Ladies and gentlemen, thank you for standing by, and welcome to the Anthem Second Quarter Results Conference Call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session; instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the company's management.

Good morning, and welcome to Anthem's second quarter 2019 earnings call. This is Chris Rigg, Vice President of Investor Relations. And with us this morning are Gail Boudreaux, President and CEO; John Gallina, our CFO; Pete Haytaian, President of our Commercial and Specialty Business Division; and Felicia Norwood, President of our Government Business Division. Gail will begin the call by giving an overview of our second quarter financial results, followed by comments on our key business initiatives and enterprise-wide growth priorities. John will then discuss our key financial metrics in greater detail and go over our updated 2019 outlook. We will then be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our Web site, Antheminc.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Anthem. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

Good morning, and thank you for joining us for Anthem's second quarter earnings call. Today, we reported second quarter results that were ahead of expectations. During the quarter, we generated GAAP earnings per share of $4.36, and adjusted earnings per share of $4.64. Our second quarter performance reflects improved execution across the enterprise and the strength of our diversified platform. Based on the strong first-half 2019 results and confidence in the remainder of the year, we have increased our full-year GAAP net income guidance to greater than $18.34 per share, and adjusted earnings per share guidance to greater than $19.30 per share, an increase of $0.10 from our prior guidance. Our total medical membership at the end of the quarter was 40.9 million, an increase of 1.3 million consumers served compared to the second quarter of 2018. Membership growth was broad-based, with continued strong performance in our Government Business and substantial improvement in our risk-based group Commercial Business. Overall risk-based membership represents more than 85% of our total growth. At investor day, we committed to multiyear growth across all business segments, driven in part by our improved pharmacy cost position through IngenioRx. As you know, we accelerated the launch of Ingenio and successfully began migrating members on May 1st. At this time, we've received transition approvals from all 14 commercial states and a majority of our Medicaid states. As a result of our accelerated progress, we now see the 2019 earnings contribution from IngenioRx trending toward the upper end of our $0.70 to $0.90 guidance. As part of our build out of IngenioRx we've recently opened our state of the art 24/7 pharmacy care center in Las Vegas providing both member support and eventually dedicated specialty patient care. The multidisciplinary teams of nurses, pharmacists, and technicians are working together, supported…

Thank you, Gail, and good morning. As evidenced by our earnings release, the strength of our businesses drove balanced growth for the quarter. Today, we reported second quarter GAAP earnings per share of $4.36 and adjusted earnings per share of $4.64 exceeding expectations and positioning us to deliver on our commitments. Second quarter operating revenue was strong and outperformed expectations reaching $25.2 billion an increase of nearly 11% or $2.5 billion over the prior year quarter. On adjusted basis, growth and operating revenue was approximately 13% and ahead of our projected long- term revenue growth of 10% to 12%. The increase is attributable to premium increases to cover overall trend, robust membership growth across both our government and commercial segments and yet another quarter of strong growth in administrative fee revenue driven by increased sales of clinical and value added services across our businesses. Medical membership ended the quarter at approximately 40.9 million members representing growth of 1.3 million members over the prior-year quarter. The growth was driven predominantly by our risk based business which increased by 1.1 million members or growth of nearly 8%. The medical loss ratio was 86.7% for the quarter, an increase of 330 basis points from the second quarter of 2018. The increase was largely driven by the one-year waiver of the health insurance tax in 2019 and a continuation of elevated medical costs in our Medicaid business. The SG&A ratio was unchanged sequentially at 13%, an improvement of 210 basis points over the prior-year quarter, the improvement was driven almost equally by the absence of the health insurer tax and solid growth in operating revenue attributable to membership gains in Medicaid and Medicare. Our results illustrate the strength of our diversified platform as challenges in our Medicaid business were more than offset by our…

Thank you. [Operator Instructions] Your first question comes from the line of Sarah James from Piper Jaffray. Please go ahead.

Thank you. So, cost trends have been a pretty big topic recently, and some of your peers have been talking about thinking about long-term trend in terms of CPI or national health expenditure plus or minus, how do you think about the right framework for long-term cost trend discussions? And then thinking through the levers there, one that's been coming up recently is outcomes-based pricing for gene therapy or medical devices. So is Anthem doing anything on that front, and is it meaningful to your long-term cost trend management?

Thank you, Sarah, and thanks very much for the question. I think it's actually a really important question because this issue of overall challenge of affordability I think poses one of most significant issues [ph] to our members, and we're committed to ultimately driving the lowest cost. One of the most important levers is this ability to move to more value-based care. And as I shared in my opening comments, enhanced personal healthcare is an area that we've been focused and have made a significant commitment to move up to 60% of our spend in value-based care arrangements, thinking about the alignment of consumer spending to care provider alignment, I think that's really the best opportunity for long-term management of the trend issues. Specifically to pharmacy, we recently reported -- you probably saw in our 2018 drug trend report that we have been successful at keeping drug trends relatively flat and focusing on total cost to care. And again, I think our best opportunity to rein in overall escalation in cost is to think about whole person health, which is managing the alignment of incentives at the care provider lever with the incentives around pharmacy, and so that total costs are ultimately managed. And we have seen that in specific areas like inflammatory disease such as Crohn's and ulcerative colitis and rheumatoid arthritis, for example, where members have seen anywhere from an 8% to 12%, if not more, savings per month and average lower inpatient hospitalizations, et cetera. So that overall contributes to our overall quality. So in terms of your broader question, I think it's absolutely the right one that we should be asking. And I think we should be looking for all of our value-based care, both for pharmacy, the integration of social, as well as the integration of behavioral health. And that's one of the reasons we're excited about bringing Beacon into the fold for Anthem, that our best chance to manage sole [ph] trend is going to be aligned with managing those components in value-based arrangements. Thank you very much for the question. Next question, please?

Your next question comes from the line of Matt Borsch from BMO Capital Markets. Please go ahead.

Yes, I just wanted to ask about the group commercial pricing environment, and the context is as investors and us analysts are looking at your results, the mix of metrics here we see somewhat elevated medical cost ratio offset by other items in the results is what in fact we saw at two of your peer companies that have reported so far. And so maybe it's all just Medicaid, but people are looking at that and trying to understand if there's more competitive pressure that we need to be concerned about.

Thanks for the question, Matt. Let me start, and then I'm going to ask Pete to give some additional commentary on sort of the marketplace dynamics. But I think first to your specific question about trend. As you saw, we reiterated our 6% plus or minus 50 basis points trend. So our trend in commercial has been extremely consistent. And we do not feel that there's -- that issue in commercial, it's lived up to expectations. In terms of the overall marketplace, it's always been a competitive marketplace, the pricing has remained very rational in the markets, and we have not see that kind of scenario over the course of this year or even last year. But I'm going to ask Pete maybe to give a little bit more dynamic input about the market specifically.

Yes, thank you, Gail. And to be specific about our MLR and operating gain, as we talked about in the prepared comments, the one-time issue associated with risk adjustment that we experienced in 2018 versus this quarter, and 2019 was really the major difference is it relates to medical cost trend, as Gail said, it remains pretty steady. We feel pretty good about where we are relative to that 6%. And then more importantly, as Gail noted, the marketplace remains very competitive but rational. We are not seeing anything unusual occurring in the marketplace. We feel very good about our position, as we've talked about on prior calls; we're very focused on being disciplined but also growing. We're continuing to see that growth. In our large group fully insured business we've had nine out of 11 months of sequential net growth, and we continue to see improvements in that regard. So overall a competitive market but rational, nothing irregular at this point.

So I guess in summary, very consistent with our expectations, and nothing really has changed. Next question, please?

Your next question comes from the line of Ricky Goldwasser from Morgan Stanley. Please go ahead.

Yes, hi, good morning, and thank you for your comments on the BR, so, just trying to dig a little bit deeper into that, could you just help us quantify some of these moving parts? You point to the Medicaid book of business. Can you give us some more sense on what specific states you're seeing the higher cost, and how do you think is that going to progress in the second-half of the year given that you've upped your guidance there?

Yes, thank you, Ricky. This is John. And unfortunately we really don't talk about state-by-state specific situations in Medicaid. We're in 23 states right now, going on 24 by the end of the year, and really review and discuss our Medicaid as a portfolio of assets and a portfolio of businesses. With that being said, yes there are a few things that maybe I'll point to specifically that can help you with your modeling. We continue to work with our state partners on a regular basis to get the rates that are appropriate for the risk and the acuity of the populations that we're serving. Many states have gone through a fairly significant re-verification effort ensuring that only those Americans who are eligible to receive Medicaid benefits are actually receiving Medicaid benefits. When the rates were first set they were set on a slightly different population and a mix of members than what we are serving today. And so as I said, we continue to work with the states to ensure that we're getting appropriate adjustments associated with the mix of membership as it works through. And there are several states that we actually have received increases in our rates in the second half of the year and we expect that that will help improve the MLR and improve the profitability of the Medicaid business in the second half of the year. So thank you for the question.

Thank you. Next question, please?

Your next question comes from the line of Steven Valiquette from Barclays. Please go ahead.

Thanks. Just on a similar topic on the last one, I know you don't want to talk about individual states but again we're thinking about Medicaid. You mentioned popping up in a few states as far as the higher costs just curious to be able to comment on whether you're seeing the costs occurring maybe in some of your newer Medicaid markets where you still may be assessing where the cost trends could normalize within the membership and relative to your provider network or are you seeing it maybe in more some of your older more mature Medicaid markets, just curious if there is any clear trend when thinking about it that way? Thanks.

Thank you, Steve for the question and I do want to have a clarification. We have not stated that we have seen an increase in medical cost. We have said we've seen an increase in benefit expense ratio and that increase in benefit expense ratio is because the premium reimbursements that we're getting have not fully compensated us for the risk that we're taking on an overall portfolio. Back to the point that I made on Ricky's question that if states are going to re-verification there is an incidence of the mix of the membership that we're serving is different than what the pricing and the rates would have been based on. So yes, there's clearly there's a mismatch between the risk of the members that we are serving today and the rates that we're receiving today. And Felicia Norwood and her team are visiting with our state partners on a regular basis if not a daily basis in some cases to ensure that the rates are appropriately reflected. And that's one of the unfortunate parts about the Medicaid businesses is that the amount of the premium that you receive and the risks that you are incurring do not always exactly align on a quarter-over-quarter basis. We've seen that typically over the course of a year that they'll be normalized, that rates will be adjusted appropriately. But when you're looking at any one specific quarter or any quarter-over-quarter comparison, it's always apt to be skewed a bit because of the mismatch that I discussed. So thank you for the question.

Thank you. Next question, please?

Your next question comes from the line of Justin Lake from Wolfe Research. Please go ahead.

Thanks I'll just on the MLR train here for a second. My question is more is that your MLR was 90 basis points above consensus. I was hoping you could tell us how the MLR looked versus your internal expectations and maybe split out the driver of first the negative TYD in the quarter and you raised guidance by 30 bps, was that to reflect what you saw in the quarter or your point like is that the back half of the year should be higher even despite these better Medicaid rates? Thanks.

Thanks Justin and I would let John continue with the answers. Thanks John.

Yes, thank you. Thank you, Justin for the question. In terms of the MLR and how it compared our internal expectations. The MLR was slightly higher than our internal expectations here for the first half of the year in the second quarter which is why we are raising our guidance, which is why we have spiked it out as is a reason for the fact that our MLR is above the analyst consensus in total. So I think that all really does align in terms of the PPIA that you stated, the PPIA is one metric. It's obviously a metric that a lot of folks really do like to focus on but it is only one metric. I would say our reserves are very consistent and conservative the way that we've approached it. We continue to have a margin in the mid to high single digit range for average deviation. But we are investing quite a bit of money in informatics and data, in systems and it is actually providing us better information and better insights into our inventory data. And so not only is that being utilized to help serve the members, it is also being utilized to help set reserves and I think we should see maybe a bit less volatility in reserves in the future associated with the fact that we have better information and we've even discussed in the past, some of the claims processing speeds have improved as well, 97% of our claims are submitted via EDI and 88% of our auto adjudicated, so the speed and accuracy is actually very, very good. And so then as you look at that one metric associated with PPIA, you have to look at other metrics in conjunction with that and the fact that our days and claims payable has increased a bit. Our cash flow as a percent of net income was 1.3 times for the quarter, 1.1 for the entire year-to-date. And I think we're very comfortable that the reserves are stated appropriately and quite nice, I go through all this just to let you know that it's really not impacting the MLR guidance per se, the MLR guidance is based on the Medicaid MLR being higher than expected which really has much to do with the revenue that we're getting is not exactly matching the risks that we're taking right here in the second quarter. Thank you.

Thank you. Next question, please?

Your next question comes from the line of A.J. Rice from Credit Suisse. Please go ahead.

Thanks. Hi everybody. I just if I could slip in a clarification, Pete had mentioned the risk adjuster headwind this year versus last. Is that any way to quantify the year-to-year impact of that on the MLR or the dollar change, and then my bigger question was around your comments on Ingenio. You said that you're going to be toward the high end of your expectation. Is there any way to talk about where you're trending ahead of what you thought and obviously nice to win with BCBS Idaho. Any background on that opportunity, does that give you any learnings for next year's selling season as you think about moving forward?

Okay. Quite a few questions there A.J. we'll try to take them sequentially. Let me have John address the risk adjuster question broadly and then I will take the others.

Great. Thank you, Gail. So yes, so A.J., on the risk adjuster and I just want to make sure that this is being characterized appropriately and we're asking and answering the proper question. So risk adjuster in 2018 in the second quarter we had a very nice positive true up and that was predicated on our 2017 individual ACA membership. And as you recall that was before we had made the decision to reduce our footprint due to the instability and uncertainty of that marketplace. And so we had approximately 1.6 million individual ACA members in 12/31/17 and then the true up we received in June was predicated on that block of business. And then fast forward 12 months and we received a true up in June of 2019 associated with our 2018 membership. That true up was positive. It was relatively small and it was extremely consistent with our expectations. And so the headwind is not a negative true up, the headwind is that the value of the true up in 2018 was significant and the value of the positive true up in 2019 was relatively small, but as I said in accordance with our guidance and our expectations.

Right and again that's the comp quarter-over-quarter, I think is what John's trying to really point out there. And overall as I said in the opening comments, we feel very, very strongly about the performance of our commercial business which perform extremely well in the quarter as well as year-to-date. In terms of IngenioRx, a couple of things one first we're extremely pleased with the way, the transition has gone as I shared again in my opening comments. In terms of us raising our guidance, when we originally gave our guidance I think what is important to recognize this was a very accelerated transition. We felt confident about it but we also realized that we needed to get state approvals both at the commercial and Medicaid level. So we didn't have exact clarity on when those would come in. What we see now is that we converted several million members in the quarter. And then again beginning in July several million more those have gone well. We have received most of the regulatory approvals on the Medicaid side and all of them on the commercial side. And so now given our growing confidence in this conversion, we feel much better about the high end of the range and that's really the driver for what we're seeing in terms of raising the guidance, and again very strong execution by our pharmacy team. So overall that's really the driver and we feel very confident about kind of where IngenioRx is delivering value particularly the significantly improved G&A costs. In terms of Idaho, we're thrilled with the sale to Blue Cross Blue Cross of Idaho and again our focus as we've shared has been on transitioning our current clients, so we are in the sales cycle. We're pleased that Blue Cross of Idaho was one of our first customers to come on board and I said as I shared with you again I think it's strong sign of the value that we're bringing to the marketplace and also the improved service model. We do have a very strong pipeline going into 2021 as you realize many of these sales are very long tail two, three years based on the contracts in the PBM and the large account business, but we think a real big opportunity for us is the opportunity to bring back pharmacy into our Integrated Medical clients. That's an area that over the last several years that we have lost quite a bit of that integrated business and our value proposition is very strong, so we're optimistic about that but we see that going really more into the latter half of 2020 and into 2021. Thank you very much for the question. Next question please.

Your next question comes from the line of Lance Wilkes from Bernstein. Please go ahead.

Yes, just a quick clarification on Medicaid and just trying to understanding this re-verification issue predominantly. Are you taking any actions to try to further impact medical costs beyond what you ordinarily would be doing just in recognition of that sort of issue? And then my broader question is really great, great win with Blue Cross of Idaho as you're looking at the different services and partnerships, you have with the Blues. What are the areas that we should be thinking of is like the more immediate meaning 2021 sort of opportunities as Medicaid, is it AIM or what would it be PBM?

Great. Thank you very much for the question Lance, I'm going to have Felicia address what's happening in our Medicaid business, I think she can talk broadly about the initiatives.

Thank you, Lance, and good morning. As John said earlier, the Medicaid challenges that we're facing are really isolated to a handful of states and given the breadth and size of our portfolio and the ongoing work that we do on a daily basis with our states we felt very confident about being able to manage through that. In terms of our medical management capabilities, we really have industry leading capabilities. Our operating platform is unmatched. Our core competencies are certainly widely recognized by our state partners as really recognized by the industry leading win rate that we've had. We've always had a focus on whole person health particularly in our Medicaid business and the ability to be able to manage not just, it's you know the medical conditions and pharmacy conditions but also those social barriers have been a driver for us. So we feel good about the capabilities we have on the Medicaid side in terms of managing our members effectively. And I think as we work through these issues in the handful of states, we'll continue to see improvements both respect to our overall Medicaid performance.

Great, well, thanks Felicia. In terms of the second part of your question Lance, I would say almost to all of those we see opportunities across a very wide range of partnerships with different Blue plans but also outside of Blue plans care provider partners are also areas that we have done a number of different things. So, on the specifics, so clearly our Medicaid partnerships we're very pleased with that, we'll be bringing North Carolina live in the fourth quarter hopefully as that goes by. We've got additional partnerships there with our care more business as well to offer care delivery services more broadly to that population. As I think about Ingenio, we clearly see opportunities for Ingenio to partner with other Blue plans across either their entire population even subsets of that population. Beacon does quite a bit of work with other Blue Cross and Blue Shield plans and we see that is an opportunity to further expand and Aspire has also strong relationships. So as you can see we see a breadth of potential opportunities both inside of the Blue Cross system but also with care provider partners. And today even just to give you one quick example in the Medicaid space, we have eight partnerships fiber with Sister Blue Cross and Blue Shield plans and three are with care provider relationships. On Medicare because of our strength in the dual eligible population, we're going to be expanding our partnership in Louisiana to dual eligibles beginning in January as well. So again a pretty broad based operation for us. And so we're not just focused on growing one specific business or line but really kind of meeting the needs of each of those plans and where they have potential gaps and potentially how we can put together very unique situations. The last thing I would add is as you saw probably recently some of the announcements around our digital capabilities. We also believe that those will be very strong offerings for us to work with other Blue plans around consumer engagement and care provider integration and those things we think will resonate very strongly in the market and actually support the other businesses that I shared with you at the beginning. So thanks. Thank you very much for the question. And next question please.

Your next question comes from the line of Kevin Fischbeck from Bank of America Merrill Lynch. Please go ahead.

Great, maybe one clarification before the question, just to make sure the Ingenio number that you're talking about is more about kind of pulling for the aggregate savings, if you're not changing your kind of two-year aggregate savings number, just want to make sure you have that right, but my real question is really about MLR unfortunately. So just wanted to see you are saying that the issues on the Medicaid side, would love to hear some comments about on the commercial business and on the Medicare business, how the MLR is trending there. I just want to make sure it's line because you are showing pretty good growth in both of those businesses. Thanks.

Let me answer your first question. Yes, you are right. Your assessment on Ingenio is in line. And then John I will ask you to respond to the MLR question.

Yes, thank you Kevin for the question. And as I think Pete had referenced earlier, the MLR in commercial is actually very much aligned with what our expectations have been. As we review and evaluate the cost trend, we have reaffirmed today the 6% plus or minus 50 basis points cost trend in commercial that is something that has been consistent for the entire year. And then we continued to reaffirm that guidance. Medicare has been certainly consistent with our expectations as well. We are really quite pleased with our growth in Medicare, having 16% growth rate already through six months and expect to continue to improve. The group retiree business within Medicare which you didn't ask about specifically but just for clarity purposes that business typically dilutive when it first sold. And it takes awhile to get the care management programs to get risk scores, get the information accumulated so that we can get appropriate reimbursement based on risk adjustors and various other aspects like that. But, it's actually performing in line with our expectations. We did expect it to be dilutive in the first half of the year and it was. But it's very much in line with the expectations. So I would say we feel very comfortable with the performance, and the growth both in our commercial business as well as our Medicare business. And that the MLR pressures that we are seeing as a consolidated company really relate to the lack of appropriate premium and reimbursement rates on the Medicaid businesses.

Thank you. Next question, please?

Your next question comes from the line of Ralph Giacobbe from Citi. Please go ahead.

Thanks, morning. You have mentioned a couple times now that Medicaid rates aren't sufficient I guess in a handful of states. I am assuming you have some visibility on the kind of the year ahead. We obviously recently got the Iowa rate. So are you comfortable looking ahead that you'll get the better rates? Or, are we at a point of potentially exiting states? Thanks.

Hi. No, thank you for the question, Ralph, and clearly that is a very appropriate question. Something that we need to be looking at and evaluating on a state by state basis, however, we are very comfortable with the future state aspect of Medicaid. Medicaid does have the $80 billion pipeline that we have been talking about for a while over the next five years, and we do believe that we can garner our fair share of that. The acuity of that pipeline is skewed more to the higher premium type businesses whether it's the aged, blind, disabled, long term support services or others. And we will be very disciplined in terms of how we approach that, how we price for that to ensure that we are being appropriately reimbursed. But no, we are not at the point now that we are talking about exiting states. We want to be a partner with the state. We believe the states like us. As a partner, we have provided a significant amount of value and savings to these states over time. And it all boils down just getting the reimbursement correct. So we feel very good about the both the short term and the long term trajectory of the Medicaid business.

Thank you. Next question, please?

Your next question comes from the line of Steve Tanal from Goldman Sachs. Please go ahead.

Good morning, guys. Unfortunately, I also wanted to just ask about MLR and then I don't fully just get this one thing sort of like the way the claims payable table which suggests there is about 40 million of unfavorable prior year development in the quarter. And it was favorable about 160 last year. So, sort of a 200 million swing there in isolation would have pressured MBR by about 85 bps year on year, but then in the release you sort of note that claims reserves establish that yearend and developed moderately better. So, first just trying to understanding what was actually built into guidance on that point and also where the negative development kind of emanated from by business. And finally on this whole thing, just hoping you might comment on how MLR trended year-on-year and commercial and [technical difficulty] side of Medicaid.

Sure, Steve. Thank you very much. The PPA metric that you stated was consistent with the how I answered Justin Lake's question a few minutes ago associated with that are reverses are very consistent and that we do have explicit conservatives inbuilt into those. The better information we have, the better insights has certainly provided us clarity in terms of our loss reserves. And it's just one metric. Days and claims payable has increased, cash flows has been very positive 1.3 times net income. And so, we feel very good about the situation. One other thing just to really clarify when you are looking at the prior year number, that's based on the 12/31/17 run off. And the 12/31/17 run off had 1.6 million individual ACA members in it. And we had announced a few months earlier that we are going to exit 65% of the footprint associated with the individual ACA. And so, we are a very conservative in the fourth quarter of 2017 associated with our reserve picks on the ACA -- individual ACA business, and that turned out to be redundant which you are seeing in the go-forward footnote from a year ago. So all in, we actually feel very comfortable with the business. There is no surprises here. There is no new news. Medicaid has been performing under our expectations. Commercial and Medicare have both been performing consistent with our expectations. And we actually feel very good about the revenue adjustments and the revenue enhancements that we are expecting in Medicaid in the second half of the year. And then, we will continue on with the strong performance in the commercial and Medicare.

The only thing I would like to add to John's comment is Medicaid is performing within our range although at the low end of the range so that is little bit more clarity on that. So overall we still believe that the Medicaid is very good business, but again you see this in the Medicaid business where trying to align the mix of the business against the payments that you receive and that's why we often see outer period payments in Medicaid. Next question, please?

Your next question comes from the line of Gary Taylor from JPMorgan. Please go ahead.

Hi, just one clarification for Gail and a question for John. Gail, just wondering on Ingenios as we think about it, you mentioned the strong 2021 pipeline and a big Priority is moving Anthem's own book to Ingenio by January 2020. So I guess you really hadn't thought much about the opportunities for large external client wins for 2020 such as Idaho. So this is sort an anomaly or is there really more opportunity there than perhaps we have considered?

Thanks for the question, Gary. First, we are really pleased with the win. So I don't know that I would call it an anomaly. We are out in the marketplace. This is more just about the timing of contract renewals. And I think our -- in fact we have been -- we have not being aggressively selling, just given the amounts of conversion that we wanted to make sure that went really well for our clients. But we are clearly out there talking to clients and sharing our value proposition. So I wouldn't call it an anomaly, but I would also say that we really do believe that it will be more in '21 and beyond just because of the timing. And it is hard for many clients to move off of the cycle that they currently have. And that would be more in line with expectations, but we would like to see certainly the integration of our medical and pharmacy story is really strong. And that we think that there is opportunities to do more in 20. Thank you. And the second part of the question again, please?

When you cite few of the different factors impacting the MLR year on year including Medicaid and RRR et cetera, one thing you don't talk about is the possibility of pretty significant ramp and the ESI contract cost that Cigna has talked about in the closing years here. So is a reason that's not pressuring MLR year-over-year, just that that was well known by you in advance and would have been reflected in pricing?

Yes, thank you, Gary. That's an excellent question. And as we have stated, we believe that we are being overcharged by an excess of $3 billion by Express Scripts based on our contractual provisions. But that was known and it was baked into our numbers. The trend that we are experienced pharmacy, while it's higher than we would like, it's consistent with what we planned for at the beginning of the year. So, thank you.

Thank you. Next question, please?

Your next question comes from the line of Peter Costa from Wells Fargo. Please go ahead.

Back to the Blue Cross of Idaho question, congratulations on that, Blue Cross of Idaho I believe used CVS as their PBM previously and uses CVS for Ingenio as the backend. How much easier did that make it to win that client because of the CVS? Because most of the other Blue Cross Blue Shield plans use either Express or Prime. How much harder will it be for you to win business away form Express and Prime rather than from CBS customer?

Yes. So thanks for the question. I think overall, the opportunity win is really because of the strong value proposition that we bring to the marketplace. So, I really focus on the Ingenio we built a brand new service center. I think we have got the state-of-the-art capabilities that are far superior to many in this space right now. And honestly, we have the experience working as a Blue plan ourselves and understand how to serve that marketplace very very well. And this gives us an opportunity. It's part of our whole person health to integrate those type of concepts in terms of our analytics, our digital platform, the integrated teams that we put in our Las Vegas center. So we are starting really with kind of a blank sheet of paper which makes this the next generation PBM. And I guess I was focused more on that because I think that's the value proposition that we bring to the marketplace versus targeting any individual competitor and trying to beat them. I mean we are trying to create a brand new value proposition. Thank you very much. Next question, please?

Your next question comes from the line of Charles Rhyee from Cowen. Please go ahead.

Yeah, thanks for taking the question. I had the question regarding the senate finance committee drug pricing bill that was introduced yesterday, and then wanted information particularly in -- first, Medicaid eliminating spread pricing for PBM. And I believe the senate health committee is also looking to eliminate that perhaps in the commercial market. Can you talk about sort of the privilege at this point of spread pricing and PBM contracting maybe in general or particularly with Ingenio? And our estimate -- we are estimating maybe is less than 2%. But can you talk about sort of how you see that impacting your business here? And then obviously, there was a redesign in the Part D program or proposed redesign the Part D program should be more cost put in catastrophic to the plan. How do you see that maybe impacting how premiums are set or any impact to the part D plan sponsors? Thanks.

Thanks, Charles. Quite a few questions there, and I think first and foremost where we are all aligned is on the affordability of pharmacy and that we need to ensure that we have strong programs in place quite frankly on total cost, total net cost meaning total cost of premium as well as what consumers pay ultimately. In terms of -- you mentioned a number of things that are happening right now. And there are a number of things going on in the house and the senate around pricing whether it's spread pricing or some of the other issues that you brought up on Part D. I think first and foremost we are in the midst of providing comments on that and actively engaged in that. And I think given that these have been recently released and a lot of it depends on the details. I think it's immature for us to comment publically on where we think these are going to end up. Again, we are committed to ensuring that we get sort of the best lowest net cost. And we clearly align sort of the states -- and if you asked about Medicaid where our states are, we clearly align with the rules of our states and same thing with the federal government on Medicare. So, overall, I think there is going to be a lot more discussion, debate, and input where you need to get to a lot more other details on specifically how these programs are going to work. But at this stage, I think the ultimate judge needs to be the lowest net cost both from cost to consumers but also premium cost ultimately, so all parties involved. So, I can't really provide much more guidance on that because at this stage I think that there is still lot more details around these proposals and how they would work. Next question, please?

Your next question comes from the line of Dave Windley from Jefferies. Please go ahead.

Hi, good morning. It's Dave Styblo in for Dave Windley. Just had a question about the Medicaid, I think management has done a great job of explaining how it's isolated to the handful states. Curious about the risk that this could bleed into other states, that there might be a second wave that could come at some point and how debate discussions are evolving just not beyond the shortlist that you guys have talked about. And then as a follow-up would management care to comment about the EPS cadence in the back half of the year since there are still many moving parts with Ingenio coming on and some of the earlier wins that were dilutive in the first half becoming more breakeven or positive in the second half.

I think John will answer the second part of your question and then I will ask Felicia to comment a little bit about just sort of the environment in Medicaid. But I do commend everyone for getting multiple questions and quite a few, so there is quite a few, then we'll try to adjust all of them, John please.

There is a lot of multi part one questions, but thank you for the question and the cadence of our EPS seasonality, because you know, our seasonality certainly has changed, and it's changed over the years. A few years ago, it changed when the elimination of the reinsurance program occurred throughout the ACA. It changed again when we exited the ACA, and now it's changing again with the launch of Ingenio, and it will change next year due to a full-year impact of Ingenio. So, thank you for clarifying or allowing me to clarify that the earnings seasonality has and will continue to change on a quarter-over-quarter basis. in 2019, there are a couple of other things very specifically that are driving our year-over-year and quarter-over-quarter seasonality. I talked about the commercial risk adjustment for the ACA was fairly significant in the second quarter of 2018, and it was a positive adjustment in the second quarter 2019, but relatively small. And that clearly is impacting our year-over-year seasonality. Our mix of business continues to change, and I'm not sure that everyone is truly reflected just how much our mix of business has changed over the past several years. You go back 10 years ago, we were a commercial company. We had over 70% of our revenues was generated from our commercial business area, and look at the second quarter results today, over 60% of our revenue was from our Government Business Division. And the Government Business Division has a bit flatter seasonality typically than Commercial does. And so, clearly that's continually changing. And I have talked about some of the auto period adjustments on Medicaid, and the fact that they don't always align. As we look at the second-half of 2019, we do see some revenue enhancements in Medicaid, given some of the recent rate actions and some of the other common conversations we've had with our state partners. But also thinks like -- when we went live with our partnership with Blue Cross and Blue Shield of Minnesota from Medicaid, in the fourth quarter of last year, we encouraged significant administrative expense to be prepared to have a very clean and flawless one-one '19 transition to that membership. And that trend went relatively well, and now we expect the second-half of '19 for it to be accretive, working its way towards our target margin range for a new line of business, or a new state. And so, when you're looking at the second-half of 2019, you have the cost of implementation, and you look at the second-half of '18, the cost of implementation in the second-half of 2019 you have the accretion. And the same thing is going on with the group retiree business. My reference is that was diluted at the beginning, and it is dilutive but it's improving throughout the year. So, a lot of moving parts, but we are very comfortable with the overall aspect of our numbers.

Great. May be Felicia give a little commentary about the state?

Sure. And thanks for the question, Dave. As we said, that was -- there were elevated cost pressures in a handful of states, but the discipline around working with states for perspective rates happens in all of our states. So, our teams are engaged in almost a daily basis, and working with our states around understanding what's happening with the emerging experience of our Medicaid membership, and the mix issues that we discussed before. So, the other thing you should understand too is all the state's rating periods are different. So they are not on a calendar year. They happen at different times of the year, and in addition to that there are also opportunities from mid-year rate adjustments. So, the rate process in states is very complex, dynamic, and very iterative in terms of the work that we have to do on a daily basis. So, while the pressure is certainly isolated in a handful of states, the discipline around the work that we do with our states on a day-to-day basis happens consistently across all 22 or so of our markets.

Thank you. Next question, please?

Your next question comes from the line of Josh Raskin from Nephron Research. Please go ahead.

Great, thanks. I appreciate you guys fit me in. I'll be brief I guess. Just on Idaho, if you could just walk us through the process of that, was there a formal RFP, and if so, when did that happen, and maybe just let us know what resonated -- what were the big takeaways that they weren't getting from their previous administrator that they're looking forward to you guys?

Yes. Well, thanks, Josh. Obviously we don't get into detail about specific customer RFP situations, and that kind of detail. It's confidential and it's obviously competitive in nature, but I guess what I would say is, our new platform, our transparent approach, focus that we put on digital integration and consumer services I think are resonated, and our ability to really understand, quite frankly, how that business is managed and try to help them improve their overall affordability and cost would be the key winners, and we have a very compelling value proposition. Overall we believe we have best-in-class rates in contracting and that combined with really solid integration I think are really kind of -- were part of the reasons for the win. So, thanks for the question. Next question, please?

Your next question comes from the line of Scott Fidel from Stephens. Please go ahead.

Thanks for fitting me in. Actually just wanted to shift back over to group MA and was hoping maybe to get some numbers just around the membership pipeline opportunity for 2020, maybe just first if you could dive in terms of the number of lives of the contracts that you have already secured that you mentioned? And then overall how large the membership opportunity is on the group MA pipelines of 2020? Thanks.

Great. I will let Pete comment on that.

Yes, sure, Scott, thanks for the question. Yes, we feel good about the group MA business as you know, last year we started off at around 20,000 members, we have grown that into the year at 150,000 approaching around 160,000 members. And as we have talked about, we are going to end the year this year approaching 200,000. We still feel good about that. A lot of our opportunities we talked about before comes from our conversion opportunities, which means that we have a captive pipeline of self-funded clients that see the value proposition here, and we continue to see that escalating, and our value proposition resonating, and we feel good about the future year growth of the Group Retiree business.

Thank you. Next question, please?

Your next question comes from the line of Michael Newshel from Evercore. Please go ahead.

Thanks. Can you comment on some of the recent policy proposals related to negotiated commercial rates? So we have the Trump executiv0e order on transparency and also surprised billing bills that would payout in network at the local median rate, do you think either of these could have any effect on relative cost advantage, does it help competitors with higher unit cost at all?

So, couple of different things going on, and let me first talk about price billing. We very much support that consumers do not have surprises, and part of our contracting strategy is to bring in all of those care providers into our networks. So, when an individual consumer goes to somebody in network, they should not have to deal with something that's outside of the network, and that's something that we have long advocated with our care providers, and so we are obviously very supportive of that. We want to ensure that there are the appropriate protections for consumers and that they balance the incentive to providers, but we don't replace that obviously with costly bureaucratic processes. So that would be one thing on surprised billing, but overall we are very supportive of helping consumers have the fine cost and really understand that. In terms of the second one around transparency of cost, again, we have been a long supporter of enabling consumers to really understand what the costs are. We think it's less valuable to have individual unit costs by procedure, and that's one of reasons our engaged platform allows people to really truly understand how much something costs against their benefit plan and what their true out-of-pocket costs will become. A great example of -- you know, think about a member who needs an MRI, the average cost maybe $1,200, which is great to know if you look at the individual components. But actually it may only cost $50 out-of-pocket, because they have already met their deductible, and that's way more helpful, and then they can also compare different facilities and look at not just cost, but also quality. As I think of that though the price transparency issue is -- the other issue in terms of competitiveness for us is our move to value-based care I think really changes sort of that one's focus on just unit costs. So I believe our movements of value-based care will drive cost down to a much more reasonable level, and that's where our strategy is. And so, I don't see just the unit cost issue being the dominant issue, and I think that we have to think about transparency around total cost here again for the entire procedure and how it affects consumers directly and that they can make decisions based on what they're paying out-of-pocket. Thank you very much for the question. Next question, please?

Your next question comes from the line of Frank Morgan from RBC Capital. Please go ahead.

Good morning. A lot of my questions are answered, but maybe go back to Beacon acquisition, just the timing there on that closing of that acquisition, the possibility of additional deals, cross-sell opportunities, and would that be affected by this transition of Express Scripts, or would that be totally unrelated? Thanks.

In terms of Beacon, what we've shared is that we are planning on working towards the fourth quarter close, and we are working through obviously all the approvals that are required there. In terms of your second question, it really doesn't have any relationship to that. Completely separate issue; what it means for us in the future, we are excited about Beacon, because again, it gives us part of our whole person care strategy, our movement towards -- you know, very much focused on value-based care, which I just spoke about, areas that we are focused on social issues and now the behavioral issues, those three combined I think allow us to much more effectively manage total cost of care. So, we are excited about Beacon. It gives us the scale solution in growing area, and a very important area for us. It focuses on the special aid populations in Medicaid. So we've seen them in many of our markets, and feel that this would be a very, very strong offering for us. So, again thank you for the question. And next question, please?

Your final question today comes from the line of Steve Willoughby from Cleveland Research. Please go ahead.

Hi, good morning. This is actually Rob Cottrell on for Steve. Just wanted to stay on individual Medicare for 2020, now that bids have been submitted, just wondering if you can provide any commentary on outlook as well as what if any change you expect in the Medicare business now that you have Ingenio cost position? Thanks.

Great, I will ask Felicia Norwood to answer, please.

Thank you very much Rob for that question. As we think about 2020, we take a real balanced approach in structuring our offerings [ph]. We evaluate both our benefit designs as well as the competitive landscape. We certainly appreciate the increased flexibility that's come from our federal partner around the 2019 benefit offerings when we made some changes with respect to social determinants of health benefits, and frankly I think we were leaders out there in trends of that space. We will be making some modest improvements with respect to those offerings, because we believe that they certainly can be differentiators with respect to our products in the various markets. Going forward, the story hasn't changed very much. We've been delivering very strong growth in the individual MA space, and certainly our approach is to make sure that we have competitive benefit designs out there, while also making sure that we are maintaining our pricing discipline with respect to this business as we go forward. So, thank you.

Thank you, Felicia. And thank you to everyone for allowing our call to go little longer than normal. We felt it was important to respond to everyone's question. We appreciate your questions for our team. Our performance in the first-half of this year gives us confidence in our ability to capitalize on future growth prospects and deliver better outcomes and better value on behalf of our members and shareholders. Our success is made possible by our 60,000 associates who are committed to carrying out the Anthem's mission, vision, and values each and every day. Again, thank you for your interest, and I look forward to speaking with you in the future.

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