Hi, good morning, everyone. My name is Erin Wright. I'm Lead Healthcare Services Analyst at Morgan Stanley. We're happy to have Cigna with us today. With them, we have David Cordani, Chairman and CEO. We obviously and we also have Ralph Giacobbe, and Lance as well, heading up the IR effort there. I just some important disclosures, please see Morgan Stanley Research Disclosure website at morganstanley.com. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, I will allow David to give some opening comments.
I'll be brief, since she's allowing me, so I'll be brief, and we'll get into the Q&A. First, thanks for the opportunity to have a conversation today about Cigna, where we are and where we're going. A few headlines: one, we're pleased with our results. We have a continued track record of delivering strong balance results and harnessing the breadth of our company, our benefits portfolio, and our services portfolio as we step into now the midpoint through the midpoint of 2023, and build off our track record off a strong performance. Our outlook remains positive. Our outlook remains positive relative to strong retention rates, broadening relationships, and new business ads across our portfolio. And I ask you to think about us pulling on some core capabilities that drive that each and every day.
One, deep and smart breadth to our clinical acumen and our clinical capabilities. At the end of the day, the health service portfolio requires deep and leveraged clinical capabilities. Second is harnessing longitudinal data to drive targeted interventions or solution development, which I'll come back to. Third is a proven track record and a deep strategic commitment to partnering. We believe the breadth, the pace, the environment presents an opportunity to partner, to create leverage with other entities in creating value. I mentioned solutions. You won't really hear us talking about products. You'll hear us orient around solutions. Products are point solutions, they're racked and stacked. Solutions are consultatively put together, and that brings me to my fifth point. We have an orientation as we work with clients around being consultative.
So consultative solution providers that pull from that, those clinical capabilities and pull from that longitudinal data to bring solutions forward for the benefit of those we serve. Again, the headline is: strong retention, deepening of relationships, targeted new adds that continue to drive our growth. Lastly, as we look to the future, we recognize the environment is and will continue to be dynamic, so we work to position our company to be able to thrive in a dynamic, fluid environment, in terms of the multimodal capabilities we have. Our proven track record around delivering on our commitments, not just making commitments, but delivering on our commitments, which include delivering, on average, a 10%-13% EPS CAGR over time, plus an attractive dividend.
We have a proven track record of meeting or exceeding that on a regular basis, and that has to do with harnessing the model I made reference to, both the power of our benefit suite as well as our solutions portfolio, which I'm sure we'll talk about as we peel it back. So in summary, feel good about the start to the year. It builds on momentum from our prior year's activities. We have discrete focus capabilities that we seek to continue to strengthen, so we could be that solution provider for those we're able to partner with on a go-forward basis. And our outlook remains strong relative to continued growth across our portfolio, and I'll end with an asterisk.
Our services-based asset-light model allows us to convert a significant amount of earnings from operating cash flows to deployable cash flows, which we think is a strategic advantage in a fluid, dynamic environment. With that, I promised brief comments, so we'll go to questions.
Great. Thanks so much. So in the latest quarter, you did beat EPS but didn't raise. So can you touch a little bit on the rationale between the unchanged guidance in the latest print and elements of conservatism there that we should be thinking about?
Yes. So more broadly, if you think about the first half of the year, we entered into the year with an attractive top-line and bottom-line outlook. We're very clear that the fiscal year 2023 includes a large implementation cost for significant client expansions. Centene is one that we've talked about a lot relative to the cost to onboard Centene, which we're doing the work in 2023 without the revenue. So that creates a fundamental investment that we're making, as well as our expansion of the DoD contracts and certain other contracts beyond that. So we started the year with good transparency, expectations, and attractive top-line and bottom-line growth. We had strong performance through the first quarter. We yielded a good result through the first quarter. We lifted our results. Second quarter, we had strong performance again.
We did raise revenue, we did raise membership, we did raise cash flow. In the quarter, we didn't raise our EPS outlook. We thought that it was prudent. Our outlook is in at least measure, for our portfolio, will remain on pace to have a, a very strong 2023 result, which to remind folks, is in at least $24.70. And we put a markdown, earlier this year for 2024, I was going to pause to make sure I get the year correct, of at least $28 to indicate that, we remain on track for our growth algorithm.
Okay, great. And then one of the key topics of conversation, I think, over the entire summer has been on utilization trends across the healthcare services continuum in general, whether that's attributed to, you know, demand across hip and knee procedures and MA, as well as outpatient dynamics. But can you talk a little bit about what you're seeing now? Are there any indicators on an interquarter basis that you can point to that anything is, you know, extending more in terms of or longer in terms of this elevated utilization trend? And what's embedded, I guess, in your expectations now?
Yes, so a few points there, and maybe I'll start from your middle comment back. We're in the middle of the third quarter, and what I would say, broadly speaking, what we're experiencing is in line with what we indicated we expected to see, stepping into the latter part of the year when we delivered our second quarter results. Big picture. Now, step back. As you look at the utilization trends, when we talk about trend at any individual company, it always comes down to relative to one's expectations coming in the year. So what did you expect to transpire in the year, and what is actually transpiring in the year? We expected for 2023 to see an uptick in costs somewhat.
You all recall we embedded some uptick in costs relative to provider cost pressure tied to the inflationary dynamic, et cetera. That's a cost pressure. Additionally, we expected to see uptick in outpatient, where outpatient continues to uptick as inpatient moderates with some professional services. And by and large, we're seeing that, yes, we did see increase in outpatient. Yes, we did see some increase in musculoskeletal, but broadly speaking, still within the corridor of our expectations, which is why in the first quarter, we improved our MLR outlook, and we remained within our MLR outlook, and our overall trend is in pattern with our expectations thus far in the second half of the year.
Then could you touch on GLP-1s? That was also a key topic that's been brought up in the most recent earnings call and just more recently across this entire conference, too. But can you speak to the implications across the ASO benefits business and then Evernorth and the pharmacy business, and just as a whole, is this overall upside to the enterprise?
So, a couple grounding points. I'll come to GLP-1. So we'll bounce between the benefit suite and the services suite here. In the benefit suite, as you go to the commercial space, to remind everybody, think about approximately 85% of our benefits business in the commercial space is ASO or an aligned funding mechanism. Big picture. It can move a few points on either side of that equation. So you have that portfolio, and then in the services space, by definition, we're in a capacity of servicing largely to other health plans, large, sophisticated employers, governmental entities.
When you think about GLP-1s, second comment I would give you is GLP-1s, I would suggest, are a very important example of what we've deemed to be a strategic direction from a societal standpoint, meaning the majority of innovations that will take place from a health and well-being standpoint, both today and in the future, more likely than not, are going to be pharmaceutical in nature. More likely than not will be pharmaceutical in nature. And we see classes coming forward. We'll talk about the Alzheimer's class, et cetera, from that standpoint, which is precisely why six years ago, we leaned more aggressively and comprehensively into the pharmacy space, both core pharmacy, specialty pharmacy, that we can come back to.
Now on GLP-1s, big picture, think on the benefit side of the portfolio, 10%-20% of our clients are adopting expanded GLP-1 coverage beyond the service of diabetes from that standpoint for weight management. On the services side of the equation, think about 40%-50% of our clients are adopting GLP-1s beyond the diabetes side of the equation. Why? Why the big difference? Very simple. Think on the services side, really large employers, health plans, et cetera. Think on the benefit side, a variety of employer sizes. The larger the employer, the higher probability that they've already taken an adoption for weight management. The smaller the size of the employer, the lower the probability they've taken an adoption relative to it. And then lastly, as you come in between, the clinical programs here are mission-critical.
We're learning as a society, even for weight management, this is not just consume and move forward. The clinical coordination, clinical complexity around it is really meaningful, and this is where our Evernorth portfolio performs quite well. Lastly, you said, is there opportunity? There's net opportunity for this in our service business. We see this as another add for our service business on a go-forward basis. So hopefully, that gives you color between benefits and services, some of the difference of adoption, and then the clinical capabilities coming into play, helping us be a leader in this space.
Similar type of dynamic across Alzheimer's as well, right?
Alzheimer's, you come into a very different strike point, so now you're coming into the seniors population. And then we'll be dealing with. I would expect we'll be dealing with new drugs coming into the space on a regular basis. That will again press on the need for significant clinical acumen to help to coordinate the interventions, because the more complex both the clinical need and the makeup of the pharmaceutical, the more imperative there is around having the clinical competency, the data competency, and the provider coordination competency that comes around that, which is really where our Accredo capability within Evernorth thrives, through our TRCs or Therapeutic Resource Centers that are designed around individual disease states or health burden states.
Then can you speak a little bit about the PBM regulatory news flow, and what we're hearing out of Washington? What do you think ultimately gets passed? It sounds like things are moving a little bit more towards transparency, but what do you think ultimately comes to fruition there, and how are you - what are you paying most attention to?
Sure. So, so no doubt, the regulatory environment is active. Stepping back, we have, we do, and we expect to continue to operate in a pretty active regulatory environment, meaning our space has always been an actively regulated environment from that standpoint, and it's something we're familiar with and used to. Two, before I get into the existing environment, which we're going to have to speculate into a little bit, let me just reiterate, the pharmacy benefit management capabilities and the overall pharmacy care management capabilities create tremendous value all day, every day for employers, for health plans, for governmental agencies, and for healthcare delivery system partners we work with on specialty pharmaceuticals. We're really proud of the cost dampening, the clinical care coordination, and the service coordination we're able to engender. So we lean into the regulatory dialogue.
As I mentioned, it's a pretty fluid space, so we have to speculate in terms of what's going to transpire. But to Erin's point, there's a lot of energy relative to transparency. We embrace transparency. We just add to transparency that transparency needs to be generate an outcome that is actionable for the desired party, as opposed to transparency for transparency's sake from that standpoint. And second, we believe passionately in ensuring that choice is maintained, especially in the employer community, where the employer, through ERISA-governed plans, are exercising their fiduciary responsibility. So additional transparency, good, if it guides more informed actions, but ensuring that choice remains for the employer marketplace, which is by and large driving innovation all day, every day for the benefit of their coworkers and their coworkers' families.
Are you already having some of those conversations, I guess, with customers to, like, can you do some of these, like, intercycle PBM contract changes to adapt to any sort of major change that you might potentially see from a PBM regulatory standpoint?
The way you asked your question, I can't answer you yes or no.
Because we have potential regulatory changes, potential entry or contracting cycles. But to the spirit of your question, think about our business as strategically designed to engender flexibility and modularity. Like, fundamentally, that's what we do all day, every day. It's flexibility and modularity. That's what makes us such a great partner. We seek to be the undisputed partner of choice. You need to build modularity in your capabilities to do so. You may recall back in April, we announced some new market-facing initiatives. Erin, to reinforce your question, ClearCareRx is a commercial solution for the benefit of employers that is a full, transparent, full pass-through, fee-based, guaranteed outcome-based offering. We've been perfecting that over two plus years with about a dozen sophisticated employers. We're able to carry that forward.
Our Copay Assurance program for the benefit of individual beneficiaries, again, provides more choice for employers or health plans to provide that. So those are examples of modular approaches, and then the way in which we're able to design solutions with a Prime Therapeutics or with other health plans, are indicative of having the modular support. So we seek to put ourselves in position to evolve with the change, but also importantly, lead the change. And I'll end one-- add one last example. We're really proud of our Independent Rx program that we also rolled out earlier this year, where we were able to identify individual, independently owned pharmacies that are truly the only pharmacy in a ZIP code..
We leaned in proactively with increased reimbursement and collaborative support for those pharmacies to enable them to expand services, vaccinations, preventative care, basic behavioral screening from that standpoint. Those are examples of us leaning into an environment of change as opposed to resisting it, and those examples have been received very favorably in the market.
How is adoption for, like, ClearCareRx in terms of that fully transparent model?
It's a choice that's on the shelf, and it's a choice that we give to employers. So back to, bless you. From a consistency standpoint, we believe in choice, and when I talk about a solution-based orientation, our responsibility is to sit with, in this case, an employer, try to understand their culture, their strategy, their health burden, their readiness to change, their desire to use incentives, disincentives, and help to design the benefit structure, the financing mechanisms, the clinical programs, and service programs. So ClearCareRx is actually expanding conversations, where more employers are wanting to learn more about those, and we have referenceable employers that have been using it for a couple of years to be able to talk through. So it's an example, it's not a silver bullet, but it's an example that's changing conversations in a constructive way.
And then in thinking about modular, but also on the flip side of that, like unbundling and sort of the recent commotion in the space around the Blue Shield of California contract and the PBM relationship there, what do you think was... the rationale was, outside of cost savings or presumed cost savings from that? Do you think it will ultimately be successful in implementation, and will others follow suit?
Yes. So I, I'm not going to speculate on the rationale, or the probability of outcome, but you have to step back and say that organization, at that point in time, determined that they were going to embark upon a relatively disruptive change for the benefit that is most frequently used by their members or customers, with an objective of getting more value. So they chose to go down that path. They chose to head down a path, to create a series of solutions. Now, behind the scenes, it's actually a positive for our corporation. We serve or partner with many of the organizations that are part of that suite, and back to modularity, we've built the capabilities to be able to serve in a way, to afford more choice.
I think the key that I would draw in between here is that in some cases, and this is not indicating that action, it's just for consideration, at the end of the day, the consumer experience and the physician experience needs to be thought through relative to the final execution of the architecture. Because we're talking about the most frequently used benefit in the healthcare system, the pharmaceutical benefit, and you have a physician-patient relationship from that standpoint, and, and I'm sure that they've thought through the architecting of that. But back to, it's an example of somebody pursuing more value, what was not our client. Two, we serve multiple and partner with multiple of the intermediaries that are being pulled together, so we actually have a net positive that plays through.
Three, we've already proactively built modularity into our capabilities so we can configure those solutions back for either health plans or other aggregators.
Because presumably the Prime Therapeutics relationship plays into-
It's a great example. So Prime Therapeutics is a servicer here. We serve Prime Therapeutics. It creates a net win for Prime. It creates a net win for us.
Another one just on sort of PBM as well, biosimilars. Can you talk a little bit about the strategy around Humira, also Stelara, and others down the pipe? How's that playing out, I guess, relative to your expectations so far?
Yes. So stepping back... We've been on the record now for a couple of years plus of talking about the biosimilar opportunity for the United States, as the United States lags adoption and consumption versus other OECD countries around the world. So we've been very consistent. Two, if you click back, the tape a year ago or so, we were very clear saying that 2023, we would see as a society, an acceleration of movement, but it wouldn't be a night switch. This was not going to be a cliff moving from December of 2022 to January of 2023, and, and that's not a Cigna statement. It was more of what we thought the market norms would be in terms of evolution, and 2023 is manifesting itself that way. Now, that's all being said against biosimilars present a tremendous opportunity societally.
It presents a tremendous opportunity for us. Our specialty capabilities, are in a leadership position to drive through, and we're successfully executing, programs relative to adoption of enablement of preferencing, biosimilar choice as we go forward. And we expect to see the biosimilar trends continue to accelerate through 2024 and 2025 as we go forward. So a very positive societal trend. We're well-positioned, and we see continued momentum building.
Okay, great. Switching gears a little bit to the commercial business, and value-based care always is a question around, you know, how that can be applied to the commercial side of the business. What are your thoughts now, and can you talk a little bit about kind of the VillageMD relationship and how that plays into that as well?
Yeah. So first, let me define really briefly value-based care for how we see it. Value-based care for us, and I'll give you some history in terms of how long we've been at this. Value-based care for us is moving from a traditional fee-for-service environment where fee-for-service pay to an environment and a continuum where the rewards are based not just on consumption, but quality of outcome. Sounds simple, it's hard. It's hard to actually configure that. In the commercial space, we've been at this for over a decade. Today, in excess of 40% of all of our commercial lives are in robustly avowed value-based care.
I'm not defining it as a basic P for P, pay for performance, robustly built out programs, and in the individual exchange business, maybe 50% or so are attached to it. Those programs don't require us to own the provision of care to be able to enable it. It requires us to partner with the providers of care, align the incentives, flow the information, extend the clinical resources to more coordinate care. And we see positive outcomes, which is in part why Cigna's been in the leadership position in the commercial space for multiple years of delivering a lower-than-market medical cost trend, because you're delivering more value along the way. To the latter part of your comment, VillageMD. VillageMD presented an opportunity for us to extend that recipe and extend our philosophical orientation around partnering.
So we now have a meaningful minority interest in Village that enables us to accelerate collaboration more aggressively. We're using our Evernorth accountable care resources to more intensely embed bodies of work within Village's already successful value-based care offerings for, yes, Medicare, but Village is more commercial than they do Medicare, where we could bring our virtual care, our behavioral care, importantly, our longitudinal data flows, and even sharpen further cultivation and curation of high specialty networks. So think about it at an MSA level or at an SMSA level, trying to bring even more precision to an oncology subnetwork or a cardiology subnetwork or an MSK subnetwork, et cetera, to enable the primary care providers of Village to provide even higher quality service, building off of a level of strength.
We're still in the early innings of that, but we like the momentum, and our customers and clients are seeing some of the benefits where Village exists, and our commercial population exists today.
Okay, great. Just a couple of quick ones on Medicare Advantage. I know a small, smaller portion of your business, but can you speak to the MA growth that your expectations for the year and then also star ratings, if there's any early indications? I know some people had, I guess in the past few days or so, have had some early indication there.
Yeah, so for the year, so 2023, the year we're in, we're approximately in line with our growth algorithm for Medicare Advantage customer life growth. We've systematically, from 2019 to today, expanded our geographic reach. Back in 2019, we were in less than 20% of the addressable market. Our objective, over a five-year period of time or so, was to get to approximately half of the addressable market to have offerings in market, and we're meaningfully on our way, having eclipsed over 40% of the addressable market from that standpoint. We haven't provided guidance for 2024 yet. 2024 will be a more disrupted year than prior years. By and large, I think the market accepts that.
We expect to see more variability, competitor by competitor, in markets, with a lot of the change that CMS is bringing forward. As it relates to stars, our Star Ratings are strong today. I won't get ahead of CMS. We're a few weeks out from CMS's publications, but we expect our Star Ratings to remain strong as we look forward to the most recent measurement period.
Update on Medicaid redeterminations here. I guess that would represent upside to the guide. How are you thinking about that and the potential upside kinda to Cigna at this point?
... So, so for Medicaid redeterminations, again, for the breadth of the audience here and listening, one, remind everybody, we don't have something to defend or lose, so we, we're not at risk of losing revenue because of losing Medicaid revenue in our portfolio, 'cause we don't have Medicaid revenue in our benefits portfolio. We do service Medicaid health plans on the Evernorth Services side, so we have visibility relative to that. But on the benefits way, don't think about us having revenue dislocation. Two, as we entered the fiscal year when we provided guidance, we said we were not embedding uptick in lives for 2023 in our outlook for Medicaid redeterminations, specifically because the rate and pace of those by state is yet to be determined, and we didn't wanna be basing our commitment to the street on that.
We did acknowledge we expected to see some life upside. We've seen a bit of life upside, mostly on the individual exchange side of the equation in the first half of the year, and we built some of that into the second half of the year, outlook, as we provided second quarter results for the individual exchange, specifically because when lives come in partial year, they tend to be non-profitable, so we needed to be making sure we factor that into our second half outlook. We haven't built any further uptick in life capture in the second half of the year for Medicaid redeterminations in our commercial population.
Home health is an area we get a lot of questions on, too, and you have a relatively... I mean, you have some of a footprint there today, but you said it's an area, at least in the past, you've said that you would focus on that as well. Is the areas like the Accredo home infusion arm, I think you have over 500 clinicians, or is that at scale for you at this point? Is that something that you wanna build upon?
So, let me put Evernorth back in context for everybody. For Evernorth, think about three big sets of capabilities. There's more than that, but I'll make it easy for all of us. You have the traditional pharmacy, specialty pharmacy, either direct to patient or direct to physician, and Evernorth care assets, virtual care, behavioral care, on-site care, home care, et cetera. Where Erin's coming back to is in our specialty capabilities, we have now approaching 600 nurses that are field-based, who essentially spend their time in homes. And they are home infusion specialists that are invited into homes on a regular basis in a very intimate way to support our patients that we serve through the breadth of Accredo. That's at scale. We cover nine-- We have access and accessibility within 75-mile range of 90% of all Americans.
Not 90% of my customers, 90% of all Americans. That's at scale. Above and beyond that, within the Evernorth care capabilities, we have some in-home capabilities above and beyond the infusion. Those are in targeted MSAs, and that presents a potential additional growth opportunity. So the growth here is either, A, the Accredo home infusion nurse helping to provide expanded services because they're already a trusted clinician on behalf of patients, whether it's social determinants of health or more comprehensive health screenings, et cetera, and/or expanding our Evernorth care in-home capabilities, which is really targeted into a finite number of MSAs today.
Okay. And then M&A, I mean, I think you've previously said that large deals are not off the table for you, but you've also mentioned partnership models as well. What's your sweet spot in terms of, as well as your appetite to kind of build upon the Evernorth business through behavioral, virtual, provider enablement, other areas of focus for you?
Yes. So first, as you think about M&A opportunity, you have to have M&A capacity. So maintaining the strategic framework as well as the financial health is rather important. As I noted, our business portfolio is designed as a service-based, asset-light portfolio, so we are able to produce a significant amount of deployable cash flow in any given year. That's out of strategic and structural design. Specific to M&A, what we said is our capital deployment priorities are, first and foremost, make sure we serve the needs of our growing business, both through the underlying capital necessary and CapEx. Secondly, we contemplate M&A that is strategic and financially attractive. And third, we continue to evaluate the ability to return excess capital to shareholders. We have a robust dividend, as well as ongoing share repurchase.
In the M&A capacity, we had sharpened our M&A targets, our targeted categories, even further at our last Investor Day, and we said, for meaningful M&A, two parts of our portfolio, are priorities, specifically U.S. government programs and Evernorth care capabilities. Those are two of the three specialty portfolio, excuse me, Evernorth portfolio assets we have. Specialty pharmacy is one, U.S. government's two, Evernorth care is three. So we said two of those three would be high priorities, and then we add on and say we would always look at bolt-on opportunities, across our benefit suite and with the size of our company, bolt-on capabilities enter into the single-digit billion-dollar range.
So, priorities: two bolt-ons, opportunistic and targeted, strategic, and good financial discipline. We have a good track record that when we do transact, we have a good track record of converting it into value creation and value realization.
If I could sneak one last one in there, just given the commercial mix of your business, just macro, a quick... I guess, what are your thoughts on kind of the macro environment right now and the impact across your customer base?
And you go macroeconomic environment?
Yes.
So, when you think about the commercial space, we've been pretty consistent. If you take back a year, year and change ago, where there's a bit more dour outlook relative to the economy, we separate a little bit of the economic outlook from the employment outlook. And at that point, looking back a year ago or so, you had most employers were still struggling to get to full employment. And from a year ago till early part of this year, we kinda saw that phenomenon still coming through, where employers net were still adding, even though some were culling from that standpoint.
As we stepped into 2023, we planned for and expected to see some dampening for that, just because of the overall economic outlook, and we built in some dampening of that into our second half of the year outlook. Even with that, we have a really robust commercial life growth. And the color I would give you in terms of margins, we haven't seen any light switch there. We've seen a little softening of disenrollment in some sectors, but, we're pleased to have entered the year with tremendous outlook relative to commercial growth. We increased our growth outlook at Q1, we increased our growth outlook at Q2, and we see a little societal damping relative to the overall employer market right now.
Perfect. Okay. Thank you so much for the time. I appreciate it.
Thank you all. Enjoy the rest of the conference. Appreciate your time today.