Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, where participants are encouraged to present a single question. 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 fourth quarter 2022 earnings call. This is Steve Tanal, Vice President of Investor Relations, and I'm joined this morning on our earnings call by Gail Boudreaux, President and CEO; John Gallina, our CFO; Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial and Specialty Business Division; and Felicia Norwood, President of our Government Business Division. Gail will begin the call with a brief discussion of some of the highlights of the quarter and year before turning to our recent announcement of the acquisition of Blue Cross and Blue Shield of Louisiana and a number of other updates on key strategic initiatives. John will then discuss our financial results and outlook for 2023 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 some 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 can 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.

Thanks Steve and good morning everyone. Today, we're pleased to share that Elevance Health delivered strong fourth quarter results, closing out another year of growth, consistent with our long-term targets and considerable progress in our transformation to become a trusted lifelong health partner. In the fourth quarter, Elevance Health delivered GAAP earnings per share of $3.93, and adjusted earnings per share of $5.23. For the full year, we reported GAAP earnings per share of $24.81 and adjusted earnings per share of $29.7, reflecting growth of 15% year-over-year from our adjusted baseline of $25.20 in 2022. 2022 marks the fifth consecutive year in which we grew adjusted earnings per share within or above our long-term target growth rate of 12% to 15%. This reflects the focused and sustained execution of our strategy to optimize our health benefits businesses, invest in high-growth opportunities, and accelerate capabilities and services. Elevance Health ended 2022 serving more than 47.5 million medical members, up nearly 2.2 million members year-over-year, including more than 1 million new commercial members and over 1 million new government members. Investments in enhancing the customer experience, delivering innovative, customized whole health solutions, deepening digital engagement, and prioritizing health equity all helped to deliver strong growth across customer segments. Membership growth, coupled with expansion in both the scope and scale of Carelon's business with our health plans, helped to propel double-digit growth in CarelonRx and Carelon services. In total, for the year, Elevance Health produced nearly 14% growth in operating revenue and double-digit growth in adjusted operating earnings. Now, I'd like to discuss a number of recent developments, including the acquisition of Blue Cross and Blue Shield of Louisiana that we just announced on Monday. Like our Anthem Blue Cross, Blue Shield family of plans, Blue Cross and Blue Shield of Louisiana is deeply rooted in its local community, serving Louisiana for almost 90 years. And like our health plans, Blue Cross and Blue Shield of Louisiana is committed to improving the health and lives of the people of Louisiana. Our organizations are well aligned in our mission and purpose, and have worked together in partnership through our Healthy Blue Alliance, serving Medicaid and dual special needs plans in Louisiana for a number of years now. Upon closing, Blue Cross and Blue Shield of Louisiana will be our 15th Blue state, providing us with deep local roots in a new market, while we bring national scale and access to our portfolio of innovative solutions and capabilities to support the community. We're looking forward to accelerating Blue Cross and Blue Shield of Louisiana's strategy to make an even greater difference in the health and lives of the 1.9 million individuals they serve. Blue Cross and Blue Shield plans are at their best when we collaborate. Together, the Blue system provides health benefits to nearly 15 million consumers across all 50 states. There are many untapped opportunities to leverage our unique scale. One recent example is Synergy Medication Collective. Earlier this year, we became a founding investor in this new contracting organization founded by a group of Blue Cross and Blue Shield affiliated companies. The collective focuses on improving affordability and access to medical specialty drugs that are injected or infused in a clinical setting. Synergy will seek best-in-class medical drug pricing, leveraging our collective industry-leading specialty drug spend to enhance affordability, and drive toward value-based care representing another example of Blue's partnering for progress. Inside Elevance Health, we are also directly addressing fast-growing areas of cost trend. In November, we announced the acquisition of BioPlus, the largest independent specialty pharmacy provider offering a complete range of specialty pharmacy services for patients living with complex and chronic conditions. BioPlus will enhance our ability to deliver on our whole health promise and enable us to leverage our resources and scale to deliver greater affordability and access to critical medications. Over time, it will allow us to bring specialty pharmacy fulfillment for our members in-house, at what is a dynamic time in this field, given the anticipated growth of biosimilars. Upon closing, BioPlus will become part of CarelonRx, our pharmacy services business that we rebranded at the beginning of this year. With the addition of specialty pharmacy, we will expand the scope of the services and capabilities within Carelon, and by extension, the proportion of overall healthcare spending that we manage or address. The acquisition of BioPlus furthers our commitment to scaling healthcare services to address the needs of health plans beginning with our own. Of Carelon's nearly $41 billion of revenue in 2022, approximately 60% came from partnering with our health plans. Meanwhile, in 2022, Carelon achieved the goal we set at our March 2021 Investor Conference of managing at least 20% of our consolidated benefit expense by 2025. This is three years ahead of schedule, and a testament to the growing suite of capabilities within Carelon. Carelon has made significant progress since our last investor conference, and we look forward to providing shareholders an update on our long-range planning at our next investor conference, which will be held on Thursday, March 23, 2023 in New York City. Increasingly, we are evaluating and growing our enterprise through two primary businesses; health benefits and healthcare services. And we're continuing down the path of scaling Carelon by addressing the needs of our commercial, Medicare, and Medicaid health benefits businesses. Beginning with the first quarter of 2023, we will evolve our external reporting to better align with this approach and begin to report Carelon split between Carelon RX and Carelon Services, while we combine our commercial and government health benefits operations for reporting purposes into a single health benefits segment. Our new reporting structure will allow stakeholders to more clearly track the progress we are making against our enterprise strategy and better reflect how we evaluate our business results against our enterprise strategy today. Now, I'd like to touch on a few recent highlights before discussing our outlook for 2023. During the fourth quarter, we were pleased to become the first managed care organization in the nation to earn the full three-year health equity accreditation from the National Committee for Quality Assurance for all of our own Medicaid health plans, covering nearly 90% of our Medicaid membership. This recognition demonstrates that focus and resolve yield results. We have long been dedicated to countering health inequities across our enterprise and through partnerships with care providers. We continue to work toward health equity through policy and practice in pursuit of better outcomes and experiences for all, and ultimately to improve the health of humanity. Our Medicaid team is prepared to uphold that commitment by ensuring access to care for underprivileged populations through continuity of coverage for all beneficiaries eligible for Medicaid, who will be subject to the eligibility redeterminations this year. We look forward to working alongside state partners to help minimize loss of coverage due to administrative challenges and to ensure beneficiaries no longer eligible for Medicaid understand their coverage options. Our ACA exchange plans are now being offered in almost every county in our 14 Blue states. We remain committed and prepared to ensure seamless transitions of those Medicaid members as they move into exchange plans or employer-based coverage. Across our health plans, we are optimizing our businesses. The pandemic brought with it substantial uncertainties and that resulted in margin compression in our commercial and Medicare health plans in 2021 that we didn't recover in 2022. It has since become apparent that COVID costs are not going to zero. And as we discussed last year, we've been repricing our risk in our commercial business, and we are enjoying improved reimbursement rates, risk adjustment revenue, and star quality bonus payments in our Medicare Advantage business in 2023. With January 1 renewals behind us in commercial, and the 2023 Medicare Advantage plan year underway, we remain confident in the margin recovery previously discussed and for the improvement in our commercial and Medicare businesses to more than offset anticipated member attrition in our Medicaid business when redeterminations begin on April 1st. Our confidence in operating our Medicare Advantage business solidly inside our long-term 3% to 5% target margin range has been underpinned by our bid strategy, in which we took a balanced approach. While the AEP proved to be somewhat more competitive than we expected, we still expect to grow Medicare Advantage membership relatively close to our prior targeted growth rate in 2023. Turning now to our outlook for 2023. We expect adjusted earnings of greater than $32.60 per share, reflecting growth of over 12%. Our guidance reflects double-digit growth in operating earnings in each of our health benefits and Carelon businesses that will be driven by the focused execution of our enterprise strategy to optimize our health benefits business, invest in high-growth opportunities, and accelerate capabilities and services. Our outlook contemplates a range of outcomes on Medicaid redeterminations, coverage shifts and retention, and our expectation for commercial and Medicare margin recovery from pandemic era lows. John will discuss our assumptions in greater detail. The strong growth we achieved in 2022 would not have been possible without the hard work and dedication of our more than 100,000 associates. Our collective determination to improve lives and communities is unwavering, and we look forward to making a meaningful difference as Elevance Health. I would like to thank them for the important work they do and the impact they make every day. Now I'd like to turn the call over to John for more on our operating results.

Thank you, Gail, and good morning to everyone on the line. We are pleased to have delivered solid fourth quarter financial results, closing out another strong year of growth for Elevance Health. The focused execution on our enterprise strategy continues to drive progress against our stated long-term targets. Fourth quarter adjusted earnings per share of $5.23 was ahead of our expectations and drove full-year adjusted earnings per share to $29.7, reflecting growth of over 15% year-over-year off of our adjusted 2021 baseline of $25.20 and above our long-term 12% to 15% annual earnings per share growth target. We ended the year with 47.5 million members, up 2.2 million or nearly 5% year-over-year, with organic growth having comprised more than 85% of our overall increase. In the fourth quarter, medical membership grew by 248,000 members, led by growth in Medicaid, driven in large part by the ongoing suspension of eligibility redeterminations and the acquisition of Vivida Health, which added 29,000 Medicaid members. For the full year, we added 1.1 million net new commercial members and 1.1 million net new government members. Total operating revenue for the year was nearly $156 billion, an increase of approximately 14% over the prior year, reflecting solid growth in our health benefits businesses and continued momentum in Carelon. We are pleased with the progress made to accelerate our service capabilities during the year as Carelon Rx and Carelon services grew revenue by 12% and 27% over 2021, respectively. The consolidated benefit expense ratio for the fourth quarter was 89.4%, a decrease of 10 basis points over the fourth quarter of 2021. This strong performance includes an improvement in commercial underwriting margin and also benefited from the reclassification of certain quality improvement expenses. These improvements were partially offset by the Medicaid business, which carries a higher benefit expense ratio than our commercial and Medicare health plans. Elevance Health's SG&A expense ratio in the fourth quarter was 11.5% and 11.4% for the full year reflecting an improvement of 20 basis points in the fourth quarter and full year. These positive results include the negative impact on the SG&A ratio related to aligning certain quality improvement expenses with CMS guidelines. The overall improvement was driven primarily by expense leverage associated with strong growth in operating revenue. In 2022, we produced another year of strong operating cash flow of $8.4 billion, representing 1.4 times net income, which was significantly better than our outlook to start the year and was driven by stronger risk-based membership growth and maintaining a prudent balance sheet. Additionally, relative to our initial guidance, a shift in the timing of certain payments to state-based partners added over $500 million to the fourth quarter operating cash flow that we now expect that we will pay in the first quarter of 2023. We ended 2022 with a debt-to-cap ratio of 39.9%, in line with our expectations and within our targeted range. During the fourth quarter, we repurchased 1.1 million shares of our stock for $567 million. For the year, we repurchased 4.8 million shares for $2.3 billion, exceeding our initial outlook for 2022, as we took advantage of the volatile periods in the market and opportunistically repurchase shares. Consistent with our approach throughout the pandemic, we maintained a prudent posture with respect to reserves. Days and claims payable ended the year at 47.7 days, an increase of 2.5 days year-over-year, and stable with the third quarter. Medical claims payable grew over 15% year-over-year compared to premium revenue growth of 13.5%. In summary, 2022 was a very strong year. We grew adjusted earnings per share by over 15%. We grew operating gain by nearly 13%. We grew membership by 2.2 million, and we grew revenue by nearly 14%, all with a stable medical loss ratio, a 2.5-day increase in days in claims payable and operating cash flow of $8.4 billion or 1.4 times net income. Before turning to our 2023 outlook, I would like to provide more detail on our decision to adapt our external segment reporting to better align with our enterprise strategy. Beginning with the first quarter of 2023, we will begin to disclose Carelon as a separate business division and provide operating revenue, operating gain, and operating margin information separately for Carelon Services and Carelon Rx. Carelon offers a diverse suite of services across behavioral health, advanced analytics and services, complex care, pharmacy services and digital assets, and we remain committed to expanding the scale and scope of services Carelon provides to our own and third-party health plans. As we've continued down the path of scaling Carelon by addressing the needs of our commercial, Medicare, and Medicaid health benefits businesses, it's become increasingly apparent that the similarities between our health plans have evolved to outnumber the differences. And we have also decided to combine our employer, individual, Medicare, Medicaid health plans and products into a single health benefits division. The remaining segment, Corporate and Other, will include a small amount of revenue and earnings from non-Carelon, non-health benefits businesses, as well as our corporate unallocated expenses. The new health benefits segment will combine the same group of businesses that currently comprises the commercial and specialty and government business divisions. In the Carelon Services segment, it reflects the same group of businesses that comprised the diversified business group, now Carelon services, which has historically been included as part of our old other segment. We are excited to begin disclosing the performance of our two primary and distinct businesses in a manner more consistent with how we will grow our enterprise for years to come and to be doing so at a time of strength for our organization. As you can see, our commercial health plan margin recovery is well underway and will extend into 2023, which is reflected in our Health Benefits segment margin guidance provided in our press release this morning. To ensure a smooth transition to our new reporting structure, we have also included a supplemental table in this morning's press release, showing our quarterly and full year 2022 results pro forma for the new reporting structure alongside new supplemental performance metrics for CarelonRx and Carelon services that can be used to model revenue for each business. Our commitment to elevating whole health and advancing health beyond healthcare is unwavering, and our new segment reporting structure will allow our stakeholders to more clearly track the progress we're making against our enterprise strategy. Now, I'd like to discuss our outlook for 2023 in greater detail. We are pleased to have provided initial earnings per share guidance of greater than $32.60, reflecting growth of over 12% year-over-year, putting us on track to produce a sixth consecutive year of growth in adjusted earnings per share, consistent with our long-term 12% to 15% compound annual growth rate target. 2023 will be a year of optimization, but we will also demonstrate the balance and resilience of our health benefits businesses as we execute the planned recovery of our commercial and Medicare health plan margins from pandemic era lows, which we expect will more than offset the impact of membership attrition and margin normalization in our Medicaid business when eligibility redeterminations resume. For 2023, we anticipate growth in medical membership despite commercial repricing and Medicaid redeterminations. Commercial risk-based membership is expected in 2023, up over 200,000 at the midpoint, ending the year in the range of 4.9 million to 5.1 million members. Growth will be driven by individual and small group risk-based membership, partially offset by attrition in our large group risk business, driven by the repricing discussed earlier. Note that we expect commercial risk-based membership to decline by approximately 60,000 in the first quarter, with individual up approximately 100,000 and group risk-based membership down approximately 160,000. We anticipate growth in individual and group risk-based membership over the balance of the year, concentrated in the second half as consumers transition from Medicaid to commercial coverage. Fee-based membership is expected to grow by approximately 600,000 members at the midpoint to 27.1 million to 27.4 million at year-end 2023. The wider-than-normal range contemplates a variety of scenarios related to coverage shifts out of Medicaid, and into employer-sponsored plans and the relatively uncertain macroeconomic backdrop. We expect approximately one-third of this growth to occur in the first quarter with the balance more heavily concentrated in the back half of the year as consumers transition from Medicaid to commercial coverage. Total commercial membership will end the year in the range of 32 million to 32.5 million members, up over 800,000 members at the midpoint. Medicare Advantage membership is expected to grow by approximately 75,000 to 125,000 members, with growth in both individual and group pushing our membership over the 2 million member mark. Medicaid membership is expected to end the year in the range of 10.8 million to 11.3 million, driven by the attrition associated with eligibility redeterminations beginning on April 1 of this year. This wider-than-normal range contemplates a range of scenarios on the pace of redeterminations and the prospect of macroeconomic headwinds developing over the course of 2023. And finally, we expect our Medicare supplement and federal employees' health benefits memberships will be relatively stable year-over-year. In total, medical membership is expected to end 2023 in the range of 47.4 million to 48.5 million, reflecting growth of over 400,000 members at the midpoint. The consolidated medical loss ratio is expected to be 87.2% in 2023, plus or minus 50 basis points, an improvement of approximately 20 basis points compared with 2022, primarily driven by the repricing of commercial risk-based business and margin expansion in Medicare Advantage, related to the improved reimbursement levels across rates, risk adjustment and star quality performance. The SG&A expense ratio is expected to be 11.2%, plus or minus 50 basis points, a reduction of 20 basis points at the midpoint driven by expense leverage associated with growth in operating revenue, partially offset by continued growth in our Carelon businesses, which carry higher SG&A ratio than our health benefits business. We expect operating gain for the year to be greater than $9.35 billion, reflecting growth of at least 10% over 2022, again, being the primary driver of growth in adjusted earnings per share. Below the line, we expect investment income to be approximately $1.6 billion and interest expense to be approximately $1 billion, both reflecting the impact of higher interest rates. And our effective tax rate is expected to be in the range of 22% to 24%. Our full year operating cash flow is expected to be greater than $7.6 billion, including the unfavorable impact of a timing delay on the payment of approximately $500 million to certain Medicaid state partners that we previously believed we would pay in the fourth quarter of 2022. Adjusting for timing, our 2023 cash flow outlook will be greater than $8.1 billion or approximately 1.1 times our expected GAAP net income. We expect full year share repurchases of approximately $2 billion, and our weighted average fully diluted share count for the year is expected to be in the range of 239 million to 240 million shares outstanding. Our 2023 guidance does not include the pending acquisition of BioPlus or Blue Cross and Blue Shield of Louisiana, which we expect will close later in the year. Importantly, neither is expected to have a material impact on earnings in 2023. At the segment level, we expect the Health Benefit segment operating revenue to grow in the mid to upper single-digit percentage range year-over-year in 2023, with segment operating margin up 25 to 50 basis points year-over-year. We expect CarelonRx revenue to grow in the upper single-digit percentage range with low single-digit growth in adjusted scripts and mid-single-digit growth in revenue per adjusted script. And we expect Carelon Services to grow revenue in the low double-digit range organically, excluding all pending or unannounced M&A, driven by growth in revenue per consumer served, as we expect consumer serve to grow in the low-single-digit range from 105 million at year-end 2022. Carelon Services operating margin is expected to expand by 25 to 50 basis points year-over-year in 2023. With respect to earnings seasonality, we are projecting similar profitability patterns to historical ranges and expect to earn slightly more than 55% of our full year adjusted earnings per share in the first half of the year with slightly more than half of that in the first quarter, consistent with current consensus modeling of seasonality. Finally, we remain committed to enhancing shareholder returns through capital deployment, including share repurchases and dividends, and are pleased to announce that our Board of Directors recently approved a 16% increase in our regular quarterly dividend to $1.48 per share, our 12th consecutive annual increase, which will be paid on March 24 and to shareholders of record at the close of business on March 10. In closing, 2022 was another year of strong growth for Elevance Health as we continue down the path of transforming from a traditional health insurance company to a trusted lifelong health partner, and we are well positioned to deliver another year of strong growth in line with our long-term targets in 2023. We look forward to discussing our enterprise strategy and long-term financial targets at our upcoming investor conference, which we will host in New York City on Thursday, March 23, 2023. And with that, operator, please open the line for questions.

Our first question, we’ll go to the line of Lance Wilkes from Bernstein. Your line is open.

Yes. Thanks. And can you talk a little bit about the growth in the services business, which is really interesting. Both org changes that you're intending to put in place to kind of support the new segment reporting, if any? And then, in the care delivery aspect of that, can you just talk a little bit about what you've been doing to date with some of your partnerships with Aledade and Privia and how that's kind of being deployed in the market and what your expectations are for care delivery long term?

Thank you for the question, Lance. Let me provide some context for what you asked, and then I'll have Pete Haytaian, who leads Carelon, offer more details on that. Over the past 18 months, we have been building our team, and Pete has done an excellent job of both bringing in individuals from the services industry to Carelon and promoting people from our health benefits business who have a deep understanding of that sector. We believe we have created a strong mix of talent and effectively strengthened our team. Therefore, we do not anticipate any structural changes; as acquisitions occur, they will integrate into the verticals we've outlined in our strategy. Now, I'll let Pete share more about Carelon and our growth in that area.

Yes. No, thanks a lot Gail. Thanks a lot, Lance, for the question. Overall, as Gail said, we're really pleased with the momentum and performance that we saw in 2022. And as Gail noted, in the year, we did do a lot around restructuring. We obviously went through rebranding, which there was a lot of excitement around. And as she said, we infused a lot of new talent across the organization. And then, in terms of the infrastructure we built internally, we're very focused. As you know, a core part of our strategy is focused on internal growth and serving Elevance affiliated health plans. And so we built the infrastructure to engage, to a much better degree, with our associates and partners internally. And we're seeing really good progress there. I hope you can see that through the numbers and the improvement in the year. We remain keenly focused on whole health and improving the patient experience. That's something else that we're very focused on looking from the outside in, in terms of the patient experience. And I'd say the other thing that we've been really focused on internally, and we're trying to change the culture, and it's working, is driving more risk and capitation through the portfolio. And that has really helped in terms of the acceleration of our growth and the innovation that we're seeing going forward. As it relates to your question on some of the care delivery partnerships. We're seeing really good progress there. Again, when you look at the assets within Carelon, it can add a lot of value to our partners. And so, we continue to look to wrap around those services and create incremental value. And as we look forward, we have that in mind as well. When we talk to our provider base partners, where are they feeling stressed, where can we support them. So there's a lot of opportunity that we got going forward.

Yes. Thanks, Pete. And Lance, specifically, in terms of how we're deploying, we see those partnerships and some of the investments we've made as part of our overall value-based care strategy. Our penetration has been strong, we're around 63%, driven by purposeful collaboration. Those are two really good examples. We continue to learn and improve that approach, and part of that is how we work closely with Carelon to capitate services and actually, I think, impact more of the healthcare dollar and impact more of overall services. But we feel really confident about the strategy that we've deployed. And as I've shared before on these calls, we know that sharing the downside risk is really the most important part of where we need to achieve better outcomes. And so we're continuing to grow those arrangements, early days still, but we feel good about the partnerships that we have, and we continue to expand them, and we feel on track to deliver on the goals that we've shared previously at our Investor Day, but also in these calls. So thanks very much for the question and next question please.

Next, we'll go to the line of A.J. Rice from Credit Suisse. Please go ahead.

Thanks, everyone. Congratulations on the deal with Blue Cross Blue Shield of Louisiana. It's been a while since we've seen one of those. My main memory is that the approval process and navigating the regulatory aspects can be somewhat challenging. Could you share any updates on your discussions with the states and your level of confidence? I know you're aiming for a year-end close. John, you mentioned that this won't significantly impact this year's numbers, likely due to the late closure. Would it be accurate to say this would be accretive? Can you provide any financial insights on it? Additionally, given the recent changes related to the Blues, including the antitrust settlement, are you noticing more discussions or increased interest in collaboration? Do you think this could lead to a broader increase in activity?

Thank you, A.J. You raised an excellent set of questions, and I'd like to address them. We are genuinely excited about acquiring Blue Cross and Blue Shield Louisiana. It's been a while since a deal like this has happened, and this acquisition is very much a strategic move. The Board of Blue Cross and Blue Shield Louisiana is eager to enhance their impact and accelerate their existing strategy. This plan is well-managed, boasting a 4.5-star Medicare rating, which is significant in the context of this acquisition. Another vital aspect is that Blue Cross Blue Shield of Louisiana aligns closely with our strategy. They are deeply embedded in their local communities and have been serving Louisiana for over 90 years. Our mission closely mirrors theirs, and we've maintained a Healthy Blue Alliance partnership that serves our Medicaid and dual special needs plans for several years now. This cultural alignment is strong. We are also excited because this acquisition represents our reach into a 15th Blue state. As we have done in our other 14 states, we will maintain our deep local roots in this new market while also leveraging our national scale and access to a portfolio of innovative solutions and capabilities. This will enhance the strategic focus of Blue Cross Blue Shield and support community initiatives, positively impacting the 1.9 million lives involved. Regarding closing, this will be contingent upon standard closing conditions, and we anticipate that the deal will be finalized in the second half of 2023. We are committed to making a significant impact on the community and the residents of Louisiana through the foundation, Accelerate Louisiana, which will enhance healthcare status, accessibility, affordability, and health equity—areas we've been deeply invested in. You also mentioned collaborations. We've engaged in several and are pleased with the Synergy Medical Collective, which exemplifies our joint efforts surrounding medical specialization and a strong focus on improving affordability. With 150 million Americans in our care across the country, our collaborative efforts can lead to greater impacts on access and affordability. Once again, thank you for your question. We are enthusiastic about this partnership and see great potential for collaboration, particularly through Carelon to advance all Blues. Thank you. Please, go ahead with the next question.

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

Thanks. Good morning. I wanted to follow up. In 2022, your commercial business had a margin of about 7%. I know you're not reporting that specifically anymore, but you had set an 11% target for 2025. Is that still your expectation for 2025? Could you update us on the progress made toward that target in 2023? Also, I understand there might be some caution with Medicaid margins. Where do you anticipate your Medicaid margins will fall compared to the long-term target of 2% to 4%? Thank you.

Thank you, Justin. Good morning. And we do appreciate the questions. In terms of commercial, we're actually doing very, very well. We have a repricing effort going on that began on July 1 of 2022. And what we had seen was that the overall cost structure of the commercial market was higher than we had assumed. And so, this repricing was about 25% of the large group block in July. And then we repriced about 50% of the block here on January 1, 2023, and it was really to ensure that the premiums more accurately reflect the underlying cost structure of the book. The result of that would be margin recovery associated with that. We feel very good about the progress that we're making, and we still stand by the commitments that were made in our prior Investor Day to get the commercial margins up to the level that we had estimated by 2025. You have to look at now the health services segment in total. And as you had asked, we have the commercial margin improvement ongoing, we will have Medicare margin improvement, as our risk adjusters are really recovering, risk-adjusted revenue really recovering from pandemic era lows. Also, we do have 74% of our MA membership in 4-star plans or above for the 2023 payment year. And we believe our Medicare Advantage business will be solidly within the target margin range of 3% to 5%. And then, on Medicaid, which was your final question, we've been working very closely with our state partners on Medicaid and feel very good about the rating actions. And that the rates are actuarially sound rates and feel very good about that. However, we were making either at or above the high end of our range here in the last couple of years, which obviously resulted in MLR collars and various other rebates being paid back to the states. We expect that the Medicaid business will be solidly within the 2% to 4% range, closer to the high end, but still with actuarial equivalent rates. So hopefully, that helps clarify all that. Thank you.

Thank you. Next question, please.

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

Hi. Good morning. Thanks for the questions. On Carelon, you mentioned that you hit the target for 20% of benefit expense through Carelon ahead of schedule. Could you talk about how much higher this percentage can go from here with your current capabilities? And then specifically on the outlook for 2023. The revenue guidance for Carelon Services came in a bit below your long-term target. How are you thinking about growth from here just given the progress that you've made? And will more growth come from external customers going forward? Thank you.

Yes. Thanks, Nathan. I'm going to have Pete Haytaian provide a little perspective. And as we shared earlier, we are going to be updating our long-term planning at our Investor Day in March. So we probably won't go into like where we think our updated guidance is on that, but we can certainly give you some color on how each of the components are playing and feel very good about the progress that Carelon overall is making. So Pete?

Yes. No, thanks for the question, Nathan. As it relates to 2023, just to be clear, and John noted this in the prepared remarks, the low double-digit range growth in 2023 is really organic growth. It does not include M&A. I think if you look at our recent history, there's been a lot of M&A that's contributed meaningfully to us. And we're being very intentional about that. We're very focused on it. It's something that we'll continue to do. And I think it's an important part of our growth strategy going forward. As Gail said, in terms of the amount of medical spend that we penetrate, we'll talk more about that at Investor Day, but we're really encouraged with our trajectory right now. We feel like we can continue to grow pretty significantly. There's a lot of white space internally. So a lot of opportunity there. But to your point about external growth, we did establish some new leadership. We've got a new infrastructure in terms of external growth. We're very focused. As Gail said, you've heard a lot about the Blues and Blue partnerships, and we're very encouraged by what we're seeing in terms of the Blue opportunity. So we do think we can see nice growth externally as well. But again, our first focus is on the affiliated health plans and creating value there first.

Thank you. Next question, please.

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

Hi. Thanks. Good morning. Just I had two follow-ups on the Blues topic. The first is if you can maybe give us some color on the incremental revenue you expect to drive from the BCBSLA Louisiana acquisition because obviously, you already have some revenues that you're generating off of Healthy Blue. Then also maybe just an update on the Blue Cross Blue Shield of Minnesota situation, I think that, that relationship on the Medicaid side will term at the beginning of 2024. Just any update on membership or financial impact that you expect from that situation as well? Thank you.

Thank you, Scott, for your question. Regarding our association with Blue Cross and Blue Shield of Louisiana, we do not expect that transaction to close until later this year. The impact on 2023 will be minimal, mostly consisting of data line items. However, if it closes in 2023, we anticipate an additional 1.6 million members in 2024 after adjusting for double counts. As you mentioned, we already have a significant partnership with them. This could result in approximately $4.5 billion more in revenue on top of our current figures. This outlines the high-level economics we expect for 2024.

I'm going to ask Felicia Norwood to comment on Minnesota.

Yes. Good morning, Scott, and thank you for the question on Minnesota. We operate over 27 Medicaid plans across the country with over 11.5 million members. And when you think about what we do, we bring very deep expertise in this business and a relentless focus on our whole health strategy, health equity and improving health outcomes. The expertise we bring to the table has been recognized by our external partners, and we really look forward to continuing to bring that experience to other Blue partners and alliances, not only in Medicaid but in Medicare as well. When I think about our alliance relationships, each of them is very different. And Blue Cross Blue Shield of Minnesota decided to end our administrative services relationship, which supported about 330,000 Medicaid members and provide back-office services in-house. We're going to work with them to make sure that there's a seamless transition, because at the core of what we do, we want to make sure our members are taken care of, and that's our highest priority. So we continue to value alliance relationships and really look forward to continued growth in this segment, with partners who value the deep expertise that we bring to the table for serving vulnerable and complex populations. Thank you.

Yes. Thanks, Felicia. And Scott, that will be in January 24, just from a timing perspective. Next question, please.

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

Thanks, very much. Good morning. I just wanted to follow up on utilization expectations for 2023. John, you made the comment that COVID is not going away. I agree that that should be in the baseline. But as we think about this, do you feel like there's any level of pent-up demand or potentially higher acuity levels as we move into 2023? And would you call out any specific line of business?

Thank you for the question, Lisa. We're not discussing specific trend assumptions for 2023, but when you consider some of our cost drivers, the emergency room has been favorable, in-patient has been favorable, while pharmacy costs are slightly higher than expected and out-patient is also running a bit higher than anticipated. We don't see significant pent-up demand, more like an adjustment to the new normal. To reiterate, the overall cost structure of our business is higher than it would have been without COVID. COVID remains a cost driver. What's most important is that our pricing now reflects this underlying cost structure, and our MLR guidance aligns with the increased costs. We feel well positioned as we head into 2023. Thank you.

Next question, please.

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

Great. Thanks. I guess, my question is going to be really on 2024. So if you can make a direct comment on that, that would be great. But if not, at least comment on the 2023 trajectory to give us a little bit of a sense, because it seems like the story here for 2023 is balanced portfolio improvements in commercial and Medicare are offsetting Medicaid. But obviously, the Medicaid pressure is one that builds throughout the year, both from a revenue and I would think, from an MLR pressure perspective, which begs the question about whether it's a bigger headwind in 2024 than it is in 2023 and whether there are similar opportunities in 2024 to kind of to offset that? Thanks.

Thank you for your question, Kevin. As you noted, we won't share specific details about 2024 right now. However, during our upcoming Investor Day in a few months, we'll provide more insight into our long-term goals. Your characterization of 2023 as a year focused on optimizing our health benefits business while growing Carelon is accurate. Regarding the Medicaid redeterminations, there are numerous variables that can affect their pace and timing on a state-by-state basis. The good news is that our membership base is balanced and resilient, allowing us to accommodate members regardless of their age, employment status, or health condition. We anticipate that about half of the Medicaid members will be reverified this calendar year, with the other half next year. Overall, we feel well-positioned to retain a significant portion of that membership. Thank you.

Yes, thanks, John. And Kevin, I think it's an insightful question because as you've heard us talk about, I think there's three core pillars of how we see our business evolving. Optimizing our health benefits business. It's highly scaled. We're very diversified in that business. And again, as you think about 2023, we have an opportunity for margin recovery, which is really we've been intensely focused on. But the other two pillars, I think, are really important about our future growth, which is investing in growth opportunities. And then third, accelerating services and capabilities, particularly through Carelon. And remember, as we think about Carelon, a lot of that is synergistic with our health plan business. We've continued to grow this and that allows the synergy to also occur with Carelon services as well as expanding capabilities that you've seen us, but through organically and inorganically. So overall, I think we've got more levers than we've ever had historically, and those positioned us well for the balance that John just shared. Next question, please.

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

Hi. Good morning. It'd be great if you could expand a little bit on the dynamics you saw in Medicare Advantage open enrollment this year. And how you think those trends might play out over the next couple? And then specifically, hoping to clarify the enrollment expectations there. I think you said 75,000 to 100,000 membership growth. Is that a sequential Q1 figure or year-end figure just trying to realign versus some of the previous expectations you've shared here. Thanks.

Sure, I'll have Felicia Norwood, who leads that business, share her comments.

So, good morning and thank you for that question. When we think about Medicare Advantage, as Gail mentioned in her early remarks, we took a very strategic approach as we thought about our bids for 2023, and we expect to deliver good performance in terms of growth, not just in individual, but also in group. As John referenced, we plan to grow between 75,000 and 125,000. But we did end up encountering a very competitive. On the other hand, we had very solid growth in our D-SNP business, which is where we've had a focus for some period of time. And I think that positions us well for the rest of OEP in the remainder of 2023. As we think about our competitiveness, we have a very strong benefit portfolio, and we believe that we're positioned well in order to continue to grow this business. So at the end of the day, a competitive environment, which it always will be in Medicare Advantage, but still an opportunity to grow in a business that we feel very good about. And most importantly, the opportunity is we are in 2023 to deliver very strong margin recovery and operate squarely within our 3% to 5% pre-tax target margin range in this business, so solid growth and solid margins in 2023.

Thank you. Next question, please.

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

Hi. Thanks. Good morning. I was wondering if you could provide an update on some of the trends you're seeing in value-based care. I heard some of the comments earlier. But as you go into 2023, are there any changes in the dynamics of the industry? Any changes specify in contracting terms that either the providers are looking for or that you're trying to push? And then, maybe any updated views on the employment or ownership of physicians or physician groups.

Thank you for the question, Josh. Regarding value-based care, we've been refining and improving our strategy, and we're making significant progress. There is increasing interest in sharing both upward and downward risk. Historically, value-based care focused more on upside risk, and we've reached about 63% in that area. We’ve evolved to include more downside risk, and a key change is the more timely exchange of data, which allows for more integrated actions. We're collaborating closely with our care providers on this and incorporating it into our processes. Additionally, we’re looking at how to manage specialty services post-primary care, which is a critical aspect of the Carelon strategy under Pete’s leadership. As I think about this, there's a noticeable increase in interest and dialogue over time, as it takes years for physician practices to feel comfortable with value-based care. We're building credibility, improving our reporting and engagement, and expanding our efforts beyond just Medicare Advantage. Some of our partnerships also extend to commercial relationships with a different focus, including fee-based customers. Regarding physician ownership, we've remained consistent in that area. We do own physicians as part of our integrated health plans, which are performing well in markets like the MMM and the health fund in Florida. CareMore is becoming even more integrated with our initiatives. Overall, our strategy remains steady, with a focus on driving more downside risk and integrating data in real-time. Building true partnerships takes time and effort from both sides, but we're optimistic and have seen increased enrollment in those partnerships, with resulting improvements in quality and cost outcomes. Thank you for your question. Next question, please.

Next, we'll go to the line of Rob Cottrell from Cleveland Research. Please, go ahead.

Hi. Good morning. And thanks for taking my questions. Just on the CarelonRx or PBM, how should we square the high single-digit outlook for 2023 relative to your long-term 2025 low double-digit outlook? And then also, can you provide a bit more color on what Carelon's role will be within the synergy collective? Thank you.

I'm going to ask Pete Haytaian to address that, please.

Yes. Thanks. In terms of the short-term, if you're referencing the script growth, overall, we're going to see nice script growth in Medicare and commercial. In terms of the headwind to that, really, that's due to the Medicaid dynamic around reverifications, or redeterminations. And then overall, we're going to see lower COVID vaccination. So that doesn't impact operating gain, but that is really the reason for the difference in the numbers in terms of what you're seeing short-term, long-term. In terms of overall growth, though, we feel really good about how we're doing in the pharmacy business. There continues to be a lot of interest in our integrated value proposition. In 2022, we're coming off a good year. We saw a 300% improvement in net membership growth. So that was good in terms of penetrating our self-funded business. And we're seeing that continue to play through into 2023. We're obviously through a lot of the selling for the beginning of the year, what we did see is we saw a lot more activity and penetration in the 10,000 or less business. We saw RFPs up by about 6% year-over-year. And again, I'll reiterate, but this is a segment an area that we perform really, really well in. I think you referenced a synergy at the end of your question. And again, to Gail's point in our commentary, our focus, a big part of our strategy is overall affordability and choice and this creates an opportunity for us in the context of medical specialty to create more affordability for our members. Again, by working in conjunction with the Blues across 100 million Americans, those that are utilizing specialty on the medical side, we have an opportunity to create much greater affordability. So we look forward to that. That work is in earnest right now in 2023 with value potentially playing through into 2024.

Thank you. Next question, please.

Next, we'll go to the line of Whit Mayo from SVB Securities. Please go ahead.

Hey, just on the topic of health plan optimization and commercial repricing initiatives. Can you comment maybe more specifically on stop loss? I think you guys are beginning to anniversary some of the challenges in the creep and high-cost claims last year, just how you feel about trends in the business margins, just maybe broadly, any comments about the overall stop-loss market? Thanks.

Sure, Whit. I'm going to have Morgan Kendrick, who leads our commercial business, give you some perspective there.

Hello, Whit, and thank you for your question. Concerning the stop-loss business, it has been an area of underperformance in the past, and we started working on recovering the margins in that sector back in January of last year. Our efforts initially focused on our external business. As the year progressed, we had our July cohort, which John mentioned, representing about 25% of our integrated business, including both stop-loss and risk-based business. Both segments underwent a repricing exercise in the middle of the year, which concluded in January. Regarding the stop-loss market, we are optimistic about our strong penetration and see further growth opportunities in both our internal integrated business and external business. At this point, we believe we have appropriately priced our business based on risk, and we will continue to manage this carefully as we move through 2023.

Thank you. Next question, please.

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

Hi. Thanks for taking my question. Good morning. You called out a headwind to the MLR this year from the growth, the outsized growth in Medicaid did not call out a benefit to the SG&A ratio in 2022 from that. I'm wondering if there was one. And then more importantly, as the direction of those books reverses and Medicaid shrinks in 2023 from redetermination. Does that create a headwind? And what levers are you pulling to offset that headwind for SG&A ratio? Thanks.

Thank you for the question, Dave. As you can imagine, there's a lot of puts and takes associated with SG&A ratios and by the ability to invest and the fact that we have been investing quite heavily in various digital capabilities, things that are member facing and can actually improve the member experience. The other aspect is that, we've really enjoyed a lot of fixed cost leveraging. Our premiums grew at 13.5% year-over-year, which obviously allowed the SG&A ratio to decline from that aspect as well. So, we do expect a reduction in our operating expense ratio in 2023, driven by the leverage of top-line growth, as well as improved operating efficiency, partially offset by the reinvestment in strategic initiatives in support of our growth. So, while certainly, the mix of business does matter. And as we said in the guidance, Carelon services carries a higher SG&A ratio than the rest of the company in general. And we expect Carelon Services to grow faster, a lot of puts and takes. But fixed cost leveraging and investment in capabilities are probably two of the most significant drivers year-over-year. Thank you.

Next question, please.

Next, we'll go to the line of Steven Valiquette from Barclays. Please, go ahead.

Thank you for the update on the 2023 membership guidance, especially regarding your commercial segment and the repricing strategy. You mentioned your objective to reduce the profitability gap between fee-based and risk-based commercial customers. Could you share more details on your anticipated progress in closing that profit gap in 2023, considering the pricing and growth trends you've discussed for both the risk and fee-based segments in commercial?

Great. I'll have Morgan share his thoughts.

Thank you for the question, Steven. We had a very successful selling season with CarelonRx, as Pete mentioned, and we significantly grew our specialty lines of business. We are making steady progress towards closing the revenue gap between risk-based and fee-based business. Reflecting on 2022, our admin fee revenue increased nearly 8%, compared to 4% in our fee-based membership growth. This indicates a clear expansion in revenue and product sold per member. This growth is driven not only by our Carelon assets but also by strong performance in our clinical buy-ups, specialty products, and aligned incentives with Carelon services. We are optimistic about this trajectory and the ongoing reduction of the gap. As John noted earlier, this effort is not limited to a single segment; it is about expanding our fee-based business overall. A significant portion of that business is transitioning to fee-based schedules, along with the impact of the Carelon asset that we are developing in collaboration with Pete and his team. Thank you for the question.

Yes, thank you for the question. As Morgan mentioned, we are making significant progress in enhancing both revenue per member and profitability per member in our fee-based business. The example he provided illustrates this well. Overall, we are pleased with our progress and have strong confidence in our direction. Thank you again for the question. This is part of our efforts to optimize our health benefits business. Next question, please.

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

Hey, good morning. And thanks for taking the question. I ask, kind of, a question on the future state of the CarelonRx business, because you guys announced the BioPlus acquisition, you've got the synergy initiatives. You've got the JV with SS&C on DomaniRx. So I guess it's probably a question for 2024 or beyond. But I guess can you talk about how much of the vertical integration of the PBM business that you think that you need to do, given the outsourced relationship with CVS and the other initiatives that you have going on? Thank you.

Yes, George. Thanks a lot for that question. And I think it's helpful to sort of step back and think about our overall strategy and where we started in this regard. When we started a few years ago, we always talked about being a different kind of PBM and our strategy has been keenly focused on whole health and integration of medical, pharmacy, behavioral, and social. And that's been core to what we've been doing. And we've also said, and we've been very deliberate about this, that we want to own the strategic levers that matter. Those that, quite frankly, drive the greatest affordability choice, and of course superior patient experience. And that's the journey we're going on. I think what you're seeing in BioPlus and what you're seeing in synergy are really good examples of that and what we prioritized. If you look at specialty pharmacy, it's 40% to 50% of the overall drug spend right now. And it's a critical driver of value for patients. And so that's where we started. And we'll continue on this journey, again, through the lens of greater affordability and superior patient experience. So over time, you will continue to see us take ownership of the strategic levers that really matter.

Thank you. We have one last question.

And for our final question, we'll go to the line of Michael Ha from Morgan Stanley. Please go ahead.

Hey, thank you for the question. Just wanted to dig a little deeper on commercial margins. I know you mentioned you're still targeting 10.5% to 11.5% by 2025. I think John might have mentioned 125 bps better commercial margin in 2023. Was that right? And if so, that would be slightly more than 8% for 2023, which means there's still a considerable gap to your 2025 target. And I was expecting a majority of that improvement might happen this year just given your repricing efforts, but if you're seeing 125 bps in 2023 and the following two years, would need at least 225 bps of improvement. So I was wondering if you could just talk a little bit more about the path and progression of that improvement in 2024 and 2025. If you could help us break down the drivers, we can better envision that path? Like what percent of that improvement is coming from upselling your fee-based business or the shift to higher margin small group or just any other contributors, maybe potentially more pricing efforts beyond 2023? Yeah, thank you.

Thank you for the question, Michael. I'm not sure where your 125 basis point comment came from, as it was not part of our prepared remarks. However, I can share that if you review the press release, you'll see that on a reported basis, commercial margins for the third quarter of 2022 increased by 120 basis points compared to the third quarter of 2021. Additionally, in the fourth quarter of 2022 versus the fourth quarter of 2021, the commercial margins increased by 180 basis points. Regarding margin improvement, as we've historically indicated, it will not be uniform. With three more years, from 2023 to 2025, to reach our target margins, we expect to see a significant portion of that improvement occurring in 2023 for the reasons you mentioned. Continued improvements will follow in 2024 and 2025. We will keep optimizing our fully insured block along with the fee-based selling strategies that Morgan discussed, and we remain committed to our margin target through 2025. Thank you.

Thank you, John, and thank you for everyone for joining us. In closing, we're pleased to have delivered another strong year in 2022 and are confident that the ongoing execution of our strategy positions us well for 2023. We look forward to discussing our long-term strategy in greater detail at our 2023 Investor Conference, which we said we plan to host in New York City on March 23, 2023. Thank you for your interest in Elevance Health, and have a great rest of the week. Thank you.

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through February 24, 2023. You may access the replay system at any time by dialing 800-396-1242 and international participants can dial 203-369-3272. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.