Well, thanks everyone for joining us for the final day of the conference. Really pleased to have Elevance Health for our fireside chat today. With us from the company are CFO Mark Kaye, Nathan Rich from investor relations. Mark, thanks for being here. I guess first, any kind of opening comments you'd like to make, perhaps, how performance is going so far in the third quarter? And maybe reframe for us also, just generally, how to think about maybe the jump-off point that we should be thinking about to achieve the EPS growth of 12%, or at least 12% you're targeting for 2027.
Firstly, a big thank you, Steve, to yourself and to Wells Fargo for having us. I think that's a great starting point for the conversation today. As reflected in the Form 8-K we filed this morning, we are reaffirming our 2026 adjusted EPS guidance of at least $27, as well as our full-year benefit expense ratio outlook. Year to date, our results have demonstrated improved execution across our broad and diversified portfolio, consistent with the framework that we outlined at the beginning of the year. That momentum continued through July and August.
As such, third quarter adjusted EPS is currently tracking ahead of the outlook we provided on our second quarter earnings call, and that's supported by that favorable benefit expense performance, as well as strong operating execution across the enterprise. We are encouraged by how results are developing through the first two months of the quarter, and that reinforces or further reinforces our confidence in our full-year outlook. Importantly, we still have one month remaining, and we'll provide obviously a more complete update when we report the third quarter in October.
Looking ahead just to 2027, we remain committed to delivering at least 12% adjusted EPS growth off of our 2026 ending earnings baseline. That outcome is supported by multiple levers across both health benefits and Carelon, and it's not dependent upon the performance of any single line of business. Finally, just to add, we continue to invest with discipline. We're using AI to improve productivity and operating efficiency, and to deploy capital in ways that support durable earnings or durable enterprise earnings growth in 2027 and beyond.
Okay. Yeah, fantastic. Thanks for that. Maybe we could, obviously cost trend is a very front and center for the issue for the industry, given where we've been over the past couple of years. Your comments today dovetail into this a little bit. Maybe just expand a little bit on cost trend and what you're seeing as you have the first couple of months of the quarter that you're talking about now.
Steve, that's a great question. As I noted, our overall experience through August has been favorable to our expectations, although the underlying drivers do vary by market. In Medicare Advantage, performance remains ahead of expectations, and this reflects the intentional product and geographic actions that we took for 2026, the quality of the membership that we've retained, and continued execution on our medical cost initiatives.
Together, those factors support our path to an operating margin of at least 2% this year. In Medicaid, the benefit expense ratio has developed more favorably than anticipated, and that reflects the benefit of recent rate actions, and that is translating into margin performance slightly ahead of our full-year outlook. In individual ACA, claims experience is also tracking modestly better than expected, and the significant shift towards Bronze products has created more back-half weighted pattern of plan paid costs.
That cost emergence has developed more slowly than we anticipated. As such, we're being very thoughtful about how we incorporate this experience in our risk adjustment position overall. Overall, I would say really our individual ACA business is performing well, and it is modestly ahead of our expectations.
Then last, in employer group, cost trend is developing in line with how we priced the business, and we continue to see a broadly elevated cost trend base, but very consistent with what we expected this year. Our focus really remains in helping employers manage affordability while delivering a better experience for their members. Taken together, as we look across the portfolio, we're very pleased with our performance so far in the third quarter.
Yeah, fantastic. Maybe now we'll go business by business to discuss this a little bit more. Maybe we could start on Medicare Advantage, obviously, clearly, a strong start to the year. You outperformed in the first half of the year. It sounds like that continues thus far. I guess maybe talk a little bit more about what's driving the outperformance and I guess how what you're seeing in Q3 perhaps compares to the first half of the year.
We're pleased with the progress that we're seeing in Medicare Advantage. The favorable performance that we saw in the first half has continued so far into the third quarter. The performance here really reflects the intentional portfolio actions we took to strengthen our HMO and D-SNP footprint and improve our value proposition and underlying economics, as well as better underlying claims experience, and that's supported by continued execution against our cost of care initiatives.
I think CareBridge here is a good example of how we are strengthening that execution. It allows us to engage more effectively with complex and dual eligible members in the home, allows us to coordinate care earlier, and allows us to reduce that avoidable utilization. Across multiple payer relationships, we are seeing CareBridge help demonstrate medical cost savings in that mid-teens percentage range. We continue to have confidence in our margin outlook for the year and in the underlying actions we are taking to improve the economics of the business over the long term.
Great. Maybe help us think about the margin objectives in Medicare Advantage that you have for 2027 as we think about what is going to be in your bids. I guess maybe also contrast bid assumptions that you used to develop 2027 relative to the approach you took for 2026.
Steve, that is a very timely question. Our approach in both years is really grounded in the same objectives: deliver a strong value proposition for seniors and sustainable financial performance for the company. We are going to stay pretty high level until the plan details are public. Broadly speaking, our 2027 bids are designed to build on the progress that we made in 2026, while continuing to take a very measured view of the cost environment. As we developed the bids, we did use advanced analytics to understand which benefits matter the most to members and where we may have some flexibility.
That has allowed us to preserve stability in areas like maximum out-of-pocket and our Everyday Options Allowance while making more targeted changes. D-SNP does remain an important area of growth for us, particularly in fully integrated models where we bring together our Medicare, our Medicaid, and our Carelon capabilities to best serve members with more complex needs. We see incremental opportunity for margin improvement in 2027 and obviously further progress over time towards our 3%-5% operating margin target.
Okay. Thank you. Maybe now just to touch on star ratings. Star ratings have obviously become a more volatile input for the industry in recent years. You also have litigation that has added to the complexity of that. I guess how does the company manage this key driver, and how are you thinking about the range of potential outcomes on stars over the next couple of years?
Yeah, as we also heard from some of our peers yesterday, we have received Plan Preview 2 from CMS. But similar to their comments, as a reminder, CMS does ask plans not to disclose those results until star ratings are officially released in October. So I am not going to get ahead of the process today. What I can say is that stars remains an important multi-year operating priority for us. To your point, the program continues to see changes in measures, in cut points, in methodologies. Our engagement with CMS really is centered on transparency and consistency as well as comparable treatment for similarly situated plans.
Operationally, our focus is on the areas that we can control. So think here clinical quality, care management, provider data connectivity, and member engagement, really including those capabilities that help us reach higher needs members more effectively. If I step back, we do take a very long-term view of stars. Our priority here is really to improve quality for members in ways that also support better performance in Medicare Advantage over time.
Got it. Maybe the last one on M&A. Obviously, there was some dialogue with CMS earlier in the year. Maybe give us the update on what the latest is on the progress to fully remediate and resolve CMS issues that you talked about.
This is probably the simplest question for me to address today.
Yeah.
The issue has been resolved. We reached a final resolution with CMS in July, and that resolution allows us to continue offering our Medicare Advantage plans to beneficiaries without interruption. We are obviously very pleased to have completed that process, and our focus now is really on serving members and executing really well through the upcoming annual election period.
Okay, great. Maybe to pivot then to Medicaid. With the second quarter, you improved the Medicaid rate outlook. Maybe talk a little bit more about some of the drivers of that. I guess how much of that came from rates that, again, like you are seeing and benefiting from in the second half of this year versus rates that maybe benefited the first half of the year?
We are encouraged by how the Medicaid rate environment has developed. We now have very good visibility into the vast majority of our Medicaid premium revenue for the rest of the year. The benefit that we are seeing from recent rate actions that I mentioned is weighted more towards the second half of the year. We have also, to your point, seen some favorable off-cycle items, but I would really not characterize those as material relative to the overall rate activity. The key point here, or the broader positive, is really that states are increasingly incorporating more recent cost experience into their actuarial work. That improves the alignment between rates and costs and supports our view that 2026 should be the trough for Medicaid margins.
Okay. I think your opening comments might have alluded to maybe the answer to this, but you've had some obviously positive development on rates. In the second quarter, you were describing cost and acuity as broadly in line with expectations, but there wasn't a change to the margin outlook at that time, which I think was a little confusing to folks. I guess, how should we interpret the balance of those two items and thinking about Medicaid margins? Maybe expand on that a little bit for what you're expecting now in the balance of the year.
Yeah. Overall, we're encouraged by how the business is developing relative to our full-year expectations. As I mentioned earlier, our benefit expense ratio is developing more favorably than we anticipated, and that's supported principally by recent rate actions that are providing increasing support to the business. At the same time, membership and acuity remain broadly consistent with the assumptions embedded in our outlook, which gives us added confidence in the framework that we laid out earlier this year.
We also remain focused on the areas within our control, including helping members receive clinically appropriate care and reducing unnecessary cost across the system. Taken together, Medicaid margin performance is tracking slightly ahead of our full-year outlook, and I would say we are very pleased with the progress that we're seeing.
Okay, great. You touched on this a little bit, but maybe we could expand a little bit on how we're thinking about Medicaid into 2027 and the implementation of work requirements. Clearly, there's some positives to think about, whether it's rate catch-up or cost of care initiatives, but also some negatives, incremental acuity, potential dislocation of forward cost trend. I guess, how is the company thinking about the balance of those items, and is there any credence to the thought that you're getting rate now to help you this year that you might have otherwise gotten in next year instead?
I'd say that's a super question, actually, a very timely one. As we look to 2027, we continue to expect improvement in Medicaid margins, and that's going to be supported first and foremost by better alignment between rates and the underlying cost experience in the business. As states are increasingly reflecting more recent cost trends in their actuarial processes, but they're also making program design changes to support long-term sustainability. We have taken targeted actions to better manage medical costs, particularly in areas where we have seen persistent trend, and we expect that benefit to continue building over time.
The One Big Beautiful Bill Act will also shape membership and acuity dynamics as we move into 2027. We currently expect the majority of our states to begin implementing community engagement requirements in January 2027, with the timing and the magnitude of the impact driven by each state's implementation approach. While we are mindful of the potential acuity impact from implementation, we believe improved rate alignment, together with the actions that we're taking on cost, will support Medicaid margin improvement in 2027, even as the One Big Beautiful Bill Act takes effect.
Okay. Yeah, and maybe to expand a bit on that, I guess it'd be great to hear the latest on your discussion with state partners. What's really changed versus a year or two ago when we think about the actuarial process that's in play?
Yeah, I appreciate that follow-up. Look, I'd characterize the discussions with state partners as constructive and increasingly data-driven. The most important change really from a year or two ago is improved visibility. During the post-PHE unwind, states and health plans were working through significant changes in enrollment, acuity, and utilization. Today, we have much more mature claims and eligibility information.
We also have better state-by-state cohort analysis and really a clearer understanding of the categories that are driving cost pressure. That improved visibility is influencing the actuarial dialogue. There hasn't been one uniform methodology or methodological change across every state. Rate setting obviously still has an inherent lag. However, states are increasingly using more recent experience and requesting supplemental current data to inform rate adequacy and forward trend assumptions. That's making the process, in my opinion, much more responsive to the cost environment that we're experiencing.
I'd also add that part of our role as a payer is to bring actionable evidence to those discussions, and we provide state and population-specific insights on utilization, acuity, and the underlying cost drivers as we work with states on targeted clinical and program design solutions. Importantly, the objective here is broader than advocating for a higher headline rate. It is about achieving actuarially sound funding and building sustainable Medicaid programs that really preserve that access and the quality for the members that they serve.
Okay. Then you've talked about, most recently in the second quarter call, considering exiting Medicaid markets where you don't see a path to sustainable performance. We obviously know about Washington, D.C., more recently, Louisiana looks like you'll be exiting. I guess we're in a pretty unusual environment with Medicaid performance. I guess, how can we better understand how you're judging these states and thinking about what's sustainable versus what's not sustainable?
Also a great question. Medicaid remains an important part of our diversified portfolio, and we continue to see attractive opportunities where the state partnership, the program design, the economics, where they're all aligned. At the same time, we're going to be very disciplined about where we participate. We recently made the decision to exit the District of Columbia, and we will also be ending our participation in the joint venture with Blue Cross and Blue Shield of Louisiana at the end of this year. The way we think about these decisions is over a multi-year horizon based on cumulative performance and the forward path to really acceptable returns.
That assessment includes elements like rate adequacy, benefit and program design, policy stability, network operating requirements, et c, but it's really our ability to work constructively with the state to address the underlying drivers of cost. We also consider strategic fit, particularly alignment with our dual strategy and the opportunity to deploy Carelon capabilities like CareBridge and behavioral health.
The point here is that strategic value cannot substitute for actuarially sound rates and a sustainable operating threshold. Finally, I'd note here the threshold for exiting a market, as you would expect, Steve, it's appropriately high. Where we see a credible path to sustainable performance, we remain very committed to investing in that market and then working with our state partners to realize that opportunity.
Okay. Thanks for that. Maybe to pivot now, I guess, to the exchanges. Again, I think you touched on this a little bit in the opening commentary, but overall, the commentary on the exchanges was pretty positive with the second quarter. It looked like the upside in the quarter itself was primarily attributable to out of period items, and the guidance at that time at least seemed to reflect pretty minimal profitability for the current year. Can you help us kind of square your thinking and commentary on exchanges? To the extent that you are now trending a little bit more favorably, perhaps. Again, when do you think you will start to recognize that into the P&L? Sounds like Q3.
Yeah. Coming into the year, we expected a modest improvement in profitability in our individual ACA business. During the first half, results have benefited from the more pronounced seasonality associated with our Bronze product mix. Given that claims experience, as well as the fact that utilization patterns and risk adjustments were still developing, we did not believe it was prudent to carry the full amount of that first-half favorability through the balance of the year. Now that we have greater visibility into the third quarter, underlying claims experience has continued to track modestly better than our expectations.
In particular, the increase in cost emergence we anticipated in the second half has developed more gradually than we assumed. We are also reflecting that emerging experience in both our current period risk adjustment payable and our assessment of the full-year performance. Overall, I think we would say or we would characterize the trajectory here as incrementally better than it was at the time of our second quarter earnings call. We now obviously have greater evidence that the improvement extends beyond first half seasonality, and we expect that to translate into modestly better full-year performance for the business.
There has been a lot of focus on the potential for some second-half actions by the Trump administration to address program integrity challenges. I guess, can you describe a little bit how you are accounting for any potential direct exposure to this membership and how you are thinking about the potential impacts to risk adjustment and your assumed risk adjustment position?
Yeah, we fully support measures that strengthen program integrity and enrollment verification in the individual ACA market. Ensuring that individuals are appropriately enrolled and that subsidy eligibility is accurately determined is critical to protecting consumers and taxpayers and supporting the long-term sustainability of the marketplace. As such, we are working very closely with the CMS and state regulators, and we view their efforts to address improper enrollment as constructive.
The impact will obviously vary by state and market mix, but really based on what we see today, we don't expect a material impact on the business. Separately, we are continuing to advocate for reforms that do address misuse of the independent dispute resolution, or IDR, process that providers have used, and we believe this represents another meaningful opportunity to reduce avoidable costs across the healthcare system.
Yeah, maybe to expand a little bit on that, I guess to check in on the kind of the employer risk book. I guess update us on how the employer risk book is performing. I think you reported the second quarter results before a lot of the sort of noise on IDR started. Maybe just expand a little bit what impact is IDR having on cost trend this year, I guess how does that compare to what you experienced in 2025, and how are margins performing today versus targeted levels?
Our employer group risk business is performing in line with expectations. Commercial medical cost trend remains elevated, and the experience we're seeing is consistent with the assumptions that we embedded in our 2026 pricing. We'll obviously continue to manage the environment through disciplined pricing and targeted cost of care initiatives. With respect to the independent dispute resolution process, the impact on our business has not differed materially from what we contemplated in our outlook. At the system level, however, IDR has become a significant affordability concern.
We strongly support the original intent of the No Surprises Act and its protections against unexpected out-of-network bills. But the volume and economics of the dispute process have expanded well beyond what was initially contemplated. Based on the current trajectory, dispute volumes are expected to exceed 3.9 million cases in 2026, and due to adverse incentives, providers are prevailing in about 85% of those cases, with award volumes averaging about eight times in-network rates, eight times.
In 2025 alone, we've estimated the IDR process added about $15 billion of incremental cost to the healthcare system. We think there's a real opportunity to preserve those important consumer protections while addressing the inappropriate uses of the process. Finally, as we look to 2027, we'll continue to reflect the cost environment appropriately in our pricing, and we're going to advocate for reforms or continue to advocate for reforms that improve affordability for our members and, more importantly, for the broader healthcare system.
Okay. That's great. Maybe it makes sense to pivot now to Carelon. I guess starting with CarelonRx, maybe update us on how this year is tracking relative to guidance. We've heard from some competitors in the space about some headwinds that are maybe a little bit more specific to them, things like GLP-1s and 340B. Broadly, I guess, how's this business performing, and what are the key trends to watch over the next couple of years, especially as the industry goes through a period of change?
Yeah. So CarelonRx is tracking in line with our full-year outlook, supported by momentum in specialty pharmacy and expanding relationships with our ASO customers. Our strategy really remains anchored in the integration of medical and pharmacy management, and that model is designed to lower the total cost of care, which really positions us well as the market moves towards greater predictability. On GLP-1s, we have not seen a material change in utilization affecting our PBM results.
Our CarelonRx ASO book skews towards small and mid-size employers where coverage for weight loss GLP-1s remains limited and has generally become more selective. Where clients do provide coverage, we have a weight management program that helps support appropriate access and outcomes while managing affordability, and we manage GLP-1s as part of the holistic care that we provide to members, not as a prescription volume opportunity.
On 340B, you should not assume a direct read-through from others. Our exposure is much more limited, with more direct impact concentrated in specialty pharmacy rather than our core PBM. Based on obviously what we see today, we don't expect 340B to be a material headwind to CarelonRx. Finally, I'd say we've got pretty compelling evidence that the integrated medical and pharmacy model delivers value. Members with integrated benefits have generated savings of about $100 per member per month.
They've also experienced 30% fewer emergency room visits. We've seen a 10% reduction in high cost specialty drug administration, et c. Looking ahead, I'd say that the key growth drivers here are deeper ASO penetration, the continued scaling of our specialty and dispensing business, and then really that stronger integration of pharmacy decisions with medical outcomes and total cost of care.
Great. Then maybe to pivot to the services business. You talked a lot about the investments you are making. I would love to hear a little bit more about that. You mentioned some benefits from investing into the platform and scaling newer risk-based programs with the second quarter results. Maybe you could touch on that.
Steve, thank you. I appreciate you throwing in an additional Carelon question. The investment thesis here for Carelon Services is really pretty straightforward. We have got to build a clinical platform that allows us to identify need earlier, intervene across more of the care journey, and then selectively take risk where we can improve both outcomes and total cost of care. Health OS and our AI-enabled workflows form an important part of that foundation. They improve clinical data connectivity, they help us identify rising risk members earlier, and then allow us to coordinate care more effectively across the settings.
They can also reduce administrative friction for care providers and make clinical decision making faster, and most importantly, more consistent. We are then using that foundation to expand risk-based clinical models in those high cost fragmented areas like oncology, serious mental illness, post-acute care, and musculoskeletal. I would say our approach here is quite disciplined. We have got to prove that model first within the affiliated health benefits population, use that population to demonstrate measurable clinical and financial value, and then only scale it externally when the model and the economics are repeatable.
An example I can give here is that we recently applied that approach to our MSK capability within commercial and within an external blues plan. Our last point here is that the programs are not all going to scale at the same margin or at the same earnings cadence, but performance is broadly going to be in line with the expectations. We really do expect these capabilities to become larger contributors to revenue and operating gain as they mature, reprice, and gain scale.
All right. Well, good news. I have another Carelon question. Maybe you could touch a little bit on how we should be thinking. Obviously, your own membership is a pretty key input for the Carelon businesses going into 2027. Any kind of initial framing there that you might offer? Then just remind us as we think about the margins really on the health plan side of the business starting to improve, how does that translate through to performance for Carelon Services?
Thanks, Steve. As we look to 2027, changes in affiliated membership could affect volumes across both CarelonRx and Carelon Services. We are incorporating potential pressure from Medicaid and individual ACA risk membership into our early planning. Importantly, however, Carelon's growth is not dependent upon affiliated membership alone. We remain confident in Carelon's underlying earnings trajectory, supported by external growth, deeper penetration of Carelon capabilities across Elevance, and the ongoing scaling of our clinical and pharmacy solutions.
Carelon also plays an important role in supporting health benefits margins by lowering the cost of care and improving outcomes. Those capabilities demonstrate value within Elevance and allow us to gain greater confidence in deploying them more broadly than across the affiliated populations. In my mind, that creates what I think of as a self-reinforcing growth model. Broader internal adoption strengthens health benefits performance while building the proof points needed to expand with external customers, which then supports Carelon's growth over time.
Okay, great. Obviously AI is a huge focus across all their companies and across the market. Maybe help us think about the return profile of the AI investments you are making, the timeline to unlock return on those investments. I guess, how do you think about what could make the returns durable as competitors, especially in the insurance businesses, pursue similar objectives?
Thanks, Steve. I appreciate talking about AI just for a little bit. We do think about the return profile here in stages. The investments that we are accelerating this year are focused on high volume workflows where implementation is already underway. As a result, we do expect benefits to begin emerging in the near term through early identification of cost trends, more timely cost of care actions, and then improved operating efficiency. The more meaningful financial opportunity builds as those capabilities then begin to scale across the enterprise and become embedded in that day-to-day decision making.
Over time, we see the potential to improve both medical cost performance and the administrative cost structure of the business. For example here, we are using AI to identify emerging costs and quality trends earlier. Our platforms like Health OS can then help us engage care providers sooner, which supports better clinical decisions and reduces administrative friction across the system. That durability comes not from the technology alone, but from most importantly, how it's integrated into our operating model.
Health Benefits provides that visibility into where cost and quality issues are emerging. Then you can think about Carelon as then bringing that clinical, the pharmacy, the care management capabilities then needed to intervene effectively. I also think AI tools are going to become increasingly accessible across the industry. But the combination, in our minds, of our data, our integrated capabilities, and the scale that we have, which supports more than 100 million people, does create that reinforcing advantage. As the platform learns and improves, we really believe it can generate more effective interventions and increasingly durable value over time.
Great. Maybe just time for one more question, just as we think about capital deployment, maybe just spend a minute on the current priorities from the company and any kind of notable contrast or not versus maybe the past few years.
It's a great place to end. Our capital deployment framework remains unchanged. We continue to balance organic reinvestment, discipline, strategic M&A, dividends, and share repurchases while preserving balance sheet flexibility to respond to opportunities as they arise. The distinction today is really the near term weighting within that framework. We are placing greater emphasis on integrating and scaling the capabilities that we have already added, as well as funding targeted organic investments that really can strengthen our long-term earnings potential for the business. At the same time, we will remain opportunistic on share repurchases.
With our operating cash flow guidance this year of at least $6 billion, we do have the capacity to support those priorities while maintaining a strong balance sheet. A good example I can give here is our decision this year to redeploy a portion of the non-recurring, below-the-line favorability into those accelerated investments in medical cost management, the member and provider experience, and then obviously Carelon and enterprise productivity.
We very strongly believe that that's an attractive use of capital because these are targeted investments designed to improve execution, lower unit costs, and then support more durable earnings growth over time. I'd simply say the framework has not changed, but the near-term mix reflects the opportunities we see today. Thank you.
All right, well, fantastic. I think that's where we're going to have to leave it. Thank you very much for your time today. Appreciate you being here.
Likewise. Thank you very much, Steve.
Thank you.