Anthem, Inc. (now Elevance Health): 2019 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed October 23, 2019. The registrant was named Anthem, Inc. at the time of this filing. Financial amounts below are in millions of dollars except per-share data, membership, and percentages.
Business context
Anthem operated health plans and related services across Commercial & Specialty and Government businesses, serving approximately 41.0 million medical members at quarter-end. IngenioRx began providing pharmacy benefit management services in Q2 2019, with services transitioning from Express Scripts to CVS Health.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $26,444 | $22,980 | $76,009 | $68,037 |
| Total revenue | $26,674 | $23,251 | $76,806 | $68,732 |
| Net income | $1,183 | $960 | $3,873 | $3,325 |
| Diluted EPS | $4.55 | $3.62 | $14.83 | $12.58 |
| Benefit expense ratio | 87.2% | 84.8% | 86.1% | 83.3% |
| SG&A ratio | 12.9% | 15.4% | 13.0% | 15.3% |
- Q3 operating revenue increased 15.1% year over year; nine-month operating revenue increased 11.7%. Growth was led by Government Business premiums and, to a lesser extent, IngenioRx-related administrative revenue.
- Q3 net income rose 23.2%; nine-month net income rose 16.5%. Diluted EPS increased 25.7% and 17.9%, respectively, helped by higher earnings and fewer average diluted shares.
- Benefit expense rose 14.1% in both comparison periods. The higher benefit expense ratio reflected the loss of revenue associated with the 2019 suspension of the Health Insurance Provider Fee (HIP Fee); nine-month results also reflected elevated Medicaid medical costs.
- SG&A expense fell 3.6% in Q3 and 5.2% year to date, primarily due to the HIP Fee suspension. The fee is scheduled to resume in 2020.
- Medical membership increased 2.7% year over year to 40.984 million. Medicaid membership rose 8.3% and total Medicare membership rose 14.6%; Local Group membership declined 0.2%.
- Operating cash flow was $4,734 for the first nine months, versus $3,364 in 2018. Cash and cash equivalents were $4,190 at September 30, 2019, up from $3,934 at year-end 2018. Investing cash use was $3,515 and financing cash use was $962.
- Total assets were $77,809 and shareholders’ equity $31,332 at quarter-end. The company reported a 40.0% debt-to-capital ratio, compared with 40.2% at year-end 2018; its calculation includes lease liabilities. It had $18,816 outstanding under senior notes, $500 under commercial paper, and $710 in short-term borrowings. Cash, cash equivalents, and investments in fixed-maturity and equity securities totaled $26,997; $2,998 was held at the parent company for general corporate use.
Material changes and notable items
- Government Business revenue increased 14.1% in Q3 and 13.4% for the first nine months, primarily on Medicaid and Medicare growth. Segment operating gain rose 35.1% in Q3 but was essentially flat year to date, with elevated Medicaid costs and the HIP Fee suspension weighing on the year-to-date comparison.
- Commercial & Specialty revenue increased 3.9% in Q3 and 4.3% year to date. Segment operating gain increased 11.5% and 6.9%, respectively.
- Anthem issued $2.5 billion of notes in September 2019: $850 million due 2025, $825 million due 2029, and $825 million due 2049. It also extended its $2.5 billion revolving credit facility to June 2024 and established a $1.0 billion 364-day facility; neither facility had amounts outstanding during the reported nine months.
- Share repurchases totaled $1,396 for the first nine months, and cash dividends totaled $616. The quarterly dividend was $0.80 per share, up from $0.75 a year earlier.
- Adoption of lease accounting in January 2019 recorded $728 of operating lease liabilities and $637 of right-of-use assets, with a $26 cumulative adjustment to opening retained earnings; the company said adoption did not affect income or cash flows.
Outlook, risks, and contingencies
- No full-year earnings or EPS guidance is stated in the supplied filing text. Management estimated 2019 Local Group medical cost trend of 5.5%–6.5% and cautioned that interim results are not necessarily indicative of full-year results.
- Anthem expected its acquisition of Beacon Health Options, a behavioral health organization, to close in late Q4 2019, subject to customary approvals and closing conditions.
- Management cited healthcare utilization and unit-cost trends, rate adequacy and regulatory approvals, Medicare and Medicaid program risks, ACA legal and regulatory uncertainty, competition, and the transition and performance of pharmacy benefit services as significant uncertainties.
- The company disclosed multiple legal and regulatory matters, including the Blue Cross Blue Shield antitrust litigation, the Express Scripts contract dispute, Cigna merger-related litigation, and a DOJ investigation of Medicare risk-adjustment programs. For legal proceedings where losses were reasonably possible and estimable, aggregate possible losses in excess of established reserves were estimated at $0 to approximately $700; Anthem stated that many matters could not be reasonably estimated.
- Anthem reported no material changes to its risk factors or market-risk disclosures since its 2018 Form 10-K. Management said disclosure controls were effective.
Important facts for investors to verify
- Whether higher medical costs, especially in Medicaid, continue to pressure benefit ratios and Government Business profitability.
- How the 2020 return of the HIP Fee affects pricing, expenses, taxes, and reported margins.
- Progress and financial effects of the IngenioRx transition to CVS Health, alongside the continuing Express Scripts litigation.
- Closing, financing, and integration terms for the planned Beacon acquisition.
- Developments in the disclosed litigation and regulatory matters, including the potential loss range and any changes to reserves.
- Debt, capital deployment, and liquidity after the 2019 note issuance, share repurchases, and dividends.