Q3 2024 Elevance Health Inc Earnings Call
Speaker Change: Importantly, we are not leveraging the future to achieve short term gains we are investing to position elegance Hal for strong growth over the long term.
Speaker Change: The issues impacting the Medicaid business are timed out and our state partners are working constructively with us on rate renewals, we're confident that rates will ultimately reflect the underlying acuity of our members, albeit on a lag.
Speaker Change: <unk> often used data that is more than a year old in setting rates. These.
Speaker Change: These short term headwinds are a byproduct of the large scale and unprecedented mix shifts associated with the end of the public health emergency.
Speaker Change: Over the long term Medicaid managed care as an attractive business that is integral and complementary to our other health benefits and Caroline businesses.
Speaker Change: And offer significant growth opportunities, notably serving specialized populations, where we provide distinct value with our unique capabilities.
Speaker Change: Across our health benefits business, we are diligently executing on our growth strategy for.
Speaker Change: Our Medicaid team is working tirelessly with our state partners and we appreciate the collaboration.
Speaker Change: While the rate increases we've received are the highest in the past decade, they're still inadequate to cover 2024 cost trends that we now expect to be three to five times historical averages.
Speaker Change: We're confident that rates will reflect the acuity of our members as enrollment continues to stabilize and we're acting with urgency to deliver significant operational efficiencies and appropriately manage the cost of care.
Speaker Change: Partnering with states as they expand managed care to beneficiaries with chronic or complex conditions aligns well with our specialized whole health solutions and is an important part of our growth strategy.
Speaker Change: In partnership with Blue Cross Blue Shield of North Carolina, we're pleased to be expanding our service to north Carolinians through the recent award of a sole source foster care contract covering nearly 60000 new members. This marks the second sole source foster care when in 2024.
Speaker Change: Sure.
Speaker Change: In Medicare, we're taking deliberate steps to ensure the long term sustainability of our business.
Speaker Change: We are now two days into the 2025 annual election period and are pleased with our positioning overall.
Speaker Change: We remain disciplined in our approach to 2025 bids building on the actions we took to position our Medicare advantage business for sustainable performance heading into 2024.
Speaker Change: For 2025, we took a balanced approach to margin and membership prioritizing the benefits seniors value most to mitigate the impact of cms's rate cuts on beneficiaries and promote access to high quality comprehensive and coordinated care for our members.
Speaker Change: <unk>.
Speaker Change: Given the benefit reductions and meaningful market exits, we made heading into 2024.
Speaker Change: We maintain greater stability in our offerings for 2025 and as a result, we expect to grow individual Medicare advantage membership in line or slightly better than the broader market in 2025 led by products, where we have strong sustainable market.
Speaker Change: <unk>.
Speaker Change: Medicare advantage star quality ratings remain a key enterprise priority.
Speaker Change: And we're committed to our long term goal of achieving and maintaining star ratings at the high end of all plants and our markets.
Speaker Change: For payment year 2026 <unk>.
Speaker Change: We improved our own performance across nearly 60% of star measures and are pleased to be the only large payer to offer multiple five star plans.
Unfortunately.
Speaker Change: We will see the percentage of our members in plans rated four stars or higher decline due to significantly higher cut points.
Speaker Change: The entire decline in our four star member mix was due to one of our larger each contract's narrowly missing a four star rating by 410 thousands of a point.
Speaker Change: We have challenged our initial scoring with TNF and are considering all of our options.
Speaker Change: Our commercial businesses are performing well and are on track to achieve their financial targets.
Speaker Change: We anticipate further growth in 2025 to be driven by increased penetration of our best in class products and services given momentum in both of our individual exchange and national account businesses.
Speaker Change: For the largest employers we offer differentiated value in innovative and attractive solutions and our focus on whole health in partnership with Carolina is resonating and.
Speaker Change: In our individual exchange business, we are delivering particularly strong growth with membership up more than 30% year to date.
Speaker Change: As we look to 2025, we're expanding our individual and family plans in three States, Florida, Maryland, and Texas under the Wellpoint brand.
Speaker Change: It will complement our existing presence in these states, while driving growth for health benefits and Caroline segments.
Speaker Change: Focused geographic expansion enhances our ability to serve as a lifetime trusted health partner to consumers and our communities.
Turning to Caroline, we're making significant progress in scaling our enterprise flywheel for growth.
Speaker Change: Caroline Rx continues to expand its customer base, while diversifying its value proposition.
Speaker Change: Earlier this month, we closed the acquisition of Kroger specialty pharmacy, which is aligned with our strategy of controlling the levers that matter and delivering whole health affordably.
Speaker Change: Meanwhile, innovative solutions, such as our specialty Rx savings navigator weight management solutions, and ensure Rx continue to gain traction and drive savings for our clients.
Speaker Change: Growth in Carolina services remains strong and we are on track to exceed the upper end of our initial outlook for low twenties percentage revenue growth.
Speaker Change: This includes external growth above our initial targets for 2020 for a proof point and first demonstrating our value proposition internally before driving growth externally.
Speaker Change: Caroline also recently entered into an agreement to acquire care bridge, a value based manager of home and community based services for chronic and complex members that will serve as the foundation for Caroline's home health business and we're excited to continue to serve all its customers and members.
Speaker Change: Caroline services is expanding its capabilities to manage a growing proportion of healthcare spending supporting the long term growth of the business and by extension the value it creates for health plan customers.
Speaker Change: Despite the challenges of the current environment, we're investing to position elegance health for sustained growth over the long term, including through the application of AI driven solutions that are enhancing member and provider experiences.
Speaker Change: <unk> costs and driving more efficient processes.
We expect to realize operational and financial benefits in 2024, and greater impact in 2025 and beyond.
Speaker Change: For our members.
Speaker Change: Integrating AI across touch points to provide personalized digital service improve.
Speaker Change: To improve access to care and further increased satisfaction.
Speaker Change: We're also improving provider interactions and reducing costs by streamlining administrative tasks.
Speaker Change: Automating onboarding and enhancing contract administration.
Speaker Change: And for our associates, we're investing in tools that increase productivity reduce manual tasks and enhanced efficiency across the organization.
Speaker Change: These are just a few of the AI applications, we anticipate in the coming years as we focus on programs that can have the greatest impact guided by our mission to provide unmatched value to our members providers and associates.
Speaker Change: In summary, our businesses remains fundamentally strong and we remain confident in the flywheel for long term growth, we are building with our complementary businesses.
Issues impacting Medicaid or time bound and we're acting with urgency to improve performance.
Speaker Change: Adequate rates that reflect the acuity of our members.
Speaker Change: We are confident that we're making the right investments to position elegance health for strong and sustainable growth over the long term and service of consumers across all age and income levels.
Speaker Change: And that we will emerge from this period of unprecedented change stronger and even better position to serve the growing need for care management and cost containment and our health care system.
Speaker Change: Before closing I would also like to thank our dedicated associates for their tireless commitment to our mission and for the work they do each and every day to deliver for all of our stakeholders.
Speaker Change: It is their dedication and passion for those that we're privileged to serve that is reflected in our ongoing recognition as a great place to work for the fifth consecutive year.
Speaker Change: With that I'd like to turn the call over to Mark <unk>, our CFO to provide more details on our operating results and outlook Mark.
Mark: Thank you Gail and good morning to everyone on the line.
Mark: As Gale shared we reported third quarter results, including GAAP diluted earnings per share of $4 36, and adjusted diluted earnings per share of $8.37.
Mark: Which came in below our expectations.
Mark: We ended the third quarter with $45 8 million members flat sequentially.
Mark: Growth in commercial was largely offset by the loss of approximately 85000 Medicaid members due to specific footprint change that took effect at the beginning of September.
Mark: Year over year commercial membership has grown by nearly 600000, driven by strong fee based and individual AC health plan growth.
Mark: Stinker value, we deliver to large employers and the targeted local positioning of our products.
Mark: Total operating revenue for the quarter was $44 7 billion up over 5% year over year, reflecting strong reacceleration in growth from the low point last quarter.
Mark: The consolidated benefit expense ratio was 89, 5% for the third quarter, an increase of 270 basis points year over year, principally due to Medicaid cost trend developing worse than expected, while <unk> rate increases will reach record levels. This year they remain inadequate.
Mark: Cost trend in the range of three to five times historical averages were.
Working closely with our state partners to ensure they fully capture the acuity of our Medicaid membership and future rates.
Mark: During the quarter, we mitigated the impact through disciplined medical management and took further proactive actions to enhance operating efficiency across the enterprise.
Mark: As a result, <unk> health adjusted operating expense ratio was nine 6% an improvement of 150 basis points.
Mark: Adjusted operating gains for the quarter was $2 4 billion and $8 3 billion for the year to date period.
Mark: Primarily reflecting declines in our Medicaid business.
Mark: We maintained a consistent and prudent posture with respect to reserves.
Mark: Days and claims payable at the end of the third quarter stood at 42, eight days, which remains slightly above our targeted range in the low <unk>.
Mark: Given third quarter results and our expectation that cost train did not Medicaid business will remain elevated through at least the fourth quarter, we have reduced our full year outlook for adjusted diluted earnings per share to approximately $33.
Mark: We now expect our 2020 full benefit expense ratio will be more than 100 basis points higher than we anticipated last quarter, bringing the full year to approximately 88, 5%.
Mark: Full year operating cash flow is now expected to be approximately $4 5 billion.
Mark: Okay.
Mark: It is important to keep in mind that the issues impacting the Medicaid managed care industry time bound and we are confident that rates will ultimately reflect the underlying acuity of our Medicaid membership.
Mark: It's also notable that in 2024 businesses, representing more than half of our revenues will be operating at margins below the long run potential.
Mark: We expect margins will return to appropriate and sustainable levels.
Mark: Time.
Mark: Turning to 2025 weeks.
Mark: We expect continued momentum in our commercial business bolstered by the expansion of our exchange offerings into three new states and the alignment of our value proposition and national and large group markets.
Mark: We'll deliver balanced growth in our Medicare advantage business and stability in Medicaid Redetermination is returned to a normal cadence.
Mark: And we will further scale carillon.
Mark: Enterprise flywheel for growth with notable contributions from the expansion of specialty pharmacy dispensing capabilities and carillon Rx and continued momentum in carillon services as we drive greater product adoption internally and externally and build out our home and community based business.
Finally, we are undertaking bold actions to modernize and transform many of our core processes through the application of new technologies that will create structural efficiencies and long term value.
Mark: There is much to be excited about in 2025.
Mark: And we expect strong acceleration in revenue growth at least in line with our long term growth algorithm in the high single digit percent range.
Mark: While we are confident that the issues impacting the Medicaid managed care industry at time bound at this point in time.
Mark: Our outlook for 2025 of adjusted EPS growth is at least in the mid single digit percent range.
Mark: This reflects our assumption that the timing disconnect between Medicaid rates and acuity will continue.
Mark: We will navigate this backdrop with the same focus and discipline that has been central to the long term success.
Mark: <unk> health.
Mark: Importantly, the earnings power of our diverse and complementary businesses remained strong and we are confident in our ability to deliver at least 12% growth in adjusted diluted.
Mark: <unk> earnings per share annually on average over time.
Mark: Operator, please open the call for questions.
Speaker Change: Ladies and gentlemen, if you wish to ask a question. Please press Star then one on your telephone keypad, you'll hear prompt that you have been queued.
Speaker Change: You may withdraw your question at any time by pressing Star then two if youre using a speakerphone. Please pick up the handset before pressing the numbers once again, we ask each participant limit themselves to a single question to allow ample time to respond to each analysts that may wish to participate in this portion of the call for our first question will go to the line of a J rice from UBS. Please go ahead.
Speaker Change: Hi, everybody. Thanks for the question.
Speaker Change: So in the slide deck, you are reiterating your expectation of 12% earnings growth from 22 to 27, which off that 22 base would suggest you get something like $51 27, but youre also saying off the new base this year youll grow 5%.
Speaker Change: Next year.
Speaker Change: Which would give you something like 34 65 high something at a high 30 for US I guess the question is is it sounds like all of the short term issues around our around Medicaid is getting the right rates is going to be sufficient to get you the kind of accelerated earnings growth in 'twenty six 'twenty seven.
Speaker Change: What gets you back on track to hit that.
Speaker Change: Multi year, 12% CAGR target or should we rebase that given what we're looking at a 25% in 'twenty 'twenty four 'twenty five.
Speaker Change: Yeah.
Thank you for the question a J, let me provide a little bit of proof high level perspective around that because I think there is you have a lot of math in that question, but I think it's important certainly appreciate the dynamic environment that we're currently operating in I think to really start that.
Speaker Change: We believe that the earnings power of our diverse and complementary businesses remains strong so feel good about thinking about at least 12% over the long term and in adjusted EPS over time, So I think that's important.
Speaker Change: As you heard and we're thinking about what's happening in our business right now I would like to sort of reiterate some of the things that mark shared in his opening comments first strong acceleration in revenue growth at least don't chop and line with our long term algorithm in the high single digit percentage. So theres a lot I think can be excited about in our business momentum in our commercial business.
Speaker Change: <unk> strong.
Speaker Change: And entering several additional expanded HCA footprints next year, we feel good about the Medicare advantage business, which we focus to be sustainable long term growth and Caroline is going to deliver even greater value as we look at the internal and external growth, we're seeing in services and a robust pipeline in Carolina Rx and then the last piece of it.
Speaker Change: That is continuing to realize substantial operational efficiencies. However, given the dynamics that we spoke about in the environment that we're in we anticipate that Medicaid margins and 25 are going to remain along our long term target, but again. This is a timing disconnect between rates and acuity, which we do believe is time bound but.
Speaker Change: Think that can persist through 2025 and also it's really important that we are going to continue to make ongoing investments in 25, because we think that there is a powerful opportunity across our business. So taken together, we think that we're being prudent in how we think about 25%.
Speaker Change: Our expectations at this pace and timing.
Speaker Change: Our guidance will give you a lot more detail on the fourth quarter, but I think you can rest assured we're going to continue to navigate 25 with the same focus and discipline that has been central to our long term success.
Speaker Change: Next question. Thank you.
Speaker Change: Next we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead.
Yes, hi, Thanks for the question just wanted to come back to the Medicaid discussion you obviously the magnitude of the revision that's implied there is alarming, particularly given that we're at the end of the membership impacts from Redetermination I'm, just trying to understand better how things got so much worse. So quickly I guess, how much of this is actually new to the third quarter.
Speaker Change: Versus not having a good reading on where things were last quarter and to the extent there are new developments in the third quarter can you better help us understand perhaps what some of those are thank you.
Speaker Change: Thank you, let me ask Marc <unk>, our CFO to address your question. Thank you.
Marc: Stephen good.
Marc: Good morning.
Let me start off by noting that we experienced accelerated cost trends in Medicaid throughout the third quarter.
Marc: Additionally, we saw unfavorable prior period development related to the current year, specifically in our Medicaid business.
Marc: If I step back for a moment.
Kate: Kate cost trends accelerated in the quarter the restated negatively for the current year and as such we're tracking in the range of around 353 to five times.
Kate: Historical average depending on the state.
Kate: The elevated level of cost trend is driven.
Kate: You heard us address this in our prepared remarks, primarily by the higher overall membership acuity given their redetermination cycle is now substantially complete.
Kate: We are continuing to work with the states, we very much appreciate the collaboration and while rate increases to date have also been higher than the historical average.
Kate: Main insufficient to fully cover the claims trends that we're seeing and so it's important to keep in mind that the state processes themselves typically reliant reference periods that lag current experienced by as much as one to two years and while we are sharing more recent experienced and trained information real time with the states.
Kate: Going to take time before that's fully reflected in the rate schedules.
Kate: Thank you next question please.
Speaker Change: Next we will go to the line of Ben Hendrix from RBC capital markets. Please go ahead.
Ben Hendrix: Okay. Thank you very much I, just wanted to kind of drill in a little bit more on the pacing of the catch up.
Ben Hendrix: Of rates to acuity that you may expect over the coming year or you call. It you don't have perfect visibility into it but are there any pockets I think mark mentioned, the big bolus of members that kind of came off.
Ben Hendrix: Recently, you just are there any pockets of areas, where where you see a large bolus of members come off acuity increase and then have a state renegotiation that could be kind of a catalyst for.
Ben Hendrix: Creating some accelerated recovery or how do you think about pacing of the recovery throughout next year. Thanks.
Speaker Change: Yes. Thanks for the question Ben I'll ask Mark to comment on this as well, but I remember this is one of the largest and unprecedented mix shifts we've seen in Medicaid as the phe has.
Speaker Change: Unwound over the course of the year and again as Mark said, what we saw was this acceleration through the third quarter. So I think putting that in perspective is really important we have not had an environment like this before in Medicaid. So it's a very unusual timeframe for us, but let me have mark give a little bit more color on that and I think the only thing I'll add Gail.
Speaker Change: <unk> is that as we think about 2025, we do expect that mismatch between rates and acuity to narrow, especially as the state rate updates.
Speaker Change: Creasing the reflect the underlying member acuity.
Speaker Change: Thank you next question please.
Speaker Change: Next we will go to the line of Ann Hynes from Mizuho. Please go ahead.
Speaker Change: Great. Thank you.
Speaker Change: Give us a little bit more detail on the utilization trends like what is increasing more than your expectations of inpatient outpatient pharmacy.
Speaker Change: Any color you could provide would be helpful. Thanks.
Speaker Change: Amit Mark address that please thanks.
Speaker Change: Maybe let me take this briefly from two perspectives.
Speaker Change: A little bit of a Medicare.
Speaker Change: And then I'll do a Medicaid and Medicare in the quarter was slightly elevated manageable overall.
Speaker Change: Selected some incremental pressure related to the two midnight rule and we also saw a late summer surge in Covid.
Speaker Change: Cade as I spoke about two trains of minutes ago, we are seeing some ongoing pockets of elevated trend. They are most notable in the behavioral health area.
Speaker Change: That we do expect margins to continue to remain pressured through the rest of the year and certainly for those two businesses will remain below our long term average in 2025, yes, thanks and again our results were.
Speaker Change: We're predominantly driven by Medicaid and as Mark said, we did see some slight pressure in Medicare, but feel very comfortable about where we positioned our bids for 2025. So thank you next question. Please.
Speaker Change: Next we'll go to the line of Andrew Mok from Barclays. Please go ahead.
Speaker Change: Okay.
Speaker Change: Hi, This is Stephanie on for Andrew.
Stephanie: Looks like the 200 basis points of <unk> enterprise MLR, Miss like translates to about 500 basis points of Medicaid pressure in the quarter. One is that the right ballpark to think about into like just given the apparent like hundreds of basis points of incremental pressure in the Medicaid book profitable today.
Speaker Change: Thank you I'll ask mark to respond to that as well.
Speaker Change: Thank you very much for the question.
Speaker Change: The ballpark is about right for 2024.
Speaker Change: As I think about the Medicaid business is expected to be profitable this year.
Speaker Change: Albeit below our target margin range for the year itself.
Speaker Change: It is important to know that you really cant look at the Medicaid marginal business in any particular single quarter.
Speaker Change: It is important to know that you really cant look at the Medicaid marginal business in any particular single quarter.
Speaker Change: Our normal quarter to quarter dynamics of the business, but importantly over the long term, we do expect the Medicaid managed care business to be profitable and attractive one for us and it's integral in it as complementary to other health benefits and carillon businesses.
Speaker Change: Thanks for that Mark and again, just want to reiterate that we do believe this is time bound and we also believe that Medicaid is a very good business, particularly the specialized populations, where we have unique capabilities.
Speaker Change: But again, thank you for the question and next question. Please.
Speaker Change: Next we'll go to the line of Erin Wright from Morgan Stanley. Please go ahead.
Speaker Change: Okay.
Erin Wright: Thanks, and I wanted to ask on Medicare advantage, just based on the analysis of sort of the M&A landscape now in the latest kind of benefit design details is there.
<unk> environment, playing out as you would expect in terms of being fairly rationale with a focus on kind of profit versus growth is it is it playing out according to plan there and in driving some of that assumption in terms of you're at or above market growth in EMEA next year. Thanks.
Speaker Change: Thanks for the question Erinn first I think it's really important to realize we feel well positioned and MAA.
Speaker Change: And we took a number of actions prudent actions last year at the beginning of the year to position the business for long term.
Speaker Change: Fortunately, we had a number of market exits of markets. We didn't think we saw long term sustainability and this year. We continue to look for stability and make sure that we are in this business for the long term, so I'm going to ask Felicia to comment now that we're a few days into AEP and give you a perspective of our thoughts on the markets. Thank you Dale and thank you Erin for the question.
Felicia: Our strategy as we look at Medicare advantage really didn't start this year around our approach to balancing membership and margin. We started last year to really take strategic actions in order to create a sustainable foundation for growth in our Medicare advantage business and that included exiting several underperforming markets and that.
Felicia: Tenant about 85000 members. In addition to that we made significant reductions in our supplemental benefits in Puerto Rico on the heels of some losses in 2023, so as we put together our bid for 2025, we started to work with the foundation and wanted to make sure that we maintain stability, where we need it.
But we wanted to be very focused on a balance between growth and margin, particularly in attractive and sustainable products and performance for us as we went forward specifically.
Felicia: Specifically, we focus very much on our D. SNP business in our high priority markets, where we have the assets and the cost structure to really support leading market share. Additionally, I want to note that our products are predominantly HMO not PPO and we were very prudent in our positioning overlaying our local market dynamics.
Felicia: <unk>, <unk> and consumer preferences with our own market prioritization framework.
Felicia: When we look at where we are now only two days into AEP, we feel very good about how we're positioned in terms of our key products and our target market, we prudently navigate the environment and as we sit here today as he said, we really expect to grow in line or slightly better than the market, but competitively Phil we're very positioned.
Speaker Change: Well as we head into this AEP. Thank you. Thank you next question. Please.
Speaker Change: Next we'll go to the line of Justin Lake from Wolfe Research. Please go ahead.
Justin Lake: Thanks, Good morning wanted to follow up on your comments around Medicaid trend accelerating through the quarter and being three to five X typical to your point I don't think anyone on this call has ever heard of trend being discussed in terms of multiples of a typical given it got worse through the quarter. Just curious if you could give us some color on.
What's going on through the quarter or is it that youre seeing people come back on the roles that are sicker, given the redetermination themselves should've been.
Justin Lake: Give or take run out at this point and then given it looks like the exit rate in the quarter is.
Justin Lake: The lowest margin the highest cost sounds like can you tell us where you were ending the quarter and where you expect to be for the fourth quarter versus that 3% to 4% margin target that we all think about.
Speaker Change: Hey, Justin Thanks. Thanks for the question just a couple of thoughts and then I'll ask mark to provide a little bit more perspective remember again. This was the most significant change we've seen in membership in Medicaid probably as long as I've been in this business coming off of the PHA and again the driver was the <unk>.
Speaker Change: <unk> that we saw through the third quarter.
Speaker Change: We did plan for accelerated acuity in our business, which I think is important but again none of us when.
Speaker Change: When you are planning for three to five times the cost structure, we have been working very diligently with our state partners in terms of understanding those rates and where we need to be and again. They are looking at data oftentimes a year in arrears, then have been responsive to changing their process, but it has not kept pace, yet and we think it will take them some time.
Speaker Change: With that let me ask mark to give a little bit more perspective on some of the other questions that you had embedded.
Speaker Change: Yes.
Speaker Change: Justin just to add additional color here as you heard from Gary We definitely plan for an elevated.
We will have trained in 2020 relative to the historic.
Speaker Change: Average Medicaid trend, which is run in the low single digit percent range until the point, we made earlier that trend is now running around.
Speaker Change: Three to five times historic average levels of course, depending on the states meaningfully above our expectations and that's really driven by this unprecedented.
Speaker Change: Redetermination related activity, which has resulted in several downstream changes in membership mix membership counts acuity program adjustments et cetera, and also like just to reiterate some of that long term target for Medicaid is in that 2% to 4% range.
Speaker Change: And finally, Justin to your point, we have also not been standing still obviously, you've been very active in managing the things that we can control around cost structure and acceleration of initiatives that we had in place around AI and making our business sustainable for the long term and again very active with our state partners proud of our teams for the work that they've done.
Speaker Change: Done to bring this forward, but again, we do think this will take time to work with our state partners to get the match at the appropriate level. So thanks for the question and next question. Please.
Speaker Change: Next we'll go to the line of Lisa Gill from Jpmorgan. Please go ahead.
Alright, thanks, very much and good morning, one of your peers talked about accelerating Rx trends in specialty we've seen changes to IRA around catastrophic coverage. The one you haven't called out anything around <unk> as far as cost trend goes are you seeing that.
Speaker Change: How does your price for that going into 2025, and then just on the flipside Caroline Rx had very strong results is that a key driver of what we're seeing especially on the specialty side and growth in specialty.
Speaker Change: So thanks for the question Lisa Let me get a little perspective directly on your question I'll ask Pete <unk>, who leads our pharmacy business to provide some context. So year to date, we have seen an increase in Medicare advantage party specialty drug utilization, but the trends in unit costs have been in line with our assumptions. So we don't see it as a significant impact.
Pete: To what we've been talking about let me ask Pete to give you a little more perspective on what's happening in terms of overall pharmacy, yes. Thanks, Lisa for the question. As you said, we were very pleased with what we're seeing in terms of our Carole on our <unk> strategy and growth.
Pete: Send you down our path of enforcing the strategic levers that matter down our path of specialty pharmacy and infusion, we're making really good progress there and as it relates to growth. Our story is resonating in the marketplace. We're beginning to see a lot of pull through in that regard and we've had some nice wins going into 2025 upmarket as well so that that is all pre.
Pete: Exceeding its plan.
Pete: In terms of our overall performance from an operating margin perspective, though as Gail said, we did expect what we saw in the specialty pharmacy trends, we did see that increase but it was really as expected. When you look at our overall margins the outperformance in the quarter was largely due to a onetime favorable revenue adjustment that was intra year.
Pete: And when you when you when.
Pete: When you even that out or spread that out through the year.
Pete: The full year still remains on track in terms of our initial guidance around the 66, 5% margin profile. So we feel overall very good about where we are and where we are where we expect it to be.
Speaker Change: Thanks, Pete next question please.
Next we'll go to the line of Lance Wilkes from Bernstein. Please go ahead.
Speaker Change: Yes.
Quick follow up on.
Speaker Change: The rate outlook for Medicaid if you could just give some color on what you observed as far as rate increases maybe historically or in the first half of the year and then what youre seeing in the second half of the year and what your outlook is based on how far you are along in early 'twenty five and then the broader question is just are you anticipating making any.
Strategic moves as a result of these pressures that again, our time time bounded and as part of that does this make any change in how you might in source all of the functions of your PVM.
Speaker Change: Yeah.
Speaker Change: So a lot of questions. There Lance. Thank you let me let me just address your question on strategic then I'll ask Felicia specifically talk about Medicaid we feel we've laid out a very comprehensive strategy around the growth drivers and the.
Speaker Change: The opportunities as I shared in the first question really how we see acceleration in revenue and.
Speaker Change: Strong commercial business, we believe the time bound issues around Medicaid and we think we will work through those with the assets. We have and then Medicare being well positioned in Carolina is a real accelerator for us and as you saw we announced an additional acquisition. This morning as part of <unk> that gives us home based care in another.
Speaker Change: <unk> inside of our growth strategy for Carolyn services, where we can take.
Speaker Change: Significantly more pass through of the type of medical expense were managing insider Caroline So I would say, we're very focused on the long term growth drivers in our flywheel for growth inside of elegance health and feel very positive about the fundamentals of our business. So strategically I think we're moving forward in the exact same path.
Speaker Change: That we've laid out and in the pharmacy side, taking more control over the levers that matter for us and you've continued to see us.
Integrate the Kroger specialty pharmacy acquisition, our advanced home delivery. So I feel very good about that progress and we're dealing with the time based issues. The Medicaid right now, but let me ask Felicia to to address the Medicaid specifically, so lance good morning, and thanks for the question if.
Felicia: You can imagine the rate negotiations with our state partners are ongoing and when you take a look at how our portfolio of business is spread out across the year. We have about half of our states that have January states than the other half that our July states and in the back half of the year. The work that we started with our state certainly earn.
Felicia: July states in rates certainly took a look at the 25 rates that they were working with us on but we also put a lot of work into work with our states on understanding the trends that we're seeing in the first half of the year.
Felicia: As you heard earlier the reference period for most of our states. Our 2023, when you think about the 25 rate setting process. So there will certainly be that misalignment in that timing mismatches, we talk about when we look at the work that we're seeing with our state partners. Some states have certainly been more receptive to going back and taken a look at those.
Felicia: And addressing those rates now we've had certain states that have given us midyear rate adjustments and more of those will happen as we go through the back half of the year and early next year as well, but as you heard earlier. This is a process, which you clearly understand that will take some time to actually get total alignment between our rate and the acuity of the member.
Felicia: Chip that we're seeing on the heels of.
Felicia: An unprecedented change in mix with respect to this business, but I will tell you. We are going to continue our strong advocacy working with our state partners sharing up to date information around the changes that we're seeing and we have full confidence that we will ultimately have rates that are aligned with the acuity of the membership in our population so thank.
Felicia: For the question.
Felicia: Next question please.
Speaker Change: Next we'll go to the line of Josh Raskin from Nephron Research. Please go ahead.
Josh Raskin: Hi, Thanks, sorry to stay on the topic, but I'm still struggling with why the security rate mismatches accelerating now and why this cost trend is accelerating now my understanding is that most of the redetermination.
Josh Raskin: Have been done right. They started over a year ago. So felt like there was last redetermination activity in the most recent quarter than previously and I think Lee.
Josh Raskin: Last quarter, there was a conversation around higher utilization from members that were about to lose coverage and so you would have expected that to slow so I guess I'm still confused as to what's causing this big acceleration in this trend why is that happening so late in the process.
Josh Raskin: Yes.
Speaker Change: Josh Good morning, and thanks very much for the question at two key points I'd like you to keep in mind here at first we've modeled a prudent view of costs for the fourth quarter.
Speaker Change: And you could think about that as a holding Medicaid trend approximately flat relative to where we were in September.
Speaker Change: And the second key point to keep in mind here is that we had unfavorable development related to the current year in the quarter.
Speaker Change: Next question please.
Speaker Change: Next we'll go to the line of Michael Hall from Baird. Please go ahead.
Michael Hall: Alright, thank you.
Michael Hall: To add on the Medicaid topic. So based on your 24 guide I'm not mistaken implied <unk> impact actually seem to be larger than your third quarter MLR pressure. So it sounds like thats the case, but.
Michael Hall: Is this basically assuming security rate mismatch worsening through the next quarter, even though you have all your September October raising crazy good and at this point I guess in mid October do you think you now have enough data and visibility into your own acuity mix that you can pass along to these dates and time for Jan one renewals or just I presume.
Michael Hall: Raft rates are probably already there so could they open that back up and adjust or is it too late.
Speaker Change: Yes, a couple of things just high level. One you also have to factor in the seasonality into the fourth quarter. So make sure youre doing that and I'll ask Felicia to talk a bit about Medicaid and the process that just goes on our rate setting.
Speaker Change: So thank you so much for the question again.
Speaker Change: This point, we have about 55% of our rate visibility for premium for January. However, those are draft rates. So we spend a lot of time with our states right now, making sure that they understand the experience that we were seeing in the second and third quarters as we head into the rate setting process. So yes, when we <unk>.
Speaker Change: <unk> draft rates the process is still ongoing.
Speaker Change: Ongoing and we are continuing to make sure that the states have visibility around that information. So we have 55% as I said, our visibility into the January renewals, but those are early discussions Michael and expect a lot of work to happen between now and the end of the year in terms of the work between us and our state partners.
Speaker Change: Yeah.
Speaker Change: Maybe one comment just to add on to Felicia's remarks, just to reaffirm Medicaid trend is not expected to accelerate in the fourth quarter, It's primarily seasonality that's resulting in these numbers.
Speaker Change: Next question please.
Speaker Change: Next we'll go to the line of Ryan Lyngstad from Cowen. Please go ahead.
Speaker Change: Hi, good morning.
Ryan Lyngstad: It sounds like you expect growth on the exchange side into 2025, so I guess in that context, how should we think about the margin profile for it maybe just the exchanges in the overall commercial business. Thank you Kevin.
Speaker Change: Thank you you are running but thank you very much for the question, we'll have Morgan Kendrick, who leads our commercial business respond to that Ryan. Thank you for the question.
Morgan Kendrick: We feel really good about our commercial business in aggregate and certainly the individual ACA is a big big piece of that.
Morgan Kendrick: We've taken a very disciplined approach over the last 36 months in gradually expanding our footprint and our competitiveness and our 14 geographies as Gale mentioned in the prepared remarks upfront, we're expanding that another market. So this year, we're expecting to have nice growth in our markets, probably improving share in the markets that we serve by about two points moving forward that said.
When I think about next year, we're positioned really well in our in the geographies, where we have already served we're in the process of sort of determining the positioning in the markets that we're moving into but we're really excited about that business and it also being in line with our expectations on the economics.
Morgan Kendrick: Thank you and just another thing to remember those are states, where we also have Medicaid and Medicare business. So it aligns with us knowing those states well.
Speaker Change: Thank you next question.
Speaker Change: Next we'll go to the line of Scott Fidel from Stephens. Please go ahead.
Scott Fidel: Alright. Thanks.
Scott Fidel: Just interested if you could maybe dimension for us and discuss some of the downstream impacts from the Medicaid environment to the Carolina health businesses do know that there is.
Scott Fidel: Quite a bit of leverage our exposure in those businesses to Medicaid. So curious on how those businesses are performing and how you how you are positioning them.
Scott Fidel: Around some of these dynamics, we are seeing in Medicaid.
Speaker Change: Yes. Thanks for the question Scott I'll ask Pete to address your questions. Yes, Scott I think it's a great question I. Appreciate it first just stepping back and thinking about Caroline overall and as you heard in the prepared remarks overall very pleased with the growth trajectory of.
Speaker Change: Caroline services exceeding 30% growth in the quarter quarter year over year not on a path to exceed initial guidance of the high teens low 20. So we feel very good about that and as it relates to growing internally and externally I will say that we're continuing down the path that we've been in.
Speaker Change: With regard to proving out our solutions internally and then growing externally I did want to point out that debt and as Gale mentioned in the prepared remarks, seeing really nice traction externally I would say forex improvement in terms of growth in 2024 and good visibility on 2025 as it relates to your question specifically, yes, we do have.
Speaker Change: Products oriented to Medicaid Medicare, we are taking full risk and as it relates to our performance overall, we are seeing some of those behavioral health trends play through so when you look at the margin profile in the short term we are being impacted by the behavioral health trends. We are also being impacted.
Speaker Change: By the acceleration in some of the risk arrangements that were we're deploying and as you recall I think I've said it in the past on early on when we launch these risk arrangements the margin profiles are bit more compressed.
Speaker Change: And then as it evolves and improves so the combination of those two factors is what's been affecting us in the short term, we feel very good about the long term and continuing to grow within the.
Speaker Change: The government program business as well as in the commercial business we are <unk>.
Speaker Change: Assuming a diversified approach just like the rest of element itself.
Speaker Change: Question. Please.
Speaker Change: Next we will go to the line of Whit Mayo from Leerink partners. Please go ahead.
Speaker Change: Okay.
Whit Mayo: Hey, Thanks, I just wanted to go back and follow up I think it was justin's question not sure I actually heard the answer or the rejoin her coming back negatively impacting costs like are they increasingly gaining access through the point of care through presumptive eligibility of the hospital, where something like what is the actual care activity look like on the rejoin or pop.
Speaker Change: Sure.
Speaker Change: With Ted's Mark Youre good.
Speaker Change: Good morning, and thank you very much for the follow up here.
Speaker Change: Our number of trained factors that are remaining to various degrees.
Speaker Change: Certainly some have improved over the past.
Speaker Change: Quarter to think about like the pull forward effect to think about member Ms characterization and certainly some that are ongoing.
Speaker Change: What's really important here is that these states actuarial rate process.
Speaker Change: And our ongoing discussions with them really aimed to capture the overall cost to the members and ensuring the adequacy of rates over time on your question. Specifically you could think about a portion of trained as being attributed primarily to the acuity mix shift versus I think we spoke about last quarter. So thats.
Speaker Change: Same store.
Speaker Change: Type training utilization and you could think about approximately 60% of the trend as being related to acuity mix and the key point is I'm going to sort of end here is that.
Speaker Change: Our embedded Medicaid outlook really does include prudent assumptions for cost trend in the fourth quarter inclusive of all the underlying factors.
Speaker Change: Thank you next question please.
Speaker Change: Next we will go to the line of Sarah James from Cantor Fitzgerald. Please go ahead.
Sarah James: Thank you Mike when you said Medicaid is profitable in 'twenty four is that across all states or is it a mix of some profitable and some not and then can you just help us understand the actuarial soundness protection is that a two year or three year period, if we look at 2025.
Speaker Change: Below target margins, but I think 23 was a good year for you guys on Medicaid.
Speaker Change: Does that still give you a position to pursue retroactive rate increases on top of the Medicare rate update you are targeting.
Speaker Change: Sarah Thank you very much for the question here I'm not going to talk about states specifically <unk>.
Speaker Change: Simply just to note.
Speaker Change: Kate margins on the whole are expected to compressed significantly this year.
Speaker Change: And we've talked about this extensively this is the industry wide timing disconnect between rates and acuity.
Speaker Change: Our long term expectations arent changed.
And that's because we are continuing to proactively collaborate with our state partners on integrating acuity into the rates that we're seeing we know that's going to take time based on the state's processes. The collation of data et cetera, and so we're very confident that over time.
Speaker Change: We'll certainly appropriately.
Speaker Change: Cherlin otherwise basis reflect the underlying acuity that we're experiencing and so I would certainly say that we are confident.
Speaker Change: In our long term targets that we are committed we have set out and we are committed to achieving them.
Speaker Change: Thank you and just reiterating I think we do believe Medicaid as a long term very good business for us it's complementary to our other health benefits business.
Speaker Change: Particularly around <unk>.
Speaker Change: Specific.
Populations that we think we have very unique.
Speaker Change: Skills to serve those so again, thank you very much for your questions.
Speaker Change: Medicaid is a long term and this being an industry time bound issue next question. Please.
Speaker Change: Next we'll go to the line of Dave Windley from Jefferies. Please go ahead.
Speaker Change: Good morning. Thank you for taking my questions I wanted to try to understand respectively. The the comments about kind of the cadence of rate.
Speaker Change: Recovery or achievement, and Cade and Medicaid.
Speaker Change: And then the confidence in MA bids.
Bids for Medicare and with the question.
Speaker Change: Dean in your mid single digit EPS growth for next year.
Speaker Change: Do you expect margins in Cade and care, respectively to be up flat or down. Thank you.
Speaker Change: Okay.
Speaker Change: So thanks. Thank you very much for the question, let me ask Mark for Us to address your questions on margins and then obviously at this pace. We will give you some directional commentary because it is still early in the year for 25, but we'll give you at least a sense of how we're thinking mark overall, we expect for 2002.
Mark: Five margins to continue to remain strong in commercial when you start there.
Mark: On the Medicaid side your margins will remain below our long term margin at range and it's really predominantly related to the timing mismatch that we spoken about you could think about them as effectively being stable year over year.
Mark: And then on many care because of the sustainability around by 2025 product positioning we actually expect margins to improve in 2025 compared to 2024.
Speaker Change: Yes. Thanks for the question next question please.
Speaker Change: We will go to the line of Joanna <unk> from Bank of America. Please go ahead.
Speaker Change: Hi, good morning. Thanks, so much for taking my questions. So just last question I guess on the Medicaid commentary and I guess the margin commentary you just made in terms of margins being stable for the next year.
Speaker Change: Is that right.
Speaker Change: Confirmation that.
Speaker Change: Yes.
End of 'twenty five the Medicaid rate mismatch will be fully restored if that's the way we.
Speaker Change: <unk> by the end of the area, it's going to be restored.
Speaker Change: Thanks for the question, let me actually step back for a second and think about MLR guidance.
Speaker Change: 2025, and we're not looking to provide that necessarily today, but let me share a few modeling considerations that that might help you first begin with respect to the third quarter, we had some out of period items, including unfavorable inter year development for the Medicaid business and we do not expect that to repeat.
Speaker Change: As we progressed towards and through 2025, you could think about that is it first half second half story, where we expect the rate versus acuity mismatch and mitigate to narrow as the year progresses and as rates continue to improve.
Speaker Change: It's also important when you think about the modeling for the business to remember that January one is a major renewal base in our commercial business right and that marks the beginning of it and we also marked the beginning of a new plan year for Medicare. So we're remaining intensely focused on the appropriate medical management, that's going to continue through 2025, I would say otherwise it's.
Speaker Change: Too early to provide specific <unk>.
Speaker Change: <unk> line of business guidance as we head into next year right and thanks, Mark and just to reiterate that we are taking a prudent view of the timing on the mismatch in Medicaid and want to be respectful of the state process and the work. We're doing we feel that it has been a very good process with the states, but again they have to get their data from prior periods.
Speaker Change: And so we're trying to update them on what we're seeing.
Speaker Change: Again, it's early in the timing, but we wanted to give some sense of our confidence in the long term of our business and the fundamentals, but again want to take a prudent view of what's happening in Medicaid, particularly on the state rates will have one more question. Please.
Speaker Change: And for our final question will go to the line of George Hill from Deutsche Bank. Please go ahead.
George Hill: Hey, good morning, guys and just kind of a couple of quick follow ups here on the Medicaid I guess number one Marcus could you provide more color on what drove the <unk> in the quarter and then I guess from a state.
George Hill: Concentration perspective is kind of is the discrepancy between rates and acuity broad based or whereas the other state concentrations here that we should be concerned about like it could be the resolution of the issue.
Speaker Change: So in terms of your overall question clearly I mean, we manage a portfolio of states and we don't get into specific states, but every state is a little bit different based on the population we serve and the programs that are in place. So I wouldn't make it generalized across all states.
George Hill: No that we are working very diligently with each of the states.
George Hill: To make sure and again this is industry wide not just unique to <unk> and we see this across everything so thank you very much for the question and now we.
Speaker Change: We will turn I think first of all say, thank you operator, and thank you for all the interest and support of everyone who has been on the line.
Speaker Change: I just wanted to reiterate we're confident that we're making the right investments to position <unk> for strong and sustainable growth over the long term and that we are confident we're going to emerge from this period of unprecedented change even stronger.
You everyone for your interest in <unk> health and thank you for joining us on this call.
Speaker Change: Ladies and gentlemen, a recording of this conference will be available for replay. After 11 am today through November 16, 2024, you may access the replay system at anytime by dialing 866.
Speaker Change: <unk> zero.
Speaker Change: 4837, and international participants can dial to 033.
Speaker Change: 369.
Speaker Change: 194 three.