Earnings Call Transcript - ELV Q2 2021

Operator, Operator

Thank you for joining us for Anthem's Second Quarter Earnings Conference Call. Today's call is being recorded. I will now hand it over to the company's management. Please proceed.

Stephen Tanal, Vice President of Investor Relations

Good morning and welcome to Anthem's second quarter 2021 earnings call. This is Steve Tanal, Vice President of Investor Relations and with us this morning on call are Gail Boudreaux, President and CEO; John Gallina, our CFO; Peter Haytaian, President of our Commercial and Specialty Business Division; Felicia Norwood, President of our Government Business Division and Jeff Alter, President of our Pharmacy and Health Solutions Businesses. 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 will 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 will 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

Good morning and thank you for joining us today for Anthem's second quarter 2021 earnings call. This morning, we reported second quarter GAAP earnings per share of $7.25 and adjusted earnings per share of $7.03, ahead of our expectations despite ongoing uncertainties associated with the COVID-19 pandemic. I'm pleased to report that we continue to deliver on our commitments to our stakeholders, while making considerable progress against our long-term strategy to transform our organization from a health benefits company to a lifetime trusted partner in health. This transformation is fueled by the continued expansion of our digital platform, which improves connections across the healthcare system, while leveraging the industry's largest data sets to drive actionable insights in pursuit of better health. In the second quarter, Anthem produced strong membership growth, one significant new contract in our government business and continued to integrate and expand our digital platform. On the membership front, we ended the second quarter with 44.3 million members, up 1.9 million or 4.4% year-over-year and 820,000 new members since the end of the first quarter, reflecting the strategic acquisition of Puerto Rico's leading Medicare Advantage organization MMM as well as strong organic growth in our core benefits businesses. MMM is the largest Medicare Advantage plan in Puerto Rico and operates the only 4.5-star rated plans in the territory. It is also the second-largest Medicaid health plan. Through its integrated care delivery model, MMM has established a strong track record of delivering quality care for seniors and dual eligible individuals with complex and chronic needs. Medicare Advantage remains a key area of focus for our organization, and we continue to see an immense opportunity to grow and optimize this business. Just last week, we were awarded a major contract to serve the retirees of the city of New York in partnership with Emblem Health, in what was one of the largest public procurements for group Medicare in the last decade. This opportunity builds on our more than 50-year relationship serving New York City's workers, retirees, and their families and will significantly increase Anthem's group Medicare Advantage business as well as our Medicare Advantage market share in New York. We're honored to have been selected to make a material difference in the lives of New Yorkers who worked hard to serve the city. In addition to MMM, we also closed on the acquisition of myNEXUS during the second quarter, advancing our strategy to grow and deepen Anthem's capabilities in Medicare Advantage. myNEXUS is a digitally enabled organization that optimizes home health for more than 2 million Medicare Advantage members across 20 states, including more than 900,000 existing Anthem Medicare Advantage members. myNEXUS improves outcomes by facilitating timely, personalized care for our members in the comfort of their homes, leading to improved continuity of care and reduced hospital admissions, readmissions, and emergency room visits. In addition to supporting future growth in Medicare Advantage, myNEXUS furthers our diversified business group's strategy to deliver on its risk contracts and the expansion of home-based care. Our Medicaid business is also performing very well and continues to build upon our deep local alliances and investments in population health, digital tools, and local solutions to help address the social drivers of health in our communities. We extended our strong RFP track record in the quarter, securing an award to continue serving consumers in the state of Nevada. This follows our recent award in Ohio. These wins build on the momentum we have coming off a fantastic start to the launch of North Carolina, which went live at the beginning of this month. Our Healthy Blue plan has already become the largest Medicaid managed care plan by membership in North Carolina, and the leading choice for consumers and beneficiaries who chose their plan; nearly 50% selected Healthy Blue, underscoring the power of our alliance partnerships and the Blue brand. In our commercial business, together with IngenioRx, we continue to innovate while demonstrating the power of true integration. By deploying machine learning and automation across our comprehensive ecosystem of medical, pharmacy, lab, and social drivers of health data, Anthem and IngenioRx are improving outcomes. Across these businesses, we're leveraging our proprietary predictive modeling algorithms to apply rich analytic solutions that allow us to tailor our integrated medical and pharmacy offerings to each member population. This enables us to deliver the right solutions to improve health based on individualized needs. We extend this customized approach to our specialty products, which we are increasingly selling in bundles through Anthem's Whole Health Connection, a differentiator in the marketplace. This traction gives us confidence in the long-term targets we articulated for our commercial business at our recent Analyst Day, including narrowing the profit gap between our fee and risk-based commercial business by serving more of our fee-based members in more ways. The success we are seeing in our core business validates our commitment to continue to invest in building our digital platform for health. The essence of a platform is that what we own matters less than what we can connect, and we are seeing great success in making connections through consumer and provider-facing tools. While we are still in the early innings, our efforts to simplify the healthcare experience while creating a more connected and powerful platform are clearly resonating with consumers, providers, and employers. For example, over 30% of members registered for the Sydney health app are actively using the platform. In the second quarter, we continued to expand access to Sydney across multiple Medicaid markets and saw a five-fold increase in engagement compared to our legacy digital tools for Medicaid. In the commercial markets, 32 national accounts have purchased Sydney preferred for its superior end-to-end experience and enhanced functionality like our 'find care' feature, which provides members seeking surgical treatments, a personalized omni-channel experience, including price transparency, tailored physician and facility recommendations, and access to telephonic health coaches to guide them through the process. Digital is also playing a key role in deepening our value-based care penetration and provider enablement by improving connectivity and real-time access to meaningful, actionable data. We continue to invest in building enhanced data connections to enable deeper collaboration at scale via our HealthOS provider platform. HealthOS connects siloed health data in disparate technologies to drive deeper insights and reduce costs and complexity. More than 100,000 value-based care physicians and 13,000 value-based care coordinators are connected to HealthOS today. This connection allows technology partners and providers to plug into HealthOS and gain data-driven insights as part of their existing workflow. In May, we announced a new partnership with Epic that will allow bi-directional exchange of health information, paving the way to better leverage data-driven insights in care decisions. Epic is a significant enabler of many of our efforts to improve our HEDIS and star scores. We have nearly 150 provider systems on our glide path through the end of 2022 and are in discussions with other healthcare information companies for similar partnerships. All of these efforts align to Anthem's purpose: to improve the health of humanity. Our community health strategy supports our purpose by addressing the health-related social needs of our associates, members, and communities to data and evidence-based interventions that promote health equity. Our commitment to living this purpose has earned recognition that I'm particularly proud of. For example, Anthem was recently named one of the top 100 US companies supporting healthy communities and families by Just Capital, the leading platform for measuring and improving corporate performance in the stakeholder economy. We are the leader in our industry, ranking number one among healthcare providers and number 14 overall on the list. In addition, Points of Light, the world's largest organization dedicated to volunteer service, recently recognized Anthem as one of the 50 most community-minded companies in America for 2021. As we reflect on our achievements this quarter and our broader mission, we are cognizant that fundamentally improving the health of humanity takes partnerships, aligned incentives, and connections across people, care providers, researchers, data scientists, communities, and others dedicated to improving health. Anthem is making these connections through our digital platform for health while following the data and embracing our unique assets to drive positive change in ways that only Anthem can. We have deep local roots in our communities and the industry's largest data sets, both of which position us uniquely well to deliver against our mission. I'll now turn the call over to John to discuss our financial performance and outlook in greater detail.

John Gallina, CFO

Thank you, Gail. And good morning to everyone on the line. Earlier this morning, we reported second quarter results that included GAAP earnings per share of $7.25 and adjusted earnings per share of $7.03. Another strong quarter in which we delivered on our financial commitments while reinvesting in each of our businesses, all while navigating the ongoing COVID-19 pandemic. Second quarter results again underscored the balance and resilience of our enterprise. We ended the quarter with 44.3 million members, growth of 1.9 million lives year-over-year, or 4.4%, including growth of 820,000 in the second quarter alone. Excluding the acquisition of MMM, we grew organically by 232,000 members in the quarter driven by growth in our Medicaid and commercial fully insured businesses, partially offset by continued attrition in our large group and national fee-based accounts, in line with our expectations and prior guidance. Second quarter operating revenue of $33.3 billion grew 14% over the prior year quarter. On a HIF-adjusted basis, our top line grew nearly 16% with no impact from MMM, which closed at the end of the quarter. Growth was driven by higher premium revenue in Medicaid and Medicare associated with strong membership growth in addition to rate increases to cover cost inflation. Pharmacy product revenue also contributed to our top line growth as IngenioRx grew affiliated and unaffiliated revenue, with a value proposition that continues to resonate in the marketplace. The medical loss ratio for the second quarter was 86.8%; an increase of 890 basis points compared to the prior year quarter, driven by an increase in non-COVID utilization from the depressed levels a year ago, and to a lesser extent, the repeal of the health insurance tax in 2021. Relative to our expectations, total medical costs were favorable, driven by non-COVID cost developing favorably partially offset by somewhat higher-than-expected cost for COVID-related care. Please note that while total benefit costs were favorable to our expectations, total cost ended the quarter slightly above our estimate of a normalized level. Our second quarter SG&A expense ratio came in at 11.5%, a decrease of 240 basis points year-over-year, excluding the effect of the repeal of the health insurance tax; our SG&A ratio decreased 110 basis points, driven by leverage of strong revenue growth, partially offset by ongoing investments in support of our growth and our evolution to become a digital-first enterprise. Turning to our balance sheet; we ended the second quarter with a debt-to-capital ratio of 40.9%, down sequentially from 41.6% in the first quarter. The decrease was due to the early repayment of debt at par originally scheduled to mature in August of this year, and an increase in equity driven by our strong bottom line performance in the quarter. We continue to expect our debt-to-capital ratio to end the year slightly below 40%. During the quarter, we repurchased approximately 1.3 million shares of our common stock at a weighted average price of $380.59 for $480 million. We have now repurchased close to 60% of our full year outlook of $1.6 billion, which is still an appropriate figure for modeling purposes. We maintain a prudent posture with respect to reserves for the second quarter, ending the period with 48.1 days in claims payable, an increase of 1.2 days compared with the first quarter and 2.1 days year-over-year. MMM and myNEXUS, both of which closed during the quarter, increased our June 30th claims payable balances with minimal impact on the average days of claims, resulting in the DCP calculation increasing by 1.6 days. Excluding these acquisitions, days of claims payable was largely consistent with the last quarter, decreasing by just 0.4 days. Given the continued uncertainty associated with COVID, we continue to take a prudent posture in establishing reserves. As a result, our second quarter earnings did not benefit from the favorable prior period development. Operating cash flow was $1.7 billion or 0.9x net income in the second quarter. The year-on-year decline was driven by the deferral of normal tax payments out of the second quarter of last year into the back half as was permitted by the IRS. On a year-to-date basis, cash flow is $4.2 billion or 1.2x of net income. Given our solid performance in the first half, we are increasing our guidance for full year operating cash flow to greater than $5.8 billion. As a reminder, our operating cash flow is depressed this year due to the timing of certain payments as well as the settlement of the BlueCross and BlueShield multi-district litigation scheduled for the fourth quarter. Turning to our earnings outlook for the year, we're raising our guidance for the full year adjusted earnings per share to greater than $25.50 from the greater than $25.10, which squarely puts us at the midpoint of our long-term annual adjusted earnings per share growth target of 12% to 15%. There are a number of moving pieces associated with our revised guidance, which includes a portion of the upside we generated in the second quarter. The underlying fundamentals of our core business remain strong, evidenced by our first half results. Given strong year-to-date performance on medical costs, we now expect our full year medical loss ratio to end in the lower half of our full year guidance of 88% plus or minus 50 basis points. Given accelerated reinvestment in our business in the first half of the year and startup costs for new contracts in the back half, we now expect full year SG&A ratio to end the year in the upper half of our prior guidance range of 10.8% plus or minus 50 basis points. We have also increased our outlook for investment income for the year, given strong performance in our alternative investment portfolio in the first two quarters, which we have not carried forward in our guidance. The outperformance in this non-operating line item is more than entirely offset by a higher effective tax rate in our full year guidance. In the context of our upwardly revised guidance, we now expect to absorb earnings dilution in the second half associated with the startup cost for the award of the city of New York group Medicare Advantage contract and our entry into the Ohio Medicaid program, both of which will go live in 2022. We have also taken a slightly more cautious view of the back half of the year, in light of new COVID variants coupled with a slowing vaccination rate, a combination that could result in the potential for higher COVID-related costs. Our guidance also includes a partial year of MMM and myNEXUS, both of which are expected to contribute much more meaningfully to our financial results in 2022 and beyond. As noted in our press release, we now expect to generate approximately $137 billion of operating revenue in 2021. And to end the year with 44.8 to 45.3 million members. Finally, while it is premature to comment quantitatively on 2022, we want to remind you that group Medicare Advantage contracts and large Medicaid wins are generally dilutive in the first full year of operations. We have a strong line of sight towards a compelling ROI on our recent new business wins and over the seven-year term of our new group Medicare Advantage contract with the City of New York, we expect the returns to be well in excess of our cost of capital. Additionally, with these two wins, our percent of membership and revenues from our government business division will become an even larger percentage of our totals. In closing, we were pleased to deliver another quarter of solid growth while reinvesting in our enterprise. We continue to grow inward in our services businesses and outward in all of our segments, each of which remains well positioned for growth. Our mix continues to evolve towards our strategic areas of focus, Medicare Advantage and the government business, in addition to our service segments. We have entered the second half with strong underlying fundamentals, solid momentum, and a prudently positioned balance sheet. And with that, operator, please open up the call to questions.

Operator, Operator

For our first question, we'll take a call from Lance Wilkes from Bernstein.

Lance Wilkes, Analyst

Yes, could you talk a little bit about utilization you saw during the quarter in both government and commercial lines and any trends you're seeing with July? And in particular, maybe any distinction between COVID and non-COVID? And how you think the Delta variant might impact that? Thanks.

John Gallina, CFO

Good morning, Lance. And thank you for the question. This is John. So in terms of the utilization of the second quarter, the overall utilization was slightly above normalized levels, but slightly less than our expectation. So in total for the company, we exceeded baseline, albeit that we were better than what we projected. When you think about it on a line of business basis, Medicaid had the highest level of deferred utilization. We certainly had some COVID costs, and so Medicaid was below baseline, commercial was slightly above baseline overall, and Medicare Advantage was actually slightly above baseline overall once you take into account all the other issues associated with the risk score revenues and the additional payments that we are still making on the 3.75% rate increases that existed. So all very much consistent with what we thought 90 days ago, just a little bit better. As you look at July, we really don't provide mid-quarter guidance, but we're monitoring our pre-operative and pre-certification data. As a reminder, we expect both the third quarter and the fourth quarter to be above baseline each quarter for the rest of the year. Based on everything we've seen so far, July is tracking very consistent with those expectations. Thank you, Lance.

Operator, Operator

Next, we'll go to the line of Justin Lake from Wolfe Research.

Justin Lake, Analyst

Thanks. A couple of questions on the government side; one, can you give us an update on how much membership you've gotten from, you think you've gotten from re-determinations being delayed? And then how do you think about that kind of rolling off as you look ahead to 2022 and beyond? And then you talked about this big Medicare Advantage contract from the city of New York. Would be helpful to know, I was just looking on the internet, it looks like it might be a couple of hundred thousand members. Is that a ballpark estimate there for 2022 on what you might pick up? Thanks.

Gail Boudreaux, President and CEO

Great. Well, thanks for the questions, Justin; we will try to address them. I'll start first on the city of New York, and then Felicia should share some of her insights on the Medicaid business in particular. Thanks again for the question, because first, we're really honored to have been awarded the contract with the City of New York and continue serving these members in the state as we execute on our strategy. This is really a great proof point for Anthem that we shared with everyone at our Investor Day about our goal to go deeper in each of the sites we serve. This contract gives us that opportunity in a very important state. It also serves as a proof point for our goal to convert our existing clients to group Medicare Advantage, so two really strong proof points for the strategy that we've been talking about for the last several years. I think a bit of background would be helpful on the city in New York; we have served them for more than 50 years. We've been their medical management vendor for the past five years. So if you think about that, it has given us a really good strong understanding of the members and their health needs. For us, it was a great opportunity to provide them with a strategic offering and group Medicare Advantage. As I mentioned in my prepared remarks, generally, these contracts are dilutive in the first full year of operations. In the back half of the year, we're going to incur startup costs with no offsetting revenue as we get ready to go live in January of '22. And we're absorbing that in the guidance that we've given you. As we've noted, contracts of this size tend to be dilutive as the members transition into group Medicare Advantage. I think the good news is, given that we have been the medical management vendor, we have some insight into these members, but we also need to collect the data to reflect the members’ acuity and risk scores and ramp up other medical management issues, particularly with our value-based care provider relationships, and obviously working with our partner Emblem. In terms of overall membership, at this time, it's a little bit early to call, but we believe it'll be over 200,000 lives; there will be some variability in that because there is a choice in open enrollment to buy up and do different things. But we think it will clearly be over 200,000 lives. As we think about 2022, the guidance and what that means, we'll share that later in this year. We're a little early on that, and we'll address that at the end of the year. Again, I'll just close on this section by noting that as a seven-year contract, we think that it's really positive for us overall, and it gives us breadth and depth in the market. Beginning in '23, we expect to have a positive impact on our earnings and a really strong and compelling ROI. With that, I'm going to ask Felicia to address the second part of your question, which was about Medicaid and re-verification.

Felicia Norwood, President of Government Business Division

So good morning, Justin. Our Medicaid enrollment ended the second quarter at about 9.7 million members, that was up 582,000 when you include MMM, so just in terms of our organic growth, 267,000 increase in terms of our Medicaid membership compared to the first quarter of 2021. When you take a look at it all in, the increase is predominantly due to the continued suspension of re-verifications. We also had a couple of small tuck-in acquisitions in our Florida market as well. Our guidance assumes that re-verifications remain on hold through the end of 2021. With the renewed public health emergency from the Biden administration announced yesterday, we still feel very good about that timeline. With that said, we continue to work very closely with our state partners and our members, helping them understand re-verifications and what it means. We're going to continue to stay close to that as we look to the end of the year. Thank you.

Operator, Operator

Next, we'll go to the line of A.J. Rice from Credit Suisse.

A.J. Rice, Analyst

Hi, everyone. Thanks for the question. I just may ask about Ingenio; it looks like it was one of the bright spots in the quarter. Is there any update you can provide as to script trends? I know COVID vaccines as well as just the return of acute scripts seem to be helping and I wonder if you saw that. Also, any comment you could give us on the PBM selling season? I know you were targeting some of your customers; do you have ASO business with long-standing relationships, any movement there that you've seen?

Gail Boudreaux, President and CEO

Well, thanks, AJ. I'm going to ask Jeff Alter to comment on your questions. But thank you, we felt very strongly about our Ingenio results and think Jeff can share with you some of what's happening inside of the business. Jeff?

Jeff Alter, President of Pharmacy and Health Solutions

Thanks, good morning, AJ. Yes, it was a strong quarter, thanks for noticing that. We believe our integrated stories are beginning to take hold in the marketplace. The work that we do to ensure that our partners, both inside our Anthem businesses and our external partners, are getting the best course of treatment at the lowest possible drug costs is resonating. As we see that continuing to resonate in the market, we've been enjoying a nice trajectory on our earnings as well as our growth in script volume and membership. So we're in the middle of the selling season, and that value story is resonating. We particularly see an advantage inside the labor and trust segment and the mid-market of our commercial business. We continue to see strong support for our government businesses, Medicaid and Medicare. Thanks for the question.

Operator, Operator

Next, we'll go to the line of Rob Cottrell from Cleveland Research.

Rob Cottrell, Analyst

Hi, good morning. I wanted to see if you could help quantify what you're thinking the expected COVID kind of all-in number will be this year relative to the previous $600 million expectation.

John Gallina, CFO

Thank you, Rob, and good morning. As you noted, the prior guidance was a $600 million headwind. There are certainly a lot of moving parts behind that estimate. Year-to-date, COVID costs did come in slightly better than expected. Non-COVID costs tracking. I'm sorry. COVID came in slightly higher than expected, with non-COVID tracking slightly better than expected. So all-in costs are a bit favorable to our outlook in the first half. But there's still a considerable amount of uncertainty surrounding COVID in the back half of the year, and we want to maintain a prudent if not cautious posture with respect to our guidance. Yes, so in that context, we believe that the net headwind of $600 million is still appropriate, with a majority of that in the back half of the year. That's an all-in type of estimate that includes the impact on our risk scores, the additional fee schedules, the COVID costs, the increase in vaccination administrative costs, all in, so at this point in time, we think $600 million is a reasonable estimate to stay with. Thank you for the question.

Gail Boudreaux, President and CEO

Thanks, John. The only thing I'd add is that's very similar and consistent to what we've guided throughout the year.

Operator, Operator

Next, we'll go to the line of Lisa Gilson from JPMorgan.

Lisa Gilson, Analyst

Hi. Good morning. Thanks very much. Gail, you mentioned several times today digital as well as the virtual care initiative. Can you maybe just give us a little more color as we think about virtual care and the utilization of virtual care? Ultimately, how do you see that impacting your medical cost trend?

Gail Boudreaux, President and CEO

Well, thanks for the question, Lisa. I think a couple of things are embedded in that. We are, as I shared with you in the opening comments, particularly around our HealthOS platform, we're really building an integrated platform where we can drive data. So I'll address virtual care in a minute. But I think it's all connected. We're starting with really our deep data insights and connecting that with our care provider network, trying to give them the best information at every point in time. We're using that to enable our value-based care providers. The core of what we're sharing is that virtual care is a component of it. You saw not only virtual care but also at-home care. We believe that our ability to reach the commitment we made at Investor Day around getting our trend to CPI hinges on the combination of these initiatives. Starting again with enabling our value-based providers, providing real-time data, and connecting that to consumers through our Sydney platform. We've accelerated many of these initiatives over the past year, particularly in the second quarter. You heard the proof point we shared about our Medicaid business; we see opportunities to accelerate consumer engagement as well. Fundamental to our strategy is getting our value-based payment and our providers enabled with the data so that they can make informed decisions to take greater risks. We view this as a critical element of our journey towards achieving CPI trended CPI over the next several years. Virtual care is just part of the continuum we offer, including at-home care, helping providers serve patients effectively. Thanks for the question. This is a core element of our strategy, comprehensive as it encompasses not only the digital platform but also our value-based care.

Operator, Operator

Next, we'll go to the line of Steven Valiquette from Barclays.

Steven Valiquette, Analyst

Thanks. Good morning, everyone. Just a quick question on memberships. You talked about commercial and specialty enrollment decreasing by 174,000 lives mainly on the fee-based side as a result of the economic environment. While high-level unemployment is trending favorably as 2021 progresses, there's noise around a low impact on payrolls. I was just curious to hear more about the mechanics of the economic environment leading to that sequentially lower membership and how that sort of plays out for the rest of the year. Thanks.

Gail Boudreaux, President and CEO

Well, thanks. We'll have Pete address that as part of the commercial outlook.

Peter Haytaian, President of Commercial and Specialty Business Division

Hey, Steve. Thanks for the question. As you alluded to, enrollment and membership in the quarter came in as we expected. The themes haven't really changed fundamentally. First of all, I want to note how proud I am of the team in terms of our performance and execution as reflected in the print with good year-to-date growth of over 100,000 members. Our sales again exceeded our lapses in our local market business, meaning strong performance on the fully insured side where we saw sequential growth in the individual, small, and local large group business. This was very good in terms of what we can control and execute against. Regarding your question on the economy, that is where we continue to see a headwind in our fee-based business, and the group changes continue to put some pressure on us. We are beginning to see things open up a bit, and the pipeline has been light in the fee-based business over the last year, but we are beginning to see that pipeline open as we approach Q3 and Q4 and look into 2022. We have some good visibility for 2022 on the national side of our business. We feel good about where that stands right now in terms of the growth headed to 2022. It's early in the selling season, and I feel strongly that based on our team's execution and capabilities, our engagement with the broker community focused on affordability, as the economy continues to improve, we will begin to see that membership come back in the back half of the year into 2022.

Gail Boudreaux, President and CEO

Thanks, Pete. I want to reiterate a couple of points that Pete made, as they are very important; our ability to sell more than our lapses continues to be strong. Over the last year and a half, we have been consistent in our approach to sales. I attribute much of this to our products and tools. We've been focusing on our sales effectiveness, and it has resonated clearly in the marketplace. For the growth in our risk-based business, we maintain a steady approach. We performed well in the markets, and our strength in strong national accounts is showing this year. We are very optimistic about our pipeline.

Operator, Operator

Next, we'll go to the line of Scott Vidal from Stevens.

Scott Vidal, Analyst

Hi, thanks, and good morning. I'm just interested; I know you're not ready to talk specifically about 2022. First, in terms of a proper jumping-off point to think about, would increasing guidance range for EPS be the right number, or are you still thinking about where the prior EPS was in terms of the jumping-off point? There are clearly two significant contracts that you've got here with New York City for group MA and Ohio Medicaid. I'm just thinking if there's any way to potentially ring-fence how you're thinking about initial dilution in 2022 as we try to model that properly.

John Gallina, CFO

Scott, thank you for the question. I agree, it's premature to discuss 2022 at this point. However, related to the specificity of our new guidance of $25.50, it does reflect that $0.40 raise. We're happy with the core operating performance of the company improving throughout the quarter and the year. I could say that the core fundamentals of our business remain solid, and we are confident in our ability to deliver 12% to 15% annual EPS growth over the long term. That said, there will be dilution related to these large contracts in 2022; it's too early to declare that. As Gail said, we still need to understand the exact number of members that we have in the city of New York. We have much work to do on that. As we get closer to 2022, we will have more clarity on our expectations. We've accounted for various startup costs, integrations, and those costs are incorporated in our $25.50 guidance.

Operator, Operator

Next, we'll go to the line of David Windley from Jefferies.

David Windley, Analyst

Hi, thanks for taking my question. If I look back at the balance sheet since the beginning of the pandemic, your days in claims payable depending on the starting timeframe looks like it's increased anywhere from seven to ten days. I'm wondering, do you expect that over the long term DCP will come back down to the high 30s where it was pre-pandemic, and what visibility would you need to see that happen? If I could slip in, since nobody else has asked, where are your thoughts on AduHelm and coverage for AduHelm?

John Gallina, CFO

Thank you. I'll start with the first question and then address AduHelm. Regarding the days in claims payable, it was essentially flat quarter-over-quarter, as you've indicated, up between 7 to 10 days. There's a lot of uncertainty in this environment. We must record reserves per actuarial standards, ensuring that our methodologies and calculations are very consistent with Generally Accepted Accounting Principles. There are uncertainties that have existed each quarter and every month during this entire pandemic, and we've been extremely prudent and conservative in our approach. We expect to continue this until there is more clarity into the future. Over time, and I stress over time as that could be a few years, I would expect our DCP to go back down. However, multiple variables impact days in claims payable, including our investments in digital, which improve auto-adjudication rates, cleaner claim submissions, leading to improved throughput. The days in claims payable should decrease as we get better insight into the environment. Thank you for the question.

Gail Boudreaux, President and CEO

Thank you. Regarding your second question, Anthem recognizes the limited hope or choice for treatment of Alzheimer's disease; it is a heartbreaking disease for patients, families, friends, and caregivers. We've been monitoring the drug's development closely for over a year while also watching FDA guidance and all available evidence as it changes. We will continue to evaluate with our clinical experts. We appreciate your patience as we conduct our due diligence to ensure the most clinically appropriate use of drugs and therapies for our members. Thank you.

Operator, Operator

Next, we'll go to the line of Ralph Giacobbe from Citi.

Ralph Giacobbe, Analyst

Thanks. Good morning. I guess first just wanting to clarify the commentary. Maybe I misheard it, but it sounded like better medical cost performance. But John, I think you said overall, our total cost was higher than expectations. I just wanted to clarify that. And then going back to Scott's question; while you don't want to quantify the dilution for '22, it sounds like you're absorbing startup costs this year. Can you help in terms of the magnitude of what you're absorbing this year for startup costs around those contracts? Thanks.

John Gallina, CFO

Ralph, thank you for the question. I appreciate you asking for clarification. Our total cost for the second quarter was better than our overall expectations, but higher than baseline due to COVID. So we've experienced a favorable outcome in the quarter, while total costs ended above the baseline as the COVID effect subsides and we are dealing with the non-COVID utilization adjustment as well. Regarding the startup costs for City of New York and Ohio contracts, we're not discussing specifics of dollars at this point since we have numerous moving parts surrounding our guidance. We closed on MMM and myNEXUS, which included some financing and integration costs. The startup costs for New York and Ohio have been factored into our guidance of $25.50. Thank you for the question.

Operator, Operator

Next, we'll go to the line of Stephen Baxter from Wells Fargo.

Stephen Baxter, Analyst

Hey, thanks for the question. Wanted to ask one on Medicare Advantage. Just wanted to ask about your current expectations for risk adjustment revenue in 2021 and get a sense of how the company is feeling about revenue recovery for 2022. As we think about MMM, is there anything we should keep in mind regarding any dynamics they might have versus the rest of your portfolio? Thanks.

Gail Boudreaux, President and CEO

Felicia?

Felicia Norwood, President of Government Business Division

Good morning, and thank you for that question. We've engaged in significant outreach this year with our members, checking in to see how they were doing, helping to address health-related social needs, ensuring that they were getting vaccines and able to see their doctors and access care, particularly to close gaps in care lingering from 2020. This includes home visits and telehealth; meeting members where they feel comfortable engaging with their care providers. Based on our analytics, we feel very good about our position and believe we are on track to help our members' health risks reflect 2020 payments similar to our 2019 levels. Regarding the CMS payments, we anticipate receiving those, which is in line with our expectations; our outlook is optimistic around risk scores, data collection, and accuracy in coding as noted. Our 2022 payments should resemble those of 2019, just to clarify.

Operator, Operator

Next, we'll go to the line of Matt Borsch from BMO Capital Markets.

Matt Borsch, Analyst

Yes, if I could just ask about a little bit more about utilization patterns. So in Medicare Advantage, in the second quarter, you referenced the risk score issues, but were the utilization, the elective procedures, etc., above your sort of normal baseline? If I understood you correctly.

John Gallina, CFO

Oh, yes. Thanks, Matt. Maybe I can help answer that question. In the second quarter, we saw that inpatient was still below baseline, ER utilization is still short of baseline. However, doctor's visits and outpatient services were a bit above. And part of that, at our encouragement, is to encourage members to seek healthcare when they need it, including checkups and annual visits, various things like that. The more often seniors see a doctor, the better opportunity for us to collect data and information on them to help maximize risk revenues. Our strategy provides consistent incentives for members to receive care. We’re pleased to see outpatient and doctor visits above baseline for the quarter. We're happy about that because we think that's beneficial in the long term. Hopefully, that helps.

Gail Boudreaux, President and CEO

Yes, and I want to add to John's comment. We’ve consistently forecasted that we expect this to be above our normalized level, especially in Medicare with the highly vaccinated population. We have looked at trends from 2020. We're encouraging them with house visits for immunizations, preventative care, etc. It's an important metric, and while we project the back half of the year to be above baseline, we do not see a surge coming, given some constraints within the system. We're maintaining prudence regarding the anticipated effects of the Delta variant, all of which has been incorporated into our guidance. Hopefully, that clarifies our expectations.

Operator, Operator

Next, we'll go to the line of Joshua Raskin from Nephron Research.

Joshua Raskin, Analyst

Thanks. Good morning. My question is on the commercial employer preferences as we move into 2022. I'm curious if you're seeing any impacts from COVID on employer group preference around benefit design, work from home, or any emerging trends such as new applications. Also, is there any impact on your goal to increase the number of products that you sell into individual or specific customer groups?

Peter Haytaian, President of Commercial and Specialty Business Division

Thanks for the question, Josh. We continue to see what we spoke about at our Investor Day, a real focus on affordability and ease of use for members. That's corresponded to greater emphasis on behavioral health and advocacy, which has become critical in addressing issues stemming from COVID. We're selling that value proposition into the marketplace, and it's resonating with existing and new accounts. While we're about in the seventh inning of the selling season, those themes are growing, and we're seeing new account wins occur. Importantly, existing employer accounts are showing growth. Organizations are increasingly sensitive to concerns around COVID while needing to navigate the complexities of the system. Additionally, the digitization of our business is focused on utilizing data effectively to provide support for both members and providers at the point of care. We’re continuing that trend.,

Gail Boudreaux, President and CEO

Thanks, Pete. The only point I would add is that the two proof points I’m seeing highlight our Sydney care sales, particularly in the large end, which is usually the first mover. Integration is crucial in our strategy. Our Total Health, Total You model focuses on overall health through integration. I see those themes continuing to play a significant role. Thanks for your question.

Operator, Operator

Next, we'll go to the line of Kevin Fischbeck from Bank of America.

Kevin Fischbeck, Analyst

Hi. Great, thanks. I wanted to follow up on the commercial commentary, because we've been hearing this from a couple of other companies, that commercial utilization is coming in a little bit above baseline. I just wanted to figure out whether you can parse that out as far as core utilization versus COVID utilization, and whether there's any implications for pricing for next year. Additionally, are you able to parse out whether there's an actual trend issue or if it's simply timing or COVID costs?

John Gallina, CFO

Thanks, Kevin. I'll address the pricing issue directly; we will maintain a disciplined approach to pricing, ensuring that we price to forward trends. We confirmed this plan in 2020, resulting in seen benefits in 2021. Yes, there are many moving pieces. We have sophisticated models in place to track this weekly, incorporating all COVID and non-COVID impacts into pricing considerations. We observe vaccination progress, the population and the ensuing trends like the upticks in COVID cases, and the response of non-COVID electives. All factors are integral to our pricing strategy. Some geographic and product line variations exist, resulting in a complex yet prudent pricing approach.

Operator, Operator

Next, we'll go to the line of Ricky Goldwasser from Morgan Stanley.

Ricky Goldwasser, Analyst

Yes, hi, good morning. Two questions here. One on the MMM acquisition. Can you quantify for us the impact to the benefit for the second half of '21? And then, Gail, in your prepared remarks, you talked about myNEXUS with about 900,000 of Anthem MA members on it. How long would it take to deploy it across your entire MA book? What's the limiting factor there? Can you quantify for us what would be the impact on medical cost?

John Gallina, CFO

Thank you, Ricky, for those questions. First of all, I'll address MMM; past year results for MMM when you look at it in our consolidated numbers, they were weighed down by financing costs, integration costs. Puerto Rico also has a higher tax rate on average than the rest of the US. All those factors have been incorporated. We don't expect meaningful accretion from MMM in 2021 but anticipate it will contribute more significantly in 2022. The moving parts for the back half of '21 are substantial, and we’re focused on integration and implementation costs as we included them in our $25.50 guidance. With that, I’ll turn it back over to Gail.

Gail Boudreaux, President and CEO

Yes, thanks. In terms of your question on myNEXUS, it is a critical element of our strategy, both inside Anthem and outside. We think about 2 million lives served, with 900,000 inside Anthem, and we've deployed it extensively, although there are more opportunities to explore. We're working through our integration plans as we grow, and we see this as a strong opportunity for home care and digital integration, hence its significance. We expect considerable value leveraging this offering. It's important that we can effectively reach our members digitally. Thus, this is strongly correlated with lowering care costs and significantly impacting our overall medical costs strategy, especially for seniors since we aim to increase access to home care.

Operator, Operator

For the last question, we’ll go to the line of George Hill from Deutsche Bank.

George Hill, Analyst

Hey, good morning, guys. Thanks for taking the question. I would like to know, as it relates to Medicare Advantage and partnerships, you have relationships with Agilant and other provider-based organizations. Can you talk about the appetite to expand and grow those partnerships as a way to contain costs and ensure visibility? As those partnerships expand and cover lives faster, how does that impact how you run the MA business as you gain better visibility on costs?

Gail Boudreaux, President and CEO

Thanks for the question. I’ll start and then ask Jeff Alter to provide more detail. Part of our strategy with value-based relationships is working with dense providers in markets where we want to solidify our presence in Medicare Advantage. We want to have solid capabilities that enable our risk partners. We've partnered carefully to ensure a win-win situation aligned with the data we shared and our HealthOS platform. Partnerships mean not merely a contractor relationship but an integration of our data systems that connect to consumer-facing tools we have in place. In short, we seek deeper engagement and growth with these partners, which is a significant value proposition for both sides. Jeff, did you want to add anything?

Jeff Alter, President of Pharmacy and Health Solutions

Perhaps I'll add that we believe it's the best way to effectively build a strong value-based network for our Medicare partners. This structure allows us to bring data into the Agilant and others efficiently. The one-to-one-to-many approach we utilize is far superior to Anthem connecting directly to thousands of smaller practices. Thus, it significantly enhances our strategy in multiple ways.

Gail Boudreaux, President and CEO

Thank you for your question, and I want to thank all of you for joining us for this morning's call. As you can see, Anthem has shown solid growth throughout this pandemic while continuing to support critical needs and resources in our communities as we combat the pandemic together. The performance in the second quarter gives us confidence in our ability to capitalize on future growth prospects and deliver on our commitments to stakeholders. Our success would not be possible without the hard work and dedication of our more than 87,000 associates. I want to thank each and every one of them for everything they do each day. Thank you all for your interest in Anthem. I look forward to speaking with you in the future.

Operator, Operator

Ladies and gentlemen, a recording of this conference will be available for replay after 11 AM today, through August 20, 2021. You may access the replay system at any time by dialing 800-813-5529, and international participants can dial 203-369-3826. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.