Centene Corporation (CNC) Earnings

Management highlights

### Overall Business & Margin Progress - Centene delivered strong Q2 2026 results that exceeded prior expectations, driven by underlying business strength and clearer visibility into Marketplace risk adjustment positioning, building momentum toward the company's multi-year goal of margin restoration across all segments. - The company continues to prioritize delivering industry-leading health outcomes with an industry-leading cost structure, aligned with its mission to power health for the communities it serves. ### Medicaid Specific Operational Highlights - Disciplined execution met financial and operational targets for the quarter. Higher-than-anticipated membership attrition was concentrated in the Medicaid expansion population, driven by state-specific program changes and increased pre-OB-3 eligibility verification activity, leading to a slight uptick in overall population acuity that was successfully absorbed via quality and affordability initiatives. - The company is heavily engaged with state partners to prepare for OB-3 implementation, including investments in real-time data exchange to support ex parte eligibility, activating a nationwide member outreach and support playbook, and collaborating with state actuaries on appropriate OB-3 related rate adjustments. - Systematic quality improvement efforts have delivered improved performance in over 90% of core clinical measures over the last three reporting cycles; the company targets 75% of its Medicaid health plans to achieve 3.5+ star CQA quality ratings in the current cycle. - The company has delivered notable improvement in medical cost management in Q2, including moderation in behavioral health (particularly ABA services) from targeted interventions, and progress reducing improper payments from AI-driven upcoding (e.g. sepsis diagnoses unsupported by clinical documentation) via new algorithm and clinical review processes. ### Medicare Specific Operational Highlights - PDP is reaching post-Inflation Reduction Act (IRA) stability, with ~$25 billion in annual premium revenue and over $60 billion in annual pharmacy spend, leveraging its partnership with ESI to maintain an industry-leading cost structure. The 2027 bidding process prioritized sustainable profitability. - Medicare Advantage strategy focuses on simplifying the footprint and prioritizing growth in the dual-eligible population, where Centene's deep Medicaid expertise allows it to deliver a differentiated, integrated member experience. The company sees accelerating margin improvement from prior portfolio de-risking actions, and targets breakeven or better MA results in 2027 with further margin improvement thereafter. - Raw STARS rating performance is improving year-over-year, but the company (along with the entire industry) faces headwinds from artificial cut point increases and STARS program methodology changes, as well as uncertainty around the future of the program. ### Marketplace Specific Operational Highlights - After over a year of focused execution, the Marketplace business has achieved meaningful margin recovery. The 2025 risk adjustment reconciliation and June 2026 Wakely market acuity report confirmed the company's 2025 swift action to refile 2026 rates was appropriate, and higher Silver Tier utilization moderated during Q2. - The business continues to prepare for ongoing CMS program integrity activity, and expects membership to decline slightly in the back half of 2026 consistent with normalized seasonality, with impacts accounted for in guidance. ### AI & Enterprise Optimization Strategy - The company has already deployed multiple high-return AI use cases, including improved forecasting precision, always-on fraud waste and abuse detection, and legal invoice review that cuts monthly external legal costs by 1.5 percentage points. - The company's AI strategy is shifting from individual use cases to building scalable foundational enterprise capabilities, prioritizing investments in trusted proprietary data products, dynamic context management, and open standards to keep AI solutions reusable as the technology evolves. - As a Medicaid-focused company operating in a margin-conscious, regulated environment, Centene takes a deliberate, ROI-focused approach to AI investment, believing long-term differentiation will come from proprietary data and context as generic model technology becomes commoditized.

Guidance

- Full year 2026 adjusted diluted EPS is now guided to be greater than $4.80, an upward revision from the prior guidance of greater than $4.40 that was provided in April 2026. Approximately $0.50 of the 2026 EPS comes from non-recurring 2025 settlement items that will not recur in 2027. - Medicaid full year 2026 membership is now expected to decline 8-9% from the December 31, 2025 level, an downward revision from the prior expectation of a 6% decline. Full year 2026 Medicaid HBR guidance is maintained at ~93.5%. - Medicaid 2026 full year composite rate increase is guided to ~5%, up from the prior 4.5% forecast. - PDP full year 2026 pre-tax margin is guided to greater than 3%, an upward revision from the original 2% guidance at the start of the year. - Marketplace full year 2026 pre-tax margin is guided to 4.5-5%, an upward revision from the prior 3% guidance issued after Q1. - Full year 2026 enterprise adjusted SG&A rate is 10 basis points better than prior guidance. Total 2026 revenue is $6 billion higher than prior guidance, with only $2 billion of that being core premium and service revenue; the remaining $4 billion is non-impactful premium tax pass-through revenue. - Centene confirms the expected second half 2026 earnings trajectory: slightly above break-even in Q3 2026, and a loss in Q4 2026, consistent with historical seasonality for Medicare Part D and commercial products. - Management reaffirms the long-term goal of continued margin progression and recovery for the Medicaid segment, even through OB-3 related headwinds in 2027, with acceleration in margin recovery expected in the second half of 2027 once most OB-3 impacts are reflected in forward-looking rates.

Segment performance

1. Medicaid: Q2 2026 Health Benefit Ratio (HBR) was 93.9%, in line with prior forecasts. Full year 2026 HBR is expected to be ~93.5%, down from the original 93.7% forecast. The segment ended Q2 with 12.1 million total members. 7-1 rate development came in better than expected, bringing the 2026 full year composite rate increase forecast to 5% (up from 4.5% prior), while fundamental trend remains in the mid 4% range. 2. Medicare: Q2 2026 HBR was 89.5%, which includes 2025 favorable non-recurring settlement items. The segment outperformed expectations: the standalone PDP sub-segment is now expected to deliver a full year 2026 pre-tax margin greater than 3% (up from 2% prior guidance), with elevated specialty drug trend coming in lower than original full year expectations. Medicare Advantage, which represents just over 40% of Medicare segment revenue, continues to perform well and is approaching full year 2026 break-even performance. Centene's Decent members represent ~40% of the MA portfolio and continue to perform favorably. 3. Commercial (Marketplace-led): Q2 2026 HBR was 79.2%, down significantly from 90.6% in the year-ago quarter. The segment ended Q2 with ~3.5 million members, slightly better than prior expectations. The strong quarter was driven by three positive factors: a favorable $180 million 2025 final CMS risk adjustment reconciliation, confirmation that Centene's 2026 population acuity and relative risk adjustment position is better than prior guidance reflected, and moderating medical trend that drove better-than-expected Q2 costs. Full year 2026 pre-tax margin for the Marketplace is now forecast at 4.5% to 5%, up from 3% prior guidance. Consolidated overall: Q2 2026 total premium and service revenue was $44.4 billion, adjusted diluted EPS was $2.51, and consolidated HBR was 89.6%, down from 93% in Q2 2025. Adjusted SG&A expense ratio was 6.9%, down from 7.1% year-over-year.

Risks & headwinds

- Medicaid faces ongoing membership attrition and upward acuity pressure tied to pre-OB-3 eligibility verification activity and eventual OB-3 implementation, with the potential for unexpected dislocation between rate adjustments and actual acuity shifts if state implementation does not align with current projections. - Multiple overlapping Medicaid regulatory changes (including work requirements, SDP changes, provider tax reform, and 1115 waiver budget neutrality rules) create budget pressure for states that could impact future rate negotiations and segment margins over the medium term. - The Medicare STARS program faces ongoing methodology headwinds, including artificial cut point increases, broader program changes, and structural uncertainty about the program's future, which creates risk for Medicare Advantage margin outcomes. - The Marketplace business faces ongoing uncertainty from pending regulatory lawsuits that could impact open enrollment and membership growth, as well as continued risk from eligibility verification program integrity activity that could lead to unexpected back half membership attrition. - AI investment carries inherent risk of over-spending without delivering expected ROI if not deployed in a disciplined, focused manner, particularly for a margin-compressed business operating in the government-sponsored health space.

Analyst Q&A

• Q: With higher-than-expected Medicaid attrition driven by pre-OB-3 eligibility activity, is this attrition a pull forward of 2027 OB-3 impacts, and how is acuity shifting as a result? /

  A: Most incremental attrition is concentrated in the Medicaid expansion population, with states beginning to tighten eligibility rules in preparation for OB-3. It is likely that some of this activity represents a pull forward of future OB-3 impacts. Management is holding 50 basis points of incremental rate benefit in reserve to offset potential additional acuity impact from higher back half attrition, and is working with states to support eligible members and avoid unnecessary coverage disruption.

• Q: Given OB-3 related regulatory changes for Medicaid in 2027, do you still expect Medicaid margins to expand, and how manageable are the headwinds? /

  A: OB-3 impacts are concentrated in the 18% of the Medicaid portfolio that is the expansion population, with expected attrition spread over 2027-2029, making the scale of impact much smaller and more manageable than the prior PHE unwinding redetermination process. Management has greater ability to support eligible members to maintain coverage, and CMS now allows for mid-cycle and retro rate adjustments to account for acuity shifts, creating more tools to manage impacts. The goal of continued Medicaid margin recovery through OB-3 headwinds remains in place.

• Q: How are you balancing margin recovery versus membership growth in 2027 Marketplace pricing, and do you expect overall market growth? /

  A: Pricing is evaluated state-by-state, and the core strategic priority for 2027 remains continued margin restoration for the Marketplace business after the 2025 turbulence. The competitive landscape has shifted slightly with some market exits, but Centene's bronze segment strategy remains unchanged. Management expects the overall ACA market to return to normalized long-term growth after recent policy changes, but pending regulatory lawsuits that have been stayed create near-term uncertainty that will be clarified closer to open enrollment.

• Q: How are enterprise optimization and AI investments impacting the SG&A cost structure, and what is the investment philosophy? /

  A: Enterprise optimization, including organizational simplification, operating model improvements, and AI deployment, is focused on driving long-term SG&A efficiency while improving member and provider experience, which is already delivering visible SG&A ratio improvement in 2026. Centene takes a deliberate, ROI-focused approach to AI as a Medicaid-first company in a margin-constrained environment, prioritizing foundational data and context capabilities over generic deployments, and only launching AI use cases that deliver clear, tangible returns.