Q2 2019 Earnings Call
Machine vision and values.
By doing so we are enabling our 60000 plus associates to expect more of themselves and create real change for those we are fortunate to serve.
And now I will turn the call over to John to discuss the second quarter financial results and our revised 2019 outlook John .
Thank you Gail and good morning.
As evidenced by our earnings release, the strength of our businesses drove balance growth for the quarter.
Today, we reported second quarter GAAP earnings per share of $4.36 in adjusted earnings per share of $4.64 exceeding expectations and positioning us to deliver on our commitments.
Second quarter operating revenue was strong and outperformed expectations, reaching $25.2 billion, an increase of nearly 11%.
Or $2.5 billion over the prior year quarter.
On a hip adjusted basis growth in operating revenue was approximately 13% and ahead of our projected long term revenue growth of 10% to 12%.
The increase is attributable to premium increases to cover overall trend robust membership growth across both our government and commercial segments and yet another quarter of strong growth in administrative fee revenue driven by increased sales of clinical and value added services across our businesses.
Medical membership ended the quarter at approximately 40.9 million members representing growth of 1.3 million members over the prior year quarter.
The growth was driven predominantly by our risk based business, which increased by 1.1 million members or growth of nearly 8%.
The medical loss ratio was 86.7% for the quarter, an increase of 330 basis points from the second quarter of 2018.
The increase was largely driven by the one year waiver of the health insurance tax in 2019, and a continuation of elevated medical costs in our Medicaid business.
BSG in a ratio was unchanged sequentially at 13% and improvement of 210 basis points over the prior year quarter.
The improvement was driven almost equally by the absence of the health insurer tax and solid growth in operating revenue attributable to membership gains in Medicaid and Medicare.
Our results illustrate the strength of our diversified platform as challenges in our Medicaid business were more than offset by our other business areas.
Our Medicaid business continues to be within our target margins, albeit at the low end of the range, but we remain confident and fully expect our margins to improve as we continue to work with our states on a daily basis to ensure the rates we receive appropriately reflect the acuity of our membership.
It is important to note that the challenges we are facing in our Medicaid business remain isolated to a handful of states.
And our very manageable given the size and breadth of our overall portfolio.
Our medical management capabilities and operating platform, our unmatched core competencies that are widely recognized by our state partners as evidenced by our industry, leading RFP win rate compared to both our diversified and pure play competitors alike.
We are pleased with our continued growth in Medicare.
Year to date, our total Medicare advantage membership is up 16%.
And a significant driver of the impressive top line growth I mentioned earlier.
Moving to commercial membership has grown nearly 300000 members compared to the prior year quarter.
It is important to keep in mind that our second quarter 2018 commercial segment results benefited from a favorable risk adjuster true up associated with our 2017 AC business.
With that said, our second quarter 2019, commercial operating margin was a solid 10.4%, reflecting the team's progress towards increasing the penetration of clinical and other value added services.
Consistent with last quarter, we continue to expect our local group medical cost trend in the range of 6% plus or minus 50 basis points.
Turning to the balance sheet, our debt to cap ratio was 39.4% at the end of the quarter.
We repurchased 1.7 million shares of common stock at a weighted average price of $272.95 totaling approximately $458 million.
In total we have repurchased 2.8 million shares of common stock year to date.
Operating cash flow was $1.4 billion in the quarter up $895 million from the prior year and represented 1.1 times net income for the first six months of 2019.
Days and claims payable was 39.1 days, an increase of 8.6 days sequentially and inline with expectations.
Looking ahead, we now expect full year 2019, total operating revenue of approximately $102 billion.
With premium revenue, increasing by $2 billion at the midpoint.
Driven by our outlook for higher than expected growth in fully insured membership.
Fully insured enrollment is now expected to be in the range of 15.6 to 15.8 million lives in self funded enrollment is now expected to be between 25.4 and 25.5 million lives.
Altogether full year medical membership is now expected to be in the range of 41 to 41.3 million members.
The medical loss ratio is now expected to be in the range of 86.2% to 86.5% due to the aforementioned trends in Medicaid.
The S. Gionee ratio is now expected to be in the range of 13.2% to 13.5% due to the greater than expected revenue growth and administrative expense efficiencies.
Taken together, we now expect full year, adjusted net income to be greater than $19.30 per share.
And with that.
I will turn the call over to the operator for Q and a.
Operator.
Thank you, ladies and gentlemen, if youd like to ask a question. Please press Star then one on your Touchtone phone you will hear a tone, indicating you have been placed in Q you may removed himself from queue at any time by pressing the pound key if you are using a speakerphone. Please pick up the hand handset before pressing the numbers and in order to get through as many questions as possible today. Please limit yourself to one question per turn.
Once again, if you have a question. Please press star one at this time.
One moment. Please for your first question.
Your first question comes from the line of Sarah James from Piper Jaffray. Please go ahead.
Thank you.
So how do you guys have been pretty big topic that will some of your peers have been talking about thinking about long term trend in terms of Cts bye.
National Health expenditure plus or minus how do you think about the right framework for long term costs from discussions and non thinking through the levers there one that's been coming up recently is.
Outcomes based pricing for gene therapy, and medical devices, so with anthem doing anything on that side.
Is it meaningful long term cost churn management.
Thank you Sarah Thanks, very much for the question I think it's it's actually a really important question because this issue of overall challenge affordability I think.
Posted one on a significant addition to our members and we're committed to ultimately driving the lowest cost.
The one of the most important levers is the ability to move to more value based care and as I shared in our my opening comments enhanced personal health care as an area that we've been focused and have made a significant commitment.
Tim is up 60% of our spend in value based care arrangements thinking about the alignment of consumer spending to care provider.
Alignment I think thats really the best opportunity for long term management of the trend issues.
Specifically to pharmacy, we recently provided you probably saw on our 2018 drug trend report that we have been successful at keeping drug trend relatively flat in focusing on total cost of care and again I think our best opportunity.
To rein in overall escalation in costs, if I think about a person health, which is managing the alignment of incentives that the care provider lever with the incentives around pharmacy and so that total costs are ultimately manage and we have seen that in specific areas like inflammatory disease, such as crowns and ulcerative colitis and rheumatoid arthritis. For example, where members have seen anywhere from 8% to 12% if not more savings per month, and average lower inpatient hospitalizations et cetera.
So that overall contributes our overall quality so in in terms of your broader question I think it's absolutely the right one that we should be asking and I think we should be looking for all of our value based care both from pharmacy, the integration of social as well as the integration of behavioral health and that's why the reasons are excited about bringing beacon into the fold for anthem that our best chance to manage settled trend is going to be aligned with managing those components in value based arrangements.
Thank you very much for the call for the question next next question. Please.
Your next question comes from the line of Matt Morris from BMO Capital markets. Please go ahead.
I just wanted to ask about the group commercial pricing environment and the context is as investors and analysts are looking at.
Your results.
Yes, the mix of metrics here with the somewhat elevated medical cost ratio offset by.
Other items in the results is is what in fact, we saw at.
Two of your peer companies that have reported so far and so maybe it's all just Medicaid but people are looking at that and trying to understand if theres more competitive pressure that we need to be concerned about.
Thanks for the question, Matt Let me, let me start and then I'm going ask Pete to give some additional commentary on sort of the marketplace dynamics.
But I think first to your specific question about trend as you saw we reiterated our 6% plus or minus 50 basis points trend. So our trend in commercial has been extremely consistent.
And we do not feel that theres that this issue in commercial it lived up to expectations in terms of the overall marketplace.
It's always been a competitive marketplace. The pricing has remained very rational in the markets and we have not seen that kind of scenario over the course of this area than last year, but I'm going to ask Pete maybe to give a little bit more dynamic.
Input about the market specifically, yes.
Thank you Gail and to be specific about about RMR and operating gain as we talked about in the prepared comments the onetime issue associated with risk adjustment that that we experienced and and 2018 versus versus this quarter. In 29 teams really the major difference as it relates to medical cost trend to Gail said it remains pretty steady we feel pretty good about where we are relative to that 6% and then more importantly, as as Gale noted that the marketplace remains very competitive but rational we're not seeing anything unusual occurring in the marketplace. We feel very good about our position as we've talked about on prior calls we're very focused on on being disciplined but also growing we're continuing to see that growth and our large group fully insured business. We've had nine out of 11 months of sequential net growth and we continue to see improvements in that regard so.
Overall, a competitive market, but rational nothing irregular at this point, so I guess in summary, very consistent with our expectations and nothing really has changed.
Next question please.
Your next question comes from the line of Ricky Goldwasser from Morgan Stanley . Please go ahead.
Yes, hi, good morning, and thank you for the comments on the BR. So just trying to dig a little bit deeper into that could you just help us quantify some of these moving parts.
You point to.
The Medicaid book of business.
Can you give us some more sense on what our specific states, where you are seeing the higher costs and how do you think is that going to progress in the second half of the year given that youve opt.
Guidance there.
Yes. Thank you Ricky this is John and.
No. Unfortunately, we really don't talk about state by state specific situations and Medicaid where in 23 states right now going on 24 by the end of the year and really review and discuss our Medicaid performance as a portfolio of assets in the portfolio of businesses.
With that being said there are few things that maybe I'll point to specifically that can help.
Help you with your modeling.
We continue to work with our state partners on a regular basis.
To get the rates that are appropriate for the risk in the acuity of the populations that we're serving.
Many states have gone through a fairly significant re verification effort ensuring that only those.
Americans, who are eligible to receive Medicaid benefits are actually receiving Medicaid benefits.
The when the rates were first said they were set on a slightly different.
Population and a mix of members than what we're serving today and so as I said, we continue to work with the states to ensure that we're getting appropriate adjustments associated with the mix of membership as it works through and there are several states that we actually have received.
But increases in our rates in the second half of the year and we expect that that will help improve the MSR and improve the profitability below the other Medicaid business in the second half of the year. So thank you for the question. Thank you next question. Please. Your next question comes from the line of Steven Valiquette from Barclays. Please go ahead.
Thanks, just on similar topic on the last one I know you don't want to talk about individual states, but again when thinking about Medicaid you mentioned popping up in a few states as far as the higher cost just curious to be able to comment on whether you are seeing.
The cost occurring and maybe in some of your newer Medicaid markets, where you so may be assessing where the cost trends could normalize within the membership and relative to your provider network or are you seeing maybe a more some of your older more mature Medicaid markets just curious if there's any.
Clear trend when thinking about it that way thanks.
Yeah, no. Thank you Steve for the question and and I do want to have a clarification.
We have not stated that we have seen an increase in medical costs. We have said, we have seen an increased and benefit expense ratio and that increased and benefit expense ratio is because the premium reimbursements that we're getting.
I have not fully compensated us for the risk that we're taking on an overall portfolio.
Back to the point that I made on Rickys question that.
As states are going to re verification. There is an incidence of the mix of the membership that we're serving is different than what the pricing and the in the rates would have been based on.
So theres clearly there is a mismatch mismatch between the risk of the members that we're serving today and the rates that we are receiving today and Felicia Norwood and her team are visiting with our state partners on a regular basis, if not a daily basis in some cases to ensure that the rates are appropriately reflect that and thats one of the unfortunate parts about the Medicaid businesses.
Is that.
The amount of the premium that you received in the risk that you are incurring do not always exactly aligned on a quarter over quarter basis.
We've seen that typically over the course of a year that there'll be normalize that rates will be adjusted appropriately, but when you're looking at any one specific quarter or any quarter over quarter comparison, it's always have to be skewed a bit because of the mismatch that I discussed.
So thank you for the question. Thank you next question. Please. Your next question comes from the line of Justin Lake from Wolfe Research. Please go ahead.
Okay. Thanks, I'll just see.
Im a large running here for a second.
My question is more.
Is that you are teaching minimal our was 90 basis points above consensus I was hoping you could tell us how the SLR looks versus your internal expectations and maybe split out the driver of both first the negative in the quarter and you raised the low end of the guidance by 30 Bips was that to reflect what you saw in the quarter or is your point like it that the back half of years of your higher.
Even despite these better Medicaid rates. Thanks, Thanks, Jess and I'll, let John continue with the the answers. Thanks, John Yes. Thank you.
Thank you Justin for the question.
In terms of.
The MLL R and how it compared to our internal expectations.
The the EMR was slightly higher than our internal expectations here for the first half of the year in the second quarter.
Which is why we are raising our guidance, which is why we have spike that out as a as a reason for the fact that our MSR as above the analyst consensus in total, but I think that all all really does a line.
In terms of the of the PPI a that you stated the PPA is one metric. It's obviously a metric that a lot of folks really do like to to focus on.
But it is only one metric I would say our reserves are very consistent and conservative the way that weve approached that we continue to have a margin in the.
Mid to high single digit range for adverse deviation.
But we are investing quite a bit of money and informatics and data and systems and thats actually providing us better information and better insights into our industry data and so.
Not only is that being utilized to help serve the members. It's also being utilized to help set reserves and I think we should see maybe a bit less volatility and reserves in the future associated with the fact that we have better information and.
And Weve, even discussed in the past some of the claims processing speeds have improved as well.
97% of our claims are submitted via email.
And 88% or auto adjudicated.
So the speed and accuracy is actually very very good.
And.
And so then as you look at that one metric associated with PPA you have to look at other metrics in conjunction with that and the fact that our days in claims payable has increased a bit.
Our cash flow as a percent of net income was 1.3 times for the quarter 1.1 times for the entire year to date.
And I think we're very comfortable that the reserves are stated appropriately and and quite honestly I go through all this just to let you know that it really not impacting the ammo our guidance per se. The m. Our guidance is based on the the Medicaid MLR being higher than expected, which really has as much to do with fee revenue that we're getting is not exactly matching the risks that we are taking.
Right here in the second quarter.
Thank you. Thank you next question please.
Your next question comes from the line of AJ Rice from Credit Suisse. Please go ahead.
Thanks, Hi, everybody.
Just if I could slip in a clarification Pete had mentioned the risk adjuster headwind this year versus last is that.
Anyway to quantify the year to year impact of that are the on the ml are the dollar change and then my bigger question was around your comments on Jennie O. You said that you're going to be towards the high end of your expectation is there any way to talk about where you're trending ahead of what you thought and.
Obviously, it's a nice win with BCBS Idaho.
Any background on that opportunity does that give you any learnings for next year selling season as you think about moving forward.
Okay quite a few questions there Ajay we'll try to take them sequentially. Let me have John address the risk adjuster questioned broadly and then they will take the others yeah, great. Thank you Gal. So yes, so jay on the risk adjuster and I just want to make sure that this has been characterized appropriately and we're we're asking and answering the proper question. So risk adjuster in 2018 in the second quarter, we had a very nice positive true up and that was predicated on our 2017 individually CA membership and as you recall that was before we had made the decision to reduce our footprint due to the instability and uncertainty of that marketplace and so we had approximately $1.6 million individually seeing members at 12 30 117, and then the true up we received in June was predicated on that block of business and then fast forward 12 months and we received a true up in June of 2019.
[noise] associated with our 2018 membership that true up was positive.
It was relatively small and it was extremely consistent with our expectations and so the headwind is not a negative true up the headwind is that the value of a true up in 18 was significant and the value of the positive true up in 19 was relatively small, but as I said.
In accordance with our with our guidance and our expectations right and again thats the comp.
Quarter over quarter I think is what John is trying to really point out there and overall as I said in the opening comments, we feel very very strongly about the performance of our commercial business, which performed extremely well in the quarter and as well as year to date.
In terms of Ingenio Rx.
Couple of things one first we're extremely pleased with the way the transition has gone as I shared again in my opening comments.
In terms of us raising our guidance when we originally gave our guidance I think what's important to recognize this was a very accelerated transition.
We felt confident about it but we also realized that we needed to get state approvals, both at the commercial and Medicaid level. So we didnt have exact clarity on when those would come in.
What we see now is that.
We converted several million members.
In the quarter and then again beginning in July several million more those have gone well. We have received most of the regulatory approvals on the Medicaid side and all of them on the commercial side and so now given our growing confidence in this conversion we feel much better about the high end of the range and that's really the driver for what we're seeing in terms of raising the guidance.
And again very strong execution by our by our pharmacy team. So overall, that's really the driver and we feel very confident about kind of where NGL Rx is delivering value, particularly the significantly improved unit costs in terms of Idaho, we're thrilled with the sale to Blue Cross Blue Cross of Idaho Alan.
Again, our focus as we shared has been on transitioning our current clients. So we are in the sales cycle.
We are pleased that Blue cross of Idaho was one of our first customers to come onboard and I said as I shared with you again I think it's a strong sign of the value that we're bringing to the marketplace and also.
The improved service model.
We do have a very strong pipeline going into 2021 as you realize many of these sales are very long tail, two or three years based on the contracts in the PBM and the large account business.
But we think a real big opportunity for us is the opportunity to bring back pharmacy into our integrated medical clients. That's an area that over the last several years that we have lost quite a bit of that integrated business and our value proposition is very strong. There. So we're optimistic about that but we see that going really more into latter half of 2000 into 21.
Thank you very much for the question next question. Please.
Your next question comes from the line of Lance Wilkes from Bernstein. Please go ahead.
Yes.
Just a quick clarification on.
On Medicaid and just trying to understand.
Understanding that as a re verification issue predominantly are you taking any actions to try to further impact medical costs beyond what you ordinarily would be doing just in recognition of that sort of issue and then my broader question is really.
Great Great win with Blue Cross of Idaho, as you're looking at the different services and partnerships, we have with the blues.
One of the areas that we should be thinking of is like the more immediate meaning 2021 sort of opportunities is a medicaid as a team or would it be PBM.
Great. Thank you very much for the question Lance I'm Gonna have Felicia address whats happening in our Medicaid business I think she can talk broadly about the initiative.
Thank you Lance and good morning.
As John said earlier that the Medicaid challenges that we're facing are really isolated to a handful of state 10, given the breadth and size of our portfolio and the ongoing work that we do on a daily basis with our states. We felt very confident about being able to manage through that in terms of our medical management capabilities, we really have industry, leading capabilities. Our operating platform is unmatched our core competencies are certainly widely recognized by our state partners as really recognized by the industry leading win rate that we Pat we've always had a focus on whole person health.
Particularly in our Medicaid business and the ability to be able to manage not just as you know the medical conditions in pharmacy conditions, but also those social barriers have been a driver for us. So we feel good about the capabilities, we have on the Medicaid side in terms of.
Managing our members effectively and I think as we work through these issues in a handful of states will continue to see improvements with respect to our overall Medicaid performance.
Great well, thanks, Felicia in terms of any the second part of your question Lance.
I would say almost to all of those we see opportunities across a very wide range of partnerships with different blue plans, but also outside of Blue plans care provider partners are also.
Areas that we have done.
A number of different things so on the.
Specific so clearly our Medicaid partnerships, we're very pleased with that we'll be bringing North Carolina alive in the fourth quarter hopefully as that goes live we've got additional partnerships there with our care more business as well to offer.
Care delivery services more broadly to that population.
As I think about Ingenio, we clearly see opportunities for LNG now to partner with other blue plans across either their entire population even subsets of that population Beacon does quite a bit of work with other blue Cross Blue Shield plans and we see that as an opportunity to further expand and aspire has also strong relationships as you can see we see a breadth of potential opportunities both inside of the Blue Cross system, but also.
With care provider partners and today, even just to give you. One quick example in the Medicaid space, we have eight partnerships fiber with.
Sister, Bluecross, Blueshield plans and Threea with care provider relationships.
On Medicare.
Because of our strength in the dual eligible population, we're going to be expanding our partnership in Louisiana.
To dual Eligibles beginning in January as well, so again, a pretty broad based opportunity for us and so we're not just focused on growing one specific business or line, but really kind of meeting the needs of each of those plans and where they have potential gaps and potentially how we can put together a very unique situations. The last thing I would add is as you saw probably recently some of the announcements around our digital capabilities. We also believe that those will be very strong offerings for us to work with other blue plans around consumer engagement and care provider.
Integration and.
Those things, we think will resonate very strongly in the market and actually support the other businesses that I shared with you at the beginning so thanks. Thank you very much for the question and our next question. Please.
Your next question comes from the line of Kevin Fischbeck from Bank of America Merrill Lynch. Please go ahead.
Great maybe one clarification before I ask the question.
Just to make sure the Ingenio number you're talking about is more about kind of.
Pulling forward the aggregate savings that you're not changing your kind of two year aggregate savings number just want to make sure I have that right, but my real question is really about.
About hamler Unfortunately.
Just want to see what you're saying that the us usually on the Medicaid side would love to hear some comments about on the commercial business and on the Medicare business. How the MLL R is trending there is going to make sure. It's in line because you are showing pretty good growth in both of those businesses. Thanks.
Let me answer your first question, Yes, you are right. Your assessment on Ingenio is in line and then John ill ask two to respond to the MSR question. Yes. Thank you Kevin for the for the question and is I think Peter referenced earlier.
The MSR and commercial is actually very much aligned with what our expectations have been.
As we review and evaluate the cost trends, we have reaffirmed today, the 6% plus or minus 50 basis point cost trend in commercial.
That is.
Been something that's been consistent for the entire year and then we continue to reaffirm that guidance.
Medicare has been certainly consistent with our expectations as well.
We're really quite.
Quite pleased with our growth in Medicare, having a 16% growth rate already through through six months and expect to continue to improve that the group retiree business within Medicare, which you didnt ask about specifically, but just for clarity purposes.
Yes that business typically dilutive when its first sold and it takes a while to get the care management programs get the risk scores get the the information accumulated so that we can get appropriate reimbursement based on risk adjusters and various other aspects like that but it's actually performing in line with our expectations.
We did expect it to be dilutive in the first half of the year and it was.
But it is very much in line with expectations. So I would say, we feel very comfortable with the performance and the growth both in our commercial business as well as our Medicare business and that the MSR pressures that we're seeing as a consolidated company really relate to the.
The lack of appropriate premium and reimbursement rates on the Medicaid businesses.
Thank you next question please.
Your next question comes from the line of Ralph Giacobbe from Citi. Please go ahead.
Thanks, Good morning.
So you mentioned a couple of times now that the Medicaid rates are sufficient I guess and a handful of states.
Obviously, we have some visibility on kind of the year ahead, obviously recently got the Iowa rate. So are you comfortable looking ahead that you don't get the better rates or are we at a point of potentially exiting states. Thanks.
No. Thank you for the question Ralph and clearly that is a very appropriate question something that we need to be looking at and evaluating on a state by state basis.
But however, we are very comfortable with the future state aspect of Medicaid Medicaid that does have the $80 billion pipeline that we've been talking about for a while over the next five years and we do believe that we can.
Garner our fair share of that.
The the acuity of that pipeline is skewed more to the the higher premium type businesses, whether it's the age blind disabled long term support services or others.
And we will be very disciplined in terms of how we approach that how we price for that to ensure that we are being appropriately reimbursed.
But no we are not at the point now that we're talking about exiting states.
We want to be a partner with the state we believe the states like us as a partner we have provided significant amount of value and savings to the states overtime.
And.
It all boils down to is getting the the reimbursement correct. So we feel very good about the the both the short term and the long term trajectory of the Medicaid business.
Thank you next question. Please your next question comes from the line of Steve personnel from Goldman Sachs. Please go ahead.
Good morning, guys. Unfortunately, I also wanted to just ask about EMR net outflow just this one thing.
Sort of ticked away the claims payable table. It suggests there's about 40 million of unfavorable prior year development in the quarter and those favorable about 160 last year, so sort of a 200 million swing that in isolation, but have pressured NBR by about 85 Fcr on year, but then in the release you Sorta note that claims reserves established at year end developed moderately better. So so first just trying to understand what what was actually built into guidance on that point and also where the negative development kind of emanated from by business. Finally on this whole thing just hoping you might comment on how ml are trended year on year, and commercial and Medicare sort of outside of Medicaid.
Sure Steve Thank you very much in the.
The PJ.
Metric that you stated it was consistent with how I answered that Justin legs question, a few minutes ago.
Associated with the.
You know that our reserves are being are very consistent.
And that we do have explicit conservatism built into those.
Yes.
The.
The better information, we have the better insights is certainly provided us.
Clarity in terms of our loss reserves.
And it's just one metric.
Days in claims payable was increased cash flow has been very positive 1.3 times net income.
And so we feel very good about the about the situation.
One other thing just to really clarify when you're looking at the prior year number four cents based on the 12 30 117 run out and the 12 30 117 run out had $1.6 million individually CA members in it and we had announced a few months earlier that we're going to exit 65% of the footprint associated with the individually CA and so we were very conservative in the fourth quarter of 2017 associated with our AR reserve picks on the CA individually business and that turned out to be redundant, which you are seeing in the roll forward footnote from a year ago.
So all in we actually feel very comfortable with.
With the business there is no new Theres no surprises here, there's no new news Medicaid has been performing under our expectations commercial and Medicare have both been performing consistent with our expectations and we actually feel very good about the.
The revenue adjustments in the revenue enhancements that were expecting in Medicaid in the second half of the year, and then where will continue on with a strong performance in the commercial and Medicare.
Yes, the only thing I would like to add to John's comment.
Is Medicaid is performing within our range, although at the low end of the range. So that that is a little bit more clarity on that and so overall, we still believe that the Medicaid is very good business, but again you see this in the Medicaid business, where you're trying to line the mix of the business against the.
Payments that you received and Thats why we often see on a payment out of period payments in Medicaid next question. Please.
Your next question comes from the line of Gary Taylor from Jpmorgan. Please go ahead.
Hi.
Just one clarification for Gail and a question for John .
Gail just wondering on engine you as we think about it you mentioned the strong.
2021 pipeline and a big.
Priority is moving anthems on book.
To Ingenio by January of 2020, So I guess, we really hadn't thought much about the opportunity for.
Large external client wins for 2000, Twentys such as Idaho. So this is sort of an anomaly or is it really more opportunity there than perhaps weve considered.
Thanks for the question Gary first we're really pleased with with the win.
So I don't know that I would call an anomaly we're out in the marketplace. This is more just about the timing of contract renewals and I think our.
Quite frankly, we then we have not been aggressively selling for 120, just given the amount of conversion and we wanted to make sure that went really well for our clients, but we are clearly out there talking to clients and sharing our value proposition.
So I wouldn't call it an anomaly, but I would also say that we really do believe that it will be more in 21 and beyond just because of the timing and it is hard for many clients to move off of the cycle that they currently have and that would be more in line with expectations, but we would like to see certainly the integration of our medical and pharmacy story is really strong and we think that there is opportunities to what to do more in 20. Thank you.
And the second part of the question again please.
When you cite a few of the different factors impacting the and the lower year over year, including Medicaid the three r.'s et cetera.
One thing you don't talk about is the.
The possibility of a pretty significant ramp in the ESI contract costs that that Cigna has talked about in the closing years here. So is the reason that's not pressuring and while our year over year is just that that was well known by unit Vance and would have been reflected in pricing.
No. Thank you Greg Gary that's actually excellent question and as we have stated we are leaving we're being overcharged by an excess of $3 billion by.
By express scripts based on our contractual provisions.
But that was known and it was baked into our numbers.
The trend that we are experienced for pharmacy, while it's higher than we would like it's consistent with what we planned for at the beginning of the year.
Thank you. Thank you next question please.
Your next question comes from the line of Peter Costa from Wells Fargo. Please go ahead.
Back to the Blue Cross at Idaho question.
Congratulations on that.
The cost of Idaho, I believe you Cvs is their PBM previously you CBS for Antonio is the backend how much easier does that make it to when that client because of Cvs because most of the other blue Cross Blue Shield plans, either express or prime how much harder will it be for you to win business away from express and prime rather than from CBS customer, yes. The thanks for the question I think overall.
The opportunity to win this is really because of the strong value proposition that we bring to the marketplace. So I really focus on the integration built a brand New service Center I think we've got state of the our capabilities that are far superior to many in the space right now.
And honestly, we have the experience working as a blue plan ourselves and understand how to serve that market place very very well and this gives us an opportunity as part of our whole person health to integrate those type of concepts in terms of our analytics, our digital platforms. The integrated teams that we put in our Las Vegas Center.
So we're starting really with that kind of a blank sheet of paper, which makes this the next generation PBM and I guess I would focus more on that because I think that's the value proposition that we bring to the marketplace versus targeting any individual competitor in China beat them. I mean, we're trying to create a brand new value proposition.
Thank you very much next question please.
Your next question comes from the line of Charles Rhyee from Cowen. Please go ahead.
Yes, thanks for taking the question.
Had a question regarding the Senate Finance Committee drug pricing Bill that was introduced yesterday.
And in one of the provision, particularly in it.
In a reverse the Medicaid eliminating spread pricing for Pvms and and I believe the Senate help committee is also looking to eliminate that perhaps in the commercial market.
Can you talk about sort of the the prevalence at this point of spread pricing in PBM contracting.
Maybe in general.
Particularly in general.
And our estimates, whereas maybe it's less than 2%, but can you talk about sort of how you see that impacting.
Your business here and then obviously those are redesigning the part D program or proposed redesign part D program shifting more cost bring the catastrophic to the plan. How do you see that may be impacting how premiums are set or any impact too.
To part D plans sponsors. Thanks, Thanks, Charles let it quite a few questions there and I think first and foremost where we're all aligned is on the affordability of pharmacy in that we need to.
Ensure that we have a strong we have strong programs in place quite frankly, and total cost total net cost, meaning total cost of premium as well as what consumers pay ultimately in terms of you mentioned a number of things that are happening right now and there are a number of things going on.
In the house in the Senate around pricing, whether its spread pricing or some of the other issues that you brought up on part D. I think first and foremost we're in the midst of.
Providing comments on that and actively engaged in that and I think given that in these have been recently released in a lot of this depends on the details I think it's premature for us to comment publicly on where we think these are going to end up.
Again, we're committed to ensuring that we get to the best lowest net cost and we clearly align.
With sort of that our states since you asked about Medicaid where our states are we clearly aligned with the roles of our states and same thing with the federal government on on Medicare So.
Overall.
No I think theres going to be a lot more discussion debate and input where you need to get to a lot more of the details on specifically how these programs are going to work, but at this stage I think the ultimate judge needs to be the lowest net cost both from cost to consumers, but also premium costs ultimately.
So to all parties involved so I cant really provide much more guidance on that because at this stage I think that there is still lot more details around these proposals and how they would work.
Next question please.
Your next question comes from the line of Dave Windley from Jefferies. Please go ahead.
Hi, Good morning, it's Dave Styblo in for Dave Windley.
Just had a question about the Medicaid I think management has done a great job of explaining.
How is isolated to a handful of states curious about the risks that this could bleed into other states. If there might be a second wave that could come at some point and how the rate discussions are evolving to stop beyond the shortlist of states that you guys.
Have talked about and then as a follow up what.
That would management care to comment about the EPS cadence in the back half of the year. Since there are so many moving parts with ingenio coming on in some of the some of the earlier wins that were dilutive in the first half becoming more more breakeven or positive in the second half.
I think John ill answer the second part of your question and then I'll ask Felicia to comment a little bit about just sort of the environment and Medicaid, but I do.
Commend everyone forgetting multiple questions and quite a few so there's quite a few there and we'll try to address all of them. John Please where a lot of a lot of multipart one questions.
But no. Thank you for that for the question the the cadence of our EPS seasonality because our seasonality certainly has changed and it's changed over the years.
A few years ago to James one the elimination of the reinsurance program occurred due to the CA the changed again, when we exited the CA and now it's changing again with the launch of Ingenio and that will change next year due to a full year impact of in June so.
So thank you for clarifying are allowing me to clarify that the that the earning seasonality has and will continue to change on a quarter over quarter basis. In 2019. There are a couple of other things very specifically that are driving our.
Year over year and quarter over quarter seasonality.
I talked about the the commercial risk adjustment for the CA was fairly significant in the second quarter of 2018, and it was a positive adjustment in the second quarter 2019, but relatively small and that clearly is impacting our year over year seasonality.
Our mix of business continues to change and I'm not sure that everyone is truly reflected just how much our mix of business has changed over the past. Several years. You go back 10 years ago. We are a commercial company, we had over 70% of our revenues was generated from our commercial business area and look at the second quarter results today over 60% of our revenue was from our government business Division and.
The government business Division has a bit flatter seasonality typically than commercial does.
And so clearly that's continuing to change it and.
And I've talked about some of the out of period adjustments on Medicaid and the fact that they don't always aligned as we look at the second half of 2019.
We do see some revenue enhancements and Medicaid given some of the recent rate actions and some of the other.
Common conversations we've had with our state partners.
But then there's also things like when we went live with.
With our partnership with Blue Cross and Blue Shield of Minnesota for Medicaid in the fourth quarter of last year, we incurred significant administrative expense to be prepared to have a very clean and flawless. One 119 transition to that membership and that transition went relatively well and and and and now we expect the second half of 19 for it to be accretive working its way towards our target margin range for a new line of business or a new state and so when you're looking at the second half of 2019, you have the cost of implementation and you look at the second half of or have 18, the cost of implementation in the second half of 2019, you have the accretion and the same things going on with the group retiree business.
My reference that that was dilutive at the beginning.
And it is dilutive, but it's it's improving throughout the year, so a lot of moving parts.
But we're very comfortable with the overall aspect of our numbers great. Maybe three should give a little commentary about the state sure and thanks for the question. Dave is we said that was that there was elevated cost pressures and a handful of states, but the discipline around working with states with respect to rates happens in all of our states. So our teams are engaged on almost a daily basis and working with our states around understanding what's happening with the emerging experience through our Medicaid membership.
And the mix issues that we discussed before so that the other thing you should understand too with all the state rating period, so different so they're not on a calendar year. They happen at different times of the year. In addition to that there are also opportunities from meet your rate adjustments. So the rate process in states, it's very complex dynamic and very iterative in terms of the work that we have to do on a daily basis. So while the pressures are certainly isolated in a handful of states that discipline around the work that we do with our states on a day to day basis happens consistently across all 22 or so of our markets. Thank you next question. Please.
Your next question comes from the line of Josh Raskin from Nephron Research. Please go ahead.
Great. Thanks, I. Appreciate you guys fit me and now I'll be brief I guess just on Idaho, If you could just walk us through the process of that.
Was there a formal RFP and if so what.
When did that happen and maybe just let us know what resonated with them what was what were the big takeaways that they weren't getting from their previous.
PBM administrator that that they're looking for with you guys, yes, well. Thanks. Thanks, Josh obviously, we don't get into detail about specific customer RFP situations and and that kind of.
Of of detail its confidential and it's obviously competitive in nature, but I guess, what I would say is.
Our new platform our transparent approach.
The focus that we put on digital integration and consumer services, I think all resonated and our ability to really understand quite frankly, how that business is managed and try to help them.
Improve their overall affordability and cost would be to the key winters and we have a very compelling value proposition overall, we believe we have.
Best in class.
Rates and contracting and that combined with really solid integration I think are really kind of.
Were part of the reason for the wins. So thanks for the question next question. Please.
Your next question comes from the line of Scott Fidel from Stephens. Please go ahead.
Thanks for all the demand.
Actually just wanted to shift back over to group and I and I was hoping maybe to get some numbers just around the membership pipeline opportunity for 2020, maybe just first if you could size in terms of the number of lives.
The contracts that you've already secured that you mentioned and then overall how large the.
Membership opportunity is on the group that M&A pipeline for 2020, Thats, great ill ask Pete to comment on that yes sure Scott. Thanks for the question, Yes, we feel we feel good about the group and my business as you know last year, we started off at around 20000 members, we've grown that into the year at 150000 approaching around 160000 members as we've talked about.
We're going to end the year. This year approaching 200000, we still feel good about that a lot of our opportunities we've talked about before.
Comes from our conversion opportunities, which means that we have a captive pipeline of self funded clients that see the value proposition here and we continue to see that escalating and our value proposition resonating and we feel good about the future year growth of the group retiree business.
Thank you next question please.
Your next question comes from the line of Michael Newshel from Evercore. Please go ahead.
Thanks can you comment on some of the recent policy proposals related to negotiated commercial rates. So we have the Trump executive order on transparency and also surprise billing bills that would pay on a network of local median rate do you think either of these could have any effect on relative cost advantage does it does it help competitors with higher unit costs at all.
So a couple of different things going on in there let me first talk about spreads billing.
We very much support that consumers do not have surprised and part of our contracting strategy is to bring in all of those care providers into our networks.
So when an individual consumer goes to somebody in network. They should not have to deal with something that's outside of the network and that's something that we have long advocated with our care providers and so we're we're obviously very supportive of that we want to ensure that there are the appropriate protections for consumers and that they balance the incentives for providers, but we don't replace that obviously with costly bureaucratic processes. So that would be one thing on surprise billing, but overall.
We're very supportive of helping consumers have defined costs and really understand that.
In terms of the second one around.
Yeah transparency of costs again, we've been a long supporter of enabling consumers to really understand what costs are.
We think it's a little it's less valuable to have individual unit costs by procedure and that's one of the reasons are engage platform allows people to really truly understand how much something costs against their benefit plan and what their true out of pocket costs would become great example of that.
Think about a member who needs and MRI. The average cost may be $1200, which is great to know if you look at the individual components.
But actually it may only cost $50 out of pocket, because they've already met their deductible and Thats way more helpful. And then they can also compare different facilities and look at not just cost but also quality.
As I think about though.
The price transparency issues. The other issue in terms of competitiveness for US is our move to value based care I think really changes.
Sort of that intense focus on just unit costs.
So I believe our value based our movement to value based care will drive cost down to them.
A much more reasonable level and Thats, where our strategy is and so I don't see just the unit cost issue being the dominant issue and I think that we have to think about transparency around total cost of care again for the entire procedure and how it affects consumers directly and that they can make decisions based on what they are paying out of pocket.
Thank you very much for the question next next question. Please.
Your next question comes from the line of Frank Morgan from RBC Capital. Please go ahead.
Good morning, a lot of my questions the hazard, but maybe go back to Beacon acquisition, just the timing there on that closing of that acquisition the possibility of additional deals.
Cross sale opportunities and would that be affected by this transition to express scripts or would that be totally unrelated. Thanks.
In terms of Beacon, what we've shared is that we are.
Planning are working towards a fourth quarter close and were working through obviously all of the approvals that are required there.
In terms of your second question it really doesn't have any relationship to that we.
Completely separate issues, what does it mean for us in the future. We're excited about beacon because again it gives us part of our whole person care strategy.
Our our movement towards very much focused on value based care, which I just spoke about.
Areas that we're focused on social issues and now the behavioral issues. Those three combined I think allow us to much more effectively manage total cost of care. So on so we're excited about beacon gives us a scaled solution and a growing area.
And a very important area for us.
It focuses on the specialized populations in Medicaid. So we have seen them in many of our markets and feel that.
This will be a very very strong offering for us. So so again. Thank you for the question. The next question. Please.
Your final question today comes from the line of Steve Willoughby from Cleveland Research. Please go ahead.
Hi, Good morning, this is actually Rob Cottrell on for Steve.
Just wanted to stay on the individual Medicare for 2020 now that bids have been submitted just wondering if you can provide any commentary on how luck as well as what if any changes you expect in the Medicare business side now that you have the ingenio cost position. Thanks.
Great ill escalation early to answer please.
So thank you very much Ralph for that question. If we think about 2020, we take a real balanced approach in structuring our breadth, we evaluate both our benefit designs as well as the competitive landscape.
We certainly appreciate the increased flexibility that's come from our federal partners around the 2019 benefit offerings, where we made some changes with respect to social determinants of health benefits and frankly, I think we were leaders out there in terms of that space, we will be making some modest improvements with respect to those offerings. Because we believe that they certainly can be differentiator, it's with respect to our products in the various markets.
Going forward the story Isnt changed very much weve been delivering very strong growth in the individual MH space and our certainly our approach is to make sure that we have competitive benefit designs out there. While also making sure that we are maintaining our pricing discipline with respect to this business as we go forward. So thank you. Thank you Felicia.
And thank you to everyone for allowing our call to go a little longer than normal we felt it was important to respond to everyone's questions.
We appreciate your questions for our team.
Our performance in the first half of this year gives us confidence in our ability to capitalize on future growth prospects and deliver better outcomes and better value on behalf of our members and shareholders.
Our success is made possible by EUR 60000 associates, who are committed to carrying out anthems mission vision and values each and every day.
Again, thank you for your interest and I look forward to speaking with you in the future.
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