Integrated Value-Based Care Will Improve Medicare Advantage Delivery

Key Takeaways

• Expansion of value-based care models and integration of new services may enhance revenue, reduce costs, and improve member satisfaction.
  
• Strategic investments and strong membership retention are likely to sustain growth and stabilize revenue streams in the long term.
  
• Elevated Medicare costs and regulatory uncertainties could challenge Elevance Health's revenue growth and margin stability.

Catalysts

Operates as a health benefits company in the United States.

• Elevance Health is continually expanding its value-based care models, such as the value-based oncology care program, which successfully reduced inpatient admissions and improved treatment adherence. This approach is extended to Medicare Advantage, aligning care more closely with member needs and potentially enhancing both revenue and margins.
  
• The scaling of HealthOS and integration into provider workflows supports real-time decision-making and reduces administrative burden, potentially lowering costs and enhancing revenue through improved service delivery efficiency and member satisfaction.
  
• Carelon's expansion to include new post-acute and behavioral health contracts with external health plan clients reinforces its role as a scalable platform, possibly increasing revenue from non-member clients and contributing to earnings.
  
• Strategic investments in home healthcare, such as the acquisition of CareBridge, to expand into home and community-based services aim to deliver high-touch support, thereby enhancing care for complex needs populations, potentially improving outcomes and lowering costs. This strategy could positively affect net margins through efficient care management.
  
• Strong membership retention in key segments like Medicare Advantage, aided by integrated care offerings and strategies focusing on lifetime member value, is expected to sustain membership growth and stabilize revenue streams.

Elevance Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elevance Health's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 4.2% in 3 years time.
• Analysts expect earnings to reach $9.6 billion (and earnings per share of $45.14) by about April 2028, up from $5.9 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 13.2x on those 2028 earnings, down from 15.9x today. This future PE is lower than the current PE for the US Healthcare industry at 22.8x.
• Analysts expect the number of shares outstanding to decline by 2.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Elevance Health Future Earnings Per Share Growth

Risks

• Elevance Health mentions elevated utilization patterns and high cost trends in the Medicare segment, which could potentially impact their net margins if these trends continue or worsen.
  
• The moderation in Individual ACA membership effectuation rates suggests potential challenges in meeting membership growth expectations, which could impact revenue projections.
  
• Upcoming Medicaid rate discussions that have yet to be finalized could pose a risk if the outcomes do not align with expectations, potentially affecting net margins.
  
• The company's risk adjustment model (V28) changes could necessitate adjustments that may not fully align with prior reimbursement assumptions, posing a risk to net earnings.
  
• External macroeconomic factors, such as changes in regulation, utilization trends, or competition, could adversely affect the overall financial outlook and impact revenue and margins.

Valuation

• The analysts have a consensus price target of $501.761 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 $585.0, and the most bearish reporting a price target of just $428.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $227.7 billion, earnings will come to $9.6 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $415.9, the analyst price target of $501.76 is 17.1% 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.