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

All right. Good morning, everybody. Thanks for joining our Third Annual Wolfe Healthcare Conference. My name is Justin Lake. I cover providers and payers here at Wolfe. We're kicking off the conference this morning with the A team. We got the folks at Anthem here: CFO, John Gallina; Head of IR, Steve Tanal. I really appreciate you 2 being here. This meeting is being recorded so you can watch it on replay if you miss anything. And most importantly, I'm going to try to save a few minutes at the end for questions from folks participating here. So feel free to send me an e-mail with any questions to [email protected], and that Wolfe is with an e at the end. So with that, let me throw it over to John. Maybe give us a quick kind of update, state of the union going into -- coming out of the year and into 2022. John?

Thank you, Justin, and good morning, everyone. Certainly appreciate your attendance and your interest in Anthem. I do think that we're in a really, really good situation. We've got a lot of momentum as we finalize 2021, heading into 2022. We had really an excellent national selling season. Ingenio is doing quite well. Our Medicaid organic growth is doing well. We've had a 100% win rate for the year for every RFP that we participated in. Medicare Advantage continues to be really a strong driver, both in the individual and the group side. Our Diversified Business Group, now run by Pete Haytaian, we've really got some high aspirations for that for both internal growth as well as external growth. Commercial continues to do well in very strong, very capable hands. And I think we have an extremely strong balance sheet. So we feel very good about how we're positioned as we exit 2021. We've been very conservative in our assumptions associated with COVID and believe we're entering 2022 with some nice momentum. So with that, I'll turn it back to you, Justin, and you can ask some more specific questions.

Sure. Thanks. Maybe you could give us a quick update on what's going on with COVID. A lot of folks are seeing moderation, thank goodness, in the number of cases out there, admissions. But more than that, because I think we could see that in the numbers, I'd love to hear your view on things like testing. And I know there was some legislation in California that looks like it's going to force employers to cover all types of testing, including kind of maintenance or -- testing. So just how are you thinking about COVID in '22 versus '21 from a cost perspective?

Sure. So as you know, in 2021, I think we were relatively transparent at the beginning of the year with approximately a $600 million headwind that we had incorporated into our 2021 guidance. And we still grew above our -- within our 12% to 15% long-term earnings growth rate even including that headwind. And some of that's going to dissipate in 2022. Probably the most significant piece is the Medicare risk adjusters and the risk scoring, risk coding, where there was such a significant drop in utilization in 2020. We weren't able to get the scores. '21, the utilization was more normalized, maybe not exactly at run rate but much, much, much closer. And so the majority of that headwind dissipates. Some of the other headwinds do persist, and those headwinds do include things like testing and treatment. We have -- as I had stated in the second, third and fourth quarter of 2021, we believe that the cost structure would be above baseline in each and every quarter. Certainly, those assumptions have proved to be either accurate or even slightly conservative in terms of how we've done it. We expect that to continue in -- through 2022 as well, in that the cost structure will be above baseline when you include COVID and non-COVID combined. In terms of some of the specificity, we are looking at ingredient costs, for instance, in terms of the vaccine. Our Medicare Advantage bids assumed that we would be responsible for those costs starting January 1. On the Commercial side, we are assuming more of a July 1 type of a time frame in terms of being responsible for all those costs as well. So we've tried to be very thoughtful and conservative associated with it. And as I stated, we do have our trend assumptions for '22 assuming that COVID and non-COVID combined will continue to be above baseline.

Got it. And so from that perspective, is it -- you did a great job, like you said, of setting expectations for 2021 and talking about cost above baseline. Is it reasonable to think that it's kind of similarly set in terms of -- the percentage above baseline in 2022 will be similar to '21 in terms of when we see the MLR guidance and all of it will kind of piece together towards that? Or will it be more or less in your mind?

I would say the way that I'm looking at the headwinds, I just want to make sure that people are clear in terms of the impact. So like, for instance, the Medicare risk scores would impact MLR. So when I talk about trend and things like that, I just want to make sure that I don't confuse people or that people aren't assuming something different than what I'm trying to say. As we look at the cost structure of COVID and the cost structure of COVID and non-COVID combined, including things like the ingredient costs and all the other puts and takes, we are expecting a relatively similar range of cost structure in '22 as we experienced in '21. But you can't just immediately say, well, then the MLR will be the same because you have pricing considerations, you've got risk score considerations. You've got a lot of other things that may impact some of those metrics.

Right. So MLR should be better as COVID -- like you've said, it's a little bit more of a tailwind next year year-over-year mostly because of Medicare. But the overall, does MLR not -- is that not what you're saying?

Well, it's a little too early to provide specific MLR guidance. I'm going to go out of my way not to provide any guidance or any metrics for next year. But I would say that directionally, we're consistent.

Got it. Got it. And then talk about -- there's been a lot of questions around -- for the industry around -- everybody went out of their way to talk about COVID. And like you said, you laid out a -- I think, at the end of the day, a $600 million headwind, right, to -- for COVID from -- to numbers. So you put $200 million of that back mostly, I think, like you said, the Medicare Advantage risk score portion of it. The -- but we're -- there's $400 million left. And people are wondering, is the industry in general and obviously Anthem in particular going to be talking about this in 2023, 2024? In terms of -- is it going to continue? Is there going to be another $200 million in '23, for instance, right, that helps us grow above 12% to 15%, which is the normal growth rate? Or is this just going to become fungible? And just -- I'll give you an out right now. Cigna's already started saying, "We're not talking about COVID anymore," right? They're saying, "It's too intertwined with the business. And even though we gave you a number before, we're not giving it to you." So maybe that's the way it's going to -- that's a trend we're going to see, that maybe 2022 is the last year we'll kind of hear about COVID headwinds, tailwinds. It will just become part of the business. But I wanted to get your view on that.

Yes. That's a great question, Justin. And I guess I will say, since I'm not giving 2022 guidance, far be it for me to provide a '23 prediction associated with a headwind or a tailwind. But the way that our competitor that you mentioned framed it, I think, is probably appropriate. And I do -- it would not surprise me to see many others following suit. I guess what I would say from an Anthem perspective is, yes, we've affirmed our 12% to 15% long-term growth rate multiple times and continue to affirm our 12% to 15% long-term growth rate. And that is always going to have headwinds and tailwinds in it. It's always going to have pluses and minuses. COVID certainly is one of those. Dilution from New York Group Retiree is one of those. There's ongoing growth, share buyback. There's any number of things that can impact that. And on a net basis though, I feel very good about our ability to hit our 12% to 15% annual growth rate every year for the foreseeable future.

Got it. So the -- you mentioned New York. Let's jump over to that. Obviously, a really important win for the company. No Medicare Advantage in place, especially group MA, but you've talked about it being a big opportunity for the company. So talk to us a little bit about the -- I'm kind of -- you've done a good job of trying to help people kind of frame this in terms of the size of the contract. I know it's still a little bit in flux, that it's going to be pretty dilutive in year 1. I think you've talked about some maybe high single-digit kind of negative margins for next year before it starts improving. So one, is that -- so I've got it at about a 2% to 3% kind of a headwind to 2022. And is that a reasonable ballpark? And then tell us how the -- how -- one, how does the trajectory look from there? When does it get to breakeven, for instance? Is it 1 year or is it 2 to 3 from that level? And then two, I know Aetna is out there objecting to the award. It sounds like sour grapes, but -- and I know this happens all the time in these types of awards. But give us an update there on whether -- when you think we'll kind of know for certain that you're keeping this.

Sure. So first of all, on the dilution for next year, it's probably no surprise to anyone listening in on the call, Justin, that your modeling is very credible. And I believe what you have laid out in terms of the potential impacts are a reasonable proxy that can be utilized to assess the significance of the dilution in year 1 and very, very reasonable. Having said that, we've got expectations that year 2, which would be 2023, would be approaching breakeven overall for the contract. And then year 3, which would be 2024, would be approaching the target margins. Which -- on the Group Retiree, we've talked about MA target margins to be in the 3% to 5%, individual MA being at the higher end, group MA being in the middle to the lower end. And then we'll be at target margins for the duration of the contract thereafter. So that's really the thought process right now. And then in terms of the business itself, there is nothing that has happened that we know of that has caused us to delay or not be prepared for a January 1 launch date. We continue to staff up. We continue to be prepared. We continue to -- we've got all the enrollment, the benefit configuration loading, all of the things that go into being prepared for a 1/1 go-live date. Nothing has happened to delay or slow that down at this point in time. So we feel good that we're going to go live on January 1. And what's the time frame a legal perspective? I don't know, right? Ask the lawyers. But right now, as of today, January 1 still looks really good. And we're staffing up, and we will be well prepared for a smooth 1/1 transition.

That's helpful. I wanted to talk about the fact that within that 12% to 15% growth target, right, your end markets, the larger ones, Commercial and Medicaid certainly have solid growth, but you're probably going to need a little bit more than that, right so -- to kind of get to 12% to 15%. I know you've talked about capital deployment. We could talk about that in a second. But you've got other initiatives out there that should help you improve profitability and get to that 12% to 15% EPS. And so last week, I know you had your commercial folks out there, including Chris Rigg, at a conference talking about the commercial targets. I know they did a good job there. So we can probably skip the 5:1 to 3:1 because I think that's been fully vetted. But there are others -- the commercial risk market share, for instance, you have started to see an improvement there, Medicare Advantage, DBG. Can you just talk to us -- maybe give us a little bit of an update in terms of what those kind of drivers are that you kind of laid out at the Investor Day a couple of years ago and have updated and where you're at with that.

Sure. Maybe we'll start with Medicare Advantage because that may be the area that has some of the most upside associated with it. If you look at our 14 Blue states, we've only got just over 10% market share within those 14 states on an aggregate basis. And that compares to mid-30s, 35-ish percent market share on the Commercial side within those same states. And a lot of reasons for that, being late to the game, some Blue's rules that have changed over the last several years that had caused the ability to really maintain 4-star plans when folks lived outside of our 14 states and various other aspects that have now all been resolved. And so now over the last year or 2, we've been well positioned for growth in those areas. When you look at it, for every 1% increase in market share in our 14 states, it's about $1.5 billion in incremental revenue. And so we would be naive to say that we're going to go from 10% to 35% market share in MA. It's not going to happen quickly. However, we do believe it is very reasonable that our new sales each year and our new business each year does maintain a market share consistent with the commercial market share. So if we're 10% all in now and we grow our business next year, say, at a 35% market share clip, then that will take our overall market share to something north of 10%, 11%, 12%. Then you do it again and you do it again. And that's how we will continue to increase our market share. We believe that it's really focused on the new entrants to MA in general. There may be a few folks who switch, but that's not the primary focus. The primary focus is the fact that you know 11,000 Americans turn age 65 every day and an increasing percentage of them, into the mid- to upper 40s, are selecting MA plans. And when you look at the demographics we're in, we got 14 Blue states. We have Florida, which we actually are in the top 3 in MA in Florida. So some of the largest Medicare Advantage states in America are part of our footprint. So we do believe that there's a lot of upside there that would help increase the overall growth rate of Anthem. Certainly -- and then group MA would be on top of all that, quite honestly. And then you have -- Medicaid has done quite well. And yes, there can be reverification here for the next year. But there's also still the infamous $80 billion pipeline which is interesting. It was an $80 billion pipeline 4 years ago, an $80 billion pipeline today. So -- and as I said, we're now -- we've improved, 100% win rate. So we feel good about continuing to grow the Medicaid area after the reverification impacts dissipate, which should be in the next year. So really looking out over 2- to 3- to 5-year horizon. But our Diversified Business Group in Ingenio, which is now being run by Pete Haytaian, clearly maybe one of the best operators in the entire sector, we're very excited about that. Ingenio has done exceedingly well since we've launched it, and its sales continue to increase. Its penetration continues to increase. Diversified Business Group has done much better. And as we laid out at Investor Day, we really have the focus on growing it both internally and externally by having best-in-class assets, best-in-class services and capabilities, charging those best-in-class services and capabilities to our Anthem family at fair market value, maintaining the margin levels within the Commercial and Government Business divisions and then having the margin associated with that intercompany charge in the Ingenio Diversified Business Group area. And of course, you eliminate all the revenue and everything in consolidation, yet the margin retains. And that's part of the strategy for how we will get overall margin expansions for all of Anthem over the next 5 years, which was sort of laid out during Investor Day. And we feel very, very good about that. And then with the best-in-class asset and then utilizing Anthem as a proof point, we are much better positioned to continue to sell to other Blues and other payers. And the other payers don't have to just be other Blues. The other Blues are certainly the segment that we're really going to try to penetrate quite quickly. And then we have mergers and acquisitions. Amy Mulderry has been doing a phenomenal job running the area since she's gotten here. We've had way more opportunities and things we've ever looked at than before. We're not sitting around waiting for bankers' auctions. We're proactively out there beating the bushes, looking at what's available, what might fit within our criteria, what might fit within our strategic vision. And I really feel very good about continuing that. And then 50% of our free cash flow over the next 5 years is a substantial amount of money. And some mergers and acquisitions will contribute a few percent anyway within that overall 12% to 15%.

That's a helpful overview. So the -- let's start with M&A and the -- all I could tell you there is I wish you'd stop hiring my favorite clients and hire more of my competitors like Steve Tanal. Okay?

Well, funny, they've both been awesome hires.

I know they have. Congratulations on both. Getting Amy is a real win. The -- so let's talk about M&A first. Specifically, a number of your peers have recently started really kind of accelerating the discussion around the -- getting larger in the physician management space, right? It's obvious, the synergies here with the membership they can bring to the table versus, let's say, a CVS that also has both membership and some local capabilities with the stores. So you had United, right? Got here with OptumCare 10 years ago. Humana is talking about doing this on a bigger scale. CVS has just talked about doing it on a bigger scale. So you're kind of up next, so to speak, right? You've got the biggest bolus of membership that hasn't really kind of stated a change in view. So I know you have some assets here, right? You own CareMore. You own -- I think you bought a couple -- a plan in Florida on the Medicare Advantage side that had some physician assets, clinic assets as well. So it's not like you don't have these things. But what is kind of the strategy as you kind of look out over the next 2 to 3 years here? Is this something that you need to bring to bear?

Yes. That's a great question, especially given what some of our competitors are doing. Of course, they're all starting from a -- they have a different starting point than we do as well. That does need to be taken into consideration. And the strategy that they're employing may work very well for them, so I don't want to disparage it at all. But I will say -- we talked about our market share. 1 out of every 8 Americans has an Anthem Blue Cross and Blue Shield card in their purse or their wallet. 1 out of every 3 folks within our 14 states has an Anthem Blue Cross or Blue Shield card in their wallet. Nobody else can even say anything even remotely close to that. So given that backdrop, and that is such a key differentiator, that every provider in our geographies needs and wants to work with us. And so our thought is that in terms of the primary care and things such as that, that through aligned incentives, through contracting, through the sharing of data and information, that we can get to the same or a better place than any of the other folks who are buying provider groups can, and we can do so in a far more capital-efficient manner. The other thing just to think about for a moment is it is not a problem for us to launch a high-performing network. I don't know that anybody else can talk about launching a high-performing network. They're going to talk about launching a network of physicians they own, and then they're going to give it some name that makes it sound really good. But it may or may not be the best. Who knows? It may or may not be the best providers in the geography. So we do believe that our members will be best served and our strategy best served in the most capital-efficient manner to not go ahead first into buying primary care physicians. Now having said that, there's always a "but" and there's always a "what if." That does not mean that we will not participate in the profit streams that exists within the health care industry. So like, for instance, in our Diversified Business Group, we just bought myNEXUS. It's actually provided us an entry into the home more so than we ever have. There are certainly profit streams within the overall care setting that we believe that we could participate in the profit stream in the care setting as well as providing the insurance and the overall administration associated with it as we have historically. And so you did mention CareMore. HealthSun was the name of the entity that you weren't -- is off the top of your tongue in Florida, MMM in Puerto Rico. When it makes sense -- when you look at like HealthSun, for instance, these clinics are embedded in the community. It's how the folks within that geography access care. It is really truly part of the Medicare Advantage offering, is to provide this full spectrum. And you're not going to sell -- whoever is not going to be successful at selling Medicare Advantage in that place in Florida without having the overall community offering associated with it. That's how the demographics work, and it's done extremely well. And it actually has 4.5- and 5-star plans associated with it because everybody is there. That's where they get their care. That's where they have some of their social interactions. It's where they have a lot of their friends. That's where they go to meet. And so yes, if the demographics and geography make that strategy a good strategy, we're all over it. But that's not typically a strategy you see in the Midwest. It's different in a geography-by-geography basis. So I guess a very -- maybe to take my long-winded answer and shorten it a bit, primary care is not something that we see as a strategic need right now because of our market share and our scale. However, there are other areas in the health care system that we're very open to and believe that participating in those profit streams make a lot of sense long term.

One follow-up here. My recollection is, talking to a bunch of your peers on the Blue side, that a bunch of them are looking to set up or has set up MSL organizations, right, where they can provide services to physician groups that are looking to take risks. You would seem pretty well -- given your market share and scale at the local level, you seem pretty well set up to potentially participate that way, offering other services to physicians. Is that something that you've set up and had any success with?

Yes. There's -- some of the value-based contracting that we do now seems to be sort of -- all these things are related. They all sort of touch each other, and there's some overlap. But I would say that some aspects of value-based contracting and some aspects of MSL are -- do overlap with each other, so absolutely.

Got it. Okay. Then let's flip over to Medicaid. If I look at kind of the complexion of your business this year, and tell me if you would disagree, but it looks like the Medicaid business has definitely been an -- feels like it's been an outperformer, maybe offsetting some pressure on the Commercial business especially that you might have seen in the third quarter. So can you talk a little bit about where your Medicaid margins are relative to that 2% to 4%, I think, that has been the pretax target?

Sure. Medicaid has done exceedingly well. There's -- I guess there's a reason that we're in an MLR collar or an MLR rebate position with many of our Medicaid states. Because -- and I am a fan, quite honestly, of the collars and the corridors. I've made this comment in the past, that from the state's perspective, these collars or corridors that many of which -- well, actually, many of which existed prior to COVID, more of which were created during COVID, they do protect the state from the "insurance companies making too much money." And then -- and all an MLR collar does is limit insurance companies' profits. I like the corridors because the corridors then also provide the insurance companies downside risk protection that could go the opposite direction. And we saw that a little bit in 2019 when the reverification caught everybody in the sector by surprise. We went first. Every one of our peers used the word reverification in their earnings call over the next 180 days as an example of why their Medicaid was not performing as well as they had anticipated. And a lot of those corridors did not exist in 2019. And so for the -- we do look at Medicaid as portfolio states. We're literally in half the country. And I like the fact that there are guardrails on both sides. And I believe that we can continue to grow top line quite nicely in order to maintain our growth trajectory. Having said all that, we're clearly near the higher end of the range in 2021.

Got it. And should -- within the '22 plan, are we kind of expecting that to go back to more the midpoint?

Certainly, we're expecting to maintain actuarially justified rates. We will continue to work very hard. It is a bit premature to give a specificity on Medicaid today versus anything else so I'll just say that all the things that you're wishing I would answer right now have been factored into our 12% to 15% thought process.

Okay. And a couple of other questions on Medicaid. One, the redeterminations, you talked about that being a pressure a couple of years ago and taking you to the lower end of margins, maybe even a little bit below. We're going to see redeterminations come back here at some point. Are you having discussions with the states? Do you feel like the rates will kind of be able to reflect the fact that it's probably going to be a healthier population that gets pushed off of Medicaid first?

Yes. Your last comment there, Justin, I think, was the absolute most important element. And just to remind everybody that 2019 -- we talked about the reverification impact in 2019. Essentially, what happened was the healthier portion of the Medicaid population lost their Medicaid coverage in 2019 during the reverification process. And the rates that had been provided at the beginning of 2019 were provided on the entire population. And so what we're left with were rates that were no longer reflective of the remaining population that we are serving. So yes, that did happen in 2019. Obviously, we're a lot smarter. We're on top of it. We have been very proactively working with all of our states in terms of actuarially justified rates of looking at the various potential impacts. And one thing about Medicaid is that it's sort of rare for any one quarter for the rates of all of the states and the acuity of all the states to match exactly on a quarter-by-quarter basis. A lot of times and usually, it gets trued up throughout the year. It is not uncommon for the following year to have a retro increase or decrease to true things up. And that's -- one of the good things about Anthem is when we're in half of America, 1 or 2 states being trued up at any point in time aren't going to kill our entire portfolio or change the trajectory. And this happens every quarter. I only talk about them when it's truly a material number, which has happened a handful of times over the last several years. But I can guarantee you the retro rates that we get and the true-ups and everything happens all the time, all the time. And more often than not, it's not material enough to Anthem to talk about. So your question very specifically was what do we expect -- how do we expect the rates that the states will reimburse us and the acuity of our remaining population to align in 2022. I feel very good about it. There may be a quarter or 2 where it gets a little bumpy and rocky as we "negotiate" and prove the -- provide the data and insights into the states. But at the end of the day or at the end of the year, I feel very good that it's all going to be appropriate and the rates will be actuarially justified. It just may be a little bumpy on a quarter-by-quarter basis.

Okay. And then I do have a question here from an investor on this. Specifically, we've seen a pickup in ER utilization as COVID has kind of died down a bit, Medicaid members more likely to be using the ER. So a little -- the question here is are you seeing a pickup in Medicaid utilization or do you think there would -- you might see one as COVID kind of moderates?

Yes. The question associated with ER utilization is very, very good. The ER utilization that we're seeing today is still less than what it was, say, in 2019 or pre pandemic. The question is will it ever get back to where it was. And I would say doubtful. Is there a chance that there could be a little bit of an uptick? Yes, certainly. There's always a chance. But I feel pretty good about the fact that we now have a lot of other things that are going on. We have digital care, virtual care. One of the good things about the pandemic is many states back in 2019 did not allow telemedicine as part of the delivery system. Well, that has now changed. They realized that the archaic rules that they had in place needed to change, and they changed them, which was great. Now they -- so given the fact that telemedicine is an option, do we really expect the utilization patterns post pandemic to look exactly like they look pre pandemic? I would say no. So now what we're talking about is a matter of significance, a matter of impact. Is it -- how much percent, et cetera, et cetera? So that's why I said -- could there be a little bit of an uptick? Yes, there certainly could be. Will it get back to pre-COVID levels? Doubtful.

Okay. And maybe we'll wrap up here with a question on MA. We're in -- the open enrollment periods just started. Wanted to get your view on how you kind of see that shaping up. Do you think that growth will be -- for the industry will be as strong as this year? And then in terms of competitors, we've heard one of your peers is being a little bit more aggressive than the rest in terms of benefits. Just curious for any comments you have on the competitive environment there.

Yes. Thank you for that question. And it's always, obviously, a very competitive environment. Everybody knows that this is really a great growth area. And there's a reason that you can't turn on a football game or a TV show without seeing some former athlete or entertainer talking about a Medicare Advantage plan, why you should pick up the phone now and call. So yes, it's very competitive. But this gets back to the fact that the number of folks who are in the market are significant, 11,000 Americans every day turn age 65, with increasing percent of those selecting Medicare Advantage. I do expect another extremely strong year. The market -- the folks available for Medicare Advantage is growing exceedingly fast. I believe the entire industry can do very well, and each and every one of us could probably declare success at the end of the year. I feel exceptionally good about what I've seen for Anthem's open enrollment thus far. They're in the process. We are very much aligned with our long-term growth plan. We've talked about double-digit MA growth on a sustainable basis here through the baby boomer era, and -- which all syncs up back to those market share comments I made earlier. They all do reconcile with each other. We are very much on track to hit that. So I feel very good about our MA growth for another year.

And any competitor stand out to you as being more or less aggressive or we'll leave it at that?

Yes. I'm not going to talk about any competitors by name. But I will say that when we did our bids, we assumed that we would have to pay for the vaccine come January 1. So I don't know if everyone assumed that or not, but I know we did.

All right. We'll leave it there. Guys, I really appreciate you being here with us. Look forward to staying in touch for year-end. And enjoy the rest of the day, everybody. We'll see you soon.

Very good. Thanks, everyone. Thanks for your interest in Anthem. Have a good day.