Elevance Health, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Amounts are in millions of dollars except per-share data, percentages, and membership. Prior-period figures were restated following adoption of long-duration insurance accounting guidance; the company said adoption had no overall material impact.
Business context and reporting period
Elevance is a diversified health company serving 48.1 million medical members at quarter-end. Its reporting segments changed in 2023: Health Benefits, CarelonRx, Carelon Services, and Corporate & Other. Comparative segment information was reclassified to match the new presentation.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total operating revenue | $41,898 | $37,886 | +10.6% |
| Total revenues, including investment income and financial instrument losses | $42,172 | $38,095 | +10.7% |
| Net income | $2,004 | $1,779 | +12.6% |
| Shareholders’ net income | $1,989 | $1,789 | +11.2% |
| Diluted EPS | $8.30 | $7.32 | +13.4% |
| Operating cash flow | $6,469 | $2,541 | +$3,928 |
| Benefit expense ratio | 85.8% | 86.1% | Down 0.3 percentage points |
| Operating expense ratio | 11.5% | 11.5% | No change |
Premium revenue was $35,868, product revenue $4,022, and service fees $2,008. Benefit expense was $30,786; operating expense was $4,800. The effective tax rate increased to 23.5% from 22.9%. Dividends were $1.48 per share, compared with $1.28.
Operating revenue growth reflected Medicaid and Medicare Advantage membership growth, Health Benefits rate increases, and higher CarelonRx pharmacy revenue. Management attributed higher net income to improved segment operating gains, higher investment income, and lower financial-instrument losses, partly offset by higher interest expense, intangible amortization, and taxes.
- Health Benefits: Revenue $37,280, up 9.6%; operating gain $2,159, up 16.6%; operating margin 5.8%, up 0.4 percentage points.
- CarelonRx: Revenue $8,024, up 20.1%; operating gain $512, up 28.6%; operating margin 6.4%, up 0.4 percentage points.
- Carelon Services: Revenue $3,312, up 12.3%; operating gain $209, up 4.5%; operating margin 6.3%, down 0.5 percentage points.
Medical membership rose 2.9% to 48.124 million, led by Medicaid (+8.9%), Medicare Advantage (+6.9%), and Individual plans (+15.2%); Employer Group risk-based membership declined 5.7%. CarelonRx adjusted scripts increased 3.7% to 75.7 million.
Balance sheet, cash flow, and liquidity
At March 31, 2023, cash and cash equivalents were $10,142, total assets $109,040, total liabilities $71,580, and total equity $37,460. Cash, cash equivalents, and fixed-maturity and equity securities totaled $38,953. Debt was approximately $25,466, comprising $265 of short-term borrowings and $25,201 of long-term debt; the consolidated debt-to-capital ratio was 40.5%, versus 39.9% at year-end 2022.
Operating cash flow was $6,469; investing cash use was $3,184 and financing cash use was $531. Cash increased $2,755 to $10,142. The company attributed the higher operating cash flow mainly to early receipt of April CMS premiums, working-capital timing, and higher net income. It spent $1,638 net on acquisitions, repurchased $622 of stock, and paid $351 in dividends.
In February, Elevance issued $2,600 of senior notes at coupon rates of 4.900% to 5.125%, and repaid $1,500 of notes at maturity during the quarter. Commercial paper outstanding was $325. A $4,000 revolving credit facility had no borrowings; the company reported compliance with its covenants. Management said available cash, investments, operating receipts, and borrowing facilities should cover expected cash needs for the next 12 months.
Material changes, outlook, risks, and unusual items
- Membership and policy changes: Medicaid redeterminations could reduce Medicaid enrollment as states resumed eligibility reviews from April 1, 2023. Management expects potential growth in commercial, Medicare, and exchange coverage as some members leave Medicaid. The company expanded Individual Public Exchange participation to 138 of 143 rating regions for 2023.
- Medical costs and reserves: Q1 COVID-19 claim costs were lower than the prior year. Medical claims payable was $15,728 at quarter-end. Favorable prior-period claims development reduced incurred claims by $1,068, compared with $933 in Q1 2022; reserve estimates depend on utilization, cost, and claims-processing assumptions.
- Acquisitions and divestiture: Elevance completed its BioPlus specialty-pharmacy acquisition in February; preliminary purchase accounting included $728 of goodwill and $809 of finite-lived intangible assets. It agreed to acquire Blue Cross and Blue Shield of Louisiana, expected to close by the end of Q4 2023 subject to approvals, and to sell its life and disability businesses to The Standard, expected to close by the end of Q1 2024 subject to approvals.
- Litigation and investigations: The company reported an aggregate range of reasonably possible losses in excess of established reserves of $0 to approximately $250. The Blue Cross Blue Shield subscriber antitrust settlement remains subject to appeals; Elevance had paid $506 into escrow toward its $596 settlement amount, accrued in 2020. A DOJ Medicare risk-adjustment lawsuit and separate CareMore and HealthSun investigations are ongoing; the company disputes or is cooperating with the matters as described in the filing. The filing does not provide a clear estimate of potential exposure for these matters.
- Other legal exposure: Elevance seeks more than $14.8 billion in its Express Scripts pharmacy-pricing lawsuit, but the remaining claims were narrower and a trial was set for December 2023. The requested damages are allegations, not a recorded recovery.
- Market and regulatory risks: The filing identifies medical utilization and provider-cost trends, government-program funding and regulation, risk-adjustment audits, competition, investment-market volatility, cybersecurity and technology disruptions, litigation, and acquisition execution as risks. It warns that privatized pricing of COVID-19 treatments and vaccinations could affect future claims costs. No specific full-year financial guidance is provided; management cautions that Q1 results may not indicate full-year results.
Important facts for investors to verify
- Whether Medicaid disenrollments and member transitions develop as management expects, and the effect on membership and margins.
- Claims-cost trends and the sustainability of favorable prior-period reserve development.
- How much Q1 operating cash flow reflects timing, particularly the early CMS premium receipt, versus recurring cash generation.
- Debt, acquisition spending, share repurchases, and regulated-subsidiary capital or dividend restrictions.
- Progress and financial consequences of the BioPlus and Louisiana acquisitions, the planned life and disability divestiture, and the disclosed litigation and government investigations.
- Comparability of results given the segment reorganization and restated prior-period accounting figures.