Value-based Care Programs And Provider Partnerships Will Improve Health Outcomes And Lower Costs

Key Takeaways

• Innovation in care delivery and digital engagement is enhancing customer experiences and may drive cost savings and revenue growth for Elevance Health.
  
• Strategic acquisitions and focused cost management are likely to support Elevance Health's long-term growth and improve profit margins.
  
• Elevated medical costs and membership declines in Medicaid present challenges to margins and revenue growth, requiring effective cost management and strategic adjustments.

Catalysts

Operates as a health benefits company in the United States.

• The introduction of value-based care programs and partnerships with care providers could drive improved health outcomes and lower overall costs for Elevance members, potentially increasing net margins.
  
• Enhancements to digital engagement through the Sydney app, which closed critical gaps in care and saved members an estimated 1.5 million hours, are likely to improve customer satisfaction, reduce overall costs, and contribute to revenue growth.
  
• The further integration and expansion of Carelon, including the acquisition of CareBridge, is set to bolster home
• and community-based services, aligning with Elevance Health's long-term strategy for growth and possibly increasing operating revenue.
  
• Anticipated growth in Medicare Advantage membership in the range of 7% to 9% for 2025, along with stability in benefit offerings, suggests potential for incremental revenue growth and improved retention.
  
• The company's focus on executing strategic initiatives to manage cost trends and its disciplined approach to operational expenses are expected to augment profit margins and support the goal of returning to 12% adjusted EPS growth annually.

Elevance Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elevance Health's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 4.1% in 3 years time.
• Analysts expect earnings to reach $9.2 billion (and earnings per share of $43.54) by about January 2028, up from $6.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 15.7x today. This future PE is lower than the current PE for the US Healthcare industry at 23.7x.
• Analysts expect the number of shares outstanding to decline by 3.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.01%, as per the Simply Wall St company report.

Elevance Health Future Earnings Per Share Growth

Risks

• The elevated Medicaid cost trends, particularly in behavioral health and inpatient services, are persisting longer than anticipated, which may create pressure on net margins if rate adjustments from state partners are delayed or insufficient.
  
• The reduction in Medicaid membership due to redeterminations has led to a year-over-year decrease in total membership, potentially impacting overall revenue growth if not offset by gains in other segments.
  
• Rising costs and administrative complexities in the healthcare ecosystem could challenge operating margins and the affordability of offerings if not mitigated by effective cost management and process improvements.
  
• The strategic focus on Medicare Advantage growth amid existing benefit reductions and market exits involves risk, as maintaining balance between growth and margins may be challenging if competitive pressures increase or regulatory conditions change unfavorably.
  
• Elevated medical cost trends, especially within Medicaid and Medicare, are expected to persist, which could lead to increased operating ratios and potentially impact earnings if not managed through prudent pricing and cost containment strategies.

Valuation

• The analysts have a consensus price target of $493.34 for Elevance Health based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $625.0, and the most bearish reporting a price target of just $388.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $223.5 billion, earnings will come to $9.2 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of $405.4, the analyst's price target of $493.34 is 17.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.