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

Thank you everyone for joining us today. It's my pleasure to be introducing Anthem. Anthem is one of the largest health insurers in the country with a growing services business, and it's my pleasure to be introducing them today. And today, we have kind of a focus on the services aspect of the business with Peter Haytaian, who is the EVP and President of Diversified Business Group & Ingenio; and then Paul Marchetti, who is the VP of Ingenio; Stephen Tanal, as you guys all know, from Investor Relations this year as well. So I do want to dive into the services part of the business a little bit more, but I want to start with a couple of obligatory broader Anthem questions, if we can.

So I guess when you guys think about how Q1 played out and how the year is going, can you give your latest thoughts on trend and how you're thinking about the impact of COVID?

Absolutely. Yes. So first, thanks for having us. It's a pleasure to be here. Steve Tanal, Vice President of Investor Relations. So yes, so hopefully, everybody was sort of saw the quarter, and I'll kind of recap that a little bit. I think, first and foremost, it's really important to point out the moment at which we provided initial guidance for the year, it was sort of mid-January when we were working that plan and setting the expectations for the quarter in particular. And it was at a moment in time where we had not yet clearly seen the peak of COVID positivity rates, hospitalizations for COVID were approaching all-time highs for the pandemic ended up surpassing slightly. And we had actually just gotten the terms of the at-home COVID testing coverage rule from the Biden administration for Commercial. And while there is -- we were hoping for more protections there, the cap of a test per member per month was not exactly very comforting. And so as we sort of work through all the different assumptions around what that could mean for the quarter, including potential stockpiling of COVID tests given that, that would likely occur in Q1 and the fact that we've been offering free tests on Sydney since late October, early November in the prior year, and we already secured that supply. We didn't really have a supply constraint that I think the industry was looking at. And so we ended up providing what in hindsight was a very conservative guidance. Clearly, the quarter played out a lot better than we had assumed it would. And the way I would describe that, first and foremost, that COVID spike came down much faster than we had sort of expected, really came down sharply in the month of February, in particular. And non-COVID, while we expected an offset, we are providing guidance, we weren't really willing to bet on a very deep sort of a depression, if you will, utilization, but that is what ended up happening. So January and February, non-COVID were favorable to our assumptions. COVID itself came down much quicker. And the expectation then, which is informed by what we've seen in all the prior COVID surges over the last now almost third year, the pandemic is that what you tended to see were short-lived bouts of sort of deferrals, if you will, and then you tend to expect non-COVID to kind of run hot or a little bit above normal levels. for a month or 2 as you work through some of that deferral. So that was our expectation for March. So we booked March. You can kind of see that, I think, in the reserves and the way we ended the quarter. The expectation was March and April, you'd probably see non-COVID run a little bit elevated. I would say, pretty consistent with what we're seeing. So we're still feeling pretty good about everything we've said and the guidance we've provided. We didn't comment too specifically on the second quarter other than to say we were comfortable with consensus at the time. But yes, no change to those expectations. And I think it's early to sort of say, well, what happens next. We're watching that as well. But so far, very consistent with the guidance we provided.

All right. Excellent. And then I guess, when we think about that trend, and where we are Commercial versus Medicare versus Medicaid? Any color on that?

Yes. So I know it sometimes sounds like nuance when you differentiate the concept of trend and cost levels or costs relative to a normal or baseline level. But we focus more their trend, obviously, more referring to year-on-year changes in the overall cost of care. So if you think about more of the level and where we're at, I'd say Commercial continues to be the one area where we're sort of looking at it as most above what would be a normal level all in followed by Medicare and Medicaid is a 1 line of business where overall utilization is still sort of below baseline. But an expectation that it is coming back closer and the plan assumes that it will over the course of the year. So still very consistent with those kinds of patterns. Of course, that's looking at it all in, right? If you look at just non-COVID, that's sort of a different story. But you really, I think, at this point, really need to think about it on an all-in basis. Certainly, that's how we're increasingly looking at or I think it's less instructive to sort of break out COVID and say it's onetime or fleeting at this stage. There's some element of it that's run rate, we believe. And so we're continuing to monitor that very closely, but that's where we're at.

All right. And then, I guess, the other kind of dynamic of Q1 was the enrollment number quite strong. Can you talk a little bit about how you're winning in the marketplace and what drove the outperformance?

Sure. Yes. So I probably have Pete weigh in a bit on this here, but the strength is broad-based, and that's what's really exciting, right? We have growth in every line of business, a lot of momentum in every area of Anthem and it's frankly really exciting. Commercial is the one area where I think the quarter was most really standout growth there driven by the fee-based side and national accounts. And I think the reasons why we're winning is particularly exciting. But I'll let Pete talk about that because, frankly, he ran that business up until not long ago.

Yes. No, I appreciate it. Yes, it's really great to see. I mean I think the strategies that we deployed over the last several years for [ replay ] have been playing out. We talked about a subsegment strategy across each one of our segments, individual small group, our local business. et cetera. And then on the national side, I mean, that's where we saw a decent amount, but we saw growth across the portfolio, but we saw a really nice growth on the national side. I guess a couple of key themes as it relates to the national business. One, our cost advantage and total cost of care value really played through. We saw a lot of large accounts that were typically slice offerings in which we had proven ourselves and created a lot of value and the opportunity to expand upon that, I think, became highly visible. And so that was one. Our efforts on advocacy and focusing on simplicity, the work we're doing with Sydney and the expansion of that, the uptake that we've seen in that capability really play through. So that was really great to see as well. But yes, I think Commercial was over 1.2 million members growth sequentially in the quarter. And again, across most of the segments, so really nice growth.

Yes. So I guess when you talk about that slice dynamic, is that something that you think is -- was that -- is it a broad-based trend or really Anthem specific, because it something that you guys did from a product perspective?

Yes. I mean it's sort of getting granular on the opportunities. I mean I don't want to speak for whether or not it's broad-based. I do think that once we get in with a client, and we show our value proposition and it sticks. And then they see that relative to some of the competition. I do think that they see that value becomes apparent. But it's up to us to prove that and execute against that. So -- it's -- this business goes in cycles. The RFP pipe changes I think when we were dealing with what we were dealing with last year. Our leadership in National saw this as a distinct opportunity. So what you were seeing come through the pipe were very large accounts with that kind of an opportunity, and we took advantage of it. So I was really excited to see that for the team because it's many years of work in terms of creating that value position and seeing it come through like it did. It was great to see.

A little pivot to DBG & Ingenio for many -- I think people have seen, obviously, Gail was at United. We've all seen what United has built out. I mean when you think about how big these 2 businesses could be for Anthem over time, I mean, where do you think that this can go?

I mean I am more excited now about it than I was before I took the role. I think there's tremendous opportunity without getting into specific ratios of how much of our earnings this will be. I think it will be over the next several years, a meaningful part of our earnings in terms of overall Anthem contribution. I'd say when you look at the -- and a lot of you know this, when you look at the overall opportunity in services outside of sort of you exclude pharmacy and manufacturing side of things and you look at your services, you're talking about $350 billion of EBITDA that's going to be created over the next several years. So having that opportunity in total ground is a great thing. Our focus our very targeted focus on the complex and chronic ill and then managing the complexities in health care gets me really excited because there's vast opportunity there. If you look at the Anthem portfolio, you look at our most chronic and complex members, you're looking at $12,500 PMPY for that population versus an average Commercial number at about 4,500. So there's tremendous opportunity there. And then we're very focused on being on the right side of health care as it relates to the strategies that we deploy. So again, when you look at those profit pools, where the puck is going into health care, I think we're directed. We're moving in that direction. Anthem as a client is a tremendous opportunity. We have 47 million-plus members now. Hopefully, we continue to grow as an enterprise and penetrating that book of business. That's one thing that surprised me. I mean I ran government, I ran commercial. I know there was a lot of cost of care opportunity, but now getting more granular with respect to the services that we're delivering on the DBG side and on the pharmacy side, really understanding that better. And then thinking about the natural extension opportunities off that. I mean a really great example is when you think about our advanced analytics vertical where we have myNEXUS. And you have an asset that gets us in the home. So we're through our [ research ] and through our coordination of home care work in the home, and we're providing coordinating services around that. And there are so many natural extension opportunities that come off that. And again, it's on the right side of health care, more care is being delivered in the home. After sort of having that asset and understanding it better, we've now rolled out a post-acute care product offering, we're about to roll out a post-acute offering in the Anthem portfolio. We're also looking at durable medical equipment and the opportunity there. We're also looking at social determinants of health and the opportunity there. So you can think about all those services that extend off the home. And I think there are deeper opportunities that we can engage in as well over time. I mean you think about the pharmacy connection and home infusion. I mean these are all areas and profit pools that are expanding in a big way, not to suggest that I don't think we still have a lot of opportunity on the payer side, but it's really exciting to be on this side of things where you're seeing these profit pools expand so much.

And so I think you guys gave kind of longer-term guidance on 15%, 20% type growth in this business? I mean is that the right way to think about it? And how much of that is coming from the increased penetration within Anthem versus kind of the outside book of business?

Yes, I think that's correct. I mean I would say that the upper teens, 20% growth that we talked about at Investor Day is something that we continue to believe that we can achieve. I would say that the opportunity that exists is really based upon the assets that we have today. It's not sort of considering new assets and a lot of the new services we're considering. So that continues to be an opportunity. The best -- a big significant portion of it is penetrating Anthem. But I would say that -- and it really is sort of -- it is interesting to be able to do this, get the experience and Anthem and then use that as a springboard to expand externally. And we're seeing that. We're seeing a lot of interest in the Blues. I think that they're a natural partner of ours. We've got 26 relationships on the DBG side around the Blues, 10 of which that have multiple offerings. We also have other payers and where we can add value. I think they're very interested in our services. So the combination of that, the expansion of our services and then the inorganic opportunities that we think exist and extend off of what we're doing, I think, is a tremendous opportunity.

I think could you just maybe expand on that? Like in some ways, it makes sense because you're Blue Cross Blue Shield, they are Blue Cross Blue Shield, there should be a relationship there. But like why is the opportunity specifically there versus just the market more broadly. Why is that always the focus?

Yes. I'll give a general comment and then maybe Paul can also talk about it from a pharmacy perspective. But I would say 1 thing, look, it starts at the top. I think Gail has done a tremendous job and a lot of our other leaders in building appropriate partnerships. So the dynamic and the Blues has changed, has changed a lot. I also think that even in periods of consternation or where there could be controversy, if you can add value and you understand how to navigate the Blue world, they embrace those services, other Blues or other use as an example with you before, Kevin, when we were going through the Cigna dynamic years ago, and I was in the GBD, we established over 6 partnership relationships in terms of operating Medicaid businesses for Blue Plan Partners. And it's because we could offer value that they really need help on. Similarly now, I think we're up to 15 partnerships from that perspective. And we have 26 partnerships, like I said, on the DBG side. So we have that insurance relationship. We're looking to continue to expand that. I think we have a lot of the same values. I'll let Paul talk a little bit about the proposition of integration as it relates to pharmacy and how I think we're aligned a lot on that as organizations.

Yes. To that point, I mean, we're not competing with them in the marketplace. We built IngenioRx really to be not a traditional PBM focused on whole person health with the value of integration, that's what's resonating in the marketplace today in terms of where we're winning. And as it relates to the Blues, I'll speak to the experience we have with the Blues of Idaho. We not only are helping them in terms of their pharmacy trend and capabilities, but that's extending into how we're supporting them in terms of their own growth, commercial side. We're working with them on broker distribution channel strategies as they think about specialty carve-outs and other dynamics playing out in certain markets. We're also helping them with connecting the pharmacy piece of the business and drugs and rebates back into the value-based strategy. So as we think about site of service optimization. So those are all elements that because we're not a competitor, they see that as an advantage and really a partner that's helping enable their growth. So while in the Ingenio business, we're not relying on the Blues as a big growth element going forward. We do see, as we continue to build out our capabilities around specialty, the value of integration continues to gain strength in terms of the power and what we're doing today and going forward and guaranteeing that. We do see that value position resonating pretty well with Blues that don't want to continue to compete against some of the vendors that they're utilizing services...

Yes, I think that's a really important point that listen, we have to put a product in the marketplace, and we have to create value that's at least comparable, if not better, to be able to sort of serve the Blues. So they're very open in that regard. But if we can, the fact that we're not actively competing against them on the medical side is meaningful. I mean, generally speaking, sort of the demeanor, although they're not -- they don't all say this, but the demeanor is one in which it would be nice to work if we could versus feeding a competitor, quite frankly. But they're always going to go with an asset or a product that creates the greatest value for them. So we don't take that and we take that very seriously.

Yes. I guess -- Yes, it's hard to say how it's going to play out, but we do have that lawsuit, I guess, against the Blue Cross and Blue Shield plan. If you're kind of forced to compete or have to compete, does that lessen the Blue opportunity in any way?

I mean we're not going to -- we don't really comment on this because it is an active litigation. But I would say that just generally speaking, if you look at our actions, you look at Gail's leadership, there's been a strong bent towards partnership. And so that's been our demeanor and our approach. And some of the other larger Blues we have a lot of business with. I mean if you look at our Medicaid, Medicare and then DBG partnerships and the concentration that we have. So just look at it logically, I mean, are we -- do you want to disrupt that relationship or you don't want to work in partnership.

Great. And then one of the things that came out in the call was that the Commercial margin is still kind of below average, and yet you think that you've got a better opportunity to get them -- sell more services in and get services margin on top. So it's a little bit hard for me to get my head around how you're going to improve both the Commercial margin and then get a margin below that as well. So can you talk a little bit about how all that adds up and how that comes together.

Yes, sure. I mean, I'd say -- well, first, I'd start with foundationally, I think we have a really strong Commercial business. And as we've talked about, I think the sort of the dynamics of COVID and many of the things that Steve talked about are things that we are addressing head on and I'm confident that, that margin improvement will come through. It's just foundationally a very good business, and I think we're an industry leader in that regard. So I feel like that will come through. As it relates to simultaneously then creating value on the Ingenio side -- I mean, excuse me, on the services side and including Ingenio. Look at it as a cost of care and efficiency opportunity. And when you're in the P&L and you're looking at your overall portfolio and where trend is, if there's a need that we can serve in that regard, they would just like they would with any other vendor, they look at trends, they establish a baseline, create a year-over-year trend. And then what our goal is, is to ultimately assume risk on that. So capitate that out. And we obviously then have to perform within that cap and outperform what that baseline and trend is. And if we do, the win is across the board, right? I mean the Commercial business has stable and predictable cost of care and trend. We've outperformed that trend and have created incremental margin in the unregulated entity and then for Anthem holistically. So that's the equation. We've begun on that journey. We are having success in that regard. We've seen that begin to come through with our performance in terms of the assets that we're pushing through the risk on, but that will be a big part of our strategy going forward in terms of growth.

I was -- just to put a finer point around it, I would say, definitely don't conflate the 2 ideas. I think we're very deliberate in that each of the divisions has its own target margin and Commercial's margin target has not changed, despite anything they may or may not do with Pete's org now. So we're really thinking about it from the corporate lens as 2 separate stories entirely. And as Pete described, they need to earn their margin on whatever arrangements they have. But from a commercial lens, they are underperforming the margins that we expected of them. And again, it's largely due to COVID, but we sort of have identified that. We know what we're doing about it. We're already taking action in the market to bring that back. So every confidence that, that's going to transpire on the Commercial side distinct from what Pete is doing in DBG.

And then I guess we could talk about the Ingenio growth opportunity. How has that rollout gone versus expectations? And when you go into the marketplace, how are you differentiating yourself versus the larger peers?

Yes. So I'll ask you to step back for a moment and realize that Ingenio is only 3 years old. 3 years ago, we migrated away and focused on the migration -- and over the last 12 to 18 months, we built really a growth strategy. And so Part of that is how we're going to market the value proposition, the strategy around the value of integration, having analytics and a value prop that demonstrates to a medical customer, as a primary opportunity to sell, what the incremental value they'll gain by carving in pharmacy. And not only are we comfortable with the analysis, but we're even for specific cases and segments we're guaranteeing it. So that's resonating in the marketplace. We are doing really well year-over-year in terms of our membership net is up 3x. Our win rate is up 3x. We've developed broker and distribution strategies to understand not only who's selling us, but who's not and why and also engaging those distribution partners to continuously grow the business. I think the other thing is we're very segment-specific focused, and we're having a lot of success middle market and down market as part of that strategy, which is a really good business, very profitable business, which really drives overall the performance of the business, which is doing really well on an op-game perspective. So a combination of year-over-year net membership growth, a value proposition that's resonating op gain that's very strong. We expect that to continue. And strategically, we're going to continue to focus on building up the capabilities within pharmacy that integrate with what Pete described in terms of those other services of managing complex and chronic areas around specialty, virtual technology capabilities that engage the consumer and power the consumer in terms of how in which they get their drugs today incorporate it into our value-based strategy. So all of that together we think, enables us to, as Pete described, really take risk on cohorts of chronic complex that are using drugs on the specialty side. And then also having that value proposition, bringing it out to the market and medical customers to carve in pharmacy as part of the overall equation. The other thing we've done is I've already touched on the Blues as we think about external business. But we've made investments in the last quarter of last year around sales, new sales directors focused on public and labor and driving coalition business. We think that's a real great opportunity. There's some ramp-up time that is required there, but it's a really relationship-oriented business. We think that's going to be -- in addition to carving in medical customers, we think that's another opportunity for growth as well.

Yes. And just emphasis added on something Paul said, again, our primary and he said this, but our primary client opportunity is with Anthem and the integrated proposition around our medical business. And I wouldn't get too concerned with -- if we're not delivering on a lot of large groups like super large groups, jumbo accounts, I think what Paul said is really important. Middle market and down market, we're seeing a lot of success. And so we're very comfortable with our commitments we made in terms of long-term growth, in terms of overall performance. So we will show year-over-year growth and we'll continue to show improvement in that regard. But I think our emphasis is on the middle market and down market to a greater degree because that's where we're seeing our proposition really play through and also our margin performance play through.

And so that was interesting when you talked about taking capitation on certain subpopulations that so that you're doing now or something that you're rolling out? Talk about the pharmacy.

No, I was referencing pharmacy integrated with the other services to take capitation as part of the overall services strategy.

Okay. That makes sense. We all love our baseball analogies. So when you think about that potential to talk about Anthem being the biggest client opportunity for both Ingenio and DBG, so what inning are we in as far as the services and as far as the Ingenio kind of opportunity within Anthem?

Yes. Ingenio, I'll speak to Ingenio and then Pete can comment on DBG. Ingenio, we're really in the second inning. I mean we're just getting started. Like I said, we're engaging the market now where we haven't done before, it's been a building process. But like I said, the value proposition is resonating. We're growing. And now it's additional capabilities on top of really focus on the market and profitable growth. So early in the game.

Yes, I would say the same thing. I mean just to add to what Paul said, there are aspects of pharmacy. As you all know that we're not deeply engaged, in the areas that we have a lot of interest in. So -- and then really tied to what I said around our overall DB&I strategy around the complex on the chronic. So that specialty pharmacy, the experience of the consumer, all areas of great importance to us where we see growth opportunity. And then on the DBG side, I would say the same thing. We're probably in the second inning. Again, because we've got a series of assets right now that we're really excited about and then we think we can penetrate the Anthem book to a much greater extent. But then the expansion opportunity within each one of those segments I get excited about. I used myNEXUS as an example. There's examples like that with AIM there's examples like that with CareMore, with Aspire, where we're penetrating new lines of business. We're rolling out new products and services. And that doesn't even include the inorganic opportunities that exist and the profit pools we talked about related to the verticals we talked about. So -- it becomes a matter of prioritization of deployment of capital -- of execution and prioritization. I mean, I think if you look at all those issues, we have a tremendous opportunity.

How do you think about competition? Because it feels like all of the managed care companies are pivoting from, okay? We've got our base of managed care business. Now we're going to go into the services and try and expand those and offer those broadly. I mean how do you that competitive environment where you are and what differentiates you when you go to market?

Yes. I think it's -- well, first of all, yes, there is a lot of excitement moving into the space for us. I'll talk about our strategy, sort of our whole health strategy. You really started the pop. There is a reason for the holding company brand changed Elevance, right, and talking about Elevate and Advance. And our goal but we're very confident in the payer space and our ability to grow that, our goal to expand into other opportunities. And the integrated value proposition we talk about the whole health proposition we talk about is something that we're deeply focused on. I would say that I think, as it relates to [ overall ] billing what I get excited about is it's targeted, and it's also focused on the areas where there's a lot of value. It's not necessarily a broad-brush approach. We're trying to be all things to all people, but we're focused on those chronic and complex where there's a lot of dollars and there's a lot of quality improvement opportunity. So there's that. And then I'd say this is coming from the P&L side of things. Where I would like to distinguish our services business is really from an operations and execution perspective. Because when you get really in -- behind the curtain and understand these product offerings, I know we get sort of enamored with some of the marketing around it and technology. But you think about the life cycle of a member and getting discharged from a hospital, for example, and that post-acute care dynamic or the home care needs and many of us have had relatives or have personally gone through that and how complicated that can be, the opportunity for us to create products with cohesion and then execute that against that effectively. So it is a cohesive sort of experience for the member across multiple offerings is what I get most excited about and what I think in an area that where we can differentiate ourselves. So when you go back to our Investor Day a couple of years ago and Rajeev was up there talking about a digital platform for health essentially, what we're talking about is bringing cohesion to our product offerings. We're collectively bringing these together, including the work that digital is doing and what we're doing with Sydney in creating that cohesive experience. So I would like that to be the differentiator that this all makes sense. It's logical. You have this cohesive relationship and you're executing against your plan in a differentiating way.

If I could put a finer point, I think Kevin, you asked about differentiation, and I think we'd be remiss not to point out, we start first with a unique set of assets, right? We're the Blue brand, and we have a ton of density at the local level. There are many ways in which we try to leverage that and we do leverage that day to day. Not least of which would be to partner with providers where we can. We know we're very relevant on the ground. So in some respects, that allows us to be a little more capital light on the provider side of the feed strategy. Alternatively, you can look at that as a density play. So it gives us optionality to build something if we need it at the local level. A lot of ways that we think about that in practice. Of course, the Blue brand itself is something we're leaning into, especially in Medicare Advantage, here's talk about the focus on our 14 Blue states. That is a very valuable brand, especially for that demographic, and the Blues have not leaned into that historically, but we're taking advantage of that. As the MA business grows, all this pulls through more. And then finally, again, remiss if we didn't point out the fact that every one of our businesses on the payer side has a great momentum. So we're starting from a position of offense on this and we're doing things thoughtfully, and we're trying to be on the right side of health care, the whole time. So I do think what we're doing is actually quite differentiated. Obviously, a heavy risk book as well, which makes it sort of easier. There's test bed, if you will, on the Anthem side then you can leverage that and go sell it to your ASO clients, et cetera. So I think those base ingredients are very differentiated versus some of the other players out there, even though some of the strategies, I think I admit the sound similar, but I think we start from a stronger position, and we're leaning into those advantages for sure.

All right. That's excellent. I say that's all we have time for. So thank you very much.

All right. Thank you, Kevin.