Business context and reporting period
Anthem, Inc. (the registrant named in this filing; the request identifies Elevance Health) filed this unaudited Form 10-Q for the three months ended March 31, 2017. Anthem reported 40.6 million medical members, up 2.6% year over year, and operated Commercial and Specialty, Government, and Other segments.
Financial results and condition
Unless otherwise stated, amounts are in millions of dollars. Results compare the three months ended March 31, 2017 with the same period in 2016.
| Metric | 2017 Q1 | 2016 Q1 | Change |
|---|---|---|---|
| Operating revenue | $22,319.5 | $20,309.4 | +9.9% |
| Total revenue | $22,525.9 | $20,288.5 | +11.0% |
| Net income | $1,009.9 | $703.0 | +43.7% |
| Diluted EPS | $3.73 | $2.63 | +41.8% |
| Operating cash flow | $2,688.2 | $1,359.8 | +$1,328.4 |
| Benefit expense ratio | 83.7% | 81.8% | +190 basis points |
| SG&A expense ratio | 14.3% | 15.8% | -150 basis points |
| Net income as % of total revenue | 4.5% | 3.5% | +100 basis points |
Premium revenue was $20,951.3, up 10.3%; benefit expense rose 12.9% to $17,542.8. Income tax expense fell to $505.1 from $609.0, and the effective tax rate declined to 33.3% from 46.4%. The filing attributes much of the tax reduction to the 2017 suspension of the Health Insurance Provider Fee (HIP Fee) and tax benefits from a newly adopted share-based compensation standard.
Cash and cash equivalents were $6,772.4 at quarter-end, versus $4,075.3 at December 31, 2016. Cash, cash equivalents and investments, including long-term investments, totaled $29,434.4. Total liabilities were $42,851.6 and shareholders’ equity was $26,091.9. Anthem’s debt-to-capital ratio was 39.7%, compared with 38.5% at year-end. The company reported $540.0 of short-term borrowings, $1,152.8 of current long-term debt and $15,449.9 of long-term debt excluding its current portion.
Investing activities used $1,227.0; financing activities provided $1,234.3. Operating cash flow increased partly because of premium receipts, membership growth and timing of Medicare prepayments and state Medicaid payments. Cash generation was partly offset by higher claims payments. Anthem paid $172.2 in dividends and repurchased $50.7 of shares during the quarter.
Material changes and segment performance
- Revenue growth reflected premium rate increases, membership growth—particularly in Medicaid, Large Group and Medicare—and higher administrative fees. Medical membership grew 8.4% in Medicaid and 3.7% in Medicare.
- Benefit expense grew faster than operating revenue, increasing the consolidated benefit expense ratio. Anthem cited medical cost experience in Medicaid and the absence of HIP Fee-related revenue in 2017 as contributing factors. Lower SG&A expense and a lower SG&A ratio partly offset these pressures.
- Commercial and Specialty operating revenue increased 8.2% to $10,289.6; operating gain was $1,302.4, up 0.7%, and operating margin fell to 12.7% from 13.6%.
- Government operating revenue increased 11.4% to $12,025.7; operating gain declined 2.0% to $318.6, and operating margin fell to 2.6% from 3.0%, primarily reflecting Medicaid medical cost experience.
- Anthem recorded a $253.8 estimated guaranty association assessment related to the Penn Treaty insurers’ liquidation. The filing says future assessments are expected to be largely recovered through premium surcharges and premium tax credits.
Outlook, commentary, risks and contingencies
- For Local Group fully insured business, management considered a 2017 cost-of-care trend estimate of 6.5%–7.0% appropriate. It cited provider rate increases, utilization and specialty drug costs as cost pressures, and described contracting, benefit design and care-management efforts to mitigate them. This is a cost-trend estimate, not earnings guidance.
- The HIP Fee was suspended for 2017; the filing stated that the fee was scheduled to resume at $14.3 billion industry-wide in 2018 unless changed by later action. Anthem said policy and regulatory changes, including possible ACA modification, repeal or replacement, could materially affect its business.
- The proposed Cigna acquisition, valued at approximately $53 billion based on the 2015 announcement-date share price, remained unresolved. A federal district court ruled for the DOJ in February 2017; Anthem appealed, with the appellate decision pending at the filing date. Cigna purported to terminate the merger agreement and sued; a Delaware court temporarily enjoined termination. Anthem said it remained committed to completing the deal. A termination fee of $1,850.0 could be payable under certain conditions if required regulatory approvals cannot be obtained.
- Anthem expected a pro forma debt-to-capital ratio of approximately 49% after a Cigna closing and stated a goal of reducing it to the low 40% range about 24 months afterward. The company said it intended to maintain its dividend and investment-grade senior debt ratings; ratings agencies had placed certain ratings under review for possible downgrade.
- Anthem disclosed ongoing litigation involving its PBM agreement with Express Scripts, Blue Cross Blue Shield antitrust claims, the cyberattack disclosed in 2015, and other matters. The DOJ was also investigating Anthem’s Medicare chart-review and risk-adjustment programs. For specified legal proceedings where losses could be reasonably estimated, the aggregate reasonably possible loss in excess of established reserves was estimated at $0–$250 million; Anthem could not reasonably estimate potential cyberattack losses.
- Medical claims payable was $7,920.6 at quarter-end. Prior-period claims developed favorably by $794.6 in Q1; the filing notes that claims liabilities depend on estimates and may develop differently from expectations.
- Anthem reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It cautioned that first-quarter results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the registrant and period: this source is Anthem, Inc.’s Q1 2017 filing, not a filing under the name Elevance Health.
- Track the Cigna appellate and Delaware proceedings, closing conditions, possible termination fee, financing commitments and any resulting leverage or rating changes.
- Assess whether Medicaid medical costs, pricing and membership trends support the reported margins and management’s 6.5%–7.0% cost-trend estimate.
- Review subsequent development of medical claims reserves, especially given the $794.6 million favorable prior-period development in the quarter.
- Monitor legal, regulatory and cyberattack exposures, including the PBM dispute and Medicare program investigation; some potential losses were not estimable.
- Evaluate the sustainability of cash flow and liquidity, including the contribution of payment timing, commercial paper borrowings and other financing activity.