All right. I think we're ready for our next presentation. Welcome, everyone. I'm A.J. Rice, the Healthcare Services Analyst at Credit Suisse, and we're very pleased to have with us today the management team of Cigna , Eric Palmer, Executive Vice President and Chief Financial Officer, and Alexis Jones, Director of Investor Relations. I'm going to turn it over to Eric to make a few comments, maybe just give us some perspective coming out of the recently reported third quarter.
Thanks, A.J. And a pleasure to be here virtually with everyone. Maybe just a couple of remarks to get us started here. As I'm sure you know, we just reported our third quarter results last Thursday, and it is another strong quarter for Cigna . I would highlight our strategy, accelerated by our recent launch of Evernorth, which positions us to continue to deliver in a really rapidly changing, dynamic environment. We delivered strong financial results in the quarter, and we continue to take actions to support our customers, our clients, our colleagues and coworkers, healthcare professionals overall. We've got, again, a really nice track record of supporting all of those in the environment around us. We've got confidence in our 2020 outlook. We updated our 2020 outlook, increased the revenue line, tightened our range from an earnings per share, and moved it up at the midpoint.
We're on track to achieve our long-standing target of $20- $21 of earnings per share for 2021. Overall, we just note we continue to have really strong financial strength and flexibility with robust cash flow operations in both 2020 and 2021, and are positioned well there as well. It's, again, a number of positive elements of momentum as we continue to navigate through this disrupted time. I'll stop my comments there and happy to go where you'd like, A.J.
All right. I appreciate those comments. You know we live in a world of "what have you done for me lately?" People are obviously focused on your 2021 comments as well, which you've reaffirmed your $20- $21. You talked about a couple of puts and takes, I think, on that. Maybe I'll just have you review, as you stand here today and think about next year, what are some of the tailwinds and headwinds that you're facing, and what would put you toward the higher end of that range that might break to the positive, or what would be challenging that might put you toward the lower end of that?
Yeah, I mean, so appreciate that, A.J. Stepping back, we provided our 2021 guidance already back in the spring of 2018 when we announced the combination with Express Scripts and have been pleased to be on track for that for some time. We'll have a lot more color and more detail to share as we get into our fourth quarter earnings and our normal timing of providing an update in the course of closing out the full year. In the meantime, we just note the headwinds and tailwind dimensions that we think about would be really more centered around the rate and pace of any changes from an economic perspective around us. The other dimension would be just around the normal items in terms of utilization or things along those lines. Again, more to come as we get to the end of the year.
Right. You have a committed sort of a long-term earnings growth target that you have out there. What is that, and what are the building blocks to that in a normal year, would you say?
Yeah, sure. From a normal kind of long-term perspective, we've provided some targets as part of our Investor Day back in the summer of 2019 already. There we outlined both the margins, the growth rates, et cetera, for our businesses, and the expectation for what we would do for capital deployment on top of that. In total, A.J., we expect to grow our enterprise on an average annual basis in the 6%- 8% range in terms of the core earnings growth of the enterprise. On top of that, put capital to work to get us to another 4%- 5% of earnings per share growth. Our long-term guidance is for 10%- 13% EPS growth on an annual basis on average. Again, any given year could be a put or take from that, but that's our long-term expectation.
Two things that were floating around as incremental tailwinds for next year were, one, playing out the fourth, I guess, ultimate synergies out of the Express Scripts deal. I think at one point you'd characterize that as about a $477 million synergy opportunity with, if I remember the original numbers, it's sort of a $90 million step up from 2020 to 2021, or that would be the equivalent of a $0.20 boost to EPS. There was this discussion for a long time about stranded overhead that was going to go away, and that was about a $0.40 headwind at the worst. What's the thinking on that? Are you on track or ahead or behind on the Express synergies? How should we think about those previous discussions around the stranded overhead from some of the businesses?
Yeah, sure. From a synergies perspective, I would characterize this as on track. No change in terms of the numbers that we put out as part of our initial expectations. We've continued to work through those synergies since announcing the combination and the like. Again, I would say we're on track for those and tracking well from an execution on achieving those synergies. In terms of the notion around stranded overhead or things along those lines, stepping back on that, we announced almost two years ago now, we provided a bit of an estimate related to the effect of overhead associated with the Anthem transition out happening a little bit sooner than we had previously contemplated. I think of that notion as kind of in the past at this point. A lot's changed over the course of the last couple of years. We've effectively transitioned that book of business out.
That's been done and behind us for some time now. We've effectively transitioned the Cigna volumes in. We've launched and built quite a successful collaboration with Prime and such. We think of that as more in the past than anything else at this point, A.J. So, like I say, we'll provide more detail on our 2021 guidance as we get to our year-end results. I think of that notion as being kind of behind us at this point.
OK. A big part of this company story is around operating cash flow, which I guess once you've completed the divestiture of the group life and disability business, you're looking at about $8 billion of operating cash flow in 2021. You've had strong cash flow this year. A little bit has been diverted toward paying down debt. It sounds like once you exit this year, you'll be at a capital structure, debt to cap at least, that you're comfortable with maintaining. Talk to me a little bit about your availability for capital deployment and some of the priorities there.
Yeah, sure. I really appreciate that. I think this is a key point of strength of our business model and how we expect to operate going forward in terms of the cash that we expect to generate. As you know, we've been committed to achieving a debt to capitalization ratio of less than 40% within two years of the close of the Express Scripts combination, and we're coming up on that. We are on track to achieve the debt to cap ratio of less than 40% once we cross through that milestone and cross through the completion of our group insurance divestiture. Looking ahead, we do expect to have a meaningful amount of capital available for deployment.
Our priorities from a capital deployment perspective really remain consistent with the framework we've talked about historically in terms of ensuring that we continue to invest in ourselves, that we continue to invest in our capabilities and the like, and that we make sure that our subsidiaries are well capitalized. That's a key priority. We will look for opportunities for additional accretive combinations or M&A activity, things that could add into the portfolio. We've outlined some of those categories in terms of areas that we would be interested in. We look to return capital to shareholders beyond that. Again, that'll be the framework we'll think about, and we'll look forward to providing more detail on how that evolves as we get into 2021 as well.
I guess pre-Express Scripts, the company had not really looked seriously. It didn't seem like it had a dividend. We've been asked recently, as we come out of the pandemic, as you've got Express generating a lot of cash flow on that side of the business, what's the company's thinking about whether they would consider a dividend or not?
I think at the highest order, we think about what's the best use of our capital overall and look at this question and how we deploy our capital regularly. I think we've got a good track record here, and this will be something that we'll take up as we get past our current priorities and get into 2021. Think of that as something that we evaluate and we'll take up and reevaluate as we go forward.
There's not a philosophical reason that you wouldn't pay a dividend per se. It's just obviously the company's been through a lot with integrating a major acquisition in the last two years. Some companies have a predisposition, we'd rather do buybacks than dividends or whatever. Would you put Cigna in that class?
I would just say, as we look to the future, the company has a really strong position overall. I wouldn't put any sort of philosophical markers down. We've obviously been active in share repurchase even throughout the course of 2020, as we've seen that as a really compelling use of the shareholder capital. There's no philosophical objections, kind of one way or the other. We'll look at what the best approach is as we are in 2021.
OK. Maybe just looking at the individual business lines a little bit. On the commercial side, it seems like there's two major questions sort of coming out of a year like this year. How do you develop an expectation around cost trend, and what is your confidence given we could have deferred procedures, we could have people still scared of going in, we may well have a vaccine, it looks like today, and we testing and all of that stuff? I think your book's a little more insulated from that issue, but I'll let you walk through it in the way you want to. Any thoughts on that? I'm going to come back and ask you on enrollment as well.
You bet. Stepping back, I appreciate you talking about the book being a bit more insulated. If you step back, in our commercial book of business, fully 85% of our customer relationships are in self-funded arrangements where we are working with employers to effectively manage their dollars. That set of programs has worked well for us and has worked well for our clients. On top of that, out of that 15% or so that are insured, a meaningful portion of those are insured in what I'd call a participating arrangement where our clients benefit from favorability on experience and the like. Even in the portion where it's guaranteed cost, we build up the rates based off of our customers' experience and our expectation for their experience in the future.
It's, again, very different than an entity that's got a lot more fully insured and kind of rating different things in big blocks or things along those lines. Our orientation is to work through and to identify the costs for the particular group and work to base those costs off of the characteristics of that group. We've seen differences in terms of costs and expectations around the impact of COVID that vary by geography. They vary by demographics. They vary by whether or not the workforce is able to work in a remote or isolated way or whether they're out and engaged with others. All of those types of things go into our approach.
Just like we do in, I'll say, quote unquote, "normal times," we'll work consultatively with our clients to find ways and to identify what we think the right premiums, the right costs, and such will be for them going forward. Our philosophical approach, as you say, is to ensure that we are aligning the costs of our services up with our expected costs and approaching it that way. It's, again, a very bespoke kind of client-by-client approach to estimating that. As you say, there are some variables in play. Certainly, the expectation for how and when there are changes in terms of treatment, how folks are accessing the healthcare system, what the book of business level is, the macro expectations for changes in employment and the like are all things that I have to take into consideration. We'll look forward to providing even more specificity as we get into 2021.
At a macro level, our orientation is that the employment levels and the like will return to normal relatively slowly throughout the course of next year. Our orientation is that there will continue to be meaningful costs in place for COVID in terms of costs of treatment and things along those lines in place as we get into 2021. Those things are all factored into our thinking for the balance of this year as well as for 2021's kind of earnings range that we reaffirmed.
When you think about the membership numbers on the commercial side, any comment or update or thoughts about the selling season, how that played out this year? We generally hear that people decided to stay with the incumbent more often than not because of all the craziness of the pandemic, but maybe that changed as the selling season progressed. Whether we're talking about your self-funded business or what you're seeing in the select, obviously you've got the issue of what the economy does. I don't know whether ASO-type business tends to have less impact on the margin than maybe small group and some of those areas do in an economy. Any thoughts on any of that?
Yeah, I'm going to do a couple of things I'd pick up out of your comments there. First of all, I would say that there's a bit of a dimension of a high degree of retention in our book of business and such. To be clear, the selling season is active and the like. While initially in the pandemic, I'd say kind of shopping was shut down, I think folks have figured out how to work through the dynamics and such. I think there's probably a bit of an initial bit in the pandemic where there wasn't as much market activity. I think a lot of market activity has now resumed on that front.
Now, with respect to the kind of dynamics around the kind of makeup of the book of business or things along those lines, I think first of all, Cigna is not really a significant player in the under 50 market or the small group market where I think there's been more disruption. That's kind of one dimension. Two, I think there is a bit of a dimension where just the positioning of the industries of who our clients and such are made up of is a bit favorable relative to average. We have a very low number of our clients who are in travel, tourism, restaurants, and the like, some of the industries that have been most significantly impacted. That's been a bit of a positive positioning factor for us as well.
OK. All right. When you think about the Evernorth business, I mean, I think we naturally think, oh, that's the PBM by another name. I think long term, you've got other aspirations for that that'll morph into something more broad service orientation. Maybe first of all, just take a minute and tell us what the thinking was in setting that up. Does that affect where capital is going to go to build that out further? How should we think about that?
Yeah, sure. We announced Evernorth back in September in terms of being the next step forward for our services business. A couple of things to step back. One, would just say I think of Evernorth as the logical evolution of our health services strategy and was kind of in mind as we even approached the combination with Express Scripts. We see there being a real opportunity to bring to market additional services that are helpful, whether they're marketed to other health plans, to large employers, to healthcare professionals, to government agencies. We think there's a real opportunity to bring services across the board to those different constituencies. Obviously, we've got a world-class leading capability in a number of dimensions of pharmacy through the capabilities brought to us and that we've continued to build on within Express Scripts and Accredo and such in that domain.
There's opportunity for additional services as well as we think about the opportunities and the continued build-out of EviCore and the solutions that they bring to market that will be in as part of the Evernorth kind of portfolio. We think that that portfolio of services and solutions has the potential to continue to grow and not only be a growth engine in terms of supporting and working with, again, other health plans, large clients, et cetera, but also being a collection of capabilities that help to power and drive the sustained results that we've had within our U.S. medical business as well.
Some of the other of your peers have branched into some provider assets. They've gone into data analytics and other IT services solutions, certainly home health and physicians. Are any of those on the drawing board? How would we think about things that move you away from the pharmacy services into some of these other areas? Are they on the table?
Yeah, I would think of the data and analytics space as a space we're already in. We've got meaningful capabilities in that space, and it just is so important to have the depth of knowledge and insight to drive at and effectively power how we operate in all of our businesses. There's a real underpinning there and would expect that only to grow as we go forward, both in terms of services as well as just empowering the effectiveness of our U.S. medical business. That would be one. In terms of care delivery and such, I think we are particularly oriented around looking ahead to additional digital solutions, virtual solutions, things that enable care in the home, all as areas that are exciting for us. I think of all of those as elements that also get at that dimension of care delivery.
Those would be the types of areas I'd think about in terms of the continued push from an Evernorth perspective. All areas that we already have stakes in but have quite a lot of potential to continue to grow.
I think on the third quarter conference call, you said that the retention rate had been very high in the pharmacy benefit management business, I think 98%. Can you comment on wins? I know a lot of contracts maybe didn't really end up turning over for next year because of the pandemic. Can you comment on wins heading into 2021? Also, how much of your book do you have an unusually large or sort of a normal year for next year in terms of book out for renewal?
Nothing I would call out in terms of notable amounts of the book out or not out or anything along those lines. I think of it as fairly typical. 98% is strong, another strong year. We've had quite strong retention for several years running now within the Express Scripts book of business. I think that's really a function of the track record and the results that we're delivering for our clients. We're pleased with the strength of the retention result and looking forward to another strong year. As I said before, we'll blow out the details even a little bit further in our year-end results as we provide the more detailed guidance for 2021 and beyond.
Yep. You also mentioned the Accredo opportunity, which was a big aspect of the Express Scripts deal for you. One of the thoughts was the ability to integrate that with the Cigna businesses. How far along are you in doing that? I think there's just generally underlying growth in that, especially pharmacy business. Maybe just comment a little more on the Accredo opportunity for you.
Yeah, sure. Stepping back, specialty pharmacy is a really important driver. At the most macro level, if you think about where innovations are in terms of the orientation of providing care for individuals, such a huge portion of new innovations are coming in the form of pharmaceutical innovations. Whereas there was a time when the primary way of intervening was a surgical intervention, more and more of the new therapies, new innovations, new treatments are coming in a pharmaceutical way and in specialty pharmacy in particular. Start with that as a backdrop. Specialty pharmacy is also complicated. These are complex therapies in a lot of cases that require close coordination with the delivery system and the like. Having expertise in these different therapies is really an important dimension. Accredo is a leading player in terms of working to support clients and customers with needs in specialty pharmacy.
We continue to hear from our clients both the appreciation for the results that we are able to drive through Accredo, but also the need for additional solutions in the market overall to help address the rising cost of specialty pharmaceuticals and the like. That sets a really important backdrop for the importance of Accredo going forward. As we've talked about, I'd say we have the kind of primary elements of integration really in place at this point in terms of Accredo being connected in with providing solutions for our integrated medical business. The connectivity and the basic levels of integration are more behind us.
Having said that, I think there's still more opportunity for us to continue to deepen the connectivity with the Accredo capabilities, the therapeutic resource centers that exist within Accredo, even further with our collaboratives, even further with our relationships with the delivery system overall as we look to continue to advance the effectiveness of how we manage costs for the benefit of our customers and clients and such. I'd say the kind of primary status of integration is complete in terms of the today state model, but there's still more opportunity to do and to further even improve the depth and the connectivity as we look to the future and as we contemplate all the different developments and advancements in care that will be coming toward us over the coming years.
OK. Maybe just to ask you about the public exchange marketplace, you continue to maintain a foothold there. It looks like for next year, you're expanding into 80 new counties. I think from a geographic reach, that might take you up about 27%, if I've got that right. What kind of growth are you looking for next year? In the first year, do you capture your fair share, or does it take a couple of years to really penetrate these new counties?
Yeah, we haven't provided specific guidance at that level yet, A.J. But again, we'll have more to come on that front. I'd say just kind of stepping back, we've been consistent in terms of our approach and our orientation on the ACA market. Even though in the first couple of years, that generated some losses for us, we've continued to learn and refine our approach to how we approach that market and has consistently generated positive margin for us for 2017 and beyond. Importantly, we've continued to improve our effectiveness in terms of the approach to going to market, the efficiency, and how we operate and the like. You should expect us to continue to look to grow. We haven't broken out exactly the number of lives that we would expect to go off of that expansion in terms of geographic footprint.
Again, just know that we're pleased with and excited about the opportunity to continue to expand the footprint there and continue to work to serve more customers in that space.
On the Medicare Advantage enrollment growth this year, you've seen a dramatic reacceleration. You may be the fastest growing of the majors this year in terms of enrollment. What was the secret sauce that allowed you to do that? I know there's a fair amount of expansion that you're doing this year. After a few years of relatively tepid growth, this year it's taken off. Is that really leveraging the Express Scripts offering and getting a more complete product, or is it just a function of deciding to start expanding the geographies more aggressively?
There are a few different dimensions that I would call out here. Stepping back, in our Investor Day in the summer of 2019, we had announced our intent to pretty meaningfully expand our geography. As of mid-2019, our geographic footprint covered less than 20% of where the individual Medicare Advantage beneficiaries are. We signaled in the summer of 2019 that over the course of the coming five years, we wanted to expand our geographic footprint to cover at least 50% of where the Medicare Advantage beneficiaries were. We also noted at that time an expansion of our product set instead of just the historic focus from an HMO perspective to now having a focus on HMO and PPO products. Declared a year and a half ago or so, our intent to meaningfully expand our footprint.
We also signaled at that time that we expected over the coming five years to have a 10%- 15% average annual growth rate in terms of number of customers served. To your call out, I'm very pleased with the traction that we've gotten in our first year on the results there. In 2020, we've delivered now upwards of 18% customer growth so far this year. We're positioned for a nice step forward in terms of growth again as we look to next year. We've expanded our geographic footprint, and we've expanded our product set. As we look to all of those pieces, we're having growth in our existing markets, markets where we have leading positions. We know them well. We've continued to grow those. We've had growth by adding new products. We've had growth by adding new markets. All of those come together to drive a strong membership growth.
I think the other thing I'd call out as being a really key enabler, a prerequisite almost of being able to drive that level of growth and do it in a responsible way, is building off of the strong star positioning that we've got. We've got now in the high 80s percentage of our customers in four-star or greater plans. That's really helpful both in terms of underscoring that we're doing a good job for our customers and our beneficiaries and for the Medicare program, but also provides a benefit in the form of reimbursement in terms of the level of reimbursement we're able to achieve and how we can set our benefits for new markets and the like as well.
That enables us to drive an even more attractive value proposition as we work to continue to drive that expansion, which positions us well and becomes a bit of a positive cycle, a self-reinforcing cycle, if you will, in terms of being able to continue to drive that growth. We're really pleased with the start of expanding our footprint. The last thing I would note is we do have the Express Scripts capabilities that you called out. I think that's a help as well. I wouldn't say it's the only factor, but certainly having meaningful and strong capabilities from a pharmacy perspective are also key in terms of driving that star result and driving the effectiveness and competitiveness in terms of the product set.
OK. I know your, I think the stated goal is in the government business to do a 4%- 5% margin. Medicaid is very small, so I'm assuming that's being driven largely by Medicare over the next near to intermediate term. When you've got this kind of growth trajectory, I'm assuming you might be toward the lower end of that. Give us a flavor for where you're at. Is there a trade-off between growth and margin that for the next few years you'll be focused more on making sure you get the growth?
Yeah. So A.J., I appreciate the way you framed that. I mean, stepping back, we have declared that we expect the government business to run at a 4%- 5% pre-tax margin. That's our goal. You're right, the Medicare Advantage product set is the biggest product set within the government segment. It does drive the result there. Our orientation in terms of driving to our decision making, I try not to think of it quite so binary in terms of just growth or margin, but we're really working to drive what's going to be the best for the long term in terms of the best kind of enduring value we can create for our shareholders. Actually, we think there is attractive opportunity there to be investing in capabilities and such.
We've got a willingness to run a little bit below our kind of long-term target range when the opportunity is right. We think focusing on investing and building out capabilities and such is important there. That would enable us to go a little below that long-term target range. I don't think of it quite so binary as, hey, we're in growth mode or margin mode. We really work to maximize the long-term value that we can create here overall.
I have to ask you the obligatory question about Medicaid. I know on the slide deck for the quarter, you said one of the priorities, probably the fifth of the priorities, I don't know if they were in order, but was state-based programs. I'm looking at state-based programs. What's the company's current thinking about getting bigger in Medicaid generally, or other state-based programs you might be referring to there?
Yeah, as we think about that kind of comment about state-based programs, that's a phrase that we coined or that we started using a couple of years back now around looking at different states exploring different potential more value-oriented or value-based types of approaches to helping support their populations, that could present an opportunity where we would be well suited to be of value. To date, that's not played out in terms of something that's been in the direct realm from an M&A perspective. Looking at the Medicaid market overall, I would note we actually support a number of Medicaid operations in Evernorth, whether that's on the pharmacy set of services or within the portfolio of capabilities we've got within EviCore. Those are areas that we can and do support the Medicaid market and do so in a meaningful way.
I'd also note within the government business, we have a meaningful number of dual eligible individuals that we support on the Medicare side of things. Those areas continue to be strengths for us. I would not see us in the near term prioritizing traditional Medicaid in terms of a business for us, in terms of being the primary writer. We do think and already have a meaningful book of business where we're supporting Medicaid through services and through the individuals we service in a dual eligible way.
OK. I should ask you about your international business. That's something unique to Cigna. I think there were some fears at the beginning of the pandemic that that might get hit given some of the issues overseas with outbreaks, but it seemed to hold in there pretty well. What's the company's current thinking about that business and so forth?
I appreciate that. I appreciate your raising that, A.J. From our international portfolio, just to remind the audience, we've got a group-based portfolio that supports employers and intergovernmental organizations and the like across the world. That's a business that we've had a leading position in for some time. We've got a more individually oriented portfolio, largely providing more supplemental benefits and more simple products, primarily in Southeast Asia. Both of those businesses continue to perform well for us. The supplemental benefits business has had different markets that have had disruption earlier in the year, depending on the progression of COVID and such, where we had maybe little blips here or there in terms of the selling cycles and the like. Again, broadly, both businesses have held up and performed really well.
We continue to see them as growth drivers for the organization and important in terms of us being able to both innovate from a capability perspective and also service our multinational clients truly around the globe.
OK. Maybe just to wrap up, I'll go back to the capital deployment. If I look at what the company's done this year, you've been paying down debt to make your commitment of 40% debt to capital. You've also probably done more in the way of share repurchases earlier than we thought. I know that's probably being opportunistic with the volatility in the stock and all given everything that's going on macro, et cetera. Have you sort of forward bought some stock in anticipation of some of the cash coming down the pike? How should we think about where you're at with respect to your buyback and all the activity you've done so far this year?
Yeah, sure. We have been opportunistic in terms of doing some share repurchase even in advance of the receipt of the proceeds from the group insurance divestiture. Stepping back, our commitments and our priorities for 2020 really were, over the course of the year, deleveraging and deploying capital for the benefit of our shareholders, primarily in the form of repurchase this year. Those have been the two priorities, and we've worked to navigate throughout the course of this year. We did not have to wait for the proceeds from the group insurance divestiture before we tackle either one of those things.
At the end of the day, we've had flexibility in navigating across those commitments and continue to be on track toward achieving our deleveraging commitment on a full-year basis, as well as deploying a meaningful amount of dollars in share repurchase to both offset the dilution from the group insurance business not being part of the portfolio on a go-forward basis, but also just be opportunistic, as you note. I'm pleased with the results that we've been able to generate there so far this year.
I think I better wrap it up. I really appreciate Cigna participating in our Healthcare Conference once again, Eric and Alexis. I appreciate everyone dialing in, and we'll speak to everyone soon.
Great. Thank you very much.
Thank you, A.J.