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

All right. Great. I want to thank everyone for joining us today at the BofA Virtual Healthcare Conference. It's my pleasure to introduce Anthem. Anthem is one of the largest providers of managed care insurance in the U.S., but also has a growing PBM and specialty management business. Presenting today, we have John Gallina, who is the CFO. We also have Stephen Tanal, who is the -- from Investor Relations, and we may have Prakash Patel joining us with diversified business group.

But why don't we jump in to Q&A, if that's okay. I guess maybe one of the key questions that seems to be on people's minds is the timing and the pace of volume and utilization rebounding through the year. I mean what are you guys forecasting in your guidance?

Yes. Thank you, Kevin, for that question. And at the beginning of the year, we talked about a $600 million COVID headwind. And back in January, when we first had that assessment or assumption, we believe that would occur throughout the entire year. Well, what we saw was, in January, utilization, actually on the COVID side was quite high. The third wave of COVID was both higher and longer in duration near the first or the second waves. And so January was about baseline. However, by the end of February, utilization had dropped, some of it being weather related. But it actually dropped across the entire country, even with the geographies did not have the weather issues and still down through all of March, but I think it did start to tick back up at the end of March associated with the fourth wave. I was happy it was a season and -- spring breaks and things like that. So we ended the first quarter below baseline on a cost -- overall cost basis. However, we still maintained the $600 million headwind and really push more of it back to later in the year. So in the second quarter, we do expect the second quarter to be slightly above baseline for numerous reasons. You have the fourth wave of COVID that I referenced, that continued on through mid-April. Then you have the continued rollout of the vaccines. And of course, the government did change the amount that was to be reimbursed for administration of the vaccines, where we had a $28 cost structure baked into our thought process. It's now $40 per dose. Medicare, the government is going to pay for it. Medicaid, we will be reimbursed. On the commercial risk, in particular, we're at risk for that. So we've factored that into our thoughts for the rest of the year. And then you get to the third quarter, we again expect the cost structure to be above baseline. And then I'm defining baseline, since baseline is a non-defined term. Baseline is essentially, what would the cost structure be if the things were "normal" and COVID never existed. So we expect the cost structure to be slightly higher in the third quarter as part of that. It's all part of that $600 million. But the pent-up demand is coming back. We are projecting that there will be some higher acuity associated with that pent-up demand, that's going to be on our cost structure. And we also expect that the vaccinations will continue, specifically with students and kids. You probably saw that just this week, Pfizer has been approved for 12 to 15-year-olds. And so the expectation is, is that the late second quarter and into the third quarter is when the majority of that age group will be vaccinated. So we're trying to factor that in. And then in the fourth quarter, we again expect higher than baseline utilization. Pent-up demand is certainly part of it, continued vaccination for the kids. While under 12 has not yet been approved, we believe that it will be approved at some point here in the future. And so we want to make sure that, that cost structure is factored into our guidance expectations. And so we've included that as well. And then the fourth quarter also has the return of the flu season. The flu season this past year was very, very, very low. Where just the year before, it was much higher with both B strain and then an A strain and then even a few years before that, the flu season was as significant as we're seeing in over a decade. So we are, for purposes of our financial modeling, assuming that there will either be a flu season, a new variant from other countries, a combination thereof, that will impact utilization and increased utilization. So we want to make sure that we've got -- we're covered for that. So we've been very prudent in the way that we would follow that as well. So I think the short answer to your question is, Kevin, is that we've got above baseline utilization. So both -- all for Q2 and Q3 and Q4.

All right. That's really helpful. That's great detail. I guess when you put all that together, how do you think about 2022 then? Is this above baseline, utilization kind of washed out by that in 2022, a "normal" year? Or you expect that some of these things are going to continue into next year?

Yes, that's an excellent question on 2022. So the -- maybe I'll start with the negative side of the equation because there's obviously 2 sides. As I talked about the new variants, the flu season, various other things, and we expect to increase in the fourth quarter. It's very likely that whatever that is will continue into early 2022 as well. So we want to make sure that we have captured that. And so that's part of our thought process as I said in 2022. COVID will not -- we do not expect it to be 0, that we have a $600 million headwind. So yes, there will be something associated with 2022. While it's not specifically a trend, it's very related to the COVID headwind. So that in 2021, one of the issues that we have, along with everyone else, and our sector, but honestly, is that the risk score revenue in the Medicare Advantage area is a bit depressed in 2021 because of the preferred utilization in 2020. And that folks weren't go to the doctor. We couldn't get all the HCC coverage capture program in order to maximize risk score revenue. And so that's part of our 2021 headwind. Well, through the first quarter, non-COVID utilization for Medicare is still below baseline. And the expectation is it probably stays at least for the entirety of the year, slightly below baseline. Obviously, COVID cost on top of that caused the overall cost structure above baseline. But with overall utilization, the 12 months being slightly below baseline, there certainly is a risk, but the risk score revenue in 2022 can be slightly less than a normalized year. Much better in 2021, but maybe still just slightly less than a normalized year. And then on the other side of the equation is that what we've seen is we've seen people who are actually accessing the care system differently than they had historically, far less ER utilization than we've seen historically. We don't believe at this point in time that the ER will ever get back to the same extent that it was pre-COVID. A lot more digital aspects. Digital in our minds includes any type of modality where you can access a health care system that could certainly be telehealth or it could be telephone, it could be chat, it could be texting, anything that's really super convenient for the member and allow them to interact with the health care system in a far less expensive way than sitting in a doctor's waiting room and seeing the doc and then leaving as it happened historically. And so that will help offset that to some extent. I mean all in, it's really premature to declare exactly what 2022 is going to look like. But certainly, we see those 3 things as 3 significant factors compared to whatever the definition of normal is.

I think that's pretty fair this far out. I guess -- so you guys are -- that answer is somewhat little bit different than kind of how I was thinking about prior answers. I think on the call, you kind of said, "Hey, think about 2021, add back the $600 million and then grow 12% to 15% from there." The initial 2021 guidance, I should probably say, that you're still kind of reaffirming that because that kind of implies that the $600 million does largely go in. But now you're saying that maybe some of it might be a little bit of a headwind next year, how you're thinking about that?

I think how I'd like to characterize it is that, right now, we have a current guidance of $25 -- greater than $25.10. And we believe that all things being equal, that $25.10 is really a very good, solid representation of the earnings power that this company has, based on its current mix of business, its current membership, its current systems and its current strategies and constraints. And then we feel very comfortable affirming growth of 12% to 15% off of that. Now as the year progresses, and hopefully, we see some upside from our extremely conservative balance sheet or upside from very prudent guidance perspective, we need to assess by that upside, how an upside might impact future growth projections. But right now, we're very comfortable with $25.10 as sort of the baseline. And then reaffirming our 12% to 15% long-term growth rate off of that.

Okay. That's helpful. And then I guess, one of the things that comes up a lot is that you guys have talked about, during recession, how you've got -- you're not really a commercial insurer, you're much more diversified than that. And you have the Medicaid business, which the big catchers made you lose to Commercial, pick them up on Medicaid, and that creates that stability in your overall book of business. But I guess, how should we think about that as the economy starts to improve? Does that mean then that there's an offsetting headwind that as the commercial starts to grow again, the Medicaid businesses sees a headwind? Or how do you think about your ability to grow through different economic cycles since you are somewhat diversified here?

Yes, sure. No, thank you for that question. And I'll just say, if you look at our on our membership growth, we've grown membership in 2018, and we grew membership in '19, and we grew membership in '20 and we grew membership in the first quarter of '21. So many, many different economic cycles and economic realities that the country has experienced over that time frame. And we've grown each and every year on an organic basis and expect to continue to. So in a very challenging time frame that the country and economy had here in the second, third and fourth quarters of 2020, our Medicaid business grew quite well. Very robust. In that time frame, our Commercial had sales exceeding lapses in the quarter, all 4 quarters in 2020 and 2021. But our sales have exceeded lapses in those quarters. Then the impact on our Commercial membership has been the -- ASO business had a negative change, and that caused a decline in that. So the expectation then is, as the economy continues to improve, we certainly expect to continue to have sales exceeding lapses in Commercial. And then hopefully, we'll have in-group change become positive. And then with that in-group change becoming positive, that just fits right into our 5:1 to 3:1 strategy, where we're having very nice margin expansion within the ASO block of business and on Commercial to really get more wallet share associated with those numbers. And so we see actually a lot of upside on that part of the equation. Then you look at the Medicaid business, we are very fortunate that we're going live in North Carolina here in the third quarter, over 400,000 members. We were just awarded the Ohio contract. We have been in Ohio historically. So we were awarded the Ohio contract, beginning in 2022. We just got notification that we've renewed our position in Minnesota. Minnesota just came out with the results just yesterday. And so we're going to maintain our position in Minnesota. We have one of the industry-leading success rates from a bid perspective in terms of Medicaid. And with this growth that we're seeing in North Carolina and Ohio, in particular, we think we can more than offset any of the reverification or attrition loss that you might see from the reverification. So we've got a very, fairly solid, stable Medicaid block of business over the next few years. Now we're looking for a growing commercial base once the economy improves. So we feel really, really good about our businesses. So of course, all this is with double-digit Medicare Advantage growth.

Yes. No, no. That's great.

I was just going to add, this is Prakash. You talked about the diversification beyond that. I would say a couple of more things maybe just to add to that. Regardless of the economic changes in the marketplace, we are investing, obviously, a lot of tourisms, the migration to the home, the digital and virtual therapeutics and products, which are going to continue to grow. And we see it across the segments in our book of business with care, obviously, with Commercial. The other piece is adding more capabilities. So we'll have more to offer. Either we built out or acquire like the myNEXUS acquisition we just closed on, which also increases what we can do on behalf of our clients and our membership in partnership with providers as well. And then the other piece that I might talk about is creating new products that Pete and his group at CSP and Commercial site can leverage. So we're also working on new offerings, including in behavioral health. That he'll be able to take forward to migrate to a 3:1 that John referred earlier. And also on the Medicaid side, the $82 billion of pipeline that we referenced, there's going to be a significant portion of that's going to have behavioral health overhang as well. So we're excited about the position that Beacon gives us in that marketplace as well. So there's a number of these other diversified themes here that I think support what John was mentioning as well.

Yes. I understand. We want to follow up on that diversified give me one second. But just to close the loop on the Medicaid business. You mentioned that redeterminations could be or looks like there will be a headwind next year. How should investors be thinking about that headwind, I guess, both from a membership revenue perspective, but also maybe from an incremental margin perspective? I think that those numbers will be likely a little bit above average margin.

Right. Yes, no, a very good question. So we are not expecting a cliff event associated with reverifications, to be very clear about that. The various states we believe we'll need to have a softer landing for these folks where they end up going to. We do have individual ACA offerings in the majority of those states as well. So we can certainly pick up those same numbers just by shifting there. We talked a lot about growth before with individual ACA as part of that a catcher's win mentality. And so expect the reverifications to tick high throughout 2022. In terms of range, there's a couple of aspects to that, is, number one, we are very proactively talking to the states already about the rating and then the thought process around that, if you go back to as recently as 2019 when we were in the first company to talk about reverifications being [indiscernible] and how to change the risk profile of the pool, which I think was really where you're having a question was the folks who end up losing Medicaid coverage as part of reverification are typically healthier than the rest of the pool in general. And so you remove them from the pool, the overall acuity of the pool is lot worse. That if the rates reflect the prior pool, then there's bit of a disconnect. That's exactly what we saw in 2019. Well, having that as such fresh history, we're talking to the states very proactively about how those rates are being determined, what the expectations are for reverifications as well as without the rating associated with that and hopefully not have an issue. But the other thing that I'm actually a fan of some of these risk corridors that exist within the Medicaid arena because what the risk corridors do is protect loss against downside, the speech feel protected against excess upside, it's really a win-win. If you look at Anthem's Medicaid business, we're like a 5-year period of time, it's an excellent business. High revenue and a lot of membership, volume at the providers, delivers a great return on capital, provides administrative cost leverage. Just about every metric to think about, yes, a good positive associated with it. But then you look at it over the prior 20 quarters and you see volatility. And I think what some of these corridors will do is help reduce that volatility. So that there's not quite so significant amount of period adjustments and catch-ups and interactive type of things going on. And that is done more on a real-time basis and not -- hopefully within the same calendar year and not a change calendar. So I do feel that the corridors to provide a degree of protection.

Okay. That's helpful. So you talked about being optimistic about Medicaid rates reflecting as you go forward. Would you say that today, the rate outlook kind of absent that is rational? Or are there any states that you're worried about?

So we had about half of our states renew in the first quarter and the other half renew throughout the rest of the year in terms of our actual rates. We were very pleased with the rationalization of the rates actuarially sound, actuarially justified. If our utilization continues to be depressed on COVID, there certainly could be some high-end of the corridors hit front or back similarly fine. Medicaid is actually going to be the best thing when we're making the high end of the range, that be an excellent outcome. But the rates that we have so far for 2021, we believe the state partners have done a nice job in general, and that they're all actually booked. I know there's a big concern that 2020 is not a valid year to utilize for future rating because of the utilization. That's very true. It is not. 2020 cannot be used as part of the baseline for any future rate cycle. So we were relying much more heavily on 2019 than 2018 from an actual perspective.

Okay. That makes sense. You guys spend a lot of time at the Analyst Day talking about it. Where do you see the most opportunity to grow? What parts of the business should we be focusing on the most? And what kind of KPI should we be looking for from the outside about parking your progress?

Thanks for that question, Kevin. Going back to our strategy, as we talked about creating new products, enabling existing ones as well, especially around complex and chronic conditions, new care models, new payment models. And ultimately, our objective, I think one of the critical KPIs is the total cost of care that we manage and how much of that is under value-based or risk-based arrangements. Very important part of our strategy. Today, just as a metric, as we mentioned at Investor Day, approximately 70% of our business is under risk-based arrangements today. We want to continue to increase that. And we also talked about another key metric being mid to high single digits in our operating margins. So we're going to be able to do it and do it very effectively as we grow our footprint. 70% of the business will be Anthem, the rest of it external, which is what we put out as our long-term growth plan, which is what we're -- which is we're tracking to today. So those are, I think, some really critical metrics that you have to look at. In terms of growth, we're very pleased across our 3 business pillars. And all 3 of them are going to be important, as we go forward in achieving our long-term growth plan. So we expect significant growth across the board. Clearly, as we integrate solutions around whole person, we expect behavioral health to have a material part of the overall growth. It's an important part of these next-generation care models, and we've seen it underscore dramatically in this environment with behavioral health, mental health and physical health and that whole interplay. It's even more dramatic when you look at the data sets. 40% of our behavioral health diagnosed members and it's pretty consistent on the populations across the country. 40% of our behavior health diagnosis members have at least 1 significant chronic physical health condition as well. So integrating behavioral health and mental health are going to be very important parts of increasing the total cost of care. We'll see us do more with Ingenio as well on the specialty side, especially as it connects with providers. But you'll see growth across all 3 business pillars. Clearly, CareMore and Aspire on the care delivery as government business continues to grow both direct contracting, and supporting Anthem and outside. You'll see us grow that footprint. We added a number of non-Anthem clients for CareMore this year, continue to grow that out on the government side. On the analytics and services group, where we have our AIM clinical pathways, our health guide navigation, program integrity and now are myNEXUS some of the critical programs you'll see us build there includes a digital-first program with AIM, where we'll integrate those capabilities also downstream so we can manage more total cost. For example, on a chronic pain patient, we know that when we see certain pathways, we can combine that offering with health guide member navigation because these members have a tremendous journey when they're looking for support and back pain or chronic pain. There's an addiction and substance abuse component depression. So how do we blend that with our behavioral health offering, and some of these members have cancer diagnosis as well. So we have the Aspire piece. And then myNEXUS on the home side. By bringing these solutions together, we'll be able to take on more of that total cost of care and make it easier for our clients to have a single vendor to work with on a more of a seamless way than what they have today on the marketplace. So good growth will happen there. And then behavioral health, as I mentioned, I think 2 other data points I'd give you is the $82 billion I was referencing earlier in the pipeline on the Medicaid side. A big portion of that will have the health overlay. And the Medicaid population in particular, they have 4x higher incidence of the most significant behavioral health diagnosis than you see in the Commercial and Medicare. So this integrated solution strategy we have is going to really help us to increase our footprint out in the marketplace. So all 3 of those areas are going to grow. And these are some of the ways that we're going to go out and capture that growth.

Okay. That's helpful. I guess if you think about RFP cycle right now. Can you talk a little bit about how the Commercial RFP pipeline is shaping up for next year? And then also how the PBM pipeline is?

Sure, Kevin. Thank you for that question. On the RFP side, the commercial pipeline is actually, including the national pipeline, is actually looking very good. We are very confident with our ability to capture and grow a lot of that business. And it's premature to provide a specificity associated with that answer. But it's a stronger pipeline than we've seen in the last couple of years now that people are getting out of COVID. But in terms of the PBM, there certainly have been some PBM stand-alone opportunities that we've pursued, but that's not really where our primary focus is on the PBM. Our primary focus is to capture the ASO business that we have ourselves. Yes, less than 20% of our ASO members utilize our PBM services. Of course, that takes back to the substandard contract that we have with the prior PBM that we're now out of. And so now we're into the selling cycle associated with that. But most of those ASO customers are 3-year cycles. So literally, it will take every bit of 3 years is not 2 cycles of 3 years in order to get the penetration rate up to the high end of where we expect it to be. We feel very good about our ability to increase that penetration. And that's all part of the 5:1, 3:1 strategy that I talked about earlier, and that's where our primary focus is.

Okay. That's helpful. And I guess one of the things that we were kind of asking, actually we're basically out of time. So this -- to answer this kind of quickly. Capital deployment. Where do you think we should be expecting you to be putting your capital? You've got a strong balance sheet. Your long-term guidance doesn't seem to fully allocated to cash. So how should we be thinking about that?

Well, the -- yes, on capital deployment, it's consistent with what we said for a few years now, 50% of the free cash flow associated with M&A or reinvesting in the business, 30% of share buyback, 20% of the dividends. Yes, we have raised the dividend quite nicely over the last few years to keep pace with that as our growth rate has been the #1 growth rate in the entire sector for 2019 and then again in 2020 and our dividend has kept pace. Yes, so then our share buyback, for this year our guidance is $1.5 billion even with recent improvement in the stock price in the entire sector, we still believe it's an appropriate number to target for share buyback for this year and so maintain that. And then the M&A, we did disclose on myNEXUS the MMM acquisition, we expect to close here in the second quarter. And then we had, both handful of things, 4 or 5 different M&A deals that we closed on in 2020. So we expect to continue to be opportunistic in terms of M&A. [indiscernible] has done a great job running our corporate development area. And utilize that cash for that. So and my full expectation is that we will be spending at least 50% of our free cash flow on M&A over the next several years. Is it going to be exactly 50% in 1 quarter and 1 year? Probably not. 50% of really good thought process for a 5-year total. Absolutely. So that's what we're focused on. And I think that's going to be a appropriate assumptions.

All right. Great. That's -- again, that's all we have time for. And thank you guys for joining us today, and looking forward to doing this next year in person in Las Vegas.

Thank you. Appreciate it. Thanks for having us. Take care.