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

Hi. Good morning. I'm Steve Halper from Cantor Fitzgerald Equity Research. I cover managed care and health care IT. We're very pleased to have with us today, Anthem, with John Gallina, the CFO; and Steve Tanal, who heads up the Investor Relations program. Just in terms of housekeeping, if you have a question, please send it over in the meeting platform, and I'll see that question and I can ask -- or e-mail me at [email protected], and I'd be more than happy to relay that question over to management. So John and Steve, thank you for joining us today.

Yes. Thank you. We're happy to be here and looking forward to answering your questions.

Great. So I think we'll dispense with sort of an overview question, and we'll get into some topical issues of the day. And I was hoping we could start out on the legislative outlook first. It's almost like real time. There's this a big budget battle going on in Washington. You got the infrastructure bill. You have what some people are calling the social spending reconciliation act. And it seems like health care has taken a little bit of a backseat for now, and we were just wondering what Anthem's view on the current legislative environment is as well as some of the specifics that might or might not make its way into any potential legislation that's passed.

Yes. Sure, Steve. Thank you. And as you pointed out, Congress is still formulating the budget reconciliation legislation. So it's really impossible to speculate on details since -- or detailed policies since we don't even know what's going to be included or not included ultimately. But like any large legislative package, there's always risks and opportunities for the industry. And I think the one thing that's most important from our perspective is that based on our understanding of what's going on and what's being discussed, we don't see anything that's really unique or disproportionate in terms of a risk to Anthem or our customers. On the other hand, there are conversations going on to widen the program and to include things like dental, vision and hearing. And as that happens, we think that's positive to the business and that we'll be well positioned to really benefit from that and have our members benefit from that. The other thing about the legislation, I guess they are talking about making the enhanced ACA subsidies permanent, which could improve access to coverage. Again, all these things are just -- who knows where exactly it's going to come out, but that would certainly be a positive. But we remain actively involved in policy discussions around the budget reconciliation. And I think probably the most important takeaway is we don't see anything that's really unique or disproportionate to Anthem at this point in time or our customers.

Yes. And how do we feel about the government negotiating drug pricing? What's -- I'm not saying it's happening. I'm just saying sort of what's the view there.

I'm not sure I can answer the question of how do I feel about that. That's very much a loaded question. I'll just say that...

[indiscernible] my thoughts.

I just say that we are very involved in the discussions and want to make sure that we're appropriately positioned, make sure that our members are getting the quality that they need, the access that they need and the value that they're entitled to, and we're going to work through that. And I really don't want to get into the specificity of something like that at this point in time.

Would you agree that health care -- with my first comment that health care has taken a little bit of a backseat in sort of the bigger picture?

Yes, I would agree that it's not the front-page news, the way that it has been in some previous legislative discussions. So that doesn't mean it's not going to be impacted positively or negatively. There's certainly probably will be some impacts. It's just not the lead story the way that it had been in some prior conversations years back.

Yes. So I guess this will be a fun week relative to seeing what happens. And I read somewhere that the House bill is 2,400 pages, and then we're going to start reading that nobody is actually looking at what's in the 2,400 pages. We've been down that road before, right?

That seems to ring a bell for conversations that were occurring around 2010, I think, is what you're referring to. So time will tell.

Yes. Exactly. Okay. So appreciate the comments on the legislative environment. We're finishing up the third quarter later this week. How would you characterize Anthem's selling season in the commercial employer market at this point?

Yes. Thank you. Selling season has been good. First, I'll start on maybe the pricing for our risk-based plans and then comment on the selling season specifically. And our pricing methodology in 2020 for 2021, I've made comments in previous public settings that for individual ACA that we've made the cognizant decision back in the summer of 2020 to add a 2% to 4% premium surcharge to our premium rates associated with COVID cost and the uncertainties and unknowns for COVID that would impact our members and our cost structure for 2021. And that was individual ACA, but I think the corollary or the comment there is then that is sort of the basis or the baseline or the starting point in terms of how we assess the other lines of business. And we haven't provided and will not provide for competitive reasons the specificity of exactly the percentages by line of business or by customer. But the thought process of having a forward trend that includes the best information and having a COVID surcharge in it is certainly front and center in our thought process. So then we work our way to this year, and we look at 2022, and then we have to make assessments and assumptions associated with the COVID cost that might exist in 2022 and compare that to what's already in our baseline. So we've already got COVID surcharge, if you will, in general on our baseline. And then the thought is, is that we start with that baseline and then include forward trend to the extent of our best estimates associated with forward trend and price for that completely so that our 2022 pricing includes full trend as well as a COVID surcharge associated with it and tweaking it as needed or necessary by line of business or by geography. And that's really our strategy associated with risk-based pricing. And then -- and we have been successful in terms of our growth. We've grown our commercial risk business in 2019 and 2020 and 2021. And I believe we're the only carrier in the sector to be able to say that affirmatively in all 3 of those years, and that's with the COVID surcharge. So we feel very good about the rational pricing that's out there in the marketplace as well. On the national accounts, the selling season really is picking back up. It's much closer to pre-COVID levels here from an overall membership opportunity. RFP counts might be down slightly, but larger groups are back in the market. And we're having a good strong selling season. We actually are having an extremely high retention rate associated with the business and a good strong selling season. So I don't want to declare a membership number at this point in time other than to say we're very bullish about the activity and very bullish about Anthem's ability to win.

So just remind us, I guess, last year in 2020 for '21 coverage, I guess there was a little bit of reluctance by employers to implement change in the phase of COVID. So you think that has sort of -- that concern or pause has eased?

Well, what I'll say is that the volume of activity in 2021 is much, much closer to the volume of activity in 2019.

Okay. And how long do COVID surcharges stick around? Is that until we're done with COVID? I don't think we'll ever be done with COVID.

Well, I guess that's my question for you is when do you think we'll be done with COVID.

Can't answer that question. We'll never be done with COVID.

What I will say is that we will always price to our best view of forward trend and include COVID and non-COVID costs both in the forward trend estimates.

Okay. So based on your available data, right, do you concur with some of the data that we've been seeing that Delta variant cases have finally started to ease nationally?

Yes. As we look at the third quarter, July was pretty much aligned with expectations, maybe slightly better, but really aligned. And maybe I should talk about expectations briefly before I answer the rest of the question. We gave our guidance at the end of the second quarter on our earnings call, and our guidance was for the cost structure to be above baseline for each and every month in the last 6 months of the year. So clearly, the third quarter was going to be above baseline. When you add COVID and non-COVID combined, the fourth quarter above baseline. And that gave us an elevated medical loss ratio over historical levels that was presumed, and all that is already baked into the guidance that we provided at the end of July, which is earnings per share of greater than $25.50 per share, and feel very good about that. Well -- so then July was pretty much aligned, slightly better, but not enough to really be noticeable. August was a bit higher, tried to be very transparent about that in other conversations I've had. That was something that was impacting the entire country. All you do is turn on the news or look at the Internet from a news source perspective or look at statistics, and you could see that the positivity rate of Delta was much higher and that we had, had a spike. And I acknowledge that Anthem saw that same thing within our numbers. And then some of the systems were actually hospital provider systems. We're starting to limit elective procedures in early September. And there are a few that I can point to very specifically, including some here in my hometown of Indianapolis that came out with press releases limiting elective procedures in order to ensure that bed space was available. And so now what we've seen in September, as we have seen COVID costs come down, as the spike has been subsiding, and we've also simultaneously seen non-COVID costs tweak down, and I think the non-COVID cost tweaking down has a direct correlation to many of these provider systems limiting elective procedures here at the beginning of September. So we actually feel very good about that, and that does allow us to continue to affirm our guidance for 2021. We feel very good as we look at our modeling and look at the overall cost for the full year. We feel very good about our modeling. The highs might be a little bit higher than we had modeled, and the lows are actually a little bit lower than we had modeled, but our all-in cost structure were actually fairly credible in our modeling at this point during the year.

And you're comfortable reaffirming that guidance?

Yes. Absolutely. I'll just put that on the record. We reaffirm our 2021 guidance and the information that we provided on our second quarter call at the end of July that we are reaffirming that today.

So we got a question from an investor. Can you ask what -- why is there a headwind from costs running over baseline if they price for costs to run over baseline, i.e., price for normal trend plus the COVID surcharge?

Yes. I will presume that this investor is trying to piece together part of the $600 million headwind we have, and part of that did have excess COVID cost in it. The pricing for COVID was specifically associated with the individual ACA business. I had tried to be very clear about that and said that it was really relative to the individual ACA, and then that was a starting point for other lines of business. If you go back and look at Medicare -- I'm sorry, if you go back and look at the Medicare line of business, the utilization in January was significantly higher than we had expected. We gave our guidance for the full year at the end of January. We already had several weeks of January information in hand at that point in time. We also had the legislative changes that occurred in December and January associated with the Medicare Advantage area, whether it be the Medicare fee schedules or the DRG bump associated with the sequestration. So while I feel very good that our individual ACA business did a really nice job of covering the COVID, I don't know that our pricing across every line of business covered every bit of COVID. So that's one of the reasons there's a headwind in our 2021 guidance. But what I would say is our 2021 guidance here that we provided at the end of July has taken all that into consideration.

Great. So while we're on the topic of individual exchange markets, can you generally talk about the plans for 2022 in terms of new markets that you're entering and what sort of positioning are you -- did you look to take as we enter into the annual election period for marketplace plans?

Sure. So we've actually performed quite well in the individual ACA market over time. Matter of fact, I believe we are the only carrier that can sit here and say that since the marketplace was created in 2014, we have never lost money in any 1 year ever and feel very good about that. Now we did have a period of time in 2015 and '16 that we were relatively close to breakeven, and it was extremely capital-intensive area with a lot of uncertainty. And so we did reduce our footprint as a result. And people can go back and look at history from that perspective if they're curious. But the last few years with our somewhat reduced footprint, we've done exceedingly well, have met target profit margins. It's all even pre-COVID, we're in MLR position in many states in 2019 before COVID had even started, and all COVID did was just to ensure that those MLR caps were hit. But we do feel very good about our position. We do think that our scale and our market share within our markets gives us a unique competitive advantage. It helps us to be really a risk-adjusted receiver because we have the best data on the -- on those folks given the deep penetration we do have. We will, maybe, tweak our market a bit or our counties a bit. We are not ever -- at least say not ever. Right now, we certainly don't have any perspective of leaving our 14 states in terms of the individual ACA. We think the Blue brand is an extremely important element of that. It's a huge value proposition that no one else has, except for Blue, and it does make a difference. And our goal is to be in the low or second low silver in the pricing depending on the market. And with that, then the member can get the subsidy based on that product and then buy from there. And to that extent, that allows many folks to get our product for free. So that's really the overall strategy. But we feel very good about our positioning within the individual ACA marketplace. And quite honestly, maybe you'll get to this later, but that market is going to grow in 2022 as the Medicaid reverification issue plays out. There's external studies out there and research that we think is relatively credible that talks about that up to 20% of the people who have gone on Medicaid here in the past 12 to 18 months, due to the lack of reverification during that time frame, will enter the individual ACA marketplace. Some of them will keep Medicaid coverage. Some will go to employer-sponsored plans and the remainder to the individual ACA marketplace. So we're very well positioned to capture those members and to keep them in the Anthem family to the extent that they came from an Anthem Medicaid plan. I've probably answered your next question already.

Well, I was just going to make a comment relative to the very first comment about legislative outlook. Any efforts to expand ACA, probably work to your benefit as well as the industries as long as the source is coming from the uninsured into the ACA plans? But I think your comment about those folks falling off of Medicaid, flipping into ACA plans is not generally appreciated by investors, by and large. I got another question...

Yes. Thank you for clarifying that or at least providing that perspective because I completely agree with it.

So we got another question from an investor. Within the monthly commentary that you had provided on cost trends, are you able to provide any color and break that down between commercial Medicare and Medicaid?

I guess I will say as I have provided the most monthly commentary I'm comfortable providing, we provide guidance on an annual basis. We report results on a quarterly basis. Monthly information, if not taken in the area or the way that it is presented and looking at the entirety of a situation, can actually cause -- potentially could cause misleading commentary. So sorry, I'm not going to provide monthly data.

No, that's fair. That's fair. So let's go back to Medicaid and how you feel about that business and how the company plans on growing that line of business.

Sure. So maybe I'll continue on with the commentary on the reverification. And certainly, there's unknowns even exactly when the federal health emergency will expire. And then when that federal health emergency expires, then what is the timing and the veracity of states to run through the reverification process? Typically, they would have 12 months in order to do a reverification process to -- after the federal health emergency expires. And so depending on the perspective of the legislature within the state, they may be more -- their thought process may be more focused on delaying the reverification versus other states might want to do a little bit sooner. It could have a lot to do with the unemployment rates within those states as well the political perspective of the state legislature. Having said that and operating in all different types of states, and red states and blue states and higher unemployment states and lower unemployment states, is our Medicaid business literally spans half of America. We believe that it will be slower in general for the reverification to occur and be -- that there will not be a cliff event. That will be more on a step-by-step basis. There is a research institute that recently put out a bit of research, it was the Urban Institute, to actually address where do they believe that the members who have gained Medicare coverage over the last 18 months will go once reverification begins. And actually, when we read the study, it was relatively consistent with what our internal expectations and our internal modeling had already existed. So without talking about our internal numbers, specifically, I'll talk about the Urban Institute because we do believe it's a very credible amount of percentages and has much consistency. But they said 20% will go to the individual ACA -- are eligible for the individual ACA. They estimated that approximately 35% of all the people that gain Medicaid coverage would keep Medicaid coverage over the long term. And so that's the 35% and the 20% would be 55%. And then they expect 40% to 45% to go into employer-sponsored plans, which is, as you look at sort of the in-group change that we had a negative aspect of from our employer-sponsored plans over the past 18 months, it's actually very consistent with that. So it's basically reversing that trend. And then there's a few percent that might drop into the uninsured, but it's only a few percent. And so we believe that those estimates are relatively credible and that as we look at the members that we picked up over the last 18 months due to the lack of reverification that we will maintain the vast majority of them in the Anthem product.

Yes. And that speaks to the range of products and diversity within those markets that you have, so that's great.

Absolutely, Steve. I continue to say I believe that we have the most balanced insurance portfolio in the entire industry, and I think the Medicaid reverification members will help prove that out.

Yes. So John, I've been covering Anthem since 2012. And as you know, my historical expertise as a research analyst was in health care IT. And we've published a lot of reports here at Cantor, just talking about Anthem's investment in IT. We have a few minutes remaining. Can you just talk about some of the notable investments that the company has made in the IT side because I generally think they're overlooked by most investors?

Yes. So thank you for that. And we actually have made a lot of noticeable investments. And I think one of the reasons it's been overlooked, I view it as a huge positive. We've been able to deliver on our 12% to 15% growth rate for the last several years while simultaneously making these investments. And we haven't had to spike anything out or call anything out. We've actually been covering these investments. And really, our focus on digital is really to focus on every area of the business in terms of -- if you think about the income statement. We'll have digital aspects to drive top line revenue and accelerate growth, whether it's AI-enabled clinical programs, whether it's the better product offerings, digital first products, various other aspects of things that can help drive top line growth. And then we have digital programs that we're creating to help address benefit expense, whether it's using AI to look at various disease states and say, well, gee, of all these disease states, how are they all treated? What were the course and the mode of treatment? What was the outcome? What were the symptoms and the profile of the members leading up to this situation? And then how can we provide that information to our providers so that they have better information to know what the best course of treatment is as well as some of the advanced care management of looking at, well, who else in our portfolio today has some of the same symptoms or same -- they're in the same part of the disease state and be far more proactive in terms of managing those things? Digital and AI helps enable all those types of things to help bend the cost curve down. And then certainly, having our Sydney Health platform and the app and the ability for members to access the information on a real-time basis, have everything as a one-stop shop, whether you need your ID card. There's even a cool little thing in terms of -- anybody that's ever done the calorie counting apps, how cumbersome it can be to figure out now exactly what did I eat? And did it have this? Did it have that? Anyway, it actually has a thing where you can -- you just hold it over your plate of food, and it picks it up and tells you what you have on your plate of food and how many calories it is, way better than those other ones that are a bit more cumbersome. But the whole point of talking about that is we're designing Sydney as a one-stop shop for everything, scheduling, interactions, ID cards, health type assessments, et cetera, et cetera. So clearly, a lot of investments there, and we're continuing to improve it and make it more user-friendly and make it a better and better app here as we go through. And then I didn't even talk about administrative expenses, and that's what people usually think about first many times when you talk about digital is -- are we eliminating non-value-added procedures? Are we making things more automated? Are we making claims processing more automated and being done more accurately and less expensively simultaneously? Of course, there's all kinds of work going on with that in the background as well. So -- but I think the most important part of answering your question is we're looking at the entirety of our company, having the company be on a digital platform for health and how can digital drive the top line? How can digital help drive the benefit expense line? How can digital help drive the efficiencies of the admin expense line. It's not just trying to do some systems consolidation or other things. It's really embedding digital in everything that we do.

Last question should take 10 seconds to answer. What inning do you think you are in this digital transformation?

That's a great question. I assume we're playing a 9-inning game and not a double header. That's just a 7-inning game.

Not a 7-inning game.

I would say we're probably in the top of the third.

Top of the third. Okay. Great.

Yes. Yes. We rallied in the bottom of the second. We have a lead, but we need to extend that lead over the next 6 innings.

Good. We look forward to watching.

Thank you.

John and Steve, thank you so much for your time, and thank you, everyone, in the audience. If you have any further questions, feel free to e-mail me. Thank you. Have a great week.

Yes. Thank you. Goodbye.