Centene (CNC) 2025 Earnings Quality Report

Grade: C — Some Red Flags, Investigate

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-17) + Yahoo Finance

Auditor: KPMG LLP — Clean opinion (served since 2005)

Fiscal Year: 2025 (ended December 31, 2025)

One-line verdict: Centene reported a $6.7B GAAP net loss in 2025 — its first loss in years — driven almost entirely by a $6.7B non-cash goodwill impairment charge that the 10-K ties directly to a stock price collapse triggered by a mid-year Marketplace morbidity shock. Underlying operations remained profitable, but the Health Benefits Ratio jumped from 88.3% to 91.9% on higher Medicaid and Marketplace medical costs, and KPMG flagged both the $20.5B medical claims liability and the $2.1B ACA risk adjustment accruals as Critical Audit Matters. The C grade reflects mixed signals: the M-Score is clean at -3.07, cash of $17.9B exceeds debt of $18.2B, but operating cash flow turned negative relative to a GAAP loss, the Z-Score sits in distress territory at 0.52, and impairments are up 54% year over year. Centene is one of the largest beneficiaries of Medicaid and ACA Marketplace programs — both of which face explicit structural risk from the OBBBA and the expiration of Enhanced APTCs.

The $6.7B Goodwill Impairment: What Actually Happened

The 10-K is explicit: "During the year ended December 31, 2025, we recorded total impairment charges of $7.3 billion driven by a $6.7 billion goodwill impairment, $513 million Magellan Health impairment, $55 million intangible asset impairment related to the wind-down of certain contracts in the Other segment, and $20 million owned real estate impairment."

These charges drove the GAAP loss of $6,677M. The 10-K explains the sequence in the MD&A:

"Late in the second quarter of 2025, data from an independent actuarial firm suggested a materially higher implied aggregate morbidity of the Marketplace membership as a whole than anticipated, resulting in a significant reduction of our expected net risk adjustment revenue for 2025. In addition, during 2025, our Medicaid membership had higher than expected medical costs, including due to unanticipated increased costs in behavioral health, home health and high-cost drugs."

The financial chain reaction from there was mechanical: the morbidity shock hammered the stock, the market capitalization dropped below carrying value, and goodwill — most of it from the 2022 Magellan Health acquisition and historical Medicaid expansion deals — had to be written down. Note the goodwill line on the balance sheet collapsed from $17.6B to $10.8B:

The engine's E2 check actually *passes* on this: "Goodwill+Intangibles change -33% YoY. Normal" — the screen recognizes that a *decline* in goodwill (from impairment) is the opposite of the fraud signal it's looking for (surging goodwill from serial acquisitions). D1 still fails because $15.4B remains equal to 77% of the reduced $20.0B equity base.

Revenue: $194.8B, But Profitability Collapsed

From the 10-K Consolidated Statements of Operations:

Revenue grew 19% — the Marketplace business doubled. But medical costs grew 25%, outpacing revenue, and the impairment line took the GAAP result below zero.

The segment breakdown:

Commercial (the Marketplace franchise) added $8.3B in revenue but *lost* $2.6B in gross margin — that's where the Marketplace morbidity shock landed. The 10-K explains: "higher medical costs driven primarily by behavioral health, home health and high-cost drugs, partially offset by rate and revenue increases."

Medicare grew 62% in revenue primarily on the PDP business. The 10-K attributes this to "program changes in the PDP business as a result of the IRA along with premium yield and membership growth." This is the one part of the business where the Inflation Reduction Act *helped* — the Part D redesign transferred catastrophic-phase liability off plan sponsors, improving PDP economics.

Health Benefits Ratio: 88.3% → 91.9%

This is the single most important operating metric for a managed care company. From the MD&A: "The HBR for the year ended December 31, 2025 was 91.9%, compared to 88.3% in 2024. The increase was primarily driven by lower Marketplace estimated risk adjustment revenue, increased Marketplace medical costs, program changes in the PDP business as a result of the IRA and higher medical costs in Medicaid driven primarily by behavioral health, home health and high-cost drugs, partially offset by Medicaid rate increases."

A 3.6 percentage-point HBR increase on $171.6B in premium revenue equals roughly $6.2B in gross margin compression — almost exactly matching the reported Gross Margin decline of $2.9B when offset by SG&A leverage (SG&A ratio fell from 8.5% to 7.4%).

Balance Sheet: The Reshape After Impairment

Cash and investments ($17.9B + $2.4B + $17.0B = $37.3B) comfortably exceed total debt (~$18.2B), so the engine's C4 check actually passes. Centene is not in a solvency crisis. The Z-Score of 0.52 is misleading for a regulated insurer with this much restricted investment float.

Cash Flow: The Positive Surprise

Despite the $6.7B GAAP loss, cash flow from operations was positive $5.1B in 2025 — a massive improvement from the $154M in 2024:

The engine's C1 check watches this: "CFFO/NI = -0.76. Below 1.0" — mechanically accurate, but misleading because the denominator is a GAAP loss driven by a non-cash impairment. Adding back the $7.3B in impairments, "underlying" CFFO/NI would be roughly 5.1/(−6.7+7.3) = 8.5x (very strong). The engine's C3 check passes: "Accruals ratio = -15.3%. Low accruals." This is actually a healthy cash conversion signal.

2024 was the anomaly — OCF nearly evaporated because Premium and trade receivables grew $4.3B on Marketplace expansion, consuming working capital. 2025 collected $1.5B of that back.

Free cash flow of $4.3B was supplemented by $1.0B in divestiture proceeds (Circle Health and CHS). Buybacks collapsed from $3.1B in 2024 to just $475M in 2025 — the company locked down capital returns in the face of the impairment.

Auditor: KPMG Flagged Two Critical Audit Matters

KPMG issued a clean opinion and identified two CAMs:

1. Evaluation of the estimated medical claims liability

From the audit report: "The balance at December 31, 2025 was $20,544 million. We identified the evaluation of the estimated medical claims liability as a critical audit matter...The medical claims liability included an estimate for medical claims developing under moderately adverse conditions, which represents the risk of adverse deviation in the Company's actuarial methods of reserving, which required auditor judgment to evaluate."

KPMG's procedures: "With the assistance of the actuarial professionals, we challenged the Company's estimate of the medical claims liability, including the effects of moderately adverse conditions, by developing an independent estimate for certain health plans using the Company's medical claims data, and relative range. We assessed the potential for management bias by evaluating the Company's position and movement within the actuarial professionals' relative range."

This is important: KPMG's actuarial team built an independent estimate and compared Centene's position within their range. The fact that a CAM was flagged and the 2025 HBR jumped 3.6 points is consistent with a company that's been genuinely surprised by claim trends — not with management overstating reserves.

2. Evaluation of the estimated ACA risk adjustment accruals

From the audit report: "The Company recorded an estimated asset and liability (the ACA risk adjustment accruals) of $1,449 million, and $2,087 million, respectively at December 31, 2025...The final settlement of the December 31, 2025 ACA risk adjustment accruals is scheduled to be determined by the Centers for Medicare and Medicaid Services (CMS) in June 2026, based on data submitted by insurance companies through April 2026."

This CAM is where the Marketplace morbidity shock lives on the balance sheet. CMS determines final risk adjustment transfers in June of the following year, meaning Centene's reported 2025 results depend on an estimate that won't be finalized for 6+ months after year-end.

18-Point Screening

Revenue Quality

Expense Quality

Cash Flow Quality

Balance Sheet

Acquisition Risk

Beneish M-Score

Additional Scores: F-Score 1.21, Z-Score 0.52 (distress zone — reflects the GAAP loss year only, not ongoing solvency).

Key Risks from the 10-K

1. OBBBA and Enhanced APTC Expiration — The 10-K explicitly states: "member and provider behavior could continue to be influenced by the uncertainty surrounding the availability, affordability, funding and access to health insurance, whether under Medicaid programs or the Affordable Care Act (ACA) or the OBBBA, including due to the expiration of the Enhanced Advance Premium Tax Credits (APTCs) and additional program integrity initiatives for Marketplace products." Centene has 5.5M Marketplace members as of December 31, 2025 — if APTCs expire and Marketplace membership collapses, this segment's economics unravel.

2. Marketplace Morbidity Surprises — From the MD&A: "Late in the second quarter of 2025, data from an independent actuarial firm suggested a materially higher implied aggregate morbidity of the Marketplace membership as a whole than anticipated, resulting in a significant reduction of our expected net risk adjustment revenue for 2025." The 2025 result reflects a specific event — but the underlying statistical risk (estimating morbidity for 5.5M members under actuarial methods that are settled 18 months later) is ongoing.

3. Medicaid Redeterminations and Acuity — The 10-K: "as a result of the expiration of the public health emergency (PHE) due to the COVID-19 pandemic, and the resulting Medicaid redeterminations process, as well as changes in state benefit designs, we have continued to experience a higher HBR related to the remaining members, due to the acuity profile of this membership."

4. Medical Cost Trend Acceleration — From Item 1A: "In 2025, we have experienced an accelerated increase in medical cost trend. The drivers of this trend include increasing medical demand, expanded access to care facilitated by program changes at the state level, and the rapid release and availability of new, high-cost pharmaceuticals." This directly drove the HBR increase.

5. Government Contract Concentration — Item 1A: "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 results of operations, financial condition or cash flows may be materially adversely affected." Centene's Medicaid business runs state-by-state on contracts that periodically come up for bid.

6. Medical Claims Liability Estimation — KPMG's CAM. The $20.5B medical claims liability depends on actuarial methods whose inputs (claim submission patterns, medical cost trend, behavioral changes) are inherently uncertain.

7. ACA Risk Adjustment True-Up — KPMG's second CAM. Final CMS settlement of 2025 risk adjustment is not until June 2026.

Summary

Grade: C. Genuinely a mixed year — one giant non-cash charge against strong cash generation.

The headline loss of $6.7B is almost entirely non-cash. Operating cash flow was $5.1B, free cash flow was $4.3B, cash rose from $14.1B to $17.9B, and cash+investments ($37.3B) comfortably exceeds debt ($18.2B). The $6.7B goodwill impairment was triggered by a stock price drop, which was triggered by the Marketplace morbidity shock announced mid-2025. The impairment does not reflect a permanent loss of earning power — it reflects the gap between what Centene *paid* for acquired businesses (mainly Magellan Health in 2022 and earlier Medicaid expansion deals) and what the current market values those businesses at after a bad year.

That said, the operating picture deteriorated meaningfully. Commercial (Marketplace) gross margin fell 33% even as the segment grew revenue 25%. The HBR jumped from 88.3% to 91.9% — a 3.6-point move that for a company this size equals billions in lost gross profit. KPMG's actuarial team flagged both the $20.5B medical claims liability and the $2.1B ACA risk adjustment accrual as areas requiring specialized judgment.

Three things make this not an F:

What investors need to watch going forward:

This is a C, not an F — but the trajectory needs to improve before it earns anything higher. Centene is one of the most exposed companies in the S&P 500 to the OBBBA, the expiration of the Enhanced APTCs, and the political economy of Medicaid itself.

**Disclaimer**: This report is based on Centene's 2025 10-K (SEC EDGAR) and public financial data. This is NOT investment advice.

**About EarningsGrade**: We screen earnings reports for financial red flags. Grade C means the engine found some red flags that warrant deeper investigation before proceeding.