Elevance Health, Inc. (ELV) Earnings Call Transcript
March 8, 2022
Earnings Call Speaker Segments
Good -- I'm trying to figure out if it's morning or afternoon. Still morning, Eastern Time. So I'll say good morning, everybody. Thanks for joining us. Gary Taylor, Healthcare Facilities Managed Care. Thanks for joining us at the Cowen 42nd Healthcare Conference. It's my pleasure to introduce Anthem. Anthem is one of the largest health benefit companies in the United States, serving more than 45 million medical members. Anthem offers a broad spectrum of network-based managed care products to individual group, Medicare and Medicaid markets and also an array of specialty services. And primarily interacting with me on the Q&A is the Chief Financial Officer, John Gallina. So welcome, John and team. And I think I'm going to turn it over to John just first for a few introductory comments, and then we'll move into the Q&A.
Yes. Thank you, Gary, and good morning, everyone. I just really want to start out by just talking about how excited we are to be here and to be part of this process and even talk about the great start we have for 2022. We really started our membership extremely strong. Our national selling season was excellent. Morgan Kendrick discussed this during our last earnings call. And the ASO and fee-based membership increases that we're seeing here in the first quarter are very, very good, very solid. And then Medicare Advantage, we continue to grow that business quite nicely. Good, solid, sustainable growth in our Medicare Advantage area, again, very much aligned with our strategy of growing in the low to mid-double digits on an annual basis and having good solid sustainable membership. And then Medicaid continues to perform very well. We have maintained our 100% win rate on RFPs and continue to grow through the public health emergency and indications are public health emergency will be extended again. And that will continue to be a positive to Medicaid and actually a slight positive to Anthem overall each time that gets extended. The other thing about Medicaid that some of you may or may not be aware of is a month ago, we announced our acquisition of the Paramount members in the Ohio Medicaid market. That was one of our -- Ohio was one of our 100% win rate states, and Paramount was going to lose coverage, so we took over their members effective February 1. Really give us some nice momentum going into the July 1 contract renewal. So that was 257,000 member increase in the first quarter, above and beyond our expectations for the quarter. And then we really can't talk about 2022 without talking about COVID. And obviously, there's still many uncertainties associated with COVID. And Omicron had a significant surge in January, the highest surge since COVID began, but February had a significant drop. And I'm really very happy to state that after 2 months' of time, January and February actuals in total, when you look at both COVID and non-COVID combined for all lines of business, Anthem is actually running better than expected. So even though the surge in January is significant, the drop in February more than offset it, and we're running better than expected. And as part of all that, the home testing was part of the issue. Back in November, we proactively started offering free home testing kits to our fully insured members several months prior to the administration requiring it. But when the administration required it, we were really concerned that there would be abuse in stockpiling. And so we baked that into our expectations into our guidance. And now here we are in mid-March, and there's really been no evidence of any abuse or stockpiling. Quite honestly, the utilization of home testing kits and providing those for free has really [ mirrored ] the surges of COVID. It was highest when Omicron was surging and it's come down with Omicron coming down. So all of this really puts us to the point that we issued our 8-K this morning reaffirming guidance. But taking the events of the first 2 months, we now have a bias that our first quarter medical loss ratio will be below our full year range, which is actually an improvement from what we talked about 6 weeks ago. And we have reaffirmed our earnings per share of $2.25. So we're obviously even more comfortable with that now than we were before. And just as a reminder, that is a 12% growth rate off of our adjusted baseline. And we feel very good about delivering those -- that performance at this point in time. So thank you for giving me the opportunity to put that on the record, Gary. And I'll turn it back to you to answer your questions.
I appreciate. Maybe I'll go -- I'll respond to your commentary, go just a little off script here for a second. So one of the questions was kind of handling the COVID testing. So it's good to hear that that's dropping with Omicron. In terms of sort of the netting effect of that higher COVID surge in January, we have had a couple of device companies talking about seeing -- exiting February, seeing a much more pronounced pickup in some of the elective procedures. How do you think about 1Q shaping up better than you thought, keeping the year the same, which it's so early in the year? I totally understand that, but more from the standpoint of how do you see utilization sort of progressing? So you're net favorable early. It sounds like maybe some electives are picking up. Does that -- do you think 2Q could run a little hotter? Like what are your thoughts there?
Yes. No, great question, Gary. And maybe before talking about 2Q, I think it would be informative to talk about the fact that when we provided our guidance for 2022, our guidance assumed that the combination of COVID and non-COVID combined would be above baseline for each and every quarter during the year. And we still believe, even with all these positives that I stated, that the first quarter will be above baseline for the quarter. It will just be much better than the expectations that we laid out. So as we look at various utilization patterns, we really don't see a significant amount of pent-up demand still in the system at this point in time. Certainly, during the surges, pent-up demand does occur. And there are examples of health care systems unable to fully support all of the needs of the community on a time-to-time basis. But we believe that the most significant amount of that is behind us and that people that have needed access to care have been able to get access to care. Now working into the second quarter, our guidance assumes that the total of COVID, non-COVID combined will be above baseline. We believe that Medicare Advantage will be close to baseline on a non-COVID basis and then add COVID on top of it. Commercial actually had the most significant increase in non-COVID claims of any of the lines of business versus what it had been. And we're assuming that, that will stay relatively similar and consistent with our expectations. So I just want to make sure I don't answer that question with a yes or no because I think it's far more insightful than that. But yes, we believe that the second quarter will be above baseline and that some of these elective procedures and such will occur and that the Medicare and Commercial, non-COVID will be really close to baseline all by itself. And then there will continue to be COVID cost on top of that. So I think the answer is probably yes. But I also believe the answer is, we've already got that factored into our thought process.
Yes. There's sort of the interesting debate investors keep having between -- it sounds -- the hospitals, the surgery centers and the device companies that are all anticipating at least inpatient surgical is going to reaccelerate again, that there is this concept of a backlog and most of the payers that we talk to believing there's not a substantial amount of pent-up demand or that a lot of those cases have been worked through over the course of the last couple of years. So it's probably -- it seems like a disconnect, maybe a broader disconnect than really exists, but it's certainly topical question...
Could be. And what I will say is, as you look at the beginning in mid-February, as the Omicron surge declined, we did see an increase in non-COVID spike. And there was really some of the things that were more schedulable. There are certain -- certainly, whenever there's a situation where you need to access the health care system immediately, you should access the health care system immediately. And it shouldn't matter if there's a COVID surge or not. But in the post surge arena, things that you can schedule where it's a medical procedure that may be necessary, but you can live with some problem or an issue for a few more months or a few more weeks, it's just a little bit more of an irritation. We clearly saw an increase of those in February. However, the drop in Omicron and COVID was so significant, it more than covered it. And that's one of the reasons I don't believe that we still have the pent-up demand because now late February into early March is more normalized.
Got it. So I sent over a list of about [ 40 to 100 ] questions that I wanted to cover in the next 19 minutes. So I'm going to be careful here and try to pick some of the highlights. But I want to -- let's just start with Commercial business, broadly risk and nonrisk. Anything to point out in terms of key benefit design changes. We had a panel yesterday with the consultant and our own benefit manager talking about trends in employer benefits that hit on this concept of a lot of employers looking at navigators, particularly large self-funded accounts, people looking at incremental voluntary supplemental benefits and that sort of thing. Any big picture trends? People always ask about high deductible. Has that really peaked in terms of employer interest and appetite? I mean any big picture trends in either risk or nonrisk counts that you'd point out?
Yes. It's a great question. And quite honestly, there are a few. First of all, say that back to my opening comments, our national selling season was excellent. And we'll see where the entire sector comes out. But I'd be surprised if we did not have the industry-leading growth within the fee-based business here in the first quarter of 2022. That was one of the best-selling seasons we've ever had. One of the things that is different that people may not appreciate is that this is really the first time that we're seeing 5 generations within the workforce. And where that's meaningful is that each generation accesses the health care system a little bit differently, and they want to be communicated to a bit differently. The folks who are at the older end of that, some of which are not as technologically savvy, some of which that really want to have more face-to-face interactions, all the way down to the younger part, who wants to do everything on a telephone. And I feel like I'm talking about my family in some regards since I have -- I'm in one of those demographics and my kids are in the other. But it really has caused us to really focus on the fundamentals in terms of how we're going to interact with our members and meet the members where they want to be met and communicate with them where they want to be met. In terms of working with the employers themselves, certainly, large group risk base is very price-sensitive. And -- but they are large enough, they require some good solid service. The navigators that you mentioned, we really only see them in the ASO accounts typically. And that really does put a premium on the navigators that are providing a great value in terms of service, handholding, some personalization-type features. So there are certainly things that we are doing that can help with that as well. But these navigators are not impacting our ability to grow. What they're doing is they're providing an ancillary service to make the members of these large ASO customers hopefully have better health outcomes with better value and better service. And then on small group, price has always been the primary decision point. And we really are looking more closely at continuing to enhance our benefit designs. What we've seen is some of the alternative funded products, things I know Peter Haytaian used like to talk about MEWAs and things like that. The alternative funded products that provide a little bit better price point to the small group employers or some of our best-selling type arrangements. So it's really -- it's having advocacy solutions and it's having really the good pricing, seems sort of obvious, but it's becoming maybe a little bit more in focus here than it had been in the past.
Just a couple of follow-ups on the whole sort of navigator concept in the ASO business. I mean do you see that as an incremental business opportunity, service opportunity for Anthem to have more formalized competitive response or offering? Or do you see more of an opportunity to collaborate or partner with some of those types of companies?
And I'd say, quite honestly, the answer is both. And to the extent that some of our digital offerings and some of our services and the various things that we're developing help with that, then we'll certainly try to capitalize on it and optimize it. But these companies are created and they exist because they're providing a certain level of value. And to the extent that we can partner with them and have a more holistic offering, that can only help. So I'll just say both at this point.
Yes. And then just last one, just on small group. For a while, it was such a dramatic headwind post ACA because the mandates and central health benefits essentially push premiums a lot higher. So there's a lot of headwind for you, your risk book converting to nonrisk. Some of the surveys suggest after a couple of years of holding very tight because of dealing with the pandemic that there was a bit of an acceleration again in small group towards ASO. Is that something you'd agree with broadly that you're seeing or not so much?
I would say here for 2022, it's really slowed down. We haven't seen a lot of that. One of the things that is different now is that the health insurer fee is gone. That was such a big driver of having companies go from fully insured ASO is to avoid the entire health insurance fee. And so a year ago, I guess maybe 2 years ago now, that was legislated out of existence. And I think that has done a significant amount to help slow down the conversion to ASO at that point in time. So -- but yes, there is several years that there is a significant shift from fully insured ASO, but that's much slower now.
And then just to wrap it up on Commercial. A few years ago when Gail came in, the goal around Commercial -- a goal around Commercial was to modernize and modularize the Commercial benefit offering. So maybe your '22 selling season speaks for itself. How do you gauge the progress there? And is there still a lot to do there? Or do you feel like Anthem's Commercial benefit offering has largely been repositioned in the marketplace?
A couple of things on that. I do believe our benefit offering has been repositioned. I talked about some of the alternative funded products that we've really expanded and enhanced and really better understanding the 5 generations and being able to communicate and interact with those folks. But the other part of that, that was inherent in the strategy was that when Gail came here, we were really starting on our systems retirement strategy. And it was very cumbersome for us back then to roll out new product across 14 states because of all of the different systems that we still had. And so one of the things we did with the modularization was figure out a way to enhance our speed to market with all of these various systems. Well, I am thrilled to say that our system migration strategy has been going exceptionally well. And we're down now to really only 3 systems that have over 90% of our membership on them. And to the extent that we have less systems, then speed to market is that much faster because you only program things once, you have to tweak it of course for whatever state mandates may exist. But you don't have to have all of the separate and disparate programming on multiple systems that try to get to the same answer. So the modularization and modernization is going quite well. But we are never done with product development and product design. We're always trying to stay ahead of the curve on that. But we think it's been very successful. And is -- as you helped to indicate your question, 2022, does speak to that. You look at -- we've grown membership as a company in 2019 and 2020 and 2021. And we will grow it again in 2022, all on an organic basis. M&A is on top of all that. So that's almost every economic reality that America could face, we've faced in the last 4 years. And we will be net membership growers all 4 years. So there's a reason for that. And great products and great service is 2 of them.
The catcher's mitt as you described is working. Shifting to Medicare, another year of double-digit growth. I don't think -- I don't know if I have seen you guys talk publicly since Humana sort of raised public concerns about almost irrational level of benefits and unsustainability. And they subsequently walked some of that commentary back. But of course, now investors are on high alert for -- what is the margin versus growth algorithm in Medicare for '22 specifically? And then we head into '23. And the advanced notice tells us we have another year of really historic funding growth and presumably another -- potentially another year of rich benefit enhancement. So can you talk a little bit about what you think of the market broadly? And then two, just your margin versus growth algorithm and obviously, annually, you're sort of weighing benefits and -- versus margin enrollment versus margin, et cetera?
Sure. And this is our first public appearance since those comments were made since they were made well after we provided our year-end earnings call. But as I stated in my introductory comments, solid sustainable growth within Medicare Advantage. We're looking at low to mid-double-digit growth. And we still have many of our Blue Cross and Blue Shield states where our MA presence is underpenetrated, and we think there's great opportunities. So the whole construct of the business, the entire marketplace factored over 10,000 Americans turn age 65 every day, none of that's changed. We still feel like this is an exceptional growth opportunity for Anthem over the next several years. In terms of some of the buying decisions, I think there's a few things that I will say is that, number one, Anthem was a little bit later to the Medicare Advantage game from a few of the other primary competitors, who I'm sure everybody knows. And part of that was clarifying some rules with Blue Cross and Blue Shield Association and doing things, which are all behind us now. And that's why we're growing so nicely. We have some of the best growth rates in the entire industry, good sustainable growth rates. Our margins were slightly below our low end of our target margin last year, which we attribute all to COVID. And margins will increase this year. And we do believe that having sustainable margins within the target margin range in a post-COVID environment is something very achievable and very much in accordance with our plans. One thing we have seen is that supplemental benefits continue to play a larger and larger role in the purchasing decisions every year. And the supplemental benefits are actually very good benefits. There are things that are all sort of connected to the health system or healthy lifestyles, but have not been traditionally part of a medical insurance program. Examples might be a gym membership. It might be a grocery card to purchase healthy groceries on a monthly basis. It could be over-the-counter medications that are typically not covered. And so we have a whole -- I think there's 9 different categories of supplemental benefits that we can offer. And we actually provide the membership sometimes the choice, pick any 2 of these to add to your benefit design. And that's one thing that we really do want to stay ahead of is that these are such meaningful benefits to some people and actually do drive many of the purchasing decisions that we want to make sure that our product design is well ahead of that. In terms of the margins, as I said, we do believe that we can have long-term sustainable margins within the range. And quite honestly, Anthem is well set as anyone at this point in time when you look at where we're coming from and where we're going. And what I mean by that is it's really specifically focusing on the Stars. Our Star ratings a year ago, with just over 50% of our membership was in 4-star plans or above, while the Star information that came out here a few months ago, we'll have close to 75% of our membership in 4-star plans or above. The revenue associated with that comes through in 2023. So we've got a significant increase in revenue from our increase in Star ratings. We had the advanced notice that you talked about that's going to help everyone in the sector. And it should allow us to have both a very desirable benefit design and to ensure that we are pricing to target margin simultaneously because we have upsides in a couple of different areas where most of our competitors don't have all the same upside simultaneously. So we think we're very well positioned and think -- we still continue to believe that Medicare Advantage will be a very desirable business to be in for the long term.
So we've got a couple of minutes left. I've got 142 topics to hit, so I'm going to have to narrow down. One question I got from a client online is, if 1Q MLR is going to come below expectations, for now, we're keeping the year the same, totally reasonable, where do we put that? Do we think about just shifting that into 2Q for now and keeping that same seasonality of earnings, which I don't have off the top of my head, but I know you talked about. Would you want us to put it in the back half of the year? If you had a model, do you want to comment on that?
That's a great question and one that we were struggling with because you are exactly correct that it is just a bit premature on March 10 to make any significant changes to the earnings seasonality at this point or the MLR seasonality. There's many, many unknowns out there. We still have Easter season. You still got Thanksgiving and Christmas. And who knows what's going to happen at that point in time? If someone really wants to update their model today, yes, just shift it into the latter half of the year. But when we provide our earnings and our update -- on our first quarter earnings call in late April, when we provide our update, we'll provide much more clarity on that. We'll have certainly 3 months of actual. We'll have the majority of April that will have line of sight to that we'll be able to comment on and provide more clarity at that point in time. So it's really -- right now, we can view it as incremental conservatism.
30 seconds left. Some of the pure-play Medicaid plans are thinking about 50% of their COVID enrollment gains dropping off with -- when the redeterminations begin. How does that 50% sit from your perspective? And does it -- is it just healthier members coming off? Does it have MLR implications?
Yes. So we had made a comment back 90 days ago that we still believe is accurate. I think we've got about 65% of that membership dropping off. And of course, we do have the catcher's mitt that you referenced, so we can pick it back up. And will it have MLR implications? The answer is not as simple as yes or no. We will be in an MLR collar position we were in 2021 for most of our Medicaid states. We are projecting a [ BNMR ] collar position for a few of our Medicaid states here in 2022. As those healthier members drop off, the first thing that happens is that the MLR collars get decreased prior to impacting anything else. But yes, overall, it certainly should affect that. Now the public health emergency may be extended and now it will take 14 months for the states to do it versus 12 months. So we're really talking that until mid '23 until we start to see some of these impacts. But we think we're very well positioned picking up business on Commercial, picking up Individual ACA business and feel very good about being able to weather the storm with another year of profitable growth.
Great. So with that, we're out of time. I want to thank the Anthem team and John. Thanks very much. Everybody, have a great day.
Thank you. Appreciate it, everyone. Goodbye.
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