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

Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead.

Good morning, and welcome to Elevance Health Second Quarter 2026 Earnings Conference Call. My name is Nathan Rich, Vice President of Investor Relations. With us on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Felicia Norwood, our Chief Health Benefits Officer; Morgan Kendrick, President of our Commercial Health Benefits business; and Aimee Dailey, President of our Government Health Benefits business. Gail will begin with a review of our second quarter results, the progress we have made against our strategic priorities and targeted investments designed to strengthen the enterprise over time. Mark will then discuss our financial performance and outlook in greater detail. After our prepared remarks, the team will be available for a question-and-answer session. During the call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevanchealth.com. We will also be making forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties may cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

Good morning, and thank you for joining us. Elevance Health delivered second quarter results ahead of our outlook, reflecting favorable benefit expense performance, disciplined execution and the actions we are taking to manage health care costs more effectively across the enterprise. Today, we are raising our 2026 adjusted diluted earnings per share guidance to at least $27, and we remain confident in our ability to return to at least 12% adjusted EPS growth in 2027 off our ending 2026 earnings baseline. Importantly, our confidence is not based on a single line of business or a single quarter. We are seeing progress across the breadth of our portfolio. Medicare Advantage reflects the deliberate actions we took to improve performance. Our commercial and individual ACA businesses are developing as anticipated in Carelon and our AI-enabled capabilities are becoming more meaningful contributors. We remain focused on disciplined management of the Medicaid business as the operating environment remains dynamic. The broader enterprise is performing against the framework we laid out and the targeted investments underway are designed to strengthen the durability of that performance. Health care should be easier to navigate and more responsive to the people it serves. Consumers expect more from the health care system, greater transparency, better connectivity and more personalized support that meets their needs and we share that expectation. At Elevance Health, trust is earned through every interaction. To be our members' lifetime trust and health partner, we must continue to make health care simpler, more personal and more affordable. That's why we're accelerating investments in capabilities that directly support our strategy. These capabilities are tied to the operating levers that drive performance, earlier detection of medical cost trend, more precise clinical intervention, a simpler member experience and better provider connectivity. Let me share a few examples. First, we are managing medical cost trend with greater speed and precision. In a dynamic environment, we're improving our ability to detect cost pressures earlier and respond quickly with targeted action plans across our clinical network, payment integrity and operating teams. In many cases, we've compressed months of work into days. These capabilities are already helping us identify emerging cost drivers more quickly and deploy more focused interventions across the enterprise. Second, we're improving how members access care and support through Sydney Health Concierge care and proactive member engagement. We're using data digital tools and dedicated care teams to help members navigate benefits, schedule care, manage conditions and close gaps in care. The result is a more proactive seamless and personal experience. Third, we're expanding Carelon value-based solutions to address complex and fast-growing areas of health care spend. CareBridge extends Carelon's whole health model into the home, where better coordination can improve outcomes and lower costs. CareBridge can generate medical savings in the mid-teens for these members and we're expanding it to new markets. Finally, we're reducing friction for care providers and members. With Health OS, we collaborate with providers earlier in the care journey to review care plans, reduce delays and support better clinical decisions. In health systems, where these workflows have been deployed, we've seen significant reduction in avoidable denials, documentation requests and administrative friction. Together, these investments strengthen our ability to manage trend and improve the experience for members and care providers. They're directly tied to the areas that matter most to long-term performance, earlier trend detection, more precise intervention and a scalable operating model. Turning now to our performance by line of business. Let me start with Medicaid because I know it's an important area of focus for investors. The Medicaid environment continues to be dynamic, and we're managing it with discipline. Second quarter performance supports our full year framework, reflecting stronger-than-expected rate updates membership and acuity that remain broadly aligned with our assumptions and targeted actions against known areas of elevated trends. Based on what we see today, our Medicaid operating margin outlook remains appropriately prudent and unchanged from our prior guidance. Our outlook reflects a balanced view of the second half, an elevated trend environment improving rate alignment, acuity that remains broadly consistent with our expectations and the growing impact of the actions we are taking to manage health care costs. We continue to see 2026 as the trough year for our Medicaid margin with improvement over time, supported by better rate alignment and the maturation of our care management actions. Medicaid remains an important part of our portfolio, and we are managing it with clear strategic and financial discipline. We regularly assess each market based on strategic fit, operational requirements and the ability to generate an appropriate return on capital. We recently reached a mutual agreement with the District of Columbia to exit the DC Medicaid market. As we continue our assessment, we expect to exit additional Medicaid markets over the next 12 to 18 months, where we do not see a path to sustainable performance. These are targeted portfolio actions, and they do not change our commitment to serving Medicaid members in markets where we can deliver value for states, members and shareholders. In Medicare Advantage, we are seeing clear evidence that the deliberate actions we took to reposition the portfolio are translating into stronger performance, disciplined plan design, a more focused mix of D-SNP and HMO products favorable claims experience and the growing impact of our care management programs support our path to at least a 2% operating margin this year. Our 2027 bids were developed with the same discipline, reflecting a prudent view of cost trend, continued focus on margin improvement and stability in the benefits that members value most. We will continue to manage this business with focus on delivering long-term value for seniors and sustainable performance for the enterprise. In the individual ACA business, Performance is developing broadly consistent with how we priced and planned the year. Member retention has been encouraging, and the composition of the risk pool remains broadly aligned with our assumptions. As expected, the higher mix of Bronze plans creates more prance seasonality, and we are not extrapolating early year favorability as we prepare for 2027. Our focus remains on offering value for consumers while improving the long-term financial sustainability of this business. In commercial, the market is focused on affordability and experience. and that aligns directly with our differentiated offerings. Employers are looking for solutions that lower health care costs, simplify navigation and better support their employees. Our integrated medical and pharmacy model is resonating, and we're seeing strong demand for our patient advocacy, behavioral health and digital engagement capabilities. Turning to Carelon. Performance remains in line with our expectations, and we're focused on scaling solutions that improve outcomes for members with complex and chronic needs. Behavioral health is a clear example. When members need additional support, our programs help identify those needs earlier, connect them to appropriate care and coordinate services more effectively. Through stronger member engagement and fewer adverse events, these programs have delivered 10% cost savings on average. As we expand these capabilities across new populations and external client relationships, Carelon is becoming an increasingly important and durable driver of enterprise growth over time. In summary, our second quarter performance gives us increased confidence in the year. We're raising our earnings guidance, managing the business with discipline, scaling Carelon's value-based capabilities and investing in the areas that matter most to our future financial performance. Before closing, I want to thank our associates. The progress we are making is a direct reflection of their focus, discipline and commitment to the people we serve. With that, I'll turn the call over to Mark to review our second quarter financial results and outlook in greater detail.

Thank you, Gail, and good morning, everyone. Elevance Health reported second quarter adjusted diluted earnings per share of $7.45, which exceeded our outlook. The strength in our operating performance reflected favorable benefit expense performance in Medicare Advantage and individual ACA, disciplined expense management and continued execution against our care management initiatives. We continue to make targeted investments in the capabilities that support our long-term growth. In the quarter, we also recorded a net below-the-line benefit of $0.80 per share. primarily related to valuation adjustments within net investment income. Importantly, we intend to use this nonrecurring benefit to fund onetime investments in the second half of the year that advance the capabilities Gail discussed. These investments are focused on medical cost management, member engagement provider connectivity and Carelon's integrated capabilities. They are intended to strengthen our operating model and improve the consistency of our performance over time. Our second quarter operating results support raising our full year 2026 adjusted diluted earnings per share guidance to at least $27 while preserving appropriate prudence in our outlook. Similarly, we now view at least $26 as the appropriate earnings baseline for modeling purposes, and we remain confident in returning to at least 12% adjusted EPS growth in 2027 off this higher earnings baseline. Now turning to our second quarter results. We ended the quarter with 44.9 million medical members. As expected, the sequential change was primarily driven by non fee-based customer transition and attrition in our individual ACA and Medicaid businesses. Operating revenue totaled $49.8 billion an increase of 0.8% year-over-year, driven by higher premium yields and product revenue, partly offset by lower health plan membership. In Medicaid, second quarter performance supports the full year margin framework we laid out earlier this year. Cost drivers remain elevated and concentrated in the categories we have discussed previously, including behavioral health, specialty pharmacy, outpatient surgery and emergency department utilization. Our outlook assumes this operating environment persists through the balance of the year. rate updates received during the quarter were higher than anticipated, and membership and acuity remain broadly aligned with our expectations. We are also acting directly on the cost drivers we are seeing through clinical oversight enhanced payment integrity, earlier interventions in behavioral health and network management. Taken together, our full year Medicaid operating margin outlook of approximately negative 1.75% and remains appropriately prudent based on what we see today. We view 2026 as the track for Medicaid margins with improvement over time as rates incorporate more recent experience and our care management actions mature. In Medicare Advantage, results were stronger than expected and were contributed to our outperformance in the quarter. The intentional portfolio actions we took for 2026 are translating to improved performance disciplined plan design, a more focused product mix, favorable claims experience and our capabilities all support our path to an operating margin of at least 2% this year. Our 2027 bid submissions placed an emphasis on plans where we can deliver sustainable value for seniors, particularly dual eligible members and appropriate returns for the enterprise. In our individual ACA business, favorability in the quarter reflected the more pronounced seasonality associated with our higher mix of bronze plans, which is contemplated in our outlook. We have now incorporated the final 2025 CMS risk adjustment results, which were favorable to our prior estimate. We are prudently reestablishing the majority of the prior year favorability in our current year risk adjustment accrual given current market dynamics, member mix and claims experience that is still maturing. Member retention remains modestly ahead of our expectations and we now expect to end 2026 with at least 1 million individual ACA members. Commercial group performance was in line with our expectations, with cost trend remaining elevated but consistent with the pricing approach we have taken, we have applied the same discipline to the 2027 selling season. Turning to Carelon. Performance remains consistent with the outlook we provided at the beginning of the year. In CarelonRx, we are pleased with early progress in the 2027 selling season, reflecting demand for our integrated medical and pharmacy offering. In Carelon Services near-term earnings reflect ongoing investment in the platform and the scaling of newer, risk-based programs, which naturally take time to mature. The capabilities we are building are directly aligned with the operating priorities Gail discussed. Now moving to the balance sheet and operating cash flow. Days in claims payable were 45.4 days as of June 30, an increase of 2.9 days year-over-year. Operating cash flow totaled $1.9 billion in the quarter, driven by our strong operating performance. Second quarter cash flow also benefited from the timing of the state Medicaid pass-through payment received in the quarter that was remitted in July. Additionally, we made an initial remittance to CMS of $342 million in the second quarter related to the matter discussed last quarter and our estimate of the potential total financial exposure remains unchanged. As of July 9, we completed all steps required by CMS and have subsequently received written confirmation from CMS that sanctions will not be imposed and the matter is closed. We are pleased to have reached this resolution and look forward to offering our Medicare Advantage plans to beneficiaries without interruption. Based on the strength of our operating performance and our outlook for the remainder of the year, we are raising our full year operating cash flow to at least $6 billion. Turning now to our revised outlook. We view our updated 2026 adjusted diluted earnings per share guidance of at least $27 as prudent and appropriate, supported by current operating trends. Beyond our EPS outlook, the principal operating elements of our full year framework remain unchanged, so we now expect our adjusted operating expense ratio to be in the upper half of our full year guidance range. With respect to seasonality, we expect third quarter adjusted EPS to represent approximately 17% of our revised full year guidance. Our confidence in returning to at least 12% adjusted EPS growth in 2027 of our ending 2026 earnings baseline is supported by multiple levers, including continued execution in health benefits, growth in Carelon, operating efficiency and disciplined capital deployment. With that, operator, please open the line for questions.

[Operator Instructions] For our first question, we'll go to the line of A.J. Rice from UBS.

Maybe just to drill down a little bit on your Medicaid comments if possible. It sounds like the rate updates are coming in more favorable. When you think about the trajectory over the course of the year, that 1.75% negative margin, is the back half more favorable than the front half? Is there an expectation on where you'll exit the year? And then if you could just provide a little color more on your thinking about exiting markets is -- I know you probably don't want to mention the states, but can you give us a sense of overall sizing maybe of how much we're talking about there? And is this in any way driven by future things like work requirements? Or is it basically driven by just current discussions with states and where you feel you're landing?

Thanks for the question, A.J. Let me -- it might be helpful to sort of first frame kind of the overall quarter and how we're expecting the year because I think that's important. And then I'll ask Mark to comment more specifically on your Medicaid questions, which I think are very important. As you take a look back at just what we've reported, we're very pleased with the performance we've seen through June and second quarter results exceeded our outlook. And I do think they very much focus on the disciplined execution given that, as you know, we've raised our guidance to at least $27 while maintaining, I think, which is important, a prudent view of the second half. And again, thinking about our overall performance, the second quarter was broad-based. We saw favorable performance in Medicare Advantage and individual ACA and continued disciplined execution in commercial with all also ongoing progress against Carelon, which is scaling quite nicely and seeing some good benefits from the actions we've taken to manage medical costs. Specifically to Medicaid, as I shared and Mark shared in his comments, is -- remains dynamic, and we are managing that business with discipline. What's important to think about is that original full year framework is still intact from what we see today, and it's supported by stronger-than-expected rates, membership and acuity that are broadly aligned with our assumptions and very specific focused actions around the known cost pressures, which really haven't changed over the course of this quarter or last year. And importantly, we're seeing those begin to mature the actions we're taking, and I think that's important, too. But again, we want to remain prudent given the dynamic environment that we're in. I also just want to comment briefly on the investments we're making on the nonrecurring below-the-line favorability we saw. These are targeted investments, and they're very focused on long-term performance acceleration. So strengthening medical cost management, the provider connectivity work and improving operating efficiency. And I think it's really important for everyone to understand, these are onetime and nonrecurring investments that will not go [ on beyond '26 for these we found it was important because it wasn't part of our recurring earnings. So taken together, we see a lot of confidence in 2026. And quite frankly, a lot of confidence now in these emerging areas to return to our at least 12% adjusted EPS. With that, I'll ask Mark to comment more specifically on your Medicaid questions so that we can round out the totality of what you asked.

A.J., appreciating you may get a couple of Medicaid questions on the call today. Just to answer you specifically, we do expect the second half Medicaid margin profile to improve from the second quarter, and that's going to be supported by that favorable July 1st rate activity as well as our continued execution against the cost pressures that we've been discussing.

Next, we'll go to the line of Justin Lake from Wolfe Research.

Maybe I'll just follow up on A.J.'s question here in a couple of ways on Medicaid. First, maybe is there anything you can give us in terms of order of magnitude on some of the exits you talked about maybe versus that $57 billion kind of Medicaid run rate on revenue? How do we think about those exits in terms of sizing? And then you talked about acuity being in line with your expectations in Medicaid. And I find that interesting just because you had 1 of the more conservative assumptions on acuity impact the trend this year. I think it was in the 2% to 3% range. So I'm curious, are you -- as Medicaid lives keep a trading, are you seeing the acuity of those members, the utilization continuing to tick higher, meaning the healthier members that keep a trading, is it kind of in line with that 2% to 3%?

Justin, thank you for the questions there. Let me go ahead and start off by saying that Medicaid cost trend in the second quarter developed broadly in line with the framework that we expected. Costs remain elevated, but the drivers are identifiable and they're actionable. And they're primarily in the categories that we spoke about in the scripted remarks here, behavioral health, including ADA therapy, emergency department utilization, outpatient surgery and specialty pharmacy. Importantly, I would say we are not seeing a new step-wise acuity reset. Membership and acuity remain broadly aligned with our assumptions and the incremental pressure is increasingly coming from utilization among members who remain in the program. And that distinction is really important because it gives us very clear operating levers. From an outlook perspective, the second quarter really reinforced our confidence in the full year Medicaid framework. The July rate activity was constructive. It was also modestly favorable to our expectations, and that shows that the rate environment is moving in the right direction as states incorporate more recent experience. And at the same time, we are staying quite prudent. Specifically, we are not assuming a material improvement in Medicaid trends in the back half of the year. And so the way I'd summarize it is as follows: elevated but understood trend, improving rate alignment, targeted cost actions underway and a full year margin outlook that we believe is appropriately prudent.

Next, we'll go to the line of Stephen Baxter from Wells Fargo.

I know it's still pretty early in the year for the exchanges and you aren't carrying the favorability that you've discussed largely forward at this stage. But would be great to try to understand, as you got a better perspective on where risk adjustments coming in for the first half. Like how do we think about where first half performance was versus your expectations? How are you thinking about your risk adjustment position in 2026? And I know you're reestablishing most of the 2025 risk adjustment favorability that you saw in the quarter. But any sense of what did actually flow through the results in the quarter would actually be helpful.

Steve, thanks very much for the question. I think the way I'd frame this is that the final 2025 risk adjustment results were quite favorable relative to our prior estimate and that's reinforced our confidence in our estimation and reserving process. And you're able to give a sense of the magnitude of that simply by looking at our disclosures in the earnings release in terms of the sequential move quarter-over-quarter in reported ACA revenue. At the same time, we are not extrapolating that favorability into 2026. From our perspective, the ACA market is still developing, member mix has changed meaningfully. And obviously, the shift towards Bronze plans has implications for both premium yield and risk adjustment. So as we move into the second half of the year, we are reestablishing much of that 2025 favorability in our 2026 risk adjustment accrual. And again, I'd call that really intentional prudence.

Next, we'll go to the line of Ann Hynes from Mizuho Securities.

Can you remind us in all your divisions? What your trend actually was for Medicaid, ACA and MA in guidance and what Q2 actually came the final results were.

Very much appreciate the question this morning. And maybe let me take that really from the perspective of Medicaid to start. And I'm going to combine your question a little bit, what Justin asked earlier just around utilization and acuity specific medicate. I think a little bit more color here would be helpful to put out. So I would say both utilization and acuity, especially in Medicaid, do remain part of that equation. But that persistent pressure now is increasingly driven more by utilization among members who remain in the program. And obviously, we saw during the post PHN winding, the largest issue was really the acuity reset of lower cost members really exited the program. And I would say that dynamic hasn't disappeared, but it really is moderating. We are seeing members leave Medicaid today who are still lower cost than those that are saying, but that gap has really significantly narrowed. And that's really important to us as we think about our trend outlook for the remainder of the year. And then in terms of ACA, I would simply say here that trend was very much in line to slightly favorable for the second quarter, that's supported by those favorable volume and timing dynamics I'd simply note here that we don't view the quarter as a change in the earnings profile for the year, and that favorability reflected at more Bronze plan orientation as well as that better early membership coming in.

Next, we'll go to the line of Andrew Mok from Barclays.

Wanted to follow up on the seasonal favorability. You called out $0.25 of favorability this quarter, which grew sequentially from $0.15 in the first quarter. I understand that you're not taking credit for that in guidance. But can you help us understand why this increased sequentially when you presumably had better visibility into underlying membership and benefit design. And then relatedly, is there anything you're seeing that suggests that this first half upside would reverse in the back half of the year? Or is that just a conservative stance on your end?

Andrew, thanks very much for the question. Let me go ahead and start here by reiterating sort of a comment from Gail earlier that the quarter really reflected very solid execution, reflected a diversified set of earnings contributors. And the financial flexibility to now invest in further capabilities that are going to make our performance more durable over time. In the quarter, we had about $0.50 of operating outperformance. And I would say that was about equally split between Medicare Advantage and the individual ACA. In Medicare Advantage, that favorability primarily reflected the deliberate portfolio actions we took for 2026. Our favorable membership mix, better claims experience. And those actions were really intentional, right? We prioritized sustainable economics, and we're delivering on what we committed to do. In the individual ACA to your question, the favorability really reflected 2 factors: First, we saw more pronounced seasonality to your point from a higher mix of bronze plans. That was about equal in magnitude to what we saw in the first quarter. And secondly, we did see that final ACA 2025 risk adjustment results come through favorable to our estimate. We have reestablished the vast majority of that. And so as we think about the outlook for the full year, this is really about us being prudent for the second half rather than anything else.

Yes. Thanks, Mark. And I guess I would just like to reiterate Mark's comment given the last several questions. One, around -- there are no surprises. Our outlook remains prudent, as Mark said, and in explaining each of the lines of business. So we feel very much aligned, but we wanted to make sure in this environment that we do remain prudent.

Next, we'll go to the line of Lance Wilkes from Bernstein.

Could you talk a little bit about the bidding posture you've got in ECA and MA for '27 as far as your orientation towards growth versus further margin recovery. And maybe if you can just give a clarification on the Medicaid exits. As far as criteria, are you looking at particular types of programs, blue states or maybe your market share position in states would be important criteria for determining which ones would be more likely to be subject to exit?

Great. Well, thanks, Lance. I'm going to have Felicia to address the ACA question and then Aimee Dailey, who leads government business to talk about the market exits in Medicaid. So Felicia?

Yes, and thank you for the question, Lance. As we think about ACA for 2027, I think we are taking a very consistent posture with what we had in 2026. So we are going to be very focused on making sure that we are achieving the sustainable margin through very disciplined market-specific pricing that will reflect the cost trend and certainly the evolving morbidity. When you look at our prioritization, obviously, having plan options that are going to drive that sustainable performance becomes very important for us. So we've been very pleased with how we've seen the marketplace shift in terms of bronze plans. We think that it's going to be very important to our strategy as we drive sustainable margins going forward. And I do think the expectation for us is to continue to prioritize affordable plan options that are going to continue to drive sustainable performance for the enterprise. In terms of Medicaid exits, I will say this. Medicaid remains a scale set a very core part of our diversified portfolio. But we are going to be very disciplined around where we participate. We made a mutual decision with DC to exit. And we feel good about that decision, and we will make sure that there is continuity of care for our members as we go through this transition. But if we take a look at our overall portfolio, we regularly assess all of the markets that we participate in. And as a result of this, we will plan to exit additional markets where the economics don't support sustainable performance. At the end of the day, Medicaid participation has to make strategic and financial thrust within our diversified portfolio. So where we have alignment with duals, our Carelon strategy and a sustainable operating framework, we remain committed. And where those conditions are present, we're going to take the disciplined action that we need to. Bottom line, we are very committed to supporting members in states where we can deliver sustainable value going forward, and we'll continue to work very closely with our state partners.

Thanks, Felicia. And I know, Felicia, it was very comprehensive, but maybe just some comments from Aimee as well.

Yes. I will just reiterate that Medicaid remains a core part of our diversified portfolio. We continue to be committed to the program and the members we serve. Our participation has to make strategic and financial sense, as Felicia said, but we will remain committed in this market and our -- we'll evaluate it with discipline.

Next, we'll go to the line of Lisa Gill from JPMorgan.

I appreciate the comments on your investments, onetime nonrecurring. But can you help me understand how that's going to play into the growth rate going into next year? What kind of operational leverage you can get? And more specifically, are these investments in technology and people. How do I think about the specific investments that you are making? And again, what the return will be as we get into '27.

Thanks, Lisa, and thanks for the question. So I think, again, going back to reframe, the investments, as I said, are onetime and nonrecurring. So those -- the investment costs in '26 will not be occurring to 27. And also, we are looking at these as long-term durable capability. Some are technology, but honestly, they're all driven based on improving capabilities that we have outside of the business. So as we think about that operating impact, it's really an enabler of all of the key capabilities we talked about. They're aimed at the levers that matter most to our long-term performance. So strengthening medical costs. In my opening comments, I talked about moving from months of identification to days and hours. And again, we're using this to strengthen our data and our insight capabilities and then take actions faster on medical cost management. It's also about simplifying the member experience, improving provider connectivity and enhancing our claims accuracy and driving greater operational efficiency. We feel very confident in returning to our adjusted at least 12% and earnings growth next year. And I think these are the kinds of things that give us that confidence because it gives us the leverage that we're talking about. So just a couple of things to make this real. For members, what we're looking at, we've shared Sydney Health touches about 22 million members now. That means fewer handoffs, better navigation, more proactive support concierge care and proactive member engagement helps us support members upfront faster because the data is now centralized and members can navigate much more easily. Medical cost management is really about investments in analytics and AI-enabled tools that, again, allow us to identify those pressures earlier but more importantly, allow us to implement clinical oversight, payment integrity, changes in our network, those kind of interventions. Those take time to mature but we need the data. We need the infrastructure in place this year, and we expect to see that next year. And it's not just going to be in our cost structure, our expense cost structure, we expect to see it in our medical cost structure. That's what these investments in medical management are about. And then I'll just conclude on 2 things. On provider connectivity, we shared with you Health OS and the related tools. Those really are about reducing the documentation requests, improving prior authorization, getting us to 80% real time improving payment accuracy and reducing friction, those are all, I think, really important components of what we're doing. And finally, Carelon, which is an important strategic asset for us scaling those value-based solutions in the complex areas of spending. CareBridge has been very successful for us. We're looking to continue to accelerate the deployment of CareBridge behavioral health and oncology or 2 other areas. So we expect those benefits to be embedded and build over time. But I think the objective is straightforward. Use this nonrecurring opportunity to accelerate capabilities that manage how we manage costs and simplify our experience for our long-term goals. So thanks very much for the question.

Next question, we'll go to the line of Kevin Fischbeck from Bank of America.

I just having a little difficulty reconciling some of the commentary that you made on the Medicaid side. You've talked a lot about the volatility of things there. But I guess when we think about how you've talked about things, you said rates are coming in better, and it seems like everything else is coming in line, but you haven't improved your outlook for margins. So why isn't there a lift if rates are coming in better? And then if rates are coming in better, why are we talking more about exiting potential states today than we have a couple of years ago. It seems like is the opposite of an improving rate outlook?

Kevin, really appreciate the question and the opportunity to talk through this a little bit more. Let me start off by saying that our second half Medicaid trend outlook is very consistent with our first half experience and in the sense, quite prudent. And there are 3 important points I wanted to make here. First, the July rate activity was favorable. And as we mentioned earlier, that does confirm that the rate environment is moving in the right direction though the full year benefit is obviously naturally moderated by the timing and the portion of the book that's affected. Second, membership and acuity are broadly aligned with the assumptions embedded in our initial outlook, and that's encouraging. And third, we continue to see elevated utilization, but in the categories we've been discussing. And that pressure is increasingly driven by those identifiable utilization patterns, which allows us to respond more effectively. When we think about the rate update as of July 1, you could think about it still being in that mid-single-digit percent range, but maybe towards the upper end of mid-single digits as opposed to the lower end when we originally started the year. and that should give you enough for modeling purposes.

And Kevin, specifically to your question around exits for markets, as Felicia shared, we're taking a portfolio look at all of our states, quite frankly. We did this in Medicare last year. we made, I think, very disciplined decisions around long-term profitability as well as long-term fit for the company. We've been doing the same thing in Medicaid and have made those same kind of decisions. So it's not just about what 2026 or '27 look like. This is really about the long-term sustainability of those markets. how they align to our dual footprint and some of the other considerations we have. So we actually feel that this is the right time to be very disciplined about these actions and look at where the long-term trajectory is for the places that we want to participate. So thanks very much for the question, the opportunity to explain that Mark.