Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the anthem fourth quarter earnings Conference call. At this time, all participants Arnold listen only mode. Later, we will conduct a question and answer session. If you wish to ask a question. Please press one then zero on your telephone.
Keypad, you will hear a problem that you have been acute you mean withdraw your question it anytime by repeating the one zero command. If you are using these speakerphone. Please pick up the handset before pressing the numbers. These instructions will be repeated prior to the question and answer portion of this call. As a reminder, this conference is being record.
I would now like turn the conference over to the company's management. Please go ahead.
Good morning, welcome to anthems fourth quarter 2019 earnings call.
This is Chris Rigg, Vice President of Investor Relations.
And what does this morning, our Gail Boudreaux, President and CEO .
John Galena.
CFO .
Pete I tie in president of our commercial and specialty business Division.
Felicia Norwood President of our government business Division.
Yeah, we'll begin the call by giving an overview of our fourth quarter financial results.
Followed by comments on our key business initiatives in enterprise wide growth priorities.
John will then discuss our key financial metrics in greater detail.
And review, our 2020 financial guidance.
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. dotcom.
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 generally beyond the control of anthem.
These risks and uncertainties can cause actual results could differ materially from our current expectations.
We advise listeners to carefully review the risk factors discussed in today's press release, Andr quarterly filings with the FCC.
I will now turn the call over to Gale.
Good morning, everyone and thank you for joining anthem fourth quarter 2019 earnings call.
In 2019 anthem delivered strong top and bottom line growth across the enterprise.
We achieved record organic top line growth of 13%.
We had our best year of organic risk based membership growth in over a decade.
At our Investor Day last March we talked about this being a new error free anthem.
One focused on growth.
The innovation.
On the transformation of health care as we know it.
We also committed how long term revenue growth.
10% to 12%.
In adjusted earnings per share growth of 12% to 15%.
10 months later.
We delivered on our commitment.
And we are poised for another year success in 2020.
In the fourth quarter, we reported GAAP earnings per share of $3 on 62 cents.
And adjusted earnings per share of $3, an 88 cents.
For the full year.
We delivered GAAP earnings per share $18.47.
Adjusted earnings per share of $19.44.
Up 22% versus the prior year.
Our 2020 adjusted earnings per share guidance of greater than $22.30.
Represents core growth near the upper end of our long term guidance range when normalized for the impact of the health insurer fee beginning in 2021.
We also expect another strong year of revenue growth.
Over 13% on a reported basis and nearly 12% on adjusted basis.
On January 1st of this year, we successfully completed the Ingenio Rx migration.
Transitioning more than 15 million people over the past eight months.
The launch of Ingenio, our acts as a key milestone in the realization of our strategy to integrate pharmacy with medical and behavioral health as part of whole person care.
The success of our accelerated migration will allow us to deliver greater health care value increased transparency to the people we serve.
And Investor Day, we also shared our goal of reducing our number of technology platforms from six to two by the end of 2022.
Today I am pleased to share that we're well on our way and expect to have 80% of our consumers on their destination platform by the end of this year.
By reengineering, our business processes and simplifying our technology infrastructure, we are driving greater operating performance.
And we're making it easier to do business with anthem.
We remain committed to keeping healthcare affordable and slowing health care spending growth.
By partnering with care providers to value based care arrangements.
And by empowering consumers with the information they need to take an active role in their own health and wellness.
Today anthem has more than 60% of medical spend tied to value based care arrangements with 32% in upside downside risk arrangements, creating greater alignment of cost and quality, while delivering improved health outcome.
Total health total you.
Our integrated end to end digital first clinical model now serves more than 2 million consumers since its introduction in 2018.
Using both AI and machine learning to engage members with emerging risks.
I don't know total you has delivered a nearly 12% reduction in hospital admissions and a reduction in emergency room visits of more than 10% to date.
In our commercial business, we improved sales effectiveness and strengthened how we work with our distribution partners through investments in our front end broker portal and sales management technology.
We added valuable digital capabilities.
Make it easier for our broker partners to do business with us.
Our integrated tools are helping to ensure that our distribution partners can seamlessly sell entering new anthems medical and specialty businesses.
Our focus on upgrading talent and improving sales execution helped us deliver one of our strongest overall commercial membership growth performances in more than a decade, while maintaining our pricing discipline.
Sales of specialty benefits.
Pharmacy solutions and clinical programs exceeded expectations in 2019 with specialty products growing by more than 1 million members and at a rate faster than our medical membership.
Overall fee based profitability is increasing and we are well on our way to narrowing the profit gap between risk based and fee based members from five to one to three to one.
Shifting to our government business, we recognize that social and environmental factors are intrinsically tied to a person's health.
Among all social barriers food and security is the most pervasive affecting one and eight Americans.
Since its inception 20 years ago. The anthem Foundation has been fighting food and security and our impact is being felt across the country.
Because of our effort anthem is one of only 50 company and the only national Health care company to be deemed a leadership partner by feeding America. The nations largest domestic hunger relief organization.
Our focus on service and positively impacting our local communities continues to be a hallmark of our culture and anthem.
In Medicaid despite facing challenges with changing risk pools as result of enrollment re verification throughout the first half of 2019.
The second half of the year was strong and our state business ended the year inline with expectations.
We continued our strong track record of winning more than 80% of Medicaid procurements in 2019.
And we continue to see an 80 billion dollar pipeline of opportunity over the long term.
And as we announced last week, we were pleased to welcome to new Medicaid health plans into anthem.
The new plans in Missouri in Nebraska allow us to expand our industry, leading specialized care to more than 300000, new consumers, bringing our full Medicaid reach so totaled 23 states and the district of Columbia.
During the year Medicare advantage enrollment grew by more than 20%.
Outpacing the market and in line with our guidance.
As of yearend, we are now the fourth largest individual Medicare advantage plan in the nation.
Our steady momentum is carrying over into 2020.
As we saw solid growth during the annual enrollment period, and we expect our membership growth rate to continue to lead the industry for the fourth year in a row.
Similar to 2019.
Our growth is tied to our strong brand recognition among seniors.
Along with our robust supplemental offerings, which are unmatched in the industry.
Our essential extras benefit is highly valued by seniors.
As it provides coverage for services such as healthy food delivery transportation home assistance alternative medicine anymore.
Additionally, our over the counter benefit continues to be valued by this important population.
Sales of Medicare part D. Also accelerated during the recent annual enrollment period, reflecting our improved pharmacy cost structure, enabling us to compete more effectively.
We are entering 2020 with confidence in our ability to drive growth.
Reduce costs.
And create meaningful change within the overall healthcare system.
Our business expectations include robust membership growth of 1.1 million members at the midpoint of our guidance.
Driven by growth in both risk and fee based membership.
Despite the return of the health insurer fee in 2020.
We anticipate stable commercial risk based membership a significant improvement compared to the decline experienced in 2018. The last time the has returned.
We expect growth to continue in our specialty businesses at a pace similar to 2019. In addition to delivering strong clinical program and pharmacy benefit sale.
Medicaid membership is expected to grow in the 400000 member range.
Excluding the implementation of the North Carolina contract, which is likely to be delayed until 2021.
Once again, we expect Medicare advantage membership to surpass the industry growth rate.
And increased by 150 to 200000 in both individual and group Medicare advantage.
We will also continue to invest in digital technologies innovations to enhance engagement with the people we serve.
And to achieve our goal of making healthcare simpler more affordable and more effective.
Our innovative Sydney application provides wellness incentive packages health and wellness content Tele health services and full integration with our electronic health record interest in this new digital tool has been strong with more than 625000 downloads since its launch last.
October .
Addition, life health online are easy to use tele health solution.
Grew by nearly 40% of the prior year.
Giving people greater flexibility over where and how they receive care and finally.
And some focus on social responsibility and sustainability continues to gain national attention.
We were pleased to be included on Fortune's list of most admired companies again this year.
And recognized by Bloomberg.
On their list of companies exemplifying gender equality.
And now I'll turn it over to John Galena for a detailed look at our performance numbers John .
Thank you Gail and good morning. This.
This girl stated we're pleased to report strong fourth quarter and full year financial results and are well positioned for robust growth in 2020 .
Fourth quarter adjusted earnings per share was $3.88 up 59% year over year for the full year adjusted earnings per share was $19.44 representing growth of 22% over 2018.
2019 was a year of major milestone to them.
As Gale mentioned earlier, we successfully launched Ingenio Rx on an accelerated and compressed timeline with minimal customer abrasion.
After adjusting for the benefit from in June Youre acts, which contributed a little more than one dollar to our full year results earnings grew at the upper end of our 12% to 15% target range.
Simply put.
Our core business is solid and we are delivering real growth across each of our segments.
Total operating revenue in the fourth quarter was $27.1 billion, an increase of 16% over the prior year quarter.
This increase in operating revenue was driven by membership growth in our risk based businesses.
Premium increases to cover overall trends.
Revenue related to the launch of in junior Rx and increased penetration of our specialty integrated clinical offerings.
For the full year operating revenue grew nearly 13% or 15% on a hip adjusted basis.
Selling and solidly above our 10% to 12% target range.
Overall, the fourth quarter medical loss ratio was 89% representing an increase of 220 basis points over the prior year, which as expected was primarily driven by the one year waiver of the health insurer fee.
The remaining drivers over medical loss ratio coming in at the high end of our expectations included the fact that with our excellent results in the individual business, we reduced our risk adjuster position by $50 million and the flu season started earlier than normal resulting in more.
For flu costs than expected in the fourth quarter.
Medical costs continued to be well maintain inline with our expectations and our local group medical cost trend approximated 6% for the year.
The SGN a expense ratio in the fourth quarter was 12.9%.
Line of 260 basis points over the prior year.
Driven by our robust double digit top line growth combined with the one year waiver health insurer fee along with our continued focus on operational efficiency.
Turning to the balance sheet the debt to cap ratio was 39.5% at the end of 2019 consistent with our target range.
During the quarter, we took advantage of weakness in our stock price and repurchased 1.2 million shares at a weighted average price of $260.87.
In total we repurchased approximately $1.7 billion of stock in 2019 were 6.3 million shares consistent with our guidance provided last quarter.
Full year operating cash flow was $6.1 billion, reflecting 58% growth over 2018.
Operating cash flow exceeded expectations for the year coming in well above our previous outlook of greater than $5.5 billion and was primarily driven by growth in our government businesses.
Our full year operating cash flow at 1.3 times net income.
Illustrates the high quality of earnings in 2019.
Now to our 2020 guidance.
Before I begin it is important to note that our 2020 guidance includes the acquisitions over the Missouri, and Nebraska Medicaid plans a closed last week.
That does not include the pending acquisition of Beacon, which we now expect to close later in the first quarter.
We're also closing on the TCPA acquisition that will enhance handsome already strong capabilities into large group segment.
Anthem has already largest customer of this TCPA.
With that acquisition will increase our self funded membership by 200000 and is already included in our membership guidance.
As Gal stated earlier total medical membership is expected to reach 42.1 million members at the guidance midpoint or growth of 1.1 million members.
In 2020.
We expect operating revenue to grow over 13% to approximately $117 billion, reflecting premium rate increases the cover overall cost trends and the return of the health insurer fee as well as membership growth and the full year impact.
From the launch of Ingenio Rx.
The consolidated medical loss ratio is expected to be 85.8% plus or minus 50 basis points, a decrease of 100 basis points at the midpoint and largely driven by the return of the health insurer fee.
The EMR is further impacted by changing business mix, where the government business continues to be the faster growing portion of our business, including the Missouri, and Nebraska, Medicaid acquisitions and margin normalization in the individual business.
These headwinds are partially offset by improved Medicaid performance.
As a result of our improved pharmacy cost structure with the launch of in junior Rx, coupled with medical cost management initiatives, we expect our local group medical cost trend to be in the range of 4% plus or minus 50 basis points.
The SGN a expense ratio is expected to be 12.8% plus or minus 30 basis points, primarily due to growth in operating revenue.
And we do spending related to the in junior Rx migration.
Looking to below the line, we project investment income of $970 million and interest expense of $815 million.
The tax rate is expected to be in the range of 24% to 26% with the increase primarily driven by the return of the non deductible health insurer fee in 2020 .
Full year operating cash flow is expected be greater than $6.4 billion contributing to another year of quality earnings.
Our long term capital deployment targets are unchanged and we remain committed to delivering sustainable long term shareholder returns.
Anthem has increased its dividend every year since it began paying dividends and we have done so again and 2020 , increasing our dividend by nearly 19%. We expect full year share repurchases of at least $1.5 billion and our weighted average share count to end the year.
In the range of 255 to 257 million shares outstanding.
The permanent repeal of the health insurer fee beginning in 2021 represents a significant step forward in improving the affordability of healthcare and is consistent with our commitment to driving the lowest net cost of care for our members.
With that said our full year 2020 outlook now incorporates a total health insurer fee related headwind of approximately 80 cents.
Of which approximately 50 cents had been included in our prior commentary.
We now expect full year adjusted earnings per share of greater than $22.30, which includes a benefit of $2 in 30 cents related to the full year contribution from in junior Rx and the incremental headwind from the repeal the health insurer attacks beginning in 2021.
This level of earnings represents growth of over 40% since 2018.
Finally, it is important to keep in mind that the seasonality of earnings in key financial metrics will be impacted by a number of factors this year.
The first half from 2020 will benefit from the in junior Rx contribution, which was immaterial to the financial results in the first half from 2019.
In addition, leap day and the number of workdays in the first quarter of 2020 compared to 2019 will increase the hefty adjusted MSR by nearly 100 basis points with the impact reversing the rest of the year.
Further majority of the margin normalization in the individual business will occur in the first after the year, whereas the improvement in Medicaid will be more evenly distributed throughout the year.
Taken together, we expect first half earnings will approximate 55% of the full year total.
With a little more than half of that coming in the first quarter.
In total 2020 will be another strong year.
And with that we will now open the call for questions.
Operator.
Thank you, ladies and gentlemen, if you wish to ask your question. Please press one than zero on your telephone keypad, you will hear a prompts that you've been cued you mean withdraw your question and anytime by repeating the one zero command if you're using these speakerphone. Please pick up the handset for press in the numbers and we do ask.
Please limit yourself to one question and one moment. Please for our first question.
And we will go to Ralph Giacobbe with Citi. Please go ahead.
Thanks, Good morning, I, just want to go to sort of back has the at all are in the commentary there you've seen that obviously higher and the range that you had raised three Q I know you mentioned sort of risk adjuster, maybe visibility on kind of what you got details there.
And then the medical cost growth. According to plan for the 4% plus or minus 50 basis points, obviously aided by the engineered savings maybe if you can kind of exclude that.
Maybe help how you see sort of core trends for comparability in 20 versus the 6% decided.
Correct.
Thanks.
Hi, Good morning, Ralph and this is John Thank you for the question in terms of the of the 2019 medical loss ratio. We did end the year at 86.8%, which was within the guidance range. It had been previously provided.
We certainly would have been below the high end of the range had it not been for a couple of nonrecurring issues that served to increase the ratio at the end of the year.
First with the exceptional performance we've had in our individual business in after reviewing the wakely information and in.
During our own analyses.
We did reduce our risk adjuster position by $50 million.
That goes through as a negative to the MSR. It increases EMR when you do things like that and then.
And then the flu season.
It began earlier than anticipated.
And so there's more flu cost in 2019 in the fourth quarter 2019 that haven't been anticipated.
So obviously, we covered both of those with all of our earnings information.
But without those two really nonrecurring issues, we would have been below the high end of the range. We still ended up within the range.
Associated with it with 2020.
Obviously, a lot of moving parts were very.
Very excited to have a 4% cost trend.
We are pricing for that in our pricing remains very disciplined, but we think that will really really help us in terms of.
A future growth potential.
Thank you next question, please and we'll go to Justin Link with Wolfe Research. Please go ahead.
Thanks.
Before I get to my question I, just want to follow up on Ralphs quickly.
In terms of being at the higher end of the range.
Yes, ex that $50 million are still would have been around 86, eight I don't know with the flu costs are but it's been a trend of two to three quarters now where it's been pushing towards the high end rather than the midpoint.
And if you guys I understand that from our viewpoint, it's hard to understand what's driving that so is there anything you can tell us that would give us comfort that there's not some trend inside the business.
Maybe hasn't been fully taking account might be a headwind into 2020 and then my question is around membership growth for next year.
Specifically around.
Medicare advantage.
Well I think you said 150 to 200000 is that 150 to 200 total.
Or is that 150 to 200 and each of individual and group.
And if it's a 150 to 200 and total can you tell us.
Can you tell us how that breaks down.
Let me ask John to first discuss the medical cost in MLL R issues, and then I'll come back to membership John .
Yes.
Justin I, certainly understand your perspective, but there really isn't anything that that's lurking beneath the surface that causes an issue for 2020.
And just to level set the 2020, maybe I'll talk about that for a moment.
Yes, we did end 2019 at 86.8, our guidance for next year is 85.8, Thats, an improvement of 100 basis points, but given the fact that the hedges out the hip present in the dynamics of that in pricing for the.
The tax non deductibility on an apples to apples basis, you could expect that our MSR would go down by 150 basis points in 2020, and it's going down 100, So that's actually a 50 basis point increase.
And it's really it's largely the result of business mix and I really can't emphasize enough how much the mix does change the BMR.
Our government business continues to be growing a growing portion of our premium revenue very strong growth. We've had some of the best organic growth and sector over the last several years and the fully insured growth has been driven primarily by the government business divisions and the government's MSR is higher than the company's average.
And so then that causes the overall MRT increase.
I will say that our pricing does remain discipline and we cover costs trend. So we feel very comfortable with our guidance and expectations and in that.
The numbers for 2020, our ER.
We're very solid.
Just in terms of your second question around Medicare advantage membership, yes that is a total number.
As you think about the breakdown, it's roughly 75% individual M&A and about 25% group.
In terms of the overall numbers, we feel very strongly about our as I mentioned, our individual M&A growth and actually we're coming off of strong growth in the group market in 2019, and as we think about 2020 were expecting additional growth in group, but again, just the timeline of the procurements has been a little bit longer but we still.
Feel very strongly about our group offering the brand is resonating extremely well and we're really pleased.
Again with the individual may open enrollment season that we just had in that we will grow at a pace faster than the industry. Once again. So thanks to the question and next question. Please.
And we'll go to AJ Rice with credit Suisse. Please go ahead.
Hi, everybody.
Just one quick point of clarification to John's comment then a question about margin trends for 2020.
It sounds like a third quarter call you guys were sort of imply.
And your broad comments it will be at least 20 to 50 or at least 20 to 60 based on John's comment. The fact that now at least 20 to 30, it sounds like Thats, a 100% due to the gift repeal which was not expected I just wanted to confirm that and then.
For the margin trends were 2020.
Is there any way to flush out a little bit how much as a headwind that normalization of the individual margin is how much of a tailwind the comments about Medicaid our next year versus this year sort of how those will impact the margin than I'm, assuming you're seeing in relative stability in Medicare, but maybe that's not true can you comment.
On that.
Thank you for that one question AJ, how how do my best to see if I can hence sure.
But on the on the 2020 guidance, you're exactly correct, our core assumptions from the third quarter are unchanged.
The growth rates that we had that we laid out in terms of.
No ingenio, adding $2 in 30 cents for the year contributed a little bit more than a dollar to 2019.
Increasing our earnings by the low end of the 12% to 15% growth rate that we had promised at Investor day.
And that included covering a 50 cents.
They have headwinds that we knew about but what we didnt know about was that there would be a permanent repeal of the himself starting in 2021.
And when you look at how that impacts our 2020 mid year renewals that the 2020 midyear renewals no longer need to charge and price for that incremental cost structure and so the impact on 2020 is incremental 30 cents headwind on top.
But what have been communicated in the third quarter and so that is entirely the differential between today's guidance and the expectations that we had from from 90 days ago.
The.
That was the first question.
Actually could you repeat the the other part of the question.
And then your guidance all.
Yes. Thank you. Thank you AJ that was the individual margin normalization versus Medicaid yeah, we've been talking all along about how those two mitigated each other.
Yes, so as we finalized our plans for 2020 and.
We've been working very very hard with the states and everything else.
We expect that the margin normalization from individual will probably be about 10 basis points worse in terms of margin than the incremental benefit that we expect to achieve from improvement in the Medicaid business. So that's about a 10 10 base.
Point impact on overall margins that also that 10 basis points works its way through the MLR calculation as well and I am really talk about that as part of the 50 basis point increase in MSR, but that's part of that reconciling item as well as at the individual headwind is about 10 basis points more than the Medicaid tailwinds.
Thank you John in just a quick comments.
Reaffirming what John said overall, our guidance is very consistent with what we said and also we view obviously the repeal of the health insurer fee as a big positive for affordability and are very pleased that that happen next question. Please and we'll go to Steve's to now with Goldman Sachs. Please go ahead.
Good morning, guys, Yes, I wish I wanted to dig into a little bit fully insured enrollment outlook as well as NBR guidance and trying to square. This all at the 4 billion a pharmacy cost savings.
I guess it seems like growth could have been a little bit better or NBR, maybe a little lower if I'm doing the math right looks like commercial fully insured enrollment is implied down about 130000 to up 120, but I'd take the 2020 fully insured aggregate growth outlook in net out medicated M&A. So first wanted to confirm if we're thinking about commercial risk right that way.
And I guess, maybe Pete any commentary on how you've been able to use those savings to drive enrollment gains are attention and John any thoughts on sort of the NBR and whether you could end lower than the ranger somewhere towards the lower end. If you end up burning more than the at least 20% that you guys have committed to in the past that'd be helpful.
Great. Thank you for the many questions, we'll try to hit them each but just in terms of fully insured now have Pete give some commentary on that if you look at the midpoint of our guidance essentially were guiding to flat commercial risk membership and remember if you think about the return of the health insurer fee. When this occurred a few years ago.
The market overall was down pretty significantly as where we so our growth is actually inside of that when you think about flat quite good given the market dynamics now ask Pete just some additional commentary about what's really happening inside of there yeah. That's it. Thanks, Steven Thanks, Gail it's exactly right now we're very pleased with our are fully insured growth you saw that.
Play through in 2019, we've experienced growth in the large group and four out of the last five quarters and as Gill said the flat nature of our growth in 2020 is really this one large account, which is not really that unusual and in light of the fact of the have coming back in a very large account moving from fully insured.
So and as Gill said last time has happened was in 2018 and we saw.
A mid single digit regression membership, so really nice improvement from that perspective, but longer term outside of that one large client are fully insured growth would have been positive and in 2020 and now with the value Ingenio coming through you had asked about that and yes. We are seeing that play through in our value. It's very nice to have that play.
Through any year when that have was coming back so that was definitely an offset and then all the things that we've talked about in the past our product portfolio. Our sub segments strategy, what we're doing around brokers and broker engagement are all really playing through so again longer term outside of this one one large account we see positive growth in the large fully insured and fully insured business in general.
Yeah and Thats. Thank you Steve for the following up on the other part of your question on the.
$4 billion savings from a full year implementation of in junior Rx, We're actually very excited about that because at the end of today that 4 billion in savings makes health care more affordable and group trend is just one aspect of that business very important aspect and.
But as we've stated in the past the impact of the of the savings in that 3.2 billion that were returning to the customers.
It's really based on a market by market.
Line of business by line of business assessment.
And each marketplace is little bit different our competitive advantage differs in certain marketplaces in the extent that were close to an MLR rebate. We obviously would included the all into the pricing.
In the extent that we have really really good market share in really good competitive positioning we may look a little bit more dropped to the bottom line and then you have to go back through Lion line of business by line of business and hard so some of our customers have pass through pricing they actually receive 100% of the benefit of the better pricing.
Medicare advantage.
We are utilizing the the benefit to offset some of the the forestar headwinds that we have all in we continue to reaffirm that at least 20 percents can hit the bottom line.
And the rest will be returned to the customers. Yes, we always do aspire to do more aspire to do better but right now our guidance is is pretty solid.
Thank you next question please.
We will go to Steven Valiquette with Barclays. Please go ahead.
Thanks, Good morning, everybody so.
Even though the $50 million risk adjuster reduction only impacted MSR by 20 bips in the quarter.
Just curious if we're able to provide just little more color around the decision tree and when it makes sense for you guys to alter that position really just trying to understand that business on that could occur really at any given time in any quarter going forward, how should we think about the in the volatility around this in future periods. Thanks.
Yes, sure no great question, Steve and in terms of our risk adjuster position obviously, we.
Evaluated and monitor it on a regular basis.
Many of the things and the individual marketplace or zero sum game, we don't have.
The.
The appropriate transparency into everyone else's risk pools, and everyone else is risk adjuster scores, we utilize a third party service called Wakely that many of the companies in our industry utilize our to do estimates, we take that along with our own competitive intelligence and our own not.
Allege and analyses and we make adjustments as appropriate there was a weekly.
Report that was provided to the entire industry in mid December that was utilized by us as part of our overall assessment Wakely does.
Report multiple times a year so.
We've been very accurate.
Over the past several years and our estimates have been them very very good. So we feel good about the about the estimate in and quite honestly. It occurred for a really good reason and that's because we were over performing on that block of business.
Thank you next question please.
And go to Gary Taylor with JP Morgan. Please go ahead.
Hi, Good morning, I, just have one question, but I thought maybe thats 15 cents.
Sure.
The one question I have I, just want to ask about and Jennie O and if theres any possibility we're going to have any increased segment.
Disclosure for 2020 of the PBM revenue and fees are all rolled up in that single line. So even though you've given us a cost of goods dollar amount, we can't really see the.
The gross margin and to some degree I think that.
A bit of a bridge.
And in some of your guidance versus our.
Model. So I guess the question is what we consider any additional disclosure and are you willing to give us a little help just on the.
The gross margin as opposed to just the dollar Cogs for 2020.
Sure no. Thank you Gary and I appreciate you asking one question.
But the.
Yes, the answer to the segment reporting question is we will follow the rules and requirements is promulgated by the FCC.
And it certainly adhere to their their guidelines for segment reporting.
There is a very good chance at some point here in 2020.
If ingenio has the growth that we expected to have that it will require us to breakout and have a third segment and at that point in time, we will provide that information as well as comparative information, but until we are required by the FCC to provide that additional segment, we're going to maintain our current segment reporting structure.
Just maybe a little bit of help to give you.
She is you can see in the press release, our cost of products sold is 7.1 billion at the midpoint.
In order to get in junior revenue really have to add to the $2.30 or approximately 800 million back to that because that's the area, where it's going to be reported and then theres a gionee load.
Associated with the.
The administrative staffing of Ingenio and you have to add both those to get to what the impact to be in junior revenue is which is a little bit more than $8 billion. So hopefully thats helpful to your modeling.
Your next question please.
We'll go to Ricky Goldwasser with Morgan Stanley . Please go ahead.
Yes, hi, good morning, So I noted, it's too early to talk about 2021, but.
Just couple couple of questions on how you think about that so first of all when you think about ingenio.
Any early thoughts about 2021 selling season and what's your what's you are seeing aim do you think that you are ready to start to actively competing for external PBM business and then secondly, when we think about the Hes gone for 2021 any preliminary thoughts on how you're going to apply to 10 detailing.
Between reinvesting in the business to improve benefit design ferriss savings sung so bottom line.
Thank you for the question Ricky couple of things, one you're right, we're not going to be giving guidance yet on 2021, but in terms of a little color on Ingenio Rx.
A couple of big opportunities first we're really pleased with the way that the migration to the 15 million members. When I think it really demonstrated the operational capability that we have inside of this business is quite mature and that has been a real positive the big opportunity. We have in 2020 and I mentioned this in some of my prepared remarks and in 21.
Is to increase the penetration in our own self funded book of business.
Right now we're in the range of only about 20% well below all of our competitors and others in the space, that's really been driven heavily by the non competitiveness of our prior arrangement and we're seeing real big opportunities for us as we both in 2020 as well as in 2021, so that first and foremost is our prime.
Mary.
As of external operations as you know those are long term procurements, we just feel that we're ready to compete in that we were really pleased to bring on Bluecrest of Idaho. This year for January and has that has gone well.
But again in terms of the exact timing. These are three year cycles generally we will be competing for them.
In terms of when those procurements come through will be a little bit more lumpy than exactly and 21, but we feel really well prepared.
And again, our big opportunities are within our own existing book of business and that again.
We're really pleased what we saw in the part D growth. This year, it's really the first year that we've been competitive in the Medicare part D.
Ingenio gives us an opportunity to can to also be more competitive in Medicare advantage, our individual and group membership so across the board. We see it has a nice growth accelerator for both commercial and government.
Thanks very much of the question next question. Please.
And that will be Peter Costa with Wells Fargo. Please go ahead.
Good morning.
The other side of the mix issue relative to.
As far as SGN, a 10 seems like you're seeing has come in better than expected. All this year you originally at your Investor day, given a target for 2023 of of 11% to 12% and then for 19 of 13.5% Christian and you came in below 13%.
Can you talk about whether the target for 2023 is now further improved.
And then also just in terms of as we think about the progression to that have we are we still linearly progressing to that or is it something that we should be thinking about we just got an acceleration this year because of the Max.
No. Thank you Pete Great question.
In terms of the of the improvement we are are very very happy with some of the operational efficiencies and.
Just some of the the better processes that we now have things that really made the we experienced better in easier for the customer and at the end today, that's most important part systems migration.
Is going to be 80% complete by the end of this year and.
And then we can continue on from there go talked about 62, so I would say that just given some of those issues.
The.
The improvement is not going to be linear through 2023, it'll be a little bit better here in the first few years as we get through the systems migration is we were investing heavily in digital right now and as we get those capabilities up and running.
For instance that maybe there is a bit of a heavier load 2019 was negatively impacted by the early.
Acceleration and implementation of Ingenio, and so thats not part of our of our 2020 and quite honestly, we do have the best organic growth in the entire sector over the last several years in that organic growth is helping or asked you in a ratio maybe a little bit faster than we had anticipated so a lot of.
Positives there really.
I think the short answer to your question is the improvements going to be a little bit faster in the first couple of years of the five year period versus the last couple of years and I would just add started to reiterate what John said, we have been intensely focused on operational execution across anthem and you're starting to see that clearly system migrations has been successful.
Being at 80% by the end of this year on our destination platforms allows us a few things one leverage on our SGN, a but more importantly, improving our business process get you, making it easier to do business with anthem. The investments that we are making in digital our investment levels have been very consistent and so as you think about her SGN.
Hey ratio, we're getting leverage from our growth, but we're really getting leverage from reengineering our business processes from an end to end simplifying our technology infrastructure.
And I think thats, a huge opportunity for us as we continue to make it easier to do business with anthem as well as for consumers to have the tools at their fingertips, and that's really where we're heading on this thank you very much next question.
We will go to Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.
Great. Thanks, I wanted to go back to the DLR commentary because.
I guess I appreciate the concept of of growing the government business faster not getting a mix issue, but you are coming in at the higher end of DRAM. All our this year and usually we think about the business being repriced and if you're coming at the higher under them are this year, there's an opportunity to improve that.
Going into the following year. So just trying understand why we're not seeing.
More of that and I guess, maybe two two questions related to that first.
Okay.
Normalization individual business are we going to be at that normal margin in 2020 or is this something that's also going to be a headwind in future years and second just understand how ingenio works with MLL R. It sounds like you're saying.
Ingenio lower cost trend, but you price to that cost trend. So it's not impacting one way or the other VML are in the quarter and if you just break out how much ingenio due to lower travel trends have been without ingenio.
Thank you Kevin again for that at a that question.
In terms of the MLR for 2020 in your commentary.
Mixes is extremely important and yes, we do reprice our business each year.
The.
We do price very discipline, our pricing includes overall cost trend and we feel very good about the target margins that we have associated with.
The various lines of business and Medicaids going to improve in 2020, as we've talked about so thats going to be a tailwind, but there are several headwinds to that metric and again the mix being yes. This is on a on a after him basis, because if really makes all the metrics confusing.
On a reported basis.
And mix is the single biggest issue.
I had referenced in a different question about the individual normalization.
That is going to impact our MSR is that comes through and due to answer your side question on individual normalization given the way the MLR rebate.
Rules work in the three year, averaging associated with the profitability of that we do expect that 2020, well have individual margins that are within our range are sustainable range here for the future.
Another data point just on the MLR.
No that people have really considered again is the elimination of the Hes in 2021 and in the fact that are 2020 renewal pricing will not include the gross up for the him for the tax nondeductibility to have for the period that the contract years go.
Into 2021 reduces premium increases EMR, all those things combined or what really drives the the increase year over year.
Thank you next question please.
We'll go to Josh Raskin with Netfront. Please go ahead.
Hi, Thanks. Good morning, just my question on the the opportunity that you guys had potentially to work with prime.
In their decision to go another route I'm, just curious sort of how that unfolded.
Why do you think they decided to sort of do something else was there something.
Missing on the Ingenio side do you think it was just sort of financial or I'm, just curious to get your feedback.
Thanks for the question Josh in terms of Prime.
First let me talk a little more broadly, but our partnership with Blue is we don't we're going to comment on specific.
Decisions that are made or deals that are done anything that really I think is a broader question that we won't comment on but I think it's the bigger issue you're asking is how do we partner with the blues and I think Thats, Ben It's absolutely Bennett port and part of our strategy.
And looking at that we feel really good about where we began with our partnerships with the blues first in our core business, which is the Medicaid partnerships and the growing Medicare advantage partnerships that we have that we must recently launched those are going very well.
And we continue to add more our diversified business group, which is a growing part of our portfolio today works with two thirds of the blues, we're obviously not going to sell everyone. Every single product we have.
But again, we see the blues as a very strong partnership with us and actually most recently.
Horizon Bluecross Blueshield in New Jersey.
Just added one of our core products help guide to their largest customer the state in New Jersey. So we've got we see strong and growing opportunities in terms that we also think that ingenio will be a very strong opportunity in the pharmacy space. So we think there's plenty of room across the blues for us to do partner.
Ships as well to work with each other.
So from that perspective, we're still very bullish on our opportunities across the system. Thanks very much next question.
We'll go to Sarah James with Piper Sandler. Please go ahead.
Thank you.
Deceleration to that 4% local group trend, it's the lowest that China has.
And Dan can you talk that first how much is in general versus any other buckets decelerating anymore and then just to clarify you've said that your pricing to trends I want to confound.
Does that mean, there's no conservative buffer baked into spread in the event that that deceleration from 6% to 4% doesn't come to fruition. Thanks.
Sarah Thank you for the question and just to clarify yes. There are many many things that go into trend.
There's the obviously the the changing population the acuity of the business the mix.
We have cost of care initiatives that we have implemented in prior years, we have cost care initiatives that we will implement in 2020, although the impact trend and then we also have the impact of Ingenio just for clarity, we're not going to itemize, each one of those and what their each worth individually in aggregate it.
Makes our trend down to 4% that compares to the fact that we ended 2019 squarely at the midpoint of our prior trend of 6% plus or minus 50 basis points and now we have a 4%.
In terms of pricing methodology.
The pricing methodology does have a bit of conservatism baked into it but it's not a percent or a number that we're going to talk about here.
But we feel very good about our ability to deliver on the on the pricing discipline that we've laid out yeah and I'll just reiterate what John said, we have not changed anything around our pricing discipline. We've remained exactly consistent on that to our forward view of costs and that's that's how we're pricing.
And then in terms of just a couple of factors because I think everyone is focusing on just ingenio Rx and the impact on trend. We have also been working very diligently around how do we change overall costs and.
Right now 60% of our spend is in risk based arrangements, we expect to see greater pull through of that because more and upside downside risk, but we think there is the best alignment of cost quality in healthcare outcomes.
We're very focused on bundled payments and incentives for site of care working around orthopedics cardiac women's health services.
Our situs service on where we work with our GBG counterparts around particularly our aim around moving to the appropriate say to service I think is another really important area around G. III great area that we're focused on right now and then finally specialty Rx over targeted for redirection in that area. So those are all large.
Dollar areas and big areas of have trended spend and we have been intensely focused on that as part of our overall medical cost management and alignment of those services as well as wedding Genio brings to us on just a unit cost perspective. Thanks very much of the question next question. Please.
And we'll be Lance Wilkes with Bernstein. Please go ahead.
Yes can you talk a little bit about.
The improvements Medicaid in Fourq during the second half and in particular can you point to kind of specific actions you've taken and then how much of that improvement is coming on the medical cost side versus operating expenses.
Thanks to the question Lance I'm Gonna have Felicia Norwood.
Respond.
Good morning, Lance and thanks for the question. So now we have spent the that a big part of 2019.
Focused on working with our state partners to make sure that we were getting rates that were aligned with the acuity mix up our membership we saw a celebration every their applications during 2019 and its you know that provided some headwind for US. We are pleased to say that as we head into 2020, we.
I've spent a lot of time with our state partners to get the rates that we believe are appropriate for the that makes sense acuity of the population that we're serving at the end of the day. It's all about a combination of rates, but also the medical management programs that we have in place as well to support our members we say all the time in it.
Through we're very focused on whole person care. We have worked very closely with complex in specialized populations and making sure that our memories are getting care and the most appropriate setting. So when we think about the opportunity we have for us on the Medicaid side around improving our overall cost. If we go forward is certainly.
A combination of having in place the Wright medical management programs and being very disciplined in pitch inline with our state partners around getting the rates that we need to support the changing mix up our population as we go forward.
Next question please.
We'll go to Matthew Borsch with BMO capital markets. Please go ahead.
Yes could you just talk a little bit about the outlook on the commercial side I mean, it hurts your broad comments, but how do you expect to start this year in terms of by commercial enrollment, particularly on the risk side. When we think about group versus individual given the trends that you're seeing.
Yes. Thanks, Thanks, Matt as we talked about we talked about a large client transitioning from a fully insured. So so at the beginning of the are you will see that that play through but as we talked about to the remaining portion of the year, you'll see our are fully insured business continues to improve and grow for all.
The reasons that we we stated before and as it relates to the individual business I think that that you know we saw modest growth. This year, we believe in our strategy around around individually remain disciplined with respect to that business, we're targeting markets, where we can achieve the appropriate economics and establish the right networks have the right.
Elaborative relationship with providers and partners and and we're seeing that play through but it's a very methodical and thoughtful approach and so I think you'll see as it relates to 2020, our individual business play out in a very similar fashion than it did in 2019.
Thank you next question please.
We'll go to Dave Windley with Jefferies. Please go ahead.
Hi, Thank you for taking my question wanted to come back to MLL R apologize, but on MLL R. Looking at.
It's kind of if I extend out maybe one more decimal point it looks like MLL R really was kind of outside barely but outside of your range for the year and the the risk adjustment if I take that out would really bring you back down to still at the very high end of your ml our range for the year. So you use I think said that the trends were basically.
Inline with expectations, but for flu. So I'm wondering if you could quantify flu. So we could have a better sense of the magnitude of that in the fourth quarter and for the fourth quarter of next year I understand what the what the year over year compare would be on that.
Hi, Dave. Thank you for the question and quite honestly I'm not going to comment on decimal points that go out farther and farther and farther I really don't think that it's a productive conversation.
However, I will say that the flu was more significant in the in the month of December specifically and November but in the fourth quarter and total than we had anticipated. There's obviously a lot of factors that go into EMR in premium and everything else and.
We're going to talk about the things that are material and significant not the ones that change things by 100 basis points, 100th of a basis point or something like that so.
Our our answers.
Stand that we believe we have provided the information that's that's needed.
Next question please.
Charles three with Cowen. Please go ahead.
Yes. Thanks, Hey, just the same question I wanted to clarify couple of things.
First going back to normal or not so much about the above the guidance range itself. The 50 basis points range is a little bit wider than normal is that just simply as you kind of take on Missouri, Nebraska or is there anything else and sort of the variation that UK expecting and then secondly, I think to an earlier question.
Yes, obviously going to a 4% cost trend from section you talk about.
Largely being genuine a few other things, but without ingenue, what would that six so how should we compare that 6% compared to 19. Thanks.
Thank you Charles and in terms of the guidance range and expanding the.
Them or by 50 basis points, it's it's really to.
To be more consistent with how others in the industry have expressed trend over the last several years.
Well is the fact that we continue to be a growing company with some really good topline growth and want to provide guidance that we don't have to we're not to revise and change maybe as much as we had on them or basis for the future and that in terms of the of the NGL is.
As in response to Sarah's question, we're not going to provide the.
Specific item position of each item and trend and how much medical management is worth how much site of care as worth how much bundled payments are worth or how much in juniors where for that matter.
On the trend on a on a percentage basis.
Thank you next question.
We'll go to Frank Morgan with RBC capital markets. Please go ahead.
Good morning lot of questions and the impact of the mix shift on your overall MLL R. I'm just curious could you give us a.
A high level thoughts around the what's the differential in that target market market margin in those two businesses. The government the commercial and then in terms of.
Your assumptions around in Nebraska, Missouri contracts.
Where are they relative to your government contract margins to our targeted margins and have those states been through these re verification cycles. Thanks.
Yes, Frank this is John I'll start out on the question and then turn it over to Felicia that provide some some final thoughts.
If you look at the government business Division in terms of how it is contributed to the revenue of anthem for 2018 2019, it's been slightly more than 60% for each year.
Now when you look into 2020, and you look at our Medicaid growth, including Missouri in Nebraska, you look at our sustained double digit growth the Medicare advantage, which on a percentage basis has led the industry for several years in a row.
The fact that the return of the hit US is muting the fully insured commercial growth.
Take it all and we expect that government revenue to increase as a percentage of total revenue by several percentage points and.
Just the dynamic on that ends up being the leading factor associated with the with the increase in them all our year over year.
Felicia if you'd like to talk about in Missouri in Nebraska, Yeah first of all let me say that we're very excited for the opportunity to be able to serve Medicaid beneficiaries and working with state partners in Missouri and Nebraska.
Just to level set again.
We verifications in eligibility determinations are part of the normal course of business and Medicaid programs in states are required to verify eligibility at least annually. We have not certainly we just closed last week, but we certainly haven't seen anything yet with respect to this population around celebrated their applications, but.
We will work closely with our state partners there as we take on this business and.
During the value of anthem to beneficiaries in the state. Thank you next question. Please.
Well, two Whit Mayo with UBI US. Please go ahead.
Hi, Thanks, just a quick one on Medicare advantage, you picked up about 90000 lives and open enrollment.
The midpoint of here your guidance range of 150 to 200000 applies half of the growth coming this year from open enrollment alone, but historically you've earned perhaps a third given the the year round the step growth and group when so what's different this year as we think about the seasonality of your expected gross that's history makes us look pretty low as.
Starting point.
Thank you for the question.
Yes, we are very very pleased about what we saw during the App apc's and frankly, it with some of the strongest growth we've ever seen and we look forward to being able to continue to grow our business over the course of the year. So now we are focused very much not just on our inmate populations also duals.
As well and we are consistently bringing in business with respected that over the course of the year that up for you in a row of exceeding the industry growth rates with respect to M&A. It's been very significant for US. We spent a lot of time focus with our partners and also focused on our product portfolio and what we think about.
The competitive product portfolio, we have and the supplemental benefit offerings. We felt that we are well positioned for growth. If we go forward. So if you think about it we are very much committed to being able to deliver on the commitment we made which is to deliver mid double digit growth again in 2020.
Next question please.
That will be George Hill with Deutsche Bank. Please go ahead.
Good morning, guys and thanks for taking the questions. John I just wanted to delve into a comment you made in the prepared commentary it sounded like you were talking about.
In the from the risk based business to the fee based business, you're seeing kind of the profit ratio go from five to one to three to one I guess can you unpack that a little bit I'm, assuming it's the gross in the profit of the fee based business as opposed to a shrinkage in the profit of the risk based business and I guess can you talk about what's driving the increase.
I will pass profitability the fee based business and kind of allowing you to generate that margin. Terry. This is Gail I think that was in my commentary I will I'll ask Pete to comment that say.
Strategy that we've shared pretty broadly as part of Investor day in terms of improving the profitability of our fee based business relative to the industry. So are we feel very good about the profitability of our fully insured. So it's not a decline there it's more of an improvement but ill, let Pete talk about the specific actions underneath that yes exactly. So this is a it's a major.
At Investor Day, it's a major component in our growth strategy in terms, expanding and improve expanding our margins improving arieso business overall and Tom pack you know how we achieve that it's through a series of Upselling in terms of capabilities and program. So specifically as Gale noted our specialty business. This year performed exceptionally well growing.
By over a million members, that's a component upselling, our specialty products into Arieso business stop losses included as well clinical programs, we're seeing very significant uptake and Gale mentioned in her prepared comments programs like total health total you. All these things are playing into success with respect to this and then longer term.
And into 2020, we look really forward to including Ingenio Rx in that context that will be a significant driver of taking us to to the three to one as we we committed to and even forward looking thinking about future assets like Beacon.
We'll continue to create improvements as well so we remain really bullish with respect to this story and on a path to success to meet our commitments by 2023.
Next question please.
We'll go to Scott Fidel with Stephens. Please go ahead.
Hi, just had a follow up question just on the commentary around North Carolina. You had mentioned that you expect that will now be a 2021 of that in terms of implementation.
Just interested because a couple of your peers have talked more too.
I want to talk to Threeq you start another I talked to a fourq you start so just interested whether you've actually gotten some recent feedback from the state I'm, telling you it's going to be more like 2021, or whether you're just be a trying to be a little conservative around that assumption that just remind us in terms of what you're pick wise in terms of what you're expecting on.
North Carolina membership whenever that actually does get implemented thanks.
Hi, Good morning, and thank you for the question first and foremost let me say that we are very much looking forward to working with our state partner and Blue Cross Blue Shield of North Carolina in order to serve Medicaid beneficiaries in the state.
Well, we were here in the last quarter, we expected the business to go live on February Onest based on everything we know today and I will say, we have not had a definitive answer from the state. We are assuming that in order to be able to deliver on b. The business it would take until possibly 2020.
Wind before you would be able to go live with respect to the contract with that said I will say that we have been very much working closely with our partner in the state of North Carolina, and we are already today operational readiness is critical for us and we have gone through numerous iterations with the state around testing and preparedness.
At the go live but based on where we are sitting today, it's our expectation that the business won't be going live until 2021.
Next question please.
And our final question would be from Steve Willoughby with Cleveland Research. Please go ahead.
Hi, Thanks for squeezing me in here at the end.
Yeah I'll just wondering if you could provide a little bit more color on two different items, one just as it relates to the acquisition.
Depending of the GP or you mentioned just why that interest you actually acquire that business and then also if you could provide any color as it relates to something you mentioned back at the analyst meeting as it relates to the Blues high performing network for 2021, maybe just an update on how you are thinking about that for anthem and maybe the blues network overall. Thank you.
Great. Thank you for the two questions.
First in terms of the the Ta acquisition, it's a capability acquisition predominately for US. The reason, we're interested where the majority of the membership today. It is for a sub segment of the business that requires a different type of flexibility. We've been very focused obviously on converting our systems to having a destination.
Farm in our commercial business. This gives us a little more flexibility around.
Subsegments of the market that we do business and hospital labor et cetera that historically has different sort of operating requirements. So we felt that this was this added to our portfolio. It's an area that the blues have always been strong in.
This this specific ta again as the majority of ours and works closely with other blue partner. So we feel good about that.
In terms of the second question.
The.
Hi, performing network, sorry, I was just.
Catching up there a little bit on it.
We we're actually making great progress, we're really excited about it it's part of our overall affordability.
We're working with our other Blue partners I think it's actually a very strong statement around what we're trying to do with some high performing networks and 55, M. essays 22 of which are an anthem states. We believe that this will provide us with you leverage our deep provider relationships and allow us to seamlessly instead.
Plus by how our customers get a significant cost structure advantage and much higher outcomes.
Overall, it's progressing we've had great interest from our largest clients, particularly national account clients. As you know we've always had a very strong unit cost advantage inside of the Bluecrest system.
This is I think builds upon that offset to have a very strong performance orientation and the network again is built on based based on both cost and quality.
So we have selected those care providers within our networks, who are delivering truly superior outcomes and I think it aligns very well with our value based initiatives and what I also like about this as blues across the country.
We're building a very consistent set of outcome metrics for our clients and that again, it's resonating very strongly so thank you very much that question, but obviously very excited about the partnership and the opportunity there.
Let me now thank you very much for joining our call. This morning as you can see 2019 has been a strong year for anthem.
Across our enterprise I'm pleased with our performance, but we have much more work to do as we move into the new year, we'll continue to focus on our performance execution in order to drive growth and create a better health care experience for everyone. We serve.
We'll also continue to evolve our culture and further build our talent and capabilities to create positive change across organization and in the communities, where we live and work.
Look forward to delivering another strong performance in the year ahead and want to thank all of our associates for their.
They are very good work. Thank you.
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