EUR 850.00 For Business Accounts Only

Morningstar | Anthem Delivers Decent 2Q Results as It Realigns Its Strategy and Operations

Anthem reported second-quarter results that largely fell in line with our outlook, and we are reiterating our narrow-moat rating and $209 fair value estimate for the managed-care firm. We believe CEO Gail Boudreaux has Anthem solidly on track with her focus on improving the sales, servicing, and marketing operations of the MCO's core insurance business. While the near term may be spotty as management implements its plan, we believe its efforts will pay off over the long term. The primary asset driving this strategy will be Anthem's highly recognizable Blue Cross/Blue Shield brand it is able to use across 14 states. From our perspective, this brand is one of the most powerful within the U.S. healthcare market and should give Anthem's products an advantage when businesses and individuals shop for health insurance. In addition, the extensive Blue-related provider network provides a key differentiator that most other health insurers do not possess. We believe the combination of these factors and management's recognition of its opportunity are key long-term positives.

For the quarter, Anthem reported decent results as solid execution helped lower the firm's MLR by 265 basis points to 83.43%. While we would note that the reinstitution of the insurer tax was a major contributor to this positive development, we believe Anthem's improving underwriting and prudent membership strategy played a key role. Nevertheless, we would caution investors that as Anthem looks to grow its membership, we expect its MLR to increase. We expect growth to emanate from three higher-cost cohorts--public exchange, Medicare, and Medicaid. These members are lower profit on a per-plan-basis, and we believe the MCO will need to continue its improved underwriting execution and expand its value-based provider reimbursement plans.

Management also continued to emphasize the potential value it can create through its new in-house pharmacy benefit manager--both through internal synergies and external opportunities. However, we are skeptical this new PBM operation will be able to drive a level of savings and efficiency on par with the current major three PBMs. Initially, Anthem will migrate its prescription claims from Express Scripts over to CVS once the current agreement ends in 2020. Anthem will also move most of the PBM-related functions in-house and service its claims through a segment it will call, IngenioRx. We believe the firm's current level of internal prescription claims makes it a mid-tier PBM player at best, and it will likely not have enough scale and pricing power to compete with the major three PBMs (CVS, Express, and UnitedHealth). Thus, we believe this dynamic is why the firm chose to partner with CVS over an extended period rather than execute all activities internally. We also question Anthem's ability and long-term dedication to building a third-party PBM that will directly compete with CVS.