Elevance Health, Inc. (ELV) Earnings Call Transcript & Summary

All right. Let's get started here. I want to thank everybody for being here at our Wolfe Healthcare Conference, especially our next presenters here for this chat. We've got Elevance, thank God I didn't call them, Anthem. That's -- still being training myself, John, it's been tough.

Elevance Health.

Elevance Health. The CFO of Elevance Health, John Gallina, got the czar of Investor Relations here, Steve Tanal with us. So what I thought before we kind of kick off Q&A, maybe you could give us a little [indiscernible] union, John, in terms of where you think things are right now, kind of going into the fourth quarter. There's questions about flu. You guys obviously put up a good 3Q and talked about it positively about 2023. Just give us your kind of latest update.

Thank you, Justin. And certainly, I thanks to each of you for being here and your interest in Elevance Health. And so I do recognize a few faces who I have already been part of the one-on-one. So hopefully, everything I say will be very consistent with what you heard...

30 minutes ago.

30 minutes ago, yes. But we delivered a very, very strong third quarter. Actually, I think we have delivered 3 very strong quarters already thus far in 2022. We've been pleased to be able to raise our guidance to greater than $28.95. And we really, I think, have a very high quality of earnings as well. Our growth has been very good. We're at 47.3 million members at this point, and that's nearly a 5% growth rate year-over-year. And most impressively, is over 90% of that growth has been organic. And it has come in all lines of business. Obviously, everybody knows about Medicaid and PHE but we've grown Medicare, and we've grown Commercial as well. And when you look at our quality of earnings, we still have cash flow continues to exceed net income on a quarterly basis by a fairly wide margin. Our days in claims payable is actually up a day year-over-year through all this. And our medical loss ratio, if you adjust for the reclassification that we announced in the third quarter when we aligned our MLR definitions to the CMS clarifications. Our MLR is exactly flat year-over-year. And I think that's very noteworthy that it's flat because our Medicaid business has been the fastest growing and now occupies a higher percent of overall membership than it had. And so flat is actually very good from that perspective. And then in the fourth quarter, as you referenced, Justin, we think we're very well positioned. When we provided our guidance of $28.95 and some of the various metrics, there is an implied MLR in the fourth quarter that needed to be between 90% and 91% in order for all the rest of the math to work out. And that's obviously higher than what is reflected in the consensus models right now. So we believe the consensus models need to be updated to be consistent with the commentary that we provided there at the end of October. And why 90% to 91%? Well, at that point in time, we saw that the flu season was starting to be worse than it had been in the last several years. We have been tracking the Australian flu season in terms of the spikes and expected a much worse flu season than the last several years. The other thing is, if you look at COVID, if you go back to 2020, there was a bit of a spike in COVID during the Thanksgiving, Christmas timeframe. You look at 2021, there was a bit of a spike of COVID during the Thanksgiving, Christmas time frame. So the likelihood that there could be a spike this year, I think, is a bit higher. And what we wanted to ensure was that our guidance reflected that conservatism and that we're very prudent in terms of these numbers. Now we also have RSV. People are talking about the triple whammy flu, RSV and COVID. We believe our 90% to 91% positions us very well to cover those eventualities as they occur and allow us to move into '23 with momentum. So...

That's really helpful. And as usual, you've done a pretty good job of anticipating questions, right? The biggest one we've been getting more recently is on flu, right? We're seeing -- what you just talked about in Australia, we're seeing a bit of a pickup. It went through my house a couple of weeks ago. So in terms of -- maybe you can help us understand first, like what's a normal flu season for you guys in terms of cost? And maybe you can talk about orders of magnitude in terms of are you assuming something like double back in the third -- in the fourth quarter versus typical?

Yes. So sure. I guess the first thing I'll say is we talk about flu season like it's some really definitive thing. One thing that's not on a medical coding sheet is the word flu. You have to look at things like upper respiratory, you look at Tamiflu prescriptions and various other things. So the word flu in it of itself and the cost of flu does leave itself to some interpretation. And I can provide an exact number. I don't know that, that exact number really has a lot of meaning given all the other dynamics going on at the same time in terms of flu, RSV, COVID et cetera, et cetera. The one thing I will say about the flu season, when you look at the Elevance Health block of business, and I say the block of business because we have, I believe, with the #2 Medicaid block in this sector, we have the #1 Commercial block in the sector. We have the fastest-growing Medicare Advantage block in the sector. It's about 1/3 of a flu season's cost are incurred in the fourth quarter of the end of the year, and about 2/3 of that flu season's cost are incurred in the first quarter of the following year. And one of the things that we're seeing from the Australian flu season is it looks like it's been shifted a little bit. And so maybe it's a little faster as opposed to just being elevated for the entirety of the season. That remains to be seen. We obviously want to make sure that we're covered, and we thought that our MLR did. So what we've embedded as I say, I don't want to talk about flu in a vacuum because you have to talk about RSV and COVID at the same time. But certainly, our thought process when we gave our guidance was that the flu season would be much worse in the last couple of years and maybe a little bit worse than the pre-pandemic flu season that existed.

Got it. Is there a way maybe to come at this from a different angle, you've got 90% to 91%. Is there a way to think about the -- how much of a cushion you put in the MLR versus normal?

That's not a -- certainly not a number I'm going to sit here and discuss on stage. But what I will say is that the entire COVID dynamic we've seen since March of 2020, there has been a direct correlation when COVID spikes, non-COVID drops. And then as COVID goes down, non-COVID goes back up. And we've seen that through the third quarter of 2022 without fail. And the one part that we're -- make sure that we're very cautious of is that if there's a spike in regular flu or a spike in RSV is, will that have a similar impact to the other utilization that COVID did or not. And our guidance is that it will have less of a correlation than it would have. So without providing a...

So it's more additive?

Yes, more additive. So without providing any specificity in numbers, that was the approach that we took.

And last question on this is, does this get bigger in the Medicaid side versus Medicare and Commercial? Or do you feel like it's pretty evenly spread out?

Well, the RSV, I'll start with that, children are more susceptible. And so you look at where the -- as I said, we're the #2 Medicaid, #1 Commercial. We certainly infer -- ensure our fair share of kids. So clearly, there's the issue there. You go back to, I believe it was 2018 -- it was '18 or '19 where we had the flu B, which was more susceptible to younger was in the fall. And then A, which is more susceptible, the seniors was in the winter in the January, February timeframe. Those are the types of things that will impact the seasonality and how it goes between years, et cetera, et cetera. Right now, our guidance, as I said, assumes some additive costs. So I think we feel pretty good about it. But unfortunately, we're not going to know the extent of the flu season until it's over.

Got it. Let's switch over to -- you did a pretty good job of conveying improvement on the Commercial. So you reported 2Q, Commercial margins, you talked about the trend, you missed trend a little bit in terms of pricing. The -- you're getting it repriced. You had 25% of your book in the third quarter, successful there. Can you talk about what kind of rate increases you're putting through there? And then what's the persistency of the book that we should be looking for into 2023 as you finish repricing?

Right. No, thank you for the question and then how you characterize it or categorized it because it is very consistent. We repriced about 25% of our large group block of business in July, and persistency was very good. If you look at the membership table, our Commercial, fully insured I believe, is down just over 30,000 lives. Well, just to put a finer point on that, closer to 45,000 loss in Commercial large group, and 10,000 to 15,000 gain in growth in Commercial small group. So fast forward to 11/23, we're going through the pricing actions again. And it does feel a bit more competitive. I believe the term that Morgan Kendrick has been using is addition by subtraction. We do expect some level of loss of membership, maybe a little bit more than double the July. But it's all by design. It's all baked into our thought process. It's all baked into our guidance and our expectations. And feel very good about our ability to really achieve these cost numbers. Now I can't provide a percent increase in terms of pricing for competitive reasons. And that's not something I don't think anybody who's sitting in this chair would provide at this point in time. And hopefully, you ask them all as opposed to just me. But we do feel very good about catching up a trend, as I had been explaining. The trends that we had put in the last few years have been very consistent with normalized cost trend. It's just that when you look at how COVID has impacted the entire cost structure of health care, the commercial lines of business have seen some increases that we think are really permanent. COVID is here to stay -- And while it's a fraction of what it may have been a year ago or 2 years ago, it's still additive to if it never existed in the first place. And so we need to price for that. And so that's what these price increases are really doing is it's the normalized price increases plus reflecting the fact that COVID is here to stay and so there is a cost structure here to stay nad getting that caught up. And we believe we're getting most of that into the July 1, '22 and January 1, '23 price increases but there still could be some small margin enhancements on July 1, '23 and January 1, '24. Because you sometimes for competitive reasons, just can't through it all just one [indiscernible]. But we still feel very good about our ability to get that. And then the other point just to make on that with the overall Commercial margin profile is I made the grew small group membership in the third quarter of '23. And we believe that we can continue to grow small group membership each of the next few years. Well small group has a higher target margin profile than large group. So we do want to change the mix of business ever so slightly to have a higher percent of small group versus large group in our book because that's one of the things that will help us to ultimately achieve our target margin range for the entire segment.

Got it. Well, again, you've anticipated my next question. So let's dig into the Commercial margins a little bit. That's obviously an opportunity...

Because Justin, you are so good at asking for follow-up questions, I just want your follow-up to be the first question.

Yes. We Bruce [indiscernible] I have is a way to complement me on the call, and I wasn't sure exactly where he was going. But at least I'll assume that was a sincere one unlike his. The -- seriously, the -- your margins are -- let's call it almost 400 basis points according to my math below where you want to be in 2025, right? On the Commercial side, right? You've guided to 11% at the midpoint. I've got you somewhere between 7% and 7.5% this year. So I think what you said publicly on the last call was that you expect to get there, it's still in 2025, and you expect to get if I were to say ratably, it would be 100 plus -- a little over 100 basis points a year, you expect to get more of that in 2023?

Correct.

Okay. Good. The -- the other thing -- so you still feel confident in getting to 11%. What needs to happen beyond this repricing. So let's go through a little bit of it. I know you've got to get the ASO profitability from 5:1 to 3:1. So maybe give us that one first in terms of where you're going to be in '23? And the -- and you still target getting to that 3:1 in 2024?

Sure. And actually, if I could take a step back, 2022 included the Omicron surge in the first quarter that disproportionately impacted Commercial. So that's got to be part of the math as well that the number that we have for 2023 -- or 2022, the number after 2022 is almost artificially lower because there was the Omicron surge as part of the year. So I did want to set that up because that will help lift the overall margins of the segment naturally as it goes away. But in terms of the 5:1 to 3:1, we feel very good about that. If you look at the metrics, we've grown fee income 7.3% year-over-year while our Commercial membership has grown 4.3%. So obviously, we continue to penetrate our existing membership base and to upsell some of these value-added services along the way. We're just under 4:1 at the end of last year, making some progress this year. It will take us through the entirety of '25 to hit the 3:1. So we're about halfway there from -- we first announced this strategy in 2019. We're a little bit more than halfway there at this point.

Got it.

But that's clearly part of the key element of improving the overall margins.

Got it. And you expect to get there by 2025?

Yes. End of, yes.

Okay. End of 2025, and that's an important part of getting to that 11% target margin. Anything else that you want to point out to us in terms of other kind of key indicators of how you're going to get to the 11%?

Well, certainly, the 5:1 to 3:1 that you asked about, the small group that I made sure that was clear because when you look at our membership table and it just says Commercial fully insured, it's not immediately obvious what the mix of business is associated with that. So we need to continue to have small group to be a slightly higher percent of our overall book than it is now. And then executing on that pricing strategy and staying ahead of trend. And as I said, we'll get the majority of that here in '23 with maybe a bit more in '24. So all those things need to factor in. And quite honestly, not have another Omicron surge or whatever quick letter of the alphabet it happens to be.

Let's move over. The -- you announced an interesting acquisition recently on the specialty pharma side. Maybe you can give us a little bit more. You've -- you've been growing Carelon in a compelling way. You're moving more of your internal business there. You're trying to add capabilities. How does this acquisition kind of impact that? And where do you see that moving over the next few years?

Yes, sure. No, thank you for asking. So we announced our acquisition of BioPlus here recently. And for those of you who aren't familiar with BioPlus, it is the largest independent specialty pharmacy that was out there. So we just purchased it. And BioPlus has access to over 100 limited distribution drugs and with really a focus or an emphasis on oncology-type drugs. About 85% of its revenue stream is in Medicare at this point in time. And I think they processed about 250,000 scripts last year. And so you look at that and say, well, how is Elevance Health going to really capitalize on this? Well, it's going to be part of our Carelon business unit. And it should allow us to interact with the member and the patient in more ways that can really help support our whole health concept of ensuring that there's connectivity of all the various things across these members or these patients' needs. We do need to scale it a bit. 250,000 is -- it's very small compared to the Elevance Health membership profile. And so we will be investing in the capabilities here over the next couple of years. It's really -- it's -- if we just bought the company, it's got a nice EBITDA. It's got a great growth rate. It had a 20% top line growth rate over the last couple of years. But it's not big enough to accommodate Elevance Health in on of itself. So we will continue to invest and scale in it. But you think about what's going on in specialty pharmacy, biosimilars and things like that, we thought it really made sense for us to own the capability and to help with the affordability of pharmaceutical-type care associated with these things, especially as biosimilars become more and more prevalent to the extent that we can be part of that transaction, that process as well. We think it will be very beneficial to our members.

Got it. And so right now, I assume CVS is taking care of your -- [ CareMax ] taking care of your specialty pharmacy delivery to a great extent.

To a great extent, yes.

And you're looking to move that more internally over time?

Yes. Yes.

Got it.

And our contract allows us to do that. So...

Any kind of target in terms of when you would move and when you would hope to kind of have most of that being done in-house at BioPlus?

We believe it's a couple of year process to do the investment and build up the capabilities before it really is a meaningful part of the Carelon operations.

Got it. Got it. Let's flip over to Medicaid. In the third quarter, you talked about Medicaid. It was outperforming, let's call it, in the -- over the last 4 to 6 quarters. In the third quarter, it sounded like it was more in line. Can you -- one, am I right there? And two, can you tell us what drove that?

Well, Medicaid has continued to perform very well. And it's interesting why you say in line, what that really means when compared to elevated expectations versus historical expectations. But Medicaid is doing extremely well. We continue to work with the states in terms of renewals and rating and actually have a very good track record, and we've had some excellent conversations with the majority of the states associated with getting actuarially sound rates next year. Not to ask -- answer one of your questions before you ask, I will. And say what we have seen is that Florida is a little bit of an outlier. So that's one where we continue to work with the state and ensuring that we're getting the appropriate rates. Florida has agreed to open up the conversation again in the spring once we have better data and better documentation. But we feel very good about the states giving us appropriate rate increases. Now, of course, we had the 60-day notification period for the end of the PHE come and go without a notification. So the perspective now is that the PHE will go at least until April 11, which means redeterminations, reverifications, don't start until May 1 at the absolute earliest. And that is slightly accretive to our book of business as we model it out. But given how well balanced we are and the fact that we have expanded our ACA presence throughout our 14 states. We now have an ACA product that 96% of the population within our 14 Blue states has access to. Obviously, as you know, we have the #1 market share in commercial. We feel very good about our ability to capture membership regardless where it goes or where it stays.

Got it. Got it. Yes. Is there any update there in terms of where you think that membership goes? And I think you had said you expect to hold on to 1/3 of the growth that you'd had in Medicaid in the Medicaid book, but obviously, the is broader than that. So is there any kind of updated view you want to give us both on that 1/3, or how we should think about what percentage of the other 2/3 might end up in a different Anthem product or Elevance Health product? I knew I was going to do that.

Yes. Yes. No, actually, it could be an Anthem product because if it's Commercial, it's Anthem product.

Thank you for that. Very kind.

Yes. Thank you. But the number that 1/3 that you're referencing are 35%, we made those comments back in fall of 2020. Conditions were a lot different. The economy was different. There's a lot of different perspectives. And there is actually other studies that have been done independently that had similar conclusions. Fast forward to today, you now have issues in terms of -- is there going to be a recession? What's that going to do to the economy? What's that going to do to unemployment? And all these percentages could actually change quite wildly. I think the most relevant really aspect is when you look at the 14 Blue Cross and Blue Shield states that we own and operate, within those 14 states, the Medicaid population has increased by 7.5 million members. And if you look at our Medicaid book, our Medicaid book has grown by about 2.7 million in that same time frame associated with lack of reverifications. Obviously, our Medicaid book has grown much faster than that because of winning RFPs and launching North Carolina and acquiring a couple of companies but 2.7 million is really the relevant number. And about half of that is within our 14 Blue states. So that 7.5 million that I referenced, 1.4 is already in Anthem, customer or member through our Medicaid program. So I think the real question is, once the PHE ends what happens to that 7.5 million members. And we could argue we're Blue in the face in terms of what percentage goes into each. But if you think about it from the chair I'm in from Elevance Health perspective, if a large number stays in Medicaid, we're fine because we have a good Medicaid presence. If a large portion goes to Commercial, well, we have the #1 commercial market share in our 14 states by an extremely wide margin on a weighted average basis. So we feel very good about that. And then if a disproportionate amount goes to the individual ACA, well, we have improved or increased our reach within the individual ACA quite dramatically, as I think I mentioned a few minutes ago that 96% population within our 14 states has access to an Anthem ACA product in 2023. That's up from only 83% having access to an Anthem ACA product in 2022, which is up from back in the 30% back in 2018 when we reduced our footprint. So we have had a cognizant decision process as the ACA has become more stable to continue to increase our reach in that. And so we feel very well positioned to capture the membership wherever it goes.

That's helpful. You mentioned the economy being an uncertainty. Walk us through what you think happens in a recession from both a membership perspective and a cost perspective, right? We were both around in 2008. And the recollection I have is that cost ticked up a bit. right, as maybe people thought of using it before -- use before you lose it if you're concerned about your job. How are you guys thinking about that?

Yes. That's a great question, Justin. And I think -- before I talk about what might happen in the next year, I want to reflect on 2008 for a minute. In 2008, if you look at the company, a company that was called Wellpoint then Anthem Elevance Health, Nearly 80% of the revenue base of my company was in Commercial. We have less than 30% of the revenue base of my company today is in Commercial. So we have actually changed the overall structure and dynamic of the company pretty dramatically in the 14, 15 years since then. The other thing in 2008 is the individual ACA did not exist. And Medicaid had not been expanded. So using 2008 as a -- it's a nice frame of reference. But to say that it's truly indicative, it's probably not because of all the different changes. Now the other thing we have going on now because in a typical recession, what you should expect to see is you expect to see layoffs. You should expect to see Medicaid growing. You should expect to see people who are worried about being laid off -- their utilization actually drops as they try to ensure that they're not utilizing discretionary income, or -- and then on the other side, you see people that want to go to the doctor and get it done while they still have insurance. So you have both these things going on simultaneously based on each person's individual perspective. The thing that makes this a lot different is we have a PHE in effect. And so the PHE in effect, has caused Medicaid to continue to grow and continue to grow. And so then the question is, if we have a recession, what's the likelihood that Medicaid will grow at the same rate that it would have without a PHE . And I think the answer is it will grow less than it would have without a PHE because folks are already covered on it. But I think the real issue is that it's the enhanced subsidies on the ACA will cause that block of business to probably get some of the biggest growth opportunities associated with the recession.

Got it. Got it. Before we close for the session here, I want to touch on Medicare. Two things, one, the -- it looked like you priced your Medicare book with pretty consistent benefits year-over-year. And you talked about you feel like you're well positioned for the selling season. I want to make sure -- I think going into it, you had said that your margins were below your 3% to 5% target, but still profitable, right? Do we get all the way back to that 3% to 5% target in 2023?

So yes. So the -- just to put Medicare into perspective, Medicare Advantage, in particular, into perspective, I think the entire industry is benefiting from a strong rating year.

Sure.

The entire industry is benefiting from the fact that risk score coding should be much closer, at least the revenue associated with it in '23 to historical levels than it had been during the pandemic when there wasn't as much utilization or access to the records were maybe a little bit more difficult to receive. So we're all benefiting from that, including Elevance Health. If you look at the payment year associated with star ratings, Elevance Health star rating has improved as much as anybody else in the entire industry from the '22 payment year to the '23 payment year. So we have all 3 of those things as tailwinds. So we believe that all 3 of those tailwinds will allow us to have good growth, maybe even a little bit above market average growth. But to really then put a focus on margins and to get, I'll say, comfortably back into the target margin range. So utilizing that in terms of we -- because you're correct, we were below target margin range for a few years. So -- and I'm speaking really to the individual MA. We expect our individual MA to be back within target margin ranges in '23.

Got it. So you've got -- if I put together the mosaic on 2023, it feels like you've got a significant improvement in Commercial, significant improvement in Medicare and left yourself some cushion in terms of what's going to happen in Medicaid from a margin perspective.

That's very correct. Well, you are a good analyst. So...

Stop. I'm going to blush. One more question, RADV, right? And I ask you this hopefully in the light of it's an important business for you, Medicare Advantage, but it's not life and death, right? You're not going to be writing a check that's going to change the -- if this does go, the government is difficult, you'd lose a lawsuit. It's not going to change the outlook of the company dramatically. So what is a reasonable outcome? Like what is the industry lobbying for in your mind? And I know [ error rate ] and the fee-for-service adjuster is the key item that seems to be that the industry seems to be lobbying on. How do you -- I guess the question I would have for you is, one, if this thing comes out, what's a reasonable number that the industry has been lobbying for? And then what I've told people is I think the error rate has declined over time, right? So you've got RADV audits, I'm sure in your book of business that have been happening from 2012 to, I think, 2018. And I'm sure you guys are also doing your own audits, right? To see how these things look in '19 and '20 and '21. I think it will be helpful for people to understand how you think -- even without specific numbers, how do those '12 audits look like versus the '18 audits versus where you think you are now, because part of this is backward looking, you just write a check, and part of it is forward-looking in terms of how the business might change. I assume the -- your audits are probably materially better post going to encounter data, all that. So maybe you can give us some color on those 2 items before I unleash you for the rest of the day here.

Well, and I appreciate that you said without specific numbers because -- yes, you might as well be realistic in terms of the question. But so CMS is supposed to provide clarity in February. And obviously, we don't know exactly what that's going to say. It's been very quiet. We don't really have any advanced knowledge or advanced notice on what that may or may not say. And so in terms of what a good percentage is, that's hard for me to say up here on stage as much as it needs to be actuarially sound, obviously, and needs to compensate appropriately for the various other issues involved in the overall reimbursement methodology. So I would agree with you that maybe the -- as we go through and we invest in analytics, we invest in better data. We have more real-time information from providers that the error rate certainly can go down. But at the end of the day, it really needs to compensate. So what are we lobbying for at the 10,000-foot level, a fair and appropriate reimbursement methodology that puts us on an equal playing field. And if it doesn't come out, well, there's certainly the industry has a lot of options that it can pursue. And unfortunately, the members may end up being impacted through benefit design on a long-term basis as well. So I don't want to predict any of those as much as to say all these are possibilities. But at the end of the day, it has to be fair and appropriate and that the reimbursement needs to compensate the insurers for the risk we're taking and provide an appropriate return of capital, as simple as that.

That's helpful. John, thanks for all the time today. Really appreciate you being here.

Thank you.

Thanks.