Elevance Health outlines $30 EPS target and signals 125 bps Medicaid margin decline as company shifts strategic investments for 2026

Earnings Call Insights: Elevance Health (ELV) Q3 2025

MANAGEMENT VIEW

* CEO Gail Boudreaux opened with, "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 as the appropriate earnings baseline, excluding $3 of discrete nonrecurring items."
* Boudreaux highlighted key 2026 assumptions: "Continued membership reverifications and state program changes have driven acuity higher, and we are planning for at least a 125 basis point year-over-year decline in Medicaid margins as rates, like acuity and utilization trends, remain elevated. This is an initial input at this early stage, not formal guidance."
* The company is focused on integrating recent acquisitions and will prioritize returning capital to shareholders through share repurchases.
* Boudreaux stated, "Carelon is expanding external relationships and scaling pharmacy, behavioral health, specialty care management and home-based services, embedding value-based care principles throughout. External revenue grew double digits year-over-year."
* CFO Mark Kaye reported, "Elevance Health reported third quarter GAAP diluted earnings per share of $5.32 and adjusted diluted earnings per share of $6.03. Our operating performance reflected enhanced medical cost management and expense discipline, consistent with the expectations we outlined last quarter."
* Kaye added, "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."

OUTLOOK

* The company reaffirmed its 2025 adjusted EPS guidance of approximately $30, maintaining $27 as the appropriate earnings baseline, excluding $3 of nonrecurring favorable items.
* Management is planning for "at least a 125 basis point year-over-year decline in Medicaid margins" for 2026 and expects full year 2025 Medicaid operating margin to be modestly negative.
* The anticipated expiration of enhanced subsidies could "significantly impact membership in 2026."
* Guidance for 2026 will be finalized in January, with more details on Medicaid rates, marketplace subsidies, and Medicare AEP results.

FINANCIAL RESULTS

* Third quarter GAAP diluted EPS was $5.32 and adjusted diluted EPS was $6.03.
* Total operating revenue for the quarter was $50.1 billion, an increase of 12% year-over-year.
* Enrollment ended at 45.4 million medical members.
* Consolidated benefit expense ratio was 91.3%.
* Medicaid performance reflected pressure from elevated acuity and utilization, and full year 2025 Medicaid operating margin is now expected to be modestly negative.
* Carelon Rx revenue grew 20% year-over-year. Carelon Services grew by more than 50%.
* Net investment income was $625 million, with almost $150 million from discrete valuation adjustments.
* Third quarter operating cash flow of $1.1 billion was impacted by a cash settlement payment related to Blue Cross Blue Shield litigation.
* The company repurchased $875 million of shares in the quarter.

Q&A

* Albert Rice, UBS: Asked about Medicaid margin outlook and state engagement. CFO Kaye responded, "Our preliminary 2026 Medicaid trend assumption is really anchored to our expected fourth quarter exit rate...we now expect the full year 2025 Medicaid operating margin to be modestly below breakeven or approximately negative 50 basis points."
* Felicia Norwood, EVP: "Our conversations with our states remain very constructive...states are certainly more receptive to ways that can help reduce the overall cost of the Medicaid program and improve affordability."
* Stephen Baxter, Wells Fargo: Inquired about investment spending in 2026. CFO Kaye replied, "We do expect to make discrete investments worth several hundred million dollars and quantify that as approximately $1 of EPS really to advance our strategic goals."
* Lisa Gill, JPMorgan: Questioned ACA exchange membership impact if subsidies expire. Boudreaux indicated the company is prepared for both outcomes, and Kaye noted, "If the enhanced advanced premium tax credits were to expire at year-end, we'd expect a material contraction in the ACA marketplace."
* Andrew Mok, Barclays: Asked about Health Benefits margins and Medicare outlook. CFO Kaye said, "We actually expect margin stability with potential for slight improvement this year, even excluding the onetime value-based care settlement."
* Justin Lake, Wolfe Research: Sought clarity on Medicaid margin deterioration. CFO Kaye confirmed, "Margins deteriorated as the year has gone on...we see 2026 as the low point in the Medicaid margin."

SENTIMENT ANALYSIS

* Analysts pressed on Medicaid margin outlook, ACA membership risks, and the scale of required investments, with a slightly negative tone driven by concerns over margin recovery and enrollment headwinds.
* Management maintained a disciplined, confident tone in prepared remarks, repeatedly using phrases like "prudent and practical" and "we are confident in our strategy." Responses in Q&A remained cautious but emphasized constructive state engagement and proactive strategies, with several instances of "we are taking a prudent approach" and "we are confident."
* Compared to the previous quarter, analysts' skepticism was more pronounced in questions about Medicaid and ACA, while management’s tone shifted from explaining the prior guidance reset to emphasizing forward-looking discipline and operational control.

QUARTER-OVER-QUARTER COMPARISON

* The current quarter reaffirmed 2025 adjusted EPS guidance, compared to a revised guidance in the previous quarter which was reset due to higher acuity and Medicaid/ACA pressures.
* Strategic focus has shifted toward integrating acquisitions and scaling value-based care, with a clear message that Carelon’s double-digit external revenue growth and ongoing investment in technology are now central priorities.
* Medicaid margin deterioration was highlighted more concretely in this quarter, with the explicit expectation for at least a 125 basis point decline in 2026, compared to the prior quarter’s broader discussion of margin headwinds and recovery timelines.
* Analysts focused heavily on Medicaid and ACA membership risks in both quarters, but the current call featured more pointed questions about the duration and depth of margin pressure.
* Management’s confidence in long-term recovery and disciplined capital allocation is more pronounced in this quarter, with a focus on durable, not just near-term, earnings growth.

RISKS AND CONCERNS

* Medicaid margin deterioration due to elevated acuity and utilization, with rates lagging behind cost trends and state program changes.
* Significant risk to ACA membership if enhanced subsidies are not extended, potentially causing a "material contraction in the ACA marketplace."
* Ongoing enrollment headwinds in Health Benefits projected as a directional headwind for Carelon in 2026.
* Management is proactively addressing these risks through disciplined pricing, program refinements, and expanded behavioral health and specialty drug management.

FINAL TAKEAWAY

Elevance Health’s management reaffirmed its 2025 adjusted EPS guidance of approximately $30 and signaled a prudent approach for 2026 amid persistent Medicaid and ACA headwinds. The company committed to several hundred million dollars in strategic investments—about $1 of EPS—targeted at technology, Carelon scaling, and operational initiatives to support long-term growth. While Medicaid margins are expected to decline by at least 125 basis points in 2026, management emphasized constructive state partnerships and proactive cost management as key mitigation strategies. The company remains focused on integrating acquisitions, scaling value-based care, and returning capital to shareholders, positioning itself for a more balanced growth profile beyond 2026.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/elv/earnings/transcripts]

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