Executive Summary / Key Takeaways

• Centene Corporation, a leading government-focused healthcare enterprise, is executing a strategic plan aimed at margin recovery and profitable growth across its core Medicaid, Medicare, and Commercial segments, leveraging its local operating model and data-driven approach.
• First quarter 2025 results demonstrated strong top-line momentum with total revenue growing 15% year-over-year, driven by robust performance in the Medicare Prescription Drug Plan (PDP) and Health Insurance Marketplace businesses, leading to an increase in full-year 2025 revenue guidance to a midpoint of $165 billion.
• Despite temporary pressures from Medicaid redetermination acuity shifts and Q1 influenza costs impacting the Health Benefits Ratio (HBR), the company is making progress in aligning rates with acuity, projecting a 4%+ composite rate increase for the full year in Medicaid and targeting a return to pre-pandemic margins.
• Strategic initiatives in Medicare, including pruning the Medicare Advantage (MA) footprint and improving Star ratings (55% of members in 3.5+ star plans for 2026), are positioning the segment for breakeven by 2027, while the PDP business is poised for significant growth and margin expansion driven by Inflation Reduction Act (IRA) dynamics.
• While facing industry-wide challenges like policy uncertainty (enhanced premium tax credits expiration, IRA impacts), competitive pressures, and managing utilization trends (specialty drugs, behavioral health), Centene's diversified portfolio, operational discipline, and focus on technology adoption provide a foundation for achieving its reiterated full-year 2025 adjusted EPS outlook of greater than $7.25 and unlocking significant long-term earnings power.

Centene's Strategic Foundation in Government Healthcare

Centene Corporation stands as a prominent force in the U.S. healthcare landscape, distinguished by its deep focus on government-sponsored and commercial programs serving under-insured and uninsured individuals. With a history spanning approximately four decades, the company has cultivated a local-first operating model, emphasizing integrated, high-quality, and cost-effective services tailored to the unique needs of communities across the nation. This foundational strategy has positioned Centene as a key partner for state and federal governments, providing managed care solutions across Medicaid, Medicare, and the Health Insurance Marketplace.

The healthcare industry is currently undergoing significant evolution, marked by shifts in government policy, changing member demographics, and increasing cost pressures. Key trends include the unwinding of the Medicaid continuous enrollment provision, the implementation of the Inflation Reduction Act impacting Medicare Part D, and ongoing debates surrounding the future of Marketplace subsidies. Within this dynamic environment, Centene competes with a range of players, from diversified giants like UnitedHealth Group (UNH) and CVS Health (CVS), which includes Aetna, to more specialized government program insurers like Molina Healthcare (MOH). While larger competitors like UNH and CVS/Aetna leverage extensive scale and integrated service models, Molina often competes directly in the Medicaid space with a focus on operational efficiency. Centene differentiates itself through its extensive local presence, deep understanding of complex populations, and a strategic focus on operational excellence and margin recovery.

Centene's operational backbone is increasingly supported by investments in data analytics and technology, including the deployment of artificial intelligence (AI). This technology is being leveraged to improve various aspects of the business, from enhancing the provider and member experience to automating administrative processes. For instance, AI is being applied to automate and optimize the management of provider contracts, aiming to reduce manual labor and improve efficiency. Furthermore, these technological capabilities enable the generation of considerably stronger analytics on provider performance, which is crucial for advancing initiatives like value-based care. While specific quantitative metrics on the benefits of these technologies compared to competitors are not detailed, the strategic intent is clear: to drive standardization, improve administrative efficiency, and enhance clinical outcomes, thereby supporting the company's cost leadership and operational effectiveness, particularly in managing complex government programs. This focus on leveraging technology for efficiency and insight is a critical component of Centene's strategy to maintain its competitive edge and drive margin improvement.

Performance and Progress on the Path to Recovery

Centene's first quarter 2025 results underscore the momentum building across its diversified portfolio. Total revenues grew 15% year-over-year to $46.6 billion, primarily fueled by robust premium and membership growth in the Medicare Prescription Drug Plan (PDP) and Health Insurance Marketplace businesses. Premium and service revenues saw a significant 17% increase, reaching $42.5 billion. This strong top-line performance contributed to adjusted diluted earnings per share of $2.90 in the quarter, a notable increase from $2.26 in the prior-year period.

The company's core operating metric, the Health Benefits Ratio (HBR), stood at 87.5% in Q1 2025, an increase from 87.1% in Q1 2024. This uptick was primarily driven by a higher Medicaid HBR, influenced by a more active influenza season than anticipated, which added $130 million in incremental medical expense, and the ongoing impact of acuity shifts among members remaining after the Medicaid redeterminations process. However, this was partially offset by a decrease in the Medicare segment HBR, reflecting the expected impact of IRA program changes on the quarterly progression of medical costs. The Selling, General and Administrative (SGA) expense ratio improved to 7.9% in Q1 2025 from 8.9% in the prior year, demonstrating continued expense leveraging over higher revenues and discipline, particularly benefiting from growth in the PDP business.

Medicaid, Centene's largest segment, saw revenues increase 4% year-over-year in Q1 2025 to $26.4 billion. Despite a 2% year-over-year membership decline to 12.96 million due to redeterminations, the company is making progress in aligning rates with the acuity of the remaining population. Management reported constructive dialogue with state partners, resulting in a mid-4% composite rate increase for the 1/1/25 cohort and approximately 5% for the 4/1/25 cohort. While acknowledging that rate sufficiency is still a work in progress, the company projects a full-year composite rate increase of 4%+ for 2025 and expects the Medicaid HBR to be in the mid to high 91s for the year, a step down from the temporarily elevated 92.5% in FY 2024, signaling progress toward margin recovery.

The Medicare segment experienced substantial revenue growth, increasing 48% year-over-year to $8.8 billion in Q1 2025. This surge was primarily driven by significant growth in the PDP business, where membership increased 22.2% year-over-year to 7.87 million. The IRA changes effective in 2025 have led to a meaningful shift in cost-sharing responsibilities and a significant increase in PDP premiums, contributing to this revenue growth. Medicare Advantage (MA) membership, however, declined 9.6% year-over-year to 1.04 million, consistent with the company's strategic decision to prune its footprint for 2025 to better align with its Medicaid presence and focus on profitability. Despite the MA membership decline, retention was stronger than expected, contributing $1 billion to the full-year revenue guidance increase. The segment is on track for its goal of MA breakeven by 2027, supported by operational improvements and enhanced Star ratings, with 55% of members now in plans rated 3.5 stars or higher for the 2026 payment year, up from 23% previously.

The Commercial segment, primarily driven by the Health Insurance Marketplace business (Ambetter Health), saw revenues jump 31% year-over-year to $10.1 billion in Q1 2025. Marketplace membership grew an impressive 29.4% year-over-year to 5.63 million, reflecting expanded geographic footprint, strong product positioning, and better-than-expected retention. While the Q1 Commercial HBR of 75.0% was slightly higher than the prior year (73.3%), reflecting utilization by new members, the company expects to operate well within its target margin range of 5% to 7.5% for the Marketplace business. The company anticipates a return to pre-COVID seasonality, with membership peaking in Q1 and seeing attrition throughout the year, ending 2025 in the mid-4 million range.

From a liquidity perspective, Centene generated $1.51 billion in operating cash flow in Q1 2025, a significant improvement from using $456 million in the prior-year period. This was primarily driven by net earnings and an increase in medical claims liabilities. The company ended Q1 2025 with a debt-to-capital ratio of 39.5%, down from 41.2% at year-end 2024, and a debt-to-adjusted EBITDA of 2.8 times. With $2.23 billion remaining under its stock repurchase authorization and a new credit facility providing $4 billion in revolving credit and $2 billion in term loans, Centene maintains a solid balance sheet and ample liquidity to support its operations and strategic initiatives.

Outlook and Key Considerations

Centene reiterated its full-year 2025 adjusted EPS outlook of greater than $7.25, signaling confidence in its ability to execute against its strategic priorities despite ongoing market dynamics. The company raised its full-year premium and service revenue guidance to a midpoint of $165 billion, reflecting stronger-than-anticipated membership growth, particularly in Medicare Advantage and the Marketplace. This increased revenue base is expected to build attractive long-term earnings power.

The updated outlook incorporates a recalibrated consolidated HBR, increasing by 50 basis points. This adjustment reflects the impact of incremental Q1 Marketplace growth (initially assumed at a lower margin), a full-year Medicaid HBR projection in the mid to high 91s (including the Q1 flu impact), and higher utilization of specialty drugs in non-low-income PDP members. Partially offsetting this is a lowered consolidated adjusted SGA ratio midpoint, reflecting strong Q1 performance and the favorable mix impact of growth. Investment income guidance was also slightly lowered.

Looking ahead, key areas of focus include continuing to work with state partners to achieve rate sufficiency in Medicaid to fully match acuity shifts and return to target margins. In Medicare, the company remains committed to the path to MA breakeven in 2027, driven by ongoing operational improvements and Stars performance. The PDP business is expected to see continued revenue growth in 2025, with a target pretax margin of around 1%, which the company aims to expand over time. The Marketplace business is expected to deliver strong margins within the 5-7.5% range, although the potential expiration of enhanced premium tax credits at the end of 2025 and the impact of new program integrity rules for 2026 remain uncertainties that the company is actively preparing for.

While the outlook is positive, several risks warrant close monitoring. Policy changes at both the federal and state levels, including potential changes to Medicaid funding, the future of Marketplace subsidies, and evolving Medicare regulations, could impact membership, rates, and profitability. Utilization trends, particularly the cost of specialty drugs in both Medicaid and Medicare, and behavioral health costs in Medicaid, continue to be areas requiring careful management and rate advocacy. Competition remains intense across all segments, requiring continuous focus on operational efficiency, quality, and value proposition. Legal and regulatory proceedings, inherent in the government programs space, also pose potential risks.

Conclusion

Centene Corporation is navigating a complex but opportunity-rich healthcare landscape from a position of strategic focus and operational momentum. The company's deep expertise in government-sponsored programs, coupled with its local operating model and increasing leverage of data and technology, provides a solid foundation. While the unwinding of Medicaid redeterminations and evolving program dynamics present temporary challenges, Centene is demonstrating progress in aligning rates with acuity and driving margin recovery.

Strong top-line growth in Q1 2025, particularly in the PDP and Marketplace segments, underscores the company's ability to capture opportunities in attractive markets and has led to increased revenue expectations for the year. Strategic initiatives in Medicare are positioning the segment for improved profitability, while the Marketplace business continues to deliver strong results. Although policy uncertainty and utilization trends remain key risks, Centene's diversified portfolio, disciplined cost management, and commitment to operational excellence support its reiterated full-year adjusted EPS outlook and its long-term growth trajectory. For investors, Centene represents an opportunity to participate in the growth and evolution of the government healthcare market, underpinned by a company actively working to enhance its operational performance and unlock embedded earnings power.