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 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; Pete 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 and recent progress against our strategic initiatives. 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. This morning, we reported second quarter results, including adjusted diluted earnings per share of $10.12, reflecting 12% growth year-on-year. These results reflect thoughtful execution in a dynamic operating environment as well as the unique strengths of our enterprise, including the power of our diverse set of businesses. We have reaffirmed our full year adjusted diluted earnings per share guidance of at least $37.20, which represents 12% growth year-over-year. We have prudently maintained our full year outlook, given industry-wide dynamics we are navigating in our Medicaid business and the investments we are making to support business transformation and deepen capabilities within CarelonRx. Our Health Benefits segment demonstrated balance and resilience in the quarter. In Commercial, we continue to make progress on our margin recovery initiative and are delivering solid membership growth, notably in our individual ACA business, which has grown substantially year-over-year. We've also extended our momentum in national accounts where the business is tracking to historically high retention levels and new customer acquisition remains strong. Year-to-date, we've consolidated business with additional existing employer group clients who previously only worked with us on a slice of their business, a testament to the unique value we deliver to the market. In Medicaid, we are pleased with our recent new business wins and re-procurement success, positioning us for future growth. We launched the Indiana Pathways for Aging program just weeks ago and are proud to be the largest payer in this important program in our home state, serving nearly 40% of all eligible Hoosiers. Indiana Pathways plays directly to our strengths, serving populations with chronic and complex needs. We were also privileged to be awarded the KanCare Kansas Medicaid RFP this quarter, working in partnership alongside two Blue partners as Healthy Blue. Turning to Medicaid redeterminations. While nearly all of our members have had their eligibility redetermined since the process resumed last year, our work is not done. With approximately 70% of coverage losses attributable to administrative challenges, we continue our proactive outreach to members to maximize access to care and minimize barriers to whole health. We expect disenrolled members to re-enroll throughout the year, albeit on a longer lag than expected when redeterminations resumed last year. We are seeing the percentage of returners steadily increase, especially in our Blue states where we offer both Commercial and Medicaid health plans. As a result of redeterminations, our Medicaid membership mix has shifted, resulting in increased acuity, and we are working actively with our state partners to ensure rates remain actuarially sound. In Medicare, we were pleased with the recent ruling regarding our challenge of the initial 2024 Star ratings. As a result, our enterprise weighted-average rating has increased to 4.0 Star and we now expect approximately 56% of our members will be in plans rated at least 4.0 Star or in contracts too new to be rated that will be reimbursed similarly in payment year 2025. This outcome will help offset funding cuts to the Medicare Advantage program for the second consecutive year, which we believe will result in increased premiums and/or reduced benefits for seniors and people with disabilities who rely on Medicare Advantage for their health and well-being. For our part, we maintained our disciplined approach to 2025 bids. We will be offering highly valued and competitive benefits as we seek to balance growth and margins and remain focused on building an attractive and sustainable Medicare Advantage business for the long term. In our Health Services businesses, we are making progress on our key strategic priority to scale our enterprise flywheel for growth. Carelon Services delivered robust growth in operating revenue and earnings in the quarter as we gained traction with external clients both through new business wins and the expansion of risk-based services to existing customers. For example, we recently secured a significant win with an existing Blue Cross Blue Shield partner and deployed new behavioral and medical benefit management services to state and third-party payer clients. These awards are a testament to the value we deliver and an affirmation of our strategy of proving value internally before driving growth externally. Turning to CarelonRx. We are integrating recent acquisitions and scaling key value drivers as we invest to control the levers that matter to deliver greater value and enhance consumer experiences for our members. Our margin performance in the second quarter reflects elevated investment, specifically around infrastructure and service levels as we remain committed to providing best-in-class home delivery and SpecialtyRx services. We see significant opportunity to grow and scale these assets and remain excited about the growth potential of CarelonRx. We are making progress on our enterprise strategy in 2024 to accelerate capabilities and services, invest in high-growth opportunities and optimize our Health Benefits business and have robust long-term growth potential embedded in each of these imperatives. We are delivering strong and accelerating growth in Carelon Services with a long runway ahead. Meanwhile, our guidance for 2024 embeds significant investment in growth, notably in CarelonRx and government health plan operating margins below their long-term average with meaningful upside to our targets. Our focused execution reflects our confidence in Carelon as our flywheel for enterprise growth and the embedded earnings power of our businesses, which together will enable us to deliver strong growth in adjusted diluted earnings per share over the long term. In closing, I want to thank our community partners who share our purpose and dedication as well as our associates who work hard every day to make Elevance Health a lifetime trusted health partner for the members we are privileged to serve. Their collective passion is reflected in a recent external recognition, including as one of America's Greatest Workplaces in 2024 by Newsweek, where Elevance Health earned five out of five stars, as well as our inclusion among the Best Companies to Work For for 2024 by US News and World Report. With that, I'd like to turn the call over to our CFO, Mark Kaye, to discuss our financial results and outlook in greater detail. Mark?

Thank you, Gail, and good morning to everyone on the line. As Gail shared, we reported second quarter results, including GAAP diluted earnings per share of $9.85 and adjusted diluted earnings per share of $10.12, representing growth of 12% year-over-year. We ended the second quarter with 45.8 million members, principally reflecting attrition in our Medicaid membership. Our commercial fee-based business grew by 354,000 lives year-over-year, reflecting the distinct value we provide to self-insured employers and the strength of the Blue Cross Blue Shield brand. Additionally, the thoughtful positioning of our individual ACA products has proven effective in ensuring robust and profitable growth. Total operating revenue for the quarter was $43.2 billion, approximately flat year-over-year. As we approach the tail-end of Medicaid redeterminations, we anticipate growing operating revenue in the second half of the year, driven by growth in premiums and CarelonRx product revenue related to higher external membership and the acquisition of Paragon Healthcare. Carelon Services' momentum accelerated in the quarter. Operating revenue grew by over 26% and operating earnings increased by more than 30% due to growth in risk-based services provided to internal and external clients, prudent pricing, and strong execution. The consolidated benefit expense ratio was 86.3% for the second quarter, an improvement of 10 basis points year-over-year. This improvement was driven by several factors including premium rate adjustments in recognition of medical cost trends, disciplined medical management, and a shift in our mix of business towards commercial. This was partially offset by our Medicaid business where acuity has increased due to attrition of healthier members. Elevance Health's adjusted operating expense ratio was 11.5% in the second quarter, an increase of 50 basis points relative to the second quarter of 2023. We absorbed elevated investment costs notably in CarelonRx and this along with other strategic initiatives will position our company for long-term sustainable growth. We anticipate significant improvement in our operating expense ratio in the second half of this year. Adjusted operating gain for the enterprise grew approximately 6% year-over-year, led by Carelon Services. We have maintained a prudent posture with respect to reserves. Days and claims payable at the end of the second quarter stood at 45.3 days, above our long-term target range in the low 40s. As a reminder, days in claims payable in the first quarter included approximately 1.7 days related to the industry-wide delays in claims receipts. With respect to our outlook, we are closely monitoring acuity and cost trends, notably in Medicaid, and are working collaboratively with states to ensure rates remain actuarially sound. We are, however, expecting second-half utilization to increase in Medicaid and as a result, anticipate our full-year benefit expense ratio will end the year in the upper half of our initial guidance range. Nonetheless, we expect to achieve our full-year adjusted diluted earnings per share guidance of at least $37.20. Before I close, I'd like to briefly talk through our enterprise growth algorithm which we have included in the supplemental earnings presentation provided this morning. Our commitment to growing adjusted diluted earnings per share by at least 12% annually on average incorporates upper single-digit growth in operating revenue, underpinned by membership growth, geographic expansion, and momentum in Carelon as we scale our enterprise flywheel. Our commitment to disciplined underwriting and operating expense management across all lines of business will drive the improvement inherent in our enterprise operating margin target of 6.5% to 7% by 2027. Taken together, we are targeting growing operating earnings in the upper single-digit to low double-digit percent range annually on average over time. Finally, we expect capital deployment to consistently deliver one-third of our targeted adjusted diluted earnings per share growth rate. Overall, our results in the first half of the year are consistent with our initial guidance, and we will maintain a steadfast focus on execution and operating efficiency over the balance of the year. And with that, operator, please open the call to questions.

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

Hi, everybody. Maybe just to kick it off here. I know you've laid out your long-term growth objectives and all. I wonder if at this early date, you're prepared to comment a little more on any plans you have to accelerate growth in '25. I know the topline has had redeterminations and other things this year. What's your thought about ability to get back to that growth trajectory that you're seeking long-term in '25?

Great. Thanks, A.J., and thanks very much for the question this morning. I think let me start with what Mark outlined as our enterprise growth algorithm because I think that really frames for everyone how we are thinking about our business. And also as you think about 2024 and our results, the balance and resilience of our complementary businesses that has allowed us to grow in multiple ways in many types of different macroeconomic environments. While it is early for '25, I'd like to at least frame sort of how we're thinking about 2025. We do expect to accelerate revenue growth across all of our businesses. Specifically in our health business, we see a lot of really strong momentum in commercial and that's been ongoing. Part of that's through the targeted expansion of our individual ACA footprint and in some cases, adding new geographies that help support what's happening in the Medicaid redeterminations. In Medicare Advantage, as we said in our opening comments, we feel that we've positioned ourselves for sustainable growth in margins and look at that as a very good long-term business. And then in Medicaid, we're nearing the end of the redetermination cycle and we do anticipate a return to growth. You've heard about some of our early wins this year which we are very pleased with. We also do believe that some of those that were redetermined based on administrative reasons will be coming back, albeit it's taken a little bit longer than we originally thought. And then I'd like to kind of close these comments about our excitement around Carelon and the growth that we're seeing and how we progressed. You saw some of that come through in the second quarter. In Carelon Services, we are seeing some very strong external growth in the quarter and we see expanded opportunities as we continue to build our capabilities, particularly in the risk market. What we're seeing here is our ability to prove it on our own businesses first and then take it to the market commercially has been a really strong selling point for us and we're very excited about that. And then finally, CarelonRx is our ability to scale, especially on the specialty side, including the integration of some of our recent capabilities such as Paragon Healthcare, BioPlus Specialty Pharmacy. We're looking forward to adding the Kroger Specialty Pharmacy business as well as we continue to diversify. So overall, as we think about acceleration of revenue growth in '25, we do expect it across all of our business and are extremely positive about what we're seeing inside of our business. So, thank you for the question. And next question, please.

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

Thanks for the questions. I wanted to ask on Medicaid. I think about a quarter of your book is due to set rates in the back half of the year. Could you maybe just talk about what your guidance assumes for these rate updates? And maybe anything you've seen kind of so far as you think about the updates for July or October to the extent you have visibility? And I guess, Mark, on your comment on Medicaid utilization, have you seen the level of care on a same member basis increase or is the issue really just the timing dynamic between where state rates are and the level of acuity that you're seeing in your population?

Well, thanks for the questions, Nathan. A lot in there. So let me ask Felicia Norwood, who leads Government first and then have Mark respond to the second part of your question. Felicia?

Good morning, Nathan. You are absolutely right. The way our rate timing works, we have about half of our states where we have rates in the first half of the year and the other half in the back half of the year with our core group certainly in the fourth quarter. At this point, we have visibility into nearly all of our Medicaid Premium for 2024 and the rate conversations with our states are very constructive. With that said, not all of our rates are final. We are in constant conversations with our states and providing them with information, updated information that we see in terms of the experience almost weekly to make sure that they are seeing what we are seeing from an overall change perspective as we wind down redeterminations, which certainly has been one of the largest transformative things that have happened in Medicaid for some period of time. I will say that the conversations are ongoing. We fully expect our rates to remain actuarially sound, but we acknowledge the potential for a short-term disconnect between the timing of our rates and the emerging acuity in our populations and that's certainly been reflected in our updates for the year. I will say that we continue to make sure that states and their actuaries have the most recent data that we have and we will continue to have that engagement as we go through the fourth quarter rate process with a few very large states that remain in negotiations with us. And with that, I will turn it over to Mark to talk about the rest of the issues around utilization.

Thanks very much, Felicia, and good morning. Medicaid utilization in the quarter, as you heard from Felicia, reflected higher acuity as expected. We are also seeing signs of increased utilization across the broader Medicaid population, including in outpatient home health, radiology, durable medical equipment, as well as some elective procedures. I just wanted to add here, just as we noted in our prepared remarks, the full-year outlook does allow for both this shift in acuity and increased utilization in the second half of the year, including the rate timing mismatch that Felicia spoke to.

Thank you. Next question, please.

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

Yeah. Could you talk a little bit about CarelonRx, and in particular, interested in the contracting approach and scope for the CVS contract that underlies parts of that as you're insourcing things? And then just if you could give a quick update on the status of the integration rollout to the Anthem members and other members of BioPlus and Paragon and the status of Kroger? Thanks.

Great. Well, thanks, Lance. I'm going to ask Pete Haytaian, who leads Carelon to address your question.

Thanks for the question, Lance. We're very optimistic about our overall pharmacy strategy. Our core business is performing well and our approach is attracting significant interest in the market as we insource and diversify. Our integrated value story is resonating, supported by competitive pricing. We're seeing strong results in the core PBM down-market and middle-market segments. Regarding our diversification and assets, our specialty infrastructure is well-developed to accommodate Elevance scripts, and we've started migrating those scripts this year. We're also preparing for the upcoming Kroger acquisition, which we expect to finalize in Q3 or Q4, involving significant investment and preparation for a successful transition. As for Paragon, we see a substantial opportunity with $16 billion in infusion spending related to Elevance Health, predominantly in hospitals. This allows us to provide care in more suitable settings, such as ambulatory sites or homes, and we are strategically targeting specific areas to establish these sites. We're launching one soon and planning to expand with additional sites through 2025. Overall, our strategy of insourcing essential levers and pursuing growth opportunities is looking very promising.

Thanks, Pete, and thanks again, Lance, for the question. I think this is a great example of our flywheel for growth and our ability to scale these assets which we're very excited about. And again, thinking about this as the opportunity to drive a differentiated cost of care for our health plans within Elevance Health, but also better experience for members and support our partners across the ecosystem. So again, a really important part of our flywheel. Next question, please.

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

Okay, great. Thanks. I guess in your prepared remarks, you mentioned that the results here were somewhat burdened by, I guess, three things. One, your investments in Carelon for growth and then you had below average margins in Medicaid and below average margins in Medicare Advantage. Can you help size those things? How should we think about where those margins are today relative to kind of where they should be from a target perspective? Thanks.

Thanks very much for the question. We're not going to comment on in detail where single lines business operating margin may land, given our combined Health Benefits reporting segment. However, to your question, let me give you a little bit of color. We do expect the Medicaid margins to compress year-over-year. There are key factors driving this, including or beyond the industry-wide dynamics that we're navigating. And those include what we spoke to a moment ago around the timing mismatch of rates relative to acuity and the higher acuity itself associated with the Medicaid membership mix. Importantly, as you heard us talk to you just a moment ago, we are holding very constructive conversations with the states to ensure those rates remain actuarially sound. In Medicare, we do continue to expect margins are going to improve in 2024 compared to 2023. They will still remain below our long-term target margin range. And then finally, we are very pleased with the progress of our 2024 commercial repricing initiatives and our disciplined pricing practices. And we've spoken about this before, but it's worth emphasizing 2023 really marked the end of that first full year of our efforts to recover margins and you're seeing some of that benefit together with the action that we're taking in 2024 come through our numbers.

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. What are your expectations for market-level growth in MA for 2025? And I know it's early, but maybe any headwinds, tailwinds and how we should expect Elevance to grow market share relative to the overall market in MA for 2025?

I'll ask Felicia to comment on that, Josh. Thank you.

So, good morning, Josh, and thank you. It's an incredibly dynamic time in Medicare Advantage. And now more than ever, we think it's important to be very thoughtful and rational as we plan for 2025. Despite this environment, Medicare Advantage enrollment is at an all-time high and over 50% of individuals are still choosing MA. And that means there's still a clear value for what MA offers and we're committed in the long-term to having and operating a profitable and sustainable MA business. It's a little early to talk about 2025 in terms of growth expectations. Our bids were recently submitted to CMS and frankly, we are still getting feedback on that. In addition to that, the industry-wide submissions aren't known yet. We feel encouraged by commentary from peers that everybody is going to kind of price rationally and have benefit rationalization as we head into 2025, but we still have to wait and see what emerges once we have greater information from our competitors. So at this point, there's a lot of unknowns. I will tell you we maintained a very disciplined approach, offering competitive benefits while we are balancing growth and margins. I think we were very thoughtful in the plan designs that we put out there to make sure that we were focusing on profitable growth and the sustainability of this program for the long term. We are very focused on our DSNP business, which is where we believe that we have a strong advantage when we think about our Medicaid and Medicare positioning. We also prioritized our products in terms of our local market dynamics. So it's still early to determine what growth is going to look like for 2025. We feel very good about how we position our business on the heels of our strategy in 2024 to make sure that we have a sustainable long-term business in Medicare Advantage. 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 really want to stick with Medicare Advantage for a minute. Can you talk about what you saw specifically in the quarter around trend? And then, Felicia, maybe you can comment on what you included around trend assumption in your MA bids as we think about 2025?

Great. I'll ask Mark to comment on your question.

Thanks very much for the additional questions here on Medicaid. First, we are seeing a larger than typical pull-forward effect and that's really driven by the increased numbers of Medicaid members who are losing coverage. You can think about this as beneficiaries who are facing an imminent loss of coverage in the month or so preceding that coverage loss, picking up additional benefits. Second, member mischaracterization among the core expansion in specialized population has caused some localized revenue pressure as some members expect to regain coverage after previously being determined as ineligible. And third, on this topic of Medicaid, elevated outpatient trends in elective procedures. Steve just flagged me, he said to talk about Medicare. So I apologize for that. On Medicare, the answer is very short. Trends developed in line with expectations.

Thank you, Mark. Next question, please.

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

Thanks. Appreciate the question. First, can you size the Medicaid trend increase that you're seeing here? And then second, I just wanted to follow up on Kevin's question on government margins. Understand you don't want to give us specific absolute margin levels, but I was wondering if you could share your expectation of the trajectory of margins in Medicare Advantage and Medicaid for 2025 versus 2024? Thanks.

Thanks very much for the question. Segment margins in the quarter improved by 20 basis points year-over-year. I would argue that the first half results here are consistent with our initial guidance range. We expect full year margins to end within our initial outlook, up 25 basis points to 50 basis points, primarily driven by the ongoing recovery of our Commercial business. From a seasonality perspective, there are two key comments I wanted to draw out here. For modeling purposes, second quarter revenue growth is going to mark the low point for the year and we expect third and fourth quarter operating revenue and premium revenue growth rates to improve. Secondly, just on the MLR that ties directly to your question, we now expect the third quarter MLR to be near the high end of our full-year guidance range. I note this specifically, as the current third quarter consensus estimate does not appear to capture the calendar day shift associated with the Leap year and that's going to have approximately a 70 basis point impact on the third quarter MLR.

Thank you. Next question, please.

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

Hey, thanks for taking my question. Can you talk a little bit about the investments you're making around CarelonRx and how you're thinking about the timeline in terms of scaling specialty? And are there ample opportunities out there for you like Kroger and Paragon out there? Thanks.

Well, thanks. Thanks, Erin, and welcome to our call. I think this is the first time you've been on our call. So it's great to hear from you. I'll ask Pete to comment.

Yeah, no, thank you. We feel very good about our specialty strategy, and I appreciate the question. I'll try not to repeat what I said before and give you a little bit more context. As I noted, as it related to our specialty strategy, we acquired BioPlus last year in 2023. Again, we spent a lot of time last year in building out the infrastructure and the capacity to be able to assume Elevance scripts. Our focus as it relates to the near term is being able to migrate Elevance scripts, which will occur through this year and into 2025. As you noted, we're going to be opportunistic and we have been as it relates to things like Kroger, that provides additional scale for us. To give you a little bit of color on Kroger, it's about 500,000 incremental scripts. They also give us access to additional LDDs as well as having a presence in places like Puerto Rico, which could help us as well. We'll continue to be opportunistic as it relates to our specialty strategy and focus on delivering whole health. We anticipate, as I noted earlier, that Kroger would close Q3, Q4 of this year, and we're preparing for that and continuing to make investments around that. As we move forward more broadly, and Gail touched upon this regarding our specialty strategy, there's a real focus on patient differentiation in Whole Health. We have a wonderful opportunity as we move forward to drive Whole Health and capture all the value of Carelon, including things like integrating behavioral health and other services. That's going to be our goal and focus moving forward. We feel very bullish about it. We feel very bullish about our growth. We feel very bullish about delivering on the Carelon strategy and Whole Health as we move forward.

Next question, please. Thank you, Pete.

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

Thank you. Just wanted to ask about your long-term growth targets. In your deck, you now had a slight decline in health benefits long-term growth CAGR. And apologies if I missed this in your comments, but could you provide some color on what's driving that? Is that MA, Medicaid, presumably not Commercial? And then I also think you reaffirmed long-term targets on Carelon. But over the past year since your Investor Day, CD&R partnership, BioPlus, acquisition of Paragon, pending Kroger, the business seemingly has taken very positive steps forward in its evolution. So would it be fair to say your prior targets at Investor Day, most of those assumptions within your guide or long-term targets did not contemplate all these new developments? Specifically, Carelon Services revenue per consumer serve the 50% growth target by '27 now appears like there's much higher runway. So just overall taking a step back, even though you're reaffirming your targets. Is it true that now today, there's significantly greater potential embedded earnings power within Carelon versus last year that could be unlocked in future years? Thank you.

This quarter, we are pleased to introduce our growth algorithm, which underpins our adjusted diluted earnings per share target of average annual growth of at least 12% over time. You asked a little bit about the revision, and we have revised our enterprise revenue growth target from the high single to low double-digits to high single-digit percent range and that's primarily to reflect Medicaid-related attrition that has occurred to date and the impact of the prudent actions we're taking in our 2024 and 2025 Medicare Advantage bids in response to the risk model revisions. Accordingly, our health benefits segment revenue CAGR should now be in the mid-to-upper single-digit percent range. The key point here is our path is much the same. That really means that we're expecting high-single-digit to low double-digit percent growth in operating earnings, and the key point here to the second half of your question, with approximately one-third contribution from capital deployment and that capital deployment can come through in the form of inorganic activity to support our Carelon businesses. Thank you.

Next question, please.

Next, we'll go to the line of Andrew Mok from Barclays. Please go ahead.

Hi, good morning. Wanted to follow up on some of the Medicaid comments. It sounds like you're optimistic that rates get better in the back half, but also acknowledge a temporary disconnect that persists and expect higher Medicaid utilization in the back half. So if we translate that into MLR expectations, does guidance assume that Medicaid MLR peaks in 2Q and gets better from here with potentially better rates, or do you expect it to peak at some point in the back half of the year? Thanks.

Great question. The opening comments there are completely consistent with the way that we're thinking about it. You should really think about this as we now expect our full-year benefit expense ratio to be in the upper half of that initial guidance range, i.e., 87% to 87.5%, principally because of the Medicaid dynamics that we're navigating. We're not looking to provide specific quarter-by-quarter guidance.

Next question, please.

Next, we'll go to the line of Ryan Langston from Cowen. Please go ahead.

Hi, good morning. Just a quick one for me. Prior year development was a bit more favorable than we expected. Can you maybe give us a sense of if that's just mostly from the fourth quarter, and if so, any kind of particular pockets of utilization you'd call out is maybe coming in better than expected? Thanks.

Thanks very much for the question. Let me put the prior development in the context of the medical claims payment change this quarter. I think that's more instructive to understand the dynamics here. You saw medical claims payable in the quarter go down by approximately $1.3 billion versus the first quarter. There are really several factors that drove this and then ultimately drove PYD development. They include the reserve runoff due to Medicaid membership decline, the catch-up in claims paid associated with elevated reserves for industry-wide claim receipt delays in the first quarter, and then the improved operational environment that's reflected through our shorter cycle times. The key point here is that MCP remains at historically high levels, both in aggregate and on a fully insured PMPM basis. That indicates the continuity of our historical prudent reserving practices and our strong balance sheet.

Thank you, Mark. And, Ryan, welcome to our call for the first time. It's great to have you. Next question, please.

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

Hi. Thanks. I just wanted to come back to the Medicaid utilization comments. I think you were making in response to an earlier question. I'd love to expand a little bit on that. Could you comment perhaps on how much of the pressure is geographically isolated in some of your markets versus maybe more broad-based? I think you're speaking to also some utilization of care from people that were expecting to lose coverage. Would you be expecting that dynamic to slow a little bit as redeterminations end, or is that potentially offset by rejoiner dynamics or factors like that? Thank you.

Thanks for the question and appreciate the opportunity to provide additional clarification here. Certainly, we expect the larger than typical pull-forward effect that we've seen in the second quarter to abate as the year goes on, principally because we're through the tail end of redeterminations at this point. We are obviously working with the states to ensure that the timing and rate mismatch is appropriately adjusted. On the member miscategorization, this is really ensuring that those members who are initially categorized, for example, as TANF are put in the more appropriate cohort for purposes of rates to think about ABD, for example. What we are really seeing elevate as the year goes on is the outpatient trends and elective procedures, and that's something that we fully accounted for in our MLR guide for the full year.

Next question, please.

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

Hi, thanks. Good morning. I was hoping you could drill a bit more into the $4.3 billion of timing items that impacted operating cash flow. And then just wanted to see whether you expect all those to reverse in the back half of the year and whether you're comfortable reaffirming your full-year CFFO target of at least $8.1 billion and if not, where you expect operating cash flow to land for the year. Thanks.

Appreciate the question this morning. Year to date, operating cash flow is $2.4 billion and to your point, that is a decrease of approximately $6 billion year-over-year. The key point here is that this includes $4.3 billion of timing-related items and approximately $1.3 billion of net cash outflows that are primarily associated with the runoff of our Medicaid reserves and the improvement in the operational environment, which is reflected by shorter cycle times. The timing-related item reflects a $3.6 billion impact from an additional month of premiums that we received from CMS in the year-ago period, and so not a concern from our perspective. On a full-year basis, we do expect operating cash flow outlook to be slightly north of $7 billion, and that really reflects the year-to-date reductions in working capital and specifically, as I mentioned a moment ago, that decrease in MCP driven by Medicaid membership attrition.

Next question, please.

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

Thank you. So in the prepared remarks, you guys mentioned a significant win with a Blue Cross Blue Shield partner. I was wondering if you can help us size your pipeline there and give us any clarity on how penetrated you are into that market. So how many of your Blues brethren do you currently have contracts with and what's the opportunity look like to expand this?

Great. Thanks, Sarah. Pete?

Yes, Sarah, thanks a lot for the question. We’re really pleased with how services growth is going. We mentioned 26% growth in the quarter and a clear path of achieving our long-term objectives. So we feel very good about that. As it relates to your question, again, our focus is, as Gail said earlier, building capabilities internally and importing them externally, and we’re seeing that play through. Your reference to Blues, I would say that we are currently engaged with most of the Blues, and our strategy with regard to that is really landing and expanding to be quite frank. This is a great example of that where we had an existing relationship with a client; we continue to grow those services with that particular Blue. They see the value in that. We were able to convert some of those capabilities to risk. I'll remind you that that is a very big part of our strategy, assumption of risk, both on a category of service basis as well as a full risk basis. You'll see that continue to move forward. As it relates to the pipeline, this year, we’re doing very well. '24 growth year-over-year is very, very strong. You'll see really nice improvement from that perspective. As you would expect, we’re already selling into 2025. A real focus in 2025 on our behavioral health capabilities, our post-acute capabilities and then some of our Carelon Health businesses. So I appreciate the question, Sarah.

Thank you, Pete, and thank you for the question, Sarah. As Pete mentioned, we have great opportunities to enhance our presence since we already collaborate with most of the Blues and other payers, as well as state partners, which has been beneficial for Carelon overall. We're enthusiastic about these opportunities. What's your next question?

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

Hey, good morning, guys. And I appreciate you taking the question. I guess, Mark, I was just going to ask if you could bridge a little bit when we think about the 2027 OP margin targets in the MCO segments. Kind of like how you think about the sources of the margin expansion there. I'd be interested in particular if you would talk about what your expectations are around the exchange subsidies and the growth of the exchange business.

Thank you very much for the question, George, and certainly happy to talk through the algorithm at a little bit of a high level. You can think about this as being driven by upper single-digit growth in revenue, enterprise operating margin expansion to 6.5% to 7%, and then the balanced approach to capital deployment, inclusive of share repurchases and strategic M&A. On the revenue side, revenue growth is going to be driven by increased membership in the health benefits business, geographic expansion efforts, and then prudent pricing to cover cost trend. Similarly in Carelon, key drivers include the expansion of risk-based revenue in Carelon Services and the continued growth in CarelonRx membership. On the margin side, expansion is going to reflect the disciplined operating expense management and the transformation of some of our business processes, leveraging new technologies including AI. That coupled together with effective medical management and underwriting disciplines is really going to enable us to achieve the enterprise operating margin target. Finally, consistent with our 2023 Investor Day guidance, we do expect to achieve approximately a third of our adjusted diluted EPS growth rate through capital deployments.

Thank you, Mark. Regarding your second question about our exchange business, we have taken a disciplined approach to its expansion. We have seen strong individual results, with a year-over-year increase of 30% to 35% and the ACA growing by nearly 40%. As we consider this, our aim is to support our members through their coverage transitions. There remains a substantial opportunity for continued growth, especially with geographic expansion for members who were previously on Medicaid and now require different coverage. We will maintain the disciplined approach we have demonstrated in the ACA. Next question, please.

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

All right. Hey, thanks. Just quickly, on midyear renewals, just remind us how much of the commercial risk book renews in the second half of this year and just how you're thinking about retention, membership, ability to take the required price action that you need. And just as a clarification, is it fair that Commercial is performing better than expectations on margin with government, worse, at least in the first half? I just wanted to make sure I properly got this. Thanks.

All right. Thank you. I'm going to have Morgan Kendrick, who leads our Commercial Business, address your questions.

Yeah. Thanks for the question. As we think about it, that cohort of business that we renew in July is about 25% of the risk-based large group business. To camp onto that, it performed as expected. In fact, we're seeing persistency up a bit. We talked about attrition in the large group risk business with our January cohort on the first quarter call. That's abated and we're seeing persistency improve, and we're seeing the margins come through. We feel really good about how we're positioned for continued growth and expansion in that business moving forward.

Next question, please.

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

Thanks for taking my question. I believe you have a cost savings plan targeting around $750 million. That's maybe a relatively nearer term initiative. I'm wondering if you could describe your progress against that. And then also, should we think about the benefits of those savings dropping through? Or are you mostly reinvesting those savings in some of your growth initiatives? Thank you.

Dave, good morning. Thanks very much for the question. In terms of the 2023 business optimization activity, we are on track to realize the gross run rate expense efficiency improvement of approximately $750 million that we committed to do. That's going to benefit both our operating performance this year and it's going to help to establish the strong foundation for growth in 2025 and beyond. If I step back just for a moment, and we covered this a bit in our prepared remarks, we do anticipate significant improvement in our operating expense ratio in the second half of the year as we continue to take additional steps to enhance operational efficiency, and we'll begin to see and realize those incremental run rate improvements over time.

Thank you, Mark. I might maybe just spend a moment because I think it's a great opportunity to share a little bit about how we're going about this. We have been very disciplined about our expense management. More importantly, we believe the opportunity around Generative AI for our business is expansive and it's going to materially impact all parts of our organization. We've been focusing on a couple of things, and I know I've spoken about this before, enhancing experiences while driving costs down, but also fueling future expansion. Over the last few months, we've really accelerated those internal efforts. And again, this has been a journey. It's not new, but we are going to start seeing the absolute impact of the AI technology and digitization around our significant operational areas. A couple of things maybe to make this real as we transform, and there's kind of three areas around the engagement model that we think about members, providers, and our own associates who are critical to this journey with us. On the member side, we look at each interaction of our members and we're using AI to make those much more unique and personalized and integrating it across our member touchpoints. Oftentimes, there are disconnects in those touchpoints, and that's a huge opportunity for us to deliver really personalized digital service and enrich that experience. The real impact you see is improved access to care, better processing times, less error rates, reduction of our calls, and use of chat. Those are some very tangible ways that we're deploying that and have been over the last year. You're going to start seeing that come through based on what Mark just shared. The provider side is an area that I'm particularly excited about because we're looking at reimagining and streamlining all of our admin tasks on an end-to-end basis with the provider lifecycle. That's a lot. As you think about those impacts, we touch not just providers but also members and some very specific things like automating the onboarding process of how they come into our plans, refining roster management specifically around data and how that drives downstream to claims, also enhancing contract administration. We think those interactions are going to improve our member experiences but also improve our relationship and our ability to work in value-based care with our care providers and more seamlessly. I'll end with associates because we know that they need to be part of this journey. It's also a cultural journey on AI that's going to drive greater efficiency. We rolled out our spark, which is our internal ChatGPT tool, to over 50,000 of our associates so that they can harness the capability, use it, and improve their own productivity. We're seeing really nice results from that. I wanted to share that because I think our expense focus and efficiency is driven a lot by the impact we're going to see from that. While we have many opportunities, we're trying to look at the end-to-end impact of where we can take friction out of the system and fundamentally improve what we're doing. That gives you a sense of how we're going about achieving the goals we set, and we see huge opportunities going forward and embedded into our growth algorithm for the future. Next question, please.

Next, we'll go to the line of Ann Hynes from Mizuho Securities. Please go ahead.

Hi, good morning. I want to focus on Specialty. I know that Elevance, with your acquisitions, is bringing more specialty in-house, not just on the dispensary side but also on the distribution side. I'm curious about your longer-term strategy. Do you see more opportunities for specialty in distribution? If so, are there specific therapeutic areas you're targeting? Thanks.

Thanks for the question, Ann. We think there's a tremendous opportunity as it relates to specialties. I said earlier, our priority in the near term is the Elevance scripts, and absorbing the Elevance scripts effectively. Then also, as we talked about what we're doing with Kroger. We continue to see opportunities to cover more LDDs. We're very focused on the patient experience and centers of excellence and how we can care for the members in a differentiated way by wrapping around additional assets. Longer term, again, we will be opportunistic, but right now, we have a lot in front of us and we want to execute against that effectively as it relates to specialty.

Yes. Thanks, Pete. And Ann, I just want to highlight one point that Pete said, it's really an integration strategy. Specialty has a long runway for us, but the integration to our Carelon Services and what we do to deliver better value for our health plan members is really critical to our strategy. I think that is unique, our ability to take both the Specialty pharmacy, but all the Specialty services around these disease categories we think is differentiating. So, thank you. Last question we're going to take now, please.

For our final question, we'll go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead.

Hi. Thank you very much. I just wanted a quick follow-up on Felicia's comments on MA bids for next year. I realize it's too early to talk about growth, but I think earlier in the year, you had talked about long term MA growth focused toward Carelon markets. I just wanted to see if you could provide any color on how your bids contemplate your geographic footprint evolving and also your density towards Carelon markets in 2025. Thanks.

So, Ben, thank you for the question. We've always been very strategic around where we want to see our MA growth as we go forward. If you recall this past year, we made very deliberate decisions around markets that we wanted to exit because we wanted to make sure that we positioned ourselves for long-term growth and performance. When we think about our strategy today, it's certainly in those areas where we have Medicare and Medicaid business because the DSNP business is incredibly important for us. Thinking about where things are going long term, having alignment around Medicare and Medicaid is critical for us. It's absolutely about being able to deliver for the Carelon flywheel too. The members that we focus on, particularly in D-SNP and other SNP products, are very complex populations. As we think about Whole Health, we've been working very collaboratively with Pete and the team to ensure that we can deliver Whole Health for those we are privileged to serve. The footprint really is focused on density, certainly in our Blue markets, but being able to be focused on our Medicaid markets as well, in places where we see opportunities to grow strategically with Carelon in the future. That's the pathway and framework we've established when we think about the long-term growth for our Medicare Advantage business, which we continue to be incredibly excited about as we think about being a lifetime trusted partner for those we serve. So thank you for the question.

So, thank you for your questions, everyone, and thank you for all of you for joining us today, for your interest and your support. We look forward to sharing more about our progress that we're making on our enterprise strategy with you in the coming quarters and are confident that the balance and resilience of our diverse set of businesses positions us well. Thank you for your interest in Elevance Health, and have a great rest of your week.

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