Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health Third 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 third quarter 2024 earnings call. This is Steve Tanal, Vice President of Investor Relations. And with us this morning on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Pete Haytaian, President of Carelon; Morgan Kendrick, President of our Commercial Health Benefits Business; and Felicia Norwood, President of our Government Health Benefits Business. Gail will begin the call with a brief discussion of the quarter and our revised outlook for the year and recent progress against our strategic initiatives. Mark will then discuss our financial results and outlook 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. Reconciliation 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 Elevance 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.

Thank you, Steve, and good morning, everyone. We appreciate you joining our earnings call. Today, we will review our third quarter financial results, discuss our outlook for 2024 and provide an update on the operating environment. During the call, we will also highlight fundamental drivers of long-term growth for Elevance Health, which remains strong. For the third quarter, adjusted diluted earnings per share were $8.37 which was below our expectations, primarily due to elevated medical costs in our Medicaid business. The impact on the third quarter and our full year outlook are being partially offset by focused medical management, the work we are doing with states to reflect the acuity of our members in rates and proactive actions we are taking to enhance operating efficiency, which will strengthen our business for the long term. We are navigating a challenging and dynamic operating environment and have reduced our full year outlook to prudently reflect these challenges. Given third quarter results and our expectation that timing disconnects between Medicaid rates and acuity currently facing the industry will continue. We have reduced our outlook for adjusted diluted earnings per share to approximately $33. Importantly, we are not leveraging the future to achieve short-term gains. We are investing to position Elevance Health for strong growth over the long term. The issues impacting the Medicaid business are time-bound and our state partners are working constructively with us on rate renewals. We're confident that rates will ultimately reflect the underlying acuity of our members albeit on a lag as states often use data that is more than a year old in setting rates. These short-term headwinds are a byproduct of the large scale and unprecedented mix shifts associated with the end of the public health emergency. Over the long term, Medicaid managed care is an attractive…

Thank you, Gail, and good morning to everyone on the line. As Gail has shared, we reported third quarter results, including GAAP diluted earnings per share of $4.36 and adjusted diluted earnings per share of $8.37 which came in below our expectations. We ended the third quarter with 45.8 million members, flat sequentially. Growth in commercial was largely offset by the loss of approximately 85,000 Medicaid members due to a specific footprint change that took effect at the beginning of September. Year-over-year, Commercial membership has grown by nearly 600,000 driven by strong fee-based and individual ACA health plan growth on the distinct value we deliver to large employers and the targeted local positioning of our product. Total operating revenue for the quarter was $44.7 billion, up over 5% year-over-year, reflecting strong reacceleration in growth from the low point last quarter. The consolidated benefit expense ratio was 89.5% for the third quarter, an increase of 270 basis points year-over-year, principally due to Medicaid cost trend developing worse than expected. While Medicaid rate increases will reach record levels this year, they remain inadequate to cover cost trend that is in the range of 3x to 5x historical averages. We are working closely with our state partners to ensure they fully capture the acuity of our Medicaid membership in future rates. During the quarter, we mitigated the impact through disciplined medical management and took further proactive actions to enhance operating efficiency across the enterprise. As a result, Elevance Health's adjusted operating expense ratio was 9.6%, an improvement of 150 basis points. Adjusted operating gains for the quarter was $2.4 billion and $8.3 billion for the year-to-date period, primarily reflecting declines in our Medicaid business. We maintained a consistent and prudent posture with respect to reserves. Days in claims payable at the end of…

[Operator Instructions]. For our first question, we'll go to the line of A.J. Rice from UBS. Please go ahead.

So, in the slide deck, you're reiterating your expectation of 12% earnings growth from 22% to 27%. Which of that 22% base would suggest you get something like $51.27? But you're also saying off of the new base this year, you'll grow 5% next year which would give you something like 34%, 65% something in the high 34s. I guess the question is -- and it sounds like all of the short-term issues are around Medicaid is getting the right rates going to be sufficient to get you the kind of accelerated earnings growth in '26 and '27 that would get you back on track to hit that multiyear 12% CAGR target? Or should we rebase that given what we're looking at in '24 and '25?

Thank you for the question, A.J. Let me provide a little bit of high-level perspective around that because I think there's -- you have a lot of math in that question, but I think it's important certainly appreciate the dynamic environment that we're currently operating in. I think to really start that, first, we believe that the earnings power of our diverse and complementary businesses remained strong. So, feel good about thinking about at least 12% over the long term and an adjusted EPS of time. So, I think that's important. As you heard, and we're thinking about what's happening in our business right now, I'd like to sort of reiterate some of the things that Mark shared in his opening comments. First, strong acceleration in revenue growth, at least in line with our long-term algorithm in the high single-digit percentage. So, there's a lot I think to be excited about in our business, momentum in our commercial business going strong. We're entering several additional expanded ACA footprint next year. We feel good about the Medicare Advantage business, which we focus to be sustainable long-term growth. And Carelon is going to deliver even greater value as we look at the internal and external growth we're seeing in services and the robust pipeline in CarelonRx. And then, the last piece of that is continuing to realize substantial operational efficiencies. However, given the dynamics that we spoke about in the environment that we're in, we anticipate that Medicaid margins in '25 are going to remain belong our long-term target. But again, this is a timing disconnect between rates and acuity, which we do believe is time bound, but think that can persist through 2025. And also, it's really important that we are going to continue to make ongoing investments in '25 because we think that there's a powerful opportunity across our business. So taken together, we think that we're being prudent in how we think about '25 and our expectations at this pace and timing and that our guidance will give you a lot more detail in the fourth quarter. But I think you can rest assure, we're going to continue to navigate '25 with the same focus and discipline that has been central to our long-term success.

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

Just wanted to come back to the Medicaid discussion. Obviously, the magnitude of the revision that's implied there is alarming, particularly given that we're at the end of the membership impacts from redetermination. Just trying to understand better how things got so much worse so quickly. I guess how much of this is actually new to the third quarter versus not having a good reading on where things were last quarter? And to the extent there are new developments in the third quarter, can you better help us understand perhaps what some of those are?

Let me ask Mark Kaye, our CFO, to address your question. Thank you.

Stephen, good morning. Let me start off by noting that we experienced accelerated cost trends in Medicaid throughout the third quarter. And additionally, we saw unfavorable prior period development related to the current year specifically in our Medicaid business. If I step back for a moment, the Medicaid cost trends accelerated in the quarter, they restated negatively for the current year. And as such, we're tracking in the range of around 3.5x -- 3x to 5x the historical average depending on the state. The elevated level of cost trend is driven -- and you heard us just in our prepared remarks, primarily by the higher overall membership acuity given the redetermination cycle is now substantially complete. And we are continuing to work with the states. We very much appreciate the collaboration. And while rate increases to-date have also been higher than the historical average they remain insufficient to fully cover the claims trends that we're seeing. And so, it's important to keep in mind that the state processes themselves typically rely on reference periods that lag current experience by as much as one to two years and while we are sharing more recent experience and trend information real time with the states, it's going to take time before that's fully reflected in their rate schedule.

Next, we'll go to the line of Ben Hendrix from RBC Capital Markets. Please go ahead.

I just wanted to kind of drill in a little bit more on the pacing of the cash up of rates to acuity that you may expect over the coming year, probably you don't have perfect visibility into it, but are there any pockets, something Mark mentioned, the big bolus of members that kind of came off recently. Just -- are there any pockets of areas where you see a large bolus of members come off, acuity increase and then have a state renegotiation that could be kind of a catalyst for creating some accelerated recovery? Or how do you think about pacing of the recovery throughout next year?

Yes. Thanks for the question, Ben. I'll ask Mark to comment on this as well. But I remember, this is one of the largest and unprecedented mix shifts. We've seen in Medicaid as the PHE has unwound over the course of the year. And again, as Mark said, what we saw was this acceleration through the third quarter. So, I think putting that in perspective is really important. We have not had an environment like this before in Medicaid. So, it's a very unusual time frame for us. But let me have Mark give a little bit more color on that.

And then, I think the only thing I'll add to Gail's remarks is that as we think about 2025, we do expect that mismatch between rates and acuity to narrow. Especially as the state rate updates increasingly reflect the underlying member acuity.

Next, we'll go to the line of Ann Hynes from Mizuho. Please go ahead.

Can you just give us a little bit more detail on the utilization trends like what is increasing more than your expectations? Is it inpatient, outpatient, pharmacy? Any color you could provide would be helpful.

Thanks. I'll have Mark address that, please.

Maybe let me take this briefly from two perspectives. I'll do a little bit of Medicare then I'll do a Medicaid. So, Medicare in the quarter was slightly elevated. It was manageable overall reflected some incremental pressure related to the two-midnight rule. We also saw a late summer surge in COVID. On Medicaid, as I spoke about trends a minute ago, we are seeing some ongoing pockets of elevated trend. They're most notable in the behavioral health area. Overall that we do expect margins to continue to remain pressured through the rest of the year. And certainly, for those two businesses will remain below our long-term average in 2025.

Yes. Thanks. And again, our results were predominantly driven by Medicaid. And as Mark said, we did see some slight pressure in Medicare, but feel very comfortable about where we positioned our bids for 2025. So, thank you. Next question, please.

Next, we'll go to the line of Andrew Mok from Barclays. Please go ahead.

This is Tiffany on for Andrew. It looks like the 200 basis points of 3Q enterprise MLR miss like translates to about 500 basis points of Medicaid pressure in the quarter. One, is that the right ballpark to think about? And two like just given the apparent like 100s of basis points of incremental pressure, is the Medicaid book profitable today?

Thank you. I'll ask Mark to respond to that as well.

Thank you very much for the question. The ballpark is about right for 2024. And as I think about the Medicaid business, it is expected to be profitable this year albeit below our target margin range for the year itself. It's important to note that you really can't look at the Medicaid marginal business in any particular single quarter. There are normal quarter-to-quarter dynamics of the business. But importantly, over the long term and we do expect the Medicaid managed care business to be a profitable and an attractive one for us and it's integral and it is complementary to either Health Benefits and Carelon businesses.

Thanks for that, Mark. And again, I just want to reiterate that we do believe this is time bound, and we also believe that Medicaid is a very good business, particularly the specialized populations where we have unique capabilities. But again, thank you for the question.

Next, we'll go to the line of Erin Wright from Morgan Stanley. Please go ahead.

And I wanted to ask on Medicare Advantage. Just based on the analysis of sort of the MA landscape now and the latest kind of benefit design details. Is there -- is the competitive environment playing out as you would expect in terms of being fairly rational with a focus on kind of profit versus growth? Is it playing out according to plan there and driving some of that assumption in terms of your at or above market growth in MA next year?

Thanks for the question, Erin. First, I think it's really important to realize -- we feel well positioned in MA and we took a number of actions, prudent actions last year at the beginning of the year to position the business for long term. Importantly, we had a number of market exits of markets where we didn't think we saw long-term sustainability. And this year, we continue to look for stability and make sure that we are in this business for the long term. So, I'm going to ask Felicia to comment now that we're a few days into AEP and give you a perspective of our thoughts on the market.

Thank you, Gail, and thank you, Erin, for the question. Our strategy, as we look at Medicare Advantage, really didn't start this year around our approach to balancing membership and margins. We started last year to real take strategic actions in order to create a sustainable foundation for growth in our Medicare Advantage business, and that included exiting several underperforming markets, and that represented about 85,000 members. In addition to that, we made significant reductions in our supplemental benefits in Puerto Rico on the heel of some losses in 2023. So, as we put together our bid for 2025, we started the work with the foundation and wanted to make sure that we maintain stability where we need it to, but we want to be very focused on a balance between growth and margin, particularly in attractive and sustainable products and performance for us as we went forward. Specifically, we focus very much on our D-SNP business in our high-priority markets, where we have the assets and the cost structure to really support leading market share. Additionally, I want to note that our products are predominantly HMO, not PPO, and we were very prudent in our positioning, overlaying our local market dynamics and consumer preferences with our own market prioritization framework. So, when we look at where we are now only two days into AEP, we feel very good about how we're positioned in terms of our key products and our target market. We prudently navigated the environment and as we sit here today, as you said, we really expect to grow in line or slightly better than the market. But competitively, still, we're very positioned well as we head into this AEP.

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

I wanted to follow up on your comments around Medicaid trend accelerating through the quarter and being 3x to 5x typical. To your point, I don't think anyone on this call has ever heard of trend being discussed in terms of multiples of typical. And given it got worse through the quarter, just curious if you could give us some color on what's going on through the quarter? Is it that you're seeing people come back on the roles that are sicker given the redeterminations themselves should have been, give or take, run out at this point? And then given it looks like the exit rate in the quarter is the lowest margin, the highest cost, it sounds like. Can you tell us where you were ending the quarter and where you expect to be for the fourth quarter versus that 3% to 4% margin target that we all think about?

Justin, thanks for the question. Just a couple of thoughts, and I'll ask Mark to provide a little bit more perspective. Remember, again, this was the most significant change we've seen in membership in Medicaid probably as long as I've been in this business, coming off of the PHE. And again, the driver was this acceleration that we saw through the third quarter. And we did plan for accelerated acuity in our business, which I think is important. But again, none of us when you're planning for 3x to 5x the cost structure. We've been working very diligently with our state partners in terms of understanding those rates and where we need to be. And again, they are looking at data oftentimes a year in arrears and have been responsive to changing their process, but it has not kept pace yet, and we think it will take them some time. With that, let me ask Mark to give a little bit more perspective on some of the other questions that you had embedded.

Yes. Justin, just to add additional color here as you heard from Gail, we definitely planned for an elevated level of trend in 2024 relative to the historic average Medicaid trend, which has run in the low single-digit percent range. And to the point we made earlier, that trend is now running around 3x to 5x historic average levels, of course, depending on the states and meaningfully above our expectations. And that's really driven by this unprecedented redetermination related activity which has resulted in several downstream changes in membership mix, membership count, acuity program adjustments, et cetera. I'd also like just to reiterate sort of that long-term target for Medicaid is in that 2% to 4% range.

And finally, Justin, to your point, we've also not been standing still. Obviously, we've been very active in managing the things that we can control around cost structure and acceleration of initiatives that we had in place around AI and making our business sustainable for the long term. And again, very active with our state partners, proud of our teams for the work that they've done to bring this forward. But again, we do think this will take time to work with our state partners to get the match at the appropriate level.

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

Gail, one of your peers talked about accelerating Rx trends in specialty. We've seen changes to IRA around catastrophic coverage. The one you haven't called out anything around Rx as far as cost trend goes. Are you seeing that how did you price for that going into 2025? And then just on the flip side, CarelonRx had very strong results. Is that a key driver of what we're seeing, especially on the specialty side and growth in specialty?

So, thanks for the question, Lisa. Let me go a little perspective directly on your question. I'll ask Pete Haytaian, who leads our pharmacy business to provide some more context. So year-to-date, we have seen an increase in Medicare Advantage Part D specialty drug utilization. But the trends in unit costs have been in line with our assumptions. So, we don't see it as a significant impact to what we've been talking about. Let me ask Pete to give you a little more perspective about what's happening in terms of overall pharmacy.

Yes. Thanks, Lisa, for the question. As you said, we're very pleased with what we're seeing in terms of our CarelonRx strategy and growth. We continue down our path of in-sourcing the strategic levers that matter down our path of specialty pharmacy and infusion. We're making really good progress there. And as it relates to growth, our story is resonating in the marketplace. We're beginning to see a lot of pull-through in that regard. And we've had some nice wins going into 2025 upmarket as well. So that is all proceeding as planned. In terms of our overall performance from an operating margin perspective, though, as Gail said, we did expect what we saw in the specialty pharmacy trends. We did see that increase, but it was really as expected. When you look at our overall margins, the outperformance in the quarter was largely due to a onetime favorable revenue adjustment that was in for year. And when you even that out or spread that out through the year, the full year still remains on track in terms of our initial guidance around the 6%, 6.5% margin profile. So, we feel overall very good about where we are and where we are where we expected to be.

Next, we'll go to the line of Lance Wilkes from Bernstein. Please go ahead.

Yes. Just a quick follow-up on the rate outlook for Medicaid. If you could just give some color on what you observed as far as rate increases maybe historically or in the first half of the year? And then what you're seeing in the second half of the year and what your outlook is based on how far you are along in early '25? And then the broader question was just are you anticipating making any strategic moves as a result of these pressures that again are time bounded? And as part of that, does this make any change in how you might in-source all of the functions of your PBM?

So, a lot of questions here, Lance. Thank you. Let me just address your question on strategic, then I'll ask Felicia specifically talk about Medicaid. We feel we've laid out a very comprehensive strategy around the growth drivers. And the opportunities, as I shared in the first question, really how we see acceleration in revenue and strong commercial business. We believe the time-bound issues around Medicaid, and we think we will work through those with the assets we have and then Medicare being well positioned. And Carelon is a real accelerator for us. And as you saw we announced an additional acquisition this morning as part of CareBridge that gives us home-based care and another pillar inside of our growth strategy for Carelon Services where we can take significantly more pass-through of the type of medical expense, we're managing inside of Carelon. So, I would say we're very focused on the long-term growth drivers in our flywheel for growth inside of Elevance Health and feel very positive about the fundamentals of our business. So strategically, I think we're moving forward in the exact same path that we've laid out. And in the pharmacy side, taking more control of the levers that matter for us, and you've continued to see us integrate the Kroger Specialty Pharmacy acquisition, our advanced home delivery. So, feel very good about that progress, and we're dealing with the time-based issues in Medicaid right now. But let me ask Felicia to address the Medicaid specifically.

So, Lance, thanks for the question. As you can imagine, the rate negotiations with our state partners are ongoing. And when you take a look at how our portfolio of business is spread out across the year, we have about half of our states that a January state and the other half that are July state than in the back half of the year. The work that we started with our states, certainly around the July states and rates certainly took a look at the '25 rates that they were working with us on. But we also put a lot of work into work with our states on understanding the trends that we're seeing in the first half of the year. As you heard earlier, the reference period for most of our states are 2023 when you think about the 25 rate setting process. So, there will certainly see that misalignment and that timing mismatch as we talk about. When we look at the work that we're seeing with our state partners, some states have certainly been more receptive to going back and taking a look at those and addressing those rates now. We've had certain states that have given us midyear rate adjustments and more of those will happen as we go through the back half of the year and early next year as well. But as you heard earlier, this is a process which you clearly understand that will take some time to actually get total alignment between our rates and the acuity of the membership that we're seeing on the heels of an unprecedented change in mix with respect to this business. But I will tell you, we are going to continue our strong advocacy working with our state partners, sharing up-to-date information around the changes that we're seeing, and we have full confidence that we will ultimately have rates that are aligned with the acuity of the membership in our population. So, thank you for the question.

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

Sorry to stay on the topic, but I'm still struggling with why the acuity rate mismatches accelerating now why this cost trend is accelerating now. My understanding is that most of the redeterminations have been done, right, that started over a year ago. So, it felt like there was less redetermination activity in the most recent quarter than previously. And I think -- last quarter, there was this conversation around higher utilization from members that were about to lose coverage. And so, you would have expected that to slow. So, I guess I'm still confused as to what's causing this big acceleration in this trend. Why is that happening so late in the process?

Josh, thanks very much for the question. Two key points I'd like you to keep in mind here. First, we've modeled a prudent view of costs for the fourth quarter. And you could think about that as us holding Medicaid trend approximately flat relative to where we were in September. And the second key point to keep in mind here is that we had unfavorable development related to the current year in the quarter.

Next, we'll go to the line of Michael Hall from Baird. Please go ahead.

Just to add on Medicaid topic. So based on your '24 guide, if I'm not mistaken implied 4Q impact actually seems to be larger than your third quarter MR pressure. So, it sounds like it's the case, but -- is this basically assuming the acuity rate mismatch worsened in the next quarter, even though you have all your September, October rate increases? And at this point, I guess, in mid-October, do you think you now have enough data and visibility into your own acuity mix that you can pass along to these states in time for Jan 1 renewals? Or just -- I presume draft rates are pretty already there? So, could they open that back up and adjust? Or is it too late?

Yes. A couple of things, just a high level one. You also have to factor in seasonality into the fourth quarter. So make sure you're doing that, and I'll ask Felicia to talk a bit about Medicaid and the process that just goes on a rate setting.

Yes. So thank you so much for the question again. At this point, we have about 55% of our rate visibility for premium for January. However, those are draft rates. So, we spend a lot of time with our states right now, making sure that they understand the experience that we were seeing in the second and third quarters as we head into the rate setting process. So yes, when we have draft rates, the process is still iterative and ongoing and we are continuing to make sure that the states have visibility around that information. So, we have 55%, as I said, visibility into the January renewals, but those are early discussions, Michael, and expect a lot of work to happen between now and the end of the year in terms of the work between us and our state partners.

And maybe one comment just to add on to Felicia's remarks. Just to reaffirm, Medicaid trend is not expected to accelerate in the fourth quarter. It's primarily seasonality that's resulting in these numbers.

Next, we'll go to the line of Ryan Langston from Cowen. Please go ahead.

It sounds like you expect on the exchange side into 2025. So, I guess in that context, how should we think about the margin profile for maybe just the exchanges in the overall commercial business. I think you can [indiscernible] you're running this year?

Thank you very much for the question. We'll have Morgan Kendrick, who leads our commercial business to respond to that.

Ryan, thank you for the question. We feel really good about our commercial business in aggregate. And certainly, the individual ACA is a big, big piece of that. We've taken a very disciplined approach over the last 36 months in gradually expanding our footprint and our competitiveness in our 14 geographies. As Gail mentioned in the prepared remarks upfront, we're expanding that in other markets. So, this year, we're expecting to have nice growth in our markets, probably improving share in the markets that we serve by about 2 points moving forward. That said, when I think about next year, we're positioned really well in the geographies where we've already served. We're in the process of sort of determining the positioning in the markets that we're moving into but are really excited about that business and it also being in line with our expectations on the economics.

Thank you. And just another thing to remember, those are states where we also have Medicaid and Medicare business. So, it aligns with us knowing those states well.

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

Just a sort of if you can maybe dimension for us and discuss some of the downstream impacts from the Medicaid environment to the Carelon Health businesses, you know that there's quite a bit of leverage or exposure in those businesses to Medicaid. So curious on how those businesses are performing and how you're positioning them around some of these dynamics we're seeing in Medicaid?

Yes. Thanks for the questions. I'll ask Pete to address your questions.

Yes, Scott. No, I think it's a great question. I appreciate it. First, just stepping back and thinking about Carelon overall. And as you heard in the prepared remarks, overall, very pleased with the growth trajectory of Carelon Services, exceeding 30% growth in the quarter. Quarter year-over-year, not on a path to exceed initial guidance of the high teens to low 20s. So, we feel very good about that. And as it relates to growing internally and externally, I'll say that we're continuing down the path that we've been in with regard to proving out our solutions internally and then growing externally. I did want to point out that -- and as Gail mentioned in the prepared remarks, seeing really nice traction externally. I'd say 4x improvement in terms of growth in 2024 and good visibility on 2025. As it relates to your question specifically, yes, we do have products oriented to Medicaid, Medicare, we are taking full risk. And as it relates to our performance overall, we are seeing some of those behavioral health trends play through. So, when you look at the margin profile in the short term, we are being impacted by the behavioral health trends. We are also being impacted by the acceleration in some of the risk arrangements that we're deploying. And as you recall, I think I've said it in the past, early on when we launched these risk arrangements, the margin profile is a bit more compressed and then as it evolves, it improves. So, the combination of those two factors is what's been affecting us in the short term. We feel very good about the long term and continuing to grow within the government program business as well as in the commercial business. We are pursuing a diversified approach just like the rest of Elevance Health.

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

I just wanted to go back and follow up. I think it was Justin's question, not sure I actually heard the answer. Are the rejoiners coming back negatively impacting cost trends, like are they increasingly gaining access through the point of care through presumptive eligibility in the hospital or something like what does the actual care activity look like on the rejoiner population?

It's Mark here. Thank you very much for the follow-up here. There are a number of trend factors that are remaining to various degrees. And certainly, some have improved over the past quarters, think about like the pull forward effect to think about member mischaracterization and certainly some that are ongoing. What’s really important here is that the state actuarial rate process and our ongoing discussions with them really aim to capture the overall cost of the members in ensuring the adequacy operates over time. On your question specifically, you could think about a portion of trained is being attributed primarily to the acuity mix shift versus -- I think we spoke about last quarter, so that same-store type trade utilization. And you could think about approximately 60% of the trend as being related to acuity mix. And the key point, as I'm going to sort of end here is that our embedded Medicaid outlook really does include prudent assumptions for cost trend in the fourth quarter, inclusive of all the underlying factors.

Next, we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead.

Mark, when you said Medicaid is profitable in '24, is that across all states? Or is it a mix of some profitable and some not? And then, can you just help us understand the actuarial soundness protection? Is that a two-year or a three-year period because we look at '24 and '25 as below target margins. But I think '23 was a good year for you guys on Medicaid. Does that still give you a position to pursue retroactive rate increases on top of the midyear rate updates you're targeting?

Sarah, thank you very much for the question here. I'm not going to talk about states specifically. But simply just to note, Medicaid margins on the whole are expected to compress significantly this year. And we started out this extensively. This is the industry-wide timing disconnect between rates and acuity. Our long-term expectations are unchanged. And that's because we are continuing to proactively collaborate with our state partners on integrating acuity into the rates that we're seeing. We know that's going to take time based on the state processes, the collection of data et cetera. And so, we're very confident that over time, rates will certainly appropriately on an actuarial and otherwise basis reflect the underlying acuity that we're experiencing. And so, I would certainly say that we are confident in our long-term targets that we have set out and we're committed to achieving them.

Thank you. And just reiterating, I think we do believe Medicaid is a long-term very good business for us. It's complementary to our other health benefits business and particularly around other specific populations that we think we have very unique skills to serve those. So again, thank you very much for your questions. We see Medicaid as a long term in this being an industry time-bound issue.

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

I wanted to try to understand, respectively, the comments about kind of the cadence of rate recovery or achievement in caid and Medicaid, and then the confidence in MA bids for Medicare and with the question being in your mid-single-digit EPS growth for next year. Do you expect margins in caid and care, respectively, to be up, flat or down?

So, thank you very much for the question. Let me ask Mark, first to address your questions on margins. And then obviously, at this pace, we'll give you some directional commentary because it's still early in the year for '25 but we'll give you at least a sense of how we're thinking, Mark.

Overall, we expect for 2025 margins to continue to remain strong in commercial. Let me start there. On the Medicaid side, here, margins will remain below our long-term margin range and that's really predominantly related to the timing match that we've spoken about. You could think about them as effectively being stable year-over-year. And then on Medicare, because of the sustainability around our 2025 product positioning, we actually expect margins to improve in 2025 compared to 2024.

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

So just last question, I guess, on this Medicaid commentary, and I guess the margin commentary you just made in terms of margins being stable to be in next year. Is that, I guess, confirmation that you assume that by the end of '25, the Medicaid rate mismatch will be fully restored? Is that the way to read by the end of the year, it's going to be restored?

Thanks for the question. Let me actually step back for a second and think about MLR guidance for 2025, and we're not looking to provide that necessarily today, but let me share a few modeling considerations that might help you. First, again, with respect to the third quarter, we had some out-of-period items, including unfavorable into your development for the Medicaid business, and we do not expect that to repeat. As we progress towards and through 2025, you could think about that as a first half, second half story, where we expect the rate versus acuity mismatching Medicaid to narrow as the year progresses and as rates continue to improve. It's also important when you think about the modeling for the business to remember that January 1 is a major renewal base in our commercial business, right? And that marks the beginning of an end, we also marked the beginning of a new plan year for Medicare. So, we're remaining intensely focused on the appropriate medical management, and that's going to continue through 2025. I would say otherwise, it's too early to provide specific individual line of business guidance as we head into next year.

Right. And thanks, Mark. And just to reiterate that, we're taking a prudent view of the timing on the mismatch in Medicaid and want to be respectful of the safe process and the work we're doing, we feel that it has been a very good process with the states. But again, they have to get their data from prior periods. And so, we're trying to update them on what we're seeing. So again, it's early in the timing, but we wanted to give some our confidence in the long term of our business and the fundamentals. But again, I want to take a prudent view of what's happening in Medicaid, particularly on the state rate. We'll have one more question, please.

And for a final question, we'll go to the line of George Hill from Deutsche Bank. Please go ahead.

And just kind of a couple of quick follow-ups here on the Medicaid again. I guess number one, Mark, could you provide more color on what drove the PYD in the quarter? And then I guess from a state concentration perspective is kind of -- is the discrepancy between rates and acuity broad-based? Or is -- are there state concentrations here that we should be concerned about, like that could speed the resolution of the issue?

So, in terms of your overall question, clearly, we manage a portfolio of states, and we don't get into specific states. But every state is a little bit different based on the population we serve and the programs that are in place. So, I wouldn't make it generalized across all states. I know that we are working very diligently with each of the states to make sure -- and again, this is industry-wide, not just unique to Elevance Health, and we see this across everything. So, thank you very much for the question. And now we'll turn, I think, to, first of all, say thank you, operator, and thank you for all the interest and support of everyone who has been on the line. I just want to reiterate, we're confident that we're making the right investments position Elevance Health for strong and sustainable growth over the long term and that we are confident we're going to emerge from this period of unprecedented to change even stronger. Thank you, everyone, for your interest in Elevance Health, and thank you for joining us on this call.

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