Dive Brief:
- Centene is resuscitating profits faster than expected, especially in Medicare. After tamping down Medicare Advantage and prescription drug plan costs in the third quarter, the St. Louis-based insurer now expects to break even in the business this year — a target Centene previously thought it wouldn’t reach until 2027.
- Medicare’s outperformance buoyed Centene’s 2026 outlook. Centene raised its expectations for full-year earnings following the third quarter results posted Tuesday, its third guidance raise this year.
- Staffing cuts saddled the insurer with higher severance spending in the quarter, though the reductions should help grow margins further in 2027, executives said. The insurer lost almost 6,000 employees in the quarter, which a spokesperson said was the result of layoffs and a voluntary separation program started in June.
Dive Insight:
Insurers continue to dig themselves out of the hole they found themselves in starting in 2024, when higher medical spending started eating into profits, especially in government programs like Medicaid and the Affordable Care Act.
As the largest insurer in both programs, Centene has outsized exposure to the cost fluctuations. But recent Medicaid rate hikes, and Centene jacking up premiums in its ACA plans this year, has boosted the company’s bottom line — momentum that continued into the third quarter.
It was “another very good quarter on our path to margin restoration,” CFO Drew Asher said on the call.
Centene reported a medical loss ratio, an important marker of spending on patient care, of 92.7% in the quarter, flat year over year and slightly better than analysts had expected.
Medicaid spending remains elevated, driven by behavioral health, home health and high-cost drugs, according to CEO Sarah London. Centene also dealt with some one-time wrinkles, like spiking spending in a Florida contract for children with complex needs before it passed the contract over to rival Molina Healthcare at the start of October.
But medical costs were covered by better reimbursement updates from states, including rates renegotiated in July along with off-cycle and retroactive pay bumps, executives said. State actuaries are using more recent cost data to determine Medicaid reimbursement, which better represents the “core trend we’ve been battling for the last 18 months,” London said.
Moreover, some states are prospectively boosting their rates to account for Medicaid work requirements, which kick in at the start of 2027 and are expected to boot healthier Medicaid enrollees off of the program, leaving those remaining sicker and more expensive to cover.
Centene’s medical loss ratio for its ACA business was worse than analysts had expected, though Centene’s management argued the division is still on track. Medical spending on higher acuity members in silver-tier plans continues to moderate, and higher costs associated with the Trump administration’s program integrity efforts that are kicking people off of the exchanges were covered by Centene’s reserves, London said.
Centene also expects to benefit this year from the ACA’s risk adjustment mechanism, which corrects for adverse selection by requiring insurers with healthier members to pay insurers with sicker members. The insurer now expects its ACA business will come in at the higher range of its 4.5% to 5% margin target this year, London said.
Medicare was the star of the quarter, as seniors in its Medicare Advantage and prescription drug plans drove lower spending than expected, according to Asher.
Centene now expects to break even in the segment in 2026, one year ahead of expectations. Previously the insurer expected to operate at a loss.
Overall, Centene posted revenue of $50.6 billion, up 2% year over year and above analyst expectations, as higher reimbursement made up for membership losses. Centene ended the quarter with 25.7 million members, down 8%, or almost 2.3 million people, year over year.
The company shrunk its loss to $71 million, a major improvement from the $6.6 billion loss Centene posted in the third quarter last year, when it notched a huge impairment charge to reflect its waning value in the markets.
Centene now expects adjusted earnings per share of “greater than” $5.20, up from “greater than” $4.80 previously, thanks to the improving outlook for Medicare.
Despite analysts peppering London and Asher with questions about Centene’s 2027 outlook on the call, the executives said it was too early to provide specific guidance. But the insurer should benefit from a number of tailwinds next year that should help with additional margin expansion, including price hikes for its ACA plans and states continuing to hike their Medicaid rates — and lower operational costs as a result of workforce cuts.
The number of people employed by Centene dropped from 59,800 in the second quarter to 53,900 in the third.
Centene spent almost $280 million on severance in the quarter.
“The change in our employee count from Q2 to Q3 reflects normal course of business, including employees leaving for personal or career reasons, contract wind down, involuntary actions, and retirements. It also reflects the participation in our voluntary separation program, where a majority of the necessary restructuring was accomplished,” the Centene spokesperson said.
They declined to specify how many people left as a result of contract wind-downs and involuntary actions — layoffs — compared to those who voluntarily departed through the buyouts.
