CENTENE CORPORATION
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, including those set forth under Part II, Item 1A. "Risk Factors"
of this Form 10-Q.
EXECUTIVE OVERVIEW
General
We are a leading multi-national healthcare enterprise that is committed to helping people live healthier lives. We take a local approach - with local brands and local teams - to provide fully integrated, high-quality, and cost-effective services to government-sponsored and commercial healthcare programs, focusing on under-insured and uninsured individuals.
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 and health insurer fee 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 tax and health insurer fee revenues that are separately billed. Our insurance subsidiaries are subject to the Affordable Care Act (ACA) annual health insurer fee (HIF), absent a HIF moratorium or repeal. We recognize revenue for reimbursement of the HIF, including the "gross-up" to reflect the non-deductibility of the HIF. Collectively, this revenue is recorded as premium tax and health insurer fee revenue in the Consolidated Statements of Operations. For certain products, premium taxes, state assessments and the HIF are not pass-through payments and are recorded as premium revenue and premium tax expense or health insurer fee expense in the Consolidated Statements of Operations. A moratorium suspended the HIF for the 2019 calendar year. Due to the size of the health insurer fee, one of the primary drivers of the year-over-year variances discussed throughout this section is related to the reinstatement of the HIF in 2020.
WellCare Acquisition
OnJanuary 23, 2020 , we acquired all of the issued and outstanding shares ofWellCare Health Plans, Inc. (WellCare) (the WellCare Acquisition). The transaction was valued at approximately$19.6 billion , including the assumption of$1.95 billion of outstanding debt. The WellCare Acquisition brings a high-quality Medicare platform and further extends our robust Medicaid offerings. The combination enables us to provide access to more comprehensive and differentiated solutions across more markets with a continued focus on affordable, high-quality, culturally-sensitive healthcare services. Due to the size of the acquisition, one of the primary drivers of the year-over-year variances discussed throughout this section is related to the acquisition of WellCare.
COVID-19 Trends and Uncertainties
The COVID-19 outbreak has created unique and unprecedented challenges. To support our members, providers, employees and the communities we serve, we have taken several actions and made numerous investments related to the COVID-19 crisis. We have extended coverage of COVID-19 testing and screening services for Medicaid, Medicare and Marketplace members and are waiving all associated member cost share amounts for COVID-19 testing and screening. We are delivering new critical support to Safety Net providers, including Federally Qualified Healthcare Centers (FQHCs), behavioral health providers, and long-term service and support organizations. We continue to address social determinants of health for vulnerable populations during the COVID-19 crisis with a commitment to research and investment in non-medical barriers to achieving quality health outcomes. We developed initiatives designed to support the disability community affected by the pandemic. We created a provider support program to assist our network providers who are seeking benefits from theSmall Business Administration (SBA) through the CARES Act. We established a Medical Reserve Leave policy to support clinical staff who want to join a medical reserve force and serve their communities during the COVID-19 pandemic. We are providing additional employee benefits including waiving cost-sharing for COVID-19 related treatment, emergency paid sick leave, and one-time payments to employees in a small number of critical office functions. 22 -------------------------------------------------------------------------------- Table of Con tents We have taken significant steps to support our employees to protect their health and safety, while also ensuring that our business can continue to operate and that services continue without disruption. We have implemented our business continuity plans and have taken actions to support our workforce. We have transitioned the vast majority of our employees to work from home, allowingCentene to continue to operate at close to full capacity, while continuing to maintain our internal control framework. As a result, we have experienced and expect continued incremental costs due to investments and actions we have already taken and continued efforts to protect our members, employees and communities we serve. The impact on our business in both the short-term and long-term is uncertain. The outlook for 2020 still depends on future developments, including but not limited to: the length and severity of the outbreak, effectiveness of containment actions, and the timing around the development of treatments and vaccinations. The pandemic and these future developments have impacted and will continue to affect our membership and medical utilization. FromMarch 31, 2020 throughSeptember 30, 2020 , our Medicaid andHealth Insurance Marketplace membership has increased by 1.3 million members, in line with our expectations. The pandemic also has the potential to impact the administration of state and federal healthcare programs, premium rates and risk sharing mechanisms. We continue to have active dialogue with our state partners, and the risk sharing mechanisms and rate adjustments received continue to be in line with our expectations. Medical utilization continues to normalize as elective procedures and other non-emergent care resume, consistent with our expectations. We have experienced and continue to expect incremental COVID-19 costs as the outbreak continues to spread. In addition, the pandemic has widespread economic impact, driving interest rate decreases and lowering our investment income. At this point in time, we still expect the impact of all these items to slightly benefit our 2020 results. We are confident we have the team, systems, expertise and financial strength to effectively navigate this challenging pandemic landscape.
Regulatory Trends and Uncertainties
The United States government, presidential candidates, politicians, and healthcare experts continue to discuss and debate various elements ofthe United States healthcare payment model. From the constitutionality of the Affordable Care Act, to Medicare for All (single payer), to pharmacy pricing structures, all areas of healthcare are being challenged to assure adequate healthcare is delivered to all segments of the population. During this time of deliberation, 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. We have more than three decades of experience, spanning six 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 sponsors and our members. While healthcare experts maintain focus on personalized healthcare technology, we continue to make strategic decisions to accelerate development of new software platforms and analytical capabilities. We continue to believe we have both the capacity and capability to successfully navigate industry changes to the benefit of our members, customers and shareholders.
For additional information regarding regulatory trends and uncertainties, see Part II, Item 1A, "Risk Factors."
Third Quarter 2020 Highlights
Our financial performance for the third quarter of 2020 is summarized as follows: •Managed care membership of 25.2 million, an increase of 9.9 million members, or 65% year-over-year. •Total revenues of$29.1 billion , representing 53% growth year-over-year. •HBR of 86.4%, compared to 88.2% for the third quarter of 2019. •SG&A expense ratio of 9.1%, compared to 8.9% for the third quarter of 2019. •Adjusted SG&A expense ratio of 8.9%, compared to 8.8% for the third quarter of 2019. •Operating cash flows of$(952.0) million , reflecting the payment of the HIF. •Diluted earnings per share (EPS) of$0.97 , compared to$0.23 for the third quarter of 2019. •Adjusted Diluted EPS of$1.26 , compared to$0.96 for the third quarter of 2019. 23 -------------------------------------------------------------------------------- Table of Con tents 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, 2020 2019 GAAP Diluted EPS, attributable to Centene $ 0.97$ 0.23 Amortization of acquired intangible assets 0.21
0.12
Acquisition related expenses 0.08 0.04 Other adjustments (1) - 0.57 Adjusted Diluted EPS $ 1.26$ 0.96
(1) Other adjustments include the 2019 non-cash goodwill and intangible asset
impairment of
The third quarter results include the following items, which had a net benefit
to GAAP and Adjusted EPS of
GAAP Adjusted
Diluted EPS $ 0.97 $ 1.26
Less: risk corridor benefit, net (0.52) (0.52)
Plus: charitable contribution commitment 0.35 0.35
Less: tax settlement benefit (0.12) (0.12)
Total $ 0.68 $ 0.97
•a pre-tax net benefit related to the Affordable Care Act (ACA) risk corridor
receivable settlement of $398 million (net of minimum medical loss ratio payback
and related expenses), or $0.52 per diluted share;
•a pre-tax expense of $275 million , or $0.35 per diluted share, related to a
charitable contribution commitment to our foundation; and
•a favorable tax settlement of $72 million , or $0.12 per diluted share.
The following items contributed to our growth over the last year:
•Arkansas. InMarch 2019 , ourArkansas subsidiary, Arkansas Total Care, assumed full-risk on a Medicaid special needs population comprised of people with high behavioral health needs and individuals with developmental/intellectual disabilities. •Correctional. InJuly 2020 , Centurion commenced a two-year contract with theKansas Department of Administration to provide healthcare services in theDepartment of Corrections' facilities. InApril 2020 , Centurion began providing medical services, behavioral healthcare, and substance abuse treatment within four prisons and six community corrections centers across the state ofDelaware . InJuly 2019 , Centurion began operating under a contract to provide comprehensive healthcare services to inmates housed inArizona's state prison system. InJuly 2019 , Centurion began operating under a re-awarded contract to continue the provision of mental and dental health services to theGeorgia Department of Correction's state prison facilities. •Florida. InDecember 2018 , ourFlorida subsidiary,Sunshine Health , began providing physical and behavioral healthcare services throughFlorida's Statewide Medicaid Managed Care Program under its new five year contract which was implemented for all 11 regions byFebruary 2019 . •Health Insurance Marketplace. InJanuary 2020 , we expanded our offerings in the 2020Health Insurance Marketplace in ten existing markets:Arizona ,Florida ,Georgia ,Kansas ,North Carolina ,Ohio ,South Carolina ,Tennessee ,Texas , andWashington . •HealthSmart. InMay 2019 , we acquired HealthSmart, a third party administrator providing customizable and scalable health plan solutions for self-funded employers, universities and colleges, andNative American Tribal Enterprises . Services include plan administration, care management and wellness programs, network, casualty claim, and pharmacy benefit solutions. 24 -------------------------------------------------------------------------------- Table of Con tents •Illinois. InJuly 2020 ,Meridian Health Plan of Illinois, Inc. (Meridian), began serving Medicaid members inCook County, Illinois , as a result of a member transfer agreement under which Meridian was assigned 100% ofNextLevel Health Partners, Inc.'s approximately 54,000 members who access benefits from theIllinois Department of Healthcare and Family Services' HealthChoice Illinois Program . InFebruary 2020 , we began operating inIllinois under the first phase of an expanded contract for the Medicaid Managed Care Program. The expanded contract includes children who are in need through theDepartment of Children and Family Services/Youth Care byIllinois Department of Healthcare and Family Services andFoster Care .
•Iowa. In
•Louisiana. InJanuary 2020 , ourLouisiana subsidiary,Louisiana HealthCare Connections , began operating under a one-year emergency contract extension in response to protested contract awards.Louisiana's state procurement officer overturned theLouisiana Department of Health's plan to award Medicaid contracts to four health plans, excluding ourLouisiana subsidiary. According to the chief procurement officer, the state health department failed to follow state law or its own evaluation and bid guidelines in its award. •Medicare. InJanuary 2020 , we expanded our Medicare offerings. We enteredNevada and expanded our footprint in twelve existing markets:Arizona ,Arkansas ,California ,Georgia ,Kansas ,Louisiana, Missouri ,New Mexico , NewYork, Ohio ,Pennsylvania , andTexas . •New Hampshire. InSeptember 2019 , ourNew Hampshire subsidiary, NH Healthy Families, began operating under a new five-year contract to continue to provide service to Medicaid enrollees statewide. •Pennsylvania. InJanuary 2018 , ourPennsylvania subsidiary,Pennsylvania Health & Wellness , began serving enrollees in the Community HealthChoices program in the Southeast region as part of the statewide contract that was fully implemented statewide byJanuary 2020 . •QualChoice. InApril 2019 , we completed the acquisition ofQCA Health Plan, Inc. andQualChoice Life and Health Insurance Company, Inc. The acquisition expands our footprint inArkansas by adding additional members primarily through Commercial products. •Spain. InDecember 2019 , our Spanish subsidiary,Ribera Salud , acquired 93% ofHospital Povisa, S.A. , a private hospital in the Vigo region ofSpain . InJune 2019 , our Spanish subsidiary, Primero Salud, acquired additional ownership inRibera Salud , increasing our ownership in the Spanish healthcare company from 50% to 90%. •Washington. InJanuary 2019 , ourWashington State subsidiary, Coordinated Care ofWashington , began providing managed care services toApple Health's Fully Integrated Managed Care beneficiaries in theGreater Columbia ,King andPierce Regions. This integration continued with the addition of theNorth Sound Region inJuly 2019 . •WellCare. OnJanuary 23, 2020 , we completed the WellCare Acquisition. The WellCare Acquisition brings a high-quality Medicare platform and further extends our robust Medicaid offerings. The WellCare Acquisition is a key part of our growth as we become one of the nation's largest sponsors of government health coverage. The transaction is valued at approximately$19.6 billion , including the assumption of$1.95 billion of outstanding debt.
The growth items listed above were partially offset by the following items:
•InSeptember 2020 , ourOregon subsidiary, Trillium Community Health Plan, began operating under an expanded contract serving as a coordinated care organization for six counties in the state; however, an additional competitor was added toLane County . As a result, our membership decreased.
•Effective
•In
•Effective
25
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Table of Con tents
•Beginning in January 2019 , Health Net of Arizona, Inc. began discontinuing and
non-renewing all of its Employer Group plans for small and large business groups
in Arizona . The effective date of coverage termination for existing groups is
dependent on remaining renewals; however, coverage is no longer provided to any
group policyholders and/or members as of December 31, 2019 .
We expect the following items to contribute to our revenue or future growth potential:
•We expect to realize the benefit in 2020 of acquisitions, investments, and business commenced during 2019 and 2020, as discussed above.
•InOctober 2019 , ourNorth Carolina joint venture,Carolina Complete Health , was awarded an additional service area to provide Medicaid managed care services in Region 4. With the addition of this new Region,Carolina Complete Health will provide Medicaid managed care services in three contiguous regions: Region 3, 4 and 5. InFebruary 2019 , WellCare was awarded a statewide contract to administer the state's Medicaid Prepaid Health Plans. The new contracts are expected to commence in mid-2021.
The future growth items listed above are partially offset by the following items:
•Effective
•InOctober 2020 ,Centers for Medicare and Medicaid Services (CMS) published updatedMedicare Star quality ratings for the 2021 rating year. Approximately 30% of our Medicare members are in a 4 star or above plan for the 2022 bonus year, compared to 46% for the 2021 bonus year and 86% for the 2020 bonus year. Our quality bonus and rebates may be negatively impacted in 2021 and 2022, if we are unable to utilize mitigation strategies. MEMBERSHIP FromSeptember 30, 2019 toSeptember 30, 2020 , we increased our managed care membership by 9.9 million, or 65%. The following table sets forth our membership by line of business: September 30, December 31, September 30, 2020 2019 2019 Medicaid: TANF, CHIP & Foster Care 11,498,700 7,528,700 7,623,400 ABD & LTSS 1,439,800 1,043,500 1,045,700 Behavioral Health 184,800 66,500 73,300 Total Medicaid 13,123,300 8,638,700 8,742,400 Medicare Prescription Drug Plan (PDP) 4,436,400 - - Commercial 2,719,500 2,331,100 2,388,500 Medicare (1) 1,014,300 404,500 404,500 International 599,900 599,800 462,400 Correctional 167,200 180,000 187,200 Total at-risk membership 22,060,600 12,154,100 12,185,000 TRICARE eligibles 2,877,900 2,860,700 2,860,700 Non-risk membership 227,200 227,000 227,800 Total 25,165,700 15,241,800 15,273,500
(1) Membership includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and Medicare-Medicaid Plans (MMP).
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Table of Con tents
The following table sets forth additional membership statistics, which are
included in the table above:
September 30, December 31, September 30,
2020 2019 2019
Dual-eligible (2) 974,800 639,200 629,600
Health Insurance Marketplace 2,210,800 1,805,200 1,860,200
Medicaid Expansion 2,070,500 1,346,700 1,359,300
(2) Membership includes dual-eligible ABD & LTSS and dual-eligible Medicare.
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, 2020 and 2019, prepared in accordance with generally
accepted accounting principles in the United States .
Summarized comparative financial data for the three and nine months ended
September 30, 2020 and 2019 is as follows ($ in millions, except per share data
in dollars):
Nine Months Ended September
Three Months Ended September 30, 30,
2020 2019 % Change 2020 2019 % Change
Premium $ 26,537 $ 17,472 52 % $ 74,496 $ 50,229 48 %
Service 922 743 24 % 2,859 2,123 35 %
Premium and service revenues 27,459 18,215 51 % 77,355 52,352 48 %
Premium tax and health insurer fee 1,631 761 114 % 5,472 3,424 60 %
Total revenues 29,090 18,976 53 % 82,827 55,776 48 %
Medical costs 22,932 15,406 49 % 63,659 43,642 46 %
Cost of services 861 619 39 % 2,519 1,778 42 %
Selling, general and administrative
expenses 2,507 1,617 55 % 7,146 4,800 49 %
Amortization of acquired intangible
assets 164 65 152 % 527 194 172 %
Premium tax expense 1,389 822 69 % 4,737 3,587 32 %
Health insurer fee expense 376 - n.m. 1,100 - n.m.
Impairment - 271 n.m. 72 271 (73) %
Earnings from operations 861 176 389 % 3,067 1,504 104 %
Investment and other income 95 98 (3) % 375 317 18 %
Debt extinguishment costs - - n.m. (44) - n.m.
Interest expense (184) (99) 86 % (551) (299) 84 %
Earnings from operations, before income
tax expense 772 175 341 % 2,847 1,522 87 %
Income tax expense 207 79 162 % 1,034 415 149 %
Net earnings 565 96 489 % 1,813 1,107 64 %
Loss (earnings) attributable to
noncontrolling interests 3 (1) 400 % 7 5 40 %
Net earnings attributable to Centene
Corporation $ 568 $ 95 498 % $ 1,820 $ 1,112 64 %
Diluted earnings per common share
attributable to Centene Corporation $ 0.97 $ 0.23 322 % $ 3.16 $ 2.65 19 %
n.m.: not meaningful
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Table of Con tents
Three Months Ended
Total Revenues
The following table sets forth supplemental revenue information for the three
months ended
2020 2019 % Change
Medicaid $ 19,031 $ 12,859 48 %
Commercial 4,638 3,670 26 %
Medicare (1) 3,603 1,429 152 %
Medicare PDP 582 - n.m.
Other 1,236 1,018 21 %
Total Revenues $ 29,090 $ 18,976 53 %
(1) Medicare includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and MMP. n.m.: not meaningful
Total revenues increased 53% in the three months endedSeptember 30, 2020 over the corresponding period in 2019, due to the acquisition of WellCare, growth in theHealth Insurance Marketplace business, expansions, new programs and growth in many of our states, the reinstatement of the health insurer fee in 2020, and the ACA risk corridor receivable settlement, partially offset by the divestiture of ourIllinois health plan. Operating Expenses Medical Costs Results of operations depend on our ability to manage expenses associated with health benefits and to accurately estimate costs incurred. The health benefits ratio, or HBR, represents medical costs as a percentage of premium revenues (excluding premium tax and health insurer fee revenues that are separately billed) and reflects the direct relationship between the premium received and the medical services provided. The HBR for the three months endedSeptember 30, 2020 , was 86.4%, compared to 88.2% in the same period in 2019. The decrease was attributable to the ACA risk corridor receivable settlement and the effect of the COVID-19 pandemic, partially offset by retroactive state premium rate adjustments and risk sharing mechanisms. The effect of the COVID-19 pandemic includes lower traditional medical utilization, partially offset by higher testing and treatment costs associated with COVID-19.
Cost of Services
Cost of services increased by$242 million in the three months endedSeptember 30, 2020 , compared to the corresponding period in 2019, primarily attributable to increased volume in our specialty pharmacy business, increased non-specialty pharmacy sales to our recently divestedIllinois health plan, and growth from newly acquired businesses. The cost of service ratio for the three months endedSeptember 30, 2020 , was 93.4%, compared to 83.3% in the same period in 2019. The increase in the cost of service ratio was driven by the results of the shared savings programs in our physician home health business and non-specialty pharmacy sales to our recently divestedIllinois health plan, which carries a higher cost of service ratio.
Selling, General & Administrative Expenses
Selling, general and administrative expenses, or SG&A, increased by$890 million in the three months endedSeptember 30, 2020 , compared to the corresponding period in 2019. The SG&A increase was primarily due to the addition of the WellCare business, expansions, new programs and growth in many of our states, and the$275 million charitable contribution commitment to our foundation. The SG&A expense ratio was 9.1% for the third quarter of 2020, compared to 8.9% in the third quarter of 2019. The Adjusted SG&A expense ratio was 8.9% for the third quarter of 2020, compared to 8.8% in the third quarter of 2019. The year-over-year increases to the ratios were due to the$275 million charitable contribution commitment to our foundation, partially offset by the addition of the WellCare business, which operates at a lower SG&A ratio, and the leveraging of expenses over higher revenues. 28 -------------------------------------------------------------------------------- Table of Con tents Health Insurer Fee Expense
Health insurer fee expense was
Impairment
During the third quarter of 2019, we recorded$271 million , or$0.57 per diluted share, of non-cash goodwill and intangible asset impairment. Substantially all of the impairment is associated with our USMM physician home health business and was identified as part of our quarterly review procedures, which included an analysis of new information related to our shared savings programs, slower than expected penetration of the physician home health business model into our Medicaid population, and the related impact to revised forecasts.
Other Income (Expense)
The following table summarizes the components of other income (expense) for the
three months ended
2020 2019
Investment and other income $ 95 $ 98
Interest expense (184) (99)
Other income (expense), net $ (89) $ (1)
Investment and other income. Investment and other income decreased by $3 million
in the three months ended September 30, 2020 compared to the corresponding
period in 2019. Investment income for the three months ended September 30, 2020
decreased as compared to September 30, 2019 primarily due to lower interest
rates, partially offset by higher investment balances.
Interest expense. Interest expense increased by $85 million in the three months
ended September 30, 2020 compared to the corresponding period in 2019. The
increase was driven by an increase in borrowings related to the issuance of an
additional $7.0 billion in senior notes in December 2019 to finance the cash
consideration of the WellCare Acquisition as well as the $1.9 billion of
WellCare Notes assumed upon acquisition. The increase was also driven by
incremental interest expense related to our decision to defer the redemption of
our $1.0 billion 2022 Senior Notes as well as incremental borrowings on our
revolving credit facility, both as measures to preserve liquidity due to the
economic environment created by COVID-19.
Income Tax Expense
For the three months endedSeptember 30, 2020 , we recorded income tax expense of$207 million on pre-tax earnings of$772 million , or an effective tax rate of 26.8%. The effective tax rate for the third quarter of 2020 reflects a favorable tax settlement, offset by the reinstatement of the health insurer fee in 2020. For the three months endedSeptember 30, 2019 , we recorded income tax expense of$79 million on pre-tax earnings of$175 million , or an effective tax rate of 45.1%, driven by the non-deductibility of a portion of our non-cash goodwill and intangible impairment, offset by the impact of the health insurer fee moratorium. 29 -------------------------------------------------------------------------------- Table of Con tents Segment Results
The following table summarizes our consolidated operating results by segment for
the three months ended
2020 2019 % Change
Total Revenues
Managed Care $ 28,118 $ 18,131 55 %
Specialty Services 4,063 3,564 14 %
Eliminations (3,091) (2,719) (14) %
Consolidated Total $ 29,090 $ 18,976 53 %
Earnings from Operations
Managed Care $ 888 $ 385 131 %
Specialty Services (27) (209) 87 %
Consolidated Total $ 861 $ 176 389 %
Managed Care
Total revenues increased 55% in the three months ended September 30, 2020 ,
compared to the corresponding period in 2019, due to the acquisition of
WellCare, growth in the Health Insurance Marketplace business, expansions, new
programs and growth in many of our states, the reinstatement of the health
insurer fee in 2020, and the ACA risk corridor receivable settlement, partially
offset by the divestiture of our Illinois health plan. Earnings from operations
increased $503 million between years, primarily due to the acquisition of
WellCare, the ACA risk corridor receivable settlement, the reinstatement of the
HIF in 2020, and lower medical utilization due to the COVID-19 pandemic,
partially offset by our charitable contribution commitment to our foundation and
the Health Insurance Marketplace business, where margins continue to normalize.
Specialty Services
Total revenues increased 14% in the three months endedSeptember 30, 2020 , compared to the corresponding period in 2019, resulting primarily from increased services associated with membership growth in the Managed Care segment, acquisitions and increased volume in our specialty pharmacy business. Earnings from operations increased$182 million in the three months endedSeptember 30, 2020 , compared to the corresponding period in 2019. Earnings from operations in 2019 were negatively affected by the previously discussed non-cash goodwill and intangible impairment related to our USMM physician home health business. Earnings from operations in 2020 were negatively affected by the results of the shared savings programs in our physician home health business.
Nine Months Ended
Total Revenues
The following table sets forth supplemental revenue information for the nine
months ended
2020 2019 % Change
Medicaid $ 54,201 $ 37,586 44 %
Commercial 12,893 11,187 15 %
Medicare (1) 10,157 4,277 137 %
Medicare PDP 1,856 - n.m.
Other 3,720 2,726 36 %
Total Revenues $ 82,827 $ 55,776 48 %
(1) Medicare includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and MMP. n.m.: not meaningful
30
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Table of Con tents
Total revenues increased 48% in the nine months endedSeptember 30, 2020 over the corresponding period in 2019 primarily due to the acquisition of WellCare, growth in theHealth Insurance Marketplace business, expansions, new programs and growth in many of our states and the reinstatement of the health insurer fee in 2020, partially offset by the divestiture of ourIllinois health plan. During the nine months endedSeptember 30, 2020 , we received premium rate adjustments which yielded a net 1% composite increase across all of our markets.
Operating Expenses
Medical Costs
The HBR for the nine months endedSeptember 30, 2020 was 85.5%, compared to 86.9% in the same period in 2019. The decrease was attributable to the ACA risk corridor receivable settlement and lower medical utilization due to the COVID-19 pandemic, partially offset by theHealth Insurance Marketplace business, where margins continue to normalize.
Cost of Services
Cost of services increased by$741 million in the nine months endedSeptember 30, 2020 , compared to the corresponding period in 2019, primarily attributable to increased volume in our specialty pharmacy business, increased non-specialty pharmacy sales to our recently divestedIllinois health plan, and growth from newly acquired businesses. The cost of service ratio for the nine months endedSeptember 30, 2020 , was 88.1%, compared to 83.7% in the same period in 2019. The increase in the cost of service ratio was driven by the results of the shared savings programs in our physician home health business and non-specialty pharmacy sales to our recently divestedIllinois health plan, which carries a higher cost of service ratio.
Selling, General & Administrative Expenses
SG&A increased by$2.3 billion in the nine months endedSeptember 30, 2020 , compared to the corresponding period in 2019. The SG&A increase was primarily due to the addition of the WellCare business, expansions, new programs and growth in many of our states, and$426 million of acquisition related expense in the nine months endedSeptember 30, 2020 . The SG&A expense ratio for the nine months endedSeptember 30, 2020 was 9.2%, compared to 9.2% for the corresponding period in 2019. The 2020 SG&A expense ratio was negatively affected by higher acquisition related expenses due to the recent closing of the WellCare acquisition and the$275 million charitable contribution commitment to our foundation, offset by the addition of the WellCare business, which operates at a lower SG&A ratio, and the leveraging of expenses over higher revenues. The Adjusted SG&A expense ratio for the nine months endedSeptember 30, 2020 was 8.7%, compared to 9.1% for the nine months endedSeptember 30, 2019 . The Adjusted SG&A expense ratio benefited from the addition of the WellCare business, which operates at a lower SG&A ratio, and the leveraging of expenses over higher revenues, partially offset by the$275 million charitable contribution commitment to our foundation.
Health Insurer Fee Expense
Health insurer fee expense was
Impairment
During the first quarter of 2020, we recorded$72 million of a non-cash impairment of our third-party care management software business. During the third quarter of 2019, we recorded$271 million , or$0.57 per diluted share, of non-cash goodwill and intangible asset impairment. Substantially all of the impairment is associated with our USMM physician home health business and was identified as part of our quarterly review procedures, which included an analysis of new information related to our shared savings programs, slower than expected penetration of the physician home health business model into our Medicaid population, and the related impact to revised forecasts. 31
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Table of Con tents
Other Income (Expense)
The following table summarizes the components of other income (expense) for the
nine months ended
2020 2019
Investment and other income $ 375 $ 317
Debt extinguishment costs (44) -
Interest expense (551) (299)
Other income (expense), net $ (220) $ 18
Investment and other income. Investment and other income increased by $58
million in the nine months ended September 30, 2020 compared to the
corresponding period in 2019. The increase was due to a $104 million gain
related to the divestiture of certain products of our Illinois health plan as
part of the previously announced divestiture agreements associated with the
WellCare Acquisition as well as overall higher investment balances, partially
offset by lower interest rates.
Debt extinguishment costs. In February 2020 , we redeemed all of our outstanding
$1.0 billion 6.125% Senior Notes, due February 15, 2024 (the 2024 Notes) and
recognized a pre-tax loss on extinguishment of approximately $44 million . The
loss includes the call premium, the write-off of unamortized debt issuance costs
and the loss on the termination of the $1.0 billion interest rate swap
associated with the 2024 Notes.
Interest expense. Interest expense increased by $252 million in the nine months
ended September 30, 2020 , compared to the corresponding period in 2019, driven
by an increase in borrowings related to the issuance of an additional $7.0
billion in senior notes in December 2019 to finance the cash consideration of
the WellCare Acquisition as well as the $1.9 billion of WellCare Notes assumed
upon acquisition. The increase was also driven by incremental interest expense
related to our decision to defer the redemption of our $1.0 billion 2022 Senior
Notes as well as incremental borrowings on our revolving credit facility, both
as measures to preserve liquidity due to the economic environment created by
COVID-19.
Income Tax Expense
For the nine months ended September 30, 2020 , we recorded income tax expense of
$1.0 billion on pre-tax earnings of $2.8 billion , or an effective tax rate of
36.3%. The effective tax rate for the nine months ended September 30, 2020
reflects the tax impact associated with the Illinois divestiture and the
reinstatement of the health insurer fee in 2020, partially offset by a favorable
tax settlement. For the nine months ended September 30, 2019 , we recorded income
tax expense of $415 million on pre-tax earnings of $1.5 billion , or an effective
tax rate of 27.3%, which reflects the health insurer fee moratorium.
Segment Results
The following table summarizes our consolidated operating results by segment for
the nine months ended
2020 2019 % Change
Total Revenues
Managed Care $ 79,894 $ 53,399 50 %
Specialty Services 12,058 10,174 19 %
Eliminations (9,125) (7,797) (17) %
Consolidated Total $ 82,827 $ 55,776 48 %
Earnings from Operations
Managed Care $ 3,014 $ 1,587 90 %
Specialty Services 53 (83) 164 %
Consolidated Total $ 3,067 $ 1,504 104 %
32-------------------------------------------------------------------------------- Table of Con tents Managed Care Total revenues increased 50% in the nine months endedSeptember 30, 2020 , compared to the corresponding period in 2019, primarily due to the acquisition of WellCare, growth in theHealth Insurance Marketplace business, expansions, new programs and growth in many of our states and the reinstatement of the health insurer fee in 2020, partially offset by the divestiture of ourIllinois health plan. Earnings from operations increased$1.4 billion between years driven by the acquisition of WellCare, lower medical utilization due to the COVID-19 pandemic, and the reinstatement of the HIF in 2020, partially offset by higher acquisition related expenses and normalized margins in theHealth Insurance Marketplace business.
Specialty Services
Total revenues increased 19% in the nine months endedSeptember 30, 2020 , compared to the corresponding period in 2019, resulting primarily from increased services associated with membership growth in the Managed Care segment, acquisitions and increased volume in our specialty pharmacy business. Earnings from operations increased$136 million in the nine months endedSeptember 30, 2020 , compared to the corresponding period in 2019. Earnings from operations in 2019 were negatively affected by the previously discussed non-cash goodwill and intangible impairment related to our USMM physician home health business. Earnings from operations in 2020 was negatively affected by the previously discussed$72 million impairment related to our third-party care management software business and the results of the shared savings programs in our physician home health business. LIQUIDITY AND CAPITAL RESOURCES
Shown below is a condensed schedule of cash flows used in the discussion of liquidity and capital resources ($ in millions).
Nine
Months Ended
2020 2019
Net cash provided by operating activities $ 2,522 $ 2,134
Net cash used in investing activities (2,700) (1,388)
Net cash provided by financing activities 383 128
Effect of exchange rate changes on cash and cash equivalents 8 4
Net increase in cash, cash equivalents, and restricted cash and
cash equivalents $ 213 $ 878 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$2.5 billion in the nine months endedSeptember 30, 2020 compared to providing cash of$2.1 billion in the comparable period in 2019. Operating cash flow provided by operations in 2020 was due to net earnings, an increase in medical claims liabilities from growth and expansions, and an increase in other long-term liabilities related to minimum MLR payables and a delay in tax payments related to the COVID-19 extensions to payment deadlines. This was partially offset by an increase in premium and related receivables due to the timing of payments for pharmacy rebates and HIF reimbursement and a decrease in accounts payable and accrued expenses related to risk adjustment and minimum MLR payments. Cash flows provided by operations in 2019 was primarily due to net earnings and an increase in medical claims liabilities, primarily resulting from growth in theHealth Insurance Marketplace business and the commencement or expansion of theArkansas ,Iowa ,Pennsylvania andNew Mexico health plans. Cash flows from operations in each year can be impacted by the timing of payments we receive from our states. As we have seen historically, states may prepay the following month premium payment, which we record as unearned revenue, or they may delay our premium payment, which we record as a receivable. We typically receive capitation payments monthly; however, the states in which we operate may decide to adjust their payment schedules, which could positively or negatively impact our reported cash flows from operating activities in any given period.
Cash Flows Used in Investing Activities
Investing activities used cash of
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Table of Con tents
InJanuary 2020 , we completed the acquisition of WellCare for$19.6 billion , including the assumption of debt. Total consideration for the acquisition was$17.6 billion , consisting ofCentene common shares valued at$11.4 billion ,$6.1 billion in cash, and$95 million related to the fair value of replacement equity awards associated with pre-combination service. Cash flows used in investing activities in 2019 primarily consisted of the net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments), capital expenditures and acquisitions. We spent$663 million and$530 million in the nine months endedSeptember 30, 2020 and 2019, respectively, on capital expenditures for system enhancements, market growth, and corporate headquarters expansions.
As of
Cash Flows Provided by Financing Activities
Our financing activities provided cash of$383 million in the nine months endedSeptember 30, 2020 , compared to$128 million in the comparable period in 2019. During 2020 and 2019, our net financing activities were due to increased borrowings, partially offset by common stock repurchases.
Liquidity Metrics
In connection with the WellCare Acquisition, inJanuary 2020 , we completed an exchange offer for$1.2 billion of 5.25% Senior Notes due 2025 and$750 million of 5.375% Senior Notes due 2026 (collectively, the WellCare Notes) issued by WellCare and issued$1.1 billion aggregate principal amount of 5.25% Senior Notes due 2025 and$747 million aggregate principal amount of 5.375% Senior Notes due 2026. Additionally, our wholly owned subsidiary,WellCare Health Plans, Inc. , assumed the remaining unexchanged WellCare Notes. InFebruary 2020 , we issued$2.0 billion 3.375% Senior Notes due 2030 (the$2.0 billion 2030 Notes). We used the net proceeds from the$2.0 billion 2030 Notes to redeem all of our outstanding 2024 Notes. We recognized a pre-tax loss on extinguishment of approximately$44 million , including the call premium, the write-off of unamortized debt issuance costs and a loss on the termination of the$1.0 billion interest rate swap associated with the 2024 Notes. We intended to use remaining proceeds to redeem our$1.0 billion 4.75% Senior Notes due 2022 (the 2022 Notes). The 2022 Notes were redeemed in the fourth quarter in connection with an additional offering of senior notes as further described below, and we decided to increase liquidity with the remaining proceeds of the$2.0 billion 2030 Notes. InFebruary 2020 , we terminated the interest rate swap agreements associated with the 2022 Notes and the Senior Notes dueJanuary 15, 2025 , (the 2025 Notes). The interest rate swaps associated with the 2024 Notes were also terminated in connection with the redemption of those notes as discussed above. In total, we terminated three interest rate swap contracts with a notional amount of$2.1 billion . InApril 2020 , we completed an exchange offer, whereby we offered to exchange all of the outstanding$2.0 billion 3.375% Senior Notes dueFebruary 15, 2030 ,$1.0 billion 4.75% Senior Notes due 2025,$2.5 billion 4.25% Senior Notes, and$3.5 billion 4.625% Senior Notes due 2029 for identical securities that have been registered under the Securities Act of 1933. InOctober 2020 , we issued$2.2 billion 3.0% Senior Notes dueOctober 2030 (the$2.2 billion 2030 Notes). The Company used the net proceeds from offering, together with cash on hand, to redeem all of the 2022 Notes and the$1.2 billion 5.25% Senior Notes due 2025, including all premiums, accrued interest and expenses related to the redemptions. 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 ofSeptember 30, 2020 , we had$93 million of borrowings outstanding under our Revolving Credit Facility,$1.45 billion of borrowings under our Term Loan Facility, and we were in compliance with all covenants. As ofSeptember 30, 2020 , there were no limitations on the availability of our Revolving Credit Facility as a result of the debt-to-EBITDA ratio. 34 -------------------------------------------------------------------------------- Table of Con tents We have a$200 million non-recourse construction loan to fund the expansion of our corporate headquarters. The loan bears interest based on the one month LIBOR plus 2.70% and matures inApril 2021 with an optional one-year extension. The agreement contains financial and non-financial covenants aligning with our revolving credit agreement. We have guaranteed completion of the construction project associated with the loan. As ofSeptember 30, 2020 , we had$177 million in borrowings outstanding under the loan. We had outstanding letters of credit of$121 million as ofSeptember 30, 2020 , which were not part of our revolving credit facility. The letters of credit bore weighted interest of 0.6% as ofSeptember 30, 2020 . In addition, we had outstanding surety bonds of$1.1 billion as ofSeptember 30, 2020 .
The indentures governing our various maturities of senior notes contain
restrictive covenants. As of
AtSeptember 30, 2020 , we had working capital, defined as current assets less current liabilities, of$5.5 billion , compared to$7.4 billion atDecember 31, 2019 . 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.
At
2020 Expectations
During the remainder of 2020, we expect to receive net dividends from our insurance subsidiaries of approximately$423 million and spend approximately$230 million in additional capital expenditures primarily associated with system enhancements and market and corporate headquarters expansions. These amounts are expected to be funded by unregulated cash flow generation in 2020 and borrowings on our Revolving Credit Facility and construction loan. However, from time to time we may elect to raise additional funds for these 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. 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.
Contractual Obligations
Our contractual obligations, including medical claims liabilities, debt and
interest, and lease obligations were significantly impacted due to the WellCare
Acquisition, which closed in the first quarter of 2020. For additional
information regarding the WellCare Acquisition and the impact to our estimated
contractual obligations, refer to Note 2. Acquisitions, Note 5. Medical Claims
Liability, Note 7. Debt and Note 8. Leases, included in Part I, Item 1. "Notes
to the Consolidated Financial Statements" of this filing.
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Table of Con tents
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, 2020 , we made net capital
contributions of $180 million to our regulated subsidiaries. For our
subsidiaries that file with the National Association of Insurance Commissioners
(NAIC), the aggregate RBC level as of December 31, 2019 , 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 2020 (excluding
the interim impact of the health insurer fee).
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 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. In addition, certain of our California subsidiaries have made certain
undertakings to the California Department of Managed Health Care (DMHC) to
restrict dividends and loans to affiliates, to the extent that the payment of
such would reduce such entities' TNE below the required amount as specified in
the undertaking.
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 risk based capital requirements for
insurance companies, managed care organizations and other entities bearing risk
for healthcare coverage. As of September 30, 2020 , each of our health plans was
in compliance with the risk-based capital 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.
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Table of Con tents
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