Aetna (AET) Mark T. Bertolini on Q2 2016 Results

We are in the process of defending against Justice Department

“As most of you are aware, we are in the process of defending the Justice Department lawsuit to block our proposed acquisition of Humana. The DOJ action ignores the simple fact that there is robust competition in Medicare, as evidenced by, all Medicare eligibles are free to choose between traditional fee-for-service and Medicare Advantage, and approximately 70% of the Medicare eligible population chooses traditional Medicare.”

reassessing level of participation in exchanges

“In light of the disappointing year-to-date performance, and updated 2016 projections for our individual on and off exchange products, combined with the significant structural challenges facing the public exchanges, we believe it is only prudent to reassess our level of participation on the public exchanges. Our initial action will be to withdraw our 2017 public exchange expansion plans. ”

Losing $300m this year in ACA business

“We expect the year to have a loss on ACA business of – in excess of $300 million. We are evaluating our footprint as it exists today to understand what solutions we can put forward to either fix the business, or exit the business. And so we’re going through that analysis now. As you know, there’s a short window to divestitures. But the simple – the solutions here are really two.

The problem with exchange is that the current risk adjustment mechanism does not include specialty pharmacy

“First, let me make the comment that the people that are seeking care through these exchange products need this care. So these aren’t people running off to get services that they don’t need. These are people that need the care that they’re getting. What we’re seeing in the exchanges is double-digit trend year-over-year, overall. You can double that when you talk about pharmacy. And you can triple that initial number when you talk about Specialty Pharmacy. So we have two very important things going on in the exchanges here. First, we now believe we have third parties paying premiums for special interest groups both in a small group and individual that are supporting people getting access to these services. And because of that, we have – while we have the same demographic mix in this population, we have a much higher intensity and morbidity in that population, largely around Specialty Pharmacy. So given that the current risk adjustment mechanism does not include pharmacy, we’re not actually – nobody is getting adequately reimbursed, and given that the risk adjustment mechanism is a zero sum game, there is no way to fix this unless we include pharmacy, we deal with the eligibility requirements of third party payers paying premium, and we find a way to cover these individuals.”

Issues must be addressed around eligibility and risk adjustment

“Kevin, let me – this is really a balance sheet discussion and what happens to our capital and how big the loss could get. Unless some of these issues are addressed around eligibility and the risk adjustment, this could get a lot worse. And so we have to evaluate each market by its level of volatility, the other competitors, our amount of share in that market and whether or not it’s appropriate for us to take that risk absent any other changes in the program.”

Shawn M. Guertin – CFO, Executive VP & Chief Enterprise Risk Officer

23m members

” We ended the quarter with 23 million medical members, essentially flat with the first quarter of the year. We grew operating revenue by 5% over the prior year to a record quarterly level of nearly $16 billion, driven by higher healthcare premium yields and membership growth in our Government business, partially offset by membership declines in our Commercial Insured products.

Expecting MLR at 82%

“We now project that our full-year total health medical benefit ratio will be in the range of 82% to 82.5%. The increase from our previous projection is driven by our updated view of our ACA products. Based on our improved outlook and adjusted operating revenue and continued cost control initiatives, we now project that our operating expense ratio will be approximately 18%.

Aetna (AET) Mark T. Bertolini on Q4 2015 Results

Believe we remain on track to close Humana acquisition in 2H16

“Beginning with the Humana acquisition, we continue to work diligently with the Department of Justice and with state regulators toward final approval of the transaction and continue to advance our integration readiness plans. We have obtained seven of the necessary state approvals required to close the transaction and we believe we remain on track to close in the second half of 2016.”

We have serious concerns about the sustainability of public exchanges

“despite our improved finish, this business remained unprofitable in 2015, and we continue to have serious concerns about the sustainability of the public exchanges. Specifically, we remain concerned about the overall stability of the risk pool, including enforcement of standards related to special election period enrollment, where CMS has made some recent changes, but more needs to be done. The lack of predictability and full transparency of the risk adjustment program, which is key to long-term program health, especially as the other two premium stabilization programs expire in 2017; and newly-proposed CMS regulations on network adequacy and standardization of benefits that would limit our ability to offer affordable, innovative on-exchange products. We continue to work constructively with CMS and lawmakers to set this program on a more sustainable path and achieve the underlying goal of making healthcare more affordable and accessible.”

Small group market remains rational

“the market remains rational from a pricing standpoint. We don’t see any unusual behavior, more so this year than in other years. So we see this as a rational environment.”

Seeing a slowdown in private exchanges as a employers didn’t see rate stability

“Well, I think first on private exchanges, we’re seeing the slowdown we anticipated as a result of employers who have tried it, but didn’t see the rate stability that they want to see and have pulled back, particularly on the fully insured segments and moved back to ASO. And so, that’s a sign that there need to be better proof points.”

Shawn M. Guertin – EVP, Chief Financial & Enterprise Risk Officer

Not seen any disruption from move to ICD 10

“Well, it’s certainly an issue that we have watched carefully during the quarter. We have not really seen any meaningful disruption as a result of ICD-10, and I suppose that is one of the silver linings of having a long time to get ready for this as a broader industry. But it is something that we are definitely paying attention to carefully throughout the quarter and frankly even into the beginning of this year as wel”

The Humana acquisition will accelerate our growth in Medicare Advantage

” the acquisition will substantially accelerate our ability to grow in Medicare Advantage. Aetna’s current Medicare Advantage footprint covers approximately 45% of the Medicare eligible population. The combined companies serve 4.4 million Medicare Advantage members, representing 8% of today’s 54 million Medicare beneficiaries, and will expand our geographic footprint to cover approximately 90% of the Medicare eligible population”

We think the deal will go through because there will still be plenty of competitors in each market

“On the regulatory approach, we’ve already filed our HSR. We’re starting to file in a number of states. We need 20 state approvals for Form As. We’ll file our S4 in the next couple of weeks. And so all of that, since the process is underway, we’ve engaged in conversations with insurance commissioners, with governors, with Washington, and we are most concerned about staying on our strategy, our point of view.

We’re doing deep analysis, even deeper than we did before the deal on a number of competitors by market the plans offered, the opportunity to divest. I think if you all do your homework like you have been on all of the competitors in each market and look at the markets where we may need to consider divestiture, there are plenty of competitors left in the market.

And so, I think our comfort is in the actual analysis at the end of the day, we will still be 8% of the overall Medicare market on a combined basis. We will be big in some markets where we may be have to divest. There will be plenty of competitors in each market.

And quite frankly, I think the bigger issue at the market level, where this analysis will occur, is the level of market share that the blues hold, which is really the dominant competitor in each market.”

21% EPS increase

This morning, Aetna reported record first quarter operating earnings of $2.39 a share, a 21% increase from last year’s very strong first quarter. Our first quarter performance speaks to Aetna’s focus on operating fundamentals and the continued execution of our growth strategy.”

Expanding margins thanks to moderate cost trends

The combination of this membership growth and strong yields from disciplined pricing actions drove solid topline growth as quarterly operating revenue reached $15.1 billion. Medical cost trends remain moderate and we experienced a healthy level of reserve development in the quarter and we now project that pretax operating margins will expand in 2015, despite an increasing mix of lower margin government sponsored business.”

Raising EPS projection

With this strong start to 2015, today we’re increasing our operating EPS projection to $7.20 to $7.40 per share from our previous projection of at least $7. At the top end of the range Aetna would achieve its low double-digit operating EPS growth call in 2015.”

Medicare advantage funding will increase in 2016 for the first time in several years

“For the first time in several years federal funding for this program will increase in 2016, which we expect will help us to further improve the value we offer to seniors as well as our returns to shareholders.”

90% of public exchange membership is subsidized by the government

“The demographic profile of Aetna’s public exchange membership remains generally consistent with last year. While the average age of our membership has declined modestly, the vast majority remains in silver and bronze plans and nearly 90% of our members receive a subsidy from the federal government, consistent with national averages.”

Optimistic that exchanges could develop into a growth opportunity

“We remain cautiously optimistic on the potential for the public exchanges to develop into an attractive growth opportunity where we can continue to offer value to customers and generate a reasonable return for our shareholders.”

We anticipated that cost trends would increase this year, but they haven’t

“I would say that there is really two things, obviously the preferred drug pricing contract is part of that movement. And as you know we anticipated that we would see a trend increase this year, utilization increase. We really did not see that, trend was very moderate in the first quarter.

So those are really the two items when we think about 2015 trend that are bringing that down.

Under the covers looking at it by category, there really hasn’t been anything I would say that is fundamentally changed in the story. Outpatient, emergency department usage continues to be one area that’s running.

Specialty Pharma continues to be part of the story, but there is really nothing that I would say is very different or extraordinary in the other categories compared to what we talked about over the last couple of quarters.”

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“At a recent investor conference, I was actually asked multiple times, “What do you think investors will look back on in a couple of years and really kick themselves over?” I really didn’t have to think about it very long because I think the fog of 2014 and all of the change in 2014 is masking the incredible growth opportunities that are before this company and, frankly, this industry.”

Mark T. Bertolini – Chairman, Chief Executive Officer

” Here’s how you want to think about taxes and fees. You’ve got to get them in the baseline and then — for in future years, the pain isn’t nearly as bad as it was this year.”

“there are 2 ways you solve for these taxes and fees. One is you price for it, and we will detail some of that later. And the other is you solve for it.”

“we believe in the future, that with virtual integration with the provider system, that we’ll become like the Intel Inside of the provider system through virtual integration, connecting with them in ways that allows them to do a bigger piece of what we do today.”

“Secondly, we believe that the marketplace is going to retail. And I’ll show you some statistics in a moment. And that retail marketplace is going to have individuals making the buying decision. And what they value is fundamentally different than the people we have dealt with in the past as benefit managers.”

“what’s happened with the Affordable Care Act is that it has — broke open the black box of managed care. How the business works has been exposed and regulated in far finer ways than it has in the past.”

“what does that cause you to do? Well, you have 2 choices. You can admit you’re a commodity. And when you do that, you put your thumb in your mouth, you get in a corner in a fetal position and you wait till it all goes away, till you’re out of business, or you keep cutting costs, cutting price and hope you’re the last standing. Think of the steel industry in the United States.”

“The other option is to take a look at the things you do as a company and decide which of those things that you do are of value to other parts of the value chain and create a different business model that makes you relevant in powering the rest of the value chain so that you’re no longer a commodity. And that’s the choice we have made.”

“We believe that we have the opportunity to enable the provider network to handle risk, to change the way the provider system works. And we have the opportunity to drive a retail market in health care. ”

“in the future. It will not be about employer-sponsored insurance, it will be about who is providing the subsidy to the individual who’s buying a health care policy. And we believe that subsidy will come in 1 of 3 places: it’ll be the employer providing a subsidy, the government providing a subsidy or people paying for all of it out of pocket.”

“when you get to a retail marketplace where the individuals making the decision based on the subsidy they get from either the employer or the government, their view of what is important changes, and it needs to be a system where the consumer gets what they want or finds what they want, value.”

“Third is that the distribution channel is going to change, and I think pretty dramatically over time. That’ll be more of a retail marketplace, not the model we have today.”

“the system is labyrinthian in its thinking and the way we work. Just take a look at Healthcare.gov. And those people can’t figure it out, and so we have to make it a lot simpler.”

“When you incorporate out-of-pocket cost changes with the amount of premium employees are paying, employees, consumers are now paying 41% of the health care dollar in the United States. We are not far from them paying more than their employers. That’s a huge change.”

“More and more are asking their doctor, do I need to do this? Oh, by the way, how much does it cost? ”

“we believe that the retail marketplace, whether it’s fully insured or self-funded, the retail marketplace grows to 75 million by 2020.”

“here’s how we see it breaking out: we believe there will be 9% uninsured; that there’ll be 15% in government fee-for-service, Medicaid and Medicare; and then the retail market will be individual private and public exchanges, Individual MA, Medical Supplement, managed Medicaid, 46%; and there’ll be 30% remaining in the commercial employer-sponsored market but with largely, probably, employees making a greater part of the decision given their out-of-pocket.”

“CMS, every time they make a decision, impacts the rest of this industry. They’re like the blocking fullback going through the line, and we’re like tailbacks following them. Every time they fix the SGR, we reduce our physician fee schedules because we don’t have to make up for what we thought the SGR was going to generate.”

“if you’re one of those people trying to navigate the health care system, you’re looking in a system that was originally built in 1945 for — with the Hilbert and ACT and a whole bunch of other programs to create a health care system that takes care of people and to employ people after they came back from the war.”

“so this model has to change. This is too complex for consumers to figure out. The incentives are all wrong in dealing with an individual consumer. And so moving this payment model will get all of these parts of the system to work together.”

“all the tools that we invest in, the ACS investments we made, the retail exchange, private exchange models we will build and our public exchange participation is all aimed at having the system work for the individual versus having the individual trying to find their way through the maze.”

“And now if we can make that happen on an individual basis, then what happens is private exchanges allow us to take this across the country. ”

“If you have a health system that’s approaching its community, sign up individuals to be part of its health plan, the carrier doesn’t matter anymore. Multi carrier is extraneous as a concept. It’s really about, are you able to offer a breadth of plan designs, a breadth of care management capability, wellness, et cetera, a product set that provides value to consumers to want to purchase in that place.”

“That same experience is going to occur here when these retail marketplaces occur up. They’re going to want to stay with their system, the people who know them, not necessarily the benefit plan that they have before.”

“the only constant is change and change brings opportunity.”

“Public exchanges are struggling. The enrollment is lower than everybody expected. But my view is that by 2015, if we get it fixed right, it will be a new start, and 5 years from now, nobody will remember it. I think it’s just going to continue. I’m saying public exchanges are here to stay.”

“I don’t think we’re going to repeal the Affordable Care Act. I think we’re going to change it, we’re going to make it better, because it’s now starting to get metastatic to the system in the way we’re all changing and the way the system’s evolving. And while its intention wasn’t to have that all happen, it’s happening anyway, because the private sector is reacting to it.”

“So in the long term, public exchanges will survive. We believe there will be 25 million members on public exchanges and $75 billion in premium. That’s a CBO estimate. We think that’s legitimate”

“in 2016, it’s a completely different game. The ACA pressures abate, hopefully we’ll be over some of the kludginess of what’s going on today, longer-term revenue growth opportunities begin to mature and we’ll return to longer-term operating EPS growth dynamics. So we think the next couple of years is like hard work.”

“For every million members that go from self-insured to fully-insured, it’s $4 billion more in revenue. And 4x to 5x margin, dollars of margin. Public exchanges for every million members, $3 billion of revenue. Medicare Advantage, every 500,000 members, $5.5 billion of revenue. Every 100,000 of dual eligibles, which we’ve won a number of large contracts, $3.5 billion of revenue.”

“we believe that we can go from 2013 to 2020 all the way up to $100 billion in revenue. We believe we can more than double our revenue.”

Joseph M. Zubretsky – Senior Executive Vice President of National Businesses

“[Providers] now understand that by forming communities, health care communities, with physicians, ancillary and ambulatory facilities and acute care facilities and engaging in virtual integration themselves, they can change their revenue model, be reimbursed on the basis of value and not volume and completely change the game.”

“aiming our product line in our business at the large sophisticated integrated delivery systems and freestanding hospitals is the way to go. Because the hospitals are rolling up the docs. We thought about rolling up physician practices. We thought about buying bricks-and-mortar, vertical integration. Our view is, let the hospitals deploy their capital, monetizing the value of physician contracts and physician practices, let them create the communities and we’ll contract with the hospitals.”

“In order for these to work really nicely, having 30%, 40% and 50% market share aggregated in the ratio delivered to the insurance marketplace is about right. So in Chicago, where it’s very fragmented, you need 6, 8 or 10 ACO deals to make it work. But in Dallas and Houston, you may only need 1, 2 or 3. Concentration of patient market share is what make these work really well.”

“if anybody think that just because you own a physician’s contract, you can tell them what to do and how to behave, you’re wrong.”

“our differentiated solution allows us to then convert from volume-based reimbursement to value.”

“This is about enabling them to convert from episodic acute care to patient population health. Episodic acute care, when you show up, I’ll patch you up and send your home. Patient population health, I know everything there is to know about everybody in this room, you’re part of my medical community, you’re part of the medical home.”

“The shift from episodic acute care to patient population health allows the hospital system to convert from volume-based reimbursement to value-based reimbursement.”

“Aetna is your patient aggregator.”

“the business of provider contracting. We’re not in that business anymore. We’re in the business of Supply Chain Management. And the most complex, arcane, Byzantine supply chain ever designed is the healthcare delivery system”

“this is not an HMO. An HMO had a gatekeeper, that gatekeeper was sitting as a payer. That HMO shifted the risk, but it didn’t share the risk.”

“the intense clinical focus of the ACO is a completely new model and is completely anathema to the HMO model of the mid 1990s.”

Dijuana K. Lewis – Executive Vice President of Consumer Products and Enterprise Marketing

“the healthcare system was built to deliver healthcare. It was not built to deliver a simple shopping experience for consumers. That’s the transition that we are making”

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“When you look at our first half 2013 performance, on the positive side the story really was the commercial business and that was really a function of the medical cost trend environment being fairly stable and benign during the first half of the year, so commercial was the real story.”

“I’m under no illusion that it’s going to be a high margin business, but I think we will be able to earn a fair margin. Really there’s a lot of different forces whether it’s consumerism or the cost of healthcare that I think are going to make [exchanges] a place that more and more people will go to get their healthcare. My only concern all along is getting from A to B, right? There inevitably will be operational bumps in the road as these things get off the ground but they will be worked through and I think that’s really – the only question is, is when do we get there.”

“Well, I think Medicare Advantage is going to be a fine business long term. I’ve always thought that…We’ve been preparing for a long time that we were going to get to revenue that was at a 100% of fee-for-service. Some of these announcements just accelerated that process a bit for us.”

“the buying decision used to sort of be do you have every hospital and every doc in the network and if you did not, then that was a problem. Clearly now it’s not only a cost issue but I think the ability to managed care in a more effective way can happen in a smaller system.”

“If you think about it in a very simplistic sense in an exchange sort of consumer-oriented world, the consumer does not care as long as they’re doc and hospital is in the network, right? So they don’t necessarily even may not put a lot of value on a broad network. ”

“So both of those things I think are things that are narrowing sort of the network footprint size. I think we’ve said in the past our exchange networks are pretty meaningfully smaller than our standard commercial networks I think is good evidence of that.”

“So I view it sort of in the DNA of the company almost how we think about the business is all about care management and care management models and always making those better year-after-year.”