Anthem, Inc. (now Elevance Health, Inc.) — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; filed February 18, 2021. This is an annual report, not a standalone fourth-quarter filing. Unless otherwise noted, financial amounts are in millions of dollars.
Business context
Anthem provided health benefits and related services to approximately 42.9 million medical members at year-end. Its businesses included Commercial & Specialty, Government, IngenioRx pharmacy benefit management (PBM), and Other, which included diversified health services and the acquired Beacon behavioral-health business. IngenioRx completed the transition of Anthem’s members from Express Scripts by January 1, 2020.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Operating revenue | $120,808 | $103,141 | +17.1% |
| Total revenue | $121,867 | $104,213 | +16.9% |
| Net income | $4,572 | $4,807 | -4.9% |
| Diluted EPS | $17.98 | $18.47 | -2.7% |
| Benefit expense ratio | 84.6% | 86.8% | -220 bps |
| SG&A expense ratio | 14.4% | 13.0% | +140 bps |
| Operating cash flow | $10,688 | $6,061 | +$4,627 |
Revenue growth reflected Government membership and premium growth and higher IngenioRx product revenue. Net income fell despite higher revenue, reflecting pandemic-related support and care costs, litigation and optimization charges, higher taxes, and lower investment income. The lower benefit ratio primarily reflected reduced use of non-COVID-19 care for much of the year; COVID-related costs accelerated in Q4 and exceeded the savings from lower non-COVID utilization in that quarter.
Segment operating gain was $2,681 for Commercial & Specialty (down 33.5%), $2,444 for Government (up 18.9%), and $1,361 for IngenioRx. Segment comparisons require care: IngenioRx was separately reported in 2020, while its 2019 earnings had been allocated to other segments and prior-year segment margins were not restated.
At December 31, cash and investments totaled $31,295, including $5,741 of cash and cash equivalents; total assets were $86,615 and shareholders’ equity was $33,199. Long-term debt, including its current portion, was $20,035; the reported debt-to-capital ratio was 38.7%. The company had $250 of commercial paper outstanding, no amounts drawn on its revolving credit facilities, and $1,747 of cash, cash equivalents and investments at the parent company. Regulated subsidiaries exceeded applicable minimum risk-based capital requirements.
Q4 2020 total revenue was $31,824, income before tax was $611, net income was $551, and diluted EPS was $2.19. Q4 2019 net income was $934 and diluted EPS was $3.62.
Material changes versus FY2019
- Medical membership rose 4.7% to 42.9 million. Medicaid membership increased 21.8% to 8.9 million and Medicare membership increased 11.4% to 2.4 million. Medicaid growth reflected suspended eligibility recertifications during the pandemic, acquisitions and expansion.
- Operating revenue rose 17.1%, while net income and diluted EPS declined. Operating cash flow increased substantially, primarily due to working-capital timing.
- IngenioRx unaffiliated PBM product revenue increased as the member transition was completed; IngenioRx became a separate reportable segment.
- Beacon was acquired on February 28, 2020. The preliminary purchase accounting included $1,072 of goodwill; the acquisition accounting was not finalized at year-end.
- Cash and investments increased by $5,168. Anthem repurchased $2,700 of stock and paid $954 of consolidated cash dividends during the year.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic did not materially adversely affect reported FY2020 results, but emphasized that future effects were uncertain. Risks include higher COVID care and vaccination costs, utilization rebound, claims-estimation uncertainty, membership and mix changes, Medicaid rate adjustments, collection delays, investment volatility and cybersecurity exposure.
- Guidance: The filing does not provide a clear numerical earnings or revenue forecast. Management said it would continue to monitor medical trends and pandemic effects, pursue organic growth and acquisitions, and focus on affordability, operating efficiency and capital use.
- Charges and taxes: Anthem recorded $653 of business optimization charges, including lease and property impairments and employee termination costs. The 2020 Health Insurance Provider Fee (HIP Fee) added $1,570 to SG&A and increased tax expense; the fee was permanently eliminated beginning in 2021.
- Contingencies: A proposed Blue Cross Blue Shield subscriber antitrust settlement estimated Anthem’s payment at $594; $548 net of insurance recoveries was accrued. Court approval remained outstanding, and provider litigation continued. The company also disclosed unresolved DOJ litigation and investigations concerning Medicare risk-adjustment data, ongoing Express Scripts contract litigation, and Cigna’s appeal of the ruling that Anthem did not owe a merger termination fee. The filing estimated aggregate reasonably possible losses in excess of reserves at up to approximately $250, where estimable.
- Other risks: Significant exposures include healthcare-cost forecasting and pricing, government program funding and regulation, minimum medical loss ratios and Star ratings, provider and PBM vendor relationships, privacy and cyber incidents, debt and subsidiary dividend restrictions, and the value of goodwill and intangible assets. Goodwill and other intangible assets totaled $31.1 billion; no impairment was recorded in 2020.
- Subsequent event: Anthem announced an agreement to acquire Puerto Rico-based MMM Holdings, expected to close by the end of Q2 2021 subject to customary approvals and closing conditions.
Important facts for investors to verify
- How 2021 claims utilization, COVID-related treatment and vaccination costs, and the associated claims-reserve uncertainty develop; the $11,359 medical claims payable balance is a key estimate.
- Whether Medicaid rate adjustments, membership eligibility changes and commercial employment trends affect margins and membership mix.
- Final court approval and payment terms for the subscriber antitrust settlement, and developments in the provider case, DOJ risk-adjustment matter and related investigations.
- IngenioRx profitability and the comparability of segment results given the 2020 reporting change and CVS service agreement.
- Debt maturities, capital returns and the amount of cash realistically available at the parent, given regulatory limits on subsidiary dividends.
- Beacon purchase accounting and integration, the proposed MMM acquisition, and the potential for impairment or further optimization charges.