Earnings Call Transcript
Cigna Group (CI)
Earnings Call Transcript - CI Q4 2020
Operator, Operator
Good morning. Ladies and gentlemen, thank you for standing by for Cigna's Fourth Quarter 2020 Results Review. At this time, all callers are in a listen-only mode. We will conduct a question-and-answer session later during the conference and review procedures on how to enter the queue to ask questions at that time. As a reminder, ladies and gentlemen, this conference, including the Q&A session, is being recorded. We'll begin by turning the conference over to Ms. Alexis Jones. Please go ahead, Ms. Jones.
Alexis Jones, Lead Principal for Investor Relations
Good morning, everyone, and thank you for joining today's call. I am Alexis Jones, Lead Principal for Investor Relations. With me on the line this morning are David Cordani, our President and Chief Executive Officer; and Brian Evanko, Cigna's Chief Financial Officer. In our remarks today, David and Brian will cover a number of topics, including Cigna's full-year 2020 financial results, as well as an update on our financial outlook for 2021. As noted in our earnings release, when describing our financial results, Cigna uses certain financial measures, adjusted income from operations, and adjusted revenues which are not determined in accordance with accounting principles generally accepted in the United States, otherwise known as GAAP. A reconciliation of these measures to the most directly comparable GAAP measures, shareholders' net income and total revenues, respectively, is contained in today's earnings release, which is posted in the Investor Relations section of cigna.com. We use the term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance. In our remarks today, we will be making some forward-looking statements, including statements regarding our outlook for 2021 and future performance. These statements are subject to risks and uncertainties that could cause the actual results to differ materially from our current expectations. A description of these risks and uncertainties is contained in the cautionary note to today's earnings release and in our most recent reports filed with the SEC. Before turning the call over to David, I will cover a few items pertaining to our financial results and disclosures. Regarding our results, in the fourth quarter, we recorded an after-tax special item benefit of $3.2 billion or $8.91 per share for the sale of Cigna's Group Disability and Life business that was completed on December 31, 2020. We also recorded an after-tax special item charge of $148 million or $0.41 per share for integration and transaction-related costs. As described in today's earnings release, special items are excluded from adjusted income from operations and adjusted revenues in our discussion of financial results. Beginning next quarter, in our earnings release and quarterly financial supplement, the Group Disability and Other segment will be combined with Corporate and called Corporate and Other Operation. This change to simplify our reporting was enabled by the aforementioned sale of the Group Disability and Life business. Additionally, please note that when we make prospective comments regarding financial performance, including our full-year 2021 outlook, we will do so on a basis that excludes the potential impact of any future share repurchases and anticipated 2021 dividends. With that, I will turn the call over to David.
David Cordani, President and Chief Executive Officer
Thank you, Alexis. Good morning everyone, and thank you for joining us on our call today. When we met a year ago, the challenges from COVID-19 were just beginning to fully emerge around the globe. With the arrival of vaccines, 2021 is likely to be a year of transition, as communities and businesses seek to turn the page. I am very proud of the ways in which our 70,000-plus colleagues led, and continue to lead through this difficult time for customers, our clients, our providers, our partners, and our communities. Starting last spring, we were amongst the first to waive out-of-pocket costs for COVID-19 testing as well as treatment. Our Evernorth business quickly leveraged our supply chain expertise to ensure a consistent prescription drug supply and delivery during the uncertain times. In our U.S. Medical Business, we ramped up to meet the significant increased demand for behavioral health services by growing our network, adding virtual provider partners, creating demand webcasts, treating first responders, and adding search capabilities for provider ethnicity. Overall, we were deploying hundreds of millions of dollars to support our clients and partners who were hit hardest by the pandemic. In partnership with New York Life, we launched the Brave of Heart Fund to provide charitable grants for families, frontline workers, and volunteers who lost loved ones to COVID-19. Last month, our Cigna Medical Group was amongst the first non-hospital organizations in the nation to administer antibody therapy for high-risk COVID-19 patients, freeing up much needed hospital space. Just a few weeks ago, we partnered with industry leaders from across the public and private sectors to ensure that people who received the vaccine had digital access to their vaccination records so they can safely return to their jobs and daily activities. As we continue to work to serve our clients, customers, and patients during the pandemic, we also balanced our responsibility to deliver for shareholders as well. For the 2020 full-year, we grew our adjusted revenue by 14% to $160 billion. We also delivered adjusted earnings per share of $18.45, consistent with our overall expectations, which included the ongoing elevated cost of COVID-19-related services. Today, I'm going to talk about how our strategic actions we took in 2020 position each of our businesses to navigate what we expect will be another very dynamic year, one that will require us again to balance the very needs of all of our stakeholders. I'll also tell you about our growth framework and how our execution of it will drive our success throughout this challenging environment and beyond. Following my comments, Brian Evanko will share more details about our 2020 financial results and our 2021 outlook, and then we'll take your questions. At Cigna, we've been on a journey, an important one over the past two years to significantly accelerate our strategic path. During 2020, we completed the integration of our combination with Express Scripts, and delivered on our integration priorities, including revenue growth, cash flow generation, de-leveraging targets, strong client retention, high levels of coworker retention, and working to keep our vision top of mind with innovations and improved affordability, predictability, and simplicity delivered to the market. Additionally, we delivered another important milestone of our strategic journey by launching Evernorth, our health services platform, which has meaningfully grown our strategic partnerships and is bringing innovative solutions to the market already. We also made a series of leadership changes to align our capabilities and further operationalize our strategy, reinforcing our talent depth and our commitment to continue to grow and develop our team. Based on the capital and cash flow strength of our company, we are demonstrating the ability to have an orientation to our capital deployment strategy. This means we're able to reinvest in our business for ongoing growth, pay a meaningful quarterly dividend, and deploy substantial capital for share repurchase, and target and pursue strategic M&A. At the same time, we continue to execute effectively across each of our businesses by delivering value to our clients and customers or patients. In Evernorth, our 2020 adjusted revenue increased 20%, driven by ongoing strong retention, the completion of Cigna's volumes, and organic growth, including our partnership with Prime Therapeutics. In U.S. Commercial, our relentless support of our customers, and our employee clients and partners throughout the pandemic led to strong client retention levels again in 2020, along with better-than-expected in-group strength, building a solid foundation that we will carry into 2021. In U.S. Government, we grew our Medicare Advantage customer base by 18%, exceeding our annual growth target of 10% to 15%. We expanded our geographic and product footprint to now be making market offerings in 20% of all available Medicare Advantage bio markets. In addition, 88% of Medicare Advantage and prescription drug paying customers in 2021 are in four-star plus rated plans, with our national weighted average of four-and-a-half stars, the highest amongst our national competitors. In our International business, despite navigating the challenges of the ongoing pandemic in multiple countries, we delivered full-year adjusted earnings growth of 18%, fueled by our strong partnerships. Related to Group Disability and Life, which we sold to New York Life on December 31, I am proud of the way in which our team worked to deliver in a very challenging environment, fueled by the pandemic, for the benefit of our clients and customers. As a result of the pandemic, it created a significant reduction in our earnings contribution for our business last year. However, we remain focused on serving our clients and customers. Throughout 2021, we expect the macro environment to remain dynamic, which presents both challenges and opportunities for us. Among the challenges, we expect COVID-19 and the rollout of the vaccine to continue to tax an already overburdened healthcare system. And we expect an intensified and much-needed focus on health disparities to continue as well. At the same time, we also see opportunities. They include greater recognition of the importance of the employer-sponsored market with companies playing an even more critical role in ensuring the wellbeing of their employees by offering comprehensive medical, pharmacy, and behavioral services. There were also a number of accelerating trends that will further drive fundamental changes in healthcare. For example, pharmacological innovations are quickly becoming the future of healthcare driven in part by the continued rise in specialty pharmaceuticals, gene therapies, and the evolution of the biosimilars. There is also a greater recognition and acceptance of the link between mental health and physical health. We see care access rapidly changing as a result of consumer behavior and technology and data innovation leading to growing use of virtual visits and coordinated home-based care, aided by advancements in remote monitoring as well. Against this backdrop, the progress we achieved in 2020 along with the strength of our capabilities gives us confidence that we will deliver at least $20 of adjusted earnings per share in 2021 even in the face of COVID-19 headwinds primarily in the form of elevated medical costs. Our ability to achieve these levels of continued long-term success starts with our growth framework, which has three fundamental building blocks. First, we deliver differentiated value in the form of affordable, predictable, simple solutions for our clients, customers, and patients. This drives our ability to retain, further deepen, and grow our business platforms. Second, we work to partner and innovate. This enables us to rapidly bring new solutions to the market that create even more value for our clients and customers. It also fuels our third priority, the expansion of our addressable markets that we achieve by growing our geographic footprint further, moving into underpenetrated markets through service coordination, and adding new solutions that give us the opportunity to sell to new buyer groups. Taken together, these building blocks provide us with multiple levers to continue to achieve differentiated and sustained growth not only in 2021 but over the long-term. In Evernorth, this means bringing an expanded set of solutions to our existing health plan, commercial and government clients by leveraging the strength of our pharmacy, care management, health intelligence, and benefit management capabilities. In U.S. healthcare, this means continuing outstanding retention along with further deepening relationships and targeting new business adds. In U.S. government, it means delivering at our goal of accelerated customer growth of 10% to 15% in Medicare Advantage, and continuing to expand our geographic footprint in the individual exchange market where, for example, in 2021 we will be offered in 220 counties. This is a more than 50% year-over-year increase. In International, it means continuing to grow as we deliver differentiated value for our globally mobile customers as well as our supplemental health solution customers. We look forward to delving more deeply into our growth strategy with you at our Investor Day, which is slated for March 8th. So, to summarize, I am very proud of my colleagues in our company for delivering for our customers, patients, clients, partners, and shareholders in an extraordinary year by maintaining a relentless focus on delivering on our commitments and leading through a rapidly changing landscape. Our performance is a testament to the resilience of our organization and our ability to thrive and deliver differentiated results in the most challenging of environments. We delivered strong revenue, earnings, and cash flow results in 2020. In 2021, we expect to deliver at least $20 of adjusted earnings per share. We will continue to drive attractive operating cash flow which fuels our ability to return value to our shareholders through a meaningful quarterly dividend and through ongoing share repurchase as well as targeted M&A. Overall, we have confidence that we'll achieve our 2021 outlook and our long-term growth objectives. With that, I'll turn the call over to Brian.
Brian Evanko, Chief Financial Officer
Thanks, David. Good morning everyone. First, if we look back at 2020, I am very proud of the actions we have taken in the company to meet the needs of our customers, clients, provider partners, communities, and coworkers while also delivering on our commitment to our shareholders. As we enter 2021, we remain focused on delivering differentiated value and driving growth across our businesses. My remarks today, I'll review Cigna's 2020 results including the ongoing impact of COVID-19 on our business and provide our outlook for 2021. The consolidated financial highlights for 2020 include adjusted revenue of $160 billion, adjusted earnings of $6.8 billion after-tax, adjusted earnings per share of $18.45 and operating cash flows of $10.4 billion. These results reflect strong execution across our businesses through an unprecedented environment. Regarding our segments, I'll first comment on Evernorth. Fourth quarter 2020 adjusted revenues grew to $30.5 billion and adjusted pretax earnings grew to $1.6 billion. Evernorth strong results reflect organic growth with outstanding client retention and new partnerships, effective execution of supply chain initiatives, and continued strong performance in Accredo, our industry-leading specialty pharmacy. During the quarter, we fulfilled $388 million adjusted pharmacy scripts, a 19% increase from our fourth quarter 2019. Overall, Evernorth delivered a strong fourth quarter as we completed our integration efforts and we entered 2021 with good momentum. Turning to U.S. Medical, fourth quarter adjusted revenues were $9.7 billion and adjusted pretax earnings were $328 million. These results reflect COVID-19 related impacts and the return of the health insurance tax. COVID-19 related impacts in the quarter include the direct costs of COVID-19 testing and treatment, the costs of actions we have taken to support customers, providers and coworkers and decreased specialty contributions partially offset by a reduction in non-COVID utilization. As we progressed through the fourth quarter, we experienced an increase in direct COVID-19 costs for testing and treatment as incidence rates spiked across the country. While we also saw increased levels of care deferral for non-COVID costs during the latter part of the quarter, the direct COVID-19 costs outweighed the impact of lower non-COVID costs. Turning to membership, we ended the year with 16.7 million total medical customers. This represents less than a 0.5% decline sequentially excluding the loss of 240,000 life claims as expected due to an acquisition, as our book of business remains resilient. We finished the year with 18% Medicare advantage customer growth and delivered mid single-digit growth in the Select and International segments, despite a challenged economic backdrop. Overall results for Cigna's U.S. Medical segment reflects strong fundamentals and the impact of the increase in direct COVID-19 costs as we progressed through the fourth quarter. In our international markets business, fourth quarter adjusted revenues were $1.5 billion and adjusted pretax earnings were $91 million, reflecting the costs of actions taken to support customers and coworkers and investments in the business for future growth. For our Group Disability and Other Operations segment, fourth quarter adjusted revenues were $1.3 billion. Fourth quarter adjusted pretax earnings for this segment were $11 million, reflecting elevated life claims related to the pandemic and unfavorable disability claims. As previously noted, we completed the sale of the Group Disability and Life Business to New York Life on December 31, 2020. For our Corporate segment, the fourth quarter adjusted loss of $381 million reflects lower interest expenses due to lower levels of outstanding debt. Overall Cigna's 2020 results reflect focused execution across each of our businesses through a dynamic environment, as we continue to meet the needs of those we serve, while delivering strong financial results. As we turned to 2021, we have entered the year with strength and momentum driven by our strategic actions in 2020, which David detailed. We expect the environment in 2021 to continue to be dynamic presenting both challenges and opportunities for our business. Before going to our detailed outlook with the sale of our Group Disability and Life Business, contributions from the group should be removed for the purposes of year-over-year comparisons. With that, for full-year 2021, we expect consolidated adjusted revenues of at least $165 billion representing growth of approximately $10 billion after adjusting for 2020 group revenues. We expect full-year 2021 consolidated adjusted income from operations to be at least $6.95 billion, or at least $20 per share. This is inclusive of an expected COVID-19 related headwind of approximately $1.25 per share. In 2021, we expect elevated medical costs including the impact of direct COVID-19 related costs and more normalized non-COVID utilization. We expect the impact of the gradual economic recovery on our customer base in 2021. Given these COVID-19 dynamics, we expect the primary impact to be in our U.S. medical business. Further, we expect the COVID-19 headwind to be more concentrated in the first quarter of the year, and so we would expect the cadence of earnings per share in 2021 to be more weighted towards the final three quarters of the year. Specifically, we expect approximately 20% to 22% of 2021 earnings per share to emerge in the first quarter of the year. For 2021, we project an expense ratio in the range of 7.5% to 8%, and a consolidated adjusted tax rate in the range of 22.5% to 23.5%. I'll now discuss our 2021 outlook for our segments. In Evernorth, we expect full-year 2021 adjusted earnings of at least $5.6 billion. This represents year-over-year growth of at least 4%. In Evernorth, we expect the 2021 quarterly earnings cadence to be directionally in line with 2020. For 2021, we expect adjusted pharmacy scripts of at least 1.55 billion scripts. We see significant opportunity to bring new innovative solutions to market through Evernorth, with less than 15% of our Evernorth revenues derived from Cigna's U.S. medical business, we have a significant external customer and client base, and we expect to continue to track the growth through existing and new Evernorth relationships. For U.S. Medical, we expect full-year 2021 adjusted earnings of at least $3.8 billion. This outlook reflects focused execution in our businesses driven by organic customer growth, deeper customer relationships and disciplined expense management. This outlook also includes the projected impact of COVID-19. As I said earlier, the COVID-19 headwind primarily impacts our U.S. medical business with the greatest impact in the earlier part of 2021. Key assumptions reflected in our U.S. medical earnings outlook for 2021 include the following. Regarding total medical customers, we expect 2021 growth of at least 325,000 customers. This includes continued organic growth throughout the year in our commercial business led by the select and middle-market segments, partially offset by lower national accounts enrollment. We also expect Medicare advantage customer growth in our target average annual growth range of 10% to 15%, and we expect growth in our individual ACA business, which will be largely offset by our exit of our legacy non-ACA individual market offerings. We expect the 2021 medical care ratio to be in the range of 81% to 82% reflecting the impacts in 2021 of elevated medical costs including the impact of direct COVID-19 related costs and more normalized non-COVID utilization, the repeal of the health insurance tax effective for 2021, and continued focused execution and delivery of strong clinical quality across our U.S. commercial and government businesses. We also expect continued contributions from international markets as we continue to deliver differentiated solutions that improve the health, wellbeing, and peace of mind of those we serve in our global markets. Regarding interest expense, we expect costs of approximately $1.3 billion pre-tax in 2021. All in for full-year 2021, we expect consolidated adjusted income from operations of at least $6.95 billion or at least $20 per share. Overall, these expected results reflect the differentiated value, strength and strategic positioning of our businesses, as we deliver growth while navigating the headwind associated with COVID-19. Now, turning to our capital management position and outlook, we expect our businesses to continue to drive exceptional cash flow with strong returns on capital, even as we continue reinvesting to support long-term growth and innovation. In 2020, we deployed $4.7 billion to repay debt and we repurchased 21.9 million shares of stock for $4.1 billion. We ended 2020 with a debt to capitalization ratio of 39.5% and improvement of 570 basis points over year-end 2019 as we met our deleveraging targets of a debt to capitalization ratio of less than 40%. Now, framing our capital outlook for 2021, we entered 2021 with $2.5 billion of deployable capital from our strong cash flow generation in 2020, and the remaining proceeds of the Group sale, net of the expected debt repayment we announced on deal close. For 2021, we expect at least $7.5 billion of cash flow from operations, reflecting the strong capital efficiency of our well-performing businesses. Combined, this gives us at least $10 billion to deploy in 2021, and positions us well to execute against our 2021 capital deployment priorities. First, we expect approximately $1 billion in tax payments and expenditures resulting from the Group sale. We also expect to deploy approximately $1 billion to capital expenditures primarily focused on technology to drive future growth. We expect to deploy approximately $1.4 billion to shareholder dividends, in line with our January quarterly dividend announcement. We expect to largely deploy the remaining $6.6 billion for share repurchase and strategic M&A. Year-to-date, as of February 3, 2021, we have already repurchased 4.2 million shares for $906 million. For the purpose of the planning and 2021 earnings per share guidance, our outlook reflects the deployment of the vast majority of the $6.6 billion to share repurchase. Regarding M&A, we look for opportunities that are both strategically and financially attractive. We would evaluate a given opportunity on its merits. Our balance sheet and cash flow outlook remains strong, benefiting from our highly efficient service-based orientation that drives strategic flexibility, strong margins, and attractive returns on capital. So to recap, our full-year 2020 consolidated results reflect strong execution led by our Evernorth segment. We enter 2021 with momentum. We are confident in our ability to deliver our full-year 2021 earnings outlook. Further, we strategically positioned our businesses to leverage our growth framework and to be service-based and capital light. This positioning drives significant financial strength and flexibility, and gives us continued confidence in our long-term growth targets. With that, we'll turn it over to the operator for the Q&A portion of our call.
Operator, Operator
Thank you, Mr. Evanko. Our first question is from Gary Taylor with JP Morgan. Mr. Taylor, your line is open.
Gary Taylor, Analyst
Hi, good morning. Appreciate the details. I just want to go back to sort of thinking about the COVID headwinds this year. And I know '22 is a far way away, but from this distance should we be thinking about $20.00 plus $1.25, and then putting your long-term growth rate on that. Is there any reason not to sort of generally be thinking about that as the setup for 2022?
David Cordani, President and Chief Executive Officer
Gary, good morning, it's David. As Brian noted, we estimate the $1.25 for 2021. Big picture, we think you should view it as transient or removable. I'd caution you from, at this early stage, penciling all of it as an immediate return in 2022. But to be very clear, we do believe it is removable or recoverable from that standpoint through a variety of forces. One, obviously the effectiveness and the ramping of the vaccine that will transpire from that standpoint; two, further evolution of both programs and services, as well as treatments and therapies relative to dealing with COVID, and then third, ultimately, if necessary, pricing actions activities. So big picture, agree with your conclusion. We'd just caution you not to harden it fully 100% into a 2022 number yet.
Operator, Operator
Thank you for your question, Mr. Taylor. Our next question is from Kevin Fischbeck with Bank of America. Your line is open, sir.
Kevin Fischbeck, Analyst
Okay, great, thanks. And I guess the dynamic that you saw in Q4 around elevated medical costs kind of more than offsetting the decline in this a little bit different than what we've seen from other companies, but I guess directionally similar with commentary about the impact to commercial versus Medicare. I guess maybe since you are kind of more commercially focused, maybe you could help draw a little bit of a distinction between how you expect utilization in the commercial business to rebound in 2021? Is there less pent up demand than what you might see in the Medicare business, and therefore commercial gets to more normal more quickly in 2021 than other business lines, just wanted to get your thoughts on that given your performance versus your peers in Q4.
Brian Evanko, Chief Financial Officer
Good morning, Kevin, it's Brian. So just a few kind of framing comments, and then I'll get to the core of your question. Throughout 2020, as the pandemic emerged, we certainly did witness an inverse relationship between COVID-19 claims and deferred care. If you step back all the way to the second quarter of 2020, the impact to care deferrals more than outweighed the direct costs associated with COVID-19 claims for testing and treatment across both our commercial and Medicare businesses. During the third quarter, these factors approximately offset one another, meaning the cost to COVID claims approximately offset the effective care deferrals. In the fourth quarter specifically, as the back half of the quarter emerged, we started to see the cost of COVID-19 claims for both testing and treatment start to exceed the benefits we were seeing from increased care deferral activity. We ended the quarter with performance of medical costs in aggregate that was modestly above our seasonal baseline. That effect was consistent across both the commercial and the Medicare book-to-business. Although I would note that the commercial care deferrals were lower than the Medicare care deferrals that we saw in the fourth quarter. So that's the way I would encourage you to think about it. As we roll that forward into 2021, our guidance contemplates the respective books-to-business in the $1.25 headwind.
Operator, Operator
Thank you, Mr. Fischbeck. Our next question is from Matt Borsch with BMO Capital Markets. Your line is open, sir.
Matt Borsch, Analyst
Yes, thank you. Maybe if I could just ask a question on that prior dialogue. So do I have it right that in Medicare you're actually seeing the direct costs of COVID as higher than the deferral in the fourth quarter, and if so do you expect that to continue into 2021?
Brian Evanko, Chief Financial Officer
Morning, Matt. This is Brian. So yes, you have that right. For the fourth quarter, we did see the direct cost of COVID-19 testing and treatment exceed the benefits of care deferral for the quarter in aggregate, with the back half of the quarter where the acceleration really occurred. I would note though that the fourth quarter also saw elevated care deferral relative to the third quarter in Medicare. As we roll that forward stepping into 2021, we assume that the first portion of the year there will be elevated medical costs experienced in our book of business across U.S. Medical. As the year unfolds that will gradually dissipate towards the back half of the year.
Operator, Operator
Thank you for your question, Mr. Borsch. Our next question comes from Ralph Giacobbe with Citi. Your line is open, sir.
Ralph Giacobbe, Analyst
Thanks. Good morning. Last year, you had talked about a potential opportunity to go back to customers and maybe take some risk off the table for them for 2021. I'm not sure if that program resonated or not and whether that had any impact on the guidance. Maybe if there are considerations around your stop loss book specifically for this year that we need to consider in terms of what's baked into the guidance. Thanks.
David Cordani, President and Chief Executive Officer
Ralph, good morning. It's David. I think what you're reflecting back on is, as the pandemic, the breadth and magnitude of it began to take hold and become obvious, we made the decision as an organization that we would seek to return all the favorable economics that were manifested because of COVID disruption to clients, customers, patients, our provider partners, and our coworkers. So you're reflecting back to that. We did take proactive action throughout the course of the year to work with clients, that's a client-by-client set of actions depending on the client's position, desire, funding mechanisms, etc. to both return value in an absolute sense, and in some cases restructure programs with an eye toward 2021. In some cases, you could think about the risk-sharing relationship with those clients may have moved somewhat depending, again, on the clients' preference. But that's again a client-by-client call. To the latter portion of your comment, there's no meaningful difference between stop loss either structure or performance expectation for 2020 versus 2021. We continue to feel very good about the way stop loss is performing for peace of mind for our clients, as well as for ourselves.
Operator, Operator
Thank you, Mr. Giacobbe. Our next question is from Robert Jones with Goldman Sachs. Your line is open, sir.
Robert Jones, Analyst
Great, thanks for the question. Maybe just on Evernorth and the guidance. If I look at this $5.6 billion of operating profit expectation, it doesn't seem like it bakes in too much underlying growth, if I'm thinking about this right. So I just wanted to talk through some of the pieces. If you account for the expected benefit from the Anthem overhead costs rolling off, some of the incremental deal synergies, the Prime Scripts, just want to make sure I'm thinking about the underlying business there correctly, and what you guys are assuming the kind of organic underlying growth could be in this business for '21?
David Cordani, President and Chief Executive Officer
Good morning. It's David. So let me start, I'll ask Brian to add some additional specificity. Stepping back relative to the Evernorth platform, we're delighted. We're really pleased with the performance, the growth that is being realized because of the value that's being delivered to our clients. Our commercial clients, our health plan clients, our government clients, from that standpoint. Two, to put a pin in it, this is specifically relative to transit overhead. We were able to more rapidly accelerate the extraction of this transit overhead largely because we executed our efficiency initiatives, but also the significant growth. This transit overhead extraction was more accelerated from its initiation in 2019 through 2020. Third point, before I hand it over to Brian, I would just ask you to recognize the fact that we continue to invest significantly because of the rate and pace of growth in the business as we are continuing to add significant business to that portfolio, and we've called out before, investments that are being made relative to OpEx, largely operating expenses, to add our first phase of our Prime relationship. We're evolving the second phase of the Prime relationship, and we're delighted to do so. This will take place throughout the totality of 2021, while reinforcing the growth in the underlying strength. Meanwhile, successfully continuing to grow earnings in line with our prior strategic target, we will look forward to providing you some additional insight relative to the forward-looking both revenue and earnings trajectory of that business at our Investor Day. Brian, some adds?
Brian Evanko, Chief Financial Officer
The only comment I'd add on top of this, to remind you, Robert, that the 2020 performance, when you exclude transitioning clients, showed 20% revenue growth in Evernorth, and 22% growth in adjusted pharmacy scripts year-on-year. So coming off a very strong year in 2020, and stepping into 2021 with continued momentum.
Operator, Operator
Thank you, Mr. Jones. Our next question is from Justin Lake with Wolfe Research. Your line is open, sir.
Justin Lake, Analyst
Thanks. Can you hear me this time?
David Cordani, President and Chief Executive Officer
Yes, we can, Justin.
Justin Lake, Analyst
Sorry about that. So couple quick numbers question, one the Evernorth revenues were materially higher than at least I was modeling yet it didn't seem to flow through to the bottom line in terms of earnings, which were more in line. So curious there, if there's anything I'm missing, and then on the exchange business, can you give us an update of a lot of competition there, I know you're rolling into a bunch of new markets, can you share with us how much new membership you expect to have there and any kind of margin impact, kind of versus typical targets that we should think about for '21? Thanks.
Brian Evanko, Chief Financial Officer
Good morning, Justin. It's Brian. I'll take the first part of your question, then, David will comment on the individual exchange part. In terms of the Evernorth business, really pleased with the revenue performance that we drove in 2020, and your comment about the relationship to the earnings, couple of things I would keep in mind there. One is the relationship that came out with Prime Therapeutics, effective April 1st, and that became expanded on January 1, 2021. When we onboard any new clients, there's a level of startup cost associated with that, as we think about bringing on new headcount to make sure that we're ramped-up for the volumes that will come. We had a little bit of expense related to the startup associated with our relationship with Prime Therapeutics in 2020. Additionally, the Cigna U.S. medical insourcing, which is now complete, brought revenue, but de minimis earnings contribution in 2020 to Evernorth. So those are really the two dynamics that caused a little bit of the revenue versus earnings growth difference that you think. David, anything you want to call out relative to the individual business?
David Cordani, President and Chief Executive Officer
Sure, Justin, good morning, relative to the business. First, we're pleased with the performance that we're stepping into 2021 with rolls to that portfolio. As I noted in our prepared remarks, we're expanding to counties where we're participating in about a 50%. Brian did also note that we're exiting the non-ACA portion of that business. As it relates to margins, Justin, I would remind you, we were early to note that a couple of years ago, we thought that that portfolio of businesses nationally was earning margins above a sustainable margin threshold, and we said targets have to revert to a sustainable marketing threshold. In fact, the MCR we posted this year indicates it would show some impact of the margins more normalizing, and that indeed did take place. As it relates to the 2021 and beyond positioning, we think that our margin targets are sustainable, given our provider relationships and our service proposition, and we look to grow that portfolio.
Operator, Operator
Thank you, Mr. Lake. Our next question is from Steven Valiquette with Barclays. Your line is open.
Steven Valiquette, Analyst
Great, thanks. Good morning. So if you think about the commercial membership, like you mentioned you expect continued organic growth throughout the year in overall commercial membership. Curious if we can read into that maybe that Cigna is perhaps already troughed on the quarterly progression of commercial enrollment as it relates to COVID impact, economic impact etcetera. And then just within that with national accounts expected to be down a little bit, any sense on when we may see the trough on that, whether it's early in the year or late in a year in 2021. Thanks.
David Cordani, President and Chief Executive Officer
Good morning. It's David. I think you've identified several important features there. So, as it relates to commercial customers for 2021, as we expected to step into 2021 with about the number of customers we would end 2020 with, as relates to the years pattern. I'd ask you to think about it as follows. First, we expect the ongoing COVID impact to disenrollment to continue to press down on customers throughout the first half of 2021. Second, as typically takes place in the national accounts segment, there are some non-COVID related disenrollment that happens historically in that business because most of the selling takes place during the first portion of the year. Offsetting that is continued growth and strength in the Select segment that has a very active selling season throughout the year, as well as some known middle market and new business ads that will take place during the middle portion of the year. Now, as it relates to looking forward, you asked the final part of your question relative to the trough in national accounts. Our early look at 2022 is we would expect a very attractive retention number at this point for our U.S. medical national account relationships, as well as the selling season has been pretty active right now for us. The RP volume is up. The quality of the RP volume is high. We have some new business opportunities wins that we have on board already. We are in active pursuit. So we have a level of optimism relative to the outlook for that segment for January of 2022.
Operator, Operator
Thank you, Mr. Valiquette. Our next question is from Ricky Goldwasser with Morgan Stanley. Your line is open. Mr. Goldwasser, you are on mute. Moving on to our next question from Josh Raskin with Nephron Research, your line is open.
Josh Raskin, Analyst
Hi, thanks. Good morning. Congrats, David and Brian, and the rest of the team on the new roles. So our question here is more around Cigna was relatively early in sort of that development of an ACO strategy. It seems like the market is certainly been catching up quickly. So was wondering if you could speak to your efforts around engaging providers, especially primary care physicians and maybe perhaps how that approach differs in your Medicare book versus your commercial book?
David Cordani, President and Chief Executive Officer
Good morning Josh. So, relative to the ACO strategy, I think that's a broad definition of what the market calls value-based relationships, and you're correct, we had an early start and a lot of passion and drive and therefore strategic direction relative to it. I would start with the end and that is the Medicare advantage book in general has a higher penetration of a comprehensive nature of value-based care relationships per customer that we serve versus commercial. You probably see that in other ways: you look at the marketplace, the primary care physicians, integrated multi-specialty physician groups, etc. tend to adapt many internalized value based care, more comprehensively for Medicare advantage given the population's health needs and the opportunity to deliver significant value. The exciting and piece of it is we've been working now for a decade to prove that thesis in the commercial space. It varies by market in terms of the level of breadth and depth, but we have well in excess of 600 collaborative accountable care relationships that are up and running and delivering meaningful value. The more mature ones are delivering meaningful value for customers and clients. What does that mean? Clinical quality, higher gaps in care closure, service quality, and strong service experience, and improved affordability from that standpoint. The last comment I would add here is the market is always dynamic, but one of the impacts of COVID-19 is it jars everybody in every norm. As it relates to value-based care, it puts a spotlight back on value-based care that shared risk and shared performance relationships. Now may look a little bit more palatable to some that may have not viewed it in the past and were more wedded to a fee-for-service model. We see an opportunity to further expand and deepen some of those relationships both in commercial specifically, and in some of the Medicare advantage opportunities.
Operator, Operator
Thank you, Mr. Raskin. Our next question is from Charles Rhyee with Cowen. Your line is open.
Charles Rhyee, Analyst
Hi, thank you for taking my question. I wanted to inquire again about the direct cover cost this year, specifically the $1.25 you mentioned. Is it possible to provide a breakdown between testing costs and treatment costs in that estimate? There has been some discussion about potential rule changes that would require plans to cover additional testing costs related to return-to-work expenses. I would like to hear your thoughts on that aspect first. Additionally, if such changes were to occur, how significant would the impact be on the overall testing costs? Thank you.
Brian Evanko, Chief Financial Officer
Good morning, Charles. This is Brian. So in terms of the first part of your question there, dimensioning the test versus the treatment, we have gone through extensive modeling as you might imagine to project what we think is going to transpire in 2021, which led us to the $1.25 COVID impact that we described earlier. As I went through to a previous question, we expect about half of that to come through in the form of elevated claim cost and/or revenue pressure in our U.S. Medical MCR book. I am not going to split apart each of the different components in that for you, but just rest assured we've got a variety of projections that underlie that. So, David, maybe you want to comment on the effects of some other components?
David Cordani, President and Chief Executive Officer
Regarding testing, the industry has taken strong and proactive steps to support clients and patients, especially in terms of initial testing and ongoing processes for treatment. In terms of unmed or worksite support, our approach has involved good collaboration with HHS and their staff, but that falls outside typical insurance or service relationships. When we offer services, it usually occurs dynamically and is often managed by the employer through an unmed relationship. It’s important to note that 85% of our commercial business operates on a self-funded basis, which means we act as a fiduciary. For employers seeking assistance in these areas, we are actively providing support. However, we do not anticipate significant changes in the immediate future regarding engagement on these topics, nor do we see it as a potential driver for our business considering the structure of our portfolio.
Operator, Operator
Thank you, Mr. Rhyee. Our next question is from Lance Wilkes with Bernstein. Your line is open.
Lance Wilkes, Analyst
Yes, good morning, Brian and David. So let me just pull up a little on the strategic capital deployment, and if you could just talk to maybe two dimensions on that? Appreciate your earlier comments. As you were talking about bricks and mortar being of less interest and specifying the areas in virtual home and remote monitoring etc. that were of interest, maybe you can just call out the distinction? Maybe I am putting too emphasis on physician practice as being bricks and mortar and excluding them as an area of focus. And then similarly if it's in Evernorth, will be more focused on providing these services to employers and health plans? Or, how much of the focus is providing these services to risk bearing primary care or other value-based care sorts of companies? Thank you.
David Cordani, President and Chief Executive Officer
Hey, Lance. Good morning. It's David. I'll start with the latter portion of your question first. As we evolve our capabilities both the present states, but evolve our capabilities, you should think about in general all that happens within Evernorth. It happens within Evernorth as it relates to a platform of services to serve health plans, to serve corporate clients, to serve governmental agencies, and to offer services to, as you articulated, risk bearing or performance-based healthcare delivery systems. You should think about Cigna's U.S. Medical portfolio as a consumer of those services. Clearly, an important development partner, but a consumer of those services as another client of Evernorth. As it relates to the first portion of your question, I think your basic framing of it is right. Our view is that the U.S. is not in need of more physical proximity and physical plant to serve the population in general, especially in urban and suburban areas. We obviously have additional need states relative to rural areas in that standpoint. Secondly, consumer behavior in a variety of areas including healthcare has reinforced desire not an acceptance, but a desire for bringing care and services to me in a real-time basis in a highly personalized way; therefore, virtual care coordination, and obviously that's augmented with clinical staff, but it's bringing the service to the individual and an immediate real-time basis so long as it could be longitudinally managed and coordinated effectively. The last point I want to be really clear on, our view of it is as a complimentary aspect to the care delivery system, not as addition to remediation play, but as a complimentary aspect, because to make it work properly, it needs to be connected back into the healthcare delivery system. We have many examples of it working today in our approach to virtual for both medical and behavioral. We see the ability to ramp it significantly given both the demand and the acceptance and the tool availability.
Operator, Operator
Thank you, Mr. Wilkes. Our last question will come from Scott Fidel with Stephens. Your line is open, sir.
Scott Fidel, Analyst
Okay, thanks. Good morning, guys. I had a question just maybe helping us to think about the Medicare advantage margin progression that you're thinking about for 2021 in 2022. In particular, maybe if you can call out, I don't know maybe within that $25 headwind from COVID just how you're, what you're thinking specifically about the impact from the lower raps in 2022, which I guess would probably impact you a bit more just because of all the enrollment growth, the 18% growth that you had in MA just last year, but then as we go into 2022 how much sort of improvement in margin you could potentially get as you normalize the raps. Also, it looks like we have a pretty solid base rate update from CMS as well in terms of that 4% plus.
Brian Evanko, Chief Financial Officer
Good morning, Scott. It's Brian. A few components to your question there, and just broadly the way I would encourage you to think about it is, we're on a multi-year growth trend for this business, right? We're a year or two of our geographic and product expansion with the expectation of 10% to 15% annual growth. Really happy with the 18% growth we put up in '20 and well on track to achieve 10% to 15% in '21. The margin profile tends to vary for a few different reasons. One is when we go into a new market, there tends to be a build-up in terms of investments, in people, in marketing before the customers start to come in. Two is when we rate a new customer, typically there's a bit of a ramp relative to profitability from a durational standpoint due to the risk adjustment coding, which you've appropriately called out. Thirdly, due to the unique nature of 2020 and the COVID-19 headwinds that we faced, the results of lower utilization, right? So as a result of that, we were not able to get all of the risk adjustment codes that we would in a normal year, if you will. We've factored all that into the 2021 outlook, the $1.25 earnings per share headwinds that we've called out here. A component to that is associated with Medicare advantage and it's associated with lower revenue that we would have otherwise anticipated having. So, as you kind of step forward, as David said in the beginning, in 2022 and thereafter, we expect some of that will work itself out. We're not going to give you exact 2022 guidance here today, but that's the way I would encourage you to think about the margin profile.
David Cordani, President and Chief Executive Officer
Thank you. So just to wrap up, I'd like to highlight a few key points from today's discussion. First, I'm very proud of the way in which our colleagues supported the needs of our stakeholders throughout this pandemic, while also ensuring that we delivered on our shareholder commitment. We delivered solid 2020 financial results, including revenue and EPS growth and outstanding free cash flow. Our strong 2020 performance and the strength of our businesses give us confidence that we will achieve continued attractive growth in 2021 and beyond driven by a significant increase in revenue, ongoing profit growth, and very attractive cash flow performance. We thank you for joining our call today, and we look forward to going into more depth with you around our growth plans at our Investor Day, which is slated for March 8. Have a good day.
Operator, Operator
Ladies and gentlemen, this concludes Cigna's fourth quarter 2020 results review. Cigna Investor Relations will be available to respond to additional questions shortly. A recording of this conference will be available for 10 business days following this call. You may access the recorded conference by dialing 866-451-8962 or 203-369-1203. There is no passcode required for this replay. Thank you for participating. We will now disconnect.