Elevance Health Inc. (NYSE:ELV) Q2 2023 Earnings Call Transcript July 19, 2023
Elevance Health Inc. beats earnings expectations. Reported EPS is $9.04, expectations were $8.8.
Operator: 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. [Operator Instructions] 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.
Steve Tanal: Good morning, and welcome to Elevance Health’s second quarter 2023 earnings call. This is Steve Tanal, Vice President of Investor Relations and with us this morning on the earnings call are, Gail Boudreaux, President and CEO; John Gallina, our CFO; Peter Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial and Specialty Health Benefits division; and Felicia Norwood, President of our Government Health Benefits division. Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. John will then discuss our financial results and outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today’s press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.
Gail Boudreaux: Thanks, Steve, and good morning, everyone. Today, we are pleased to share that Elevance Health delivered strong second quarter results, driven by solid execution and continued progress towards our strategy of becoming a lifetime trusted health partner, focused on the whole health needs of the consumers we are privileged to serve. Second quarter GAAP earnings per share was $7.79 and adjusted earnings per share was $9.04, reflecting double-digit growth year-over-year as a result of the strong performance in the first half of the year and momentum across Elevance Health. We are increasing our adjusted earnings per share outlook for the year to be greater than $32.85. The balance and resilience of our diverse businesses provides confidence in our near-term outlook, while the earnings power of our Health Benefits and Carelon businesses position us to deliver on our long-term growth commitments.
With respect to the second quarter, our Health Benefits business delivered particularly strong results as we continued to optimize our products, pricing and operations. We are successfully executing against the planned margin recovery of our commercial risk and Medicare Advantage businesses back toward pre-pandemic levels, and we are pleased with the performance of our Medicaid business. With Medicaid eligibility redeterminations now underway, our teams are working tirelessly to promote continuity of coverage for consumers through an omni-channel approach, working closely with our state partners. Our Medicaid and commercial colleagues are collaborating to educate members and communities on the process through in-person and online events, ensuring members know how to renew their Medicaid coverage when eligible or enroll in other forms of coverage, including our own individual ACA plans.
To date, we have contacted more than 1.5 million of our Medicaid members. Meanwhile, our web-based digital decision support tool is seeing healthy utilization. The tool assesses eligibility for a wide variety of federal and state programs beyond health insurance to support consumers’ whole health journey, including the federal supplemental nutrition assistance program, state-based programs that assist with food and security, housing and childcare programs, and more, with links that can route consumers to websites where they can enroll in these programs. More than half of the people using our support tool who qualify for commercial or Medicare coverage are clicking through embedded links to shop for plans and more than 60% of consumers eligible for Medicaid are clicking through to their state site for recertification.
This body of work is especially important since many of the people who have lost access to Medicaid so far are losing it for administrative reasons. We expect many of these consumer will re-enroll in Medicaid over time. Transitions of coverage are not typically immediate. But emerging data points suggest consumers losing Medicaid are starting to transition onto ACA exchange plans. It’s still early in the process and our expectations for coverage transitions remain unchanged. Our deep local roots and diversified product portfolio positions us uniquely well to meet consumers’ needs regardless of age or socioeconomic status. Carelon continued to advance its strategy of integrating physical, behavioral, social, and pharmacy services to deliver whole health affordably, with ongoing investments and capabilities focused on serving people across their entire healthcare journey, connecting them to the care, support, and resources they need.
Carelon Services delivered solid organic growth led by the expansion of post-acute care management solutions with our Medicare health plans. While Carelon Behavioral Health extended its leadership position through multiple external business wins with new and existing customers, new business awards and successful execution in these fast growing high-cost areas of trend underscore the value Carelon provides to health plans and the expanding earnings power and attractive growth profile of the Carelon Services business. CarelonRx also continued to grow nicely while investing in key value drivers. Specifically, specialty pharmacy and advanced home delivery revenue grew nearly 20% year-over-year and we posted solid operating earnings while absorbing investments in support of our long-term strategy.
The integration of the BioPlus Specialty Pharmacy is now tracking ahead of schedule and we expect to begin migrating scripts early next year. Additionally, we remain on track to launch advanced home delivery by the end of 2023. Together, these capabilities will create additional shareholder value while allowing us to deliver even better consumer experiences in specialty and maintenance pharmacy. Expanding and more deeply integrating value-based care across the care continuum is foundational to our enterprise strategy. We are making significant progress in many key areas, including maternal health, where we have continued to expand our obstetrics practice consultants and quality incentive programs to additional markets given outstanding early results.
These programs have helped improve timeliness to and adequacy of prenatal care and increased postpartum visit compliance, contributing to a reduction in pre-term births of 12% and low-birth weight deliveries of 20% in participating Medicaid populations. These programs have driven cost savings per delivery and first-year mom and baby costs of 5% to 10% and we are now offering them in 24 Medicaid and 11 commercial markets across the country. We’re also working with care provider partners to enable acute care in the home, a patient centered care alternative to traditional care in the hospital that improves cost, quality and patient experiences. For select patients, acute care at home is safe, improves patient satisfaction and provides high value care, resulting in approximately a 20% reduction in cost, a 25% decrease in readmissions and a 50% reduction in time spent in bed.
We have partnerships with a number of major health systems in our markets with strong results and have significant interest from other health systems to expand this work. Connectivity with care provider partners is crucial to supporting our value-based care strategy and to enabling personalized hybrid and virtual care. We are continuing to expand bi-directional data exchanges between our systems and care providers EMRs. Across 24 markets, we are now connected with over 1,700 hospitals. In addition to enabling physicians practice value-based care more effectively, these arrangements have simplified common business practices, resulting in more than 60% fewer requests for clinical information and more than 80% less provider appeals. This has not only enhanced operating efficiency for our clinicians and care provider partners, it has also accelerated care approval processes for consumers.
Automation remains an area of focus and opportunity across Elevance Health and deep data sets like ours are foundational for generative artificial intelligence. Our data is centralized and cleansed and we are in the process of scaling digital solutions for greater impact and testing the application of new technologies. We’re harnessing our adaptive artificial intelligent solution to promote identification and access to whole health services during physical health procedures like surgery. Our approach allows us to cast a broad net to perform initial screenings for depression and other social drivers of health to ensure we are addressing our members’ whole health needs. Our digital chronic concierge care program is a cloud-based care management platform that connects the patient’s entire care management team to triage, monitor and engage with patients through convenient digital channels.
Fully digital enrollment, engagement and support, alongside key behavioral health components, provides members with highly personalized proactive, concierge-like experiences, while reducing the overall cost of care for members with chronic conditions. We’re also using large language models to assist our call center agents, improving their efficiency, accuracy and quality. We’re excited about these opportunities and the positive impacts they will have on consumers, care provider partners and the operating efficiency of Elevance Health. Guided by our enterprise strategy, we are fueled by a passion for making a positive difference in the world. Accordingly, environmental, social and governance frameworks are embedded in our enterprise strategy.
We continue to lead our sector with respect to ESG ratings from three of the most prominent corporate governance research, ratings and analytics firms. And we were pleased that USA Today recently ranked Elevance Health fifth out of 400 organizations in its inaugural America’s Climate Leaders, based on core emissions reductions year-over-year and core greenhouse gas reductions. Before I turn the call over to John, I’d like to thank our more than 100,000 associates for the works that they do every day on behalf of the members we are privileged to serve. Their dedication is what allows us to advance our strategy and deliver strong operating results in service of our bold purpose to improve the health of humanity. Collectively, our passion to improve lives and communities is unwavering.
Now, I’d like to turn the call over to John for more on our operating results. John?
John Gallina: Thank you, Gail, and good morning to everyone on the line. As Gail mentioned earlier, we reported strong second quarter results, including GAAP earnings per share of $7.79 and adjusted earnings per share of $9.04. We were pleased to deliver another quarter of double-digit growth in revenue, operating income and adjusted earnings per share, driven by the focused execution of our strategy. Our results exceeded our expectations and the balance and resilience of our diverse set of businesses provides confidence in our outlook. As a result, we have increased our adjusted earnings per share guidance to be greater than $32.85 in 2023, reflecting strong growth consistent with our long-term targeted compound annual growth rate.
We ended the second quarter with 48 million members, up 938,000 year-over-year. During the quarter, medical membership declined by 135,000 members as the majority of our Medicaid states initiated eligibility redeterminations. While we are still very early in the redetermination process, at this time, we are seeing many Medicaid members losing coverage for administrative reasons. Many of these consumers will likely re-enroll in Medicaid in the near to intermediate term. In fact, many Medicaid beneficiaries who lose coverage for administrative reasons have 30 to 90 days to re-enroll depending on the state with coverage retroactive to the termination date. Meanwhile, we are seeing encouraging early indications that Medicaid beneficiaries losing coverage are transitioning into ACA exchange plans.
But transitions of coverage are not always immediate. And our expectation is that commercial membership growth will re-accelerate in the back half of this year and into 2024. Overall, we believe our prior outlook for coverage transitions remains appropriate. We continue to expect by the end of the initial redetermination cycle that 40% to 45% of net new beneficiaries on Medicaid as a result of the suspension of redeterminations during the public health emergency will stay on Medicaid. But most importantly, we are well positioned to provide people who lose Medicaid coverage with alternative plan offerings. We believe it is essential that these individuals have access to quality healthcare coverage and we are positioned to meet their needs. With respect to our membership outlook, please note that a new entrant into one of our state Medicaid programs will result in a loss of approximately 140,000 members in that state in the third quarter.
This was known as of last year and was factored into our 2023 planning and initial membership guidance. Second quarter operating revenue of $43.4 billion increased $4.9 billion or approximately 12.7% year-over-year. Growth was driven by premium rate increases to cover overall trend in our Health Benefits businesses, along with higher premium revenue driven by membership growth in Medicaid and Medicare. Our services business, Carelon, continues to produce strong results with double digit top-line growth in CarelonRx and Carelon Services, as we continue to execute on our strategy of becoming a lifetime trusted health partner. Execution of our strategy is diversifying our revenue streams, creating greater earnings power and consistency, and enabling us to deliver strong growth regardless of the prevailing economic environment.
The consolidated benefit expense ratio for the second quarter was 86.4%, a meaningful improvement year-over-year, driven by premium rate adjustments in our commercial risk-based business to better reflect the post-pandemic medical cost structure, offset in part by a charge we took in the second quarter associated with a court ruling in a certain state holding health plans liable for certain COVID costs retroactive to the beginning of the pandemic. We strongly disagree with this ruling and it is currently on appeal, but we’ve recorded the potential charge in the meantime. With respect to our current performance, we of course are closely monitoring utilization and trend factors which remain consistent with our expectations overall and within each line of business.
In the context of our upwardly revised guidance for adjusted earnings per share, we are reiterating our initial outlook for our full year consolidated benefit expense ratio. Elevance Health’s adjusted operating expense ratio was 11% in the second quarter, down 10 basis points year-over-year. The decrease was driven by expense leverage associated with strong growth in operating revenue, partially offset by additional operating expenses in support of growth as we continue to execute our enterprise strategy. Operating gain for the enterprise grew 12% year-over-year in the second quarter, led by our Health Benefits business, which delivered double-digit top-line growth and strong margin improvement. Operating margin for our Health Benefits business expanded by 50 basis points year-over-year, consistent with our full year outlook despite absorbing the charge I mentioned earlier associated with the adverse court ruling in a certain state.
Carelon delivered a strong quarter as well, with healthy top-line growth for CarelonRx and Carelon Services. CarelonRX operating earnings include investments in support of our strategy, including scaling our recently acquired specialty pharmacy and the build-out of our advanced home delivery business, which is set to launch later this year. CarelonRx also benefited from a favorable out-of-period item in the second quarter of 2022, which had the effect of depressing its year-on-year operating earnings growth rate this quarter. Carelon Services had a strong second quarter, led by organic growth in Carelon post-acute management. Turning to our balance sheet, we ended the second quarter with a debt to capital ratio of 39.6%, in line with our expectations and consistent with our target range.
During the quarter, we repurchased 1.4 million shares of our common stock at a weighted average share price $457.34 for approximately $646 million. Year-to-date, we have repurchased 2.7 million shares for $1.3 billion, pacing ahead of our full year outlook of approximately $2 billion. We expect to remain opportunistic given recent weakness in our share price and the attractive valuation levels offered by the market. We continue to maintain a prudent posture with respect to reserves. Days and claims payable stood at 46.5 days at the end of the second quarter, an increase of 0.5 days sequentially and a decrease of 1.3 days year-over-year. As we disclosed in the second quarter of last year, the timing of certain provider pass-through payments and corresponding reserves had the effect of increasing days and claims payable by approximately 1.8 days in the prior year quarter.
Excluding that dynamic, days and claims payable would have increased by 0.5 days year-over-year and medical claims payable would have grown by 11.9%, compared with growth in premium revenue of 10.6%. As a reminder, we continue to expect days and claims payable will be in the low-40 range long term and anticipate normalization towards this range in the coming years as cycle time shortened in COVID-related uncertainty receipts. Operating cash flow was approximately $2 billion or 1.1 times net income in the second quarter of 2023. Year-to-date, excluding an extra payment received from CMS, our operating cash flow was $4.9 billion or 1.3 times net income. Overall, we are pleased with our second quarter and our year-to-date performance. As we look to the second half of the year, we are excited for the pending acquisition of Blue Cross Blue Shield of Louisiana, the launch of our CarelonRx Pharmacy, a differentiated digital-first home delivery model and the continued scaling of BioPlus as it prepares to serve more Elevance Health members in early 2024.
Given the strong start to the year, the diversity of our assets, and the balance and resilience of our enterprise, we have raised our full year outlook for adjusted earnings per share to greater than $32.85, reflecting growth that is consistent with our long-term target compound annual growth rate. We have consistently delivered on our financial commitments and have the conviction that we will continue to do so. We will remain focused on the execution of our strategy to become a lifetime trusted health partner by serving the whole health needs of the consumers we are privileged to serve. The better job we do serving our members, the better we will do for all of our stakeholders. With that, operator, we will now open up the line for questions.
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Q&A Session
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Operator: [Operator Instructions] For our first question, we’ll go to the line of A.J. Rice from Credit Suisse. Please go ahead.
A.J. Rice: Thanks. Hi, everybody. Appreciate the good performance on the medical loss ratio line and that you’re benefiting from your repricing in the commercial book, which you’ve been talking about for a while. You didn’t really call out anything that’s deviating from your underlying expectations relative to Medicare Advantage, commercial and Medicaid. I just wondered if you would maybe flush that out a little more. Are you seeing any trend changes or anything on the horizon? And how did you think about the MA bids in light of anything you saw there on the utilization front?
John Gallina: Thank you for the kind words, AJ, and good morning everyone. And I really do appreciate the question and the opportunity to provide clarity on these issues. We’re obviously very pleased with our results for the second quarter, which is really following delivery of strong results also in the first quarter. And related to your question and the issues on trend, and I do think part of the confusion out there is trying to understand what is happening versus what is expected or what was expected. And as we’ve noted previously, when you combine COVID and non-COVID cost, the overall cost of the healthcare system is more expensive than if COVID had never occurred, something we’ve been talking about and analyzing and stating for a while now.
So given that fact, we had already included the elevated cost structure into our pricing, into our projections and into our guidance. And quite honestly, this is true for all lines of business within the Health Benefits segment. So if you look at the first and second quarter in particular, there really isn’t anything all that surprising or all that different from our overall expectations. Cost continued to be higher when compared to a baseline as if COVID never existed. So we obviously are very well positioned. And as you know, based on this morning’s call, we raised our guidance by $0.15 to $32.85 per share. And those expectations fall solidly within our 12% to 15% compound annual long-term growth rate target. But I think just as importantly, as you heard in my prepared comments, we reaffirmed our original guidance for the full year 2023 benefit expense ratio.
So, anyway, thanks for the question, AJ. And, operator, next question please.
Operator: Next, we’ll go to the line of Lance Wilkes from Bernstein. Please go ahead.
Lance Wilkes: Yeah. Could you talk a little bit about in Carelon, the combination of where you’re getting those wins, the types of organizations you’re winning with, the self-insured employers or other Blues, and then where you are as far as the build-out of the pharmacy capabilities, the advanced home delivery and how if at all that impacts your re-contracting — upcoming re-contracting for PBM? Thanks.
Gail Boudreaux: Thanks very much, Lance, for the question. I’m going to have Pete Haytaian address it, but I think you hit a couple of key areas around Carelon on both Services and Rx where we feel that we’re advancing the strategy that we laid out at Investor Day and feel really good about the progress. So Pete, why don’t you talk about both of those areas?
