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

Gary Taylor, health care facilities and managed care here at TD Cowen. My pleasure to introduce Elevance Health. Most of you know, one of the largest health care company. I was going to say health insurers, but I think everyone's getting in trouble. Health care companies in the U.S., 47 million members across all lines of business, commercial group, individual MA, Medicaid. It's Carelon segment offers pharmacy services through Carelon Rx and health care services through Carelon Health. And today, we have Mark Kaye, Executive Vice President and CFO; and Stephen Tanal, who's Vice President, Investor Relations.

So I'm going to kick it off with your 8-K from yesterday just around Stars, and you saw the improvement in the 2025 Stars, which is what payment year Stars, which CMS had originally put out. And the question I would -- getting from investors is like, well, what changed? Did you guys appeal something? Was something wrong? So kind of just first, why did that change? And then kind of what does it mean for you as you're thinking about 25?

Gary, firstly, thank you very much for hosting Elevance Health and TD Cowen for the opportunity to speak with yourself and with our investor group today. In the fourth quarter, to your question, Elevance Health did file a request for reconsideration with the CMS and HHMs challenging the handling of the 2024 Stars rating for Medicaid Advantage and Part D health contracts. And the complaint really included 2 causes of action. First, Elevance Health contended that it was wrongly held responsible for a single missed call that never reached our system, and that caused multiple age contracts to fall short of a 4-star rating due to a shared call center. And that obviously had significant revenue implications. And then second, Elevance Health allegedly agencies failed to adhere to regulations regarding the calculation of MA Stars ratings and specifically the guardrail that limits year-to-year variations in cut points for ratings. Good news. CMS recently informed us. And to your point, we released in the 8-K yesterday morning that 4 of our Medicare Advantage contracts will have a higher a 2024 star rating as a result of CMS agreeing with our position on the secret shopper call that was never received.

Okay. So I've taken aback for a second. So a single call, literally a single call caused $200 million worth of revenue impact in your Stars?

I appreciate the accuracy with which you have recounted the implication.

Wow, yes, I'll be thinking about that for a while. So that's interesting. So remind us then of the Star decline that still is in place, like what's sort of the remaining revenue impact. How much of that do you think you can offset? Some of that, I think, with group integration and your [indiscernible], but just kind of fill us in on the stub there.

Yes. So we previously mentioned that approximately 1/3 of our members were in group Medicare Advantage plans and that we were considering diversification efforts around and CMS' reconsideration decision yesterday obviously obviates that need for contract diversification as the Medicare Advantage contract or specifically the group Medicare Advantage contract that we are looking to diversify away from is now also for star rated. In terms of the remaining approximately $300 million headwind net of provider contractor offsets. And we're continuing to assess all options that we have at our disposal to manage the remaining Star headwind for 2025, and that's going to include actions like operating expense efficiencies similar to the business optimization effort we announced in the third quarter of last year, capital deployment as well as targeted network and product enhancements.

Shifting to kind of what's turned in the topic of the week a little bit. Unfortunately, Change Healthcare and the cyber attack there and the outage and the network outage. Can you just round out for us whatever you can say empirically, how much of your incoming claims is coming through change, how much is your outgoing? What other EDIs do you use? Is pre-off you using any part of them for pre-off how it's impacting claims, inventories, et cetera, et cetera?

Yes. Gary, that's an incredibly [indiscernible] and a very timely question. So Change Healthcare is a significant clearing house for payers and for providers. It is one of them, though. And if I think back to the use here, providers really use it to submit claims, eligibility requests and more through the platform, which then ultimately distributes that information to our intake system at Elevance Health, which we call Availity. Initially, we saw a 15% to 20% reduction in the daily volume of electronic data submissions we receive from providers, the majority of which were claims related. However, since then, we've seen providers adapt -- and today, we're about down to a 10% reduction relative to normal daily volumes. Availity is our primary gateway into Elevance Health for electronic claims and related data submissions from providers. And some providers are now submitting claims directly to Availity, while others have switched their clearing house. And over this past weekend actually saw a significant increase in activity levels relative to recent weeks, which suggests in a large part, the providers are starting to catch up in terms of their submissions back to Elevance. And the last point I just want to make on this topic is that, importantly, prior authorization volumes have not been impacted in any material way since Change Healthcare is not part of our prior authorization environment.

That's helpful. So when we think about how this might impact the first or second quarter, I guess, in my mind, I'm saying, well, unfortunately, it comes right at a time where we're trying to figure out if trend is going to still accelerate like it was in '23 or come off, so any lack of visibility disruption that is inconvenient, but just from your running the business perspective, presumably, there's lower claims coming in, but you're going to keep a consistent sort of reserving process, accrue IBNR with the expectation that just because you're not seeing claims doesn't mean they're not eventually going to come in as the backlog clears. And then just when this gets solved, is some lag from that when we receive the inventories and everything sort of clear out. Is that -- is that sort of fair? Just keep accruing with the consistent conserving reserving methodology, and that's what we ought to be thinking about.

Sure. For the first quarter, we will definitely continue to adopt a consistent reserving approach to that we've adopted in prior quarters. And as you can imagine, we are working very closely with the impacted providers, both to ensure that they are supported through the claims submission process and to ensure that we have the correct inventory counts at the end of the quarter to be able to appropriately reflected in our financial statements.

I want to shift just big picture and back up a few years, just a little bit because I remember when Gail came into Elevance, she laid out some strategies, some very company idiosyncratic strategies to gain share across commercial and Medicare and Medicaid. And I was really -- I was kind of -- I think I was kind of like, yes, right. But then as she explained those, it was like this is actually really thoughtful, like and just I know it's cliche at this point, but modernizing and modularizing the commercial offering and creating sort of the blue card equivalent for group MA and partnering with sister Blues on Medicaid, et cetera. So all of those have seen some progress. All of those have seen a little bit of disruption at various points. But is there still legs to those 3 sort of initial pillars of our strategy on the insurance side? I'm not even at Carelon yet, but just on the insurance side?

Let me see we've made significant progress on our strategies to gain share during Gail's tenor. And maybe I'll take them sort of 1 at a time. The commercial fee-based business, thinking about the cohort that we originally had to begin with, we're squarely on track to achieve our prior goal of more deeply serving our fee-based employer customers to drive per member profitability much closer to our group risk-based business. In addition, we've also had very strong success in growing our fee-based medical membership while continuing to drive deeper integration, Gary, to the point you just made with our Carelon Rx and our Carelon services and then, of course, our specialty products across the different groups. As we discussed in the Investor Day conference in March, our enterprise contribution from fee-based business did grow by more than 60% between 2018 and 2022, but we still have a significant opportunity for future growth, and we're targeting enterprise-wide contribution of our fee-based business to be another 50% by 2027. And we're going to continue to do that by delivering on a diverse set of solutions within our health benefits and our Carelon book of business. If I pivot just briefly to the government side. First, on a group Medicare Advantage. We've grown significantly since 2018. We see continued opportunities for growth going forward. And then on Medicaid, Blue alliances we had 8 alliances in 2019. We since launched several more and are now sitting at approximately 16 alliances today. And while they're not necessarily created equal, they all share the obvious advantage of deepening our relationship with other Blues. And here too, we see attractive opportunities for future alliances as we consider the RFP pipeline in addition to the benefits Carelon often derives from working with our alliance joint ventures. Maybe one last comment that I promised to let you ask another question. The [indiscernible] one of the things that's really important to me is that while each of these individually are exciting opportunities, they are components of a broader enterprise strategy. And we think about this as optimizing our health benefits business, investing in high-growth opportunities and then accelerating growth through Carelon, which is what we refer to internally as sort of our enterprise flywheel. And what I mean by that is Carelon remains very focused on bending the cost curve down and on delivering enhanced consumer experiences both of which then enhance the competitiveness of our health benefits business, which aids membership growth for a health plans that in turn then drives growth for Carelon. And it's the flywheel effect that we executed at scale that's going to drive sustained growth over the long term and something that I am, the management team are very excited about.

I want to go to Carelon services for a moment and think about that. There was a pretty wide spectrum in terms of what your peers are doing there. United has built a lot -- spend a lot of capital and now is even subject to antitrust investigation of maybe they've spent too much and -- so that's one end of the spectrum and other companies really haven't done a lot beyond either PBM and a little bit of specialty, et cetera. You guys have been growing Carelon services, but I guess, still somewhat hesitant to spend a lot of capital there, I think. So maybe just kind of refresh us on where do you think services is going? And what's the capital you're willing to put into that business?

Yes, that's a great question. So Carelon services is enjoying strong momentum today. And you see that reflected in our guidance for revenue growth in the upper teens to low 20s 2024. Also by 2025, we would have passed through what I think of as a top line headwind associated with our Medicaid membership attrition that's tied to redetermination activity. When I think about 2024 in particular, it's going to be broad-based growth across various businesses, both internal and external, and really concentrated in 2 areas as I think about it, behavioral health and then Carelon insights, which covers our medical benefits management and our post-acute solutions product sets. With respect to the assets we have in place today, we still have meaningful opportunities to launch and scale new risk-based products that are addressing high-cost, complex areas of specialty medical spend such as oncology, muscoskeletal renal, for example, as well as whole health risk fire members that have serious mental illnesses and growth in Carelon longer term is really going to be driven by those new product launches and by the innovation that we're putting through. As a CFO, if I think back for a second or step back for a second, we are targeting to deploy approximately 50% of our free cash flow towards M&A or [indiscernible] or organic reinvestment back into the business, with the remaining 50% return to shareholders either through dividends or through share repurchases. On M&A, targets have got to align with our broader strategy. And so we really consider acquisitions in 2 buckets here. First, capabilities and services for Carelon that we can scale and which align with our focus on catering to the whole health needs of our consumers, especially those with complex and chronic conditions. And then bolt-on acquisitions the health for benefit segment that complements our existing footprint and provide deep roots in some of the new markets we're focused on.

And I mean, off the top of my head, I feel like you haven't quite been hitting that 50% of free cash flow on acquisitions in the last few years. So we're expecting that to accelerate then [indiscernible]

I would argue the expectation is for us to continue to be disciplined and thoughtful in the deployment of shareholder capital. And to the extent that we are, on average, not able to deploy to M&A, organic reinvestment we will return it to shareholders. And you saw that in 2023 through an average share repurchase program that was slightly larger in nature than what we have done historically.

As I was mentioning, a lot of your peers have invested a lot in value-based care assets, including making multibillion-dollar acquisitions of public companies, et cetera, and in the very near term, that space is really struggling, right? So do you kind of look at that and say, well, that's a validation of our prudence to not throw billions of dollars around or you look more at it like, there's going to be a rationalization and sort of a fallout reorganization of value-based care, and there's potentially more opportunities for us to put capital to work at a higher return?

Yes. I think you're really going to consider the point at which we're starting here. And we've got scale in our commercial business. We've got scale in our Medicaid business. We are growing Medicare Advantage that we spend several markets, and there is no one-size-fits-all approach that will work for Elevance Health. But at the same time, we recognize the importance of partnerships with providers, and that's a key part to our vision long term. And so the design of our value-based care strategy is really multipronged. And it's built around those areas where we can create the most value ultimately for our stakeholders. As we implement the value-based care strategies, there really are 5 primary constituents as I think about it, that we partner with to achieve our shared goals. And 3 of them are oriented around primary care specifically advanced primary care clinics, physician care extenders and then aggregators. And these groups focus on high-cost, high-need members and really equipping the primary care physicians with the capabilities, the data and the support that they need to practice value-based care. And together, we are improving our members' access to high-quality, cost-effective primary care and increasingly downside risk sharing. We're also partnering with a number of health systems that are aligned with our transition to a value-based care and then enabling those partnerships through EMR connectivity and by directional data exchanges. And if I were to put that in numbers, we are well on track to achieve the goals that we shared at our 2023 Investor Day Conference of having 80% of our overall benefit expense in value-based care arrangements in -- or by 2027. And that's up from approximately 60% today. with approximately half or 40% in that downside risk. And then briefly on Carelon, again, to my earlier comment, the opportunity here is to carve in those high-cost complex areas with the idea of bending that cost curve down and creating and supporting that virtuous flywheel that we've started.

I want to move to kind of line of business down, start with your commercial risk business. I mean, this business seems to have been pretty well underwritten by the industry and you, in particular, for 2023 as best as we can ascertain, since you don't disclose it anymore. But -- and it isn't as if costs haven't been up in commercial, it seemed to recover sort of pretty quickly post pandemic. But this is kind of your 1 free negotiated market sort of opportunity to underwrite well. So when you think about '24, will -- is there still commercial margin recovery to go? And are you expecting to be fully recovered in commercial margins for '24 in the guidance?

Yes. So I completely agree with your premise that the commercial health benefits business has been performing well. We have definitely executed on a margin recovery initiative on our fully insured business, and we've been doing this since 2022. And that really followed the significant margin compression that occurred in the early years of COVID. We have made progress towards our margin recovery goals in 2023. And we expect another year of strong margin recovery now in 2024. And then after 2024, we expect continued opportunities to enhance margin, but driven more by a mix shift towards fee-based product lines that would be more incremental in nature than the margin recovery you would have seen in 2023 and 2024. On buydowns, we're actually not seeing a lot of activity. We actually hear more often from employers that are focused on retaining talent in a relatively competitive environment. And many employees have least room to move in this particular aspect after years of buy-down activities. I was in Texas last week with the international accounts team and our Customer Advisory Group meeting. And what I heard the most from our customers and from those large employers is the concept of affordability, simplicity and experience. And we are delivering on all 3 fronts in the marketplace today and that is contributing to some of the examples that we've shared previously around more than 30 large employers looking to expand their relationship to us from a slice of the business to acting as their sole provider on the medical health benefit side.

Yes. I appreciate that. I think for the last decade, benefit buydown was probably the most topical issue and commercial coverage and really, as you said, a full employee economy seems to have gone to the wayside. Is there anything more important than in commercial in terms of topical than GLP whether it's in your risk business, where I think mostly you're still not covering for weight loss, unless the employer wants to put a rider on top of that and pay for that? But also for the nonrisk business, like is this is this the most topical issue and benefits cost on the commercial side?

T's a very topical issue. So maybe just on GLP-1s, therapeutics for weight loss. For commercial fully insured members, we really cover this in 2 states that mandate we cover or mandate coverage of GLPs for weight-loss drug purposes, and those are California and New York. Approval for coverage here actually requires prior authorization based on a physician's [indiscernible] of BMI and sort of the accompanying a diet and exercise regime and so we are very prudent in working with both California and New York to ensure that we're compliant with the regulations, especially on the fully insured side of GLP-1 coverage.

And is it your PBM that's primarily due in the pre-off for GLP for weight loss?

I'm actually going to have to phone a friend on this one. Steve?

We may or may not outsource some of that, Gary, but we do some of it directly as well.

Got you. And then you have gained share in commercial nonrisk as well this year. And I guess I'm interested on why that's happening. And then my little sidebar was just we've seen some of your competitors kind of doing some things, where they're moving providers out of network, but then creating shared savings between gross charges and net and anyway, it looks like it isn't always helping the employer some of the shared savings arrangements or at least how the mechanics are constructed. So what's kind of driving your share gain in non-risk? is it any new product? Is it shared savings? Is it the vertical integration piece? What would you point to?

Yes. I would maybe highlight here that growth has really been driven in part by existing clients moving to consolidate from multiple carriers to just Elevance Health. And in my mind, that speaks to the differentiated value that we are able to offer to our customers. The focus here of the team is really again on affordability, simplicity and experience as the key attributes behind the growth that we are seeing in the employer market. And from our perspective, driving innovation is going to be really core to continuing that success into the future. And that includes things like our digital tools, clinical capabilities, strategic network capabilities, and ultimately partnering with Carelon to deliver on each. When I look at our individual client proposals, we work with clients to develop a total cost position and then we get compensated in part for the value that we create as part of that work. I think about shared savings, which is pretty topical as an approach, but it's not the only lever, And ultimately, clients add up all the levers and the design benefits, and they come up with a total cost position that they are comfortable investing in on behalf of their employees. And where there is incremental opportunity is where we can beat that expectation as Elevance Health and have mechanisms like shared savings in place to help us earn a portion of that value. And there are a lot of specific examples, maybe one very brief one. advocacy solutions continues to grow quite well within the group market segment. Our message is resonating in the market. We've seen marquee clients return back to Elevance Health connections because of our personalized engagement, some of the quality of our reporting and comprehensive solutions that we offer.

Let's shift to Medicaid. I just want to -- I want to highlight what seems like a dichotomy and have you explained it to us, but generally, we're saying as you're seeing redetermination activity, you're getting paid actuarially sound rates generally from the states. But you do still expect Medicaid margins to come down. So is that just operating -- negative operating leverage because this revenue is coming off? Do you actually think the Medicaid MLRs are going up in '24?

Yes. So, as we shared on the earnings call back in January, our Medicaid business is performing well despite membership headwinds. We currently have visibility into approximately 70% of our Medicaid premium revenue for 2024 and we are encouraged by the rates rate updates that we've seen. The vast majority are in line with our expectation and our actuarially -- as an actuary, actuarially sound. Conversations with the states have been very constructive. They're ongoing. We expect our rates to remain very consistent with what's needed to support the member services in those individual markets. And it's also interesting that states are now using base data from the PHE period and making adjustments to that data for the expected levels of acuity that they see in the individual markets. And we'll continue to work with the states and their consultants on that. Overall, I'd say that we're pleased with the margins on this particular business. We expect those ultimately to normalize after a few particularly strong years in select programs. And our target margin for Medicaid is unchanged. And just to make a point here, it can vary significantly both by state and program. And for 2024, we do expect our health benefits business margin to expand by to 25 to 50 basis points over 2023's results.

Say that last sentence again. If the MLR will be down, you're saying for Medicaid?

We expect the health benefits margin to expand 25 to 50 basis points over 2023 for the health benefits segment. So MLR approximately 87%, plus minus 50 bps.

Right. What is your Medicaid target margin now like you were earning at the high end of that and '24 will be into that range?

Gary, can I say that our target margin for Medicaid is unchanged? Let's go with that.

All right. I'll look it up. Medicare Advantage, nobody seems very happy with the advance notice. I mean, depending on the data you use second half of the year, MA cost trends per member per month look to be in the 6% to 7% range. CMS has given you a whopping negative 16 basis points. Some plans are feeling like the actual number is worse than that. And then on top of that, CMS lowered the forward trend assumptions below 4% for both '24 and '25. So this isn't very nice. What's the lobbying angle? Do you feel like the industry is aligned on lobbying around this? And do you have any expectation for final notice?

So maybe 2 critical points I wanted to make up front. So first, I completely agree with the notion that what we're seeing in terms of the initial rate guide is light. And the second, to make the point that the effective rate does not include fourth quarter data. So keep in mind, their preliminary rates, there is a historical tendency whereby rates will improve into the final notice period, which we expect at the beginning of April. We have urged CMS to incorporate recent fee-for-service and utilization data and to explore our policy options to ensure 2025 MA benchmarks reflects higher use of health care services and cost trends and the idea here is so that seniors continue to see stability in their costs, their benefits and choices and that we ensure that they continue to have an access or continued access to a range of benefit options that they value and appreciate in 2025 and beyond. We do have a very strong policy process and technical -- we do have strong policy process and technical concerns with the proposed changes to both Part C and Part D normalization. Our comments actually on those sections are pretty extensive. And you'll be able to see those as they become public as part of the federal register. And then wherever, of course, the final notice lands for 2025. We're going to take a disciplined approach to our bids. And that means being very thoughtful about balancing growth and margin.

All right. Well, with that we're at time. So thanks for your comments and presentation. I appreciate it.

Thanks for having me.

Thanks, Gary.