Steve Tanal:

Good morning, and welcome to Elevance Health's second quarter 2024 earnings call. This is Steve Tanal, Vice President of Investor Relations. And with us this morning on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Pete Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial Health Benefits business; and Felicia Norwood, President of our Government Health Benefits business. Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

Mark Kaye:

Thank you, Gail, and good morning to everyone on the line. As Gail shared, we reported second quarter results, including GAAP diluted earnings per share of $9.85 and adjusted diluted earnings per share of $10.12, representing growth of 12% year-over-year. We ended the second quarter with 45.8 million members, principally reflecting attrition in our Medicaid membership. Our commercial fee-based business grew by 354,000 lives year-over-year, reflecting the distinct value we provide to self-insured employers and the strength of the Blue Cross Blue Shield brand. Additionally, the thoughtful positioning of our individual ACA products has proven effective in ensuring robust and profitable growth. Total operating revenue for the quarter was $43.2 billion, approximately flat year-over-year. As we approach the tail-end of Medicaid redeterminations, we anticipate growing operating revenue in the second half of the year, driven by growth in premiums and CarelonRx product revenue related to higher external membership and the acquisition of Paragon Healthcare. Carelon Services' momentum accelerated in the quarter. Operating revenue grew by over 26% and operating earnings increased by more than 30% due to growth in risk-based services provided to internal and external clients, prudent pricing and strong execution. The consolidated benefit expense ratio was 86.3% for the second quarter, an improvement of 10 basis points year-over-year. This improvement was driven by several factors including premium rate adjustments in recognition of medical cost trends, disciplined medical management and a shift in our mix of business towards commercial. This was partially offset by our Medicaid business where acuity has increased due to attrition of healthier members. Elevance Health's adjusted operating expense ratio was 11.5% in the second quarter, an increase of 50 basis points relative to the second quarter of 2023. We absorbed elevated investment costs notably in CarelonRx and this along with other strategic initiatives will position our company for long-term sustainable growth. We anticipate significant improvement in our operating expense ratio in the second half of this year. Adjusted operating gain for the enterprise grew approximately 6% year-over-year, led by Carelon Services. We have maintained a prudent posture with respect to reserves. Days and claims payable at the end of the second quarter stood at 45.3 days, above our long-term target range in the low 40s. As a reminder, days in claims payable in the first quarter included approximately 1.7 days related to the industry-wide delays in claims receipts. With respect to our outlook, we are closely monitoring acuity and cost trends, notably in Medicaid, and are working collaboratively with states to ensure rates remain actuarily sound. We are, however, expecting second half utilization to increase in Medicaid and as a result, anticipate our full year benefit expense ratio will end the year in the upper half of our initial guidance range. Nonetheless, we expect to achieve our full year adjusted diluted earnings per share guidance of at least $37.20. Before I close, I'd like to briefly talk through our enterprise growth algorithm which we have included in the supplemental earnings presentation provided this morning. Our commitment to growing adjusted diluted earnings per share by at least 12% annually on average incorporates upper single-digit growth in operating revenue, underpinned by membership growth, geographic expansion and momentum in Carelon as we scale our enterprise flywheel. Our commitment to disciplined underwriting and operating expense management across all lines of business will drive the improvement inherent in our enterprise operating margin target of 6.5% to 7% by 2027. Taken together, we are targeting growing operating earnings in the upper single-digit to low double-digit percent range annually on average over time. Finally, we expect capital deployment to consistently deliver one-third of our targeted adjusted diluted earnings per share growth rate. Overall, our results in the first half of the year are consistent with our initial guidance, and we will maintain a steadfast focus on execution and operating efficiency over the balance of the year. And with that, operator, please open the call to questions.

A.J. Rice:

Hi, everybody. Maybe just to kick it off here. I know you've laid out your long-term growth objectives and all. I wonder if at this early date, you're prepared to comment a little more on any plans you have to accelerate growth in '25. I know the topline has had redeterminations and other things this year. What's your thought about ability to get back to that growth trajectory that you're seeking long-term in '25?

Operator:

Next, we'll go to the line of Nathan Rich from Goldman Sachs. Please go ahead.

Gail Boudreaux:

Well, thanks for the questions, Nathan. A lot in there. So let me ask Felicia Norwood, who leads Government first and then have Mark respond to the second part of your question. Felicia?

Mark Kaye:

Thanks very much, Felicia, and good morning. Medicaid utilization in the quarter, as you heard from Felicia, reflected higher acuity as expected. We are also seeing signs of increased utilization across the broader Medicaid population, including in outpatient home health, radiology, durable medical equipment, as well as some elective procedures. I just wanted to add here, just as we noted in our prepared remarks, the full year outlook does allow for both this shift in acuity and increased utilization in the second half of the year, including the rate timing mismatch that Felicia spoke to.

Operator:

Next, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead.

Gail Boudreaux:

Great. Well, thanks, Lance. I'm going to ask Pete Haytaian, who leads Carelon to address your question.

Gail Boudreaux:

Thanks, Pete, and thanks again, Lance, for the question. And just I think this is a great example of our flywheel for growth and our ability to scale these assets which we're very excited about. And again, thinking about this as the opportunity to drive a differentiated cost of care for our health plans within Elevance Health, but also better experience for members and support our partners across the ecosystem. So again, a really important part of our flywheel. Next question, please.

Kevin Fischbeck:

Okay, great. Thanks. I guess in your prepared remarks, you mentioned that the results here were somewhat burdened by, I guess, three things. One, your investments in Carelon for growth and then you had below average margins in Medicaid and below average margins in Medicare Advantage. Can you help size those things? How should we think about where those margins are today relative to kind of where they should be from a target perspective? Thanks.

Gail Boudreaux:

Thank you. Next question, please.

Josh Raskin:

Hi, thanks. Good morning. What are your expectations for market-level growth in MA for 2025? And I know it's early, but maybe any headwinds, tailwinds and how we should expect Elevance to grow market-share relative to the overall market in MA for 2025?

Felicia Norwood:

So, good morning, Josh, and thank you. It's an incredibly dynamic time in Medicare Advantage. And now more than ever, we think it's important to be very thoughtful and rational as we plan for 2025. Despite this environment, Medicare Advantage enrollment is at an all-time high and over 50% of individuals are still choosing MA. And that means there's still a clear value for what MA offers and we're committed in the long-term to having and operating a profitable and sustainable MA business. It's a little early to talk about 2025 in terms of growth expectations. Our bids were recently submitted to CMS and frankly, we are still getting feedback on that. In addition to that, the industry-wide submissions aren't known yet. We feel encouraged by commentary from peers that everybody is going to kind of price rationally and have benefit rationalization as we head into 2025, but we still have to wait and see what emerges once we have greater information from our competitors. So at this point, there's a lot of unknowns. I will tell you we maintained a very disciplined approach, offering competitive benefits while we are balancing growth and margins. I think we were very thoughtful in the plan designs that we put out there to make sure that we were focusing on profitable growth and the sustainability of this program for the long term. We are very focused on our DSNP business, which is where we believe that we have a strong advantage when we think about our Medicaid and Medicare positioning. And we also did prioritization around our products in terms of our local market dynamics. So it's still early to determine what growth is going to look like for 2025. We feel very good about how we position our business on the heels of our strategy in 2024 to make sure that we have a sustainable long-term business in Medicare Advantage. Thank you.

Operator:

Next, we'll go to the line of Lisa Gill from JPMorgan. Please go ahead.

Gail Boudreaux:

Great. I'll ask Mark to comment on your question.

Gail Boudreaux:

Thank you, Mark. Next question, please.

Justin Lake:

Thanks. Appreciate the question. First, can you size the Medicaid trend increase that you're seeing here? And then second, I just wanted to follow up on Kevin's question on government margins. Understand you don't want to give us specific absolute margin levels, but I was wondering if you could share your expectation of the trajectory of margins in Medicare Advantage and Medicaid for 2025 versus 2024? Thanks.

Gail Boudreaux:

Thank you. Next question, please.

Erin Wright:

Hey, thanks for taking my question. Can you talk a little bit about the investments you're making around CarelonRx and how you're thinking about the timeline in terms of scaling specialty? And are there ample opportunities out there for you like Kroger and Paragon out there? Thanks.

Pete Haytaian:

Yeah, no, thank you. We feel very good about our specialty strategy, and I appreciate the question. I'll try not to repeat what I said before and give you a little bit more context. But as I noted, as it related to our specialty strategy, we acquired BioPlus last year in 2023. And again, we spent a lot of time last year in building out the infrastructure and the capacity to be able to assume Elevance scripts. And our focus as it relates to the near term is being able to migrate Elevance scripts, which will occur through this year and into 2025. As you noted, we're going to be opportunistic and we have been as it relates to things like Kroger, that provides additional scale for us. To give you a little bit of color on Kroger, it's about 500,000 incremental scripts. They also give us access to additional LDDs as well as having a presence in places like Puerto Rico, which could help us as well. And so we'll continue to be opportunistic as it relates to our specialty strategy and really on our focus to deliver whole health. We are anticipating, as I noted earlier, that Kroger would close Q3, Q4 of this year, and we're preparing for that and continuing to make investments around that. And then I'd say as we move forward more broadly and Gail touched upon this as it relates to our specialty strategy, there's a real focus on patient differentiation in Whole Health. We have a wonderful opportunity as we move forward to really drive Whole Health and capture all the value of Carelon, including things like integrating behavioral health and other services. And so that's going to be our goals and focus moving forward. We feel very bullish about it. We feel very bullish about our growth. We feel very bullish about delivering on the Carelon strategy and Whole Health as we move forward.

Operator:

Next, we'll go to the line of Michael Ha from Baird. Please go ahead.

Mark Kaye:

This quarter, we are pleased to introduce our growth algorithm which underpins our adjusted diluted earnings per share target of average annual growth of at least 12% over time. You asked a little bit about the revision, and we have revised our enterprise revenue growth target from the high single to low double-digits to high single-digits percent range and that's primarily to reflect Medicaid-related attrition that has occurred to date and the impact of the prudent actions that we're taking in our 2024 and 2025 Medicare Advantage bids in response to the risk model revisions. Accordingly, our health benefits segment revenue CAGR should now be in the -- will now be in the mid-to-upper single-digit percent range. But the key point here is our path is much the same. And that really means that we're expecting high-single-digit to low double-digit percent growth in operating earnings. And the key point here to the second half of your question, with approximately one-third contribution from capital deployment and that capital deployment can come through in the form of inorganic activity to support our Carelon businesses. Thank you.

Operator:

Next, we'll go to the line of Andrew Mok from Barclays. Please go ahead.

Mark Kaye:

Great question. And the opening comments there are completely consistent with the way that we're thinking about it. You should really think about this as we now expect our full year benefit expense ratio to be in the upper half of that initial guidance range, i.e., 87% to 87.5%, principally because of the Medicaid dynamics that we're navigating. We're not looking to provide specific quarter-by-quarter guidance.

Operator:

Next, we'll go to the line of Ryan Langston from Cowen. Please go ahead.

Mark Kaye:

Thanks very much for the question. Let me put the prior development in the context of the medical claims payment change this quarter. I think that's more instructive to understand the dynamics here. And you saw medical claims payable in the quarter go down by approximately $1.3 billion versus the first quarter. And there are really several factors that drove this and then ultimately drove PYD development. And they include the reserve runoff due to Medicaid membership decline, the catch-up in claims paid associated with elevated reserves for industry-wide claim receipt delays in the first quarter, and then the improved operational environment that's reflected through our shorter cycle times. And the key point here is that MCP, which is why it's more instructive, remains at historically high levels, both in aggregate and on a fully insured PMPM basis. And that indicates the continuity of our historical prudent reserving practices and our strong balance sheet.

Operator:

Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead.

Mark Kaye:

Thanks for the question and appreciate the opportunity to provide additional clarification here. Certainly, we expect the larger than typical pull-forward effect that we've seen in the second quarter to abate as the year goes on, principally because we're through the tail end of redeterminations at this point. We are obviously working with the states to ensure that the timing and rate mismatch is appropriately adjusted. On the member miscategorization, this is really ensuring that those members who are initially categorized, for example as TANF are put in the more appropriate and -- cohort for purposes of rates to think about ABD, for example. And then what we are really seeing elevate as the year goes on is the outpatient trains and elective procedures, and that's something that we fully accounted for in our MLR guide for the full year.

Operator:

Next, we'll go to the line of Scott Fidel from Stephens. Please go ahead.

Mark Kaye:

Appreciate the question this morning. Year to date, operating cash flow is $2.4 billion and to your point, that is a decrease of approximately $6 billion year-over-year. The key point here is that this includes $4.3 billion of timing-related items and approximately $1.3 billion of net cash outflows that are primarily associated with the runoff of our Medicaid reserves and the improvement in the operational environment, which is reflected by a short -- shorter cycle times. The timing-related item reflects a $3.6 billion impact from an additional month of premiums that we received from CMS in the year ago period, and so not a concern from our perspective. On a full year basis, we do expect operating cash flow outlook to be slightly north of $7 billion, and that really reflects the year-to-date reductions in working capital and specifically, as I mentioned a moment ago, that decrease in MCP driven by Medicaid membership attrition.

Operator:

Next, we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead.

Gail Boudreaux:

Great. Thanks, Sarah. Pete?

Gail Boudreaux:

Yeah. Thanks, Pete. Thanks for the question, Sarah. As you heard from Pete, it's an -- we have exciting opportunities to deepen our penetration because we do work with most of the Blues -- other Blues today and also other payers, quite frankly, and state partners has been a great opportunity for Carelon more broadly and you're seeing that come through. So thanks for the question. We're excited about the opportunity there. Next question, please.

George Hill:

Hey, good morning, guys. And I appreciate you taking the question. I guess, Mark, I was just going to ask if you could bridge a little bit when we think about the 2027 OP margin targets in the MCO segments. Kind of like how you think about the sources of the margin expansion there. And I'd be interested in particular if you would talk about what your expectations are around the exchange subsidies and the growth of the exchange business.

Gail Boudreaux:

Thank you, Mark. And to your second part of the question around our exchange business, as you have heard us talk about, we have been, I think, very disciplined in our approach to expanding that business. We have had very strong results individually, up 30% -- 35% year-over-year with the ACA growing almost 40%. So as you think about that, our goal is to serve our members throughout their coverage transitions. We see a significant opportunity to continue that expansion, including geographic expansion, particularly for members that were historically in Medicaid and now need other coverage. So, again, a really nice opportunity. But you'll see that same sort of disciplined approach that we've shown throughout in the ACA. Next question, please.

Whit Mayo:

All right. Hey, thanks. Just quickly, on midyear renewals, just remind us how much of the commercial risk book renews in the second half of this year and just how you're thinking about retention, membership, ability to take the required price action that you need. And just as a clarification, is it fair that Commercial is performing better than expectations on margin with government, worse, at least in the first half? I just wanted to make sure I properly got this. Thanks.

Morgan Kendrick:

Yeah. Thanks for the question. As we think about it, that cohort of business that we renew in July is about 25% of the risk-based large group business. And to camp onto that, it performed as expected. In fact, we're seeing persistency up a bit. We talked about attrition in the large group risk business with our January cohort on the first quarter call, That's abated and we're seeing persistency improve, and we're seeing the margins coming through. So we feel really good about how we're positioned for continued growth and expansion in that business moving forward.

Operator:

Next, we'll go to the line of Dave Windley from Jefferies. Please go ahead.

Mark Kaye:

Dave, good morning. Thanks very much for the question. In terms of the 2023 business optimization activity, we are on track to realize the gross run rate expense efficiency improvement of approximately $750 million that we committed to do. And that's going to benefit both our operating performance this year and it's going to help to establish the strong foundation for growth in 2025 and beyond. If I step back just for a moment, and we covered this a bit in our prepared remarks, we do anticipate significant improvement in our operating expense ratio in the second half of the year as we continue to take additional steps to enhance operational efficiency, and we'll begin to see and realize those incremental run rate improvements over time.

Operator:

Next, we'll go to the line of Ann Hynes from Mizuho Securities. Please go ahead.

Pete Haytaian:

Thanks for the question, Ann. We think there's a tremendous opportunity as it relates to specialties. I said, earlier, our priority in the near term is the Elevance scripts, and absorbing the Elevance scripts effectively. And then also, as we talked about what we're doing with Kroger. We continue to see opportunities to cover more LDDs. And then in addition to that, as it relates to Whole Health, we are very focused on the patient experience. We are very focused on centers of excellence and how we can care for the members in a differentiated way by wrapping around additional assets. Longer term, again, we will be opportunistic, but right now, we have a lot in front of us and we want to execute against that effectively as it relates to specialty.

Operator:

For our final question, we'll go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead.

Felicia Norwood:

So, Ben, thank you for the question. We've always been very strategic around where we want to see our MA growth as we go forward. If you recall this past year, we made very deliberate decisions around markets that we wanted to exit because we wanted to make sure that we positioned ourselves to long term growth and performance. When we think about our strategy today, it's certainly in those areas where we have Medicare and Medicaid business, because the DSNP business is incredibly important for us. And if you think about where things are going long term, having alignment around Medicare and Medicaid is critical for us. But ultimately, it's absolutely about being able to deliver for the Carelon flywheel as well. The members that we are focused on, particularly in D-SNP and other SNP products, are very complex populations. And as we think about Whole Health, we've been working very collaboratively with Pete and the team to make sure that we are able to deliver Whole Health for those that we are very privileged to serve. So the footprint really is focused on density, certainly in our Blue markets, but being able to be focused on our Medicaid markets as well, in places where we see opportunities to grow strategically with Carelon in the future. And that's the pathway and framework that we've established when we think about the long term growth for our Medicare Advantage business which we continue to be incredibly excited about as we think about being a lifetime trusted partner for those we serve. So thank you for the question.

Operator:

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through August 17th, 2024. You may access the replay system at any time by dialing 800-391-9851. International participants can dial 203-369-3268. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.

Steve Tanal:

Good morning, and welcome to Elevance Health's first quarter 2024 earnings call. This is Steve Tanal, Vice President of Investor Relations. And with us this morning on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial Health Benefits Business; and Felicia Norwood, President of our Government Health Benefits Business. Gail will begin the call with a brief discussion of the quarter, recent progress against our strategic initiatives, and our updated outlook for the year. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

Mark Kaye:

Thank you, Gail. As you heard earlier, our first quarter results reflect solid performance under a dynamic operating environment. We ended March with 46.2 million members reflecting Medicaid attrition, partially offset by ongoing momentum in our commercial business. During the quarter, we added nearly 400,000 commercial fee-based members, driven by strong retention and a successful national account selling season, and over 200,000 individual ACA members, given our attractive product positioning and coverage transitions away from Medicaid. Medicare Advantage membership declined slightly, as expected, given select market exits and the collective actions we continue to take to establish a strong foundation for profitable and sustainable growth over the long term. Operating revenue for the quarter was $42.3 billion, in line with our expectations. The consolidated benefit expense ratio of 85.6% improved 20 basis points year-over-year due to disciplined premium rate adjustments to reflect medical cost trends and the ongoing recovery of commercial margins from pandemic era lows. The adjusted operating expense ratio was 11.4%, consistent with the first quarter of 2023, indicative of our commitment to disciplined expense management and investment prioritization. Solid performance and growth in operating gain for both our health benefits and Carelon segments of $138 million and $72 million respectively, led to growth in consolidated adjusted operating gains of over 7%. Carelon Services had a particularly strong start to the year with revenue and operating earnings growth driven by risk based service line expansions and effective cost management, especially in our Carelon Insights and Carelon Behavioral Health businesses, further accelerating our enterprise flywheel or growth. Operating cash flow in the first quarter was $2 billion, or approximately 0.9 times net income. With respect to the balance sheet, we ended the quarter with a debt to capital ratio of 39.4%, in line with our target range, preserving ongoing capital allocation flexibility. We repurchased 1.1 million shares of common stock for approximately $566 million during the quarter, underscoring our confidence in the intrinsic value of our shares and the long-term value proposition. We maintained our prudent and consistent approach to reserving. Days in claims payable stood at 49 days as of March 31st, up three days from the prior year quarter. This increase was largely driven by higher reserves associated with slower claims receipts due to an industry-wide disruption that impacted a major claims clearinghouse. As a reminder, we expect our days in claims payable to be in the low 40s range long term. I'd also like to take a moment to provide additional color on our strategic partnership with Clayton, Dubilier & Rice. We are excited to partner with CD&R to scale what will be a best-in-class, payor agnostic advanced care delivery and enablement platform catering to the unique needs of consumers, regardless of their form of coverage. This collaboration will allow us to advance our local-oriented approach to care delivery based on the unique needs of the communities, consumers, and employers we are privileged to serve. At the onset, Elevance Health will hold a significant minority position in the combined business with a clear path to first majority and then full ownership in approximately five years. The formation of the strategic partnership includes our capital contribution in the form of cash and our equity interest in certain care delivery and enablement assets of Carelon Health as well as the conveyance from CD&R of our pre-health in Millennium Physician Group, and is subject to customary regulatory approvals. Overall, we are pleased with our first quarter performance and the solid start to the year. Momentum in our health benefits and Carelon businesses and the balance and resilience of our enterprise underscores our confidence in delivering another year of growth in adjusted diluted earnings per share consistent with our long-term compound annual growth rate of at least 12%. As we look forward to the rest of 2024, our focus will remain on successfully executing our strategy as we accelerate capabilities and services, invest in high growth opportunities, and optimize our health benefits business. And with that, operator, please open the call for questions.

Lance Wilkes:

Great. Thanks so much. Let me ask a little bit about the value-based care strategy and the execution that's obviously a really big step forward. Could you talk a little bit about kind of the vision and scope of this? Is this going to be more focused on enablement or in particular markets, is practice ownership going to be important? Then maybe if you can kind of color in the picture a little bit as far as leadership, names, which Carelon assets are going to be contributed. And near term, do you see which areas of leverage across the membership base of Elevance, do you see this being able to penetrate most effectively? Thanks.

Operator:

Next, we'll go to the line of AJ Rice from UBS. Please go ahead.

Gail Boudreaux:

Thanks for the question, AJ. Let me maybe provide some broad-based comments and then I'll turn it over to Mark to provide a little more specificity on your questions. Now, I want to say first and foremost, I'm really proud of our teams and how they responded to this issue that occurred with Change quickly and effectively, first to protect our members and their data, and also help our care providers maintain their operations and cash flow. Importantly, I think it's important to note that from a perspective, we were not as significantly impacted by this and we are back to normal operations in terms of claims flow. Importantly, another thing that's really important to understand is our prior authorization provider payments and pharmacy claims were not materially impacted as well because they don't go through Change. We don't use Change significantly for those. So with that, I'll turn it over to Mark to provide a little more comments. But I think framing it overall, we feel that our teams acted quite quickly and really proud of our ability to work in the ecosystem to help support them.

Gail Boudreaux:

Thank you. Next question, please.

Josh Raskin:

Hi, thanks. Good morning. I wanted to get back to the partnership with CD&R and specifically what alternatives did you evaluate and consider before coming to this arrangement? And I think in the past, you were stressing more and I've heard it today as well that focus on specialty care. So how does that fit in and sort of get bolted on, on top of this? And maybe where does this fit into your longer term national approach? And then how important was it that you could serve multiple memberships inside not just Medicare Advantage? Thanks.

Operator:

Next, we'll go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead.

Gail Boudreaux:

Thanks, Ben. I'm going to have Pete probably provide a lot more context. But just quickly, about a third of the membership is under risk arrangement now. So with that, Pete, why don't you give a little more color into the relationship and how we see it evolve.

Mark Kaye:

And then 1 quick financial remark just at the end of Pete's comments there. We do expect the consolidated entity once formed to have over $4 billion in annualized debt revenue.

Operator:

Next, we'll go to the line of Dave Windley from Jefferies. Please go ahead.

Gail Boudreaux:

Thank you. I'm going to have Felicia Norwood address your questions.

Gail Boudreaux:

Next question, please.

Lisa Gill:

Hi, good morning and thank you. I was wondering if maybe you could talk about utilization trends by line of business and what you saw in the quarter versus your expectation.

Gail Boudreaux:

Next question, please.

Kevin Fischbeck:

Great. Thanks. Just wondering if, it's not a huge increase in guidance, but would love to kind of hear what was driving the increase in guidance. Is it something on the health plan side? Is it on the Carelon side? And I guess just thoughts about how you thought about providing increases in guidance. It sounds like you believe that visibility is relatively high in claims, but obviously there's some concern there. So I don't know if there's any conservatism or thought about pace of raises versus what you're actually seeing in the core business today. Thanks.

Gail Boudreaux:

Next question, please.

Whit Mayo:

Hey, thanks. Just wanted to hear any comments on the external revenue growth with Carelon Services. Did that grow faster than the overall segment? You did, I think, reference some strong external growth. So curious what might be gaining traction in the market. And then just a quick question on guidance. Mark, you've averaged maybe 55% to 56% of earnings in the first half. Any reason that would be different this year? Thanks.

Peter Haytaian:

Yeah, thanks for the question. As it relates to Carelon external growth, we continue to see a really nice momentum in our build. I mean, for 2024, from an overall sales perspective, we've already this time of the year, exceeded what we did in all 2023. And you heard Gail mention in her prepared remarks several new wins, which we're really excited about, really growth across the portfolio with some notable wins in behavioral health. She mentioned winning a statewide account in Medicaid for Maryland, which we're really excited about, and then some new innovative solutions with large employers as well as wins in the state of California. And on the behavioral health side, also some select wins in the crisis space, so areas that we've been really focused on. In addition to that, we've had some notable wins with the Blues related to our insights business. We've talked about this before, but it's really critical that we prove some of our risk arrangements and our differentiated capabilities in Elevance and then port those to the Blues. And we've seen that play through with several notable wins. Lastly, I'd say we're excited about the ‘25 pipeline. We're obviously actively in the selling season, our pipeline is very rich. And again, I would say a large focus on our insights businesses, as well as our behavioral health businesses.

Gail Boudreaux:

Thanks, Mark, and thanks for the question, Whit. And I just want to add to Pete's comments about just the momentum that we're seeing inside of Carelon. First, our proof points are within Elevance Health, and then secondarily now seeing some really nice momentum and traction externally. So thanks for the question. And next question, please.

Nathan Rich:

Great. Good morning, and thanks for the questions. Gail, I wanted to follow up on your comments on the Medicare business and the goal of balancing growth and margins. Could you maybe just elaborate on that, given the tougher rate environment that you highlighted? And I think the companies prioritize margin improvement in Medicare this year. Does that kind of remain on track for 2024? And do you expect to plan for further improvement in 2025?

Operator:

Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead.

Mark Kaye:

Thank you very much for the question. You should see these two targets as synergistic. We remain firmly committed to achieving a long-term adjusted earnings per share CAGR of 12% to 15% through 2027 as we communicated at our Investor Day event last year. And then as we think more broadly around the long-term, we have confidence that through business cycles and over time, the earnings power of our health benefits and Carelon flywheel will generate the momentum and the foundation that's needed to sustain a long-term compound annual growth rate of at least 12%.

Operator:

Next, we'll go to the line of Sarah James from Cancer Fitzgerald. Please go ahead. And Sarah, your line is open.

Andrew Mok:

Hi. Good morning. Hoping you can give us an update on your transition of specialty scripts to BioPlus and help us understand the contribution that that's expected to have this year. Thanks.

Peter Haytaian:

Yeah, thanks for the question, Andrew. Listen, the integration of BioPlus is going well. As you know, we remain on an accelerated calendar regarding this. I'll just reiterate, we spent last year building out the infrastructure and the team, and we did begin migrating scripts in January of this year. And we're doing so really on a staged basis. So we'll continue to do the migration throughout ‘24 and into 2025 as it relates to the Elevance Health book of business. I'd say overall things are going well. The infrastructure build is going well in addition to the BioPlus dispensing facilities that are in place. We're live with one additional facility now as we speak and we have two more going live this year. So we feel very good about the capacity, not only with respect to the Elevance Health business, but business beyond that. So we're excited, we're on a path, and again it will be staged throughout ‘24 and ‘25.

Operator:

Next, we'll go to the line of George Hill from Deutsche Bank. Please go ahead.

Gail Boudreaux:

Yeah, George, I think Felicia pretty much covered your question, which is, we think things are quite aligned at this point. So in terms of the acuity and the mix, everything, we have visibility into 75% of our Medicaid premiums. We've had very constructive discussions with our states. So, overall, we feel things are lining up. They're actuarially sound, and our conversations are ongoing. So, I feel very good about our Medicaid business, just to sort of put a finer point on that. In terms of Kroger, I'm going to ask Pete to comment on Kroger and how that's going to align with our broader pharmacy business.

Gail Boudreaux:

Next question, please.

Scott Fidel:

Hi, thanks. Just interested if we could double-click on the Carelon Services margins in the first quarter with the 90 basis points of expansion. Anything specifically that you would call out there, and then that pacing does seem to be quite a bit stronger than the full-year guidance where you had sort of called for a flattish to down 30 basis points. So, curious whether you have any updates for us just on how you expect Carelon Services margins to trend for the full year. Thanks.

Peter Haytaian:

Yeah, no, it's appreciated. And Mark's really covered it. But think about it this way. We are launching some pretty significant risk arrangements this year. We've talked about it, but a full risk arrangement in oncology, a full risk arrangement with the seriously mentally ill. And you should think about this as a natural cadence to launching this throughout the year, and that's what's going to impact the margins. So, for example, with the seriously mentally ill, we're doing this largely with the Medicaid business. It's not a big bang across all the Medicaid states immediately, as you'd expect. It's more methodical state by state in ‘24 and ‘25.

Operator:

Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead.

Gail Boudreaux:

I'm going to ask Felicia to address that.

Gail Boudreaux:

Next question, please.

Ann Hynes:

Yeah, thank you. Congrats on retaining the Florida contract, but it looks like you're actually gaining market share. Can you let us know the membership growth? And also looking ahead over the next couple of years, is there any big state renewal risks for Elevance and alternatively, is there any big RFP opportunities for you? Thanks.

Gail Boudreaux:

Next question, please.

Gary Taylor:

Hi. Good morning. Two quick ones for me. I just wanted to come back to Medicaid for a second. I mean, it's obvious your commercial book is doing very well, but you had expected Medicaid margins to come down this year, but you're saying the rate adjustments you're getting are actuarially sound for the acuity changes. So should we think about the lower Medicaid margins this year primarily just the deleveraging the OpEx impact of losing the revenue and enrollment and that MLR is going to be fairly stable? And then just my second question was, Mark made this comment, John made this comment for years about how days claims payable would eventually come down into the low 40s. That's a lot of inherent or embedded earnings power that could come through the P&L at some point over time. Can you give us any sort of sense of what long-term means in terms of seeing the reserves move lower?

Gail Boudreaux:

Thank you, Mark. One more question, please.

Sarah James:

Thank you. Just wanted to clarify a couple of things. One, on the reserve boost, are you saying the 1.7 days is fully related to conservatism via Change? Because that seems like about a $600 reserve boost to us, so I wanted to see if there was any other factors in that 1.7 days. And second, could you give us a sense of your Medicaid rate seasonality? Like, what percent of your book renews in 1Q versus 2Q versus 3Q?

Felicia Norwood:

And, Sarah, just on your question with respect to our Medicaid states and when our rates are up for renewal, we have roughly 10 states that renew in January, another state that renews in April, another nine that renew in July, and then the last two renew in the back half of the year in September and October.

Operator:

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through May 17, 2024. You may access the replay system at any time by dialing 800-876-4955. International participants can dial (203)-369-3997. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.

Steve Tanal:

Good morning, and welcome to Elevance Health's fourth quarter 2023 earnings call. This is Steve Tanal, Vice President of Investor Relations. And with us this morning on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Peter Haytaian, President of Carelon, Morgan Kendrick, President of our Commercial Health Benefits Business; and Felicia Norwood, President of our Government Health Benefits Business. Gail will begin the call with a brief discussion of the quarter and year and recent progress against our strategic initiatives. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

Mark Kaye:

Thank you, Gail, and good morning. I am pleased to join you for my first earnings call as CFO of Elevance Health. As Gail shared, we delivered strong results every quarter of 2023, including in the fourth quarter, which was marked by solid top and bottom line growth and significant progress in the execution of our enterprise strategy to accelerate capabilities and services, invest in high-growth opportunities and optimize our businesses. Fourth quarter adjusted diluted earnings per share of $5.62 and full year adjusted diluted earnings per share of $33.14 were ahead of expectations. Since 2018, Elevance Health has achieved a compound annual growth rate of nearly 16%, surpassing our long-term target range of 12% to 15%. Operating revenue exceeded $170 billion in 2023, up 9.3% year-over-year driven by growth in both our health benefits and Carelon businesses. The benefit expense ratio was 89.2% for the fourth quarter and 87% for the full year, representing an improvement of 50 basis points and 60 basis points respectively, compared to the prior year periods. This was primarily driven by premium rate adjustments in recognition of medical cost trend, most notably in our commercial health benefits business. The adjusted operating expense ratio was 11.6% for the fourth quarter, up 20 basis points compared to the prior year period, driven by accelerated investments made in the quarter, notably in network quality, value-based care and customer experience initiatives designed to address key priority areas for Medicare Advantage stars. For the full year, the adjusted operating expense ratio was 11.3% flat year-over-year. Operating cash flow was $8.1 billion in 2023 or 1.3 times GAAP net income. This includes the benefit of approximately $300 million of state-based payments for 2024 dates of service that we received in the fourth quarter and which will correspondingly impact operating cash flow in 2024. We ended the year with a debt-to-capital ratio of 38.9% in line with our targeted range. Giving confidence in our outlook, we took advantage of market volatility during the fourth quarter to accelerate share repurchases, specifically, we repurchased 2 million shares of our common stock for $929 million, bringing total share repurchases for the year to 5.8 million shares at a total cost of $2.7 billion. Our health benefits business ended the year with approximately 47 million members, a decrease of around 570,000 year-over-year, driven by attrition in Medicaid associated with eligibility redeterminations, partially offset by growth in our commercial fee-based membership. Today, we are seven to eight months into the Medicaid redetermination process. And while there is significant variability by state, we believe that nearly two-thirds of our members have had their eligibility evaluated. Of those unenrolled, approximately 70% have lost coverage due to administrative reasons. And we have also seen an elongation in the time some beneficiaries have taken to reenroll into Medicaid, while others have transitioned on to an ACA exchange plan. As Gail noted, we are executing an extensive renewal campaign to maximize continuity of coverage. Accordingly, we expect reenrollment into Medicaid continue through at least 2024 and for growth in ACA exchange plans to accelerate. This has been incorporated into our membership guidance ranges for 2024. Turning to our financial outlook for 2024. We are pleased to provide initial guidance for adjusted diluted earnings per share of greater than $37.10, reflecting growth of at least 12% year-over-year. We are focused on optimizing our health benefits business, including through the ongoing margin recovery of our commercial risk-based business, the strategic repositioning of our Medicare Advantage plan offerings in certain markets and the transformation of our cost structure. Further, we are investing in high-growth opportunities with a focus on establishing a foundation for sustained long-term growth. We will scale Carelon's existing capabilities and add new ones in 2024 and driving incremental earnings growth and accelerating our enterprise flywheel for growth. The momentum in our commercial health benefits in Carelon businesses is partially offset by the Medicaid membership headwinds included in our guidance. We anticipate total medical membership to end 2024 in the range of $45.8 million to $46.6 million, down approximately $750,000 year-over-year at the midpoint. Medicaid membership is expected to end the year in the range of 8.8 million to 9.2 million members with attrition driven by the net loss of approximately 930,000 members associated with changes in our footprint discussed on our third quarter earnings call and ongoing eligibility redeterminations. Commercial membership is expected to grow by over $750,000 at the midpoint, ending the year in the range of 32.4 million to 32.8 million members. This includes over 300,000 net new risk-based members and approximately 400,000 net new fee-based members, collectively driven by new business wins and strong client retention reflecting our resolute focus on customer affordability, experience and simplicity. Medicare Advantage membership is expected to end the year approximately flat. As a reminder, we took intentional actions as part of our 2024 bid strategy to improve the sustainability of our product offerings. And given unexpected competitive dynamics in certain markets experienced greater-than-expected attrition. Nonetheless, these actions will help establish a strong foundation for profitable and sustainable growth over the long-term. And we remain confident in the outlook for utilization and medical cost trends embedded in our 2024 bids. Finally, we expect our Medicare supplement and federal employees' health benefits membership to remain relatively stable year-over-year. On a consolidated basis, operating revenue for 2024 is expected to be flat to up low single-digits. We project operating earnings for the year to be at least $10.3 billion, reflecting 9% growth with contributions from both our health benefits and Carelon businesses, disciplined benefit management, and the successful execution of our 2023 business optimization initiatives. Please note that our guidance metrics do not include the impact of pending M&A, even though we have several transactions we expect to close this year. Earnings seasonality is expected to be relatively consistent year-over-year with slightly more than 55% of our full year adjusted diluted earnings per share in the first half of the year and more than half of that expected in the first quarter. Finally, I'm pleased to announce that our Board of Directors recently approved a 10.1% increase in our regular quarterly dividend, raising it to $1.63 per share. This marks our 13th consecutive annual dividend increase, underscoring our commitment to delivering strong results for our shareholders and the value of our balanced and resilient business model. In closing, 2023 was a strong year for the company, and I'm looking forward to working alongside the talented and dedicated team at Elevance Health to deliver on our financial targets. I look forward to meeting all of you in 2024. And with that, operator, please open the line for questions.

A.J. Rice:

Hi, everybody. Welcome on board, Mark. Congratulations to the company for another year of meeting the growth targets and I know it's early to talk about this, but maybe you'd have to take some steps today to ensure your positioning. With 2025, you'll have the Star ratings impact overcome. When you think about that, will the company do anything differently? How do you think about the levers you have to push to offset what appears at least on the surface to be a couple percentage points of headwind from that Star ratings impact? We step up share repurchases, accelerate investments in Carelon, how do you think about that at this early date and the ability to sustain that 12% to 15% even into next year?

Operator:

Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead.

Mark Kaye:

Good morning and thank you very much for the question. Maybe let me start with the 2023, just to set the context here. So 2023 benefit expense ratio end of the year slightly better than our initial expectations at that 87%. And just to remind you, that represented the 60 basis point improvement year-over-year as well as falling in the lower half of our initial 2023 guidance range. As it relates to 2024, we are guiding to a flat benefit expense ratio of 87%, plus/minus 50 basis points. And our outlook here reflects a consistent approach to reserves and a prudent thought process around utilization, given the dynamic operating environment, especially for our government businesses. If I take a deeper look at the underlying businesses themselves, the health benefit expense ratio reflects that intentional management action we're taking in commercial. It will continue on through into 2024 around the disciplined underwriting practices and part of our margin recovery efforts. And then certainly, on the Medicare the advantage side, continued appropriate expectations around utilization and Medicare -- medical cost trends.

Operator:

Next, we'll go to the line of Josh Raskin from Nephron Research. Please go ahead.

Gail Boudreaux:

Well, thanks, Josh, very much for the question. And just maybe a couple of overarching comments because I think it's important that I'm going ask Felicia Norwood who leads our government business to comment more specifically. And I think it's important to frame that we made some very specific discipline decisions and feel really good about our bids entering into this. And Felicia, we actually exited some markets very specifically that were underperforming. So I think you have to take that into account. But she'll just provide a lot more detail on kind of where we landed this year and the perspective on the market. So Felicia, please.

Gail Boudreaux:

Thank you. Next question please?

Sarah James:

Thank you. Do you guys have some really nice margin expansion guided to for Carelon in 2024? I was wondering if you could unpack it a little bit for us, as we think through the major buckets that are causing the expansion. And then also the pacing, if it's ratable as we think about the margin expansion due 2024 and then I guess, further out as we get to 2027?

Peter Haytaian:

Yes. Let me - thank you, Sarah, for the question. Let me talk about Carelon Services growth. And we are very excited about the opportunity and the progress that we're making with respect to services growth. I think you saw that play through in 2023. We committed to double-digit increase on revenue, which we achieved. And as it relates to our 2024 guide, you saw that we're talking about high teens, low 20s growth. And it's really playing through our strategy that we talked about focusing in on complexities in healthcare, high-cost spend areas, and really driving capitated risk in key areas, to support our health plans. In 2023, we did that with our post-acute care initiative, DME, wound care. And as we move forward into 2024, I mean Gail mentioned this in the prepared remarks. We have new offerings that are whole health full risk opportunities like oncology, assuming full risk in oncology, as well as in Medicaid with behavioral health with the seriously mental ill population. So, these are significant initiatives that are really propelling the trajectory of our business. I would also say that as it relates to external growth. We're also seeing really nice improvements from that perspective and really nice momentum. Our pipeline in 2023 or 2024 growth was much more significant. In terms of our sales this time versus last year, we've seen a real nice trajectory in our growth. And we've had a couple of really nice notable wins with the Blues. I would say that as it relates to that and the opportunity with the Blues. They are doing exactly, what we've talked about in the past, and looking closely at some of these full risk comprehensive offerings that, we're delivering in Elevance Health and then very interested in that in terms of the opportunities to create predictable stable cost of care for them. So, very pleased with where we are in the trajectory of growth in Carelon.

Operator:

Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead.

Mark Kaye:

Stephen, thanks very much for the question. On Medicaid membership, our outlook reflects the footprint adjustments we spoke about on our third quarter earnings call and the continued attrition due to redetermination. We believe Medicaid redeterminations are approximately two-thirds complete across our Medicaid markets. And in general, we've seen more front-loaded disenrollment. Notably in a few large states that have elected to adopt accelerated processes. And then based on the trends that we've observed relative - or related to these market-wide coverage shifts. We have adjusted our Medicaid retention assumption, to be approximately 30% of our PHE related growth. We're not planning to provide point estimates for coverage transitions generally. We do, however, believe that ACA will pick up more than initially expected, while employer group coverage will gain a little bit less than initially expected. But most importantly, these updated projections are factored into our membership guidance that we provided this morning.

Operator:

Next, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead.

Gail Boudreaux:

Well, thanks for the question, Lance. It's quite a bit there. But I think let me start with our value-based strategy, we've talked about on this call a number of times, and I think I would say it's remained really consistent, but we're making a lot of very good progress on that. Overall, more than 60% are in value-based care. And in Medicare, it's even more. Specific to your question on renegotiation. We have multiple-year arrangements with our value-based providers, and we're always looking at a couple of things. One, quite frankly, to make sure that it's a win-win and we're aligned, both on cost quality outcomes and Stars. So, we spend a lot of time focusing on some of the ways that, we can get data back and forth more simply. We use our - we've integrated the way we share data back and forth. And that's really around closing gaps in care and quite frankly, simplifying the process under which we work with those providers. Our goal is to make that ubiquitous across all of our value-based providers. And so, we made a lot of progress there, and dramatically improve sort of the time, to action with those providers. And I think that's important because, honestly, that gives them data to act and that improves their outcomes. We have seen our value-based providers perform better in the circumstance, and we think that, that's going to remain important. In terms of our strategy around ownership. We've talked about that. We - as you know, we do have assets inside of Carelon. I guess where I would focus you more is around the specialty high-cost complex areas of specialty, because that's where we think that there's a huge differentiated focus between our technology, our clinical domain expertise and our ability to drive trend. Again, we don't need to own the providers, but we do need to have a significant role in the enablement of those care providers, and we have spent time doing that. We launched a number of new products this year with oncology, serious mental illness, and we're getting into other areas like musculoskeletal, renal and more. And I think - that's where you see the significant spend area is accelerating and Carelon with its assets has a great opportunity. So, we expect Carelon's care provider enablement platforms continue - to contribute pretty significantly Carelon's revenue meaningfully over the longer-term, and we're building those assets. And again, I'll keep going back to my flywheel, where we think that will improve the performance of our health benefit plans. There's a lot of interest in externally in these. And Pete mentioned, we saw some nice traction in a few of these offerings this year. So overall, I'd say very consistent focus around our value-based care - care enablement, and we feel like we're getting a lot of traction. And I would focus you a lot on the specialized care Specialty Care, particularly on the Carelon growth opportunity. So, thank you very much for the question. Next question, please?

Nathan Rich:

Great. Good morning. Thanks for the questions. Two on the Medicare business. First, you talked about Medicare cost trend developing as expected in the fourth quarter. I guess, I'd be curious if there are any areas that came in higher or lower than expected and what the benefit expense guidance for 2020 - for assumes for Medicare cost trend? And then I guess, higher level, as you reposition the Medicare business, and I understand there's several moving pieces over the next couple of years. What's the company's current view, I guess, first of the Medicare Advantage market longer term? But then second, the membership growth and margin potential for Elevance, specifically within that market context? Thank you.

Mark Kaye:

Nathan, overall utilization in the fourth quarter developed largely in line with our expectations. And that's evidenced by our reported benefit expense ratio, which came in favorable, as you know, to consensus and really to the midpoint of our initial full year 2023 guidance range. We did see pockets of high utilization, specifically in Medicare related to orthopedics such as knee and hip replacements and other outpatient procedures. But this is broadly planned for as part of our underlying cost trained assumptions. Similarly, we saw a seasonal up-tick in respiratory elements, including the flu and COVID as well as increased RC vaccinations. But again, utilizations were aligned with what we planned. We'll continue to monitor our claims trends closely, including prior authorization data. We remain confident that our Medicare Advantage bids for 2024, and our pricing commercial do reflect appropriate projections for utilization and medical cost trends.

Operator:

Next, we'll go to the line of Lisa Gill from JPMorgan. Please go ahead.

Mark Kaye:

Lisa, thank you very much for the question. I'll talk about health benefits, and I'll pass it over to Pete in a couple of minutes to talk about Carelon. On the health benefits side, we are seeing operating margins expand, or expect to expand by 25 to 50 basis points in 2024. And I think about this has really being driven by three primary categories. First is the continued underwriting discipline and the pricing actions that we're taking in commercial. 2023 really marks the end of the first full year of our efforts to recover margins from the pandemic era lows, and we expect those supporting initiatives really to continue through 2024, and then possibly into 2025. Second one, I'd call your attention to here really relates to the Medicare margin expansion. And here, as you've heard us talk about, this is about building that strong foundation for sustainable long-term growth in 2024. And striking that balance between growth and margin. And in 2024, we leaned a little bit more towards the margin and the growth and you see that come through in some of our outlook projections this morning. And then the third one, I'd call your attention to, is really the operating expense leverage, you see that we are gaining additional incremental leverage in 2024 with our guide down to 11.1% for the operating expense ratio.

Gail Boudreaux:

Next question please?

Scott Fidel:

Hi thanks. Good morning. I was hoping you could - just on the commercial risk enrollment guidance, if you can break that down for us, between group and individual? And then on the individual piece, I'm curious in terms of what you're thinking in terms of how much of that growth comes from the catchers - from Medicaid. And then, how you're thinking about the acuity of those lives that are coming into the exchanges from Medicaid. We know that in Medicaid, that acuity is generally rising as the re-determinations continue. So I'm curious, though, in terms of those lives that are transitioning into the exchanges - are you thinking about those as being sort of higher, lower, or in line acuity with the legacy population in the exchange market? Thanks a lot.

Morgan Kendrick:

Yes, Scott, thanks for the question. As we think about the ACA business, we've talked about it for a while now. We're quite bullish on that segment. And as we've remarked in other quarterly reports, we operate in all rating areas in our 14 geographies where we can. And certainly, we've seen an expansion in the actual market share, and the market growth actually in these geographies. In fact, it's certainly a big driver is Medicaid re-determination. As we've indicated earlier on the call today, we've concluded about two-thirds of those. We expect that to continue in 2024. And also, as we've noted in the past, we've seen an elongated period of time from when someone is re-determined and when they actually join Medicare or come on an ACA product moving along. That said, quite pleased that our growth this year is outpacing our market growth. So clearly, we're picking up our fair share and more, quite honestly, of the Medicaid re-determined members. So at the end of the day, this will continue. We've had a very steadfast and steady approach around the right economics, and the right network strategies, to draw in these members. It's very important for the business to continue. And I'm going to turn that over to Mark to speak a little bit about the margins and the separation of the various pieces that you asked the question on.

Gail Boudreaux:

Yes. And thanks, Scott. And I think you also asked about the acuity in the individual exchange marketplace. So I wanted to just put a fine point on that. Our risk profile of the members we're picking up certainly in 2023, obviously, early in 2024 very much aligns with the expectation of what we've historically had. So, we feel it's actually rolling out, to our expectations. Thank you for the question. Next question, please?

Ben Hendrix:

Thank you very much. I just wanted to follow-up on the Carelon margin question. On Carelon services, slightly down margins in the guidance. Just wanted to see if that - the degree to which that is associated with new risk-based arrangements, or membership, or to the perhaps to the new behavioral benefits and kind of what are the prospects for that, kind of ramping up beyond 2024? Thanks.

Gail Boudreaux:

Yes. And just to sort of put a finer point on it, we do remain confident in our long-term guidance that we gave in mid to upper single-digit operating margin. So as Pete said, we think the business we're bringing on, is really good. We're committed to bringing in more risk business. But in the early years, that does have a little bit lower profile. But overall, we feel very good about the long-term. Next question, please?

Justin Lake:

Thanks. Good morning. Most of my questions have been answered, but a couple of numbers here. First, you reported $200 million plus of positive prior year development in the quarter, materially more than I think the company has ever seen in Q4. Just curious, given the MLR was generally in line. Can you tell us whether there were any pressure areas that work to offset the benefit of the PYD in the quarter? And then with the benefits repositioning of Medicare Advantage, which we've clearly done, do you expect to be within your 3% to 5% target margin here for Medicare Advantage in 2024? Thanks.

Gail Boudreaux:

Thank you. Next question, please?

Gary Taylor:

Hi. Good morning. I just wanted to follow-up on enrollment. I kind of thought the story for 2023 was that with the intentional commercial repricing, which has been pretty successful this year, you lost some commercial risk enrollment because of that? And I'm just trying to figure out on the 1 million plus decline in risk enrollment for 2024, how much of that is commercial risk versus the expected Medicaid redeterminations?

Gail Boudreaux:

Thank you. And just again, to put a fine point, most of the loss in risk membership, is driven by both the Medicaid redeterminations and the adjustment in the footprint that we've shared with you in the past. So, that really is the key driver. Next question please?

David Windley:

Hi. Thanks for squeezing me in here. I wanted to go to CarelonRx on the revenue growth side. High growth in 2023 low single-digits, I think you're expecting in 2024. I suspect the BioPlus acquisition inorganically would have contributed to some of that growth in 2023, but I don't think it bridges the full change. So maybe you could add some color around the slowdown in growth, the lower growth expectations for CarelonRx in 2024? Thanks.

Gail Boudreaux:

Thank you, Pete. Our next question will be our last question.

George Hill:

Yes, good morning guys and thanks for squeezing me in after Dave. I'm going to come back to MA margins one more time. And I'm going to ask you if you could expand a little bit if there is a way to disaggregate kind of the MA margin expansion thinking about your pricing initiatives versus utilization expectation versus mix, and kind of the market exits that you guys have targeted. Just trying to figure if you can kind of maybe rank order the contribution on margin expansion in MA from each of those four initiatives?

Gail Boudreaux:

Thank you, Mark, and thank you to everyone who joined us. In closing, we're pleased to have delivered another strong year in 2023, and we're confident that the ongoing execution of our strategy and the balance and resilience of our diverse set of businesses positions us well for 2024 and beyond. We're very excited about our future, and we look forward to sharing more on our progress with you in the coming year. Thank you again for your interest in Elevance Health, and have a great rest of your week.

Steve Tanal:

Good morning, and welcome to Elevance Health's third quarter 2023 earnings call. This is Steve Tanal, Vice President of Investor Relations. And with us this morning on the earnings call are Gail Boudreaux, President and CEO; John Gallina, our CFO; and Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial and Specialty Health Benefits business; and Felicia Norwood, President of our Government Health Benefits business. Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. John will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

John Gallina:

Thank you, Gail, and good morning to everyone on the line. As Gail mentioned earlier, we reported strong third quarter results. Given outperformance against our initial expectations year-to-date, we have increased our outlook for adjusted earnings per share in 2023 to be greater than $33, reflecting growth consistent with our long-term compound annual target of 12% to 15%. Our outlook includes incremental investments we have planned for the fourth quarter to support growth in Medicare Advantage in 2024 and beyond. Based on our updated guidance, our five-year compound annual growth rate in earnings per share is expected to be 16%, which makes Elevance Health the only company in our sector to have exceeded 15% over that time frame. We ended the third quarter with 47.3 million members, an increase of 42,000 members year-over-year driven by growth in BlueCard and ACA membership. During the quarter, medical membership declined by 664,000, driven by attrition in Medicaid due to eligibility redeterminations and a new entrant into one of our state programs in July, which resulted in a loss of approximately 140,000 Medicaid members. We are now three to four months into redeterminations of most of our states, and this enrollment in many appears to be front loaded with approximately three quarters of those terminated from Medicaid having lost coverage for administrative reasons. We are seeing many consumers return to Medicaid after being temporarily disenrolled, while others are experiencing gaps in coverage before transitioning on to ACA exchange plans. Given the patterns we have observed to-date, we expect reenrollment in the Medicaid and transitions to ACA exchange plans to accelerate. Operating revenue in the third quarter was $42.5 billion, an increase of 7.2% over the prior year quarter. Growth was driven by rate increases to cover overall trend in our health benefits business, coupled with double-digit top line growth in CarelonRx driven by growth in pharmacy customers and the acquisition of BioPlus. The consolidated benefit expense ratio for the third quarter was 86.8% an improvement of 40 basis points compared to the third quarter of last year, driven by premium rate adjustments to cover medical cost trend and solid performance within our government business. Now I would like to spend a moment discussing the business optimization charge we announced as part of our results this morning. As Gail mentioned earlier, we took decisive action during the quarter to position our company for long-term success by enhancing operating efficiency, refining the focus of our investments and optimizing our physical footprint. These actions will ensure we stay well positioned to provide affordable products while delivering on our commitments to all of our stakeholders. As a result of this strategic review, we incurred a business optimization charge of approximately $700 million, comprised of write-offs and write-downs of internally developed software and related assets, severance and leases associated with optimizing our physical footprint. These actions will result in gross annual run rate operating expense savings of approximately $750 million per year, a portion of which will be reinvested in growth opportunities, including Medicare Advantage and the accelerated rollout of certain digital capabilities. We are committed to doing even better and we'll continue to evaluate opportunities to enhance operating efficiency further. Elevance Health's adjusted operating expense ratio in the third quarter was 11.1%, and a decrease of 30 basis points over the prior year quarter. However, the third quarter last year included additional out-of-period quality improvement expenses due to the accounting realignment we announced then. Excluding out-of-period quality improvement expenses in the third quarter of last year, our adjusted operating expense ratio would have been unchanged. Adjusted operating gain for the enterprise grew 12.6%, led by our Health Benefits business, which delivered double-digit growth as we continue to optimize premium rates and products while enhancing operating efficiency across the segment. Operating margin for our Health Benefits improved by 30 basis points year-over-year consistent with our expectations. Carelon also delivered a strong quarter with growth in pharmacy growth in pharmacy customers and the acquisition of BioPlus propelling CarelonRx to 17.5% revenue growth. CarelonRx operating earnings included investments to support the build-out of our specialty pharmacy and advanced home delivery capabilities both of which will ramp up in the coming months. In addition, comparisons to the third quarter of 2022 have been negatively affected by the out-of-period fee-based revenue realized in the third quarter of last year. In Carelon Services, strong growth in operating earnings was driven by expansion of Carelon post-acute solutions and growth in our behavioral health business. Turning to our balance sheet. We ended the third quarter with debt-to-capital ratio of 39.2%, in line our with our expectations and consistent with our target range. During the quarter, we repurchased approximately 1.1 million shares of common stock for $480 million. Year-to-date, we repurchased 3.8 million shares of common stock for 1.7 billion, pacing ahead of our full year outlook of approximately $2 billion. We will remain opportunistic with share repurchases, especially considering the share price and recent volatility in the market. As noted in our earnings release, we ended the quarter with $5.1 billion of board-approved share repurchase authorization remaining. We continue to maintain an appropriately prudent posture with respect to reserves. Days and claims payable stood at 48.6 days at the end of the third quarter, an increase of 2.1 days sequentially and an increase of 0.9 days year-over-year. As a reminder, we continue to expect days in claims payable to be in the low 40s range over time and anticipate normalization towards this range in the coming quarters as cycle times shortened and COVID-related claims uncertainty recedes. Operating cash flow was approximately $2.6 billion or two times net income in the third quarter of 2023. Excluding the impact of the business optimization charge I discussed earlier, operating cash flow would have been 1.4 times net income. Given strong performance year-to-date, we are planning to make planning to make incremental investments in the fourth incremental investments in the fourth quarter in Medicare Advantage marketing and retention and in capabilities and services that we expect will enhance customer satisfaction, supporting our growth in 2024 and beyond. While we are disappointed in the outcome of the recently released Star quality ratings, we remain committed to this important line of business for the long-term and are exploring all options to mitigate the financial impact on 2025. Turning to 2024. Although we are not planning to provide specific guidance on this call, I would like to review some of the tailwinds and headwinds that are known at this time, starting with our tailwinds. We continue to optimize our health benefits business, including by executing a multiyear margin recovery in our commercial risk-based margins to return to pre-pandemic levels and expect margin improvement will continue next year. We also anticipate improvement in Medicare earnings, driven in part by corrective actions taken in our 2024 Medicare Advantage bids to improve financial performance in Puerto Rico, where we experienced significant challenges this year. We expect continued momentum in Carelon, including growth in Carelon services, driven by new product launches and opportunities for meaningful external growth across businesses and the ramp-up of BioPlus and the launch of Carelon Advanced Home delivery both of which to supplement ongoing momentum within Carelon Rx. We also expect to enhance operating efficiency as a result of the actions we took during the third quarter and we'll continue to look for opportunities to drive efficiency as we transform our cost structure over the long term. And we expect today's higher interest rate environment to drive growth in investment income. Our tailwinds will be partially offset by our headwinds, which all relate to the Medicaid business, where we anticipate membership attrition associated with ongoing eligibility redeterminations and the net loss of approximately 930,000 additional members associated with changes in our footprint. While Medicaid rates remain actuarially sound, we're also mindful of the risks associated with evolving risk pools. And we'll continue to monitor and manage these dynamics closely. Beyond 2024, Medicaid offers attractive long-term growth opportunities, notably in specialized populations, and we anticipate a return to growth in 2025 and beyond. Most importantly, the balance and resilience of our diverse businesses provides confidence in our near-term outlook while the earnings power of our Health Benefits and Carelon Divisions, position us to deliver on our long-term growth commitments. At this point in time, we believe the current consensus estimate for adjusted earnings per share of approximately $37 in 2024 is appropriate. And we anticipate delivering another year of growth consistent with our long-term compound annual growth rate target next year. We look forward to providing more specific guidance, on our fourth quarter earnings call. Finally, as many of you know, this will be my last earnings call as CFO of Elevance Health. It has been a pleasure to serve this organization for more than 29 years, including the past seven in my current role. I have been involved in 88 quarterly earnings calls since Anthem went public in 2001, including 30 of them as Chief Financial Officer. Every year has had its opportunities and challenges and 2024 is no different. We serve our members while furthering our mission and will continue to meet and exceed our shareholder commitments. The balance and resilience of our businesses has created numerous tailwinds and has allowed us to overcome various headwinds, and I'm confident we will continue to do so. I feel fortunate to have been part of what I believe to be the best leadership team in the industry and to be leading the finance organization in an even stronger position than when I took over. I've enjoyed engaging with all of you over the years. I want to thank you for your support. I look forward to supporting Mark Kaye, as he assumes the role of CFO, ensuring a smooth transition before retiring, to spend more time with my family in the first quarter of next year. With that, operator, please open the line for questions.

A.J. Rice:

Hi everybody. Thanks and John, I wish you the best and the retirement. It's been great working with you, and I really appreciate all the help over the years. I want to maybe just ask on the commercial at margin improvement story and what you've been doing there, is if you ex-out that the year this quarter, what was the underlying cost trend for you? Did you see any pockets of variance and utilization that are worth calling out? And you guys have said on the recorded or the message so far, several times that you have that there will be some additional benefits on the commercial margin improvement story into next year. Is there any way to size that that or talk about relative to how much gain you had this year from that repricing and the other things you're doing to improve the margin on the commercial side?

Gail Boudreaux:

Yes. Thanks for the question, A.J., and I'll just reiterate John's comments on commercial. I think the team has done a really nice job as we shared, this is a multiyear journey in terms of the commercial business, and we feel like we're right on track. And as -- the team has done a really nice job of balancing both membership retention, as well as getting our margins in line where we believe they need to be. So thanks for the question. And next question, please.

Nathan Rich:

Great. Good morning, and thanks for the question. And let me just echo my congratulations, John, on your retirement. I wanted to ask on the Medicare business. Could you talk about the goal for improving Star scores? Are you investing to kind of get back to the level that you are out with 65% of members in 4-star plans? And over what period are you thinking? And how should we think about the magnitude of the incremental investments planned for the fourth quarter as well as into next year. And any comment on the kind of how long it would take to reach the run rate of optimization savings, the $750 million that you talked about would be helpful as well. Thank you.

Operator:

Next, we'll go to the line of Lisa Gill from JPMorgan. Please go ahead.

Gail Boudreaux:

Thank you for the question, Kyle, and certainly appreciate all the commentary. First of all, on Medicaid, the Medicaid disenrollment, as we said, has been very much front-loaded. And in terms of how that compares to our expectations, our expectations were as it would have been more normalized over a 12 to 14 month process. What we are seeing is that there's administrative churn and that a lot of people are losing Medicaid coverage temporarily and then they're coming back on. We're reenrolling folks 30, 60, 90 days after they were disenrolled and that was, that dynamic was not part of the original thought process but it's certainly part of the reality. I'd like to say September 30th or December 31st for that matter is just going to be one point in time over a 12 month to 14 month process. What we have not seen, and maybe the most important element is that at the beginning of the year, when we discussed that we think that we're going to going to retain about 40% to 45% of all Medicaid members who received coverage during the PHE, we still believe that is a very good estimate. And by the time the dust settles in the third quarter of 2024, we feel good about that estimate. It's just going to be a little bumpier or rockier along the way because of the gaps in coverage and because of the administrative churn. And on the commercial side, we're actually seeing really excellent growth in the individual ACA. Once redeterminations began in a particular state, the level of applications on the ACA products were up three times the amount that they were prior to that. And so that really does point to the fact that we do have the catcher's mitt in action. The employer-sponsored side that's actually going maybe a little bit less than we had anticipated. So individual ACA is going a little bit faster, employers sponsored a little bit slower. But all in, we really do believe that by the time we get through this entire process, which won't be completed until sometime in the third quarter of 2024, that the estimates we provided at beginning of the year will prove to be pretty good estimates. So hopefully, that helps. Thank you. Next question, please.

Stephen Baxter:

Hi, thanks. Wanted to follow-up on the Medicaid redeterminations question there. So I appreciate all that commentary you just made. Would it be fair to say that at this point in part driven by the fact that you've got seemingly good and actuarially sound rate updates from your states that you haven't really seen all that much normalization of your margins in 2023. I believe you came into the year thinking that you performed in 2022 above your long-term targeted range, and there might be some pressure. I would love to just get an update on how that's performed in 2023 and how you're thinking or potentially considering that in your comments on 2024? Thank you.

Gail Boudreaux:

Yes. Thanks, John. And I think as -- just to put a, sort of, summary on that, we feel we've got great visibility into the rest of this year. And the discussions around 2024 have been incredibly productive with about 50% of our premiums with good visibility there. So we think that those conversations are going well, and things are tracking according to expectations. So thanks for the question and next question please.

Ben Hendrix:

Thank you very much. I just also want to reiterate congratulations to John and thank you for all the help. Just wanted to circle up with a quick follow-up on MA. Appreciate all the questions on my health advocate and efforts there. I just wanted to know if there's any early thoughts on how much of the headwind you can mitigate with contract diversification/ And then kind what the time line is for getting all those approvals at the state level to carry that forward. Thank you.

Operator:

Next, we'll go to line of Kevin Fischbeck from Bank of America. Please go ahead.

Gail Boudreaux:

Yes. Thanks for the question, Kevin. I think let me put this in a little perspective because it's important to note, we're always evaluating our cost structure. And as we headed into 2024, we took very proactive and decisive action in the third quarter. We wanted a couple of things; one, increase our financial and operational flexibility and also ensure that we're positioned to deliver on our commitments to stakeholders. So, if you look at the charge in total, I mean, it really is kind of focused in three areas of cost management. And I think it's prudent to continue to always look at your cost structure, something we've been doing is, obviously, as we've been looking to manage that. And let me go through the three pieces because I think it's important. First, as you know, and we've talked about quite a bit on these calls, we've been investing over the past several years in modernizing our infrastructure, particularly around digital capabilities and migrating a lot of our applications to the cloud, consolidating our systems and our data and now most recently, use cases on using AI to drive greater efficiencies. The pace of technological innovation has changed and it continues to accelerate. And again, as I said, we're committed to deploying those responsibly quickly in our company. So what you're seeing in that first bucket is the write-down of some of those legacy processes that have now been replaced with our support -- that support our long-term goals with digital and AI and other things. And we've gone through that first phase that we've been talking about over the last several years on consolidation, data aggregation, et cetera. The second adjustments were really to our workforce. And that, again -- last year, we aligned our structure on benefits and services. This gave us an opportunity to look at redundancies across our business and our processes and eliminate handoffs, streamlined, very focused on ensuring that members because of our large benefit businesses can move between those businesses. It's an integral part of our strategy. And so that's been an important part of streamlining our work processes, simplifying our member experiences. And so as you think about the investments that we've been making in technology, particularly our front-door applications and things that automate some of our work, this was an opportunity for us to make sure that we had the right scaling of our workforce. And again, in the bigger scheme, these are not significant numbers. But again, I think it's really important that we constantly look at our cost structure. Then the last part is we went to a hybrid work environment. We've been evaluating the size and locations of our work sites, and we took the opportunity to further optimize those to make sure that we were located in the right places and had the right footprint. So as you think about all those, it's an approximately $700 million of charges, and it results in a run rate of about $750 million. Again, as John said, it doesn't all drop to the bottom line but that we think is important to support our long-term growth in our enterprise strategy. So that gives you a bit of a sense of how we thought about these as an ongoing opportunity to continue to optimize our cost, which we think is important for affordability in healthcare. So thanks very much for the question, and next question.

Sarah James:

Thank you and echo my congratulations to John. I was hoping that you guys could give a little bit more context around the recapture rate of the terminated Medicaid lives. So are you seeing recapture within Medicaid from the appeal process yet? And then on the ACA side, how do you think about the 30% recapture maturing into 2024 with your members, but then also potentially there's more people looking for ACA plans in 2024.

Gail Boudreaux:

Yes. Thanks, John. And Sarah, I think just to sort of put a bow on this, I think it's really important just to frame it, almost 75% are administrative disenrollments and then over almost 37% are children under 18. So those are two areas, obviously, we're intensely focused on and there's a timing issue associated with this. So there's some delays in coverage and some coverage gaps, and we've been working really closely with our states. But as John said, we are seeing some encouraging signs where that 30% or more of our Medicaid members who are terminated prior to the end of June are now returning and retaining coverage with Elevance. So we expect that reenrollment to accelerate in the coming quarters. So I think that's important to keep in mind as we're all working through this process And certainly, the states are working through this process, and we have been continuing to adapt how we get to these members particularly the ones that were just enrolled for administrative reasons. So again, we feel pretty comfortable with the numbers that we shared and the guidelines we showed, and we are seeing pickup certainly in the individual business as this progresses. So thanks again for the question. And next question please.

Michael Ha:

Thanks and congrats to John as well. I wanted to ask a quick question first regarding BioPlus. I wanted to confirm, did you mention you're going start migrating specialty script away from your legacy platform early next year. Would that imply you've made the decision to in-source your specialty drug spend away from CBS? And then my real question, just regarding MA and STAR ratings, in terms of the improvement efforts for CAP specifically, how much of the overall underperformance would you attribute to the providers pivot? And how can you fix those results for that without actually having ownership of providers? I mean how can you effectively drive your provider network to make the necessary changes to improve your results? Curious what the plan is there.

Peter Haytaian:

Thanks for the question, Michael. Yes, to answer your question directly, we are beginning the migration to BioPlus starting January 1. And again, just to reiterate, we've been very, very focused on the last year with regard to implementation and integration of BioPlus as it relates to our specialty strategy. A lot of the focus this year has been building the infrastructure and the team. So that we have the appropriate scale and capacity to take on the Elevance Health volume. And we feel very good about that. As Gail noted in his prepared remarks, we are accelerating the time line in that regard, and we are moving forward with that for January 1. And again, this is all a part of our strategy in pharmacy, just to reiterate, and that is to in-source the strategic levers that matter. Specialty pharmacy is very critical to that as well as what we're doing in advanced home delivery. So again, excited about that. And yes, it is launching January 1.

Operator:

Next, we'll go to the line of Josh Raskin from Nephron Research. Please go ahead.

Gail Boudreaux:

Yes. Thanks for that question, Josh. We'd love to share more about our strategy. I'm going to have Pete Haytaian talk about it as you know he leads that part of our business.

Gail Boudreaux:

Thanks, Pete, and thanks for the question. And I think if just summarize everything Pete said, we're really working in Carelon across kind of four major areas. Obviously, pharmacy with CarelonRx and then three pillars inside of our Carelon services business, care delivery, our insights and our behavioral health and all of those come together in all of Pete said. And we have a great opportunity to provide greater certainty and cost management to our owned health businesses, but externally commercialize that and seen a lot of momentum going into '24 on that, prove it on ourselves and then show the market the capabilities, particularly around the Blue system. So, thanks again for the question, Josh, and this will be our last question.

Justin Lake:

Thanks for squeezing me in, and I'll ask it my thanks to John for everything over the years. Really appreciate it, bud. Along those lines, Gail, maybe you can give us a little color around the CFO search and what you expect Mark to bring to the organization. And then just curious, if you have any early views on 2024 Medicare Advantage membership growth, both for Elevance and the market overall? Thanks.

Felicia Norwood:

So good morning, Justin, and thank you. We are actually very excited about AEP. As Gail referenced, we are only three days in, but we're actually very pleased with the response we have from our brokers regarding the competitive positioning of our benefits and we believe that will be able to grow membership above the market in excess of some strategic decisions that we made around targeted market exit. So I want to point out that we made the very intentional and discrete decision to leave some markets that have been underperforming for us some period of time. Strategically, it was the right thing to do so that we can make sure we are focused on those markets where we have an opportunity to be very successful, deliver strong benefits for the members that we're privileged to serve. So as we think about where are today, we feel good about our positioning. As I said, we're very early in terms of where we are. But we believe as we head into 2024, we're going to be able deliver solid growth. As I said, I believe that will be above the overall market rate, based on where we're positioned. So thank you very much for the question.

Operator:

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 AM today through November 17, 2023, you may access the replay system at any time by dialing 866-405-7293, and international participants can dial 203-369-0605. This concludes our conference for today. Thank you for your participation and for using Verizon Conferencing. You may now disconnect.

Steve Tanal:

Good morning, and welcome to Elevance Health's second quarter 2023 earnings call. This is Steve Tanal, Vice President of Investor Relations and with us this morning on the earnings call are, Gail Boudreaux, President and CEO; John Gallina, our CFO; Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial and Specialty Health Benefits division; and Felicia Norwood, President of our Government Health Benefits division. Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. John will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

John Gallina:

Thank you, Gail, and good morning to everyone on the line. As Gail mentioned earlier, we reported strong second quarter results, including GAAP earnings per share of $7.79 and adjusted earnings per share of $9.04. We were pleased to deliver another quarter of double-digit growth in revenue, operating income and adjusted earnings per share, driven by the focused execution of our strategy. Our results exceeded our expectations and the balance and resilience of our diverse set of businesses provides confidence in our outlook. As a result, we have increased our adjusted earnings per share guidance to be greater than $32.85 in 2023, reflecting strong growth consistent with our long-term targeted compound annual growth rate. We ended the second quarter with 48 million members, up 938,000 year-over-year. During the quarter, medical membership declined by 135,000 members as the majority of our Medicaid states initiated eligibility redeterminations. While we are still very early in the redetermination process, at this time, we are seeing many Medicaid members losing coverage for administrative reasons. Many of these consumers will likely re-enroll in Medicaid in the near to intermediate term. In fact, many Medicaid beneficiaries who lose coverage for administrative reasons have 30 to 90 days to re-enroll depending on the state with coverage retroactive to the termination date. Meanwhile, we are seeing encouraging early indications that Medicaid beneficiaries losing coverage are transitioning into ACA exchange plans. But transitions of coverage are not always immediate. And our expectation is that commercial membership growth will re-accelerate in the back half of this year and into 2024. Overall, we believe our prior outlook for coverage transitions remains appropriate. We continue to expect by the end of the initial redetermination cycle that 40% to 45% of net new beneficiaries on Medicaid as a result of the suspension of redeterminations during the public health emergency will stay on Medicaid. But most importantly, we are well positioned to provide people who lose Medicaid coverage with alternative plan offerings. We believe it is essential that these individuals have access to quality healthcare coverage and we are positioned to meet their needs. With respect to our membership outlook, please note that a new entrant into one of our state Medicaid programs will result in a loss of approximately 140,000 members in that state in the third quarter. This was known as of last year and was factored into our 2023 planning and initial membership guidance. Second quarter operating revenue of $43.4 billion increased $4.9 billion or approximately 12.7% year-over-year. Growth was driven by premium rate increases to cover overall trend in our Health Benefits businesses, along with higher premium revenue driven by membership growth in Medicaid and Medicare. Our services business, Carelon, continues to produce strong results with double digit top-line growth in CarelonRx and Carelon Services, as we continue to execute on our strategy of becoming a lifetime trusted health partner. Execution of our strategy is diversifying our revenue streams, creating greater earnings power and consistency, and enabling us to deliver strong growth regardless of the prevailing economic environment. The consolidated benefit expense ratio for the second quarter was 86.4%, a meaningful improvement year-over-year, driven by premium rate adjustments in our commercial risk-based business to better reflect the post-pandemic medical cost structure, offset in part by a charge we took in the second quarter associated with a court ruling in a certain state holding health plans liable for certain COVID costs retroactive to the beginning of the pandemic. We strongly disagree with this ruling and it is currently on appeal, but we've recorded the potential charge in the meantime. With respect to our current performance, we of course are closely monitoring utilization and trend factors which remain consistent with our expectations overall and within each line of business. In the context of our upwardly revised guidance for adjusted earnings per share, we are reiterating our initial outlook for our full year consolidated benefit expense ratio. Elevance Health's adjusted operating expense ratio was 11% in the second quarter, down 10 basis points year-over-year. The decrease was driven by expense leverage associated with strong growth in operating revenue, partially offset by additional operating expenses in support of growth as we continue to execute our enterprise strategy. Operating gain for the enterprise grew 12% year-over-year in the second quarter, led by our Health Benefits business, which delivered double-digit top-line growth and strong margin improvement. Operating margin for our Health Benefits business expanded by 50 basis points year-over-year, consistent with our full year outlook despite absorbing the charge I mentioned earlier associated with the adverse court ruling in a certain state. Carelon delivered a strong quarter as well, with healthy top-line growth for CarelonRx and Carelon Services. CarelonRX operating earnings include investments in support of our strategy, including scaling our recently acquired specialty pharmacy and the build-out of our advanced home delivery business, which is set to launch later this year. CarelonRx also benefited from a favorable out-of-period item in the second quarter of 2022, which had the effect of depressing its year-on-year operating earnings growth rate this quarter. Carelon Services had a strong second quarter, led by organic growth in Carelon post-acute management. Turning to our balance sheet, we ended the second quarter with a debt to capital ratio of 39.6%, in line with our expectations and consistent with our target range. During the quarter, we repurchased 1.4 million shares of our common stock at a weighted average share price $457.34 for approximately $646 million. Year-to-date, we have repurchased 2.7 million shares for $1.3 billion, pacing ahead of our full year outlook of approximately $2 billion. We expect to remain opportunistic given recent weakness in our share price and the attractive valuation levels offered by the market. We continue to maintain a prudent posture with respect to reserves. Days and claims payable stood at 46.5 days at the end of the second quarter, an increase of 0.5 days sequentially and a decrease of 1.3 days year-over-year. As we disclosed in the second quarter of last year, the timing of certain provider pass-through payments and corresponding reserves had the effect of increasing days and claims payable by approximately 1.8 days in the prior year quarter. Excluding that dynamic, days and claims payable would have increased by 0.5 days year-over-year and medical claims payable would have grown by 11.9%, compared with growth in premium revenue of 10.6%. As a reminder, we continue to expect days and claims payable will be in the low-40 range long term and anticipate normalization towards this range in the coming years as cycle time shortened in COVID-related uncertainty receipts. Operating cash flow was approximately $2 billion or 1.1 times net income in the second quarter of 2023. Year-to-date, excluding an extra payment received from CMS, our operating cash flow was $4.9 billion or 1.3 times net income. Overall, we are pleased with our second quarter and our year-to-date performance. As we look to the second half of the year, we are excited for the pending acquisition of Blue Cross Blue Shield of Louisiana, the launch of our CarelonRx Pharmacy, a differentiated digital-first home delivery model and the continued scaling of BioPlus as it prepares to serve more Elevance Health members in early 2024. Given the strong start to the year, the diversity of our assets, and the balance and resilience of our enterprise, we have raised our full year outlook for adjusted earnings per share to greater than $32.85, reflecting growth that is consistent with our long-term target compound annual growth rate. We have consistently delivered on our financial commitments and have the conviction that we will continue to do so. We will remain focused on the execution of our strategy to become a lifetime trusted health partner by serving the whole health needs of the consumers we are privileged to serve. The better job we do serving our members, the better we will do for all of our stakeholders. With that, operator, we will now open up the line for questions.

A.J. Rice:

Thanks. Hi, everybody. Appreciate the good performance on the medical loss ratio line and that you're benefiting from your repricing in the commercial book, which you've been talking about for a while. You didn't really call out anything that's deviating from your underlying expectations relative to Medicare Advantage, commercial and Medicaid. I just wondered if you would maybe flush that out a little more. Are you seeing any trend changes or anything on the horizon? And how did you think about the MA bids in light of anything you saw there on the utilization front?

Operator:

Next, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead.

Gail Boudreaux:

Thanks very much, Lance, for the question. I'm going to have Pete Haytaian address it, but I think you hit a couple of key areas around Carelon on both Services and Rx where we feel that we're advancing the strategy that we laid out at Investor Day and feel really good about the progress. So Pete, why don't you talk about both of those areas?

Gail Boudreaux:

Yeah. Thank you, Pete. As you can hear from the excitement I think from Pete and all the things we're doing about Carelon Services and CarelonRx, there's a lot going on to really build our strategy and I think execute on it. And I guess I would just punctuate two things that Pete talked about. One, the behavioral health area. We really see ourselves as a leader in the crisis management area as well as we're seeing a lot of internal or external validated -- validity of that strategy. And I think starting to pull through not just in its historic government business, but also on the commercial side where they're integrating physical and behavioral in particular, which is a core part of our whole health strategy. And then on the pharmacy side, again, we're really trying to make sure that the value and strategic levers are coming through and you heard that in what Pete talked about. So thanks for the question, Lance, and next question please.

Justin Lake:

Thanks. Good morning. First, just wanted to follow-up on AJ's question to see if you can give us a little color. You're saying trend is above normal and you priced for it. We appreciate that color. Just any kind of incremental that you can give us on how much higher and what you've seen in 1Q to 2Q might be helpful? And then my question is just take that to the margin side, right, can you tell us how margins are running versus the expectations coming into the year? I know you had expected improvement in Medicare and commercial and obviously some volatility in Medicaid. Can you tell us how those are running in specifically, anything on Medicare beyond Puerto Rico issues you discussed in the second quarter would be helpful? Thanks. Or how that's trending?

Gail Boudreaux:

Yeah. Thanks, John, and thanks for the questions, Justin. I think it's important we've been very consistent all year. We haven't changed our view of how we see MLR and feel very comfortable as John said in the guidance that we gave and where we're heading on margins. So thanks again for the question and opportunity to comment. Next question please.

Michael Ha:

All right. Thank you. Regarding Medicaid redetermination, fully appreciate -- understand how it's too early to really extrapolate any current results. But thus far, number one, how's the acuity mix shift tracking relative to your expectations? Number two, how do you view this enrollment so far? Florida looks positive, but the recent Texas data, does that concern you at all? Number three, with the number of states going through mid-year rate renewals, are you seeing acuity adjustments in these draft rates and would that represent upside to your guidance? Thank you.

Felicia Norwood:

So, Michael, good morning. Appreciate the opportunity to talk about redeterminations where our teams have certainly spent quite a bit of time trying to make sure that individuals who are eligible for Medicaid continue to maintain their eligibility. So it is still very early. And it's important that we don't draw conclusions based on a few months in, because the redetermination cycle is going to extend well into 2024. And with that said, I will say what we have seen so far is certainly relative -- consistent with our expectations, albeit with a great deal of variability as you go from state to state. At the end of the day, however, we still believe that the guidance that we provided is certainly appropriate. As you know, CMS gave states guidelines to really do this over a 14-month period. But at the end of the day, states are taking their own approach, and some of those have certainly front-loaded or accelerated the redetermination process based on members that they believe are no longer eligible. As we take a look at this today, we do expect that many of these members will return to Medicaid once we continue our outreach, and they're able to provide the documentation to the states that they need. So when we look at where we are today, those members could come back over a 30 or 90-day period and we are very much focused on advocacy with our community-based organizations, our care provider partners, the federally qualified health centers, all of those entities that impact our members every single day. With that said, I will say that some of the front-loading that occurred, has happened in some of the states where we don't have Elevance Health in terms of a Blue state platform. And so we haven't fully seen the appreciation of our catcher's mitt, but we are fully prepared in collaboration with our commercial partners to be able to do that. In terms of your question with respect to rates, we are always fully engaged with our state partners in terms of the rate setting process. At this point, we have visibility into almost all of our rates for 2023 and many of them for ‘24. What we are seeing so far is in line with our expectations. States are certainly taking acuity into the rate setting process that we see. And certainly they have the ability to work collaboratively with us if we see things that they don't see. But our early reads on acuity for our kind of leavers versus our stayers is in line with the expectations that we've seen so far. So at this point, we feel good about where we are from a rate perspective for 2023. The collaboration with our state partners remains strong. Shifts in acuity are now our standard input into the rate setting process. So we've been very much pleased with how that's going with our state partners. And we will continue to work very strongly to make sure that individuals who are truly eligible for Medicaid continue to have access to coverage. And those who aren't, that they are able to have coverage through one of our exchange or commercial based products. So thank you for the question.

Operator:

Next, we'll go to the line of Josh Raskin from Nephron Research. Please go ahead.

Peter Haytaian:

Yeah, thanks for the question, Josh. It's Pete Haytaian here. First of all, in terms of Carelon’s overall -- the Carelon Services overall performance from an operating perspective, we're very pleased. Op gains saw a nice improvement year-over-year. And just to be clear, as it relates to our margin profile for the year, we're very confident in achieving the 25 basis points to 50 basis points guidance that we gave in terms of margin improvement over the year. In terms of the variation there, a lot of this has to do with seasonality and as seasonality continues to evolve, we are sort of seeing differences there. This year, what's different than previous years is we're driving a lot more business through the government business. So as I talked about in my earlier comments, in terms of the post-acute care initiative with our Medicare teams, as well as the durable medical equipment opportunity, these are examples of things where we're driving a lot more business through the government business and that's translating into earnings really being weighted to the back half of the year. So that's where the difference is. In terms of the one-time issue, I think you're probably referencing pharmacy. And in the case of pharmacy again to speak about how we're performing there, we're very pleased overall with how that's going in terms of our margin performance. The 6% to 6.5% range in terms of margin performance for the year and guidance that we gave, we still feel very comfortable with that. The one-time issue that occurred in terms of the year-over-year difference, Q2 ‘22 versus this year, was a one-time favorable positive impact that we experienced in pharmacy last year that we're not seeing this year. But overall, pharmacy is performing very, very well. And we feel very comfortable with the 6% to 6.5% guidance for the year.

Operator:

Next, we'll go to the line of George Hill from Deutsche Bank. Please go ahead.

Felicia Norwood:

Good morning, George. It's Felicia Norwood. If we take a look at the risk model changes for 2024, they certainly were an integral part of our strategy as we thought about our bid process. But let me start by saying that we feel good about our bids for 2024. I believe when we step back and take a look at where we are, we continue to recognize the importance of stability in our offerings to seniors. And I think that we have submitted bids that take into consideration both the risk model changes as well as the importance of having those benefits that are critical to seniors as we go forward. It's always going to be a very highly competitive environment in Medicare Advantage. We always expect that. But from our perspective, this is something that we've had the opportunity to be very thoughtful about. And as we put our bids together each year, we're always taking a very balanced approach between our aspirations for growth as well as with respect to margins. And I think that we have landed in a place where we're going to be offering attractive plans for our seniors that provide sustainable economics for us for the long term. So thank you very much for the question.

Operator:

Next, we'll go to the line of Lisa Gill from JPMorgan. Please go ahead.

John Gallina:

Thanks for the question, Lisa, and good morning. Yeah, associated with trends and COVID existing versus not existing and what the baseline might have been, it's really not a lot of pent-up demand for care. There certainly can be small pockets of that. But in general, the healthcare system was pretty much open for business quite significantly in 2022. There may have been some staffing shortages that impacted that ever so slightly, but not all that significantly, we don't believe. And we just think that it's really -- it's an overall increasing in cost structure. COVID is not gone. It still exists. It's just no longer the big significant driving force that it had been for the past several years. And so as we look at things in total, we see a higher cost structure in general. And then associated with GLP-1 drugs, that is one element of a multitude of elements as part of an overall trend conversation. And as I said, trend overall is consistent with our expectation. So we feel very good about that. And can there be an upside on CarelonRx? Well, certainly a small one, but not enough to really change the trajectory at this point. So thank you for the questions.

Operator:

Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead.

John Gallina:

Yeah. Thanks, Kevin. Appreciate the question. Associated with the 40% to 45%, I'm not positive about the CAGR you're looking at from ‘19 and exactly what's in the baseline and what all the thought processes are versus qualifications and eligibility requirements. But as we do our review in our work and certainly access a lot of independent studies as well, we feel very comfortable that we believe that 40% to 45% will stay on. And that's really a projection for what will be the ultimate result a year from now after the entire redetermination process occurs and things shake out. So I think it's a very reasonable expectation and we feel very good about it. And then in terms of the overall coverage patterns, everything else, one thing to point out that might be inherent in your question is as we look at the second quarter of 2023, actually many of our states, Medicaid states that are not Blue states, actually went a little bit earlier on in the beginning of the redetermination. So everybody will have started redeterminations by now. But when you look at who started in the April, May timeframe, for us, it was more heavily weighted to the states that are not our Blue states. So we still feel very good about our overall catcher's mitt and the fact that we think 20% to 25% of these folks will ultimately end up on employer sponsored plans, 20% to 25% will ultimately end up in an individual ACA product, 40% to 45% will stay on Medicaid. And that's what we're tracking to and we actually have some insights into the states that are starting in June, it looks very promising that our thought process is going to be validated. So thank you for the question.

Operator:

Next, we'll go to the line of Scott Fidel from Stephens. Please go ahead.

John Gallina:

Yeah. Thanks for the question, and good morning. In terms of our EPS, guidance, as you know, we raised it to $32.85 or greater than $32.85. And I think that would assume that a little bit more than 56% of our earnings will have occurred in the first half of the year. So when you look at the last six months of the year, we are actually pretty comfortable with what the current consensus estimates have associated with the third quarter and with the seasonality that the current consensus estimates have inherent in it. And that is that the third quarter will be a bit more profitable than the fourth quarter which is very consistent with the typical seasonality of our business. And then for ‘24, as you know, it's just really premature to go into a 2024 conversation at this time. We'll provide a lot more insights on that at the end of the year, a little bit more in the third quarter and a lot more at the end of the year and have a more robust conversation about 2024 at that time.

Operator:

Next, we'll go to the line of Steven Valiquette from Barclays. Please go ahead.

Gail Boudreaux:

Sure. I'll ask Morgan Kendrick, who leads Commercial business maybe to comment a little bit about commercial and what we're seeing in the marketplace.

Gail Boudreaux:

Thanks, Morgan. And again, just reiterating something that Morgan just said, I think is important is the consolidation trend where we become single source has been accelerating in the last few years and we continue to see that. That's a notable trend this year. And I think what's important is we're also seeing it not just in medical coverage but beginning to consolidate with Carelon Services as well. So that's a very positive trend for the strategy around whole health that we laid out. Thank you. Next question. I think this will be our last question.

Nathan Rich:

Great. Thanks for the question. I wanted to ask on the CarelonRx margins. I think they were down sequentially from the first quarter. Could you maybe just elaborate a bit more on what drove that margin step-down? I know you had BioPlus rolling in. But do you still expect margins to be flattish for the full year? And then on biosimilars, how has the pricing of biosimilar Humira come in relative to expectations? And is that a significant swing factor to kind of in the outlook for that segment?

Gail Boudreaux:

Thank you, Pete. Now I'd like to close by saying thank you. We're pleased with our performance year to date and we're confident that the ongoing execution of our strategy positions us well for the balance of 2023 and in the years to come. Through a steadfast focus on whole health and our diverse and expanding suite of products and solutions, we'll continue to meet the needs of clients, consumers and communities we serve, advancing our strategy of becoming a lifetime trusted health partner. Thank you all for your interest in Elevance Health, and have a great rest of week.

Steve Tanal:

Good morning and welcome to Elevance Health's first quarter 2023 earnings call. This is Steve Tanal, Vice President of Investor Relations. And with us this morning on the earnings call are Gail Boudreaux, President and CEO; and John Gallina, our CFO; Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial and Specialty Health Benefits Division; and Felicia Norwood, President of our Government Health Benefits Division. Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. John will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

John Gallina:

Thank you, Gail, and good morning to everyone on the line. As Gail mentioned earlier, we reported strong first quarter results, including GAAP earnings per share of $8.30 and adjusted earnings per share of $9.46, representing growth of approximately 15% year-over-year. Our first quarter results reflect the continued execution of our enterprise strategy, as we continue to optimize our mature businesses, invest in high-growth opportunities and accelerate the growth of our enterprise through Carelon, all in service of becoming a lifetime trusted health partner. We ended the first quarter with medical membership of 48.1 million members, an increase of nearly 600,000 in the quarter and over 1.3 million year-over-year. Risk-based membership grew by approximately 1 million members year-over-year, driven by organic growth in Medicaid and Medicare Advantage, dual-eligible special need plan and group members. In our commercial business, our individual membership grew by 124,000 lives or 15% year-over-year and by 19% year-to-date, driven by geographic expansion and strategic product positioning that should enable additional growth when coverage shifts related to medicaid redeterminations began later this year. Membership momentum in these areas was partially offset by attrition in our commercial group risk business, which we expected as a result of the pricing actions we took on January 1 renewals and to better reflect our post-pandemic cost structure and optimize the business for sustainable economics long term. Our fee-based business grew by approximately 370,000 lives year-over-year on top of a record selling season in the first quarter of last year, driven by strong retention rates and another solid national account selling season and with growth in BlueCard members. Overall, these results reflect balanced growth and strong momentum in our diverse health benefits business, and we believe that our well-balanced portfolio of offerings will serve us well when Medicaid beneficiaries begin to transition coverage in the coming quarters. As we discussed at our investor conference last month, growth in medical membership translates to growth for Carelon, which continues to grow both organically and inorganically through expanding the scale and scope of services it provides to our own and other health plans. Carelon's momentum continued in the first quarter, evident in its top line growth of nearly 18% and margin expansion that allowed operating gain to grow by nearly 21%. Now, before discussing our first quarter results in more detail, I'd like to spend a minute on our adoption of the new GAAP accounting requirements for how insurance companies account for long-term future policy benefit liabilities and deferred acquisition costs. For us, this new accounting requirement impacts our Medicare supplement plans. We adopted the new accounting guidelines for the long duration targeted improvements at the beginning of the year and embedded the new approach in our initial 2023 guidance. The change does not impact our previously reported cash flow. Our current cash position or our business strategy and will not materially impact future operating results. However, the new accounting pronouncement required us to restate prior year results. In the GAAP reconciliation table at the end of our press release, we have shown the isolated impact of the new accounting policies on our first quarter 2022 earnings, which we consider to be immaterial. First quarter operating revenue of $41.9 billion, increased approximately 11% year-over-year. Growth was driven by higher premium revenue in Medicaid and Medicare, premium rate increases to cover overall cost trends and strong top line growth in CarelonRx and Carelon services. The medical loss ratio for the first quarter was 85.8%, an improvement of 30 basis points year-over-year, driven by premium rate adjustments in our Health Benefits business to more accurately reflect our post-pandemic cost structure. Our first quarter operating expense ratio came in at 11.5%, flat relative to the first quarter of 2022. Operating gain for the enterprise grew approximately 16% year-over-year in the first quarter as Carelon grew over 20%. And the Health Benefits delivered strong growth in the mid-teens percentage range on double-digit revenue growth and margin recovery of pandemic-era lows as we had expected. Turning to our balance sheet. We ended the quarter with a debt-to-capital ratio of 40.5%, up from 39.9% at year-end 2022. The increase was due to debt raised during the quarter, a portion of which was used to fund our acquisition of BioPlus, which closed in February and refinanced a debt maturity. During the quarter, we repurchased 1.3 million shares of our common stock at a weighted average price of $476.66 for approximately $622 million. Days and claims payable ended the first quarter at 46 days, a decrease of 1.5 days sequentially and 0.9 days year-over-year. Declines in DCPs were primarily driven by mix. With the Omicron COVID surge in the first quarter of 2022 and COVID claims generally having a longer cycle time than our overall average, DCPs were elevated a year ago. Medical Claims Payable also included nearly $400 million more of provider pass-through payments related to Medicaid in the first quarter of last year compared to the first quarter of this year. Excluding provider pass-through payments from both periods, our Medical Claims Payable would have grown by 10.1% year-over-year compared with 9.4% growth in premium revenue. As a reminder, we expect our Days in Claims Payable to be in the low 40% range long-term. Operating cash flow in the first quarter was $6.5 billion, including the early receipt of a month of premium revenue from CMS. Excluding it, operating cash flow was $3.5 billion or 1.7 times net income. Overall, we are pleased with our first quarter performance and the strong start to the year. Momentum in our Health Benefits and Carelon businesses bolsters our confidence in delivering another year of growth in adjusted earnings per share, consistent with our long-term target compound annual growth rate of 12% to 15%. Given the strong start to the year, the balance and resilience of our enterprise and the momentum we have in each of our business segments, we have raised our full year outlook for adjusted earnings per share to greater than $32.70. As we look to the rest of 2023, our focus will remain on execution of our strategy and demonstrating that we have the best catchers met in the industry. We will continue to optimize our mature businesses, invest in high-growth opportunities and accelerate the growth of our organization through Carelon. And with that, operator, please open up the call to questions.

Justin Lake:

Thanks. Good morning. I'll use my question on the DCP discussion, given it's a pretty important topic going on across the industry right now. So, John, you talked about seasonality impacts. You talked about type -- different types of claims driving a little bit lower DCP. And then you said low 40s is where we're going. Now, over time, I think everyone in -- every managed care investor looks at DCP and thinks of it as quality of earnings metric, right? When it's going up, it's good and down, it's bad, right? And typically, you just think that there's more or less reserving going on. I know there's a lot more to it. So, maybe you can tell us what's been driving your DCP lower recently beyond what you talked about already? And how are we going to get to the low 40s, meaning is it going to be for lower reserving, or is it going to be the kind of mechanical aspects? And over what time period should we expect that to kind of normalize? Thanks.

Gail Boudreaux:

Yeah. Thanks, John, and thanks, Justin. And I just want to reiterate what John said because I think it is a really important question. We feel we had a really strong start to this year and that, again, reiterating that DCP didn't impact earnings. And as you think about all the factors John talked about really is the mix and the longer tail of COVID claims and entering a more reasonable payment cycle. So thanks very much for the question, the opportunity to provide a little more perspective there. Next question please.

A.J. Rice:

Hi everybody. Thanks for the question. MLR was right in line with expectations on a consolidated basis, at least Street expectations, 30 basis points better year-to-year. Can you comment on any trends you're seeing underlying that with both respect to service categories, areas of care management that are plus or minuses and as you look at your MLR guidance for the full year, any changes in your thinking about the rest of the year there?

Gail Boudreaux:

Thank you. Next question, please.

Lance Wilkes:

Yes. Could you talk a little bit about cross-sales in the quarter, in particular, I was interested in PBM cross sales and into your self-insured block? And then just in general, what your product strategy is with respect to self-insured as you're looking at your bundling in of some of your services businesses there? Thanks.

Morgan Kendrick:

Lance, thanks for the question. When we think about the fee-based business, we've had a really, really strong run in the past several years. And I think that goes back and speaks to the health and the value that we're driving to the market, especially to the employers who are actually spending their own money. To your point, Carelon is a big, big piece of it. We had a really nice selling cycle this year, in fact, with the pharmacy business. We didn't see very many jumbos in the medical side. So thus, that was sort of absent from the actual Rx percentage as well for us. But nonetheless, we're seeing more and more attraction to this idea of the whole integrated delivery model of pharmacy medical together and the value that's delivering. Secondly, you think about the other products that are working with Carelon on, whether it's the behavioral health, whether these are sort of the incentive programs around payment integrity and bill review, things of that nature that are really important to our self-funded customers, that continues to see very strong growth and attraction from the market. That said, at the end of the day, Pete's team and my team are working together to build for purpose things that create value in the market. And again, I'll anchor back to the three things that Gail mentioned in the beginning in her opening remarks. The market is keenly focused on affordability, experience and simplicity. And the more that we can pull together, the better it's going to be for our markets. And I think the connection here between Carelon and the commercial fee-based business is strategically critical to that, continuing to drive growth. Pete, I'll turn it to you.

Gail Boudreaux:

Yes. Thank you for the question. I would just offer one additional proof point. We've shared this before, which is -- the customers who are single sourcing with us that we have many times shared multiple carriers, and we've done 23 of those over the last few years. And I think that's another good example of our ability not only consolidate medical but also to sell additional services, and it shows the value that we're bringing to the market. So again, just another quick proof point on ability to cross-sell. Next question, please.

Ben Hendrix:

Hey, thank you very much. Having had a little bit more time to work through the 2024 and a rate update and the RAD B rule, are there any incremental thoughts you can offer on the rate impact to Anthem's plans specifically and the extent to which the risk rebating and audit could impact physicians' willingness to take risk within the Carelon partnerships? Thanks.

Felicia Norwood:

Yes. Good morning, Ben. And thank you for that question. As Gail said, we're certainly pleased with the phase-in of the risk model changes. This will give us the opportunity to smooth the impact to beneficiaries as well as the providers who serve them. Medicare Advantage for us strategically is a very important business long-term, and we will continue to be very focused on trying to make sure that we have a Whole Health approach and health equity around certainly individuals who participate in this program significantly who have low incomes and are certainly very much underrepresented. As I've said before, the individuals in this program over 40% have incomes less than $25,000. And when we take a look at our opportunity around drivers of health and supplemental benefits, it's important that we're able to balance all of these things as we take a look at our bids for 2024 as well as what we need to do with our provider partners long-term. With that said, we certainly don't believe that we are disproportionately disadvantaged by any of the changes here relative to our competitors. And as we think about our strategy for 2024, we will continue to be very focused on how we grow this very important business for us and equally important, how we continue to deliver value for those that we're privileged to serve.

Operator:

Next, we'll go to the line of Lisa Gill from JPMorgan. Please go ahead.

Gail Boudreaux:

Yes. Thank you for the question, Lisa. I think understanding our overall care provider strategy, it's really important that it's, first and foremost, critical to how we think about our health benefits business. And again, you said it at the beginning of the comments, it's about driving greater value-based care and importantly, increasing the amount of downside risk that we're going to share with providers. A couple of weeks ago, we shared with you, as you know, at the investor conference that our goal is to get to 80% of our consolidated health care reimbursement and value-based care by 27% and 40% downside. And again, we're sitting in the mid-60% right now and a little bit varied by business. But again, as you are thinking about our strategy, you mentioned Aledade and a few others, that's just one piece of it. It's important that we're trying to solve this for all lines of business and across multiple geographies. And so for us, we want it for Commercial, Medicaid, and Medicare. So, one size model isn't going to fit all for us. With respect to Carelon, what we're building and investing in our new enablement capabilities and those are going to allow us to accelerate the management and take more whole person risk from a variety of structures, quite frankly, not just through primary care. And again, I guess I would like to point out what's different about how we're thinking about scaling and leveraging what Carelon has and building across that continuum is that we really see a huge opportunity to enable and integrate specialty for the chronic and complex. That's an area you just heard Felicia talk about the dual population. It's a big population for us, specialized populations in Medicaid. And they're a huge part of benefit expense, and we think that's an area that has been under sourced quite frankly. So, as we think about it, yes, we are in partnerships. As you mentioned, some of those, they're important. They're helping us grow. But it's only one piece of our broader strategy, which, again, is to drive value-based care in our markets. And so we do see this as a big opportunity to drive both more consistency in our health benefits business, but also importantly drive operating gain and earnings inside of Carelon as we increase our capabilities. So, a little bit different than just primary care focused. I think much broader than that and how we're thinking about the overall strategy. Thanks very much for the question. Next question please.

Scott Fidel:

Thanks. Was interested maybe if you could drill in a little bit more on the post-acute care expansion in terms of where exactly things stand in terms of the scaling of that across the platform after the first quarter and then the timing on how you see that rolling out across the client base across Medicare and Commercial? And to the extent maybe just share some of the latest outcomes around that in terms of the key deliverables that you're driving for your clients on that? Thanks.

Peter Haytaian:

Thanks Scott. As we talked about, and Gail mentioned in the prepared remarks, we're really excited about this product offering. I talked about this at Investor Day, but we started on this journey a year, maybe 13, 14 months ago, we were able to fully implement this and finalize the implementation of this in the Medicare business in the first quarter. And that was with respect to the core post-acute care offering. And as we talked about, we are now expanding that with respect to durable medical equipment and social drivers of health. That will happen throughout this year. We are also expanding these services in terms of post-acute care into Medicare and Medicaid, and that will flow through this year and into next year. So there's a lot of runway still internally to drive these services. In terms of your question on key metrics and performance, that also is something that I'm very excited about. I mean, again, what we're trying to really do here is create a differentiated experience for post-acute care providers. So when they are in need of services or approval of services, they're dealing with technology in a portal that's differentiated, and it's a streamlined service so that they can get the approvals they need in the most appropriate fashion. And as we're looking at the different levels of post-acute care, we're seeing our performance play through and meet our original objectives. And that is that where appropriate, going to the appropriate levels of care and sites of care and then ultimately into the home, where cost and quality is most effective. And so we look across a series of metrics in that regard, and we're very pleased at the progress we're making. So in terms of the core product and the performance, very good; in terms of the expansion opportunity into other lines of business, that will happen over the next year into 2024.

Operator:

Next, we'll go to the line of Steven Valiquette from Barclays. Please go ahead.

Gail Boudreaux:

Yeah. Thanks for the question, Steve. I'll ask Morgan to provide a little more color. But I guess I would say, if you look at the history of our business, we've had a pretty resilient book of business, both matched a little bit heavily – more heavily to government business, but we, quite frankly, diversified that and see nice growth in the individual, which you mentioned. From the employer perspective, I would just point to two things. One, we continue, as Morgan said, around those three areas of experience and value affordability to really drive, I think, a distinctive offering in the marketplace. So that served us well, certainly in the fee-based business, but also BlueCard. The Blue system overall, our BlueCard numbers are up, and that shows the distinctive value we add in our network across the entire system. So I think that's another -- in a recessionary whatever kind of environment that you might think about, we actually, I think, managed quite well because of distinctive value, and we're continuing to innovate our products. But I'll ask Morgan maybe to trade a little bit more color on how we see in the marketplace.

Gail Boudreaux:

Thank you. Next question, please.

Nathan Rich:

Good morning. Thanks for the question. I wanted to follow up on A.J.'s question on utilization. Could you talk about how you expect cost trends to develop over the course of the year? And I guess, we've seen some data points on increases in procedure volumes. And at the Analyst Day, you had talked about cost pressure from the new GLP-1 drugs. I guess, are you comfortable that if we continue to see higher utilization in areas like these that it would be captured within your MLR guidance for the year?

Gail Boudreaux:

Next question, please.

Dave Windley:

All right. Thank you for taking my question. Good morning. I wanted to go to redetermination with that -- upon us. You talked about working with the states very closely for several quarters now. At the Investor Day, we were involved in some discussions where there was a little bit more detail offered around states prospectively estimating changes in the risk pool from redetermination and factoring that into rates. And so that seems a little bit more supportive, I guess, of margin prospectively and something we would be -- need to be less concerned about as this evolves and the risk pool changes. I wondered if you could add some color to that and perhaps talk about what the composite rate looks like, how much higher it is than normal as a result of that type of activity? Thanks.

Gail Boudreaux:

Thanks, John. And maybe I'll ask Felicia just to give a little bit of perspective on what's happening with redeterminations because the process has started, but it's fairly early in the process. So Felicia?

Gail Boudreaux:

Thank you, Felicia. Next question, please.

Kevin Caliendo:

Great. Thanks. Thanks for taking my questions. Really appreciated the answer on the DCPs. And I guess just in the commentary that trend is normal and you're not really seeing anything extraordinary there. I guess my question is why are MLRs not really beating anymore. We're hearing trend is normal. We understand Days in Claims Payable and why they're coming down. It just feels like the risk to MLR right now is greater. Is there -- is it a pricing issue? Is it a mix issue? Is it just that this is the new normal, and we're sort of back to where trend and pricing are much more similar and maybe we just got spoiled through the years of COVID?

Gail Boudreaux:

Thank you. Next question please.

Kevin Fischbeck:

Great. Thanks. Wanted to ask about the exchange presence. Obviously, you're growing that well, expanding into markets. The market always loves growth, but then there becomes a time when growth could be too much growth. So, I wanted to get a little more color on kind of how membership or equality data you have around what that performance looks like so far? And then how you're thinking about the risk profile of the redetermination population back on to the exchanges? Is that something that you think would have a normal margin, a higher margin, or lower margin than the exchange business overall? Thanks.

Morgan Kendrick:

Kevin, thanks for the question, and Gail. I don't know there's a whole lot to add back to the comment around pace and sustainability of the business, Kevin. We took this very measured approach, certainly, looking at Medicaid redeterminations, we wanted to make sure we were expanding into the areas where we could serve as many members as we could in our 14 geographies. That said, the interesting thing about this cycle, we had a lot of ins and outs in the market with competitors that had come in and then left. So it left a lot of movement in the market that perhaps ordinarily wouldn't have occurred. So back to Gail's comments, we feel good about where we're positioned. We feel good about the economics behind it and are positioned well for when redetermination begins.

Gail Boudreaux:

Thank you for the question. One last question.

Stephen Baxter:

Yeah, hi. Thanks. I was hoping to get a quick update on how the government business performed in the first quarter. I think you previously had talked about Medicare Advantage as being a margin tailwind year-over-year for 2023, but I didn't necessarily see that in the release or the prepared remarks as a driver on the MLR line. So I just want to understand that a little bit better. Thank you.

Gail Boudreaux:

Yeah. And thanks for the question. Thanks, John. And overall, I guess, reiterate we do feel the government business performed better than expectations. So we feel very good about to be specific to your question.

Operator:

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through May 19, 2023. You may access the replay system at any time by dialing 866-361-4942 and international participants can dial 203-369-0190. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.

Steve Tanal:

Good morning and welcome to Elevance Health's fourth quarter 2022 earnings call. This is Steve Tanal, Vice President of Investor Relations, and I'm joined this morning on our earnings call by Gail Boudreaux, President and CEO; John Gallina, our CFO; Peter Haytaian, President of Carillon; Morgan Kendrick, President of our Commercial and Specialty Business Division; and Felicia Norwood, President of our Government Business division. Gail will begin the call with a brief discussion of some of the highlights of the quarter and year before turning to our recent announcement of the acquisition of Blue Cross and Blue Shield of Louisiana and a number of other updates on key strategic initiatives. John will then discuss our financial results and outlook for 2023 in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevate Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

John Gallina:

Thank you, Gail, and good morning to everyone on the line. We are pleased to have delivered solid fourth quarter financial results, closing out another strong year of growth for Elevance Health. The focused execution on our enterprise strategy continues to drive progress against our stated long-term targets. Fourth quarter adjusted earnings per share of $5.23 was ahead of our expectations and drove full-year adjusted earnings per share to $29.7, reflecting growth of over 15% year-over-year off of our adjusted 2021 baseline of $25.20 and above our long-term 12% to 15% annual earnings per share growth target. We ended the year with 47.5 million members, up $2.2 million or nearly 5% year-over-year, with organic growth having comprised more than 85% of our overall increase. In the fourth quarter, medical membership grew by 248,000 members, led by growth in Medicaid, driven in large part by the ongoing suspension of eligibility redeterminations and the acquisition of Vivida Health, which added 29,000 Medicaid members. For the full year, we added 1.1 million net new commercial members and 1.1 million net new government members. Total operating revenue for the year was nearly $156 billion, an increase of approximately 14% over the prior year, reflecting solid growth in our health benefits businesses and continued momentum in Carelon. We are pleased with the progress made to accelerate our service capabilities during the year as Carelon Rx and Carelon services grew revenue by 12% and 27% over 2021, respectively. The consolidated benefit expense ratio for the fourth quarter was 89.4%, a decrease of 10 basis points over the fourth quarter of 2021. This strong performance includes an improvement in commercial underwriting margin and also benefited from the reclassification of certain quality improvement expenses. These improvements were partially offset by the Medicaid business, which carries a higher benefit expense ratio than our commercial and Medicare health plans. Elevance Health's SG&A expense ratio in the fourth quarter was 11.5% and 11.4% for the full year reflecting an improvement of 20 basis points in the fourth quarter and full year. These positive results include the negative impact on the SG&A ratio related to aligning certain quality improvement expenses with CMS guidelines. The overall improvement was driven primarily by expense leverage associated with strong growth in operating revenue. In 2022, we produced another year of strong operating cash flow of $8.4 billion, representing 1.4 times net income, which was significantly better than our outlook to start the year and was driven by stronger risk-based membership growth and maintaining a prudent balance sheet. Additionally, relative to our initial guidance, a shift in the timing of certain payments to state-based partners added over $500 million to the fourth quarter operating cash flow that we now expect that we will pay in the first quarter of 2023. We ended 2022 with a debt-to-cap ratio of 39.9%, in line with our expectations and within our targeted range. During the fourth quarter, we repurchased 1.1 million shares of our stock for $567 million. For the year, we repurchased 4.8 million shares for $2.3 billion, exceeding our initial outlook for 2022, as we took advantage of the volatile periods in the market and opportunistically repurchase shares. Consistent with our approach throughout the pandemic, we maintained a prudent posture with respect to reserves. Days and claims payable ended the year at 47.7 days, an increase of 2.5 days year-over-year, and stable with the third quarter. Medical claims payable grew over 15% year-over-year compared to premium revenue growth of 13.5%. In summary, 2022 was a very strong year. We grew adjusted earnings per share by over 15%. We grew operating gain by nearly 13%. We grew membership by 2.2 million, and we grew revenue by nearly 14%, all with a stable medical loss ratio, a 2.5-day increase in days in claims payable and operating cash flow of $8.4 billion or 1.4 times net income. Before turning to our 2023 outlook, I would like to provide more detail on our decision to adapt our external segment reporting to better align with our enterprise strategy. Beginning with the first quarter of 2023, we will begin to disclose Carelon as a separate business division and provide operating revenue, operating gain and operating margin information separately for Carelon Services and Carelon Rx. Carelon offers a diverse suite of services across behavioral health, advanced analytics and services, complex care, pharmacy services and digital assets, and we remain committed to expanding the scale and scope of services Carelon provides to our own and third-party health plans. As we've continued down the path of scaling Carelon by addressing the needs of our commercial, Medicare and Medicaid health benefits businesses, it's become increasingly apparent that the similarities between our health plans have evolved to outnumber the differences. And we have also decided to combine our employer, individual, Medicare, Medicaid health plans and products into a single health benefits division. The remaining segment, Corporate and Other will include a small amount of revenue and earnings from non-Carelon, non-health benefits businesses, as well as our corporate unallocated expenses. The new health benefits segment will combine the same group of businesses that currently comprises the commercial and specialty and government business divisions. In the Carelon Services segment, reflects the same group of businesses that comprised the diversified business group, now Carelon services, which has historically been included as part of our old other segment. We are excited to begin disclosing the performance of our two primary and distinct businesses in a manner more consistent with how we will grow our enterprise for years to come and to be doing so at the time of strength for our organization. As you can see, our commercial health plan margin recovery is well underway and will extend into 2023, which is reflected in our Health Benefits segment margin guidance provided in our press release this morning. To ensure a smooth transition to our new reporting structure, we have also included a supplemental table in this morning's press release, showing our quarterly and full year 2022 results pro forma for new reporting structure alongside new supplemental performance metrics for CarelonRx and Carelon services that can be used to model revenue for each business. Our commitment to elevating whole health and advancing health beyond health care is unwavering, and our new segment reporting structure will allow our stakeholders to more clearly track the progress we're making against our enterprise strategy. Now, I'd like to discuss our outlook for 2023 in greater detail. We are pleased to have provided initial earnings per share guidance of greater than $32.60, reflecting growth of over 12% year-over-year, putting us on track to produce a sixth consecutive year of growth in adjusted earnings per share, consistent with our long-term 12% to 15% compound annual growth rate target. 2023 will be a year of optimization, but we will also demonstrate the balance and resilience of our health benefits businesses as we execute the planned recovery of our commercial and Medicare health plan margins from pandemic era low's, which we expect will more than offset the impact of membership attrition and margin normalization in our Medicaid business when eligibility redeterminations resume. For 2023, we anticipate growth in medical membership despite commercial repricing and Medicaid redeterminations. Commercial risk-based membership is expected in 2023, up over 200,000 at the midpoint, ending the year in the range of 4.9 million to 5.1 million members. Growth will be driven by individual and small group risk-based membership, partially offset by attrition in our large group risk business, driven by the repricing discussed earlier. Note that we expect commercial risk-based membership to decline by approximately 60,000 in the first quarter, with individual up approximately 100,000 and group risk-based membership down approximately 160,000. We anticipate growth in individual and group risk-based membership over the balance of the year, concentrated in the second half, as consumers transition from Medicaid to commercial coverage. Fee-based membership is expected to grow by approximately 600,000 members at the midpoint to 27.1 million to 27.4 million at year-end 2023. The wider-than-normal range contemplates a variety of scenarios related to coverage shifts out of Medicaid, and into employer-sponsored plans and the relatively uncertain macroeconomic backdrop. We expect approximately one-third of this growth to occur in the first quarter with the balance more heavily concentrated in the back half of the year as consumer's transition from Medicaid to commercial coverage. Total commercial membership will end the year in the range of 32 million to 32.5 million members, up over 800,000 members at the midpoint. Medicare Advantage membership is expected to grow by approximately 75,000 to 125,000 members, with growth in both individual and group pushing our membership over the 2 million member mark. Medicaid membership is expected to end the year in the range of 10.8 million to 11.3 million, driven by the attrition associated with eligibility redeterminations beginning on April 1 of this year. This wider-than-normal range contemplates a range of scenarios on the pace of redeterminations and the prospect of macroeconomic headwinds developing over the course of 2023. And finally, we expect our Medicare supplement and federal employees' health benefits memberships will be relatively stable year-over-year. In total, medical membership is expected to end 2023 in the range of 47.4 million to 48.5 million, reflecting growth of over 400,000 members at the midpoint. The consolidated medical loss ratio is expected to be 87.2% in 2023, plus or minus 50 basis points, an improvement of approximately 20 basis points compared with 2022, primarily driven by the re-pricing of commercial risk-based business and margin expansion in Medicare Advantage, related to the improved reimbursement levels across rates, risk adjustment and star quality performance. The SG&A expense ratio is expected to be 11.2%, plus or minus 50 basis points, a reduction of 20 basis points at the midpoint driven by expense leverage associated with growth in operating revenue, partially offset by continued growth in our Carelon businesses, which carry higher SG&A ratio than our health benefits business. We expect operating gain for the year to be greater than $9.35 billion, reflecting growth of at least 10% over 2022, again, being the primary driver of growth in adjusted earnings per share. Below the line, we expect investment income to be approximately $1.6 billion and interest expense to be approximately $1 billion, both reflecting the impact of higher interest rates. And our effective tax rate is expected to be in the range of 22% to 24%. Our full year operating cash flow is expected to be greater than $7.6 billion, including the unfavorable impact of a timing delay on the payment of approximately $500 million to certain Medicaid state partners that we previously believed we would pay in the fourth quarter of 2022. Adjusting for timing, our 2023 cash flow outlook will be greater than $8.1 billion or approximately 1.1 times our expected GAAP net income. We expect full year share repurchases of approximately $2 billion, and our weighted average fully diluted share count for the year is expected to be in the range of 239 million to 240 million shares outstanding. Our 2023 guidance does not include the pending acquisition of BioPlus or Blue Cross and Blue Shield of Louisiana, which we expect will close later in the year. Importantly, neither is expected to have a material impact on earnings in 2023. At the segment level, we expect the Health Benefit segment operating revenue to grow in the mid to upper single-digit percentage range year-over-year in 2023, with segment operating margin up 25 to 50 basis points year-over-year. We expect CarelonRx revenue to grow in the upper single-digit percentage range with low single-digit growth in adjusted scripts and mid single-digit growth in revenue per adjusted script. And we expect Carelon Services to grow revenue in the low double-digit range organically, excluding all pending or unannounced M&A, driven by growth in revenue per consumer served, as we expect consumer serve to grow in the low single-digit range from 105 million at year-end 2022. Carelon Services operating margin is expected to expand by 25 to 50 basis points year-over-year in 2023. With respect to earnings seasonality, we are projecting similar profitability patterns to historical ranges and expect to earn slightly more than 55% of our full year adjusted earnings per share in the first half of the year with slightly more than half of that in the first quarter, consistent with current consensus modeling of seasonality. Finally, we remain committed to enhancing shareholder returns through capital deployment, including share repurchases and dividends and are pleased to announce that our Board of Directors recently approved a 16% increase in our regular quarterly dividend to $1.48 per share, our 12th consecutive annual increase, which will be paid on March 24 and to shareholders of record at the close of business on March 10. In closing, 2022 was another year of strong growth for Elevance Health as we continue down the path of transforming from a traditional health insurance company to a lifetime, trusted health partner, and we are well positioned to deliver another year of strong growth in line with our long-term targets in 2023. We look forward to discussing our enterprise strategy and long-term financial targets at our upcoming investor conference, which we will host in New York City on Thursday, March 23, 2023. And with that, operator, please open the line for questions.

Lance Wilkes:

Yes. Thanks. And can you talk a little bit about, the growth in the services business, which is really interesting. Both org changes that you're intending to put in place to kind of support the new segment reporting, if any? And then, in the Care delivery aspect of that, can you just talk a little bit about what you've been doing to date with some of your partnerships with Aledade and Privia and how that's kind of being deployed in the market and what your expectations are for care delivery long term?

Peter Haytaian:

Yes. No, thanks a lot Gail. Thanks a lot, Lance, for the question. Overall, as Gail said, we're really pleased with the momentum and performance that we saw in 2022. And as Gail noted, in the year, we did do a lot around restructuring. We obviously went through rebranding, which there was a lot of excitement around. And as she said, we infused a lot of new talent across the organization. And then, in terms of the infrastructure we built internally, we're very focused. As you know, a core part of our strategy is focused on internal growth and serving Elevance affiliated health plans. And so we built the infrastructure to engage, to a much better degree, with our associates and partners internally. And we're seeing really good progress there. I hope you can see that through the numbers and the improvement in the year. We remain keenly focused on whole health and improving the patient experience. That's something else that we're very focused on looking from the outside in, in terms of the patient experience. And I'd say the other thing that we've been really focused on internally, and we're trying to change the culture, and its working, is driving more risk and capitation through the portfolio. And that has really helped in terms of the acceleration of our growth and the innovation that we're seeing going forward. As it relates to your question on some of the care delivery partnerships. We're seeing really good progress there. Again, when you look at the assets within Carelon, it can add a lot of value to our partners. And so, we continue to look to wrap around those services and create incremental value. And as we look forward, we have that in mind as well. When we talk to our provider base partners, where are they feeling stressed, where can we support them. So there's a lot of opportunity that we got going forward.

Operator:

Next, we'll go to the line of A.J. Rice from Credit Suisse. Please go ahead.

Gail Boudreaux :

Well, thank you, A.J. That was a very comprehensive set of questions, and let me try to kind of go through them. First, we really are excited about the acquisition of Blue Cross and Blue Shield Louisiana. As you said, it's been some time since one of these has occurred. But I think as you think about like the driver for this, this is very much a strategic acquisition. The Board of Blue Cross and Blue Shield of Louisiana, really wanted to have a greater impact and accelerate the strategy that they put in place. This is a solidly run plan, 4.5-star Medicare plan. And I think those are really important things as you think about this acquisition. The other thing that I think is really important for us is Blue Cross Blue Shield of Louisiana very much aligns with our strategy. They're deeply rooted in their local communities. They -- as we shared, they've served Louisiana for more than 90 years. Our mission and purpose is well aligned. And we've had a healthy Blue Alliance partnership with them that serves our Medicaid and dual special needs plans for a number of years now. So we've worked together culturally, I think there's a great alignment there. And the other thing is we're excited because this brings the 15th Blue state. So we can -- just as we have in our other 14, we've kept our deep local roots in a new market, but we also can bring our national scale and access to our portfolio of innovative solutions and capabilities, again, accelerating what the Blue Cross Blue Shield strategic focus has been, and that supports the community. And I think accelerates their strategy and making an even greater difference in impact on the 1.9 million lives. In terms of closing, this will be subject to the normal closing conditions. And as we shared, we believe that we expect the deal to close in the second half of 2023. So again, not much more there. We do feel the impact that we can have on the community and the citizen in Louisiana with the foundation, accelerate Louisiana really is a strong component of this and helps accelerate health care status, accessibility, affordability as well as health equity, and those are areas that we've been deeply investing and committed to as well. In terms of collaborations, you heard that we've done a number of collaborations and feel good about the Synergy Medical Collective, which is a great example of all of us coming together around medical specialty and again, with an alignment and focus around fundamentally improving affordability. We have 150 million Americans that we serve across this country. And we feel that ability for us to work together to have an even greater impact, again, on access and affordability is really important. And I would just point to that as an example. So, thank you very much for the question. I think we, again, are excited about this. We think it's a great collaboration for us and feel that there's an opportunity for us to work together and for us to obviously use Carelon to help support the advancement of all Blues. So thanks very much. Next question, please.

Justin Lake:

Thanks. Good morning. Just wanted to check in, in 2022, you did about 7% margin in that commercial business. I know you're not reporting it specifically anymore. But you had 11% target out there for 2025. I wanted to check in on that target and just find out if that is still what you're expecting to do by 2025. Maybe you could share with us how much progress you're making towards that in 2023? And then give us -- I'm sure there's an offset there in terms of more conservatism on the Medicaid side from a margin perspective. Can you share what you -- where you expect your Medicaid margins to be versus the 2% to 4% target you have out there long term? Thanks.

Gail Boudreaux:

Thank you. Next question, please.

Nathan Rich :

Hi. Good morning. Thanks for the questions. On Carelon, you mentioned that you hit the target for 20% of benefit expense through Carelon ahead of schedule. Could you talk about how much higher this percentage can go from here with your current capabilities? And then specifically on the outlook for 2023. The revenue guidance for Carelon Services came in a bit below your long-term target. How are you thinking about growth from here just given the progress that you've made? And will more growth come from external customers going forward? Thank you.

Peter Haytaian :

Yes. No, thanks for the question, Nathan. As it relates to 2023, just to be clear, and John noted this in the prepared remarks, the low double-digit range growth in 2023 is really organic growth. It does not include M&A. I think if you look at our recent history, there's been a lot of M&A that's contributed meaningfully to us. And we're being very intentional about that. We're very focused on it. It's something that we'll continue to do. And I think it's an important part of our growth strategy going forward. As Gail said, in terms of the amount of medical spend that we penetrate, we'll talk more about that at Investor Day, but we're really encouraged with our trajectory right now. We feel like we can continue to grow pretty significantly. There's a lot of white space internally. So a lot of opportunity there. But to your point about external growth, we did establish some new leadership. We've got a new infrastructure in terms of external growth. We're very focused, as Gail said, you've heard a lot about the Blues and Blue partnerships, and we're very encouraged of what we're seeing in terms of the Blue opportunity. So we do think we can see nice growth externally as well. But again, our first focus is on the affiliated health plans and creating value there first.

Operator:

Next, we'll go to the line of Scott Fidel from Stephens. Please go ahead.

John Gallina :

Yes, sure. Thank you, Scott, for the question. So associated with Blue Cross and Blue Shield of Louisiana. As we had stated, we're not expecting that to close until later in [Technical Difficulty] impact on 2023 will not be material, really data line items. However, assuming it does close in 2023 -- in 2024, what we should see is an incremental 1.6 million members after you eliminate the various double counts and you referenced the significant partnership we have with them already. So it's an incremental 1.6 million members. And it's really -- it's an incremental $4.5 billion in revenue on top of what we have now. So that's really about the high-level economics that we would expect to inure in 2024.

Felicia Norwood:

Yes. Good morning, Scott, and thank you for the question on Minnesota. We operate over 27 Medicaid plans across the country with over 11.5 million members. And when you think about what we do, we bring very deep expertise in this business and a relentless focus on our whole health strategy, health equity and improving health outcomes. The expertise we bring to the table has been recognized by our external partners, and we really look forward to continuing to bring that experience to other Blue partners and alliances, not only in Medicaid, but in Medicare as well. When I think about our alliance relationships, each of them is very different. And Blue Cross Blue Shield of Minnesota decided to end our administrative services relationship, which supported about 330,000 Medicaid members and provide back-office services in-house. We're going to work with them to make sure that there's a seamless transition, because at the core of what we do, we want to make sure our members are taking care of, and that's our highest priority. So we continue to value alliance relationships and really look forward to continued growth in this segment, with partners who value the deep expertise that we bring to the table for serving vulnerable and complex populations. Thank you.

Operator:

Next, we'll go to the line of Lisa Gill from JPMorgan. Please, go ahead.

John Gallina:

Thank you for the question Lisa and we're not discussing specific trend assumption for 2023, but really when you look at some of the cost drivers that we have relative to the expectations, emergency room has been favorable, in-patient has been favorable, pharmacy cost actually running a little bit higher than expected. And out-patient is running a little bit higher than expected. I don’t know that we really see any pent-up demand as much as we see -- being as much as the new normal. But just to reiterate. The overall cost structure of the business is higher than if COVID had never occurred. COVID is here and it continues to be a cost driver. What I think is probably most important in all of this is that our pricing now reflects the underlying cost structure and our MLR guidance also reflects this higher cost structure. So we actually feel very well positioned going into 2023. Thank you.

Operator:

Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please, go ahead.

John Gallina :

Yes. Thank you for the question, Kevin. And as you indicated in your question, we're not going to provide any specific details we did on 2024. Obviously, at our Investor Day coming up here in a few months, we'll provide a lot more long-term aspirations. But I think the way you've characterized 2023 is correct. It's really -- it's a year of optimizing our health benefits business, while we continue to grow and expand the capabilities within Carelon. And then you talk about, well, gee, could the headwind be greater? As you look at the Medicaid redeterminations, there's certainly a lot of variables associated with the pace and timing, on a state-by-state basis, where they go, which lines of business, they ultimately reside in I think one of the great things about the balance and resilience of our membership base is that we end up with the members somewhere. We have a product offering for every member regardless of age, regardless of employment status, with regardless of health condition, and feel very, very good. So we do expect approximately about half of the Medicaid members to be reverified here in this calendar year and the other half next year. So there is some balance there. But at the end of the day, we are very well positioned to retain much of that membership. Thank you.

Operator:

Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead.

Gail Boudreaux :

Sure, I'll have Felicia Norwood, who leads that business, to share her comments.

Gail Boudreaux:

Thank you. Next question, please.

Josh Raskin:

Hi. Thanks. Good morning. I was wondering if you could provide an update on some of the trends you're seeing in value-based care. I heard some of the comments earlier. But as you go into 2023, are there any changes in the dynamics of the industry? Any changes specify in contracting terms that either the providers are looking for or that you're trying to push? And then, maybe any updated views on the employment or ownership of physicians or physician groups.

Operator:

Next, we'll go to the line of Rob Cottrell from Cleveland Research. Please, go ahead.

Gail Boudreaux :

I'm going to ask Pete Haytaian to address that, please.

Gail Boudreaux :

Thank you. Next question, please.

Whit Mayo :

Hey, just on the topic of health plan optimization and commercial repricing initiatives. Can you comment maybe more specifically on stop loss? I think, you guys are beginning to anniversary some of the challenges in the creep and high-cost claims last year, just how you feel about trends in the business margins, just maybe broadly, any comments about the overall stop-loss market? Thanks.

Morgan Kendrick :

Hi, there, and Whit, thank you for the question. Regarding the stop-loss business, that's certainly an area that was underperforming priorly and we began that journey to recover the margins in that business back in January of last year. It started with some of our integrated -- our external business rather. And then year progressed further, we had our July cohort, which John mentioned earlier, which was about 25 [ph] to some of our integrated business, both stop loss and risk-based business. Both of those went through a repricing exercise midyear, and then that concluded with January. So regarding the stop-loss market, we feel very good about it. We've got continued strong penetration, but opportunity to continue to grow that, both on our internal integrated business as well as our external. And we feel at this point in time, we have right-priced our business based on risk and we'll continue doing that so very fastidiously as we move through in 2023.

Operator:

Next, we'll go to the line of Dave Windley from Jefferies. Please go ahead.

John Gallina:

Thank you for the question, Dave. As you can imagine, there's a lot of puts and takes associated with SG&A ratios and by the ability to invest and the fact that we have been investing quite heavily in various digital capabilities, things that are member facing and can actually improve the member experience. The other aspect is that, we've really enjoyed a lot of fixed cost leveraging. Our premiums grew at 13.5% year-over-year, which obviously allowed the SG&A ratio to decline from that aspect as well. So, we do expect a reduction in our operating expense ratio in 2023, driven by the leverage of top line growth, as well as improved operating efficiency, partially offset by the reinvestment and strategic initiatives in support of our growth. So, while certainly, the mix of business does matter. And as we said in the guidance, Carelon services carries a higher SG&A ratio than the rest of the company in general. And we expect Carelon Services to grow faster, a lot of puts and takes. But fixed cost leveraging and investment in capabilities are probably two of the most significant drivers year-over-year. Thank you.

Operator:

Next, we'll go to the line of Steven Valiquette from Barclays. Please, go ahead.

Gail Boudreaux:

Great. I'll have Morgan share his thoughts.

Gail Boudreaux:

Yes. Thanks for the question. I think, as Morgan just shared, we're making really nice progress on really improving the -- both the revenue per member and the profitability per member in our fee-based business. And the example he gave, I think, helps demonstrate that. And so overall, we feel it's been strong and we have a lot of confidence in that. So thanks again for the question. And it's, again, part of optimizing our health benefits business that we've talked about. Next question, please.

George Hill:

Hey, good morning. And thanks for taking the question. I ask, kind of, a question on the future state of the CarelonRx business, because you guys announced the BioPlus acquisition, you've got the synergy initiatives. You've got the JV with SS&C on DomaniRx. So I guess it's probably a question for 2024 or beyond. But I guess can you talk about how much of the vertical integration of the PBM business that you think that you need to do, given the outsourced relationship with CVS and the other initiatives that you have going on? Thank you.

Gail Boudreaux :

Thank you. Next question.

Gary Taylor :

Hi. Good morning. Actually I had a quick question about BioPlus as well. I was just wondering a couple of things. If you could give us a sense of annual revenue there, geographic reach and someone I think Pete earlier said in the future would bring specialty fulfillment in-house. And I thought that's what BioPlus was. So I just want to make sure I understand the business model there?

Gail Boudreaux :

Thank you. We have one last question.

Michael Ha :

Hey, thank you for the question. Just wanted to dig a little deeper on commercial margins. I know you mentioned you're still targeting 10.5% to 11.5% by 2025 I think John might have mentioned 125 bps better commercial margin in 2023. Was that right? And if so, that would be slightly more than 8% for 2023, which means there's still a considerable gap to your 2025 target. And I was expecting a majority of that improvement might happen this year just given your repricing experts, but if you're seeing 125 bps in 2023 and the following two years, would need at least 225 bps of improvement. So I was wondering if you could just talk a little bit more about the path and progression of that improvement in 2024 and 2025. If you could help us break down the drivers we can better envision that path? Like what percent of that improvement is coming from up-selling your fee based business or the shift to higher margin small group or just any other contributors, maybe potentially more of a pricing efforts beyond 2023? Yeah, thank you.

Gail Boudreaux:

Thank you, John, and thank you for everyone for joining us. In closing, we're pleased to have delivered another strong year in 2022 and are confident that the ongoing execution of our strategy positions us well for 2023. We look forward to discussing our long-term strategy in greater detail at our 2023 Investor Conference, which we said we plan to host in New York City on March 23, 2023. Thank you for your interest in Elevance Health, and have a great rest of week. Thank you.

Steve Tanal:

Good morning, and welcome to Elevance Health's third quarter 2022 earnings call. This is Steve Tanal, Vice President of Investor Relations. And with us this morning on the earnings call are Gail Boudreaux, our President and CEO; John Gallina, our CFO; Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial and Specialty Business Division; and Felicia Norwood, President of our Government Business Division. Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. John will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

John Gallina:

Thank you, Gail, and good morning to everyone on the line. As Gail mentioned earlier, we reported third quarter adjusted earnings per share of $7.53, an increase of approximately 11% year-over-year driven by broad-based momentum across our enterprise. We are pleased to have delivered another quarter of double-digit growth in revenue, operating income and adjusted earnings per share, driven by the disciplined execution of our strategy and ongoing growth of health benefits and services businesses, progressing us further down our path of transforming from a health benefits company to a lifetime trusted partner in health. We ended the third quarter with 47.3 million members growing 2.2 million or nearly 5% year-over-year, including growth of 232,000 members in the third quarter. Our industry-leading organic enrollment growth, which constituted nearly 90% of our total enrollment growth year-over-year, was led by strong sales in our commercial fee-based membership, growth in Medicaid driven in large part by the ongoing suspension of eligibility redeterminations and growth in excess of the overall market in our individual Medicare Advantage business, primarily driven by dual eligible members. We supplemented strong organic growth with the acquisitions of the Paramount and Integra Medicaid health plans which together added approximately 300,000 Medicaid members earlier this year. Operating revenue in the third quarter was $39.6 billion, an increase of $4.1 billion or approximately 11% over the prior quarter with strong growth in each of our businesses. We earned higher premium revenue driven by membership growth in Medicaid, including the acquisitions of Integra and Paramount; Medicare; and commercial risk and fee-based membership growth and premium rate increases to cover overall cost trends in all of our health benefits lines. Our services businesses, Carelon and IngenioRx produced a very strong growth as we continue to execute against our long-term growth strategy. IngenioRx grew revenue 11% year-over-year, while the other segment comprised primarily of Carelon, grew operating revenue 26%. Carelon and IngenioRx are delivering significant value to our Commercial and Government health plans. And consistent with our strategy, we continue to increase the breadth and depth of services Carelon is providing. Revenue eliminating consolidation, a proxy for affiliated business between our risk-based health plans and our services businesses, grew 17% year-over-year in the third quarter, representing approximately 21% of our consolidated benefit expense, up from approximately 20% a year ago. The consolidated benefit expense ratio for the third quarter was 87.2%, a decrease of 50 basis points over the third quarter of 2021. During the quarter, we realigned certain quality improvement expenses incurred since the beginning of this year, which had a favorable impact on our benefit expense ratio and an offsetting unfavorable impact on our SG&A expense ratio with no impact on operating earnings. Excluding the impact of the accounting realignment, our benefit expense ratio would have been approximately flat year-over-year and better than our expectations. We were pleased to deliver operating margin expansion in our commercial business, driven in part by stronger medical underwriting performance in our Commercial group risk business. The successful July 1 renewal process where we repriced approximately 25% of our large group risk business and the continued increases in penetration of services into our fee-based businesses contributed to the segment's performance. We were pleased with the retention of our July 1 renewals and have even more confidence as we approach the January 1 renewal date. Elevance Health's SG&A expense ratio in the third quarter was 11.4%, an increase of 30 basis points over the prior year quarter. The increase was primarily driven by spend to support growth and the realignment of certain quality improvement expenses as previously described. Excluding the realignment, our SG&A ratio would have improved by approximately 20 basis points year-over-year. Third quarter operating cash flow was $4.9 billion or 3.1x net income, driven primarily by the early receipt of certain fourth quarter premium revenue from CMS during the third quarter. We also paid our share of the Blue Cross Blue Shield Association's litigation settlement of approximately $500 million in the quarter. Excluding both of these items, operating cash flow would have been $3 billion or 1.9x net income, another indication of high quality earnings. Turning to our balance sheet. We ended the third quarter with a debt-to-capital ratio of 39.7% in line with our expectations and consistent with our target range. During the quarter, we repurchased approximately 1.2 million shares of common stock for $579 million. Year-to-date, we've been opportunistic with respect to share repurchases during periods of volatility in our share price and have already repurchased 3.7 million shares for $1.7 billion, exceeding our initial outlook of repurchasing at least $1.5 billion in 2022. We continue to maintain a prudent posture with respect to reserves. Days in claims payable stood at 47.7 days at the end of the third quarter, a decrease of 0.1 days sequentially but an increase of 0.9 days year-over-year. Given strong performance year-to-date, we are increasing our full year earnings outlook. We now expect adjusted earnings per share to be greater than $28.95, implying growth of approximately 15% of the adjusted baseline of $25.20 provided at the beginning of the year. Our businesses are continuing to perform well with strong momentum that we expect will carry into 2023. While we will not provide specific guidance for 2023 on this call, I would like to review some known tailwinds and headwinds worth considering as we continue planning for 2023. Starting with the tailwinds, the continued execution of our commercial margin recovery in 2023 through disciplined underwriting to cover our forward view of medical cost trends, enhanced operating efficiencies and ongoing strategies to improve the productivity and profitability of our commercial fee-based business. The growth we anticipate in our individual ACA and employer-sponsored membership as consumers transition coverage when Medicaid eligibility redeterminations resume. We expect strong earnings growth in Medicare Advantage driven by membership growth in excess of the broader market and operating margin expansion that we expect will be driven by three primary factors. Number one, having 73% of our Medicare Advantage members in four-star or higher-rated plans for the 2023 payment year, an increase of 15 percentage points year-over-year. Number two, the continued recovery and risk adjustment as utilization has returned to more normalized levels. And number three, a relatively strong funding environment for the overall industry in 2023. Finally, we expect ongoing momentum in Carelon services and IngenioRx, which will carry into next year. Our tailwinds will be weighed against one known headwind, and that is the membership attrition and related impacts on our Medicaid business is eligibility redeterminations are conducted over the course of the next year. Although interest rates continue to rise rapidly, investment income is not expected to be a material tailwind or headwind. In 2022, we enjoyed significant outperformance in our alternative investments in the first half of the year. Rising interest rates are expected to benefit the second half, and we are anticipating a full year of benefit from higher rates in 2023. While performance in both years is expected to be strong overall, I would not call out investment income as a material tailwind or headwind for either 2023 or 2022 at this point. We’re also mindful of the uncertain economic environment and the risk that business conditions could deteriorate. While the balance and resilience of our enterprise and the momentum we have across our businesses leaves us well-positioned for growth in the coming years, a more severe recession could create challenges. Our associates are prepared to adapt to any change in the business environment with detailed plans that ensure we will remain positioned to meet the unique needs of our clients and customers as they evolve with a commitment to affordability and value throughout. Accordingly, at this point in time, we expect to produce another year of growth in adjusted earnings per share in line with our long-term target compound annual growth rate in 2023, which is consistent with the current consensus estimate. We look forward to providing more specific guidance on our fourth quarter earnings call. In closing, we continue to execute against the strategic priorities we mapped out at our 2021 Investor Conference and are pleased to have delivered another strong quarter while also continuing to reinvest in our business, better positioning us to deliver strong growth for years to come. With that, operator, please open the line for questions.

Unidentified Analyst:

Hey, guys, thanks for the question. This is Austin on for Justin here. On commercial margin, just focusing on that for a second. You guys showed some sequential improvement there, but it looks like you probably need around 300 basis points to kind of hit that 2025 target range that you laid out there. Just curious, on the pacing of that, how much are you expecting to come in 2023 and 2024? And then maybe a slight follow-up there. You mentioned retention, John. How did that track versus typical on those July 1 renewals? Thanks.

Morgan Kendrick:

Thanks, John, and thanks for the question, Justin. As John said, this is going to be – it’s going to take a bit to get it completely turned. July came in actually as expected. Certainly, there was some attrition in the large group risk business. To give you some concept there as it relate – context here as it relates to January, John said about 50% of that business is up for renewal. We have just released those in market. So it’s a bit early to tell, but our expectations are that there will be some attrition, which is – would be natural when we’re right pricing this business and we’re unmoved by anything being different than expected as we move forward.

Operator:

Next, we’ll go to the line of A.J. Rice from Credit Suisse. Please go ahead.

John Gallina:

Thank you for the question, A.J. So, our Government Business division is actually performing very well. And for the year, we’re certainly going to be posting some very strong results. Both Medicaid and Medicare have been growing nicely. And I think that’s evidenced by the excellent top line growth we’ve seen of over 13% year-over-year. Medicaid’s performance is strong, but for Medicaid, and we’ve said this in the past, on a quarterly basis, results can be a bit more variable and susceptible to swings. And when viewed in isolation, any one quarter could be misleading. Medicare is continue to perform consistent with our expectations and, as you know, has significant upside for 2023. If you think about Medicare and the improving star ratings that I talked about in my prepared comments, the more complete and accurate risk scoring that will allow us to enhance the revenue in those areas. We feel very well positioned for the future of our Medicare Advantage book. And in terms of 2023 growth, it is premature to provide specifics associated with 2023 growth. But our goal is to clearly grow faster than the industry. And we have done that on a percentage basis now for the last several years in a row and expect to do that for the next several years ongoing. So thank you for the question, A.J.

Felicia Norwood:

Yes. Thank you, Gail, and good morning, A.J. As Gail said, it was certainly very early in the Medicare Advantage annual election period. But we’re pleased with what we’ve seen so far around our competitive positioning. When we think about our supplemental benefits, they really compare favorably with our competitors, and we really lead the industry in terms of our everyday extras, our over-the-counter offerings, transportation benefits and certainly those things that are focused on addressing the whole health needs of our members and those social drivers of health. Additionally, as you know, we actually improved our footprint by expanding into 145 new counties on the HMO side and then 210 counties from a PPO perspective. So while we’re early in this process based on the feedback we’re getting from our distribution channel and others, we feel very good about how we are positioned as we head into AEP and look forward to continued growth in this business. Thank you.

Operator:

Next, we’ll go to the line of Lance Wilkes from Bernstein. Please go ahead.

Gail Boudreaux:

Yes. Thanks for the question, Lance. I’m going to have Pete Haytaian, who leads that business, give you a perspective on Ingenio. But overall, I’d just say we’re really pleased seeing some really, really strong growth in Ingenio and more importantly, integrating it into our 5:1 to 3:1 strategy. So I think Pete can provide you a lot more granularity on kind of what we’re seeing in the market. Pete?

Gail Boudreaux:

Thank you. Next question, please.

Scott Fidel:

Hi. Thanks. Good morning. Was interested if you could just talk about the competitive environment and managed Medicaid a bit particularly as we’re in a pretty active RFP cycle right now and with a couple of other big states coming up and with a couple of the competitors having – shown some improved momentum in some of the recent RFP results. So, interested just in the competitive backdrop and then what Elevance is doing right now strategically or tactically to try to keep your competitive edge of Medicaid. Thanks.

Felicia Norwood:

So, good morning, Scott. In many respects, the Medicaid space has always been competitive, but you’re right, it’s certainly become hyper competitive recently and we continue to be, I think, well positioned around our success. When I take a look at the RFP process, as you know, states really delayed part of the RFP process in the midst of COVID, but things have certainly wrapped up significantly over the past year or so. When I take a look at where we are, our focus has really been around health equity, population health. You heard Gail referenced earlier our NCQA distinction with respect to health equity. And our state partners are certainly looking at health plans who can help them improve outcomes and focus specifically on those health equity areas that we’ve been working on here at Elevance Health. So I feel strongly about our ability to kind of elevate and advance health for our members and address the needs of our state partners at a local level. When I look at the RFP opportunities, we’ve been focused on certainly California was significant, a really big win for us. We won in every county, we were able to win in and we actually picked up a county that was a new county for us, so a very strong performance there. We recently also re-procured our RFP in Puerto Rico coming in first, and that demonstrated to me continued strong momentum in terms of our ability to address the needs of our state partners. And most recently yesterday having the DC City Council approved a new win for us in the district. So I continue to see momentum around our value proposition, being able to respond to the needs of our state customers and meet our Medicaid members where they are as we continue to focus on health equity, improved outcomes and advancing those issues that we know are very important to our state partners.

Operator:

Next, we’ll go to the line of Nathan Rich from Goldman Sachs. Please go ahead.

John Gallina:

Thank you for the questions, Nathan. So let me do the easy one first and that was the accounting adjustment. So during the third quarter, CMS provided clarifying guidance on the types of cost that can be included in the quality improvement cost and therefore, considered benefit expense versus those that need to be classified as SG&A. In our GAAP presentations have historically always mirrored the CMS definitions and requirements. So when CMS clarified those definitions, we realigned our reporting accordingly. And so just to be clear, the impact for the third quarter was to improve MOR by about a 0.5%, which would then make the negative impact on SG&A about 0.5% with no impact on the bottom line, clearly a reclass. For the full year, there will be about a 20 basis point impact on each of those. And then in terms, and we always, always try to be fully transparent. So, we wanted to ensure everyone was aware of the nuances in this reporting and what we will see by the end of the year of about a 20 basis point benefit to MLR for this clarification that CMS provided that we aligned with. So hopefully that helped from that perspective. And then in terms of the of the trends and costs and utilization in general, as you’ve stated, you pointed out without the reclassification, our MLR would’ve been flat, which is actually a nice improvement because of a mix on a mix adjusted basis. Since our government membership now is a higher percent of our fully insured membership than it was a year ago. So third quarter did come in better than expected, but the overall cost structure of the health system is still a bit higher than what it would’ve been had COVID never occurred. But I think the most important element of all this is that our trends continue to be in line with our expectations in each of our lines of businesses. So, associated with lines of businesses, Medicaid is doing slightly better than historical levels. Medicare is very much in line. We’re seeing outpatient a bit higher and inpatient a bit lower, helping offset to have a more normalized trend. And then commercial has been very consistent with our last several quarters where outpatient continues to be higher, but even more so than the benefit that we’re seeing in inpatient. And so that’s been all part of the process and all part of the guidance. So, we’re obviously not going to comment on 2023 at this point in time, but hopefully that answers all your questions.

Operator:

Next, we’ll go to the line of Steven Valiquette from Barclays. Please go ahead.

Gail Boudreaux:

Well, Steve, thanks for your question. I think just a couple of, I’d say clarifications as we go through this process. We’ve been working very, very closely with our states and across our enterprise. And a few things that I think are important that we’ve shared with you in the past. One, we’ve had a long time to plan for this and a long time to discuss this with each of our specific states, and each state will have a bit of a different process, but where we can, we’re sharing data that the states allow us to do that. We’re also working with community organizations to make sure that first and foremost, that everyone who’s eligible for coverage retains eligibility for coverage. And I think that’s probably where we start in this whole process, is ensure that those, just because of administrative things, et cetera, that we ensure that they have the right eligibility for the right program. For those that are not going to be eligible for Medicaid, again, we’re working across our commercial business as well as our Medicaid business to provide, I think the most education and seamless transition. If you start just a little bit of facts for our business. If you think about our 14 commercial states, Medicaid membership in those states grew roughly 7.5 million beneficiaries in those states. We, as part of our exchange footprint, now cover pretty much all of the counties in our footprint of 14 states and also have incredibly strong market share, not only in the exchange, but also in our commercial benefits business. So, we think there’s an opportunity, obviously with our brand recognition our dedication to this membership, our community involvement, and the work we’re doing, again, with community partners, educating our commercial business to be quite frankly, well positioned and don’t see it as a jump ball. We think we’re actually quite well positioned in those states. And in terms of our own Medicaid membership, approximately 2.7 million members – million of those members came in as a result of the PAG and obviously we know those members well, they know us well, they recognize our brand. And so, again, based on the state rules, and regulations will be working very closely to help that transition. So, I feel like, given the time we’ve had to plan the guidance from the administration, our work with the states, that actually this is going to be a much more organized process than I would call it just to jump all with a real opportunity for those who lead in the market to have an opportunity to move those members and keep coverage, which again, is our primary goal here. So again, thanks for the question. And we look forward to continuing to update everyone on our progress there. Thank you. Next question.

Rob Cottrell:

Hi, good morning. Thanks for taking my question. I guess, I just wanted to ask about the negotiating environment with health systems. There’s been some conversation in the market about financial pressures across health systems leading to increased value-based care adoption. Are you seeing that play out across your negotiations and your contracting team? And do you expect that to ultimately have a positive impact for you all over the next year or two?

Operator:

Next, we’ll go to the line of Lisa Gill from JPMorgan. Please go ahead.

Gail Boudreaux:

So thanks for the question, Lisa. I’m going to ask Morgan to add some commentary, but just an overview. Yes, we are. So first, Sydney is our front door to healthcare. So we have really embedded all of our capabilities in Sydney. And what I shared with you are a couple things. One, that virtual primary care is one of the elements of our care delivery strategy. And Morgan talk about the product offerings that we have there as well. But we’re also seeing it, and you saw some of the early data around an opportunity to help us manage chronics in a much more efficient way. And so we’re seeing a lot of uptake in that. And it’s also embedded into what our customers are selecting. So we’re adding a lot more capability inside of Sydney. So a couple of very important just quick facts, but let me turn it over to Morgan to share with you a little bit about the product strategy, which is an element of our affordability offerings for the market.

Gail Boudreaux:

Yes, thanks, Morgan. And Lisa, just sort of two important concepts that I want to reiterate. One that we’ve embedded virtual capabilities for our customers across the board. And we’re also aligning those with our high performance networks. And we talk about best costs in the marketplace and what’s really driving a lot of our growth. It’s that affordability. And again, it’s not just virtual for virtual by itself, but it’s aligned to our high performance network strategy. And then second, as Morgan said, we’re in – I would say earlier days, but we have been beginning to launch a number of virtual only products. But again, they have tied to physical assets or high performance network. So again, really trying to drive best cost and quality and outcomes for our members. Next question, please. Thank you.

Kevin Fischbeck:

Great, thanks. I guess I want to go back to a comment that John made in prepared comments about the impact of a recession. I guess, the company historically has talked about the kind of the balanced business mix between Commercial, Medicaid, and how the two businesses kind of offset each other during a recession. So one, I guess first you didn't mention a recession either as a tailwind, I'm sorry, as a headwind. So I assume, does that mean that you don't assume a recession that the guidance or you assume a modest one has no impact? And then what exactly do you mean that if it's a severe recession, how should we think about how that impacts a company like Elevance given your business mix? Thanks.

Operator:

Next we'll go to the line of Gary Taylor from Cowen. Please go ahead.

John Gallina:

Yes. Thank you, Gary. I'll answer the first part of your question, then turn it over Felicia for your second question. But in terms of the impact on rebates, it was de-minimus. The vast majority of the reclassification impact that the commercial line of business and while we do have occasional MLR rebates in commercial, they're not nearly as prevalent as they are in some of our, in Medicaid at this point in time. So there was really de-minimus that's why I said there's virtually no bottom line impact. Felicia?

Gail Boudreaux:

Thank you. Next question, please.

Whit Mayo:

Hey, I just wanted to go back to Carelon for a second. Any way to frame what percent of your post-acute spin for MA today is being delegated to MyNEXUS or any of your other assets? And then kind of what are the targets for that business over time? Just any way to, quantify and put some numbers around it. I think, I may have underappreciated that the tail around this.

Gail Boudreaux:

Yes, thanks Pete. And a number that we do share more broadly is the percentage of spend that Carelon manages for Elevance Health. And that has continued to increase and it's around 21%. So just to give you a little bit of perspective, and it's obviously a number that, we will we continue to have a bigger impact on. Next question, please?

Dave Windley:

Hi, thanks. I wanted to come back to the comments around commercial renewal. And John's prepared, you talked about being even more confident about Jan 1 than July 1, which was successful. Wondered if you could put a finer point on the factors that drive that confidence, and then to what extent do those same factors benefit growth beyond renewal and or help your catchers met for catching Medicaid from redetermination.

Morgan Kendrick:

Thanks Dave. To – express confidence, I think that July played out as we indicated exactly as we expected. The renewals that we needed we obtained, and of course there was some attrition in the book that was certainly planned, that same phenomenon we're seeing and in we're the very beginnings of it for January 1. I think the confidence that was alluded to earlier is in the actual position in which we're pricing the business. We sort of got in the spot last year, pricing early for 2021 or 2022 and then things reveal differently in the fall. That's sort of shaping up as planned as we see right now. So the confidence in the numbers, in the market are there. When we think about this concept of a catchers met with Medicaid redetermination, there's business that stays on the Medicaid side. There's business that's going to move to the commercial side, be it group or individual. Gail alluded to the fact that we've done a really nice job in expanding our footprint to cover roughly 95% of the population of the geographies we serve – from a commercial individual ACA perspective. And then, we have very strong penetration in the commercial risk and non-risk business would also be part of that catchers met, so to speak for the group side. So all in we're confident in A the results from July B how we're [Technical Difficulty].

Gail Boudreaux:

Yes, thanks for the question. I think in total, I think I shared this in sort of the recession response. We really haven't seen a lot of change in, in-group and actually it's been up a little bit. So I wouldn't necessarily call it a trend, but it's been running fairly stable. And I think as you think about, where employers are, they're holding onto their employees, they've got a number of jobs still open, so we're not seeing any impact yet across any of our commercial business on the attrition side and actually are seeing some net ads. So thank you very much for the question. And thank you, operator. In closing, we're pleased with the broad based momentum across our businesses and are confident that our ongoing execution of our strategy positions us to continue delivering against the financial targets we shared with you at our investor conference last year. We'll keep executing with excellence and discipline to deliver an enhanced value to all of our stakeholders. Thank you for your interest in Elevance Health and have a great rest of week.

Steve Tanal:

Good morning, and welcome to Elevance Health Second Quarter 2022 Earnings Call. This is Steve Tanal, Vice President of Investor Relations. And with us this morning on the earnings call are Gail Boudreaux, President and CEO; John Gallina, our CFO; Peter Haytaian, President of Carillon; Morgan Kendrick, President of our Commercial and Specialty Business Division; and Felicia Norwood, President of our Government Business division. Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. John will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

John Gallina:

Thank you, Gail, and good morning to everyone on the line. Earlier this morning, we reported second quarter results, including GAAP earnings per share of $6.79 and adjusted earnings per share of $8.04, reflecting growth of more than 14% year-over-year. We were pleased to deliver another quarter of double-digit growth in revenue, operating income and adjusted earnings per share, driven by the disciplined execution of our strategy. Our results exceeded our expectations. And with momentum in all of our businesses and confidence in our growth trajectory, we have increased our full year earnings per share outlook. We ended the second quarter with 47.1 million members, up 2.7 million or 6.1% year-over-year, including growth of 276,000 members in the second quarter. We grew enrollment year-over-year in each of our benefit businesses with approximately 90% of our membership growth being organic, supplemented by the acquisitions of the Paramount and Integra Health Plans, which added 255,000 members and 43,000 Medicaid members in the first and second quarters of this year, and together strengthened our footprint in two attractive existing markets. Second quarter operating revenue of $38.5 billion increased $5.2 billion or approximately 16% over the prior year quarter, with strong growth in each of our businesses. We earned higher premium revenue driven by membership growth in Medicaid, Medicare and Commercial; premium rate increases to cover overall cost trends; the acquisitions of Paramount and Integra; and the timing of the MMM acquisition, which closed at the end of the second quarter in the prior year. Our services businesses, Carelon and IngenioRx, produced very strong growth. IngenioRx revenue grew 14% year-over-year, while the other segment revenue, comprised primarily of Carelon, grew operating revenue 31%. The strong performance in our services businesses is being driven by the disciplined execution of our strategy to work side-by-side with our health plans, the scale services that drive differentiated value for consumers, beginning with the more than 47 million medical members, which includes the more than 20 million that are fully insured, for whom we can more quickly roll out new capabilities. Beyond helping to improve our members' lives and reducing health care costs across the system, the growth of Carelon and IngenioRx are aiding diversification of Elevance Health's businesses and producing cash flow in noninsurance and therefore, nonregulated entities. Revenue eliminated in consolidation, a proxy for business between Carelon and IngenioRx and our own risk-based health plans grew 24% year-over-year in the second quarter and represented 21.8% of the consolidated benefit expense, up from 20.5% a year ago. The consolidated benefit expense ratio for the second quarter was 87%, an increase of 20 basis points over the second quarter of 2021, driven primarily by the shift in mix business towards government programs, which carry higher medical loss ratios relative to the Commercial business. The overall medical cost insurance businesses remained higher than what we consider to be a normalized level had the pandemic never happened, with Commercial furnace above, Medicare near normal cost levels, and Medicaid still somewhat below. However, medical costs in the quarter were slightly favorable to our expectations. We expect the cost structure for health plans to remain somewhat elevated in the back half of the year, which is reflected in our guidance. Elevance Health's SG&A ratio in the second quarter was 11.1% on a GAAP basis, a decrease of 40 basis points over the prior year quarter. The decrease was driven by expense leverage associated with strong growth in operating revenue, partially offset by higher investments to support our growth. Second quarter operating cash flow was $2.5 billion or 1.5 times net income, which includes the impact of higher working capital in relation to certain provider pass-through payments in one of our Medicaid states that we anticipate will be paid in the third quarter of this year. As a reminder, we also continued to expect to pay $500 million, which is our share of the Blue Cross Blue Shield Association's litigation settlement. Turning to our balance sheet. We ended the second quarter with a debt-to-capital ratio of 39.7%, in line with our expectations and consistent with our target range. During the quarter, we repurchased approximately 1.3 million shares of common stock for $624 million. Year-to-date, we've been opportunistic with respect to share repurchases during periods of volatility in our stock and have already repurchased 2.5 million shares for $1.2 billion. Our full year outlook of $1.5 billion is, however, still an appropriate figure for full year modeling purposes. We continue to maintain a prudent posture with respect to reserves. Days and claims payable stood at 47.8 days at the end of the second quarter, an increase of 0.9 days sequentially and a decrease of 0.3 days year-over-year. ECPs would have been 46 days, excluding the timing of certain provider pass-through payments that we will anticipate in the third quarter of this year. As a reminder, DCPs were elevated by 1.6 days in the second quarter last year due to the timing of acquisitions. Normalizing for timing-related impacts, DCPs are very consistent on a year-over-year basis. Given stronger-than-expected performance year-to-date and the continued momentum in each of our businesses, we are increasing our full year earnings outlook. We now expect adjusted earnings per share to be greater than $28.70, implying growth of approximately 14% off of the adjusted baseline of $25.20 provided at the beginning of the year. In closing, we are pleased to have delivered another strong quarter, our first reported as Elevance Health. In my 28 years with the company, this is easily the most prepared and well-balanced our enterprise has been as we look into the future. Strong underlying fundamentals, coupled with our balanced and diverse set of businesses, gives me confidence in our ability to deliver another strong year of growth in 2022, regardless of how the macroeconomic environment evolves. The diversification of our enterprise and the resilience that provides is an extremely valuable asset. Consider that in 2021, operating revenue of our Commercial and Specialty businesses represented just 25% of our total gross operating revenue, down from nearly 70% in 2008. And for the first time last year, operating earnings in our government business exceeded operating earnings in our commercial business. It is no coincidence that we have produced strong growth for our enterprise in both good and bad times for the broader economy in recent years. Simply put, we are well-prepared to meet the needs of our clients should they evolve in response to a more challenged business environment. Today, the momentum in each of our businesses, driven by the disciplined execution of our strategy, coupled with the diversity of our businesses, positions us uniquely well. With that, operator, please open the line for questions.

A.J. Rice:

Thanks. Hi, everybody. Just maybe drill down a little more on the comments around the commercial business. I know the commercial operating margin dipped year-to-year to 7.6%. And I wondered, it sounds like you're seeing elevated utilization there. Is that something that you just think is temporary? Will that correct itself? And are you moving toward making pricing adjustments for 2023 on that? Or is this sort of the run rate to go forward with?

John Gallina:

Yes. Thank you, and good morning A.J., and associated with utilization, in our first quarter call, I think we were very clear that the Omicron surge in January was most significant to the commercial market. And so that obviously has a direct impact on the commercial margins. And even as we go through the full six months and project out for the rest of 2022, we do believe that commercial will have a cost structure, when you add COVID and non-COVID combined, to be in excess of baseline -- above baseline actually each quarter for the year. Medicare is going to be close to baseline. And Medicaid, we expect to be a bit below baseline. Overall, the entire company above baseline for the rest of the year. So clearly, those cost structures being directed more towards the commercial marketplace have a direct impact on the commercial margins that you're seeing. And as Gail said, we do believe that they're transitory, and that we will price the forward trend for the future. Thank you.

Operator:

Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead.

Gail Boudreaux:

Sure. Well, thanks for the question, Justin. Let me address your first question. We have not changed our 2025 perspective in the short run, different impacts that we didn't obviously have at the time we gave that, but we haven't changed anything about our 2025 overall margin perspective across the businesses that we shared. So, I just want to be really clear about that. In terms of your second question, the City of New York contract, a couple of things on that. One, when we originally bid on this contract, it was set to go live in January 1 of this year. But as you know, and we've shared on this call, due to litigation, that go-live date has been delayed several times now. Based on the fact that we've been on in the active litigation, we had asked the City for some certainty around exactly what the benefits would be. And also, quite frankly, Medicare Advantage contracts take a lot of work to put up, and we want to make sure that the members were best served. We've served these members for a long time, and we needed greater certainty. So we did not feel, based on the inability of what's going on with the litigation as well as being prepared, that we could go forward with the contract. And then notably, the City remains one of our very important customers, and we continue to serve those clients on a fee-based business. So that's where we stand on the city in New York. Thanks very much for the question, though. Next question, please.

Lance Wilkes:

Yes. Could you talk a little bit about the Carelon business. And in particular, I'm interested in as you look at penetration in the fully insured and the self-insured business, what is the current status of kind of product penetration there? And what are the biggest opportunities for you as you drive that forward?

Peter Haytaian:

Thanks, Lance. Appreciate the question. First of all, we're really pleased with our progress and performance in Carelon so far from a growth and operating perspective as we build up the services business. Overall, Q2 is in line with the improvements we expected. I'm really pleased with the performance improvements across all the verticals. As we've discussed before, Lance, one of our main focal points is really driving more capitation and risk through Carelon. So as it relates to progress, we're really executing on that strategy with strength. So from a cross-selling perspective, we've played that through in Beacon, in AIM and with myNEXUS. As we talked about with AIM, we just finalized capitating a lot of the services this year starting last year. We're also executing on our strategy associated with growth, and I'm really excited about the innovation that's occurring. Gail mentioned in her remarks, a really great example is the rollout of a post-acute care offering being myNEXUS indexes. This is a great example of penetrating our business to a greater degree. I think you've heard me talk about this before, but one of the things we're trying to do is naturally extend our offerings and penetrate our business to a greater degree. And that's exactly what the supposed acute care offering is. We're taking the tools, technology and capabilities of myNEXUS, and we're utilizing that with a new offering to penetrate the Medicare business in a much more broad way. So I'm really thrilled with the progress. You'll continue to see that. I think the opportunities are vast in terms of further penetration.

Operator:

Next, we'll go to the line of Lisa Gill from JPMorgan. Please go ahead.

Gail Boudreaux:

Thanks for the question. I'm going to ask Felicia Norwood, who leads our government business, to please address that. Felicia?

Gail Boudreaux:

Thank you, Felicia. I just want to reiterate one point, I think, that's really important that Felicia made, which she and John have said many times, which is the balanced portfolio that we have across Elevance Health. And one of the statistics that I think really brings at home is there's been more than 6 million Medicaid entrants as part of not doing redeterminations in our 14 Blue states. And we have significantly, regardless of the percentage you look at in our commercial business, have coverage now in nearly every county on our individual exchanges. So we've been planning for this. We're preparing for it across our businesses and feel very well prepared to manage that. And again, obviously, CMS has given the guidance to take up to 14 months and not determine more than one night at a month. So again, thank you very much for the question. But overall, we feel that we've got very good coverage. Next question, please.

Matt Borsch:

Yes. Hi. Thank you. I just wanted to ask about, as you pull these pieces together or have pulled them together for Carelon, how are you thinking about home health? And I mentioned that in the context that, of course, an acquisition of a home health company by one of your largest competitors and also the issues in the home health area with the shortage of nurses and so forth, and how you're grappling with that, frankly, in the current environment?

Peter Haytaian:

Yes. No, I appreciate the question, Matt. Home Care is a space we're really interested in. Our focus with Carelon, as we've talked about, is on complex patients. We've talked about being on the right side of health care, giving patients access to services in the most appropriate setting. And certainly, home is a critical component in that regard. I think when you look at our acquisition of MyNEXUS, which closed last year, and its focused on the home through utilization management tools and capabilities and partnering with a very vast network of providers, we have nine of the top 10 nationally to drive the most appropriate level of services in the home is a good example. Another example in terms of how we're penetrating the home today is through Aspire. It's a national leading company in the delivery of palliative care services. So, I'd say strategically, in the short-term, I mentioned this before, we've been looking actively for natural extension opportunities with regard to the assets we have. And again, a great example of that is the post-acute care launch that we just mentioned. We also launched most recently, as it relates to the home, the delivery of social determinants of health and star services via those capabilities. On a longer term basis, in terms of your question, we really -- we do continue to evaluate further opportunities in terms of direct care that can be provided in the home and delivering that value to all our Elevance Health plans and ensuring patients get the right level of care. And we are very sensitive to your last point about the labor issues. It's been interesting, but a lot of the companies that we've been partnering with have been able to effectively navigate some of the labor issues as it relates to home in terms of our members getting critical care. So, that's a good thing right now in the short term.

Operator:

Next, we'll go to the line of Nathan Rich from Goldman Sachs. Please go ahead.

Gail Boudreaux:

Well, thanks for the question. I'll have Morgan Kendrick, who leads our Commercial and Specialty Business, to address that. Morgan?

Gail Boudreaux:

Yes, thanks. I'm going to have Pete address your pharmacy penetration question. Pete?

Gail Boudreaux:

Yes. Thanks, Pete. I think what you heard from both Morgan and Pete is really, we're very pleased that we're winning in the most sophisticated and discerning segment of the market, and that really plays across all of our customers. So thanks very much for the question. Next question please.

Gary Taylor:

Can you hear me now?

Gary Taylor:

Okay, great. Sorry. I just want to come back to Commercial operating income a little bit, obviously, you had growth -- modest growth this quarter. COVID still impacting it. I think earlier in the year, you had talked about some of the extreme quarterly seasonality in Commercial OI easing a bit this year, which would imply that Commercial OI growth in the second half will continue to look better. Just want to make sure that's still your expectation. And particularly with -- just in the early months of July, we are seeing COVID hospitalizations picking up again. Is it still your expectation that that Commercial OI growth can improve from what we've seen in the first half?

Gail Boudreaux:

Thank you. And that, again, as John said, very consistent with the expectations that we've always had. Next question please.

Scott Fidel:

Hi, thanks. I wanted to ask about just for an update on the marketplace business, and if you can talk about how marketplace margins have been performing year-to-date relative to plan. Then also just some initial insights on how you're thinking about the pricing environment for the exchanges in 2023. Obviously, a lot of different moving pieces to pricing as there always seems to be in this business, but does seem that at least some of the most, let's call it, aggressive actors in the market have started to file for some firming rate increases. So, just interested in your perspectives on how pricing is looking for the exchanges next year? Thanks.

Morgan Kendrick:

Yes, Scott. Thanks for the question. Generally, your question is around how we think about the '23 pricing. Again, we've noted we really like this business. There's a great opportunity. Our margins are performing as expected, quite honestly, for '22. We're just now pricing '23. We're in the middle of that cycle. Your point is spot on, that there's always an actor that's looking to take aggressive share in aggressive pricing points in each geography. We are seeing some firming, but there's always a new actor that wants to come into the mix, so to speak. It is a competitive market, but we continue to look at this as an expanding opportunity. As Gail alluded to and Felicia alluded to, when we think about the Medicaid redetermination, we are now in north of 95% of the counties in the geographies that we serve. So, we feel strongly about it. We're taking prudent, normal pricing actions. Nothing's changed in our pricing strategy. We're pricing to the forward view of trend with all of -- in modifying for all of the challenges that are currently facing in the business or in the economies. That said, we expect it to be expanding. We've been notified some expansions in some of our largest geographies. We know that we look good in those geographies. So, over the next 60 days through -- 60 to 90 days, we will firm up the position. But right now, we feel quite good about it.

Operator:

Next, we'll go to the line of Steven Valiquette from Barclays. Please go ahead.

John Gallina:

Thank you, Steve, for the question. So just for clarity, we have not provided any commentary associated with the difference between ACA and Group. We've talked about Commercial in total. So, I'm not exactly sure what comment that you were referring to, but it's not anything that was part of this call. And just to reiterate what I've said, we have seen overall cost structures in commercial to be elevated in excess of what a normalized baseline would have been, had COVID had never occurred. You can certainly look at the amount of membership that we have in fully insured risk versus ACA. And obviously, risk is the lion's share of the membership -- the group risk. I'm sorry, is the lion's share of the fully insured membership. So obviously, that is the primary driver. But overall, we do believe that the COVID costs are transitory. They're not going to go to zero, as Gail had said. We are going to proactively price for forward trend. But the impact that we have on our margins currently is a transitory piece of that equation. And so we feel very good about our long-term aspects. Thank you.

Operator:

Next, we'll go to the line of David Windley from Jefferies. Please go ahead.

Gail Boudreaux:

Sure. Felicia, would you like to address that?

Gail Boudreaux:

Thank you. Next question, please.

Ricky Goldwasser:

Yes, hi. Good morning. So one clarifying question. You talked clearly about COVID plus non-COVID utilization being about above a baseline for the year and second half. What are you seeing for non-COVID utilization on the Commercial business? Is it in line with pre-COVID or below? And then secondly, can you comment on the sensitivity of commercial membership to potential changes in unemployment? One of your competitors talked about 50 basis points for every 100 basis point change non-employment. So just kind of like wanted to see if you have any context to give us there? And what are you hearing from your clients about their plans to manage their workforce?

Gail Boudreaux:

Yes. And to the second part of your question, I think, I caught most of it, Ricky. But I think there's a few things, one, to your how are employees thinking about their workforce. As I think we shared a little bit earlier in the call Morgan did. Now we're really seeing, kind of, employers still expanding their workforce and looking for more benefits and to maintain the strength of their workforce. So we haven't seen any pullback yet in terms of our employer populations across any of the sized segments that we serve. That's not to say that, that couldn't happen. But at this stage, it's -- as you think about the challenges in the economy, they're more inflation-based than employment-based at this stage. And employers are still looking for strong solutions. One of the things that we're offering, obviously, is affordable products. We've been continuing to enhance our product portfolio. We have a very strong cost position. Again, one of the reasons we win is, we go in with a very strong medical cost position across all those segments. So I think from that perspective, we have not seen any noticeable difference. In terms of our own book of business, if you look at our history, we've got actually -- I really can't comment on the others who've given you some numbers around what they think would happen. But our book of business has been quite resilient. As you remember, we have a very deep -- we support school districts, public service -- public services, et cetera. And so, we have a very, I think, different profile across our businesses, and our history has shown that those have had greater stickiness during both up and downtimes in the economy. So, overall, I think at this stage, we're still seeing strong interest and strong growth from the commercial sector. Next question, please.

Robert Cottrell:

Hi. Good morning. Thanks for taking my question. Just wanted to follow up on Medicaid. Given that now utilization within the Medicaid business has been running below baseline or below expectations for the past several quarters, is there any risk to states coming back to you and doing rate adjustments, given the lower-than-expected utilization?

Gail Boudreaux:

Next question please.

Stephen Baxter:

Yes, hi. Thanks. I just wanted to ask about the assumptions you're making on utilization in the back half of the year and what we should think about through the MLR cadence there. So, appreciating that you're running above what you view as the baseline, but it does seem like other parts of the system view that they're below baseline, are expecting a ramp of utilization throughout the year. I guess how much of that is in your thinking for the guidance. Thank you.

Gail Boudreaux:

Next question please.

Whit Mayo:

Thanks. I just wanted to go back to MyNEXUS for a second. Can you share like what percent of your MA membership is in states that you have delegated some services to MyNEXUS today? I'm just trying to think of the opportunity as you scale the partnership. And when you delegate risk, if that's what we want to call it to MyNEXUS, what are they doing with network tiering, narrowing the network when you optimize the level of care? Is that just reducing the allowable visits? I'm just trying to properly understand exactly what you're doing.

Peter Haytaian:

Yes. Let me start with what you asked about exactly what we're doing on the post-acute care launch because it's something that we're really excited about in terms of the natural extension of the capabilities we have. Today, when you think about what MyNEXUS does, we have industry-leading tools and capabilities that really allow us to efficiently manage on the UM side. And as we've talked about, partner with our network providers and then effectively manage the level and appropriateness of services in the core product, it's in the home. So, when you think about the post-acute care product, just to give you specificity on what we're doing, we're really -- we're leveraging these tools for post-acute care management upon discharge of the patient out of the inpatient setting. And then through our leading portal, again, the tools and technologies that really differentiate us, post-acute care providers are easily able to make requests for services. It creates a much more effective and efficient experience for the provider. And this enables us to be very clear upfront in terms of the most appropriate levels of post-acute care. So, when you think about that in that setting, you think about long-term acute care facilities, you think about rehabilitation facilities, you think about skilled nursing facilities. And we're managing the appropriate level of services, and then we're eventually facilitating a discharge hopefully to the home. And as we've talked about, what Carelon does is we manage that entire episode of care on a capitated basis. This builds in predictable cost-of-care for our partners and the health plans in this case, for Felicia, in the Medicare business. And if we're effective at managing that, we are driving an incremental margin for Carelon and then incremental benefit for Elevance.

Operator:

Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead.

John Gallina:

Yes. Thank you, Kevin, for the question. And certainly, some of the questions you asked were may be consistent with some of the things we saw in 2019. So let me just maybe reference a little bit what's different now versus then. So in 2019, we went through a redetermination process. It worked through very quickly. And then the overall acuity of the population was a little bit higher than what the rates that had been set, well, justified. And just FYI, there were retroactive rate increases ultimately, but there was clearly a disconnect for a few quarters there in 2019, where now we have a very well thought-out process that's going to take up to 14 months that won't even begin until after the PHE expires. The other thing is, as I had mentioned in a different question, we're in an MLR collar position in virtually every Medicaid market. And so the immediate impact to any of the rates will first be to reduce the MLR collar position that we're in. In 2019, we were -- had very, very few MLR collars. But I think the most important element of all this is now part of how the pricing is done, that the -- thanks to some of the great work our teams have done, that the standard rating input now, as part of the Medicaid pricing, includes an acuity change factor. And that was not the case in 2019. That was a one-off conversation, and now it's part of the standard input into the rates for 2022. So all-in, we think we're in a significantly better position today than we were then. 2019 might be informative but it's certainly not a precedent. So we actually feel very good about our future state prospects. Thank you for the question.

Operator:

Next, we'll go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead.

Gail Boudreaux:

Sure. Felicia?