Anthem, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. The filing is for Anthem, Inc.; the requested company name, Elevance Health, does not match the registrant name in this filing. Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Business context and reporting period
Anthem operated a U.S. health benefits business with Commercial & Specialty, Government, and Other reporting segments. It served 40.244 million medical members at year-end, up 0.8% from 2016. Government Business represented $48,276.2 million of operating revenue; Commercial & Specialty represented $40,754.1 million. HealthSun, a Florida Medicare Advantage plan serving about 40,000 members, was acquired in December 2017. The America’s 1st Choice acquisition closed in February 2018, after year-end.
Key financial results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $89,061.2 | $84,194.0 | +5.8% |
| Total revenues | $90,039.4 | $84,863.0 | +6.1% |
| Income before tax | $3,963.8 | $4,555.4 | -13.0% |
| Net income | $3,842.8 | $2,469.8 | +55.6% |
| Diluted EPS | $14.35 | $9.21 | +55.8% |
| Operating cash flow | $4,184.8 | $3,270.2 | +$914.6 |
| Cash and investments | $25,179.0 | $23,262.7 | +$1,916.3 |
| Long-term debt, less current portion | $17,382.2 | $14,358.5 | +$3,023.7 |
The benefit expense ratio rose to 86.4% from 84.8%; the SG&A expense ratio improved to 14.2% from 14.9%. Income before tax as a percentage of total revenue fell to 4.4% from 5.4%. Segment operating gain, a non-GAAP measure, declined to $4,175.4 million from $4,801.7 million. Commercial & Specialty operating gain fell 10.0% to $2,876.1 million; Government operating gain fell 19.8% to $1,430.2 million.
Fourth-quarter total revenue was $22,680.3 million, versus $21,714.4 million a year earlier. Fourth-quarter income before tax was $124.2 million, net income was $1,230.7 million, and diluted EPS was $4.67; the large gap between pretax income and net income reflects tax effects, including the tax-law change.
Year-end total assets were $70,540.0 million and shareholders’ equity was $26,502.9 million. Debt-to-capital increased to 42.9% from 38.5%. The company reported $1,275.0 million of short-term borrowings and $803.6 million outstanding under its commercial paper program; commercial paper is classified as long-term debt in the balance sheet. It had a $3,500 million revolving facility with no balance drawn, and $2,759.8 million of cash, cash equivalents and investments at the parent company. Operating cash flow was 1.1 times net income, versus 1.3 times in 2016.
Material changes versus 2016
- Operating revenue increased mainly from premium rate increases, Medicare Advantage and Large Group growth, and higher self-funded administrative fees. Year-end medical membership increased by 325,000; Medicare membership rose 7.4%, while Individual membership fell 4.6% and Medicaid fell 0.8%.
- Benefit expense grew 8.1%, faster than operating revenue, reflecting medical cost trends, higher Medicare costs, and membership growth. Government segment operating margin declined to 3.0% from 3.9%.
- Net income increased despite lower pretax income, chiefly because income tax expense fell to $121.0 million from $2,085.6 million. The 2017 effective tax rate was 3.1%, including a provisional $1,108.3 million benefit from remeasuring deferred taxes under the Tax Cuts and Jobs Act; the 2016 effective rate was 45.8%.
- Operating cash flow improved, while investing cash outflow rose to $5,082.4 million, primarily reflecting investment purchases, the HealthSun acquisition, and property and equipment spending.
- Anthem issued $5,500 million of notes in November 2017 and repurchased debt, recording $282.4 million of total losses on extinguishment of debt. It also repurchased 10.5 million shares for $1,997.7 million and paid $704.9 million in cash dividends.
Outlook, risks and unusual items
- Management expected 2018 Local Group medical cost trend of 5.5%–6.5% using an updated allowed-amount methodology. The filing estimates 2017 trend at about 5.5% on that comparable basis (the prior paid-amount measure was approximately 6.5%).
- For 2018, Anthem planned to offer Individual ACA-compliant products in 56 of its 143 rating regions, citing market sustainability and uncertainty around federal policy and subsidies. Management highlighted adverse selection, enrollment, pricing adequacy, medical cost trends, and potential changes to the ACA as material uncertainties.
- The ACA Health Insurance Provider Fee was suspended for 2017, resumes at an industry-wide $14.3 billion for 2018, and was suspended for 2019 under law at the filing date. The end of cost-sharing reduction payments in October 2017 and the scheduled reduction of the individual mandate penalty to zero in 2019 may affect marketplace risk pools.
- Anthem planned to transition PBM services from Express Scripts to CVS Health under a five-year agreement starting January 1, 2020, and to launch IngenioRx. Anthem’s litigation against Express Scripts alleges pricing and operational breaches; the disputed claims include approximately $13 billion of asserted pricing damages over the remaining contract term. No outcome is assured.
- The Cigna merger was terminated in May 2017 after courts blocked the transaction. Litigation continued: Cigna sought a $1.85 billion termination fee and other damages; trial was scheduled for February 2019. Anthem said it considered Cigna’s claims without merit. Outcomes and potential financial effects were uncertain.
- The 2015 cyberattack resulted in a proposed $115 million class settlement and non-monetary relief; final approval remained pending. Regulatory investigations and related state cases also remained unresolved. Anthem recorded a $253.8 million estimated Penn Treaty guaranty-fund assessment, expected to be largely recovered through future surcharges and tax credits.
- Other risks include government-program reimbursement and audit exposure, provider contracting and healthcare-cost volatility, regulatory limits on subsidiary dividends, substantial indebtedness, cybersecurity and vendor dependence, and possible litigation or investment losses. Goodwill and intangible assets totaled $27.6 billion; no impairment was recorded in 2017.
Ernst & Young issued an unqualified audit opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of the 2017 net income and EPS increase is attributable to the nonrecurring tax benefit and other tax items, and what earnings level is expected absent those effects.
- Whether medical cost trends and claims reserves develop as assumed; the year-end medical claims payable liability was $7,991.5 million, and favorable prior-year claims development was $1,164.6 million.
- Whether Government Business margins stabilize, and whether 2018 pricing and medical cost experience support profitability in Medicare and Medicaid.
- The final financial exposure and timing of the Cigna, Express Scripts, cyberattack, antitrust, and other legal or regulatory matters; the filing does not establish their ultimate outcomes.
- Debt repayment capacity, capital allocation, and regulated-subsidiary dividend availability, including the effects of acquisitions, buybacks, and future debt maturities.
- The completed America’s 1st Choice acquisition’s purchase accounting and contribution, which were not included in 2017 results.