Thank you for standing by, and welcome to the Anthem First Quarter Results Conference Call. At this time, all lines are in a listen-only mode. Later, there'll be a question and answer session. Instructions will be given at that time. If you should need assistance during today's call, please press star followed by the 0. As a reminder, this conference is being recorded. I'd now like to turn the conference over to the company's management.
Good morning. Welcome to Anthem's first quarter 2019 earnings call. This is Chris Rigg, Vice President of Investor Relations. With us this morning are Gail Boudreaux, President and CEO, John Gallina, our CFO, Pete Haytaian, 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 first quarter financial results, followed by comments on our key business initiatives and enterprise-wide growth priorities. John will discuss our key financial metrics in greater detail and go over our updated 2019 outlook. We will be available for Q&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 at 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. Thank you for joining us for Anthem's first quarter earnings call. Today, we reported a strong start to 2019 with first quarter GAAP earnings per share of $5.91, an adjusted earnings per share of $6.03, driven by our strongest risk-based membership growth in nearly a decade. With confidence and growing momentum, we are increasing our full year adjusted earnings per share guidance to greater than $19.20 per share. During the first quarter, we grew total medical membership by 905,000 consumers across all business lines, with more than 75% of that growth coming from risk-based membership. At Investor Day, we committed to growing our commercial business, in part by developing a broad suite of new consumer products and making it easier for our customers and brokers to do business with us.
We've redesigned our business processes, streamlined our service offerings, and enhanced our online employer shopping portal and digital broker tools. During the quarter, our commercial business added nearly 400,000 members. Of note, risk-based group membership increased in the quarter, reflecting a substantial improvement over the mid-single digit decline in the first quarter of 2018. Administrative fees and other revenue increased by more than 7% over the prior year quarter, outpacing fee-based membership growth, demonstrating that our sales of our specialty products and clinical wellness solutions are gaining traction in the market. Our Medicare Advantage enrollment grew by nearly 14% in the first quarter, above the market and driven by our unique supplemental benefits. As part of our Medicare offering, we launched a social determinants of health benefits package in which members can expand coverage for benefits such as healthy meals, transportation, adult daycare, and in-home personal care.
Our focus on caring for the whole person is designed to deliver better care and outcomes, reduce costs, and ultimately accelerate growth. We are on track to deliver on our full year Medicare Advantage growth target of greater than 20%, and we continue to expect year-end group Medicare Advantage enrollment of nearly 200,000 members. As a result of our strong product and service offerings for Dual Special Needs members, we've historically seen approximately 60% of our individual Medicare Advantage growth coming from outside of the annual enrollment period. Currently, over 20% of our individual Medicare Advantage members are enrolled in Dual Special Needs plans. Over the last 12 months, we've added nearly 600,000 members in Medicaid, including approximately 330,000 members through the successful launch of our alliance with Blue Cross Blue Shield in Minnesota in January.
We expect our partnership model will continue to accelerate growth over the near term with Blue Cross Blue Shield of North Carolina and through a recently expanded agreement with Blue Cross Blue Shield of Louisiana for the dual eligible population. As we look ahead, chronic care and value-based solutions like CareMore and Aspire are clear differentiators as states move medically complex populations into managed care. These offerings not only position us for long-term growth in our own states, but allow us to be the partner of choice for our Blue peers. Beyond the capabilities of CareMore and Aspire, we are also developing unique public-private partnerships, such as our Blue Triangle program. The program seeks to improve the quality of life and foster independence for Indiana's Medicaid members.
Launched in 2017, Blue Triangle targets homeless individuals with a variety of unmet physical and mental health needs and provides them with additional healthcare, housing, and social support. Since inception, the program has reduced inpatient behavioral health costs by 55% and emergency room spending by 32%, while at the same time moving 59% of program participants into permanent housing. We are pleased with the results of our Blue Triangle program and recognize the impact our partnerships can bring to our members and our communities. Medical cost performance in the first quarter was in line with expectations and reflected our relentless focus on managing the overall cost of care. The relationships we have built with care providers is driven by our unmatched local market presence. We continue to strengthen those relationships through programs like Enhanced Personal Healthcare, enabling Anthem to lead the industry in value-based payment penetration.
The growth of our value-based care model has been substantial. By the end of 2019, we expect to have 58% of medical spend tied to value-based care, up from 49% in 2017. In 2019, we expect 30% of value-based care will be tied to shared savings programs, up from 24% in 2018, and we are well positioned to achieve our 2023 target of 50%. All in, we expect Enhanced Personal Healthcare to generate nearly $600 million of savings for our customers and consumers during 2019. Our efforts in value-based care are supported through our artificial intelligence programs like Predictive Service, which allow us to determine when members or care providers might call us. Rather than waiting for them to call, we reach out to them proactively via phone, text, or email. AI enables this program by understanding patterns and reasons that trigger calls.
Based on these patterns, we can link AI to events that happen on a regular basis, such as claims adjustments, referrals, and prior authorization requests, improving both the care provider and consumer experience, as well as the cost of care. Turning to our pharmacy business, earlier this month, IngenioRx hosted its second annual client conference. Attendance more than doubled this year and was well attended by consultants, brokers, and current and prospective employer and Blue Plan clients. In its role as a true thought leader, IngenioRx leaders discussed topics ranging from how we approach pharmacy networks to planning for the specialty pipeline. Interest in IngenioRx is continuing to build as our value proposition becomes increasingly evident to the market. IngenioRx is built to drive the lowest absolute cost for our consumers.
In 2020, we will move to providing point-of-sale rebates in our commercial risk-based business, we are prepared to do the same in our Medicare business. In our fee-based business, our benefit designs provide flexibility as we believe employers should have a say as part of the broader discussion on value-based care and total health, therefore, we're prepared to support their desired approach regarding their health benefit strategy. Looking ahead, we are in the final stages of preparing for the launch of IngenioRx, we will begin migrating some of our members on May 1st. We have 2,500 individuals solely focused on this transition. We've conducted endless testing and are focused on creating a positive experience for our members. We are confident in our ability to execute this transition for our clients and members who will begin to realize the benefits of IngenioRx as they are migrated.
We are ready, we are on track to meet our financial commitments. At Investor Day, we noted that this is a new era at Anthem. Our business results shared today and our strategic plans moving forward are driven by a strong and intentional focus on our culture. Our vision, mission, and values are our foundation. They are clear, purposeful, and bold, they guide our more than 60,000 associates in this time of growth at Anthem. Our focus on culture is enabling our team to expect more of themselves and create real change for those we are fortunate to serve. Now, I will turn the call over to John to discuss the first quarter financial results and our revised 2019 outlook.
Thank you, Gail, and good morning. Once again, we reported a strong start to the year with first quarter GAAP earnings per share of $5.91 and adjusted earnings per share of $6.03, growth of more than 11% over the prior year quarter. Our first quarter performance was driven by solid membership growth across all lines of business. Medical membership grew by more than 1.2 million lives year-over-year, driven by significant growth in our risk-based businesses. During the quarter, Government membership increased by 511,000 members, followed by our commercial business, which added 394,000 members and is reflective of our focus on execution. First quarter operating revenue was up 9% over the prior year quarter to $24.4 billion.
Absent the impact of the health insurer fee on 2018 revenue, core operating revenue in the first quarter of 2019 grew in excess of 11% year-over-year, driven by higher enrollment in all lines of business and premium increases to cover overall cost trends. The medical loss ratio was 84.4% in the first quarter, an increase of 290 basis points over the prior year period. The increase was largely driven by the one-year waiver of the health insurer fee and significantly lower out-of-period revenue in the Medicaid business. Operating margins in both our Medicare and Medicaid businesses are within our long-term target range, even with the dilution from our growth in group Medicare and entering a new Medicaid state. Additionally, in the first quarter of last year, we disclosed several out-of-period retroactive rate adjustments in our Medicaid business.
The non-recurrence of these retro rate adjustments was contemplated in our guidance and is a significant factor in the quarter-over-quarter profitability comparison within our Government Business Division. There are routinely out-of-period adjustments within a Medicaid portfolio as large and diverse as ours. We expect more normalized year-over-year growth in the government segment over the latter three quarters of the year. The SG&A ratio was 13%, an improvement of 230 basis points relative to the first quarter of 2018. The improvement reflects the absence of the health insurer fee, growth in operating revenue, and expense management. We do expect the SG&A ratio to increase the rest of 2019 due to additional investment spending, including additional cost to support the launch of IngenioRx. Turning to the balance sheet, we ended the quarter with a debt-to-capital ratio of 40%, consistent with our targeted range.
During the quarter, we repurchased approximately 1.1 million shares of common stock at a weighted average price of $275.23 per share, totaling $294 million. Operating cash flow was $1.6 billion, or 1.1 times net income, and in line with expectations. While this is a very strong result, the metric declined since we received an extra payment from CMS in the first quarter of 2018. As expected, days in claims payable increased by 2.3 days sequentially to 38.5 days. Overall, we were pleased with our first quarter performance, and we are increasing our full-year 2019 adjusted earnings per share guidance to at least $19.20. Our updated earnings guidance reflects our solid first quarter results and slightly better than previously anticipated revenue growth.
Further, we now expect the percentage of full-year 2019 earnings in the first half of the year to approach the mid 50% range, slightly higher than we expected when we reported fourth quarter results. With that, I'll turn the call over to the operator for Q&A. Operator?
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press the star followed by the one on your touch tone phone. You'll hear a tone indicating you've been placed in queue. To remove yourself from queue, please press the pound key. Due to limited time and in fairness to other listeners, we ask that you please limit yourself to one question. The first question is from the line of Steven Valiquette with Barclays. Please go ahead.
Great. Thanks. Good morning, everybody. Congrats on these results. I guess for us, the question is going to be just around the Medicaid cost trends. You had that blurb in the press release that in certain states it's maybe still a little bit elevated. I thought you want to talk about which states and maybe just give a little more color on what you're doing as far as some of the initiatives to improve some of that Medicaid cost trend.
Yeah. Hey, thanks, Steve. This is some of the conversations she's having with her state partners. In terms of the Government Business Division in total, just to provide clarity, even with the elevated cost structure, the business is operating well within targeted margin ranges. We're very comfortable with that. As you do look at the Government Business, because we don't spike out Medicaid separately in the press release or in our script, the Government Business has declined slightly year-over-year with the group retiree growth that we had is slightly dilutive, which has obviously positioned us very well for the future. Then as you noted, we have a few select states where we are not performing at target margins. We're working with the states on a daily basis to ensure the rates that we receive are actuarially sound and accurately reflect the acuity of the membership.
Felicia, maybe if you'd like to talk a little bit about medical management initiatives or some of the other conversations you're having with the state partners.
Thank you, John, and thank you, Steve. As John said, our Medicaid business is a portfolio of businesses. When you take a look at a portfolio as large and diverse as ours, you will always see performance variability across our states. As you said, we are not going to get into the details specifically on a state-by-state basis, our team works every day with our state partners to make sure that we are securing actuarially sound rates that really represent the acuity of the population and profile that we're serving. We have in place, in our business, solid foundational ways of managing members, particularly members that are complex and have high cost trends. The addition of our Aspire and CareMore capabilities give us very strong capabilities around managing members who are medically complex.
We feel very good about our medical management capabilities, and we certainly feel very good about our ability to work collaboratively with our state partners around securing actuarially sound rates.
Great. Well, thank you. Thanks for the question, Steve, and I'll just sort of wrap up, I think, our perspective. We see the government business, both Medicare and Medicaid, as a very strong growth platform for us and feel good about the overall portfolio. Certainly the Medicare group business is an area that we've targeted for significant growth. As John said, we fully expected that to be somewhat dilutive in the beginning of a contract. Next question, please. Thank you.
Now to the line of Gary Taylor with JPMorgan. Please go ahead.
Hi, can you hear me?
Yes.
Hi, thanks. I just want to check on when we look at the government margin performance, it looks like if we exclude the retroactive adjustments from a year ago, that would explain up to three-quarters of the deterioration OI in the government business, and I wanted to make sure I was roughly in the ballpark on that. Related to that, when we look at the prior year development in the first quarter of 2018, which was pretty evenly split between commercial and government, I presume when the K comes out without those retroactive adjustments, the government PYD would be one of the places where the overall prior year development is lower. Just wanted to make sure we're directionally on track with that thinking.
Yeah. Hey, Gary. Thanks for the questions. In terms of the year-over-year profitability, I hate to use the same answers over and over again, clearly the out-of-period is an issue, as you pointed out. The dilution associated with the group retiree is an issue. We did just launch a new state in terms of Minnesota, our partnership with Minnesota Blue Cross and Blue Shield and Medicaid. That's obviously impacting some of our metrics on a year-over-year basis. There's a whole list of things, but directionally, I think you're in the right ballpark. Associated with the prior year development, I guess the only comment that I would make is, without disclosing the specificity of line of business, is that at 12/31/2018 or 2017, we had the individual business, 1.6 million individual members, and had the reserves associated with that.
The roll-forward footnote, a year ago, had the run-out associated with individual in it, and we only have about 30% of that number of members today. The run-out in here in the current period is obviously based on a much smaller base, and that will be a reconciling item on top of the commentary that you made.
Thank you. Next question, please.
Now to the line of Ana Gupte with SVB Leerink. Please go ahead.
Pete, thanks. Good morning. Congrats on the commercial fully insured growth. I was asking about the pricing. I think you said you've been going to market a total cost of care bundled. Wanted to get a sense for how much of a discount that represents relative to others that are either doing this integrated strategy or not. Is the share gain coming from other fully insured players or from self-insured stop-loss or new growth?
Well, thank you. Thank you for the question, Ana. There's a couple of pieces in there. Let me try to address them, then I'll ask Pete to comment on what's been sort of our strategies in the commercial business. First and foremost, thank you for recognizing we feel very good about our commercial growth this quarter, and quite frankly, our projections for the full year. We had made a commitment to grow our risk-based business, and we did deliver at the full-year numbers. I think more than anything, it's a combination. Pricing, it's a competitive market.
We have stayed very disciplined in our pricing, so it's less driven just by pricing than a full portfolio of products. We've also invested in tools, as I mentioned in my opening comments, around our brokers and trying to simplify our business processes, and also make sure that all of our 14 commercial states are really operating under a single, what I'll call operating sales infrastructure, sales discipline, and sales execution. Overall, yes, we are doing a couple of things around product. We are moving heavily to value-based reimbursement. I think that's also been a positive in terms of the alignment of our clinical programs with our value-based reimbursement network structure and then our products. Those have combined.
Maybe I'll ask Pete to comment a little broadly because it's not just our risk-based that you saw our revenue grew in the quarter, which is also a very specific strategy about bundling. Pete, you want to add some comments?
Yeah. Thanks, Gail. Thanks, Anna. Yes, I'd say that it's a competitive marketplace and that pricing is not necessarily we only, but it continues to be a competitive and rational marketplace. We've talked over the last several quarters about our competitiveness, about talent, about our segment structure, about our centers of excellence. We do see all those things playing through. As Gail noted, we're bringing much better products to market and options. We're meeting customers where they are. We're providing greater services to our distributors and engaging with providers in a differentiated way, creating choice in the marketplace. Overall, we're very pleased with respect to our growth. As Gail said, we focused on a couple of major things, growing our fully insured business. We saw that play through. In our group fully insured business, we've had seven consecutive quarters of sequential growth.
Number 2, we talked about, and Gail referenced this, our margin expansion in our ASO business, and that continues to improve month-over-month and quarter-over-quarter. There's many things that are contained therein. Obviously, we look forward to the onset of IngenioRx and the value that that will create in our ASO margin profile. Importantly, as it relates to the other things that we talked about, selling specialty products, you see as a very strong proof point our specialty product growth growing over 550,000 members sequentially in the quarter as a strong proof point. We're selling more stop loss into our accounts. We continue to bundle our clinical packages effectively, and we are on a path to this from 5 to 1 to 3 to 1 if we. All in all, we feel very good about that.
I feel very good about the team and the execution. We think the momentum will continue. As you know, we'll probably see things lighten up in the second quarter, the momentum of growth will continue in the third and fourth quarter. Thanks, Anna.
Great. Thank you very much for the question. Next question, please.
Now to the line of Ralph Giacobbe with Citi. Please go ahead.
Thanks. Good morning. Wanted to go to Iowa specifically. If you could maybe just give us a sense of what's embedded in guidance and maybe how the lives are also sort of divvied up. As initially, I'm assuming you expected maybe to cede some share to Centene initially. Now that United's out, is that still the case, or will you essentially keep your existing book and just take on the incremental UNH lives? Just trying to get a sense of the churn of that membership base and what's assumed in your guidance. Thank you.
Yeah, sure. Thanks, Ralph. In terms of the guidance, I'll provide a little clarity on what's included and then ask Felicia to talk a little bit about the conversations with the state and the fact that a lot of this is still not yet completely finalized. Our guidance is that we have a little bit more than 30%, about a third of the members within the state right now. Our guidance assumes, at least for purposes of what we've just provided, that we would retain that level of membership. Our guidance also assumes that we will get actuarially justified rates beginning July 1st, 2019. I'll turn it over to Felicia to talk a little bit about the dynamics of what's going on based on that.
Yeah, good morning, and thank you, Ralph. As you can imagine, we're working very closely with our state partner in Iowa right now. Those conversations include a range of discussions, including what happens with respect to membership allocation, as well as what happens with respect to rates. Certainly out of respect for the conversations that are going on right now, it wouldn't be appropriate to comment on the specifics of those conversations. As John indicated, to the extent things change, we will certainly update any guidance. I will say that our goal and our focus is making sure that we have actuarially sound rates that will allow a sustainable program in Iowa and allow us to continue to serve the Medicaid beneficiaries there in improving their solutions for our state partner.
Yeah. Thank you.
All right. Thank you very much. Next question.
Now to the line of Sarah James with Piper Jaffray. Please go ahead.
Thank you. Can you give us some context for the $14 billion DBG and IngenioRx build-out by sizing the addressable market for Anthem? Can you update us on your progress on discussions you're having for selling technology or PBM externally, and if there's a difference in the response you're getting from Blue versus non-Blue? Thanks.
Sure. Thank you for the questions. The numbers that you just itemized are 2023 targets. Clearly it will take several years to get to that point. We had disclosed that we expect the combination of both Diversified Business Group to achieve about 8%-10% of the total revenue of the company on a consolidated basis, which is where their $14 billion came from in 2023. Then to earn about 10%-11% margins, Diversified Business Group being a bit higher than that, and IngenioRx being in the single-digit margin range. Quite honestly, we're working very closely with many folks, but we don't expect to see a significant ramp in a lot of these sales processes, specifically in IngenioRx, until 2021.
We are wholly focused on getting the transition completed here in 2019 and delivering the full run rate value that we promised in 2020 and have a lot of proof points then associated with the sales activity. On the Diversified Business Group, we continue to be opportunistic in terms of building out the portfolio. We've had several very positive conversations with other Blue Cross and Blue Shield plans in terms of being able to provide the services. We actually have several Blues who are customers today, and we want to continue and expand those relationships. We feel very good about the 2023 expectations that have been provided, but it will take a few years to ramp up to that point.
Sarah, just a few additional comments, I think, to John's very thorough response. As John said, our primary focus in 2019 going into 2020 is the successful migration of our existing book of business. We are seeing some early traction. As I mentioned in my comments, we did have our second client conference and had very strong attendance. Our integrated guarantees, where we're focused on whole person health, are resonating. We are looking to pull through pharmacy, certainly in the partnerships that we're doing with other Blues, and that's the case certainly in our new North Carolina bid. I think we have an opportunity to continue to do that across the partnerships that we're forming. I think it's a fairly broad-based strategy, but again, intense focus on the migration of IngenioRx in 2019. We're beginning, obviously, the selling season.
You'll see more of that into 2020 and 2021 in DBG as well. We see it as a real opportunity to package our products in a very integrated way and look at overall total cost of care. Thank you very much. Next question, please.
Now to the line of Josh Raskin with Nephron Research. Please go ahead.
Hi, thanks. Good morning. I guess a question more sort of just on the Blue strategy longer term. Gail, as you think about Anthem three to five years from now, what does success look like? What would you be pleased with in terms of products and JVs and other connections to the other Blues?
Thank you for the question, Josh. It's a great question. I think we outlined much of that at our Investor Day. In terms of each of our Blue partners is unique, and each of them has a unique set of circumstances. I think success for us, obviously, is to continue to be able to package our IngenioRx solutions to continue to do partnerships in Medicaid. We're really pleased with the partnership we just announced expanding our Louisiana venture into the dual-eligible market. We think that's another great opportunity. We're going to be very opportunistic, and we have an opportunity, I think, through our DBG assets. CareMore is expanding with several of our Blue partners, as is Aspire. AIM has been a longstanding partner to the Blues.
I think as we mature in this space, we look at an opportunity to really package a series of our offers versus single one-offs. We are going into risk arrangements as well with them, particularly in our CareMore organization. I think that's the maturity of our business. Once we complete our own conversion of IngenioRx, I think that's another opportunity for us to offer, I think, a very strong integrated platform in a very different way because, again, we're partners, not competitors, with our fellow Blue plans. Thank you very much for the question. Next one, please.
Now it's the line of Charles Rhyee with Cowen. Please go ahead.
Yeah. Thanks for taking the question. John, obviously, we raised the guidance here for the full year 2019. If I recall at the Investor Day, you guys had pointed out expectations for about 20% EPS growth this year and also for next year. When we think about next year, should we think about the 20% on top of the revised guidance? Or in some ways, can we think of this sort of, not quite a pull forward, but we shouldn't build on top of this revised number? And I guess related to that, as we think about the SGA improvement this year, is there anything in that we should think about one-time in nature, or is this a good run rate as we think about our model going forward and maybe factoring how Ingenio costs ramp into that as well? Thanks.
Yeah. Thank you, Charles. In terms of the guidance, we're very bullish about how we started the year, we really did raise the guidance because of our strong revenue growth. We grew membership across all lines of business. Risk membership had some of the best growth we've seen in quite some time within the company, very bullish. Most of the metrics we didn't have to change the guidance on, but very strong top-line growth. I would say from that perspective, while we are not yet providing 2020 guidance, there is nothing that this guidance raise that does that impacts our long-term growth strategy and the percentages that were laid out at Investor Day at this point in time. Associated with the SGA ratio, it is very, very good here in the first quarter.
We do expect SGA ratio to go back up in the latter half of this year as we finalize the accelerated rollout and implementation of IngenioRx and migrate all of our members from now through January 1, 2020, onto the new CVS platform. The SGA ratios and guidance that we provided, we're going to maintain because we expect our SGA ratio to be a little higher the last part of the year than it is here in the first quarter.
Thank you. Next question, please.
The line of A.J. Rice with Credit Suisse. Please go ahead.
Hi, everybody. I thought maybe I'd ask you about capital deployment. Obviously, in the last three or four months, there's sort of a shifting landscape of opportunities. On the one hand, with the Washington backdrop, stock has come in, there's an opportunity perhaps on the buyback side. On the flip side, in M&A, I know traditionally you've looked at Medicare Advantage and care management capabilities, but there's also potential opportunities around Medicaid and in pharmacy benefit. Just seeing whether you'd comment on whether you have any interest in those areas. I know you've got a lot on your plate bringing Ingenio in, but would there be capabilities you'd be interested in picking up on the PBM side, perhaps?
Yeah. Thanks, A.J. I think just based on the way you phrased the question, I think our answer very appropriately is to say that we're going to maintain a balanced approach to capital deployment. At Investor Day, I laid out that we expect to utilize 50% of our free cash flow for either reinvesting in the business or M&A, about 30% over the long term on share buyback, and 20% for dividends. However, that 50% and 30% could actually shift at any point in time based on current market conditions and opportunities that are out there. In terms of M&A opportunities, absolutely, we're very focused on the MA tuck-ins that either provide us a footprint or solidify a footprint in a market that we don't have, enhancing capabilities specifically associated with our Diversified Business Group and various other things.
We're not taking anything off the table at this point in time. We do want to be opportunistic. We want to make sure it provides the best long-term shareholder value, we'll react to market conditions accordingly.
Thank you, A.J. Next question, please.
That's the line of Justin Lake with Wolfe Research. Please go ahead.
Thanks. Good morning. My question is on your earnings seasonality. First off, appreciate the update, John. By my math, using 55% of EPS in the first half implies 2Q would be about $4.53, which is up about six, seven% year-over-year. Just curious whether you could lay us out some of the puts and takes to consider in Q2 from an earnings perspective, and maybe touch on the PBM specifically, if you can, in terms of whether any of that PBM earnings power that you've talked about will benefit 2Q or perhaps it's actually a drag in Q2 due to start-up costs. Thanks.
Yeah. Thank you, Justin. A great question, and as always, I am always very impressed with your modeling capabilities. In terms of 2Q, there isn't a lot of things impacting the 2Q seasonality as much as there's things impacting the seasonality of the other quarters. You specifically called out IngenioRx. We're going to start the IngenioRx implementation on May 1st, but the vast majority of the membership that does transition in 2019 is in the second half of the year. Just an FYI, that does not even include all of our Medicare business or individual ACA business that's slated to migrate on January 1, 2020, which still gives us a full year of 2020 benefit, but zero in 2019.
Virtually, the entirety of the benefit of IngenioRx that was described at Investor Day, the $0.70-$0.90 increase in our guidance, is all in the third and fourth quarter. Here in the first quarter, we had the year-over-year issues associated with Medicaid out of period from 12 months ago. The second quarter is normalized as I think it could be. It's the other quarters that are impacting. The only other thing I will say is that the second quarter could be a slight drag from Ingenio, given the investment that we're going to make in terms of ensuring that the transition is done very well. At 55%, your math is certainly very credible.
Next question, please.
Now to the line of Matt Borsch with BMO Capital Markets. Please go ahead.
Oh, yes. I was hoping you could just talk about 2020 in terms of the Medicare Advantage product now that you have the final rates and as you consider the impact of the health insurer fee coming back in and the competition, so forth. Understanding you can't reveal your strategy per se, can you touch on some of the factors that you're thinking about?
Sure. Thanks for the question, Matt, I'll ask Felicia to provide some more commentary. As you know, I think you said in your question, we're still in the bid process now, we will, from competitive reasons, not go into too much detail. Maybe Felicia, if she can give you a little bit of color on how we're thinking about 2020.
Yes. Thank you for the question. When we think about 2020, obviously, we always take a balanced approach as we think about our bid process. This past year, as you know.
We believe that they help to drive growth for us from an overall business perspective, and we appreciate the flexibility that CMS has provided in terms of expanding those benefits as we head into 2020. When we take a look at where we are, we've obviously been pleased with the growth that we've seen this year and look forward to continuing to accelerate our growth above the industry average as we move into 2020.
Thank you. Next question, please.
To Peter Costa with Wells Fargo Securities. Please go ahead.
Thanks. I'd like to ask you about the JVs you're doing with the other Blue Cross and Blue Shield plans and how that's impacted by the ongoing MDL litigation against the Blue Cross Blue Shield Association. If you look at the Cigna litigation, it seemed like you guys thought that the MDL litigation might actually settle within a couple of years, that seems to have not happened. What's your thought process on that, is that going to actually help to get more JVs done, or does it hurt you if it gets resolved in some way?
Thanks for the question, Peter. We won't comment on ongoing litigation, but in terms of the joint ventures, those are really borne opportunity for us to take, just like we would, quite frankly, other partners in the marketplace. We're doing joint ventures with Blue plans. Really, as we've shared before, these joint ventures are all very unique, they're all very much driven by the market conditions in that state and the really strong platform that we have as part of our Medicaid business. We see that as a really strong opportunity for us to expand that platform. I think it's that.
Part of our strategy has been very clear that we wanted to work more collaboratively with our Blue partners because we do think many of them have not had the depth of expertise in government programs, we think that's a huge opportunity for growth. We've included that in our outlook. Again, each of these partnerships is very unique and very different. I would also tell you that we have many of these. For example, the MaineHealth ACO and our joint venture in Colorado and behavioral health. They're a very broad footprint, broader than just Blues. Again, we do see some significant opportunity with Blue partners, again, leveraging the strengths that we bring to the market, we think we'll have opportunities in pharmacy and across DBG as well. Thank you. Next question, please.
Now to Zack Sopcak with Morgan Stanley. Please go ahead.
Hi, good morning. Thanks for the question. In the opening comments, Gail, you talked about point-of-sale rebates for the commercial risk book for 1-1-2020. Then for the fee-based book, appreciate your comments on flexibility. Going forward, if point-of-sale rebates become mandated by the government through legislation, how would you expect employers to react to that? Do you think they would tighten formularies or take other action? Thank you.
Thanks for the question. I think first and foremost, what's really important in this discussion around pharmacy rebates and pricing, et cetera, is getting to the absolute lowest cost. That, as I shared at Investor Day, is really what we're building IngenioRx on. We start in a very unique position because we're building a new generation PBM, and as you might recall, our PBM rates were not competitive. Our ability to offer extremely competitive rates and the numbers that we've shared with you really stem from that. From a point-of-service view on the commercial business, once we get through our conversion, we will for our consumers across our book of business. We think that certainly makes sense for the marketplace. Again, in the self-funded business, our view there is to match what our customers want.
We're fully prepared to offer point-of-sale rebates, but again, we want to be aligned to what customers want. Your specific question about if rebates were to go away, rebates are an effective tool in terms of negotiation, so I think that's important to remember in this, but again, understanding that we want to be very transparent. On the side of rebates, as you think about this, certainly in the government program, HHS has said it will create an alternative discounting arrangement. We need to understand the details of that and work with that. We believe there are other ways to create value through, for example, our integrated guarantee and looking at our whole health strategy, which is gaining some traction in the market. There are also other opportunities around product expansion fees, admin fees, et cetera. It doesn't all rely on those.
Again, I know a lot of focus is spent on rebates. It's less than 10% of the drugs, and most of the drugs, I would say almost all of the drugs that are rebatable have competition. Our view on that is that we think it's a very prudent strategy, and we feel very good about being able to launch a PBM that starts in a very different place than trying to retool an existing model. Thanks for the question. Next, please.
To Kevin Fischbeck with Bank of America. Please go ahead.
Great. Thanks. Just want to go into the guidance a little bit more. You mentioned, I guess, revenue coming in a little bit better as one of the drivers, but as you mentioned, you didn't really change any of the components behind the guidance. Just wondering where within those ranges, maybe you feel at the higher end, more likely is it membership? Is it specialty flow through MLR G&A? I guess maybe a little bit more color on where in those ranges you're looking at.
Yeah. Thanks, Kevin. Great question. One of the areas that really wasn't part of the specific guidance, and we were just very pleased with the results, are in the administrative fee revenue for the quarter, which is the greater upselling of value-added services as well as the specialty membership. Both of those have outpaced Our core medical membership quite nicely and really helped contribute to the top line and helped contribute to the bottom line. As I said, we did raise our earnings per share by $0.20 this quarter without changing the core metrics. We're still within the bounds of our guidance range and are comfortable with our revised guidance. Our growth has been in all lines of business, but we did not provide specific guidance on administrative fee revenue and specialty membership, and those did exceptionally well. Thank you.
Next question, please.
To David Windley with Jefferies. Please go ahead.
Hi. Thanks for taking my question. I wanted to come back, follow up on Justin's question. As he pointed out, your 2Q implied guidance here would be mid-single-digit year-over-year growth compared to, if I look at ex-PBM growth is in the mid-teens. It does appear that there's some seasonal cadence differences year-over-year in something, MLR, SG&A, and I guess I wanted to understand a little bit better what that might be. I presume that it's not just the spending on IngenioRx, because my assumption there is that you're spending a lot of money in the first quarter as well, but maybe correct me where I'm wrong.
You know, Dave, we obviously are spending a lot of money in the first quarter as well as the second quarter with very minimal benefit from IngenioRx in the second quarter, offsetting a bit of it with the IngenioRx benefits really being backloaded to the second half of the year. We have a lot of things going on, like for instance, the dilution of our group retiree business. That obviously extends throughout the entirety of the majority of 2019. It's going to take us a good year to get the Blue Cross and Blue Shield of Minnesota so that in 2020 we're going to be more profitable, and then even later in 2020 till we hit target margins on that. All those things are going into consideration in terms of the year-over-year comparability.
Actually, it's a lot of positive things that are having a short-term negative impact associated with the quarter-over-quarter reviews.
Thank you. Next question, please.
Now to the line of Stephen Tanal with Goldman Sachs. Please go ahead.
Morning, guys. Thanks for taking the question. I guess I just wanted to dig in a little bit more on the benefits ratio and just get some more color there if we can. I guess up 290 basis points year-on-year. The HIF, I think, was guided to about 200 basis points for the year. Then the retroactive revenue adjustments in Medicaid, you'd said $0.20 last year. I think that's about 35 basis points. There's sort of a balance of uptick, about 55 basis points. Clearly, PYD was down year-on-year, I think you noted in the release that that development was better than you expected. Any comments on kind of the quarter itself as well as maybe just following up on some of the seasonality discussion kind of pursuant to this point?
Is it sort of fair to say that maybe some of the value of the forthcoming PBM savings were sort of shared with some of the customers up front? Or any sort of thought process on that? Just thinking about the seasonality of MLR Q1 versus the full year, obviously a much tighter range now this year than in years past. That's it. Thanks.
Sure. No, thanks, Steve. I'll just say, just to take it off the table, the IngenioRx and whatever structure savings benefits, that does not impact the first quarter of 2019 in the MLR at all. I will say first I'd like to reaffirm our medical loss ratio guidance of 86.2%, plus or minus 30 basis points. As I said, we've held that constant. The HIF, as you mentioned, is obviously a big driver, basically 2% of the change. We also have the group retiree business, which is again, it's dilutive, which means that it's increasing the MLR on a temporary basis. The mix of business we have now versus a year ago is a little bit more skewed to the higher MLR business, especially with the significant growth we've had in our Medicaid lines of business over the past 12 months.
The out-of-period adjustments, you mentioned them, it's clearly a driver. Our cost trends are consistent at 6%, plus or minus 50 basis points. We feel very comfortable with our guidance and the quality of our earnings.
Thank you. Next question.
Now to Scott Fidel with Stephens. Please go ahead.
Hi, thanks. Just want to ask a modeling question just to make sure that I've got this right because it's a new line for all of us. Just in terms of cost of products sold and you're guiding for the $1.6 billion-$1.8 billion. I guess, John, can you sort of maybe walk us through just the cadence of how we should be thinking about that with the IngenioRx rollout in terms of 2Q and then sort of relative to 3Q, 4Q on that?
Sure. The cost of products, as you mentioned, is going to be a new line item, and that is going to relate from an accounting perspective when we provide PBM services to our ASO clients or independent third-party clients, we would recognize a cost of products expense associated with the fulfillment of their pharmacy benefit. The revenue that would be associated with that would obviously be the reimbursement we would get associated with those cost of products plus all the value-added services that Ingenio is making and providing and the profit margin associated with that. That will be relatively small again in the second quarter and then ramp up into the third quarter and obviously be a little bit more in the fourth quarter associated with the $1.6 billion-$1.8 billion of cost.
Ingenio, the revenue I would say, or the benefit should reconcile back to that $0.70-$0.90 improvement in guidance that we provided associated with Ingenio, which would be the revenue aspect of the cost of product, which is the expense number.
Thank you. Next question, please.
To Frank Morgan with RBC Capital Markets. Please go ahead.
Good morning. Gail, in your prepared remarks, I think you mentioned when you were discussing social determinants of health, I think you mentioned a personal care services benefit that you'd added to some of your plans. I'm just curious about the extent that benefit is offered today, how many states it's in, any plans to expand that, and have you really identified that yet as an opportunity for helping control overall costs? Thank you.
Thank you very much for the question, Frank. As I noted in my opening comments, we have a bundle of social determinants in addition to some over-the-counter items that we've also added to our Medicare Advantage beneficiaries across our states. Really, which benefit gets selected is really based on that we have probably the most comprehensive offering, and we're really pleased with that, and we're very pleased that CMS has also expanded the level of opportunity that can be offered going into this next year's Medicare Advantage selling season.
What we do know about those, the reason we specifically that they allow for us to help manage the whole person care, again, going back to our original strategy, and that while it's still early, we have in our Medicaid population that these benefits will ultimately help us manage overall total cost of care and outcomes for our members and also improve our star ratings. Our quality outcomes are better. I shared with you just the demonstration program that we did here in the Indiana market around Blue Triangle, and that's a great example of embedding things beyond just the physical health benefits, but also social issues that impact people's ability to get care. We did include that bundle broadly. Again, which of the specific benefits are taken advantage really depends on Thank you very much for the question. Next question, please.
Now to the last question from Lance Wilkes with the Sanford Bernstein. Please go ahead.
Morning. Just a quick cleanup question or two. First one would be just related to medical cost trend. If you could talk a little bit about where you're seeing maybe pressure versus opportunities, obviously very early in the year. The other aspect was just in Medicaid. You've obviously had some wins. There's some Medicaid expansion going forward. Can you just give us a little more color on what you see coming in the year that you already know about as far as certain state expansions, wins, and expected implementation dates? Thanks.
I'm going to ask John first to address your question on medical costs and then Felicia to share some perspective on Medicaid.
Sure. Yeah, thanks. Good morning, Lance. In terms of medical cost trend, as I think I stated in a previous question, we're reaffirming our 6% medical cost trend guidance plus or minus 50 basis points. It really is aligning quite nicely with our expectations. I will take this opportunity to clarify that the 6% plus or minus 50 basis points does not include any aspect of the implementation of IngenioRx in the second half of the year. That will obviously benefit our drug cost later in the year and provide benefits associated with a lower pharmacy cost structure.
In order to provide what we think is better clarity, better information, and make it easier to understand and model our business, we are going to provide cost trend guidance in 2019 without the IngenioRx implementation, because it's partial year for just some clients, and would provide a result that really isn't all that meaningful. In 2020, when we provide our cost trend guidance of 2020, it will have a full year of IngenioRx baked in. It'll actually be, I believe, far more transparent and meaningful the way that we're doing it. In terms of other issues or trends or areas of concern, after the first quarter, medical cost trend is very consistent with expectations.
Felicia?
Yeah. Thank you, Lance, for the question. As you know, the Medicaid pipeline continues to be very robust. We have rebids that are before us in Louisiana as well as Minnesota that will be submitted over the next couple of months. Most recently, we're certainly pleased with our win in Washington, D.C., which was a rebid for us, but having the ability to continue to serve Medicaid beneficiaries in that state is very positive for us. We look forward to continuing a strong track record, which is over 83% of our wins when we go out to bid and look forward to continuing to working with our state partners to serve Medicaid beneficiaries.
Great. Thank you very much.
Thank you. I'd now like to turn the conference back to company management for closing comments.
Thank you all for joining us today. We very much appreciate your questions for our team. As you can see, we started off this year in a position with a growing pipeline of opportunity ahead of us. Our first quarter performance confirms our confidence in our ability to deliver sustainable, real growth on behalf of our members and shareholders. Our success is made possible by the dedication of our 60,000 associates who are committed to living Anthem's mission, vision, and values each and every day. Thank you for your interest, and I look forward to speaking with you again soon.
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