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

Hi, everybody. It's -- I'm A.J. Rice, the healthcare services analyst at Crédit Suisse. We're very pleased to have you participated in our conference this year. Anthem is next up. Anthem, I'm joined by John Gallina, EVP and CFO; Rajeev Ronanki, SVP and Chief Digital Officer for Anthem; and then Chris Rigg, Vice President of Investor Relations and Corporate Finance. So Anthem just reported strong results a little over a week ago.

I thought I'd just kick off by asking John to maybe give us 1, 2 or 3 things, as the dust is settled, that you would say are the key takeaways from the report in the release.

Thank you, A.J., and I appreciate being here, and then welcome to everyone on the live feed right now. Yes. Our third quarter was very strong. We're very happy with the reported results, very much consistent with expectations. I think 2020 is anything but a normal year, but I think our third quarter results and our year-to-date results have really shown just really the strength of our overall portfolio and just how well we're operating, even considering all the pandemic COVID-19 issues. We had strong underlying results in the Commercial area that really did a great job of maintaining their membership. There, a little bit of loss of ASO membership due to in-group change, negative in-group change, but our Government portfolio performed exceedingly well. And we had significant growth in our Medicaid area, as you can imagine. As a matter of fact, our Medicaid area had nearly 10x the growth as the loss of our fully insured area within Commercial. And then Medicare continues to be performing well with additional growth. We've made some very conscious and cognizant decisions to neutralize the impact of COVID-19 on our reported results and have provided value back to the system in order to ensure that we do not end up with being "overly profitable" as some people have referred to it. But we've provided over $2.6 billion of value back to the system throughout the year as well as -- that is projected for the full year 2020 and will allow us to affirm our earnings per share of greater than $22.30, where we've been since the beginning of the year. So while nothing is normal about 2020, the results are probably as normal as you could possibly imagine given all the other situations that exist.

Okay. That's great. And so maybe, we're 3 quarters of the way through the year. We've obviously, as you said, have been dealing with this pandemic. And today, we have an announcement around a potential vaccine, also been -- a debate about how -- what are the long-term changes that may result from the pandemic. I guess I'll just throw that -- another open-ended question. As you guys step back and think about where we come out the other end of this, what -- any thoughts on how the business has been impacted? Do we get back to sort of a normal? Or is there -- will there be significant changes? And any thoughts on the -- whether a vaccine is a positive or a negative for you in terms of financial? Obviously, it's a positive for the country. But what would your reaction be to that?

Yes. No, no. Thank you for that question, A.J. And absolutely, the vaccines is a positive for the country. And quite honestly, part of our mission is to help improve the health of humanity, and a vaccine is very much aligned with that. So a vaccine is very much aligned with our mission. And we're certainly cautiously optimistic about the vaccine, whether it's this one or any other ones that come out here in the foreseeable future, that will be very, very successful and allow the country and the world, for that matter, to get back to whatever the new normal becomes. In terms of how the vaccine and the timing of it could impact our business model, the question is really not that much. We have a very well-balanced portfolio. As I mentioned just previously, we have really the leading Commercial line of business in the sector doing very, very well, and a vaccine could certainly help that improve as the economy takes off again and help certainly with lowering the unemployment rate and allowing for a continued Commercial membership growth. Our Medicaid has been doing exceedingly well. We have one of the leading Medicaid franchises in the entire sector. So regardless which direction the economy goes, we're very well balanced to capture the membership. And one thing that the vaccine doesn't change under any scenario is 11,000 Americans are turning age 65 every day. And we have the fastest-growing Medicare Advantage block of business in the industry, albeit we're starting at a smaller starting point than a couple of our competitors. But we're doing very well with mid-double-digit growth for multiple years in a row, and we expect to continue mid-double-digit growth for the next several years as well. And it's really -- it's a lot about providing the value to the customers, meeting the customers where they're at. Certainly, how care is offered and how utilization occurs may change in terms of incremental telemedicine, incremental digital, various other aspects which we're investing heavily in, which I'll allow Rajeev to comment on that here in a moment as well. And so the strategy really is about meeting the customers where they want to be met in providing the services and value that needs to be provided in order for us to continue to grow and thrive and quite honestly continue to be part of the solution associated with the health care. But Rajeev -- or maybe, A.J., you want to tee-up Rajeev, that would be great.

Yes. So Rajeev, thanks for participating in the call. Obviously, your area of focus has come under more and more into focus for investors this year as we've seen some companies coming public that are touching on some of the stuff you're doing. I know Sydney is something that's regularly mentioned on your earnings calls. Can you explain what Sydney is and its functionality and how it affects Anthem members across the portfolio of different offerings?

Sure, A.J., and good morning, everyone. Pleasure to be here. So one of Anthem's -- to John's point, our mission is to improve the health of humanity and it's also to simplify the health care experience. As consumers of health, we've always had areas of frustration when we've interacted with the health care system, and we want to fix that. So Sydney, essentially, think of that as a set of digital properties and digital assets that are a means to simplifying health care for all of our consumers. You can access Sydney through 3 forms today through our web, through an app called Sydney Health as well as through voice assistance like Alexa, Google Home and Apple. So what we could do with that, essentially, is kind of 3 primary things. You can get information. So if you have a question about your benefits, am I covered for this, what are my co-pays, all the things that you might want to know about your plan design, your benefits, et cetera, you can get that through Sydney. You can get -- you can find care. So if you want to essentially find digital care, virtual care like telemedicine or text or e-mail with your doctors or make appointments with your primary care physicians or find a side of care that you're interested in or is recommended by a doctor, you can do that conveniently through any of our web assets or app or voice. And it shows price and transparency information, allows you to compare options and essentially select the care that you would like to get delivered. And then lastly, it allows you to stay well. We have a wealth of data on claims and clinical and lab and other sources of information, and we continually mine that information using artificial intelligence, machine learning and other technologies to find unique insights about the things that would keep us healthy. So through our digital and web assets, we engage our consumers continuously and proactively through personalized information that allows them to stay well. So for example, if we predict that one of our members might develop diabetes 6 months from now, we're able to then, knowing that information, proactively alert them to the programs that we have available to keep them healthy as well as provide recommendations on the steps that they could do to keep healthy and then stay on that healthy trajectory.

And maybe just a follow-up to that. What is the different client-type attitude toward this? Are they seeing this as nice to have? Or are they seeing it as something a must-have? Or is it -- how much of a differentiator between plans and decision factor is it for -- in the commercial market and I guess individually in the MA market and for states and Medicaid?

Yes. It's very much -- I think it's moved on from being a nice to have to a must-have. I mean I think we, as consumers, and other industries, if you think about retail or banking or any of the other industries that we, as consumers, interact with, we always have a good default to a digital-first approach. And health care as far is fast catching up to that. It's not nearly there yet. But Anthem's emphasis is that by delivering a digital-first experience, it differentiates us, and it makes it simple and easy for consumers to use our services. So A.J., to your question on segments, I think National Accounts have always going to lead the charge on this as large employers sort of adopting digital technologies first and in some ways being a more innovative segment, they've led the adoption. We're seeing huge adoption in our fully insured business. We see it as a way in which we can drive better cost-of-care options, healthier options, provide more information. For MA, we're essentially integrating a lot of loyalty rewards and other programs into the benefits, and the digital assets become sort of the one-stop shop to get access to that. And then for Medicaid, interestingly, a lot of states are asking for ways in which we can integrate community assets into our digital front door. So that beyond health benefits, if there's social services, access to transportation, access to nutritious food options, those things which all contribute to health, we're able to package and deliver that through sort of a one-stop shop for our Medicaid beneficiaries. And so the good news is we're seeing adoption of this across the board. The levers for adoption are slightly different. But I think I'd be happy to report that it's definitely a must-have, which means that we are committed to investing in it, to John's point, and relentlessly seeking the feedback from all segments and all consumers to make it continually better.

Right. Great. John, maybe to come back to you on the -- there's been a lot of focus on Medicaid. And obviously, as you said, that's been a bright spot for you this year. A lot of discussion about retroactive rate adjustments and also the risk-sharing mechanisms. And what you're seeing this year, how has that played out relative to your expectations? And can we look at this year and in any way see that as a jumping-off point to thinking about next year? Or is it totally reset on many of those things?

Great question, A.J. And to try to take each part of it, so number one, we certainly have had our fair share of retroactive rate adjustments, and they have been relatively consistent with expectations. In the third quarter alone, we had approximately $300 million of retroactive adjustments, and that brought the full year to just under $400 million. The expectation is that -- well, by full year, the year-to-date, just under $400 million. And the expectation is that the full year 2020, including the fourth quarter impacts of all these, would be closer to $500 million of retroactive rate adjustments. That was all contemplated as part of the $22.30 guidance that we reaffirm. And as I said, relatively consistent with the expectations that we have based on the deferred utilization and based on the fact that the utilization for Medicaid for the entirety of 2020 will be less than a normal year. Now utilization is coming back. The fourth quarter -- which I'm sure we'll get to this later on in the Q&A. But the fourth quarter will run a higher medical loss ratio for all lines of business than what a typical fourth quarter would have been as some of the deferred utilization comes back to the system. In terms of risk corridors and collars and jump-off point for 2021, quite honestly, the 2020 experience is not going to have a significant impact on the calculation or the determination of 2021 rates, at least at the outset. Obviously, there can always be adjustments made. But in order for Medicaid rates to be actuarially sound and actuarially valid, which is required by law, Medicaid, most states, usually utilize 2 years' worth of data in determining the rates. And there's -- any amounts or any claims that are less than 6 months old are typically not complete or mature enough to really be completely credible from an actuarial perspective, and so the 2021 rates would be primarily based upon 2018 and 2019 calendar year information. And you could just take those 2 years in those rates, and we're moving forward, move it backwards for any typical renewal cycle. And so the base rates will be based on that time frame, and that time frame obviously excludes the significant amount of deferred utilization that occurred in the second quarter of 2020 and also excludes the rebound in incremental utilization that we expect to incur in the fourth quarter of 2020, all things being equal. There's obviously adjustments that can be made, tweaks that can be made associated with the final rates as long as they are actuarially appropriate assumptions. But the real point that I'm trying to make and really I think the answer to your question is, is that 2020, by itself, is not necessarily the determining factor of 2021 rates. 2020 is really not even part of the initial calculation of 2021 rates. And then there's also the opportunity to do something that they call a skip year. And so 12 months from now, when we're talking about 2022 rates, you're saying, "Well, gee, isn't 2020 going to be part of that calculation?" Well, it doesn't have to be because if there is a period that is not considered actuarially appropriate or actuarially representative of the calculation, that actuarial principles allow you to discount or skip that data point from the calculation. So we continue to work very closely with our states and really in discussions with them, some on almost a daily basis. And our expectation is, is that we will end up with actuarially justified rates through 2021 and 2022 and beyond. And that the anomaly that 2020 has on the calculation will be adjusted appropriately. And then we'll certainly have collars and corridors and things like that, that will need to be managed, too. But at the end of the day, the collars and corridors typically have more positives to them anyway because it prevents both unexpected upside and unexpected downside associated with results and performance.

There's been a lot of questions about rate discussions with the states given some states having tougher budgetary issues, also some question as to whether this lingering discussion about a final COVID relief package that might include some relief for the states, whether that's held up discussions. Can you just talk? I know you have a lot of states that reset on January 1, I believe, in your Medicaid book. What's the latest on that? And do you have visibility at this point on most of your rate updates for next year in Medicaid?

Yes. Thank you, A.J. We have visibility on many. If you look at our portfolio, we're in 23 different states as of January 1, and a little over half of them renew January 1. So obviously, the other half renew at some other point during the calendar year. And for the states where we've had the conversations and discussions, I don't want to -- I am not going to sit here and say that they are all finalized, and they're all definitively done. But in general, they're all positive, and they all make sense. They all appear to be actuarially sound, so we have a comfort level going into 2021 associated with the small subset or the small population that we have resolved that the process will work itself out properly in that 2021 rates will be appropriate.

Obviously, we could be talking about more broader sweeping changes given what's happened with the election. But if we do end up with Biden as President and looks like it will be, do you see any of your states -- I don't know what your exposure is to states that have not expanded Medicaid, but do you think that would be a catalyst? What does your discussions look like around that?

A.J., there's still almost $80 billion of pipeline. It's funny. We talked about the $80 billion pipeline 3 or 4 years ago. And while -- maybe the $80 billion pipeline is constructed a bit differently than it was back then, it still exists. And we expect that we can achieve our fair share. Medicaid expansion was always a small part of that $80 billion but not the driving force of it. The driving force of it was really -- had to do with specialized populations, whether it be the aged, blind, disabled, the long-term support services, various other high-acuity-type Medicaid members, and we still have our sights set on that and still have our sights set on getting our fair share of that. Now there was a small part of the $80 billion that was for potential Medicaid expansion, and maybe that piece becomes a little bit more relevant or a little bit more possible than it did given the change in the presidency. But it was never the driving force or the driving strategy, but it was clearly something that we wanted to be opportunistic for and take advantage of as it occurred.

Any thoughts more broadly on the RFP outlook for next year or 2 in Medicaid?

The RFP outlook is it looks a bit more robust for 2022 than it does for 2021 at this point. There's a lot of things going on. There's obviously several appeals and various other things going on, what has occurred in the Medicaid RFP arena just in the past year. But we're thinking 2022 and 2023 are going to be more robust years.

Okay. And then one last question on Medicaid, and then I'll go back to Rajeev. You had very good enrollment growth this year. I think most of the companies that have seen enrollment growth, maybe not as robust as yours but still good, have attributed that to redeterminations as opposed to the unemployment picture. I think when we were talking post conference call, you said that it's sort of a little muddy there because what was the redetermination that was getting thrown into out of Medicaid 6 months ago might be a review that ends up staying in Medicaid now given that we got a little higher unemployment rate. Any -- how do you guys look at that? Do you have any ability to sort of assess what's really driving the membership growth we're seeing?

Well, thank you, A.J. I mean it truly is the lack of redeterminations with the lack of reverification that's the primary driver. I believe the comment that we made post call was that if you look at a typical year for the past handful years, and 2019 was a little bit higher than normal. But you look at the end of '19, early '20, prior to the pandemic, 2018, you can see that reverification has, on average, reduced the Medicaid enrollment by about 2%. And so that 2% drop now has stopped because there's reverification, so it stopped. Well, in order -- under a normal year, in order to just maintain flat Medicaid membership, if 2% drops off due to reverification, 2% had to come in somehow. And that somehow is typically through an economic situation, whether it's layoffs or anything else or people qualifying for Medicaid that previously didn't qualify. So now you fast-forward to today to the last 6 months of 2020 and what you have is you no longer have the 2% drop off, yet you see our enrollment growing. And it has -- it grown our Medicaid enrollment has grown by 10x the amount that our Commercial risk decline has occurred. And so my comment to you was, well, clearly, there has to be some amount of unemployment for the Medicaid to grow on a net-net basis. And so for me to say that there is no impact of unemployment is not exactly true. It's just that the lack of reverification has been the primary driver because we are getting more entrants, and we are not getting anybody leave on the other side and it is growing. What we have not seen is we have not seen a dramatic influx of Medicaid enrollment due to a significant spike in unemployment that you can just sort of see the spike go through the Commercial system and then into the Medicaid system. That is what has not happened.