Business context and reporting period
Anthem, Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter ended September 30, 2018. The company provided health benefits and related services to 39.5 million medical members. Its reportable segments were Commercial & Specialty, Government, and Other. Unless stated otherwise, amounts below are in millions of dollars, except per-share data and percentages.
Financial results and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $22,980 | $22,097 | $68,037 | $66,614 |
| Total revenue | $23,251 | $22,426 | $68,732 | $67,359 |
| Net income | $960 | $747 | $3,325 | $2,612 |
| Diluted EPS | $3.62 | $2.80 | $12.58 | $9.70 |
| Benefit expense ratio | 84.8% | 87.0% | 83.3% | 85.6% |
| SG&A ratio | 15.4% | 13.6% | 15.3% | 13.9% |
- Q3 operating revenue rose 4.0%, net income 28.5%, and diluted EPS 29.3% year over year. For the nine-month period, operating revenue rose 2.1%, net income 27.3%, and diluted EPS 29.7%.
- Net margin was 4.1% in Q3 versus 3.3% a year earlier, and 4.8% for nine months versus 3.9%. The effective tax rate fell to 22.7% in Q3 and 26.5% year to date, from 33.2% and 32.0%, respectively, primarily reflecting the 2017 Tax Cuts and Jobs Act.
- Operating cash flow was $3,364 for nine months, down from $5,486. Cash and cash equivalents were $4,260 at September 30, 2018, versus $3,609 at year-end 2017. Cash, cash equivalents, and investments in fixed-maturity and equity securities totaled $24,452.
- Total debt represented by short-term borrowings, current long-term debt, and long-term debt was $19,419. Debt-to-capital was 40.0%, down from 42.9% at year-end 2017. The company reported no borrowings under its $3.5 billion revolving credit facility.
- Total assets were $74,445 and shareholders’ equity was $29,094. The company paid $0.75 per share in dividends in each of the first three quarters and repurchased $1,192 of stock during the first nine months.
Material changes versus the prior comparable period
- Government Business revenue increased 15.0% in Q3 and 13.1% year to date, reflecting Medicare growth, acquisitions, and rate increases. Commercial & Specialty revenue declined 9.2% in Q3 and 10.7% year to date, primarily because of reduced ACA marketplace participation and lower fully insured Local Group membership.
- Medical membership declined 1.9% year over year to 39.5 million, with Individual membership down 59.2%. Medicare membership increased 17.8%, partly due to acquisitions of America’s 1st Choice and HealthSun.
- Benefit expense decreased year to date, and the benefit expense ratio improved 230 basis points. In contrast, SG&A rose 12.4% year to date and its ratio increased 140 basis points, reflecting the reinstated Health Insurance Provider Fee (HIP Fee) and spending on growth initiatives.
- Operating cash flow declined by $2,122, attributed to lower ACA premium-stabilization receipts, growth-related spending, Medicare prepayment timing, and membership declines. Acquisitions used $1,732 in cash. The America’s 1st Choice acquisition was completed in February 2018.
- Accumulated other comprehensive loss widened to $811 from $101 at year-end 2017, largely reflecting investment-market changes. Under new accounting guidance, changes in fair value of certain equity securities now flow through earnings.
Outlook, commentary, risks, and unusual items
- Management estimated 2018 Local Group cost-of-care trend at 5.5%–6.5%. The filing does not provide a clear full-year earnings or revenue guidance figure; interim results are not necessarily indicative of full-year results.
- The HIP Fee resumed for 2018; the company recorded $1,157 of related SG&A expense for the first nine months and $243 of related additional income tax expense. It was suspended for 2017 and 2019.
- Key uncertainties include ACA and other regulatory changes, medical utilization and unit-cost trends, Medicare and Medicaid funding and compliance, membership and pricing pressures, and the ability to maintain investment-grade credit ratings. Management identified medical claims payable as its most judgment-sensitive accounting estimate; prior-period claims development was favorable by $866 in the first nine months of 2018.
- Significant litigation includes the Blue Cross Blue Shield antitrust cases, the Cigna merger dispute, and Anthem’s dispute with Express Scripts over pharmacy pricing. Anthem seeks more than $14.8 billion in damages in the Express Scripts case; this is a disputed claim, not a recognized recovery. For proceedings where losses could be estimated, the company reported an aggregate reasonably possible loss range of $0–$250 in excess of established reserves; other matters could not be reasonably estimated.
- The 2015 cyberattack class settlement of $115 received final court approval in August 2018, with appeals pending. The company also reported a 2018 resolution with the HHS Office for Civil Rights involving a monetary settlement and a two-year corrective action plan; the settlement amount was not stated in the provided filing text.
- Anthem planned to transition PBM services to IngenioRx under a five-year agreement with CVS Health beginning as the Express Scripts agreement ends on December 31, 2019.
Important facts for investors to verify
- Whether Medicare growth and acquired membership can offset continued declines in Individual and fully insured commercial membership.
- Whether medical cost trends remain within management’s 5.5%–6.5% estimate and how favorable prior-year claims development affects reported results.
- The sustainability of operating cash flow after its year-over-year decline, given acquisition spending, investment, debt service, dividends, and repurchases.
- Developments in the Express Scripts, Cigna, antitrust, and cyber-related matters, including any liabilities, recoveries, or settlement payments.
- The final purchase accounting for America’s 1st Choice and HealthSun, and the effects of the PBM transition and HIP Fee on future margins.