The Cigna Group (CI) Earnings Call Transcript & Summary

[ Audio Gap] to introducing Cigna. Cigna is one of the largest health insurers and [indiscernible] pharmacy benefit management companies. Presenting today, we have Brian Evanko, CFO. We also have Ralph Giacobbe, from the Investor Relations as well. I think we should go right into Q&A.

So I guess, first, on the Commercial side of business. During the quarter the guidance, probably [indiscernible] coming in stronger than we thought. So can you talk a little bit about what drove the outperformance in the Commercial membership, let's start there.

Sure. Good morning, everybody. Great to be here, face-to-face as well. So thanks for hosting us. But our Commercial membership in the first quarter came in a bit stronger than we expected. And for the full year across Cigna Healthcare, which is our overall health plan segment at Cigna, we're guiding for net medical customer growth to be at least 725,000 lives for the year, which is an increase of about 150,000 lives from where we had previously expected those results to come in. The vast majority of the growth that we'll see this year in 2022 comes from fee-based relationships. So within our U.S. Commercial segment, we have about 80% to 85% of our lives are in self-funded or fee-based relationships and 725,000 of growth that we expect will come predominantly from those types of arrangements. And there's a few different drivers of that, Kevin. So one, we did see some stronger new client sales than what we had previously been anticipating. Two, we've seen stronger retention in pockets of the book of business than we had been anticipating; and then thirdly, within groups, there's less attrition that's transpired, which I would ascribe predominantly to the economy strengthening over the course of the last year or 2. So those 3 factors contributed to the strength in the fee-based offerings and importantly, our sales and client management teams, which I would assert are the best in the industry, continue to focus on making sure they understand each of our clients' unique needs and tailoring benefit programs to those.

So when we think about those 3 components that drove it, was there one that was an outsized contributor?

Amongst the 3, the first 2 that I highlighted, the new client wins and the stronger retention were greater than the third. So you can think of just directionally those 2 as being the larger contributors.

Can you talk a little bit about the competitive environment in Commercial right now? One of the things that we always look at, when we worry about more competitive Commercial pricing environment is the nonprofit [ loose ] capital levels that those still are kind of near all-time highs. And then the comment that you made last year about pricing in $1 of the $2 of COVID headwinds for this year because you were concerned about the potential disruption in the marketplace for kind of fully pricing it back in. That just to me sounded a little bit like there was some competitive pressures that you were considering when you made that pricing decision. So I'd love to just hear your updated views on competitive backdrop?

Yes. The Commercial markets are competitive. There's no doubt about that, but importantly, not irrational. So the competitive dynamics I would assert are not meaningfully different than what they have been in prior years, meaning this market is always looking for affordability. This market is always looking for ways to make sure that they're attracting and retaining the best employees, so competitive, but not irrational. Now importantly, for us, we entered 2022 saying we needed to expand our margins in the Cigna Healthcare book of business. So our 2021 margin for the Healthcare segment was 8.1%. And that's below what our long-term margin goal is for that segment, which is between 9% and 10.5%. So we stepped into the year saying we need to expand the margin. We're doing that. So we're on track with our refreshed income guide to deliver margins between 8.5% and 9%. So I think mid- to high 8s from a profit margin standpoint, and we're showing the net growth of 725,000-plus lives. So many people didn't think we could expand margins and grow customers. We were able to do that here in 2022. And as we step into '23, we have a further margin expansion opportunity of what we'll deliver here in '22. But a lot of that comes back to the sales and client management and the fact that many of our employer clients are asking for our support and their benefit strategies to make sure that they're attracting and retaining employees given how competitive the labor market is. So the discussions we're having with our employer clients are quite a bit different right now than they were 5 or 10 years ago when they were talking about tweaks to benefit plan designs. They're much more focused on their overall employee management strategy right now.

So is there any reason to believe that you wouldn't be at that target margin for 2023?

We certainly expect to see margin expansion in '23 off of '22. Importantly, the pricing happens client by client in Commercial, where we're looking at claims experience, et cetera. So to the extent that we're not able to get the prices that gets all the way back to the target margins, there could be another year that's required, but our goal will be to try to capture it in '23.

And that commentary about how employers are thinking about health benefits for their employees. When I hear higher retention, obviously, there's a dynamic of maybe people are just not looking to switch during COVID or they're looking to focus on back to work and not focus on benefit changes versus the things that you're doing to kind of improve retention and create that value. So how would you think about the outperformance? Is there a macro thing where you think that there might be more out for bid next year? Or is there a real something you'd point to towards an initiative that got you that retention?

There's certainly a little bit more in the way of RFP volumes coming through right now for 1/1/23 in comparison what we saw for 1/1/22 and 1/1/21 and the National Accounts segment, which is our largest client, I think 5,000-plus tends to be earlier in the cycle. So here, as we sit here in May, most of the National Accounts have made choices as to whether they're going to be out to bid or not for '23. And we tend to see between 50 and 100 RFPs for National Accounts in a given year. This year, for '23, we'll be up roughly 20% in terms of volumes compared to what we saw in 2022. The early returns on that are that the incumbents appear to have an advantage, all else equal based on what we're hearing so far from some of the national account RFP opportunities, but the dust hasn't settled on that. There's still more time and that will unfold. But importantly, one thing that's been a bit of a silver lining, if you could call it that from the pandemic is there's a stronger link between employment and health benefits now than there has been, probably at any point, I could assert my career that I've seen, meaning employers are saying, a benefit strategy that's going to attract new employees in and retain them is a really important part of my talent management strategy. And it's not just a matter of saying, what should we do with the deductibles this year or the premium levels, but how do I think of health benefits as a mechanism to bring the best and brightest into my company and keep them there. And so our sales and client management teams are very focused on helping our employers grow their business beyond just the health care component of the benefits that we would historically have consulted on. So that's a big change that's transpired in the last year or 2. And we think we're really well positioned to capitalize on that trend.

Okay. And then as we think about the Evernorth part of the business, maybe focus first on the PBM side of things. Retention dropped a little bit this year, but next year, it looks like it's bouncing back to where kind of you guys are targeting it. I guess what happened this year? And how is the selling season for next year shaping up?

Within Evernorth, and keep in mind, Evernorth includes the Express Scripts PBM, it also includes the Accredo specialty pharmacy, it includes our Express Scripts mail order capabilities and it includes a series of Health Services capabilities that today are not that significant, but we're investing to build out. So I think in that latter bucket in virtual care, behavioral health, remote diagnostic monitoring, et cetera. But back on the retention question, I think Kevin was specifically asking about the Express Scripts PBM. So in 2022, we had 2 known health plan client losses that contributed to the retention level in '22 being a bit lower, mid-90s, you think of it for purposes of the full year. Historically, we had been more in the 96% to 98% range on a sustained basis, and that's measuring overall prescriptions. And then what percentage of those renew, it's ignoring new business. It's only looking at the existing prescriptions 1 year to the next. For purposes of '23, as of now, we have about 90% of the renewals, the volumes locked in, and we would expect retention of 95% or better based on what we see as of today. But importantly, this is just the pharmacy benefits management capability within Express Scripts. It doesn't include the Accredo specialty pharmacy, which right now is delivering over 35% of the revenue for Evernorth. So I just -- I wouldn't want everyone to focus solely on the PBM. But importantly, we'll see stronger retention in '23.

I mean what would it look like if we included the specialty business? I mean how -- is it a similar kind of retention rate on specialty?

It's a bit of a different conversation with the specialty because we have many patients that we serve in the specialty pharmacy who are not PBM clients. So you think about roughly 40% of our Accredo specialty pharmacy patients do not have a PBM relationship with us. So oftentimes, what happens is a patient who has a complex condition will utilize our Accredo specialty pharmacy, and then they'll become a lifetime Accredo or second to none in terms of their ability to work with patients, make sure that they're staying on the right medication protocols, et cetera. So it's a bit of a different conversation, and we expect continued growth in specialty, both in terms of the all-in prescriptions, but importantly, the revenue. And as I shared in our first quarter update on Friday, within Evernorth, less than 1% of the overall prescriptions are specialty, but over 35% of the revenue comes from specialty. So very small volumes, but high dollar prescriptions because these are really complicated conditions and often high-dollar drugs that require extreme care and really expertise from the clinicians to make sure that patients are staying on track.

And I guess while we're talking about specialty, biosimilars have gotten a lot of focus. So how are you thinking about that opportunity for the company? I guess, in general, over time, but then maybe specifically on the timing, like how should we think about 2023 versus 2024 impact of biosimilars?

Yes. So we're excited about the biosimilar wave, if you will, that's to come. There are already biosimilars in the market, as I'm sure everyone knows. So just this past year in 2021, for example, we brought SEMGLEE into our National Preferred Formulary for insulin, and that's something that will drive cost down for our clients and customers as one example. But in 2023, we have a bit of a step-up in the biosimilar environment with HUMIRA where we expect to see biosimilar competition starting in the first quarter and then a series of additional biosimilars introduced in the third quarter of 2023. So '23 a bit of an acceleration year, if you will, relative to where the market's been with biosimilars to date. '24, we'll have another step with STELARA coming to market with biosimilars. So there's going to be a bit of a build effect over the coming years and an accumulation effect where you'll start to see greater contributions in '24 and '25 from biosimilars. But there's still quite a bit to work through here in terms of contract negotiations with the existing brand manufacturers and the biosimilar manufacturers to determine exactly what's on the formularies and what sequence. But we're excited about the opportunity to drive competition and ultimately, we're squarely focused on lowest net cost for our clients and customers. And that could be biosimilars that are interchangeable, could be biosimilars that are not interchangeable, could be HUMIRA in some instances. So it depends on where we get to in terms of lowest net cost for our clients and customers.

So I guess when we think about the biosimilars, you guys have given the long-term growth rate of what you think Evernorth is going to be. I mean does that 4% to 6% number kind of include an assumption that biosimilars was going to come in? Or is biosimilars kind of an upside opportunity on top of that long-term growth rate of Evernorth?

Yes. So I'm going to rewind the clock a little and then I'll get to the forward-looking. When Cigna acquired Express Scripts at the end of 2018, most people concluded that the Express Scripts business would not be able to grow at a meaningful rate. Most people thought 0%, maybe 2% growth. We've shown over that time period that there's a meaningful amount of growth in the Evernorth business, which includes Express Scripts and those other capabilities I was alluding to earlier. So if you rewind the clock and look at 2019 revenue for Evernorth and look at our 2022 revenue guide, $40 billion of revenue growth has transpired in 3 years. So that's over 40% growth in 3 years of a business that most people thought would not be able to grow. So when we introduced in the 2019 Investor Day, a growth goal of 3% to 5% annual Evernorth revenue and income growth, many people question whether we could do that. We were able to outperform that meaningfully to date. And last year at our Investor Day, we increased that to 4% to 6% in the March 2021 Investor Day. That included an assumption around biosimilars at the time, Kevin, in terms of what we knew was to come. Obviously, as we get more and more data points, we continue to refine those estimates. And what we'll talk about at our Investor Day on June 3, just a few weeks away now, is exactly how to think about the numerical contributions from the biosimilars and how that ladders up into the overall Evernorth growth outlook.

Okay. That's helpful. And I guess how do you participate in the economics of that? I guess when we think about biosimilars is, okay, look back at the generic wave and how that impacted the business. But as the business has moved to more transparent models to focus your point on lowest net cost, like how does the company actually benefit from the value that you're creating for your customers?

Yes. So there's a number of ways where the biosimilars will contribute to our P&L. And on a drug-for-drug basis, if we move someone from a brand over into a biosimilar, we expect the revenue contribution will probably be a little bit lower, but we expect the income contribution will be similar or potentially a little bit stronger on a drug-for-drug basis when we make that migration. But importantly, we view the biosimilars is a little bit different than the classic branded generic shift because in this case, you've got the nuances such as is it interchangeable? Or is it not? You have the nuances, for example, with HUMIRA of 2 different dosages and making sure that patients are getting the right dosage level. You've also got the nuance of getting physician alignment and patient alignment with the biosimilars if they've been accustomed to taking the brand for some period of time. So there's a number of variables in there that will impact adoption. But we would expect at the end of the day, if we're able to move someone over to a biosimilar, drive down the cost, then we'll be able to capture a piece of that, whether that's in the different economic levers we have today, such as rebates or spread pricing or others, we would expect we'll be able to capture a piece of that in our income.

Okay. Great. And I guess just to your point about how last guidance had 4% to 6% included some amount of biosimilars you knew that way it was coming. I guess what do you know now that you didn't know when you provided that last update on your guidance, trying to think about what's changed over the last year or so.

There's a little bit more specificity of the calendar of events, there's a little bit more specificity around, as you're saying, interchangeability. And as we start to have early contract negotiations with the manufacturers, we're starting to get signals as to what the economics could look like. So there's just a few updates along those lines. But importantly, as you step back and think about the 4% to 6% growth, Evernorth represents a variety of services that we provide to employers, health plans and government entities. So biosimilars is not the only driver of that by any means. It's just one contributor to the overall picture. But we're going to be growing each component within Evernorth at different rates, but they're all going to grow. And so biosimilars is a tailwind for us all in, but it's not the only contributor to the 4% to 6%.

Maybe it makes sense to talk a little bit more about that because it feels like you guys believe that Evernorth is not being valued appropriately by the street. But it also kind of feels from the street perspective that we don't have a great sense of what actually drives Evernorth. So I guess it's going to be a big part of what the Analyst Day is going to be about. But is there any way to kind of size like core PBM versus specialty versus other health care services? I mean how do you think about those drivers?

Yes. I'll try to be directionally helpful maybe without too much precision. But if you think about the current revenue contribution from the different components. I mentioned specialty represents about 35% of the revenue, actually, we crossed over the 35% mark of Evernorth revenue. The Health Services, so think of those that are nonpharmacy oriented, you can view that as a small piece today, but one that will grow more rapidly in the future. So think of it in the 10% or slightly less than 10% range on revenue and then the balance is in the Express Scripts PBM and mail order capabilities. So if you just mention the pieces on a revenue basis and where will the growth come in the future, we would expect, again, if you just take those 3 buckets, the highest percentage growth rate is likely to come from the Health Services category, which represents the smallest contributor to revenue. We would expect specialty to continue to grow at a higher rate. And then the lowest of the 3 in terms of growth rates would be the PBM and the mail order capability, but we would expect each of these to grow. So each component of Evernorth will grow, but they'll grow at different rates and then it ladders up to the all-in figure we were referencing earlier.

That's really helpful. I guess when we think about the services business and growing a services business, it's something that every managed care company is now talking about. It feels from the outside as if it's a more competitive environment to do that. So what differentiates you when you think about the offerings that you bring to bear? How do you differentiate yourself in the market?

Yes. In the Health Services space, we still have a tremendous amount of headroom here, both to build out capabilities organically, and it's an area of M&A priority for us as well. So today, we have capabilities, if you think about virtual care with our acquisition of MDLIVE last year. Behavioral care, we've had behavioral clinicians that have served our Cigna Healthcare customers for years and years and years with great outcomes. We have capabilities in home health, although we don't tend to talk about that often. We have a presence in about a dozen cities around the country. And then we have a variety of other capabilities in terms of remote diagnostics and monitoring. And those are all areas of interest for us in addition to targeted care delivery and care coordination and care management. So we've got some owned care delivery today. We do not expect to own care delivery, for example, physical primary care at scale in the future, but we are willing to own on a targeted basis. We're looking to make investments in all of those areas in the Health Services swim lane. Importantly, there's still a tremendous amount of upside for serving our Cigna Healthcare customers today. So today, our Cigna Healthcare customers tap into those services and they generate both affordability for our Cigna Healthcare clients and customers and they generate a profit pool for us in Evernorth, we have more upside there as we think about Evernorth health services and the opportunity to -- if you think about -- traditionally, we talk about cross-selling, but more importantly, it's integrating those back into the Cigna Healthcare experience that our clients and customers have. So that will help with affordability, will drive down net cost for our Cigna Healthcare customers, and it will drive an additional profit pool within Evernorth. But importantly, we don't see that as just serving Cigna Healthcare. We also -- we're looking for those services to serve employers and health plans and government entities within Evernorth that are unaffiliated to Cigna Health care, which today, the majority of Evernorth's business is not related to Cigna, not related to Cigna Healthcare. So we have, call it, 80% or so of the Evernorth business is unaffiliated with the Cigna health plan relationship. That all represents fertile ground for us to add more and more health services into that employer, that health plan client, that government entities relationship with Evernorth. So we view that as another growth opportunity, which ultimately will drive the high percentage growth rate I was referencing earlier.

And so why not own capitated physicians? It feels like that seems to be something that's a hot topic for a lot of companies. Is that more just your Commercial focus? And so that model resonates more on the Medicare side? Or is there something you don't see the value in that? Why not?

So we've been able to drive great alignment to date in the absence of owning significant amounts of care delivery. And when I say great alignment, I'm talking about alignment with provider groups through a variety of traditionally, we call them value-based care models. So they could be bonus programs, they could be 2-sided risk programs. We've also been able to drive alignment, as we were talking about earlier, on the demand side with the employer clients that we serve and also our customers to make sure that whether it's at the point of care in the myCigna mobile app that we're providing advice and guidance, not just steerage but advice and guidance on the optimal side of care. On the employer client side, making sure we're helping to consult in terms of what's the right benefit plan design for them, given the unique needs of their employees and their dependents to drive not only to the right sites of care, but also to the right clinical outcomes. So we focus end-to-end on alignment, not just on the supply side with the providers, but also on the demand side with our employer clients and our customers to make sure that at the end of the day, we're aligning incentives across the entire ecosystem. And we've proven to date that we're able to drive great affordability outcomes without owning care at scale, without capitating physicians at scale, without focusing on risk transfer. Not that, that's a wrong strategy for others, but we're not concentrated on that right now as the primary source of affordability benefit. So importantly, we're open to owning care delivery on a targeted basis, but we're not looking to do that at scale. It has to be geographies where it makes sense for specific situations where we believe the access will otherwise be impaired.

And you've said in the past that home care is an opportunity for you. When you say home care, are you thinking about like actual something similar to what United did with LHCG, like that type of home care? Or is there some other kind of overlay of care management or care coordination that you're kind of thinking about when you say home care?

Home care, the way we think about it is in the context of alternate sites of care. So we talked about in a variety of settings that alternate sites to care is a mega trend. We anticipate continuing for the next decade plus. So as more and more people are looking to utilize virtual services not only for convenience purposes but also for chronic conditions, we're seeing more and more appetite for that. Home care fits into this domain of alternate sites of care, the way we think about it, meaning instead of having to go into a physician's office for everything, instead of having to go to a hospital for certain services, there are certain procedures that can be done in an in-home setting. So we think of it as both physicians and assistance going in and providing care to an individual, but we also think of it as the technology ecosystem that enables alternate sites of care in an end-to-end fashion. And so we expect more and more longitudinal chronic care will transpire in a virtual or a home setting than what we've seen to date. And we've already got some evidence of this with certain conditions that are more right for it than others.

And to go back to the point on physicians. So you can't get that alignment with that through contracting there. That becomes -- why would you need to own that versus contracting? No one has that capability that you want.

We don't necessarily need to own it, so just to be clear. We have a home care business today, it's called Alegis Care. We also have partnerships with home care businesses in a number of areas. So we don't necessarily need to own that, just to clarify. But we see alternate sites of care as a critical part of our strategy in terms of driving affordability, but it does not have to be owned.

Okay. And I guess you guys have talked about not doing a large transaction. I guess you guys seem to get broader discussions every so often about that. You're not going to do a larger transaction, I guess, this year, but this is a year that you would have been trying to do one with the asset sale and cash coming in. You've got really strong cash flow. Interest rates are still low, but they're going up. I mean what was the decision about not making a large transaction this year, but I guess leaving the door open for potentially doing one in the future.

Yes. So we communicated at the end of February to Kevin's question here. Our intent for 2022 was not to do any large-scale or transformational M&A. And instead, we will be repurchasing at least $7 billion of shares. And when you add that to our dividend, it means we'll return over $8 billion to shareholders in 2022. Importantly, we felt like the market was desiring clarity from Cigna in terms of our intention with all the deployable capital that we had available. So that prompted us to make that announcement. And we feel great about the existing businesses we have. So we've generated EPS growth at or above our targeted range for many, many years. We're committed to 10% to 13% EPS growth going forward. We're going to achieve that in 2022. We achieved that in 2021. And so we're confident with our existing businesses in the sense that we don't need to make a large-scale move in the M&A domain. And any larger scale M&A, we've been pretty clear on, needs to make strategic sense for the company, needs to make financial sense and needs to have a level of certainty of close in order for us to pursue it. So we're willing to consider those types of assets again in the future, but for purposes of 2022, we felt it was important to provide clarity to the market of our intentions.

Okay. And when we think about the government part of the business, that's a business that you guys have talked about showing strong growth on. You fell short this year as you positioned that business for margin. How should we think about that business going forward? Should we expect 10% to 15% growth as the right expectation going forward over time or...

That's Medicare Advantage.

Medicare Advantage, exactly, yes.

So for our MA business, 2022 was a bit of a reset year. So importantly, and to Kevin's question, we needed to see margin expansion relative to what we had generated in '21 for margins. So in '21, we had pressure from risk adjustment, and we had pressure from COVID claims. In 2022. We're on track to generate that margin expansion. So we believe 2023 will be a return to growth in the Medicare business. Our bids are due a little less than a month from now. So we're in the final stages of determining geography by geography, how we want to position ourselves for growth. But we would expect 2023 to be a growth year for the MA business again. And over the longer term, we'd expect this to become a bigger portion of the portfolio as Medicare continues to grow.

And then maybe last round of question would be on the Commercial business. I think in a lot of people's minds, the Commercial is not a growth business. And so that's kind of been one of the concerns with the company. The company has been able to grow Commercial on average over time pretty consistently. But that kind of means you have to continue to gain market share. So how do you feel about the positioning and the opportunity to continue to grow market share over the next 5-plus years?

Within Commercial, if you think about the overall market, you got about 150 million lives, give or take, depending on what time period you measure. We don't expect that to grow meaningfully in the future. There might be some level of growth in that number, but we don't expect it to grow by multiple percentage points per year or anything along the lines of that. So we align with that part of the thesis in terms of the market itself will likely not grow at an outsized rate. With that said, we've proven over time that we can grow lives faster than the market. We can expand services on our existing clients when you think about pharmacy, behavioral, stop-loss, dental and all the other capabilities we have. And on top of that, to the extent that medical inflation continues to be in the single-digit percentage range, that gives some revenue tailwind as well to the overall Commercial business. So those 3 things contribute to a rate of growth in Commercial that might be above what some others are able to do. To your point on the growth in the lives, importantly, you have to subsegment our Commercial book. So our National Accounts business and the higher end of the middle market, we have pretty high market share, and I wouldn't expect those market shares to necessarily increase meaningfully from where they are. So that's a bit more of a [ hold ] served subsegment, the National business in the upper end of the middle market. Under 500 employers, what we call the Select segment. We have single-digit market share in the 100 to 500 space. We call this the Select segment. And in the 51 to 100 space, we have low single-digit market share. Both of those represent continued opportunities for growth for us, especially as we continue our energy around affordability efforts, for oftentimes, we're moving from a position where we had a cost structure that was uncompetitive in a local geography to one that's certainly competitive. And that's allowed us to win more and more business in targeted geographies in the Select segment at 51 to 500. So that's where you should expect to see a bit more growth in the lives as opposed to the national and the upper end of the middle market.

All right. Excellent. I think that's all we have time for. So thank you very much.

Thank you, Kevin.