Earnings Call Transcript
Elevance Health, Inc. (ELV)
Earnings Call Transcript - ELV Q3 2021
Operator, Operator
Ladies and gentlemen, thank you for standing by and welcome to Anthem's Third Quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session where participants are encouraged to present a single question. These instructions will be repeated prior to the question-and-answer portion of this call. As a reminder, today's conference is being recorded. I would now like to turn the conference over to the Company's management. Please go ahead.
Stephen Tanal, Vice President of Investor Relation
Good morning. And welcome to Anthem's Third Quarter 2021 Earnings Call. This is Steve Tanal, Vice President of Investor Relation. And with us this morning on the earnings call are Gail Boudreaux, President and CEO, John Gallina, our CFO, Peter Haytaian, President of our Diversified Business Group, IngenioRx, Morgan Kendrick, President of our Commercial and Specialty Business Division, and Felicia Norwood, President of our Government Business Division. Gail will begin the call with a brief discussion of the quarter, recent progress against our strategic initiatives, and close on Anthem's commitment to its mission. John will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we'll reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, antheminc.com. We'll also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Anthem. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.
Gail Boudreaux, President and CEO
Thanks, Steve, and good morning everyone. We're pleased to talk with you about another strong quarter. This morning, we reported third quarter GAAP earnings per share of $6.13, and adjusted earnings per share of $6.79. Ahead of expectations, despite another surge in COVID that created challenges throughout the country, once again, Anthem continues to deliver on stakeholder commitments, accelerate growth in every core benefits business, and make considerable progress towards our long-term strategy to transform from a health benefits company to a trusted lifetime partner in health. Addressing the whole person is essential to becoming a trusted lifetime partner in health. Responding to the pandemic has allowed us to instill new agility and innovation into the business, particularly around solutions for physical health, pharmacy, behavioral and social needs, with an emphasis on maternal health, access to nutritious food, and health disparities. Ultimately, we believe we're only as healthy as the communities we live in and recognize our important role in ensuring everyone has an opportunity to be and stay healthy. As the healthcare paradigm shifts, we're accelerating work to simplify members' and clients' everyday experiences, and meet their evolving needs to a personalized experience. Moreover, there's abundant opportunity to modernize further and reinforce our position, leveraging our technology, predictive analytics, and innovative products and services to bring an enhanced experience only Anthem can offer. We expect whole-person healthcare, powered by digital technology to help us achieve our goal of driving commercial medical cost trend down towards the rate of TPI by 2025. Currently, we're exploring more ways to drive differentiated value across medical and pharmacy. Our insight-driven approach is fueling new programs that drive better cost and quality outcomes for our members, including in the areas of behavioral health and autoimmune disease. Additionally, we recently launched a new offering to test the full suite of our capability in the form of a virtual primary care first product, which we expect to demonstrate meaningful reduction in overall cost of care and greater member satisfaction. We are already selling virtual-first risk-based commercial plans in certain markets across each of Anthem's 14 blue states for the 2022 plan year, featuring simplified plan designs, 24 by 7 service, and leveraging our high performing network that enable affordable price points. We've also seen strong interest in these capabilities from our fee-based clients, and will be embedding virtual primary care with several large fee-based clients throughout 2022. At the same time, innovative product offerings like Sydney Preferred, which allows employers to customize a digital first healthcare experience for their employees are gaining considerable momentum. To date, more than 50 national accounts have signed up for Sydney Preferred, representing nearly 900,000 commercial members. To help accelerate our digital platform, we've elevated Rajeev Ronanki to President of Digital Platform. Rajeev will drive the commercialization of our digital capabilities for consumers and care providers as we re-imagine the health ecosystem. Then we'll share notable third quarter highlights and business driving initiatives for the balance of fiscal 2021, starting with our Medicaid business which is performing well. Our Healthy Blue plan in partnership with Blue Cross Blue Shield of North Carolina has quickly become the largest Medicaid managed care plan by membership in North Carolina and the leading choice for consumers. Its success, coupled with the ongoing suspension of eligibility redetermination, drove Anthem's total Medicaid membership above 10 million at quarter-end, exceeding our internal expectations. Our commitment to members and their community has never been stronger. And we continue to develop innovative solutions to meet their unique holistic health needs. As a result, our focus on reducing health disparities and inequities remains vital to the value Anthem offers day partners. This is reflected in our momentum along with our 100% RFP win rate year-to-date. Looking further ahead, Anthem will launch another new statewide Medicaid managed care contract in Ohio in the summer of 2022. After earning the City of New York's Group Medicare Advantage contract last quarter, we added several new group MA customers in the third quarter for January 1st, 2022 start dates, and are having growing pipelines of new prospects. As part of our strategy to deepen our Medicare Advantage market penetration, we remain focused on converting commercial age-outs to MA relationships, and preparing for a flawless January launch of our Group Medicare Advantage plan for New York City's retirees. Customized solutions at scale underpin our approach to individual Medicare Advantage benefits for 2022. Many of our MA plans will allow customers to choose what's best for them from a menu of innovative Whole Health benefits. For example, in some areas, the program will include a Kroger grocery card, generous over-the-counter benefits, and up to 60 hours of in-home support to assist with light housekeeping, errands, and companionship. We expect these and other benefit enhancements to help drive another year of double-digit growth in our individual Medicare Advantage membership next year. Medicare star ratings continue to be a focused area across Anthem. And the ratings released two weeks ago show we've made solid progress. We're particularly proud that Health Fund received a five-star rating for the fifth consecutive year, the only Medicare Advantage health plan in Florida to accomplish such an achievement. For the 2023 payment year, we anticipate approximately 73% of members in plans that CMS rated as 4-plus stars, up from 58% on a comparable basis a year ago. That figure will move even higher with the City of New York's Group Medicare Advantage contract launch next year. At the same time, investments in provider partnerships are accelerating Anthem's evolution towards high quality, value-based care. This is necessary to drive improved outcomes and cost of care across all of our benefits businesses, and is critical in Medicare Advantage where they impact reimbursement through star ratings. This year, more than 60% of our Medicare Advantage spending will be in risk-sharing arrangements. Based on our current contracts, we expect that to increase to more than 70% in 2022 with approximately 30% of Medicare Advantage spending in fully capitated risk arrangements. Investments in our primary care partnerships in particular will support members and drive growth through the expansion of value-based care leading to an even larger proportion of our members in 4-plus star contracts over time. We recognize there's still more work to do, and we'll continue our efforts to raise customer satisfaction by aligning incentives with care providers to improve quality and medication adherence, while simultaneously enhancing our member experience, accelerating our use of data and analytics, and leveraging IngenioRx as our pharmacy benefit manager. Lastly, a few highlights of the strong growth we see in our commercial business. We're nearing the end of the most robust national account selling season in Anthem's history. Volume of RFPs was down, but average size was up considerably, and we won a disproportionate share of new business and expanded services with our existing clients. IngenioRx is also showing exciting growth, with more than a fivefold increase in new sales at this point in the selling season compared to the relatively depressed base a year ago when the pandemic weighed heavily on employer decision-making. The consistent theme across all of our businesses is that each continues to produce strong organic growth. This drove medical enrollment to more than 45 million U.S. consumers, strengthening Anthem's position as the largest health insurer in America by membership. I'm pleased with the progress we're making towards delivering our strategy, and want to share two recent leadership changes to accelerate our efforts. Pete Haytaian will lead our Diversified Business Group and IngenioRx, both of which are critical components of our growth strategy. Pete has an impressive track record of growth and innovation in his previous roles, leading Anthem's commercial and government businesses. With Pete's transition, we're confident our commercial and specialty business division will maintain its strong momentum under the leadership of Morgan Kendrick, who has driven market-leading growth across critical lines of our commercial business, including national accounts and most recently, as President of Anthem's commercial west markets, our largest region. The breadth and depth of our collective leadership ensures we stand ready to deliver on our promises to stakeholders across all areas of our business and will guide Anthem to long-term sustainable growth. It's a privilege to work alongside such a strong group of leaders committed to advancing our purpose and mission. In summary, our actions and the focus and discipline we've brought to the business have positioned Anthem for the next several years of growth. Our strategy to extend our role from a partner in health benefit to a lifetime trusted partner in health is resonating in the marketplace, as evidenced by our growth. Our response to COVID brings a new level of agility and speed to the business, along with more opportunities to reach consumers and care providers than ever before. And we continue to simplify and personalize our member relationships with relevant benefits and enhanced innovative experiences where and when they want. With that, I will turn the call over to John to discuss our financial results in more detail.
John Gallina, CFO
Thank you, Gail, and good morning to everyone on the line. As Gail mentioned earlier, we reported third quarter adjusted earnings per share of $6.79, an increase of approximately 62% year-over-year, driven by strong growth across all of our businesses. This growth was a result of focused execution against our strategic priorities despite a challenging backdrop created by another surge in COVID. Our third quarter results once again demonstrate the balance and resilience of our core benefit businesses, and the strong growth momentum we are producing across the board. We ended the quarter with 45.1 million members, growth of 2.4 million lives year-over-year, or 5.7%, including growth of 730,000 during the quarter, led by the successful launch of our Healthy Blue Medicaid plan in North Carolina. In addition to the 426,000 members gained in that state, we produced incremental organic growth of nearly 380,000 members during the quarter, driven by strong growth in our Medicaid and commercial risk-based businesses. This growth was partially offset by continued in-group attrition in our group fee-based business, consistent with our expectations. Operating revenue in the third quarter was $35.5 billion, an increase of 16% versus the prior-year quarter, and nearly 18% on a HIF adjusted basis. The increase was driven by higher premium revenue associated with strong membership growth in our Medicaid, Medicare, and commercial risk businesses, as well as rate increases to cover cost trends, and ongoing momentum in our diversified service businesses, including IngenioRx. The benefit expense ratio for the third quarter was 87.7%, an increase of 90 basis points compared to the prior-year quarter, driven by the repeal of the health insurance tax in 2021. Excluding the impact of the HIF, our medical loss ratio would have decreased by approximately 50 basis points, driven by an unfavorable rate adjustment in our Medicaid business in the third quarter of 2020. All in, the cost of care was above what we would consider to be normalized or baseline levels in the third quarter of this year, driven by higher COVID costs in the month of August and September. But medical costs were nonetheless better than we had expected for the quarter overall, with lower non-COVID utilization helping absorb the higher-than-expected COVID-related costs. Our third-quarter SG&A ratio was 11.1%, a decrease of 620 basis points from the 17.3% in the prior-year quarter, primarily due to charges we took last year related to business optimization and the Blue Cross and Blue Shield Association litigation settlement. Excluding charges from the base year, and the impact of the repeal of the health insurance tax, our SG&A ratio would have decreased by approximately 130 basis points, driven by leverage associated with growth and operating revenues, partially offset by higher spending to support our growth and our transition to becoming a digital enterprise for health. Operating cash flow during the quarter was $2.5 billion or 1.7 times net income. Turning to our balance sheet, we ended the third quarter with a debt-to-capital ratio of 38.9%, down approximately 100 basis points from the 39.9% as of the end of the second quarter. The decrease was driven by growth in shareholders' equity associated with our earnings in the quarter and a reduction in commercial paper outstanding. We continue to maintain a prudent posture with respect to reserves, given the ongoing uncertainty associated with the COVID-19 pandemic and lengthening in cycle times that we have seen since the pandemic began. We ended the third quarter with 46.8 days in claims payable, a decrease of 1.3 days compared to the second quarter, and an increase of 5.7 days as compared to the prior year quarter. The timing of our acquisition of MMM inflated days in claims payable in the second quarter and drove the sequential change. Excluding timing-related impacts associated with the acquisition, our days in claims payable would have increased by 0.2 days sequentially. Given strong performance year-to-date, we are raising our guidance for full-year adjusted earnings per share to greater than $25.85 from greater than $25.50, putting us at the high end of our long-term annual adjusted earnings per share growth target of 12% to 15%. Please note that this guidance continues to reflect the total COVID and non-COVID costs combined, exceeding baseline in every month of the fourth quarter and assumes a similar overall net headwind from COVID for the year relative to our prior guidance. Given significant outperformance in the third quarter on our investment income line, we have increased our full-year outlook for investment income by $100 million to approximately $1.2 billion, which is 260 million above our initial outlook of $940 million. Much of the outperformance in this area stems from stellar results in our alternative investment portfolio year-to-date that we would not expect to recur. Accordingly, we believe that there is at least $200 million of non-recurring upside in the investment income line that should be removed when assessing the appropriate base for earnings growth for 2022, equating to approximately $0.65 of earnings per share in 2021 and implying a baseline for growth entering 2022 of $25.20. Most importantly, our businesses are performing well with strong growth momentum that we expect we'll carry into 2022. Although we will not provide specific guidance for next year on this call, I would now like to shift focus to the tailwinds and headwinds that we are considering into next year starting with the tailwinds. Recall that our 2021 guidance continues to embed a significant net headwind related to the effects of COVID. While it is too early to declare how much of the overall net headwind we will be able to earn back in 2022, we do believe that we will recover a portion of it resulting in a year-over-year tailwind. Based on our strong competitive positioning, we expect another year of double-digit membership growth in our individual Medicare Advantage membership. We also expect strong growth in our Commercial membership, aided by what is shaping up to be the strongest national account selling season in the history of the company. We expect accretion from the annualization of earnings of our acquisitions of MMM and myNEXUS. And we expect an EPS lift from our share repurchase program, which was opportunistic during recent periods of volatility in our stock price. Our tailwinds will be weighed against known headwinds and these include the dilution associated with the first year of operations of our new Group Medicare Advantage contract serving New York City's retirees, which we continue to expect will launch on January 1st, as well as dilution related to the startup and launch of our new Medicaid contract in Ohio, which we expect to begin on July 1st, 2022. In addition, the resumption of Medicaid eligibility re-determinations, assuming a return to a more normal operating environment, and finally, the non-recurrence of the upside in the investment income line this year that I had described earlier. Based on what we know today, we believe our tailwinds will largely offset our headwinds, enabling us to reaffirm our commitment to growth and adjusted earnings per share of at least 12% in 2022 after adjusting for the portion of investment income that we have identified as non-recurring. We look forward to providing more specific guidance on our fourth quarter earnings call when we will discuss our 2022 outlook in more detail. In closing, we continue to execute against our strategic growth priorities, and are pleased to have delivered another quarter of strong growth and continued reinvestment in our business, all while maintaining a solid balance sheet given the ongoing uncertainties associated with the pandemic. And with that, Operator, please open the line to questions.
Operator, Operator
Once again, we ask that each participant limit themselves to a single question to allow ample time to respond to each participant that may wish to participate in this portion of the call. For our first question, we will go to the line of A.J. Rice with Credit Suisse. Please go ahead.
A.J. Rice, Analyst
Thanks. Hi, everybody. I appreciate the headwinds and tailwinds for next year that you're offering. I guess when you look at those items that you've delineated, a lot of them look like they're pretty well set at this point. What would be the ones where there is the greatest potential variability? I'm assuming the COVID-related issue. How much of that you get back next year is probably one, but can you comment on that? Where there's the greatest variability among those items?
John Gallina, CFO
Good morning A.J., and thank you for the question. Associated with the headwinds and tailwinds, of course, we do want to look at them in their entirety but we should think about the potential variability, COVID has the absolute most uncertainty of any line item on there. I mean it's been an incredible situation that we've been through as a country since March of 2020 and COVID continues to have uncertainty associated with it. The New York group retiree business are still going through their enrollment process so we don't have the absolute exact number of lives lined up at this point in time. And so there's some variability there. But you are correct. We do have some pretty good line of sight on most of the rest of them. But COVID is clearly the lion's share of uncertainty at this point.
Gail Boudreaux, President and CEO
A.J. I'd add to John 's response that one of the things that we do feel very good about is the underlying strength and the core of all of our benefits businesses. Our growth's been strong, and I think we've been performing very well in line with the expectations we set. So next question, please. Thanks for the question.
Operator, Operator
Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead.
Justin Lake, Analyst
Thanks. Good morning. Just wanted to clarify something then a question. The clarification is just wanted to make sure, John, you were talking about 12% growth, and then you talked about that off at $25.20 jump-off point. So that's number 1, and then just the question is on cost trend, looks like the Government margins were materially stronger than commercial in the quarter. So you gave some overall posturing commentary, but was hoping you could give us some trend breakdown between commercial, Medicaid, and Medicare, how that performed in the quarter versus that slightly above normal overall discussion you had. Thanks.
John Gallina, CFO
Yes. Thanks Justin, I appreciate the question. In terms of the jump-off point for 2022, you are correct. We've quantified our investment income, outperformance for the year. We believe that there is at least $200 million that's unlikely to recur. And so that $200 million equates to approximately $0.65 of earnings per share. And then you take that off of our updated guidance, and we believe the appropriate jump-off point for 2022 growth is $25.20. So appreciate the opportunity to clarify that. Associated with the various lines of business, the commercial profitability, they're still very, very good. However, commercial had the surge of COVID in August and September was really more significantly pronounced within the commercial line of business than it was in the other two lines of business. We took the opportunity to reserve prudently within the commercial line for that spike and to build commercial reserves as a result of what we're seeing at that point in time. Fortunately, non-COVID came in much lower in September across all lines business, which allowed our quarter to come out in a really, really good place. Medicare was very much consistent with expectations. Medicaid was actually a little bit better than expectations for the quarter. And just as a reminder, we had guided to be above baseline costs for COVID and non-COVID combined for each of the 3 months in the third quarter and we were. We were just ended up being better than our expectations. But the commercial issue was really had to do with the spike in August associated with COVID. Thank you for the question.
Gail Boudreaux, President and CEO
Next question, please.
Lance Wilkes, Analyst
Yeah, thanks a lot. Could you talk a little bit about the strategy and vision for Diversified and Ingenio, with Pete moving into that role? And maybe as part of that, talking a little bit about the pipeline of opportunities in the Diversified and Ingenio book, as well as selling government services and other Blues. Thanks.
Gail Boudreaux, President and CEO
Thanks for the multitude of questions. I'll ask Pete in his new role to respond to Lance.
Peter Haytaian, President of Diversified Business Group, IngenioRx
Thank you, Lance. I appreciate the opportunity to speak. I would like to start by discussing the growth related to Ingenio before moving on to the Diversified Business Group. I want to express my gratitude to Gail and the team for placing me in this role. My background in both non-Government and Commercial areas gives me a unique perspective, and I believe that by working together as an enterprise, we can significantly increase our penetration of the Anthem portfolio. Regarding Ingenio and its growth, we've collaborated closely with the commercial sector, and as previously mentioned, our main opportunity lies in expanding within the self-funded business. We have seen a substantial increase in activity this year compared to last year, with positive outcomes in the smaller business sector and middle market. We are certainly experiencing more engagement and achieving more wins. This area offers strong financial and profitability potential, particularly with larger jumbo accounts. We are also witnessing increased activity in the pharmacy sector, although it remains highly competitive, and incumbency plays a significant role. As we approach 2022, we are optimistic about Ingenio's growth trajectory and performance, expecting improved net membership growth compared to 2021. In terms of the Diversified Business Group and our strategies, I am excited about our position. Considering the future of healthcare, particularly the role of specialty pharmacy, there are numerous opportunities to explore, including virtual services. We are on the verge of a significant evolution in pharmacy, which presents a great chance for us to engage with the Anthem business. Regarding the DBG portfolio, the verticals we discussed during Investor Day hold tremendous potential. There are significant growth opportunities in behavioral health, especially with Beacon leading the field. Additionally, managing care transitions and addressing costs in the Commercial sector is crucial, and our assets like AIM and myNEXUS are proving to be successful in this area. We also have strong resources for managing chronic illnesses with CareMore and Aspire. Although I have only been in this position for about a week and a half and don't want to overstate things, I believe the opportunity to penetrate Anthem is substantial across our entire portfolio: Medicare, Medicaid, and Commercial. There are also great external opportunities ahead. I look forward to collaborating with my colleagues, Felicia and Morgan, to drive our business forward.
Gail Boudreaux, President and CEO
Thank you, Pete, and thanks for the question, Lance. I think to sum up what Pete has shared; this really is part of our ongoing journey and evolution in Anthem that we shared with you at our Investor Day. It really is part of our transformation from a health benefits company to truly a trusted lifetime partner in health and we see significant opportunities. And I think this shows the maturing of the strategy we shared. So thanks for the question and next question, please.
Operator, Operator
Next, we'll go to the line of Matthew Borsch from BMO Capital Markets. Please go ahead.
Matthew Borsch, Analyst
Thank you. Hoping you could comment on the aftermath of the Blue settlement, particularly as it relates to how you see competition among the Blues and your role with that changing, maybe intensifying as we go into next year and after.
Gail Boudreaux, President and CEO
Yes. Matt, thanks for the question. We are still in the midst of that litigation and the settlement is ongoing, so I won't comment. I think it's inappropriate to comment at this time. But given the tone of your question, I think it's really important, and we've had a long history, quite frankly, of partnering with Blue in addition to working with them on accounts that are in our service areas, part of the seeding process. And so, we expect that to continue, expect, obviously, to offer the capabilities that we have. Pete just shared with you what we're doing with IngenioRx. We also think our diversified business capabilities are going to be incredibly important. Some of our Digital Platform capabilities that we've also offered to other Blues. So I can't really comment on where we are in terms of that litigation because it's not finally settled yet, but we feel that there's a significant amount of opportunities for us even outside of this settlement to work with Blue partners across the country. Thanks to question and next question, please.
Operator, Operator
Next, we'll go to the line of Ralph Giacobbe from Citi. Please go ahead.
Ralph Giacobbe, Analyst
Great, thanks. Good morning. I guess I just want to go to membership. ASO dipped and you cited some of the economic backdrop, but commercial risk was up nicely sequentially. So is there some shift between the two? Or maybe just any thoughts around those dynamics. And then one thing specifically around individual enrollment as well is pretty nicely sequential. And, John, to your comments around higher COVID costs, was there any disproportionate pressure on the exchanges specifically that sort of weighed on margins in the segment? And then just hoping you could talk about your positioning on the exchanges for 2022 and expectations for growth there. Thanks.
Gail Boudreaux, President and CEO
Ralph, thanks for the question. I'm going to ask Morgan Kendrick, who's leading our Commercial businesses also, they've been intimately involved in these, to respond to your questions. Please, Morgan.
Morgan Kendrick, President of Commercial and Specialty Business Division
Thank you, Gail, and Ralph, I appreciate your question. There was a lot to cover. Regarding your comments on the reductions in the large group business, that aligns with our expectations. We anticipated a decline in our fee-based business. As you mentioned, we've experienced strong growth in the risk-based business across the segment. The individual market has benefited from an extended special enrollment period, resulting in year-over-year and month-over-month growth. Additionally, in our large group and small group business, we have seen month-over-month sales growth that outpaces lapses. Importantly, our large group business has performed quite well, with sales exceeding lapses in 23 of the last 25 quarters. Looking ahead into the new year, it is clear that we are in a competitive environment for individuals and HDA. However, I would describe this market as rational. Our approach continues to be disciplined as we analyze this market on a county-by-county basis. For 2022, we plan to expand to serve 83% of the counties we can, an increase from 71% the previous year. This growth is primarily achieved through our unique partnerships with providers and by leveraging our scale and density in various regions to deliver market value. Our strategy is long-term, and we are confident that our pricing strategies align with our projections for future trends. Thank you again for your question.
Gail Boudreaux, President and CEO
And one last thing, Ralph. You asked about anything distinctive regarding the individual in relation to COVID, and I would say no. Our individual business has performed consistently. Overall, we observed, as John mentioned, higher COVID spikes in commercial, and the individual segment is not unique or distinct. We believe we are well-positioned in that market. Next question, please.
Operator, Operator
Next, we'll go to the line of Lisa Gil from JPMorgan. Please go ahead.
Lisa Gilson, Analyst
Thanks very much, and good morning. I just wanted to go back out to your thoughts on the virtual primary care offering. One, can you talk about how that product will be priced? And then secondly, will they be in all 14 of your markets, or will this be more of a limited type of offering initially? And then lastly, as I think about virtual primary care, how do we think about the cost trends there and the potential savings when we think about those types of products?
Gail Boudreaux, President and CEO
Thank you for your question, Lisa. It’s an important topic as we consider the future of our products. The pandemic has really underscored the demand for virtual care services. We previously discussed our joint venture with Hydrogen Health, and we've been actively collaborating with our partners to offer these services, especially in urgent and primary care through chat and texting. We're now working on what I would describe as the next generation of virtual primary care, building on our experiences from the past year. We recently launched virtual first services, which are integrated with our high-performance network, a critical aspect. We're seeing strong demand in our high-performance network, which, as we've mentioned before, has a cost structure that is 12% to 15% lower. We believe that integrating virtual primary care into this framework will be a strong foundation for growth. I'm optimistic about this initial launch and look forward to continuing to innovate and enhance our offerings. We are currently operating in our Blue states and have a presence in most of our markets. While we don’t cover every county yet, we plan to expand as we learn and align our efforts. Much of this depends on our high-performing networks and the utilization of both virtual care and those networks. Our offerings will feature virtual visits with a $0 copay, simplified plan designs, and 24/7 service to fully leverage our network. Value-based contracts will be central to achieving that cost advantage, and we anticipate being at least 15% lower than traditional products. This will be a starting point as we gain further experience. We’ve noticed considerable interest, initially launching in our fully insured risk-based business, and now our national fee accounts are keen on including this in their offerings. We’ve experienced one of our strongest national account-selling seasons, which I attribute to our innovations in digital services and a distinct cost structure bolstered by high-performing networks. We’re excited about the potential for this to shape future trends and opportunities for our clients, and you'll hear more about it in the upcoming months as we make further progress with our employers. Thank you for your question. What’s the next question, please?
Operator, Operator
Next, we'll go to the line of Gary Taylor from Cowen. Please go ahead.
Gary Taylor, Analyst
Hi, good morning. Can you hear me?
Gail Boudreaux, President and CEO
We can. Thank you.
Gary Taylor, Analyst
Okay, sorry. As I was thinking about 2022, I wanted to ask about something I thought would be a tailwind and something I thought would be a headwind but you didn't mention, so just some color would be helpful. Was thinking that the special enrollment period on exchanges, if that were to eventually go away, would potentially be a tailwind for that business, but you said you're performing in line there, so maybe don't see that as material tailwind, and then on the Medicaid side of the house, you did mention redeterminations as a headwind, but we certainly note for you and across the board, that seems to be a population that's not just vaccine hesitant but utilization hesitant and the MLRs look really strong there. So I was thinking there could be headwind, not just on redetermination, but on margin as well. So just wanted some color on those two things.
John Gallina, CFO
Yes, sure, Gary. Thank you for the question. So let me see if I can address these appropriately. With the special enrollment period and the exchanges, we have talked about the fact that exchanges are a nice strategy of ours. We're being very, very prudent in terms of our approach. We're going from having, I think, just a little bit over 70% of our counties covered, just over 80% of our counties covered next year. And we do expect some nice membership growth associated with the individual. But I would say that is all captured in just our core underlying growth in the fundamentals of the business performing extremely well. We expect all of our businesses to grow, and the individual is no different. In terms of the Medicaid in the redeterminations, the headwind that we referenced really has to do with Medicaid membership, but this is my opportunity to again talk about the balance and resilience of our membership and our catcher's mitt. And we may be able to turn that headwind into a tailwind depending on where those folks go. We do believe that once redeterminations start, that we will be able to maintain a significant amount of that membership within an Anthem product. We offer a product for every American in every situation, young, old, rich, poor, sick, healthy. We have a product for all of them. And right now, there is a significant number of members within our Medicaid plans. And after redetermination occurs, Medicaid may shrink a little bit, but that means that there's really some significant growth opportunities in other lines of business. I didn't spike it out specifically because we think it's a driver and we could actually turn a headwind into a tailwind. Thank you for the question.
Gail Boudreaux, President and CEO
Next question, please.
Operator, Operator
Next, we'll go to the line of Steven Baxter from Wells Fargo. Please go ahead.
Steven Baxter, Analyst
Yeah. Hi. Thanks. You touched on this a little bit, but was hoping you could expand on the national account outlook for next year. We'd love to hear more about what you think is driving that growth and what you're seeing in terms of competitive dynamics in that market. And then just to clarify, was that commentary influenced at all by what insight you're getting from your clients about in-group expectations or that's purely a comment about the new accounts that you wanted? Thanks.
Gail Boudreaux, President and CEO
I'll ask Morgan to address that.
Morgan Kendrick, President of Commercial and Specialty Business Division
Thank you for the question, Steve. As Gail mentioned, the national business is performing very well, although there has been a slight decrease in RFP activity. It's important to note that while the number of RFPs fell, our membership actually increased, and Anthem had a very successful year. The up-market performed strongly as well. A noteworthy observation is that we saw a record number of customers switching from multi-partner healthcare solutions to a single-partner solution with Anthem. To address your question directly, we must earn the right to win each day. Looking at our assets and their impact in the market, our advocacy-based Whole Health digital solutions are thriving. Gail previously mentioned that we have 50 customers using Sydney Preferred, which serves as our digital front door or gateway to health, providing access to all our offerings. Additionally, as we look ahead to 2023, we will continue to innovate these assets, and it's crucial that we maintain our commitment to earning this right. The market is clearly responding positively to our direction, and we are enthusiastic about the path forward in 2023.
Gail Boudreaux, President and CEO
Thank you. Next question, please.
Operator, Operator
Next, we'll go to the line of Rob Cottrell from Cleveland Research. Please go ahead.
Rob Cottrell, Analyst
Hi, good morning. Wanted to ask about, Gail, you mentioned behavioral briefly. Curious if you can provide a little bit more comment on the Beacon cross-selling efforts and how that's going across both the government and commercial businesses?
Gail Boudreaux, President and CEO
Thank you. I will make a quick comment, and then I will ask Pete to add his thoughts, as this relates to our Diversified Business Group. Overall, we recognize the growing demand for behavioral health services. I want to briefly mention the connection that Morgan mentioned regarding Whole Health. Beacon has consistently been a strong participant in the Medicaid market, and we are continuing to integrate it into our overall government business. However, there is also significant potential in the commercial sector. Pete, maybe you can share some early insights based on what you've observed.
Peter Haytaian, President of Diversified Business Group, IngenioRx
I appreciate that, Ralph. Just to remind everyone, Beacon serves roughly 44 million members, with 13 million of those being Anthem. The services offered are extensive, and Beacon has been a leader in the behavioral health sector for quite some time. This encompasses a wide range of services from mild to severe mental health, family support, crisis prevention, opioid abuse treatment, FMI, and EAP programs, which I believe will benefit Anthem significantly. Additionally, the pandemic has underscored the urgent need for behavioral health services. We saw a threefold increase in individuals reporting symptoms of anxiety and depression, and a 2.5 times increase in reports of suicidal thoughts, alongside a notable rise in opioid abuse. This aligns well with our diverse portfolio across Medicare, Medicaid, and Commercial. The integration process is progressing smoothly, and we are actively incorporating Beacon's clinical programs and expertise into the Anthem business. In my previous role on the commercial side, we developed new product offerings, including a Behavioral Health Advantage program launching in 2022. Furthermore, we are collaborating closely with Felicia and the government team on a new post-acute care product, which is just the start. I see tremendous opportunities in behavioral health moving forward. I'm particularly focused on the role of virtual services, as we've experienced significant growth in this area with Beacon, and leveraging this will be crucial for our portfolio in the future. Thank you for the question.
Gail Boudreaux, President and CEO
Thanks, Pete and the only thing, I guess I would add is you think about the commercial markets, that next-generation of EAP services in an area that we are highly focused on. And you've heard us share our strategy about sub-segment markets within the commercial business. So we see it clearly in the employer space expansion student space to military services space where we see the demand and need for behavioral health services dramatically increasing as a result of the pandemic. Next question, please.
Operator, Operator
Next, we'll go to the line of Ricky Goldwasser from Morgan Stanley. Please go ahead.
Ricky Goldwasser, Analyst
Yeah. Hi. Good morning. Question on utilization. John, you talked about the fact that September you saw a dip in non-COVID utilization. How is it trending in October? And if I recall last quarter, you said that the MLR guidance did low-end of the range assumes that I think going to end the year above baseline. So how are we trending there? And then in line with that, if we think about 2022 your commercial pricing, what did you embed in your assumptions regarding return of core utilization?
John Gallina, CFO
Thank you for the question, Ricky. And maybe I'll talk a little bit about the fourth quarter, and then turn it over to Morgan to talk a little bit more about 2022. But in terms of the fourth quarter, our expectations and our guidance are that the COVID and non-COVID combined will continue to be above baseline each month in the fourth quarter. So obviously the entirety of the fourth quarter being above baseline. We are seeing very good trends, as I stated we had the spike in August, it started to decline coming into September, non-COVID utilization was lower in September than we had expected. October is relatively close to expectations at this point, but there's a lot of uncertainties in the fourth quarter. The Delta variant is still out there, and we want to be very respectful for it, as well as any other new variants that may or may not exist. And we are expecting an increase in testing, an increase in some of the vaccinations and booster shots, especially with the kids. It's unclear right now exactly when the 5-year-old will be eligible for vaccination, but we want to make sure that we're cautious in terms of our guidance associated with that cost structure as well. And as you, I'm sure you already know, the fourth quarter just on a normal basis has a higher seasonality in terms of MLR. And so that's obviously factored in as well. But I'd say at the end of the day, we've been very cautious and very prudent in our fourth quarter expectations with the combination of COVID and non-COVID combined being above baseline. Morgan.
Morgan Kendrick, President of Commercial and Specialty Business Division
Thank you, John, and thank you, Ricky, for your question. John addressed most of the points, but I want to emphasize that as we look to next year, we are not apathetic. We have confidence in our strategy and the discipline we've maintained. In line with our past practices, we're pricing based on a forward-looking trend while remaining mindful of market uncertainties. As John mentioned, COVID will be a continuing factor. We have conducted thorough assessments of various scenarios and their potential impacts. However, we feel very confident in the pricing strategy we've set for the 2022 business. Thank you once again for your question.
Gail Boudreaux, President and CEO
Thank you. Next question, please.
Operator, Operator
Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please, go ahead.
Kevin Fischbeck, Analyst
Great, thanks. Just wanted to dig in a little bit into the redetermination headwind that you mentioned. Is there any way for you to kind of size how much memberships today you think you have due to redeterminations, how you're thinking about net losses, how much you might pick up on the exchanges in the commercial market? And then, as it relates to Medicaid rates, how you feel about Medicaid rates broadly, particularly again, with redeterminations coming in that can influence what rates are appropriate given the risk pool. So, those 3 aspects.
John Gallina, CFO
Sure, Kevin. I’ll respond to your questions. Regarding redetermination, we are assessing where we believe these members will transition. There have been several credible studies on this. We anticipate that by the end of next year, assuming redeterminations begin to take place in the early second quarter of 2022, approximately 35% of those members will remain on Medicaid. We expect about 45% will return to employer-sponsored plans, and around 20% will be eligible for subsidized coverage on exchanges. We have products available in all these areas and plan to maintain our fair share. Thus, we feel optimistic about our potential to retain membership within the Anthem family next year. On the topic of Medicaid pricing, we learned important lessons in prior years about collaborating proactively with states to secure actuarially justified rates. We will continue this approach. Although it’s early in the ratings season, we are comfortable with our current observations and are developing our financial plans based on prudent assumptions that are well-supported. We are also having productive discussions with states to ensure we receive actuarially justified rates moving forward. Additionally, there are now numerous financial measures in place that were not as prevalent before, such as collars and corridors, which help maintain profitability and stability in that marketplace. Hence, we need to view Medicaid over a long-term horizon. Thank you, Kevin.
Gail Boudreaux, President and CEO
Thanks for the question. Next question, please.
Operator, Operator
Next, we'll go to the line of David Windley from Jefferies. Please go ahead.
David Windley, Analyst
Hi, thanks. Thanks for taking my question. My question is about kind of your strategic investment preference. Gail, you've emphasized that for Anthem, your preferences to partner rather than own your provider networks. I'm wondering if you could shine maybe a brighter light on how your investments in behavioral and digital and some of the other areas that you've mentioned kind of accelerate your strategy and driving a better return for Anthem than the possibility of owning and controlling some of your key providers. Just I'm sure that those others are higher return, but in what way are they for Anthem? Thanks.
Gail Boudreaux, President and CEO
Thank you for the question, David. You’ve touched on many key factors. Primarily, due to the density in our markets, we believe that investing in partnerships is the best approach to enhance membership and improve star ratings. With one in eight patients being an Anthem member, collaborating with these providers yields good returns. Additionally, we can tap into profit streams by integrating some of our assets, so we're not ignoring those profits. Instead, we see a more efficient capital use through investment and partnership while leveraging our existing assets. This is central to our strategy, which has been successful and is accelerating. We anticipate having 70% of our operations in value-based arrangements and 30% in fully capitated arrangements. This is a significant factor for our Medicare Advantage business, and all our benefits sectors will benefit from this approach. Regarding our investments, we aim to transform ourselves, with one aspect being the creation of a digital health platform. We see opportunities not just within Anthem but with our Blue partners as well, leading to future commercialization possibilities. This is a key reason for elevating Rajeev Ronanki to explore these opportunities further. We’re already engaged in this within Anthem, but we believe there's more to gain with our partners. For instance, Sydney Health is gaining significant traction, and we believe our Health OS can be a broader contributor to the health ecosystem. We have invested significantly in Stars, quality improvement, AI, analytics, and digital therapeutics, building a comprehensive digital ecosystem. As for value, we focus on the most efficient capital deployment and utilize our market strengths. This aligns with our strategy and helps us leverage Ingenio, DBG, and other services, which have yet to reach their full potential. We're hopeful about Pete's leadership in this area, given his understanding of both commercial and government sectors. Thank you for your question. We see it as a strong growth opportunity ahead. Next question, please.
Operator, Operator
Next, we'll go to the line of Steven Valiquette from Barclays. Please go ahead.
Steven Valiquette, Analyst
Great. Thanks. Good morning. So I have another question on the lower than expected non-COVID utilization for the third quarter. I guess I was curious if you have any additional color by medical cost category, whether it's inpatient, outpatient, pharmacy, etc. What I'm really curious about is specifically whether any cost category had a more notable falloff versus baseline when thinking about the sequential trends in 3Q versus the trend back in June quarter. Thanks.
John Gallina, CFO
Thanks for your question, Steve. In terms of the specificity, I would say that what we saw in September was that inpatient non-COVID probably dropped the most of all of the different buckets that you stated. We don't view any of these things as being changing to the ultimate baseline. There were announcements that were made at the beginning of September that certain facilities were deferring or canceling some elective procedures in order to ensure that there is appropriate bed space. So while certainly we saw the impact on the financials, we do monitor pre-OSP research, various other things, and don't really view that situation as a significant change through the baseline going forward. But thank you for the question.
Gail Boudreaux, President and CEO
Next question, please.
Operator, Operator
Next, we'll go to the line of Scott Fidel from Stephens. Please go ahead.
Scott Fidel, Analyst
Thanks. Good morning. I just wanted to ask about the additional Group MA contracts that you called out that you've added in the 3Q for 2022. Any chance that you can maybe size the number of lives that you're expecting from those? And then just on the Group NYC contract implementation, I know you're still working on membership and things like that, but interested if you can maybe bring expense for loss, the dilution you're thinking about for 2022 against that 12% EPS growth off the baseline you talked about. That will be helpful as well. Thanks.
Gail Boudreaux, President and CEO
I was going to ask Felicia to respond on your MA questions first and then we'll have John. Thank you.
Felicia Norwood, President of Government Business Division
Good morning, and thank you for the question. I'll say, Scott, that at the end of the day, the additional contracts that Gail referenced, we're certainly pleased with the opportunity to add those to our business for 1/1/22. They are not going to be material drivers of their own. But what they do is that they represent the ability for us to continue to penetrate that pipeline that we have with our Commercial customers. So as you know, our strategy has always been to be able to penetrate the inherent commercial pipeline that we have so that we're able to keep members Blue for life. And what we've done in terms of that third quarter is to have a very robust pipeline that gives us some very nice sized groups, certainly much smaller than anything you've seen around the city of New York or anything else, but they are not going to be material drivers in bit, I would say, very closely with what we consider the sweet spot when we look at the opportunities to grow MA going forward. We still consider this a very strategic asset for us in being able to grow that business as we go forward. Once again, we are very poised to deliver on the launch of the City of New York business for 1/1/22, and are certainly pleased with the opportunity to be able to continue to support New York retirees, who have been customers for Empire for a long period of time. So this is another, I would say, affirmation of our strategy around what we're doing with respect to group MA business. And additionally, the pipeline for this business remains strong as we head into 2023. And with that, I'll turn it over to John to talk about the dilution.
John Gallina, CFO
Thank you, Felicia and Scott, I appreciate the question. Unfortunately, this is third quarter call and we're really not going to get into specificity associated with guidance for 2022. We'll talk in more detail about that at the next quarter. And as I said, New York's still going through their enrollment process, so we don't have all the information that quite fine-tuned, but what I would ask you to do is to really evaluate the tailwinds and the headwinds that I provided in their entirety. And then after you adjust for the outperformance in investment income, we think that those headwinds and tailwinds pretty much offset each other and will allow us to achieve our 12 to 15% growth for the future. Thank you.
Gail Boudreaux, President and CEO
Next question, please.
Operator, Operator
Next, we'll go to the line of George Hill from Deutsche Bank. Please go ahead.
George Hill, Analyst
Hey, good morning, guys. And thanks for taking the question. I guess this is probably going to be a 22 question as well, John, but I was wondering if you could claim any numbers around the success of Ingenio, given all the positive commentary. Can we just have any comments on how you guys are thinking about the opportunities with generics to and biosimilars in general?
John Gallina, CFO
Yeah, thanks for that. Thanks for that question. As you referenced as it relates to Ingenio, we're really pleased with the performance. In large part, the performance this year was due to strong membership and volume across the entire portfolio, so all our lines of business. And utilization is also tracking to expectation. So we feel good about that heading into 2022, as well as the growth that I talked about and our focus on penetrating the ASO business. So we feel good about the Ingenio business heading into 2022, the growth and then the stability of the business in terms of its margin contribution.
Gail Boudreaux, President and CEO
Thank you. Next question, please.
Operator, Operator
Next, we'll go to the line of Joshua Raskin from Nephron Research. Please go ahead.
Joshua Raskin, Analyst
Hi. Thanks for squeezing me in here at the end. How do you think about the No Surprises Act around your strategy or network contracting and maybe potential changes in the balance of power between payers and providers and local markets? And specific to Anthem, do you think best cost position, biggest discounts, is that helpful or harmful as you think about the future?
Gail Boudreaux, President and CEO
Well, thanks for the question, Josh. In terms of the overall, our past year, we have had a cost structure advantage in a cost structure advantage. But as you heard in my comment, given our market density, we are moving heavily towards value-based payment. I mean, that is at the core of our strategy. So that's an alignment of working with care providers in a much different way. And again, we believe both the investments we're making in primary care, the investments we're making in downstream home care, other things through our Diversified Business Group, IngenioRx that we have an opportunity to bring those assets together uniquely. And then, leverage the density, originally, in our Commercial business, but now our Medicaid business and our Medicare Advantage business, so we feel we've made really good strides on that and we actually see a better alignment with care providers than we've ever had in the past. So quite frankly, I'm optimistic about where we're heading, and I think that that really is the core of our strategy. So thank you for the question and next question, please.
Operator, Operator
Next, we'll go to the line of Whit Mayo from SVB Leerink. Your line is open.
Whit Mayo, Analyst
Thanks. Last year, the industry waived many co-insurance requirements. Can you remind me what the current situation is? Are we back to the 2019 co-pay and co-insurance member requirements? Are we still waiving fees for primary care in Medicare Advantage? The main question is about any headwinds or tailwinds we should consider for 2022 regarding changes in member cost-sharing. Thanks.
Gail Boudreaux, President and CEO
Thank you for the question, Whit. During the peak of the pandemic, non-COVID utilization decreased significantly, and we wanted to be considerate of the situation. We waived several cost-sharing requirements as part of our overall response across all our businesses. As we moved into 2021, those usual practices were reinstated largely because non-COVID utilization returned to normal levels in many cases, with no significant declines. Therefore, we are currently adhering to our established policies as we approach 2022. Thank you for your question. Now, we'll move on to the next inquiry.
Operator, Operator
And our final question will go to the line of Frank Morgan from RBC Capital Markets. Please go ahead.
Frank Morgan, Analyst
Good morning. There is a lot of suggestions about labor with providers, and I'm just curious, are you starting to have discussions when you start to negotiate with the providers about their wage inflation outlook they're seeing, and what is your sense of that? And then secondly, just any early initial insights into what might be resonating so far in the annual enrollment period. Thanks.
Gail Boudreaux, President and CEO
Thank you for the two-part question. Regarding the labor market, it's clear that across all sectors, there is pressure to increase employment levels. In terms of our negotiated contracts, we work on a three-year cycle and are focused on value-based payments. The significant opportunity lies in shifting from traditional individual unit cost increases to bundling payments based on value, covering entire episodes and procedures. We're currently navigating a dynamic environment in our negotiations. We believe we have accounted for this in our forward outlook, seeing the biggest opportunity in managing value along with unit costs through value-based payments. This approach ensures that the right services are delivered at the right time. For our forward review, we are considering all factors, and since many of our largest contracts are set on a three-year cycle, not all are currently being negotiated. Thank you for your question. I'll now ask Felicia to discuss our annual enrollment period, which I believe was your second question.
Felicia Norwood, President of Government Business Division
Yeah. Good morning, Frank, and thank you for the question. If you know, we're in the early days of the annual enrollment period, and we're actually very pleased with what we've seen so far with respect to how we are positioned competitively in terms of our benefits in the plans that we're offering, and feel that we'll be able to produce another year of double-digit growth in our individual Medicare products. I'll say we're especially pleased with our supplemental benefits, our over-the-counter offerings. These are the things we call our essential extras, everyday extras. We give members an opportunity to choose from a portfolio of benefits that allows them to address during these, particularly the social drivers of health. The other thing I will say is that we are also pleased with how we are positioned with respect to our products, where we have a very strong value proposition considering our deep knowledge and experience between Medicare and Medicaid, and being able to serve chronic and complex populations. So when we think about where we are today, a little bit less than 5 days in, we feel good about our positioning and look forward to having a very successful AEP.
Gail Boudreaux, President and CEO
Thank you Felicia, and thank you again for your interest in Anthem. As we close the call, I want to recognize our associates. This continues to be a challenging year, each day they step up and they step out to live our mission and values and serve our members and communities with care and compassion. I'm impressed and grateful for what they do all the time. We work hard to create a culture at Anthem where everyone feels valued and their contributions make a difference, so I'm particularly proud to see us recently named among America’s 100 great places to work and healthiest 100 workplaces. I'll leave you with this. There's increasing opportunity for Anthem to offer elevated personalized experiences as we holistically address what our society needs to be and stay healthy. We're building for tomorrow and beyond, evolving the business to be more digital, moving fast, thinking differently, and operating with discipline. Personally, I'm extremely optimistic for our future. Thank you.
Operator, Operator
Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 AM today through November 19th, 2021. You may access the replay system at any time. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.