.

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,
			2024						2023
GAAP diluted EPS attributable to Centene			$	1.36					$	0.87
Amortization of acquired intangible assets			0.33						0.33
Acquisition and divestiture related expenses			0.02						0.03
Other adjustments (1)			—						0.87
Income tax effects of adjustments (2)			(0.09)						(0.10)
Adjusted diluted EPS			$	1.62					$	2.00

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

2023:

(a) Circle Health Group (Circle Health) impairment of $251 million, or $0.46 per share ($0.50 after-tax), Operose Health Group (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).

(2) The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment. The three months ended September 30, 2024, include a tax benefit of $2 million, or $0.00 per share, related to tax adjustments on previously reported divestitures.

We reference an adjusted SG&A expense ratio, defined as adjusted SG&A expenses, which excludes acquisition and divestiture related expenses and other items, divided by premium and service revenues. A reconciliation from GAAP SG&A to adjusted SG&A and additional detail is provided above under the heading "Non-GAAP Financial Presentation." We also reference effective tax rate on adjusted earnings, defined as GAAP income tax expense (benefit) excluding the income tax effects of adjustments to net earnings divided by adjusted earnings (loss) before income tax expense.

Current and Future Operating Drivers

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

Medicaid

• In September 2024, our subsidiary, Superior HealthPlan (Superior), commenced the contract awarded by the Texas Health and Human Services Commission to continue to provide healthcare coverage to the aged, blind or disabled (ABD) population in the state's STAR+PLUS program. The contract has a six-year term with a maximum of three additional two-year extensions.

• In September 2024, our subsidiary, NH Healthy Families, commenced the contract awarded by the New Hampshire Department of Health and Human Services to continue providing physical health, behavioral health and pharmacy services for New Hampshire's Medicaid managed care program, known as Medicaid Care Management (MCM). The contract has a five-year term.

• In July 2024, our subsidiaries, Carolina Complete Health and WellCare of North Carolina, began coordinating physical and other health services with Local Management Entities/Managed Care Organizations under the state's new Tailored Plan program. The Tailored Plans are integrated health plans designed for individuals with significant behavioral health needs or intellectual/developmental disabilities.

• In June 2024, our subsidiary, Western Sky Community Care, concluded serving members upon the expiration of its New Mexico Medicaid managed care contract.

• In April 2024, our subsidiary, Oklahoma Complete Health, commenced the statewide contracts to provide managed care for the SoonerSelect and SoonerSelect Children's Specialty Plan programs. The new contracts have a one-year term with five, one-year renewal options.

• In January 2024, our subsidiary, Nebraska Total Care, commenced the statewide Medicaid managed care contract to continue serving the state's Medicaid Managed Care Program, known as Heritage Health. The initial contract term is five years and includes the option for two subsequent, one-year renewals, for a potential total of seven years.

• In January 2024, our California health plan commenced direct Medicaid contracts in 10 counties (Los Angeles, Sacramento, Amador, Calaveras, Inyo, Mono, San Joaquin, Stanislaus, Tulare and Tuolumne). In Los Angeles, a portion of the membership is subcontracted. Prior to January 2024, our California health plan previously served the state's Medicaid Managed Care population with contracts in 13 counties, including San Diego.

• In December 2023, our subsidiaries, Carolina Complete Health and WellCare of North Carolina, began providing coverage under North Carolina's new Medicaid Expansion program.

• In September 2023, our subsidiary, 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 anticipate that any remaining reductions will be limited to certain populations of members as the majority of states have substantially completed their unwinding processes as of October 2024. We continue to work with our state partners to match rates to acuity post-redeterminations.

• 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 providing members with quality healthcare, coordinated services and benefits.

Medicare

• Given our strong bid positioning, Medicare Prescription Drug Plan (PDP) membership increased 49% year-over-year.

• Consistent with our strategic positioning and bid strategy, Medicare Advantage membership declined 14% year-over-year.

• The decrease in our Star quality ratings in the 2023 rating year, which CMS published in October 2022, adversely impacts 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. As a result of this expectation, we recorded a premium deficiency reserve of $250 million in the fourth quarter of 2023, which increased to $300 million in the first quarter of 2024 to $335 million in the second quarter of 2024 and decreased by $90 million to $245 million in the third quarter of 2024 to reflect the seasonality of earnings, in connection with the 2024 Medicare Advantage business.

Commercial

• In 2024, our Health Insurance Marketplace product, Ambetter Health expanded into Delaware. In total, the Marketplace plan is available across 29 states. Additionally, Marketplace membership increased 22% year-over-year due to the expanded footprint, strong product positioning and open enrollment results, as well as overall market growth.

Other

*•*In July 2024, our subsidiary, Magellan Health, commenced the Idaho Behavioral Health Plan contract.

• In December 2023 and January 2024, we completed the divestitures of Operose Health and Circle Health, respectively.

• In June 2023, we completed the divestiture of Apixio. 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 and HealthSmart.

The benefits of successful execution of our value creation initiatives have impacted our current results of operations and will continue to impact future results of operations, including the implementation of our new third-party pharmacy benefits management (PBM) contract, which commenced in January 2024.

We expect the following items to impact our future results of operations, subject to the resolution of various third-party protests within the Medicaid segment:

Medicaid

• In October 2024, our subsidiary, Meridian Health Plan of Michigan, commenced the contract awarded by the Michigan Department of Health and Human Services (MDHHS) to continue serving as a Medicaid health plan for the Comprehensive Health Care Program. The contract has a five-year term, with three optional one-year extensions, for a total of eight possible contract years.

• In September 2024, our subsidiary, Health Net Community Solutions, was selected by the California Department of Health Care Services to provide managed dental health care services to beneficiaries of Medi-Cal, the State's Medicaid program, in Los Angeles and Sacramento counties. The new 54-month contract is expected to take effect on July 1, 2025.

• In September 2024, our subsidiary, Iowa Total Care, was selected by the Iowa Department of Health and Human Services to continue providing Medicaid managed care services under the Iowa Health Link program. The contract is expected to begin July 1, 2025 and is a four-year term, with an optional two-year extension, for a total of six possible contract years.

• In August 2024, our subsidiary, PA Health and Wellness, was selected by the Pennsylvania Department of Human Services to continue to administer Pennsylvania's Community HealthChoices program, the Medicaid managed care program that covers adults who are dually eligible for Medicare and Medicaid or who qualify to receive Medicaid long-term services and supports due to a need for the level of care provided in a nursing facility. The contract is expected to begin April 1, 2025 and is a five-year term, with three optional one-year extensions, for a total of eight possible contract years.

• In July 2024, the State of Florida announced plans to execute agreements with eight health plans, including our subsidiary, Sunshine Health. The Statewide Medicaid Managed Care program includes integrated Managed Medical Assistance, Long-Term Care services, Serious Mental Illness, Child Welfare and HIV specialty products. The contract is expected to begin on February 1, 2025.

• In May 2024, our subsidiary, Sunflower Health Plan, was selected to continue providing managed health care services through KanCare, the State of Kansas' Medicaid and Children's Health Insurance Program. The new contract is expected to take effect on January 1, 2025 for a three-year term, with two optional one-year extensions, for a total of five possible contract years.

• In December 2023, our subsidiary, Arizona Complete Health, was selected by the Arizona Health Care Cost Containment System – Arizona's single state Medicaid agency – to provide managed care for the Arizona Long Term Care System (ALTCS). The program supports Arizonans who are elderly and/or have a physical disability (E/PD) with physical and behavioral healthcare, as well as provides pharmacy benefits and home and community-based services. The new ALTCS-E/PD contract is expected to begin in October 2025 and is a three-year term, with four optional one-year extensions, for a total of seven possible contract years.

• 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 expected to begin in July 2025.

Medicare

• In 2025, Wellcare will offer Medicare Advantage plans in 32 states, including its newest state, Iowa. Wellcare will discontinue offering Medicare Advantage products in Alabama, Massachusetts, New Hampshire, New Mexico, Rhode Island and Vermont in 2025. We currently anticipate that the 2025 Plan year will operate at a loss driven by Star ratings; accordingly, we expect to record a premium deficiency reserve in the fourth quarter of 2024.

• In October 2024, CMS issued 2025 Medicare Advantage Star Ratings on the Medicare Plan Finder. Based on the data, Centene Corporation had approximately 46% of its Medicare Advantage membership enrolled in plans rated 3.5 stars or higher – compared to approximately 23% in the prior year. This represents meaningful progress and was consistent with internal expectations despite higher than industry-anticipated cut point changes. Additionally, we are appealing CMS' scoring of our TTY (Text-to-Voice teletypewriter services for the hearing impaired) measure which, if successful, could further increase our percentage of Medicare Advantage members enrolled in plans rated 3.5 stars or higher.

• In October 2024, our subsidiary, Meridian Health Plan of Michigan, was selected by the MDHHS to provide highly integrated Medicare and Medicaid services for dually eligible Michiganders through a Highly Integrated Dual Eligible Special Needs Plan. The plan is expected to launch on January 1, 2026 and is a seven-year term, with three optional one-year extensions, for a total of 10 possible contract years.

Commercial

• In 2025, our Health Insurance Marketplace product, Ambetter Health will expand its geographic footprint, adding 60 new counties across 10 states, which includes expansion into Iowa. In total, the Marketplace plan will be available across 29 states.

Other

• In October 2024, we completed the sale of Collaborative Health Systems, a management services organization.

*•*In December 2022, the Department of Defense announced that the TRICARE Managed Care Support Contract commencing in 2025 was not awarded to Health Net Federal Services.

MEMBERSHIP

From September 30, 2023 to September 30, 2024, our managed care membership increased by 670 thousand, or 2%. The following table sets forth our membership by line of business:

						September 30, 2024						December 31, 2023						September 30, 2023
Traditional Medicaid (1)						11,478,600						12,754,000						13,470,900
High Acuity Medicaid (2)						1,590,200						1,718,000						1,769,600
Total Medicaid						13,068,800						14,472,000						15,240,500
Commercial Marketplace						4,501,300						3,900,100						3,681,600
Commercial Group						426,600						427,500						424,200
Total Commercial						4,927,900						4,327,600						4,105,800
Medicare (3)						1,129,900						1,284,200						1,310,600
Medicare PDP						6,766,400						4,617,800						4,539,800
Total at-risk membership						25,893,000						24,701,600						25,196,700
TRICARE eligibles						2,747,000						2,773,200						2,773,200
Total						28,640,000						27,474,800						27,969,900
(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.

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, 2024 and 2023, 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, 2024 and 2023 is as follows ($ in millions, except per share data in dollars):

			Three Months Ended September 30,																		Nine Months Ended September 30,
			2024						2023						% Change						2024						2023						% Change
Premium			$	36,115					$	33,866					7		%				$	106,784					$	101,404					5		%
Service			784						1,101						(29)		%				2,425						3,353						(28)		%
Premium and service revenues			36,899						34,967						6		%				109,209						104,757						4		%
Premium tax			5,124						3,075						67		%				13,057						9,782						33		%
Total revenues			42,023						38,042						10		%				122,266						114,539						7		%
Medical costs			32,201						29,479						9		%				93,898						88,260						6		%
Cost of services			692						856						(19)		%				2,041						2,603						(22)		%
Selling, general and administrative expenses			3,057						3,048						n.m.						9,169						9,075						1		%
Depreciation expense			140						148						(5)		%				408						436						(6)		%
Amortization of acquired intangible assets			173						180						(4)		%				519						542						(4)		%
Premium tax expense			5,095						3,156						61		%				13,218						10,021						32		%
Impairment			—						440						n.m.						13						478						(97)		%
Earnings from operations			665						735						(10)		%				3,000						3,124						(4)		%
Investment and other income			432						214						102		%				1,440						992						45		%
Interest expense			(176)						(181)						3		%				(530)						(542)						2		%
Earnings before income tax			921						768						20		%				3,910						3,574						9		%
Income tax expense			211						293						(28)		%				896						914						(2)		%
Net earnings			710						475						49		%				3,014						2,660						13		%
(Earnings) loss attributable to noncontrolling interests			3						(6)						n.m.						8						(3)						n.m.
Net earnings attributable to Centene Corporation			$	713					$	469					52		%				$	3,022					$	2,657					14		%
Diluted earnings per common share attributable to Centene Corporation			$	1.36					$	0.87					56		%				$	5.69					$	4.85					17		%
n.m.: not meaningful

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

Total Revenues

Total revenues increased 10% in the three months ended September 30, 2024, over the corresponding period in 2023, primarily driven by Medicaid rate increases, membership growth in the Marketplace business due to strong product positioning as well as overall market growth, along with increased premium tax revenue, partially offset by lower Medicaid membership primarily due to redeterminations and recent divestitures in the Other segment.

Operating Expenses

Medical Costs/HBR

The HBR for the three months ended September 30, 2024, was 89.2%, compared to 87.0% in the same period in 2023. The increase was primarily driven by higher acuity in Medicaid resulting from the redetermination process as we continue to work with states to match rates with acuity. The increase was also driven by Medicare Star rating impacts.

Cost of Services

Cost of services decreased by $164 million in the three months ended September 30, 2024, compared to the corresponding period in 2023. The decrease was primarily driven by recent divestitures. The cost of service ratio for the three months ended September 30, 2024, was 88.3%, compared to 77.7% in the same period in 2023. The increase was primarily driven by the divestiture of Circle Health, which operated at a lower cost of service ratio.

Selling, General & Administrative Expenses

The SG&A expense ratio was 8.3% for the third quarter of 2024, compared to 8.7% in the third quarter of 2023. The adjusted SG&A expense ratio was 8.3% for the third quarter of 2024, compared to 8.6% in the third quarter of 2023. The decreases were primarily driven by the divestiture of Circle Health, which operated at a higher SG&A expense ratio, and continued leveraging of expenses over higher revenues. The decreases were partially offset by growth in the Marketplace business, which operates at a meaningfully higher SG&A expense 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 then 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.

Other Income (Expense)

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

			2024						2023
Investment and other income			$	432					$	214
Interest expense			(176)						(181)
Other income (expense), net			$	256					$	33

Investment and other income. Investment and other income increased by $218 million in the three months ended September 30, 2024, compared to the corresponding period in 2023. The three months ended September 30, 2024 included increased interest income on investments driven by higher cash balances. 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.

Interest expense. Interest expense decreased by $5 million in the three months ended September 30, 2024, compared to the corresponding period in 2023.

Income Tax Expense

For the three months ended September 30, 2024, we recorded income tax expense of $211 million on pre-tax earnings of $921 million, or an effective tax rate of 22.9%. For the third quarter of 2024, our effective tax rate on adjusted earnings was 23.3%.

For the three months ended September 30, 2023, we recorded an 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 then pending divestiture of Circle Health. For the third quarter of 2023, our effective tax rate on adjusted earnings was 24.2%.

Segment Results

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

						2024						2023						% Change
Total Revenues
Medicaid						$	26,440					$	24,694					7		%
Medicare						5,643						5,430						4		%
Commercial						8,693						6,453						35		%
Other						1,247						1,465						(15)		%
Consolidated total						$	42,023					$	38,042					10		%
Gross Margin (1)
Medicaid						$	1,475					$	2,012					(27)		%
Medicare						675						968						(30)		%
Commercial						1,736						1,364						27		%
Other						120						288						(58)		%
Consolidated total						$	4,006					$	4,632					(14)		%
(1)			Gross margin represents premium and service revenues less medical costs and cost of services.

Medicaid

Total revenues increased 7% in the three months ended September 30, 2024, compared to the corresponding period in 2023. Gross margin decreased $537 million in the three months ended September 30, 2024, compared to the corresponding period in 2023. The increase in total revenues was primarily driven by increased premium tax revenue and rate increases, partially offset by lower membership primarily due to redeterminations. Gross margin decreased due to lower overall membership as a result of the redetermination process, coupled with higher acuity post-redeterminations as we continue to work with our state partners to match rates to the changes in acuity.

Medicare

Total revenues increased 4% in the three months ended September 30, 2024, compared to the corresponding period in 2023 primarily driven by increased PDP membership of 49%, partially offset by lower Medicare Advantage membership. Gross margin decreased $293 million in the three months ended September 30, 2024, compared to the corresponding period in 2023, primarily driven by lower Medicare Advantage revenue resulting from the Star quality ratings impact and lower membership discussed above.

Commercial

Total revenues increased 35% in the three months ended September 30, 2024, compared to the corresponding period in 2023. Gross margin increased $372 million in the three months ended September 30, 2024, compared to the corresponding period in 2023. Increases were primarily driven by 22% membership growth in the Marketplace business along with improved margin through strong 2024 product design and execution.

Other

Total revenues decreased 15% in the three months ended September 30, 2024, compared to the corresponding period in 2023. Gross margin decreased $168 million in the three months ended September 30, 2024, compared to the corresponding period in 2023. Decreases were primarily due to recent divestitures.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

Total Revenues

Total revenues increased 7% in the nine months ended September 30, 2024, over the corresponding period in 2023 primarily driven by membership growth in the Marketplace business due to strong product positioning as well as overall market growth and outperformance in Marketplace risk adjustment for the 2023 benefit year, along with Medicaid rate increases and increased premium tax revenue. The increases were partially offset by lower Medicaid membership primarily due to redeterminations and recent divestitures in the Other segment.

Operating Expenses

Medical Costs/HBR

The HBR for the nine months ended September 30, 2024 was 87.9%, compared to 87.0% in the same period in 2023. The increase was primarily driven by higher acuity in Medicaid resulting from the redetermination process as we continue to work with states to match rates with acuity. The increase was also driven by Medicare Star rating impacts. The increases were partially offset by Marketplace membership growth and improved margin through strong 2024 product design and execution as well as outperformance in Marketplace risk adjustment for the 2023 benefit year.

Cost of Services

Cost of services decreased by $562 million in the nine months ended September 30, 2024, compared to the corresponding period in 2023. The decrease was primarily driven by recent divestitures. The cost of service ratio for the nine months ended September 30, 2024 was 84.2%, compared to 77.6% in the same period in 2023. The increase was primarily driven by the divestiture of Circle Health, which operated at a lower cost of service ratio.

Selling, General & Administrative Expenses

The SG&A expense ratio for the nine months ended September 30, 2024 was 8.4%, compared to 8.7% for the corresponding period in 2023. The adjusted SG&A expense ratio for the nine months ended September 30, 2024 was 8.3%, compared to 8.6% for the nine months ended September 30, 2023. The decrease in the adjusted SG&A expense ratio was primarily driven by the divestiture of Circle Health, which operated at a higher SG&A expense ratio, ongoing SG&A savings initiatives and continued leveraging of expenses over higher revenues. The decrease was partially offset by growth in the Marketplace business, which operates at a meaningfully higher SG&A expense ratio as compared to Medicaid and Medicare distribution costs.

Impairment

During the nine months ended September 30, 2024, we recorded total impairment charges of $13 million, primarily driven by Health Net Federal Services property, software and equipment related to the TRICARE Managed Care Support Contract that was no longer recoverable following the 2024 final ruling.

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 then 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.

Other Income (Expense)

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

			2024						2023
Investment and other income			$	1,440					$	992
Interest expense			(530)						(542)
Other income (expense), net			$	910					$	450

Investment and other income. Investment and other income increased by $448 million in the nine months ended September 30, 2024, compared to the corresponding period in 2023, driven by higher interest rates on larger investment balances. The nine months ended September 30, 2024 also included an $83 million Magellan Specialty Health divestiture gain, $21 million net gain on the sale of property, $20 million Circle Health divestiture gain and $7 million HealthSmart divestiture gain partially offset by an additional loss on the divestiture of our Spanish and Central European businesses of $7 million.

The nine months ended September 30, 2023 included 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 previously reported divestiture 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 divestiture 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.

Interest expense. Interest expense decreased by $12 million in the nine months ended September 30, 2024, compared to the corresponding period in 2023.

Income Tax Expense

For the nine months ended September 30, 2024, we recorded income tax expense of $896 million on pre-tax earnings of $3.9 billion, or an effective tax rate of 22.9%. The effective tax rate for 2024 reflects tax effects of the Circle Health divestiture. For the nine months ended September 30, 2024, our effective tax rate on adjusted earnings was 24.2%.

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 then pending divestiture of Circle Health. For the nine months ended September 30, 2023, our effective tax rate on adjusted earnings was 24.5%.

Segment Results

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

						2024						2023						% Change
Total Revenues
Medicaid						$	76,083					$	75,523					1		%
Medicare						17,556						16,971						3		%
Commercial						24,979						17,439						43		%
Other						3,648						4,606						(21)		%
Consolidated total						$	122,266					$	114,539					7		%
Gross Margin (1)
Medicaid						$	4,880					$	6,663					(27)		%
Medicare						1,866						2,617						(29)		%
Commercial						6,074						3,701						64		%
Other						450						913						(51)		%
Consolidated total						$	13,270					$	13,894					(4)		%
(1)			Gross margin represents premium and service revenues less medical costs and cost of services.

Medicaid

Total revenues increased 1% in the nine months ended September 30, 2024, compared to the corresponding period in 2023. Gross margin decreased $1.8 billion in the nine months ended September 30, 2024, compared to the corresponding period in 2023. The increase in total revenues was primarily driven by increased premium tax revenue and rate increases, partially offset by lower membership primarily due to redeterminations. Gross margin decreased due to lower overall membership as a result of the redetermination process, coupled with higher acuity post-redeterminations as we continue to work with our state partners to match rates to the changes in acuity.

Medicare

Total revenues increased 3% in the nine months ended September 30, 2024, compared to the corresponding period in 2023, primarily driven by increased PDP membership of 49%, partially offset by lower Medicare Advantage membership. Gross margin decreased $751 million in the nine months ended September 30, 2024, compared to the corresponding period in 2023 driven primarily by lower Medicare Advantage revenue resulting from the Star quality ratings impact and lower membership discussed above.

Commercial

Total revenues increased 43% in the nine months ended September 30, 2024, compared to the corresponding period in 2023. Gross margin increased $2.4 billion in the nine months ended September 30, 2024, compared to the corresponding period in 2023. Increases were primarily driven by 22% membership growth in the Marketplace business along with improved margin through strong 2024 product design and execution as well as outperformance in Marketplace risk adjustment for the 2023 benefit year.

Other

Total revenues decreased 21% in the nine months ended September 30, 2024, compared to the corresponding period in 2023. Gross margin decreased $463 million in the nine months ended September 30, 2024, compared to the corresponding period in 2023. 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,
			2024						2023
Net cash provided by operating activities			$	741					$	7,836
Net cash used in investing activities			(1,154)						(242)
Net cash used in financing activities			(2,393)						(1,457)
Effect of exchange rate changes on cash and cash equivalents			7						19
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents			$	(2,799)					$	6,156

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 $741 million in the nine months ended September 30, 2024, compared to providing cash of $7.8 billion in the comparable period in 2023.

Cash flows provided by operations in 2024 were primarily driven by net earnings, partially offset by pharmacy rebate remittance timing as we transitioned to the new third-party PBM, which commenced in January 2024, and risk adjustment payments for the Marketplace 2023 benefit year.

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 Used in Investing Activities

Investing activities used cash of $1.2 billion in the nine months ended September 30, 2024, compared to using cash of $242 million in the comparable period in 2023. Cash flows used in investing activities in 2024 and 2023 were driven primarily by 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.

We spent $490 million and $576 million in the nine months ended September 30, 2024 and 2023, respectively, on capital expenditures the majority of which was driven by system enhancements and computer hardware.

As of September 30, 2024, our investment portfolio consisted primarily of fixed-income securities with an average duration of 3.3 years. At September 30, 2024, we had unregulated cash and investments of $1.2 billion, including $266 million of cash and cash equivalents and $888 million of investments. Unregulated cash and investments at December 31, 2023 was $1.0 billion, including $200 million of cash and cash equivalents and $810 million of investments.

Cash Flows Used in Financing Activities

Financing activities used cash of $2.4 billion in the nine months ended September 30, 2024, compared to using cash of $1.5 billion in the comparable period in 2023. Financing activities in 2024 were driven by stock repurchases of $2.2 billion, which included $2.1 billion under the stock repurchase program and $112 million of repurchases related to income tax withholding upon the vesting of previously awarded stock grants, and net decreases in debt of $244 million.

Financing activities in 2023 were driven by stock repurchases of $1.6 billion.

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 2023, the Company's Board of Directors authorized up to a cumulative total of $10.0 billion of repurchases under the program.

During the third quarter of 2024, we repurchased 16.3 million shares of common stock for $1.2 billion under the stock repurchase program. We have approximately $3.2 billion remaining under the program for repurchases as of September 30, 2024. No duration has been placed on the repurchase program. We reserve the right to discontinue the repurchase program at any time. Refer to Note 8. Stockholders' Equity for further information on stock repurchases.

As of September 30, 2024, 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, 2024, 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, 2024. As of September 30, 2024, 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, 2024, we had no borrowing outstanding under our Revolving Credit Facility, $2.0 billion of borrowings under our Term Loan Facility, and we were in compliance with all covenants. As of September 30, 2024, 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 $145 million as of September 30, 2024, which were not part of our Revolving Credit Facility. The letters of credit bore weighted interest of 0.7% as of September 30, 2024. In addition, we had outstanding surety bonds of $886 million as of September 30, 2024.

At September 30, 2024, our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 39.1%, compared to 40.7% at December 31, 2023. The debt to capital ratio decrease was primarily 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, 2024, we had working capital, defined as current assets less current liabilities, of $3.3 billion, compared to $4.0 billion at December 31, 2023. We manage our short-term and long-term investments aiming to ensure a sufficient portion of the portfolio is highly liquid and can be sold to fund short-term requirements as needed.

2024 Expectations

During the remainder of 2024, we expect dividends to be offset by capital contributions to our insurance subsidiaries. We expect to spend approximately $170 million in additional capital expenditures.

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, which matures in August 2026. Additionally, our senior notes mature between December 2027 and August 2031. 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 target 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, these actions encompass a larger organizational mission to enhance our member and provider experience, improve outcomes for our members and innovate to ensure that Centene is 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, 2024, we received dividends of $2.8 billion from and made $416 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, 2023, 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 2024.

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, 2024, 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 2023 Annual Report on Form 10-K for a description of our Critical Accounting Estimates.