Business context and reporting period
Anthem, Inc. (the registrant named in this 10-K; the request metadata identifies Elevance Health) reported for the fiscal year ended December 31, 2016. Anthem provided health benefits and related services to 39.9 million medical members. Its reportable segments were Commercial and Specialty Business, Government Business, and Other.
Financial performance and key metrics
Amounts are in U.S. dollars; financial figures are in millions except per-share data and membership.
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total operating revenue | $84,194.0 | $78,404.8 | +7.4% |
| Total revenue | $84,863.0 | $79,156.5 | +7.2% |
| Income from continuing operations | $2,469.8 | $2,560.0 | -3.5% |
| Net income | $2,469.8 | $2,560.0 | -3.5% |
| Diluted EPS | $9.21 | $9.38 | -1.8% |
| Operating cash flow | $3,204.5 | $4,116.0 | -$911.5 |
| Benefit expense ratio | 84.8% | 83.3% | +150 bps |
| SG&A expense ratio | 14.9% | 16.0% | -110 bps |
| Medical membership | 39.919 million | 38.599 million | +3.4% |
- Revenue growth reflected premium rate increases and membership growth, especially in Medicaid and National Accounts. Benefit expense grew faster than revenue, reflecting medical cost trends and Government Business experience.
- Net income was pressured by lower Government Business operating results, Cigna transaction costs, higher interest expense, and lower realized investment gains. Operating cash flow fell mainly with higher claims payments and timing of self-funded customer reimbursements.
- Segment operating gain was $3,195.2 million in Commercial and Specialty Business (+12.0%) and $1,784.3 million in Government Business (-9.8%). Government Business revenue rose 11.4%, but medical costs—particularly in Medicaid and Iowa—reduced its margin.
- Fourth-quarter 2016 revenue was $21,714.4 million, net income $368.4 million, and diluted EPS $1.37, compared with $20,187.9 million, $180.9 million, and $0.68, respectively, in fourth-quarter 2015.
Financial position, liquidity, and capital
- At December 31, 2016, cash and cash equivalents were $4,075.3 million; total cash, cash equivalents, and investments, including long-term investments, were $25,519.0 million. Total assets were $65,083.1 million and shareholders’ equity was $25,100.4 million.
- Long-term debt, less current portion, was $14,358.5 million; current portion of long-term debt was $928.4 million, and short-term borrowings were $440.0 million. The reported debt-to-capital ratio was 38.5%, down from 40.8% in 2015. Commercial paper outstanding was $629.0 million; the $3.5 billion revolving credit facility had no borrowings outstanding.
- Operating, investing, and financing cash flows were $3,204.5 million, $(513.9) million, and $(732.9) million, respectively. The company paid $684.0 million in cash dividends and made no share repurchases under its repurchase program in 2016.
- Regulated subsidiaries exceeded applicable risk-based capital requirements. Anthem estimated approximately $1.9 billion of subsidiary dividends to the parent in 2017, subject to regulatory restrictions.
Material changes, outlook, risks, and unusual items
- Membership increased by 1.320 million. Medicaid membership rose 10.4% to 6.527 million, while Individual membership declined 0.7% to 1.664 million. Self-funded membership grew 4.3%.
- Management estimated 2016 Local Group fully insured cost-of-care trend at the lower end of 7.0%–7.5% and expected 2017 trend of 6.5%–7.0%. It cited provider rate increases and specialty drug costs as cost pressures.
- The proposed approximately $53 billion Cigna acquisition remained unresolved at the filing date. A federal court ruled for the DOJ on February 8, 2017; Anthem appealed. Cigna purported to terminate the merger agreement and sued, while Anthem sought enforcement; a Delaware court temporarily enjoined termination. The agreement’s termination fee could be $1.85 billion under specified conditions. Management also expected acquisition financing to raise pro forma debt-to-capital to about 49%, with a stated goal of reducing it to the low 40% range within approximately 24 months after closing.
- Anthem reported 2016 losses in public exchange business as enrollment had higher risk and utilization than anticipated; 2017 premium increases may not fully offset this exposure. It recorded a 100% valuation allowance on unpaid risk-corridor receivables for 2014–2016; 2014 payments were about 14.9% of amounts requested, and no 2015 or 2016 payments had been made as of the filing.
- The ACA industry health insurer fee was suspended for 2017 and was scheduled to resume at $14.3 billion industry-wide in 2018, absent further action. Anthem’s 2016 share was $1,176.3 million, and the fee was not deductible for federal income tax purposes.
- Anthem sued pharmacy-benefit manager Express Scripts over pricing and alleged operational breaches; Express Scripts denied the claims and asserted counterclaims. Anthem alleged approximately $13 billion of pricing damages over the remaining contract term, plus other claimed damages; these were allegations, not adjudicated losses. The PBM agreement’s initial term runs through December 31, 2019.
- The 2015 cyberattack exposed personal information. Litigation and government investigations continued; Anthem said it could not reasonably estimate possible losses. The NAIC exam concluded without fines or penalties, with Anthem agreeing to provide a credit-protection program for affected members who were minors.
- Other material exposures include estimated Penn Treaty guaranty-association assessments of $190–$220 million, and legal proceedings for which the company estimated an aggregate reasonably possible loss range of $0–$250 million above established reserves where estimable. Management reported no goodwill impairment in 2016.
Investor verification priorities
- Track the Cigna appeal and related litigation, closing conditions, termination-fee exposure, financing needs, and anticipated deleveraging.
- Verify Medicaid medical-cost experience, especially Iowa, rate adequacy, and whether the 2017 cost-trend outlook and public-exchange pricing assumptions hold.
- Review development of medical claims reserves: the year-end liability was $7,892.6 million and included $850.4 million of favorable prior-year reserve development.
- Monitor risk-corridor receivable recoverability, the 2018 health insurer fee, and any changes to ACA rules or government-program reimbursement.
- Follow the Express Scripts dispute, PBM service continuity and pricing, cyberattack litigation and costs, and Penn Treaty assessments.
The independent auditor issued an unqualified opinion on the financial statements and internal controls over financial reporting as of December 31, 2016.