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Anthem looks to Cigna acquisition, exchange business, drug pricing litigation

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Anthem Inc. on Wednesday said its net income plummeted 18.7% in the first quarter, as investment losses squeezed its bottom line despite gains in membership.

Indianapolis-based Anthem also said it remains committed to the public health insurance exchanges established under the Affordable Care Act but does not plan any expansion next year, and said it has several options on handling its bitter dispute with Express Scripts Holding Co. over drug pricing.

For the first quarter, the health insurer said its net income dropped to $703.0 million, down from $865.2 million a year earlier, due to investment losses and costs related to its pending acquisition of Cigna Corp.

Still, revenue increased 6.5% to $20.29 billion in the three months that ended March 31, as growth in membership — particularly in the Medicaid segment — boosted results.

Quarterly premium revenue increased 7.8% to $18.99 billion.

Anthem's total membership jumped 2.8% to 39.6 million from the same period the year before.

Anthem posted net realized losses on investments of $125.1 million and “other-than-temporary impairment losses” of $66.9 million. The insurer also reported an operating loss of $47.6 million driven by costs related to its proposed Cigna acquisition.

CEO Joseph Swedish said during an investor conference call that Anthem expects the deal to close in the second half of this year.

“We view this quarter as decent and in line with our expectations,” Ana Gupte, New York-based managing director and senior research analyst at Leerink Partners L.L.C., said Wednesday in a research note.

Exchange business

During the analyst call, Anthem executives said the insurer remains committed to public health insurance exchanges and believes the market can be stabilized.

“We were diligent with respect to pricing our exchange offerings for 2016,” Mr. Swedish said. “We believe we are well-positioned for continued growth in exchange lives as this market stabilizes to a more sustainable level over time.”

Still, changes need to be made to ensure the market becomes sustainable, including updating the risk adjustment model and further tightening restrictions on special enrollment periods, Mr. Swedish said.

Several insurers have said lax special enrollment period enforcement has allowed patients to enroll in coverage when they need it and drop coverage when treatment is complete.

“We are actively engaged with our government partners to help build that long-term sustainable model that we believe will ultimately create an affordable marketplace, and in doing so we believe we can continue to develop a rate structure in the marketplace that's adequate for us and appropriate in terms of affordability for members,” Mr. Swedish said.

Still, Anthem said it does not plan to expand beyond the 14 states where it currently sells exchange coverage.

“We are not targeting on a stand-alone basis any new markets outside of our 14 states,” Mr. Swedish said. “I think our goal is to continue to stabilize the market in those states and start trending toward our targeted 3% to 5% margin” in 2018.

The insurer ended the quarter with 975,000 members in its individual public exchange business, an increase of 184,000 year-over-year.

Dispute with Express Scripts

Speaking to Anthem's legal battle with Express Scripts over drug pricing, Mr. Swedish said the insurer has several options for pharmacy benefit management services, including continuing its contract with St. Louis-based Express Scripts, switching to another PBM or bringing the PBM services in-house.

But “it's not a decision that is imminent,” he said.

Last month, Anthem filed a nearly $15 billion lawsuit against Express Scripts alleging the PBM's pricing exceeds competitive benchmark pricing by more than $3 billion annually.

Last week, Express Scripts countered with a lawsuit of its own claiming that Anthem in “has failed to negotiate in good faith.”