Ladies and gentlemen, thank you for standing by. Welcome to the Anthem Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded.

Good morning and welcome to Anthem's fourth quarter 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 Haytaian, President of our Commercial & Specialty Business Division; and Felicia Norwood, President of our Government Business Division. Gail will begin the call by giving an overview of our fourth quarter 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 review our 2020 financial guidance. We will then 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, 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, everyone, and thank you for joining Anthem's fourth quarter 2019 earnings call. In 2019, Anthem delivered strong top and bottom line growth across the enterprise. We achieved record organic top line growth of 13% and we had our best year of organic risk-based membership growth in over a decade. At our Investor Day last March, we talked about this being a new era for Anthem, one focused on growth, innovation and the transformation of healthcare, as we know it. We also committed to long-term revenue growth of 10% to 12% and adjusted earnings per share growth of 12% to 15%. 10 months later, we delivered on our commitments and we are poised for another year of success in 2020. In the fourth quarter, we reported GAAP earnings per share of $3.62 and adjusted earnings per share of $3.88. For the full year, we delivered GAAP earnings per share of $18.47 and adjusted earnings per share of $19.44, up 22% versus the prior year. Our 2020 adjusted earnings per share guidance of greater than $22.30 represents core growth near the upper end of our long-term guidance range when normalized to the impact of the health insurer fee beginning in 2021. We also expect another strong year of revenue growth over 13% on a reported basis and nearly 12% on a HIF-adjusted basis.

Thank you, Gail, and good morning. As Gail stated, we are pleased to report strong fourth quarter and full year financial results and are well positioned for robust growth in 2020. Fourth quarter adjusted earnings per share was $3.88, up 59% year-over-year. For the full year, adjusted earnings per share was $19.44, representing growth of 22% over 2018. 2019 was a year of major milestones at Anthem. As Gale mentioned earlier, we successfully launched IngenioRx on an accelerated and compressed time line with minimal customer abrasion. After adjusting for the benefit from IngenioRx, which contributed a little more than $1 to our full year results, earnings grew at the upper end of our 12% to 15% target range. Simply put, our core business is solid and we are delivering real growth across each of our segments.

Thank you. And we will go to Ralph Giacobbe with Citi. Please go ahead.

Thanks. Good morning. I just want to go to back to the MLR and the commentary there. You came in obviously at the higher end of the range that you had raised in 3Q. I know you mentioned the risk adjuster maybe visibility on what you got details there. And then the medical cost growth for 2020, obviously, the 4% plus or minus 50 basis points, obviously, aided by the Ingenio savings. But maybe if you can exclude that and maybe help how you see core trends for comparability in 2020 versus the 6% that you cited for 2019?

Yeah. Hi, good morning Ralph and this is John. Thank you for the question. In terms of the 2019 medical loss ratio, we did end the year at 86.8%, which was within the guidance range that had been previously provided. We certainly would have been below the high end of the range had it not been for a couple of non-recurring issues that serve to increase the ratio at the end of the year. First, with the exceptional performance we've had in our individual business and after reviewing the weekly information and doing our own analysis, we did reduce our risk adjusted position by $50 million. That goes through as a negative to the MLR. It increases MLR when you do things like that. And then the flu season, it began earlier than anticipated. And so there's more flu cost in 2019 and the fourth quarter of 2019 that had been anticipated. So, obviously, we covered both of those with all of our earnings information. But without those two really non-recurring issues, we would have been below the high end of the range and we still ended up within the range. Associated with 2020, obviously, a lot of moving parts. We're very, very excited to have a 4% cost trend. We are pricing for that. And our pricing remains very disciplined, but we think that will really help us in terms of future growth potential.

Thank you. Next question, please?

And we'll go to Justin Lake with Wolf Research. Please go ahead.

Thanks. Before I get to my question, I just want to follow-up on Ralph's quickly. In terms of being at the higher end of the range ex that $50 million you still would have been around $86 million to $88 million . I don't know what the flu costs are. But it's been a trend of two to three quarters now where it's been pushing towards the high end rather than the midpoint. And if you guys understand that from our viewpoint, it's hard to understand what's driving that? So is there anything you can tell us that would give us comfort that there's not some trend inside the business that maybe hasn't been fully taken account, might be a headwind to the 2020? And then my question is around membership growth for next year, specifically around Medicare Advantage. Gail, I think, you said 150,000 to 200,000. Is that 150,000 to 200,000 total? Or is that 150,000 to 200,000 in each of individual and group? And if it's 150,000 to 200,000 in total, can you tell us how that breaks down?

Let me ask John to first discuss the medical cost and MLR issues and then I'll come back to membership. John?

Yes. Justin, I certainly understand your perspective, but there really isn't anything that's working beneath the surface that causes an issue for 2020. And just to level set the 2020, maybe, I'll talk about that for a moment. We did end 2019 at 86.8. Our guidance for next year is 85.8. So that's an improvement of 100 basis points. But given the fact that the HIF is out, the HIF is in and the dynamics of that and pricing for the tax non-deductibility, on an apples-to-apples basis, you could expect that our MLR would go down by 150 basis points in 2020 and it's going down 100. So that's actually a 50 basis point increase. And it's really -- it's largely the result of business mix. And I really can't emphasize enough how much the mix does change the MLR. Our government business continues to be growing -- a growing portion of our premium revenue, very strong growth. We've had some of the best organic growth in the sector over the last several years. And the fully insured growth has been driven primarily by the Government Business division. And the government's MLR is higher than the company's average. And so, then that causes the overall MLR increase. I will say that our pricing does remain disciplined and we cover cost trends. So we feel very comfortable with our guidance and expectations and that the numbers for 2020 are very solid.

Justin, in terms of your second question around Medicare Advantage membership. Yes, that is a total number. As you think about the breakdown, it's roughly 75% individual MA and about 25% group. In terms of the overall numbers, we feel very strongly about our -- as I mentioned our individual MA growth. And actually, we're coming off of strong growth in the group market in 2019. And as we think about 2020, we're expecting additional growth in group. But again, just the time line of the procurement has been a little bit longer, but we still feel very strongly about our group offering. The brand is resonating extremely well and we're really pleased, again, with the individual MA open enrollment season that we just had and that we will grow at a pace faster than the industry once again. So, thanks for the question and next question please.

And we'll go to A.J. Rice with Credit Suisse. Please go ahead.

Hi, everybody. Just one quick point of clarification to John's comment and then a question about margin trends for 2020. It sounds like, on the third quarter call you guys were sort of implying in your broad comments that it would be at least 22.50 or at least 22.60. Based on John's comments, the fact that it's now at least 22.30. It sounds like that's 100% due to the HIF repeal, which was not expected. I just want to confirm that. And then just more of the margin trends for 2020. Is there any way to flesh out a little bit how much of a headwind normalization the individual margin is? How much of a tailwind, the comments about Medicaid or next year versus this year? And how those will impact the margin? And I'm assuming you're assuming relative stability of Medicare but maybe that's not true. Can you comment on that?

No, thank you for that one question A.J. I’ll do my best to see if I can answer it. But on the 2020 guidance you're exactly correct. Our core assumptions from the third quarter are unchanged. The growth rates that we had that we laid out in terms of Ingenio adding $2.30 for the year contributed a little bit more than $1 to 2019, increasing our earnings by the low end of the 12% to 15% growth rate that we had promised at Investor Day. And that included covering a $0.50 HIF headwinds that we knew about. But what we didn't know about was that there will be a permanent repeal of the HIF starting in 2021. And when you look at how that impact our 2020 mid-year renewals that the 2020 midyear renewals no longer need to charge and price for that incremental cost structure. And so the impact on 2020 is incremental $0.30 headwind on top of what had been communicated in the third quarter. And so that is entirely the differential between today's guidance and the expectations that we had from 90 days ago. The -- that was the first question. Actually could you repeat the other part of the question?

In your guidance in terms of headwinds tailwinds…

Yeah. Thank you, A.J. That was the individual margin normalization versus Medicaid. We have been talking all along about how those two mitigated each other. As we finalized our plans for 2020 and we've been working very, very hard with the states and everything else, we expect that the margin normalization from individual will probably be about 10 basis points worse in terms of margin than the incremental benefit that we expect to achieve from improvement in the Medicaid business. So that's about a 10 basis point impact on overall margins. And also that 10 basis points works its way through the MLR calculation as well. I didn't really talk about that as part of the 50 basis point increase in MLR but that's part of the reconciling item as well is that the individual headwind is about 10 basis points more than the Medicaid tailwind.

Thank you, John. And just a quick comment, sort of, reaffirming what John said. Overall our guidance is very consistent with what we said. And also we view, obviously, the repeal of the health insurer fee as a big positive for affordability and are very pleased that that happened. Next question, please.

And we'll go to Steve Tanal with Goldman Sachs. Please go ahead.

Good morning guys. I guess, I just wanted to dig into a little bit the fully insured enrollment outlook as well as the MBR guidance and trying to square this all with the $4 billion of pharmacy cost savings. I guess, it seems like growth could have been a little bit better or MBR maybe a little lower. If I'm doing the math right, it looks like commercial fully insured enrollment is implied down about 130,000 to up 120,000 when I take the 2020 fully insured aggregate growth outlook and net out Medicaid and MA. So first I wanted to confirm if we're thinking about commercial risk right that way? And I guess maybe Pete, any commentary on how you've been able to use those savings to drive enrollment gains or attention? And John any thoughts on the MBR, and whether you could add lower than the range or somewhere towards the lower end, if you end up burning more than at least 20% that you guys have committed to in the past that would be helpful.

Great. Thank you for the many questions. We'll try to hit them each, but just in terms of fully insured and I'll have Pete give some commentary on that. If you look at the midpoint of our guidance, essentially we're guiding to flat commercial risk membership. And remember, if you think about the return of the health insurer fee, when this occurred a few years ago, the market overall was down pretty significantly, as were we. So our growth is actually inside of that, when you think about flat quite good, given the market dynamics. But I'll ask Pete to give some additional commentary about what's really happening inside of there.

Yes, that's it. Thanks Steve and thanks Gail. It's exactly, right. We're very pleased with our fully insured growth. You saw that play through in 2019. We've experienced growth in the large group and four out of the last five quarters. And as Gail said, the flat nature of our growth in 2020 is really this one large account, which is not really that unusual in light of the fact that the HIF coming back and a very large account moving from fully insured to ASO. And as Gail said, the last time this happened was in 2018 and we saw a mid-single-digit progression in membership. So a really nice improvement from that perspective. But longer term outside of that one large client, our fully insured growth would have been positive in 2020. And now with the value of Ingenio coming through, you'd asked about that, and yes, we are seeing that play through in our value. It's very nice to have that play through in a year when the HIF was coming back. So that was definitely an offset. And then, all the things that we've talked about in the past, our product portfolio, our sub-segment strategy, what we're doing around brokers and broker engagement, are all really playing through. So, again, longer term outside of this one large account, we see positive growth in the large fully insured and fully insured business in general.

Yes. And thank you Steve for the following up on the other part of your question, on the $4 billion savings from a full year implementation of IngenioRx. We're actually very excited about that, because at the end of the day, that $4 billion in savings makes healthcare more affordable. And group trend is just one aspect of that business and a very important aspect. But as we've stated in the past, the impact of the savings and the $3.2 billion that we're returning to the customers, it's really based on a market-by-market, line-of-business by line-of-business assessment. And each marketplace is a little bit different. Our competitive advantage differs in certain marketplaces, in the extent that we're close to an MLR rebate. We obviously would include it all into the pricing. In the extent that we have really good market share and really good competitive positioning, we may let a little bit more drop to the bottom line. And then, you have to go back through line of business by line of business. In our ASO, some of our customers have passed through pricing. They actually receive 100% of the benefit of the better pricing. In Medicare Advantage, we are utilizing the benefit to offset some of the 4-star headwinds that we have. All-in, we continue to reaffirm that at least 20% is going to hit the bottom line and the rest will be returned to the customers. Yes, we always do aspire to do more, aspire to do better. But right now, our guidance is pretty solid.

Thank you. Next question, please.

We will go to Stephen Valiquette with Barclays. Please, go ahead.

Thanks. Good morning, everybody. So even though the $50 million risk-adjuster reduction only impacted MLR by 20 bps in the quarter, just curious to be able to provide just a little more color around the decision tree and when it makes sense for you guys to alter that position? Really just trying to understand, if this is something that could occur really at any given time in any quarter going forward, how should we think about the volatility around this in future periods? Thanks.

Yeah, sure. No great question Steve. And in terms of our risk adjuster position, obviously, we evaluate it and monitor it on a regular basis. Many of the things in the individual marketplace or a zero-sum game, we don't have the appropriate transparency into everyone else's risk pools and everyone else's risk adjuster scores. We utilize a third-party service called Wakely that many of the companies in our industry utilize to do estimates. We take that along with our own competitive intelligence and our own knowledge and analysis and we make adjustments as appropriate. There was a weekly report that was provided to the entire industry in mid-December that was utilized by us as part of our overall assessment. Wakely does a report multiple times a year. So -- but we've been very accurate over the past several years. And our estimates have been very, very good. So we feel good about the estimate. And quite honestly it occurred for a really good reason. And that's because we were over performing on that block of business.

Thank you. Next question, please.

And we'll go to Gary Taylor with JPMorgan. Please go ahead.

Hi, good morning. I just have one question, but I thought maybe I'd ask 15 since that's going to be the trend. The one question I have, I just want to ask about Ingenio and if there's any possibility we're going to have any increased segment disclosure for 2020? The PBM revenue and fees are all rolled up in that single line. So even though you've given us a cost of good dollar amount, we can't really see the gross margin. And to some degree I think that's a bit of a bridge and some of your guidance versus our model. So, I guess the question is would we consider any additional disclosure? And are you willing to give us a little help just on the gross margin as opposed to just the dollar COGS for 2020?

Sure. No, thank you Gary and I appreciate you asking one question. But the answer to the segment reporting question is, we will follow the rules and requirements as promulgated by the SEC and certainly adhere to their guidelines for segment reporting. There is a very good chance that at some point here in 2020 if Ingenio has the growth that we expected to have that it will require us to break out and have a third segment. And at that point in time, we will provide that information as well as comparative information. But until we're required by the SEC to provide that additional segment, we're going to maintain our current segment reporting structure. Just maybe a little bit of help to give you. As you can see in the press release, our cost of products sold is $7.1 billion at the midpoint. In order to get Ingenio revenue, really have to add the $2.30 or approximately $800 million back to that because that's the area where it's going to be reported. And then there's a G&A load associated with the administrative staffing of Ingenio. And you have to have both of those to get to what the impact of the Ingenio revenue is, which is a little bit more than $8 billion. So hopefully that's helpful to your modeling.

Thank you. Next question, please.

And we'll go to Ricky Goldwasser with Morgan Stanley. Please go ahead.

Yeah. Hi, good morning. So I know it's too early to talk about 2021. But just a couple of questions on how you think about that. So, first of all, when we think about Ingenio, any early thoughts about the 2021 selling season, what you are seeing? And do you think that you are ready to start actively competing for external PBM business? And then secondly, when we think about the HIF gone for 2021, any preliminary thoughts on how you're going to apply the tailwind between reinvesting in the business to improve benefit design, versus savings that are flowing through to the bottom line?

Thank you for the question, Ricky. A couple of things. One, you're right. We're not going to be giving guidance yet on 2021. But in terms of a little color on IngenioRx, a couple of big opportunities. First, we're really pleased with the way that the migration of the 15 million members went. And I think it really demonstrated the operational capability that we have inside of this business is quite mature and that has been a real positive. The big opportunity we have in 2020, and I mentioned this in some of my prepared remarks, and in 2021, is to increase the penetration in our own self-funded book of business. Right now, we're in the range of only about 20%, well below all of our competitors and others in the space. That's really been driven heavily by the non-competitiveness of our prior arrangement and we're seeing real big opportunities for us, as we, both in 2020 as well as in 2021. So that, first and foremost, is our primary. In terms of external operations, as you know, those are long-term procurements. We do feel that we're ready to compete in that. We were really pleased to bring on Blue Cross of Idaho this year for January and that has gone well. But again, in terms of the exact timing these are three-year cycles, generally. We will be competing for them. In terms of when those procurements come through, will be a little bit more lumpy than exactly in 2021, but we feel really well prepared. And again, our big opportunities are within our own existing book of business. And then again, we're really pleased with what we saw in the Part D growth this year. It's really the first year that we've been competitive in the Medicare Part D. Ingenio gives us an opportunity to also be more competitive in Medicare Advantage, our individual and group membership. So across the board, we see it as a nice growth accelerator for both commercial and government. Thanks very much for the question. Next question, please.

And that will be Peter Costa with Wells Fargo. Please go ahead.

Good morning. The other side of the mix issue relative to MLR is SG&A. And it seems like your SG&A has come in better than expected all this year. You'd originally -- at your Investor Day, you had a target for 2023 of 11% to 12% and then for 2019 of 13.5% for SG&A and you came in below 13%. Can you talk about whether the target for 2023 is now further improved? And then also, just in terms of, as we think about the progression to that, have we -- are we still linearly progressing to that? Or is it something that we should be thinking about, we just got an acceleration this year because of the mix?

Thank you, Pete. Great question. And in terms of the improvement, we are very, very happy with some of the operational efficiencies and just some of the better processes that we now have, things that really make the experience better and easier for the customer. And at the end of the day, that's the most important part. The systems migration is going to be 80% complete by the end of this year. And then, we can continue on from there. Gail talked about a six to two. So I would say that, just given some of those issues the improvement is not going to be linear through 2023. It will be a little bit better here in the first few years, as we get through the systems migration as we're investing heavily in digital right now and as we get those capabilities up and running, for instance, that maybe there's a bit of a heavier load. 2019 was negatively impacted by the early acceleration and implementation of Ingenio and so that's not part of our 2020. And quite honestly, we do have the best organic growth in the entire sector over the last several years and that organic growth is helping our SG&A ratio maybe a little bit faster than we had anticipated, so a lot of positives there really. I think the short answer to your question is the improvement is going to be a little bit faster in the first couple of years of the five-year period versus the last couple of years.

Yeah. And I would just add, sort of, to reiterate what John has said, we have been intensely focused on operational execution across Anthem. And you're starting to see that. Clearly system migrations have been successful being at 80% by the end of this year. And our destination platform allows us a few things. One, leverage on our SG&A, but more importantly improving our business process, making it easier to do business with Anthem. The investments that we are making in digital, our investment levels have been very consistent. And so as you think about our SG&A ratio, we're getting leverage from our growth but we're really getting leverage from reengineering our business processes from an end-to-end, simplifying our technology infrastructure. And I think that's a huge opportunity for us as we continue to make it easier to do business with Anthem as well as for consumers to have the tools at their fingertips. And that's really where we're heading on this. Thank you. Next question.

We will go to Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Great. Thanks. I want to go back to the MLR commentary because -- I mean, I guess I appreciate the concept of growing the Government Business faster and creating a mix issue, but you are coming in at the higher end of your MLR this year. And usually we think about the business being repriced. And if you're coming at the higher end of MLR this year there's an opportunity to improve that going into the following year. So just trying to understand why we're not seeing more of that? And I guess maybe two questions related to that. First, talk about margin normalization in the bigger business. Are we going to be at that normal margin in 2020? Or is this something that's also going to be a headwind in future years? And second, just to understand how Ingenio works with MLR. It sounds like you're saying Ingenio lower cost trend but you price to that cost trend. So it's not impacting one way or the other the MLR in the quarter? And if you could just break out how much Ingenio did lower trend, what would the trend have been without Ingenio?

Thank you, Kevin, again for that question. In terms of the MLR for 2020 in your commentary, mix is extremely important. And yes we do reprice our business each year. The -- we do price very discipline. Our pricing includes overall cost trend and we feel very good about the target margins that we have associated with the various lines of business. And Medicaid is going to improve in 2020 as we have talked about. So that's going to be a tailwind. But there are several headwinds to that metric. And again mix being -- and this is on an after HIF basis, because HIF really makes all of the metrics confusing on a reported basis and mix is the single biggest issue. I had referenced in a different question about the individual normalization. That is going to impact our MLR as that comes through, and to answer your side question on individual normalization. Given the way the MLR rebate rules work in the three-year averaging associated with the profitability of that, we do expect that 2020 we'll have individual margins that are within our sustainable range here for the future. Another data point, just on the MLR, that -- I don't know that people have really considered, again, is the elimination of the HIF in 2021. And the fact that our 2020 renewal pricing will not include the gross up for the HIF, or the tax non-deductibility to HIF, for the period that the contract years go into 2021, reduces premium and increases MLR. All those things combined are what really drives the increase year-over-year.

Thank you. Next question, please?

We'll go to Josh Raskin with Nephron. Please go ahead.

Thanks. Good morning. Just my question on the opportunity that you guys had potential to work with Prime and their decision to go another round. I'm just curious, sort of, how that unfolded and why you think they decided to sort of do something else? Was there something missing on the Ingenio side? Do you think it was just sort of financial? Or I'm just curious to get your feedback.

Thanks for the question, Josh. In terms of Prime, first, let me talk a little more broadly about our partnership with the Blues. We're not going to comment on specific decisions that are made or deals that are done. I mean, that really, I think, is a broader question that we won't comment on. But, I think, it's the bigger issue you're asking is, how do we partner with the Blues? And I think, that's been -- it's absolutely been an important part of our strategy. And looking at that we feel really good about where we've been with our partnerships with the Blues. First, in our core business, which is the Medicaid partnerships and the growing Medicare Advantage partnerships that we have, that we most recently launched, those are going very well. And we continue to add more. Our diversified business group, which is a growing part of our portfolio today, works with two-thirds of the Blue. We're obviously not going to sell everyone every single product we have. But, again, we see the Blues as a very strong partnership with us. And actually most recently Horizon Blue Cross Blue Shield of New Jersey just added one of our core products Health Guide to their largest customer, the state of New Jersey. So we've got -- we see strong and growing opportunities in terms of that. And we also think that Ingenio will be a very strong opportunity in the pharmacy space. So, we think, there's plenty of room across the Blues for us to do partnerships, as well as to work with each other. So from that perspective, we're still very bullish on our opportunities across the system. Thanks very much. Next question?

We'll go to Sarah James with Piper Sandler. Please go ahead.

Thank you. The deceleration to the 4% Local Group trend, it's the lowest that trend has been for Anthem. Can you unpack that for us? How much is Ingenio versus any other buckets decelerating in there? And then, just to clarify, you said that you're pricing to trend. So I want to confirm, does that mean there's no conservative buffer baked into spread in the event that the deceleration from 6% to 4% doesn't come to fruition? Thanks.

Sarah, thank you, for the question. And just to clarify, there are many, many things that go into trend. There's the -- obviously, the changing population, the acuity of the business, the mix. We have cost of care initiatives that we have implemented in prior years. We have cost of care initiatives that we will implement in 2020, all the impact trend. And then, we also have the impact of Ingenio. Just for clarity, we are not going to itemize each one of those and what they are each worth individually. In aggregate, it takes our trend down to 4%. And that compares to the fact that we ended 2019 squarely at the midpoint of our prior trend of 6% plus or minus 50 basis points. And now we have a 4%. In terms of pricing methodology, the pricing methodology does have a bit of conservatism baked into it but it's not a percent or a number that we're going to talk about here, but we feel very good about our ability to deliver on the pricing discipline that we've laid out.

Yeah. And I'll just reiterate what John said. We have not changed anything around our pricing discipline. We've remained exactly consistent on that to our forward view of costs and that's how we're pricing. And then in terms of just a couple of factors because I think everyone is focusing on just IngenioRx and the impact on trend. We have also been working very diligently around how do we change overall costs. And right now 60% of our spend is in risk-based arrangements. We expect to see greater pull-through of that because more an upside downside risk where we think there is the best alignment of cost quality and health care outcomes. We are very focused on bundled payments and incentives for site of care, working around orthopedics, cardiac, women's health services. Our site of service where we work with our DBG counterparts around, particularly our aim around moving to the appropriate site of service I think is another really important area around GI, great area that we're focused on right now. And then finally specialty RX, where we're targeted for redirection in that area. So those are all large dollar areas and big areas of trend in spend. And we have been intensely focused on that as part of our overall medical cost management and alignment of those services as well as what Ingenio brings to us on just a unit cost perspective. Thanks very much for the question. Next question, please.

That will be Lance Wilkes with Bernstein. Please go ahead.

Yeah. Could you talk a little bit about the improvements in Medicaid in 4Q and the second half and in particular you point to, kind of, specific actions you've taken? And then how much of that improvement is coming on the medical cost side versus operating expenses?

Thanks for the question Lance. I'm going to have Felicia Norwood respond.

Good morning Lance and thanks for the question. As you know we have spent the -- a big part of 2019, focused on working with our state partners to make sure that we were getting rates that were aligned with the acuity and mix of our membership. We saw acceleration of re-verifications during 2019, and as you know that provided some headwinds for us. We are pleased to say that as we head into 2020, we have spent a lot of time with our state partners to get the rates that we believe are appropriate for the mix and acuity of the population that we're serving. At the end of the day it's all about a combination of rates, but also the medical management programs that we have in place as well to support our members. We say all the time and it's true we're very focused on whole person care. We have worked very closely with complex and specialized populations and making sure that our members are getting care in the most appropriate setting. So when we think about the opportunity we have for us on the Medicaid side around improving, our overall cost as we go forward is certainly a combination of having in place the right medical management programs and being very disciplined and vigilant with our state partners around getting the rates that we need to support the changing mix of our population as we go forward.

Next question, please.

We'll go to Matthew Borsch with BMO Capital Markets. Please go ahead.

Yeah. Could you just talk a little bit about the outlook on the commercial side? I mean, I heard your broad comments, but how do you expect to start this year in terms of your commercial enrollment, particularly on the risk side, when we think about group versus individual, given the trends that you're seeing?

Yeah. Thanks, Matt. Now as we talked about, we talked about a large client transitioning from fully insured to ASO. So at the beginning of the year, you will see that play through. But as we talked about, through the remaining portion of the year, you'll see our fully insured business continues to improve and grow, for all the reasons that we stated before. And as it relates to the individual business and, I think, that we saw a modest growth this year. We believe in our strategy around individual. We remain disciplined with respect to that business. We're targeting markets where we can achieve the appropriate economics and establish the right networks, have the right collaborative relationship with providers and partners. And we're seeing that play through, but it's a very methodical and thoughtful approach. And so, I think, you'll see, as it relates to 2020, our individual business play out in a very similar fashion than it did in 2019.

Thank you. Next question, please?

We'll go to Dave Windley with Jefferies. Please go ahead.

Hi. Thank you for taking my question. I wanted to come back to MLR, I apologize. But on MLR, looking at, kind of, if I extend out maybe one more decimal point. It looks like MLR really was kind of outside – barely, but outside of your range for the year. And the risk adjustment, if I take that out, would really bring you back down to still at the very high end of your MLR range for the year. So you've, I think, said that the trends were basically in line with expectations but for flu. So I'm wondering if you could quantify flu, so we could have a better sense of the magnitude of that in the fourth quarter and for the fourth quarter of next year, understand what the year-over-year compare would be on that.

Dave, thank you for the question. And, quite honestly, I'm not going to comment on decimal points that go out further and further and further. I really don't think that it's a productive conversation. However, I will say that, the flu was more significant in the month of December, specifically, in November, but in the fourth quarter in total, than we had anticipated. There's obviously a lot of factors that go into MLR and premium and everything else. And we're going to talk about the things that are material and significant, not the ones that change things by 100 basis points -- 100th of a basis point or something like that. So our answer's stand, that we believe we have provided the information that's needed.

Next question, please?

That will be Charles Rhyee with Cowen. Please go ahead.

Yeah. Thanks. Hey. Just, thanks for taking questions. Just want to clarify a couple of things. First, going back to MLR, not so much about the guidance range itself. The 50 basis points range is a little bit wider than normal. Is that just simply, as you kind of take on Missouri and Nebraska? Or is there anything else in sort of the variation that you're kind of expecting? And then secondly, I think, to an earlier question, you're obviously going to a 4% cost trend from 6%. You talked about largely being Ingenio and a few other things. But without Ingenio, what would that 6 -- how would we compare that 6% compared to 2019? Thanks.

No. Thank you, Charles. And in terms of the guidance range and expanding the MLR by 50 basis points, it's really to be more consistent with how others players in the industry have expressed trend over the last several years, as well as the fact that we continue to be a growing company with some really good top-line growth and want to provide guidance that we don’t have to revise and change maybe as much as we had on the MLR basis for the future. And then in terms of the Ingenio is as in response to Sarah's question, we're not going to provide the specific itemization of each item and trend and how much medical management worth? How much site of care is worth? How much bundled payments are worth? Or how much Ingenio's is worth for that matter on the trend on a percentage basis.

Thank you. Next question.

We'll go to Frank Morgan with RBC Capital Markets. Please go ahead.

Good morning. A lot of questions of the impact of the mix shift on your overall MLR. I'm just curious, could you give us a high-level thought around what's the differential in that target market -- margin in those two businesses the Government, the Commercial? And then in terms of your assumptions around the Nebraska Missouri contracts, where are they relative to your government contract margins to our targeted margins? And have those states been through these reverification cycles? Thanks.

Yeah, Frank this is John. I'll start out on the question and then turn it over to Felicia to provide some final thoughts. But if you look at the Government Business division in terms of how it has contributed to the revenue of Anthem for 2018 and 2019, it's been slightly more than 60% for each year. But now when you look into 2020 and you look at our Medicaid growth including Missouri and Nebraska, you look at our sustained double-digit growth in Medicare Advantage, which on a percentage basis has led the industry for several years in a row, the fact that the return of the HIF is muting the fully insured commercial growth. You take it all in, we expect that Government revenue to increase as a percentage of total revenue by several percentage points. And just the dynamic on that ends up being the leading factor associated with the increase in the MLR year-over-year. Felicia if you'd like to talk about Missouri and Nebraska?

Yeah. First of all let me say that, we're very excited for the opportunity to be able to serve Medicaid beneficiaries and working with state partners in Missouri and Nebraska. Just to level set again, reverifications and eligibility determinations are a part of a normal course of business and Medicaid programs and states are required to verify eligibility at least annually. We have not -- certainly we just closed last week, but we certainly haven't seen anything yet with respect to this population around accelerated reverifications, but we will work closely with our state partners there as we take on this business and bring the value of Anthem to beneficiaries in the state. Thank you.

Next question, please.

We'll go to Whit Mayo with UBS. Please go ahead.

Hey, thanks. Just a quick one on Medicare Advantage. You picked up about 90,000 lives in open enrollment and at the midpoint of your guidance range of 150,000 to 200,000 implies half of the growth coming this year from open enrollment alone. But historically you've earned perhaps one-third given the year-round net growth and group wins. So what's different this year as we think about the seasonality of your expected growth since history makes us look pretty low as a starting point?

Thank you for the question. Yes we're very, very pleased about what we saw during the AEP season. Frankly, it was some of the strongest growth we've ever seen. And we look forward to being able to continue to grow our business over the course of the year. As you know, we are focused very much, not just on our MA population, but also duals as well and we are consistently bringing in business with respect to that over the course of the year. The fourth year in a row of exceeding industry growth rates with respect to MA has been very significant for us. We spent a lot of time focused with our partners and also focused on our product portfolio. And when we think about the competitive product portfolio we have and the supplemental benefit offerings, we feel that we are well positioned for growth as we go forward. So if you think about it, we are very much committed to being able to deliver on the commitment we've made, which is to deliver mid-double-digit growth again in 2020.

Next question, please?

That will be George Hill with Deutsche Bank. Please go ahead.

Good morning, guys, and thanks for taking the question. John, I just want to delve into a comment you made in the prepared commentary. It sounded like you were talking about in the -- from the risk-based business to the fee-based business, you're seeing kind of the profit ratio go from 5:1 to 3:1. I guess, can you unpack that a little bit? I'm assuming, it's the growth in the profit of the fee-based business, as opposed to a shrinkage in the profit of the risk-based business? And I guess, can you talk about what's driving the incremental profitability of the fee-based business and kind of allowing you to generate that margin?

Sure. This is Gail. I think, that was in my commentary. I will -- I'll ask Pete to comment. That's a strategy that we've shared pretty broadly as part of Investor Day, in terms of improving the profitability of our fee-based business relative to the industry. So we feel very good about the profitability of our fully insured. So it's not a decline there. It's more of an improvement. But I'll let Pete talk about the specific actions underneath that.

Yes, exactly. So this is a -- it's a -- as we talked about at Investor Day, it's a major component in our growth strategy in terms of expanding and -- expanding our margins and improving our ASO business, overall. And to unpack how we achieve that. It's through a series of upselling in terms of capabilities and programs. So, specifically, as Gail noted, our specialty business this year performed exceptionally well, growing by over 1 million members. That's a component of selling our specialty products into our ASO business. Stop losses included as well. Clinical programs, where we're seeing very significant uptick. And Gail mentioned in the prepared comments, programs like Total Health Total You. All these things are playing into success with respect to this. And then, longer term, and into 2020, we look really forward to including IngenioRx. In that context, that will be a significant driver of taking us to the 3:1 as we committed to and even forward-looking thinking about future assets like Beacon will continue to create improvements as well. So we remain really bullish with respect to this story and on a path to success to meet our commitments by 2023.

Next question, please?

We'll go to Scott Fidel of Stephens. Please go ahead.

Hi. Just had a follow-up question, just on the commentary around North Carolina. And you had mentioned that, you expect that will now be a 2021 event in terms of implementation. Just interested, because a couple of your peers have talked more to -- one had talked to a 3Q start, another had talked to a 4Q start. So just interested, whether you've actually gotten some recent feedback from the state, telling you it's going to be more like 2021? Or whether you're just being -- trying to be a little conservative around that assumption. Just remind us in terms of what your pick was in terms of what you're expecting on North Carolina membership, whenever that actually does get implemented? Thanks.

Yes. Good morning and thank you for the question. First and foremost, let me say that we are very much looking forward to working with our state partner and Blue Cross Blue Shield of North Carolina in order to serve Medicaid beneficiaries in the state. When we were here in the last quarter, we expected the business to go live on February 1st. Based on everything we know today and I will say we have not had a definitive answer from the state, we are assuming that in order to be able to deliver on the business, it would take until possibly 2021 before you would be able to go live with respect to the contract. With that said, I will say that we have been very much working closely with our partner in the state of North Carolina and we are ready today. Operational readiness is critical for us and we have gone through numerous iterations with the state around testing and preparedness for the go-live. But based on where we are sitting today, it's our expectation that the business won't be going live until 2021.

Next question please.

And our final question will be from Steve Willoughby with Cleveland Research. Please go ahead.

Hi. Thanks f or squeezing me in here again. Gail, just wondering if you could provide a little bit more color on two different items. One, just as it relates to the acquisition. It sounds like its dependent of the TPA you mentioned. Just why that interests you in actually acquiring that business? And then also if you could provide any color as it relates to something you mentioned back at the analyst meeting as it relates to the Blue's high-performing network for 2021. And maybe just an update on how you are thinking about that for Anthem and maybe the Blues network overall? Thank you.

Great. Thank you for the two questions. And first in terms of the TPA acquisition, it's a capability acquisition predominantly for us. The reason we're interested where the majority of the membership today it is a sub-segment of the business that requires a different type of flexibility, we've been very focused obviously on converting our systems to having a destination platform in our commercial business. This gives us a little more flexibility around sub-segments of the market that we do business in hospital labor, et cetera that historically has different operating requirements. So we felt that this was -- this added to our portfolio. It's an area that the Blues have always been strong in. And this specific TPA again is the majority of ours and works closely with the Blue partners. So we feel good about that. In terms of the second question, the high performing network. Sorry, I was just catching up there a little bit on it. But we're actually making great progress. We're really excited about it. It's part of our overall affordability. We're working with our other Blue partners. I think it's actually a very strong statement around what we're trying to do with high performing networks and 55 MSAs, 22 of which are in Anthem states. We believe that this will provide us with leverage our deep provider relationships and allow us to seamlessly and simplify how our customers get a significant cost structure advantage and much higher outcomes. Overall it's progressing. We've had great interest from our largest client’s particularly national clients. As you know we've always had a very strong unit cost advantage inside of the Blue Cross system. This is I think builds upon that also to have a very strong performance orientation and the network again is built based on…

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