Elevance Health (ELV, Financial) shares dropped 13% to a 52-week low after reporting a rare earnings miss in Q3 and lowering its FY24 EPS outlook. The company's Medicaid business is facing unprecedented challenges. The benefit expense ratio (BER), which indicates the percentage of premiums used to cover costs, increased by 270 basis points year-over-year to 89.5%, primarily due to a timing mismatch between Medicaid rates and the severity of members' medical conditions.
Elevance Health is not alone in dealing with rising medical costs and state-driven Medicaid member redeterminations. UnitedHealth Group (UNH, Financial) also highlighted similar timing mismatches, noting that states often use outdated care activity data, affecting eligibility and coverage. While UNH expects this to be a temporary issue, ELV's management was less optimistic but believes rates will eventually align with member acuity as enrollment stabilizes.
Despite ELV's assurance, investors remain skeptical due to the significant guidance cut and ongoing cost pressures. ELV's Q3 BER increase led to a 7% year-over-year earnings contraction, with EPS at $8.37, missing analyst expectations for growth. The cost rise is partly due to the end of pandemic-related member disenrollments, resulting in a 3.3% year-over-year decline in total members for Q3.
- Medicaid cost trends are worsening more than anticipated. ELV noted that although Medicaid rate increases are expected to hit record levels this year, they are insufficient to cover cost trends that are three to five times higher than historical averages. ELV is collaborating with state partners to ensure future rates reflect the acuity of its Medicaid members.
- Short-term headwinds are expected to continue. Consequently, ELV reduced its FY24 adjusted EPS outlook to approximately $33.00, down from at least $37.20. Management anticipates its BER to be 100 basis points higher than previously targeted, reaching around 88.5% for the year.
On a positive note, ELV's Q3 revenue grew by 5.3% year-over-year, surpassing estimates. The company expects continued momentum in its commercial business, driven by expanded exchange offerings in three new states. ELV also benefits from a strong economic moat, holding an exclusive license for the Blue Cross Blue Shield brand across over a dozen states. However, the ongoing cost pressures continue to undermine investor confidence.
