Elevance Health, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Dollar amounts are in millions unless stated otherwise. Prior-year comparisons are restated for the adoption of long-duration insurance accounting and recast segment reporting.
Business context
Elevance served 47.3 million medical members, essentially unchanged year over year. It reports four segments: Health Benefits, CarelonRx, Carelon Services, and Corporate & Other. The company expanded its 2023 Individual Public Exchange participation and completed its BioPlus specialty-pharmacy acquisition in February.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total operating revenue | $42,480, up 7.2% | $127,755, up 10.1% |
| Total revenues, including investment income and financial-instrument losses | $42,849, up 7.3% | $128,693, up 10.3% |
| Net income | $1,300, down 18.6% | $5,160, up 3.0% |
| Shareholders’ net income | $1,289, down 19.6% | $5,131, up 2.0% |
| Diluted EPS | $5.45, down 17.7% | $21.56, up 4.3% |
| Operating cash flow | Not presented for the quarter | $11,032, versus $9,917 |
Third-quarter benefit expense was $30,606; the benefit expense ratio was 86.8%, down 40 basis points. The operating expense ratio rose 150 basis points to 12.9%, primarily reflecting business-efficiency charges. Net income as a share of total revenues was 3.0%, versus 4.0% a year earlier. For the first nine months, the benefit expense ratio was 86.3%, down 50 basis points, while the operating expense ratio was 11.8%, up 50 basis points.
For the quarter, Health Benefits operating gain increased 13.0% to $1,847 and Carelon Services gain increased 38.4% to $173; CarelonRx gain fell 7.6% to $477. Corporate & Other recorded a $741 operating loss, compared with a $24 loss, principally due to the efficiency program. For the nine months, operating gain rose in Health Benefits, CarelonRx, and Carelon Services, but the Corporate & Other loss widened.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $10,919 at September 30, 2023, versus $7,387 at year-end 2022. Cash, fixed-maturity securities, and equity securities totaled $39,711, up $4,667 from year-end.
- Total assets were $110,478; total equity was $38,539. Medical claims payable was $16,176.
- Total debt was approximately $24,844, including current and long-term debt, versus $23,849 at year-end. The consolidated debt-to-capital ratio was 39.2%, compared with 39.9% at year-end. The company reported compliance with debt covenants and no borrowings under its $4 billion revolving facility at quarter-end.
- Operating cash flow of $11,032 exceeded investing cash outflow of $4,543 and financing cash outflow of $2,955. Uses included $1,570 for acquisitions, $1,748 for share repurchases, and $1,049 in dividends.
Changes versus prior periods and notable items
- Revenue growth reflected Health Benefits premium-rate increases, Medicaid and Medicare Advantage membership growth in the first half, and CarelonRx external-member growth and BioPlus. Benefit costs rose with medical-cost trends and membership-related healthcare costs.
- Third-quarter operating expense included $730 of charges under the new 2023–2024 Business Efficiency Program: $446 for IT assets and contract write-offs, $230 for personnel costs, and $54 for facility-related impairments. The program is expected to be substantially complete by Q3 2024, with related cash outlays primarily through 2024.
- Nine-month medical claims results included $1,342 of favorable prior-period development, versus $901 in 2022. Management attributed the 2023 development to more favorable late-2022 trends and faster-than-expected completion of claims.
- Net losses on financial instruments were $124 in Q3 and $358 for the first nine months. The filing attributes quarterly deterioration mainly to losses on sales of fixed-maturity securities and other investments. Fixed-maturity securities had $2,435 of gross unrealized losses at quarter-end, primarily associated with higher interest rates; the company said it did not intend, and was unlikely to be required, to sell the affected securities before recovery or maturity.
- Elevance adopted the long-duration insurance accounting standard in 2023. Management said adoption had no overall material impact, but comparative financial information was restated. Prior-year segment information was also recast to the new structure.
Outlook, risks and contingencies
- CMS’s 2024 Medicare Advantage Star ratings placed 34% of Elevance’s members in plans rated at least 4.0 Stars, versus 64% under the 2023 ratings. The company expects about $500 of lower 2025 operating revenue, net of contracting offsets, and plans to mitigate effects on operating gain and EPS. The impact on bonus payments and plan-level rebates is expected in 2025.
- Medicaid eligibility redeterminations resumed in 2023 and reduced Medicaid membership. Management expects some affected members to seek commercial coverage, including through Public Exchanges; the filing does not quantify the expected net membership effect.
- The company expects cash, investments, operating receipts, and available credit to cover expected cash needs over the next 12 months. It cautions that results may vary with medical costs and utilization, membership, government funding and regulation, Star ratings, competition, investment markets, litigation, and other risks.
- Pending transactions: the sale of life and disability businesses to The Standard and the proposed acquisition of Blue Cross and Blue Shield of Louisiana were each expected to close in the first half of 2024, subject to approvals and customary conditions.
- Legal matters include Blue Cross Blue Shield antitrust litigation, a DOJ Medicare risk-adjustment suit, and DOJ investigations concerning CareMore and HealthSun risk-adjustment practices. The company is contesting or cooperating as described in the filing; outcomes remain uncertain. For proceedings where a loss is reasonably possible and estimable, aggregate possible losses in excess of established reserves were estimated at $0 to approximately $250. The Express Scripts dispute includes a company claim alleging more than $14.8 billion in pharmacy-pricing damages; this is an alleged claim, not a stated expected recovery.
Important facts for investors to verify
- Whether medical-cost trends and premium pricing continue to support the benefit expense ratio, and whether favorable claims-reserve development recurs.
- The realized costs, timing, cash requirements, and operational effects of the $730 efficiency-program charges and planned workforce and facility actions.
- How the 2024 Star ratings affect 2025 revenue, operating gain, and EPS relative to management’s estimate and mitigation plans.
- Membership and financial effects of Medicaid redeterminations, Public Exchange growth, and the pending Louisiana acquisition and life-and-disability divestiture.
- Developments in the identified litigation and regulatory investigations, including whether exposure changes beyond the disclosed estimable range.