Dark Lining

Anthem's Challenges Overshadow Its Tax-Cut Boost

Its rivals are aggressively diversifying, as a big new rival is born.
Photographer: David McNew/Getty Images
ANTHEM INC
+3.42
At Closing, June 15th
245.16 USD

It has become tricky to evaluate 2018 profit forecasts in the light of massive U.S. tax cuts; companies are offering varying (if fairly buoyant) guidance that likely involves a fair bit of guesswork.

But even within that context, the roughly 15 percent profit boost Anthem Inc. projected for this year, as it released fourth quarter earnings on Wednesday, is meaty. And it's easier to trust because Anthem's business is confined to the U.S.

It's just a shame it had to get overshadowed by seismic shifts in the U.S. health-care market.  

Assimilated

The launch of a new health-care company from Amazon, Berkshire Hathaway, and JPMorgan dealt a blow to Anthem's share price

Source: Bloomberg

For one thing, a new health-care company from Amazon.com Inc., Berkshire Hathaway Inc. and JPMorgan Chase & Co. (let's call it "AmBerMorg," at least until they formally name the thing), while in its infancy, is a potential threat to Anthem's commercial insurance business.

Self-insurance -- in which organizations pay for employee health expenses themselves while farming administrative services to an insurer -- is nothing new. But this venture looks more ambitious than that. One of its likely goals is to take on (and ideally improve on) some of the functions insurers currently manage. If successful, AmBerMorg may be a blueprint for how companies can self-insure with less help from Anthem and its ilk. It may even become a competing service provider in its own right. 

Self-funded plans generally aren't as profitable as fully insured plans where an insurer takes on risk. Anthem had nearly 25 million people enrolled in self-funded insurance plans as of the end of 2017, the most of any U.S. insurer. If AmBerMorg takes off, then self-insurance may become more common and less profitable.

All About That Base

Anthem's commercial and specialty business -- underpinned by its employer focused offerings -- provides a majority of its profit

Source: Bloomberg

AmBerMorg's birth also comes on the heels of Anthem's October 2017 decision to start its own pharmacy benefit manager (PBM), IngenioRX. If AmBerMorg takes an active and successful role in running its own drug benefit -- a decent long-term bet -- then it could reduce IngenioRX's customer base. 

The PBM business is key to another emergent problem for Anthem: the blockbuster merger between CVS Health Corp. and Aetna Inc. The deal -- if it passes regulatory muster --would combine one of the country's largest PBMs with a major insurance rival. Anthem's IngenioRX won't be up and running until about 2021. A combined CVS/Aetna will have an enormous head start, along with many more resources on the pharmacy side and a nationwide network of low-cost clinics. 

Anthem is also well behind UnitedHealth Group Inc., which has spent billions buying care providers to cut costs for its insurance products. On a smaller scale, government-focused rival Humana Inc. acquired a large home-care and hospice business in December. 

Anthem's new CEO Gail Boudreaux outlined goals on Wednesday's call and suggested growing government businesses will be a particular priority. No AmBerMorg problem there. The company's investment in integrated care networks for Medicaid and Medicare patients have given it a provider presence in certain markets.  

But Anthem's diversification is starting to conspicuously lag that of its more active peers. Boudreaux deserves time to fully articulate her strategy. But Anthem can't stand still while its rivals take aggressive action and while new rivals are born. 

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

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