HTN’s View:
Like its MCO peers, the golden path for Centene runs through acuity shifts from H.R.1 implementation that are within expectations and/or states responding with off-cycle rate adjustments in the event of a surprise.
Medicare and the ACA business both appear to be humming along fine, with Centene taking a cautious approach to each program's open enrollment period while continuing profitable growth in its standalone PDP product.
Enterprise optimization efforts, including layoffs and a voluntary separation program, helped bring Centene’s adjusted SG&A ratio to 6.5% in Q3, a 50bps YoY improvement. Like Molina, HTN wants to see whether these reductions end up being too much, too little, or just right heading into a potentially bumpy 2027 with the H.R.1 implementation.
Centene reports solid Q3 results driven by a combination of a more favorable trend environment and care management efforts paired with enterprise optimization, reducing the adj. SG&A ratio by 50 bps YoY.
Premium and service revenue of ~$45.1b, up 0.5% YoY
Adjusted EPS of $0.58, up 16.0% YoY
Adjusted SG&A expense ratio of 6.5%, down 50 bps YoY
Consolidated HBR of 92.7%, unchanged YoY
Medicaid HBR of 93.6%, up 20 bps YoY
Medicare HBR of 93.8%, down 50 bps YoY
Commercial HBR of 89.0%, down 90 bps YoY
In Medicaid, utilization pressure from Centene’s Florida CMS exit and acuity from H.R.1 prep were cushioned by in-line rates and favorable trend development
Aetna and Humana MCOs remain outstanding, but Centene’s earnings call reinforces the case for a 2026 trough year and a 2027 margin recovery, as commentary and data both support rate/trend stabilization. In Q3, Centene’s trend ran a bit hot, but management attributed it to a utilization spike from the Florida CMS contract, which it exited on October 1st.
H.R.1 implementation-driven acuity shifts are the biggest risk for the Medicaid business, but Centene management is sanguine
2026 being the trough year depends on no acuity-shift surprise materializing, and analysts spent time during the call trying to get comfortable with how well Centene is managing that risk.
Medicare HBR exceeded expectations, and PDP operating leverage is contributing to earnings performance
Centene is on track to return to break-even for Medicare Advantage in 2026, a year ahead of expectations. Medicare HBR outperformed, and Centene expects membership to be down YoY as they focus on profitability. The standalone Prescription Drug Plan seems like a strong business for Centene, with strong growth, favorable operating leverage with low-to-mid-single-digit SG&A, and the Inflation Reduction Act subsidy driving performance.
Commercial business is expected to achieve ~5% pre-tax margin, a ~600 bps positive swing
Centene, like most other ACA carriers HTN has covered this year, has successfully used its shrink-to-grow profitability strategy for the exchanges. They acknowledged pressure from the NSA IDR process across their entire commercial book and discussed their previously announced exit from some non-exchange commercial markets, which make up a smaller part of their business.
Centene headcount reductions are helping drive the significant adj. SG&A ratio improvements, bringing guidance for full-year adj. SG&A ratio to 7.2% at the midpoint
Centene’s enterprise optimization efforts, including a large voluntary departure program, have delivered significant improvements to the company’s adjusted SG&A ratio, with headcount down ~11.5% YoY and the adjusted SG&A ratio up 50bps. As with Molina, it will be interesting to see what, if any, impact lower SG&A spend has on managing care for its populations as Medicaid enters a potentially tricky year.
