Elevance Health, Inc. annual report, FY2019

Business context and reporting period

The supplied filing is Anthem, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed February 19, 2020—not a standalone Q4 filing. The request identifies Elevance Health, Inc.; the filing itself is under the name Anthem, Inc. Amounts below are in millions of dollars unless noted. Anthem reported approximately 41.0 million medical members and operated Commercial & Specialty, Government, and Other segments.

Financial performance and key metrics

Net margin was 4.6%, versus 4.1% in 2018. Premium revenue rose to $94,173 from $85,421; administrative fees and other revenue increased to $8,968 from $5,920, including IngenioRx activity beginning in Q2 2019. Anthem attributed revenue growth mainly to Medicaid expansion and Medicare membership growth, premium-rate increases, and higher administrative revenue. Net income benefited from stronger Commercial & Specialty and Government results, IngenioRx, net realized gains rather than losses on financial instruments, and lower income tax expense. The 2019 effective tax rate was 19.7%, compared with 26.0% in 2018.

For Q4 2019, total revenue was $27,407, income before tax was $1,098, net income was $934, and diluted EPS was $3.62. Q4 2018 comparatives were $23,373, $542, $424, and $1.61, respectively.

Segment operating gain was $4,046 for Commercial & Specialty (+12.4%) and $2,054 for Government (+6.5%); Other recorded an operating loss of $101. Government operating revenue grew 13.2% to $62,632, while Commercial & Specialty revenue increased 4.6% to $37,421.

Cash flow, debt and liquidity

Cash and investments totaled $26,157 at year-end, up $3,518 from 2018; cash and cash equivalents were $4,937. Total assets were $77,453 and shareholders’ equity was $31,728. Long-term debt, less current portion, was $17,787; total debt-to-capital was 39.5%, compared with 40.2% a year earlier. Year-end borrowings included $700 short-term borrowings, $400 commercial paper, and $650 of Federal Home Loan Bank advances. The company reported compliance with debt covenants and applicable statutory capital requirements. Its revolving facilities provided $3,500 of combined capacity, with no balances outstanding at year-end; it also reported $3,792 remaining under its share repurchase authorization.

Operating cash flow was approximately 1.3 times net income. Cash uses included $1,701 for share repurchases, $818 for shareholder cash dividends, and $1,077 for property and equipment. Management estimated approximately $3,035 in subsidiary dividends to the parent during 2020, subject to regulatory limits.

Material changes, outlook and risks

• Medical membership increased by 1.062 million, driven primarily by fully insured growth. Medicaid membership rose 8.2%, Medicare 14.4%, and Individual membership 4.4%; Local Group membership declined 0.3%.
• The benefit expense ratio increased as the 2019 suspension of the Health Insurance Provider Fee reduced revenue, and due to less favorable prior-year reserve development in Commercial & Specialty and margin normalization in Individual. Management estimated full-year 2019 aggregate cost-of-care trend at about 6.0% and forecast 2020 Local Group medical cost trend of 3.5%–4.5%, including expected IngenioRx savings and other cost-management benefits.
• IngenioRx began operations in Q2 2019; the transition of Anthem members from Express Scripts was completed January 1, 2020. CVS Health performs certain PBM administrative functions under a five-year agreement. Management expects improved pharmacy cost solutions and integration, but execution and vendor dependence remain risks. The first external health-plan contract, Blue Cross of Idaho, began January 1, 2020.
• Beacon Health Options acquisition was pending, expected to close in Q1 2020 subject to approvals and customary conditions. The filing provides no purchase price in the supplied text.
• The Health Insurance Provider Fee was suspended for 2019, resumed for 2020, and was scheduled for permanent repeal beginning in 2021. ACA litigation and potential regulatory changes remained uncertain. Anthem participated in 91 of 143 rating regions for Individual ACA-compliant products and described its market approach as selective.
• Material legal matters included the Cigna merger litigation, in which Cigna sought a $1,850 termination fee; the Express Scripts PBM pricing and contract dispute, with Anthem alleging more than $14,800 in pricing damages and $158 in operational damages; and other regulatory and class-action matters. The aggregate range of reasonably possible losses in excess of established reserves was estimated at $0–$750. Outcomes were uncertain.
• Medical claims payable was $8,842 at year-end, including an estimated $8,633 for claims incurred but not reported or not yet processed. The company recognized $500 of favorable prior-year claims reserve development in 2019; completion- and trend-factor assumptions are sensitive estimates.
• The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included valuation of incurred-but-not-paid claims and revenue recognition for the new PBM business.

Most important facts for investors to verify

1. Confirm the reporting entity and period: the supplied document is Anthem’s FY2019 10-K, with quarterly data included, rather than a standalone Q4 filing by a company named Elevance Health.
2. Track whether the 2020 Local Group medical-cost trend guidance of 3.5%–4.5% materialized, and whether IngenioRx delivered anticipated savings after the transition.
3. Review subsequent development of the $8,842 claims liability and the $500 favorable reserve release, particularly the sensitivity to completion and trend assumptions.
4. Monitor outcomes and potential financial exposure in the Cigna and Express Scripts litigation, alongside the stated $0–$750 reasonably possible loss range for other matters.
5. Assess the Beacon acquisition’s closing, final terms and integration, as well as the effect of the 2020 Health Insurance Provider Fee on expense and pricing.
6. Reconcile debt maturities, regulated-subsidiary dividend capacity, and capital returns against operating cash flow and liquidity needs.