CENTENE CORP CNC

Centene achieved a 150 basis points sequential improvement in Medicaid HBR to 93.4% in Q3 FY25, aided by a $150 million positive revenue adjustment in Florida's CMS program, with $90 million retro to Q1/Q2. This improvement reflects strategic actions including rate advocacy, program changes, clinical management, network optimization, and fraud, waste, and abuse interventions. The company is targeting a back half Medicaid HBR of approximately 93.2% and expects full-year 2025 Medicaid HBR to be around 93.7%.

The Marketplace segment ended Q3 with 5.8 million members, performing in line despite medical cost pressure in September, primarily from outpatient ED. Centene repriced its products for 2026, averaging mid-30s rate increases, across 95% of its membership to account for baseline morbidity, trend, eAPTC expiry, and program integrity measures, aiming for meaningful margin expansion in 2026. The outcome of congressional dialogue on eAPTCs remains uncertain, but the company is prepared for various scenarios, including potential market contraction in the high teens to mid-30s range.

Both Medicare Advantage and PDP segments performed in line with expectations. Medicare Advantage is progressing towards a 2027 breakeven goal, supported by improved 2026 Star ratings, with 60% of members now in plans at or above 3.5 stars (up from 55% prior year) and roughly 20% in 4-star plans. PDP performance was consistent with expectations and largely contained by risk corridors, providing increased visibility for Q4, with 2025 pretax margins expected in the 3s.

The adjusted SG&A expense ratio remained strong at 7.0% in Q3, down from 8.3% last year, reflecting continued leveraging of expenses over higher revenues and good discipline. Investment income was stronger than expected in Q3, up $79 million compared to Q2, due to one-time^📎 gains and temporarily higher cash balances. The company may harvest unrealized losses in Q4 to improve the 2026 investment income trajectory.

Centene recorded a non-cash goodwill impairment charge of $6.7 billion in Q3, resulting from an accelerated annual evaluation due to a drop in market cap. This charge has no impact on statutory capital, cash, or adjusted EPS. The company maintains a strong balance sheet with a debt-to-cap ratio of 45.5% (well below the 60% covenant limit), $0 drawn on its $4 billion revolver, and $1.4 billion in operating cash flow in Q3.

While detailed 2026 guidance will be provided in February, Centene anticipates meaningful margin improvement in Marketplace and Medicare Advantage. Medicaid profitability is expected to be consistent with the improved 2025 outlook. The company acknowledges potential headwinds from PDP outperformance not recurring, lower net investment income, and an increased tax rate, but remains focused on driving overall EPS growth and margin improvement through operational efficiencies and managing policy landscape changes.