Elevance Health, Inc. (ELV) Earnings Call Transcript & Summary

Okay, great. Good afternoon. I'm Steven Valiquette, the health care services analyst here at Barclays. And welcome to our next session of the virtual version of the Global Health Care Conference. This will feature Anthem. Fortunate enough to have CFO, John Gallina, with us for this fireside chat; and also Chris Rigg from Investor Relations is on as well. So gentlemen, thanks for your flexibility around this change in conference menu, and welcome.

Thank you, Steve. We're happy to be here.

Okay. Great. So obviously, coronavirus incredibly topical right now with investors, and we'll start at a high level around this. Normally managed care companies are hesitant to talk about health care utilization trends for any short-time window. But I think given the special circumstance, I guess, I'm curious whether you're able to discuss just directionally whether or not you're seeing any notable changes in utilization, either lower just as maybe U.S. population is just generally going into hibernation in late February and early March or maybe higher in certain pockets? Maybe we'll just start high level on what you're seeing in the marketplace right now on the utilization side.

Yes. Sure. So let me maybe take a step back and address coronavirus and some of the things that we're doing at Anthem more globally, and then we can drill down from there. And clearly, we'll respond to the financial aspects. We've got cross-functional team assigned to this that meets on a daily basis. And this multidisciplinary team actually meets multiple times a day when circumstances warranted. And they're trying to review and analyze the coronavirus from virtually every angle or basis that we need to. And I'll just spend a minute maybe commenting on 3 of those thought processes. First of all, we have a very robust workforce with over 67,000 associates here in America. We also have operations in India, operations in the Philippines. We have an office in Israel. And we're clearly concerned about their health and their safety. And so we've done several things in terms of the coronavirus. At first, we limited international travel. And then several days ago, we really stepped that up, and we've limited all travel. And travel can only be done in the most extreme or business-critical issues, things that are -- we have a legal obligation to travel, there's a regulatory obligation or there's a customer-facing obligation that really has to be done face-to-face. And we actually have a group of folks who are reviewing and evaluating the travel request to ensure that critical is interpreted consistently across the company. We also have asked all of our associates who have done personal travel to notify us as to where the travel occurred and then took appropriate steps from there. And we do have a very robust business continuity plan that's been in place actually for years and years and years that we're utilizing and tapping into associated with this. And I'm happy to say that the majority of our associates do have the capability to work from home, if that were necessary or required. And with those capabilities and with the ability to shift calls between states or call centers, if that ever became necessary, we believe that we can maintain a very productive work environment and continue to serve our members through the duration of this coronavirus. And then associated with the members, we did several days ago announce that we're waiving the out-of-pocket costs associated with getting the test. The last thing that we want to have occur is someone who has the symptoms of coronavirus is concerned about getting the test because they have an issue with affording the co-pay or the deductible. So we've waived that aspect of the cost structure. But we're also reaching out to all of our members in terms of either through text messaging or e-mails or other avenues just associated with common sense things, washing hands, staying out of public places when it's not necessary to be in public places, providing them information on the Anthem website that they can utilize and obtain facts about the situation and also referring to the CDC website. And then the financial impact, and I guess, most specifically, here we are as of early March, we have not yet seen a significant impact on utilization associated with coronavirus in either direction. But there's really just not that many cases. As of last night, there are only 687 active cases in the U.S., and of those 687, 679 or 99% of them were considered mild. And in each of those situations, the patient was instructed to go home and self-quarantine themselves in their home. And only 1% were severe or critical and required hospitalization. And that's based on the entire U.S. population. So as you know, Anthem has just over 41 million members that we ensure and we're responsible for. So we're certainly just a subset of U.S. population. We did last night issue an 8-K reaffirming our earnings per share guidance of $22.30 for the year. And then inherent in that, that assume that the various metrics and other things, including the medical loss ratio was also affirmed. And as we look at it, we feel very comfortable with that assessment given with the utilization patterns have been or have not been. But we do know that there is really 2 significant variables that we'll need to continue to monitor and address. Number one is, will the coronavirus utilization uptick and will it uptick at a very rapid pace? And is there the potential that some of the cost can increase at an exponential rate? That is clearly a concern and something we're monitoring and reviewing. But the other aspect of it is, it's unclear as to how much mitigation or dampening effect that could occur associated with elective procedures or discretionary services in the health care industry. And as we look at this, we've looked at a lot of historical data points, things like snow days where -- when schools close and when it's severe enough snowfall that roads are closed down, except for emergency vehicles. There's a lot of evidence out there that discretionary procedures actually reduce during that time frame. And while some are merely deferred until later on, other of those procedures are actually eliminated and don't occur, and so there is a net saving. So as we really look at where we are today, look at the minimal utilization issues that have occurred thus far and then take into consideration the fact that the coronavirus utilization could improve -- could increase and the discretionary services could decrease, we believe that it was prudent to reaffirm our guidance because we really don't see the net of those at this point in time having a significant impact to our financial expectations.

Okay. All right. Great. That's definitely helpful color. And while your guidance, obviously, for this year is intact, just kind of thinking ahead to next year, people are going to sort of thinking around scenarios, the [ shrinkages ] fizzle out. But let's say, if it does become something greater than what people are visualizing right now, the good news is, under an insurance product, you could theoretically price for it next year, which I think you could also do more easily in a commercial book versus more government-type business. But just curious to hear some of your thoughts around the ability to price for some like this in 2021 if you needed to?

Yes. No, Steve, you're correct that we clearly have the ability to reprice for it in the commercial book. And the commercial book, we can reprice for it during 2020 as well. We have some of our membership renews every month throughout the 12 months of the year. And while we may have the most members renewing on January 1, we also have members that renew on April 1 and July 1 and October 1. Actually December 1 is a fairly big renewal month for us as well, probably the fifth largest of any of the months. And to the extent that we believe that this coronavirus will continue and persist and will impact the cost structure and impact the future trend, we will be able to bake that in, and we'll be able to price for it on a real-time basis. And then as you mentioned, the government programs, a lot of it is working with the states on Medicaid to ensure that -- again, there's actuarial justified rates that include the reality of what's going on in the marketplace. And then with the Medicare Advantage, it's ensuring that that's baked into the rate structures and benefit designs of the bids, and a little bit different time frame for all of them. The most flexibility clearly is in the commercial marketplace.

Okay. Great. And also thinking about it, this became something bigger. It seems like some managed care companies have reinsurance, other ones don't. Just curious to hear more about which camp you might fall into? And what's your general philosophy around that?

No. Thank you for that question. In terms of reinsurance, we use a very limited basis. We have our reinsurance maybe in some of our specialty product lines, our long-term disability product. That's an add-on product or our life product has a reinsurance attribute to it as well as short-term disability. But on the health side, as we look at the size and scale of our company and the actuarial soundness of every market that we operate in, with 30% to 40% market share across market by market, we have -- we're very well capitalized. Our risk-based capital is -- it's very, very strong. Our reserves are very strong. We don't believe that we need reinsurance within the health side of the business. So there's no reinsurance products or programs that we could point to associated with the coronavirus or any other health aspects since we're large enough and actuarially incredible enough to have an appropriate risk for.

Okay. All right. Great. Given that a lot of managed care executives are meeting with the Vice President, Mike Pence, today. I don't know if the Anthem has some representation there now. But I guess I'm curious to the extent that you're either involved in that or focused on that. Are these discussions mainly around just insurance coverage for coronavirus? Or are there other factors as well? Is there any read on what's coming out of those meetings from your perspective?

Yes. Unfortunately, I have literally been on the telephone speaking with buy side analysts all day. And I have been unable to watch or monitor the proceedings. Although I do know from one of the prior calls, one of the analysts told me that they saw Gail Boudreaux sitting next to Mike Pence and speaking to Mike Pence on TV today. So yes, Gail was invited. Gail was participating and [ Jack ], obviously, was sitting next to the Vice President in terms of the insurers response in preparation. But I don't have any official word in terms of the readout of the meetings at this time.

Okay. All right. Great. So maybe we can shift gears here a little bit, just focus on a few other topics that are more Anthem-specific. First, obviously, there was a lot of discussion around your 4Q '19 medical loss ratio, came in a little bit at the high end of the revised range. There was a discussion around flu impact on that. But also group MA, I think, did not improve as much as maybe what you had planned for. Is there just any additional color around some of those dynamics and how that played out relative to expectations? And then is that an area on group MA that can maybe improve for 2020?

Yes. No. Thank you for the question, Steve. So you are correct that we ended 2019 at the high end of the guidance range for MLR. And there really were 2 or 3 main points on that. First of all, was the flu. And I just want to make sure everybody is clear that the flu -- the normal flu, I guess, I should call it, is not actually created equally. If you look at what had occurred in the fourth quarter of 2019, the B strain was the most prevalent strain of the flu. And the B strain children are more susceptible to it than the A strain. And so the flu season started a little earlier than normal, and was for the -- primarily the B strain. And then if you look at the very robust commercial membership that Anthem has as well as really some market-leading Medicaid membership we have, we only probably have as many the children that we ensure as anyone. And so we had a disproportionate negative hit associated with the flu in the fourth quarter. And that all by itself increased our MLR by about 10 basis points. And then we also had some really good news associated with our individual ACA business, was coming in very strong. And we got the Wakely data associated with the risk adjusters and believe that with really the well-above market margin performance -- target margin performance, that we have been enjoying, that we needed to record a $50 million impact or reduction to our risk-adjuster position in order to really reflect what we -- how we think the risk-adjuster is going to come out next June. And we've been actually very, very good with our assumptions over the last several years, that the June true-up has really been immaterial for us several years in a row because we've done such a good job of estimating that at year-end and certainly expect that to occur again. So that was a $50 million negative that we had to contemplate in when we did our guidance in addition to the flu. And then you referenced, I think, the group MA -- yes, the group MA. And that's a growing line of business for us. It's a line that we've just gotten into significantly over the last year or so with some changes to the Blue Cross and Blue Shield Association rules that allow us to not only market, but to serve those members on an appropriate basis. There used to be Blue Cross and Blue Shield rules that limited 1 Blue's ability to reach into another Blue's service area, and do customer surveys or to do provider chart chasing or other types of things like that. And really, in order to maintain 4-star plans under CMS, you have to have the ability to do all those things. And Gail Boudreaux was very critical in terms of interacting with the Blues to get those rules changed and allowed us to actually get into the group MA area, which we think will be a nice growth area for us. But we fully expect that, that business to be dilutive in the first few years of getting into it and it's -- it was maybe even a bit more dilutive, but certainly consistent with overall expectations. We do believe that there are some significant growth opportunities with that over the next 5 years and think that within the next couple of years that we'll be able to get that business up to target margin ranges. But it is dilutive at the outset, and that's what we're experiencing right now.

Okay. All right. Great. Again, shifting gears here a little bit, maybe talk about the individual business a little bit. When you guys provided your 2020 guidance, you talked about the clinical margin normalization in individual or exchange business, maybe more than offsetting margin improvement in Medicaid. I think people are still trying to get to the bottom of where your individual margins were and how they're tracking this year, how much of a step down there might have been relative to your long-term target of 3% to 5%. I don't know if you're able to give any more color around that or put a number on it, but thought I'd just throw that out again. We still get a lot of questions around that.

Sure. So yes, you're correct that our long-term target is 3% to 5% for the individual ACA business. But on the margin normalization, it's really been forced by our outperformance in 2018 and 2019, while as you know the MLR rebates are based on 3-year rolling averages. And back in 2017, 2016, when all the other companies were really exiting the ACA business, and -- we reduced our footprint as well, we never lost money. There were many companies that lost money, but we essentially had a fairly large breakeven book of business for a few years. And then we exceeded target margin ranges in '18, we exceeded target margin ranges in '19. And then as we look at what the impacts for 2020 are, if we hit target margin ranges, if we would exceed them again, we would be in an MLR rebate position, and that MLR rebate position would basically force us down essentially to target margin ranges. And so that's just the reality of what's going on. And so we are going to be unable to have the upside from our performance in individual because of the superior performance we had in '18 and '19. And then on the Medicaid business, as I said, the normalization of individual exceeds the Medicaid. Medicaid, we started 2020 at the low end of our target margin range for the entire Medicaid block of business. And we do view our entire Medicaid block of business as a portfolio of assets where we're in almost 50% of America -- 50% of the states in America, providing some sort of Medicaid managed care services. And we still expect, even with some of the rate actions that have occurred thus far, to end 2020, clearly, at the midpoint of the target margin range. And so that's an increase of about 1% on a block of business that is a fairly sizable block of business, and you can do the math on that to sort of figure out the numbers. And then you apply that to the approximate size of the individual business, our individual business is going down from margins in teens to margins in the mid-single digits. And that's how the math works with individual being a bigger headwind than Medicaid as a bigger tailwind. And then the other aspect of that, I think it's very important is that we expect the tailwind from Medicaid to be sort of pro rata throughout the year and to earn a little bit more each quarter throughout the year, where the seasonality of the individual business is causing the most significant impact for the first quarter of 2020 associated with any comparison, say, to 2019.

Okay. All right. That's helpful. We've got a couple of minutes left here. Maybe shifting gears to IngenioRx -- trying to eat some lunch at the same time here. The -- so obviously, we're getting further along in the transition. Curious as you think about the upcoming 2021 PBM selling season this summer, should we anticipate that Ingenio can maybe even making even bigger dent in new customer wins outside of the in-house Anthem book of business? So I'm just curious how we think about your ability to bid and win on business that you could maybe take away from other competitors just in the open marketplace?

Sure. No, a very good question. So in terms of Ingenio, I think a lot of this -- the answer is based on what's the highest priority of time working our way into having really a fully functional, robust, full-service PBM. So in 2019, we went early. We terminated the ESI deal a year earlier than originally contractually allowed to because of the change in control provision in the contract. And literally #1 priority was to take the 16-plus million PBM members that we had and transition them and migrate them onto the new platform in a very seamless manner with minimal customer abrasion. And we were phenomenally successful. We have one of the best PBM migrations that the industry has seen. And it went very, very well, and we finalized last migration on January 1, 2020, a full 12 months ahead of schedule of what the original timetable was, so that the $4 million -- $4 billion in value that we're getting from having better pricing through the CVS contract started on a run rate basis a year earlier. And so that's what the -- that was the primary focus. And now the next focus is to take that $4 billion, deliver at least 20% of it to the bottom line here in 2020, and then take the other 80% and ensure that we have the best-in-class, most highly competitive, appropriate priced products across all lines of business. And you'll see that -- I think we're seeing some very nice fully insured membership growth across our company. We're also seeing some good ASO growth. The only thing that's a little different about that is that the health insurer fee was gone in 2019 and came back in 2020. And so you look at the last time, there was no health insurer fee and it came back, I believe, the entire group fully insured marketplace shrank by over 2% that year. And actually, if you look at Anthem's experience in the first quarter of 2018, our decline of commercial fully insured was even greater. And now we're guiding to having relatively stable commercial fully insured membership here in 2020, which actually means that there's inherent growth in it because we do expect the entire commercial marketplace to shrink a little bit here with the return of the health insurance fee. But anyway, taking that -- the better pricing and ensuring that we're getting the right price point and maximizing our membership growth and taking that 80% and delivering the more affordable health care to our members is clearly part of the process, and we expect that to continue with membership growth into 2021 and beyond on the fully insured side. And then on the ASO side, if you look at our ASO national account membership, we had -- consistently had our customers carve out the PBM offering. We had the #1 growth rate of ASO in the industry. But over 80% of the time, customers carved out the PBM offering. And that's because the pricing through ESI was so uncompetitive. And we believe, now with the successful migration and having a fully functioning up and running PBM, that with the 2021 selling -- '20-'21 selling season that we can really start increasing the penetration of our own ASO quite nicely. Many of these ASO customers are on 3-year contracts. So it will literally takes 3 more years to increase the penetration to more industry normalized levels. But as we do that, that will also be a huge benefit to our 5 to 1 to 3 to 1 strategy of really doing a better job of monetizing ASO customers as well. And then the last piece of the Ingenio question really relates to stand-alone sales. And we have had some success. We were the PBM for Blue Cross of Idaho, and that was a nice win. We think we're going to be competitive in the marketplace, but that's not the most significant operating gain growth area. It's third on the list for a reason. And then we believe we will have a competitive offering, and we'll be competitive. But the primary growth drivers to our EPS are going to be the 20%, and then the fully insured leverage and then the ASO buy-ups.

Okay. All right. Great. Well, with that, I think we're out of time. It might be a minute or 2 over here. So I definitely want to thank you guys for your time today and enjoy the rest of the virtual conference.

Yes. Thank you. And looking out my office in Indianapolis, it looks exactly like Miami Beach.

Sure, it does. All right. Thanks, again.

Thanks, Steve. Good bye.