WellPoint's CEO Presents at The 30th Annual JPMorgan Chase Healthcare Conference (Transcript)

| About: Anthem, Inc. (ANTM)

Wellpoint, Inc. (WLP) The 30th Annual JPMorgan Chase Healthcare Conference January 10, 2012 5:30 PM ET


Angela F. Braly - Chairman, Chief Executive Officer, President and Chairman of Executive Committee


John F. Rex - JP Morgan Chase & Co, Research Division

John F. Rex - JP Morgan Chase & Co, Research Division

Good afternoon. Next up, I have -- welcome, first of all. I'm John Rex to cover the services stocks here at JPMorgan. And next up, we have WellPoint presenting. Up on the stand, you have Angela Braly, CEO; Wayne Deveydt, CFO; and Michael Kleinman who runs the Investor Relations effort for the company. So I'm going to turn the time over to Angela. She's going to give the presentation, and of course, we're going to have a breakout session directly afterwards.

Angela F. Braly

Thank you. I want to thank you all for participating today and having an interest in our company. Let me go ahead and get started. Of course, we have to remind you that my presentation will include some forward-looking statements, and there are factors that could cause actual results to differ materially from these forward-looking statements. And we advise you to review the risk factors in our SEC filings.

I also want to make sure you know that we confirmed our guidance for 2011 on an adjusted basis at $6.95 to $7, and we plan to give guidance for 2012 on our earnings call on January 25. We invite you to participate in that as well.

So I'm going to take you through a brief profile of WellPoint, and highlight for you our compelling value proposition, talk about our strategy and our outlook over the long term.

So let me get started with an understanding of who WellPoint is. We are Anthem Blue Cross of California. We're Anthem Blue Cross Blue Shield in 13 states or 12 states. We're Empire Blue Cross Blue Shield in New York and Blue Cross Blue Shield of Georgia. We have 34 million medical members, many more members when we count our specialty and ancillary benefits that we provide. We have a top line of about $60 billion and market cap of $23 billion.

When you think about WellPoint, think about the -- both the geographic diversity of our membership because we're in 14 states, and those states vary and cross the country from California to Maine. But we also have a diversity in the business segments that we serve. Our largest block of business is in the Local Group market where we have over 15 million lives. We have -- we're the largest provider of individual policies in the marketplace with almost 2 million members. We serve National Accounts, which has been a book that has grown for us historically over the last decade or so. We're over 12 million National Account lives. We have one of the largest Medicaid managed care plans. We serve the Medi-Cal program here in California and a number of other states. We also act as the back office for a number of other Blue plans who participate in Medicaid programs in their Blue licensed state. We have a senior membership of over 1 million, about 1.4 million lives, and we expect growth in our senior membership, which I'll talk about. We have about 1.5 million Federal Employee Program lives, and we serve that program proudly as part of the Blue Cross system. About 60% of our medical management is -- or medical membership is in the ASO or self-funded market, and about 40% is fully insured. We do have a broad portfolio of specialty products. We have Medicare Part D business, and we also have a government business that serves as the administrator or back office for Parts A and B, providing claims processing capabilities.

I think the point here is that all of these diverse segments are going to be meaningful in terms of the strategy of the future. So our presence in the Medicaid market and in the Medicare market make it a great opportunity for us to consider the dual-eligible market. We also have the opportunity to participate in the exchanges of the future, but we are not obligated to participate in any specific exchange or all exchanges across our states.

When you look at us by each state, the fact that we have a significant market share in the states is meaningful for a couple of reasons. One is it gives us obviously an advantage in terms of negotiating network contracts with our providers and hospitals. And we have advantages there, but as we get into our care management and utilization management capability, having a significant portion of a physician's patient group be Blue Cross Blue Shield members is meaningful in terms of the changes we may make around care management will really have an impact on their practice. And we intend to utilize and focus there in the way we have an influence on the utilization and cost of care.

It's also important what we've done while we've been these 14 former Blue Cross companies that came together, we've brought the data all together. So we have an enterprise data warehouse that has all of the data for all of our customers. We have a Master Consumer Profile. We think that data is very valuable and useful. And then the way we operate is to have a local plan president in each of our states that has a material P&L responsibility. And so they also have a real feel for the marketplace. They know the presidents of the hospitals. They work with the local regulators. And we think that's a long-standing differentiating advantage. And while we think the marketplace will change, we think that advantage will be meaningful to our company and to our customers. Obviously, the Blue Cross and Blue Shield brands are widely recognized, more recognized than any of our customers, and you'll see us continue to focus on the brand and continue to make investments in the brand because it's a very strong brand to go into a consumer market. It's very attractive in the Medicare or the senior market. And so between ourself that has 34 million lives and the other Blue plans, together we have about 100 million lives. So 1 in 3 Americans is carrying a Blue Cross Blue Shield card.

We also have historically very broad networks. We have vast numbers of hospitals and physicians in our networks. Now will there be the breadth of networks in the future for all products? I think we have the flexibility coming from the ability to take those broad networks and potentially tier those networks or narrow them for some product offerings, I think, will be meaningful going into the future. But we certainly have strength in our position around the network discounts as well as part of that network strategy that we have going forward.

A couple of years ago we really declared our strategy, which is we're a very purpose-driven, mission-focused company, and we sincerely put our customer first in all of our encounters. And we have been clear about our expectations to have a meaningful impact on healthcare value. That means the cost and quality of healthcare being delivered to our customers. We're very focused on excelling at day-to-day execution, which in our company is about continuous improvement. It's about gaining efficiency and productivity, but doing so while we continue to improve the service experience that our customers have. And we do think we have the opportunity to capitalize on new opportunities for growth. We see those changing in the healthcare reform environment, as well as demographically, and so I'll go over some of those growth opportunities.

The ways in which we have focused on delivering the best healthcare value for our customers are a number of ways. We focused on transparency, and we developed something that's called Anthem Care Compare, which is a transparency tool that puts a number of common procedures, both the cost and quality for the whole episode group, available to our members, so they can access it and consider cost and quality as part of their purchase decision for procedures. We also send to physicians and members personal care notes from a capability that we have that mines our data and looks at certain either combinations of clinical indicators or provides updates and information to customers and to hospitals. We have a number of accountable care organization pilots and patient-centered medical homes. We have over a dozen of them, and we have some real results that we have seen resulting from the programs that we have thus far. You will see from us more about our strategy of focusing on the primary care provider, making sure that they're rewarded for making good decisions in navigation for our members, their patients, through the healthcare delivery system.

One of the innovations that we partnered with IBM on was on the Watson program. As all of you are probably familiar, it's so much [ph] dated. The RAND study that said that typically or 55% of the time, you will receive evidence-based medicine and 45% of the time, you may not. So it doesn't mean it's wrong. It may be too little. It may be too much. But 55% of the time is where evidence-based medicine was. We think that number needs to increase dramatically, and so we partnered with Watson to create the first commercial application for their Watson engine, which is an artificial intelligence language-based engine. And our work with them is creating 2 use cases, one that's up and running. And that is a capability to provide information to this engine and assist our nurse case management and utilization management decisions to improve the percentage of evidence-based medicine applied in care. And then we're partnering for Use Case 2 with oncologists. We have an arrangement, we've announced, with Cedar-Sinai and are working with other oncology groups then to in addition to providing the literature and medical information about oncology, also providing and feeding into the Watson capability a longitudinal health record that would provide the relevant clinical information for the patient member so that the outcomes or the physician could be assisted by this capability in making evidence-based medicine choices for the member. More to come on that as it rolls forward. But the Use Case 1 is up, and our nurses are operating with the Watson capability today.

We are very focused on excelling at day-to-day execution, which I said really focuses on continuous improvement. We are standardizing and simplifying our environment but doing so in a way that we think is attractive to consumers and enhancing the consumer experience. We are -- our strategy anticipates that we move from a business-to-business environment for health benefits to more of a business-to-consumer environment through possibilities around defined contribution for employers, as well as more individuals accessing care through exchanges or private marketplace like exchanges that we can provide. So we're enhancing the consumer experience. We're improving our service metrics in every capability. We're also creating for our actuarial area more focus on the data analytics that are going to be relevant to the cost of care and the cost of care in an ICD-10 environment.

So some of the achievements we have created there -- and as we create productivity, increased productivity happens through automation. It happens through a number of continuous improvement processes that we have in place, not specifically Six Sigma but a proprietary continuous improvement mechanism. And one of the results is we get better automation, which means we get faster claims payment processes. It also means we have more transparency into the data sooner for pricing and reserving, and we've seen that in the EDI exchange. So we receive over 90% of our claims electronically, and we're able to accelerate the processing as a result.

In addition, we have reduced our SG&A expenses, and we continue to plan to do so. It's a multiyear plan that takes into consideration that we came from multiple separate entities, multiple different systems, and we've had the ability to reduce the number of systems, convert quietly and uneventfully over to our destination systems that we will serve our members. We've also consolidated our enterprise data, as well as our portals for accessing information for the consumer and enhance the consumer experience, all while we significantly reduce the SG&A.

As we look to the strategy of the future, we do anticipate shifts in the way in which the segments are arrayed in our population. We are expecting growth, for example, in the senior population due to demographics. Because of healthcare reform, we anticipate changes. We anticipate more eligible individuals in the Medicaid program. The exchanges will create an opportunity that we can avail ourselves of, and we see employers having a number of choices in terms of how their employees will receive benefits. And our strategy is to create a number of different ways in which the employee or member who comes through an employer can access the healthcare system and healthcare benefits through us. So if we create the relationship with the individual consumer, that member, we want to keep that member whether they're in an individual product, a product provided by government like Medicaid or Medicare or through an employer relationship.

So as we arrayed the different segments and anticipated the growth that was coming, we do think the senior population is a growth vehicle, and I'll talk in a moment about CareMore, which was an acquisition that we're very excited about at WellPoint. So we've targeted those areas we think are growth opportunities. We do think the exchanges create a potential growth opportunity, but we're going to approach those on a state-by-state basis and consider the feasibility and likelihood of success for each of the exchanges on a state-by-state basis. Given our structure with a state plan president in each state, we think we're in the best position to discern the feasibility of that state's exchanges going forward.

There are other opportunities we think are going to create opportunities for an employer with the risk or an ASO contract, for example, to send his employee through a defined contribution program, which I'll talk about. And then we do think we have opportunities to diversify our revenue source. Although in our 5-year plan, which we have available on our website and have described in the past, we aren't really counting on those diverse sources of revenue but rather looking at our expectations about growth in our core business, and we put forward a 5-year plan that had an estimated 10% CAGR over that 5-year period.

So let me talk about CareMore. I think Alan Hoops is with us here today, CEO of CareMore. And we're delighted to have the CareMore company part of our family. We closed this transaction very quickly, and it's a really unique business model that does a number of things. It takes care of seniors very, very well, which is really critical, and it does so through a couple of mechanisms, one of which is it really engages that senior member early in their relationship. And they have a Healthy Start visit, which does a couple things. It helps us understand who that member is, helps us collect the data for risk scores. It helps us collect data for information around the STAR ratings. Then we have a Nifty after Fifty model, where you can get prescribed a visit to Nifty after Fifty. It's a physical therapy and physical fitness center, which can really help with the wellness and the rehabilitation of a Medicare member. And then we have an extensivist model where we have physicians who are really uniquely trained as extensivists to deal with, and they actually round in hospitals to help coordinate the care for the most frail of our members and meet the needs of our members in special needs plans. We also think there are great opportunities for CareMore and our experience in the Medicaid business as well as our traditional senior business to meet the needs of the future dual-eligible population.

So as I described, there are opportunities we believe for employers to consider how to create for their employees the ability to receive benefits but do so in a way that creates a defined contribution on behalf of the employer. So the employer would create a stipend for their employee and then send that employee with the stipend through this new technology called Bloom Health. This is a company that we acquired together with Blue Cross Blue Shield of Michigan and Health Care Service Corporation, which is the Blue Cross plan of Illinois, Texas, New Mexico and Oklahoma. And together, it creates for us a ability to create a Blue mechanism, a technology where the employer can create a defined contribution obligation and create more transparency for their employee or retiree. So they know how much they have contributed to that employee's coverage benefits, and then it also provides the employee with the mechanism to make a choice about the coverage that might be best for them based on the stipend that's available for the employee. We think the employers are very interested today in this for their retirees in particular, and as they consider in the future the ways in which that they can continue to provide benefits to their employees, that this capability will be critical. And it gives us an opportunity to partner with our other Blue plans and create a Blue solution, essentially a private exchange-like mechanism for employers.

As a result of that, we have -- we also are very committed and accountable in terms of creating operating gain growth for our company but also the increase in EPS. We are accountable to our shareholders for the return of capital, which we have consistently applied our capital to share repurchases, as well as dividends. So we'll give more guidance later in the year in terms of our go-forward. But our 5-year plan was pretty consistent. We have the opportunity to repurchase about 10%, 11% to 12% of our shares each year and also make a meaningful dividend for our shareholders.

Also, we are very accountable from the credit perspective as well, and our ratings are displayed here and important in terms of senior debt at A-, the financial strength rating at A+, debt to capital is 29.7%. We have flexibility within our range, but we feel comfortable up to 35% debt to cap. And then we do have this opportunity for available cash flow, and at the parent level, we have $2.4 billion in available cash and investments.

So when you bring together our strategy going forward, we do think it's an important part of our strategy to really produce healthcare value, meaning lower cost, higher quality and the data and metrics to support and prove that. We're going to continue to focus on excelling at day-to-day execution through continuous improvement, enhancing the consumer experience, reducing our SG&A cost. We're the market-leading efficient scaled organization, and we're going to continue to produce -- invest in things like CareMore and our brand and our capabilities to enhance the consumer experience, all the while funding in part that investment through our increased inefficiency -- efficiency and productivity. And we do think we have new opportunities for growth, either growth that the demographic shifts are occurring, so employees go from an employer relationship potentially to a Medicare relationship, but some cases, individual relationships. Those are new opportunities. We have new opportunities for growth in our specialty or ancillary lines of business. But we also think over time we will have new opportunities for growth and diverse sources of revenue, as we anticipate what our customers' needs will be in the future and then move forward to create mechanisms for access to care that is more convenient and effective for them in the future as our members.

So with that, I think we're going to wrap it up, and thank you again for your participation. We have about 3 minutes, John. So do you want to take a Q&A before we move on?

Question-and-Answer Session

John F. Rex - JP Morgan Chase & Co, Research Division

Yes, we have a minute or 2 for some Q&A in here if we'd like to before we go across the hall. And if there's not one, maybe, Angela, I'd just like to throw one at you. So as it relates to your government program businesses, as you look at your configuration days, so you clearly added some capabilities there with CareMore. Do you consider your book of business underweight where you want to be in terms of government program exposure at this point? And kind of where would you ideally like to be?

Angela F. Braly

We think it's a great growth opportunity for us particularly in the Medicare Advantage space and potentially in the Medicare, Medicaid dual-eligible space. We think that we have created a service experience that's a very positive one. The brand, the Blue Cross brand is very strong in the senior segment, and the CareMore capabilities really catapult us forward. So our expectations for CareMore, we have 28 neighborhood care centers, which are neighborhood centers that focus up to 4,000 members around the care that's available there. But we intend to expand that about 12 a year for the next couple of years into states in which we're Blue Cross and Blue Shield. I think those are real opportunities for us. And then the dual eligible, we've served the Medi-Cal for a number of years, and we think the Medi-Cal program together with our traditional Medicare program and our CareMore capabilities now will give us great opportunities in the dual population.

John F. Rex - JP Morgan Chase & Co, Research Division

And so from a capabilities perspective now, does that put you where you need to be? Or are there other capabilities you need for that business?

Angela F. Braly

I think we really have the core capabilities particularly with the CareMore assets, and we have the systems in place to scale those opportunities. So I think we're in pretty good shape in terms of those capabilities, and we can meet the needs of the customers both on the Medicaid side and the Medicare side as well. And that -- those capabilities also have the potential to serve the needs of our most acutely ill customers, which 5% of your members drive 50% of your costs. Certainly, 20% drive 80%. And so if you can meet those needs in a way that's more efficient and produces a better outcome for them, that capability goes beyond Medicare or Medicaid and into the commercial population that needs it the most.

John F. Rex - JP Morgan Chase & Co, Research Division

Great. We'll move across the hall. Thank you.

Angela F. Braly

All right. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!