The paragraph is an introduction to Elevance Health's third quarter 2024 earnings conference call. The operator opens the call and introduces Steve Tanal, Vice President of Investor Relations, who outlines the participants in the call, including key executives such as Gail Boudreaux, President and CEO, and others responsible for distinct business areas. Gail will discuss the quarter's performance, the revised outlook, and strategic initiatives, while Mark Kaye will detail the financial results. The session will include a Q&A. Certain non-GAAP measures will be referenced, and listeners are reminded of risks associated with forward-looking statements.

In the earnings call, Gail Boudreaux discusses Elevance Health's third-quarter financial results, highlighting that adjusted diluted earnings per share were $8.37, which fell short of expectations due to increased medical costs in the Medicaid business. Consequently, the company's full-year earnings outlook has been reduced to approximately $33 per share. Despite these challenges, Elevance Health is focusing on medical management, collaborating with states to adjust rates for member acuity, and enhancing operating efficiency for long-term growth. The issues with Medicaid are temporary, and efforts are underway with state partners to align rates with member acuity, which is expected to improve over time. The difficulties arise from shifts due to the end of the public health emergency.

The paragraph discusses the growth and strategy of Medicaid managed care, emphasizing its importance to the company's overall health benefits and Carelon businesses. The company is actively working with state partners to address cost trends and improve operational efficiencies, especially in serving specialized populations. Despite significant recent rate increases, these are still insufficient to cover projected 2024 costs. The company is expanding services in North Carolina with a new foster care contract, marking a second success in this area. In Medicare, they are taking strategic steps to ensure long-term sustainability and are satisfied with their positioning as they enter the 2025 annual election period.

The company is prioritizing benefits that seniors value to counter CMS rate cuts and maintain stability in their 2025 Medicare Advantage offerings, expecting membership growth in alignment with the market. They aim to achieve high star quality ratings, and despite some rating challenges due to raised cut points, they are improving in key performance measures and offer multiple five-star plans. Their commercial businesses are meeting financial goals, with anticipated growth driven by strong demand for their individual exchange and national account products. They provide innovative solutions for large employers, with their focus on whole health proving successful, and individual exchange membership has increased by over 30% this year.

By 2025, the company plans to expand its ACA plans in Florida, Maryland, and Texas under the WellPoint brand, enhancing its role as a trusted health partner. The Carelon segment is achieving growth through the expansion of CarelonRx, the recent acquisition of Kroger Specialty Pharmacy, and innovative solutions like SpecialtyRx Savings Navigator. Carelon is on target to surpass its projected revenue growth and is extending its capabilities further with the acquisition of CareBridge. This is expected to boost Carelon's home health business and increase its influence over healthcare spending, driving long-term growth and value for health plan customers.

Elevance Health is strategically investing in AI-driven solutions to support long-term growth by enhancing member and provider experiences, reducing costs, and improving efficiency. The company anticipates operational and financial benefits starting in 2024, with a greater impact in 2025 and beyond. Efforts include personalized digital services for members, streamlined administrative tasks and improved interactions for providers, and productivity-enhancing tools for associates. Elevance Health remains confident in its fundamental strength, addressing Medicaid challenges, and is committed to emerging stronger to meet increasing needs for care management and cost containment.

In the article's seventh paragraph, Gail expresses gratitude to the company's associates for their commitment and highlights the company's recognition as a great workplace. The paragraph then transitions to Mark Kaye, the CFO, who discusses the company's financial performance for the third quarter. The GAAP diluted earnings per share were $4.36, and the adjusted diluted earnings per share were $8.37, both below expectations. The company maintained 45.8 million members, with commercial growth compensating for the loss of 85,000 Medicaid members due to a specific policy change. Commercial membership grew by nearly 600,000 year-over-year, driven by fee-based and ACA health plans. Operating revenue increased by over 5% to $44.7 billion. However, the benefit expense ratio rose by 270 basis points to 89.5% due to unforeseen Medicaid cost trends. Efforts are being made with state partners to adjust future rates to better reflect the acuity of Medicaid membership.

During the quarter, Elevance Health implemented measures to improve operating efficiency, resulting in a reduction of the adjusted operating expense ratio to 9.6% and achieving $2.4 billion in adjusted operating gains for the quarter. However, challenges in the Medicaid business led to a lowered full-year outlook for adjusted diluted earnings per share to approximately $33 and a projected increase in the 2024 benefit expense ratio to 88.5%. The company anticipates operating cash flow for the year to be around $4.5 billion and expects Medicaid rates to eventually align with the membership's actual acuity. Over half of the business segments will operate below potential margins in 2024, with a recovery expected over time. For 2025, Elevance projects growth in the commercial business, expansion of Medicare Advantage, and stability in Medicaid as normal redetermination processes resume.

The paragraph discusses Carelon's growth strategy, focusing on expanding specialty pharmacy dispensing and increasing product adoption to enhance home and community-based services. It mentions ongoing modernization efforts through new technologies to create efficiencies and long-term value. The company is optimistic about 2025, projecting strong revenue growth in line with their long-term high single-digit percentage growth algorithm. Despite challenges in the Medicaid managed care industry, they expect mid-single-digit EPS growth for 2025 and plan to maintain at least 12% annual growth in adjusted diluted EPS over time. A.J. Rice from UBS is noted as asking about the specifics of their earnings growth expectations during a call.

In the paragraph, Gail Boudreaux discusses the challenges and growth prospects for the company. She addresses concerns about whether Medicaid rates will support accelerated earnings growth in 2026 and 2027, needed to achieve a 12% CAGR target. Despite the complex environment, she expresses confidence in the long-term earnings potential of the company's diverse businesses, emphasizing strong revenue growth and momentum in various sectors, including commercial business, Medicare Advantage, and CarelonRx. Boudreaux acknowledges that Medicaid margins are expected to remain below targets in 2025, but underscores operational efficiencies and strategic expansions that offer a positive outlook.

The paragraph discusses financial considerations regarding Medicaid, emphasizing a disconnect between rates and acuity that is expected to persist through 2025. Despite this, the company plans to make continued investments in 2025, seeing significant opportunities in their business. The company's strategy involves prudently navigating 2025 with a focus on maintaining their long-term success. Stephen Baxter from Wells Fargo questions the alarming revision in Medicaid, especially after membership impacts from redetermination. Mark Kaye, the CFO, responds by explaining that the company faced accelerated cost trends in Medicaid throughout the third quarter and observed unfavorable prior period developments, indicating Medicaid cost trends significantly exceeded historical averages depending on the state.

The paragraph discusses the impact of the redetermination cycle completion on cost trends, highlighting increased membership acuity as a key driver. Despite collaborating with states and experiencing higher-than-average rate increases, these are still insufficient to cover claims trends due to the states' reliance on outdated reference periods. Ben Hendrix from RBC Capital Markets inquires about the rate adjustment pace to match acuity, especially after significant membership changes in Medicaid due to the unwinding of the Public Health Emergency. Gail Boudreaux and Mark emphasize the unprecedented nature of these shifts and the unusual Medicaid environment in this transition period.

The paragraph discusses the company's expectations and trends related to Medicare and Medicaid. Mark Kaye explains that while Medicare experienced slight pressure due to factors like the two-midnight rule and a late summer COVID surge, Medicaid is facing ongoing elevated trends, particularly in behavioral health. This has resulted in pressure on margins, which are expected to remain below the long-term average through 2025. Gail Boudreaux adds that most of the results were driven by Medicaid, and despite slight pressure on Medicare, they are confident in their positioning for 2025. An unidentified analyst then questions whether a 200 basis point miss in the third-quarter enterprise Medical Loss Ratio translates to about 500 basis points of Medicaid pressure, seeking confirmation on this assumption.

The paragraph involves a discussion about the profitability of a Medicaid business. Mark Kaye notes that while the Medicaid business is expected to be profitable this year, it will fall below the target margin range. He emphasizes that profitability should be viewed over the long term rather than quarter-to-quarter. Gail Boudreaux adds that the situation is temporary and that Medicaid remains a valuable business, especially for specialized populations. Additionally, Erin Wright from Morgan Stanley asks about the Medicare Advantage (MA) landscape, questioning whether the competitive environment aligns with expectations, focusing on profit versus growth. Gail Boudreaux responds by saying they feel well-positioned in the MA market and took strategic actions to ensure long-term success.

The paragraph discusses the strategic adjustments made in the Medicare Advantage business to ensure long-term sustainability and growth. Felicia Norwood explains that the company began these strategies last year by exiting underperforming markets, affecting 85,000 members, and reducing supplemental benefits in Puerto Rico. As they prepare for 2025, the focus is on stabilizing operations and balancing growth with margins, especially in high-priority markets with strong market share and a predominance of HMO products. Felicia expresses confidence in their current positioning just days into the Annual Enrollment Period (AEP) and expects growth in line with or slightly better than the market.

In the paragraph, Justin Lake from Wolfe Research asks about the accelerating Medicaid trend, noting it's significantly higher than usual and seeking clarification on its causes and financial implications. Gail Boudreaux responds by highlighting the unprecedented membership changes in Medicaid following the Public Health Emergency (PHE), driven by increased acuity. Despite planning for increased costs, the actual expenses were unexpectedly high. She emphasizes collaboration with state partners to address these challenges, though changes in processes are slow. Mark Kaye is invited to provide further details on the issue.

In the paragraph, it is discussed that the Medicaid trend for 2024 is expected to be significantly higher than the historical average, largely due to unprecedented redetermination activities affecting membership and program adjustments. Long-term targets for Medicaid trends remain at 2% to 4%. Gail Boudreaux mentions active measures being taken to manage costs and initiatives, including working closely with state partners, with the understanding that achieving the desired outcomes will take time. Lisa Gill from JPMorgan inquires about prescription (Rx) trends, particularly in specialty areas, and changes to IRA catastrophic coverage. Gail Boudreaux responds by directing the question to Pete Haytaian for further insights into their pharmacy business, suggesting positive results and growth in the specialty sector.

The paragraph discusses the current situation and outlook regarding Medicare Advantage Part D specialty drug utilization and overall pharmacy trends. There has been an increase in drug utilization, but unit costs align with assumptions, posing no significant impact. Pete Haytaian expresses satisfaction with CarelonRx's strategy and growth, particularly in specialty pharmacy and infusion, noting successful market penetration and wins for 2025. Financial performance exceeded expectations due to a one-time favorable revenue adjustment, but overall margins remain aligned with initial guidance of a 6%-6.5% margin profile. Lance Wilkes from Bernstein inquires about Medicaid rate increases observed historically and in the first half of the year to forecast trends into early 2025.

The paragraph discusses strategic moves in response to time-bound pressures, particularly regarding Medicaid and pharmacy operations. Gail Boudreaux highlights Elevance Health's comprehensive growth strategy, emphasizing acceleration in revenue and strong performance in Medicare. She notes the acquisition of CareBridge enhances their home-based care capabilities and overall growth strategy for Carelon Services. Boudreaux asserts confidence in long-term growth drivers and integration of Kroger Specialty Pharmacy to gain better control in the pharmacy sector. Felicia Norwood adds that rate negotiations with state partners about Medicaid are ongoing.

The paragraph discusses how the business portfolio is split between states with January and July plan start dates. There is a focus on adjusting rates for 2025, influenced by trends seen in the first half of 2023. Some states are more open to reconsidering and adjusting rates midyear. Although this process takes time, there is ongoing collaboration with state partners to ensure rates align with the membership's needs, despite recent changes in business mix. The speaker expresses confidence in achieving appropriate rate alignment and thanks the participant for their question. Josh Raskin from Nephron Research then asks for further clarification on the reasons behind the accelerating cost trends and acuity rate mismatches.

In the paragraph, Josh asks about the trends in Medicaid redetermination activities, noting a perceived slowdown and questioning the acceleration of certain trends late in the process. Mark Kaye responds by stating they've taken a cautious approach to modeling costs for the fourth quarter and highlights an unfavorable development in the current quarter. Michael Hall then inquires about the larger fourth-quarter impact implied in the 2024 guidance, relative to the third quarter's medical ratio pressure. He questions whether they can adjust for acuity rate mismatches despite having updated rates for September and October. Gail Boudreaux reminds him to consider seasonality in the fourth quarter, and Felicia Norwood prepares to elaborate on the Medicaid rate setting process.

The paragraph provides an update on the company's progress in setting premium rates for January, mentioning they currently have about 55% visibility, though these are only draft rates. The process is described as ongoing and collaborative with state partners, with significant work expected before the year ends. Mark Kaye comments that Medicaid trends are stable, attributing current numbers to seasonality. Ryan Langston from Cowen asks about the margin profile for exchanges and commercial business. Morgan Kendrick responds, expressing confidence in the commercial business, particularly the ACA segment, highlighting a disciplined expansion approach over the past 36 months across 14 geographies.

The paragraph discusses the positive growth outlook for their markets, expecting a 2-point market share increase. They are well-positioned in current geographies and are assessing new market entries, aligning with economic expectations. Gail Boudreaux highlights the synergy with Medicaid and Medicare businesses in familiar states. Scott Fidel inquires about the impact of Medicaid on Carelon Health businesses. Pete Haytaian responds, expressing satisfaction with Carelon's growth, exceeding 30% quarterly growth, surpassing initial guidance, and noting strong internal and external growth strategies with increasing external traction.

The paragraph discusses the company's growth expectations and challenges in the healthcare sector, specifically in relation to Medicaid and Medicare products. It anticipates a fourfold growth in 2024 and good prospects for 2025. However, short-term margins are being impacted by behavioral health trends and the accelerated deployment of risk arrangements, which initially compress margins but are expected to improve over time. The company's strategy includes growth in both government program and commercial business sectors, with a diversified approach similar to Elevance Health. A follow-up question from an operator asks about rejoiners' impact on cost trends and care activity, to which Mark Kaye responds, noting ongoing trend factors such as member mischaracterization and pull-forward effects.

The paragraph discusses the challenges and expectations regarding Medicaid rates and margins. It highlights that the state actuarial rate process aims to ensure cost adequacy over time, with a specific focus on an acuity mix shift, which is attributed to about 60% of the trend. The outlook for Medicaid includes assumptions on cost trends. In response to a question from Sarah James at Cantor Fitzgerald, Mark Kaye notes that while Medicaid margins are expected to compress significantly this year due to an industry-wide timing disconnect between rates and acuity, their long-term expectations remain unchanged. They're working with state partners to integrate acuity into rates, though this process will take time.

The paragraph discusses the confidence in achieving long-term financial targets, particularly with Medicaid and Medicare. Gail Boudreaux emphasizes Medicaid as a valuable, long-term business, complementing other health benefits. Dave Windley from Jefferies inquires about the expectations for rates and margins in Medicaid (referred to as "caid") and Medicare, and how these impact earnings growth. Mark Kaye responds, indicating that commercial margins are expected to remain strong in 2025, Medicaid margins will be stable year-over-year but below long-term expectations, and Medicare margins are expected to improve due to sustainable product positioning.

In the paragraph, Joanna Gajuk from Bank of America inquires about the Medicaid rate mismatch and its anticipated restoration by the end of 2025. Mark Kaye responds by explaining that while they are not providing Medical Loss Ratio (MLR) guidance for 2025 yet, they expect an improvement in the rate versus acuity mismatch in Medicaid as the year progresses. He notes the impact of January 1st as a major renewal date in their commercial business and highlights ongoing medical management efforts. Gail Boudreaux adds that they are taking a cautious approach to address the Medicaid mismatch and have had a productive process with the states, although they rely on data from prior periods.

The paragraph discusses Elevance Health's focus on providing updates about their business outlook, especially in relation to Medicaid state rates. George Hill from Deutsche Bank asks about the drivers of the PYD in the quarter and state-specific rate and acuity discrepancies. Gail Boudreaux explains that the situation varies by state due to different populations and programs, emphasizing their commitment to working with states to address issues. She also highlights that these challenges are industry-wide, not unique to Elevance Health. The paragraph concludes with a thank you to participants and reinforces Elevance Health's confidence in their investments for long-term growth.

The operator informed participants that a recording of the conference will be available for replay from 11:00 a.m. today until November 16, 2024. The replay can be accessed by dialing 866-510-4837, with an alternative number for international participants being 203-369-1943. The conference has concluded, and participants can now disconnect. The operator thanked everyone for their participation and for using Verizon conferencing.

This summary was generated with AI and may contain some inaccuracies.