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Increased 1Q15 Costs to Hurt Anthem’s EBITDA Margins

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EBITDA margins

Analysts projected that Anthem’s revenue will be higher in 1Q15 compared to 1Q14. However, the company will experience a drop in EBITDA (earnings before interest, tax, depreciation, and amortization) margins in 1Q15 compared to the margins in 1Q14. The drop is mainly due to health insurer fees and high pharmaceutical drug expenses.

The above graph shows that Anthem’s EBITDA margins in 1Q15 are estimated to be 7.8% lower than the margins in 1Q14. This projection is in sync with the company’s expectation of higher operating expenses in 2015.

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Projected expenses

Anthem (ANTM) expects MLR (medical loss ratio) of about 83.0% plus or minus 30 basis points in 2015, almost consistent with the company’s MLR of 83.1% in 2014. The projection incorporates lower Medicaid gross margins in 2015 after the strong performance in 2014. This conservative estimate is based on the company’s assumption that the new members covered through Medicaid expansion in Tennessee will account for higher medical expenses.

To find out more about the significance of the MLR ratio in the health insurance industry (XLV), please refer to Why the Affordable Care Act hurts the managed care industry.

Based on the forecast of normal utilization levels and higher hepatitis C drug related expenses in 2015, Anthem has projected medical cost trend levels to hover at about 7% plus or minus 50 basis points. The company expects that the SG&A (selling, general, and administrative) expenses will be about 16.1% plus or minus 30 basis points in 2015, resulting mainly from the impact of rising health insurer fees in 2015. Health insurer fees have also led to an increase in operating expenses for peer companies such as Aetna (AET), Cigna (CI), and UnitedHealth Group (UNH).

Investments

Continued investments in Medicaid expansion and other growth initiatives are expected to increase Anthem’s SG&A expenses in 2015. The increased expenses are thus expected to lower Anthem’s EBITDA margins in 2015.

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