Q2 2025 Elevance Health Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the eleventh Health. Second 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. If you wish to ask a question, please press star, then 1 on your telephone keypad, you will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then 2. These instructions will be repeated prior to the question and answer portion of this call. 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.

Nathan Rich: Good morning and welcome to elevance health, second quarter, 2025 earnings conference. Call, my name is Nathan Rich, vice president, of investor relations with us this morning on the earnings call R Gail budro, president and CEO. Mark K. Our CFO, Pete Haiyan president of carillon Morgan. Kendrick president of our commercial health benefits business and Felicia Norwood, president of our government health benefits business,

Nathan Rich: Gail will begin the call with the discussion of our second quarter performance and revised Outlook as well as the progress we've made against our strategic initiatives.

Mark K: 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

Are available on our website avantel cam.

Mark K: We will also be making 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.

Mark K: These risks and uncertainties may 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.

Good morning and thank you for joining us.

Gail: Let me start by directly addressing our revised full year outlook.

We know this adjustment is disappointing and we're taking concrete actions to address it.

Our focus is on execution, making the right decisions. Now to strengthen the business and position elevance health for long-term sustainable performance.

Gail: Our strategy remains grounded in delivering Whole Health Solutions that are simple, affordable and personalized.

Gail: While the external environment continues to evolve, we are focused on the areas within our control.

Gail: Managing cost to playing targeted Investments and reinforcing the operational Foundation that supports long-term value creation.

In the second quarter, we delivered adjusted EPS consistent with our expectations.

Gail: These results reflect continued strength in our Medicare Advantage portfolio and discipline cost management across key parts of the business. As we navigate evolving Dynamics in the ACA and Medicaid markets.

Gail: Our Carillon platform continues to drive growth.

Gail: Caroline RX is gaining Traction in the market with its Integrated, Medical Pharmacy offering and Caroline Services delivered strong results with carebridge scaling rapidly across dual eligible and high Acuity. Medicaid populations.

Gail: as I mentioned at the start of the call, we are revising our full year, 2025 adjusted EPS guidance to approximately $30,

Gail: This reset reflects the same pressures that others in the sector have now confirmed particularly elevated medical cost Trends across ACA and slower than expected Medicaid rate alignments.

Gail: Visibility into the second half of the year.

Gail: It is not based on assumptions of a near-term recovery.

Gail: we are choosing to act now, not later to ensure our Outlook reflects prevailing conditions and to give investors clearer visibility

Gail: We believe this step positions us to execute with discipline and begin rebuilding long-term margin stability that will Empower our future growth.

Looking ahead. We're executing against a clear strategy focused on strengthening structural performance across the Enterprise.

We're advancing our efforts to stabilize Trends, particularly in high-cost areas like Specialty, Services, post-acute care, and certain outpatient settings.

Gail: Our programs focus on ensuring the right care and the right setting grounded in safety quality and outcomes.

In support of our commitment to simplify care delivery. We've significantly streamlined, our prior authorization processes,

With over half of electronic requests. Now processed in real time and fewer requirements for high-performing providers.

Gail: Our AI enabled tools, such as health OS and intelligent clinical assist helps streamline, clinical workflows, and accelerate routine approvals by surfacing relevant data.

All medical decisions, requiring clinical judgment are reviewed by licensed professionals, with independent oversight, to ensure care is appropriate consistent and aligned with our commitment to Quality.

We're using Advanced analytics identify fraud waste and abuse enabling us to intervene where patterns deviate from Clinical and billing standards reinforcing system Integrity while protecting appropriate access to care.

Gail: Our value-based care portfolio continues to expand, particularly in Behavioral Health and oncology.

Gail: More than 1/3 of our benefit expense is. Now in downside risk Arrangements, supporting improved care coordination and cost predictability.

Through Carillon, we're scaling these capabilities across elevance health and with external clients helping to drive better outcomes for complex and chronic populations.

Importantly, these are not future State aspirations. They are embedded in our operations today and form, the core of our multi-year plan to stabilize margins and build sustainable earnings power.

Gail: Well, it is still early to provide an initial outlook for 2026. The actions we're taking are designed to stabilize Trend, improve pricing alignment and restore operating leverage over time.

Gail: In ACA, we've already re-priced products for rising cost intensity.

Gail: We also expect a broader Market reset in 2026 as the scheduled. Expiration of enhanced subsidies drives further risk, pull changes and our position reflects early disciplined action.

In Medicaid, we're proactively engaged with State Partners to ensure that upcoming rate Cycles continue to reflect the developing Acuity environment.

While rate recovery has lagged, current cost levels, we expect a meaningful catch up as utilization data. Becomes more actionable.

Gail: In commercial, we're maintaining a disciplined approach to pricing, ensuring our renewals, and network contracts are aligned to the trend environment.

Gail: And in, Medicare Advantage. We bid with discipline with a focus on margin, normalization, supported by stable utilization and Caroline, Le clinical programs.

Gail: These steps combined with our structural cost, levers in Care Management payment, integrity and value based care. Delivery are designed to improve visibility and consistency as we move through 2025 and into the next phase of growth.

Gail: We recognize that revising guidance for the second consecutive year is disappointing.

Gail: And we remain committed to transparency and strong execution. As we continue to navigate unprecedented cost Trend affecting multiple lines of business.

We're taking this step to reflect what we can control.

Gail: Sharpening, our execution.

Focusing, our investments and strengthening the core drivers that will support a more durable and sustainable future.

And this would not be possible without the dedication of our nearly 100,000 Associates that amplify our impact every day.

Transformation.

With that, I'll turn it over to Mark to walk through the financials.

Gail: mark,

Gail: thank you and good morning everyone.

Speaker Change: Health, reported second quarter Gap, diluted earnings per share of $7.72 and adjusted diluted earnings per share of 8.84.

Speaker Change: As Gail discussed, we have updated our full year 2025 adjusted earnings per share to be approximately 30 dollars reflecting. Both an industry-wide increase in morbidity, impacting our ACA business and a slower deceleration in Medicaid cost, trend

Pressures. We expect to continue in the second half.

Speaker Change: Although external conditions remain Dynamic. We are prioritizing factors, we can directly influence and which are within our control, including taking decisive actions to stabilize Trend and align pricing for long-term sustainability.

Speaker Change: We ended the second quarter with 45.6 million medical members down approximately 200,000, sequentially driven by a reduction in Medicaid membership and lower effectuation rates in our ACA business.

A dynamic. We first highlighted on last quarter's earnings call.

Speaker Change: Operating Revenue was 49.4 billion. An increase of 14% year-over-year principally, reflecting higher, premium yields, in recognition of elevated cost Trend and recently completed Acquisitions in home health and Specialty. Pharmacy.

Speaker Change: The Consolidated benefit expense ratio was 88.9% an increase of 260 basis points. Year-over-year driven by our ACA and Medicaid businesses partially offset by a favorable out of period settlement with a value-based care provider.

Speaker Change: In the ACA Market membership shift from Medicaid into ACA following the redetermination process together with lower effectuation rates, have driven a market-wide increase in morbidity, resulting in elevated, medical cost trends.

We have also reviewed the latest data from the weekly Consulting Group and our expectation for risk. Adjustment remains unchanged

Importantly, our 2026 rate filings capture both the current increase in Market wide morbidity and further risk pool. Deterioration resulting from the anticipated. Expiration of the enhanced subsidies.

Medicaid cost. Train decelerated in the second quarter, though. At a more modest Pace than initially expected. We are experiencing higher Acuity resulting from ongoing disenrollment, as well as an overall increase in member utilization.

Speaker Change: The rate updates we received for the July cohort aligned with our initial assumptions but lagged. Current Trend levels.

Speaker Change: As a result. We now anticipate a prolonged Medicaid margin recovery period as it will take time for states to incorporate the latest experience into rates.

Speaker Change: Medicare Advantage cost Trends remain in line with our expectations with Part D, seasonality progressing as anticipated. And we continue to Target stable margins for the year.

Speaker Change: our adjusted operating expense ratio of 10.0% improved 140 basis points year-over-year

Speaker Change: We are prioritizing strategic investments in Innovative care models. Artificial intelligence and Pharmacy services to support long-term success.

Speaker Change: Klan's strong performance in the second quarter. Underscores our steadfast commitment to expanding its capabilities as we power our Enterprise flywheel for growth.

Speaker Change: kill on RX grew operating Revenue by over 20% as we gain traction with larger clients and scale our Specialty, Pharmacy assets,

Speaker Change: Profitability in the quarter was impacted by ongoing initiatives around accelerating growth as we expand up Market.

Speaker Change: Kill on Services delivered greater than 50% growth in revenue and operating gains through its expansion of risk based relationships and the integration of carebridge.

Speaker Change: Turning to the balance sheet. We ended the quarter with a debt to Capital ratio of 40.8%. Preserving flexibility for strategic Investments and opportunistic capital deployment.

Speaker Change: Year to date. We've returned approximately 2 billion dollars to investors.

Speaker Change: Operating cash flow totaled 2.1 billion in the quarter and we now expect approximately 6 billion dollars for the full year. Reflecting our revised earnings Outlook and discreet working capital items.

Speaker Change: Ratio to be approximately, 90% for the full year.

Speaker Change: As elevated Trend levels persist in our ACA and Medicaid businesses.

In the dynamic operating environment.

Speaker Change: This Outlook sets a prudent foundation for execution, during the second half of the year.

Speaker Change: With respect to seasonality, we contemplate slightly more earnings to be realized. In the third quarter, relative to the fourth quarter,

And looking ahead. We're also assessing the implications of the recently passed budget reconciliation, Bill, particularly Medicaid work requirements. And more frequent eligibility reviews, as well as the scheduled expiration of the enhanced Marketplace subsidies.

Speaker Change: These changes could present near-term enrollment pressures and further shifts in the risk pool.

Speaker Change: finally, we are focused on restoring margins stability, and building, long-term earnings power through disciplined pricing growth in Kon and investments, in technology to deliver value for our members and shareholders over time,

With that operator, please open the line for questions.

Speaker Change: And gentlemen.

Speaker Change: If you wish to ask a question, please press star, then 1 on your telephone keypad, you will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then 2. If you're using a speaker-phone please pick up the handset before pressing the numbers once again we ask that each participant limit themselves to a single question to allow ample time for each analyst that may wish to participate in this portion of the call for our first question, we'll go to the line of Andrew Moc from Barkley's. Please go ahead.

Andrew Moc: Hi, good morning. Uh, question on the ACA, can you help? Delineate, the pressure. You're seeing in that business between unit cost Trends and shifts in the risk pool. And in the prepared remarks, I think you said your expectation for risk, adjustment this year remains unchanged for the current year. So can you explain how that's possible? Given the higher morbidity that we're seeing? Thanks,

Andrew, thank you very much for the uh, the question and uh, good morning. There are 3, principal factors that we are a monitoring and which are behind the sharper. Optic on medical Trends in our ACA book. Uh, the first is a risk pool Acuity, and Mobility, which is risen materially, as a result of the higher proportion of relatively healthier members, especially in states, with a larger portion of fully subsidized individuals. And we've seen that, uh, occur because of the exit from the market. And that's concurrent with higher Acuity members from Medicaid, moving into ACA, uh, following the redetermination process and you

Speaker Change: You could think about that as being about 70% of the total impact.

Speaker Change: Second and third impacts relate to utilization. Uh utilization is running higher in several uh cost categories in ACA uh notably emergency room visits, uh Behavioral Health Services, uh some prescription drugs and Specialty, Pharmacy, very consistent with the claims patterns that we have previously called out.

Speaker Change: And, uh, on utilization here, we also do see a subset of providers. Uh, employing more aggressive coding tactics. Um, and in some ways inappropriately leveraging, what we think of, as the independent dispute resolution, uh, process that obviously inflates allowed amounts. I just wanted to make a comment here that you know, that inappropriate use of iDrive is about, is contributing to higher costs for the entire Health Care system without necessarily improving a patient care. And you can think about that as being about 30% of the total uh, on risk adjustment.

The key Point here is that the uh, uptick in member Acuity, we are observing uh is driven by a broader Market wide Mobility Trend, not by shifts in our membership mix uh versus the market or a risk adjustment profile.

Mark K: Thank you, Mark. Next question, please.

Speaker Change: Next, we'll go to the line of AJ rice from UBS, please go ahead.

Speaker Change: Change is next to your even practical to think about.

Speaker Change: Well, thanks for that question, AJ. There's a whole number of Parts there. Let me take a step back and sort of reframe, uh, for you. The sort of Outlook that we've given I think, first, and foremost, as you heard in our prepared remarks, we took a prudent view of the full year, and we looked to really incorporate those elevated trends that we experienced in the second quarter. And I think, importantly, we're not betting on new initiatives, to bend the, uh, Trend or cost curve. So, we didn't assume any improvements in trends for the remainder of the year. If you think about ACA, I'll touch on that. We have embedded a more elevated. More morbidity profile into our forecasts. We think that the morbidity has stabilized given what we've seen but we're also allowing for potential for a more significant pull through at the end of the year as we expect, unless something happens with those subsidies that will expect people to be using more services. So that's embedded uh as people will seek treatment before coverage could potentially lapse and I think that's an important assumption

Speaker Change: Secondarily on Medicaid. We're also planning for elevated morbidity due to the ongoing enrollment losses. You saw that in the second quarter in some states that have already begun, um, more aggressively determination processes. So we're seeing that we do expect um, a grant more gradual alignment to rates. If you've noticed, we have been pleased. It's been a very constructive discussion and rates came in line with our original expectations. What changed is that morbidity increase? Because of the

Mark K: Enrollment losses that uh, increase that uh profile. Um, so those rate discussions remain constructive in our states so we're not again forecasting. Anything new in terms of what's happening there we have made progress and we continue to expect it to be a step down. Uh, and then, as Mark said, we're urgently working honestly to bend the cost Trend but again, in terms of and forward, look and Outlook, uh, we haven't taken that into guidance, but again, know that it's important. I'll turn it over to Mark to talk a little bit about your uh percentage issue and how that frames out. Yeah. Very very briefly. Uh AJ you could think about the um reduction in fully or guidance split between ACA and Medicaid as slightly more weighted towards ACA.

Thank you. Next question, please.

Next, we'll go to the line of Stephen Baxter from Wells. Fargo, please. Go ahead. Okay.

Stephen Baxter: Hi, thanks. Just wanted to ask, uh, on the Medicaid side. I think the the concern is kind of broadly that you're going to continue to get caught up on. I guess what I would refer to as base, period rates being incorrectly set but then there's going to be a disconnect or potentially risk of being a disconnect on forward Trend where you're going to be continually underpaid there. I guess, how do you think about that Dynamic? Do you think that's an accurate characterization of of, really kind of what's happening right now? And how do you think you addressed that with States? If you need to to make some argument for higher forward Trend uh then you perceived over the past couple of years. Thanks. Yeah. Thanks for the question, Stephen. Just a couple of

Of thoughts. I think first we're going through what I would call an unusual cycle coming out of the pandemic where there was significant redetermination, the Acuity change, pretty dramatically. And we have asked the states to move forward, their view from their normal practices, and they've been very constructive. So again, I just want to reinforce that the discussions with the states, based on the data that we've been sharing with them, they've been very responsive and those rates have aligned. When we look at our 71 rating, we're seeing again, though some additional just because of, um, moving forward of some of the new regulations that are coming in additional redetermination. Um, and so that data needs to catch up with the states. Uh, our sense is that we'll normalize, um, over a couple of rate cycles and again, they're using actually sound data. We're getting it in front of them faster than they've ever used it and I think that's a very positive sign. Maybe I'll ask Mark if he wants to comment a little bit more specifically on the discussion with the states and and very briefly. I I'd add on here, so

Stephen Baxter: The updated guidance that we put out this year it doesn't anticipate slower trained deceleration. Um, together with that, ongoing risk, full pressure to persist in the second half. Uh, importantly, here Medicaid. Margins are still expected to show year-over-year Improvement in the baccoff and we do expect them to remain positive for the full year. Um, I'll bet you know below our long-term targets

Stephen Baxter: Thank you. Next question, please.

Lisa Gil: Next, we'll go to the line of Lisa Gil from JP Morgan. Please go ahead.

Speaker Change: Answer the question Lisa. Let me I'll directly address your question. On Trend in Medicare. Advantage it remained elevated, but it came in line with consistently with our expectations. So, similar to what we've been sharing, um, in the first quarter and along other conferences, very much consistent in line. So we didn't see any difference. Let me ask Felicia to talk a little bit about our bid strategy and, uh, share how we're thinking about that. So good morning, Lisa and thank you for the question, you know? As we look ahead to 2026, it is still too early to be specific about our bid. Um but I will say that we continue the very disciplined and thoughtful approach in terms of how we approach the bid.

Knowing that there is going to be the potential for some volatility as we head into 2026.

Felicia Norwood: We prioritize the plan offerings that we believe are going to deliver, strong retention for us, and sustainable. Long-term value for our members, we specifically focused on geographies and plan types. That we've been very much focused on as we go forward, namely our HMO, our duels. And, and certainly looking to lean into margin as we think about 2026. So it is too early to comment on the more specifics of that but we feel very good about how we are positioned the actions, we've taken to lean into margins as we go forward and the progress, we continue to make around stabilizing and improving our margins.

In the ma program. Yes,

Thank you, Felicia. And the only add I would make is just a reminder, this has been a multi-year strategy for us over the last several bid Cycles where we really focused on trying to get the stability in this Marketplace and have taken those approaches. So, so, thank you. And next question, please.

Speaker Change: Next, we'll go to the line of Lance wils from Bernstein. Please go ahead.

Lance Wils: Great, thanks. Could you comment a little bit on the utilization? You're seeing understanding the risk pool deterioration and a couple of those lines. Um if you could just talk a little bit about utilization you're seeing by category you know, inpatient outpatient Etc. And then also differences um by segments and and along those lines. If you could comment on, prior period development, you know, how things are developing in reserves. Thanks.

Speaker Change: Thanks very much for the uh the question here. Maybe let me start off by saying the ACA Marketplace is in the midst of a broad recalibration. That is exerting near-term pressure on Managed Care performance across the industry and there are several underlying drivers some of which I called out a moment ago but principally among them. The migration of membership from Medicaid uh post redetermination onto the exchanges and that together with the lower fluctuation rates we're seeing in some states. Um, has made the resulting risk pool, much more acute. And that's really what's driving, the elevated medical cost Trends. So even if it again, you could think about this as a market wide, uh, MO

Speaker Change: Ability shift not an IV Pacific pricing uh or risk adjustment issue. As we think about the individual categories that I noted earlier. Chief among them is emergency room and Behavioral Health Services maybe just to call out 1 stat here. You know, for the ACA we are seeing members in our uh 2024, 25 cohorts, utilizing the emergency room at nearly 2 times the level, um, of our commercial group members. And then finally, on the prior year, or prior period development, uh, there's nothing of particular notes, uh, to call out here. Uh, as you recall, uh, as you'll see in our file, the earnings release this morning was approximately 40 million, uh, for the quarter.

Thank you. Next question, please.

Speaker Change: Next, we'll go to the line of Justin Lake from Wolfe research. Please go ahead.

Speaker Change: Thanks. Good morning. Uh just a couple of numbers questions here. First, appreciate your caller on the split of the guidance revision. If I think about the impact here would be fair to say your Medicaid. Margins are now maybe in the 1.

Speaker Change: Percent range and maybe the exchanges of slightly negative and then just given the potential for margin Improvement in Medicare the exchanges and Medicaid next year. Do you see that potential to grow above the 12% lrp next year? And maybe you could share your view of head with the Tailwinds of the 2026. Thanks

Speaker Change: Again to help rebuild margin and ensure long-term sustainability. Uh, as I mentioned earlier on Medicaid, margins are still expected to show year-over-year Improvement in the back half. They'll remain positive for the full year. About below our long-term guide.

Speaker Change: Yes, thanks Mark. And Justin to your second question, you know, as we said, we're really not in a position to give formal guidance, but let me sort of frame some of the areas, um, because there are a number of variables, uh, 1 of the, in terms of the opportunities. We see, I guess I would price to first and foremost, um, significant discipline in our pricing for cost Trends. And that is across the ACA, which we've already talked about our product filings or addressing this higher Market Acuity and the potential for further deterioration in the risk pool, shouldn't those subsidies? Not, um, be renewed in Medicaid. We're also as we've also shared on this, call working with our states to ensure that our rates are tracking, um, to the member AC cutie, uh, as well as preparing, for the policy shifts that can occur. And then finally, a Medicare Advantage again, as we should just spoke to, we have put very disciplined benefit designs, uh, and a focus on sustainable position and margin recovery. And then I'd add to that in terms of those opportunities. We also continue to expect ongoing strong growth and performance from our carillon.

Speaker Change: Business as you heard from the call today, in an ongoing, what we're seeing in our pipelines. You know, the biggest unknown for us right now is the policy uncertainties around the ultimate disposition of the enhanced subsidies, um, in the individual ACA Market, whether they expire or there's a step down, uh, I think is really an important factor going into it. The impact of the market Integrity rule, which will come into play, which we think is a positive, quite frankly, for the discipline in the market. But again, we need to be able to understand that. So it's really for us to Define. Um, I'll share again what I said, uh, in my comments earlier. Uh, while those are unknowns, we are taking action. Now, while we haven't put them into the 2025 refor. Uh, we are working very hard to make sure that we bend the trend on areas that Mark has talked about some of the aberrant billing practices we're seeing but also around areas that uh we think we can have an impact like er utilization and things like that. So we'll be back to you with more clarity as the year progresses but wanted to give you a

Speaker Change: Sense of both the opportunities we see and the unknowns that we're facing as we go through this year. Uh next question, please.

Speaker Change: Next, we'll go to the line of Aaron Wright. From Morgan Stanley. Please go ahead.

Aaron Wright: Great. Um, more along those lines about some of the areas that are under your control, I guess more specifically. What are you doing? Maybe differently in terms of cost structure initiatives throughout the balance of the year and into next year and, and, and can you speak to the nature tiny magnitude of those and how you're thinking about that as you approach some of those items that are more under your control? Thanks.

Speaker Change: Yeah, thanks very much Aaron. I mean, I think there's a a number of things that are within our control. Obviously, we have been, um, managing our cost structure. Most with really quite frankly. This was something we committed to at the beginning of the year, but the transformation of using technology, uh, fundamentally to simplify our processes to automate our processes that is ongoing. And we have, um, shown I think very strong discipline and that will continue, and that will drive run rate for us. Um, we're also using, um, our data, uh, and using AI quite frankly, to get ahead of the cost curve. And what I mean by that is really trying to shift left to understand what's happening earlier in the process, uh, and making sure that we are identifying these trans. Particularly these billing abnormalities that we're seeing 1. Great example of that is the IDR process, which Mark spoke about, you know, this quarter. Um we took very aggressive action and filed a legal suit against what we think is the misuse of the IDR process under the no surprises act. And just to put that in perspective, we've seen

Speaker Change: Out of network providers and their billing Partners submit. Thousands of disputes sometimes, hundreds in a single day and our payment request can be significantly inflated, which is costing the entire Health Care System. Sometimes those are from, as much as 21 times billed, charges just to give some perspective on this. Um, we fully support that act, but we also know that it has to be implemented appropriately. So that's 1 example. We're Alan leaning into the work that Caroline has done, we had very good results in Carolyn. So you think about the the areas that Mark talked about our ability to take more of that, uh, and manage it through Caroline. I think is really important whether it's around Specialty, Services areas like that. So again, we have an embedded that in the trend right now, but we are clearly working on oncology, uh, severe, uh, mental illness. Um, msk products. Things of that nature that we think are important for affordability, over the Long Haul, but again, take time to implement. And we know that the issues specifically in the uh, individual ICA Market.

Speaker Change: So, thank you very much for that. Uh, question. And next question, please.

Speaker Change: Next, we'll go to the line of Ben Hendricks, from RBC Capital markets, please go ahead.

Great. Thank you very much. Just wondering if the current environment is making any uh, or driving any drastic changes to your Capital allocation strategy this year. Um, are you still thinking about the uh, kind of 50/50 split of investment versus returning capital and then to the extent that the m&a and organic reinvestment piece of it is changing. Are there shifts there that may allocate more, Capital internally versus uh for example adding uh capabilities to Caroline uh or or other uh activities. Just any any thoughts on Capital allocation for the rest of the year. Thank you.

Ben, thanks very much for the question in the second quarter. We repurchased approximately 380 million dollars worth of shares. But importantly, here I'll adjust the Cherry purchase pacing in the second quarter, uh, was different. And it was different because we wanted to ensure we had enough flexibility heading into what we see as a dynamic rate and margin environment. Uh, that's big, you know, in my opinion with the stock trading, well below what we see, as its intrinsic value, I really wanted to make sure that we retain full flexibility to be more opportunistic in the periods ahead. We are firmly on track to achieve our full full year or a diluted uh weighted average shake out to 225 to 226 million. But that year is we want to be opportunistic, more broadly on image.

Speaker Change: A um I'll focus in 2025 is really on integration and scaling of the Acquisitions that we completed, uh, last year. So we do anticipate lower levels of m&a activity this year with a greater emphasis as I mentioned a minute ago, um, on opportunistic, share repurchases. And then as I try to think, over the long term, uh, we're going to retain consistency with our algorithm meaning we'll Target deploying about 50% of free, cash flow uh towards m&a organic reinvestment back into the business with the other 50% being returned to shareholders uh including 30% for share repurchases in about 20% for dividends. Thank you.

Next question, please.

Speaker Change: Next, we'll go to the line of Joshua Raskin from nefron research. Please go ahead.

Joshua Raskin: Hi. Thanks. Good morning. I guess my question is really about your commentary around creating more stability and predictability and maybe what could be done differently in the future, you know, we've spoken about the potential for risk pool changes, both in the ACA exchanges and on the Medicaid side. And so how do you change that pricing process for the ACA or rate negotiations with the state? What what makes this business more predictable in the future?

Speaker Change: Thanks very much for the, uh, the question Josh, Let Me Maybe step back for a moment. You know, we continue to see the ACA Market as a valuable and a complimentary business, uh, to our Kalan and Medicaid segments.

Speaker Change: And that's because it enables us to extend affordable coverage, uh, to more consumers, while maintaining a balanced profitable growth, we very much appreciate cms's ongoing efforts to promote stability in the individual market and get that gets at the heart of your question. They included several Provisions in the recently finalized Marketplace integrity and affordability role, uh, that supported that goal uh, including for example, the elimination of the monthly special enrollment periods. Uh, they strengthen pre-enrollment, verification of income and I think all of that contributes.

An importantly, I'd add, you know, our rate filings that are upcoming for the 26th cycle, will capture both the current Acuity and our expectation. For further deterioration in the risk pool in 2026.

Speaker Change: And so in my opinion and our team is mentioned team, you know, more obviously could be done here. Um ultimately we believe the AC Market will likely be smaller um and higher Acuity uh driven next year. Especially if the enhanced subsidies expire and 1 of the quick comments just on Medicaid from an earlier question you know we do expect the full year 2025 Medicaid cost Trend to be driven approximately a third from Acuity and about 2/3 from utilization uh, and coding.

Speaker Change: Next question, please.

Next, we'll go to the line of Dave, windley from Jeffrey's. Please go ahead.

Dave Windley: Hi. Thanks for taking my question. I wanted to confirm an understanding and then pose a question. So Mark to your earlier answer on

Dave Windley: ACA, if I understand right on risk adjustment, you're basically saying

Speaker Change: The pool is deteriorating. Your book is basically.

Shifting in line with the broader risk pool. So your risk adjustment assumptions, don't change your risk transfer assumptions.

Speaker Change: Don't change from your beginning of your

Speaker Change: Expectations, is that the right understanding of what you're saying? And therefore, the

Speaker Change: Book is reflective of just the deterioration of the book.

Speaker Change: Is that right Dave? Dave that is a spot-on and I would go 1 step further to say. You could think about the Acuity in the ACA Market at this point in time, largely being stabilized, post those lower effectuation rates the industry. So in April

Speaker Change: That's great. And that teased up my my actual question which is

Speaker Change: what assumptions are you making about further attrition?

Speaker Change: In the overall membership and therefore shifts in wrist pool.

Speaker Change: in, in light, of kind of thinking about 1,

Speaker Change: Pre-pandemic.

Speaker Change: And then 2 to your point, that, you know, some of this Acuity is coming from membership, shifting from Medicaid. And I think you also made, um, 1 of the management team members made a made a, a reference to non-medicated expansion States. And my concern would be that some of those Medicaid shifts will be found to be ineligible

Speaker Change: in the ACA market. Now that might help the risk pool in fact, but

Speaker Change: But what again, what assumptions are you making about the the further attrition this year?

In the ACA uh enrollment base. Thank you.

Speaker Change: Great question to be clear. At least for the remainder of 2025, we've assumed membership stability in the ACA base, at what we have done is think about what fourth quarter utilization is going to do and here. Obviously, if Congress allows, the enhanced premium tax credits to lapse at the year end. Uh, we will expect a measurable lost chance, uptick in fourth quarter utilization, as some members are going to schedule their elective care before, they're out of pocket costs rise in 2026. And and start the, the reason I'm bringing this up is that this use it or lose it pattern. Um, has been modest in the individual Market because most ACA enrollees either, use coverage consistently throughout the year or they're going to hold this for financial protection. However,

Speaker Change: The combination of what we're seeing now with this higher prevailing Acuity and the likely subsidy Cliff has led us to believe that we're going to see a much more meaningful Q4 surge, uh, than in Prior years. And that's the key assumption that we've now embedded, uh, in our full year at guidance Outlook.

Speaker Change: Next question, please.

Speaker Change: Next, we'll go to the line of an Hines from Mazoo Securities. Please go ahead.

Speaker Change: Hi, good morning and thank you. Um, several times you talked about increased coding. I, I think, Market 1 year are responses.

Speaker Change: You noted that um 6 you saw increased coding it. Can you just elaborate on those comments? Um, are you seeing increased coding across all segments?

Speaker Change: And you did. Um, I think mentioned you said a certain instead of providers, can you elaborate on that comment? And I think there's some indication that going for forward providers might. Um, utilize AI to help document and code better as a health insurer. How do you view this as a risk and how do you underride for this Behavior change?

Speaker Change: Yeah, thank you for the question, and I think there's there's a lot there. So, let me clarify those questions because I think they're important. So, um, I already spoke to the iDrive issue, which is very specific. And I think that 1 has driven what I'll call very unnecessary costs beyond what that across the entire health system. And as you heard, we're taking a very aggressive approach against those billing companies that are doing that. So, that's 1 specific pocket. The other 1 is, I would say it's actually more isolated pockets where hospitals are using some AI enabled coding tools that can increase document document Acuity and in turn unit costs, we have flagged these because we've been tracking those, as I said with our analytics earlier in the quarter.

Speaker Change: Uh and it is 1 potential. Contributor titler claims and higher allowed amounts. We are now putting those through our payment Integrity process.

Speaker Change: We need aligns us um like in the areas of prior authorization where you can get the documentation and the medical records aligned immediately and we have the same data and then we're not going back and forth. So I think that's a positive in the system but where we see it like in the IDR process, just to increase that doesn't help anything around the system, we're going after that. So I want to just differentiate between that but it has been a contributor and it's something that we think is um that we need to focus response to and that's where we're using our technology as well. Uh, thank you for the question. Next question, please.

Kevin Fischbach: Next, we'll go to the line of Kevin fishbach from Bank of America. Please go ahead.

Kevin Fischbach: Great thanks. Um, looks I want to go back to you to an earlier, uh, line of questioning about Medicaid because I, you know, going into redetermination, there was a lot of optimism from the industry about, um, you know, States being proactive about risk, pool shifts, understanding those shifts, um, better Real Time data and and we're still struggling with dealing with these types of things, and I appreciate that, you know, in many ways, the risk pool shifts have been unprecedented but it does seem like what Trump is doing.

Kevin Fischbach: Uh, with his bill is going to create another period of the next 3 to 5 years of unprecedented risk, pool shifts as well. So why why should we be assuming any, you know, Improvement in Medicaid, margins over the next couple of years if there seems to be this you know, lag here between rate setting and um,

Kevin Fischbach: The data coming in around where costs are real time. Thanks.

Kevin Fischbach: Um, well first, thanks for the question, Kevin. I think, you know, as we think about this we um, you know, we still think that both Medicaid and the ACA markets are both very positive markets. And yes, there's been a period of dislocation, uh, in what's happened? But again, it has been unprecedented given what the amount of um redetermination that occurred first in the Medicaid market. And now what we're seeing in the risk flow as we think about, um, what is happening longer term with what this potential bill could do. We're monitoring those implications. Particularly the enhanced work, requirements changes to the subsidy eligibility, uh, that may impact, Medicaid, and ACA. And while they may present, I guess what we'll call near-term, enrollment pressure, because we think we're going to be able to work through them. We've long maintained that these strong Partnerships with the states and our capabilities can help them actually deliver a much better outcome. And again, we are not passive in this relationship with the state. They're looking to us in terms of capabilities, we have in the commercial Market to help them manage through this.

Kevin Fischbach: We know that a lot of the early, um, redetermination were administrative and the Straits, quite frankly, the states struggled with the amount of volume and process. So we've learned a lot in this process, we're going to have to work through them and also moving up. The experience that we're seeing on the Acuity of the population. And using that data earlier, we're seeing more constructive engagement from the states, their actuaries are now. I think quite aware of the kind of shifts that occur when this enrollment changes. So, again, um, you know, we have to work through what work requirements will mean. We've had it in a few states. That will be something new for Most states to have to implement. We've got some time to implement that. But again, I think those are all really important factors and we consider this partnership with the states that we need to help them get through this process. But overall, I just want to reiterate, we did continue to think that these are core strategic franchises and that it's a short-term volatility issue that we're going to get through and we feel really good about sort of the kind of how we're pacing through.

It and as Mark said, we are seeing sequential improvements. Thank you very much for the question. Next question.

Ryan Langston: Next, we'll go to the line of Ryan, Langston, from TD Cowen, please go ahead.

Ryan Langston: Thanks Mark. I hope I heard you right, but I think you said Medicaid cost Trend decelerated into the second quarter slightly but underlying utilization increased, I guess if I have that, right? Do you really have a sense on what's actually driving that utilization pickup? And we've seen some commentary by other competitors of States, carving and benefits without suitable, rate increases. Are you seeing that in your States? Thank you.

Thanks very much for thanks very much for the question. I simply say, you know, Medicaid cost trained good moderate in the second quarter.

Ryan Langston: The Slowdown was far less pronounced than we had expected.

Ryan Langston: We first anticipated. And then again a third from acuity

Ryan Langston: 2/3 from utilization coding and I acknowledge that is different from 2024 where we indicated 60% was Acuity. 40% was utilization and that's simply a fact that most simply a result of the fact that most redetermination related Acuity impacts have now been absorbed while the elevated utilization, is what we're seeing comes through.

Ryan Langston: Yeah, and Ryan to the last part of your question on the carbons, the normal process for States implementing new programs is generally, we work with their actuaries and what we think is the right amount and if for some reason there's a dislocation in that we continue to work with them and they have usually are very responsive. So again I would look at that um is not the biggest contributor. I would our big contributor at least for us. I would look at that really as an issue of timing for the most part and generally getting that right as they get more mature in the program. Next question, please.

Next, we'll go to the line of Sarah. James from Cantor Fitzgerald. Please go ahead.

Sarah James: Thank you. Can you talk about how Caroline margins are, uh, lining up compared to your initial expectations? And then some of the growth related pressure, um the RX side from uh growth in large employers and Specialty and then on services from carebridge. When do you expect that to normalize? Or is the shift in Carolyn RX, more of a long term margin shift with the new mix?

Let me have uh, Pete heian, who leads that business comment? Yeah, no. Thanks for the, uh, the question. Sorry. I asked a lot there about Caroline, so I'll try to cover it all. Um, on the, on the services side, again, really strong growth as we've talked about and that's contributed, um, to the year-over-year performance Improvement. Um, and as it relates to margins and services, you specifically asked about, um, they they came in within our expectations slightly down from last year. Again, that was largely driven by uh carebridge as well as continued expansion of risk arrangements and and taking on more risk both in Lance health and um externally. We're also very happy about what we're seeing externally in terms of growth. And so that is all contributing, um, to, to our performance, in terms of, you know, how that progresses through the year. I think that that what you were asking as well. Um, similarly, um, because of seasonality in these rust deals, we'll see that margin decreased throughout the year. And again with the addition of carbridge, our margin moderate,

Sarah James: It's because it comes with a different profile from a margin perspective. Um, on the RX side, you know, similarly, a very strong growth. In fact it was our strongest year of growth um yet and um and that actually is contributing to the the issues associated. With our our margin, the year-over-year performance from an operating perspective actually improved in uh in in Pharmacy. Pretty nicely 7.8% in in the quarter. Um margins um were lower because of very significant you know growth that

Sarah James: We're seeing, um, we continue to do well, um, down market and Middle Market. But also we're seeing an expansion, um, at the upper end of the market with some large jumbo accounts.

And so we're investing in that pretty heavily, um, as it relates to both this year and going into next year, and I would largely put that in the context of a lot of the differentiated services that we're working on along with our Commercial Business. Um, programs like Total Health Total Health, Connect that are just really oriented to Whole Health and differentiated customer service. Um, so we look forward to that continued growth and and, and, uh, expansion in our Pharmacy business,

Sarah James: Next question, please.

Next, we'll go to the line of George Hill from Deutsche Bank. Please go ahead.

Speaker Change: Yes. Um, good morning guys. And thanks for taking the questions. Uh, Mark, except for the Q4 Surge and Acuity in the ACA business. It seems like you called out, I guess. First I would ask, can you kind of quantify the expectation there? And there are there any other 1-time items or things that you would call out in the guide as it relates to the back of the back of the ear assumptions? Uh, given that the uh, the deterioration kind of in the earnings power looks pretty significant in the back half of the Year. Thank you.

Speaker Change: Thanks very much for you. The question, maybe the way I'll take this, is to talk a little bit about seasonality between the third and fourth quarter. Uh, we do anticipate a modder modestly higher portion of earnings to be realized in the third quarter, uh, compared to the fourth quarter. And while our fourth quarter Outlook, you know, reflects some utilization, pull forward in the AC exchange business, as you mentioned,

Speaker Change: Mentioned. Um, I'd say there's also evolving seasonality and dynamics that we've called out previously. In part D offering the expected step down in earnings, uh, is lower than what 1 normally would expect. And there are 2 factors here. Uh, first impacts most important, we expect a discrete non-operating tax benefit to be recognized at your end.

Speaker Change: Management Programs. They're going to have the greatest impact in Q4 helping to offset that higher Trend that we've modeled uh, into our business. And so taken together, those 2 factors would account for what we're seeing and likely what you're asking about. Thanks.

Speaker Change: Next question, please.

Speaker Change: Next, we'll go to the line of Jason casserola from Guggenheim please. Go ahead.

Jason Casserola: Uh, great thanks for taking my question. Um, just on, Medicaid, I guess given the continued disconnect there. I mean, you've talked about this being a near-term, issue wanting to be a continued partner to stay, but, you know, your comments before around the potential for normalization rate cycle numbers, over the next couple of weeks Cycles, are you coming to a point where, you know, it could make sense to potentially exit States or reduce Footprints within certain POS populations? Or, you know, maybe what would you have to see outright to start considering those possibilities I guess in context of your, of your trying to, you know, improve margins, uh, for that business. Thanks.

Jason Casserola: Yeah, thanks for the question. Um, I think there's a couple things 1 States. Uh, in our footprint have been very responsive uh in terms of the alignment of what we've shown them and we do believe at this stage, it is really catching the data up. Um, once we have the data in front of them, they have been again, uh, improving the rates to align with the Acuity of the population. So I think that, you know, that question clearly we're always looking at ensuring that we have a stable Medicaid, um, population that, you know, is aligned to the Acuity and we get appropriate rates. Um,

Jason Casserola: And I think it's premature from what we've seen from our states to make those kind of determinations. Because again, it's been very productive. Uh, and our states have been very responsive. Um, although again it's a lag because what they're facing as well. So, um, so again. But, you know, we are always looking at this. And thank you very much for the question. Next question, please.

Next, we'll go to the line of whip Mayo from svb Lin, please go ahead.

Uh hey thanks. Just a a quick 1. Um maybe just an update on where you think you are around commercial margins. Now in light of all the commentary and how you're thinking about the pace of getting back to the targets and any comments maybe on midyear renewals for your fully insured business. Thanks

with thank you very much for the uh, the question. Um, I totally think that, you know, we continue to be very pleased with the trajectory of our large group. Uh commercial margin recovery over the past couple of years. You know, in 2025 our guidance, uh continues to include expected strong consistent margin performance. Um, on utilization in that group just because we haven't touched on it. Um, I'd say you know Group Medical trained continues to remain elevated but really importantly in line with what we've expected and what we priced for uh similar cost pressures in that market emergency room visits. Physician delivered BH Services uh and Specialty of Pharmacy. If I think overall commercial margins, we obviously expect a slight decline this year that just reflects the performance of our ACA business, which we've spoken about

Yeah, thanks Mark. And maybe I'll ask Morgan Kendrick. Just to talk a little bit about what he's seeing in the market because I think that's an important context. Yeah, with thanks for the question is Mark said, you know outside of ACA we're pretty pleased with the way. The health business is actually performing and you you made reference to the large group fully insured or risk business earlier in your question in 1. And that's 1 that where I think, you know, we're seeing the market Harden quite a bit relative to pricing several years back. There was sort of a run on membership. It's the market sort of rationalized around the proper Trends and the proper pricing on the business. So when we finish we, the second largest cohort of ours was July. We're really comfortable with how it manifested as far as the retention on that business and where there is, um, opportunity. We continue to sell the large group, fully insured products, um, quite nicely in our geographies albeit. There is a desire for many. Um, many entities who have some level of risk tolerance to move to self-funded. So that's when we see the loss on the actual wrist side, it's typically moving over to a self-funded opportunity with us, but again, quite pleased with the business.

And that's consistent with how we're looking at the national business. Of course, all being asmo really, really strong performance.

Jason Casserola: Thank you, thank you. Thank you, Morgan. And I think the theme there just to sort of call it out. Is we've seen a, I think a much more rational hardening Market in our fully insured across the board and, um, Morgan, and the team have done a nice job there. Um, we have we'll time I think for 1 more question.

Speaker Change: And for a final question, we'll go to the line of Michael ha from Bayard. Please go ahead.

Hi. Thank you, quick 1 first, on exchanges, I understand the FTR checks this year. Had been delayed to this summer. Is that already concluded? Has that member attrition been reflected in your updated guide. Just trying to understand, in fact, could be another shoe to drop. And then my main question, I guess the piggybacks off of Kevin and Stephen question, but maybe to frame it slightly differently.

Speaker Change: We just experienced a 3D determinations, the large disenrollment from procedural reasons. And now with the the new timeline starting in 27, all the preparation States need, especially with what you mentioned with how they've struggled with all the volume of processes. How do you gain comfort that work? Requirements, won't catalyze. Another big procedural additional enrollment situation and widen that rate Acuity mismatching further over the next few years. Thank you.

Thank you. Thanks for the question. Um, there's a number in there. Maybe I'll ask solution to address sort of the work requirements component. Thank you, first.

No, thank you for the question. Michael. You know, I'll start by saying that we have very good experience in terms of work requirement programs and working collaboratively with our state Partners, when it's all said and done. You know, we've operated in multiple regulatory environments and the expectation from us is to be a good State partner in helping them through some of the operational challenges. So we are going to be providing them with opportunities to understand how you can do this more efficiently. States, certainly are always pressured when it comes to resources and Staffing to support this kind of activity. And so we are there to make sure that we bring Innovative programs to help them meet the needs of beneficiaries. We have that experience in Indiana which early implemented, work requirements, um George

Speaker Change: Which is another state where work requirements are in place today. And I think we've been able to work very effectively with our state Partners to make sure that we are bringing the value to the table to support our states and equally important support members and individuals who rely on Medicaid programs to make sure that they continue to have access for necessary care as we go through this period.

Speaker Change: Thank you, Felicia. And thank you to everyone on the line. As you heard on the call today, we're actively addressing the levers that we can control even as the ACA Medicaid markets, go through a period of recalibration.

Speaker Change: The actions we're taking to line pricing stabilized Tren in Drive. Operating leverage will position us for improved performance in 2026. At the same time, we're making the right strategic Investments to enhance the embedded earnings power of the business and enable the Enterprise to achieve its long-term growth objectives. Thank you for your interest in elevance health and thank you for joining our call today.

Speaker Change: Ladies and gentlemen.

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