The Cigna Group (CI) Earnings Call Transcript & Summary

Thanks, everybody, for coming. I'm Gary Taylor, I cover health care facilities and managed care. Anyway, my pleasure to introduce Cigna. Cigna is a global health care company with 2 distinct segments, Cigna Healthcare and Evernorth. Cigna Healthcare is the health benefits business. That includes the third largest commercial risk, health insurer, the largest ASO administrator. Evernorth health services operates the second largest PBM and also the second largest specialty pharmacy in the U.S. as well as various health care services businesses. And we have Brian Evanko, the Chief Financial Officer, joining us today for the chat. So Brian, thanks for being here.

I think I'll start with just a question I've had from some folks, but long-term earnings guidance for Cigna is 10% to 13%. Going into 2023, you've guided lower than that. You called out a couple headwinds to that and sort of that the underlying growth ex those headwinds to be in line with your long-term range. But maybe just refresh us on some of those headwinds and how that's shaping up?

Sure, Gary. And thanks to even Cowen for hosting us. Are you guys hear me back there? In the back? No. I'll try this. Maybe this will work a little bit better. So again, thanks to you and the team for hosting us here. As you mentioned, our long-term average annual EPS commitment is 10% to 13% per year. And if you look back over the past decade, we've grown 14% compounded in terms of our adjusted EPS. 2022 was a strong year, where we came in at 14% EPS growth. So we're pleased with both the long-term track record of success as well as the strong year in '22. To your point, our '23 guide, the adjusted EPS growth rate is below the 10% to 13% average annual growth rate range. And there's really 3 drivers of that, that I'd call your attention to. One is our Centene contract win, which is effective January 1 of '24. We will spend about $200 million in 2023, preparing to onboard Centene. So before the revenue comes in, we're going to be spending money, which naturally creates some pressure on the P&L. The second item, which we haven't actually discussed in our prior earnings releases, but is relevant for 2023 is our defined benefit pension plan, which is overfunded. The way that U.S. GAAP accounting works in this context is we have to reset each year the interest rate assumption. And with interest rates popping up over the last 12 to 18 months, it's created about $100 million of U.S. GAAP expense in 2023, that wouldn't have been there in the absence of that interest rate increase, which weighs a bit on the '23 EPS growth rate range. But importantly, this is a non-cash expense because we're overfunded. We have no required contributions into the pension. But the way that it is recognized causes a bit of a pressure point on our 2023 EPS growth rate range. And then finally, as we always do stepping into a new year, we tend to start with the level of prudence in the guide. And our convention isn't at least convention. So our EPS guide for this year is at least $24.60, which you should view as a floor as opposed to a range. So those 3 factors combined lead to the EPS growth for '23 being a little more muted compared to our long-term expectation.

Got you. And just to be clear, is my mic picking up? Okay. I'll leave it there. But the -- so the $100 million, I think, is maybe $0.25 or so after tax, if I'm thinking through that correctly quickly. But that was -- this isn't new. This was contemplated when you gave the guidance for '23 back in January.

Correct. Yes. So we reset these each year toward the end of the year. And typically November, December, where we set the interest rate assumption. You're right, $100 million pretax translates to roughly [ 1/4 ] EPS.

Okay. Great. I'm going to slide a little curve ball in just because it seems a little more topical lately, but it's big picture. This is probably the most common question I've had recently, but what do you make of the regulatory noise around PBM right now? I mean, there's always kind of an undercurrent, but you had the 2022 PBM Transparency Act. It didn't move, but there's a little bit of congressional interest in the FTC either late last year, early this year, wants a whole bunch of information from the industry. We think that's probably a year before we hear anything from them. And then last week, the Oversight Committee wants more information. So what do you make of that? Is it because insulin and EpiPen during the pandemic seem to get a lot of attention and we're heading into election here. Do you think there's anything besides usual kind of undercurrent of politics that are driving what seems to be some extra scrutiny?

There's certainly a bit of additional scrutiny recently that's come up, as you pointed out, from those different areas. But if you go back in the 25 years I've been in the health care world, there have been many instances like this where it spikes and then we prove the value that we create for our clients and customers and then it moves on, right? And so we're confident that with the inquiries that are underway now, we're going to be able to tell our story, show the value creation from the standpoint of the data and the analytics that surround that and come out stronger on the other side. That said, clearly, there are some opportunities that led to these inquiries. One is we're seeing more and more independent pharmacies, put their hand up and saying, I'm struggling to survive. So maybe the PBMs are to blame. Two, we have, in some instances, some of our patients who have high cost sharing, right, they might be in a high deductible plan. They might have a specialty pharmaceutical it needs to get filled, and that creates noise in the system, particularly early in the year. And it's important for the industry to get after that as an opportunity. And then finally, part of our role in terms of controlling costs is at times, we have to say no where we have to gain access to certain drugs and that creates noise at times. But we're -- as I said earlier, Gary, we're confident that through the ability to create value for our clients and customers and participate in some of that value that we create, we're striving to the lowest net cost outcome for the finance year and ultimately creating value for clients and driving cost out of the system compared to if PBMs did not exist.

Thanks. I know I'll fall back into saying PBM when you'd rather me say Evernorth. So you can correct me on that as we go along because, obviously, Evernorth has become much larger than just sort of the core PBM capabilities. What are your kind of core outlook for profitability at Evernorth? I think -- quite frankly, there's been a bear case about EBITDA per script, which is how traditionally PBM has looked at for a decade. And if I look at my model, I think the EBITDA per script the same today as it was 10 years ago. So it hasn't compressed materially despite concerns that people have had about the space. So when you just think about Evernorth going forward, I guess, one, what is kind of the core margin outlook? And then two, do we need to start moving away from this EBITDA per script because you're obviously growing the services part of the business model as well?

Yes. So I appreciate you leading me to the correction of the way we think about Evernorth because we definitely see Evernorth is far more than our Express Scripts PBM, the Accredo Specialty Pharmacy, which has been growing double digits for many years in a row now is almost 40% of the revenue in that part of our company -- in the service company. And our health services business, which right now is relatively small but growing, also represents circa 10% of the segment. So the per script metrics become less and less relevant each day as the specialty pharmacy continues to grow at a more rapid rate. To your point on margins, we're currently operating in the zone of about 4.5% for the segment, but that reflects many different sub margins by business type within. And we wouldn't expect there to be a massive amount of margin change at the product level or the solution level, but the overall segment margin level will change based on the mix of clients and customers and products within. Importantly, for this year, we're on track for income of at least $6.4 billion, which represents growth of 4.5%, even with the Centene-related onboarding costs I made reference to. And on average, over the longer run, we'd expect this segment of the company to grow 5% to 7% per year. And we've significantly outperformed our original expectations at the time we acquired Express Scripts back in 2018, where at that point, it was viewed as a 2% to 4% grower and now we're on track for 5% to 7% per year on average.

There's definitely parts of Evernorth that are growing a lot faster. So that line, I always ask about after the quarter that fees and other income is like $7.3 billion in 2022. It was up 19%. What are sort of the biggest contributors to that line? And can you give us a sense of that 19% growth? How much of that was organic?

Yes, you're right. The fees and other revenue line has been growing quite substantially for us the past several quarters now. A few different components in there. One in the health services space that I was alluding to just a minute ago, MDLIVE visits and fees show up in that line. Secondly, our eviCore benefits management business, the medical benefits management business shows up in that line. Thirdly, our behavioral health care solutions show up in that line. In the pharmacy space, we have many clients now who are asking for network management services or formulary management services, but they want to pay their own claims. When we have those relationships, that shows up as fee income in that line. And then we have clinical programs as well in the pharmacy space like SafeGuardRx that show up in that line. The vast majority of that growth was organic. So MDLIVE, which we acquired in April of 2021 with the exception of that first quarter of '21, everything else in there is organic growth. So we're quite pleased with that.

And as on MDLIVE, is the primary care part growing as fast or slower than the behavioral piece? Because I know some of the other virtual care companies that's like the behavioral piece is the piece that's really been driving a lot of outsized growth lately?

We're showing strong growth across the board in MDLIVE. So if you look at the total visits for the full year of 2022, you can think of percentage growth in the high teens for MDLIVE compared to '21. And if you think about how the world changed, '22 should have been a tougher year to have virtual care growth than '21 when everyone was locked down. So high teens growth across the MDLIVE platform, which we're quite pleased with. About 1/4 of all of the MDLIVE visits are behavioral health in nature right now, which means the other 3/4 are unrelated to that, their primary care as well as we continue to build out that portfolio to include the opportunity down the line to do more chronic condition management, which is where we think the real opportunity is over time to link the complex physical care delivery for complex chronic care with the virtual capabilities that we have within MDLIVE.

Got it. I want to talk about VillageMD a little bit. I think probably 3 quarters of last conference call, it felt like we're about VillageMD. So the $2.7 billion investment for a mid-teens stake in VillageMD, Summit and what's -- I forgetting. What was the other part of Summit/...

CityMD.

Okay, yes. So your investment was in that whole piece, right? So I guess I've got questions, client questions around the gamut from -- is that design that -- the Cigna Health business is going to start sending its members to VillageMD is preferred primary care. On the call, you kind of talked about being able to sell in some of your care management services from Evernorth into VillageMD as a customer. I've got people that think but gee, ultimately, Walgreens, VillageMD, Cigna starts to look a lot like this super vertically integrated CVS. So I still think people are kind of all over the board really trying to understand sort of the key motivation behind that deal. And I know David spent a lot of time on the call, but maybe take another crack at like 2 or 3 key points on why you guys wanted to do that?

Sure. And you're right, they consumed 4 of the 13 questions on our earnings call, but who's counting. Relative to this opportunity, which we're thrilled with, you should think of it in 2 broad categories in terms of why we did it. One, the financial. Secondly, the strategic. Financially, we invested $2.7 billion into the combined Village plus Summit company. And for that, we got about 14% equity. And obviously, you can do the math on what that equates to. Importantly, though, we also will get a dividend of 5.5% on $2.2 billion of that. So that made the financial picture more attractive than just having the minority equity ownership. But the strategic piece of this is, for us, far more interesting and important over the medium to longer term. And importantly, the way you should think about the strategic interest here is really it's an acceleration of our value-based care strategy. And our value-based care strategy is not one that's simply around ownership and capitation. It's much more about partnership and enablement. And so what we're intending to build here in partnership with VillageMD, so you think of it as an interoperable set of capabilities, combining Village's primary care, Cigna's supplemental care. So think of virtual through MDLIVE, think of our behavioral health and think of our care coordination capabilities powered by data and insights, all of that in a risk-based construct, meaning where we generate savings through that interoperable ecosystem at a local geographic market level, those savings will be split between the client, meaning the health plan or the employer, Village and Evernorth. And so I said Evernorth, I didn't say Cigna because Evernorth, our service company will be the part of the company that's actually creating these constructs. So local market level, we'll start Chapter 1 of this will be in a handful of geographies where we have high density of Cigna Healthcare health plan lives and relevance in terms of Village having quite a bit of physician panel. And so in those geographies, there will be a handful of those in 2023, we'll build these risk-based constructs. And then in the medium term, we'll extend that concept to additional geographies, other places where Cigna Healthcare has a lot of health plan lives and Village has physicians as well as other provider partners. So this is an Evernorth capability that will be extensible to other geographies, it will be extensible to other providers. That's why Evernorth is playing the role. Cigna Healthcare health plan will be a beneficiary, but it's not a health plan capability, it's a service company capability and introduces new profit pools for us, but also the opportunity to take cost out of the system. So that's how I broadly think about it.

Got it. So Cigna health plan business could be a customer or a beneficiary of this local ecosystem they have created, but so could another health plan or employer? Is that right way to think about it?

Correct. Phase 1 you should think about as being built for the Cigna health plan, but it can be extensible to others.

And with a particular focus on where you have MA or very line of business agnostic?

One of the things we really liked about the Village partnership is it's about 60% commercial employer today combined with -- when you combine with Summit and the balance mostly MA, quite different. Most people, when they think value-based care, they think MA, they think risk-based capitation transfer, et cetera. And so in this instance, it allows us to get into the commercial employer space with value-based care solutions in a very different way than what we typically do in other geographies. So we like that quite a bit. Now it doesn't preclude MA by any means, but it allows us to get into significantly more commercial employer populations.

And are any of those contracts between Evernorth and Village are those in place today? Are there any certain amount of guaranteed contracts? Or that's all getting built now from the round up and then it goes live at some point later this year in '24?

Yes. The -- so today component of our contracting with them, you should think of as traditional provider networks. Meaning we have Village and Summit physicians and Cigna Healthcare's provider networks today, but not the value-based care model I just made reference to. So our investment into VillageMD was predicated on building the value-based care constructs, the interoperable networks I described. And so those need to be constructed geography by geography across the country. And as I mentioned, we expect a handful of those by the end of '23 to be up and live.

Maybe last one on this. Any like specific year 1, year 2 goals that you might be able to share from this? I think it's building. It's getting going, but as investors are sort of evaluating over the next 12 to 24 months, is this taking off, is getting built the way that Cigna hoped or intended? Are there any milestones you could point us to prior?

Yes. We'll think about what to give you in terms of more detailed insights in terms of our quarterly results. You should not think of the value-based care constructs as being particularly material to the '23 financial results, meaning the faster they come online, the better, but not particularly material to our outlook. The dividend income, obviously, it starts to accrue to us immediately given that the money went in, in January of this year. So that's the bigger driver financially for us in '23.

Got it. Here's another topic that's really been on investors' minds over the last 12 months or so biosimilars. I know you guys have talked a lot about it. You spent a lot of time last summer at your Investor Day talking about it. How would you explain? And I think Evernorth, you were able to boost the OI growth target by 1 point long term based on the multiyear trend you see in biosimilars. How, in simplest terms, would you break it down that biosimilars help Evernorth's revenue and profit trajectory?

Yes. In the simplest terms, the way we tend to think of it is whenever there's additional competition in the drug supply chain, that's when we go to work, and we're able to drive further cost out. And so today, approximately 7% of all of our specialty drug spend has competition. And the other 93% does not, right, which is a problem because when you're a single source, you have much less negotiating power than if you've got competition in the market. So one of the beauties of biosimilars is it brings something that's chemically equivalent up against the reference drug and allows companies like Evernorth to negotiate against their respective manufacturers and get optimal terms on behalf of our clients and subsequently our customers. And so we've been able to see value creation here in '23 already from HUMIRA having a competitor in the market in February through the Amgen drug. And in the third quarter of this year, we'll see additional competitors come to market. And each of those has the net effect of bringing the lowest net cost into the market. And when we create that value, meaning we're able to take cost out, we're able to essentially keep a component of that or a fraction of that. So that's the way to think of why it's valuable for us and Evernorth. But the lion's share of that benefit is going to the financier our clients. It's not going into us, but we're able to keep a piece of it. And to your point of the increased long-term outlook for income, a portion of that is biosimilars, not all of it, though. We also expect higher growth in the health services component of Evernorth as we were touching on earlier.

Got you. Let's shift to the health benefits business for a few minutes. So let's start with MA, not your largest business, but very topical to investors because of the advance notice, the 2% rate cut and the expectation that '24 is going to be a little more challenging. Every year is a [ sale for ] benefits versus enrollment, trade-off, but it's a tougher [ sale for ] if the benchmark moves down 2% instead of plus 3% basically. How are you guys thinking about that at this moment? In particular, have you run numbers on how your numbers flow through that new risk model that CMS has promulgated? And how do you think that -- if it stands, how do you think that impacts your ability to grow in '24?

Yes. So lots in there. I'll try to be as concise as possible here. So first of all, the Medicare Advantage program, overall, we see as a great example of a public-private partnership over time. And you can see it in the form of not only the growth in the market but the satisfaction levels from the beneficiaries. Now that we have over 30 million people who are enrolled in Medicare Advantage plans, it represents about half of the U.S. Medicare population. So we view it over time as being a great example of a public-private partnership. And we've been participating in that, but obviously, to a lesser degree than many of our competitors. We currently have about 5% of Cigna's total revenue, and we've got about 2% national share, if you look at the live. So that's a big opportunity for us to grow over the longer term. A really important part of this, though, is the funding of the program, and there have been 3 things over the last several months that have started to put a bit of pressure on the funding. The first was the Stars changes that are effective for the 2024 revenue year, where the industry in aggregate, came down, which means the funding level came down. Cigna's impact was very consistent with the overall industry. So if you look at the percentage of our lives and 4 Stars, it moved very similarly to the industry. You should think of that as pretty much tracking. But that was one example of a revenue headwind when you think about program funding. The second one was the RADV rule that was published a little over a month ago now, which -- while the final rule was certainly less extreme than it could have been still looks like it will take a bit of funding out of the program over time through the retrospective audits. And from our point of view, we would expect to have a similar level of kind of 2% type impact. If you think about our national share, there's no reason that Cigna will be more or less exposed than anyone else as it relates to the RADV rule. The final item as it relates to the 2024 rate notice, so the plus 1% headline growth number minus the 3% or the...

Yes, we never pay...

The risk adjusted model gets to the minus 2% you referenced to. So our impact is we run our own book of business through is very similar to that minus 3% in terms of the impact of the risk adjustment model. But what we do see is when we break it down by subsegments, there's quite a bit of variability by geography. There's also variability based on patient type. So for example, dual eligibles appear to have a more negative impact versus new to Medicare individuals seem to be a little more favorably impacted from it. Similarly, risk-bearing provider groups that we partner with seem to have a more negative impact, whereas those in a more traditional fee-for-service contact a little more favorable. So there's variability from all of that. So I would expect some of our competitors likely have a more negative effect than we do. But in average, for us, we're coming in very close to the industry numbers that were published by CMS.

And so as you look at '24, I mean if the advance notice stands, you can either take a substantial possible margin hit or you have to rein in the benefit through the bid structure to sort of protect margins, rein in benefits in theory that has some impact on enrollment growth for the industry. I know you guys are hoping and intending to grow faster than industry and MA for a period of time. Is that the way you look at '24, if the rule stands, whatever you thought the industry might grow, you probably have to rein in that growth expectation modestly. Is that fair?

Well, I think your caveat of if the rule stands is a really important one because there's still 4 weeks or so before we get the final notice, and a lot could change in that time period. But importantly, the MA market is so localized when it comes to bids. I mean we're putting bids together, not only at the product level, but down at the MSA and then County ZIP level. So it's very micro market. So it's -- from our point of view, too early to conclude that we would have a low growth year or a no growth year. And we remain optimistic over the medium to longer term that this will continue to be a very attractive secular growth market. And then we'll participate in that and be able to achieve our longer-term goal of 10% to 15% average annual growth.

Switching to the commercial business. What are you seeing from employers right now? I mean, unemployment is what a 50-year low. I think actually we're going to have an employee benefits panel tomorrow morning, so ease that a little bit. But what are you guys seeing employers do? I mean, generally, what we're hearing is unemployment is low. It's a really tough environment for employers to make carrier changes, material benefit changes, cost shifting, like all that sort of stalls because they're using benefits as a recruitment and retention tool, and that's an important part of the total compensation equation. Are you guys seeing anything different from that? And how would you characterize just the underwriting environment for '23 now that we're done with that?

We've continued to see quite a bit of interest from our employer clients in maintaining and/or in certain instances, enhancing benefits to compete for talent. So to your point, 3.4% unemployment rate right now. Low workforce participation rates, all those things are creating dynamics where employers are competing very aggressively for talent, definitely not backing away from health benefits. So we're seeing that's just a confirmation of your comment, Gary. Additionally, there's a lot of interest in behavioral health, where we're seeing higher levels of utilization of behavioral benefits than we've really ever seen. And then finally, more and more of our larger employers are seeking to consolidate some of their point solutions into more of a full-service provider of which Evernorth is one. There are others in the market as well. So those are a few of the more directional trends that we're seeing. The pricing environment remains rational. So as we always do, we price to forward-looking cost trends, and we were expecting this year to see more normalized levels of both utilization and unit cost trend after we had a favorable 2022. And on top of that, we expect some level of provider inflation, which is already essentially locked into our contracts to the tune of, I think, 50 to 100 basis points that's being passed through into our pricing as well.

You've sort of anticipated some return to normalization. I mean, we've seen in some of our surveys and third-party data that in the first part of the year, it does look like certain parts of the country and certainly hospital seems to have picked up. Is there anything you guys are seeing that's surprising or inconsistent with how you think you've priced the book of business this early in the year?

So far Q1 is tracking in line with our expectations. So there's nothing I'd call out here that's abnormal in that respect. And again, that's in line with our expectations. Others may have had different expectations. But we're seeing patterns largely consistent with what we expected to at this point.

Great. We're out of time. Thanks, everybody, for joining us.