ANTHEM : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-K)

(In Millions, Except Per Share Data or As Otherwise Stated Herein)

 This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), should be read in conjunction with our audited consolidated
financial statements included in Part II, Item 8 of this Annual Report on Form
10-K. References to the terms "we," "our," "us," "Anthem" or the "Company" used
throughout this MD&A refer to Anthem, Inc., an Indiana corporation, and, unless
the context otherwise requires, its direct and indirect subsidiaries. References
to the "states" include the District of Columbia, unless the context otherwise
requires.
This section of this Annual Report on Form 10-K generally discusses 2020 and
2019 items and year-over-year comparisons between 2020 and 2019. A detailed
discussion of 2018 items and year-over-year comparisons between 2019 and 2018
that are not included in this Annual Report on Form 10-K can be found in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2019.

Overview

We are one of the largest health benefits companies in the United States in
terms of medical membership, serving approximately 43 medical members through
our affiliated health plans as of December 31, 2020. We are an independent
licensee of the Blue Cross and Blue Shield Association ("BCBSA"), an association
of independent health benefit plans. We serve our members as the Blue Cross
licensee for California and as the Blue Cross and Blue Shield ("BCBS") licensee
for Colorado, Connecticut, Georgia, Indiana, Kentucky, Maine, Missouri
(excluding 30 counties in the Kansas City area), Nevada, New Hampshire, New York
(in the New York City metropolitan area and upstate New York), Ohio, Virginia
(excluding the Northern Virginia suburbs of Washington, D.C.) and Wisconsin. In
a majority of these service areas, we do business as Anthem Blue Cross, Anthem
Blue Cross and Blue Shield, and Empire Blue Cross Blue Shield or Empire Blue
Cross. In addition, we conduct business through arrangements with other BCBS
licensees as well as other strategic partners. Through our subsidiaries, we also
serve customers in numerous states across the country as AIM Specialty Health,
Amerigroup, Aspire Health, Beacon, CareMore, Freedom Health, HealthLink,
HealthSun, Optimum HealthCare, Simply Healthcare, and/or UniCare. Also, in the
second quarter of 2019, we began providing pharmacy benefits management ("PBM")
services through our IngenioRx subsidiary. We are licensed to conduct insurance
operations in all 50 states and the District of Columbia through our
subsidiaries.
We manage our operations through four reportable segments: Commercial &
Specialty Business, Government Business, IngenioRx and Other. In 2019, IngenioRx
was included in our Other reportable segment. Amounts for 2019 have been
reclassified to conform to the current year presentation of our reportable
segments for comparability.
Our operating revenue consists of premiums, product revenue, and administrative
fees and other revenue. Premium revenue is generated from fully-insured
contracts where we indemnify our policyholders against costs for covered health
and life insurance benefits. Product revenue represents services performed by
IngenioRx for unaffiliated PBM customers and includes ingredient costs (net of
any rebates or discounts), including co-payments made by or on behalf of the
customer, and administrative fees. Unaffiliated PBM customers include our
self-funded groups that contract with IngenioRx for PBM services and external
customers outside of the health plans we own. Administrative fees and other
revenue come from fees from our self-funded customers for the processing of
transactions or network discount savings realized, revenues from our Medicare
processing business and revenues from other health-related businesses, including
disease management programs and miscellaneous other income.
Our benefit expense primarily includes costs of care for health services
consumed by our fully-insured members, such as outpatient care, inpatient
hospital care, professional services (primarily physician care) and pharmacy
benefit costs. All four components are affected both by unit costs and
utilization rates. Unit costs include the cost of outpatient medical procedures
per visit, inpatient hospital care per admission, physician fees per office
visit and prescription drug prices. Utilization rates represent the volume of
consumption of health services and typically vary with the age and health status
of our members and their social and lifestyle choices, along with clinical
protocols and medical practice patterns in each of our markets. A portion of
benefit expense recognized in each reporting period consists of actuarial
estimates of claims incurred but not yet paid by
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us. Any changes in these estimates are recorded in the period the need for such
an adjustment arises. While we offer a diversified mix of managed care products
and services through our managed care plans, our aggregate cost of care can
fluctuate based on a change in the overall mix of these products and services.
Our managed care plans include: Preferred Provider Organizations; Health
Maintenance Organizations ("HMOs"); Point-of-Service plans; traditional
indemnity plans and other hybrid plans, including Consumer-Driven Health Plans;
and hospital only and limited benefit products.
We classify certain quality improvement costs as benefit expense. Quality
improvement activities are those designed to improve member health outcomes,
prevent hospital readmissions and improve patient safety. They also include
expenses for wellness and health promotion provided to our members. These
quality improvement costs may be comprised of expenses incurred for: (i) medical
management, including care coordination and case management; (ii) health and
wellness, including disease management services for such conditions as diabetes,
high-risk pregnancies, congestive heart failure and asthma management and
wellness initiatives like weight-loss programs and smoking cessation treatments;
and (iii) clinical health policy, such as identification and use of best
clinical practices to avoid harm, identifying clinical errors and safety
concerns, and identifying potential adverse drug interactions.
Our cost of products sold represents the cost of pharmaceuticals dispensed by
IngenioRx for our unaffiliated PBM customers (net of rebates or discounts),
including any co-payments made by or on behalf of the customer, per-claim
administrative fees for prescription fulfillment and certain direct costs
related to sales and administration of customer contracts.
Our selling, general and administrative expenses consist of fixed and variable
costs. Examples of fixed costs are depreciation, amortization and certain
facilities expenses. Certain variable costs, such as premium taxes, vary
directly with premium volume. Commission expense generally varies with premium
or membership volume. Other variable costs, such as salaries and benefits, do
not vary directly with changes in premium but are more aligned with changes in
membership. The acquisition or loss of a significant block of business would
likely impact staffing levels and thus, associated compensation expense. Other
variable costs include professional and consulting expenses and advertising.
Other factors can impact our administrative cost structure, including systems
efficiencies, inflation and changes in productivity.
Our results of operations depend in large part on our ability to accurately
predict and effectively manage healthcare costs through effective contracting
with providers of care to our members, product pricing, medical management and
health and wellness programs, innovative product design and our ability to
maintain or achieve improvement in our CMS Star ratings. Several economic
factors related to healthcare costs, such as regulatory mandates of coverage as
well as direct-to-consumer advertising by providers and pharmaceutical
companies, have a direct impact on the volume of care consumed by our members.
The potential effect of escalating healthcare costs, any changes in our ability
to negotiate competitive rates with our providers and any regulatory or
market-driven restrictions on our ability to obtain adequate premium rates to
offset overall inflation in healthcare costs, including increases in unit costs
and utilization resulting from the aging of the population and other
demographics, the impact of epidemics and pandemics, as well as advances in
medical technology, may impose further risks to our ability to profitably
underwrite our business, and may have a material adverse impact on our results
of operations.
For additional information about our business and reportable segments, see Part
I, Item 1, "Business" and Note 20, "Segment Information" of the Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel
strain of coronavirus ("COVID-19") a global health pandemic. At the onset of the
pandemic, to prevent its spread, most states issued shelter-in-place or
stay-at-home orders, which generally required the businesses not considered
essential to close their physical offices. While these orders were largely
lifted during the second quarter of 2020, many states and local authorities
continued to impose certain restrictions on the conduct of businesses and
individuals.
The COVID-19 pandemic continues to evolve, and the virus and mitigation efforts
have continued to impact the global economy, cause market instability, increase
unemployment and put pressure on the healthcare system. The COVID-19 pandemic
has impacted and will continue to impact our membership and benefit expense and
has influenced and will likely continue to influence member behavior, impacting
how members access healthcare services. Although increased unemployment caused
by the COVID-19 pandemic resulted in a decline in our Local Group membership,
our Medicaid
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membership grew as a result of the temporary suspension of eligibility
recertification efforts in response to the COVID-19 pandemic. While reduced or
cancelled utilization of non-COVID-19 health services by our members decreased
our claim costs overall in 2020, in the second half of 2020 utilization of such
services began to rebound, and non-COVID-19 claim costs began to normalize as
the shelter-in-place, stay-at-home orders and other restrictions on the conduct
of businesses were lifted. Our expenses in 2020 included additional costs to
cover COVID-19 related testing, treatment, expanded coverage of insurance
benefits, waivers for cost-sharing and actions to support our providers.
Furthermore, our expenses associated with COVID-19, including testing and
treatment and the actions taken to support our members in response to the
pandemic, accelerated in the fourth quarter of 2020 and exceeded the benefit we
experienced during the quarter from the lower volume of healthcare claims
attributable to decreased utilization of non-COVID-19 health services.
We remain focused on increasing access and coverage for our members and made
several changes to our membership benefits and business operations, adopted
tools and policies to assist consumers and care providers and provided support
to our associates and our local communities, which were discussed in Part I,
Item 1, "Business - COVID-19," of this Annual Report on Form 10-K. Further,
during 2020 we proactively took several actions to preserve our liquidity and
financial flexibility and minimize the effects of the COVID-19 pandemic,
including:
•Borrowing under our senior revolving credit facility in March 2020, which was
repaid in April 2020;
•Delaying certain tax payments as permitted by the IRS and the Coronavirus Aid,
Relief, and Economic Security Act (the "CARES Act"); and
•Temporarily suspending our share repurchase activity in March 2020, which was
resumed in late June 2020.
The COVID-19 pandemic has created unique and unprecedented challenges, and
although it has impacted and will likely continue to impact our membership and
benefit expense, it did not have a material adverse effect on our reported
results in 2020. However, this may change in the future as the COVID-19 pandemic
is evolving, and the extent of its impact will depend on future developments,
which are highly uncertain and cannot be predicted at this time. We will
continue to monitor the COVID-19 pandemic as well as resulting legislative and
regulatory changes that may impact our business. For additional discussion
regarding our risks related to the COVID-19 pandemic and our other risk factors,
see Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K and
"Business Trends" in this MD&A.
Business Trends
The Patient Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act of 2010, as amended (collectively, the "ACA"), has changed
and may continue to make broad-based changes to the U.S. healthcare system. We
expect the ACA will continue to impact our business model and strategy. Also,
the legal challenges regarding the ACA, including a federal district court
decision invalidating the ACA, which was argued before the U.S. Supreme Court in
November 2020 and has been stayed pending the U.S. Supreme Court's decision,
could significantly disrupt our business. We currently offer Individual
ACA-compliant products in 103 of the 143 rating regions in which we operate. Our
strategy has been, and will continue to be, to only participate in rating
regions where we have an appropriate level of confidence that these markets are
on a path toward sustainability, including, but not limited to, factors such as
expected financial performance, regulatory environment, and underlying market
characteristics. In addition, the continuing growth in our government-sponsored
business exposes us to increased regulatory oversight.
In the second quarter of 2019, we began using IngenioRx to market and offer PBM
services to our affiliated health plan customers throughout the country, as well
as to customers outside of the health plans we own. Our comprehensive PBM
services portfolio includes features such as formulary management, pharmacy
networks, a prescription drug database, member services and mail order
capabilities. IngenioRx delegates certain PBM administrative functions, such as
claims processing and prescription fulfillment, to CaremarkPCS Health, L.L.C.,
which is a subsidiary of CVS Health Corporation, pursuant to a five-year
agreement. With IngenioRx, we retain the responsibilities for clinical and
formulary strategy and development, member and employer experiences, operations,
sales, marketing, account management and retail network strategy. From December
2009 through December 2019, we delegated certain PBM functions and
administrative services to Express Scripts, Inc. ("Express Scripts"). We began
transitioning existing members from Express Scripts to IngenioRx in the second
quarter of 2019, and completed the transition of all of our members by January
1, 2020.
Pricing Trends: We strive to price our healthcare benefit products consistent
with anticipated underlying medical cost trends. We continue to closely monitor
the COVID-19 pandemic and the impacts it may have on our pricing, such as surges
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in COVID-19 hospitalizations, infection rates, and the cost of COVID-19
vaccines. We frequently make adjustments to respond to legislative and
regulatory changes as well as pricing and other actions taken by existing
competitors and new market entrants. Product pricing in our Commercial &
Specialty Business segment, including our Individual and Small Group lines of
business, remains competitive. Revenues from the Medicare and Medicaid programs
are dependent, in whole or in part, upon annual funding from the federal
government and/or applicable state governments. The ACA imposed an annual Health
Insurance Provider Fee ("HIP Fee") on health insurers that write certain types
of health insurance on U.S. risks. We priced our affected products to cover the
impact of the HIP Fee when it was in effect. The HIP Fee was suspended for 2019,
was resumed for 2020 and has been permanently repealed beginning in 2021.
Medical Cost Trends: Our medical cost trends are primarily driven by increases
in the utilization of services across all provider types and the unit cost
increases of these services. We work to mitigate these trends through various
medical management programs such as utilization management, condition
management, program integrity and specialty pharmacy management, as well as
benefit design changes. There are many drivers of medical cost trends that can
cause variance from our estimates, such as changes in the level and mix of
services utilized, regulatory changes, aging of the population, health status
and other demographic characteristics of our members, epidemics, pandemics,
advances in medical technology, new high cost prescription drugs, and healthcare
provider or member fraud. Our underlying Local Group medical cost trends reflect
the "allowed amount," or contractual rate, paid to providers.
The COVID-19 pandemic has caused a decrease in utilization of non-COVID-19
health services, which decreased our claim costs in 2020. While the utilization
of such services began to rebound and claim costs began to normalize in the
second half of 2020, further increases in the utilization of such services may
increase our claim costs in the future and affect our medical cost trends. Our
expenses in 2020 include additional costs to cover COVID-19 related testing,
treatment, expanded benefits coverage and waivers for cost-sharing. In response
to the current crisis, we expanded coverage for certain members in our
affiliated health plans for testing and treatment related to a COVID-19
diagnosis. Governmental action has required us to provide full coverage for
COVID-19 testing to our members, and future governmental action could require us
to provide additional coverage, including, for example, vaccines. Increased
member demand for care, along with continued COVID-19 care, testing and
vaccination costs, are expected to result in increased future medical costs. The
continued cost and volume of covered services related to the COVID-19 pandemic
may have a material adverse effect on our future claim costs. We continue to
closely monitor the COVID-19 pandemic and its impacts on our business, financial
condition, results of operations and medical cost trends.
For additional discussion regarding business trends, see Part I, Item 1,
"Business" of this Annual Report on Form 10-K.
Regulatory Trends and Uncertainties
Federal and state legislation has been enacted, and is likely to continue to be
enacted, in response to the COVID-19 pandemic that has had, and we expect will
continue to have, a significant impact on all of our lines of business,
including mandates to waive cost-sharing on COVID-19 testing, treatment and
related services. The federal government enacted the Coronavirus Preparedness
and Response Supplemental Appropriations Act, the Families First Coronavirus
Response Act and the CARES Act in March 2020, the Paycheck Protection Program
and Health Care Enhancement Act in April 2020 and the Consolidated
Appropriations Act of 2021 in December 2020 (the "Appropriations Act"). These
acts provide, among other things, prohibitions on prior authorization and
cost-sharing for certain items and services related to COVID-19 tests, reforms
including waiving Medicare originating site restrictions for qualified providers
providing telehealth services, financial support to healthcare providers,
including expansion of the Medicare accelerated payment program to all providers
receiving Medicare payments, and funding to replenish and administer small
business loan programs to help small businesses keep their workers employed and
healthcare benefits covered in the group market.
The Appropriations Act contains a number of provisions that may have a material
effect upon our business, including procedures and coverage requirements related
to surprise medical bills and new mandates for continuity of care for certain
patients, price comparison tools, disclosure of broker compensation and
reporting on pharmacy benefits and drug costs. The various health plan-related
requirements of the Appropriations Act will go into effect on January 1, 2022,
and our first report on pharmacy benefits and drug costs is due December 27,
2021.
Regulatory changes have also been enacted, and are likely to continue to be
enacted, at the state and federal level in response to the COVID-19 pandemic.
Those changes, which could have a significant impact on health benefits,
consumer
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eligibility for public programs, and our cash flows, include mandated expansion
of premium payment terms including the time period for which claims can be
denied for lack of payment, mandates related to prior authorizations and payment
levels to providers, additional consumer enrollment windows, and an increased
ability to provide services through telehealth. We are providing extensions to
premium payment terms in certain situations and working closely with state
regulators that are mandating or requesting such relief.
The ACA presented us with new growth opportunities, but also introduced new
risks, regulatory challenges and uncertainties, and required changes in the way
products are designed, underwritten, priced, distributed and administered.
Changes to our business environment are likely to continue as elected officials
at the national and state levels continue to enact, and both elected officials
and candidates for election continue to propose, significant modifications to
existing laws and regulations, including changes to taxes and fees. In addition,
the legal challenges regarding the ACA, including a federal district court
decision invalidating the ACA in its entirety, which was argued before the U.S.
Supreme Court in November 2020 and has been stayed pending the U.S. Supreme
Court's decision, continue to contribute to this uncertainty. In a separate
development, in April 2020, the U.S. Supreme Court ruled that the federal
government is required to pay health insurance companies for amounts owed, as
calculated under the risk corridor program of the ACA. In June 2020, the U.S.
Court of Federal Claims entered a final judgment stipulating that we are
entitled to reimbursement for risk corridor amounts from 2014, 2015 and 2016. At
the end of December 2020, the U.S. Department of Health and Human Services
("HHS") issued final guidance on how to treat the risk corridor recoveries that
we expect to receive. Based on the guidance from HHS, we revised previously
filed minimum medical loss ratio ("MLR") reports and recognized the net premium
impact of the risk corridor recoveries in the fourth quarter of 2020. We will
continue to evaluate the impact of the ACA as any further developments or
judicial rulings occur.
The annual HIP Fee, which has been permanently eliminated beginning in 2021, was
allocated to health insurers based on the ratio of the amount of an insurer's
net premium revenues written during the preceding calendar year to the amount of
health insurance premium for all U.S. health risk for those certain lines of
business written during the preceding calendar year. The HIP Fee was
non-deductible for federal income tax purposes. Our affected products were
priced to cover the increased selling, general and administrative and income tax
expenses associated with the HIP Fee when applicable. The HIP Fee was suspended
for 2019. For 2020, the HIP Fee resumed and the total amount due from
allocations to health insurers was $15,523. For the year ended December 31,
2020, we recognized $1,570 as selling, general and administrative expense
related to the HIP Fee. There was no corresponding expense for 2019 due to the
suspension of the HIP Fee for 2019. The HIP Fee has been permanently eliminated
beginning in 2021.
As a result of the ACA, the HHS issued MLR regulations that require us to meet
minimum MLR thresholds of 85% for Large Group and 80% for Small Group and
Individual lines of business. Plans that do not meet the minimum thresholds have
to pay a MLR rebate. For purposes of determining MLR rebates, HHS has defined
the types of costs that should be included in the MLR rebate calculation.
However, certain components of the MLR calculation as defined by HHS cannot be
classified consistently under U.S. generally accepted accounting principles
("GAAP"). While considered benefit expense or a reduction of premium revenue by
HHS, certain of these costs are classified as other types of expense, such as
selling, general and administrative expense or income tax expense, in our GAAP
basis financial statements. Accordingly, the benefit expense ratio determined
using our consolidated GAAP operating results is not comparable to the MLR
calculated under HHS regulations.
The ACA also imposed a separate minimum MLR threshold of 85% for Medicare
Advantage and Medicare Part D prescription drug plans ("Medicare Part D").
Medicare Advantage or Medicare Part D plans that do not meet this threshold have
to pay an MLR rebate. If a plan's MLR is below 85% for three consecutive years,
enrollment is restricted. A Medicare Advantage or Medicare Part D plan contract
will be terminated if the plan's MLR is below 85% for five consecutive years.
For additional discussion regarding regulatory trends and uncertainties, and
risk factors that could cause actual results to differ materially from those
contained in forward-looking statements made in this Annual Report on Form 10-K,
see Part I, Item 1, "Business - Regulation" and Part I, Item 1A, "Risk Factors."
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Other Significant Items
Business and Operational Matters
On February 2, 2021, we announced our entrance into an agreement with InnovaCare
Health, L.P. to acquire its Puerto Rico-based subsidiaries, including MMM
Holdings, LLC ("MMM") and its Medicare Advantage plan MMM Healthcare, LLC,
Medicaid plan and other affiliated companies. MMM is an integrated healthcare
organization and seeks to provide its Medicare Advantage and Medicaid members
with a whole health experience through its network of specialized clinics and
wholly owned independent physician associations. This acquisition aligns with
our vision to be an innovative, valuable and inclusive healthcare partner by
providing care management programs that improve the lives of the people we
serve. The acquisition is expected to close by the end of the second quarter of
2021 and is subject to standard closing conditions and customary approvals.
In 2020, we introduced enterprise-wide initiatives to optimize our business and
as a result, recorded a charge of $653 in selling, general and administrative
expenses. We believe these initiatives largely represent the next step forward
in our progression towards becoming a more agile organization, including process
automation and a reduction in our office space footprint. For additional
information, see Note 4, "Business Optimization Initiatives" and Note 18,
"Leases," of the Notes to Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report on Form 10-K.
On February 28, 2020, we completed our acquisition of Beacon Health Options,
Inc. ("Beacon"), the largest independently held behavioral health organization
in the country. At the time of acquisition, Beacon served more than thirty-four
million individuals across all fifty states. This acquisition aligned with our
strategy to diversify into health services and deliver both integrated solutions
and care delivery models that personalize care for people with complex and
chronic conditions. For additional information, see Note 3, "Business
Acquisitions," of the Notes to Consolidated Financial Statements included in
Part II, Item 8 of this Annual Report on Form 10-K.
In February 2018, we completed our acquisition of Freedom Health, Inc., Optimum
HealthCare, Inc., America's 1st Choice of South Carolina, Inc. and related
entities. This Medicare Advantage organization offers HMO products, including
Chronic Special Needs Plans and Dual-Eligible Special Needs Plans, under its
Freedom Health and Optimum HealthCare brands in Florida and its America's 1st
Choice of South Carolina brand in South Carolina. This acquisition aligned with
our plans for continued growth in the Medicare Advantage and Special Needs
populations.
Other significant transactions in recent years that have impacted or will impact
our capital structure or that have influenced or will influence how we conduct
our business operations include our Board of Directors' declarations of
dividends on our common stock, repurchases of our common stock, debt repurchases
and new debt issuances (2020 and prior). For additional information regarding
these transactions, see Note 13, "Debt" and Note 15, "Capital Stock," of the
Notes to Consolidated Financial Statements included in Part II, Item 8 of this
Annual Report on Form 10-K.
Litigation Matters
In the consolidated multi-district proceeding in the United States District
Court for the Northern District of Alabama (the "Court") captioned In re Blue
Cross Blue Shield Antitrust Litigation ("BCBSA Litigation"), the Blue Cross Blue
Shield Association (the "BCBSA"), and Blue Cross and/or Blue Shield licensees,
including us (the "Blue plans") have approved a settlement agreement and release
(the "Subscriber Settlement Agreement") with the plaintiffs representing a
putative nationwide class of health plan subscribers. Generally, the lawsuits in
the BCBSA Litigation challenge elements of the licensing agreements between the
BCBSA and the independently owned and operated Blue plans. The cases were
brought by two putative nationwide classes of plaintiffs, health plan
subscribers and providers, and the Subscriber Settlement Agreement applies only
to the putative subscriber class. No settlement agreement has been reached with
the provider plaintiffs at this time, and the defendants continue to contest the
consolidated cases brought by the provider plaintiffs.
If approved by the Court, the Subscriber Settlement Agreement will require the
defendants to make a monetary settlement payment, our portion of which is
estimated to be $594, and will contain certain non-monetary terms including (i)
eliminating the "national best efforts" rule in the BCBSA license agreements
(which rule limits the percentage of non-Blue revenue permitted for each Blue
plan) and (ii) allowing for some large national employers with self-funded
benefit plans to request a bid for insurance coverage from a second Blue plan in
addition to the local Blue plan. We recognized our estimated payment obligation
of $548, net of third-party insurance coverage received as of December 31, 2020.
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On November 30, 2020, the Court issued an order preliminarily approving the
Subscriber Settlement Agreement, following which members of the Subscriber class
were provided notice of the Settlement Agreement and an opportunity to opt out
of the class. All terms of the Subscriber Settlement Agreement are subject to
final approval by the Court before they become effective. Objections to the
settlement as well as the deadline for those that wish to opt-out from the
settlement must be submitted by July 28, 2021. Claims must be filed by November
5, 2021. A final approval hearing has been scheduled for October 20, 2021. If
the Court grants approval of the Subscriber Settlement Agreement, and after all
appellate rights have expired or have been exhausted in a manner that affirms
the Court's final order and judgment, the defendants' payment and non-monetary
obligations under the Subscriber Settlement Agreement will become effective. For
additional information regarding this lawsuit, see Note 14, "Commitments and
Contingencies - Litigation and Regulatory Proceedings - Blue Cross Blue Shield
Antitrust Litigation," of the Notes to Consolidated Financial Statements
included in Part II, Item 8 of this Annual Report on Form 10-K.
In August 2020, the Delaware Court of Chancery ruled that neither we nor Cigna
Corporation could collect damages in connection with the now terminated
Agreement and Plan of Merger, between us and Cigna Corporation. Cigna filed a
notice of appeal in November 2020 challenging the trial court's opinion that
Anthem did not owe Cigna a termination fee. Cigna filed its appellate brief in
December 2020, and we filed a response in January 2021. For additional
information, see Note 14, "Commitments and Contingencies - Litigation and
Regulatory Proceedings - Cigna Corporation Merger Litigation," of the Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
In January 2019, we exercised our contractual right to terminate our PBM
Agreement with Express Scripts (the "ESI PBM Agreement") and we completed the
transition of our members from Express Scripts to IngenioRx by January 1, 2020.
Notwithstanding our termination of the ESI PBM Agreement, the litigation between
us and Express Scripts regarding the ESI PBM Agreement continues. For additional
information regarding this lawsuit, see Note 14, "Commitments and Contingencies
- Litigation and Regulatory Proceedings - Express Scripts, Inc. Pharmacy Benefit
Management Litigation," of the Notes to Consolidated Financial Statements
included in Part II, Item 8 of this Annual Report on Form 10-K.
Selected Operating Performance
During the year ended December 31, 2020, total medical membership increased by
1.9, or 4.7%. Our medical membership grew in both our Government Business and
Commercial & Specialty Business segments. The increase in medical membership in
our Government Business segment was driven by organic growth in our Medicaid
business due to the temporary suspension of eligibility recertification efforts
in our markets in response to the COVID-19 pandemic, as well as acquisitions,
and growth in our Medicare business. The increase in medical membership in our
Commercial & Specialty Business segment was primarily driven by growth in our
self-funded business, partially offset by declines in our fully-insured Local
Group membership due to negative in-group changes as a result of increased
unemployment caused by the COVID-19 pandemic.
Operating revenue for the year ended December 31, 2020 was $120,808, an increase
of $17,667, or 17.1%, from the year ended December 31, 2019. The increase in
operating revenue was primarily driven by higher premium revenue in our
Government Business segment, as well as increased pharmacy product revenue
related to the launch of IngenioRx.
Net income for the year ended December 31, 2020 was $4,572, a decrease of $235,
or 4.9%, from the year ended December 31, 2019. The decrease in net income was a
result of lower operating results in our Commercial & Specialty Business
segment, which was largely driven by costs associated with actions taken to
support our members and providers in response to the COVID-19 pandemic and costs
for COVID-19 related care, as well as our estimated payment obligation related
to the BCBSA Litigation and expenses related to our business optimization
initiatives recognized in 2020, higher income tax expense, and a decrease in net
earnings from investment activities. These decreases in net income were largely
offset by higher operating results in our IngenioRx and Government Business
segments.
Our fully-diluted earnings per share ("EPS") for the year ended December 31,
2020 were $17.98, a decrease of $0.49, or 2.7%, from the year ended December 31,
2019. Our diluted shares for the year ended December 31, 2020 were 254.3, a
decrease of 6.0, or 2.3%, compared to the year ended December 31, 2019. The
decrease in EPS resulted from the decrease in net income, partially offset by
the impact of a lower number of shares outstanding in 2020.
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Operating cash flow for the year ended December 31, 2020 was $10,688, or
approximately 2.3 times net income. Operating cash flow for the year ended
December 31, 2019 was $6,061, or approximately 1.3 times net income. The
increase in operating cash flow was primarily due to the impact of the timing of
working capital changes. The increase was further due to membership growth in
our Government Business segment and higher net income in 2020, excluding the
non-cash impact of accrued expenses related to our business optimization
initiatives and the BCBSA Litigation.
Our results of operations discussed throughout this MD&A are determined in
accordance with GAAP. We also calculate operating gain to further aid investors
in understanding and analyzing our core operating results. We define operating
revenue as premium income, product revenue and administrative fees and other
revenue. Operating gain is calculated as total operating revenue less benefit
expense, cost of products sold and selling, general and administrative expense.
We use these measures as a basis for evaluating segment performance, allocating
resources, forecasting future operating periods and setting incentive
compensation targets. This information is not intended to be considered in
isolation or as a substitute for income before income tax expense, net income or
EPS prepared in accordance with GAAP, and may not be comparable to similarly
titled measures reported by other companies. For additional details on operating
gain, see our "Reportable Segments Results of Operations" discussion included in
this MD&A. For a reconciliation of reportable segment operating revenue to the
amounts of total revenue included in the consolidated statements of income and a
reconciliation of reportable segment operating gain to income before income tax
expense, see Note 20, "Segment Information," of the Notes to Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form
10-K.
We intend to expand through a combination of organic growth, strategic
acquisitions and efficient use of capital in both existing and new markets. Our
growth strategy is designed to enable us to take advantage of additional
economies of scale, as well as providing us access to new and evolving
technologies and products. In addition, we believe geographic and product
diversity reduces our exposure to local or regional regulatory, economic and
competitive pressures and provides us with increased opportunities for growth.
In 2019, we began using IngenioRx to market and offer PBM services, and we
expect IngenioRx to improve our ability to integrate pharmacy benefits within
our medical and specialty platform. In 2020, we continued growing our
government-sponsored business. In all other markets, we intend to maintain our
position by delivering excellent service, offering competitively priced
products, providing access to high-quality provider networks and effectively
capitalizing on the brand strength of the Blue Cross and Blue Shield names and
marks.
Membership
Our medical membership includes seven different customer types: Local Group,
Individual, National Accounts, BlueCard®, Medicare, Medicaid and our Federal
Employees Health Benefits ("FEHB") Program. BCBS-branded business generally
refers to members in our service areas licensed by the BCBSA. Non-BCBS-branded
business refers to members in our non-BCBS-branded Amerigroup, Freedom Health,
HealthSun, Optimum HealthCare and Simply Healthcare plans, as well as Beacon,
HealthLink and UniCare members. In addition to the above medical membership, we
also serve customers who purchase one or more of our other products or services
that are often ancillary to our health business.
•Local Group consists of those employer customers with less than 5% of eligible
employees located outside of the headquarter state, as well as customers with
more than 5% of eligible employees located outside of the headquarter state with
up to 5,000 eligible employees. In addition, Local Group includes Student Health
and UniCare members. Local Group accounts are generally sold through brokers or
consultants who work with industry specialists from our in-house sales force and
are offered both on and off the public exchanges. Local Group insurance premiums
may be based on claims incurred by the group or sold on a self-insured basis.
The customer's buying decision is typically based upon the size and breadth of
our networks, customer service, the quality of our medical management services,
the administrative cost included in our quoted price, our financial stability,
our reputation and our ability to effectively service large complex accounts.
Local Group accounted for 36.4%, 38.2% and 39.4% of our medical members at
December 31, 2020, 2019 and 2018, respectively.
•Individual consists of individual customers under age 65 and their covered
dependents. Individual policies are generally sold through independent agents
and brokers, retail partnerships, our in-house sales force or via the exchanges.
Individual business is sold on a fully-insured basis. We offer on-exchange
products through public exchanges and off-exchange products. Federal premium
subsidies are available only for certain public exchange Individual
products. Unsubsidized Individual customers are generally more sensitive to
product pricing and, to a lesser extent, the configuration of the network and
the efficiency of administration. Customer turnover is generally
                                      -51-
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higher with Individual as compared to Local Group. Individual business accounted
for 1.6%, 1.7% and 1.6% of our medical members at December 31, 2020, 2019 and
2018, respectively.
•National Accounts generally consist of multi-state employer groups primarily
headquartered in an Anthem service area with at least 5% of the eligible
employees located outside of the headquarter state and with more than 5,000
eligible employees. Some exceptions are allowed based on broker and consultant
relationships. Service area is defined as the geographic area in which we are
licensed to sell BCBS products. National Accounts are generally sold through
independent brokers or consultants retained by the customer working with our
in-house sales force. We believe we have an advantage when competing for very
large National Accounts due to the size and breadth of our networks and our
ability to access the national provider networks of other BCBS companies at
their competitive local market rates. National Accounts represented 18.0%, 18.5%
and 19.0% of our medical members at December 31, 2020, 2019 and 2018,
respectively.
•BlueCard® host customers represent enrollees of Blue Cross and/or Blue Shield
plans not owned by Anthem who receive healthcare services in our BCBSA licensed
markets. BlueCard® membership consists of estimated host members using the
national BlueCard® program. Host members are generally members who reside in or
travel to a state in which an Anthem subsidiary is the Blue Cross and/or Blue
Shield licensee and who are covered under an employer-sponsored health plan
issued by a non-Anthem controlled BCBSA licensee (the "home plan"). We perform
certain functions including claims pricing and administration for BlueCard®
members, for which we receive administrative fees from the BlueCard® members'
home plans. Other administrative functions, including maintenance of enrollment
information and customer service, are performed by the home plan. Host members
are computed using, among other things, the average number of BlueCard® claims
received per month. BlueCard® host membership accounted for 14.1%, 14.8% and
14.6% of our medical members at December 31, 2020, 2019 and 2018, respectively.
•Medicare customers are Medicare-eligible individual members age 65 and over who
have enrolled in Medicare Supplement plans; Medicare Advantage, including
Special Needs Plans ("SNPs"), also known as Medicare Advantage SNPs; Medicare
Part D; and dual-eligible programs through Medicare-Medicaid Plans ("MMPs").
Medicare Supplement plans typically pay the difference between healthcare costs
incurred by a beneficiary and amounts paid by Medicare. Medicare Advantage plans
provide Medicare beneficiaries with a managed care alternative to traditional
Medicare and often include a Medicare Part D benefit. In addition, our Medicare
Advantage SNPs provide tailored benefits to special needs individuals who are
institutionalized or have severe or disabling chronic conditions and to
dual-eligible customers, who are low-income seniors and persons under age 65
with disabilities. Medicare Advantage SNPs are coordinated care plans
specifically designed to provide targeted care, covering all the healthcare
services considered medically necessary for members and often providing
professional care coordination services, with personal guidance and programs
that help members maintain their health. Medicare Advantage membership also
includes Medicare Advantage members in our Group Retiree Solutions business who
are related to National Accounts, retired members of Local Group accounts, or
retired members of groups who are not affiliated with our Commercial accounts
who have selected a Medicare Advantage product through us. Medicare Part D
offers a prescription drug plan to Medicare and MMP beneficiaries. MMP, which
was established as a result of the passage of the ACA, is a demonstration
program focused on serving members who are dually eligible for Medicaid and
Medicare. Medicare Supplement and Medicare Advantage products are marketed in
the same manner, primarily through independent agents and brokers. Medicare
business accounted for 5.5%, 5.2% and 4.6% of our medical members at
December 31, 2020, 2019 and 2018, respectively.
•Medicaid membership represents eligible members who receive healthcare benefits
through publicly funded healthcare programs, including Medicaid, ACA-related
Medicaid expansion programs, Temporary Assistance for Needy Families, programs
for seniors and people with disabilities, Children's Health Insurance Programs,
and specialty programs such as those focused on long-term services and support,
HIV/AIDS, foster care, behavioral health and/or substance abuse disorders, and
intellectual disabilities or developmental disabilities, among others. Total
Medicaid program business accounted for 20.6%, 17.7% and 16.8% of our medical
members at December 31, 2020, 2019 and 2018, respectively.
                                      -52-
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•FEHB members consist of United States government employees and their dependents
within our geographic markets through our participation in the national contract
between the BCBSA and the U.S. Office of Personnel Management. FEHB business
accounted for 3.8% of our medical members at December 31, 2020 and 3.9% at both
December 31, 2019 and 2018.
In addition to reporting our medical membership by customer type, we report by
funding arrangement according to the level of risk that we assume in the product
contract. Our two principal funding arrangement categories are fully-insured and
self-funded. Fully-insured products are products in which we indemnify our
policyholders against costs for health benefits. Self-funded products are
offered to customers, generally larger employers, who elect to retain most or
all of the financial risk associated with their employees' healthcare costs.
Some self-funded customers choose to purchase stop loss coverage to limit their
retained risk.
                                      -53-
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The following table presents our medical membership by customer type, funding
arrangement and reportable segment as of December 31, 2020, 2019 and 2018. Also
included below is other membership by product. At this time, the following table
does not include membership resulting from our acquisition of Beacon. The
medical membership and other membership presented are unaudited and in certain
instances include estimates of the number of members represented by each
contract at the end of the period.
                                                                 December 31                                       2020 vs. 2019                                2019 vs. 2018
(In thousands)                                    2020              2019              2018                 Change                 % Change              Change              % Change
Medical Membership
Customer Type
Local Group                                      15,614            15,682            15,733                       (68)                 (0.4) %              (51)                 (0.3) %
Individual                                          680               684               655                        (4)                 (0.6) %               29                   4.4  %
National:
National Accounts                                 7,736             7,596             7,588                       140                   1.8  %                8                   0.1  %
BlueCard®                                         6,059             6,060             5,838                        (1)                    -  %              222                   3.8  %
Total National                                   13,795            13,656            13,426                       139                   1.0  %              230                   1.7  %
Medicare:
Medicare Advantage                                1,428             1,214             1,006                       214                  17.6  %              208                  20.7  %
Medicare Supplement                                 933               905               846                        28                   3.1  %               59                   7.0  %
Total Medicare                                    2,361             2,119             1,852                       242                  11.4  %              267                  14.4  %
Medicaid                                          8,852             7,265             6,716                     1,587                  21.8  %              549                   8.2  %
FEHB                                              1,623             1,594             1,556                        29                   1.8  %               38                   2.4  %
Total Medical Membership by Customer Type        42,925            41,000            39,938                     1,925                   4.7  %            1,062                   2.7  %
Funding Arrangement
Self-Funded                                      25,629            25,418            25,287                       211                   0.8  %              131                   0.5  %
Fully-Insured                                    17,296            15,582            14,651                     1,714                  11.0  %              931                   6.4  %
Total Medical Membership by Funding
Arrangement                                      42,925            41,000            39,938                     1,925                   4.7  %            1,062                   2.7  %
Reportable Segment
Commercial & Specialty Business                  30,089            30,022            29,814                        67                   0.2  %              208                   0.7  %
Government Business                              12,836            10,978            10,124                     1,858                  16.9  %              854                   8.4  %
Total Medical Membership by Reportable Segment   42,925            41,000            39,938                     1,925                   4.7  %            1,062                   2.7  %
Other Membership
Life and Disability Members                       5,064             5,259             4,795                      (195)                 (3.7) %              464                   9.7  %
Dental Members                                    6,385             6,263             5,807                       122                   1.9  %              456                   7.9  %
Dental Administration Members                     1,316             5,516             5,327                    (4,200)                (76.1) %              189                   3.5  %
Vision Members                                    7,536             7,261             6,946                       275                   3.8  %              315                   4.5  %
Medicare Part D Standalone Members                  413               283               309                       130                  45.9  %              (26)                 (8.4) %


December 31, 2020 Compared to December 31, 2019
Medical Membership
Total medical membership grew in both our Government Business and Commercial &
Specialty Business segments as well as by funding arrangement. Fully-insured
membership increased primarily due to growth in our Medicaid and Medicare
businesses, partially offset by membership decreases in our fully-insured Local
Group business. Local Group membership decreased due to negative in-group
changes as a result of increased unemployment caused by the COVID-19 pandemic,
                                      -54-
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which was partially offset by sales exceeding lapses. Self-funded medical
membership increased primarily as a result of membership increases in our
National Accounts business driven by our acquisition of a third-party
administrator. Medicaid membership increased primarily due to organic growth in
existing markets due to the temporary suspension of eligibility recertification
during the COVID-19 pandemic as well as our acquisition of Medicaid plans
in Missouri and Nebraska in 2020. Medicare membership increased primarily due to
higher sales.
Other Membership
Our other membership can be impacted by changes in our medical membership, as
our medical members often purchase our other products that are ancillary to our
health business. Life and disability membership decreased due to higher lapses
in our fully-insured Local Group business. Dental membership increased primarily
due to new sales and growth in our National Accounts and membership growth in
our FEHB program, as well as new sales in our Individual product offerings.
Dental administration membership decreased due to the lapse of a large dental
administration services contract. Vision membership increased due to higher
sales in our Medicare and Local Group businesses.
Consolidated Results of Operations
Our consolidated summarized results of operations and other information for the
years ended December 31, 2020, 2019 and 2018 are as
follows:
                                                                                                                                    Change
                                                      Years Ended December 31                              2020 vs. 2019                             2019 vs. 2018
                                             2020               2019              2018                  $                    %                   $                    %
Total operating revenue                  $ 120,808          $ 103,141          $ 91,341          $      17,667              17.1  %       $      11,800               12.9  %
Net investment income                          877              1,005               970                   (128)            (12.7) %                  35                3.6  %
Net realized gains (losses) on financial
instruments                                    182                 67              (206)                   115            (171.6) %                 273             (132.5) %
Total revenues                             121,867            104,213            92,105                 17,654              16.9  %              12,108               13.1  %
Benefit expense                             88,045             81,786            71,895                  6,259               7.7  %               9,891               13.8  %
Cost of products sold                        8,953              1,992                 -                  6,961             349.4  %               1,992                    NM
Selling, general and administrative
expense                                     17,450             13,364            14,020                  4,086              30.6  %                (656)              (4.7) %
Other expense1                               1,181              1,086             1,122                     95               8.7  %                 (36)              (3.2) %
Total expenses                             115,629             98,228            87,037                 17,401              17.7  %              11,191               12.9  %
Income before income tax expense             6,238              5,985             5,068                    253               4.2  %                 917               18.1  %
Income tax expense                           1,666              1,178             1,318                    488              41.4  %                (140)             (10.6) %

Net income                               $   4,572          $   4,807          $  3,750          $        (235)             (4.9) %       $       1,057               28.2  %

Average diluted shares outstanding           254.3              260.3             264.2                   (6.0)             (2.3) %                (3.9)              (1.5) %

Diluted net income per share             $   17.98          $   18.47          $  14.19          $       (0.49)             (2.7) %       $        4.28               30.2  %
Effective tax rate                            26.7  %            19.7  %           26.0  %                                   700bp3                                  (630)bp3
Benefit expense ratio2                        84.6  %            86.8  %           84.2  %                                 (220)bp3                                    260bp3
Selling, general and administrative
expense ratio4                                14.4  %            13.0  %           15.3  %                                   140bp3                                  (230)bp3
Income before income tax expense as a
percentage of total revenues                   5.1  %             5.7  %            5.5  %                                  (60)bp3                                     20bp3
Net income as a percentage of total
revenues                                       3.8  %             4.6  %            4.1  %                                  (80)bp3                                     50bp3


Certain of the following definitions are also applicable to all other results of
operations tables in this discussion:
NM Not meaningful.
1Includes interest expense, amortization of other intangible assets and loss on
extinguishment of debt.
2Benefit expense ratio represents benefit expense as a percentage of premium
revenue. Premiums for the years ended December 31, 2020, 2019 and 2018 were
$104,109, $94,173 and $85,421, respectively. Premiums are included in total
operating revenue presented above.
                                      -55-
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3bp = basis point; one hundred basis points = 1%.
4Selling, general and administrative expense ratio represents selling, general
and administrative expense as a percentage of total operating revenue.
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Total operating revenue increased as a result of higher premium revenue due
mainly to membership growth in our Government Business segment related to our
Medicaid and Medicare businesses and rate increases designed to cover the impact
of the HIP Fee reinstatement for 2020. The increase in operating revenue was
further attributable to an increase in pharmacy product revenue as we completed
the transition of all of our unaffiliated PBM customers to IngenioRx between the
second quarter of 2019 and January 1, 2020. The increase in operating revenue
was partially offset by a decrease in premiums in our Commercial & Specialty
Business segment related to fully-insured membership declines as a result of
increased unemployment caused by the COVID-19 pandemic.
Net investment income decreased primarily due to losses from other invested
assets and lower yields on our short term investments. The losses on our other
invested assets were primarily due to losses from energy sector private equity
funds recognized in 2020 as a result of a decrease in the worldwide demand for
energy due to the COVID-19 pandemic.
Net realized gains on financial instruments increased primarily due to the
changes in the fair values of our investments in equity securities. This
increase was partially offset by a decrease in net realized gains on sales of
equity securities.
Benefit expense increased primarily due to increased costs as a result of growth
in our Medicaid and Medicare membership and overall cost trends across our
businesses including increased expense to cover COVID-19 related costs such as
testing, treatment, expanded coverage of insurance benefits, waivers for
cost-sharing and actions taken to support our members in response to the
pandemic. These increases were partially offset by the lower volume of
healthcare claims experienced resulting from decreased utilization of
non-COVID-19 health services during the COVID-19 pandemic.
Our benefit expense ratio decreased primarily due to the COVID-19 impact of
lower utilization rates of healthcare benefits, and to a lesser extent, the HIP
Fee reinstatement for 2020. These decreases were partially offset by increased
benefit costs associated with actions taken to support our members in response
to the pandemic and COVID-19 related care. The decreases were further offset by
the impact of retroactive rate adjustments in our Medicaid business and premium
credits provided in response to the COVID-19 pandemic to our members enrolled in
select Individual plans and fully-insured employer customers.
Cost of products sold increased as we completed the transition of all of our
unaffiliated PBM customers to IngenioRx between the second quarter of 2019, when
it began its operations, and January 1, 2020.
Selling, general and administrative expense increased primarily due to the
reinstatement of the HIP Fee for 2020 and increased spend to support growth in
our businesses. The increase was further due to the recognition of expenses
related to our business optimization initiatives and the BCBSA Litigation during
2020.
Our selling, general and administrative expense ratio increased as a result of
the higher selling, general and administrative expenses discussed above,
partially offset by the growth in operating revenue.
Our effective income tax rate increased primarily due to the reinstatement of
the non-tax deductible HIP Fee for 2020.
Our net income as a percentage of total revenue decreased as a result of all
factors discussed above.
Reportable Segments Results of Operations
Beginning in 2020, IngenioRx met the quantitative thresholds for a reportable
segment and the results of our operations are now described through four
reportable segments: Commercial & Specialty Business, Government Business,
IngenioRx and Other. We use operating gain to evaluate the performance of our
reportable segments. Operating gain is calculated as total operating revenue
less benefit expense, cost of products sold and selling, general and
administrative expense. It does not include net investment income, net realized
gains (losses) on financial instruments, interest expense, amortization of other
intangible assets, loss on extinguishment of debt or income taxes, as these
items are managed in a corporate shared service environment and are not the
responsibility of operating segment management.
                                      -56-
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The discussion of segment results presented below is based on operating gain, as
described above, and operating margin, which is calculated as operating gain
divided by operating revenue. Our definition of operating gain and operating
margin may not be comparable to similarly titled measures reported by other
companies. We use these measures as a basis for evaluating segment performance,
allocating resources, forecasting future operating periods and setting incentive
compensation targets. This information is not intended to be considered in
isolation or as a substitute for income before income tax expense, net income or
EPS, prepared in accordance with GAAP. For our 2019 segment reporting, operating
gain generated from IngenioRx activities were allocated and included in our
Commercial & Specialty Business and Government Business based upon their
utilization of those services, which aligns with the method by which we assessed
the 2019 operating performance of our reportable segments. Beginning January 1,
2020, we are managing the operating performance of each of our segments on a
standalone basis. Prior year 2019 allocations were not restated to conform to
the 2020 presentation; however, operating margins for IngenioRx were
approximately 8% in 2019. For additional information, see Note 20, "Segment
Information," of the Notes to Consolidated Financial Statements included in Part
II, Item 8 of this Annual Report on Form 10-K.
The following table presents a summary of our reportable segment financial
information for the years ended December 31, 2020, 2019 and 2018:
                                                                                                                                       Change
                                                         Years Ended December 31                              2020 vs. 2019                             2019 vs. 2018
                                                2020               2019              2018                  $                    %                   $                    %
Operating Revenue
Commercial & Specialty Business             $  36,699          $  37,421          $ 35,782          $        (722)             (1.9) %       $       1,639                4.6  %
Government Business                            71,572             62,632            55,348                  8,940              14.3  %               7,284               13.2  %
IngenioRx                                      21,911              5,402                 -                 16,509             305.6  %               5,402                    NM
Other                                           6,057              2,293             1,519                  3,764             164.2  %                 774               51.0  %
Eliminations                                  (15,431)            (4,607)           (1,308)               (10,824)            234.9  %              (3,299)             252.2  %
Total operating revenue                     $ 120,808          $ 103,141          $ 91,341          $      17,667              17.1  %       $      11,800               12.9  %

Operating Gain (Loss)
Commercial & Specialty Business1            $   2,681          $   4,032          $  3,600                 (1,351)            (33.5) %                 432               12.0  %
Government Business2                            2,444              2,056             1,928                    388              18.9  %                 128                6.6  %
IngenioRx3                                      1,361                  -                 -                  1,361                   NM                   -                    NM
Other4                                           (126)               (89)             (102)                   (37)             41.6  %                  13              (12.7) %

Operating Margin
Commercial & Specialty Business                   7.3               10.8  %           10.1  %                                 (350)bp5                                     70bp5
Government Business                               3.4                3.3  %            3.5  %                                    10bp5                                   (20)bp5
IngenioRx                                         6.2                  -  %                NM                                       NM                                        NM


NM  Not meaningful.
1Includes expenses of $524 for the BCBSA Litigation and $311 for business
optimization initiatives recognized in 2020.
2  Includes expenses of $205 for business optimization initiatives and $24 for
the BCBSA Litigation recognized in 2020.
3  Includes expenses of $4 for business optimization initiatives recognized in
2020.
4  Includes expenses of $133 for business optimization initiatives recognized in
2020.
5  bp = basis point; one hundred basis points = 1%.
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Commercial & Specialty Business
Operating revenue decreased primarily due to fully-insured membership declines
as a result of increased unemployment caused by the COVID-19 pandemic. The
decrease in operating revenue was further attributable to the absence of
pharmacy
                                      -57-
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administrative fee revenue that is now being recognized within the IngenioRx
segment and the impact of premium credits provided to certain members in
response to the COVID-19 pandemic. These decreases were partially offset by
higher premium revenue resulting from rate increases designed to cover the
impact of the HIP Fee reinstatement for 2020.
The decrease in operating gain was primarily driven by costs associated with
actions taken to support our members and providers in response to the pandemic
and COVID-19 related care, as well as expenses for the BCBSA Litigation and
business optimization initiatives recognized in 2020. The decrease was further
attributable to the shift of pharmacy earnings to our IngenioRx segment and the
impact of premium credits provided to certain members in response to the
COVID-19 pandemic. The decrease was partially offset by the impact of the lower
volume of healthcare claims attributable to decreased utilization of
non-COVID-19 health services during the COVID-19 pandemic.
Government Business
Operating revenue increased primarily due to higher premium revenue as a result
of membership growth in our Medicaid business driven by the temporary suspension
of eligibility recertification efforts during the COVID-19 pandemic,
acquisitions and new expansions, as well as membership growth in our Medicare
business. The increase in premium revenue was further attributable to the HIP
Fee reinstatement for 2020.
The increase in operating gain was primarily driven by the lower volume of
healthcare claims attributable to decreased utilization of non-COVID-19 health
services during the COVID-19 pandemic. The increase was partially offset by
costs associated with actions taken to support our members in response to the
pandemic and COVID-19 related care and retroactive rate adjustments and higher
experience-rated refunds in our Medicaid business. The increase in operating
gain was further offset by increased spend to support growth and expenses for
business optimization initiatives recognized in 2020.
IngenioRx
Operating revenue and operating gain increased as a result of the transition of
our existing members to IngenioRx, which commenced its operations during the
second quarter of 2019. Operating revenue represents product revenues from
services performed for our fully-insured affiliated health plans and self-funded
customers and external customers outside of the health plans we own. Product
revenues and cost of goods sold for our fully-insured affiliated health plan
customers are eliminated in consolidation. Operating gain represents operating
revenue less cost of products sold and selling, general and administrative
expenses.
Other
Operating revenue increased due to our acquisition of Beacon in February 2020
and higher administrative fees and other revenue from services performed by DBG
in certain markets.
The increase in operating loss was driven by expenses recognized for our
business optimization initiatives.

Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with GAAP.
Application of GAAP requires management to make estimates and assumptions that
affect the amounts reported in our consolidated financial statements and
accompanying notes and within this MD&A. We consider our most important
accounting policies that require significant estimates and management judgment
to be those policies with respect to liabilities for medical claims payable,
income taxes, goodwill and other intangible assets, investments and retirement
benefits, which are discussed below. Our other significant accounting policies
are summarized in Note 2, "Basis of Presentation and Significant Accounting
Policies," of the Notes to Consolidated Financial Statements included in Part
II, Item 8 of this Annual Report on Form 10-K.
We continually evaluate the accounting policies and estimates used to prepare
the consolidated financial statements. In general, our estimates are based on
historical experience, evaluation of current trends, information from
third-party professionals and various other assumptions that we believe to be
reasonable under the known facts and circumstances. Estimates can require a
significant amount of judgment, and a different set of assumptions could result
in material changes to our reported results.
                                      -58-
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Medical Claims Payable
The most subjective accounting estimate in our consolidated financial statements
is our liability for medical claims payable. At December 31, 2020, this
liability was $11,359 and represented 21% of our total consolidated liabilities.
We record this liability and the corresponding benefit expense for incurred but
not paid claims, including the estimated costs of processing such claims.
Incurred but not paid claims include (1) an estimate for claims that are
incurred but not reported, as well as claims reported to us but not yet
processed through our systems, which approximated 96%, or $10,925, of our total
medical claims liability as of December 31, 2020; and (2) claims reported to us
and processed through our systems but not yet paid, which approximated 4%, or
$434, of the total medical claims payable as of December 31, 2020. The level of
claims payable processed through our systems but not yet paid may fluctuate from
one period-end to the next, from approximately 1% to 5% of our total medical
claims liability, due to timing of when claim payments are made.
Liabilities for both claims incurred but not reported and reported but not yet
processed through our systems are determined in the aggregate, employing
actuarial methods that are commonly used by health insurance actuaries and meet
Actuarial Standards of Practice. Actuarial Standards of Practice require that
the claim liabilities be appropriate under moderately adverse circumstances. We
determine the amount of the liability for incurred but not paid claims by
following a detailed actuarial process that uses both historical claim payment
patterns as well as emerging medical cost trends to project our best estimate of
claim liabilities. Under this process, historical paid claims data is formatted
into "claim triangles," which compare claim incurred dates to the dates of claim
payments. This information is analyzed to create "completion factors" that
represent the average percentage of total incurred claims that have been paid
through a given date after being incurred. Completion factors are applied to
claims paid through the period-end date to estimate the ultimate claim expense
incurred for the period. Actuarial estimates of incurred but not paid claim
liabilities are then determined by subtracting the actual paid claims from the
estimate of the ultimate incurred claims.
For the most recent incurred months (typically the most recent two months), the
percentage of claims paid for claims incurred in those months is generally low.
This makes the completion factor methodology less reliable for such months.
Therefore, incurred claims for recent months are not projected from historical
completion and payment patterns; rather, they are projected by estimating the
claims expense for those months based on recent claims expense levels and
healthcare trend levels ("trend factors").
Because the reserve methodology is based upon historical information, it must be
adjusted for known or suspected operational and environmental changes. These
adjustments are made by our actuaries based on their knowledge and their
estimate of emerging impacts to benefit costs and payment speed. Circumstances
to be considered in developing our best estimate of reserves include changes in
utilization levels, unit costs, mix of business, benefit plan designs, provider
reimbursement levels, processing system conversions and changes, claim inventory
levels, claim processing patterns, claim submission patterns and operational
changes resulting from business combinations. A comparison of prior period
liabilities to re-estimated claim liabilities based on subsequent claims
development is also considered in making the liability determination. In our
comparison to prior periods, the methods and assumptions are not changed as
reserves are recalculated; rather, the availability of additional paid claims
information drives changes in the re-estimate of the unpaid claim liability. To
the extent appropriate, changes in such development are recorded as a change to
current period benefit expense. The impact from COVID-19 on healthcare
utilization and medical claims submission patterns has increased estimation
uncertainty on our incurred but not reported liability at December 31, 2020.
Slowdowns in claims submission patterns and increases in utilization levels for
COVID-19 testing and treatment during the fourth quarter of 2020 are the primary
factors that lead to the increased estimation uncertainty.
We regularly review and set assumptions regarding cost trends and utilization
when initially establishing claim liabilities. We continually monitor and adjust
the claims liability and benefit expense based on subsequent paid claims
activity. If it is determined that our assumptions regarding cost trends and
utilization are materially different than actual results, our income statement
and financial position could be impacted in future periods. Adjustments of prior
year estimates may result in additional benefit expense or a reduction of
benefit expense in the period an adjustment is made. Further, due to the
considerable variability of healthcare costs, adjustments to claim liabilities
occur each period and are sometimes significant as compared to the net income
recorded in that period. Prior period development is recognized immediately upon
the actuary's judgment that a portion of the prior period liability is no longer
needed or that an additional liability should have been accrued. That
determination is made when sufficient information is available to ascertain that
the re-estimate of the liability is reasonable.
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While there are many factors that are used as a part of the estimation of our
medical claims payable liability, the two key assumptions having the most
significant impact on our incurred but not paid claims liability as of
December 31, 2020 were the completion and trend factors. As discussed above,
these two key assumptions can be influenced by utilization levels, unit costs,
mix of business, benefit plan designs, provider reimbursement levels, processing
system conversions and changes, claim inventory levels, claim processing
patterns, claim submission patterns and operational changes resulting from
business combinations.
There is variation in the reasonable choice of completion factors by duration
for durations of three months through twelve months where the completion factors
have the most significant impact. As previously discussed, completion factors
tend to be less reliable for the most recent months and therefore are not
specifically utilized for months one and two. In our analysis for the claim
liabilities at December 31, 2020, the variability in months three to five was
estimated to be between 40 and 90 basis points, while months six through twelve
have much lower estimated variability ranging from 0 to 30 basis points.
The difference in completion factor assumptions, assuming moderately adverse
experience, results in variability of 2%, or approximately $204, in the
December 31, 2020 incurred but not paid claims liability, depending on the
completion factors chosen. It is important to note that the completion factor
methodology inherently assumes that historical completion rates will be
reflective of the current period. However, it is possible that the actual
completion rates for the current period will develop differently from historical
patterns and therefore could fall outside the possible variations described
herein.
The other major assumption used in the establishment of the December 31, 2020
incurred but not paid claim liability was the trend factors. In our analysis for
the period ended December 31, 2020, there was a 320 basis point differential in
the high and low trend factors assuming moderately adverse experience. This
range of trend factors would imply variability of 4%, or approximately $427, in
the incurred but not paid claims liability, depending upon the trend factors
used. Because historical trend factors are often not representative of current
claim trends, the trend experience for the most recent six to nine months, plus
knowledge of recent events likely affecting current trends, have been taken into
consideration in establishing the incurred but not paid claims liability at
December 31, 2020. The COVID-19 pandemic continues to have a significant impact
on 2020 dates of service. Our expenses associated with COVID-19 accelerated in
the fourth quarter of 2020 and exceeded the benefit from lower volume of
healthcare claims attributable to decreased utilization of non-COVID-19 health
services. We will continue to monitor emerging experience in order to better
understand the possible implications to our reserves.
See Note 12, "Medical Claims Payable," of the Notes to Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for a
reconciliation of the beginning and ending balance for medical claims payable
for the years ended December 31, 2020, 2019 and 2018. Components of the total
incurred claims for each year include amounts accrued for current year estimated
claims expense as well as adjustments to prior year estimated accruals. In Note
12, "Medical Claims Payable," the line labeled "Net incurred medical claims:
Prior years redundancies" accounts for those adjustments made to prior year
estimates. The impact of any reduction of "Net incurred medical claims: Prior
years redundancies" may be offset as we establish the estimate of "Net incurred
medical claims: Current year." Our reserving practice is to consistently
recognize the actuarial best estimate of our ultimate liability for our claims.
When we recognize a release of the redundancy, we disclose the amount that is
not in the ordinary course of business, if material.
The ratio of current year medical claims paid as a percent of current year net
medical claims incurred was 87.7% for 2020, 89.3% for 2019 and 90.2% for 2018.
This ratio serves as an indicator of claims processing speed whereby 2020 claims
were processed at a slower speed than in 2019 and 2018.
We calculate the percentage of prior year redundancies in the current year as a
percent of prior year net incurred claims payable less prior year redundancies
in the current year in order to demonstrate the development of the prior year
reserves. For the year ended December 31, 2020, this metric was 8.0%, largely
driven by favorable trend factor development at the end of 2019 as well as
favorable completion factor development from 2019. For the year ended
December 31, 2019, this metric was 7.4%, largely driven by favorable trend
factor development at the end of 2018 as well as favorable completion factor
development from 2018. For the year ended December 31, 2018, this metric was
13.7%, largely driven by favorable trend factor development at the end of 2017
as well as favorable completion factor development from 2017.
We calculate the percentage of prior year redundancies in the current year as a
percent of prior year net incurred medical claims to indicate the percentage of
redundancy included in the preceding year calculation of current year net
incurred
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medical claims. We believe this calculation supports the reasonableness of our
prior year estimate of incurred medical claims and the consistency in our
methodology. For the year ended December 31, 2020, this metric was 0.8%, which
was calculated using the redundancy of $637. This metric was 0.7% for 2019 and
1.3% for 2018. We believe these metrics demonstrate an appropriate level of
reserve conservatism.
The following table shows the variance between total net incurred medical claims
as reported in Note 12, "Medical Claims Payable," of the Notes to Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form
10-K, for each of 2019 and 2018 and the incurred claims for such years had it
been determined retrospectively (computed as the difference between "net
incurred medical claims - current year" for the year shown and "net incurred
medical claims - prior years redundancies" for the immediately following year):
                                                                               Years Ended December 31
                                                                            2019                     2018
Total net incurred medical claims, as reported                         $    78,195               $   68,651
Retrospective basis, as described above                                     78,058                   69,081
Variance                                                               $       137               $     (430)
Variance to total net incurred medical claims, as reported                     0.2   %                 (0.6) %


Given that our business is primarily short tailed (which means that medical
claims are generally paid within twelve months of the member receiving service
from the provider), the variance to total net incurred medical claims, as
reported above, is used to assess the reasonableness of our estimate of ultimate
incurred medical claims for a given calendar year with the benefit of one year
of experience. We expect that substantially all of the development of the 2020
estimate of medical claims payable will be known during 2021.
The 2019 variance to total net incurred medical claims, as reported of 0.2% was
greater than the 2018 percentage of (0.6)%. This was driven by the fact that the
change in the prior year redundancy reported for 2020 as compared to 2019 was
greater than the change in the prior year redundancy reported for 2019 as
compared to 2018.
Income Taxes
We account for income taxes in accordance with the Financial Accounting
Standards Board ("FASB") guidance, which requires, among other things, the
separate recognition of deferred tax assets and deferred tax liabilities. Such
deferred tax assets and deferred tax liabilities represent the tax effect of
temporary differences between financial reporting and tax reporting measured at
tax rates enacted at the time the deferred tax asset or liability is recorded. A
valuation allowance must be established for deferred tax assets if it is "more
likely than not" that all or a portion may be unrealized. Our judgment is
required in determining an appropriate valuation allowance.
At each financial reporting date, we assess the adequacy of the valuation
allowance by evaluating each of our deferred tax assets based on the following:
•the types of temporary differences that created the deferred tax asset;
•the amount of taxes paid in prior periods and available for a carry-back claim;
•the tax rate at which the deferred tax assets will likely be utilized in the
future;
•the forecasted future taxable income, and therefore, likely future deduction of
the deferred tax item; and
•any significant other issues impacting the likely realization of the benefit of
the temporary differences.
We, like other companies, frequently face challenges from tax authorities
regarding the amount of taxes due. These challenges include questions regarding
the timing and amount of deductions that we have taken on our tax returns. In
evaluating any additional tax liability associated with various positions taken
in our tax return filings, we record additional liabilities for potential
adverse tax outcomes. Based on our evaluation of our tax positions, we believe
we have appropriately accrued for uncertain tax benefits, as required by the
applicable guidance. To the extent we prevail in matters we have accrued for,
our future effective tax rate would be reduced and net income would increase. If
we are required to pay more
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than accrued, our future effective tax rate would increase and net income would
decrease. Our effective tax rate and net income in any given future period could
be materially impacted.
In the ordinary course of business, we are regularly audited by federal and
other tax authorities, and from time to time, these audits result in proposed
assessments. We believe our tax positions comply with applicable tax law, and we
intend to defend our positions vigorously through the federal, state and local
appeals processes. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. Accordingly, although their
ultimate resolution may require additional tax payments, we do not anticipate
any material impact on our results of operations or financial condition from
these matters.
For additional information, see Note 8, "Income Taxes," of the Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
Goodwill and Other Intangible Assets
Our consolidated goodwill at December 31, 2020 was $21,691 and other intangible
assets were $9,405. The sum of goodwill and other intangible assets represented
35.9% of our total consolidated assets and 93.7% of our consolidated
shareholders' equity at December 31, 2020.
We follow FASB guidance for business combinations and goodwill and other
intangible assets, which specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill. Under the
guidance, goodwill and other intangible assets (with indefinite lives) are not
amortized but are tested for impairment at least annually. Furthermore, goodwill
and other intangible assets are allocated to reporting units for purposes of the
annual impairment test. Our impairment tests require us to make assumptions and
judgments regarding the estimated fair value of our reporting units, which
include goodwill and other intangible assets. In addition, certain other
intangible assets with indefinite lives, such as trademarks, are also tested
separately.
We complete our annual impairment tests of existing goodwill and other
intangible assets with indefinite lives during the fourth quarter of each year.
These tests involve the use of estimates related to the fair value of goodwill
at the reporting unit level and other intangible assets with indefinite lives,
and require a significant degree of management judgment and the use of
subjective assumptions. Certain interim impairment tests are also performed when
potential impairment indicators exist or changes in our business or other
triggering events occur. We have the option of first performing a qualitative
assessment for each reporting unit to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying amount,
which is an indication that our goodwill may be impaired. These qualitative
impairment tests include assessing events and factors that could affect the fair
value of the indefinite-lived intangible assets. Our procedures include
assessing our financial performance, macroeconomic conditions, industry and
market considerations, various asset specific factors and entity specific
events. If we determine that a reporting unit's goodwill may be impaired after
utilizing these qualitative impairment analysis procedures, we are required to
perform a quantitative impairment test.
Our quantitative impairment test utilizes the projected income and market
valuation approaches for goodwill and the projected income approach for our
indefinite lived intangible assets. Use of the projected income and market
valuation approaches for our goodwill impairment test reflects our view that
both valuation methodologies provide a reasonable estimate of fair value. The
projected income approach is developed using assumptions about future revenue,
expenses and net income derived from our internal planning process. These
estimated future cash flows are then discounted. Our assumed discount rate is
based on our industry's weighted-average cost of capital. Market valuations are
based on observed multiples of certain measures including revenue; earnings
before interest, taxes, depreciation and amortization; and book value of
invested capital (debt and equity) and include market comparisons to publicly
traded companies in our industry.
We did not incur any impairment losses as a result of our 2020 annual impairment
tests, as it was determined that it is more likely than not that the estimated
fair values of our reporting units were substantially in excess of the carrying
values as of December 31, 2020. Additionally, we do not believe that the
estimated fair values of our reporting units are at risk of becoming impaired in
the next twelve months.
If estimated fair values are less than the carrying values of goodwill and other
intangibles with indefinite lives in future annual impairment tests, or if
significant impairment indicators are noted relative to other intangible assets
subject to amortization, we may be required to record impairment losses against
future income.
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For additional information, see Note 3, "Business Acquisitions" and Note 10,
"Goodwill and Other Intangible Assets," of the Notes to Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Investments
Current and long-term marketable investment securities were $25,554 at
December 31, 2020 and represented 29.5% of our total consolidated assets at
December 31, 2020. We classify fixed maturity securities in our investment
portfolio as "available-for-sale" and report those securities at fair value.
Certain fixed maturity securities are available to support current operations
and, accordingly, we classify such investments as current assets without regard
to their contractual maturity. Investments used to satisfy contractual,
regulatory or other requirements are classified as long-term, without regard to
contractual maturity.
Our impairment review is subjective and requires a high degree of judgment. We
conduct this review on a quarterly basis, using both qualitative and
quantitative factors. Such factors considered include the extent to which a
security's market value has been less than its cost, the reasons for the decline
in value (i.e., credit event compared to liquidity, general credit spread
widening, currency exchange rate or interest rate factors), financial condition
and near term prospects of the issuer, including the credit ratings and changes
in the credit ratings of the issuer, recommendations of investment advisors, and
forecasts of economic, market or industry trends.
Prior to 2020, our fixed maturity securities were evaluated for
other-than-temporary impairment where credit-related impairments were presented
within the other-than-temporary impairment losses recognized in our consolidated
statements of income with an adjustment to the security's amortized cost basis.
Effective January 1, 2020, if a fixed maturity security is in an unrealized loss
position and we have the intent to sell the fixed maturity security, or it is
more likely than not that we will have to sell the fixed maturity security
before recovery of its amortized cost basis, we write down the fixed maturity
security's cost basis to fair value and record an impairment loss in our
consolidated statements of income. For impaired fixed maturity securities that
we do not intend to sell or if it is more likely than not that we will not have
to sell such securities, but we expect that we will not fully recover the
amortized cost basis, we recognize the credit component of the impairment as an
allowance for credit loss in our consolidated balance sheets and record an
impairment loss in our consolidated statements of income. The non-credit
component of the impairment is recognized in accumulated other comprehensive
income. Furthermore, unrealized losses entirely caused by non-credit-related
factors related to fixed maturity securities for which we expect to fully
recover the amortized cost basis continue to be recognized in accumulated other
comprehensive income.
The credit component of an impairment is determined primarily by comparing the
net present value of projected future cash flows with the amortized cost basis
of the fixed maturity security. The net present value is calculated by
discounting our best estimate of projected future cash flows at the effective
interest rate implicit in the fixed maturity security at the date of purchase.
For mortgage-backed and asset-backed securities, cash flow estimates are based
on assumptions regarding the underlying collateral, including prepayment speeds,
vintage, type of underlying asset, geographic concentrations, default rates,
recoveries and changes in value. For all other securities, cash flow estimates
are driven by assumptions regarding probability of default, including changes in
credit ratings and estimates regarding timing and amount of recoveries
associated with a default.
We have a committee of accounting and investment associates and management that
is responsible for managing the impairment review process. We believe we have
adequately reviewed our investment securities for impairment and that our
investment securities are carried at fair value. We have established an
allowance for credit loss and recorded credit loss expense as a reflection of
our expected impairment losses. Given the inherent uncertainty of changes in
market conditions and the significant judgments involved, there is continuing
risk that declines in fair value may occur and additional impairment losses on
investments may be recorded in future periods.
In addition to marketable investment securities, we held additional long-term
investments of $4,285, or 4.9% of total consolidated assets, at December 31,
2020. These long-term investments consisted primarily of certain other equity
investments, the cash surrender value of corporate-owned life insurance policies
and real estate. Due to their less liquid nature, these investments are
classified as long-term.
The COVID-19 pandemic and efforts to prevent its spread have significantly
impacted the global economy, causing market instability and declines in the fair
value of our investment holdings in the energy sector and consumer-driven
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industries such as travel, entertainment and retail. While the markets have
stabilized since the onset of the COVID-19 pandemic, the extent and length of
the recovery remain uncertain. Further, the energy sector and consumer-driven
industries remain distressed. Given this market uncertainty, there is a risk
that our investments that have declined may not recover in future periods.
Through our investing activities, we are exposed to financial market risks,
including those resulting from changes in interest rates and changes in equity
market valuations. We manage market risks through our investment policy, which
establishes credit quality limits and limits on investments in individual
issuers. Ineffective management of these risks could have an impact on our
future results of operations and financial condition. Our investment portfolio
includes fixed maturity securities with a fair value of $23,995 at December 31,
2020. The weighted-average credit rating of these securities was "A" as of
December 31, 2020. Included in this balance are investments in fixed maturity
securities of states, municipalities and political subdivisions of $1,010 that
are guaranteed by third parties. With the exception of twenty-one securities
with a fair value of $34, these securities are all investment-grade and carry a
weighted-average credit rating of "AA" as of December 31, 2020. The securities
are guaranteed by a number of different guarantors, and we do not have any
material exposure to any single guarantor, neither indirectly through the
guarantees, nor directly through investment in the guarantor. Further, due to
the high underlying credit rating of the issuers, the weighted-average credit
rating of the fixed maturity securities without a guarantee, for which such
information is available, was "A" as of December 31, 2020.
Fair values of fixed maturity and equity securities are based on quoted market
prices, where available. These fair values are obtained primarily from
third-party pricing services, which generally use Level I or Level II inputs for
the determination of fair value in accordance with FASB guidance for fair value
measurements and disclosures. We have controls in place to review the pricing
services' qualifications and procedures used to determine fair values. In
addition, we periodically review the pricing services' pricing methodologies,
data sources and pricing inputs to ensure the fair values obtained are
reasonable.
We obtain quoted market prices for each security from the pricing services,
which are derived through recently reported trades for identical or similar
securities, making adjustments through the reporting date based upon available
market observable information. For securities not actively traded, the pricing
services may use quoted market prices of comparable instruments or discounted
cash flow analyses, incorporating inputs that are currently observable in the
markets for similar securities. Inputs that are often used in these valuation
methodologies include, but are not limited to, broker quotes, benchmark yields,
credit spreads, default rates and prepayment speeds. As we are responsible for
the determination of fair value, we perform analysis on the prices received from
the pricing services to determine whether the prices are reasonable estimates of
fair value. Our analysis includes procedures such as a review of month-to-month
price fluctuations and price comparisons to secondary pricing services. There
were no adjustments to quoted market prices obtained from the pricing services
during the years ended December 31, 2020 and 2019.
In certain circumstances, it may not be possible to derive pricing model inputs
from observable market activity, and therefore, such inputs are estimated
internally. Such securities are designated Level III in accordance with FASB
guidance. Securities designated Level III at December 31, 2020 totaled $392 and
represented approximately 1.3% of our total assets measured at fair value on a
recurring basis. Our Level III securities primarily consisted of certain
corporate securities and equity securities for which observable inputs were not
always available and the fair values of these securities were estimated using
inputs including, but not limited to, prepayment speeds, credit spreads, default
rates and benchmark yields.
For additional information, see Part II, Item 7A, "Quantitative and Qualitative
Disclosures about Market Risk," and Note 2, "Basis of Presentation and
Significant Accounting Policies," Note 5, "Investments," and Note 7, "Fair
Value," of the Notes to Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report on Form 10-K.
Retirement Benefits
Pension Benefits
We sponsor defined benefit pension plans for some of our employees. These plans
are accounted for in accordance with FASB guidance for retirement benefits,
which requires that amounts recognized in financial statements be determined on
an actuarial basis. As permitted by the guidance, we calculate the value of plan
assets as described below. Further, the difference between our expected rate of
return and the actual performance of plan assets, as well as certain changes in
pension liabilities, are amortized over future periods.
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An important factor in determining our pension expense is the assumption for
expected long-term return on plan assets. As of our December 31, 2020
measurement date, we selected a weighted-average long-term rate of return on
plan assets of 6.72%. We use a total portfolio return analysis in the
development of our assumption. Factors such as past market performance, the
long-term relationship between fixed maturity and equity securities, interest
rates, inflation and asset allocations are considered in the assumption. The
assumption includes an estimate of the additional return expected from active
management of the investment portfolio. Peer data and an average of historical
returns are also reviewed for appropriateness of the selected assumption. We
believe our assumption of future returns is reasonable. However, if we lower our
expected long-term return on plan assets, future contributions to the pension
plan and pension expense would likely increase.
This assumed long-term rate of return on assets is applied to a calculated value
of plan assets, which recognizes changes in the fair value of plan assets in a
systematic manner over three years, producing the expected return on plan assets
that is included in the determination of pension expense. We apply a corridor
approach to amortize unrecognized actuarial gains or losses. Under this
approach, only accumulated net actuarial gains or losses in excess of 10% of the
greater of the projected benefit obligation or the fair value of plan assets are
amortized over the average remaining service or lifetime of the workforce as a
component of pension expense. The net deferral of past asset gains or losses
affects the calculated value of plan assets and, ultimately, future pension
expense.
The discount rate reflects the current rate at which the pension liabilities
could be effectively settled at the end of the year based on our most recent
measurement date. We use the annual spot rate approach for setting our discount
rate. Under the spot rate approach, individual spot rates from a full yield
curve of published rates are used to discount each plan's cash flows to
determine the plan's obligation. At the December 31, 2020 measurement date, the
weighted-average discount rate under the annual spot rate approach was 2.24%,
compared to 3.11% at the December 31, 2019 measurement date. The net effect of
changes in the discount rate, as well as the net effect of other changes in
actuarial assumptions and experience, have been deferred and amortized as a
component of pension expense in accordance with FASB guidance.
In managing the plan assets, our objective is to be a responsible fiduciary
while minimizing financial risk. Plan assets include a diversified mix of equity
securities, investment grade fixed maturity securities and other types of
investments across a range of sectors and levels of capitalization to maximize
long-term return for a prudent level of risk. In addition to producing a
reasonable return, the investment strategy seeks to minimize the volatility in
our expense and cash flow.
Effective January 1, 2019, we curtailed the benefits under the Anthem Cash
Balance Plan B pension plan. All grandfathered participants no longer have pay
credits added to their accounts, but continue to earn interest on existing
account balances. Participants continue to earn years of pension service for
vesting purposes.
Other Postretirement Benefits
We provide most associates with certain medical, vision and dental benefits upon
retirement. We use various actuarial assumptions, including a discount rate and
the expected trend in healthcare costs, to estimate the costs and benefit
obligations for our retiree benefits.
At our December 31, 2020 measurement date, the selected discount rate for all
plans was 1.99%, compared to a discount rate of 2.93% at the December 31, 2019
measurement rate. We developed this rate using the annual spot rate approach as
described above.
The assumed healthcare cost trend rates used to measure the expected cost of
pre-Medicare (those who are not currently eligible for Medicare benefits) other
benefits at our December 31, 2020 measurement date was 7.00% for 2021 with a
gradual decline to 4.50% by the year 2033. The assumed healthcare cost trend
rates used to measure the expected cost of post-Medicare (those who are
currently eligible for Medicare benefits) other benefits at our December 31,
2020 measurement date was 5.50% for 2021 with a gradual decline to 4.50% by the
year 2033. These estimated trend rates are subject to change in the future.
For additional information regarding our retirement benefits, see Note 11,
"Retirement Benefits," of the Notes to Consolidated Financial Statements
included in Part II, Item 8 of this Annual Report on Form 10-K.
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New Accounting Pronouncements
For information regarding new accounting pronouncements that were issued or
became effective during the year ended December 31, 2020 that had, or are
expected to have, a material impact on our financial position, results of
operations or financial statement disclosures, see the "Recently Adopted
Accounting Guidance" and "Recent Accounting Guidance Not Yet Adopted" sections
of Note 2, "Basis of Presentation and Significant Accounting Policies," of the
Notes to Consolidated Financial Statements included in Part II, Item 8 of this
Annual Report on Form 10-K.

Liquidity and Capital Resources
Introduction
Our cash receipts result primarily from premiums, product revenue,
administrative fees and other revenue, investment income, proceeds from the sale
or maturity of our investment securities, proceeds from borrowings, and proceeds
from the issuance of common stock under our employee stock plans. Cash
disbursements result mainly from claims payments, administrative expenses,
taxes, purchases of investment securities, interest expense, payments on
borrowings, acquisitions, capital expenditures, repurchases of our debt
securities and common stock and the payment of cash dividends. Cash outflows
fluctuate with the amount and timing of settlement of these transactions. Any
future decline in our profitability would likely have an unfavorable impact on
our liquidity.
The COVID-19 pandemic and the related mitigation efforts have significantly
impacted the economy, causing market instability and increasing unemployment in
the United States. While the full impact of COVID-19 on our business remains
uncertain, it could have a material adverse effect on our claim payments,
collection of our premiums, product or administrative fee revenues, our
investments and our ability to access credit. Additional discussion regarding
the impact of COVID-19 can be found elsewhere in this MD&A.
We manage our cash, investments and capital structure so we are able to meet the
short-term and long-term obligations of our business while maintaining financial
flexibility and liquidity. We forecast, analyze and monitor our cash flows to
enable investment and financing within the overall constraints of our financial
strategy.
To preserve our liquidity and financial flexibility and to minimize the effects
of the COVID-19 pandemic, we proactively took several actions during 2020,
including borrowing under our senior revolving credit facility in March 2020,
which was repaid in April 2020; delaying certain tax payments as permitted by
the IRS and the CARES Act; and temporarily suspending our share repurchase
activity in March 2020, which was resumed in late June 2020. We may take
additional actions going forward to maximize our liquidity, including increasing
our borrowings from existing or new Federal Home Loan Bank memberships and other
available borrowings. We will continue to monitor the market conditions and seek
to act in a prudent manner.
A substantial portion of the assets held by our regulated subsidiaries are in
the form of cash and cash equivalents and investments. After considering
expected cash flows from operating activities, we generally invest cash that
exceeds our near term obligations in longer term marketable fixed maturity
securities to improve our overall investment income returns. Our investment
strategy is to make investments consistent with insurance statutes and other
regulatory requirements, while preserving our asset base. Our investments are
generally available-for-sale to meet liquidity and other needs. Our subsidiaries
pay out excess capital annually in the form of dividends to their respective
parent companies for general corporate use, as permitted by applicable
regulations.
The availability of financing in the form of debt or equity is influenced by
many factors, including our profitability, operating cash flows, debt levels,
debt ratings, contractual restrictions, regulatory requirements and market
conditions. The securities and credit markets have in the past experienced
higher than normal volatility, although current market conditions are more
stable. During recent years, the federal government and various governmental
agencies have taken a number of steps to strengthen the regulation of the
financial services market. In addition, governments around the world have
developed their own plans to provide stability and security in the credit
markets and to ensure adequate capital in certain financial institutions.
Further, in response to the COVID-19 pandemic, the federal government has
established a number of programs to provide liquidity to the financial system
that provides lending to states, municipalities, and eligible businesses.
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A summary of our major sources and uses of cash and cash equivalents for the years ended December 31, 2020, 2019 and 2018 is as follows:

                                                             Years Ended December 31                             $ Change
                                                                                                        2020 vs.          2019 vs.
                                                      2020              2019             2018             2019              2018
Sources of Cash:
Net cash provided by operating activities         $  10,688          $ 6,061          $ 3,827          $  4,627          $  2,234
Proceeds from sales, maturities, calls and
redemptions of investments, net of purchases              -                -            1,929                 -            (1,929)
Issuance of common stock under Equity Units stock
purchase contracts                                        -                -            1,250                 -            (1,250)
Issuances of commercial paper and short- and
long-term debt, net of repayments                         -              608                -              (608)              608
Issuances of common stock under employee stock
plans                                                   176              187              173               (11)               14
Other sources of cash, net                              315                -                -               315                 -
Total sources of cash                                11,179            6,856            7,179             4,323              (323)
Uses of Cash:
Purchases of investments, net of proceeds from
sales, maturities, calls and redemptions             (3,433)          (1,919)               -            (1,514)           (1,919)
Repurchase and retirement of common stock            (2,700)          (1,701)          (1,685)             (999)              (16)
Purchases of subsidiaries, net of cash acquired      (1,976)               -           (1,760)           (1,976)            1,760
Purchases of property and equipment                  (1,021)          (1,077)          (1,208)               56               131
Repayments of commercial paper and short- and
long-term debt, net of issuances                       (298)               -           (1,086)             (298)            1,086
Cash dividends                                         (954)            (818)            (776)             (136)              (42)
Other uses of cash, net                                   -             (338)            (337)              338                (1)
Total uses of cash                                  (10,382)          (5,853)          (6,852)           (4,529)              999
Effect of foreign exchange rates on cash and cash
equivalents                                               7                -               (2)                7                 2

Net increase in cash and cash equivalents $ 804 $ 1,003 $ 325 $ (199) $ 678

Liquidity-Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The increase in cash provided by operating activities was primarily due to the
impact of the timing of working capital changes. The increase was further due to
membership growth in our Government Business segment and higher net income in
2020, excluding the non-cash impact of accrued expenses related to our business
optimization initiatives and the BCBSA Litigation.
Other significant changes in sources and uses of cash year-over-year included
increases in cash used for acquisitions, net purchases of investments and cash
used for repurchase and retirement of common stock.
Financial Condition
We maintained a strong financial condition and liquidity position, with
consolidated cash, cash equivalents and investments in fixed maturity and equity
securities of $31,295 at December 31, 2020. Since December 31, 2019, total cash,
cash equivalents and investments in fixed maturity and equity securities
increased by $5,168, primarily due to cash generated from operations. This
increase was partially offset by cash used for common stock repurchases,
acquisitions, purchases of property and equipment and cash dividends paid to
shareholders.
Many of our subsidiaries are subject to various government regulations that
restrict the timing and amount of dividends and other distributions that may be
paid to their respective parent companies. Certain accounting practices
prescribed by insurance regulatory authorities, or statutory accounting
practices, differ from GAAP. Changes that occur in statutory accounting
practices, if any, could impact our subsidiaries' future dividend capacity. In
addition, we have agreed to certain
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undertakings to regulatory authorities, including the requirement to maintain
certain capital levels in certain of our subsidiaries.
At December 31, 2020, we held $1,747 of cash, cash equivalents and investments
at the parent company, which are available for general corporate use, including
investment in our businesses, acquisitions, potential future common stock
repurchases and dividends to shareholders, repurchases of debt securities and
debt and interest payments.
Debt
Periodically, we access capital markets and issue debt ("Notes") for long-term
borrowing purposes, for example, to refinance debt, to finance acquisitions or
for share repurchases. Certain of these Notes may have a call feature that
allows us to redeem the Notes at any time at our option and/or a put feature
that allows a Note holder to redeem the Notes upon the occurrence of both a
change in control event and a downgrade of the Notes below an investment grade
rating. For more information on our debt, including redemptions and issuances,
see Note 13, "Debt" of the Notes to Consolidated Financial Statements included
in Part II, Item 8 of this Annual Report on Form 10-K.
We calculate our consolidated debt-to-capital ratio, a non-GAAP measure, from
the amounts presented on our audited consolidated balance sheets included in
Part II, Item 8 of this Annual Report on Form 10-K. Our debt-to-capital ratio is
calculated as total debt divided by total debt plus total shareholders' equity.
Total debt is the sum of short-term borrowings, current portion of long-term
debt, long-term debt, less current portion, and lease liabilities. We believe
our debt-to-capital ratio assists investors and rating agencies in measuring our
overall leverage and additional borrowing capacity. In addition, our bank
covenants include a maximum debt-to-capital ratio that we cannot and did not
exceed. Our debt-to-capital ratio may not be comparable to similarly titled
measures reported by other companies. Our consolidated debt-to-capital ratio was
38.7% and 39.5% as of December 31, 2020 and 2019, respectively.
Our senior debt is rated "A" by S&P Global, "BBB" by Fitch Ratings, Inc., "Baa2"
by Moody's Investor Service, Inc. and "bbb+" by AM Best Company, Inc. We intend
to maintain our senior debt investment grade ratings. If our credit ratings are
downgraded, our business, financial condition and results of operations could be
adversely impacted by limitations on future borrowings and a potential increase
in our borrowing costs.
Future Sources and Uses of Liquidity
We have a shelf registration statement on file with the SEC to register an
unlimited amount of any combination of debt or equity securities in one or more
offerings. Specific information regarding terms and securities being offered
will be provided at the time of an offering. Proceeds from future offerings are
expected to be used for general corporate purposes, including, but not limited
to, the repayment of debt, investments in or extensions of credit to our
subsidiaries and the financing of possible acquisitions or business expansions.
We have a senior revolving credit facility (the "5-Year Facility") with a group
of lenders for general corporate purposes. In June 2019, we amended and restated
the credit agreement for the 5-Year Facility to, among other things, extend the
maturity date from August 2020 to June 2024 and decrease the amount of credit
available from $3,500 to $2,500. In June 2019, we also entered into a 364-day
senior revolving credit facility (the "364-Day Facility") with a group of
lenders for general corporate purposes, which provides for credit in the amount
of $1,000. In May 2020, we amended and extended the 364-Day Facility, which now
matures in June 2021. Our ability to borrow under these credit facilities is
subject to compliance with certain covenants. We do not believe the restrictions
contained in these covenants materially affect our financial or operating
flexibility. As of December 31, 2020, we were in compliance with all of our debt
covenants. There were no amounts outstanding under the 5-Year Facility or the
364-Day Facility at December 31, 2020.
Through certain subsidiaries, we have entered into multiple 364-day lines of
credit (the "Subsidiary Credit Facilities") with separate lenders for general
corporate purposes. The Subsidiary Credit Facilities provide combined credit up
to $300. Our ability to borrow under the Subsidiary Credit Facilities is subject
to compliance with certain covenants. At December 31, 2020, we had no
outstanding borrowings under the Subsidiary Credit Facilities.
We have a $3,500 commercial paper program, the proceeds of which may be used for
general corporate purposes. Should commercial paper issuance be unavailable, we
have the ability to use a combination of cash on hand and/or our two senior
revolving credit facilities, which provide for combined credit in the amount of
$3,500, to redeem any outstanding commercial
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paper upon maturity. While there is no assurance in the current economic
environment, we believe the lenders participating in our credit facilities, if
market conditions allow, would be willing to provide financing in accordance
with their legal obligations. At December 31, 2020, we had $250 outstanding
under our commercial paper program.
We are a member, through certain subsidiaries, of the Federal Home Loan Bank of
Indianapolis, the Federal Home Loan Bank of Cincinnati, the Federal Home Loan
Bank of Atlanta and the Federal Home Loan Bank of New York, collectively (the
"FHLBs"). As a member, we have the ability to obtain short-term cash advances,
subject to certain minimum collateral requirements. At December 31, 2020, we had
no outstanding short-term borrowings from the FHLBs.
As discussed in "Financial Condition" above, many of our subsidiaries are
subject to various government regulations that restrict the timing and amount of
dividends and other distributions that may be paid. Based upon these
requirements, we currently estimate that approximately $2,505 of dividends will
be paid to the parent company during 2021. During 2020, we received $3,618 of
dividends from our subsidiaries.
We regularly review the appropriate use of capital, including acquisitions,
common stock and debt security repurchases and dividends to shareholders. The
declaration and payment of any dividends or repurchases of our common stock or
debt is at the discretion of our Board of Directors and depends upon our
financial condition, results of operations, future liquidity needs, regulatory
and capital requirements and other factors deemed relevant by our Board of
Directors.
On January 26, 2021, our Audit Committee declared a quarterly cash dividend to
shareholders of $1.13 per share on the outstanding shares of our common stock.
This quarterly dividend is payable on March 25, 2021 to the shareholders of
record as of March 10, 2021.
Under our Board of Directors' authorization, we maintain a common stock
repurchase program. As of December 31, 2020, we had Board authorization of
$1,092 to repurchase our common stock. On January 26, 2021, our Audit Committee,
pursuant to authorization granted by the Board of Directors, authorized a $5,000
increase to our common stock repurchase program.
For additional information regarding our sources and uses of capital, see Note
5, "Investments," Note 6, "Derivative Financial Instruments," Note 13, "Debt"
and Note 15, "Capital Stock-Use of Capital-Dividends and Stock Repurchase
Program" of the Notes to Consolidated Financial Statements included in Part II,
Item 8 of this Annual Report on Form 10-K.

Contractual Obligations and Commitments
Our estimated contractual obligations and commitments as of December 31, 2020
are as follows:
                                                                                            Payments Due by Period
                                                                     Less than                                                  More than
                                                    Total             1 Year             1-3 Years          3-5 Years            5 Years
On-Balance Sheet:
Debt1                                            $ 31,066          $    

1,679 $ 3,953 $ 17,641 $ 7,793 Operating leases, including imputed interest2 982

197                 336                213                 236
Investment commitments3                                20                  11                   7                  1                   1
Other long-term liabilities4                          716                   9                 284                281                 142
Off-Balance Sheet:
Purchase obligations5                               5,761                 975               3,143              1,523                 120
Operating leases, including imputed interest2         139                   6                  24                 24                  85
Investment commitments6                             1,320                 270                 448                 61                 541

Total contractual obligations and commitments $ 40,004 $ 3,147 $ 8,195 $ 19,744 $ 8,918

1Includes estimated interest expense. 2See Note 18, "Leases," of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

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3Represents low income housing tax credits.
4Primarily consists of reserves for future policy benefits, projected other
postretirement benefits, deferred compensation, supplemental executive
retirement plan liabilities and certain other miscellaneous long-term
obligations. Estimated future payments for funded pension benefits have been
excluded from this table, as we had no funding requirements under ERISA at
December 31, 2020 as a result of the value of the assets in the plans.
5Includes estimated payments for future services under contractual arrangements
from third-party service contracts.
6Includes unfunded capital commitments for alternative investments.
The above table does not contain $282 of gross liabilities for uncertain tax
positions and interest for which we cannot reasonably estimate the timing of the
resolutions with the respective taxing authorities. For further information, see
Note 8, "Income Taxes," of the Notes to Consolidated Financial Statements
included in Part II, Item 8 of this Annual Report on Form 10-K.
In addition to the contractual obligations and commitments discussed above, we
have a variety of other contractual agreements related to acquiring materials
and services used in our operations. However, we do not believe these other
agreements contain material noncancelable commitments.
We believe that funds from future operating cash flows, cash and investments and
funds available under our senior revolving credit facilities and/or from public
or private financing sources will be sufficient for future operations and
commitments, and for capital acquisitions and other strategic transactions.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet derivative instruments, guarantee
transactions, agreements or other contractual arrangements or any
indemnification agreements that will require funding in future periods. We have
not transferred assets to an unconsolidated entity that serves as credit,
liquidity or market risk support to such entity. We do not hold any variable
interest in an unconsolidated entity where such entity provides us with
financing, liquidity, market risk or credit risk support.
Risk-Based Capital
Our regulated subsidiaries' states of domicile have statutory risk-based capital
("RBC") requirements for health and other insurance companies and HMOs largely
based on the National Association of Insurance Commissioners ("NAIC") Risk-Based
Capital (RBC) For Health Organizations Model Act ("RBC Model Act"). These RBC
requirements are intended to measure capital adequacy, taking into account the
risk characteristics of an insurer's investments and products. The NAIC sets
forth the formula for calculating the RBC requirements, which are designed to
take into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to an individual insurance company's business. In
general, under the RBC Model Act, an insurance company must submit a report of
its RBC level to the state insurance department or insurance commissioner, as
appropriate, at the end of each calendar year. Our regulated subsidiaries'
respective RBC levels as of December 31, 2020, which was the most recent date
for which reporting was required, were in excess of all applicable mandatory RBC
requirements. In addition to exceeding these RBC requirements, we are in
compliance with the liquidity and capital requirements for a licensee of the
BCBSA and with the tangible net worth requirements applicable to certain of our
California subsidiaries.
For additional information, see Note 22, "Statutory Information," of the Notes
to Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.

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