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

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Hi, everyone. Thanks for joining us. I'm Steve Baxter, the health care services analyst here at Wells Fargo. We're very pleased to be joined by Anthem today, as I'm sure most of -- not all of you know, Anthem is one of the largest health insurers in the country and also has increasing exposure to businesses beyond insurance such as PBM and the company's Diversified Business Group. From the company today, we have John Gallina, the company's CFO; and Steve Tanal from Investor Relations. So today's format is a fireside chat. So please note there's a window [ for your own ] questions. These questions are only visible to me and will remain anonymous, and I'll do my best to work those in. So John, I understand you'd like to start with some opening comments. So I'm going to turn the floor over to you.

Yes. Thank you, Steve. And good morning or good afternoon, everyone. I appreciate your interest in Anthem and joining us for the call. I would like to make an opening comment to address a few questions that we've been getting throughout the day. And we try to be very candid about the current environment and what we're seeing. And I actually made a few specific comments about what we thought was very obvious. And that was that COVID cost in August were elevated. However, I think it's really important to keep in mind that our guidance already assume that total cost would be above baseline in each and every month in the second half of 2021. So as we sit here today, we feel very good about our guidance for the rest of the year, and we reiterated that guidance in writing just a few days ago. So clearly, no one has a crystal ball. But we believe our approach to managing our business throughout this pandemic and the financial expectations that we've set all remain very appropriate. So with that, I'd love to address the questions on your mind. Steve?

Perfect. Thanks for the intro there. And then a couple of follow-ons to that just to help clarify a little bit further for people and then maybe cover a couple of different things that are not COVID. But I guess, first, obviously, we're all seeing the same metrics that I think you alluded to as being obvious when you look at the government reported data for admissions. So when you're kind of making those comments about the overall sort of total utilization picture, I guess, what will be helpful is if you could talk a little bit about what you're seeing on the non-COVID side. And then if possible, kind of bifurcate that to us in terms of -- I know that the visibility tends to be the highest on the inpatient side. I guess what are you guys also seeing non-COVID when you look outside the inpatient setting? And I guess, just remind us what your visibility is sort of like for non-inpatient claims sort of on a month-by-month basis, I think that would be helpful and hopefully puts most of this to the side.

Sure. So in terms of our guidance specifically, we did not talk about the exact percent that we thought non-COVID would be at baseline or what the exact percent COVID would add to it. We speak about those in total because there is a bit of a natural hedge or an offset as one goes up, the other one has gone down, at least since the pandemic has begun. Certainly, that fact pattern has existed. So in the month of July and August, non-COVID, it was getting closer to baseline probably the closest on Medicare Advantage, but still slightly below commercial, increased a bit over the first 6 months of the year to be a bit closer to baseline. And then Medicaid is actually the one that's far less below baseline still at this point in time. Of course, you add those together, the entirety of the entire cost structure is very consistent with our guidance and expectations is above baseline. And it's just -- August was a bit elevated. And then in terms of non-COVID and some of the other issues, really at the end of August and early September, and it wasn't really until Labor Day weekend that a lot of the health systems throughout the country, specifically some here in Indiana, where I sit, we've seen some in Florida, Texas, Ohio, other states have announced the cancellation, elimination or reduction of non -- or of elective procedures, so of non-COVID type procedures. And we do have daily insights into pre-auth and pre-cert type things. We are starting to see the trend of those come down a bit here in early September. But it's just early September. I mean this has only been 7, 10, 14 days for the majority of these announcements to have been made. So the first 60 days of the quarter, the non-COVID was more -- much more consistent with what our expectations are. I think we're seeing it to come down a little bit here in September. And again, that's been a phenomenon that we've seen since COVID started back in March of 2020, that as COVID goes up, non-COVID goes down. The one thing I will say is that non-COVID is -- we now expect and our guidance assumes, non-COVID will go down at a slower rate than it did maybe a year ago where it went down much more quickly so that there will still be some savings in the system, just the savings won't be at the same level as they were previously. So yes, we monitor pre-auth and pre-cert stuff on a regular basis. And to the extent those are inpatient procedures, that's very clear. Some of those procedures are outpatient so we can monitor those as well. And then a lot of the other stuff is really just -- some, it's anecdotal and others is just our day-to-day relationships with many of the providers in our networks.

Perfect. That's super helpful. And just to clarify and kind of emphasize the one point -- yes, just want to make sure that that's clear to people because I think that's important because I think people do wonder each wave, are we seeing behavior change that's going to lead to a lower amount of non-COVID offset as we go through this third wave here. What you're saying is that your guidance allows for that. You're not assuming we see a perfect analogue of the first 2 waves, you're assuming that it won't necessarily be the same degree of offset, and that's comfortable inside the outlook you guys have.

Yes, that is correct. We believe that our outlook is very prudent in our approach. Even look at the second quarter as an example, when we guided at the end of the first quarter, we had expectations for the full year. And in the second quarter, our guidance was for total cost trend to be above baseline. We were correct, it was. However, it was better than we expected because the drop-off that you saw from the surge that occurred at the end of March into early April was much steeper than we had anticipated. And so we ended up in a better place for the quarter than we had anticipated, although we were still above 1.0 for the quarter. And so with that, really, outperformance for the quarter, we provided some of it back to the shareholders in terms of raising our guidance and actually getting our guidance squarely into our 12% to 15% growth rate range so that we are growing our earnings on an annual basis within our long-term sustainable growth rate. And then we took the remainder of that outside and actually utilized it to have even more prudent guidance for the second half and to have a more conservative view associated with the second half. So that's just another example of where we believe that the way that we are treating this from a financial perspective and managing through it is very appropriate.

Got it. Makes sense. And thank you for the details. So just to touch on another sort of just recent sort of news item. Obviously, a big announcement last night on testing and kind of workplace-based testing. It would be helpful -- I know obviously, [ you've been ] still trying to digest it the same way that we all are. Just big picture, how should we think about that testing? It generally seems like, again, that you guys are responsible for paying for testings or by physician versus testing is being done as a return-to-work type test. Just big picture, how are you guys thinking about what that could mean for cost as we think about the back half of the year, maybe even into next year?

Sure. No, thank you for that question. So first of all, the announcements that were made yesterday were really all revolved around getting more people vaccinated and requiring and increasing the vaccine. And we're actually very happy with that as a company. There is a direct correlation between the populations that have been vaccinated and the onset of the Delta variant. So the more that gets vaccinated, I think the better it off for us as a company, but more importantly, for the country to help work our way through this. So very, very happy about that. Also happy about the fact that additional fundings given to the FDA to help really review and hopefully accelerate the approval of vaccines for those under 12 years old since the Delta variant appears to be impacting 12-year-olds and below for the first time where the statistically -- was not statistically significant for those children for the first wave of coronavirus. So certainly, a lot of changes in dynamics. On the testing specifically, we have, always will believe that the testing done in a medical setting for a medical need is a covered benefit. However, surveillance testing is not a covered benefit and not the responsibility of the health insurance industry, that was made extremely clear black -- back in March with the regulations that were put out. And everything that was said last night, nothing contradicts or even presupposes anything different. So surveillance testing is not part of the insurance product testing for medical purpose as this. That's how we've been treating it and reacting, and that's how we would proceed throughout -- for the foreseeable future.

Got it. Very helpful. And then hopefully, it's a little hard to move off the COVID topic, but I think an important thing, I've been getting a lot of questions on it myself is just how to think about sort of the $600 million that you guys have talked about as sort of the net COVID headwind that you're incurring. It would be great just to kind of just remind us kind of what that consists of, how has that changed throughout the year? And then how should we think about the recovery of that $600 million over the next year or 2 years, 3 years? Like what's the period look like there? And I guess how much of it you feel within your control?

Yes. No, great question, Steve. Thank you. So the $600 million, I just want to remind everybody is a net number. That's a net headwind impact of COVID in 2021 associated with our financial expectations. And we are still within our 12% to 15% long-term earnings growth rate range even with that $600 million headwind. But it's comprised of many items. Medicare risk adjustment, certainly, was a big item that was part of there where the deferred utilization from 2020 actually provided us the -- we did not have the full opportunity to gather the HCCs and various other codes that we would have gathered under normal circumstances. And so our risk score revenue is lower in 2021. The $600 million includes some of the regulatory and legal changes that were made last December and January in terms of the Medicare fee schedule being increased. The sequestration offset, the bump in the DRG payments associated with COVID treatment costs that are provided to inpatient facilities. It also included things such as the excess COVID cost in -- netted against the deferred utilization savings. Back in 2020 and into early 2021, we are paying copays and deductibles for everyone that had a COVID diagnosis. So the $600 million included the portion in 2021 that occurred before the benefit packages were more normalized on that. So all of those things were in the $600 million on a net basis. I think it's fairly clear that a few of them should start to reverse. They're certainly an open question for the magnitude of those things. But like for instance, on the risk score coding, we know that just based on what we have done here through the first 8 months, we've had better access to data, more normalized utilization. We expect the risk score quoting revenue in 2022 to recoup a fairly large portion of what that headwind was in 2021 as an upside. On the other hand, things like, gee, what's net COVID cost versus the deferred savings utilization -- or deferred utilization savings? That's still an uncertainty and an unknown. It would not surprise me a bit for that to continue on and continue to have that headwind into '22. But it's really too early to specify any exact amount other than to talk about it conceptually. And a few of those things that are regulatory and legislative in nature, some of them expire at the end of this year. So then obviously, they go away. Others continue into 2022, obviously, they stay and you have to just go through one by one by one. At the end of the day, in the entirety, the -- we do expect some level of upside. Some is a nebulous term and it's going to stay nebulous until we have more specificity. But the $600 million should provide at least some benefit into 2022.

Got it. Yes, makes sense. I understand it's very dynamic. So then as sort of a related question, I guess, just big picture, as you guys think about pricing your business for 2022, I guess this is probably more specific to commercial, but also I'd love to hear your thoughts on Medicare. I guess just big picture, how did you approach pricing and bids in such a dynamic environment? Would love to hear about some of the key assumptions that you guys are making. And then one thing I've just been thinking about is there is some concern, I guess, that different companies could be landing at very different answers on what they think is the right way to price 2022. I guess what's the potential for seeing some sort of atypical things in the market or do you feel like because the environment is dynamic that maybe it's a little bit less competitive than it might be in a typical year? Would love to get your thoughts on that.

Yes. Let me respond to your question in this manner. And I really don't want to go into exactly what our negotiations are for our commercial group business right now because they are literally happening on a real-time basis. We have the majority of our group commercial membership renews on January 1. Only a small portion of that has been locked and loaded at this point. There's many negotiations ongoing currently. Over the next few months, obviously, we'll have a lot more transparency to that and have a lot more firmed up numbers. However, let's take a look at the individual ACA business, which, in many regards, utilizes a lot of the same networks, although narrower and have similar benefits in some cases. And if you go back 15 months ago, and as we sat there in doing some of the ACA filings for 2021, we made the cognizant decision at that time to increase premiums by 2% to 4% throughout the geographies where we were offering ACA products. And I do believe that, that was one of the reasons that our ACA business is actually performing fairly well in 2021 and within our expectations, is because that we had the foresight to include those premium surcharges in the filings. So as we go through this year, knowing that the Delta variant, the coronavirus, COVID-19, all those things that something is going to exist into 2022. Again, nobody has a crystal ball. We don't know exactly how significant it's going to be. But we all know that it's not going to be 0. And so what we believed was that while our premium charges already have a 2% to 4% surcharge embedded in them, we need to probably keep and maintain that for the foreseeable future. And so that's how we constructed our ACA filings, again, for 2022. And I'm not going to get into the specificity of the commercial group pricing, but there's obviously a very similar thought process associated with that. There are other dynamics in terms of probably 20% of our individual ACA markets were actually in an MLR rebate position, further solidifying and justifying our very good decision to do the pricing that we did a year ago. So we'll tweak those a bit in order to maintain competitiveness. But in general, there's a 2% to 4% surcharge that was embedded a year ago, and we've maintained it.

Got it. And I appreciate all of that. And maybe...

Yes, I'm sorry. You also had another question about the competitive nature. And I'll just say that we've seen, in general, most of the peers appear to be very rational, which we're very happy to see. I'll just remind everyone that we do not compete in the commercial side against 36 other Blue Cross and Blue Shield carriers or the nonprofits in those other 36 states because our commercial footprint is limited to the 14 states, but we do have the significant market share throughout the states that we operate in. If any other company makes a decision outside of our 14 states to be very aggressive in pricing. It does not impact us at all. As a matter of fact, it probably helps us because the competitors in those states may need to respond or react, which means that they would have to be more disciplined in our states. We will be disciplined in pricing. We will ensure that we are covering to what we believe is forward cost trend, including all these factors. And to the extent that a competitor needs to respond [ to one ] of the other 36 states, I think it just further solidifies the ability for Anthem to maintain its pricing structure within our 14 states.

Got it. That makes perfect sense. So then maybe pivoting a little bit here to kind of touch on some of the Government Business here. I guess Medicaid is another one that people are watching, just given the dynamic nature of enrollment there and eventually how things could progress as we eventually see redeterminations restart. I guess I would love to hear your latest thinking on thoughts on potential timing for redeterminations to restart, likelihood at this point that that's going to get pushed out into next year. And I guess sort of -- it's a little bit hard to say, obviously, how many of these members will eventually kind of lead the roles. But would love to get a sense of as you think about it and deduce an analysis on that population, any kind of thought process you have at this point around what the incremental margins these populations could look like? We've had some peers talk about they think it's closer to a normal margin, but intuitively, it seems like it could skew a little bit higher. I'd love to just get your latest thoughts on Medicaid broadly.

Sure. On the Medicaid, on the membership growth that has occurred in Medicaid due to the lack of reverifications through the pandemic and then as required by the federal health emergency, we've been planning all along for the federal health emergency to expire in early '22. So we'll obviously respond and react as more information becomes known. But even with that, we believe that many of the states will try to ensure there is a soft landing for those folks. So we are not expecting a cliff event of an entire reverification. The reverification, I believe, needs to occur at some point during the year. We think some states will be much slower than others in terms of the reverification. But the other thing is that I think that's extremely important is that Anthem does have the most balanced and resilient block of business. I've referred to it in the past that we have the largest catcher's mitt in the industry. We have individual ACA products where people who lose their Medicaid coverage could buy those products. We experienced negative in-group change in our commercial business over the pandemic. While certainly, many of those folks who lose Medicaid eligibility due to reverification, may lose it because they gained employment. Well, in those cases, we would expect that our in-group change actually reverses, and we actually start picking up positive in-group change, obviously, all tied to the economic and unemployment projections as well. So we actually feel very good about our ability to capture and maintain membership in one of our lines of business, whether it's commercial ASO, commercial group, individual ACA or we still believe that there will be many of those members will maintain Medicaid coverage through the entirety of 2022. Obviously, it would stay at the same margins that we had them in 2021 in theory.

Got it. And I just want to -- I think you may have touched on it at the end there, but just to be clear, do you guys have thoughts on sort of where the margins could sit for some of this population that could potentially roll off? I appreciate that it can be caught elsewhere kind of in the catcher's mitt, but just trying to think about how that might translate on a member-to-member basis.

Well, it all boils down to having actuarially appropriate rates from the state. And the one thing about Medicaid that does occur is that it's typically very difficult for any one quarter for the exact acuity of the population and the reimbursement rates to exactly align. That's why in Medicaid, it's very common to have retroactive rate increases. And then even in the past 1.5 years, some retroactive rate decreases or clawbacks. But you look at 2019 as the most recent example of reverification process going on. The members that were removed from their roles due to the reverification were typically at the high end of the target margin range from a profitability perspective. And so then what needed to occur in 2019 was that we needed to get some retroactive rate increases to counterbalance. And we got those, although it was not aligned from a timing perspective, there was obviously a delay. We know that now. We are proactively talking to our states about that very fact on a regular basis to ensure that we don't really repeat history completely the same way we did back in 2019 in that knowing as members end up being removed from Medicaid due to the reverification process that the rates -- underlying rate structure for the remaining population needs to be reflective of expectations and not just maintaining that same rate structure. So we are very proactive with our states with that conversation at this point.

Got it. And I appreciate all that color. And then sort of this is a little bit of a bigger picture question, I guess. And this is probably what I would have led with if the environment wasn't as dynamic as it is with COVID. But just, as we think about the first half there, the EPS guidance has come up about $1 from the starting point. I guess as you guys think about the major drivers, obviously, we have our own models. Your company model is going to be different than that. As you think about the major drivers of the upside during the first half relative to your initial expectations, I guess I'd love to hear you talk a little bit about what those are. And then just from like a kind of a jump-off point point of view, how should we think about the sustainability of the upside that you've seen in the first half of this year?

Sure. Sure. So yes, we've been very pleased with our performance on a financial basis for the first half, even with all of the other dynamics going on in the industry. So certainly, our medical loss ratio was favorable in the first half. Part of that was the non-COVID drop in the second quarter was maybe a bit more significant than we had anticipated. COVID dropped following the Easter vacation and spring break at a very quick level. But all in all, the cost structure has been very, very strong and very solid. We've actually had some nice membership growth. I believe we are the only entity in the industry to grow commercial risk membership during this time frame, and we've grown it in a very profitable manner. So growing membership profitably in a pandemic, I think, is extremely impressive. And we've done very, very well with that. Obviously, the Medicaid membership has been a significant driver. And yes, that was due to all the reverification or lack of reverification that we just got done talking about, that's been certainly an upside. And many things position us very, very well for the future. We're also making some progress on the 5 to 1 to 3 to 1 strategy, which is where the fully insured group member makes 5x as much EBITDA as an ASO group member and our strategy is to take that down to closer to 3 to 1 over time. And we've made some improvements on that during the year as well. And we actually expect to end the year closer to 4 to 1. So we've actually improved that by an entire turn over the last few years. And then investment income has really been performed extremely well. We have about 90% of our portfolio is in fixed maturities, very steady, very stable, duration of 4 to 4.2 really matches and balances out against our liabilities quite well. But the other 10% are in alternative investments, real estate, various other things, and they have performed exceedingly well to the point that there's probably some unsustainable upside in the investment income line item thus far this year. So I think the thing that's most exciting for me is that the vast, vast majority of the upside that was from core operations appear sustainable. And as part of our long-term thought process, we'll have to adjust the investment income onto a more normalized level. But we feel very, very good about where we're sitting from a financial perspective at this point in time.

Got it. No, that's very comprehensive, I appreciate that. And then I appreciate you touching on the 5 to 1 to 3 to 1 transition and maybe you think kind of 4 might be where you're at exiting the year. As we think about kind of what the key levers are, I know Ingenio is a big piece of that. But how do we think about the timing, I guess, potentially getting from 4 to 3? How long do you think that might take? And are any of the levers as you go from 4 to 3 different than the same levers that took you from 5 to 4?

Great question. So we first announced the strategy at our Investor Day back in March 2019, utilizing 2018 as our baseline and maybe at a 5-year horizon. So that would be the end of 2023 would have been the expectation to hit the 3 to 1. Of course, at that point in time, we didn't realize that COVID-19 was going to occur and that there'd be a pandemic. We made excellent progress in 2019, started out 2020 actually ahead of pace and then things slowed down quite dramatically. And the number of bids and changes and things that were available in 2020 and then the January '21 selling season, was a bit slow. So -- but we've actually recovered quite nicely on that. We see the 2022 selling season being more consistent with historical or normal levels and believe that, as I said, we can exit the year closer to 4 to 1. And we still have our sights set on getting to 3 to 1 by the end of 2023 or early '24 at the absolute latest. And then we don't want to be done. We want to continue to drive it down and continue to close the gaps. We actually do have some states and geographies that were doing better than others. The midsized or medium-sized companies are really a sweet spot for a lot of this. The upselling of Ingenio is big. We weren't able to upsell Ingenio in 2019 because we're still under contract with a different PBM at that point in time with pricing that was not competitive. We now have a very competitive contract with our new PBM. For our new fulfillment vendor, we have our own PBM to provide the services. And so now each year, when there's renewals the expectation is to increase penetration and do some upselling of Ingenio services. Most of these large ASO are 3-year contracts. So it literally takes 3 years to talk to each one of them at renewal. So that's why you're easily talking about a 5- or 6-year cycle to get the Ingenio penetration to probably where it needs to be on a target level basis to get through the renewal cycles. Our integrated health care management is doing very, very well. The stop-loss is most desirable on the medium-sized companies, and that's been helping. We've been increasing our penetration of disability, life, vision and dental for these most recent renewals. So we feel very good about that. Each one of these helps in a small way so that at the end, we can be from the 5 to 1 to 3 to 1. And -- but I would say the Ingenio penetration is probably #1 on the list.

Perfect. No, that makes sense. [indiscernible] So unfortunately, we have reached our time. I think we probably could have continued this conversation for an hour, but I appreciate you giving us the time and the insight of the business and best of luck through the rest of the year.

Well, thank you, Steve. And if you could have finished in an hour, you'd be much faster than most of your competitors, so I appreciate that. But thank you very much, everyone, for your interest in Anthem. I do think we're very well positioned both for 2021 as well as the future. We've reaffirmed the 12% to 15% long-term core earnings growth rate multiple times and now again today. We believe the core operations are doing extremely well and that we're very well positioned. And we didn't really even get to talk about the profit streams from Ingenio as well as Diversified Business Group that helped supplement the core insurance operations. So we believe we are very well positioned for the future. So with that, thank you, everyone, and have a good day.

Thank you very much.