Q3 2019 Earnings Call

Good morning, I would like to apologize for the technical difficulties that we are experiencing with our phone carriers. This is not an issue related to anthem, if you're joining via webcast. Please limit your questions to Chris Rigg, Vice President of Investor Relations is email address is Chris Dodd rig at anthem.

Dot com, which also can be found on page six of the company's press release, we will be monitoring emails accordingly.

Ladies and gentlemen, thank you for standing by and welcome to the anthem third quarter results Conference call. At this time all lines are in listen only mode. Later, there will be a question and answer session and instructions will be given at that time, if you shouldn't need assistance. During today's call. Please press star followed by zero as a reminder, this conference is being recorded.

I would now like turn the conference over to the company's management.

Good morning, and welcome to anthems third quarter 2019 earnings call.

This is Chris Rigg, Vice President of Investor Relations.

And with US this morning, our Gail Boudreaux, President and CEO .

John Galena our CFO .

Pete high tie in president of our commercial and specialty business Division.

Felicia Norwood President of our government business Division.

Good will begin the call by giving an overview of our third quarter financial results followed by comments on our key business initiatives and enterprise wide growth priorities.

John will then discuss our key financial metrics in greater detail and go over our updated 2019 outlooks we.

We will then be available for QNX.

During the call we were reference certain non-GAAP measures.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website anthem Inc. dot 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 in general beyond the control advance.

These risks and uncertainties can cause actual results could differ materially from our current expectations.

We advise listeners are cautioned that these statements are subject to certain risks and uncertainties.

Many of which are difficult to predict and general beyond the control of anthem.

These risks and uncertainties can cause actual results to differ materially from our current expectations.

We advised.

Listeners are cautioned that these statements are subject to certain risks and uncertainties.

Many of which are difficult to predict and general beyond the control of anthem.

These risks and uncertainties can cause actual results to differ materially from our current expectations.

Advise listeners are cautioned that these statements are subject to certain risks and uncertainties.

Many of which are difficult to predict and general beyond the control of anthem.

These risks and uncertainties can cause actual.

We advise listeners to carefully review the risk factors discussed in today's press release in our quarterly filings with the FCC.

I will now turn the call over to Gale.

Thank you, Chris and good morning.

Today, we reported third quarter 2019, GAAP earnings per share of $4.55.

And adjusted earnings per share a $4 in 87 cents, reflecting strong revenue and earnings growth across our businesses.

Operating margin was 5.8% for the quarter.

Substantial improvement both sequentially and year over year.

Over the last several quarters, our enterprise wide financial results have been strong and in 2019, we will exceed our long term revenue and earnings growth target.

Yeah, So third quarter operating revenue increased a robust 50%.

Over the prior year quarter to $26.4 billion.

Medical membership grew across the board.

Increasing by 1.1 million consumers served.

With our risk businesses accounting for nearly 90% of total growth.

Yes, the specialty businesses also delivered solid growth.

Only adding nearly 150000, new consumers in the quarter and nearly 800000. She is a first month of this year first nine months.

Anthem whole health connection has been a key enabler of our strategy to increase specialty product sales by integrating information across our package medical and specialty offerings.

Driving more effective innovations to close gaps in care and reduce costs.

As part of anthem whole health connection we identified the dentist account for nearly 10% of opioid prescriptions.

By leveraging this insight and mobilizing our local provider network and clinical teams, we initiated a multiyear effort to broadly educate anthem dentist on effective non narcotic alternative.

As a result opioids prescribed by our dental providers decreased by more than 50% and the number of opioid prescriptions exceeding a seven day supply were cut by more than 90%.

Our clinical focus is designed to support care providers by giving them data tools and capabilities to effectively manage performance.

This example illustrates the power of our focus on whole person health.

To deliver improved outcomes and reduce costs well impacting one of the most pressing health care issues facing society today.

The migration of our pharmacy business twin Genie Rx continues to go extremely well and we remain on track to have all of our members on the Ingenio Rx platform by January 1st 2020.

We're confident in our ability to execute on the remaining aspects of the transition and now expect to be in a position to provide value added services at much more competitive pricing.

Ingenio Rx is a key example of the strategic end to end execution that we're driving across all aspects of our business.

With E successful wave of our migration, we've implemented a command center model, bringing together hundreds of associates, representing critical operational areas to work side by side 24 by seven.

Through this model, we've been able to monitor performance in real time and to play cross functional Swat teams to quickly and effectively resolve any issues or concerns.

Medicaid results improved this quarter, but at a slower rate than previously anticipated.

As we had better alignment of revenue relative to the risk profile of the population served.

We added nearly 200000 members and see continued strong growth through 2020.

We remain confident we'll continue to improve our performance, while delivering even greater value for our state partners and the individuals that we serve in our Medicaid program.

Our previously announced acquisition a beacon health remains on track to close late in the fourth quarter.

This strategic addition to the and some portfolio will strengthen our market position in behavioral health and help further our efforts around whole person care.

Improving performance execution or ground anthem remains a key priority and focus.

We made progress in many areas, but there's still more work needed in order to unlock the full potential of our enterprise.

We're very disappointed with the recently announced star rating scores for payment your 2021, which did not improve at the rate we had targeted.

Unfortunately, these ratings were largely impacted by our clinical pharmacy results.

However, with the successful transition to Ingenio Iraq.

We are refocused our organization with clear accountability and line of sight to Delever dramatically improved results going forward.

We're absolutely committed to improving the percentage of our members and Forestar plan.

Across the anthem, we remain intensely focused on creating innovative meaningful and affordable products and services for our customers consumers and care provider partners.

We continue to invest in digital capabilities in AI in order to create the kind of health care experience our consumers demand today.

Our recently launched electronic personal health record is gaining traction.

This unique tool is empowering consumers to be more engaged in health care decisions by supporting greater alignment and communication with their own care providers.

We're excited about the watches Sydney, our next generation consumer engagement platform.

Sydney is delivering on our promise of a simpler more personalized experience, giving consumers control over where and how they engage with us regarding their care benefits coverage their health and wellness school anymore.

Leveraging data in a high see me is prevent providing a personalized health care experience tailored to each individual's unique needs, resulting in improved engagement and ultimately a lower total cost.

Turning to 2020.

In commercial we anticipate another solid year about risk and fee based membership growth in.

In addition to the benefit of Ingenio Rx, we've deployed a broad portfolio of innovative products to meet our customers where they are these include anthems recently announced chamber based association products, along with the newly launched health think high performing provider network, giving employers more affordable choices.

We anticipate another strong year of national account growth.

National account customers represent our most sophisticated buyers and our success is determined by our ability to deliver better quality at the lowest net cost with improved member satisfaction.

Clinical programs such as total total you are integrated end to end digital first clinical model or exceeding expectations on this front.

Since launching in January of this year, we've added 1 million members and expect to have approximately 2 million consumers in 2020.

In Medicare advantage, we're pleased to have grown enrollment by nearly 20% in 2019 I remain confident that we will continue to outpace the market for the fourth consecutive year based on the value, we believe deliver seniors through our highly attractive plan designs and supplemental benefits.

We also anticipate continued growth in our group retiree business.

For 2020, we're enhancing our supplemental benefit choices, which are highly valued by seniors and include areas such as transportation.

Caregiver support and nutritional education to name just if you.

These services are in addition to our already successful over the counter benefit in partnership with Walmart.

Our efforts in this area are proving that anthems unique focus on whole person care is truly resonating with this important population.

As you know our Medicaid business is well positioned for robust membership and revenue growth in the year ahead.

Our partnership in North Carolina is expected to go live in the first quarter.

Add approximately 400000 members.

Supplementing our strong organic growth, we look for its working with our state partners to serve members in Missouri in Nebraska upon completion of the Centene Centene Wellcare transaction.

Our commitment to sustainability also remains a key focus for our organization.

With that.

I'm pleased to share that anthem was named to the Dow Jones sustainability index for the second year in a row during this quarter.

This recognition acknowledges our commitment to responsibly address the challenges facing today's dynamic and ever evolving healthcare environment.

At anthem, our focus on culture in talent continues to serve as our foundation for success.

We are enhancing talent across the organization to support our focus on growth and improve our performance execution.

We're not satisfied and no we can and will do more to improve anthems impact across the health care system for those we serve.

I will now pass the call over to John for more detailed review of our third quarter financial performance before concluding our prepared remarks with our initial assessment of 2020 John .

Thank you Gail and good morning.

As Gale stated, we reported solid third quarter financial results with adjusted earnings per share, increasing 28% year over year to $4.87.

Adjusted net income was $1.3 billion in the quarter up 25% over the prior year.

In total our consolidated operating gain grew by more than 22% over the prior year quarter.

During the second quarter, we shared with you our outlook for improved segment performance in the second half of the year.

The government business grew operating gain by 35% in the quarter, while the commercial business grew by more than 11% compared to the third quarter of 2018.

As you can see.

Not only did we deliver on our commitments.

We generated substantial double digit growth in doing so.

Operating revenue in the third quarter of 2019 was $26.4 billion, an increase of 15% versus the prior year quarter and 17% on a hip adjusted basis.

With our updated outlook, we now expect full year operating revenue of approximately $103 billion with premium revenue now on the range of $94 billion to $95 billion.

We are firmly on track to deliver our strongest year of organic operating revenue growth in over a decade.

The increase in operating revenue during the quarter reflects strong enrollment growth in our risk based businesses.

As was premium increases to cover overall cost trends.

In addition, our results benefited from revenue related to the launch of in junior acts and the growth in our specialty and integrated clinical offerings.

The medical loss ratio in the third quarter was 87.2% representing an increase of 240 basis points over the prior year quarter.

The increase was predominantly driven by the one year waiver of the health insurer fee.

In the quarter reserves developed somewhat unfavorably, including favorable prior year development and unfavorable current year development.

The unfavorable development totaled $50 million it was isolated to the commercial segment.

This included a few large groups that will be terminating later this year.

The magnitude of the impact is immaterial, representing only <unk>, 0.05% of our full year benefit expense, but it did impact the medical loss ratio in the quarter.

Overall third quarter medical cost were well contained in our local group medical cost trend is reaffirmed at our 6% plus or minus 50 basis points range.

It is important to note that the Medicaid M or improved on a sequential and year over year, if adjusted basis. Despite ongoing just a moment.

We continue to expect further margin stabilization.

But given the magnitude of the Medicaid rebel Affrication challenge, we faced in 2019, our full year and more is trending in the range of 86.5% to 86.8%.

Arrest DNA ratio was 12.9% a decrease of 250 basis points compared the prior year quarter.

The decrease route reflects our historically strong topline growth coupled with the one year waiver or the health insurer fee.

For the four year, we now expect or asked you in a ratio to be in the range of 13% to 13.3%.

Turning to the balance sheet, our debt to cap ratio was 40% at the end of the third quarter, which is consistent with our target range.

During the third quarter, we successfully completed a debt offering for $2.5 billion at a weighted average coupon of 2.98% and a weighted average life or 15 years.

I'm, especially pleased that are 10, and 30 year notes were issued at all time record lows.

Efficient capital deployment and cost discipline remain top priorities.

Earlier this year at our Investor Day Conference, we committed to an opportunistic capital deployment strategy focused on sustainable long term total shareholder return.

So for this year, we've announced plans for two strategic acquisitions.

One of which expands our footprint Medicaid.

While the other deepens, our clinical expertise and measuring specialized populations.

Simply put we are building our business investing strategically.

We also committed to a capital deployment plan that we'd be both flexible and balanced.

After careful consideration of the market environment, we made the decision to accelerate our pace of share repurchases in the quarter and take advantage of the broader market conditions.

As a result, we repurchased 2.4 million shares during the third quarter at a weighted average price of $266 from 52 cents and we now expect or 2019 share count to be in the range of 260 261 million shares.

Total share buy back for the year is expected to be between 1.6 and $1.8 billion subject to market conditions.

Operating cash flow was $1.7 billion in the quarter were 1.4 times net income signifying high earnings quality for the quarter and representing an increase of $1.1 billion compared to the third quarter of 2018.

The increase was primarily driven by membership growth in our Medicaid and Medicare businesses.

For the first nine months of the year operating cash flow was 4.7 billion worry solid at 1.2 times net income.

As a result of our strong growth year to date and proactive efforts to better manage our cash and the timing of collections.

We now expect operating cash flow for the full year to be greater than $5.5 billion.

2019 has been a productive year at anthem.

Despite the challenges we faced early on we have made substantial progress, including the launch of in junior Rx, which is now expected to contribute at least one dollar to full year adjusted earnings per share.

As a result, we're raising our full year guidance and now expect like 2019 adjusted earnings per share to be greater than $19 in 40 cents.

We are wholly committed to driving the lowest net cost of care for our members, while achieving greater diversification across our businesses.

Both of which are reflected in our double digit top and bottom line growth targets.

There is still one quarter left in 2019.

And our focus is on driving sustainable long term value in completing 2019 on our growth trajectory.

Enabling us to enter 2020 with positive momentum.

And with that I will now pass the call back over to Gale.

Thanks, John .

As you've heard throughout this morning, we are growing on all fronts.

Our revenue growth is strong and we have made substantial progress in advancing our mission driving higher quality care at the lowest netcomm.

As we began to shift our focus to 2020.

The headwinds that we face are manageable with Tailwinds that lay the foundation for compelling long term growth and far outweigh the impact from short term challenges.

Our growth heading into 2020 is fueled by our commitment to precision and execution with an emphasis on sustainable value for our stakeholders.

As is customary we will provide more detailed outlook for 2020 on our fourth quarter earnings call.

But our initial view of 2020 contemplates the following tailwinds.

The full year impact from Ingenio Rx.

Margin improvement in Medicaid.

Overall 2019 in 2020 membership growth.

Increased penetration of specialty and clinical programs in our fee based businesses and accretion from capital deployment.

These will be partially offset by margin normalization in the individual business.

Dilution from government contracts in Medicaid and growth in our group Medicare and the return of the health insurance fee.

At this early stage our view on 2020 would point to core adjusted earnings per share growth near the low end of our 12% to 15% target growth rate relative to our original 2019 guidance.

We continue to expect Ingenio, Iraq will produce total operating gain of at least 800 million or roughly $2.30 per share in 2020.

We're on track for another year of historically strong revenue and earnings growth.

And we look forward to building on our momentum in the year ahead.

As I approached my second anniversary here and anthem I remain incredibly proud of the more than 60000 associates, who are living our mission vision and values every day in service to those who trust us with their care.

And with that operator, we will open it up to questions.

Ladies and gentlemen, we will now begin the question answer session. If you wish to ask a question. Please press star followed by one on your Touchtone phone, you'll hear a tony indicating that you've been been placed in Q and to remove yourself from Q. Please press the pound key due to limited time, and then fairness to other listeners we ask that you limit yourself to one question per turn.

Your first question comes from the line of Ralph Giacobbe from Citi. Please go ahead.

Thanks. Good morning, just hoping you could you could start with providing a little more details on the unfavorable reserve development or with come within commercial and and I know you quantified the impact in the quarter.

How much of that sort of feel reflects the higher I'm a lot handle our outlook for the year as well and then any details around that thanks.

Thanks, Rob I'm going ask Pete I tie into talking about our commercial business, which we feel very strongly about and then maybe John to tie up the overall ml. Our question, yes. Thanks for the question Ralph as it relates to our commercial fully insured business.

Earlier this year, we set up to do a couple things when we want to grow our membership and we want to improve our year over year operating performance and I'd say, you know with confidence that we we've done both our year over year operating margins and performance has shown strong improvement.

And you can see that through the release.

In addition of that we've seen solid membership growth in fact in our large large group fully insured business, we've seen and nine out of the last 12 months not sequential growth. So we feel really good about that the in year unfavorable development is really immaterial.

We had a few large groups and being a blue we have some large fully insured groups, where we didn't have a meeting of the mines with quite frankly, and so those groups are gonna be moving on and as it relates to our outlook Q4 and into 2020, we feel very comfortable with our fully insured business great Yeah and Ralph This is John Thank you for the question then Youre.

Reshaped the opportunity to provide a little bit of clarity to.

To be clear Medicaid and more specifically the Medicaid we verification process is driving the entire increase and the increasing a ammo our guidance and I'll just give me a couple of proof points, if you'd like them freer for your modeling and your information.

In some states, we verification efforts had minimal impact, but another's we've seen disenrollment on the average of 2% with stage going as high as 4% this enrollment.

And those same states. If you review the statutory filings from the first six months severe for us and our peers.

We'll see that the m. orders associated with those remaining populations or up on average 3% year over year with some states being up as high as 5% year over year.

And as we had told you in a prior quarter call. The re verification has impacted a little over half of our stage at this point in time and if you just take that 3% times half over Medicaid block and applied to our consolidated medical loss ratio, you'll see that the consolidated medical loss ratio would go up 50 basis points.

And then just another quick proof point for your modeling purposes is.

We've made commentary that were at the low end over target margin ranges associated with Medicaid for the year associated with the a lack of revenue on the re verification. The timely was the lack of revenue on re verification in the difference between the midpoint.

Of our operating margin in the low end over operating margin. If you apply those dollars again to the medical loss ratio, you'll see that it would drive the consolidated medical loss ratio by about 50 basis points. So both of these things are just proof points to show that the entire increases associated with me.

Medicaid and that the the commercial issue, which was only 0.05% of annual benefit expense really didn't drive that guidance change. So thank you for the question. Thank you next question. Please. Your next question comes from the line of Justin Lake from Wolfe Research. Please go ahead.

Thanks. Good morning, just one numbers a question here and then I'll ask my actual a b obviously lot of folks on 2020, So just want to make sure I got the math right here.

We start with.

Around $18.20 of core EPS right. That's the guide of $19 minus ingenio coming into the year and then at 12% to that rolled out by 12% gets us into low Twentys and then we add back the entire ingenio of $22.30.

Did you get somewhere between 20 to 50 in 20 to 60 I know the range is going to be wider than that but it's not about the right math.

Thank you Justin Thanks to the question in terms of we're not giving exact guidance as you know, we're giving headwinds and tailwinds, but as you think about your math I'd say you're in the ballpark clearly to what we articulated at our Investor day to this past spring so yes.

That's helpful. And then my question would just a follow up on Medicaid specifically I know you guys. You said things got better. So in the first half you were running at the low end to your range. So lets say, 2% can you give us an ideal what you're expecting to do in the back half of the year in Medicaid back after this year and then.

We should think about Medicaid into next year whats in that in that out 2020 number for a Medicaid margin. Just so we can try to have a have a starting point. Thanks, yes sure. Justin. Thank you you know the the low end of the target margin range from Medicaid is where we actually expect us to be ready.

Until we close do for the entire year, but the second half is definitely going to be better than the first half a in terms of about 2019, and then a in terms of 2020, you know we do expect ultimately to be in the target margin range a associated with Medicaid. Unfortunately, the timing doesn't.

Always work out perfectly and sometimes it can take 12 to 18 months to get the appropriate rates associated with our negotiations and sharing of information with our state partners and so we clearly have an expectation of improvement associated with Medicaid in 2020, but it's really premature.

Provide an exact percentage or where we are exactly in the range at this point until we get to the point that will provide a lot more guidance metrics on the fourth quarter call, Yeah, and let me just add to John's comments I think overall in terms of Medicaid we feel quite good about the conversations we're having as she shared with you in China.

So the re verification and the data that we have.

We're working very.

Proactively with our states and again a lot of this comes down to timing and their cycle, but we feel quite good about what we've been able achieved to date and also what we feel for 20 twice were very positive about the overall Medicaid environment business going forward next question. Please.

Next question comes from the line of A. J Rice from Credit Suisse. Please go ahead.

Oh, Hi, I'm, just maybe continuing books.

Think about the 2021 seeing what's not it sounds like you guys. You are assuming again, probably change it's a business normalizes margin I know you had an assumption of a declining margin for three years in a row and continued to outperform at a is that just conservatism or do you know something that would suggest that that's.

On a moderate.

And then in Jennie O. It sounds like years, assuming this that you got the same upside that you had originally forecast in terms of gain on what sounds like things have gone at least as well if not a little better is there any chance of upside there and a and then finally the Medicaid just a follow on that question.

Are you when you talk about what the margin for next year and what's assumed in that number is not only what you have realized so far in terms of true ups or are there more true ups that are potentially on the table that you haven't yet realize that would be.

Potential upside so thanks for the multitude and a multifaceted question age I think you hit most of our businesses. So let me let me start with John and have him address the first part of it and that we'll see if we get through it. Thank you again. Thank you Jay So yes, we do expect normalization of a individual mark.

Engines in 2020, and just as a frame of reference in 2016 in 2017, Yeah. We performed essentially on a breakeven basis in that line of business. You know, we never really lost money on the exchanges, but it was a essentially breakeven and then we reduced our foot print quite dramatically in 2000.

And 18 by some 65% and walked away from almost a million members and had a extremely successful 2018 and they're having a very good 2019, we expect immersions to moderate in 2019, and they have but not quite as quickly as we had assume they're going into 2000.

20, well the way that the DMR rebate rules work as are based on a three year rolling average and so the 2000.

17, and 18 19 rebates would have had a the prior information a in with when we are much larger maybe you get the 2020 and we've got three a fairly good years I'm, assuming that we hit our target margin ranges for 2020, and and so that's going to actually limit the ability to have.

Incremental upside in terms of Ingenio Rx first of all we were really pleased with the way the transition has gone in the migration of our members.

As you saw we upped our guidance and that's really a result of both strong operational execution, but also greater certainty. It now we when we first gave it we didnt know exactly what our state approvals would occur in Medicaid in commercial and now obviously that we have certainty on and again as I shared in my opening remarks really strong execution.

Of the migration, probably one of the most complex migrations that's happened in the space. So we're really pleased about that we feel very good going into 2020 that all of our business will now be on that platform and we can use our integrated capabilities and the digital things that weve advanced over the last year. So thank you very much of the question and next question. Please.

Your next question comes from the line of Ricky Goldwasser from Morgan Stanley . Please go ahead.

Yeah, Hi, good morning, and couple of questions here. So just first a follow up on what the unfavorable reserve development that you saw in the commercial business I understand it immaterial to to bottom line and what's going to have an impact into fourth quarter, but.

But can you talk a little bit about what you're seeing in terms of off the competitive marketplace.

How competitors are kind of like responding to the fact that you now have.

Just.

Better economics and ability to provide more of.

Portable offerings. So that is just a question one and second of all.

If you can give us any early read now I'll take the Medicare for 2020 times are out there.

How do you see the landscape in opportunities compared to before in anything that surprised you.

Oh, Thank you very much and we are going to try to limit to one question I know, we're getting multiple a in but we'd ask that we would just wanted to one question and let me ask Pete first to comment on the on the commercial marketplace competitiveness, Yes, I think as it relates to our full ensure business. It remains a competitive marketplace. We're laying remains a rational marketplace. We're real excited about our positioning we've talked.

Before about our segment positioning and our product portfolio and the options that were creating the marketplace and we are seeing an uptick there in terms of performance and we continue to see growth as I mentioned before nine out of the last 12 months, we've seen that net positive growth.

One thing that we are seeing in the marketplace today and that is with the addition of Ingenio. Another capabilities that we have we are we are seeing another market have a bit of inertia I'm, a little bit more than we expected and when I mean by that as retention rates are really really strong for us and for our competitors.

Our sales close ratios are improving and then has to deal with our sales effectiveness. So we feel really good about all that but we are seeing a lot a little bit less moving in the marketplace, a little bit more stickiness with the membership and so a little bit slower rates of uptick but other than that we feel really good about our positioning in the full ensure marketplace going into 2020, yeah, and I guess, what I would just add to Pete's comments any.

And what we had something we've had really solid growth. We think it's a disciplined market. It's always been competitive we're very happy with a solid retention rates were saying and we've invested quite heavily in that business. Both in product offering. So we feel well positioned for 2020 with a variety of affordable options, particularly in our small business area and as I shared.

We're seeing great traction in our largest the clients who are really are most sophisticated and I really valuing the innovation that we brought to the market. So overall as Pete said at a very very we feel very strongly about the commercial business right now and maybe Felicia Norwood. If can address Medicare question, you had as well sure yeah. Thank you and Ricky Thank you for the question.

We feel very good about our positioning in terms of our portfolio on the Medicare side as we head into HP. As you now were about flat day nine into this but the feedback has been incredibly positive from our distribution channel in our brokers and 2019 as you know we were one of the first stop plans carriers to re.

Really make a strong and bats, mattson supplemental benefits. We believe that these are some of the most differentiating characteristics in the market with respect to our seniors and we've seen great receptivity to the benefits that we have out there.

This is particularly true with respect to our over the counter benefit with Walmart, which is brought great cost advantage and affordability to seniors. So as we head out into ATP <unk> competitive positioning is strong we enhanced our supplemental benefits operating a this year as well. So we are very bullish.

At our expectations with respect to the 2020 selling season Medicare. Thank you. Please next question. Please.

Your next question comes from the line of Kevin Fischbeck from Bank of America. Please go ahead.

Hi, sorry, sorry about that thank you maybe just following up on that Ingenio and the commercial market, but maybe a broader question across all the products with the savings that you got for 2020, how much of that benefit did you flow through immediately into quite well I guess kind of get a sense of where 22.

One of your fully updated view on pharmacy costs and the growth that you got.

Well, we'll get endpoint is one of your kind of reflective of what that new bases or did you because of the transition forever reason kind of slowly build that into the pricing. So that we should expect the multiyear benefit from.

Membership.

Did you treat Medicare or Medicaid or commercial any differently I actually thought about pricing that benefit through to the customers in the pace of that timing.

Yes sure. Thanks, Kevin This is John and if I understand your your question properly.

The benefit in 2020 is we know that the the value that were were obtaining from and Jane you know as approximately a 4 billion dollar actually slightly greater than $4 billion.

Versus what we would have paid off with our prior carrier.

And that we're going to take 20% of that in dropped to the bottom line, which is the 800 million that was part of gals up prepared comments, which is the $2.30. A leap, yes, and then the 3.2 billion is being baked into either benefit design or more affordable pricing or other options.

Flow straight through to the customer in terms of the timing of all that we really did not let any of that assumptions go through in 2019 2019.

The majority of the year, we're still under the Oh, the ASI contract and the pricing that we have with our Ah. Our book really did represent the pricing of the pharmacy costs that we're employing so don't over read into or over analyze the 2019 versus a 20 Twond <unk>.

Genius, providing about a dollar benefit 19, and there's going to provide about $2.30 and benefit in 2020 in that $2.30 is now run rate.

Thank you next question please.

Your next question comes from the line of Steve touched all from Goldman Sachs. Please go ahead.

Good morning, guys. Thanks for the question.

The unfavorable development sort of situation seems like an isolated issue, but it sounds like you wouldn't have had a favorable development on the commercial business. Excluding the large group you mentioned I want to put words in your mouth, but that's sort of the message I feel like we're hearing and so I guess typically we'd expect some favorable development. So just looking for any color you could provide in the balance of the business and as your.

You sort of local group trend at this point that it's sort of accelerated through the first nine months of the year.

Realizing you reiterated your outlook, but any color maybe in where you might land in the range so that could be helpful as well. Thanks.

Sure Thanks and.

In terms of a of the development Ah you know we did have favorable prior year development. The a that development that we reference was current year end year, we usually don't talk about that but since it was a a it did impact BMR slightly and it certainly it impacted the.

The commercial operating gain growth commercial grew 11% quarter over quarter commercial expanded their margins by a three tenths of a percent quarter over quarter and that was in spite of this.

All of this negative development, so really what it points to is the fact that the commercial business is is even stronger then it may appear initially so you know, but we did have favorable prior year development and we certainly have a consistent.

Conservative reserving methodology that we will expect to employ.

I guess I would add to John's comments that our commercial growth is very solid and we have very healthy margins and I think if you as you look at our margins overall, we feel very good about commercial business and again I'm. The amount of reserved development is fairly minor, but we felt that we would pointed out and I think exactly as Pete addressed that that's really the driver. So we wanted to give you some clarity.

Net next question please.

Your next question comes from the line of Matt Borsch from BMO capital markets. Please go ahead.

Yes, I was hoping you could job and maybe give us a sense of how things look as you're going into January one in terms of I'm not looking for our guidance in the year just got a sense on the January one national account changes and how.

How you think you did in that process and whether they are very strong retention rates that you.

I referenced earlier is that playing out in that market as well right I'll, let Pete to address that question. Yes. Thanks, Matt Great question. We're obviously in the late innings for sort of in the ninth inning of the selling season that were as it relates to 2020, there's some minor puts and takes but it's almost complete and we feel very good about our positioning in our results. We had a good year this year and go.

We entered 2020, we think we're going to have a very strong year as well from a growth perspective, and a retention perspective, most importantly enough scale pointed out in her prepared remarks, we feel really good about our value proposition and how that's playing out in the marketplace.

Things like our total value story and clinical programs and advocacy programs like total health total you, which we've just recently launched with differentiated AI capabilities and care management capabilities. We already have over 1.2 million members in that program, we feel really good about our consumer engagement platform and the work that we've done historically through engaged.

Now, we've launched and rolled out the new Sydney digital platform, an ecosystem and ramp them health got from an advocacy perspective, really really performing well and resonating in the marketplace with over 8 million on members and that with MPS scores that continue to improve so our value propositions playing out in the market. We will have a strong Q1 with respect.

The growth international business.

Thank you next question please.

Next question comes from the line of Peter Costa from Wells Fargo. Please go ahead.

Thanks for the question was still down a little bit more on the commercial.

Development unfavorable development.

What exactly causing the unfavorable development wasn't a provider specifically that was higher costs for the product type.

Higher cost you know some geography.

Drill down and understand what exactly caused that I know you said, it's a couple of accounts, but I want I understand more.

Yeah. Pete This is John Yeah, that's not the type of information for competitive reasons that we're really going to go into on the on this call, especially given the fact that that those accounts have terminated at once we determine what actuarially justified rate increases would be let's just say that we understood.

And you know what the what the causes were yeah, we priced the forward trend we feel very comfortable that this issue has been a been taking care of and yeah, we feel very bullish about our or aspects, but we really can't get into the level of granularity for competitive reasons that you're talking about.

Thank you next question. Please your next question comes from the line of Gary Taylor from JP Morgan. Please go ahead.

Hi, Good morning, I, just want to go back to the really strong government operating income growth, which was up 35% year.

Year over year and when we initially told that number this morning, we presume.

Some of the the retro price increases for the acuity mix really had come through and driven that but that's not what you cited and.

In the release, you said still costs, primarily like a cost performance and some on the call you said.

Phil what you're getting from states in terms of rates was was not quite as good or as you anticipated. So I just wanted to.

I understand that.

We're not material benefits from some of this acuity true ups happening in the quarter and if not what was really the source of the past performance.

Well. Thank thank you very much for the question I think there's there's certainly a couple of things embedded in that question. The first is that 2018 was was low as you think about the comparative from 2018 to 19 and as you go back to our call in that quarter. So you're comparing I think that quite frankly as well.

Hello baseline 2018, so there isn't anything unusual in this quarter for 2019 in our government business. We have made a lot of progress on getting the rates that matched the population. So we feel really good about that but as you know this is a complex business with geographies and a population mix and so we still feel that there's a lot of runway and.

We're having those conversations and our states and we are making progress and we are seeing it flow through but we didn't have a giant retro payment or anything of that sort to point to in this quarter, but we did see improvement a rates and we are seeing improvement in the overall management of the business. So I guess the the summary answer the question as you know the.

Comparison.

Like where we're heading but we also believe we have a lot more runway into conversations are quite productive with our states than we do feel confident but again, we can't absolutely predict timing.

Thank you next question please.

Your next question comes from the line of Steven Valiquette from Barclays. Please go ahead.

Great. Thanks, good morning, everybody so.

Just on the topic of a Medicaid membership over and above the shifting of Medicaid enrollees into commercial plans. That's been talked about previously I guess I'm. Just curious if you can comment on the public charge rule that could create some extra volatility around Medicaid enrollment I know in light of summer federal courts and joining the rule do you think the on just the notion of this could still be material.

Ramp them either in late 19, and the into 2020. Thanks Leslie should a comment. Thank you for the question, Steve and good morning, you know in terms of the public charts rule, we haven't seen a material impact on our business year to date. However, the rule is still pending we will continue to monitor with it.

Slip our state partners and certainly because of the unknown. We are cautiously optimistic that we're going to be able to work closely with our partners as individuals are going through this process. No. This in some respects is that I can to some other things you see with respect to re verification and one of the things that we've been able to.

Do with our state partners is to try to understand early on individuals who have been impacted or may be impacted and have an opportunity to work with individuals to maintain their eligibility. So thus far we haven't seen a material impact on our business, but as I said, it's still early so we will continue to monitor this and work closely with our.

State partners throughout this process. Thank you next question. Please your next question comes from the line of Lance Wilkes from Bernstein. Please go ahead.

Good morning.

Could you talk a little bit about the partnership strategy with see other blues that are out there and you know what you're seeing as far as progress and mitigate joint ventures, Medicare advantage Cross sells, especially and you do the other blues have any sort of change perspective or greater sense of urgency in any of this given the.

Political dialogue and concepts like public option et cetera, well well. Thank you for the question Lance as you know we shared that we are working quite closely with our blue partners across a variety of opportunities and.

We're very pleased with the partnerships that we havent Medicaid we have eight alliances today, five or with our fellow Bluecross Blueshield partners.

We're also adding additional partnerships, we're adding a Medicare partnership in Louisiana, and we're adding a partnership in Maine with the main health system. So it's broader than just the blues I know your question was more specific to the blues as you saw we announced you know that Blue cross of Idaho will be and Ingenio Rx customer. So there's another great example.

So more broadly I think we've you know we are have a broad array of capabilities both through Medicaid, but also through our diversified business group, our aim business and our care more businesses work across the spectrum North Carolina is a great example, where we are doing a partnership with Blue Cross Blue Shield in North Carolina for Medicaid.

Our care more business will be building clinics in that environment as well and then Ingenio Rx will be the PBM. So to me that offers a really great glimpse of the ability to package things across the lose in terms of overall I think as a system. We're intensely focused on affordability in cost and access for the one in three Americans that we.

Serve across Bluecross Blueshield plans.

And I think you saw hopefully many of the Medicare I'm focusing advertising about the Bluecross Blueshield brand. This past year. So I think what you're seeing is that we recognized that role we have in the American health care system and by working together, we can do a lot more to have an impact on the system. So thanks very much the question, but we're very.

Quite frankly bullish and excited about the opportunities that as a blue system. The impact that we can have a crossamerica.

Next question please.

Your next question comes from the line of George Hill from Deutsche Bank. Please go ahead.

Hey, good morning, guys and thanks for taking the question just to piggyback on the one that Gary asked earlier, if we think about the expected Medicaid margin improvements in 2020, how much of that is dependent upon the risk or acuity adjustments coming through and John I think you talk a little bit about the timing of those tending turning around like 12 to 18 months, so that would kinda coincide with it kind of seeing the issuance.

Two of next year, and it's starting to roll through into into 2020, and I'd say just am I thinking about that right.

Yeah sure George that's very good question and in terms of exactly how much is related to do the re verification, while it's certainly a piece of it but let's just be clear every year.

We go through with Actuarially justified raids and have re renewals psych ray renewals in negotiations with our states and so obviously hitting our target margins requires getting from a portfolio of of states that we have of getting the right rates on an overall basis.

Clearly part of that conversation is around re verification, but that's not the entirety of the conversation. The conversation is really about actuarially justified rate based on the acuity of the population regardless, what the starting point is so and warmer guard getting the right rates as the entire issue, but it's not just.

The verification.

Thank you next question please.

Your next question comes from the line of Josh Raskin from Nephron Research. Please go ahead.

Hi, Thanks for that man.

Question around the Medicare advantage stars I know you mentioned in your prepared remarks that Theres, a focus on improvement et cetera, and you know as we kind of look through the the metrics. It looked like drug experience drug safety categories like that where the ones that you had the biggest decline so.

I know, there's a huge delay and so as in Jennie O kind of ramps up in 19 and into 20 is there an opportunity you think to improve things for next year or is this going to be a multiyear sort of fix and you guys dug in their certain metrics. If you think you can control shorter term around DNA stars. Thanks.

Thanks to the question Josh as you can you clearly identified some of the areas that we've focused on as well.

In terms you direct question as I said, we are disappointed in the results and we dug in very deeply to figure out where we can have an impact last year, we did make an impact and moving one of our largest contracts to for starwood that intention to focus.

But we know this year part of the issue was just the timeliness of data and our ability to have an impact on some of the members in those clinical pharmacy plans now that we've removed we will be moving our entire Medicare advantage business on one one we're already very engaged in having an impact. So yes. We do believe we can have an impact not only on clinic.

But we also believe in some of the other metrics, where we did make improvements on he just for example in many of our markets. We still have opportunities there with better data and the integration of the data that I shared with you earlier and then certainly in some of the consumer metrics, we feel that as part of our end to end focus on execution across our businesses that there's opportunity there. So.

Yes, we absolutely believe we can have an impact on pharmacy now owning pharmacy, 100% under our own control. We really do believe that will be a multiyear opportunity for us from dramatically expand that so you hit the core but as we look at our results. This year. The biggest disappointment was in those clinical pharmacy results, which declined.

So thank you very much in the question next question. Please.

Your next question comes from the line of Scott Fidel from Stephens. Please go ahead.

But question just is on group Medicare advantage and instead of you can just update us on.

Margins on the class of 2019 fitness are progressing relative to plan and then relative to 2020 I know that you talked about expected continued growth in group and May even.

And if you can maybe help sort of size size that war or just sort of how that's trending relative to the long term trajectory that you provided for us at Investor Day right sure. Thanks, Pete I'll have Pete share some perspective on the group Medicare market. Yeah. Thanks, Scott I. Appreciate the question as you know we saw some really nice growth and 29.

And in the group retiree business and we do expect growth to continue into 2020.

As we've said before and we're seeing Thats come through our greatest opportunity continues to be with respect to our inherent pipeline of existing commercial clients that have Medicare wrap product and so we're seeing really strong sales there as it relates to new store sales and RFP is the market continues to be really competitive and we do when some business there as well we're also looking.

At creating new opportunities. The question was asked before about a blue partnerships and we see this as a another wonderful opportunity for blue partnerships, and where we're actually exploring those and then finally I'd say, having a competitive pharmacy benefit will certainly help in 2020 beyond as it relates to to upcoming bids and group retirees overall, we we feel good.

That will continue to see growth in that space right and you know and that business is dilutive. When we first I'd takes 12 to 18 months of dilution and so it continues to be a headwind until we have.

You know until we get the block of business doing appropriate level.

Thank you next question please.

Your next question comes from the line of Dave Windley from Jefferies. Please go ahead.

Hi, I'm, Josh asked my a earlier question I'm going ask a follow on to that on when thinking about this and I stars in improving that investments in quality.

As you as you think about the 3.2 billion that you have to essentially reinvest in the business. How how would you if youd be so kind as to tell us how would you think about allocating that between the benefit design and price point references that I think John gave earlier and then how much would quality investments like.

Stars consume a 3.2 billion.

Well, we haven't broken it down in that way and I guess I'm as we think about this.

We're investing heavily in pharmacy, Jesse you know I mean, it's not just the benefit of the impact of the earnings that we get because of lower cost of goods sold which is really driving that 4 billion that is fundamentally a lower cost of goods sold but as part of bringing ingenio Rx up to speed and the migration, we've built a new integrated specialty clinical service center.

With Chaz.

Areas of excellence around these these areas that I think we'll absolutely and help help our clinical performance in pharmacy and again, we know what we need to do and we have a very clear line of sight around what the opportunities are in pharmacy, and we feel very confident our ability to have an impact on those as you think more broadly about pharmacy in China.

Shared with you how we're approaching that $3.2 billion and it's very different based on each of our <unk> lines of business and where we were competitively and how that aligns with plan designs et cetera. So its not a straight line formula, but clearly pharmacy gives us a tailwind as our opportunity in Medicare advantage and helps us off.

Some of this impact from stars.

Thank you next question please.

Your next question comes from the line of Sarah James from Piper Jaffray. Please go ahead.

Thank you I was hoping you could talk about the TPG selling process beyond Eugenio just wondering how long the selling process is to better understand how strong. The line of sight is into the near term sales and from conversations. So far do you have a sense of what the near term product mix.

Could look like over the next couple of years. Thanks, well. Thank you for the question Sir I think broadly as you think about any you know group of services businesses. They the selling cycles very much verity.

Our our aim business has been in the market for very long period of time aspire has a very mature sales cycle and Caremore also is working as part of very much not just NRT integrations that we mentioned and the partnerships we have but they've been actively talking to our blue partners about areas, where they can help so.

It isn't a definite but I'd say generally in as you think about pharmacy. Its 12 to 18 months that lease lead time as you think about large scale projects, bringing up a new caremore site, you're usually talking nine months plus in terms of the procurement and the discussion. Our aim is a shorter sale often because we can deal with close your capabilities and.

We're really excited about bring brief beacon into the family in the fourth quarter. Because we also believe that provide some really unique capabilities. So overall as we shared our diversified service business is is a growing business its something over the next three to four years, you know you're going to see much more significant traction but quite.

Frankly, we are seeing progress and sales already and we feel really good about that but I would say at least 12 to 18 months is a lead time in terms of the conversations in the procurement just given these are fairly large sales that we're talking to people about but thank you very much. The question and we're very much looking forward to sharing more about Tpgs. We go forward next question. Please.

Your next question comes from the line of Michael Newshel from Evercore ISI. Please go ahead.

Oh, Thanks for exchanges in 2020 can you frame the magnitude of any geographic expansion, you're planning and whether whether that kind of revenue growth could be any meaningful offset to the merger normalization you talked about Pete. Please yeah sure. Thanks for the question Michael.

Please with with our individual performance and progress I think our strategy really remains the same with respect to expansion, we're disciplined and were targeted in terms of where we play.

We've talked about this before but it's been largely based upon geographies, where we can partner whiskey providers at the right economics and in partnership on delivering really strong cost of care partnering with providers and being aligned on risk adjustment and in many instances we're focused on obviously leveraging our value based care relationships and of course, then you know importantly, we have to.

Positioned well with respect to our product and being number one number two as it relates to the right product and this is translated into good results for us as we talked about earlier a bit better than than expected as we continue down. This path in 2020 were continuing to target expansions, we do see pockets where were you know.

Competitively.

Some of our competitors are a little bit better position and if that's the case, we're going to remain disciplined and we're not going to participate in those markets in which we can't do what I said before on that as partner with providers and have the most competitive product. So we feel like we're continuing down a path of being very methodical and thoughtful about that business and we'll continue to grow that business and the right way next question.

Please.

And your final question today comes from the line of Charles re from Cowen. Please go ahead.

Oh, yeah. Thanks for squeezing me in here.

You know just to clarify earlier some of your common shopping around the end Gail around the.

Commercial business you know these few accounts I know you didn't want to get too much into it but you know the reason for termination it sounds like you're saying is because when you reprice the business for them.

There's going to wafer just didn't match up with what I think its clients I'd wanted.

But it does that factor also would expect to savings that you would have been able to generate for them through in Jennie O.

And just to be clear, though this shouldn't have any effect on how impact on how your commercial book is pricing for next year.

Well, let me let me start and then a question John to follow up first in terms of the last part of your question now we feel really strongly I mean, we reaffirmed our trend we feel very strongly about our book of business and the commercial business is performing our margins are good they're improving.

And honestly outside of even just risk, we're adding a lot more specialty products and pack, bringing through revenue in our clinical products overall, no you shouldn't read into anything about our commercial business.

In terms of your second question, maybe I'll, let John I'm, John answer that one because I don't think that there's much more to add but yeah sure. Thank you go and you know in terms of the impact on the overall commercial book really there. There is is not any are you. Our prior guidance did assume that these members would stay with us for the rest of the.

Sure. So it was a difficult decision so there won't be a slight impact on our or year end membership wherever associated with our pricing with their growth outlooks it with our competitive position in each of our markets. There's really no change we feel very good about our commercial business strategy and the the ability for Pete the team to execute.

I think that 2020 is going to be another growth year for us. Thank you.

Thank you very much for all of your questions and I'd like to thank everyone for hanging in there. This morning, while we dealt with the phone issues, but we're happy that we were able to dress all of your questions and still get every went through the the lines. As you can see we remain committed to delivering a simple more affordable and personalize experience for those we serve.

And I look forward to building on our momentum in 2020.

I want to thank our associates for their ongoing commitment to serving our nearly 41 million members and I look forward to speaking with all of you again soon thank you.

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