Anthem on Wednesday said its profit for the third quarter of 2016 fell nearly 6% as higher medical claims and expenses related to its pending tie-up with Cigna squeezed earnings.
Anthem CEO Joseph Swedish also said results in the insurer's individual ACA business “were disappointing” due to low membership growth and higher than expected medical costs from members with chronic diseases. If the marketplace does not soon show progress toward sustainability, Anthem will likely re-evaluate its 2018 participation, he said.
“2017 is a critical year as we continue to assess the long-term viability of our exchange footprint,” Swedish said during a conference call with investors. “If we do not see clear evidence of an improving environment and a path toward sustainability in the marketplace, we will likely modify our strategy in 2018.”
Indianapolis-based Anthem reported lowered profit just a few weeks before it will defend its $54 billion combination with rival insurer Cigna Corp., which was challenged by the U.S. Justice Department earlier this year. Opening statements are set for Nov. 21, and the trial will wrap up by Dec. 2.
The lead-up to the trial, to take place in U.S. District Court for the District of Columbia, has been increasingly contentious. Anthem on Wednesday reiterated its commitment to the merger. Cigna, on the other hand, has seemed less enthusiastic in recent months. In September, the Justice Department revealed that the two insurers accused each other of breaching the merger agreement.
Swedish on Wednesday said Anthem “is fully committed to challenging the DOJ's decision in court,” adding that he continues to believe the department's move to block the merger is based on a flawed analysis of the healthcare industry. Anthem expects to hear a decision on the merger by the end of January.
Anthem incurred $71.6 million in costs related to the merger in the three months ended Sept. 30, and $246.2 million for the first nine months of the year.
Higher spending on Medicaid claims also weighed on profit, which fell 5.7% to $617.8 million in the quarter from $654.8 million in the same quarter last year.
Medical costs in the Medicaid business, which grew membership by 554,000, year over year, were particularly high in Iowa, where Anthem implemented a new contract in April.
Anthem said the growth in its Medicaid costs caused operating revenue in the government business line to fall 23.6% to $478.9 million in the third quarter of 2016 compared with the same period a year ago.
Anthem's medical loss ratio, indicating how much of the collected health insurance premiums are spent on medical expenses and other items that improve quality of care, increased to 85.5% in the third quarter, up from 83.6% in the same quarter a year ago, largely driven by Medicaid costs and expansion plan costs. The ratio was in line with analysts' expectations.
Exchange enrollment declined by 34,000 members during the quarter to 889,000 lives, Anthem said. Though results in the individual ACA-compliant business were disappointing, Anthem said it expects to “return to slight profitability” in 2017.
If the marketplace doesn't show improvement, Anthem will modify its participation on a state and regional basis.
Despite lower overall profit, revenue grew 7.5% to $21.4 billion in the quarter compared with the same period a year ago.
Anthem's membership totaled 39.9 million members on Sept. 30, up 1.2 million members from the same quarter a year ago. Most membership gains came from national employer accounts and Medicaid. Medicaid membership grew the most, up 9.4% year over year to 6.4 million members at the end of the quarter.
