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

Okay. We are live. Cool. So hi, everybody. Lance Wilkes, health care services analyst for Bernstein. Thanks so much for either staying in here or for coming on in for Elevance. And just one comment I'll make before we do introductions. As we kind of entered the year, Elevance is our top pick for 2024. And our posturing, I was talking with clients on Tuesday, best ideas and different things like that. Like our view is that the Elevance story, and the story I think you'll probably walk through, is the story that I would kind of characterize as if I had one stock that I was putting in a drawer for 5 and 10 years, this would be the opportunity. And something we've been very intrigued with what I inappropriately call the Optum for the Blues strategy, but you'll hear a bit more appropriately. So with this, thanks so much for attending. Gail, if you want to just give a quick introduction of yourself and the company.

Sure. Well, first, thanks, Lance. It's great to be here. I'm joined by Steve Tanal, who heads Investor Relations and our FP&L function, our planning function inside of Elevance Health. And it might be helpful to just spend a few minutes to set some context for how we're thinking about the business. I guess I'd like to start with first, we're very pleased with the performance of each of our businesses. Coming out of the first quarter, hopefully, you saw through our results, a very disciplined execution of our strategic initiatives. That first quarter gave us a lot of confidence, even though we're in a quite dynamic industry. We've seen a lot about that, talked a lot about the dynamism within the industry, that gave us confidence to be able to raise our full year guidance to greater than $37.20, which equates to a little bit more than a 12% growth rate. But with that, I'd like to spend a little bit of time talking about sort of 2024 and our view of that. And again, starting at a high level, we have been intensely focused on executing against our strategic initiatives. And that comes down to three things that we try to frame all of our conversations on, and this gets back to the flywheel for growth. You heard Lance talk about what we're trying to create inside of our Carelon businesses. And that very much is synergistic. We have a very diversified portfolio. And that synergy, we think, is really the power, and I'll talk a little bit about the earnings power that it creates for us, as we continue to build Carelon and continue to operate within the Health Benefits business. But again, going back to sort of the three core things, it is: accelerating services and capabilities, very focused on the Carelon opportunities, and I'll share some of that and where we are; second, investing in high-growth opportunities; and then the third is optimizing our Health Benefits business. So as you think about that, and again, getting back to the flywheel for growth that we've often talked about, let me talk about Carelon high level first. Carelon Services, one of the big priorities we had was to accelerate external growth, and we're really pleased with the acceleration we're seeing to date as well as what you'll see in the back half of the year and into '25 on top line revenue. And that both about the capabilities that would be used to market, some of the risk opportunities that we're seeing around oncology, incremental business that we put into the market, and we think there's big scaling opportunities and external interest in those opportunities. On the Carelon Rx side, we see the opportunity to scale the assets that we've recently acquired fairly quickly, and we've begun that process. So again, we've talked about BioPlus, which is our specialty pharmacy offering, beginning to scale those inside of Carelon and then -- or inside of Elevance, overall, and also looking with external partners to do that as well. And then Paragon, a recent acquisition, where we see opportunities in the infusion space, again, to bring down our own cost structure inside of Elevance, but also to scale with partners. And we're excited about the recently announced Kroger Specialty Pharmacy acquisition that we hope to close this year. So those give us opportunities, again, around accelerating growth inside of Carelon which, again, helps to fuel our flywheel. Turning to the Health Benefits business really quickly. We saw a very solid performance in the first quarter. And again, as I said in the beginning, very pleased with the overall performance. Commercial, we continue to execute on the turnaround of the margin from the post-pandemic lows and have seen great traction of that over the last few years. And we're seeing nice growth in that business as you saw through the first quarter, and that growth is also coming from the individual ACA market, where we've had a very definitive strategy about being balanced and extending, and now we're in all of our counties and actually some market share growth inside of our Blue counties. So I think a very strong and positive story there. On the Medicare side, as an industry, you all know we're all facing headwinds going into 2025 due to the funding mechanisms. We made some very deliberate moves in '24 to reposition our business and feel very good about that repositioning. And so as we get into talking about Medicare, you're going to hear us talk about really balanced growth in earnings, balanced margin and growth in that space and feel the move we made in '24 [ were positioning ] for us around where we want to be in that business. And then on Medicaid, we also feel very good that we're executing on the guidance that we made coming in with that. We talked about that quite on the first quarter call. And if I go back to that first quarter call, the other things that we said are we are watching acuity very closely. And we're very encouraged by the constructive conversations that we're having with our state about rates and the overall business. So overall, I would say it's aligned with the guidance that we gave and, again, feel good. So in total, our Health Benefits business, we feel, is operating in a solid place, and we feel good about that business. We also feel good about the overall medical benefit ratio that we gave at the beginning of the year and feel confident in that. So I think that sort of gives you a bit of perspective about the core of our businesses. And then I just want to spend [ a minute ] on the announced relationship and JV with CD&R around building an advanced primary care and enablement business. That is very much aligned with the strategy that we have had over the last several years to build value-based care at a hyperlocal level and to partner with care providers. And this was sort of the next logical step in our mind about accelerating that. And there are a couple of things that I think make this unique specifically for Elevance Health. One, very much partnership oriented with care providers, hyperlocal at the market level and across all lines of business. So Medicare, Commercial and Medicaid. And many of what you see in the market today is designed for a very specific business segment. We actually think it should be the other way that we need to drive value-based care across all patients that care provider see and across all business segments. And so this has been uniquely curated to do that. It will be payer agnostic. And we feel that we're bringing together really strong leaders as well as very strong assets into this JV, that we can begin to scale and it starts to scale. Once closed, it will have 1 million numbers to start. And again, the depth of our market presence in each of these three markets, we believe, is very unique. So we're excited about that. We think it's a great partnership. We've worked with some of these assets already and have a really good insight into them. So we think that bringing this together is going to be a strong opportunity for us to accelerate value-based care, and at the same time, within our strategy in Carelon, we're building specialty enablement. So I've already shared a little bit, and we've talked about oncology, MSK, work we're doing around DME and then behavioral health, where we have an asset already and are becoming a leader in that space. And I guess I'd just like to close my remarks punctuating a couple of things that I think are really important as you think about Elevance. One, we are very confident in the adjusted EPS guidance that we shared with you and very confident in the medical cost ratio as well, as we think about the way we positioned our business, feel very good about that. And as we look to the long term, the earnings power, the embedded flywheel that we are creating and the earnings power embedded in Carelon as well as our benefits business gives us a lot of confidence about our ability to continue to generate our goal of at least 12% of adjusted EPS on the long term. So again, two core things and two things that I just wanted to share with this group because, again, we feel quite positive about the performance of our business and the progress we're making on our strategic initiatives list.

I guess that's great framing for all of us. So let's talk a little bit about the Carelon strategy and the Carelon execution. And interested -- to me, aspects of that strategy appear very executable because you're really acquiring sorts of businesses that then you're going to deploy to your fully insured or self-insured, other payers out there. Can you talk a little bit about how that process of scaling the acquisitions is going? And maybe the duration that investors should be thinking about from when you're kind of announcing then close a deal to when you'd start to feel the impacts flowing through kind of Carelon Services earnings or Carelon Rx earnings?

Yes. No, thanks, Lance. I think it's a great question, and it's something, quite frankly, that we're intensely focused on. And I would break it into two. I mean as you know, last year, at our investor conference, we gave guidance around Carelon in total. And we sort of -- we see the Rx business growing at sort of low double digits on the top line, and we see the services business growing in the high teens to 20s. So just that gives you a little bit of framing around the growth that we see inside of Carelon. I'd like to break it into two areas. Let's start with the pharmacy asset. We've been working on the pharmacy assets for a number of years. And there's, we think, significant potential, both on taking the assets we have, scaling them across our very deep benefits business and then adding new capabilities. So again, I'll go back to we identified specialty pharmacy as a huge and growing area. We identified infusion as another area. And the way we focus on this is things that we can take across our benefits business that are vended out today or we use a third party that we feel can help us change the cost curve inside of our benefits business to make us more competitive there, but also have a very -- we look at the growth trajectory of these markets, and we felt that those areas were fast growing, needed management and integration, and it's not just about pharmacy, for example. So yes, we can scale in your question. When we buy them, it kind of depends where they are. But we generally think we can [ sort of see some ] immediate benefit, but over the course of 12 to 18 months, you start to get that all of your contracts, et cetera. But I think it's not about the asset itself, and I'll use an example in specialty pharmacy, it's also oncology is about wrapping Carelon full-risk services. So the drugs are one component of that full-risk arrangements that we're selling in the marketplace and offering to our own business. So they go hand in hand. We're building programs and capabilities around those areas of specialty in addition to just what we're doing on scaling, obviously, the pharmacy. On the services side, I think it's an incredible opportunity because what we've been doing historically, our business -- and we had many of these assets, and we've acquired more of these assets sort of post-acute care and have kind of built our business around the health, the insights part of it of how do we generate more of these [ around home ] and integrity and insights and data and analytics, and then we had bought a behavioral health asset. So what we've done with those assets has been looking at them, our focus around whole health, how do we connect the dots. And then how do we bring the pieces together between pharmacy and services and first offer them inside of Elevance Health, inside of our own businesses because again, we've got the depth to do that. Our goal is to generally take out a vendor that we've used in the past, bring it in-house, put it at risk and then create capacity, and those proof points are what sell in the marketplace. So we -- other payers, other Blue partners embedded with our joint ventures that we have with some of the Blues. So again, I think those Carelon Services growth, and we're seeing about a 2x pipeline going into next year from this year. Nice growth this year. We had some really nice external sales. Post-acute behavioral health, those are areas that are really important right now. Proven inside, take it outside, and I think some of that's just the timing of sales pipeline, that sort of maturity. But again, going back to, and we see Carelon Services growing at high teens to low 20s and with the current capabilities. And then as we round those out and build more programs around them, I think there's a big integration around whole health.

And to kind of frame where we're at, and how the progress is going in sort of the cross-sells, the way you've described this historically has been at in-sourcing for your fully insured book and then selling into the kind of self-insured employer market and also to the external. Could you give any areas where you're seeing progress in that cross-sells and the type of category, whether it's home health or both acute or behavioral or Rx?

Yes. So I'll break it down a little because I think cross-sell, it's a pretty broad term. And I think we've actually expanded our own internal definition of cross-sell. So I'll talk about, first, the traditional cross-sell, which is a number of years ago, we said, "Look, we want to increase the profitability of our self-insured, self-administered book." So to bring more of what I'll call the traditional services, dental, pharmacy, and we're still working on that. We set a goal last year because we're growing our self-insured book very nicely, and we're actually consolidating from other carriers. I think we're very unique in that over the last several years, we're one of the only carriers who has gone from multisource and national accounts to full source. And I think that's a real strength of our combined capabilities. Within that, our goal has been to basically increase the profitability on a per member base of 50% by 2027, which is the goal that we shared at our investor conference. We're making really good progress. You can see it as we grow, we're growing our self-insured and we're putting more services through that. Some of those are traditional services like dental, adding more pharmacy. We've done really nicely on middle-market pharmacy sales and have increased that pretty dramatically. Now with our expanded capabilities around dispensing, specialty infusion, we're moving much more upstream and have had very productive conversations. I think there, you'll start to see that later in the [indiscernible], that those are 2- to 3-year kind of sales processes. But again, we are in the mix on all of those and beginning now for the next few years in those conversations, so feel very good. The other opportunity we have, which is a little broader, which is the capabilities that Carelon has. So taking oncology risk, taking MSK risk, DME at risk, for example, behavioral health on the severe mental illness area in Medicaid with states. We've launched a number of full-risk programs, first inside of Elevance Health and also now selling externally, and we've had some nice pickup there. And that actually speaks to the growth you're seeing inside of Carelon Services. So that, I think, has been used sort of cross-sell and how we are seeking even things around specialty, packaging that taking risk and even selling it potentially into the self-administered market on the Commercial side. That's a little longer tail. But what we see is with other payers, other Blues with our joint ventures, those are getting a lot of traction in the Carelon Services world.

One of the things you guys have really been, I think, systematic about has been the pace of acquisitions, as you've built up these broad Carelon sorts of assets. So one of the questions, it's a broader question, I'm going to get into the value-based care initiative and PBM stuff in a moment. But at a higher level, do you see a changing and some sort of acceleration in the pace, a number of acquisitions, the size of acquisitions, given the fact that you're both going to be doing things to build out this kind of NewCo value-based care, and you probably still have white space that you're going to try to address either in things in the PBM or things in the other parts of Carelon Services?

Yes. So I mean a little bit about our earnings algorithm. We've said our earnings algorithm is 2/3 organic growth, 1/3 capital deployment. Within that algorithm, about 50% of the capital deployment goes to investment in the business and M&A, and the other 30% to share repurchase, 20% to dividends. And if you think about that, we've been pretty consistent over time. Year-to-year, it might move a little bit, but we've been pretty consistent. But getting back to the pace of acquisitions, it's first the framing, right, about what are the market opportunities? So where do we think the big market growth opportunities are? And because we have such a deep Health Benefits business, where are the needs? Where are the things that will bend the cost curve? So we're not buying just to buy. It's really part of our strategic framework, again, going back to capabilities and services that fundamentally support changing the cost curve, improving the experience, being able to control more of the spend and bend cost, its priority or improved quality and having more control, I think, over the levers you need in the Health Benefits business, those are the primary focus for Carelon. And we know that those are big market opportunities. We've mapped out the space and the growth vectors within health care services. And so that's where we're focused. What you've seen in that purchase are things that fit very much into our strategic alignment and things we know we can scale, things that we believe will provide better competitiveness for our Health Benefits business. So again, we want to see we all -- knowing that specialty is a huge area, we wanted to get into the dispensing space to have more control over our future. Our acquisition allowed us to have a significant presence in the limited distribution drugs. And then we also know we can scale it fairly rapidly, so doing that. Infusion, another area that we -- as we looked at our cost spend again and sort of projected out areas, another area that we could then bring it together, and it would be synergistic. On the health care services side, think about what I just said on the pharmacy side, specialty is a fast-growing area. Specialty drugs alone and controlling that is one piece of the equation. But honestly, it doesn't work without a program wrapped around it. And that, I think, works for everything. So what we're building our programs around oncology, and it's not just the drug. It's obviously value-based care enablement with specialty and how then we wrap around all the services and predict the risk. We start -- severely mental illness is another one. And our Medicaid business is a huge issue. Small percentage of the population, very hard to access. We put together -- because of our deep expertise in Medicaid in working with severe and complex populations. And honestly, where Carelon Behavioral Health had its strength, how do we now take looking across both businesses, the population that needs dedication, community input and knowledge about access. Also, how does the drug come into that because there's a serious use of psychotropic drugs and things like that, and that's based so in addiction where we're a leader in addiction. So those are examples, I guess, of how we're bringing together capabilities and getting back to your acquisition question. So we look at those things that will help accelerate the kind of capabilities that we've laid out on our 5- and 10-year game plan and, again, go back to those things, what are the first capabilities, how do you accelerate value-based care? So value-based care, we made a commitment. 80% of our spend will be in value-based care by '27, 40% upside/downside risk where you really get the alignment. So I'll go back to the -- maybe we feel that, that is -- we will capitalize that, and the goal will be around opportunistic M&A and also scaling those assets across our business. To give you a sense of kind of how we think about this because I don't think it's -- we say we want 5 acquisitions or 4. We want to really find the right fit. We want to be programmatic about it, I think, is the other thing we should think about.

And...

Oh, if maybe Steve can -- if you want to add any comments about the acquisition strategy or...

Well, no, I think you nailed it, Gail. I think what's really exciting to me, just as much as a shareholder as everybody in the room is thinking about how we expand what we buy, right? So we all talk about assets that are really scalable. There are some really good examples of that. Obviously, the recent ones are in Rx, but you can think about myNEXUS as well. And I'll use myNEXUS as an example because I think that's really the epitome of what Gail just described, where it was a vendor that we were using for a portion of our Medicare Advantage members to manage home health on a capitated basis. What we saw there was they were doing a good job, better outcomes, better experiences. So our MA business side and the Health Benefits side endeavor to do more business with them, which is interesting. So you have that built-in scalable opportunity. And then when you looked at the assets and the clinicians that they had, it was apparent that there were service line expansions as well. It was sort of a question of why wouldn't you do post acute with the assets you've assembled? You can enter new markets as well and cover more of our MA base. And so I think that's -- those are some of the key things that we think [indiscernible]. And in that case, we took it from 800,000 MA lives to 1.2 million in months, and now it's across all of our business, basically, ex Puerto Rico. So we have since expanded that to post-acute management and now it's ramping in DME, right? So service line expansion, scaling to then selling external as you have the proof points. So I think Gail has a bit of that example out there.

That's great. So turning to the value-based care announcement, and I think you just framed that nicely. Can you talk a little bit about kind of your long-term vision for the size and scope and integration of that business, both kind of when it will be coming in, how pervasive it will be across you and then how you might partner with other Blues?

Yes. No, thanks, Lance. I think it all starts with our like historic strategy of partnering with care providers in a hyperlocal way in our communities just because of who we are and the way we do business and the density of our footprint and a deep commitment to value-based care. Now again, 80% needs to go to downside risk. And so there's a number of elements of the strategy. And what I would say about this partnership, it is one element in a multipronged strategy. It's an important element because we wanted to continue to have access to advanced primary care, we wanted to work with local care providers to enable them. And one of the local pool from the tenant and getting to risk and upside/downside risk is getting care providers in the right structure with the right tools and ready to take risk. And we know that there's a lot of education and a lot of work and a lot of data that's required. And so we have been working in a number of these partnerships over the last few years to start to build the foundation in our local markets to do this. And so this was a natural extension of that strategy. So again, we think what's important to us is that it goes across all three business lines: Medicare, Commercial and Medicaid, and be purpose built for those. So we will take the assets, which we think are very well-performing good assets, continue to scale and build them, but be able then to expand them in an organic way across our book of business and with other payers to go see patients regardless of that payment type. And that really is not done. Most of the assets out there are very specific to a single opportunity, for example, in one business line have been very custom built for that. So we are looking at this more broadly. And we like this because we know the skills of the team that we're partnering with. We've worked with them. And then our team with our data and our membership, I think, also provide a launch path. We're going to have 1 million members when we launch. Again, if you think about the scale of that, it's a very important starting point. So that's one part of it, Lance. And then we expect to continue to expand that organically. We do think it will be very attractive to other payers as part of the space. We're seeing nice traction in the employer market already with one of the assets where employers are very interested in getting a couple of things. They want guaranteed access to primary care. And I think that's very important. They want integrated digital tools, which are built around this asset. They want the same experience we often talk about in Medicare Advantage, where we curate these provider groups that you haven't really seen in the Commercial marketplace. I think that's what makes this unique. And there's a lot of interest from employers about becoming part of this. So I'm very optimistic about, I think, the potential there. But that's one leg of the stool. The other leg is what we're doing inside of Carelon, again, around value-based care we'll continue on that journey, in addition to just what we're doing here with this group. And we're also building specialty enablement because I think that's really an important part of spend, and I've touched on a couple of those: oncology, around DME, around MSK through assets of Carelon Behavioral Health integration. And again, how do we tie this all together for whole health, because doing this all in silos isn't all that effective, but doing this in [indiscernible] to support that, we're willing to put these programs together and go at risk, I think, is a differentiator in the market. So ultimately, we will own the assets on that and then part of the joint venture, but feel this is the right way for us to scale it and really bring it to market and work collaboratively. And again, we've been at this. It's not new. We've been at it for a number of years. We have this question a lot about what are we doing in the space and how are we going to approach it. And we felt for us, given our footprint and our expertise or depth, that this was the right answer. And our goal of being hyperlocal again, but also a partner to care providers was really important and being more focused on the enablement side as well as, yes, we've owned care providers, but it hasn't been the dominant strategy for us. We feel that this kind of is a great blend and will advance our high-performance network strategy as well as the value-based care.

So really comprehensive description of it. One question I'd have, I've -- in talking with investors are kind of positive that, that shift was that we'll remember from health insurance to each of those and ultimately, becoming managed care. And that transition, and if you remember, the diversity of HMOs that existed back there, both geographically types and things like that, kind of suggest that value-based care might be that next big change in the system. Managed care companies all see it. You went through this. So you're not going to get disrupted and proved it. But as you look at this, do you perceive, and the comment on Carelon still focused on value-based care, do you perceive that this is one thing that you'll ultimately have inside, and you will make other initiatives and ultimately, you'll own all these things and combine them? Or is this going to be the vehicle by which you do kind of primary value-based care? And then you'll be doing like specialty value-based care subcap sorts of arrangements in Carelon?

Yes. I think it's a little bit of both. I mean I don't think there is -- as you just -- you had a really great analogy, which is the world of HMOs, the world of value-based care. There's a lot of flavors in this. I think they're enablers and tools of a better-performing health care system. And that's what we're all trying to achieve here, which is not subsegment health care, but bring it back together because patients don't experience health care in segments. But we also know that when individuals have very specific needs, they need focused, integrated, synchronized care, which doesn't always occur in our fee-for-service system. So our goal ultimately starts with how do we deliver true whole person care. And that is, as I've said many times, not just the only medical side, but also a social driver. And we see a lot of that, particularly in our government-based business around food as medicine, transportation needs. And so it's bigger than like trying to parse it. The way we've tried to orient ourselves is always thinking about connecting the dots. And I do think that, that's where our data and our integration and building this across different businesses is important because you might be in Medicaid today, in an individual exchange tomorrow, in Medicare the third day. And a care provider doesn't necessarily see you across what coverage you have, they see you as their patient and whatever conditions you have. So I think that's the first kind of paradigm we need to break, all of us. And then second, we're trying to organize ourselves around let's first start with advanced primary care and get people access, connect that. But we also know there's very unique needs that advanced primary care isn't that well adapted to serve, that mean very specific programs, navigation and support. And that's where the specialty integration comes. So well, not answering specifically because I don't think it's that linear. I think it all gets back to how do we connect the dots, how do we use information between these care providers to integrate care, not duplicate it and allow the patient to have more say in their [indiscernible] so that they have data at their hands. And I think that's the true consumerization, where people can navigate their care and can come in between. So if you're a patient who has cancer, yes, you have intense support around that, but you also have other conditions. And we know behavioral health very much affect individuals diagnosed with cancer. And oftentimes, when we build these programs in the industry, we don't bring in the behavioral health component. We're looking to how do we integrate this across our own businesses. And I think that's where Carelon plays a really unique and distinctive role in integrating that. And we can see that because of our benefits businesses and what we see from the data there. So that actually fuels our innovation and fuels where I think we're going to take this. And again, I think value-based care is absolutely the way to go. And we're at early innings still. We've talked about it for a while, but there's an opportunity to really prove it drives differentiated outcomes. And we begin to see that in great coordinated care.

Let me shift over to Carelon Rx and your broader PBM and pharmacy strategies. You've obviously in-sourced a number of additional capabilities. We're kind of like your journey has been kind of changing vendors, building a whole front end of PBM, now starting to add in more and more sorts of capabilities. You've got your CVS contract that will be running up at some point. What's your strategy for what you need to own, what you want to be owning and maybe a time frame for that as you think of that space?

Yes. No, I think you actually framed really well. We're interested in owning the value levers. So a number of years ago, we began to build Carelon Rx. And what you've seen us is systematically and purposefully add capabilities that help us support, again, the integration of whole health and where we think we can best support our businesses. And so specialty care, huge opportunities; opportunity in dispensing; infusion, those are the areas that we had a big runway to scale them instead of our own business. So from that, we're very interested, again, in owning the value levers. And those -- again, that can be integrated to our whole-health strategy. And so I think we've been very consistent and programmatic about doing that, and we'll continue to do that because we feel like that's going to be the most important part of how we really deliver on our purpose, which is much bigger than the insurer or even a service deliverer. It's for the health of humanity. And you do that by integrating care and taking your assets and looking at them in a unique way. And so there's a lot of steps along the journey, but we feel really good about the progress and the scaling capability. And we'll continue to look at other things that fill the gaps for us in pharmacy and in services.