管理層發言
Ladies and gentlemen, thank you for standing by. Welcome to the Elevance Health second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session where participants are encouraged to present a single question. If you wish to ask a question, please press star then one on your telephone keypad. You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then two. These instructions will be repeated prior to the question-and-answer portion of this call. As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead.
Good morning, welcome to Elevance Health second quarter 2026 earnings conference call. My name is Nathan Rich, Vice President of Investor Relations. With us on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Felicia Norwood, our Chief Health Benefits Officer; Morgan Kendrick, President of our Commercial Health Benefits business; and Aimée Dailey, President of our Government Health Benefits business. Gail will begin with a review of our second quarter results, the progress we have made against our strategic priorities, and targeted investments designed to strengthen the enterprise over time. Mark will then discuss our financial performance and outlook in greater detail. After our prepared remarks, the team will be available for a question-and-answer session. During the call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com.
We will also be making forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties may cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.
Good morning, thank you for joining us. Elevance Health delivered second quarter results ahead of our outlook, reflecting favorable benefit expense performance, disciplined execution, and the actions we are taking to manage healthcare costs more effectively across the enterprise. Today, we are raising our 2026 adjusted diluted earnings per share guidance to at least $27, and we remain confident in our ability to return to at least 12% adjusted EPS growth in 2027, off our ending 2026 earnings baseline. Importantly, our confidence is not based on a single line of business or a single quarter. We are seeing progress across the breadth of our portfolio. Medicare Advantage reflects the deliberate actions we took to improve performance. Our Commercial and Individual ACA businesses are developing as anticipated, and Carelon and our AI-enabled capabilities are becoming more meaningful contributors.
We remain focused on disciplined management of the Medicaid business as the operating environment remains dynamic. The broader enterprise is performing against the framework we laid out, and the targeted investments underway are designed to strengthen the durability of that performance. Healthcare should be easier to navigate and more responsive to the people it serves. Consumers expect more from the healthcare system, greater transparency, better connectivity, and more personalized support that meets their needs, and we share that expectation. At Elevance Health, trust is earned through every interaction. To be our members' lifetime trusted health partner, we must continue to make healthcare simpler, more personal, and more affordable. That's why we're accelerating investments in capabilities that directly support our strategy. These capabilities are tied to the operating levers that drive performance, earlier detection of medical cost trend, more precise clinical intervention, a simpler member experience, and better provider connectivity.
Let me share a few examples. First, we are managing medical cost trend with greater speed and precision. In a dynamic environment, we're improving our ability to detect cost pressures earlier and respond quickly with targeted action plans across our clinical, network, payment integrity, and operating teams. In many cases, we've compressed months of work into days. These capabilities are already helping us identify emerging cost drivers more quickly and deploy more focused interventions across the enterprise. Second, we're improving how members access care and support. Through Sydney Health, Concierge Care, and proactive member engagement, we're using data, digital tools, and dedicated care teams to help members navigate benefits, schedule care, manage conditions, and close gaps in care. The result is a more proactive, seamless, and personal experience. Third, we're expanding Carelon's value-based solutions to address complex and fast-growing areas of healthcare spend.
CareBridge extends Carelon's whole health model into the home, where better coordination can improve outcomes and lower costs. CareBridge can generate medical savings in the mid-teens for these members, and we're expanding it to new markets. Finally, we're reducing friction for care providers and members. With Health OS, we collaborate with providers earlier in the care journey to review care plans, reduce delays, and support better clinical decisions. In health systems where these workflows have been deployed, we've seen significant reduction in avoidable denials, documentation requests, and administrative friction. Together, these investments strengthen our ability to manage trend and improve the experience for members and care providers. They're directly tied to the areas that matter most to long-term performance, earlier trend detection, more precise intervention, and a scalable operating model.
Turning now to our performance by line of business. Let me start with Medicaid, because I know it's an important area of focus for investors. The Medicaid environment continues to be dynamic, and we're managing it with discipline. Second quarter performance supports our full-year framework, reflecting stronger than expected rate updates, membership, and acuity that remain broadly aligned with our assumptions, and targeted actions against known areas of elevated trend. Based on what we see today, our Medicaid operating margin outlook remains appropriately prudent and unchanged from our prior guidance. Our outlook reflects a balanced view of the second half, an elevated trend environment, improving rate alignment, acuity that remains broadly consistent with our expectations, and the growing impact of the actions we are taking to manage healthcare costs. We continue to see 2026 as the trough year for our Medicaid margin, with improvement over time supported by better rate alignment and the maturation of our care management actions.
Medicaid remains an important part of our portfolio, and we are managing it with clear strategic and financial discipline. We regularly assess each market based on strategic fit, operational requirements, and the ability to generate an appropriate return on capital. We recently reached a mutual agreement with the District of Columbia to exit the D.C. Medicaid market. As we continue our assessment, we expect to exit additional Medicaid markets over the next 12-18 months where we do not see a path to sustainable performance. They do not change our commitment to serving Medicaid members in markets where we can deliver value for states, members, and shareholders. In Medicare Advantage, we are seeing clear evidence that the deliberate actions we took to reposition the portfolio are translating into stronger performance. Disciplined plan design, a more focused mix of D-SNP and HMO products, favorable claims experience, and the growing impact of our care management programs support our path to at least a 2% operating margin this year.
Our 2027 bids were developed with the same discipline, reflecting a prudent view of cost trend, continued focus on margin improvement, and stability in the benefits that members value most. We will continue to manage this business with focus on delivering long-term value for seniors and sustainable performance for the enterprise. In the individual ACA business, performance is developing broadly consistent with how we priced and planned the year. The composition of the risk pool remains broadly aligned with our assumptions. As expected, the higher mix of bronze plans creates more pronounced seasonality; we are not extrapolating early year favorability. As we prepare for 2027, our focus remains on offering value for consumers while improving the long-term financial sustainability of this business. In commercial, the market is focused on affordability and experience, that aligns directly with our differentiated offerings.
Employers are looking for solutions that lower healthcare costs, simplify navigation, and better support their employees. Our integrated medical and pharmacy model is resonating, we're seeing strong demand for our patient advocacy, behavioral health, and digital engagement capabilities. Turning to Carelon, performance remains in line with our expectations, we're focused on scaling solutions that improve outcomes for members with complex and chronic needs. Behavioral health is a clear example. When members need additional support, our programs help identify those needs earlier, connect them to appropriate care, coordinate services more effectively. Through stronger member engagement and fewer adverse events, these programs have delivered 10% cost savings on average. As we expand these capabilities across new populations and external client relationships, Carelon is becoming an increasingly important durable driver of enterprise growth over time.
In summary, our second quarter performance gives us increased confidence in the year. We're raising our earnings guidance, managing the business with discipline, scaling Carelon's value-based capabilities and investing in the areas that matter most to our future financial performance. Before closing, I want to thank our associates. The progress we are making is a direct reflection of their focus, discipline, and commitment to the people we serve. With that, I'll turn the call over to Mark to review our second quarter financial results and outlook in greater detail.
Thank you, Gail, and good morning, everyone. Elevance Health reported second quarter adjusted diluted earnings per share of $7.45, which exceeded our outlook. The strength in our operating performance reflected favorable benefit expense performance in Medicare Advantage and individual ACA, disciplined expense management, and continued execution against our care management initiatives. We continue to make targeted investments in the capabilities that support our long-term growth. In the quarter, we also recorded a net below-the-line benefit of $0.80 per share, primarily related to valuation adjustments within net investment income. Importantly, we intend to use this non-recurring benefit to fund one-time investments in the second half of the year that advance the capabilities Gail discussed. These investments are focused on medical cost management, member engagement, provider connectivity, and Carelon's integrated capabilities.
They are intended to strengthen our operating model and improve the consistency of our performance over time. Our second quarter operating results support raising our full-year 2026 adjusted diluted earnings per share guidance to at least $27 while preserving appropriate prudence in our outlook. Similarly, we now view at least $26 as the appropriate earnings baseline for modeling purposes, and we remain confident in returning to at least 12% adjusted EPS growth in 2027 off this higher earnings baseline. Now turning to our second quarter results. We ended the quarter with 44.9 million medical members. As expected, the sequential change was primarily driven by a known fee-based customer transition and attrition in our individual ACA and Medicaid businesses. Operating revenue totaled $49.8 billion, an increase of 0.8% year-over-year, driven by higher premium yields and product revenue, partly offset by lower health plan membership.
In Medicaid, second quarter performance supports the full-year margin framework we laid out earlier this year. Cost drivers remain elevated and concentrated in the categories we have discussed previously, including behavioral health, specialty pharmacy, outpatient surgery, and emergency department utilization. Our outlook assumes this operating environment persists through the balance of the year. Rate updates received during the quarter were higher than anticipated, and membership and acuity remain broadly aligned with our expectations. We are also acting directly on the cost drivers we are seeing through clinical oversight, enhanced payment integrity, earlier interventions in behavioral health, and network management. Taken together, our full-year Medicaid operating margin outlook of approximately -1.75% remains appropriately prudent based on what we see today. We view 2026 as a trough for Medicaid margins with improvement over time as rates incorporate more recent experience and our care management actions mature.
In Medicare Advantage, results were stronger than expected and were a contributor to our outperformance in the quarter. The intentional portfolio actions we took for 2026 are translating to improved performance. Disciplined plan design, a more focused product mix, favorable claims experience, and our capabilities all support our path to an operating margin of at least 2% this year. Our 2027 bid submissions placed an emphasis on plans where we can deliver sustainable value for seniors, particularly dual-eligible members, and appropriate returns for the enterprise. In our individual ACA business, favorability in the quarter reflected the more pronounced seasonality associated with our higher mix of bronze plans, which is contemplated in our outlook. We have now incorporated the final 2025 CMS risk adjustment results, which were favorable to our prior estimate. We are prudently reestablishing the majority of the prior year favorability in our current year risk adjustment accrual given current market dynamics, member mix, and claims experience that is still maturing.
Member retention remains modestly ahead of our expectations, and we now expect to end 2026 with at least 1 million individual ACA members. Commercial group performance was in line with our expectations, with cost trend remaining elevated but consistent with the pricing approach we have taken. We have applied the same discipline to the 2027 selling season. Turning to Carelon, performance remains consistent with the outlook we provided at the beginning of the year. In CarelonRx, we are pleased with early progress in the 2027 selling season, reflecting demand for our integrated medical and pharmacy offering. In Carelon Services, near-term earnings reflect ongoing investment in the platform and the scaling of newer risk-based programs, which naturally take time to mature. The capabilities we are building are directly aligned with the operating priorities Gail discussed. Now moving to the balance sheet and operating cash flow.
Days in claims payable were 45.4 days as of June 30th, an increase of 2.9 days year-over-year. Operating cash flow totaled $1.9 billion in the quarter, driven by our strong operating performance. Second quarter cash flow also benefited from the timing of the state Medicaid pass-through payment received in the quarter that was remitted in July. Additionally, we made an initial remittance to CMS of $342 million in the second quarter related to the matter discussed last quarter, and our estimate of the potential total financial exposure remains unchanged. As of July 9th, we completed all steps required by CMS and have subsequently received written confirmation from CMS that sanctions will not be imposed and the matter is closed. We are pleased to have reached this resolution and look forward to offering our Medicare Advantage plans to beneficiaries without interruption. Based on the strength of our operating performance and our outlook for the remainder of the year, we are raising our full-year operating cash flow to at least $6 billion.
Turning now to our revised outlook. We view our updated 2026 adjusted diluted earnings per share guidance of at least $27 as prudent and appropriate, supported by current operating trends. Beyond our EPS outlook, the principal operating elements of our full-year framework remain unchanged, though we now expect our adjusted operating expense ratio to be in the upper half of our full-year guidance range. With respect to seasonality, we expect third quarter adjusted EPS to represent approximately 17% of our revised full-year guidance. Our confidence in returning to at least 12% adjusted EPS growth in 2027 off our ending 2026 earnings baseline is supported by multiple levers, including continued execution in health benefits, growth in Carelon, operating efficiency, and disciplined capital deployment. With that, operator, please open the line for questions.
分析師問答
Ladies and gentlemen, if you wish to ask a question, please press star then one on your telephone keypad. You will hear a prompt that you have been queued. You may withdraw your question at any time by pressing star then two. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, we ask that each participant limit themselves to a single question to allow ample time to respond to each analyst that may wish to participate in this portion of the call. For our first question, we'll go to the line of A.J. Rice from UBS. Please go ahead.
Hi, everybody, thanks for the comments. Maybe just to drill down a little bit on your Medicaid comments, if possible. Sounds like the rate updates are coming in more favorable. When you think about the trajectory over the course of the year, that -1.75% margin, is the back half more favorable than the front half? Is there an expectation on where you'll exit the year? If you could just provide a little color more on your thinking about exiting markets, I know you probably don't want to mention the states, but can you give us a sense of overall sizing maybe of how much we're talking about there, and is this in any way driven by future things like work requirements, or is it basically driven by just current discussions with states and where you feel you're landing?
Thanks for the question, A.J. It might be helpful to first frame the overall quarter and how we're expecting the year, because I think that's important. I'll ask Mark to comment more specifically on your Medicaid questions, which I think are very important. As you take a look back at what we've reported, we're very pleased with the performance we've seen through June, and second quarter results exceeded our outlook. I do think they very much focus on the disciplined execution. Given that, as you know, we've raised our guidance to at least $27 while maintaining a prudent view of the second half. Again, thinking about our overall performance, the second quarter was broad-based. We saw favorable performance in Medicare Advantage and individual ACA and continued disciplined execution in commercial, with ongoing progress against Carelon, which is scaling and seeing benefits from the actions we've taken to manage medical costs.
Specifically to Medicaid, as I shared and Mark shared in his comments, it remains dynamic, and we are managing that business with discipline. What's important to think about is that the original full-year framework is still intact from what we see today, and it's supported by stronger than expected rates, membership and acuity that are broadly aligned with our assumptions, and very specific focused actions around the known cost pressures, which really haven't changed over the course of this quarter or last year. Importantly, we're seeing those actions begin to mature. We want to remain prudent given the dynamic environment. I also want to comment briefly on the investments we're making using the non-recurring below-the-line favorability we saw. These are targeted investments, focused on long-term performance acceleration: strengthening medical cost management, provider connectivity, and improving operating efficiency.
These are one-time and non-recurring investments that will not go on beyond 2026. Taken together, we see a lot of confidence in 2026 and in these emerging areas to return to at least 12% adjusted EPS. With that, I'll ask Mark to comment more specifically on your Medicaid questions so that we can round out the totality of what you asked.
A.J., appreciating you may get a couple of Medicaid questions on the call today, just to answer yours specifically, we do expect the second-half Medicaid margin profile to improve from the second quarter, and that's going to be supported by that favorable July 1st rate activity, as well as our continued execution against the cost pressures that we've been discussing.
Thank you. Next question, please.
Next, we'll go to the line of Justin Lake from Wolfe Research. Please go ahead.
Thanks. Good morning, maybe I'll just follow up on A.J.'s question here in a couple of ways on Medicaid. First, is there anything you can give us in terms of order of magnitude on some of the exits you talked about, maybe versus that $57 billion kind of Medicaid run rate on revenue? How do we think about those exits in terms of sizing? Then you talked about acuity being in line with your expectations in Medicaid. I find that interesting just because you had one of the more conservative assumptions on acuity impact to trend this year. I think it was in the 2%-3% range. So I'm curious, as Medicaid lives keep attriting, are you seeing the acuity of those members, the utilization continuing to tick higher, meaning the healthier members that keep attriting, is it kind of in line with that 2%-3%? Thanks.
Justin, good morning, and thank you for the questions. Let me start by saying Medicaid cost trend in the second quarter developed broadly in line with the framework that we expected. Costs remain elevated, but the drivers are identifiable and actionable. They're primarily in behavioral health, including ABA therapy, emergency department utilization, outpatient surgery, and specialty pharmacy. Importantly, we are not seeing a new stepwise acuity reset. Membership and acuity remain broadly aligned with our assumptions, and the incremental pressure is increasingly coming from utilization among members who remain in the program. That distinction is important because it gives us very clear operating levers. From an outlook perspective, the second quarter reinforced our confidence in the full-year Medicaid framework. The July rate activity was constructive and modestly favorable to our expectations, which shows that the rate environment is moving in the right direction as states incorporate more recent experience. At the same time, we are staying quite prudent. Specifically, we are not assuming a material improvement in Medicaid trend in the back half of the year. The way I'd summarize it is as follows: elevated but understood trend, improving rate alignment, targeted cost actions underway, and a full-year margin outlook that we believe is appropriately prudent.
Thank you. Next question, please.
Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead.
Yeah. Hi, thank you. I know it's still pretty early in the year for the exchanges, you aren't carrying the favorability that you've discussed largely forward at this stage, but it would be great to try to understand, as you got a better perspective on where risk adjustment's coming in for the first half, how do we think about where first half performance was versus your expectations? How are you thinking about your risk adjustment position in 2026? I know you're reestablishing most of the 2025 risk adjustment favorability that you saw in the quarter, but any sense of what did actually flow through the results in the quarter would actually be helpful. Thank you.
Stephen, thanks very much for the question. The final 2025 risk adjustment results were quite favorable relative to our prior estimate, and that's reinforced our confidence in our estimation and reserving process. You're able to get a sense of the magnitude of that simply by looking at our disclosures in the earnings release in terms of the sequential move quarter-over-quarter in reported ACA revenue. At the same time, we are not extrapolating that favorability into 2026. From our perspective, the ACA market is still developing. Member mix has changed meaningfully, and the shift towards bronze plans has implications for both premium yield and risk adjustment. As we move into the second half of the year, we are reestablishing much of that 2025 favorability in our 2026 risk adjustment accrual, and again, I'd call that intentional prudence.
Thank you. Next question, please.
Next, we'll go to the line of Ann Hynes from Mizuho Securities. Please go ahead.
Great. Thank you. Can you remind us in all your divisions on what your trend actually was for Medicaid, ACA, and MA in guidance, and what Q2 actually came the final results were? Thank you.
Very much appreciate the question. Maybe let me take that really from the perspective of Medicaid to start. I'll combine your question a bit with what Justin asked earlier around utilization and acuity in Medicaid, as more color will be helpful. I would say both utilization and acuity, especially in Medicaid, remain part of that equation. That persistent pressure is increasingly driven more by utilization among members who remain in the program. We saw during the post-PHE unwind the largest issue was the acuity reset as lower-cost members exited the program. That dynamic hasn't disappeared, but it is moderating. We are seeing members leave Medicaid today who are still lower cost than those that are staying; that gap has significantly narrowed. That's important as we think about our trend outlook for the remainder of the year. In terms of ACA, trend was very much in line to slightly favorable for the second quarter, supported by favorable volume and timing dynamics. I would note we don't view the quarter as a change in the earnings profile for the year; that favorability reflected the more bronze plan orientation and better early membership coming in. Thank you.
Thank you. Next question, please.
Next, we'll go to the line of Andrew Mok from Barclays. Please go ahead.
Hi, good morning. Wanted to follow up on the seasonal favorability. You called out $0.25 of favorability this quarter, which grew sequentially from $0.15 in the first quarter. I understand that you're not taking credit for that in guidance, but can you help us understand why this increased sequentially when you presumably had better visibility into underlying membership and benefit design? Relatedly, is anything you're seeing that suggests that this first half upside would reverse in the back half of the year, or is that just a conservative stance on your end? Thanks.
Andrew, thanks very much for the question. The quarter reflected solid execution and a diversified set of earnings contributors, plus the financial flexibility to invest in capabilities to make performance more durable. In the quarter, we had about $0.50 of operating outperformance, roughly split between Medicare Advantage and individual ACA. In Medicare Advantage, that favorability primarily reflected the deliberate portfolio actions we took for 2026, favorable membership mix, and better claims experience. Those actions were intentional and prioritized sustainable economics. In the individual ACA, the favorability reflected two factors. First, more pronounced seasonality from the higher mix of bronze plans, similar in magnitude to the first quarter. Second, we saw the final ACA 2025 risk adjustment results come through favorable to our estimate. We have re-established the vast majority of that. As we think about the outlook for the full year, this is about being prudent for the second half rather than expecting a reversal of the first-half benefit.
Thanks, Mark. I would reiterate that our outlook remains prudent and aligned across lines of business. Next question, please.
Next, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead.
Great. Could you talk a little bit about the bidding posture you've got in ACA and MA for 2027 as far as your orientation towards growth versus further margin recovery? Maybe if you can just give a clarification on the Medicaid exits. As far as criteria, are you looking at particular types of programs, blue states, or maybe your market share position in states that would be important criteria for determining which ones would be more likely to be subject to exit? Thanks.
Great, thanks, Lance. I'm going to ask Felicia to address the ACA question, and then Aimée Dailey, who leads government business, to talk about the market exits in Medicaid. Felicia?
Good morning, and thank you for the question, Lance. As we think about ACA for 2027, we are taking a consistent posture with 2026. We will be very focused on achieving sustainable margin through disciplined market-specific pricing that reflects cost trend and evolving morbidity. Our prioritization includes plan options that drive sustainable performance. We've been pleased with the marketplace shift toward bronze plans and believe that orientation will be important for our strategy to drive sustainable margins going forward. We will continue to prioritize affordable plan options that drive sustainable performance for the enterprise. Regarding Medicaid exits, Medicaid remains a core part of our diversified portfolio. We will be disciplined about where we participate. We made a mutual decision with D.C. to exit, and we feel good about that decision while ensuring continuity of care for our members during the transition.
We regularly assess all markets we participate in and will plan to exit additional markets where the economics don't support sustainable performance. At the end of the day, Medicaid participation must make strategic and financial sense within our diversified portfolio. Where we have alignment with duals, our Carelon strategy, and a sustainable operating framework, we remain committed. Where those conditions aren't present, we will take disciplined action. We are committed to supporting members in states where we can deliver sustainable value and will continue working closely with state partners.
Thanks, Felicia. Aimée, do you want to add a few comments?
I will reiterate that Medicaid remains a core part of our diversified portfolio. We continue to be committed to the program and the members we serve. Our participation has to make strategic and financial sense, as Felicia said, but we will remain committed in this market and evaluate it with discipline.
Thank you. Next question, please.
Next, we'll go to the line of Lisa Gill from JPMorgan. Please go ahead.
Thanks very much. Good morning. I appreciated the comments on your investments, one-time, non-recurring. Can you help me understand how that's going to play into the growth rate going into next year, what kind of operational leverage you can get? More specifically, are these investments in technology and people? How do I think about the specific investments that you are making, and again, what the return will be as we get into 2027?
Thanks, Lisa. The investments are one-time and non-recurring; the costs sit in 2026 and will not reoccur into 2027. We view these as long-term, durable capabilities. Some are technology, but all are driven to improve capabilities inside the business. These investments are enablers of key capabilities: strengthening medical cost management, simplifying the member experience, improving provider connectivity, and enhancing claims accuracy and operational efficiency. Our goal is to move from months of identification to days and hours for medical cost pressures by strengthening data and insight capabilities and taking actions faster on medical cost management. For members, Sydney Health touches about 22 million members now, resulting in fewer handoffs and more proactive support. Concierge Care and proactive engagement help support members upfront because data is centralized and members can navigate more easily.
Medical cost management investments include analytics and AI-enabled tools to identify pressures earlier and implement clinical oversight, payment integrity, and network changes. These take time to mature, but we need the infrastructure this year and expect results next year in medical cost structure, not just expense structure. Provider connectivity investments, like Health OS, reduce documentation requests, improve prior authorization, increase real-time processing, improve payment accuracy, and reduce friction. Finally, Carelon is an important strategic asset; we are scaling value-based solutions in complex spending areas like CareBridge, behavioral health, and oncology. We expect benefits to build over time. We view this non-recurring opportunity as accelerating capabilities that manage costs and simplify the experience for long-term goals.
For our next question, we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead.
Great, thanks. I'm having a little difficulty reconciling some of the commentary you've made on the Medicaid side. You've talked a lot about the volatility of things there. I guess when we think about how you've talked about things, you said rates are coming in better, and it seems like everything else is coming in line, but you haven't improved your outlook for margin. Why isn't there a lift if rates are coming in better? If rates are coming in better, why are we talking more about exiting potential states today than we have a couple of years ago? It seems like it's the opposite of an improving rate outlook. Thanks.
Kevin, good morning, I appreciate the question. Our second-half Medicaid trend outlook is consistent with our first-half experience and is quite prudent. Three points: First, the July rate activity was favorable, confirming the rate environment is moving in the right direction, though the full-year benefit is moderated by timing and book portion affected. Second, membership and acuity are broadly aligned with our initial outlook assumptions, which is encouraging. Third, we continue to see elevated utilization in categories we've discussed. That pressure is increasingly driven by identifiable utilization patterns, which allows us to respond effectively. For modeling, you could think about the rate update as of July 1st being in the mid-single digit percent range, maybe toward the upper end of mid-single digits as opposed to the lower end when the year started. That should give you enough for modeling purposes.
Kevin, specifically on exits for markets, as Felicia shared, we're taking a portfolio look at all our states. We did similar work in Medicare last year, making disciplined decisions around long-term profitability and fit for the company. We've applied the same approach in Medicaid. It's not just about 2026 or 2027; it's about long-term sustainability, alignment to our dual footprint, and other considerations. We feel this is the right time to be disciplined and evaluate where the long-term trajectory supports participation. Thank you for the question and the opportunity to explain that further. Next question, please.
Next, we'll go to the line of Scott Fidel from Goldman Sachs. Please go ahead.
Thanks. Good morning. Sorry, I'm going to stick on the Medicaid topic as well. I thought it might be helpful just maybe looking out two to three years, and you talked about how you continue to view 2026 as the trough year for Medicaid. Clearly, you're not going to continue to sustain -1.75%, and we'll look to change on that. What I'm curious about, though, is how you would frame the macro around Medicaid, as we look out to what's a pretty substantial package of regulations that will be coming from OBBBA with the SDP reform and work requirements and the 1115 waivers, moving budget neutral. That could all have implications for funding for Medicaid. Also you're talking about these proactive initiatives you're doing, including exiting markets and clearly, doing what you can from the company level. How would you frame that in terms of thinking about Medicaid as the trough, trying to reconcile that with the headwinds ahead at the sector level, at the macro level, and then the company doing all it can to improve the margin performance?
Thanks for the question. I'll ask Mark and Felicia to comment. My overall framing is that those are manageable within the framework we've laid out and the experience we've had to date. The maturation of rate alignment and our actions, plus disciplined portfolio decisions, make this manageable. Mark?
Thanks. This is an important question. Let me address 2027, One Big Beautiful Bill Act implications and acuity. For 2027, we do expect some incremental acuity pressure as eligibility dynamics continue, including OBBBA-related community engagements and verification requirements. Importantly, we don't view that as a broad-based reset comparable to the post-PHE unwind. That means the large acuity shift is largely behind us. While OBBBA matters, it's not a defining moment for how we see 2027 today.
When we look at 2027 and potential work requirements in the interim final rule, it doesn't give us pause or concern. The changes will be phased, state-specific, and manageable. The rule sets a framework, but states have significant flexibility. We'll work closely with state partners to help members manage operational complexity associated with work requirements. The members potentially impacted are Medicaid expansion members and some waiver members, representing roughly 20% of our overall book. We view this as a phased implementation requiring collaboration with states and members, and manageable in the broader Medicaid context.
Thank you, Felicia and Mark. As a reminder, our confidence in 2027 is based on the breadth of our portfolio and the operating actions we've taken. It's not dependent on any single line of business. Commercial is performing well with pricing discipline; MA is benefiting from our 2026 actions; individual ACA is developing consistently with our plans. Medicaid remains important, and we see 2026 as the trough with improvements supported by rate alignment and maturing actions. We are prudent to allow those actions to mature before taking full credit. Our broad earnings path is not dependent on a single business, and accelerating targeted investments supports long-term results. Thank you. Next question, please.
Next, we'll go to the line of Dave Windley from Jefferies. Please go ahead.
Hi, thanks for taking my question. Good morning, I wanted to ask a question still on kind of utilization, but the shape of your experience in the first half. I think Elevance did not call out quite as much flu and weather in the first quarter as some of your peers did, and I wondered if what we're hearing from you on 2Q is perhaps a reflection of bounce back activity more so than maybe you might have anticipated from 1Q. Again, I'm suggesting maybe flu, weather-related in retrospect. Then if I could ask, on the non-recurrence of the investment scale, I want to make sure I understand. Does that mean the dollars come out next year, i.e., $0.80 worth of EPS comes back to the bottom line next year, or you just don't grow those investments next year and they fall into the baseline? I want to make sure I understand that. Thank you.
Sure, we'll clarify. Mark, could you go through the numbers?
Appreciate the questions. On the first, focusing on Medicaid, we did not see the second quarter as an acceleration in Medicaid cost trends beyond expectations. The second quarter cost trend was consistent with first quarter experience when adjusting for flu activity and prior development from the first quarter. In other words, core utilization is consistent. On the investment spend, the 2026 outlook from the first quarter already included approximately $0.75 of EPS tied to targeted investment spending that we spoke about at the beginning of the year. Those investments are part of the ongoing run rate and support areas like AI adoption, workforce enablement, and Carelon scaling. In addition, we expect to deploy approximately $0.80 of net below-the-line favorability from the second quarter into one-time accelerated investments in the second half. You should not see that $0.80 as recurring in 2027; these are one-time for this year, not part of 2027.
As a reminder, our jumping-off point for the adjusted 12% growth is the $26 baseline we shared. Next question, please.
Next, we'll go to the line of Ryan Langston from TD Cowen. Please go ahead.
Thanks. Based on some of the commentary from the hospital, surgical volumes appear to be broadly lower in the second quarter versus last year. In the prepared remarks, you mentioned outpatient surgery as a continued source of cost pressure. I'm wondering if that pressure is related more toward higher volumes or higher acuity procedures, and is there any risk that you see of any catch-up from those procedures in the back half of the year? Thank you.
Outpatient surgery is not a universal trend driver, but it matters in certain lines of business. For example, Medicaid outpatient surgery trend is more utilization-driven. Local group is more unit-cost-mix-driven. In Medicare and individual ACA, we are seeing moderately lower surgery trends. On ACA, we did expect per member utilization to be higher because we priced for higher expected morbidity. Overall, it's not a universal trend driver relative to the other categories we've highlighted.
Next question, please.
Next, we'll go to the line of Elizabeth Anderson from Evercore ISI. Please go ahead.
Hi, guys. Good morning. You talked a lot about the prudence of the outlook in terms of margins and your expectations for the year, which makes sense given the volatility in many of the business lines. Can you talk about any change in prudence regarding your reserve posturing starting in the second quarter for any of your businesses?
Appreciate the question. We remain confident in our reserving levels, and the reserving posture we have maintained is consistent and prudent relative to our membership base, claims inventory, and claims experience, and consistent with prior practice. We ended the quarter with days in claims payable of 45.4 days, up 2.9 days year-over-year. We feel good about the reserving posture as we ended the second quarter.
Next question, please.
Next, we'll go to the line of Erin Wright from Morgan Stanley. Please go ahead.
Great, thanks. I know there's a lot of questions on Medicaid, so I'll ask something a little different. I want to dig in a little more on what's happening in Medicare Advantage in terms of underlying utilization trends. There seems to be a narrative that utilization trends are more favorable here. What are your expectations that that continues? I know it's early to talk about Stars, but if I throw that out there in the context of the administration, how you think about Stars generally speaking. Thanks.
Sure. Aimée, would you comment on Medicare Advantage?
I'll cover both topics. On bid approach, our 2027 bids were consistent with the disciplined strategy we've executed. While encouraged by the final rate notice, we believe underlying medical cost trend still outpaces program funding. We submitted bids with a prudent view of trend and focus on sustainable margin improvement. The actions we took in 2026 are performing as expected; second quarter favorability reflected deliberate portfolio actions, favorable membership mix, and better claims experience. We remain on track to achieve at least a 2% margin for Medicare Advantage this year. Regarding Stars, it's early to comment on the next payment year. Stars remains one of our core enterprise priorities. We've invested in CAHPS infrastructure with AI-powered personalized member engagement, omni-channel outreach, and rewards programs. We've also invested in clinical data interoperability, provider engagement, and programs to close gaps in care. While not making predictions about payment year 2028, we feel good about the trajectory and view Stars as a multi-year journey executed against a disciplined roadmap.
Thank you, Aimée. Next question, please.
Next, we'll go to the line of Jason Cassorla from Guggenheim Securities. Please go ahead.
Great, thanks. Good morning. Maybe just wanted to ask on commercial, you're still tracking to the high end of ASO or fee-based enrollment guidance. You're fairly in line with the employer group risk enrollment expectation. Just is there anything fundamental worth noting about what you're seeing on the commercial enrollment front? Then, with trend expected to remain elevated, how are you balancing pricing versus the trend-bender opportunity for commercial books? Lastly, you've talked about the integrated model resonating. Is there any way you can help frame the runway you have for the integrated model opportunity? Thanks.
Thanks. Morgan, can you address commercial?
I'll address the market. The bulk of the commercial business is fee-based or self-funded, comprising local market activity and national accounts, both performing well. Persistency and sales rates are climbing, which indicates our assets are resonating. The market is focused on affordability and simplicity, which aligns with our focus. Our 2026 was a record year in national accounts, and our pipeline for 2027 is similarly large. Customers who left us two or three years ago have moved back to us, which speaks to the quality of our assets and how the organization works to make healthcare more affordable and easier to navigate for consumers.
Briefly on pricing, we are pricing to our forward view of medical cost trends with the discipline needed to support sustainable margins over time.
Thank you. We have time for one more question.
For our final question, we'll go to the line of George Hill from Deutsche Bank. Please go ahead.
Hey, good morning, guys, and thanks for squeezing me in. Mark, a simple question. I just want to zoom out. You started to talk about the outlook for 2027 broadly. I thought, could you just quickly address where your early expectations and the puts and takes are for 2027, put against the long-term growth algorithm? I imagine you guys will lose less money in Medicaid next year, which will be a good thing, and may all continue to grow. Commercial probably flattish. Carelon's up, capital deployment will be somewhere. We'd love if you could, whatever you can say, broadly sketching out the 2027 outlook versus the long-term growth algorithm. Thank you.
George, thanks for the question. Our confidence in 2027 is based on the breadth and durability of our earnings base, not on any single line or recovery assumption. As we look to next year, we expect good visibility across major drivers. On Medicaid, our base case is that performance improves as rates reflect cost experience and our management actions mature. In Medicare Advantage, the 2026 portfolio actions are showing through, mix is developing favorably, and the 2027 bid approach was disciplined. Commercial Group sales outlook is strong. On individual ACA, we're pricing and positioning the book consistently for 2027 as we did for 2026. Capital deployment remains an important contributor to EPS growth over time, and we are executing capital management effectively. The path to at least 12% adjusted EPS growth in 2027 is broad-based, balanced, and grounded in execution across our businesses.
Thank you, Mark, and thank you to everyone who joined us on the call today. We're pleased with the strong second quarter performance, and we're encouraged by the progress we're making across Elevance Health. We're raising our 2026 adjusted EPS guidance, managing the business with discipline, and accelerating targeted investments in medical cost management, member experience, provider connectivity, operating efficiency, and Carelon's integrated capabilities. We're confident in the path ahead and committed to creating long-term value for our members, customers, partners, and shareholders. Thank you for your interest in Elevance Health, and have a great rest of week.
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