The Cigna Group (CI) Earnings Call Transcript & Summary

Pleasure to be introducing Cigna. Cigna Group is one of the largest providers of health insurance in the U.S. and also one of the largest pharmacy benefit managers. Presenting today, we have Brian Evanko, who's the CFO of the company. I don't know, Brian, if you have anything you want to start off with before we jump into Q&A.

Yes, maybe a few things, Kevin. Thanks to you and Bank of America for hosting us here this week. We just reported our first quarter results last Friday, so not a lot of new information given it's just been a few days that transpired since then. But our first quarter results were ahead of our expectations. We delivered $5.41 of adjusted EPS, which was better than what we had been projecting, with the upside driven by our Cigna Healthcare business in particular, which is the health plan side of the franchise. So think of roughly 40% of the company there. The favorability was in the medical care ratio, specifically in viral-oriented conditions in the quarter. Our Evernorth business continues to perform really well. So we had a good quarter in Q1 here and delivered against our expectations there. And in aggregate, the revenue for the franchise came in ahead of expectations as well. So good start to the year. As it relates to the full year 2023, we've increased our EPS guidance for the year to at least $24.70 per share, which is a $0.10 raise off of where we were. We increased our revenue outlook by $1 billion for the year as well and also increased our Cigna Healthcare medical customer growth expectation to be at least 1.3 million customers off of where we started the year. So really pleased with the quarter; the strong guide for the full year, which also includes a number of embedded earnings opportunities that are not included in the guide. And the final thing, if you didn't see, we did proactively offer a series of disclosures on Friday associated with our Express Scripts pharmacy benefit manager. Given the amount of rhetoric that exists across the ecosystem right now and the number of incorrect data points being introduced from various stakeholders, we thought it was really important to be on the record by specifically putting forward some quantitative and qualitative information in a formal SEC setting such as our call. And also, we had supplemental 10-Q disclosures along with the micro site that we introduced with some important data points to help both investors understand what our PBM does do and doesn't do, but also make sure that broader stakeholders are familiar with the value we create. Because our clients hire us for a reason, because we're very good at managing prescription drugs on their behalf and in driving value back to them. So for all those reasons, we thought it was important to step into that discussion. And Kevin, I'm sure we'll spend a little bit of time on that topic here today.

Yes, definitely. So that's a good setup. I guess maybe starting on the Q1 performance in the managed care side of things. Trying to square everything that all the companies here are saying this week. You got the hospital companies, the med tech companies saying utilization is great, growing really well, and it's going to continue. And managed care companies saying everything is fine. This isn't an issue. So can you help us square how those 2 seemingly incongruent statements come together?

Sure. As we stepped into 2023, we expected that there was going to be a more normalized level of utilization in the health care system compared to the COVID years where there was quite a bit of disruption. And when I say a more normalized level of utilization, if you go back to 2019, roll that forward for 4 years at, call it, normalized levels of cost trends, that's what we assumed in our pricing and our planning for purposes of 2023 outlooks. And that's what we saw in the first quarter. So if you bifurcate the viral and the nonviral, so viral here means flu, RSV and COVID. The viral conditions in the quarter came in a little lighter than our expectations, and that drove the favorability in our medical care ratio in the quarter. The nonviral conditions came in very much in line with our expectations. So I think that squares a little bit to the commentary from other parts of the supply side here in health care. Also important to keep in mind, year-over-year, if you look at first quarter '23 versus first quarter '22, the percentage growth in nonviral conditions was high because the first quarter '22 had a depressed level of nonviral utilization given all the Omicron-related COVID activity in that time period. So a little bit of a lighter comp created a high percentage growth rate year-over-year, but in aggregate, a more normalized level of utilization is what we saw for nonviral conditions in the first quarter, and that's what we've anticipated for the remainder of the year in terms of what's embedded in our guide.

Yes. So I guess from that perspective, the year-over-year -- you said normal trend for the year, but you always thought Q1 was going to look really big from at least a non-COVID volume perspective. And then the growth rate should be decelerating as the year goes on, just where the comps get more normalized.

In nonviral, yes. The all-in cost trend, we anticipate '23 versus '22 being a more normalized level plus the incremental provider inflation that we've priced for and planned for when you think about a '23 versus '22 all-in cost trend level.

Okay. That makes sense. And then I guess when we think about -- on the PBM side of things, it was great to get the disclosure that you provided, very welcome. I guess the -- as an analyst, you always wonder if you push the envelope too far, but by saying you get 20% of your rebate of your profitability from rebates and spread. Can you help us think about where the other 80% is coming from so that we can understand a little bit better how that segment makes its money.

Sure. And for those that maybe didn't see the disclosure, what we talked about on Friday is of the Evernorth segment, which is our health services company, we're on $6.4 billion or more income there this year. Approximately 20% of that is associated with PBM retained rebates and network retail spread. So it was important to us to get that data point out there because there were some wide ranges on that -- those sources of income for us. We wanted to help investors to narrow down the range a little bit. So 20% of the $6.4 billion in Evernorth is about 60% of the company, if you think about income, so 20% of the 60% is associated with those 2 earning sources. So we thought it was important to put that out there. Now the other 80%, a portion of that comes from PBM fee-based income. So we have a variety of service and clinical programs through the PBM, whether that be clients that just want to use our network or whether those that want to use our clinical programs or whether those that want a more fully transparent model, such as the ClearCareRx program we introduced in April, where we passed through all the rebates and there's no spread contribution. Those are all examples of PBM fee-based income that comprises a portion of that 80%. Secondly, our specialty pharmacy, Accredo, which is a great asset, a highly differentiated and a strong economic moat around this business currently comprises about 40% of the revenue of Evernorth and also has a meaningful income contribution. So here, you can think of not just filling the prescriptions, but it's a very clinically oriented business, meaning we have over 500 home infusion nurses that go to people's homes and provide infusions in their homes. That sort of thing happens in our specialty pharmacy in Evernorth. The third area I'd highlight is our home delivery pharmacy. So as the name applies, we deliver prescriptions directly to people's homes. And then the fourth area is Evernorth Care Services. So here, you can think of more health services versus the other categories I just described are more prescription drug-oriented. Evernorth Care Services oriented around care management, care coordination and targeted care delivery. So we have our MDLIVE virtual care business in here. We have our behavioral health business in here. We have our eviCore medical benefits management business in here, amongst other health services capability. So those 4 pieces, PBM fee-based, specialty pharmacy, home delivery pharmacy and Evernorth Care Services comprised that other 80%.

Was that in order of importance or...

Those are not ranked from a quantitative standpoint. I was just giving you a sense for the lay of the land.

Because the 40% specialty, I guess I usually think of specialty is a little bit lower margin. Is that the right way to think about it? Or is it -- or is about the same margin as the rest of Evernorth...

If you think of Evernorth, in aggregate, delivers 4% to 4.5% margins, which we -- again, we think are competitive, sustainable in a variety of scenarios. The specialty pharmacy, you can think of in that zone, maybe a little on the lower end of that, but directionally in that general zone. So that's obviously a meaningful contributor to the 80%. But I would want you to think it's just exactly 1 for 1 to the revenue either.

And then the services business is like 10% of Evernorth. Is that -- should that also be kind of the way to think about that profitability?

So from a revenue standpoint, it's about 10% of Evernorth today. Over time, that will grow faster than the rest of Evernorth because of the investments we're making as well as that's an area we seek to be acquisitive over time. And so that will show a higher percentage growth rate. Over time, that will be a higher-margin part of the segment, too. So I mentioned 4% to 4.5% margins for Evernorth. Over time, the health care services portfolio will perform above that. Today, it's not because of the level of investment that's going in. So it'd be reasonable to think approximately commensurate with the revenue just from a directional standpoint.

Okay. All right. So I think that gives us enough to get a better sense. I appreciate that. I guess when we think about then the way that you guys have been investing in your business, so you bought Express Scripts, you delevered, you're now generating huge amounts of cash flow. We kind of looked around and you see all these other companies seem to be buying things, whether it's providers or home health or technology. And you made a couple of investments, some smaller things that you mentioned on the health services side. You've done a couple of things with VillageMD, but like in general, it feels like you're not investing as much as some of the peers are. Do you guys at all feel like there's an arms race out there that you need to be competing in? How do you feel about your capabilities? And what do you need to invest in?

I appreciate the question and I totally agree with the comment about the cash generation. That's one of the things we take most pride in, right? This year, we'll generate over $9 billion of cash from operations. And the last 12 months, if you did the trailing 12, you'll find over $11 billion. So really strong cash generation and the franchise will continue to generate a tremendous amount of cash in the future. The last few years, we have used quite a bit of that deployable capital for share repurchase to your point. A big driver of that was the dislocation in our share price. We continue to view share repurchase as a very attractive lever given where the stock trades today. That said, we will be more acquisitive on a net basis in the future, I think, than we have been the last couple of years. If you look at where the capital has been deployed and really with 2 specific areas of focus, one being the Evernorth Care Services platform that I referenced a moment ago and the second one being our U.S. government programs and services. So I'm not sure I would use the term arms race per se, but we are interested in acquiring more capabilities in the Evernorth Care platform, whether that be care management, care coordination and targeted care delivery, but in a manner that's synergistic with the rest of the company. So importantly, as we look at potential deals, we have to see a strong level of synergy versus just owning something to own it. So when we think of the acquisition of MD Live that we did in 2021, we saw strong synergy with the Cigna Healthcare platform. We also saw strong synergy with Evernorth's health plan clients who can use those capabilities. The investment we made in VillageMD, just earlier this year of $2.7 billion, while it wasn't an acquisition per se, was an example of capital deployment toward care services capabilities, which gets us into value-based care, not just in the government lines, but in the commercial lines since 60% of the patient panel of VillageMD is commercial employer lives. And our Cigna Healthcare business is heavily commercial employer weighted today. So all those things we found attractive and synergistic. And you should expect there to be more investment in that area going forward.

So when you think about that, I mean, I guess, VillageMD I thought was kind of an interesting deal for you guys for a long time because you said we don't need to own providers. And then -- you then make an investment in a provider, but it's a minority investment, so you don't control the provider. So like how do you think about why VillageMD, how do you think about -- how much control you need of an asset to make an investment worthwhile?

Yes. I think we've proven over time, if you look at the health plan for a minute in Cigna Healthcare, that a partnered model can drive great outcomes, partner with the delivery system. So we've been able to continue to drive great affordability for our clients and customers. As evidenced by, we added 1 million customers in 2022. We're on track to add 1.3 million or more in '23. Most of those coming from commercial employer fee-based relationships where the cost of goods sold is a key driver of whether we win or lose the client. So -- and that's been done in the context of partnering with the delivery system as opposed to owning the delivery system. That said, we don't have a religious opposition to ownership. It just needs to make sense financially from the standpoint of the synergies of any potential acquisition. The VillageMD investment intentionally was not an acquisition, it was a minority investment. So we have about 13% to 14% of VillageMD with our investment. We'll receive not only the equity component, but we have a dividend stream of 5.5% off of $2.2 billion of that, that flows through our P&L starting this year. But importantly, the strategic component of this is why we did the deal, meaning Evernorth, in partnership with VillageMD, is constructing as we speak, local market value-based care ecosystems, starting with primary care, but including specialty care that allow us in those geographies to essentially monetize in a shared savings context when we save money for the finance year. So if we're able to drive care to a more effective site or we're able to reduce unnecessary tests, those savings will be shared between the payer or the financier of the plan sponsor, VillageMD and Evernorth. And this isn't a commercial employer platform in addition to Medicare. So a little bit different than when people tend to think value-based care, they think Medicare Advantage, capitate and I'm done. In this case, on the commercial employer ecosystem, we're talking about creates value-based sharing relative to a reference point across the plan sponsor, Evernorth and VillageMD. And over time, those handful of local markets that we're building out right now will be extensible to other Evernorth health plan clients. And that ecosystem will be extensible to other provider partners outside of Village, because Evernorth owns the risk-based entities that I made reference to. So that's the reason this is so interesting to us. And it doesn't just apply to our risk book. It also applies to our self-funded commercial employer book who has VillageMD in their network.

So I guess from that perspective, that it's a partnership, was the equity investment necessary to get that partnership? Or was that something you could have done without that? I guess, in the past you kind of talked about how we don't need to make investments if we can partner, we're big. So why did this have an equity component? Alongside that.

Yes. We felt in this case, the equity ownership would a, accelerate the progress that we were talking about through aligning incentives; b, it's already allowed us to strengthen our position from the standpoint of our health plan in those local markets where Village has a presence. And finally, I think the mutual alignment from the standpoint of our management teams made us feel like culturally this made a lot of sense to get closer. And it gives us optionality down the line. Do we sell our position? Do we increase our position depending on how things transpire?

And when you mentioned -- you said one being Evernorth care services and the other one being government services. So like what exactly does that mean? Does that mean managed Medicaid and Medicare Advantage or is there other components to that potentially?

Yes. The phraseology we've been using is U.S. government programs and services, which you can think of through the Cigna Healthcare platform being a payer, right? So today, we have a Medicare Advantage business, about 600,000 customers, give or take, right, relatively small nationally. We have some good density in certain local markets, but relatively small nationally. The individual exchange also in there, so over 700,000 customers right now, but we're only in 16 states, so potentially interest there. And then our Medicaid business, which today doesn't exist in the health plan since we divested the last of our operations, is another area of potential interest for us in the health plan. And then the service company, similarly serving government-oriented patients or individuals is of interest to us through different assets. But you can think of that one as both having a health plan component as well as a service component depending on the asset.

Okay. And then I guess when you guys talk about doing deals, you talk about having an accretion kind of target as part of your criteria, and you target -- and you talked about high visibility of closing. Does that stop you from doing -- should we be not thinking about transformative deals because those -- it's harder to check those boxes when you do these really large transactions and we should be thinking smaller things? Or does that not necessarily rule out anything?

Yes. And I think your point about larger deals is really important because smaller M&A has to be strategically aligned, but we're a lot more comfortable with something that might be a push financially or in some cases, considering dilutive transactions if it's on the smaller end. So some of the smaller acquisitions we made over the last 5 to 10 years were not accretive immediately. And so that's the type of thing strategically we will continue to do. When you get into the larger scale transaction zone, that's where we said 3 criteria need to be met: one, it needs to be strategically aligned with where the company is heading; two, financially to the point of it needs to be an accretive transaction; and then thirdly, have high probability of closing. So all those 3 criteria need to be met for us to consider something larger. Obviously, there are only a finite number of potential assets that fall into the categories we referenced earlier that would fall into that category, but we look at each of those criteria.