Elevance Health, Inc.

Good morning and welcome to Elevance Health's second 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 Boudreau, President and CEO, Mark Kay, our CFO, Pete Haitayan, 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 second quarter performance and revised outlook as well as the progress we've made against our strategic initiative. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, ElevanceHealth.com. We will also be making 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. Let me start by directly addressing our revised full year outlook. We know this adjustment is disappointing and we're taking concrete actions to address it. Our focus is on execution, making the right decisions now to strengthen the business and position Elevance Health for long-term sustainable performance. Our strategy remains grounded in delivering whole health solutions that are simple, affordable, and personalized. While the external environment continues to evolve, we are focused on the areas within our control, managing cost, deploying targeted investments, and reinforcing the operational foundation that supports long-term value creation. In the second quarter, we delivered adjusted EPS consistent with our expectations. These results reflect continued strength in our Medicare Advantage portfolio and discipline cost management across key parts of the business as we navigate evolving dynamics in the ACA and Medicaid markets. Our Carillon platform continues to drive growth. Carillon Rx is gaining traction in the market with its integrated medical pharmacy offering, and Carillon services delivered strong results. with CareBridge scaling rapidly across dual eligible and high acuity Medicaid populations. As I mentioned at the start of the call, we are revising our full year 2025 adjusted EPS guidance to approximately $30. This reset reflects the same pressures that others in the sector have now confirmed, particularly elevated medical cost trends across ACA and slower than expected Medicaid rate alignment. Importantly, this decision is anchored in our view that the elevated trends we are now observing will persist and reflects our updated visibility into the second half of the year. It is not based on assumptions of a near-term recovery. We are choosing to act now, not later, to ensure our outlook reflects prevailing conditions and to give investors clearer visibility. We believe this step positions us to execute with discipline and begin rebuilding long-term margin stability that will empower our future growth. Looking ahead, we're executing against a clear strategy focused on strengthening structural performance across the enterprise. We're advancing our efforts to stabilize trends, particularly in high-cost areas like specialty services, post-acute care and certain outpatient settings. Our programs focus on ensuring the right care in the right setting, grounded in safety, quality and outcomes. In support of our commitment to simplify care delivery, we've significantly streamlined our prior authorization processes with over half of electronic requests now processed in real time and fewer requirements for high performing providers. Our AI-enabled tools such as HealthOS and Intelligent Clinical Assist help streamline clinical workflows and accelerate routine approvals by surfacing relevant data. All medical decisions requiring clinical judgment are reviewed by licensed professionals with independent oversight to ensure care is appropriate, consistent, and aligned with our commitment to quality. We're also using advanced analytics to identify fraud, waste, and abuse. enabling us to intervene where patterns deviate from clinical and billing standards, reinforcing system integrity while protecting appropriate access to care. Our value-based care portfolio continues to expand, particularly in behavioral health and oncology. More than one-third of our benefit expense is now in downside risk arrangements, supporting improved care coordination and cost predictability. Through Carillon, We're scaling these capabilities across Elevance Health and with external clients, helping to drive better outcomes for complex and chronic populations. Importantly, these are not future state aspirations. They are embedded in our operations today and form the core of our multi-year plan to stabilize margins and build sustainable earnings power. While it is still early to provide an initial outlook for 2026, The actions we're taking are designed to stabilize trend, improve pricing alignment, and restore operating leverage over time. In ACA, we've already repriced products for rising cost intensity. We also expect a broader market reset in 2026 as the scheduled expiration of enhanced subsidies drives further risk-pull changes, and our position reflects early, disciplined action. In Medicaid, We're proactively engaged with state partners to ensure that upcoming rate cycles continue to reflect the developing acuity environment. While rate recovery has lagged current cost levels, we expect a meaningful catch-up as utilization data becomes more actionable. In commercial, we're maintaining a disciplined approach to pricing, ensuring our renewals and network contracts are aligned to the trend environment. And in Medicare Advantage, we bid with discipline. with a focus on margin normalization supported by stable utilization and Carillon-led clinical programs. These steps, combined with our structural cost levers in care management, payment integrity, and value-based care delivery, are designed to improve visibility and consistency as we move through 2025 and into the next phase of growth. We recognize that revising guidance for the second consecutive year is disappointing, And we remain committed to transparency and strong execution as we continue to navigate unprecedented cost trend affecting multiple lines of business. We're taking this step to reflect what we can control, sharpening our execution, focusing our investments, and strengthening the core drivers that will support a more durable and sustainable future. And this would not be possible without the dedication of our nearly 100,000 associates that amplify our impact every day. We remain confident in the strength of our enterprise, the impact of our investments, and our ability to create long-term value through operational discipline, innovation, and our commitment to whole health transformation. With that, I'll turn it over to Mark to walk through the financials.

Mark? Thank you, and good morning, everyone. Elevant Health reported second quarter GAAP diluted earnings per share of $7.72 and adjusted diluted earnings per share of $8.84. As Gail discussed, we have updated our full year 2025 adjusted earnings per share to be approximately $30, reflecting both an industry-wide increase in morbidity impacting our ACA business and a slower deceleration in Medicaid cost trend. pressures we expect to continue in the second half. Although external conditions remain dynamic, we are prioritizing factors we can directly influence and which are within our control, including taking decisive actions to stabilize trend and align pricing for long-term sustainability. We ended the second quarter with 45.6 million medical members, down approximately 200,000 sequentially, driven by a reduction in Medicaid membership and lower effectuation rates in our ACA business, a dynamic we first highlighted on last quarter's earnings call. Operating revenue is $49.4 billion, an increase of 14% year-over-year, principally reflecting higher premium yields in recognition of elevated cost trend and recently completed acquisitions in home health and specialty pharmacy. The consolidated benefit expense ratio was 88.9%, an increase of 260 basis points year over year, driven by our ACA and Medicaid businesses, partially offset by a favorable out-of-period settlement with a value-based care provider. In the ACA market, membership shifts from Medicaid into ACA following the redetermination process, together with lower effectuation rates have driven a market-wide increase in morbidity, resulting in elevated medical cost trends. We have also reviewed the latest data from the Wakely Consulting Group, and our expectation for risk adjustment remains unchanged. Importantly, our 2026 rate filings capture both the current increase in market-wide morbidity and further risk pool deterioration, resulting from the anticipated expiration of the enhanced subsidies. Medicaid cost trend decelerated in the second quarter, though at a more modest pace than initially expected. We are experiencing higher acuity resulting from ongoing disenrollment, as well as an overall increase in member utilization. The rate updates we received for the July cohort aligned with our initial assumptions, but lagged current trend levels. As a result, we now anticipate a prolonged Medicaid margin recovery period as it will take time for states to incorporate the latest experience into rates. Medicare Advantage cost trends remain in line with our expectations, with Part D seasonality progressing as anticipated, and we continue to target stable margins for the year. Our adjusted operating expense ratio of 10.0% improved 140 basis points year over year. We are prioritizing strategic investments in innovative care models, artificial intelligence, and pharmacy services to support long-term success. Kailan's strong performance in the second quarter underscores our steadfast commitment to expanding its capabilities as we power our enterprise flywheel for growth. Kailan Rx grew operating revenue by over 20% as we gain traction with larger clients and scale our specialty pharmacy assets. Profitability in the quarter was impacted by ongoing initiatives around accelerating growth as we expand up market. Calon Services delivered greater than 50% growth in revenue and operating gain through its expansion of risk-based relationships and the integration of CareBridge. Turning to the balance sheet, we ended the quarter with a debt to capital ratio of 40.8%. preserving flexibility for strategic investments and opportunistic capital deployment. Year-to-date, we've returned approximately $2 billion to investors. Operating cash flow totaled $2.1 billion in the quarter, and we now expect approximately $6 billion for the full year, reflecting our revised earnings outlook and discrete working capital items. Turning to our revised guidance for 2025, we forecast our benefit expense ratio to be approximately 90% for the full year as elevated trend levels persist in our ACA and Medicaid businesses. In a dynamic operating environment, this outlook sets a prudent foundation for execution during the second half of the year. With respect to seasonality, we contemplate slightly more earnings to be realized in the third quarter relative to the fourth quarter. And looking ahead, we're also assessing the implications of the recently passed budget reconciliation bill, particularly Medicaid work requirements and more frequent eligibility reviews, as well as the scheduled expiration of the enhanced marketplace subsidies. These changes could present near-term enrollment pressures and further shift in the risk pool. Finally, we are focused on restoring margin stability and building long-term earnings power through disciplined pricing, growth in KELON, and investments in technology to deliver value for our members and shareholders over time. With that, operator, please open the line for questions.