Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, where participants are encouraged to present a single question. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead.

Good morning and welcome to Elevance Health's fourth quarter 2022 earnings call. This is Steve Tanal, Vice President of Investor Relations, and I'm joined this morning on our earnings call by Gail Boudreaux, President and CEO; John Gallina, our CFO; Peter Haytaian, President of Carillon; Morgan Kendrick, President of our Commercial and Specialty Business Division; and Felicia Norwood, President of our Government Business division. Gail will begin the call with a brief discussion of some of the highlights of the quarter and year before turning to our recent announcement of the acquisition of Blue Cross and Blue Shield of Louisiana and a number of other updates on key strategic initiatives. John will then discuss our financial results and outlook for 2023 in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevate Health. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail.

Thanks Steve and good morning everyone. Today, we're pleased to share that Elevance Health delivered strong fourth quarter results, closing out another year of growth, consistent with our long-term targets and considerable progress in our transformation to become a lifetime trusted health partner. In the fourth quarter, Elevance Health delivered GAAP earnings per share of $3.93, and adjusted earnings per share of $5.23. For the full year, we reported GAAP earnings per share of $24.81 and adjusted earnings per share of $29.7 and reflecting growth of 15% year-over-year from our adjusted baseline of $25.20 in 2022. 2022 marks the fifth consecutive year in which we grew adjusted earnings per share within or above our 12% to 15% long-term target growth rate. This reflects the focused and sustained execution of our strategy to optimize our health benefits businesses, invest in high-growth opportunities, and accelerate capabilities and services. Elevance Health ended 2022, serving more than 47.5 million medical members, up nearly 2.2 million members year-over-year, including more than 1 million new commercial and over 1 million new government members, investments in enhancing the customer experience, delivering innovative, customized whole health solutions, deepening digital engagement, and prioritizing health equity, all helped to deliver strong growth across customer segments. Membership growth, coupled with expansion in both the scope and scale of Caroline's business with our health plans, helped to propel double-digit growth in CarelonRx and Carelon services. In total, for the year, Elevance Health produced nearly 14% growth in operating revenue and double-digit growth in adjusted operating earnings. Now, I'd like to discuss a number of recent developments, including the acquisition of Blue Cross and Blue Shield of Louisiana that we just announced on Monday. Like our Anthem Blue Cross, Blue Shield family of plans, Blue Cross and Blue Shield of Louisiana is deeply…

Thank you, Gail, and good morning to everyone on the line. We are pleased to have delivered solid fourth quarter financial results, closing out another strong year of growth for Elevance Health. The focused execution on our enterprise strategy continues to drive progress against our stated long-term targets. Fourth quarter adjusted earnings per share of $5.23 was ahead of our expectations and drove full-year adjusted earnings per share to $29.7, reflecting growth of over 15% year-over-year off of our adjusted 2021 baseline of $25.20 and above our long-term 12% to 15% annual earnings per share growth target. We ended the year with 47.5 million members, up $2.2 million or nearly 5% year-over-year, with organic growth having comprised more than 85% of our overall increase. In the fourth quarter, medical membership grew by 248,000 members, led by growth in Medicaid, driven in large part by the ongoing suspension of eligibility redeterminations and the acquisition of Vivida Health, which added 29,000 Medicaid members. For the full year, we added 1.1 million net new commercial members and 1.1 million net new government members. Total operating revenue for the year was nearly $156 billion, an increase of approximately 14% over the prior year, reflecting solid growth in our health benefits businesses and continued momentum in Carelon. We are pleased with the progress made to accelerate our service capabilities during the year as Carelon Rx and Carelon services grew revenue by 12% and 27% over 2021, respectively. The consolidated benefit expense ratio for the fourth quarter was 89.4%, a decrease of 10 basis points over the fourth quarter of 2021. This strong performance includes an improvement in commercial underwriting margin and also benefited from the reclassification of certain quality improvement expenses. These improvements were partially offset by the Medicaid business, which carries a higher benefit…

[Operator Instructions] Our first question, we’ll go to the line of Lance Wilkes from Bernstein. Your line is open.

Yes. Thanks. And can you talk a little bit about, the growth in the services business, which is really interesting. Both org changes that you're intending to put in place to kind of support the new segment reporting, if any? And then, in the Care delivery aspect of that, can you just talk a little bit about what you've been doing to date with some of your partnerships with Aledade and Privia and how that's kind of being deployed in the market and what your expectations are for care delivery long term?

Well, thanks for the question, Lance. Let me frame a little bit of what you asked, and then I'll ask Pete Haytaian, who leads Carelon to give you a little bit more color on that. First, in terms of org structure, we've actually been building our team over the last 18 months, and Pete's done a really strong job of both, bringing individuals who are in the services industry to Carelon, but also taking individuals from our health benefits business, who have a deep understanding of that business and having them lead. So we feel we've got a really good mix of talent and have been building our bench strength pretty effectively. So we don't envision any structural changes, obviously, as acquisitions come in, they fit into the verticals that we've shared as part of our strategy. So let me just have Pete comment a little bit about -- a little bit more about Carelon and our growth there.

Yes. No, thanks a lot Gail. Thanks a lot, Lance, for the question. Overall, as Gail said, we're really pleased with the momentum and performance that we saw in 2022. And as Gail noted, in the year, we did do a lot around restructuring. We obviously went through rebranding, which there was a lot of excitement around. And as she said, we infused a lot of new talent across the organization. And then, in terms of the infrastructure we built internally, we're very focused. As you know, a core part of our strategy is focused on internal growth and serving Elevance affiliated health plans. And so we built the infrastructure to engage, to a much better degree, with our associates and partners internally. And we're seeing really good progress there. I hope you can see that through the numbers and the improvement in the year. We remain keenly focused on whole health and improving the patient experience. That's something else that we're very focused on looking from the outside in, in terms of the patient experience. And I'd say the other thing that we've been really focused on internally, and we're trying to change the culture, and its working, is driving more risk and capitation through the portfolio. And that has really helped in terms of the acceleration of our growth and the innovation that we're seeing going forward. As it relates to your question on some of the care delivery partnerships. We're seeing really good progress there. Again, when you look at the assets within Carelon, it can add a lot of value to our partners. And so, we continue to look to wrap around those services and create incremental value. And as we look forward, we have that in mind as well. When we talk to our provider base partners, where are they feeling stressed, where can we support them. So there's a lot of opportunity that we got going forward.

Yes. Thanks, Pete. And Lance, specifically, in terms of how we're deploying, we see those partnerships and some of the investments we've made as part of our overall value-based care strategy. Our penetration has been strong, we're around 63% driven by purposeful collaboration. Those are two really good examples. We continue to learn and improve that approach, and part of that is how we work closely with Carelon to capitate services and actually, I think, impact more of the health care dollar and impact more of overall services. But we feel really confident about the strategy that we've deployed. And as I've shared before on these calls, we know that sharing -- the downside risk is really the most important part of where we need to achieve better outcomes. And so we're continuing to grow those arrangements, Early days still, but we feel good about the partnerships that we have, and we continue to expand them, and we feel on track to deliver on the goals that we've shared previously at our Investor Day, but also in these calls. So thanks very much for the question and next question please.

Next, we'll go to the line of A.J. Rice from Credit Suisse. Please go ahead.

Thanks. Hi, everybody. Congratulations on the Blue Cross Blue Shield of Louisiana deal. It's been quite a while since we've seen one of those. My big recollection is the approval process and navigating the regulatory side of things can be a little tricky. Can you give us a sense of any discussions you have with the states at this point and your confidence level? I know you're saying by year-end close. And John, you mentioned that it wouldn't be meaningful to this year's numbers. I'm assuming that's partly due to late closure. But is it -- can we say that it would be accretive? Is there anything you can say financially about it? And then the last aspect of this is, obviously, there's a lot of changing things related to the Blues generally with the antitrust settlement, et cetera. Are you seeing more discussions, Gail, as you're out there, or is there more interest in collaboration, maybe we could see a broader upswing in activity?

Well, thank you, A.J. That was a very comprehensive set of questions, and let me try to kind of go through them. First, we really are excited about the acquisition of Blue Cross and Blue Shield Louisiana. As you said, it's been some time since one of these has occurred. But I think as you think about like the driver for this, this is very much a strategic acquisition. The Board of Blue Cross and Blue Shield of Louisiana, really wanted to have a greater impact and accelerate the strategy that they put in place. This is a solidly run plan, 4.5-star Medicare plan. And I think those are really important things as you think about this acquisition. The other thing that I think is really important for us is Blue Cross Blue Shield of Louisiana very much aligns with our strategy. They're deeply rooted in their local communities. They -- as we shared, they've served Louisiana for more than 90 years. Our mission and purpose is well aligned. And we've had a healthy Blue Alliance partnership with them that serves our Medicaid and dual special needs plans for a number of years now. So we've worked together culturally, I think there's a great alignment there. And the other thing is we're excited because this brings the 15th Blue state. So we can -- just as we have in our other 14, we've kept our deep local roots in a new market, but we also can bring our national scale and access to our portfolio of innovative solutions and capabilities, again, accelerating what the Blue Cross Blue Shield strategic focus has been, and that supports the community. And I think accelerates their strategy and making an even greater difference in impact on the 1.9 million lives. In terms of closing,…

Next, we'll go to the line of Justin Lake from Wolfe Research. Please, go ahead.

Thanks. Good morning. Just wanted to check in, in 2022, you did about 7% margin in that commercial business. I know you're not reporting it specifically anymore. But you had 11% target out there for 2025. I wanted to check in on that target and just find out if that is still what you're expecting to do by 2025. Maybe you could share with us how much progress you're making towards that in 2023? And then give us -- I'm sure there's an offset there in terms of more conservatism on the Medicaid side from a margin perspective. Can you share what you -- where you expect your Medicaid margins to be versus the 2% to 4% target you have out there long term? Thanks.

Thank you, Justin. Good morning. And we do appreciate the questions. In terms of commercial, we're actually doing very, very well. We have a repricing effort going on that began on July 1 of 2022. And what we had seen was, the overall cost structure of the commercial market was higher than we had assumed. And so, this repricing was about 25% of the large group block in July. And then we repriced about 50% of the block here on January 1, 2023, and it was really to ensure that the premiums more accurately reflect the underlying cost structure of the book. The result of that would be margin recovery associated with that. We feel very good about the progress that we're making, and we still stand by the commitments that were made in our prior Investor Day to get the commercial margins up to the level that we had estimated by 2025. You have to look at now the health services segment in total. And as you had asked, we have the commercial margin improvement ongoing, we will have Medicare margin improvement, as our risk adjusters are really recovering, risk-adjusted revenue really recovering from pandemic era lows. Also, we do have 74% of our MA membership in 4-star plans or above for the 2023 payment year. And we believe our Medicare Advantage business will be solidly within the target margin range of 3% to 5%. And then, on Medicaid, which was your final question, we've been working very closely with our state partners on Medicaid and feel very good about the rating actions. And that the rates are actuarially sound rates and feel very good about that. However, we were making either at or above the high end of our range here in the last couple of years, which obviously resulted in MLR collars and various other rebates being paid back to the states. We expect that the Medicaid business will be solidly within the 2% to 4% range, closer to the high end, but still with actuarial equivalent rates. So hopefully, that helps clarify all that. Thank you.

Thank you. Next question, please.

Next, we'll go to the line of Nathan Rich from Goldman Sachs. Please go ahead.

Hi. Good morning. Thanks for the questions. On Carelon, you mentioned that you hit the target for 20% of benefit expense through Carelon ahead of schedule. Could you talk about how much higher this percentage can go from here with your current capabilities? And then specifically on the outlook for 2023. The revenue guidance for Carelon Services came in a bit below your long-term target. How are you thinking about growth from here just given the progress that you've made? And will more growth come from external customers going forward? Thank you.

Yes. Thanks, Nathan. I'm going to have Pete Haytaian provide a little perspective. And as we shared earlier, we are going to be updating our long-term planning at our Investor Day in March. So we probably won't go into like where we think our updated guidance is on that, but we can certainly give you some color on how each of the components are playing and feel very good about the progress that Carelon overall is making. So Pete?

Yes. No, thanks for the question, Nathan. As it relates to 2023, just to be clear, and John noted this in the prepared remarks, the low double-digit range growth in 2023 is really organic growth. It does not include M&A. I think if you look at our recent history, there's been a lot of M&A that's contributed meaningfully to us. And we're being very intentional about that. We're very focused on it. It's something that we'll continue to do. And I think it's an important part of our growth strategy going forward. As Gail said, in terms of the amount of medical spend that we penetrate, we'll talk more about that at Investor Day, but we're really encouraged with our trajectory right now. We feel like we can continue to grow pretty significantly. There's a lot of white space internally. So a lot of opportunity there. But to your point about external growth, we did establish some new leadership. We've got a new infrastructure in terms of external growth. We're very focused, as Gail said, you've heard a lot about the Blues and Blue partnerships, and we're very encouraged of what we're seeing in terms of the Blue opportunity. So we do think we can see nice growth externally as well. But again, our first focus is on the affiliated health plans and creating value there first.

Thank you. Next question, please.

Next, we'll go to the line of Scott Fidel from Stephens. Please go ahead.

Hi. Thanks. Good morning. Just I had two follow-ups on the Blues topic. The first is if you can maybe give us some color on the incremental revenue you expect to drive from the BCBSLA Louisiana acquisition because obviously, you already have some revenues that you're generating off of Healthy Blue. Then also maybe just an update on the Blue Cross Blue Shield of Minnesota situation, I think that, that relationship on the Medicaid side will term at the beginning of 2024. Just any update on membership or financial impact that you expect from that situation as well? Thank you.

Yes, sure. Thank you, Scott, for the question. So associated with Blue Cross and Blue Shield of Louisiana. As we had stated, we're not expecting that to close until later in [Technical Difficulty] impact on 2023 will not be material, really data line items. However, assuming it does close in 2023 -- in 2024, what we should see is an incremental 1.6 million members after you eliminate the various double counts and you referenced the significant partnership we have with them already. So it's an incremental 1.6 million members. And it's really -- it's an incremental $4.5 billion in revenue on top of what we have now. So that's really about the high-level economics that we would expect to inure in 2024.

I'm going to ask Felicia Norwood to comment on Minnesota.

Yes. Good morning, Scott, and thank you for the question on Minnesota. We operate over 27 Medicaid plans across the country with over 11.5 million members. And when you think about what we do, we bring very deep expertise in this business and a relentless focus on our whole health strategy, health equity and improving health outcomes. The expertise we bring to the table has been recognized by our external partners, and we really look forward to continuing to bring that experience to other Blue partners and alliances, not only in Medicaid, but in Medicare as well. When I think about our alliance relationships, each of them is very different. And Blue Cross Blue Shield of Minnesota decided to end our administrative services relationship, which supported about 330,000 Medicaid members and provide back-office services in-house. We're going to work with them to make sure that there's a seamless transition, because at the core of what we do, we want to make sure our members are taking care of, and that's our highest priority. So we continue to value alliance relationships and really look forward to continued growth in this segment, with partners who value the deep expertise that we bring to the table for serving vulnerable and complex populations. Thank you.

Yes. Thanks, Felicia. And Scott, that will be in January 24, just from a timing perspective. Next question, please.

Next, we'll go to the line of Lisa Gill from JPMorgan. Please, go ahead.

Thanks, very much. Good morning. I just wanted to follow up on utilization expectations for 2023. John, you made the comment that COVID is not going away, I agree that, that should be in the baseline. But, as we think about this, do you feel like there's any level of pent-up demand or potentially higher acuity levels as we move into 2023? And would you call out any specific line of business?

Thank you for the question Lisa and we're not discussing specific trend assumption for 2023, but really when you look at some of the cost drivers that we have relative to the expectations, emergency room has been favorable, in-patient has been favorable, pharmacy cost actually running a little bit higher than expected. And out-patient is running a little bit higher than expected. I don’t know that we really see any pent-up demand as much as we see -- being as much as the new normal. But just to reiterate. The overall cost structure of the business is higher than if COVID had never occurred. COVID is here and it continues to be a cost driver. What I think is probably most important in all of this is that our pricing now reflects the underlying cost structure and our MLR guidance also reflects this higher cost structure. So we actually feel very well positioned going into 2023. Thank you.

Next question, please.

Next, we'll go to the line of Kevin Fischbeck from Bank of America. Please, go ahead.

Great. Thanks. I guess, my question is going to be really on 2024. So if you can make a direct comment on that, that would be great. But if not, at least comment on the 2023 trajectory to give us a little bit of a sense, because it seems like the story here for 2023 is balanced portfolio improvements in commercial and Medicare are offsetting Medicaid. But obviously, the Medicaid pressure is one that builds throughout the year, both from a revenue and I would think, from an MLR pressure perspective, which begs the question about whether it's a bigger headwind in 2024 than it is in 2023 and whether there are similar opportunities in 2024 to kind of to offset that? Thanks.

Yes. Thank you for the question, Kevin. And as you indicated in your question, we're not going to provide any specific details we did on 2024. Obviously, at our Investor Day coming up here in a few months, we'll provide a lot more long-term aspirations. But I think the way you've characterized 2023 is correct. It's really -- it's a year of optimizing our health benefits business, while we continue to grow and expand the capabilities within Carelon. And then you talk about, well, gee, could the headwind be greater? As you look at the Medicaid redeterminations, there's certainly a lot of variables associated with the pace and timing, on a state-by-state basis, where they go, which lines of business, they ultimately reside in I think one of the great things about the balance and resilience of our membership base is that we end up with the members somewhere. We have a product offering for every member regardless of age, regardless of employment status, with regardless of health condition, and feel very, very good. So we do expect approximately about half of the Medicaid members to be reverified here in this calendar year and the other half next year. So there is some balance there. But at the end of the day, we are very well positioned to retain much of that membership. Thank you.

Yes, thanks, John. And Kevin, I think it's an insightful question because as you've heard us talk about, I think there's three core pillars of how we see our business evolving. Optimizing our health benefits business. It's highly scaled. We're very diversified in that business. And again, as you think about 2023, we have an opportunity for margin recovery, which is really we've been intensely focused on. But the other two pillars, I think, are really important about our future growth, which is investing in growth opportunities. And then third, accelerating services and capabilities, particularly through Carelon. And remember, as we think about Carelon, a lot of that is synergistic with our health plan business. We've continued to grow this and that allows the synergy to also occur with Carelon services as well as expanding capabilities that you've seen us, but through organically and inorganically. So overall, I think we've got more levers than we've ever had historically, and those positioned us well for the balance that John just shared. Next question, please.

Next, we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead.

Hi. Good morning. It'd be great if you could expand a little bit on the dynamics you saw in Medicare Advantage open enrollment this year. And how you think those trends might play out over the next couple? And then specifically, hoping to clarify the enrollment expectations there. I think you said 75,000 to 100,000 membership growth. Is that a sequential Q1 figure or year-end figure just trying to realign versus some of the previous expectations you've shared here. Thanks.

Sure, I'll have Felicia Norwood, who leads that business, to share her comments.

So, good morning and thank you for that question. When we think about Medicare Advantage, as Gail mentioned in her early remarks, we took a very strategic approach as we thought about our bids for 2023, and we expect to deliver good performance in terms of growth, not just in individual, but also in group. As John referenced, we plan to grow between 75,000 and 125,000. But we did end up encountering a very competitive. On the other hand, we had very solid growth in our D-SNP business, which is where we've had a focus for some period of time. And I think that positions us well for the rest of OEP in the remainder of 2023. As we think about our competitiveness, we have a very strong benefit portfolio, and we believe that we're positioned well in order to continue to grow this business. So at the end of the day, a competitive environment, which it always will be in Medicare Advantage, but still an opportunity to grow in a business that we feel very good about. And most importantly, the opportunity is we are in 2023 to deliver very strong margin recovery and operate squarely within our 3% to 5% pre-tax target margin range in this business, so solid growth and solid margins in 2023.

Thank you. Next question, please.

Next, we'll go to the line of Josh Raskin from Nephron Research. Please, go ahead.

Hi. Thanks. Good morning. I was wondering if you could provide an update on some of the trends you're seeing in value-based care. I heard some of the comments earlier. But as you go into 2023, are there any changes in the dynamics of the industry? Any changes specify in contracting terms that either the providers are looking for or that you're trying to push? And then, maybe any updated views on the employment or ownership of physicians or physician groups.

Well, thanks for the question, Josh. In terms of -- a little bit consistent, I guess, with what I shared before on value-based care, I mean, we've been -- we continue, quite frankly, to refine and improve our strategy. We feel we're making really good progress on it. What we're seeing is a lot more interest in sharing up and downside risk. Historically, value-based care was more upside risk and we've gotten about 63%. We've gone -- we've continued to refine that to now include much more downside risk. And also, I think one of the biggest differences is the sharing of data bilaterally and much more timely. So that action can be taken in -- I think, in a much more integrated way. And we're doing a lot of work with that with our care providers. It's embedded. And also, what happens, like, post primary care. So how do we manage all the specialty services? That's a big part of the Carelon strategy in terms of what Pete is doing in his business. So as I think about that, I would say, structurally, we're seeing a lot more interest and a lot more conversation as this takes several years for, I think, physician practices to get comfortable with value-based care. And so, we're building credibility with that. We're getting better at our reporting and our engagement. And we're not only doing it across Medicare Advantage, and I think that is one of the changes. Some of our relationships are specific to commercial, for example, and that's a very different approach, including with some fee-based customers. So that would be a trend. In terms of the ownership of physicians, I think, we've been very consistent about that. We do own physicians in terms of our integrated health plans, and those have performed very well in MMM and health fund in Florida. I think, CareMore is beginning to become even more integrated with the work we're doing. So I think our strategy has stayed very consistent there. So I don't really have any significant updates, other than I think it's all embedded and our ability to drive more downside risk integrate data in a much more real-time basis. And then, really become true partners and train each other and how do we work in a value-based care environment. As, I think, you know well, this doesn't happen overnight, and it takes quite a bit of work for us on both sides to be committed to the long-term partnership, but we feel good, and we're seeing more enrollment in those partnerships. And the results have been good. We see differentiated quality and cost outcomes. So thank you very much for the question. Next question, please.

Next, we'll go to the line of Rob Cottrell from Cleveland Research. Please, go ahead.

Hi. Good morning. And thanks for taking my questions. Just on the CarelonRx or PBM, how should we square the high single-digit outlook for 2023 relative to your long-term 2025 low double-digit outlook? And then also, can you provide a bit more color on what Carelon's role will be within the synergy collective? Thank you.

I'm going to ask Pete Haytaian to address that, please.

Yes. Thanks. In terms of the short-term, if you're referencing the script growth, overall, we're going to see nice script growth in Medicare and commercial. In terms of the headwind to that, really, that's due to the Medicaid dynamic around reverifications, or redeterminations. And then overall, we're going to see lower COVID vaccination. So that doesn't impact operating gain, but that is really the reason for the difference in the numbers in terms of what you're seeing short-term, long-term. In terms of overall growth, though, we feel really good about how we're doing in the pharmacy business. There continues to be a lot of interest in our integrated value proposition. In 2022, we're coming off a good year. We saw a 300% improvement in net membership growth. So that was good in terms of penetrating our self-funded business. And we're seeing that continue to play through into 2023. We're obviously through a lot of the selling for the beginning of the year, what we did see is we saw a lot more activity and penetration in the 10,000 or less business. We saw RFPs up by about 6% year-over-year. And again, I'll reiterate, but this is a segment an area that we perform really, really well in. I think you referenced a synergy at the end of your question. And again, to Gail's point in our commentary, our focus, a big part of our strategy is overall affordability and choice and this creates an opportunity for us in the context of medical specialty to create more affordability for our members. Again, by working in conjunction with the Blues across 100 million Americans, those that are utilizing specialty on the medical side, we have an opportunity to create much greater affordability. So we look forward to that. That work is in earnest right now in 2023 with value potentially playing through into 2024.

Thank you. Next question, please.

Next, we'll go to the line of Whit Mayo from SVB Securities. Please go ahead.

Hey, just on the topic of health plan optimization and commercial repricing initiatives. Can you comment maybe more specifically on stop loss? I think, you guys are beginning to anniversary some of the challenges in the creep and high-cost claims last year, just how you feel about trends in the business margins, just maybe broadly, any comments about the overall stop-loss market? Thanks.

Sure, Whit. I'm going to have Morgan Kendrick, who leads our commercial business, give you some perspective there.

Hi, there, and Whit, thank you for the question. Regarding the stop-loss business, that's certainly an area that was underperforming priorly and we began that journey to recover the margins in that business back in January of last year. It started with some of our integrated -- our external business rather. And then year progressed further, we had our July cohort, which John mentioned earlier, which was about 25 [ph] to some of our integrated business, both stop loss and risk-based business. Both of those went through a repricing exercise midyear, and then that concluded with January. So regarding the stop-loss market, we feel very good about it. We've got continued strong penetration, but opportunity to continue to grow that, both on our internal integrated business as well as our external. And we feel at this point in time, we have right-priced our business based on risk and we'll continue doing that so very fastidiously as we move through in 2023.

Thank you. Next question, please.

Next, we'll go to the line of Dave Windley from Jefferies. Please go ahead.

Hi. Thanks for taking my question. Good morning. You called out a headwind to the MLR this year from the growth, the outsized growth in Medicaid did not call out a benefit to the SG&A ratio in 2022 from that. I'm wondering if there was one. And then more importantly, as that -- as the direction of those books reverses and Medicaid shrinks in 2023 from redetermination. Does that create a headwind? And what levers are you pulling to offset that headwind for SG&A ratio? Thanks.

Thank you for the question, Dave. As you can imagine, there's a lot of puts and takes associated with SG&A ratios and by the ability to invest and the fact that we have been investing quite heavily in various digital capabilities, things that are member facing and can actually improve the member experience. The other aspect is that, we've really enjoyed a lot of fixed cost leveraging. Our premiums grew at 13.5% year-over-year, which obviously allowed the SG&A ratio to decline from that aspect as well. So, we do expect a reduction in our operating expense ratio in 2023, driven by the leverage of top line growth, as well as improved operating efficiency, partially offset by the reinvestment and strategic initiatives in support of our growth. So, while certainly, the mix of business does matter. And as we said in the guidance, Carelon services carries a higher SG&A ratio than the rest of the company in general. And we expect Carelon Services to grow faster, a lot of puts and takes. But fixed cost leveraging and investment in capabilities are probably two of the most significant drivers year-over-year. Thank you.

Next question, please.

Next, we'll go to the line of Steven Valiquette from Barclays. Please, go ahead.

Yes. Great. Thanks. Good morning. Appreciate the color on the 2023 membership guidance, particularly in the -- your commercial segment with the repricing strategy. You may have touched on this a little bit, but I guess, you previously talked about your goal of narrowing the profitability gap between the fee-based and risk-based commercial customers. I'm just curious, if you can just provide a little more color on your expected progress on that profit gap in calendar 2023 in particular, just in light of all the pricing and growth trends you talked about for the risk and fee-based books of business in commercial.

Great. I'll have Morgan share his thoughts.

Steven, thank you for the question. And we had a very successful selling season with CarelonRx, as Pete indicated, and we grew our specialty lines of business rather materially, and we continue to make steady progress towards our goal of improving that revenue gap between risk and fee-based business. One thing of note, when you think about in 2022, retrospectively looking back, which will take -- carry us forward as well, admin fee revenue grew nearly 8% compared with 4% in our fee-based membership growth. So this alone is certainly clearly indicating that we've got an expansion in revenue and product per sold member. I would say, this is driven by not only our Carelon assets, but it's also driven by strong growth in our clinical buy-ups. Again, noted specialty products and our aligned incentives Carelon services products. And, again -- so we feel good about that trajectory. We feel good about that gap continuing to close. And as John had indicated earlier, this isn't about any one segment. This is around actually growing that fee-based business. Many -- much of that business is moving to the fee-based schedules, but also the pull-through of the Carelon asset that we're working jointly with Pete and his team on. Thank you for the question.

Yes. Thanks for the question. I think, as Morgan just shared, we're making really nice progress on really improving the -- both the revenue per member and the profitability per member in our fee-based business. And the example he gave, I think, helps demonstrate that. And so overall, we feel it's been strong and we have a lot of confidence in that. So thanks again for the question. And it's, again, part of optimizing our health benefits business that we've talked about. Next question, please.

Next, we'll go to the line of George Hill from Deutsche Bank. Please, go ahead.

Hey, good morning. And thanks for taking the question. I ask, kind of, a question on the future state of the CarelonRx business, because you guys announced the BioPlus acquisition, you've got the synergy initiatives. You've got the JV with SS&C on DomaniRx. So I guess it's probably a question for 2024 or beyond. But I guess can you talk about how much of the vertical integration of the PBM business that you think that you need to do, given the outsourced relationship with CVS and the other initiatives that you have going on? Thank you.

Yes, George. Thanks a lot for that question. And I think it's helpful to sort of step back and think about our overall strategy and where we started in this regard. When we started a few years ago, we always talked about being a different kind of PBM and our strategy has been keenly focused on whole health and integration of medical, pharmacy, behavioral and social. And that's been core to what we've been doing. And we've also said, and we've been very deliberate about this, that we want to own the strategic levers that matter. Those that, quite frankly, drive the greatest affordability choice, and of course superior patient experience. And that's the journey we're going on. I think what you're seeing in BioPlus and what you're seeing in synergy are really good examples of that and what we prioritized. If you look at specialty pharmacy, it's 40% to 50% of the overall drug spend right now. And it's a critical driver of value for patients. And so that's where we started. And we'll continue on this journey, again, through the lens of greater affordability and superior patient experience. So over time, you will continue to see us take ownership of the strategic levers that really matter.

Thank you. Next question.

Next, we'll go to the line of Gary Taylor from Cowen. Please go ahead.

Hi. Good morning. Actually I had a quick question about BioPlus as well. I was just wondering a couple of things. If you could give us a sense of annual revenue there, geographic reach and someone I think Pete earlier said in the future would bring specialty fulfillment in-house. And I thought that's what BioPlus was. So I just want to make sure I understand the business model there?

Yes. Thanks for the question, Gary. We feel really good about adding BioPlus to the family. It hasn't obviously closed yet. We think it will likely close in the first quarter. And in terms of their breath, I won't get into all the specifics about it, but they are the largest independent specialty pharmacy out there that remains with a broad range of services. They cover over 100 of the limited distribution drugs. So we feel really good about that. And their footprint is covering all 50 states. So we believe it's a really great platform. The other thing I would say that we're really impressed by two things, quite frankly. One is really great talent over there with a lot of experience, long-standing experience. And then the other real differentiating factor around BioPlus is their differentiated service model. Time to therapy, the speed to which they're providing services is really differentiating and we'd like to build upon that. So we're excited about this. And when it closes, we're obviously going to be very focused on building the scale to be able to take on all our specialty pharmacy.

Thank you. We have one last question.

And for our final question, we'll go to the line of Michael Ha from Morgan Stanley. Please go ahead.

Hey, thank you for the question. Just wanted to dig a little deeper on commercial margins. I know you mentioned you're still targeting 10.5% to 11.5% by 2025 I think John might have mentioned 125 bps better commercial margin in 2023. Was that right? And if so, that would be slightly more than 8% for 2023, which means there's still a considerable gap to your 2025 target. And I was expecting a majority of that improvement might happen this year just given your repricing experts, but if you're seeing 125 bps in 2023 and the following two years, would need at least 225 bps of improvement. So I was wondering if you could just talk a little bit more about the path and progression of that improvement in 2024 and 2025. If you could help us break down the drivers we can better envision that path? Like what percent of that improvement is coming from up-selling your fee based business or the shift to higher margin small group or just any other contributors, maybe potentially more of a pricing efforts beyond 2023? Yeah, thank you.

Yeah. Thank you for the question, Michael. I'm not sure where your 125 basis point comment came from. But that was not part of our prepared remarks. What I can share is that if you look at the press release and you can see on a reported basis, the third quarter of 2022 versus the third quarter of 2021, commercial margins increased by 120 basis points. And then in the fourth quarter of 2022 versus fourth quarter of 2021 on that reported basis, the commercial margins increased by 180 basis points. In terms of the margin improvement, as we have said historically, it is not going to be pro rata. If we've got three more years, 2023 through 2025 to get to those target margins that it will -- there will be far more of the improvement here in 2023 for the reason that you noted. And then there will be continued improvement in 2024 and 2025. Obviously, we're going to continue to optimize our fully insured block together with the fee based selling strategies that Morgan talked about, overall, we're still standing behind that margin target through 2025. Thank you.

Thank you, John, and thank you for everyone for joining us. In closing, we're pleased to have delivered another strong year in 2022 and are confident that the ongoing execution of our strategy positions us well for 2023. We look forward to discussing our long-term strategy in greater detail at our 2023 Investor Conference, which we said we plan to host in New York City on March 23, 2023. Thank you for your interest in Elevance Health, and have a great rest of week. Thank you.

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