Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health Second 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 second quarter 2023 earnings call. This is Steve Tanal, Vice President of Investor Relations and with us this morning on the earnings call are, Gail Boudreaux, President and CEO; John Gallina, our CFO; Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial and Specialty Health Benefits division; and Felicia Norwood, President of our Government Health Benefits division. Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. John 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. 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 are pleased to share that Elevance Health delivered strong second quarter results, driven by solid execution and continued progress towards our strategy of becoming a lifetime trusted health partner, focused on the whole health needs of the consumers we are privileged to serve. Second quarter GAAP earnings per share was $7.79 and adjusted earnings per share was $9.04, reflecting double-digit growth year-over-year as a result of the strong performance in the first half of the year and momentum across Elevance Health. We are increasing our adjusted earnings per share outlook for the year to be greater than $32.85. The balance and resilience of our diverse businesses provide confidence in our near-term outlook, while the earnings power of our Health Benefits and Carelon businesses position us to deliver on our long-term growth commitments. With respect to the second quarter, our Health Benefits business delivered particularly strong results as we continued to optimize our products, pricing, and operations. We are successfully executing against the planned margin recovery of our commercial risk and Medicare Advantage businesses back toward pre-pandemic levels, and we are pleased with the performance of our Medicaid business. With Medicaid eligibility redeterminations now underway, our teams are working tirelessly to promote continuity of coverage for consumers through an omnichannel approach, working closely with our state partners. Our Medicaid and commercial colleagues are collaborating to educate members and communities on the process through in-person and online events, ensuring members know how to renew their Medicaid coverage when eligible or enroll in other forms of coverage, including our own individual ACA plans. To date, we have contacted more than 1.5 million of our Medicaid members. Meanwhile, our web-based digital decision support tool is seeing healthy utilization. The tool assesses eligibility for a wide variety of federal and state programs beyond health insurance to support consumers’ whole health journey, including the federal supplemental nutrition assistance program, state-based programs that assist with food and security, housing and childcare programs, and more, with links that can route consumers to websites where they can enroll in these programs. More than half of the people using our support tool who qualify for commercial or Medicare coverage are clicking through embedded links to shop for plans and more than 60% of consumers eligible for Medicaid are clicking through to their state site for recertification. This body of work is especially important since many of the people who have lost access to Medicaid so far are losing it for administrative reasons. We expect many of these consumers will re-enroll in Medicaid over time. Transitions of coverage are not typically immediate. But emerging data points suggest consumers losing Medicaid are starting to transition onto ACA exchange plans. It's still early in the process and our expectations for coverage transitions remain unchanged. Our deep local roots and diversified product portfolio position us uniquely well to meet consumers' needs regardless of age or socioeconomic status. Carelon continued to advance its strategy of integrating physical, behavioral, social, and pharmacy services to deliver whole health affordably, with ongoing investments and capabilities focused on serving people across their entire healthcare journey, connecting them to the care, support, and resources they need. Carelon Services delivered solid organic growth led by the expansion of post-acute care management solutions with our Medicare health plans. While Carelon Behavioral Health extended its leadership position through multiple external business wins with new and existing customers, new business awards and successful execution in these fast-growing high-cost areas of trend underscore the value Carelon provides to health plans and the expanding earnings power and attractive growth profile of the Carelon Services business. CarelonRx also continued to grow nicely while investing in key value drivers. Specifically, specialty pharmacy and advanced home delivery revenue grew nearly 20% year-over-year and we posted solid operating earnings while absorbing investments in support of our long-term strategy. The integration of the BioPlus Specialty Pharmacy is now tracking ahead of schedule and we expect to begin migrating scripts early next year. Additionally, we remain on track to launch advanced home delivery by the end of 2023. Together, these capabilities will create additional shareholder value while allowing us to deliver even better consumer experiences in specialty and maintenance pharmacy. Expanding and more deeply integrating value-based care across the care continuum is foundational to our enterprise strategy. We are making significant progress in many key areas, including maternal health, where we have continued to expand our obstetrics practice consultants and quality incentive programs to additional markets given outstanding early results. These programs have helped improve timeliness to and adequacy of prenatal care and increased postpartum visit compliance, contributing to a reduction in pre-term births of 12% and low-birth weight deliveries of 20% in participating Medicaid populations. These programs have driven cost savings per delivery and first-year mom and baby costs of 5% to 10% and we are now offering them in 24 Medicaid and 11 commercial markets across the country. We're also working with care provider partners to enable acute care in the home, a patient-centered care alternative to traditional care in the hospital that improves cost, quality, and patient experiences. For select patients, acute care at home is safe, improves patient satisfaction and provides high value care, resulting in approximately a 20% reduction in cost, a 25% decrease in readmissions and a 50% reduction in time spent in bed. We have partnerships with a number of major health systems in our markets with strong results and have significant interest from other health systems to expand this work. Connectivity with care provider partners is crucial to supporting our value-based care strategy and to enabling personalized hybrid and virtual care. We are continuing to expand bi-directional data exchanges between our systems and care providers' EMRs. Across 24 markets, we are now connected with over 1,700 hospitals. In addition to enabling physicians to practice value-based care more effectively, these arrangements have simplified common business practices, resulting in more than 60% fewer requests for clinical information and more than 80% less provider appeals. This has not only enhanced operating efficiency for our clinicians and care provider partners, it has also accelerated care approval processes for consumers. Automation remains an area of focus and opportunity across Elevance Health and deep data sets like ours are foundational for generative artificial intelligence. Our data is centralized and cleansed and we are in the process of scaling digital solutions for greater impact and testing the application of new technologies. We're harnessing our adaptive artificial intelligence solution to promote identification and access to whole health services during physical health procedures like surgery. Our approach allows us to cast a broad net to perform initial screenings for depression and other social drivers of health to ensure we are addressing our members’ whole health needs. Our digital chronic concierge care program is a cloud-based care management platform that connects the patient's entire care management team to triage, monitor and engage with patients through convenient digital channels. Fully digital enrollment, engagement and support, alongside key behavioral health components, provides members with highly personalized proactive, concierge-like experiences while reducing the overall cost of care for members with chronic conditions. We're also using large language models to assist our call center agents, improving their efficiency, accuracy, and quality. We're excited about these opportunities and the positive impacts they will have on consumers, care provider partners, and the operating efficiency of Elevance Health. Guided by our enterprise strategy, we are fueled by a passion for making a positive difference in the world. Accordingly, environmental, social and governance frameworks are embedded in our enterprise strategy. We continue to lead our sector with respect to ESG ratings from three of the most prominent corporate governance research, ratings, and analytics firms. And we were pleased that USA Today recently ranked Elevance Health fifth out of 400 organizations in its inaugural America’s Climate Leaders, based on core emissions reductions year-over-year and core greenhouse gas reductions. Before I turn the call over to John, I'd like to thank our more than 100,000 associates for the work that they do every day on behalf of the members we are privileged to serve. Their dedication is what allows us to advance our strategy and deliver strong operating results in service of our bold purpose to improve the health of humanity. Collectively, our passion to improve lives and communities is unwavering. 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. As Gail mentioned earlier, we reported strong second quarter results, including GAAP earnings per share of $7.79 and adjusted earnings per share of $9.04. We were pleased to deliver another quarter of double-digit growth in revenue, operating income and adjusted earnings per share, driven by the focused execution of our strategy. Our results exceeded our expectations and the balance and resilience of our diverse set of businesses provides confidence in our outlook. As a result, we have increased our adjusted earnings per share guidance to be greater than $32.85 in 2023, reflecting strong growth consistent with our long-term targeted compound annual growth rate. We ended the second quarter with 48 million members, up 938,000 year-over-year. During the quarter, medical membership declined by 135,000 members as the majority of our Medicaid states initiated eligibility redeterminations. While we are still very early in the redetermination process, at this time, we are seeing many Medicaid members losing coverage for administrative reasons. Many of these consumers will likely re-enroll in Medicaid in the near to intermediate term. In fact, many Medicaid beneficiaries who lose coverage for administrative reasons have 30 to 90 days to re-enroll depending on the state with coverage retroactive to the termination date. Meanwhile, we are seeing encouraging early indications that Medicaid beneficiaries losing coverage are transitioning into ACA exchange plans. But transitions of coverage are not always immediate. And our expectation is that commercial membership growth will re-accelerate in the back half of this year and into 2024. Overall, we believe our prior outlook for coverage transitions remains appropriate. We continue to expect by the end of the initial redetermination cycle that 40% to 45% of net new beneficiaries on Medicaid as a result of the suspension of redeterminations during the public health emergency will stay on Medicaid. But most importantly, we are well positioned to provide people who lose Medicaid coverage with alternative plan offerings. We believe it is essential that these individuals have access to quality healthcare coverage and we are positioned to meet their needs. With respect to our membership outlook, please note that a new entrant into one of our state Medicaid programs will result in a loss of approximately 140,000 members in that state in the third quarter. This was known as of last year and was factored into our 2023 planning and initial membership guidance. Second quarter operating revenue of $43.4 billion increased $4.9 billion or approximately 12.7% year-over-year. Growth was driven by premium rate increases to cover overall trend in our Health Benefits businesses, along with higher premium revenue driven by membership growth in Medicaid and Medicare. Our services business, Carelon, continues to produce strong results with double-digit top-line growth in CarelonRx and Carelon Services, as we continue to execute on our strategy of becoming a lifetime trusted health partner. Execution of our strategy is diversifying our revenue streams, creating greater earnings power and consistency, and enabling us to deliver strong growth regardless of the prevailing economic environment. The consolidated benefit expense ratio for the second quarter was 86.4%, a meaningful improvement year-over-year, driven by premium rate adjustments in our commercial risk-based business to better reflect the post-pandemic medical cost structure, offset in part by a charge we took in the second quarter associated with a court ruling in a certain state holding health plans liable for certain COVID costs retroactive to the beginning of the pandemic. We strongly disagree with this ruling and it is currently on appeal, but we've recorded the potential charge in the meantime. With respect to our current performance, we are of course closely monitoring utilization and trend factors which remain consistent with our expectations overall and within each line of business. In the context of our upwardly revised guidance for adjusted earnings per share, we are reiterating our initial outlook for our full year consolidated benefit expense ratio. Elevance Health's adjusted operating expense ratio was 11% in the second quarter, down 10 basis points year-over-year. The decrease was driven by expense leverage associated with strong growth in operating revenue, partially offset by additional operating expenses in support of growth as we continue to execute our enterprise strategy. Operating gain for the enterprise grew 12% year-over-year in the second quarter, led by our Health Benefits business, which delivered double-digit top-line growth and strong margin improvement. Operating margin for our Health Benefits business expanded by 50 basis points year-over-year, consistent with our full-year outlook despite absorbing the charge I mentioned earlier associated with the adverse court ruling in a certain state. Carelon delivered a strong quarter as well, with healthy top-line growth for CarelonRx and Carelon Services. CarelonRx operating earnings include investments in support of our strategy, including scaling our recently acquired specialty pharmacy and the build-out of our advanced home delivery business, which is set to launch later this year. CarelonRx also benefited from a favorable out-of-period item in the second quarter of 2022, which had the effect of depressing its year-on-year operating earnings growth rate this quarter. Carelon Services had a strong second quarter, led by organic growth in Carelon post-acute management. Turning to our balance sheet, we ended the second quarter with a debt to capital ratio of 39.6%, in line with our expectations and consistent with our target range. During the quarter, we repurchased 1.4 million shares of our common stock at a weighted average share price $457.34 for approximately $646 million. Year-to-date, we have repurchased 2.7 million shares for $1.3 billion, pacing ahead of our full-year outlook of approximately $2 billion. We expect to remain opportunistic given recent weakness in our share price and the attractive valuation levels offered by the market. We continue to maintain a prudent posture with respect to reserves. Days and claims payable stood at 46.5 days at the end of the second quarter, an increase of 0.5 days sequentially and a decrease of 1.3 days year-over-year. As we disclosed in the second quarter of last year, the timing of certain provider pass-through payments and corresponding reserves had the effect of increasing days and claims payable by approximately 1.8 days in the prior year quarter. Excluding that dynamic, days and claims payable would have increased by 0.5 days year-over-year and medical claims payable would have grown by 11.9%, compared with growth in premium revenue of 10.6%. As a reminder, we continue to expect days and claims payable will be in the low-40 range long term and anticipate normalization towards this range in the coming years as cycle time shortened in COVID-related uncertainty receipts. Operating cash flow was approximately $2 billion or 1.1 times net income in the second quarter of 2023. Year-to-date, excluding an extra payment received from CMS, our operating cash flow was $4.9 billion or 1.3 times net income. Overall, we are pleased with our second quarter and our year-to-date performance. As we look to the second half of the year, we are excited for the pending acquisition of Blue Cross Blue Shield of Louisiana, the launch of our CarelonRx Pharmacy, a differentiated digital-first home delivery model and the continued scaling of BioPlus as it prepares to serve more Elevance Health members in early 2024. Given the strong start to the year, the diversity of our assets, and the balance and resilience of our enterprise, we have raised our full-year outlook for adjusted earnings per share to greater than $32.85, reflecting growth that is consistent with our long-term target compound annual growth rate. We have consistently delivered on our financial commitments and have the conviction that we will continue to do so. We will remain focused on the execution of our strategy to become a lifetime trusted health partner by serving the whole health needs of the consumers we are privileged to serve. The better job we do serving our members, the better we will do for all of our stakeholders. With that, operator, we will now open up the line for questions.

For our first question, we will go to A.J. Rice from Credit Suisse. Please go ahead.

Thanks. Hi, everybody. Appreciate the good performance on the medical loss ratio line and that you're benefiting from your repricing in the commercial book, which you've been talking about for a while. You didn't really call out anything that's deviating from your underlying expectations relative to Medicare Advantage, commercial, and Medicaid. I just wondered if you would maybe flush that out a little more. Are you seeing any trend changes or anything on the horizon? And how did you think about the MA bids in light of anything you saw there on the utilization front?

Thank you for the kind words, AJ, and good morning everyone. I really do appreciate the question and the opportunity to provide clarity on these issues. We're obviously very pleased with our results for the second quarter, which is really following delivery of strong results also in the first quarter. And related to your question and the issues on trend, I do think part of the confusion out there is trying to understand what is happening versus what is expected or what was expected. As we've noted previously, when you combine COVID and non-COVID costs, the overall cost of the healthcare system is more expensive than if COVID had never occurred, something we've been talking about, analyzing, and stating for a while now. So given that fact, we had already included the elevated cost structure into our pricing, projections, and guidance. And quite honestly, this is true for all lines of business within the Health Benefits segment. So if you look at the first and second quarter in particular, there really isn't anything surprising or different from our overall expectations. Costs continued to be higher when compared to a baseline as if COVID never existed. So we are obviously very well positioned. And as you know, based on this morning's call, we raised our guidance by $0.15 to $32.85 per share. And those expectations fall solidly within our 12% to 15% compound annual growth rate target. But I think just as importantly, as you heard in my prepared comments, we reaffirmed our original guidance for the full year 2023 benefit expense ratio. So, anyway, thanks for the question, AJ. And, operator, next question please.

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

Could you discuss the successes you're achieving with Carelon, the types of organizations you're partnering with, such as self-insured employers or other Blues, and the status of your pharmacy capabilities build-out, including advanced home delivery? Additionally, how does this influence your upcoming re-contracting for PBM? Thank you.

Thanks very much, Lance, for the question. I'm going to have Pete Haytaian address it, but I think you hit a couple of key areas around Carelon on both Services and Rx where we feel that we're advancing the strategy that we laid out at Investor Day and feel really good about the progress. So Pete, why don't you talk about both of those areas?

Thank you, Gail, and thank you, Lance, for your question. As we've emphasized before, a significant aspect of our strategy is concentrating on managing high-cost, high-trend areas. Gail mentioned this in her prepared remarks. Our approach includes managing risk through Elevance Health while ensuring we create value that can be shared externally. We are seeing positive results from this strategy. Let me outline what is happening internally and how it relates to our external interactions. Internally, we are closely collaborating with our P&L and exploring many opportunities. We are finalizing the post-acute care initiative this year, which involves over 1.2 million Medicare members. We've also launched a new durable medical equipment service within our Medicare business and are expanding it to commercial. Additionally, we have insourced several critical services in medical benefits management, which was formerly AIM, covering areas like genetic testing and oncology. There is considerable focus on the behavioral health and physical health opportunities as well, particularly with assuming full risk in those areas. Interestingly, our success internally is impacting our external pipeline, especially with the Blues. They are recognizing our strong internal performance and are interested in similar solutions. Notably, home solutions through myNEXUS and our Carelon post-acute care offerings are gaining significant traction. Our new post-acute care product in the Medicare sector is generating excitement as well, along with growing interest in innovations related to payment integrity. As for the advanced home delivery and CarelonRx Pharmacy launch, I am very excited about this initiative. Our pharmacy strategy focuses on leveraging significant strategic levers. This effort isn't just about insourcing mail; it’s about enhancing our overall member experience. For example, our system will connect with Sydney, our consumer engagement platform, allowing for easy scheduling of medications and providing 24/7 access to pharmacists, which is a substantial differentiator. Additionally, we know that mail service experiences can vary, so we aim to offer a clear view of delivery statuses, creating an Uber-like experience for tracking pharmaceuticals. We are eager to enhance our service experience and prepare for the launch in 2024.

Thank you, Pete. As you can sense from the enthusiasm in Pete's voice and all the initiatives we're implementing with Carelon Services and CarelonRx, we have a lot happening to effectively build and execute our strategy. I want to emphasize two points Pete mentioned. First, in the behavioral health sector, we position ourselves as a leader in crisis management and have validated our strategy both internally and externally. This is beginning to reflect not only in our traditional government business but also in the commercial sector, where we are integrating physical and behavioral health, which is essential to our whole health strategy. Additionally, on the pharmacy side, we are focused on ensuring that our value and strategic advantages are clearly demonstrated, as Pete highlighted. Thank you for the question, Lance, and please proceed with the next question.

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

Thanks. Good morning. First, just wanted to follow-up on AJ's question to see if you can give us a little color. You're saying trend is above normal and you priced for it. We appreciate that color. Just any kind of incremental that you can give us on how much higher and what you've seen in 1Q to 2Q might be helpful? And then my question is just take that to the margin side, right, can you tell us how margins are running versus the expectations coming into the year? I know you had expected improvement in Medicare and commercial and obviously some volatility in Medicaid. Can you tell us how those are running in specifically, anything on Medicare beyond Puerto Rico issues you discussed in the second quarter would be helpful? Thanks. Or how that's trending?

Thank you for the question, Justin. I'm happy to provide the follow-up. I want to reiterate that we raised our EPS guidance and reaffirmed MLR guidance for the year, which suggests a positive trend. However, I'm not sure we are seeing anything significantly different from what others have mentioned. We anticipated that healthcare costs would remain high compared to the baseline as if COVID hadn't been an issue. While I won't give a specific point estimate, I can say that we have acknowledged these costs, priced for them, and integrated them into our expectations. This is the second time this year we've raised guidance and reaffirmed our MLR outlook, so I feel we’re in a solid position. Regarding margins, our Health Benefits segment is performing well overall, with margins improving by 50 basis points year-over-year and on track to achieve our guidance of a 30 to 60 basis point improvement. It's worth noting that a court ruling we disagree with led to a charge; without that, our margin improvement would have exceeded the upper end of our forecast. Health Benefits margins are performing quite well. The commercial repricing effort is on target, Medicaid is performing as expected, and Medicare Advantage is largely in line with expectations, aside from one geographic area that isn’t significant to Elevance Health's overall results. We are focused on this area and anticipate opportunities for improvement in 2024. Overall, we are very pleased with our performance and optimistic about the remainder of the year.

Yeah. Thanks, John, and thanks for the questions, Justin. I think it's important we've been very consistent all year. We haven't changed our view of how we see MLR and feel very comfortable, as John said, in the guidance that we gave and where we're heading on margins. So thanks again for the question and opportunity to comment. Next question please.

Next, we'll go to the line of Michael Ha from Morgan Stanley. Please go ahead.

Thank you. Regarding Medicaid redetermination, I understand it's too early to draw conclusions from current results. However, I have a few questions: first, how is the acuity mix shift progressing compared to your expectations? Second, what is your perspective on enrollment so far? Florida appears to be doing well, but does the recent data from Texas raise any concerns for you? Lastly, with several states undergoing mid-year rate renewals, are you noticing acuity adjustments in these draft rates, and could this lead to an increase in your guidance? Thank you.

I'm going to ask Felicia Norwood, who leads our Government business to comment on Medicaid. Thanks.

Good morning, Michael. Thank you for the chance to discuss redeterminations. Our teams have dedicated significant time to ensure that those eligible for Medicaid retain their eligibility. It's still quite early in the process, and we must be cautious about drawing conclusions after just a few months, as the redetermination cycle will continue well into 2024. So far, the trends we are observing align with our expectations, although there is considerable variability across different states. Ultimately, we remain confident that our guidance is appropriate. The Centers for Medicare & Medicaid Services provided states with a 14-month timeline for this process, but states are adopting their own strategies and some have expedited the redetermination for members they believe are no longer eligible. We anticipate that many of these members will re-enroll in Medicaid once we conduct further outreach and they can submit the necessary documentation. Currently, we expect these members to potentially return over the next 30 to 90 days, and we are actively working with community organizations, care provider partners, and federally qualified health centers to assist our members. It's worth noting that some states that have front-loaded their redetermination processes do not have Elevance Health's Blue state platform, so we haven't fully experienced the effectiveness of our strategies there, but we are ready to collaborate with our commercial partners to address this. Regarding rates, we engage consistently with our state partners in the rate-setting process, and we currently have insight into almost all of our rates for 2023 and many for 2024. What we are observing aligns with our expectations, and states are including acuity factors in their rate considerations. They are open to collaboration if there are areas where we see differing perspectives. Our initial assessments of acuity among members leaving versus those staying are consistent with our expectations. Therefore, we feel positive about our rate position for 2023, and our collaboration with state partners remains strong. Changes in acuity are now a standard factor in the rate-setting process, and we are pleased with this progress. We will continue to work diligently to ensure that those truly eligible for Medicaid maintain their coverage, while those who are not eligible have access to our exchange or commercial products. Thank you for your question.

Yeah. So Michael, as you heard from Felicia, there's a lot there and there's incredible work across our enterprise going into this. But overall, it's aligned very closely with the expectations we set. So thank you for the question.

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

Hi. Thanks. Good morning. The margin pressure in Carelon year-over-year I saw on the press release was attributed to higher medical cost trends and the non-recurrence of an out-of-period favorable adjustment last year. Could you just explain the higher medical cost and maybe what specific line items that is, if that's behavioral or Rx or something?

Thank you for the question, Josh. It's Pete Haytaian here. First of all, we are very pleased with Carelon Services' overall performance from an operating perspective, seeing a nice year-over-year improvement in operational gains. We're confident in achieving our guidance of 25 to 50 basis points margin improvement for the year. The variation is largely due to seasonality, which is evolving and causing some differences. This year, unlike previous years, we are driving more business through government initiatives, such as the post-acute care initiative with our Medicare teams and opportunities in durable medical equipment. This shift is resulting in earnings being more heavily weighted toward the second half of the year. Regarding the one-time issue you mentioned, which I assume refers to pharmacy, we are pleased with how pharmacy is performing in terms of margins. We maintain our guidance for the year of a 6% to 6.5% margin range. The one-time issue impacting year-over-year comparisons between Q2 ‘22 and this year was a favorable adjustment we experienced last year in pharmacy that we don't see this year. Overall, pharmacy is performing very well, and we feel confident in our margin guidance.

Next question, please. Thank you.

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

Yeah. Good morning, guys. As it relates to Medicare Advantage, I'm wondering if we can revisit an old topic, which is the changes to the risk model that CMS announced at the beginning of April. I guess as you guys have had more time to kind of digest the proposed risk model changes, can you talk a little bit about how it makes you guys think about ’24 just as some of your peers have kind of talked about the risk model kind of driving meaningful changes to kind of both benefit design and the bid process? We would love any update you could provide around that.

Good morning, George. It's Felicia Norwood. If we take a look at the risk model changes for 2024, they certainly were an integral part of our strategy as we thought about our bid process. But let me start by saying that we feel good about our bids for 2024. I believe when we step back and take a look at where we are, we continue to recognize the importance of stability in our offerings to seniors. And I think that we have submitted bids that take into consideration both the risk model changes as well as the importance of having those benefits that are critical to seniors as we go forward. It's always going to be a very highly competitive environment in Medicare Advantage. We always expect that. But from our perspective, this is something that we've had the opportunity to be very thoughtful about. And as we put our bids together each year, we're always taking a very balanced approach between our aspirations for growth as well as with respect to margins. And I think that we have landed in a place where we're going to be offering attractive plans for our seniors that provide sustainable economics for us for the long term. So thank you very much for the question.

Thank you. Next question, please.

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

Thanks very much and good morning. I just want to go back to a comment that John made. And that's around higher cost if COVID never happened. And so, one, I just want to understand, is there a pent-up demand because of COVID? Is that the reason for that comment? And then secondly, both at your Analyst Day and I think at another conference, you called out GLP-1s running higher. Can you maybe just put that into perspective for us as to how much that can add to a medical cost trend? And does that benefit your pharmacy side of your benefit business as you see that higher utilization?

Thanks for the question, Lisa, and good morning. Regarding trends and the current state of COVID, there isn't a significant amount of pent-up demand for care. While there may be some small instances of that, the healthcare system was largely operational throughout 2022. Staffing shortages may have had a minor effect, but we don’t think it was substantial. We view the overall situation as an increase in cost structure. COVID is still present, but it no longer plays the significant role it once did over the past few years. Overall, we see a general rise in costs. The discussion around GLP-1 drugs is just one aspect of a broader trend. Overall, the trends align with our expectations, which makes us feel positive. As for CarelonRx, there may be a slight upside, but it’s not enough to alter our current trajectory. Thank you for the questions.

Next question please.

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

Great. Thanks. I just want to go back to redeterminations and how you're thinking about that. I think you said that you expected to keep about 40% to 45% of the Medicaid redetermination growth, which I think is something close to about a 4% CAGRs into 2019, which seems a little high to me given that total employment is up about 3 million over that time period. So can you just maybe refresh how you're thinking about keeping those people, why they'll stay on and then maybe the other 55%, if you can kind of give an update on anything you're seeing there about how those people re-enroll and through the year how we should expect then to come on? You mentioned some delays. Is there a way to think about Q2 disenrollment, when do they show up on either employer coverage or the exchanges? Thanks.

Yeah. Thanks, Kevin. Appreciate the question. Associated with the 40% to 45%, I'm not positive about the CAGR you're looking at from ‘19 and exactly what's in the baseline and what all the thought processes are versus qualifications and eligibility requirements. But as we do our review in our work and certainly access a lot of independent studies as well, we feel very comfortable that we believe that 40% to 45% will stay on. And that's really a projection for what will be the ultimate result a year from now after the entire redetermination process occurs and things shake out. So I think it's a very reasonable expectation and we feel very good about it. And then in terms of the overall coverage patterns, everything else, one thing to point out that might be inherent in your question is as we look at the second quarter of 2023, actually many of our states, Medicaid states that are not Blue states, actually went a little bit earlier on in the beginning of the redetermination. So everybody will have started redeterminations by now. But when you look at who started in the April, May timeframe, for us, it was more heavily weighted to the states that are not our Blue states. So we still feel very good about our overall catcher's mitt and the fact that we think 20% to 25% of these folks will ultimately end up on employer-sponsored plans, 20% to 25% will ultimately end up in an individual ACA product, and 40% to 45% will stay on Medicaid. And that's what we're tracking to, and we actually have some insights into the states that are starting in June, it looks very promising that our thought process is going to be validated. So thank you for the question.

Thanks. And the only thing I'd add to that is, again, there's a timing lag here, but we feel our expectations are very much aligned. And we are seeing, particularly in the individual change, that early states that our applications are up at a much higher rate than they were prior to redeterminations, which you would expect, and given our commercial market share in our Blue states. So very well positioned in the ACA market for those that will ultimately not keep Medicaid coverage. But again, as I shared in my early remarks, we're working really hard to make sure that everyone who's going through this process in conjunction with our state partners understands the options that are available to us. And that's been very positive. We're seeing a lot of really good uptake and we're actually contacting, having great success rates in contacting individuals where we have the information. So those are very encouraging early signs to us. And again, we'll continue to update as we get through this process because many of the states are really just in the throes of it, certainly our Blue states. But, thanks very much for the question. Next question, please.

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

Hi, thanks. I was hoping first you could just maybe touch on the EPS split expected for 3Q versus 4Q. And then my main question is just sort of taking the discussion we're having on the cost structure for medical costs in 2023, just interested in how you're thinking about that rolling forward into 2024. We're already starting to capture a lot of early data points on commercial premium pricing and it looks like the environment is hardening quite a bit in terms of pricing trends. And so just interested in how you're sort of thinking about pricing for cost trends for ’24? Thanks.

Yeah. Thanks for the question, and good morning. In terms of our EPS guidance, as you know, we raised it to $32.85 or greater than $32.85. And I think that would assume that a little bit more than 56% of our earnings will have occurred in the first half of the year. So when you look at the last six months of the year, we are actually pretty comfortable with what the current consensus estimates have associated with the third quarter and with the seasonality that the current consensus estimates have inherent in it. And that is that the third quarter will be a bit more profitable than the fourth quarter, which is very consistent with the typical seasonality of our business. And then for 2024, as you know, it's just really premature to go into a 2024 conversation at this time. We'll provide a lot more insights on that at the end of the year, a little bit more in the third quarter and a lot more at the end of the year and have a more robust conversation about 2024 at that time.

Yeah, thanks again for that question. And again on just your pricing question, we've got a very consistent approach to pricing and we're going to keep that discipline as we project our forward view of cost. So I don't think anything has changed though. There's not a whole lot more that's new, but we're very disciplined about our projection and how we see that and that's how we price to. So thanks for the question and next question.

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

Thanks. Good morning. You mentioned that commercial membership growth is expected to accelerate in the second half of 2023 and into 2024. Can you clarify if this is primarily due to potential tailwinds from redetermination, or are there other factors at play? For instance, could favorable market dynamics like low unemployment or anticipated market share gains for Elevance in 2024 contribute to this outlook for accelerating commercial membership growth? Thank you.

Sure. I'll ask Morgan Kendrick, who leads Commercial business maybe to comment a little bit about commercial and what we're seeing in the marketplace.

Thank you for the question, Steve. Morgan here. I’d like to say that our expectations for membership growth are in line with our earlier projections. It's interesting that we're nearing the end of our national cycle, and this year we've noticed that receipts have been coming in slower, with decisions taking longer. This pattern is consistent with what we typically observe during economic shifts, especially concerning affordability. As we enter the fourth quarter, we are optimistic about our business outlook for the last quarter of this year and the first quarter of next year, which seem promising. We have made significant strides with major lower market wins for the upcoming year, and we are pleased with how well our offerings are being received. Our performance nationally has been exceptional over the past several years, and while this year is no different, we've mentioned before that each cycle has its unique characteristics. I want to highlight three important points. First, as we approach the end of the year and look forward to next year, we have a very large group of existing contracts which signifies strong retention for our company. This demonstrates that our offerings resonate well with some of the most selective buyers in the country. Second, our win share continues at the same rate we’ve observed, despite a lower pipeline and fewer cases. Lastly, we are experiencing significant internal growth as employers consolidate their benefit partnerships from multiple vendors to one, and this trend is continuing with us. Overall, we are confident in our business trajectory, and as previously mentioned, our pricing strategies are aligned with our outlook on trends. We feel quite optimistic at this point. Thank you again for the question.

Thanks, Morgan. And again, just reiterating something that Morgan just said, I think is important is the consolidation trend where we become a single source has been accelerating in the last few years and we continue to see that. That's a notable trend this year. And I think what's important is we're also seeing it not just in medical coverage but beginning to consolidate with Carelon Services as well. So that's a very positive trend for the strategy around whole health that we laid out. Thank you. Next question. I think this will be our last question.

Our final question comes from Nathan Rich from Goldman Sachs. Please go ahead.

Great. Thanks for the question. I wanted to ask on the CarelonRx margins. I think they were down sequentially from the first quarter. Could you maybe just elaborate a bit more on what drove that margin step-down? I know you had BioPlus rolling in. But do you still expect margins to be flattish for the full year? And then on biosimilars, how has the pricing of biosimilar Humira come in relative to expectations? And is that a significant swing factor to kind of in the outlook for that segment?

Yeah, Nathan. Thanks for the question. This is Pete. Again, when we think about our operating performance in CarelonRx, I'll just say upfront, we're confident in our pharmacy business. And if you exclude BioPlus, we will come in at that 6% to 6.5% range. So flattish as we talked about. And as Gail mentioned in her prepared remarks, we're continuing to invest in things like BioPlus and advanced home delivery. BioPlus, our original guidance did not include BioPlus. And so that as we talked about that, that's had a bit of dilution. But again, outside of BioPlus, we're very confident in coming into the 6% to 6.5% range. As it relates to your question on Humira and biosimilars, again, as we said, we're very excited about biosimilars coming into the marketplace and how that's going to drive overall cost and affordability down the road. We and CarelonRx have been very, very focused on driving lowest net cost. We obviously were well aware of what occurred in July in terms of the launches and we've been staying very, very close to that. And as we've said before, we have historically supported biosimilars alongside our reference brand. On Humira, we do expect to include a biosimilar or biosimilars in a similar formulary position as Humira this year. We're not going to go into more specifics in terms of timing or specifically what we're going to do, but we will do that. And I would finally say that with the addition of BioPlus to our portfolio, I think we're now in a much better position to directly manage specialty pharmacy more holistically. So appreciate your questions.

Thank you, Pete. Now I'd like to close by saying thank you. We're pleased with our performance year to date and we're confident that the ongoing execution of our strategy positions us well for the balance of 2023 and in the years to come. Through a steadfast focus on whole health and our diverse and expanding suite of products and solutions, we'll continue to meet the needs of clients, consumers and communities we serve, advancing our strategy of becoming a lifetime trusted health partner. Thank you all for your interest in Elevance Health, and have a great rest of week.

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 AM today through August 18, 2023. 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.