Welcome, everyone, to the third and final day of our conference. We appreciate your being here. We particularly appreciate Elevance Health being part of the conference this morning and kicking us off on Wednesday. We have Mark Kaye, Executive Vice President, Chief Financial Officer. We also have Nathan Rich, Head of Investor Relations, with us here. Thanks so much, guys, for doing this again. Mark, maybe a big-picture question. Stepping back from the individual businesses, what are the two or three strategic choices that will matter most for Elevance over the next three years? How should investors distinguish the earnings recovery that seems to be underway from the actions designed to establish a stronger, more durable long-term growth model for the company? What milestones would tell us that the strategy's on track?
A.J., thank you so much to yourself and UBS for hosting. It's a pleasure to be here today. I think it's a great place to begin our discussion. In the near term, our priorities are focused on strengthening earnings and building a foundation for future growth. Those efforts are connected by a common strategy: lowering the cost of healthcare and making the experience simpler and better for members. First, we're restoring sustainable margins in health benefits. That means maintaining discipline in pricing and portfolio decisions while advancing medical cost management. Better alignment between revenue and costs support the recovery while improving the underlying cost of care that helps make the progress much more durable.
Second, we're scaling Carelon's pharmacy and clinical capabilities across our health plans and with external clients. That includes expanding risk-based solutions in complex, high-cost areas like oncology, behavioral health, and care in the home. Our differentiation really comes from how those capabilities work together. For example, dual-eligible members, we are able to pair attractive plan designs with coordinated pharmacy and clinical support, including care in the home. That helps us address members' needs more effectively while reducing avoidable costs. As we demonstrate that value within our health plans, we strengthen health benefits and build the evidence and operating experience to expand with external customers. That gives us a growth opportunity beyond health plan members alone. Third, we're making our operating model more connected and scalable. Data and AI have helped us identify member needs earlier and to translate those insights into timely support.
They also help simplify interactions with providers and reduce manual work. The opportunity is to deliver a more personalized experience while serving more members and clients efficiently. Taken alongside disciplined capital deployment, those actions can help us achieve a solid baseline from which we can achieve our long-term EPS growth objectives.
Okay. Then within your framework for at least 12% adjusted EPS growth in 2027 from the recently increased 2026 earnings baseline, what drivers have the greatest visibility today, and which remain more dependent on external conditions? How much of the improvement reflects margin normalization versus history versus repeatable organic earnings growth?
We remain confident in delivering at least 12% adjusted EPS growth in 2027 from our higher 2026 earnings baseline of at least $26.75. That baseline reflects stronger underlying performance this year, and it does exclude non-recurring items. In Medicare Advantage, our deliberate portfolio actions are already translating into stronger performance. Our 2027 bids build on that progress, and they are designed to support further margin improvement and targeted growth, particularly in duals. Importantly, those bids assume a similar level of medical cost trend to 2026. In Medicaid, we expect better rate alignment and a growing contribution from our medical cost actions to support margin improvement. The pace of that improvement is partly dependent on state actions, including the timing and adequacy of rate updates and the implementation of community engagement requirements.
In commercial and individual ACA, our 2027 pricing reflects our forward view of medical costs and the populations that we continue to serve. Alongside that pricing discipline, our commercial fee-based business provides an additional source of growth supported by a very strong national account selling season. Finally, in Carelon, here we add a repeatable organic growth opportunity through a broader adoption of our risk-based clinical programs and deeper pharmacy relationships with employers. We expect that expansion, both internally and externally, to more than offset the affiliated pressure from lower health plan or anticipated affiliated health plan membership. Finally, I would say that the distinction here is that margin recovery strengthens our current earnings base, while client growth and broader adoption of our capabilities expand that base over time.
Both obviously contribute to our 2027 framework, and it is that breadth, not the dependence on any single business or assumption, is what supports our outlook for 2027.
Okay, great. As you think about allocating resources across health benefits and Carelon, where do you see the strongest risk-adjusted returns over the next three years? To the extent M&A can supplement growth, where might the company look, and what is your appetite for assets like we've seen in the market recently, surgery centers, infusion services, and physician groups?
That's a great question. Some of our most attractive risk-adjusted returns come from scaling capabilities we already own across established member and client relationships. We can extend a proven solution without having to build a new business or a customer base from the ground up. That is why integration has been a priority for us this year. We're focused on realizing the value of our acquisitions and establishing the operating capacity to support further growth. As that work progresses, we expect to evaluate selective M&A more actively in 2027 and beyond. Within Carelon, our priorities include capabilities that strengthen the management of complex and chronic conditions, expand our ability to take risk in high-cost care, and grow our insights business. In health benefits, we assess targeted acquisitions through the lens of deepening local density or strengthening our capabilities for specialized populations.
Of course, we balance those investment opportunities with continued capital returns to shareholders. Ultimately, the objective here is to strengthen the enterprise long-term earnings power through disciplined capital allocation.
Okay. Thinking about the integrated model, where does combining health benefits with Carelon create the clearest economic advantage? How do you measure incremental enterprise value versus intercompany eliminations rather than simply shifting earnings between the segments? What evidence shows that the model can succeed with external customers?
We deliver value for our members by connecting capabilities across health benefits and Carelon in ways that are differentiated in the market. We measure the success of our model at the enterprise level through lower total medical costs, improved clinical outcomes, increased member retention, and broader adoption by external customers. This last point is particularly important because it demonstrates that our own capabilities deliver value beyond our health plans. Let me give a couple of examples here. We have demonstrated significant value for employers with integrated medical and pharmacy benefits, with savings of up to $100 per member per month, and that reinforces the value of managing total cost of care. Within CarelonRx, our penetration of our commercial ASO membership is still in the mid-20% range, and we see meaningful opportunity to extend that value to more of our existing customers.
In Medicare Advantage, we have launched a comprehensive D-SNP care management program with CareBridge, and a key pillar of our strategy is to deliver more coordinated care in the home. Our integrated view of our plan design and Carelon's capabilities have allowed us to evaluate investments based on the economics of the entire enterprise rather than just the health plan, and that has created an opportunity to deliver greater value to members while obviously strengthening enterprise returns. In our commercial plans, we have realized significant savings by leveraging Carelon's risk-based oncology solution. That is effectuated effectively by connecting clinical pathways, member navigation, and provider incentives. Our oncology programs are delivering care and reducing avoidable spend, and specifically, our models delivered a 4% reduction in total cost trend for attributed cancer patients, and that translates to over $900 per member per month for those members.
Those are the capabilities that ultimately reinforce the flywheel and our confidence that solutions that we have developed will create durable earnings growth over time.
Okay. I would be remiss if I did not ask you about a couple of events that have occurred in the last week. Over the last week, we have had one of your major peers announce plans to separate their retail operations from their insurance and pharmacy benefit operations. Does this move or change the competitive landscape for you in any way, positively or from a new challenge perspective? Does it lead you to shift away from any strategic or investment priorities?
The value that we bring to the healthcare system is around how we connect Carelon's pharmacy and clinical capabilities with our health benefits business to improve member outcomes, lower the total cost of care, and simplify the member experience. That remains the foundation of our strategy and investment priorities. As I mentioned, we are already demonstrating the value of that approach, and our results reinforce our confidence in extending our capabilities to more members and external clients. CVS remains an important partner, and we were very pleased to enter into a new five-year agreement in the third quarter. This provides continuity while we evolve the specialty pharmacy and dispensing capabilities that we are building. Importantly, this agreement positions us well as the industry transitions to more fee-based, predictable models focused on total or lowest net cost.
That direction, I would say, is very consistent with how we are building CarelonRx, pairing more predictable client-aligned contracting with integrated medical and pharmacy management. We connect pharmacy decisions with members' broader medical needs, helping them stay on therapy and receive treatment in the most appropriate setting. That combination is what improves outcomes while ultimately lowering the total cost of care.
Okay. The other development in the last week is the shifting political landscape due to the midterms. Investors are wondering what will change with respect to healthcare. How do you assess the shifting landscape? People are looking at things like the OBBBA, the ACA enhanced subsidies, Medicaid expansion in states like Texas, among other things. Any initial reactions?
At Elevance Health, we have a long history of working constructively with policymakers from both parties at the federal, state, and local levels. We are bringing data-based proposals or policy proposals forward. That will continue as the policy agenda evolves. On the Medicaid and ACA coverage items you mentioned, the details of specific proposals and their implementation will matter. We are working closely with states as they implement Medicaid community engagement requirements. Alongside those coverage decisions, there is an important opportunity to address the underlying cost of care. One example here is reforming the independent dispute resolution process. We strongly support the No Surprises Act protections for patients, and our advocacy is more about preserving those protections while ensuring payment disputes are resolved fairly and efficiently without adding avoidable costs for employers and consumers.
We also see an opportunity for thoughtful payment reforms, and here our advocacy is focused on ensuring payment accuracy and better aligning payments for comparable services that can be delivered safely in different settings while preserving access and quality. Continued progress towards value-based care obviously complements that effort by rewarding better outcomes rather than the volume of services that are delivered. We will continue working with the Congress, the administration, and our state partners to bring those practical data and research-supported solutions to these discussions. Clearly here, the common objective is to make affordable coverage more sustainable by addressing the cost of care behind it and simplifying the system. That is where we believe we can contribute constructively as the political landscape evolves.
Okay. Let us pivot over and talk about Medicaid for a minute. You have described 2026 as the trough for Medicaid margins. What determines and is likely to contribute to the pace of recovery from here? Rate adequacy, acuity, medical management, or operating costs? How do you see the pace of margin recovery in Medicaid unfolding over the next few years?
We continue to view 2026 as the trough for Medicaid margins and expect improvement in 2027. Let me highlight the key factors that really support that outlook. First, states are incorporating more recent cost experience into rates, which we have observed with the mid-year and second-half rate updates that we have received. Those actions have strengthened margins, although rates have not yet fully caught up with the current cost environment. Second, we are addressing the medical cost drivers within our control through targeted clinical interventions, network actions, program design changes, and those initiatives are underway, and we expect their contribution to build as they mature in scale. Third, we are maintaining a prudent view of membership mix and acuity. Our initial outlook incorporates expected changes in acuity as community engagement requirements take effect in 2027.
Those effects will be concentrated in the Medicaid expansion population, and they will obviously vary by state. Taken together, better rate alignment and the continued operational execution, they underpin our expectation for margin improvement over time, with our efforts focused on strengthening the financial foundation while delivering significant value for our members and for our state partners.
Okay. For January 1, 2027, Medicaid renewals, how are proposed rates comparing with your respective medical cost assumptions? Do they address the existing rate shortfall or primarily just cover the incremental trend? How are states incorporating potential changes in membership acuity in their rate updates heading into 2027, and what mechanisms exist for states to adjust rates if the population starts to differ from expectations?
We are encouraged by the preliminary rates that we've seen for the January 1 renewals. States are incorporating the medical cost experience from 2025 and 2026 into rates while recognizing that the elevated trend environment is likely to persist. Where uncertainty remains is how fully rates will reflect changes in member acuity as community engagement requirements are implemented. Some states have already included prospective acuity adjustments in their draft rates to account for those requirements. We are working closely with our state partners to provide data as they refine those assumptions. Finally, several states with July renewals have indicated a willingness to consider mid-cycle adjustments in early 2027 as actual experience emerges. Those discussions obviously remain preliminary, but they do provide a potential further mechanism to respond to changes in the population rather than have to wait for the next annual renewal cycle.
Okay. You said you've taken a prudent view for membership this year. What range of membership outcomes are you planning for as work requirements are implemented? What drives the timing across your states?
Yeah, it's a really great question, A.J. We are actively assessing the potential membership and acuity implications of the community engagement requirements as part of our initial 2027 plan development. Specifically, states continue to work through the details of how new requirements will be administered, including verification processes, exemption criteria, and the timing of eligibility reviews. Those decisions will ultimately shape both the magnitude and the pace of membership changes. We're also continuing to see the regulatory landscape evolve. For example, a recent federal court ruling broadened the medical frailty exemption, which could allow more eligible individuals to maintain coverage than under the previous interpretation. That's another illustration of why we believe it might be too early to provide a range of potential membership-based outcomes at this stage.
It's also worth noting that the impact of these requirements is concentrated in the Medicaid expansion population, which for us represents 20% of our total Medicaid membership. As we obviously gain greater clarity on state implementation efforts, we'll provide more details underpinning the assumptions as part of our January 2027 earnings call.
Okay. You alluded to this earlier. Beyond the payment rate catch-ups, what other actions can Elevance deploy to improve the economics of the Medicaid business? How much flexibility does the company have to realize administrative cost reductions as memberships change?
Let me maybe note upfront that we have levers to manage both medical costs and our operating expense structure. On medical costs, we have a broad set of initiatives underway, and we expect their contribution to build as they mature in scale. That's going to be particularly relevant in behavioral health, specialty pharmacy, and outpatient services. For example, we are strengthening clinical oversight and care coordination. We are leveraging advanced analytics to identify emerging cost pressures earlier, and we're deploying more proactive interventions to help members receive clinically appropriate care in the most effective setting. We also have practical ways to manage operating expenses as membership changes, and that's going to include automating routine tasks and eliminating handoffs. Through Health OS, for example, we're reducing requests for medical records and speeding up the prior authorization workflows, making the process simpler for both members and providers.
Importantly, this work is already underway, and we expect to benefit more fully and more meaningfully as we move through 2027.
Okay. I am going to pivot over to the marketplace product. In thinking about the ACA marketplace business, what key assumptions underpin your 2027 market and membership outlook? How are you thinking about affordability, retention, metal tier migration, and how those items might impact the risk pool?
We are well-positioned to build on this year's progress. Our pricing remains disciplined and county-specific, and that reflects our forward view of medical cost trend and market morbidity, together with risk adjustment and the local benefit network dynamics. While membership effectuation was better than expected in 2026, we are not assuming the risk pool has fully normalized. As such, we are planning for a continued membership attrition in 2027, reflecting our view that the ACA market will take more than one renewal cycle to stabilize following the expiration of enhanced subsidies. Across the portfolio, our competitive positioning is broadly consistent with 2026. In select markets, we have deliberately prioritized rate adequacy over near-term competitiveness to ensure sustainable returns. Our objective, in short, is to preserve affordable choices for consumers while pricing appropriately for the members we expect to serve, and we believe our 2027 rates strike that right balance.
Okay. Maybe specifically, how is the company thinking about margin recovery in this business? Where are your margins currently, and is 5%-7% still the right zone to think about a normalized margin for the ACA marketplace segment?
We are encouraged by the progress in our individual ACA business, and we see an opportunity to build on that performance in 2027. Performance, as I mentioned, has been better than expected this year, and we have maintained an appropriately measured outlook around fourth quarter seasonality. Consumers are finding value in our plans, particularly our lower-cost bronze offerings, and that has translated into better retention and a more stable membership base than we initially expected. That again reinforces our confidence in how we have positioned our business. For 2027, we see potential for further improvements while we continue delivering compelling value and affordability for consumers.
Okay. Let's pivot over to commercial for a second. How are employers balancing affordability, which is in the headlines a lot these days, benefit design, and network breadth for 2027? What is changing and what is staying basically the same? How are fully insured renewal yields comparing with your prospective medical cost assumptions for the year ahead?
Affordability and simplicity remain employers' top priorities. What is changing is how some employers choose to fund their benefits as they respond to an elevated medical cost environment. We are seeing greater interest in alternative funding arrangements and more willingness to assume risk. Importantly, the solutions that we offer are across the continuum, and that can vary from fully insured to fee-based arrangements, allowing us to maintain those relationships as employers' needs evolve. While we expect some membership decline in our fully insured risk business in 2027, we continue to see strong growth in our fee-based business. This reflects both a strong selling season for our national accounts business and employers moving to alternative funding products that we offer, really allowing us to retain those relationships. From a pricing perspective, our approach remains unchanged.
We are pricing fully insured renewals to our forward view of medical cost trend. We are maintaining the discipline needed to support sustainable margins. Finally, I would say regardless of the funding arrangement, our broader value is helping employers manage the underlying cost of care. Our networks and our integrated medical pharmacy capabilities, they all support that effort, while our advocacy and our digital tools, they make benefits just easier for members to navigate and to use.
You had mentioned earlier, the IDR is something you are advocating around. What drives your IDR exposure? What mitigation actions are proving effective here, and what residual uncertainty remains in your pricing assumptions with regard to this issue?
We identified IDR-related cost pressure in our commercial business early in 2025, and we incorporated that experience into the claims base and forward trend assumptions that we used to price 2026. Earlier this year, we noted that our experience has remained consistent with those assumptions. As a reminder, the pressure here is really driven by rising dispute volumes and arbitration awards that substantially exceed commercial in-network rates. The impact varies by geography, it varies by provider network, which makes understanding sometimes the specific exposure important. We are also taking targeted actions to manage that exposure. Our broad claims visibility helps us identify emerging billing patterns earlier and respond through focused claims review and provider engagement. Where appropriate, we are working to bring providers in-network to support member access and more predictable costs.
We've carried that same discipline into our 2027 pricing, assuming elevated IDR-related pressure persists rather than relying on reform necessarily to resolve it. The remaining uncertainty here is how dispute volumes and arbitration outcomes develop alongside the timing and effect of any policy changes. Managing that exposure, however, does not resolve, and this is maybe the key point here, it does not resolve the broader affordability issue. We again strongly support the No Surprises protections for patients. Our concern is that the dispute process is simply adding cost for employers and consumers without a corresponding improvement in care. That's why we continue to advocate for a fairer and more accountable process with stronger eligibility safeguards and payment outcomes grounded in objective market rates. The goal, again, reduce avoidable costs while preserving the consumer protections that the law was intended and designed to provide.
Okay. I'm going to pivot over to Medicare. I think with the latest update, you said, affirm you were tracking to a 2% margin this year. How much of the improvement you're realizing this year reflects pricing and benefit actions versus some of the geographic exits, retained membership mix versus favorable underlying utilization trends?
We are pleased with the progress in Medicare Advantage, and we remain on track to deliver an operating margin of at least 2% this year, and that's an improvement of over 100 basis points from 2025. The primary driver has been the deliberate portfolio repositioning we undertook for 2026. Our pricing, benefit design, geographic actions, they've all strengthened the economics of the business, with favorable member retention also developing positively. Utilization has been broadly consistent with the assumptions embedded in our 2026 bids. We planned for an elevated cost environment, and the experience today reinforces that confidence, how we positioned the business. Our 2026 actions are delivering the intended results. They provide a very strong foundation for continued Medicare Advantage margin improvements in 2027.
Okay. Just thinking about medical cost trend, what are you seeing in the second half of the year in MA, and how does that compare with the assumptions embedded in your 2027 bid? Which service categories are showing the most variability or seem to be the most challenging?
Great question. We have planned for an elevated utilization environment, and third quarter medical cost trend was generally consistent with our expectations. Areas of elevated cost have included inpatient care and medical specialty pharmacy, particularly oncology. Those costs remain areas of focus for our clinical and our medical cost management teams. For the fourth quarter, we expect underlying trend to remain broadly consistent with our year-to-date experience, and that expectation is reflected in our full-year guidance. Our 2027 bids assume a similar level of medical cost trend to 2026, and we are pursuing further margin improvement through disciplined benefit design and continued medical cost management rather than relying on a lower trend environment.
Okay. How are you balancing membership growth with continued margin improvement as you think about 2027 and even beyond? I have to ask you, do you have any early takeaways from the open enrollment period thus far? As we think about pacing a margin recovery, when do you expect to return to your long-term margin target for the segment?
Our priority remains continued margin improvement towards our long-term 3%-5% operating margin target in Medicare Advantage. We are on track to achieve at least 2% this year, and we expect further improvement in 2027. We are pursuing membership growth that supports that trajectory, particularly in duals, and our focus is on markets and products where we can deliver compelling value for members while earning sustainable returns. Carelon is an important advantage in serving that population. The CareBridge example I showed earlier demonstrates how better care coordination can improve quality and lower total cost, and expanding those capabilities to more members helps strengthen the underlying economics, so growth and margin can reinforce one another. Early activity during the annual election period is developing broadly in line with our expectations. We took a very deliberate market-by-market approach to our bids.
We used enhanced analytics and AI-enabled insights to assess competitive positioning and make precise benefit decisions. While it's still early, we are encouraged by how that positioning is translating into enrollment activity. On the timing of reaching our long-term target, the funding and medical cost environment will obviously influence the pace, but we're very focused on the actions we can take to sustain improvement, meaning maintaining disciplined benefit design, expanding clinical capabilities, and focus on improving care and affordability. That progress this year is what gives us a stronger foundation for improvement in 2027.
Okay. Maybe I'll slip in a couple on Carelon as we wrap up. How would greater adoption of the transparent or rebate-free model change CarelonRx competitive positioning or earnings outlook, if at all?
The move towards greater predictability in the PBM market is consistent with how we have been building CarelonRx, and we view this as an evolution in how pharmacy services are contracted rather than a change in the value we deliver. Our model is flexible by design, so we already support transparent fee-based arrangements. We've also provided the option for net pricing at the pharmacy counter for our commercial fully insured members since 2020, and that gives us an established foundation to adapt as the market evolves. From an earnings perspective, we view the transition as manageable. Our long-term mid-single-digit margin target already contemplates a more transparent client-aligned market. While the economics may shift across contract structures, CarelonRx's value is not dependent on any single rebate or spread mechanism.
As such, our focus really remains on aligning compensation with the services that we provide and the value that we deliver. Connecting medical and pharmacy management helps clients address total cost of care, but it also allows us to expand our specialty and dispensing capabilities and give us a more direct role in helping members access medications. That's really the foundation for sustainable earnings as the contracting model evolves.
Great.
Thank you.
And one more. On the services side, can you give us an update on where you are in the journey towards moving more members toward risk-based models? Where are the strongest areas currently, and what other areas of opportunity do you see in the future?
Thanks, A.J. We are moving from demonstrating the value of newer risk-based models to expanding them across more members and markets. We are focused on complex, fragmented areas of care where specialized clinical expertise can improve outcomes and lower the total cost of care with pricing that supports sustainable returns. CareBridge is a strong example. It serves more than 300,000 members, and it's demonstrated mid-teens medical cost savings across multiple payer relationships. That gives us the foundation to expand adoption within our health plans and with external customers. Looking ahead, we see further opportunities in musculoskeletal and post-acute care. Please note, our approach remains disciplined, establish clinical and economic value within the health plans, then expand where the model can deliver repeatable results. Thank you, A.J.
That's great. Well, thanks so much to Elevance, Mark, and Nate for participating in the conference this year. Next up in this room will be Mettler-Toledo at 8:45 A.M.