Executive Summary / Key Takeaways

• Elevance Health, one of the largest U.S. health insurers, is executing a strategy focused on integrated, whole-person health through its diversified Health Benefits and rapidly expanding Carelon segments.
• The Carelon segment, encompassing pharmacy (CarelonRx) and services (Carelon Services), is demonstrating significant growth momentum, driven by strategic acquisitions, expansion of risk-based capabilities, and increasing external client adoption, positioning it as a key long-term growth engine.
• Near-term financial performance is impacted by elevated medical cost trends and increased member acuity in the Medicaid business following redeterminations, creating a timing mismatch with state-set rates that is expected to persist through 2025.
• Despite Medicaid pressures, the company reaffirmed its 2025 adjusted EPS guidance range of $34.15 to $34.85, supported by strong performance in Commercial and Medicare Advantage, operational efficiencies, and Carelon's growth.
• Elevance Health is investing in technological differentiation, including AI-driven solutions and the HealthOS platform, to enhance member/provider experiences, streamline operations, and build a competitive moat, reinforcing confidence in its ability to deliver at least 12% adjusted EPS growth annually on average over time.

Elevance Health: Forging an Integrated Future

Elevance Health, Inc., an Indiana corporation, stands as a titan in the U.S. health insurance landscape, serving approximately 45.8 million medical members as of March 31, 2025. Operating as an independent licensee of the Blue Cross and Blue Shield Association and under prominent brands like Anthem, Wellpoint, and Carelon, the company has strategically evolved into an integrated health enterprise. This transformation is centered on a core purpose: improving the health of humanity by addressing the full spectrum of physical, behavioral, and social health needs.

The company's strategic journey is marked by a deliberate expansion of capabilities beyond traditional health insurance. This is most evident in the rise of its Carelon segment, envisioned as the "enterprise flywheel for growth." Recent history underscores this focus, with targeted acquisitions like BioPlus Specialty Pharmacy (2023), Paragon Healthcare (2024) for infusion services, CareBridge (December 2024) for home and community-based services, Centers Plan for Healthy Living (December 2024) for managed long-term care, and Granular Insurance Company (February 2025) for stop-loss solutions. These moves, alongside investments in joint ventures like Mosaic Health for care delivery innovation and Liberty Dental for dental administration, demonstrate a clear intent to build a comprehensive ecosystem capable of managing complex care needs and driving value across the healthcare system.

In a competitive landscape dominated by large, diversified players like UnitedHealth Group (UNH), The Cigna Group (CI), and Humana Inc. (HUM), alongside niche providers like Aflac Incorporated (AFL), Elevance Health leverages its extensive Blue Cross and Blue Shield network and significant scale as foundational strengths. While UNH often leads in overall scale and profitability margins (UNH TTM Net Margin ~4%, ELV TTM Net Margin ~3.2%), and CI demonstrates strong revenue growth fueled by its pharmacy business (CI TTM Net Margin ~1%), Elevance Health differentiates itself through its integrated model and a growing emphasis on technological innovation and specialized care management, particularly within Carelon.

The Accelerating Momentum of Carelon

The Carelon segment is increasingly central to Elevance Health's investment narrative, serving both affiliated health plans and external clients. This segment is divided into CarelonRx (pharmacy services) and Carelon Services (healthcare-related services and capabilities).

CarelonRx is strategically focused on insourcing key functions, particularly in specialty pharmacy and infusion services, through acquisitions like Paragon Healthcare and the pending integration of Kroger Specialty Pharmacy. This strategy aims to control critical levers in the pharmacy value chain, enhance consumer experiences, and diversify its offerings. In the first quarter of 2025, CarelonRx reported operating revenue of $10,116 million, a significant 25.4% increase year-over-year, contributing $602 million in operating gain (+15.1%). This growth was driven by higher prescription volume (+9.0% in adjusted scripts) and contributions from recent acquisitions. Management commentary highlights that the segment's value story, particularly its integrated approach and focus on high-touch customer service, is resonating in the marketplace, leading to competitive pricing and strong performance in core PBM markets.

Carelon Services is demonstrating even more explosive growth, integrating physical, behavioral, pharmacy, and social services to manage complex populations and drive affordability. The acquisition of CareBridge significantly bolstered its capabilities in home and community-based services. In Q1 2025, Carelon Services' operating revenue surged by 63.0% year-over-year to $6,536 million, yielding an operating gain of $491 million (+69.3%). This remarkable growth is attributed to the CareBridge acquisition and the expansion of risk-based capabilities in areas like specialty care and behavioral health. Management notes strong balanced growth from both internal adoption by affiliated health plans and increasing traction with external payers, including significant wins with Blue Cross Blue Shield partners and state clients. This external validation underscores Carelon Services' ability to deliver risk-based outcomes and positions it as a scalable platform for whole-person care solutions, with management expecting at least 50% growth for the full year 2025.

Health Benefits: Navigating Market Dynamics

The Health Benefits segment, while facing specific market challenges, continues to form the core of Elevance Health's business, contributing the majority of revenue ($41,431 million in Q1 2025, +11.2% YoY).

The Commercial business shows strong momentum, driven by integrated medical and pharmacy offerings that resonate with employers. The company has achieved record retention levels and strong new customer acquisition in national accounts, including winning sole source provider contracts. The Individual ACA market is a notable growth area, with membership increasing approximately 11% sequentially in Q1 2025. The company is strategically expanding its ACA footprint into new states like Florida, Maryland, and Texas under the Wellpoint brand, leveraging its existing presence in these Medicaid and Medicare markets to build lifetime value.

In Medicare, Elevance Health is pursuing a targeted and disciplined growth strategy focused on sustainability. The company anticipates Medicare Advantage membership of 2.2 million to 2.25 million by year-end 2025, reflecting planned growth in group MA and high-single-digit expansion in individual MA. While retention has remained strong, the company faces challenges related to Medicare Advantage Star ratings, with the percentage of members in plans rated four stars or higher expected to decline for payment year 2026 due to significantly higher cut points, including narrowly missing a 4-star rating on a large contract. Despite this, management maintains confidence in its disciplined approach to 2025 bids, aiming to balance growth and margins.

The Medicaid business presents the most significant near-term headwind. Following the end of the COVID-19 Public Health Emergency and the resumption of eligibility redeterminations, the company experienced membership attrition (-5.0% YoY in Q1 2025), particularly among healthier members. This has led to increased acuity within the remaining population and, consequently, elevated medical cost trends, described as reaching 3x to 5x historical averages in Q3 2024. State-set rates, which often rely on historical data lagging current experience by a year or more, have remained insufficient to fully cover these heightened costs. While the company is engaged in constructive conversations with state partners and has seen rate increases, a timing mismatch persists. Management prudently assumes this disconnect will continue through 2025, impacting Medicaid margins, though they expect the issue to be time-bound and rates to ultimately reflect member acuity.

Financial Performance and Operational Excellence

Elevance Health's consolidated financial performance in Q1 2025 reflects the dynamics across its segments. Total operating revenue grew by 15.4% to $48,765 million, primarily driven by premium rate increases in Health Benefits, recent acquisitions, and membership growth in Medicare Advantage and Individual ACA, partially offset by Medicaid attrition. Net income decreased by 2.9% to $2,184 million, while diluted EPS saw a slight increase of 0.2% to $9.61, benefiting from fewer diluted shares outstanding.

The consolidated benefit expense ratio (BER) increased to 86.4% in Q1 2025 from 85.6% in Q1 2024. This rise is primarily attributed to higher medical cost trends across Health Benefits, particularly the inadequacy of Medicaid rates to cover these trends, partially offset by out-of-period premium taxes in Medicaid and favorable Part D seasonality changes related to the Inflation Reduction Act. The adjusted operating expense ratio (OER) improved to 10.7% in Q1 2025 from 11.6% in Q1 2024, reflecting operating expense leverage from revenue growth and ongoing cost management efforts, despite some out-of-period premium tax expenses.

Operational efficiency and technological advancement are key strategic pillars. The company finalized its 2023-2024 Business Efficiency Program, aimed at enhancing efficiency and optimizing its footprint. Furthermore, Elevance Health is making significant investments in AI-driven solutions to transform operations. These technologies are being deployed to enhance member experiences through personalized digital service and improved access to care, streamline provider interactions by automating tasks like onboarding and contract administration, and increase associate productivity. Operational tools like the HealthOS digital platform, supporting over 88,000 care providers and 1,200 provider organizations, enable real-time decision-making and faster prior authorizations for high-performing providers. Patient advocacy solutions are achieving a 95% satisfaction rate, and value-based arrangements are driving significant per member per month savings (around $100). These technological and operational initiatives are expected to yield increasing benefits in 2025 and beyond, contributing to structural efficiencies and supporting long-term margin targets.

Liquidity and Capital Allocation

Elevance Health maintains a strong financial condition and liquidity position. As of March 31, 2025, consolidated cash, cash equivalents, and investments totaled $34,712 million. While this represented a decrease from year-end 2024 due to cash used for debt repayments, share repurchases, dividends, and capital expenditures, it was partially offset by operating cash flow and changes in working capital.

Operating cash flow for Q1 2025 was $1,017 million, a decrease from $1,978 million in Q1 2024, primarily due to timing-related changes in working capital, which management expects to reverse over the year. The company anticipates a more normalized operating cash flow of approximately $8 billion for the full year 2025.

The company manages its capital structure prudently, with a debt-to-capital ratio of 41.3% at March 31, 2025, well within its covenant limit of 60%. It has access to liquidity through its $4,000 million revolving credit facility (maturing April 2027), a $4,000 million commercial paper program (with no outstanding amounts), and borrowings available from the Federal Home Loan Banks ($250 million outstanding in Q1 2025).

Capital allocation priorities include strategic investments (such as acquisitions), share repurchases, and dividends. In Q1 2025, the company repurchased 2.2 million shares for $880 million, demonstrating confidence in its intrinsic value. The Board of Directors recently approved a 5% increase in the quarterly dividend to $1.71 per share, marking the 14th consecutive annual increase and reflecting confidence in the business model and commitment to shareholder returns.

Outlook and Risks

Elevance Health reiterated its adjusted diluted EPS guidance for 2025 in the range of $34.15 to $34.85. This outlook is based on several key assumptions: continued strong performance in the Commercial business, targeted and disciplined growth with improving margins in Medicare Advantage, stabilization followed by improvement in Medicaid margins as rates catch up to acuity, and significant growth contributions from the Carelon segment. The company expects a more front-loaded earnings contribution in 2025, with over 60% of adjusted EPS realized in the first half of the year. Operating revenue is anticipated to grow in the high-single to low double-digit percent range, bolstered by acquisitions. The consolidated medical loss ratio is projected around 89.1% (+/- 50 bp), and the adjusted operating expense ratio is expected to be around 10.4% (+/- 50 bp), implying slight year-over-year improvement.

Despite this positive outlook, several risks warrant investor attention. The primary risk remains the timing and magnitude of Medicaid rate adjustments relative to the elevated medical cost trends and increased member acuity. While management is confident in eventual rate adequacy, the persistence of this timing mismatch could continue to pressure Medicaid margins. Changes to Medicare Advantage Star ratings and potential future regulatory changes (including those stemming from the Inflation Reduction Act) could impact funding and profitability. Litigation risks, including ongoing antitrust lawsuits and the DOJ's False Claims Act suit related to Medicare risk adjustment data, could result in significant liabilities. The potential expiration of enhanced Premium Tax Credits for ACA plans at the end of 2025, if not extended, could adversely affect Individual market membership and profitability. Competition across all segments remains intense, requiring continuous investment in capabilities and efficiency to maintain market position and profitability.

Conclusion

Elevance Health is navigating a complex healthcare environment marked by significant shifts in government programs and evolving market dynamics. While the near-term presents challenges, particularly within the Medicaid business due to a timing disconnect between rates and elevated acuity, the company's core investment thesis remains compelling. The strength of its diversified Health Benefits portfolio, coupled with the accelerating momentum and strategic importance of the Carelon segment, positions Elevance Health for sustained long-term growth.

The company's strategic investments in integrated care capabilities, technological differentiation through AI and digital platforms, and a disciplined approach to capital allocation are foundational to its ability to enhance operational efficiency, manage costs, and deliver differentiated value to members, providers, and clients. As the Medicaid environment stabilizes and rates align with underlying acuity, and as the Carelon flywheel continues to generate growth both internally and externally, Elevance Health is well-positioned to capitalize on the growing demand for comprehensive, affordable healthcare solutions. The company's reiterated guidance and commitment to its long-term growth algorithm underscore confidence in its ability to emerge from the current period stronger and deliver value for shareholders over time.