Anthem, Inc. (now Elevance Health, Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Unless noted otherwise, financial amounts below are in millions of dollars. The filing was made under the name Anthem, Inc.
Business context
Anthem operated health-benefit plans and related services across commercial, Medicare, Medicaid and other markets. It reported 40.843 million medical members at March 31, 2019, up 1.156 million, or 2.9%, year over year. Government Business membership grew 9.0%; Commercial & Specialty membership grew 0.9%.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total operating revenue | $24,388 | $22,342 | +9.2% |
| Total revenue | $24,666 | $22,537 | +9.4% |
| Benefit expense | $19,282 | $17,046 | +13.1% |
| Net income | $1,551 | $1,312 | +18.2% |
| Diluted EPS | $5.91 | $4.99 | +18.4% |
| Operating cash flow | $1,630 | $2,215 | −$585 |
- The benefit expense ratio increased to 84.4% from 81.5%, while the SG&A expense ratio improved to 13.0% from 15.3%. Net income was 6.3% of total revenue versus 5.8%.
- Cash and cash equivalents were $4,482 at quarter-end. Cash, cash equivalents and investments in fixed-maturity and equity securities totaled $24,013, up $1,374 from year-end 2018.
- Total liabilities were $44,525 and shareholders’ equity was $29,998. The reported debt-to-capital ratio was 40.0%, compared with 40.2% at December 31, 2018; this measure includes lease liabilities beginning in 2019.
- Cash from operations declined mainly because of the timing of Medicare prepayments received in 2018 and lower premium receipts associated with the 2019 suspension of the Health Insurance Provider Fee (HIP Fee).
- The company repurchased $294 of shares and paid $206 in dividends during the quarter. The quarterly dividend was $0.80 per share, up from $0.75.
Changes versus the prior-year quarter
- Revenue growth reflected membership increases and rate increases, particularly in Government Business. Government operating revenue rose 12.0%, but segment operating gain fell 20.4% to $383 and its operating margin declined to 2.6% from 3.6%.
- Commercial & Specialty operating gain increased 12.6% to $1,587, with margin rising to 16.9% from 15.7%; management cited improved Local Group medical cost performance and stronger self-funded service revenue.
- Higher medical costs in Medicaid and prior-year retroactive Medicaid revenue adjustments weighed on Government Business results. Across the company, the benefit expense ratio also reflected the loss of revenue associated with the HIP Fee suspension and prior-year Medicaid revenue adjustments.
- The effective tax rate declined to 20.3% from 26.3%, principally because the non-deductible HIP Fee was suspended for 2019. Net realized investment results shifted to a $78 gain from a $26 loss.
Outlook, risks and unusual items
- Management estimated 2019 Local Group medical cost trend at 5.5%–6.5%. The filing did not provide full-year revenue, earnings or EPS guidance and cautioned that first-quarter results are not necessarily indicative of full-year results.
- The HIP Fee was suspended for 2019 and scheduled to resume in 2020. Management noted ongoing uncertainty around ACA changes and litigation, including a Texas court decision invalidating the ACA that was stayed pending appeal. Anthem had reduced Individual ACA participation and offered products in 73 of 143 rating regions.
- IngenioRx’s transition from Express Scripts began March 2, 2019, after early termination of the Express Scripts agreement. CVS Health was expected to begin providing certain pharmacy-benefit services in Q2 2019; migration was expected to take 12 months. Litigation with Express Scripts continued, including Anthem’s claim for more than $14.8 billion in pharmacy-pricing damages. The claimed amount is not a finding of liability or a disclosed expected recovery.
- Other significant proceedings include the Cigna merger-related litigation, with closing argument scheduled for September 2019, and a DOJ investigation of Medicare risk-adjustment and chart-review programs. For specified legal proceedings, Anthem estimated aggregate reasonably possible losses in excess of established reserves of $0–approximately $250; it said many exposures could not be reasonably estimated.
- Medical claims estimates are a key judgment area. Prior-period claims redundancies contributed $455 of favorable development in Q1 2019, compared with $633 in Q1 2018. The company also adopted lease accounting on January 1, 2019, recording opening operating lease liabilities of $728 and right-of-use assets of $637; adoption did not affect reported income or cash flows.
- Other stated risks include medical-cost and utilization trends, government-program funding and regulation, litigation and investigations, cybersecurity-related proceedings, investment-market changes, and substantial indebtedness. Management said it intended to maintain investment-grade senior debt ratings.
Important facts for investors to verify
- Whether Medicaid medical-cost experience and Government Business margins improve, and how the 5.5%–6.5% Local Group trend estimate compares with actual experience.
- Whether membership growth and pricing are sufficient to offset benefit-cost increases, especially in government programs.
- The operational and financial effects of the Express Scripts-to-CVS transition, including any transition costs, service disruption or outcome of the continuing pricing litigation.
- Developments in ACA-related litigation and regulation, the HIP Fee’s scheduled 2020 resumption, and potential effects on pricing and participation.
- Updates on material legal and regulatory matters, including the Cigna dispute, DOJ investigation and cyberattack-related proceedings; the filing does not establish the ultimate outcomes.
- Cash-flow conversion, debt and leverage, capital returns, and any changes in subsidiary regulatory limits on dividends or capital requirements.