The Cigna Group (CI) Earnings Call Transcript & Summary

Okay. Great. Good morning. Welcome to Day 2 of the Barclays Global Healthcare Conference. I'm Steven Valiquette, the healthcare services analyst here at Barclays. And our first session today will be with Cigna. So with us from the company, we have Brian Evanko, the company's CFO; as well as Alexis Jones from Investor Relations. The company is fresh off their analyst meeting from just a couple of days ago, and there are plenty of topics to discuss off the back of that very comprehensive and informative meeting. This will be a fireside chat format for our session today. So let's dive right in.

So first, maybe we'll start with Evernorth since there were a lot of new topics around that at the meeting a couple of days ago. And for Evernorth, a little more time has passed since the rebranding of that segment. I think investors are seemingly still getting their arms around the 4 pillars of growth within that segment. So maybe we can start off with having you spend a couple of minutes just discussing the newer components that go beyond the pharmacy pillar to also include growth from care solutions, health intelligence and enhanced benefit management capabilities.

Sure, Steve, and good morning, everybody. Thanks for joining. As you made reference, Steve, Evernorth is our Health Services platform, previously Express Scripts, which, as a reminder, Cigna and Express Scripts combined in late 2018. And in 2020, we launched the Evernorth platform. And to your point, 4 growth pillars that are inside of the Health Services Evernorth platform going forward: one being our pharmacy services pillar; the second being benefits management; the third being care solutions and care coordination; and the final one being our health intelligence platform. People tend to, I think, view us as predominantly pharmacy services given the Express Scripts legacy. However, we see considerable growth across all 4 of those platforms going forward, and we expect operating income growth over the next 5 years across each of those 4. And in aggregate, across Evernorth, we expect 4% to 6% growth in revenue and earnings over the long-term across those 4 platforms in total. But perhaps the 2 that are the newest for us and the ones investors are probably least familiar with are care solutions, care coordination and the health intelligence. And care solutions, care coordination includes care delivery. So as an example, our recent announcement of our acquisition of MDLIVE is one example of that, where we seek to have targeted ownership of parts of care delivery and/or coordination of care across different sites. Now we do not intend to own bricks-and-mortar care delivery at scale. And so MDLIVE is a virtual care asset that we believe is very complementary to the rest of our Evernorth capabilities, but it's an example of how we're expanding the addressable market through the care coordination and care solutions vertical. The intelligence vertical, if you think of that as using data, analytics and insights in order to drive better outcomes for Evernorth's clients. Some of Evernorth's clients are external. Actually, 80% of Evernorth's revenue comes from external to Cigna clients. And then we also have a relationship with Cigna's U.S. Medical business, the commercial and the government health plans. But the example we unpacked in our Investor Day, Monday, was how we use emerging data and insights to help manage COVID, especially post-discharge COVID patients. We've been able to drive down the costs versus control groups using those data and insights in real-time fashion and coordinating back with the physicians that are closest to the patients. So just a couple of color there for -- examples for you, Steve, to unpack some of the 4 pillars that are underneath that Evernorth platform.

Okay. Great. Okay. And then just within the PBM part of the business, in particular, within that, the selling season was definitely more benign last summer for the 2021 PBM selling season. So for the upcoming '22 PBM selling season, this summer, as we think about customer categories, just curious if you see more opportunity for market share gains either in the employer or the health plan customer segment based on the evolved Evernorth offering or maybe perhaps the government customer segment level? Maybe break down the opportunity set by customer category.

Sure. So for our core pharmacy services or PBM capabilities that you made reference to, 2020 was definitely a lighter year in terms of market activity, primarily due to the pandemic. Just many employers and/or health plans that maybe would have been out in the market chose to defer that given the pandemic, understandably. So this year, we are seeing more activity in terms of RFPs and the opportunity to win new business as well. It's up directionally 10%, 20%, somewhere in that order of magnitude year-on-year in terms of the amount of activity we're seeing out in the market. For us, as we think about market opportunities, very importantly, we see opportunities to sell on an integrated basis. We see opportunities to sell on a point solution basis, and we see opportunity to sell on a coordinated basis. And just to unpack those real quick for you. Integrated, meaning medical pharmacy behavior, all packaged up as one, one relationship with Cigna. Point solutions being we might offer just our PBM services or just our medical capabilities or just our behavioral health services. Coordinated would be someone says, "I want Cigna Medical and I want Express Scripts PBM." Now ultimately, that's all Cigna, but it feels like best-of-breed on an individual capability-by-capability basis. So we've made investments to harmonize that experience for an employer client, as an example, under that coordinated services vertical. So we see 3 different ways to go-to-market. For 2022, specifically, your core question, we see growth opportunities in each of the verticals: employers, health plans and government entities. The 3 examples I gave you earlier of ways we go-to-market are predominantly going after the employer space, and we continue to see a lot of upside in the longer run with employers in particular. But health plan clients continue to be quite sticky with us. I think we disclosed on our fourth quarter call, we had 2 health plan losses for '22, but we also have some wins that we'll be talking about in the coming months as we -- as the dust starts to settle on the final outcomes for 1/1/22.

Okay. Great. All right. Maybe one more question on Evernorth. You touched on the MDLIVE acquisition. Question maybe just dive a little bit deeper into the thought process on what went into making that acquisition. And also somewhat interrelated, but just as far as just telehealth overall, just curious conceptually whether this is something that you plan to do fully in-house? Or will you still outsource that to a lot of third-party vendors? Just curious, maybe just dive a little deeper into that -- this collective topic.

Sure. So big picture, we're really pleased with our recently announced acquisition of MDLIVE, and the pandemic has massively accelerated the adoption of virtual health across the industry. So I don't think we're unique in that regard, but it's massively accelerated by years compared to what we think the trajectory would have otherwise been. So for us, we step back and we see some megatrends that are impacting the industry. And one of the big ones, we call the macro forces that we see impacting the next 5 to 10 years, is alternative sites of care scaling up materially. So virtual is an example of that, care in the home and remote monitoring is another example of that. And coming back to what I said earlier, we believe that there's going to be a shift away from traditional supply, traditional bricks-and-mortar care delivery to more alternate sites of care over time. And we seek to be part of that, which is why we stepped into this acquisition of MDLIVE. MDLIVE has been a long-standing partner of ours. So we invested early with our Cigna Ventures capital arm into MDLIVE. So we've been a partner to the business for quite some time. This was a logical next step for us. But importantly, we don't see the virtual care market as it sits today as being the destination. Today, it's largely urgent care, routine primary care, a little bit of behavioral care. We think this is just Phase 1 of where virtual will go over time. And over time, we expect and we believe that the market will unfold to do more complex care management as well as more longitudinal management of specific conditions. So much of what's done in a traditional setting today or traditional bricks-and-mortar setting today, we think will virtualize over time. In the near term, we see virtual as largely an augmentation of the existing delivery system. And over time, it could evolve into, in some cases, disintermediating an efficient supply. So we see all those things, exciting opportunities for us. And we believe MDLIVE is going to be a catalyst for a lot of that change for Cigna.

Okay. Great. Okay. So let's shift gears now to the U.S. Medical segment. And obviously, utilization trends, I think, are front of mind for a lot of investors right now. Yes. If we think about utilization trends for COVID versus non-COVID medical costs thus far in 2021 with this rapid decline of COVID cases and declined hospitalizations over the past month or 2, how might this impact Cigna's first quarter '21 reporting period, in particular, the context of your full year guidance?

Sure, Steve. So as we talked about on Monday, we were pleased to reaffirm our full year outlook of at least $20 earnings per share and at least $6.95 billion of adjusted income along with at least $165 billion of revenue. So even with a very dynamic time that we continue to operate in, we were -- we're pleased to reaffirm our full year outlook. As it relates to the quarter, in particular, a few things have emerged over the last few weeks, few data points that I think might be useful here. One being, to your point, new COVID-19 case counts and hospitalizations have come down quite a bit after peaking in the December and January time frame, which we see as a very good thing for the country and for our customers and our patients. Two, non-COVID utilization continues to show an offsetting factor. So when COVID comes down, non-COVID tends to go up. And so we continue to see that offsetting dynamic emerge here in 2021. We also saw in the month of February some weather-related disruption, both in terms of care delivery but also in the pharmacy supply chain. That created some noise in the month of February. On top of that, we now have a couple more months of data on our 2020 experience as we think about the runout of the activity in the fourth quarter and such. And we're a little bit past the halfway mark here in the quarter. So we got a little bit of an early read on how things are shaping up. And during our fourth quarter call, Steve, we talked about the full year 2021 outlook of at least $20 of earnings per share with 20% to 22% of that emerging in the first quarter. So we said, first quarter, we expect it to be a little depressed due to higher COVID-19 claim utilization. And therefore, we expect a 20% to 22% of our earnings per share to emerge in the first quarter. Based on all those different data points I cited earlier, we're trending more towards the top half of that range based on how Q1 is shaping up. And so we'll unpack that further in our first quarter call in a few weeks. But again, those various data points are pushing us more towards the top half of that range of 20% to 22% of the earnings emerging in the quarter.

Okay. Great. That's helpful. Also thinking ahead now to 2022. From the Analyst Day a couple of days ago, one of the statements that really stuck out was the fact that the COVID cost might be half in '22 what they're expected to be in '21. Curious how the company arrived at that conclusion. Whether there was hard math that went into that or it was more just kind of a qualitative statement? I think we've got a lot of questions on that following the analyst meeting. I think people thought they couldn't have potentially be reduced by more than 50% in '22 versus '21. So I just wanted to unpack that a little bit further.

Sure, Steve. So the specific metric, I think you're referencing is the fact that we cited at least 3% more EPS accretion in '22 due to the dissipation of some of the COVID headwinds that we see here in 2021. And again, that's off of our expectation of $20 earnings per share in 2021. So the 3% equates to, call it, $0.60 out of the $1.25 that we expect as a 2021 earnings per share headwind. And I think the specific wording we used was at least 3%. So think of half of that or potentially a little bit more than half of that coming back. And as we unpack it, the $1.25 per share headwind that we see here in 2021, you can think of about half of that coming from our U.S. medical care ratio. So accelerated testing and treatment cost in 2021 as well as a little bit of pressure on our Medicare Advantage revenue due to lower utilization in 2020, putting less in the way of risk scores in the books for '21. So those factors contribute about half of the pressure. We see 35% to 40% of the pressure from lower customer volumes, predominantly due to the economic effects of the pandemic and specifically in our commercial employer book of business, disenrollment from some of our larger clients as well as lower new volumes. So that produces the other 35% to 40% of the $1.25. And then the last piece is smaller effects, none of which are really material, but an example would be we expect a little bit of elevated claims in our International Markets business this year. So you kind of put that all together and you get $1.25 as a headwind in the year 2021. Now how that dissipates heading into '22, that first half, so we can call it, $0.60 to $1.25, more than half of that is associated with elevated claims. In 2021, we expect more than half of that to come back in 2022 or about half of that to come back in 2022. Some of that's lower claims. Some of that is price adjustments that we'll make as we head into '22. The Medicare Advantage pressure, we expect to recover pretty much all of that heading into '22 through the bid cycle and/or utilization activity in '21. So we expect to recover pretty much all of that in '22. The economic pressure, the 35% to 40%, our current expectation is about half of that will come back in 2022 with the belief that the back half of '21 is when the U.S. economy will start to strengthen more materially, and therefore, we'll see some of the customer volumes come back. So if you do all the math on that, you get a number in that 3%-ish of EPS accretion for '22 or maybe a little bit north of that, which is again, why we said at least 3% one-time EPS accretion bump relative to our typical long-term expectation of a 10% to 13% outlook.

Okay. Yes, that's great. That definitely helps to break that down further. Sticking with the U.S. Commercial, one of the other data points from the analyst meeting was that Cigna mentioned that you guys have less than 10% market share in the Select segment, which is the 51 to 500 employees, that this segment will grow at a double-digit rate. Just for a quick backdrop. Just remind us why Cigna has perhaps lagged a little bit in their market share in that segment previously? And again, what's changing to accelerate that growth?

Yes. If you go way back with our U.S. Commercial business many, many years, historically, we were very focused on the National Accounts segment or the upper end of the Middle Market. And about a decade ago, we made an acquisition of Great-West Healthcare, which really opened up capability for us in the Select segment in particular. So think of employers with 51 to 500 lives, which is what we call the Select segment. And so over the past decade or so, we've had tremendous capability open up through that acquisition. And we've been gradually strengthening our footprint in that space across the country, which has allowed us to grow quite rapidly in that space. So while the absolute level of current market share may sound light, to your point, of less than 10%, the growth there has been quite attractive over a multiyear period where we've grown close to double digits for the past decade in that space. And so once some of the headwinds from COVID settle, we expect to resume a double-digit growth rate in that segment, in particular, the 51 to 500 segment, which includes the acquisition of new market share from competitors in many geographies. And the big reason for that is the affordability strategies that we talked about on Monday. We expect to continue to broaden our addressable market in the commercial space through bringing more cost-effective solutions to market that allow us to compete for business that historically we were not price competitive enough to win. And the 51 to 500 segment, again, what we call Select, tends to buy on an integrated basis, medical, pharmacy and behavioral. And we tend to win on an integrated basis because of the clinical integration capabilities that we've developed over time, including leveraging Evernorth at a level that many of our competitors are not able to fully do. So that's a big picture kind of how we got to where we are with Select. But we're really excited about that growth opportunity in the future, and we think it's largely unappreciated by many who are looking at us externally.

Okay. Great. And then you touched on National Accounts a little bit. I have 2 questions on that, that I'll kind of combine into one. First, you guys mentioned that for National and Middle Market combined, you're going to grow the addressable market by expanding the number of geographies in the U.S., where you have highly differentiated medical costs, but also with National Accounts and with the COVID vaccine rollout seemed to have a lot of success. Is there any early read on National Account membership coming back as the unemployment outlook improves?

Yes. On the back half of your question, Steve, I'd say too early to call. It's unfortunately just premature to make calls on National Accounts membership coming back. We're looking forward to when we have more widespread vaccination in place for all of our customers and clients, but just too premature to call on that one. And on the first part of your question, the affordability gains we're making, which, again, if you recall we were saying a minute ago, we expect 25% more addressable market to be opened up through improved affordability. That benefits not just National Accounts, not just our Middle Market, but also the Select segment. So all 3 components of our U.S. Commercial business will benefit from improved affordability, and therefore, a wider addressable market that we can win clients and customers. Early '22 selling cycle is underway, and we're finding ourselves to be in a good competitive situation on a number of new RFPs as well. But again, too premature to give you any more quantitative data on that. We'll give you a little more color on the first quarter call in a few weeks.

Okay. Great. If we shift gears now to the government books within U.S. Medical. First, for Medicare Advantage, you're targeting membership growth in the 10% to 15% range. But from your -- let's say, on a relative basis, a little bit smaller MA membership base versus some of the other public peers. It seems that you could grow organically at a substantially faster rate than that if you wanted to. So I guess I'm just curious to hear about the puts and takes on just doing a major geographic expansion like one of your large peers did a couple of years earlier versus what could arguably be a more methodical approach with only growing 10% to 15%, if we want to state it that way.

Sure, Steve. So today, we have offerings available in the Medicare Advantage market for 29% of all the Medicare eligibles across the country, if you just plotted everyone on a map and look at where our product offerings are. So large opportunity for us over time to expand the addressable market through new geographies as well as introducing new product solutions like PPOs, which we've been doing over the past year or 2. We intend to grow that footprint to 50% by 2025. So 29% today going to 50% by 2025. And through that, expect that to yield a 10% to 15% annual MA customer growth rate. Why not go faster? I appreciate the question, for one. Two, we believe focus is really important, and we believe that getting the appropriate return on our investments is very important. And so we want to make sure that rather than going out and kind of planting flags in different places where we may not get customers or we may not be ready to manage the medical costs or we may not have the right provider networks, we want to be focused and make sure that we have the right to win early in any markets we step into. So that's really been the approach we've used. And we're quite confident going forward in our ability to be able to achieve that objective but also earn appropriate returns for -- on our investments that we're making in that important business.

Okay. Okay. And then for the individual exchange business, you guys increased your geographic footprint by 50% for 2021. So as other competitors that have previously exited the exchanges are now coming back in this year and next year. Maybe just give a little more color on the evolving competitive landscape. Whether or not margins are stabilizing in this business across the industry for '21 and preliminarily for '22? If there's any early read on that. And how that fits into your overall margin targets for U.S. Government segment?

Sure. So big picture, we're really pleased with how the individual market has performed for Cigna over time. It's been a bit of a choppy ride since the inception of the exchanges in 2014 with the early years, in particular, being pressured from a financial perspective. But we've had a consistent presence in the exchanges since day 1. And we've actually methodically expanded in that space as well from originally being in 5 state exchanges to now we have a presence in 10, and we committed on Monday that we're going to be doubling that footprint further by 2025 to be on 20 exchanges by the year 2025. And so we expect to continue to expand our addressable market in the individual space as well. The business from a profitability standpoint has performed quite well in the past 2 to 3 years. So the peak of profitability for us was in 2018. We earned an unsustainably high margin in '18 and then it's gradually come down. And in 2020, we ended up, call it, on the high end of our long-term range for margin in that business. And our long-term range is 4% to 6% for the individual business. And so we ended up at the high end of that range in 2020. For '21, we expect to land within that range based upon the way that we price the business and early signals. And you're right, the market is becoming more competitive. We've seen new entrants come into the market in '20 and '21 and early signals are there will be more of that in '22. The pricing cycle tends to be second quarter for that business. So it still remains to be seen as it relates to relative competition of pricing for 2022. But big picture, we're really pleased with that business and see continued growth opportunities for ourselves there.

Okay. Great. Maybe 1 follow-up just back on Medicare Advantage for a moment. This kind of ties into capital deployment question as well. But now that Cigna is flushed with even more cash following the sale of the Group Disability and Life business, where does Medicare Advantage sit on the totem pole of priorities from an M&A perspective, either for a small-scale or large-scale Medicare Advantage acquisition opportunities?

Sure. So we talked about on Monday our 4 M&A priorities going forward, and one of those is government products and services. So we're always looking for opportunities to accelerate our strategy, and one of those areas is government. And so when I talked earlier about our MA customer growth journey, that's an organic customer growth journey. So we are very confident in our ability to organically grow with the existing growth platforms that we have across Cigna. And so we don't need to do a large acquisition in order to accomplish our long-term goal of 6% to 8% revenue and earnings growth and 10% to 13% earnings per share growth at the franchise level. So we don't need to do more acquisitions in order to achieve the 6% to 8% revenue and earnings growth outlook we put forward. However, if one presents itself, we will absolutely consider it. So we're always on the lookout for things that will accelerate our strategy and never say never as it relates to transformational M&A. But in the near term, that's not something that we're particularly focused on. So that's big picture how we encourage you to think about the 4 M&A priorities and MA specifically being within one of them.

Okay. Final quick question. So the EPS guidance of at least $20 EPS for this year. Previously, it was that range of $20 to $21. I think mentally, some people still think of it, that range is still applicable. I know there's a ton of moving parts within the company. But ultimately, is there 1 or 2 of the biggest swing factors in your mind that might determine whether EPS at the end of this year will be closer to $20 or perhaps still closer to $21? And I guess we'll leave it with that as our final question.

Sure, Steve. Yes, short answer is COVID. So the degree with which COVID impacts us favorably or unfavorably will be, by far, the largest swing factor in 2021. So we talked earlier about the $1.25 earnings per share headwind that we see. That will be certainly the largest swing factor that impacts where we land for the year. I just would also remind you though, Evernorth has proven to be an important stabilizing force for our franchise, both in 2020 and in 2021 through the pandemic. And over 2/3 of our revenue today is coming from Evernorth and so an important stabilizing force relative to many of the COVID dynamics, which are manifesting themselves in U.S. Medical. So big picture though, we're very confident in our outlook for the year of at least $20 earnings per share and look forward to going deeper with you in a few weeks on the first quarter call.

All right. Great. With that, we're definitely over time here by a minute or 2. So I want to thank Brian and Alexis for their time today, and everyone enjoy the rest of the conference.

Thank you, Steve.

Thank you.