(In Millions, Except Per Share Data or as Otherwise Stated Herein) This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, should be read in conjunction with the accompanying consolidated financial statements and notes, our consolidated financial statements and notes as of and for the year endedDecember 31, 2019 and the MD&A included in our 2019 Annual Report on Form 10-K. References to the terms "we," "our," "us," or "Anthem" used throughout this MD&A refer toAnthem, Inc. , anIndiana corporation, and unless the context otherwise requires, its direct and indirect subsidiaries. References to the "states" include theDistrict of Columbia , unless the context otherwise requires. Results of operations, cost of care trends, investment yields and other measures for the three and six months endedJune 30, 2020 are not necessarily indicative of the results and trends that may be expected for the full year endingDecember 31, 2020 , or any other period. Overview We are one of the largest health benefits companies inthe United States in terms of medical membership, serving greater than 42 million medical members through our affiliated health plans as ofJune 30, 2020 . We serve our members as theBlue Cross licensee forCalifornia and as theBlue Cross and Blue Shield , or BCBS, licensee forColorado ,Connecticut ,Georgia ,Indiana ,Kentucky ,Maine ,Missouri (excluding 30 counties in theKansas City area),Nevada ,New Hampshire ,New York (in theNew York City metropolitan area and upstateNew York ),Ohio ,Virginia (excluding theNorthern Virginia suburbs ofWashington, D.C. ) andWisconsin . In a majority of these service areas, we do business asAnthem Blue Cross ,Anthem Blue Cross and Blue Shield , andEmpire Blue Cross Blue Shield orEmpire Blue Cross . We also 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 asAIM 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, or PBM, services through our IngenioRx subsidiary. We are licensed to conduct insurance operations in all 50 states and theDistrict of Columbia through our subsidiaries. For additional information about our organization, see Part I, Item 1, "Business" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our 2019 Annual Report on Form 10-K. Additional information on our segments can be found in this MD&A and in Note 15, "Segment Information" of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of a novel strain of coronavirus, or COVID-19, a global health pandemic and recommended containment and mitigation measures worldwide. The COVID-19 outbreak has also been declared a national emergency inthe United States and continues to spread domestically and in other countries globally. To mitigate the spread of this virus, beginning inMarch 2020 most states imposed shelter-in-place or stay-at-home orders, which generally required businesses not considered essential to close their physical offices. While these orders have largely been lifted, many states and local authorities continue to impose certain restrictions on the conduct of businesses and individuals. The virus and efforts to prevent its spread have drastically impacted the global economy, causing market instability and increasing unemployment inthe United States . In response to the COVID-19 pandemic, federal and state legislation has been, and we expect will continue to be, enacted that will impact our business. For additional information on existing legislation related to the impact of the COVID-19 pandemic on our business, see "Regulatory Trends and Uncertainties" in this MD&A. As COVID-19 continues to spread, we remain focused on increasing access and coverage for our members, adapting tools and policies to assist consumers and care providers, and leveraging data and advanced analytics to provide innovative solutions. We launched an online COVID-19 assessment tool and enhanced the digital capabilities ofSydney Care , our mobile app, to include a symptom checker feature, as well as virtual text visit and video visit features. The symptom checker feature guides users through a resulting action plan depending upon the results of the user's assessment, and the virtual text -42-
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feature connects users to certified physicians
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To date, the COVID-19 pandemic has not had a material adverse impact on our business, cash flows, financial condition or results of operations. However, the COVID-19 pandemic is evolving and its impact will depend on future developments, which are highly uncertain and cannot be predicted at this time. As such, the COVID-19 pandemic, including the changes we make in response to it and any further steps taken to expand or otherwise modify the services delivered to our members, could have a material adverse impact on our business, cash flows, financial condition and results of operations going forward. These impacts include, but are not limited to, the following: •Our covered medical expenses, including preventive care and COVID-19 treatment, may rise; •Our membership may decline; •Our membership mix may change to less profitable lines of business; •Premium receipts from our Commercial and Government customers may be delayed or uncollectable; •Reimbursements for benefit payments made on behalf of our self-insured customers may be delayed or uncollectable; •Our suppliers' operations may be interrupted; •Our operations may be interrupted; •Our access to credit to meet liquidity may become limited and our credit rating may be negatively impacted; and •Our investment returns may be reduced and investment values may become impaired. We are focused on continuing to navigate these challenges and taking measures to address the impacts of the COVID-19 pandemic. To preserve our liquidity and enhance financial flexibility, we are delaying certain tax payments as permitted by the Internal Revenue Service and the Coronavirus Aid, Relief, and Economic Security, or CARES, Act and are monitoring our discretionary spending. 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 risk factors, see Part I, Item 1A, "Risk Factors" included in our 2019 Annual Report on Form 10-K and Part II, Item 1A, "Risk Factors" included in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Business Trends The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, as amended, or collectively, the ACA, has changed and may continue to make broad-based changes to theU.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, or the 2018 ACA Decision, which judgment has been stayed pending appeal, could significantly disrupt our business. During 2019, we modestly expanded our participation in the Individual ACA-compliant market. 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. We currently offer Individual ACA-compliant products in 91 of the 143 rating regions in which we operate. 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 toAnthem health plan customers throughout the country, as well as to external customers outside of the health plans we own. Our comprehensive PBM services portfolio includes services such as formulary management, pharmacy networks, prescription drug database, member services and mail order capabilities. InJuly 2019 , we announced our first contract win with a third-party health insurer,Blue Cross of Idaho , and IngenioRx began providing PBM services under that contract onJanuary 1, 2020 . Also in the second quarter of 2019, IngenioRx began delegating certain PBM administrative functions, such as claims processing and prescription fulfillment, toCaremarkPCS 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. FromDecember 2009 throughDecember 2019 , we delegated certain PBM functions and administrative services toExpress Scripts Inc. , or Express Scripts, pursuant to our PBM agreement with Express Scripts, or the ESI PBM Agreement. 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 byJanuary 1, 2020 . We expect IngenioRx to provide our members with more cost-effective solutions and improve our ability to integrate pharmacy benefits within our medical and specialty platform. -44-
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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 continued deferral of non-emergent or elective health services, surges in COVID-19 related hospitalizations, and the cost of a potential COVID-19 vaccine. 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 ourIndividual 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, or HIP Fee, on health insurers that write certain types of health insurance onU.S. risks. We price our affected products to cover the impact of the HIP Fee, when applicable. The HIP Fee was suspended for 2019, has resumed for 2020 and has been permanently eliminated effective 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, and may continue to cause, deferral of non-emergent or elective health services, which has decreased our claim costs in the short-term and could increase our claim costs in the long-term and affect our medical cost trends. Further, the cost and volume of covered services related to the COVID-19 disease could have a material adverse effect on our claim costs. 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 throughDecember 31, 2020 . 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. We continue to closely monitor the COVID-19 pandemic and its impacts to our business, financial condition, results of operations and medical cost trend. For additional discussion regarding business trends, see Part I, Item 1, "Business" included in our 2019 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 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 inMarch 2020 and the Paycheck Protection Program and Health Care Enhancement Act inApril 2020 . 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 health care 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. In addition, these legislative reforms and the Internal Revenue Service Notice 2020-23, orIRS Notice 2020-23, issued inApril 2020 in response to the COVID-19 pandemic include tax deferrals and other beneficial provisions, including a delay of certain payroll and federal income tax payments, which we expect to have a positive impact on our 2020 cash flows. For more information on measures we have taken to increase our cash on hand, see "Future Sources and Uses of Liquidity" in this MD&A. 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 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 -45-
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are providing extensions to premium payment terms in certain situations and continue to work 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 the 2018 ACA Decision, which judgment has been stayed pending appeal, continue to contribute to this uncertainty. In a separate development, inApril 2020 , theU.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. InJune 2020 , theU.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. We will review developments and recognize the impact, if any, in a future reporting period. We will continue to evaluate the impact of the ACA as any further developments or judicial rulings occur. The annual HIP Fee is 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 allU.S. health risk for those certain lines of business written during the preceding calendar year. We record our estimated liability for the HIP Fee in full at the beginning of the year with a corresponding deferred asset that is amortized on a straight-line basis to selling, general and administrative expense. The final calculation and payment of the annual HIP Fee is due bySeptember 30th of each fee year. The HIP Fee is non-deductible for federal income tax purposes. Our affected products are priced to cover the increased selling, general and administrative and income tax expenses associated with the HIP Fee. The total amount due from allocations to all health insurers is$15,523 for 2020. For the three and six months endedJune 30, 2020 , we estimated our portion of the HIP Fee to be$420 and$837 , respectively, which were recognized as general and administrative expense. There was no corresponding expense for 2019 due to the suspension of the HIP Fee for 2019. For additional discussion regarding regulatory trends and uncertainties and risk factors, see Part I, Item 1, "Business - Regulation", Part I, Item 1A, "Risk Factors", and the "Regulatory Trends and Uncertainties" section of Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2019 Annual Report on Form 10-K and Part II, Item 1A, "Risk Factors" included in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Other Significant Items OnFebruary 28, 2020 , we completed our acquisition ofBeacon Health Options, Inc. , or 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 aligns 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 1, Item 1 of this Form 10-Q. InJanuary 2019 , we exercised our contractual right to terminate the ESI PBM Agreement, and we completed the transition of our members from Express Scripts to IngenioRx onJanuary 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 11, "Commitments and Contingencies - Litigation and Regulatory Proceedings -Express Scripts, Inc. Pharmacy Benefit Management Litigation," of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. InMay 2017 , we announced that we were terminating the Agreement and Plan of Merger, or Cigna Merger Agreement, between us and Cigna Corporation. For additional information about ongoing litigation related to the Cigna Merger Agreement, see Note 11, "Commitments and Contingencies - Litigation and Regulatory Proceedings - Cigna Corporation Merger Litigation," of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. -46-
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Selected Operating Performance For the twelve months endedJune 30, 2020 , total medical membership increased 1.6, or 3.9%. 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 primarily due to fully-insured membership growth in our Medicaid and Medicare businesses. 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 membership. Operating revenue for the three months endedJune 30, 2020 was$29,178 , an increase of$4,001 , or 15.9%, from the three months endedJune 30, 2019 . Operating revenue for the six months endedJune 30, 2020 was$58,626 , an increase of$9,061 , or 18.3%, from the six months endedJune 30, 2019 . The increase in operating revenue for the three and six months endedJune 30, 2020 compared to 2019 was primarily driven by pharmacy product revenue related to the launch of IngenioRx, as well as higher premium revenue in our Government Business segment. Net income for the three months endedJune 30, 2020 was$2,276 , an increase of$1,137 , or 99.8%, from the three months endedJune 30, 2019 . Net income for the six months endedJune 30, 2020 was$3,799 , an increase of$1,109 , or 41.2%, from the six months endedJune 30, 2019 . The increase in net income for the three and six months endedJune 30, 2020 compared to 2019 was due to higher operating results in all of our segments. The increase was partially offset by higher income tax expense and lower net investment income. Our diluted earnings per share, or EPS, was$8.91 for the three months endedJune 30, 2020 , which represented a 104.4% increase from EPS of$4.36 for the three months endedJune 30, 2019 . Our fully-diluted EPS was$14.85 for the six months endedJune 30, 2020 , which represented a 44.5% increase from fully-diluted EPS of$10.28 for the six months endedJune 30, 2019 . The increase in EPS for the three and six months endedJune 30, 2020 compared to 2019 resulted primarily from the increase in net income. Operating cash flow for the six months endedJune 30, 2020 and 2019 was$8,025 and$3,067 , respectively. This increase was primarily attributable to higher net income in 2020, a delay of our estimated federal income and certain payroll tax payments as permitted by the CARES Act andIRS Notice 2020-23, and higher premium receipts as a result of the HIP Fee reinstatement for 2020. -47-
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Membership
The following table presents our medical membership by customer type, funding
arrangement and reportable segment as of
June 30 (In thousands) 2020 2019 Change % Change Medical Membership Customer Type Local Group 15,616 15,670 (54 ) (0.3 )% Individual 711 741 (30 ) (4.0 )% National: National Accounts 7,872 7,693 179 2.3 % BlueCard® 6,171 6,009 162 2.7 % Total National 14,043 13,702 341 2.5 % Medicare: Medicare Advantage 1,366 1,170 196 16.8 % Medicare Supplement 921 877 44 5.0 % Total Medicare 2,287 2,047 240 11.7 % Medicaid 8,180 7,099 1,081 15.2 % Federal Employees Health Benefits 1,616 1,593 23 1.4 %
Total Medical Membership by Customer Type 42,453 40,852 1,601 3.9 % Funding Arrangement Self-Funded
25,888 25,433 455 1.8 % Fully-Insured 16,565 15,419 1,146 7.4 %
Total Medical Membership by Funding Arrangement 42,453 40,852 1,601 3.9 % Reportable Segment Commercial & Specialty Business
30,370 30,113 257 0.9 % Government Business 12,083 10,739 1,344 12.5 % Total Medical Membership by Reportable Segment 42,453 40,852 1,601 3.9 % Other Membership Life and Disability Members 5,110 4,906 204 4.2 % Dental Members 6,096 5,931 165 2.8 % Dental Administration Members 1,318 5,523 (4,205 ) (76.1 )% Vision Members 7,457 7,161 296 4.1 % Medicare Part D Standalone Members 392 287 105 36.6 % -48-
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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 the membership decreases in our fully-insured Local Group business. Local Group membership decreased due to lapses and in-group change exceeding sales. Self-funded medical membership increased primarily as a result of membership increases in our National Accounts business resulting from our acquisition of a third-party administrator and sales and favorable in-group changes exceeding lapses. The increase in self-funded membership was further attributable to higher BlueCard® activity at otherBlue Cross Blue Shield Association , or BCBSA, plans whose members reside in or travel to our licensed areas. 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 inMissouri andNebraska . Medicare membership increased primarily due to higher sales during open enrollment. 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. We have experienced growth in our life and disability and dental memberships primarily due to higher sales in our Local Group business. Dental administration membership decreased due to the lapse of a large dental administration services contract. Vision membership increased due to higher sales in ourMedicare and Local Group businesses. -49-
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