Anthem, Inc. (now Elevance Health, Inc.) — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The filing is by Anthem, Inc.; its interim financial statements are unaudited and prepared under U.S. GAAP. Anthem reported 40.3 million medical members and operated Commercial & Specialty, Government, and Other segments.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | 22,096.7 | 21,125.2 | 66,614.2 | 62,709.1 |
| Total revenue | 22,426.0 | 21,403.9 | 67,359.1 | 63,148.6 |
| Benefit expense | 18,103.6 | 16,922.5 | 53,563.6 | 49,266.5 |
| Income before tax | 1,118.9 | 1,136.5 | 3,839.6 | 3,896.8 |
| Net income | 746.9 | 617.8 | 2,612.1 | 2,101.4 |
| Diluted EPS | $2.80 | $2.30 | $9.70 | $7.84 |
- Q3 operating revenue rose 4.6% and total revenue rose 4.8%; nine-month operating revenue rose 6.2% and total revenue rose 6.7%. Growth was primarily from higher premiums, including rate increases and membership growth.
- Net income increased 20.9% in Q3 and 24.3% for the nine months, despite slightly lower pretax income in both comparisons. Lower income-tax expense and stronger investment results supported the increase; the nine-month comparison also benefited from lower intangible amortization.
- Benefit expense grew faster than premiums: the benefit expense ratio increased 150 basis points to 87.0% in Q3 and 170 basis points to 85.6% for the nine months. The SG&A ratio improved to 13.6% from 14.8% in Q3 and to 13.9% from 14.8% for the nine months.
- Net income as a percentage of total revenue was 3.3% in Q3 versus 2.9%, and 3.9% for the nine months versus 3.3%. Segment operating gain was $982.0 million in Q3, down from $1,078.1 million; nine-month segment operating gain was $3,794.4 million, down from $4,148.7 million. Commercial & Specialty and Government segment operating margins declined in both comparisons.
- Q3 income-tax expense was $372.0 million (33.2% effective rate), versus $518.7 million (45.6%). Nine-month tax expense was $1,227.5 million (32.0%), versus $1,795.4 million (46.1%). The filing attributes much of the decrease to the 2017 suspension of the non-deductible Health Insurance Provider Fee (HIP Fee), along with other period-specific tax effects.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $5,486.0 million, compared with $2,993.4 million. Management cited higher premium receipts, membership growth, and timing of California Medicaid capitation payments; increased claims payments and timing of state Medicaid payments partly offset the increase.
- Investing cash outflow was $1,461.7 million and financing cash outflow was $2,006.3 million. Financing outflow included $1,635.4 million of share repurchases and $525.4 million of cash dividends. Cash and cash equivalents increased $2,021.9 million to $6,097.2 million.
- At September 30, cash, cash equivalents and investments, including long-term investments, totaled $29,271.7 million, up $3,752.7 million from year-end 2016. Total assets were $68,309.9 million; shareholders’ equity was $25,948.3 million.
- Reported debt-to-capital ratio was 38.5%, unchanged from December 31, 2016. Short-term borrowings were $1,180.0 million, current long-term debt $1,273.4 million, and long-term debt excluding current maturities $13,777.3 million. Commercial paper outstanding was $1,315.5 million. Anthem reported no balance outstanding on its $3.5 billion revolving facility, and $450 million drawn on new 364-day credit lines.
- Medical claims payable was $7,963.9 million, versus $7,892.6 million at year-end 2016. The company recorded $1,066.3 million of favorable prior-period claims development in the first nine months, compared with $772.8 million in the prior-year period.
Material changes, outlook and risks
- Benefit costs and utilization trends pressured segment results, including higher medical cost experience in Medicare. Management estimated a 6.5%–7.0% cost-of-care trend for its Local Group fully insured business; provider rate increases and specialty-drug costs were cited as contributors.
- The HIP Fee was suspended for 2017; management noted it was scheduled to resume at an industry-wide amount of $14.3 billion in 2018 unless changed by legislation or regulation. Anthem planned to offer Individual ACA-compliant products in 56 of its 143 rating regions in 2018, down from 137 regions, citing market sustainability and uncertainty around federal cost-sharing reduction funding.
- After the Cigna merger was blocked and the agreement terminated in May 2017, related litigation continued. Cigna sought, among other relief, a $1.85 billion termination fee; Anthem disputed the claims. The filing does not state a determinable outcome.
- Anthem accrued $115 million in Q2 2017 for a class settlement relating to its 2015 cyberattack; preliminary approval had been granted, with final approval still pending. Regulatory inquiries and other related matters remained open.
- Other significant legal matters included the Blue Cross Blue Shield antitrust litigation, the California gross-premiums-tax case, and disputes and purported class claims involving Express Scripts. Anthem described outcomes as uncertain; for proceedings where losses could be reasonably estimated, it placed the aggregate possible loss in excess of established reserves at $0–$250 million.
- Anthem announced a HealthSun acquisition, expected to close by year-end 2017, and an America’s 1st Choice acquisition, expected to close in Q1 2018; both were subject to regulatory and other approvals and were expected to be slightly accretive in 2018. It also announced IngenioRx and a five-year CVS Health agreement to provide PBM services beginning January 1, 2020, when the Express Scripts agreement was scheduled to end.
- No formal full-year financial guidance is provided in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results. Principal stated risks include health-care policy and funding changes, medical cost and utilization trends, premium-rate adequacy, litigation and investigations, cyber and information-security risks, regulatory restrictions on subsidiary distributions, and debt and credit-rating exposure.
Investor verification priorities
- Check whether elevated benefit ratios and Medicare cost trends persist, and how pricing and membership changes affect segment operating margins.
- Assess the sustainability of operating cash flow, including the effects of claims, Medicaid payment timing, and working-capital movements.
- Verify claims-reserve development and whether favorable prior-period redundancies continue at comparable levels.
- Track the outcomes and potential financial exposure from Cigna, Blue Cross Blue Shield, Express Scripts, cyberattack, and other legal or regulatory matters; distinguish pleaded claims from recorded liabilities.
- Confirm acquisition approvals, closing dates and integration results, and the transition to CVS/IngenioRx in 2020.
- Monitor the HIP Fee and ACA marketplace rules, 2018 exchange participation, debt maturities and borrowing levels, and regulated subsidiaries’ capital and dividend capacity.