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Anthem’s Medical Care Ratio Jumped in 4Q15

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Anthem’s medical care ratio in 4Q15

In 2015, Anthem’s (ANTM) medical cost trend was at the lower end of the range of 6.5%–7.5% that the company had previously projected. The company has projected a slightly higher medical cost trend for fiscal 2016, however, in the range of 7%–7.5%, especially for its local group business. (To learn more about the impact of medical cost trends on health insurance companies, please refer to Market Realist’s “Medical Cost Trend Means Rising Premiums for Health Insurance.”)

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Increasing exposure to the low-margin government business

In 4Q15, Anthem’s medical care ratio, a ratio of medical costs against premium revenues, rose by 2.5% on YoY (year-over-year) basis. The company’s medical care ratio for fiscal 2015 also reached 83.3%, which represents a YoY rise of 0.2%.

This rise in medical costs is mainly attributed to Anthem’s increasing exposure to the low-margin government business and to higher medical expenses in its public exchange business. In 4Q15, Anthem’s medical care ratio exceeded that of its peer UnitedHealth Group (UNH), which was 82.7%.

Anthem’s operating expenses in 4Q15 and fiscal 2015

Anthem’s SG&A (selling, general, and administrative) expenses ratio, however, benefitted from the changing business mix and declined by 0.1% YoY to reach 16% in 2015.

Additionally, the increased focus on controlling administrative costs has also helped Anthem reduce its SG&A ratio. Anthem has projected its SG&A ratio to further decline to 15.4% by mid-2016.

Outlook for Anthem’s medical care ratio in 2016

Anthem expects its medical care ratio to increase by 0.3% and reach 83.6% in 2016. Similar to peers like Cigna Corporation (CI) and Aetna (AET), Anthem expects its Medicaid program to be a key driver of the company’s long-term growth. However, we should note that the Medicaid program generally witnesses higher medical costs than other health insurance programs and, hence, is expected to result in a higher medical care ratio for Anthem.

Investors can gain exposure to Anthem by checking out the Vanguard Health Care ETF (VHT) and thereby reducing the excessive company-specific risks of investing directly in a healthcare company’s stock. Anthem accounts for about 1.2% of VHT’s total holdings.

Now let’s look at what analysts are recommending for Anthem’s stock after the company’s 4Q15 results.

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