To invest in our business transformation through the development and application of new technologies, including generative AI, which will drive sustainable operational efficiencies over time. And our preliminary outlook also considers the impact of some non-recurring expense reductions we will realize in 2024, as well as incremental investments in AI and digital capabilities.
2025 is likely to be a tale of two halves, with continued headwinds in the first half giving way to recovery in business performance and margins in the second half. Finally, we expect net investment income to be a headwind next year, driven by the lower interest rate environment and higher interest expense.
If I take all of this together, I would simply say we believe our preliminary outlook for 2025 is prudent in light of uncertainties, and we expect to have greater visibility into the financial drivers of the year when we provide detailed guidance on our Q4 earnings call in January.
Okay, great. And thanks for the comments about the business lines. When thinking about the mid-single-digit growth rate, capital deployment's typically expected to provide about 4% of the growth at Elevance, certainly in the context of talking about a 12% growth algorithm historically. Given what you just shared, about 25, will capital deployment contribute its traditional 4% plus to EPS growth in 25?
Yes, thanks, A.J. So our long-term growth algorithm supports at least 12% adjusted diluted EPS growth annually, on average, over time. And approximately one-third of that comes from capital deployment, i.e., M&A and share repurchases. And it's important to keep in mind that these numbers represent long-term averages, with results to vary in any given year. In addition, we have not provided detailed guidance for 2025, and so it's really too early to comment with specificity around any individual components.
However, as I noted just a couple of minutes ago, we do anticipate that incremental investments in generative AI in support of long-term sustainable advantages, net investment income, and some non-recurring 2024 expense reductions will be an EPS headwind in 2025, and that's reflected in our initial outlook. And we certainly look forward to providing more specific information in January.
Okay. Maybe just to ask about Medicaid a little bit, since that's been the primary focus. One of the major questions we've received from investors is sort of the dichotomy between Elevance's commentary and that of some of the peers. It was noted on your Q3 conference call that the recovery could possibly take multiple cycles to get back to normalized margins. I know states need actuarially sound rates, but can they take multiple years to get back to normal?
Is the issue that the required increases for some states are so large that the state budgets can't absorb the needed increase? The company I know said on its Q3 call that it may take several rate cycles. Do we have that right?
A.J, that is a great question, and we have considered these dynamics in our initial outlook for 2025. States have been receptive to industry outreach, and they certainly recognize the current challenges. This is reflected in part in the 2024 average annual rate increases that we've received, which are at the highest level in a decade. Our Medicaid team continues to work tirelessly with our state partners, and this has resulted in a number of updates to our 2024 rates through mid-year adjustments.
While we are executing on best-in-class medical cost management and we're seeing material improvement in rates, reimbursement still lags medical costs. The timeline is not yet clear when rates will fully reflect the cost of our members.
As such, at this point in time, we expect the pressure on our Medicaid business to continue into 2025, though rate renewals throughout the year, notably in January and July, should drive the improvement that we expect will be well underway by the second half of the year. In addition, while rates must be actuarially sound, it's important to keep in mind that states typically rely on reference periods that lag current experience by as much as one to two years.
And while we are sharing emerging experience proactively with the states, it will take time for rates to fully reflect the acuity of the populations that we serve. As for state budgets, I'd simply say while needed rate increases are significant in some cases, so too are the membership declines that we've seen, which helps offset some of that pressure.
Okay, great. I think on the Q3 call, Elevance talked about trends running three to five times higher than normal. Traditionally, we thought of the Medicaid cost trend as being in the 2% to 3% range. So putting those numbers to that would suggest that the company's seeing high single-digit to low double-digit increases in the second half of 2024, perhaps in the range of 6% to 15%. Are we thinking about all that correctly?
Absolutely, you're thinking about those ranges and historical averages correctly. As a reminder, these elevated trends are primarily due to overall higher acuity across our Medicaid membership, and that's related to the significant mixture associated with the redetermination cycle, which we now believe is substantially complete.
In addition, we have been seeing higher trends in the stayers population, which are also elevated relative to historical norms across many service lines, notably behavioral health, inpatient procedures, outpatient home health, and DME, and importantly, we remain in close contact with the states, and we very much appreciate their collaboration.
Okay. I assume the January 1 rate updates that some states will help Medicaid margins improve somewhat in the first half of next year versus the back half of this year. First of all, is that the right way to think about it? And is there any reason to think the trends seen in the Q3 with respect to Medicaid margins will be materially different in Q4, given that there's less help from rate updates?
A.J, yes. And again, I think you're thinking about this correctly. Just keep in mind that we have good visibility into the January 1st rate increases already. And while stronger than normal, they remain broadly insufficient to fully cover the cost of the populations that we serve. So while margins may improve a bit in the early part of next year, it's still going to take time for the business to return to the long-term target margin range.
I would say today we have line of sight into just over half of our total 2025 Medicaid premium revenue. With respect to your question on trend, our guidance takes a prudent view of cost for the Q4 by assuming a consistent level of cost trend for the remainder of the year relative to where we were in September, in addition to considering regular seasonal patterns in our Medicaid business. I'd simply say we continue to believe that our outlook is prudent.
Okay. You mentioned earlier, it sounds like some of the pressure Elevance is seeing goes beyond just the impact of redetermination, and there's some greater utilization on the part of the population this year versus last year that you're retaining. Can you spend a little more time diving into this a little bit more? Is there anything about your geographical footprint that would account for why it sounds a little different than what we're hearing from some of the others? Any thoughts on why your experience might be a little different?
We are seeing trend in the Stayers population, tracking higher than historical norms. I can't speak for our competitors, but simply would note that differences in geographic footprints and member mix across various Medicaid cohorts can create meaningful differences in cost trend, risk sharing, and more. And importantly, if we control for geography and member mix, we do not believe our experience is unique. In fact, we have a leading approach to medical management, and we consistently perform in the upper half to the upper quartile relative to our peers.
Okay. And it was noted, and you referenced this a minute ago, that the company straight-lined the September cost trend, which was viewed as the peak for the remainder of the Q4. Based on what you've seen quarter to date, does this still seem like an accurate level? Are things trending as you expected? We've gotten a number of questions as to why, if every month since April has looked a little worse than the prior month, why September would be the peak.
Yeah, it's a very fair observation. I think it simply principally underscores our desire to set prudent expectations. Our guidance does assume that we will absorb a similar level of Medicaid cost trend in the Q4 compared to September, plus normal seasonal output, plus normal seasonal impacts, and we simply continue to believe our outlook is appropriate and prudent.
Okay. When thinking about the recovery to the company's target margins of Medicaid of 2% to 4%, it sounds like the principal drivers will be getting actuarially sound rate updates. Is there much that the company can do to drive efficiency or otherwise improve performance proactively?
Yeah, A.J, super question. So, absolutely, and we have been taking proactive actions to enhance operating efficiency, appropriately manage medical cost trend, and stay in active dialogue with states to fix issues or fix rate issues expeditiously where possible, and we're doing this all while continuing to invest in the business so as to not curtail Elevance Health's long-term growth potential. I actually start with disciplined expense management, which you can see in our Q3 adjusted operating expense ratio.
Second, we closely track drivers of cost trend at the local level and are working intently to avoid fraud, waste, and abuse in this high-trend environment while ensuring our members have access to affordable, high-quality healthcare. We're also in constant contact with the states, and we're being extra vigilant in identifying rate errors and inadequacies, including inappropriate attribution.
So, for example, high acuity members showing up in lower acuity cohorts or rate cells upon rejoining. So I'd say simply, yes, there is quite a bit we're doing to mitigate the impacts of this challenging operating environment. But as you noted, rate increases that drive reimbursement back to actuarially appropriate levels, they're a necessary condition for Medicaid margins to return to our long-term target margin range over time.
Okay. Maybe I'll pivot over to Medicare Advantage for a few minutes. There's been some questions in the investment community regarding Elevance's approach to benefit design in MA for 2025. The discussion point has been that perhaps the company's been aggressive in adding benefits at a time when others are pulling back. Historically, we thought Elevance generally prioritizes margin stability over enrollment gains. What perspective can you provide regarding the company's approach to MA bids for 2025?
First, let me start by reiterating that we remain comfortable with our Medicare Advantage plan positioning for 2025, including our expectation for individual membership growth that is slightly above overall market growth rates, in part due to stronger retention. We have consistently strived as a company to balance membership and margin growth, and 2025 will be no different.
With that said, it's also important to keep in mind that we took hard actions ahead of the 2024 annual election period to position our MA business for long-term sustainable performance. So if I say that another way, we took more difficult actions than most other payers entering this year, which has allowed us to be much more targeted in our design approach for 2025.
And this multi-year perspective is critical to keep in mind. While our action for 2025 may seem less aggressive than some of our competitors, I'd simply, again, acknowledge or note that our positioning is quite prudent.
Okay. How has the open enrollment in MA progressed thus far? Is there anything about it that's a surprise to you? There's been speculation the market Elevance could see double-digit enrollment growth or even better next year in MA, just as CVS saw outsized growth this year. Would you be surprised by growth in the high teens or greater? Would it scare you from a margin contribution perspective?
We feel good about our MA bids and our positioning for next year, including, again, our expectation for individual Medicare Advantage membership growth slightly above the market rate, in part due to stronger retention. We also expect strong growth in our MA group plans and while it's still early in the AEP cycle, we are pleased with our positioning and growth so far, which is driven in part through improved retention that relates to our relative benefit stability in the face of significant disruption from some of our peers.
As you know, retention is critical as the economics on new members tends to ramp up after an initial period of losses or break-even performance and that's really why we strive to balance membership growth with margin year in and year out. You asked about surprises.
One surprising statistic I'd offer up is that just under two million seniors received a termination notice in the days leading up to the 2024 AEP period. Only around 1% to 2% of those impacted individuals are our members. This has resulted in a fair amount of market disruption, which has impacted members shopping earlier in the AEP cycle.
We're closely monitoring and managing these dynamics at the local level. I'd say it's still early. We're comfortable with our experience to date. We'll have more to say once we get past the AEP period and into open enrollment early next year.
Okay. We did see that the company has taken the approach of making some MA products non-commissionable starting at the beginning of November 1. Is there anything to call out about that?
Yes, absolutely. And this is not a decision that we took lightly, but it was the right thing to do. Heading into AEP, we anticipated significant disruption, and even more so once we determined that nearly two million members have received notices of upcoming planned terminations just prior to AEP. With that in mind, we focused our efforts on markets where we saw the highest level of disruption resulting from competitor actions.
And based on our local market knowledge, we took additional measures to ensure that we are able to serve our members sustainably for the long term. And financial performance and benefit stability is a critical component of that, while also looking to maximize retention of existing members and optimize our growth mix and margin profile.
As such, Elevance Health notified brokers that for select plans, we will no longer pay commissions for new sales of select Medicare Advantage plans effective November 1st for 2025 plan effective dates. Importantly, we're going to continue to pay commissions for member renewals, and we expect that that's going to help further improve the favorable disenrollment rates that we're seeing.
I'd say overall, we're comfortable with the slightly higher than market growth in the individual Medicare Advantage space. We're also continuing to watch Medicare cost trend closely. Recall that we indicated in October that cost trend was elevated but manageable due to greater impact from the Two-midnight rule, and while we're closely monitoring Medicare cost trend, we remain confident in our outlook for adjusted earnings per share growth next year.
Okay. I just want to confirm before we leave MA. It sounds like Elevance has been operating below its target MA margin range of 3% to 5% for 2024, and that the expectation is not for significant change in 2025. Are we thinking about that correctly? What's a reasonable timeframe to expect this business to get back to target margins?
A.J, that is correct. We expect to end the year below our long-term target margin range in Medicare Advantage. We are targeting slight margin improvement in 2025, overcoming the Star revenue headwind we're facing, but ultimately, we expect to remain below our target margin range next year.
As a company, we are committed to achieving our long-term target margins, but getting there is going to require appropriate and continued medical management and a continuation of our disciplined approach to bids, which really means balancing membership growth with margin improvement, all in relation to the funding environment and specifically Medicare Advantage rates, star quality bonus revenue, and accurate reimbursement for the acuity of our members.
Given that CMS growth rates assumed in rate setting in recent years have been insufficient to cover the cost trend in this business, we'd rather not come into a specific timeframe today. You can expect us to provide more color on our long-term outlook during the Investor Day next year.
Okay. Switching over to commercial for a few minutes. The commercial business is the company's largest segment. Further, it's been performing well. One of your peers has called out elevated cost trends, which they are pricing for and taking larger premium increases for 2025 versus 2024. What's the company seeing in the commercial market in terms of cost trend and projected premium increases for next year?
We are really quite pleased with the performance of our commercial business over the past couple of years as we deliver on our margin recovery initiative. We've also seen strong retention in our employer business and strong growth in our individual ACA membership. I'd simply say the commercial business is well on track to achieve its financial objectives. In 2024, for now, cost trends have been higher than historical averages.
They're in line with our expectations and pricing, and we're approaching 2025 with a consistent approach, pricing for a prudent view of forward trend, and we do anticipate that 2025 will be another year of trend above historical averages, but I simply agree with your statement, A.J, that the operating and pricing environment broadly remains receptive and it remains firm.
Okay. The company's been working through a two-year repricing cycle in commercial. Is it possible, as this cycle comes to an end, that the company could see a pickup in enrollment in the commercial segment and further market share gains? In other words, has the two years of repricing in the commercial business been a constraint on enrollment growth in any way?
Yeah, A.J, as I mentioned just a moment ago, we've been really pleased to achieve robust retention levels in our employer business, including commercial group risk-based retention, returning to normalized levels over the past couple of quarters. And this really underscores the tremendous value proposition that we deliver to the market. As you know, we did see some pressure on the commercial group risk-based membership at points in time during our margin recovery efforts.
And while this has been a modest constraint on enrollment growth, the overall impact of our efforts has been positive. Looking forward, with the repricing cycle now mostly complete, we would expect to return to a more normal pattern of membership growth in that business. And with that said, I just want to say I'm really excited about the growth potential associated with our ongoing expansion of our ACA health plan business.
Okay. And I wanted to ask you about that. The individual business has been a standout for growth in 2024. How are you thinking about 2025 for that business? Would your posture toward how active you are in this segment change once there's clarity on the enhanced subsidies beyond 2025? And any thoughts on the ICHRA opportunity? Is that significant for smaller, midsize employers that they might increasingly choose to shift their employees to the exchanges?
We are really pleased with our growth year to date, which has been over 30% in our individual ACA products. We expect another strong year of growth in 2025, aided by our expansion into three new states under our WellPoint brand.
We already have Medicaid and Medicare footprints in each of those three geographies, and so the expansion of our ACA health plans will simply round out our offering, and this reflects our focus as a company on serving consumers across their entire healthcare journey as we continue to execute on our strategy of being a lifetime trusted health partner.
Thinking past 2025, the durability of the enhanced subsidies is absolutely something that we're monitoring. We are committed to growth in the ACA marketplace regardless. It's attractive. It's a complementary business for us, and it has certainly created a promising white space for long -term growth.
On ICHRAs themselves, we are having some discussions with prospective clients, but I'd note that the movement to ICHRAs so far has been quite modest, and should that change, we believe we're well positioned as we have strong relationships with employers and brokers in our markets, and we offer ACA health plans in nearly all counties in our 14 Blue states.
As a reminder, ACA plans are the options employers, sorry, are the options employees can choose from when their employer chooses to adopt an ICRA offering, and this is important because it means that if ICHRAs gain momentum, we can drive growth on our existing individual ACA plans, which reflect both our strong networks and our price positioning in our 14 blue states. Bottom line, we've seen limited interest in ICRHAs to date, well positioned in the markets should that change in the future.
All right. Just wanted to pivot over to Carelon. The company's called out strong performance there. The company's working on a number of new initiatives, including ramping up the insourcing of services recently acquired, such as Kroger Specialty Pharmacy, Paragon, BioPlus. Can you comment on how all this is going and how much of a tailwind to Carelon could this provide in growth next year?
Carelon continues to make significant strides in our strategy to accelerate our enterprise flywheel for growth. And we're excited about the future potential of the assets we are building in both CarelonRx and within Carelon services.
The acquisition of Kroger Specialty Pharmacy, or KSP, closed in October, and script migrations, as you would expect, have already begun. KSP is very well aligned with our strategy and specifically Carelon's efforts to control the levers that matter to deliver whole health affordably while being complementary to our existing businesses, including BioPlus and Paragon.
On BioPlus, specialty pharmacy capabilities continue to mature by adding processes and patient experience improvements that ultimately enable growth and enhance patient services. And the migration of Elevance Health and KSP scripts to BioPlus will continue into 2025 with an ongoing focus on ensuring our members have access to the highest quality options, which prioritizes affordability and choice.
Last quick one, Paragon also closed in March. I view Paragon as an acquisition that deepens our ability to provide affordable, convenient access to specialty medications for those with chronic and complex conditions. We are actively working to scale this asset through the buildout of infusion centers while ensuring alignment with KSP's integrated home infusion business.
Okay. And the company's also struck a deal with Clayton, Dubilier & Rice. It's a form of joint venture that will pursue care enablement assets. Can you tell us a little more about what the company hopes to do here? How quickly do you see this developing?
Yeah, absolutely. And I'll start by highlighting that during the Q3, our joint venture with CD&R closed, forming Mosaic Health, a new national primary care delivery platform. Mosaic Health marks the next step in our journey to bring value-based care to more consumers, partnering closely with providers to drive greater risk adoption and advance our specialty enablement capabilities.
Our goal in forming Mosaic Health was to build a best-in-class, payer-agnostic care delivery platform with significant scale to start. And Mosaic Health will cater to the unique needs of consumers, regardless of their form of coverage, as well as employers' growing interest in enhancing consumer healthcare experience and lowering costs.
I'd say we are excited about the ability of Mosaic to enhance advanced primary care at a local level while reaching national scale. And Mosaic Health serves nearly one million consumers across our commercial Medicare and Medicaid health plans today.
It will operate and expand as an independent company in strong partnership with our health benefits and our Carelon businesses. As a reminder, we expect to increase our ownership in 2028 and beyond, ultimately acquiring the business, which will become a Carelon company.
Okay. And Carelon Elevance has completed a number of acquisitions and transactions to bulk up the business. Presumably, these are largely serving the Elevance population. Where is the company now in its efforts to build up its cross-selling to ASO customers and move the ratio of ASO-like contribution to full risk contribution from five to one to three to one? Where is the company on that transition, and is there any updated view as to when the three to one may be achieved?
We have been making strong and consistent progress towards our goal of expanding the services we provide to fee-based employers. And as a reminder, we are no longer evaluating the opportunity through the lens of per member profitability. Beginning with our 2023 investor day, we moved to a target in the enterprise-wide earnings contribution of our fee-based business by at least 50% by 2027 relative to 2022.
We are well on track to achieve this target through the strong traction in our diverse set of solutions offered by health benefits and Carelon businesses, as well as growth in fee-based membership that was not adequately captured in our prior per member profitability metric. We've had a successful 2025 selling season, and we're encouraged by the ongoing momentum we're seeing in CarelonRx. Sales are strong. Retention rates are in the mid-90s%. Pipeline for new business is good.
To your point, cross-selling pharmacy into the existing fee-based book of business remains a key aspect of our growth target. We've seen meaningful traction, especially in the middle market for some years now, and our win rate continues to improve. On the commercial business, we continue to expect margin expansion driven by the mix shift towards higher margin fee-based product lines, including the pull-through of additional services offered to fee-based employers.
Okay. As you just mentioned, the CarelonRx is seen as principal opportunities pursuing business in legacy Anthem ASO accounts, as well as Medicaid, notably, where the company can partner with other Blue plans. Can you comment on what traction CarelonRx is seeing in pursuit of this strategy?
Yeah. First, let me reiterate that CarelonRx is making significant strides to advance its strategy and accelerate our enterprise flywheel for growth. And we're excited about the future potential of the assets, and we're confident in our strategy. Our successful 2025 selling season is inclusive of strong sales and retention. And we've seen, as I mentioned a minute ago, a robust pipeline for new business.
And we are remaining, and we do remain committed to cross-selling pharmacy. If I step back and I think more broadly about the long-term growth framework for Elevance Health, a key driver of CarelonRx revenue target of low double-digit revenue growth annually on average over time is volume growth from increased fee-based penetration, as well as growth in specialty scripts.
And our recent acquisitions that I spoke about a moment ago really do ensure that we are well positioned to continue creating value for employer and state-based customers, as well as for CarelonRx.
Okay. Another focus for Carelon has been trying to partner with other Blue plans. Can you provide an update on how this is trending? Has the move toward a settlement regarding the long-running Blues antitrust situation created an incremental opportunity? Has the announcement of HCSC that they are going to buy Cigna's MA business meant that other Blue plans are more interested in working with you to develop their government capabilities?
Regarding our ongoing partnership with other blue health plans, we have seen external growth in Carelon improve materially year over year and continue to drive penetration into the blues higher. For example, 2024 includes several notable blue wins in medical benefit management and in post-acute care with the solutions we are developing via capitated risk arrangements through Carelon Services.
Today, Carelon Services has relationships with the majority of non-Elevance Health blues and sells multiple capabilities to more than half, underscoring our belief that Elevance Health is a preferred partner for the blues. Specifically to your question on the Blue Cross Blue Shield antitrust settlement, we recorded our portion of the final settlement related to the provider aspect of the Blue Cross Blue Shield Association multi-district litigation in the Q3.
That came after 12 years of litigation and provides certainty with respect to our provider relationship. The settlement, in our view, preserves the fundamental mission of the Blue system while offering providers greater opportunities to work within the Blue system.
Okay. And finally, I might just ask, can you remind us regarding the company's current priorities with respect to capital deployment, MA, tuck-in deals, share repurchases, dividends? Any of these becoming more or less a focus? Will the MA focus principally be on building Carelon's service offering? Any other areas of interest? And I know from time to time there's discussion about whether Elevance might look at a larger deal and any updated perspective on the possibility of considering a larger deal.
A.J, not much has changed with respect to capital deployment. Strategic M&A remains an important component of future growth. As I shared earlier, we expect capital deployment to contribute approximately a third of our adjusted diluted EPS growth target of at least 12% annually on average over time.
M&A targets must align with our broader strategy, and as such, we consider acquisitions in two buckets: capabilities and services for Carelon that we can scale and that align with our focus on catering to the whole health needs of consumers, especially those with chronic and complex conditions, and then bolt on health plan acquisitions for our health benefits segment that complement our existing footprint or provide deep roots in new markets. At this point in time, we are not considering transformative transactions.
Thinking holistically, we target deploying approximately 50% of our free cash flow towards M&A or organic reinvestment back into the business, with the other 50% being returned to shareholders, including approximately 30% for share repurchases and approximately 20% for dividends. And importantly, these allocations are meant to reflect long-term averages. And in any one year, we have the flexibility to be opportunistic and allocate capital above or below those ranges.
So take, for example, this year, despite the one-time cash outflows associated with Medicaid redeterminations, we are actively repurchasing shares today and expect to hit our original target for share repurchases in 2024. And in summary, I'd simply end with our strategic focus is on opportunities that are going to bend that cost curve down while concurrently delivering improved health outcomes and greater affordability for our members. Thank you.
Okay. I think we're out of time here. I want to express my appreciation to Elevance for participating this year. Mark, Vince, and Nate, welcome aboard as new IR for Elevance. So, I look forward to working with him. And I think the room is clear for the next half an hour, but I appreciate everyone coming in.
Thank you, A.J.