The Cigna Group (CI) Earnings Call Transcript & Summary

Okay. Good. I can't see, but hopefully, you can hear me. It's my pleasure this morning -- I don't want to mess with that. It's my pleasure this morning to introduce Cigna. Cigna provides group health insurance, managed care and pharmacy benefit products and services and international health plans worldwide. The company completed its acquisition of Express Scripts just over a year ago. Recently, it announced plans to sell its Group Life and Disability (sic) [ Group Disability and Life ] business. Today, the company serves over 17 million global medical customers, 70%, which are in self-funded arrangements as well as 28 million behavioral care, 17 million dental, more than 75 million pharmacy members. The company was able to generate almost $140 billion of revenue in 2019. And it's my pleasure to have a fireside chat format with the CEO, David Cordani. So David, welcome. Thanks for being here.

Thanks for having me here this morning.

He was on TV this morning. So you guys might have seen that. I guess what I'll do is I'll maybe kick it off to you and let you make a couple opening comments, and then I've got a whole page of questions that we'll walk through as we have time.

Sure. I look forward to getting there. First, good morning, and thank you all for some of your time today to talk about Cigna. My opening comments, just to put it back in context, when we were together here about a year ago, we spent a lot of time talking about what we intended to do as a combined corporation. And what I thought I would do is just briefly put a synopsis together of what we have done and what we intend to do now going forward. As I look back to 2019, 2019 was a very good year for our corporation. We're on track as we close the year and we'll report shortly. We -- our guidance suggests we will deliver 18% to 20% EPS growth, phenomenal revenue growth and strong client and service expansion across our portfolio. Additionally, we laid out integration goals for putting the 2 companies together. First and foremost, ensure we are delivering outstanding service to our customers and clients across our growing diverse portfolio of services. Our Net Promoter Score measures, our retention measures and our additional growth measures continue to reinforce that we're achieving that. Second, ensure that we are maintaining a high level of coworker retention and engagement. Our retention level is actually elevated from pre-combination levels. And importantly, our engagement measures from our colleagues are elevated from pre-combination levels. That's really important because we're a service company. The proposition that our customers experience around the world is driven by that. Third, deliver further improvements in medical and pharmacy costs. We're on track yet again to deliver the lowest medical cost and pharmacy cost trend in the industry. Fourth, deliver on the first tranche of our shareholder synergies, of which we have delivered on in this year. And then five, keep the vision front of mind, which is to drive innovation. And we marked multiple innovations like the Patient Assurance Program for insulin-dependent diabetics, Embarc, our digital formulary and the like. And then lastly, as we get ready to turn the chapter and go forward, we also work really hard to reinforce one of our strategic imperatives, which is we seek and strive to be the undisputed partner of choice, working with others to create shared value in the marketplace. And just 3 examples to call out in recent proximity. One, we're proud to have earned the opportunity to serve Prime Therapeutics, a critical strategic win for us, and we're delighted and it reinforces our deep commitment to servicing and expanding the relationships we have with health plan clients across the United States. Two, just yesterday, announced a strategic relationship with Oscar to codevelop new innovative programs for the smaller employer part of the commercial marketplace, a place where we've historically not played, leveraging the best of both companies and, a handful of months ago, announcing that down in Australia, we're partnering with nib to develop their data and analytics capabilities for in-country innovation from that standpoint. Lastly, looking forward, we're on track to be able to deliver a very attractive 2020 with strong top line growth as well as strong bottom line growth and phenomenal free cash flow generation, and that puts us well in position to deliver on our commitment to our shareholders of $20 to $21 of EPS in 2021 and importantly, approximately at least $8.5 billion of operating cash flow as we've configured our corporation not just to be a growing corporation, top line and bottom line, but to be able to convert a significant portion of our earnings to deployable free cash flow. And of that $8.5 billion of operating cash flow, we have about $800 million of it earmarked against CapEx in internal R&D, so almost $8 billion of deployable capital as we step into 2021. Net-net, we accomplished a lot over the last year. I'm really proud and pleased with our team, and that puts us in position to continue to grow, serve more lives and deliver more innovation as we look to the marketplace going forward. Gary, I'll turn it back to you.

And I definitely want to ask about some of those new partnerships in a moment here. Maybe first, yesterday, you also provided your 2020 enrollment guidance to The Street. Can you kind of frame that out for us? So in Medicare Advantage, really strong double-digit growth, really significant turnaround there. We sort of do some implied math, looks like Commercial business, maybe up 1%, 1.5%, but we had talked about last night's continued strength of sort of Middle and Select and less so in National. So sort of frame up for us how you look at that 2020 enrollment guidance and what was driving that.

Yes. Sure. In our disclosure in advance of this session, we tried to put out some forward-looking indicators to provide some insights in terms of the quality of our business. Headline to Gary's question, we feel really good about the aggregate life growth and the aggregate revenue growth we're stepping into 2020 with across our portfolio. As it relates to medical customers, 3 different pockets. Commercial employers, very good results in our Select segment, that's our fastest-growing segment, continues to be our fastest-growing segment. Those are employers, think about between 100 and 500 lives, fully integrated, fast-growing, high-performing for us. Middle Market, our largest segment of our Integrated Medical proposition, continued good performance. And then the National segment, which we define in a tighter range than our competitors, commercial employers with 5,000 or more employees that are multistate. We had a little bit of reduction in terms of medical customer growth. And strategically, we view that as a flat-to-down segment within our portfolio for the Integrated Medical portion of our business. I'll comment on services in a moment. So in totality, another year, our tenth year in a row of organic medical membership growth in the Commercial population, the only company that's been able to achieve that. Second, as Gary mentioned, really strong performance in Medicare Advantage. We said at our Investor Day last spring that we would grow 10% to 15%. We're stepping into 2020 in that range of growth. And we feel great about where and how we've been able to grow, and it puts us on a trajectory on a go-forward basis, on a further improving Stars basis with outstanding NPS and a deep set of relationships that are value-based care with the physician communities. And lastly, just 2 additional edits yet and net against that performance. We knew we were losing about 50,000 in Medicaid lives from the cancellation of a contract. There's no EPS implication of that. As our CFO has walked through in the past, that was a single-state focused contract that we had. And then finally, we expected to have a somewhat slight decrease in our Commercial, individual exchange lives in 2020. That's a net effect of the Commercial lives as well. As we were looking at the pricing environment for 2020 in some markets with some new entrants, we thought the pricing was getting a little bit too frothy, and we moderated our expectations and maintained some pricing discipline. Taken as a whole, we feel really good about the retention, the growth in our targeted subsegments and then the quality of relationships we have to carry into 2020 there.

So a year ago, the transaction either just closed or was getting ready to...

December 20. So we were here a couple of weeks after close.

Right. So a year ago, we were sitting here and just a few weeks out from closing a $70 some-odd billion acquisition of Express Scripts. And you really firmly believed in combining these 2 companies, creating this integrated offering. So a year into it, can you give us some maybe highlights and lowlights? What's maybe been more compelling than you thought? Anything that has been surprising or disappointing? But how are you feeling about it a year into it?

Yes, as I indicated in my opening comments, I'm pleased and appreciative of what our 70,000-plus colleagues achieved in 2019, truly am, for the benefit of our 165 million-plus customer relationships around the world as we continue to grow. Highlight 2 items I'm exceptionally pleased with. The depth and breadth and impact of the Accredo specialty pharmacy asset within ESI is even more powerful and has even more leverage, and we had high aspirations as we were putting the 2 companies together. And that's even further validated by our physician partners that we work with across the United States who, even pre-closing, were pushing on us to say how quickly can we get access to even further expand it, clinical program coordination, for those in most need around the specialty pharmaceuticals. So area 1, we had high expectations, knock on wood, that's exceeding our expectations, and we see massive opportunity, not just for in-kind growth, but innovation, evolution, et cetera, as that continues to be a partner-of-choice asset for pharmaceutical manufacturers and clinical partners. Secondly, I would say that we had high aspirations of the culture of the 2 companies as we work together, come together. In many ways, at the broad 70,000 colleague level, that's exceeded my expectation as well. People getting up every day, challenging themselves of how we work to improve the quality of life for our customers, each and every day for the better, it is a powerful, powerful asset when you have 70,000-plus people working to that end each and every day. The environment we operate in, we can't control all that each and every day. That gets a little distracting at times, it gets a little disruptive at times, keeping our organization focused on delivering our promise, driving innovation, continuing to grow, that's been quite impressive across the franchise, and I couldn't be more pleased.

As we came out of 2019, heading into 2020 election year, there's been a lot of proposals by various candidates in terms of health care reform. And I thought you made a very good point on CNBC this morning. You were asked a question about the PBM. And you basically said it's not particularly fruitful to pick on one part of the system versus another. So when we think about the role that payers and integrated payer and provider can play in sort of shaping the narrative in Washington, where are you oriented and where are you prioritizing sort of that effort to make the government or those entities understand that there's significant value that a company like Cigna can bring?

Yes. So we start with a view that the public environment and the private environment working together can create more value and more sustainable value, whether it's designing products, programs and services for those most in need, ensuring that there's effective regulation, driving innovation and leverage, creating an environment for competition. So we start with an environment that we are a regulated industry, but there's power in terms of leveraging the best of the public and private side of the equation, and we don't resist it. Two, we believe we have a responsibility to substantively and constructively engage in policy change. So we're highly interactive in Washington, and we view that it is not a partisan conversation, it's a principal-based conversation. It's not a political conversation, it's a conversation around people and their health. That's how we drive ourselves on a going-forward basis. And then we try to reinforce it with action. So if I can, just to use a concrete action to reinforce because I think concrete actions and words merged together matter, literally 100 days into our combination, we launched the Patient Assurance Program for insulin-dependent diabetics. It's indisputable, based on data, that individuals in the United States, at some point in time, in cases, ration their insulin because of affordability challenges. That's a fundamental failure. All the evidence-based care says that's a bad outcome for the individual, it's a bad outcome for our community, it's a bad outcome for society. We challenge ourselves to reengineer the entire process to launch Patient Assurance Program that says an individual who is insulin-dependent has a $25 financial obligation for a 30-day supply period. Clear, affordable, predictable, simple. And then we carry that back into Washington as an example of a platform. Embarc is another example. Another about 100 days later, first, taking 2 gene therapies and bringing them in that are financially disruptive to anybody as a financier and reengineering it through an open-architected not-for-profit that could be availed to a whole variety of individuals: employers, health plans, governmental entities, with a level of predictability and importantly, alignment back to the manufacturers and outcome. So we, first off, believe in the public-private relationship, we believe we have a responsibility to constructively engage and we do, and we believe we have to actually lead with examples like what I referenced, then we'll continue to drive that going forward.

Can we talk a little bit about -- so yesterday, you announced a new collaboration or venture with Oscar Health. Can you maybe just describe a little more what exactly that is? And then I appreciated the explanation yesterday of sort of what does Oscar get out of that from Cigna and what does -- how does Cigna benefit from that relationship with Oscar.

Sure. So we view that as another example of us working to partner. So how do you take the best of a and the best of b to create something more than 1 plus 1 and try to create leverage? So with Oscar, Mario and team have built a very nice innovative platform that starts from an individual-centric and works its way forward, starts with a digital-first framework and works its way forward, philosophically believes in value-based care and philosophically believes in using data, consumer engagement and trying to channel, navigate and support individuals to get activated with the highest-quality physician based upon that individual's need set. We, philosophically, are aligned with that. We enter that from the employer, larger, middle and down to 100 life employers. They enter that world through the individual and work their way up. The small employer, most states regulate that as under 50, some under 100, we view as an underserved market that has less innovation that has been brought forth to that. Oscar viewed it that way. We viewed it that way. We've historically not participated. We were able to bring the best of both companies together. And we will innovate and bring new small employer, think under 50 typically, offerings to the market to take a value-based care pay for outcome, take an individual clinical navigation support infrastructure that is data-rich in terms of supporting individuals to increase the value we're able to deliver to small employers who are looking for something different. They're looking for something different. And whether you're a small employer of 2, 3, 4 employees, being able to deliver something highly innovative from that standpoint is really impactful. And both our teams are excited about that, and you'll see us start to stand up offerings before this calendar year is over in a few markets and MSAs as we drive forward.

And then just last month, another pretty significant announcement, and you alluded to it, was the new relationship with Prime Therapeutics. So kind of walk us through that. I guess one observation I have is that the Prime, the fifth largest PBM in the country, needs help to be more competitive in terms of contracting and both for retail pharmacy and drug acquisition cost. They can be that large and still need to avail themselves of someone who is even larger. So that's kind of an interesting observation. But can you sort of walk us through the origin of that? Was that something that ultimately was competitively bid? Or was -- they were seeking all sorts of input to that and Cigna sort of won that? And is there an opportunity to move farther along with Prime where, ultimately, they're purchasing more services from Cigna?

Sure. So I think it's -- first, just attitudinally, before we talk about Prime, our view is that every company, every business model every day has a headwind and it requires to drive additional innovation to create more value and more differentiation. So less about Prime and more about every company, there's just inherent fundamental headwinds that every company faces to be able to maintain its margins, maintain its growth or otherwise, let alone expand that. And additional value driven through innovation is mission-critical. Scale is a part of that, an innovation culture is a part of that, having the data analytics and we believe being able to partner and create leverage is mission-critical. This outcome with Prime Therapeutics we are delighted with. We're delighted to further expand our relationships and be able to support additional health plans to create more value for their customers and/or patients, to further improve affordability and further improve value from that standpoint. It was a competitive process. We're delighted to have been selected, and we were desired to be selected. It will be strategically valuable for us. It will be strategically valuable for them. We believe we're chosen based upon performance. We believe we're chosen based upon trust because we're going to be working together. We were consistent through the entire process of what we were offering to build together. And our performance will yield additional opportunities, we believe, to further expand that relationship. But those relationships are because of performance. So long as we perform and deliver value, we're optimistic that we'll continue to be able to expand with Prime on a go-forward basis. But we are delighted with that outcome, and it's a good, strategic add for our corporation and I think awesome validation that we are deeply committed to servicing the health plan marketplace with a variety of services across the United States.

Maybe shifting gears a little bit. One of the aspects of the combined company and the merger with ESI, in our view, one of the underappreciated aspects was the free cash flow generation of the combined company. And to that end, I think you'll be back -- by year-end, be back in the 30s, at least in terms of debt-to-cap, which is typically perceived as sort of a normal, if not, maybe slightly under-levered. So already, investors are asking again, is there another large capital deployment opportunity for Cigna? So maybe just walk through what are the capital deployment priorities as we stand here today or as we move into 2021? And certainly getting asked, is there a possibility in your mind that you could still see large consolidation among the health insurers in the U.S.? Is that something that's still plausible?

Yes. So let's break this out in a couple of chunks. One, we have deliberately configured our portfolio, very consciously and deliberately configured our portfolio, not only as a growing portfolio but a portfolio that actually is able to convert a significant amount of our operating earnings into operating cash flow and a very high percentage of operating cash flow to deployable cash flow. There are many business models that actually generate earnings but don't generate deployable cash flow. We believe a high level of fluidity of deployable cash flow in a dynamic marketplace is both a strategic asset and should be highly valuable to our investor fiduciary partners from that standpoint. To put math around this, we will generate $8.5 billion of operating cash flow in 2021. And our track record shows we converted a significant amount of operating cash flow in 2019 and will in 2020 from that standpoint. As it relates to capital deployment priorities, our capital deployment priorities have been consistent. First, make sure the franchise is appropriately capitalized and our CapEx for R&D continues to be capitalized. We've been at a burn rate of about $800 million against that, and that is typically factored into our capital plan. Second is to look at strategic and financially attractive M&A. And then third is to return excess capital to shareholders. We have a track record of not letting capital sit idle from that standpoint. As it relates to strategic M&A, we walked through priorities at our Investor Day in the second quarter of this past year. We typically have 5 priorities at any given point in time. One is not more important than 3, but they typically have to be walked through in a list, so in no particular order, they're: to further our global footprint, to further our U.S. seniors capabilities, to further our outcare coordination and service capabilities, to further our digital analytic capabilities and to further our state-based risk program and capabilities. And we've positioned our corporation with tremendous optionality. Well-positioned growth platforms, we have 4, outstanding free cash flow and choices and optionality around that and a clear strategic M&A footprint and set of objectives in front of us that we will continue to look for strategic alignment and financial alignment. To the last part of your question, I don't know. I don't know. There are different schools of thought relative to the last part, which was is there opportunity for large-scale M&A in the health insurer platforms. Time will tell as we get through the next leadership cycle in Washington. And otherwise, some would make an acute argument that the answer is yes. Some making a palpable argument that the answer is no. What I would tell you is we're really pleased with the configuration of assets that we have in our portfolio, the capabilities we have in our portfolio, a proven track record on bolting on capabilities even in 2019 and phenomenal fiscal flexibility to have choices of what we do on a go-forward basis.

Maybe in the last couple of minutes here, one last question. Sort of a long-running criticism, bear case about the PBM model has just been transparency, at least from investors' perspective in terms of the economic model and fees, et cetera. So what is Cigna doing to bring improved transparency to customers whether that's commercial customers or government customers?

Yes. So when you think about the term transparency, we need to think about transparency to whom, a financier or the consumer? So stepping back, Cigna, legacy Cigna, 85% of all of our client relationships for medical in the United States are typically in a self-funded standpoint. So we start from a transparency and alignment mechanism. We've been working tirelessly to have more value-based care relationships with health care professionals versus less. There's a dimension of transparency that exists within that. So we have a basic belief set that appropriate transparency yields better alignment. Better alignment breeds an opportunity to drive innovation together. Within Express Scripts, what I would ask you all to think about is that the legacy of Express Scripts serves the largest, most sophisticated commercial employers, health plans or governmental entities. So the buyers of those services fall into 1 of those 3 categories. The way they choose to finance their purchase is dictated by their choices and trade-offs at any given point in time. So if you will, if you take a government purchaser, it's fully transparent. There's a full level of transparency and trade-offs that take place even in the procurement rules that list that out. Health plans make their own individual trade-off scenarios. Individual commercial employers do. What Express Scripts has done is what Cigna does is we provide choice to those clients. The employer or health plan as a client, how do you want to finance your purchase? And more alignment versus less, you want to transfer more risk, performance-based risk, to us versus performance-based risk to you from that standpoint. And we will continue to evolve those. The end, Gary, what I would bring forward is, I think what we and the industry need to do more of on an accelerated basis is bring additional transparency around choice to the individual to avoid the kind of shock or surprise dimension that may take place in the way a benefit program is designed or otherwise, then coming back and using Patient Assurance. That's an example. It's not the answer. It's a concrete example of taking that transparency all the way down to the individual level to provide that peace of mind that everybody wants from that standpoint. So believe in transparency. Transparency is in the eyes of the beholder. As it relates to the employer that decides how to finance their alternative or the health plan, they've entered the level of trade-offs that work for them in a given cycle, and we'll continue to evolve those year in, year out from that standpoint. Government, full, regulated transparency that exists relative to that, and we need to drive more constructive transparency at the consumer level to yield the peace of mind that they want. And that's what we're driving toward.

Thank you very much. We'll continue with Cigna across the hallway in the breakout.

Thank you.