Earnings Call Transcript - ELV Q1 2026

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health First Quarter Earnings Conference 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.

Nathan Rich, Vice President, Investor Relations

Good morning, and welcome to Elevance Health's First Quarter 2026 Earnings Conference Call. My name is Nathan Rich, Vice President of Investor Relations. With us on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Felicia Norwood, our Chief Health Benefits Officer; Morgan Kendrick, President of our Commercial Health Benefits business; and Aimee Dailey, President of our Government Health Benefits business. Gail will open the call by highlighting our first quarter performance and the actions we are taking to advance our strategic priorities. Mark will then discuss our financial results and revised 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 financial 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 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 may 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.

Gail Boudreaux, President and Chief Executive Officer

Good morning, and thank you for joining us. Health care is undergoing significant transformation, and it requires us to operate with greater speed, precision and connectivity. Costs are rising, expectations are rising, and both members and care providers want a simpler, more integrated experience. At Elevance Health, our strategy remains clear: lower the cost of health care and simplify how people navigate the system. What is evolving is how we execute. We are operating with greater alignment, accountability and clarity across the enterprise, and that progress is showing up in our results. In the first quarter, our performance exceeded expectations, driven by underlying business strength, along with ACA seasonality and nonrecurring investment income. While it is still early in the year, the trends we are seeing give us increased confidence in the trajectory of the business. That is why we are raising our full year adjusted diluted earnings per share guidance to at least $26.75. Our outlook remains grounded in prudent, achievable assumptions with clear visibility into the key drivers of performance, supported by improving claims experience. We are advancing our strategy in several focused ways. First, we've realigned our leadership structure to strengthen coordination between health benefits and Carelon. We have streamlined accountability, aligned core functions more closely to the business and brought decision-making closer to where the work is done. Those changes are designed to sharpen execution and create greater alignment across the enterprise. Second, we are embedding and scaling AI across clinical, operational and administrative workflows where it can have direct measurable impact, and we are already seeing tangible results. These capabilities are improving how we engage members and how we manage costs. They are enabling earlier, more personalized interventions, strengthening decision-making through predictive analytics and reducing administrative expense through automation. Together, these are driving greater efficiency and supporting more consistent performance over time. Third, we are transforming how care is delivered through Carelon by advancing our integrated whole health approach. By combining CareBridge and our Care at Home capabilities into a single risk-based solution, we are driving higher engagement and stronger clinical outcomes. These programs have reduced hospital readmission by 20% and generated more than 10% savings on post-acute care, supported by integrated pharmacy, specialty care and behavioral health. We continue to see strong demand for Carelon's capabilities, reinforcing its role as a driver of current performance and long-term growth. Let me turn to our first quarter performance. In Medicaid, we are seeing early evidence that our actions are lowering costs, particularly in behavioral health and specialty pharmacy. That progress is being driven by more targeted, proactive interventions that allow us to engage earlier, coordinate care more effectively and support members in the most appropriate settings. We are addressing rapid growth in ABA therapy through rigorous clinical oversight, and we're using predictive analytics to identify members at risk of substance use disorder before adverse events occur. In Medicare Advantage, the steps we have taken to reposition the business are driving improved performance, and we remain on track to achieve an operating margin of at least 2% in 2026. We were also encouraged to see CMS address a portion of the funding challenges in the final rates for 2027. As we prepare for bid submissions, we will remain disciplined and continue to prioritize plans that deliver long-term value while supporting progress toward our financial objectives. Regarding the notice we received from CMS in February related to historical risk adjustment data, we are engaging constructively with the agency and making steady progress toward resolution. We stand firmly behind the integrity of our risk adjustment program, supported by rigorous oversight and governance. Importantly, this matter does not affect our outlook or how we serve our members, and it does not change how we are managing the business or our expectations for performance. In commercial, we maintained a disciplined pricing approach for 2026 to ensure appropriate returns and our first quarter performance reflects that focus. As we look ahead to the 2027 selling season, we are seeing strong employer interest, supported by a robust pipeline and early wins. Our integrated medical and pharmacy capabilities continue to resonate in the market. In Individual ACA, we are seeing modestly stronger retention, particularly in bronze metal plans where affordability remains critical. First quarter results reflect pronounced seasonality given product mix and the business remains on track toward a more sustainable financial profile. In Carelon, our risk-based solutions are delivering measurable value. Using AI and advanced analytics, we are identifying high-risk members earlier and engaging them through coordinated whole-person care. That is driving higher medication adherence, fewer emergency room visits and lower hospital readmissions, and it continues to support strong demand for our capabilities. In summary, we are executing our strategy with discipline and clarity. Our actions are translating into measurable results, improving affordability, simplifying the health care experience and strengthening financial performance. We are building momentum, and we are seeing that translate into more consistent performance across our businesses with strong visibility into the drivers of our results. Elevance Health was recently named to Fortune's 100 Best Companies to Work For list for the sixth consecutive year. We view that as a reflection of the strength of our culture and our people and an important foundation as we improve execution and build greater consistency in our results. As we look ahead, we remain confident in our ability to deliver at least 12% adjusted EPS growth in 2027. Before I close, I want to recognize and thank our associates. Their commitment, resilience and sense of purpose drive our progress, supporting our members, partnering with care providers and advancing our mission every day. With that, I will turn the call over to Mark to review our first quarter financial results and updated outlook.

Mark Kaye, Chief Financial Officer

Thank you, Gail, and good morning, everyone. Elevance Health reported first quarter adjusted diluted earnings per share of $12.58, which exceeded our expectations. The strength in our operating results reflected favorable claims experience and seasonality in our Individual ACA business. In addition, we recognized approximately $1 per share from nonrecurring valuation adjustments within net investment income. We are raising our full year 2026 adjusted diluted earnings per share guidance to at least $26.75 based on our first quarter results, and we view the assumptions embedded in our outlook as appropriate and supported by current operating trends. Our confidence reflects the actions we are taking to manage cost trend and maintain expense discipline. Further, we are investing to scale AI across our enterprise, which will enable earlier identification of a member's health needs, guide them to more effective and affordable care and reduce administrative complexity, strengthening both outcomes and long-term performance. In 2027, we expect to return to at least 12% adjusted EPS growth off of our revised 2026 earnings baseline of $25.75. Turning to our first quarter results. We ended March with 45.4 million members, an increase of nearly 200,000 from year-end, driven by growth in our commercial fee-based membership and higher enrollment in Individual ACA. This was partly offset by anticipated declines in Medicare Advantage, Employer Group Risk and Medicaid. Operating revenue totaled $49.5 billion, up 1.5% year-over-year as higher premium yields were largely offset by lower health plan membership compared with the prior year. Our consolidated benefit expense ratio was 86.8%. Medical costs were modestly better than we had assumed in our outlook, reflecting both favorable claims experience and the impact from actions we have taken to manage trend. These collectively contributed approximately two-thirds of our operating outperformance in the quarter. The remaining one-third reflected seasonality in our Individual ACA business associated with higher membership in our bronze plans, which have benefit designs that typically defer a greater portion of planned costs into the second half of the year. Our adjusted operating expense ratio was 10.5%, an improvement of 20 basis points year-over-year. While we continue to manage costs thoughtfully, the focused investments we're making in artificial intelligence and Carelon's clinical capabilities will improve how we operate, strengthen our earnings power and better position the enterprise for long-term growth. Before discussing our performance in greater detail, I want to briefly highlight two items recorded in the quarter that were excluded from adjusted earnings. First, we have initiated steps to submit risk adjustment data related to historical periods to CMS and are following the process established by the agency to bring this matter to resolution. We recorded an accrual of $935 million, representing our current best estimate of the identified potential exposure based on the information available today. While the final amount will be determined through the resolution process, we believe our accrual appropriately reflects this matter. Second, we recorded a $129 million charge related to business optimization. This reflects ongoing actions to simplify organizational structures and support accelerated decision-making. Turning now to our businesses. Medicaid performance was slightly favorable to our expectations, benefiting from progress on the initiatives we have implemented to manage costs. We remain confident in our full year operating margin outlook of approximately negative 1.75% as our guidance maintains a prudent stance towards rate adequacy and trend development over the remainder of the year. In Medicare, results were stronger than we anticipated, reflecting the impact of the portfolio actions we took for 2026. Those actions, including product repositioning and selective market exits, support improved performance, and we remain on track to achieve an operating margin of at least 2% this year. Commercial Group developed as planned, consistent with the pricing discipline we outlined last quarter. As employers focus on lowering health care costs, we are seeing stronger demand for our integrated whole health clinical programs and patient advocacy solutions. Individual ACA membership grew sequentially in the first quarter with a meaningful portion of the growth driven by our 2025 expansion states and more consumers selecting plan options at the bronze metal level. Our current view of membership effectuation indicates that we are on track to end the second quarter with approximately 1.2 million members ahead of our initial outlook. However, given the unique market dynamics this year and a significant shift in product mix, it is still early to revise our full year outlook to at least 900,000 members. Carelon's first quarter operating gain declined modestly from the prior year, reflecting lower health plan membership and continued investment in the expansion of our risk-based capabilities, partially offset by improvement in specialty pharmacy and CareBridge. These dynamics are consistent with how we are evolving the business, and we remain focused on advancing performance over time. Carelon is an important contributor to our enterprise performance and a key driver of our long-term growth strategy. Now moving to the balance sheet and operating cash flow. Days in claims payable were 46.6 days, an increase of 5.3 days sequentially. Operating cash flow was $4.3 billion in the quarter, and we continue to expect full year operating cash flow of at least $5.5 billion, inclusive of potential cash payments related to the CMS matter. In the quarter, we repurchased 3.7 million shares for $1.1 billion at an average price of just over $300 per share. Our capital deployment priorities reflect confidence in the durability of our business and its long-term earnings power, and we remain on track for at least $2.3 billion of share repurchases in 2026. We are pleased with the strong start to the year and are confident in our full year outlook. Beyond the update to our 2026 earnings per share guidance, the principal operating elements of the framework we provided last quarter remain appropriate. With respect to seasonality, our expectations for the second quarter are largely unchanged, and we anticipate our second quarter earnings per share to be approximately 23% of our revised full year guidance. With that, operator, please open the line for questions.

Operator, Operator

For our first question, we'll go to the line of A.J. Rice from UBS.

A.J. Rice, Analyst

Maybe just we're well into the PBM selling season for 2027. And I guess we're gearing up for the commercial employer market selling season. Are you hearing anything different in terms of the amount of activity that you're seeing out there and the types of priorities that our employers are putting on engaging, anything they're emphasizing given AI, given a little uncertainty in the economy that you would call out that's different this year as we begin to move into the selling season?

Gail Boudreaux, President and Chief Executive Officer

Thanks for the question, A.J. Let me start with the commercial selling season, and then I'll ask Mark to comment on the PBM. In terms of the national account season, where we see early interest, we're off to a really strong start. We've got some early wins. What we're hearing from our national account employers is they're very focused on affordability. AI is important in terms of the consumer experience. As you know, we have two core goals: reduce the cost of health care for them and improve the experience, and we've been investing heavily to ensure those capabilities scale through. From an employer perspective, we hosted our national account group, and we had most of our clients in and they shared a lot of satisfaction. We had a very strong 2026 selling year and for 2027 we have a very strong pipeline, almost a record level. We're pretty enthusiastic about how our assets are resonating. The other thing we're starting to see is continued consolidation from clients. We've had a record of taking clients who have multiple carriers and consolidating some single carrier under us. That theme is continuing. So we're very optimistic. Overall, the season is very focused on affordability given what's going on in the economy, but also very focused on experience and wanting to ensure simplicity so there's real value pulling through for the commercial group. But let me ask Mark to comment on the PBM side as well.

Mark Kaye, Chief Financial Officer

Yes. Thanks, A.J. Carelon Rx delivered a strong ASO selling season for 2026. We had several national account wins and improved win rates across both the middle market and large group. That performance reflects growing demand for a more integrated medical-pharmacy model and for some of the differentiated value Carelon Rx brings to employers and our health plan partners. Sales momentum remains strong. Total sales to date are running ahead of plan including two marquee national wins, highlighting our ability to compete upmarket successfully for large sophisticated clients. We've also seen good renewal activity, especially as we enter this active phase of client strategy discussions. On the commercial side, good penetration across that book and strong cross-selling of pharmacy into our existing fee-based relationships remains an important lever for us. This opportunity is producing measurable results. For clients with aligned medical-pharmacy benefits we have seen savings upwards of $100 per member per month as well as significantly fewer ER visits and a reduction in some high-cost specialty drug administration. In short, as we look forward to 2027, our confidence is grounded in that pipeline momentum and the demonstrated value we bring.

Gail Boudreaux, President and Chief Executive Officer

Yes. Thanks, Mark, and thanks, A.J. We feel really well positioned for national accounts as well as for employer groups.

Operator, Operator

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

Stephen Baxter, Analyst

I was hoping you could expand a little bit on the cost trend comments. Obviously, it seems like you're seeing some level of moderation in Medicare and are confident enough at this stage to identify that. And then on Medicaid, on the other hand, it seems to be much more consistent with what you've been talking about recently. Maybe help us try to understand the differentiation that you're seeing there and what's driving that at this stage.

Gail Boudreaux, President and Chief Executive Officer

Thanks for the question, Stephen. At a high level, cost trend is tracking in line with our expectations, and that's consistent with the stronger performance we delivered in the quarter. It's not one driver or one single item. We saw solid execution across our enterprise, and that's what supports our full year adjusted EPS outlook of $26.75 and gives us confidence into the trajectory for 2027. From a cost standpoint, actions we've taken are beginning to show through: earlier use of data to find out where the outliers are, utilization management, stronger payment integrity, and better site-of-care optimization, where we've been very focused. Overall, businesses are performing in line and in some cases ahead of assumptions. We've embedded prudent assumptions in our outlook, and we will stay disciplined in how we view the balance of the year. We are not relying on a different trend environment to support the guide and will continue to scale our actions.

Operator, Operator

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

Justin Lake, Analyst

Your guidance assumed a conservative view of Medicaid membership declines, I think, in the high single-digit range for the year. I noticed for the quarter, Medicaid membership looks like it was down about 1.5% excluding the growth in Indiana. So I'm curious what you're seeing here in terms of membership mix. Specifically, are you seeing membership declines heavier among lower-utilizing members, potentially pressuring the risk pool? And can you remind us what you've built in for acuity pressure within your Medicaid margin guidance?

Mark Kaye, Chief Financial Officer

Thanks very much, Justin. We remain comfortable with our Medicaid membership guidance range for 2026, which reflects a high single-digit percentage decline driven by ongoing eligibility reverifications and disenrollment activity. At this point, we expect to finish the year toward the higher end of that range, reflecting prudence embedded in our original outlook and the way state reverification activity has unfolded so far. Timing has been modestly more favorable than we originally assumed. Our full year guidance assumes greater membership pressure from reverifications over the balance of the year versus what we saw in the first quarter. That reflects the range of potential state actions, uncertainty around timing of six-month eligibility periods and overall enrollment-related pressures as the year progresses.

Gail Boudreaux, President and Chief Executive Officer

This is aligning similar to what we put in our guidance. We continue to believe this is the trough year and that supports our view for 2027 given what we're seeing in the business.

Operator, Operator

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

Andrew Mok, Analyst

I wanted to follow up on the employer side and the affordability discussion. Can you help us understand what you're seeing in terms of consumer behavior in response to reset deductibles? And relatedly, have you observed any impact from higher gas prices or broader macro pressures on health care utilization?

Gail Boudreaux, President and Chief Executive Officer

I'll ask Morgan to share his perspective.

Morgan Kendrick, President, Commercial Health Benefits

Yes, Andrew, thanks for the question. The market is aligned with our strategy of reducing the cost of health care and improving the consumer experience, making it simpler. The system is overly complex and burdensome for consumers to seek care and go through treatments. That's what we're working to solve, and it's why we had such a strong season upmarket and why that approach permeates into our down-market business. In local geographies and national, the focus is around affordability and simplicity. We do see a shift in funding: the upper end is largely self-funded, fee-based business, while the down market is about 50-50 between risk-based and fee-based. People want to know we are focused on the right things: leveraging our unit cost position and medically managing in a way that drives trends down consistently.

Gail Boudreaux, President and Chief Executive Officer

Maybe a little bit on the ACA, Mark, just in terms of what we're seeing in consumer behavior there.

Mark Kaye, Chief Financial Officer

Broadly, consumer shopping behavior in the ACA market has been in line with our expectations. The biggest difference versus our initial view is that the shift toward bronze plans has been more pronounced and is a positive for us in certain markets. That dynamic makes sense because subsidies are tied to the benchmark silver plan. As benchmark premiums moved higher in 2026, those bronze options became more affordable on a net-of-subsidy basis for consumers. We feel pretty good about our positioning in ACA.

Gail Boudreaux, President and Chief Executive Officer

Next question, please.

Operator, Operator

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

Lisa Gill, Analyst

I want to ask a question around Carelon and Carelon Rx. When I look at the margin in the quarter, it came in below our expectations. You reiterated the guidance for the year. Can you talk about the progression of getting that margin back when we think about Carelon specifically and then within that Carelon Rx? And then secondly, any comments around recent legislation, whether at the federal level and any impact to your business on the PBM side or the potential of what's been proposed, for example, in the state of Tennessee, any impact on the PBM business?

Mark Kaye, Chief Financial Officer

Lisa, thanks very much. Let me start with Rx. Performance in the quarter was in line with our expectations. Revenue growth was driven by strong revenue per script and continued momentum in the external business, particularly in the ASO space, partially offset by lower script volume from affiliated health plan membership. On margin, the first quarter performance was in line with our expectations and fully consistent with our full year guidance for that mid-5% margin range. The quarter reflected normal seasonality in the PBM business, along with expected mix and the current earnings cadence across the platform. We saw some improvements in specialty and home dispensing, which helped performance. Regarding regulation, the direction is toward greater transparency, stronger reporting and closer alignment between PBMs and their clients. For Carelon Rx, that direction of travel is consistent with the model we are building. We already offer clients flexibility, including rebate pass-throughs and transparent fee-based arrangements. Our strategy is not dependent upon any single economic mechanism; it's built around integrated medical and pharmacy management with a focus on total cost of care.

Gail Boudreaux, President and Chief Executive Officer

Thank you, Mark. Next question, please.

Operator, Operator

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

Lance Wilkes, Analyst

Got a question on employer and in particular, the progress you're making on the second blue bid opportunity out there. Maybe if you could just remind us of the 2026 experience you had in sales there. Then talk a little about the value proposition you're selling, the target clients who are open to this and what pipeline looks like for 2027. And as part of that, any detail on the type of Carelon services those clients would be picking up more likely?

Gail Boudreaux, President and Chief Executive Officer

Thanks, Lance. I'll have Morgan address your questions.

Morgan Kendrick, President, Commercial Health Benefits

Lance, last year was the first year we did the second blue bid and it was very successful for the business. We had additional opportunities that came through. We're still seeing that again in year two, though not quite as high. We have roughly 2 million members in queue; a couple of those are second blue bid, but the overwhelming majority is just business in the market coming from other places. The assets speak for themselves; renewal numbers in our national business are nearly 100%, around 99.3%. These organizations don't move often; they like what they're getting and they keep it. Regarding Carelon, clients are looking for solutions around specific conditions—MSK, diabetes, and similar areas—to work directly in their population where the need is skewed and we can solve for it. As Mark indicated, pharmacy integration was one of the largest wins last year in the upper end of the market. We expect continued participation, though slightly dampened this year versus last.

Gail Boudreaux, President and Chief Executive Officer

Thank you, Morgan. Next question, please.

Operator, Operator

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

Ann Hynes, Analyst

I know you said Medicaid margins were tracking better than your expectations and what's embedded in guidance. Can you tell us what Q1 results were? And can you also remind us what your rate increases are for 2026 as in guidance? Have there been any positive updates since the last report?

Gail Boudreaux, President and Chief Executive Officer

Mark, I'll ask you to start and then Felicia to provide additional comments.

Mark Kaye, Chief Financial Officer

Ann, from a trend perspective, first quarter was slightly ahead of our expectations reflecting favorable claims development. Underlying cost trend remains elevated and first quarter trend is consistent with our full year outlook. We continue to contemplate Medicaid trend at the high end of the mid-single-digit guidance range we provided. On margins, on a sequential basis, we saw the expected deterioration in the first quarter, coming in as anticipated. For the full year, we're comfortable with our guide of negative 1.75% operating margin.

Felicia Norwood, Chief Health Benefits Officer

Ann, our Medicaid rates through April are right in line with our expectations. Rates are coming in close to the mid-single-digit range. That remains slightly below the trend we continue to see in the business, so we will continue to work constructively with our state partners around closing that rate-to-trend gap. Those conversations remain constructive. We provide regular information to states on our performance, and we expect continued progress as we work on July rates, though it is still early to view July fully. The progress we're making is expected to continue throughout the rest of the year. Through the first quarter, rates were certainly right in line with expectations, and we have already started discussions with states regarding July.

Gail Boudreaux, President and Chief Executive Officer

Next question, please.

Operator, Operator

Next, we'll go to the line of Scott Fidel from Goldman Sachs.

Scott Fidel, Analyst

I was hoping you could expand on the risk-based management programs you've been deploying in Carelon services. Maybe talk about the overall scope of how those programs have been expanding and the actions within the operating model that you have to protect against upside risk on medical cost trend? Also, could you comment on the investments you called out in the quarter related to that line of business?

Mark Kaye, Chief Financial Officer

Scott, we're taking a disciplined approach to managing risk in Carelon services. We're intentional about where we take risk, how we price for it and how we balance exposure across our Medicare, Medicaid and commercial businesses with a mix of subcapitated full risk and fee-based offerings. An advantage is using our affiliated health plan membership as a proving ground to launch and scale capabilities quickly. For example, we started our risk-based oncology solution in commercial, expanded into Medicare and plan to move it into Medicaid in the latter half of this year. We followed a similar path for post-acute and more recently in behavioral health. As we grow the risk-based side, the segment will reflect normal mix and timing dynamics. Low affiliated health plan membership remains a headwind across several offerings this year, and some newer risk-based programs will have a different earnings cadence as they progress. A couple of quick examples: the risk-based oncology program started in 2024 and expanded in 2025; post-acute started in Medicare and moved into commercial; and behavioral health has launched with serious mental illness in the Medicaid population.

Gail Boudreaux, President and Chief Executive Officer

Next question, please.

Operator, Operator

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

Ryan Langston, Analyst

I appreciate you sizing the settlement potential with CMS. Can you give us a sense of how those conversations are progressing? And how did you arrive at that $935 million figure?

Gail Boudreaux, President and Chief Executive Officer

Let me provide a comprehensive view. The $935 million accrual recorded in the first quarter reflects our current best estimate of probable exposure associated with this historical matter, based on information we have today and our engagement with CMS. This relates to historical payment disputes involving interpretation of risk adjustment policy during the period in question. Importantly, it's not about how we operate the business today and doesn't change our confidence in the integrity of our current risk adjustment practices, compliance or governance. Since receiving the notice from CMS in February, we've moved quickly to engage constructively with the agency. Those discussions have given us better clarity on process and the path to resolution. We are following the process CMS outlined. Under the current timeline, we have through July 31 to meet the compliance requirements. We appreciate that extension because of the complexity of the work required. Based on the steps CMS has prescribed and the current timeline, we believe that if we complete those steps the sanctions will not go into effect. We are working constructively with the agency and feel we are moving toward resolution.

Operator, Operator

Next, we'll go to the line of Elizabeth Anderson from Evercore ISI.

Elizabeth Anderson, Analyst

Appreciate the comments about two-thirds of the outperformance being favorable claims and better management. Could you help parse the breakdown of that? I know Mark commented about the flu and other first-quarter utilization items. Anything else on how you're viewing weather or flu items in the first quarter? And in terms of better management of claims, should we think about that ramping up or being relatively ratable across the rest of 2026?

Mark Kaye, Chief Financial Officer

Elizabeth, let me frame the quarter. EPS came in ahead of our initial outlook and included about $0.45 of core outperformance. About two-thirds of that, roughly $0.30, reflected underlying business favorability, and the remaining $0.15 was driven by seasonality-related timing dynamics. The underlying favorability was concentrated primarily in our health benefits business and reflected better claims experience than we had assumed, including a less severe flu-like season that accounted for about $0.10 of the benefit. The remaining outperformance was timing related from our ACA business driven by the higher mix of bronze plans, which we expect will defer a portion of planned costs into the back half of the year. We increased full year EPS guidance by $1.25 relative to our prior outlook. Of that increase, $0.25 reflects the portion of underlying nonseasonal business favorability we saw in the quarter, and the remaining $1 was a nonrecurring item. That nonrecurring item should be excluded from the 2026 earnings baseline when modeling growth to 2027. We are returning to at least 12% EPS growth off a 2026 baseline of at least $25.75.

Gail Boudreaux, President and Chief Executive Officer

Next question, please.

Operator, Operator

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

Kevin Fischbeck, Analyst

Can we go back to the exchange commentary? We've been trained to look at better-than-expected enrollment sometimes as a red flag. Can you give any color about whether the high enrollment has come with any change in the underlying risk pool that you're seeing? Last year there was a change in the risk pool in part because a group of people losing Medicaid coverage came onto the exchanges. Are you seeing any signs that that's a potential pressure this year?

Mark Kaye, Chief Financial Officer

We took a fairly prudent view when pricing 2026, assuming the impact from the expiration of enhanced premium subsidies would occur in the first year but that risk pool stabilization would take time. It's still early and more time is needed for retention patterns and claims to mature before having a fully developed view of the morbidity profile. One early indicator: prior claims experience for renewing members in paid status has been running moderately higher than for cancel or nonpayment cohorts, supporting the view that relaxation of subsidies has increased morbidity of the remaining pool. Importantly, that dynamic is tracking consistent with or even better than our pricing for 2026. We feel good about our membership mix and are encouraged by the shift toward bronze both in our book and across the market.

Gail Boudreaux, President and Chief Executive Officer

Next question, please.

Operator, Operator

Next, we'll go to the line of David Windley from Jefferies.

David Windley, Analyst

I wanted to come back to Medicaid. Gail, you reiterated that you think 2026 is the trough. I wanted to understand the assumptions embedded in that for 2027 in terms of expectations for member attrition from work requirement implementation and similar policy changes. Also, how are you thinking about staying or leaving state by state in situations where rate discussions aren't moving in the direction you'd like?

Gail Boudreaux, President and Chief Executive Officer

Let me take the second part of the question first. As Felicia shared, we're having constructive discussions with states. While rates are still lagging, we've seen positive movement with states trying to be constructive. It's not only about rates but also actions we can take on benefits and network changes. Where we don't see a sustainable path to profitability in a state, we will exit, but we don't see that stage now. We need sustainable paths and to ensure capital invested can be returned. I'll ask Mark to comment on membership evolution for this year and next.

Mark Kaye, Chief Financial Officer

Modestly better Medicaid membership at year-end 2026 would not change our view that 2026 is the trough year for Medicaid margins. If membership comes in better than expected, the most likely explanation is timing—some eligibility-driven attrition occurring later than we had assumed—which could shift some membership and acuity pressure into 2027. We would not expect incremental pressure to be as broad as during the post-public health emergency period because it is much more targeted and concentrated in the expansion population. Importantly, this does not change our belief in the setup we see for 2027. We expect 2027 to benefit from better rate alignment as states incorporate recent experience into their rate-setting cycles. Work requirements and community engagement requirements may create additional pressure over time, but we expect that impact to be phased and more manageable than prior redetermination cycles.

Gail Boudreaux, President and Chief Executive Officer

Thank you, Mark. Next question, please.

Operator, Operator

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

Erin Wilson Wright, Analyst

AI and automation across managed care have been big question areas for investors. Can you talk about proof points or progress on that front, quantify any efficiency gains or your long-term goals? How are you tracking associated incremental investments and how do you see that playing out into 2027 and 2028?

Gail Boudreaux, President and Chief Executive Officer

Great question, Erin. It's important to step back: our technology and AI strategy supports our core strategy—make health care more affordable and simpler and more personalized for the people we serve. We're investing more than $1 billion in digital and AI-enabled capabilities to support that strategy. We are embedding AI in practical ways that scale and support core business outcomes. Examples: our AI-enabled virtual assistant has 22 million commercial members using it regularly, helping people get answers quickly and improving consumer effort scores. Our personalized matching tool, Sydney, uses over 500 data points to match people to the right care providers; more than 20% of our members have already connected and are finding high-performing providers, which helps drive better medical costs. On clinical and care operations, AI improves speed, accuracy and decision-making and strengthens payment integrity, getting information earlier to identify outliers and act faster on network and clinical interventions. For care providers, we are reducing administrative burden. HealthOS supports data sharing, reduces paperwork and accelerates approvals; in prior authorization it can reduce denials by more than 70% and eliminate much back-and-forth. We're also enabling our associates: more than 60,000 have access to AI tools to improve productivity. We have guardrails in place and view AI as a productivity tool. These investments are practical, not just pilots, and are embedded in capabilities you will see reflected in operational measures and, over time, financial performance.

Operator, Operator

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

Benjamin Hendrix, Analyst

I wanted to get more color on the site-of-care optimization actions you mentioned that are helping control cost trend. We heard a peer mention notable reductions in hospital admissions and skilled nursing transfers through heightened clinical review. Can you share anecdotes within Carelon risk-based programs or the broader benefits business where you're seeing gains from those site-of-care efforts?

Mark Kaye, Chief Financial Officer

CareBridge is our home-based care platform focused on Medicaid and dual-eligible members with complex needs. Strategically, it extends Carelon's whole health model into the home where better coordination can improve outcomes, lower total cost of care and support stronger health plan performance. We're pleased with how CareBridge is integrating into the broader Carelon ecosystem. First quarter results are in line with expectations but we are seeing signs of improvement as we scale the platform and drive operational efficiencies. We are expanding CareBridge to deepen reach and value and have launched additional Medicaid home and community-based support programs in several states, deepening market penetration. As those capabilities are embedded, we are seeing early indications of improved cost of care performance. Site-of-care optimization through CareBridge is about keeping members aligned to the right level of care, reducing unnecessary facility-based utilization and using the home as a more effective and lower-cost setting for managing complex and chronic needs.

Gail Boudreaux, President and Chief Executive Officer

I will ask Aimee Dailey, who leads our government business, to comment on how we're deploying CareBridge inside the health benefits business. Aimee?

Aimee Dailey, President, Government Health Benefits

Thank you, Gail. One of the greatest strengths of CareBridge is its ability to engage members where they're comfortable. That engagement rate allows better reach and access for members to their health care and has created significant ER avoidance and improved primary care visits. That enables us to close quality gaps in care and help members get better long-term outcomes. We're very pleased with early adoption of the CareBridge model across our duals business where we see a high level of need.

Gail Boudreaux, President and Chief Executive Officer

Next question, please.

Operator, Operator

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

Sarah James, Analyst

Any takeaways on where you sit versus the industry from the new Wakely data? I think they provided context around average premiums or metal tiers. On the bronze shift you mentioned, can you quantify how much your mix moved? Give an idea of the delta between peak and trough MLR between bronze and silver. Is that a couple hundred basis points or larger?

Mark Kaye, Chief Financial Officer

The early Wakely report has been a helpful input because it provides visibility into market size, metal mix and enrollment patterns. The report supports our view of a greater shift towards bronze and a greater share of new sales, which has implications for relative risk in the market. I would caution it's still early; the report does not fully capture retro cancellations, nonpayment behavior or maturing cohorts. Visibility will continue to improve as we get more effectuation data and cohort-based information in coming months. We feel comfortable with our pricing and positioning for sustainability in the ACA market this year. We are seeing a much more balanced bronze-silver mix this year based on new sales.

Gail Boudreaux, President and Chief Executive Officer

Next question, please.

Operator, Operator

Next, we'll go to the line of Jason Cassorla from Guggenheim.

Jason Cassorla, Analyst

On the return to at least 12% EPS growth in 2027, you've got margin expansion opportunity across end markets and early benefits of AI and investment spend. Could you help frame how to think about the components of that 2027 growth, including how much is predicated on pricing and trend you can control? If Medicaid margins remain pressured, how do you feel about the levers and growth opportunities across other businesses offsetting to drive at least 12% growth?

Gail Boudreaux, President and Chief Executive Officer

Thanks for the question. First, start with 2026: this upgrade to our guide reflects execution and is grounded in prudent expectations. Specific to 2027, we're confident in at least 12% adjusted EPS growth off the revised baseline of $25.75. Over the past couple of years we've made targeted investments in portfolio, pricing and operating discipline designed to protect earnings and position us for durable growth. We're leveraging our diversified platform. Three points: first, key earnings levers are already in motion—pricing, care management and portfolio positioning from actions in 2025 and 2026. Second, we are making meaningful investments in 2026 and as those mature we expect a step-up in returns in 2027. Third, the path is not predicated on any single assumption; our portfolio has multiple independent levers and disciplined execution across health benefits and Carelon. Those factors give us confidence in achieving earnings growth consistent with our long-term algorithm.

Operator, Operator

And for our final question, we'll go to the line of George Hill from Deutsche Bank.

George Hill, Analyst

This one is probably for Mark. We saw a pretty big step-up in days in claims payable, both sequentially and year-over-year. Can you unpack what drove that? Was it membership mix, exiting Part D, legacy claims? And how should we think about how that number trends through the balance of the year?

Mark Kaye, Chief Financial Officer

George, days in claims payable ended the quarter at 46.6 days, up 5.3 days from year-end, driven mainly by normal first-quarter seasonality and higher medical claims inventory across the business. Commercial was affected in part by individual mix dynamics we've discussed. Medicaid and Medicare reflected a typical earlier slowdown in the claims payment cycle. The main takeaway is the DCP result was largely a seasonal and mix-related movement. It does not reflect any change in our underlying reserve approach. On prior year development, that was approximately $250 million in the first quarter. Typically, prior year development is reestablished as margins and reserves through the normal process and so does not have a material P&L impact.

Gail Boudreaux, President and Chief Executive Officer

Well, thank you. Thank you for the questions and thank you to everyone on the line. As we move through 2026, our focus remains on operational execution, strengthening our diversified platform and building momentum across the enterprise. We're encouraged by our strong start to the year and the progress we're seeing. Our strategy to improve affordability, simplify the experience for all of our consumers and care providers and deliver better outcomes for the people we serve is what's driving durable financial performance over the long term. Thank you for your continued interest in Elevance Health, and have a great rest of the week.

Operator, Operator

A recording of this conference will be available for replay after 11:00 a.m. today through May 22, 2026. You may access the replay system at any time by dialing (800) 391-9853 and international participants can dial (203) 369-3269. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.