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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________________________
FORM 10-Q
____________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to
____________________________________________
Commission file number: 001-31826
____________________________________________
CENTENE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 42-1406317
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7700 Forsyth Boulevard  
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (314) 725-4477 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Common Stock $0.001 Par Value CNC New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer Accelerated filer
Non-accelerated filer   Smaller reporting company
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No  
As of July 16, 2021, the registrant had 583,043,563 shares of common stock outstanding.



CENTENE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
  PAGE
   
Part I
Financial Information
Item 1.
1
 
1
 
2
 
3
 
4
 
6
 
7
Item 2.
Item 3.
Item 4.
Part II
Other Information
Item 1.
Item 1A.
Item 2.
Item 6.



CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements. Without limiting the foregoing, forward-looking statements often use words such as “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,” “would,” “could,” “should,” “can,” “continue” and other similar words or expressions (and the negative thereof). Centene Corporation and its subsidiaries (Centene, the Company, our or we) intends such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. In particular, these statements include, without limitation, statements about our future operating or financial performance, market opportunity, growth strategy, competition, expected activities in completed and future acquisitions, including statements about the impact of our proposed acquisition of Magellan Health (the Magellan Acquisition), our completed acquisition of WellCare Health Plans, Inc. (WellCare and such acquisition, the WellCare Acquisition), other recent and future acquisitions, investments, the adequacy of our available cash resources and our settlements with Ohio and Mississippi to resolve claims and/or allegations made by those states with regard to past practices at Envolve Pharmacy Solutions, Inc. (Envolve), as our pharmacy benefits manager (PBM) subsidiary, and other possible future claims and settlements related to the past practices at Envolve and our ability to settle claims with other states within the reserve estimate we have recorded and on other acceptable terms, or at all. These statements may be found in the various sections of this filing, such as Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1. “Legal Proceedings,” and Part II, Item 1A “Risk Factors.” 

These forward-looking statements reflect our current views with respect to future events and are based on numerous assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, business strategies, operating environments, future developments and other factors we believe appropriate. By their nature, forward-looking statements involve known and unknown risks and uncertainties and are subject to change because they relate to events and depend on circumstances that will occur in the future, including economic, regulatory, competitive and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions.

All forward-looking statements included in this filing are based on information available to us on the date of this filing. Except as may be otherwise required by law, we undertake no obligation to update or revise the forward-looking statements included in this filing, whether as a result of new information, future events or otherwise, after the date of this filing. You should not place undue reliance on any forward-looking statements, as actual results may differ materially from projections, estimates, or other forward-looking statements due to a variety of important factors, variables and events including, but not limited to:

the impact of COVID-19 on global markets, economic conditions, the healthcare industry and our results of operations and the response by governments and other third parties;
the risk that regulatory or other approvals required for the Magellan Acquisition may be delayed or not obtained or are subject to unanticipated conditions that could require the exertion of management's time and our resources or otherwise have an adverse effect on us;
the possibility that certain conditions to the consummation of the Magellan Acquisition will not be satisfied or completed on a timely basis and accordingly, the Magellan Acquisition may not be consummated on a timely basis or at all;
uncertainty as to the expected financial performance of the combined company following completion of the Magellan Acquisition;
the possibility that the expected synergies and value creation from the Magellan Acquisition or the WellCare Acquisition (or other acquired businesses) will not be realized, or will not be realized within the respective expected time periods;
the risk that unexpected costs will be incurred in connection with the completion and/or integration of the Magellan Acquisition or that the integration of Magellan Health will be more difficult or time consuming than expected;
the risk that potential litigation in connection with the Magellan Acquisition may affect the timing or occurrence of the Magellan Acquisition or result in significant costs of defense, indemnification and liability;
a downgrade of the credit rating of our indebtedness;
the inability to retain key personnel;
disruption from the announcement, pendency, completion and/or integration of the Magellan Acquisition or from the integration of the WellCare Acquisition, or similar risks from other acquisitions we may announce or complete from time to time, including potential adverse reactions or changes to business relationships with customers, employees, suppliers or regulators, making it more difficult to maintain business and operational relationships;
i

our ability to accurately predict and effectively manage health benefits and other operating expenses and reserves, including fluctuations in medical utilization rates due to the impact of COVID-19;
competition;
membership and revenue declines or unexpected trends;
changes in healthcare practices, new technologies and advances in medicine;
increased healthcare costs;
changes in economic, political or market conditions;
changes in federal or state laws or regulations, including changes with respect to income tax reform or government healthcare programs as well as changes with respect to the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act (collectively referred to as the ACA) and any regulations enacted thereunder that may result from changing political conditions, the new administration or judicial actions;
rate cuts or other payment reductions or delays by governmental payors and other risks and uncertainties affecting our government businesses;
our ability to adequately price products;
tax matters;
disasters or major epidemics;
changes in expected contract start dates;
provider, state, federal, foreign and other contract changes and timing of regulatory approval of contracts;
the expiration, suspension, or termination of our contracts with federal or state governments (including, but not limited to, Medicaid, Medicare, TRICARE or other customers);
the difficulty of predicting the timing or outcome of legal or regulatory proceedings or matters, including claims against our PBM business or whether additional claims, reviews or investigations relating to our PBM business will be brought by states, the federal government or shareholder litigants, or government investigations;
challenges to our contract awards;
cyber-attacks or other privacy or data security incidents;
the exertion of management’s time and our resources, and other expenses incurred and business changes required in connection with complying with the undertakings in connection with any regulatory, governmental or third party consents or approvals for acquisitions, including the Magellan Acquisition;
disruption caused by significant completed and pending acquisitions making it more difficult to maintain business and operational relationships;
the risk that unexpected costs will be incurred in connection with the completion and/or integration of acquisition transactions;
changes in expected closing dates, estimated purchase price and accretion for acquisitions;
the risk that acquired businesses will not be integrated successfully;
restrictions and limitations in connection with our indebtedness;
our ability to maintain or achieve improvement in the Centers for Medicare and Medicaid Services (CMS) Star ratings and maintain or achieve improvement in other quality scores in each case that can impact revenue and future growth;
availability of debt and equity financing, on terms that are favorable to us;
inflation; and
foreign currency fluctuations.

This list of important factors is not intended to be exhaustive. We discuss certain of these matters more fully, as well as certain other factors that may affect our business operations, financial condition and results of operations, in our filings with the Securities and Exchange Commission (SEC), including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Item 1A. “Risk Factors” of Part II of this filing contains a further discussion of these and other important factors that could cause actual results to differ from expectations. Due to these important factors and risks, we cannot give assurances with respect to our future performance, including without limitation our ability to maintain adequate premium levels or our ability to control our future medical and selling, general and administrative costs.

ii


SUMMARY OF RISK FACTORS

Our business is subject to numerous risks and uncertainties that you should be aware of in evaluating our business, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. These risks include, but are not limited to, the following, all of which are more fully described in Part II, Item 1A "Risk Factors." This summary should be read in conjunction with the Risk Factors section and should not be relied upon as an exhaustive summary of the material risks facing our business.

Our business could be adversely affected by the effects of widespread public health pandemics, such as the spread of COVID-19;
Our Medicare programs are subject to a variety of unique risks that could adversely impact our financial results;
Failure to accurately estimate and price our medical expenses or effectively manage our medical costs or related administrative costs could negatively affect our results of operations, financial position and cash flows;
Risk-adjustment payment systems make our revenue and results of operations more difficult to estimate and could result in retroactive adjustments that have a material adverse effect on our results of operations, financial condition and cash flows;
Any failure to adequately price products offered or any reduction in products offered in the Health Insurance Marketplaces may have a negative impact on our results of operations, financial position and cash flow;
We derive a portion of our cash flow and gross margin from our prescription drug plan (PDP) operations, for which we submit annual bids for participation. The results of our bids could materially affect our results of operations, financial condition and cash flows;
Our encounter data may be inaccurate or incomplete, which could have a material adverse effect on our results of operations, financial condition, cash flows and ability to bid for, and continue to participate in, certain programs;
If any of our government contracts are terminated or are not renewed on favorable terms or at all, or if we receive an adverse finding or review resulting from an audit or investigation, our business may be adversely affected;
Ineffectiveness of state-operated systems and subcontractors could adversely affect our business;
Execution of our growth strategy may increase costs or liabilities, or create disruptions in our business;
If competing managed care programs are unwilling to purchase specialty services from us, we may not be able to successfully implement our strategy of diversifying our business lines;
If state regulators do not approve payments of dividends and distributions by our subsidiaries to us, we may not have sufficient funds to implement our business strategy;
We derive a significant portion of our premium revenues from operations in a limited number of states, and our results of operations, financial position or cash flows could be materially affected by a decrease in premium revenues or profitability in any one of those states;
Competition may limit our ability to increase penetration of the markets that we serve;
If we are unable to maintain relationships with our provider networks, our profitability may be harmed;
If we are unable to integrate and manage our information systems effectively, our operations could be disrupted;
An impairment charge with respect to our recorded goodwill and intangible assets could have a material impact on our results of operations;
A failure in or breach of our operational or security systems or infrastructure, or those of third parties with which we do business, including as a result of cyber-attacks, could have an adverse effect on our business;
Reductions in funding, changes to eligibility requirements for government sponsored healthcare programs in which we participate and any inability on our part to effectively adapt to changes to these programs could substantially affect our results of operations, financial position and cash flows;
The implementation of the ACA, as well as potential repeal of, significant changes to, or judicial challenges to the ACA, could materially and adversely affect our results of operations, financial position and cash flows;
Our business activities are highly regulated and new laws or regulations or changes in existing laws or regulations or their enforcement or application could force us to change how we operate and could harm our business;
Our businesses providing pharmacy benefits management and specialty pharmacy services face regulatory and other risks and uncertainties which could materially and adversely affect our results of operations, financial position and cash flows;
We have been and may from time to time become involved in costly and time-consuming litigation and other regulatory proceedings, which require significant attention from our management and adversely affect our business;
If we fail to comply with applicable privacy, security, and data laws, regulations and standards, including with respect to third-party service providers that utilize sensitive personal information on our behalf, our business, reputation, results of operations, financial position and cash flows could be materially and adversely affected;
iii

If we fail to comply with the extensive federal and state fraud, waste and abuse laws, our business, reputation, results of operations, financial position and cash flows could be materially and adversely affected;
Our investment portfolio may suffer losses which could materially and adversely affect our results of operations or liquidity;
Adverse credit market conditions may have a material adverse effect on our liquidity or our ability to obtain credit on acceptable terms;
We have substantial indebtedness outstanding and may incur additional indebtedness in the future. Such indebtedness could reduce our agility and may adversely affect our financial condition;
Changes in the method pursuant to which the LIBOR rates are determined and potential phasing out of LIBOR after 2021 may affect the value of the financial obligations to be held or issued by us that are linked to LIBOR or our results of operations or financial condition;
Mergers and acquisitions may not be accretive and may cause dilution to our earnings per share, which may cause the market price of our common stock to decline;
We may be unable to successfully integrate our existing business with acquired businesses and realize the anticipated benefits of such acquisitions;
The merger with Magellan Health is subject to conditions, some or all of which may not be satisfied, or completed on a timely basis, if at all. Failure to complete the merger with Magellan Health could have adverse effects on our business;
Centene and Magellan Health have been and may be targets of securities class action and derivative lawsuits that could result in substantial costs and may delay or prevent the Magellan Acquisition from being completed;
Completion of the Magellan Acquisition may trigger change in control or other provisions in certain agreements to which Magellan Health or its subsidiaries are a party, which may have an adverse impact on the combined company’s business and results of operations;
We may be unable to attract, retain or effectively manage the succession of key personnel; and
Future issuances and sales of additional shares of preferred or common stock could reduce the market price of our shares of common stock.
iv


Non-GAAP Financial Presentation

The Company is providing certain non-GAAP financial measures in this report, as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. The Company uses the presented non-GAAP financial measures internally to allow management to focus on period-to-period changes in the Company’s core business operations. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

Specifically, the Company believes the presentation of non-GAAP financial information that excludes amortization of acquired intangible assets and acquisition related expenses, as well as other items, allows investors to develop a more meaningful understanding of the Company’s performance over time. The tables below provide reconciliations of non-GAAP items ($ in millions, except per share data):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
GAAP net earnings (loss) $ (535) $ 1,206  $ 164  $ 1,252 
Amortization of acquired intangible assets 188  197  383  363 
Acquisition related expenses 40  71  87  384 
Other adjustments (1)
1,314  (11) 1,416  12 
Income tax effects of adjustments (2)
(270) (53) (353) (125)
Adjusted net earnings $ 737  $ 1,410  $ 1,697  $ 1,886 
GAAP diluted earnings (loss) per share (EPS) $ (0.92) $ 2.05  $ 0.28  $ 2.20 
Amortization of acquired intangible assets (3)
0.25  0.25  0.50  0.48 
Acquisition related expenses (4)
0.05  0.10  0.11  0.58 
Other adjustments (1)
1.87  —  1.99  0.05 
Adjusted Diluted EPS (5)
$ 1.25  $ 2.40  $ 2.88  $ 3.31 
(1) Other adjustments include the following items:
2021 - (a) legal settlement expense of $1.25 billion, or $1.78 per diluted share, net of an income tax benefit of $0.34, for the three and six months ended June 30, 2021;
(b) debt extinguishment costs of $46 million, or $0.06 per diluted share, net of an income tax benefit of $0.02, for the six months ended June 30, 2021;
(c) severance costs due to a restructuring of $2 million, or $0.00 per diluted share, net of an income tax benefit of $0.00, and $58 million, or $0.07 per diluted share, net of an income tax benefit of $0.03, for the three and six months ended June 30, 2021, respectively;
(d) a reduction to the previously reported gain due to the finalization of the working capital adjustment related to the divestiture of certain products of our Illinois health plan of $62 million, or $0.08 per diluted share, net of an income tax benefit of $0.02, for the three and six months ended June 30, 2021; and
(e) the $0.01 impact of including an additional 8 million shares in the calculation of adjusted diluted EPS which were excluded from the calculation of the GAAP net loss per share due to their anti-dilutive effect for the three months ended June 30, 2021.
2020 - (a) debt extinguishment costs of $44 million, or $0.06 per diluted share, net of an income tax benefit of $0.02, for the six months ended June 30 2020;
(b) gain related to the divestiture of certain products of our Illinois health plan of $11 million, or $0.00 per diluted share, net of an income tax expense of $0.02, and $104 million, or $0.11 per diluted share, net of an income tax expense of $0.08, for the three and six months ended June 30, 2020, respectively; and
v

(c) non-cash impairment of $72 million, or $0.10 per diluted share, net of an income tax benefit of $0.03, for the six months ended June 30, 2020.
(2)     The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment.
(3)    The amortization of acquired intangible assets per diluted share presented above is net of an income tax benefit of $0.08 and $0.09 for the three months ended June 30, 2021 and 2020, respectively, and $0.15 and $0.16 for the six months ended June 30, 2021 and 2020, respectively.
(4)    Acquisition related expenses per diluted share presented above are net of an income tax benefit of $0.02 and $0.02 for the three months ended June 30, 2021 and 2020, respectively, and $0.04 and $0.09 for the six months ended June 30, 2021 and 2020, respectively.

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
GAAP selling, general and administrative expenses $ 2,273  $ 2,255  $ 4,640  $ 4,639 
Acquisition related expenses 39  70  85  365 
Restructuring costs —  58  — 
Adjusted selling, general and administrative expenses $ 2,232  $ 2,185  $ 4,497  $ 4,274 
vi

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares in thousands and per share data in dollars)
  June 30, 2021 December 31, 2020
(Unaudited)
ASSETS    
Current assets:
   
Cash and cash equivalents
$ 11,018  $ 10,800 
Premium and trade receivables
11,202  9,696 
Short-term investments
1,566  1,580 
Other current assets
1,678  1,317 
Total current assets 25,464  23,393 
Long-term investments
13,472  12,853 
Restricted deposits
1,112  1,060 
Property, software and equipment, net
2,912  2,774 
Goodwill
18,805  18,652 
Intangible assets, net
8,069  8,388 
Other long-term assets
1,705  1,599 
Total assets $ 71,539  $ 68,719 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
   
Medical claims liability
$ 12,763  $ 12,438 
Accounts payable and accrued expenses
8,053  7,069 
Return of premium payable
2,127  1,458 
Unearned revenue
446  523 
Current portion of long-term debt
253  97 
Total current liabilities 23,642  21,585 
Long-term debt
16,536  16,682 
Deferred tax liability 1,438  1,534 
Other long-term liabilities
3,795  2,956 
Total liabilities 45,411  42,757 
Commitments and contingencies
Redeemable noncontrolling interests
83  77 
Stockholders’ equity:
   
Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at June 30, 2021 and December 31, 2020
—  — 
Common stock, $0.001 par value; authorized 800,000 shares; 599,988 issued and 583,002 outstanding at June 30, 2021, and 598,249 issued and 581,479 outstanding at December 31, 2020
Additional paid-in capital
19,545  19,459 
Accumulated other comprehensive earnings
239  337 
Retained earnings
6,956  6,792 
Treasury stock, at cost (16,986 and 16,770 shares, respectively)
(830) (816)
Total Centene stockholders’ equity 25,911  25,773 
Nonredeemable noncontrolling interest 134  112 
Total stockholders’ equity
26,045  25,885 
Total liabilities, redeemable noncontrolling interests and stockholders’ equity
$ 71,539  $ 68,719 
The accompanying notes to the consolidated financial statements are an integral part of these statements. 
1

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except shares in thousands and per share data in dollars)
(Unaudited)
  Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Revenues:
Premium $ 27,627  $ 24,745  $ 54,560  $ 47,959 
Service 1,235  979  2,416  1,937 
Premium and service revenues
28,862  25,724  56,976  49,896 
Premium tax and health insurer fee
2,163  1,988  4,032  3,841 
Total revenues
31,025  27,712  61,008  53,737 
Expenses:    
Medical costs
24,389  20,307  47,780  40,727 
Cost of services
1,107  833  2,155  1,658 
Selling, general and administrative expenses
2,273  2,255  4,640  4,639 
Amortization of acquired intangible assets
188  197  383  363 
Premium tax expense
2,236  1,723  4,164  3,348 
Health insurer fee expense
—  379  —  724 
Impairment
—  —  —  72 
Legal settlement 1,250  —  1,250  — 
Total operating expenses
31,443  25,694  60,372  51,531 
Earnings (loss) from operations (418) 2,018  636  2,206 
Other income (expense):    
Investment and other income
39  113  142  280 
Debt extinguishment costs
—  —  (46) (44)
Interest expense
(163) (187) (333) (367)
Earnings (loss) before income tax expense (542) 1,944  399  2,075 
Income tax (benefit) expense (7) 742  237  827 
Net earnings (loss) (535) 1,202  162  1,248 
Loss attributable to noncontrolling interests — 
Net earnings (loss) attributable to Centene Corporation $ (535) $ 1,206  $ 164  $ 1,252 

Net earnings (loss) per common share attributable to Centene Corporation:
Basic earnings (loss) per common share $ (0.92) $ 2.08  $ 0.28  $ 2.23 
Diluted earnings (loss) per common share $ (0.92) $ 2.05  $ 0.28  $ 2.20 

Weighted average number of common shares outstanding:
Basic
582,804  579,189  582,331  561,623 
Diluted
582,804  587,498  589,799  569,559 

The accompanying notes to the consolidated financial statements are an integral part of these statements.
2

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(In millions)
(Unaudited)
  Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Net earnings (loss) $ (535) $ 1,202  $ 162  $ 1,248 
Reclassification adjustment, net of tax (15) (17)
Change in unrealized gain (loss) on investments, net of tax 76  248  (78) 114 
Defined benefit pension plan net gain, net of tax —  —  — 
Foreign currency translation adjustments (3) (6)
Other comprehensive earnings (loss) 63  250  (98) 111 
Comprehensive earnings (loss) (472) 1,452  64  1,359 
Comprehensive loss attributable to noncontrolling interests — 
Comprehensive earnings (loss) attributable to Centene Corporation $ (472) $ 1,456  $ 66  $ 1,363 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

3

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except shares in thousands and per share data in dollars)
(Unaudited)
Three and Six Months Ended June 30, 2021
  Centene Stockholders’ Equity    
  Common Stock       Treasury Stock    
 
$0.001 Par
Value
Shares
Amt Additional
Paid-in
Capital
Accumulated
Other
Comprehensive Earnings
(Loss)
Retained
Earnings
$0.001 Par
Value
Shares
Amt Non-redeemable
Non-
controlling
Interest
Total
Balance, December 31, 2020 598,249  $ $ 19,459  $ 337  $ 6,792  16,770  $ (816) $ 112  $ 25,885 
Comprehensive Earnings:                  
Net earnings (loss) —  —  —  —  699  —  —  (5) 694 
Other comprehensive loss, net of $(49) tax
—  —  —  (161) —  —  —  —  (161)
Common stock issued for employee benefit plans 1,675  —  —  —  —  —  — 
Common stock repurchases (316) —  (19) —  —  156  (10) —  (29)
Stock compensation expense —  —  51  —  —  —  —  —  51 
Contribution from noncontrolling interest —  —  —  —  —  —  — 
Balance, March 31, 2021 599,608  $ $ 19,500  $ 176  $ 7,491  16,926  $ (826) $ 116  $ 26,458 
Comprehensive Earnings:                  
Net earnings (loss) —  —  —  —  (535) —  —  (3) (538)
Other comprehensive earnings, net of $19 tax
—  —  —  63  —  —  —  —  63 
Common stock issued for employee benefit plans 390  —  —  —  —  —  — 
Common stock repurchases (10) —  —  —  —  60  (4) —  (4)
Stock compensation expense —  —  36  —  —  —  —  —  36 
Contribution from noncontrolling interest —  —  —  —  —  —  —  21  21 
Balance, June 30, 2021 599,988  $ $ 19,545  $ 239  $ 6,956  16,986  $ (830) $ 134  $ 26,045 

4

Three and Six Months Ended June 30, 2020
  Centene Stockholders’ Equity    
  Common Stock       Treasury Stock    
 
$0.001 Par
Value
Shares
Amt Additional
Paid-in
Capital
Accumulated
Other
Comprehensive Earnings
(Loss)
Retained
Earnings
$0.001 Par
Value
Shares
Amt Non-redeemable
 Non-
controlling
Interest
Total
Balance, December 31, 2019 421,508  $ —  $ 7,647  $ 134  $ 4,984  6,460  $ (214) $ 108  $ 12,659 
Comprehensive Earnings:                  
Net earnings (loss) —  —  —  —  46  —  —  (3) 43 
Other comprehensive loss, net of $(40) tax
—  —  —  (139) —  —  —  —  (139)
Common stock issued for acquisitions
171,225  —  11,526  —  —  —  —  —  11,526 
Common stock issued for employee benefit plans
2,448  —  —  —  —  —  — 
Common stock repurchases (291) —  (17) —  —  9,308  (541) —  (558)
Stock compensation expense
—  —  117  —  —  —  —  —  117 
Contribution from noncontrolling interest
—  —  —  —  —  —  — 
Other
—  —  —  —  —  —  — 
Balance, March 31, 2020 594,890  $ —  $ 19,279  $ (5) $ 5,030  15,768  $ (755) $ 107  $ 23,656 
Comprehensive Earnings:                  
Net earnings (loss) —  —  —  —  1,206  —  —  (6) 1,200 
Other comprehensive earnings, net of $76 tax
—  —  —  250  —  —  —  —  250 
Common stock issued for employee benefit plans
269  —  —  —  —  —  — 
Common stock repurchases
—  —  —  —  47  (3) —  (3)
Stock compensation expense
—  —  47  —  —  —  —  —  47 
Contribution from noncontrolling interest
—  —  —  —  —  —  —  15  15 
Balance, June 30, 2020 595,160  $ —  $ 19,333  $ 245  $ 6,236  15,815  $ (758) $ 116  $ 25,172 

The accompanying notes to the consolidated financial statements are an integral part of these statements.
5

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions, unaudited)
  Six Months Ended June 30,
  2021 2020
Cash flows from operating activities:
   
Net earnings
$ 162  $ 1,248 
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization 717  618 
Stock compensation expense 87  164 
Impairment —  72 
Loss on debt extinguishment 46  44 
Deferred income taxes (76) 17 
Gain on divestiture 62  (104)
Other adjustments, net 14 
Changes in assets and liabilities    
Premium and trade receivables (1,514) (1,159)
Other assets (458) 202 
Medical claims liabilities 325  146 
Unearned revenue (83) (127)
Accounts payable and accrued expenses 1,285  1,309 
Other long-term liabilities 1,161  1,028 
Other operating activities, net —  14 
Net cash provided by operating activities 1,728  3,474 
Cash flows from investing activities:
   
Capital expenditures (437) (412)
Purchases of investments (3,590) (1,849)
Sales and maturities of investments 2,809  1,768 
Acquisitions, net of cash acquired (140) (3,000)
Divestiture proceeds, net of divested cash (62) 466 
Other investing activities, net —  (5)
Net cash used in investing activities (1,420) (3,032)
Cash flows from financing activities:
   
Proceeds from long-term debt 2,398  2,630 
Payments of long-term debt (2,353) (1,598)
Common stock repurchases (33) (561)
Payments for debt extinguishment (54) (21)
Debt issuance costs (28) (93)
Other financing activities, net 24  22 
Net cash provided by (used in) financing activities (46) 379 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash (24)
Net increase in cash, cash equivalents and restricted cash and cash equivalents 238  824 
Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period
10,957  12,131 
Cash, cash equivalents, and restricted cash and cash equivalents, end of period
$ 11,195  $ 12,955 
Supplemental disclosures of cash flow information:
   
Interest paid $ 355  $ 360 
Income taxes paid
$ 406  $ 75 
Equity issued in connection with acquisitions $ —  $ 11,526 
The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the Consolidated Balance Sheets to the totals above:
June 30,
2021 2020
Cash and cash equivalents $ 11,018  $ 12,798 
Restricted cash and cash equivalents, included in restricted deposits 177  157 
Total cash, cash equivalents, and restricted cash and cash equivalents $ 11,195  $ 12,955 
The accompanying notes to the consolidated financial statements are an integral part of these statements.
6

CENTENE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Operations

Basis of Presentation

The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements included in the Form 10-K for the fiscal year ended December 31, 2020. The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, footnote disclosures that would substantially duplicate the disclosures contained in the December 31, 2020 audited financial statements have been omitted from these interim financial statements, where appropriate. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of the interim periods presented.

Certain 2020 amounts in the consolidated financial statements and notes to the consolidated financial statements have been reclassified to conform to the 2021 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.

Recently Adopted Accounting Guidance

In December 2019, the Financial Accounting Standards Board issued an Accounting Standards Update which simplifies the accounting for income taxes. The guidance is effective for annual and interim periods beginning after December 15, 2020. The Company adopted the new guidance in the first quarter of 2021. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.

7

2. 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):
  June 30, 2021 December 31, 2020
  Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized Losses
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized Losses
Fair
Value
Debt securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$ 604  $ $ (1) $ 605  $ 907  $ $ —  $ 911 
Corporate securities 7,242  203  (28) 7,417  6,560  262  (8) 6,814 
Restricted certificates of deposit
—  —  105  —  —  105 
Restricted cash equivalents
177  —  —  177  157  —  —  157 
Short-term time deposits
82  —  —  82  53  —  —  53 
Municipal securities 3,348  112  (5) 3,455  2,970  129  (2) 3,097 
Asset-backed securities 1,175  10  (1) 1,184  1,154  13  (3) 1,164 
Residential mortgage-backed securities
985  16  (5) 996  1,068  27  —  1,095 
Commercial mortgage-backed securities
809  22  (5) 826  748  30  (5) 773 
Equity securities (1)
317  —  —  317  318  —  —  318 
Private equity investments
906  —  —  906  838  —  —  838 
Life insurance contracts
181  —  —  181  168  —  —  168 
Total $ 15,830  $ 365  $ (45) $ 16,150  $ 15,046  $ 465  $ (18) $ 15,493 
(1) Investments in equity securities primarily consists of exchange traded funds in fixed income securities.
The Company’s investments are debt securities classified as available-for-sale with the exception of equity securities, certain private equity investments and life insurance contracts. 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 June 30, 2021, 97% of the Company’s investments in rated securities carry an investment grade rating by nationally recognized statistical rating organizations. At June 30, 2021, the Company held certificates of deposit, equity securities, private equity investments and life insurance contracts, which did not carry a credit rating. Accrued interest income on available-for-sale debt securities was $92 million and $86 million at June 30, 2021 and December 31, 2020, respectively, and is included in other current assets on the Consolidated Balance Sheets.

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 June 30, 2021.

8

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):
  June 30, 2021 December 31, 2020
  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
$ (1) $ 398  $ —  $ —  $ —  $ 205  $ —  $ — 
Corporate securities (26) 2,245  (2) 77  (7) 953  (1) 24 
Municipal securities (4) 576  (1) 26  (2) 238  —  — 
Asset-backed securities (1) 272  —  40  (2) 302  (1) 105 
Residential mortgage-backed securities
(5) 446  —  —  59  — 
Commercial mortgage-backed securities
(3) 228  (2) 40  (5) 147  —  13 
Total $ (40) $ 4,165  $ (5) $ 185  $ (16) $ 1,904  $ (2) $ 144 

As of June 30, 2021, the gross unrealized losses were generated from 1,512 positions out of a total of 6,515 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 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, the Company did not record the unrealized loss in earnings for these securities.

In addition, the Company continuously monitors available-for-sale debt securities for credit losses. 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 allowance when evidence demonstrates that it is credit related. Evidence of a credit related loss may include rating agency actions, adverse conditions specifically related to the security, or failure of the issuer of the security to make scheduled payments.

The contractual maturities of short-term and long-term debt securities and restricted deposits are as follows ($ in millions):
  June 30, 2021 December 31, 2020
  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 $ 1,388  $ 1,396  $ 364  $ 365  $ 1,407  $ 1,414  $ 817  $ 818 
One year through five years 5,243  5,398  478  478  4,748  4,937  221  223 
Five years through ten years 3,648  3,760  259  261  3,460  3,639  18  19 
Greater than ten years 69  74  81  87  —  — 
Asset-backed securities 2,969  3,006  —  —  2,970  3,032  —  — 
Total $ 13,317  $ 13,634  $ 1,109  $ 1,112  $ 12,666  $ 13,109  $ 1,056  $ 1,060 
 
Actual maturities may differ from contractual maturities due to call or prepayment options. Equity securities, private equity investments and life insurance contracts are excluded from the table above because they do not have a contractual maturity. 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.
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3. 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 June 30, 2021, 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 $ 11,018  $ —  $ —  $ 11,018 
Investments:        
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$ 136  $ —  $ —  $ 136 
Corporate securities —  7,387  —  7,387 
Municipal securities —  3,023  —  3,023 
Short-term time deposits —  82  —  82 
Asset-backed securities —  1,184  —  1,184 
Residential mortgage-backed securities —  996  —  996 
Commercial mortgage-backed securities —  826  —  826 
Equity securities 315  —  317 
Total investments $ 451  $ 13,500  $ —  $ 13,951 
Restricted deposits:        
Cash and cash equivalents $ 177  $ —  $ —  $ 177 
Certificates of deposit —  — 
Corporate securities —  30  —  30 
Municipal securities
—  432  —  432 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
469  —  —  469 
Total restricted deposits $ 646  $ 466  $ —  $ 1,112 
Total assets at fair value $ 12,115  $ 13,966  $ —  $ 26,081 
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The following table summarizes fair value measurements by level at December 31, 2020, 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 $ 10,800  $ —  $ —  $ 10,800 
Investments:        
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$ 165  $ —  $ —  $ 165 
Corporate securities —  6,789  —  6,789 
Municipal securities —  3,070  —  3,070 
Short-term time deposits —  53  —  53 
Asset backed securities —  1,164  —  1,164 
Residential mortgage backed securities —  1,095  —  1,095 
Commercial mortgage backed securities —  773  —  773 
Equity securities 316  —  318 
Total investments $ 481  $ 12,946  $ —  $ 13,427 
Restricted deposits:        
Cash and cash equivalents $ 157  $ —  $ —  $ 157 
Certificates of deposit —  105  —  105 
Corporate securities —  25  —  25 
Municipal securities
—  27  —  27 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
746  —  —  746 
Total restricted deposits $ 903  $ 157  $ —  $ 1,060 
Total assets at fair value $ 12,184  $ 13,103  $ —  $ 25,287 
 
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 private equity investments and life insurance contracts, which approximates fair value, was $1,087 million and $1,006 million as of June 30, 2021 and December 31, 2020, respectively.

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4. Medical Claims Liability

The following table summarizes the change in medical claims liability ($ in millions):
Six Months Ended June 30,
2021 2020
Balance, January 1 $ 12,438  $ 7,473 
Less: Reinsurance recoverable 23  20 
Balance, January 1, net 12,415  7,453 
Acquisitions and divestitures —  3,746 
Incurred related to:
          Current year 49,147  41,149 
          Prior years (1,367) (422)
         Total incurred 47,780  40,727 
Paid related to:
          Current year 38,618  34,783 
          Prior years 8,837  5,742 
         Total paid 47,455  40,525 
Balance at June 30, net
12,740  11,401 
Plus: Reinsurance recoverable 23  17 
Balance, June 30
$ 12,763  $ 11,418 

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 health benefits ratio (HBR) and other return of premium programs, the Company recorded $350 million and $46 million as a reduction to premium revenue in the six months ended June 30, 2021 and 2020, respectively.

Incurred but not reported (IBNR) plus expected development on reported claims as of June 30, 2021 was $8,636 million. 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.

5. Affordable Care Act
The Affordable Care Act established risk spreading premium stabilization programs as well as a minimum annual medical loss ratio (MLR) and cost sharing reductions.
In June 2021, the Centers for Medicare and Medicaid Services (CMS) announced the final risk adjustment transfers for the 2020 benefit year. As a result of the announcement, the Company increased its risk adjustment net payables by $83 million from December 31, 2020. After consideration of minimum MLR and other related impacts, the net pre-tax expense recognized was approximately $80 million for the six months ended June 30, 2021.
The Company's net receivables (payables) for each of the programs are as follows ($ in millions):
June 30, 2021 December 31, 2020
Risk adjustment receivable $ 457  $ 340 
Risk adjustment payable (1,529) (1,224)
Minimum medical loss ratio (189) (238)
Cost sharing reduction receivable 108  101 
Cost sharing reduction payable (1) (1)
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6. Debt
 
Debt consists of the following ($ in millions):
  June 30, 2021 December 31, 2020
$2,200 million 4.75% Senior Notes due January 15, 2025
$ —  $ 2,230 
$1,800 million 5.375% Senior Notes due June 1, 2026
1,800  1,800 
$750 million 5.375% Senior Notes due August 15, 2026
790  794 
$2,500 million 4.25% Senior Notes due December 15, 2027
2,483  2,482 
$3,500 million 4.625% Senior Notes due December 15, 2029
3,500  3,500 
$2,000 million 3.375% Senior Notes due February 15, 2030
2,000  2,000 
$2,200 million 3.00% Senior Notes due October 15, 2030
2,200  2,200 
$2,200 million 2.50% Senior Notes due March 1, 2031
2,200  — 
Total senior notes 14,973  15,006 
Term loan facility 1,450  1,450 
Revolving credit agreement 154  97 
Mortgage notes payable —  50 
Construction loan payable 187  180 
Finance leases and other 180  153 
Debt issuance costs (155) (157)
Total debt 16,789  16,779 
Less current portion (253) (97)
 Long-term debt $ 16,536  $ 16,682 

Senior Notes

In July 2021, the Company issued $1,800 million 2.45% Senior Notes due 2028 (the 2028 Notes). The Company intends to use the net proceeds from the offering of the 2028 Notes to finance a portion of the cash consideration payable in connection with its previously announced acquisition of Magellan Health Inc. and to pay related fees and expenses. If the Magellan Acquisition is not completed, the Company expects to use the net proceeds of the offering for debt repayment and general corporate purposes.

In February 2021, the Company issued $2,200 million 2.50% Senior Notes due 2031 (the 2031 Notes). In conjunction with the 2031 Notes offering, the Company completed a tender offer (the Tender Offer) to purchase for cash, subject to certain conditions, any and all of the outstanding aggregate principal amount of the $2,200 million 4.75% Senior Notes due 2025 (the 2025 Notes). The Company used the net proceeds from the 2031 Notes, together with available cash on hand, to fund the purchase price for the 2025 Notes accepted for purchase in the Tender Offer (approximately 36% of the aggregate principal amount outstanding) and used the remaining proceeds to redeem any of the 2025 Notes that remained outstanding following the Tender Offer, including all premiums, accrued interest and costs and expenses related to the redemption. The Company recognized a pre-tax loss on extinguishment of $46 million on the redemption of the 2025 Notes, including the call premium and write-off of unamortized debt issuance costs.

Construction Loan

In October 2017, the Company executed a $200 million non-recourse construction loan to fund the expansion of the Company's corporate headquarters. Until final completion of the construction project, which occurred in July 2021, the loan bore interest based on one month LIBOR plus 2.70%, which reduced to LIBOR plus 2.00% at the time construction was completed. The agreement contains financial and non-financial covenants similar to those contained in the Company Credit Facility. The Company guaranteed completion of the construction project associated with the loan. In April 2021, the Company finalized the one year extension of the construction loan maturing in April 2022. As of June 30, 2021, the Company had $187 million in borrowings outstanding under the loan, which is included in the current portion of long-term debt.

Mortgage Notes Payable

The Company paid its non-recourse mortgage note of $50 million in January 2021. The mortgage note was collateralized by its corporate headquarters building and bore a 5.14% interest rate.
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7. Leases

The Company records right of use (ROU) assets and lease 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. The Company recognized operating lease expense of $68 million and $72 million for the three months ended June 30, 2021 and 2020, respectively, and $134 million and $134 million for the six months ended June 30, 2021 and 2020, respectively.

The following table sets forth the ROU assets and lease liabilities ($ in millions):
  June 30, 2021 December 31, 2020
Assets
ROU assets (recorded within other long-term assets) $ 1,297  $ 1,311 
Liabilities
Short-term (recorded within accounts payable and accrued expenses) $ 200  $ 204 
Long-term (recorded within other long-term liabilities) 1,324  1,334 
Total lease liabilities $ 1,524  $ 1,538 

During the three and six months ended June 30, 2021, the Company reduced its lease liabilities by $71 million and $138 million, respectively, for cash paid. In addition, during the three and six months ended June 30, 2021, new operating leases commenced resulting in the recognition of ROU assets and lease liabilities of $12 million and $108 million, respectively. As of June 30, 2021, the Company had additional operating leases that have not yet commenced of $57 million. These operating leases will commence in 2021 and 2022 with lease terms ranging from five to nine years.

As of June 30, 2021, the weighted average remaining lease term of the Company’s operating leases was 9.4 years. The lease liabilities as of June 30, 2021 reflect a weighted average discount rate of 3.3%. Lease payments over the next five years and thereafter are as follows ($ in millions):
  June 30, 2021
2021 $ 118 
2022 245 
2023 219 
2024 199 
2025 162 
2026 137 
Thereafter 696 
Total lease payments 1,776 
Less: imputed interest (252)
Total lease liabilities $ 1,524 
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8. Earnings Per Share

The following table sets forth the calculation of basic and diluted net earnings per common share ($ in millions, except per share data in dollars and shares in thousands):
Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Earnings (loss) attributable to Centene Corporation $ (535) $ 1,206  $ 164  $ 1,252 
Shares used in computing per share amounts:  
Weighted average number of common shares outstanding 582,804  579,189  582,331  561,623 
Common stock equivalents (as determined by applying the treasury stock method) —  8,309  7,468  7,936 
Weighted average number of common shares and potential dilutive common shares outstanding 582,804  587,498  589,799  569,559 
   
Net earnings (loss) per common share attributable to Centene Corporation:
Basic earnings (loss) per common share $ (0.92) $ 2.08  $ 0.28  $ 2.23 
Diluted earnings (loss) per common share $ (0.92) $ 2.05  $ 0.28  $ 2.20 

The calculation of diluted loss per common share for the three months ended June 30, 2021 excludes 8 million shares related to stock options, restricted stock and restricted stock units as their effect would have been anti-dilutive due to the net loss for the quarter. The three months ended June 30, 2020 excludes the impact of 32 thousand shares related to anti-dilutive stock options, restricted stock and restricted stock units.

The calculation of diluted earnings per common share for the six months ended June 30, 2021 and 2020 excludes the impact of 32 thousand and 72 thousand shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

9. 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 for the three and six months ended June 30, 2020 has been conformed to the 2021 presentation of segment eliminations.

Segment information for the three months ended June 30, 2021, is as follows ($ in millions):
  Managed Care Specialty
Services
Eliminations Consolidated
Total
Total revenues from external customers $ 29,588  $ 1,437  $ —  $ 31,025 
Total revenues from internal customers 3,122  (3,124) — 
Total revenues $ 29,590  $ 4,559  $ (3,124) $ 31,025 
Earnings from operations $ (415) $ (3) $ —  $ (418)

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Segment information for the three months ended June 30, 2020, is as follows ($ in millions):
  Managed Care Specialty
Services
Eliminations Consolidated
Total
Total revenues from external customers $ 26,623  $ 1,089  $ —  $ 27,712 
Total revenues from internal customers 2,714  (2,715) — 
Total revenues $ 26,624  $ 3,803  $ (2,715) $ 27,712 
Earnings from operations $ 1,909  $ 109  $ —  $ 2,018 

Segment information for the six months ended June 30, 2021, is as follows ($ in millions):
  Managed Care Specialty
Services
Eliminations Consolidated
Total
Total revenues from external customers $ 58,190  $ 2,818  $ —  $ 61,008 
Total revenues from internal customers 6,008  (6,011) — 
Total revenues $ 58,193  $ 8,826  $ (6,011) $ 61,008 
Earnings from operations $ 541  $ 95  $ —  $ 636 

Segment information for the six months ended June 30, 2020, is as follows ($ in millions):
  Managed Care Specialty
Services
Eliminations Consolidated
Total
Total revenues from external customers $ 51,559  $ 2,178  $ —  $ 53,737 
Total revenues from internal customers 5,251  (5,253) — 
Total revenues $ 51,561  $ 7,429  $ (5,253) $ 53,737 
Earnings from operations $ 2,126  $ 80  $ —  $ 2,206 

10. 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, submissions to state agencies related to payments or state false claims acts, 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 and other federal and state fraud, waste and abuse laws;

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; and

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.
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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, except for the reserve estimate as described below with respect to claims or potential claims involving services provided by Envolve Pharmacy Solutions, Inc. (Envolve), as the Company’s pharmacy benefits manager subsidiary. 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. Upon the return of the matter to the Los Angeles County Superior Court, motions for summary judgment were scheduled. Health Net California’s motion for summary judgment was heard by the Court in March 2020. In March 2020, the Court granted Health Net California’s motion for summary judgment. In September 2020, the plaintiff appealed the Court’s decision. The Company intends to continue its vigorous defense 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.

Beginning in April 2021, several lawsuits have been filed against the Company and its subsidiaries, alleging that the defendants failed to prevent Health Net members' personal and health data from being exposed in connection with a data breach involving Accellion's File Transfer Appliance. The Company denies any wrongdoing and intends to vigorously defend against the claims in these lawsuits. In addition, claims related to these lawsuits are anticipated to be covered in part by the Company’s insurance carrier. As a result, while these matters are subject to many uncertainties, the Company does not believe that an adverse outcome in these matters is likely to have a materially adverse impact on the Company’s financial position, results of operations and cash flows.

Ohio, Mississippi and Other States

On March 11, 2021, the State of Ohio filed a civil action against the Company and the Company’s subsidiaries, Buckeye Health Plan Community Solutions, Inc. and Envolve, in Franklin County Court of Common Pleas, captioned as Ohio Department of
17

Medicaid, et al. v. Centene Corporation, et al. The complaint alleged breaches of contract with the Ohio Department of Medicaid relating to the provision of pharmacy benefits management (PBM) services and violations of Ohio law relating to such contracts, including among other things, by (i) seeking payment for services already reimbursed, (ii) not accurately disclosing to the Ohio Department of Medicaid the true cost of the PBM services and (iii) inflating dispensing fees for prescription drugs. The plaintiffs sought an undisclosed sum of money in damages, penalties, and possible termination of the contract with Buckeye Health Plan.

In June 2021, the Company reached no-fault agreements with the Attorney General of Ohio and with the Attorney General and State Auditor of Mississippi to resolve claims and/or allegations made by the states related to services provided by Envolve. The Company will pay $88 million to Ohio and $55 million to Mississippi. As a result of the settlement, the Ohio Attorney General’s litigation against the Company was dismissed. Additionally, the Company is in discussions with a plaintiff’s group in an effort to bring final resolution to similar concerns in other affected states. Consistent with those discussions, the Company has recorded a reserve estimate of $1,100 million related to this issue, exclusive of the above settlements. Additional claims, reviews or investigations relating to the Company’s PBM business may be brought by other states, the federal government or shareholder litigants, and there is no guarantee the Company will have the ability to settle such claims with other states within the reserve estimate the Company has recorded and on other acceptable terms, or at all. This matter is subject to many uncertainties, and an adverse outcome in this matter could have an adverse impact on the Company’s financial position, results of operations and cash flows.

11. Subsequent Events

In July 2021, Centene acquired the remaining 60% interest in its equity method investment in Circle Health, the U.K.’s largest independent operator of hospitals, for approximately $700 million with cash on hand. The Company is currently evaluating the impact of the step acquisition on the Company’s consolidated financial position, results of operations and cash flows.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including those set forth under Part II, Item 1A. “Risk Factors” of this Form 10-Q.

EXECUTIVE OVERVIEW

General

We are a leading multi-national healthcare enterprise that is committed to helping people live healthier lives. We take a local approach - with local brands and local teams - to provide fully integrated, high-quality, and cost-effective services to government-sponsored and commercial healthcare programs, focusing on under-insured and uninsured individuals.

Results of operations depend on our ability to manage expenses associated with health benefits (including estimated costs incurred) and selling, general and administrative (SG&A) costs. We measure operating performance based upon two key ratios. The health benefits ratio (HBR) represents medical costs as a percentage of premium revenues, excluding premium tax and health insurer fee revenues that are separately billed, and reflects the direct relationship between the premiums received and the medical services provided. The SG&A expense ratio represents SG&A costs as a percentage of premium and service revenues, excluding premium tax and health insurer fee revenues that are separately billed.

Prior to 2021, when the Affordable Care Act (ACA) health insurer fee (HIF) repeal was effected, our insurance subsidiaries were subject to the HIF. We recognized revenue for reimbursement of the HIF, including the “gross-up” to reflect the non-deductibility of the HIF. Collectively, this revenue was 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 were not pass-through payments and were recorded as premium revenue and premium tax expense or health insurer fee expense in the Consolidated Statements of Operations. Due to the size of the health insurer fee, one of the primary drivers of the year-over-year variances discussed throughout this section is related to the repeal of the HIF in 2021.

Magellan Acquisition

In January 2021, we announced that we entered into a definitive merger agreement to acquire Magellan Health for $95.00 per share in cash for a total enterprise value of approximately $2.2 billion. We expect the transaction to broaden and deepen our whole health capabilities and establish a leading behavioral health platform. The transaction is subject to the receipt of required state regulatory approvals and other customary closing conditions. The transaction is not contingent upon financing. We intend to fund the acquisition primarily through our recently completed debt financing and cash on hand. The transaction is expected to close in the second half of 2021.

COVID-19 Trends and Uncertainties

The COVID-19 outbreak has created unique and unprecedented challenges. In 2020, we saw significant decreases in traditional utilization as stay-at-home orders were put in place, partially offset by COVID-19 treatment costs. As stay-at-home orders were lifted and vaccinations have become available in 2021, utilization has returned in varying degrees. As a result, one of the primary drivers of the year-over-year variances discussed throughout this section is related to COVID-19. In 2021, we launched several initiatives which encourage our health plan members, as well as all Americans, to receive the COVID-19 vaccine.

The impact on our business in both the short-term and long-term is uncertain and difficult to predict. The outlook for 2021 depends on future developments, including but not limited to: the length and severity of the outbreak (including new variants, which may be more contagious, more severe or less responsive to treatment or vaccines), the effectiveness of containment actions, the timing of vaccinations and achievement of herd immunity, and the timing and rate at which members return to accessing healthcare. The pandemic and these future developments have impacted and will continue to affect our membership and medical utilization. From March 31, 2020 through June 30, 2021, our Medicaid membership has increased by 2.1 million members. In addition, the pandemic has and continues to have the potential to impact the administration of state and federal healthcare programs, premium rates and risk sharing mechanisms. We continue to have active dialogues with our state partners.

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Medical utilization continues to lack consistency and will be influenced by the intensity of additional waves of the pandemic. We will be watching external trends closely as COVID-19 costs could increase based upon macro trends. New variants and additional waves of the pandemic could create new dynamics and uncertainties around our expectations. In addition, the pandemic has had widespread economic impact, including d