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Why Anthem’s Benefit Expense Ratio Rose in 1Q17

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Expense guidance for 2017

For full-year 2017, Anthem (ANTM) has projected the medical cost trend for its local group business to fall in the range of 6.5%–7.0%. To learn more about medical cost trends, please see Medical cost trend means rising premiums for health insurance.

If Anthem’s actual medical cost trend for full-year 2017 turns out lower than expected, it may have a favorable impact on the company’s stock price as well as the Vanguard Total Stock Market ETF (VTI). Anthem makes up about 0.19% of VTI’s total portfolio holdings.

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Benefit expense ratio

In 1Q17, Anthem’s benefit expense ratio was 83.7%, which is 190 basis points higher on a year-over-year (or YoY) basis. Waivers in health insurance tax provided for 2017 as well as increased claim expenses related to Anthem’s Medicaid business in Iowa were major factors driving the rise in the company’s benefit expense ratio. However, this negative impact was partly offset due to one fewer calendar day in 1Q17 compared to 1Q16. Further, the company raised premium rates for plans offered on Affordable Care Act (or ACA) health insurance exchanges to reflect the higher risk of morbidity for enrollees and, subsequently, greater expenses. The combined impact of premium raises and retroactive revenues paid by Iowa State to reimburse the company for higher-than-expected expenses since April 2016 played a key role in reducing Anthem’s benefit expense ratio in 1Q17.

In 1Q17, Centene’s (CNC) benefit expense ratio—also called the “medical care ratio”—was around 87.6% while UnitedHealth Group’s (UNH) was 82.4%. Aetna (AET) has also been implementing several cost optimization measures to reduce its benefit expense ratio.

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