Executive Summary / Key Takeaways

• Medicaid's 2026 Margin Trough Is Telegraphed and Manageable: Elevance Health faces a projected 125+ basis point decline in Medicaid margins in 2026 from an already negative 2025 baseline, driven by elevated acuity and utilization that state rate updates have not fully captured. Management explicitly frames 2026 as the "trough" year, not the start of a new reset cycle, with a clear line of sight to 2-4% long-term margins.

• Carelon Services Is the Underappreciated Growth Engine: While Health Benefits struggles with medical cost trends, Carelon Services delivered 58% revenue growth in Q3 2025 and is positioned for over 50% growth for the full year, driven by the CareBridge acquisition and expansion of risk-based capabilities. This segment transforms ELV from a pure insurer into a technology-enabled healthcare services platform.

• Value-Based Care and AI Create Operational Leverage: Over 35% of Elevance's care arrangements now include downside risk, up from less than 20% three years ago, while AI-enabled tools like HealthOS have reduced prior authorization burdens and cut claims denials by 68%. These initiatives support long-term margin stability even as near-term pressures persist.

• Valuation Disconnect Reflects Market Myopia: Trading at 14.7x earnings and 0.42x sales, ELV trades at a significant discount to UnitedHealth (UNH) (17.6x earnings) despite generating comparable revenue growth and superior cash flow metrics. The market's focus on Medicaid headwinds obscures the durable earnings power of the Carelon platform and the company's disciplined capital allocation.

• Key Variables for 2026: Rate Recovery and Carelon Maturation: The investment thesis hinges on whether state Medicaid rates align with acuity trends by mid-2026 and whether Carelon Services can sustain high growth while expanding margins as new deals mature. Execution on AI-driven automation will determine the pace of operating leverage.

Setting the Scene: From Anthem to Healthcare Platform

Elevance Health, incorporated in Indiana in 2001 and headquartered in Indianapolis, began its journey as Anthem, Inc., a traditional health benefits company operating as an independent licensee of the Blue Cross and Blue Shield Association across numerous states. The June 2022 rebranding to Elevance Health reflected a strategic evolution beyond insurance toward a purpose of improving the health of humanity through integrated clinical and benefits capabilities. Today, Elevance serves approximately 45.4 million medical members across all 50 states, the District of Columbia, and Puerto Rico, operating as the Blue Cross licensee for California and the Blue Cross and Blue Shield licensee for 13 additional states, while also conducting business under the Wellpoint, Carelon, MMM, and Simply Healthcare brands.

The company reports operations across four segments: Health Benefits (core insurance offerings), CarelonRx (pharmacy benefits management), Carelon Services (integrated healthcare services), and Corporate Other. This structure reveals a deliberate pivot from pure risk-bearing insurance toward a diversified healthcare platform that leverages data, technology, and care delivery capabilities to manage complex populations.

Elevance sits as the second-largest player in the highly consolidated U.S. managed care market with approximately 12% national market share, trailing only UnitedHealth Group's 15% but ahead of CVS Health (CVS) (12% via Aetna), The Cigna Group (CI) (11%), and Humana (HUM) (6%). The industry faces structural headwinds from rising medical and pharmacy costs, ongoing Medicaid eligibility redeterminations following the COVID-19 public health emergency, and regulatory changes from the Inflation Reduction Act and potential expiration of enhanced ACA subsidies. These dynamics create both pressure and opportunity, as incumbents with scale, technology, and capital can capture market share from smaller, less efficient competitors while building new revenue streams beyond traditional insurance.

Technology, Products, and Strategic Differentiation: The Carelon Advantage

Elevance's core technological differentiation lies in its HealthOS platform and Carelon's integrated service model. HealthOS creates a unified data layer that connects physical, behavioral, pharmacy, and social services, enabling real-time prior authorization processing and reducing administrative friction. The platform has cut claims denials by more than 68% for providers aligned with Elevance's data-sharing protocols, while over half of electronic prior authorization requests are now processed in real-time. This matters because administrative costs represent one of the few controllable expense levers in healthcare, and every percentage point reduction in the operating expense ratio flows directly to operating gain.

The company's AI-enabled virtual assistant will reach more than 10 million members by year-end 2025, demonstrating how digital innovation enhances access and engagement. A partnership with OpenAI trains associates to deploy these tools responsibly at scale, improving first-contact resolution and shortening wrap-up times. For providers, the platform reduces administrative burden through aligned data sharing and faster approvals, while advanced analytics identify fraud, waste, and abuse patterns that inflate medical costs. The "so what" is tangible: these capabilities enable Elevance to manage complex populations more efficiently than competitors reliant on legacy systems, supporting both margin defense and member satisfaction.

Carelon Services represents the strategic apex of this technology integration. The segment offers value-based networks, provider enablement, member engagement, and utilization management, primarily targeting chronic and complex populations. The December 2024 acquisition of CareBridge, a value-based healthcare company for home and community-based services, accelerates the care-at-home strategy and contributed to Carelon Services' 58% revenue growth in Q3 2025. More than one-third of Elevance's benefit expense now flows through downside risk arrangements, supporting improved care coordination and cost predictability. This matters because it aligns incentives with providers, reduces unnecessary utilization, and creates recurring revenue streams that are less volatile than traditional insurance underwriting.

The Total Health, Total You advocacy program exemplifies this differentiation, delivering personalized guidance to over 6 million members with a 95% satisfaction rate and a Net Promoter Score of 82. Employers value this holistic approach, contributing to record retention in the national accounts business for 2025. The program's success reflects Elevance's ability to embed value-based care principles throughout its operations, driving nearly $100 in per-member-per-month savings across medical and pharmacy costs. This is not incremental improvement; it is a structural cost advantage that competitors cannot easily replicate.

Financial Performance & Segment Dynamics: The Medicaid Pressure Valve

Third-quarter 2025 results illustrate the divergent fortunes within Elevance's portfolio. Consolidated revenue grew 12% year-over-year to $50.7 billion, driven by premium rate increases, recent acquisitions, and Medicare Advantage membership growth. However, the consolidated benefit expense ratio jumped 260 basis points to 88.9%, reflecting severe pressure in the ACA and Medicaid businesses. Net income increased 17.8% to $1.19 billion due to lower income tax expense and investment gains, but this masks underlying operational stress in the Health Benefits segment.

Health Benefits, representing the core insurance operations, saw operating revenue grow 10.4% to $42.2 billion in Q3, yet operating gain plummeted 62.5% to $601 million. The operating margin compressed 280 basis points to 1.4% for the quarter and 190 basis points to 3.5% year-to-date. This deterioration stems from higher medical cost trends across all lines of business, particularly Medicaid, where elevated acuity and utilization have not been fully offset by rate updates. The segment's performance validates management's decision to take "immediate actions" and a "prudent approach" to guidance, but it also raises questions about the durability of insurance margins in a post-pandemic environment.

Medicaid specifically represents Elevance's most acute challenge. Cost trends remain elevated due to higher population acuity and increased utilization, with the full-year 2025 operating margin expected to be modestly negative at approximately -50 basis points. Management now anticipates at least a 125 basis point decline in 2026 as rates continue to lag behind acuity and utilization trends. This matters because Medicaid comprises roughly 25% of Elevance's membership base, and margin compression of this magnitude creates a significant headwind to consolidated earnings. However, management's framing of 2026 as the "trough" year provides clarity: they expect sequential improvement through 2027 as state rate cycles catch up and operational savings from care management programs take hold, ultimately targeting a 2-4% margin range.

CarelonRx, the pharmacy benefits segment, grew revenue 20.3% to $6.2 billion in Q3, driven by higher prescription volume and recent acquisitions. Yet operating gain declined 10.2% to $556 million as margins compressed 170 basis points to 5.1%. The margin pressure reflects expenses associated with expanding dispensing services and scaling specialty pharmacy assets, including the migration of scripts to the BioPlus platform and transition of Kroger Specialty Pharmacy (KR) scripts by year-end 2025. This investment phase is necessary to compete with larger PBMs like OptumRx and CVS Caremark, but it temporarily suppresses profitability. The segment's trajectory suggests that scale gains will eventually offset margin dilution, particularly as external client relationships deepen.

Carelon Services emerges as the portfolio's bright spot, with revenue surging 57.9% to $2.7 billion and operating gain rising 19% to $219 million. The segment serves 97.6 million consumers, down 3.7% year-over-year due to membership shifts, but revenue per consumer has expanded dramatically. The CareBridge acquisition contributed significantly to growth, while organic expansion of risk-based capabilities in specialty care and behavioral health drove margins. The segment's 5.2% operating margin year-to-date matches the prior year, demonstrating that rapid growth is not coming at the expense of profitability. This diversification shifts Elevance's earnings away from volatile insurance underwriting toward more predictable, higher-multiple services revenue, supporting a re-rating of the stock over time.

Corporate Other saw its operating loss narrow dramatically from $999 million to $81 million in Q3 2025, primarily due to the absence of a prior-year $666 million Provider Settlement Agreement accrual related to the Blue Cross Blue Shield antitrust litigation. This litigation, which began in 2012, reached final approval in August 2025, removing a major overhang on the stock. The settlement's resolution allows management to focus entirely on operational execution rather than legal distractions.

Cash flow generation remains robust, with $5.8 billion in operating cash flow over the trailing twelve months and $4.6 billion in free cash flow. The company held $2.6 billion in cash and investments at the parent company as of September 30, 2025, providing ample liquidity for strategic investments. The debt-to-capital ratio stands at 42.1%, down from 43% at year-end 2024, and the company amended its credit facility in September 2025 to extend maturity to 2030 and increase available credit to $5 billion. This financial flexibility supports both defensive and offensive moves in a consolidating industry.

Capital allocation reflects discipline and confidence. The company repurchased $875 million of shares in Q3 2025 and $2.9 billion for the full year 2024, exceeding initial forecasts. The Board approved a 5% dividend increase to $1.71 per share in Q4 2024, marking the 14th consecutive annual increase. Management's opportunistic approach to buybacks, particularly when the stock trades below intrinsic value, signals conviction in long-term earnings power despite near-term headwinds.

Outlook, Management Guidance, and Execution Risk

Elevance's 2025 guidance reflects a sober assessment of persistent cost pressures. Management reaffirmed adjusted EPS guidance of approximately $30 in Q3 2025, a revision from the initial range of $34.15-$34.85 provided in Q4 2024. This $4+ reduction, while disappointing, demonstrates management's willingness to "act now, not later" rather than assume a near-term recovery in medical cost trends. The guidance reset is anchored in the expectation that elevated ACA morbidity and slower Medicaid rate alignment will persist through year-end, not based on hopes of an imminent reversal.

Looking to 2026, management adopts a "prudent and practical" posture, acknowledging uncertainties while providing key planning assumptions. The most significant is the projected 125+ basis point decline in Medicaid margins from the 2025 baseline. This decline reflects continued membership reverifications and state program changes that drive acuity higher, with rates remaining elevated but still trailing trend. However, management explicitly states they view 2026 as the "trough" for Medicaid margins, anticipating sequential improvement through 2027 as rate updates and operational savings take hold. This framing offers investors a clear timeline for margin recovery and a baseline against which to measure progress.

Medicare Advantage performance offers a counterpoint to Medicaid's challenges. For the 2027 payment year, approximately 55% of Elevance's MA members will be in plans rated 4 stars or higher, including three 5-star contracts, up from 40% for 2026. This improvement reflects disciplined investments in quality measures and care coordination. The company exited certain service areas impacting approximately 150,000 members for 2026, prioritizing margin sustainability over membership growth. This demonstrates strategic focus: Elevance is willing to shrink to grow stronger, a discipline not always evident among competitors chasing scale at any cost.

The ACA market presents both opportunity and risk. Membership shifts from Medicaid into ACA plans, combined with lower effectuation rates among highly subsidized populations, have driven market-wide morbidity increases. Elevance has taken a disciplined approach to pricing, reflecting higher acuity in its 2026 rate filings. The critical variable is the fate of enhanced premium tax credits, currently set to expire at year-end 2025. If Congress does not extend them, management expects a "material contraction" in the ACA marketplace, with meaningfully lower enrollment and a smaller, more acute risk pool. This would pressure margins but also reduce competition from thinly capitalized players unable to manage adverse selection.

Carelon's trajectory provides the most compelling element of the long-term story. Management expects Carelon Services to grow above its long-term target range in 2025, with over 50% growth driven by both acquisitions and organic expansion. External revenue grew double digits year-over-year, reflecting broad momentum across pharmacy, behavioral health, and specialty services. This matters because it diversifies Elevance's earnings away from volatile insurance underwriting toward more predictable, higher-multiple services revenue. The faster-than-projected Carelon growth has shifted near-term margin dynamics, as new deals take time to reach mature profitability, but the long-term earnings power is substantially higher than original 2023 targets.

Risks and Asymmetries: What Could Break the Thesis

Three material risks threaten Elevance's investment case, each with distinct mechanisms and mitigating factors. First, Medicaid rate alignment could take longer than the 2026-2027 timeline management projects. States face budget pressures and bureaucratic delays in incorporating elevated acuity into actuarial models. If rate updates continue to lag into 2027, margin recovery could stall, turning the projected trough into a prolonged valley. Mitigating this, management's conversations with state partners remain "constructive," and states are "more receptive to ways that can help reduce the overall cost of the program." Elevance's value-based care capabilities and data-driven insights position it as a collaborative partner rather than an adversary in these negotiations.

Second, the expiration of enhanced ACA subsidies would materially impact membership and morbidity. A full expiration could shrink the individual market by 30-40% based on Congressional Budget Office estimates, leaving a smaller, sicker pool that drives premium increases and adverse selection. While Elevance's disciplined pricing positions it to survive this transition, the near-term earnings impact could be severe. Mitigating this, Congress has flexibility for partial extensions or glide paths, and Elevance's diversified business mix reduces dependence on ACA relative to pure-play individual market insurers.

Third, execution risk on Carelon scaling and technology integration could limit margin expansion. Carelon Services' rapid growth requires integrating acquisitions like CareBridge while building new risk-based capabilities. If implementation quality suffers or external client growth slows, the segment's margin trajectory could disappoint. Mitigating this, Carelon's 5.2% operating margin has held steady despite rapid scaling, and the segment's 134% net dollar retention (implied by revenue growth exceeding consumer growth) suggests strong client satisfaction and expansion.

Asymmetry exists to the upside if Elevance's AI and automation initiatives deliver faster-than-expected operating leverage. The company's partnership with OpenAI and deployment of AI-enabled tools across 10 million members could reduce administrative costs by 5-10% over two to three years, providing a margin buffer even if medical cost trends remain elevated. Additionally, if Medicaid rates align more quickly than expected or if the ACA subsidy environment proves more stable, 2026 could mark an earlier-than-anticipated inflection point.

Valuation Context: Discounted Despite Durable Advantages

At $360.18 per share, Elevance Health trades at 14.7 times trailing earnings and 0.42 times sales, a significant discount to UnitedHealth Group's 17.6 times earnings and 0.70 times sales, despite comparable revenue growth trajectories. The price-to-operating cash flow ratio of 16.51 and price-to-free cash flow of 21.53 reflect strong cash generation that supports both reinvestment and shareholder returns. The enterprise value of $77 billion represents 8.63 times EBITDA, well below UnitedHealth's 12.12 times, suggesting the market is pricing in persistent margin compression that management's guidance indicates will be temporary.

The dividend yield of 2.01% and payout ratio of 27.55% provide income while preserving capital for growth investments. The balance sheet is robust, with a debt-to-equity ratio of 0.73 and current ratio of 1.56, providing flexibility to fund Carelon expansion and weather Medicaid margin pressure. Return on equity of 12.57% trails UnitedHealth's 17.48% but exceeds Cigna's 15.54% and Humana's 7.16%, reflecting Elevance's diversified earnings power.

Relative to peers, Elevance's valuation appears misaligned with its strategic positioning. UnitedHealth commands a premium for its Optum integration, yet Elevance's Carelon platform is growing faster and expanding external relationships at a rapid clip. CVS Health's P/E of 212 reflects margin pressure from retail operations, while Cigna's lower multiple reflects smaller scale in government programs. Elevance's discount appears rooted in the market's focus on near-term Medicaid headwinds rather than the durable earnings power of its services platform and technology-enabled cost management.

Conclusion: The Trough Is Clear, the Recovery Is Underway

Elevance Health stands at an inflection point where short-term Medicaid margin compression is creating a valuation disconnect that obscures the company's transformation into a technology-enabled healthcare services platform. The projected 125+ basis point decline in Medicaid margins for 2026 is well-telegraphed and framed by management as the trough, not the beginning of a new downward cycle. This clarity provides investors with a baseline against which to measure progress and a timeline for recovery that aligns with state rate cycles and operational savings from value-based care programs.

The underappreciated story is Carelon's ascent. With over 50% revenue growth and expanding external relationships, Carelon Services is shifting Elevance's earnings mix toward higher-multiple, more predictable services revenue. The integration of CareBridge and expansion of risk-based capabilities position Elevance to capture a growing share of healthcare spending on complex populations, where its data integration and care coordination create measurable cost advantages.

The investment thesis hinges on two variables: the pace of Medicaid rate recovery and Carelon's ability to scale while expanding margins. Management's disciplined approach to pricing, combined with AI-driven operational leverage and a strong balance sheet, provides multiple levers to navigate the trough and emerge with a more resilient, diversified earnings stream. For investors willing to look beyond near-term margin pressure, Elevance offers a rare combination of discounted valuation, durable competitive moats, and a clear path to sustained growth.