424B5 1 nt10019947x4_424b5.htm 424B5

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Filed Pursuant to Rule 424(b)(5)
Registration No. 333-238050
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
Amount to be
Registered
Proposed Maximum
Aggregate Offering Price Per Unit
Proposed Maximum Aggregate Offering Price
Amount of Registration Fee(1)
2.50% Notes due 2031
$2,200,000,000
100.00%
$2,200,000,000
$240,020.00
(1)
Calculated in accordance with Rule 457(r) of the Securities Act of 1933, as amended.

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PROSPECTUS SUPPLEMENT
(To Prospectus dated May 6, 2020)
$2,200,000,000

Centene Corporation
2.50% Senior Notes due 2031
Centene Corporation (“Centene,” the “Company” or “we”) is offering $2,200,000,000 in aggregate principal amount of 2.50% senior notes due 2031 (the “notes”). Centene will pay interest on the notes on March 1 and September 1 of each year, commencing on September 1, 2021. The notes will mature on March 1, 2031.
We may redeem the notes, in whole or in part, at our option at any time at the redemption prices described under “Description of the Notes—Optional Redemption.” The notes will be our senior unsecured obligations and rank equally in right of payment with all of our existing and future senior debt and will be senior in right of payment to all of our existing and future obligations that are by their terms expressly subordinated or junior in right of payment to the notes. The notes will not be guaranteed by any of our subsidiaries. As a result, the notes will be structurally subordinated to any obligations of our subsidiaries, including medical claims liabilities, accounts payable and accrued expenses, unearned revenue and other long term liabilities. In addition, the notes will be effectively junior to all of our existing and future secured obligations to the extent of the value of the assets securing such obligations.
The notes will not be listed on any securities exchange. Currently, there is no public market for the notes.
On February 10, 2021, we commenced an offer (the “tender offer”) to purchase for cash, subject to certain conditions, any and all of the $2,200,000,000 outstanding aggregate principal amount of our 4.75% Senior Notes due 2025 (the “4.75% 2025 notes”). The tender offer is being made upon the terms and conditions set forth in our offer to purchase, dated February 10, 2021, as it may be amended from time to time (the “offer to purchase”). Additionally, on February 10, 2021, we delivered a notice of conditional redemption to redeem any remaining 4.75% 2025 notes not validly tendered and accepted for purchase pursuant to the tender offer, in accordance with the terms of the indentures governing the 4.75% 2025 notes (the “2025 notes redemption”).
Investing in the notes involves substantial risks. See “Risk Factors” beginning on page S-13 of this prospectus supplement. Before investing in the notes, you should also consider the risks described under “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2019 and in our quarterly reports on Form 10-Q, which have been incorporated by reference in this prospectus supplement and the accompanying prospectus.
 
Per Note
Total
Price to the public(1)
100.00%
$2,200,000,000
Underwriting discounts and commissions
1.00%
$22,000,000
Proceeds to us (before expenses)
99.00%
$2,178,000,000
(1)
Plus accrued interest, if any, from February 17, 2021.
Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the notes offered hereby to purchasers in book-entry form on or about February 17, 2021.

Joint Active Book-Running Managers
BofA Securities
Barclays
Joint Book-Running Managers
J.P. Morgan
Truist Securities
Wells Fargo Securities
Co-Managers
Fifth Third Securities
Regions Securities LLC
US Bancorp
MUFG
BMO Capital Markets
PNC Capital Markets LLC
CIBC Capital Markets
Stifel
Prospectus Supplement dated February 10, 2021

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You should read this document together with additional information described under the heading “Where You Can Find More Information and Incorporation by Reference.” You should rely only on the information contained or incorporated by reference in this prospectus supplement, the accompanying prospectus and any pricing term sheet prepared by or on behalf of us. We have not, and the underwriters have not, authorized anyone to provide you with additional or different information. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information we have included in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date of this prospectus supplement or the accompanying prospectus or that any information we have incorporated by reference is accurate as of any date other than the date of the document incorporated by reference. Neither this prospectus supplement nor the accompanying prospectus constitutes an offer, or an invitation on our behalf or on behalf of the underwriters, to subscribe for and purchase any of the securities and may not be used for or in connection with an offer or solicitation by anyone, in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.
Prospectus Supplement
Table of Contents
 
Page
Prospectus
 
Page
We expect that delivery of the notes will be made to investors on or about the closing date specified on the cover page of this prospectus supplement, which will be the fourth business day following the date of confirmation of orders with respect to the notes (this settlement cycle being referred to as “T+4”). Under Rule 15c6-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), trades in the secondary market generally are required to settle in two business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the notes prior to the delivery of the notes hereunder will be required, by virtue of the fact that the notes initially will settle T+4, to specify an alternative settlement cycle at the time of any such trade to prevent a failed settlement. Purchasers of the notes who wish to trade the notes prior to their date of delivery hereunder should consult their own advisors.
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ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement and the accompanying prospectus are part of a registration statement that we filed with the SEC utilizing a “shelf” registration process. Under this shelf registration process, we may sell the securities described in the accompanying prospectus from time to time. In this prospectus supplement, we provide you with specific information about the notes we are selling in this offering and about the offering itself. Both this prospectus supplement and the accompanying prospectus include or incorporate by reference important information about us and other information you should know before investing in the notes. This prospectus supplement also adds, updates and changes information contained or incorporated by reference in the accompanying prospectus. To the extent that any statement we make in this prospectus supplement is inconsistent with the statements made in the accompanying prospectus, the statements made in the accompanying prospectus are deemed modified or superseded by the statements made in this prospectus supplement. You should read both this prospectus supplement and the accompanying prospectus, as well as the additional information in the documents described below under the heading “Where You Can Find More Information and Incorporation by Reference,” before investing in the notes.
Unless otherwise indicated or the context otherwise requires, the terms the “Company,” “we,” “us,” “our” or similar terms and “Centene” refer to Centene Corporation, together with its consolidated subsidiaries after giving effect to the WellCare Acquisition (as defined below), but not giving effect to the Magellan Acquisition (as defined below).
PRESENTATION OF FINANCIAL INFORMATION
The body of generally accepted accounting principles in the United States is referred to as “GAAP.” A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure.
This prospectus supplement contains information relating to “Adjusted EBITDA,” which is a non-GAAP measure. Our and WellCare’s measurement of Adjusted EBITDA is not comparable to those of other companies. We use Adjusted EBITDA internally to allow management to focus on period-to-period changes in our core business operations. WellCare has historically used Adjusted EBITDA internally because WellCare’s management believed it was useful in assessing WellCare’s ongoing performance. Therefore, we believe that Adjusted EBITDA is meaningful to investors in addition to the information contained in the GAAP presentation of financial information included or incorporated by reference in this prospectus supplement. 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. You are therefore cautioned not to place undue reliance on Adjusted EBITDA and a reconciliation of Adjusted EBITDA to its most directly comparable financial measures calculated in accordance with GAAP is presented under “Summary—Summary Historical Consolidated Financial Information.”
INDUSTRY AND MARKET DATA
Throughout this prospectus supplement and the documents incorporated by reference herein, we rely on and refer to information and statistics regarding the healthcare industry. We obtained this information and these statistics from various third-party sources, discussions with state regulators and our own internal estimates. We believe that these sources and estimates are reliable, but we have not independently verified them and cannot guarantee their accuracy or completeness. In addition, certain of these third party sources, information and statistics were published before the global COVID-19 (as defined below) pandemic and therefore do not reflect any impact of the COVID-19 pandemic on any specific market or globally.
WHERE YOU CAN FIND MORE INFORMATION AND INCORPORATION BY REFERENCE
We file annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains an internet website that contains reports, proxy statements and other information regarding issuers, including Centene, who file electronically with the SEC. The address of that site is www.sec.gov. The information contained on the SEC’s website is expressly not incorporated by reference into this offering.
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The SEC allows us to disclose important information to you by referring you to other documents filed separately with the SEC. This information is considered to be a part of this prospectus supplement, except for any information that is superseded by information included directly in this prospectus supplement or incorporated by reference subsequent to the date of this prospectus supplement as described below.
This prospectus supplement incorporates by reference the documents listed below that we have previously filed with the SEC:
our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 18, 2020;
our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020, filed with the SEC on April 28, 2020, July 28, 2020 and October 27, 2020, respectively;
the portions of our Definitive Proxy Statement on Schedule 14A filed with the SEC on March 13, 2020 that are incorporated by reference into Part III of the Annual Report on Form 10-K for the year ended December 31, 2019.
To the extent that any information contained in any report on Form 8-K or 8-K/A, or any exhibit thereto, was furnished to, rather than filed with, the SEC, such information or exhibit is specifically not incorporated by reference.
In addition, we incorporate by reference (i) any future filings we make with the SEC and (ii) Item 15(c) of any Annual Reports on Form 10-K under Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this prospectus supplement (excluding any current reports on Form 8-K to the extent disclosure is furnished and not filed). Those documents are considered to be a part of this prospectus supplement, effective as of the date they are filed. Any statement contained in this prospectus supplement or in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this prospectus supplement to the extent that a statement contained in any subsequently filed document which is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus supplement.
You can obtain any of the other documents listed above from the SEC, through the SEC’s website at the address indicated above, or from Centene, without charge, by requesting them in writing or by telephone from the company at the following address and telephone number:
By Mail:
Centene
7700 Forsyth Boulevard
St. Louis, Missouri 63105
Telephone: (314) 725-4477
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
All statements, other than statements of current or historical fact, included or incorporated by reference in this prospectus supplement 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 (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 Inc., a Delaware corporation (“Magellan Health,” and such proposed acquisition, the “Magellan Acquisition”), our recently completed acquisition of WellCare Health Plans, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“WellCare,” and such acquisition, the “WellCare Acquisition”), other recent and future acquisitions, investments and the adequacy of our available cash resources.
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 or incorporated by reference in this prospectus supplement are based on information available to us on the date of this prospectus supplement. Except as may be otherwise required by law, we undertake no obligation to update or revise the forward-looking statements included or incorporated by reference in this prospectus supplement, whether as a result of new information, future events or otherwise, after the date of this prospectus supplement. 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 obtained subject to conditions that are not anticipated that could require the exertion of management’s time and our resources or otherwise have an adverse effect on us;
the risk that Magellan Health’s stockholders do not approve the definitive Merger Agreement (as defined below);
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 will not be realized, or will not be realized within the applicable expected time periods;
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 the Magellan Acquisition;
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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, which could give rise to an obligation to redeem existing indebtedness;
the possibility that competing offers will be made to acquire Magellan Health;
the inability to retain key personnel;
disruption from the announcement, pendency, completion and/or integration of the Magellan Acquisition or 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;
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 (“ACA”) 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, including the ultimate outcome in “Texas v. United States of America” regarding the constitutionality of the ACA;
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 pending or future legal and regulatory proceedings or government investigations;
challenges to our contract awards;
cyber-attacks or other privacy or data security incidents;
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the possibility that the expected synergies and value creation from acquired businesses, including businesses we may acquire in the future, will not be realized, or will not be realized within the expected time period;
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;
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 (“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 SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and you should consider such risks before investing in the notes. The “Risk Factors” section of this prospectus supplement 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.
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SUMMARY
This summary highlights information contained in this prospectus supplement, the accompanying prospectus and the documents incorporated into each by reference. Because it is a summary, it does not contain all of the information that you should consider before investing in the notes. You should read the entire prospectus supplement, the accompanying prospectus and the documents incorporated by reference herein and therein carefully, including the sections titled “Risk Factors” and “Description of the Notes” and the financial statements and related notes thereto included or incorporated by reference in this prospectus supplement and the accompanying prospectus in their entirety before making an investment decision.
Centene Corporation
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. We also provide education and outreach programs to inform and assist members in accessing quality, appropriate healthcare services. We believe our local approach, including member and provider services, enables us to provide accessible, quality, culturally-sensitive healthcare coverage to our communities. Our population health management, educational and other initiatives are designed to help members best utilize the healthcare system to ensure they receive appropriate, medically necessary services and effective management of routine, severe and chronic health problems, resulting in better health outcomes. We combine our decentralized local approach for care with a centralized infrastructure of support functions such as finance, information systems and claims processing.
Our initial health plan commenced operations in Wisconsin in 1984. We were organized in Wisconsin in 1993 as a holding company for our initial health plan and reincorporated in Delaware in 2001. Our stock is publicly traded on the New York Stock Exchange under the ticker symbol “CNC.” Our principal executive offices are located at 7700 Forsyth Boulevard, St. Louis, Missouri 63105, and our telephone number is (314) 725-4477.
We operate in two segments: Managed Care and Specialty Services. Our Managed Care segment provides health plan coverage to individuals through government subsidized and commercial programs. Our Specialty Services segment includes companies offering diversified healthcare services and products to our Managed Care segment and other external customers. For the nine months ended September 30, 2020, our Managed Care and Specialty Services segments accounted for 96% and 4%, respectively, of our total external revenues. Our membership totaled 25.2 million as of September 30, 2020. For the year ended December 31, 2019, our total revenues and net earnings attributable to Centene were $74.6 billion and $1.3 billion, respectively, and our total cash flow from operations was $1.5 billion. For the nine months ended September 30, 2020, our total revenues and net earnings attributable to Centene were $82.8 billion and $1.8 billion, respectively, and our total cash flow from operations was $2.5 billion.
COVID-19 Trends and Uncertainties
A novel strain of coronavirus (“COVID-19”) outbreak has created unique and unprecedented challenges. To support our members, providers, employees and the communities we serve, we have taken several actions and made numerous investments related to the COVID-19 crisis. We have extended coverage of COVID-19 testing and screening services for Medicaid, Medicare and Marketplace members and are waiving all associated member cost share amounts for COVID-19 testing and screening. We are delivering new critical support to Safety Net providers, including Federally Qualified Healthcare Centers (“FQHCs”), behavioral health providers, and long-term service and support organizations. We continue to address social determinants of health for vulnerable populations during the COVID-19 crisis with a commitment to research and investment in non-medical barriers to achieving quality health outcomes. We developed initiatives designed to support the disability community affected by the pandemic. We created a provider support program to assist our network providers who are seeking benefits from the Small Business Administration (“SBA”) through the CARES Act. We established a Medical Reserve Leave policy to support clinical employees who want to join a medical reserve force and serve their communities during the COVID-19 pandemic. We are providing additional employee benefits including waiving cost-sharing for COVID-19 related treatment, emergency paid sick leave, and one-time payments to employees in a small number of critical office functions.
We have taken significant steps to support our employees to protect their health and safety, while also ensuring that our business can continue to operate and that services continue without disruption. We have implemented
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our business continuity plans and have taken actions to support our workforce. We have transitioned the vast majority of our employees to work from home, allowing Centene to continue to operate at close to full capacity, while continuing to maintain our internal control framework. As a result, we have experienced and expect continued incremental costs due to investments and actions we have already taken and continued efforts to protect our members, employees and communities we serve.
The impact on our business in both the short-term and long-term is uncertain. The outlook for 2021 depends on future developments, including but not limited to: the length and severity of the outbreak (including new strains, which may be more contagious, more severe or less responsive to treatment or vaccines), the effectiveness of containment actions, and the timing around the development of treatments and distribution of vaccinations. The pandemic and these future developments have impacted and will continue to affect our membership and medical utilization. From March 31, 2020 through December 31, 2020, our Medicaid membership has increased by 1.7 million members. The pandemic also has 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.
Medical utilization continues to normalize as elective procedures and other non-emergent care resume, consistent with our expectations. We have experienced and continue to expect incremental COVID-19 costs as the outbreak continues to spread. In addition, the pandemic has widespread economic impact, driving interest rate decreases and lowering our investment income.
The impact of all these items slightly benefited our 2020 results. We are confident we have the team, systems, expertise and financial strength to continue to effectively navigate this challenging pandemic landscape.
Recent Developments
Magellan Acquisition
In January 2021, we announced that we entered into a definitive merger agreement under which we will acquire Magellan Health for $95.00 per share in cash for a total enterprise value of approximately $2.2 billion. The transaction, which was unanimously approved by the boards of directors of both companies, is expected to broaden and deepen our whole health capabilities and establish a leading behavioral health platform. The transaction is subject to clearance under the Hart-Scott Rodino Act, receipt of required state regulatory approvals, the approval of the definitive merger agreement by Magellan Health’s stockholders and other customary closing conditions. The transaction is not contingent upon financing. We intend to fund the acquisition primarily through debt financing. The transaction is expected to close in the second half of 2021.
Fourth Quarter and Year Ended 2020 Results
On February 9, 2021, the Company announced the following preliminary results for the fourth quarter of 2020 and full year of 2020.
In summary, the 2020 fourth quarter and full year results were as follows:
2020 Results
 
Q4
Full Year
Total revenues (in millions)
$28,288
$111,115
Health benefits ratio
88.4%
86.2%
SG&A expense ratio
10.3%
9.5%
Adjusted SG&A expense ratio(1)
9.7%
8.9%
GAAP diluted (loss) earnings per share
$(0.02)
$3.12
Adjusted diluted EPS(1)
$0.46
$5.00
Total cash flow provided by operations (in millions)
$2,981
$5,503
(1)
A full reconciliation of the Adjusted SG&A expense ratio and Adjusted diluted EPS are shown below.
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CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares in thousands and per share data in dollars)
 
December 31,
2020
December 31,
2019
 
(Unaudited)
(Audited)
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$10,800
$12,123
Premium and trade receivables
9,696
6,247
Short-term investments
1,580
863
Other current assets
1,317
1,090
Total current assets
23,393
20,323
Long-term investments
12,853
7,717
Restricted deposits
1,060
658
Property, software and equipment, net
2,774
2,121
Goodwill
18,652
6,863
Intangible assets, net
8,388
2,063
Other long-term assets
1,599
1,249
Total assets
$68,719
$40,994
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Medical claims liability
$12,438
$7,473
Accounts payable and accrued expenses
7,069
4,164
Return of premium payable
1,458
824
Unearned revenue
523
383
Current portion of long-term debt
97
88
Total current liabilities
21,585
12,932
Long-term debt
16,682
13,638
Deferred tax liability
1,534
189
Other long-term liabilities
2,956
1,543
Total liabilities
42,757
28,302
Commitments and contingencies
 
 
Redeemable noncontrolling interests
77
33
Stockholders’ equity:
 
 
Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at December 31, 2020 and December 31, 2019
Common stock, $0.001 par value; authorized 800,000 shares; 598,249 issued and 581,479 outstanding at December 31, 2020, and 421,508 issued and 415,048 outstanding at December 31, 2019
1
Additional paid-in capital
19,459
7,647
Accumulated other comprehensive earnings
337
134
Retained earnings
6,792
4,984
Treasury stock, at cost (16,770 and 6,460 shares, respectively)
(816)
(214)
Total Centene stockholders’ equity
25,773
12,551
Noncontrolling interest
112
108
Total stockholders’ equity
25,885
12,659
Total liabilities, redeemable noncontrolling interests and stockholders’ equity
$68,719
$40,994
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CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except shares in thousands and per share data in dollars)
 
Three Months Ended
December 31,
Year Ended
December 31,
 
2020
2019
2020
2019
 
(Unaudited)
(Unaudited)
(Unaudited)
(Audited)
Revenues:
 
 
 
 
Premium
$25,559
$17,210
$100,055
$67,439
Service
886
802
3,745
2,925
Premium and service revenues
26,445
18,012
103,800
70,364
Premium tax and health insurer fee
1,843
851
7,315
4,275
Total revenues
28,288
18,863
111,115
74,639
Expenses:
 
 
 
 
Medical costs
22,605
15,220
86,264
58,862
Cost of services
784
687
3,303
2,465
Selling, general and administrative expenses
2,721
1,733
9,867
6,533
Amortization of acquired intangible assets
192
64
719
258
Premium tax expense
1,595
882
6,332
4,469
Health insurer fee expense
376
1,476
Impairment
72
271
Total operating expenses
28,273
18,586
108,033
72,858
Earnings from operations
15
277
3,082
1,781
Other income (expense):
 
 
 
 
Investment and other income
105
126
480
443
Debt extinguishment costs
(17)
(30)
(61)
(30)
Interest expense
(177)
(113)
(728)
(412)
Earnings (loss) before income tax expense
(74)
260
2,773
1,782
Income tax expense (benefit)
(55)
58
979
473
Net earnings (loss)
(19)
202
1,794
1,309
Loss attributable to noncontrolling interests
7
7
14
12
Net earnings (loss) attributable to Centene Corporation
$(12)
$209
$1,808
$1,321
 
 
 
 
 
Net earnings per common share attributable to Centene Corporation:
 
 
 
 
Basic earnings (loss) per common share
$(0.02)
$0.50
$3.17
$3.19
Diluted earnings (loss) per common share
$(0.02)
$0.49
$3.12
$3.14
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
Basic
580,129
414,044
570,722
413,487
Diluted
580,129
422,262
579,135
420,409
Non-GAAP Financial Presentation
The Company is providing certain non-GAAP financial measures herein 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.
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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
December 31,
Year Ended
December 31,
 
2020
2019
2020
2019
GAAP net (loss) earnings attributable to Centene
$(12)
$209
$1,808
$1,321
Amortization of acquired intangible assets
192
64
719
258
Acquisition related expenses
156
38
602
104
Other adjustments (1)
17
30
29
301
Income tax effects of adjustments (2)
(84)
(32)
(262)
(127)
Adjusted net earnings
$269
$309
$2,896
$1,857
(1)
Other adjustments include the following items:
(a)
divestiture gain of $104 million, or $0.10 per diluted share for the year ended December 31, 2020;
(b)
non-cash impairment of $72 million, or $0.10 per diluted share for the year ended December 31, 2020;
(c)
debt extinguishment costs of $17 million and $30 million, or $0.02 and $0.05 per diluted share for the three months ended December 31, 2020 and 2019, respectively, and $61 million and $30 million, or $0.07 and $0.05 per diluted share for the year ended December 31, 2020 and 2019, respectively; and
(d)
non-cash goodwill and intangible asset impairment of $271 million, or $0.57 per diluted share, for the year ended December 31, 2019.
(2)
The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment.
 
Three Months Ended
December 31,
Year Ended
December 31,
 
2020
2019
2020
2019
GAAP diluted (loss) earnings per share attributable to Centene
$(0.02)
$0.49
$3.12
$3.14
Amortization of acquired intangible assets(3)
0.25
0.12
0.95
0.47
Acquisition related expenses(4)
0.21
0.07
0.86
0.19
Other adjustments(5)
0.02
0.05
0.07
0.62
Adjusted diluted EPS
$0.46
$0.73
$5.00
$4.42
(3)
The amortization of acquired intangible assets per diluted share presented above is net of an income tax benefit of $0.08 and $0.04 for the three months ended December 31, 2020 and 2019, respectively, and $0.29 and $0.14 for the year ended December 31, 2020 and 2019, respectively.
(4)
The acquisition related expenses per diluted share presented above are net of an income tax benefit of $0.05 and $0.02 for the three months ended December 31, 2020 and 2019, respectively, and $0.18 and $0.06 for the year ended December 31, 2020 and 2019, respectively.
(5)
Other adjustments include the following items:
(a)
gain related to the divestiture of certain products of the Company’s Illinois health plan of $0.10 per diluted share, net of income tax expense of $0.08 for the year ended December 31, 2020;
(b)
non-cash impairment of our third party-care management software system of $0.10 per diluted share, net of an income tax benefit of $0.02 for the year ended December 31, 2020;
(c)
debt extinguishment costs of $0.02 and $0.05 per diluted share, net of an income tax benefit of $0.01 and $0.02 for the three months ended December 31, 2020 and 2019, respectively, and $0.07 and $0.05 per diluted share, net of an income tax benefit of $0.04 and $0.02 for the year ended December 31, 2020 and 2019, respectively; and
(d)
non-cash impairment of $0.57 per diluted share, net of an income tax benefit of $0.08 for the year ended December 31, 2019.
 
Three Months Ended
December 31,
Year Ended December 31,
 
2020
2019
2020
2019
GAAP SG&A expenses
$2,721
$1,733
$9,867
$6,533
Acquisition related expenses
154
24
580
85
Adjusted SG&A expenses
$2,567
$1,709
$9,287
$6,448
Concurrent Tender Offer and Redemption of 4.75% 2025 Notes
On February 10, 2021, we commenced the tender offer to purchase for cash, subject to certain conditions, any and all of the $2,200,000,000 outstanding aggregate principal amount of the 4.75% 2025 notes. The tender offer
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is being made upon the terms and conditions set forth in the offer to purchase. Additionally, on February 10, 2021, we delivered a notice of conditional redemption to redeem any remaining 4.75% 2025 notes not validly tendered and accepted for purchase pursuant to the tender offer, in accordance with the terms of the indentures governing the 4.75% 2025 notes, subject to the satisfaction or waiver by the Company of the condition (as defined below).
The tender offer is subject to a number of conditions that may be waived or changed, including a condition pursuant to which we will not be required to accept for purchase any 4.75% 2025 notes that are tendered in the tender offer, unless this offering of the notes is consummated (the “condition”). The 2025 notes redemption will also be subject to the satisfaction or waiver of certain conditions, including the consummation of this offering of the notes in an aggregate principal amount of at least $2.2 billion, and timing of redemption is subject to change.
The tender offer is scheduled to expire at 5:00 P.M., New York City time, on February 17, 2021, unless extended (such date and time, as it may be extended, the “tender expiration time”), and holders who validly tender and do not validly withdraw their 4.75% 2025 notes at or prior to the tender expiration time will receive the consideration set forth in the offer to purchase for those 4.75% 2025 notes that we accept for purchase. Subject to applicable law, holders are permitted to withdraw their tendered 4.75% 2025 notes at any time prior to the tender expiration time.
We intend to use the net proceeds of this offering, together with cash on hand, to fund the purchase price for the 4.75% 2025 notes accepted for purchase in the tender offer and to redeem any 4.75% 2025 notes that remain outstanding following the tender offer pursuant to the 2025 notes redemption, including all premiums, accrued interest and expenses related to the tender offer and the 2025 notes redemption. Pending the application of any of the net proceeds of the offering for the foregoing purposes, net proceeds may be temporarily used for general corporate purposes.
The tender price of the 4.75% 2025 notes will be equal to $1,025.85, per each $1,000 principal amount of the 4.75% 2025 notes validly tendered at or prior to the tender expiration time or the guaranteed delivery time (as defined in the offer to purchase) pursuant to the guaranteed delivery procedures and accepted for purchase. The redemption price of the 4.75% 2025 notes will be equal to 102.375% of the principal amount of the 4.75% 2025 notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date falling prior to the redemption date).
This prospectus supplement is not an offer to purchase or a solicitation of an offer to sell the 4.75% 2025 notes and does not constitute a redemption notice for the 4.75% 2025 notes. The tender offer is being made only by and pursuant to the terms of the offer to purchase. This offering is not conditioned on the tender of the 4.75% 2025 notes in the tender offer or the redemption of any remaining 4.75% 2025 notes outstanding pursuant to the 2025 notes redemption. BofA Securities, Inc. is acting as the sole dealer manager in connection with the tender offer, for which they will receive customary fees and indemnification against certain liabilities and reimbursement of expenses.
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The Offering
The following summary describes the principal terms of the notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. See “Description of the Notes” in this prospectus supplement and “Description of Debt Securities” in the accompanying prospectus for a more detailed description of the terms and conditions of the notes. In this section titled “The Offering,” the “Company,” “we,” “our,” or “us” refers only to Centene Corporation and not any of its subsidiaries.
Issuer
Centene Corporation, a Delaware corporation.
Securities Offered
$2,200,000,000 aggregate principal amount of 2.50% senior notes due 2031.
Maturity Date
The notes will mature on March 1, 2031.
Interest Rate
The notes will bear interest at a rate equal to 2.50% per annum.
Interest Payment Dates
Interest on the notes will be payable semi-annually on March 1 and September 1 of each year, beginning on September 1, 2021.
Priority
The notes will be our senior unsecured obligations and:

equal in right of payment with all of our existing and future senior debt, including our 4.75% 2025 notes, our 5.375% senior notes due 2026 (the “5.375% 2026 notes”), our 4.25% senior notes due 2027 (the “4.25% 2027 notes”), our 4.625% senior notes due 2029 (the “4.625% 2029 notes”), our 3.375% senior notes due 2030 (the “3.375% 2030 notes”), our 5.375% senior notes due 2026 (the “additional 5.375% 2026 notes”), our 3.00% senior notes due 2030 (the “3.00% 2030 notes”) and borrowings under our Company Credit Facility (as defined below);

senior in right of payment to any of our existing and future obligations that are by their terms expressly subordinated or junior in right of payment to such notes;

structurally subordinated to liabilities of our subsidiaries that do not guarantee such notes, including WellCare’s 5.375% senior notes due 2026 (the “5.375% stub notes”); and

effectively junior to any of our existing or future secured obligations to the extent of the value of the assets securing such obligations.
As of September 30, 2020, on an as adjusted basis after giving effect to (i) our previously completed offering of $2.2 billion of our 3.00% 2030 notes, and the application of the net proceeds thereof for the redemption of all of our outstanding 4.75% Senior Notes due 2022 notes and 5.25% Senior Notes due 2025 (the “September 2020 refinancing transactions”) and (ii) this offering and the application of the proceeds thereof as described in “Use of Proceeds,” we would have had $16.7 billion of senior debt
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outstanding and approximately $121 million of issued and undrawn letters of credit, and our subsidiaries had $25.9 billion of indebtedness and other liabilities outstanding, including the 5.375% stub notes, medical claims liabilities, accounts payable and accrued expenses, unearned revenue and other long term liabilities (excluding intercompany liabilities).
In addition, as of September 30, 2020, on an as adjusted basis after giving effect to (i) the September 2020 refinancing transactions and (ii) this offering and the application of the proceeds thereof as described in “Use of Proceeds,” Centene would have had $1.9 billion of available and undrawn borrowings under the Company Credit Facility (with an uncommitted option to increase our Company Credit Facility by up to $500 million plus certain additional amounts based on our total debt to EBITDA ratio). Of the outstanding letters of credit referenced above, none were issued under the Company Credit Facility.
Optional Redemption
Prior to December 1, 2030, the notes will be redeemable at any time or from time to time in whole or in part at our option at a redemption price described in “Description of the Notes—Optional Redemption.”
On or after December 1, 2030, the notes will be redeemable at any time in whole or from time to time in part at our option, at a redemption price equal to 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest thereon to, but excluding, the date of redemption.
Change of Control
If we experience specific kinds of changes of control, we will make an offer to purchase all of the notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the date of purchase. See “Description of the Notes—Repurchase at the Option of Holders Upon a Change of Control.”
Certain Covenants
The indenture that will govern the notes will contain covenants that, among other things, will limit our ability and the ability of our restricted subsidiaries to:

create certain liens; and

merge or consolidate with other entities.
These covenants are subject to important exceptions and qualifications, that are described under the headings “Description of the Notes—Certain Covenants” and “Description of the Notes—Repurchase at the Option of Holders Upon a Change of Control” in this prospectus supplement.
Form and Denomination
The notes will be issued only in fully registered form, without coupons, in denominations of $2,000 and integral multiples of $1,000 in excess thereof. The notes will be issued in book-entry form and will be
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represented by global certificates deposited with, or on behalf of, The Depository Trust Company, or DTC, and registered in the name of Cede & Co., DTC’s nominee. Beneficial interests in the notes will be shown on, and transfers will be effected only through, records maintained by DTC or its nominee; and these interests may not be exchanged for certificated notes, except in limited circumstances.
Use of Proceeds
We intend to use the net proceeds of this offering, together with cash on hand, to fund the purchase price for the 4.75% 2025 notes accepted for purchase in the tender offer and to redeem any 4.75% 2025 notes that remain outstanding following the tender offer pursuant to the 2025 notes redemption, including all premiums, accrued interest and expenses related to the tender offer and the 2025 notes redemption. Pending the application of any of the net proceeds of the offering for the foregoing purposes, net proceeds may be temporarily used for general corporate purposes. See ”Use of Proceeds.”
No Public Market
The notes will be new securities for which there is currently no established trading market. Certain of the underwriters have advised us that they intend to make a market for the notes. The underwriters are not obligated, however, to make a market for the notes, and any such market-making may be discontinued by the underwriters in their discretion at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the notes. See ”Underwriting.”
Risk Factors
Investing in the notes involves substantial risks. You should carefully consider the risks described under the heading “Risk Factors” in addition to the other information contained in this prospectus supplement and the documents incorporated by reference herein before making an investment in the notes.
Trustee
The Bank of New York Mellon Trust Company, N.A.
For additional information regarding the notes, see the “Description of the Notes” section of this prospectus supplement.
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following summary historical consolidated financial information as of December 31, 2019, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2019 has been derived from our audited consolidated financial statements, which are incorporated by reference into this prospectus supplement. The following summary historical consolidated financial information as of September 30, 2020 and for each of the nine months ended September 30, 2020 and 2019 has been derived from our unaudited interim consolidated financial statements incorporated by reference into this prospectus supplement. Our unaudited interim financial statements were prepared on the same basis as the audited annual financial statements, and, in the opinion of our management, include all adjustments, consisting only of normal, recurring adjustments necessary for a fair presentation of the information set forth herein. Our operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for any future periods.
On January 23, 2020, we completed the WellCare Acquisition. Accordingly, our operating results for the period following the WellCare Acquisition may not be comparable to the periods prior to the WellCare Acquisition. The unaudited pro forma condensed combined statement of operations data combines the historical consolidated statements of operations of Centene and WellCare for the year ended December 31, 2019, after giving effect to the completion of the WellCare Acquisition and the related financing, as if they occurred on January 1, 2019. The unaudited pro forma condensed combined balance sheet as of December 31, 2019, combines the historical consolidated balance sheets of Centene and WellCare, giving effect to the acquisition as if it had occurred on December 31, 2019. The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (i) directly attributable to the merger, (ii) factually supportable, and (iii) with respect to the statement of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements and the separate historical audited financial statements of WellCare as of and for the year ended, December 31, 2019, and the related notes included as an exhibit to our Current Report on Form 8-K/A filed on February 26, 2020, which is incorporated herein by reference.
This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes, which appear in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, which are incorporated herein by reference. See “Where You Can Find More Information and Incorporation by Reference” in this prospectus supplement.
 
Year Ended December 31,
Pro Forma Year Ended
December 31, 2019
Nine Months Ended
September 30,
 
2017
2018
2019
2019
2020
(in millions, except per share data in dollars)
 
 
 
 
 
 
Statement of Operations Data:
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
Premium
$ 43,353
$ 53,629
$ 67,439
$94,536
$ 50,229
$ 74,496
Service
2,267
2,806
2,925
3,435
2,123
2,859
Premium and service revenues
45,620
56,435
70,364
97,971
52,352
77,355
Premium tax and health insurer fee
2,762
3,681
4,275
4,408
3,424
5,472
Total revenues
48,382
60,116
74,639
102,379
55,776
82,827
Expenses:
 
 
 
 
 
 
Medical costs
37,851
46,057
58,862
82,798
43,642
63,659
Cost of services
1,847
2,386
2,465
2,961
1,778
2,519
Selling, general and administrative expenses
4,446
6,043
6,533
8,788
4,800
7,146
Amortization of acquired intangible assets
156
211
258
732
194
527
Premium tax expense
2,883
3,252
4,469
4,602
3,587
4,737
Health insurer fee expense
709
1,100
Impairment Loss
271
271
271
72
Total operating expenses
47,183
58,658
72,858
100,152
54,272
79,760
Earnings from operations
1,199
1,458
1,781
2,227
1,504
3,067
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Year Ended December 31,
Pro Forma Year Ended
December 31, 2019
Nine Months Ended
September 30,
 
2017
2018
2019
2019
2020
Other income (expense):
 
 
 
 
 
 
Investment and other income
190
253
443
614
317
375
Debt extinguishment costs
(30)
(30)
(44)
Interest expense
(255)
(343)
(412)
(814)
(299)
(551)
Earnings from operations, before income tax expense
1,134
1,368
1,782
1,997
1,522
2,847
Income tax expense
326
474
473
513
415
1,034
Net earnings
808
894
1,309
1,484
1,107
1,813
Loss attributable to noncontrolling
interest
20
6
12
12
5
7
Net earnings attributable to Centene
Corporation common shareholders:
 
 
 
 
 
 
Net earnings
$828
$900
$1,321
$1,496
$1,112
$1,820
 
As of December 31,
Pro Forma as of
December 31, 2019
As of September 30,
 
2017
2018
2019
2019
2020
(in millions)
 
 
 
 
 
 
Consolidated Balance Sheet Data
 
 
 
 
 
 
Cash and cash equivalents
$4,072
$5,342
$12,123
$7,768
$6,215
$12,198
Investments and restricted deposits
5,978
8,138
9,238
12,792
9,374
12,411
Total assets
21,855
30,901
40,994
62,238
34,252
68,364
Medical claims liability
4,286
6,831
7,473
10,827
7,975
12,899
Long-term debt
4,695
6,648
13,638
15,696
6,975
16,737
Total stockholders’ equity
6,864
11,013
12,659
23,939
12,405
25,843
Other Financial Data (Unaudited):
 
As of December 31,
Pro forma
Year Ended
December 31,
2019
Nine Months Ended
September 30,
Twelve Months
Ended
September 30,
2020
 
2017
2018
2019
2019
2020
(in millions)
 
 
 
 
 
 
 
Adjusted EBITDA(1)
$1,906
$2,359
$3,329
$4,681
$2,678
$4,671
$5,322
(1)
Adjusted EBITDA is defined as net earnings attributable to Centene before income tax expense, interest expense, depreciation, amortization (excluding senior note premium amortization), non-cash stock compensation expense and non-cash impairment.
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Management believes that Adjusted EBITDA, which is a non-GAAP financial measure, provides information that is useful to investors in understanding period-to-period operating results and enhances the ability of investors to analyze Centene’s business trends and to understand Centene’s performance. This non-GAAP financial measure should not be considered in isolation, or as a substitute for the corresponding GAAP financial measures and may not be comparable to similar measures used by other companies. A reconciliation of this non-GAAP financial measure with the most directly comparable financial measure calculated in accordance with GAAP follows (unaudited):
 
As of December 31,
Pro forma
Year Ended
December 31,
2019
Nine Months Ended
September 30,
Twelve Months
Ended
September 30,
2020
 
2017
2018
2019
2019
2020
(in millions)
 
 
 
 
 
 
 
Net earnings attributable to Centene
Corporation
$828
$900
$1,321
$1,496
$1,112
$1,820
$2,029
Income tax expense
326
474
473
513
415
1,034
1,092
Interest expense
255
343
412
814
299
551
664
Depreciation and amortization
362
497
645
1,255
475
932
1,102
Stock compensation expense
135
145
177
302
106
218
289
Impairment
271
271
271
72
72
Debt extinguishment costs
30
30
44
74
Adjusted EBITDA
$1,906
$2,359
$3,329
$4,681
$2,678
$4,671
$5,322
Adjusted EBITDA for the twelve months ended September 30, 2020 does not include WellCare’s Adjusted EBITDA for October 1, 2019 through December 31, 2019. Below is WellCare’s Adjusted EBITDA for the three months ended December 31, 2019, which is derived from WellCare’s audited financial statements for the year ended December 31, 2019 and WellCare’s unaudited interim financial statements for the three months ended September 30, 2019. These calculations do not take into account any pro forma adjustments as a result of the WellCare Acquisition. Further, these calculations were calculated to conform to Centene’s presentation and may not be comparable to WellCare’s previous reports.
 
Three Months Ended
December 31, 2019
(in millions)
 
Net earnings
$8
Income tax expense (benefit)
(8)
Interest expense
29
Depreciation and amortization
68
Stock-based compensation expense
48
Impairment
Debt extinguishment costs
Adjusted EBITDA
$ 145
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RISK FACTORS
An investment in the notes involves a number of risks. You should carefully consider all the information set forth in this section and all other information included in this prospectus supplement and the accompanying prospectus and incorporated by reference herein and therein before deciding to invest in the notes. In particular, we urge you to consider carefully the factors set forth below and such risk factors as may be updated from time to time in our public filings. Any of these risks could materially and adversely affect our business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this prospectus supplement and the accompanying prospectus. While we believe we have identified and discussed below and in the documents incorporated by reference herein the material risks affecting our business, there may be additional risks and uncertainties that we do not presently know or that we do not currently believe to be material that may adversely affect such business, financial condition and results of operations in the future. To the extent the COVID-19 pandemic adversely affects our business, operations, financial condition and operating results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section (including those described in our public filings, which are incorporated by reference in this prospectus supplement), such as those relating to our substantial level of indebtedness, our need to generate sufficient cash flows to service our indebtedness, and our ability to comply with the covenants contained in the agreements that govern our indebtedness.
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:
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;
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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, 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 benefit 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;
From time to time, we may become involved in costly and time-consuming litigation and other regulatory proceedings, which require significant attention from our management;
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;
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 earning per share, which may cause the market price of our common stock to decline;
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We may be unable to successfully integrate our existing business with acquired businesses and realize the anticipated benefits of such acquisitions;
The financing arrangements that we entered into in connection with the WellCare Acquisition may, under certain circumstances, contain restrictions and limitations that could significantly impact our ability to operate our business;
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 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; and
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.
Risks Relating to Our Business
Our business could be adversely affected by the effects of widespread public health pandemics, such as the spread of COVID-19.
Public health pandemics or widespread outbreaks of contagious diseases could adversely impact our business. In December 2019, COVID-19 emerged, which has now spread globally, including throughout the United States. The extent to which COVID-19 continues to impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence. Factors that may determine the severity of the impact include the duration and scale of the outbreak, new information which may emerge concerning the severity of COVID-19 (including new strains, which may be more contagious, more severe or less responsive to treatment or vaccines), the costs of prevention and treatment of COVID-19 and the potential that we will not receive state and federal government reimbursement of additional expenses incurred by our members who contract or require testing for COVID-19 or who experience other health impacts as a result of the pandemic, employee mobility, productivity and utilization of leave and other benefits, financial and other impacts on the healthcare provider community, disruptions or delays in the supply chain for testing and treatment supplies, protective equipment and other products and services, and the actions to contain COVID-19 or address its impact (including federal, state and local laws, regulations and emergency orders, including directives to remain at home, physically distance or forced business closures as well as the timing and scope of vaccine distribution), among others. Additionally, the spread of COVID-19 has led to disruption and volatility in the global capital markets, which could adversely impact our access to capital, and a decline in interest rates which could reduce our investment income. Finally, the impact of the above items on our state and federal partners could result in program changes or delays or reduced capitation payments to us. We cannot at this time predict the ultimate impact of the COVID-19 pandemic, but it could adversely affect our business, including our financial position, results of operations and/or cash flows. COVID-19 may exacerbate the other risks described herein.
Our Medicare programs are subject to a variety of unique risks that could adversely impact our financial results.
If we fail to design and maintain programs that are attractive to Medicare participants; if our Medicare operations are subject to negative outcomes from program audits, sanctions, penalties or other actions; if we do not submit adequate bids in our existing markets or any expansion markets; if our existing contracts are modified or terminated; or if we fail to maintain or improve our quality Star ratings, our current Medicare business and our ability to expand our Medicare operations could be materially and adversely affected, negatively impacting our financial performance. For example, in October 2020, CMS published updated Medicare Star quality ratings
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for the 2021 rating year. Approximately 30% of our Medicare members are in a 4 star or above plan for the 2022 bonus year, compared to 46% for the 2021 bonus year and 86% for the 2020 bonus year. Our quality bonus and rebates may be negatively impacted in 2021 and 2022 and the attractiveness of our Medicare Advantage plans may be reduced.
There are also specific additional risks under Title XVIII, Part D of the Social Security Act associated with our provision of Medicare Part D prescription drug benefits as part of our Medicare Advantage plan offerings. These risks include potential uncollectibility of receivables, inadequacy of pricing assumptions, inability to receive and process information and increased pharmaceutical costs, as well as the underlying seasonality of this business, and extended settlement periods for claims submissions. Our failure to comply with Part D program requirements can result in financial and/or operational sanctions on our Part D products, as well as on our Medicare Advantage products that offer no prescription drug coverage.
Although we do not anticipate that a single-payer national health insurance system will be enacted by the current Congress, members of Congress have proposed several legislative initiatives over various sessions of Congress that would establish some form of a single public or quasi-public agency that organizes healthcare financing, but under which healthcare delivery would remain private. Additionally, the potential impact of the change of administration on healthcare reform efforts is unknown. We are unable to predict the nature and success of these or other initiatives or political changes, which could have an adverse effect on our business.
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.
Our profitability depends to a significant degree on our ability to estimate and effectively manage expenses related to health benefits through, among other things, our ability to contract favorably with hospitals, physicians and other healthcare providers. For example, our Medicaid revenue is often based on bids submitted before the start of the initial contract year. If our actual medical expenses exceed our estimates, our Health Benefits Ratio (“HBR”), or our expenses related to medical services as a percentage of premium revenues, would increase and our profits would decline. Because of the narrow margins of our health plan business, relatively small changes in our HBR can create significant changes in our financial results. Changes in healthcare regulations and practices, the level of utilization of healthcare services, hospital and pharmaceutical costs, disasters, the potential effects of climate change, major epidemics, pandemics or newly emergent diseases (such as COVID-19), new medical technologies, new pharmaceutical compounds, increases in provider fraud and other external factors, including general economic conditions such as inflation and unemployment levels, are generally beyond our control and could reduce our ability to accurately predict and effectively control the costs of providing health benefits. Also, member behavior could continue to be influenced by the uncertainty surrounding the ACA, including ongoing legal challenges to the ACA including the case originally captioned “Texas v. United States,” which is currently pending before the Supreme Court.
Our medical expenses include claims reported but not paid, estimates for claims incurred but not reported, and estimates for the costs necessary to process unpaid claims at the end of each period. Our development of the medical claims liability estimate is a continuous process which we monitor and refine on a monthly basis as claims receipts and payment information as well as inpatient acuity information becomes available. As more complete information becomes available, we adjust the amount of the estimate, and include the changes in estimates in medical expenses in the period in which the changes are identified. Given the uncertainties inherent in such estimates, there can be no assurance that our medical claims liability estimate will be adequate, and any adjustments to the estimate may unfavorably impact our results of operations and may be material.
Additionally, when we commence operations in a new state or region or launch a new product, we have limited information with which to estimate our medical claims liability. For a period of time after the inception of the new business, we base our estimates on government-provided historical actuarial data and limited actual incurred and received claims and inpatient acuity information. The addition of new categories of eligible individuals, as well as evolving Health Insurance Marketplace plans, may pose difficulty in estimating our medical claims liability.
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From time to time in the past, our actual results have varied from our estimates, particularly in times of significant changes in the number of our members. If it is determined that our estimates are significantly different than actual results, our results of operations and financial position could be adversely affected. In addition, if there is a significant delay in our receipt of premiums, our business operations, cash flows, or earnings could be negatively impacted.
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.
Most of our government customers employ risk-adjustment models to determine the premium amount they pay for each member. This model pays more for members with predictably higher costs according to the health status of each beneficiary enrolled. Premium payments are generally established at fixed intervals according to the contract terms and then adjusted on a retroactive basis. We reassess the estimates of the risk adjustment settlements each reporting period and any resulting adjustments are made to premium revenue. In addition, revisions by our government customers to the risk-adjustment models have reduced, and may continue to reduce, our premium revenue.
As a result of the variability of certain factors that determine estimates for risk-adjusted premiums, including plan risk scores, the actual amount of retroactive payments could be materially more or less than our estimates. Consequently, our estimate of our plans’ risk scores for any period, and any resulting change in our accrual of premium revenues related thereto, could have a material adverse effect on our results of operations, financial condition and cash flows. The data provided to our government customers to determine the risk score are subject to audit by them even after the annual settlements occur. These audits may result in the refund of premiums to the government customer previously received by us, which could be significant and would reduce our premium revenue in the year that repayment is required.
Government customers have performed and continue to perform audits of selected plans to validate the provider coding practices under the risk adjustment model used to calculate the premium paid for each member. In 2018, CMS proposed the removal of the fee for service adjuster from the risk adjustment data validation audit methodology. If adopted, this proposal, or any similar CMS rule making initiative, could increase our audit error scores. We anticipate that CMS will continue to conduct audits of our Medicare contracts and contract years on an on-going basis. An audit may result in the refund of premiums to CMS. It is likely that a payment adjustment could occur as a result of these audits; and any such adjustment could 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.
Due to among other things, the elimination of the individual mandate penalty in the Tax Cuts and Jobs Act, we may be adversely selected by individuals who have higher acuity levels than those individuals who selected us in the past and healthy individuals may decide to opt out of the pool altogether. In addition, the risk adjustment provisions of the ACA established to apportion risk amongst insurers may not be effective in appropriately mitigating the financial risks related to the marketplace product, are subject to a high degree of estimation and variability, and are affected by our members’ acuity relative to the membership acuity of other insurers. Further, changes in the competitive marketplace over time may exacerbate the uncertainty in these relatively new markets. For example, competitors seeking to gain a foothold in the changing market may introduce pricing that we may not be able to match, which may adversely affect our ability to compete effectively. Competitors may also choose to exit the market altogether or otherwise suffer financial difficulty, which could adversely impact the pool of potential insured, or require us to increase premium rates. Any significant variation from our expectations regarding acuity, enrollment levels, adverse selection, or other assumptions utilized in setting adequate premium rates could have a material adverse effect on our results of operations, financial position and cash flows.
We derive a portion of our cash flow and gross margin from our 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.
A significant portion of our PDP membership is obtained from the auto-assignment of beneficiaries in CMS-designated regions where our PDP premium bids are below benchmarks of other plans’ bids. In general,
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our premium bids are based on assumptions regarding PDP membership, utilization, drug costs, drug rebates and other factors for each region. Our 2021 PDP bids resulted in 33 of the 34 CMS regions in which we were below the benchmarks, and within the de minimis range in the remaining region, compared with our 2020 PDP bids in which we were below the benchmarks in 32 regions, and within the de minimis range in the remaining two regions. For those regions in which we are within the de minimis range, we will not be eligible to have new members auto-assigned to us, but we will not lose our existing auto-assigned membership.
If our future Part D premium bids are not below the CMS benchmarks, we risk losing PDP members who were previously assigned to us and we may not have additional PDP members auto-assigned to us, which could materially reduce our revenue and profits.
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.
Our contracts require the submission of complete and correct encounter data. The accurate and timely reporting of encounter data is increasingly important to the success of our programs because more states are using encounter data to determine compliance with performance standards and to set premium rates. We have expended and may continue to expend additional effort and incur significant additional costs to collect or correct inaccurate or incomplete encounter data and have been, and continue to be, exposed to operating sanctions and financial fines and penalties for noncompliance. In some instances, our government clients have established retroactive requirements for the encounter data we must submit. There also may be periods of time in which we are unable to meet existing requirements. In either case, it may be prohibitively expensive or impossible for us to collect or reconstruct this historical data.
We may experience challenges in obtaining complete and accurate encounter data, due to difficulties with providers and third-party vendors submitting claims in a timely fashion in the proper format, and with state agencies in coordinating such submissions. As states increase their reliance on encounter data, these difficulties could adversely affect the premium rates we receive and how membership is assigned to us and subject us to financial penalties, which could have a material adverse effect on our results of operations, financial condition, cash flows and our 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.
A substantial portion of our business relates to the provision of managed care programs and selected services to individuals receiving benefits under governmental assistance or entitlement programs. We provide these and other healthcare services under contracts with government entities in the areas in which we operate. Our government contracts are generally intended to run for a fixed number of years and may be extended for an additional specified number of years if the contracting entity or its agent elects to do so. When our contracts with government entities expire, they may be opened for bidding by competing healthcare providers, and there is no guarantee that our contracts will be renewed or extended. Competitors may buy their way into the market by submitting bids with lower pricing. Even if our responsive bids are successful, the bids may be based upon assumptions or other factors which could result in the contracts being less profitable than we had anticipated. Further, our government contracts contain certain provisions regarding eligibility, enrollment and dis-enrollment processes for covered services, eligible providers, periodic financial and informational reporting, quality assurance, timeliness of claims payment and agreement to maintain a Medicare plan in the state and financial standards, among other things, and are subject to cancellation if we fail to perform in accordance with the standards set by regulatory agencies.
We are also subject to various reviews, audits and investigations to verify our compliance with the terms of our contracts with various governmental agencies, as well as compliance with applicable laws and regulations. Any adverse review, audit or investigation could result in, among other things: cancellation of our contracts; refunding of amounts we have been paid pursuant to our contracts; imposition of fines, penalties and other sanctions on us; loss of our right to participate in various programs; increased difficulty in selling our products and services; loss of one or more of our licenses; lowered quality Star ratings; or required changes to the way we do business. In addition, under government procurement regulations and practices, a negative determination
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resulting from a government audit of our business practices could result in a contractor being fined, debarred and/or suspended from being able to bid on, or be awarded, new government contracts for a period of time.
If any of our government contracts are terminated, not renewed, renewed on less favorable terms, or not renewed on a timely basis, or if we receive an adverse finding or review resulting from an audit or investigation, our business and reputation may be adversely impacted, our goodwill could be impaired and our financial position, results of operations or cash flows may be materially affected.
We contract with independent third-party vendors and service providers who provide services to us and our subsidiaries or to whom we delegate selected functions. Violations of, or noncompliance with, laws and regulations governing our business by such third parties, or governing our dealings with such parties, could, among other things, subject us to additional audits, reviews and investigations and other adverse effects.
Ineffectiveness of state-operated systems and subcontractors could adversely affect our business.
A number of our health plans rely on other state-operated systems or subcontractors to qualify, solicit, educate and assign eligible members into managed care plans. The effectiveness of these state operations and subcontractors can have a material effect on a health plan’s enrollment in a particular month or over an extended period. When a state implements either new programs to determine eligibility or new processes to assign or enroll eligible members into health plans, or when it chooses new subcontractors, there is an increased potential for an unanticipated impact on the overall number of members assigned to managed care plans.
Execution of our growth strategy may increase costs or liabilities, or create disruptions in our business.
Our growth strategy includes, without limitation, the acquisition and expansion of health plans participating in government sponsored healthcare programs and specialty services businesses, contract rights and related assets of other health plans both in our existing service areas and in new markets and start-up operations in new markets or new products in existing markets. We continue to pursue opportunistic acquisitions to expand into new geographies and complementary business lines as well as to augment existing operations, and we may be in discussions with respect to one or multiple targets at any given time. Although we review the records of companies or businesses we plan to acquire, it is possible that we could assume unanticipated liabilities or adverse operating conditions, or an acquisition may not perform as well as expected or may not achieve timely profitability. We also face the risk that we will not be able to effectively integrate acquisitions into our existing operations effectively without substantial expense, delay or other operational or financial problems and we may need to divert more management resources to integration than we planned.
In connection with start-up operations and system migrations, we may incur significant expenses prior to commencement of operations and the receipt of revenue. For example, in order to obtain a certificate of authority in most jurisdictions, we must first establish a provider network, have systems in place and demonstrate our ability to administer a state contract and process claims. We may experience delays in operational start dates, including those related to stay-at-home directives and other impacts of COVID-19. As a result of these factors, start-up operations may decrease our profitability. The timing of operating of our new East Coast headquarters in Charlotte, and the expected benefits of its completion, may also be negatively impacted as a result of these factors. In addition, we are planning to further expand our business internationally and we will be subject to additional risks, including, but not limited to, political risk, an unfamiliar regulatory regime, currency exchange risk and exchange controls, cultural and language differences, foreign tax issues, and different labor laws and practices.
If we are unable to effectively execute our growth strategy, including as a result of the continued impact of COVID-19, our future growth will suffer and our results of operations could be harmed.
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.
We are seeking to diversify our business lines into areas that complement our government sponsored health plan business in order to grow our revenue stream and diversify our business. In order to diversify our business, we must succeed in selling the services of our specialty subsidiaries not only to our managed care plans, but to programs operated by third parties. Some of these third-party programs may compete with us in some markets, and they therefore may be unwilling to purchase specialty services from us. In any event, the offering of these
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services will require marketing activities that differ significantly from the manner in which we seek to increase revenues from our government sponsored programs. Our ineffectiveness in marketing specialty services to third parties may impair our ability to execute our business strategy.
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 principally operate through our health plan subsidiaries. As part of normal operations, we may make requests for dividends and distributions from our subsidiaries to fund our operations. In addition to state corporate law limitations, these subsidiaries are subject to more stringent state insurance and health maintenance organizations laws and regulations that limit the amount of dividends and distributions that can be paid to us without prior approval of, or notification to, state regulators. If these regulators were to deny or delay our subsidiaries’ requests to pay dividends, the funds available to us would be limited, which could harm our ability 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.
Operations in a limited number of states have accounted for a significant portion of our premium revenues to date. If we were unable to continue to operate in any of those states or if our current operations in any portion of one of those states were significantly curtailed, our revenues could decrease materially. Our reliance on operations in a limited number of states could cause our revenues and profitability to change suddenly and unexpectedly depending on legislative or other governmental or regulatory actions and decisions, economic conditions and similar factors in those states. For example, states we currently serve may open the bidding for their Medicaid program to other health insurers through a request for proposal process. Our inability to continue to operate in any of the states in which we operate could harm our business.
Competition may limit our ability to increase penetration of the markets that we serve.
We compete for members principally on the basis of size and quality of provider networks, benefits provided and quality of service. We compete with numerous types of competitors, including other health plans and traditional state Medicaid programs that reimburse providers as care is provided, as well as technology companies, new joint ventures, financial services firms, consulting firms and other non-traditional competitors. In addition, the administration of the ACA has the potential to shift the competitive landscape in our segment.
Some of the health plans with which we compete have greater financial and other resources and offer a broader scope of products than we do. In addition, significant merger and acquisition activity has occurred in the managed care industry, as well as complementary industries, such as the hospital, physician, pharmaceutical, medical device and health information systems businesses. To the extent that competition intensifies in any market that we serve, as a result of industry consolidation or otherwise, our ability to retain or increase members and providers, or maintain or increase our revenue growth, pricing flexibility and control over medical cost trends may be adversely affected.
If we are unable to maintain relationships with our provider networks, our profitability may be harmed.
Our profitability depends, in large part, upon our ability to contract at competitive prices with hospitals, physicians and other healthcare providers. Our provider arrangements with our primary care physicians, specialists and hospitals generally may be canceled by either party without cause upon 90 to 120 days prior written notice. We cannot provide any assurance that we will be able to continue to renew our existing contracts or enter into new contracts on a timely basis or under favorable terms enabling us to service our members profitably. Healthcare providers with whom we contract may not properly manage the costs of, and access to services, be able to provide effective telehealth services, maintain financial solvency, including due to the impact of COVID-19, or avoid disputes with other providers. Any of these events could have a material adverse effect on the provision of services to our members and our operations.
In any particular market, physicians and other healthcare providers could refuse to contract, demand higher payments, or take other actions that could result in higher medical costs or difficulty in meeting regulatory or accreditation requirements, among other things. In some markets, certain healthcare providers, particularly
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hospitals, physician/hospital organizations or multi-specialty physician groups, may have significant market positions or near monopolies that could result in diminished bargaining power on our part. In addition, accountable care organizations, practice management companies, which aggregate physician practices for administrative efficiency and marketing leverage, and other organizational structures that physicians, hospitals and other healthcare providers choose may change the way in which these providers interact with us and may change the competitive landscape. Such organizations or groups of healthcare providers may compete directly with us, which could adversely affect our operations, and our results of operations, financial position and cash flows by impacting our relationships with these providers or affecting the way that we price our products and estimate our costs, which might require us to incur costs to change our operations. Provider networks may consolidate, resulting in a reduction in the competitive environment. In addition, if these providers refuse to contract with us, use their market position to negotiate contracts unfavorable to us or place us at a competitive disadvantage, our ability to market products or to be profitable in those areas could be materially and adversely affected.
From time to time, healthcare providers assert or threaten to assert claims seeking to terminate non-cancelable agreements due to alleged actions or inactions by us. If we are unable to retain our current provider contract terms or enter into new provider contracts timely or on favorable terms, our profitability may be harmed. In addition, from time to time, we may be subject to class action or other lawsuits by healthcare providers with respect to claim payment procedures or similar matters. For example, our wholly owned subsidiary, Health Net Life Insurance Company (“HNL”), is and may continue to be subject to such disputes with respect to HNL’s payment levels in connection with the processing of out-of-network provider reimbursement claims for the provision of certain substance abuse related services. HNL expects to vigorously defend its claims payment practices. Nevertheless, in the event HNL receives an adverse finding in any related legal proceeding or from a regulator, or is otherwise required to reimburse providers for these claims at rates that are higher than expected or for claims HNL otherwise believes are unallowable, our financial condition and results of operations may be materially adversely affected. In addition, regardless of whether any such lawsuits brought against us are successful or have merit, they will still be time-consuming and costly and could distract our management’s attention. As a result, under such circumstances we may incur significant expenses and may be unable to operate our business effectively.
If we are unable to integrate and manage our information systems effectively, our operations could be disrupted.
Our operations depend significantly on effective information systems. The information gathered and processed by our information systems assists us in, among other things, monitoring utilization and other cost factors, processing provider claims, and providing data to our regulators. Our healthcare providers also depend upon our information systems for membership verifications, claims status and other information. Our information systems and applications require continual maintenance, upgrading and enhancement to meet our operational needs and regulatory requirements. We regularly upgrade and expand our information systems’ capabilities. If we experience difficulties with the transition to or from information systems or do not appropriately integrate, maintain, enhance or expand our information systems, we could suffer, among other things, operational disruptions, loss of existing members and difficulty in attracting new members, regulatory problems and increases in administrative expenses. In addition, our ability to integrate and manage our information systems may be impaired as the result of events outside our control, including acts of nature, such as earthquakes or fires, or acts of terrorists, which may include cyber-attacks by terrorists or other governmental or non-governmental actors. In addition, we may from time to time obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable if such third parties fail to perform adequately.
An impairment charge with respect to our recorded goodwill and intangible assets could have a material impact on our results of operations.
We periodically evaluate our goodwill and other intangible assets to determine whether all or a portion of their carrying values may be impaired, in which case a charge to earnings may be necessary. Changes in business strategy, government regulations or economic or market conditions have resulted and may result in impairments of our goodwill and other intangible assets at any time in the future. Our judgments regarding the existence of impairment indicators are based on, among other things, legal factors, market conditions, and operational
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performance. For example, the non-renewal of our health plan contracts with the state in which they operate may be an indicator of impairment. If an event or events occur that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill and other intangible assets, such revision could result in a non-cash impairment charge that could have a material impact on our results of operations in the period in which the impairment occurs.
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.
Information security risks have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct our operations, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state agents. Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks.
Security breaches may arise from external or internal threats. External breaches include hacking personal information for financial gain, attempting to cause harm or interruption to our operations, or intending to obtain competitive information. We experience attempted external hacking or malicious attacks on a regular basis. We maintain a rigorous system of prevention and detection controls through our security programs; however, our prevention and detection controls may not prevent or identify all such attacks on a timely basis, or at all. Internal breaches may result from inappropriate security access to confidential information by rogue employees, consultants or third party service providers. Any security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential member information, financial data, competitively sensitive information, or other proprietary data, whether by us or a third party, could have a material adverse effect on our business reputation, financial condition, cash flows, or results of operations.
Risks Relating to Regulatory and Legal Matters
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 majority of our revenues come from government subsidized healthcare programs including Medicaid, Medicare, TRICARE, State Children’s Health Insurance Program (“CHIP”), Long-Term Services and Supports (“LTSS”), Aged, Blind, or Disabled program (“ABD”), Foster Care and Health Insurance Marketplace premiums. Under most programs, the base premium rate paid for each program differs, depending on a combination of factors such as defined upper payment limits, a member’s health status, age, gender, county or region and benefit mix. Since Medicaid was created in 1965, the federal government and the states have shared the costs for this program, with the federal share currently averaging approximately 60%. We are therefore exposed to risks associated with federal and state government contracting or participating in programs involving a government payor, including but not limited to the general ability of the federal and/or state governments to terminate or modify contracts with them, in whole or in part, without prior notice, for convenience or for default based on performance; potential regulatory or legislative action that may materially modify amounts owed; our dependence upon Congressional or legislative appropriation and allotment of funds and the impact that delays in government payments could have on our operating cash flow and liquidity; and other regulatory, legislative or judicial actions that may have an impact on the operations of government subsidized healthcare programs including ongoing litigation involving the ACA. For example, future levels of funding and premium rates may be affected by continuing government efforts to contain healthcare costs and may further be affected by state and federal budgetary constraints. Governments periodically consider reducing or reallocating the amount of money they spend for Medicaid, Medicare, TRICARE, CHIP, LTSS, ABD and Foster Care. Furthermore, Medicare remains subject to the automatic spending reductions imposed by the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012 (“sequestration”), subject to a 2% cap, which was extended by the Bipartisan Budget Act of 2019 through 2029. The Coronavirus Aid, Relief, and Economic Security Act of 2020 temporarily suspended the Medicare sequestration for the period of May 1, 2020 through December 31, 2020, while also extending the mandatory sequestration policy by an additional one year, through 2030. The Bipartisan-Bicameral Omnibus COVID Relief Deal passed in December 2020 further extended the suspension of the Medicare sequestration until March 31, 2021.
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In addition, reductions in defense spending could have an adverse impact on certain government programs in which we currently participate by, among other things, terminating or materially changing such programs, or by decreasing or delaying payments made under such programs. Adverse economic conditions may put pressures on state budgets as tax and other state revenues decrease while the population that is eligible to participate in these programs remains steady or increases, creating more need for funding. We anticipate this will require government agencies to find funding alternatives, which may result in reductions in funding for programs, contraction of covered benefits, and limited or no premium rate increases or premium rate decreases. A reduction (or less than expected increase), a protracted delay, or a change in allocation methodology in government funding for these programs, as well as termination of one or more contracts for the convenience of the government, may materially and adversely affect our results of operations, financial position and cash flows. In addition, if another federal government shutdown were to occur for a prolonged period of time, federal government payment obligations, including its obligations under Medicaid, Medicare, TRICARE, CHIP, LTSS, ABD, Foster Care and the Health Insurance Marketplaces, may be delayed. Similarly, if state government shutdowns were to occur, state payment obligations may be delayed. If the federal or state governments fail to make payments under these programs on a timely basis, our business could suffer, and our financial position, results of operations or cash flows may be materially affected.
Payments from government payors may be delayed in the future, which, if extended for any significant period of time, could have a material adverse effect on our results of operations, financial position, cash flows or liquidity. In addition, delays in obtaining, or failure to obtain or maintain, governmental approvals, or moratoria imposed by regulatory authorities, could adversely affect our revenues or membership, increase costs or adversely affect our ability to bring new products to market as forecasted. Other changes to our government programs could affect our willingness or ability to participate in any of these programs or otherwise have a material adverse effect on our business, financial condition or results of operations.
Finally, changes in these programs could reduce the number of persons enrolled in or eligible for these programs or increase our administrative or healthcare costs under these programs. For example, maintaining current eligibility levels could cause states to reduce reimbursement or reduce benefits in order for states to afford to maintain eligibility levels. If any state in which we operate were to decrease premiums paid to us or pay us less than the amount necessary to keep pace with our cost trends, it could have a material adverse effect on our results of operations, financial position and cash flows.
The implementation of the ACA, as well as potential repeal of, changes to, or judicial challenges to the ACA, could materially and adversely affect our results of operations, financial position and cash flows.
The enactment of the ACA in March 2010 transformed the U.S. healthcare delivery system through a series of complex initiatives; however, the implementation of the ACA continues to face administrative, judicial and legislative challenges to repeal or change certain of its significant provisions. Changes to, or repeal of, portions or the entirety of the ACA, as well as judicial interpretations in response to constitutional and other legal challenges, as well as the uncertainty generated by such actual or potential challenges, could materially and adversely affect our business and financial position, results of operations or cash flows. Even if the ACA is not amended or repealed under the current administration, a future administration or members of Congress could continue to propose changes impacting implementation of the ACA, which could materially and adversely affect our financial position or operations.
Among the most significant of the ACA’s provisions was the establishment of the Health Insurance Marketplace for individuals and small employers to purchase health insurance coverage that included a minimum level of benefits and restrictions on coverage limitations and premium rates, as well as the expansion of Medicaid coverage to all individuals under age 65 with incomes up to 138% of the federal poverty level beginning January 1, 2014, subject to each state’s election. The U.S. Department of Health and Human Services (“HHS”) additionally indicated that it would consider a limited number of premium assistance demonstration proposals from states that want to privatize Medicaid expansion. Arkansas was the first state to obtain federal approval to use Medicaid funding to purchase private insurance for low-income residents, and we began operations under the program beginning on January 1, 2014. Several states have obtained Section 1115 waivers to implement the ACA’s Medicaid expansion in ways that extend beyond the flexibility provided by the federal
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law, with additional states pursuing Section 1115 waivers regarding eligibility criteria, benefits, and cost-sharing, and provider payments across their Medicaid programs. Litigation challenging Section 1115 waiver activity for both new and previously approved waivers is expected to continue both through administrative actions and the courts.
There have been significant administrative efforts to repeal, or limit implementation of, certain provisions of the ACA through changes in regulations. Such initiatives include repeal of the individual mandate effective in 2019, as well as easing the regulatory restrictions placed on short-term health plans and association health plans (“AHPs”), which plans often provide fewer benefits than the traditional ACA insurance benefits.
Additionally, the U.S. Department of Labor issued a final rule on June 19, 2018 which expanded flexibility regarding the regulation and formation of AHPs provided by small employer groups and associations. On June 13, 2019, the HHS, the U.S. Department of Labor and the U.S. Treasury issued a final rule allowing employers of all sizes that do not offer a group coverage plan to fund a new kind of health reimbursement arrangement (“HRA”), known as an individual coverage HRA (“ICHRA”). Beginning January 1, 2020, employees became able to use employer-funded ICHRAs to buy individual-market insurance, including insurance purchased on the public exchanges formed under the ACA.
In addition to administrative efforts to expand the flexibility of other insurance plan options that are not required to meet ACA requirements, there have also been efforts to address the ACA’s non-deductible tax imposed on health insurers based on prior year net premiums written (the “health insurer fee” or “HIF”). The ACA imposed HIF was $8.0 billion in 2014, and $11.3 billion in each of 2015 and 2016, with increasing annual amounts thereafter. The HIF payable in 2017 was suspended by the Consolidated Appropriations Act for fiscal year 2016; however, a $14.3 billion payment occurred in 2018. Collection of the HIF for 2019 was also suspended, but resumed in 2020 with a $15.5 billion payment. Congress passed a spending bill in December 2019, which would repeal the health insurance tax indefinitely, effective in 2021. If we are not reimbursed by the states for the cost of the HIF (including the associated tax impact), or if we are unable to otherwise adjust our business model to address the current assessment, our results of operations, financial position and cash flows may be materially adversely affected.
The constitutionality of the ACA itself continues to face judicial challenge. In December 2018, a partial summary judgment ruling in “Texas v. United States of America” held that the ACA’s individual mandate requirement was essential to the ACA, and without it, the remainder of the ACA was invalid (i.e., that it was not “severable” from the ACA). That decision was appealed to the Fifth Circuit, which ruled in December 2019 that the individual mandate was unconstitutional after Congress set the individual mandate penalty to $0 and remanded the case to the district court for additional analysis on the question of severability. In March 2020, the U.S. Supreme Court agreed to hear the case to review whether the individual mandate is constitutional and, if the individual mandate is unconstitutional, the severability issue. In June 2020, Noel J. Francisco, the then Solicitor General of the United States, together with multiple U.S. Department of Justice colleagues, submitted a brief to the U.S. Supreme Court supporting the argument that the individual mandate is unconstitutional and that the remaining provisions of the ACA are not severable. The U.S. Supreme Court heard oral arguments in November 2020 and a ruling is anticipated in 2021. The ACA remains in effect until judicial review of the decision is concluded. The ultimate content, timing or effect of any potential future legislation or the outcome of the lawsuit cannot be predicted and may be delayed as a result of court closures and reduced court dockets as a result of the COVID-19 pandemic.
These changes and other potential changes involving the functioning of the Health Insurance Marketplace as a result of new legislation, regulation, executive action or litigation could impact our business and results of operations.
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 business is extensively regulated by the states in which we operate and by the federal government. In addition, the managed care industry has received negative publicity that has led to increased legislation, regulation, review of industry practices and private litigation in the commercial sector. Such negative publicity may adversely affect our stock price and damage our reputation in various markets.
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In each of the jurisdictions in which we operate, we are regulated by the relevant insurance, health and/or human services or government departments that oversee the activities of managed care organizations providing or arranging to provide services to Medicaid, Medicare, Health Insurance Marketplace enrollees or other beneficiaries. For example, our health plan subsidiaries, as well as our applicable specialty companies, must comply with minimum statutory capital and other financial solvency requirements, such as deposit and surplus requirements.
The frequent enactment of, changes to, or interpretations of laws and regulations could, among other things: force us to restructure our relationships with providers within our network; require us to implement additional or different programs and systems; restrict revenue and enrollment growth; increase our healthcare and administrative costs; impose additional capital and surplus requirements; and increase or change our liability to members in the event of malpractice by our contracted providers. In addition, changes in political party or administrations at the state or federal level in the United States or internationally may change the attitude towards healthcare programs and result in changes to the existing legislative or regulatory environment.
Additionally, the taxes and fees paid to federal, state and local governments may increase due to several factors, including: enactment of, changes to, or interpretations of tax laws and regulations, audits by governmental authorities, geographic expansions into higher taxing jurisdictions and the effect of expansions into international markets.
Our contracts with states may require us to maintain a minimum HBR or may require us to share profits in excess of certain levels. In certain circumstances, our plans may be required to return premiums back to the state in the event profits exceed established levels or HBR does not meet the minimum requirement. Factors that may impact the amount of premium returned to the state include transparent pharmacy pricing and rebate initiatives. Other states may require us to meet certain performance and quality metrics in order to maintain our contract or receive additional or full contractual revenue.
The governmental healthcare programs in which we participate are subject to the satisfaction of certain regulations and performance standards. Regulators require numerous steps for continued implementation of the ACA, including the promulgation of a substantial number of potentially more onerous federal regulations. If we fail to effectively implement or appropriately adjust our operational and strategic initiatives with respect to the implementation of healthcare reform, or do not do so as effectively as our competitors, our results of operations may be materially adversely affected. For example, under the ACA, Congress authorized CMS and the states to implement managed care demonstration programs to serve dually eligible beneficiaries to improve the coordination of their care. Participation in these demonstration programs is subject to CMS approval and the satisfaction of conditions to participation, including meeting certain performance requirements. Our inability to improve or maintain adequate quality scores and Star ratings to meet government performance requirements or to match the performance of our competitors could result in limitations to our participation in or exclusion from these or other government programs. Specifically, several of our Medicaid contracts require us to maintain a Medicare health plan.
In April 2016, CMS issued final regulations that revised existing Medicaid managed care rules by establishing a minimum medical loss ratio standard for Medicaid of 85% and strengthening provisions related to network adequacy and access to care, enrollment and disenrollment protections, beneficiary support information, continued service during beneficiary appeals, and delivery system and payment reform initiatives, among others. CMS subsequently issued a Notice of Proposed Rulemaking on November 8, 2018, advancing CMS’ efforts to streamline the Medicaid and CHIP managed care regulatory framework and to pursue a broader strategy to relieve regulatory burdens, support state flexibility and local leadership, and promote transparency, flexibility, and innovation in the delivery of care. On November 13, 2020, CMS finalized revisions to the Medicaid managed care regulations, many of which became effective in December 2020. While not a wholesale revision of the 2016 regulations, the November 2020 final rule adopts changes in areas including network adequacy, beneficiary protections, quality oversight, and the establishment of capitation rates and payment policies. Although we strive to comply with all existing regulations and to meet performance standards applicable to our business, failure to meet these requirements could result in financial fines and penalties. Also, states or other governmental entities may not allow us to continue to participate in their government programs, or we may fail to win procurements to participate in such programs, either of which could materially and adversely affect our results of operations, financial position and cash flows.
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In addition, as a result of the expansion of our businesses and operations conducted in foreign countries, we face political, economic, legal, compliance, regulatory, operational and other risks and exposures that are unique and vary by jurisdiction. These foreign regulatory requirements with respect to, among other items, environmental, tax, licensing, intellectual property, privacy, data protection, investment, capital, management control, labor relations, and fraud and corruption regulations are different than those faced by our domestic businesses. In addition, we are subject to U.S. laws that regulate the conduct and activities of U.S.-based businesses operating abroad, such as the Foreign Corrupt Practices Act. Any failure to comply with laws and regulations governing our conduct outside the United States or to successfully navigate international regulatory regimes that apply to us could adversely affect our ability to market our products and services, which may have a material adverse effect on our business, financial condition and results of operations.
Our businesses providing pharmacy benefit 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 provide pharmacy benefit management (“PBM”) and specialty pharmacy services, including through our Envolve Pharmacy Solutions product. These businesses are subject to federal and state laws that, among other requirements, govern the relationships of the business with pharmaceutical manufacturers, physicians, pharmacies, customers and consumers. We also conduct business as a mail order pharmacy and specialty pharmacy, which subjects these businesses to extensive federal, state and local laws and regulations. In addition, federal and state legislatures and regulators regularly consider new regulations for the industry that could materially and adversely affect current industry practices, including the receipt or disclosure of rebates from pharmaceutical companies, the development and use of formularies, and the use of average wholesale prices.
Our PBM and specialty pharmacy businesses would be materially and adversely affected by an inability to contract on favorable terms with pharmaceutical manufacturers and other suppliers, including with respect to the structuring of rebates and pricing of new specialty and generic drugs. In addition, our PBM and specialty pharmacy businesses could face potential claims in connection with purported errors by our mail order or specialty pharmacies, including in connection with the risks inherent in the authorization, compounding, packaging and distribution of pharmaceuticals and other healthcare products. Disruptions at any of our mail order or specialty pharmacies due to an event that is beyond our control could affect our ability to process and dispense prescriptions in a timely manner and could materially and adversely affect our results of operations, financial position and cash flows.
From time to time, we may become involved in costly and time-consuming litigation and other regulatory proceedings, which require significant attention from our management.
From time to time, we are a defendant in lawsuits and regulatory actions and are subject to investigations relating to our business, including, without limitation, medical malpractice claims, claims by members alleging failure to pay for or provide healthcare, claims related to non-payment or insufficient payments for out-of-network services, claims alleging bad faith, investigations regarding our submission of risk adjuster claims, putative securities class actions, protests and appeals related to Medicaid procurement awards, employment-related disputes, including wage and hour claims, submissions to state agencies related to payments or state false claims acts and claims related to the imposition of new taxes, including but not limited to claims that may have retroactive application. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on our business and financial position, results of operations and/or cash flows and may affect our reputation. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings are costly and time consuming and require significant attention from our management, and could therefore harm our business and financial position, results of operations or cash flows.
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.
As part of our normal operations, we collect, process and retain confidential member information. We are subject to various federal, state and international laws, regulations, rules and contractual requirements regarding the use and disclosure of confidential member information, including the Health Insurance Portability and
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Accountability Act of 1996 (“HIPAA”), the Health Information Technology for Economic and Clinical Health (“HITECH”) Act of 2009, the Gramm-Leach-Bliley Act, and the European Union’s General Data Protection Regulation, which require us to protect the privacy of medical records and safeguard personal health information we maintain and use. Certain of our businesses are also subject to the Payment Card Industry Data Security Standard, which is a multifaceted security standard that is designed to protect credit card account data as mandated by payment card industry entities. Despite our best attempts to maintain adherence to information privacy and security best practices, as well as compliance with applicable laws, rules and contractual requirements, our facilities and systems, and those of our third-party service providers, may be vulnerable to privacy or security breaches, acts of vandalism or theft, malware or other forms of cyber-attack, misplaced or lost data including paper or electronic media, programming and/or human errors or other similar events. In the past, we have had data breaches resulting in disclosure of confidential or protected health information that have not resulted in any material financial loss or penalty to date. For example, in January 2021, we learned that Accellion, a third-party data transfer provider with whom we contract, had a system vulnerability that resulted in unauthorized access to certain sensitive data of our customers, including protected health information, over a period of several days in January 2021 as well as unauthorized access to the data of several of Accellion’s other clients. This incident is still under investigation, but we currently do not believe that it will have a material adverse effect on our business, reputation, results of operations, financial position and cash flows. However, there can be no assurance that the January 2021 incident and other privacy or security breaches will not require us to expend significant resources to remediate any damage, interrupt our operations and damage our business or reputation, subject us to state, federal, or international agency review, and result in enforcement actions, material fines and penalties, litigation or other actions which could have a material adverse effect on our business, reputation, results of operations, financial position and cash flows.
In addition, HIPAA broadened the scope of fraud, waste and abuse laws applicable to healthcare companies and established enforcement mechanisms to combat fraud, waste and abuse, including civil and, in some instances, criminal penalties for failure to comply with specific standards relating to the privacy, security and electronic transmission of protected health information. The HITECH Act expanded the scope of these provisions by mandating individual notification in instances of breaches of protected health information, providing enhanced penalties for HIPAA violations, and granting enforcement authority to states’ Attorneys General in addition to the HHS Office for Civil Rights. It is possible that Congress may enact additional legislation in the future to increase the amount or application of penalties and to create a private right of action under HIPAA, which could entitle patients to seek monetary damages for violations of the privacy rules.
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.
We, along with other companies involved in public healthcare programs, are the subject of federal and state fraud, waste and abuse investigations. The regulations and contractual requirements applicable to participants in these public sector programs are complex and subject to change. Violations of fraud, waste and abuse laws applicable to us could result in civil monetary penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicaid, Medicare, TRICARE, and other federal healthcare programs and federally funded state health programs. Fraud, waste and abuse prohibitions encompass a wide range of activities, including kickbacks for referral of members, incorrect and unsubstantiated billing or billing for unnecessary medical services, improper marketing and violations of patient privacy rights. These fraud, waste and abuse laws include the federal False Claims Act, which prohibits the known filing of a false claim or the known use of false statements to obtain payment from the federal government, and the federal anti-kickback statute, which prohibits the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services. Many states have fraud, waste and abuse laws, including false claim act and anti-kickback statutes that closely resemble the federal False Claims Act and the federal anti-kickback statute. In addition, the Deficit Reduction Act of 2005 encouraged states to enact state-versions of the federal False Claims Act that establish liability to the state for false and fraudulent Medicaid claims and that provide for, among other things, claims to be filed by qui tam relators (private parties acting on the government’s behalf). Federal and state governments have made investigating and prosecuting healthcare fraud, waste and abuse a priority. In the event 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.
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Risks Relating to Conditions in the Financial Markets and Economy
Our investment portfolio may suffer losses which could materially and adversely affect our results of operations or liquidity.
We maintain a significant investment portfolio of cash equivalents and short-term and long-term investments in a variety of securities, which are subject to general credit, liquidity, market and interest rate risks and will decline in value if interest rates increase or one of the issuers’ credit ratings is reduced. Furthermore, COVID-19 has impacted, and may continue to impact, the global economy resulting in significant market volatility and fluctuating interest rates. As a result, we may experience a reduction in value or loss of our investments, which may have a negative adverse effect on our results of operations, liquidity and financial condition.
Adverse credit market conditions may have a material adverse effect on our liquidity or our ability to obtain credit on acceptable terms.
In the past, the securities and credit markets have experienced extreme volatility and disruption, which has increased due to the effects of COVID-19. The availability of credit, from virtually all types of lenders, has at times been restricted. In the event we need access to additional capital to pay our operating expenses, fund subsidiary surplus requirements, make payments on or refinance our indebtedness, pay capital expenditures, or fund acquisitions, our ability to obtain such capital may be limited and the cost of any such capital may be significant, particularly if we are unable to access our existing credit facility.
Our access to additional financing will depend on a variety of factors such as prevailing economic and credit market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity, and perceptions of our financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. If one or any combination of these factors were to occur, our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain sufficient additional financing on favorable terms, within an acceptable time, or at all.
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.
As of December 31, 2020, we had consolidated indebtedness of $16,779 million. We intend to incur additional indebtedness to finance a portion of the consideration for the Magellan Acquisition, and we may further increase our indebtedness in the future.
This may have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing borrowing costs.
Among other things, the Company Credit Facility and the indentures governing our notes require us to comply with various covenants that impose restrictions on our operations, including our ability to incur additional indebtedness, create liens, pay dividends, make certain investments or other restricted payments, sell or otherwise dispose of substantially all of our assets and engage in other activities. Our Company Credit Facility also requires us to comply with a maximum debt-to-EBITDA ratio and a minimum fixed charge coverage ratio.
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.
As of December 31, 2020, borrowings under our Company Credit Facility bear interest based upon various reference rates, including LIBOR. On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. On November 30, 2020, ICE Benchmark Administration, the administrator of LIBOR, announced plans to consult on ceasing the publication of certain U.S. dollar LIBOR rates on December 31, 2021 and to extend the transition for other U.S. dollar LIBOR rates to June 2023. The U.S. Federal Reserve concurrently issued a statement advising banks to stop new U.S. dollar LIBOR issuances by the end of 2021. In light of these recent announcements, the future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to the phasing out of LIBOR could cause LIBOR to perform differently than in the past or cease to exist. The U.S. Federal Reserve, in conjunction with the Alternative
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Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, announced replacement of U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The first publication of SOFR was released in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain. As a result, it is not possible to predict the effect of any changes, establishment of alternative references rates or other reforms to LIBOR that may be enacted in the U.K. or elsewhere. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
Risks Associated with Mergers, Acquisitions and Divestitures
Mergers and acquisitions may not be accretive and may cause dilution to our earning per share, which may cause the market price of our common stock to decline.
The market price of our common stock is generally subject to volatility, and there can be no assurances regarding the level or stability of our share price at any time. The market price of our common stock may decline as a result of acquisitions, including the Magellan Acquisition, if, among other things, we are unable to achieve the expected cost and revenue synergies or growth in earnings, the operational cost savings estimates in connection with the integration of acquired businesses with ours are not realized as rapidly or to the extent anticipated, the transaction costs related to the acquisitions and integrations are greater than expected or if any financing related to the acquisitions is on unfavorable terms. The market price also may decline if we do not achieve the perceived benefits of the acquisitions, including the Magellan Acquisition, as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the acquisitions on our financial position, results of operations or cash flows is not consistent with the expectations of financial or industry analysts.
We may be unable to successfully integrate our existing business with acquired businesses and realize the anticipated benefits of such acquisitions.
The success of acquisitions we make, including the Magellan Acquisition, will depend, in part, on our ability to successfully combine the existing business of Centene with such acquired businesses and realize the anticipated benefits, including synergies, cost savings, growth in earnings, innovation and operational efficiencies, from the combinations. If we are unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or may take longer to realize than expected and the value of our common stock may be harmed.
The integration of acquired businesses, including Magellan Health, with our existing business is a complex, costly and time-consuming process. The integration may result in material challenges, including, without limitation:
the diversion of management’s attention from ongoing business concerns and performance shortfalls as a result of the devotion of management’s attention to the integration;
managing a larger company;
maintaining employee morale and retaining key management and other employees;
the possibility of faulty assumptions underlying expectations regarding the integration process;
retaining existing business and operational relationships and attracting new business and operational relationships;
consolidating corporate and administrative infrastructures and eliminating duplicative operations;
coordinating geographically separate organizations;
unanticipated issues in integrating information technology, communications and other systems;
unanticipated changes in federal or state laws or regulations, including the ACA and any regulations enacted thereunder;
unforeseen expenses or delays associated with the acquisition and/or integration;
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achieving actual cost savings at the anticipated levels; and
decreases in premiums paid under government sponsored healthcare programs by any state in which we operate.
Many of these factors will be outside of our control and any one of them could result in delays, increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could materially affect our financial position, results of operations and cash flows. Our ability to successfully manage the expanded business following any given acquisition, including the Magellan Acquisition, will depend, in part, upon management’s ability to design and implement strategic initiatives that address not only the integration of two independent stand-alone companies, but also the increased scale and scope of the combined business with its associated increased costs and complexity. There can be no assurances that we will be successful in managing our expanded operations as a result of acquisitions or that we will realize the expected growth in earnings, operating efficiencies, cost savings and other benefits.
The financing arrangements that we entered into in connection with the WellCare Acquisition may, under certain circumstances, contain restrictions and limitations that could significantly impact our ability to operate our business.
We incurred significant new indebtedness in connection with the WellCare Acquisition. Certain of the agreements governing the indebtedness that we incurred in connection with the WellCare Acquisition contains covenants that, among other things, may, under certain circumstances, place limitations on the dollar amounts paid or other actions relating to:
payments in respect of, or redemptions or acquisitions of, debt or equity issued by us or our subsidiaries, including the payment of dividends on our common stock;
incurring additional indebtedness;
incurring guarantee obligations;
paying dividends;
creating liens on assets;
entering into sale and leaseback transactions;
making investments, loans or advances;
entering into hedging transactions;
engaging in mergers, consolidations or sales of all or substantially all of their respective assets; and
engaging in certain transactions with affiliates.
In addition, we are required to maintain a minimum amount of excess availability as set forth in these agreements.
Our ability to maintain minimum excess availability in future periods will depend on our ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are beyond our control. The ability to comply with this covenant in future periods will also depend on our ability to successfully implement its overall business strategy and realize the anticipated benefits of the WellCare Acquisition, including synergies, cost savings, innovation and operational efficiencies.
Various risks, uncertainties and events beyond our control could affect our ability to comply with the covenants contained in our financing agreements. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of its obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair its ability to obtain other financing.
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Additional Risks Associated with the Magellan Acquisition
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.
The completion of the merger is subject to a number of conditions, including, among others, the receipt of U.S. federal antitrust clearance and certain other required state regulatory approvals, which make the completion of the Magellan Acquisition and timing thereof uncertain. Also, either we or Magellan Health may terminate the merger agreement (the “Merger Agreement”) if the Magellan Acquisition is not consummated by October 4, 2021 (subject to an automatic extension to January 4, 2022 in certain circumstances), except that this right to terminate the Merger Agreement will not be available to any party whose failure to perform, in any material respect, any obligation under the Merger Agreement has been the proximate cause of the failure of the merger to be consummated on or before that date.
If the Magellan Acquisition is not completed, our ongoing business may be adversely affected and, without realizing any of the benefits that we could have realized had the Magellan Acquisition been completed, we will be subject to a number of risks, including the following:
the market price of our common stock could decline;
inability to secure financing;
if the Merger Agreement is terminated and our board of directors (Board) seeks another business combination, our stockholders cannot be certain that we will be able to find a party willing to enter into any transaction on terms equivalent to or more attractive than the terms that we and Magellan Health have agreed to in the Merger Agreement;
time and resources committed by our management to matters relating to the Magellan Acquisition could otherwise have been devoted to pursuing other beneficial opportunities;
we may experience negative reactions from the financial markets or from our customers or employees; and
we will be required to pay our costs relating to the Magellan Acquisition, such as legal, accounting, financial advisory and printing fees, whether or not the Magellan Acquisition is completed.
In addition, if the Magellan Acquisition is not completed, we could be subject to litigation related to any failure to complete the Magellan Acquisition or related to any enforcement proceeding commenced against us to perform our obligations under the Merger Agreement. If any such risk materializes, it could adversely impact our ongoing business.
Similarly, delays in the completion of the Magellan Acquisition could, among other things, result in additional transaction costs, loss of revenue or other negative effects associated with uncertainty about completion of the Magellan Acquisition and cause us not to realize some or all of the benefits that we expect to achieve if the Magellan Acquisition is successfully completed within its expected timeframe. We cannot assure you that the conditions to the closing of the Magellan Acquisition will be satisfied or waived or that the Magellan Acquisition will be consummated.
Centene and Magellan Health 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.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on Centene’s and Magellan Health’s respective liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Magellan Acquisition, then that injunction may delay or prevent the Magellan Acquisition from being completed, or from being completed within the expected timeframe, which may adversely affect Centene’s business, financial position and results of operation. Currently, Centene is not aware of any securities class action lawsuits or derivative lawsuits having been filed in connection with the Magellan Acquisition.
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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.
The completion of the Magellan Acquisition may trigger change in control and other provisions in certain agreements to which Magellan Health or its subsidiaries are a party. If we and Magellan Health are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if we and Magellan Health are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to Magellan Health or the combined company. Any of the foregoing or similar developments may have an adverse impact on the combined company’s business and results of operations.
General Risk Factors
We may be unable to attract, retain or effectively manage the succession of key personnel.
We are highly dependent on our ability to attract and retain qualified personnel to operate and expand our business. We may be adversely impacted if we are unable to adequately plan for the succession of our executives and senior management. While we have succession plans in place for members of our executive and senior management team, these plans do not guarantee that the services of our executive and senior management team will continue to be available to us. Our ability to replace any departed members of our executive and senior management team or other key employees may be difficult and may take an extended period of time because of the limited number of individuals in the Managed Care and Specialty Services industry with the breadth of skills and experience required to operate and successfully expand a business such as ours. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these personnel. If we are unable to attract, retain and effectively manage the succession plans for key personnel, executives and senior management, our business and financial position, results of operations or cash flows could be harmed.
Future issuances and sales of additional shares of preferred or common stock could reduce the market price of our shares of common stock.
We may, from time to time, issue additional securities to raise capital or in connection with acquisitions. We often acquire interests in other companies by using a combination of cash and our common stock or just our common stock. Further, shares of preferred stock may be issued from time to time in one or more series as our Board of Directors may from time to time determine each such series to be distinctively designated. The issuance of any such preferred stock could materially adversely affect the rights of holders of our common stock. Any of these events may dilute your ownership interest in our company and have an adverse impact on the price of our common stock.
Risks Relating to the Notes
We and our subsidiaries may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations, including the notes, depends on our and our subsidiaries’ financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, competitive, legislative, regulatory and other factors beyond our control. As a result, we may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness, including the notes. In addition, because we conduct a significant portion of our operations through our subsidiaries, repayment of our indebtedness is also dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us by dividend, debt repayment or otherwise. Our subsidiaries are distinct legal entities and they do not have any obligation to pay amounts due on the notes or to make funds available for that purpose or for other obligations. Pursuant to applicable state limited liability company laws and other laws and regulations, our subsidiaries may not be able to, or may not be permitted to, make distributions to us in order to enable us to make payments in respect of the notes. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
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We cannot assure you that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our Credit Agreement, dated as of March 24, 2016, as amended and restated as of December 14, 2017, as further amended and restated as of May 7, 2019, as further amended and restated as of September 11, 2019 and as further amended as of November 14, 2019, by and among Centene, the various financial institutions named therein, as lenders, and Wells Fargo Bank, National Association, as administrative agent (as may be further amended, amended and restated, supplemented or otherwise modified from time to time the “Company Credit Facility”), in an amount sufficient to enable us to pay our indebtedness, including the notes, or to fund our other liquidity needs. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives.
The restrictive covenants in our debt instruments may limit our operating flexibility. Our failure to comply with these covenants could result in defaults under our indentures and future debt instruments even though we may be able to meet our debt service obligations.
The instruments governing certain of Centene’s indebtedness, including the Company Credit Facility, impose or will impose significant operating and financial restrictions on us. These restrictions may in certain circumstances significantly limit, among other things, our ability to incur additional indebtedness, pay dividends, repay junior indebtedness, sell assets, make investments, engage in transactions with affiliates, create liens and engage in certain types of mergers or acquisitions. Our future debt instruments may have similar or more restrictive covenants. These restrictions could limit our ability to obtain future financings, make capital expenditures, withstand a future downturn in our business or the economy in general, or otherwise take advantage of business opportunities that may arise. If we fail to comply with these restrictions, the note holders or lenders under any debt instrument could declare a default under the terms of the relevant indebtedness even though we are able to meet debt service obligations and, because our indebtedness has cross-default and cross-acceleration provisions, could cause all or a substantial portion of our debt to become immediately due and payable.
We cannot assure you that we would have sufficient funds available, or that we would have access to sufficient capital from other sources, to repay any accelerated debt. Even if we could obtain additional financing, we cannot assure you that the terms would be favorable to us. If we default on any future secured debt, the secured creditors could foreclose on their liens. As a result, any event of default could have a material adverse effect on our business and financial condition, and could prevent us from paying amounts due under the notes.
Despite current indebtedness levels, we may still be able to incur substantially more debt, including secured debt, which could further exacerbate the risks we face.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future, including secured indebtedness. The terms of the Company Credit Facility do not fully prohibit us or our subsidiaries from incurring additional indebtedness and the indentures governing, or that will govern, the notes and our outstanding notes do not and will not limit the amount of additional unsecured indebtedness we and our subsidiaries may incur. As of September 30, 2020, on an as adjusted basis after giving effect to (i) the September 2020 refinancing transactions and (ii) this offering and the application of the proceeds thereof as described in “Use of Proceeds,” we would have had $16.7 billion of senior debt outstanding and approximately $121 million of issued and undrawn letters of credit, and our subsidiaries had $25.9 billion of indebtedness and other liabilities outstanding, including the 5.375% stub notes, medical claims liabilities, accounts payable and accrued expenses, unearned revenue and other long term liabilities (excluding intercompany liabilities). In addition, as of September 30, 2020, on an as adjusted basis after giving effect to (i) the September 2020 refinancing transactions and (ii) this offering and the application of the proceeds thereof as described in “Use of Proceeds,” Centene would have had $1.9 billion of available and undrawn borrowings under the Company Credit Facility (with an uncommitted option to increase our Company Credit Facility by up to $500 million plus certain additional amounts based on our total debt to EBITDA ratio). Of the outstanding letters of credit referenced above, none were issued under
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the Company Credit Facility. If new debt is added to our current debt levels, the related risks that we now face would increase. In addition, our Company Credit Facility and the indentures governing our outstanding notes do not, and the indenture that will govern the notes will not, prevent us or our subsidiaries from incurring obligations that do not constitute indebtedness under the applicable agreement. A substantial amount of debt we incur in the future could be secured. To the extent we were to secure debt we incur in the future under any credit facility or other debt, your ability to receive payments under the notes will be effectively subordinated to the secured debt, which will have a prior claim on any assets securing the debt, to the extent of the value of those assets, and it is possible that there will be insufficient assets remaining from which claims of the holders of notes can be satisfied. As of the date of this prospectus supplement, we do not have significant amounts of secured indebtedness.
Because we are a holding company and depend entirely on cash flow from our subsidiaries to meet our obligations, your right to receive payment on the notes will be structurally subordinated to our subsidiaries’ obligations.
The notes will be obligations exclusively of Centene Corporation. Our cash flow and our ability to service our debt, including the notes, depends on the earnings of our subsidiaries and on the distribution of earnings, loans or other payments to us by our subsidiaries.
Our subsidiaries are separate and distinct legal entities with no obligations to pay any amounts due on the notes or to provide us with funds for our payment obligations, whether by dividend, distribution, loan or other payments. In addition, the ability of our subsidiaries to make any dividend, distribution, loan or other payment to us is subject to statutory restrictions and regulatory capital requirements. Payments to us by our subsidiaries will also be contingent upon our subsidiaries’ earnings and their business considerations.
None of our subsidiaries will guarantee the notes. As a result, the notes will be structurally subordinated to all indebtedness and other liabilities (including medical claims liabilities, accounts payable and accrued expenses, unearned revenue and other long-term liabilities) of our subsidiaries. Any right we have to receive assets of any of our subsidiaries upon the subsidiary’s liquidation or reorganization (and the consequent right of the holders of the notes to participate in the assets) will be structurally subordinated to the claims of that subsidiary’s creditors, except to the extent that we are recognized as a creditor of the subsidiary, in which case our claims would still be subordinate in right of payment to any security in the assets of the subsidiary and any indebtedness of the subsidiary senior to that held by us. As of September 30, 2020, on an as adjusted basis after giving effect to (i) the September 2020 refinancing transactions and (ii) this offering and the application of the proceeds thereof as described in “Use of Proceeds,” the notes would have been effectively junior to approximately $25.9 billion of liabilities outstanding of our subsidiaries, including the remaining 5.375% stub notes, medical claims liabilities, accounts payable and accrued expenses, return of premium payable, unearned revenue and other long term liabilities (excluding intercompany liabilities).
In addition, our regulated subsidiaries have historically generated substantially all of our revenues. Our regulated subsidiaries are subject to various state government statutory and regulatory restrictions applicable to insurance companies generally, that limit the amount of dividends, loans and advances and other payments they can make to us. If insurance regulators at any time determine that payment of a dividend or any other payment to us would be detrimental to an insurance subsidiary’s policyholders or creditors, because of the financial condition of the insurance subsidiary or otherwise, the regulators may block dividends or other payments to us that would otherwise be permitted without prior approval. Furthermore, if one or more of our regulated subsidiaries becomes insolvent, the regulators may seize its assets to cover its obligations under healthcare policies, which could result in our remaining assets generating insufficient revenue to pay the notes in full or at all.
The ability of holders of the notes to require Centene to repurchase the notes as a result of a disposition of “substantially all” assets may be uncertain.
The definition of change of control in the indenture governing the notes will include a phrase relating to the direct or indirect sale, transfer, conveyance or other disposition of “all or substantially all” of the properties or assets of the Company and its restricted subsidiaries, taken as a whole. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of the notes to require Centene to repurchase such notes as a
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result of a sale, transfer, conveyance or other disposition of less than all of Centene’s assets and the assets of Centene’s restricted subsidiaries taken as a whole to another person or group may be uncertain. See “Description of the Notes—Repurchase at the Option of Holders Upon a Change of Control.”
We may not have the ability to raise the funds necessary to finance the change of control offer required by the indenture.
Upon a change of control, we will be required to offer to repurchase the notes at 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of the notes or that the restrictions in our Company Credit Facility or any other future indebtedness will not allow such repurchases. In order to satisfy our obligations, we could seek to refinance the notes and any other indebtedness then required to be repurchased, or obtain a waiver from the holders of the notes and other affected indebtedness. However, we may not be able to obtain a waiver or effect a refinancing on terms acceptable to us, if at all. Our failure to purchase, or give notice of an offer to purchase, the notes would be a default under the indenture governing the notes, our Company Credit Facility and the indentures governing our 4.75% 2025 notes, 5.375% 2026 notes, 4.25% 2027 notes, 4.625% 2029 notes, 3.375% 2030 notes, additional 5.375% 2026 notes, 3.00% 2030 notes and may constitute a default under future indebtedness as well. See “Description of the Notes—Repurchase at the Option of Holders—Change of Control.”
In addition, certain important corporate events, such as leveraged recapitalizations, may not, under the indenture governing the notes, constitute a “change of control” that would require us to repurchase the notes, notwithstanding the fact that such corporate events could increase the level of our indebtedness or otherwise adversely affect our capital structure, credit ratings or the value of the notes. See “Description of the Notes—Repurchase at the Option of Holders—Change of Control.”
There will be limited covenants in the indenture governing the notes.
The indenture that will govern the notes will not contain covenants that limit our ability or the ability of our restricted subsidiaries to incur or guarantee additional indebtedness and issue preferred stock, pay dividends or make other distributions, make other restricted payments and investments, sell assets, including capital stock of restricted subsidiaries, incur restrictions on the ability of restricted subsidiaries to pay dividends or make other payments and engage in transactions with affiliates. As a result, the holders of our outstanding notes and the notes will not be able to prevent us from incurring substantial additional debt, paying dividends or making other restricted payments or entering into certain types of transactions, any of which could substantially affect our capital structure and have an adverse impact on your investment in the notes.
There is currently no public market for the notes, and an active trading market may not develop for the notes. The failure of a market to develop or to be maintained could adversely affect the liquidity and value of the notes.
The notes are a new issue of securities, and there is no market for the notes and an active trading market may not develop for the notes. We do not intend to apply for listing of the notes on any securities exchange or for quotation of the notes on any automated dealer quotation system. We have been advised by the underwriters that following the completion of this offering, certain of the underwriters currently intend to make a market for the notes. However, they are not obligated to do so and any market-making activities with respect to the notes may be discontinued by them at any time without notice. In addition, any market-making activity will be subject to limits imposed by law. There can be no assurance as to the liquidity of any existing market or any market that may develop for the notes. If an active, liquid market does not develop or is not maintained for the notes, the market price and liquidity of the notes may be adversely affected. If any of the notes are traded after their initial issuance, they may trade at a discount from their initial offering price.
The liquidity of the trading market, if any, and future trading prices of the notes will depend on many factors, including, among other things, prevailing interest rates, our operating results, financial performance and prospects, the market for similar securities and the overall securities market, and may be adversely affected by unfavorable changes in these factors.
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U.S. federal and state fraudulent transfer laws may permit a court to void the notes, and if that occurs, you may not receive any payments on the notes.
U.S. federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the notes. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the notes could be voided as a fraudulent transfer or conveyance if we (a) issued the notes with the intent of hindering, delaying or defrauding creditors or (b) received less than reasonably equivalent value or fair consideration in return for issuing the notes and, in the case of (b) only, one of the following is also true at the time thereof:
we were insolvent or rendered insolvent by reason of the issuance of the notes;
the issuance of the notes left us with an unreasonably small amount of capital or assets to carry on its business;
we intended to, or believed that we would, incur debts beyond our ability to pay as they mature; or
we were a defendant in an action for money damages, or had a judgment for money damages docketed against us if, in either case, the judgment is unsatisfied after final judgment.
As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is secured or satisfied. A court would likely find that we did not receive reasonably equivalent value or fair consideration for issuing the notes to the extent we did not obtain a reasonably equivalent benefit directly or indirectly from the issuance of the notes.
We cannot be certain as to the standards a court would use to determine whether or not we were insolvent at the relevant time or, regardless of the standard that a court uses, whether the notes would be subordinated to our other debt. In general, however, a court would deem an entity insolvent if:
the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all of its assets;
the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
it could not pay its debts as they became due.
If a court were to find that the issuance of the notes was a fraudulent transfer or conveyance, the court could void the payment obligations under the notes and subordinate the notes to presently existing and future indebtedness of the applicable obligor or require the holders of the notes to repay any amounts received. In the event of a finding that a fraudulent transfer or conveyance occurred with respect to the notes, you may not receive any repayment on the notes.
Further, as a court of equity, the bankruptcy court may subordinate the claims in respect of the notes to other claims against us under the principle of equitable subordination if the court determines that (1) the holder of the notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holders of the notes and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code.
A lowering or withdrawal of the ratings assigned to the notes by rating agencies may increase our future borrowing costs and reduce our access to capital.
There can be no assurances that any rating assigned to the notes will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. A lowering or withdrawal of the ratings assigned to the notes by rating agencies may increase our future borrowing costs and reduce our access to capital, which could have a material adverse impact on our financial condition and results of operations.
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The unaudited pro forma condensed combined financial information included and incorporated by reference in this prospectus supplement is presented for illustrative purposes only and may not be reflective of the operating results and financial condition of Centene on a combined basis with WellCare.
The unaudited pro forma condensed combined financial information included and incorporated by reference in this prospectus supplement is presented for illustrative purposes only and is not necessarily indicative of what Centene’s actual financial position or results of operations would have been had the WellCare Acquisition been completed on the dates indicated or its position after the WellCare Acquisition. The unaudited pro forma condensed combined financial information was prepared with the expectation, as of the date of its preparation, that Centene would be identified as the acquirer under GAAP and reflects adjustments based upon preliminary estimates of the fair value of assets to be acquired and liabilities to be assumed. The final acquisition accounting was based upon the actual purchase price and the fair value of the assets and liabilities of Centene under GAAP as of the date of the completion of the WellCare Acquisition. The final acquisition accounting may differ materially from the pro forma condensed combined financial information included and incorporated by reference in this prospectus supplement.
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USE OF PROCEEDS
We estimate that the net proceeds of this offering will be approximately $2,173 million, after deducting underwriting discounts and commissions and estimated expenses of the offering. We intend to use the net proceeds of this offering, together with cash on hand, to fund the purchase price for the 4.75% 2025 notes accepted for purchase in the tender offer and to redeem any 4.75% 2025 notes that remain outstanding following the tender offer pursuant to the 2025 notes redemption, including all premiums, accrued interest and expenses related to the tender offer and the 2025 notes redemption. Pending the application of any of the net proceeds of the offering for the foregoing purposes, net proceeds may be temporarily used for general corporate purposes. The 4.75% 2025 notes accrue interest at a rate per annum of 4.75% and mature on January 15, 2025.
BofA Securities, Inc. is acting as the sole dealer manager in connection with the tender offer. Certain of the underwriters or their affiliates may be holders of our 4.75% 2025 notes, and accordingly, may receive a portion of the proceeds of this offering as a result of the tender offer and the 2025 notes redemption. See “Underwriting—Other Relationships.”
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CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents and capitalization as of September 30, 2020, (1) on an actual basis, (2) on an as adjusted basis to give effect to our previous offering of our 3.00% 2030 notes and redemptions of our 4.75% 2022 notes and our 5.25% 2025 notes and (3) on an as further adjusted basis, after giving effect to the issuance and sale of the notes offered hereby and the application of the net proceeds thereof, together with available cash on hand, to fund the purchase price for the 4.75% 2025 notes accepted for purchase in the tender offer and to redeem any 4.75% 2025 notes that remain outstanding following the tender offer pursuant to the 2025 notes redemption, including all premiums, accrued interest and expenses related to the tender offer and the 2025 notes redemption as described under “Use of Proceeds.”
You should read this table in conjunction with “Use of Proceeds” and the financial statements incorporated by reference in this prospectus supplement. You should not place undue reliance on the following as adjusted information and the other as adjusted information in this prospectus supplement because this offering is not contingent upon any of the transactions reflected in the adjustments included in the following information.
 
September 30, 2020
 
Actual
As Adjusted
As Further Adjusted(1)
(in millions, except shares in thousands)
 
 
 
Cash and cash equivalents
$12,198
$12,112
$12,038
Current portion of long-term debt
$89
$89
$89
Company Credit Facility(2)
93
93
93
Term Loan Credit Facility(2)
1,450
1,450
1,450
Notes offered hereby
2,200
4.75% 2022 notes(3)
1,005
5.25% 2025 notes(3)
1,245
5.375% 2026 notes
1,800
1,800
1,800
Additional 5.375% 2026 notes(3)
796
796
796
4.75% 2025 notes(3)
2,233
2,233
4.25% 2027 notes(3)
2,481
2,481
2,481
4.625% 2029 notes
3,500
3,500
3,500
3.375% 2030 notes
2,000
2,000
2,000
3.00% 2030 notes
2,200
2,200
Other long-term debt(4)
134
112(5)
110(6)
Total debt
16,826
16,754
16,719
Redeemable noncontrolling interests(7)
36
36
36
Shareholders’ equity:
 
 
 
Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding, actual and as adjusted
Common stock, $0.001 par value; authorized 800,000 shares; 595,622 issued and 579,726 outstanding, actual and as adjusted
Additional paid-in capital
19,390
19,390
19,390
Accumulated other comprehensive earnings
293
293
293
Retained earnings
6,804
6,790(8)
6,751(9)
Treasury stock, at cost (15,896 actual, as adjusted and as further adjusted)
(762)
(762)
(762)
Total stockholders’ equity
25,725
25,711
25,672
Noncontrolling interest
118
118
118
Total stockholders’ equity
25,843
25,829
25,790
Total capitalization
$42,705
$42,619
$42,545
(1)
Excludes estimated expenses of $5.0 million.
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(2)
As of September 30, 2020, the Company has $93.0 million of borrowings outstanding under its $2.0 billion Revolving Credit Facility and $1.45 billion of borrowings under its Term Loan Facility, which is fully drawn.
(3)
Includes unamortized premium or discount.
(4)
Includes finance leases, mortgage notes payables, construction loan payable, and debt issuance costs.
(5)
Adjusted for $27 million in debt issuance costs associated with the 3.00% 2030 notes and the write-off of $5 million in debt issuance costs related to the 4.75% 2022 notes and the 5.25% 2025 notes.
(6)
Adjusted for the estimated $22 million in debt issuance costs associated with the notes offered hereby and the write-off of $20 million of debt issuance costs related to the 4.75% 2025 notes.
(7)
As a result of put option agreements, noncontrolling interest is considered redeemable and is classified in the Redeemable Noncontrolling Interests section of the consolidated balance sheets. Noncontrolling interest is initially measured at fair value using the binomial lattice model as of the acquisition date. We have elected to accrete changes in the redemption value through additional paid-in capital over the period from the date of issuance to the earliest redemption date following the effective interest method.
(8)
Reflects the write-off of debt issuance costs and unamortized premiums and the recording of $59 million in call premiums associated with the early repayment of the 4.75% 2022 notes and the 5.25% 2025 notes.
(9)
Reflects the write-off of debt issuance costs and unamortized premiums and the recording of $52 million in call premiums associated with the early repayment of the 4.75% 2025 notes.
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DESCRIPTION OF THE NOTES
Centene will issue 2.50% senior notes due 2031 (the “notes”) under a base indenture, dated as of October 7, 2020 (the “base indenture”), between Centene and The Bank of New York Mellon Trust Company, N.A., as trustee, as amended and supplemented by a second supplemental indenture with respect to the notes to be dated as of February 17, 2021 (the “second supplemental indenture” and, together with the base indenture, the “indenture”), between Centene and the trustee. This description supplements and, to the extent inconsistent therewith, replaces the descriptions of the general terms and provisions contained in “Description of Debt Securities” in the accompanying prospectus.
You can find the definitions of certain terms used in this “Description of the Notes” under the subheading “—Certain Definitions.” In this “Description of the Notes,” references to “Centene,” the “Issuer,” “we,” “us” and “our” refer only to Centene Corporation and not to any of its subsidiaries.
The terms of the notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”).
This “Description of the Notes” and the “Description of Debt Securities” in the accompanying prospectus are a summary of the material provisions of the indenture. They do not restate that agreement in its entirety. We urge you to read the indenture because it, and not this “Description of the Notes” or the “Description of Debt Securities” in the accompanying prospectus defines your rights as holders of the notes. A copy of the indenture will be available upon request to Centene at the address indicated under “Where You Can Find More Information and Incorporation by Reference” elsewhere in this prospectus supplement. Certain defined terms used in this “Description of the Notes” and the “Description of Debt Securities” in the accompanying prospectus but not defined below under the caption “—Certain Definitions” or elsewhere in this “Description of the Notes” or the “Description of Debt Securities” in the accompanying prospectus have the meanings assigned to them in the indenture.
The registered holder of a note will be treated as the owner of it for all purposes. Only registered holders will have rights under the indenture.
Brief Description of the Notes
The notes
The notes:
will be senior unsecured obligations of Centene;
will be equal in right of payment to all existing and future senior Indebtedness of Centene, including Centene’s obligations under the 2025 notes, the new 2025 notes, the 2026 exchange notes, the 2026 notes, the 2027 notes, the 2029 notes, the 2030 notes, the 3.00% 2030 notes and the Company Credit Facility;
will be effectively junior to any existing or future secured Indebtedness of Centene to the extent of the value of the assets securing such Indebtedness; and
will be senior in right of payment to any future subordinated Indebtedness of Centene.
None of Centene’s subsidiaries will guarantee the notes. As a result, the notes will be structurally subordinated to all Indebtedness and other liabilities (including medical claims liabilities, accounts payable and accrued expenses, unearned revenue and other long-term liabilities) of Centene’s subsidiaries, including the WellCare 2026 notes. Any right of Centene to receive assets of any of its subsidiaries upon the subsidiary’s liquidation or reorganization (and the consequent right of the holders of the notes to participate in those assets) will be structurally subordinated to the claims of that subsidiary’s creditors, except to the extent that Centene is itself recognized as a creditor of the subsidiary, in which case the claims of Centene would still be subordinate in right of payment to any security in the assets of the subsidiary and any Indebtedness of the subsidiary senior to that held by Centene.
All of Centene’s operations are conducted through its subsidiaries. Therefore, Centene’s ability to service its Indebtedness, including the notes, is dependent upon the earnings of its subsidiaries and their ability to distribute those earnings as dividends, loans or other payments to Centene. Certain of Centene’s subsidiaries are restricted by statute, regulatory capital requirements and certain contractual obligations in their ability to make distributions
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to Centene. As a result, we may not be able to cause such subsidiaries to distribute sufficient funds to enable us to meet our obligations under the notes. See “Risk Factors—Risks Relating to the Notes—Because we are a holding company and depend entirely on cash flow from our subsidiaries to meet our obligations, your right to receive payment on the notes will be effectively subordinated to our subsidiaries’ obligations.”
As of September 30, 2020, on an as adjusted basis after giving effect to (i) the September 2020 refinancing transactions and (ii) this offering and the application of the proceeds thereof as described in “Use of Proceeds,” Centene would have had $16.7 billion of senior debt outstanding and approximately $121 million of issued and undrawn letters of credit, and Centene’s subsidiaries had $25.9 billion of indebtedness and other liabilities outstanding, including the 5.375% stub notes, medical claims liabilities, accounts payable and accrued expenses, unearned revenue and other long term liabilities (excluding intercompany liabilities). In addition, as of September 30, 2020, on an as adjusted basis after giving effect to (i) the September 2020 refinancing transactions and (ii) this offering and the application of the proceeds thereof as described in “Use of Proceeds,” Centene would have had $1.9 billion of available and undrawn borrowings under the Company Credit Facility (with an uncommitted option to increase our Company Credit Facility by up to $500 million plus certain additional amounts based on our total debt to EBITDA ratio). Of the outstanding letters of credit referenced above, none were issued under the Company Credit Facility.
On the Issue Date, all of our direct and indirect Subsidiaries will be “Restricted Subsidiaries.” However, under the circumstances described below under the subheading “—Certain Covenants —Designation of Restricted and Unrestricted Subsidiaries,” we will be permitted to designate certain of our Subsidiaries as “Unrestricted Subsidiaries.” Our Unrestricted Subsidiaries will not be subject to certain restrictive covenants in the indenture.
Principal, Maturity and Interest
The Issuer initially will issue $2.2 billion aggregate principal amount of the notes. The Issuer may issue additional notes (“Additional notes”) under the indenture from time to time after this offering. The notes offered hereby and any Additional notes subsequently issued under the indenture will be treated as a single class for all purposes under the indenture, including waivers, amendments, redemptions and offers to purchase; provided, however, in the event that any Additional notes are not fungible with the notes for federal income tax purposes, such non-fungible Additional notes will be issued with a separate CUSIP number and ISIN so they are distinguishable from the notes. The Issuer will issue the notes in denominations of $2,000 and in integral multiples of $1,000 in excess thereof.
The notes will mature on March 1, 2031. Interest on the notes will accrue at the rate of 2.50% per annum and will be payable semi-annually in arrears on March 1 and September 1, commencing on September 1, 2021. The Issuer will make each interest payment to the holders of record on the immediately preceding February 15 and August 15. Interest on the notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.
Methods of Receiving Payments on the Notes
All payments on the notes will be made at the office or agency of the paying agent and registrar within the City and State of New York unless the Issuer elects to make interest payments by check mailed to the holders at their address set forth in the register of holders.
Paying Agent and Registrar for the Notes
The Trustee will initially act as the paying agent and registrar. The Issuer may change the paying agent or registrar without prior notice to the holders of the notes, and the Issuer or any of its Restricted Subsidiaries may act as paying agent or registrar.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the provisions of the indenture. The registrar and the Trustee may require a holder to furnish appropriate endorsements and transfer documents in connection with a transfer of notes. Holders will be required to pay all taxes due on transfer. The Issuer is not required to transfer or exchange any note selected for redemption. Also, the Issuer is not required to transfer or exchange any note for a period of 15 days before a selection of notes to be redeemed.
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Optional Redemption
Prior to December 1, 2030 (three months prior to the maturity date) (the “Par Call Date”), the notes will be redeemable at any time or from time to time in whole or in part at the Issuer’s option at a redemption price equal to the greater of:
(1)
100% of the principal amount of the notes being redeemed on that redemption date, and
(2)
the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed (exclusive of interest accrued to, but excluding, the date of redemption) that would be due if such notes matured on the Par Call Date, discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points,
plus accrued and unpaid interest on the notes being redeemed to, but excluding, the date of redemption.
On or after the Par Call Date, the notes will be redeemable at any time in whole or from time to time in part at the Issuer’s option, at a redemption price equal to 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest thereon to, but excluding, the date of redemption.
Notwithstanding the foregoing, installments of interest on the notes that are due and payable on any interest payment date falling on or prior to a redemption date for the notes shall be payable on such interest payment dates to the persons who were registered holders of such notes at the close of business on the applicable record dates.
Any redemption of the notes may, at the Issuer’s discretion, be subject to one or more conditions precedent. In addition, if such redemption or notice is subject to satisfaction of one or more conditions precedent, such notice shall state that, in the Issuer’s discretion, the redemption date may be delayed until such time as any or all of such conditions shall be satisfied (or waived by the Issuer in its sole discretion), or such redemption may not occur and such notice may be rescinded in the event that any or all such conditions shall not have been satisfied (or waived by the Issuer in its sole discretion) by the redemption date, or by the redemption date so delayed.
For purposes of these redemption provisions, the following terms have the following meanings:
Treasury Rate” means, the arithmetic mean (rounded to the nearest one-hundredth of one percent) of the yields displayed for each of the five most recent days published in the most recent Statistical Release under the caption “Treasury constant maturities” for the maturity (rounded to the nearest month) corresponding to the remaining life to maturity of the notes (assuming the notes mature on the Par Call Date) as of the date of redemption. If no maturity exactly corresponds to such remaining life to maturity, yields for the two published maturities most closely corresponding to such remaining life to maturity shall be calculated pursuant to the immediately preceding sentence and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month. The Treasury Rate will be calculated on the third business day preceding the date the applicable notice of redemption is given. For the purpose of calculating the Treasury Rate, the most recent Statistical Release published prior to the date of calculation of the Treasury Rate shall be used.
Statistical Release” means that statistical release designated “H.15” or any successor publication published daily by the Board of Governors of the Federal Reserve System and which establishes yields on actively traded U.S. Treasury securities adjusted to constant maturity, or, if such release (or any successor publication) is no longer published at the time of any calculation under the indenture, then such other reasonably comparable index Centene designates.
Selection and Notice
If less than all of the notes are to be redeemed at any time, such notes to be redeemed shall be selected in accordance with the operating procedures of The Depository Trust Company (“DTC”).
No notes of $2,000 or less can be redeemed in part. Notices of redemption will be sent by electronic transmission (for notes held in book entry form) or first class mail at least 15 but not more than 60 days before
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the redemption date to each holder of the notes to be redeemed at its registered address; provided that redemption notices may be sent more than 60 days prior to a redemption date if the notice is issued in connection with a defeasance of the notes, a satisfaction and discharge of the indenture or a redemption of the notes subject to one or more conditions precedent.
If any note is to be redeemed in part only, the notice of redemption that relates to that note will state the portion of the principal amount of that note that is to be redeemed. A new note in principal amount equal to the unredeemed portion of the original note will be issued in the name of the holder of the note upon cancellation of the original note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest will cease to accrue on notes or portions of them called for redemption.
The Trustee shall not be responsible for any actions taken or not taken by DTC.
Mandatory Redemption
The Issuer is not required to make mandatory redemption or sinking fund payments with respect to the notes. However, under certain circumstances, the Issuer may be required to offer to purchase the notes as described below under the caption “—Repurchase at the Option of Holders Upon a Change of Control.” The Issuer may at any time and from time to time purchase notes in the open market or otherwise.
Repurchase at the Option of Holders Upon a Change of Control
Upon the occurrence of a Change of Control with respect to the notes, each holder of the notes will have the right to require the Issuer to repurchase all or any part (equal to $2,000 or an integral multiple of $1,000 in excess thereof) of that holder’s notes pursuant to the offer described below (the “Change of Control Offer”) on the terms set forth in the indenture. In the Change of Control Offer, the Issuer will offer a payment in cash (the ”Change of Control Payment”) equal to 101.0% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest, if any, on the notes repurchased, to, but excluding, the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date falling prior to the date of purchase).
Within 30 days following the date upon which the Change of Control occurred the Issuer will send a notice to each holder of the notes describing the transaction or transactions that constitute the Change of Control and offering to repurchase notes on the date specified in the notice (the “Change of Control Payment Date”), which date will be no earlier than five Business Days and no later than 60 days from the date of such Change of Control, pursuant to the procedures required by the indenture and described in such notice. The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the change of control provisions of the indenture, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the change of control provisions of the indenture by virtue of such compliance. On the Change of Control Payment Date, the Issuer will, to the extent lawful:
(1)
accept for payment all notes or portions of notes validly tendered and not withdrawn pursuant to the Change of Control Offer;
(2)
deposit with the paying agent an amount equal to the Change of Control Payment in respect of all notes or portions of notes validly tendered and not withdrawn; and
(3)
deliver or cause to be delivered to the Trustee the notes properly accepted together with an officers’ certificate stating the aggregate principal amount of the notes or portions of such notes being purchased by the Issuer.
The paying agent will promptly send to each holder of notes validly tendered the Change of Control Payment for the notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each holder a new note equal in principal amount to the unpurchased portion of the notes surrendered, if any; provided that each new note will be in a principal amount of $2,000 or an integral multiple of $1,000 in excess thereof.
The Issuer will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date.
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The Company Credit Facility, the original 2025 indenture, the new 2025 indenture, the 2026 exchange indenture, the 2026 indenture, the 2027 indenture, the 2029 indenture, the 2030 indenture and the 3.00% 2030 indenture each provide, and the indenture will provide, that certain change of control events with respect to Centene will constitute a default thereunder. Any future credit agreements or other agreements to which Centene becomes a party may contain similar restrictions and provisions. The occurrence of a Change of Control may result in a default under other Indebtedness of Centene and its Subsidiaries, giving the lenders thereunder the right to require Centene to repay obligations outstanding thereunder. Centene’s ability to repay any borrowings outstanding under the Company Credit Facility and to repurchase (i) the original 2025 notes, the new 2025 notes, the 2026 exchange notes, the 2026 notes, the 2027 notes, the 2029 notes, the 2030 notes and the 3.00% 2030 notes or (ii) the notes, in each case following a Change of Control also may be limited by Centene’s then existing resources. There can be no assurance that sufficient funds will be available when necessary to make any required repayments or repurchases. Centene’s failure to repay the Company Credit Facility or to repurchase (i) the original 2025 notes, the new 2025 notes, the 2026 exchange notes, the 2026 notes, the 2027 notes, the 2029 notes and the 2030 notes or (ii) the notes, in each case in connection with a Change of Control would result in a Default under the Company Credit Facility, the original 2025 indenture, the new 2025 indenture, the 2026 exchange indenture, the 2026 indenture, the 2027 indenture, the 2029 indenture, the 2030 indenture and the 3.00% 2030 indenture, and the indenture, respectively. Such a Default would, in turn, constitute a default under other existing Indebtedness of Centene and may constitute a default under future Indebtedness as well. The Issuer’s obligation to make an offer to repurchase the notes as a result of a Change of Control may be waived or modified at any time prior to the occurrence of such Change of Control with the written consent of the holders of a majority in principal amount of the notes. See “—Amendment, Supplement and Waiver.” The provisions of the indenture would not necessarily afford holders of the notes protection in the event of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction involving Centene that may adversely affect the holders.
The Issuer will not be required to make a Change of Control Offer with respect to the notes upon a Change of Control if (a) a third party makes the Change of Control Offer with respect to the notes in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a Change of Control Offer made by the Issuer and purchases all notes validly tendered and not withdrawn under the Change of Control Offer or (b) a notice of redemption of all outstanding notes has been given pursuant to the indenture as described above under the caption “—Optional Redemption,” unless and until there is a Default in the payment of the redemption price on the redemption date or the redemption is not consummated due to the failure of a condition precedent contained in the redemption notice to be satisfied. A Change of Control Offer may be made in advance of a Change of Control and may be conditional upon the occurrence of a Change of Control, if a definitive agreement is in place for the Change of Control at the time the Change of Control Offer is made.
The definition of Change of Control includes a phrase relating to the direct or indirect sale, lease, transfer, conveyance or other disposition of “all or substantially all” of the properties or assets of Centene and its Subsidiaries taken as a whole. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of notes to require the Issuer to repurchase its notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of Centene and its Subsidiaries taken as a whole to another Person or group may be uncertain.
If holders of not less than 90.0% of the aggregate principal amount of the outstanding notes validly tender and do not withdraw the notes in a Change of Control Offer (as defined above) and the Issuer (or any third party making such Change of Control Offer in lieu of the Issuer as described above) purchases all of the notes validly tendered and not withdrawn by such holders, the Issuer or such third party, as the case may be, shall have the right, upon at least 15 but not more than 60 days prior notice, given not more than 30 days following such initial purchase, to purchase all of the notes that remain outstanding following such initial purchase at a price equal to the price offered to each other holder in the applicable Change of Control Offer, plus accrued and unpaid interest, if any, to, but excluding, the date of such second purchase (subject to the rights of holders of the notes of record on the relevant record date to receive interest due on an interest payment date falling prior to such second purchase date).
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Certain Covenants
Overview
Holders of the notes will not be able to prevent us and our subsidiaries from incurring substantial additional debt, paying dividends or making other restricted payments or entering into certain types of transactions and, except to the limited extent described below under “—Liens,” and “—Merger, Consolidation or Sale of Assets” and above under “—Repurchase at the Option of Holders Upon a Change of Control,” would not necessarily be protected in the event of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction involving Centene or its subsidiaries that may adversely affect the holders.
Liens
The Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur or assume or otherwise cause or suffer to exist or become effective any consensual Liens of any kind (other than Permitted Liens) against or upon any of their respective properties or assets, now owned or hereafter acquired, or any proceeds, income or profit therefrom or assign or convey any right to receive income therefrom, to secure any Indebtedness of the Issuer unless prior to, or contemporaneously therewith, the notes are equally and ratably secured by a Lien on such property, assets, proceeds, income or profit; provided, however, that if such Indebtedness is expressly subordinated to the notes, the Lien securing such Indebtedness will be subordinated and junior to the Lien securing the notes with the same relative priority as such Indebtedness has with respect to the notes.
Any Lien created for the benefit of the holders of the notes pursuant to the preceding paragraph shall provide by its terms that such Lien should be automatically and unconditionally released and discharged upon the release and discharge of the Lien that gave rise to the obligation to secure the notes.
With respect to any Lien securing Indebtedness that was permitted under this covenant to secure such Indebtedness at the time of the incurrence of such Indebtedness, such Lien shall also be permitted to secure any Increased Amount of such Indebtedness.
Merger, Consolidation or Sale of Assets
The Issuer may not, directly or indirectly: (1) consolidate or merge with or into another Person (whether or not the Issuer is the surviving corporation) or (2) sell, assign, transfer, convey, lease, divide or otherwise dispose of all or substantially all of the properties or assets of the Issuer in one or more related transactions, to another Person; unless:
(1)
either:
(a)
the Issuer is the surviving Person; or
(b)
the Person formed by or surviving any such consolidation or merger (if other than the Issuer) or to which such sale, assignment, transfer, lease, conveyance, division or other disposition has been made (the “Surviving Entity”) is a Person organized or existing under the laws of the United States, any state of the United States or the District of Columbia; provided, however, that, in the case that the Surviving Entity is not a corporation, a corporation organized or existing under such laws is a co-obligor under the notes and the indenture;
(2)
the Surviving Entity expressly assumes pursuant to agreements reasonably satisfactory to the Trustee all the Obligations of the Issuer under the notes and the indenture; and
(3)
immediately after giving effect to such transaction no Event of Default shall have occurred and be continuing.
For purposes of this covenant, the sale, assignment, transfer, lease, conveyance, division or other disposition of all or substantially all of the properties or assets of one or more Subsidiaries of the Issuer, which properties or assets, if held by the Issuer instead of such Subsidiaries, would constitute all or substantially all of the properties or assets of the Issuer on a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties or assets of the Issuer.
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Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors of the Issuer may designate any of its Restricted Subsidiaries to be an Unrestricted Subsidiary if that designation would not cause a Default and if that designation otherwise is consistent with the definition of an Unrestricted Subsidiary.
Any designation of a Subsidiary of the Issuer as an Unrestricted Subsidiary will be evidenced to the Trustee by filing with the Trustee a certified copy of a resolution of the Board of Directors of the Issuer giving effect to such designation and an officers’ certificate certifying that such designation complied with the preceding conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the preceding requirements as an Unrestricted Subsidiary, it will thereafter cease to be an Unrestricted Subsidiary for purposes of the indenture. The Board of Directors of the Issuer may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the Issuer; provided that such designation will only be permitted if no Default or Event of Default would be in existence following such designation.
All Subsidiaries of an Unrestricted Subsidiary shall also be an Unrestricted Subsidiary.
SEC Reports
The indenture will provide that whether or not required, so long as the notes are outstanding, the Issuer will file with the SEC (unless the SEC will not accept such filing), within the time periods specified in the SEC’s rules and regulations and deliver to the Trustee within 15 days after the filing of the same would be required by the SEC, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Issuer would be required to file with the SEC if subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. The indenture will further provide that, notwithstanding that the Issuer may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, so long as the notes are outstanding the Issuer will file with the SEC, to the extent permitted, and provide the Trustee with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act within the time periods specified in the SEC’s rules and regulations. The Issuer will be deemed to have furnished such reports referred to in this section to the Trustee and the holders of the notes if the Issuer has filed such reports with the SEC via the EDGAR filing system or any successor system and such reports are publicly available.
Events of Default and Remedies
Each of the following is an “Event of Default” with respect to the notes:
(1)
default for 30 consecutive days in the payment when due and payable of interest on the notes;
(2)
default in the payment when due and payable of the principal of or premium, if any, on the notes (upon maturity, redemption, required repurchase or otherwise);
(3)
failure by the Issuer or any of its Restricted Subsidiaries to comply with the covenant described above under the caption “—Certain Covenants—Merger, Consolidation or Sale of Assets;”
(4)
failure by the Issuer or any of its Restricted Subsidiaries for 30 consecutive days after notice to comply with the provisions described under the caption “—Repurchase at the Option of Holders Upon a Change of Control;”
(5)
failure by the Issuer for 120 days after notice to comply with the provisions described under the caption “—SEC Reports;”
(6)
failure by the Issuer or any of its Restricted Subsidiaries for 60 consecutive days after notice to the Issuer by the Trustee or the holders of at least 25.0% in aggregate principal amount of the notes then outstanding voting as a single class to comply with any of its other covenants or agreements in the indenture or such notes;
(7)
default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Issuer or any of its Restricted Subsidiaries (or the payment of which is Guaranteed by the Issuer or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the Issue Date, if that default:
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(a)
is caused by a failure to pay principal of such Indebtedness at its express maturity prior to the expiration of any applicable grace period (a “Payment Default”); or
(b)
results in the acceleration of such Indebtedness prior to its express maturity, and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates to $300 million or more;
(8)
failure by the Issuer or any of its Restricted Subsidiaries to pay final non-appealable judgments entered by a court or courts of competent jurisdiction aggregating in excess of $300 million, which judgments are not paid, discharged or stayed for a period of 90 days; and
(9)
certain events of bankruptcy, insolvency or reorganization described in the indenture with respect to the Issuer or any Significant Subsidiary of the Issuer or any group of Subsidiaries of the Issuer that, taken together, would constitute a Significant Subsidiary, that remains for 90 days undismissed.
In the case of an Event of Default specified in clause (9), with respect to the Issuer, any Subsidiary that constitutes a Significant Subsidiary of the Issuer or any group of Subsidiaries of the Issuer that, taken together, would constitute a Significant Subsidiary, the principal, premium, if any, and accrued and unpaid interest, if any, of all the outstanding notes shall become due and payable immediately without further action or notice. If any other Event of Default occurs and is continuing with respect to the notes, the Trustee or the holders of at least 25.0% in aggregate principal amount of the notes then outstanding may declare the principal, premium, if any, and accrued and unpaid interest, if any, of all the outstanding notes due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as provided in the indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the notes notice of any continuing Default or Event of Default with respect to the notes if it determines that withholding notice is in their interest, except a Default or Event of Default relating to the payment of principal, premium, if any, or interest on the notes.
The holders of at least a majority in aggregate principal amount of the notes then outstanding by notice to the Trustee may on behalf of the holders of all of the notes waive any existing Default or Event of Default and its consequences under the indenture, except a continuing Default or Event of Default in the payment of interest or premium, if any, on, or the principal of, the notes, and rescind any acceleration and its consequences with respect to the notes.
The Issuer is required to deliver to the Trustee annually a statement regarding compliance with the indenture. Upon becoming aware of any Default or Event of Default, the Issuer is required to deliver to the Trustee a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Issuer, as such, will have any liability for any Obligations of the Issuer under the notes, the indenture, or for any claim based on, in respect of, or by reason of, such Obligations or their creation. Each holder of notes by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. The waiver may not be effective to waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
The Issuer may, at its option and at any time, elect to have all of its Obligations discharged with respect to the outstanding notes (“Legal Defeasance”) except for:
(1)
the rights of holders of outstanding notes to receive payments in respect of the principal of, or interest or premium, if any, on the notes