Q3 2021 Cigna Corp Earnings Call
Okay.
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Ladies and gentlemen, thank you for standing by for Cigna's third quarter 'twenty 'twenty. One 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 queue to ask questions at that time, if you should require assistance during the call. Please press star zero on.
You touched on phones as a reminder, ladies and gentlemen, this conference, including the Q&A session is being recorded we'll begin by turning the conference over to Miss Alexis Jones. Please go ahead Ms Jones.
Good morning, everyone and thank you for joining today's call I'm Alexis Jones lead principal for Investor Relations with me on the line. This morning are David <unk>, Our President and Chief Executive Officer, and Brian event go Cigna's, Chief Financial Officer in our remarks today, David and Brian will cover a number of topics, including Cigna's third quarter 2021 finance.
Results as well as an update on our financial outlook for 2021.
As noted in our earnings release, when describing our financial results Cigna uses certain financial measures adjusted income from operations and adjusted revenues, 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 statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.
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 third quarter, we recorded an after tax special item benefit of $35 million or 10 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.
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 and does not assume any impact from any business combinations or divestitures that may occur after today.
Such as our recently announced the planned divestiture of life accident and supplemental benefits businesses outside of the U S, which we expect to close in 2022 with that I will turn the call over to David.
Thanks, Alex.
And thank you to everyone for joining us on our call today.
This morning, I will spend a few minutes talking about our strong results for the quarter how.
How we are advancing our growth strategy and I'll provide some additional perspective on our 2022 outlook and then Brian will share some more details about our third quarter results and our outlook for the remainder of the year and then we'll take your questions. So let's jump in.
During the quarter, we delivered adjusted revenue of 44 billion and adjusted EPS of $5 73 per share.
All while continuing to reinvest back in our business to fund growth expansion and ongoing innovation and we continue to return significant value to our shareholders.
These results reinforce we are delivering for our customers patients clients provider partners as well as for you our shareholders.
With our high performing health service portfolio and sharp focus on executing our strategy. We are confident in our ability to continue driving growth and are again, raising our full year 2001 guidance for adjusted EPS and revenue.
Our performance is strong considering the ongoing impact of the pandemic on medical costs as well as the higher claims we've experienced amongst the special enrollment period or FCB customers within our individual business.
As it relates to our MCR in the quarter, our commercial business did improve from the second quarter to the third quarter and our Medicare advantage business also improved sequentially.
We continue to execute a series of actions in 2021, and two till 2022 to further improve our MCR.
Ryan will walk through this in more detail in a few moments.
Separately in early October we also announced an agreement with Chubb to sell her life accident and supplemental benefits business in our international markets platform in seven countries for $5 7 billion $5 75 billion.
We expect to realize about $5 4 billion in net after tax proceeds and to complete the transaction in 2022 following regulatory approvals.
Guided by our strategy and similar to our 2020 divestiture of our group insurance business. This transaction unlocks the value of the best in class, leading asset while also enabling us to even more sharply focus our business on health and well being services. So overall, our performance for the quarter, which reflects our clear.
Strategy and strong execution and delivering attractive results and importantly, our ongoing commitment to prioritize and support the evolving health and well being needs of those we serve.
Now I'll walk through some additional detail for <unk> and U S medical businesses.
A year ago, we launched every known to the marketplace as our health service platform focused on servicing health plans employers government organizations and health care providers.
Since that time <unk> has established itself with unique partnerships and innovative services that are resonating with multiple buyer groups.
Our <unk> pharmacy, and our medical offerings through our U S. Medical platform are the two primary gateways through which most of our clients and customers formed their base relationship with us.
Wrapping around these two exceptionally strong platforms are our additional suites of innovative health services revenue, it including benefits management care solutions and intelligent solutions.
These help us to expand and deepen existing relationships.
In the third quarter ever North retained and expanded our relationship with the department of Defense Tricare Pharmacy program and renewed a seven year contract.
We're privileged to serve almost 10 million active duty service members retirees and their families.
<unk> will continue supporting Tricare pharmacy operations, including specialty pharmacy services.
Military pharmacy claims and retail network pharmacies. The new contract also allows for expansion of specialty in care coordination services through 2029.
As we look to the balance of the year and into 2022, <unk> will continue to grow revenue and earnings.
Turning to our U S medical platform in U S. Commercial our teams are leveraging and deploying innovative solutions from Avenue to expand our service offerings and address the evolving needs of our clients and customers.
For example, in our U S. Commercial platform, we are leveraging <unk> MD life capabilities to expand virtual care options for our customers through their employers with primary urgent behavioral and dermatology care.
As part of these value based arrangements during virtual visits MD life physicians are leveraging our <unk> intelligence capabilities, enabling them to provide more connected and coordinated experience.
And we continue to expand our capabilities with MD life as we recently launched a virtual first health plan for employers.
Another Great example of every northern newest commercial partnering to bring more value to our health plan clients as a new arrangement, we have with University of Pittsburgh Medical Center Health plan.
We will make in network care available to <unk> customers, who live work or travel outside of our network service area.
<unk> has been in every north pharmacy client for 16 years and this agreement illustrates how we are collaborating across our enterprise to deliver greater affordability and differentiated value for health plan clients.
We are pleased to how the market continues to recognize the value we are delivering through our broad suite of solutions and as such we continue to grow through both our U S commercial and <unk> platforms.
Within Medicare advantage consistent with our strategy, we continue to grow in our existing markets and expanding into new geographies. Our progress is further supported by our overall value of our offerings for 2022 calendar year, 89% of our Medicare advantage customers will be enforced star or greater plans nationally.
This is the highest level, we've ever achieved and it marks the fifth year in a row, we have improved our stars performance.
And that our individual and family plan business, we have driven strong growth in this year, increasing customers by 47% through the third quarter of.
A substantial portion of this growth did come from the extended special enrollment period.
As I previously noted some of the MTR impact in the third quarter was driven by the medical cost amongst those we added during the outpaced SCP growth. We do expect this will moderate in 2022.
We are positioning ourselves to build on this momentum in the individual family plan business by expanding our addressable markets again as we enter in three new States and 93, New counties in 2022.
These new markets offer the potential to reach an additional $1 5 million customers.
The continued strength of our results and the growth we are generating through the execution of our strategy gives us confidence we will deliver against our commitments in 2021, we will deliver EPS in line with our long term targets and revenue growth well above our long term targets for yet another year. We will also deliver EPS within our long term target range of 2000.
'twenty two specifically for 2021, we are committed to delivering our increased guidance for full year adjusted EPS of at least $20 35.
For full year 2021, we remain on track for generating at least $7 5 billion of.
Cash flow from operations, and we expect to return more than $7 billion to shareholders in 2021 through dividends and share repurchase.
Looking to 2022, we expect to grow EPS by at least 10% off of our increased 2021 guidance of at least $20 35 per share.
We anticipate a number of tailwind, including core growth in our business and additional contribution from margin expansion in our U S medical business as we drive pricing actions executed affordability and efficiency initiatives and benefit from the return of Medicare risk adjustment revenue to more normalized levels. We're also expecting year over year headwinds as we plan for net invest.
Net income to be more in line with historical levels and of course, the rate and pace of ongoing strategic investments will vary from year to year in short 2022 will be another strong year for Cigna.
Now to briefly summarize as we've demonstrated through the quarter and throughout 2021, we are delivering for our customers patients clients and provider partners as they experience the ongoing challenges of the pandemic.
We're also taking significant value enhancing actions such as divesting a portion of our international business, returning substantial amounts of capital to our shareholders and continuing to strategically invest in our capabilities and strategic partnerships all of which position us to continue to advance our long term growth agenda and continue to deliver shareholder value.
With that I'll turn the call over to Brian.
Thanks, David Good morning, everyone.
Today, I'll review key aspects of Cigna's third quarter results, including the ongoing impact of COVID-19 on our business and I will discuss our updated outlook for the full year.
During the quarter total medical costs were higher than our expectations within our U S Medical segment.
Largely by the impact of the Delta variant in our U S commercial business.
<unk> increased medical costs for special enrollment period customers in our U S individual business.
Importantly, I would remind you that approximately 80% of our revenues are from service based businesses that are not significantly exposed to medical cost fluctuations.
Our balanced portfolio and multiple levers for value creation resulted in signals overall revenue and earnings exceeding our third quarter expectations.
This strong third quarter performance, coupled with capital deployment activities led to an increased outlook for full year, 2021, which I will discuss shortly.
Now turning to enterprise results key consolidated financial highlights in third quarter 2021.
Include adjusted revenue growth of 9% to $44 3 billion.
Adjusted earnings growth of 20% to $1 9 billion after tax and.
And adjusted earnings per share growth of 30% to $5 73.
Results in the third quarter reflects strong top and bottom line growth with contributions across all of our businesses with overall performance above our expectations.
I will now discuss our segment level results and will then provide an update on the details of our outlook as well as our capital positioning.
Regarding our segments I'll first comment on <unk>.
<unk> third quarter 2021, adjusted revenues grew 13% to $33 6 billion.
Adjusted Pharmacy script volume increased 8% to 411 million scripts and adjusted pretax earnings grew 7% to $1 5 billion compared to third quarter 2020.
<unk> strong results in the quarter were driven by organic growth, including strong volumes in retail and specialty pharmacy.
Along with ongoing efforts to improve affordability for the benefit of our clients customers and patients and deepening of existing relationships.
Partially offset by significant strategic investments to support ongoing growth, including our virtual care platform and technology capabilities.
Overall, <unk> continues to create differentiated value for clients and customers, while driving overall revenue and earnings growth that exceeded our original expectations through the first three quarters of 2021.
Turning to U S medical third quarter adjusted revenues were $10 5 billion.
And adjusted pre tax earnings were approximately $1 billion.
Overall, our U S medical earnings exceeded our expectations during the third quarter, reflecting the impact of favorable net investment income and increased specialty contributions partially offset by higher claim costs due to the net impact of COVID-19, and increased medical costs for special enrollment period.
Customers in our individual business.
The net effect of these claim cost impacts produced a medical care ratio of 84, 4% in the third quarter.
Looking ahead, we are actively managing overall medical costs and our MCR with a range of actions.
<unk> continuing to leverage our insights from our strong data and analytics capabilities to address key drivers and identify opportunities such as guiding customers to more effective and efficient sites of care.
Continued discipline in our pricing and rate actions.
And we're also continuing to promote preventative care and access to behavioral services to provide meaningful support to patients and moderate overall medical costs over the longer term.
Turning to membership we ended the quarter with $17 million total medical customers, an increase of approximately 368000 customers year to date.
In U S medical a year to date customer growth was driven by net growth in select and middle markets within U S. Commercial and continued organic growth in Medicare advantage and individual within U S government.
In our international markets business.
Third quarter adjusted revenues were $1 6 billion and adjusted pre tax earnings were $250 million. These results were in line with our expectations.
Corporate and other operations delivered a third quarter adjusted loss of $275 million.
Overall cigna's broad portfolio of services continues to serve the needs of our customers and clients Cigna.
<unk> remains committed to delivering value for all of our stakeholders, leveraging our well positioned businesses.
Now turning to our updated outlook for full year 2021.
We are raising our adjusted earnings per share guidance for full year 2021 to at least $20 35 per share, reflecting the strength of the quarter the favorable impact of our year to date share repurchase and acknowledgment of the ongoing fluidity of the broader environment.
This represents EPS growth of at least 10% from 2020 <unk>.
Consistent with our long term EPS growth range of 10% to 13%.
Even with the ongoing challenges associated with Covid, 19, and while having significantly increased our dividend in 2021.
As we look forward. It is clear that COVID-19 will continue to have an impact in the fourth quarter and in 2022, and as time progresses COVID-19 related impacts and the ongoing performance of the business are becoming more intertwined.
We no longer believe it's constructive to continue to quantify the impact of COVID-19. These.
These dynamics are fully contemplated in our 2021 expectation for adjusted EPS of at least $20 35.
And our 2022 expectation for EPS growth of at least 10% after 2021 guidance.
Turning to revenue, we now expect full year 2021 consolidated adjusted revenues of at least 172 billion.
Representing growth of at least 11% from 2020, when adjusting for the divestiture of our group disability and life business.
I would note this revenue growth rate significantly exceeds our projected long term average annual growth goal of 6% to 8% and represents the third consecutive year of significant revenue outperformance since our combination with express scripts in late 2018.
I will now discuss our 2021 outlook for our segments.
We continue to expect full year 2021, adjusted earnings of at least $5 8 billion.
Representing growth of at least 8% over 2020, reflecting the significant value we create for our customers and clients.
For U S. Medical we continue to expect full year 2021, adjusted earnings of at least $3 5 billion.
Underlying this updated outlook, we now expect the 2021 medical care ratio to be in the range of 84% to 84, 5%, which includes our expectations for elevated medical costs for individual special enrollment period customers.
Regarding total medical customers, we continue to expect 2021 growth of at least 350000 customers.
Now moving to our 2021 capital management position and outlook.
We expect our businesses to continue to drive strong cash flows and returns on capital.
Even as we continue reinvesting to support long term growth and innovation.
For full year 2021, we continue to expect at least $7 $5 billion of cash flow from operations.
<unk>, the strong capital efficiency of our well performing businesses.
Year to date as of November <unk> 2021, we have repurchased $26 5 million shares for $6 3 billion.
And we now expect full year 2021 weighted average shares of approximately 342 million shares. This.
This includes the impact of the $2 billion accelerated share repurchase that we announced in the third quarter.
On October 27, we declared a $1 per share dividend payable on December 20 to shareholders of record as of December 7th.
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 now to recap.
Results from the third quarter reflects strong top and bottom line growth with solid contributions across our businesses.
Cigna has shown the ability to deliver value through dynamic environments with our breath of businesses and multiple earnings levers.
We continue to support our customers clients and co workers and deliver on our financial commitments.
We now expect 2021 full year adjusted earnings of at least $20 35 per share.
Representing growth of at least 10% from 2020, consistent with our long term EPS growth rate range of 10% to 13%.
And we expect to grow 2022, adjusted EPS at least 10% of our raised 2021 guidance.
With that I will turn it over to the operator for the Q&A portion of the call.
Ladies and gentlemen at this time if you do have a question. Please press star one on your Touchtone phone. If someone asked 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 button.
We ask that you. Please limit yourself to one question to allow sufficient time for questions from those remaining in the queue and one moment. Please for the first question.
Our first question comes from Mr. A J rice with credit Suisse. Your line is open you may ask your question.
Thanks, Hello, everybody.
Just maybe to try to drill down a little bit on that expectation for at least 10% growth off the new updated numbers for this year I know it sounds like youre getting away from talking about that <unk> 50 of net COVID-19.
Impact that you're absorbing this year I know, there's various inputs there, but I was wondering because there last quarter. It sounded like you were carrying a lot of your expectation for COVID-19 related costs broadly defined into next year.
As you think about your updated thoughts about 'twenty two could you comment on.
<unk>.
Ongoing COVID-19 headwind are you expecting any is there any other big changes to the puts and takes you'd laid out last quarter as you think about 'twenty two.
Hey, Jay Good morning, it's David.
Let me try to shape, our insights relative to 2022 now that we're much deeper into 2021.
First youre right earlier this year.
Tried to frame.
The magnitude of the headwind indisputably Covid may disruption to the marketplace, where there was testing treatment revenue dislocation et cetera.
Against that backdrop as you know our broad service portfolio.
And abroad funding mechanisms continue to perform quite well when we're able to deliver from a marketplace standpoint. If you think about 2021, there's really four big chunky items.
One was the headwind category the headwind created by the Covid costs and the headwind created by MRA revenue Decrement, and then positives offsetting that somewhat which were favorable net investment income and some operating expense items now as we think about and look at the 2022 environment our visibility in terms of our growth outlook.
Our rate execution, our affordability initiatives, our efficiency initiatives and our understanding of how this year is coming to close broadly speaking those puts and take in 2021, largely offset one another as we step into 2022, the headwinds and tailwind so or at least 10% growth in 2000.
22 off of our elevated 2021, EPS essentially represents capital deployment in line with our strategic target of 4% to 5% of accretion and the residual at least 5% to 6% from fundamental operating growth to get it to that at least 10% so to recap.
Additional visibility in terms of the drivers for 2022 growth mix of growth rate execution affordability and then secondly, the puts and takes in 2021 are configuring the way that they largely offset one another as we step into 2022 underscoring that that at least 10% is largely fundamental for our business portfolio.
Okay, great. Thanks, a lot.
Thank you Mr. <unk>. Our next question comes from MS. Lisa Gill with Jpmorgan. Your line is open you may ask your question Hi, Thanks, very much and good morning.
David I, just wanted to better understand how you're thinking about the ever north business. As we think about 2022 and I know you've talked in the past about some of the business losses, but if you can give us an update as to how to think about <unk> going into 2022, and then as we think about.
The upper North business and think about the virtual primary care offerings that are out in the marketplace. What are you thinking with MD life.
Good morning, Lisa.
So relative to iron ore first as we step into 2022 as Brian and I. Both noted we are quite pleased with the underlying performance of our north if you look at the inherent growth.
<unk> has delivered for the organization and the diversity of the growth we're quite pleased with that secondly, our ability to both drive fundamental growth continued to invest in innovation and extend our partnerships. We feel quite good. So just framing every north and then coming to the NBA live question our revenue portfolio.
As for specific portfolios of services that are positioned well with pharmacy every north care, everyone benefits and have an earth intelligence.
Our positioning relative to serving health plans large employers expanding with governmental agencies and increasingly with health care providers continues to resonate well in the marketplace for 2022.
Your question.
[noise]. Thanks, Good morning out wanted to ask David about the the international cell first in terms of Ah multiple it looks like you got about 10 to 12 times kind of ER net income for that business is that correct in the in the right ballpark and then if so you know just.
Curious in terms of the strategic you know kind of nature of the sale in terms of.
You know the multiple looks kind of depressed relative to a business. That's historically been looked at as a double digit topline grower and then can you tell us how we should take about capital deployment.
Once you once you get those funds is it gonna be similar to what we saw with a life of disability, where there's a lot of share repo or should we think about something else.
Sure. Good morning, Justin let me start and have a Brian shaped a little further both.
How do you feel about the value realisation here in the capital deployment first stepping back we're quite proud of what he has been built in our international portfolio over a long period of time. This specific portion of our international portfolio, So direct individual life accident and supplemental businesses.
We've successfully grown over a long period of time, but using our strategy as a guide the important underscore here our strategy guide us to further enhance and deepen our health and wellbeing solutions. This portion of our portfolio was less directly aligned over time to that so we use a strategy as a guide number one.
Two we feel very good about the value realisation.
And the net value realisation areas quite important in terms of a high performing asset and I. Appreciate your correlation to the group transaction another high performing asset where we felt quite good about using our strategy as a guide and.
Capitalizing on it very attractive valuation and then finally.
That strategic action is done to allow us to even further intensify our focus in the sub segments of the business that are more health and wellbeing oriented both in the us as well as globally from that standpoint is will continue to grow so that's bryan to speak a little bit more toward how we looked at the valuation of their capital deployment philosophy going forward.
And good morning, Justin.
The math that you asked about in terms of the 10 to 12 times multiple is in the right ballpark that you're looking at US GAAP earnings contributions from the divested businesses. Very importantly, this is a case, where economics and accounting don't necessarily square up if you look at the the discounted cash flows of the business here and the purchase price that we were.
Are able to get it's it's quite an attractive deal economically. So we're we're quite pleased with the financial terms for that reason as you look at the timing of wind dividends were available to be extracted as an example.
Terms of deployment with the proceeds the broad temporary as David made reference two of our group disability in life divestiture is what we would expect to fall in this instance, as well with the exception of and we don't have the same need for long term debt repayment as we did with the group disability in life transaction. So we would expect the primary used to be for share repurchase.
And when we indicated in the press release that this would be neutral the slightly dilutive two or 2022 EPS outlook. That's under the assumption that the primary use is for share repurchase.
Thank you Mr. Like our next question comes from Miss Perky walked Goldwasser with Morgan Stanley You May I ask you a question.
Hey, guys. This is Michael Honn for Ricky.
Thanks for the question as it relates to 2022 commercial growth a number of your peers have already mentioned expecting shrunk.
Diffused concerns around member tuition and the dynamics and emphasize share gains I think one of your period. You had mentioned 22 shaping up to be one of the strongest national account telling seasons in Australia. So.
With that said, it's been a bright area, but also hard to imagine that everyone in winning contracts from gaming chair.
So with that context, but are you guys getting with the competitive landscape and are you able to grow next year when everyone else comes in taking sure.
Good morning, it's David.
Just a minute a backdrop relative to our performance in the commercial market and then I'll jump right into 22, we have a very focused strategy and a long track record over the last decade of successfully growing in the commercial marketplace as we seek subsegment and deliver.
<unk> solutions for our respective clients in that marketplace and did you think about it over the last decade ish. We've generally grown low single digit medical membership, we couple of that with significant and targeted cross selling of our new and innovative services and then we complement that with appropriate pricing actions noted that yields.
Higher single digit revenue growth. So that's the big picture of our strategic approach I would also highlight with ever north.
Further expanding the services that we're able to bring through to deepen relationships like our prior conversation relative to virtual care. As an example, now specifically 2022 to be clear will grow again.
We will clearly grow our medical customer base again, and specifically within the commercial market. We have good visibility in terms of having net growth in our national accounts in large account business portfolio and we'll have another year of growth within our select segment. So the net of all that in a marketplace that is competitive as we are.
Oriented around solutions that have affordability and high engagement programs with funding mechanisms. We will again have another year of net growth in the U S commercial portfolio and it's something we're quite proud of and positioned to continue on.
Thank you. Our next question comes from Mister Kevin Fishback with Bank of America, You May I ask you a question.
Great. Thanks, it sounds like in the quarter.
You mentioned you benefited from investment income and.
Specialty how performance I guess.
To think so do you believe that the specialty outperformance is something that is going to be sustainable and then if you could just talk a little bit more about the competitive.
Landscape for commercial pricing for next year do you think that you're going to be within your target range or I guess, maybe where you are target range. It looks like it would be in the commercial business for next year.
Good morning, Kevin It's Brian I'll start on the first piece of your question I think this was in the context of our U S. Medical performance in terms of your question of specialty So as you reflect on our third quarter performance for that segment again the earnings in totality, we're above our expectations in the quarter. We had two areas of favorability as you called out inverse.
<unk> income and specialty contributions in here specialty contributions includes pharmacy behavioral dental the full suite of portfolio capabilities. We have in the specialty domain that was partly offset by the two sources of claims pressure that I articulated in the.
The COVID-19 related pressure and commercial as well as the special enrollment period Mcr's that were elevated in the individual exchange specifically on the the favorability that we recorded in the third quarter of the investment income is non-recurring. So you should not consider that to be something that would that would occur again in the fourth quarter or into 22, and we would expect to see.
Specialty contributions to persist as favorability as we head into fourth quarter ended the 22 that was the smaller component of the two in terms of the favorable items in the third quarter, but that is something we would expect to continue to persist going forward, David maybe you'll comment on the pricing environment for commercial for good morning, Kevin relative to the pricing environment for <unk>.
Marshall and I am going to maybe sneak in a little bit on the individual market place here as well, but specifically that market has continued to be a competitive market and it remains that many of the commercial marketplace more broadly the employer commercial market and with that as a backdrop into my prior.
Answer we will grow our commercial book of business and we will improve rmcer, our visibility has us both growing and improving our NCR within the commercial book of business. So to do that we will be quite disciplined Kevin to be clear and we are willing to make targeted trade offs for MCR or margie.
<unk> versus volume and the net of that will yield net customer growth.
And net margin improvement as we step into 2022.
And add on specifically in the individual market our visibility in the individual market is that there are significant pockets of competitiveness in certain markets and as such in the individual marketplace. We would expect for 2022 to see no growth or more likely negative growth. Some shrinkage in our book of business, but improvement in the MCR within that portfolio and.
That's fully contemplated in our 2022 outlook of net growth for the portfolio as well as earnings expansion.
Thank you Mr. Fishback. Our next question comes from Mister Gary Gary Taylor Mccowen, you May ask you a question.
Hi, good morning.
Just want to go back to the MCR comments and I appreciate what you just said.
David.
But just wanted to think a little bit more about.
2021, so far so as we kind of look at the potential impact of special enrollment period enrollees based on your typical.
Trish in it it doesn't look like that's particularly material to the increase in C. R vs 2019 baseline.
Which is up about 400 basis points in the <unk>. When you had a lot of COVID-19 costs, but it was almost 400 basis points in the <unk>. When you didn't have a lot of COVID-19 cost and you had more.
More deferred care coming back. So I guess the question is is there any is there any other substantial moving parts.
How you are running versus the 2019 baseline and then just going forward what are your what do you anticipate as COVID-19 in the Delta very comes down do you feel like commercial utilization is largely caught up or were sort of still back in a cycle like Cooper in the <unk>, where you see some of the deferred care increasing.
Good morning, Gary It's Brian.
I tried to take the various components to that question here.
So do you think about where we're running in 2021 on the MCR, maybe I'll talk in terms of the full year guide I think probably the most constructive way to pull it apart.
The 84 to 84, 5% refresh guidance that we issued if the special enrollment period lives within the individual exchange portfolio.
Had not grown to the level that they are and had not had the elevated MCR that they did in the quarter. We would've had MCR performance for the full year that was more like at the higher end of our prior guidance range. So towards the higher end of the 80, 384% range. If you exclude the impact of the individual.
Customers from the full year outlook. So just give you a little bit of dimension as to the materiality there those customer buys have built up over the course of the year. So there were not that many in the second quarter. There were many more in the third quarter and the elevated MTR hit us, particularly.
Significantly in the third quarter, and we expect that pressure to continue into the fourth quarter is David date reference to their prior question, we would expect that to dissipate into 2022 as many of those lives attrit indoor choose new carriers.
As it relates to other parts of the portfolio the commercial business in the third quarter, we had some elevated COVID-19 related costs, particularly in August and September with the Delta variant hitting younger ages more significantly than earlier in the pandemic. So that created some elevated commercial claim cost pressure in the third quarter I would note in our Medicare advantage book.
The MCR in the quarter was a little bit favorable to our expectations, which gives us greater confidence here as we head into 2022 on that subset of the overall.
Medical book of business. So hopefully it gives you a little bit of a picture for all of 2021 is shaping up in terms of your question looking forward on commercial utilization are we caught up et cetera, we have seen much less deferred care and the commercial line of business throughout the pandemic and all the indicators that we track whether that be preventive care utilization.
Or whether that be.
Of new cancer diagnoses et cetera will tell you that there is not a significant amount of future pent up demand or catch up care to come with that said are pricing posture as David mentioned earlier continues to be a prioritization of margin expansion as we head into 2022.
Thank you I appreciate it.
Thank you Mr. Tayler next question comes from Mister Ralph to Kobe with City you May ask your question.
Thanks, Good morning.
I guess I just wanted to go back you guys, specifically called out the increased specialty contributions and.
That's always been part of the story. So hoping you can give more details there what the specific drivers are there anything to call out and then maybe within that was hoping you could talk about the stop loss product I would imagine that just given higher commercial trend that maybe more of that is being triggered and maybe some under performance there but.
I would just like to get your commentary on how that is performed and how we should think about that for 2022 from a from a price repricing perspective. Thanks.
Good morning, Ralph with David just a couple of minutes on the shaping I'll hand, it over to Brian.
As you articulate the specialty components. So if we look at that proudly.
Back to our strategy our strategy has been and continues to be how do we wrap the right suite of solutions employer by employer to help to get the overall health and wellbeing offering aligned in the overall affordability line and the historic way one thinks about a specialty sweet of a few products of behavioral pharmacy dental.
Has expanded tremendously to $25 30 different services when you take the sub segments of decision support chronic care management specialty services now virtual alternative services et cetera. So my point of underscoring. This has been as you articulated and continues to be a really important part of our strategy to try to get the right value to be realized.
For our clients, our customers and our patients and as I noted R Avenue had service capabilities continue to grow which add to the portfolio of services to be leopard, there I'll ask Brian to talk a little bit more in terms of the drivers.
Sure David Good morning, Ralph So in terms of the specialty contributions we called out there a couple of areas, particularly 0.2 is more material within our self funded business, we had some strength and pharmacy in particular and as I mentioned earlier to prior question, we would expect that to persist as we head into 2022, we also saw some upside within our.
Behavioral health offerings as demand for that has continued to grow throughout the pandemic. So we saw some increased uptake there which struck drove some additional margin for us within the quarter and again those are two areas. We would expect to persist as we head into the new year relative to stop loss. Obviously, you got to pull this one apart further because you got individuals stop-loss cover as well as aggregate stop-loss cover and.
Dynamics, there behaved a little bit differently throughout the pandemic, meaning most COVID-19 related claiming.
Claimants didn't actually hit our individual stop-loss thresholds, yet we saw a little bit of pressure earlier in the pandemic on our aggregate stop us business that business gets repriced along with our typical 12 month contract cycles for all the clients that we have so we feel good about how our position there on a prospective basis I'd also note. We're seeing good demand for that product you probably saw on.
The the supplement there we had 7% premium growth on our stop offline in the quarter over quarter. So feeling good about all the specialty solutions. When you look at the total portfolio.
Okay, great. Thank you.
Thank you Mister Jacobi. Our next question comes from Mister Josh Maskin with different research you May I ask you a question.
Hi, Thanks that good morning appreciate guys, taking the question. So the MLR I know you guys only disclose one sort of big MLR for the U S. Medical segment. So I was wondering if you could break out or give a little bit more color. Even if it's just directional on the mlr's for commercial and then government and maybe even within government how much was from the ISP versus.
Medicare advantage and then just a quick follow up on stop us one or attachment points at the individual claim levels typically I know, there's a range of those but kind of made me what's the most common thresholds that an individual asked ahead.
More to Josh.
So I'll try not to be too redundant with some of my prior comments, but just to kind of.
Summarize a few the important points here as you pull apart the MLR for the full year as I mentioned earlier, the refresh 84 to 84, 5% outlook reflects particular pressure from the individual exchange lives.
And specifically the special enrollment period enrollees, so removing that we would've been towards the higher end of our prior guide of 83% to 84%, but a sub bullet. There is the individual open enrollment lives are actually performing pretty well. So when we look at the profitability of the overall individual portfolio. We have good performance on the standard open enrollment lie.
We are poor performance on the special enrollment period of lives in the total picture there.
Therefore, a bit elevated Medicare advantage that I made reference to actually ran a little bit favorable to our expectations in the third quarter, and then commercial with a touch higher than our projections due to the effects of the delta variance in the months of August and September in particular, so those are the the broad buckets that I'd paid for you. If you think about what's inside.
The medical care ratio relative to stop us, we do have a range of attachment points, depending on the clients. So we tend to see particular popularity around the $50 $75000 level, but it really depends on the risk appetite for a given client. So it's hard to say that there's one that's always the preferred choice we have a distribution in the.
Distribution evolve depending on the appetite for clients at any given point in time.
Perfect. Thanks.
Thank you Mr. Asking our next question comes from Mister Kevin Kelly Endo with UBS you May ask you a question.
Hi, This is James jerk on her Kevin just maybe with the sale chop you're signaling more of a focus decor healthcare business are there any other segments within the company that you consider non-core my view.
In the future.
Good morning, it's David.
As I noted the action, we took relative to that part of our portfolio in previously the action, we took relative to our group insurance business, we deem to be good fiduciary management of the portfolio and looking at the strategy as a guide to our actions head.
Headlines that would not signal anything.
Of materiality that sits on the horizon I would reinforce it is a dynamic process our responsibilities to dynamically manage that but I would not signal anything on the horizon quite proud of the organization and pleased with the the successful execution of both transactions one completed second under regulatory review right now.
Thank you. Our next question comes from Mister Stephen Valiquette with Barclays. You May ask you a question.
Thanks, Good morning, everybody.
The question that maybe tie up a lot of the other discussion points together.
For the preliminary view of 22, I know, it's kind of early but just thinking about the the.
The framework of 22 relative to some of your long term targets that you laid out the analysts meeting.
I'm curious I mean so.
For you S. Medical you just talked about growth next year, but long term guidance ranges, 8% to 11% earnings growth in that segment.
4% to 6% forever, North and the rest from capital deployment, but should we think about is that still the usable framework going into 22 or should we think about maybe less operational growth and maybe more from capital deployment, just any additional thoughts around those components might help knowing that it's true.
Preliminary right.
Sure Good morning, if David.
Big Pictures you took of 2022 brief reference to this previously, but our view of the earnings visibility in the growth visibility relative to 2022, essentially if you take the at least 10%, we underscore that with capital contribution for EPS growth in line with our strategic target, which is 4%.
Five.
So then if you back away from that leaves you five to six.
Fundamental organic earnings growth contribution to get to the at least 10% number.
And we think that's an appropriate imprudent and attractive outlook, given the fluidity and dynamism of the marketplace. So broadly speaking both components are in line.
With our long term strategic objective and we have a track record, including 2021, which is a disruptive year of delivering in line with that so good fundamentals.
Little more than 50% of it being organic a little less than 50% of it being capital deployment and very much in line with our long term strategic targets.
Got it okay. Thanks.
Thank you Mr. Valiquette. Our next question comes from Mister Matthew Blessed with BMO capital markets. You May ask you a question.
Yes. Thank you I just wanted to ask.
What you're seeing in terms of customer preferences and actions in the middle market.
Particular degree of interest in alternate.
And so tight funding for the products.
<unk>.
What you've seen over the last few years.
And then.
Maybe in the stop loss market.
<unk> ended with that.
Am I correct some of the other.
Carriers may be correcting for what was perhaps overly aggressive pricing.
In earlier years, which is maybe maybe giving you a little bit of a tailwind Tehran on your own growth.
Matthew Good morning, it's David.
So you referenced middle market I don't think Theres, a singular common definition of middle markets. So let me let me try to frame you important comment.
First as you look at our go to market offerings, we have a broad suite of funding alternatives and we seek to offer to our clients.
Their respective decision of how they want to finance the purchase after the benefits are configured after the access profiles configured after the clinical programs are configured in the service models are configured to align is Brian reference before the risk transfer the balance relative to them. So having that broad suite is really important if we look at the select segue.
100 to 500 life clients it varies from year to year in terms of how much of the client demand is guaranteed costs versus versus self funded with stop loss, but cell phone. It would stop loss has been a meaningful portion and as you walk from that into the heart of what I might consider middle market.
Further you walk up an average size on average more demand for self funded less demand for risk transfer and in the in between range. Some for a shared returns of fundamentals that exists. So a little bit of linearity is you just go up in respect aside from that standpoint, but the important part is choice that we offer in the marketplace.
<unk> and tried to separate the financing decision from the design features from the program.
It takes the last part of your question I do not believe that there is a a boomerang or a reconfiguration in fact, it's happened that we've benefited from from a stopwatch standpoint, we've seen just consistency.
And how we use stop loss and I would remind you from prior conversations we have a large book we have a dedicated to.
Team that managers that book, because it needs to be specialization.
In that like many other aspects of our business.
Both perform for clients importantly, giving them the peace of mind and revenue predictability an expense predictability they need as well as for us over a long period of time, but I would not call. It anything unique in terms of adding and flowing that's changed our rate of growth and stop-loss over the recent past.
Thank you.
Thank you Mr. Bush. Our next question comes from Mister George Hell with Deutsche Bank, You May I ask you a question.
Mm. Good morning, guys. Thanks for taking the questions, David and Brian just a couple of bean counting ones in a quick question, David I, just want to make sure the 2035 or whatever the numbers post Q4 is the right jumping off point for the 10% or better growth in 2022, given it sounds like you're saying all the other pushes and pulls her mute now can you quantify ppm.
<unk> to commercial medical cross-sell sales the selling season.
I'll pause right there.
So should Georgia to question to hurt.
Question, one yes, the at least $20.35, which is R. Raise EPS is the appropriate jump off to attach the at least 10% growth more pleased to have that underlying strength and clarity of message the.
The second question I think you're asking relative to PVM commercial cross-sell penetration et cetera respective growth.
Have an individual number for you we have not historically walk through individual numbers there.
Ask you to step back and remember our strategy here, we have a high.
Cross sell in high integrated offering within our medical business as you think within the prior question that Matthew asked as you go to a select segment thinking about that is 100% integrated. It is so integral to are offering and as you move upmarket. It's more of a stand alone sale that needs to be made we see.
Continued progress there.
And we're pleased to either have it as an integrated part of our medical offering or a standalone PVM offering that we could harness ansel additional services because at the end of the day. They called up my prepared remarks, there are two fundamental ways in which a client or customer establishes their primary health and wellbeing relationship either a pharmacy relationship or.
Largely off of a medical relationship and we're positioned to love or both so I would leave you with a directional answer on the PVM commercial Brian reference PVM strength primary strength in our commercial portfolio. That's a net positive and we continue to see traction both on Standalone pharmacy, as well as integrated pharmacy within our business.
Thank you.
Thank you. Mr. Hill next question comes from Stephen Baxter with Wells Fargo. You May ask you a question.
Hi, Thanks, just wanted to come back to the individual market commentary amid I appreciate that your pricing I guess conservatively in a fairly competitive backdrop.
How much of the way back towards your target margins do you think that's going to get you in 2022, and then how should we think about growth beyond 2022 is your previously I've talked about doubling this mark with your tween tripod. Thanks.
Good morning, Steven.
We were seeking to be quite clear in terms of theirs argue indisputably there are some pockets of intense.
Competitive pricing and the ISP marketplace or the individual exchange marketplaces, it's broadly articulated given the breath of our portfolio, we're going to be able to achieve both are aggregated growth as well as where I could get earnings objectives, while maintaining price discipline and temporarily dislocated markets and we deem that to be one so we expect to see a net.
Flat or decrement in our volumes in the individual exchange business in the margin improvement I am not going to give you a margin number.
Guiding in detailed for 2022, yet and we typically don't guide relative to individual margins, having said that we expect to improve that margin from 2021 2022.
A more attractive and more sustainable level, and we will maintain the discipline there as it relates to intermediate to long term, we continue to see this as a growth market, but as we manage it and if we demonstrated over time. If there were a temporary dislocations will maintain discipline and will ever other parts of the business to ensure the portfolio delivers and as I noted in my prepared remarks, we venture three more states.
Almost 100 additional counties, they give us access to an addressable market of approximately $1.5 million additional customers to sell too and we've been in this marketplace since its inception in 2014.
And we have a track record of sustained performance, albeit episodically needing to sharpen focus as we will in 2022, given the market conditions.
Thank you Mister Baxter. Our next question comes from Dave Lindley with Jeffrey you May ask you a question.
Hi, Thanks for taking my questions David I'm interested in your views, albeit early on this build back better build it appears to be moving toward a vote and maybe specifically what you think.
The impact of government negotiation on a top 10 or 20.
Drugs beyond our exclusivity would have on your PVM business.
Good morning, Dave.
So clearly lots of.
The right now on the Hill.
And we've operated for a long period of time in an environment will continue to that has an active both legislative and regulatory agenda.
So we understand that fully a big picture stepping back any initiatives that are constructive and sustainable that improve affordability and value for individuals were actively open to engaged in and generally supportive of specifically in the pharmacy space, where you double click down on we think the most meat.
Thankful way to have sustainable apologies policy change it could further affordability is to stimulate and further accelerate more competition and if I harken back as an example to make a tangible of hepatitis C was I think a very positive example that reinforces that that is the marketplace rapidly moved from one to two suppliers for hepatitis C.
Mm services, which was a breakthrough drug that society benefits from the overall affordability changed dramatically.
That's an action that is different than who's negotiating or it's very different than putting an artificial cap on a rate of growth from that standpoint, So big picture.
We will await the specific details and we'll we will remain actively engaged no doubt.
We believe the most sustainable way to further improve affordability is to expand choice and expand competition. That's what's worked in the marketplace and the model and lastly, prior conversation we've had our well performing in broad portfolio pharmacy services and tools is well positioned to be able to deliver value any changing and.
<unk> and we're confident and the capabilities we have over the over the strategic horizon here great. Thanks for your thoughts.
Thank you Mr. Windley. Our last question comes from Lance milk with Bernstein, you May I ask you a question.
Yeah could you just give a little more color on them.
Pharmacy, what I was particularly interested in is.
From a vaccine standpoint in the quarter how.
How much would that impact volumes and margin and then are you seeing much <unk>.
Impact of margin from especially pharmacy.
Going generic whether that's the beginning or your outlook for that thanks.
Good morning, let Brian so within within the third quarter and number north we fulfilled about 4 million Covid vaccine prescriptions, so kind of put that into contact us about 1% of our total script volume and year to date, we're up to about 16 million.
Cross the three quarters here in 2021, so again roughly about 1% of total script volumes forever north not a material contribution from an income standpoint, and if that number goes up or down next year will materially move the needle for the segment.
Segment more broadly in the second part of your question as we think about specialty generics and you can even broaden that to include Biosimilars. We're really excited about those for the future from the standpoint of driving affordability on behalf of our clients and customers. We think competition is a good thing and ultimately specialty generics while the timing.
<unk> with which they are introduced is hard to predict and does create some variability in our quarterly income patterns of ultimately review that is a great thing for our clients customers and ultimately for our business. Unfortunately, we have a wide range of earnings levers that allow us to capture value in a variety of ways, depending on how different client contracts are constructed so we're really excited about especially generics.
Biosimilars going forward.
Great. Thanks.
Thank you Mr. Wilkes I will now turn the call back over to David quite any for closing remarks.
Just to briefly wrap up recall I do want to underscore how proud and appreciative I am of our more than 70000 coworkers around the globe, who continue to be dedicated to the many stakeholders. We serve our team is working to support our patients or clients our customers. Our partners in this very fluid and ongoing challenging environment and the team is.
You step up time and time again to make sure we are providing the level of support again for our clients, our customers or patients as well as our communities and through it all as an enterprise we remain focused on executing our strategy guided by our framework of delivering value every day partnering and innovating to expand and then expanding our addressable markets to broaden our reach.
So we thank you for your engagement today, we look forward to providing future updates on our success going forward and.
Ask you to enjoy the rest of your day. Thanks.
Ladies and gentlemen, this concludes sickness third quarter of 2021 results preview Signet Investor relations will be available to respond to just no question shortly.
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Thank you for participating we will know disconnect.
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