All right, keep this room, keep this packed room, rolling. Little bit loud. Gary Taylor, Healthcare Facilities and Managed Care here at TD Cowen. My pleasure, new Elevance Health. Most of you know, one of the largest healthcare company. I was going to say health insurers, but I didn't want getting in trouble. Healthcare companies in the US, 47 million members across all lines of business, commercial group, individual, MA, Medicaid. Its Carelon segment offers pharmacy services through CarelonRx and healthcare services through Carelon Health. And today, we have Mark Kaye, Executive Vice President, CFO, and Stephen Tanal, who's Vice President, Investor Relations.
So I'm going to kick it off with your 8-K from yesterday, just around stars, and you saw the improvement in the 2025 stars, which is what payment year stars, which CMS had originally put out. And the question I kept getting from investors is like: Well, what changed? Did you know, did you guys appeal something? Was something wrong? So kind of just first, why did that change, and then kind of what does it mean for you as you're thinking about 25?
Gary, firstly, thank you very much for hosting Elevance Health and TD Cowen for the opportunity to speak with yourself and with our investor group today. In the fourth quarter, to your question, you know, Elevance Health did file a request for reconsideration with CMS and HHS, challenging the handling of the 2024 Star Ratings for Medicare Advantage and Part D health contracts. And the complaint really included two causes of action. First, Elevance Health contended that it was wrongly held responsible for a single missed call that never reached our system, and that caused multiple MA contracts to fall short of a four-star rating, due to a shared call center, and that obviously had significant revenue implications.
Then, second, Elevance Health alleged the agencies failed to adhere to regulations regarding the calculation of MA Star Ratings, and specifically, the guardrail that limits year-to-year variations in cut points for ratings. Good news, CMS recently informed us, and to your point, we released in the 8-K yesterday morning that four of our Medicare Advantage contracts will have a higher 2024 Star rating as a result of CMS agreeing with our position on the secret shopper call that was never received.
Okay, so I'm taken aback for a second. So a single call, literally a single call, caused $200 million worth of revenue impact in your stars.
I appreciate the accuracy with which you have recounted the implication.
Wow! Yeah, I'll be thinking about that for a while. So that's interesting. So remind us, remind us then, of the, of the Star decline that still is in place. Like, what's sort of the remaining revenue impact? How much of that you think you can offset? Some of that, I think, with group integration and your EGWP plans, but just kind of, you know, fill us in on the stub then.
Yeah, so we previously mentioned that approximately one-third of our members were in group Medicare Advantage plans, and that we were considering diversification efforts around. And CMS's reconsideration decision yesterday obviously obviates that need for contract diversification, as the Medicare Advantage contract, or specifically the group Medicare Advantage contract, that we are looking to diversify away from, is now also 4-star rated. In terms of the remaining approximately $300 million headwind net of provider contractor offsets, we're continuing to assess all options that we have at our disposal to manage the remaining star headwind for 2025, and that's going to include actions like operating expense efficiencies, similar to the business optimization effort we announced in the third quarter of last year, capital deployment, as well as targeted network and product enhancements.
Thank you. Shifting to kind of what's turned into topic of the week a little bit. Unfortunately, Change Healthcare and the cyberattack there, and the outage and the network outage. Can you just, you know, round out for us, you know, whatever you can say empirically, you know, how much of your incoming claims is coming through Change? How much is your outgoing? What other, you know, EDIs do you use? Does pre-auth... Are you using any part of them for pre-auth? How it's impacting claims, inventories, et cetera, et cetera.
Yes, so, Gary, that's an incredibly apropos and, very timely, a very timely question. So Change Healthcare is a significant, clearinghouse for payers and, for providers. It is one of them, though. And if I think back, you know, to, to the use here, providers really use it to submit claims, eligibility requests, and more through the platform, which then ultimately distributes that information to our intake system at Elevance Health, which we call Availity. Initially, we saw a 15% to 20% reduction in the daily volume of electronic data submissions we received from providers, the majority of which were claims related. However, since then, we've seen providers adapt, and today we're about down to a 10% reduction, relative to, normal daily volumes.
Availity, Availity is our primary gateway into Elevance Health for electronic claims and related data submissions from providers, and some providers are now submitting claims directly to Availity, while others have switched their clearing house. And over this past weekend, actually saw a significant increase in activity levels relative to recent weeks, which suggests in a large part that providers are starting to catch up in terms of their submissions back to Elevance. The last point I just want to make on this topic is that importantly, prior authorization volumes have not been impacted in any material way since Change Healthcare is not part of our prior authorization environment.
That's helpful. So when we think about how this might impact the first or second quarter, I guess in my mind's eye, I'm saying, well, unfortunately, it comes right at a time where we're trying to figure out if trend is gonna still accelerate like it was in 2023 or come off, so any lack of visibility, disruption is, it's inconvenient. But just from your running the business perspective, presumably, there's lower claims coming in, but you're gonna keep a consistent sort of reserving, process, accrue IBNR with the expectation that just because you're not seeing claims doesn't mean they're not eventually gonna come in as the backlog clears.
And then just when this gets solved, as, you know, some lag from that would-- when we would see, you know, the inventories and everything sort of clear out. Is that, is that sort of fair, just keep, you know, accruing with the consistent conservative reserving methodology, and that's what we ought to be thinking about?
Sure. For the first quarter, we will definitely continue to adopt a consistent reserving approach to that we've adopted in prior quarters. And as you can imagine, we are working very closely with the impacted providers, both to ensure that they are supported through the claims submission process and to ensure that we have the correct inventory counts at the end of the quarter to be able to appropriately reflect in our financial statements.
Thanks. I want to shift just big picture and back up a few years, just a little bit. Because I remember when, you know, Gail came into Elevance, she laid out, you know, some strategies, some very, you know, company idiosyncratic strategies to gain share across commercial and, Medicare and Medicaid, and I was, I was really... I was kinda-- I think I was kinda like: "Yeah, right," you know? But then, as, as she explained those, I was like, "This is actually really thoughtful," like, and, just, you know, I know it's cliché at this point, but modernizing and modularizing the commercial, offering and, creating sort of the Blue Card equivalent for a group MA and partnering with, Sister Blues on Medicaid, et cetera. And so all of those have seen some progress.
All of those have seen a little bit of disruption at, you know, various points. But, is there still, you know, legs to those three sort of initial pillars of her strategy on the insurance side? I'm not even at Carelon yet, but just on the insurance side.
Let me say we've made significant progress on our strategies to gain share during Gail's tenure, and maybe I'll take them sort of one at a time. In the commercial and fee-based business, thinking about, you know, the cohort that we originally had to begin with, we're squarely on track to achieve our prior goal of more deeply serving our fee-based employer customers to drive per-member profitability much closer to our group risk-based business. In addition, we've also had very strong success in growing our fee-based medical membership while continuing to drive deeper integration, Gary, to the point you just made, with our Carelon Rx and our Carelon Services, and then, of course, our specialty products across the different groups.
As we discussed in the Investor Day conference in March, our enterprise contribution from fee-based business did grow by more than 60% between 2018 and 2022, but we still have a significant opportunity for future growth, and we're targeting enterprise-wide contribution of our fee-based business to be another 50% by 2027. We're gonna continue to do that by delivering on a diverse set of solutions within our health benefits and our Carelon book of business. If I pivot just briefly to the government side, first, on Group Medicare Advantage, we've grown significantly since 2018. We see continued opportunities for growth going forward. Then on Medicaid Blue alliances, you know, we had eight alliances in 2019. We've since launched several more and are now sitting at approximately 16 alliances today.
While they're not necessarily created equal, they all share the obvious advantage of deepening our relationship with other Blues. And here, too, we see attractive opportunities for future alliances as we consider the RFP pipeline, in addition to the benefits, you know, Carelon often derives from working with our alliance joint ventures. Maybe one last comment, then I promise to let you ask another question. The unity of Elevance, you know, one of the things that's really important to me is that, you know, while each of these individually are exciting opportunities, they are components of a broader enterprise strategy. And we think about this as optimizing our health benefits business, investing in high-growth opportunities, and then accelerating growth through Carelon, which is what we refer to internally as sort of our enterprise flywheel.
What I mean by that is Carelon remains very focused on bending the cost curve down and on delivering enhanced consumer experiences, both of which then enhance the competitiveness of our health benefits business, which aids membership growth for our health plans, that in turn then drives growth for Carelon. It's this flywheel effect that, when executed at scale, that's gonna drive sustained growth over the long term and something that I and the management team are very excited about.
Thanks. I want to go to Carelon Services for a moment and think about that. There's a pretty wide spectrum in terms of what your peers are doing there. You know, United's, you know, built a lot, spent a lot of capital and now is even subject to antitrust investigation of, you know, maybe they've spent too much in co- so that's one end of the spectrum, and other companies really haven't, you know, done a lot beyond either PBM and a little bit of specialty, et cetera. You guys have been growing Carelon Services, but I guess still somewhat hesitant to spend a lot of capital there, I think. So maybe just kind of refresh us on where do you think services is going, and, you know, what's, what's the capital you're willing to put into that, you know, business?
Yeah, that's a, that's a great question. So Carelon Services is enjoying strong momentum today, and you see that reflected in our guidance for revenue growth in the upper teens to low twenties for 2024. Also by 2025, we would have passed through what I think of as a top-line headwind associated with our Medicaid membership attrition that's tied to redetermination activity. When I think about 2024 in particular, it's gonna be broad-based growth across various businesses, both internal and external, and really concentrated in two areas as I think about it: behavioral health and then Carelon Insights, which covers our medical benefits management and our post-acute solutions product sets.
With respect to the assets we have in place today, you know, we still have meaningful opportunities to launch and scale new risk-based products that are addressing high cost, complex areas of specialty medical spend, such as oncology, musculoskeletal, renal, for example, as well as whole health risk for our members that have serious mental illnesses.
You know, growth in Carelon longer term is really gonna be driven by those new product launches and by the innovation that we're putting through. As a CFO, if I think back for a second or step back for a second, you know, we are targeting to deploy approximately 50% of our free cash flow towards M&A or, and/or organic, reinvestment back into the business, with the remaining 50% return to shareholders, either through dividends or through share repurchases. On M&A, targets have got to align with our broader strategy, and so we really consider acquisitions in two buckets here.
First, capabilities and services for Carelon that we can scale and which align with our focus on catering to the whole health needs of our consumers, especially those with complex and chronic conditions, and then bolt-on acquisitions for the health benefit segment that complement our existing footprint and provide, you know, deep roots in some of the new markets we're focused on. And, I mean, off the top of my head, I feel like you haven't quite been hitting that 50% of free cash flow on acquisition the last few years, so we're expecting that to accelerate then. I would argue the expectation is for us to continue to be disciplined and thoughtful. Okay.
in the deployment of shareholder capital, and to the extent that we are, on average, not able to deploy to M&A organic reinvestment, we will return it to shareholders. You saw that in 2023 through an average share repurchase program that was slightly larger in nature than what we had done historically. You know, as I was mentioning, a lot of your peers have, you know, invested a lot in value-based care assets, and including making multi-billion-dollar acquisitions of public, you know, companies, et cetera. In the very near term, that space is really struggling, right?
So do you kind of look at that and say, "Well, that's validation of our prudence to not throw billions of dollars around," or you look more at it like there's gonna be a rationalization and sort of a fallout reorganization of value-based care, and, you know, there's potentially more opportunities for us to put capital to work at a higher return? Yeah, I think, you know, you've really got to consider the point at which we're starting here. You know, we've got scale in our commercial business. We've got scale in our Medicaid business. We are growing Medicare Advantage, but we span several markets, and, you know, there is no one-size-fits-all approach that will work for Elevance Health.
But at the same time, we recognize the importance of partnerships with providers, and that's a key part to our vision long term. And so the design of our value-based care strategy is really multi-pronged, and it's built around those areas where we can create the most value ultimately for our stakeholders. As we implement the value-based care strategies, there really are five primary constituents, as I think about it, that we partner with to achieve our shared goals, and three of them are oriented around primary care specifically advanced primary care clinics, physician care extenders, and then aggregators. And these groups focus on high cost, high number, high need members and really equipping, you know, the primary care physicians with the capabilities, the data, and the support that they need to practice value-based care.
Together, you know, we are improving our members' access to high quality, cost-effective primary care and increasingly downside risk sharing. We're also partnering with a number of health systems that are aligned with our transition to a value-based care, and then enabling those partnerships through EMR connectivity and bi-directional data exchanges. If I were to put that in numbers, you know, we are well on track to achieve the goals that we shared at our 2023 Investor Day conference of having 80% of our overall benefit expense in value-based care arrangements in or by 2027, and that's up from approximately 60% today, with approximately half or 40% in that downside risk.
And then briefly on Carelon, you know, again, to my earlier comment, the opportunity here is to carve in those high-cost, complex areas with the idea of bending that cost curve down and creating and supporting that virtuous flywheel that we've started.
... Thanks. I want to move to kind of line of business now, and start with, your commercial risk business. I mean, this, this business seems to have been pretty well underwritten, by the industry and, and you in particular for 2023, as best as we can ascertain, since you don't disclose it, anymore. But, and it isn't as if costs haven't been up in commercial. It seemed to recover sort of pretty quickly post-pandemic, but this is kind of your one, you know, free negotiated market sort of opportunity to underwrite, well. So when you think about 2024, well, is there still commercial margin recovery to go, and, and are you expecting to be fully recovered, in commercial margins for 2024 in the guidance?
Yes, so I, I completely agree with your premise, that the commercial health benefits business has been performing well. We have definitely executed on a margin recovery initiative on our fully insured business, and we've been doing this since 2022, and that really followed the significant margin compression that occurred in those early years of of COVID. We have made progress towards our margin recovery goals in 2023, and we expect another year of strong margin recovery now in 2024. Then after 2024, we expect continued opportunities to enhance margin, but driven more by a mix shift towards fee-based product lines that would be more incremental in nature than the margin recovery you would have seen in 2023 and 2024. On buy downs, we're actually not seeing a lot of activity.
We actually hear more often from employers that are focused on retaining talent in a relatively competitive environment, and, you know, many employers have less room to move in this particular aspect after years of buy-down activities. You know, I was in Texas last week with the Anthem National Accounts team and our customer advisory group meeting, and what I heard the most from our customers and from those large employers is the concepts of affordability, simplicity, and experience. And we are delivering on all three fronts in the marketplace today, and that is contributing to some of the examples that we've shared previously around more than 30 large employers looking to expand their relationship to us from a slice of the business to acting as their sole provider on the medical health benefits side.
Yeah, I appreciate that. I think for the last decade, you know, benefit buy down was probably the most topical issue in commercial coverage. And really, as you said, in full employment economy, seems to have gone to the wayside. Is there anything more important than in commercial in terms of topical than GLP, whether it's in your risk business, where I think mostly you're still not covering unless for weight loss, unless the employer wants to put a rider on top of that and pay for that? But also for the non-risk business, like, is this the most topical issue in benefits costs on the commercial side?
It's a very topical issue. So maybe just on GLP-1s, you know, therapeutics for weight loss. For commercial fully insured members, we really cover this in two states that mandate we cover, or mandate coverage of, GLPs for weight loss drug purposes, and those are California and New York. Approval for coverage, you know, here actually requires prior authorization, based on a physician's attestation of BMI and sort of the accompanying diet and exercise regime. And so we are very prudent in working with both California and New York to ensure that we're compliant with their regulations, especially on the fully insured side of GLP-1 coverage.
Is it your PBM that's primarily doing the pre-auth for GLP for weight loss?
I'm actually gonna phone a friend on this one. Steve? We may or may not outsource some of that, Gary, but we do some of it directly as well.
Gotcha. And then you have gained share in commercial non-risk as well, this year, and I guess I'm interested on why, why that's happening. And then my little sidebar was just, you know, we've seen some of your competitors kind of doing some things where they're, you know, moving providers out of network, but then, you know, creating shared savings between gross charges and net. And anyway, it looks like it isn't always helping the employer, some of the shared savings arrangements, or at least how the mechanics are constructed. So what's kind of driving your share gain in non-risk? Is it, you know, any new product? Is it shared savings? Is it the vertical integration piece? What would you point to?
Yeah, I would maybe highlight here that, you know, growth has really been driven in part by existing clients moving to consolidate from multiple carriers to just Elevance Health. In my mind, that speaks to the differentiated value that we are able to offer to our customers. The focus here of the team is really, again, on affordability, simplicity, and experience as the key attributes behind the growth that we are seeing in the employer market. From our perspective, driving innovation is gonna be really core to continuing that success into the future, and that includes things like our digital tools, clinical capabilities, strategic network capabilities, and ultimately partnering with Carelon to deliver on each.
When I look at our individual client proposals, we work with clients to develop a total cost position, and then we get compensated in part for the value that we create as part of that work. I think about shared savings, which is pretty topical as an approach, but it's not the only lever, and ultimately, clients add up all the levers and the design benefits, and they come up with a total cost position that they're comfortable investing in on behalf of their employees. And where there is incremental opportunity is where we can beat that expectation as Elevance Health, and have mechanisms like shared savings in place to help us earn a portion of that value. And there are a lot of specific examples, maybe one very brief one, advocacy solutions continues to grow quite well within the group, group market segment.
Our message is resonating in the market. We've seen more key clients return back to Elevance Health, connections because of our personalized engagement, some of the quality of our reporting and comprehensive solutions that we offer.
Let's shift to Medicaid. I wanna highlight what seems like a dichotomy and have you explain it to us. But generally, we're saying, as you're seeing, redetermination activity, you're getting paid actuarially sound rates generally from the states, but you do still expect Medicaid margins to come down. So is that just operating, negative operating leverage because this revenue's coming off? Do you actually think that Medicaid MLRs are going up in 2024?
Yeah, so as we shared on the earnings call back in January, our Medicaid business is performing well despite membership headwinds. We currently have visibility into approximately 70% of our Medicaid premium revenue for 2024, and we are encouraged by the rate updates that we've seen. The vast majority are in line with our expectation and are actuarially, as an actuary, actuarially sound. Conversations with the states have been very constructive. They're ongoing. We expect our rates to remain very consistent with what's needed to support the member services in those individual markets.
It's also interesting that states are now using base data from the PHE period and making adjustments to that data for the expected levels of acuity that they see in the individual markets, and we'll continue to work with the states and their consultants on that. Overall, I'd say that we're pleased with the margins on this particular business. We expect those ultimately to normalize after a few particularly strong years in select programs, and our target margin for Medicaid is unchanged. You know, just to make a point here, it can vary significantly, both by state and program. For 2024, we do expect our health benefits business margin to expand by 25-50 basis points over 2023's results.
Say that last sentence again. If the MLR will be down, you're saying, for Medicaid?
We expect the health benefits margin to expand 25-50 basis points-
Okay
... over 2023 for the health benefits segment, so MLR approximately-
Oh, for the whole segment.
... 70% ± 50 basis points.
Right, right, right. What is your Medicaid target margin now? Like, you were earning at the high end of that, and 2024 will be into, into that range?
Gary, can I say that our target margin for Medicaid is unchanged?
Yeah.
Okay.
Okay.
Let's go with that.
All right. I'll look it up.
Yeah.
Medicare Advantage. Nobody seems very happy with the advance notice. I mean, depending on the data you use, you know, second half of the year, MA cost trends per member per month look to be in the 6% to 7% range. CMS has given you a whopping -16 basis points. Some plans are feeling like the actual number is worse than that. And then on top of that, CMS lowered the forward trend assumptions below 4% for both 2024 and 2025, so this isn't very nice. What's the lobbying angle? Do you feel like the industry's aligned on lobbying around this, and do you have any expectation for, you know, for final notice?
Yeah, so maybe two critical points I wanted to make up front. So first, I completely agree with the notion that what we're seeing in terms of the initial rate guide is light, and the second, to make the point that the effective rate does not include fourth quarter data. So keep in mind, they're preliminary rates. There is a historical tendency whereby rates will improve into the final notice period, which we expect at the beginning of April. We have urged CMS to incorporate recent fee-for-service and utilization data, and to explore policy options to ensure 2025 MA benchmarks reflect higher use of healthcare services and cost trends.
The idea here is so that seniors continue to see stability in their costs, their benefits, and choices, and that will ensure that they continue to have an access or continue their access to a range of benefit options that they value and appreciate in 2025 and beyond. We do have a very strong policy process and technical concerns with the proposed changes to both Part C and Part D normalization. Our comments actually on those sections are pretty extensive, and you'll be able to see those as they become public as part of the Federal Register. Then wherever, of course, the final notice lands for 2025, we're gonna take a disciplined approach to our bids, and that means being very thoughtful about balancing growth and margin.
Got it. Well, with that, we're at time. So-