Stephen Baxter is a Senior Equity Research Analyst at Wells Fargo, specializing in coverage of major managed care and health insurance companies including UnitedHealth Group, Centene, Molina Healthcare, Humana, and Elevance Health. As an analyst, he has issued over 500 ratings since 2019 with a focus on the general healthcare sector, but his investment calls have produced a success rate around 37% and an average return per rating of -6.2%, ranking him among the lower percentile of Wall Street analysts by performance metrics. Baxter began his equities research career prior to 2019 and currently serves as a key sector specialist at Wells Fargo, having also been featured as a guest speaker at industry events and university investment clubs. He maintains professional standing as a senior analyst but publicly available details about securities licenses or specific FINRA registrations are not listed.
Stephen Baxter sought clarification on the economic impact of the US Oncology network decisions and gains, specifically asking if the gain related to an equity investment was included within the $51 million figure previously mentioned.
Britt Vitalone, Chief Financial Officer, clarified that the $51 million figure encompasses both the gains from market decisions and the realization of an equity investment.
Stephen Baxter followed up on the network decisions and gains, seeking clarification on whether the gain was separate from market decisions and if it was included in the $51 million figure provided.
Britt Vitalone, CFO, clarified that the gains from the equity investment and the market decisions together represent the $51 million figure.
Stephen Baxter of Wells Fargo asked for clarification on the drivers behind the significant year-over-year decline in SG&A expenses and the slower gross profit growth observed in the quarter.
CFO Britt Vitalone explained that the primary driver for the SG&A decline was the divestiture of the Canadian Rexall and Well.ca retail businesses. He attributed the slower gross profit growth to a combination of business mix and the impact of those same divestitures, while highlighting the company's overall success in generating operating leverage.
Stephen Baxter sought initial thoughts on the margin assumption for new-to-Humana sales growth for 2026, specifically if it would be comparable to the 2% target (excluding Stars headwind) for the overall book.
Celeste Mellet, CFO, indicated that while it's too early for 2026 guidance, the margin for new members will be influenced by the contracts they enroll in, with 4 and 4.5 Star contracts yielding higher margins. She reiterated the expectation for individual MA margin (excluding Stars) to double in 2026 over 2025, with new sales margins expected to be relatively consistent with the overall margin.
Stephen Baxter asked for initial thoughts on the assumed margin for new-to-Humana sales growth for 2026, specifically if it would be comparable to the targeted 2% margin (excluding STARS headwinds) for the overall book.
Celeste Mellet, CFO, stated it's too early for 2026 guidance but noted that new member margins would depend on the contracts they are sold on, with 4- and 4.5-star contracts typically yielding higher margins. She reaffirmed the expectation for individual MA margin (excluding STARS) to double in 2026 over 2025.
Stephen Baxter asked about the Florida rate mechanics, specifically if Florida's Medicaid HBR would improve sequentially in Q4 after the Q3 true-up, or if the Q3 performance effectively reflected the year-to-date rate adjustment rather than a Q4 improvement.
CFO Drew Asher explained that the Q3 HBR was 93.4%. Adjusting for the $150 million Florida retro (60 bps, with $40 million related to prior periods), the jumping-off point is 94.0%. He expects a sequential lift from Q3 to Q4 due to the 9-1 and 10-1 rate cohort (Florida being slightly above average in that mix). This, combined with trend and a 'soft November' (fewer business days/holidays), contributes to the expectation of around 93% HBR for Q4, leading to a 93.7% full-year HBR for 2025, which they aim to maintain for 2026.
Stephen Baxter asked about the cadence of Florida's rate mechanics, specifically if Florida's performance would improve sequentially in Q4 after the Q3 true-up, and if the Q3 performance effectively reflected the rate year-to-date.
Drew Asher, Executive Vice President and Chief Financial Officer, explained that the Q3 HBR of 93.4% included the $150 million Florida revenue adjustment, with $90 million being retro to Q1/Q2. Adjusting for this, the underlying HBR was around 94.0%. He anticipates a sequential lift from Q3 to Q4, driven by the 9-1/10-1 rate cohort (including Florida's rates), contributing to an expected Q4 HBR around 93% and a full-year 2025 HBR of 93.7%.
Stephen Baxter sought clarification on the core upside not included in guidance from previous quarters, asking if a similar amount existed in Q3 2025 after excluding specific items. He also asked for confirmation on whether the projected mid-teens EPS growth for 2026 is calculated after adjusting the 2025 baseline by $0.45.
Brian Newman, CFO, clarified that the mid-teens EPS growth for 2026 should be calculated by taking the midpoint of the 2025 guidance ($6.60), backing off the $0.45 adjustment, and then applying the growth rate. He explained that the $0.45 adjustment accounted for a combination of net positives and negatives from out-of-period risk and revenue adjustments, totaling about $900 million from the first half, minus $150 million from provider settlements.
Stephen Baxter asked for an update on where Medicare Advantage margins finished for the full year 2024, what margin level is assumed in the 2025 guidance, and the expected progression of MA margin recovery beyond 2025.
CFO Tom Cowhey stated that 2024 Medicare Advantage margins ended in the negative 4.5% to 5% range. He confirmed that while margins are expected to improve in 2025, the business will remain loss-making in the current outlook. Executive Steve Nelson added his commitment to returning the business to target margins over a multiyear period, citing early progress in forecasting, pricing discipline, and operational execution.
Stephen Baxter inquired about the sequential progress on pharmacy business margins, the expectation for continued improvement in Q4 based on guidance, and the trajectory of margins exiting this year with opportunities for further improvement in 2026, considering ongoing limited distribution drug launches and generic dynamics.
CFO Jen Phipps stated that Q4 margins are expected to be higher than previous quarters, as Q4 typically has the highest margins, driven by continued growth in different businesses and product mix. CEO Jon Rousseau added that enterprise-wide lean, efficiency, and operational initiatives, along with the growth of the higher-margin Provider segment and synergies from acquisitions, are key drivers. He emphasized a focus on efficiency, quality, and partnering with payers for enhanced rates, noting that margin is a key function of mix and intentional efforts.
Stephen Baxter asked about the trajectory of margins in the pharmacy business, noting sequential progress and expectations for Q4, and the opportunity for further improvement in 2026 given continuing LDD launches and generic dynamics.
CFO Jen Phipps stated that Q4 margins are expected to be higher than previous quarters, as Q4 typically has the highest margins due to continued growth and product mix, leading to a slightly higher annual margin. CEO Jon Rousseau added that enterprise-wide lean, efficiency, and operational initiatives will be helpful, along with higher margins in the Provider segment and synergies from acquisitions. He emphasized a focus on quality, payer partnerships, and efficient operations.
Stephen Baxter asked for more detail on the change in surgical trends, specifically the shift from slightly down to slightly up, where the improvement is coming from, and if there's any evidence of pull-forward demand from exchange patients anticipating coverage loss.
CFO Steve Filton stated that surgical volume improvement is relatively across the board, with cardiology and cardiac services being particularly strong. He indicated no significant pull-through impact from exchange patients, as their utilization behavior tends to mirror the Medicaid population, being more emergency room-centric rather than elective cases.
Stephen Baxter asked for more elaboration on the change in surgical trends, specifically the shift from slightly down last quarter to slightly up this quarter, and where the improvement is coming from. He also inquired if there was any evidence of 'pull forward' care, such as from exchange patients, due to concerns about potential coverage loss.
CFO Steve Filton stated that surgical improvement was relatively across the board, with cardiology and cardiac services showing particular strength. He does not believe there is a significant 'pull-through' impact from exchange patients accelerating care, as their utilization behavior tends to mirror Medicaid (emergency room-centric rather than elective cases).
Stephen Baxter requested additional color on the expected Medicare Advantage membership declines in 2026, specifically the breakdown between individual, duals, and group segments. He also asked if the company agrees with CMS's flat enrollment growth expectation for 2025 and about the outlook for industry growth in 2027 and beyond.
Stephen Hemsley (Chairman and CEO, UnitedHealth Group) directed the question to Bobby Hunter (CEO of Government Programs, UnitedHealth Group). Bobby Hunter clarified that the approximately 1 million Medicare Advantage membership contraction for 2026 includes both group and individual. He noted that 600,000 members are impacted by product exits, with the remaining balance split between pressure in group MA due to disciplined pricing and aggressive competitor actions, and individual MA. He expects 2026 industry growth to be more in line with 2025 due to benefit cuts, plan closures, and broker disruption, but believes in long-term MA growth beyond these levels, emphasizing the need for program stability.
Stephen Baxter requested additional details on the expected 2026 Medicare Advantage membership declines, specifically the breakdown across individual, duals, and group segments. He also asked for the company's view on industry-level MA enrollment growth for 2025 and projections for 2027 and beyond.
Bobby Hunter, CEO of Government Programs, UnitedHealth Group, explained that the approximately 1 million MA membership contraction for 2026 includes both group and individual, with 600,000 from product exits. The remaining balance is split between group MA pressure due to disciplined pricing and aggressive competitor actions, and individual MA. He expects 2026 industry growth to be flat, similar to 2025, but believes in long-term MA growth beyond those levels, emphasizing the need for program stability.
Asked for clarification on the new 5% long-term target margin for the value-based care business, inquiring what the old target was and what the key drivers are to get back to that 5% level beyond 2026.
Patrick Conway explained that the main driver for margin recovery is the maturation of patient cohorts. New cohorts (years 1-2) have negative margins, while mature cohorts (year 5+) operate at 8%+ margins. As the portfolio mix shifts towards more mature cohorts, the overall margin will rise to the 5% range. John Rex added that the new target is more circumspect about the time and investment required to bring practices to full performance, reflecting a long-term growth and investment strategy.
Stephen Baxter inquired about HCA's confidence in achieving its long-term volume range for 2026, considering potential flat/down exchange volumes and other moving parts like Medicaid/self-pay growth.
CEO Sam Hazen expressed confidence based on 18 consecutive quarters of volume growth, more capital coming online, growing ambulatory outreach, and new physician relationships. He noted that population growth in many markets and diversification across the company support the demand equation, with exchanges being a small component.
Stephen Baxter with Wells Fargo inquired about HCA's confidence in achieving its long-term volume range for 2026, considering the impact of exchange growth and potential for Medicaid or self-pay growth.
CEO Sam Hazen expressed confidence based on 18 consecutive quarters of volume growth, increased capital coming online, growing ambulatory outreach, and new physician relationships. He noted that population growth in many markets and the diversification of HCA's demand equation support the long-term range.
Stephen Baxter sought clarification on Molina Healthcare's Medicaid outlook for next year, specifically asking if rates are expected to exceed the current 7% cost trend and whether enrollment on a same-contract basis is projected to be up, down, or stable.
CEO Joseph Zubretsky and CFO Mark Keim stated that Medicaid membership has seen a 1% decline per quarter due to more rigorous enrollment activities, leading to some acuity shift. They expressed optimism for rates to at least keep pace with, and likely slightly exceed, trend due to states' responsiveness, a full-year baseline capturing cost increases, discrete rating cells for LTSS, pharmacy, and behavioral health, and an early positive glimpse at the 1/1 rate cycle. They noted that Medicaid rates are currently 3-4% underfunded, and states are recognizing this need for adjustment.
Stephen Baxter from Wells Fargo asked if the negative pressure from Medicaid acuity shifts has now stabilized or if it's expected to continue into Q4. He also sought to understand what is enabling states to provide large rate updates so quickly given the dynamic claims environment.
CFO Mark Keim explained that some redetermination pressure carried into Q3 due to weighted average math and a couple of states extending their processes, but he does not view these as sustaining dynamics, projecting a more normalized trend for Q4. President and CEO Joe Zubretsky stated that the state rate-setting process itself hasn't changed; it always accounts for acuity shifts. The current shift is simply more dramatic and high-profile, prompting states to react accordingly within their established models.
Stephen Baxter inquired about the several hundred million dollars of investment spending flagged for 2026, asking about its materiality, whether it is transitory, and its influence on the ability to grow earnings in 2027.
Mark Kaye (CFO and EVP, Elevance Health) quantified discrete investments for 2026 at approximately $1 of EPS, focusing on technology adoption (AI in clinical workflows, automation), Carelon investments (scaling client onboarding, pharmacy capabilities), and operational/quality initiatives (STAR ratings, member engagement). Gail Boudreaux (President and CEO, Elevance Health) emphasized AI as a strategic enabler, detailing its use for members (Sydney's personalized match), customer service (first contact resolution), and providers (Health OS reducing prior authorizations and denials). She stated these are front-loaded investments expected to create leverage and support long-term growth.
Stephen Baxter inquired about the materiality and transitory nature of the 'several hundred million dollars' in investment spending flagged for 2026, particularly its influence on 2027 earnings growth.
Mark Kaye, CFO, quantified the investment as approximately $1 of EPS, focusing on technology adoption (AI, automation), Carelon expansion (client onboarding, pharmacy capabilities), and operational/quality initiatives (STAR ratings, member engagement). Gail Boudreaux, President and CEO, elaborated on strategic AI investments across member services, provider platforms (HealthOS), and internal operations, emphasizing their front-loaded nature to drive long-term leverage and affordability.
Stephen Baxter of Wells Fargo followed up on Medicaid, questioning why it was cited as a driver for a higher year-over-year MLR in 2025, which seemed to contrast with previous expectations for stability. He asked for the specific full-year Medicaid MLR change embedded in the guidance.
CFO Mark Kaye clarified that while Q4 Medicaid cost trends stabilized, they remain at elevated levels. He anticipates these higher trends, particularly in behavioral health and inpatient care, will persist into the first half of 2025. Since current state rates have not yet fully caught up to these costs, the company is maintaining a prudent outlook, expecting a margin rebound in the second half of the year as incremental rate adjustments are implemented.
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