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

Hi. Good morning, and welcome back to Day 3 of the Barclay's Global Healthcare Conference. My name is Andrew Mok, I'm the Managed Care and Facilities Analyst here at Barclays. And with me, I'm pleased to welcome Mark Kaye, CEO ((sic) [ CFO ]; Pete Haytaian, EVP and President of CarelonRX and Carelon; and Steve Tanal, Vice President of Investor Relations. Gentlemen, welcome.

Thanks, Andrew. Thanks for having us.

So maybe to start, there's been a wide range of expectations laid out so far this year with respect to 2024 utilization, particularly within the Medicare business. Mark, it's always nice to hear from someone who has a fresh set of eyes to the business, it's especially helpful if that person is an actuary. So from your perspective, what's causing so much dispersion across the industry right now?

Andrew, first, thank you very much to yourself and to Barclays for hosting us at the conference this year. We're very excited to be here and looking forward to the fireside conversation this morning. On your question, I agree with your observations around Medicare. And while we cannot speak for our peers, we believe there are anecdotal differences that have more to do with how actuals are developing relative to price expectations as well as the differences in product and network mix and geographies. For example, our Medicare business has a heavier mix of HMO versus PPO product. And as you know, the HMO construct provides for a greater degree of utilization management. And so this is likely one differentiating factor. In addition, the patterns and cost trends that we've observed in the business were consistent with our expectation for increased pockets of elevated utilization and trend throughout 2023, with some acceleration in the fourth quarter. And most important from Elevance's health perspective, we plan for this in our underlying cost trend assumptions by embedding a product view of trend in -- product view of trend for 2023 and for 2024 in our Medicare bids. We've also exited specific plans in markets where we've had been underperforming for some time. And given the ongoing risk model revisions, we actually saw no path to a long-term attractive, sustainable economics in some of those geographies. And this, together with rightsizing our supplemental benefits in Puerto Rico really put us on the right path forward. Taken together, these strategic decisions holistically allowed us to invest incrementally in products and markets where we have the confidence to grow profitably and sustainably for 2024 and over the long term. And our Medicare business, we view, excluding the Mainland exits and excluding Puerto Rico, is poised to grow in line at least with overall market growth rates this year. On your second question, there aren't any material modifications that we're looking to make at this time. But maybe let me go ahead and turn it over to Pete Haytaian, who runs our Carelon business to provide more context for how his team is building and their efforts are enhancing our competitiveness in this space.

Yes. Thanks a lot, Mark, and thank you, Andrew, for having us. If you step back and you look at the Carelon strategy, and I think many of you have heard us talk about this, it's around whole health, driving affordability with empathy. And that clearly applies to the portfolio across all lines of business. But as it relates to Medicare, there's a lot that we're doing that we're really excited about. And we've been focusing over the last couple of years on innovation really create greater predictability and stability in terms of Medicare costs overall. A couple of things that I'd point out. I could talk about many things across the portfolio that we're doing. One of the things that we're really proud of that we launched last year that really informs trend in a big way is our post-acute care management program that we launched with what was historically called myNEXUS. And that program, as you know, in the Medicare space, in terms of discharge planning around the inpatient setting into the post-acute care setting and then managing that continuum is critical to managing overall trend and then ultimately, getting members into the best setting in terms of home care as an example of something that we launched, we're doing so on a fully capitated basis. So we're locking in predictable and stable cost of care for our Medicare business, and we're creating then earnings in Carelon. It's a really great example of the flywheel concept that we're talking about. But in addition to that, there's many things that we're evaluating. You heard me talk about probably in the past, the full risk oncology program that we're launching. So this certainly has an impact on Medicare in a big way. And then, of course, across the pharmacy portfolio in terms of all the innovation that we've been deploying, be it in specialty with BioPlus, with home delivery, if you think about members with complex needs chronic care and what we're doing in that space, I think, is really differentiating. So generally speaking, we are applying many different strategies, of course, across the portfolio for our Medicare business, but I think those are some things that are worth pointing out that really create and impact trends.

And maybe sticking on Medicare for a second. At the end of 2023, you noted that you're still below your target margins of 3% to 5%. Where exactly, can you help us understand where you landed? And what's embedded in your guidance for 2024?

It's a great question. So we took a very disciplined approach to our 2024 Medicare bids. And that was centered around the foundation of establishing a strong and sustainable platform for growth over time. And that was especially important for us given the phase-in of the risk model revision. As I noted earlier, exiting some of the unprofitable plans in the U.S. Mainland as well as a reset of our supplemental benefit offering in Puerto Rico really allows us to be able to expand our Medicare margins over time. Our full year guidance also contemplates a range of outcomes for each line of business, and we are guiding this year to an improvement in our health benefits operating margin by between 25 and 50 basis points year-over-year. On 2025, it is too early to provide specifics that you should expect us to continue to strike a balance between growth and margin and most importantly, to deliver exceptional value and experience to our members. With respect to Star scores, we are pleased with the results of CMS's reconsideration around our single secret shopper phone call. And as you know, that lead to four additional [ each ] contracts having a 4-star rating, thus significantly improving our stock quality bonus headwind for payment year 2025. And then we're also actively working through mitigation strategies for the remaining Stars headwind of approximately $300 million, and we'll consider several options to do that, including expense efficiency, capital deployment and network and product enhancements in that context. And then finally, on your question, we are encouraged about what our peers have said about the 2025 Medicare Advantage bid strategies and the need for increased rationality in that market, especially around supplemental benefit offerings.

So it sounds like you have some flexibility with respect to 2025 bids. Is that -- do you think you're in a position of relative strength here, knowing what some of your competitors have laid out? And what your specific situation is?

Andrew, I completely agree with that characterization. We're certainly approaching 2025 from a position of strength.

And then maybe moving on to the broader utilization backdrop. Is there any update you can provide relative to how utilization is tracking so far this year? And then relatedly, with respect to the disruption at Change Healthcare. Can you help us understand how that impacts a large payer like yourself? What sort of visibility do you have into Q1 trends right now?

All right. Maybe just briefly on the first point. So we're comfortable that our full year guidance as we reaffirmed last week and which implies, in part that utilization and cost trends continue to track very much in line with our expectations. That's the key point I wanted to emphasize. On Change Healthcare, maybe just a quick minutes on background, Change Healthcare obviously acts as a large clearing house for providers to submit claims, eligibility requests and more to payers. With Change being distributing the information to our intake system, Availity. And Availity is the primary gateway into Elevance Health [ for ] electronic claims and related data submissions from providers with many providers now [ submitting ] claims directly. When the breach occurred and Change Healthcare was disconnected, we initially observed a 15% to 20% reduction in the daily volumes of electronic data receipts from providers, most of which were claims-related. Providers have since adapted and as of late last week, our daily electronic claims receipts were trending back towards normal levels, inclusive of catch-up claims submissions. Overall, I would say, since the start of the breach, our cumulative electronic data receipts are approximately 10% below what we would normally expect. And so we have temporarily expanded operational capacity to [ expediously ] process these claims once received. I also wanted to note that prior authorizations, provider payments, and pharmacy claims are not materially impacted as we do not use Change Healthcare to execute those processes. And then finally, to support impacted providers in certain cases, we have extended timely filing deadlines by an additional 30 days. And we're working with some providers individually regarding their specific issues and needs including assessing loan options where necessary.

So just so I have this right. So it sounds like at the height of the Change disruption, 15% to 20% lower. And then given that's only a few weeks of the quarter, combined with the fact that there have been some mitigating efforts quarter-to-date claims is only 10% below. Is that right?

You got it.

Okay. Understood.

Sorry, maybe just to clarify that, not even quarter-to-date, but since the beginning of the disruption actually. So just on the daily [indiscernible].

Since February [ 21st to 22nd ].

So quarters [indiscernible] even higher then.

It's even less. Yes exactly. Absolutely.

Maybe moving on to another news item that's been fairly topical. Texas just announced an intent to award last week and there are a number of other upcoming Medicaid RFPs such as Florida and Georgia. First, can you help us understand what are your early impressions of the Texas RFP award?

Maybe let me start holistically looking at Medicaid RFPs in general. And our goal here is really to demonstrate our commitment to superior access, enhanced care quality, improved clinical and patient outcomes and really the promotion of health equity. And our track record of success speaks to our ability to do this successfully. We offer our members best-in-class coverage and the resources and services that they need to ensure they receive the highest quality of care. And a great example, Andrew, that really comes to mind here is some of the coordination and prioritized activities that we've put out around advancing health equity. Last year, for example, our industry-leading approach received renewed recognition when the National Committee for Quality Assurance awarded the newly established health equity accreditation plus for Elevance Health to over 20, I think, of Elevance Health's affiliated Medicaid health plans, and that covers over 90% of our Medicaid members and that makes us really the only national plan to have receive this distinction to date. So with that backdrop, we are currently awaiting awards in Georgia, we were looking to retain our existing business, which spans the core population as well as the state's foster care program. And in Florida, we're also looking to retain our core book of business and expand into new programs that are in cover beneficiaries with serious mental illnesses and child welfare and areas where Carelon's capabilities will absolutely come into play. And maybe that's a good segue for me to turn your question over to Pete for a minute. Is the combination of our expertise in Medicaid and our health equity with Carelon's capabilities really puts us in a strong and differentiated position to work with our state partners.

I appreciate that. I think everybody is well aware of how competitive Medicaid bids are getting and how important it is to innovate and Carelon does play a big role in that in the context of the Elevance Health Medicaid business. There's a lot that I could talk about in terms of how we're innovating in the Medicaid space. And one of the areas that I'll just sort of emphasize here is behavioral health. I think we all know the significance of behavioral health coming out of the pandemic, the trends that people are experiencing the access issues. And so in Carelon, we put a real emphasis on that as it relates to our portfolio, but also differentiating ourselves in Medicaid. Our behavioral health strategy at the highest level, which includes Medicaid is, number one, access and providing differentiated access, and we're working in a variety of ways to do that. The combination of our -- the Beacon legacy network along with the Elevance health network creates a robust network, but we're also adding a lot of virtual options as well as our own captive providers. We also are very focused in -- our [ surrogate ] second priority is Crisis where we're very focused. And that's a nice foray into the states and really building a partnership with the states in terms of crisis needs of members. And then lastly, I'd mention specialized populations and behavioral health. And this is an area where you can really differentiate in Medicaid, Mark mentioned the SMI or the Seriously Mentally Ill population, and we're doing something really different there that no one's done before, quite frankly, in the space and that is taking full risk on that population. So these are folks with very serious mental illnesses embedded in the community, sometimes hard to find and also have very significant physical and medical health issues and cost trends that are exorbitant. And so we've built a differentiated clinical and execution model that's community based. We're really excited about that. Carelon is taking full risk on that for all our SMI members. And it's a real opportunity for us. Again, not only create that dynamic of predictable and stable cost of care but really put an offering in the market, especially with respect to Medicaid that truly differentiates us. And it makes a meaningful difference in these folks' lives if we can impact them. Remember, these are folks that are not getting basic needs. So if you can manage effectively their behavioral health needs and then have them avoid seeing the ER 20, 50, 100 times a year, getting basic dental care, getting basic primary care you can make a huge difference, not only in cost but in these folks' lives from a quality perspective. So we're excited about that. I think that's a really good example of what we're doing in Medicaid.

And maybe in addition to that, you also made a number of key acquisitions in Carelon, including Paragon and BioPlus. What opportunities do those acquisitions present for you? And as you look to expand, what sort of capabilities do you view as a strategic focus of the company?

Yes. No, it's great. We're very excited about both BioPlus and Paragon. As it relates to BioPlus, I think many of you know that we spent the last year making a lot of investment to really accelerate the migration time line for that. We went live January 1. Think of the work that we did last year is largely building the infrastructure for specialty pharmacy, i.e., building out the dispensing facilities on a national basis as well as some of the administrative facilities, building the appropriate tech for scale and then hiring the talent. And we've been working on that over the last year. We really like the BioPlus team. We love their model, their centers of excellence are differentiating. And one thing that I really appreciated when we were doing the due diligence on them is how they face off with the provider community. If you can imagine when folks need specialty meds, you want a timely, accurately and what BioPlus is known for is a 2-hour response time to providers and a 2-day deliveries on the oncology side. So things like that. We really feel like that's differentiating in the marketplace. Think of that as migrating through '24 into '25 in incremental million scripts that Elevance Health has that we can absorb into BioPlus. So we're super thrilled about that. And obviously, that plays right into our whole health strategy in Carelon. On the Paragon side, equally as excited. You probably heard that we closed on that transaction on Monday. And again, it's a really good representation of how Carelon is demonstrating whole health. Think about our portfolio, the density that we have in our markets, how we can, on a ZIP code basis, stand up these facilities. We have $16 billion of infusion spend that Elevance Health, 50% of which can be diverted into a more appropriate setting, quite frankly. So that is the sort of the base opportunity. And then with the density of our business by ZIP Code, we can target, we can stand up these facilities. It's a scalable model. It's actually not that hard to execute against not that I'm minimizing the execution needs but you're talking about standing up an ambulatory facility in about 9 months, EBITDA positive in about 12 months. They being Paragon, have the infrastructure for that and the expertise for that. So we're super excited about launching that across the portfolio. And then the other thing that I'd add beyond Elevance, is the opportunity this creates for Carelon in general and our external business. I think this is a great example of sort of 1 plus 1 equals 3 when you think about it. We are creating predictable and stable cost of care for our health plan business, so driving material cost of care there. We're driving value in our Rx organization through dispensing. And then that which we haven't talked about, but I think as a future opportunity is taking full risk on this eventually through Carelon overall and then packaging that and also commercializing that. You can think about the opportunity in the blues in the future. So we're super excited about that. And finally, probably talking too much. But finally, I would say our strategic approach in terms of future opportunities, I always view this through the lens of our strategy. And that's, again, delivering whole health, driving affordability with [ empathy ], really focused on those areas of high cost complex areas in health care. And when you think about that across the spectrum, I think it's pretty clear. One area that we're really focused on is enabling around specialty care. Not only enablement on the primary care side, but around Specialty Care. We've done that with oncology now, we've done that with the SMI population, we're very interested in the MSK space, in the renal space, in women's health. These are all areas of high spend. And I'd say one thing that's differentiating about what we're doing is we're not anchored to one line of business. This applies across the portfolio, commercial, Medicare and Medicaid. So that's one area of interest, I'd say the other area of interest is the home. Obviously, there's a broad continuum of services that can be deployed in the home. We are more oriented to serving the complex and the chronic in the home. And then I would say, finally, there are several bolt-on opportunities to enhance what we're doing. When you think about our Rx strategy, you've seen what we've done already. I think that we would continue to look to enhance that and embrace the strategic leverage that matter. But I think there are also bolt-on opportunities that can enhance our pharmacy business.

That was a great overview. There's also, relatedly, there's a number of initiatives underway at Elevance to expand commercial margins. When I think about the different lines of businesses, ASO, commercial risk, individual, which opportunities do you see as the greatest and most attractive over the next 2, 3 years?

Yes. So Andrew, we have a number of exciting opportunities for sustainable growth in each of our commercial businesses. So maybe let me take them one by one. In the Commercial group risk space, we're almost tiers into the execution of our margin recovery initiative from our Pandemic [indiscernible]. And in 2023, we made substantial progress. And in 2024, we expect another strong year of margin recovery as we further expand and deepen our efforts around disciplined underwriting and portfolio management. Beyond 2024, we continue to see opportunities for growth, driven predominantly through the mix shift of our business towards some of the higher-margin fee-based product lines. And we previously framed this opportunity, to your point, Andrew, through the lens of a per member profitability of our fee-based business relative to our risk business. But we're now viewing the opportunity more broadly in absolute terms. And that means we're looking at growing our fee-based membership itself. And on that front, we've had very strong success year-to-date. We are guiding to full year 2024 fee-based medical membership growth of at least 400,000 members and all while continuing to improve the per member unit economics through a deeper integration, as you heard from Pete, of specialty products like CarelonRx and like those offered by Carelon services. We also discussed during our March 2023 Investor Day conference, the idea of targeting growth in enterprise-wide earnings contribution of our fee-based business by at least another 50% by 2027 relative to 2022. And we can continue to do that by delivering a diverse set of solutions offered by health benefits businesses and Carelon while continuing to grow fee-based membership. If I turn over maybe to the commercial fee-based membership growth, which is mostly driven by growth in terms of moving from a [ slice-to-sole ] carrier basis. And that speaks to the differentiated value that we bring to our customers, the idea of affordability, experience and simplicity. And then finally, on the individual ACA business. We expect strong growth in 2024 associated with the coverage transitions out of Medicaid and our thoughtful product positioning by market that we expect will enable us to continue to deliver attractive and healthy planned margins. And clearly, you can tell, we're very excited about the opportunities for '24.

And maybe on that last point, the individual market. Today, it's a small but important business line, particularly as we enter year two of Medicaid redeterminations. Does this product have the potential to be a larger focus for Elevance. How are you thinking about the possibility of enhanced subsidies sunsetting in 2026?

Andrew, that's a great question and a tough one for me to try to cover in under a minute, but let me do my best. First, you've got to consider our strategy, and that's around serving consumers as their lifetime trusted health partner. And the fact that the individual ACA market today provides access to care for more than 21 million consumers. Second, I would say is our positioning in the market is essential given the unique challenges that Medicaid eligibility redeterminations are creating for our members. And that means we're very focused on ensuring individuals have access to care wherever possible. And we're doing that by offering a comprehensive suite of products and plans that are designed to meet a very diverse set of needs. You'll also recall in 2023, we expanded our ACA footprint to cover nearly all of our counties in our 14 Blue commercial states. And for 2024, we've priced our plan strategically by market to maximize sustainable growth. And those are two avenues that we're exploring to meet our members' needs. On your question around the likelihood of an extension of the enhanced premium tax credit subsidies beyond 2025, the way that we're thinking about this internally is that if enhanced subsidies were to expire, it would have a significant negative impact on individual aggregate ACA membership, which would be a negative for consumer health care coverage. We've also seen some estimates for the overall market impact. Our 14 blue states have not benefited historically as much as others have. And so we think if subsidies were to expire, the blue markets will contract but likely less than the national ACA market would contract overall.

Maybe a last question here. We're just about out of time, but I wanted to get your perspective on generative AI and the potential use cases across the enterprise?

All right. Definitely a topic I'm very excited about and can talk about at length. So maybe just a couple of early comments or comments upfront. I would say the application of advanced technologies to Al, Elevance Health industry-leading data sets to drive our business forward is of particularly important to our executive leadership team. We are very excited about the potential that we have in these areas. And I want to say, first and foremost, our approach to applying this technology puts our people first. And by that, I mean, our focus is on our members and their families together with the caregivers and the providers in the communities that we serve. We are using launch language models today to enhance our operational efficiency and to improve effectiveness. And we're continuously applying these new tools to augment some of the associates processes that are in place today to enable increased workflow automation and ultimately to ensure that we are leading in this exciting technological advancements.

With that, let's end it there. And thank you so much for joining us today, and enjoy the rest of the conference.

Thank you, Andrew. Appreciate it.