Earnings Call Transcript - ELV Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Anthem’s Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. 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.

Chris Rigg, Head of Investor Relations

Good morning. This is Chris Rigg and welcome to Anthem’s Fourth Quarter 2020 Earnings Call. As many of you know, I have transitioned from Head of Investor Relations to be the Chief Financial Officer of our Commercial & Specialty Business division. Steve Tanal will be joining Anthem as the new Vice President of Investor Relations. We look forward to welcoming him next week. With us this morning on the earnings call are Gail Boudreaux, President and CEO; John Gallina, our CFO; Pete Haytaian, President of our Commercial & Specialty Business Division; and Felicia Norwood, President of our Government Business Division. 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 for Anthem’s fourth quarter 2020 earnings call. Despite a year challenged by COVID-19 and significant economic uncertainty, we delivered strong growth across all of our businesses. This morning, Anthem reported fourth quarter 2020 GAAP earnings per share of $2.19 and adjusted earnings per share of $2.54. For the full year, Anthem reported GAAP earnings per share of $17.98 and adjusted earnings per share of $22.48. Our full-year results reflect the ongoing impact of COVID-19 treatment costs and more normal utilization patterns in the second half of the year. Consistent with our expectations, fourth quarter utilization was above baseline, reflecting higher costs attributable to the recent surge of COVID-19 cases, coupled with the return of non-COVID-19 care utilization. I’m incredibly proud of what we’ve accomplished in 2020, and the strength and resiliency shown by our enterprise amidst the global pandemic. We met our financial commitments, delivered strong growth, and we stepped up as a business and through the commitment and compassion of our associates to support our members, partners, and communities when they needed us most to address the new increase in urgent needs. Our growth in 2020 was powered by strategic investments we’ve made in recent years to streamline and simplify our business and enhance the member and customer experience. Membership trends in the year exceeded expectations on all fronts. Medical enrollment finished the year strong at 42.9 million members, representing growth of 1.9 million members over the prior year. We’re pleased that our commercial business has continued to grow even in this challenging economic environment. In addition to the AmeriBen acquisition, growth has been fueled by strong customer retention and a steady pipeline of new accounts sales. In fact, sales in our large group risk business have outpaced lapses in 14 of the last 16 months, reflecting the market-leading performance of our new virtual strategies and tools, as well as the benefit of our innovative products. Total commercial membership was flat sequentially in the fourth quarter, reflecting growth in our risk-based group business offset by in-group change in our fee-based business as a result of the economic environment. Our risk-based business has been incredibly resilient as we’ve deepened talent, enhanced our products and improved sales execution across our markets. In addition, sales of our large group specialty dental and vision products outperformed 2019 results, demonstrating that employers value the affordability and simplicity of Anthem’s integrated medical and specialty offerings. It’s clear the actions we’ve taken to focus on the consumer and their unique needs are garnering a strong market response. Medicaid membership grew by roughly 1.6 million consumers during the year and nearly 300,000 lives in the fourth quarter, marked by strong organic growth aided by the pause on new verifications and two strategic acquisitions in Nebraska and Missouri. Medicare Advantage membership ended the year nearly 18% compared to 2019, continuing our meaningful growth in the senior business. Our essential extra suite of benefit options resonates with seniors, and we saw greater than 300% increase in the selection of benefits such as personal home helper services, transportation benefits, and access to personal home safety devices. We’re pleased with our continued growth in this important segment for Anthem and the demonstrated resilience of our diversified portfolio. Our AEP performance is in line with expectations and we expect another year of double-digit growth, once again, outperforming the industry average growth rate. Throughout the course of this past year, our deeply committed associates have stepped up and shown great compassion and care to those we serve and to one another.

John Gallina, CFO

Thank you, Gail, and good morning. As Gail stated, we are pleased to report strong fourth quarter and full-year financial results. Fourth quarter adjusted earnings per share was $2.54, down 35% year-over-year driven primarily by cost related to the COVID-19 pandemic, including actions taken to support our members. For the full year, adjusted earnings per share was $22.48, representing growth of 16% over 2019. Total operating revenue for the fourth quarter was $31.5 billion, an increase of more than 16% over the prior-year quarter, reflecting solid growth in Medicaid and Medicare. For the full year, we ended 2020 serving 42.9 million members, including growth of 300,000 lives during the fourth quarter. Medicaid membership was up more than 11 times the decline in our commercial risk-based business. This is the tenth consecutive quarter of membership growth, further demonstrating the strength and resiliency of our business. The fourth quarter medical loss ratio was 88.9%, a decrease of 10 basis points over the prior-year quarter. COVID-related costs accelerated during the quarter above expectations. However, this was offset by non-COVID utilization coming in lower than expectations. Taken together, overall utilization was above baseline, albeit slightly better than expected. For the full year, operating cash flow was $10.7 billion or 2.3 times net income. Fourth quarter operating cash flow was $3.8 billion, compared to $1.3 billion in the prior-year quarter. The increase is primarily attributable to changes in our net working capital and enrollment growth in our government businesses. Our operating cash flow in the fourth quarter benefited from several payments that were originally expected to be received in 2021. We will reverse these in 2021 and they negatively impact our operating cash flow metrics. We ended 2020 with a strong balance sheet as the debt-to-cap ratio was 38.7%, consistent with our target range. Looking ahead, our current guidance reflects our latest assumptions related to the COVID-19 pandemic. Importantly, our guidance includes new items that were unknown at the time of our third quarter call, including the passage of the Consolidated Appropriations Act in late December and the corresponding one-year increase in Medicare physician payment rates. We remain confident that our long-term earnings growth target of 12% to 15% is both credible and sustainable. Turning to our 2021 guidance metrics, total medical membership is expected to reach 44.4 million members at the midpoint, reflecting growth across our key business segments. Our long-term capital deployment targets are unchanged as we progress down this path of becoming the most innovative, valuable and inclusive partner in the healthcare ecosystem with the continued focus of delivering sustainable long-term shareholder returns.

Justin Lake, Analyst

Thanks. Good morning. I wanted to see if you can walk through the $0.50 to $0.70 as much detail as possible. You mentioned the stimulus with a higher physician fee schedule and the quarterly sequestration. So, I estimated that at about $0.20. So, I was hoping you could confirm that and then break out the other $0.40 in terms of rebuild locations and how that benefits Medicaid, the higher total costs of 20% add-on the Medicaid rebates, et cetera. And then lastly, can we assume that when you think about the 2021 jump-off point for the 12% to 15% EPS growth next year, would you grow off the $25.10 getting back with $0.50? Thanks.

John Gallina, CFO

Yes. Thank you, Justin, and good morning. I appreciate the question and the opportunity to clarify the $0.50 to $0.70 change in our expectations. As you mentioned, with the appropriations bill and the extension of the federal health emergency, we now have a disconnect between some of the costs and the embellishments. We completely agree with their approach to Medicare at 3.75% fee schedule rate increases as well as a sequestration. The Medicare rate increased for 12 months. The sequestration is only for three months as an offset, but there’s a third component as well. And that’s a 20% bump in the inpatient DRG; it’s going to be extended for the full year, as well as part of the federal health emergency. So, when we take the three of those combined, that actually accounts for about two-thirds of the $0.50 to $0.70 differential that you’re asking about. The other one-third really relates to the fact that the non-COVID utilization in the fourth quarter was lower than we had anticipated. And so, once you factor that in, that’s about the other third. So, you take those out and we’ll come down to the $25.10 that you have been modeling to the $24.50 at the midpoint. And then in terms of your question associated with the 2022 jump-off point, while it is premature to give 2022 guidance, we believe that many of these issues are transient and we’re very comfortable affirming the 12% to 15% long-term sustainable growth rate on a $25.10 starting point. And thank you for the question.

Gail Boudreaux, President and CEO

Thank you for the question, Justin. Next question.

A.J. Rice, Analyst

Hi, everybody. I know there are a lot of puts and takes around this question, but right now, people are trying to make an assumption as to when there be mass distribution of the vaccine and when things might start to get back to normal. Conceptually, when you think about your 2021 guidance, how have you pegged that thinking, and if we were to find out, for example, if we say, you’ve pegged it for the middle of the year or later in the year, if it happens, if there’s variance, say, it’s in March or it’s in October, would that – how would that change the financial outlook that the company’s presenting?

John Gallina, CFO

Yes. Thank you, A.J., I’m sorry. A great question. The most vulnerable populations, which include Medicare Advantage members, et cetera. Our expectation is that by the end of the first quarter, they will achieve the vaccination level appropriate. We’re really looking at having somewhere in the neighborhood of about 60% of Americans vaccinated for the year, with Medicare we would expect to be a bit higher. The commercial population and the Medicaid population, we wouldn’t expect the vaccines to be rolled out and completed until the end of the summer. Maybe even a little longer with the commercial population being close to the average for America for the year and then Medicaid being a little bit less. So, to the extent of the rollout and the efficacy of the vaccine, very clearly, it could have an impact on the financial results for the year. As COVID costs go down, we do expect non-COVID utilization to increase. So, it’s certainly not a one-for-one, but there are clearly a lot of dynamics associated with that modeling. And if the vaccine is either faster or slower, it’ll have an impact in one direction or another. And hopefully, that helps.

Gail Boudreaux, President and CEO

Yes. And A.J., this is Gail Boudreaux. I think, in addition to John’s question, as we shared, it is an incredibly dynamic environment relative to what’s happening with COVID and the vaccine. We are working closely though to ensure access for our members. We’ve added a number of new tools in terms of our trackers and our online toolkit to ensure that people know where vaccines are available. We’re going to work with our States closely. We entered a partnership with Lyft to provide 60 million free rides. Our sense is that the senior population, obviously, in the rollout is going to have first access to that. So again, everything John said, I think, we are trying to model in this incredibly dynamic environment, but remain optimistic and supportive of what’s happening and want to be a good partner to our States and our customers. So, thank you for the question, our next question, please.

Steven Valiquette, Analyst

Okay, great. Thanks. Good morning, Gail and John. Thanks for taking the question here. So, it’s just in relation to those higher Medicare physician rates for 2021. If I was curious to hear more about the mechanics of this, just whether or not any of your capitated or at-risk payment arrangements with physicians would provide any sort of protection for Anthem against these impacts. And therefore, this might have a greater impact on your fee-for-service arrangements with physicians, or is everything just indexed to the rate update and that doesn’t really matter, but curious to hear more about the mechanics on that. Thanks.

John Gallina, CFO

Yes. Thanks, Steve. I appreciate the question. The amount that we’ve disclosed in terms of the impact on our guidance, it’s really the net amount regardless of the risk methodology we have with the provider network. In terms of looking at how they play through the reimbursement methodologies, what we’ve provided is the net impact of all those.

Ricky Goldwasser, Analyst

Yes. Hi, good morning. Question focused on the exchange business appears to be competitive. I mean, it’s always been competitive, but we’re hearing some anecdotes of increased competition. How do you think about a dynamic in – specifically, how do you think about sort of, the margin goals that you have articulated in the past?

Gail Boudreaux, President and CEO

Thanks for the question, Ricky. I’m going to ask Pete Haytaian, who leads our commercial business to respond. Pete?

Pete Haytaian, President of Commercial & Specialty Business Division

Yes. Thanks a lot for the question, Ricky. In terms of the individual business and sort of, as we see Q1 play out, we feel good about our strategy. We continue our thoughtful targeted growth approach in the individual business. We’ve expanded into about 115 counties in 2021. Our approach continues to be based upon a focus on best-in-class economics, through value-based relationships, differentiated medical management, but really try to partner with key providers to enable excellence in quality and risk adjustment. While we’ll experience growth, environmental, and I think you’re alluding to this, there is more competition. There does appear to be less overall new sales across the federal facilitated marketplace and the state-based exchanges. It seems to be down a bit year-over-year. We believe that this is due to several different factors. We all know that in several states, there were special election periods throughout 2020, which certainly could have been a factor, also less overall government engagement and that could change with the Biden administration in terms of overall marketing and then less prospect engagement, we saw that just in light of the political environment and the economic climate. But overall, I think we remain optimistic regarding this business.

Gail Boudreaux, President and CEO

Yes. And I would just add to Pete’s comments that we’ve had a very consistent strategy around the individual marketplace that really hasn’t changed year-over-year. We’ve done some expansion in States, where we obviously have a very deep footprint and we would continue to be opportunistic and very optimistic about what we think the opportunities are there.

Ralph Giacobbe, Analyst

Thanks. Good morning. I was hoping to get into the MLR guidance a little bit more, John, the 80% – maybe, you can give us some underlying assumptions, it does imply a step up and I know you mentioned mix. But even outside of that, it seemed a little bit higher. So hoping maybe, a sense of expectation of what you assumed in guidance around maybe, Local Group medical costs for 2021 and how we should consider that maybe off of either 2020, or maybe 2019. Thanks.

John Gallina, CFO

Yes. Thank you, Ralph, for that question. When we look at our MLR guidance, we believe it’s appropriate given the uncertainty around the timing and the efficacy of the vaccine rollout and the full-year impact of COVID, as well as those unexpected changes in Medicare physician rates and sequestration. We’re only looking at 2019 as the point of comparison since that was the last period that there was not a HIF. It’s really a fairly simple roll forward from that perspective. You look at the mix of the business that we have today with far more Medicaid members. We’ve actually had exceedingly strong growth in our Medicare advantage the last few years, being in the upper teens on a couple of year basis and exceeding the rest of the industry. All of that obviously changes our business mix. And just on an apples-to-apples basis, mix is driving about 60 basis points of the increase in the 2021 MLR versus the 2019 MLR. And then when we look at the impacts of COVID, there’s certainly the cost of COVID, which is in the billions of dollars. And then of course, we had the pricing actions that we’ve taken into account for that, as well as our reimbursements from regulatory entities that we believe are appropriate in the COVID environment. When we take the net of all those, the impact of COVID is another 30 basis points to 50 basis points on our MLR for 2021. But it’s really those two items with mix in COVID.

Gail Boudreaux, President and CEO

Next question, please.

George Hill, Analyst

Yes. Good morning, John. You actually just covered everything that I was going to ask about the MLR and the COVID impact. I guess I would just say, one of your peers called out the COVID impact in Q4. I’m wondering if you guys would be willing to do that. And then Gail, my follow-up is now that Ingenio was kind of fully stood up. Where do you see the white space in Anthem’s offering going forward?

John Gallina, CFO

Sure. I’ll start with your question, George. In terms of the COVID cost, I think really, probably, your question is what type of COVID costs are included in your guidance. We’ve spent considerable time analyzing and modeling potential impacts. A few of the peers, A.J. in particular, is asking what happens with COVID vaccine with a lot of different concerns? Of all the modeling assumptions we have, the timing and efficacy of the vaccine is one of the assumptions that has the greatest amount of variability associated with it. All-in, we’re estimating that we have about a $600 million COVID headwind inherent in our 2021 guidance. COVID costs when we include testing, treatment, vaccine administration; it’s several billions of dollars.

Gail Boudreaux, President and CEO

Yes. Thanks, John. I just want to reiterate what John said in terms of just our long-term EPS trajectory. And as you think about Ingenio, we’re really pleased with the performance of IngenioRx. We’re past the transition and we’re now in full integration of that business with our other opportunities, particularly, in our commercial business. We would expect as we sell through 2021 that there’s continuing an ongoing opportunity to integrate IngenioRx with our commercial footprint.

Kevin Fischbeck, Analyst

Great, thanks. I wanted to see what your guidance was including for two of the, I guess, things that might still be a little bit influx, as far as the Biden policies, I guess, first on the view about redeterminations or do you assume that they’re going to come back this year or in fact not come back until next year? And the second, how you’re thinking about testing costs, it sounds like you’re including some testing costs in there. but I guess Biden’s been talking about having insurers cover potentially back-to-work and back-to-school type testing.

Gail Boudreaux, President and CEO

Yes. Thanks for the question. In terms of our guidance on verifying and testing, we originally thought the public health emergency would end in the first quarter that’s what we knew at the time. Our assumption was that Medicaid reverifications would probably really begin in the summer and we are expecting no reverification to be on pause for the full year.

Dave Windley, Analyst

Hi, good morning. Thanks for taking my question. You had – management had sized a $500 million number from Medicaid risk corridor or call-back, wondered if that turned out to be the $100 million that was going to fall in the fourth quarter, if that turned out to be an accurate assessment or if it was different than that and to what extent are you viewing those call-backs are continuing into 2021. And then if I could slip in, the flu season is just extraordinarily low apart from COVID and wondered if that has any impact on your thoughts or guidance for 2021?

John Gallina, CFO

Thanks, Dave. And just to provide some frame of reference to answer your question. In terms of some of the Medicaid call-backs, we had experienced about $100 million in the first six months of the year, had about $300 million worth in the third quarter. While it turned out, it was more than that in the fourth quarter, nearly $250 million in the fourth quarter for a total of about $650 million for the year. I think it’s very important to note that even with that $650 million call-backs with all the various corridor and collar and other rate protections that existed within that block of business, that Medicaid still ended in 2020 within target margin ranges.

Gail Boudreaux, President and CEO

Next question please.

Joshua Raskin, Analyst

Hi, thanks. Good morning. Question is Anthem’s strategy around working with physicians and health systems and risk-based arrangements. And if you could size the overall spend that you see going through risk-based contracts, and specifically, through global capitation.

Gail Boudreaux, President and CEO

Yes. Thanks for the question, Josh. We’ve shared this publicly a few times. We’re over 60% in some type of upside downside risk. Our strategy is to continue to build upon that, and we believe that having one in eight patients in our markets that are Anthem patients provides us with a real foothold. We still see a lot of runway for us to increase the penetration, particularly in our middle-sized and large accounts with integrated pharmacy benefit offerings.

Lance Wilkes, Analyst

Yes. Could you talk a little bit about your strategy, partnering and cross-selling into other Blue Cross organizations, and could you hit three areas that it would just be interesting to understand the progress and the outlook for Ingenio, for our diversified in particular, the Beacon asset name, and then also your Medicaid partnerships?

Gail Boudreaux, President and CEO

Thank you very much. I’ll begin, and then I’m going to ask Felicia to share some comments around our Medicaid partnerships. You hit really on the three key areas that we’re partnering with our Blue, other Blue plans on, and even there’s a couple of others. First, Ingenio is one of our first commercial partners in that space, and we continue to work across Ingenio in addition to several other relationships that we’ve had with other Blues; it’s a longer-term sales process. We actually do think there’s a really good opportunity for us to continue to build and expand and we see as a very big opportunity to integrate our whole health strategy.

Felicia Norwood, President of Government Business Division

Good morning, Lance and thank you for the question. We’re very pleased with our Blue partnerships. We started the year with five partnerships on the Blue side. We’ve now added Nebraska and Missouri branded as Healthy Blue. The opportunity that we have is that we’re really a natural partner to our Blue plan, and see this as an opportunity for us to continue to leverage the breadth and scope of Anthem’s deep knowledge around Medicaid execution, and being able to continue to grow that membership as we go forward.

Robert Jones, Analyst

Great. Good morning. Thanks for the question. I guess maybe, just one on the SG&A expense ratio, the expectation for 10.8% plus or minus at the midpoint. I know there’s the moving pieces this year. I was hoping John; maybe, give us a little context on the drivers of this. Obviously, we would have the SG&A ratio lower than what we saw this year. And I know we’re thinking about the HIF and mix, and then just other cost initiatives. So, just any breakdown of that would be helpful.

John Gallina, CFO

Yes, sure. Thank you for the question. Our SG&A levels are decreasing and yes, they’re really again to be more consistent with the plans that we discussed at our Investor Day a couple of years ago. We continue to have systems migration strategies, looking very hard to eliminate non-value added workflows and really enhance our digital capabilities. Overall, we feel very good about that. We anticipate a lot of growth in Medicaid. Medicaid carries a lower SG&A ratio than the company does in general, in terms of mix and made an average. So, a lot of moving parts and a lot of factors, but we’re very confident with our 10.8% and believe that it’s very much delivering on the promises that we laid out a couple of years ago at Investor Day.

Scott Fidel, Analyst

Hi, thanks. I actually wanted to just ask about Diversified Business Group just more broadly in terms of thinking about the 2021 outlook, and interested if you could maybe, talk about how you’re thinking about revenue growth in margin profile for the business. I know there’s a bunch of businesses within that. But generally more broadly, and then call out, any key COVID headwinds or tailwinds to consider around that segment?

John Gallina, CFO

Yes, sure, Scott. Thank you for the question. Diversified Business Group is an extremely important part of our long-term strategy and our long-term growth aspirations. In 2021, we do expect to see some nice growth on a specific, on a percentage basis out of Diversified Business Group. We expect Beacon to really be a meaningful growth driver once the vaccine stabilizes the COVID issue. We’re very bullish about DBG’s long-term aspirations and helping drive the overall growth of Anthem for the future.

Matthew Borsch, Analyst

Yes. I was just wondering if you could talk about the enrollment outlook for the beginning of the year, particularly, what you’re seeing in terms of large accounts. And then Medicare Advantage also how you see that coming into the New Year? Thanks.

Gail Boudreaux, President and CEO

Sure. I’m going to ask for Pete to answer the commercial question and then Felicia about Medicare Advantage, but just a couple of overarching comments on that. Overall, we’re really pleased with how our commercial business performed in 2020, just given the economic headwinds. But our sales have been robust and our retention good. We still feel very good about our portfolio.

Pete Haytaian, President of Commercial & Specialty Business Division

Yes. Thanks a lot for the question. Overall, with all the headwinds we talked about in 2020, we actually saw the commercial book grow sequentially year-over-year. We did see furloughs in our book of business and in less risky segments being a factor. As we head into 2021, that’s really going to be the story, as it relates to our execution. If that changes and the economy improves quicker than we think, then that would be a positive. Overall, we’re taking a more conservative view of that in light of where the economy is today. That would overall lend itself to about flattish overall membership growth in the commercial business.

Felicia Norwood, President of Government Business Division

And in terms of our Medicare business, Medicare Advantage, particularly, the results of the past AEP are in line with our expectations. We certainly expect another year of double-digit growth outperforming the industry average growth rate. We’re also pleased to be expanding our footprint into 109 new counties and will be offering Medicare Advantage plans in Iowa, as well as statewide across Kentucky and Tennessee.

Steve Willoughby, Analyst

Hi, good morning and thanks for taking my question. Most of mine have been asked, but two things for you. One just to follow up on the last question, I was wondering if maybe, Felicia could comment at all as it related to Medicare Advantage between individual and group.

Felicia Norwood, President of Government Business Division

As I referenced earlier, our individual sales for AEP were in line with our expectations. We are very pleased with what we saw and expect to deliver the double-digit growth that we referenced. From a group perspective, while there was a bit of a delay in the GRS pipeline, we still think that opportunity is intact and we expect to see more of these opportunities as we move into 2022 and beyond.

Gail Boudreaux, President and CEO

Well, thank you very much. That will be our last question. I want to thank everyone for joining our call this morning. As you’ve heard here today, Anthem delivered strong results in 2020, and we’re well positioned moving into 2021 despite the ongoing uncertainties. I look forward to speaking with you at our Investor Day event in March. Thank you again for joining us.

Operator, Operator

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 AM today through November 27, 2021. You may access the replay system at any time by dialing 888-566-0406 and entering the access code 8850. International participants can dial 402-998-0591. This concludes our conference for today. Thank you for your participation.