ANTM
#Thank you, Doug, and good morning
We're pleased to announce strong second quarter 2017 GAAP earnings per share of $3.16 and adjusted earnings per share of $3.37 with both membership and revenue tracking well
Our second quarter financial results show that we are continuing to carry forward the strong momentum we built coming into the year and during the first quarter
Our membership growth coupled with the strong quality of earnings so far in 2017 gives us confidence that the value proposition we bring to the marketplace is resonating well
Within membership, both fully insured and self-funded enrollment continue to track well versus our expectation, as we ended the quarter with nearly 40.4 million members
In the first six months of 2017, our membership has grown by 468,000 lives
We're particularly pleased with the membership trends in our commercial insured business, as both Large and Small Group membership came in ahead of expectations again during the quarter
Our membership results on a consolidated basis translated into second quarter operating revenues of $22.2 billion, an increase of $924 million or 4.3% versus the second quarter of 2016. During the quarter, our Individual enrollment declined by 107,000 lives which was expected
Our total Individual enrollment of approximately 1.8 million members consists of 1.5 million ACA-compliant members and 300,000 non-ACA-compliant members
Of the 1.5 million ACA-compliant members, approximately 1 million or less than 2.5% of our total enrollment were from the individual exchanges
Self-funded enrollment in Local Group and National Accounts were in line with expectations
Before I discuss the details of our business unit performance, I want to spend a few moments on the evolving policy landscape
As a company, we recognize that access to affordable and high quality healthcare is immensely important and intensely personal for all American
Anthem has always been committed to our members and sought to provide value and limit disruption, no matter their financial circumstances or health status
Our commitment to all of our members, including the most vulnerable populations, has not changed and will not change in the face of what we believe will be an ongoing period of debate and policy and regulatory adjustments in healthcare
State and federal regulatory and legislative changes will likely impact our Individual and Medicaid businesses and we remain focused on informing government leaders as they develop policy to achieve the common goal of creating stable and affordable marketplaces
For example, insuring appropriate funding for all whom we serve, a balanced risk pool, effective rules and regulations that limit expensive abuses prevalent in today's marketplace, elimination of unnecessary taxes that add to the cost of insurance
Altogether, Anthem will continue to contribute in an ongoing discussion in Washington and the states on behalf of our members and all American, as we work towards stability and sustainability by providing ideas built on experience, data, and member feedback
Turning back to our financial results
Our strong second quarter financial performance reflected contributions from both the Commercial and Government segments
In the Commercial business, we grew our Local Group insured enrollment by 22,000 lives, bringing our year-to-date enrollment growth to 69,000, despite a market that is shrinking overall
Operating revenues were $10.3 billion in the second quarter of 2017, an increase of over $400 million or 4.1% versus the prior year quarter
The increase was primarily attributable to premium rate increases, reflecting overall cost trends in our Individual and Local Group businesses, as well as enrollment grew primarily in the Local Group business
These increases were partially offset by the one year waiver of the health insurance tax in 2017, which improved affordability for our members
Our second quarter 2017 operating margin for Commercial of 9.4% declined by 150 basis points from 10.9% in the second quarter of 2016. The decline was largely due to the impact of less favorable adjustments to prior year risk adjuster accruals, the one year waiver of the health insurance tax in 2017 and higher performance-based incentive compensation accruals
The decline was partially offset by the impact of strong operating performance in our Local Group business and improved core medical cost experience in our Individual business
In the Individual ACA-compliant business, our second quarter financial performance was in line with our most recent expectations
The overall morbidity levels of our enrollment identified in the first quarter has stayed consistent, giving us better line of sight into the expected claims experience
Our updated 2017 guidance continues to assume that this business will operate at a slight loss for the year
We're focused on mitigating the claims pressure through medical management capabilities
At the end of June, we received the final 2016 risk adjuster and reinsurance data from CMS and have updated our accruals
We're pleased that the reinsurance rate of 52.9% was slightly ahead of our expectations and the significant risk adjustment receivable for the 2016 benefit year was in line with our expectations
The work to determine our final 2018 market footprint in the Individual ACA-compliant business is not yet complete
We expect to provide additional clarity on our final 2018 market footprint during our third quarter call, if not sooner
As a company, our strategy has been and will continue to be to only participate in rating regions where we have an appropriate level of confidence that these markets are on a path toward marketplace stability
Thus far, we have notified state regulators of our decision to largely exit the Individual ACA-compliant marketplace in three of our states, which represents a little less than 10% of our total Individual ACA-compliant enrollment
While we have filed initial rate request in all of the other states, it is important to note that those filings do not necessarily indicate the final level of participation
There are still many areas of marketplace uncertainties, principally, cost-sharing reduction subsidy funding that make it challenging to be comfortable with the level of predictability of a sustainable marketplace
If we aren't able to gain certainty on some of these items quickly, we do expect that we will need to revise our rate filings to further narrow our level of participation
That said, we are closely monitoring state and federal legislative and regulatory developments
And if the level of uncertainty in the marketplace is reduced, we would have increased confidence in our ability to predict the appropriate level of market participation
Switching to the Government business, membership was flat during the quarter, but we grew year-over-year operating revenues by 4.5% to $11.9 billion
Operating margin for the Government business was 2.5% during the second quarter of 2017, a decline of 150 basis points compared to the prior year
The decline was primarily due to higher performance-based incentive compensation accruals and the impact of the one year waiver of the health insurance tax in 2017. In our Medicaid business, our financial performance was largely in line with expectations outside of the Iowa contract
While our operating performance improved in Iowa versus the second quarter of 2016, it did underperform our expectations during the second quarter of 2017. We continue to believe the medical performance of the business supports higher rates than provided under the current contract
We remain highly engaged in working to secure actuarially sound rates that reflect the acuity of the populations we serve
We continue to see a strong pipeline of RFP opportunities for future growth in the Medicaid business, and expect 15 to 20 RFPs to be released over the next year-and-a-half
The pipeline includes opportunities for new business in both new and existing states, as well as re-procurements of existing contracts which, in many cases, offer the potential for additional business beyond our current footprint
Additionally, the pipeline is largely concentrated in new and specialized populations and services, such as long-term services and support and those with intellectual and developmental disabilities
In these areas, Anthem has a proven track record of providing market-leading capabilities, which are necessary to effectively manage these vulnerable populations
In the Medicare business, our core gross margin performance was in line with expectations
We continue to expect to organically grow our Medicare Advantage enrollment by low to mid double-digit percentages over the next few years, with a financial contribution that is within our long-term targeted operating margin range
We also continue to target M&A opportunities to augment our growth profile
Turning to discuss our updated 2017 financial outlook
We now expect adjusted earnings per share of greater than $11.70 for the full year 2017, an increase of $0.10 from our previous outlook
Our updated outlook reflects the improved performance in our Commercial Local Group business and reflects the uncertain nature of the Individual ACA-compliant marketplace
Finally, as it relates to our PBM strategy, our pharmacy team is analyzing our options to create the best long-term pharmacy solution
While it would be premature to share specifics regarding the RFP process, we remain very confident in our ability to drive significant value for our clients, members, and shareholders
The RFP process has further validated our expectation to be able to lower our pharmacy cost by more than $3 billion annually, once we transition to our future state
Should we decide to leave Express Scripts, we're very confident in our ability to thoughtfully plan for the transition of our customers to our new solution
A seamless transition for our members is a key component in our evaluation process, and we will be very focused on mitigating any potential abrasion for our customers throughout this process
We remain committed to informing the market of our long-term pharmacy strategy by the end of 2017. With that, I will turn the call over to <UNK> to discuss our financial statements and provide additional details on our updated 2017 outlook
Very quickly, maybe chop your question up into a couple parts
First of all, regarding some prior comments regarding M&A around MA, we still are very focused on examining markets, market by market looking at opportunities
Yes, we're still mindful of the opportunities for tuck-ins
We think that there certainly are opportunities that we should focus on very carefully and so we're going to continue that pursuit
As you know, we've got a MA platform that is now restructured and completely ready for expansion, both organically as well as by way of M&A
So, we're going to keep our options open
We're going to continue to look at the right fit for us in the markets that we believe where we can perform at a very, very high level
And so, we do have teams that are very actively engaged and focused on the best proposition possible
M&A, broadly speaking, is still a very significant long-term strategy for us given that – kind of an overarching theme is that it's still all about access, affordability and quality of services, both with respect to service as well as safety
We're very mindful of that fact that scale does matter in this pursuit, and we will continue to very carefully examine the marketplace to assess our optionality, our targets and hopefully create fits that are really synergistic with respect to how we're going to best serve the marketplace
Great example of – you may recall, a few years ago, the acquisition of Simply Healthcare probably stands out as the kind of transaction that I think and will be incredibly beneficial for the company, not just serving the marketplace, but also from a financial perspective being a great fit with respect to the synergies that I mentioned a moment ago, Simply was a incredibly well-run company
And I think we're very pleased to be able to, brought that into our portfolio, then being able to leverage off of that significant strength that it brought to us and continue to expand in the Florida marketplace
I think that – hopefully that's a response to the question about M&A and more specifically MA open for more questions there
With respect to the political landscape, I think we're all very observant of what's happening
I don't think it's an exaggeration by the hour, leading up to just maybe a week or so ago, we tried to stay very, very engaged in sharing our thoughts about what it would take to stabilize the marketplace
We do have ingredients that we have continually communicated as sort of the recipe or the ingredients to create stabilization in the marketplace, the ingredients that we believe will repair the Affordable Care Act issues that we've come upon repeatedly over the last few years, and we do believe we have been heard
, with respect to how that all might play out in the end with respect to policy decisions that will be made by way of a vote in Congress, I think, is anybody's guess, but quite frankly, we do believe we have the ability to share our opinions, our voice is heard, and we're hopeful that the kind of stabilization, we believe, is essential to best serve our marketplace is going to be embedded in whatever may come out of Congress
There are other points of view that maybe nothing will happen in the short run
I can't weigh in on that at all
I don't know
But again, we're very hopeful, and we do believe that stabilization is a distinct possibility and obviously, as I said, we will continue to make the contributions necessary for our voice to be heard, as well as the voice of the industry overall
So, thanks for the question, and I look forward to maybe talking more about this as these policy decisions are created and put into force
<UNK>, thank you very much for that comment
With respect to rates, you asked a question about what other characteristics of the market might influence our decisions around rate adjustment
Clearly, CSR is a standout
We've repeatedly said that that aspect of pricing and the subsidies that support membership in our markets can translate to as much as a – maybe 18% to 20% uptick in premium, if subsidies aren't granted
It remains to be seen whether that will ultimately be allowed, but if not, then obviously we're going to have to revisit our pricing market by market in order to judge whether or not pricing adjustment is necessary or even if re-entry on any measure of scale is appropriate
As I said earlier, so much is dependent on stability of each of those markets of which you may know
We have 139 rating regions and so those rating regions are going to be carefully analyzed, sliced and diced and then determined if quite frankly a rating – or excuse me, a premium increase is tolerable beyond a certain point, and if in fact we will be able to remain as an active participant in those rating regions
Right now, as you know, our extraction represents about 10% of membership and our hope that between now and, let's say, through September a lot of decisions will be made, but I can't underscore that time is of the essence, and some of our critical decisions may have to occur in a relatively short period of time
So, I would tell you, the decision making is going to be, as they say, fast and furious and time is of the essence for us to make the right decisions for the benefit of the markets we serve, the membership we serve, as well as for the company overall
And <UNK>'s absolutely right, there's a cascading effect
One other key ingredient, which is material, is the tax
And the tax, if it were to have the moratorium lifted, it's probably something on the order of 4% to 5% premium increase, so you can see the compounding effect of all of these issues that don't map to stabilization that then creates this cascading effect that <UNK> mentioned earlier
So, again, that's all included in our analytics specific to 139 rating regions that we are looking at very carefully to judge the in and out decisions that we have to make
Two parts, one, Iowa; one CSR in terms of further exploring that issue
Regarding Iowa, we got a great state partner and, obviously, we've been engaged in dialogue with them now for a quite lengthy period of time and we're very hopeful that, as <UNK> pointed out in his remarks, the actuarial soundness that we're pursuing, I think, will be made clear and the right decisions will be able to occur
And again, it's a work in process and I think going beyond, any kind of conversation at that level, I think, is not appropriate given the intricacy of the dialogue that we're having with our state partners
And with respect to contract terms, obviously, probably, in fact, cannot go into those terms at this time, but in the main we do believe that over time we'll be able to have the right kind of facts laid out that demonstrates the degree of adjustments that are necessary to create the actuarial soundness that we need to continue to serve the membership in Iowa
So, we're optimistic, but it is truly a work in process
With respect to CSR, there are a variety of paths and, obviously, the first path focuses specifically on action taken by Congress and if CSRs will be embedded in some type of legislative model and that's going to have to kind of play out based on the votes that occur in Congress
Absent that, and again I don't want to predict where all of that might go with respect to yet again another path, but obviously, there may be other choices that may occur related to funding by other means
Funding specific to an action taken by the administration, but I think put it altogether, I believe that the leadership that we deal with in Washington are very mindful and fully aware of how CSR really maps to stabilization and, in particular, the effect on premium increases for the people that we serve across the country
So, I think it's – that too is a work in process, but it's yet – remains to be seen exactly how that funding will flow to us to support our marketplace
We just don't know yet
Great
<UNK>, thanks for the question regarding PBM
Questions really come at us repeatedly on this point and obviously, it's evolutionary from the very beginning back in January of 2016. And go back in time, we've always stated that we would make it very clear, quite frankly make a clear statement of the choice we've made in terms of contracting by the end of the fourth quarter and we still are committed to that
With respect to that, we've been engaged in a very analytical process
You all well know that RFPs went to the market and we now have received those RFPs and are in an analytical mode that's very thoughtful, very thorough
And as we've repeatedly said, we think our pursuit has always been about optionality and kind of constructing a hybrid model has been one of those options that we've carefully evaluated, meaning that we have probably multiple paths that can best serve our customers, our members, whether it's a mail order proposition that is sent out to someone to administer by way of maybe private labeling it, the fact that we will always retain control of our formulary, and then other characteristics of a hybrid model, which represents various constructs within a model that equates to great value for our membership
Of course, the other extreme would be to send it all out to another vendor and so we've always been mindful of the many choices we have, which I think speaks to the power, the significance of optionality being very much in our favor
We've stood by, as you well know, our expectation in terms of $3 billion per year in terms of savings, go forward at 01/01/2020 and beyond and nothing that has occurred thus far has moved us off of that expectation
And so again, we're working very carefully with respect to the analytics around an RFP
I do want to underscore that it's not just about the money
It has a lot to do with customer service, our commitment to a transition that is virtually seamless
Given the complexities, we well recognize that and so whichever direction we go in, we will be very careful in our choices regarding best serving our customers with a seamless transition
So, it's obviously a complicated formula for success, but it's literally – it's all hands on deck to get us from today to 01/01/2020 and I feel really good about the path we're on and I don't think there are any complexities that we aren't aware of and working on
And I think we again feel very, very good about the process and what potential will come our way in terms of very positive characteristics beginning 01/01/2020. <UNK>?
<UNK>, thanks for the question specific to this continued formation of the ACA marketplace
We've always said that our target is 3% to 5% margin
We certainly haven't backed off of that
As you can imagine, toward the day-to-day grind of best managing that portfolio is governed in large measure by rules of engagement and the stabilization necessities that I talked about earlier coming to reality
Our sense is that stabilization is a distinct possibility
We are still committed to the 3% to 5% margin performance and we're also committed, as I've said repeatedly over nearly a year now and going back to last summer, kind of worked off the characterization of surgical extraction, we still are very focused on that as well
And I think, <UNK>, that we will make the right decisions with respect to engagement in the market, detachment from a market
Our hope is that we will be able to continue to perform in a very robust and meaningful manner in all 139 rating regions, but so much depends on how legislative process plays out and what stabilization rules are put into place, but again I'll reiterate, we're still hopeful that a 3% to 5% margin is achievable
And so, <UNK>, I don't know if you want to add to kind of the outlook and how engaged we are in making that a reality
<UNK>, that's kind of the question that is very powerful perspective on the future of our industry
I've been a great believer that so-called secret sauce for our performance in the marketplace moving into the future is all about translating data to information, meaningful information that supports our provider community, especially in terms of better choices that they can make in and around evidence-based practice
Information that supports the needs of our consumers given the significant risk position that they're now being subjected to in terms of higher deductibles, etcetera
They need to make very well-informed decisions in terms of accessing healthcare and remaining healthy
Therefore, we are very committed to the wellbeing of all of our members
In that regard to your point about artificial intelligence and the foundational aspect of how you support the development of useful information, we're investing quite heavily with respect to data infrastructure, foundational buildout with respect to our IT systems
We are definitely using artificial intelligence today and optimizing our ACA benefits across 139 rating regions and actually, this has been a three-year journey for us in the AI space specific to that process
Again, I do want to underscore we will recognize that this is the future of a very successful health benefit manager and in that regard, the appropriative amount of funding is being distributed, allocated to our technologies that will advance artificial intelligence that can best support the needs of all the interests that we engage with, whether it's a provider or a consumer, government, what have you, we are intimately involved in building out that kind of capability today
Hopefully in the near future, we'll be able to talk more about that
So, thanks for questions
Very appropriate and very significant
Great
Thank you, operator
And thank you all for your questions
They were great questions today
And I just want to underscore that as a company we remain committed to confronting some really tough questions and challenges in and around the healthcare delivery system, as we are focused on expanding access to high-quality affordable healthcare to our customers
And I think that it's really critical for me to underscore the key contributors to that success being our associates who've given continued support to the company and to our customers, which total 40.4 million members
And our associates do that every day with incredible commitment
Thank you all for your interest in Anthem, and we look forward to speaking with you soon at upcoming conferences
Thank you very much for the time
