Earnings Call Transcript - ELV Q4 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Elevance Health Fourth 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. If you wish to ask a question, please press star then 1 on your telephone keypad. You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then 2. These instructions will be repeated prior to the question and answer portion of this call. As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead.

Nathan Rich, Vice President of Investor Relations

Good morning, and welcome to Elevance Health Fourth Quarter 2025 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; Peter Haytaian, President of Carillon; 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 discussion of our fourth quarter performance, our 2026 guidance, and the progress we continue to make on our strategic priorities. 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 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 CEO

Good morning, and thank you for joining us today. Affordability remains the central challenge in health care. At Elevance Health, our focus is on improving outcomes, making care easier to access and navigate, and managing costs responsibly. Our commitment to whole person health shapes how we deliver on our strategy. Strengthening care coordination, reducing unnecessary complexity, and creating a simpler experience for those we serve. Before I go through the business, there are three points I want to underscore. First, 2026 is a year of execution and repositioning. And the outlook we provided today reflects prudent achievable assumptions grounded in pricing discipline, operational rigor, and targeted investments. Second, even in a dynamic environment, we are acting decisively in the areas within our control to strengthen margins, reduce volatility, and improve the consistency of our performance. And third, as those actions take hold, we expect to return to at least 12% adjusted EPS growth in 2027 off our ending 2026 earnings baseline supported by the earnings power of our diversified platform. Consistent with that approach, we are establishing 2026 adjusted diluted earnings per share guidance of at least $25.50. As you consider the year-over-year comparison, it's important to remember that our 2025 results included approximately $3.75 per share of favorable non-recurring items. Let me walk through how we are positioning the portfolio...

Mark Kaye, CFO

Thank you, Gail, and good morning. Elevance Health reported adjusted diluted earnings per share of $3.33 for the fourth quarter and $30.29 for the full year. Relative to our guidance, fourth quarter results benefited from greater tax favorability than anticipated, increasing the full-year contribution from nonrecurring items to $3.75 per share. Solid underlying performance in the quarter enabled us to advance a portion of the investments we had planned for 2026 and to support our workforce as we enter the year. Throughout 2025, we remained focused on aligning pricing to elevated cost trends, refining our product portfolio, and investing selectively in capabilities that differentiate our model and support sustainable growth. We ended the year with 45.2 million members, a decrease of approximately 500,000 year over year, principally reflecting a decline in Medicaid membership due to continued eligibility reverification. Operating revenue for the quarter totaled $49.3 billion, an increase of 10% from the prior year, driven by premium rate adjustments and recognition of higher cost trends and acquisitions completed in the past year...

A.J. Rice, Analyst

Hi, everybody. Thanks for the question. I wonder when you think about the cost trend across the major lines of businesses, I think the industry would say, and I think you guys would say that it was elevated in 2025 across commercial, Medicaid, Medicare, and exchanges. I know, Mark's saying that you have a mid-single-digit cost trend assumption at Medicaid, I believe, for the '26 guidance. But I wondered if I could just get you to comment on are you assuming sort of a similar cost trend in '26 in your embedded guidance to what you experienced in '25? Or is there any place you're assuming it gets worse or better?

Mark Kaye, CFO

Hey, A.J. Good morning, and thank you very much for that question. Briefly, I would say the fourth quarter medical cost performance across the health benefits segment came in generally in line to slightly better than our expectations. We did see some modest variations by line of business, and so we've carried that forward into our planning for 2026. To your question, in commercial, within large group, we do expect cost patterns and margins to be largely consistent with what we saw in 2025, meaning an elevated but stable trend environment with some pockets of high utilization. In ACA, we again expect accelerating cost trend, especially as the expiration of the enhanced premium subsidies affects the risk pool. We expect to see some healthier members exit, and we do expect the remaining population to become more acute. In Medicaid, we expect cost pressure to remain pressured again in 2026 at roughly twice the historical average. And that's going to reflect elevated utilization. It's going to reflect continued misalignment between rates and member acuity. That said, I would say after two years of fairly unprecedented trend, we do expect some moderation versus 2025. So you could think about cost trend here moving into that mid-single-digit range per your question. Then finally, in Medicare, we anticipate higher reported cost trend in 2026 that's going to be largely driven by our membership mix, including a greater emphasis on the D-SNP. So overall, I'd say we're continuing to monitor trends very closely. We're comfortable with how we ended 2025, and we're very confident that our outlook for 2026 is prudent and appropriate.

Felicia Norwood, President of Government Health Benefits Business

Thank you for the question, Andrew. I'm going to have Felicia Norwood start, and then maybe Mark talk a little bit about the second part. Good morning, Andrew, and thank you for the question. You know, our enrollment during AEP and the member composition is really aligned with our focus on margin. As you know, we took very deliberate steps to reposition our business to deliver sustainable value for our members and move the business towards our margin objectives. So while our outlook for our membership is going to be in the high teens percentages, as Gail referenced, and this is below our expectations, we're really pleased at how members reacted to our emphasis on D-SNP as well as our HMO products as we go forward...

Mark Kaye, CFO

And, Andrew, on your question on the employee group risk membership, we are expecting to end 2026 down in the high single-digit percent range. And the short answer here is it's just a strong focus on margin discipline. Some of the expected decline is really driven by deliberate price decisions that we've made, maybe more specifically in a subset of accounts, including some of the lower or negative margin public sector business that we had. And we really did make a conscious decision to hold the line on pricing and not pursue business that returns below our margin threshold.

Justin Lake, Analyst

Thanks. Good morning. I wanted to ask about margin in the health benefits business for '26. So you mentioned Medicaid margins of minus 1.75%. I appreciate the help there. And you did say that margins were a little better than expected, I think, Mark, in the fourth quarter. Can you expand on the drivers of that in terms of pricing and cost as you go into 2026? And then any color on where guidance assumptions sit for margins for the exchanges in Medicare Advantage would be helpful as well. Thank you.

Mark Kaye, CFO

Justin, thanks very much for the question. I thought a good place for me maybe to start here is really to talk about how we ended the year from a margin perspective, then I'll give a little bit of color in 2026. So overall, health benefit margins very much in line with our outlook and our expectation. On Medicaid, margins were pressured in the fourth quarter, but they did track slightly better than our outlook that we gave in October. That really reflected two things. One, we had some favorable prior period development come through. We also had some modest retroactive rates. And if you exclude those two items, Medicaid margins completely in line with expectations. They still reflected that elevated utilization, they still reflected that ongoing reverification-driven risk deterioration and the misalignment of our rates and acuity. On Medicare, fourth quarter margins, inclusive of the IRA-driven Part D seasonality, were largely in line with our expectations. They reflected the prudent assumptions that were embedded in our 2025 bids and overall guidance. And then in the commercial large group, cost patterns and margins, I would say, were, again, largely consistent with our expectations. On the ACA side, a smidgen better than our prudent outlook. Cost trends were significantly above historical levels, but, again, very much in line with what we were expecting. And so as we think about 2026, the guidance that we put out this morning really incorporates that framework...

Gail Boudreaux, President and CEO

Thank you. Next question, please.

Ryan Langston, Analyst

Hi. Thanks. Maybe just big picture. If you could give us a little bit more details and speak to what gives you that confidence to confirm the long-term EPS growth target of 12% plus starting in 2027? In light of the trends that you've seen in the past two years. Is there something specific in Medicare or Medicare or the commercial markets that's just an opportunity to start growing earnings in '27? You seeing something in Carillon's side that maybe leads to a stronger acceleration of growth there? And lastly, I assume this includes your view of the 2027 MA rates post the prelim notice?

Gail Boudreaux, President and CEO

Yeah. Thank you for the question, Josh. You know, I think it helps as we frame '27. Let's start with '26. We guided to an adjusted diluted EPS of at least $25.50. And, again, as I shared, you know, we see that outlook as prudent and achievable. And it's based on actions that are already underway to reposition our business and improve margins across the enterprise. As I step back, '25 was about strengthening the foundation. We tightened pricing discipline, we improved our execution, and we advanced our affordability through Carillon. And as you just heard, Mark, the fundamentals came in where we expected them to. And I think that work matters as we think about the next few years because it gives us a very clear line of sight and a lot of confidence in the outlook that we're laying. My headline for '26, it's all about execution. The fundamentals are there. Looking to '27, we have confidence in at least 12% adjusted EPS growth coming off of our '26 ending baseline...

Operator, Operator

You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then 2. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, we ask that each participant limit themselves to a single question to allow ample time to respond to each analyst that may wish to participate in this portion of the call. For our first question, we'll go to the line of A.J. Rice from UBS. Please go ahead.

Josh Raskin, Analyst

Hi. Thanks. Maybe just big picture. If you could give us a little bit more details and speak to what gives you that confidence to confirm the long-term EPS growth target of 12% plus starting in 2027? In light of the trends that you've seen in the past two years. Is there something specific in Medicare or Medicare or the commercial markets that's just an opportunity to start growing earnings in '27? You seeing something in Carillon's side that maybe leads to a stronger acceleration of growth there? And lastly, I assume this includes your view of the 2027 MA rates post the prelim notice?

Gail Boudreaux, President and CEO

Yeah. Thank you for the question, Josh. You know, I think it helps as we frame '27. Let's start with '26. We guided to an adjusted diluted EPS of at least $25.50. And, again, as I shared, you know, we see that outlook as prudent and achievable. And it's based on actions that are already underway to reposition our business and improve margins across the enterprise. As I step back, '25 was about strengthening the foundation. We tightened pricing discipline, we improved our execution, and we advanced our affordability through Carillon. And as you just heard, Mark, the fundamentals came in where we expected them to. And I think that work matters as we think about the next few years because it gives us a very clear line of sight and a lot of confidence in the outlook that we're laying...