Great. Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Managed Care and Facilities Analyst here at Barclays. With me on stage, and I'm pleased to welcome Brian Evanko, CFO of Cigna Group. Brian, welcome.
Thanks, Andrew. Appreciate you hosting us.
Great. Let's start with, you know, a topic that's been on people's minds for the last few weeks, Change Healthcare and some of the disruption there. What have you seen? What's been your experience thus far, and what's Cigna's overall exposure to something like this?
I appreciate the question Andrew and thanks again to you and Barclays for hosting us here this week. So the Change Healthcare outage which transpired a few weeks ago did impact us. So we utilize services for Change Healthcare in a variety of different ways in the company. So if you take our two high-performing businesses Cigna Healthcare which is our health plan asset about 40% of the company's income Evernorth Health Services which is our service company business about 60% of the income Cigna Healthcare provider claim submissions and claim payments are one of the specific areas where we utilize Change Healthcare. Today operationally we have about 10%-15% of the claims that are still disrupted. That was a higher percentage when the outage first transpired.
We were able to move some volume to other trading partners pretty quickly thereafter and then we implemented some workarounds as well. Evernorth was a little less impacted. We had some prescription drug eligibility verifications that we had to skip for a short period of time before we moved volume to other trading partners. Now financially we do not expect a material impact to this. Obviously as we work through the first quarter close we'll have to make some estimates potentially on our reserving. As we work through pricing and underwriting implications we'll make sure to keep this top of mind. Don't expect there to be a significant financial implication based on what we know as of today.
Got it. Any comments on just the broader progression of utilization trends this year whether it's you know medical visibility into claims during healthcare or just the broader utilization environment?
Yeah, so despite the Change Healthcare outage I just made a reference to, we do have a good level of visibility of what's transpiring as it relates to care authorizations et cetera in the environment. As we stepped into 2024, we expected the strong utilization that existed in 2023 to continue in 2024. And in fact our all-in cost trend estimates for 2024 in Cigna Healthcare are portfolio are expected to be a little bit higher than what we saw in 2023 at all-in. And that reflects the effect of continued provider inflation or contract rates as well as utilization patterns continuing into 2024. So our guidance and our pricing and our forecasting all accounted for that. So far, while it's still early in the year, things are progressing broadly in line with our expectations.
We would expect the MCR guidance we issued in our fourth quarter call to still be appropriate based on what's transpired thus far in the quarter.
Great. Let's move on to Evernorth. Over the last five years Evernorth's growth profile has increased the number of times. In fact I think it's more than doubled from when it was standalone Express Scripts. There was a target of 2%-4%. Now it's 5%-8% at Evernorth today. How would you bucket the drivers of that accelerating growth within Evernorth?
Yeah, so we're really thrilled with our Evernorth business. I'd start there in terms of the performance that's emerged over the last few years. To your point, we acquired Express Scripts in 2018. We've built out additional services in that part of the company over time. And really, if you think about why the growth rate has accelerated since we've made the acquisition of Express Scripts, there's a few things I'd highlight. One would be the mega trends that we expect to transpire in the next five to 10 years and have been unfolding in recent years. One of those is what we call pharmacological innovation. We're seeing just a wave of new drugs coming through the pipeline, whether those be biosimilars, whether those be GLP-1 drugs, whether those be rare and orphan drugs. All of that innovation is transpiring as we speak.
So that's one of the mega trends that's been unfolding and we expect to continue persisting for the next 5-10 years. The Evernorth business has been designed to capitalize on those. A second area is as it relates to technology we would expect continued tech-led innovation within the ecosystem. Our Evernorth business has been built around choice modularity and the leverage of technology particularly in especially pharmacy and care services platforms. Then a final area a final mega trend we see is vitality amongst all of the individuals in the US is plateauing. So it's creating a true mental health crisis in the US right now. We have a leading behavioral health business in Evernorth that while small today is scaling as we speak.
So all those things led us to increase the growth algorithm for Evernorth business to 5%-8% going forward. The specialty and care service is part of the portfolio. We expect to be an even faster grower. And then we have a durable pharmacy benefit services business that'll be a 2%-4% grower. And the weighted average of that gets you to 5%-8% expected average annual growth.
Great. And what kind of visibility did you have into that growth at the time you bought Express Scripts? Like how much of this is you know being in the right place with that asset? How much is this Cigna developing and going deeper into these growth areas?
Yeah, so I mean we designed Evernorth to be responsive to those trends I just outlined. And so the specialty pharmacy in particular is an area that's had outsized growth, which was a $30 billion business five years ago. $60 billion business in 2023. So it's doubled in five years because it's positioned really well to take advantage of all that pharmacological innovation that I made reference to. The pharmacy benefit services business has performed as expected, with the one add being we won the Centene contract effective 1/1/2024, which we would not have anticipated prior to winning that contract. So we were thrilled with that. Good validation of the value proposition and the core Express Scripts PBM business.
but the intentional design of Evernorth is really what we're pleased with when we look back at the growth story there.
Right. And specialty was a big part of the story that you told last week at your investor day. What differentiates Cigna in this market and drives your conviction to take you know up to 200 basis points of market share?
Yeah, with the specialty pharmacy assets we have, whether that be Accredo, the specialty pharmacy, CuraScript, which is the distribution engine, Carepath Rx, which is our pathway into health systems. All of those assets have been built and constructed over time with intention. And so to your point on kind of what led to the differentiation, I'll just speak to that in a minute. But first, the numbers here I think are important. We expect high single-digit secular growth in the specialty pharmacy market going forward off of what's already a $400 billion addressable market. $400 billion is actually bigger than what the individual Medicare Advantage market is today. So and we expect the specialty market of $400 billion to grow high single digits, faster growth than even what you see in the individual MA market, which I realize those are comparing apples and oranges.
But for context this is a really big market today with really attractive secular growth. And to your point we expect up to 2 percentage points of additional growth from Cigna. So we would expect the specialty pharmacy business that we own to grow 8%-11% off of an already sizable starting point. Now why is that? First of all important to keep in mind specialty pharmacies are very different than retail pharmacies. So usually when we think of filling a prescription we think of walking or driving to our nearby retail pharmacy. You go to the counter you pick it up. Specialty pharmacy is not like that at all. These are highly complex really expensive clinically intense drugs that often have special handling requirements whether that be temperature control or other injectables that need to be injected in a certain period of time.
Really clinically complex. We've built clinical expertise over a long period of time that's differentiated from our competitors in this space. Meaning we employ 500 pharmacists and we have 600 home infusion nurses. We have infrastructure that's been built up, owned operational infrastructure around the country that's been built up 15 Therapeutic Resource Centers. These are centers of excellence around specific conditions. So take hypertension, and we've 14 others like that that are very specifically targeted as specific conditions. We have four state-of-the-art clean rooms. So, and clean rooms, they have licensing requirements to actually establish. They take years to build. Most of our competitors have zero or maybe one clean room. We have four of them around the country. And we have 28 dispensing sites around the U.S. So all those things, those owned operational assets create competitive barriers.
Country and an economic moat that's proven to be really strong for us. So the clinical expertise, the owned operational assets, and then the access to these specialty drugs. So one of the things that's not often well understood is manufacturers of these drugs want to work with specialty pharmacies who they can trust and who won't impact their own brand. So meaning our clinicians are experts in dealing with patients. If there's a problem there in the delivery from the specialty pharmacy to the patient, the brand of the manufacturer can be put at risk. And so the manufacturers choose to work with us. We have access to over 98% of all the specialty drugs in the U.S. And we're, we have the number one access to all the limited distribution drugs or LDDs across the U.S.
All those create a leadership position for us in the specialty pharmacy market.
Great. You also sized a $100 billion biosimilar opportunity by 2030. Are there any drugs in particular that stand out that drive an outsized portion of that outside of Humira?
Yeah, so one of the things when I spoke to pharmacological innovation earlier that we're really excited about is all the competition that will transpire in this market. So biologics that today don't have competition we expect to your point $100 billion of those sales to suddenly be subject to biosimilar competition through the end of the decade. There's not a single drug that I would point to though that's a large driver of the $100 billion. Humira's the biggest; the next biggest is likely to be Stelara which is a 2025 biosimilar launch. Think of that as call it $10 billion of the $100 billion. But you're gonna have a lot of smaller ones that'll aggregate up. And it's an example of the cumulative effect of multi-year biosimilar introduction in the business that we have positioned to capitalize on that.
Great. Maybe just picking on the biosimilars for a minute. What's been your experience on the uptake of Humira this year? What are your expectations particularly in light of I think the interchangeable high concentration version of the drug was recently approved a few weeks ago. You know, what does that acceleration curve and uptake look like in 2024 and 2025?
Yeah, 2023 the Humira biosimilars that were introduced in the market took a relatively small share. We expect that percentage adoption of biosimilars to continue growing as 2024 unfolds. To your point, the approval of the high dosage interchangeables which just recently happened and we'll introduce later this year. We expect to drive further adoption. So we would expect further share shift as 2024 unfolds. And we use the power of competition to drive better economics for our clients. So one of the things we introduced at our investor day last week was Evernorth will have a $0 patient out of pocket available through Accredo later this year in terms of a Humira biosimilar. So that's an example of we're encouraging biosimilar utilization through aligning incentives with our clients and patients.
Right. And one of your peers has taken the branded biosimilar off the formulary for 2024. How are you thinking about changes to the formulary you know this year and next year? Are there changes you can make intrayear? Just curious how the formulary might evolve over the next year or two with this increased adoption.
Yeah, so we can make changes to the formulary intrayear. We did that last year when there were additional biosimilars in the middle of the calendar year. As it relates to our approach here, as I said earlier, we use competition to drive to the lowest net cost. So we have not made a decision yet as to whether we'll have a single biosimilar preferred or multiple co-preferred, whether the reference drug will still be co-preferred. We're still working through all of that as we speak. But importantly, the power of the free market forces around competition are key to our model ultimately. But we're still working through the specifics of all that. But we can make changes intrayear. I'd also note we have many client-specific formularies too.
Clients can choose do they wanna use our national preferred formulary or do they wanna craft their own formulary that maybe prefers a biosimilar or Humira or something else.
Great. And one of the other exciting initiatives you have last week with the financial guarantee on GLP-1. Can you help us understand how the mechanics and economics of this arrangement work?
Sure. Sure. I'll go a little bit deeper on this. This has been a common question I think since we announced the program last week which is called Encircle Rx. So it's the first of its kind trend guarantee for GLP-1s in our Evernorth Health Services business. So if you start with the need state here. Employers see that GLP-1s could be game-changing drugs for many of their employees or their dependents provided that they're taken in a clinically appropriate way that there's adherence in all their associated lifestyle management that transpires alongside of that. So there's interest from employers. But there's also concern from employers about the cost particularly in the early years before you start to see the potential for the clinical payback down the line and lower medical costs.
And so the need state here for the employers they'd like to be able to provide access but they wanna be able to do it in a way that's controlled and where their costs are manageable. And so the leaders in the space who said that's a problem statement we're gonna step into that and we're gonna offer the Encircle Rx program. Now the specific mechanics of it work as follows. So the individual or employers who today do not provide any weight management coverage if they buy Encircle Rx from us they'll pay us a monthly fee and we'll take risk on the fee. So that's the financial component for us or the financial exposure for us. We'll get paid a fee. We'll take risk on that fee.
If they have an existing weight management program and therefore we have a baseline of utilization to start from we'll provide those employers with a 15% trend guarantee. It's a one-year guarantee based on their most recent utilization period. So 15% trend guarantee that's subject to a risk corridor. So our financial exposure is subject to a corridor and after that corridor then the residual risk goes back to the employer. Now we're confident we have enough experience with other types of drugs in clinical situations that we'll be able to manage within the 15% trend guarantee for the vast majority of employers who choose this. And importantly lifestyle and behavioral modification goes alongside of it from the standpoint of our Omada digital tools will help those taking the GLP-1s perform the associated lifestyle modifications that we would expect.
So whether that's changes in diet or whether that's changes in exercise patterns, all of that kinda goes alongside of it. But these are types of programs while they're a different drug class we've used these very successfully with our value-based care strategies in Evernorth for many years.
Great. What's been the client feedback on this particular introduction?
There's a lot of interest in it. It's really early because we've only had it in the market for a matter of days. But there's a lot of interest in the program. The people wanna understand exactly what the fee structure is and how much of the guts of it they're interested in the mechanics the same way you are. But there's a lot of interest in this because across our Evernorth book we have almost half of the employers today who cover weight management. Now we tend to have larger employers in our Evernorth book. But that represents opportunity for them to have more predictability in their costs. And it represents opportunity for the other 50%+ who don't cover it to step into this space over time.
Great. If this is becoming a more manageable cost on your end, would you see greater adoption of GLP-1s more broadly in the commercial space?
Over time, we would expect, provided that the clinical efficacy is there and it proves to be effective, that we would expect there to be more adoption there. You're seeing supply constraints start to ease a little bit as we get more and more manufacturers in the next year as well.
Great. Let's shift to the commercial segment. You know despite all the attention that Medicare gets it's interesting that Cigna actually participates in two businesses that arguably grow faster than Medicare Advantage. One specialty that we just talked to but also the select commercial segment which I think clients like to spend some time on. You seem to prioritize this subsegment of the commercial market more than peers. What differentiates Cigna's value and win rate in this market specifically?
Yeah, so we were just talking about Evernorth, the services platform, 60% of the company's income roughly. Now in Cigna Healthcare, where your question was pointed at, the other 40%. The Select segment in the US employer space we define as 50-500 employees, so that's just definitional. We have about a 7% market share amongst that employer subsegment today. That compares to, we have low double-digit market share in 500 and up, where historically we've been very successful with multi-site employer propositions and product innovations over time. So the seven percent share that we have in the Select segment has been growing, but we still see opportunity for that to move into the double digits over time. In terms of why we win, there's a few things I'd I'd pull out. One, we take a multifaceted approach to affordability.
Those employer clients care a lot about affordability in terms of their budgets. What do I mean by that? We've over time been systematically improving our unit cost reimbursements with providers. We've been using site of care optimization approaches. So whether that's moving care from inpatient to outpatient, physical care to virtual care, moving specialty injectables from facilities to doctor's offices, all those things contribute to a more affordable outcome for the employers. Secondly, we've had an agnostic approach to funding arrangement in the 50-500 size employer space. Conventional wisdom is employers in that space want a fully insured or full-risk funding arrangement with their payer. We take a funding-agnostic go-to-market approach where we're willing to do ASO or self-funded all the way down to 50 lives, no problem.
Ultimately because we don't have a fully insured book to protect we don't have to worry about revenue loss or what that does to income contributions. That represents both sides for us. We've proven to be successful in writing a lot of self-funded business where today that's 60% of our Select segment. The industry's about 30%. We have a much greater share that's self-funded than the industry because we've taken that agnostic approach to funding.
Great. I wanna go a little bit deeper on this agnostic approach. What does that actually mean from a financial perspective? Does that mean that you know profit-dollar parity with risk? Just help me understand you know what that translates to from a financial perspective.
Yeah, so where you went profit-dollar parity would be the right way to think of it. So not the same percentage profit margin because the self-funded revenue's gonna be so much lower. But on a earnings per customer basis comparable. And the reason for that is generally speaking if you're a small employer you're gonna buy all of your solutions from one payer one player. So you don't wanna have a Cigna solution for your medical and a different company for your pharmacy. You're gonna buy one because generally small employers have very limited HR departments. They want simplicity. And as a result of that on our self-funded offerings we're able to get most of our offerings in at one time including our stop-loss and risk.
Great. And then on the individual market this is an area that didn't receive as much attention yesterday. It's not a big part of your business today. But where does it fit into the broader strategy at Cigna? You prioritize margins this year. What's going to dictate your appetite for growth in that market?
Yeah, so we think it's an important subsegment of the U.S. healthcare system because there are individuals who don't have access to a government-sponsored plan whether that be Medicare, Medicaid, TRICARE, or they don't have employer-sponsored coverage access. So the people in the middle, either those who are unemployed or between jobs or early retirees, there needs to be a solution for them. So the individual market is that solution. So we've been participating in this market for 10 years since the ACA went live with a measured approach to which geographies that we're in. It's a small part of the overall company today. So when you look at the overall revenue and income contributions, it's a small fraction. I think almost single-digit type percentage of the total company.
We see over time 10%-15% annualized operating income growth in this space because we're only in 14 states today. We expect there will be secular growth in the individual market going forward as well.
Great. On the last interview call David made an interesting comment that senior growth has reached a peak and framed that market more as an opportunity for expansion at Evernorth. How does that slowing senior growth in particular change your view of the Medicare market today versus say 5-10 years ago?
Yeah, the Medicare market in aggregate we see as an attractive part of the U.S. healthcare system, so make no mistake about that. While we made a strategic decision to divest our Medicare business and take healthcare to HCSC, that was a decision that was made thoughtfully and specifically because of the relative contribution of that business to the overall size of Cigna and the difficulty from a human capital and the amount of financial resources we felt will be needed to really scale it up. So that was the reason we made the decision to divest that business to HCSC. We continue to see the Medicare space as an attractive subsegment. We serve millions of Medicare lives today through Evernorth and we'll continue to do that through our service company HCSC.
The comment about growth decelerating et cetera, we would expect there will be some level of decelerating growth, but it's still an attractively growing space overall in the U.S. healthcare system. So we look forward to serving more lives over time at Evernorth. And I made the decision on the health plan side as I made reference to for the reasons of relative scale.
Great. Maybe in the last minute here I wanted to touch on M&A priorities. You know where do you think the greatest service capabilities are that complement your existing portfolio? We'd just love to hear the kind of the attractiveness of the opportunities out there.
Yeah so importantly as you step back and think about our financial commitments going forward and our long-term growth expectation and is operating income of 6%-9% and 4%-5% of additional EPS appreciation through capital deployment. So put those pieces together that's 10%-14% EPS growth which is higher than our prior expectation and higher than our longstanding commitment of 10%-13% for many years. So we took the ceiling up on our growth rate given all the megatrends that I made reference to in the beginning and the opportunity we see going forward. Now what M&A prospects could be interesting? We're open to a variety of things that are strategically aligned to where the company is headed. Now importantly we have a leading position in the PBM, Express Scripts. We have a leading position in the specialty pharmacy, Accredo.
We have a leading position in our U.S. employer business. So we don't have gaps in capabilities per se in any of those businesses. So if we were to do anything acquisitive there it would be to extend our leadership position. There are other parts of the company where we have lesser scale or lesser presence for example the Evernorth Care Services space where we've talked about the opportunity for addressable market expansion organically or inorganically. Or in the Cigna Healthcare platform where we have a lesser presence in the benefits. Those are areas of interest. But importantly any M&A needs to be strategically aligned, accretive, financially attractive and have a high probability of growth.
Great. Well, we're out of time here, so thank you so much for Brian. Thank you everyone for listening. Please enjoy the rest of the conference.
You too.
Take care.
Appreciate it.
Fantastic.
Thanks.