Earnings Call Transcript - CI Q3 2020

Operator, Operator

Good morning. Ladies and gentlemen, thank you for standing by for Cigna’s Third 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 question-and-answer session is being recorded. We will 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 Eric Palmer, Cigna’s Chief Financial Officer. In our remarks today, David and Eric will cover a number of topics, including Cigna’s third quarter 2020 financial results, as well as an update on our financial outlook for 2020. 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, shareholder’s 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 2020 and future performance. These statements are subject to risks and uncertainties that could cause 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. First, with our reporting for third quarter 2020, we have updated our segment names to align with our launch of Evernorth and to better reflect a suite of services offered across our portfolio. The segment previously reported as Health Services is now reported as Evernorth and the segment previously reported as Integrated Medical is now reported as U.S Medical. There are no changes to the underlying businesses reported in either segment. Regarding our results, in the third quarter, we recorded an after-tax special item charge of $83 million or $0.23 per share for integration and transaction-related costs. We also recorded a special item benefit of $89 million after-tax or $0.24 per share for a contractual adjustment for a former client. Finally, we recorded a special item benefit of $76 million after-tax or $0.21 per share for the receipt of payments related to our risk quarter claim. 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. Additionally, please note that when we make prospective comments regarding financial performance including our full year 2020 outlook, we will do so on a basis that excludes the impact of any future share repurchases. Finally, our outlook for 2020 assumes a full year of earnings from Cigna’s Group Disability and Life business. We continue to expect our divestiture of that business to be completed in the fourth quarter of 2020. With that, I will turn the call over to David.

David Cordani, President and CEO

Thanks, Alexis. Good morning, everyone, and thank you for joining our call today. I will begin by providing a few brief comments on Tuesday’s election results, which are certainly top of mind for all of us. Then, I will speak to how Cigna’s strategy accelerated by our recent launch of Evernorth, positions us to continue building on our history of delivering strong performance in dynamic and rapidly evolving environments. I will also provide comments on our strong third quarter results and I will conclude a few brief overview comments relative to 2021 before turning the call over to Eric. First, relative to the election. Certainly, we along with everybody else awaits to see a clear and orderly conclusion. Regardless of the final outcome, our mission to improve the health, well-being, and peace of mind of those we serve around the world has not changed and is more critical than ever. We are ready to continue engaging in critical discussions on healthcare with members of both sides of the aisle at federal, state and local levels. And we look forward to working constructively with the current administration or a new administration as we have been privileged to do so in the past. Looking forward, the long-term health needs of individuals and society at large transcends the results of any particular election or political climate. There is no question that simply continuing with the status quo for healthcare is not sufficient under any circumstances. Take for example that today’s children are likely to be the first generation in American history to live shorter lives than their parents. Clearly, this is unacceptable. And the COVID-19 crisis has only reinforced our unsustainable healthcare challenges, including eroding individual health status, increased mental health impacts from heightened stress, anxiety and loneliness, health disparities and social determinants of health, and gaps in our healthcare delivery infrastructure. Many U.S. states are seeing their healthcare systems overwhelmed and only exacerbated by the underlying chronic conditions such as diabetes that increase the risk of severe complications from COVID-19. The bottom line is that there is no one healthcare system that is perfectly positioned. In our view, the conversation regarding healthcare must focus less on who pays the cost of an unsustainable system. In fact, systems around the world continue to struggle with unsustainability and rising costs including nationalized systems. What is important is that we work together to find solutions to meet the diverse underlying needs that are unique to a population in the most effective way possible. Regardless of the political climate, more than ever, people, governments, and employers, as well as health plans are looking for healthcare systems that focus on keeping people healthy and not just treating them when they are sick, caring for the whole person, both mind and body, and ensuring the most affordable, high-value delivery of healthcare services. At Cigna, we are delivering on this promise and our strategy is designed to answer the call for a healthcare system that is more affordable, predictable, and simple. Our strategy guides us to customize our solutions to meet the diverse needs of our clients, our customers, and our patients, and look at every decision and action we take to ensure it is addressing the demands for more value. We have amassed a targeted portfolio of capabilities to accelerate this direction, and when combined with our partnership orientation, our focus on data-driven innovation and capital flexibility, we are positioned to deliver differentiated value for those we serve and sustainable attractive growth. As you know, we recently introduced Evernorth, an evolution of our high performing health service portfolio and another important milestone in delivering on our strategy. With Evernorth, we have a distinct and dedicated platform of services and innovative healthcare solutions for health plans, employers, government organizations, and healthcare providers. The launch of this new brand in September was met with overwhelming support and excitement from these various groups. Through this dedicated platform, we are demonstrating our commitment to meet their unique needs and invest in their success. Additionally, the platform further reinforces our position as the partner of choice to create more shared value for our clients and their customers. A recent example of this is our growing partnership with Prime Therapeutics. Through our Prime relationship, we expand our retail pharmacy network and rebate administration services to more Americans through their 23 Blue Cross/Blue Shield Plans. We achieve this by enhancing the retail pharmacy network and increasing affordability from pharmaceutical manufacturers. With Evernorth, our relationship with Prime will be further expanded. This includes the option for Prime’s plans to access the Accredo Specialty Pharmacy and Express Scripts’ home delivery in-network pharmacies beginning on January 1, 2021. Evernorth reinforces our deep commitment to leverage our broad capabilities to serve health plans, employers, government entities, and healthcare professionals, and pursue mutually beneficial partnerships. At the same time, we are continuing to further invest in our Cigna brand, under which our U.S. Commercial, U.S. Government, and International businesses go to market. We will continue to be known for a customer- and client-focused approach and for delivering industry-leading trends and outstanding customer service. For example, I am pleased to announce that our Medicare Advantage business achieved an annual customer Net Promoter Score of plus 74, the fourth consecutive year we have shown an increase. In addition, in 2021, 88% of our customers will be in four-star plus rated plans and we are the only major plan to achieve an increase year-over-year. This is just one important example of how our Cigna-branded companies will continue to deliver differentiated value in the marketplace. With Cigna and the recent addition of the Evernorth platform, we now have two powerful brands from which to drive sustained growth today and well into the future. Now, turning to our third quarter performance. We delivered strong results that were in line with our expectations. As a result, and as expected, we experienced the return of elevated utilization to more typical levels and the ongoing impact of COVID-19. We also continue to take actions to support our customers, our clients, our coworkers, our healthcare professionals, and our communities in these exceptionally challenging times. Additionally, we remain on track to complete the integration of Cigna and Express Scripts by the end of this year. Our consolidated revenue was $40.8 billion with after-tax earnings of $1.6 billion. In our Evernorth segment, we continue to deliver strong performance, demonstrating the value we bring to health plans, employers, and government clients. Within the U.S. Medical segment, we saw an increase in cost as expected as utilization returned to more typical levels. And our International business continues to deliver revenue and earnings growth as we meet the needs of our global customers as they navigate the disrupted environment due to COVID-19. With our strong third quarter results, we are confident that we will achieve our updated 2020 revenue and EPS outlook. Looking forward to 2021, we have a number of tailwinds including continued growth momentum, favorable impacts from synergies from our Express Scripts combination, and further administrative synergies. We expect year-over-year headwinds from increased medical costs largely driven by the ongoing impact of COVID-19. Diving a bit more deeply into our growth momentum, we expect to drive continued organic growth across each of our well-positioned platforms. I’d specifically highlight strong growth within our pharmacy service portfolio, including specialty and underlying script growth aided by a projected 98% client retention level and continued expansion of our U.S. Government business including Medicare Advantage, where we continue to drive both strong market and product expansion, as well as in-market growth, putting us on track for customer growth in our targeted range of 10% to 15% in 2021 and an individual change where we have increased our addressable market footprint by over 50%. All in all, we are positioned for both very strong revenue and continued earnings growth in 2021, and we remain on track to achieve our strategic goal of $20 to $21 of EPS. We expect a strong operating momentum and capitalized framework to drive attractive operating cash flows of greater than $8 billion. This significant cash flow generation combined with our ongoing deleveraging will give us significant strategic and financial flexibility for 2021 and beyond. Now to summarize before turning it over to Eric. Cigna has a long history of delivering strong performance in dynamic rapidly evolving environments, focused first and foremost on addressing the health and well-being needs of the individuals we serve. This approach transcends the results of any particular election cycle. We continue to build on this foundation as we delivered another strong quarter driven by the outstanding dedication of our more than 70,000 colleagues around the world who focused every day on our mission to improve the health, well-being, and peace of mind of those we serve. Our mission and our strategy as champions were affordable, predictable and simple healthcare will continue to guide us, as we provide exceptional value for the benefit of our customers, patients, and clients. And the launch of Evernorth will further fuel our strategy and expand our ability to serve more individuals. Finally, as we usually do, we look forward to providing more detailed and complete guidance for 2021 on our fourth quarter earnings call. With that, I will turn it over to Eric.

Eric Palmer, CFO

Thanks, David, and good morning, everyone. Today, I will review key aspects of Cigna’s third quarter results including the ongoing impact of COVID-19 on our business and discuss our outlook for the full year. Key consolidated financial highlights for the third quarter of 2020 include, adjusted revenues of $40.8 billion, adjusted earnings of $1.6 billion after-tax, and adjusted earnings per share of $4.41. Our results this quarter and year-to-date reflect focused execution across our businesses in a dynamic and rapidly evolving environment. Regarding our segments, I will first comment on Evernorth. Third quarter adjusted revenues grew to $30 billion and adjusted pretax earnings grew to $1.4 billion. As previously discussed, in Evernorth, the cadence of quarterly earnings is more typical in 2020 than in 2019, where earnings were more weighted to the second half of the year due to the timing of certain supply chain initiatives. Evernorth’s strong results in the quarter were driven by organic growth and customer script volumes, the effective execution of supply chain initiatives, and continued performance and expansion of specialty pharmacy services through Accredo, our industry-leading specialty pharmacy. We fulfilled 381 million adjusted pharmacy scripts, a 22% increase over the third quarter of 2019. Overall, Evernorth continued its positive momentum and delivered another strong quarter financial performance. Turning to our U.S. Medical segment. Third quarter adjusted revenues were $9.6 billion and adjusted pretax earnings were $757 million. These results reflect unfavorable prior period development, primarily related to the second quarter of 2020, COVID-19-related impacts, and the return of the health insurance tax. COVID-19-related impacts include the return of medical utilization to more typical levels, the direct costs of COVID-19 testing and treatment, decreased specialty contributions, and lower net investment income. It also reflects the actions we have taken throughout the year to support our stakeholders in this disruptive environment. For all customers, we continue to waive cost sharing for COVID-19 testing and treatment. For our Medicare Advantage and individual and family plans customers, we continue to waive cost sharing for in-office and telehealth visits for primary care, specialty care, and behavioral health. For clients, we have provided premium relief programs, and for our providers, we have implemented a variety of financial assistance programs. I am proud of the way that we at Cigna continue to respond to the pandemic in support of our stakeholders. Turning to membership, we ended the quarter with 17 million global medical customers, less than a 1% decline sequentially. Our U.S. commercial book of business remains resilient due to the industry mix of our clients and continued commitments that employers are making to the health and well-being of their employees through COVID. We also continue to see growth in Medicare Advantage, where we have grown membership 18% through the end of the third quarter and we continue to grow in the Select segment. Overall, with the exception of the unfavorable prior period development, results in our U.S. Medical segment are in line with our expectations. Turning to our International markets business, third quarter adjusted revenues were $1.4 billion and adjusted pretax earnings were $208 million, reflecting continued operational efficiency, lower claims due to COVID-19, and ongoing business growth. For our Group Disability and Other Operations segment, third quarter adjusted revenues were $1.3 billion. Third quarter adjusted pretax earnings for the segment were $70 million, reflecting elevated life claims due to the pandemic. For our Corporate segment, the third quarter of 2020 loss of $356 million reflects lower interest expenses due to lower levels of outstanding debt. Overall, as a result of focused execution in a dynamic environment, we continue to deliver value for all of our stakeholders and strong financial results. Now, looking forward to our outlook for full year 2020. As we look to the balance of the year, we expect continued strong execution across our portfolio of businesses. We expect medical utilization to remain at more typical levels with continued direct costs of COVID-19 testing and treatment, and we expect some increase in commercial disenrollment due to continued dislocation in the broader labor market. In the fourth quarter, we will also continue to make investments to support our clients, customers, and employees in this disrupted environment. Taken as a whole, we now expect full year 2020 consolidated adjusted revenues of approximately $158 billion, and we now expect full year consolidated adjusted earnings per share in the range of $18.30 to $18.60. I would remind you that our financial outlook excludes the impact of future share repurchases and assumes a full year of contributions from our Group Disability and Life business, although we continue to expect our divestiture of that business to close in the fourth quarter. Overall, these expected results are driven by strong underlying fundamentals, disciplined expense management, and the effective deployment of capital. Now moving to our 2020 capital and liquidity position and outlook, third quarter cash flows from operations of $895 million reflect the additional third quarter tax payments of approximately $826 million that was delayed from the second quarter as permitted under the CARES Act, as well as the payment of $445 million for the health insurance tax for the full year. Through the end of the third quarter, cash flows from operations were $6 billion, and for 2020, we now expect cash flows from operations of greater than $8 billion. Our businesses generated substantial amounts of cash flow, and in combination with $5.3 billion in net proceeds expected from the sale of our Group Disability and Life business, we have significant capital and financial flexibility. Through the end of the third quarter, we deployed $1.7 billion to debt repayment and our debt to capitalization ratio of 42.8% as of September 30th is improved from 45.2% in December 31, 2019. We have $1.2 billion of cash available at the parent as at the end of the third quarter, and on a year-to-date basis, we have repurchased $16 million shares of stock for $2.9 billion. Following the close of the group transaction, free cash available to the parent's is expected to be at least $7 billion, and we expect to deploy $4 billion to $5 billion to return our debt to capitalization ratio below 40%. Our balance sheet and cash flow outlook remain strong, benefiting from our highly efficient, service-based orientation that drives strategic flexibility, strong margins, and returns on capital. Now to recap, our third quarter consolidated results reflect focused execution across our businesses and the dynamic, rapidly evolving environment with particular strength in the momentum in our Evernorth segment. We are well-positioned to meet the financial targets we have established for 2020, all while continuing to support our clients, customers, and employees, and as such, we now expect 2020 full-year adjusted EPS of $18.30 per share to $18.60 per share and remain on track to deliver on our target of $20 to $21 of adjusted earnings per share in 2021.

Operator, Operator

Thank you. Our first question is from Justin Lake with Wolfe Research. Sir, your line is open.

Justin Lake, Analyst

Thanks. Good morning. I want to ask, first, can you give us a little more color on the negative development that you said that you attributed to the second quarter in terms of the drivers and maybe what business would have been? And then, secondly, can you give us any update on the deal close, what states or what needs to happen to get this close and what you might give us some more fulsome kind of thought process around capital deployment given post that deal close over the next 12 months, 14 months, you will have somewhere by my math $8 billion to $10 billion to deploy, but thoughts on dividend things like that? Thanks.

Eric Palmer, CFO

Thanks, Justin. Good morning. I'll begin with the reserve development aspect. Looking back to the second quarter, we experienced significantly lower utilization in April and May. As we concluded the second quarter, we needed to estimate the claims for June. In hindsight, utilization in June returned more quickly than we had anticipated. So, to clarify, we recorded about one point in the loss ratio in the third quarter that should have been accounted for in the second quarter. Essentially, this means 100 basis points on the loss ratio in this quarter is related to the in-year reserve development from the second quarter, which is the key takeaway regarding reserve development. Primarily, this relates to the Commercial business. Regarding the deal close, we are on track for completion in the fourth quarter. We issued a release a few weeks ago stating that we have obtained 63 out of the 65 necessary regulatory approvals, meaning we are very close to finalizing the transaction. I will now turn it over to David for insight on capital deployment and future plans.

David Cordani, President and CEO

Justin, good morning. Appreciate your question. And embedded in your question is acknowledgment of the strategic positioning of our portfolio. As you noted, we will be producing a significant amount of cash flow that is deployable from that standpoint. From our point of view, stepping back, as noted in Eric’s prepared remarks, you saw that we were pretty active in the share repurchase domain over the third quarter and saw some tremendous opportunity there. Specific to your question, as I noted, we are going to look forward to providing 2021 guidance on our fourth quarter call and you might expect that as we complete our group closure, as Eric articulated in the fourth quarter and stepping into the first quarter, we have an opportunity not just to refresh our 2021 outlook, but also to refresh our capital deployment priorities and alike off of that very strong base. So we look forward to that conversation.

Gary Taylor, Analyst

Hi. Good morning. First, a clarification, and then a question. In the slide deck, you do explicitly still point to the $20 to $21 in 2021. So I just wanted to confirm you are explicitly affirming that today. It just wasn’t featured real prominently in the release. So I do want to make sure on that. And then, my question is on your experience-rated Commercial business, are there going to be premium or MLR headwinds because of lower utilization as you move into 2021 or has there been enough customer relief, so to speak, that it skews out that dynamic?

Eric Palmer, CFO

Hi, Gary. It’s Eric. So on the first one, just to be clear, yes, we are reaffirming the $20 to $21 target and I don’t think there’s any ambiguity on that. That’s been a target we have had for some time, and we continue to be on track for that. So, again, I think the short answer to that question is yes. On the experience-rated business, so as customers, as our clients have different levels of utilization and if there are favorable utilization, we accrue for that in the period. So, I would not think about there being any future headwinds here. Many kind of the dynamics associated with lower utilization are already reflected in the results and in the current period.

Andrew Mok, Analyst

Hi. Good morning. This is Andrew Mok on for Steve. I wanted to revisit the Medicare Advantage growth targets. When you unveiled the new MA strategy last year, you laid out 10% to 15% membership growth targets with 2020 serving as a stepping stone year. You are now on track to outperform the high end of that target in year one and it looks like you will have a very attractive product offering for 2021? So is it fair to say that your formal growth targets even at the high end might be a bit conservative when we think about 2021 membership growth? Thanks.

David Cordani, President and CEO

Andrew, good morning. It’s David. Thanks for referring me to the question. So stepping back, we are delighted with our performance in 2020 for starters. And as we laid out that multiyear 10% to 15% growth objective. We also underscored that we were going to systematically expand our positioning in the market from less than 20% of the addressable market in 2019 to 50% of the addressable market by 2024. So we are systematically expanding our geographies and we have added a new platform in terms of individual PPO in 2020. So that continues to carry forward. As it relates to 2021, our view of our positioning of our offerings in the marketplace, we feel quite good about that. As I noted in my prepared remarks, we have a strong base to jump off of relative to an 80% star rating and a Net Promoter Score of 74. We remain committed to that 10% to 15% range. We look forward to providing you updates as we go forward. We always strive to perform at our best. And I appreciate your optimism and make sure that the senior team knows your optimism as well relative to this, but we are excited to end 2020 with a strong year and step into 2021 with some great growth momentum and look forward to continuing that beyond 2021. So specific to inorganic opportunities, we have continued to have a portfolio of inorganic priorities. We have historically had five priorities or so that we have walked through and we previously refreshed them about a year ago at our Investor Day from that standpoint and U.S. seniors remains on that list. The underpinning growth chassis for this business is an organic growth chassis, to be clear. So we will be opportunistic and always open-minded relative to inorganic opportunities. But the growth chassis here is an organic growth chassis aided by our end market growth, our platform expansion into individual PPO, our new market entry, which I referenced before, as well as over time additional employer growth from that standpoint. So it’s organic first and opportunistic on an inorganic as appropriate in the future.

A.J. Rice, Analyst

Thanks. Hi, everybody. Maybe just ask about, I think, this is the first quarterly call you have done since you established the Evernorth business as a separate distinct entity. Maybe just give us a little bit of your thinking behind that decision to move that into the separate entity and begin to have its own brand identification. What does it say about where the company is going in terms of incremental business lines that that might pursue, tuck-in acquisitions, service capabilities, and just give us a little bit more of your thinking about where you are going with the Evernorth business?

David Cordani, President and CEO

A.J., good morning. It’s David. So specifically relative to Evernorth, as I noted, we are quite excited to have launched that in September. We view it as a further reinforcement of our health service strategy. We have talked for quite some time as a business — an evolving business portfolio of services and a health service portfolio. Specific to Evernorth, the way I’d ask you to think about it is, one, it’s a further reinforcement of the dedication we have of resources for supporting large complex employer needs, health plan needs, governmental entity needs at both federal and state agency levels, as well as healthcare-integrated systems and healthcare providers who were taking performance based risks or value-based programs around that. Within our portfolio today, we have a large well-performing pharmacy service portfolio solutions, we have benefit management solutions to bring forward to the marketplace, we have care management solutions, and a growing portfolio of data and analytics solutions from that standpoint. And lastly, to your comment, we see this not only as an attractive organic growth platform and our performance reinforces that we are building from strength, but also an opportunity for tuck-in or expansion capabilities as we go forward. And illustratively from that standpoint, we continue to see opportunities to expand services that we offer to individuals around care delivery and care coordination from that standpoint, embracing technology, embracing virtual services, expanding our home healthcare capabilities, etc. We are building some of those capabilities organically today and we will be opportunistic from an inorganic standpoint. So just an acceleration of our service portfolio, dedication of resources, reinforcing our partner of choice orientation, and a very broad portfolio of services today that will continue to expand for the benefit of those we can serve.

Josh Raskin, Analyst

Thanks. Good morning. Can you just give us some feedback on the integrated PBM and medical offering, as you guys are a year further past the integration with Express Scripts and kind of how that’s going into 2021. Are employers looking at that integration or the table stakes, and sort of if that’s the case, what are the key differentiators you are going to market with?

David Cordani, President and CEO

Josh, good morning. It’s David. So, first, as a backdrop, as you know, we have had a long history within the Cigna portfolio of integrated offerings from employers, with a deep conviction relative to integrating those offerings with medical off of the then Cigna PBM, behavioral health, and care management services, and that continues. The combination helps us further strengthen that value proposition in terms of furthering the affordability dimension of it, but also bringing some more systemic flexibility for solution design that we can bring toward middle market and larger clients from that standpoint. I would say that that continues, continued traction relative to the integrated proposition. In addition to that, our results show the underlying strength of the pharmacy services from a point solution as we think about it or a specific either PBM, PBM and specialty, or broader suite of services around that. And then through Evernorth, we see the opportunity to further expand that by coordinating, say, behavioral health with pharmacy services going forward. So to the core of your question, our strength and momentum continues. The strong clinical outcomes we are delivering continues. Many employer/buyers value that integrated proposition and are oriented around that within the Cigna brand, but some larger corporate buyers orient still around either an a la carte or point solution and increasingly looking for some additional leverage around that, we talked about coordinated benefits by bringing, say, pharmacy and behavioral together to coordinate those services and as a combined corporation with the Cigna brand and the Evernorth brand, we are really well-positioned to deliver for either buyer orientation.

Kevin Fischbeck, Analyst

Hi. Great. Thanks. I wanted to ask about the commercial membership trends. In the quarter, you mentioned that things are getting better in part because of furloughs or also in part because of your customer segments that you are targeting. It sounds like you are assuming that attrition will accelerate in the future. But I guess, have your thoughts changed at all about the size of the decline that you might see during this recession and how resilient your customer membership might be over the next few quarters even with unemployment at these levels?

David Cordani, President and CEO

So, Kevin, good morning. It’s David. First, as we get into the commercial conversation, I do want to pause for a second and recognize from what we see is just a tremendous contribution that employers are making right now in these disruptive times facing COVID. We are seeing employers of all sizes work, stretch, innovate to do everything possible to support their employees and their family members, whether those are expanded services, additional coverages relative to testing and treatment costs. And they are working tirelessly to either minimize the layoffs or when they need to transpire, doing them through furloughs and having coordination. So I do think it’s important to pause there and recognize the power of that system right now and corporations of all shapes and sizes working really hard to support individuals. As it relates to membership, as Eric noted, in the big picture of a disruptive environment, we are pleased with our performance. Our portfolio tends to be well-positioned by industry sub-segment and our transparency of our programs has us highly aligned with employers. For example, through the third quarter, our employer clients because of our transparent funding mechanisms have about $3 billion less spending than they otherwise would have projected to have given the environment and the continuity of cash flow that takes place around that is quite helpful, above and beyond that we have taken some additional steps. As we look forward, we know it’s a disruptive environment. We expect right now as we look at the environment that we will continue to see employer customer disruption throughout the residual part of this year and into 2021. That’s factored into our outlook when we talk about 2021 in detail. Next quarter, we will try to give you more insight relative to that. We are expecting, net-net, with our new growth, as well as retention as well this enrollment, we would go from the end of this calendar year’s number to the beginning of 2021 with approximately stable commercial membership, as we continue selling to the Select segment, continue to have some retention losses, but all within our strategic range. And then throughout the course of the year, while we expect to see some continued disenrollment pressure, our outlook relative to growth is quite positive with some known traction into 2021. So, all in all, in a highly disruptive environment, we are very pleased with the results we're able to deliver and we are fortunate to be partnered with so many commercial clients that are putting their employees first front and center.

Ralph Giacobbe, Analyst

Great. Thanks. Good morning. I was hoping you talk a little bit more about how the onboarding of Prime has gone and the opportunity not just on the retail but on the specialty side? And how the option or I guess options perhaps works for each of the blues? And then what impact that could have either in 2021 or if we have to consider a certain cost and whether it’s more of a 2020 impact? Thanks.

David Cordani, President and CEO

Good morning, Ralph. So, first and foremost, relative to Prime, as I noted in the prepared remarks, we work every day to try to earn that right to be as we call it an undisputed partner of choice. It’s a strategic imperative. It guides our actions and underlying that, we need to have the products, programs, and services to deliver value. But we also have to have the orientation to partner and to seek mutual alignment. We are pleased with the early configuration with Prime. We established that and stood up in April of this calendar year, and it’s performing well. The further dedication we had around Evernorth and our performance relative to that first expansion services earned us the right, as we noted, too, and the opportunity to be able to serve Prime in a more expansive basis. We will see that growth continue systematically throughout 2021. As I noted in my prepared remarks, the plans have choices. We are a choice-based framework. But, for example, the Accredo value proposition is a tremendous value proposition and we are excited to expand that starting in January 1st for many of the Prime plans. There are ongoing investments we are making. That’s factored into our outlook for this year. There will be further investments we are making in the fourth quarter of this year for the tremendous underpinning of growth around that. But we are well-positioned to be able to make that happen and achieve our goals and objectives for 2020 that Eric noted in terms of our refreshed objective, and as we get into the detailed 2021 guidance next quarter, we will try to give you a little bit more color. But we just see this as an ongoing expansion of a mutually beneficial relationship, where we are able to create together some tremendous value that individuals will benefit from as we expand those we are able to serve.

Matthew Borsch, Analyst

Yes. I was hoping to just ask about the level of medical trend particularly in your commercial book but Medicare too that you are seeing now and I am trying to understand if we put aside the actions that you have taken to grant relief to patients and providers and just look at it from the standpoint of the recovery and utilization plus the direct cost of COVID. Are you below trend, above trend or at trend and where do you expect that to go as we get into next year?

Eric Palmer, CFO

Matt, it’s Eric. Good morning. So, with respect to the component pieces, I touched on it a little bit on my prepared remarks, but to unpack the components. I would have you think about putting COVID aside, utilization being slightly below kind of what we would have said would be normal. So call it 95%-ish for the third quarter in terms of kind of normal levels of utilization. When you add on top of that the impact of testing and treatment for COVID and on top of that the additional actions that we have taken to reduce barriers or reduce cost sharing and to ensure our customers have access to the care, that puts you all together a little bit above normal. And you might remember, in the second quarter, we had set an expectation that the loss ratio for the second half of this year would be elevated relative to what you otherwise might call it a normal loss ratio. So when you put those pieces together, those are that big building blocks. The only other thing I note is, it really does vary by geography. So as we have had the COVID play in and out of different geographies that kind of move things up and down and such. But, again, when you roll it all up together in aggregate, it would be consistent with what I just described.

Dave Windley, Analyst

Are you on mute? Mr. Windley, we are unable to hear you with your question. We will move on to the next question, who is Scott Fidel with Stephens. Your line is open, sir.

Scott Fidel, Analyst

Okay. Hi. Thanks. Good morning. Just interested if you can just throw in a bit more on, I know David had mentioned as one of the tailwinds for 2021 being some opportunities for administrative savings. And just interested if you have established or can identify a specific cost savings target yet or and if not, maybe just talk about some of the key buckets of admin savings opportunity that you see for 2021? Thanks.

Eric Palmer, CFO

Yeah. Scott, it’s Eric. Good morning. So I would not call out any particular initiative or program. I think about the opportunity here as really being much more in our continued ongoing drive for improving affordability of our services overall. Just think about things like leveraging technology, improving the efficiency, automation, et cetera, of all the different processes throughout the organization. But, I think, again, it’s just part of the culture of us continuing to create efficiencies versus any particular program.

John Ransom, Analyst

Hey. Good morning. A two-part question, if you would. Number one, how do you think about the materiality if at all if the unlikely event happens that there’s a wholesale pharma manufacturer revolt against 340B discounts at contract pharmacies? And then, secondly, we are seeing an acceleration of the rise of these new models that promise 20%, 30%, or 40% savings on medical trend by integrating primary care doctors and data. Are you still committed to your CPI goal and do you think that the market can just continue to sustain mid-single digit-trends for Evernorth or do you think the industry is vulnerable as the trend continues to kind of double and triple CPI? Thanks.

David Cordani, President and CEO

It’s David. Let me take it in reverse order. So when we step forward and put forth the CPI goal and objective, I think it caused the market to question whether or not that was theoretically possible or otherwise. But it was a conversation that needs to be had, because we established it around an orientation that it was a symbol of sustainability, not that it was perfect, but it’s a symbol of sustainability. Said otherwise, if total basket of goods costs from a societal standpoint are increasing by X, whatever X is, 2%, businesses need to find a way to approximate that to create a level of sustainability or better from that standpoint. And we are proud of the fact that we have delivered the lowest medical cost trend, and by the way the lowest pharmacy trend in our space as best anybody could tell apples-to-apples year in, year out. So that continuation is mission-critical. This is a unique year, as everybody knows, relative to COVID in terms of disrupting the trend. But we continue to drive toward that. Second, within the context of your question, we see many, to your term, disruptive or innovative models to drive step function improvements and we have many clients today pre-COVID that are benefiting from CPI or well better than CPI trend who are on the highly innovative dimension of consumer engagement, incentive alignment, heavy leverage, and utilization of value-based care provider groups and centers of excellence leverage from that standpoint, et cetera. So, you used the word disruption, I will use the word innovation. We see the need for relentless drive relative to that, because as I noted in my prepared remarks, we can’t continue to afford and no society can continue to afford paying at the levels that are being driven. The last point I’d make here is, our open-framed partner orientation has us embrace, if you will, innovators or disruptors be they care delivery systems or alike from that standpoint. So, more to follow here. I appreciate you highlighting it, and we remain extremely committed to driving optimal value here. As it relates to your first point, there are a bunch of, I’d say, hypotheticals and theoreticals within that. The way I hear your first point though more broadly is, it’s another example of pressing for sustained affordability 340B was designed with a specific purpose and intent in mind. There are many hospitals and delivery system infrastructures that need 340B to make them work. It’s an interesting time to have that conversation, whereby delivery system infrastructures are strained in ways we haven’t seen in the past due to COVID causing massive revenue ramifications, of which governmental intervention and some player like our self and others in our space are providing support from that standpoint. So, it’s an interesting time to have that theoretical conversation, but unlike most programs, it will most likely evolve and our broader service portfolio is positioned to evolve with it.

Robert Jones, Analyst

Great. Thanks for the question. I guess just a couple of clarifications on Evernorth. I mean, first, just to follow up on Josh’s question on the Integrated Medical pharmacy offering. I am just curious if you are actually seeing less desire or less PBM carve-outs in the market today or is it still something more of a discussion point with your customers? And then just on the quarter, Evernorth did see a fairly meaningful step up in OpEx and you touched on some of these items. Just curious, is that kind of more one-time in nature this year versus next year, or is this probably or potentially a more permanent level of spend as we think about the Evernorth business?

David Cordani, President and CEO

Good morning, Rob. It’s David. I will take the first question and I will ask Eric to address your second question. The simple answer is, no. We don’t see a C change in terms of buyer behavior relative to wanting more of or less of. It’s one client at a time. We have a very much of a consultative orientation trying to find the right configuration of benefits and funding mechanisms that work for clients. Now, within that, our Select segment is an integrated offering, full stop, period, the end. It’s designed to be an integrated offering, whether it’s on an ASO platform or a guarantee cost platform. As you move upmarket into the commercial employer space within middle market and national accounts, you see different buying behaviors and it ebbs and flows. And I think the important message here is that, as an entity, we are extremely well-positioned to deliver what a client wants, whether they want a fully integrated offering, whether they want a point solution, a best-in-class PBM or best-in-class specialty pharmacy or both from that standpoint, or increasingly you are looking to get some additional value off the coordination of services, be it care management services, behavior health, et cetera, relative to that. But I wouldn’t say there’s a C change. I would say, think about Evernorth and Cigna together as being extremely well-positioned to deliver on the value that buyers want, be it integrated or point solutions if you want standalone pharmacy services in this case, or evolving some coordination of services to get another step function of value that come along with that. Eric?

Eric Palmer, CFO

Yeah. On the G&A ratio, in particular, there’s just a couple of things I would call out here. At the most macro level, we do continue to spend and continue to invest in building additional capabilities in this business and you see that in the G&A. There are a couple of other impacts that caused it as well. One, as you might remember, we talked a bit in the past, after the close of the acquisition, just kind of rebuilding of the amortization. So the amortization on the assets you acquired gets reset and then we have to rebuild that expense into that — have built up over time. Offsetting that is us continuing to work to find synergies and find additional efficiencies. So, again, those would be the biggest buckets that play into that ratio in any given quarter. But it’s not we will be looking to continue to spend and build additional capabilities there as we go forward.

Charles Rhyee, Analyst

Hi. Can you guys hear me? Okay. Great. Okay. Thanks. Thanks for squeezing me in here. And just maybe a two-part question here. First, on vaccines, with the potential COVID vaccine coming, can you talk about sort of the how that kind of impacts the company both positive from — I guess, a revenue standpoint and a cost standpoint? And talk about sort of what — how pricing and reimbursement, as you understand it, maybe at this point I know it’s very early — could happen because I understand the government has bought a first big tranche of vaccine. How do you understand the distribution of that to work particularly as we think maybe more from the Evernorth side? And then, secondly, related to that, I think, yesterday, Biogen had a very positive ad com meeting for their new Alzheimer’s drug. Again, maybe if you could, Dave, walk through how we — or Eric, how we should think about that impacting maybe the Evernorth business. Is that something you would expect to distribute to the Accredo brand and is this something I would fall into the Embarc program as well? Thanks.

David Cordani, President and CEO

Good morning. It’s David. So, in your first point, there are multiple dimensions within that. But stepping back on the vaccine, in the current configuration, we don’t step into this viewing that the vaccine presents a unique revenue generation opportunity. It’s a service opportunity. It will be facilitated through Evernorth for sure. The pricing, the reimbursement structure, et cetera, that will evolve will be very based on the specific vaccines that manifest themselves, as you know. Our political leadership team is highly embedded in the national dialogue relative to this including the distribution, complexity that comes along with these vaccines that our society is starting to get their arms around relative to more than one dose, the continuity that needs to transpire, how society will be prioritized from medical professionals through first responders, to high-risk individuals, etc. And we are well configured as a large service provider to be in support of and in service to that initiative, and we look forward relative to that. Our team is taking prudent estimates relative to what we think the cost of the vaccines would be relative to our 2021 outlook as well through that lens. As relates to the Alzheimer’s drug, I think it’s another good example of ongoing innovation where as we hit the pause button for a moment and recognize that the vast majority of innovation in the present environment and as we extrapolate forward around healthcare innovation is and will continue to transpire pharmaceutically. The chapter is evolving on an accelerated basis that clinical innovation globally will be heavily pharmaceutically oriented from that standpoint. And the Alzheimer drug, which is quite exciting from a societal standpoint, is also extremely complex and costly. Hence having market leading specialty pharmacy capability per Accredo positioning does quite well and to your last point, presents additional opportunities to potentially expand the Embarc program, which we would suggest would transpire over time. So I think it’s a good concrete example of what the future has in store relative to very exciting and life-changing drugs, but also highly complex and costly and having the capabilities to be able to serve and support that, whether who the Alzheimer drug you just questioned or previously Ricky questioned relative to biosimilars going the other way, our Evernorth portfolio is really well-positioned to be able to create great value for society here. Thanks, everyone. So as we wrap up here, I’d like to first and foremost acknowledge Cigna’s more than 70,000 colleagues around the globe, who again have worked tirelessly and with great empathy throughout this pandemic in support of those we are able to serve around the world, customers, patients, and clients. Our mission at Cigna to improve the health, well-being, and peace of mind of those we serve has never been more important and continues to guide all the actions. Specific to Evernorth, it represents an exciting new chapter for our company and along with our other growth platforms, we seek to leverage our broad suite of capabilities to create innovative and flexible solutions to tackle some of society’s toughest healthcare issues and drive sustained growth. From a results perspective, we once again deliver strong results this quarter and remain on track to complete the integration of Cigna Express Scripts by the end of this calendar year. We are also well-positioned to deliver very strong revenue and EPS outlook for 2020, as well as our 2021 EPS target of $20 per share to $21 per share. With that, we thank you for joining our call. Hope everybody remains healthy and safe in these trying times. Thanks.

Operator, Operator

Ladies and gentlemen, this concludes Cigna’s third 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 1800-839-8789 or 203-369-3037. There is no passcode required for this replay. Thank you for participating. We will now disconnect.