Morningstar | Anthem's Scale and Unique Brand of Blue Cross Products Underpins its Narrow Moat
Anthem is dealing with several challenges as it tries to navigate a tough operating environment. However, we believe CEO Gail Boudreaux has implemented a positive strategy of refocusing the firm back toward its core insurance business. While the near term may be spotty as management continues to implement its plan, we believe its efforts will pay off solidly 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 in 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 provider network also 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 is a key long-term positive.In line with its peers, Anthem has taken a major step back from its Affordable Care Act exchange business for 2018. Based on information provided by management, we expect individual membership to fall by over 50% by the end of 2018. We believe this is a prudent strategy given the extreme uncertainty of this market. The legislative outlook for overall ACA mandates and subsidy funding remains uncertain at best given the mixed signals emanating from both congress and the administration. Thus, Anthem’s conservative approach to 2018 ACA compliant membership will help it to avoid potential losses, lessen operational risk, and preserve shareholder returns. In addition, Anthem announced it will officially move its pharmacy benefit manager contract from Express Scripts over to CVS once the current agreement ends in 2020. Anthem will also transition most of the PBM functions in-house and service its claims through a segment it will call IngenioRx. We believe the firm will likely not have enough scale or pricing power to compete with the major three PBMs. Thus, we believe this dynamic is why the firm chose to partner with CVS rather than execute all activities internally.Anthem is an insurance holding company. Through its subsidiaries, the company is a health benefits company, serving medical members through its affiliated health plans. The company has three segments: Commercial & Specialty Business, which provides fully-insured health products, managed care services to self-funded customers, and other insurance products and services; Government Business, which includes Medicare and Medicaid businesses, its subsidiary, National Government Services, and services provided to the federal government in connection with its Federal Health Products and Services business; and Other, which includes pharmacy benefits management business and integrated health services business.
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