Elevance Health Inc (ELV) Q3 2024 Earnings Call Highlights: Revenue Growth Amid Medicaid Challenges

Adjusted Diluted Earnings Per Share (EPS): $8.37 for Q3 2024, below expectations. GAAP Diluted EPS: $4.36 for Q3 2024. Total Operating Revenue: $44.7 billion, up over 5% year-over-year. Benefit Expense Ratio: 89.5% for Q3 2024, an increase of 270 basis points year-over-year. Adjusted Operating Expense Ratio: 9.6%, an improvement of 150 basis points.

Adjusted Operating Gain: $2.4 billion for Q3 2024 and $8.3 billion year-to-date. Membership: 45.8 million members, flat sequentially; commercial membership grew by nearly 600,000 year-over-year. Days in Claims Payable: 42.8 days, slightly above the targeted range. Full Year Outlook for Adjusted Diluted EPS: Reduced to approximately $33. Full Year Operating Cash Flow: Expected to be approximately $4.5 billion.

Warning! GuruFocus has detected 3 Warning Sign with IIIN. Release Date: October 17, 2024 For the complete transcript of the earnings call, please refer to the full earnings call transcript. Positive Points Elevance Health Inc (NYSE:ELV) reported strong revenue growth of over 5% year-over-year, reaching $44.7 billion for the third quarter. The company is expanding its individual and family ACA plans in three states, which is expected to drive growth in its health benefits and Carelon segments. CarelonRx continues to expand its customer base and recently closed the acquisition of Kroger Specialty Pharmacy, aligning with its strategy to deliver whole health affordably.

Elevance Health Inc (NYSE:ELV) is investing in AI-driven solutions to enhance member and provider experiences, reduce costs, and improve operational efficiency. The company is confident in its long-term growth strategy, expecting to deliver at least 12% growth in adjusted diluted earnings per share annually over time. Negative Points Elevance Health Inc (NYSE:ELV) reported adjusted diluted earnings per share of $8.37, which was below expectations due to elevated medical costs in its Medicaid business. The company has reduced its full-year outlook for adjusted diluted earnings per share to approximately $33, reflecting challenges in the operating environment. Medicaid cost trends are developing worse than expected, with trends running 3 to 5 times historical averages, leading to inadequate rate coverage.

The percentage of members in Medicare Advantage plans rated four stars or higher is expected to decline due to higher cut points. Elevance Health Inc (NYSE:ELV) is facing a timing disconnect between Medicaid rates and acuity, which is expected to persist through 2025, impacting margins. Q & A Highlights Q: You're reiterating your expectation of 12% earnings growth from '22 to '27. Is getting the right Medicaid rate sufficient to achieve this growth, or should we rebase expectations? A: Gail Boudreaux, President and CEO, emphasized that the earnings power of Elevance Health's diverse businesses remains strong. They expect strong revenue growth and are confident in achieving at least 12% EPS growth over time.

However, Medicaid margins in '25 are expected to remain below long-term targets due to timing disconnects between rates and acuity. Q: The Medicaid cost trends seem alarming. How much of this is new to the third quarter versus not having a good reading last quarter? A: Mark Kaye, CFO, explained that Medicaid cost trends accelerated in the third quarter, with unfavorable prior period development. The elevated cost trend is driven by higher membership acuity post-redetermination. While rate increases have been higher than historical averages, they remain insufficient to cover current claims trends.

Q: Can you provide more detail on the utilization trends? What is increasing more than your expectations? A: Mark Kaye noted that Medicare trends were slightly elevated due to the two-midnight rule and a late summer COVID surge. In Medicaid, ongoing elevated trends are most notable in behavioral health, impacting margins through the rest of the year. Q: How do you expect the Medicaid rate to catch up with acuity over the coming year? A: Gail Boudreaux stated that the mismatch between rates and acuity is expected to narrow in 2025 as state rate updates increasingly reflect underlying member acuity. The unprecedented mix shifts in Medicaid due to the PHE unwinding have been challenging, but they are working closely with state partners. Q: Are the rejoiners coming back negatively impacting cost trends? A: Mark Kaye explained that a portion of the trend is attributed to acuity mix shifts, with approximately 60% related to this factor.

The state actuarial rate process aims to capture overall member costs, ensuring rate adequacy over time. For the complete transcript of the earnings call, please refer to the full earnings call transcript. This article first appeared on GuruFocus. View comments