Elevance Health is bracing for continued high medical costs within its Medicaid business, with executives projecting these elevated expenses to persist through 2026. The company anticipates a potential improvement in profitability only by 2027. This outlook has tempered initial investor enthusiasm, even after a strong third-quarter profit report.
Key Takeaways
- Elevance Health expects high Medicaid costs to continue into 2026.
- Profitability for the Medicaid segment may not improve until 2027.
- Increased demand for behavioral health and weight-loss drugs is driving costs.
- The company reaffirmed its 2025 adjusted profit forecast of $30 per share.
- Uncertainty surrounds Affordable Care Act (Obamacare) subsidy expirations in 2026.
Medicaid Challenges Impact Outlook
The company's Medicaid segment, which provides government-backed health plans for low-income individuals, has seen a significant increase in medical costs. This trend is largely due to shifts in enrollment patterns. When states began redetermining Medicaid eligibility, many healthier members left the program, leaving a higher proportion of individuals requiring more extensive medical services.
Elevance Health's Chief Financial Officer, Mark Kaye, stated that 2026 is expected to be the "low point" for Medicaid profitability. He indicated that the insurer anticipates seeing improvements throughout 2027.
Fact Check
- Elevance Health's shares dropped by as much as 4% in early trading following the Medicaid cost announcement.
- The company's third-quarter adjusted profit per share was $6.03, surpassing analyst estimates of $4.93.
- The third-quarter medical loss ratio (MLR) was 91.3%, better than analysts' predicted 91.73%.
Drivers of Increased Costs
Elevated demand for specific medical services is a primary factor pushing up costs. This includes a notable rise in behavioral health services. Additionally, the increasing use of weight-loss drugs is contributing significantly to the pressure on government-backed health plans.
Julie Utterback, an analyst at Morningstar, commented that the impact on Medicaid margins could constrain Elevance's earnings for a third consecutive year. This highlights the sustained nature of these cost pressures.
Future Uncertainty for Individual Plans
Beyond Medicaid, Elevance Health also projects higher costs in the fourth quarter for its individual plans, which fall under the Affordable Care Act (ACA), often known as Obamacare. This is partly due to members utilizing their benefits more extensively before anticipated changes in the coming year.
A significant area of uncertainty for 2026 involves the expected expiration of additional premium tax credits. These subsidies were put in place during the COVID-19 pandemic to help individuals afford Obamacare plans. Their potential removal could impact patient enrollment and affordability.
Understanding Medical Loss Ratio (MLR)
The Medical Loss Ratio (MLR) is a key metric in the health insurance industry. It represents the percentage of premium revenues that health insurers spend on medical care and activities to improve healthcare quality. A higher MLR means a larger portion of premiums goes directly to patient care, while a lower MLR indicates more funds are used for administrative costs or profit.
Company Prepared for Policy Shifts
Elevance Health has stated its readiness for a range of policy changes regarding these subsidies. This includes scenarios where enhanced subsidies are renewed, modified, or allowed to expire. However, the company will wait for clearer visibility on these policy decisions before issuing a formal 2026 forecast. A forecast is expected in January.
Despite these challenges, Elevance Health has reaffirmed its adjusted profit forecast for 2025, projecting approximately $30 per share. The company also maintained its expectation for a medical loss ratio of 90% for the year, indicating a consistent approach to managing healthcare spending against premium income.
"We see 2026 as the low point," said Chief Financial Officer Mark Kaye, referring to Medicaid profitability. "We expect improvement through 2027."
The company's ability to navigate these complex cost environments, especially within its large Medicaid portfolio, will be crucial for its financial performance in the coming years. The ongoing demand for specific health services and the evolving landscape of government subsidies will continue to shape the healthcare insurer's outlook.
Investor Concerns and Market Reaction
The news regarding persistent Medicaid costs overshadowed Elevance Health's otherwise strong third-quarter performance. Investors reacted swiftly, causing the company's shares to decline.
Daniel Barasa, a portfolio manager at Gabelli Funds, emphasized that the primary concern for investors remains the Medicaid segment. He echoed the sentiment that 2026 is viewed as the trough year for this business. This highlights the market's focus on future profitability over immediate gains.
The healthcare sector overall has faced challenges with high costs. The changes in Medicaid enrollment, specifically, have created an environment where insurers are covering a sicker population, leading to increased demand for medical services. This trend is not unique to Elevance Health but is a broader industry concern.
- Behavioral health services have seen a significant increase in utilization.
- The rising popularity and prescription of weight-loss drugs are adding to medical expenses.
- Changes in Medicaid eligibility have altered the risk profile of the insured population.
As the company prepares its 2026 forecast, clarity on government policy regarding ACA subsidies will be vital. The balance between managing rising medical costs and adapting to regulatory changes will define Elevance Health's trajectory in the near term.
