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

RBC Capital Markets Healthcare Conference. I'm Ben Hendrix, RBC's healthcare services and managed care analyst. We're pleased to kick off day 2 of the conference with Elevance Health, specifically management from the company's health care services and pharmacy benefit business, Carelon. And with us this morning from management are Peter Haytaian, Executive Vice President and President of Carelon and Carelon Rx; Amy Mulderry, Chief Development Officer and CFO of Carelon; Paul Marchetti, President of Carelon Rx; and Stephen Tanal, Vice President, Investor Relations of Elevance Health.

And with that, just we'll kick off with the question about the Carelon's management. You've noted early success in reaching your goal of Carelon managing at least 20% of Elevance's consolidated benefit expense with clear room for continued growth. Can you give us an updated outlook for integration of Carelon into the Health Benefits segment?

Yes, sure. Thanks a lot, Ben, and thank you for having us. We appreciate it. Very happy here to talk about Carelon. Yes, in terms of growth, we're really very pleased that we actually achieved that goal of 20% of overall medical expenses, and we see a really strong trajectory going forward. We actually did exceed the goal before we -- earlier than we anticipated. And that was in large part because of our strategy, really accelerated, driving more risk through the Elevance Health Benefits business. But I would say that the opportunity going forward is very, very vast in terms of penetrating more. That's what's really so exciting about the story. As we talked about from a strategic perspective, our first focus is Elevance Health and the benefits of our health plans within Elevance, with 47, 48 million Americans that we cover today, 21 million fully insured. We have a tremendous opportunity to further penetrate. And when you look across each one of our assets, it really varies in terms of the opportunity and the degree to which we can penetrate the business. So for example, we have assets like what was formerly known as AIM, now called medical benefits management in Carelon, and we started really penetrating the commercial business from that perspective. And we have a tremendous opportunity now to continue to grow that business in the Medicaid and Medicare businesses, for example. Where in contrast with assets like myNEXUS, we now call that Carelon post-acute Care Services, we started our engagement really on the Medicare side around home care as well as post-acute care services. Now we're expanding that portfolio, and we're also growing it into the commercial and the Medicaid businesses. So the white space opportunity that exists internally is still very, very significant. We see a wonderful opportunity to grow within. And then also it's a wonderful springboard to grow externally as well.

And how does that look from a geographic perspective? Are there states or regions where integration happens particularly in an accelerated or delayed pace?

No, not really. I mean we -- I wouldn't think about it from a geographic perspective. I'd really think about it from an asset perspective and then a line of business perspective. So like I noted, if you think about -- I'll use the myNEXUS example again. Largely that asset -- before we acquired, it was focused largely on the Medicare business. We brought it inside, we penetrated all of our business across home care, mostly on the Medicare side, and then have an opportunity to expand in commercial and Medicaid in that regard. And I also think about it in the context of new product opportunities and launches. And so in that sort of first year of having it inside the company, we developed what we called a post-acute care product offering. And within literally a period of about 14, 15 months, ideated it and then actually launched it and did that across the entire Medicare portfolio. And it was across all the geographies for Medicare. So I really -- when you think about Carelon services growth, I think about the asset and whether or not we penetrated all the lines of business, and then the new opportunities to roll out new offerings versus thinking about it geographically.

Elevance has often cited the significant opportunity to scale services across the nationwide Blue system, over 110 million members. And in your Investor Day, you noted continued growth in Carelon revenue from external Blues last year. We've heard from your peers the importance of the carrier-agnostic growth component of share delivery strategies. So how penetrated is Carelon into the external Blues opportunity currently? And where does that go over the next 5 years?

Yes. No, I appreciate that question. The Blues opportunity is a tremendous opportunity for us when you think about our external growth. I would say that our focus is first on Elevance. And what's so great about that is that we obviously can learn a lot internally. And our ability to scale across our portfolio is very important. But once we do that, it's a really strong proof point and springboard to work with the Blues. As you'd expect, I mean we have a lot in common with the Blues. We understand the system, we have a lot of the same values and focus on quality and cost of care. And so we've penetrated a lot of the Blues. 26-plus Blues, we've got 12, 13 plus with multiple offerings. But I wouldn't really think about it from that perspective. If I was thinking about the Blues and the opportunity within the Blues, I would think about it as I am very confident we will probably penetrate most of the Blues. There may be a couple that we don't. It's not about that. It's about the degree to which we can penetrate the Blues. And can we package offerings? Can we offer an integrated package at risk? And that's where I see tremendous opportunity. Because, again, what we offer internally in Elevance Health's predictability and stability and the cost structure, we do that at risk. If we can prove it at scale in our organization, there are Blues that are going to look at that and say, I'd be very interested. And then the other thing I'd say about the Blues world is so exciting for us is we're not necessarily competing for their bread and butter. We're not competing in their individual, their small group and their local large group business, for example. And so some of our competitors in the services space are. And so if we can offer something with differentiated value, they're going to embrace that.

Are there any unique needs that Blues have a hard time filling that you guys are uniquely positioned to address?

I don't know if I'd say unique. I would say, very consistent with what we're concerned about. And as I said, I think when you look at the health benefits business, that's their core offering, right, is on the insurance side for the most part. And we're going into an environment where predictability and stability and cost is very meaningful, where quality is very meaningful. And so if we can insert ourselves and we can do that in a differentiated way at much greater efficiency for them, that has meaningful value. I mean -- so for example, when you think about the post-acute care solution that I talked about, that creates a dynamic with providers in which we have a differentiated technology that's being utilized. So it's good in terms of the provider community in post-acute care. In addition to that, we are actually offloading a lot of the responsibility in terms of management of UM and coordination for those services on behalf of that Blue. And we're doing at risk. So you think about that equation. I mean we're creating greater efficiency, greater quality. We're having a better relationship with the provider community for creating predictability and stability in the cost structure because we're doing it at risk. And so it's -- those are the types of things that I think are really appealing to the Blues, and that they're opening their eyes to in terms of the kind of success we're having.

If I can even add on, I think what is unique is our access to capital and the scale that we are serving 14, soon to be 15, loose markets, and we have access to capital to be able to deploy on acquisitions like myNEXUS. And that is unique compared to a single state Blue. So giving them access to the affordability tools and capabilities we're providing to our own health plan, I think, sets us apart.

Yes. Great point.

That's a great lead into my next question, too. As Carelon has grown over the last 18 months, it seems like the development strategy has evolved. So with M&A more prevalent part of the story, so at the risk of being too specific, where do you see the most significant gaps in Carelon's capabilities currently and plans to fill that?

Well, we have the privilege of having Amy here with us who has -- she both has responsibility being CFO of Carelon as well as leading business development. So I'll let Amy.

Sure. And I don't know that it's gaps as much as opportunity really. So what I would say is M&A is obviously a really important tool and an important growth driver for Carelon services. And as we said at Investor Day, we included a modest amount of M&A in our long-term target for growth for Carelon. Without getting too specific, I'd say the strategy that we are using for M&A, I think myNEXUS is a great example. We're looking for assets capabilities that our health plans find value in. Our government business used myNEXUS as a way to improve affordability for their members. We acquire that asset and we drive synergies that creates financial value through further penetrating the existing book of business, new lines of business with Elevance Health and then deploying a road map of adding products and services to that asset like DME and like the post-acute solutions. So that is sort of the road map, that is the playbook that we're using. And then we're validating the proof point within our own book of business to commercialize that externally. So without giving a road map for specific areas where we're going to be looking for M&A, I will say the criteria is, first and foremost, what is going to drive affordability access to the health plan, what drives value to the health plan, and then how do we build a business model within Carelon services, how do we create synergies through further penetration of our book of business and then selling externally. So a lot of opportunity.

Great. And you've noted Elevance's recent acquisition of Blue Cross Blue Shield of Louisiana as a growth in value creation opportunity for Carelon. So I was wondering if you could lay out the road map for integrating Carelon into a newly acquired regional health plan and what needs to happen from a provider network perspective for Carelon to really start taking risk in Louisiana.

Yes, we are really excited about the opportunity with Louisiana. I mean Amy can tell you when that deal was done, part of the thesis of it, and to her point about us having access to capital, us having a service business that's comprehensive, the ability of putting the companies together and offering those services to residents of Louisiana to drive better cost and quality was a major component in the deal and something that I think both teams are super excited about. I would say that it's very similar. So I wouldn't really think about Louisiana any differently than you would the 14 Blue that we have or what I described earlier in terms of penetrating the Elevance Health business. What's so beneficial about being a Blue, number one is, they have 90 years in that marketplace. They have deep, deep relationships with the providers. They have deep density with the provider community. And so when you think about us launching products and new offerings, having that connectivity with the provider base is really, really critical. We would follow a cadence just like we would internally. I mean we are going to deploy the entire portfolio within Louisiana. Obviously, the barriers that we would face is just really time and building the pipes. But in terms of connecting with the provider community, it's really about effective communications, making sure that they understand the new offerings, how it's going to benefit them and then implementing, creating that value within the health plan. So again, I'll give you because it just happened. And Amy mentioned our post-acute care offering via myNEXUS. What was so great about that was we have deep density even with the long-term care providers. We were able to, unlike some of our competitors in the service business that could be a mile wide and an inch deep in terms of these relationships, we can engage with the post-acute care providers and say, we are launching a new technology. You're going to be interfacing with this technology. And here's how it works and you go through those training sessions. And then you hold their hand through that process. And because of the relationship we have with them and the density and the volume that's going through, it's not that they're forced to work with us, they want to work with us. They really want to understand it. And that enables scale and speed. And so think of it that way as it relates to Louisiana. We see a wonderful opportunity to penetrate their entire book of business with our portfolio. And we're going to do that over the next -- once the deal closes, over a year, 1.5 years period.

Stepping back, you noted that Carelon services revenue per consumer served was $117 in 2022, which you expect to grow 50% by 2027. As we think about the existing Carelon services buckets, insights, behavioral and care delivery, what is represented in that $117 currently and what are the most immediate expansion areas?

It's not that dissimilar from the way I've talked about growth, but I'll let Amy sort of talk about the opportunity.