Detailed Narrative
Medicaid Dynamics and 2026 Outlook
Elevance Health detailed ongoing pressures in Medicaid, including elevated acuity and utilization driven by reverifications and state program changes. The company expects the full-year 2025 Medicaid operating margin to be modestly negative, approximately -50 basis points. For 2026, they anticipate at least a 125 basis point year-over-year decline in Medicaid margins. Management views 2026 as the 'trough' for Medicaid margins, with sequential improvement expected in 2027 as rates catch up📎 and operational savings take hold, supported by active collaboration with states on rate alignment and program improvements.
Medicare Advantage Strategy and Star Ratings
The company has implemented disciplined actions to enhance Medicare Advantage profitability for 2026, including exiting certain service areas which will impact approximately 150,000 members. A significant improvement in Star ratings is noted, with 55% of MA members expected to be in 4-star or higher contracts for payment year 2027, up from 40% in 2026. Elevance Health maintains a strategic focus on HMO and duals products, which align well with their value-based care approach, while PPO products have historically not been a primary focus.
Carelon's Continued Growth and Diversification
Carelon demonstrated robust performance, with Carelon Rx revenue growing 20% year-over-year and Carelon Services expanding over 50% year-over-year. The segment is actively expanding external relationships and scaling its pharmacy, behavioral health, specialty care management, and home-based services. While anticipated Health Benefits membership losses will create a directional headwind for Carelon in 2026, the company expresses confidence in its diversified growth strategy and strong market momentum to mitigate this impact.
Strategic Investments in AI and Technology
Elevance Health plans to make targeted investments of several hundred million dollars in 2026, equating to approximately $1 of EPS impact, to advance strategic goals. A substantial portion is allocated to technology adoption, particularly AI-enabled virtual assistants and clinical workflows. These innovations are already yielding benefits, such as a 68% reduction in prior authorization denials and a 100% reduction in peer-to-peer reviews for providers on the HealthOS platform, enhancing efficiency and reducing administrative burdens. These front-loaded investments are deemed crucial for achieving long-term operating leverage.
ACA Marketplace and Subsidy Uncertainty
The company remains committed to the ACA marketplace, with pricing strategies designed to account for higher acuity. Management is preparing for various policy outcomes regarding enhanced subsidies, noting that their expiration would lead to a material contraction in the marketplace, characterized by significantly lower enrollment and a higher morbidity risk pool in 2026. Elevance Health emphasized its readiness to collaborate with states and policymakers to ensure continued access and affordability for members, irrespective of the subsidy decision.
Capital Allocation and Shareholder Returns
Elevance Health maintains a strong balance sheet and is dedicated to disciplined capital allocation. Following several years of strategic acquisitions to build out Carelon's capabilities, the current focus is on integrating these assets. The company prioritizes returning capital to shareholders through share repurchases, having executed $875 million in buybacks during Q3 FY25. This approach balances investment in growth with consistent shareholder returns.