Q3 2025 Elevance Health Inc Earnings Call

Speaker #2: Ladies and gentlemen, thank you for standing by and welcome to the Elevance Health third-quarter earnings conference call. At this time, all participants are in a listen-only mode.

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Elevance Health third 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 one 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 two. 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.

Speaker #2: 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 one on your telephone keypad.

Speaker #2: You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star, then two. These instructions will be repeated prior to the question-and-answer portion of this call.

Speaker #2: 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.

Speaker #3: Good morning, and welcome to Elevance Health's third-quarter 2025 earnings conference call. My name is Nathan Rich, Vice President of Investor Relations. With us this morning on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Pete Haitian, President of Carillon; Morgan Kendrick, President of our Commercial Health Benefits Business; and Felicia Norwood, President of our Government Health Benefits Business.

Nathan Rich: Good morning and welcome to Elevance Health's third quarter 2025 earnings conference call. My name is Nathan Rich, Vice President of Investor Relations. With us this morning on the earnings call are Gail Boudreaux, President and CEO, Mark Kaye, our CFO, Pete Haytaian, President of Carelon, Morgan Kendrick, President of our Commercial Health Benefits business, and Felicia Norwood, President of our Government Health Benefits business. Gail will begin the call with a discussion of our third quarter performance, our planning assumptions for 2026, and the progress we've made against our strategic initiatives. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, ElevanceHealth.com.

Speaker #3: Gail will begin the call with a discussion of our third-quarter performance, our planning assumptions for 2026, and the progress we've made against our strategic initiatives.

Speaker #3: 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 financial measures.

Speaker #3: Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making forward-looking statements on this call.

Nathan Rich: 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. 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.

Speaker #3: 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.

Speaker #3: 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.

Speaker #3: I will now turn the call over to Gail.

Speaker #4: Good morning, and thank you for joining us. Healthcare is at a pivotal moment. The industry has been challenged by rising medical and pharmacy costs and regulatory changes that will impact coverage for millions of Americans.

Gail Boudreaux: Good morning and thank you for joining us. Health care is at a pivotal moment. The industry has been challenged by rising medical and pharmacy costs and regulatory changes that will impact coverage for millions of Americans. At Elevance Health, we're focused on lowering the total cost of care and improving the member experience. We're acting with urgency through an integrated clinical and benefits approach, leveraging value-based care to align incentives, improve outcomes, and guide people to high-value, lower-cost settings. Tools like HealthOS and our AI-enabled clinical support are already reducing friction, speeding decisions, and bending the cost curve. Our third quarter results reflected solid execution with the benefit expense ratio in line with our expectations. While results included approximately $1 of favorable items below the line, underlying performance remained consistent with the outlook we shared last quarter.

Speaker #4: At Elevance Health, we're focused on lowering the total cost of care and improving the member experience. We're acting with urgency through an integrated clinical and benefits approach, leveraging value-based care to align incentives, improve outcomes, and guide people to high-value, lower-cost settings.

Speaker #4: Tools like HealthOS and our AI-enabled clinical support are already reducing friction. Beating decisions and bending the cost curve. Our third-quarter results reflected solid execution, with the benefit expense ratio in line with our expectations.

Speaker #4: While results included approximately $1 of favorable items below the line, underlying performance remained consistent with the outlook we shared last quarter. We are reaffirming 2025 adjusted EPS of approximately $30 and continue to view $27 as the appropriate earnings baseline excluding $3 of discrete, non-recurring items.

Gail Boudreaux: We are reaffirming 2025 adjusted EPS of approximately $30 and continue to view $27 as the appropriate earnings baseline excluding $3 of discrete non-recurring items. As we plan for 2026, our posture is prudent and practical, and we're approaching next year with discipline and focus. We want to set expectations that reflect today's realities, acknowledge uncertainties that remain, and be clear about the levers we control. While we are still in our planning process for next year, there are a few key assumptions that will shape our outlook, starting with Medicaid. Continued membership reverifications and state program changes have driven acuity higher, and we are planning for at least 125 basis point year-over-year decline in Medicaid margins as rates like acuity and utilization trends remain elevated. This is an initial input at this early stage, not formal guidance.

Speaker #4: As we plan for 2026, our posture is prudent and practical, and we're approaching next year with discipline and focus. We want to set expectations that reflect today's realities: acknowledge uncertainties that remain, and be clear about the levers we control.

Speaker #4: While we are still in our planning process for next year, there are a few key assumptions that will shape our outlook. Starting with Medicaid, continued membership re-verifications and state program changes have driven acuity higher.

Speaker #4: And we are planning for at least a 125 basis point year-over-year decline in Medicaid margins. As rates like acuity and utilization trends remain elevated, this is an initial input at this early stage, not formal guidance.

Speaker #4: In Medicare Advantage, we've taken disciplined actions to improve profitability in 2026, focusing on products that drive retention and value while exiting plans not aligned with our long-term strategy.

Gail Boudreaux: In Medicare Advantage, we've taken disciplined actions to improve profitability in 2026, focusing on products that drive retention and value while exiting plans not aligned with our long-term strategy. For the 2027 payment year, approximately 55% of our MA members will be in four-STAR or higher contracts, including three five-STAR contracts, up from about 40% for payment year 2026, demonstrating steady improvement in STAR's performance and strong returns on the investments we've made in Commercial. Our integrated medical pharmacy model and advocacy solutions continue to resonate with employers. We maintained a disciplined approach to pricing, and we're pleased with strong client retention. We continue to see expansion in our fee-based relationships driven by new client growth and sustained high retention among our large employer customers. Our industry-leading net promoter scores reflect the trust employers place in our model.

Speaker #4: For the 2027 payment year, approximately 55% of our MA members will be in four-star or higher contracts, including three five-star contracts, up from about 40% for payment year 2026.

Speaker #4: Demonstrating steady improvement in STAR's performance and strong returns on the investments we've made. In Commercial, our integrated medical pharmacy model and advocacy solutions continue to resonate with employers.

Speaker #4: We maintained a disciplined approach to pricing and were pleased with strong client retention. We continue to see expansion in our fee-based relationships, driven by new client growth and sustained high retention among our large employer customers.

Speaker #4: Our industry-leading net promoter scores reflect the trust employers place in our model. In the ACA market, our products are positioned to provide value to members while reflecting the higher acuity observed this year.

Gail Boudreaux: In the ACA market, our products are positioned to provide value to members while reflecting the higher acuity observed this year. We have taken a disciplined approach to pricing while continuing to design offerings that ensure affordability and access. The anticipated expiration of enhanced subsidies would significantly impact membership in 2026. If the subsidies are extended, we will work closely with states to support implementation and ensure continued access for consumers who rely on this coverage. Carelon is expanding external relationships and scaling pharmacy, behavioral health, specialty care management, and home-based services, embedding value-based care principles throughout. External revenue grew double digits year over year, reflecting broad momentum across pharmacy, behavioral, and specialty services. Clients are turning to us for the value we deliver. CarelonRx had another strong selling season for 2026 with several national account wins and high retention.

Speaker #4: We have taken a disciplined approach to pricing. While continuing to design offerings that ensure affordability and access, the anticipated expiration of enhanced subsidies would significantly impact membership in 2026.

Speaker #4: If the subsidies are extended, we will work closely with states to support implementation and ensure continued access for consumers who rely on this coverage.

Speaker #4: Carillon is expanding external relationships and scaling pharmacy, behavioral health, specialty care management, and home-based services. Embedding value-based care principles throughout, external revenue grew double digits year-over-year.

Speaker #4: Reflecting broad momentum across pharmacy, behavioral, and specialty services, clients are turning to us for the value we deliver. Carillon Rx had another strong selling season for 2026, with several national account wins and high retention.

Speaker #4: Carillon services continue to deepen its partnerships with external clients, driven by high-value solutions and the launch of new innovative products. At the same time, enrollment dynamics in health benefits will create a directional headwind for Carillon next year, which we will size when we provide our earnings guidance in January.

Gail Boudreaux: Carelon Services continues to deepen its partnerships with external clients, driven by high-value solutions and the launch of new innovative products. At the same time, enrollment dynamics in health benefits will create a directional headwind for Carelon next year, which we will size when we provide our earnings guidance in January. In Medicaid, reverification effects have raised acuity and sustained higher cost trends, and states are preparing program changes that will influence the pace of rate adequacy. We are proactively working with our state partners on rate alignment, recommending program improvements such as benefit refinements, and supporting states as they implement program changes. In parallel, we're expanding behavioral health interventions, strengthening specialty drug management, and optimizing sites of care. These steps are designed to improve program effectiveness and bend the cost curve. We are creating our own future through innovation.

Speaker #4: In Medicaid, re-verification effects have raised acuity and sustained higher cost trends. States are preparing program changes that will influence the pace of rate adequacy.

Speaker #4: We are proactively working with our state partners on rate alignment, recommending program improvements such as benefit refinements, and supporting states as they implement program changes.

Speaker #4: In parallel, we're expanding behavioral health interventions, strengthening specialty drug management, and optimizing sites of care. These steps are designed to improve program effectiveness and bend the cost curve.

Speaker #4: We are creating our own future through innovation. By year-end, more than 10 million members will have access to our AI-enabled virtual assistant. Demonstrating how digital innovation is enhancing access, efficiency, and engagement across our platform.

Gail Boudreaux: By year end, more than 10 million members will have access to our AI-enabled virtual assistant, demonstrating how digital innovation is enhancing access, efficiency, and engagement across our platform. For providers, we've lowered the number of prior authorization requests in the last two years, and providers on our HealthOS platform benefit from aligned data sharing, faster approvals, and reduced administrative burden. These initiatives collectively improve affordability, experience, and productivity across Elevance Health. Looking ahead, by January, we expect greater visibility across our Medicaid rate cycle, marketplace subsidies, and Medicare AEP results. A more complete picture of 2025 trends will refine our outlook for medical costs and the impact of our care management programs. With these inputs, we will then establish guidance that is both prudent and achievable. Capital deployment remains an important lever in our long-term earnings growth algorithm.

Speaker #4: For providers, we've lowered the number of prior authorization requests in the last two years. And providers on our HealthOS platform benefit from aligned data sharing, faster approvals, and reduced administrative burden.

Speaker #4: These initiatives collectively improve affordability, experience, and productivity across Elevance Health. Looking ahead, by January, we expect greater visibility across our Medicaid rate cycle, marketplace subsidies, and Medicare AEP results.

Speaker #4: A more complete picture of 2025 trends will refine our outlook for medical costs and the impact of our care management programs. With these inputs, we will then establish guidance that is both prudent and achievable.

Speaker #4: Capital deployment remains an important lever in our long-term earnings growth algorithm. Following several years of strategic acquisitions to expand Carillon's capabilities, our focus is now on integrating those assets.

Gail Boudreaux: Following several years of strategic acquisitions to expand Carelon's capabilities, our focus is now on integrating those assets. We remain committed to disciplined capital allocation, balancing investment and growth with consistent shareholder returns. We will prioritize returning capital to shareholders through share repurchases while remaining disciplined stewards of capital. Stepping back, our message today is straightforward. We delivered results consistent with our revised outlook and reaffirm our 2025 adjusted EPS of approximately $30. We're approaching 2026 with discipline and focus and will provide an EPS range in January. While we recognize the external environment remains dynamic, we are confident in our strategy, our execution, and our ability to drive sustainable value for our stakeholders. With that, I'll turn it over to Mark to discuss our financial results and outlook in more detail.

Speaker #4: We remain committed to disciplined capital allocation, balancing investment in growth with consistent shareholder returns. We will prioritize returning capital to shareholders through share repurchases, while remaining disciplined, stewards of capital.

Speaker #4: Stepping back, our message today is straightforward. We delivered results consistent with our revised outlook and reaffirm our 2025 adjusted EPS of approximately $30. We're approaching 2026 with discipline and focus.

Speaker #4: And we'll provide an EPS range in January. While we recognize the external environment remains dynamic, we are confident in our strategy, our execution, and our ability to drive sustainable value for our stakeholders.

Speaker #4: With that, I'll turn it over to Mark to discuss our financial results and outlook in more detail.

Speaker #5: Thank you, Gail. And good morning to everyone. Elevance Health reported third-quarter GAAP-deluded earnings per share of $5.32 and adjusted-deluded earnings per share of $6.03.

Mark Kaye: Thank you, Gail, and good morning to everyone. Elevance Health reported third quarter GAAP diluted earnings per share of $5.32 and adjusted diluted earnings per share of $6.03. Our operating performance reflected enhanced medical cost management and expense discipline, consistent with the expectations we outlined last quarter. We are sharpening pricing, accelerating our digitization and automation journey, and embedding value-based care principles across our enterprise relative to the earnings cadence previously described. Results this quarter benefited from the timing of planned tax actions contemplated in our full year guidance and stronger net investment income, a portion of which we intend to reinvest to support our long-term growth. As Gail discussed in her remarks, we are reaffirming 2025 adjusted EPS to be approximately $30 and continue to view $27 as the appropriate earnings baseline for modeling purposes.

Speaker #5: Our operating performance reflected enhanced medical cost management and expense discipline, consistent with the expectations we outlined last quarter. We are sharpening pricing, accelerating our digitization and automation journey, and embedding value-based care principles across our enterprise.

Speaker #5: Relative to the earnings cadence previously described, results this quarter benefited from the timing of planned tax actions contemplated in our full-year guidance and stronger net investment income.

Speaker #5: A portion of which we intend to reinvest to support our long-term growth. As Gail discussed in her remarks, we are reaffirming 2025 adjusted EPS.

Speaker #5: To be approximately $30. And continue to view $27 as the appropriate earnings baseline for modeling purposes. This excludes approximately $3 of non-recurring favorable items, primarily tax, the value-based provider settlement recognized in the second quarter, and valuation adjustments that benefited net investment income.

Mark Kaye: This excludes approximately $3 of non-recurring favorable items, primarily tax, the value-based provider settlement recognized in the second quarter, and valuation adjustments that benefited net investment income. Total operating revenue for the quarter was $50.1 billion, up 12% year over year, reflecting higher premium yields, recently closed acquisitions, and growth in our Medicare Advantage membership, partially offset by ongoing Medicaid reverifications. We ended the quarter with 45.4 million medical members. Disenrollment in our Medicaid membership remains concentrated among lower acuity members, driven by more stringent eligibility reviews and changes to state reverification processes. The consolidated benefit expense ratio was 91.3%, aligned with our expectations. Medicaid performance reflected pressure from elevated acuity and utilization, which were not fully offset by rate updates.

Speaker #5: Total operating revenue for the quarter was $50.1 billion, up 12% year-over-year. This reflects higher premium yields, recently closed acquisitions, and growth in our Medicare Advantage membership.

Speaker #5: Partially offset by ongoing Medicaid re-verifications. We ended the quarter with 45.4 million medical members. Disenrollment in our Medicaid membership remains concentrated among lower acuity members.

Speaker #5: Driven by more stringent eligibility reviews, and changes to state re-verification processes. The consolidated benefit expense ratio was 91.3%, aligned with our expectations. Medicaid performance reflected pressure from elevated acuity and utilization, which were not fully offset by rate updates.

Speaker #5: We now expect our full-year 2025 Medicaid operating margin to be modestly negative. Establishing a baseline from which we anticipate a decline of at least $125 basis points in 2026.

Mark Kaye: We now expect our full year 2025 Medicaid operating margin to be modestly negative, establishing a baseline from which we anticipate a decline of at least 125 basis points in 2026. As rates continue to lag, acuity and utilization trends remain elevated. We continue to partner closely with states on rate adequacy and operational enhancements to ensure the sustainability of their Medicaid outcomes. Medicare Advantage costs, inclusive of Part D, were marginally better than expected due to disciplined plan design and member composition. Trend has been elevated but manageable, and we now expect our operating margin to increase slightly in 2025. Though still well below our long term range, performance in the ACA market developed somewhat favorably to the prudent expectations we set in July. The cost trends remain significantly above historical levels.

Speaker #5: As rates continue to lag acuity, and utilization trends remain elevated. We continue to partner closely with states on rate adequacy and operational enhancements to ensure the sustainability of their Medicaid programs.

Speaker #5: Medicare Advantage costs, inclusive of Part D, were marginally better than expected, due to disciplined plan design and member composition. Trend has been elevated but manageable, and we now expect our operating margin to increase slightly in 2025.

Speaker #5: Though still well below our long-term range, performance in the ACA market developed somewhat favorably, to the prudent expectations we set in July. Though cost trends remain significantly above historical levels.

Speaker #5: We continue to anticipate a high single-digit decline in full-year operating margin, and are planning for higher costs in the fourth quarter, as members utilize their benefits ahead of coverage changes next year.

Mark Kaye: We continue to anticipate a high single digit decline in full year operating margin and are planning for higher costs in the fourth quarter as members utilize their benefits ahead of coverage changes next year. Cost patterns and margins in our commercial group business were consistent with our expectations. Our integrated medical pharmacy model and advocacy solutions coupled with Carelon's differentiated value-based care approach is driving higher retention and expanded fee-based relationships. Carelon continues to deliver strong performance across both pharmacy and services, reflecting the power of our integrated platform. CarelonRx revenue grew 20% year over year, driven by strong momentum with our largest clients, and Carelon Services grew by more than 50%, supported by robust organic growth and the continued integration of CareBridge. We are making targeted investments in technology integration initiatives and operational efficiency to sustain this growth and enhance performance across the enterprise.

Speaker #5: Cost patterns and margins in our commercial group business were consistent with our expectations. Our integrated medical pharmacy model and advocacy solutions coupled with Carillon's differentiated value-based care approach is driving higher retention and expanded fee-based relationships.

Speaker #5: Carillon continues to deliver strong performance across both pharmacy and services. Reflecting the power of our integrated platform. Carillon Rx revenue grew 20% year-over-year. Driven by strong momentum with our largest clients, and Carillon services grew by more than 50%.

Speaker #5: Supported by robust organic growth and the continued integration of Cambridge, we are making targeted investments in technology, integration initiatives, and operational efficiency to sustain this growth.

Speaker #5: And enhance performance across the enterprise. While Carillon Rx margins are expected to be modestly below our guidance due to these investments, Carillon services is trending towards the high end of our guidance range.

Mark Kaye: While CarelonRx margins are expected to be modestly below our guidance due to these investments, Carelon Services is trending towards the high end of our guidance range, highlighting the strength of our differentiated value-based care model. Together these businesses demonstrate how Carelon is driving growth across Elevance Health. Our adjusted operating expense ratio was 10.4%. We continue to manage the business with discipline while making targeted investments to scale Carelon's capabilities, support and strengthen our workforce, and accelerate technology adoption. Net investment income was $625 million, with approximately $150 million primarily related to discrete valuation adjustments in our alternatives investment portfolio. Third quarter operating cash flow of $1.1 billion, or 1 times GAAP net income, was impacted by the cash settlement payment related to the Blue Cross Blue Shield multidistrict litigation.

Speaker #5: Highlighting the strength of our differentiated value-based care model. Together, these businesses demonstrate how Carillon is driving growth across Elevance Health. Our adjusted operating expense ratio was 10.4%.

Speaker #5: We continue to manage the business with discipline while making targeted investments to scale Carillon's capabilities, support and strengthen our workforce, and accelerate technology adoption.

Speaker #5: Net investment income was $625 million. With approximately $150 million primarily related to discrete valuation adjustments, in our alternatives investment portfolio. Third-quarter operating cash flow of $1.1 billion.

Speaker #5: Or one times GAAP net income, was impacted by the cash settlement payments related to the Blue Cross Blue Shield multi-district litigation. Our balance sheet remains strong.

Mark Kaye: Our balance sheet remains strong, preserving flexibility to support our growth objectives, invest in new capabilities, and return capital to shareholders. In the quarter, we repurchased $875 million of shares, reflecting our disciplined approach to capital deployment and commitment to returning value to shareholders. Even as we continue integrating recent acquisitions, we maintained a prudent posture with respect to reserves. Days in claims payable of 42.6 days, excluding the impact of Carelon, were approximately flat year over year. Turning to next year, while we are not providing 2026 earnings guidance today, I will outline several key variables informing our planning assumptions. Our current outlook assumes our Medicaid operating margin will decline by at least 125 basis points year over year. The critical factors underpinning this input include the ongoing misalignment of rates and acuity, elevated utilization trends, and funding and eligibility changes in certain states.

Speaker #5: Preserving flexibility to support our growth objectives. Invest in new capabilities, and return capital to shareholders. In the quarter, we repurchased $875 million of shares, reflecting our disciplined approach to capital deployment.

Speaker #5: And commitment to returning value to shareholders. Even as we continue integrating recent acquisitions, we maintained a prudent posture with respect to reserves. Days in claims payable of 42.6 days, excluding the impact of Cambridge, were approximately flat year-over-year.

Speaker #5: Turning to next year, while we are not providing 2026 earnings guidance today, I will outline several key variables informing our planning assumptions. Our current outlook assumes our Medicaid operating margin will decline by at least $125 basis points year-over-year.

Speaker #5: The critical factors underpinning this input include the ongoing misalignment of rates and acuity. Elevated utilization trends, and funding and eligibility changes in certain states.

Speaker #5: We will refine our view on our fourth-quarter call as we gain visibility on the premium rates that reset in January and the impact of state-specific program changes.

Mark Kaye: We will refine our view on our fourth quarter call as we gain visibility on the premium rates that reset in January and the impact of state-specific program changes in Medicare. We took a disciplined and thoughtful approach to 2026 bids, prioritizing plans that deliver attractive value to members while producing sustainable financial performance. As we have previously noted, we exited certain service areas that will impact approximately 150,000 members. We expect strong growth in Carelon to continue across both pharmacy and services, offset by the impact of expected health benefits membership losses. Finally, our operating expense outlook includes several hundred million dollars of incremental investments to advance our strategic goals. We are intentionally prioritizing durable long-term performance over near-term expense leverage.

Speaker #5: In Medicare, we took a disciplined and thoughtful approach to 2026 bids. Prioritizing plans that deliver attractive value to members, while producing sustainable financial performance.

Speaker #5: As we have previously noted, we exited certain service areas that will impact approximately $150,000 members. We expect strong growth in Carillon to continue, across both pharmacy and services.

Speaker #5: Offset by the impact of expected health benefits membership losses. And finally, our operating expense outlook includes several hundred million dollars of incremental investments, to advance our strategic goals.

Speaker #5: We are intentionally prioritizing durable, long-term performance, over near-term expense leverage. These include targeted use of AI and digital tools to enhance the member and provider experience, the expansion of Carillon's capabilities, and initiatives to strengthen future performance.

Mark Kaye: These include targeted use of AI and digital tools to enhance the member and provider experience, the expansion of Carelon's capabilities, and initiatives to strengthen future performance, including improvements in our star ratings. Looking beyond 2026, we remain confident in the enterprise's long-term growth algorithm. While next year will reflect challenging Medicaid dynamics, membership changes, and disciplined investment, we expect 2027 to mark a return to a more balanced earnings growth profile. With that, operator, please open the line for questions.

Speaker #5: Including improvements in our star ratings. Looking beyond 2026, we remain confident in the enterprise's long-term growth algorithm. While next year will reflect challenging Medicaid dynamics, membership changes, and disciplined investment, we expect 2027 to mark a return to a more balanced earnings growth profile.

Speaker #5: With that operator, please open the line for questions.

Speaker #6: Ladies and gentlemen, if you wish to ask a question, please press star then one on your telephone keypad. You will hear a prompt that you have been queued.

Operator: Ladies and gentlemen, 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 speakerphone, 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 to respond to each analyst that may wish to participate in this portion of the call. For our first question, we'll go to the line of AJ Rice from UBS. Please go ahead.

Speaker #6: You may withdraw your question at any time by pressing star, then two. If you're using a speakerphone, please pick up the handset before pressing the numbers.

Speaker #6: Once again, we ask that each participant limit themselves to a single question to allow ample time to respond to each analyst that may wish to participate in this portion of the call.

Speaker #6: For our first question, we'll go to the line of AJ Rice from UBS. Please go ahead.

Speaker #7: Thanks. Hi everybody. Maybe just to try to drill down a little further on the comments around Medicaid. Obviously, you're saying this year you're slightly negative or somewhat negative, and then you're going to be 125 basis point margin incrementally negative next year, it sounds like.

Nathan Rich: Thanks. Hi everybody. Maybe just to try to drill down a little further on the comments around Medicaid. Obviously you're saying this year you're slightly negative or somewhat negative, and then you're going to be 125 basis point margin incrementally negative next year. It sounds like when you're in your dialogue with the states, are they acknowledging that? Are they seeing you as being unique relative to other players in that trend, and therefore it's harder to get the update? As you talk about where the pressure points are, can you sort of give a little more flavor? Is it just the cost trend is worse than you would have anticipated and you could expect it to continue to be worse? Is it the rate updates are not coming in as you thought?

Speaker #7: When you're in your dialogue with the states, are they acknowledging that? Are they seeing you as being unique relative to other players? And that trend, and therefore, is it harder to get the update?

Speaker #7: And as you talk about where the pressure points are, can you sort of give a little more flavor? Is it just the cost trend is worse?

Speaker #7: Then you would have anticipated, and expected to continue to be worse? Is it the rate updates are not coming in as you thought? And then are you factoring in any of this change in benefit design that states are contemplating?

Nathan Rich: Are you factoring in any of this change in benefit design that states are contemplating, or would that be potentially upside if that were to occur?

Speaker #7: Or would that be potential upside if that were to occur?

Speaker #8: Thank you, AJ. Pretty fulsome questions. So why don't I ask Mark to sort of frame some of how we're thinking about it, and then Felicia to comment specifically about the discussions with states.

Gail Boudreaux: Thank you, A.J. Pretty fulsome question. Why don't I ask Mark to sort of frame some of how we're thinking about it, and then Felicia to comment specifically about the discussions with state.

Speaker #8: Mark?

[Company Representative]: Good morning. We're not going to be providing specific point estimates for the composite rate update or the medical cost trend today, but let me clearly frame the two anchors behind our outlook for at least a 125 basis point decline next year. First is trend. Our preliminary 2026 Medicaid trend assumption is really anchored to our expected fourth quarter exit rate, which we typically also view as the seasonal low point for Medicaid margins in the year. It's really a prudent base from which to plan 2026. For context, we now expect the full year 2025 Medicaid operating margin to be modestly below breakeven or approximately negative 50 basis points. That aligns with what we previously communicated. The trend continues to be pressured by elevated acuity and utilization driven by some of those state reverification processes and program changes. Second is rates.

Speaker #1: AJ, good morning. So we're not going to be providing specific point estimates for the composite rate update or the medical cost trend today. But let me clearly frame sort of the two anchors behind our outlook for at least the 125 basis point decline.

Speaker #1: Next year, first is trend. Our preliminary 2026 Medicaid trend assumption is really anchored to our expected fourth-quarter exit rate. Which we typically also view as the seasonal low point for Medicaid margins in the year.

Speaker #1: So it's really a prudent base from which to plan 2026. And for context, we now expect the full-year 2025 Medicaid operating margin to be modestly below break-even, or approximately negative 50 basis points.

Speaker #1: And that aligns with what we previously communicated. The trend continues to be pressured by elevated acuity and utilization, driven by some of those state re-verification processes and program changes.

Speaker #1: Second is rates. We do expect state rate updates to be modestly above historical levels. But still trail trend into 2026. Given state rate cycles, lagged claims data, and that more acute risk pool.

[Company Representative]: We do expect state rate updates to be modestly above historical levels but still trail trend into 2026 given state rate cycles, lagged claims data, and that more acute risk pool. If I put those together, that gets us to our initial planning assumption for 2026. Here's the important point. We do view 2026 as the trust, not the beginning of another reset period. The actions we are taking will position us to improve through the cycle as we ultimately target that 2% to 4% margin range over time.

Speaker #1: And so if I put those together, that gets us to our initial planning assumption for 2026. And here's the important point. We do view 2026 as the trust, not the beginning of another reset period.

Speaker #1: And the actions we are taking will position us to improve through the cycle as we ultimately target that 2% to 4% margin range over time.

Speaker #8: So AJ, thank you for that question. You know, our conversations with our states remain very constructive. The states certainly recognize the challenges around affordability in this program, but our expectation that rates remain actuarially sound.

Felicia Norwood: AJ, thank you for that question. Our conversations with our states remain very constructive. The states certainly recognize the challenges around affordability in this program, but our expectation is that rates remain actuarially sound. One of the things that's changed in the conversations this time around is states are more receptive to ways that can help reduce the overall cost of the Medicaid program and improve affordability. One of the things that we've been doing is providing them with options around the levers that they have that can address some of the program changes that are increasing costs and utilization in the program. For example, we've seen increases in certain categories of services, things like ABA, which is applied behavioral analysis, changes that we can make with respect to GLP-1s and other things that have driven up costs. The conversations this time around have not just been about rates.

Speaker #8: One of the things that's changed certainly in the conversations this time around is states are certainly more receptive to ways that can help reduce the overall cost of the Medicaid program and improve affordability.

Speaker #8: So one of the things that we've been doing is providing them with options around the levers that they have that can certainly address some of the program changes that are increasing costs and utilization in the program.

Speaker #8: So, for example, we've seen increases in certain categories of services, things like ABA, which is Applied Behavioral Analysis. Changes that we can make with respect to GLP-1s and other things that have driven up costs.

Speaker #8: But the conversations this time around have certainly not just been about rates. So states are exploring ways that they can reduce their program costs in order so that we all have a program that's more sustainable.

Felicia Norwood: States are exploring ways that they can reduce their program costs in order so that we all have a program that's more sustainable. At this point, I will tell you the conversations are solid. They're going very well. There's been a very nice exchange around ideas for maintaining the long-term sustainability of the Medicaid program, which we're all aligned around, and we look forward to continuing to work with our states through this process. We've laid out several approaches. There's greater receptivity, and we look forward to continuing to work collaboratively with our state partners around the long-term sustainability of this program.

Speaker #8: So at this point, I will tell you that the conversations are solid. They're going very well. There's been a very nice exchange around ideas for maintaining the long-term sustainability of the Medicaid program.

Speaker #8: Which, you know, we're all aligned around. And we look forward to continuing to work with our states through this process. But we've laid out several approaches.

Speaker #8: There's greater receptivity, and we look forward to continuing to work collaboratively with our state partners around the long-term sustainability of this program. Thank you.

Speaker #8: Next question, please.

Gail Boudreaux: Thank you. Next question, please.

Speaker #6: Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead.

Operator: Next we'll go to the line of Steven Baxter from Wells Fargo. Please go ahead.

Speaker #7: Hi, thanks. I just wanted to ask about, you know, some of the investment spending that you flagged in the slides. I think, you know, you're talking about potentially several hundred million dollars of investment.

Nathan Rich: Hi. Thanks. I just wanted to ask about some of the investment spending that you flagged in the slides. I think you're talking about potentially several hundred million dollars of investment. Obviously the company is investing every year. Trying to understand what you guys are trying to spike there in terms of materiality to 2026. If you look at some of the commentary that you have on 2027 and speaking about the influence of investment spending on your ability to grow earnings there, is it fair to think that some of this increased investment is transitory in nature? Just hoping we can understand that better. Coming up, the call.

Speaker #7: Obviously, the company is investing, you know, every year. So trying to understand what you guys are trying to spike there in terms of materiality to the 2026.

Speaker #7: And then it also, you know, when you look at some of the commentary that you have on 2027, and speaking about, you know, the influence of investment spending on your ability to grow earnings there.

Speaker #7: Is it fair to think that some of this increased investment is transitory in nature? Just hoping we could understand that better coming off the call.

Speaker #7: Thanks.

[Company Representative]: Thanks, Stephen, thanks very much for the question this morning. If we look ahead to 2026, we do expect to make discrete investments worth several hundred million dollars and quantify that as approximately $1 of EPS to advance our strategic goals. These dollars are going to be really focused in three primary areas. First, technology adoption where we're deploying AI into clinical workflows, automating roster processes, modernizing core systems, all with the idea of simplifying care delivery and driving efficiency. Second is Carelon investments. We're going to be scaling new client onboarding as we expand into larger upmarket accounts and build pharmacy capabilities in our home delivery, infusion, and specialty locations. Thirdly, around operational and quality initiatives. Think here: further improvements in Star ratings and deeper member engagement. Together these investments are intended to align with our long-term growth objectives.

Speaker #1: Stephen, thanks very much for the question this morning. If we look ahead to 2026, we do expect to make discrete investments worth several hundred million dollars.

Speaker #1: But quantify that as approximately a dollar of EPS. Really to advance our strategic goals. And these dollars are going to be really focused in three primary areas.

Speaker #1: First, technology adoption. Where we're deploying AI into clinical workflows, automating roster processes, modernizing core systems. All with the idea of simplifying care delivery and driving efficiency.

Speaker #1: Second is Carillon Investments. We're going to be scaling new client onboarding as we expand into larger up-market accounts and build pharmacy capabilities in our home delivery, infusion, and specialty locations.

Speaker #1: And then thirdly around operational and quality initiatives. Think here further improvements in star ratings and deeper member engagement. And together, you know, these investments are intended to align with our long-term growth objectives.

Speaker #1: They'll enhance member satisfaction and then position the enterprise for greater operating leverage over time.

[Company Representative]: They'll enhance member satisfaction and position the enterprise for greater operating leverage over time.

Speaker #8: Yeah, and Stephen, I'd like to just give a little bit more perspective on some of the investments, particularly where we're heading on AI—generative AI.

Gail Boudreaux: Stephen, I'd like to just give a little bit more perspective on some of the investments, particularly where we're heading on AI, generative AI. I think it's important not to see that. We see it as a strategic enabler of what we are trying to accomplish which will really drive more affordable, accessible, and personalized care. We've been embedding AI responsibly, not just as an experiment but at scale. We see that they're improving our efficiency and our outcomes and also the experience for members, providers, and associates. Maybe just to put some real tangible examples on that, I shared a little bit in my opening comments for members. For example, our personalized match feature in our Sydney helps one in five of our members right now select the right provider using more than 500 personalized data points and improving navigation and satisfaction. We're using it across our customer service.

Speaker #8: And, you know, I think it's important not to see that we see it as a strategic enabler of what we are trying to accomplish, which will really drive more affordable, accessible, and personalized care.

Speaker #8: We've been embedding AI responsibly, not just as an experiment, but at scale. And we see that they're improving our efficiency and our outcomes. And also the experience for members and providers and associates.

Speaker #8: And maybe just to put some real tangible examples on that, I shared a little bit in my opening comments. For members, for example, our personalized match feature in our Sydney helps one in five of our members right now select the right provider using more than 500 personalized data points and improving navigation and satisfaction.

Speaker #8: Reusing tools across our customer service, we have tools that improve our first contact resolution, shorten wrap-up time, and help with proactive engagement. And I think, really importantly for the commitments we've made on care providers, our HealthOS platform is automating our onboarding, our contracting, and our roster management.

Gail Boudreaux: We have tools that improve our first contact resolution, shorten wrap up time, help with proactive engagement, and I think really importantly for the commitments we've made on care providers, our HealthOS platform is automating onboarding, our contracting, our roster management. It's also reducing a lack of information so that we have reduced denials by more than 68% and peer to peer reviews by over 100%. We're getting real time data that's also giving us greater insight into some of the things that Felicia shared, which is how we get ahead of the cost curve. Across the enterprise we see it as a huge opportunity to help support our productivity goals. We look at it to reduce the burdens on care providers by reducing our chart request by almost half. Our national account teams, for example, are using it to update benefits and onboard clients.

Speaker #8: It's also reducing a lack of information, so we have reduced denials by more than 68% in peer-to-peer reviews by over 100%. We're getting real-time data that's also giving us greater insight into some of the things that Felicia shared, which is how we get ahead of the cost curve.

Speaker #8: So, across the enterprise, we see it as a huge opportunity to help support our productivity goals. We look at it to reduce the burdens on care providers by reducing our chart requests by almost half.

Speaker #8: And then our national account teams, for example, are using it to update benefits and onboard clients. So across the board, including for our own associates, we're investing in them as well.

Gail Boudreaux: Across the board, including for our own associates, we're investing in them as well. We just signed a partnership with OpenAI where we're going to actually train our folks to be able to use these skills appropriately. The reason I wanted to share more detail on that is we're embedding these at scale across our operations and prioritizing high use impact cases that reduce first the complexity, they drive savings and enhance the experience, which are two of our core goals. One, reducing the cost curve and two, enhancing the experience our members have. What we see is this is going to create leverage for us, improve affordability, strengthen operational performance, and support sustainable long term growth. To your last question around sort of the impact of those, we see these as front loaded investments across the board.

Speaker #8: We just signed a partnership with OpenAI, where we're going to actually train our folks to be able to use these skills appropriately. The reason I wanted to share more detail on that is we're embedding these at scale across our operations.

Speaker #8: And prioritizing high-use impact cases that reduce, first, the complexity; they drive savings and enhance the experience, which are two of our core goals: one, reducing the cost curve; and two, enhancing the experience our members have.

Speaker #8: So what we see is this is going to create leverage for us. Improve affordability, strengthen operational performance, and support sustainable long-term growth. And to your last question around sort of the impact of those, we see these as front-loaded investments across the board.

Speaker #8: Mark shared that. We're seeing great pickup in the investments we've made in stars. I just shared the AI investments. And we think that they help support us.

Gail Boudreaux: Mark shared that we're seeing great pickup in the investments we've made in stars. I just shared the AI investments and we think that they help support us. Thank you for that question. Next question, please.

Speaker #8: So thank you for that question and next question, please.

Speaker #6: Next, we'll go to the line of Lisa Gill from JP Morgan. Please go ahead.

Operator: Next we'll go to the line of Lisa Gill from JPMorgan. Please go ahead.

Speaker #9: Good morning, and thank you. Just want to go to the individual ACA exchanges. Obviously, you know, the timeline is ticking here for the extension of the enhanced subsidies.

Gail Boudreaux: Good morning and thank you. Just want to go to the individual ACA exchanges. Obviously, you know, the timeline is ticking here for the extension of the enhanced subsidies. Gail or anyone on the call, can you give us any color around, you know, what the difference would be in membership as we think about 2026. Should the note be able to come to some kind of agreement and not have the enhanced subsidies in 2026? You know, we've clearly seen what the proposed rates are by state. The question is really around membership and how to think about that going into next year. Yes, thanks for the question, Lisa. I think maybe we take a little bit of step back and then I'll have Mark talk a little about membership.

Speaker #9: Gail, or anyone on the call, can you give us any color around, you know, what the difference would be in membership as we think about '26?

Speaker #9: Should they not be able to come to some kind of agreement and not have the enhanced subsidies in '26? And, you know, we've clearly seen what the proposed rates are by state.

Speaker #9: So really just the question is really around membership and how to think about that going into next year.

Speaker #8: Yes, thanks for the question, Lisa. You know, I think maybe we take a little bit of a step back, and then I'll have Mark talk a little bit about membership.

Speaker #8: But obviously, we're really proud of the role that we play in the ACA marketplace. And we may, we are still remain very committed to the affordable access for individuals and families who rely on these plans.

Gail Boudreaux: Obviously, we're really proud of the role that we play in the ACA marketplace and we still remain very committed to the affordable access for individuals and families who rely on these plans. As we think about 2026, we've taken a very balanced approach. I want to talk about a little bit. Our filings are designed to reflect the higher acuity and we are ready and prepared for a range of policy outcomes, including both the renewal and the potential modification of those enhanced subsidies. We're ready to work with our states and our policymakers on that path forward. If they are extended, we'll work quickly with regulators and states to ensure a smooth execution and continued affordability. If there's some changes or phase downs, I think we're prepared also to work with our states closely to help people stay insured, because I think that is the core issue here.

Speaker #8: As we think about 2026, we've taken a very balanced approach. And again, I want to talk about a little bit of our filings are designed to reflect the higher acuity.

Speaker #8: And we are ready and prepared for a range of policy outcomes, including both the renewal and the potential modification of those enhanced subsidies. And we're ready to work with our states and our policymakers on that path forward.

Speaker #8: So if they are extended, we'll work quickly with regulators and states to ensure a smooth execution and continued affordability. And if there's some changes or phase downs, I think we're prepared also to work with our states closely to help people stay insured.

Speaker #8: Because I think that is the core issue here. So I guess before we get into the membership, I think it's really important to sort of talk about the strategically first that we think we feel very strongly we're operating responsibly and flexibly.

Gail Boudreaux: Before we get into the membership, I think it's really important to sort of talk about this strategically first, that we feel very strongly we're operating responsibly and flexibly and that our pricing supports the stability for members, but also ensuring we can sustain participation in the market for the long term. We expect that to translate obviously into improved performance, financial performance in 2025. Let me have Mark maybe just comment a little bit about your membership question, which again, not having the final policy expectations, I think we still have to assume it's just planning assumptions at this point.

Speaker #8: And that our pricing supports the stability for members, while also ensuring we can sustain participation in the market for the long term. We expect that to translate, obviously, into improved financial performance in '25.

Speaker #8: But let me have Mark maybe just comment a little bit about your membership question, which again, not having the final policy expectations, I think we still have to assume is just planning assumptions at this point.

Speaker #1: And Lisa here, you know, clearly you've seen enhanced advanced premium tax credits were to expire the year-end. We'd expect a material contraction in the ACA marketplace.

[Company Representative]: Lisa, clearly, if the enhanced advanced premium tax credits were to expire at the year end, we'd expect a material contraction in the ACA marketplace. We've seen some of those independent estimates from the Congressional Budget Office, which indicate meaningfully lower enrollment and a much higher morbidity risk pool into 2026 under those expiration scenarios. If I step back just for a second, that smaller, more acute pool does mean fewer enrollees to spread risk and sharper premium increases. That is really what we're seeing. Certainly, a full or partial extension of those premium subsidies, along with the transition or glide path, would definitely support consumers in a more stable, affordable marketplace over time.

Speaker #1: We've seen some of those independent estimates from the Congressional Budget Office. Which indicate meaningfully lower enrollment and a much higher mobility risk pool into 2026.

Speaker #1: Under those expiration scenarios, if I step back just for a second, you know, that smaller, more acute pool does mean fewer enrollees to spread risk.

Gail Boudreaux: I just want to reinforce that we plan for that in terms of our filings and going forward, but also recognize that there are real pressures and rising costs, and we want to be a part of that solution with our policymakers as well. Next question please.

Operator: Next we'll go to the line of Andrew Mock from Barclays. Please go ahead.

Nathan Rich: Hi, good morning. The health benefits margins finished the quarter at 1.4%, which I think implies government margins are negative. You commented that you now expect Medicare operating margins to increase slightly in 2025, but I think it was unclear if that was a year over year comment or a positive revision to this year's outlook. Can you clarify that comment and help us understand where Medicare margins sit for the year? Is there a path back to target Medicare margins next year given the actions you took in plan exits and benefit reductions? Thanks.

[Company Representative]: Andrew, good morning and thanks very much for the question. I anticipate we probably are going to get a couple questions here on margin and trend. Maybe let me start by framing high level what we're seeing and what we've incorporated into our outlook for the full year on Medicaid. As we spoke about earlier, performance has been weaker than expected really, as that cost trend does remain elevated given the high utilization and the member acuity shift driven by the ongoing state reverification efforts and program changes. Within the commercial book, our outlook incorporates trends in our ACA book reflective of the holistic impact of higher population morbidity, that elevated utilization and rising unit costs.

[Company Representative]: We're continuing to expect operating margins for our ACA business to be down year over year in the high single digit % range and commercial large group margins to remain largely consistent with prior expectations. We have seen some favorability in ACA relative to our initial expectations and you see that come through in a sense this quarter. To your question in Medicare, we feel good about our positioning given the composition of our membership and results to date. We actually expect margin stability with potential for slight improvement this year, even excluding the one-time value-based care settlement that we recognized last quarter. That's going to be supported by strong retention, disciplined cost management and product positioning, and ultimately really better recognition of that member acuity following the elevated utilization we've seen in recent years.

Mark Kaye: Thank you.

Gail Boudreaux: Thank you. Next question, please.

Expect a margin stability with potential for slight Improvement this year. Uh, even excluding the 1 time value based care settlement that we recognized last quarter and that's going to be supported by strong retention, uh, discipline cost management and product product positioning and then ultimately really better recognition of that member Acuity. Uh following the elevated utilization, we've seen uh, in recent Years, thank you.

Operator: Next we'll go to the line of Justin Lake from Wolfe Research. Please go ahead.

Thank you. Next question, please.

Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead.

[Company Representative]: Thanks.

Nathan Rich: Good morning. Wanted to follow up on your Medicaid comments. Appreciate the color on the 50 basis points of negative margin for this year, but I think you've been clear that this business has deteriorated through the year and thus the losses are probably more significant than this than the full year would indicate. Coming out of the year, meaning the run rate in Q3 and Q4 might be worse than that and that minus 50 basis points annually. It would be helpful to give us more color on kind of how you see this business exiting the year, maybe the fourth quarter margin so we can understand how that 125 basis points compares to that Q4 run rate.

Thanks. Good morning. Uh, wanted to follow up on your Medicaid comments. Appreciate the color on the 50 basis points of negative margin for this year, but I think you've been clear that this business is deteriorated through the year and thus the losses are probably more significant.

Than this than the full year would indicate, you know, coming out of the Year meeting the Run rate in 32 and 42 might be worse than that. And that's minus 50 basis points annually. So it would be helpful to get a more color on. Kind of how you see this business, exiting the year, maybe the fourth quarter,

Margin. So we can understand how that 125 basis points compares to that Q4 run rate.

[Company Representative]: Justin, thanks very much for the question here and certainly your underlying premise is correct. Margins deteriorated as the year has gone on. Look, we've been very clear today, as I try to think forward a little bit, that 2026 is going to reflect those same continued pressures in Medicaid as rates catch up to acuity. It's important to be realistic about that. Again, in 2026, we do expect also those rate actions to be directionally constructive. You heard Felicia talk to that, and to reflect that elevated acuity we've experienced since redeterminations. That's an important turning point. At the same time, we've also spoken to not waiting on rate cycles alone. We've intensified care management and program integrity programs in the highest cost categories: long term services and support, behavioral health, specialty pharmacy. We are seeing measurable improvement.

[Company Representative]: If I put that together, that's really why we see 2026 as the low point in the Medicaid margin. From there, we would expect to see sequential improvement through 2027 as those rates and the operational savings take more of a hold. I'd say we're pretty confident that the business ultimately will return to that 2% to 4% target margin range.

Justin thanks very much for the uh the question here and certainly your underlying premise is correct. Margins deteriorated uh as the year has gone on look. We've been very clear today as I try to think forward a little bit that the 2026 is going to reflect those same continued pressures in Medicaid um as rates catch up to a cutie and it's important to be real realistic about that in 2026. We do expect also there's rate actions to be directionally constructed. You heard Felicia talk to that and to reflect that elevated Acuity we've experienced since redetermination and that's an important Turning Point. At the same time, you know, we've also spoken to not waiting on rate Cycles alone, right? We've intensified Care Management and program Integrity programs and the highest cost categories uh long-term services and support behavioral health Specialty, Pharmacy, and we are seeing measurable Improvement and if I put that together that's really why we see 2026 as the low point in the Medicaid margin,

Gail Boudreaux: Thank you, Mark and Justin. Just to put a fine point on that, reiterating that we are taking a very prudent approach to Medicaid, and as we think about the 125 basis points of margin deterioration, we are assuming that we enter the year at the place we exited the year. Thanks for that. Next question, please.

And from there, we would expect to see sequential improvement through 2027 as those rates and the operational savings take more of a hold. I'd say we're pretty confident that the business ultimately will return to that 2% to 4% target margin range.

Operator: Next, we'll go to the line of Lance Wilt from Bernstein. Please go ahead.

Thank you, uh, Mark and and Justin just to you know, put a fine point on that. Um, kind of reiterating that we are taking a very prudent approach to Medicaid and as we think about the 125 basis points of margin deterioration, uh, we are assuming that we uh, enter the year at the place. We exited the year. So, thanks for that next question, please.

Nathan Rich: Yeah, on the Medicaid book, could you talk a little bit about how you're looking at that book? If there's a wide range of margins by state and contract, what are your opportunities to exit any contracts? Obviously, given the more significant negative margins that are there? Maybe as just a quick follow up over on Carelon, if you could talk a little on CarelonRx about any progress you're seeing in the specialty pharmacy acquisition contribution to margin stability or any sort of impacts on margin over there. Thanks.

Next, we'll go to the line of Lance. Wolfe from Bernstein. Please go ahead.

Gail Boudreaux: Thanks, Lance. I'll ask Felicia to start and then Pete to comment on CarelonRx. Good.

Yeah, um, on the Medicaid book. Could you talk a little bit about how you're looking at that book? If there's a wide range of margins by state and contract? What are your opportunities to exit any contracts? Obviously, given the um, you know, more significant negative margins that are there and maybe as just a quick follow-up over on Caroline. If you could talk a little on Carol on RX about any progress, you're seeing in, uh, the specially Pharmacy acquisition um contribution to, you know, margin stability or any sort of impacts on margin over there. Thanks.

Felicia Norwood: Morning, Lance, and thank you for the question. There certainly is great variability in performance as you go from state to state. As you know, we have a portfolio of over 24 markets in Puerto Rico. When we take a look across the board, states are certainly at a very different place. The expectation, as you heard from Mark, is that we were going to continue to work with states on their rates, program changes, and the other things that we can do to improve overall performance. With that said, if a state isn't going to deliver the expectations that we need from a financial perspective, we will certainly consider exiting that business if we can't deliver on the long term. Our framework has to consider a lot of variables.

thanks Lance, I'll ask Felicia to start and then Pete to comment on Caroline RX

Good morning, Lance and thank you for the question. Um there certainly is great variability in performance as you go from state to state. And as you know, we have a portfolio of over 24 markets in Puerto Rico and when we take a look at the board states are certainly at a very different place.

The expectation you heard from Mark is that we were going to continue to work with states on their rates program changes and the other things that we can do to improve overall performance.

With that said, if a state isn't going to deliver the expectations that we need from a financial perspective, we will certainly consider exiting that business if we can't deliver on the long term.

Felicia Norwood: We have to take a look at the rate adequacy versus the trend that we're seeing, the program designs, the regulatory environment, and policy stability that we see there, all kinds of things with respect to our risk sharing arrangements, operational challenges, and other things. At the end of the day, we are very much committed to Medicaid. We think it brings strong value to this enterprise. It aligns with our ability to serve incredibly vulnerable members, and our preference is to be there. If we were to exit, we would align that with normal changes in terms of contract extensions, which, as you know, actually happen every year because Medicaid contracts, while they're four or five year contracts, the contract renews every single year. There is also certainly the opportunity around RFPs in that strategy with respect to exiting.

But our framework has to consider a lot of variables. We have to take a look at the rate adequacy versus a trend that we're seeing the program designs, the regulatory environment and policy stability that we see there. All kinds of things with respect to our risk sharing Arrangements, operational challenges, and other things.

Incredibly vulnerable members and our preferences to be there. But if we were to exit Lance, we would align that with normal changes in terms of contract extensions, which as, you know, actually happened every year because Medicaid contracts, while there are 4 or 5 year contracts.

Felicia Norwood: Our expectations would be to do everything we could to minimize disruption and ensure continuity of care for members. We are going to be strong partners with our states, but we are going to be incredibly mindful around this business and whether or not there is the ability to be there sustainably for a long term in support of our states and our members. Thank you for the question, and then I'm going to turn this over to Pete.

Nathan Rich: All right, Lance, thank you very much for the question. Appreciate it. Our specialty strategy is integral to the diversification strategy that we're deploying in pharmacy. We're very excited about it. We stand for whole health and driving greater affordability and simplicity and are very focused on the patient experience. This diversification strategy is very important to our long term growth trajectory going forward. We're making really good progress as it relates to that. I think we started with the BioPlus platform and we continue to migrate scripts to that platform. Last year, as you know, we acquired Kroger Specialty Pharmacy. In light of that, we had a commitment to transition those scripts by the end of this year, which we're making really good progress on. I'm very, very happy with the team's performance in that regard in terms of how that's gone from an execution perspective.

The contract renews every single year and then there's also certainly the opportunity around rfps and that strategy with respect to exiting, but our expectations would be to do everything we could to minimize disruption and ensure continuity of care for members. So we're going to be strong partners with our States but we're going to be incredibly mindful around this business and whether or not there is the ability to be there sustainably for a long term in support of our states and our members. So thank you for the question and then I'm going to turn this over to Pete. All right. Lance, thank you very much for the question. I appreciate it. And um, you know, special our, our specialty strategy is integral to the diversification strategy that we're deploying. And, and Pharmacy, we're very excited about it. You know, we stand for, um, Whole Health and driving greater affordability, and simplicity and very focused on the patient experience. And this diversification strategy is very important to our long-term growth trajectory uh, going forward, we're making really good progress.

Nathan Rich: We'll continue to migrate further scripts as we move forward into 2026. I would also say that we look forward to really continuing to build a diversified and differentiated strategy around this so we can garner scripts outside of Elevance Health as well. Thanks for the question. We appreciate it.

Gail Boudreaux: Next question, please.

Rest as it relates to to that. Um, I think you know, we started with the bioplus platform and we continued to migrate scripts to that platform last year. We as you know, we acquired Kroger Specialty Pharmacy. And uh in light of that we had a commitment to transition those scripts by the end of this year, which we're making really good progress on. I'm very, very happy with the teams performance in that regard in terms of how that's gone from an execution perspective. And we'll continue to to migrate further scripts, as as we move forward into 2026. I would also say um that we look forward to really continuing to build a diversified um and differentiated strategy around this so we can Garner scripts outside of elements as well. So thanks for the question. We appreciate it.

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

Next question, please.

Nathan Rich: Great, thanks. I guess just to follow up on the Medicaid comments, trying to understand, I guess there's been concern that the risk pool shifts that are supposed to happen from the reconciliation bill could be pulled forward. Just want to understand how much of that risk pool shift that you kind of expect to be happening in 2026. I don't know how you would quantify that, whether it's a third of what you'd expect over the next five years happens next year or some way to think about that. Then just to clarify, when you guys talked about returning to balanced growth in 2027, is that saying back to the normal growth algorithm or does balance kind of imply something a little bit less than the long term growth rate? Thanks.

Great, thanks. Um, I guess just to follow up on, on the Medicaid comments. Um, trying to understand. I guess there's been concern that the risk pool shifts that are supposed to happen from the reconciliation bill, you know, could be pulled forward. So just want to understand how much of that. Um, you know, risk pools shift that you kind of expect to be happening in in 2026. I don't know how you would quantify that whether it's, you know, a third of what you'd expect from the next 5 years happens. Next year or some, some way to think about that. And then, just to clarify, when you guys talked about returning to balance growth in 2027, is that is that saying back to the normal growth algorithm or is balanced kind of implies something a little bit less than than the long-term growth rate?

Thanks.

[Company Representative]: Kevin. Thanks very much for the question. Let me maybe touch on the first one briefly. Then I'll talk about the balanced earnings growth after that on Medicaid. I think the way you could think about this is that the reduction in our expectations for margins this year and sort of our guidance next year of that 125 or at least 125 basis points decline really reflects a more balanced split now between acuity and utilization versus what we provided last quarter on balanced growth. When we talk about that return to more balanced earnings growth profile in 2027, we really mean getting back to the growth algorithm that has characterized our business. That means contributions from commercial government, Carelon, supported by the operating leverage and disciplined capital deployment that we've done historically.

Kevin. Thanks very much. Uh for the question, let me uh maybe touch on the first 1 that briefly then I'll talk about the balanced earnings growth. Uh, after that on on Medicaid. I think the way you could think about this is that the reduction in our expectations for margins this year and sort of our guidance. Next year of that 125 or at least 125 basis points declined. Really reflects a more balanced split now between Acuity and utilization versus what we provided last quarter.

On balance the growth. Well, when we talk about that return to more balanced earnings growth profile in 2027, we really need getting back to the growth algorithm that has characterized our business.

[Company Representative]: Our 2026 repositioning and investments are intended to set up 2027 for the more balanced contribution across businesses. Specifically, we would expect our earnings drivers to be more evenly distributed, including improved Medicaid rate alignment, further Medicare margin normalization following our pricing actions, and sustained momentum across Carelon. As you heard from Pete and our commercial franchise, of course on policy, the OBBBA act implementation is still going to be progressing, but we're confident we can manage through it with disciplined execution. While we're not providing an out year EPS growth rate today, hopefully you can see from our comments that we reflect that confidence that really past 2026 the business should again resemble that more balanced, consistent growth that we've historically delivered, grounded in discipline and diversification across cycles.

And that means contributions from commercial government kalon supported by the operating leverage and and disciplined, Capital deployment, that we've done historically and our 2026 repositioning and Investments are intended to set up 2027 for the more balanced contribution across businesses. So specifically we would expect our earnings drivers to be more evenly distributed uh including improved Medicaid rate alignment. Uh, further Medicare margin normalization following our pricing actions um and sustained momentum across Kellan as you heard from Pete and our commercial franchise. Um, of course on policy the O bbba implementation is still going to be progressing but we're confident we can manage through it with the disciplined execution. And so while we're not providing an out your

Gail Boudreaux: Thank you. Next question, please.

EPS growth rate today. Hopefully, you can see from our comments that we reflect that confidence, that it really passed 2026. The business should again resemble. That more balanced consistent growth that we've historically, delivered grounded in discipline and diversification across Cycles.

Operator: Next we'll go to the line of Ann Hines from Mizuho Securities. Please go ahead.

Thank you. Next question, please.

Gail Boudreaux: Great, thank you. I just would like to focus on membership growth in 2026. With the Medicaid redetermination, should we assume that membership in your Medicaid book will actually decline next year? That coupled with rates, I'm just trying to figure out like will you have revenue actually declining or should we assume Medicaid revenue actually grows in 2026? Also, with the Medicaid expected membership decline in 2024 for Medicaid and the ACA, can you just give us more detail how that impacts Carelon Services and CarelonRx? Does one of the segments have an outsized proportion for membership losses versus the other?

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

Great. Thank you. Uh, I just would like to focus on membership growth in 2026.

Well actually decline next year and May and that coupled with rates. I'm just trying to figure out. Um like will you have Revenue actually declining or should we assume Medicaid Revenue actually grows in 2026?

And then also with the Medicaid um expected membership declined. Um in 200

Operator: Thanks.

For Medicaid and the ACA you just give us more detail how that impacts Carillon services in Carolina RX does 1 of the segments have a um outside performance for from membership losses versus the other. Thanks.

[Company Representative]: Appreciate the question this morning. For 2026, Medicaid membership outlook, while very preliminary at this point, does consider things like the continued normalization following the redetermination process, as well as the impact of state program changes and RFP outcomes. Whilst we do expect some churn to persist into next year, we do expect the pace of disenrollments to be manageable, and we are beginning to see stabilization in some of our markets overall. Again, as a planning assumption, you could expect 2026 average Medicaid membership to be modestly lower than where we end 2025. That is going to be driven by many of the factors that we've spoken about on the call today, and we'll provide more guidance as we enter January.

Gail Boudreaux: Yeah, I'm going to ask maybe Pete to comment on Carelon?

Nathan Rich: Yeah, no, thanks for the question. In the context of membership impacts on Carelon going forward, let me just step back first and talk about the growth prospects in Carelon. I think you saw that come through. You heard it through Gail's comments and Mark's comments. We're seeing very strong growth both on the services side as well as on the pharmacy side. Importantly, we're diversifying our growth. We're seeing a lot of really nice external growth across many of our solutions. Of course, Elevance Health is our largest client and if Elevance Health has significant membership impacts, it will have some impact on Carelon. I view that really as time bound. We have incredible momentum in the marketplace that would be short term. We feel like diversification of our assets and our strategy will enable continued growth in Carelon.

Appreciate the, uh, the questions this morning. So, for 2026, uh, Medicaid membership, uh, Outlook. Um, while very preliminary at this point, does consider things like the continued normalization following the redetermination process as well, as well as the impact of the state program changes in RFP and outcomes. Uh, well, we do expect some churn to, uh, persist into next year. We do you expect the pace of disenrollment to be manageable, um, and we are beginning to see stabilization uh, in some of our markets. Um overall um, again as a planning assumption you could expect 2026 average, Medicaid membership to be modestly lower than where we end 2025 and that's going to be driven by many of the factors that we've spoken about on the call today and we'll provide more guidance as we enter January. Yeah, I'm going to ask maybe Peter uh comment on Caroline. Yeah, no thanks for the uh the question and the context of

Gail Boudreaux: Thank you. Next question, please.

Membership, impacts on Carillon. I'm going forward. Let me just step back first and talk about um, the growth prospects in Caroline. I think you saw that come through, you've heard it through Gail's comments, and Mark's comments, we're seeing very strong growth, both on the services side, as well as on the pharmacy side. And importantly, uh, we're diversifying our growth. Um we're seeing a lot of really nice external growth across, you know, many of our Solutions. Now, of course, elevance is our largest client. And if elevance has significant membership impacts, it will have some impact on Caroline. But I've used that really as time bound, we have incredible momentum in the marketplace. That would be short-term. Um, we feel like diversification of our assets and our strategy will enable continued growth in carillon.

Operator: Next, we'll go to the line of Joshua Raskin from Nephron Research. Please go ahead.

Thank you. Next question, please.

Mark Kaye: Hi, thanks. Just a quick clarification on Medicaid. Maybe if you could just sort of delineate how much of the 125 bps next year is, you know, trend running above reimbursement, how much of that is the adverse selection continuing? If there's any impact from OBB, the OBB. My real question is just can you provide, you talked a little about this last quarter, an update on the increased coding trends that you talked about from providers and maybe specifically if that's still just pockets and have you made any progress, I think you were talking about using payment integrity tools or other areas.

Next, we'll go to the line of Joshua Raskin from Nephron Research. Please, go ahead.

Hi. Thanks. Just a quick clarification on Medicaid, maybe if you could just sort of delineate, how much of the 125 bips next year is, you know, Trend running above reimbursement. How much of that is the adverse selection continuing? And then if there's any impact from obb, uh, the obb and then my real question is just can you provide you talked a little about this last quarter and update on the increased coding trends that you talked about from providers and maybe specifically if that's still just pockets. And have you made any progress? I think you were talking about using payment Integrity, tools or other areas.

[Company Representative]: Josh, appreciate the question and the short answer to it is we'll provide more specificity around our outlook for Medicaid in January. Maybe I can spend just a minute talking about really what's changed since our commentary in July on the earnings call or September at the Wells Fargo conference. We've always consistently framed 2026 Medicaid margin as having a wide range of potential outcomes, and our preliminary guide of the 125 basis point decline sits within that range. What's changed now is we have more 2025 experience, we have updated state inputs, and that's let us narrow the early view while staying prudent. First, I would say our experience is clearer this year. Medicaid performance has been pressured by elevated acuity and utilization. We spoke about that last quarter, and we were iterating that commentary again today. That has not been fully offset by rate updates.

[Company Representative]: We've seen disenrollments remain concentrated among lower acuity members due to those more stringent eligibility reviews and changes to the state reverification processes. Those are factors that have increased the average acuity of the remaining risk pool, and that's directly led to our guidance today that Medicaid operating margin will be below breakeven for the full year. The second point I'd make here is that state level updates have also sharpened our assumptions. We have seen several large states, including our home state, experience budget pressure as a result of implementing program changes in response, and that will similarly lead to continued risk pool deterioration and that ongoing sort of near term misalignment of rates with trend. Briefly on coding trends. As we spoke about last quarter, our focus really remains on working with the providers to ensure accuracy, compliance, and sustainability in how those member conditions are documented.

Josh, appreciate the uh the question and the short answer to it is will provide more specificity around our outlook for Medicaid. Uh in January, uh maybe I can spend just a minute talking about really what's changed uh since our commentary in July on the earnings call or September at the Wells Fargo conference and we've always consistently framed 2026 Medicaid margins as having a wide range of potential outcomes and our preliminary guide of the 125 basis. Point decline sits within that range and really what's changed. Now is we have more 2025 experience. We have updated State inputs and let's let us narrow the early views. Uh, while while staying prudent, uh first I would say, you know, our experience is clearer this year. You know, Medicaid performance has been pressured uh by elevated Acuity and utilization, we spoke about that last quarter and we were iterating that commentary again today, and that is not being fully offset by rate updates. Uh, we've seen disenrollment

Remain concentrated among lower Acuity members due to those more stringent eligibility reviews and changes to the state reverification processes and those are factors that have increased the average Acuity of the remaining risk pool. And that's led to our direct. Well, that's directly led to our guidance. Uh, today, that Medicaid operating margin will be below. Break, even for the full year. The second point I'd make here is that state level updates have also sharpened our assumptions. Uh, we have

[Company Representative]: We are taking meaningful steps to improve that oversight so that the data capture, the clinical documentation, the vendor oversight is all accurate and appropriate for our business.

Mark Kaye: Thank you.

Gail Boudreaux: Yes, thank you, Mark, and thanks for the question. Josh, just taking a step back, I know there's a lot of interest in this. I think I just want to reinforce as we think about Medicaid and our other assumptions, these are prudent planning assumptions and that we are managing our near term dynamics with discipline and the work we've done this year. We are looking to position Elevance Health for a durable, sustainable growth as we go beyond 2026 and into 2026. Just a little bit of background, and as you heard from Mark, we are very aggressively addressing the higher coding intensity and we've seen it in pockets but have significant tools to advance that as well. Thank you for the question. Next question, please.

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

A meaningful steps to improve sort of that, that oversight. Um, so that the data capture the clinical documentation, the vendor of site, um, is all accurate and appropriate, uh, for our business. Thank you. Yes. Thank you, Mark. And thanks for the question, Josh, you know, just taking a step back, and I know there's a lot of interest in this. I think I just want to reinforce as we think about Medicaid. And our other assumptions, these are prudent planning assumptions. Um and that we are managing our near-term, Dynamics with discipline, and the work, we've done this year, we are looking to position elevance health, for a durable sustainable growth as we go beyond, 26, and into 26. So, just a little bit of background and as you heard from Mark, um, we are very aggressively addressing the higher coding intensity and we've seen it in Pockets. But, um, have a significant tools to to advance that as well. So thank you for the question. Next question, please.

Nathan Rich: Hi, good morning. Thank you. I know you commented that you're working with state partners on some of these initiatives. Did I hear you say that your state partners are explicitly contemplating pulling back on benefits or other ways to give you some relief just besides paying better rates? If so, how long would those adjustments typically take to implement and you to maybe see any potential benefit? Thank you.

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

Felicia Norwood: Good morning and thank you for the question. Absolutely. I think states are looking at all of the levers that they have in order to improve affordability in this program. One of the things you have to understand as we step back and think about where states are, the enhanced FMAP that states used to have to support their Medicaid programs is no longer there. States have to look for all of the levers they have to be able to improve affordability in what really is one of the largest spends in a state budget. Those levers include program changes that I mentioned before, including changes to a range of optional medical services that you see in the Medicaid program. The timing of those generally aligns with the new contract year and sometimes that can be either January or July.

Hi, good morning, thank you. I know you commented that you're working with State Partners on some of these initiatives, but did I hear you say that your state partners are explicitly contemplating pulling back on benefits or other ways uh to give you some relief just besides paying better rates and and if so, how long would those adjustments? Typically take to implement and you to maybe see any potential benefit? Thank you.

Felicia Norwood: Those are certainly within the power of the state to drive those changes with respect to the contracts. We continue to work closely with them. Ultimately, our goal is to make sure that we are working with states around improving total cost of care and being able to have at their disposal the levers that they can to do that, combined with the work that we bring to the table around being able to deliver networks that have value-based arrangements and other ways to introduce care innovations to improve overall total care costs are things that states are looking at. I think there's an opportunity here to continue to be collaborative with our state partners around the long-term viability of this program and we're fully aligned with our state partners in doing that. Thank you.

So, good morning and thank you for the question. Absolutely. I think states are looking at all of the levers that they have in order to improve affordability in this program. I mean, 1 of the things you have to understand is we step back and think about where states are the enhanced fmap that states used to have to support their Medicaid programs, no longer there and so states have to look for all of the levers, they have to be able to improve affordability, and what really is 1 of the largest spend in a state budget. Those levers include program changes that I mentioned before including changes to a range of optional medical services that you see in the Medicaid Program, the timing of those generally aligned with the new contract here and sometimes that can be either January or July but those are certainly within the power of the state to to drive those changes with respect to the contracts and we continue to work closely with them. Ultimately our goal is to make sure that we are working with states around improving

Improving total cost of care and being able to have at their disposal, the, the the levers that they can to do that.

Combined with the work that we bring to the table around being able to deliver networks that have value-based arrangements and other ways to introduce cure innovations to improve overall total care costs, these are things that states are looking at. So, I think there's an opportunity here to continue to be collaborative with our state partners around the long term.

Term viability of this program.

Gail Boudreaux: Next question, please.

And we're fully aligned with our state Partners in doing that. Thank you.

Operator: Next we'll go to the line of Scott Fidel from Goldman Sachs. Please go ahead.

Next question, please.

Nathan Rich: Thanks. Good morning. I was hoping to just drill into two of the product areas in Medicare and get your updates on your thinking there. The first would be just, I know on D-SNP that that's an area you want to continue to focus on moving forward, and maybe give us some thoughts on how you see that positioned for 2026 now that you have more insight into the competitive landscape. Then a PPO, just curious on sort of your view on that longer term. I know that you're pulling back for 2026. There has been a longer term sort of cycle of expansion and then pullback for Elevance Health and the PPO product. Curious on just how you're thinking about sort of putting that into the longer term strategy perspective. Thank you.

Next, we'll go to the line of Scott, Fidel from Goldman Sachs. Please go ahead.

All right, thanks, uh, good morning. Um, was hoping to just uh drill into 2 of the uh the product areas and Medicare and get your updates on on, uh, your your, um, thinking there. The first would be just, I know on dip that, that's an area you want to continue to focus on moving forward and, and, um, maybe give us some some thoughts on on how you see that, um, position for 26 now that you have more insight into the competitive landscape. Um, and then a PPO, um, you know, just curious on sort of your view on on that longer term. Um, I know that you're pulling back for 2026. Um, you know, there has been a longer term sort of cycle of expansion and then pull back uh, 4 elevators. So, curious on just how you're thinking about, you know, sort of putting that into the longer term strategy perspective. Thanks.

Felicia Norwood: Thank you for the question. Certainly it's very early in the AEP process. We're only six days into the annual election period, but we are very pleased with how we are positioned in our products and in our target markets. As you said, we took very strong focus and investments in our HMO and our Duals products. Duals has been a strategy for us for some time. It aligns very well with our Medicaid footprint and also the ability of Carelon to help manage individuals who have complex conditions. We invested in HMO and Duals in order to make sure that we were continuing to focus on those areas that we believe drive great value for seniors and meaningful value for the enterprise. PPO has never really been a strong product focus for Elevance Health, not traditionally.

oh, so thank you for the question and you know, certainly it's um,

Very early in the AEP process, we're only 6 days into the annual election period. The we're very pleased with how we are positioned in our products. And in our Target, March markets, as you said, we took very strong focus and investments in our HMO and our duals products.

Duels has been a a strategy for us for some time. It aligns very well with our Medicaid footprint and also the ability of Caroline to help manage individuals who have complex conditions. So we invested in HMO and Duels in order to make sure that we were continuing to focus on those areas that we believe Drive, Great Value for seniors, and meaningful value for the Enterprise,

Felicia Norwood: We had a handful of PPO products across states and, as you know, over the last couple of years we actually even declined our position where we had a PPO footprint. It's our expectation to be able to manage the conditions of our members effectively, and PPO certainly doesn't allow us to do that the same way that our HMO and DSNP portfolio allows us to do so. As we sit here today, we feel good about our positioning in our key markets. Where we made the geographic decisions to expand and go deeper are those markets where we believe we bring great value.

PPO has never really been a strong product focus for Elevance Health.

Not traditionally, we had a handful of PO products, and as you know, over the last couple of years.

Felicia Norwood: As we think about the strategy that we put in place a few years ago and pulled through into 2026, we feel good about how we are positioned around improving our profitability and believe that we're going to make meaningful progress towards our long term target range of 3% to 5% in our Medicare program. Thank you.

Gail Boudreaux: Thanks, Felicia and Scott. Just to reiterate, we've always been more heavily weighted on HMO products, and it also aligns very much to our value-based care strategy and our ability to take risk, particularly with Carelon on our specialty risk such as in oncology. It's an alignment to a long-term strategy that we've had. Next question, please.

Even declined our position, where we had a PPO footprint, it's our expectation to be able to manage the conditions of our members effectively and pose certainly doesn't allow us to do that the same way that our HMO and dnet portfolio allows us to do. So as we sit here today, we feel good about our positioning and our key markets where we made the geographic decisions to expand and go deeper or those markets where we believe we bring Great Value. And as we think about these strategies that we put in place a few years ago and pulled through into 26, we feel good about how we are positioned around, improving our profitability and believe that we're going to make meaningful progress towards our long-term target range of 3 to 5% in our Medicare program. Thank you. Thanks, Alicia and Scott just to to reiterate, we've always been more heavily weighted on HMO products and it also aligns very much to our value based care strategy and our ability to take risks, particularly with Carol on our specialty risks such as an in

Operator: Next we'll go to the line of Erin Wright from Morgan Stanley. Please go ahead. Sorry, was on mute.

Tech. So it's in alignment to a long-term strategy that we've had next question, please.

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

Gail Boudreaux: Anything to call out on the commercial cost trend? I mean, I think you mentioned just broader cost trends kind of in line with expectations. Any areas such as behavioral to call out that have been called out before by you and others? Anything else to call it from a pricing perspective or otherwise from a commercial perspective? Thanks, Aaron.

Sorry was on mute. Um, anything to to call out on, on the commercial cost Trend. I mean, I think you mentioned just broader concerns kind of in line with expectations but any areas such as behavioral to call out that have been called out before but you and others. Um I guess anything else to to call it from a pricing perspective or otherwise from a commercial perspective. Thanks.

[Company Representative]: Thanks for the question. Cost trend in the ACA market developed somewhat favorably to our prudent expectations in the quarter. Despite the overall deterioration in the risk, poor acuity and the elevated utilization, we continue to see pressure in that ACA market across inpatient, medical surgery, behavioral health, pharmacy and ER usage. On the commercial group side, elevated trends persist but remain mostly in line with what we're expecting and we see a couple of pockets there around outpatient utilization and the unit cost mix of services, including some higher cost surgeries that we're monitoring. For the most part, very consistent with our outlook. No concerns.

Gail Boudreaux: Next question, please.

Erin, thanks for the question. So cost Trend in the ACA Market developed, uh, somewhat favorably to our prudent expectations in the quarter, uh, despite the overall deterioration in the, the the risk pool Acuity. And the elevated utilization. Uh, we continue to see pressure in that ACA market across inpatient, medical surgery, uh, Behavioral Health, uh, Pharmacy and uh, ER usage on the commercial group side, elevated Trends, uh, persists, but remain mostly in line with what we're expecting and we see a couple of pockets there around outpatient you utilization. Um, and the unit cost mix of services including some higher cost surgery surgeries that were monitoring. But for the most part very consistent with our Outlook, no concerns.

Operator: Next we'll go to Lyna. Ben Hendricks from RBC Capital Markets, please go ahead.

Next question, please.

Gail Boudreaux: Great. Thank you very much. Just Medicare Advantage, thinking about the 150,000 members impacted by exits and other plan changes, to what extent are these members just members that you're simply no longer competing for versus a subset that could be recaptured into other plans?

Next, we'll go to line of Ben Hendricks from RBC Capital Markets. Please go ahead.

Nathan Rich: Stepping back a bit from that.

[Company Representative]: How are you thinking about retention broadly?

Gail Boudreaux: In your continuing markets, especially in light.

Nathan Rich: Of the better four-STAR ratings we saw earlier this month.

Gail Boudreaux: Thanks.

Great, thank you very much. I just, uh, Medicare Advantage, thinking about the 150,000 members impacted by exits and other plan changes. To what extent are these members just members that you're simply no longer competing for versus a subset that could be recaptured into other plans? And then, stepping back a bit from that, how are you thinking about retention broadly in your continuing markets, especially in light of the better star ratings we saw earlier this month? Thanks.

Felicia Norwood: Morning Ben, and thank you for the question. Retention is certainly a big perk. Our strategy, and I think we've done an excellent job over the last couple of years of being focused on those places geographically and in those products where we have the best opportunity to do that. Our strategy in 2026 reflects a very disciplined focus on our sustainable performance over time. We approached select plans and service areas where we didn't believe we had the opportunity to see long-term sustainable performance as we looked out towards the future of our Medicare Advantage program. This is a very intentional strategy that we took, continuing on our AEP strategy from 2025. It gives us deeper performance in those markets where we have a larger footprint and aligns with our Medicaid business.

Felicia Norwood: From our perspective, Ben, we are working closely with those individuals that we are not retaining to make sure that they are able to find the right plan that works for them. We feel good about the focus, the strategy, the footprint, and the products that we've laid out for 2026 and look forward to continuing to improve our overall performance in Medicare Advantage. Thank you for the question.

Morning Ben and thank you for the question. Um, retention is certainly uh, a big part of our strategy and I think we've done an excellent job over the last couple of years of being focused on those places geographically and in those products where we have the best opportunity to do that. You know our strategy in 2026 reflects a very disciplined focus on our sustainable performance over time. So we approached select plans and service areas where we didn't believe we had the opportunity to see long-term sustainable performance as we looked out towards the future of our Medicare Advantage program. So this is a very intentional strategy that we took. Uh, continuing on our AEP strategy from 2025, it gives us deeper performance in those markets where we have a larger footprint and allow aligns with our Medicaid business. And I think, you know, from our perspective then we are working closely with

Gail Boudreaux: Next question, please.

With those individuals that we are not retaining to make sure that they are able to find the right plan, that works for them. But we feel good about the focus to strategy, the footprint and the products that we've laid out for 2026 and look forward to continuing to improve our overall performance in Medicare Advantage. So, thank you for the question.

Operator: Next we'll go to the line of Dave Windley from Jefferies. Please go ahead.

Next question, please.

Nathan Rich: Hi, thanks for taking my question. I wanted to come back to Medicaid and try to understand a little bit of progression. I understand that you're highlighting some reverification activity that is ongoing in your markets. It seems that OB3 will trigger another round of acuity shift, maybe starting as early as late 2026. Our assumptions are our understanding is that that could be fairly significant. I'm trying to marry that with your expectations for sequential improvement in Medicaid margin through 2027 when you are facing what seems like another acuity shift ahead of a rate catch up situation from late 2026 through 2027. Thank you.

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

Hi. Thanks for taking my question. I wanted to come back to Medicaid and try to understand a little bit of progression. Um, I understand that you're highlighting some reverification activity that is ongoing in your markets. It seems that that OB3 will trigger another round of acuity shift, maybe starting as early as late 2026.

And and our our assumptions are our understanding is that that could be fairly significant. And so I'm trying to to marry that with your expectations for sequential Improvement in Medicaid margin.

when you are facing, what seems like another

Acuity shift ahead of rate. Catch-up situation from, you know, late 2026 through 2027. Thank you.

Gail Boudreaux: Dave.

[Company Representative]: Thanks very much for the question. Let me do a little bit of a progression here. As we think about 2026, about evenly split two key drivers. Rates continue to lag, higher acuity, and then persistently elevated cost trends on that. First, driver rates continuing to lag, higher acuity. That's really compounded by those state reverification processes, those program changes that we've spoken about. That's really where those higher disenrollments are raising that acuity on the persistently elevated cost trend. This is simply utilization remaining above historical norms across several categories that we continue to monitor. I spoke about a little bit ago, 2026, or at least our view is 2026 will be the low point for us in Medicaid margins and we're going to see sequential improvement in 2027. There are really four concrete drivers that underline our view. First, tight medical cost management.

Dave, thanks very much, uh, for the question. So let me do a little bit of, uh, progression here as we think about 2026.

Evenly split. Uh, two key drivers: rates continue to lag, higher acuity, and then persistently elevated cost trends.

On that first driver rates continue to lag uh higher Acuity. That's really compounded by the state reverification processes. Those program changes that we've spoken about and that's really where those higher disenrollment are raising that acuity

On the persistently elevated cost trend, this is simply, you know, utilization remaining above historical norms across several categories that we continue to monitor. And I spoke about that a little bit ago.

2026. Well, at least our view is that 2026 will be the low point for us in Medicaid margins, and we're going to see sequential improvement in 2027. There are really four concrete drivers that underline our view.

First.

[Company Representative]: That means expanding behavioral health interventions, strengthening specialty drug management, and optimizing sites of care. You heard from Felicia. We're actively working with the states on that rate alignment and program refinements. These programs are in flight and they are really designed to bend that cost of care curve as 2026 progresses into 2027. Second is the budget reconciliation bill provisions. Those are phased and manageable. Clearly we know that federal changes under the bill are going to be staggered, primarily effective in 2027 and 2028. That is going to allow us time to plan and collaborate with the states. Importantly, that pacing then reduces execution risk and supports a more steadier transition of the risk pool. The third one is rates. Rates are going to begin to catch up to trends and reverification impact. States are starting to incorporate more recent experience into base rates, albeit with lags.

Titan Medical cost management, right? And that means expanding behavioral health interventions. That means strengthening specialty drug management. That means optimizing sites of care. And you heard from Felicia. We're actively working with the states on that rate alignment and program refinements. These programs are in flight and they are really designed to bend the cost of care curve as 2026 progresses into 2027.

Second is the budget reconciliation. Bill Provisions. Those are phased and manageable.

I clearly we know that Federal changes under the bill, they're going to be staggered, primarily effective in 27 and 28, but that's going to allow us time to plan and collaborate with the states and importantly, that pacing. Then reduces execution risk and supports a more. Steady transition of the risk pool?

The third one is rates, right? Rates are going to begin to catch up to trends and reverification impact.

[Company Representative]: As 2025 and 2026 experience rolls into the state cycle, we expect further alignment and progress. Finally, I would say our 2026 outlook is intentionally prudent and therefore a credible base off of which to build.

States are starting to incorporate more recent experience into base rates, albeit with lags and so as 2025 and 26 experience roles in to the state cycle. We expect further alignments and progress. And so finally I would say our 2026 Outlook

Gail Boudreaux: Yes. Thanks, Mark and Dave. Just to put a finer point on one of Mark's discussions around, as you think about the implementation of the bill in 2027, it is not complete reverification. It's less than 20% of our membership will be impacted. I think you need to sort of spend size that in terms of that. That's why we feel 2026 is the lower point. We do see that as manageable going forward. We do believe that the riskful impacts we have seen now as some states, some of our larger states, have accelerated some of that redetermination work even into 2025. That gives us confidence. I'll take the last question, please.

Operator: For a final question, we'll go to the line of George Hill from Deutsche Bank. Please go ahead.

Is intentionally prudent. And therefore and and therefore a credible base uh, off of which to build. Yes, thanks Mark. And Dave just to put a finer point on 1 of Mark's uh, discussions around, as you think about the implementation of the bill in 27? Um, it is not complete reverification, it's less than 20% of our membership will be impacted. So I think you need to sort of size that in terms of that. So that's why we feel 26 is the lower Point. Um, and we do see that as manageable going forward and we do believe that the risk pool impacts. We have seen now, as some states, some of our larger states have accelerated, some of that redetermination work even into 25. So that's what gives us confidence. Um, I'll take the last question, please.

Gail Boudreaux: Yeah, good morning, guys, and thanks for taking my question. I'll say Dave took one of my Medicaid questions. Mark, I kind of have a quick two pointer around it on Medicaid. Number one, is there a way to put a bottom goal post around Medicaid expectations for 2026? You said you expect it to be greater than, or call it down about 125 basis points. Is there a way to put a bottom limit on that? I thought your answer to the last question was great. If Medicaid margin recovery is pushed out another year, does that impact your ability to grow earnings in 2027?

For a final question, we'll go to the line of George Hill from Deutsche Bank. Please go ahead.

Uh yeah. Good morning guys. And thanks for taking my question. I'll say, Dave, took 1 of my Medicaid questions from work. I kind of have a quick 2 pointer around that on Medicaid.

I guess the number is 1. Is there a way to put a bottom goalpost around Medicaid expectations for 2026? You said you expect it to be greater than, or call it down about 125 basis points, I guess? Is there a way to put a bottom limit on that? And then I thought your answer to the last question was great. But if Medicaid margin recovery is pushed out another year, does that impact your ability to grow earnings in 2027?

[Company Representative]: George, thanks very much for the feedback and for the question. We certainly understand the interest in anchoring to a floor, but we believe it's more responsible to wait until we have clearer visibility before setting formal guidance. There are obviously a lot of key variables that we're monitoring. Certainly January Medicaid rate updates is an important one. I think more broadly across the business, the Medicare AEP outcomes, the status of the enhanced subsidies, the cost trends really through the rest of the year, all of that factors into our thinking holistically in how we think about 2026. What we wanted to share with you on the call today is our preliminary view into key planning variables and assumptions for next year. We'll come back with more specificity in January to answer detailed questions.

Mark Kaye: Thanks, George.

Gail Boudreaux: Thank you. Just so we're clear, we're not waiting on rate cycles. We're doing a lot, so we're not victim only to this. I think that's really important. Secondarily, as Felicia shared throughout the course of this call, we are in the midst of those discussions with our states. They are leaning constructively. We wanted to give a planning assumption that we thought was very prudent going into 2026. Let me please close because I want to thank you again for your continued confidence in Elevance Health. As you've heard, we've taken decisive steps to strengthen our foundation, advancing affordability, enhancing the member and provider experience, and positioning our enterprise for sustainable growth. These efforts are grounded in our whole health strategy, which connects our physical, behavioral, and social health to deliver a more affordable, personalized, and effective care.

George. Thanks very much for the feedback and for the question we certainly understand, you know, the interesting anchoring uh to a floor. Uh but we believe it's more responsible to wait until we have clear visibility before setting, that formal guidance. Uh, there are a lot of key variables that were monitoring uh certainly January, Medicaid rate updates is an important 1, but now I think more broadly across the business, the Medicare AAP outcomes the status of the enhanced subsidies the cost Trends really through the S, the rest of the year. And so all of that factors into our thinking holistically and how we think about 2026 and really what we wanted to share with you on the call today is our preliminary review into key planning variables and assumptions. Uh for next year we'll come back with more specificity in January to answer detailed questions. Thanks George. Yeah, thank you. And again, um, just so we're clear, we're not waiting um, on raid Cycles.

We're doing a lot. So we're not victim only to this. I think that's really important and then, secondarily, uh, as Felicia shared throughout the course of this call. We have we're in the midst of those discussions. With our states, they are leaning constructively. But again, we wanted to give a planning assumption that we thought was very prudent going into 26.

Let me please close because I want to thank you again for your continued confidence in elevance health.

To strengthen our foundation, advancing affordability, enhancing the member and provider experience, and positioning our enterprise for sustainable growth.

Gail Boudreaux: I want to take a moment now to thank our associates across Elevance Health for their dedication to our members, care providers, and the communities we serve. It's your commitment to affordability, experience, and outcomes that is the cornerstone of our success. We remain focused on disciplined execution, innovation, and delivering consistent value for our members, our partners, and our shareholders. Thank you for joining us today. We look forward to demonstrating our continued progress as we execute on our strategy.

These efforts are grounded in our whole health strategy, which connects our physical, behavioral, and social health to deliver more affordable, personalized, and effective care. I want to take a moment now to thank our associates across Elevance Health for their dedication to our members, care providers, and the communities we serve. It's your commitment to affordability, experience, and outcomes that is the cornerstone of our success.

We remain focused on disciplined execution, innovation, and delivering consistent value for our members, our partners, and our shareholders. Thank you for joining us today. We look forward to demonstrating our continued progress as we execute on our strategy.

Operator: Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 A.M. today through November 21, 2025. You may access the replay system at any time by dialing 800-391-9853, and international participants can dial 203-369-3269. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today, through November 21st 2025, you may access the replay system at any time by dialing 80000.

391.

9853 and international. Participants can dial 203.

369.

3269. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing, you may now disconnect