Ladies and gentlemen, thank you for standing by, and welcome to the Anthem Second Quarter Results Conference Call. At this time, all lines are in a listen only mode. Later, there will be a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded.
I would now like to turn the conference over to the company's management.
Good morning, and welcome to Anthem's Q2 2019 earnings call. This is Chris Rigg, Vice President of Investor Relations. And with us this morning are Gail Boudreaux, President and CEO John Gallina, our CFO Pete Haitayan, President of our Commercial and Specialty Business Division and Felicia Norwood, President of our Government Business Division. Gail will begin the call by giving an overview of our Q2 financial results, followed by comments on our key business initiatives and enterprise wide growth priorities. John will then discuss our key financial metrics in greater detail and go over our updated 2019 outlook.
We will then be available for Q and A. During the call, we will reference certain non GAAP measures. Reconciliations of these non GAAP measures to the most directly comparable GAAP measures are available on our website, antheminc.com. We will also be making some forward looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Anthem.
These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.
Good morning, and thank you for joining us for Anthem's 2nd quarter earnings call. Today, we reported 2nd quarter results that were ahead of expectations. During the quarter, we generated GAAP earnings per share of $4.36 and adjusted earnings per share of $4.64 Our 2nd quarter performance reflects improved execution across the enterprise and the strength of our diversified platform. Based on the strong first half twenty nineteen results and confidence in the remainder of the year, we have increased our full year GAAP net income guidance to greater than $18.34 per share and adjusted earnings per share guidance to greater than $19.30 per share, an increase of $0.10 from our prior guidance. Our total medical membership at the end of the quarter was $40,900,000 an increase of 1,300,000 consumers served compared to the Q2 of 2018.
Membership growth was broad based with continued strong performance in our government business and substantial improvement in our risk based group commercial business. Overall, risk based membership represents more than 85% of our total growth. At Investor Day, we committed to multiyear growth across all business segments, driven in part by our improved pharmacy cost position through IngenioRx. As you know, we accelerated the launch of Ingenio and successfully began migrating members on May 1. At this time, we've received transition approvals from all 14 commercial states and a majority of our Medicaid states.
As a result of our accelerated progress, we now see the 2019 earnings contribution from IngenioRx trending toward the upper end of our $0.70 to $0.90 guidance. As part of our build out of IngenioRx, we've recently opened our state of the art 20 fourseven Pharmacy Care Center in Las Vegas, providing both member support and eventually dedicated specialty patient care. The multidisciplinary teams of nurses, pharmacists and technicians are working together, supported by our digital engagement tools to provide personalized support to improve the experience and health outcomes for consumers. The benefits of the move to IngenioRx are immediate for our clients and members and we are on track to have all of our members on the IngenioRx platform by January 1, 2020. While there is still work ahead of us, the dedication of the 2,500 individuals focused on this transition has been extraordinary and a key driver of our success.
The strong value proposition of IngenioRx is resonating in the marketplace, and we are pleased that we were selected by Blue Cross of Idaho to provide pharmacy services effective January 1, 20 20. Our partners at Blue Cross of Idaho see the value of our best in class capabilities and appreciate our commitment to deliver more affordable care and a simplified consumer experience. While our focus remains primarily on existing client transitions for 2020, we are increasingly confident in our ability to capitalize on opportunities across the marketplace for us to bring innovative pharmacy services back to our medical clients. Across Anthem, we've been investing in digital innovation to create more personalized and integrated experiences for employers, state partners, consumers and care providers. 1 of the areas where we see an opportunity to directly improve the health of the people we serve is with the launch of Anthem's electronic personal health record.
Our Electronic Personal Health Record gives consumers access to their own electronic health record containing claims history, lab data and CMS' Blue Button data through a secure and easy to use mobile application. We believe easier access to this information for consumers and their families will empower them to be more engaged in health care decisions and support greater alignment and communication with care providers. The electronic personal health record will be available to our commercial and Medicare members in the Q4 and will roll out to all members by early 2020. Another area where we are focused is helping consumers manage their health and benefits in a simpler, more personal and integrated way. By leveraging our engagement capabilities with solutions like Anthem Amplified, we are able to deliver consumer experience that brings together account specific plan benefits, personal medical records and care provider selection tools to best meet individual needs.
With Anthem amplified, consumers have access to 4 key capabilities: a health checker that works to identify symptoms using voice and digital interactions a transparent marketplace that provides customers with upfront information around cost before they even go to the doctor, a scheduler that helps find nearby care providers and set up appointments and finally, a retail like experience to pay for services directly from a laptop or mobile device. Our investments in technology are designed to create more personalized, transparent and convenient solutions for our consumers and customers. We are also leveraging digital solutions for our care provider partners by embedding these tools in our value based programs like enhanced personal healthcare, which is driving more appropriate use of services, strong adherence to clinical treatment protocols and significant cost efficiencies. Our ongoing approach across our local markets is focused on helping consumers make informed decisions, driving sustainable outcomes across all aspects of well-being and reducing overall costs. The growth of our value based care model is accelerating.
Through the Q2, approximately 59% of medical spend is tied to value based care, ahead of our full year target of 58%. In addition, 36% of value based care is now tied to shared savings programs, which is also tracking ahead of our full year target. I'm excited about the impact of the investments we are making in our digital programs and value based care models to help us achieve our mission to improve lives and simplify health care. We will continue to develop innovative solutions that benefit our stakeholders across the continuum of care. Our commercial business performed well in the quarter with total margins solidly above 10% due to higher penetration of value added services specialty offerings in our fee based business.
Sales of specialty and clinical programs helped drive a strong upper single digit increase in core administrative fees and other revenue. The robust growth was expected seasonal decline in fee based membership, proving that our cross selling efforts are yielding results. In our risk based business, we remain on track to achieve our 2019 membership growth of 150,000 to 300,000 members. Medicare Advantage is performing well, and our strong capability in this area is positioning us for solid multiyear growth. More than 50% of our growth in individual MA this year has been driven by market share gains.
It's clear that seniors value our supplemental benefit offerings like our unique over the counter solutions that improve overall affordability and the retail experience for our consumers. We expect continued growth in our individual business over the balance of the year, and we expect to achieve our full year mid double digit growth target. Further, our dual special needs membership has increased nearly 300% since the end of 2015, and we now have the number 1 or 2 market share position in our states today. In the Group Medicare segment, the pipeline is robust and several recent contract wins give us confidence in our ability to deliver another year of strong growth in 2020 and bring us closer to our goal of serving 800,000 members by 2023. Over the last 12 months, we've added nearly 700,000 members in Medicaid, including approximately 65,000 members in the quarter.
We were pleased to recently be awarded the statewide contract for Florida Healthy Kids effective January 1, 2020, taking our strong Simply brand from 4 regions in the state to all 11 regions in support of children's health and wellness. The Medicaid pipeline remains robust and our outlook for future growth is aligned to our ability to provide innovative solutions to our state partners and drive better value for our members. Importantly, our pending acquisition of Beacon will further enable us to capitalize on opportunities to serve complex and specialized populations in Medicaid as well as the overall behavioral health needs of more than 60,000,000 consumers. This acquisition is a significant milestone for growth in the diversified business group and will meaningfully expand our footprint in the growing behavioral health market. Our success to date in behavioral health has been due to our highly coordinated whole person approach to managing care.
Beacon's proven ability to manage chronic care populations and specialized expertise will strengthen us in this space as we continue to pursue growth both organically and through alliance partnerships. At Anthem, we recognize that we play an important societal role regarding some of the most critical issues facing Americans today. For many of the nation's most vulnerable populations, we have a unique opportunity to remove social barriers. With that in mind, we recently launched the Food is Medicine program with Feeding America, the nation's largest domestic hunger relief organization. The partnership will work with hospital outpatient clinics to identify and assist people facing food insecurity, a problem that affects almost 12% of all households in a given year.
By improving access to food, we can better manage the high cost of care for our state partners, while empowering consumers to better manage their health and well-being. We're also taking a strong stand relative to the environment. As a health care company, Anthem recognizes the link between environmental health and the health of our consumers and communities. And we are committed to continually improving the environmental sustainability of our operations. To that end, we recently joined RE100, which is a global initiative bringing together influential businesses focused on renewable energy.
As part of this effort, we're committed to sourcing 100% of the electricity used in our offices with wind and solar energy by the year 2025. We are proud to be the 1st health benefits company to join the RE100 alongside other leading brands and our push for a more sustainable planet. As we have noted before, this is a new era at Anthem. Our business results shared today and our strategic plans moving forward are driven by our continued focus on our culture with our mission, vision and values. By doing so, we are enabling our 60,000 plus associates to expect more of themselves and create real change for those we are fortunate to serve.
And now, I will turn the call over to John to discuss the 2nd quarter financial results and our revised 2019 outlook. John?
Thank you, Gal, and good morning. As evidenced by our earnings release, the strength of our businesses drove balanced growth for the quarter. Today, we reported 2nd quarter GAAP earnings per share of $4.36 and adjusted earnings per share of 4 point $6.4 exceeding expectations and positioning us to deliver on our commitments. 2nd quarter operating revenue was strong and outperformed expectations reaching $25,200,000,000 an increase of nearly 11% or $2,500,000,000 over the prior year quarter. On a HIF adjusted basis, growth in operating revenue was approximately 13% and ahead of our projected long term revenue growth of 10% to 12%.
The increase is attributable to premium increases to cover overall trend, robust membership growth across both our government and commercial segments and yet another quarter of strong growth in administrative fee revenue driven by increased sales of clinical and value added services across our businesses. Medical membership ended the quarter at approximately 40,900,000 members, representing growth of 1,300,000 members over the prior year quarter. The growth was driven predominantly by our risk based business, which increased by 1,100,000 members or growth of nearly 8%. The medical loss ratio was 86.7 percent for the quarter, an increase of 3.30 basis points from the Q2 of 2018. The increase was largely driven by the 1 year waiver of the health insurance tax in 2019 and a continuation of elevated medical cost in our Medicaid business.
The SG and A ratio was unchanged sequentially at 13%, an improvement of 2 10 basis points over the prior year quarter. The improvement was driven almost equally by the absence of the health insurer tax and solid growth in operating revenue attributable to membership gains in Medicaid and Medicare. Our results illustrate the strength of our diversified platform as challenges in our Medicaid business were more than offset by our other business areas. Our Medicaid business continues to be within our target margins, albeit at the low end of the range, but we remain confident and fully expect our margins to improve as we continue to work with our states on a daily basis to ensure the rates we receive appropriately reflect the acuity of our membership. It is important to note that the challenges we are facing in our Medicaid business remain isolated to a handful of states and are very manageable given the size and breadth of our overall portfolio.
Our medical management capabilities and operating platform are unmatched. Core competencies that are widely recognized by our state partners as evidenced by our industry leading RFP win rate compared to both our diversified and pure play competitors alike. We are pleased with our continued growth in Medicare. Year to date, our total Medicare Advantage membership is up 16% and a significant driver of the impressive top line growth I mentioned earlier. Moving to commercial, Membership has grown nearly 300,000 members compared to the prior year quarter.
It is important to keep in mind that our Q2 2018 commercial segment results benefited from a favorable risk adjusted true up associated with our 2017 ACA business. With that said, our Q2 2019 commercial operating margin was a solid 10.4%, reflecting the team's progress towards increasing the penetration of clinical and other value added services. Consistent with last quarter, we continue to expect our local group medical cost trend in the range of 6% plus or minus 50 basis points. Turning to the balance sheet. Our debt to cap ratio was 39.4% at the end of the quarter.
We repurchased 1,700,000 shares of common stock at a weighted average price of $272.95 totaling approximately $458,000,000 In total, we have repurchased 2,800,000 shares of common stock year to date. Operating cash flow was $1,400,000,000 in the quarter, up $895,000,000 from the prior year and represent a 1.1 times net income for the 1st 6 months of 2019. Days and claims payable was 39.1 days, an increase of 0.6 days sequentially and in line with expectations. Looking ahead, we now expect full year 2019 total operating revenue of approximately $102,000,000,000 with premium revenue increasing by $2,000,000,000 at the midpoint, driven by our outlook for higher than expected growth in fully insured membership. Fully insured enrollment is now expected to be in the range of 15,600,000 to 15,800,000 lives and self funded enrollment is now expected to be between 25,400,000 and 25,500,000 lives.
Altogether, full year medical membership is now expected to be in the range of 41,000,000 to 41,300,000 members. The medical loss ratio is now expected to be in the range of 86.2% to 86.5% due to the aforementioned trends in Medicaid. The SG and A ratio is now expected to be in the range of 13.2% to 13.5% due to the greater than expected revenue growth and administrative expense efficiencies. Taken together, we now expect full year adjusted net income to be greater than $19.30 per share. And with that, I'll turn the call over to the operator for Q and A.
Operator?
Your first question comes from the line of Sarah James from Piper Jaffray. Please go ahead.
Thank you. So, consurance has been a pretty big topic recently and some of your peers have been talking about thinking about long term trend in terms of CPI or national health expenditure plus or minus. How do you think about the right framework for long term cost term discussions? And then thinking through the levers there, one that's been coming up recently is outcomes based pricing for gene therapy or medical devices. So is Anthem doing anything on that front?
And is it meaningful to your long term cost churn management?
Thank you, Sarah. Thanks very much for the question. I think it's actually a really important question because this issue of overall challenge of affordability, I think, poses one of the most significant issues to our members and we're committed to ultimately driving the lowest cost. The one of the most important levers is this ability to move to more value based care. And as I shared in our my opening comments, enhanced personal healthcare is an area that we've been focused and have made a significant commitment to move up to 60% of our spend in value based care arrangements.
Thinking about the alignment of consumer spending to care provider alignment, I think that's really the best opportunity for long term management of the trend issues. Specifically to pharmacy, we recently reported you And again, I think our best opportunity, to reign And again, I think our best opportunity, to rein in overall escalation in cost is to think about whole person health, which is managing the alignment of incentives at the care provider lever with the incentives around pharmacy and so that total costs are ultimately managed. And we have seen that in specific areas like inflammatory disease such as Crohn's and ulcerative colitis and rheumatoid arthritis, for example, where members have seen anywhere from an 8% to 12%, if not more savings per month and average lower inpatient hospitalizations, etcetera. So that overall contributes to our overall quality. So in terms of your broader question, I think it's absolutely the right one that we should be asking.
And I think we should be looking for all of our value based care, both from pharmacy, the integration of social as well as the integration of behavioral health. And that's one of the reasons we're excited about bringing Beacon into the fold for Anthem that our best chance to manage Shoal Trend is going to be aligned with managing those components in value based arrangements. Thank you very much for the call for the question. Next question please.
Your next question comes from the line of Matt Borsch from BMO Capital Markets. Please go ahead.
Yes. I just wanted to ask about the group commercial pricing environment. And the context is as investors and analysts are looking at your results, the mix of metrics here would be somewhat elevated medical cost ratio offset by other items in the results is what in fact we saw at 2 of your peer companies that have reported so far. And so maybe it's all just Medicaid, but people are looking at that and trying to understand if there's more competitive pressure that we need to be concerned about?
Thanks for the question, Matt. Let me start and then I'm going to Pete to give some additional commentary on sort of the marketplace dynamics. But I think first to your specific question about trend, as you saw, we reiterated our 6% plus or minus 50 basis points trend. So our trend in commercial has been extremely consistent. And we do not feel that there's that's an issue in commercial.
It's lived up to expectations. In terms of the overall marketplace, it's always been a competitive marketplace, but pricing has remained very rational in the markets. And we have not seen that kind of scenario over the course of this year or even last year. But I'm going to ask Pete maybe to give a little bit more dynamic input about the market specifically.
Yes. Thank you, Gail. And to be specific about our MLR and operating gain, as we talked about in the prepared comments, the one time issue associated with risk adjustment that we experienced in 2018 versus this quarter in 2019 is really the major difference. As it relates to medical cost trend, as Gail said, it remains pretty steady. We feel pretty good about where we are relative to that 6%.
And then more importantly, as Gail noted, the marketplace remains very competitive, but rational. We are not seeing anything unusual occurring in the marketplace. We feel very good about our position. As we've talked about on prior calls, we're very focused on being disciplined, but also growing. We're continuing to see that growth.
In our large group fully insured business, we've had 9 out of 11 months of sequential net growth and we continue to see improvements in that regard. So overall, a competitive market, but rational, nothing irregular at this point.
So I guess in summary, very consistent with our expectations and nothing really has changed. Next question please.
Your next question comes from the line of Ricky Goldwasser from Morgan Stanley. Please go ahead.
Yes. Hi, good morning and thank you for your comments on the BR. So just trying to dig a little bit deeper into that. Could you just help us quantify some of these moving parts? You point to the Medicaid book of business.
Can you give us some more sense on what are specific states where you're seeing the higher cost? And how do you think is that going to progress in the second half of the year given that you've upped your guidance there?
Yes. Thank you, Ricky. This is John. And unfortunately, we really don't talk about state by state specific situations in Medicaid. We're in 23 states right now, going on 24 by the end of the year and really review and discuss our Medicaid performance as a portfolio of assets and portfolio of businesses.
With that being said, there are a few things that maybe I'll point to specifically that can help you with your modeling. We continue to work with our state partners on a regular basis to get the rates that are appropriate for the risk and the acuity of the populations that we're serving. Many states have gone through a fairly significant reverification effort, ensuring that only those Americans who are eligible to receive Medicaid benefits are actually receiving Medicaid benefits. When the rates were first set, they were set on a slightly different population and a mix of members than what we are serving today. So as I said, we continue to work with the states to ensure that we're getting appropriate adjustments associated with the mix of membership as it works through.
And there are several states that we actually have received increases in our rates in the second half of the year and we expect that that will help improve the MOR and improve the profitability of the Medicaid business in the second half of the year. So thank you for the question.
Thank you. Next question please.
Your next question comes from the line of Steven Valiquette from Barclays. Please go ahead.
Thanks. Just on a similar topic on the last one. I know you don't want to talk about individual states, but again, when thinking about Medicaid, you mentioned popping up in a few states as far as the higher costs.
Just curious to be able
to comment on whether you're seeing the costs occurring maybe in some of your newer Medicaid markets, where you still maybe assessing where the cost trends could normalize within the membership and relative to your provider network? Or are you seeing it maybe in more of some of your older, more mature Medicaid markets? Just curious if there's any clear trend when thinking about it that way. Thanks.
Yes. No, thank you, Steve, for the question. And I do want to have a clarification. We have not stated that we have seen an increase in medical cost. We have said we've seen an increase in benefit expense ratio and that increase in benefit expense ratio is because the premium reimbursements that we are getting have not fully compensated us for the risks that we're taking on an overall portfolio.
Back to the point that I made on Ricky's question that as states are going through reverification, there is an incidence of the mix of the membership that we are serving is different than what the pricing and the rates would have been based on. So there's clearly there's a mismatch between the risk of the members that we are serving today and the rates that we are receiving today. And Felicia Norwood and her team are visiting with our state partners on a regular basis, if not a daily basis in some cases, to ensure that the rates are appropriately reflected. And that's one of the unfortunate parts about the Medicaid businesses is that the amount of the premium that you receive and the risk that you are incurring do not always exactly align on a quarter over quarter basis. We've seen that typically over the course of a year that there'll be normalized that rates will be adjusted appropriately.
But when you're looking at any one specific quarter or any quarter over quarter comparison, it's always apt to be skewed a bit because of the mismatch that I discussed. So thank you for the question.
Thank you. Next question please.
Your next question comes from the line of Justin Lake from Wolfe Research. Please go ahead.
Thanks. I'll just keep on the MLR train here for a second. My question is that your future MLR was 90 basis points above consensus. I was hoping you could tell us how the MLR looked versus your internal expectation. And maybe split out the driver of, but first, the negative PYD in the quarter.
And you raised the low end of guidance by 30 bps. Was that to reflect what you saw in the quarter? Or to your point, like is that the back half of the year, it should be higher even despite these better Medicaid rates? Thanks.
Thanks, Justin. I'm going to let John continue with the answers. Thanks, John.
Yes. Thank you. Thank you, Justin, for the question. In terms of the MOR and how it compared to our internal expectations, the MR was slightly higher than our internal expectations here for the first half of the year and the second quarter, which is why we are raising our guidance, which is why we have spiked it out as a reason for the fact that our MLR is above the analyst consensus in total. So I think that all really does align.
In terms of the PPIA that you stated, the PPIA is one metric. It's obviously a metric that a lot of folks really do like to focus on, but it is only one metric. I would say our reserves are very consistent and conservative the way that we've approached it. We continue to have a margin in the mid to high single digit range for adverse deviation. But we are investing quite a bit of money in informatics, in data and systems and it's actually providing us better information and better insights into our indoor data.
And so not only is that being utilized to help serve the members, it's also being utilized to help set reserves. And I think we should see maybe a bit less volatility in reserves in the future associated with the fact that we have better information. And we've even discussed in the past, some of the claims processing speeds have improved as well. 97% of our claims are submitted via EDI and 88% are auto adjudicated. So the speed and accuracy is actually very, very good.
And so then as you look at that one metric associated with PPIA, you have to look at other metrics in conjunction with that and the fact that our days in claims payable has increased a bit. Our cash flow as a percent of net income was 1 point 3 times for the quarter, 1.1 times for the entire year to date. And I think we're very comfortable that the reserves are stated appropriately. And quite honest, I go through all this just to let you know that it's really not impacting the MOR guidance per se. The MOR guidance is based on the Medicaid MOR being higher than expected, which really has as much to do with the revenue that we're getting is not exactly matching the risks that we're taking right here in the Q2.
Thank you. Great.
Thank you. Next question, please.
Your next question comes from the line of A. J. Rice from Credit Suisse. Please go ahead.
J. Rice:] Thanks. Hi, everybody. Just if I could slip in a clarification, Pete had mentioned the risk adjuster headwind this year versus last. Is that any way to quantify the year to year impact of that or the on the MLR or the dollar change?
And then my bigger question was around your comments on Ingenio. You said that you're going to be toward the high end of your expectation. Is there any way to talk about where you're trending ahead of what you thought? And obviously, it's a nice win with BCBS Idaho. Any background on that opportunity?
And does that give you any learnings for next year's selling season as you think about moving forward?
Okay. Quite a few questions there, A. J. We'll try to take them sequentially. Let me have John address the risk adjuster question broadly and then we'll take the others.
Yes, great. Thank you, Gale. So yes, so A. J. On the risk adjuster and I just want to make sure that this is being characterized appropriately and we're asking and answering the true up And that was predicated on our 2017 individual ACA membership.
And as you recall, that was before we had made the decision to reduce our Twelvethirty Oneseventeen. And then the true up we received in Twelvethirty Oneseventeen. And then the true up we received in June was predicated on that block of business. And then fast forward 12 months and we received a true up in June of extremely consistent with our expectations. And so the headwinds extremely consistent with our expectations.
And so the headwind is not a negative true up. The headwind is that the value of the true up in 2018 was significant and the value of the positive true up in 2019 was relatively small, but as I said, in accordance with our guidance and our expectations.
Right. And again, that's the comp, quarter over quarter, I think is what John is trying to really point out there. And overall, as I said in the opening comments, we feel very, very strongly about the performance of our commercial business, which performed extremely well in the quarter and as well as year to date. In terms of IngenioRx, a couple of things. 1, first, we're extremely pleased with the way the transition has gone, as I shared again in my opening comments.
In terms of us raising our guidance, when we originally gave our guidance, I think what's important to recognize this was a very accelerated transition. We felt confident about it, but we also realized that we needed to get state approvals both at the commercial and Medicaid levels. So we didn't have exact clarity on when those would come in. What we have seen now is that, we converted several million members in the quarter and then again beginning in July several million more. Those have gone well.
We have received most of the regulatory approvals on the Medicaid side and all of them on the commercial side. And so now given our growing confidence in this conversion, we feel much better about the high end of the range. And that's really the driver for what we're seeing in terms of raising the guidance. And again, very strong execution by our pharmacy team. So overall, that's really the driver, and we significantly improved unit costs.
In terms of Idaho, we're thrilled the significantly improved unit costs. In terms of Idaho, we're thrilled with the sale to Blue Cross of Idaho. And again, our focus, as we've shared, has been on transitioning our current clients. So we are in the sales cycle. We're pleased that Blue Cross of Idaho was one of our first customers to come on board.
And I said as I shared with you again, I think it's a strong sign of the value that we're bringing to the marketplace and also the improved service model. We do have a very strong pipeline going into 2021. As you realize, many of these sales are very long tail, 2, 3 years based on the contracts in the PBM and the large account business. But we think a real big opportunity for us is the opportunity to bring back pharmacy into our integrated medical clients. That's an area that over the last several years that we have lost quite a bit of that integrated business and our value proposition is very strong there.
So we're optimistic about that, but we see that going really more into latter half of twenty twenty and into 2021. Thank you very much for the question. Next question, please.
Your next question comes from the line of Lance Wilkes from Bernstein. Please go ahead.
Yes. Just a quick clarification on Medicaid and just trying to understand understanding that it's a reverification issue predominantly. Are you taking any actions to try to further great win with Blue Cross of Idaho. As you're looking at the great win with Blue Cross of Idaho. As you're looking at the different services and partnerships you have with the Blues, what are the areas that we should be thinking of is like the more immediate meaning 2021 sort of opportunities?
Is it Medicaid? Is it AIM? Or would it be PBM?
Great. Thank you very much for the question, Lance. I'm going to have Felicia address what's happening in our Medicaid business. I think she can talk broadly about the initiatives.
Thank you, Lance, and good morning.
Good
morning. As John said earlier, the Medicaid challenges that we're facing are really isolated to a handful of states. And given the breadth and size of our portfolio and the ongoing work that we do on a daily basis with our states, we feel very confident about being able to manage through that. In terms of our medical management capabilities, we really have industry leading capabilities. Our operating platform is unmatched.
Our core competencies are certainly widely recognized by our state partners as really recognized by the industry leading win rate that we've had. We've always had a focus on Whole Person Health, particularly in our Medicaid business and the ability to be able to manage not just, as you know, the medical conditions and pharmacy conditions, but also those social barriers have been a driver for us. So we feel good about the capabilities we have on the Medicaid side in terms of managing our members effectively. And I think as we work through these issues in the handful of states, we'll continue to see improvements with respect to our overall Medicaid performance.
Great. Well, thanks, Felicia. In terms of the second part of your question, Lance, I would say almost to all of those, we see opportunities across a very wide range of partnerships with different Blue plans, but also outside of Blue plans, care provider partners are also areas that we have done a number of different things. So on the specifics though, clearly, our Medicaid partnerships, we're very pleased with that. We'll be bringing North Carolina live, in the Q4.
Hopefully, as that goes live, we've got additional partnerships there with our CareMore business as well to offer care delivery services more broadly to that population. As I think about Ingenio, we clearly opportunities for Ingenio to partner with other Blue plans across either their entire population, even subsets of that Beacon does quite a bit of work with other Blue Cross and Blue Shield plans and we see that as an opportunity to further expand. And Aspire has also strong relationships. So as you can see, we see a breadth of potential opportunities both inside of the Blue Cross system, but also with care provider partners. And today, even just to give you one quick example, in the Medicaid space, we have 8 partnerships, 5 are with Sister Blue Cross and Blue Shield plans and 3 are with care provider relationships.
On Medicare, because of our strength in the dual eligible population, we're going to be expanding our partnership in Louisiana to dual eligibles beginning in January as well. So again, a pretty broad based opportunity for us. And so we're not just focused on growing one specific business or line, but really kind of meeting the needs of each of those plans and where they have potential gaps and potentially how we can put together very unique situations. The last thing I would add is, as you saw probably recently some of the announcements around our provider integration and those things we think will resonate very strongly in the market and actually support the other businesses that I shared with you at the beginning. So thank you very much for the question.
And next question please.
Your next question comes from the line of Kevin Fischbeck from Bank of America Merrill Lynch. Please go ahead.
Great. Maybe one clarification before ask the question. Just to make sure the Ingenio number that you're talking about is more about kind of pulling forward the aggregate savings. You're not changing your kind of 2 year aggregate savings number. Just want to make sure I have that right.
But my real question is really about MLR, unfortunately. So just want to see, you're saying that the issue is really on the Medicaid side. We'd love to hear some comments about on the commercial business and on the Medicare business, how the MLR is trending there. Just want to make sure it's in line because you are showing pretty good growth in both of those businesses. Thanks.
Let me answer your first question. Yes, you are right. Your assessment on Ingenio is in line. And then John, I'll ask to respond to the MLR question.
Yes. Thank you, Kevin, for the question. And as I think Pete had referenced earlier, the MOR in commercial is actually very much aligned with what our expectations have been. As we review and evaluate cost trends, we have reaffirmed today the 6% plus or minus 50 basis point cost trend in commercial. That has been something that's been consistent for the entire year and then we continue to reaffirm that guidance.
Medicare has been certainly consistent with our expectations as well. We're really quite pleased with our growth in Medicare having a 16% growth rate already through 6 months and expect to continue to improve that. The group retiree business within Medicare, which you didn't ask about specifically, but just for clarity purposes, that business is typically dilutive when it's first sold and it takes a while to get the care management programs, get the risk scores, get the information accumulated so that we can get appropriate reimbursement based on risk adjusters and various other aspects like that. But it's actually performing in line with our expectations. We did expect it to be dilutive in the first half of the year and it was, but it's very much in line with expectations.
So I would say we feel very comfortable with the performance and the growth both in our commercial business as well as our Medicare business. And that the MOR pressures that we're seeing as a consolidated company really relate to the lack of appropriate premium and reimbursement rates on the Medicaid businesses.
Thank you. Next question please.
Your next question comes from the line of Ralph Giacobbe from Citi. Please go ahead.
Thanks. Good morning. So you mentioned a couple of times now that the Medicaid rates aren't sufficient, I guess, in a handful of states. I would assume you have some visibility on kind of the year ahead. We obviously recently got the Iowa rate.
So are you comfortable looking ahead that you'll get the better rates? Or are we at a point of potentially exiting states? Thanks.
No, thank you for the question, Ralph. And clearly, that is a very appropriate question and something that we need to be looking at and evaluating on a state by state basis. But however, we are very comfortable with the future state aspect of Medicaid. Medicaid does have the $80,000,000,000 pipeline that we've been talking about for a while over the next 5 years. And we do believe that we can garner our fair share of that.
The acuity of that pipeline is skewed more to the higher premium type businesses, whether it's the age blind, disabled, long term support services or others. And we will be very disciplined in terms of how we approach that, how we price for that to ensure that we are being appropriately reimbursed. But no, we're not at the point now that we're talking about exiting states. We want to be a partner with the state. We believe the states like us as a partner.
We have provided significant amount of value and savings to these states over time. And it all boils down just getting the reimbursement correct. So we feel very good about the both the short term and the long term trajectory of the Medicaid business.
Thank you. Next question, please.
Your next question comes from the line of Steve Tanal from Goldman Sachs. Please go ahead.
Good morning, guys. Unfortunately, I also wanted to just ask about MLR and then hopefully just get this one thing sort of picked away. The claims payable table would suggest there's about $40,000,000 of unfavorable prior year development in the quarter And it was favorable about $160,000,000 last year. So sort of a $200,000,000 swing that in isolation would have pressured MBR by about 85 bps year on year. But then in the release, you sort of note that claims reserves established at year end developed moderately better.
So first, just trying to understand what was actually built into guidance on that point and also where the negative development kind of emanated from by business? And then finally, on this whole thing, just hoping you might comment on how MLR trended year on year in commercial and Medicaid side of Medicaid?
Sure, Steve. Thank you very much. And the PPIA metric that you stated was consistent with how I answered Justin Lake's question a few minutes ago associated with that our reserves are being are very consistent and that we do have explicit conservatism built into those. The better information we have, the better insights has certainly provided us clarity in terms of our loss reserves. And it's just one metric.
Days and claims payable has increased, cash flow has been very positive, 1.3 times net income. And so we feel very good about the situation. One other thing just to really clarify, when you're looking at the prior year number, of course, that's based on the Twelvethirty Onetwenty 17 run out. And the Twelvethirty Oneseventeen run out have 1,600,000 individual ACA members in it. And we had announced a few months earlier that we were going to exit 65 percent of the footprint associated with the individual ACA.
And so we were very conservative in the Q4 of 2017 associated with our reserve picks on the individual ACA business. And that turned out to be redundant, which you're seeing in the roll forward footnote from a year ago. So all in, we actually feel very comfortable with the business. There's no surprises here. There's no new news.
Medicaid has been performing under our expectations. Commercial and Medicare have both been performing consistent with our expectations. And we've actually feel very good about the revenue adjustments and the revenue enhancements that we're expecting in Medicaid in the second half of the year. And then we'll continue on with the strong performance in the commercial and Medicare.
Yes. The only thing I'd like to add to John's comment is Medicaid is performing within our range, although at the low end of the range. So that is a little bit more clarity on that. And so overall, we still believe that the Medicaid is very good business. But again, you see this in the Medicaid business where you're trying to align the mix of the business against the payments that you receive.
And that's why we often see out of payment out of period payments in Medicaid. Next question please.
Your next question comes from the line of Gary Taylor from JPMorgan. Please go ahead.
Hi. Just one clarification for Gail and a question for John. Gail, just wondering on Ingenio as we think about it, you mentioned the strong 2021 pipeline and a big priority is moving Anthem's own book to Ingenio by January of 2020. So I guess we really hadn't thought much about the opportunity for large external client wins for 2020 such as Idaho. So is this just sort of an anomaly or is there really more opportunity there than perhaps we've considered?
Thanks for the question, Gary. First, we're really pleased with the win. So I don't know that I would call it an anomaly. We're out in the marketplace. This is more just about the timing of contract renewals.
And I think our, quite frankly, we've been we have not been aggressively selling for 1120 just given the amount of proposition. So I wouldn't call it an anomaly, but I would also say that we really do believe that it will be more in 2021 and beyond just because of the timing. And it is hard for many clients to move off of a cycle that they currently have and that would be more in line with expectations, but we would like to see certainly the integration of our medical and pharmacy story is really strong and we think that there's opportunities to do more in 2020. Thank you. And the second part of the question again, please.
When you cite a few of the different factors impacting the MLR year over year, including Medicaid and the 3Rs, etcetera, one thing you don't talk about is the ESI contract costs that Cigna has talked about in the closing years here. So is the reason that's not pressuring MLR year over year, just that that was well known by Unitvance and would have been reflected in pricing?
Yes. No, thank you, Gary. That's an excellent question. And as we have stated, we believe that we are being overcharged by an excess of $3,000,000,000 by Express Scripts based on our contractual provisions. But that was known and it was baked into our numbers.
The trend that we experienced for pharmacy, while it's higher than we would like, it's consistent with what we planned for at the beginning of the year. So thank you.
Thank you. Next question, please.
Your next question comes from the line of Peter Costa from Wells Fargo. Please go ahead.
Back to the Blue Cross of Idaho question. Congratulations on that. Blue Cross of Idaho, I believe, used CVS as their PBM previously and you used CVS for Genio as the back end. How much easier did that make it to win that client because of CVS? Because most of the other Blue Cross and Blue Shield plans use either Express or Prime.
How much harder will it be for you to win business away from Express and Prime rather than from a CVS customer?
Yes. So thanks for the question. I think overall, the opportunity to win this is really because of the strong value proposition that we bring to the marketplace. So I really focus on the we built a brand new service center. I think we've got state of the art capabilities that are far superior to many in the space right now.
And honestly, we have the experience working as a blue plant ourselves and understand how to serve that marketplace very, very well. And this gives us an opportunity as part of our Whole Person Health to integrate those type of concepts in terms of our analytics, our digital platforms, the integrated teams that we've put in our Las Vegas center. So we're starting really with kind of a blank sheet of paper, which makes this the next generation PBM. And I guess I would focus more on that because I think that's the value proposition that we bring to the marketplace versus targeting any individual competitor and trying to beat them. I mean, we're trying to create a brand new value proposition.
Thank you very much. Next question, please.
Your next question comes from the line of Charles Rhyee from Cowen. Please go ahead.
Yes, thanks for taking the question. I had a question regarding the Senate Finance Committee drug pricing bill that was introduced yesterday. And in one of the provision, particularly when it refers to Medicaid, eliminating spread pricing for PBMs. And I believe the Senate Health Committee is also looking to eliminate that perhaps in the commercial market. Can you talk about sort of the prevalence at this point of spread pricing in PBM contracting, maybe in general or particularly with Ingenio?
And our estimates we're estimating maybe it's less than 2%. But can you talk about sort of how you see that impacting your business here? And then obviously, there was a redesign in the Part D program or proposed redesign of Part D program shifting more cost to the plan, how do you see that maybe impacting how premiums are set or any impact to Part D plan sponsors? Thanks.
Thanks, Charles. Quite a few questions there. And I think, 1st and foremost, where we are all aligned is on the affordability of pharmacy and that we need to ensure that we have a strong we have strong programs in place, quite frankly, on total cost, total net cost, meaning total cost of premium as well as what consumers pay ultimately. In terms of you mentioned a number of things that are happening right now and there are a number of things going on in the House and the Senate around pricing, whether it's spread pricing or some of the other issues that you brought up on Part D. I think 1st and foremost, we're in the midst of providing comments on that and actively engaged in that.
And I think given that these have been recently released and a lot of this depends on the detail, I think it's premature for us to comment publicly on where we think these are going to end up. Again, we're committed to ensuring that we get to have the best lowest net cost and we clearly align with sort of our states, if you asked about Medicaid, where our states are. We clearly align with the rules of our states and same thing with the federal government on Medicare. So overall, I think there's going to be a lot more discussion, debate and input. We're going to need to get to a lot more of the details on specifically how these programs are going to work.
But at this stage, I think the ultimate judge needs to be the lowest net cost both from cost to consumers, but also premium cost ultimately, to all parties involved. So, I can't really provide much more guidance on that because at this stage, I think that there's still a lot more details around these proposals and how they would work. Next question please.
Your next question comes from the line of Dave Windley from Jefferies. Please go ahead.
Hi, good morning. It's Dave Styblo in for Dave Windley. Just had a question about the Medicaid. I think management has done a great job of explaining how it's isolated to the handful of states. Curious about the risk that this could lead into other states that there might be a second wave that could come at some point and how the rate discussions are evolving beyond the shortlist of states that you guys have talked about?
And then as a follow-up, what would management care to comment about the EPS cadence in the back half of the year since there's so many moving parts with Ingenio coming on and some of the earlier wins that were dilutive in the first half becoming more breakeven or positive in the second half?
I think John will answer the second part of your question and then I'll ask Felicia to comment a little bit about just sort of the environment in Medicaid. But I do commend everyone for getting multiple questions and quite a few. So there's quite a few there and we'll try to address all of them. John, please?
Right. A lot of multipart one questions. But no, thank you for the question and the cadence of our EPS seasonality because our seasonality certainly has changed and it's changed over the years. A few years ago, the change when the elimination of the reinsurance program occurred through the ACA, changed again when we exited the ACA and now it's changing again with the launch of Ingenio and it will change next year due to a full year impact of Ingenio. So thank you for clarifying or allowing me to clarify that the earnings seasonality has and will continue to change on a quarter over quarter basis.
In 2019, there are a couple of other things very specifically that are driving our year over year and quarter over quarter seasonality. I talked about the commercial risk adjustment for the ACA was fairly significant in the Q2 of 2018 and it was a positive adjustment in the Q2 of 2019, but relatively small. And that clearly is impacting year over year seasonality. Our mix of business continues to change. And I'm not sure that everyone is truly reflected just how much our mix of business has changed over the past several years.
You go back 10 years ago, we were a commercial company. We had over 70% of our revenues was generated from our commercial business area. And look at the 2nd quarter results today, over 60% of our revenue was from our government business division. And the government business division has a bit flatter seasonality typically than commercial does. And so clearly that's continuing to change it.
And I've talked about some of the out of period adjustments on Medicaid and the fact that they don't always align. As we look at the second half of twenty nineteen, we do see some revenue enhancements in Medicaid given some of the recent rate actions and some of the other common conversations we've had with our state partners. But then there's also things like when we went live with our partnership with Blue Cross and Blue Shield of Minnesota for Medicaid. In the Q4 of last year, we incurred significant administrative expense to be prepared to have a very clean and flawless oneonenineteen transition to that membership. And that transition went relatively well.
And now we expect the second half of twenty nineteen for it to be accretive, working its way towards our target margin range for a new line of business or a new state. And so when you're looking at the second half of twenty nineteen, you have the cost of implementation and you look at the second half of twenty eighteen, the cost of implementation, the second half of twenty nineteen, you have the accretion. And the same thing is going on with the group retiree business. I referenced that that was dilutive at the beginning and it is dilutive, but it's improving throughout the year. So a lot of moving parts, but we're very comfortable with the overall aspect of our numbers.
Maybe Felicia give a little commentary about the states.
Sure. And thanks for the question, Dave. As we said, that was there was elevated cost pressures in a handful of states, but the discipline around working with states with respect to rates happens in all of our states. So our teams are engaged on almost a daily basis and working with our states around understanding what's happening with the emerging experience for our Medicaid membership and the mix issues that we've discussed before. So the other thing you should understand too is all the states' rating periods are different.
So they're not on a calendar year. They happen at different times of the year. In addition to that, there are also opportunities for mid year rate adjustments. So the rate process in states is very complex, dynamic and very iterative in terms of the work that we have to do on a daily basis. So while pressures are certainly isolated in a handful of states, the discipline around the work that we do with our states on a day to day basis happens consistently across all 22 or so of our markets.
Thank you. Next question, please.
Your next question comes from the line of Josh Raskin from Nephron Research. Please go ahead.
Great, thanks. I appreciate you guys fitting me in. I'll be brief, I guess. Just on Idaho, if you could just walk us through the process of that, was there a formal RFP? And if so, what time when did that happen?
And maybe just let us know what resonated with them? What were the big takeaways that they weren't getting from their previous PBM administrator that they're looking for with you guys?
Yes. Well, thanks, Josh. Obviously, we don't get into detail about specific customer RFP situations and that kind of detail. It's confidential and it's obviously competitive in nature. But I guess what I would say is, our new platform, our transparent approach, the focus that we put on digital integration and consumer services, I think all resonated.
And our ability to really would be the key winners. And we have a very compelling value proposition overall. We believe we have best in class rates and contracting and that combined with really solid integration, I think are really kind of were part of the reason for the win. So thanks for the question. Next question please.
Your next question comes from the line of Scott Fidel from Stephens. Please go ahead.
Thanks for also fitting me in. Actually just wanted to shift back over to Group MA and I was hoping maybe to get some numbers just around the membership pipeline opportunity for 2020. Maybe just first if you could size in terms of the number of lives of the contracts that you've already secured that you mentioned. And then overall, how large the membership opportunity is on the group MA pipeline for 20 20? Thanks.
Great. I'll ask Pete to comment on that.
Yes, sure, Scott. Thanks for the question. Yes, we feel good about the Group MA business. As you know, last year, we started off at around 20,000 members. We've grown that into the year at 150,000 approaching around 160,000 members.
And as we've talked about, we're going to end the year this year approaching 200,000. We still feel good about that. A lot of our opportunities we've talked about before comes from our conversion opportunities, which means that we have a captive pipeline of self funded clients that see the value proposition here and we continue to see that escalating and our value proposition resonating and we feel good about the future year growth of the Group Retiree business.
Thank you. Next question please.
Your next question comes from the line of Michael Newshel from Evercore. Please go ahead.
Thanks. Can you comment on some
of the recent policy proposals related to negotiated commercial rates? So we have the Trump executive order on transparency and also surprise billing bills that would pay out of network at a local median rate. Do you think either of these could have any effect on relative cost advantage? Does it help competitors with higher unit costs at all?
So a couple of different things going on in there. Let me first talk about surprise billing. We very much support that consumers do not have surprise And part of our contracting strategy is to bring in all of those care providers into our networks. So when an individual consumer goes to somebody in network, they should not have to deal with something that's outside of the network and that's something that we have long advocated with our care providers. And so we're obviously very supportive of that.
We want to ensure that there are the appropriate protections for consumers and that they balance the incentives for providers, but we don't replace that obviously with costly bureaucratic processes. So that would be one thing on surprise billing. But overall, we're very supportive of helping consumers have defined costs and really understand that. In terms of the second one around transparency of costs, again, we've been a long supporter of enabling consumers to really understand what costs are. We think it's a little it's less valuable to have individual unit costs, by procedure.
And that's one of the reasons our Engage platform allows people to really truly understand how much something costs against their benefit plan and what their true out of pocket costs would become. Great example of think about a member who needs an MRI, the average cost may be $1200 which is great to know if you look at the individual components. But actually it may only cost $50 out of pocket because they've already met their deductible, and that's way more helpful. And then they can also compare different facilities and look at not just cost, but also quality. As I think about though, the price transparency issues, the other issue in terms of competitiveness for us is our move to value based care, I think, really changes, sort of that intense focus on just unit costs.
So I believe our value base our movement to value based care, will drive cost down to a much more reasonable level and that's where our strategy is. And so I don't see, just the unit cost issue being the dominant issue. And I think that we have to think about transparency around total cost of care again for the entire procedure and how it affects consumers directly and that they can make decisions based on what they're paying out of pocket. Thank you very much for the question. Next question please.
Your next question comes from the line of Frank Morgan from RBC Capital. Please go ahead.
Good morning. A lot of my questions are answered, but maybe go back to Beacon acquisition, just the timing there on that closing of that acquisition, the possibility of additional deals, cross sell opportunities and would that be affected by this transition to Express Scripts or would that be totally unrelated? Thanks.
In terms of Beacon, what we've shared is that we're planning or working towards the Q4 close and we're working through obviously all of the approvals that are required there. In terms of your second question, it really doesn't have any relationship to that. We completely separate issues. What does it mean for us in the future? We're excited about Beacon because again it gives us part of our whole person care strategy, our movement towards very much focused on value based care, which I just spoke about, areas that we're focused on social issues and now the behavioral issues, those three combined, I think, allow us to much more effectively manage total cost of care.
So we're excited about Beacon. It gives us a scaled solution in a growing area and a very important area for us. It focuses on the specialized populations in Medicaid. So we have seen them in many of our markets and feel that this will be a very, very strong offering for us. So, so again, thank you for the question.
And next question, please.
Your final question today comes from the line of Steve Willoughby from Cleveland Research. Please go ahead.
Hi, good morning. This is actually Rob Cottrill on for Steve. Just wanted to stay on individual Medicare for 2020 now that bids have been submitted. Just wondering if you can provide any commentary on outlook as well as what if any changes you expect in the Medicare business now that you have the Ingenio cost position? Thanks.
Great. I'll ask Felicia Norwood to answer, please.
So thank you very much, Ralph, for that question. As we think about 2020, we take a real balanced approach in structuring our bridge. We evaluate both our benefit designs as well as the competitive landscape. We certainly appreciate the increased flexibility that's come from our federal partner around the 2019 benefit offerings where we made some changes with respect to social determinants of health benefits. And frankly, I think we were leaders out there in terms of that space.
We will be making some modest improvements with respect to those differentiators with respect to our products in the various markets. Going forward, the story hasn't changed very much. We've been delivering very strong growth in the individual MA space. And our certainly our approach is to make sure that we have competitive benefit designs out there, while also making sure that we are maintaining our pricing discipline with respect to this business as we go forward. So thank you.
Thank you, Felicia, and thank you to everyone for allowing our call to go a little longer than normal. We felt it was important to respond to everyone's questions. We appreciate your questions for our team. Our performance in the first half of this year us confidence in our ability to capitalize on future growth prospects and deliver better outcomes and better value on behalf of our members and shareholders. Our success is made possible by our 60,000 associates who are committed to carrying out Anthem's mission, vision and values each and every day.
Again, thank you for your interest and I look forward to speaking with you in the future.
Ladies and gentlemen, this conference will be available for replay 701 and entering the access code 432,045. International participants dial 32036 53844. Those numbers once again are 1-eight hundred-four seventy five-six thousand seven hundred and one or 320-three 653844 with the access code 432,045. That does conclude your conference for today. Thank you for your participation and for using AT and T Executive Teleconference.
You may now disconnect.