Anthem, Inc. (now Elevance Health) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in millions of dollars except per-share data and membership. The filing registrant is Anthem, Inc.
Business context
Anthem provided health benefits and related services to approximately 42.6 million medical members at quarter-end. Its reported segments were Commercial & Specialty, Government, IngenioRx pharmacy benefit management, and Other. The company acquired behavioral health organization Beacon on February 28, 2020; its results are included in Other from that date.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $30,649 | $26,444 | $89,275 | $76,009 |
| Total revenue | $31,158 | $26,674 | $90,043 | $76,806 |
| Net income | $222 | $1,183 | $4,021 | $3,873 |
| Diluted EPS | $0.87 | $4.55 | $15.75 | $14.83 |
| Benefit expense ratio | 86.8% | 87.2% | 83.1% | 86.1% |
| SG&A ratio | 17.3% | 12.9% | 14.7% | 13.0% |
- Q3 operating revenue grew 15.9%; nine-month operating revenue grew 17.5%. Growth primarily reflected Government membership and premiums, plus IngenioRx pharmacy product revenue following the transition of customers from Express Scripts.
- Q3 net income fell 81.2%, while nine-month net income rose 3.8%. Q3 results included a $607 business-optimization charge and a $594 estimated share of the Blue Cross Blue Shield subscriber litigation settlement. The Q3 effective tax rate was 42.9%, versus 20.6%, partly reflecting the reinstated, nondeductible health insurer fee.
- Nine-month operating cash flow was $6,875, up from $4,734. Net cash used in investing was $7,629, including $1,973 for acquisitions; net cash used in financing was $200. Cash and cash equivalents ended at $3,984, down $953 from year-end 2019.
- At September 30, cash, cash equivalents, and fixed-maturity and equity securities totaled $30,324. Current assets were $45,450 and current liabilities $28,561. Total debt, including short-term borrowings, was approximately $20,843; the company-reported consolidated debt-to-capital ratio was 39.2%, compared with 39.5% at December 31, 2019. It reported compliance with debt covenants.
- Medical membership increased 4.0% year over year to 42.625 million, chiefly from Medicaid and Medicare growth. Local Group membership declined amid pandemic-related unemployment.
Changes, outlook, and risks
- COVID-19 reduced elective and non-emergency claims utilization in Q2; utilization and claims costs began to normalize in Q3. The company said the pandemic had not materially adversely affected reported results through September 30, but future impact remained uncertain. Expanded coverage, testing and treatment costs, premium credits, and potential further regulatory requirements could affect future claims and cash flows.
- Management reported no numerical earnings guidance in the supplied filing text. It said the 2020 year-to-date results were not necessarily indicative of full-year results. The HIP Fee resumed for 2020 and was stated to be eliminated beginning in 2021.
- The $607 optimization charge comprised $224 for lease right-of-use asset impairments, $195 for property and equipment impairments, and $188 for employee termination and contract-exit costs; most such future costs were expected to be paid by the end of 2021.
- The company accrued an estimated $594 payment under a proposed subscriber settlement in the Blue Cross Blue Shield antitrust litigation, subject to court approval. Provider litigation remained unresolved. Anthem also disclosed a DOJ Medicare risk-adjustment lawsuit and investigations involving CareMore and HealthSun; outcomes were uncertain. It estimated aggregate reasonably possible legal losses in excess of established reserves at $0–approximately $300, while noting many matters could not be estimated.
- Other notable exposures included uncertain COVID-19 utilization and enrollment, government-program rate and regulatory changes, investment impairment risk, and a $1,377 remaining commitment under a new IT services agreement through June 2025.
- The company stated that it expected operating cash flows, cash and investments, and available financing to support operations and commitments, while noting COVID-19 could adversely affect liquidity. It resumed share repurchases in late June after a temporary suspension; nine-month repurchases totaled $1,342, and cash dividends totaled $720.
Important facts for investors to verify
- How much of the unusually weak Q3 result reflects the $607 optimization charge and $594 litigation accrual, and whether the proposed settlement receives court approval.
- Whether claims utilization, COVID-19 costs, Medicaid membership, and commercial enrollment develop as management anticipated; the filing provides no specific earnings outlook.
- IngenioRx’s ongoing revenue and profitability after the customer transition, and the sustainability of segment results excluding unusual items.
- Debt, cash-flow, and investment-portfolio trends, including the effect of acquisitions, repurchases, and any additional credit losses.
- Developments in the DOJ risk-adjustment case, CareMore and HealthSun investigations, and other legal contingencies that the filing says may not be reliably estimable.