Elevance Health - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue and EPS beat consensus: total revenues were $50.71B vs S&P Global consensus $49.49B*, and adjusted diluted EPS was $6.03 vs $4.94*, with GAAP EPS at $5.32.
• Operating revenue grew 12% YoY to $50.1B, driven by premium yields, acquisitions, and MA membership growth; benefit expense ratio rose to 91.3% on Part D seasonality under the Inflation Reduction Act.
• Guidance: FY25 adjusted EPS reaffirmed at approximately $30.00 and benefit expense ratio ~90%; GAAP EPS outlook raised to ~$24.70 (from ~$24.10 in Q2).
• Near-term stock narrative catalyst: EPS beat and reaffirmed FY25 guidance offset by candid 2026 planning assumptions—Medicaid margin expected to decline ≥125 bps and several hundred million of incremental investments (AI, Carelon, Stars)—which could temper forward estimates into 2026 while reinforcing 2027 “balanced growth” setup.

What Went Well and What Went Wrong

What Went Well

• Operating revenue rose 12% YoY to $50.1B; Carelon revenue +33% YoY to $18.3B, aided by pharmacy and home health acquisitions and scaling risk-based solutions.
• Management reaffirmed FY25 adjusted EPS of ~$30 and highlighted disciplined execution and AI-enabled solutions improving affordability and experience; CEO: “positioning our businesses for long-term, sustainable growth”.
• Medicare Advantage costs (incl. Part D) were “marginally better than expected,” with membership and product positioning driving slight margin improvement for FY25 ex one-time items.

What Went Wrong

• Consolidated benefit expense ratio increased 180 bps YoY to 91.3% on elevated trend and IRA Part D seasonality; Health Benefits operating margin fell to 1.4% vs 4.2% YoY.
• Medicaid margins pressured by elevated acuity/utilization and lagging rates; FY25 Medicaid operating margin now “modestly below breakeven” (~-50 bps), and 2026 planning assumes ≥125 bps further decline.
• Adjusted operating margin compressed to 2.7% from 5.5% YoY; adjusted operating expense ratio rose to 10.4% from 9.4% YoY due to targeted investments.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by and welcome to the Elevance Health third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session where participants are encouraged to present a single question. If you wish to ask a question, please press star then one on your telephone keypad. You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then two. These instructions will be repeated prior to the question and answer portion of this call. As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead.

Nathan Rich (VP of Investor Relations)

Good morning and welcome to Elevance Health's third quarter 2025 earnings conference call. My name is Nathan Rich, Vice President of Investor Relations. 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 discussion of our third quarter performance, our planning assumptions for 2026, and the progress we've made 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 financial 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 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 may cause actual results to differ materially from our current expectations. We advise the 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.

Gail Boudreaux (President and CEO)

Good morning and thank you for joining us. Healthcare is at a pivotal moment. The industry has been challenged by rising medical and pharmacy costs and regulatory changes that will impact coverage for millions of Americans. At Elevance Health, we're focused on lowering the total cost of care and improving the member experience. We're acting with urgency through an integrated clinical and benefits approach, leveraging value-based care to align incentives, improve outcomes, and guide people to high-value, lower-cost settings. Tools like Health OS and our AI-enabled clinical support are already reducing friction, feeding decisions, and bending the cost curve. Our third quarter results reflected solid execution, with the benefit-expense ratio in line with our expectations. While results included approximately $1 of favorable items below the line, underlying performance remained consistent with the outlook we shared last quarter.

We are reaffirming 2025 adjusted EPS of approximately $30 and continue to view $27 as the appropriate earnings baseline, excluding $3 of discrete, non-recurring items. As we plan for 2026, our posture is prudent and practical, and we're approaching next year with discipline and focus. We want to set expectations that reflect today's realities, acknowledge uncertainties that remain, and be clear about the levers we control. While we are still in our planning process for next year, there are a few key assumptions that will shape our outlook. Starting with Medicaid, continued membership re-verifications and state program changes have driven acuity higher, and we are planning for at least a 125 basis point year-over-year decline in Medicaid margins as rates like acuity and utilization trends remain elevated. This is an initial input at this early stage, not formal guidance.

In Medicare Advantage, we've taken disciplined actions to improve profitability in 2026, focusing on products that drive retention and value while exiting plans not aligned with our long-term strategy. For the 2027 payment year, approximately 55% of our MA members will be in four-star or higher contracts, including three five-star contracts, up from about 40% for payment year 2026, demonstrating steady improvement in STAR's performance and strong returns on the investments we've made. In commercial, our integrated medical pharmacy model and advocacy solutions continue to resonate with employers. We maintained a disciplined approach to pricing and were pleased with strong client retention. We continue to see expansion in our fee-based relationships, driven by new client growth and sustained high retention among our large employer customers. Our industry-leading net promoter scores reflect the trust employers place in our model.

In the ACA market, our products are positioned to provide value to members while reflecting the higher acuity observed this year. We have taken a disciplined approach to pricing while continuing to design offerings that ensure affordability and access. The anticipated expiration of enhanced subsidies would significantly impact membership in 2026. If the subsidies are extended, we will work closely with states to support implementation and ensure continued access for consumers who rely on this coverage. Carelon is expanding external relationships and scaling pharmacy, behavioral health, specialty care management, and home-based services, embedding value-based care principles throughout. External revenue grew double digits year-over-year, reflecting broad momentum across pharmacy, behavioral, and specialty services. Clients are turning to us for the value we deliver. CarelonRx had another strong selling season for 2026, with several national account wins and high retention.

Carelon Services continues to deepen its partnerships with external clients, driven by high-value solutions and the launch of new innovative products. At the same time, enrollment dynamics and health benefits will create a directional headwind for Carelon next year, which we will size when we provide our earnings guidance in January. In Medicaid, re-verification effects have raised acuity and sustained higher cost trends, and states are preparing program changes that will influence the pace of rate adequacy. We are proactively working with our state partners on rate alignment, recommending program improvements such as benefit refinements, and supporting states as they implement program changes. In parallel, we're expanding behavioral health interventions, strengthening specialty drug management, and optimizing sites of care. These steps are designed to improve program effectiveness and bend the cost curve. We are creating our own future through innovation.

By year-end, more than 10 million members will have access to our AI-enabled virtual assistant, demonstrating how digital innovation is enhancing access, efficiency, and engagement across our platform. For providers, we've lowered the number of prior authorization requests in the last two years, and providers on our Health OS platform benefit from aligned data sharing, faster approvals, and reduced administrative burden. These initiatives collectively improve affordability, experience, and productivity across Elevance Health. Looking ahead, by January, we expect greater visibility across our Medicaid rate cycle, marketplace subsidies, and Medicare AEP results. A more complete picture of 2025 trends will refine our outlook for medical costs and the impact of our care management programs. With these inputs, we will then establish guidance that is both prudent and achievable. Capital deployment remains an important lever in our long-term earnings growth algorithm.

Following several years of strategic acquisitions to expand Carelon's capabilities, our focus is now on integrating those assets. We remain committed to disciplined capital allocation, balancing investment and growth with consistent shareholder returns. We will prioritize returning capital to shareholders through share repurchases while remaining disciplined stewards of capital. Stepping back, our message today is straightforward. We delivered results consistent with our revised outlook and reaffirm our 2025 adjusted EPS of approximately $30. We're approaching 2026 with discipline and focus, and we'll provide an EPS range in January. While we recognize the external environment remains dynamic, we are confident in our strategy, our execution, and our ability to drive sustainable value for our stakeholders. With that, I'll turn it over to Mark to discuss our financial results and outlook in more detail.

Mark Kaye (CFO and EVP)

Thank you, Gail, and good morning to everyone. Elevance Health reported third quarter GAAP diluted earnings per share of $5.32 and adjusted diluted earnings per share of $6.03. Our operating performance reflected enhanced medical cost management and expense discipline, consistent with the expectations we outlined last quarter. We are sharpening pricing, accelerating our digitization and automation journey, and embedding value-based care principles across our enterprise. Relative to the earnings cadence previously described, results this quarter benefited from the timing of planned tax actions contemplated in our full-year guidance and stronger net investment income, a portion of which we intend to reinvest to support our long-term growth. As Gail discussed in her remarks, we are reaffirming 2025 adjusted EPS to be approximately $30 and continue to view $27 as the appropriate earnings baseline for modeling purposes.

This excludes approximately $3 of non-recurring favorable items, primarily tax, the value-based provider settlement recognized in the second quarter, and valuation adjustments that benefited net investment income. Total operating revenue for the quarter was $50.1 billion, up 12% year-over-year, reflecting higher premium yields, recently closed acquisitions, and growth in our Medicare Advantage membership, partially offset by ongoing Medicaid re-verifications. We ended the quarter with 45.4 million medical members. Disenrollment in our Medicaid membership remains concentrated among lower acuity members, driven by more stringent eligibility reviews and changes to state re-verification processes. The consolidated benefit-expense ratio was 91.3%, aligned with our expectations. Medicaid performance reflected pressure from elevated acuity and utilization, which were not fully offset by rate updates.

We now expect our full-year 2025 Medicaid operating margin to be modestly negative, establishing a baseline from which we anticipate a decline of at least 125 basis points in 2026, as rates continue to lag acuity and utilization trends remain elevated. We continue to partner closely with states on rate adequacy and operational enhancements to ensure the sustainability of their Medicaid programs. Medicare Advantage costs, inclusive of Part D, were marginally better than expected due to disciplined plan design and member composition. Trend has been elevated but manageable, and we now expect our operating margin to increase slightly in 2025, though still well below our long-term range. Performance in the ACA market developed somewhat favorably to the prudent expectations we set in July, though cost trends remain significantly above historical levels.

We continue to anticipate a high single-digit decline in full-year operating margin and are planning for higher costs in the fourth quarter as members utilize their benefits ahead of coverage changes next year. Cost patterns and margins in our commercial group business were consistent with our expectations. Our integrated medical pharmacy model and advocacy solutions, coupled with Carelon's differentiated value-based care approach, are driving higher retention and expanded fee-based relationships. Carelon continues to deliver strong performance across both pharmacy and services, reflecting the power of our integrated platform. CarelonRx revenue grew 20% year-over-year, driven by strong momentum with our largest clients, and Carelon Services grew by more than 50%, supported by robust organic growth and the continued integration of CareBridge. We are making targeted investments in technology, integration initiatives, and operational efficiency to sustain this growth and enhance performance across the enterprise.

While CarelonRx margins are expected to be modestly below our guidance due to these investments, Carelon Services are trending towards the high end of our guidance range, highlighting the strength of our differentiated value-based care model. Together, these businesses demonstrate how Carelon is driving growth across Elevance Health. Our adjusted operating expense ratio was 10.4%. We continue to manage the business with discipline while making targeted investments to scale Carelon's capabilities, support and strengthen our workforce, and accelerate technology adoption. Net investment income was $625 million, with approximately $150 million primarily related to discrete valuation adjustments in our alternatives investment portfolio. Third quarter operating cash flow of $1.1 billion, or one times GAAP net income, was impacted by the cash settlement payment related to the Blue Cross Blue Shield multi-district litigation.

Our balance sheet remains strong, preserving flexibility to support our growth objectives, invest in new capabilities, and return capital to shareholders. In the quarter, we repurchased $875 million of shares, reflecting our disciplined approach to capital deployment and commitment to returning value to shareholders, even as we continue integrating recent acquisitions. We maintained a prudent posture with respect to reserves. Days in claims payable of 42.6 days, excluding the impact of CareBridge, were approximately flat year-over-year. Turning to next year, while we are not providing 2026 earnings guidance today, I will outline several key variables informing our planning assumptions. Our current outlook assumes our Medicaid operating margin will decline by at least 125 basis points year-over-year. The critical factors underpinning this input include the ongoing misalignment of rates and acuity, elevated utilization trends, and funding and eligibility changes in certain states.

We will refine our view on our fourth quarter call as we gain visibility on the premium rates that reset in January and the impact of state-specific program changes. In Medicare, we took a disciplined and thoughtful approach to 2026 bids, prioritizing plans that deliver attractive value to members while producing sustainable financial performance. As we have previously noted, we exited certain service areas that will impact approximately 150,000 members. We expect strong growth in Carelon to continue across both pharmacy and services, offset by the impact of expected health benefits membership losses. Finally, our operating expense outlook includes several hundred million dollars of incremental investments to advance our strategic goals. We are intentionally prioritizing durable, long-term performance over near-term expense leverage.

These include targeted use of AI and digital tools to enhance the member and provider experience, the expansion of Carelon's capabilities, and initiatives to strengthen future performance, including improvements in our STAR ratings. Looking beyond 2026, we remain confident in the enterprise's long-term growth algorithm. While next year will reflect challenging Medicaid dynamics, membership changes, and disciplined investment, we expect 2027 to mark a return to a more balanced earnings growth profile. With that, operator, please open the line for questions.

Operator (participant)

Ladies and gentlemen, if you wish to ask a question, please press star then one on your telephone keypad. You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then two. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, we ask that each participant limit themselves to a single question to allow ample time to respond to each analyst that may wish to participate in this portion of the call. For our first question, we'll go to the line of A.J. Rice from UBS. Please go ahead.

AJ Rice (Managing Director)

Thanks. Hi, everybody. Maybe just to try to drill down a little further on the comments around Medicaid. Obviously, you're saying this year you're slightly negative or somewhat negative, and you're going to be 125 basis point margin incrementally negative next year, it sounds like. When you're in your dialogue with the states, are they acknowledging that? Are they seeing you as being unique relative to other players in that trend? Therefore, it's harder to get the update. As you talk about where the pressure points are, can you sort of give a little more flavor? Is it just the cost trend is worse than you would have anticipated and expected to continue to be worse? Is it the rate updates are not coming in as you thought?

Are you factoring in any of this change in benefit design that states are contemplating, or would that be potentially upside if that were to occur?

Gail Boudreaux (President and CEO)

Thank you, A.J. Pretty fulsome question. Why don't I ask Mark to sort of frame some of how we're thinking about it, and then Felicia to comment specifically about the discussions with states. Mark?

Mark Kaye (CFO and EVP)

A.J., good morning. We're not going to be providing specific point estimates for the composite rate updates or the medical cost trend today. Let me clearly frame the two anchors behind our outlook for at least the 125 basis point decline next year. First is trends. Our preliminary 2026 Medicaid trend assumption is really anchored to our expected fourth quarter exit rate, which we typically also view as the seasonal low point for Medicaid margins in the year. It's really a prudent base from which to plan 2026. For context, we now expect the full year 2025 Medicaid operating margin to be modestly below breakeven or approximately -50 basis points. That aligns with what we previously communicated. The trend continues to be pressured by elevated acuity and utilization, driven by some of those state re-verification processes and program changes. Second is rates.

We do expect state rate updates to be modestly above historical levels, but still trail trend into 2026, given state rate cycles, lagged claims data, and that more acute risk pool. If I put those together, that gets us to our initial planning assumption for 2026. Here's the important point. We do view 2026 as the trough, not the beginning of another reset period. The actions we are taking will position us to improve through the cycle as we ultimately target that 2%-4% margin range over time.

Felicia Norwood (President of Government Health Benefits)

A.J., thank you for that question. Our conversations with our states remain very constructive. The states certainly recognize the challenges around affordability in this program, but our expectation is that rates remain actuarially sound. One of the things that's changed in the conversations this time around is states are more receptive to ways that can help reduce the overall cost of the Medicaid program and improve affordability. One of the things that we've been doing is providing them with options around the levers that they have that can address some of the program changes that are increasing costs and utilization in the program. For example, we've seen increases in certain categories of services, things like ABA, which is applied behavioral analysis, changes that we can make with respect to GLP-1s and other things that have driven up costs. The conversations this time around have not just been about rates.

States are exploring ways that they can reduce their program costs in order so that we all have a program that's more sustainable. At this point, I will tell you the conversations are solid. They're going very well. There's been a very nice exchange around ideas for maintaining the long-term sustainability of the Medicaid program, which we're all aligned around. We look forward to continuing to work with our states through this process. We've laid out several approaches. There's greater receptivity, and we look forward to continuing to work collaboratively with our state partners around the long-term sustainability of this program.

Gail Boudreaux (President and CEO)

Thank you. Next question, please.

Operator (participant)

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

Stephen Baxter (Senior Equity Research Analyst of Healthcare Services)

Hi, thanks. I just wanted to ask about some of the investment spending that you flagged in the slides. I think you're talking about potentially several hundred million dollars of investment. Obviously, the company is investing every year. Trying to understand what you guys are trying to spike there in terms of materiality to 2026. It also, you know, you look at some of the commentary that you have on 2027 and speaking about the influence of investment spending on your ability to grow earnings there. Is it fair to think that some of this increased investment is transitory in nature? Just hoping we could understand that better coming off the call. Thanks.

Mark Kaye (CFO and EVP)

Stephen, thanks very much for the question this morning. If we look ahead to 2026, we do expect to make discrete investments worth several hundred million dollars. Quantify that as approximately $1 of EPS, really to advance our strategic goals. These dollars are going to be really focused in three primary areas. First, technology adoption, where we're deploying AI into clinical workflows, automating roster processes, modernizing core systems, all with the idea of simplifying care delivery and driving efficiency. Second is Carelon investments. We're going to be scaling new client onboarding as we expand into larger upmarket accounts and build pharmacy capabilities in our home delivery and infusion and specialty locations. Thirdly, around operational and quality initiatives. Think here further improvements in STAR ratings and deeper member engagement. Together, these investments are intended to align with our long-term growth objectives.

They'll enhance member satisfaction and then position the enterprise for greater operating leverage over time.

Gail Boudreaux (President and CEO)

Yeah, Stephen, I'd like to just give a little bit more perspective on some of the investments, particularly where we're heading on AI, generative AI. I think it's important to see that we see it as a strategic enabler of what we are trying to accomplish, which will really drive more affordable, accessible, and personalized care. We've been embedding AI responsibly, not just as an experiment, but at scale. We see that they're improving our efficiency and our outcomes, and also the experience for members, providers, and associates. Maybe just to put some real tangible examples on that, I shared a little bit in my opening comments. For members, for example, our personalized match feature in our Sydney helps one in five of our members right now select the right provider using more than 500 personalized data points and improving navigation and satisfaction. We're using it across our customer service.

We have tools that improve our first contact resolution, shorten wrap-up time, help with proactive engagement. I think really importantly for the commitments we've made on care providers, our Health OS platform is automating our onboarding, our contracting, our roster management. It's also reducing a lack of information so that we have reduced denials by more than 68% and peer-to-peer reviews by over 100%. We're getting real-time data. That's also giving us greater insight into some of the things that Felicia shared, which is how we get ahead of the cost curve. Across the enterprise, we see it as a huge opportunity to help support our productivity goals. We look at it to reduce the burdens on care providers by reducing our chart requests by almost half. Our national account teams, for example, are using it to update benefits and onboard clients.

Across the board, including for our own associates, we're investing in them as well. We just signed a partnership with OpenAI where we're going to actually train our folks to be able to use these skills appropriately. The reason I wanted to share more detail on that is we're embedding these at scale across our operations and prioritizing high-use impact cases that reduce first the complexity. They drive savings and enhance the experience, which are two of our core goals. One, reducing the cost curve and two, enhancing the experience our members have. What we see is this is going to create leverage for us, improve affordability, strengthen operational performance, and support sustainable long-term growth. To your last question around sort of the impact of those, we see these as front-loaded investments across the board. Mark shared that. We're seeing great pickup in the investments we've made in STAR ratings.

I just shared the AI investments, and we think that they help support us. Thank you for that question. Next question, please.

Operator (participant)

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

Lisa Gill (Managing Director)

Good morning and thank you. I just want to go to the individual ACA exchanges. Obviously, you know, the timeline is ticking here for the extension of the enhanced subsidies. Gail, or anyone on the call, can you give us any color around, you know, what the difference would be in membership as we think about 2026? Should they not be able to come to some kind of agreement and not have the enhanced subsidies in 2026? You know, we've clearly seen what the proposed rates are by state. The question is really around membership and how to think about that going into next year.

Gail Boudreaux (President and CEO)

Yes, thanks for the question, Lisa. I think maybe we take a little bit of a step back and then I'll have Mark talk a little bit about membership. Obviously, we're really proud of the role that we play in the ACA marketplace, and we still remain very committed to the affordable access for individuals and families who rely on these plans. As we think about 2026, we've taken a very balanced approach. I want to talk about it a little bit. Our filings are designed to reflect the higher acuity, and we are ready and prepared for a range of policy outcomes, including both the renewal and the potential modification of those enhanced subsidies. We're ready to work with our states and our policymakers on that path forward. If they are extended, we'll work quickly with regulators and states to ensure a smooth execution and continued affordability.

If there's some changes or phase downs, I think we're prepared also to work with our states closely to help people stay insured because I think that is the core issue here. Before we get into the membership, I think it's really important to sort of talk about this strategically first, that we feel very strongly we're operating responsibly and flexibly, and that our pricing supports the stability for members, but also ensuring we can sustain participation in the market for the long term. We expect that to translate, obviously, into improved performance, financial performance in 2025. Let me have Mark maybe just comment a little bit about your membership question, which again, not having the final policy expectations, I think we still have to assume is just planning assumptions at this point.

Mark Kaye (CFO and EVP)

Lisa, clearly if the enhanced advanced premium tax credits were to expire at the year-end, we'd expect a material contraction in the ACA marketplace. We've seen some of those independent estimates from the Congressional Budget Office, which indicate meaningfully lower enrollment and a much higher mobility risk pool into 2026 under those expiration scenarios. If I step back just for a second, that smaller, more acute pool does mean fewer enrollees to spread risk and sharper premium increases. That's really what we're seeing. Certainly, a full or partial extension of those premium subsidies, along with the transition or glide path, would definitely support consumers in a more stable, affordable marketplace over time.

Gail Boudreaux (President and CEO)

I just want to reinforce that we plan for that in terms of our filings and going forward, but also recognize that there are real pressures and rising costs, and we want to be a part of that solution with our policymakers as well. Next question, please.

Operator (participant)

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

Andrew Mok (Director)

Hi, good morning. The health benefits margins finished the quarter at 1.4%, which I think implies government margins are negative. You commented that you now expect Medicare operating margins to increase slightly in 2025, but I think it was unclear if that was a year-over-year comment or a positive revision to this year's outlook. Can you clarify that comment and help us understand where Medicare margins sit for the year? Is there a path back to target Medicare margins next year, given the actions you took in plan exits and benefit reductions? Thanks.

Mark Kaye (CFO and EVP)

Andrew, good morning, and thanks very much for the question. I anticipate we probably are going to get a couple of questions here on the margin and trend. Let me start by framing high level what we're seeing and what we've incorporated into our outlook for the full year. On Medicaid, as we spoke about earlier, performance has been weaker than expected, really as that cost trend does remain elevated given the high utilization and the member acuity shift driven by the ongoing state re-verification efforts and program changes. Within the commercial book, our outlook incorporates trends in our ACA book reflective of the holistic impact of higher population mobility, that elevated utilization and rising unit costs.

We're continuing to expect operating margins for our ACA business to be down year-over-year in the high single-digit percent range, and commercial large group margins to remain largely consistent with prior expectations. We have seen some favorability in ACA relative to our initial expectations, and you see that come through in a sense this quarter. To your question in Medicare, we feel good about our positioning given the composition of our membership and our results to date. We actually expect margin stability with potential for slight improvement this year, even excluding the one-time value-based care settlement that we recognized last quarter. That is going to be supported by strong retention, discipline cost management, and product positioning, and ultimately really better recognition of that member acuity following the elevated utilization we've seen in recent years. Thank you.

Gail Boudreaux (President and CEO)

Thank you. Next question, please.

Operator (participant)

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

Justin Lake (Analyst - Healthcare Services)

Thanks. Good morning. I wanted to follow up on your Medicaid comments. Appreciate the color on the 50 basis points of negative margin for this year. I think you've been clear that this business has deteriorated through the year, and thus the losses are probably more significant than the full year would indicate. Coming out of the year, meaning the run rate in 3Q and 4Q might be worse than that, and that's -50 basis points annually. It would be helpful to get more color on how you see this business exiting the year, maybe the fourth quarter margin, so we can understand how that 125 basis points compares to that Q4 run rate.

Mark Kaye (CFO and EVP)

Justin, thanks very much for the question here. Certainly, your underlying premise is correct. Margins deteriorated as the year has gone on. Look, we've been very clear today as I try to think forward a little bit that 2026 is going to reflect those same continued pressures in Medicaid as rates catch up to acuity. It's important to be realistic about that. In 2026, we do expect also those rate actions to be directionally constructive. You heard Felicia talk to that and to reflect that elevated acuity we've experienced since redeterminations. That's an important turning point. At the same time, we've also spoken to not waiting on rate cycles alone, right? We've intensified care management and program integrity programs in the highest cost categories, long-term services and support, behavioral health, specialty pharmacy, and we are seeing measurable improvement.

If I put that together, that's really why we see 2026 as the low point in the Medicaid margin. From there, we would expect to see sequential improvement through 2027 as those rates and the operational savings take more of a hold. I'd say we're pretty confident that the business ultimately will return to that 2%-4% target margin range.

Gail Boudreaux (President and CEO)

Thank you, Mark and Justin. Just to put a fine point on that, reiterating that we are taking a very prudent approach to Medicaid. As we think about the 125 basis points of margin deterioration, we are assuming that we enter the year at the place we exited the year. Thanks for that. Next question, please.

Operator (participant)

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

Lance Wilkes (Managing Director)

Yeah, on the Medicaid book, could you talk a little bit about how you're looking at that book? If there's a wide range of margins by state and contract, what are your opportunities to exit any contracts? Obviously, given the more significant negative margins that are there. Maybe as just a quick follow-up over on Carelon, if you could talk a little on CarelonRx about any progress you're seeing in, especially pharmacy acquisition, contribution to margin stability or any sort of impacts on margin over there. Thanks.

Gail Boudreaux (President and CEO)

Thanks, Lance. I'll ask Felicia to start and then Pete to comment on CarelonRx.

Felicia Norwood (President of Government Health Benefits)

Good morning, Lance, and thank you for the question. There certainly is great variability in performance as you go from state to state. As you know, we have a portfolio of over 24 markets in Puerto Rico. When we take a look across the board, states are certainly at a very different place. The expectation, as you heard from Mark, is that we are going to continue to work with states on their rates, program changes, and the other things that we can do to improve overall performance. With that said, if a state isn't going to deliver the expectations that we need from a financial perspective, we will certainly consider exiting that business if we can't deliver on the long term. Our framework has to consider a lot of variables.

We have to take a look at the rate adequacy versus the trend that we're seeing, the program designs, the regulatory environment, and policy stability that we see there, all kinds of things with respect to our risk-sharing arrangements, operational challenges, and other things. At the end of the day, we are very much committed to Medicaid. We think it brings strong value to this enterprise. It aligns with our ability to serve incredibly vulnerable members, and our preference is to be there. If we were to exit, Lance, we would align that with normal changes in terms of contract extensions, which, as you know, actually happen every year because Medicaid contracts, while they're four or five-year contracts, the contract renews every single year. There is also certainly the opportunity around RFPs in that strategy with respect to exiting.

Our expectations would be to do everything we could to minimize disruption and ensure continuity of care for members. We are going to be strong partners with our states, but we are going to be incredibly mindful around this business and whether or not there is the ability to be there sustainably for a long term in support of our states and our members. Thank you for the question. I'm going to turn this over to Pete.

Pete Haytaian (President of Carelon)

All right, Lance, thank you very much for the question. Appreciate it. Our specialty strategy is integral to the diversification strategy that we're deploying in pharmacy. We're very excited about it. We stand for whole health and driving greater affordability and simplicity and are very focused on the patient experience. This diversification strategy is very important to our long-term growth trajectory going forward. We're making really good progress as it relates to that. I think we started with the BioPlus platform and we continue to migrate scripts to that platform. Last year, as you know, we acquired Kroger Specialty Pharmacy. In light of that, we had a commitment to transition those scripts by the end of this year, which we're making really good progress on. I'm very, very happy with the team's performance in that regard in terms of how that's gone from an execution perspective.

We'll continue to migrate further scripts as we move forward into 2026. I would also say that we look forward to really continuing to build a diversified and differentiated strategy around this so we can garner scripts outside of Elevance Health as well. Thanks for the question. We appreciate it.

Gail Boudreaux (President and CEO)

Next question, please.

Operator (participant)

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

Kevin Fishbeck (Director and Senior Equity Research Analyst)

Great, thanks. I guess just to follow up on the Medicaid comments, trying to understand, I guess there's been concern that the risk pool shifts that are supposed to happen from the reconciliation bill could be pulled forward. I just want to understand how much of that risk pool shift that you kind of expect to be happening in 2026. I don't know how you would quantify that, whether it's a third of what you'd expect over the next five years happens next year or some way to think about that. Then just to clarify, when you guys talked about returning to balanced growth in 2027, is that saying back to the normal growth algorithm or is balance kind of imply something a little bit less than the long-term growth rate? Thanks.

Mark Kaye (CFO and EVP)

Kevin, thanks very much for the question. Let me maybe touch on the first one briefly, then I'll talk about the balanced earnings growth after that. On Medicaid, I think the way you could think about this is that the reduction in our expectations for margins this year and sort of our guidance next year of that 125 basis points or at least 125 basis points decline really reflects a more balanced split now between acuity and utilization versus what we provided last quarter. On balanced growth, when we talk about that return to a more balanced earnings growth profile in 2027, we really mean getting back to the growth algorithm that has characterized our business. That means contributions from commercial, government, Carelon, supported by the operating leverage and disciplined capital deployment that we've done historically.

Our 2026 repositioning and investments are intended to set up 2027 for the more balanced contribution across businesses. Specifically, we would expect our earnings drivers to be more evenly distributed, including improved Medicaid rate alignment, further Medicare margin normalization following our pricing actions, and sustained momentum across Carelon, as you heard from Pete, and our commercial franchise. Of course, on policy, the OBBBA implementation is still going to be progressing, but we're confident we can manage through it with a disciplined execution. While we're not providing an out-year EPS growth rate today, hopefully you can see from our comments that we reflect that confidence that really past 2026, the business should again resemble that more balanced, consistent growth that we've historically delivered, grounded in discipline and diversification across cycles.

Gail Boudreaux (President and CEO)

Thank you. Next question, please.

Operator (participant)

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

Ann Hynes (Senior Healthcare Services Equity Analyst and Managing Director)

Great, thank you. I just would like to focus on membership growth in 2026. With the Medicaid re-verification, should we assume that membership in your Medicaid book will actually decline next year and back up with rates? I'm just trying to figure out, like, will you have revenue actually declining or should we assume Medicaid revenue actually grows in 2026? Also, with the Medicaid expected membership decline in 2024 for Medicaid and the ACA, can you just give us more detail how that impacts Carelon Services and CarelonRx? Does one of the segments have an outsized proportion for membership losses versus the other? Thanks.

Mark Kaye (CFO and EVP)

Appreciate the question this morning. For 2026, our Medicaid membership outlook, while very preliminary at this point, does consider things like the continued normalization following the redetermination process, as well as the impact of state program changes and RFP outcomes. Whilst we do expect some churn to persist into next year, we do expect the pace of disenrollments to be manageable, and we are beginning to see stabilization in some of our markets. Overall, again, as a planning assumption, you could expect 2026 average Medicaid membership to be modestly lower than where we end 2025. That is going to be driven by many of the factors that we've spoken about on the call today. We'll provide more guidance as we enter January.

Gail Boudreaux (President and CEO)

Yeah, I'm going to ask maybe Pete to comment on Carelon.

AJ Rice (Managing Director)

Yeah, no, thanks for the question. In the context of membership impacts on Carelon going forward, let me just step back first and talk about the growth prospects on Carelon. I think you saw that come through. You heard it through Gail's comments and Mark's comments. We're seeing very strong growth both on the services side as well as on the pharmacy side. Importantly, we're diversifying our growth. We're seeing a lot of really nice external growth across, you know, many of our solutions. Now, of course, Elevance is our largest client. If Elevance has significant membership impacts, it will have some impact on Carelon. I view that really as time-bound. We have incredible momentum in the marketplace that would be short-term. We feel like diversification of our assets and our strategy will enable continued growth in Carelon.

Gail Boudreaux (President and CEO)

Thank you. Next question, please.

Operator (participant)

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

Joshua Raskin (Research Analyst)

Hi, thanks. Just a quick clarification on Medicaid. Maybe if you could just sort of delineate how much of the 125 basis points next year is, you know, trend running above reimbursement, how much of that is the adverse selection continuing, and then if there's any impact from the OBB. My real question is just, can you provide, you talked a little about this last quarter, an update on the increased coding trends that you talked about from providers? Maybe specifically if that's still just pockets and have you made any progress? I think you were talking about using payment integrity tools or other areas.

Mark Kaye (CFO and EVP)

Josh, I appreciate the question. The short answer to it is we'll provide more specificity around our outlook for Medicaid in January. Maybe I can spend just a minute talking about really what's changed since our commentary in July on the earnings call or September at the Wells Fargo conference. We've always consistently framed 2026 Medicaid margins as having a wide range of potential outcomes. Our preliminary guide of the 125 basis point decline sits within that range. Really what's changed now is we have more 2025 experience, we have updated state inputs, and that's let us narrow the early view while staying prudent. First, I would say our experience is clearer this year. Medicaid performance has been pressured by elevated acuity and utilization. We spoke about that last quarter and we were iterating that commentary again today. That has not been fully offset by rate updates.

We've seen disenrollments remain concentrated among lower acuity members due to those more stringent eligibility reviews and changes to the state re-verification processes. Those are factors that have increased the average acuity of the remaining risk pool. That's directly led to our guidance today that Medicaid operating margin will be below break even for the full year. The second point I'd make here is that state-level updates have also sharpened our assumptions. We have seen several large states, including our home state, experience budget pressure as a result of implementing program changes in response. That will similarly lead to continued risk pool deterioration and that ongoing sort of near-term misalignment of rates with trend. Briefly on coding trends, as we spoke about last quarter, our focus really remains on working with the providers to ensure accuracy, compliance, and sustainability in how those member conditions are documented.

We are taking meaningful steps to improve that oversight so that the data capture, the clinical documentation, the vendor oversight is all accurate and appropriate for our business. Thank you.

Gail Boudreaux (President and CEO)

Yes, thank you, Mark, and thanks for the question, Josh. Just taking a step back, and I know there's a lot of interest in this, I think I just want to reinforce as we think about Medicaid and our other assumptions, these are prudent planning assumptions and that we are managing our near-term dynamics with discipline. The work we've done this year, we are looking to position Elevance Health for a durable, sustainable growth as we go beyond 2026 and into 2026. Just a little bit of background. As you heard from Mark, we are very aggressively addressing the higher coding intensity, and we've seen it in pockets, but have significant tools to advance that as well. Thank you for the question. Next question, please.

Operator (participant)

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

Ryan Langston (Director and Senior Analyst - Healthcare Equity Research)

Hi, good morning. Thank you. I know you commented that you're working with state partners on some of these initiatives. Did I hear you say that your state partners are explicitly contemplating pulling back on benefits or other ways to give you some relief just besides paying better rates? If so, how long would those adjustments typically take to implement and you to maybe see any potential benefit? Thank you.

Felicia Norwood (President of Government Health Benefits)

Good morning and thank you for the question. Absolutely. I think states are looking at all of the levers that they have in order to improve affordability in this program. One of the things you have to understand is, as we step back and think about where states are, the enhanced FMAP that states used to have to support their Medicaid programs is no longer there. States have to look for all of the levers they have to be able to improve affordability in what really is one of the largest spends in a state budget. Those levers include program changes that I mentioned before, including changes to a range of optional medical services that you see in the Medicaid program.

The timing of those generally aligns with the new contract year, and sometimes that can be either January or July, but those are certainly within the power of the state to drive those changes with respect to the contracts. We continue to work closely with them. Ultimately, our goal is to make sure that we are working with states around improving total cost of care and being able to have at their disposal the levers that they can to do that, combined with the work that we bring to the table around being able to deliver networks that have value-based arrangements and other ways to introduce care innovations to improve overall total care costs. These are things that states are looking at.

I think there's an opportunity here to continue to be collaborative with our state partners around the long-term viability of this program, and we're fully aligned with our state partners in doing that. Thank you.

Gail Boudreaux (President and CEO)

Next question, please.

Operator (participant)

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

Scott Fidel (Managing Director and Senior Research Analyst)

Hi, thanks. Good morning. I was hoping to just drill into two of the product areas in Medicare and get your updates on your thinking there. The first would be just, I know on D-SNP that that's an area you want to continue to focus on moving forward and maybe give us some thoughts on how you see that positioned for 2026 now that you have more insight into the competitive landscape. Then on PPO, you know, just curious on sort of your view on that longer term. I know that you're pulling back for 2026. There has been a longer term sort of cycle of expansion and then pullback for Elevance Health and the PPO product. Curious on just how you're thinking about, you know, sort of putting that into the longer term strategy perspective. Thanks.

Felicia Norwood (President of Government Health Benefits)

Thank you for the question. It is very early in the AEP process. We're only six days into the annual election period, but we're very pleased with how we are positioned in our products and in our target markets. As you said, we took very strong focus and investments in our HMO and our Duals products. Duals has been a strategy for us for some time. It aligns very well with our Medicaid footprint and also the ability of Carelon to help manage individuals who have complex conditions. We invested in HMO and Duals in order to make sure that we were continuing to focus on those areas that we believe drive great value for seniors and meaningful value for the enterprise. PPO has never really been a strong product focus for Elevance Health. Not traditionally, we had a handful of PPO products across states.

Over the last couple of years, we actually even declined our position where we had a PPO footprint. It is our expectation to be able to manage the conditions of our members effectively, and PPO certainly doesn't allow us to do that the same way that our HMO and D-SNP portfolio allows us to do. As we sit here today, we feel good about our positioning in our key markets where we made the geographic decisions to expand and go deeper are those markets where we believe we bring great value. As we think about the strategy that we put in place a few years ago and pulled through into 2026, we feel good about how we are positioned around improving our profitability and believe that we're going to make meaningful progress towards our long-term target range of 3%-5% in our Medicare program. Thank you.

Gail Boudreaux (President and CEO)

Thanks, Felicia. Scott, just to reiterate, we've always been more heavily weighted on HMO products, and it also aligns very much to our value-based care strategy and our ability to take risk, particularly with Carelon, our specialty risks such as in oncology. It is an alignment to a long-term strategy that we've had. Next question, please.

Operator (participant)

Next, we'll go to the line of Erin Wright from Morgan Stanley. Please go ahead.

Eric Wright (Research Analyst)

Sorry, I was on mute. Anything to call out on the commercial cost trend? I mean, I think you mentioned just broader cost trends kind of in line with expectations, but any areas such as behavioral to call out that have been called out before by you and others? I guess anything else to call out from a pricing perspective or otherwise from a commercial perspective? Thanks.

Mark Kaye (CFO and EVP)

Erin, thanks for the question. Cost trend in the ACA market developed somewhat favorably to our prudent expectations in the quarter, despite the overall deterioration in the risk pool acuity and the elevated utilization. We continue to see pressure in that ACA market across inpatient medical surgery, behavioral health, pharmacy, and usage. On the commercial group side, elevated trends persist but remain mostly in line with what we're expecting. We see a couple of pockets there around outpatient utilization and the unit cost mix of services, including some higher cost surgeries that we're monitoring, but for the most part, very consistent with our outlook. No concerns.

Gail Boudreaux (President and CEO)

Next question, please.

Operator (participant)

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

Ben Hendrix (VP)

Great, thank you very much. Just Medicare Advantage, thinking about the 150,000 members impacted by exits and other plan changes. To what extent are these members just members that you're simply no longer competing for versus a subset that could be recaptured into other plans? Stepping back a bit from that, how are you thinking about retention broadly in your continuing markets, especially in light of the better STAR ratings we saw earlier this month? Thanks.

Felicia Norwood (President of Government Health Benefits)

Morning, Ben, and thank you for the question. Retention is certainly a big part of our strategy, and I think we've done an excellent job over the last couple of years of being focused on those places geographically and in those products where we have the best opportunity to do that. Our strategy in 2026 reflects a very disciplined focus on our sustainable performance over time. We approached select plans and service areas where we didn't believe we had the opportunity to see long-term sustainable performance as we looked out towards the future of our Medicare Advantage program. This is a very intentional strategy that we took, continuing on our AEP strategy from 2025. It gives us deeper performance in those markets where we have a larger footprint and aligns with our Medicaid business.

I think, from our perspective, Ben, we are working closely with those individuals that we are not retaining to make sure that they are able to find the right plan that works for them. We feel good about the focus, the strategy, the footprint, and the products that we've laid out for 2026 and look forward to continuing to improve our overall performance in Medicare Advantage. Thank you for the question.

Gail Boudreaux (President and CEO)

Next question, please.

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

Dave Windley (Managing Director)

Hi, thanks for taking my question. I wanted to come back to Medicaid and try to understand a little bit of progression. I understand that you're highlighting some Medicaid re-verification activity that is ongoing in your markets. It seems that OB3 will trigger another round of acuity shift, maybe starting as early as late 2026. Our assumptions are, our understanding is that that could be fairly significant. I'm trying to marry that with your expectations for sequential improvement in Medicaid margins through 2027 when you are facing what seems like another acuity shift ahead of a rate catch-up situation from late 2026 through 2027. Thank you.

Mark Kaye (CFO and EVP)

Dave, thanks very much for the question. Let me do a little bit of a progression here. As we think about 2026, about evenly split, two key drivers: rates continue to lag higher acuity and then persistently elevated cost trends. On that first driver, rates continuing to lag higher acuity, that's really compounded by those state Medicaid re-verifications, those program changes that we've spoken about, and that's really where those higher disenrollments are raising that acuity. On the persistently elevated cost trends, this is simply utilization remaining above historical norms across several categories that we continue to monitor and I spoke about a little bit ago. 2026, or at least our view is 2026 will be the low point for us in Medicaid margins. We're going to see sequential improvement in 2027. There are really four concrete drivers that underline our view. First, tightening medical cost management, right?

That means expanding behavioral health interventions. That means strengthening specialty drug management. That means optimizing sites of care. You heard from Felicia, we're actively working with the states on that rate alignment and program refinements. These programs are in flight and they are really designed to bend that cost of care curve as 2026 progresses into 2027. Second is the budget reconciliation bill provisions. Those are phased and manageable. Clearly, we know that federal changes under the bill are going to be staggered, primarily effective in 2027 and 2028, but that's going to allow us time to plan and collaborate with the states. Importantly, that pacing then reduces execution risk and supports a more steady transition of the risk pool. The third one is rates, right? Rates are going to begin to catch up to trend and re-verification impact.

States are starting to incorporate more recent experience into base rates, albeit with lags. As 2025 and 2026 experience rolls into the state cycles, we expect further alignment and progress. Finally, I would say our 2026 outlook is intentionally prudent and therefore a credible base off of which to build.

Gail Boudreaux (President and CEO)

Yes, thanks, Mark. Dave, just to put a finer point on one of Mark's discussions around as you think about the implementation of the bill in 2027, it is not complete re-verification. It's less than 20% of our membership will be impacted. I think you need to sort of size that in terms of that. That's why we feel 2026 is the lower point. We do see that as manageable going forward. We do believe that the risk pool impacts we have seen now as some states, some of our larger states, have accelerated some of that redetermination work even into 2025. That gives us confidence. I'll take the last question, please.

Operator (participant)

For a final question, we'll go to the line of George Hill from Deutsche Bank. Please go ahead.

George Hill (Managing Director and Equity Research Analyst)

Yeah, good morning guys, and thanks for taking my question. I'll say Dave took one of my Medicaid questions. So Mark, I kind of have a quick two-pointer around it on Medicaid. I guess number one, is there a way to put a bottom goalpost around Medicaid expectations for 2026? You said you expect it to be greater than, or call it down about 125 basis points. I guess is there a way to put a bottom limit on that? I thought your answer to the last question was great, but if Medicaid margin recovery is pushed out another year, does that impact your ability to grow earnings in 2027? George, thanks very much for the feedback and for the question. We certainly understand the interest in anchoring to a floor, but we believe it's more responsible to wait until we have clear visibility before setting formal guidance.

Mark Kaye (CFO and EVP)

There are obviously a lot of key variables that we're monitoring. Certainly, January Medicaid rate updates is an important one. I think more broadly across the business, the Medicare AEP outcomes, the status of the enhanced subsidies, the cost trends really through the rest of the year. All of that factors into our thinking holistically and how we think about 2026. What we wanted to share with you on the call today is our preliminary view into key planning variables and assumptions for next year. We'll come back with more specificity in January to answer detailed questions. Thanks, George.

Gail Boudreaux (President and CEO)

Thank you. Just so we're clear, we're not waiting on rate cycles. We're doing a lot. We're not victim only to this. I think that's really important. Secondarily, as Felicia shared throughout the course of this call, we're in the midst of those discussions with our states. They are leaning constructively, but we wanted to give a planning assumption that we thought was very prudent going into 2026. Let me please close because I want to thank you again for your continued confidence in Elevance Health. As you've heard, we've taken decisive steps to strengthen our foundation, advancing affordability, enhancing the member and provider experience, and positioning our enterprise for sustainable growth. These efforts are grounded in our whole health strategy, which connects our physical, behavioral, and social health to deliver a more affordable, personalized, and effective care.

I want to take a moment now to thank our associates across Elevance Health for their dedication to our members, care providers, and the communities we serve. It's your commitment to affordability, experience, and outcomes that is the cornerstone of our success. We remain focused on disciplined execution, innovation, and delivering consistent value for our members, our partners, and our shareholders. Thank you for joining us today. We look forward to demonstrating our continued progress as we execute on our strategy.

Operator (participant)

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 A.M. today through November 21st, 2025. You may access the replay system at any time by dialing 800-391-9853. International participants can dial 203-369-3269. This concludes our conference for today. Thank you for your participation and for using Verizon Conferencing. You may now disconnect.