Elevance Health: Strategic Transformation Powers Long-Term Growth Despite Near-Term Headwinds (NYSE:ELV) - ELV Stock Research Report

## Executive Summary / Key Takeaways * Elevance Health is executing a strategic transformation, leveraging its Carelon platform and advanced technology to drive long-term value and manage a dynamic healthcare landscape, despite recent downward revisions to its 2025 earnings outlook. * The company's third-quarter 2025 results demonstrated robust operating revenue growth of 12% year-over-year to $50.087 billion, primarily fueled by premium rate increases, strategic acquisitions, and Medicare Advantage growth. * Near-term profitability is pressured by elevated medical cost trends in the Affordable Care Act (ACA) and Medicaid segments, coupled with a lag in state rate adjustments to reflect increased member acuity. Full-year 2025 adjusted EPS guidance has been revised to approximately $30, reflecting the persistence of these trends. * Elevance Health's Carelon platform, encompassing CarelonRx and Carelon Services, is a significant growth engine, with Carelon's operating revenue increasing 33% in Q3 2025. Strategic acquisitions like CareBridge and Kroger Specialty Pharmacy are enhancing its integrated care delivery and pharmacy capabilities. * The company maintains a strong financial position, supported by disciplined capital allocation, including a 14th consecutive annual dividend increase and ongoing share repurchase programs, underscoring confidence in its long-term earnings power and commitment to shareholder returns. ## A Healthcare Leader's Strategic Evolution Elevance Health, Inc., established in 2001 and formerly known Anthem, Inc., has grown into one of the largest health insurers in the United States, serving approximately 45.40 million medical members as of September 30, 2025. Operating as an independent licensee of the Blue Cross and Blue Shield Association, the company offers a broad spectrum of health plans and services under well-known brands such as Anthem Blue Cross/Blue Shield, Wellpoint, and Carelon across all 50 states, the District of Columbia, and Puerto Rico. Its overarching purpose is to improve the health of humanity by delivering whole health solutions that are simple, affordable, and personalized. The company's strategic direction is increasingly centered on its Carelon platform, which acts as an enterprise flywheel for growth. This involves a deliberate expansion of capabilities through both organic initiatives and strategic acquisitions. Recent examples include the 2023 joint venture investment in Liberty Dental, the 2024 joint venture with Clayton, Dubilier & Rice for Mosaic Health to accelerate care delivery innovation, and the late 2024 acquisitions of CareBridge for home and community-based services and Centers Plan for Healthy Living to bolster its Medicaid and dual-eligible markets. In early 2025, the acquisition of Kroger Specialty Pharmacy further integrated pharmacy services, aligning with Elevance Health's strategy to control key levers in delivering affordable whole health. These moves underscore a commitment to expanding its footprint in value-based care and specialized populations. ## Technological Edge and Innovation in Healthcare Delivery Elevance Health is distinguishing itself through significant investments in technology and innovation, which are fundamental to its strategy of simplifying care, improving outcomes, and managing costs. The company's core differentiated technology includes its HealthOS digital platform and a suite of AI-enabled tools. HealthOS integrates clinical data and insights directly into provider workflows, supporting over 88,000 care providers and more than 1,200 provider organizations. This platform facilitates real-time decision-making and seamless prior authorizations when documentation is accurate and complete. The tangible benefits of these technologies are quantifiable. Over half of electronic prior authorization requests are now processed in real-time, and fewer requirements are imposed on high-performing providers, significantly reducing administrative friction. AI-enabled tools, including intelligent clinical assist, streamline clinical workflows and accelerate routine approvals by surfacing relevant data. Furthermore, these advanced analytics are crucial for identifying fraud, waste, and abuse, allowing the company to intervene where patterns deviate from clinical and billing standards. Patient advocacy solutions, another key technological differentiator, supported over 6 million members in the first quarter of 2025, achieving a 95% satisfaction rate and saving members an estimated 1.5 million hours in 2024. Value-based arrangements, powered by these integrated solutions, have driven nearly $100 in per member per month savings across medical and pharmacy. In terms of R&D and new technological developments, Elevance Health is expanding its value-based oncology care model to Medicare Advantage in 2025, building on its successful commercial implementation. This initiative aims to reduce inpatient admissions and improve adherence to treatment protocols. Currently, more than one-third of the company's benefit expense is in downside risk arrangements, reflecting a strategic shift towards models that support improved care coordination and cost predictability. For investors, these technological advancements and strategic R&D initiatives are critical. They contribute to Elevance Health's competitive moat by enhancing efficiency, reducing operational costs, improving member and provider satisfaction, and ultimately bolstering financial performance through better margins and sustainable growth. ## Competitive Dynamics in a Shifting Landscape Elevance Health operates within a highly competitive healthcare landscape, facing direct competition from industry giants such as UnitedHealth Group (TICKER:UNH), Cigna (TICKER:CI), Humana (TICKER:HUM), and Centene (TICKER:CNC). While Elevance Health holds a prominent market position, it generally trails UnitedHealth Group in overall scale and the breadth of its integrated services. UnitedHealth Group's Optum division, with its focus on data analytics, pharmacy services, and physician services, provides a comprehensive ecosystem that often drives faster expansion and stronger financial performance. Elevance Health, however, differentiates itself through a strong emphasis on consumer-centric care journeys and community-focused strategies, particularly in localized care solutions, which can foster greater customer loyalty. Compared to Cigna, Elevance Health's focus on domestic, community-focused health solutions contrasts with Cigna's global and pharmacy-heavy approach. Elevance Health's digital and behavioral health tools offer comparable performance in user engagement, and its established provider networks can provide greater efficiency in certain domestic segments. Against Humana, Elevance Health offers a more diversified portfolio across all age groups, whereas Humana's strategy is heavily concentrated on Medicare Advantage plans. Elevance Health's strategic adaptability for multi-generational plans provides an advantage, though Humana's specialized expertise in senior health often leads to stronger market share capture in that segment. Finally, in comparison to Centene, Elevance Health provides a wider array of commercial and digital solutions, contrasting with Centene's government-focused strategy. Elevance Health's technological capabilities for digital health are a key differentiator, while Centene's strength lies in cost-effective access for lower-income segments. Elevance Health's competitive advantages, or moats, include its strong brand legacy (as an independent licensee of Blue Cross and Blue Shield), extensive provider networks, and regulatory licenses. These assets create significant barriers to entry for new competitors and contribute to stable membership retention and pricing power. However, the company is vulnerable to regulatory dependencies, particularly in government programs, and must continuously invest in technology to avoid potential gaps that could impact operational efficiency and expose it to rivals' advancements. The broader industry is witnessing major trends like digital health adoption and AI integration. While AI offers efficiency gains, the increasing demand for data centers could also lead to higher operational costs due to electricity consumption. ## Financial Performance: Resilience Amidst Pressures Elevance Health's financial performance in the third quarter of 2025 reflects both its strategic strengths and the prevailing industry headwinds. The company reported total operating revenue of $50,087 million for the three months ended September 30, 2025, an increase of 12% year-over-year. This growth was primarily driven by premium rate increases in the Health Benefits segment, contributions from recent acquisitions, and expansion in its Medicare Advantage business. For the nine months ended September 30, 2025, total operating revenue reached $148,273 million, up 13.9% from the prior year. Net income for the third quarter of 2025 rose 17.8% to $1,187 million, resulting in diluted earnings per share (EPS) of $5.32, a 22% increase from the same period in 2024. This quarterly improvement was largely attributable to decreased losses on financial instruments and lower income tax expense. However, for the nine months ended September 30, 2025, net income decreased by 8% to $5,115 million, primarily due to a reduced operating gain in the Health Benefits segment and increased net losses on financial instruments, partially offset by stronger operating gains in CarelonRx and Carelon Services.

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Profitability metrics highlight the impact of current market dynamics. The consolidated benefit expense ratio increased to 91.3% for the third quarter of 2025 and 88.9% for the nine months ended September 30, 2025. This rise was mainly due to higher medical cost trends across all lines of business, including a pronounced Part D seasonality related to the Inflation Reduction Act (IRA) in Medicare. Conversely, the operating expense ratio improved, decreasing to 10.5% for both the three and nine months ended September 30, 2025, reflecting operating leverage from revenue growth and disciplined cost management. Carelon, the company's integrated health services platform, continues to be a significant contributor to revenue growth. Carelon's operating revenue increased by 33% to $18.3 billion in the third quarter of 2025, driven by recent acquisitions in home health and pharmacy services, and the scaling of Carelon Services' risk-based solutions. CarelonRx operating revenue grew 4.62% to $6,159 million in Q3 2025, while Carelon Services operating gain for the nine months ended September 30, 2025, surged 62.76% to $1,110 million. ## Addressing Headwinds: Medicaid and ACA Challenges Elevance Health is currently grappling with significant headwinds in its Medicaid and ACA businesses, which have necessitated a revision of its full-year outlook. The Medicaid segment has experienced "unprecedented cost trends," with rates often lagging behind the actual cost trend, which has been 3x to 5x historical averages in some states. This "timing disconnect between Medicaid rates and acuity" is a direct consequence of the large-scale membership shifts following the unwinding of the Public Health Emergency (PHE). While the company is actively collaborating with state partners to align rates with the current acuity of its membership, the reliance on historical data in state rate-setting processes means that rate recovery is expected to be gradual. Similarly, the ACA market is undergoing a "broad recalibration" marked by elevated medical cost trends. This is driven by a market-wide increase in morbidity, influenced by members transitioning from Medicaid post-redetermination and lower effectuation rates, particularly among highly subsidized individuals. Elevance Health has also identified "inappropriate use of IDR" (Independent Dispute Resolution) by some providers, contributing to higher costs without necessarily improving patient care. In response, the company has proactively repriced its ACA products for 2026 to account for this rising cost intensity and the potential for further risk pool deterioration if enhanced federal subsidies expire. ## Medicare Advantage: Stability and Strategic Bidding In contrast to the challenges in Medicaid and ACA, Elevance Health's Medicare Advantage (MA) portfolio has demonstrated consistent performance and remains a source of strength. The company's disciplined approach to its 2025 bids, building on actions taken in 2024, has positioned the MA business for sustainable performance. Elevance Health prioritized benefits valued by seniors to mitigate the impact of CMS' rate cuts, focusing on high-quality, comprehensive, and coordinated care. For 2025, the company anticipates Medicare Advantage membership growth in the range of 7% to 9%, inclusive of new wins in group MA and high-single-digit expansion in individual MA. This growth is expected to be driven by products where Elevance Health holds a strong, sustainable market position. The company's 2026 rate filings for MA reflect a focus on margin normalization, supported by stable utilization and Carelon-led clinical programs. While the advanced MA rate notice for 2026 reflects progress, the company believes it is still insufficient in light of recent cost trends, indicating ongoing engagement with CMS. ## Carelon: The Enterprise Growth Engine The Carelon platform is a pivotal growth engine for Elevance Health, encompassing CarelonRx and Carelon Services. This segment is central to the company's "whole health" strategy, integrating physical, behavioral, pharmacy, and social services. Carelon's operating revenue increased by an impressive 33% to $18.3 billion in the third quarter of 2025, highlighting its accelerating contribution to the company's top line. \ CarelonRx continues to expand its customer base and diversify its value proposition. The early 2025 acquisition of Kroger Specialty Pharmacy further integrates key levers in pharmacy services, enhancing control over the delivery of affordable whole health. While profitability in CarelonRx was impacted by initiatives to accelerate growth upmarket in Q2 2025, its nine-month operating gain still grew 3.36% to $1,694 million. Carelon Services has demonstrated particularly strong momentum, delivering over 50% growth in revenue and operating gain in Q2 2025. This growth is driven by the expansion of risk-based relationships and the successful integration of CareBridge, a value-based manager of home and community-based services acquired in December 2024. Carelon Services' nine-month operating gain surged 62.76% to $1,110 million. The segment is expanding its capabilities to manage a growing proportion of healthcare spending, supporting long-term growth both internally within Elevance Health's affiliated plans and externally with other clients. ## Liquidity and Capital Allocation: A Foundation of Strength Elevance Health maintains a robust financial condition and strong liquidity, providing a solid foundation for its strategic initiatives and shareholder returns. As of September 30, 2025, consolidated cash, cash equivalents, and investments in fixed maturity and equity securities totaled $37,327 million, representing a $1,611 million increase since December 31, 2024. The parent company held $2,647 million of these liquid assets, available for general corporate use, including investments, acquisitions, stock repurchases, and dividends.

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Operating cash flow for the nine months ended September 30, 2025, was $4,206 million, a decrease from $5,102 million in the prior year. This reduction was primarily due to a $666 million payment made in September 2025 related to the Provider Settlement Agreement in the Blue Cross Blue Shield Antitrust Litigation and lower net income. Despite this, the company's debt-to-capital ratio stood at a healthy 42.10% as of September 30, 2025, well within its 5-Year Facility covenant of 60%. The 5-Year Facility itself was recently amended in September 2025, extending its maturity to 2030 and increasing available credit to $5,000 million, further enhancing financial flexibility.

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Elevance Health is committed to returning capital to shareholders. The Board of Directors approved a 5% increase in its quarterly dividend to $1.71 per share, marking the 14th consecutive annual increase. The company also has a substantial common stock repurchase program, with an $8,000 million increase authorized in October 2024 and $7,166 million remaining at September 30, 2025, which is expected to be utilized over a multi-year period. Management aims to deploy approximately 50% of free cash flow towards M&A and organic reinvestment, with the other 50% returned to shareholders through repurchases and dividends. ## Outlook and Key Risks Elevance Health has revised its full-year 2025 adjusted EPS guidance to approximately $30, a recalibration reflecting persistent elevated medical cost trends in ACA and slower-than-expected Medicaid rate alignment. This outlook is based on the assumption that these elevated trends will continue, rather than a near-term recovery. The full-year 2025 benefit expense ratio is projected to be approximately 90%, and operating cash flow is expected to be around $6 billion. Earnings seasonality for 2025 is anticipated to be slightly more weighted towards the third quarter than the fourth. Looking ahead to 2026, the company is taking decisive actions to stabilize trends, improve pricing alignment, and restore operating leverage. This includes repricing ACA products for rising cost intensity and proactively engaging with state partners to ensure Medicaid rates reflect the developing acuity environment. Despite the near-term pressures, Elevance Health remains confident in its long-term objective of achieving at least 12% adjusted EPS growth annually on average over time, driven by its diversified business model and the expanding capabilities of Carelon. Key risks to this outlook include the ongoing elevated medical cost trends, particularly in Medicaid and ACA, and the persistent lag in Medicaid rate adjustments. Policy uncertainties surrounding the potential expiration of enhanced federal subsidies for ACA plans and the implementation of new Medicaid work requirements could further impact enrollment and risk pools. Regulatory scrutiny, including increased Risk Adjustment Data Validation (RADV) audits for Medicare Advantage plans, also poses a financial risk. Furthermore, litigation, such as the ongoing Medicare Risk Adjustment lawsuit and follow-on cases from the Blue Cross Blue Shield Antitrust Litigation, could result in unforeseen liabilities. The adoption of AI-enabled coding tools by some providers, if used to inflate costs, represents an emerging challenge that the company is actively addressing through its payment integrity processes. ## Conclusion Elevance Health is navigating a complex and dynamic healthcare environment with a clear strategic vision centered on whole health solutions and technological innovation. While the company has faced near-term headwinds, particularly from elevated medical cost trends in its Medicaid and ACA segments, its proactive measures in pricing, cost management, and strategic investments are designed to strengthen its operational foundation and restore long-term margin stability. The robust growth of the Carelon platform, fueled by strategic acquisitions and an expanding suite of integrated services, positions Elevance Health for sustained future growth. The company's commitment to leveraging advanced technology, such as HealthOS and AI-driven tools, provides a critical competitive advantage, enhancing efficiency, reducing costs, and improving member and provider experiences. Despite the current challenges, Elevance Health's strong financial health, disciplined capital allocation, and consistent shareholder returns underscore its resilience. Investors should monitor the progress of Medicaid rate alignment and the impact of policy changes on the ACA market, but the company's strategic transformation and technological leadership offer a compelling long-term investment thesis in the evolving healthcare landscape.