Elevance Reaction....Much Ado

Possible Overreaction on Wall Street on Elevance Q3 2024 earnings

Elevance reported earnings 10/17 before the market opened and the stock cratered 15% on news that their Medical Cost Ratio grew to 89.5% which was a 270 basis increase over Q3 of 2023. As discussed in many of the Q2 earnings calls, misalignment for reimbursement from the states for their Medicaid line of business was a large driver. This drove a huge EPS miss that sent Wall Street into a tailspin sell-off of all of the “Big Six Payors”. Membership was flat year over year at 45.8 million members as the 600,000 member growth in ACA along with commercial was offset by Medicaid redeterminations. Despite all of this, revenue grew 5% to almost 45 billion in the quarter. Given the level of coverage on all stocks and more folks being engaged in the market, we are seeing more pronounced reactions to earnings that can sometimes be unwarranted. After finally listening to the call along with looking into the 10Q, I believe this happened to Elevance and below are my takeaways. 

Medicare Advantage

They have positioned their bids for open enrollment very conservatively, and they expect to grow in line with the rest of the broader market. There are some concerns around Medicare advantage with the back to back CMS rate cats for reimbursement and similar to other payers of mentioned some headwinds they feel are related to the V 28 risk adjustment changes along with some of the impact from the IRA they feel like they improved on their Medicare stars nearly 60% of their measures were better year over a year unfortunately they’ll see a decline in their four star or higher given that one of their larger four-star plans missed the CMS cut off by four 10,000th of a point.  Given this narrow miss, they are meeting with CMS and are challenging whether or not they can get an adjustment as they believe. This is not fair given the current environment and their historical performance with the star rating. They left several markets in the MAPD space and have lost about 85,000 members as they begin to look to bid each county, state, and form of plan more prudently in this new environment of Medicare Advantage. Based on their prudent pricing approach for their bids, they expect margins to normalize for them in MAPD for 2025.

Medicaid

As I have covered in several substacks, the redeterminations happened at a very fast level so most of the healthier patients with higher incomes have lost their Medicaid coverage. This has sent the PMPM (Per Member Per Month) expense higher and states have not raised their PMPM reimbursement to cover the Payors for these elevated costs. In the call, Mark Kaye (CFO) mentioned that it is 3-5 times higher in utilization in some states so they are really still meeting with states to ensure they get made whole on these expenses to care for the beneficiaries. Mark and Gail said they had planned/budgeted for utilization to be low single digits multiple more utilization but this explosion was more than they had seen since being in the business. They see this as a short term head wind that should subside but I think wall street was caught off guard how big the misalignment was on reimbursement and many payors did a poor job managing the timeline. Felicia Norwood has been on several calls and done a really nice job of putting some tighter frames on the problem. She cited that half of the state partners are January shifts and half are July shifts with regard to the rate adjustments. This was helpful to put some timelines on how this financial headwind plays out.

Commercial

Feel like they haven’t really differentiated offering with Carolon coming on board and it is really resonating with larger employers in Carelon ability to drive value and savings. This is why we’ve seen them lean in over the last 6/4 on specialty drugs with the acquisition of bio plus paragon and most recently Kroger specialty. Sounds like they rolled out a program very similar to Cigna/Evernorth/ESI with a weight management GLP-1 component for their employer customers as this has become such a large spend across healthcare.