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On this episode of Yahoo Finance Presents, Cigna CEO David Cordani sat down with Yahoo Finance's Brian Sozzi to discuss the ongoing impact of the COVID-19 pandemic on the health insurance industry as well as the future direction of Cigna and importance of telehealth.
BRIAN SOZZI: Cigna is coming off a closely watched investor day, the health services company outlined long-term adjusted sales and earnings per share growth of 6% to 8%. Cigna also discussed how its business will take shape after the COVID-19 pandemic. Joining us now is Cigna president and CEO David Cordani. David, good to see you again. It's been a while since you and I talked. We're coming up really on more than a year, just over a year of the pandemic. How is the pandemic impacting your business?
DAVID CORDANI: Sure, so from the pandemic effect, obviously, it's impacted countries around the globe. So every aspect of what we do is, in some ways, changed in terms of how we interact and support our clients or customers and patients. On the other hand, a lot of it's still the same. It comes down to one person at a time supporting their individual health and well-being from that standpoint.
So examples of changes-- one, we provided a lot more financial support back to corporate clients, health plan clients, physician partners during 2020 with a lot of dislocation, provided a lot more access support to individuals relative to COVID related coverage. Another dimension of what's changed is a massive accelerant in virtual care use and adoption.
And as you may have seen, we took a further step forward, taking a long standing partner with MD Live from a partnered relationship to an acquired opportunity for us. So, a pretty dynamic environment, but one I'm really proud of what we've been able to support our clients and customers through this past year.
BRIAN SOZZI: Now we have a lot to get to. Your investor day was definitely in depth. Just, you know, one more thing on the near term. So this year, the COVID impact, what, $1.25 a share impact. Where did those costs come from? And do they roll off after the pandemic gets in the rearview mirror?
DAVID CORDANI: Yeah, so we called out for our investors an approximately $1.25 headwind for 2021 tied to COVID. And there's really three major buckets. One is elevated medical costs, as COVID treatment, COVID testing, and based medical costs environment continue into 2021. Second is dislocation of revenue, either because of, one, loss of jobs for individuals within the corporate employer sector or a little less revenue in the Medicare Advantage environment because of lower utilization of some services.
And then the third bucket was about 10% of the $1.25, miscellaneous items, some increase in international medical costs and the like. And what we told our shareholders was that about half of that was recoverable in 2022 as we step forward out of 2021, and the residual half will be recovered in 2023. So about 3% more EPS accretion on our 10% to 13% EPS outlook. We'd see another 3% of that in 2022, another 3% in 2023.
BRIAN SOZZI: So key to any long-term-- or key to any investor day, really, is looking out over a next-- really, over the next couple of years. And to that end, what's the lasting impact of the pandemic on a company like yours?
DAVID CORDANI: So we called out three large forces that we think are indisputable that will form beyond the two-year horizon, but within the two-year horizon as well. One, pharmacological innovations represent the future of healthcare. The number of new drugs, be they specialty pharmaceuticals, gene therapies, biosimilars, et cetera, that pipeline will continue to grow. Second is the acceptance of mental health and physical health needing to be coordinated together. And third is the acceptance of and rapid evolution of new forms of care delivery, like virtual care, from that standpoint.
Each one of those presents tremendous opportunities for our company. Our company has been positioned to not only respond to, but leverage those trends with leading pharmacy and specialty pharmacy capabilities, leading behavioral health and individual care capabilities, and rapidly evolving virtual care capability.
So, taken as a whole, we laid out a pretty exciting path for our shareholders by saying we will have sustained 6% to 8% revenue growth, sustained 6% to 8% earnings growth, and sustained 10% to 13% EPS growth. In addition to that, we now have an approximately 2% dividend yield. So a very compelling outlook for our corporation.
BRIAN SOZZI: Talk to us a little bit about telehealth. So recently, you purchased MDLive. So you're-- I think the investor read is there. You're all in. How big do you think Cigna will be in telehealth?
DAVID CORDANI: So when we think about telehealth, our view has been for quite some time that with the evolution of technology and consumer preference, there's a significant opportunity to bring care closer to the individual. So, put the individual at the center. Telehealth is one dimension. Coordinated in home care is another dimension from that standpoint.
As it relates to telehealth today while it's growing multiplicatively, it's still largely in urgent care and more simple primary care interaction. We think that will continue. We think it will evolve to comprehensive primary care. We've actually innovated some services around that in our medical group out in Arizona that we own a medical group from that standpoint. Then you go to chronic care, where almost half of all Americans have one chronic condition. And then you have the ability to evolve into complex chronic care from that standpoint.
So we see virtual care and coordinated in-home care as a big part of the future of healthcare. It's highly personalized, high clinical quality, the ability to close gaps in care, and high levels of affordability come through that. So we see it as AAA in win-win-win that starts with the consumer or patient and delivers significant value.
BRIAN SOZZI: How do you see the telehealth longer term outlook playing out? I've covered a lot of these telehealth SPACs. It seems like every day there's another one of these companies. Is it these companies eventually join forces? Or do you, a company like Cigna, a large player, go out there and acquire some more of these companies?
DAVID CORDANI: Well, if you look at any industry, the intermediate term answer is probably all of the above, right? So if we just leave our space for a minute and just observe how industry reformatting takes place, it's probably an all of the above opportunity. And then ultimately it's going to come down to who could create the most value, and value in this case being for the patient or individual. Is it personalized? Is it simplified? Is access highly coordinated? Is clinical quality positive? And is it an affordable solution? That's the power where we see it.
So to do that, beyond urgent care or simple primary care, you need world class behavior health capabilities. We have that. You need world class pharmacy capabilities. We have that. You need world class specialty pharmacy capabilities. We have that. And importantly, for Cigna, we also see it working as a complementary aspect of our physician relationships around the United States, not in conflict, meaning it's an extender of your physician relationship and we have over 700 collaborative accountable care relationships there.
So, to your very clear question, I think you'll see a variety of models unfold. Our model will be a highly coordinated model. It will be done in concert with and complementary to someone's practicing physician or primary physician. And it will leverage those capabilities I talked about. And our team is quite excited about the ability to deliver significantly more value for the tens and tens and tens of millions of individuals we serve every day in the United States.
BRIAN SOZZI: As part of your longer term outlook-- and this was, to me, a shocking number-- you all produced $50 billion in operating cash flow from 2021 to 2025. How else will you spend that, beyond acquisitions?
DAVID CORDANI: So I appreciate you calling out that point because it's a compelling shareholder message. $50 billion of operating cash flow over this five-year horizon-- part of it is, we've positioned our corporation to be more services oriented and what we call capital light. So we enter models that have less capital encumbered. Therefore, we're able to turn more of our earnings into free or deployable cash flow. In this case, the $50 billion.
What we told our shareholders is that about 15%, 20% of that will be consumed every year for internal growth, capitalization of growing, insurance revenues. And we run a Capex budget for new innovation of an excess of a billion dollars a year. The residual, about 20% of the residual will be in dividend, and then 80% of the residual or $8 billion residual, about 80% of that will be available for share repurchase or M&A. That's about three times the rate of what it's been the last few years.
So, massive shareholder value creation. And maybe to put a fine point on it, what it means is that in our 10% to 13% earnings per share growth, 4% to 5% of that will come from either share repurchase or M&A and add another 2% of dividend, 6% to 7% shareholder return from capital deployment alone, that's a really compelling proposition.
BRIAN SOZZI: We've talked in the past about the regulatory outlook for healthcare. Now that we do have a new administration in the White House, what could they do? What would you like to see from them to help bring down healthcare costs?
DAVID CORDANI: So, first off, some of what we expect to see-- and we see that transpiring even in the pending bill that's about to make its way to the president's desk-- is to further strengthen the Affordable Care Act. That strengthening will happen to additional subsidies on the federal exchange, as well as potentially a larger percentage of Americans eligible for subsidies. Some further support for Medicaid programs through that lens, we expect to see that unfold.
Now beyond that, the best way we could improve overall affordability is to do one of a few things-- either, A, help to get more patients to the highest performing physicians, B, help to reduce health risks before they result in major health conditions-- that's more preventative, wellbeing services and active management of a population. We do that through our collaborative relationships from that standpoint. And then third, incentivize alternative access to care, either virtual or in the home. Those three dimensions have the ability to take large percentages of cost out of the equation, which is affordability.
And for example, Brian, we have the lowest rate of medical cost growth in our industry today. And what we told our investors this morning is that coming out between now and 2023, as we enter 2024, we expect to have a meaningful majority of our corporate clients and health plan clients in the United States experiencing a rate of cost growth that's 0 or less, if we have our most innovative programs with them. So being able to tap into those innovative programs is the primary way of improving affordability, always looking at it through the lens of the customer or individual patient.
BRIAN SOZZI: Well, I'm doing what I can to help bring down healthcare costs. I've been working out like a mad man in my house throughout the pandemic. And I'm sure a lot of other people have been doing the same as well. All right, we'll leave it there. Cigna president and CEO David Cordani, always good to speak with you. Stay safe, and we'll talk to you soon.
DAVID CORDANI: You, too, Brian. Be well.