Elevance Health Inc. (NYSE:ELV) Q1 2024 Earnings Call Transcript

Elevance Health Inc. (NYSE:ELV) Q1 2024 Earnings Call Transcript April 18, 2024

Elevance Health Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $10.54. ELV isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Elevance Health First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session where participants are encouraged to present a single question. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the conference over to the company’s management. Please go ahead.

Steve Tanal: Good morning, and welcome to Elevance Health’s first quarter 2024 earnings call. This is Steve Tanal, Vice President of Investor Relations. And with us this morning on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial Health Benefits Business; and Felicia Norwood, President of our Government Health Benefits Business. Gail will begin the call with a brief discussion of the quarter, recent progress against our strategic initiatives, and our updated outlook for the year. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A.

During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today’s press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

Gail Boudreaux: Thank you, Steve, and good morning, everyone. We appreciate you joining today’s earnings call. I’m pleased to report that Elevance Health delivered first quarter GAAP earnings per share of $9.59 and adjusted diluted earnings per share of $10.64, reflecting growth of 12.5%. These results reflect disciplined execution of our strategic initiatives during a dynamic time for our industry. Given the solid start to the year, we have increased our guidance for adjusted earnings per share by $0.10 to be greater than $37.20. We are making significant progress on our enterprise strategy in 2024 to accelerate capabilities and services, invest in high growth opportunities, and optimize our Health Benefits business. On Monday, we announced the next step in our journey to expand access to high-quality patient-centered value-based care in our local markets.

After years of experience working closely with care providers to advance value-based care, we are confident that our hyper-local approach, which aligns the right incentives, real-time patient information and clinical decision support tools, delivers better health outcomes, improved consumer and provider experience, and greater affordability. Accordingly, we entered into an agreement to form a strategic partnership with Clayton, Dubilier & Rice to build a payer-agnostic advanced primary care and physician-enablement business, serving consumers across commercial, Medicare, and Medicaid health plans, consistent with the diversity of our own medical membership. Upon formation, the combined company will serve nearly 1 million consumers. The new venture will bring together the strengths of three innovative care provider entities, including certain care delivery and enablement assets of Carelon Health.

Importantly, we have worked closely with these companies and their management teams and are confident in the value they deliver for our Medicare, Medicaid, and commercial health plan members and employers. We’re excited to collaborate with CD&R and a broad range of care provider partners to accelerate innovation, enhance healthcare experiences, and improve health outcomes for consumers. The collaborative development of the business will advance our enterprise strategy by accelerating the provision of value-based care for our members and consumers more broadly, with our Carelon businesses providing capabilities to integrate and personalize the care delivered. In time, Elevance Health will have full ownership of what we expect will be a leading platform for value-based care delivery and physician enablement at scale across commercial group, ACA, Medicare, and Medicaid health plans, advancing our role as a lifetime trusted health partner for the consumers we are privileged to serve.

In the first quarter, we made tangible progress on our strategic initiatives, notably in Carelon, where we continue to scale our flywheel for enterprise growth. Carelon Rx closed its acquisition of Paragon Healthcare, a leading provider of infusion services. We are looking forward to expanding its geographic reach and therapeutic coverage to serve more consumers and Elevance Health members for years to come. As Carelon Rx furthers our enterprise commitment to address the whole health needs of our members, notably those with chronic and complex conditions, we are accelerating the buildout of our own specialty pharmacy. For example, we recently entered into an agreement to acquire Kroger’s Specialty Pharmacy business, the sixth largest specialty pharmacy in the country.

The acquisition will bolster the growth of our existing pharmacy and infusion businesses while increasing Carelon Rx’s access to limited distribution drugs. Carelon Services is also off to a strong start this year as we implemented and were awarded multiple new contracts, a testament to the value Carelon services provides. For instance, Carelon Behavioral Health was selected by the Maryland Department of Health to provide behavioral health management services to more than 1.7 million Medicaid members starting in 2025. And in California, our team will partner with the public school system to expand behavioral health management services for students later this year. This initiative represents a major step forward in addressing the critical need for mental health support in educational settings and demonstrates our commitment to improving the health and well-being of our communities.

Momentum with external clients is building and underscores the value Carelon Services is creating for health plan customers through better consumer experiences and improved affordability. Our health benefits business is similarly off to a solid start. Commercial margin continues to recover from pandemic era lows, and we are enjoying momentum in membership growth, notably in our individual ACA plans and among large self-insured employers. Existing clients are demonstrating their confidence in our offerings by consolidating their business with us after years of offering our solutions side by side with those of our competitors. In our Medicaid business, we were pleased to be selected in Florida and Virginia to serve beneficiaries across traditional and complex populations statewide, including those with serious mental illness in Florida and sole source foster care in Virginia.

These awards and their pull-through opportunities for Carelon services underscore the distinct value Elevance Health delivers. In the first quarter, our Medicaid business performed in line with our expectations. We estimate that nearly 90% of our members have had their eligibility redetermined. Further, our team continues to work tirelessly to maximize access to care for Medicaid members subject to eligibility redetermination, helping them to understand their options in the face of ongoing logistical and operational challenges. Holistically, we are proud of the work we have done in contacting more than 4.5 million Medicaid beneficiaries through our omni-channel approach. Nonetheless, a majority of members who have lost coverage for administrative reasons have not yet returned.

We’re seeing a gradual increase in Medicaid re-enrollment and anticipate continued upticks in rejoiner rates as more Medicaid beneficiaries recognize their need to re-enroll, aligned with the trends that we have observed in recent months. Turning to Medicare. We were pleased to announce last month that CMS updated the Star scores for four of our contracts, which increased the percentage of our members in four star or higher-rated contracts to nearly 50%, up from 34%. While this will improve our star quality bonus revenue in 2025, our goal is to have our star quality ratings at the high end of all plans in our local markets, which will be a multi-year journey. Funding for Medicare in 2025 will be challenging for the entire industry. We are disappointed that CMS has decided to cut Medicare Advantage rates for the second consecutive year, which will negatively impact seniors, notably those at the lower end of the income spectrum who rely on the program for their health and wellbeing.

While we remain committed to serving seniors through plan offerings that focus on their unique needs, we will also continue to demonstrate discipline in our Medicare Advantage bids seeking to balance growth and margin while continuing to deliver exceptional value for seniors. Across the enterprise, our focus on delivering whole health for the consumers we are privileged to serve remains steadfast. We recently released our 2023 Advancing Health Together progress report, which underscores the strides we are making through value-based care. The report showcases examples of our success, facilitated by the unique partnerships that we’ve created with care providers across the healthcare ecosystem. I’d like to highlight a particular achievement that underscores our innovative approach to improving quality and value in healthcare.

Recently, Elevance Health was honored by the NCQA with its Innovation Award, featuring quality accelerators in healthcare for leading-edge strategies that improve quality and value, specifically for our obstetrics specialty provider enablement program. The impact of these value-based partnerships and clinical interventions has led to consistent improvements in health outcomes and costs, including reducing preterm birth rates by 12% and low birth weight babies by 20%, all while improving access to timely prenatal care and postpartum follow-up. For those interested in learning more about these transformative initiatives and other examples of our progress, I encourage you to visit our Advancing Health Together website. In closing, I want to extend my deep gratitude to our 100,000 associates who embody our purpose of improving the health of humanity through their tireless commitment.

It’s also heartening to see their efforts recognized externally. We were honored to be named to Fortune magazine’s 100 Best Companies to Work for list for the fourth year in a row. We were also included in their World’s Most Admired Companies and America’s Most Innovative Companies list. With that, I’d like to turn the call over to our CFO, Mark Kaye to provide more on our operating results and outlook. Mark?

Mark Kaye: Thank you, Gail. As you heard earlier, our first quarter results reflect solid performance under a dynamic operating environment. We ended March with 46.2 million members reflecting Medicaid attrition, partially offset by ongoing momentum in our commercial business. During the quarter, we added nearly 400,000 commercial fee-based members, driven by strong retention and a successful national account selling season, and over 200,000 individual ACA members, given our attractive product positioning and coverage transitions away from Medicaid. Medicare Advantage membership declined slightly, as expected, given select market exits and the collective actions we continue to take to establish a strong foundation for profitable and sustainable growth over the long term.

Operating revenue for the quarter was $42.3 billion, in line with our expectations. The consolidated benefit expense ratio of 85.6% improved 20 basis points year-over-year due to disciplined premium rate adjustments to reflect medical cost trends and the ongoing recovery of commercial margins from pandemic era lows. The adjusted operating expense ratio was 11.4%, consistent with the first quarter of 2023, indicative of our commitment to disciplined expense management and investment prioritization. Solid performance and growth in operating gain for both our health benefits and Carelon segments of $138 million and $72 million respectively, led to growth in consolidated adjusted operating gains of over 7%. Carelon Services had a particularly strong start to the year with revenue and operating earnings growth driven by risk based service line expansions and effective cost management, especially in our Carelon Insights and Carelon Behavioral Health businesses, further accelerating our enterprise flywheel or growth.

Operating cash flow in the first quarter was $2 billion, or approximately 0.9 times net income. With respect to the balance sheet, we ended the quarter with a debt to capital ratio of 39.4%, in line with our target range, preserving ongoing capital allocation flexibility. We repurchased 1.1 million shares of common stock for approximately $566 million during the quarter, underscoring our confidence in the intrinsic value of our shares and the long-term value proposition. We maintained our prudent and consistent approach to reserving. Days in claims payable stood at 49 days as of March 31st, up three days from the prior year quarter. This increase was largely driven by higher reserves associated with slower claims receipts due to an industry-wide disruption that impacted a major claims clearinghouse.

As a reminder, we expect our days in claims payable to be in the low 40s range long term. I’d also like to take a moment to provide additional color on our strategic partnership with Clayton, Dubilier & Rice. We are excited to partner with CD&R to scale what will be a best-in-class, payor agnostic advanced care delivery and enablement platform catering to the unique needs of consumers, regardless of their form of coverage. This collaboration will allow us to advance our local-oriented approach to care delivery based on the unique needs of the communities, consumers, and employers we are privileged to serve. At the onset, Elevance Health will hold a significant minority position in the combined business with a clear path to first majority and then full ownership in approximately five years.

The formation of the strategic partnership includes our capital contribution in the form of cash and our equity interest in certain care delivery and enablement assets of Carelon Health as well as the conveyance from CD&R of our pre-health in Millennium Physician Group, and is subject to customary regulatory approvals. Overall, we are pleased with our first quarter performance and the solid start to the year. Momentum in our health benefits and Carelon businesses and the balance and resilience of our enterprise underscores our confidence in delivering another year of growth in adjusted diluted earnings per share consistent with our long-term compound annual growth rate of at least 12%. As we look forward to the rest of 2024, our focus will remain on successfully executing our strategy as we accelerate capabilities and services, invest in high growth opportunities, and optimize our health benefits business.

And with that, operator, please open the call for questions.

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Q&A Session

Operator: [Operator Instructions] For our first question, we’ll go to the line of Lance Wilkes from Bernstein. Please go ahead.

Lance Wilkes: Great. Thanks so much. Let me ask a little bit about the value-based care strategy and the execution that’s obviously a really big step forward. Could you talk a little bit about kind of the vision and scope of this? Is this going to be more focused on enablement or in particular markets, is practice ownership going to be important? Then maybe if you can kind of color in the picture a little bit as far as leadership, names, which Carelon assets are going to be contributed. And near term, do you see which areas of leverage across the membership base of Elevance, do you see this being able to penetrate most effectively? Thanks.

Gail Boudreaux: Well, great. Thanks so much for the question, Lance. First, as I shared on in my opening comments, we’re very excited about this partnership with CD&R, because it is very much the next step in our journey to bring value-based care to more consumers, specifically about partnering closely with care providers. And we see it as absolutely consistent to driving greater risk adoption and advancing our specialty enablement strategy as well. So it’s very much a first step there. And as you said in your question, this aligns very closely with our strategy and our broad partnership focus to work directly with care providers in our local markets. And our goal again remains to increase more downside risk sharing in our value-based arrangements.

I think, to take a step back, what makes this approach unique is that we’re enabling value-based care across all lines of business. So, as I shared, the combined company is going to be payor-agnostic, and it’s focused on enabling advanced primary care locally. And from the get-go, it’s going to serve nearly 1 million consumers, and that’s going to be across our commercial, Medicare and Medicaid health plans upon formation. Another thing I think is important is that it provides the opportunity to pull through Carelon services to support those patients and accelerate that specialty enablement for complex and chronic patients. We have been working with these management teams and these assets for some time and feel very confident about the alignment of our goals to serve as a lifetime trusted health partner.

The goal gets back again to focusing on whole health, the needs of consumers, driving greater affordability, and fundamentally differentiate a consumer experience. A few things about the partnership too, and again, what makes it different for patients. They’re going to have access to integrated teams. We’re looking at personalized navigation, expanded digital assets, and specialized services. The primary care model is going to be built to be very distinctive, including community practices, purpose-built clinics, high-risk clinics, and digitally-enabled care models. So, as you can see, it’s a fairly comprehensive approach. And the last thing I’d say is that employers in the market have not historically had access to a lot of these capabilities.

And we have seen through the work that we’re already doing, that this dedicated primary care capacity that integrates the clinical and benefits navigation with their specific health and wellness strategies is truly differentiating. So again, this is being purpose-built to work across all of the aspects of [Medicare, Medicare] (ph), commercial, not just a single business. So very much excited. We see this as an opportunity to accelerate innovation in the space and improve healthcare outcomes and consumer experiences. So thanks very much for the question. Next question, please.

Operator: Next, we’ll go to the line of AJ Rice from UBS. Please go ahead.

AJ Rice: Hi, everybody. Thanks for the question. I appreciate Mark’s comments about the buildup, a little bit in days in claims payable, but just maybe to flesh out a little bit more the impact of the Change cyber-attack on results. Do you have a census of what percentage of your claims that you normally see in the first quarter may still be out there? Do you feel like you’ve got a good handle on that? And anything when you address that in terms of your normal IV&R, maybe you’ve got a significantly higher level of IV&R because you’re allowing for the Change and if you can break out what you’re actually seeing a little bit on cost trends versus needing to sort of provision for the unknowns of the Change cyber-attack.

Gail Boudreaux: Thanks for the question, AJ. Let me maybe provide some broad-based comments and then I’ll turn it over to Mark to provide a little more specificity on your questions. Now, I want to say first and foremost, I’m really proud of our teams and how they responded to this issue that occurred with Change quickly and effectively, first to protect our members and their data, and also help our care providers maintain their operations and cash flow. Importantly, I think it’s important to note that from a perspective, we were not as significantly impacted by this and we are back to normal operations in terms of claims flow. Importantly, another thing that’s really important to understand is our prior authorization provider payments and pharmacy claims were not materially impacted as well because they don’t go through Change.

We don’t use Change significantly for those. So with that, I’ll turn it over to Mark to provide a little more comments. But I think framing it overall, we feel that our teams acted quite quickly and really proud of our ability to work in the ecosystem to help support them.

Mark Kaye: AJ, as you just heard from Gail, we acted quite responsibly to sever our network connections to Change Healthcare and to protect the data of both our members and providers. While we initially observed a 15% to 20% reduction in the daily volume of electronic data receipts from providers, most of which were claims related, in recent weeks our extensive efforts have led to a significant catch-up in outstanding claim volumes. And for the quarter, we are effectively caught up on claims receipts and are now working to complete all necessary claims adjudication and processing activities. As such, as part of the normal reserving practices, we’ve reflected the appropriate impact of the industry-wide disruption related to Change Healthcare in the reserves we’ve reported for our first quarter financials, and that ensures both consistency with historical practice and prudence.