Elevance Health

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Elevance Health is a large health insurance provider in the US, offering a diverse range of medical plans and health-related services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Elevance Health (ELV) operates as a health insurance provider, offering plans that range from employer-sponsored to government-sponsored. Their offerings are primarily through managed care plans, and in addition to health insurance, the company also offers other health-related services such as pharmacy benefit management, and health care coordination.

Business Overview

Elevance Health, formerly known as Anthem, is a leading health benefits company in the United States. The company’s operations are categorized into three primary segments: Health Benefits, Carelon Services, and Carelon and Other.

Health Benefits: This segment is primarily responsible for providing a variety of health plans and benefits. The focus is on employer-sponsored, individual, and government-sponsored plans (e.g., Medicare and Medicaid). The emphasis on premiums and risk management for these plans form a core part of this segment.
Carelon Services: This segment is a significant driver of the company’s long term strategy. Carelon integrates digital-first and data analytics to improve care delivery, and provides services such as behavioral health, complex and specialty care, pharmacy benefit management, and data and analytics solutions.
Carelon & Other: Primarily encompasses other non-core operations and investments.

Elevance Health is one of the largest health insurers in the United States with operations focused on employer, individual, and government-sponsored health plans. As an integrated health-benefits company they also offer health-related services such as pharmacy benefit management and health care coordination.

Industry Trends and Competitive Landscape

The healthcare industry is continuously changing due to a number of factors:

Regulatory Changes: Shifts in government policies and regulations relating to healthcare create both opportunities and threats. The Affordable Care Act, for example, and changes in Medicare or Medicaid, impact coverage options and pricing structures.
Technological Innovations: Advancements in digital health, AI, and telemedicine are transforming how healthcare services are delivered and managed. Companies that adopt these technologies early may gain a competitive advantage.
Consolidation: The sector has seen consolidation with mergers and acquisitions, meaning fewer but larger competitors with increased bargaining power. This also results in larger market shares.
Cost Pressures: The ongoing increase in healthcare costs puts pressure on both payers and providers. This results in an effort to find effective ways to reduce spending while maintaining the standards of care.
Changing Consumer Preferences: Consumers increasingly want more personalized and convenient access to healthcare options, resulting in demands for greater choice and transparency.

Key industry trends include regulatory changes, technological innovations, market consolidation, rising costs, and changing consumer preferences.

As for competition, Elevance Health competes with other major national health insurers such as UnitedHealth Group, Humana, Centene, Cigna, and various regional Blue Cross Blue Shield organizations.

Large, established national companies compete in terms of scale, coverage, and data resources.
Smaller, more specialized companies may focus on a geographic niche, or excel in a specific area of healthcare services.
Individual providers, including hospital groups, may set up their own health plans to take on the market and control prices.

Financial Analysis

Elevance Health has generated consistent growth in its revenue, profitability, and equity over the past few years.

Revenue: Elevance health’s revenue has been primarily driven by premium revenue, which is closely tied to membership growth and pricing strategies in its various health plans. Growth has also been seen in the non-regulated health care sector.
- In 2022, ELV had revenue of $156.6B, this increased to $170.4B in 2023. In the latest earnings, Q1 2024, premiums rose 8.8%, primarily due to membership growth, higher premium rates, and favorable changes in business mix.
Margins: The company is able to maintain good margins which are influenced by effective cost management, the use of data and analytics, and successful pricing strategies.
- For the 2023, the operating margin was 5.7%, which is a drop from 6.3% in 2022. The drop was caused by lower levels of commercial membership. Also, medical expenses rose slightly by 0.3% in 2023. In Q1 2024 operating margins were reduced to 5.6%. The net income margin of 4% has remained stable and consistent in the past 3 quarters.
ROIC: The company has had very good returns on invested capital and they aim to increase it further through a variety of strategies like improving efficiencies and lowering costs.
- Their ROIC was at 16.3% at the end of 2023.
Capital Structure: Elevance Health utilizes a mix of debt and equity to finance their operations, and actively manages its balance sheet to maintain optimal capital ratios. The company is not significantly overleveraged.

Elevance Health demonstrates strong and growing financials, with recent premium revenue growth, a solid ROIC, and an operating margin of 5.7% that while has reduced year-over-year is still at reasonable levels.

Recent Concerns and Controversies

The most noteworthy recent challenge for Elevance Health is ongoing efforts from CMS to increase oversight of Medicare Advantage (MA) plans. This has the potential to lower revenue and place greater financial and regulatory pressures on plan operators. The company has been trying to mitigate these concerns through improving their own performance and cost reduction programs.

The most noteworthy recent challenge for Elevance Health is ongoing efforts from CMS to increase oversight of Medicare Advantage (MA) plans. Management has been trying to mitigate these concerns through improving their own performance and cost reduction programs.

The 2024 Medicare Advantage (MA) final rule is the culmination of several provisions of the 2024 Medicare Advantage rule cycle by CMS. Most of these provisions are now in effect and as a result have added additional regulatory and compliance hurdles for all health insurance providers. This has the potential to cause administrative burdens, reduce revenue, or raise costs for MA plans.
Management has been stressing efficiency and cost control methods to minimize negative impacts.
The cyberattack by a data breach group: In 2023, it was found by cyber security researchers that a large dataset of customer data had been leaked by a data breach group, which, included the health data of tens of millions of patients from Elevance Health. A lawsuit was made against Elevance Health, as a result.

Moat

Elevance Health’s moat stems primarily from:

Scale: As one of the largest health insurers in the U.S., Elevance Health enjoys economies of scale, enabling it to operate more efficiently and at lower costs compared to smaller peers. This advantage is particularly significant in administrative costs, technology, and bargaining power with providers. This gives it a relatively strong scale advantage.
Brand Recognition: Elevance Health operates several national brands such as Anthem and Wellpoint and a number of established regional Blue Cross Blue Shield brands. These well known brands, give it an edge in a marketplace where trust and familiarity are very important.
Network Effects: The company serves a large and diverse range of clients that include corporations and the government. This allows it to capture greater premiums due to their reach and coverage. For PBMs specifically, they gain from large negotiating powers with drug companies.

While these elements provide some barriers to entry and contribute to their value, these advantages are not completely impenetrable. Thus I give a moat rating of 3 out of 5.

Risks

The company has some important risks that may impede or derail their success:

Regulatory Risk: Changes in healthcare legislation, especially those relating to Medicare and Medicaid, can significantly alter the company’s revenue and profit potential. In recent years the government has also begun to scrutinize Medicare Advantage more closely.
Competition: Intense competition in the healthcare industry, with new market entrants or better pricing plans, can erode the company’s market share. The increased competition from tech companies to integrate their services into health care is also a serious risk.
Healthcare Cost Increases: Increases in medical costs and drug prices may reduce the profitability of their plans. It could also cause the company to raise prices, which can then cause some customers to go elsewhere.
Data Breaches: There is a growing risk that any of the sensitive health data that Elevance holds will be compromised, or lead to a huge lawsuit.
Execution Risk: The failure to integrate and execute acquisitions successfully, and poor performance in the new business lines can negatively impact the long-term growth of the company.

Understandability

The business is moderately easy to understand. It operates primarily in healthcare and health insurance, which are concepts that are familiar to most people, however, the business has some complexities including multiple different segments and the way insurance plans are organized, making the company fairly complicated to understand completely. So I rate it as a 3 out of 5 for understandability.

Balance Sheet Health

Elevance has a healthy balance sheet overall:

Debt: Debt levels are managed to maintain an investment grade rating. The debt-to-equity ratio is stable but could still be lowered in the future.
Cash: The cash levels have been increasing in the last few years.
Assets: They have a strong history of asset growth. However, the number of intangible assets, though stable, are still very large.

Considering these factors, I rate the overall balance sheet health as 4 out of 5.