Elevance Health, Inc. ($ELV)

Hi. Good morning. My name is Andrew Mok. I'm the Facilities and Managed Care Analyst here at Barclays. Welcome to day 1 of the Barclays Global Healthcare Conference. I'm pleased to kick off today's event with Elevance Health. And joining me on stage for today's fireside chat is Mark Kaye, CFO, and Nate Rich, VP of IR. Welcome.

Thank you very much, Andrew. Pleasure to be here.

Mark, there's been a couple of notable recent developments at Elevance over the past few weeks. So I think it would be helpful for you to get your perspective on some of these issues. So first, as it relates to the CMS sanctions letter, what's the scope of concerns raised by CMS in its communications with you? And what actions are you taking towards a resolution?

Andrew, that's a great place to start. Let me start with the scope itself. So as outlined in CMS' letter, the concerns that they've raised relate to certain historical risk adjustment data submission practices, specifically for dates of service prior to April 2023. And importantly, from our perspective, this is not simply a data submission issue. We view this as a broader policy and payment dispute, about how retroactive corrections should be treated under the risk adjustment framework that was in place during that period. In terms of actions we've taken, we have approached this in good faith and with transparency. And given the uncertainty at the time, we've proactively disclosed to CMS certain diagnosis codes that our internal review had isolated and potentially unverified. And we did that to be clear and forthright with the agency. And alongside that, we repeatedly sought CMS guidance on how prior year corrections should be handled given the broader litigation and regulatory landscape during that period. While we were surprised and disappointed by the sanctions notice, we have engaged promptly with CMS, and we're committed to resolving this constructively. And I really want to be clear on two points. This relates to the interpretation of past CMS risk adjustment practices. It does not reflect our current practices, and it does not affect how we serve our Medicare Advantage beneficiaries today. And so finally, our focus is very much on a timely resolution, so we can keep our full attention where it belongs on serving our members and executing our operating priorities.

Great. What led you to believe that your risk adjustment practices were accurate and appropriate?

Let me address that directly. We stand by the integrity of our compliance program and our risk adjustment practices, both historically and today. And at its core, this is a disagreement over the interpretation of policy. It's not an unwillingness to correct inaccurate data. The diagnosis codes that issue were originally submitted by providers, and consistent with our compliance posture, we proactively flagged certain codes to potentially unverified issues, and we shared them with CMS in good faith. It's also important to emphasize that our position aligned with the statutory framework in place at that time. And that's the bridge to the broader context. So think about this prior to 2023, there was a well-established industry-wide discussion about payment alignment between fee-for-service Medicare and Medicare Advantage. And our view, consistent with that discussion was that CMS should not hold Medicare Advantage audit and correction processes to a higher standard than fee-for-service Medicare. And if I make that maybe concrete with a simple example. So if a beneficiary in traditional Medicare is not correctly coded for a chronic condition like diabetes, that error can flow into the Medicare Advantage benchmarks and payments rates. And so CMS then requires Medicare Advantage plans to correct and adjust similar diagnosis codes without also adjusting the benchmark to account for those fee-for-service errors, the result is a widening payment gap. And I would say, finally, our actions overtime have been very consistent with that good faith posture. We've had nearly 8 years of correspondence with CMS. CMS did not recoup payments related to the transparently disclosed codes, and when we asked for substantive guidance, we were referred back to the existing data submission requirements rather than receiving discretion on the core policy issue.

Great. And I guess given that, can you provide a framework to evaluate the financial impact of resolving this matter with CMS?

I appreciate that question. The reality is this process remains in its early stages. And we are engaged in discussions with CMS, and we are evaluating all avenues of resolution. While it would be premature to provide a definitive estimate at this point, I can offer some perspective on how we are thinking about it. Importantly, we're starting from a position of strength. Our balance sheet is well capitalized. Our cash flow generation is robust. And from where we stand today, we do not expect the financial impact of a resolution, to change our capital deployment priorities or actions in 2026. And so specifically, our outlook for at least $5.5 billion of operating cash flow, gives us the capacity to fully fund dividends and share repurchase activities while continuing to invest in the business. We'll provide further updates as discussions progress. But importantly, we believe this matter can be resolved without altering our long-term strategic or capital objectives.

Right. And maybe beyond capital objectives, what impact could the sanctions have on Medicare specifically for this year?

Yes. We're approaching this quite thoughtfully, but also with the appropriate urgency. First and foremost, our priority is a prompt resolution so we can remain focused on serving our current Medicare Advantage members. Our 2026 adjusted earnings guidance, which we reaffirmed this morning, includes our current estimate of the impact of sanctions, should they ultimately be imposed. And as you know, a meaningful portion of the 2026 enrollment cycle is already behind us, which helps contain the in-year financial implications. And at the same time, we recognize that a prolonged sanction period could carry additional impact. And so we're working constructively and with urgency with CMS towards a very timely resolution. We do remain confident in the Medicare outlook we provided in January, including the expectation of margin improvement to at least 2% this year.

Do you think this impacts your current risk adjustment practices going forward? And what gives you confidence that your practices conform to CMS' current regulations today?

This does not impact our risk adjustment practices going forward, and I appreciate the opportunity to clarify that. And the reason is relatively straightforward. CMS has acknowledged that the submission practices at issue, relate to diagnosis data from April 2023 and earlier. For date of service after April 2023, the regulatory framework was much clearer. Specifically, in 2023, you'll recall, CMS finalized the Risk Adjustment Data Validation or RADV rule and adopted the position that no adjustment would be made to account for error rates in fee-for-service data. And so in light of that clarity, we adjusted our approach prospectively. And specifically, we discontinued the voluntary disclosure process that was tied to our broader request for policy guidance, and we communicated that change directly to the agency. And so when you ask what gives us confidence today? Well, it comes down to governance and controls. We have very well-established compliance-audit governance process in place. We have robust processes to support the accuracy and integrity of the codes we submit, including reviews, quality checks, audits of our risk adjustment vendors. And so maybe to summarize, to be clear, the RADV rule helped clarify how to approach date of service after April 2023, but we continue to stand by our prior position for earlier periods, and we sought guidance on the appropriate treatment of those earlier period items.

Great. And maybe just to follow up on all of this. Does this have broader implications for your Medicare business related to unlinked chart reviews, RADV audits or star ratings performance, anything of that nature?

Thank you. We do not believe this matter [indiscernible] implications for our Medicare business. The issues CMS raised, relate to historical risk adjustment processes. They do not reflect our current operating processes or practices. And on the specific items that you've mentioned, chart reviews and RADV audits, our approach today is unchanged. And as I spoke to a moment ago, we have very well established and mature compliance audit and governance oversight. And finally, on stars and quality, this matter does not affect our stars ratings or quality performance initiatives. We continue to see very strong and positive momentum there, including improvement to about 59% of our Medicare Advantage members and plans rated 4 stars or higher for payment year 2027. So net-net, we view this as a discrete historical policy and payment dispute, not a structural issue in the ongoing performance of our Medicare Advantage franchise.

Great. Let's move on. I guess taking a step back, as you look at the first few months of 2026, how is performance tracking relative to your expectations? And how are results trending across your major business lines?

So as we noted in our 8-K filed this morning, we are reaffirming our full year 2026 outlook, including adjusted EPS of at least $25.50 and a benefit expense ratio of approximately 90.2% at the midpoint. Notably, our first quarter earnings performance is tracking modestly above the outlook we discussed on our prior earnings call. And maybe let me briefly highlight some of the underlying drivers. First, in ACA, we are seeing more pronounced seasonality driven by the shift in membership mix towards Bronze plans. As you know, higher deductibles in these products typically mean utilization is deferred into later periods of the year, and that contributes to lower first quarter medical costs. Second, Medicare and Medicaid are running slightly favorable to our initial prudent expectations based on how cost trend has developed early in the year. And trends in Commercial Group, just to complete the picture, they're running in line with expectations. Third, the influenza-like illness activity, that also moderated as the quarters progressed. That resulted in or will likely result in slightly less pressure than the approximately 20 basis points that we embedded in our first quarter outlook. And so I'd say while this is pretty encouraging, it does remain early in the year, and we'll provide a comprehensive update when we report our first quarter results in April.

Great. I'd like to dig into a few more of those throughout. But I do want to touch on the leadership transition as well. With the announcement of Pete Haytaian's departure and your expanded oversight at Carelon, how are you approaching that responsibility? And how should we think about Carelon's strategic direction from here?

That's a great question. So let me start by acknowledging the important role that Pete played in the development of Carelon. We greatly appreciate his contributions to building and scaling the platform. Importantly, over the last 2 years, he and I have worked very closely together on both strategic direction and operational execution. And I have greatly valued that partnership. And so this transition does not signal a change in strategy, rather it simply reflects a refinement of our management structure, designed to enhance accountability and execution across the enterprise. Carelon remains integral to our enterprise strategy, and my approach is going to be consistent with how we've managed the platform to-date. So driving revenue growth, maintaining margin discipline and delivering durable earnings performance. One of my early priorities is to ensure that we have deep leadership bench strength across Carelon's core businesses. We have very strong leaders in-place today. We're putting an even sharper focus on operating cadence around priorities, decision rights, performance metrics. So execution remains fast and consistent. And then at the same time, consolidating Health Benefits under Felicia Norwood's leadership strengthens enterprise alignment and helps us further simplify our governance and accelerate decision-making. Felicia and I, just on a personal note, we work very closely together, and that collaboration will certainly grow under this structure. And we feel that's going to lead to an acceleration of the flywheel between the Health Benefits and our Carelon businesses, particularly early in areas like pharmacy, behavioral health and specialty management, where we can continue to drive meaningful value.

Great. Moving on to Medicaid. You've noted that trend exiting 2024 was in the double-digit percent range and moderated throughout 2025 to mid-single digits. Can you walk us through what drove that moderation and why you're comfortable assuming mid-single-digit trend continues in 2026? And then related to the flu call-out, the favorability there, does that relate to the Medicaid business mostly?

So as we entered 2025, Medicaid cost trend was running in the low double-digit percent range and historically unprecedented for this program. And that reflected two factors: a sharp step-up in acuity as redeterminations removed healthier members and then sustained elevated utilization across behavioral health, outpatient services and specialty pharmacy. Over the course of the last year, cost trend was impacted by tighter reverification activity and certain state-based program changes. And as we've moved through the year, however, those mix shifts have become less severe and trend has decelerated from its peak levels. While we do not expect -- or sorry, while we do expect continued eligibility tightening and some incremental increases in acuity in 2026, the pace is going to be more moderate than last year. And therefore, for the full year, we are planning for medical cost trend in the mid-single-digit percent range, running modestly above the state rate increases. And ultimately, if I step back for a moment, our performance is really driven by that gap between trend and rate. That gap remains in 2026, which is why we view our guidance of negative 1.75% operating margin as a trough. We expect alignment will improve overtime with rates, certainly as rates catch up to current experience. And then on flu, it reflects the impact across the businesses. Certainly, Medicare Advantage is a meaningful portion of that.

Great. Understood. From my perspective, there seems to be a greater emphasis this year on actions within your control that can potentially impact that Medicaid trend. Can you give us more color on those initiatives and how we should think about the magnitude and timing of their financial impact?

It's a great question, Andrew. And you're right that we should be very focused on factors within our control, which is absolutely critical in today's environment. Our primary initiatives really fall into several buckets. First is tighter medical and pharmacy cost management. I think, care specialty drug management, formulary oversight and disciplined utilization management. Second is expanded behavioral health interventions. We are leveraging Carelon's behavioral health capabilities, including integrated care coordination models and home and community-based support through CareBridge to ensure members receive the right level of care in clinically appropriate settings. Third, I would say, is stronger payment integrity, where we are using advanced analytics to identify outlier billing and utilization patterns and then improve payment accuracy. And we're increasingly applying AI to flag high-risk carrier earlier or high-risk claims earlier, prevent fraud waste and abuse and then stop improper payments before they impact the system. Fourth, I'd say, site of care optimization through Carelon's specialty and post-acute management programs, we're redirecting care to the most appropriate settings. And then finally, operating efficiency, where we are using AI to simplify processes and enhance our digital capabilities. So importantly, these actions are very much aligned to the state priorities. We do view benefit design and program refinement as critical levers to support long-term Medicaid sustainability.

Great. Let's move on to the ACA. In January, you noted that ACA membership following open enrollment was around 1.4 million members. That was up 10% sequentially, and you expect year-end enrollment of 900,000, which is down 30% year-over-year. So as we approach mid-March, can you share how ACA effectuation trends are tracking and how they compare with this time last year?

Sure. Open enrollment activity came in stronger than we initially anticipated with membership up approximately 10% sequentially. A meaningful portion of that growth was driven by our 2025 expansion states, specifically Texas and Florida, where we continue to see stronger traction. In our core Blue states, membership trends were actually very much in line with the overall market. The key variable to your point here is effectuation rates, which is specifically how many members ultimately activate their coverage by paying their premiums. And through February, effectuation rates on both new sales and active renewals, they're tracking in line with typical patterns. I'd say approximately half of our membership base consists of passive renewals and nonpayment rates within this cohort, they're running as expected, and that reinforces our view that the 900,000 members represents a floor for our full year, year-end individual membership outlook.

Right. So effectuation trends, you're saying are in line with historical patterns. So that presumably would be a bit better than what I think the industry had anticipated heading into the year, correct?

That is correct. And I would also note it, as early. We've got January and February. The key variable is obviously going to be April because they've got that 90-day grace period for subsidized passive renewals.

Great. And now that you have a better sense of what your 1Q ACA attrition and membership is looking like, can you put a finer point on the expected margin improvement you see in that business line? And then relatedly, can you give us a sense for how much of your medal mix is shifting this year? You called out the seasonality impact of Bronze. What is -- what does that shift look like in your membership base?

Great question. So we've repositioned our ACA business in 2026 for a more sustainable financial profile. And we took appropriate pricing actions to reflect the higher costs observed in 2025 and the expiration of enhanced subsidies. In terms of mix, we've seen a meaningful rotation to Bronze plan selection this year. And that's important because higher deductibles tend to defer utilization, which creates steeper seasonality and shifts claims later in the year. As a result, we've been thoughtful in how to utilize [indiscernible] impacted as the year progresses. To put numbers around it, approximately 90% of our book is now roughly evenly split between Bronze and Silver, whereas last year, the mix skewed more towards Silver. New sales are running a little bit over half Bronze with maybe roughly 1/3 of members selecting Silver. And in addition, I would say that the percentage of members who receive a subsidy is also broadly consistent with prior years. So while it's still early and while we'll watch our member mix closely as well as the utilization patterns evolve in the coming months, we remain very comfortable with the overall outlook on our ACA business for 2026.

Great. Taking a step back at the enterprise level, you unveiled $1 of incremental investments late last year and $0.75 is included in 2026 EPS guidance. Can you help us understand the timing and nature of that spend? And what return you expect to receive from those investments in the following years?

I appreciate the question. So we are investing thoughtfully around three crucial priorities. First, digital and AI capabilities throughout the enterprise, second, scaling Carelon's capabilities in home-based care and specialty pharmacy services. And then third, quality initiatives like our Star ratings. We are particularly excited to scale AI and advanced analytics across the core operations, and we are embedding these capabilities in how we manage medical costs, pharmacy utilization, claims processing, provider workflows. And we are also increasingly leveraging predictive models to identify inflections in cost trends earlier in the cycle, whether that's emerging utilization patterns, specialty drug exposure or high-risk members with the idea of being able to intervene in a more targeted way, early on. What we feel differentiates us here is the enterprise-wide integration, not point solutions. And our scale allows us to translate data into action quickly and consistently across the organization. So maybe three quick examples here. So first, on cost management, predictive analytics are improving our ability to manage medical cost trends. Second, on administrative efficiency, the AI-enabled automation is reducing manual claims handling. It's also improving payment accuracy and it's lowering, cost per claim. And that creates operating leverage that allows us to then redeploy resources towards much higher value activities. And third, on experience, approximately 22 million commercial members now have access to AI-enabled digital navigation tools like HealthOS, which reduces provider friction through faster approvals and streamlined data exchange. And Andrew, maybe just let me conclude here. We feel we measure success with these capabilities through very tangible outcomes, and that's going to mean cost reduction, cycle time improvement and productivity gains.

Great. Well, we only have a few seconds left. So let's just end it there. Mark, thank you so much for joining us here today. Nate, thank you as well. Please enjoy the rest of the conference.

Thank you very much, Andrew.