ANTM
#Thanks, <UNK>
In the Government Business, we added an additional 109,000 members during the quarter, bringing the total 2016 enrollment increase to 614,000 members, representing 6.9% versus year-end 2015. The enrollment growth and pricing increases translate into 2016 Government Business operating revenue of $45.5 billion, a growth of 11.4% versus 2015. Operating margins for the Government Business was 3.9% in 2016, a decline of 90 basis points compared to the prior year, driven by lower gross margins in the Medicaid business
As we communicated previously, we expected Medicaid margins to compress from 2015 levels due to rate actions impacting 2016. In addition, we experienced higher-than-expected claims across Medicaid business in the current year, including materially higher-than-expected cost in the recently implemented Iowa contract
Operating margins in the fourth quarter of 4.5% were higher than expected due to the retroactive change in the minimum MLR calculation under California's Medicaid expansion business we discussed earlier
Importantly, core medical cost trends during the quarter were relatively in line with our most recent expectations
The pipeline of opportunity for our Medicaid business remains substantial, with approximately three-fourths of the pipeline in new and specialized services, and the remainder in traditional Medicaid services
We continue to believe our Medicaid asset and geographic footprint is very well positioned to capitalize on these growth opportunities over the next five years, as we continuously demonstrate that we are part of the solution to addressing the challenges of rising healthcare cost for our state partners' constituents while improving quality
Within Medicare, we are pleased with the progress the team continues to make, as our 2016 margins reflected improvement versus 2015. The improvement is a direct result of investments made in our Medicare business over the past three years
We have now positioned our portfolio to grow MA in 2017, which we will discuss in more detail when we turn to our 2017 outlook
Switching to our Commercial business, our enrollment came in better than expected, growing by over 700,000 members during 2016 to 30.4 million members, representing growth of 2.4%
This growth translated into better-than-expected operating revenue of $38.7 billion during the year, an increase of $1.1 billion, or 3%, compared to 2015. Our 2016 operating margin of 8.3% compared to 7.6% in 2015, an improvement of 70 basis points
Commercial operating margins during the year reflected a lower SG&A ratio due to lower administrative cost resulting from expense efficiency initiatives, as well as fixed cost leveraging on a growing membership base
In addition, operating margins benefited from membership growth and our self-funded product offerings, which carry a higher-than-average operating margin
These increases were offset by operating margin losses in our individual ACA-compliant business, driven by higher-than-expected medical cost experience, as we have discussed previously
Within our ACA-compliant plans, our performance during the fourth quarter was generally in line with previous expectations
We continue to experience higher-than-expected costs from members with chronic conditions
Next, I'd like to discuss the balance sheet
Consistent with our past practice, we have included a roll forward of our medical claims payable balance in this morning's press release
For the full-year 2016, we experienced favorable prior-year reserve development of $850 million, which was moderately better than our expectations
Our reserves continue to include a provision for adverse deviation in the mid to high-single digits, and we believe our reserve balances remain consistent and strong as of December 31, 2016. Our days in claims payable was 41.3 days as of the end of the year, an increase of 0.7 days from the 40.6 days we reported last quarter
Our debt to cap ratio was 38.5% as of December 31, lower by 20 basis points from the 38.7% at the end of the third quarter, which reflects the impact of an increase in shareholders' equity as we did not repurchase any stocks during the quarter
We ended the fourth quarter with approximately $1.4 billion of cash and investments at the parent company, which was impacted by the timing of changes in intercompany funding arrangements, and the settlement of intercompany receivables
Adjusted for the timing impact of these changes, cash and investments at the parent company would have totaled approximately $3.3 billion, as of December 31, 2016. Our investment portfolio was in unrealized gain position of approximately $568 million as of the end of the quarter
For the 3Rs, we continue to book reinsurance as appropriate and we continue to reflect a net receivable position for risk adjustors
As we have consistently done since 2014, we have continued our conservative posture of recording a 100% valuation allowance against any unpaid receivables for the 2014, 2015, and 2016 benefit years for risk corridors
Our reported earnings have never benefited from the amounts we are due under the U.S
corridor program
Now, moving on to cash flow
For the full-year 2016, we reported operating cash flow of approximately $3.2 billion, or 1.3 times net income, which was stronger than expected and reflects the quality of our earnings
Cash flow in the quarter totaled $275 million
As a reminder, our third quarter operating cash flow included the favorable timing of an extra CMS payment, which had an offsetting impact in our fourth quarter operating cash flow
We also used $171 million during the quarter for our cash dividend
With that, I will turn the call back over to <UNK> to discuss our 2017 outlook, and provide some incremental commentary on earnings expectations beyond 2017. <UNK>?
Yeah, thank you, <UNK>
In terms of the high-single digit, low-double digit, that was on an EPS basis, so that would include a little bit of capital deployment associated with that on a long-term basis
Associated with the second part of your question, the Medicare, we've done extremely well over the past few years trying to get that platform fixed and get it corrected
And we're very close to target margins in that block of business right now, albeit at a lower membership level than we would like to have on a long-term basis
We think that there is some significant opportunities for growing the top-line and maintaining those target margins
On the Medicaid, it's a mixed bag
The Medicaid expansion, we've done extraordinarily well, and we've actually been earning above target margins
And that's one of the headwinds we have going into 2017, is the pricing associated with the Medicaid expansion book of business coming back down into target margin levels
And then on the Commercial, we think there's a lot of opportunities associated with wallet share, doing a better job of penetrating our large group ASO block of business, as well as trying to retain and maintain our ACA-compliant and non-ACA compliant Small Group books of business
So it's not a simple question, but we think we're very well positioned for growth, but we're doing pretty well right now
Yeah, sure, thank you, <UNK>
And then, <UNK>, on the other question on the HIF holiday, as we had indicated in our prepared comments, that makes many of our metrics non-comparable on a reported basis year over year
I would look at it this way, in 2016, the amount of health insurer fee that Anthem is going to be required to pay, and is expensed, is approximately $1.2 billion
And we've had a very cognizant approach to try to ensure that our pricing associated with that maintained a constant EPS number
So we're pricing for the fee, the tax gross-up, and the non-deductibility of that again and again, so you can sort of then calculate the impacts
Once you go through that, you'll see that the MLR ratio, year over year, it is going up nominally, really not much at all
The single biggest driver by far is the fee
The G&A ratio is coming down a bit, but the single biggest driver of it coming down – the magnitude's coming down, is the fee
And then you also have to realize that in the competitive environment that we work in, occasionally there can be some fungibility associated with the pricing and how much it's fee versus other things
As well as that in the Medicare Advantage area that we've taken the waiver of the fee and we've baked it into product design and benefits to the customer so that the members actually enjoy that
So a lot of moving parts, but the vast majority of our reported movement is the fee
Yeah, <UNK>, thank you for the inquiry
In terms of – I'll answer the second part first
The renewal was due on July 1, and that's when we would expect to obtain actuarially justified rates associated with Iowa
We are still negotiating with the State of Iowa in terms of the rates
So it's premature to provide a specific point estimate or data element on that, other than to say that we're requesting actuarially justified rates
In terms of 2016, as we had stated, I think in the second quarter call that the expense – the medical loss ratio is a good 20 percentage points higher than we expected
It did come down a bit over the rest of the year, in some of our medical management initiatives and some of our other cost of care initiatives went into place, but it still ended up at a loss in the 10 to 15 percentage points higher than we would have expected, based on that block of business
So <UNK>, let me answer your question on enrollment, and then I know <UNK> has some commentary on the second part of your question
In terms of the enrollment, even though open enrollment ended last night, that only provides us one portion of the equation, and that's the applications, and we monitor that very closely
Applications are a little bit stronger, a little bit better than we expected
Not dramatically, but a little bit stronger
And as we look at the demographics associated with those applications, whether it's age and income distribution, subsidy eligibility, metal levels, various things like that, we're very comfortable with the overall amount of applications as compared to what we planned for
What we do not know and what no one knows at this point is how the renewals work and what percent of renewals that you'll retain versus who jumps to another plan versus who goes somewhere else
And so that's really premature to give an exact membership number because it's really unknown
But I will say the applications were a little bit stronger than we had anticipated
Yeah, sure, thank you, <UNK>
The California Medicaid retroactive adjustment – the medical loss ratio calculation, just for a little bit of clarifications, had to do with how taxes are treated and getting the definition within the California Medicaid arena to more closely align with the definition that already existed as part of the ACA MLR rebate calculation
In terms of – that was the primary driver of us going from $10.80 to $11 for 2016. We were already in an MLR rebate position in California when this occurred
And so what had happened was once we re-performed the calculation under the corrected rules, under the corrected definition, it allowed us to reduce the amount of liability we had on the books associated with the MLR rebate
So there is no offset or – it's just a – we perform the calculation, we'll settle the MLR rebate with the state in 2017, as was previously prescribed and it allowed us to be the primary driver of adding $0.20 per share to the shareholders here at the end of 2016.
Yeah, thank you, <UNK>
And A
, your specific question on trend, so just to clarify, trend for 2016 came in relatively in line with our expectations
Felt very, very good about that, maybe closer to the low-end of the range that we provided at the beginning of 2016. And then, as we look into 2017 in general, trend is relatively stable year over year, except for the one item that you pointed out, and that was the Hepatitis C drug spend
So that has nothing to do with Express Scripts
In 2015, we changed the coverage options and allowed a broader coverage of people that qualified for Hep C treatment
We proactively went out at that point in time and did some rebate contracting and various other things that really mitigated the significant increase that we saw in 2016. The increases would have been even greater without the proactive steps we took
Now, we believe that the cost structure associated with that, the utilization associated with that is going to stay flat from 2016 to 2017. It's just that by staying flat from 2016 to 2017, it means we did not have the increase that we saw from 2015 to 2016, so it's impacting our overall trend calculations
So at the end of the day, trend is really stable year over year
We just have the mathematical dynamic of what's going on with Hepatitis C
Yeah, hey, <UNK>
In terms of the individual ACA compliant, just to give you a frame of reference, it's about 80%
Just a tiny bit over 80% is ACA compliant in our plan, which means that approaching 20% is non-compliant
So yeah
And then in terms of the – in terms of the – what was the question? Could you repeat the question on the PBM?
Yeah, no, thank you
Yeah, so the RFP is not yet out, although it's imminent
And as we have stated previously, we expect to go through and then be very thoughtful in our approach, and by the fourth quarter of 2017, provide more clarity to all of you associated with our future pharmacy strategy
At that point in time, we would expect to provide some quantification and clarification associated with what the economics are, which could be as a 2020 type upside at that point in time
How much of that is passed back through the customer and provides affordability aspects, versus how much is retained by the shareholders
Yeah, sure, <UNK>, thank you
So in terms of the $14, we've talked about some of the headwinds that we're facing on the third quarter call, and those headwinds are still very real, and we continue to work through them
Commercial insured mix was a headwind
The most significant of which was the ACA exchanges, the fact that there was supposed to be 26 million people enrolled in the exchanges by 2018, and we're at far, far short of half of that from a basis within the country, and what the impact is on us
But clearly, we're keeping our foot on the gas
We're trying to do everything possible in order to bridge the gap
But we wanted to ensure that everyone realized, back 90 days ago, that these headwinds were significant and we may not be able to completely overcome them
But we've got a lot of things going on that are going very, very, very well
Medicaid is ahead
We talked about Medicare, given the great growth we have with that
And all of this is without the PBM having any real upside in the $3 billion we talked about
So, we have not declared specifics on 2018 yet
Little premature to do that, but the headwinds are still very real
But we are working very hard to overcome as many of them as we possibly can
And then on your trend question, just say that we really don't go into specific trend information associated with each type of procedure, each type of process
But, as I said, the overall trend is relatively consistent year over year, except for the Hep C movement, in terms of how that's impacting it
So you can – now you can assume that that trend is normally unit price driven, that's the most significant driver of it on a year-over-year basis
Our utilization, we track that very closely, that remains pretty much in line with our expectations
In our medical management, our provider collaboration, those various other things have done a really nice job of keeping the utilization patterns fairly constant and fairly low movement year over year
So it's predominantly price
Well, how about if I say we expect it to be this week?
It's with anything else, yeah, we certainly do expect it to be imminent and if it came out either today or tomorrow, neither of those would be a surprise
But, I mean, as you know with all those things, the devil is always in the details
I mean, we really need to evaluate it, need to understand how it impacts various aspects of our business and various aspects of our membership
We've got a – we're cautiously optimistic
Like I said before, our Medicaid – or, I'm sorry, our Medicare asset is a reconstructed asset, really poised for growth
And we feel very, very good about where we're going to be as a company in the Medicare and Medicare Advantage area specifically, over the next several years
So, tomorrow is just one piece of the puzzle
But until we actually see the details, it's a little premature to declare anything
And <UNK>, just to give you maybe a little more specificity associated with your question, on the back of <UNK>'s response
The fourth quarter SG&A ratio is a little bit higher than what we had initially stated
But when you take a step back and look at the entire year, it's still about half of the savings or half of the decrease from the initial SG&A guidance back at the beginning of 2016 is non-recurring, and maybe half is operational efficiencies along with fixed cost leveraging
So even though we did increase the amount of compensation expense here in the fourth quarter, we're still below target on that
And so it still is a headwind as we get into 2017. Associated with the operational efficiencies, I mean, there has been a lot of very successful projects that have been done here over the past few years
Our higher accuracy of auto adjudication rates of claims continue to go up year over year
Our claims cycle time decreased
Those are things that actually improve the accuracy of our claims payment process, and we do it in a more cost effective and cost efficient manner, just as two examples of things where part of the savings in 2016 are recurring, and will be part of our run rate for 2017. So it's a bit of a mixed bag, but as <UNK> said, we're very proud of how we finished 2016, and think we're heading into 2017 with some nice momentum
We've been in a net receivable position consistently for a while
We were maybe a slight payer back in 2014, but we've been in a net receiver position most of the time since then
So hopefully that clarifies it
It's not one significant obvious item
There is many, many things that are part of the effective tax rate
You really have to look at the states, and where companies make money, and what is the state tax situation – is it a premium tax state? Is it an income tax state? What is the income tax? Is it a franchise tax state? So all those things are clearly part of the variation
The investment portfolio, what percent of an investment portfolio is in tax exempt versus taxable yields? And how does that impact it? I mean, there is any fair share of permanent tax differences that occur
We're pretty comfortable with a lot of the tax planning strategies we've made
We all do start with the 35% rate on a pre-ACA, non-HIF type basis
And I'm not positive I know all of the differences between our rate and everybody else's, other than to say that we see this as a huge focus item, that every time that we can do a tax planning strategy, that just ignores the benefit to the shareholders
And so we put a lot of time and effort and focus on taxes behind the scenes that nobody really sees, and I think our effective tax rate helps confirm that
