Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health Third 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. These instructions will be repeated prior to the question-and-answer portion of this call. 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 third 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; and Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial and Specialty Health Benefits business; and Felicia Norwood, President of our Government Health Benefits business. 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, 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 another solid quarter of financial and operational performance, reflecting the strength and resilience of our diversified portfolio of businesses. Third quarter GAAP earnings per share was $5.45, including a charge we took during the quarter that I will discuss in detail in a moment. Adjusted earnings per share was $8.99, reflecting growth of approximately 20% over the third quarter of 2022. Our results demonstrate our ability to execute on our enterprise strategy of delivering whole health solutions that are affordable, personalized and simple. Based on our strong year-to-date results and confidence in our outlook, we are increasing our guidance for adjusted earnings per share to be greater than $33 for 2023, which includes incremental investments planned for the fourth quarter that will accelerate our strategy and enhance the performance of our Medicare Advantage business. It is the strength and resilience of our diverse businesses that provides comfort in our outlook, while the earnings power of our Health Benefits and Carelon division provides us the confidence to reiterate our commitment to our long-term target compound annual growth rate in adjusted earnings per share of 12% to 15%. Let me now turn to some highlights from our business segments. Starting with our Health Benefits division, which delivered robust third quarter results as we continue optimizing our diverse set of businesses, while responding to a dynamic and evolving business environment. In our Commercial Risk business, we are successfully executing on our goal to deliver operating margins in line with pre-pandemic norms. Retention has been consistent with our expectations, and we're pleased with our progress, which we expect will extend well into 2024. In the employer market, we're delivering differentiated value where it matters for employers: affordability, experience, and simplicity. Over the past three years, we've become the sole source medical benefits provider for 32 of our national clients, including nine additional customers who will be consolidating their coverage with us effective January 2024. For large employers, we continue to deliver differentiated value and are seeing employers move away from point solutions and slice offerings to selecting Elevance Health as their strategic partner for the integration of all of their medical benefits. Consistent with these results, our advocacy solutions business, which provides personalized guidance and support to help members both navigate the complex healthcare system and optimize their health and well-being, will add 37 new clients in 2024 covering more than 550,000 members. This includes two large employers who are returning to Elevance Health after previously testing third-party advocacy vendors. In the individual market, we are seeing strong growth in plans that offer affordable and comprehensive coverage designed around the needs of consumers in our communities, including those transitioning from Medicaid to individual ACA coverage. Year-to-date, our individual membership has grown by 27%. Through the first half of this year, the latest period for which industry data is available, our individual ACA membership growth rate more than tripled that of our competitors in our 14 Blue states. Our government business also posted a strong quarter. In our Medicaid business, rates are actuarially appropriate, but we are absorbing a membership headwind related to the pace of Medicaid redeterminations, especially in states that have adopted accelerated timelines. Nearly three-quarters of all Medicaid beneficiaries terminated in our markets to date have lost coverage for administrative reasons, and 37% of the attrition from our own health plans has been driven by individuals under 18 years of age, many of whom may still be eligible for Medicaid benefits. We are doing all we can to ensure continuity of coverage for as many consumers as possible, working closely with our state partners to ensure individuals eligible for Medicaid retain coverage while also offering affordable ACA exchange plans in nearly all of our Blue counties. We are seeing encouraging signs in some of our Blue states where we offer Medicaid and commercial coverage. We have seen 30% or more of our Medicaid members who were terminated prior to the end of June return or retain coverage with Elevance Health, albeit with gaps in coverage that can extend for several months. We expect re-enrollment to accelerate in the coming quarters as we continue with our omni-channel approach to outreach and engagement, ensuring our members are aware of their options. Accordingly, we anticipate the rate of membership attrition associated with redeterminations will slow considerably in the coming quarters. In Medicare, we continue to offer high-quality plans that provide seniors access to comprehensive and coordinated care, and we are committed to doing so for the long-term. We're disappointed, however, with our Stars performance for measurement year 2022, which is the basis for Star ratings that will impact the 2025 payment year, and specifically, with our decline in consumer survey scores and the way in which CMS applied a new statistical methodology that resulted in significant increases to many star measure touchpoints. To improve our performance in future periods, we have already commenced investments in four primary areas: service, product, network access, and operations. For example, in July of this year, we built on the success of our innovative advocacy model in the employer market by adapting it for the unique needs of Medicare-eligible consumers. This new program, My Health Advocate, is a comprehensive, personalized and relationship-based customer service model that enables our members to effectively navigate the healthcare system, their benefits, and ultimately, to improve their overall health and well-being. Furthermore, we have enhanced our core and supplemental benefits to reduce member's out-of-pocket costs for prescription medications, simplified our dental benefits and strengthened our grocery and over-the-counter benefits. We're also simplifying consumer and provider experiences through the automation and elimination of certain prior authorizations, accelerating our work with value-based care provider partners and improving clinical decision appeal rates. Collectively, these actions and the ongoing investments should enhance our performance in key star measures and ultimately increase member satisfaction with our plans. We are actively pursuing all our options and exploring actions to mitigate the direct financial impact on payment year 2025, including through contract diversification, operating efficiency, and capital deployment alternatives. We will provide updates on our action plans and progress in future engagements in advance of 2025. Moving to Carelon. We are pleased with our momentum in the business as it continues to advance its strategy of integrated physical, behavioral, social, and pharmacy services to deliver whole health affordably. Carelon Services delivered particularly strong growth in operating earnings, led by the expansion of our post-acute care management solutions. We also extended our service offerings in adjacent areas, including durable medical equipment and wound care, further enhancing our customer value proposition and differentiation. CarelonRx continues to make significant progress towards the near-term rollout of multiple new capabilities that will enhance the affordability and experience of pharmacy for our members and CarelonRx customers. One of these capabilities is EnsureRx, an integrated benefit for commercial pharmacy members that compares the benefit cost for over 50 covered generic medications to our network of multiple cash discount cards, then automatically applies the lowest cost at any pharmacy. The program launches early next year, and we will save our customers money while enhancing their experience. EnsureRx will also capture claim data to ensure full safety checks and maintain the integrity of our data. We're also pleased with the integration of BioPlus, which continues to track ahead of schedule, and we expect to begin migrating specialty scripts from our legacy pharmacy platform early next year. Finally, we remain on track to launch our advanced home delivery capability in the fourth quarter. Together, these businesses will allow us to deliver even better consumer experiences and enhance affordability while creating additional shareholder value over time. Now I'd like to address the actions we took during the quarter to transform our cost structure and enhance our operating efficiency. With affordability of healthcare a paramount concern for all of our customers and more uncertainty in the business environment heading into 2024, we took proactive and decisive action in the third quarter to increase our financial and operational flexibility and to ensure we will remain well-positioned to deliver on our commitments to all of our stakeholders. Specifically, we completed a strategic review of our operations, assets, and the investments we've made over the years to identify opportunities to increase efficiency and enhance focus, all while driving greater impact from our programs at scale. This resulted in workforce and asset optimization that will make us more nimble, focused, and efficient and allow us to concentrate our resources on the most promising programs while further optimizing our physical footprint. The pace of technological innovation is rapid and accelerating, and we are committed to keeping pace. As we pivot away from some legacy projects, including those tied to systems that are being replaced with cloud-based models, we are also scaling key digital programs for greater impact. One example is HealthOS, a key enabler of our strategy that is helping to change the way care providers deliver care while reducing administrative burden. HealthOS is our digital platform for health that allows us to exchange data bi-directionally with providers in real-time and is essential to a number of our priorities, including our approach to value-based care. We are also in the early stages of rolling out new AI capabilities and large language models that are helping us personalize member experiences and automate administrative tasks. We're excited about the possibilities of the rapid technological innovation that is underway and are committed to continuous improvement, innovation, and the ongoing optimization of our processes, reengineering much of what we do while delivering more personalized experiences to our members along the way. Before I close, I'd like to note that we remain confident in our ability to close the acquisition of Blue Cross and Blue Shield of Louisiana. We're actively working with local regulators and stakeholders to address any remaining questions. The deal offers tremendous value and opportunity for the people of Louisiana, including through the creation of a multibillion-dollar foundation focused on improving their health and lives, and we look forward to the privilege of serving as their lifetime trusted health partner. As you will hear from John in just a moment, the balance of our diverse set of businesses, the momentum of our enterprise strategy, and the decisive actions we have taken to enhance our operating efficiency, give us confidence in our ability to deliver strong growth in adjusted earnings per share in 2024. In closing, I want to thank all of our associates around the world for their dedication and hard work. In the third quarter, we were also pleased to be named one of America's greatest workplaces by Newsweek and the number one best large workplace in healthcare by Fortune. It is the work our associates do every day on behalf of the individuals we are privileged to serve that allows us to deliver strong operating results in service of our bold purpose to improve the health of humanity. Collectively, we are fueled by passion for having a positive impact on our communities, our members, and the environment. With that, I'd like to turn the call over to John to provide more on our operating results and outlook.

Thank you, Gail, and good morning to everyone on the line. As Gail mentioned earlier, we reported strong third quarter results. Given outperformance against our initial expectations year-to-date, we have increased our outlook for adjusted earnings per share in 2023 to be greater than $33, reflecting growth consistent with our long-term compound annual target of 12% to 15%. Our outlook includes incremental investments we have planned for the fourth quarter to support growth in Medicare Advantage in 2024 and beyond. Based on our updated guidance, our five-year compound annual growth rate in earnings per share is expected to be 16%, which makes Elevance Health the only company in our sector to have exceeded 15% over that time frame. We ended the third quarter with 47.3 million members, an increase of 42,000 members year-over-year driven by growth in BlueCard and ACA membership. During the quarter, medical membership declined by 664,000, driven by attrition in Medicaid due to eligibility redeterminations and a new entrant into one of our state programs in July, which resulted in a loss of approximately 140,000 Medicaid members. We are now three to four months into redeterminations of most of our states, and this enrollment in many appears to be front-loaded with approximately three quarters of those terminated from Medicaid having lost coverage for administrative reasons. We are seeing many consumers return to Medicaid after being temporarily disenrolled, while others are experiencing gaps in coverage before transitioning on to ACA exchange plans. Given the patterns we have observed to date, we expect reenrollment in the Medicaid and transitions to ACA exchange plans to accelerate. Operating revenue in the third quarter was $42.5 billion, an increase of 7.2% over the prior year quarter. Growth was driven by rate increases to cover overall trend in our health benefits business, coupled with double-digit top-line growth in CarelonRx driven by growth in pharmacy customers and the acquisition of BioPlus. The consolidated benefit expense ratio for the third quarter was 86.8%, an improvement of 40 basis points compared to the third quarter of last year, driven by premium rate adjustments to cover medical cost trend and solid performance within our government business. Now I would like to spend a moment discussing the business optimization charge we announced as part of our results this morning. As Gail mentioned earlier, we took decisive action during the quarter to position our company for long-term success by enhancing operating efficiency, refining the focus of our investments and optimizing our physical footprint. These actions will ensure we stay well positioned to provide affordable products while delivering on our commitments to all of our stakeholders. As a result of this strategic review, we incurred a business optimization charge of approximately $700 million, comprised of write-offs and write-downs of internally developed software and related assets, severance and leases associated with optimizing our physical footprint. These actions will result in gross annual run rate operating expense savings of approximately $750 million per year, a portion of which will be reinvested in growth opportunities, including Medicare Advantage and the accelerated rollout of certain digital capabilities. We are committed to doing even better and we'll continue to evaluate opportunities to enhance operating efficiency further. Elevance Health's adjusted operating expense ratio in the third quarter was 11.1%, and a decrease of 30 basis points over the prior year quarter. However, the third quarter last year included additional out-of-period quality improvement expenses due to the accounting realignment we announced then. Excluding out-of-period quality improvement expenses in the third quarter of last year, our adjusted operating expense ratio would have been unchanged. Adjusted operating gain for the enterprise grew 12.6%, led by our Health Benefits business, which delivered double-digit growth as we continue to optimize premium rates and products while enhancing operating efficiency across the segment. Operating margin for our Health Benefits improved by 30 basis points year-over-year consistent with our expectations. Carelon also delivered a strong quarter with growth in pharmacy customers and the acquisition of BioPlus propelling CarelonRx to 17.5% revenue growth. CarelonRx operating earnings included investments to support the build-out of our specialty pharmacy and advanced home delivery capabilities, both of which will ramp up in the coming months. In addition, comparisons to the third quarter of 2022 have been negatively affected by the out-of-period fee-based revenue realized in the third quarter of last year. In Carelon Services, strong growth in operating earnings was driven by the expansion of Carelon post-acute solutions and growth in our behavioral health business. Turning to our balance sheet. We ended the third quarter with debt-to-capital ratio of 39.2%, in line with our expectations and consistent with our target range. During the quarter, we repurchased approximately 1.1 million shares of common stock for $480 million. Year-to-date, we repurchased 3.8 million shares of common stock for $1.7 billion, pacing ahead of our full year outlook of approximately $2 billion. We will remain opportunistic with share repurchases, especially considering the share price and recent volatility in the market. As noted in our earnings release, we ended the quarter with $5.1 billion of board-approved share repurchase authorization remaining. We continue to maintain an appropriately prudent posture with respect to reserves. Days and claims payable stood at 48.6 days at the end of the third quarter, an increase of 2.1 days sequentially and an increase of 0.9 days year-over-year. As a reminder, we continue to expect days in claims payable to be in the low 40s range over time and anticipate normalization towards this range in the coming quarters as cycle times shorten and COVID-related claims uncertainty recedes. Operating cash flow was approximately $2.6 billion or two times net income in the third quarter of 2023. Excluding the impact of the business optimization charge I discussed earlier, operating cash flow would have been 1.4 times net income. Given strong performance year-to-date, we are planning to make incremental investments in the fourth quarter in Medicare Advantage marketing and retention and in capabilities and services that we expect will enhance customer satisfaction, supporting our growth in 2024 and beyond. While we are disappointed in the outcome of the recently released Star quality ratings, we remain committed to this important line of business for the long-term and are exploring all options to mitigate the financial impact on 2025. Turning to 2024. Although we are not planning to provide specific guidance on this call, I would like to review some of the tailwinds and headwinds that are known at this time, starting with our tailwinds. We continue to optimize our health benefits business, including by executing a multiyear margin recovery in our commercial risk-based margins to return to pre-pandemic levels and expect margin improvement will continue next year. We also anticipate improvement in Medicare earnings, driven in part by corrective actions taken in our 2024 Medicare Advantage bids to improve financial performance in Puerto Rico, where we experienced significant challenges this year. We expect continued momentum in Carelon, including growth in Carelon services, driven by new product launches and opportunities for meaningful external growth across businesses and the ramp-up of BioPlus and the launch of Carelon advanced home delivery, both of which supplemented ongoing momentum within CarelonRx. We also expect to enhance operational efficiency as a result of the actions we took during the third quarter and we'll continue to look for opportunities to drive efficiency as we transform our cost structure over the long term. And we expect today's higher interest rate environment to drive growth in investment income. Our tailwinds will be partially offset by our headwinds, which all relate to the Medicaid business, where we anticipate membership attrition associated with ongoing eligibility redeterminations and the net loss of approximately 930,000 additional members associated with changes in our footprint. While Medicaid rates remain actuarially sound, we're also mindful of the risks associated with evolving risk pools. And we'll continue to monitor and manage these dynamics closely. Beyond 2024, Medicaid offers attractive long-term growth opportunities, notably in specialized populations, and we anticipate a return to growth in 2025 and beyond. Most importantly, the balance and resilience of our diverse businesses provides confidence in our near-term outlook while the earnings power of our Health Benefits and Carelon Divisions position us to deliver on our long-term growth commitments. At this point in time, we believe the current consensus estimate for adjusted earnings per share of approximately $37 in 2024 is appropriate. And we anticipate delivering another year of growth consistent with our long-term compound annual growth rate target next year. We look forward to providing more specific guidance on our fourth quarter earnings call. Finally, as many of you know, this will be my last earnings call as CFO of Elevance Health. It has been a pleasure to serve this organization for more than 29 years, including the past seven in my current role. I have been involved in 88 quarterly earnings calls since Anthem went public in 2001, including 30 of them as Chief Financial Officer. Every year has had its opportunities and challenges, and 2024 is no different. We serve our members while furthering our mission and will continue to meet and exceed our shareholder commitments. The balance and resilience of our businesses has created numerous tailwinds and has allowed us to overcome various headwinds, and I'm confident we will continue to do so. I feel fortunate to have been part of what I believe to be the best leadership team in the industry and to be leaving the finance organization in an even stronger position than when I took over. I've enjoyed engaging with all of you over the years. I want to thank you for your support. I look forward to supporting Mark Kaye as he assumes the role of CFO, ensuring a smooth transition before retiring to spend more time with my family in the first quarter of next year.

For our first question, we'll now take A.J. Rice from UBS. Please go ahead.

Hi everybody. Thanks and John, I wish you the best in your retirement. It's been great working with you, and I really appreciate all the help over the years. I want to maybe just ask on the commercial margin improvement story and what you've been doing there. If you exclude this quarter, what was the underlying cost trend for you? Did you see any pockets of variance and utilization that are worth calling out? And you guys have said several times that there will be some additional benefits on the commercial margin improvement story into next year. Is there any way to size that or talk about relative to how much gain you had this year from that repricing and the other things you're doing to improve the margin on the commercial side?

Good morning, A.J., and thank you for the kind words at the beginning. In terms of answering your question specifically, we're certainly very pleased with the performance of our health benefits businesses in the third quarter as well as year-to-date. As you know, we've increased margins quite significantly. And the health benefit segment margins, we guided to improve those by 30 to 60 basis points year-over-year, and we're very much on track to deliver that. From a line of business, in particular, we're not providing specific margin information and specific detail on commercial versus Medicaid versus Medicare since we are operating this as a holistic health benefits segment. But we do expect continued improvement in the commercial margins into '24 as we continue to work on our strategy of ensuring that the pricing truly reflects the underlying cost structure, as well as additional penetration in the fee-based businesses dealing with our strategy. So, we feel very good about where we're heading and our trajectory into 2024. So thank you for the question.

Yes. Thanks for the question, A.J., and I'll just reiterate John's comments on commercial. I think the team has done a really nice job as we shared, this is a multiyear journey in terms of the commercial business, and we feel like we're right on track. The team has done a really nice job of balancing both membership retention as well as getting our margins in line with where we believe they need to be. So thanks for the question.

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

Great. Good morning, and thanks for the question. And let me just echo my congratulations, John, on your retirement. I wanted to ask on the Medicare business. Could you talk about the goal for improving Star scores? Are you investing to get back to the level that you were at with 65% of members in 4-star plans? And over what period are you thinking? And how should we think about the magnitude of the incremental investments planned for the fourth quarter as well as into next year? And any comment on the length of time to reach the run rate of optimization savings, the $750 million that you talked about would be helpful as well. Thank you.

Thank you for the question, Nathan. I expect there will be several inquiries about stars, so let me address that topic comprehensively. Improving stars is a major priority for us. We are deeply committed to the Medicare Advantage business and dedicated to providing high-quality plans for seniors. However, as I mentioned earlier, we are quite disappointed with the recent star ratings and the decrease in the number of our members in 4-star plans for payment year '25. To provide some context, we experienced declines in the CAP survey scores, which weigh heavily in our ratings. We were affected by a new CMS statistical methodology that resulted in significant increases in cut points. While we made improvements in around half of the star measures, these were insufficient to counteract the impact of the heavily weighted measures and the raised cut points, leading to three of our largest contracts suffering in their star ratings, as you've observed. We have already started to make the necessary investments. Earlier this year, we focused on areas related to CAHPS that contributed to the decline. One notable initiative is enhancing the My Health Advocate model, which I previously touched on. This model offers highly personalized customer service designed to assist members with issues crucial to CAHPS improvement. It has proven to be very effective in our commercial sector. Additionally, we identified areas for enhancing our core and supplemental benefits to lower members' out-of-pocket expenses, which was reflected in our star results, and simplifying the process for members to use our over-the-counter benefits. We are committed to advancing value-based care and will continue to integrate these results into our contracting process. Last year, we took steps to improve our clinical decision appeals processes, another area affected by the increased cut points. Financially, we anticipate a reduction in quality bonus revenue of about $500 million in 2025 after accounting for our contracting provisions. As John and I mentioned, we have proactively begun to address this challenge for 2025. We have various strategies at our disposal, including contract diversification, operating expense efficiencies, capital deployment, and focused network and product enhancements. We will keep refining our approach. Our plans are already underway, and we have a clear view of the opportunities ahead. Due to our diversified business model, we are confident in the combined earnings potential of our health benefits and Carelon segments, which enables us to project an annual adjusted earnings per share growth of 12% to 15% in the long term. Thank you again for the question, and I appreciate the chance to provide a thorough update on our initiatives regarding stars.

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

Yes, hi, good morning. This is Kyle on for Lisa. Just want to add my thanks to John, wishing him all the best. Switching to Medicaid, appreciate all the color on the redeterminations and the front-loaded disenrollment trends. Can you talk about how membership is trending relative to what you expected earlier this year and how acuity mix is trending? Then related, on the commercial side, how membership growth is tracking in the employer group and individual businesses? Are you guys getting the growth you anticipated? Is there anything to call out on the margin side? Is there anything about this year and 2024? Thanks.

Thank you for the question, Kyle, and certainly appreciate all the commentary. First of all, on Medicaid, the Medicaid disenrollment, as we said, has been very much front-loaded. In terms of how that compares to our expectations, our expectations were that it would have been more normalized over a 12 to 14 month process. What we are seeing is that there's administrative churn and many people are losing Medicaid coverage temporarily before returning. We're reenrolling folks 30, 60, 90 days after they were disenrolled, and that dynamic was not part of the original thought process but it's certainly part of the reality. I’d like to say that September 30th or December 31st is just going to be one point in time over a 12 month to 14 month process. What we have not seen, and maybe the most important element is that at the beginning of the year, when we discussed that we thought we would retain about 40% to 45% of all Medicaid members that received coverage during the PHE, we still believe that is a very good estimate. By the time the dust settles in the third quarter of 2024, we feel good about that estimate. It’s just going to be a little bumpier or rockier along the way because of the gaps in coverage and the administrative churn. On the commercial side, we're actually seeing really excellent growth in the individual ACA. Once redeterminations began in a particular state, the level of applications for the ACA products were up three times the amount that they were prior to that. This indicates we do have a catcher's mitt in action. The employer-sponsored side is going somewhat slower than we had anticipated. So, individual ACA growth is a bit faster, while employers are proving a little slow, but overall, we believe that by the time we get through this entire process, which won't be completed until sometime in the third quarter of 2024, the estimates we provided at the beginning of the year will prove to be pretty good estimates. So, hopefully that helps. Thank you.

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

Hi, thanks. I wanted to follow-up on the Medicaid redeterminations question there. So I appreciate all that commentary you just made. Would it be fair to say that at this point, in part driven by the fact that you've got seemingly good and actuarially sound rate updates from your states that you haven't really seen all that much normalization of your margins in 2023? I believe you came into the year thinking that you performed in 2022 above your long-term targeted range, and there might be some pressure. I would love to just get an update on how that's performed in 2023 and how you're thinking about that in your comments on 2024. Thank you.

Yes, sure. Thank you very much for that question. And actually, I think Kyle did ask about Acuity as well. So hopefully, I'll address both of those here with this answer. Medicaid continues to be doing very well and very much in line with our expectations and in line with what we saw coming. The one thing that I will reinforce is that in the rating formulas in the future or currently now is an acuity factor that's supposed to take changes in acuity into consideration. That factor was not in place in 2019. So comparisons to 2019 really aren't all that relevant at this point in time for that purpose. What we've seen thus far, though, is very little change in the overall acuity of the book. We are taking a very close look at that. As I stated in my prepared comments, we're going to be monitoring that extremely closely and working with our states. So I'm very happy to report that all of the renewals that we've had with the discussions we've had with the states thus far, we have been provided actuarially sound rates. We believe that with actuarially sound rates, we can continue to deliver on Medicaid consistent with how we have in the past, providing a lot of benefits to beneficiaries while providing returns to the shareholders.

Yes. Thanks, John. As just to put a sort of summary on that, we feel like we've got great visibility into the rest of this year. And the discussions around 2024 have been incredibly productive with about 50% of our premiums showing good visibility there. We think those conversations are going well, and things are tracking according to expectations. So thanks for the question and next question please.

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

Thank you very much. I just also want to reiterate congratulations to John and thank you for all the help. Just wanted to circle up with a quick follow-up on MA. Appreciate all the questions on my health advocate and efforts there. I just wanted to know if there's any early thoughts on how much of the headwind you can mitigate with contract diversification. And then, what is the timeline for getting all those approvals at the state level to carry that forward? Thank you.

Yes. Thanks for the question, Ben. As we think about that, as I said, we've got a number of levers at our disposal. And I would focus on that. But in terms of contract diversification, about a third of the members affected were in group contracts. So we'll look at moving those potentially to a 4-Star contract. But again, I just want to reiterate, it's just one lever in our toolbox, and so we're not just looking at that, but we're looking across all of the things to have mitigation for 2025. So thanks again for the question. And again, a lot happening in our enterprise around the efforts there to make sure that we remediate and stay very focused. This is an enterprise priority for us. Next question please.

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

Great. Thanks. I want to extend my congratulations to John as well. Regarding the cost cutting, it appears to be substantial. I would like more details on what specifically drove this decision. It seems this initiative was primarily a response to issues related to 2024, rather than 2025, as you indicated that it would help deliver lower costs to customers while managing some uncertainties in 2024. Could you provide more insight into how this will enhance benefits in Medicare Advantage compared to the technology investments you've mentioned? I'm seeking a bit more explanation on why this cut is so significant. Additionally, if you're implementing these changes now, how do you view your potential to achieve substantial savings to counterbalance the Stars program in 2025? Thank you.

Yes. Thanks for the question, Kevin. Let me put this in a little perspective because it's important to note, we're always evaluating our cost structure. As we headed into 2024, we took very proactive and decisive action in the third quarter. We wanted a couple of things: one, to increase our financial and operational flexibility and two, to ensure that we're positioned to deliver on our commitments to our stakeholders. So if you look at the charge in total, I mean, it really is focused on three areas of cost management. I think it's prudent to continue to always look at your cost structure, and it's something we've been doing, is obviously, looking to manage that. Let me go through the three pieces because I think it's important. First, as you know, and we've talked about quite a bit on these calls, we've been investing over the past several years in modernizing our infrastructure, particularly around digital capabilities and migrating a lot of our applications to the cloud, consolidating our systems and our data, and now most recently, using AI to drive greater efficiencies. The pace of technological innovation has changed and continues to accelerate. Again, as I said, we're committed to deploying those responsibly quickly in our company. What you're seeing in that first bucket is the write-down of some of those legacy processes that have now been replaced with our support that align with our long-term goals with digital and AI and other things. The second adjustments were really to our workforce. Last year, we aligned our structure on benefits and services, giving us an opportunity to look at redundancies across our business and our processes and eliminate handoffs, and streamline, being very focused on ensuring that members, because of our large benefit businesses can move between those businesses. It’s an integral part of our strategy. So as you think about the investments we've been making in technology, particularly our front-door applications and automating some of our work, this was an opportunity for us to ensure that we had the right scaling of our workforce. In the bigger scheme, these are not significant numbers. But again, I think it's important we constantly look at our cost structure. The last part is we went to a hybrid work environment. We've been evaluating the size and locations of our work sites, and we took the opportunity to further optimize those to ensure that we were appropriately located in the right places and had the right footprint. As you think about all those, it’s an approximately $700 million of charges, and it results in a run rate of about $750 million. Again, as John said, it doesn't all drop to the bottom line, but that we think is important to support our long-term growth in our enterprise strategy. So that gives you a bit of a sense of how we thought about these as an ongoing opportunity to continue to optimize our cost, which we think is important for affordability in healthcare. So thanks very much for the question, and next question.

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

Thank you, and echo my congratulations to John. I was hoping that you guys could give a bit more context around the recapture rate of the terminated Medicaid lives. Are you seeing recapture within Medicaid from the appeal process yet? And then on the ACA side, how do you think about the 30% recapture maturing into 2024 with your members, but then also potentially there's more people looking for ACA plans in 2024?

Thank you for the question, Sarah. In terms of the Medicaid redeterminations, as I stated, we're three to four months into the process. It's a little early to have definitive data points, but we do have certainly some bias. We've seen 10% to 20% of the members who lost coverage in Medicaid in June reenroll with us in the third quarter. We expect trends like that to continue. That's just one data point. Certainly, there's more time, but there are gaps in coverage. On the individual ACA side, we are seeing that by the time that folks leave Medicaid, there's typically a couple of months' gap before they become enrolled in an ACA plan. Some of the membership this enrollment is temporary and there's gaps in coverage. However, we think we have a great opportunity in our 14 Blue states. The number of members added to Medicaid in our 14 Blue states totaled about 8 million people across all 14 states, with about 1.5 million of those enrolled in Elevance Health Medicaid plans. This means that for the other 6.5 million that went to a different carrier, if that different carrier can retain 40% to 45% of those Medicaid members, which I think is reasonable, that implies over half of the 6.5 million are in play. We have leading market share in virtually every market we operate in, both in employer-sponsored as well as being very strong in the ACA products. We believe we will see an acceleration of individual ACA membership in early to mid-2024 for Elevance Health.

Yes. Thanks, John. To sort of summarize, I think it's really important to note that almost 75% are administrative disenrollments, and almost 37% are children under 18. We are intensely focused on those two areas, and there’s a timing issue associated with this, leading to some delays in coverage. We've been working closely with our states. There are encouraging signs where the 30% or more of our Medicaid members who were terminated prior to the end of June are now returning and retaining coverage with Elevance. We expect that reenrollment to accelerate in the coming quarters. So, I think it’s important to remember that as we're all working through this process, and the states are adapting to this process as well. Thank you again for the question. Next question please.

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

Thanks and congrats to John as well. I wanted to ask a quick question first regarding BioPlus. I wanted to confirm, did you mention you're going to start migrating specialty scripts away from your legacy platform early next year? Would that imply you've made the decision to in-source your specialty drug spend away from CBS? And then my real question, regarding MA and STAR ratings, in terms of the improvement efforts for CAP specifically, how much of the overall underperformance would you attribute to the provider's pivot? And how can you fix those results for that without actually having ownership of providers? How can you effectively drive your provider network to make the necessary changes to improve your results? Curious what the plan is there.

Thanks for the question, Michael. I'll have Pete start, and then I'll address your question on MA.

Thanks for the question, Michael. Yes, to answer your question directly, we are beginning the migration to BioPlus starting January 1. We have been very focused on the last year with regard to implementation and integration of BioPlus as it relates to our specialty strategy. A lot of the focus this year has been building the infrastructure and the team so that we have the appropriate scale and capacity to take on Elevance Health’s volume, and we feel very good about that. As Gail noted in her prepared remarks, we are accelerating the timeline in that regard, and we are moving forward with that for January 1. This is all a part of our strategy in pharmacy, just to reiterate, and that is to in-source the strategic levers that matter. Specialty pharmacy is very critical to that as well as what we're doing in advanced home delivery. So, again, excited about that.

Yes. To the second part of your question, we've delved deeply into the drivers, especially around the three contracts, and we've assessed what the cut points were. There have been some challenges with navigation for our members. So, I wouldn’t attribute it solely to ownership or lack of ownership, but I will address value-based care. Remember, this measurement is from the year 2022. We've made significant progress in moving a lot of our contracts to value-based care and embedding that into how we operate. We’ve also worked closely with aggregators and been building the numbers in that respect. Our strategies are intensely focused, and we believe our health navigator will significantly assist. Another area impacting us was appeals and grievances; in some of our processes back in 2022, those were high-performing contracts, but the cut points fell below in our evaluation. Overall, we are making significant strides within value-based care, and that's an ongoing commitment for us in the Medicare Advantage space. We see substantial opportunities in specialty care, and we believe our unique opportunity lies within these high-cost clinical categories.

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

Hi, thanks. I'll add my congrats for 88 quarters for John as well. My question is can you speak to the strategy of how Carelon and benefits segments aim to really work together over time? I'm specifically interested in tying the various companies within Carelon together and then also on that care delivery side as part of the answer. Are there certain capabilities that you think are missing or would be helpful for Elevance in terms of putting together that totality of strategy?

Yes. Thanks for that question, Josh. We'd love to share more about our strategy. I'm going to have Pete Haytaian talk about it as he leads that part of our business.

Yes. Thanks for the question. It is a good opportunity to share our strategy holistically. As Gail mentioned in her prepared remarks, we talk about whole health and integrated care and driving affordability. But I really want to build on Gail’s points because I believe it's our focus and what differentiates us. We’re looking at high-cost areas of healthcare and facing off with our health plan partners. We identify those opportunities like specialty care. We see this as a tremendous opportunity and real differentiator. Our approach towards high-cost care segments allows us to manage members holistically while assuming full financial risk. This will drive earnings through Carelon, our unregulated entity, allowing us to focus on areas of growth where we can commercialize successfully. As we move forward, we are launching an oncology program at financial risk in January. We’re also working on specialty care in musculoskeletal health, renal care, and serious mental illness, allowing us to broaden our commercial opportunity. I appreciate the question, Josh.

Thanks, Pete. If I could summarize that, we're focused on how Carelon operates across key health service areas – pharmacy through CarelonRx, and three service lines in Carelon services: care delivery, insights, and behavioral health. We have a phenomenal opportunity to provide certainty and cost management to our owned health businesses while also commercializing those capabilities. We’re seeing positive momentum going into 2024 as we prove these capabilities and showcase them within the Blue system. Thank you for the question, Josh, and this will be our last question.

And our final question, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead.

Thanks for squeezing me in, and I'll add my thanks to John for everything over the years. Really appreciate it. Along those lines, Gail, maybe you can give us a little color around the CFO search and what you expect Mark to bring to the organization. Just curious if you have any early views on 2024 Medicare Advantage membership growth, both for Elevance and the market overall? Thanks.

Well, thanks for the question, Justin, and first of all, I will also offer my appreciation to John for his guidance and counsel and our partnership during my tenure as CEO. Mark Kaye has been with us now for about a month, and we're excited to have him. He was the CFO of Moody's and brings incredible insights to our business, being an actuary by training. Mark and John have been working hand-in-hand on the transition, and John will be continuing as an adviser to me through the first quarter, as you heard in his opening remarks. We’re at a significant time for our business. We have great growth opportunities ahead of us and I’m thrilled to have Mark joining our team. I want to thank John – John will be missed, but he deserves time with his family. Now I’ll ask Felicia to comment a bit about Medicare Advantage. We’re just a few days into AEP, so it's still very early.

Good morning, Justin, and thank you. We are quite excited about AEP. We are only three days in, but we're actually very pleased with the response we have from our brokers regarding the competitive positioning of our benefits. We believe that we will be able to grow membership above the market due to some strategic decisions that we made around targeted market exit. We made an intentional choice to leave some underperforming markets to ensure we could focus on markets where we have a strong opportunity to be successful and deliver strong benefits for our members. As we think about where we are today, we feel good about our positioning. While it’s early, we believe we will deliver solid growth and that it will be above the overall market rate.

Thank you, Felicia. And thank you to all of you on the line for your continued support and for joining us. Through a steadfast focus on whole health, our diverse and expanding suite of products and solutions will continue to meet the needs of clients, consumers, and the communities we serve, advancing our strategy of becoming a lifetime trusted health partner, while delivering on our commitments to all of our stakeholders. Thank you for your interest in Elevance Health. Have a great rest of the week.

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