Q4 2020 Cigna Corp Earnings Call
Okay.
[music].
Good morning.
Ladies and gentlemen, thank you for standing by for Cigna's fourth quarter 2020 results review.
At this time, all callers are in a listen only mode.
We will conduct a question and answer session later during the conference and review procedures on how to enter the queue to ask questions at that time.
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As a reminder, ladies and gentlemen, this conference, including the Q&A session is being recorded.
By turning the conference over to MS. Alexis Jones.
Go ahead Ms Jones.
Good morning, everyone and thank you for joining today's call.
This Johns lead principal for Investor Relations with me on the line. This morning are David <unk>, Our President and Chief Executive Officer, and Brian event goes thickness Chief Financial Officer.
In our remarks today, David and Brian will cover a number of topics, including Cigna's full year 2020 financial results as well as an update on our financial outlook for 2021.
Noted in our earnings release, when describing our financial results Cigna uses certain financial measures adjusted income from operations and adjusted revenue, which are not determined in accordance with accounting principles generally accepted in the United States otherwise known as GAAP.
A reconciliation of these measures to the most directly comparable GAAP measures shareholders' net income and total revenues respectively is contained in today's earnings release, which is posted in the Investor Relations section of Cigna Dot com.
We use the term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance.
In our remarks today, we will be making some forward looking statements, including statements regarding our outlook for 2021 and future performance. These.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations a.
A description of these risks and uncertainties is contained in the cautionary note to today's earnings release and in our most recent reports filed with the SEC.
Before turning the call over to David I will cover a few items pertaining to our financial results and disclosures.
Regarding our results in the fourth quarter, we recorded an after tax special item benefit of $3 $2 billion or $8 91 per share for the sale of Cigna's group disability and life business that was completed on December 31 2020.
We also recorded an after tax special item charge of $148 million or 41 cents per share for integration and transaction related costs.
As described in today's earnings release special items are excluded from adjusted income from operations and adjusted revenues in our discussion of financial results.
Beginning next quarter in our earnings release, and quarterly financial supplement the group disability and other segment will be combined with corporate and called corporate and other operations.
This change to simplify our reporting was enabled by the aforementioned sale of the group disability and life business.
Additionally, please note that when we make prospective comments regarding financial performance, including our full year 2021 outlook. We will do so on a basis that includes the potential impact of future share repurchases and anticipated 2021 dividend.
With that I will turn the call over to David.
Thank you Alexis good morning, everyone and thank you for joining us on our call today.
Well, we made a year ago the challenges from COVID-19, we are just beginning to fully emerged around the globe.
Derived wound vaccines 2021 is likely to be a year of transition as communities and businesses seek to turn the page.
I am very proud of the ways in which our 70000 plus colleagues led and continue to lead through this difficult time for our customers our clients where providers are partners in our communities.
Starting last spring, we were amongst the first wave out of pocket costs for COVID-19 testing as well as treatment.
Our revenue of the business quickly leveraged our supply chain expertise to ensure consistent prescription drug supply and delivery during these uncertain times.
Our U S medical business, we ramped up to meet the significant increased demand for behavioral health services by growing our network, adding virtual provider partners, creating demand webcast.
Treating first responders and adding search capabilities for provider ethnicity.
Well, we were deploying hundreds of millions of dollars to support our clients and partners.
Hit hardest by the pandemic.
In partnership with New York Life, We launched the Brave of Heart fund to provide charitable grants for families frontline workers and volunteers, who lost loved ones to COVID-19.
Then last month, our Cigna Medical group was amongst the first non hospital organizations in the nation to administer antibody therapy for high risk COVID-19 patients freeing up much needed hospital space.
And just a few weeks ago, we partnered with industry leaders from across the public and private sectors to ensure that people who received the vaccine had digital access to the vaccination records. So they can safely return to their jobs and daily activities.
As we continue to work to serve our clients our customers our patients from the pandemic. We also balanced our responsibility to deliver for shareholders as well.
For 2020 full year, we grew our adjusted revenue by 14% to $160 billion. We also delivered adjusted earnings per share of $18 45.
Consistent with our overall expectations, which included the ongoing elevated cost of COVID-19 related services.
Today, I'm going to talk about how our strategic actions. We took in 2020 position each of our businesses to navigate what we expect will be another very dynamic year.
Wonderful requires again developed the varying needs of all of our stakeholders.
I'll also tell you about a growth framework and how our execution of it will drive our success throughout this challenging environment and beyond.
Following my comments, Brian you've ankle will share more details about our 2020 financial results and our 2021 outlook and then we'll take your questions.
At Cigna, we've been on a journey and important one over the past two years to significantly accelerate our strategic path.
During 2020, we completed the integration of our combination with express scripts and delivered on our integration priorities, including revenue growth cash flow generation deleveraging targets strong client retention high.
High levels of coworker retention and working to keep our vision top of mind with innovations and improved affordability predictability and simplicity delivered to the market.
In addition, we delivered another important milestone of our strategic journey by watching every noise, our health services platform.
Which has meaningfully grown our strategic partnerships and is bringing innovative solutions to the market already.
We also recently made a series of leadership changes to align our capabilities and further operationalize our strategy reinforcing our talent depth and our commitment to continue to grow and develop our team.
And based on the capital and cash flow strength of our company. We are demonstrating the ability to have an and orientation to our capital deployment strategy.
This means we're able to reinvest in our business for ongoing growth and pay a meaningful quarterly dividend.
And deploy substantial capital to share repurchase and target and pursue strategic M&A.
At the same time, we continue to execute effectively across each of our businesses by delivering value to our clients and customers of patients and ever lowers our 2020 adjusted revenue increased 20% driven by ongoing strong retention.
Completion of in sourcing cigna volumes and organic growth, including our partnership with Prime Therapeutics.
And U S commercial our relentless support of our customers and our employer clients and partners.
The pandemic led to strong client retention levels again in 2020, along with better than expected in group strength building a solid foundation that we will carry into 2021.
And U S government, we grow our Medicare advantage customer base by 18% exceeding our average annual growth target of 10% to 15%.
And we expanded our geographic and product footprint to now be making market offerings in 28% of all available Medicare advantage buyer markets.
In addition, 88% of Medicare advantage and prescription drug plan customers. In 2021 are in four star plus rated plans with our national weighted average of four five stars the highest amongst our national competitors.
And in our international business. Despite navigating the challenges of the ongoing pandemic in multiple countries. We delivered full year adjusted earnings growth of 18% fueled by our strong partnerships.
Related to group disability and life, which we sold to New York Life on December 31, I am proud of the way in which our team worked to deliver in a very challenging environment fueled by the pandemic for the benefit of our clients and customers.
As a result of the pandemic it created a significant reduction in our earnings contribution for our business last year. However, we remained focused on serving our clients and customers.
Throughout 2021, we expect the macro environment to remain dynamic, which presents both challenges and opportunities for us.
Among the challenges, we expect COVID-19, and the rollout of the vaccine to continued attacks an already overburdened health care system.
And we expect an intensified and much needed focus on health disparities to contribute as well.
At the same time, we also see opportunities sales.
They include greater recognition of the importance of the employer sponsored market.
With companies, playing an even more critical role in ensuring the well being of their employees by offering comprehensive medical pharmacy and behavioral services.
There are also a number of accelerating trends that will further drive fundamental changes in health care.
For example, pharmacological innovations are quickly becoming the future of health care driven in part by the continued rise in specialty pharmaceuticals gene therapies and the evolution of Biosimilars.
There's also a greater recognition and acceptance of the link between mental health and physical health.
And we see care access rapidly changing as a result of consumer behavior and technology and data innovation, leading to growing use of virtual visits and coordinated home based care all aided by advancements in remote monitoring as well.
Against this backdrop the progress we achieved in 2020, along with the strength of our capabilities.
That gives us confidence that we will deliver at least $20 or adjusted earnings per share in 2021.
Even in the face of the COVID-19 headwinds primarily in the form of elevated medical costs.
Our ability to achieve this level of continued long term success starts with our growth framework, which has three fundamental building blocks.
First we deliver differentiated value in the form of affordable predictable simple solutions for our clients customers and patients.
This drives our ability to retain further deepen and grow our business platforms.
Second we work to partner and innovate this enables us to rapidly bring new solutions to the market that create even more value for our clients and customers and it also fuels our third priority.
The expansion of our addressable markets, which we will achieve by growing our geographic footprint further by moving into Underpenetrated markets through service coordination and the addition of new solutions. It gives us the opportunity to sell to new buyer groups.
Taken together these building blocks provide us with multiple levers to continue to achieve differentiated and sustained growth not only in 2021, but over the long term.
You never know what this means.
Bring me an expanded set of solutions to our existing health plan commercial and government clients by leveraging the strength of our pharmacy care management health intelligence and benefit management capabilities.
In U S health care. This means continued outstanding retention, along with further deepening relationships and targeted new business adds.
And U S government immune from delivering on our goal of accelerating customer growth of 10% to 15% in Medicare advantage.
It also means continued to expand our geographic footprint in the individual exchange market, where for example in 2021 will be offered in 220 counties. This is a more than 50% year over year increase.
And in international it means continuing to grow as we deliver differentiated value for our globally mobile customers as well as our supplemental health solution customers.
We look forward to delving more deeply into our growth strategy with you at our Investor day, which is slated from our case.
So in other summarize I'm very proud of our colleagues in our company for delivering for our customers patients clients partners and shareholders in an extraordinary year.
By maintaining a relentless focus on delivering other commitments.
And leading through a rapidly changing landscape.
Our performance is a testament to the resilience of our organization and our ability to thrive and deliver differentiated results in the most challenging of environments.
We delivered strong revenue earnings and cash flow results in 2020.
In 2021, we expect to deliver at least $20 or adjusted earnings per share and we will continue to drive attractive operating cash flow, which fuels our ability to return value to our shareholders through a meaningful quarterly dividend and through ongoing share repurchase as well as targeted M&A.
Overall, we are confident that we will achieve our 2021 outlook and our long term growth objectives with that I'll turn the call over to Brian.
Thanks, David Good morning, everyone.
First as we look back in 2020, I'm very proud of the actions we've taken as a company to meet the needs of our customers clients provider partners communities and coworkers, while also delivering on our commitments to our shareholders and as we entered 2021, we remain focused on delivering differentiated value and driving growth across our businesses.
My remarks today I will review Cigna's 2020 results, including the ongoing impact from COVID-19 on our business and provide our outlook for 2021.
Key consolidated financial highlights for 2020 include adjusted revenue of $160 billion.
Adjusted earnings of $6 $8 billion after tax.
Earnings per share of $18 45.
And operating cash flows of $10 4 billion.
These results reflect strong execution across our businesses through an unprecedented environment.
Regarding our segments I'll first comment on other normal fourth.
<unk> fourth quarter 2020, adjusted revenues grew to $35 billion.
And adjusted pretax earnings grew to $1 6 billion.
<unk> strong results reflect organic growth with outstanding client retention and new partnerships.
<unk> execution of supply chain initiatives and continued strong performance and accretive our industry, leading specialty pharmacy.
During the quarter, we fulfilled 388 million adjusted pharmacy scripts, a 19% increase over fourth quarter 2019.
Overall, <unk> delivered a strong fourth quarter as we completed our integration efforts and we enter 2021 with good momentum.
Turning to U S medical fourth quarter adjusted revenues were $9 7 billion.
And adjusted pre tax earnings were $328 million. These.
These results reflect COVID-19 related impacts and the return of the health insurance tax.
COVID-19 related impacts from the quarter include the direct costs from COVID-19 testing and treatment the cost of actions, we have taken to support customers providers and coworkers and decreased specialty contributions partially offset by a reduction in non COVID-19 utilization.
As we progressed through the fourth quarter, we experienced an increase in direct COVID-19 cost per testing and treatment as incidence rates spiked across the country.
While we also saw increased levels of care deferral for non COVID-19 costs. During the latter part of the quarter. The direct COVID-19 costs outweighed the impact of lower non COVID-19 costs.
Turning to membership we ended the year with $16 7 million in total medical customers.
This represents less than a 0.5% declined sequentially, excluding the loss of a 240000 life client as expected due to an acquisition as.
As our book of business remains resilient.
We finished the year with 18% Medicare advantage customer growth and.
And delivered mid single digit growth in the select and international segments, Despite a challenging economic backdrop.
Overall results for Cigna U S. Medical segment reflects strong fundamentals and the impact of the increase in direct COVID-19 costs as we progressed through the fourth quarter.
In our international markets business fourth quarter, adjusted revenues were $1 5 billion.
And adjusted pre tax earnings were <unk> $91 million, reflecting the cost actions taken to support customers and coworkers.
And investments in the business for future growth.
For our group disability and other operations segment fourth quarter adjusted revenues were $1 3 billion.
Fourth quarter adjusted pre tax earnings for this segment were $11 million, reflecting elevated life claims related to the pandemic and unfavorable disability claims.
As previously noted we completed the sale of the group disability and life business to New York Life on December 31, 2020.
For our corporate segment, the fourth quarter adjusted loss of $381 million reflects lower interest expenses due to lower levels of outstanding debt.
Overall, cigna's 2020 results reflect focused execution across each of our businesses through a dynamic environment.
As we continue to meet the needs of those we serve while delivering strong financial results.
As we turn to 2021, we've entered the year with strength and momentum driven by our strategic actions in 2020, which David detail.
And we expect the environment in 2021 to continue to be dynamic presenting both challenges and opportunities for our business.
Before going through our detailed outlook with the sale of our group disability and life business contributions from group should be removed for the purposes of year over year comparisons.
With that for full year 2021, we expect consolidated adjusted revenues of at least 165 billion.
Representing growth of approximately $10 billion.
After adjusting for 2020 group revenues.
We expect full year 2021 consolidated adjusted income from operations to be at least $6 95 billion.
Or at least $20 per share.
This is inclusive of an expected COVID-19 related headwind of approximately $1 25 per share.
In 2021, we expect elevated medical costs, including the impact of direct COVID-19 related costs and more normalized non COVID-19 utilization.
And we expect impacts from a gradual economic recovery on our customer base in 2021.
Given these COVID-19 dynamics, we expect the primary impact to be in our U S medical business.
Further we expect the COVID-19 headwinds to be more concentrated in the first quarter of the year.
And so we would expect the cadence of earnings per share in 2021 that would be more weighted to the final three quarters of the year Spa.
Specifically, we expect approximately 20% to 22% of 2021 earnings per share to emerge in the first quarter of the year.
For 2021, we projected expense ratio in the range of seven 5% to 8%.
And a consolidated adjusted tax rate in the range of 22, 5% to 23, 5%.
I will now discuss our 2021 and outlook for our segments.
For <unk>, we expect full year 2021, adjusted earnings of at least $5 6 billion.
This represents year over year growth of at least 4%.
<unk>, we expect the 2021 quarterly earnings cadence to be Directionally in line with 2020.
For 2021, we expect adjusted pharmacy scripts of at least 155 billion scripts.
And we see significant opportunity to bring new innovative solutions to market through ever notice.
With less than 15% of our <unk> revenues derived from Cigna U S. Medical business, we have a significant external customer and client base and we expect continued attractive growth through existing and new ever north relationships.
For U S medical we expect full year 2021, adjusted earnings of at least $3 $8 billion.
This outlook reflects focused execution in our businesses driven by organic customer growth deepening of customer relationships and disciplined expense management.
This outlook also includes the projected impact of COVID-19.
As I said earlier, the COVID-19 headwinds primarily impacts our U S medical business with the greatest impact in the earlier part of 2021.
Key assumptions reflected in our U S medical earnings outlook for 2021 include the following.
Regarding total medical customers, we expect 2021 growth of at least 325000 customers.
This includes continued organic growth throughout the year in our commercial business led by the select and middle market segments, partially offset by lower national accounts enrollment.
We also expect Medicare advantage customer growth in our target average annual growth range from 10% to 15%.
And we expect growth in our individual ACA business, which will be largely offset by our exit of our legacy non ACA individual market offerings.
We expect the 2021 medical care ratio to be in the range of <unk>, 81% to 82%, reflecting the impact from 2021 of elevated medical costs, including the impact of direct COVID-19 related costs and more normalized non COVID-19 utilization there.
The repeal of the health insurance tax effective for 2021, and continued focused execution and delivery of strong clinical quality across our U S commercial and government businesses.
We also expect continued contributions from international markets as we continue to deliver differentiated solutions that improve the health well being and peace of mind of those we serve and our global markets.
Regarding interest expense, we expect cost of approximately $1 $3 billion pre tax in 2021, all in for full year 2021, we expect consolidated adjusted income from operations of at least $6 95 billion or.
Or at least $20 per share.
Overall these expected results reflect the differentiated value strength and strategic positioning of our businesses as we delivered growth while navigating the headwind associated with COVID-19.
Now turning to our capital management position and outlook.
We expect our businesses to continue to drive exceptional cash flow with strong returns on capital EBIT as we continue reinvesting to support long term growth and innovation.
In 2020, we deployed $4 7 billion to repay debt and we repurchased $21 9 million shares of stock for $4 1 billion.
We ended 2020 with a debt to capitalization ratio of 39, 5% an improvement of 570 basis points over year end 2019, as we met our deleveraging target of a debt to capitalization ratio of less than 40%.
Now framing our capital outlook for 2021, we.
We entered 2021 with $2 5 billion of deployable capital from our strong cash flow generation in 2020, and the remaining proceeds of the group sales net of the expected debt repayment, we announced upon deal close.
For 2021, we expect at least seven $5 billion of cash flow from operations, reflecting the strong capital efficiency of our well performing businesses.
Combined this gives us at least $10 billion to deploy in 2021 and positions us well to execute against our 2021 capital deployment priorities.
First we expect approximately $1 billion in tax payments and expenditures, resulting from the group sales.
We also expect to deploy approximately $1 billion to capital expenditures, primarily focused on technology to drive future growth.
We expect to deploy approximately $1 $4 billion to shareholder dividends in line with our January quarterly dividend announcement.
And we expect to largely deployed the remaining $6 6 billion.
For share repurchase and strategic M&A.
Year to date as of February three 2021, we have already repurchased $4 2 million shares for $906 million.
For the purposes of planning in 2021 earnings per share guidance. Our outlook reflects the deployment of the vast majority of the $6 6 billion to.
To share repurchase.
Regarding M&A, we look for opportunities that are both strategically and financially attractive and we would evaluate a given opportunity on its merits.
Our balance sheet and cash flow outlook remains strong benefiting from our highly efficient service based orientation that drives strategic flexibility strong margins and attractive returns on capital.
So to recap our full year 2020 consolidated results reflect strong execution led by our <unk> segment.
We entered 2021 with momentum and we are confident in our ability to deliver our full year 2021 earnings outlook further we strategically positioned our businesses to leverage our growth framework and to be service based and capital light.
This positioning drive significant financial strength and flexibility and gives us continued confidence interval of term growth targets with that I will turn it over to the operator for the Q&A portion of our call.
Thank you Mr. Banco ladies and gentlemen at this time if you do have a question. Please press star one on your Touchtone phone. If someone asked you. A question ahead of you you can remove yourself from the queue by pressing star two also if youre using a speakerphone. Please pick up your handset before pressing the buttons.
Finally, we ask that you. Please limit yourself to one question to allow sufficient time for questions from those remaining in the queue. One moment. Please for the first question.
Our first question is from Gary Taylor with J P. Morgan Mr. Taylor Your line is open.
Hi, good morning.
We shared the details I just wanted to go back to sort of thing.
Given the headwinds.
This year and I know 20 twos, the part a way away, but from this distance should we be thinking about $20 plus $1 25 other than.
Putting your long term growth rate on that is there any reason not to sort of generally be thinking about that as the setup for 2022.
Very good morning, it's David.
As Brian noted we estimate the dollar twenty-five headwind for 2021 Big picture, We think you should view it as transient or removable of ichor.
Caution you from at this early stage penciling all of it.
As an immediate return in 2022.
To be very clear, we do believe it is removable or recoverable from that standpoint through a variety of force is one obviously the.
The effectiveness and the ramping of the vaccine.
That will transpire from that standpoint to further evolution of both programs and services as well as treatments and therapies relative to dealing with COVID-19.
And then third ultimately if necessary pricing actions activities. So big picture agree with your conclusion would just caution you not to harden it fully 100% into 2022 number yet.
Thanks, David.
Thank you for your question Mr. Taylor. Our next question is from Kevin Fischbeck with Bank of America. Your line is open Sir.
Okay, great. Thanks.
I guess.
The dynamic that you saw in Q4.
Around the elevated medical costs kind.
Kind of.
More than offsetting the decline in core you've mentioned a little bit different than what we've seen from other companies, but I guess.
<unk> similar with commentary about the impact of commercial versus.
Medicare I guess, maybe yeah.
Since you are kind of more commercially focused maybe you could help draw a little bit of a distinction between how you expect utilization on the commercial business to rebound in 2021.
Yes, pent up demands than what you might see in the Medicare business and therefore, you know <unk>.
You'll get some more normal more quickly in 'twenty 'twenty, one and other business line I just wanted to.
Thoughts on that given year.
Versus appears in Q4.
Good morning, Kevin It's Brian.
So just a few kind of framing comments and then I'll get to the core of your question.
Throughout 2020 as the pandemic emerged we certainly did witness an inverse relationship between COVID-19 claims and deferred care and if you step back all the way to the second quarter of 2020, the impact of care deferrals more than outweighed the direct costs associated with COVID-19 claims for testing and treatment across both our commercial and <unk>.
Care businesses during the third quarter. These factors approximately offset one another meeting the cost of Covid claims approximately offset the effective care deferrals in the fourth quarter, specifically as the back half of the quarter emerged we started to see the cost of COVID-19 claims for both testing and <unk>.
Treatment start to exceed the benefits, we're seeing from increased carrier for <unk> activity and so we ended the quarter with performance of medical costs in aggregate that was modestly above our seasonal baseline that effect was consistent across both the commercial and the Medicare books of business, Although I would note that the.
Commercial care deferrals were lower than the Medicare care deferrals that we saw in the fourth quarter. So that's the way I would encourage you to think about it and as we roll that forward into 2021, our guidance contemplates the respective books of business in the $1.25 headwind.
Thank you Mr. Fischbeck. Our next question is from Matt Borsch with BMO capital markets. Your line is open Sir.
Yes. Thank you Mike maybe if I just ask a question on that prior dialogue so.
Do I have it likely be a Medicare you actually seen the direct cost of Covid as higher.
The deferral in the fourth quarter.
So do you expect that to continue into 2021.
Good morning, Matt It's Brian.
Yes, you have that rate for the fourth quarter, we did see the direct cost of COVID-19 testing and treatment exceed the benefits of care deferral for the quarter in aggregate with the back half of the quarter, where the acceleration really occurred.
I would note, though that the fourth quarter also saw elevated care deferral relative to the third quarter and Medicare and again as we roll that forward to stepping into 2021.
Assume that the first portion of the year there'll be elevated medical cost experience in our book of business across U S medical and as the year unfolds that will gradually dissipate towards the back half of the year.
Sorry, just one quick question I'm trying to isolate net.
Looking for any specific guidance, but directionally Medicare just Medicare Congress day in that book in the fourth quarter. It was.
The deferrals were less than COVID-19 keeping costs on these that's expected to continue this year.
In the fourth quarter, both our commercial and Medicare businesses in aggregate saw total claim costs that were modestly above the seasonal based on sales.
So okay. Thanks.
Thank you for your question Mr. Borsch. Your next question comes from Ralph Giacobbe with Citi. Your line is open Sir.
Thanks, Good morning.
Last year, you had talked about a potential opportunity to go back to customers and maybe take some risk off the table for them for 2021, I'm not sure if that program resonated or not and whether that had any impact on the guidance and maybe if there are considerations around your stop loss book specifically for this year that we need to consider in terms of.
What's baked into the guidance. Thanks.
Ralph Good morning, it's David.
Reflecting back on as the pandemic, the breadth and magnitude of it began to become to take hold and become obvious we made the decision as an organization that.
We would seek to return all the favorable economics that were manifested because of COVID-19 disruption to clients customers patients are.
Provider partners and a cohort or so you were talking back to that but we did take proactive action throughout the course of the year to local clients. That's a client by client set of actions depending on the client's position desire funding mechanisms et cetera.
To both return value in absolute sense and in some cases restructure programs with an eye towards 2021 in some cases, you can think about the call. It the risk sharing relationship with those clients may have moved somewhat depending again on the client's preference, but that's again a client by client call to the latter portion of your comment.
I'd say theres no meaningful difference between stop loss either structure or performance expectation for 2020 versus 2021, and we continue to feel very good about the way stop losses performing for peace of mind for our clients as well as for ourselves.
Okay. Thank you.
Thank you Mr. Jacobi and our next question is from Robert Jones with Goldman Sachs. Your line is open Sir.
Great. Thanks for the question and maybe just on ever north into guidance, but if I look at this $5 6 billion of operating profit.
Expectation is it doesn't seem like it's baked in to much underlying growth just if I'm thinking about this right. So I just wanted to talk through some of the pieces and if your accounts or the.
The expected benefits from the anthem overhead costs rolling off some of the incremental deal synergies. The prime scripts just wanted to make sure I'm thinking about the underlying business there correctly.
What you guys are assuming the kind of organic underlying growth could be in this business for 'twenty one.
Good morning, it's David.
So let me start and I'll ask Brian.
To add some additional specificity.
Back relative to do you have a north platform. We're delighted we're really pleased with the performance.
The growth and that is being realized because of the value that's being delivered to our clients our commercial clients. Our health plan clients, our government client from that standpoint.
Two is.
To put opinion is specifically relative to the stranded overhead.
We were able to more rapidly accelerate the extraction of the stranded overhead largely because of executing our efficiency initiatives, but also the significant growth. So the stranded overhead attraction was more accelerated from its initiation in 2019 through 2020.
Third point before I hand over to Brian I would just ask you to recognize the fact that we continue to invest significantly because of the rate and pace of growth in the business. As we are continuing to add significant business to that portfolio and we've called out before investments that are being made relative to opex largely operating expenses.
To add our first phase of our prime relationship now we're evolving our second phase of the prime relationship and we're delighted to do so and that will take place relative to <unk> of 2021, all reinforcing the growth in the underlying strength. Meanwhile, successfully continuing to grow earnings in line with our prior strategic target we will.
Look forward to providing you some additional insight relative to the forward looking both revenue and earnings trajectory of that business at our Investor Day, Brian Smith.
The only comment I'd add on top of that is to remind from Roger Robert that the 2020 performance. When you exclude transitioning clients showed 20% revenue growth in <unk> and 22% growth in adjusted pharmacy scripts year on year. So we're coming off a very strong year in 2020 and stepping into 2021 with continued momentum.
That's fair thanks, so much from the comments.
Thank you Mr. Jones. Our next question is from Justin Lake with Wolfe Research. Your line is open Sir.
Mr. Lake are you on mute.
Moving on to our next question from George Hill with Deutsche Bank. Your line is open Sir.
Yeah. Good morning, guys and thanks for taking the question I guess as we think about the dollar twenty-five headwind for calendar 'twenty. One are you able to give us an order of magnitude on what is the what.
What is the like the gross impact other COVID-19 headwind versus the gross impact of the expectation for Ralph reduce medical claims from reduced medical costs that.
That would be helpful. Thank you.
Good morning, George its Brian.
So I appreciate the question the nature of the way you structured it.
Approach it maybe a little bit differently, but hopefully this will get at what Youre, what youre looking for here is we dimension. The $1 25, I would encourage you to think about it in three three broad categories. The first one being the impact of elevated COVID-19 testing treatment and vaccination cost as well as some of the pressure we anticipate on our revenue for example.
In our Medicare business I would size that at about half of the $1 25 impact as it relates to the 2021 effect on our U S Medical book and Youll see that primarily in the medical care ratio of the MCR.
The second component the sizable is in customer volumes against specifically in our U S. Medical business, we would expect about 35% to 40% or so of that $1 25 per show up in the form of lower volumes due to the ongoing economic pressures associated with the pandemic and then the balance is a smaller components that will show up in different.
Parts of the company.
Okay, and maybe as a quick follow up is there any impact expected to the Evercore segment.
Yeah.
The other north impact is.
Quite modest and I would characterize it is immaterial relative to the size of that business.
Very helpful. Thank you.
Thank you Mr Hill. Our next question is from Ricky Goldwasser with Morgan Stanley. Your line is open.
Mr. Goldwasser are you on mute.
Moving on to our next question from a J Rice with credit Suisse. Your line is open Sir.
Thanks, Hi, everybody.
Just to ask about ever north the two aspects there one with the now enhanced capital deployment. It seems like part of the story forever, nor does diversify the service offering beyond the pharmacy benefit focus.
Currently has a can you comment on how quickly you.
Thank you Ted diversifying our borders maybe update us on the areas that you're thinking about.
Adding to the capability there and then just basically don't ever north.
There was some talk last year that the pbms selling season people were renewing for a year because of the pandemic and.
Do you expect the selling season to have more rfps than normal this year or is it sort of a normal RFP season from what youre seeing so far.
A J good morning, it's David.
Relative to your first question the platforms that we are operating with an average orders and again, we'll work through it in some good detail at our Investor day, there were four platforms within our portfolio, our well performing pharmacy services, our care management or benefit management, our health intelligence platforms.
That are functioning operating delivering significant value today at each one of which will will continue to be invested in first and foremost organically I'm, Brian referenced the capex deployment that we have within our portfolio whenever north is a part user of that $1 billion Capex secondly through partnerships.
The way, we work to partner in different ways shapes, and forms and thirdly potentially through M&A from that standpoint, but the platforms. We have we feel quite good about as an illustration in terms of the M&A.
M&A capabilities, we've talked about expanding our ability to share of customers, where they are and where they seem to be served whether that's expanded virtual platforms expanded in home capabilities et cetera through that lens as it relates to your second question the selling season et cetera are grounded in the comments, we made relative to just.
The very strong growth results, we've put up over multiple years now I won't be able to carry that momentum through 2021 were pretty sick into the 2022 selling season right now.
Health plan season is far along the large commercial season is meaningfully along and the wealth of middle market consortium selling season is in the early stages as of right. Now we know we have two health plan losses for 2022, we've had essentially 99% plus retention up until that point.
From a health plan business and we would like to retain every client every day and we know that that's not possible, but we have two known losses that have been written about in the marketplace. Notwithstanding that we have visibility to meaningful new business adds from the 2022 selling season, and we'll be able to continue to build on the momentum we posted.
For 2019 and 2020.
Okay. Thanks.
Thank you Mr. <unk>. Our next question is from Dave Windley with Jefferies. Your line is open Sir.
Hi, good morning, I'm, hoping to hear David how how central and important.
Telemedicine is to Cigna and Cigna strategy thinking about how are you baking that into product design. How are you thinking about ex.
<unk> tended higher reimbursement deferral of of patient co pay and does like remote passive digital monitoring of high risk patients fold into that picture I'd just love to hear you talk about how central that is and how much say cigna is pushing that as opposed to waiting on customers to pull that from.
<unk>.
So this is.
Good morning, it's interesting where you ended in terms of push pull.
We've talked before around our orientation is being we think about yourself as a consultative solution provider, so I pause a little bit on the.
Push side of the equation, but stepping back you were framing I think is quite healthy as I noted in my prepared remarks, we see the change in which care will be accessing coordinated as one of the three defining trends over the decade in front of us and we see significant opportunity to be clear so William view that we see significant opportunity.
To deliver more value more choice more simplicity with appropriate coordination back to customers and patients through effective use of virtual programs. This is well beyond telemedicine as well beyond urgent care triaging.
There's longitudinal nature of that is attached to that is aided by remote monitoring is aided by a coordinated system to make that longitudinal delivery work. We see this trend setting from health care through behavioral health to coordinated health care and behavioral services from that standpoint, and we see it as a significant opportunity I'd also note that.
We've been mindful in terms of the positioning of the Corp, whereby we see that as not only a significant opportunity in the market, but for us because we thought not to be positioned in we'll call it bricks and mortar delivery or fixed delivery infrastructure, but having the flexibility to have the variable delivery infrastructure that is needed for <unk>.
And then lastly, we do see your point do you have the ability to design benefits.
If you have any virtual primary benefit structure that are being tested in the marketplace. Today and you can push that you could put that in a push category.
But it's a choice that you would offer and we've already seen some positive marker so significant opportunity. Our company is positioned to pursue it and you should expect us to spotlight a little bit more detail on March eight alright. Thank you.
Thank you Mr. Windley. Our next question is from Justin Lake with Wolfe Research. Your line is open Sir.
Thanks can you hear me this time.
Yes, we cant Justin.
Sorry about that.
Joe a couple of quick numbers questions one.
The other north revenues were materially higher than I was modeling yet it didn't seem to flow through to the bottom line in terms of earnings which were more in line. So curious there if there's anything I'm missing and then on the exchange business can you give us can you give us an update there's a lot of competition. There I know you're rolling into a bunch of new markets can you can you share with.
How much new membership do you expect to have there been any kind of margin impact all kind of burden typical targets that we should think about from 'twenty one.
Good morning, Justin It's Brian I'll take the first part of your question and then David will comment on the individual exchange Park guests.
Are the other north business really pleased with the revenue performance that we.
Drove a 2020.
Your comment about the relationship to the earnings couple of things I would keep in mind. There one is the relationship.
<unk> came out with Prime Therapeutics effective April one and that became expanded on January one 2021, when we onboard any new clients. There is a level of startup cost associated with that as we think about bringing on new headcount to make sure that were wrapped up for the volume that will come. So we had a little bit of expense related to the startup.
With our relationship with Prime Therapeutics in 2020. Additionally, the Cigna U S medical in sourcing which is now complete.
Revenue, but de Minimis earnings contribution in 2020 tavern north. So those are really the two dynamics that caused a little bit of the other revenue versus earnings growth difference that you cited David anything you want to call out relative to the individual business sure Justin Good morning relative to the business first we're pleased with the performance that we're stepping into 2000.
'twenty, one with relative to that portfolio as I noted in our prepared remarks, we're expanding the counties were participating in by about 50%.
Brian did also note that we're exiting the non.
A portion of that business as it relates to margins just I would remind you we were early to note that a.
A couple of years ago, we thought that that portfolio of business is nationally.
Earning margins above a sustainable margin thresholds and we set targets of reverting to a sustainable margin threshold and in fact, the MCR. We posted this year, we indicated it would show some impact of the margins more normalizing in that indeed to take place as it relates to the 2021 and our early look at beyond.
Positioning we think that our margin targets are sustainable given our provider relationships in our service proposition and we look to grow that portfolio.
Thank you Mr. Lake. Our next question is from Steven Valiquette with Barclays. Your line is open.
Great. Thanks. Good morning. So if you think about the commercial membership out like you mentioned you expect a continued organic growth throughout the year and overall commercial membership I'm curious if we can read into that maybe that cigna is perhaps already dropped on the quarterly progression of commercial enrollment as it relates to COVID-19.
Covid impact economic impact et cetera, and then just within that with national accounts are expected to be down a little bit any sense on when we may see the trough on that whether it's early in the year or late in the year and in 2021.
Good morning, it's David.
Thank you.
Genticide several several important features here so as it relates to commercial.
Commercial customers for 2021.
As expected we expected to step into 2021 with about the number of customers. We would end 2020 with as it relates to the year's pattern I'd ask you to think about it as follows first we.
We expect.
The ongoing COVID-19 impact to dis enrollment to continue to have pressure on customers throughout the first half of 2000, our customer number throughout the first half of 2000.
And 21 SEC.
Second.
As typically takes place in the National accounts segment. There are some non COVID-19 related this enrollment that happens historically in that business because most of the selling takes place during the first portion of the year offsetting that is continued growth and strength in the select segment.
That is a very active selling season throughout the course of the year as.
As well as some known that we'll call it middle market New business adds that will take place during the middle portion of the year.
Now as it relates to looking forward you asked the final part of your question relative to the trough of National accounts.
The early look at 2022, as we would expect.
A very attractive retention number at this point for our U S medical National account relationships.
As well as the selling season has been pretty active right now for us. The RFP volume is up the quality of the RFP volume is high.
We have some new business opportunities wins that we have on board already.
We're in active pursuit. So we have a level of optimism relative to the outlook for that segment for January of 2022 hope that helps Steve.
Yeah, that's great. Thanks.
Thank you Mr. Valiquette. Our next question is from Ricky Goldwasser with Morgan Stanley. Your line is open.
Yeah.
MS Goldwasser are you on mute.
Moving on to our next question from Josh Raskin with Nephron Research. Your line is open hi.
Hi, Thanks, good morning.
Congrats Eric and Brian and the rest of the team on the new roles.
So our question here is more around Cigna was relatively early in sort of that development of an ACO strategy. It seems like the market certainly been catching up quickly. So I was wondering if you could speak to your efforts around engaging providers, especially primary care physicians and maybe perhaps how that approach differs in your Medicare book versus your commercial book.
Good morning, Josh.
So relative to the ACO strategy I think it's a broad definition of what the market calls value based relationships and you're correct. We had an early start and a lot of passion and drive and therefore strategic direction relative to it.
I would start with the end and that is the Medicare advantage book in General has a higher penetration of and comprehensive nature of value based care relationships per customer that we serve versus commercial so.
And you probably see that in other ways you look at the marketplace. The primary care physicians, the integrated multi specialty physician groups et cetera.
Tend to adopt adapt and internalize value based care more comprehensively for Medicare advantage, given the Population's health needs and the opportunity to deliver a really significant value the exciting and piece of it is we've been working now for a decade.
To prove that thesis in the commercial space and it varies by market in terms of the level of breadth and depth, but.
We have well in excess of 600 collaborative accountable care relationships that are up and running.
And delivering meaningful value the more mature ones are delivering meaningful value for our customers and clients what does that mean clinical quality. So higher gaps in care closure service quality strong service experience and improved affordability from that standpoint, and then the last comment I would add here is the market is always dynamic but.
One of the impacts of COVID-19, as it jars, everybody in every norm and as it relates to value based care. It puts a spotlight back on value based care of that.
Shared risk and share performance relationships now may look a little bit more palatable to some that may have not viewed it in the past and were more weighted to a fee for service model. So we see an opportunity to further expand and deepen some of those relationships both in commercial specifically, but as well as in some of the Medicare advantage opportunities.
Thank you.
Thank you Mr. Raskin. Our next question is from Charles <unk> with Cowen Your line is open.
Yeah, Hey, thanks for taking the question just wanted to ask again about the direct COVID-19 costs. This year and this dollar twenty-five in and I apologize. If you gave it but is there a way to give a split between maybe testing costs relative to treatment costs in that number that you expect this.
This year.
And you know.
I think theres been some talk about potential for changing rules, where our plans would be required to cover additional testing costs like about a return to work kind of caused that I don't think plants are currently.
Oh, covering just wanted to.
Get your sense first on that first part and then secondly is that a big amount that you if that were to happen how how big amount is that in the testing scheme overall thanks.
Good morning, Charles This is Brian so in terms of the first part of your question there dimensioning the testing versus the treatment.
Gone through extensive modeling as you might imagine to project. What we think is going to transpire in 2021, which led us to a $1 25.
Covid impacts that I described earlier.
I went through to a previous question, we expect about half of that to come through in the form of elevated claim cost <unk> revenue pressure in our U S. Medical MCR book, So I'm not going to split a party to the different components in that.
For you, but just rest assured we've got a variety of projections that underlie that David maybe you want to comment on the effects of I'm sure. The consumers are relative to the testing as we stand today first and foremost.
The industry broadly speaking stepped in early clear and aggressively and support our clients and patients relative to testing initially as well as evolving thought process from process procedures relative to treatment as it relates to what I would describe as Ahmed.
Our worksite support the posture has been thus far in terms of good collaboration with HHS.
Illustration staff that is outside of what an insurance or a service relationship should be to the extent this revisit it.
Revisit a dynamically, but thats typically carried by the employer through relationship or otherwise I'd also remind you that 85% of our commercial business is self funded so we act as a fiduciary income.
Cases, where individual employers want assistance relative to that we're proactively supporting through that lens, but we do not see that as either a likely in the immediate future even relative to engagement on these topics this week or be a needle mover for us given the makeup of our portfolio of businesses.
Great. Thank you.
Thank you Mr. <unk>. Our next question is from Lance Wilkes with Bernstein. Your line is open.
Yeah, Good morning, Brian and David.
So let me just pull up a little bit on the strategic capital deployment and if you could just talk to maybe two dimensions on that I. Appreciate your earlier comments as you were talking about bricks and mortar being of less interest in specifying some of the areas in virtual home in and remote.
From a monitoring et cetera that were of interest if maybe you could just call out.
The distinction, maybe I'm, putting too much emphasis on physician practices being bricks and mortar and index.
And excluding them as an area of focus and then similarly EBIT soon ever north will it be more focus on providing these services to employers and health plans or how much of the focus is providing these services to risk bearing primary care or other value based care other sorts of companies. Thank you.
Good morning, it's David.
Start with the latter portion of your question first so as we.
Of all of our capabilities, both the present state, but if all of our capabilities you should think about in general all that happens with any other north and it happens within <unk> as it relates to a platform of services to serve health plans to serve corporate clients to serve governmental agencies and two offers.
Services too as you articulated a risk bearing a performance based health care delivery systems, and you should think about Cigna Cigna U S medical portfolio as a consumer of those services now clearly an important development partner, but a consumer of those services as another client of <unk> as it relates to the.
First portion of your question I think your basic framing of it is right and so if we just reiterated and step it up a notch, but our view is that the U S is not in need of more physical proximity and physical plant to serve the population in general, especially in urban and suburban areas.
We obviously have.
Additional need states relative to rural areas from that standpoint, secondly that consumer behavior in a variety of areas, including health care was reinforced.
A desire not an acceptance, but a desire for bringing care and services to me in a real time basis and highly personalized basis, therefore virtual care coordination and obviously, that's augmented with clinical staff, but it's bringing the service to the individual in an immediate real time basis. So long as it can be longitudinally match.
<unk> and coordinated effectively and then the last point I want to be really clear on our view of it is as a complimentary aspect to the care delivery system not as addition to remediation play, but as a complimentary aspect because to make it work properly it needs to be connected back into the health care delivery system and we have many examples have been working today.
Roche to virtual both for medical as well as Ralph we just see the ability to ramp it significantly given both the demand and the acceptance and then the tool availability.
Okay. Thanks.
Yeah.
Thank you Mr will <unk>, our last question will come from Scott Fidel with Stephens. Your line is open Sir.
Okay.
Thanks, Good morning, guys.
My other question, just maybe helping us to think about the Medicare advantage margin progression that you're thinking about for 2021 and 2022 in particular, maybe if you can call out I don't know maybe within that dollar twenty-five had.
A headwind from Covid, just how you're what you're thinking specifically about the impact from the lower wraps.
2022, which which I guess would probably be impacting you a bit more just because of all the the enrollment growth of 18% growth that you had and I may.
Just last year, but then as we go into 2022.
How much sort of improvement in margin you could potentially get as you normalize the wraps and then also it looks like they are pretty solid.
No base rate update from CMS as well in terms of that 4% plus.
Good morning, Scott It's Brian.
Key components to your question, there and just broadly the way I would encourage you to think about it as well.
We're on a multiyear growth journey for this business right, where you are two of our.
Of our geographic and product expansion with your expectation of 10% to 15% annual growth really happy with the 18% growth, we put up in 'twenty and well on track to achieve 10 to 15 and 21 the margin profile tends to vary for a few different reasons. One is when we go into a new market there tends to be a buildup in terms of investments in.
In people and in marketing before the customers start to come in to is when we write a new customer typically there is a bit of a ramp relative to profitability from a duration standpoint due to the risk adjustment coding, which you appropriately called out thirdly due to the unique nature of 2020, and the COVID-19 headwinds that we faced there was lower utilization.
Right. So as a result of that we.
We were not able to get all of the risk adjustment codes that we would in a normal year. If you will we factored all that in to the 2021 outlook. The $1 25 in earnings per share headwind that we'd called out here a component of that is associated with Medicare advantage and it's associated with lower revenue than we would have otherwise anticipated having so.
You kind of step forward as David said in the beginning 2022 and thereafter, we expect some of that will work itself out and were not going to give you exact 2022 guidance here today, that's the way I would encourage you to think about the margin profile.
Yeah. Thanks.
Thank you Mr. Fidel I will now turn conference back over to Mr. David <unk> for closing remarks.
Thank you so just to wrap up I'd like to highlight a few key points from today's discussion first I'm very proud of the way in which our colleagues supported the needs of our stakeholders throughout this pandemic. While also ensuring that we delivered on our shareholder commitments, we delivered solid 2020 financial results, including revenue and EPS growth and outstanding free cash flow.
And our strong 2020 performance and the strength of our businesses give us confidence that we will achieve continued attractive growth in 2021 and beyond driven by significant increases in revenue ongoing profit growth and very attractive cash flow performance. We thank you for joining our call today, and we look forward to going into more depth with you around our growth.
Plans at our Investor day, which is slated for March 8th.
Have a good day.
Ladies and gentlemen, this concludes cigna's sports quarter 2020 results Freebies Cigna.
Cigna Investor relations will be available to respond to additional questions. Shortly.
Accordingly, This conference will be available for 10 business days. Following this call you may access the recorded conference by dialing 866.
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