The Cigna Group (CI) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us. My name is Lisa Gill, and I'm the health care services analyst with JPMorgan. It is with great pleasure this afternoon that we have with us Cigna Health. With me today is CEO, Dave Cordani. Dave will make a few comments, and then we're going to jump into a fireside chat. Dave?

Thanks. Thank you, Lisa. Hello, everyone. Happy New Year. So as Lisa said, we'll just make a few comments, and then we're going to into a conversation here. A couple of headlines. One, our corporation is quite proud of the results we were able to deliver for 2022. 2022 has been a very good year from a clinical quality, from a service quality from an innovation standpoint, from a growth standpoint and from an overall performance. That sets us up for what we expect to be another strong year in 2023 with very good customer or member additions as we start the year in the month of January. Stepping back, key to our success is ongoing sustained growth. Our growth framework is a very simple growth framework. We leverage our business portfolio that falls into 2 tranches. We have 3 large scale foundational businesses, that's our PBM business. It's our commercial benefits business, and it's our global benefits business. Taken as a whole, that's about $100 billion of revenue. Those are mature, stable, established businesses in mature stable markets that generate low to mid-single-digit growth in a relatively predictable way, high cash flow and importantly, present the opportunity to establish foundational relationships with clients that we could grow and expand over time. We then add to that the leverage we have from our Accelerate businesses, of which is 3. These businesses are in subsegments that have secular tailwinds that are greater for growth, that is specialty pharmacy, our Evernorth care capabilities, and our government benefits business. Taken as a whole that's approaching $75 billion of revenue together. And then the third part of our growth strategy in terms of enabling our sustained growth is enterprise leverage. How do we harness capabilities to do something that any one business couldn't do? Typically leveraging data, talent or, in some cases, client relationships. When you put that recipe together as a whole, we generate 6% to 8% revenue growth, 6% to 8% earnings growth. And importantly, our service-oriented framework enabled us to generate a significant amount of operating cash flow. We project over the foreseeable several years, we'll generate an additional $50 billion of operating cash flow. A meaningful portion of that is deployable back to shareholder value creation, either through accretive M&A or share repurchase as well as an attractive dividend. That enables us to deliver on our commitment, which is on average 10% to 13% EPS growth on average over time. And if you back check us over the last 12 years, we've done that, over the last 12 years and an attractive dividend. My last comments will be relative to forward-looking positioning. There's plenty of areas of innovation we could chat about, two I will call out. In the space of mental health and physical health, we have long been a long-standing believer in terms of the connectivity between physical health and mental health, and have been driving innovative clinical programs, engagement programs and services both for our patients or customers as well as with our physician partners. And our more recent expression of that is a unique program through Evernorth, our Evernorth Vitality Index that measures in a credible way the level of underlying vitality, which starts with health for an individual, for an employer, for community and otherwise, and provides you a pathway to improve vitality. And for example, for employers, we know when we improve vitality, improve engagement you improve retention of those employees, you improve productivity of those employees. Conversely, the opposite exists if vitality is low, you could see that in the community as well. So areas of innovation include the mental health, physical health connection and evolving that into vitality. And then my final comments are we are deep believers in evolving the set of capabilities to making health care more personalized, real-time and coordinated. And we believe a digital-first orientation presents the opportunity to do so, not to the exclusion of physical access and care delivery, but to augment, extend and bring more leverage to the physical assets. So that takes place not just through traditional virtual medical care, but virtual behavioral care, extension of capabilities that are brought into the home, leveraging technology and otherwise. Importantly, as extenders of the care equation not as a means of dis-intermediating the care equation and our Evernorth services portfolio are well positioned. So in summary, strong 2022, good start to 2023 in terms of customer growth, a durable growth profile for our organization with established foundational businesses and accelerated growth businesses and enterprise leverage, a track record of delivering on our targets, and sustained innovation on a go-forward basis. And I just teased out 2 headlines with Vitality as well as with our digital first approach. With that, I'll follow your lead.

Great. Thanks so much. The stock performed exceptionally well last year. When we think about Cigna on a go-forward basis, you laid out 2 roads here. But as I think about the competitive strengths of Cigna, Evernorth really stands out to me. Can you talk about from an Evernorth perspective, do you have all the pieces you need today? Where do you think you're best positioned competitively as we think about the future?

Sure. So when I think about the competitive assets of the franchise, I tend to boil them down and it's at risk sometimes oversimplify. There's 2 pieces we pull upon day in, day out: Deep clinical expertise; and data. Data as a mechanism of providing more predictability, more speed and more precision relative to intervention and how we bring our clinical capabilities and our data together present competitive advantages or points of differentiation for us. And importantly, as it relates to Evernorth as well as Cigna Healthcare, we bring that to market not through products or point solutions. We see that we get the market consultatively, working with employers, health plans, governmental agencies, health care delivery systems to understand the pain points or opportunities for improvement and then design the solutions that best work for them through that lens. Within Evernorth, our Evernorth portfolio has grown with tens of billions of dollars of organic revenue over the last several years, and we continue to grow that. As you look at our Accelerate businesses, 2 businesses within those are Evernorth business: Our specialty portfolio, both Accredo direct to patient; as well as CuraScripts direct to physician; and our Evernorth Care capabilities. Both of those will continue to be fed aggressively, organically and situationally inorganically as an illustration.

As we think about one other business within Evernorth, that's the PBM, something that you know I know well. You had nice extensions with Prime and Department of Defense as well as the CNC win, Centene win. Can you talk about the PBM's competitive positioning as we think about 2023 and maybe even early 2024 comments around the selling season?

Yes. So the PBM, at least come back to that, that's a foundational business I made reference to before. You have a scaled, mature, high-performing business that has very attractive cost of goods sold infrastructure, services and importantly clinical programs. Even over the last several years, we've continued to evolve the clinical programs through the SafeGuardRx programs and the ability to leverage further programs that actually yield value-based care configurations for the benefit of those we serve. And Lisa, to your point, we've had material growth. Looking to 2023, I got to make sure I have the right years that I'm quoting in my mind, we'll have another year of very good retention and new business wins. Early look to 2024 because we're already in that selling season. Beyond the tremendous Centene win, which is strategic, there are some additional wins. And we expect 2024 to be another year of very strong client retention levels because a smaller portion of our businesses out to bid. So strong foundational assets. We continue to invest in them from an innovation standpoint, typically around the clinical side of the equation, and good -- very good retention and good targeted growth.

Over the years, there have been a lot of talk around value-based programs within pharmacy. And I think having followed Express Scripts for a long time. There are a number of different programs. You've talked about, SafeGuardRx and some others, but really proving that the drug that's on the formulary truly works. I think we can go back and we look at what they were able to do in hep C all those years ago, right, really moving patients to the lower cost option. As we think of the next frontier, which is biosimilars, we think of HUMIRA is coming to the market. We know the first product, right, has already been here, but pricing will come. We'll see one small product that will have interchangeability. More broadly, how do I think about biosimilars the opportunity in 2023? Is this more of a '24, '25 opportunity? And how do I think about the margin profile of a biosimilar?

So there's a lot in that very important question. Big picture, this is a tremendous societal opportunity. So before we come to it from a business standpoint, it's a tremendous societal opportunity to create some more affordability or pay for capacity as new high-cost drugs come forward. And we're not the first to blaze this path as a country. There's other OECD countries that are far advanced relative biosimilars. Order of magnitude, we deal with about as a society, about 7% of the specialty drugs as having a biosimilar alternative today. That will rapidly go up 3.5x over the next several years to about 25%. So meaningful alternatives are available. However, biosimilar transitions aren't as simple as the -- on the other side of the pharmacy equation going from a brand to a generic. Typically, you're dealing with a level of clinical engagement that's necessary to make sure you get the right drug for the right patient with the right clinical efficacy, and that's a lot of where the strength of both Accredo and our Evernorth portfolio and coupled with Cigna Healthcare because of our deep physician relationships from a network standpoint. We see this as a tremendous growth opportunity. We see '23 as a transitional year. And if we roll the clock back a year ago, we were very clear that while some thought that 2023 was going to be the pivot year and said that there'll be a couple of points of EPS accretion in 2023, we said no. We view that there'll be continued building momentum for the biosimilar transition in '23, but it will build momentum throughout the course of the year and then build further momentum as you go into 2024. As it relates to margin profile for us, the way in which our business model is built as we align incentives, so although a biosimilar will have less revenue as an example, right, one of the affordability dimensions is the price comes down, so our revenue profile comes down. Our ability to have an equal margin or even slightly better depending on the clinical programs that are required to make the mechanism work are going to be quite attractive. So ending where I started, this is a really important societal win in terms of getting higher adoption of the biosimilars, not just in '23 but as we go forward, to create more affordability capacity for other transformative medications that will come forward that are curative in nature.

And I started the conversation around value-based care and thinking how biosimilars fit into value-based care. But I really think of value-based care in 2 other ways when I think about pharmacy. One, relationships with the manufacturers and programs you can do around value-based care there. But secondly, your thoughts on how important pharmacy is in the total care of the patient and how we think about that from a value-based care perspective.

So 2 different comments. So maybe click back to another tangible example and then come back up to the importance. So we both mentioned SafeguardRx. So think about SafeGuardRx as coordinated clinical programs around a drug class and a drug class being used to address a clinical need. Whereby we've aligned an incentive structure back to the manufacturer that if the clinical efficacy and/or the consistency of consumption pattern by the patient is broken, the pharmaceutical manufacturer takes on some additional economic burden. Said otherwise, we want to pay for outcomes, not just for consumption. And SafeguardRx has over 100 drugs that actually function in that way and that will continue to grow through that lens. Stepping back to your broader point, we have believed and we do believe that in some way, shape or form pharmaceutical innovation or take the word out pharmaceutical and maybe insert the word chemical innovation, presents largely where the majority of health care innovation will transpire over the course of the next decade. That doesn't mean there won't be evolutions in terms of medical devices or surgical interventions, but a disproportionate amount of the curative or life changing, of course, as a treatment for the foreseeable future will be pharmaceutical or chemical in nature. And our ability to have leading resources, both the way in which to work with the manufacturers, the way in which to have use the data to get the precision of the right patient and the right time, and then the clinical coordination the more complicated the drug, the more imperative to clinical coordination that's necessary, we see that as game changing. So it's a big part of the future.

And generally, those people are taking more than 1 drug, right. When we think about the co-morbidities of that individual.

Correct.

As we think about some other things from a pharmaceutical perspective, the IRA may have some unintended consequences as we think about Part D. And I know it's still early on. We did a panel on Monday where we tried to really kind of decipher what does it mean and how are we going to think about it.

What was the answer?

We're still late.

That's okay.

How are you thinking about it from a PBM perspective when we think about Medicare Part D? And then also, you have done a number of programs as it pertains to insulin in diabetes. And that's an area that they're going to cap the out-of-pocket costs.

Yes. So let me come to the end and then work my way back. The number of programs you make reference to, what I'm quite proud of, and actually it was stood up plus or minus to the day 100 days after we closed the combination with Express Scripts was our insulin-based patient assurance program. And we challenge our team to design a program whereby we would cap the cost of insulin out of pocket for an insulin-dependent beneficiary at $25 per month. And we challenged the team to reverse engineer the ecosystem to enable that to happen. Today, the order of magnitude 10 million people benefit from that program today. We took the architecture of that. We shared it with CMS and a part of that architecture is the underpinnings of the CMS program, which have the cap to $35. And what that proves is that you could step up to a challenge and try to get the level of affordability, simplicity and predictability for the patient and beneficiary and the economic incentive line. But you got to do it by challenging the status quo through that lens. Moving back up through the IRA, I think you're right, there's still a lot to be determined. As it relates for PDP, for PDP in aggregate, this will change aspects of how the PDP program work. It will change it across the board, so the competitive landscape will change. Our business model is durable and we thrive in an environment change, and you compete on a relative basis. So you just need to be on the balls of your feet and be prepared to evolve your sets of capabilities to be able to innovate. And if you look at PDP in order of scale and magnitude to our franchise, we typically -- not that it's not important, we typically don't talk about it because it's not a big earnings driver for our franchise in aggregate. That doesn't mean it's unimportant. So IRA is, I think, a symbol of continued evolutionary regulatory or legislative change with seeking to get to better simplicity, affordability and predictability for individuals. We did it 3 years ago with the $25 program. So we received the intent favorably, and we need to be able to flex our capabilities to be able to continue to innovate.

One of the things that came out around IRA is, potentially, could you see more Part D participants move into Medicare Advantage, that this will be a better program for them for the health plans? And is this a pipeline to converting some of those individuals. Do you think of it that way?

You've obviously read the positioning relative to that. And if everything else was static and the decision for a beneficiary was on the margin, and this was the only change, yes. But when you step back, an individual who buys Part D as an individual who's consciously buying something else and is not buying MA from that standpoint. So a beneficiary is deciding they want Medicare fee-for-service and they want to augment it with a PDP and stuff or otherwise through that lens. Having said that, though, a big picture, we all see the same trend, right? Medicare Advantage continues to outgrow the growth of Medicare fee-for-service. It's doing so because it's delivering real value to individuals. Beneficiaries benefit from the clinical quality, the service quality, the coordination and the additional services. And I think to your point, this may be just one more added value proposition that weighs down one side and lifts the other side on a relative basis.

Do you think that that's an education process for the individual? So you say I feel that a lot of times that senior population is not quite as educated. And so is this an opportunity to -- for that incremental education around Medicare Advantage and the shift towards Medicare Advantage?

Well, I'm not sure I agree with your opening statement, because Medicare beneficiary purchasers are, in general, pretty sophisticated when they go out and do their drug compares and otherwise in that lens. However, there may be a further opportunity. And like most populations, Medicare is not a single segment. So you have to orient our way around re-segmenting. So what we see in Medicare is new Medicare eligibles adopt Medicare Advantage at a higher rate than maybe a Medicare eligible from 20 years ago through that lens as well. So bringing more precision and data to figure out where, if you have that education or information sharing may matter, I think that's where it will play out.

In that lens when we think about Medicare Advantage for 2023, I don't think you've released your numbers to date on how the open enrollment season went. Any color that you can add?

So we did do -- you're correct. We didn't release numbers in detail. What we did do is I think we posted a deck in support of this conference. And what we indicated is for Cigna Healthcare lines of business, we're going to grow at least in line with the market. So what some investors concluded from that is if you take MA, the MA extrapolation is the market is going to grow high single digits. So we've essentially published that we're going to grow at least that. And my tone to you all would be we feel good about how we're going to step into January 1 from an MA standpoint and from a growth standpoint and the way AEP performed for us and what we believe we'll see throughout the course of the year, including the fact that a portion of our portfolio is in a 5 Star configuration as well.

Great. Sticking to MA just for a minute, one, if we look at the last couple of years, Medicare Advantage rates came in better than we on the Street had anticipated, I think, better than the industry had anticipated. What are your thoughts going into '24 at this point?

We don't know. You're asking me to look in with several other questions, crystal balls, which I don't have one. I think we could be instructive by looking to the past to look to the future and whether it's '24, '25, that rate environment tended to do this over time. And over time, when you draw a line through it, you get to a reasonable result, but it ebbs and flows. So if you take your tee up, if it flowed a little bit with the rates being pretty good, it may speak to the rates being under a little bit of pressure. I'm not sure if that's '24 or '25, but it may speak to a little bit of pressure on the rates.

Just from our perspective, that's the way we're thinking about it as well, kind of maybe 0 to very low single digit, 1% or 2%. And it feels that, that's where consensus is going, just for whatever it's worth. Sticking on that topic of DC and MA, we're all looking to the ruling on February 1 around RADV. And I've asked other managed care companies that have been here this week, their thoughts around it and how they're thinking about that going into that ruling. And I'd love to hear your thoughts as well.