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

All right. I want to thank everyone for joining us today. Welcome to the Bank of America Virtual Healthcare Conference. It's my pleasure to introduce Anthem. Anthem is the largest managed care company in the country through its offerings of commercial, Medicare, Medicaid, insurance. Presenting today, we have John Gallina, who is the CFO of the company. We also have Chris Rigg from Investor Relations on the line as well. But with that, maybe, John, if you have a couple of things you want to start off, and then we'll jump into Q&A.

Yes. Thank you, Kevin, and good morning, everyone. I certainly hope everyone is staying healthy and safe in these uncertain times and certainly look forward to the day that we can do this again in person as opposed to virtually or telephonically. But with that, I just want to address that here we are in early May. We have released our earnings just a few weeks ago on April 29. Our first quarter earnings, I think, were very positive. I believe that you could tell by reviewing and analyzing those earnings, that we're well positioned to deliver on our promises for 2020 and that we were well positioned to continue our journey of our long-term growth rate that we had talked about at Investor Day. Being 10% to 12% top line growth and 12% to 15% earnings per share growth on a sustainable basis. And of course, all that was pre-COVID and pre the coronavirus crisis that we have. And so a lot of things have changed along the way. The middle of March was the first day at home order that was issued, and things really changed quite dramatically. And a lot of companies had to adjust and adapt. So I don't know if each of you have seen our press release from April 29. But if you haven't, I encourage you to look it up. And on the second page, we actually address many of the things that Anthem did on a proactive basis associated with the crisis, some of the things that we're specifically doing for our associates, care that we're providing associated with consumers, with customers, interactions with providers, things that we are doing for the communities in general. And the Blue Cross and Blue Shield Association had issued a press release, maybe a week earlier than that, that I'd talked about that the Blues collectively had provided $3 billion of value into the system in response to the coronavirus epidemic. And while no single Blue, including Anthem had their exact number itemized, so I tell you that Anthem's response to that was commensurate with our size to the Blue Cross and Blue Shield Association. So if you think about how big we are as part of the overall association that was a decent proxy for how much of the $3 billion was associated with our outreach as well. And we believe that we need to be part of solutions. And the type of company we are is to help out those in needs and to provide the service and support to the customers and communities when they need them. And we will continue to do that. And as we've seen just in the last several weeks, even a greater imbalance is being created and equities are being created by the situation in terms of impacts on certain customers, impacts on certain providers and communities. And so Anthem does acknowledge that we will continue to address those inequities and continue to address those imbalances. We're analyzing things right now. We're strategizing on exactly what that might look like and when it's premature to provide any specificity on the next announcement at this time. But I do just want everyone to know and understand that we are committed to addressing those things and ensuring that it's clear that we are part of the solution of this entire crisis. So with that, Kevin, I'll pause and turn it over to you to conduct the Q&A.

All right. Great. Well, thank you for that. I guess you mentioned, obviously, COVID. COVID's the topic as you are here, big impact on utilization. I guess how are you thinking about the cadence of that impact on the company in Q2, in the back half of the year? And I know there's so many variables, but what is your best guess for that timing and pace of when things turn back to normal?

Sure. That's certainly a question that I wish we had a crystal ball and could answer with a high degree of certainty or clarity, but it's -- really, it's just educated assumptions based on various information, reading reports, trying to understand things. We are monitoring the pre-authorizations very closely, monitoring that prescriptions very closely. And I think we saw at the end of March, the very first aspect of some of the utilization being deferred. And we have talked about 30% to 40% of our medical cost structure is associated with nonemergent procedures. Nonemergent by definition, you can schedule, you can put off for a period of time and we did see the drop. On the other hand, also at the end of March, we released our -- I'm sorry, we relaxed the refill too soon requirements associated with prescriptions. And we saw influx of that prescriptions in the third and fourth week of March, more so than a typical 2-week period. We have waived co-pays and deductibles on telehealth services, another virtual services associated to that. None of our members had a concern about accessing the healthcare system. And so from a cadence perspective, the first quarter had minimal impact from COVID because the pluses and the minuses helped offset. And plus, we incurred some additional administrative costs in the first quarter associated with getting 75,000 associates to work from home, which we were successfully able to do in a very, very short period of time, including ensuring they have access to the systems and having Internet access, as the strength that was needed and headsets for telephone calls and things like that. So the first quarter had minimal impact overall. In the second quarter, clearly, you see, in the month of April, the emerging procedures dropped sustainably. And we did expect them to drop sustainably, and they did. And actually, we saw some of the emergent procedures drop even at a slightly faster rate than we expected. With all the stay-at-home orders and various other things, there are less automobile accidents. There are less sporting injuries, weekend warriors [indiscernible] in emergency room is occurring on a less frequent basis in April than it does on a historic basis or historic level. But then you get into May, we do see an uptick in some of these things. We're seeing some of the new prescriptions increasing, which really is an indication that people are going back to the doctor's office, maybe accessing the primary care physicians or pre-authorizations, which are still down compared to historical are up here in April versus -- I'm sorry, up here in May versus April. So we're seeing a -- slowly, we're seeing the healthcare industry being accessed. But the second May is still below a normal month, at least so far as we're standing here on May 14. And we expect the uptick to continue and then at some point later in the year when there's a comfort level over people's ability to go out into the workforce, people's ability to go with the social aspects, that they'll also be going out in the healthcare system. Then some of this pent-up demand that's occurred from all these deferred procedures in April, May and potentially, June, we think that there's a very high likelihood that some of those will occur in the third and fourth quarter and even into 2021, quite honestly, of some of the pent-up demand being addressed. So it's really not able to provide any metrics associated with that, just general commentary. But that's the way that we see the year playing out at this point in time.

Yes. So that's helpful. I mean you guys reaffirmed guidance for the year. Is the thought process that the volume will come back in the back half of the year to offset the lower first half? Or is it more of that -- even if it doesn't, you're just going to do things like this, I'll call it, $1 billion-type investment into the communities that net-net, you would just expect any upside to kind of be reinvested back into your customers and communities?

No. Thank you for the question, Kevin. And I would say, that's partially correct. But in terms of our reaffirmation of guidance, as you can imagine, we have done significant sensitivity analyses and have really tried to evaluate what might happen. There's many, many different opinions out there for what the current looks like from an inflection perspective and what the impacts are. And we've been trying to model many different scenarios. But if you think about the hypothetical scenario of -- while the coronavirus hangs around for a while, people are afraid to go out and access the system at the level that they historically had, the economy continues to struggle as a result of that. Unemployment is at a very high level for a while. As we look at our mix of business and the fact that we do, we are very strong in Medicaid to get that business. We would lose commercial membership, a lot of puts and takes. But with the deferred procedures and various other things that might happen as we looked at that and said, in total, we feel comfortable affirming the $22.30. And then on the other side, is -- again, there are many, many scenarios. But another potential scenario could be that either through some level of antibody testing or other testing that people are more comfortable coming out sooner that the healthcare system is accessed faster, that the pent-up demand gets addressed that much more quickly. Then if that happens, that also means that the economy and the recession is not as bad that the impact on the commercial market is not as severe. And so commercial does maintain more of their members, there still will be unemployment under any of these scenarios, which is not the same level of unemployment. And so we'll have the commercial business versus having that in Medicaid. And you look at the various aspects of all those things. And we said, "Well gee, all in, if that scenario plays out, we believe that it's that the $22.30 is a number that we're comfortable affirming as well." One of the -- couple of the key differences between those 2 are the imbalances and the inequities that could be produced quite different under each scenario. And the metrics associated with our performance whether it's premiums, whether it's SG&A ratio, whether it's medical loss ratio, can differ significantly under those 2 scenarios as well -- as well as any scenario in between, which is really why we are comfortable affirming the $22.30 EPS guidance, but withdrew guidance metrics for all other aspects of the P&L because of the variation that could occur based on which one of those 2 -- or derivation of those 2 scenarios play out.

That's really helpful. I guess, in general, it sounds like for this year, you've got kind of this COVID versus recession dynamic that there's puts and there's takes in offsetting directions, which helps reaffirm guidance this year. But I guess, how do you think about, in general, growth during a recession? I mean for better or for worse, you guys have, I think, the second largest Medicaid business, you're relatively large on the exchanges. But for better or for worse your view is more impacted by such a greatly large commercial book. How do you think about your ability to grow in that -- versus that 12% to 15% long-term target during a recession?

Yes. That's a great question, Kevin. I think the one thing I do want to clarify is part of all that. While we do have a very large and robust commercial book that's comprised of both large group fully insured, small group fully insured as well as a substantial administrative services only block. Because if you go back to 2008, the last time the company really went through a recession, we had about 75% of our earned premium and our revenue was based on the commercial block of business. And then you look at how the mix of business that Anthem has, has changed so significantly over the last 12 years. We're looking at only about 30% of our revenue is dedicated on the commercial line of business. The rest being the significant growth we've had in Medicaid over that period of time. Our Medicare Advantage, while it certainly is in a growing environment, it is far more substantial than anything that existed in the overage 65 population in mid plus choice or other type of products back in 2008. And we also have some diversification associated with our revenue stream between Ingenio and diversified business group. So again, that's why we feel very confident talking about having the largest catchers met in the industry in terms of the ability to grow, and we can continue to grow in the Medicaid arena in a poor economy, we can continue to grow in Commercial arena in a stronger economy. One thing the economy doesn't impact is people turning age 65, and there's still 11,000 Americans turning 65 every day. If anything, we think that this will really help influence the people's choices of selecting Medicare Advantage. And Medicare Advantage will be selected either on a consistent basis or even a slightly higher percentage basis here in the future. And then you take the Ingenio and diversified business group earnings and then some of the capital deployment strategies we've had, we feel very comfortable. We are finding the 12% to 15% long-term growth rate in, virtually, any economy. We think we have one of the most diverse and robust business mixes in the industry and that we can be successful in our modal economic periods.

That's really helpful. I guess how do you think about -- it's early, but when we think about 2021, I guess, just structurally, you mentioned all the things going on about 2020, like no one has a good idea what the 2020 base cost is. So normally, you've got a decent idea of what this year's base is and then you forecast growth off of that base. How do you even think about pricing for next year given that uncertainty? And does that change what you're thinking about for Commercial versus Medicare versus Medicaid?

That's another very good question, Kevin. And conceptually, I don't know that it's different between any of the lines of business. One of the key issues or key elements here is really focusing on what we believe forward trend will be and then having a pricing commensurate forward trend. But it's going to require us to look at things differently than we have historically, whether it's us or anyone else in the industry or the consultants that we deal with or even the states that we talk to. A huge element of the trend discussion has always historically been looking at historical trend and what were cost structures in the most immediately preceding year. And then you rolled forward things that you're going to -- you think will change, whether it's demographics, acuity. We really look hard into the pharmacy aspect of, is there going to be a blockbuster drug that's going to come out or if anything go off patent and again go to generic. We look at our hospital contracting, like, for instance, with the vast, vast, vast majority of our providers were on a 3-year contract with each of them. And so we have about 1/3 of our hospital contracts renewed each year, which means that at any point in time, we've got 2/3 of our inpatient cost structure with a really, really clear line of sight associated with that. That way you take all those multiple variables as well as many, many others in your own -- into your future trend. But you historically have utilized your prior trend as sort of a starting point of a jump-off point for that. Well, now our historical trend is not going to be credible because even though the first quarter of 2020 had minimal COVID impact on a net-net basis, the second quarter will have a significant impact. The lack of utilization that we're seeing in the month of April, and even with May upticking, it's still going to be less than normal. And then as we said, there may or may not be an increase in utilization in the third or fourth quarter depending on if there's a second wave of COVID or not. What that's going to say is that 2020 will not be credible or reliable from a building-the-trend perspective. And so we'll have to utilize different analyses and looking at more of the 2019 roll forward take basis. So a lot of variables that are going to go into it at the end of the day, what we really need to have is a clear view of what we think the forward trend will look like for 2021 and respond accordingly. And as I had stated earlier, based on whichever scenario plays out in 2020, the way that Anthem will address some of the inequities and imbalances in the system could be different as well, which, again, will make 2020 less credible to be a comparative starting point for our analytics.

But you feel comfortable that assuming you get the forward view trend right, that you should have a target margin on your businesses next year. There's no reason to think you shouldn't be able to price to that forward view of trend?

That's correct. As part of reaffirming sort of the 12% to 15% earnings per share growth rate, that would be inherently assumed, yes.

Yes. When you did the announcement of the impact of the recession, one of the bigger impacts on EPS was actually just lower interest rates. Are you able to recapture any of that in your rate setting across any of your products or is that a separate kind of dynamic that focus underwriting margin?

That's really generally separate from the pricing methodology. If you look at some of the pricing methodology that we have to file with the various states, there's typically not a significant piece that has do with the interest rates. But while you asked about that, and I just talked about is -- I think everybody knows, the market experienced about 150 basis points federal rate cuts here in 2020 that were really not anticipated as of the beginning of the year. And if you look at Anthem's portfolio, about 90% of our portfolio is in fixed maturities and it's a very, very high quality. We've got a duration a little bit above 4%. So certainly, our reinvestment rates on just under 25% of our portfolio, and will cause a bit of a headwind associated with the drop in rates. And on the other side of the balance sheet, we have been issuing that. We issued $2.5 billion of debt last week at 2.54%, the lowest rate in the history of the company. We do have some variable rate debt on our books, and so there's some savings there. So there is a hedge. It's not a 100% hedge, but there is a hedge against that. But the other 10% of our investment portfolio has been subjected to some significant volatility as the overall market has been subjected to the significant volatility. So obviously, we're addressing all of our liquidity issues. We're actually holding cash. And we're not reinvesting things in long term at quite the same rate that we would under normal circumstances as we wanted to ensure that we had addressed all liquidity needs. I was around, in 2008, as an officer of Anthem when that crisis hit. And when we saw how hard it was to access the commercial paper market in 2008, and we saw how difficult it was to get bank financing in 2008. We said that we wanted to ensure that we have the liquidity necessary to be able to pay the claims and ensure that every member at the comfort level that if they had access to healthcare system that they would know that their insurance company had the liquidity and financial oil with all the credit claims. And so part of ensuring that meant that we had to get even more conservative with our cash and our cash flow. So all those things happen. There will be a headwind to our investment income and are below the line. We'll miss expectations at some level this year. And -- but all that was factorated into $22.30 before we talked about, as I talked about all the various scenarios. But we don't know exactly how big of a headwind it will be because how we respond and react in the second half of the year could certainly differ under some of these scenarios. But investment income will be a bit of a headwind in 2020.

One of the things that's interesting that you guys did was at your Investor Day. I guess last year now -- you guys raised your -- you guys raised your long-term growth target from 8% to 12%, to 12% to 15%, excluding the benefit that you received from CVS. Can you just kind of remind us, what was the big change at Anthem that kind of allowed you to take up that longer-term view? And how do you have confidence in the building blocks for that 12% to 15%?

Yes. No. Thank you. And Investor Day was about 14 months ago at this point in just the time frame, just to confirm that issue. But the 8% to 12% that we had previously, the 12% to 15%, I think the increase was even more significant than that. If you really go beneath the surface, because if you look at Anthem's growth rate from 2013 to 2018, over 50% of it was predicated, the EPS growth rate based on share buyback. And it turned out to be a phenomenally good use of capital because we bought 60 million shares in that 5-year period of time at an average price of $140 per share. And so that, just from that perspective, there is really, really a strong and prudent use of capital. However, we've now committed with a 12% to 15% earnings per share growth rate that at least 2/3 of that is going to be from core operations and above-the-line growth, and then the remainder is going to be from capital deployment-type activities. And so to go from 8% to 12% to 12% to 15% with the higher percent being above the line, we think is really -- was a substantial increase in that. Part of it is this catcher's mitt that we talked about. If you look back prior to our mix of business versus today's mix of business, we have leading mix of business and the commercial market share. It's still very resilient. We have more municipalities and universities, minions and anyone else. We have higher percent of essential workers in our commercial block and the country does on average. And so we're a bit more resilient. We've got one of the leading footprints in Medicaid. We're in 24 states in Medicaid. And so as commercial lives leave, we can pick them up on a Medicaid perspective. Medicaid also still has the pipeline of the $70 billion to $80 billion pipeline of things that are in fee for service that will ultimately go to manage care. And that may be delayed by a year or so in terms of the time line for all that. But on a long-term sustainable basis, we think that ultimately, the states will need to take that stuff out to managed care to help control the cost structure associated with it. And we're very well positioned to get our fair share of it. Our Medicare Advantage, we've enjoyed double-digit growth rates in Medicare Advantage over the last several years, we've outpaced the market every year for the last 4 or 5 years in a row. And we expect to continue to do so through the baby boomer era. And then again, with Ingenio providing the benefit, so not only do we have appropriate price point associated with the drug cost, the pharmacy cost that's embedded in our medical product, we have the bottom line impact of the $4 billion and the more than 20% that we've delivered in our first quarter out of the gate post the integration from ESI to CVS. And so it's really -- it's -- Kevin, it boils down to -- we've got a much more diverse and robust business mix today than we did even a few years ago, and we're delivering on that. And all those things considered -- and then we've also talked about taking 50% of our free cash flow and reinvesting in the business or utilizing it for M&A. And we've closed on several properties here in 2020 already, pre-COVID. We bought Beacon Health Options, which is a behavioral health carrier, that's going to help really do a lot for our diversified business group. We bought the Medicaid plans in Missouri and Nebraska, and believe that we can operate with those, and target margins on a sustainable basis. We bought small TPA to really help the capabilities in our commercial marketplace. And so we have been executing on the M&A quite well in a pre-COVID environment. I mean on a long-term basis, there's no reason to believe that we won't continue to do that. So it's really -- it's combination -- culmination of all those things that gives us comfort over raising the long-term earnings per share growth rate.

All right. That's really helpful. I guess one of the things you talked about as far as growth was also just kind of shifting from 5:1 to 3:1 on the profitability of ASO to risk. Does that get disrupted at all through this COVID dynamic? Are you still able to kind of make progress on that if you can go out and market quite as aggressively?

Right. No, it's a very good question, Kevin. And I'll just say, as we entered 2020, we believe that we were right on track to really even get closer to the 4:1 range by the end of the year. And felt that a lot of the -- especially with the Ingenio transition and getting Ingenio fully up and running on January 1, 2020, 12 months earlier than any assumption; and getting that $4 billion and that 20% dropping to the bottom line on a run rate basis, 12 months earlier than previously assumed. And having those capabilities going to help the 5:1 to 3:1 ratio as well as we did a better -- as we would do a better job of penetrating our existing medical membership associated with -- on an ASO basis with the PBM offering. I do think that with all this, it's going to slow it down. So when you say disrupted, I just want to be very, very careful or clear in terms of the answer. We believe that we will make some progress in 2020, but not quite as much progress maybe as we had originally anticipated when we provided a lot of the commentary, but we also believe that the 5:1 to 3:1 on a long-term basis is still very much in our reach in a very appropriate goal. It's just -- it certainly could take us a year longer to get to the end game. But we are making progress in 2020, just not at the same pace that we have assumed.

All right. And then we're going to end here. So maybe just last question. Is there something that you guys are doing in response to COVID? Or how you're providing benefits or what that is you provide or how people are accessing the system? Or anything you could think of that's happening now because of COVID, do you think will be a permanent change going forward even after COVID is behind us?

I believe that we've developed a lot of digital tools and Anthem Engage is a perfect example of that, where it has various aspects. I do believe that the accessing healthcare system via digital capabilities, via telemedicine and things like that, while some of those existed prior to COVID, I think the adoption rate obviously increased dramatically in the month of April. But I think it will stay at a higher level post-COVID than a good pre-COVID. And so those are examples of some of the changes. And we really do need to fine-tune our product design strategy to make sure that we're capturing those things. And as we refine our contracting strategy and the way that we interact with providers to ensure that the members can access the healthcare system in the most efficient and effective manner and be done so in the most cost-effective manner as well. So those are a couple of examples of things I think will have a higher predominance in the future than they did in the past. And the point to COVID is the reason why.

All right. Well, great. Unfortunately, that's all we have time for. I appreciate you taking time and look forward to doing this next year in-person in Vegas.

Yes. Thank you very much, Kevin, and I appreciate everyone listening in and their interest in Anthem. And as Kevin said, I hope to see all of you in person at some point in the future. Thank you.