Executive Summary / Key Takeaways

• Centene Corporation is executing a strategic recalibration across its Medicaid, Medicare, and Commercial segments, aiming to restore profitability and drive sustainable earnings growth following a challenging 2025 marked by significant Marketplace morbidity shifts and elevated Medicaid medical costs.
• The company reported a Q3 2025 adjusted diluted EPS of $0.50, exceeding prior expectations, and raised its full-year 2025 adjusted EPS forecast to "at least $2," demonstrating early progress in its turnaround initiatives.
• Aggressive repricing in the Marketplace for 2026, coupled with targeted rate advocacy and operational interventions in Medicaid, are foundational to Centene's strategy for meaningful margin improvement in the coming year.
• Centene leverages its extensive data and AI capabilities for operational efficiencies, fraud detection, and enhanced care management, which are crucial differentiators in its government-focused markets.
• Despite regulatory uncertainties from the One Big Beautiful Bill Act (OBBBA) and the potential expiration of enhanced Advance Premium Tax Credits (APTCs), Centene's strong liquidity, capital allocation strategy, and deep expertise in underserved populations position it for long-term value creation.

Centene's Foundation: A Local Approach in a Dynamic Healthcare Landscape

Centene Corporation, founded in 1984, has established itself as a leading healthcare enterprise dedicated to serving under-insured and uninsured families and commercial organizations across the United States. Its business model is built on a local approach, utilizing local brands and teams to deliver fully integrated, high-quality, and cost-effective services primarily within government-sponsored programs: Medicaid, Medicare, and the Health Insurance Marketplace (Commercial segment). An "Other" segment encompasses pharmacy operations, vision and dental, behavioral health, and corporate management. This localized strategy, coupled with a deep understanding of complex populations, forms the bedrock of Centene's competitive identity.

The healthcare industry is currently undergoing significant transformation, characterized by an accelerated increase in medical cost trends, evolving legislative frameworks, and a growing emphasis on data-driven care. Centene operates within this dynamic environment, facing pressures from rising medical demand, expanded access to care, and the rapid introduction of high-cost pharmaceuticals. The company's strategic responses are deeply intertwined with these broad industry trends, particularly the impacts of the One Big Beautiful Bill Act (OBBBA) and the Inflation Reduction Act (IRA), which are reshaping the regulatory and financial landscape for government-sponsored health programs.

In a competitive landscape dominated by large managed care organizations, Centene carves out its niche through specialized focus and scale in government programs. While larger, more diversified rivals like UnitedHealth Group (UNH) and Elevance Health (ELV) boast broader market reach and often superior financial metrics, Centene's strength lies in its deep penetration and tailored services for vulnerable populations. For instance, Centene's extensive provider network in underserved communities and its regulatory expertise in navigating complex state and federal programs provide tangible benefits, fostering stronger customer loyalty and enabling efficient adaptation to policy changes. This specialized focus allows Centene to counter the broader scale of competitors by delivering more targeted and integrated care.

Centene's technological differentiation is a critical enabler of its strategy and competitive standing. The company is committed to modernizing its platform, automating administrative processes through artificial intelligence (AI), and leveraging its unparalleled data to generate insights. This focus on technology translates into tangible benefits: improved quality of healthcare for members, enhanced operational efficiencies, and a stronger ability to combat fraud, waste, and abuse. For example, Centene's deployment of AI in payment integrity helps keep pace with aggressive billing and coding practices in the provider ecosystem. Furthermore, its advanced data analytics capabilities enable more precise actuarial modeling for rate advocacy and the design of effective risk adjustment programs with state partners. While specific quantifiable performance metrics for its AI tools are not always publicly detailed, the strategic intent is clear: to drive better health outcomes and serve as a responsible steward of taxpayer dollars, thereby strengthening its competitive moat against rivals who may lag in specialized government program expertise.

A History of Adaptation and Strategic Recalibration

Centene's journey since 1984 has been marked by continuous adaptation and strategic evolution. The company has consistently expanded its footprint in government-sponsored programs, building a robust presence across numerous states. Recent history, particularly 2024, saw Centene making significant strategic adjustments. The company pruned its Medicare Advantage (MA) footprint for 2025 to better align with its Medicaid presence, aiming to leverage synergies and enhance operational efficiency. Concurrently, its Medicare Part D (PDP) business demonstrated strong growth, positioning it as a larger revenue contributor in 2025. The Marketplace segment also delivered an outstanding performance in 2024, carrying positive momentum into the subsequent year.

However, 2025 presented unforeseen challenges that necessitated a rapid recalibration of Centene's strategy. The first half of the year saw an unexpected $2.4 billion earnings pressure in the Marketplace segment due to significant morbidity shifts and increased utilization. Simultaneously, the Medicaid segment faced an "unanticipated and unacceptable" health benefits ratio (HBR) of 94.9% in Q2 2025, driven by accelerated trends in behavioral health, home health, and high-cost drugs. These events underscored the need for aggressive, data-driven interventions to restore profitability and reinforce the company's long-term investment thesis.

Financial Performance: A Quarter of Resilience Amidst Headwinds

Centene's third-quarter 2025 financial results reflect a period of intense recalibration and demonstrated resilience. The company reported a GAAP diluted loss per share of $13.50, primarily driven by a substantial $6.7 billion non-cash goodwill impairment charge. This impairment was a direct consequence of market conditions in July 2025, including the passage of the One Big Beautiful Bill Act (OBBBA) and a decline in Centene's stock price. Importantly, this non-cash charge has no impact on statutory capital, cash, or adjusted EPS results.

On an adjusted basis, Centene delivered diluted earnings per share (EPS) of $0.50 for Q3 2025, surpassing previous expectations. Total revenues for the quarter reached $49.70 billion, marking an 18% increase year-over-year. This growth was fueled by premium and membership expansion in the PDP business, overall market growth in the Marketplace, and Medicaid rate increases, partially offset by lower Medicaid membership. For the nine months ended September 30, 2025, total revenues grew by 19% over the comparable 2024 period, reaching $145.05 billion.

The Health Benefits Ratio (HBR) for Q3 2025 stood at 92.70%, an increase from 89.20% in Q3 2024. This rise was primarily attributed to increased Marketplace medical costs, lower estimated Marketplace risk adjustment revenue, and program changes in the PDP business resulting from the Inflation Reduction Act (IRA). Higher medical costs in Medicaid, particularly in behavioral health and home health, also contributed to the elevated HBR, though these were partially offset by Medicaid rate and revenue increases. The Selling, General and Administrative (SGA) expense ratio improved to 7% in Q3 2025 from 8.30% in Q3 2024, reflecting continued expense leveraging over higher revenues and the growth of the PDP business, which operates at a lower SGA expense ratio.

Segment Deep Dive and Strategic Responses

Medicaid Segment: Addressing Cost Trends and Driving Rate Alignment

The Medicaid segment, a cornerstone of Centene's business, generated $27.96 billion in external revenues for Q3 2025, a 6% increase year-over-year. However, the segment's gross margin for the nine months ended September 30, 2025, decreased by 16% to $4.08 billion, primarily due to higher medical costs in behavioral health, home health, and high-cost drugs. Medicaid membership as of September 30, 2025, was 12.71 million, a decrease of 672,000 members year-over-year.

Centene is aggressively addressing these cost trends through a multi-pronged strategy. The company has engaged in constructive dialogue with state partners, leading to a positive 2025 retroactive revenue adjustment of $150 million in its Florida Children's Medical Services program, which included $90 million retroactively applied to Q1 and Q2 2025. This adjustment, along with the termination of a provider group in New York engaged in suspicious billing practices, demonstrates the impact of Centene's rate advocacy and fraud, waste, and abuse interventions. The 2025 composite rate adjustment for Medicaid is now expected to be approximately 5.5%, reflecting the company's efforts to match rates with the acuity of the population.

Medicare Segment: PDP Growth and MA Turnaround

The Medicare segment exhibited robust revenue growth, with external revenues increasing by 66% to $9.39 billion in Q3 2025 and 57% to $27.60 billion for the nine months ended September 30, 2025. This growth was largely driven by increased PDP premiums and membership, which reached 7.97 million members as of September 30, 2025. The Inflation Reduction Act (IRA) significantly impacted Medicare Part D, leading to a shift in cost-sharing responsibilities and a substantial increase in premiums for PDPs. While Q3 gross margin for Medicare decreased by 20% due to IRA changes, the nine-month gross margin increased by 40%.

Centene's Medicare Advantage (MA) business is making "important progress" towards its goal of achieving breakeven pretax margin in 2027. The company reported that approximately 60% of its MA membership was enrolled in plans rated 3.5 stars or higher as of October 2025, an improvement from 55% in the prior year. This progress is supported by an optimized footprint, effective 2025 pricing, and ongoing operational discipline. Centene is also strategically focusing on dual-eligible populations, launching the first phase of an enhanced integrated duals model across eight states as part of the transition to integrated D-SNPs by January 1, 2026.

Commercial Segment: Repricing for Profitability

The Commercial segment, primarily driven by the Health Insurance Marketplace (Ambetter Health), saw strong revenue growth of 26% in Q3 2025 to $10.99 billion and 25% for the nine months ended September 30, 2025. Marketplace membership increased by 29% year-over-year to 5.83 million members as of September 30, 2025. However, the segment's gross margin significantly decreased by 36% in Q3 2025 and 24% for the nine months, primarily due to increased Marketplace medical costs and lower estimated risk adjustment revenue.

Centene's analysis of Wakely data confirmed a significant shift in the Marketplace risk pool in 2025, leading to a $2.4 billion pretax earnings headwind for the full year. This shift was attributed to healthy/low-utilizing members leaving the market due to program integrity measures, new sign-ups having higher morbidity, and increased utilization coupled with aggressive provider coding. In response, Centene has aggressively repriced its products for 2026 in states covering approximately 95% of its current membership, with revised rates averaging in the mid-30s. This repricing strategy prioritizes "margin over membership" and accounts for increased 2025 baseline morbidity, forecasted trend, and the anticipated impacts of expiring enhanced APTCs and new program integrity measures. The company expects these actions to support margin expansion in the Marketplace business in 2026, unlike 2025 which is projected to run at a slight loss. Centene also continues to invest in Individual Coverage Health Reimbursement Arrangements (ICHRA), viewing it as a future growth platform for health insurance.

Other Segment: Streamlining Operations

The "Other" segment, encompassing various ancillary services, reported an 8% increase in total revenues for Q3 2025 to $1.34 billion. The three-month gross margin increased by 33%, driven by rate increases. However, the nine-month gross margin decreased by 20%, primarily due to the divestiture of Circle Health Group in Q1 2024 and the expiration of the TRICARE Managed Care Support Contract in December 2024. This segment's performance was slightly favorable in Q3 2025, reflecting ongoing efforts to streamline non-core operations.

Liquidity, Capital Allocation, and Balance Sheet Strength

Centene demonstrates a robust liquidity position and a disciplined approach to capital allocation. Operating activities generated $4.70 billion in cash for the nine months ended September 30, 2025, a significant increase from $741 million in the comparable 2024 period. This improvement was driven by net earnings, better timing of pharmacy rebate remittances, and the timing of claims and other payments. Investing activities used $188 million in cash, a notable reduction from $1.20 billion in 2024, primarily due to net additions to the investment portfolio of regulated subsidiaries and capital expenditures. Financing activities utilized $1.40 billion in cash, mainly due to net debt decreases of $971 million and stock repurchases totaling $473 million.

As of September 30, 2025, Centene had $1.80 billion remaining under its stock repurchase program. The company's balance sheet remains strong, with no outstanding borrowings on its $4 billion Revolving Credit Facility and $2 billion on its Term Loan Facility, and it remains in compliance with all debt covenants. The debt-to-capital ratio increased to 45.50% at September 30, 2025, from 41.20% at December 31, 2024, primarily due to the goodwill impairment impacting total stockholders' equity. Medical claims liability stood at $21.5 billion, representing 48 days in claims payable. Centene expects to receive approximately $200 million in net dividends from insurance subsidiaries and incur $200 million in additional capital expenditures for the remainder of 2025, with sufficient liquidity to fund operations for at least 12 months.

Outlook and Forward-Looking Strategy

Centene has increased its full-year 2025 adjusted EPS forecast to "at least $2," up from its previous forecast of $1.75 per share. This upward revision reflects early execution on improved Florida Medicaid revenue, a better-than-expected Medicaid HBR trajectory, and stronger net investment income, even with additional Marketplace medical cost pressure.

Looking ahead to 2026, Centene is focused on driving margin improvement across all segments and delivering EPS growth. For Medicaid, the company anticipates profitability consistent with its current full-year 2025 outlook, a "prudent posture" given ongoing efforts to manage cost trends and secure appropriate rates. The Marketplace business is positioned for "meaningful margin improvement" in 2026, a direct result of aggressive repricing actions taken to account for morbidity shifts, trend, and policy changes. In Medicare, the MA business is on a clear path to achieving breakeven pretax margin in 2027, supported by strategic initiatives and Star ratings improvements. While PDP outperformance in 2025 is not expected to recur at the same level in 2026, the segment remains a significant contributor. Management also anticipates that a lower tax rate environment in 2026 could make net investment income a headwind and increase the overall tax rate.

The company's long-term strategy is anchored in leveraging its data and scale, investing in Individual Coverage Health Reimbursement Arrangements (ICHRA), and adapting to the evolving policy landscape. Centene views the OBBBA as having established a stable policy floor for its programs, allowing for multi-year implementation strategies. The company's commitment to operational improvements, efficiency gains, and margin expansion is central to its dual mandate of ensuring quality health outcomes and serving as responsible stewards of taxpayer dollars.

Risks and Challenges

Despite the positive momentum, Centene faces several pertinent risks. The $6.7 billion goodwill impairment in Q3 2025 highlights the impact of legislative changes like the OBBBA and stock price volatility. Accelerated medical cost trends, particularly in Medicaid (behavioral health, home health, high-cost drugs) and Medicare Advantage, remain a significant challenge, requiring continuous management and rate advocacy.

The Marketplace segment is subject to considerable regulatory uncertainty, including the potential expiration of enhanced APTCs at the end of 2025 and the impacts of the Marketplace Integrity Affordability Final Rule. These factors are expected to reduce 2026 Marketplace membership and increase overall morbidity, necessitating careful pricing and strategic positioning. In Medicaid, ongoing redeterminations and the OBBBA's work requirements, set to largely begin in 2027, could further impact membership and risk pools.

Furthermore, Centene is currently defending against a federal securities class action and related derivative lawsuits alleging false and misleading statements regarding 2025 earnings guidance. An adverse outcome in these legal proceedings could materially impact the company's financial position. The competitive landscape also presents ongoing challenges, with rivals like Molina Healthcare (MOH) reporting higher medical cost trends and other large insurers facing similar pressures, underscoring the need for Centene to maintain its operational discipline and strategic agility.

Conclusion

Centene Corporation is demonstrating a compelling turnaround narrative, marked by a strategic recalibration aimed at restoring profitability and driving sustainable growth across its diversified healthcare portfolio. Despite a significant non-cash goodwill impairment in Q3 2025, the company's adjusted financial performance and increased full-year guidance underscore the effectiveness of its aggressive interventions in Medicaid and its strategic repricing in the Marketplace. Centene's deep expertise in government-sponsored programs, coupled with its commitment to leveraging data and AI for operational efficiencies and enhanced care management, forms a robust competitive advantage in a dynamic industry.

The path ahead involves navigating ongoing medical cost trends and regulatory shifts, particularly those stemming from the OBBBA and the evolving Marketplace policy. However, Centene's proactive measures, strong liquidity, and disciplined capital allocation position it to capitalize on long-term opportunities. The company's focus on margin expansion in 2026, driven by targeted segment strategies and technological leadership, suggests a trajectory towards unlocking significant embedded earnings power and delivering enhanced shareholder value.