The Cigna Group (CI) Earnings Call Transcript & Summary

Thanks, everybody, for joining us here at the Third Annual Wolfe Healthcare Conference. My name is Justin Lake. I cover health care services here. Pleased to have Cigna. We've got the company's CFO, Brian Evanko; and IR, Alexis Jones. So feel free to e-mail me or put a question in here in the Q&A box with any questions. But given we started a little late, Brian, I would skip the State of the Union and I'm going to go straight into Q&A, if that's all right.

Go right ahead, Justin, apologies for the technical difficulties.

No worries. No worries. The good news for you is I am back to back. So we are going to get you out of here on time regardless. So the first thing I wanted to talk about was, and I've asked this question on your calls but would love to have a little bit of a deeper conversation is your, you have a health care target in terms of growth in that business, and I want to start there in the health care business, of high single digits. I think it's 8% to 10% or 9% to 11%, Brian, in that ballpark.

Yes. It depends on if we're talking commercial only or all-in U.S. Medical, but it's in that range.

Yes. I'm talking all-in U.S. Medical. So when I look at that, when you take a step back and I look at your end markets, right, it's mostly commercial, right? It's mostly employer-based. You do have some Medicare and Medicaid. And I think most of us think of commercial as a mid-single-digit growth business in terms of end markets. And so you're looking to grow almost 2x your end market growth. And to be fair, for 10 years plus, the company was able to do that, right? And it came in the form of market share gains in the Select business. Effectively, midsized employers not only buying self-insured products but also stop-loss and other specialty. And you guys did a great job of kind of creating that market almost and then growing into it. As I look at it over the last few years, it looks like your peers have decided they're going to step into that market as well. We've certainly heard more from United, Aetna, the Blues in terms of stable premium products, et cetera, that look very similar to what you were selling. Certainly, I still think you're leading that market. But by a lot of metrics, it looks like the growth there has slowed. So the share gains now the last few years have come on the commercial risk side, right, it would appear. So first of all, let me stop there and tell me if you think there's anything I'm missing in terms of that outlook. But really, what I'm trying to find out is just, is that the case? And certainly, in my 20 years of covering managed care, trying to take share in the commercial risk business has always been a little bit more difficult and come with more volatility. So that seems to have kind of come to a head in 2021. But would you disagree with any of what I kind of just laid out there as a background?

Yes. Thanks for the question, Justin. The detailed way you kind of teed that up, I appreciate that. The all-in U.S. Medical segment, we expect to grow revenues at 9% to 12% and income at 8% to 11%. So that I think squares with where you started there. Over time, obviously, from 1 year to the next, there'll be some variability in that. We're coming off a year where income was clearly depressed. So we would expect a strong year next year coming off of that relative to margin expansion in U.S. Medical, et cetera. But your framework of the commercial marketplace is right in terms of where we've gone historically, right? Historically, we've been very focused on the self-funded market, starting off with more of an anchor relationship on the medical and over time expanding services. That continues to be the recipe that we employ in a number of geographies around the country. So I wouldn't want you or anyone on the phone to take away that we've had a big strategy pivot in our commercial book of business. Now do we have more commercial risk business? Now we do, but that was not meant to be a strategic pivot away from self-funded by any means. In some respects, it's the client preferences that are driving that. In some respects, it's the client sizes that we're going after in certain geographies. We continue to see more runway for growth in commercial. So we don't dispute the fact that industry-wide commercial growth will be slower in the future than maybe it's been the past decade. We don't dispute that. But we still see a tremendous opportunity for Cigna to continue to win in that space, both in the historical Select segment that we call 50 to 500, but also upmarket where we'll show net growth in 2022 as well. A big reason for that, though, is not just cutting prices, but more importantly, the initiatives we have underway around affordability. So for us, affordability takes a few different forms. One being, some geographies, we still don't have competitive unit costs. And we have opportunities to take our MA volume, our exchange volume and our commercial volume and drive a different relationship with the delivery systems. And since we don't own much in the way of care delivery, it's a different proposition for many health systems that we engage with. Two, we have a number of initiatives underway, I'm sure you know, around alternate sites of care. So we think a big part of the next decade is going to be virtual care, home-based care, effectively using behavioral health care. All those things over time, we believe, will have affordability benefits. And then lastly, there's still more opportunity for us in terms of U.S. Medical partnering with Evernorth, our sister company, our service company, to add more and more services that will drive affordability back into the health plan in U.S. Medical, but also will create additional profit pools for us over time such that, that singular U.S. Medical relationship becomes more valuable to the overall enterprise. So a few different tentacles here, but they give us the confidence that we'll continue to grow our commercial employer book of business. And then to round out the picture, the government side of the house, we have a significant amount of addressable market expansion coming in both Medicare Advantage and the exchanges in the next 5 years. So hopefully, that gives you a little more context for why we feel confident in those outlooks.

Got it. No, that's helpful. To your point, though, going back, the commercial market is, especially on the risk side, frankly, is a shrinking market, right, from a membership perspective. So the share you need to take to grow at 2x, right, overall is not insignificant. What is the strategy there in terms of, is it increasing your footprint like you said? Are there numbers you can put around that? And I guess the pushback, and you can kind of see it in the stock price is just that there hasn't been, there's not too many companies out there that look to grow double digits in their commercial footprint and it comes with a bunch of risks. We've seen, for instance, I look back and I remember Aetna in 10, 15 years ago trying to do that and expand their footprint and sell a bunch of commercial risk, and it ended up being more difficult than they thought. What do you think is the secret sauce for Cigna here beyond, I know you've got initiatives here, but is it beyond that in terms of footprint? Is there anything else that you can kind of point to?

Well, our footprint is already quite broad in the commercial space side. There's not a lot of geographies where you could highlight where Cigna does not have a presence, but there are many where we don't have a cost competitive presence. So one of the things that we talked about, I believe, earlier this year with our Investor Day was we expect 25% more geographies by 2025 where we have a cost competitive offering. We're going to stay cost competitive. We made a couple of points relative to what the best-in-class unit cost position would be. So that's a big part of our go-forward strategy in commercial. But coming back to what I said earlier, we don't view growing commercial risk as the prize. We view growing our relationships with commercial employers as the prize. And so some of them may choose a risk relationship, but we're not going after the fully insured risk business as our primary objective. It just so happens that, that's where the mix of clients that we've written in the last couple of years had a little more bias toward.

Got it. And so take a step back from there and look at, obviously, what I tell everybody in managed care over my history is, you're never as bad as things look when you're having a problem, you're never as good as things look when you're beating numbers, right? Like this is an insurance business and there's going to be some volatility, right? It's never completely smooth sailing. So forget this year, but the multiple on the stock certainly doesn't, it hasn't for a while, indicated that investors see the growth opportunities at Cigna kind of in line with where the company sees them. So what has been the feedback from investors over the last 6 months or so? And how do you think you bridge that over time?

So clearly, we're disappointed with the valuation of the stock. And I think that was inherent in your question, Justin. And one of the reasons we continue to repurchase shares at quite an elevated level is we think the stock price is attractive. And as we look at our long-term EPS growth outlook of 10% to 13% while we'll continue to pay a meaningful dividend, we believe that the valuation does not reflect that outlook. And so to your point on what's the sort of feedback we hear, our 2 largest businesses today, Express Scripts PBM, U.S. Commercial health plan are in markets that many investors don't see a significant growth opportunity in the future. And again, coming back to what we were talking about just a minute ago, at the industry level, we would concur with that, but we believe our model still has additional opportunity for growth in those segments. But importantly, that's only a portion of the company, and this is where I think there's maybe a little bit of misunderstanding. We also have an industry-leading specialty pharmacy in Accredo, right? That represents 1/3 of our Evernorth revenue. It's been growing at a very attractive rate. We have a mail-order capability in the Express Scripts pharmacy that's already scaled and will continue to grow. We've got in the health plan side government-oriented businesses, Medicare Advantage and the individual exchange, which still have significant growth runway in front of them. And then elsewhere in Evernorth, there are health services that we're investing in right now. If you think about care solutions, medical benefits management, the intelligence space, that will grow over time from a relatively nascent position now to being scaled assets over the course of the next 3 to 5 years. So over time, we're optimistic that the market, investors, et cetera, will place more value in some of those assets as well while also as we continue to deliver on the existing scale businesses as we have in recent years that those things will eventually pay off in the form of some share price appreciation. So this year, we'll deliver EPS that's at least 10% off of our 2020 growth in terms of $18.45, and the 2022 EPS outlook of at least 10% is also in that 10% to 13% long-term range. So we're stepping into a 2-year cycle of delivering within our targeted range even with some of the doubts that are out there about our existing scale businesses.

That's helpful. I appreciate you going through that with us. One of the other things I've heard, I feel like has kind of evolved on the Cigna story is over the last 24 months, it appears that the company has become more open to adding Medicaid to the kind of insurance platform, right? You've always talked about it as being one of kind of the 3 to 5 potential kind of capital deployment areas for the company, but it feels like you seem to be more open to it over time. So one, is that true? And then, two, maybe you can walk us through with some of the key attributes you'd be looking for here in a Medicaid business. And can you walk us through some of the synergies that might be out there with Evernorth, right, in terms of adding Medicaid, a large number of Medicaid lives to that platform?

And your question, Justin, specifically on the health plan side of our franchise, not the Evernorth services chassis, it's the presence on the health plan?

Well, I guess what I'm saying is, adding a significant amount of Medicaid scale, right, to the insurance side, right, what are the attributes you'd be looking for in terms of size and scale if you were to add that? And then, two, what kind of synergies, right, which one of the things that's changed over time is the fact that you've added this PBM, this big, and you're investing in Evernorth, right? So you have more capabilities to bring to a big Medicaid business than you've had over time historically, which might make it more attractive as well. So maybe you can walk us through how you see Evernorth adding to a large Medicaid business if it were to happen.

Sure. So I start with, our Medicaid health plan presence today is very immaterial, right? So as you know, we're in Texas, and that's in the process of being divested. And after that, we'll have basically no presence in the insurance space in Medicaid. And our long-term revenue and income outlook of 6% to 8% average annual growth, our EPS outlook of 10% to 13% average annual growth does not depend on having a presence in the Medicaid health plan space. So I start there. So it's an if, not a when for us, importantly. But one of our 4 M&A priorities is the U.S. government programs and services space. And for us, government includes Medicare, includes individual exchanges, includes Medicaid. So all of that is within the space of government. We find that to be an area of interest from the standpoint of inorganic priorities. We would not be looking to go out and organically significantly build a Medicaid footprint. So if we were to step into that space more aggressively, would be inorganic in nature. And to the core of your question, there are a number of services that our Evernorth businesses provides that are highly relevant for a Medicaid health plan. In the same way that we service Medicaid health plans today that are affiliated with Cigna, they could service a Cigna Medicaid platform in the future. So for instance, those states that don't carve out pharmacy separately, we have a lot of pharmacy assets, as you know, the PBM, specialty pharmacy, home delivery, that could be highly relevant for a Medicaid population. In virtual care, in the home care space, in behavioral, all those capabilities, some of which already exist and some of which are being built, have a lot of relevance for a Medicaid population. And then as you think about synergies in the health plan side, there's clearly some level of synergy with the exchanges, whether that be churn of members, whether that be network construct and within the Medicare space, the potential for dual eligible synergies with our MA business. So there clearly are some pockets of value creation that go beyond the underwriting margin that comes strictly with the Medicaid health plan lives. But I keep coming back to, that's an if, not a when. We don't need to act there. We don't need to have a significant presence in that space to accomplish our long-term objectives. But compared to 3 years ago prior to Express Scripts, we now have more assets and more opportunities for enterprise value creation than we did prior to that combination.

Makes a lot of sense. So then sticking on Evernorth. I believe you've recently kind of talked about the fact that, that business is going to grow next year, both top line and bottom line, but sounds like it's going to grow below that 4% to 6% longer-term target. And specifically, you mentioned that you're making some investments in that business that could kind of drag on earnings growth year-over-year but will position the company for strong growth going forward. So maybe can you, one, am I thinking about that Evernorth trajectory into next year correctly? And two, maybe you can flesh out some of those investments that you're making next year, if I heard that correctly.

Sure, Justin. So overall, next year for 2022, we indicated earnings per share growth of at least 10% for the franchise, of which 5% to 6% of the 10% will come from operating income growth. And we would expect that to transpire across each of the platforms that we'll have revenue and income growth in Evernorth, we'll have income growth in U.S. Medical additionally, and we'll have margin expansion in U.S. Medical. So within Evernorth, we haven't yet laid out segment-specific targets. We'll do that with our formal guide in a couple of months here. But we haven't yet communicated specific Evernorth revenue or income guidance, but they will grow off of a very strong 2021 where top and bottom line contributions for Evernorth were above our expectations. So off a strong year, we'll have growth in that space. To your point of where we're investing, the strategic investments will have some level of pressure, all else equal, on the income growth in that space. And they're very related to what we were just talking about earlier. Health services beyond the pharmacy, we see as a significant growth opportunity for Evernorth and for Cigna over time. So the MDLIVE acquisition we completed in April, we're continuing to invest in that because we see virtual care not being just what exists today from the standpoint of routine urgent transactional, but over time getting into more complex care. So we're making a series of investments to bring that to life. Two, in the home-based care space, we do home-based care today in a number of cities around the country. We're looking to scale that to a greater degree, which involves not only people, but technology infrastructure. The behavioral space, historically, our behavioral capabilities have served the Cigna health plan exclusively. We're looking at opportunities for those to be available to our external and affiliated clients within Evernorth as well. We'll also be making investments in medical benefits management. So as you think about the opportunity to manage longitudinal care for given conditions. For example, we see the oncology experience as being very fragmented today. We see an opportunity to manage that end-to-end through our eviCore medical benefits management chassis. And then finally, in areas like data and analytics, so both commercialized as a service that we can sell to external clients, but also for internal consumption. So all those things over time will broaden the capabilities that exist in Evernorth. Some of them will be available to external unaffiliated clients. Some of them will be consumed internally by the U.S. Medical sister health plan. So that's where a number of those strategic investments are going in '22 that will create a little bit of a drag on income growth, but we still expect to grow in aggregate off the $5.8 billion of income we'll put up this year.

Okay. And would you expect those investments to continue and increase into '23 and beyond or do you feel like you're making a run rate investment here and maybe that will continue, but probably not increase from here?

This won't all transpire in 1 year for sure. So this is a multiyear set of investments that are made. They began last year, quite frankly. So they've been building over time. I don't think we spent as much airtime going through those previously. But importantly, Evernorth 3 to 5 years from now is going to look quite a bit different than it does today. The existing businesses will continue to grow, but we're also going to have additional businesses that are not yet scaled that will start to become scaled.

Got it. Got it. Shifting gears here, kind of going back to COVID. You talked about a $2.50 COVID headwind when you updated numbers in the second quarter. And then in the third quarter, you kind of changed your discussion around COVID and didn't want to delineate it, didn't want to talk, specifically talk to that number any further. And I don't think you're the only company out there that's going to say that COVID is starting to kind of mix in with the rest of the business and it's harder to strip out. But certainly, your COVID headwind, especially when you increased it, became pretty significant at more than 10% of earnings this year. So I think what investors are trying to understand is, I think you said before that you were going to get $1 of that back in 2022, if I remember correctly. And then, so we're sitting there with another $1.50 of kind of headwind versus that previous number. So regardless of whether you talk about it or not, $1.50 is not insignificant on a low $20 run rate. So I think what investors are asking is, would you say that regardless of whether you delineate it or not, is it an opportunity to improve earnings above and beyond that 10% to 13% growth rate? Or do you feel like it's all going to mix into the business and we should really be looking at 10% to 13%, not 10% to 13% plus something more as kind of where we go beyond '22?

Let me give you a few data points to try to square this one up. And hopefully, this is responsive enough to the point. So the reason we decided to stop quantifying the explicit headwind that we had previously been talking about was, we were having a hard time internally with the scorekeeping. There were certain calls in terms of we were having debates, do you consider the individual special enrollment period lives to be a COVID headwind or not. And we were having debates on these things, which started to become a little bit disconnected with how we ran the business. And for purposes of creating a bit of an artificial metric, we realized we were actually not necessarily being constructive with the decisions that we were taking day in and day out. On top of that, we were having debates on what's long COVID versus what are just medical symptoms from people who had COVID in the past. So we were having these discussions and realized, you know what, this isn't how we run the business. More importantly, we will see margin expansion next year, all-in. And so you can think of that as recovering some of the headwind. I think we've talked about before the Medicare Advantage risk adjuster headwind, we expect to fully unwind and be recovered in '22. We would expect a portion of the overall medical cost pressure that we experienced in commercial, the exchanges and MA to be recovered in '22. And then we would expect all-in to see some margin expansion. So I'd like to think of it from the standpoint of the overall book in U.S. Medical. If you take our income guide, convert that to a margin, you get about 8.4% margin this year. Our target for this segment is between 9% and 10.5%. So at the midpoint, that tells you there's 135 basis points of margin expansion opportunity that will come over time. We won't get all of that in '22. So the remaining margin expansion is still out there for us to capture in subsequent years. That's how I'd like to think about it. And the notion of being intertwined is what led us to step away from the explicit quantification.

Got it. And kind of last question I would have is, going back to Evernorth and the PBM, there's a couple, you've talked about the retention rate being in the mid-90s. And I think that's a function of a loss of, is it 2 health plans, Brian?

We had 2 more sizable health plans that were known losses in '22. Yes, Justin.

And talking to a bunch of Blues and others, I think, is there 2 more that you know about for 2023? Is that right?

There's one that's known for '23 that's of size. Importantly, though, we have wins, too. So I wouldn't lose that side of the equation either. We've had some state government wins that will come online in '22, and there are some other wins that will be coming online as well. So just to balance out the picture, you're factually accurate, though.

Okay. And is there, as you take a few kind of larger health plan losses, is there any common thread that you'd point to that has been indicative of why we're seeing that or is it just kind of the normal cyclicality of plans jumping around a bit?

I think for each of these, we were not willing to cut into our margins to the point that may have been necessary. So the 2 that we lost in '22 will have a greater revenue loss to us than income loss. So the income contribution was much less material. So importantly that's, one thing to take away here is we will not lose margin discipline. And as we move forward, I think each and every one of these has its own learning attached to it in terms of how you think about a 3-year contract and what's year 1 versus year 2 versus year 3 and promises that are made, et cetera. So there's some sub-learnings in there. But importantly, margin discipline is something that's important to take away from those.

Got it. Well, look, Brian, Alexis, I really appreciate your time today. Thanks for joining us. Have a great Thanksgiving, if I don't talk to everybody, and enjoy the rest of the day.

Thank you, Justin.

Thanks, Brian.

Thank you.