The Cigna Group Q2 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Justin Lake - Wolfe Research, LLC - Analyst : Appreciate the commentary on cost trend. Maybe you can give us an update on what you're seeing by business line and also how things have trended 2Q versus 1Q? When you say it's in line with your pricing and your expectations, is that a year-to-date discussion? Or is that where trend is running today coming out of the second quarter? Is that in line? Or is that more or less elevated versus what you expected? Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Office - Cigna Healthcare Justin, it's Brian. So I'll start by saying we're pleased to have delivered another solid quarter of MCR performance at Cigna Healthcare which ran toward the lower end of our MCR guidance range when you exclude the prior year Medicare risk adjustment revenue impacts in the quarter that I mentioned earlier. Now within the quarter, total cost of care was broadly in line with expectations. There are a few puts and takes that I call out if we get into specific cost drivers. So we continue to see elevated usage of facility-based services, including emergency room. Additionally, we saw a continuation of elevated utilization of mental health care services, which we do see as a positive over the longer term given the correlation to whole person health. You'll recall in the first quarter, I highlighted slowing growth in surgical costs. During the second quarter, we continued to see abatement in the rate of growth of surgical costs although costs still did grow. Now taken all together, we are seeing sustained high cost trends, yet these are broadly in line with our guidance as we planned and priced for the elevated utilization levels that began in 2023 to continue throughout 2024. Now specifically in the second quarter, we did not witness aggregate acceleration or deceleration of care patterns within the quarter. I also would not note any month-to-month variability relative to the year-to-date experience that we've seen. So overall, we remain confident in the full year MCR range outlined in our guidance.

Question: Lisa Gill - JPMorgan Chase & Co, Research Division - Analyst : I want to start with the 2025 selling season on the pharmacy side. You made comments around GLP-1. We continue to see new indications there. I'm just curious, one, when we think about the opportunities in '25, how would you characterize that to what kind of programs are people buying going into 2025? And then lastly, David, you made a comment that the facts need to be more widely understood when it comes to the pharmacy business. What are your plans around making those facts more widely known? Because as you know, I agree with you that both Congress as well as the media reports don't fairly reflect what the benefits are of the business. Eric Palmer - The Cigna Group - Executive Vice President - Enterprise Strategy, President and Chief Executive Officer, Evernorth Health Services Lisa, it's Eric. I'll start then maybe invite David to add some additional comments on the end here. But overall, our foundational pharmacy benefit services business, Express Scripts is off to a really good start for 2025. We've got strong new sales and our 2025 retention rate is going to be consistent with three years and the mid-90s or better. Stepping back a little bit, Evernorth overall continues to be well positioned to grow. The specialty business is also positioned for strong growth with significant growth driven by our pharmacy benefits clients electing to use our specialty capabilities as well as strong growth in services sold directly to health systems and other health plans. So overall, we are quite excited about the strength of the solutions and how they continue to resonate with the market overall. The themes or specific programs that I would point to come back to areas that help to make the value of the dollar spent on medicine is more effective. So programs like our EncircleRx program that helps to effectively manage weight loss medication GLP-1 or our most recent oncology benefit offering that David mentioned a bit ago in his prepared remarks. So targeted specific types of programs that work really well with the broader suite of benefit offerings continue to resonate really well in that scenario we continue to invest in. David, do you want to take a bit on the broader environment comment?

Question: Albert J. William Rice - UBS Investment Bank, Research Division - Analyst : I might just flip over and ask you about the any distinction you're seeing in the health benefit selling season across your book, and a large group and select, et cetera. And then also, you called out for quite a while now, fatigue on point solutions. I wonder, I understand how you're addressing affordability and understand how you're addressing behavioral health integration. But on the point solution question, is there anything that is or do you think you'll consider buying some of these point solutions and then offering them as part of your integrated offering? Do you sort of see yourself getting in the middle of helping employers choose between the myriad of point solutions? How are you addressing that? Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Office - Cigna Healthcare A.J., it's Brian. I'll start on the Cigna Healthcare selling season and buying pattern dynamic. And then I think David will pick up on the second part of your question relative to point solutions and some of our inorganic activities. So as it relates to the Cigna Healthcare selling season, I'll concentrate my comments on the larger end of the U.S. Employer market just given the time of the year. We're seeing a relatively consistent number of RFPs this year in comparison to last year at this time. And similarly, in terms of our existing clients, we have a similar amount out to bid as we did last year at this time. So, just for some context on the numbers. Now each of these larger employer clients tend to have unique needs. There's a few areas that thematically I'd call out in terms of what our teams are seeing out in the market. One, as David made reference to earlier, affordability continues to be a key area of focus particularly with the wave of drug innovation, including GLP-1s and gene therapy hitting the market. Secondly, to your point, some of the larger employers are seeking to consolidate vendors or point solutions with those who can supply more integrated offerings. Third, we're seeing mental health and substance of these benefits and programs becoming more and more important each year, particularly given some of the downstream effects of the pandemic. And finally, many of these larger clients are interested in digitally enabled care navigation capabilities to drive either further site of care optimization or consumer empowerment. So taken all together, our Cigna Healthcare offerings are well positioned to address these themes and demands from large employers. And importantly, we also continue to see strong traction in net growth in our under 500 Select segment as you'll see in the statistical supplement, 7% year-over-year growth in customers within our Cigna Healthcare Select segment specifically. David, maybe you want to pick up on the point solution question?

Question: Andrew Mok - Barclays - Analyst : Hi, good morning. With all the changes coming to Part D, there could be significant changes, not only to membership, but also formulary managementfor next year. How does the shifting risk to Part D sponsors impact Evernorth more broadly? And how are you helping clients navigate these changes?

Question: Scott Fidel - Stephens Inc., Research Division - Analyst : Hi, thanks and good morning. I was hoping to maybe just touch on the marketplace and a couple of things there. One, just with the HIX 2023 risk adjustment true-up, if you can tell us what the net impact was to earnings if there was any relative to how you had accrued for that? And then also, just when thinking about the commentary on cost trends. Maybe if you could overlay that into the marketplace in terms of if you're seeing a similar trend there and how that's influencing your view on exchange margins for the full year. I think that prior view had been probably still a bit below long-term target there for marketplace margins this year, just interested in an updated view on margins for the year. Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Office - Cigna Healthcare Morning, Scott. It's Brian. Maybe I'll try to just take a big picture view of the individual exchange business in aggregate and hit your risk adjustment question as part of that. So the headline I'd ask you to take away broadly speaking, our individual exchange book is performing as we expected in 2024. As it relates to the final 2023 individual exchange risk-adjusted true-up, we had already been accrued for a sizable risk adjustment payable. And in the second quarter results, we did have a small unfavorable true-up that was recorded in the Cigna Healthcare P&L. But overall, this was not a meaningful performance driver in the second quarter for us. And then as it relates to the 2024 performance year, we did receive our first look at the industry-wide risk adjustment data for the specific states we participate, as we closed up the second quarter books and the preliminary industry data confirmed that our previous 2024 risk adjustment assumptions were reasonable. My earlier commentary on cost trends was broadly applicable to the individual exchange business as well. So when you put all the pieces together, we are tracking toward the improved 2024 margin profile we outlined during our first quarter call. And therefore, we'd expect to land the year slightly below our long-term target margin range of 4% to 6% for the individual exchange business.

Question: Ryan Langston - TD Cowen, Research Division - Analyst : Hey, good morning. Just looks like the exchange business was down maybe 99,000 to 100,000 members sequentially. I certainly understand why it was down versus '23 year-end, but wasn't exactly expecting that sequential move anything to call out there? And maybe a little early, but I'll ask just any expectations on 2025 in terms of growth trajectory and perhaps even margin profile? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 01, 2024 / 12:30PM, CI.N - Q2 2024 The Cigna Group Earnings Call Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Office - Cigna Healthcare Thanks. Morning, Ryan, it's Brian. Congratulations on your new role. As it relates to the individual exchange lives intra year, maybe I'll just step back

Question: Josh Raskin - Nephron Research LLC - Analyst : Hi, thanks. Good morning. I'd be curious to get your views on the potential for ICHRA and specifically how that could impact the small group or select market? And maybe how does stop-loss fit into that equation? Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Office - Cigna Healthcare Josh, it's Brian. I'll take that one as well. So we see the ICHRA market in its current form is likely being a niche market, but one that we're monitoring closely. So more specifically, we see the ICHRA market as something that could be an appealing option for smaller employers who tend to be more commoditized buyers. And we expect this is most likely to be an attractive option for employers with less than 50 employees, which is a market segment that is financially immaterial for us today. And within the under-50 market, the average employer there has fewer than 10 employees, so very small employers typically. Now all that said, our individual exchange business represents an opportunity for us to participate in the ICHRA space, should it gain more momentum. Again, I then go where I started and that we see this most likely being a niche market our stop-loss offerings, to your question, are fully integrated with our Select segment business. So you should not think of that as something that is a net threat to us in the select market provided that the under-50 concentration transpires the way that I described earlier.

Question: George Hill - Deutsche Bank AG, Research Division - Analyst : Yes. Good morning, guys. I thought I'd just ask a question on what I consider to be your cost of goods sold line, which is there continues to be a lot of discussion from the retail pharmacy side of the business around trying to negotiate new payment models or changes in terms. I don't know if there's any update that you can provide on how those conversations are progressing? Eric Palmer - The Cigna Group - Executive Vice President - Enterprise Strategy, President and Chief Executive Officer, Evernorth Health Services Good morning, George, it's Eric. First, I'm not going to comment on any specific negotiations with any pharmacies or things along those lines. But as you know, we've got a wide array of choices and options for our clients. That extends to how we've constructed our network as we look to balance access and affordability that best meets the needs of our clients and their patients. So we work to assemble a range of different network options under a range of different reimbursement types that match up with the needs for cost, access and the associated trade-offs and touch there for our clients. So overall, that approach has served us well. We work to continue to innovate to bring new solutions to market. An example of a new solution there would be like late last year, we announced our ClearNetwork Solution. ClearNetwork provides a comprehensive simple solution in that, the pricing is based off of an independent, externally created index and then it's got a simple margin that's shared between us and the pharmacy. So it's a new offering we put in the market last year that's generating interest. But again, overall, the portfolio of offerings that we continue to pull together resonates with our buyers and is part of the reason we've continued to grow the pharmacy benefits services, chassis nicely over the last few years.

Question: Erin Wright - Morgan Stanley, Research Division - Analyst : So you called out the strength across specialty and services at Evernorth. I guess, how do we think about the Humira strategy contributing to the results now? And then how does that influence sort of the quarterly progression across Evernorth in the back half of the year? And just the strategy around Humira, and how that's playing out relative to your expectations? Have you, for instance, in-sourced the Humira biosimilar across your CuraScript business. Does it make sense to in-source more than the 50%, for instance, that you're targeting on that front?

Question: Stephen Baxter - Wells Fargo Securities, LLC, Research Division - Analyst : Yes, hi. Thanks. One of the questions has been asked, but I wanted to ask about in-group membership trends. It does seem we're starting to see more mixed data on the job front. Could you spike out a little bit what you're seeing in the in group trends? And do you think your sequential membership changes are generally a good reflection of that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 01, 2024 / 12:30PM, CI.N - Q2 2024 The Cigna Group Earnings Call

Question: Dave Windley - Jefferies LLC, Research Division - Analyst : Hi, good morning. Thanks for taking my question. Brian, in your comments, I think I heard you say that the excess reserves from 1Q have basically developed in line with your expectations. I think I also heard you say that you didn't see any, say, intra quarter trends or a particular month in the quarter that stood out as an anomaly. And I think in looking at your progression looks like MLR implied for the second half is maybe in the neighborhood of 200 basis points above the first half historical normal, maybe about half of that. So just wanted to understand if the higher MLR expectation for the second half is kind of cautious posture or if you're expecting certain things to accelerate in the second half that would drive that. And maybe a last question would be relative to pricing, would you view yourselves as pricing to forward view of trend as you head into next year? Or would you be pricing to expand margin? Another long question. Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Office - Cigna Healthcare No problem, Dave. So as it relates to the second half MCR guidance, I think your question was in a year-over-year context. Really, three factors that I'd highlight, if you're looking at it relative to the back half of '23, you may recall from our first quarter earnings release, we discussed that the 2024 seasonality would be more similar to pre-pandemic norms with the MCR increasing as the year unfolded, in part driven by our individual exchange business metal tier mix, which is skewed more bronze this year. Additionally, we had some favorable stop loss utilization in the fourth quarter of 2023 that we are anticipating will normalize in 2024 and our year-to-date experience is consistent with that expectation. And then finally, there is one additional business day in the third quarter of this year, which has some elevation in the MCR in the third quarter specifically for that. So all those factors combined to generate a higher second half MCR year-over-year. But again, we remain comfortable and confident with the full year MCR guidance range that we provided here. As it relates to the pricing environment, and I'll comment specifically on our U.S. Employer business, as a reminder, this is a book that's nearly 85% ASO or self-funded. So therefore, we have earnings levers that go well beyond a pure risk-based MCR, but that said, our U.S. Employer book is currently operating from a position of strength as we've been performing within target margin ranges. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 01, 2024 / 12:30PM, CI.N - Q2 2024 The Cigna Group Earnings Call And we remain disciplined with our own pricing strategy in the current environment. We continue to price to our best estimate of forward-looking cost trends. To your point, I don't need additional margin recapture at the book level. We are seeing the impact of inflation work its way through our provider contracts. As these contracts renew, we continue to expect elevated levels of utilization through 2024. So when you put all those pieces together, our all-in pricing trend for 2024, slightly higher than what we had assumed a year ago for the corresponding 2023 pricing cycle. And we're confident in our ability to secure appropriate pricing for 2025 and beyond. So a long answer to your long question.

Question: Jessica Tassan - Piper Sandler - Analyst : Hi, thank you so much for taking the question. I'm curious how you're thinking about the possibility that Skyrizi and Rinvoq substitutions could maybe foreclose the Humira biosimilar opportunity? And I guess just what recourse do you have to ensure that the biosimilar products that you've got in the market succeed, I think you've given us plenty of evidence that they're the best for the patients. So just yes, how are you thinking about the possibility of foreclosure and what can you do to kind of prevent or mitigate that? Thank you. Eric Palmer - The Cigna Group - Executive Vice President - Enterprise Strategy, President and Chief Executive Officer, Evernorth Health Services Jessica, it's Eric. So I guess stepping back, our approach is focused on offering choice and value and getting to the lowest cost and best available solution from a patient perspective. So a couple of things I would note. First of all, our biosimilar offering is interchangeable. And so that facilitates an easier election if a patient chooses to choose a biosimilar, it's an easier process by being interchangeable, so that would be one thing I would note as a differentiator for us. More broadly, we're here to facilitate and ensure patients have access to the medicines that they need. So if the Skyrizi or Rinvoq will be in a position to fulfill that as well. But overall, we're working to make sure that we've got the right access to all of the medication. As we look ahead, ensuring we've got on a fully developed portfolio of all of the available biosimilar offerings will be important, and we'll continue to be in a position to lead here.

Question: Lance Wilkes - Bernstein - Analyst : Great. Thanks, guys. Could you just give me a little more color on some of the faster growth areas in Evernorth, in particular, if you could talk a little bit about GLP-1 coverage outlook for -- during the selling season for next year, so fee growth has been really strong. How much of that is coming from traditional PBM versus care services growth? And are you seeing any of that in Accredo? Thanks. Eric Palmer - The Cigna Group - Executive Vice President - Enterprise Strategy, President and Chief Executive Officer, Evernorth Health Services Lance. Good morning. It's Eric. So let me start and just talk a little bit about the Encircle and then I'll ask Brian to talk a little bit more about the numerical dimensions of things. So within the Encircle program, we've got over 2 million covered lives at this point. So that's growing nicely. Stepping back a little bit in terms of just looking at the coverage for GLP-1s for weight loss indications overall in the Express Scripts business, we've now got essentially 50% or so of plan sponsors covering for weight loss indications. So we've seen continued incremental growth there. The REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 01, 2024 / 12:30PM, CI.N - Q2 2024 The Cigna Group Earnings Call underlying utilization levels also continue to grow nicely. We've seen growth there, consistent with what you might have seen from an industry growth perspective or things along those lines. Looking ahead, we expect the use of these medications to continue to grow. And that is part of the growth algorithm for Evernorth overall. Stepping away from GLP-1 specifically, we see broader growth opportunity in specialty with continued growth, both through new therapies through biosimilars coming to market as well as us continuing to expand our relationships whether that's through our CuraScript, specialty distributor or through other direct opportunities. So overall, growth across a number of different fronts within Evernorth that we're pleased to be in a position to deliver. Brian, do you want to pick up the second part of Lance's question? Brian Evanko - The Cigna Group - Chief Financial Officer, Executive Vice President, President and Chief Executive Office - Cigna Healthcare Sure. So as it relates to the fees and other revenue line in Evernorth, which is up 14% quarter-over-quarter, I think about a number of different areas contributing to the strong performance. Contributions from our Evernorth Care businesses are reflected here. So think of EviCore, MDLIVE, our behavioral health business. And then additionally, to the core of your question, we are seeing continued growth in service-based solutions within the pharmacy benefit services business where clients are electing more fee-based orientations with us. So finally, the other contributor to this is the cross enterprise leverage that we're driving with Cigna Healthcare results in revenue from Cigna Healthcare showing up in fees and other revenue in Evernorth and then being eliminated at the corporate level. So all of those contribute to that strong growth in the fees and other revenue line.