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 I, Item 1A."Risk Factors" of this Form 10-K. The following discussion and analysis does not include certain items related to the year endedDecember 31, 2018 , including year-to-year comparisons between the year endedDecember 31, 2019 and the year endedDecember 31, 2018 . For a comparison of our results of operations for the fiscal years endedDecember 31, 2019 andDecember 31, 2018 , see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 18, 2020 . 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 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. The HIF has been repealed beginning in 2021.
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$19.6 billion , including the assumption of$1.95 billion of outstanding debt. The WellCare Acquisition brought a high-quality Medicare platform and further extended 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.
Magellan Acquisition InJanuary 2021 , we announced that we entered into a definitive merger agreement under which we will acquire Magellan Health for$95.00 per share in cash for a total enterprise value of approximately$2.2 billion . The transaction will broaden and deepen our whole health capabilities and establish a leading behavioral health platform. The transaction is subject to clearance under the Hart-Scott Rodino Act, receipt of required state regulatory approvals, the approval of the definitive merger agreement by Magellan Health's stockholders and other customary closing conditions. The transaction is not contingent upon financing. We intend to fund the acquisition primarily through debt financing. The transaction is expected to close in the second half of 2021.
Acquisitions
We continued to execute on our growth strategy through acquisitions during 2020. In the fourth quarter of 2020, we acquired PANTHERx andApixio . PANTHERx is one of the largest and fastest-growing specialty pharmacies inthe United States 42
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specializing in orphan drugs and treating rare diseases. PANTHERx and its management team will continue to operate independently as part of ourEnvolve Pharmacy Solutions business unit, a total drug management program that includes integrated PBM services and specialty pharmacy solutions to millions of members throughoutthe United States .Apixio is a healthcare analytics company offering artificial intelligence technology solutions. With this transaction, we will continue to digitize the administration of healthcare and accelerate innovation and modernization across the enterprise.Apixio will remain an operationally independent entity as part of ourHealth Care Enterprises group to continue bringing value to its clients and the industry, while also realizing the benefits of enhanced scale.
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 screening, testing and treatment services for Medicaid, Medicare and Marketplace members and are waiving all associated member cost share amounts. 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 employees 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. 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 2021 depends on future developments, including but not limited to: the length and severity of the outbreak (including new strains, which may be more contagious, more severe or less responsive to treatment or vaccines), the effectiveness of containment actions, and the timing around the development of treatments and distribution of vaccinations. The pandemic and these future developments have impacted and will continue to affect our membership and medical utilization. FromMarch 31, 2020 throughDecember 31, 2020 , our Medicaid membership has increased by 1.7 million members. 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 dialogues with our state partners. 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.
The impact of all these items slightly benefited our 2020 results. We are confident we have the team, systems, expertise and financial strength to continue to effectively navigate this challenging pandemic landscape.
Regulatory Trends and Uncertainties
The United States government, politicians, and healthcare experts continue to discuss and debate various elements ofthe 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. 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 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. 43
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For additional information regarding regulatory trends and uncertainties, see Part I, Item 1 "Business - Regulation" and Item 1A, "Risk Factors."
2020 Highlights
Our financial performance for 2020 is summarized as follows:
•Year-end managed care membership of 25.5 million, an increase of 10.3 million members, or 67% over 2019.
•Total revenues of
•HBR of 86.2% for 2020, compared to 87.3% for 2019.
•SG&A expense ratio of 9.5% for 2020, compared to 9.3% for 2019.
•Adjusted SG&A expense ratio of 8.9% for 2020, compared to 9.2% for 2019.
•Diluted EPS of
•Adjusted Diluted EPS of
•Operating cash flows of
A reconciliation from GAAP diluted EPS to Adjusted Diluted EPS is highlighted
below, and additional detail is provided under the heading "Non-GAAP Financial
Presentation":
Year Ended December 31,
2020 2019
GAAP diluted EPS attributable to Centene $ 3.12 $ 3.14
Amortization of acquired intangible assets 0.95 0.47 Acquisition related expenses 0.86 0.19 Other adjustments (1) 0.07 0.62 Adjusted Diluted EPS$ 5.00 $ 4.42 (1) Other adjustments include the following items: •2020 - gain related to the divestiture of certain products of ourIllinois health plan of$104 million , or$0.10 per diluted share, net of an income tax expense of$0.08 ; (b) non-cash impairment of our third-party care management software business of$72 million , or$0.10 per diluted share, net of an income tax benefit of$0.02 ; and (c) debt extinguishment costs of$61 million , or$0.07 per diluted share, net of an income tax benefit of$0.04 ; and •2019 - non-cash goodwill and intangible asset impairment of$271 million or$0.57 per diluted share, net of an income tax benefit of$0.08 and debt extinguishment costs of$30 million or$0.05 per diluted share, net of an income tax benefit of$0.02 .
The following items contributed to our revenue and membership growth in 2020:
•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, and also began operating under a re-awarded contract to continue the provision of mental and dental health services to theGeorgia Department of 44
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Correction's state prison facilities. In
•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. •Illinois. InJuly 2020 , ourIllinois subsidiary,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 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 an 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 and Wellness, began serving enrollees in the Community HealthChoices program as part of the statewide contract that was fully implemented inJanuary 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 , 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 . 45
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•WellCare. On
•In addition, revenue and membership growth was significantly driven by the suspension of eligibility redeterminations and increased unemployment levels as a result of the COVID-19 pandemic, as well as the reinstatement of the health insurer fee in 2020.
The growth items listed above were partially offset by the following items:
•Effective
•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
•Effective
•In
•Effective
•Beginning inJanuary 2019 ,Health Net of Arizona, Inc. began discontinuing and non-renewing all of itsEmployer Group plans for small and large business groups inArizona . 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 ofDecember 31, 2019 .
We expect the following items to contribute to our revenue or future growth potential:
•We expect to realize the full year benefit in 2021 of acquisitions, investments, and business commenced during 2020, as discussed above.
•InJanuary 2021 ,Centene announced that itsOklahoma subsidiary,Oklahoma Complete Health , has been selected by theOklahoma Health Care Authority (OHCA) for statewide contracts to provide managed care for the SoonerSelect and, on a sole source basis, SoonerSelect Specialty Children's Plan (SCP) (foster care) programs. The state expects to commence the SoonerSelect and SoonerSelect SCP Programs onOctober 1, 2021 .
•In
•InJanuary 2021 , we announced that we entered into a definitive merger agreement under which we will acquire Magellan Health for$95.00 per share in cash for a total enterprise value of approximately$2.2 billion . The transaction is subject to clearance under the Hart-Scott Rodino Act, receipt of required state regulatory approvals, the approval of the definitive merger agreement by Magellan Health's stockholders and other customary closing conditions. The transaction is expected to close in the second half of 2021. •InJanuary 2021 , we expanded our offerings in theHealth Insurance Marketplace . We expanded our Marketplace product, branded Ambetter, in nearly 400 new counties across 13 existing states. In addition,Ambetter-branded Marketplace products is now offered in two new states,New Mexico andMichigan .
•In
•InDecember 2020 , we acquiredApixio Inc. , a healthcare analytics company offering artificial intelligence technology solutions. With this transaction, we will continue to digitize the administration of healthcare and accelerate innovation 46
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and modernization across the enterprise.
•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:
•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. Our quality bonus and rebates may be negatively impacted in 2021 and 2022, if we are unable to utilize mitigation strategies.
•Beginning in 2021, the health insurer fee has been repealed, which will result in a decrease in revenue.
•We expect a decrease in our marketplace membership driven by a reduction in the state ofFlorida , resulting from price competition in three highly populated counties.
•We expect Medicaid eligibility redeterminations to begin on
MEMBERSHIP
From
December 31,
2020 2019
Traditional Medicaid (1) 12,055,400 7,573,600
High Acuity Medicaid (2) 1,554,700 1,110,000
Total Medicaid 13,610,100 8,683,600
Commercial 2,633,600 2,331,100
Medicare (3) 955,400 359,600
Medicare PDP 4,469,400 -
International 597,700 599,800
Correctional 147,200 180,000
Total at-risk membership 22,413,400 12,154,100
TRICARE eligibles 2,877,900 2,860,700
Non-risk membership 231,600 227,000
Total 25,522,900 15,241,800
(1) Membership includes TANF, Medicaid Expansion, CHIP,
The following table sets forth additional membership statistics, which are included in the membership information above:
December 31,
2020 2019
Dual-eligible (4) 1,066,800 639,200
Health Insurance Marketplace 2,131,600 1,805,200
Medicaid Expansion 2,181,400 1,346,700
(4) Membership that is eligible for both Medicaid and Medicare benefits.
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FromDecember 31, 2019 toDecember 31, 2020 , our membership increased as a result of: •the WellCare Acquisition; •Medicaid membership growth related to the COVID-19 pandemic; •membership growth in ourHealth Insurance Marketplace business; and •expansions, new programs and growth in many of our states. 48
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RESULTS OF OPERATIONS
The following discussion and analysis is based on our Consolidated Statements of
Operations, which reflect our results of operations for years ended December 31,
2020 , and 2019, respectively, prepared in accordance with generally accepted
accounting principles in the United States ($ in millions, except per share data
in dollars):
2020 2019 % Change 2019-2020
Premium $ 100,055 $ 67,439 48 %
Service 3,745 2,925 28 %
Premium and service revenues 103,800 70,364 48 %
Premium tax and health insurer fee 7,315 4,275 71 %
Total revenues 111,115 74,639 49 %
Medical costs 86,264 58,862 47 %
Cost of services 3,303 2,465 34 %
Selling, general and administrative expenses 9,867 6,533 51 %
Amortization of acquired intangible assets 719 258 179 %
Premium tax expense 6,332 4,469 42 %
Health insurer fee expense 1,476 - n.m.
Goodwill and intangible impairment 72 271 (73) %
Earnings from operations 3,082 1,781 73 %
Other income (expense):
Investment and other income 480 443 8 %
Debt extinguishment costs (61) (30) (103) %
Interest expense (728) (412) (77) %
Earnings before income tax expense 2,773 1,782 56 %
Income tax expense 979 473 107 %
Net earnings 1,794 1,309 37 %
Loss attributable to noncontrolling interests 14 12 17 %
Net earnings attributable to
37 %
Diluted earnings per common share attributable to
Centene Corporation: $ 3.12 $ 3.14 (1) %
n.m.: not meaningful
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Year Ended
Total Revenues
The following table sets forth supplemental revenue information for the year
ended
2020 2019 % Change 2019-2020
Medicaid $ 74,785 $ 51,831 44 %
Commercial 17,071 14,747 16 %
Medicare (1) 11,976 4,248 182 %
Medicare PDP 2,403 - n.m.
Other 4,880 3,813 28 %
Total Revenues $ 111,115 $ 74,639 49 %
(1) Medicare includes Medicare Advantage and Medicare Supplement
n.m.: not meaningful
Total revenues increased 49% in the year ended December 31, 2020 , over the
corresponding period in 2019, primarily due to the acquisition of WellCare,
growth in the Medicaid and Health Insurance Marketplace businesses, and the
reinstatement of the health insurer fee in 2020. Additionally, the net effect of
the pandemic increased our revenues due to the suspension of Medicaid
eligibility redeterminations. The increase was partially offset by the
divestiture of our Illinois health plan. During the twelve months ended December
31, 2020 , we received premium rate adjustments which yielded a net 1% composite
increase across all of our markets.
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 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 HBR for the year endedDecember 31, 2020 was 86.2%, a decrease of 110 basis points over the comparable period in 2019. The HBR decrease was primarily attributable to lower medical utilization trends due to the COVID-19 pandemic, the ACA risk corridor receivable settlement and the reinstatement of the health insurer fee. The decrease was partially offset by performance in theHealth Insurance Marketplace business, the implementation of retroactive state premium rate adjustments and risk sharing mechanisms, and higher testing and treatment costs associated with COVID-19.
Cost of Services
Cost of services increased by$838 million in the year endedDecember 31, 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 acquired businesses. The cost of service ratio for the year endedDecember 31, 2020 was 88.2%, compared to 84.3% in 2019. The increase in the cost of service ratio was driven by the results of lower revenue from the shared savings programs in our physician home health business and higher 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$3.3 billion in the year endedDecember 31, 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 in 2020, and$580 million of acquisition related expense in the year endedDecember 31, 2020 . 50
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The SG&A expense ratio was 9.5% for the year endedDecember 31, 2020 , compared to 9.3% for the year endedDecember 31, 2019 . The 2020 SG&A expense ratio increased due to higher acquisition and integration related expenses primarily due to the WellCare acquisition, the$275 million charitable contribution to our foundation and enhanced growth and profitability initiatives for our Medicare andHealth Insurance Marketplace businesses (both as a result of the one-time ACA risk corridor settlement). These items were partially offset by leveraging of expenses over higher revenues as a result of the WellCare acquisition. The Adjusted SG&A expense ratio was 8.9% for the year endedDecember 31, 2020 , compared to 9.2% for the year endedDecember 31, 2019 . The Adjusted SG&A expense ratio benefited from leveraging of expenses over higher revenues as a result of the WellCare acquisition, partially offset by the$275 million charitable contribution to our foundation and enhanced growth and profitability initiatives for our Medicare andHealth Insurance Marketplace businesses.
Health Insurer Fee Expense
Health insurer fee expense was
Impairment
During the first quarter of 2020, we recorded$72 million , or$0.10 per diluted share, of non-cash impairment of our third-party care management software business. In 2019, we recorded$271 million , or$0.57 per diluted share, of non-cash goodwill and intangible asset impairment. Substantially all of the 2019 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
year ended
2020 2019
Investment and other income $ 480 $ 443
Debt extinguishment costs (61) (30)
Interest expense (728) (412)
Other income (expense), net $ (309) $ 1 Investment and other income. Investment and other income increased by
Debt extinguishment costs. InOctober 2020 , we redeemed all of the$1.0 billion 4.75% Senior Notes due 2022 (the 2022 Notes) and the$1.2 billion 5.25% Senior Notes due 2025 (the 2025 Notes). We recognized a pre-tax loss on extinguishment of$17 million on the redemption of the 2022 Notes and the 2025 Notes in the fourth quarter of 2020, including the call premiums and write-off of unamortized debt issuance costs. InFebruary 2020 , we redeemed all of our outstanding$1.0 billion 6.125% Senior Notes, dueFebruary 15, 2024 (the 2024 Notes) and recognized a pre-tax loss on extinguishment of$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. InOctober 2019 , we redeemed the outstanding principal balance on the$1.4 billion 5.625% Senior Notes dueFebruary 15, 2021 (the 2021 Notes). We recognized a pre-tax loss on extinguishment of$30 million on the redemption of the 2021 Notes, including the call premium, the write-off of unamortized debt issuance costs and a loss on the termination of the$600 million interest rate swap agreement associated with the notes. Interest expense. Interest expense increased by$316 million in the year endedDecember 31, 2020 , compared to the corresponding period in 2019. The increase is driven by an increase in borrowings related to the issuance of an additional$7.0 billion in senior notes inDecember 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 preserve an additional$1.0 billion of liquidity due to the economic environment created by COVID-19. 51
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Table of Contents Income Tax Expense For the year endedDecember 31, 2020 , we recorded income tax expense of$979 million on pre-tax earnings of$2.8 billion , or an effective tax rate of 35.3%. The effective tax rate for the year endedDecember 31, 2020 reflects the tax impact associated with theIllinois divestiture and the reinstatement of the health insurer fee in 2020, partially offset by a favorable tax settlement. For the year endedDecember 31, 2019 , we recorded income tax expense of$473 million on pre-tax earnings of$1.8 billion , or an effective tax rate of 26.5%, which reflects the impact of the health insurer fee moratorium, partially offset by the non-deductibility of a portion of our non-cash goodwill and intangible impairment recorded in the third quarter of 2019.
Segment Results
The following table summarizes our consolidated operating results by segment for
the year ended
% Change
2020 2019 2019-2020
Total Revenues
Managed Care $ 107,296 $ 71,379 50 %
Specialty Services 16,155 13,781 17 %
Eliminations (12,336) (10,521) (17) %
Consolidated Total $ 111,115 $ 74,639 49 %
Earnings from Operations
Managed Care $ 3,031 $ 1,806 68 %
Specialty Services 51 (25) 304 %
Consolidated Total $ 3,082 $ 1,781 73 %
Managed Care
Total revenues increased 50% in the year ended December 31, 2020 , compared to
the corresponding period in 2019, primarily due to the acquisition of WellCare,
growth in the Medicaid and Health Insurance Marketplace businesses, and the
reinstatement of the health insurer fee in 2020. Additionally, the net effect of
the pandemic increased our revenues due to the suspension of Medicaid
eligibility redeterminations. The increase was partially offset by the
divestiture of our Illinois health plan. Earnings from operations increased $1.2
billion between years driven by the acquisition of WellCare, lower medical
utilization due to the COVID-19 pandemic, and the reinstatement of the health
insurer fee in 2020, partially offset by higher acquisition related expenses,
retroactive state premium rate adjustments and risk sharing mechanisms, and
higher testing and treatment costs associated with COVID-19, particularly in the
Health Insurance Marketplace business.
Specialty Services
Total revenues increased 17% in the year endedDecember 31, 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$76 million between years. Earnings from operations in 2020 was negatively affected by the previously discussed impairment related to our third-party care management software business and the results of the shared savings programs in our physician home health business. Earnings from operations in 2019 were negatively affected by the previously discussed non-cash goodwill and intangible impairment related to our USMM physician home health business. 52
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LIQUIDITY AND CAPITAL RESOURCES
Shown below is a condensed schedule of cash flows for the years ended December
31, 2020 and 2019, used in the discussion of liquidity and capital resources ($
in millions).
Year Ended December 31,
2020 2019
Net cash provided by operating activities $ 5,503 $ 1,483
Net cash used in investing activities (6,955) (1,532)
Net cash provided by financing activities 260 6,832
Effect of exchange rate changes on cash and cash equivalents 18 (2)
Net increase in cash, cash equivalents, and restricted cash and
equivalents $ (1,174) $ 6,781 Cash Flows Provided by Operating Activities
Normal operations are funded primarily through operating cash flows and borrowings under our Revolving Credit Facility. In 2020, operating activities provided cash of$5.5 billion , or 3.1 times net earnings, compared to$1.5 billion in 2019. Cash flow provided by operations in 2020 was due to net earnings, an increase in medical claims liabilities from growth and expansions, and an increase in other long-term liabilities related to minimum MLR payables and a delay in employer payroll tax payments related to the COVID-19 extensions to payment deadlines. Cash flows provided by operations in 2019 was primarily due to net earnings and an increase in medical claims liabilities, primarily resulting from growth in theHealth Insurance Marketplace business and the commencement or expansion of theArkansas ,Iowa ,New Mexico , andPennsylvania health plans. Operating cash flows were partially offset by an increase in premium and trade receivables due to the timing of payments from our state customers, as discussed below. Cash flows from operations in each year can be impacted by the timing of payments we receive from our states. As we have seen historically, states may prepay the following month premium payment, which we record as unearned revenue, or they may delay our premium payment, which we record as a receivable. We typically receive capitation payments monthly; however, the states in which we operate may decide to adjust their payment schedules which could positively or negatively impact our reported cash flows from operating activities in any given period. Year Ended December 31, 2020 2019 (Increase) decrease in premium and trade receivables$ (52) $ (1,076) Increase (decrease) in unearned revenue (528) (9) Net increase (decrease) in operating cash flow $
(580)
Cash Flows Used in Investing Activities
Investing activities used cash of$7.0 billion for the year endedDecember 31, 2020 and$1.5 billion in 2019. Cash flows used in investing activities in 2020 primarily consisted of our acquisitions of WellCare, PANTHERx andApixio , partially offset by divestiture proceeds. Cash flows used in investing activities in 2020 also consisted of net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments) and capital expenditures.
We spent
As ofDecember 31, 2020 , our investment portfolio consisted primarily of fixed-income securities with a weighted average duration of 3.3 years. We had unregulated cash and investments of$1.9 billion atDecember 31, 2020 , compared to$7.2 billion atDecember 31, 2019 . Unregulated cash as ofDecember 31, 2019 included the net proceeds from our$7.0 billion senior note issuance in advance of the closing of the WellCare Acquisition. Unregulated cash and investments include private equity investments and company owned life insurance contracts. 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) and capital expenditures. 53
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Cash Flows Provided by Financing Activities
Our financing activities provided cash of$260 million in 2020, compared to providing cash of$6.8 billion in 2019. During 2020, our net financing activities were due to increased borrowings, partially offset by common stock repurchases. During 2019, our net financing activities primarily related to the proceeds from the issuance of$7.0 billion of senior notes inDecember 2019 in preparation of the WellCare Acquisition. 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$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 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 . InMay 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). We used the net proceeds from the offering, together with cash on hand, to redeem all of the 2022 Notes and the$1.2 billion 5.25% Senior Notes due 2025. We recognized a pre-tax loss on extinguishment of$17 million , including the call premium, and the write-off of unamortized debt issuance costs.
Liquidity Metrics
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 3.5 to 1.0, which may, under certain circumstances and subject to certain elections made by us, be increased for certain periods to 4.0 to 1.0. As ofDecember 31, 2020 , we had$97 million of borrowings outstanding under our Revolving Credit Facility,$1.5 billion of borrowings outstanding under our Term Loan Facility, and we were in compliance with all covenants. As ofDecember 31, 2020 , there were no limitations on the availability of our Revolving Credit Facility as a result of the debt-to-EBITDA ratio. We have a$200 million non-recourse construction loan to fund the expansion of our corporate headquarters. InFebruary 2021 , we extended the term of the construction loan for one year. The loan bears interest based on the one month LIBOR plus 2.70% and matures inApril 2022 . The agreement contains financial and non-financial covenants aligning with the credit agreement governing our Revolving Credit Facility. We have guaranteed completion of the construction project associated with the loan. As ofDecember 31, 2020 , we had$180 million in borrowings outstanding under the loan. We had outstanding letters of credit of$129 million as ofDecember 31, 2020 , which were not part of our Revolving Credit Facility. The letters of credit bore weighted interest of 0.6% as ofDecember 31, 2020 . In addition, we had outstanding surety bonds of$1.1 billion as ofDecember 31, 2020 . The indentures governing our various maturities of senior notes contain limited restrictive covenants. As ofDecember 31, 2020 , we were in compliance with all covenants. 54
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AtDecember 31, 2020 , we had working capital, defined as current assets less current liabilities, of$1.8 billion , compared to$7.4 billion atDecember 31, 2019 . Working capital as ofDecember 31, 2019 , reflected the net proceeds from our$7.0 billion senior note issuance in advance of the closing of the WellCare Acquisition. 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. AtDecember 31, 2020 , our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 39.3%, compared to 52.0% atDecember 31, 2019 . Excluding$230 million of non-recourse debt, our debt to capital ratio was 39.0% as ofDecember 31, 2020 , compared to 51.7% atDecember 31, 2019 . AtDecember 31, 2019 , excluding non-recourse debt and the senior notes issued to fund the WellCare Acquisition in advance of closing, our debt to capital was 34.3%. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility. 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. We have 5.5 million available shares remaining under the program for repurchases as ofDecember 31, 2020 . No duration has been placed on the repurchase program. We reserve the right to discontinue the repurchase program at any time. In 2020, we used proceeds from divestitures to repurchase 8.7 million shares ofCentene common stock for$500 million through our stock repurchase program. We did not make any repurchases under this plan during 2019.
During the year ended
2021 Expectations
During 2021, we expect to receive net dividends of approximately$1.7 billion from our regulated subsidiaries and expect to spend approximately$860 million in capital expenditures primarily associated with system enhancements and market and corporate headquarters expansions. InFebruary 2021 , our Board of Directors approved an increase in our existing share repurchase program for our common stock. With the increase, we are authorized to repurchase up to$1.0 billion of shares of our common stock, inclusive of the previously approved stock repurchase program. No duration has been placed on the repurchase program. InFebruary 2021 , we issued$2.2 billion 2.50% Senior Notes due 2031 (the 2031 Notes). In conjunction with the 2031 Notes offering, we completed a tender offer (the Tender Offer) to purchase for cash, subject to certain conditions, any and all of the outstanding aggregate principal amount of the$2.2 billion 4.75% Senior Notes due 2025 (the 2025 Notes). We used the net proceeds from the 2031 Notes, together with available cash on hand, to fund the purchase price for the 2025 Notes accepted for purchase in the Tender Offer (approximately 36% of the aggregate principal amount outstanding) and intend to use the remaining proceeds to redeem any of the 2025 Notes that remain outstanding following the Tender Offer, including all premiums, accrued interest and costs and expenses related to the redemption. We have material debt, lease, and short-term medical claims obligations. Refer to Note 10. Debt, Note 11. Leases, and Note 8. Medical Claims Liability, respectively, for further information. In addition, we have material commitments as a result of our Fidelis and Health Net acquisitions. Refer to Note 17. Commitments for detail.
In the second half of 2021, we expect to complete the merger with Magellan
Health, Inc. for
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.
In addition, 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.
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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.
As of December 31, 2020 , our subsidiaries had aggregate statutory capital and
surplus of $14.2 billion , compared with the required minimum aggregate statutory
capital and surplus requirements of $5.9 billion . During the year ended
December 31, 2020 , we received $508 million of net dividends from our regulated
subsidiaries. For our subsidiaries that file with the National Association of
Insurance Commissioners (NAIC), we estimate our Risk Based Capital (RBC)
percentage to be in excess of 350% of the Authorized Control Level.
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 Department of Managed Health Care 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 December 31, 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. As of December 31, 2020 , the amount of capital
and surplus or net worth that was unavailable for the payment of dividends or
return of capital to us was $5.9 billion in the aggregate.
RECENT ACCOUNTING PRONOUNCEMENTSFor this information, refer to Note 2. Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements, included herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our results of operations and liquidity and
capital resources are based on our consolidated financial statements which have
been prepared in accordance with GAAP. Our significant accounting policies are
more fully described in Note 2. Summary of Significant Accounting Policies, to
our consolidated financial statements included elsewhere herein. Our accounting
policies regarding intangible assets, medical claims liability and revenue
recognition are particularly important to the portrayal of our financial
position and results of operations and require the application of significant
judgment by our management. As a result, they are subject to an inherent degree
of uncertainty. We have reviewed these critical accounting policies and related
disclosures with the Audit Committee of our Board of Directors.
We have made several acquisitions that have resulted in our recording of
intangible assets. These intangible assets primarily consist of purchased
contract rights and customer relationships, provider contracts, trade names,
developed technologies, and goodwill. Key assumptions used in the valuation of
these intangible assets include, but are not limited to, member attrition rates,
contract renewal probabilities, revenue growth rates, expectations of
profitability, and discount and royalty rates. We
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allocate the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill.Goodwill is generally attributable to the value of the synergies between the combined companies and the value of the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset. AtDecember 31, 2020 , we had$18.7 billion of goodwill and$8.4 billion of other intangible assets.
Intangible assets are amortized using the straight-line method over the following periods:
Intangible Asset Amortization Period
Purchased contract rights and customer relationships 3 - 21 years Provider contracts 4 - 15 years Trade names 7 - 20 years Developed technologies 2 - 7 years Our management evaluates whether events or circumstances have occurred that may affect the estimated useful life or the recoverability of the remaining balance of goodwill and other identifiable intangible assets. If the events or circumstances indicate that the remaining balance of the intangible asset or goodwill may be impaired, the potential impairment will be measured based upon the difference between the carrying amount of the intangible asset or goodwill and the fair value of such asset. Our management must make assumptions and estimates, such as the discount factor, future utility and other internal and external factors, in determining the estimated fair values. While we believe these assumptions and estimates are appropriate, other assumptions and estimates could be applied and might produce significantly different results.Goodwill is reviewed annually during the fourth quarter for impairment. In addition, an impairment analysis of intangible assets would be performed based on other factors. These factors include significant changes in membership, financial performance, state funding, medical contracts and provider networks and contracts. If a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. We first assess qualitative factors to determine if a quantitative impairment test is necessary. We generally do not calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. However, in certain circumstances, such as recent acquisitions, we may elect to perform a quantitative assessment without first assessing qualitative factors. Our specialty clinical healthcare business acquired in 2018, with goodwill of$325 million , has experienced short-term decreased profitability due to short-term rate inadequacies and the effect of the COVID-19 pandemic, coupled with immigration restrictions enacted by policy administrators. However, the goodwill is expected to be recovered and there have been no fundamental changes in the business model since the acquisition date. To the extent rates do not improve in the long-term or the new administration does not reverse the immigration restrictions, the reporting unit could be at risk for impairment.
Medical Claims Liability
Our medical claims liability includes claims reported but not yet paid, or
inventory, estimates for claims incurred but not reported, or IBNR, and
estimates for the costs necessary to process unpaid claims at the end of each
period. We estimate our medical claims liability using actuarial methods that
are commonly used by health insurance actuaries and meet Actuarial Standards of
Practice. These actuarial methods consider factors such as historical data for
payment patterns, cost trends, product mix, seasonality, utilization of
healthcare services and other relevant factors.
Actuarial Standards of Practice generally require that the medical claims
liability estimates be adequate to cover obligations under moderately adverse
conditions. Moderately adverse conditions are situations in which the actual
claims are expected to be higher than the otherwise estimated value of such
claims at the time of estimate. The claims amounts ultimately settled will most
likely be different than the estimate that satisfies the Actuarial Standards of
Practice. We include in our IBNR an estimate for medical claims liability under
moderately adverse conditions which represents the risk of adverse deviation of
the estimates in our actuarial method of reserving.
We use our judgment to determine the assumptions to be used in the calculation
of the required estimates. The assumptions we consider when estimating IBNR
include, without limitation, claims receipt and payment experience (and
variations in that experience), changes in membership, provider billing
practices, healthcare service utilization trends, cost trends, product mix,
seasonality, prior authorization of medical services, benefit changes, known
outbreaks of disease or increased incidence of
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illness such as influenza, provider contract changes, changes to fee schedules, and the incidence of high dollar or catastrophic claims.
We apply various estimation methods depending on the claim type and the period for which claims are being estimated. For more recent periods, incurred non-inpatient claims are estimated based on historical per member per month claims experience adjusted for known factors. Incurred hospital inpatient claims are estimated based on known inpatient utilization data and prior claims experience adjusted for known factors. For older periods, we utilize an estimated completion factor based on our historical experience to develop IBNR estimates. The completion factor is an actuarial estimate of the percentage of claims that have been received or adjudicated as of the end of a reporting period relative to the estimate of the total ultimate incurred costs for that same period. When we commence operations in a new state or region, we have limited information with which to estimate our medical claims liability. See "Risk Factors - Failure to accurately estimate and price our medical expenses or effectively manage our medical costs or related administrative costs could negatively affect our results of operations, financial position and cash flows." These approaches are consistently applied to each period presented. Additionally, we contract with independent actuaries to review our estimates on a quarterly basis. The independent actuaries provide us with a review letter that includes the results of their analysis of our medical claims liability. We do not solely rely on their report to adjust our claims liability. We utilize their calculation of our claims liability only as additional information, together with management's judgment, to determine the assumptions to be used in the calculation of our liability for claims. Our development of the medical claims liability estimate is a continuous process which we monitor and refine on a monthly basis as additional claims receipts and payment information becomes available. As more complete claims information becomes available, we adjust the amount of the estimates, and include the changes in estimates in medical costs in the period in which the changes are identified. In every reporting period, our operating results include the effects of more completely developed medical claims liability estimates associated with previously reported periods. We consistently apply our reserving methodology from period to period. As additional information becomes known to us, we adjust our actuarial models accordingly to establish medical claims liability estimates. The paid and received completion factors, claims per member per month and per diem cost trend factors are the most significant factors affecting the IBNR estimate. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by changes in these factors based onDecember 31, 2020 data: Completion Factors: (1) Cost Trend Factors: (2) Increase Increase (Decrease) (Decrease) in (Decrease) (Decrease) in Increase Medical Claims Increase Medical Claims in Factors Liabilities in Factors Liabilities (in millions) (in millions) (1.00) % $ 623 (1.00) % $ (169) (0.75) 466 (0.75) (126) (0.50) 310 (0.50) (84) (0.25) 155 (0.25) (42) 0.25 (154) 0.25 42 0.50 (307) 0.50 84 0.75 (459) 0.75 126 1.00 (610) 1.00 169 (1) Reflects estimated potential changes in medical claims liability caused by changes in completion factors. (2) Reflects estimated potential changes in medical claims liability caused by changes in cost trend factors for the most recent periods. While we believe our estimates are appropriate, it is possible future events could require us to make significant adjustments for revisions to these estimates. For example, a 1% increase or decrease in our estimated medical claims liability would have affected net earnings by$80 million for the year endedDecember 31, 2020 , excluding the effect of any return of premium, risk corridor, or minimum MLR programs. The estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our providers and information available from other outside sources. 58
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The change in medical claims liability is summarized as follows (in millions):
Year Ended December 31,
2020 2019 2018
Balance, January 1, $ 7,473 $ 6,831 $ 4,286
Less: reinsurance recoverable 20 27 18
Balance, January 1, net 7,453 6,804 4,268
Acquisitions 3,856 59 1,204
Less: acquired reinsurance recoverable - - 8
Incurred related to:
Current year 86,765 59,539 46,484
Prior years (501) (677) (427)
Total incurred 86,264 58,862 46,057
Paid related to:
Current year 78,838 52,453 41,161
Prior years 6,320 5,819 3,556
Total paid 85,158 58,272 44,717
Balance, December 31, net 12,415 7,453 6,804
Plus: reinsurance recoverable 23 20 27
Balance, December 31, $ 12,438 $ 7,473 $ 6,831
Days in claims payable (1) 51 45 48
(1) Days in claims payable is a calculation of medical claims liability at the end of the period divided by average expense per calendar day for the fourth quarter of each year.
Medical claims are usually paid within a few months of the member receiving service from the physician or other healthcare provider. As a result, the liability generally is described as having a "short-tail," which causes less than 5% of our medical claims liability as of the end of any given year to be outstanding the following year. We believe that substantially all the development of the estimate of medical claims liability as ofDecember 31, 2020 will be known by the end of 2021. Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. Additionally, as a result of minimum HBR and other return of premium programs, approximately$86 million ,$49 million and$25 million of the "Incurred related to: Prior years" was recorded as a reduction to premium revenues in 2020, 2019 and 2018, respectively. Further, claims processing initiatives yielded increased claim payment recoveries and coordination of benefits related to prior year dates of service. Changes in medical utilization and cost trends and the effect of population health management initiatives may also contribute to changes in medical claim liability estimates. While we have evidence that population health management initiatives are effective on a case by case basis, these initiatives primarily focus on events and behaviors prior to the incurrence of the medical event and generation of a claim. Accordingly, any change in behavior, leveling of care, or coordination of treatment occurs prior to claim generation and as a result, the costs prior to the population health management initiative are not known by us. Additionally, certain population health management initiatives are focused on member and provider education with the intent of influencing behavior to appropriately align the medical services provided with the member's acuity. In these cases, determining whether the population health management initiative changed the behavior cannot be determined. Because of the complexity of our business, the number of states in which we operate, and the volume of claims that we process, we are unable to practically quantify the impact of these initiatives on our changes in estimates of IBNR. The following are examples of population health management initiatives that may have contributed to the favorable development through lower medical utilization and cost trends: •Appropriate leveling of care for neonatal intensive care unit hospital admissions, other inpatient hospital admissions, and observation admissions, in accordance with InterQual or other criteria. •Management of our pre-authorization list and more stringent review of durable medical equipment and injectibles. •Emergency department program designed to collaboratively work with hospitals to steer non-emergency care away from the costly emergency department setting (through patient education, on-site alternative urgent care settings, etc.). 59
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•Increased emphasis on case management and clinical rounding where case managers are nurses or social workers who are employed by the health plan to assist selected patients with the coordination of healthcare services in order to meet a patient's specific healthcare needs. •Incorporation of disease management which is a comprehensive, multidisciplinary, collaborative approach to chronic illnesses such as asthma. •Prenatal and infant health programs utilized in our Start Smart For Your Baby outreach service. Revenue Recognition Our health plans generate revenues primarily from premiums received from the states in which we operate health plans, premiums received from our members and CMS for our Medicare product, and premiums from members of our commercial health plans. In addition to member premium payments, our Marketplace contracts also generate revenues from subsidies received from CMS. We generally receive a fixed premium per member per month pursuant to our contracts and recognize premium revenues during the period in which we are obligated to provide services to our members at the amount reasonably estimable. In some instances, our base premiums are subject to an adjustment, or risk score, based on the acuity of its membership. Generally, the risk score is determined by the State or CMS analyzing submissions of processed claims data to determine the acuity of our membership relative to the entire state's membership. We estimate the amount of risk adjustment based upon the processed claims data submitted and expected to be submitted to CMS and record revenues on a risk adjusted basis. Some contracts allow for additional premiums related to certain supplemental services provided such as maternity deliveries. Our contracts with states may require us to maintain a minimum HBR or may require us to share profits in excess of certain levels. In certain circumstances, including commercial plans, our plans may be required to return premium to the state or policyholders in the event profits exceed established levels. We estimate the effect of these programs and recognize reductions in revenue in the current period. Other states may require us to meet certain performance and quality metrics in order to receive additional or full contractual revenue. For performance-based contracts, we do not recognize revenue subject to refund until data is sufficient to measure performance. Revenues are recorded based on membership and eligibility data provided by the states or CMS, which is adjusted on a monthly basis by the states or CMS for retroactive additions or deletions to membership data. These eligibility adjustments are estimated monthly and subsequent adjustments are made in the period known. We continuously review and update those estimates as new information becomes available. It is possible that new information could require us to make additional adjustments, which could be significant, to these estimates. Our Medicare Advantage contracts are with CMS. CMS deploys a risk adjustment model which apportions premiums paid to all health plans according to health severity and certain demographic factors. The CMS risk adjustment model pays more for members whose medical history would indicate that they are expected to have higher medical costs. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from hospital inpatient, hospital outpatient, physician treatment settings as well as prescription drug events. We and the healthcare providers collect, compile and submit the necessary and available diagnosis data to CMS within prescribed deadlines. We estimate risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS and record revenues on a risk adjusted basis. For qualifying low income PDP members, CMS pays for some, or all, of the member's monthly premium. We receive certain Part D prospective subsidy payments from CMS for our PDP members as a fixed monthly per member amount, based on the estimated costs of providing prescription drug benefits over the plan year, as reflected in our bids. Approximately nine to ten months subsequent to the end of the plan year, or later in the case of the coverage gap discount subsidy, a settlement payment is made between CMS and our plans based on the difference between the prospective payments and actual claims experience. Our specialty services generate revenues under contracts with state and federal programs, healthcare organizations and other commercial organizations, as well as from our own subsidiaries. Revenues are recognized when the related services are provided or as ratably earned over the covered period of services. For performance-based measures in our contracts, revenue is recognized as data sufficient to measure performance is available. We recognize revenue related to administrative services under the TRICARE government-sponsored managed care support contract for theDoD's TRICARE program on a straight-line basis over the option period, when the fees become fixed and determinable. The TRICARE contract includes various performance-based measures. For each of the measures, an estimate of the amount that has been earned is made at each interim date, and revenue is recognized accordingly. 60
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Some states enact premium taxes, similar assessments and provider pass-through
payments, collectively premium taxes, and these taxes are recorded as a separate
component of both revenues and operating expenses. Additionally, our insurance
subsidiaries are subject to the Affordable Care Act annual HIF. The ACA imposed
the HIF in 2014, 2015, 2016, 2018 and 2020. The HIF was suspended in 2017 and
2019. Beginning in 2021, the HIF was permanently repealed. If we are able to
negotiate reimbursement of portions of these premium taxes or the HIF, we
recognize revenue associated with the HIF on a straight-line basis when we have
binding agreements for such reimbursements, including the "gross-up" to reflect
the HIFs non-tax deductible nature. 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.
Some states require state directed payments that have minimal risk, but are
administered as a premium adjustment. These payments are recorded as premium
revenue and medical costs at close to a 100% HBR. We have little visibility to
the timing of these payments until they are paid by the state.
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