Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

At a time of extreme uncertainty in the health-insurance market, Anthem Inc. just posted its best quarterly earnings since 2013.

The company's first-quarter results, announced Wednesday morning, beat analyst expectations on just about every measure, driven by growth in its Medicare and Medicaid businesses and a lot of new and healthier-than-expected patients enrolled via the Affordable Care Act's individual exchanges. Anthem says it intends to stay in the exchanges in 2018 -- something I (mea culpa) previously thought unlikely -- though that is based on a risky assumption Congress will fund payments to insurers that lower costs for people insured under the ACA.

The ACA was so rough for insurers last year that even Anthem still seems unwilling to fully believe that healthier ACA patients -- meaning lower costs for insurers -- are a trend. According to Bloomberg Intelligence, Anthem has the most ACA exposure of any large diversified insurer. It is also one of the last of the major insurers still willing to give Obamacare a chance; UnitedHealth Group Inc. has mostly pulled out of the exchanges due to large losses, and Aetna Inc.'s CEO said the exchanges were in a "death spiral" in February. But there are signs insurers' assumptions about Obamacare may have been too pessimistic. 

Head Start
An unexpectedly excellent first quarter gave a boost to Anthem shares
Source: Bloomberg

Given this gangbuster quarter, Anthem's current earnings guidance looks very cautious. Anthem's forecast suggests earnings for the last three quarters of the year will decline relative to 2016. There are some quirks of the first quarter that could set up a drop-off in subsequent quarters. Anthem retroactively recognized some Medicaid revenue in the quarter. And though medical spending for ACA enrollees is trending substantially better than last year, Anthem still says it's slightly higher than expected. Nearly half of Anthem's individual enrollees are new, making their costs hard to predict. The company expects to have more information and to update its forecast next quarter.

Healthier patients are likelier than sicker patients to drop insurance, which pushes down revenue and increases costs for insurers. But if Anthem's ACA business continues to hold up relatively well -- not out of the question, given tweaks to the program and the higher premiums Anthem is charging relative to last year -- and if its government business keeps growing, then there's substantial upside to the company's forecast.

Upside
Anthem's first quarter outperformance suggests that 2017 may go much better than expected
Source: Bloomberg

Anthem wasn't the only firm to get an unexpected ACA boost in the first quarter. Centene Corp., another insurer with a heavy Medicaid presence and significant ACA commitment, announced earnings Tuesday that also beat analyst expectations, thanks in part to lower-than-expected ACA costs.

Centene had lots of new ACA enrollees in the quarter, yet saw the percent of premiums it spends on patient care (its medical loss ratio, or MLR) decline relative to the same period in 2016. Anthem's MLR increased year-over-year, but not as a result of Obamacare. Centene expects costs to rise later in the year, but was confident enough in the ACA exchanges to announce it plans to stick around in 2018.

There is still plenty of risk for Anthem. The new Obamacare enrollees may turn out to be sicker than expected or have a high drop-out rate, and the continuing political fight over health care could take a negative turn for the insurer. But the company's decision to give the ACA a second and possibly third chance may pay off. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net