Company Overview

Elevance Health, Inc. is a leading healthcare company with a mission to improve the health of humanity. Formerly known as Anthem, Inc., the company has grown to become one of the largest health insurers in the United States, serving nearly 46 million medical members through its affiliated health plans as of September 30, 2024.

Historical Background

Elevance Health's journey began in 1944 as Blue Cross of California. Over the following decades, the company expanded its operations across the country, establishing Blue Cross and Blue Shield plans in multiple states. This expansion allowed Elevance Health to provide health insurance coverage to a growing number of individuals and employers. In the 1980s and 1990s, the company faced challenges from increased competition from managed care organizations and changes in government regulations. To adapt, Elevance Health diversified its offerings, expanding into areas such as pharmacy benefits management and specialty insurance products. The early 2000s saw the company undergo a rebranding, changing its name from Anthem, Inc. to Elevance Health, Inc., reflecting a broader focus on improving the health and well-being of its members beyond traditional health insurance. In 2016, the company made a significant move by acquiring Cigna Corporation, further solidifying its position in the health insurance market.

Business Segments

Today, Elevance Health operates through four reportable segments: Health Benefits, CarelonRx, Carelon Services, and Corporate Other. The Health Benefits segment offers a wide range of health plans and services, including risk-based and fee-based products, to individual, employer group, Medicare, Medicaid, and Federal Employees Health Benefits (FEHB) program members. This segment provides health products on a full-risk basis, a broad array of administrative managed care services to fee-based customers, and a variety of specialty and other insurance products and services such as stop loss, dental, vision, and supplemental health insurance benefits.

CarelonRx, the company's pharmacy services business, provides a comprehensive portfolio of pharmacy services to both affiliated and external customers. This includes home delivery and specialty pharmacies, claims adjudication, formulary management, pharmacy networks, rebate administration, a prescription drug database and member services, as well as infusion services and injectable therapies.

Carelon Services offers a broad array of healthcare-related services and capabilities, such as utilization management, behavioral health, integrated care delivery, palliative care, payment integrity services, subrogation services, and health and wellness programs. This segment also includes Elevance Health's Carelon Global Solutions, which provides services related to data management, information technology, and business operations.

The Corporate Other segment encompasses the company's businesses that do not individually meet the quantitative thresholds for an operating segment, as well as corporate expenses not allocated to the company's other reportable segments.

Financials and Liquidity

Elevance Health's financial performance has been generally strong, with the company reporting annual net income of $5.99 billion, annual revenue of $171.34 billion, annual operating cash flow of $8.06 billion, and annual free cash flow of $6.76 billion as of December 31, 2023. The company's balance sheet remains healthy, with a debt-to-capital ratio of 38.9% as of the same date.

For the most recent quarter (Q3 2024), Elevance Health reported revenue of $45.14 billion, up 5.3% year-over-year. However, net income declined by 21.2% to $1.02 billion. Operating cash flow decreased by 11.5% to $2.68 billion, while free cash flow declined by 12.0% to $2.35 billion. The revenue increase was driven by premium rate increases across all business lines to account for medical cost trends, while the net income decline was primarily due to higher medical costs in the Medicaid business, partially offset by increased investment income.

In terms of liquidity, Elevance Health maintains a strong financial position. The company's debt-to-equity ratio stands at 0.64, with cash and investments totaling $38.83 billion. Additionally, Elevance Health has access to a $4.0 billion five-year revolving credit facility. The company's current ratio is 1.50, and its quick ratio is 1.00, indicating a solid ability to meet short-term obligations.

Breaking down the financial performance by segment for the three months ended September 30, 2024, the Health Benefits segment generated operating revenue of $38.28 billion with an operating gain of $1.60 billion. CarelonRx reported operating revenue of $9.14 billion and an operating gain of $619 million, while Carelon Services contributed $4.64 billion in operating revenue and $184 million in operating gain. The Corporate Other segment reported an operating loss of $999 million for the same period.

Recent Challenges

In the third quarter of 2024, Elevance Health faced some challenges, reporting adjusted diluted earnings per share of $8.37, which fell short of expectations. This was primarily due to elevated medical costs in the company's Medicaid business, driven by a shift in the mix of its Medicaid membership related to the end of the COVID-19 public health emergency. Medicaid cost trends accelerated to 3 to 5 times historical averages, leading the company to reduce its full-year 2024 outlook for adjusted diluted EPS to approximately $33, down from their previous guidance. The company's management team has proactively implemented measures to address these issues, including disciplined medical management, collaboration with state partners to ensure adequate Medicaid rates, and accelerated initiatives to enhance operational efficiency.

Growth Prospects and Strategies

Despite these short-term headwinds, Elevance Health remains confident in its long-term growth prospects. The company is focused on expanding its commercial and government-sponsored business, scaling its Carelon Services and CarelonRx segments, and investing in technology and innovation to drive operational efficiencies and enhance the member and provider experience.

In the commercial business, Elevance Health is experiencing strong growth in its individual exchange offerings, with membership up more than 30% year-to-date as of September 30, 2024. The company is also expanding its individual and family ACA plans in three additional states – Florida, Maryland, and Texas – under the WellPoint brand, complementing its existing presence in these markets.

In the Medicare Advantage (MA) business, Elevance Health has taken a balanced approach to margin and membership for the 2025 plan year, prioritizing the benefits that seniors value most to mitigate the impact of CMS' rate cuts and promote access to high-quality, comprehensive, and coordinated care. The company expects to grow its individual MA membership in line with or slightly better than the broader market in 2025.

Elevance Health's Carelon segment continues to deliver strong performance, with Carelon Services exceeding the upper end of the company's initial 2024 revenue growth outlook. The acquisition of Kroger Specialty Pharmacy and the agreement to acquire CareBridge, a value-based manager of home and community-based services, further strengthen Carelon's capabilities and position it as a strategic partner in managing a growing proportion of healthcare spending.

The company is also making significant investments in technology and innovation, with a focus on applying artificial intelligence (AI) to enhance member and provider experiences, reduce costs, and drive more efficient processes. These initiatives are expected to yield operational and financial benefits in 2024 and greater impact in 2025 and beyond.

Future Outlook

Looking ahead to 2025, Elevance Health expects continued momentum in its commercial business, balanced growth in Medicare Advantage, and further scaling of Carelon. The company anticipates strong acceleration in revenue growth, projecting at least high single-digit percentage growth, in line with their long-term growth algorithm. For 2025 adjusted EPS growth, Elevance Health's outlook is at least in the mid-single-digit percentage range, reflecting their assumption that the timing disconnect between Medicaid rates and acuity will continue.

Despite the near-term challenges, Elevance Health remains confident in its ability to deliver at least 12% growth in adjusted diluted EPS annually on average over time. The company is actively working with state partners to ensure Medicaid rates reflect the acuity of their membership, though this process is expected to take time.

Conclusion

Despite the industry's dynamic environment and the short-term challenges faced by the Medicaid business, Elevance Health remains confident in its ability to navigate these obstacles and deliver long-term growth. The company's diversified business model, strategic investments, and disciplined execution position it well to continue serving as a trusted healthcare partner to its members, providers, and communities. With a strong financial foundation, ongoing operational improvements, and a clear strategic vision, Elevance Health is poised to address current challenges while capitalizing on future growth opportunities in the evolving healthcare landscape.