Ladies and gentlemen, thank you for standing by and welcome to the Elevance Health First 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 first quarter 2024 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; Mark Kaye, our CFO; Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial Health Benefits Business; and Felicia Norwood, President of our Government Health Benefits Business. Gail will begin the call with a brief discussion of the quarter, recent progress against our strategic initiatives, and our updated outlook for the year. Mark will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making 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.

Thank you, Steve, and good morning, everyone. We appreciate you joining today's earnings call. I'm pleased to report that Elevance Health delivered first quarter GAAP earnings per share of $9.59 and adjusted diluted earnings per share of $10.64, reflecting growth of 12.5%. These results reflect disciplined execution of our strategic initiatives during a dynamic time for our industry. Given the solid start to the year, we have increased our guidance for adjusted earnings per share by $0.10 to be greater than $37.20. We are making significant progress on our enterprise strategy in 2024 to accelerate capabilities and services, invest in high-growth opportunities, and optimize our Health Benefits business. On Monday, we announced the next step in our journey to expand access to high-quality patient-centered value-based care in our local markets. After years of experience working closely with care providers to advance value-based care, we are confident that our hyper-local approach delivers better health outcomes, improved consumer and provider experience, and greater affordability. Accordingly, we entered into an agreement to form a strategic partnership with Clayton, Dubilier & Rice to build a payer-agnostic advanced primary care and physician-enablement business, serving consumers across commercial, Medicare, and Medicaid health plans, consistent with the diversity of our own medical membership. Upon formation, the combined company will serve nearly 1 million consumers. The new venture will bring together the strengths of three innovative care provider entities, including certain care delivery and enablement assets of Carelon Health. Importantly, we have worked closely with these companies and their management teams and are confident in the value they deliver for our Medicare, Medicaid, and commercial health plan members and employers. We're excited to collaborate with CD&R and a broad range of care provider partners to accelerate innovation, enhance healthcare experiences, and improve health outcomes for consumers. The collaborative development of the business will advance our enterprise strategy by accelerating the provision of value-based care for our members and consumers more broadly, with our Carelon businesses providing capabilities to integrate and personalize the care delivered. In time, Elevance Health will have full ownership of what we expect will be a leading platform for value-based care delivery and physician enablement at scale across commercial group, ACA, Medicare, and Medicaid health plans, advancing our role as a lifetime trusted health partner for the consumers we are privileged to serve. In the first quarter, we made tangible progress on our strategic initiatives, notably in Carelon, where we continue to scale our flywheel for enterprise growth. Carelon Rx closed its acquisition of Paragon Healthcare, a leading provider of infusion services. We are looking forward to expanding its geographic reach and therapeutic coverage to serve more consumers and Elevance Health members for years to come. As Carelon Rx furthers our enterprise commitment to address the whole health needs of our members, notably those with chronic and complex conditions, we are accelerating the buildout of our specialty pharmacy. For example, we recently entered into an agreement to acquire Kroger's Specialty Pharmacy business, the sixth largest specialty pharmacy in the country. The acquisition will bolster the growth of our existing pharmacy and infusion businesses while increasing Carelon Rx's access to limited distribution drugs. Carelon Services is also off to a strong start this year as we implemented and were awarded multiple new contracts, a testament to the value Carelon services provides. For instance, Carelon Behavioral Health was selected by the Maryland Department of Health to provide behavioral health management services to more than 1.7 million Medicaid members starting in 2025. And in California, our team will partner with the public school system to expand behavioral health management services for students later this year. This initiative represents a major step forward in addressing the critical need for mental health support in educational settings and demonstrates our commitment to improving the health and well-being of our communities. Our health benefits business is similarly off to a solid start. Commercial margin continues to recover from pandemic-era lows, and we are enjoying momentum in membership growth, notably in our individual ACA plans and among large self-insured employers. Existing clients are demonstrating their confidence in our offerings by consolidating their business with us after years of offering our solutions side by side with those of our competitors. In our Medicaid business, we were pleased to be selected in Florida and Virginia to serve beneficiaries across traditional and complex populations statewide. These awards underscore the distinct value Elevance Health delivers. In the first quarter, our Medicaid business performed in line with our expectations. We estimate that nearly 90% of our members have had their eligibility redetermined. Our team continues to work tirelessly to maximize access to care for Medicaid members subject to eligibility redetermination. Holistically, we are proud of the work we have done in contacting more than 4.5 million Medicaid beneficiaries through our omni-channel approach. We're seeing a gradual increase in Medicaid re-enrollment and anticipate continued upticks in rejoiner rates as more Medicaid beneficiaries recognize their need to re-enroll, aligned with the trends observed in recent months. Turning to Medicare, we announced last month that CMS updated the Star scores for four of our contracts, which increased the percentage of our members in four-star or higher-rated contracts to nearly 50%. While this will improve our star quality bonus revenue in 2025, our goal is to have our star quality ratings at the high end of all plans in our local markets, which will be a multi-year journey. Funding for Medicare in 2025 will be challenging for the entire industry. We are disappointed that CMS has decided to cut Medicare Advantage rates for the second consecutive year, which will negatively impact seniors who rely on the program for their health and wellbeing. While we remain committed to serving seniors through plan offerings that focus on their unique needs, we will also continue to demonstrate discipline in our Medicare Advantage bids, seeking to balance growth and margin while continuing to deliver exceptional value for seniors. Across the enterprise, our focus on delivering whole health for the consumers we are privileged to serve remains steadfast. We released our 2023 Advancing Health Together progress report, showcasing examples of our success through value-based care. One achievement is that Elevance Health was honored by the NCQA with its Innovation Award, featuring quality accelerators in healthcare for leading-edge strategies that improve quality and value. The impact of these value-based partnerships and clinical interventions has led to consistent improvements in health outcomes and costs, including reducing preterm birth rates by 12% and low birth weight babies by 20%, while improving access to timely prenatal care and postpartum follow-up. For those interested in learning more about these transformative initiatives, I encourage you to visit our Advancing Health Together website. In closing, I want to extend my deep gratitude to our 100,000 associates who embody our purpose of improving the health of humanity through their tireless commitment. It's also heartening to see their efforts recognized externally. We were named to Fortune magazine's 100 Best Companies to Work for list for the fourth year in a row. We were also included in their World's Most Admired Companies and America's Most Innovative Companies list. With that, I'd like to turn the call over to our CFO, Mark Kaye, to provide more on our operating results and outlook.

Thank you, Gail. As you heard earlier, our first quarter results reflect solid performance under a dynamic operating environment. We ended March with 46.2 million members reflecting Medicaid attrition, partially offset by ongoing momentum in our commercial business. During the quarter, we added nearly 400,000 commercial fee-based members, driven by strong retention and a successful national account selling season, and over 200,000 individual ACA members, given our attractive product positioning and coverage transitions away from Medicaid. Medicare Advantage membership declined slightly, as expected, given select market exits and the collective actions we continue to take to establish a strong foundation for profitable and sustainable growth over the long term. Operating revenue for the quarter was $42.3 billion, in line with our expectations. The consolidated benefit expense ratio of 85.6% improved 20 basis points year-over-year due to disciplined premium rate adjustments to reflect medical cost trends and the ongoing recovery of commercial margins from pandemic-era lows. The adjusted operating expense ratio was 11.4%, consistent with the first quarter of 2023, indicative of our commitment to disciplined expense management and investment prioritization. Solid performance and growth in operating gain for both our health benefits and Carelon segments of $138 million and $72 million respectively led to growth in consolidated adjusted operating gains of over 7%. Carelon Services had a particularly strong start to the year with revenue and operating earnings growth driven by risk-based service line expansions and effective cost management, especially in our Carelon Insights and Carelon Behavioral Health businesses, further accelerating our enterprise growth. Operating cash flow in the first quarter was $2 billion, or approximately 0.9 times net income. With respect to the balance sheet, we ended the quarter with a debt-to-capital ratio of 39.4%, in line with our target range, preserving ongoing capital allocation flexibility. We repurchased 1.1 million shares of common stock for approximately $566 million during the quarter, underscoring our confidence in the intrinsic value of our shares and the long-term value proposition. We maintained our prudent and consistent approach to reserving. Days in claims payable stood at 49 days as of March 31st, up three days from the prior year quarter. This increase was largely driven by higher reserves associated with slower claims receipts due to an industry-wide disruption that impacted a major claims clearinghouse. As a reminder, we expect our days in claims payable to be in the low 40s range long term. I'd also like to take a moment to provide additional color on our strategic partnership with Clayton, Dubilier & Rice. We are excited to partner with CD&R to scale what will be a best-in-class, payor-agnostic advanced care delivery and enablement platform catering to the unique needs of consumers, regardless of their form of coverage. This collaboration will allow us to advance our local-oriented approach to care delivery based on the unique needs of the communities, consumers, and employers we are privileged to serve. Overall, we are pleased with our first quarter performance and the solid start to the year. Momentum in our health benefits and Carelon businesses and the balance and resilience of our enterprise underscores our confidence in delivering another year of growth in adjusted diluted earnings per share consistent with our long-term compound annual growth rate of at least 12%. As we look forward to the rest of 2024, our focus will remain on successfully executing our strategy as we accelerate capabilities and services, invest in high-growth opportunities, and optimize our health benefits business.

For our first question, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead.

Great. Thanks so much. Let me ask a little bit about the value-based care strategy and the execution. Could you talk a little bit about the vision and scope of this? Is this going to be more focused on enablement or in particular markets? Is practice ownership going to be important? Then maybe if you can kind of color in the picture a little bit as far as leadership, names, which Carelon assets are going to be contributed? And near term, do you see which areas of leverage across the membership base of Elevance? Thanks.

Well, great. Thanks so much for the question, Lance. First, as I shared in my opening comments, we're very excited about this partnership with CD&R because it is very much the next step in our journey to bring value-based care to more consumers, specifically about partnering closely with care providers. We see it as consistent with driving greater risk adoption and advancing our specialty enablement strategy as well. This aligns closely with our strategy and broad partnership focus to work directly with care providers in our local markets. Our goal remains to increase more downside risk sharing in our value-based arrangements. What makes this approach unique is that we're enabling value-based care across all lines of business. As I shared, the combined company is going to be payer-agnostic and focused on enabling advanced primary care locally. From the get-go, it will serve nearly 1 million consumers across our commercial, Medicare, and Medicaid health plans upon formation. This provides the opportunity to pull through Carelon services to support those patients and accelerate that specialty enablement for complex and chronic patients. We have been working with these management teams and these assets for some time and feel confident about the alignment of our goals to serve as a trusted health partner. The goal is focusing on whole health, the needs of consumers, driving greater affordability, and fundamentally differentiating a consumer experience. A few things about the partnership make it different for patients. They'll have access to integrated teams, personalized navigation, expanded digital assets, and specialized services. The primary care model is designed to be distinctive, including community practices, purpose-built clinics, high-risk clinics, and digitally-enabled care models. Employers in the market have not historically had access to a lot of these capabilities. We have seen through our work that this dedicated primary care capacity that integrates clinical and benefits navigation with specific health and wellness strategies is truly differentiating. This is being purpose-built to encompass all aspects of Medicare, not just a single business. So we see this as an opportunity to accelerate innovation in the space and improve healthcare outcomes and consumer experiences. So thanks very much for the question. Next question, please.

Next, we'll go to the line of AJ Rice from UBS. Please go ahead.

Hi, everybody. Thanks for the question. I appreciate Mark's comments about the buildup in days in claims payable, but just maybe to flesh out a little bit more the impact of the Change cyber-attack on results. Do you have a census of what percentage of your claims that you normally see in the first quarter may still be out there? Do you feel like you've got a good handle on that? And anything when you address that in terms of your normal IV&R, maybe you've got a significantly higher level of IV&R because you're allowing for the Change and if you can break out what you're actually seeing a little bit on cost trends versus needing to sort of provision for the unknowns of the Change cyber-attack.

Thanks for the question, AJ. Let me provide some broad-based comments and then I'll turn it over to Mark for more specifics. I want to say first and foremost, I'm really proud of our teams and how they responded to the issue with Change quickly and effectively to protect our members and their data and help our care providers maintain their operations and cash flow. We were not significantly impacted by this and we are back to normal operations in terms of claims flow. Importantly, our prior authorization provider payments and pharmacy claims were not materially impacted as well because they don't go through Change. With that, I'll turn it over to Mark to provide more comments.

AJ, as you just heard from Gail, we acted quite responsibly to sever our network connections to Change Healthcare and to protect the data of both our members and providers. While we initially observed a 15% to 20% reduction in the daily volume of electronic data receipts from providers, most of which were claims-related, in recent weeks our extensive efforts have led to a significant catch-up in outstanding claim volumes. For the quarter, we are effectively caught up on claims receipts and are now working to complete all necessary claims adjudication and processing activities. As such, we reflected the appropriate impact of the industry-wide disruption related to Change Healthcare in the reserves we've reported for our first quarter financials. This ensures both consistency with historical practice and prudence. The impact here was to increase our sequential days in claims payable quarterly result by approximately 1.7 days.

Thank you. Next question, please.

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

Hi, thanks. Good morning. I wanted to get back to the partnership with CD&R and specifically what alternatives did you evaluate before coming to this arrangement? In the past, you've stressed more about specialty care. How does that fit in, and sort of how does this align with your longer-term national approach? Also, how important was it that you could serve multiple memberships inside not just Medicare Advantage? Thanks.

Thanks for the question, Josh. I guess first and foremost, it's payer-agnostic, which is important. We've always said our goal is to serve all members across all business lines, given the depth and density of our membership in our local markets. We had a partnership already working with many of these assets. We feel quite good about what we can create. This is payer-agnostic, which is also very important. It will help us focus on advanced primary care, still centering on our chronic and complex patients, and we are continuing to build specialty care enablement, which is another important component. From a value-based care perspective across all lines of business, this remains a critical part of our strategy. This partnership includes embedded technology assets to structurally enhance care. There is a focus on patient access and experience in adopting next-generation models. Overall, we see this as a timely continuation of our previous strategic framework. Thank you very much for the question. Next question, please.

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

Hey, thank you very much. Just another question on the CD&R partnership. To what extent are these primary care platforms taking risk currently? Is that something that we will need to see develop as we get more of these digital enablement abilities from Carelon? Do you expect to see full capitation on those platforms over time?

Thanks, Ben. I'm going to have Pete probably provide more context. But just quickly, about a third of the membership is currently under risk arrangement. So with that, Pete, why don't you give a little more color into the relationship and how we see it evolve?

Thanks for the question, Ben. I’ll provide a bit more context regarding the assets and capabilities. They each have distinct strengths. We see great opportunities to cross-pollinate. When you think about MPG, they are a leader in managing Medicare and commercial risk. They have a proven model in that regard, providing strong capabilities for future growth. Apree has differentiating technology and navigation capabilities with a focus on the commercial business. Carelon Health advanced primary care is a leader in managing chronic conditions and already takes risk today. We see tremendous opportunities in many areas for that. One strong point is integrating existing Carelon services, which creates value for all three assets. I appreciate the question.

And just a quick financial remark to conclude. We expect the consolidated entity once formed to generate over $4 billion in annualized debt revenue.

Thank you. Next question, please.

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

Hi. Good morning. Thanks for taking my questions. I'll switch topics over to Medicaid. Your redetermination enrollment impacts seem to pick up some momentum in the quarter. I think you said 90% of members have now been redetermined. I wondered if you could give us some view on how you expect that to play out over the next few quarters? And from a risk pool and rate adequacy standpoint, could you provide an update on that as the membership is whittling down?

Good morning, Dave, and thank you for the question. Our Medicaid business is actually tracking very much in line with our expectations. About 90% of our members have had their eligibility redetermined. Over the next few months, we anticipate tapering down as we wrap up the unwinding process as we get through June. The downward trend in membership in the first quarter was due not just from redeterminations but also footprint changes. We're reaching out to Medicaid members aggressively. Many who lost membership did so for procedural reasons. We continue to contact over 4.5 million people to ensure those truly eligible have access. With visibility into 75% of our Medicaid rates and premiums for 2024, most are in line with our expectations and actuarially sound.

Next question, please.

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

Hi, good morning, and thank you. I was wondering if you could talk about utilization trends by line of business and what you saw in the quarter versus your expectation.

Utilization in the first quarter in our health benefits businesses was in line with our expectation, reflected in our reported benefit expense ratio of approximately 85.6%. In the commercial business, inpatient and outpatient authorization levels year-to-date were aligned with expectations, and our internal year-to-go trend remains unchanged. For Medicare, we saw utilization related to both the two midnight rule for inpatient stays and pockets of outpatient authorizations. These trends were planned for as part of our underlying cost trend assumptions. Medicaid experienced increased state-specific utilization attributed to redetermination, but we remain comfortable with what we're seeing there given constructive dialogues with impacted states. Overall, we remain confident that our MA bids for 2024 and our commercial pricing reflect appropriate utilization and medical cost trend projections.

Next question, please.

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

Great. Thanks. Just wondering if it's not a huge increase in guidance, but would love to hear what was driving it. Is it something on the health plan side or Carelon side? Any thoughts about the conservatism or pace of raises versus what you're actually seeing in the core business today?

We're pleased to report our adjusted diluted EPS this quarter, which came in slightly better than our seasonal expectation. That was led by solid performance in both our health benefits and Carelon divisions, where operating margin increased by 30 basis points and 20 basis points respectively. Specifically, favorable performance in the benefit expense ratio and recovering commercial margins from pandemic-era lows led to this increase in our guidance for adjusted EPS by $0.10 to be greater than $37.20.

Next question, please.

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

Hey, thanks. Just wanted to hear any comments on the external revenue growth with Carelon Services. Did that grow faster than the overall segment? Could you provide insights on guidance expectations?

I'll have Pete address the Carelon questions and then Mark will talk about the earnings percentages. Pete?

With respect to Carelon external growth, we continue to see nice momentum. For 2024, we've already exceeded our total sales for 2023. Gail mentioned several new wins, particularly in behavioral health, and our pipeline for 2025 is strong as we actively sell. We've seen traction in both insights and behavioral health, demonstrating the value we provide to our partners.

The seasonality of the adjusted diluted EPS in 2024 is expected to align with the past few years, with approximately 55% of earnings in the first half of the year. We expect workday seasonality to positively influence fourth-quarter results as we move towards normalization.

Thank you, Mark, and thanks for the question, Whit. I would like to add to Pete's observations about the momentum inside of Carelon. We're seeing really nice traction. Thank you. And next question, please.

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

Great, good morning, and thanks for the questions. Gail, I wanted to follow up on your comments about the Medicare business and balancing growth and margins. Could you elaborate on that? Does that remain on track for 2024? Do you expect to plan for further improvement in 2025?

As I shared in my opening comments, the Medicare rate announcement represents the second consecutive cuts to the program that we know will result in increased premiums and reduced benefits for seniors with disabilities. Our approach remains disciplined. We're focused on building a sustainable, attractive, long-term business while balancing growth and margins. It's too early to provide specifics for the 2025 bid at this stage, but we're aiming to keep our members satisfied and prioritize our key business areas. Thank you for the question. Next question, please.

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

Hi, thanks. I noticed now you're discussing at least a 12% earnings per share CAGR as your long-term expectations. You've previously mentioned a 12% to 15% range. Should we interpret this as a change?

These two targets should be seen as synergistic. We remain committed to achieving a long-term adjusted earnings per share CAGR of 12% to 15% through 2027. We are confident that through business cycles, the earnings potential from our operations will sustain a long-term compound annual growth rate of at least 12%.

Next question, please.

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

Thank you. Just wanted to clarify a couple of things. On the reserve boost, are you saying the 1.7 days is fully related to conservatism via Change? Can you give us a sense of your Medicaid rate seasonality?

The sequential increase in days in claims payable by 1.7 days is primarily related to Change Healthcare. It's worth noting that neither the decrease in claims receipts nor the reserve accrual related to this disruption had any discernible impact on our benefit expense ratio or P&L. The incurred claims are completely consistent with our expectations. Our operating cash flow is on track to meet or exceed our previous guidance.

With respect to our Medicaid states and when our rates are up for renewal, we have roughly 10 states that renew in January, another state that renews in April, another nine in July, and the last two renew in September and October.

Thank you very much for your questions. We're pleased to be off to a solid start this year, confident in ongoing execution of our strategy and the balance and resilience of our diverse set of businesses positioning us well for 2024 and beyond. We're excited about the future and look forward to sharing more progress with you in the coming year. Thank you for your interest in Elevance Health and have a great rest of your week.

Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through May 17, 2024. This concludes our conference for today. Thank you for your participation.