Given the dynamic environment with OB3 changes, do you expect Medicaid margins to expand in 2027?

Centene is committed to continued margin progression in Medicaid despite OB3 headwinds. The scope of OB3 is smaller than redeterminations, targeting 20% of the Medicaid portfolio (now 18%), with estimated mid-single-digit attrition over several years. The company has greater impactability to support members through the process. Unlike the PHE unwind, there's a tailwind from current trend data in the base period and explicit CMS guidance for mid-cycle/retro rate adjustments, allowing for tighter coordination with states on rates. “All of which is to say, again, you cannot hand-wave it, but we do think it is a more manageable effort than what we went through with redeterminations, and our goal remains margin recovery for the Medicaid business even through the OB3 headwinds over the next year or 2.”

Clarify the $481 million 2025 risk adjustment settlement vs. the $180 million Q2 benefit. What's assumed for 2026 risk adjustment, and what drove lower Q2 cost trend?

Q2 utilization moderated from Q1 expectations, consistent with the higher acuity Silver membership confirmed by Wakely data. Disease states like chronic conditions, anti-inflammatory, and oncology, with high HCC coding, drove this. For 2026, a meaningful receivable in risk adjustment is assumed. The $481 million in the 10-Q includes $250 million of expected annual margin release and $50 million of other deducts, leaving $180 million as better than prior guidance for the P&L. “Essentially, the data confirmed we took the correct swift actions in the summer of 2025 when we refiled 2026 rates with the visibility we had at the time of last year's major market shift.”

When will Medicaid rates fully catch up to acuity shifts, and is there a point where data inflects? How does the risk pool rolling off (work requirements) compare to prior membership drops?

The company expects a tighter coordination between states and payers for OB3 rate adjustments, with some states already incorporating factors for OB3. While this will mute full margin recovery potential in late 2026 and early 2027, acceleration is expected in late 2027 as underlying trend impacts, rate tailwinds, and explicit OB3 adjustments align. The expansion population (18-20% of Medicaid) is isolated, allowing for tracking of acuity moves. The current attrition is seen as a slight pull-forward of OB3 impact, providing good data for future planning. “I do think that that will mute the full potential of margin recovery that we would want to see from our efforts as we think of back half of '26 and part of '27. And once we get back half of '27, I think what we will start to see is the ability to impact underlying trend, have the benefit of the tailwind of rates from the base period and then the benefit of explicit adjustments in the forward-looking rates relative to OB3.”

CNC

Centene (CNC) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Health Care· Jul 28, 2026

Source: earnings call transcript

Executive summary

Centene Q2 FY26 — Strong Performance Drives Significant EPS Guidance Increase

Centene delivered strong Q2 FY26 results, significantly raising its full-year adjusted EPS guidance driven by outperformance in Marketplace and Medicare PDP. While Medicaid membership saw a larger-than-expected decline, favorable rate adjustments and disciplined execution supported segment performance. The company is actively leveraging AI and optimizing its enterprise to drive efficiencies and long-term margin restoration amidst a dynamic healthcare landscape.

Highlights

Q2 adjusted diluted EPS of $2.51 exceeded expectations.
Full-year 2026 adjusted diluted EPS guidance raised to greater than $4.80, up from $3.40.
Marketplace pretax margin guidance improved to 4.5%-5%, from 3%.
Medicaid 7/1 rates came in better than expected, improving full-year composite rate forecast to 5% from 4.5%.
Medicare segment delivered outperformance, with PDP pretax margin now expected to be greater than 3%.

Concerns

Medicaid membership step-down was slightly larger than anticipated, ending Q2 with 12.1 million members.
Full-year Medicaid membership expected to be down 8%-9% compared to 12/31/25, versus prior view of down 6%.
Medicare Advantage faces headwinds from artificial cut point increases and program methodology changes in STARS.
Approximately $0.50 of Q2 EPS linked to 2025 settlements is not expected to recur in 2027.
Expect a little above breakeven in Q3 and a loss in Q4 due to seasonal sloping of Medicare Part D and Commercial products.

Guidance & targets

Category	Target	Timeline	Confidence
Full-year 2026 Adjusted Diluted EPS	greater than $4.80 high materiality	FY26	High
Full-year 2026 Medicaid Composite Rate Forecast	roughly 5% medium materiality	FY26	High
Full-year 2026 PDP Pretax Margin	greater than 3% medium materiality	FY26	High
Full-year 2026 Medicare Advantage Breakeven	breakeven or better medium materiality	FY27	High
Full-year 2026 Marketplace Pretax Margin	between 4.5% and 5% high materiality	FY26	High
Full-year 2026 Medicaid Membership Decline	down 8% to 9% medium materiality	FY26	Medium
Full-year 2026 Enterprise Adjusted SG&A Rate	better by 10 basis points medium materiality	FY26	High
Full-year 2026 Workforce and Enterprise Optimization SG&A Costs	estimated $480 million midpoint medium materiality	FY26	High

Segment performance

Segment	Revenue	YoY	QoQ	Margin
Medicaid Medicaid results were on track with prior forecast. HBR of 93.9% in Q2, with full-year HBR expected around 93.5%. 7/1 rate cohort came in strong, improving full-year rate impact to 5%. Expect full-year membership to be down 8-9% compared to 12/31/25, higher than prior view of 6%. Membership: 12.1 million membersFull-year HBR expectation: around 93.5%Full-year 2026 rate impact: approximately 5%Fundamental trend: mid-4s	—	—	—	93.9% HBR
Medicare Medicare segment results were strong, with an HBR of 89.5%, including a $160 million 2025 settlement. PDP is having a strong year, with pretax margin expected to be greater than 3%. Medicare Advantage continued to perform well, getting closer to breakeven for full-year 2026. D-SNP members continue to perform favorably. PDP full-year pretax margin: greater than 3%Medicare Advantage segment revenue contribution: a little over 40%Medicare Advantage full-year 2026 performance: closer to breakevenD-SNP members: approximately 40% of Medicare Advantage portfolio	—	—	—	89.5% HBR
Commercial (Marketplace) Commercial segment, led by Marketplace, had a very strong quarter with an HBR of 79.2%, compared to 90.6% prior year. Driven by strong end to 2025, confirmation of 2026 market acuity, and tapering medical trend. Marketplace pretax margin now expected to be 4.5% to 5%. Membership was stable compared to Q1 at 3.5 million members. Marketplace pretax margin: 4.5% to 5%Marketplace membership: 3.5 million members	—	—	—	79.2% HBR

CNC operating KPIs by quarter

CNC operating KPIs stated on its earnings calls, by fiscal quarter
KPI	Dec 2024 Q4 FY24	Mar 2025 Q1 FY25	Jun 2025 Q2 FY25	Sep 2025 Q3 FY25	Dec 2025 Q4 FY25	Mar 2026 Q1 FY26	This call Jun 2026 Q2 FY26	Change vs prior quarter
Medical care ratio	89.6% Our Q4 consolidated HBR was 89.6%, while our full year consolidated HBR was 88.3%, consistent with our previous guidance range. Source: earnings call transcript	—	—	—	—	87.3% Our consolidated HBR was 87.3% for Q1. Source: earnings call transcript	89.6% Our consolidated HBR was 89.6% for Q2, down from 93% in Q2 of 2025. Source: earnings call transcript	+2.3 pt
Medical care ratio Medicaid	93.4% Our Q4 Medicaid HBR was 93.4%, up 30 basis points from Q3. Source: earnings call transcript	—	94.9% Our Medicaid portfolio also fell short of expectations in the second quarter, producing an unanticipated and unacceptable health benefits ratio of 94.9%. Source: earnings call transcript	93.4% Our third quarter Medicaid HBR was 93.4%, which included $150 million in Florida Children's Medical Services program revenue, of which $90 million or 40 basis points was retro. Source: earnings call transcript	—	93.1% More importantly, we demonstrated continued progress in the HBR with Q1 at 93.1%, an improvement of 50 basis points from the first quarter of 2025. Source: earnings call transcript	93.9% In Medicaid, at a 93.9% HBR, we are right on track with our prior forecast and are still expecting a full year HBR of around 93.5%. Source: earnings call transcript	+0.8 pt
Medical members Medicaid	13M Today, we serve 13 million Americans across our Medicaid portfolio, offering critical access to vital medical services and support for some of this country's most vulnerable and complex populations. Source: earnings call transcript	—	—	12.7M Medicaid membership is at $12.7 million, and we would expect slight attrition over the next few quarters. Source: earnings call transcript	12.5M As expected, we continue to see slight attrition in membership closing out 2025 at 12.5 million members. Source: earnings call transcript	12.4M Starting with Medicaid, we ended Q1 with 12.4 million members, slightly down from year-end. Source: earnings call transcript	12.1M As some of you have written about, we did continue to see attrition in our Medicaid membership, ending Q2 with 12.1 million members, and we expect some states to continue to trim Medicaid roles leading up to any OB3 implementation in 2027. Source: earnings call transcript	-2.4%
Medical members PDP	—	7.9M PDP ended the quarter at 7.9 million members, strong growth from 2024. Source: earnings call transcript	7.8M PDP membership ended the quarter at 7.8 million members, roughly flat on a sequential basis. Source: earnings call transcript	—	—	8.7M+ Our PDP business ended the quarter with just over 8.7 million members, thanks to the team's once again, thoughtful and data-driven approach to bid design and positioning. Source: earnings call transcript	—	—
Medical care ratio Medicare	—	86.3% Medicare segment HBR was 86.3% in the quarter, which, as we covered in past discussions, is expected to follow an inverted slope line compared to 2024 due to the Inflation Reduction Act program changes. Source: earnings call transcript	—	94.3% Our reported Medicare segment HBR was 94.3%, reflecting typical cost of care patterns within Medicare Advantage as well as the inverted seasonality of pharmacy costs within PDP, owing largely to changes related to the IRA. Source: earnings call transcript	—	84.9% Both Medicare Advantage and PDP exceeded expectations, producing an HBR of 84.9%, better than our previous forecast and contributing nicely to the first quarter adjusted EPS B Medicare Advantage, we continue to strategically align our membership with our Medicaid footprint and made great progress on our path to positive earnings. Source: earnings call transcript	89.5% Medicare segment results were strong in the quarter, including an HBR at 89.5%, inclusive of the 2025 item discussed a minute ago. Source: earnings call transcript	+4.6 pt
Medical care ratio Commercial	—	75% Q1 Commercial segment HBR at 75.0% was a little higher than last year's 73.3%, driven by 1.9 million new Marketplace Members in Q1. Source: earnings call transcript	—	89.9% In our Commercial segment, our HBR was on track for Q3 at 89.9%. Source: earnings call transcript	—	—	79.2% The Commercial segment, led by Marketplace, had a very strong quarter with an HBR of 79.2%, compared to prior year 90.6%, driven by the conversions of 3 positive factors. Source: earnings call transcript	—
Medical members Marketplace	—	—	5.9M We reported second quarter Marketplace membership of 5.9 million members as the book continued to grow, driving more than $10 billion of commercial premium and service revenue in the period. Source: earnings call transcript	—	—	3.58M We ended the quarter with 3.58 million members right around where we told you we expected to be after navigating sign-ups, payments and effectuation. Source: earnings call transcript	~3.5M Looking to the rest of 2026, we are jumping off a Q2 membership of roughly 3.5 million members, slightly better than previous expectations, with metal tier distribution, age and other key demographics largely unchanged from our Q1 results. Source: earnings call transcript	—

Operating figures the company stated on at least two of the calls shown, checked against each call's transcript. Click a figure to read the sentence. A dash means it was not stated that quarter.

Risks & headwinds

Increased Medicaid Membership Attrition H2 FY26

Full-year Medicaid membership expected to be down 8%-9% compared to 12/31/25, versus prior view of down 6%.

Mitigation:Holding back 50 basis points of rate favorability to account for higher membership attrition and associated acuity impact; engaging with state partners on OB3 implementation and rate adjustments.

Medicare Advantage STARS Program Headwinds Ongoing

Artificial cut point increases and overall STARS program methodology changes.

Mitigation:Portfolio optimization, strong operational execution, SG&A management, and strategic duals growth to accelerate margin improvement and achieve breakeven or better results in 2027.

Seasonal Earnings Trajectory H2 FY26

Expect a little above breakeven in Q3 and a loss in Q4.

Mitigation:Consistent with prior year and commentary, reflecting seasonal sloping of Medicare Part D and Commercial products.

Non-recurring 2025 Settlements FY27

Approximately $0.50 of Q2 EPS linked to 2025 settlements not expected to recur in 2027.

Mitigation:Management has clearly identified this as a reconciling item for 2027 guidance, allowing for appropriate forward planning.

Medicaid Acuity Shift from OB3 FY27-FY29

Potential for acuity impact as the Medicaid expansion population moves due to OB3 implementation.

Mitigation:Engaging with state actuaries for OB3-related rate adjustments, leveraging data for ex parte eligibility, and activating nationwide playbook for member support and community engagement.

What to watch in Q3 FY26

Medicaid Membership Attrition

Next quarter

Current Down 8-9% expected for FY26

Target Stabilization or moderation of decline

Why it matters

Continued high attrition could impact acuity and margin, requiring further rate adjustments or operational offsets.

As we look ahead to Q3, our 7/1 rate cohort, which represents about 20% of our membership, came in strong. This 7/1 cohort provides a nice sequential benefit from Q2 to Q3 to make progress toward matching rate and cost. Overall, we now expect the full year 2026 rate impact to be approximately 5%, up from 4.5%, with no change in our view of fundamental trend of mid-4s for the year. As some of you have written about, we did continue to see attrition in our Medicaid membership, ending Q2 with 12.1 million members, and we expect some states to continue to trim Medicaid roles leading up to any OB3 implementation in 2027. So for now, we are holding the incremental 50 basis point benefit of the rate improvement to account for a little higher membership attrition in the back half of the year, including the associated acuity impact.

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Q&A highlights

What's driving the higher acuity population stepping down in Medicaid, and is this a pull-forward of OB3 impact? How does this bridge to next year's acuity?

The slight incremental attrition in Q2 was mainly in the expansion population, driven by state-specific changes and increased enrollment/eligibility activity. This led to a slight uptick in acuity, which the company absorbed. Management is holding back 50 basis points of rate favorability to account for potential acuity impacts from further attrition. It's possible this is a pull-forward of OB3 activity, with states tightening criteria. Centene is deeply involved in planning with states to minimize disruption and ensure appropriate rate adjustments.

“I think it's possible that that will end up being some degree of pull forward. Again, we're accounting for that as we think about guidance for the back half of the year.”

asked by John Stansel · answered by Sarah London

2 min read 6 chapters

Detailed narrative

Medicaid Performance and OB3 Preparation

Medicaid results were in line with expectations, despite a slightly larger step-down in membership to 12.1 million members, driven by state-specific program changes and increased enrollment/eligibility activity. The company is heavily engaged with state partners for OB3 implementation, investing in real-time data exchange, member outreach, and community engagement programs.

Management expects full-year Medicaid membership to decline 8-9% and is holding back 50 basis points of rate favorability to account for potential acuity impacts from attrition.

Medicare Segment Strength and Strategy

The Medicare segment delivered outperformance, with continued strength in both PDP and Medicare Advantage. PDP benefited from prior-period true-ups and fundamental favorability, leading to an improved pretax margin outlook of greater than 3%. Medicare Advantage is performing well, with a focus on simplifying its footprint and concentrating benefits on the duals population, aiming for breakeven or better results in 2027 despite STARS program headwinds.

Marketplace Margin Recovery and Wakely Report Impact

Marketplace delivered excellent Q2 results, achieving meaningful margin recovery. A thorough analysis of the June Wakely report confirmed the hypothesis about the relative acuity of Centene's population, allowing for a revised full-year pretax margin expectation of 4.5%-5%. Favorable development on the 2025 CMS risk adjustment reconciliation contributed $180 million in the quarter.

The business expects membership to decline with a return to regular seasonality and accounts for CMS program integrity efforts.

Enterprise Optimization and AI Strategy

Centene is undergoing an enterprise optimization to drive efficiencies, including further digitization and ubiquitous use of technology and AI. The AI strategy focuses on foundational capabilities like trusted data products and dynamic context management, prioritizing investments with clear, tangible ROI. This disciplined approach aims to unlock AI's full potential while maintaining compliance and supporting the goal of industry-leading outcomes with an industry-leading cost structure.

Medical Cost Drivers and Management

Core medical cost drivers remained consistent, with behavioral health, home health, and high-cost drugs among top contributors. A slight uptick in acuity from the expansion population was absorbed due to strong execution. The company noted a year-over-year moderation in behavioral health, particularly ABA, due to focused efforts.

Progress was also made in payment integrity, particularly in areas susceptible to AI up-coding like sepsis, by implementing algorithms and clinical conversations to ensure correct payment for care delivered.

ICHRA Business Growth and Outlook

Centene's ICHRA business currently serves approximately 50,000 members, representing 2.5x growth since last year. Management sees continued interest in ICHRA as an alternative due to rising employer costs and deteriorating small group options in many geographies. The company remains bullish on ICHRA as a future option, offering choice, portability, and affordability, despite it being a smaller portion of the overall portfolio.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.