Elevance Health Inc. (NYSE:ELV) Q4 2023 Earnings Call Transcript

Elevance Health Inc. (NYSE:ELV) Q4 2023 Earnings Call Transcript January 24, 2024

Elevance Health Inc. beats earnings expectations. Reported EPS is $5.62, expectations were $5.55. 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 Fourth Quarter Earnings Conference Call. [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 fourth quarter 2023 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 and year and recent progress against our strategic initiatives. 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: Thanks, Steve, and good morning, everyone. Today, we’re pleased to share that Elevance Health delivered a strong end to 2023, demonstrating our ability to execute with agility and the balance and resilience of our enterprise. In the fourth quarter, Elevance Health delivered GAAP diluted earnings per share of $3.63 and adjusted diluted earnings per share of $5.62. For the full year, we reported GAAP diluted earnings per share of $25.22 and adjusted diluted earnings per share of $33.14. 2023 marks the sixth consecutive year in which we grew adjusted diluted earnings per share within or above our 12% to 15% long-term target growth rate with a compound annual growth rate exceeding the high end of the range. This reflects the ongoing execution of our strategy to accelerate capabilities and services, invest in high-growth opportunities and optimize our health benefits business.

In 2023, we made significant strides building upon our flywheel for growth. Carelon has and will continue to add attractive capabilities that we can scale rapidly and sustainably over the long term. For example, just a few weeks ago, we announced the acquisition of Paragon Healthcare, a company specializing in infusible and injectable therapies. The acquisition expands our capabilities catering to consumers with complex and chronic needs, who can benefit the most from our approach to whole person health. Infusion Services will complement our suite of pharmacy services, which today include a fast-growing specialty pharmacy business and our advanced home delivery service, which launched at the beginning of this year. Carelon Services is poised for strong growth in 2024 with the on-boarding of new clients and continued expansion of services provided to Elevance Health medical members, including the rollout of risk-based oncology products and Carelon Insights, as well as the launch of comprehensive Carelon Behavioral Health Management Services to address the whole health needs of Medicaid beneficiaries living with serious mental illness.

Turning to our health benefits business, 2023 marked another strong year despite a dynamic operating environment. Performance was led by the optimization of our commercial business where our operating margins continue to recover from pandemic-era lows which will continue into 2025. Commercial customers prioritize affordability, experience, and simplicity. And we’re delivering on all fronts. In 2023, we launched a series of initiatives designed to improve and simplify the customer experience, including our associates’ ability to better serve our members through the integration of AI support and natural language processing, which has significantly improved first call resolution. In addition to enhancing our claims auto adjudication rate, we’re also broadening the use of AI to automate certain aspects of our provider directory and other administrative processes, which have improved data accuracy in consumer and provider experiences.

Momentum in our national accounts business is a direct result of the unique and differentiated value we offer to large employers. We continue to consolidate business with existing clients, achieving excellent retention and winning over 75% of employers who ultimately switch carriers despite a smaller pipeline of new accounts for 2024. In our individual business, we positioned our products thoughtfully to drive profitable and sustainable growth, and we’re pleased with our performance in 2023. We’re looking forward to even stronger membership growth this year as we focus on maximizing access to care for re-determined Medicaid beneficiaries. Our relentless focus on affordable products, superior customer experiences, and simplicity is yielding strong results.

After growing commercial membership by over 400,000 members last year, we are poised to grow by another 750,000 in 2024. Medicaid eligibility re-determinations remain ongoing and in many states have accelerated the re-determination processes. To date, over 70% of our members who lost Medicaid coverage were un-enrolled for administrative reasons. This is a challenging reality for many families, but we’re encouraged that we are nearly two-thirds of the way through the process, with close to 30% of those un-enrolled before September 1st having re-enrolled in an Elevance Health product. Our research indicates that many un-enrolled members are facing barriers to re-enrollment, including awareness of the process and required actions to maintain coverage.

To address this, we’re executing an extensive renewal campaign and have reached over three million people with our omni-channel approach as we remain committed to supporting them as their trusted health partner. Despite accelerated membership attrition from re-determinations to date, our Medicaid business is performing well. Rates remain actuarially sound for the members we are privileged to serve, and we are innovating to meet their needs. For example, in 2024, we will expand our community connected care model into eight additional states. This program assists Medicaid members with their health-related social needs by identifying gaps and connecting members to support services in their communities. We will also launch a program in alliance with the affordable connectivity program, major wireless carriers and Samsung that will help increase equitable access to digital and virtual health tools.

The program will provide eligible Medicaid members with a curated selection of digital and virtual health tools via smartphone with no data cap at no cost along with training materials and ongoing guidance on how to use these tools. Strong performance in 2023 allowed us to invest for the long-term. In the fourth quarter, these investments were concentrated in Medicare, where we remain intensely focused on building a strong foundation for sustainable long-term growth. This includes improving our star quality ratings and driving profitable growth in markets where we know we can win over the long-term. Unfortunately, pockets of the Medicare Advantage market have remained hyper competitive despite a more challenging funding environment. While our plans continue to offer attractive and valuable benefits, we took intentional actions as part of our 2024 bid strategy to address product sustainability, and as such, we experienced greater-than-expected attrition in certain markets.

As a result, we expect our Medicare Advantage membership to be roughly flat in 2024 on an organic basis, but earnings to improve. Importantly, cost trends in our Medicare Advantage business continued to develop as we expected, and we are confident that the assumptions underlying our bids for 2024 are appropriate. With respect to Stars we have now fully implemented My Health Advocate our comprehensive personalized customer service model for Medicare. This has improved experiences for our members, helping them to easily navigate the health care system and their plan benefits. Early proof points reflect an improvement in first call resolution, a key indicator of future quality performance for our Medicare Advantage plans. We are confident that we have a solid foundation in our health benefits business, from which we will grow Carelon for the long-term with many of the building blocks in place to accelerate our enterprise flywheel for growth.

We are positioned to deliver another year of strong earnings growth in line with our long-term target in 2024, while continuing to invest in our future. We expect adjusted diluted earnings per share to be greater than $37.10 this year, reflecting growth of at least 12% over 2023. Finally, advancing Health Equity is foundational to our efforts to improve the health and lives of the individuals and communities we are privileged to serve. Our industry-leading approach received renewed recognition when the National Committee for Quality Assurance awarded its newly established Health Equity accreditation plus to 20 of Elevance Health affiliated Medicaid health plans covering over 90% of our Medicaid members and making us the only national plan to have received this distinction-to-date.

We also saw excellent progress on our ambitious goal to improve maternal health equity by reducing the disparity in preterm birth rates between black and non-black communities, improving the disparity gap by 5.2% relative to our 2022 baseline. In closing, I want to express my gratitude to our extraordinary team of over 100,000 associates. It is their collective passion and hard work that enables us to deliver on our commitments to all of our stakeholders. This past year alone, our associates logged over 225,000 volunteer hours in our communities, a record high for Elevance Health. This remarkable achievement reflects our deep dedication to making a tangible positive impact on the lives of the people we are privileged to serve and for the communities we call home.

As we move forward, we will remain focused on serving our members as their lifetime trusted health partner. With that, I’d like to turn the call over to our new Chief Financial Officer, Mark Kaye. Mark?

Mark Kaye: Thank you, Gail, and good morning. I am pleased to join you for my first earnings call as CFO of Elevance Health. As Gail shared, we delivered strong results every quarter of 2023, including in the fourth quarter, which was marked by solid top and bottom line growth and significant progress in the execution of our enterprise strategy to accelerate capabilities and services, invest in high-growth opportunities and optimize our businesses. Fourth quarter adjusted diluted earnings per share of $5.62 and full year adjusted diluted earnings per share of $33.14 were ahead of expectations. Since 2018, Elevance Health has achieved a compound annual growth rate of nearly 16%, surpassing our long-term target range of 12% to 15%.

Operating revenue exceeded $170 billion in 2023, up 9.3% year-over-year driven by growth in both our health benefits and Carelon businesses. The benefit expense ratio was 89.2% for the fourth quarter and 87% for the full year, representing an improvement of 50 basis points and 60 basis points respectively, compared to the prior year periods. This was primarily driven by premium rate adjustments in recognition of medical cost trend, most notably in our commercial health benefits business. The adjusted operating expense ratio was 11.6% for the fourth quarter, up 20 basis points compared to the prior year period, driven by accelerated investments made in the quarter, notably in network quality, value-based care and customer experience initiatives designed to address key priority areas for Medicare Advantage stars.

For the full year, the adjusted operating expense ratio was 11.3% flat year-over-year. Operating cash flow was $8.1 billion in 2023 or 1.3 times GAAP net income. This includes the benefit of approximately $300 million of state-based payments for 2024 dates of service that we received in the fourth quarter and which will correspondingly impact operating cash flow in 2024. We ended the year with a debt-to-capital ratio of 38.9% in line with our targeted range. Giving confidence in our outlook, we took advantage of market volatility during the fourth quarter to accelerate share repurchases, specifically, we repurchased 2 million shares of our common stock for $929 million, bringing total share repurchases for the year to 5.8 million shares at a total cost of $2.7 billion.

Our health benefits business ended the year with approximately 47 million members, a decrease of around 570,000 year-over-year, driven by attrition in Medicaid associated with eligibility redeterminations, partially offset by growth in our commercial fee-based membership. Today, we are seven to eight months into the Medicaid redetermination process. And while there is significant variability by state, we believe that nearly two-thirds of our members have had their eligibility evaluated. Of those unenrolled, approximately 70% have lost coverage due to administrative reasons. And we have also seen an elongation in the time some beneficiaries have taken to reenroll into Medicaid, while others have transitioned on to an ACA exchange plan. As Gail noted, we are executing an extensive renewal campaign to maximize continuity of coverage.

Accordingly, we expect reenrollment into Medicaid continue through at least 2024 and for growth in ACA exchange plans to accelerate. This has been incorporated into our membership guidance ranges for 2024. Turning to our financial outlook for 2024. We are pleased to provide initial guidance for adjusted diluted earnings per share of greater than $37.10, reflecting growth of at least 12% year-over-year. We are focused on optimizing our health benefits business, including through the ongoing margin recovery of our commercial risk-based business, the strategic repositioning of our Medicare Advantage plan offerings in certain markets and the transformation of our cost structure. Further, we are investing in high-growth opportunities with a focus on establishing a foundation for sustained long-term growth.

We will scale Carelon’s existing capabilities and add new ones in 2024 and driving incremental earnings growth and accelerating our enterprise flywheel for growth. The momentum in our commercial health benefits in Carelon businesses is partially offset by the Medicaid membership headwinds included in our guidance. We anticipate total medical membership to end 2024 in the range of $45.8 million to $46.6 million, down approximately $750,000 year-over-year at the midpoint. Medicaid membership is expected to end the year in the range of 8.8 million to 9.2 million members with attrition driven by the net loss of approximately 930,000 members associated with changes in our footprint discussed on our third quarter earnings call and ongoing eligibility redeterminations.

Commercial membership is expected to grow by over $750,000 at the midpoint, ending the year in the range of 32.4 million to 32.8 million members. This includes over 300,000 net new risk-based members and approximately 400,000 net new fee-based members, collectively driven by new business wins and strong client retention reflecting our resolute focus on customer affordability, experience and simplicity. Medicare Advantage membership is expected to end the year approximately flat. As a reminder, we took intentional actions as part of our 2024 bid strategy to improve the sustainability of our product offerings. And given unexpected competitive dynamics in certain markets experienced greater-than-expected attrition. Nonetheless, these actions will help establish a strong foundation for profitable and sustainable growth over the long-term.

And we remain confident in the outlook for utilization and medical cost trends embedded in our 2024 bids. Finally, we expect our Medicare supplement and federal employees’ health benefits membership to remain relatively stable year-over-year. On a consolidated basis, operating revenue for 2024 is expected to be flat to up low single-digits. We project operating earnings for the year to be at least $10.3 billion, reflecting 9% growth with contributions from both our health benefits and Carelon businesses, disciplined benefit management, and the successful execution of our 2023 business optimization initiatives. Please note that our guidance metrics do not include the impact of pending M&A, even though we have several transactions we expect to close this year.

Earnings seasonality is expected to be relatively consistent year-over-year with slightly more than 55% of our full year adjusted diluted earnings per share in the first half of the year and more than half of that expected in the first quarter. Finally, I’m pleased to announce that our Board of Directors recently approved a 10.1% increase in our regular quarterly dividend, raising it to $1.63 per share. This marks our 13th consecutive annual dividend increase, underscoring our commitment to delivering strong results for our shareholders and the value of our balanced and resilient business model. In closing, 2023 was a strong year for the company, and I’m looking forward to working alongside the talented and dedicated team at Elevance Health to deliver on our financial targets.

I look forward to meeting all of you in 2024. And with that, operator, please open the line for questions.

See also 11 Best Global Dividend Stocks To Buy Now and 10 Best Long-Term Tech Stocks To Buy.

Q&A Session

Operator: [Operator Instructions] For our first question, we’ll go to the line of A.J. Rice from UBS. Please go ahead.

A.J. Rice: Hi, everybody. Welcome on board, Mark. Congratulations to the company for another year of meeting the growth targets and I know it’s early to talk about this, but maybe you’d have to take some steps today to ensure your positioning. With 2025, you’ll have the Star ratings impact overcome. When you think about that, will the company do anything differently? How do you think about the levers you have to push to offset what appears at least on the surface to be a couple percentage points of headwind from that Star ratings impact? We step up share repurchases, accelerate investments in Carelon, how do you think about that at this early date and the ability to sustain that 12% to 15% even into next year?

Gail Boudreaux: Well, thanks for the question, A.J. There’s a lot in there. And as you know, 2025, it’s a little early to opine on 2025, but I’d like to give you at least a little bit of color on how we’re thinking about some of the things that you mentioned. Let me start first with Star ratings. So because as we shared on the last we are intensely working. Medicare Advantage is a very important business for us, and we’re strategically committed to the long-term. And I will reiterate this year, we felt we took very prudent actions for a long-term sustainable business and feel good about our bid. So that positions us well for 2025 in particular. In terms of the Star ratings, again, a few things going on there. We shared on our last call that on the group business, we have a number of levers at our disposal that we are able to pull, and we’re still moving forward with that.

And then in terms of overall Star ratings, we do think that, that’s going to be a multiyear initiative. But I wanted to share, as I shared on my early remarks that we have invested at the last part of the year, and we were investing actually prior to even the announcement, we have been successful at moving all of our business into our Health Advocate model, and we do know that we’re seeing some early signs. We don’t know where the points are going to come out, but we do feel good about the investments we’re making. And again, we feel really good about where our bids have come out. Broader, let me take a little bit step further back because I think your question around 2025 is broader than just Medicare Advantage and Stars. As I think about 2025 again, not giving guidance on 2025, but we do expect to accelerate growth in 2025 and we’ve talked quite a bit in recent calls about our flywheel for growth, which is in our improvement in both the health benefits business and our Carelon segment.

We anticipate that our health benefits business is going to continue to grow in 2025 after a reset year in 2024. We should see an accelerated impact to that growth, which will drive revenue for Carelon. And then Carelon also has been independently scaling its multiple new capabilities, and we’ll share, I assume even more of those on the call today. And then finally, as you know, we took some actions at the end of last year around our disciplined operating cost efficiencies, and we expect to see even greater benefits from those as we digitize and use AI in our investments. So honestly, I think we feel that we’ve positioned our business very prudently and that the balance and resilience of our enterprise and our earnings power of our health benefits in Carelon together gives us a lot of confidence in our ability to achieve our long-term targets.

So just a little bit more color on where we are. Thank you very much for the question. Next question please.

Operator: Next, we’ll go to the line of Kevin Fischbeck from Bank of America. Please go ahead.

Kevin Fischbeck: Great. Thanks. I guess I wanted to ask about the MLR guidance for 2024. It sounds like you guys are expecting margin improvement in MA, your repositioning commercial and Medicaid is dropping pretty meaningfully. But why is MLR only flat? I would think that we’d be seeing MLR improvement? Is there some offset in there?

Mark Kaye: Good morning and thank you very much for the question. Maybe let me start with the 2023, just to set the context here. So 2023 benefit expense ratio end of the year slightly better than our initial expectations at that 87%. And just to remind you, that represented the 60 basis point improvement year-over-year as well as falling in the lower half of our initial 2023 guidance range. As it relates to 2024, we are guiding to a flat benefit expense ratio of 87%, plus/minus 50 basis points. And our outlook here reflects a consistent approach to reserves and a prudent thought process around utilization, given the dynamic operating environment, especially for our government businesses. If I take a deeper look at the underlying businesses themselves, the health benefit expense ratio reflects that intentional management action we’re taking in commercial.

It will continue on through into 2024 around the disciplined underwriting practices and part of our margin recovery efforts. And then certainly, on the Medicare the advantage side, continued appropriate expectations around utilization and Medicare — medical cost trends.