Anthem (NYSE:ANTM) reported its Q4 and full-year 2015 earnings at the end of January, and as always, the call was a lot more interesting than the press release. I often find that I get a much better sense of what's going on with the business when I hear management and analysts bantering about it than when I'm reading a financial table. Here were the five quotes that I think really best sum up where Anthem is right now.
1. "[In 2016] we expect membership declines of approximately 300,000 in our Individual business, as we aren't experiencing the overall market growth on the public exchange that we projected when we laid out our five-year plan."
-- CEO Joe Swedish
Last year was a tough one for the Affordable Care Act's public exchanges, particularly since half of the co-ops established by the law have now collapsed. Anthem has been aggressive in competing for market share on the exchanges, so it's surprising to see the company expecting to lose so many members. (For context, Anthem only had around 791,000 members enrolled through the Obamacare exchanges at the end of 2015 -- 30% below management's expectations)
2. "Going into '16, we are still assuming we will be profitable on our individual and exchange business, albeit below our targeted 3% to 5% margins as we continue to see those markets hopefully begin to harden around pricing."
-- CFO Wayne DeVeydt
Management has consistently blamed unsustainably low prices by competitors for Anthem's difficulty in growing market share (see the growth issues under quote No. 1). And the forecast that those prices were unsustainable appears to be panning out, as many competitors are shuttering their exchange operations or raising their prices. Half-of the co-ops established by Obamacare have collapsed, and UnitedHealth Group (NYSE:UNH), the nation's largest insurer, is considering leaving the exchanges entirely because of how unprofitable those plans have been for it. Anthem, by contrast, is able to do better than break even on its exchange plans... and with competition leaving, Anthem will have the opportunity to grow market share and also make sure it prices for better profitability.
3. "For government, we expect another strong enrollment growth year."
The exchanges may have caused Anthem some difficulty, but the other half of management's Obamacare strategy -- playing Medicaid expansion -- has paid off in spades over the last few years. Management greenlighted the 2012 purchase of Medicaid insurer Amerigroup to give Anthem the expertise and the footprint to snatch up as many Medicaid patients as possible. And because of that growth, 52% of Anthem's 2015 revenue flowed through its Government segment (which includes Medicaid and Medicare). Anthem was selected last year to help manage Iowa's Medicaid program, a big contract win that management called out specifically in guiding for 350,000 new Medicaid patients served by the insurer in 2016.
4. "We're very encouraged by the turnaround plan put into place by our Medicare team, now finishing the second year of a three-year plan."
Anthem has struggled against the competition in Medicare Advantage in the past few years. But management hasn't just sat on its hands. Anthem has repositioned its MA markets and products with the aim of improving margins and quality and, eventually, returning to growth mode. For 2016, management expects no membership growth as Anthem finishes that repostioning work. Anthem also has a big opportunity to improve its Medicare star rankings -- the company has previously announced a goal of having 25% of its Medicare Advantage membership in plans rated four stars (out of five) or above in 2016. That would still leave Anthem still deeply behind UnitedHealth Group -- which expects to have 60% of its membership in plans rated four stars or higher in 2016 -- but would signal continued strength in its turnaround work.
5. "The catcher's-mitt strategy itself is working as we would have expected."
The "catcher's mitt" strategy is the centerpiece of Anthem's plan for organic growth. The idea is to build products and services that will 'catch' customers as they potentially boomerang among employer insurance, public exchanges, private exchanges, and back again. This smart strategy is underpinned by the recognition that U.S. insurance is shifting away from the employer-based model, thereby creating an opportunity for companies that can seamlessly transition their clients from one product to another.
Anthem plans to implement a similar strategy with Medicare, by the way -- as its employer-based clients age into Medicare, Anthem's management is hoping to catch them in Medicare Advantage plans and thereby retain them through the rest of their lives. It's a smart strategy that should pay ever-increasing dividends for the company long-term.
The one thing we didn't hear much about
I was surprised at how little chatter there was about Anthem's planned acquisition of Cigna (NYSE:CI). Management noted that it still plans to close the acquisition in the back half of 2016, and there were a couple of questions asked, but given how important Cigna is to Anthem's 2016 plans, I was surprised at how little anyone had to say about it. Of course, everyone's in wait-and-see mode, and the really key moments will come in a couple of quarters. And in a lot of ways, that's really the case across the board for Anthem: Whether it's the Obamacare exchanges, Medicare Advantage, or Medicaid growth, the company has laid out its plans and metrics, and the key will be how it executes over the next few quarters. As for me, I'm confident that management will deliver.