Hi, good morning, and welcome to the 27th Annual Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Facilities and Managed Care Analyst here at Barclays, and I'm pleased to be joined on stage with Mark Kaye, CFO of Elevance Health, and Nathan Rich, VP of Investor Relations. Welcome to the conference. Let's start with Medicare enrollment. The latest CMS data shows your total Medicare membership is tracking 35,000, or about 1.5% above the high end of your Medicare Advantage guidance, which you reiterated through an 8-K late afternoon yesterday. Can you help us square the February data with your reiterated guidance, Mark?
Thank you very much for the question, Andrew, and I appreciate the opportunity to speak with you this morning and to Barclays for hosting. I very much look forward to our conversation. Let me start by emphasizing that our outlook for 2025 Medicare Advantage membership remains unchanged from our fourth quarter earnings call. In the 8-K that we released yesterday, we reaffirmed our MA membership expectations, which includes high single-digit growth in individual MA and then planned double-digit growth in group MA, stemming from an expansion of existing customer relationships in 2025. To your specific question, while the February CMS Enrollment Files accurately reflect our membership, there are a few important factors that we want investors to consider and which inform our full year outlook.
First, effective March 1, we will not retain a cohort of our disenrolled membership related to a known footprint change in one of our Medicaid states. I do want to be clear that this outcome was expected and factored into our full year membership financial guidance. Also, consistent with our fourth quarter earnings call messaging, we expect minimal membership growth over the balance of the year as we maintain our marketing adjustments taken during AEP to optimize our member mix and improve retention. Taken together, the expected footprint change and lower in-year growth provide confidence in our full year guide of 2.2-2.25 million Medicare Advantage members.
Got it. Okay, so we're 35,000 above right now. You're saying there's a contract change coming, so that should reduce you about 30,000 or so, and there's no expected growth for the balance of the year. Should we be thinking about the upper end or the high end of the range at this point?
I think I would be comfortable just to say the range of 2.2-2.25. Thanks, Andrew.
Understood. Given some of the growth in the retail membership this year, how does year one new member profitability compare to continuing membership, and what are you expecting for this year's new member cohort specifically?
Generally, first year Medicare Advantage members tend to operate at a slightly negative margin, though this can vary by product and benefit type. That is why we were pleased to realize strong growth in our HMO products this year, which have more coordinated care and predictable cost patterns than PPO plans. In addition, the high levels of retention that we saw for 2025 is another important factor in our outlook as we are better able to improve access to affordable care for members that remain with us.
Got it. From a margin perspective, I think you're expecting fairly stable margins year over year. There seems to be a few moving pieces with the pricing, benefit design, membership growth, core utilization, and even the Stars headwind. Can you share with us where Medicare margins landed at the end of 2024, and maybe walk us through the puts and takes to bridge to stable Medicare margins for 2025?
Yeah, I'm happy to spend some time to walk through the drivers here. To start, our Medicare margins in 2024 were in line with our expectations. As we've previously stated, we were below our long-term target range. Coming into last year, we created a stable foundation through targeted geographic exits and proactive benefit design changes. These actions, in addition to disciplined cost management, help offset some of the funding challenges, elevated cost trends, as well as pressure from the Two-Midnight Rule . For 2025, our guidance anticipates costs are going to remain elevated but manageable. Strong retention, disciplined cost management, and improved recognition of member acuity following elevated utilization trends in recent years support our outlook for margin stability. Additionally, as I mentioned just a moment ago, we were pleased with our composition of membership from both a product and a geographic standpoint.
Finally, while it remains early in the year, we feel good about our positioning in Medicare, having seen a couple of months of results.
Got it. Understood. Maybe your comments around 2025 EPS cadence and seasonality imply a steeper ramp to 4Q MLR, which you attributed to both business mix and changes from the IRA. I think PDP and MAPD members in total maybe account for 10-15% of total risk membership. Can you help us better understand the expected Part D MLR cadence baked into guidance and how the proportionally small membership base is driving such a strong change in MLR seasonality?
Thanks, Andrew. Let me first take a minute to address our expectations on earnings seasonality. As we stated on our fourth quarter earnings call, we expect over 60% of adjusted EPS to occur in the first half of the year, with more than 50% of that to be realized in the first quarter. With that in mind, as I look at where FactSet consensus stands today, analyst EPS estimates in the first quarter look to be about a dollar light compared to our expectations. This is simply a function of seasonality. It does not change our earnings expectations for the full year. There are several factors contributing to this more pronounced seasonality. To start, we expect the first quarter MLR to benefit from a favorable calendar with the number of workdays lower than last year. This is the effect of pulling forward earnings into the first quarter.
Second is the impact of the Part D benefit design changes related to the IRA, which will have a meaningful impact on the earnings cadence in Medicare. This is going to result in seasonality for Part D being more like our medical benefits business than in past years. Finally, a shift in member mix, namely lower Medicaid membership, higher ACA growth, is going to drive more pronounced earnings seasonality again in the first quarter of this year.
We've also seen a severe flu season this year. Do you have any sense of whether that would meaningfully impact 1Q MLR at this point?
Yeah, we began the year anticipating an influenza and other influenza-like illness season in line with the pre-COVID trends, which is somewhat higher than what we experienced during the pandemic era. Incidence rates for these illnesses have actually been running a little bit above even those prudent expectations, which has generated a modest increase in costs so far. Importantly, the acuity of the activity we have seen has been consistent with our expectations. While there is still a couple of weeks left in the quarter, there is always the possibility for a late season respiratory virus activity. We believe our pricing continues to provide adequate prudence to address the elevated costs we have seen so far, and that allows us to be comfortable with the guidance that we have given so far.
Got it. Taking all in, reiterating guidance, Q1 EPS Consensus is about a dollar light, and that reflects the impact of flu as well.
Perfect.
Understood. Shifting to Medicaid, can you share how composite Medicaid rates developed for 1-1 renewals and comment maybe how they're tracking for the upcoming renewal cycle around 4-1 and 7-1?
Of course. January rate renewals were in line with our expectations and reflect early progress towards bringing rates back to a level that will prospectively cover cost trend. We also have early insight into April rates, which is similarly in line with our expectations, though April is a smaller cohort for us. On July renewals, which cover about a third of our membership base, it's still too early to comment. We'll get a better picture in the coming months as draft rates are shared. Overall, I would say that the rates we secured thus far have been broadly consistent with our initial expectations, though there is still important work ahead. We remain in constructive ongoing discussions with our state partners to further align prospective rates with elevated cost trends that we continue to observe in our Medicaid portfolio.
Great. It feels like most of the margin recovery in Medicaid does come from better state rates, which is somewhat passive. Can you help us understand maybe some of the actionable items you can take to items that are in your control to drive better cost outcomes and management?
We are certainly advocating for rates that fully reflect today's cost environment while also driving operational efficiencies that deliver better health outcomes for our members and more value for our state partners. We feel well positioned to consistently rank in the top tier of cost management and quality performance within the markets that we serve. One of the ways that we're actually innovating in this area is through the rollout of digital solutions that enhance the member experience and improve outcomes. Just to give you one example here, today we're using technology to identify members with care gaps and chronic risk factors. Our care management teams then perform proactive outreach to provide early intervention and to guide the member in accessing the care they need.
In addition, our targeted digital interactions actually helped save members over 1.5 million hours in 2024 through higher quality provider search functionality and a streamlined call center experience.
Great. Let's move on to commercial. Several of your peers in the stop-loss business called out pressure throughout the back half of the year and even more so in the fourth quarter. Stop-loss didn't seem to be a source of fourth quarter pressure for Elevance. Can you take a step back and give us some more color around what you saw with respect to commercial and stop-loss trends and your experience there and why you might have had some differentiated trends?
Thanks for the question. Your observation is spot on. We did not experience the same stop-loss pressure seen by others in the fourth quarter, and we're pleased with our overall stop-loss performance in 2024. There are several key differences worth noting. First, we primarily sell bundled stop-loss coverage as an ancillary product for self-insured groups seeking additional protection against overall claim costs. Second, only a very small portion of our portfolio is dedicated to specific claims liability coverage for fully insured clients. That is an area that others have highlighted as a source of pressure. Finally, it is worth just keeping in mind that our total stop-loss portfolio is a relatively small percentage of our total premiums. I'll simply close by saying we've taken a thoughtful and strategic approach to our stop-loss business.
We have a leadership team with deep expertise and experience in this area, and it's something we feel quite comfortable with.
Understood. Pricing aside, specialty pharmacy has been an area of accelerating trend across the broader healthcare industry. What are you seeing with respect to this trend, and which book of business is most impacted by this?
Yeah, we're seeing persistently high specialty pharmacy trends across the industry, which has been in line or fully in line with our 2024 expectations. These trends are most pronounced in categories like oncology, autoimmune, dermatologic, placing really upward pressure on overall costs. If I look forward to 2025, we've modeled specialty pharmacy or specialty trends to remain elevated. In particular, we've been prudent in assessing how Part D benefit design changes might incentivize different member and provider behavior. For example, lower cost sharing could drive higher utilization. We've also been monitoring the pipeline of new products and expanded indications. Importantly, we've baked these dynamics into our pricing and guidance for 2025. When it comes to approaching specialty pharmacy pricing, we focus on the whole person care rather than just merely unit cost.
Through our CarelonRx asset, we integrate medical and pharmacy data and utilize predictive analytics to enable more comprehensive management of health by expanding value-based arrangements, improving care coordination among providers. We aim to deliver total, or we aim to deliver the lowest net total cost while still ensuring sort of timely, high-quality care for our members. Really, all of that helps us address today's cost pressures without losing sight of the clinical outcomes that our members need.
Right. Just given the number of specialty drugs that have increased and the label expansions that we've seen, is it more difficult to kind of predict the utilization today than maybe it was five years ago?
I think I would say we're managing specialty trend pressure through a disciplined pricing and analytics approach. What also helps us here is the integrated pharmacy management, the active support of active development of new innovative solutions. That really allows us to remain confident in the way that we price some of those new solutions and products that come to market.
Great. Taking a step back, you've done a nice job improving commercial margins over the last few years. What's the trajectory of commercial margins from here, and where do you see the opportunities to expand margins further?
Yeah, we're very pleased with the trajectory of our commercial margin recovery over the last two years. Looking ahead to 2025, we do expect to realize continued improvement, albeit at a more modest pace compared to 2023 and 2024, as repricing initiatives we have executed are materially complete. Long term, we expect earnings growth from our commercial business to be driven by increased membership bolstered by the geographic expansion of our individual ACA products and improved group retention. We also expect earnings growth to come from increased penetration of our integrated medical and pharmacy offering and our innovative affordability and digital solutions, such as our suite of patient advocacy products. Finally, I'd say we remain committed to a prudent approach to pricing that delivers consistent performance and supports membership growth. That's all embedded in our long-term earnings growth algorithm.
Great. There has been a lot of headlines around DOGE's efforts to reduce the federal workforce. You have a large federal employee benefits program that represents about 1.6 million members or $15 billion in revenue. How are you thinking about the potential changes to that business, and is there anything explicitly considered for 2025?
That's a great question. At this stage, any outcome from DOGE's efforts to reduce the federal workforce remains highly uncertain, just given the various legal and regulatory hurdles still unfolding. In our latest outlook, we factored in a slight dip in federal employee program membership, but we don't foresee a material earnings impact since our contract with the federal government is structured on a cost-plus basis. Additionally, the geographies where we offer coverage to federal employees significantly overlap with our other lines of business. We are well positioned to provide affordable coverage to members affected by these potential changes. The last comment I'd maybe make here, Andrew, is it's important to note that we serve both active employees and retirees within our federal employee business, and we'd not expect the retiree population to be impacted by these actions.
Understood. You're also seeing solid growth in the individual ACA market this year, despite some new program integrity measures. Can you share what your experience has been so far with respect to February effectuated enrollment, how that came in, and how you expect intra-year attrition to play out?
Yeah. Let me start by saying that we've been really pleased with our growth in the individual ACA market over the past several years. We're encouraged by the results of the open enrollment period for 2025. To your question, through February, member effectuation rates, which represent the proportion of members who have paid their premium, have tracked a little bit lighter than we initially expected. This is likely reflective of the higher percentage of passive renewals this year, as we have seen members, especially those who have enrolled with us during or following redetermination from Medicaid, reevaluate their coverage during this grace period. This dynamic impacts a small portion of our membership base. We've adjusted our membership outlook appropriately, and that is reflected in the 8-K last night. I would say overall, we still feel pretty good about this underlying business.
We have appropriately balanced the growth in this market with prudent pricing expectations for 2025.
When you say a little bit lighter, is that a reflection of just kind of the member premiums paid, or do you think that's more driven by some of the newer measures around failure to reconcile, things of that nature that are driving effectuated enrollment lower?
There are likely several interacting and complicating attributes that drive this. The net result of that is that we're seeing slightly lighter effectuation rates than what we expected. We definitely attribute this to those members who have enrolled with us following the redetermination from Medicaid, and there are obviously several factors driving that.
Got it. Do you have full visibility into the failure to reconcile at this point?
We have enough visibility for us internally to look through some dynamics. That would be a great Q1 earnings call question.
Understood. Sticking with the ACA, would love to hear how you're thinking about the potential membership attrition and the impact to the risk pool if Congress allows enhanced subsidies to expire at the end of the year.
Yeah, we continue to closely monitor developments in Washington, and we remain fully committed to the ACA marketplace. It's not only an attractive and complementary business for us, but also represents significant long-term growth opportunities. This is particularly relevant as we expand our Wellpoint branded plans beyond our 14 Blue states. That's a key step towards fulfilling our member commitment or our commitment to being a lifetime trusted health partner at every stage of our members' journey. With that in mind, the availability of enhanced subsidies has driven increased enrollment over the past few years. Extension of those enhanced subsidies would limit potential disruption to individuals and families seeking a continuation of affordable healthcare coverage.
Congressional members on both sides of the aisle have expressed support for extending the ACA subsidies, and policymakers have a range of options, including full extension, partial or modified extension, or even phasing out of the enhanced subsidies. Regarding the risk pool, if the enhanced subsidies do expire, we would expect a reduction in enrollment that would naturally shift the pool's overall risk profile. We will account for that in our 2026 pricing, drawing upon our broad ACA pricing experience. The last comment I make here, the ACA risk adjustment program also does provide meaningful stability by transferring funds to carriers managing higher risk populations. This should help mitigate some of the hypothetical disruption that could occur from any changes in the market.
Are you preparing two sets of pricing at this point, one with the subsidies, one without the subsidies?
We are definitely thinking through several pricing options, which I imagine will include more than one submission.
Got it. Maybe let's move on to Carelon. You recently closed on the acquisition of CareBridge late last year, which represents a significant expansion into the home. Can you walk us through the strategic rationale for this deal and any expected contributions to earnings over the next few years?
Yeah, absolutely. In the fourth quarter, we successfully closed on the acquisition of CareBridge. For those of you who do not know, CareBridge is a rapidly growing value-based care company that specializes in managing home and community-based services, HCBS, for both the Medicaid and dual eligible populations. CareBridge's innovative model aligns to Carelon's whole health approach, which strengthens our ability to serve chronic and complex members. That is going to help us further scale our home business within Carelon. Specifically, we see CareBridge serving as a scalable platform to broaden our home-based reach. This includes extending services beyond the HCBS population to high-risk Medicaid and dual eligible members, while also expanding into geographies to better support Elevance Health's home and community-based beneficiaries.
In short, you can think about the acquisition of CareBridge as enabling us to expand post-acute care delivered in the home, build at-home elements into specialty care management products already offered by Carelon Services like oncology, and then drive improved health plan performance through enhanced member outcomes and reduce costs for LTSS and D-SNP members. Summarized, we view the acquisition as being strongly aligned with our strategic objective. It opens up significant white space for growth through the introduction of new capabilities and expansion into key Medicaid and dual eligible markets.
Would you like to get even bigger in the home? Is there a strategic preference for Medicaid-first or Medicare-first home providers?
Being in the home is one of the four key pillars that we think of within Carelon Services, being among sort of advanced primary care, specialty care, behavioral health, and then home-based care. It is an important avenue for us for continued growth, and it integrates very well, allowing us to scale some of the services that we already offer. Clearly, a very important acquisition for us.
Great. We are just about up on time here. Thank you so much, Mark, for the fireside today, and enjoy the rest of the conference.
Thank you very much, Andrew.