Elevance Health Stock

Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead.

Good morning, and welcome to Elevance Health's Second Quarter 2026 Earnings Conference Call. My name is Nathan Rich, Vice President of Investor Relations. With us on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Felicia Norwood, our Chief Health Benefits Officer; Morgan Kendrick, President of our Commercial Health Benefits business; and Aimee Dailey, President of our Government Health Benefits business.

Gail will begin with a review of our second quarter results, the progress we have made against our strategic priorities and targeted investments designed to strengthen the enterprise over time. Mark will then discuss our financial performance and outlook in greater detail. After our prepared remarks, the team will be available for a question-and-answer session. 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.

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.

Good morning, and thank you for joining us. Elevance Health delivered second quarter results ahead of our outlook, reflecting favorable benefit expense performance, disciplined execution and the actions we are taking to manage health care costs more effectively across the enterprise. Today, we are raising our 2026 adjusted diluted earnings per share guidance to at least $27 and we remain confident in our ability to return to at least 12% adjusted EPS growth in 2027 off our ending 2026 earnings baseline.

Importantly, our confidence is not based on a single line of business or a single quarter. We are seeing progress across the breadth of our portfolio. Medicare Advantage reflects the deliberate actions we took to improve performance. Our commercial and individual ACA businesses are developing as anticipated and Carelon and our AI-enabled capabilities are becoming more meaningful contributors. We remain focused on disciplined management of the Medicaid business as the operating environment remains dynamic.

The broader enterprise is performing against the framework we laid out and the targeted investments underway are designed to strengthen the durability of that performance. Health care should be easier to navigate and more responsive to the people it serves. Consumers expect more from the health care system, greater transparency, better connectivity and more personalized support that meets their needs, and we share that expectation.

At Elevance Health, trust is earned through every interaction. To be our members' lifetime trusted health partner, we must continue to make health care simpler, more personal and more affordable. That's why we're accelerating investments in capabilities that directly support our strategy. These capabilities are tied to the operating levers that drive performance, earlier detection of medical cost trend, more precise clinical intervention, a simpler member experience and better provider connectivity.

Let me share a few examples. First, we are managing medical cost trend with greater speed and precision. In a dynamic environment, we're improving our ability to detect cost pressures earlier and respond quickly with targeted action plans across our clinical, network payment integrity and operating teams. In many cases, we've compressed months of work into days. These capabilities are already helping us identify emerging cost drivers more quickly and deploy more focused interventions across the enterprise.

Second, we're improving how members access care and support. Through Sydney Health, concierge care and proactive member engagement, we're using data, digital tools and dedicated care teams to help members navigate benefits, schedule care, manage conditions and close gaps in care. The result is a more proactive, seamless and personal experience.

Third, we're expanding Carelon's value-based solutions to address complex and fast-growing areas of health care spend. CareBridge extends Carelon's whole health model into the home, where better coordination can improve outcomes and lower costs. CareBridge can generate medical savings in the mid-teens for these members, and we're expanding it to new markets. Finally, we're reducing friction for care providers and members.

With HealthOS, we collaborate with providers earlier in the care journey to review care plans, reduce delays and support better clinical decisions. In health systems, where these workflows have been deployed, we've seen significant reduction in avoidable denials, documentation requests and administrative friction. Together, these investments strengthen our ability to manage trend and improve the experience for members and care providers. They're directly tied to the areas that matter most to long-term performance, earlier trend detection, more precise intervention and a scalable operating model.

Turning now to our performance by line of business. Let me start with Medicaid because I know it's an important area of focus for investors. The Medicaid environment continues to be dynamic, and we're managing it with discipline. Second quarter performance supports our full year framework, reflecting stronger-than-expected rate updates, membership and acuity that remain broadly aligned with our assumptions and targeted actions against known areas of elevated trend. Based on what we see today, our Medicaid operating margin outlook remains appropriately prudent and unchanged from our prior guidance.

Our outlook reflects a balanced view of the second half, an elevated trend environment, improving rate alignment, acuity that remains broadly consistent with our expectations and the growing impact of the actions we are taking to manage health care costs. We continue to see 2026 as the trough year for our Medicaid margin with improvement over time, supported by better rate alignment and the maturation of our care management actions. Medicaid remains an important part of our portfolio, and we are managing it with clear strategic and financial discipline.

We regularly assess each market based on strategic fit, operational requirements and the ability to generate an appropriate return on capital. We recently reached a mutual agreement with the District of Columbia to exit the D.C. Medicaid market. As we continue our assessment, we expect to exit additional Medicaid markets over the next 12 to 18 months where we do not see a path to sustainable performance. These are targeted portfolio actions, and they do not change our commitment to serving Medicaid members in markets where we can deliver value for states, members and shareholders.

In Medicare Advantage, we are seeing clear evidence that the deliberate actions we took to reposition the portfolio are translating into stronger performance. Disciplined plan design, a more focused mix of D-SNP and HMO products, favorable claims experience and the growing impact of our care management programs support our path to at least a 2% operating margin this year. Our 2027 bids were developed with the same discipline, reflecting a prudent view of cost trend, continued focus on margin improvement and stability in the benefits that members value most.

We will continue to manage this business with focus on delivering long-term value for seniors and sustainable performance for the enterprise. In the individual ACA business, performance is developing broadly consistent with how we priced and planned the year. Member retention has been encouraging and the composition of the risk pool remains broadly aligned with our assumptions. As expected, the higher mix of bronze plans creates more pronounced seasonality, and we are not extrapolating early year favorability.

As we prepare for 2027, our focus remains on offering value for consumers while improving the long-term financial sustainability of this business. In commercial, the market is focused on affordability and experience, and that aligns directly with our differentiated offerings. Employers are looking for solutions that lower health care costs, simplify navigation and better support their employees. Our integrated medical and pharmacy model is resonating, and we're seeing strong demand for our patient advocacy, behavioral health and digital engagement capabilities.

Turning to Carelon. Performance remains in line with our expectations, and we're focused on scaling solutions that improve outcomes for members with complex and chronic needs. Behavioral health is a clear example. When members need additional support, our programs help identify those needs earlier, connect them to appropriate care and coordinate services more effectively. Through stronger member engagement and fewer adverse events, these programs have delivered 10% cost savings on average.

As we expand these capabilities across new populations and external client relationships, Carelon is becoming an increasingly important and durable driver of enterprise growth over time. In summary, our second quarter performance gives us increased confidence in the year. We're raising our earnings guidance, managing the business with discipline, scaling Carelon's value-based capabilities and investing in the areas that matter most to our future financial performance. Before closing, I want to thank our associates. The progress we are making is a direct reflection of their focus, discipline and commitment to the people we serve. With that, I'll turn the call over to Mark to review our second quarter financial results and outlook in greater detail.

Thank you, Gail, and good morning, everyone. Elevance Health reported second quarter adjusted diluted earnings per share of $7.45, which exceeded our outlook. The strength in our operating performance reflected favorable benefit expense performance in Medicare Advantage and individual ACA, disciplined expense management and continued execution against our care management initiatives. We continue to make targeted investments in the capabilities that support our long-term growth.

In the quarter, we also recorded a net below-the-line benefit of $0.80 per share, primarily related to valuation adjustments within net investment income. Importantly, we intend to use this nonrecurring benefit to fund onetime investments in the second half of the year that advance the capabilities Gail discussed. These investments are focused on medical cost management, member engagement, provider connectivity and Carelon's integrated capabilities. They are intended to strengthen our operating model and improve the consistency of our performance over time.

Our second quarter operating results support raising our full year 2026 adjusted diluted earnings per share guidance to at least $27 while preserving appropriate prudence in our outlook. Similarly, we now view at least $26 as the appropriate earnings baseline for modeling purposes, and we remain confident in returning to at least 12% adjusted EPS growth in 2027 off this higher earnings baseline.

Now turning to our second quarter results. We ended the quarter with 44.9 million medical members. As expected, the sequential change was primarily driven by known fee-based customer transition and attrition in our individual ACA and Medicaid businesses. Operating revenue totaled $49.8 billion, an increase of 0.8% year-over-year, driven by higher premium yields and product revenue, partly offset by lower health plan membership. In Medicaid, second quarter performance supports the full year margin framework we laid out earlier this year. Cost drivers remain elevated and concentrated in the categories we have discussed previously, including behavioral health, specialty pharmacy, outpatient surgery and emergency department utilization.

Our outlook assumes this operating environment persists through the balance of the year. Rate updates received during the quarter were higher than anticipated and membership and acuity remain broadly aligned with our expectations. We are also acting directly on the cost drivers we are seeing through clinical oversight, enhanced payment integrity, earlier interventions in behavioral health and network management. Taken together, our full year Medicaid operating margin outlook of approximately negative 1.75% remains appropriately prudent based on what we see today.

We view 2026 as a trough for Medicaid margins with improvement over time as rates incorporate more recent experience and our care management actions mature. In Medicare Advantage, results were stronger than expected and were a contributor to our outperformance in the quarter. The intentional portfolio actions we took for 2026 are translating to improved performance. Disciplined plan design, a more focused product mix, favorable claims experience and our capabilities all support our path to an operating margin of at least 2% this year.

Our 2027 bid submissions placed an emphasis on plans where we can deliver sustainable value for seniors, particularly dual eligible members and appropriate returns for the enterprise. In our individual ACA business, favorability in the quarter reflected the more pronounced seasonality associated with our higher mix of bronze plans, which is contemplated in our outlook. We have now incorporated the final 2025 CMS risk adjustment results, which were favorable to our prior estimate. We are prudently reestablishing the majority of the prior year favorability in our current year risk adjustment accrual given current market dynamics, member mix and claims experience that is still maturing.

Member retention remains modestly ahead of our expectations, and we now expect to end 2026 with at least 1 million individual ACA members. Commercial Group performance was in line with our expectations with cost trend remaining elevated but consistent with the pricing approach we have taken. We have applied the same discipline to the 2027 selling season. Turning to Carelon. Performance remains consistent with the outlook we provided at the beginning of the year. In CarelonRx, we are pleased with early progress in the 2027 selling season, reflecting demand for our integrated medical and pharmacy offering.

In Carelon Services, near-term earnings reflect ongoing investment in the platform and the scaling of newer risk-based programs, which naturally take time to mature. The capabilities we are building are directly aligned with the operating priorities Gail discussed. Now moving to the balance sheet and operating cash flow. Days in claims payable were 45.4 days as of June 30, an increase of 2.9 days year-over-year. Operating cash flow totaled $1.9 billion in the quarter, driven by our strong operating performance.

Second quarter cash flow also benefited from the timing of the state Medicaid pass-through payment received in the quarter that was remitted in July. Additionally, we made an initial remittance to CMS of $342 million in the second quarter related to the matter discussed last quarter, and our estimate of the potential total financial exposure remains unchanged. As of July 9, we completed all steps required by CMS and have subsequently received written confirmation from CMS that sanctions will not be imposed and the matter is closed. We are pleased to have reached this resolution and look forward to offering our Medicare Advantage plans to beneficiaries without interruption.

Based on the strength of our operating performance and our outlook for the remainder of the year, we are raising our full year operating cash flow to at least $6 billion. Turning now to our revised outlook. We view our updated 2026 adjusted diluted earnings per share guidance of at least $27 as prudent and appropriate, supported by current operating trends. Beyond our EPS outlook, the principal operating elements of our full year framework remain unchanged, though we now expect our adjusted operating expense ratio to be in the upper half of our full year guidance range.

With respect to seasonality, we expect third quarter adjusted EPS to represent approximately 17% of our revised full year guidance. Our confidence in returning to at least 12% adjusted EPS growth in 2027 off our ending 2026 earnings baseline is supported by multiple levers, including continued execution in health benefits, growth in Carelon, operating efficiency and disciplined capital deployment. With that, operator, please open the line for questions.

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

Maybe just to drill down a little bit on your Medicaid comments, if possible. It sounds like the rate updates are coming in more favorable. When you think about the trajectory over the course of the year, that 1.75% negative margin, is the back half more favorable than the front half? Is there an expectation on where you'll exit the year? And then if you could just provide a little color more on your thinking about exiting markets is -- I know you probably don't want to mention the states, but can you give us a sense of overall sizing maybe of how much we're talking about there? And is this in any way driven by future things like work requirements? Or is it basically driven by just current discussions with states and where you feel you're landing?

Thanks for the question, A.J. Let me -- it might be helpful to sort of first frame kind of the overall quarter and how we're expecting the year because I think that's important, and then I'll ask Mark to comment more specifically on your Medicaid questions, which I think are very important. As you take a look back at just what we've reported, we're very pleased with the performance we've seen through June and second quarter results exceeded our outlook. And I do think they very much focus on the disciplined execution.

Given that, as you know, we've raised our guidance to at least $27 while maintaining, I think, which is important, a prudent view of the second half. And again, thinking about our overall performance, the second quarter was broad-based. We saw favorable performance in Medicare Advantage and individual ACA and continued disciplined execution in commercial with also ongoing progress against Carelon, which is scaling quite nicely and seeing some good benefits from the actions we've taken to manage medical costs. Specifically to Medicaid, as I shared and Mark shared in his comments, it is -- remains dynamic, and we are managing that business with discipline. What's important to think about is that original full year framework is still intact from what we see today, and it's supported by stronger-than-expected rates, membership and acuity that are broadly aligned with our assumptions and very specific focused actions around the known cost pressures, which really haven't changed over the course of this quarter or last year.

And importantly, we're seeing those begin to mature the actions we're taking. And I think that's important, too. But again, we want to remain prudent given the dynamic environment that we're in. I also just want to comment briefly on the investments we're making on the nonrecurring below-the-line favorability we saw. These are targeted investments, and they're very focused on long-term performance acceleration. So strengthening medical cost management, the provider connectivity work and improving operating efficiency.

I think it's really important for everyone to understand these are onetime and nonrecurring investments that will not go on beyond '26 for these. We found it was important because it wasn't part of our recurring earnings. So taken together, we see a lot of confidence in 2026. And quite frankly, a lot of confidence now in these emerging areas to return to our at least 12% adjusted EPS. With that, I'll ask Mark to comment more specifically on your Medicaid questions so that we can round out the totality of what you asked.

And A.J., appreciating you may get a couple of Medicaid questions on the call today. Just to answer you specifically, we do expect the second half Medicaid margin profile to improve from the second quarter, and that's going to be supported by that favorable July 1 rate activity as well as our continued execution against the cost pressures that we've been discussing.

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

Maybe I'll just follow up on A.J.'s question here in a couple of ways on Medicaid. First, maybe is there anything you can give us in terms of order of magnitude on some of the exits you talked about maybe versus that $57 billion kind of Medicaid run rate on revenue? How do we think about those exits in terms of sizing? And then you talked about acuity being in line with your expectations in Medicaid. And I find that interesting just because you had one of the more conservative assumptions on acuity impact the trend this year.

I think it was in the 2% to 3% range. So I'm curious, are you -- as Medicaid lives keep attritting, are you seeing the acuity of those members, the utilization continuing to tick higher, meaning the healthier members that keep attritting? Is it kind of in line with that 2% to 3%?

Justin, thank you for the questions there. Let me go ahead and start off by saying that Medicaid cost trend in the second quarter developed broadly in line with the framework that we expected. Costs remain elevated, but the drivers are identifiable and they're actionable. And they're primarily in the categories that we spoke about in the scripted remarks here, behavioral health, including ABA therapy, emergency department utilization, outpatient surgery and specialty pharmacy.

Importantly, I would say we are not seeing a new stepwise acuity reset. Membership and acuity remain broadly aligned with our assumptions and the incremental pressure is increasingly coming from utilization among members who remain in the program. And that distinction is really important because it gives us very clear operating levers. From an outlook perspective, the second quarter really reinforced our confidence in the full year Medicaid framework.

The July rate activity was constructive. It was also modestly favorable to our expectations, and that shows that the rate environment is moving in the right direction as states incorporate more recent experience. And at the same time, we are staying quite prudent. Specifically, we are not assuming a material improvement in Medicaid trend in the back half of the year. And so the way I'd summarize it is as follows: elevated but understood trend, improving rate alignment, targeted cost actions underway and a full year margin outlook that we believe is appropriately prudent.

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

I know it's still pretty early in the year for the exchanges and you aren't carrying the favorability that you've discussed largely forward at this stage. But it would be great to try to understand, as you got a better perspective on where risk adjustments coming in for the first half, like how do we think about where first half performance was versus your expectations?

How are you thinking about your risk adjustment position in 2026? And I know you're reestablishing most of the 2025 risk adjustment favorability that you saw in the quarter. But any sense of what did actually flow through the results in the quarter would actually be helpful.

Steve, thanks very much for the question. I think the way I'd frame this is that the final 2025 risk adjustment results were quite favorable relative to our prior estimate. And that's reinforced our confidence in our estimation and reserving process. And you're able to get a sense of the magnitude of that simply by looking at our disclosures in the earnings release in terms of the sequential move quarter-over-quarter in reported ACA revenue. At the same time, we are not extrapolating that favorability into 2026.

From our perspective, the ACA market is still developing. Member mix has changed meaningfully. And obviously, the shift towards bronze plans has implications for both premium yield and risk adjustment. So as we move into the second half of the year, we are reestablishing much of that 2025 favorability in our 2026 risk adjustment accrual. And again, I'd call that really intentional prudence.

Next, we'll go to the line of Ann Hynes from Mizuho Securities.

Can you remind us in all your divisions, what your trend actually was for Medicaid, ACA and MA in guidance and what Q2 actually came -- the final results were?

Very much appreciate the question this morning. And maybe let me take that really from the perspective of Medicaid to start. And I'm going to combine your question a little bit with what Justin asked earlier just around utilization and acuity specific in Medicaid, as I think a little bit more color here would be helpful to put out. So I would say both utilization and acuity, especially Medicaid do remain part of that equation. But that persistent pressure now is increasingly driven more by utilization among members who remain in the program.

And obviously, we saw during the post-PHE unwinding, the largest issue was really the acuity reset as lower cost members really exited the program. And I would say that dynamic hasn't disappeared, but it really is moderating. We are seeing members leave Medicaid today who are still lower cost than those that are staying, but that gap has really significantly narrowed. And that's really important to us as we think about our trend outlook for the remainder of the year.

And then in terms of ACA, I would simply say here that trend was very much in line to slightly favorable for the second quarter. That's supported by those favorable volume and timing dynamics. I'd simply note here that we don't see the quarter as a change in the earnings profile for the year, and that favorability reflected that more bronze plan orientation as well as that better early membership coming in.

Next, we'll go to the line of Andrew Mok from Barclays.

I wanted to follow up on the seasonal favorability. You called out $0.25 of favorability this quarter, which grew sequentially from $0.15 in the first quarter. I understand that you're not taking credit for that in guidance, but can you help us understand why this increased sequentially when you presumably had better visibility into underlying membership and benefit design? And then relatedly, is there anything you're seeing that suggests that this first half upside would reverse in the back half of the year? Or is that just a conservative stance on your end?

Andrew, thanks very much for the question. Let me go ahead and start here by reiterating sort of a comment from Gail earlier that the quarter really reflected very solid execution, reflected a diversified set of earnings contributors and the financial flexibility to now invest in further capabilities that are going to make our performance more durable over time. In the quarter, we had about $0.50 of operating outperformance. And I would say that was about equally split between Medicare Advantage and the individual ACA.

In Medicare Advantage, that favorability primarily reflected the deliberate portfolio actions we took for 2026, our favorable membership mix, better claims experience. And those actions were really intentional, right? We prioritized sustainable economics, and we're delivering on what we committed to do. In the individual ACA, to your question, the favorability really reflected 2 factors. First, we saw more pronounced seasonality to your point, from a higher mix of bronze plans. That was about equal in magnitude to what we saw in the first quarter.

And secondly, we did see that final ACA 2025 risk adjustment results come through favorable to our estimate. We have reestablished the vast majority of that. And so as we think about the outlook for the full year, this is really about us being prudent for the second half rather than anything else.

Yes. Thanks, Mark. And I guess I would just like to reiterate Mark's comment given the last several questions. One, around -- there are no surprises. Our outlook remains prudent, as Mark said, and in explaining each of the lines of business. So we feel very much aligned, but we wanted to make sure in this environment that we do remain prudent.

Next, we'll go to the line of Lance Wilkes from Bernstein.

Great. Could you talk a little bit about the bidding posture you've got in ACA and MA for '27 as far as your orientation towards growth versus further margin recovery? And maybe if you can just give a clarification on the Medicaid exits. As far as criteria, are you looking at particular types of programs, blue states or maybe your market share position in states that would be important criteria for determining which ones would be more likely to be subject to exit?

Great. Well, thanks, Lance. I'm going to ask Felicia to address the ACA question and then Aimee Dailey, who leads government business, to talk about the market exits in Medicaid. So Felicia?

Yes, and thank you for the question, Lance. As we think about ACA for 2027, I think we are taking a very consistent posture with what we had in 2026. So we are going to be very focused on making sure that we are achieving the sustainable margin through very disciplined market-specific pricing that will reflect the cost trend and certainly the evolving morbidity. When you look at our prioritization, obviously, having plan options that are going to drive that sustainable performance becomes very important for us. So we've been very pleased with how we've seen the marketplace shift in terms of bronze plans. We think that it's going to be very important for our strategy as we drive sustainable margins going forward.

And I do think the expectation for us is to continue to prioritize affordable plan options that are going to continue to drive sustainable performance for the enterprise. In terms of Medicaid exits, I will say this, Medicaid remains, as Gail said, a very core part of our diversified portfolio. But we are going to be very disciplined around where we participate. We made a mutual decision with D.C. to exit. and we feel good about that decision, and we will make sure that there is continuity of care for our members as we go through this transition.

But as we take a look at our overall portfolio, we regularly assess all of the markets that we participate in. And as a result of this, we will plan to exit additional markets where the economics don't support sustainable performance. At the end of the day, Medicaid participation has to make strategic and financial sense for us within our diversified portfolio. So where we have alignment with duals, our Carelon strategy and a sustainable operating framework, we remain committed.

And where those conditions aren't present, we're going to take the disciplined action that we need to. Bottom line, we are very committed to supporting members in states where we can deliver sustainable value going forward, and we'll continue to work very closely with our state partners.

Thanks, Felicia. I know Felicia was very comprehensive, but maybe just some comments from Aimee as well.

Yes. I will just reiterate that Medicaid remains a core part of our diversified portfolio. We continue to be committed to the program and the members we serve. Our participation has to make strategic and financial sense, as Felicia said, but we will remain committed in this market and are -- we'll evaluate it with discipline.

Next, we'll go to the line of Lisa Gill from JPMorgan.

I appreciate the comments on your investments, onetime, nonrecurring. But can you help me understand how that's going to play into the growth rate going into next year? What kind of operational leverage you can get? And more specifically, are these investments in technology and people? How do I think about the specific investments that you are making? And again, what the return will be as we get into '27?

Thanks, Lisa, and thanks for the question. So I think, again, going back to reframe, the investments, as I said, are onetime and nonrecurring. So those -- the investment costs sit in '26 will not reoccur into '27. And also, we are looking at these as long-term durable -- durable capabilities. Some are technology, but honestly, they're all driven based on improving the capabilities that we have inside of the business.

So as we think about that operating impact, it's really an enabler of all of the key capabilities we've talked about. They're aimed at the levers that matter most to our long-term performance. So strengthening medical costs. In my opening comments, I talked about moving from months of identification to days and hours. And again, we're using this to strengthen our data and our insight capabilities and then take actions faster on medical cost management. It's also about simplifying the member experience, improving provider connectivity and enhancing our claims accuracy and driving greater operational efficiency.

We feel very confident in returning to our adjusted at least 12% earnings growth next year. And I think these are the kinds of things that give us that confidence because it gives us the leverage that we're talking about. So just a couple of things to make this real. For members, what we're looking at, we've shared Sydney Health touches about 22 million members now. That means fewer handoffs, better navigation, more proactive support, concierge care and proactive member engagement helps us support members upfront faster because the data is now all centralized and members can navigate much more easily.

Medical cost management is really about investments in analytics and AI-enabled tools that, again, allow us to identify those pressures earlier, but more importantly, allow us to implement clinical oversight, payment integrity, changes in our network, those kind of interventions. Those take time to mature, but we need the data. We need the infrastructure in place this year, and we expect to see that next year. And it's not just going to be in our cost structure, our expense cost structure. We expect to see it in our medical cost structure. That's what these investments in medical management are about.

And then I'll just conclude on 2 things. On provider connectivity, we've shared with you HealthOS and the related tools. Those really are about reducing the documentation requests, improving prior authorization, getting us to 80% real time improving payment accuracy and reducing friction. Those are all, I think, really important components of what we're doing. And finally, Carelon, which is an important strategic asset for us, scaling those value-based solutions in the complex areas of spending.

CareBridge has been very successful for us. We're looking to continue to accelerate the deployment of CareBridge. Behavioral health and oncology are 2 other areas. So we expect those benefits to be embedded and build over time. But I think the objective is straightforward, use this nonrecurring opportunity to accelerate capabilities that manage how we manage costs and simplify our experience for our long-term goals. So thanks very much for the question.

Our next question we will go to the line of Kevin Fischbeck from Bank of America.

I just -- I'm having a little difficulty reconciling some of the commentary that you've made on the Medicaid side. You've talked a lot about the volatility of things there. But I guess when we think about how you've talked about things, you said rates are coming in better, and it seems like everything else is coming in line, but you haven't improved your outlook for margin. So why isn't there a lift if rates are coming in better? And then if rates are coming in better, why are we talking more about exiting potential states today than we have a couple of years ago? It seems like it's the opposite of an improving rate outlook.

Kevin, I really appreciate the question, the opportunity to talk through this a little bit more. Let me start off by saying that our second half Medicaid trend outlook is very consistent with our first half experience and in a sense, quite prudent. And there are 3 important points I wanted to make here. First, the July rate activity was favorable. And as we've mentioned earlier, that does confirm that the rate environment is moving in the right direction, though the full year benefit is obviously naturally moderated by the timing and the portion of the book that's affected.

Second, membership and acuity are broadly aligned with the assumptions embedded in our initial outlook, and that's encouraging. And third, we continue to see elevated utilization, but in the categories we've been discussing. And that pressure is increasingly driven by those identifiable utilization patterns, which allows us to respond more effectively. When we think about the rate update as of July 1, you could think about it still being in that mid-single-digit percent range, but maybe towards the upper end of mid-single digits as opposed to the lower end when we originally started the year. And that should give you enough for modeling purposes.

Yes. And Kevin, specifically to your question around exits for markets, I mean, as Felicia shared, we're taking a portfolio look at all of our states, quite frankly. We did this in Medicare last year. We made, I think, very disciplined decisions around long-term profitability as well as long-term fit for the company. We've been doing the same thing in Medicaid and have made those same kind of decisions. So it's not just about what 2026 or '27 look like.

This is really about the long-term sustainability of those markets, how they align to our dual footprint and some of the other considerations we have. So we actually feel that this is the right time to be very disciplined about these actions and look at where the long-term trajectory is for the places that we want to participate. So thanks very much for the question and the opportunity to explain that more.

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

Sorry, I'm going to tick on the Medicaid topic as well. But I thought it might be helpful just maybe looking out 2 to 3 years, and you talked about how you continue to view 2026 as the trough year for Medicaid. Clearly, you're not going to sort of continue to sort of sustain the negative 1.75%, and we'll look to change on that. What I'm curious about, though, is how you would frame the sort of the macro around Medicaid as we look out to what's a pretty substantial package of regulations that will be coming from the OBBBA with the SDP reform and work requirements and the 1115 waivers moving budget neutral. I mean that could all have implications for funding for Medicaid, but then also you're talking about these proactive initiatives you're doing, including access new markets and clearly doing what you can from the company level.

So I guess, Gail, Mark, Felicia, like how would you frame that in terms of like thinking about Medicaid as the trough, but trying to reconcile that with the headwinds ahead at the sector level, at the macro level, but -- and then the company having -- sort of doing all it can to improve the margin performance.

Yes. Thanks for the question. I will ask both Mark and Felicia to comment on that. But I guess you mentioned a lot of very specific discrete things. I mean our overall framing is that many -- those are manageable things within the framework that we've laid out and the experience we've had to date and quite frankly, the maturation of what we're seeing on rates aligning as well as our actions aligning and then being very disciplined in our portfolio. But let me turn it over to Mark first, and then I'll ask Felicia to comment as well.

Thanks very much. I think this is a very interesting question and certainly one that we've been exploring internally for a while now is how is the macro environment changing and how are we expecting things to ultimately develop over time. And maybe let me cover one specific area given the specificity of your question, Scott. Let me talk a little bit about 2027, One Big Beautiful Bill Act implications in acuity, and then we can go from there.

So if I think about 2027, we do expect to continue to see some incremental acuity pressure as those eligibility dynamics continue. And that's really going to include specifically that One Big Beautiful Act related community engagement and the verification requirements. But importantly, from our perspective, we don't view that as a broad-based reset, anything comparable to the post-PHE unwind.

And that's really significant because I would say that means the acuity shift to a large degree is behind us. And so as you think about those macro factors, OBBBA is important, but it's not something that's going to be a defining moment, at least as we see 2027 at this point.

Yes. The other thing I will say is that when we take a look at 2027 and the work requirements that we're going to be working on, when we look at the interim final rule, it doesn't give us much pause or concern. I think the things that we see there are things that we anticipated, and we believe that the changes will be very phased, state-specific, and they will be very manageable. The rule sets a framework, but states continue to have significant flexibility as they work through this process.

So as we step back and think about what this means overall, we are going to be working closely with our state partners to make sure that what we are doing is helping our members manage what can be the operational complexity that goes along with work requirements. But in terms of the overall impact, we think that these will be very manageable in the framework of the broader Medicaid environment and certainly are very much unlike what happened during the redetermination process.

The members that are going to be impacted are only the Medicaid expansion members and some waiver members that represents roughly 20% of our overall book. But we take a look at this in the context that this will be a very phased implementation process. with a lot of collaboration between us, our state partners and our members. So thank you for the question.

Thank you, Felicia, Mark. And just I think it's helpful to take a zoom out for a moment because I know there's a lot of interest in Medicaid and hopefully, we've been able to answer your questions. But I think as you think about the overall company, again, our confidence in '27 is really about the broad enterprise and the breadth of our portfolio and the operating actions we've taken. So it's not dependent on any single line of business, quite frankly, and that's what gives us so much confidence and really does reflect the diversity of the contributions across health benefits, Carelon, the efficiency and capital deployment.

And again, I just want to remind people, we have several very visible drivers, and we're showing that already in 2026. Commercial is performing quite well with pricing discipline. We feel very good about MA, benefiting from the actions we took as well as the positioning we have for '27. And the individual ACA is developing consistently. And as you heard from Mark and others, we've been very prudent in how we thought about that business to ensure that it performs as planned. Medicaid does remain an important part of our broader framework, but we continue to view it '26 as the trough.

And we do see the improvement supported by the rate alignment and the maturation of the actions that we've taken this year. And again, I want to emphasize that we are being prudent because we want those actions to mature before we take full credit for them. So our broad earnings path, quite frankly, is not dependent on any outsized improvement in any single business. So that's why we see it as manageable. And again, accelerating investments, as I shared before. So thank you very much for the question. I appreciate the focus.

Next, we'll go to the line of Dave Windley from Jefferies.

I wanted to ask a question still on kind of utilization, but the shape of your experience in the first half. I think Elevance did not call out quite as much flu and weather in the first quarter as some of your peers did. And I wondered if what we're hearing from you on 2Q is perhaps a reflection of bounce back activity more so than maybe you might have anticipated from 1Q.

And again, I'm suggesting maybe flu weather related in retrospect. And then if I could ask on the nonrecurrence of the investments, Gail, I want to make sure I understand, does that mean the dollars come out next year, i.e., $0.80 worth of EPS comes back to the bottom line next year or you just don't grow those investments next year and they fall into the baseline? I want to make sure I understand that.

Sure. We'll clarify. I'll have Mark go through the numbers with you.

I appreciate the 2 questions. Let me maybe take the first one. I'll focus again on Medicaid here, just given it's the topic for the call. We did not see second quarter really as an acceleration in Medicaid cost trend beyond our expectations. And the way I'd probably frame this is the second quarter cost trend was consistent with our first quarter experience when adjusting for flu activity and the prior year development from the first quarter. In other words, core utilization is consistent.

On the investment spend here, the 2026 outlook from the first quarter already included approximately $0.75 of EPS tied to those targeted investment spending that we spoke about at the beginning of the year. Those investments should be viewed as part of the ongoing run rate of the business, and that will support areas like AI adoption and workforce enablement, Carelon scaling, et cetera.

In addition, as we've spoken about this morning, we now expect to deploy approximately $0.80 of net below-the-line favorability from the second quarter into onetime accelerated investments in the second half. You should not see that $0.80 of net below-the-line favorability as a recurring part. Those are onetime for this year, not part of 2027.

And as a reminder, our jumping off point for the adjusted 12% growth is the $26 that we shared.

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

So based on some of the commentary from the hospitals, surgical volumes appear to be broadly lower in the second quarter versus last year. In the prepared remarks, you mentioned outpatient surgery is a continued source of cost pressure. So I'm wondering if that pressure is related more towards higher volumes or higher acuity procedures? And is there any risk that you see of any catch-up from those procedures in the back half of the year?

We would say that outpatient surgery is not a universal trend driver for us, but it does matter in certain lines of business. For example, Medicaid outpatient surgery trend is more utilization driven. Local group is more unit cost mix driven. In Medicare and individual ACA, we are seeing moderately actually lower surgery trends. On ACA, we do look at utilization per member, and we did expect per member utilization to be higher because we priced for that higher expected morbidity. And so overall, I would say that, again, not really a universal trend driver for us relative to the other categories we've called out.

Next, we'll go to the line of Elizabeth Anderson from Evercore ISI.

You talked a lot about the prudence of the outlook in terms of margins and your expectations for the year, which makes sense given the volatility in many of the business lines. Can you talk about any change in like prudence regarding your reserve posturing for the -- starting in the second quarter for any of your businesses?

Appreciate the question. We remain confident in our reserving levels and that the reserving posture we have maintained is consistent and prudent, both relative to our membership base and claims inventory and claims experience, but also consistent and prudent relative to prior practice here. We ended the quarter with a days in claims payable, as you saw in our published results of 45.4 days, and that is up 2.9 days year-over-year. And so we feel good in the reserving posture as we ended the second quarter.

Next, we'll go to the line of Erin Wright from Morgan Stanley.

I know there's a lot of questions on Medicaid. So I'll ask something a little bit different, but I want to dig in a little bit more in terms of what you're seeing across Medicare Advantage in terms of just underlying utilization trends. There just seems to be a narrative out there that underlying utilization trends are more favorable here. And what are your expectations that, that continues?

And I think you talked about your bid process already on that front, but just curious how you're thinking about that going forward. And then I know it's really early to even remotely talk about Stars, but if I throw that out there just in the context of the evolution in this administration, how you think about Stars, generally speaking?

Sure. Why don't I have Aimee Dailey comment on Medicare?

Sure. So I appreciate all the questions there, and I'll try and cover as many as I can. Maybe I'll start more broadly on our bid approach. Our bid approach in 2027 was very consistent with the disciplined strategy we've been executing over the past several years. And while we're encouraged by the final rate notice, which I know is a few months past now, we do continue to believe underlying medical cost trend is still outpacing program funding. So we submitted our bids with a prudent view of trend and a continued focus on sustainable margin improvement.

The actions we took in '26 are performing as we expected, and I know we've talked about the favorability just in the second quarter, ahead of our expectations, which reflect the deliberate portfolio actions we took, a favorable membership mix and better claims experience. And so we remain on track to achieve at least 2% margin for Medicare Advantage this year. And that gives us a fair amount of confidence that the strategy is working and has informed how we approach our '27 bids. I maybe take a minute then to go to Stars. It's really still early to comment on the next payment year, and so I wouldn't want to get ahead of the CMS process.

But as you know, Stars remains one of our core enterprise priorities. We've made significant investments that we believe will continue to improve performance over time. We've enhanced our CAHPS infrastructure with AI-powered personalized member engagement, omnichannel outreach and rewards programs. And we've also invested in clinical data interoperability, strengthening provider engagement and expanding programs focusing on closing gaps in care, which is obviously very important.

So while we're not prepared or should not be making predictions about payment year '28 in the future, we feel really good about the trajectory of the business, and we view Stars as a multiyear journey and are executing against that disciplined road map.

Next, we'll go to the line of Jason Cassorla from Guggenheim Securities.

Maybe I just wanted to ask on commercial. You're still tracking to the high end of ASO or fee-based enrollment guidance. You're fairly in line with the employer group risk enrollment expectation. Just is there anything fundamental worth noting about what you're seeing on the commercial enrollment front? And then with trend expected to remain elevated, I guess, how are you balancing pricing versus kind of the trend vendor opportunity for commercial books?

And then lastly, if I could tack on, you've talked about the integrated model resonating. I guess, is there any way you can help frame for us the runway you have for the integrated model opportunity?

Let me ask Morgan Kendrick to address your questions.

Get off mute here for a minute. No, sorry about that. I want to just address your conversation around the market in general. And as I think about it, as you probably can see the bulk of the business is fee-based or self-funded on the commercial side, which consists of both local market activity as well as national accounts, both of which are performing incredibly well right now. I think about our persistency rate and our sale rate based on opportunity, and it's climbing from prior years, which tells me the market is -- our assets are resonating with the market, nonetheless.

And the market is maniacally focused on affordability and simplicity, and that's exactly what the organization is focused on as well. We see that continuing. I think it's going to be a big driver for us continually right now, what I think is really an interesting new fact that's come through is when we think about 2026 was a record year in our national account business. Our pipeline came back almost just as large this year for the '27 business as we had in '26.

And people vote with their feet, as you certainly know. Oddly or not oddly, interestingly, one of our big opportunities this year was customers that left us 2 or 3 years ago in the middle of their contract with an alternative payer have moved back to Anthem. So that's something that says and speaks loudly in my opinion, about the quality of the assets, how the whole organization works together to make health care more affordable and easier to navigate for our consumers.

And then just briefly on the pricing, we are pricing to our forward view of medical cost trend with the discipline needed to support sustainable margins over time.

Thank you. A couple of just, I guess, key takeaways. Hopefully, you heard on commercial. One, affordability and experience really matter, very disciplined pricing, really strong fee-based growth we've seen with our assets resonating. And we continue to consolidate clients, and we continue to win back clients, which I think is a really strong forward view of how the market views us. We have time for one more question.

And for our final question, we'll go to the line of George Hill from Deutsche Bank.

Mark, a simple question and I just want to zoom out. You started to talk about kind of the outlook for '27 broadly. I thought could you just quickly address kind of like where your early expectations and the puts and takes are for '27 fit against the long-term growth algorithm. I imagine you guys will lose less money in Medicaid next year, which will be a good thing and MA will continue to grow. Commercial probably flattish. Carelon's up, capital deployment will be somewhere. We just would love if you could -- whatever you can say kind of broadly sketching out the '27 outlook versus the long-term growth algorithm.

George, thanks very much for the last question here. I was really hoping to get one on Carelon. But let me talk a little bit about financials for a second here. So our confidence in 2027, as Gail mentioned earlier, is really based on the breadth and the durability of our earnings base. It's not based on any one single line of business or one recovery assumption.

And as we look towards next year, we do expect to enter '27 with pretty good visibility across the major drivers of the business. So on Medicaid, certainly, our base case is not that the business remains flat. We do expect performance to improve, especially as rates increasing to reflect cost experience and as our care management actions mature. In Medicare Advantage, certainly, the portfolio actions we took for 2026, they're showing through. Mix is developing favorably. And you heard from Aimee sort of the discipline and intentionality with which they approach the 2027 bid cycle. So we do feel confident there.

You heard from Morgan on Commercial Group, very strong outlook for sales. And certainly, on the individual ACA, you should have confidence that we are pricing and positioning our book of business as consistently for 2027 and as strongly for 2027 as we've done for 2026. And then finally, just on capital deployment, this obviously remains an important contributor to EPS growth over time, and we are executing our capital management very effectively. So key point here just in closing, our path to at least 12% adjusted EPS growth in 2027, broad-based, balanced and grounded in execution across our businesses. Thank you.

Thank you, Mark, and thank you to everyone who joined us on the call today. We're pleased with the strong second quarter performance, and we're encouraged by the progress we're making across Elevance Health. We're raising our '26 adjusted EPS guidance, managing the business with discipline and accelerating targeted investments in medical cost management, member experience, provider connectivity, operating efficiency and Carelon's integrated capabilities. We're confident in the path ahead and committed to creating long-term value for our members, customers, partners and shareholders. Thank you for your interest in Elevance Health, and have a great rest of the week.

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through August 14, 2026. 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.

Okay. Good morning, and welcome to the final day of the Goldman Sachs Healthcare Conference. I'm Scott Fidel. I'm the health care services analyst with Goldman Sachs.

Really pleased to have Elevance Health with us this morning. Elevance is one of the largest health benefits and health services companies in the country. And we've got 2 of the senior leaders with the company today, Mark Kaye and Felicia Norwood. So we're going to have a great conversation.

Just want to say the stakes aren't too high for you guys. The last 2 fireside chat for managed care that we did at the conference, Alignment was only up around 25% and Oscar was only up around 15%. So the market, Felicia, no pressure there. Just kidding, obviously, I'm sure you'll do just as well.

So let's start. We've got a number of great questions for you guys. Mark, I thought maybe kick off to you first. And just want to topically talk about the CMS MA sanctions update there. You did recently receive some favorable news on the CMS MA sanctions 2 weeks ago. Can you discuss the remaining actions you are taking to reach a full resolution from here? Does Elevance now expect that in the most likely scenario, there will be no material impact on MA enrollment or margins if CMS confirms that all required remedies have been addressed and the regulatory review is now resolved?

Scott, good morning, and just a big thank you from both Felicia and I for hosting us at the Goldman Conference today. We're very pleased to be here. We are encouraged by the progress we've made with CMS and the clearer path we now have towards a resolution. We've completed the most significant steps required to date, including submitting the requested data through CMS systems and CMS has notified us that it will not impose intermediate sanctions at this time.

Between now and July 31, the remaining work is largely procedural and technical, providing any additional detailed CMS requests, addressing technical submission items and working through any necessary payment reconciliation. We also made an initial remittance to CMS in late May of approximately $340 million, and that's primarily related to dates of service between 2015 and 2018 and was fully contemplated within the $935 million accrual we recognized in the first quarter, and that remains our current best estimate of the probable exposure associated with this historical matter.

And so to your question, based on what we know today and assuming we complete the remaining process as required, we do not expect any impact of note on Medicare Advantage enrollment, our current margin outlook or our participation in the annual election period this fall.

And then finally, I just want to reinforce an important point that we spoke previously too. This matter really relates to a historical payment dispute involving the interpretation of risk adjustment policy. It doesn't reflect how we operate the business today. And we remain confident in the integrity of our work, our current risk adjustment practices and our compliance framework. Thanks, Scott.

All right. Great. Well, glad we didn't do anything with the model before because now we won't have to change anything now. So that's an encouraging update. So maybe we'll move over to utilization. I'd probably be tarred and feathered by investors if I didn't ask for this question. So just wanted to try to sort of hone in on utilization here and sort of thinking about the second quarter cost trend. Putting together all the pieces of your health benefits business, just are there any callouts that you ought to provide a 2Q trend, either positive or negative? Just any material developments either at the industry or at the company level that would suggest that cost trend is not currently tracking to plan in the second quarter?

I very much appreciate the question. And given how central utilization is to the investor discourse at the moment, I would have been surprised if you didn't ask it.

Let me start with the headline, and then I'll walk through what we're seeing by line of business. As you saw in the 8-K that we filed this morning, the trends that we've observed in April and May reinforce our confidence in the second quarter earnings guidance we previously provided and in our full year benefit expense ratio outlook.

With that, let me take a moment to talk about what we're seeing in each of the businesses so far in the quarter. In Medicare Advantage, performance continues to be favorable to our expectations. and that reflects the deliberate portfolio actions we took for 2026, the composition of the membership we retained and the impact of our care management and navigation programs.

The favorability has been broad-based, and we continue to see strength in our dual eligible membership, where our capabilities are particularly well aligned. In individual ACA, experience is tracking in line to slightly favorable versus our expectations. We feel good about the morbidity of the population relative to how we price the business, but we are staying prudent. And the meaningful shift towards bronze plans will likely push more plan liability into the back half of the year as members move through deductibles and as we continue to monitor lapsation and utilization patterns as the year develops.

In Medicaid, cost trend remains elevated as expected, driven by both utilization and to a lesser degree, acuity, behavioral health, outpatient surgeries, emergency department visits remain areas of high trend.

And that really reinforces why we have maintained a prudent posture in our Medicaid outlook and the business remains on track with our full year margin expectation of approximately minus 1.75%. And then last, employer group performance is also in line with our expectations. The market remains reasonably firm and quite rational. And as we previously noted, we priced this year with a discipline, and we remain focused on providing our integrated medical pharmacy and advocacy solutions to our clients. And so when I put that all together, let me simply conclude by saying we remain encouraged by our positioning this year, and we'll provide greater detail when we provide our second quarter results next month.

Great. Wow, that was more than I was expecting there. So really appreciate all that detail. So just to sort of frame it out, it sounds, in my words, Medicare Advantage seems like trending very favorably. Exchanges coming in moderately favorably in line of moderately favorable, and that's pretty consistent around what we heard from Oscar as well in terms of moderately favorable. It sounds like Medicaid is still the tougher part of the business in terms of some of the cost trends and then commercial, where the industry and Elevance has pricing discipline, the pricing is tracking to a still continued robust consumption environment. Is that a fair way of sort of framing things you think or...

I appreciate the additional superlative that you may have added in there. But I think the gist of the comments is correct.

Okay. Perfect. Thank you. Okay. Let's try to get -- sort of translate that overview of the core earnings power. And the first quarter was driven by stronger underlying claims, ACA timing and then a meaningful nonrecurring investment gain. How should we think about the underlying earnings power of the business coming out of the first quarter? And what are the specific P&L drivers that provide you with confidence that the core 2026 trajectory supports your 2027 EPS growth framework of 12% plus?

Scott, that's an excellent question. So I'd say, overall, our first quarter reinforced our confidence in the earnings path ahead. And that's why we reiterated our expectation to return to at least 12% adjusted EPS growth in 2027 off of our ending earnings baseline this year. We view 2026 as a year of repositioning and execution. In health benefits, we are focused on the actions that strengthen the earnings base, disciplined pricing, tighter medical management, stronger payment integrity, better care coordination and really just continued progress towards a more sustainable performance delivery in ACA and Medicare Advantage. And those actions are already underway, and we expect them to contribute more fully as we move into 2027.

Carelon continues to be an important source of growth. And the combination of our clinical expertise and data allows us to create a more personalized set of interventions as well as improve the cost and quality of care. And this supports both the performance of our health benefits business and continued external growth. Importantly, the value of Carelon is not just growth in isolation. It also strengthens health benefits by helping us identify needs earlier, intervene more effectively and really just manage costs with better data and clinical capabilities. We also see meaningful opportunities to create leverage through technology, automation and AI. And we are applying those capabilities in practical areas such as in provider workflows and member services where they can really improve execution and support margin expansion over time. And then finally, disciplined capital deployment remains an important part of our EPS growth framework. Our cash flow generation does give us the flexibility to keep investing in the business while returning capital to shareholders in a very disciplined way.

And so in summary, I'd simply say our confidence in returning to at least 12% adjusted EPS growth in 2027 is supported by a solid 2026 earnings baseline and then multiple operational levers that are already in motion.

Great. All right. Thank you, Mark. Felicia, let's try to get you in the conversation here as well. And let's -- why don't we go right to Medicaid and pick up on some of the comments that Mark just started with.

And then also, let's maybe frame it in that concept of 2026 is trough. And Elevance has described 2026 as the trough year for Medicaid margins. What are the specific inputs that make you fully confident in the outlook for Medicaid margins to improve in '27 and beyond. And if you're not fully confident, what are the specific milestones from a rate and cost perspective for that to prove true that you would like to see to occur to achieve full confidence on 2027 Medicaid margin expansion?

So thanks for that question, Scott. As Mark said and as you mentioned, we expect 2026 to be our trough year in terms of our margin. And our early experience this year certainly leads us to believe, and we still believe that our outlook will have negative 1.75% margins for '26.

That means we head into '27 and how do we think about 2027. When we think about 2027, we are focused on a couple of things. First and foremost, our clinical management, we have to do greater care coordination and then certainly leveraging predictive analytics to help us think about our business in a very different and trend-specific way at a local market level.

A great example is that when we take a look at claims that we're seeing, we saw a spike recently in ER claims. And when we saw that spike in ER claims, 70% of those claims were around same-day discharge when at the end of the day, they were deemed critical care. So if it's critical care and you're talking about same-day discharge, no observation or overnight stay, it certainly lets us know that we're seeing some things from a claims perspective that we need to dig deeper in. And sure enough, the analytics gave us the ability to go in, drill deep and understand what was happening there from a performance perspective.

So I will say that the analytics becomes an incredibly important ingredient for us as we think about those trends as we go forward. So when you step back and we say, how do you get prepared for 2027, it's around 3 things. It always starts with rate advocacy. And at the end of the day, we're seeing more recent trends being priced into the rates as we move forward. So that 2025 experience, 2026 experience coming into the rates.

The second thing, I will say that the incremental acuity impacts are less severe. Where we are today, we have the post PHE behind us. And everything that we're seeing so far that severity of acuity is really getting tighter versus what we saw as we came out of the PHE.

And finally, it's around execution with respect to cost management. That's execution with respect to all of those trend drivers that we are looking at. That includes our behavioral health trends, our emergency department trends, trends that we're seeing in specialty pharmacy. Execution on that becomes critical. So it's really 3 levers that we have to be very focused on as we head into 2027. And when we step back and take a look at it, I think we're getting a very good handle on all of those. And we still believe that this is a very strong business for us as we look forward as you put into play all of those factors to really compel the changes that we need to see from a margin perspective.

That first point you made was interesting as well, just as we're always trying to hear about some of these new sort of emerging anecdotes around different things going on with coding and with submissions and with AI and providers and hospitals potentially using that. Do you think that, that may have been something that sort of could have been sort of fallen into that AI type of deployment around that? Or is it hard to parse that out?

At the end of the day, we're very much aware that our providers are using AI, and we have to use AI as well. I think the analytics are going to allow us to really get ahead of emerging trends and being able to identify things earlier so that we can take actions appropriately.

So at the end of the day, it's really powered, I think, our ability as well as providers' ability to take a look at what's going on. But when you see a pattern like that, think about it, 70% deemed critical care but there is no overnight stay and no observation. It gives us certainly the ability to then understand that we need to revise our protocols and put in place the appropriate things to make sure that we are mitigating those kinds of drivers as we go forward.

Yes. Got it. Yes, that's a really interesting real-time call-out there for that. So I appreciate that. I wanted to maybe sort of think about the current sort of description of the environment and then '27 and then thinking about it in the context of the big and beautiful bill coming out and the provisions there going into effect on the forward.

And the question would be how you're balancing your views on 2026 and that being a trough year for Medicaid. Obviously, a trough year at a pretty -- margins are pretty tough. But then thinking about the policy headwinds coming to the market over the next really more 3 years. And particularly what we're really focused on would be the Medicaid state-directed payment reforms and the proposal that came out and then also the Medicaid work requirements as well.

Good question. We certainly appreciate the uncertainty that surrounds the policy changes that we're going to be seeing. But when we step back and take a look at what we know now, we now have as of June 1, the federal framework from CMS.

But what that framework does is provide the foundation for what we should expect with respect to the policy changes. States were left with a lot of flexibility. And I think that as we sit here today, we are still waiting to hear more from our state partners around implementation. But the flexibilities there lead us to believe that the assumptions that we had made around what would happen with respect to the specific policy changes, particularly the work requirements as well as the 6-month reverifications are going to be aligned with the assumptions that we made as we were working to think about 2027.

The states also give flexibility with respect to allowing individuals to do self-attestation, for example, in the first year. So that could certainly mitigate the impact of what we would expect to see. So we're going to be working closely with our state partners. As you know, we will not have the same flexibilities that we had before, but we still have the flexibility to do outreach, help educate members around what this means. And at the end of the day, the requirements and policy changes will only apply for the most part to the expansion population. That only represents about 20% of our book.

So when we think about the overall impact of the changes that are going to be coming, they're going to be phased. They will be state-specific. And at the end of the day, I think they're going to be very manageable.

Great. Yes, we actually had some of the senior CMS representatives here yesterday, and they were emphasizing that same part about the phasing. And not just even in 3 years that a lot of the phasing takes up to 10 years, I guess, to fully play out. And I appreciate the call-out too, on the Medicaid expansion mix.

And I will say also on the state-directed payments. Obviously, that will be a change that happens later in the process. But at the end of the day, states are going to have to step back recalibrate rates, take a look at benefits and program design to make sure that going forward, you end up with a program that is actuarially sound and stable as we all move forward, and we're going to look forward to working with our states on that.

Yes. Yes. That's -- this is going to be a real, I think, just a moment for the states to -- it's going to be a moment to step back and sort of evaluate Medicaid and the financing and the structure on the forward. So certainly, it's going to be interesting times.

All right. So maybe just one more question on Medicaid and just go right to what investors care so much about, which is that rate versus cost sort of cost-trend gap and the spread. And so in terms of the numbers, Elevance has described that Medicaid rates are coming in around the mid-single-digit range, which historically is a pretty -- I mean, I'm covering this space, you've been in a long time, too. That's historically healthy number, but still remains below cost trend. So how should investors think about the path to closing that gap, especially with a meaningful portion of the book resetting soon in July?

First of all, I will say, as I always do, we can't just look at the one lever around rates. I mean it has to be all of the other things that I just referenced in terms of rates, medical cost management and a more stable risk pool. But on the rate issue, 40% of our membership has a July renewal. So we are in the thick of a lot of the renewals that are coming from our states. And I have to say, once again, we see it a lot. The rate discussions have been very constructive, and they are coming in right in line with our expectations and slightly better. We have a little bit more work to do with our states that firm up July and a couple of those are outstanding, but they are in line with the expectations with respect to the rating environment.

Still not where we need to be in terms of the full gap closure. But as I said before, a more recent experience coming into play by virtue of the '25 experience that we're now seeing in the rates. So that's incredibly helpful.

But we also have to be very focused on the things that I referenced around medical cost management, particularly around the trends that we're seeing in emergency use, outpatient surgeries, behavioral health interventions and equally important, things that we'll need to focus on with respect to payment integrity. So the environment is going to continue to be very dynamic. I am starting to see and we are starting to see traction around the programs that we are put in place, as I said before, between analytics and our cost management tools and the work that we continue to do with Carelon. But the rates are in line with expectations, and we continue to make progress with our states in terms of closing that rate to trend gap.

Okay. Why don't we move over to commercial and looking forward to this actually, this is the first time I think we'll be talking to you about commercial, which is now part of your portfolio. So looking forward to your perspectives on that.

So maybe we'll talk about the 2027 given where we are right now and perfect timing in terms of selling season and demand. And so far, the company has described a strong 2027 pipeline with continued employer focus on affordability, simplicity and integrated offerings. What seems most differentiated in the current selling season, 2027, relative to prior years?

So we are right in the midst of that 2027 selling season right now. And frankly, affordability and simplicity are still at the top of the list from an overall employer perspective. We're seeing a robust year, a pipeline that has over 2 million members and the second Blue bid actually even expands that opportunity. But when we think about the things that are valuable to our employers, it still remains affordability and simplicity. We've had very strong performance from a national account selling perspective. Over the last 5 years, we've had 40 customers who have made Anthem, their sole-source carrier. So some very solid results there. And we continue to have a very strong value proposition in terms of our integrated medical and CarelonRx offerings, which has been very powerful for us. So as we think about 2027, we've seen some really nice early wins, and we expect that momentum to continue throughout the selling season.

All right. Great. So many businesses, so little time. So let's -- we'll move on to MA, and I don't want to sort of talk about what already you've updated us about. But I do want to go right at sort of the margins, the margin recovery and how things are progressing there. Certainly appears from the updates that you gave today that -- and Mark, we'll get you back into the conversation here. It appears like Elevance remains on track for at least a 2% margin in '26 following the product reposition and the selective market exits. How much of the recovery is now embedded in the book based on the actions that were implemented for the 2026 AEP versus being dependent on execution on incremental initiatives for the rest of this year?

Yes. Super question, Scott. And I think about the Medicare Advantage margin recovery really in 2 parts. The structural actions that are already embedded in the 2026 book and the execution initiatives that build on that foundation over the balance of the year. The structural component is quite meaningful. Over the last several years and particularly in our 2026 bid and AEP strategy, we deliberately prioritized margin sustainability over membership growth. We repositioned the portfolio. We exited select markets and plans where the economics were not attractive, and we really focused our resources on products where we see the strongest long-term value, particularly D-SNP and HMO.

And that repositioning is now largely reflected in the membership mix and benefit design of the 2026 book, and it's a key reason we remain confident in achieving at least a 2% Medicare Advantage operating margin in 2026. At the same time, as you know, the recovery is not simply a onetime portfolio action. We still have important execution work underway around clinical programs, around care navigation, around pharmacy management. And that really allows us to continue to deliver throughout the year. And so the way I frame it really is this 2026 portfolio actions created the foundation for margin recovery. Ongoing execution is really what sustains and extends that progress. And so I think we feel very good as a management team about the stability we've created in that core portfolio, and we are well on our way to improving affordability and trend management as we progress towards our 3% to 5% long-term Medicare margin target.

Great. All right. Thanks, Mark. All right. Why don't we try to get maybe a question on the exchanges. And then certainly, you want to get some time here from Carelon as well, of course. So I think maybe, Felicia, Mark, we could sort of get you both just to sort of come in here. And maybe start, Felicia, with you. Just starting with now that we're sort of completed the post effectuations, the grace periods, how the underlying risk profile of the book compares to expectations.

And then, Mark, maybe if you want to come in afterwards, just to comment around the bronze mix shift, which you already just highlighted. And maybe just talk about around the -- how investors should think about the economics around that in terms of the -- particularly with some of the shifting of seasonality to the back half of the year.

Yes. I will say that, as Mark mentioned earlier, things are in line with expectations in terms of the performance in the exchange business. As we sit here today, membership is -- probably will end the quarter right around 1.2 million members. And we expect, as we said before, to end the year right around 900,000 members at least in the business.

But we had very strong [indiscernible] that we expected to see and certainly a very dynamic environment from an overall ACA perspective. But as we sit here today, the business is performing very much in line, slightly favorable to our expectations.

And to your point, Scott, just following up on Felicia's comments, we did see a meaningful shift towards bronze plans in 2026. with Bronze now representing about half of our ACA membership versus roughly 1/3 ago -- 1/3 a year ago. And we do view that as a pretty encouraging sign of market resilience.

In many cases, consumers appear to be choosing to maintain coverage by -- rather than exiting the market altogether. That mix shift, to your question, does affect the timing of earnings in 2026. Bronze members typically have higher member cost sharing. So plan paid medical costs tend to emerge later in the year as members move through the deductible period. And that dynamic certainly helps first quarter seasonality, but it also means a portion of the expected medical cost is likely to be deferred into the back half of the year.

And we've anticipated that pattern, and we've incorporated that pattern into our outlook. And then briefly, longer term, -- the key question is really whether the market stabilizes around coverage that consumers can afford and carry prices -- and carriers can price too sustainably. And we think Bronze or the shift to Bronze is very consistent with that direction, and we'll continue to monitor retention and utilization and maintain that discipline within our ACA business performance.

All right. Great. Well, I think we had a pretty thorough discussion there on the benefits business. So that was great. So I wish we had as much time to do Carelon, but let's try to get right over there as quickly as we can.

So Mark, maybe we'll sort of think about from the earnings path, right? Obviously, we all care about that. So Carelon remains a key long-term growth driver for the company. Near-term results still reflect [indiscernible] earnings cadence as some of the newer risk-based programs, how should investors think about the path to more visible earnings contributions from Carelon over the next 1 to 2 years?

Carelon's strategy is to address complex high-cost areas of health care through a whole health model that integrates medical, pharmacy, behavioral and home health capabilities. The objective is pretty straightforward. It's about improving outcomes, lowering the cost of care and creating a simpler experience for our members, our providers and our clients. We are investing behind the capabilities that make that model scalable and durable. And those investments are really intended to help us identify member needs earlier to be able to intervene more effectively and really to deliver measurable value both for our health benefits business and for external clients.

Near term, Carelon's earnings cadence really reflects 2 dynamics. We are continuing to invest in the platform, and we're scaling newer risk-based programs that naturally take time to mature.

But this is not simply about adding assets. We are building repeatable capabilities that can be proven inside our health benefits business first and then scaled externally where we have demonstrated outcomes. On Carelon Services side, briefly, we are seeing tangible proof points through our oncology-based programs and CareBridge's home health-based capabilities.

And then in CarelonRx, we're continuing to see meaningful runway to expand employer penetration. Clients that are aligned with medical and pharmacy benefits are seeing savings up to $100 per member per month, supported by fewer emergency room visits and reduction in high-cost specialty drug administration. So I certainly appreciate the investment phase can create some unevenness in quarterly earnings, but we do expect Carelon's earning contribution to become increasingly visible as the programs mature over time.

Great. There's 2 sort of key themes that I want to maybe sort of tie in together to get both of you to comment and just on the consideration of the time here as well.

So one would be, maybe, Mark, just sort of you could continue on that risk-based sort of expansion. That's something that I've -- we've focused a bit on our research, and we've talked to you guys about quite a bit. And just given the backdrop of, obviously, the environment around consumption and some of the programs that you've been focusing on there with oncology and post-acute behavioral.

Maybe if you want to -- you just mentioned that proof point, but just sort of more generally, even as well, just sort of give us an update on how those programs are coming in relative to your expectations as you've been scaling them and sort of keeping in mind that they could add to the volatility of the profile. And then, Felicia, maybe as well, we can get you to come in and sort of bring the bigger picture up around thinking about the integrated value proposition. that Elevance has spoken to from aligning the medical and pharmacy relationships and having that combined health plan plus Carelon model.

Scott, super question. There are probably a couple embedded in there. Let me go ahead and start off by just saying that it's important to understand why we are expanding risk-based capabilities. And members with complex chronic conditions often experience a very fragmented health care system. And Carelon is designed to make that experience more coordinated, more convenient and really more effective while lowering the total cost of care. The important proof points are clinical outcomes, cost outcomes and disciplined risk selection.

So maybe briefly, first on the clinical outcomes. We are seeing that stronger member engagement can translate to better health and lower avoidable utilization. And the example I'll give here is really around serious mental illness. Our teams have driven a bit higher medication adherence, and that's leading to a 10% reduction in inpatient admissions through more effective member engagement. And the second example I'll give here is on cost outcomes. CareBridge is a great example of how the model can scale. We are giving members 24/7 access to a clinical team that helps guide them to the right care at the right time and most importantly, the right setting, and that's generated mid-teens medical cost savings over multiple payer relationships. And maybe with the time, let me turn it over to Felicia for a moment.

No, I'll just piggyback a little bit on Mark's reference to CareBridge, which I think is a real powerful example of the integration coming together. Frankly, when we brought CareBridge into the organization, the focus was really on Medicaid. But one of the things that we've done recently is to move CareBridge to our D-SNP population. As Mark mentioned earlier, D-SNP is where we have our focus from a Medicare Advantage perspective, where we're going to have our growth. And these individuals, that dual population typically can have some of the most fragmented care when you're doing point solutions.

So having CareBridge work collaboratively on -- with our teams to bring together the medical, the specialty pharmacy, home-based solutions to our members that are very complex conditions represent a great opportunity for us. And that alignment between Carelon and the health benefits team, I think, can drive not only powerful savings, but much better outcomes and care for some of our most vulnerable members. So a real opportunity there to do more.

Great. Well, that 35 minutes went really fast. I could have had you guys up there for another 350 minutes, but I'm not sure if I would have been allowed at stage that long. So -- but that was a great conversation.

Again, thank you so much for coming to the conference and hope that the day is productive for you. Thanks a lot.

Thank you, Scott.

Good morning, ladies and gentlemen. This is Ramey Peru, Chair of the Board. Welcome to the Elevance Health 2026 Annual Meeting of Shareholders. I will preside as Chair of today's meeting. The meeting is called to order and voting is open through the meeting website. Shareholders of record and their proxy holders can vote online during the formal meeting by clicking on the Q&A icon on the meeting website. After the formal meeting, Gail Boudreaux, President and CEO, will provide a business update, followed by a question-and-answer session. Joining online are our other directors as well as several key Elevance Health executives and representatives from Ernst & Young, our independent auditors. I will now ask Kathy Kiefer, Corporate Secretary, to proceed with the meeting agenda.

Thank you, Ramey. The agenda and rules of conduct and procedures for the meeting and question-and-answer session are posted on the meeting website. To conduct an orderly meeting, we ask that you abide by these rules. Pursuant to the rules, the only matters to be acted upon by the shareholders during this meeting are set forth in the agenda. Alisa Zagare and [ Katherine Reyes ] from Computershare have been appointed to act as Inspector of Election for the matters to be voted on during today's meeting.

I will file the oath of office of the Inspector of Election with the minutes of the meeting. A complete list of our shareholders of record is available for review on the meeting website. Most shareholders have already voted by proxy and proxy votes have been tallied. If you have already voted, no further action is required. If you have not yet voted, you may do so by clicking the Vote icon on the meeting website.

The Inspector of Elections has reported that a majority of the outstanding shares entitled to vote are present today, either virtually or by proxy, and therefore, a quorum is present for purposes of conducting the business of the meeting. As described in the proxy, there are 4 items to be voted on during this meeting. The first proposal is the election of directors Gail Boudreaux, Robert Dixon and Deanna Strable, each to hold office until the 2029 Annual Meeting of Shareholders and to hold office until their successors are elected and qualified. The Board recommends a vote for each of the director nominees.

The second proposal is an advisory vote on the compensation of our company's named executive officers or the Say-on-Pay vote. The Board recommends approval of this proposal. The third proposal is to vote on ratification of the appointment of Ernst & Young as our company's independent registered public accounting firm for 2026. The Board recommends approval of this proposal. The fourth item is to vote on a shareholder proposal requesting an independent study on the impact of prohibiting corporate contributions to partisan 527 tax-exempt political groups.

Mr. Jonas Kron with Trillium Asset Management will present the proposal. Mr. Kron, you have 3 minutes to present the proposal.

Good morning. My name is Jonas Kron, and I am pleased to move Item 4, Trillium Asset Management's shareholder proposal, which asks the Board to commission an independent study evaluating the impact of adopting a policy that would prohibit corporate contributions to partisan 527 political organizations. First, let me emphasize what the proposal does not do. It does not ask Elevance to change its political spending policy. It does not ask the company to stop making political contributions. It does not ask the company to disengage from the public policy process.

It simply asks for a study, a responsible step to help shareholders assess whether a narrow category of spending is beneficial to the company. The reason is straightforward. Elevance cannot demonstrate that its contributions to partisan 527s provide measurable value to the company or its shareholders. In 2024, the company spent $1.6 million, nearly half its total political contributions on these partisan political organizations. And yet, the company does not appear to track whether these contributions improve access to policymakers, create better policy outcomes or deliver any tangible benefits.

Partisan 527s are unique. They aggregate funds and distribute them to partisan candidates and partisan political efforts, and Elevance does not control who ultimately benefits. That creates a risk of supporting positions or candidates that conflict with Elevance's stated goals and alienating employees, customers and shareholders who are politically diverse. The company argues that it has policies, governance and disclosures in place. But those processes do not answer the central question raised by the proposal. Are Partisan 527 contributions beneficial to Elevance? Do they improve outcomes? Are they worth the reputational risks they may create?

Oversight and disclosure are important, but they are not substitutes for effectiveness evaluation. Governance processes tell us how decisions are made, not whether those decisions produce value or expose the company to unnecessary risks. The problem with Elevance's position is that it is an assumption made without the very data this study would produce. Given the size of these contributions and the absence of any demonstrated return on that investment, an independent study is a prudent next step. It will give the Board and shareholders objective information to assess alignment with Elevance's long-term interests.

In conclusion, I urge shareholders to vote for this proposal because it is limited in scope, modest in cost, focused on transparency and efficacy and designed to strengthen the company's ability to make informed political spending decisions. Thank you.

Thank you, Mr. Kron. The Board recommends a vote against this proposal. That concludes the matters to be voted on during this meeting, and the polls will be closed shortly. I'll turn it back to you, Ramey.

[Voting]

Thank you. The polls are now closed. According to the preliminary report provided by the inspector of election, the director nominees have been elected. The executive compensation has received advisory approval. E&Y has been ratified, and the shareholder proposal requesting an independent study on the impact of prohibiting corporate contributions to partisan 527 tax-exempt political groups did not pass.

We will provide the final voting results in a Form 8-K filed with the SEC. The formal meeting is adjourned, and the window to submit questions is now closed. Gail will now provide a brief business update, followed by a question-and-answer session. Kathy, please review the rules for this session.

We may make forward-looking statements during this session, and actual results may differ materially from these statements. You should refer to our periodic SEC filings for the risk factors related to our business that could cause actual results to differ materially from those forward-looking statements. As mentioned earlier, the rules of conduct and procedures will apply during this Q&A session. Now I'll turn it over to Gail.

Good morning, and thank you for joining us for Elevance Health's Annual Shareholder Meeting. Thank you for your continued trust and investment in our company. Your support helps us advance our purpose to improve the health of humanity. In 2025, we delivered solid performance in a dynamic and challenging environment. We generated $197.6 billion in operating revenue, up 13% from the prior year. We delivered $7.2 billion in operating gain, and we returned $4.1 billion to shareholders through dividends and share repurchases, while ending the year with 45.2 million medical members.

These results reflect the strength of our strategy, the discipline of our execution and the value of our diversified model. Over the course of the year, we took deliberate actions to improve operational efficiency, address cost-of-care pressures and maintain expense discipline and margin stability. At the same time, we continue to invest for long-term growth across both health benefits and Carelon. Carelon, our health services platform, delivered approximately 33% growth in operating revenue and 17% growth in operating gain year-over-year.

That performance reflects the value of our integrated capabilities and the growing demand for more connected care. It was supported by expansion in risk-based services, contributions from acquisitions and continued growth in Carelon Rx. We also made meaningful progress on quality. Today, 59% of our Medicare Advantage members are in 4-plus Star plans, up from 40% from a year ago. Just as important, we stayed focused on making the health care experience simpler for the people we serve. Since 2024, we have removed prior authorization requirements from more than 400 services, while maintaining human oversight in decision-making.

We've continued to reduce friction, simplify processes and improve the experience for members and care providers. As we look ahead, the need for that work is only increasing. Health care remains costly and complex and expectations from members, employers, care providers and policymakers continue to rise. That is why we are focused on what matters most, lowering the cost of health care, making the system easier to navigate and improving health outcomes. We are advancing our whole health approach by integrating physical, behavioral, pharmacy and social care in a more connected model.

We're acting earlier and faster using real-time data and predictive analytics to guide people to the right care at the right time in the right setting. We're simplifying the experience by reducing administrative burden and strengthening digital tools so care is easier to access and understand. And we're continuing to expand value-based care, aligning incentives to quality and outcomes, not volume. In 2026, we're sharpening execution in 3 areas. First, we're prioritizing initiatives that deliver measurable impact on cost, quality and experience, while keeping our members at the center of every decision. Second, we're simplifying how work gets done, reducing complexity, increasing speed and strengthening accountability. And third, we're operating as a more integrated technology-enabled health partner, including scaling AI responsibly across our operations to improve engagement, manage medical costs and support better outcomes.

None of this happens without our people and our culture. Through our Enterprise Skills Academy, more than 85% of associates are developing new skills, especially in data, digital capabilities and responsible AI. We were also proud to be recognized as a Great Place to Work and named to Fortune's 100 Best Companies to Work For list for the sixth consecutive year. Those recognitions reflect a culture grounded in purpose, accountability and continuous improvement.

We also benefit from a strong and engaged Board of Directors, whose experience and oversight support a disciplined long-term value creation. Ramey Peru became our Independent Chair last year, and his leadership made an immediate impact. Over the past year, we also welcomed Amy Schulman and Steve Collis to the Board, bringing valuable additional expertise. And we are grateful to Kerry Clark for his dedicated service and many contributions, as he retires from the Board.

We remain confident in our path forward. In a complex environment, we are committed to delivering meaningful, measurable results for our members and communities, care providers, customers and shareholders. Together, as One Elevance Health, we are building a lower cost, more connected and more effective health care system and creating long-term value. Thank you again for your continued support and for being part of Elevance Health's journey.

Thank you, Gail. It is now time for the question-and-answer session. At this time, there are no questions. Thank you for attending the Elevance Health Annual Shareholder Meeting. Have a nice day.

That concludes the meeting. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the conference over to the company's management. Please go ahead.

Good morning, and welcome to Elevance Health's First Quarter 2026 Earnings Conference Call. My name is Nathan Rich, Vice President of Investor Relations. With us on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Felicia Norwood, our Chief Health Benefits Officer; Morgan Kendrick, President of our Commercial Health Benefits business; and Aimee Dailey, President of our Government Health Benefits business.

Gail will open the call by highlighting our first quarter performance and the actions we are taking to advance our strategic priorities. Mark will then discuss our financial results and revised 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.

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.

Good morning, and thank you for joining us. Health care is undergoing significant transformation, and it requires us to operate with greater speed, precision and connectivity. Costs are rising, expectations are rising, and both member and care providers want a simpler, more integrated experience.

At Elevance Health, our strategy remains clear: lower the cost of health care and simplify how people navigate the system. What is evolving is how we execute. We are operating with greater alignment, accountability and clarity across the enterprise, and that progress is showing up in our results. In the first quarter, our performance exceeded expectations, driven by underlying business strength, along with ACA seasonality and nonrecurring investment income. While it is still early in the year, the trends we are seeing give us increased confidence in the trajectory of the business. That is why we are raising our full year adjusted diluted earnings per share guidance to at least $26.75.

Our outlook remains grounded in prudent, achievable assumptions with clear visibility into the key drivers of performance, supported by improving claims experience. We are advancing our strategy in several focused ways. First, we've realigned our leadership structure to strengthen coordination between health benefits and Carelon. We have streamlined accountability, aligned core functions more closely to the business and brought decision-making closer to where the work is done. Those changes are designed to sharpen execution and create greater alignment across the enterprise.

Second, we are embedding and scaling AI across clinical, operational and administrative workflows where it can have direct measurable impact, and we are already seeing tangible results. These capabilities are improving how we engage members and how we manage costs. They are enabling earlier, more personalized interventions, strengthening decision-making through predictive analytics and reducing administrative expense through automation. Together, these are driving greater efficiency and supporting more consistent performance over time.

Third, we are transforming how care is delivered through Carelon by advancing our integrated whole health approach. By combining CareBridge and our [ Care at Home ] capabilities into a single risk-based solution, we are driving higher engagement and stronger clinical outcomes. These programs have reduced hospital readmission by 20% and generated more than 10% savings on post-acute care, supported by integrated pharmacy, specialty care and behavioral health. We continue to see strong demand for Carelon's capabilities, reinforcing its role as a driver of current performance and long-term growth.

Let me turn to our first quarter performance. In Medicaid, we are seeing early evidence that our actions are lowering costs, particularly in behavioral health and specialty pharmacy. That progress is being driven by more targeted, proactive interventions that allow us to engage earlier, coordinate care more effectively and support members in the most appropriate settings. We are addressing rapid growth in ABA therapy through rigorous clinical oversight, and we're using predictive analytics to identify members at risk of substance use disorder before adverse events occur.

In Medicare Advantage, the steps we have taken to reposition the business are driving improved performance, and we remain on track to achieve an operating margin of at least 2% in 2026. We were also encouraged to see CMS address a portion of the funding challenges in the final rates for 2027. As we prepare for bid submissions, we will remain disciplined and continue to prioritize plans that deliver long-term value while supporting progress toward our financial objectives.

Regarding the notice we received from CMS in February related to historical risk adjustment data, we are engaging constructively with the agency and making steady progress toward resolution. We stand firmly behind the integrity of our risk adjustment program, supported by rigorous oversight and governance. Importantly, this matter does not affect our outlook or how we serve our members, and it does not change how we are managing the business or our expectations for performance.

In commercial, we maintained a disciplined pricing approach for 2026 to ensure appropriate returns and our first quarter performance reflects that focus.

As we look ahead to 2027 selling season, we are seeing strong employer interest, supported by a robust pipeline and early wins. Our integrated medical and pharmacy capabilities continue to resonate in the market. In Individual ACA, we are seeing modestly stronger retention, particularly in bronze tier plans where affordability remains critical. First quarter results reflect pronounced seasonality given product mix and the business remains on track toward a more sustainable financial profile.

In Carelon, our risk-based solutions are delivering measurable value. Using AI and advanced analytics, we are identifying high-risk members earlier and engaging them through coordinated whole-person care. That is driving higher medication adherence, fewer emergency room visits and lower hospital readmissions, and it continues to support strong demand for our capabilities.

In summary, we are executing our strategy with discipline and clarity. Our actions are translating into measurable results, improving affordability, simplifying the health care experience and strengthening financial performance. We are building momentum, and we are seeing that translate into more consistent performance across our businesses with strong visibility into the drivers of our results.

Elevance Health was recently named to Fortune's 100 Best Companies to Work For list for the sixth consecutive year. We view that as a reflection of the strength of our culture and our people and an important foundation as we improve execution and build greater consistency in our results.

As we look ahead, we remain confident in our ability to deliver at least 12% adjusted EPS growth in 2027. Before I close, I want to recognize and thank our associates. Their commitment, resilience and sense of purpose drive our progress, supporting our members, partnering with care providers and advancing our mission every day.

With that, I will turn the call over to Mark to review our first quarter financial results and updated outlook.

Thank you, Gail, and good morning, everyone. Elevance Health reported first quarter adjusted diluted earnings per share of $12.58, which exceeded our expectations. The strength in our operating results reflected favorable claims experience and seasonality in our Individual ACA business. In addition, we recognized approximately $1 per share from nonrecurring valuation adjustments within net investment income. We are raising our full year 2026 adjusted diluted earnings per share guidance to at least $26.75 based on our first quarter results, and we view the assumptions embedded in our outlook as appropriate and supported by current operating trends. Our confidence reflects the actions we are taking to manage cost trend and maintain expense discipline.

Further, we are investing to scale AI across our enterprise, which will enable earlier identification of a member's health needs, guide them to more effective and affordable care and reduce administrative complexity, strengthening both outcomes and long-term performance. In 2027, we expect to return to at least 12% adjusted EPS growth off of our revised 2026 earnings baseline of $25.75.

Turning to our first quarter results. We ended March with 45.4 million members, an increase of nearly 200,000 from year-end, driven by growth in our commercial fee-based membership and higher enrollment in Individual ACA. This was partly offset by anticipated declines in Medicare Advantage, Employer Group Risk and Medicaid.

Operating revenue totaled $49.5 billion, up 1.5% year-over-year as higher premium yields were largely offset by lower health plan membership compared with the prior year. Our consolidated benefit expense ratio was 86.8%. Medical costs were modestly better than we had assumed in our outlook, reflecting both favorable claims experience and the impact from actions we have taken to manage trend. These collectively contributed approximately 2/3 of our operating outperformance in the quarter. The remaining 1/3 reflected seasonality in our Individual ACA business associated with higher membership in our bronze plans, which have benefit designs that typically defer a greater portion of planned costs into the second half of the year.

Our adjusted operating expense ratio was 10.5%, an improvement of 20 basis points year-over-year. While we continue to manage costs thoughtfully, the focused investments we're making in artificial intelligence and Carelon's clinical capabilities will improve how we operate, strengthen our earnings power and better position the enterprise for long-term growth.

Before discussing our performance in greater detail, I want to briefly highlight 2 items recorded in the quarter that were excluded from adjusted earnings. First, we have initiated steps to submit risk adjustment data related to historical periods to CMS and are following the process established by the agency to bring this matter to resolution. We recorded an accrual of $935 million, representing our current best estimate of the identified potential exposure based on the information available today. While the final amount will be determined through the resolution process, we believe our accrual appropriately reflects this matter.

Second, we recorded a $129 million charge related to business optimization. This reflects ongoing actions to simplify organizational structures and support accelerated decision-making.

Turning now to our businesses. Medicaid performance was slightly favorable to our expectations, benefiting from progress on the initiatives we have implemented to manage costs. We remain confident in our full year operating margin outlook of approximately negative 1.75% as our guidance maintains a prudent stance towards rate adequacy and trend development over the remainder of the year.

In Medicare, results were stronger than we anticipated, reflecting the impact of the portfolio actions we took for 2026. Those actions, including product repositioning and selective market exits, support improved performance, and we remain on track to achieve an operating margin of at least 2% this year.

Commercial Group developed as planned, consistent with the pricing discipline we outlined last quarter. As employers focus on lowering health care costs, we are seeing stronger demand for our integrated whole health clinical programs and patient advocacy solutions.

Individual ACA membership grew sequentially in the first quarter with a meaningful portion of the growth driven by our 2025 expansion states and more consumers selecting plan options at the bronze [ mental ] level. Our current view of membership effectuation indicates that we are on track to end the second quarter with approximately 1.2 million members ahead of our initial outlook. However, given the unique market dynamics this year and a significant shift in product mix, it is still early to revise our full year outlook to at least 900,000 members.

Carelon's first quarter operating gain declined modestly from the prior year, reflecting lower health plan membership and continued investment in the expansion of our risk-based capabilities, partially offset by improvement in specialty pharmacy and CareBridge. These dynamics are consistent with how we are evolving the business, and we remain focused on advancing performance over time. Carelon is an important contributor to our enterprise performance and a key driver of our long-term growth strategy.

Now moving to the balance sheet and operating cash flow. Days in claims payable were 46.6 days, an increase of 5.3 days sequentially. Operating cash flow was $4.3 billion in the quarter, and we continue to expect full year operating cash flow of at least $5.5 billion, inclusive of potential cash payments related to the CMS matter.

In the quarter, we repurchased 3.7 million shares for $1.1 billion at an average price of just over $300 per share. Our capital deployment priorities reflect confidence in the durability of our business and its long-term earnings power, and we remain on track for at least $2.3 billion of share repurchases in 2026.

We are pleased with the strong start to the year and are confident in our full year outlook. Beyond the update to our 2026 earnings per share guidance, the principal operating elements of the framework we provided last quarter remain appropriate. With respect to seasonality, our expectations for the second quarter are largely unchanged, and we anticipate our second quarter earnings per share to be approximately 23% of our revised full year guidance.

With that, operator, please open the line for questions.

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

Maybe just we're well into the PBM selling season for 2027. And I guess we're gearing up for the commercial employer market selling season. Are you hearing anything different in terms of the amount of activity that you're seeing out there and the types of priorities that our employers are putting on engaging, anything they're emphasizing given AI, given a little uncertainty in the economy that you would call out that's different this year as we begin to move into the selling season?

Thanks for the question, A.J. And I think it's a great one to start the call. Let me start with the commercial selling season, and then I'll ask Mark to comment on the PBM. But in terms of the national account season, in particular, where we see early, I think, early interest by employers, as I think I shared in my remarks, we're off to a really strong start. We've got some early wins. What we're hearing from our national account employers is they're very focused on affordability.

AI is important in terms of the consumer experience. As you know, we've got 2 core goals: reduce the cost of health care for them and improve the experience, and we've been investing heavily in ensuring that those capabilities choke through. So from an employer perspective, we just hosted our national account group, and we had most of our clients in and they shared with us think a lot of satisfaction. We had a very strong '26 selling year. But also '27, we have a very strong pipeline, almost a record level for '27. We're pretty enthusiastic about how our assets are resonating.

The other thing that we're starting to see is, again, continued consolidation from clients. We've had a record of taking clients who have multiple carriers and consolidating some single carrier under us. And that theme is continuing. So we're very optimistic. But overall, the season, I would say, very focused on affordability given what's going on in the economy, but also very focused on experience and wanting to ensure simplicity that there's real value pulling through for the commercial group.

But let me ask Mark to comment on the PBM side as well.

Yes. Thanks, A.J. Carelon Rx delivered a strong ASO selling season for 2026. So we had several national account wins. We also had improved win rates across both the middle market and large group. And that performance here really reflects growing demand for a more integrated medical pharmacy model and for some of the differentiated value that Carelon Rx is able to bring to employers and our health plan partners.

I'd say sales momentum remains strong. We have seen total sales to date running ahead of plan including 2 marquee national wins. And that really does highlight our ability to compete upmarket successfully for large sophisticated clients. We've also seen good renewal activity, especially as we enter this active phase of some of the client strategy discussions.

On the commercial side, good penetration across that book, good cross-selling of pharmacy into our existing fee-based relationships that obviously remains an important lever for us. And the reason this opportunity is real is that it is producing measurable results. And maybe just to give you 2 examples here. We have seen for clients that do have that aligned medical pharmacy benefit savings upwards of $100 per member per month as well as significantly fewer ER visits as well as a reduction in some of the high-cost specialty drug administration.

So in short, as we look forward to 2027, our confidence is really grounded in that pipeline momentum and the demonstrated value that we bring.

Yes. Thanks, Mark, and thanks, A.J. I think you heard from both of us, we feel really well positioned in -- for national accounts as well as for employer groups.

So next question please.

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

I was hoping you could expand a little bit on the cost trend comments. Obviously, it seems like you're seeing some level of moderation in Medicare and are confident enough at this stage to identify that. And then on Medicaid, on the other hand, it seems to be much more consistent with what you've been talking about recently. Maybe help us try to understand the differentiation that you're seeing there and what's driving that at this stage.

Thanks for the question, Stephen. Maybe it would be helpful to sort of take a step back in total because I think, as we said, we're really pleased with the strong start to this year. At a high level, cost trend is tracking in line with the expectations, and that's consistent with the stronger performance that we delivered in the quarter. But I think what's really important as you look through our results, it's not one driver or one single item. What we saw going into this year is solid execution across our entire enterprise, and that's what supports our full year adjusted EPS outlook guide of $26.75.

And more importantly, I think it gives us much more confidence into the trajectory, not only this year but into '27. From a cost standpoint, I just want to point out some of the actions that we've taken are beginning to show through. So as you think about earlier using data to find out where the outliers are, utilization management, stronger payment integrity, for example, and an area that I think is really important is better site of care optimization, where we've been very focused on that.

So overall, we see the businesses are performing in line. And in some cases, as Mark shared, they're ahead of assumptions. So we've embedded, we think, very prudent assumptions in our outlook, I think, and that speaks to the resilience of the portfolio. But I also want to, I guess, continue to say we're going to stay disciplined in how we view the balance of the year, and we're not relying on different trend environment to support the guide. So we're going to continue to scale what we're doing. But bottom line, I think it's important that our business, we feel, is performing well, and those actions are going to continue to gain traction throughout the year, and that reinforces our confidence. So thanks very much for the question.

Next question, please.

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

Your guidance assumed a conservative view of Medicaid membership declines, I think, in the high single-digit range for the year. And I noticed for the quarter, Medicaid membership looks like it was down about 1.5% ex the growth in Indiana. So I'm curious what you're seeing here in terms of membership mix? Specifically, are you seeing membership declines heavier among lower-utilizing members, potentially pressuring the risk pool? And can you remind us what you've built in for acuity pressure within your Medicaid margin guidance?

Mark?

Thanks very much for the question, Justin. We remain quite comfortable with our Medicaid membership guidance range that we provided for 2026, which just as a reminder, reflects a high single-digit percentage decline driven by ongoing eligibility reverifications and disenrollment activity. At this point, we do expect to finish the year towards the higher end of that range, and that reflects both the prudence embedded in our original outlook and the way that the state reverification activity has unfolded so far this year.

Overall, what we've seen to date has been broadly consistent with our expectations. I would say timing has been modestly more favorable than what we originally assumed. And then finally, I would say our full year guidance does assume that greater membership pressure from reverifications over the balance of the year versus what we saw in the first quarter. And that simply reflects that range of potential state actions, some of the uncertainty around the implementation of the timing of those 6-month eligibility periods and then overall enrollment-related pressures as the year progresses.

Yes. Thanks, Mark. And also just to sort of bring it together for you, Justin, I mean, this is aligning similar to what we put in our guidance. And we do, as we've shared before, I think this is the trough year. And we continue to believe that given what we're seeing in the business.

Next question, please.

Next, we'll go to the line of Andrew Mok from Barclays.

I wanted to follow up on the employer side and the affordability discussion. Can you help us understand what you're seeing in terms of consumer behavior in response to reset deductibles? And relatedly, have you observed any impact from higher gas prices or broader macro pressures on health care utilization?

I'll ask Morgan to share his perspective. Morgan?

Yes, Andrew, thanks for the question. I will tell you the market is completely aligned with our strategy of reducing the cost of health care and improving the experience of the consumer, making it simpler. I think that's the biggest thing that I hear that it's overly complex, burdensome for the consumers to actually seek care, go through treatments, things of that nature. That's where we're working together to solve those. That is exactly where -- and I think that's why, as Gail mentioned earlier, we had such a strong season upmarket, and that also permeates into our down level business as well. So if we think about our local geographies and national, all of this is focused around affordability and simplicity.

Beyond that, it's just a little things around the edges are just about [ accentuating ] both of those. That said, we do see a shift in way of funding. So of course, as you go further up, it's all self-funded business. It's a fee-based business. If you look at the down market, it's about 50-50 between risk-based and fee-based. Nonetheless, people want to know that we're focused on the right things. And as Gail mentioned, we listen to the markets and the markets tell us quite carefully and honestly that it's all around affordability. How are we leveraging the unit cost position that we have and then how are we medically managing that to the point that is driving their trends down consistently.

Yes. Thanks, Morgan. Maybe a little bit on the ACA, Mark, just in terms of what we're seeing in consumer behavior there.

No, absolutely. So I'd say broadly, Andrew, consumer shopping behavior in the ACA market has been in line with our expectations. The biggest difference here versus our initial view is that shift towards bronze plans has been more pronounced and is a positive for us in certain markets. And that dynamic clearly makes sense in the current environment because obviously, subsidies are tied to that benchmark silver plan. And as benchmark premiums move higher in 2026, those bronze options became more affordable on that net of subsidy basis for consumers. So we feel pretty good about our positioning in ACA.

Next question, please.

Next, we'll go to the line of Lisa Gill from JPMorgan.

I want to ask a question around Carelon and Carelon Rx. When I look at the margin in the quarter, it came in below our expectations. You reiterated the guidance for the year. Can you talk about the progression of getting that margin back when we think about Carelon specifically and then within that Carelon Rx?

And then secondly, any comments around recent legislation, whether we think about what's passed on the federal level and any impact to your business on the PBM side or the potential of what's been proposed, for example, in the state of Tennessee, any impact on the PBM business?

Lisa, thanks very much for the question. Let me start with the performance first in Rx. So I would say performance here was very much in line with our expectations in the quarter. Revenue growth was driven by strong revenue per script and continued momentum in the external business, particularly in the ASO space, and that was partially offset by lower strip volume from the affiliated health plan membership.

On margin, to your question, the key point here is that the first quarter performance was very much in line with our expectations, and it's fully consistent with our full year guide for that mid-5% margin range. I'd say the quarter itself reflected very normal seasonality in the PBM business, along with expected mix of growth and the current earnings cadence across the platform. We did see some improvements in specialty and home dispensing. So that obviously helped overall performance in the quarter.

But if you step back, I'd say, from an Rx perspective, revenue and margin, very much in line with what we expected. On your point on the regulatory for a minute, I think the direction of travel here is pretty clear. We have seen recent federal actions moving that PBM market towards greater transparency, stronger reporting and I think ultimately closer alignment between PBMs and their clients.

And so for Carelon Rx, I would say that direction of travel is fully consistent with the model that we are building. We already offer clients flexibility in how they engage with us, and that includes rebate pass-throughs as well as transparent fee-based arrangements. And more importantly, I'd say our strategy here in Rx is not dependent upon any single economic mechanism. It really is built around that integrated medical and pharmacy management and a focus on total cost of care.

Thank you, Mark. Next question, please.

Next, we'll go to the line of Lance Wilkes from Bernstein.

Got a question on employer and in particular, the progress you're making on the second blue bid sort of opportunity out there. Maybe if you could just remind us of the '26 experience you had in sales there. But then if you could just talk a little about the value proposition you're selling, sort of the target clients who are going to be open to this and what pipeline looks like for '27? And as part of that, if there's any detail on the type of Carelon services that some of those people would be picking up more likely?

Thanks, Lance. I'll have Morgan address your questions.

Lance, thanks for the question. Regarding the -- what we're seeing in the national space, with second blue bid, it was quite -- last year, as you know, was the very first year we did it. It was very lucrative for the business. We had less -- we had probably 40 more additional opportunities that came through. And so it was there. We're still seeing that again in year 2, but nonetheless, not quite as high. We've got roughly 2 million members in queue. A couple of those are second blue bid, but the overwhelming majority is just business in the market coming from other places. So it's -- to me, it's -- the assets speak for themselves, and that's exactly what the markets are telling us. The renewal numbers that we've seen in our national business are nearly 100%. It's like 99.3%. So you think about -- these are organizations that don't move very often. They like what they're getting, they like and they keep it.

To the point around Carelon, when I think about what they're looking for with Carelon, they're looking for various solutions around medical conditions, MSK, diabetes, things of that nature to work directly in their population where it may be skewed in those areas, and we can solve for it with them.

And also, as Mark indicated, pharmacy. Last year was one of the largest years we've had around integrated Rx in the upper end of the market. We do expect that to play in, but it was really, really strong last year, and we expect it to be slightly dampened this year.

Thank you, Morgan. Next question, please.

Next, we'll go to the line of Ann Hynes from Mizuho Securities.

I know you said Medicaid margins were tracking better than your expectations and what's embedded in guidance. Can you actually tell what Q -- tell us what Q1 results were? And can you also remind us what your rate increases are for 2026 as in guidance? And have there been any positive updates since the last report?

Mark, I'll ask to start and then Felicia to give some more comments.

Ann, thanks very much for the question. So from a trend perspective, I would say first quarter was slightly ahead of our expectations. That reflected the favorable claims development. That said, underlying cost trend does remain elevated. The first quarter trend is consistent with our full year outlook. And we do continue to contemplate Medicaid trend at the high end of that mid-single-digit guidance range that we provided. So as you think about margins, to your question for the first quarter, certainly, on a sequential basis, we did see an expected deterioration in the first quarter, meaning coming in exactly as we anticipated. And so for the full year, we're continuing to be very comfortable with our guide of minus 1.75% operating margin.

Yes, thank you for the question. Ann, thank you for the question. In terms of our Medicaid rates, our Medicaid rates for the first quarter, which means through April, are right in line with our expectations. The rates absolutely are coming in close to the mid-single-digit range. At the end of the day, however, that remains slightly below the trend that we continue to see in the business. So we are going to continue to work very constructively with our state partners around closing that rate to trend gap.

Overall, I will tell you that those conversations continue to be very constructive. We provide regular information to our states in terms of our performance, and we look forward to continuing to make the improvements that we expect to see in the Medicaid rates over time. But through the first quarter, certainly right in line with the expectations, and we've already started to work with our states around July rates, although it's still early in terms of a view of July, but the continued progress that we're making is expected to really continue throughout the rest of the year. So thank you very much for the question.

Next question, please.

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

I was hoping if you could maybe expand on just giving us an update on the risk-based management programs that you've been deploying in Carelon services. Maybe just talk about the overall scope of how those programs have been expanding and basically sort of the actions within the operating model that you have to sort of protect against sort of upside risk on medical cost trend?

And then also if you could just talk about the investments that you called out in the quarter also related to that line of business?

Scott, thanks very much for the question this morning. I think let me start off by saying that we are taking a very disciplined approach to how we manage risk in Carelon services. And specifically, we're very intentional about where we take risk in the business, how we price for it and then ultimately, how we balance that exposure across our Medicare, Medicaid and commercial businesses with a mix of either subcapitated full risk or really fee-based offerings.

One of the real advantages in Carelon here is that we can use our affiliated health plan membership as a proving ground to launch and scale capabilities quickly. For example, we started our risk-based oncology solution in commercial. We expanded it into Medicare. And then we plan to move it into Medicaid in the latter half of this year. And we followed a similar path for post-acute and more recently in BH as well. So a lot happening in that space.

At the same time, obviously, as we continue to grow the risk-based side of Carelon services, the segment is going to reflect some of that normal mix and timing dynamics. And I think that's the heart of your question. And that really comes with our scaling of these capabilities.

Just to point out, low affiliated health plan membership does remain a headwind across several of the offerings this year. And of course, some of the newer risk-based programs will have a different earnings cadence as they progress. And a couple of quick examples here before I leave at least this question. Risk-based oncology program, we started in 2024. We expanded in '25. Post-acute started in Medicare, we've deployed commercial. And then BH is the one that we've recently launched with some serious mental illness in the Medicaid population.

Next question, please.

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

I appreciate you sizing the settlement potential CMS. I guess can you give us a sense on how those conversations are progressing? And I'd be interested if you could help us frame sort of how you arrived at that $935 million figure?

Sure. Let me like provide you sort of a comprehensive view of how this works. Let me start with the accrual. First, the $935 million accrual that we recorded in the first quarter reflects our current best estimate of the probable exposure that is associated with this historical matter. And that's based on the information that we have today as well as our engagement with CMS. I think it's important too, as you think about it, this relates to historical payment disputes that involves the interpretation of the risk adjustment policy during that period in question.

And actually, really importantly, I think everyone -- to remind everyone, it's not about how we operate the business today, and it doesn't change the confidence, as I shared in my comments, about the integrity of our current risk adjustment practices, our compliance or our governance. But in terms of where we're going, since receiving the notice from CMS in February, we've moved very quickly to engage directly and quite constructively with the agency on this matter. And those discussions have given us much better clarity, both on process and on the path to resolution. So I want to be clear about that.

We are working through the process that CMS has outlined to address those issues raised. And CMS has updated because of the compliance time frame, which you want to share and work through -- as we work through that process and under the current time line, we have through July 31 to meet all of those compliance requirements.

Certainly, we appreciate the extension of that time frame because it reflects, I think, the complexity of the work required to complete this. That said, based on the steps that CMS has prescribed and the current time line, which I've shared, we believe and expect that if we complete those steps that the sanctions will not go into effect. So I also want to share that.

But again, we're working very constructively with the agency and feel that we're moving towards resolution of the issue. So thank you for the question.

Next question, please.

Next, we'll go to the line of Elizabeth Anderson from Evercore ISI.

Just appreciate the comments about the 2/3 of the outperformance is favorable claims and sort of better management of those claims. Could you maybe help us parse out the breakdown of that? I know Mark was helpful in providing some comments about the flu and other 1Q utilization issues. But just anything else, if you could sort of clarify at this point, how you're viewing any weather or flu items in the first quarter?

And then secondarily, in terms of some of those better management of claims, I appreciate you said that you're going to sort of flow those through for the rest of the year. Anything we should sort of think about in terms of that ramping up? Or should we think about that as relatively ratable across the rest of 2026?

Elizabeth, thanks for the question. Let me start by framing the quarter because I think that's the cleanest way to answer your question as well as address sort of the guidance change that we put through. So in the first quarter, EPS did come in ahead of our initial outlook, and that included about $0.45 of core outperformance. About 2/3 of that or roughly $0.30 reflected underlying business favorability and the remaining $0.15 was really driven by seasonality-related timing dynamics. The underlying favorability was concentrated primarily in our health benefits business, and that did reflect better claims experience than we had assumed, including to the point you made, a less severe flu-like season that was embedded in our first quarter outlook, and that accounted for about $0.10-ish of that benefit. And so the remaining outperformance was really timing related.

And as we noted in our prepared remarks this morning, primarily came from our ACA business, and that's simply driven by that higher mix of bronze plans, which we expect will defer a portion of planned costs into the back half of the year. So if I turn -- if I brought that all together and I turn to the guidance range, we did increase that full year EPS guide by $1.25 per -- relative to our prior outlook. And I would say of that increased $0.25 reflects that portion of the underlying nonseasonal business favorability we saw in the quarter. And of course, the remaining $1 was a nonrecurring item.

And one last point, just from a modeling perspective, that dollar should clearly be excluded from the 2026 earnings baseline. So when you think about us returning to at least 12% EPS growth in 2027, that growth is off of an ending 2026 baseline at this point in time of at least $25.75.

Next question, please.

Next, we'll go to the line of Kevin Fischbeck from Bank of America.

Can we maybe go back to the exchange commentary. I guess we've been trained to look at better-than-expected enrollment sometimes as a red flag. So I just wanted to see if you could give any color about whether the high enrollment has come with any change in the underlying risk pool that you're seeing?

And I guess last year, there was a change in the risk pool in part because there was a group of people coming -- losing Medicaid coverage coming on to the exchanges. Are you seeing any signs that, that's a potential pressure happening this year?

Thanks for the question. Let me start off by saying we took a fairly prudent view when pricing 2026. And we did that really with the assumption that while much of the impact from the expiration of the enhanced premium subsidies would occur in the first year, it's going to take a little while for the risk pool stabilization to ultimately play out. I'd also note it's still early in the year and more time is going to be needed for those retention patterns or member retention patterns really to settle out and for claims to mature before we have a fully developed view of the morbidity profile of the risk pool this year.

That said, one really early indicator that we have seen prior claims experience for renewing members in paid status running moderately higher than for the cancel or nonpayment cohorts. And that did support our view that [ relaxation ] here has increased the morbidity of the remaining pool. But importantly, that dynamic, that is tracking consistent with or even better than how we price the business in 2026. And so sort of to conclude here, I feel very good about our membership mix, and I feel very encouraged by that shift towards bronze, both in our book of business, but also broadly across the market itself.

Next question, please.

Next, we'll go to the line of Dave Windley from Jefferies.

I wanted to come back to Medicaid. Gail, you reiterated the comment that you think '26 is trough. I wanted to understand the assumptions embedded in that for '27 in terms of your expectations for member attrition from work requirement implementation and things of that sort? And then also ask where your thinking is around stay or leave state by state in situations where rate discussions are perhaps not moving in the direction that you'd like them to?

So let me take the second part of the question first, and then I'll ask Mark to comment on the membership assumptions. We -- so as Felicia shared with you on Medicaid, we're having very constructive discussions with the states. While the rates are still lagging, we've seen, I think, positive movement in states trying to be constructive. And it's not only about the rates, it's also about the actions that we can take on benefits as well as the changes that we're making to our networks and other things.

That being said, as I shared, I think, on the last call, where we don't see a sustainable path to profitability in a state, we will exit. I don't think we're at that stage with states. I just want to be clear. But again, we also are taking the view of, look, we need a sustainable path to this business. We do think it's an important business, both between our Medicare and Medicaid business in terms of how we serve our duals. But again, we will take a look to make sure that these rates are sustainable and that the capital we put into it can be returned.

So with that, I'll ask Mark to comment just on how we're thinking about membership evolving over this year and next year.

Thanks for the question here. I think modestly better Medicaid membership at year-end 2026 would not change our view that 2026 is the trough year for Medicaid margins. And if membership comes in somewhat better than we expected, the most likely explanation here is really timing, really that some eligibility-driven attrition would occur later than we had assumed. And that could, in theory, to your question, shift a portion of that membership and acuity pressure into 2027. But we would not expect any incremental pressure to be or we would expect any incremental pressure to be much more measured than what we would have experienced during the [ post-PHE ] period.

And the key point here is because it's much more targeted, it's much more concentrated in that expansion population rather than being broad-based across the Medicaid book. And then just as importantly, and you heard this from Gail, that does not change our belief in the setup that we see for 2027. And we do believe 2027 is going to continue to benefit from better rate alignment as states incorporate more of that recent experience into their rate setting cycles. And certainly, while work requirements and community engagement requirements may create some additional pressure over time. I just want to emphasize the point, we do expect that impact to be much more phased and much more manageable than the redetermination cycle historically.

Thank you, Mark. Next question, please.

Next, we'll go to the line of Erin Wright from Morgan Stanley.

So AI and automation across just managed care in general has been a big question area for investors. I guess, can you talk about some of the proof points today or progress on that front, quantify any of those efficiency gains or maybe your long-term goals as it relates to that? And how are you tracking in terms of the associated incremental investments? How do you see that playing out as well as we head into '27, '28? Any context there would be great.

Great. Well, thanks for the question, Erin. I think it's a great question in terms of how we're thinking about AI. And I think it's important as we talk about AI to step back because fundamentally, we see it and our technology strategy as supporting our overall strategy, which, as I said, is really very simple, make health care more affordable and make it simpler and more personalized for the people we serve.

In terms of investments, we're investing more than $1 billion in digital and AI-enabled capabilities to support that strategy. And I think the key point that I really just want to start with is we're not approaching AI as a separate technology element or experimentation. We're looking at things that will scale and support those absolute core things of our business.

So to give you some specifics, we're embedding it, I would say, in practical ways, first to help us reduce costs and again, to simplify experiences and then take administrative costs and complexity out for ourselves. So I'll walk in a couple of examples.

One, for our members, that's really about making it easier to navigate. Health care is really complicated. When we look at where we've already invested, our AI-enabled virtual assistant, I think, is a really good example. We already have 22 million commercial members on that using it regularly, and it's helping people get answers fast with less friction. And we're seeing that dramatically improve, for example, our consumer effort scores.

We're also being more personal. And I think that's another really important part of how we can deploy this technology through [ Sydney ], which is our personalized matching tool, where we help actually using over 500 data points, match people to the right care providers. More than 20% of our members have already connected and are finding the right providers. So not only is that simpler for them, but quite frankly, brings them to our providers that are high-performing providers. And again, that helps drive better medical costs.

On the clinical and care operations side, we see AI helping improve things around speed, accuracy, decision-making, strengthening payment integrity. And what that's doing is giving us information much earlier to identify outliers. Again, that feeds into our ability to see trends faster and then take actions with our team around network, around clinical interventions. So over time, we see that as a real opportunity to manage costs. Right now, it's about getting information in our hands a lot faster.

And I'll sort of close on a couple of final examples for care providers, it's really about reducing burden. We need to really reduce the friction and simplify workflows. That's a commitment that we've made. HealthOS is an area that we've been investing over. You've heard us talk about it the last several years. And that's really about data sharing, reducing paperwork and accelerating approvals. We're using it right now in our prior authorization commitments.

And one of the areas that I know frustrates everyone is this lack of information and denials generally get caused because we don't get the right information. We see this technology and AI reducing those denials by more than almost 70% and it eliminates a lot of the need for follow-up and back and forth. So that's good for the system, and I think good for care providers.

Then I'll just close, how else we're thinking about AI. We're leveraging it across our associates. More than 60,000 already have access to it. They're using it in their productivity tools. They're learning it. We have individuals signing up to understand how to use it. We have guardrails around that. We're obviously very cautious about making sure we use it the right way, but we think -- we see it as a productivity tool.

So let me just step back. I know that was a lot, but we see it. We're encouraged by technology. It's not just pilots. It's embedded in our capabilities, and you're really going to see it come through in the results we have in the measures, not just in the dollars, but also in our [ admin ]. So thank you very much for the question.

Next question, please.

Next, we'll go to the line of Ben Hendrix from RBC Capital Markets.

I wanted to get a little bit more color on the site of care optimization actions you mentioned helping to control your cost trend. Yesterday, we heard your peer mentioned some notable reductions in hospital admissions and skilled nursing transfers through some heightened clinical review. And I'm wondering if you could share some anecdotes either within the Carelon risk-based programs or in the broader benefits business where you're seeing gains from those [ site ] of care efforts specifically?

Thanks very much for the question this morning. So just as a reminder, CareBridge is our home-based care platform focused on Medicaid and dual-eligible members, especially those with complex needs. And strategically, this is important for us because it extends Carelon's whole health model into the home, where obviously, better coordination can improve outcomes, lower total cost of care and then support stronger health plan performance. We're also very pleased with how CareBridge is ultimately integrating into the broader Carelon ecosystem. I'd say first quarter results are very much in line with our expectations for CareBridge. But we are seeing continued signs of improvement as we scale that platform and drive operational efficiencies across the book.

We are also expanding CareBridge in ways that deepen both its reach, [ R-E-A-C-H ], and its value. And intentionally, we have launched additional Medicaid home and community-based support programs in several states, which has deepened our market penetration. And as a result of that, we are seeing early indications of that improved cost of care performance, especially as those capabilities are ultimately embedded into our market.

So to your question, when we talk about site of care optimization through CareBridge, it's really about keeping members aligned to the right level of care, reducing unnecessary facility-based utilization and using that home as a more effective and lower cost setting for managing those complex and chronic needs.

Thank you, Mark. I might ask Aimee Dailey, who leads our government business, to also comment on how we're deploying that inside of the health benefits business. Aimee?

Yes. No, thank you, Gail. Really, one of the greatest things about CareBridge is its ability to engage members in a place that they're comfortable being engaged. And that engagement rate allows better reach, better access for those members to their health care and actually has created a fair amount of ER avoidance and improvement in PCP visits, which allows us then to get quality gaps in care closed and really make sure that these members are getting better outcomes in the long term. And we're really -- very pleased with what we're seeing and the early adoption of our CareBridge model across our duals business. And that dual business is where we see really a high level of need in that engagement. And so very pleased with how we've been able to embrace that CareBridge model.

Next question, please.

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

What's there any takeaways on where you sit versus the industry from the new March [ Wakely ] data? I think they may have provided some context around average premiums or metal tiers. And then on the bronze shift you mentioned, can you quantify how much your mix moved? And just give us an idea of the delta between peak and trough MLR between bronze and silver. Is that just like a couple of hundred basis points? Or is it larger than that?

Thanks very much for the question here. The early [ Wakely ] report has been a helpful input because it provides additional visibility into market size, [ metal ] mix and enrollment patterns. And importantly, the report from our perspective supports our view that we are seeing a greater shift towards bronze and a greater share of new sales, both of which obviously have implications for our relative risk to the market. And therefore, to an earlier question that was asked around risk adjustment.

I'd really caution it's still an early data set from [ Wakely ]. It does not fully capture the impact of retro cancellations, nonpayment behavior or even maturing cohorts. And so I'd say while the report is useful, visibility is going to continue to improve as we get more effectuation data and cohort-based information over the coming months. All in, I think the most important point here is we feel very comfortable with our pricing and how we positioned our products for sustainability in the ACA market this year. And then to your question on specific splits, we are seeing a much more balanced bronze silver mix this year it come through based on the new sales.

Next question, please.

Next, we'll go to the line of Jason Cassorla from Guggenheim.

I wanted to ask a little bit more on the return to at least 12% EPS growth in '27. You've got margin expansion opportunity across most of your end markets. You've talked about the early benefits of AI and investment spend. But I guess could you help frame how we should be thinking about the components of that 2027 growth, including how much of that is predicated on pricing and trend that you can control or impact? Or maybe said another way, to the degree that Medicaid margins remain pressured next year, how do you feel about the levers and growth opportunities across your other businesses that could offset to drive that at least 12% growth expectation?

Well, thanks for the question. I think it's important to first start with '26. And I think the headline around '26 is this is all about execution. And as you saw, we upped our guide to at least [ $26.75 ], reflecting that early execution while remaining grounded again in prudent, achievable expectations. Specific to your question, as we think about '27, we're confident in at least 12% adjusted EPS growth off of that earnings baseline, which now stands at $25.75, as Mark shared. Over the past couple of years, and I want to reframe that, we've made targeted investments in portfolio, pricing and operating discipline. And those were all designed to protect our earnings base and position us for the durable growth that we're projecting. We're leveraging the capabilities of our diversified platform, and I think that's really important.

And there's 3 things I just want to underscore to your '27 question. First, the key earnings levers are already in motion, and I think that's important. Those are the actions that we put in place in '25 and into '26, and those are across many of the things you said, pricing, care management and portfolio positioning.

Second, we're making meaningful investments in 2026. So as those investments mature and we realize returns on those initiatives, we're going to see a clear step-up for 2027.

And third, again, the path isn't predicated on any single assumption. And I think that's really important as you think about our portfolio. It's built on many and multiple independent levers, and it's disciplined execution across both health benefits and Carelon.

So those are the factors as I think about it, that give us confidence in achieving the earnings growth consistent with the long-term growth algorithm that we talked about through '27. So thank you for the question.

And next question, please. This will be our last question.

And for our final question, we'll go to the line of George Hill from Deutsche Bank.

This one is probably for Mark. Mark, we saw a pretty big step-up in base claims payable, both sequentially and year-over-year. I was wondering 2 things. Number one, might you be able to unpack kind of what drove that for us? Was it membership mix? Was it the exiting of Part D? Was it like legacy claims? And kind of how should we think about how that number trends through the balance of the year?

George, thanks very much for the question. So DCP ended the quarter at 46.6 days. That was up 5.3 days from year-end, and that was driven mainly by normal first quarter seasonality and higher medical claims inventory across the business. A little bit deeper here. Commercial was affected in part by individual mix dynamics that we've discussed. Medicaid and Medicare really reflect that typical earlier slowdown in claims payment cycle.

And really, the main takeaway here is the DCP result was largely a seasonal and mix-related movement. I wouldn't say it reflects any change in our underlying reserve approach. On the prior year development, that was approximately $250 million in the first quarter. And it's really worth noting here around that number is that typically for prior year development, we reestablish that as margins and reserves through the normal process. And so it really doesn't have a material P&L impact. Thanks for the question.

Well, thank you. Thank you for the questions. And thank you, operator, and thanks to everyone on the line. As we move through 2026, our focus remains on operational execution, strengthening our diversified platform and building momentum across the enterprise. We're encouraged by our strong start to the year and the progress we're seeing. Our strategy to improve affordability, simplify the experience for all of our consumers and care providers and deliver better outcomes for the people we serve is what's driving durable financial performance over the long term for us.

Thank you for your continued interest in Elevance Health, and have a great rest of the week.

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through May 22, 2026. 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.

Hi. Good morning. My name is Andrew Mok. I'm the Facilities and Managed Care Analyst here at Barclays. Welcome to day 1 of the Barclays Global Healthcare Conference. I'm pleased to kick off today's event with Elevance Health. And joining me on stage for today's fireside chat is Mark Kaye, CFO, and Nate Rich, VP of IR. Welcome.

Thank you very much, Andrew. Pleasure to be here.

Mark, there's been a couple of notable recent developments at Elevance over the past few weeks. So I think it would be helpful for you to get your perspective on some of these issues. So first, as it relates to the CMS sanctions letter, what's the scope of concerns raised by CMS in its communications with you? And what actions are you taking towards a resolution?

Andrew, that's a great place to start. Let me start with the scope itself. So as outlined in CMS' letter, the concerns that they've raised relate to certain historical risk adjustment data submission practices, specifically for dates of service prior to April 2023. And importantly, from our perspective, this is not simply a data submission issue. We view this as a broader policy and payment dispute, about how retroactive corrections should be treated under the risk adjustment framework that was in place during that period.

In terms of actions we've taken, we have approached this in good faith and with transparency. And given the uncertainty at the time, we've proactively disclosed to CMS certain diagnosis codes that our internal review had isolated and potentially unverified. And we did that to be clear and forthright with the agency. And alongside that, we repeatedly sought CMS guidance on how prior year corrections should be handled given the broader litigation and regulatory landscape during that period.

While we were surprised and disappointed by the sanctions notice, we have engaged promptly with CMS, and we're committed to resolving this constructively. And I really want to be clear on two points. This relates to the interpretation of past CMS risk adjustment practices. It does not reflect our current practices, and it does not affect how we serve our Medicare Advantage beneficiaries today. And so finally, our focus is very much on a timely resolution, so we can keep our full attention where it belongs on serving our members and executing our operating priorities.

Great. What led you to believe that your risk adjustment practices were accurate and appropriate?

Let me address that directly. We stand by the integrity of our compliance program and our risk adjustment practices, both historically and today. And at its core, this is a disagreement over the interpretation of policy. It's not an unwillingness to correct inaccurate data. The diagnosis codes that issue were originally submitted by providers, and consistent with our compliance posture, we proactively flagged certain codes to potentially unverified issues, and we shared them with CMS in good faith.

It's also important to emphasize that our position aligned with the statutory framework in place at that time. And that's the bridge to the broader context. So think about this prior to 2023, there was a well-established industry-wide discussion about payment alignment between fee-for-service Medicare and Medicare Advantage. And our view, consistent with that discussion was that CMS should not hold Medicare Advantage audit and correction processes to a higher standard than fee-for-service Medicare. And if I make that maybe concrete with a simple example.

So if a beneficiary in traditional Medicare is not correctly coded for a chronic condition like diabetes, that error can flow into the Medicare Advantage benchmarks and payments rates. And so CMS then requires Medicare Advantage plans to correct and adjust similar diagnosis codes without also adjusting the benchmark to account for those fee-for-service errors, the result is a widening payment gap. And I would say, finally, our actions overtime have been very consistent with that good faith posture. We've had nearly 8 years of correspondence with CMS. CMS did not recoup payments related to the transparently disclosed codes, and when we asked for substantive guidance, we were referred back to the existing data submission requirements rather than receiving discretion on the core policy issue.

Great. And I guess given that, can you provide a framework to evaluate the financial impact of resolving this matter with CMS?

I appreciate that question. The reality is this process remains in its early stages. And we are engaged in discussions with CMS, and we are evaluating all avenues of resolution. While it would be premature to provide a definitive estimate at this point, I can offer some perspective on how we are thinking about it.

Importantly, we're starting from a position of strength. Our balance sheet is well capitalized. Our cash flow generation is robust. And from where we stand today, we do not expect the financial impact of a resolution, to change our capital deployment priorities or actions in 2026. And so specifically, our outlook for at least $5.5 billion of operating cash flow, gives us the capacity to fully fund dividends and share repurchase activities while continuing to invest in the business. We'll provide further updates as discussions progress. But importantly, we believe this matter can be resolved without altering our long-term strategic or capital objectives.

Right. And maybe beyond capital objectives, what impact could the sanctions have on Medicare specifically for this year?

Yes. We're approaching this quite thoughtfully, but also with the appropriate urgency. First and foremost, our priority is a prompt resolution so we can remain focused on serving our current Medicare Advantage members. Our 2026 adjusted earnings guidance, which we reaffirmed this morning, includes our current estimate of the impact of sanctions, should they ultimately be imposed. And as you know, a meaningful portion of the 2026 enrollment cycle is already behind us, which helps contain the in-year financial implications.

And at the same time, we recognize that a prolonged sanction period could carry additional impact. And so we're working constructively and with urgency with CMS towards a very timely resolution. We do remain confident in the Medicare outlook we provided in January, including the expectation of margin improvement to at least 2% this year.

Do you think this impacts your current risk adjustment practices going forward? And what gives you confidence that your practices conform to CMS' current regulations today?

This does not impact our risk adjustment practices going forward, and I appreciate the opportunity to clarify that. And the reason is relatively straightforward. CMS has acknowledged that the submission practices at issue, relate to diagnosis data from April 2023 and earlier. For date of service after April 2023, the regulatory framework was much clearer.

Specifically, in 2023, you'll recall, CMS finalized the Risk Adjustment Data Validation or RADV rule and adopted the position that no adjustment would be made to account for error rates in fee-for-service data. And so in light of that clarity, we adjusted our approach prospectively. And specifically, we discontinued the voluntary disclosure process that was tied to our broader request for policy guidance, and we communicated that change directly to the agency. And so when you ask what gives us confidence today?

Well, it comes down to governance and controls. We have very well-established compliance-audit governance process in place. We have robust processes to support the accuracy and integrity of the codes we submit, including reviews, quality checks, audits of our risk adjustment vendors. And so maybe to summarize, to be clear, the RADV rule helped clarify how to approach date of service after April 2023, but we continue to stand by our prior position for earlier periods, and we sought guidance on the appropriate treatment of those earlier period items.

Great. And maybe just to follow up on all of this. Does this have broader implications for your Medicare business related to unlinked chart reviews, RADV audits or star ratings performance, anything of that nature?

Thank you. We do not believe this matter [indiscernible] implications for our Medicare business. The issues CMS raised, relate to historical risk adjustment processes. They do not reflect our current operating processes or practices. And on the specific items that you've mentioned, chart reviews and RADV audits, our approach today is unchanged. And as I spoke to a moment ago, we have very well established and mature compliance audit and governance oversight.

And finally, on stars and quality, this matter does not affect our stars ratings or quality performance initiatives. We continue to see very strong and positive momentum there, including improvement to about 59% of our Medicare Advantage members and plans rated 4 stars or higher for payment year 2027. So net-net, we view this as a discrete historical policy and payment dispute, not a structural issue in the ongoing performance of our Medicare Advantage franchise.

Great. Let's move on. I guess taking a step back, as you look at the first few months of 2026, how is performance tracking relative to your expectations? And how are results trending across your major business lines?

So as we noted in our 8-K filed this morning, we are reaffirming our full year 2026 outlook, including adjusted EPS of at least $25.50 and a benefit expense ratio of approximately 90.2% at the midpoint. Notably, our first quarter earnings performance is tracking modestly above the outlook we discussed on our prior earnings call. And maybe let me briefly highlight some of the underlying drivers.

First, in ACA, we are seeing more pronounced seasonality driven by the shift in membership mix towards Bronze plans. As you know, higher deductibles in these products typically mean utilization is deferred into later periods of the year, and that contributes to lower first quarter medical costs. Second, Medicare and Medicaid are running slightly favorable to our initial prudent expectations based on how cost trend has developed early in the year. And trends in Commercial Group, just to complete the picture, they're running in line with expectations. Third, the influenza-like illness activity, that also moderated as the quarters progressed. That resulted in or will likely result in slightly less pressure than the approximately 20 basis points that we embedded in our first quarter outlook. And so I'd say while this is pretty encouraging, it does remain early in the year, and we'll provide a comprehensive update when we report our first quarter results in April.

Great. I'd like to dig into a few more of those throughout. But I do want to touch on the leadership transition as well. With the announcement of Pete Haytaian's departure and your expanded oversight at Carelon, how are you approaching that responsibility? And how should we think about Carelon's strategic direction from here?

That's a great question. So let me start by acknowledging the important role that Pete played in the development of Carelon. We greatly appreciate his contributions to building and scaling the platform. Importantly, over the last 2 years, he and I have worked very closely together on both strategic direction and operational execution. And I have greatly valued that partnership. And so this transition does not signal a change in strategy, rather it simply reflects a refinement of our management structure, designed to enhance accountability and execution across the enterprise.

Carelon remains integral to our enterprise strategy, and my approach is going to be consistent with how we've managed the platform to-date. So driving revenue growth, maintaining margin discipline and delivering durable earnings performance. One of my early priorities is to ensure that we have deep leadership bench strength across Carelon's core businesses. We have very strong leaders in-place today. We're putting an even sharper focus on operating cadence around priorities, decision rights, performance metrics. So execution remains fast and consistent. And then at the same time, consolidating Health Benefits under Felicia Norwood's leadership strengthens enterprise alignment and helps us further simplify our governance and accelerate decision-making.

Felicia and I, just on a personal note, we work very closely together, and that collaboration will certainly grow under this structure. And we feel that's going to lead to an acceleration of the flywheel between the Health Benefits and our Carelon businesses, particularly early in areas like pharmacy, behavioral health and specialty management, where we can continue to drive meaningful value.

Great. Moving on to Medicaid. You've noted that trend exiting 2024 was in the double-digit percent range and moderated throughout 2025 to mid-single digits. Can you walk us through what drove that moderation and why you're comfortable assuming mid-single-digit trend continues in 2026? And then related to the flu call-out, the favorability there, does that relate to the Medicaid business mostly?

So as we entered 2025, Medicaid cost trend was running in the low double-digit percent range and historically unprecedented for this program. And that reflected two factors: a sharp step-up in acuity as redeterminations removed healthier members and then sustained elevated utilization across behavioral health, outpatient services and specialty pharmacy.

Over the course of the last year, cost trend was impacted by tighter reverification activity and certain state-based program changes. And as we've moved through the year, however, those mix shifts have become less severe and trend has decelerated from its peak levels. While we do not expect -- or sorry, while we do expect continued eligibility tightening and some incremental increases in acuity in 2026, the pace is going to be more moderate than last year. And therefore, for the full year, we are planning for medical cost trend in the mid-single-digit percent range, running modestly above the state rate increases.

And ultimately, if I step back for a moment, our performance is really driven by that gap between trend and rate. That gap remains in 2026, which is why we view our guidance of negative 1.75% operating margin as a trough. We expect alignment will improve overtime with rates, certainly as rates catch up to current experience. And then on flu, it reflects the impact across the businesses. Certainly, Medicare Advantage is a meaningful portion of that.

Great. Understood. From my perspective, there seems to be a greater emphasis this year on actions within your control that can potentially impact that Medicaid trend. Can you give us more color on those initiatives and how we should think about the magnitude and timing of their financial impact?

It's a great question, Andrew. And you're right that we should be very focused on factors within our control, which is absolutely critical in today's environment. Our primary initiatives really fall into several buckets. First is tighter medical and pharmacy cost management. I think, care specialty drug management, formulary oversight and disciplined utilization management. Second is expanded behavioral health interventions. We are leveraging Carelon's behavioral health capabilities, including integrated care coordination models and home and community-based support through CareBridge to ensure members receive the right level of care in clinically appropriate settings. Third, I would say, is stronger payment integrity, where we are using advanced analytics to identify outlier billing and utilization patterns and then improve payment accuracy.

And we're increasingly applying AI to flag high-risk carrier earlier or high-risk claims earlier, prevent fraud waste and abuse and then stop improper payments before they impact the system. Fourth, I'd say, site of care optimization through Carelon's specialty and post-acute management programs, we're redirecting care to the most appropriate settings. And then finally, operating efficiency, where we are using AI to simplify processes and enhance our digital capabilities. So importantly, these actions are very much aligned to the state priorities. We do view benefit design and program refinement as critical levers to support long-term Medicaid sustainability.

Great. Let's move on to the ACA. In January, you noted that ACA membership following open enrollment was around 1.4 million members. That was up 10% sequentially, and you expect year-end enrollment of 900,000, which is down 30% year-over-year. So as we approach mid-March, can you share how ACA effectuation trends are tracking and how they compare with this time last year?

Sure. Open enrollment activity came in stronger than we initially anticipated with membership up approximately 10% sequentially. A meaningful portion of that growth was driven by our 2025 expansion states, specifically Texas and Florida, where we continue to see stronger traction. In our core Blue states, membership trends were actually very much in line with the overall market. The key variable to your point here is effectuation rates, which is specifically how many members ultimately activate their coverage by paying their premiums.

And through February, effectuation rates on both new sales and active renewals, they're tracking in line with typical patterns. I'd say approximately half of our membership base consists of passive renewals and nonpayment rates within this cohort, they're running as expected, and that reinforces our view that the 900,000 members represents a floor for our full year, year-end individual membership outlook.

Right. So effectuation trends, you're saying are in line with historical patterns. So that presumably would be a bit better than what I think the industry had anticipated heading into the year, correct?

That is correct. And I would also note it, as early. We've got January and February. The key variable is obviously going to be April because they've got that 90-day grace period for subsidized passive renewals.

Great. And now that you have a better sense of what your 1Q ACA attrition and membership is looking like, can you put a finer point on the expected margin improvement you see in that business line? And then relatedly, can you give us a sense for how much of your medal mix is shifting this year? You called out the seasonality impact of Bronze. What is -- what does that shift look like in your membership base?

Great question. So we've repositioned our ACA business in 2026 for a more sustainable financial profile. And we took appropriate pricing actions to reflect the higher costs observed in 2025 and the expiration of enhanced subsidies. In terms of mix, we've seen a meaningful rotation to Bronze plan selection this year. And that's important because higher deductibles tend to defer utilization, which creates steeper seasonality and shifts claims later in the year.

As a result, we've been thoughtful in how to utilize [indiscernible] impacted as the year progresses. To put numbers around it, approximately 90% of our book is now roughly evenly split between Bronze and Silver, whereas last year, the mix skewed more towards Silver. New sales are running a little bit over half Bronze with maybe roughly 1/3 of members selecting Silver. And in addition, I would say that the percentage of members who receive a subsidy is also broadly consistent with prior years. So while it's still early and while we'll watch our member mix closely as well as the utilization patterns evolve in the coming months, we remain very comfortable with the overall outlook on our ACA business for 2026.

Great. Taking a step back at the enterprise level, you unveiled $1 of incremental investments late last year and $0.75 is included in 2026 EPS guidance. Can you help us understand the timing and nature of that spend? And what return you expect to receive from those investments in the following years?

I appreciate the question. So we are investing thoughtfully around three crucial priorities. First, digital and AI capabilities throughout the enterprise, second, scaling Carelon's capabilities in home-based care and specialty pharmacy services. And then third, quality initiatives like our Star ratings. We are particularly excited to scale AI and advanced analytics across the core operations, and we are embedding these capabilities in how we manage medical costs, pharmacy utilization, claims processing, provider workflows. And we are also increasingly leveraging predictive models to identify inflections in cost trends earlier in the cycle, whether that's emerging utilization patterns, specialty drug exposure or high-risk members with the idea of being able to intervene in a more targeted way, early on.

What we feel differentiates us here is the enterprise-wide integration, not point solutions. And our scale allows us to translate data into action quickly and consistently across the organization. So maybe three quick examples here. So first, on cost management, predictive analytics are improving our ability to manage medical cost trends. Second, on administrative efficiency, the AI-enabled automation is reducing manual claims handling. It's also improving payment accuracy and it's lowering, cost per claim. And that creates operating leverage that allows us to then redeploy resources towards much higher value activities. And third, on experience, approximately 22 million commercial members now have access to AI-enabled digital navigation tools like HealthOS, which reduces provider friction through faster approvals and streamlined data exchange.

And Andrew, maybe just let me conclude here. We feel we measure success with these capabilities through very tangible outcomes, and that's going to mean cost reduction, cycle time improvement and productivity gains.

Great. Well, we only have a few seconds left. So let's just end it there. Mark, thank you so much for joining us here today. Nate, thank you as well. Please enjoy the rest of the conference.

Thank you very much, Andrew.

Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health fourth quarter earnings conference call. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the conference over to the company's management. Please go ahead.

Good morning, and welcome to Elevance Health's Fourth Quarter 2025 Earnings Conference Call. My name is Nathan Rich, Vice President of Investor Relations. With us on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial Health Benefits business; and Felicia Norwood, President of our Government Health Benefits business.

Gail will begin the call with a discussion of our fourth quarter performance, our 2026 guidance and the progress we continue to make on our strategic priorities. Mark will then discuss 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.

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.

Good morning, and thank you for joining us today. Affordability remains the central challenge in health care. At Elevance Health, our focus is on improving outcomes, making care easier to access and navigate and managing costs responsibly. Our commitment to whole person health shapes how we deliver on our strategy by strengthening care coordination, reducing unnecessary complexity and creating a simpler experience for those we serve.

Before I go through the business, there are three points I want to underscore. First, 2026 is a year of execution and repositioning, and the outlook we provided today reflects prudent achievable assumptions grounded in pricing discipline, operational rigor and targeted investments. Second, even in a dynamic environment, we are acting decisively in the areas within our control to strengthen margins, reduce volatility and improve the consistency of our performance. And third, as those actions take hold, we expect to return to at least 12% adjusted EPS growth in 2027 off our ending 2026 earnings baseline, supported by the earnings power of our diversified platform.

Consistent with that approach, we are establishing 2026 adjusted diluted earnings per share guidance of at least $25.50. As you consider the year-over-year comparison, it's important to remember that our 2025 results included approximately $3.75 per share of favorable nonrecurring items.

Let me walk through how we are positioning the portfolio. In Medicaid, we continue to see our rates lag elevated acuity and utilization, and we are working urgently with state partners on both rate actions and program design changes that support the long-term sustainability of the Medicaid program. We continue to view 2026 as a trough year. We expect our Medicaid operating margin to be approximately negative 1.75% with improvement over time as rates incorporate more current experience and our actions take hold.

We are also preparing for new eligibility and community engagement requirements under recently enacted federal legislation, the One Big Beautiful Bill Act. As these changes are phased in by states, we expect Medicaid membership may decline and the acuity of the population may shift over time. And we have reflected that in our planning assumptions. We believe this is manageable within the context of our diversified enterprise and long-term growth strategy, and we're approaching these changes constructively with state partners with a focus on continuity of care and program stability.

Turning to Medicare. Our execution during the annual election period was aligned with our emphasis on delivering greater value for members and strengthening our performance while maintaining stable share in markets that are core to our long-term growth. We expect Medicare Advantage membership to decline in the high-teens percentage range in 2026, reflecting deliberate portfolio actions and stability in our dual eligible membership. The actions we've taken and the composition of our membership should support meaningful margin improvement in 2026.

In the individual ACA market, we've repositioned our plans with discipline to reflect higher costs observed this year and the expiration of enhanced subsidies while maintaining value and access for consumers. Our commercial business continues to have healthy momentum particularly in national accounts, supported by a productive selling season, favorable client retention and new opportunities to expand our reach through the second Blue bid process.

We remain disciplined in our pricing and focused on delivering sustainable margins while helping employers address affordability through whole health solutions that integrate a member's medical, pharmacy and behavioral health needs. Our integrated approach continues to resonate in the market, and we are pleased that 40 employers over the past 5 years have selected our Anthem-affiliated plans as their sole carrier.

And finally, Carelon is increasingly recognized as a differentiated platform in the market with growing demand for its solutions in managing high-cost, complex areas of health care. Near-term growth will be moderated by lower health plan membership, most pronounced in CarelonRx, while Carelon Services is less impacted by membership dynamics, reflecting its broad mix of external relationships and value-based arrangements.

As our business mix evolves and we make targeted investments to strengthen the foundation, we are also refining certain long-term margin expectations to reflect a more prudent view of the forward environment. Our long-term enterprise margin target is 5% to 6%. For Health Benefits, Carelon and CarelonRx, we are targeting mid-single-digit margins with our Carelon Services target unchanged. These updates are intended to provide a clearer, more durable framework for evaluating performance, and they do not change our focus on disciplined execution, durable earnings growth and strong cash generation.

Stepping back, we view 2026 as a year of execution and repositioning. Across Medicaid, medicare Advantage and ACA, the dynamics we've described reflect a combination of policy-driven changes and deliberate portfolio and pricing actions designed to strengthen performance consistency, and we are aligning our cost structure and operating priorities accordingly. That's why we believe we have a clear line of sight to improve performance as we move through this year and into 2027.

Now let me turn to the actions we have underway. We are strengthening our ability to anticipate emerging utilization trends and improve care coordination by leveraging actionable data and advanced analytics. These capabilities help us identify trends earlier and address inefficiencies in the system while supporting timely access to appropriate high-quality care.

In Medicaid, we're strengthening our analytics to identify outlier utilization and billing patterns in high-cost substance use disorder treatment settings while maintaining access to clinically appropriate care. These insights are enabling targeted actions, including provider education, claims review enhancements and payment accuracy and compliance initiatives where appropriate, consistent with program requirements and clinical guidelines. We're able to execute with confidence because we've built and are scaling capabilities that improve outcomes and reduce costs in complex areas of health care.

In 2026, we will further strengthen specialty pharmacy management, advanced behavioral health support and expand care management programs for members with elevated care needs. Established programs in oncology and serious mental illness are delivering savings for our health plans in the face of heightened utilization trend.

Our patient advocacy programs now serve over 7 million members, up nearly 20% from last year. Through proactive tailored support, we help members navigate the system with greater confidence, remove points of friction and close gaps in care, especially for individuals with greater care needs where early engagement can materially improve outcomes and reduce downstream costs.

And we remain deeply committed to improving the experience of care providers. We remain on track to exceed our commitment that 80% of prior authorization decisions will be made in real time in 2027, particularly for routine approved services, supporting faster access to care and reducing administrative burden for care providers. Through our Health OS platform, we're enabling real-time data exchange that aligns information across the system, streamlines interactions with care providers and makes it easier to deliver care.

In summary, while the environment we operate in continues to evolve, our strategic direction remains clear. We are entering 2026 with prudent planning assumptions, focused execution and targeted investments to unlock the embedded earnings power of our diversified platform. And based on the actions underway this year, we remain confident in our long-term algorithm and our expectation to return to at least 12% adjusted EPS growth in 2027.

Before closing, I want to thank our associates for their unwavering commitment to our purpose throughout 2025. In the face of a challenging year for our industry, our teams operated with integrity, compassion and a deep sense of responsibility to the people and communities we serve. Their dedication is the foundation of our performance today and the progress we are building for the future, and I am deeply grateful for the impact they continue to make across Elevance Health.

With that, I'll turn the call over to Mark for a more detailed review of our financial results and outlook.

Thank you, Gail, and good morning. Elevance Health reported adjusted diluted earnings per share of $3.33 for the fourth quarter and $30.29 for the full year. Relative to our guidance, fourth quarter results benefited from greater tax favorability than anticipated, increasing the full year contribution from nonrecurring items to $3.75 per share.

Solid underlying performance in the quarter enabled us to advance a portion of the investments we have planned for 2026 and to support our workforce as we enter the year. Throughout 2025, we remain focused on aligning pricing to elevated cost trends, refining our product portfolio and investing selectively in capabilities that differentiate our model and support sustainable growth.

We ended the year with 45.2 million members, a decrease of approximately 500,000 year-over-year, principally reflecting a decline in Medicaid membership due to continued eligibility reverifications. Operating revenue for the quarter totaled $49.3 billion, an increase of 10% from the prior year, driven by premium rate adjustments in recognition of higher cost trends and acquisitions completed in the past year. Our consolidated benefit expense ratio was 93.5% for the quarter and 90% for the full year in line with our guidance.

Cost trend development was consistent with our expectations across major lines of business. Our adjusted operating expense ratio was 10.8% in the fourth quarter and 10.5% for the full year. We are managing the enterprise with discipline while making targeted investments to support our long-term performance. During the quarter, we pulled forward $0.25 of the approximately $1 per share of incremental investments that we had anticipated in 2026.

Our Medicaid operating margin ended the year slightly favorable to the outlook provided last quarter. We are encouraged by the initial results of our targeted efforts to better coordinate care and support high-quality, low-cost treatment pathways. While the benefit of these actions will build over the course of the year, we continue to expect cost trend to be in the mid-single-digit percent range in 2026 with rates lagging this level of trend. As such, we anticipate our Medicaid operating margin for 2026 to be approximately minus 1.75%, in line with what we shared last quarter.

Medicare cost trend in the quarter was consistent with our expectations. For 2026, we made deliberate changes to our plan offerings and intentionally exited select geographies, prioritizing plans that deliver value to members while producing sustainable financial performance. As you heard from Gail, we now expect Medicare Advantage membership to decline in the high-teens percentage range in 2026 while achieving meaningful margin improvement.

We have also repositioned our individual ACA business for higher expected morbidity following the expiration of enhanced subsidies. Similarly, our commercial group risk membership reflects our focus on margin stability and disciplined pricing. Carelon continues to experience strong customer demand for its solutions. However, near-term growth will be moderated by lower health plan membership. The guidance provided today reflects the impact of our anticipated membership headwinds as well as investments we plan to make as we scale our dispensing and home health assets.

Operating cash flow was $4.3 billion for the year or approximately 0.8x GAAP net income. Cash flow in December was negatively impacted by the timing of certain Medicaid-related payments, which were subsequently received in early January. Incorporating these items, we expect our 2026 operating cash flow to be at least $5.5 billion. Days in claims payable was 41.3 days, a decrease of 0.1 days sequentially. For 2026, we expect days in claims payable to remain in the low 40s range, consistent with our long-term target.

In the fourth quarter, we repurchased 1.4 million shares for $470 million, bringing full year repurchases to $2.6 billion. Combined with dividends paid during the year, we returned $4.1 billion of capital to shareholders.

Turning to our outlook. We are establishing guidance for adjusted diluted earnings per share to be at least $25.50 in 2026. We anticipate operating revenue to decline in the low single-digit percent range in 2026 driven by a low double-digit percentage decline in risk-based membership, partly offset by higher premium yields and growth in Carelon. Our consolidated medical loss ratio is expected to be 90.2% plus or minus 50 basis points, reflecting a prudent view of cost trend and shifting acuity in Medicaid.

Our adjusted operating expense ratio is expected to be 10.6% plus or minus 50 basis points as we maintain operational discipline while investing to scale Carelon, embed AI-enabled and digital capabilities and simplify the member experience. Our capital deployment plans remain aligned to our long-term framework, and we plan to allocate approximately $2.3 billion towards share repurchases in 2026.

Regarding earnings seasonality, we expect to earn approximately 2/3 of our adjusted EPS in the first half of 2026 with 65% of that coming in the first quarter. Based on the actions underway this year, we are reaffirming our long-term algorithm of at least 12% adjusted earnings per share growth annually on average over time, and we expect to return to at least that level of growth in 2027 of our ending 2026 earnings baseline.

Finally, our long-term earnings growth algorithm is supported by multiple levers: robust revenue growth, operating margin expansion driven by operational execution and technology integration and our commitment to disciplined capital allocation. As our business evolves, we are recalibrating our long-term margin targets for the enterprise as well as for each segment to reflect our current portfolio and how we expect it to evolve in the future both across and within segments.

Importantly, the revision to our health benefits target margin is reflective of the revenue mix we have today while maintaining our targets by line of business. These adjustments are intended to provide a clear and durable framework for evaluating performance but do not change our conviction in the embedded earnings power of our diversified platform.

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

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

I wonder, when you think about the cost trend across the major lines of businesses, I think the industry would say and I think you guys would say that it was elevated in 2025 across commercial, Medicaid, medicare and exchanges. I know Mark is saying that you have a mid-single-digit cost trend assumption in Medicaid, I believe in the '26 guidance. But I wondered if I could just get you to comment on are you assuming sort of a similar cost trend in '26 in your embedded guidance to what you experienced in '25? Or is there any place you're assuming it gets worse or better?

A.J., thank you very much for that question. Briefly, I would say the fourth quarter medical cost performance across the health benefits segment came in generally in line to slightly better than our expectations. We did see some modest variations by line of business, and so we've carried that forward into our planning for 2026.

To your question, in commercial, within large group, we do expect cost patterns and margins to be largely consistent with what we saw in 2025, meaning an elevated but stable trend environment with some pockets of high utilization. In ACA, we again expect accelerating cost trends, especially as the expiration of the enhanced premium subsidies affects the risk pool. We do expect to see some healthier members exit. We do expect the remaining population to become more acute.

In Medicaid, we expect cost pressure to remain pressured again in 2026 at roughly twice the historical average, and that's going to reflect elevated utilization. It's going to reflect continued misalignment between rates and member acuity. That said, I would say, after 2 years of fairly unprecedented trend, we do expect some moderation versus 2025. So you could think about cost trend here moving into that mid-single-digit range, per your question.

And then finally, in Medicare, we anticipate higher reported cost trend in 2026 but that's going to be largely driven by our membership mix, including a greater emphasis on D-SNP. So overall, I'd say we're continuing to monitor trends very closely. We're comfortable with how we ended 2025, and we're very confident that our outlook for 2026 is prudent and appropriate.

Next, we'll go to the line of Andrew Mok from Barclays.

Your 2026 membership declines generally came in larger than expected, especially on the Medicare side. Can you walk us through what played out during AEP that prompted the negative revisions and help us understand the components of membership declines within commercial risk between ACA and employer group?

Thank you for the question. I'm going to have Felicia Norwood start and then maybe Mark talk a little bit about the second part.

Andrew, thank you for the question. Our enrollment during AEP and the member composition is really aligned with our focus on margin. As you know, we took very deliberate steps to reposition our business to deliver sustainable value for our members and move the business towards our margin objectives. So while our outlook for our membership is going to be in the high teens percentage scale reference, and this is below our expectations, we're really pleased with how members reacted to our emphasis on D-SNP as well as our HMO products as we go forward.

From a profitability perspective, I will say the mix of the lives that we lost was very consistent with our strategy. A majority of the attrition occurred in PPO products and in HMO products in geographies where we didn't offer a comparable alternative and where we were intentionally disciplined in repositioning our product vis-a-vis the broader market. The outcome that we've seen in January AEP reflects deliberate choices. The products and the members that we exited were less aligned with our long-term objectives, particularly as we continue to focus on our D-SNP products.

Importantly, and I think this is critical, we are positioned to deliver meaningful Medicare margin improvement to at least 2% in 2026, which is a meaningful step up year-over-year. So very pleased at how things turned out, higher membership losses, but very consistent with the expectations. And then I'll turn it over to Mark for the rest of the responses.

[Technical Difficulty]

The decline is really driven by deliberate pricing decisions that we've made, maybe more specifically in a subset of accounts, including some of the lower or negative margin in the public sector business that we had. And we really did make a conscious decision to hold the line on pricing and not pursue business at returns below our margin thresholds.

So thank you for the question. And I think the headline there again is this played out in a very disciplined way against the pricing expectations we set. And I think we feel very good about where we're coming into '26.

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

Wanted to ask about margins in the Health Benefits business for '26. So you mentioned Medicaid margins of minus 1.75%. I appreciate the help there. And you did say that margins were a little better than expected, I think, Mark, in the fourth quarter. Can you expand on the drivers of that in terms of pricing and cost as you go into 2026? And then any color on where guidance assumption sits for margins for the exchanges on Medicare Advantage would be helpful as well.

Justin, thanks very much for the question. I thought a good place for me maybe to start here is really to talk about how we ended the year from a margin perspective. And then I'll give a little bit of color in 2026. So overall, Health Benefits margin is very much in line with our outlook and our expectation.

On Medicaid, margins were pressured in the fourth quarter, but they did track slightly better than our outlook that we gave in October. And that really reflected two things, one, we had some favorable prior period development come through, and we also had some modest retroactive rates. And if you exclude those two items, medicaid margins, completely in line with expectations. They still reflected that elevated utilization. They still reflected that ongoing reverification-driven, risk-led deterioration and the misalignment of rates and acuity.

On Medicare fourth quarter margins, inclusive of the IRA driven Part D seasonality were largely in line with our expectations. They reflected the prudent assumptions that were embedded in our 2025 bids and overall guidance. And then in the commercial large group, cost patterns and margins, I would say, were again largely consistent with our expectations. On the ACA side, a smidgen better than our prudent outlook. Cost trends were significantly above historical levels, but again, very much in line with what we were expecting.

And so as we think about 2026, the guidance that we put out this morning really incorporates that framework, and that really means that continued pressure in Medicaid, offset by improvement in Medicare Advantage, as you heard Felicia talk about, and then better performance in the individual ACA space.

And then lastly, you had a quick question on flu. So maybe let me go ahead and cover that here. We did see a meaningful uptick in influenza-like activity in December that did have a modest adverse impact on the fourth quarter benefit expense ratio. And we have carried some of that experience into our 2026 planning. So specifically, we are expecting first quarter headwind of about 20 basis points for flu. That's already embedded in that outlook.

Next, we'll go to the line of Lance Wilkes from Bernstein.

In the Medicaid business, could you talk a little bit about rate outlook for 2026? And then could you help frame for us how we should be thinking about this on a go-forward basis with respect to -- obviously, you've given the trend estimate. But how should we be looking at kind of rate expectations, what states are doing as far as program changes? And then what are the opportunities and the achievable objectives for medical management?

Felicia?

Lance, thank you for the question. We are contemplating a composite rate increase in 2026 in the mid-single-digit percent range net of certain known risk corridor impacts. I will say the final rates that we've received from states for January, and as you know, January represents about 1/3 of our Medicaid premium, those rates were in line with our expectations. But for these states, the rates, while modestly above the historical levels, will still lack trend in 2026 given the ongoing membership attrition and the shifting risk pools we continue to see as a result of some ongoing state reverification activity.

You mentioned program changes. I will say the rate discussions today are increasingly tied to broader program changes and benefit designs that states are more receptive to consideration. And I think that's very important as we think about trying to maintain long-term sustainability and the adjustments that need to be made in states around budget challenges that we're going to see in 2026.

We are always engaged in constructive conversations with our state partners, and we're also taking actions ourselves to help control what states are seeing in terms of their Medicaid budgets by doing all of the things that states expect. That's tightening our cost management, increasingly focused on those high trend drivers that you heard earlier around behavioral health, ABA and other services. And certainly very much engaged in program integrity activities to make sure that the program reflects soundness as we look at ongoing issues in the program.

So good constructive conversations with rates, a continued lag, though, in terms of the trend. But I would say we continue to be very engaged in having a program that's long-term sustainable in our Medicaid program.

Next, we'll go to the line of Josh Raskin from Nephron Research.

Maybe just big picture, if you could give us a little bit more details and speak to what gives you that confidence to confirm the long-term EPS growth target of 12% plus starting in 2027 in light of the trends that you've seen in the past 2 years.

Is there something specific in Medicare or Medicaid or the commercial markets that suggest an opportunity to start growing earnings in '27? Or are you seeing something in Carelon side that maybe leads to a stronger acceleration of growth there? And lastly, I assume this includes your view of the 2027 MA rates post the prelim notice.

Yes. Thank you for the question, Josh. I think it helps, as we frame '27 let's start with '26. We guided to an adjusted diluted EPS of at least $25.50. And again, as I shared, we see that outlook as prudent and achievable, and it's based on actions that are already underway to reposition our business and improve margins across the enterprise.

So as I step back, '25 was about strengthening the foundation. We tightened pricing discipline. We improved our execution and we advanced our affordability through Carelon. And as you just heard, Mark, the fundamentals came in where we expected them to. And I think that work matters as we think about the next few years because it gives us a very clear line of sight and a lot of confidence in the outlook that we're laying.

So my headline for '26 is all about execution. The fundamentals are there. Looking to '27, we have confidence in at least 12% adjusted EPS growth coming off of our '26 ending baseline. And again, that's because it's driven by the same fundamentals that we saw at the end of '25 and into '26. Again, over the past 2 years, we've made very specific portfolio targeted decisions. Our pricing has hardened and our operating decisions are designed to protect our earnings base and position the enterprise for durable growth. That leverages the unique capabilities. And I think our diversified platform, we're going to start to see come through.

And there's three points I just want to underscore. First, the key earnings levers are already in motion. So that puts us in place for '25 and '26. Again, pricing care management and the portfolio, we feel, are positioned. Second, our '26 outlook is intentionally prudent so as those actions mature, we can capture more operating leverage, and that sets up a clear step-up into 2027. And third, and I think this is really important to your question. The path isn't predicated on a single assumption. It's built on multiple independent levers and disciplined execution across commercial, Medicare, Carelon and Medicaid. And that's why we have the confidence both in the '27 and our long-term earnings algorithm. And that confidence is behind our outlook in 2026 and the growth in '27. So hopefully, that provides some clarity.

Next, we'll go to the line of Lisa Gill from JPMorgan.

I want to go back to Mark's comments on the investments that we'll pull forward. Mark, I want to make sure that I heard you correctly. You said it was roughly $1 of investments but $0.25 was pulled forward. So should I think that $0.75 is still embedded in your guidance for 2026? And can you talk about specifically what buckets those investments are in? And how do we think about how it flows through the model?

Lisa, thanks very much for the question. Maybe let me do a little bit of a broader framing and then I'll get specifically to your question. So our results this morning do include $3.75 of discrete noncore items embedded in our outlook. And that is, to your point, $0.75 more favorable than what we contemplated in our October call.

So what changed versus prior expectations? Well, that incremental favorability, that was driven entirely by strategic tax items that came in better than expected as we finalized results particularly in the fourth quarter. And importantly, I want to emphasize this point here. Underlying operating performance came in as expected, meaning medical cost trends, operating execution, they're consistent with our outlook.

So given that our performance in those tax-related benefits, we made two intentional decisions. One, we pulled forward a $0.25 of the approximately $1 of incremental investments that we had previously planned for 2026. And two, we deployed an additional $0.25 towards retention and targeted workforce investments here. And so it gives us a lot of confidence as we set the baseline for 2026.

Next, we'll go to the line of Ann Hynes from Mizuho Securities.

Great. I know in your long-term guidance, you're lowering the margin profile of each segment. Within the health care benefits segment, can you let us know what changed for your long-term targets for Medicaid, Medicare and commercial? And then on Carelon, it looks like you're lowering the Rx part of it. Is that just driven by membership losses? Or is there anything else that's lowering of that target?

Ann, so most important here, we have not changed the underlying margin expectations for any line of business within Health Benefits, and that continues to reflect the risk that we assume and the value that we deliver for employers and the government programs that we support. What has changed is how we calibrate the Health Benefits segment margin to the portfolio we are operating today, applying the same line of business margin framework that we've always used.

So as we worked through an elevated cost trend environment, I would say commercial growth had been more measured than we originally anticipated, also as we prioritized disciplined pricing and margin integrity over volume. At the same time, the composition within commercial, that's also evolved. So individual ACA now represents a larger share of the segment relative to group commercial, and that obviously carries a different margin profile.

And so when you reflect these dynamics through the existing line of business margin ranges, the result is that mid-single-digit Health Benefits segment margin expectation. And so the key point here, look, this is not about a change in strategy or change in underwriting discipline or pricing. This is just a recalibration to better reflect the mix of our business today and a prudent view of the operating environment.

And why don't we have Pete talk a little bit about Carelon?

Okay. No, thanks a lot for the question, Ann. So you asked about the Rx margins longer term. And yes, we are adjusting them. It's a positive story around really growth and diversification of our portfolio. As we talked about, we're seeing a lot of growth in Rx. And in fact, just to reflect on what happened this past year headed into 2026, it was our best growth year ever. And part of that is the composition of the business that we're growing through. And we're starting to see a lot more large upmarket jumbo accounts flowing through our business. So that's one factor, and that comes with a different margin profile.

In addition, we continue to build out our specialty business. That's going really well both internally and externally. And again, that comes with a bit of a lower margin profile. And you've heard Gail and Mark talk about the investments that we're making in that regard. And then finally, I would say, longer term, we're very mindful and respectful of what's going on from a policy perspective. And I think we're being very prudent in this regard as we think about the longer-term profile of the Rx business. Thanks for that question.

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

This is Christian Borgmeyer on for Ryan Langston. Can you share where you began the year in terms of ACA membership after the annual enrollment period? Data on sign-ups nationally came in higher than we expected given the expiring subsidies, but I know there's some attrition typically in the first quarter. I know it's early in the year, but any notable changes in utilization patterns from this line of business in January?

Christian, thank you very much for the question. On the individual ACA, we are guiding towards at least 900,000 members at year-end 2026. And that outlook really reflects two drivers here: first, the expiration of the enhanced premium tax credits, which we expect is going to pressure retention and increase lapse activity; and second, intentional exits that we've made as part of our repositioning of the book for a more sustainable profile.

Importantly, coming out of open enrollment, membership is up approximately 10%, and that's helped in part by some of the modest growth that we've seen in markets we first entered in 2025, which offsets some of the intentional attrition that we expected in our core Blue states. Overall, I'd say trends through open enrollment are largely in line with what we've seen in the broader market.

The key swing factor, and I think this gets to the heart of your question, is really now a situation rates. And that's going to come down to member premium payments and lapse behavior. And that typically is going to become much clearer through early April as members work through that normal billing cycle over the next few months.

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

Just interested if you can provide us with an update on capital deployment priorities for 2026. And in particular, maybe just sort of touch on the M&A priorities in terms of, one, just appetite for doing transactions this year just given a dynamic backdrop.

And then two, looking over the last several years, certainly, you've had a lot of activity on the M&A side on Carelon Services, and in particular, acquiring risk-based platforms to integrate into that. Just interested if that remains a priority at this point or whether you're more focused on integration of those assets you've acquired over the last several years.

Thank you very much for the question. I'd say in the near term, our capital allocation is going to reflect a more conservative posture. Our priority here, look, is to maintain balance sheet strength and strong credit profile, fund targeted investments that accelerate margin stabilization and Carelon's continued growth and then to remain opportunistic around share repurchases, especially where we see compelling value.

Over the longer term, the capital allocation framework is unchanged. We remain completely committed to a balance sheet approach -- or a balanced approach that supports our long-term growth algorithm, including reinvestment back into the business, disciplined M&A focused on some of the integration or integrated capabilities that have strengthened our competitive position and then, of course, consistent capital return back to shareholders through dividends and share repurchases.

On M&A specifically, our near-term priority is really focused on that integration execution, really fully scaling and realizing the value from recent acquisitions. And so at least in the first half of 2026, you should expect a lower level of M&A activity and a much greater relative emphasis on opportunistic share repurchases.

Next, we'll go to the line of Kevin Fischbeck from Bank of America.

I wanted to follow up kind of on this margin commentary and the changes that you're doing there. I guess maybe putting in the framework of just the changes that you've had in the enrollment across the different businesses. I definitely applaud when managed care companies exit markets that aren't profitable, low margin. I think it's 100% the right thing to do.

But given that the membership numbers have been lower than we would have thought, I guess, across most of the products, is there anything that we should be reading into as far as where you are strategically or competitively in these markets? The magnitude is more than we would have expected and it's a broad-based, across-the-board dynamics. So just trying to understand there's something we should be reading into this and why like this business mix that you're now forecasting is different than the business mix you thought a few years ago when you provided your previous margin assumptions.

Yes. Thanks for the question. I guess I would simply say the headline is no, this is a very disciplined approach in each of the businesses. And let me just touch on them. In the commercial business, we made very specific decisions around the ACA and feel very good about the sustainability of where the platform and the membership is coming out. And as you heard from Mark a few minutes ago, I think we positioned ourselves well for sustainable business there.

On the broader commercial risk-based business, we actually had quite high retention amongst our commercial business but made some very conscious pricing decisions around public sector accounts that have been below profitability. So again, this is a repositioning of the portfolio ready for growth. On the ASO, we had a very strong national account selling season with great retention.

I think Medicaid represents really just the redetermination impacts, but we continue to grow and have won accounts in some of the more complex populations. So again, feel good there. And I feel very good about the positioning in Medicare Advantage. We came into this. We are very clear what we needed to do. As you heard, we believe we have improved our margin and, again, our sustainability. So I actually would say where we are entering '26, we feel quite strongly positioned for future growth in a very sustainable, strong margin position. So thanks for the question.

Next, we'll go to Erin Wright from Morgan Stanley.

So clearly, the industry was somewhat caught off guard with the MA rate notice this week. And just can you remind us of just your response? I think we know that to some extent, but your just ability to mitigate this on top of the cuts that you're making this year as well. I assume you'll continue to take a disciplined approach here.

And just your thoughts on what this means for the industry, for the MA market as a whole and from a policy perspective and what we could see going forward. And just do you think also more specifically, some of the risk adjustment changes being made, are you more or less exposed relative to the industry on that front?

Yes. Well, thank you for the question, Erin. And I'll start with just your sort of between the lines question, which is we will continue to take a very approach and positioning of our Medicare book. But I think it's important to start off by first framing the implications of the advanced notice. Medicare Advantage is a critically important program for seniors, and it brings together, as we've said, affordable coverage, coordinated care and supplemental benefits that members rely on to stay healthy and independent.

We are still going through the details. We just got them of the advanced notice. But at a high level, the advanced notice is effectively flat, which you've all reported on. And quite frankly, it just doesn't keep pace with the current medical fasting utilization trends, and that does create real pressure on benefit stability and affordability for seniors.

For MA to remain strong, the program needs to be stable and sustainable, and stability gets underlined when payment rates don't keep pace with the utilization and cost trends, especially as the member needs grow more and more complex. So we're going to continue to advocate, obviously, because if funding consistently lags the reality on the ground, the levers that we have are benefits, networks, premiums and exiting geographies. And quite frankly, that's not good for seniors and I don't think it's good for the program. And we do believe we see more than 55% of seniors selecting this program. So it's very popular.

We're also supportive of the measures that protect the integrity of the risk adjustment program. And if you think back, risk adjustment exists for a reason. It's to ensure that plans are paid appropriately for the health status of the members they serve. So as we look ahead, we're going to continue to work with CMS on two things that have to go together. One is the appropriate funding that reflects the actual utilization and cost trends to support program stability; and two, if changes to that risk adjustment framework are proposed, they need to be accurate and predictable and trusted to avoid disruption, I think, in negatively impacting seniors.

So our priority is, again, work with CMS and also protect seniors' access and affordability because we know the very popular program that delivers significant value for seniors. So thanks very much for the question.

Next, we'll go to the line of Ben Hendrix from RBC Capital Markets.

I just wanted to go back quickly to the Carelon margin discussion. You noted expansion of risk-based solutions in Carelon Services through 2025. I was wondering if you could remind us of the new services under product lines where you're taking risk, and to what degree could that expansion provide an offset to the shifting margin dynamics you mentioned in CarelonRx.

I'll have Pete address your question. Thank you.

No, thanks for that question. I think it's important to step back and just talk about how we address risk and Carelon because I think it's very important strategically. We're very intentional and disciplined about how we do that and take on risk. We, as you noted, have a diverse set of services and products and offerings. And importantly, in the infrastructure of Carelon, we're very disciplined around cost of care and managing trend across all these relationships.

I'd also say that we have a good mix of fee-based business as well as risk business. And then when you break down our risk portfolio, we approach it in a very different way, in a diverse way, where we're taking risk on a category of service basis in some cases as well as on a whole health risk basis. And again, we built in appropriate protections with risk corridors and discipline in terms of how we approach that. So I do think from an enterprise perspective, the way we approach that is very important in protecting our growth and our margin profile.

In terms of the services in which we deploy risk because you asked that as well, it varies. In most of our product offerings, we are assuming risk, like I said, sometimes on a category of care basis or on a whole risk basis. In some instances, we're on a fee basis. But we're excited about the proliferation of that and our advancement of whole health going forward. When you think about our new offerings like SMI, when you think about what we're doing around oncology, when you think about what's happening with CareBridge, these are all risk offerings that are deploying a lot of value from a cost of care and quality perspective for the enterprise.

Yes. Thanks, Pete. And the only thing I'd say is we have a very strong external growth pipeline, which I think validates what Pete is saying. Again, we're looking at serving the more complex populations based on the experience we have in our own health plan. So a lot of those programs around oncology, severe mental illness, orthopedics really give us a growth opportunity. So thank you for the question.

Next, we'll go to the line of Dave Windley from Jefferies.

I wanted to ask on the Medicaid membership expected decline. Is that all same store? Or does that contemplate an exit of a state or an end of a contract? I'm thinking about Georgia.

And then the 9% in total is a little bit higher than we were expecting your 125 basis points, I think, of margin pressure in Medicaid is consistent with what you had said before. And so I wanted to try to reconcile those that, that additional membership decline doesn't further disrupt the margin.

Dave, thank you for the question. You're right. We've guided to Medicaid membership decline around 750,000 members for 2026. And this really reflects really same-store, so a continuation of the challenges that we've seen across states as some states have really implemented more stringent eligibility reverification requirements. And that has happened, it happened consistently in 2025. And we thought it was very important to be prudent as we took a look at 2026 to maintain that same posture. We're continuing to work closely with our states, but certain eligibility requirements as well as program changes will lead to some of those reductions in 2026.

And then, Dave, how that carries in forward into our margin guidance of approximately negative 1.75% for the year is really grounded in three core assumptions. Number one, cost trend is going to remain elevated. We have planned for medical cost trend in that mid-single-digit percent range, still materially above historical norms. And number two, rates, as we discussed early on the call, are going to improve. But they will still lag trends. And you can think about that as roughly 1/3 of those Medicaid premiums reset in January. And then third, we're not relying on rates alone. We are using all the levers we control: title medical and pharmacy cost management, expanded BH interventions, et cetera. And so taken together, we think our outlook for Medicaid margin is prudent for 2026.

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

Commercial risk guidance is down about 700,000 lives while ACA is growing. Can you quantify how much of that decline reflects pricing actions on those government accounts versus employers shifting preference to ASO? And in your long-term Health Benefits guidance, does the mix change assume further commercial risk attrition or mainly the impact of the actions taken this year?

Thanks very much for the question. Maybe just a moment here to clarify. So on the individual ACA, we are guiding to at least 900,000 members at year-end 2026, and it's important to put that in the context of obviously where we ended 2025. For the employer group risk-based membership, we do expect to decline year-over-year in the high single-digit percent range. We spoke a little bit about that earlier, and that's primarily because we're prioritizing margins. And then finally, in ASO, we are expecting a pretty good season. I'm actually going to ask Morgan to help here because he deserves a lot of credit for our success in how we're guiding 2026.

Thanks, Mark, and thanks, Sarah. Regarding the ASO business, National accounts, and Gail mentioned too earlier, is just a spectacular year, which I think sort of speaks to the health of the assets across the entire enterprise when you look at it. And a couple of things were sort of driving that, Gail mentioned at the beginning of the conference today around second Blue bid, where this is the first year that we've had the opportunity for employers in competing geographies against us could actually quote with our organization if they wanted.

So when we think about how it came together, we had about 11 bids in the second Blue category for 2026, won 9 of them. And the tee-up of the actual pipeline, 2027 looks strong and also '28 as we sit here. So whether we're talking to local markets or the national markets, the self-funded business has done quite well. We expect it to continue to. And with that, as you also heard from Pete earlier, the pull-through with the CarelonRx has been really, really strong. notably in the upmarket where it had not been formally. So we're pleased with it and, look forward to continued success.

Next, we'll go to the line of Jason Cassorla from Guggenheim.

Maybe just a question on aggregate Carelon. It looks like for '26, revenue is growing across both Rx and Services, margins are generally holding in for both despite the enrollment losses for your Health Benefits business. Maybe can you just help unpack or bifurcate CarelonRx and Services revenue and margin impacts, specifically coming from the Health Benefits enrollment losses versus perhaps the growth in margin maturation you're seeing from external clients would be helpful.

Right. I'll let Pete address that. Thanks.

Yes. No, thanks for that question. Let's step back and just talk about first setting up Carelon for 2026 of what we came off of in 2025, which was very, very strong. I think you saw that come through. We had almost 60% growth on the services side, and on the pharmacy side, over 20% growth. And we're very encouraged in terms of what we're selling, a diversity of services, a growing portfolio of solutions. We launched CareBridge last year on the Rx side. As I noted before, we're selling upmarket to a much greater degree.

And importantly, that momentum is continuing into 2026, with respect to your question, external sales. In fact, I'll emphasize this. We had the best year both in Services as well as Rx in terms of external growth. And when I mentioned external growth on the pharmacy side, that's the integrated ASO growth going forward. As you noted, those tailwinds are being offset by affiliated membership attrition. And when you think about services, we also had 1 large external client, which we had planned for, that went from a risk basis to a fee basis. But that was the largest driver in terms of headwinds overall.

If you step back, though, and you take out that internal membership headwind, our overall growth would have been on the services side high teens, low 20s; and on the Rx side, in the low double-digit range, so consistent with what we've guided to longer term. And I would think of that as a mid-single-digit sort of op gain impact on the affiliated membership.

And for our final question, we'll go to the line of George Hill from Deutsche Bank.

Mark, the topic where I'm getting the most questions is can you just contextualize a little bit more what does the ending baseline mean? You talked about earnings for fiscal '26 being front-end loaded. Should we kind of be thinking about that last period run rate as the baseline for 12% growth? And then maybe talk about any visibility to any onetime items in '26 and whether or not that will be included or excluded from the baseline.

George, thanks very much for the question. This is really a good one to conclude on. So let me try to bring it together, the key themes and messages that we've delivered on the call today. So we have established the 2026 EPS guidance of at least $25.50, anchored in what I consider very prudent, achievable assumptions supported by actions that we have already taken underway to reposition our business and improve margins across the enterprise.

And at a high level, you could think about the EPS bridge to $25.50 is really being driven by a few key building blocks: stable performance in commercial fully insured and continued strength in commercial fee base, continued progress towards sustainable performance in ACA, Medicaid margins compressing to approximately negative 1.75% consistent with our view that 2026 is the trough year, more than 100 basis points of operating margin improvement in Medicare Advantage to at least 2%, low single-digit operating gain growth in Carelon where external momentum is partially masked by those affiliated health benefit membership declines, and then below the line, a meaningful step down reflecting the non-recurrence of the 2025 investment income and a return to a more normalized tax rate.

So putting all of that together, again, the guidance of $25.50, prudent, achievable assumptions.

Okay. Thank you, operator, and thank you to everyone on the line. As we close, Elevance Health is entering this year with a clear strategy and a strong sense of purpose. We're focused on improving affordability, simplifying health care and applying our capabilities in ways that drive better access outcomes and experiences for members and care providers and stronger health for the communities we serve. While the operating environment remains dynamic, our diversified platform and differentiated whole health approach give us confidence in the path ahead, and the actions we've taken position the enterprise to drive sustainable earnings growth over the long term.

Thank you again for your continued interest in Elevance Health, and have a great rest of week. Thank you.

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through February 28, 2026. You may access the replay system at any time by dialing (888) 566 0046 and international participants can dial (203) 369-3677. This concludes our conference for today. Thank you for your participation.

Well, welcome, everybody. We're happy to have Elevance Health participating in the conference again this year. Mark Kaye, EVP and Chief Financial Officer; and Nathan Rich, VP of Investor Relations.

So thanks, everyone, and thanks for the perseverance to get here through a tough travel and for everyone working on the -- with the new schedule.

So Mark, the Street seems to be assuming that your 2026 EPS will be flat with 2025 as the growth in the commercial and Carelon and MA margin and HIX margin will just offset the $2.50 or so of incremental headwind in Medicaid. So people seem to be gravitating towards, basically, a $27 EPS number when you make those adjustments versus a normalized the 2025 EPS run rate.

I know you haven't given guidance, but is there anything you can say that people should be taking into account that they're not?

Thanks so much, A.J. Really appreciate yourself and UBS hosting us at the conference. And that's a great question. It's a super place for us to start the conversation today. As you noted, we will be providing earnings guidance when we report our fourth quarter results in January.

So let me maybe start with the areas that are in our control and where we see several tailwinds. First, commercial performance remains strong. We have anticipated higher trend levels, and we've priced for them. We also experienced strong momentum in national account sales and expect continued growth in fee-based relationships. Second, in the ACA market, 2026 rates were filed to reflect the higher acuity that we've seen this year, and we've prioritized the long-term sustainability even if membership is lower. And third, in Medicare Advantage, we took disciplined and deliberate actions for 2026, including refining our product portfolio, sharpening our focus on dual special needs plans and exiting select markets that were not aligned with our strategy.

And these steps really position us to deliver the greater value or greatest value to members over their lifetime to enable us to grow sustainably over the long term and really to drive meaningful progress towards our target margin range in 2026 and beyond.

Balanced against those positives, there are a few known headwinds. The largest is Medicaid, where we continue to see elevated utilization and rate misalignment, and we're working actively to address that. Our initial view for our 2026 operating margin is to decline at least 125 basis points year-over-year from a margin of approximately negative 50 basis points this year.

Within Carelon, while we continue to expand solutions to our health plans, and we see strong demand from external clients, growth will be tempered by the still evolving enrollment dynamics in our health benefits business. And we appreciate the interest that investors have on potential outcomes, and while our view on membership is not final, we wanted to offer some thoughts here. And specifically, our preliminary planning assumption for our 2026 CarelonRx operating margin will be in the mid-5% range. That's a modest step down year-over-year, but it reflects the expected impact of health benefits membership changes, specifically in ACA.

And then finally, we're investing several hundred million dollars to build out our digital and AI capabilities, expand Carelon and then further strengthen our performance. So when I think about next year from a high level, 2026 is really about executing across our business and taking actions to absorb the headwinds in areas outside of our control as our pricing, our care management and our technology investments begin to take hold.

Okay. Thanks. I think you reiterated your long-term growth algorithm of at least 12% compound annual EPS growth. Wherever we end up for '26, is it reasonable to think that the 12% target could be achievable for '27? It sounds like the company sees Medicaid low on margin as being in '26. So it could become a swing to a tailwind in '27.

Yes. A couple of items to parse here. But we continue to be confident in the fundamental earnings power of our diversified businesses and in our long-term growth algorithm, which, as you noted, is for at least 12% adjusted EPS growth on average over time.

And to be clear, this reflects a multiyear CAGR, which means growth below 12% in some years, as we've seen recently, while other years will be above that level. And so as I think about 2026, it's going to be a year of transition and execution as well as meaningful progress. We're repositioning of the ACA business to reflect the higher market acuity and potential risk pool shifts next year. Our product orientation in Medicare Advantage is disciplined. It's focused on long-term sustainability, and we took a prudent stance on our trend in our commercial group pricing.

And these actions are going to collectively allow us to build that foundation for margin improvement across our lines of business, buttressed by operating leverage and disciplined capital deployment.

Okay. And you referred to this earlier, maybe talk about Medicaid for a minute. The company is now anticipating a negative 0.5% operating margin in '25 and at least a further 125 basis points decline in '26, implying that the margin could drop to minus 1.75% you're calling that a prudent starting point and you're looking for incremental information by late January. What incremental information will the company have by then?

Yes, that's an important question. We approached our 2026 outlook by anchoring to the factors we can control, managing cost trend, driving operational efficiency and positioning the business for sustainable growth. And where uncertainty exists, we have provided our initial planning assumptions to help frame our expectations.

And so as I think about what we'll learn between now and when we set official guidance, we'll receive final rates for the portion of our premiums that reset in January, which is about 1/3 of our full Medicaid revenue. We'll have an additional 3 months of cost trend information. October results were in line with our expectations. And as reflected in our Form 8-K that we filed last night, we reaffirmed our full year guide.

And then finally, we continue to take actions to identify and impact areas of elevated trend as we work with the states to reduce underlying and improve program sustainability. And with this added visibility, we'll be better positioned to set 2026 guidance in January that is grounded in what we know and focus really on what we can control.

Okay. Does the negative 1.75% operating margin assume that the Medicaid cost trend stays about the same year-to-year and the rate increases remain about what they've been, and therefore, you're not closing the margin gap relative to the 2% to 4% long-term target?

Yes. I appreciate the opportunity to discuss the assumptions underpinning our outlook for Medicaid margins in greater detail. The decline in our Medicaid margin of at least 125 basis points in 2026 contemplates that cost trend levels remain at a level consistent with our expected experience in the fourth quarter and that rate increases remain below that cost level.

So more specifically, you can think about medical cost trend as anticipated to increase in the mid-single-digit percent range. And we're planning for a composite rate increase also in the mid-single-digit percent range, though below that expected trend level. Importantly, we continue to take actions to help states manage costs, including tightening medical care management, expanding behavioral health interventions, strengthening specialty drug management and optimizing sites of care.

And we expect these efforts to have a more meaningful impact as 2026 progresses. And our efforts, combined with the rates that are going to increasingly reflect underlying trend, underpin our belief that Medicaid margins will trough in 2026 before improving in 2027.

Okay. To that point, what gives the confidence that '26 will be the trough given that the work rules under Medicaid come in, in '27?

Yes. We've received this question a lot in the weeks since we reported. So let me outline why we believe 2026 will be the low point for Medicaid margins. First, we're taking decisive actions to improve affordability across several key levers like improving care management, deepening value-based arrangements and scaling digital and AI tools to close care gaps and streamline administrative workflows.

Second, rates should begin to catch up with cost trends as states incorporate more recent experience, which remains elevated into those base rates. And then third, while we recognize that the provisions included in the budget reconciliation bill will present a headwind, we expect the impact to phase in over time as implementation time lines vary across states.

Also, some of the eligibility tightening that we're already seeing could be pulling forward part of the effect from these future provisions, reducing the incremental impact in the later years. And so I'd say our 2026 outlook is intentionally prudent. It's meant to establish a credible foundation for improvement in 2027 and beyond.

Okay. Just broadly, why are the rates lagging the trend? When do you expect rate adequacy to improve?

Yes. Let me share with what we're seeing in our Medicaid book and why we're confident rates will come back into alignment with cost trends over time. As you know, state rate setting processes typically rely on experience periods that lag current trends by up to 12 to 24 months.

And historically, that approach has worked well in a stable cost environment where medical trends ran in the low single-digit percent range. But in today's environment where trends accelerated sharply and then remain high, that lag has led to a material timing mismatch between rates and the actual cost of care, which, as you know, is impacting our results.

Overall, I would say states are aware of this timing mismatch dynamic. And in many cases, we're now seeing rate actions begin to better reflect higher costs as that newer claims data flows through the actuarial processes. And accordingly, as states begin to then incorporate 2025 and 2026 experience into upcoming rate cycles, we expect rate adequacy to improve meaningfully heading into 2027. And then at the same time, of course, our targeted cost interventions will help lower total program costs and really enhance that long-term sustainability for our state partners.

Okay. Sort of along the same line, we step into '26, '27 and some states implement work requirements or enhanced checks on Medicaid eligibility. How are you thinking about that and whether that could lead to disenrollment that's higher than you anticipate because of those checks?

It's a good question. So early on, there was definitely the expectation that some states might move more quickly to implement work requirements, possibly as early as 2026. Where we stand today, it appears that's less likely to occur as formal rules have yet to be finalized and states will need time to implement work requirements.

That said, we have already seen many states alternatively take steps to tighten eligibility and apply more stringent verification processes. And the effect of those actions are evident in the membership declines that we've seen throughout 2025.

Looking ahead to 2026, we expect the enrollment pressure to continue as states further refine eligibility roles. We also expect lower enrollment to raise overall population acuity, which will pressure the gap between rates and medical cost trends that we just spoke about. Importantly, that expectation is already factored into our outlook for next year's margin.

And then by 2027, our view certainly is that states are going to begin implementing the provisions of the budget reconciliation bill, including work requirements. And those changes will certainly place additional pressure on membership, but we do expect that overall impact to be manageable for some of the reasons I mentioned a minute ago. And so for our part, look, we're going to continue to partner closely with the states to navigate these transitions thoughtfully, ensuring really that continuity of care for the members, supporting states as they look to achieve program sustainability and then overall, just maintain integrity and stability.

So as you think about staying in various Medicaid programs, I think the commentary from the company has been typically that as long as you are paid actuarially sound rates, you will power through. But we've seen now this elongated period where rates have not been matched trend. Is there a point where the company begins to exit certain states due to how long it is taking?

We remain fully committed to the Medicaid program for the long term. It's a vital part of our mission. It's an important growth platform for the enterprise, but we are prepared to exit if a market is not financially sustainable through an enterprise lens.

And to evaluate this decision, we're utilizing a comprehensive framework that looks at rate adequacy versus trend, historical performance, program design and stability, network and operational requirements as well as the broader regulatory landscape. We're also considering the integration that will be required to serve dually eligible populations and our ability to optimize Carelon's capabilities for this population. And if following that evaluation, it becomes clear that it will not be financially viable to remain in the market, we will make the decision to exit.

Importantly, states need stable partners, and they need those stable partners to ensure program continuity and access for beneficiaries. And so pushing margins below sustainable levels for extended period will result in plan exits and service disruption. And that's outcomes nobody wants. And that's really why we are working so closely with the states to ensure rates return to actuarial soundness and reflect current population acuity and cost trends.

Okay. As you think about the underlying cost trend dynamics in Medicaid, why is utilization trend or trend in behavioral or specialty drugs rising so much? Is there a breakpoint where states have to adjust benefit design? And similarly, how would this translate to you as the capitation rate will presumably drop if benefits are reduced?

It's a great question. So both behavioral health and specialty drugs are big drivers of the higher levels of cost that we have seen. In behavioral health, utilization continues to rise as access and awareness expands, the stigma around mental health services subsides and more conditions are being diagnosed and treated. We're also seeing broader benefit coverage and integration of behavioral health across key management programs. which, while positive for members, does add pressure on utilization beyond what many states originally anticipated.

On the pharmacy side, specialty drugs remain a key driver of medical trend as new high-cost therapies come to market and existing drugs gain expanded indications. And these treatments are clinically valuable but significantly more expensive, which increases the overall cost intensity.

From the state's perspective, elevated trend has increased interest in program changes. And as a company's strategy is really focused on improving affordability, we are at the forefront of helping states lower costs. And that means we're addressing cost pressure proactively. We're improving utilization management. We're curating high-value networks. And we're expanding value-based care programs through Carelon. And these interventions really help reduce unnecessary utilization while ensuring members continue to receive medically appropriate high-quality care.

When you think about the fact that you're operating at a 0.5% negative operating margin, Medicaid anticipating it worsens next year, how do you look at the G&A load associated with that business? Is it where you believe it should be, given how much absolute enrollment has declined?

I appreciate that question. Membership declines naturally create some G&A pressure through deleveraging. But we've been proactively addressing that, and we feel good about where we are today. Broadly speaking, there's still opportunity to reduce expense levels associated with managing Medicaid populations. And some of that is structural.

Smaller, higher acuity programs like LTSS carry inherently higher expense loads because of the staffing and operational requirements states mandate to support those members. And we are working closely with states to modernize those requirements and see significant potential to embed more digital and AI-driven solutions that can lower the cost to serve these members while at the same time, maintaining the high quality of service that the states expect.

So to your specific question, we feel good about our current G&A levels in Medicaid, and we've taken deliberate action to align our cost structure with the evolving membership base. And then over time, we do believe there's meaningful opportunity for innovation across the industry, and we're very, very focused on leading that effort.

Okay. Maybe to pivot over to Carelon for a minute or 2. I think the company anticipates a strong external growth heading into next year, but at the same time, suggested the enrollment impact on the exchanges and in Medicaid could impact growth here. Is there a way to dimension these impacts?

Yes. We'll provide our full year outlook for Carelon in January once we have greater clarity around membership levels, particularly as we move through the Medicare annual election period. and open enrollment on the exchanges. And these figures, they're going to help shape our view looking forward. And so we'll size any specific implications accordingly in our actual 2026 guidance.

At this time, and as I briefly mentioned earlier, we do expect CarelonRx operating margin to be in that mid-5% range next year. And that reflects both anticipated membership changes in health benefits, particularly in ACA and targeted investments to scale our specialty and digital capabilities. And so with that in mind, let me maybe offer just a few broad points to help frame the relationship between our health benefits membership and our Carelon performance.

Now first, earnings mix. So Carelon's affiliated earnings mix by insurance line broadly mirrors the enterprise, meaning we generate more earnings from commercial, particularly group than from government programs. Second, margin profile. Carelon's margins generally track the target margin profile of the health benefits line that we support, meaning they're higher in commercial, lower in government. And then third is revenue mix. So here, think about affiliated revenue mix is aligned with the health benefits premium distribution by line of business.

So in summary, I'd say that in today's high-cost environment, we're seeing strong demand for Carelon's differentiated capabilities. Clients are looking for partners who can manage complex cost and quality challenges and Carelon's integrated solutions are resonating.

Okay. With one of your -- specifically on CarelonRx, one of your peers has introduced what they're calling as a rebate-free PBM model. What do you anticipate that this means for the future of the PBM market?

Yes, that's a super question. So we certainly understand the interest in how the PBM market may evolve. So let me talk about Carelon's strategy. So we've built CarelonRx for long-term durability and adaptability. The strength of our pharmacy model lies in driving affordability through deep integration of pharmacy into whole person care, the coordinated management of high-cost therapies and proactive member engagement.

And these are the areas where we're investing and where we're seeing results with up to $100 per member per month savings when incentives are aligned. Our contracting framework also provides plan sponsors with meaningful optionality in how they engage with us, enabling each client to align its pharmacy benefit structure with its broader benefit strategy.

And that gets back to an essential point I want to make sure that affordability is paramount. And that's why we've led the way in transparency and value by providing net pricing at the point of sale for our commercial fully insured members since 2020. And this approach really helps members make those more informed decisions and experience meaningful savings at the pharmacy counter.

So in our view, these industry changes simply reinforce the integrated approach that we have already established. And CarelonRx is all about transparency and affordability, and that's very well aligned with where the PBM market is heading and further supported by, I'd say, the differentiated enterprise capabilities that we're building out across Elevance Health.

Okay. When you think about the evolution of issues like rebates and spread pricing, can you talk about how much exposure you have to these? And what are some of the differences and nuances to consider in terms of what you bring to market versus peers?

No. We philosophically manage CarelonRx through a flexible client-agnostic economic model. Different customers prefer different structures, and our contracts reflect that.

Nonetheless, our goal always remains the same, the lowest net pharmacy cost and the highest transparency into the commitments that we make. What really differentiates us is how we create value through that integrated approach that connects medical, pharmacy, behavioral and social health. And by addressing the whole person, we can deliver better outcomes and lower the total cost of care.

And this approach continues to resonate with employers seeking sustainable affordability. And that's reflected in the fact that most of our pharmacy clients are also partner with us for medical. We are continuing to see shifts in drug mix and utilization as new therapies come to market. We're actively managing these dynamics on behalf of our clients. And our teams really continue to adapt to those changing market conditions, I'd say, with discipline and agility because the idea here is, again, deliver consistent value and affordability across our pharmacy programs.

Okay. You've been making investments in CarelonRx, whether in specialty pharmacy, digital integration, client implementation. How are they enhancing the PBM model? And anything to say on your relationship with CVS Caremark and how that supports your broader strategy?

Our investments in CarelonRx focused on 3 principal areas that strengthen the platform and drive sustainable growth. First, we're expanding capacity to serve larger, more complex clients, enhancements to systems integration, digital capabilities, onboarding tools, they're all ensuring smooth transitions and efficient go-lives.

Second, we're advancing our pharmacy platform to meet future needs, and that means scaling clinical and fulfillment operations and enhancing automation and efficiency. And then third, we're strengthening our Medicare Stars quality performance across the enterprise, and that means enhancing some of the pharmacy capabilities to improve medication adherence and then chronic condition management. So we feel good about that.

On the relationship with CVS Caremark, that really provides continuity as we build out and expand our internal capabilities. The idea here is to ensure a seamless experience for our clients and members while preserving flexibility to transition more functions in-house over time.

Okay. Maybe just to ask you on the GLP-1 question. Do you have any early thoughts on the administration's announcement regarding GLP-1s for obesity and Medicare? How are you thinking about the potential impact on medical cost trends? Given the timing of the announcement, is there exposure for Medicare Advantage in '26? Can you comment on any protections that might be in place?

Thanks, A.J. It's a very well-timed question. So we are strongly supportive of the administration's ongoing efforts to lower drug prices and expand access to innovative therapies that improve health outcomes for tens of millions of Americans and look forward to collaborating with federal and state partners to implement these changes in a way that ensures consumers can access these treatments safely, effectively and affordably.

CMS has not yet outlined its approach to coverage for Medicare Advantage members. And historically, new benefits have been introduced through targeted demonstrations or pilot programs, which could serve as the model for obesity drug coverage. So I'd say it remains very early. Details are still emerging, but we are prepared to manage potential impacts. And importantly, we remain confident in our ability to deliver margin improvement in 2026.

Just to try to drill down a little bit more on that. Do you have any sense -- have you gotten any indication whether these changes would likely impact the January 1, '26 year or '27? If there is an impact in '26, do you think it would be optional or mandatory participation on the part of MCOs?

Yes. So there's still a lot we don't know at this stage. But as I mentioned, we don't currently envision this as having a material impact to our 2026 outlook. And what we do know today is that the administration's proposal introduces a new framework for Medicare and Medicaid coverage of GLPs for weight management. but implementation details, they remain limited. And based on what's been outlined, Medicare coverage could begin through a CMMI demonstration likely in mid-2026 or later for beneficiaries that meet certain defined clinical criteria.

What's less clear to us is really how the program will operate. For example, we don't yet know how eligibility will be verified across Medicare and state Medicaid programs. We also don't know the timing and scope for state adoption. And so I'd say it's really just too early to assess how quickly utilization might ramp once coverage begins. So we're monitoring developments closely. We're engaging with CMS and with our state partners.

Okay. And Carelon, on services, the company is expanding to take on more risk over time. Our sense is this has been mostly focused on behavioral. But given the elevated levels of behavioral utilization, how has the company managed this? Can you provide any color on how it's progressing?

Yes. So to start, Carelon Services offers a set of capabilities that is unique in the market. Our approach is clinically deep. It's data-driven and it's capital efficient.

And it's designed to address the most costly complex conditions and deliver measurable value across all lines of business. Our focus areas include oncology, serious mental illness, behavioral health. And these are areas that drive a disproportionate share of trend and where traditional primary care models are often insufficient. As I mentioned earlier, behavioral health has been a driver of higher costs. And so we've built integrated behavioral programs that align incentives around outcomes versus volume.

And that's to combine all the idea of combining these advanced analytics with specialized clinical interventions. And these programs we've seen, they're improving access. They're reducing avoidable hospitalizations and they're driving most importantly, better adherence and continuity of care. I'd say performance in the programs remain solid even amidst the elevated utilization.

And then to the last part of your question on CareBridge, the acquisition here really expands our ability to integrate behavioral and home-based care. And that's all about supporting high-need populations in their homes and communities. And this is going to be a key enabler of our next phase of growth because it allows us to create that seamless coordination across physical, behavioral and social needs.

Okay. Maybe quickly on the exchanges, companies expressed optimism on margin recovery in the exchanges. We understand you can price for a specific level of margin. But what gives you confidence on landing where you priced? I know one of your peers has said they price for mid-single-digit margins, but are only anticipating breakeven to give themselves some cushion, I guess, what is Elevance's thinking about '26 in exchanges?

Yes. While we're not providing specific margin expectations for next year at this point, we do expect meaningful progress back towards program sustainability. And our pricing, our network strategy, our care management capabilities, these all position us to offer affordable options for consumers while maintaining financial discipline.

We are focused on long-term sustainability, and that means we've rebalanced our product positioning. We've reduced the number of plans priced near the lowest cost silver tier as well as refined our geographic footprint and exited select counties with no long-term path to sustainability. And taken together, these actions give us confidence that our ACA business will improve its operating performance in 2026 even as overall market membership adjusts.

So you have a larger footprint in state-based exchanges. Does this create a different dynamic compared to others when thinking about margin recovery and how the markets in your geographic footprint may decline?

That's a good question. So we will be participating on the individual exchanges in 18 states for 2026. The majority of our membership is in our 14 blue markets, and states that have effectively, in a way, experienced lower membership growth than the overall exchange markets since the enhanced subsidies were enacted in 2021.

And that's important to keep in mind when comparing rate increases for 2026 across payers because state footprint really does matter as does product mix and, of course, relative positioning coming out of 2025.

So overall, our approach to rate filings were local. They were data-driven, and they were very focused on individual geographies. And as naturally, we calibrated pricing benefits and network design to reflect the unique characteristics of each market's risk pool. We worked very closely with regulators to ensure our final rates were appropriately oriented and most importantly, we were actuarially sound. And so taken together, that discipline is what's giving us the confidence that we're well positioned for improvement in the ACA market next year.

Okay. Maybe quickly on Medicare Advantage. The company is shrinking its footprint in '26 and exiting PDP. At this juncture, is there any way to frame where you're likely to end up in '26 in terms of enrollment?

Thanks, A.J.. So for 2026, we've approached our Medicare Advantage bids with a focus on financial discipline and long-term sustainability. We undertook a comprehensive review of our offerings, and we made the strategic decision to exit select plans and service areas where the economics no longer support our return objectives. And we expect these changes to impact approximately 150,000 members.

Also, as we've spoken to previously, we have prioritized product designs that support strong member retention with a particular emphasis on HMO and D-SNP offerings where we have a track record of delivering quality outcomes and strong performance. And at the same time, we are maintaining flexibility in our marketing strategy and broker partnerships to adapt to evolving market dynamics.

And that means really about -- that means really prioritizing member retention and supporting sort of that long-term sustainable performance. So while it's still early in the annual election period, for 2026, we are planning for our total MA membership to decline in the high single to low double-digit percent range. That is by design.

And this preliminary outlook reflects both planned exits and intentional product rationalization as we focus on growing with the right member mix for the long term. Importantly, we expect our market share to remain approximately stable in those markets that we see as core to our long-term growth. So 2 quick comments. appreciating we're almost out of time. I would say our stars ratings are improving for the 2026 plan year. We do see 55% of members in 4 star or higher plans, and that's going to really position us well to maintain momentum in 2027.

And then last, look, we'll update investors on the outcome of AEP together with our January guidance. Our goal is really clear here, a smaller but higher quality NA book exiting 2025 that supports durable margin recovery and sustainable performance over time.

As you think about the commercial business performed in line with expectations this year, '26 looks like another solid year for top line growth and premium increases. Anything on the margin you can offer there?

I would simply say in our Commercial Group Risk business, we maintained a disciplined approach to pricing. We're very pleased with the client retention levels that we're seeing for 2026. We do anticipate ongoing margin stability given the value of that integrated medical pharmacy and advocacy solution set we've spoken about today.

And then our focus on whole health here in partnership with Carelon does resonate very well with clients. I'll give you an example here. Retention levels in national accounts, they're nearing, for example, all-time highs. And then next year, it will certainly bring on an even larger number of integrated medical pharmacy clients, and that's just a testament to the value of the model that we've spoken about.

And given the high premium increases with some of the medical cost trends are employers looking to adjust product lines or other options to control medical costs? Are you seeing employers look to shift more cost on employees as you head into '26?

So at Elevance Health, A.J., affordability and simplicity underpin our enterprise strategy. And we're working closely with employers to manage rising health care costs and improve the member experience. Our whole health integrated model powered by personalized advocacy and digital tools like Sydney Health do continue to differentiate us in the market. And that's allowed us to improve engagement scores and outcomes for employees and employers.

And as a result, our Net Promoter Scores remain the highest in the industry, reflecting the trust and satisfaction of those we serve. And then through Carelon, we're delivering integrated value-based services, ranging from behavioral health to specialty pharmacy and post-acute care, all things that are helping to bend that cost curve and enhance workforce satisfaction.

Importantly, one last comment here. Employers also have more direct levers that they can use to manage costs such as benefit buydowns or plan design adjustments. We're also seeing growing adoption of our level-funded solutions, Anthem balanced fund, which do provide more predictable monthly costs with the potential to benefit from positive medical performance. So look, employers are continuing to prioritize value. This is not just about cost, and we view that as a long-term strength to our model.

And 2 more to plow through here. On the AI investments, you've talked about that. How should we think about those investments and the gains that will come from them? Is it constraining growth now because it's above-average investments?

So our AI investments are designed to create enterprise leverage by improving affordability and strengthening operational performance.

And these efforts are focused across 3 areas: improving the experience for our members, reducing friction for providers and then empowering our associates. For our members, we are deploying AI to make health care accessible and personal like the digital virtual assistant, which is being rolled out to more than 10 million members by the end of the year as well as our AI-enabled call center assist. For providers, AI is helping simplify administrative processes and improve clinical turnaround times.

And we can accelerate approvals where clinically appropriate. We can also reduce friction in the system by reducing missing or incomplete information and really process claims that are more quickly with increased automation. And then for associates, we're using AI to reduce low-value work. Look, our internal Gen AI tool spark really does allow our teams to find opportunities to work more efficiently. And we're also advancing AI fluency across the enterprise through our Open AI certification program. So a couple of examples here to give you a flavor of what we're doing.

Okay. Just lastly on capital deployment heading into '26. I know the company has long-term targets. Are we likely to see any one area significantly more emphasized next year than not?

So our capital deployment strategy remains disciplined. It is aligned with our long-term framework. And as a reminder, over time, we target deploying approximately 50% of our free cash flow towards M&A or organic reinvestment back into the business and then the remaining 50% being returned to shareholders, including about 30% for share repurchases and 20% for dividends.

And while we're going to allocate capital consistent with this framework over time, we do have the flexibility to adjust those percentages in any given year. And so in the near term, we do expect a greater emphasis on share repurchases, especially as we integrate recent acquisitions and continue to invest in growth in a disciplined manner. We do see significant intrinsic value in Elevance Health stock, and we will remain opportunistic, especially given where our shares are trading today.

Thank you, A.J.

That's great. Well, thanks so much, Elevance, for participating, Mark and Nate, and thanks, everyone, and have a great afternoon.

Thank you.

Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health Third Quarter Earnings Conference Call. [Operator Instructions].

As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead.

Good morning, and welcome to Elevance Health' 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 Carillon. 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. 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 the listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC.

I will now turn the call over to Gail.

Good morning, and thank you for joining us. 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 Health OS and our AI-enabled clinical support are already reducing friction, feeding 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. We are reaffirming 2025 adjusted EPS of approximately $30 and continue to view $27 a as the appropriate earnings baseline, excluding $3 of discrete nonrecurring items.

As we planned 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. In Medicare Advantage, we've taken disciplined actions to improve profitability in 2026. We 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 4-star or higher contracts, including 3 5-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 Promotor 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. 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 work closely with states to support implementation and ensure continued access for consumers who rely on this coverage.

Caroline is expanding external relationships and scaling Furnas, 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. Carelon Rx had another strong selling season for 2026 with several national account wins and high retention. 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 and health benefits will create a directional headwind for Carillon 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.

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 2 years, and providers Elevance Health OS platform befit from aligned data sharing, faster approvals and reduce 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 subseas 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 -- we will then establish guidance that is both prudent and achievable. Capital deployment remains an important lever in our long-term earnings growth algorithm. Following several years of strategic acquisitions to expand Carillon capabilities, our focus is now on integrating those assets. 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. 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.

Thank you, Gail, and good morning to everyone. Elevance Health reported third quarter GAAP diluted earnings per share of $5.80 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. This excludes approximately $3 of nonrecurring 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.

This enrollment 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 update. 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 programs.

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 and 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.

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 Talon's differentiated value-based care approach is driving higher retention and expanded fee-based relationships. [indiscernible] continues to deliver strong performance across both pharmacy and services, reflecting the power of our integrated platform. Kill on Rx revenue grew 20% year-over-year, driven by strong momentum with our largest clients, and Killon services grew by more than 50%, supported by robust organic growth and the continued integration of Caybridge. We are making targeted investments in technology, integration initiatives and operational efficiency to sustain this growth and enhance performance across the enterprise. While Killon-Rx margins are expected to be modestly below our guidance due to these investments, [indiscernible] 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 Kalon is driving growth across Elevance's Health. Our adjusted operating expense ratio was 10.4%, and we continue to manage the business with discipline while making targeted investments to scale [indiscernible] 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 alternative investment portfolio.

Third quarter operating cash flow of $1.1 billion or 1x GAAP net income was impacted by the cash settlement payment related to the Blue Cross Blue Shield multi-district litigation. 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 Caybridge, were approximately flat year-over-year. Turning to next year. While we are not providing 2020 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. 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. And 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. These include targeted use of AI and digital tools to enhance the member and provide 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 enterprises long-term 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.

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

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. 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 than you would have anticipated, and you expect it 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? Or would that be potentially upside if that would occur?

Thank you, A.J. Pretty fulsome question. 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 the state. Mark?

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 2 anchors behind our outlook for at least the 125 basis point decline next year. The first is trend. Our preliminary 2026 Medicaid trends 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. 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 breakeven or approximately negative 50 basis points. And that aligns with what we've 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. We do expect state rate updates to be modestly above historical levels, but still trail trend into 2026, given, say, rate cycle lag claims data and that more acute risk pool. And so if I put those together, that gets us to our initial planning assumption for 2026. SP1671564738 And here's the important point. We do view 2026 as the trust, not the beginning of another reset period. 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.

So A.J., thank you for that question. Our conversations with our dates remain very constructive. The state certainly recognize the challenges around affordability in this program, but our expectation that rates remain actuarially sound. One of the things that's changed certainly in conversations this time around, is states are certainly more receptive to ways that can help reduce the overall cost of the Medicaid program improve affordability. 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 cost and utilization in the program. So for example, we've seen increases in certain categories of services things like ADA, which is high behavioral analysis, changes that we can make with respect to GLP-1s and other things that have been up cost.

The conversations this time around have certainly not just been about raised. So states are exploring ways that they can reduce their program costs in orders so that we all have a program that's more sustainable. So at this point, I will tell you the conversations are solid. They're going very well there's been a very nice change around ideas for maintain 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. But -- 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.

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

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. So trying to understand what you guys are trying to spike there in terms of materiality to 2026. And then it also you look at some of the commentary that you have 2 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 could understand that better coming off the call. .

Steve, thanks very much for the question this morning. So if we look ahead to 2026, we do expect to meet discrete investments worth several hundred million dollars and quantify that as approximately $1 of EPS really to advance our strategic goals. And these dollars are going to be really focused in 3 primary areas. First, technology adoption, where we're deploying AI into clinical workflows, automating roster processes, modernizing core systems already 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. And then thirdly, around operational and quality initiatives. I think here, further improvements in Star ratings and deeper member engagement. And together, these investments are intended to align with our long-term growth objectives that will enhance member satisfaction and then positioning enterprise for greater operating leverage over time.

Yes. 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. And 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, and we see that they are improving our efficiency and our outcomes and also the experience for members, providers and associates. 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 1 in 5 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. We have tools that improve our first contact resolution, shortened ramp-up time. help with proactive engagement.

And I think really importantly, for the commitments we've made on care providers, our Health OS 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% in peer-to-peer reviews by over 100%. So 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. 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 request by almost half. 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. 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 2 of our core goals. One, reducing the cost curve and to enhancing the experience our members have. 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. 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.

Next, we'll go to the line of Lisa Gill from JPMorgan.

Just want to go to the individual ACA exchanges. Obviously, the time line is taking care for the extension of the enhanced subsidies. Gail or anyone on the call, can you give us any color around what the difference would be in membership as we think about '26, should be not be able to some kind of agreement and not have the enhanced subsidies in '26. And we've clearly seen what the proposed risks are by state. So really just 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 a step back and then I'll have Mark talk a little about membership. But Obviously, we're really proud of the role that we play in the ACA marketplace, and we may -- we are still being 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.

And again, 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. And we're ready to work with our states and our policymakers on that path forward. So if they are attended, we'll work quickly with regulators and states to ensure a smooth execution and continued affordability. And if there are some changes or phase downs, I think we're prepared also to work with our states closely to help people standard 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 this strategically first that we think 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.

And we expect that to translate, obviously, into improved performance financial performance in '25. 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 it's just planning assumptions at this point.

And Lisa here, clearly, if the enhanced advanced premium tax credits were to expire at 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 enrollments and a much higher morbidity risk pool into 2026 under those exploration scenarios. And if back just for a second, that smaller, more acute pool does mean fewer enrollees just spray risk and sharper premium increases. And that's really what we're seeing. Certainly, a partial extension of those premium subsidies along with the transition or a glide path that would definitely support consumers in a more stable affordable marketplace over time.

And again, I just want to reinforce that we plan for that in terms of our filings and going forward, but also recognize that they're real pressure rising costs, and we want to be a part of that solution with our policymakers as well.

Next, we'll go to the line of Andrew Mok from Barclays.

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 '25. But I think it was unclear if that was a year-over-year comment or a positive revision to the outlook. So can you clarify that comment and help us understand where Medicare margins sit for the year and there are a path back to target Medicare margin next year, given the actions you took in planned exits and benefit reductions.

Andrew, thanks very much for the question. I anticipate we probably are going to get a couple of questions here on the margin and trends. So 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 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 mobility that elevated utilization and rising unit costs. We're continuing to expect operating margins for our ACA business to be down year-over-year in the high single-digit percent range.

And then commercial [indiscernible] group margins to remain largely consistent with prior expectations. Now we have seen some favorability in ACA relative to our initial expectations, and you see that come through in a sense of this quarter. And then to your question in Medicare, we feel good about our positioning, given the composition of our membership and our results to date, we actually expect margin stability with potential for slight improvement this year. even excluding the onetime value-based care settlement that we recognized last quarter, and that's going to be supported by strong retention, disciplined cost management and product positioning and then ultimately really better recognition of that member acuity following the elevated utilization we've seen in recent years.

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

I wanted to follow up on your Medicaid comments. I 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, meeting the run rate in 3Q and 4Q might be worse than that and that minus 50 basis points annually.

So 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 if you can understand how that 125 basis points compares to that Q4 run rate?

Justin, thanks very much for the question here. And certainly, your underlying premise is correct. Margins deteriorated as the year has gone on. But we've been very clear today as I try to think forward a little bit that is going to reflect those same continued pressures in Medicaid as rates catch up to acuity. And it's important to be real 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, and that's an important turning point. .

At the same time, we've also spoken to not waiting and rate cycles alone, right? We've intensified key management and program integrity programs in the highest-cost categories, 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 the low point in the Medicaid margin. And from there, we would expect to see sequential improvement through 2027 as those rates and the operational savings take more of a hold. And I'd say we're pretty confident that the business ultimately will return to that 2% to 4% target margin range.

Thank you, Mark. And just to put a fine point on that, 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 we are assuming that we enter the year at the place we exited the year.

Next, we'll go to the line of Lance Wilkes from Bernstein.

Yes. 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 there? And maybe just a quick follow-up over on Carelon, if you talk a little on Carelon Rx about any progress you're seeing in especially pharmacy acquisition contribution to margin stability or any sort of impacts on margin were there?

Thanks, Lance. I'll ask Felicia to start and then Pete to comment on Carelon.

Lance, thank you for the question. 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 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 is that 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. .

But our framework has to consider a lot of variables. We have to take a look at the rate adequacy versus the trend that we're seeing, the prom designs, the regulatory environment and policy stability that we see there. all kinds of things with respect to our risk-sharing arrangement, 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. But if we were to exit this, we would align that with normal changes in terms of contract extensions, which, as you know, actually happen every year because Medicaid contracts, while their 4- or 5-year contracts, the contract renews every single year. And then there's also certainly the opportunity around RFPs in 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 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 very focused on the patient experience.

And 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 Bio Plus platform, and we continue to migrate scripts to that platform. Last year, we have -- as you know, we acquired Kroger Specialty Pharmacy. And 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 very, very happy with the team's performance in that regard in terms of how that's gone from an action perspective, and we'll continue to migrate further ships 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 Levante as well. So thanks for the question. We appreciate it.

Next, we'll go to the line of Kevin Fischbeck from Bank of America.

I guess just to follow up on the Medicaid comments, trying to understand, I guess there's been a concern that the risk pool shifts that are supposed to happen from the reconciliation bill could be pulled forward. So I 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 1/3 of what you expect the next 5 years happens next year or some way to think about that? And 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 is balance kind of imply something a little bit less than the long-term growth rate? .

Kevin, thanks very much for the question. Let me maybe touch the first one, briefly, then I'll talk about the balanced drinks 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 balance, when you talk about that return to a more balanced earnings growth profile we really need getting back to the growth algorithm that has characterized our business. And that means contributions from commercial, government, Carelon, supported by the operating leverage 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 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 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 outyear 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.

Next, we'll go to the line of Ann Heinz from Mizuho Securities.

I just would like to focus on membership growth in 2026. So with the Medicaid redetermination, should we assume that membership in Medicaid book will actually decline next year and that coupled with rates I'm just trying to figure out like where you have revenue actually declining? Or should we assume Medicaid revenue actually grows in 2026? And then also with the Medicaid expected membership decline in for Medicaid and the ACA. Can you just give us more detail how that impacts Carillon services in Carelon. Does one of the segments have an outsized proportion from membership losses versus the other?

Appreciate the question this morning. So the 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 the 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're in 2025. And that's going to be driven by many of the factors that we've spoken about our call today, and we'll provide more guidance as we enter January.

Yes, I'm going to ask maybe Pete to comment on Carelon.

Yes. No, thanks for the question in the context of membership impacts on Carillon 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. And importantly, we're diversifying our growth. We're seeing a lot of really nice external growth across many of our solutions. Now of course, Alliance is our largest client.

And if Elvance has significant membership impacts, it will have some impact on Carelon, but I view that really as time bound. We have incredible momentum in the marketplace. That would be short-term we feel like depiction of our assets and our strategy will continued growth in Carelon.

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

Just a quick clarification on Medicaid. Maybe if you could just sort of delineate how much of the 125 bps next year is trend running above reimbursement? How much of that is the adverse selection continuing and that there's any impact from the BB. And then my real question is just, can you provide -- you talked a little bit about this last quarter, an update on the increased coding trend 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.

Josh, I 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. And we've always consistently framed 2026 Medicaid margin is 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 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're reiterating that commentary again today. and that has not been fully offset by rate update. We've seen disenrollments 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 led to our direct -- it'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. And 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 would 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 and how those member conditions are documented. We are taking meaningful steps to improve sort of that oversight so that the data capture, the clinical documentation, the vendor of site is all accurate and appropriate for our business.

Yes. Thank you, Mark, and thanks for the question, Jon. 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 decade and our other assumptions, these are prudent planning assumptions and that we are matching 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 around. 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. .

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

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 to give you some relief just besides paying better rates? And if so, how long would those adjustments typically take to implement and you to maybe see any potential benefit?

So 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, one 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 toward all the levers they have to be able to improve affordability and what really is one 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 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 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.

So 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 partners in doing that.

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

I was hoping to just drill into 2 of the product areas in Medicare and get your updates on your thinking there. The first would be just I know [indiscernible] that that's an area want to continue to focus on moving forward? And maybe give us some thoughts on how you see that positioned for 26 now that you have more insight into the competitive landscape. And 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 pull back for ELV and the PPO product. So curious on just how you're thinking about sort of putting that into the longer-term strategy projective.

So thank you for the question. And certainly, it's very early in the AEP process. We're only 6 days into the annual election period. So 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 Carillon to help manage individuals who have complex conditions. So 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, we had a handful of PPO products across the. And as you know, over the last couple of years, we actually even declined our position where we had a PPO footprint, is our expectation to be able to manage the conditions of our members effectively and PPO certainly doesn't allow us to do that same way. that our HMO and DISA 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. And as we think about the strategy 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.

Thanks, Felicia. 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 Carol on our specialty risk such as in oncology. So it's an alignment to a long-term strategy that we've had.

Next, we'll go to the line of Erin Wright from Morgan Stanley.

Anything to call out on the commercial cost trend. I mean I think you mentioned just broader cost is kind of in line with expectations. But any areas such as behavioral to call out that have been called out before by you and others. I guess, anything else to call it from a pricing perspective, otherwise from a commercial perspective?

Erin, [indiscernible] in the ACA market developed somewhat favorably to our prudent expectations in the quarter despite the overall deterioration in the risk or 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 have a couple of pockets there around outpatient utilization and the unit cost mix of services, including some higher-cost surgeries that we're monitoring.

But for the most part, very consistent with our outlook, no concerns.

Next, we'll go to the line of Ben Hendrix from RBC Capital Markets.

Just Medicare Advantage thinking about the 150,000 members impacted by exits and other planned 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 plants. 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.

And thank you for the question. Retention is certainly 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. Our strategy in 2026 reflects a very disciplined focus on our sustainable performance over time. So we approach 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 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. And I think 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. But 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. So thank you for the question.

Next, we'll go to the line of Dave Windley from Jefferies.

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. And our assumptions are our understanding is that, that could be fairly significant. And so I'm trying to marry that with your expectations for sequential improvement in Medicaid margin through '27 when you are facing what seems like another acuity shift ahead of a catch-up situation from late '26 through 27. .

Dave, thanks very much for the question. So let me do a little bit of a progression here. As we think about 2026, about evenly split 2 key drivers, rates continue to lag higher acuity and in persistently elevated cost trends. On the first driver rates continuing to lag 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 disenrollments are raising that acuity. On persistently elevated cost trends, this is simply utilization remaining above historical norms across several categories that we continue to monitor, and 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. And there are really 4 concrete drivers that underline our view. First, tighten medical cost management, right? And that means expanding behavioral health interventions, they mean 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 ban that cost of care curve as 2026 progresses into 2027. Second is the budget reconciliation build provision. Those are phased and manageable. Clearly, we know that federal changes under the build that are 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 steadier transition of the risk pool. The third one is rates, right? Rates are going to begin to catch up to trend and reverification impact. states are starting to incorporate more recent experience into base rates, albeit with lags. And so as 2025 and '26 experience rolls into the state cycles, we expect further alignment and progress. And so finally, I would say our 2026 outlook is intentionally prudent and and therefore, a credible base off of which to build.

Dave, just to put a finer point on one of Mark's discussions around, as you think about the implementation of the bill in '27. 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. And we do see that as manageable going forward. And we do believe that the risk impacts we have seen in some states, some of our larger states have accelerated some of that redetermination work even into '25. So that gives us confidence.

I'll take the last question, please.

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

Yes. I think Dave took one of my Medicaid question, some work. I have a quick 2-point around it on Medicaid. I guess, number one, is there a way to put a bottom goalpost around Medicaid expectations for 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 earnings in 2017? .

George, thanks very much for the feedback and for the question. [indiscernible] understand the interest in incurring to a floor, but we believe it's more responsible to wait until we have clear 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. But now 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. And so all of that factors into our thinking holistically in how we think about 2026, and really what we wanted to share with you on the call today is our preliminary view into key planning variables and assumptions for next year. And we'll come back with more specificity in January to answer detailed questions.

Thank you. And again, 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. And then secondarily, as Felicia shared throughout the course of this call, we have -- we're in the midst of those discussions with our states. They are meeting 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. 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 behavior on social health to deliver a 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.

Ladies and gentlemen, a recording of this conference will be available for replay after 11 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 for using Verizon conferencing. You may now disconnect.