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

Thanks, everybody. Good morning. My name is Justin Lake. I cover health care services here at Wolfe Research. Really excited to kick off, at least for me, our second annual Wolfe Healthcare Conference with a fireside chat here with 2 esteemed managers in the managed care space. We got -- from Anthem, we've got John Gallina, the CFO; and Pete Haytaian, who is EVP and President of the company's Commercial & Specialty business. So there are -- there's room for questions. If anybody has them to -- there's a box at the bottom right-hand corner here that you can drop a question, and hopefully, we'll have time for a couple of questions from folks in the chat -- the web room here. But first, before I started off, I wanted to give John a minute here to kind of give us a quick state of the union in terms of what you saw coming out of the third quarter and how you think 2021 is shaping up for the company. John, Pete, thanks for being here, guys. John, why don't you kick it off?

Yes. Sure. Thank you, Justin, and good morning, everyone, and we certainly appreciate the opportunity to be here and to present at such an esteemed health care conference as Wolfe Research. But yes, 2020 is -- it's been a very interesting year from many perspectives, extremely difficult and challenging for most of America. But fortunately, Anthem has been able to persevere through it. We reported third quarter earnings of $4.20 per share. We've reaffirmed our full year guidance of at least $22.30 per share. And we've done quite a bit of things to help really address the inequities and the imbalances that have been created in the system associated with the COVID-19 pandemic. As you know, we've made a cognizant effort to address whether it's our members, our customers, our providers, our communities with incremental financial support. We provided in excess of $2.6 billion of financial support and value into the system. And all that's been factored into our $22.30 guidance, which is exactly the guidance that we had at the beginning of the year. So as I said, we've tried to neutralize the impact of that. We feel very good about our overall portfolio. And now we're going to finalize the fourth quarter. We do expect the fourth quarter to have elevated medical loss ratio associated here with the third wave of COVID or pent-up demand or some combination thereof, but feel good about our jump-off point for 2021. I'm more than happy to go through the specific headwinds and tailwinds of 2021. I'll let Justin ask questions on those. But we're very well positioned, we believe, with the leading commercial business in the entire sector, one of the leading Medicaid businesses in the entire sector and a growing Medicare Advantage business. And then, of course, we have Ingenio in diversified business group to help shore it up. So we feel very, very good about Anthem's positioning and our trajectory into the future. With that, why don't we find out exactly the specific questions people would like to have answers to and turn it back to you, Justin.

Thanks, John. Why don't we start off with -- you mentioned a heightened MLR in the fourth quarter? We're in a period that's starting to look a little like the second quarter, at least from a COVID perspective, right, we're seeing a spike across the country. Can you give us your view in terms of how that is shaping up in terms of how much COVID expense are you seeing relative to the second quarter? And are you seeing the accompanying slowdown that we saw in 2Q, right, maybe not the same magnitude, but are you seeing a slowdown in more typical utilization as you look at what's going on out there?

Yes, sure. Justin, thank you for the question. And we do expect that the fourth quarter will be, as I said, a higher MLR. We're actually projecting that it will be 300 to 350 basis points higher than a normal seasonally adjusted MLR would have been in the fourth quarter. Certainly, the COVID volumes and the COVID testing have increased quite a bit. And I believe one of your competitors put out a report last week, showing that COVID testing volumes increased 12.5% just in the week. And we believe that was a very credible report based on our information as well. And as you know, we're paying for the co-pays and deductibles associated with that all the various waiver of cost sharing. And so all that has been factored in. It's really -- it's a bit premature right now to really talk about the amount of the deferred utilization that may occur. Certainly, in October, we haven't seen really much of that yet. It's certainly possible, but we're -- what we're factoring into our guidance expectations for the rest of the year, really minimal deferred utilization with this increase in COVID testing, and that's why the MLR is so much higher. And if things change and are a bit different than that, we will continue to address the imbalances that are created in the system and make some cognizant decisions here in the last couple of months of the year, if we need to address those imbalances.

So is the way to think about it when you say it's 300, 350 basis points, you're assuming, I think, in that, that overall utilization is above typical, right, that we're seeing some kind of bounce back in deferred [indiscernible] plus some COVID spending in addition to that, this kind of the level that you got -- that you assumed in guidance in terms of utilization?

Yes. It's all a bit fungible. There's slightly different distinctions in commercial versus Medicaid versus Medicare. But it's -- but the entire thing is, as I said, 300 to 350 basis points higher. So yes, there's clearly pent-up demand coming through the system here in October. And it's really premature to know exactly what November and December is going to look like.

Okay. And just to put some numbers around this, if I remember correctly, your fourth quarter MLR in 2018, which I assume is probably the better comp is because you had to hit then and you have to hit today, was just under 87%. And so you wanted to add 300, 350 basis points of that. Is there any other kind of adjustments we need to make in terms of thinking about that MLR from a business mix perspective, for instance?

Yes. That is the primary differential, Justin. I appreciate you utilizing that as the appropriate baseline. The only other thing I would say is that our Medicaid mix is a bit higher today than it was 2 years ago. I mean we've grown Medicaid by 1.3 million lives approximately over the past 12 months. And while Pete and the commercial team have done a phenomenal job of maintaining membership during COVID-19, specifically our risk membership within commercial within COVID-19 has been much more stable than anyone ever predicted or projected. With that, with the incremental 1.3 million Medicaid lives, our mix is a bit tilted more to Medicaid, which does have a slightly higher MLR in average. But the baseline that you provided is a really good starting point.

So we used the 86.8%, add maybe 20 or 30 basis points for mix 300, 350, and that's -- do we need to have more than that for mix, 20 to 30, John? Do you think that's a reasonable number?

I think based on what we know today, that's a reasonable number.

That's really helpful. Appreciate all the detail there. Pete, why don't I throw it over to you? John mentioned, what a great job you're doing in a tough environment from an employer perspective. Why don't you maybe give us your thoughts on how you're seeing membership kind of roll through, right? I think the entire industry has done better than I think we all kind of would have expected 6 months ago, 8 months ago, when this all started. But I think you probably led the way in terms of the most modest decline in commercial membership. I'm sure some of that's 3-year efforts. I know you also have a little bit stickier book of business, right, more municipalities, things like that, that probably aren't going to be as economically sensitive. But what are you seeing out there? How would you level set us into 2021 in terms of how to think about commercial membership growth?

Yes. Thanks for the question, Justin. I appreciate the complements on that from you and John. And I do think the team has done an incredible job, quite frankly. I -- you said it. I mean there are some sort of environmental factors that are impacting us all. Certainly, furloughs and the extent of furloughs was one. As you said, the makeup of our book, we have less risky business as it relates to this. So we haven't seen a decline from that perspective as much. And then our expectation on unemployment, quite frankly, when this all started at this time of the year would have been much different. So that's helped. But that said, your point about execution, I think, is really playing through for us. I mean our sales versus lapses over the last several quarters have been really strong. Our decline in membership thus far has really been in large part, what we call a group change. These are employers that we may be retaining, but obviously, letting their -- some of their associate base go and/or losing coverage. I'm really pleased with our mix, too. Our fully insured declines have been minimal. I think in the third quarter, on the fully insured side, we only declined by 27,000. And again, that was basically all in group change. Our sales versus lapses were very strong. We are seeing that the early read play through into this quarter. So it's not like anything has fundamentally changed in that regard. I'd say that when I think about moving forward, the 2 factors for me that are most consequential -- I mean, first of all, I'm very confident about our execution. I feel very good about how we're positioned our portfolio of products. You know this, Justin, when I got to Commercial, that was sort of one of my high-level focus goals was to make sure that across every category, be it individual, small group, large group, national, we met the clients where they were with a portfolio of product because we weren't there a few years ago. We're there now. So I feel very good about that. I feel very good about our sales infrastructure, our leadership. And I think that is playing through on our performance and execution. I'd say the 2 big issues there will be variables out there moving forward. Yes, obviously, all the things you talked about with John and how that affects employment is major in terms of how we go into this. We did see large accounts defer, and you'd expect that, right? I mean, jumbo accounts that were interested in coming onboard and that we have been talking to for sometimes years in advance, have made decision to wait until '22. And I can understand that. With all this going on, they don't want a lot of complexity in transitions. So our overall group sales will be strong. Big factors for me in group change continue to the extent that it is. And then unlike other years, we'll probably see less jumbo activity. That doesn't mean it's going to be the case when we head for 1/1/22. But as it relates to heading into '21, you've just seen that -- and we did win some large cases, but not to the extent that we have in the past. And again, not because we know the pipeline, we have the pipeline, they are just deferred.

Right. So maybe the -- your -- what you're seeing here is a more modest kind of ASO year, Blue Card year than you had the last couple. If I remember correctly, a lot of your small group book shifted in the fourth quarter, right, with the move to the ACA. Is that right? Are you through most of those renewals? And it sounds like you're not -- you're still not seeing a lot of a drop-off there?

We do have a decent amount of small group activity in the fourth quarter, specifically in California. So there is a lot of activity there. But yes, we feel good about where we are in the small group now relative to prior periods. Again, I think we have a lot of options. In addition to the ACA, we have several other options that exist. So yes, we feel good about where we are heading into the fourth quarter around small group specifically.

Yes. So Justin, maybe I can just clarify a comment and then make another one. Back in 2013, we actually accelerated the renewal of many of our small groups into the fourth quarter that otherwise would have renewed on 1/1/14 in order to allow the groups to maintain the coverage options that they really desired. And so that's why we have a fourth quarter that some states have already had the mandating going to ACA compliant like California. We still have a bit of a block that's grandfathered in that we're monitoring very closely. But the other point I really want to make on the entire commercial membership is the last time that we really had bad news in Commercial was the first quarter 2018. Pete had a different job. We were a little bit maybe unprepared for the fact that shift came back. And if you wanted to -- you wanted a good solid PPO plan at a reasonable price with a great network and solid medical management, we had the best, but that's not what people were buying. People wanted alternative products. They wanted ways to help really look for better financing vehicles. And so during 2018, a lot of time and effort was put into really redefining our entire product portfolio, doing sales effectiveness training. There's a ton of stuff that Pete has done and his team have done on sales effectiveness. And I believe that we now -- that our sales have exceeded our lapses for 8 consecutive quarters at the end of doing all that work, showing that the core value and the underlying value of the business. And that's been through the booming time of early 2019 from an economic situation and the challenging time of 2020 from an economic situation, sales have exceeded lapses each and every quarter since we retooled the commercial product portfolio.

That's good to hear. I -- if I can throw one more out there on Commercial, it be when you guys had your Investor Day, I think it was a couple of years ago now, you laid out an -- a pretty ambitious target of trying to grow market share in what is the competitive world, right? And I know there's been less turnover, like you said, in all businesses right now. Employers are just pretty sticky. So when you have a better product like you have now, when you have better positioning, when you have lower drug costs, you'd like to see a little more employee turnover and give you something more swing, so to speak. You're not seeing that. But you still see that. As you look at your positioning in the market versus peers, you still see that opportunity? And do you think it's just going to come down the road a little bit? Or do you feel like we've kind of settled in the here. You've clearly taken some share, right, over the last year or 2, and we kind of move on from here?

No, I appreciate the question. I know it was sort of a laudable goal in light of the current environment even back when we did Investor Day. But I still feel bullish on it, to be perfectly honest with you. We -- your point is the right one. I mean COVID has thrown us for a loop in terms of looking at the data and seeing whether or not we're making that sort of 1% gain in share every year. I do track sales versus lapses relative to the rest of the industry. And if not for COVID, I could pretty confidently say that I think we were on track. And then when I look forward, if you sort of say, well, what, Pete, why do you have confidence in light of the current environment for all the factors that you said once we get out of, obviously, the COVID situation, it's really a bunch of stuff that John and I have already talked about. But when you really break it down and you look at these subsegments and you look at the degree to which we penetrated them, there's still a lot of runway. When you look at -- yes, in many of our states, we do have dominant market share, but that doesn't mean in some of those states, we don't have niche opportunities. And then in other states, I don't think we quite frankly have as much as we need to have. When you look at us relative to some of our blue peers, so there's that opportunity. And then when you look at distinct segments, I won't go through them all, but I'll give you an example. When you look at things like the student segment across our portfolio, we've done well in a few states. We continue to grow that book, but we have a lot more runway room. We've got the universities, the faculty as our clients. There's no reason why we can't have the student base. We have the relationships. We know the brokers. We've now developed very strong relationships with that community. We invested in capabilities. We invested in the TPA AmeriBen. So we have the portfolio to execute against it. That's an example of -- we got a lot more runway room. And that's what I think is going to lead us to meet those targets that I said a couple of years ago.

That's helpful. Thanks for all the color there. John, let's go over to Medicaid for a second and talk through what's going on there. You talked about $500 million this year of economic return either through retroactive rate cuts or margin corridors that states have put in place. One of your peers say it has literally -- talked about this same exact number when they talk about there being further cuts coming in 2021 or further headwinds to economics. You guys don't see -- don't seem to be seeing that. Or are you seeing that and just -- because you reiterated your 3% margin target for next year, I believe, that you think you can get there in this environment, which was your target for coming out of this year. So that's been successful. You think you can retain it. Is that a function of we think we have offsets? There is going to be some pressure from these margin targets, these margin corridors and retroactive rate cuts just not being maxing up year-over-year, meaning, I know the states don't have the same fiscal year that you do. So maybe some of it leaks into next year, but you'll offset it. Or you say you're just not really seeing the pressure from that?

Yes. So Justin, many times with your questions, there's no such thing as a yes or no answer. But I do appreciate the question, the ability maybe to provide some clarity on the Medicaid rate environment. And yes, the $500 million is something that is a combination both of rate cuts, some of which were retroactive, as well as the impacts of the corridors that were impacted. And it includes our projection of what we think is going to happen in the fourth quarter. So it's a full year number. It's just over $400 million year-to-date of which a little bit more than $300 million of that was booked in the third quarter alone, just from a seasonality perspective. But as we continue to work with the states for 2021 rates, we're very comfortable with the understanding of the need to have actuarially justified rate. So I'd like to talk for a moment about what actuarially justified rates means. What it means is that the information that's utilized to determine the rates has to be meaningful and appropriate and representative of population, representative of the expectations. And just forget about COVID for a minute, just for anything in general, typically, any set of claims that are 6 months old or younger, are not yet mature and have not yet developed enough to be utilized in an actuarially justified calculation. So for the most part, in general, what states do is they will use the 1 and 3 years prior. So for the 1/1/21 rate increases, it would be the 2019 and 2018 information that is fully complete, developed, and that is the starting point of the actuarial rate review. So obviously, we're having those conversations with the states now. That means that the 2020 dynamics associated with deferred utilization, pent-up demand, all the other things going on, the COVID type stuff isn't even in the base calculation itself. Obviously, adjustments are made to the base calculation based on the acuity of the population, various other things that are actuarially justified. But in our conversations with states, we're actually fairly comfortable with the fact that there's, say, cooler heads are prevailing, that people are really understanding what needs to happen from a rate setting process. And then on top of that, you do have the fact that the vast majority of the states that we operate in now have the risk corridor situation. Well, the risk corridor situation protects the state in terms of another bit of deferred utilization and our MLR going down, that would limit our ability to have what they would consider "excess profits." But corridors also protect us from the downside in terms of something happens with utilization out of control, et cetera, et cetera, that we've got downside limitations associated with that. We feel very good that as you look at our 24 states in the entire portfolio that we have with Medicaid, that we can operate within the target margin range. Target margin range for us is 2% to 4%. We are targeting the midpoint of that range, which is the 3% that you asked in your question. So we actually feel very good about that. And the only other comment I'd like to make just to clarify, because I'm sure some people are saying, okay, well, you dodged the bullet for COVID here in '20, but in '21, but it's going to rear its ugly head in your 2022 rating methodology. While there is a provision within the actuarial rating justification, what they call a skip year, and that is if there is a period of time in your information that you're utilizing to set your rates that is not representative of the situation for the future, then you can literally carve that period out of the rate setting process. So we are very proactively reminding the states and the actuaries in terms of that so that 12 months from now, we're not having the same battle all over again. But at the end of the day, we feel very comfortable that we will be able to operate within the target margin ranges, which are well within the risk corridors that have been established as part of this entire process.

Okay. And last question there. The rates that you're seeing, I know a big part of your book is 1/1 base, right, from a rate update perspective. We're kind of halfway through November. How much visibility do you have on 1/1 rates here?

Yes. So just for clarity, it's about half of our states, but more than half of our membership is a 1/1 "renewal," and they're not all locked and loaded. Everything isn't finalized and signed and submitted to CMS. But for the ones that we have, we feel very good about. I'm really not at liberty to talk about exact percentages that have been locked at this point in time. And we'll provide a lot more clarity on that on our fourth quarter call at the end of January. But I'm comfortable enough to say that I'm not losing sleep over any of the ones that had been agreed to at this point in time.