NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations
Centene Corporation, or the Company is a leading multi-national healthcare enterprise that is committed to helping people live healthier lives. The Company takes 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. The Company operates in two segments: Managed Care and Specialty Services. The Managed Care segment provides health plan coverage to individuals through government subsidized programs, including Medicaid, the State Children's Health Insurance Program (CHIP), Long-Term Services and Supports (LTSS), Foster Care, Medicare-Medicaid Plans (MMP), which cover beneficiaries who are dually eligible for Medicare and Medicaid, the Supplemental Security Income Program, also known as the Aged, Blind or Disabled Program (ABD), Medicare, and the Health Insurance Marketplace. The Company also offers a variety of individual, small group, and large group commercial healthcare products, both to employers and directly to members in the Managed Care segment. The Specialty Services segment consists of the Company's specialty companies offering auxiliary healthcare services and products to state programs, correctional facilities, healthcare organizations, employer groups and other commercial organizations, as well as to its own subsidiaries. The Specialty Service segment also includes the Government Contracts business which includes the Company's government-sponsored managed care support contract with the U.S. Department of Defense (DoD) under the TRICARE program, the Military Family and Life Counseling (MFLC) contract with the DoD, and other healthcare related government contracts.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Centene Corporation and all majority owned subsidiaries and subsidiaries over which the Company exercises the power and control to direct activities significantly impacting financial performance. All material intercompany balances and transactions have been eliminated.
Certain amounts in the consolidated financial statements and notes have been reclassified to conform to the 2019 presentation. These reclassifications have no effect on net earnings or stockholders' equity as previously reported.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be predicted with certainty; accordingly, the accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. The Company evaluates and updates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in its evaluation, as considered necessary. Actual results could differ from those estimates.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting. The Company allocates 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.
The Company uses its best estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date; however, these estimates are sometimes preliminary and, in some instances, all information required to value the assets acquired and liabilities assumed may not be available or final as of the end of a reporting period subsequent to the business combination. If the accounting for the business combination is incomplete, provisional amounts are recorded. The provisional amounts are updated during the period determined, up to one year from the acquisition date. The Company includes the results of operations of acquired businesses in the Company's consolidated results prospectively from the date of acquisition.
Acquisition related expenses and post-acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred.
Cash and Cash Equivalents
Investments with original maturities of three months or less are considered to be cash equivalents. Cash equivalents consist of money market funds, bank certificates of deposit and savings accounts.
The Company maintains amounts on deposit with various financial institutions, which may exceed federally insured limits. However, management periodically evaluates the credit-worthiness of those institutions, and the Company has not experienced any losses on such deposits.
Investments
Short-term investments include securities with maturities greater than three months to one year. Long-term investments include securities with maturities greater than one year.
Short-term and long-term investments are generally classified as available for sale and are carried at fair value. Certain equity investments are recorded using the fair value or equity method. Unrealized gains and losses on debt investments available for sale are excluded from earnings and reported in accumulated other comprehensive earnings (loss), a separate component of stockholders' equity, net of income tax effects. Premiums and discounts are amortized or accreted over the life of the related security using the effective interest method. The Company monitors the difference between the cost and fair value of investments. Investments that experience a decline in value that is judged to be other than temporary are written down to fair value and a realized loss is recorded in investment and other income. To calculate realized gains and losses on the sale of investments, the Company uses the specific amortized cost of each investment sold. Realized gains and losses are recorded in investment and other income.
The Company uses the equity method to account for investments in entities that it does not control but has the ability to exercise significant influence over operating and financial policies. These investments are recorded at the lower of their cost or fair value adjusted for the Company's proportionate share of earnings or losses.
Restricted Deposits
Restricted deposits consist of investments required by various state statutes to be deposited or pledged to state agencies. These investments are classified as long-term, regardless of the contractual maturity date, due to the nature of the states' requirements. The Company is required to annually adjust the amount of the deposit pledged to certain states. As of December 31, 2019 and 2018, restricted deposits included $8 million of cash and cash equivalents.
Fair Value Measurements
In the normal course of business, the Company invests in various financial assets and incurs various financial liabilities. Fair values are disclosed for all financial instruments, whether or not such values are recognized in the Consolidated Balance Sheets. Management obtains quoted market prices and other observable inputs for these disclosures. The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, premium and trade receivables, medical claims liability, accounts payable and accrued expenses, unearned revenue, and certain other current assets and liabilities are carried at cost, which approximates fair value because of their short-term nature.
The following methods and assumptions were used to estimate the fair value of each financial instrument:
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Available for sale investments and restricted deposits: The carrying amount is stated at fair value, based on quoted market prices, where available. For securities not actively traded, fair values were estimated using values obtained from independent pricing services or quoted market prices of comparable instruments.
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•
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Senior unsecured notes: Estimated based on third-party quoted market prices for the same or similar issues.
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•
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Variable rate debt: The carrying amount of the Company's floating rate debt approximates fair value since the interest rates adjust based on market rate adjustments.
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•
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Interest rate swap: Estimated based on third-party market prices based on the forward 1-month or 3-month LIBOR curve.
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•
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Contingent consideration: Estimated based on expected achievement of metrics included in the acquisition agreement considering circumstances that exist as of the acquisition date.
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Property, Software and Equipment
Property, software and equipment are stated at cost less accumulated depreciation. Computer hardware and software includes certain costs incurred in the development of internal-use software, including external direct costs of materials and services and payroll costs of employees devoted to specific software development. Depreciation is calculated principally by the straight-line method over estimated useful lives. Leasehold improvements are depreciated using the straight-line method over the shorter of the expected useful life or the remaining term of the lease. Property, software and equipment are depreciated over the following periods:
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Fixed Asset
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Depreciation Period
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Buildings and improvements
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5 - 40 years
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Computer hardware and software
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2 - 7 years
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Furniture and equipment
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3 - 10 years
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Land improvements
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3 - 20 years
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Leasehold improvements
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1 - 20 years
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The carrying amounts of all long-lived assets are evaluated to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets.
The Company retains fully depreciated assets in property and accumulated depreciation accounts until it removes them from service. In the case of sale, retirement, or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of earnings from operations in the Consolidated Statements of Operations.
Goodwill and Intangible Assets
Intangible assets represent assets acquired in purchase transactions and consist primarily of purchased contract rights, provider contracts, customer relationships, trade names, developed technologies and goodwill. Intangible assets are amortized using the straight-line method over the following periods:
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Intangible Asset
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Amortization Period
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Purchased contract rights
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5 - 21 years
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Provider contracts
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4 - 15 years
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Customer relationships
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3 - 15 years
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Trade names
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7 - 20 years
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Developed technologies
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2 - 7 years
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Other intangibles
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2 - 5 years
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The Company tests for impairment of intangible assets as well as long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (hereinafter referred to as "asset group") may not be recoverable by comparing the sum of the estimated undiscounted future cash flows expected to result from use of the asset group and its eventual disposition to the carrying value. Such factors include, but are not limited to, significant changes in membership, state funding, state contracts and provider networks and contracts. If the sum of the estimated undiscounted future cash flows is less than the carrying value, an impairment determination is required. The amount of impairment is calculated by subtracting the fair value of the asset group from the carrying value of the asset group. An impairment charge, if any, is recognized within earnings from operations.
The Company tests goodwill for impairment using a fair value approach. The Company is required to test for impairment at least annually, absent a triggering event, which could include a significant decline in operating performance that would require an impairment assessment. Absent any impairment indicators, the Company performs its goodwill impairment testing during the fourth quarter of each year. The Company recognizes an impairment charge for any amount by which the carrying amount of goodwill exceeds its fair value.
The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The Company generally does not calculate the fair value of a reporting unit unless it determines, 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, the Company may elect to perform a quantitative assessment without first assessing qualitative factors.
If the quantitative test is deemed necessary, the Company determines an appropriate valuation technique to estimate a reporting unit's fair value as of the testing date. The Company utilizes either the income approach or the market approach, whichever is most appropriate for the respective reporting unit. The income approach is based on an internally developed discounted cash flow model that includes many assumptions related to future growth rates, discount factors, future tax rates, etc. The market approach is based on financial multiples of comparable companies derived from current market data. The Company then compares the fair value of the reporting unit calculated using the income approach or market approach with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds fair value. The impairment charge is limited to the total amount of goodwill allocated to the reporting unit. Changes in economic and operating conditions impacting assumptions used in the Company's analyses could result in goodwill impairment in future periods.
Medical Claims Liability
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. The Company estimates its 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. In many situations, the claims amounts ultimately settled will be different than the estimate that satisfies the Actuarial Standards of Practice. The Company includes in its IBNR an estimate for medical claims liability under moderately adverse conditions which represents the risk of adverse deviation of the estimates in its actuarial method of reserving.
The Company uses its judgment to determine the assumptions to be used in the calculation of the required estimates. The assumptions it considers 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 illness such as influenza, provider contract changes, changes to fee schedules, and the incidence of high dollar or catastrophic claims.
The Company's development of the medical claims liability estimate is a continuous process which it monitors and refines on a monthly basis as additional claims receipts and payment information becomes available. As more complete claims information becomes available, the Company adjusts the amount of the estimates, and includes the changes in estimates in medical costs in the period in which the changes are identified. In every reporting period, the operating results include the effects of more completely developed medical claims liability estimates associated with previously reported periods. The Company consistently applies its reserving methodology from period to period. As additional information becomes known, it adjusts the actuarial model accordingly to establish medical claims liability estimates.
The Company periodically reviews actual and anticipated experience compared to the assumptions used to establish medical costs. The Company establishes premium deficiency reserves if actual and anticipated experience indicates that existing policy liabilities together with the present value of future gross premiums will not be sufficient to cover the present value of future benefits, settlement and maintenance costs.
Revenue Recognition
The Company's health plans generate revenues primarily from premiums received from the states in which it operates health plans, premiums received from its members and the Centers for Medicare and Medicaid Services (CMS) for its Medicare product, and premiums from members of its commercial health plans. In addition to member premium payments, its Marketplace contracts also generate revenues from subsidies received from CMS. The Company generally receives a fixed premium per member per month pursuant to its contracts and recognizes premium revenues during the period in which it is obligated to provide services to its members at the amount reasonably estimable. In some instances, the Company's 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 the Company's membership relative to the entire state's membership.
The Company estimates the amount of risk adjustment based upon the processed claims data submitted and expected to be submitted to CMS and records revenues on a risk adjusted basis. Some contracts allow for additional premiums related to certain supplemental services provided such as maternity deliveries.
The Company's contracts with states may require us to maintain a minimum health benefits ratio (HBR) or may require us to share profits in excess of certain levels. In certain circumstances, including commercial plans, its plans may be required to return premium to the state or policyholders in the event profits exceed established levels. The Company estimates the effect of these programs and recognizes 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, the Company does 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. The Company continuously reviews and updates 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.
The Company's 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. The Company and the healthcare providers collect, compile and submit the necessary and available diagnosis data to CMS within prescribed deadlines. The Company estimates risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS and records revenues on a risk adjusted basis.
The Company's specialty services generate revenues under contracts with state and federal programs, healthcare organizations and other commercial organizations, as well as from its own subsidiaries. Revenues are recognized when the related services are provided or as ratably earned over the covered period of services. The Company recognizes revenue related to administrative services under the TRICARE government-sponsored managed care support contract for the DoD'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.
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, the Company's insurance subsidiaries are subject to the Affordable Care Act annual health insurer fee (HIF), absent a HIF moratorium. The ACA imposed the HIF in 2014, 2015, 2016 and 2018. The HIF was suspended in 2017 and 2019. If the Company is able to negotiate reimbursement of portions of these premium taxes or the HIF, it recognizes revenue associated with the HIF on a straight-line basis when the Company has 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. The Company little visibility to the timing of these payments until they are paid by the state.
Affordable Care Act
The Affordable Care Act (ACA) established risk spreading premium stabilization programs as well as minimum medical loss ratio (MLR) and cost sharing reductions.
The Company's accounting policies for the programs are as follows:
Risk Adjustment
The permanent risk adjustment program established by the ACA transfers funds from qualified individual and small group insurance plans with below average risk scores to those plans with above average risk scores within each state. The Company estimates the receivable or payable under the risk adjustment program based on its estimated risk score compared to the state average risk score. The Company may record a receivable or payable as an adjustment to premium revenues to reflect the year-to-date impact of the risk adjustment based on its best estimate. The Company refines its estimate as new information becomes available.
Minimum Medical Loss Ratio
Additionally, the ACA established a minimum MLR for the Health Insurance Marketplace. The risk adjustment program described above is taken into consideration to determine if the Company's estimated annual medical costs are less than the minimum MLR and require an adjustment to premium revenues to meet the minimum MLR.
Cost Sharing Reductions (CSRs)
The ACA directs issuers to reduce the Company's members' cost sharing for essential health benefits for individuals with Federal Poverty Levels (FPLs) between 100% and 250% who are enrolled in a silver tier product; eliminate cost sharing for Indians/Alaska Natives with an FPL less than 300% and eliminate cost sharing for Indians/Alaska Natives regardless of FPL level when services are provided by an Indian Health Service. In order to compensate issuers for reduced cost sharing provided to enrollees, CMS pays an advance CSR payment to the Company each month based on the Company's certification data provided at the time of the qualified health plan application. After the close of the benefit year, the Company is required to provide CMS with data on the value of the CSRs provided to enrollees based on either a 'simplified' or 'standard' approach. A reconciliation will occur in order to calculate the difference between the Company's CSR advance payments received and the value of CSRs provided to enrollees. This reconciliation will produce either a payable or receivable to/from CMS. The Company has elected the standard methodology approach. In October 2017, the Trump Administration issued an executive order that immediately ceased payments of CSRs to issuers, and 2018 premium rates for Health Insurance Marketplace were set without factoring in the cost sharing subsidy payments from the federal government.
Premium and Trade Receivables and Unearned Revenue
Premium and service revenues collected in advance are recorded as unearned revenue. For performance-based contracts, the Company does not recognize revenue subject to refund until data is sufficient to measure performance. Premiums and service revenues due to the Company are recorded as premium and trade receivables and are recorded net of an allowance based on historical trends and management's judgment on the collectibility of these accounts. As the Company generally receives payments during the month in which services are provided, the allowance is typically not significant in comparison to total revenues and does not have a material impact on the presentation of the financial condition or results of operations. Amounts receivable under federal contracts are comprised primarily of contractually defined billings, accrued contract incentives under the terms of the contract and amounts related to change orders for services not originally specified in the contract.
Activity in the allowance for uncollectible accounts for the years ended December 31, is summarized below ($ in millions):
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2019
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2018
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2017
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Allowances, beginning of year
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$
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123
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$
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24
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$
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29
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Amounts charged to expense
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76
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134
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35
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Write-offs of uncollectible receivables
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(42
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)
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(35
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)
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(40
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)
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Allowances, end of year
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$
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157
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$
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123
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$
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24
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The increase in the amounts charged to expense in 2018 primarily relates to costs associated with the expiration of the Company's contract to provide health care coordination services to the U.S. Department of Veterans Affairs under the Patient-Centered Community Care and Veterans Choice Programs.
Significant Customers
Centene receives the majority of its revenues under contracts or subcontracts with state Medicaid managed care programs. Customers where the aggregate annual contract revenues exceeded 10% of total annual revenues included the State of California, where the percentage of the Company's total revenue was 11%, 13% and 18% for the years ended December 31, 2019, 2018 and 2017, respectively; the State of New York, where the percentage of the Company's total revenue was 15% for the year ended December 31, 2019, and the State of Texas, where the percentage of the Company's total revenue was 10% and 12% for the years ended December 31, 2018 and 2017, respectively.
Other Income (Expense)
Other income (expense) consists principally of investment income, interest expense and equity method earnings from investments. Investment income is derived from the Company's cash, cash equivalents, restricted deposits and investments. Interest expense relates to borrowings under the senior notes, interest rate swaps, credit facilities, mortgage and construction loans, and capital leases.
Income Taxes
Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law or tax rates is recognized in income in the period that includes the enactment date.
Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. In determining if a deductible temporary difference or net operating loss can be realized, the Company considers future reversals of existing taxable temporary differences, future taxable income, taxable income in prior carryback periods and tax planning strategies.
Contingencies
The Company accrues for loss contingencies associated with outstanding litigation, claims and assessments for which it has determined it is probable that a loss contingency exists and the amount of loss can be reasonably estimated. The Company expenses professional fees associated with litigation claims and assessments as incurred.
Stock Based Compensation
The fair value of the Company's employee share options and similar instruments are estimated using the Black-Scholes option-pricing model. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. Excess tax benefits related to stock compensation are presented as a cash inflow from operating activities. The Company accounts for forfeitures when they occur.
Foreign Currency Translation
The Company is exposed to foreign currency exchange risk through its international subsidiaries whose functional currencies include the Euro and British Pound. The assets and liabilities of the Company's subsidiaries are translated into United States dollars at the balance sheet date. The Company translates its proportionate share of earnings using average rates during the year. The resulting foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive earnings (loss).
Recently Adopted Accounting Guidance
In February 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that introduces a lessee model that requires the majority of leases to be recognized on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification 606, the FASB's new revenue recognition standard, and addresses other concerns related to the current lessee model. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The Company adopted the new guidance in the first quarter of 2019 using the modified retrospective transition approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allows an entity to not reassess lease classification for existing leases. The impact of the new guidance is further discussed in Note 11. Leases.
In January 2017, the FASB issued an ASU simplifying the test for goodwill impairment. The amendments in this ASU eliminate Step 2 from the goodwill impairment test. Thus, an entity will no longer be required to compare the implied fair value of a reporting unit's goodwill to its carrying amount. Instead, under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the fair value. The impairment charge should be limited to the total amount of goodwill allocated to that reporting unit. Under the new guidance, an entity still has the option to first perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new standard is effective for an entity's annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company adopted the new guidance in the third quarter of 2019. The Company has an immaterial amount of goodwill at reporting units with negative carrying value. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In March 2017, the FASB issued an ASU that changes the period over which premiums on callable debt securities are amortized. The new standard requires the premiums on callable debt securities to be amortized to the earliest call date rather than to the contractual maturity date of the instrument. The new guidance more closely aligns the amortization period of premiums to expectations incorporated in the market pricing on the underlying securities. The Company adopted the new guidance in the first quarter of 2019. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In August 2017, the FASB issued an ASU that amends the hedge accounting model to enable entities to better align the economics of risk management activities and financial reporting. In addition, the new standard enhances the understandability of hedge results and simplifies the application of hedge accounting in certain situations. The Company adopted the new guidance in the first quarter of 2019. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Recent Accounting Guidance Not Yet Adopted
In December 2019, the FASB issued an ASU which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740. The ASU also clarifies and amends certain areas of ASC Topic 740 to improve consistent application of and simplify the generally accepted accounting principles within Topic 740. The guidance is effective for annual and interim periods beginning after December 15, 2020. The Company is currently evaluating the potential impact of the ASU on the Company's consolidated financial position, results of operations and cash flows.
In August 2018, the FASB issued an ASU which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this ASU require an entity that is the customer in a hosting arrangement to follow the guidance on internal-use software to determine which implementation costs to capitalize and which costs to expense. The standard also requires an entity that is the customer to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. The new guidance requires an entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company adopted the new guidance in the first quarter of 2020. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In June 2016, the FASB issued an ASU, and related amendments, which changes how entities measure credit losses for most financial assets and certain other investments that are not measured at fair value through net income. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amended guidance requires the measurement of all expected credit losses for financial assets (or groups of financial assets) and available for sale debt securities held at the reporting date over the remaining life based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance in the first quarter of 2020. The vast majority of the Company's receivables and other financial instruments are with government entities and therefore the adoption did not have a material impact on its receivables and other financial instruments. The Company evaluated its investment portfolio under the new available-for-sale debt securities impairment model guidance for identification of securities with an impairment due to credit loss. The vast majority of the Company's investment portfolio is low risk, investment grade securities. The impact of the adoption related to the Company's investment portfolio resulted in an immaterial cumulative-effect adjustment to retained earnings. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
The Company has determined that there are no other recently issued accounting pronouncements that will have a material impact on its consolidated financial position, results of operations or cash flows.
3. Acquisitions
WellCare Acquisition
On January 23, 2020, the Company acquired all of the issued and outstanding shares of WellCare Health Plans, Inc. (WellCare, and such acquisition, the WellCare Acquisition). The transaction is valued at approximately $19.6 billion, including the assumption of $1.95 billion of outstanding debt.
Total consideration for the acquisition was $17,605 million, consisting of Centene common shares valued at $11,431 million (based on Centene's stock price of $66.76), $6,079 million in cash, and $95 million related to the fair value of replacement equity awards associated with pre-combination service. Each WellCare share was converted into 3.38 of validly issued, fully paid, non-assessable shares of Centene common stock and $120.00 in cash. In total, 171 million shares of Centene common stock were issued to the WellCare stockholders. The cash portion of the acquisition consideration was funded through the issuance of long-term debt as further discussed in Note 10. Debt.
The acquisition of WellCare will be accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The valuation of assets acquired and liabilities assumed has not yet been finalized. Any necessary adjustments from preliminary estimates will be finalized within one year from the date of acquisition. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. Due to the timing of the acquisition, the Company has performed limited valuation procedures, and the valuation of all assets and liabilities assumed is not yet complete.
Divestitures
Immediately prior to the closing of the WellCare Acquisition, Anthem, Inc. acquired WellCare's Missouri Medicaid health plan, a WellCare Missouri Medicare Advantage health plan, and WellCare's Nebraska Medicaid health plan. CVS Health Corporation acquired portions of Centene's Illinois Medicaid and Medicare Advantage health plans as part of previously announced divestiture agreements.
Unaudited Pro Forma Financial Information
The following table presents supplemental pro forma information for the year ended December 31, 2019 and 2018, respectively ($ in millions, except per share data):
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Year Ended
December 31, 2019
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|
Year Ended
December 31, 2018
|
Total revenues
|
|
$
|
102,379
|
|
|
$
|
88,842
|
|
Net earnings attributable to common stockholders
|
|
1,462
|
|
|
$
|
1,211
|
|
Diluted earnings per share
|
|
$
|
2.47
|
|
|
$
|
2.06
|
|
The pro forma results do not reflect any anticipated synergies, efficiencies, or other cost savings of the acquisition. Accordingly, the unaudited pro forma financial information is not indicative of the results if the acquisition had been completed on January 1, 2018 and is not a projection of future results.
The unaudited pro forma financial information reflects the historical results of Centene and WellCare adjusted as if the acquisition had occurred on January 1, 2018, primarily for the following:
|
|
•
|
Interest expense associated with debt incurred to finance the transaction.
|
|
|
•
|
Elimination of historical WellCare intangible asset amortization expense and addition of amortization expense based on the current estimated values of identifiable intangible assets of approximately $7 billion.
|
|
|
•
|
Issuance of 171 million shares of Centene common stock in connection with the per share common stock consideration.
|
|
|
•
|
Elimination of acquisition related costs.
|
|
|
•
|
Adjustments to income tax expense related to pro forma adjustments and increased income tax expense related to IRS Regulation 162(m)(6).
|
In addition, the acquisition of Fidelis Care by Centene and the acquisition of Meridian by WellCare both occurred in 2018. The pro forma information gives effect to both acquisitions and the related financing as if they occurred on January 1, 2018.
The unaudited pro forma financial information does not reflect the previously discussed divestitures as the impact would be impracticable to quantify.
Fidelis Care Acquisition
On July 1, 2018, the Company acquired substantially all of the assets of Fidelis Care for approximately $3,621 million of cash consideration, including a working capital adjustment. The acquisition consideration was funded through the issuance of $53.2 million shares of Centene common stock and the issuance of long-term debt. The Fidelis Care acquisition expanded the Company's scale and presence to New York State.
The acquisition of Fidelis Care was accounted for as a business combination using the acquisition method of accounting that requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The valuation of all assets acquired and liabilities assumed was finalized in the second quarter of 2019.
The Company's allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of July 1, 2018 is as follows ($ in millions):
|
|
|
|
|
|
Assets acquired and liabilities assumed
|
|
|
Cash and cash equivalents
|
|
$
|
2,001
|
|
Premium and related receivables
|
|
442
|
|
Other current assets
|
|
32
|
|
Restricted deposits
|
|
495
|
|
Property, software and equipment
|
|
48
|
|
Intangible assets (a)
|
|
956
|
|
Other long-term assets
|
|
2
|
|
Total assets acquired
|
|
3,976
|
|
|
|
|
Medical claims liability
|
|
1,218
|
|
Accounts payable and accrued expenses
|
|
238
|
|
Return of premium payable
|
|
123
|
|
Unearned revenue
|
|
115
|
|
Other long-term liabilities
|
|
324
|
|
Total liabilities assumed
|
|
2,018
|
|
|
|
|
Total identifiable net assets
|
|
1,958
|
|
Goodwill (b)
|
|
1,663
|
|
Total assets acquired and liabilities assumed
|
|
$
|
3,621
|
|
Significant fair value adjustments are noted as follows:
|
|
(a)
|
The identifiable intangible assets acquired are to be measured at fair value as of the completion of the acquisition. The fair value of intangible assets is determined primarily using variations of the "income approach," which is based on the present value of the future after tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, were also considered in estimating the fair value. The Company has estimated the fair value of intangible assets to be $956 million with a weighted average life of 13 years. The identifiable intangible assets include customer relationships, provider contracts, trade names and developed technologies.
|
The fair values and weighted average useful lives for identifiable intangible assets acquired are as follows:
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Weighted Average Useful Life (in years)
|
Customer relationships
|
|
$
|
711
|
|
|
11
|
Trade name
|
|
196
|
|
|
20
|
Provider contracts
|
|
33
|
|
|
15
|
Developed technologies
|
|
16
|
|
|
2
|
Total intangible assets acquired
|
|
$
|
956
|
|
|
13
|
|
|
(b)
|
The acquisition resulted in $1.7 billion of goodwill related primarily to synergies expected from the acquisition and the assembled workforce of Fidelis Care. All of the goodwill has been assigned to the Managed Care segment. The goodwill is deductible for income tax purposes.
|
Statement of Operations
From the acquisition date through December 31, 2018, the Company's Consolidated Statements of Operations include total Fidelis Care revenues of $5,628 million. It is impracticable to determine the effect on net income resulting from the Fidelis Care acquisition for the year ended December 31, 2018, as the Company began immediately integrating Fidelis Care into its ongoing operations.
Unaudited Pro Forma Financial Information
The following table presents supplemental pro forma information for the year ended December 31, 2018 and 2017, respectively ($ in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2018
|
|
Year Ended
December 31, 2017
|
Total revenues
|
|
$
|
65,792
|
|
|
$
|
58,275
|
|
Net earnings attributable to common stockholders
|
|
$
|
1,342
|
|
|
$
|
936
|
|
Diluted earnings per share
|
|
$
|
3.22
|
|
|
$
|
2.27
|
|
The pro forma results do not reflect any anticipated synergies, efficiencies, or other cost savings of the acquisition prior to July 1, 2018, or the impact of the WellCare acquisition and related financing. Accordingly, the unaudited pro forma financial information is not indicative of the results if the acquisition had been completed on January 1, 2017 and is not a projection of future results.
The unaudited pro forma financial information reflects the historical results of Centene and Fidelis Care adjusted as if the acquisition had occurred on January 1, 2017, primarily for the following:
|
|
•
|
Additional premium tax expense related to Fidelis Care no longer being a not-for-profit entity.
|
|
|
•
|
Additional Health insurer Fee revenue and expense in 2018 related to Fidelis Care as some of those revenues will be subject to the Health Insurer Fee following the first year of the closing of the Fidelis Care acquisition, absent a Health Insurer Fee moratorium.
|
|
|
•
|
Reduced Fidelis Care investment income to reflect lower investment balances and mix of investments associated with the acquired assets.
|
|
|
•
|
Interest expense associated with debt incurred to finance the transaction.
|
|
|
•
|
An adjustment to basic and diluted shares outstanding to reflect the shares issued by Centene to finance the transaction.
|
|
|
•
|
An adjustment to income tax expense to reflect the tax impact of the acquisition and Fidelis Care becoming subject to income tax.
|
|
|
•
|
Elimination of acquisition related costs.
|
Commitments
As part of the regulatory approval process, in connection with the acquisition Fidelis Care, the Company entered into certain undertakings with the New York State Department of Health. These undertakings contain various commitments by the Company effective upon completion of the Fidelis Care acquisition. One of the undertakings includes a $340 million contribution by the Company to the State of New York to be paid over a five-year period for initiatives consistent with the Company's mission of providing high quality healthcare to vulnerable populations within New York State. As a result of the closing of the Fidelis Care acquisition, the present value of the $340 million contribution to the State of New York, approximately $328 million, was expensed during 2018. As of December 31, 2019, the Company has paid $136 million.
4. Short-term and Long-term Investments, Restricted Deposits
Short-term and long-term investments and restricted deposits by investment type consist of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized Losses
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized Losses
|
|
Fair
Value
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
211
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
212
|
|
|
$
|
362
|
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
361
|
|
Corporate securities
|
3,629
|
|
|
108
|
|
|
(4
|
)
|
|
3,733
|
|
|
3,190
|
|
|
8
|
|
|
(52
|
)
|
|
3,146
|
|
Restricted certificates of deposit
|
482
|
|
|
—
|
|
|
—
|
|
|
482
|
|
|
433
|
|
|
—
|
|
|
—
|
|
|
433
|
|
Restricted cash equivalents
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Municipal securities
|
2,320
|
|
|
69
|
|
|
(1
|
)
|
|
2,388
|
|
|
2,196
|
|
|
9
|
|
|
(18
|
)
|
|
2,187
|
|
Asset-backed securities
|
741
|
|
|
5
|
|
|
(2
|
)
|
|
744
|
|
|
686
|
|
|
1
|
|
|
(4
|
)
|
|
683
|
|
Residential mortgage-backed securities
|
464
|
|
|
8
|
|
|
(1
|
)
|
|
471
|
|
|
452
|
|
|
1
|
|
|
(9
|
)
|
|
444
|
|
Commercial mortgage- backed securities
|
380
|
|
|
9
|
|
|
(1
|
)
|
|
388
|
|
|
366
|
|
|
1
|
|
|
(6
|
)
|
|
361
|
|
Private equity investments
|
664
|
|
|
—
|
|
|
—
|
|
|
664
|
|
|
387
|
|
|
—
|
|
|
—
|
|
|
387
|
|
Life insurance contracts
|
148
|
|
|
—
|
|
|
—
|
|
|
148
|
|
|
128
|
|
|
—
|
|
|
—
|
|
|
128
|
|
Total
|
$
|
9,047
|
|
|
$
|
200
|
|
|
$
|
(9
|
)
|
|
$
|
9,238
|
|
|
$
|
8,208
|
|
|
$
|
21
|
|
|
$
|
(91
|
)
|
|
$
|
8,138
|
|
The Company's investments are debt securities classified as available-for-sale with the exception of life insurance contracts and certain private equity investments. The Company's investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities. The Company limits the size of investment in any single issuer other than U.S. treasury securities and obligations of U.S. government corporations and agencies. As of December 31, 2019, 97% of the Company's investments in rated securities carry an investment grade rating by nationally recognized statistical rating organizations. At December 31, 2019, the Company held certificates of deposit, life insurance contracts and private equity investments which did not carry a credit rating.
The Company's residential mortgage-backed securities are primarily issued by the Federal National Mortgage Association, Government National Mortgage Association or Federal Home Loan Mortgage Corporation, which carry implicit or explicit guarantees of the U.S. government. The Company's commercial mortgage-backed securities are primarily senior tranches with a weighted average rating of AA+ and a weighted average duration of 4 years at December 31, 2019.
The fair value of available-for-sale debt securities with gross unrealized losses by investment type and length of time that individual securities have been in a continuous unrealized loss position were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Unrealized Losses
|
|
Fair
Value
|
|
Unrealized Losses
|
|
Fair
Value
|
|
Unrealized Losses
|
|
Fair
Value
|
|
Unrealized Losses
|
|
Fair
Value
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
59
|
|
|
$
|
(2
|
)
|
|
$
|
202
|
|
Corporate securities
|
(2
|
)
|
|
192
|
|
|
(2
|
)
|
|
48
|
|
|
(27
|
)
|
|
1,389
|
|
|
(25
|
)
|
|
871
|
|
Municipal securities
|
(1
|
)
|
|
185
|
|
|
—
|
|
|
11
|
|
|
(4
|
)
|
|
591
|
|
|
(14
|
)
|
|
806
|
|
Asset-backed securities
|
(1
|
)
|
|
153
|
|
|
(1
|
)
|
|
151
|
|
|
(2
|
)
|
|
318
|
|
|
(2
|
)
|
|
168
|
|
Residential mortgage- backed securities
|
—
|
|
|
44
|
|
|
(1
|
)
|
|
81
|
|
|
(1
|
)
|
|
61
|
|
|
(8
|
)
|
|
233
|
|
Commercial mortgage- backed securities
|
(1
|
)
|
|
118
|
|
|
—
|
|
|
21
|
|
|
(2
|
)
|
|
137
|
|
|
(4
|
)
|
|
140
|
|
Total
|
$
|
(5
|
)
|
|
$
|
703
|
|
|
$
|
(4
|
)
|
|
$
|
343
|
|
|
$
|
(36
|
)
|
|
$
|
2,555
|
|
|
$
|
(55
|
)
|
|
$
|
2,420
|
|
As of December 31, 2019, the gross unrealized losses were generated from 682 positions out of a total of 4,529 positions. The change in fair value of fixed income securities is primarily a result of movement in interest rates subsequent to the purchase of the security.
For each security in an unrealized loss position, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If the security meets this criterion, the decline in fair value is other-than-temporary and is recorded in earnings. The Company does not intend to sell these securities prior to maturity and it is not likely that the Company will be required to sell these securities prior to maturity; therefore, there is no indication of other-than-temporary impairment for these securities.
The contractual maturities of short-term and long-term investments and restricted deposits are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Investments
|
|
Restricted Deposits
|
|
Investments
|
|
Restricted Deposits
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
One year or less
|
$
|
750
|
|
|
$
|
752
|
|
|
$
|
550
|
|
|
$
|
550
|
|
|
$
|
647
|
|
|
$
|
646
|
|
|
$
|
205
|
|
|
$
|
205
|
|
One year through five years
|
3,034
|
|
|
3,106
|
|
|
106
|
|
|
108
|
|
|
3,026
|
|
|
2,998
|
|
|
351
|
|
|
350
|
|
Five years through ten years
|
2,974
|
|
|
3,069
|
|
|
—
|
|
|
—
|
|
|
2,387
|
|
|
2,362
|
|
|
—
|
|
|
—
|
|
Greater than ten years
|
48
|
|
|
50
|
|
|
—
|
|
|
—
|
|
|
88
|
|
|
89
|
|
|
—
|
|
|
—
|
|
Asset-backed securities
|
1,585
|
|
|
1,603
|
|
|
—
|
|
|
—
|
|
|
1,504
|
|
|
1,488
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
8,391
|
|
|
$
|
8,580
|
|
|
$
|
656
|
|
|
$
|
658
|
|
|
$
|
7,652
|
|
|
$
|
7,583
|
|
|
$
|
556
|
|
|
$
|
555
|
|
Actual maturities may differ from contractual maturities due to call or prepayment options. Private equity investments and life insurance contracts are included in the five years through ten years category. The Company has an option to redeem at amortized cost substantially all of the securities included in the greater than ten years category listed above.
The Company continuously monitors investments for other-than-temporary impairment. Certain investments have experienced a decline in fair value due to changes in credit quality, market interest rates and/or general economic conditions. The Company recognizes an impairment loss when evidence demonstrates that it is other-than-temporarily impaired. Evidence of a loss in value that is other-than-temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
5. Fair Value Measurements
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon observable or unobservable inputs used to estimate fair value. Level inputs are as follows:
|
|
|
|
Level Input:
|
|
Input Definition:
|
Level I
|
|
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
|
|
|
|
Level II
|
|
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
|
|
|
|
Level III
|
|
Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.
|
The following table summarizes fair value measurements by level at December 31, 2019, for assets and liabilities measured at fair value on a recurring basis ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
12,123
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,123
|
|
Investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
73
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73
|
|
Corporate securities
|
—
|
|
|
3,713
|
|
|
—
|
|
|
3,713
|
|
Municipal securities
|
—
|
|
|
2,379
|
|
|
—
|
|
|
2,379
|
|
Asset-backed securities
|
—
|
|
|
744
|
|
|
—
|
|
|
744
|
|
Residential mortgage-backed securities
|
—
|
|
|
471
|
|
|
—
|
|
|
471
|
|
Commercial mortgage-backed securities
|
—
|
|
|
388
|
|
|
—
|
|
|
388
|
|
Total investments
|
$
|
73
|
|
|
$
|
7,695
|
|
|
$
|
—
|
|
|
$
|
7,768
|
|
Restricted deposits available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Certificates of deposit
|
—
|
|
|
482
|
|
|
—
|
|
|
482
|
|
Corporate securities
|
—
|
|
|
20
|
|
|
—
|
|
|
20
|
|
Municipal securities
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
139
|
|
|
—
|
|
|
—
|
|
|
139
|
|
Total restricted deposits
|
$
|
147
|
|
|
$
|
511
|
|
|
$
|
—
|
|
|
$
|
658
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
10
|
|
Total other long-term assets
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
$
|
12,343
|
|
|
$
|
8,216
|
|
|
$
|
—
|
|
|
$
|
20,559
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
The following table summarizes fair value measurements by level at December 31, 2018, for assets and liabilities measured at fair value on a recurring basis ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
5,342
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,342
|
|
Investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
$
|
247
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
247
|
|
Corporate securities
|
—
|
|
|
3,146
|
|
|
—
|
|
|
3,146
|
|
Municipal securities
|
—
|
|
|
2,187
|
|
|
—
|
|
|
2,187
|
|
Asset-backed securities
|
—
|
|
|
683
|
|
|
—
|
|
|
683
|
|
Residential mortgage-backed securities
|
—
|
|
|
444
|
|
|
—
|
|
|
444
|
|
Commercial mortgage-backed securities
|
—
|
|
|
361
|
|
|
—
|
|
|
361
|
|
Total investments
|
$
|
247
|
|
|
$
|
6,821
|
|
|
$
|
—
|
|
|
$
|
7,068
|
|
Restricted deposits available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Certificates of deposit
|
—
|
|
|
433
|
|
|
—
|
|
|
433
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
114
|
|
|
—
|
|
|
—
|
|
|
114
|
|
Total restricted deposits
|
$
|
122
|
|
|
$
|
433
|
|
|
$
|
—
|
|
|
$
|
555
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
$
|
5,711
|
|
|
$
|
7,254
|
|
|
$
|
—
|
|
|
$
|
12,965
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
—
|
|
|
$
|
95
|
|
|
$
|
—
|
|
|
$
|
95
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
95
|
|
|
$
|
—
|
|
|
$
|
95
|
|
The Company utilizes matrix pricing services to estimate fair value for securities which are not actively traded on the measurement date. The Company designates these securities as Level II fair value measurements. In addition, the aggregate carrying amount of the Company's life insurance contracts and other private equity investments, which approximates fair value, was $812 million and $515 million as of December 31, 2019, and December 31, 2018, respectively.
6. Property, Software and Equipment
Property, software and equipment consist of the following as of December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Computer software
|
$
|
1,018
|
|
|
$
|
757
|
|
Building
|
778
|
|
|
614
|
|
Furniture and office equipment
|
457
|
|
|
335
|
|
Leasehold improvements
|
390
|
|
|
291
|
|
Computer hardware
|
378
|
|
|
308
|
|
Land
|
202
|
|
|
201
|
|
Property, software and equipment, at cost
|
3,223
|
|
|
2,506
|
|
Less: accumulated depreciation
|
(1,102
|
)
|
|
(800
|
)
|
Property, software and equipment, net
|
$
|
2,121
|
|
|
$
|
1,706
|
|
Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $342 million, $237 million and $161 million, respectively.
7. Goodwill and Intangible Assets
The following table summarizes the changes in goodwill by operating segment ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care
|
|
Specialty Services
|
|
Total
|
Balance as of December 31, 2017
|
$
|
4,015
|
|
|
$
|
734
|
|
|
$
|
4,749
|
|
Acquisitions and purchase accounting adjustments
|
1,671
|
|
|
595
|
|
|
2,266
|
|
Balance as of December 31, 2018
|
5,686
|
|
|
1,329
|
|
|
7,015
|
|
Acquisitions and purchase accounting adjustments
|
61
|
|
|
47
|
|
|
108
|
|
Impairment
|
(16
|
)
|
|
(243
|
)
|
|
(259
|
)
|
Translation impact
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Balance as of December 31, 2019
|
$
|
5,730
|
|
|
$
|
1,133
|
|
|
$
|
6,863
|
|
During the third quarter of 2019, the Company recorded $271 million of non-cash goodwill ($259 million) and intangible asset ($12 million) impairment, substantially all associated with the Company's U.S. Medical Management (USMM) physician home health business in the Specialty Services segment. The impairment was identified as part of the Company's quarterly review procedures, which included an analysis of new information related to its shared savings demonstration programs, slower than expected penetration of the physician home health business model into its Medicaid population, and the related impact to revised forecasts. The Company conducted an impairment analysis of the identifiable intangible assets and goodwill of the reporting unit using the income approach, in which fair value is derived based on the present value of discounted expected cash flows.
The majority of the increase in the managed care segment goodwill in 2018 was related to the acquisition and fair value allocations related to the Fidelis Care acquisition discussed in Note 3. Acquisitions. The majority of the increase in the specialty services segment goodwill related to other acquisitions discussed in Note 12. Stockholders' Equity.
Intangible assets at December 31, consist of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Life in Years
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Purchased contract rights
|
$
|
1,214
|
|
|
$
|
1,173
|
|
|
12.8
|
|
12.6
|
Provider contracts
|
299
|
|
|
311
|
|
|
12.4
|
|
12.3
|
Customer relationships
|
812
|
|
|
769
|
|
|
10.8
|
|
10.9
|
Trade names
|
361
|
|
|
361
|
|
|
15.2
|
|
15.2
|
Developed technologies
|
179
|
|
|
180
|
|
|
5.2
|
|
5.2
|
Other intangibles
|
5
|
|
|
5
|
|
|
2.7
|
|
2.7
|
Intangible assets
|
2,870
|
|
|
2,799
|
|
|
12.0
|
|
11.9
|
Less accumulated amortization:
|
|
|
|
|
|
|
|
Purchased contract rights
|
(375
|
)
|
|
(283
|
)
|
|
|
|
|
Provider contracts
|
(115
|
)
|
|
(90
|
)
|
|
|
|
|
Customer relationships
|
(122
|
)
|
|
(57
|
)
|
|
|
|
|
Trade names
|
(80
|
)
|
|
(55
|
)
|
|
|
|
|
Developed technologies
|
(111
|
)
|
|
(72
|
)
|
|
|
|
|
Other intangibles
|
(4
|
)
|
|
(3
|
)
|
|
|
|
|
Total accumulated amortization
|
(807
|
)
|
|
(560
|
)
|
|
|
|
|
Intangible assets, net
|
$
|
2,063
|
|
|
$
|
2,239
|
|
|
|
|
|
Amortization expense was $258 million, $211 million and $156 million for the years ended December 31, 2019, 2018 and 2017, respectively. Estimated total amortization expense related to the December 31, 2019 intangible assets for each of the five succeeding fiscal years is as follows ($ in millions):
|
|
|
|
|
|
Year
|
|
Expense
|
2020
|
|
$
|
252
|
|
2021
|
|
228
|
|
2022
|
|
222
|
|
2023
|
|
220
|
|
2024
|
|
213
|
|
8. Medical Claims Liability
The Specialty Services segment has an insignificant amount of medical claims liability and, therefore, disclosures related to medical claims liabilities have been aggregated and are presented on a consolidated basis.
The following table summarizes the change in medical claims liability ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Balance, January 1
|
|
$
|
6,831
|
|
|
$
|
4,286
|
|
|
$
|
3,929
|
|
Less: reinsurance recoverable
|
|
27
|
|
|
18
|
|
|
5
|
|
Balance, January 1, net
|
|
6,804
|
|
|
4,268
|
|
|
3,924
|
|
Acquisitions and purchase accounting adjustments
|
|
59
|
|
|
1,204
|
|
|
—
|
|
Less: acquired reinsurance recoverable
|
|
—
|
|
|
8
|
|
|
—
|
|
Incurred related to:
|
|
|
|
|
|
|
Current year
|
|
59,539
|
|
|
46,484
|
|
|
38,225
|
|
Prior years
|
|
(677
|
)
|
|
(427
|
)
|
|
(374
|
)
|
Total incurred
|
|
58,862
|
|
|
46,057
|
|
|
37,851
|
|
Paid related to:
|
|
|
|
|
|
|
Current year
|
|
52,453
|
|
|
41,161
|
|
|
34,196
|
|
Prior years
|
|
5,819
|
|
|
3,556
|
|
|
3,311
|
|
Total paid
|
|
58,272
|
|
|
44,717
|
|
|
37,507
|
|
Balance at December 31, net
|
|
7,453
|
|
|
6,804
|
|
|
4,268
|
|
Plus: reinsurance recoverable
|
|
20
|
|
|
27
|
|
|
18
|
|
Balance, December 31
|
|
$
|
7,473
|
|
|
$
|
6,831
|
|
|
$
|
4,286
|
|
Reinsurance recoverables related to medical claims are included in premium and trade receivables. 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 $49 million, $25 million, and $1 million of the "Incurred related to: Prior years" was recorded as a reduction to premium revenues in 2019, 2018, and 2017, 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 the Company has evidence that population health management initiatives are effective on a case by case basis, population health management 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 the Company. 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 its business, the number of states in which it operates, and the volume of claims that it processes, the Company is unable to practically quantify the impact of these initiatives on its changes in estimates of IBNR.
The Company periodically reviews actual and anticipated experience compared to the assumptions used to establish medical costs. The Company establishes premium deficiency reserves if actual and anticipated experience indicates that existing policy liabilities together with the present value of future gross premiums will not be sufficient to cover the present value of future benefits, settlement and maintenance costs.
Information about incurred and paid claims development as of December 31, 2019 is included in the table below and is inclusive of claims incurred and paid related to the Fidelis Care businesses prior and subsequent to the acquisition date. The claims development information for all periods preceding the most recent reporting period is considered required supplementary information. Incurred and paid claims development as of December 31, 2019 is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
For the Years Ended December 31,
|
Claim Year
|
|
2017 (unaudited)
|
|
2018 (unaudited)
|
|
2019
|
|
|
|
|
|
|
|
2017
|
|
$
|
47,574
|
|
|
$
|
46,994
|
|
|
$
|
46,950
|
|
2018
|
|
|
|
51,572
|
|
|
50,944
|
|
2019
|
|
|
|
|
|
59,627
|
|
|
|
Total incurred claims
|
|
|
$
|
157,521
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
For the Years Ended December 31,
|
Claim Year
|
|
2017 (unaudited)
|
|
2018 (unaudited)
|
|
2019
|
|
|
|
|
|
|
|
2017
|
|
$
|
42,205
|
|
|
$
|
46,767
|
|
|
$
|
46,904
|
|
2018
|
|
|
|
45,039
|
|
|
50,682
|
|
2019
|
|
|
|
|
|
52,482
|
|
|
|
Total payment of incurred claims
|
|
|
$
|
150,068
|
|
|
|
Medical claims liability, net of reinsurance
|
|
|
$
|
7,453
|
|
|
|
|
|
|
|
|
Incurred claims and allocated claim adjustment expenses, net of reinsurance, total IBNR plus expected development on reported claims and cumulative claims data as of December 31, 2019 are included in the following table and are inclusive of the acquired Fidelis Care business. For claims frequency information summarized below, a claim is defined as the financial settlement of a single medical event in which remuneration was paid to the servicing provider. Total IBNR plus expected development on reported claims represents estimates for claims incurred but not reported, development on reported claims, and estimates for the costs necessary to process unpaid claims at the end of each period. The Company estimates its 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. Information is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
|
Total IBNR Plus Expected Development on Reported Claims
|
|
Cumulative Paid Claims
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
46,950
|
|
|
$
|
—
|
|
|
260.2
|
|
2018
|
50,944
|
|
|
88
|
|
|
281.7
|
|
2019
|
59,627
|
|
|
5,347
|
|
|
290.2
|
|
9. Affordable Care Act
The Affordable Care Act established risk spreading premium stabilization programs as well as minimum annual MLR and cost sharing reductions.
On June 28, 2019, the Centers for Medicare and Medicaid Services announced the final risk adjustment transfers for the 2018 benefit year. As a result of the announcement, the Company reduced its risk adjustment net payables by $238 million from December 31, 2018. After consideration of minimum MLR, Risk Adjustment Data Validation audit results, and other related impacts, the net pre-tax benefit recognized was approximately $131 million recorded in the second quarter of 2019.
The Company's receivables (payables) for each of these programs are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Risk adjustment receivable
|
$
|
245
|
|
|
$
|
91
|
|
Risk adjustment payable
|
(1,239
|
)
|
|
(1,019
|
)
|
Minimum medical loss ratio
|
(367
|
)
|
|
(265
|
)
|
Cost sharing reduction receivable
|
73
|
|
|
57
|
|
Cost sharing reduction payable
|
(1
|
)
|
|
(107
|
)
|
10. Debt
Debt consists of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
$1,400 million 5.625% Senior notes, due February 15, 2021
|
$
|
—
|
|
|
$
|
1,400
|
|
$1,000 million 4.75% Senior notes, due May 15, 2022
|
1,004
|
|
|
1,005
|
|
$1,000 million 6.125% Senior notes, due February 15, 2024
|
1,000
|
|
|
1,000
|
|
$2,200 million 4.75% Senior notes, due January 15, 2025
|
2,228
|
|
|
1,200
|
|
$1,800 million 5.375% Senior notes, due June 1, 2026
|
1,800
|
|
|
1,800
|
|
$2,500 million 4.25% Senior notes due December 15, 2027
|
2,479
|
|
|
—
|
|
$3,500 million 4.625% Senior notes due December 15, 2029
|
3,500
|
|
|
—
|
|
Fair value of interest rate swap agreements
|
(1
|
)
|
|
(95
|
)
|
Total senior notes
|
12,010
|
|
|
6,310
|
|
Term Loan Credit Facility
|
1,450
|
|
|
—
|
|
Revolving Credit Facility
|
93
|
|
|
284
|
|
Mortgage notes payable
|
54
|
|
|
57
|
|
Construction loan payable
|
140
|
|
|
63
|
|
Capital leases and other
|
122
|
|
|
47
|
|
Debt issuance costs
|
(143
|
)
|
|
(75
|
)
|
Total debt
|
13,726
|
|
|
6,686
|
|
Less current portion
|
(88
|
)
|
|
(38
|
)
|
Long-term debt
|
$
|
13,638
|
|
|
$
|
6,648
|
|
Senior Notes
In February 2020, the Company issued $2,000 million 3.375% Senior Notes due 2030 (the 2030 Notes). The Company intends to use the net proceeds from the 2030 Notes, together with available cash on hand, to redeem all of its outstanding $1,000 million 4.75% Senior Notes due 2022 and all of its outstanding $1,000 million 6.125% Senior Notes due 2024, including all premiums, accrued interest and costs and expenses related to the redemption.
In connection with the WellCare Acquisition, in January 2020, the Company completed an exchange offer for 5.25% Senior Notes due 2025 and 5.375% Senior Notes due 2026 (collectively, the WellCare Notes) issued by WellCare and issued $1,146 million 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 WellCare Notes.
In December 2019, the Company issued approximately $1,000 million 4.75% Senior Notes due 2025 (the Additional 2025 Notes), $2,500 million 4.25% Senior Notes due 2027 (the 2027 Notes), and $3,500 million 4.625% Senior Notes due 2029 (the 2029 Notes). The Company used the net proceeds of the 2027 Notes and the 2029 Notes and a portion of the net proceeds of the Additional 2025 Notes to fund the cash consideration of the WellCare acquisition, which closed on January 23, 2020.
In October 2019, the Company redeemed the outstanding principal balance on the $1,400 million 5.625% Senior Notes due February 15, 2021, plus applicable premium for early redemption and accrued and unpaid interest through the redemption date. The Company recognized a pre-tax loss on extinguishment of $30 million on the redemption of the $1,400 million 5.625% Senior Notes in the fourth quarter of 2019, 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.
In May 2018, a wholly-owned unrestricted subsidiary of the Company (Escrow Issuer) issued $1,800 million in aggregate principal amount of 5.375% senior notes due 2026 at par. In connection with the closing of the Fidelis Care acquisition, the Escrow Issuer merged with and into the Company and the Company assumed the obligations of the Escrow Issuer under the 5.375% senior notes due 2026. The Company used the net proceeds of the offering to finance a portion of the cash consideration for the Fidelis Care acquisition, which closed in July 2018, to pay related fees and expenses, and for general corporate purposes, including the repayment of outstanding indebtedness.
The indentures governing the senior notes listed in the table above contain restrictive covenants of Centene Corporation. At December 31, 2019, the Company was in compliance with all covenants.
Interest Rate Swaps
The Company uses interest rate swap agreements to convert a portion of its interest rate exposure from fixed rates to floating rates to more closely align interest expense with interest income received on its cash equivalent and variable rate investment balances. The following is a summary of the notional amounts of the Company's interest rate swap agreements as of December 31, 2019 and 2018 ($ in millions):
|
|
|
|
|
|
|
|
|
|
Expiration Date
|
|
December 31, 2019
|
|
December 31, 2018
|
February 15, 2021
|
|
$
|
—
|
|
|
$
|
600
|
|
May 15, 2022
|
|
500
|
|
|
500
|
|
February 15, 2024
|
|
1,000
|
|
|
1,000
|
|
January 15, 2025
|
|
600
|
|
|
600
|
|
Total
|
|
$
|
2,100
|
|
|
$
|
2,700
|
|
The fair value of the swap agreements shown above are recorded in other long-term assets and other long-term liabilities in the Consolidated Balance Sheets. Under the swap agreements, the Company receives a fixed rate of interest and pays an average variable rate of either the one or three month LIBOR plus 3.44% adjusted monthly or quarterly, based on the terms of the individual swap agreements. At December 31, 2019, the weighted average rate was 5.30%.
The swap agreements are formally designated and qualify as fair value hedges. Gains and losses due to changes in fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the underlying debt. Therefore, no gain or loss has been recognized due to hedge ineffectiveness. Offsetting changes in fair value of both the interest rate swaps and the hedged portion of the underlying debt both were recognized in interest expense in the Consolidated Statements of Operations. The Company does not hold or issue any derivative instrument for trading or speculative purposes.
In connection with the redemption of the $1,400 million 5.625% Senior Notes in October 2019, the Company terminated the $600 million interest rate swap agreement associated with those notes. In connection with the February 2020 senior note issuance and anticipated redemptions, the Company terminated the remaining $2,100 million interest rate swap agreements.
The fair value of the Swap Agreements excludes accrued interest and takes into consideration current interest rates and current likelihood of the swap counterparties' compliance with its contractual obligations.
Revolving Credit Facility and Term Loan Credit Facility
On May 7, 2019, the Company amended and restated its existing credit agreement by and among Centene, Wells Fargo Bank, National Association, as administrative agent, and the lenders from time to time party thereto (as amended, restated, amended and restated or otherwise modified , the Company Credit Agreement), to, among other things, increase the revolving commitments available under its unsecured multi-currency revolving credit facility from $1.5 billion to $2.0 billion. (the Revolving Credit Facility), which includes a $300 million sub-limit for letters of credit and a $200 million sub-limit for swingline loans. On September 11, 2019, the Company further amended and restated the Company Credit Agreement, to provide for a new $1.45 billion unsecured delayed-draw term loan facility (the Term Loan Facility, the credit agreement, as amended, the Company Credit Facility). On November 14, 2019, the Company amended the Company Credit Agreement to exclude the indebtedness issued for the purpose of financing the WellCare Acquisition in the calculation of certain financial covenants until the earlier of the consummation of the WellCare Acquisition and September 20, 2020. Borrowings under the Company's Revolving Credit Facility bear interest, at the Company's option, at LIBOR, EURIBOR, CDOR, BBR or base rates plus, in each case, an applicable margin based on total debt to EBITDA ratio. Borrowings under the Term Loan Facility bear interest, at the Company's option, at LIBOR or base rates plus, in each case, an applicable margin based on the total debt to EBITDA ratio. The Company has an uncommitted option to increase its Company Credit Facility by an additional $500 million plus certain additional amounts based on its total debt to EBITDA ratio.
The Company Credit Agreement contains financial covenants including maintenance of a minimum fixed charge coverage ratio and a restriction on the Company's maximum total debt to EBITDA ratio exceeding 3.5 to 1.0. It also contains certain non-financial covenants including: limitations on incurrence of additional indebtedness; restrictions on incurrence of liens; restrictions on dividends and other restricted payments; restrictions on investments, mergers, consolidations and asset sales; and limitations on transactions with affiliates. As of December 31, 2019, the Company was in compliance with all financial and non-financial covenants under the Company Credit Facility.
As of December 31, 2019, the Company had $93 million of borrowings outstanding under the Revolving Credit Facility, with a weighted average interest rate of 1%. In October 2019, the Company borrowed $1.45 billion under the Term Loan Facility. The proceeds of the Term Loan Facility were used to fund the redemption of certain senior notes discussed below and pay fees and expenses in connection therewith, with any remaining proceeds to be used for general corporate purposes.
The Revolving Credit Facility will mature on May 7, 2024. The Term Loan Facility will mature on September 11, 2022.
Mortgage Notes Payable
The Company has a non-recourse mortgage note of $54 million at December 31, 2019 collateralized by its corporate headquarters building. The mortgage note is due January 1, 2021 and bears a 5.14% interest rate. The collateralized property had a net book value of $130 million at December 31, 2019.
Construction Loan
The Company has a $200 million non-recourse construction loan to fund the expansion of the Company's corporate headquarters. The loan bears interest based on the one month LIBOR plus 2.70% and matures in April 2021 with an optional one-year extension. The agreement contains financial and non-financial covenants aligning with the Company Credit Facility. The Company has guaranteed completion of the construction project associated with the loan. As of December 31, 2019, the Company had $140 million in borrowings outstanding under the loan.
Letters of Credit & Surety Bonds
The Company had outstanding letters of credit of $68 million as of December 31, 2019, which were not part of the Revolving Credit Facility. The Company also had letters of credit for $27 million (valued at December 31, 2019 conversion rate), or €24 million, representing its proportional share of the letters of credit issued to support Ribera Salud's outstanding debt, which are a part of the Revolving Credit Facility. Collectively, the letters of credit bore interest at 0.9% as of December 31, 2019. The Company had outstanding surety bonds of $611 million as of December 31, 2019.
Aggregate maturities for the Company's debt are as follows ($ in millions):
|
|
|
|
|
|
2020
|
|
$
|
88
|
|
2021
|
|
201
|
|
2022
|
|
2,469
|
|
2023
|
|
6
|
|
2024
|
|
1,094
|
|
Thereafter
|
|
10,001
|
|
Total
|
|
$
|
13,859
|
|
The fair value of outstanding debt was approximately $14,160 million and $6,619 million at December 31, 2019 and 2018, respectively.
11. Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases, which introduced a lessee model that requires the majority of leases to be recognized on the balance sheet. On January 1, 2019, the Company adopted the ASU using the modified retrospective transition approach and elected the transition option to recognize the adjustment in the period of adoption rather than in the earliest period presented. Adoption of the new guidance resulted in the initial recognition of right-of-use (ROU) assets of $661 million, ROU lease liabilities of $774 million and the elimination of $113 million of straight-line lease liabilities.
The Company records ROU assets and liabilities for non-cancelable operating leases primarily for real estate and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Expense related to leases is recorded on a straight-line basis over the lease term, including rent holidays. During the year ended December 31, 2019, the Company recognized operating lease expense of $203 million.
The following table sets forth the ROU assets and liabilities as of December 31, 2019 ($ in millions):
|
|
|
|
|
|
December 31, 2019
|
Assets
|
|
ROU assets (recorded within other long-term assets)
|
$
|
661
|
|
|
|
Liabilities
|
|
Short-term (recorded within accounts payable and accrued expenses)
|
$
|
161
|
|
Long-term (recorded within other long-term liabilities)
|
622
|
|
Total operating lease liabilities
|
$
|
783
|
|
During the year ended December 31, 2019, the Company reduced its operating lease liabilities by $227 million for cash paid. In addition, during the year ended December 31, 2019, new operating leases commenced resulting in the recognition of ROU assets and liabilities of $162 million, respectively. As of December 31, 2019, the Company had additional operating leases that have not yet commenced of $101 million, which included two significant leases executed during the third quarter. These operating leases will commence in 2020 with lease terms of 5 to 10 years.
As of December 31, 2019, the weighted average remaining lease term of the Company's operating leases was 6.6 years. The ROU liabilities as of December 31, 2019 reflect a weighted average discount rate of 4.2%. Lease payments over the next five years and thereafter are as follows ($ in millions):
|
|
|
|
|
|
December 31, 2019
|
2020
|
$
|
190
|
|
2021
|
182
|
|
2022
|
148
|
|
2023
|
119
|
|
2024
|
99
|
|
Thereafter
|
438
|
|
Total lease payments
|
1,176
|
|
Less: imputed interest
|
(393
|
)
|
Total ROU liabilities
|
$
|
783
|
|
The following discussion relates to the Company's lease accounting policy under ASC Topic 840 for the year ended December 31, 2018. Annual noncancellable minimum lease payments over the next five years and thereafter were as follows ($ in millions):
|
|
|
|
|
|
December 31, 2018
|
2019
|
$
|
174
|
|
2020
|
176
|
|
2021
|
145
|
|
2022
|
101
|
|
2023
|
71
|
|
Thereafter
|
200
|
|
Total lease payments
|
$
|
867
|
|
12. Stockholders' Equity
The Company has 10 million authorized shares of preferred stock at $.001 par value. At December 31, 2019, there were no preferred shares outstanding.
The Company's Board of Directors has authorized a stock repurchase program of the Company's common stock from time to time on the open market or through privately negotiated transactions. The initial program, which was extended in 2009, authorized the repurchase of up to 16.0 million shares, of which 6.7 million shares are remaining. In October 2019, the Company's Board of Directors approved a $500 million increase to the program based on the closing stock price on the date of the WellCare Acquisition. Based on the stock price of $66.76, an additional 7.5 million shares were approved. As of December 31, 2019, 14.2 million remaining shares are available under the program for repurchase. No duration has been placed on the repurchase program. The Company reserves the right to discontinue the repurchase program at any time. During the year ended December 31, 2019 and December 31, 2018, the Company did not repurchase any shares through this publicly announced program.
As a component of the employee stock compensation plan, employees can use shares of stock which have vested to satisfy statutory tax withholding obligations. As part of this plan, the Company repurchased 1 million shares at an aggregate cost of $75 million in 2019 and 1 million shares at an aggregate cost of $71 million in 2018. These shares are included in the Company's treasury stock.
In January 2020, the Company acquired WellCare and issued 171 million shares of Centene stock, with an approximate value of $11,431 million.
In May 2018, the Company completed a registered offering of 53 million shares of Centene common stock with a fair value of $2,860 million. This included the 10% over allotment option to purchase additional shares from the Company which was exercised in full by the underwriters. Net proceeds after underwriting discounts and commissions was $2,779 million. The Company used the net proceeds of the offering to finance a portion of the cash consideration in connection with the Fidelis Care acquisition, to pay related fees and expenses, and for general corporate purposes, including the repayment of outstanding indebtedness.
In April 2018, the Company acquired MHM Services Inc. (MHM) and issued 3 million shares of Centene common stock to the selling shareholders, with a fair value of $183 million.
In March 2018, the Company acquired Community Medical Holdings Corp., d/b/a Community Medical Group (CMG) and issued 3 million shares of Centene common stock to the selling shareholders, with a fair value of $149 million.
In March 2018, the Company acquired an additional 61% of Interpreta Holdings, Inc. (Interpreta) and issued 3 million shares of Centene common stock to the selling shareholders, with a fair value of $175 million.
13. Statutory Capital Requirements and Dividend Restrictions
Various state laws require Centene's regulated subsidiaries to maintain minimum capital levels specified by each state and restrict the amount of dividends that may be paid without prior regulatory approval. At December 31, 2019 and 2018, Centene's subsidiaries had aggregate statutory capital and surplus of $8,725 million and $7,259 million, respectively, compared with the required minimum aggregate statutory capital and surplus of $3,407 million and $3,279 million, respectively. As of December 31, 2019, the amount of capital and surplus or net worth that was unavailable for the payment of dividends or return of capital to the Company was $3,407 million in the aggregate.
14. Income Taxes
The consolidated income tax expense consists of the following for the years ended December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current provision
|
|
|
|
|
|
Federal
|
$
|
381
|
|
|
$
|
498
|
|
|
$
|
421
|
|
State and local
|
41
|
|
|
107
|
|
|
14
|
|
Total current provision
|
422
|
|
|
605
|
|
|
435
|
|
Deferred provision
|
51
|
|
|
(131
|
)
|
|
(109
|
)
|
Total income tax expense
|
$
|
473
|
|
|
$
|
474
|
|
|
$
|
326
|
|
The reconciliation of the tax provision at the U.S. federal statutory rate to income tax expense for the years ended December 31 is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Earnings from operations, before income tax expense
|
$
|
1,782
|
|
|
$
|
1,368
|
|
|
$
|
1,134
|
|
Loss (earnings) attributable to flow through noncontrolling interest
|
11
|
|
|
4
|
|
|
15
|
|
Earnings from operations, less noncontrolling interest, before income tax expense
|
1,793
|
|
|
1,372
|
|
|
1,149
|
|
|
|
|
|
|
|
|
Tax provision at the U.S. federal statutory rate
|
377
|
|
|
288
|
|
|
402
|
|
State income taxes, net of federal income tax benefit
|
49
|
|
|
52
|
|
|
11
|
|
Nondeductible compensation
|
42
|
|
|
33
|
|
|
58
|
|
ACA Health Insurer Fee
|
—
|
|
|
149
|
|
|
—
|
|
Income Tax Reform
|
—
|
|
|
—
|
|
|
(125
|
)
|
Valuation Allowance
|
—
|
|
|
(28
|
)
|
|
14
|
|
Nondeductible goodwill impairment
|
30
|
|
|
—
|
|
|
—
|
|
Other, net
|
(25
|
)
|
|
(20
|
)
|
|
(34
|
)
|
Income tax expense
|
$
|
473
|
|
|
$
|
474
|
|
|
$
|
326
|
|
The tax effects of temporary differences which give rise to deferred tax assets and liabilities are presented below for the years ended December 31 ($ in millions):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Medical claims liability
|
$
|
66
|
|
|
$
|
78
|
|
Nondeductible liabilities
|
97
|
|
|
128
|
|
Net operating loss and tax credit carryforwards
|
83
|
|
|
77
|
|
Compensation accruals
|
113
|
|
|
109
|
|
Premium and trade receivables
|
78
|
|
|
76
|
|
Operating lease liability
|
186
|
|
|
—
|
|
Other
|
46
|
|
|
61
|
|
Deferred tax assets
|
669
|
|
|
529
|
|
Valuation allowance
|
(66
|
)
|
|
(53
|
)
|
Net deferred tax assets
|
$
|
603
|
|
|
$
|
476
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
$
|
346
|
|
|
$
|
343
|
|
Prepaid assets
|
26
|
|
|
31
|
|
Fixed assets
|
187
|
|
|
132
|
|
Investments in joint ventures
|
2
|
|
|
27
|
|
Deferred revenue
|
13
|
|
|
19
|
|
Right of use asset
|
171
|
|
|
—
|
|
Other
|
47
|
|
|
6
|
|
Deferred tax liabilities
|
792
|
|
|
558
|
|
Net deferred tax assets (liabilities)
|
$
|
(189
|
)
|
|
$
|
(82
|
)
|
The Company adopted an ASU that introduces a lessee model that requires the majority of leases to be recognized on the balance sheet, which resulted in a right of use asset and operating lease liability for GAAP purposes. With limited exceptions these items have no tax basis, therefore both deferred tax assets and deferred tax liabilities have been grossed up in 2019 to reflect the underlying GAAP change.
Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. The valuation allowances primarily relate to future tax benefits on certain federal, state and foreign net operating loss and tax credit carryforwards. The $13 million increase in valuation allowance relates to tax losses in international jurisdictions.
Federal net operating loss carryforwards of $13 million expire beginning in 2021 through 2038; state net operating loss and tax credit carryforwards of $48 million expire beginning in 2020 through 2039. Substantially all of the non-U.S. tax loss carryforwards have indefinite carryforward periods.
The Company maintains a reserve for uncertain tax positions that may be challenged by a tax authority. A rollforward of the beginning and ending amount of uncertain tax positions, exclusive of related interest and penalties, is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Gross unrecognized tax benefits, beginning of period
|
$
|
277
|
|
|
$
|
257
|
|
Gross increases:
|
|
|
|
Current year tax positions
|
39
|
|
|
7
|
|
Prior year tax positions
|
14
|
|
|
14
|
|
Gross decreases:
|
|
|
|
Prior year tax positions
|
(8
|
)
|
|
—
|
|
Settlements
|
(16
|
)
|
|
|
Statute of limitation lapses
|
(1
|
)
|
|
(1
|
)
|
Gross unrecognized tax benefits, end of period
|
$
|
305
|
|
|
$
|
277
|
|
Uncertain tax positions increased $28 million due to various federal positions. As of December 31, 2019, $258 million of unrecognized tax benefits would impact the Company's effective tax rate in future periods, if recognized. The Company believes it is reasonably possible that its liability for unrecognized tax benefits will decrease in the next twelve months by $71 million as a result of the expiration of statutes of limitations and projected audit settlements in certain jurisdictions.
The table above excludes interest, net of related tax benefits, which is treated as income tax expense (benefit) under the Company's accounting policy. The Company recognized net interest expense related to uncertain positions of $2 million and $5 million for the years ended December 31, 2019 and 2018, respectively. The Company had $16 million and $14 million of accrued interest and penalties for uncertain tax positions as of December 31, 2019 and 2018, respectively.
The Company files tax returns for federal as well as numerous state and international tax jurisdictions. As of December 31, 2019, Health Net is under federal examination for tax years 2014 through its final return in 2016. Additionally, Centene's tax returns are under federal examination for tax years 2014 through 2017.
15. Stock Incentive Plans
The Company's stock incentive plans allow for the granting of restricted stock or restricted stock unit awards and options to purchase common stock. Both incentive stock options and nonqualified stock options can be awarded under the plans. However, an immaterial amount of options were granted, exercised, or outstanding in 2019. The plans have 8 million shares available for future awards. Compensation expense for stock options and restricted stock unit awards is recognized on a straight-line basis over the vesting period, generally three to five years for stock options and one to three years for restricted stock or restricted stock unit awards. Vesting is accelerated by one year for individuals who qualify under the Company's retirement eligible provisions. Certain restricted stock unit awards contain performance-based as well as service-based provisions. Certain awards provide for accelerated vesting if there is a change in control as defined in the plans. The total compensation cost that has been charged against income for the stock incentive plans was $177 million, $145 million and $135 million for the years ended December 31, 2019, 2018 and 2017, respectively. The total income tax benefit recognized in the Statements of Operations for stock-based compensation arrangements was $22 million, $34 million and $50 million for the years ended December 31, 2019, 2018 and 2017, respectively.
A summary of the Company's non-vested restricted stock and restricted stock unit shares as of December 31, 2019, and changes during the year ended December 31, 2019, is presented below (shares in thousands):
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Non-vested balance as of December 31, 2018
|
7,365
|
|
|
$
|
47.72
|
|
Granted
|
3,520
|
|
|
58.19
|
|
Vested
|
(3,373
|
)
|
|
40.58
|
|
Forfeited
|
(525
|
)
|
|
51.11
|
|
Non-vested balance as of December 31, 2019
|
6,987
|
|
|
$
|
56.19
|
|
|
|
|
|
The total fair value of restricted stock and restricted stock units vested during the years ended December 31, 2019, 2018 and 2017, was $202 million, $209 million and $174 million, respectively.
As of December 31, 2019, there was $266 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans; that cost is expected to be recognized over a weighted-average period of 2.4 years.
The Company maintains an employee stock purchase plan and issued 416 thousand shares, 256 thousand shares, and 258 thousand shares in 2019, 2018 and 2017, respectively.
16. Retirement Plan
Centene has a defined contribution plan which covers substantially all employees who are at least twenty-one years of age. Under the plan, eligible employees may contribute a percentage of their base salary, subject to certain limitations. Centene may elect to match a portion of the employee's contribution. Company expense related to matching contributions to the plan was $64 million, $53 million and $42 million during the years ended December 31, 2019, 2018 and 2017, respectively.
17. Commitments
In connection with obtaining regulatory approval of the Fidelis Care acquisition, the Company entered into certain undertakings with the New York State Department of Health in 2018. See Note 3. Acquisitions for further details. The Company also committed to certain undertakings with the California Department of Insurance and the California Department of Managed Health Care in connection with obtaining regulatory approval of the Health Net acquisition in 2016 The Health Net commitments related to the undertakings are as follows:
|
|
•
|
invest an additional $30 million through the California Organized Investment Network over the five years following completion of the acquisition; of which the Company has invested $13 million through 2019;
|
|
|
•
|
build a service center in an economically distressed community in California, investing $200 million over 10 years and employing at least 300 people, of which the Company has incurred $24 million through 2019;
|
|
|
•
|
contribute $65 million to improve enrollee health outcomes ($10 million over five years), support locally-based consumer assistance programs ($5 million over five years) and strengthen the healthcare delivery system ($50 million over five years), of which the Company has contributed $20 million through 2019, and;
|
|
|
•
|
invest $75 million of its investment portfolio in vehicles supporting California's healthcare infrastructure, of which the Company has invested $27 million through 2019.
|
18. Contingencies
Overview
The Company is routinely subjected to legal and regulatory proceedings in the normal course of business. These matters can include, without limitation:
|
|
•
|
periodic compliance and other reviews and investigations by various federal and state regulatory agencies with respect to requirements applicable to the Company's business, including, without limitation, those related to payment of out-of-network claims, submissions to CMS for risk adjustment payments or the False Claims Act, pre-authorization penalties, timely review of grievances and appeals, timely and accurate payment of claims, and the Health Insurance Portability and Accountability Act of 1996;
|
|
|
•
|
litigation arising out of general business activities, such as tax matters, disputes related to healthcare benefits coverage or reimbursement, putative securities class actions and medical malpractice, privacy, real estate, intellectual property and employment-related claims;
|
|
|
•
|
disputes regarding reinsurance arrangements, claims arising out of the acquisition or divestiture of various assets, class actions and claims relating to the performance of contractual and non-contractual obligations to providers, members, employer groups and others, including, but not limited to, the alleged failure to properly pay claims and challenges to the manner in which the Company processes claims and claims alleging that the Company has engaged in unfair business practices.
|
Among other things, these matters may result in awards of damages, fines or penalties, which could be substantial, and/or could require changes to the Company's business. The Company intends to vigorously defend itself against legal and regulatory proceedings to which it is currently a party; however, these proceedings are subject to many uncertainties. In some of the cases pending against the Company, substantial non-economic or punitive damages are being sought.
The Company records reserves and accrues costs for certain legal proceedings and regulatory matters to the extent that it determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. While such reserves and accrued costs reflect the Company's best estimate of the probable loss for such matters, the recorded amounts may differ materially from the actual amount of any such losses. In some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal and regulatory proceedings, which may be exacerbated by various factors, including but not limited to, they may involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; involve a large number of parties, claimants or regulatory bodies; are in the early stages of the proceedings; involve a number of separate proceedings and/or a wide range of potential outcomes; or result in a change of business practices.
As of the date of this report, amounts accrued for legal proceedings and regulatory matters were not material. However, it is possible that in a particular quarter or annual period the Company's financial condition, results of operations, cash flow and/or liquidity could be materially adversely affected by an ultimate unfavorable resolution of or development in legal and/or regulatory proceedings, including as described below. Except for the proceedings discussed below, the Company believes that the ultimate outcome of any of the regulatory and legal proceedings that are currently pending against it should not have a material adverse effect on financial condition, results of operations, cash flow or liquidity.
California
On October 20, 2015, the Company's California subsidiary, Health Net of California, Inc. (Health Net California), was named as a defendant in a California taxpayer action filed in Los Angeles County Superior Court, captioned as Michael D. Myers v. State Board of Equalization, Dave Jones, Insurance Commissioner of the State of California, Betty T. Yee, Controller of the State of California, et al., Los Angeles Superior Court Case No. BS158655. This action is brought under a California statute that permits an individual taxpayer to sue a governmental agency when the taxpayer believes the agency has failed to enforce governing law. Plaintiff contends that Health Net California, a California licensed Health Care Service Plan (HCSP), is an "insurer" for purposes of taxation despite acknowledging it is not an "insurer" under regulatory law. Under California law, "insurers" must pay a gross premiums tax (GPT), calculated as 2.35% on gross premiums. As a licensed HCSP, Health Net California has paid the California Corporate Franchise Tax (CFT), the tax generally paid by California businesses. Plaintiff contends that Health Net California must pay the GPT rather than the CFT. Plaintiff seeks a writ of mandate directing the California taxing agencies to collect the GPT, and seeks an order requiring Health Net California to pay GPT, interest and penalties for a period dating to eight years prior to the October 2015 filing of the complaint. This lawsuit is being coordinated with similar lawsuits filed against other entities (collectively, "Related Actions"). In March 2018, the Court overruled the Company's demurrer seeking to dismiss the complaint and denied the Company's motion to strike allegations seeking retroactive relief. In August 2018, the trial court stayed all the Related Actions pending determination of a writ of mandate by the California Court of Appeals in two of the Related Actions. In March 2019, the California Court of Appeals denied the writ of mandate. The defendants in those Related Actions sought review by the California Supreme Court, which declined to review the matter. The case is back before the trial court which has scheduled a hearing in March 2020 to consider a motion for summary judgment by Health Net California. In the meantime, discovery and depositions are proceeding. The court has tentatively set the case for trial in August 2020. The Company intends to vigorously defend itself against these claims; however, this matter is subject to many uncertainties, and an adverse outcome in this matter could potentially have a materially adverse impact on the Company's financial position, results of operations and cash flows.
Federal Securities Class Action
On November 14, 2016, a putative federal securities class action, Israel Sanchez v. Centene Corp., et al., was filed against the Company and certain of its executives in the U.S. District Court for the Central District of California. In March 2017, the court entered an order transferring the matter to the U.S. District Court for the Eastern District of Missouri. The plaintiffs in the lawsuit allege that the Company's accounting and related disclosures for certain liabilities acquired in the acquisition of Health Net violated federal securities laws. In July 2017, the lead plaintiff filed a Consolidated Class Action Complaint. The Company filed a motion to dismiss complaint in September 2017. In August 2019, the Court granted the Company's motion to dismiss in part and denied it in part, dismissing allegations regarding certain statements and thereby narrowing the time period to which the allegations will be subject. The case is now in the discovery phase.
The Company denies any wrongdoing and is vigorously defending itself against these claims. Nevertheless, this matter is subject to many uncertainties and the Company cannot predict how long this litigation will last or what the ultimate outcome will be, and an adverse outcome in this matter could potentially have a materially adverse impact on the Company's financial position and results of operations.
Additionally, on January 24, 2018, a separate derivative action was filed by plaintiff Harkesh Parekh on behalf of Centene Corporation against the Company and certain of its officers and directors in the United States District Court for the Eastern District of Missouri. Plaintiff purports to bring suit derivatively on behalf of the Company against certain officers and directors for violation of securities laws, breach of fiduciary duty, waste of corporate assets and unjust enrichment. The derivative complaint repeats many of the allegations in the federal securities class action described above and asserts that defendants made inaccurate or misleading statements, and/or failed to correct the alleged misstatements.
A second shareholder derivative action was filed on March 9, 2018, by plaintiffs Laura Wood and Peoria Police Pension Fund on behalf of Centene Corporation against the Company and certain of its officers and directors in the United States District Court for the Eastern District of Missouri. This second derivative complaint repeats many of the allegations in the securities class action and the first derivative suit.
A third shareholder derivative action was filed on December 14, 2018, by plaintiffs Carpenters Pension Fund of Illinois and Iron Workers Local 11 Pension Fund on behalf of Centene Corporation against the Company and certain of its officers and directors in the United States District Court for the Eastern District of Missouri. This third derivative action repeats many of the allegations in the securities class action and the other derivative suits and adds additional allegations asserting violations of securities laws, breach of fiduciary duty, insider trading and unjust enrichment. The three derivative suits have been consolidated. Lead plaintiffs and counsel have been appointed. Defendants filed a motion to dismiss on October 31, 2019. The motion has not yet been set for hearing.
The parties are in advanced negotiations to seek to settle the action for an immaterial amount to be paid by Company's insurance carrier. A settlement would be subject to negotiation and execution of a settlement agreement, as well as preliminary and final court approvals.
Veterans Administration Matter
In October 2017, a Civil Investigative Demand (CID) was issued to Health Net Federal Services, LLC (HNFS) by the United States Department of Justice. The CID seeks documents and interrogatory responses concerning whether HNFS submitted, or caused to be submitted, excessive, duplicative or otherwise improper claims to the U.S. Department of Veterans Affairs (VA) under a contract to provide healthcare coordination services for veterans. The contract began in late 2014 and ended September 30, 2018. In 2016, modifications to the contract were made to allow for possible duplicate billings with a reconciliation period at the end of the contract term. The Company is complying with the CID and believes it has met its contractual obligations. At this point, it is not possible to determine what level of liability, if any, the Company may face as a result of this matter. This matter is separate from the negotiated settlements with the VA in connection with the contract expiration on September 30, 2018.
Ambetter Class Action
On January 11, 2018, a putative class action lawsuit was filed by Cynthia Harvey and Steven A. Milman against the Company and certain subsidiaries in the U.S. District Court for the Eastern District of Washington. The complaint alleges that the Company failed to meet federal and state requirements for provider networks and directories with regard to its Ambetter policies, denied coverage and/or refused to pay for covered benefits, and failed to address grievances adequately, causing some members to incur unexpected costs. In March 2018, the Company filed separate motions to dismiss each defendant. In July 2018, the plaintiff voluntarily filed a First Amended Complaint that removed Steven Milman as a plaintiff, dropped Centene Corporation and Superior Health Plan as defendants, abandoned certain claims, narrowed the putative class to Washington State only, and added Centene Management Company as a defendant. In August 2018, the Company moved to dismiss the First Amended Complaint. In response, the plaintiff voluntarily filed a Second Amended Complaint. In September 2018, the Company filed a motion to dismiss the Second Amended Complaint. On November 21, 2018, the Court granted in part and denied in part the Company's motion to dismiss. Plaintiff Cynthia Harvey filed a Third Amended Complaint, on November 28, 2018, against Centene Management Company and Coordinated Care Corporation (Defendants), both subsidiaries of the Company. Defendants filed an answer on December 12, 2018. Plaintiffs filed a motion for class certification on January 8, 2020. The Company intends to vigorously defend itself against these claims. Nevertheless, this matter is subject to many uncertainties and the Company cannot predict how long this litigation will last or what the ultimate outcome will be, and an adverse outcome in this matter could potentially have a materially adverse impact on the Company's financial position and results of operations.
19. Earnings Per Share
The following table sets forth the calculation of basic and diluted net earnings per common share for the years ended December 31 ($ in millions, except shares in thousands and per share data in dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Earnings attributable to Centene Corporation
|
$
|
1,321
|
|
|
$
|
900
|
|
|
$
|
828
|
|
|
|
|
|
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
413,487
|
|
|
390,248
|
|
|
344,853
|
|
Common stock equivalents (as determined by applying the treasury stock method)
|
6,922
|
|
|
8,258
|
|
|
8,551
|
|
Weighted average number of common shares and potential dilutive common shares outstanding
|
420,409
|
|
|
398,506
|
|
|
353,404
|
|
|
|
|
|
|
|
Net earnings per common share attributable to Centene Corporation:
|
|
|
|
|
|
Basic earnings per common share
|
$
|
3.19
|
|
|
$
|
2.31
|
|
|
$
|
2.40
|
|
Diluted earnings per common share
|
$
|
3.14
|
|
|
$
|
2.26
|
|
|
$
|
2.34
|
|
The calculation of diluted earnings per common share for 2019, 2018 and 2017 excludes the impact of 1,048 thousand shares, 58 thousand shares and 106 thousand shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.
20. Segment Information
Centene operates in two segments: Managed Care and Specialty Services.
The Managed Care segment consists of Centene's health plans including all of the functions needed to operate them. The Specialty Services segment consists of Centene's specialty companies offering auxiliary healthcare services and products. Factors used in determining the reportable business segments include the nature of operating activities, the existence of separate senior management teams, and the type of information presented to the Company's chief operating decision-maker to evaluate all results of operations.
Segment information as of and for the year ended December 31, 2019, follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care
|
|
Specialty
Services
|
|
Eliminations
|
|
Consolidated
Total
|
Total revenues from external customers
|
$
|
71,209
|
|
|
$
|
3,430
|
|
|
$
|
—
|
|
|
$
|
74,639
|
|
Total revenues internal customers
|
170
|
|
|
10,351
|
|
|
(10,521
|
)
|
|
—
|
|
Total revenues
|
$
|
71,379
|
|
|
$
|
13,781
|
|
|
(10,521
|
)
|
|
$
|
74,639
|
|
Earnings from operations
|
$
|
1,806
|
|
|
$
|
(25
|
)
|
|
—
|
|
|
$
|
1,781
|
|
Total assets
|
$
|
37,689
|
|
|
$
|
3,305
|
|
|
—
|
|
|
$
|
40,994
|
|
Segment information as of and for the year ended December 31, 2018, follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care
|
|
Specialty
Services
|
|
Eliminations
|
|
Consolidated
Total
|
Total revenues from external customers
|
$
|
56,999
|
|
|
$
|
3,117
|
|
|
$
|
—
|
|
|
$
|
60,116
|
|
Total revenues internal customers
|
100
|
|
|
9,389
|
|
|
(9,489
|
)
|
|
—
|
|
Total revenues
|
$
|
57,099
|
|
|
$
|
12,506
|
|
|
$
|
(9,489
|
)
|
|
$
|
60,116
|
|
Earnings from operations
|
$
|
1,310
|
|
|
$
|
148
|
|
|
$
|
—
|
|
|
$
|
1,458
|
|
Total assets
|
$
|
27,627
|
|
|
$
|
3,274
|
|
|
$
|
—
|
|
|
$
|
30,901
|
|
Segment information as of and for the year ended December 31, 2017, follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Care
|
|
Specialty
Services
|
|
Eliminations
|
|
Consolidated
Total
|
Total revenues from external customers
|
$
|
45,798
|
|
|
$
|
2,584
|
|
|
$
|
—
|
|
|
$
|
48,382
|
|
Total revenues internal customers
|
44
|
|
|
9,471
|
|
|
(9,515
|
)
|
|
—
|
|
Total revenues
|
$
|
45,842
|
|
|
$
|
12,055
|
|
|
$
|
(9,515
|
)
|
|
$
|
48,382
|
|
Earnings from operations
|
$
|
917
|
|
|
$
|
282
|
|
|
$
|
—
|
|
|
$
|
1,199
|
|
Total assets
|
$
|
19,959
|
|
|
$
|
1,896
|
|
|
$
|
—
|
|
|
$
|
21,855
|
|
21. Quarterly Selected Financial Information
Quarterly selected financial information for 2019 and 2018 is as follows:
(In millions, except per share data in dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
March 31,
2019
|
|
June 30,
2019
|
|
September 30,
2019
|
|
December 31,
2019
|
Total revenues
|
$
|
18,444
|
|
|
$
|
18,356
|
|
|
$
|
18,976
|
|
|
$
|
18,863
|
|
Net earnings attributable to Centene Corporation
|
$
|
522
|
|
|
$
|
495
|
|
|
$
|
95
|
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
Net earnings per common share attributable to Centene Corporation:
|
Basic earnings per common share
|
$
|
1.26
|
|
|
$
|
1.20
|
|
|
$
|
0.23
|
|
|
$
|
0.50
|
|
Diluted earnings per common share
|
$
|
1.24
|
|
|
$
|
1.18
|
|
|
$
|
0.23
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
March 31,
2018
|
|
June 30,
2018
|
|
September 30,
2018
|
|
December 31,
2018.
|
Total revenues
|
$
|
13,194
|
|
|
$
|
14,181
|
|
|
$
|
16,182
|
|
|
$
|
16,559
|
|
Net earnings attributable to Centene Corporation
|
$
|
340
|
|
|
$
|
300
|
|
|
$
|
19
|
|
|
$
|
241
|
|
|
|
|
|
|
|
|
|
Net earnings per common share attributable to Centene Corporation:
|
Basic earnings per common share
|
$
|
0.98
|
|
|
$
|
0.77
|
|
|
$
|
0.05
|
|
|
$
|
0.59
|
|
Diluted earnings per common share
|
$
|
0.96
|
|
|
$
|
0.75
|
|
|
$
|
0.05
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22. Condensed Financial Information of Registrant
Centene Corporation (Parent Company Only)
Condensed Balance Sheets
(In millions, except shares in thousands and per share data in dollars)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
6,257
|
|
|
$
|
6
|
|
Short-term investments
|
3
|
|
|
2
|
|
Other current assets
|
50
|
|
|
61
|
|
Total current assets
|
6,310
|
|
|
69
|
|
Long-term investments
|
130
|
|
|
14
|
|
Investment in subsidiaries
|
19,561
|
|
|
17,409
|
|
Other long-term assets
|
337
|
|
|
278
|
|
Total assets
|
$
|
26,338
|
|
|
$
|
17,770
|
|
|
|
|
|
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities
|
$
|
198
|
|
|
$
|
109
|
|
Long-term debt
|
13,411
|
|
|
6,521
|
|
Other long-term liabilities
|
37
|
|
|
117
|
|
Total liabilities
|
13,646
|
|
|
6,747
|
|
|
|
|
|
Redeemable noncontrolling interest
|
33
|
|
|
10
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred stock, $.001 par value; authorized 10,000 shares; no shares issued or outstanding at December 31, 2019 and December 31, 2018
|
—
|
|
|
—
|
|
Common stock, $.001 par value; authorized 800,000 shares; 421,508 issued and 415,048 outstanding at December 31, 2019, and 417,695 issued and 412,478 outstanding at December 31, 2018
|
—
|
|
|
—
|
|
Additional paid-in capital
|
7,647
|
|
|
7,449
|
|
Accumulated other comprehensive loss
|
134
|
|
|
(56
|
)
|
Retained earnings
|
4,984
|
|
|
3,663
|
|
Treasury stock, at cost (6,460 and 5,217 shares, respectively)
|
(214
|
)
|
|
(139
|
)
|
Total Centene stockholders' equity
|
12,551
|
|
|
10,917
|
|
Noncontrolling interest
|
108
|
|
|
96
|
|
Total stockholders' equity
|
12,659
|
|
|
11,013
|
|
Total liabilities, redeemable noncontrolling interests and stockholders' equity
|
$
|
26,338
|
|
|
$
|
17,770
|
|
See notes to condensed financial information of registrant.
Centene Corporation (Parent Company Only)
Condensed Statements of Operations
(In millions, except per share data in dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Expenses:
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
11
|
|
|
$
|
28
|
|
|
$
|
7
|
|
Contingent consideration
|
(24
|
)
|
|
(4
|
)
|
|
(1
|
)
|
Other income (expense):
|
|
|
|
|
|
Investment and other income
|
11
|
|
|
3
|
|
|
2
|
|
Debt extinguishment costs
|
(30
|
)
|
|
—
|
|
|
—
|
|
Interest expense
|
(394
|
)
|
|
(334
|
)
|
|
(247
|
)
|
Loss before income taxes
|
(400
|
)
|
|
(355
|
)
|
|
(251
|
)
|
Income tax benefit
|
(172
|
)
|
|
(64
|
)
|
|
(114
|
)
|
Net (loss) before equity in subsidiaries
|
(228
|
)
|
|
(291
|
)
|
|
(137
|
)
|
Equity in earnings from subsidiaries
|
1,537
|
|
|
1,185
|
|
|
945
|
|
Net earnings
|
1,309
|
|
|
894
|
|
|
808
|
|
Loss attributable to noncontrolling interests
|
12
|
|
|
6
|
|
|
20
|
|
Net earnings attributable to Centene
|
$
|
1,321
|
|
|
$
|
900
|
|
|
$
|
828
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
Basic earnings per common share
|
$
|
3.19
|
|
|
$
|
2.31
|
|
|
$
|
2.40
|
|
Diluted earnings per common share
|
$
|
3.14
|
|
|
$
|
2.26
|
|
|
$
|
2.34
|
|
See notes to condensed financial information of registrant.
Centene Corporation (Parent Company Only)
Condensed Statements of Cash Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
Dividends from subsidiaries, return on investment
|
$
|
429
|
|
|
$
|
464
|
|
|
$
|
292
|
|
Other operating activities, net
|
(231
|
)
|
|
(317
|
)
|
|
(132
|
)
|
Net cash provided by operating activities
|
198
|
|
|
147
|
|
|
160
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital contributions to subsidiaries
|
(731
|
)
|
|
(681
|
)
|
|
(339
|
)
|
Purchases of investments
|
(124
|
)
|
|
(23
|
)
|
|
(38
|
)
|
Sales and maturities of investments
|
—
|
|
|
7
|
|
|
4
|
|
Dividends from subsidiaries, return of investment
|
291
|
|
|
11
|
|
|
28
|
|
Investments in acquisitions
|
(302
|
)
|
|
(4,226
|
)
|
|
(59
|
)
|
Intercompany activities
|
140
|
|
|
215
|
|
|
322
|
|
Other investing activities, net
|
—
|
|
|
—
|
|
|
(1
|
)
|
Net cash used in investing activities
|
(726
|
)
|
|
(4,697
|
)
|
|
(83
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from the issuance of common stock
|
—
|
|
|
2,778
|
|
|
—
|
|
Proceeds from long-term debt
|
24,647
|
|
|
6,014
|
|
|
1,400
|
|
Payments of long-term debt
|
(17,778
|
)
|
|
(4,080
|
)
|
|
(1,350
|
)
|
Common stock repurchases
|
(75
|
)
|
|
(71
|
)
|
|
(65
|
)
|
Contribution from noncontrolling interest
|
21
|
|
|
—
|
|
|
—
|
|
Payments for debt extinguishment
|
(23
|
)
|
|
—
|
|
|
—
|
|
Debt issuance costs
|
(25
|
)
|
|
(25
|
)
|
|
—
|
|
Purchase of noncontrolling interest
|
—
|
|
|
(76
|
)
|
|
(66
|
)
|
Other financing activities, net
|
12
|
|
|
10
|
|
|
5
|
|
Net cash provided by (used in) financing activities
|
6,779
|
|
|
4,550
|
|
|
(76
|
)
|
Net increase in cash and cash equivalents
|
6,251
|
|
|
—
|
|
|
1
|
|
Cash and cash equivalents, beginning of period
|
6
|
|
|
6
|
|
|
5
|
|
Cash and cash equivalents, end of period
|
$
|
6,257
|
|
|
$
|
6
|
|
|
$
|
6
|
|
See notes to condensed financial information of registrant.
Notes to Condensed Financial Information of Registrant
Note A - Basis of Presentation and Significant Accounting Policies
The parent company only financial statements should be read in conjunction with Centene Corporation's audited consolidated financial statements and the notes to consolidated financial statements included in this Form 10-K.
The parent company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of the subsidiaries. The parent company's share of net income of its unconsolidated subsidiaries is included in income using the equity method of accounting. Certain unrestricted subsidiaries receive monthly management fees from the Company's restricted subsidiaries. The management and service fees received by its unrestricted subsidiaries are associated with all of the functions required to manage the restricted subsidiaries including but not limited to salaries and wages for all personnel, rent, utilities, population health management, provider contracting, compliance, member services, claims processing, information technology, cash management, finance and accounting, and other services. The management fees are based on a percentage of the restricted subsidiaries' revenue.
Due to the Company's centralized cash management function, cash flows generated by its unrestricted subsidiaries are utilized by the parent company to the extent required, primarily to repay borrowings on the parent company's credit facilities, make acquisitions, fund capital contributions to subsidiaries and fund its operations.
Certain amounts presented in the parent company only financial statements are eliminated in the consolidated financial statements of Centene Corporation.