Medicaid Turns and the Baseline Rises $0.75, but Investment Marks Supply 81% of the Beat and the Price Already Reflects the Turn: Maintain Hold

Results vs. Consensus

Q3 2026 Scorecard

Year-Over-Year Comparisons

The defining contrast of the year has flipped. At Q2, adjusted EPS fell 15.7% while the benefit expense ratio rose 80bps. In Q3, the benefit expense ratio improved 70bps against a weak 91.3% comparison and the adjusted operating margin held at 2.7%, so the operating core stopped going backward. Adjusted EPS still rose 15.9% mostly on investment income and a 2.7% lower share count, not on operating gain, which was essentially flat. The 3.5-day rise in days in claims payable says reserving stayed conservative while the ratio improved.

Quarter-Over-Quarter Comparisons

The sequential step-down in operating gain is the normal managed-care cadence: deductibles are exhausted, plan-paid costs rise, and the third quarter's MLR runs above the second's. What is not normal is that adjusted EPS fell only 6.2% while adjusted operating gain fell 26.5%. Net investment income rose another 47.3% sequentially to fill the gap, which is the arithmetic of a quarter carried by the portfolio.

Quality of Beat

• Revenue: Good quality. Operating revenue of $50.44B beat by ~2.3% on premium yield, CarelonRx product revenue and service fees, against fewer risk members. Medicaid revenue rose 5.7% year over year on a 4.9% smaller book, the clearest sign of rate catch-up in the release. Medical membership of 44.9M ran ~0.6M above the Street on stronger ACA retention, slower Medicaid attrition and Commercial fee-based growth.
• Margins: Mixed, and better than at Q2. The benefit expense ratio of 90.6% beat consensus by about 80bps, with Medicaid, Medicare Advantage and ACA each ahead of management's outlook. The adjusted operating expense ratio rose 90bps to 11.3% on "targeted one-time investments," which consumed most of the MLR gain and left adjusted operating margin flat at 2.7%. Health Benefits operating gain of $436M missed the ~$0.5B segment estimate.
• EPS: Low quality at the headline, acceptable underneath. About 81% of the $2.29 beat was investment-income marks, the largest below-the-line contribution of the year. The ~$0.44 operating beat is real, and management folded $0.75 into the clean baseline (Q3 operating outperformance plus a better full-year ACA outlook). That baseline mechanism is the reason the market can look through the headline.

The Guidance Raise, Decomposed

Assessment: Read the guide raise in two parts. The $0.75 baseline step is earned: ~$0.50 of Q3 operating outperformance plus an improved full-year ACA margin, and it carries into 2027 at ≥12%, adding $0.84 to the floor. The other $1.25 is the $1.85 of Q3 investment marks less roughly $0.60 of offsets, chiefly "a non-recurring discrete tax item we expect to recognize in the fourth quarter" (our arithmetic, since management did not size the item). The headline $2.00 raise overstates the improvement by about 2.7x. The baseline raise understates it relative to Q2's $0.25, and that second reading is the one that matters for 2027.

Segment Performance

Reportable Segments: Q3 2026

Health Benefits Revenue by Line of Business: Q3 2026

Individual (ACA) revenue is reported inside Commercial: $2,514M in Q3 2026, up 6.6% year over year.

Medical Membership (thousands)

Medicaid: the first rate cycle that moved the margin

Medicaid was the segment that decided the Q2 downgrade, and it is where this quarter's most consequential change came. At Q2, July rates came in better than planned and the full-year margin did not move. In Q3, those same July updates delivered the sequential margin uplift management had promised, and the full-year margin now tracks "slightly ahead" of the ~-1.75% outlook. The revenue line shows the rate work directly: Medicaid revenue rose 3.7% sequentially and 5.7% year over year while membership fell 1.7% and 4.9%. By our arithmetic, revenue per period-end member rose ~5.4% quarter over quarter and ~11.2% year over year. Cost trend stayed "elevated but relatively stable compared with the second quarter," so the improvement came from the rate side and from targeted cost actions, not from a cooling trend.

"In Medicaid, third quarter performance was ahead of our outlook, primarily reflecting the benefit of recent rate actions. We are now tracking slightly ahead of our prior full year margin guidance." — Gail Boudreaux, President and CEO

The magnitude is the caveat. A full-year margin "slightly ahead" of -1.75% after a mid-year rate cycle at the upper end of the mid-single-digit range implies that most of the rate gain is still being absorbed by trend. Management said as much: rates "have certainly not fully caught up with the underlying costs." The market-exit program announced at Q2 (D.C. plus further exits over the following 12-18 months) received no update in the prepared remarks.

Assessment: This is the evidence we asked for at Q2: a rate cycle that lifts the margin, however modestly. It moves the Medicaid trough from a floor whose slope we doubted to a floor with a measurable, positive first step. It does not yet make Medicaid an engine. The size of the lift is small, the 2027 rate cycle has to absorb H.R.1 work-requirement acuity, and management declined to put a timeline on the 2%-4% target. We now underwrite a 2027 improvement; we do not yet underwrite its pace.

Medicare Advantage: holding ≥2%, guided higher in 2027

MA performed better than management expected for a second straight quarter, driven by the mix of members retained after the 2026 product and geographic exits. Membership was flat sequentially at 1.9M (down 15.5% year over year by design), and the ≥2% full-year margin target was reaffirmed. For 2027, management guided to improvement on that margin, with the annual election period emphasizing HMO plans and dual-eligible members, and pointed to its 3%-5% long-term target range. Stars were a qualified positive: roughly half of MA members will be in 4-star-or-better plans for 2027, with an enterprise average of 4 stars.

"In Medicare Advantage, the product and geographic actions we took for 2026, along with the quality of our retained membership mix, support a full-year operating margin of at least 2%." — Mark Kaye, CFO

Assessment: MA remains the cleanest proof that the self-help toolkit works, and the 2027 commitment to improve on 2% is now explicit. "Approximately half" of members in 4-star plans is adequate rather than strong for 2028 bonus payments, and it is the main constraint on how quickly MA can reach 3%-5%. The pillar is on track; the slope beyond 2027 depends on Stars execution.

Individual ACA: the bronze cost curve arrived late, and members stayed

ACA was the third contributor to the MLR beat and the source of the baseline's non-Q3 increment. The seasonal rise in plan-paid costs associated with the higher bronze mix "emerged more slowly than expected," and management folded that into its risk-adjustment position. Retention also surprised: Individual membership rose 2.4% sequentially to ~1.35M against an internal expectation of ~1.2M, and year-end guidance moved to at least 1.2M from at least 1.0M. The full-year ACA margin is now "modestly higher," and the 2027 filed rates, in management's words, position the business to build on this year's progress.

"The seasonal increase in plan paid costs associated with our higher bronze mix emerged more slowly than expected, and we have incorporated that experience into our risk adjustment position." — Mark Kaye, CFO

Assessment: The ACA book is now the strongest single argument that 2025's wound has healed. Slower bronze cost emergence is partly timing, which is why the risk-adjustment accrual absorbed it, but the retention data are structural. The caveat is management's own: the post-subsidy risk pool will "take more than one renewal cycle to normalize," so 2027 should be priced as a year of continued morbidity uncertainty, not a clean run-rate.

Commercial Group and ASO: trend on plan, win-backs continue

Commercial revenue rose 3.8% (including Individual), and cost trend stayed "elevated, relatively stable, and most importantly, in line with our pricing assumptions." The pricing posture is notably conservative: 2026 and 2027 were both priced for a low double-digit trend, including the effect of the independent dispute resolution (IDR) process, whose pressure has been "much more pronounced in our ASO block than in fully insured." Risk-based employer membership fell 6.9% year over year, while fee-based membership rose 1.9% and BlueCard 3.2%, the continued migration toward self-funding that management is selling into. The 2027 national-account cycle started with more than 1 million members in the RFP queue and included several jumbo employers returning.

"Notably, several large jumbo employers have moved back to Anthem after moving away for 12 months." — Morgan Kendrick, President, Commercial Health Benefits

Assessment: Commercial is doing its job as ballast: trend on plan, pricing discipline into 2027, and the margin framed as "stable" year over year. Pricing for low double-digit trend is expensive insurance against an IDR-driven surprise, and it is the right call while the industry argues about the process. The shrinking risk book means Commercial contributes fees and Carelon pull-through more than underwriting margin, which suits the 2027 bridge.

CarelonRx: margin up on dispensing and PBM execution

CarelonRx grew operating gain 10.8% to $616M on 5.5% revenue growth, with the margin up 20bps to 5.3%. Management credited PBM execution and better performance in its dispensing assets, notably specialty pharmacy. Adjusted scripts fell 2.8% year over year but rose 2.1% sequentially. The commercial pitch is integration: members in integrated medical-and-pharmacy plans save up to $100 per member per month and use the emergency room about 30% less, according to management.

"We were up to 10.8% on an operating gain basis. Operating margin was 5.3% for the quarter." — Mark Kaye, CFO

Assessment: CarelonRx is steady and slightly accelerating, and its margin is less exposed to the medical-cost cycle that dominates Health Benefits. The integrated-plan savings claim is the core of the 2027 commercial selling story; it is also unaudited, so we credit it through the retention and win-back data rather than the per-member figure.

Carelon Services: the best year-over-year line, the weakest sequential one

Carelon Services operating gain rose 33.3% to $292M against an easy prior-year base, with the margin up 80bps to 3.8%. Sequentially, operating gain fell from $366M and revenue slipped from $7,975M, and consumers served fell 6.8% year over year to 91.0M. Management emphasized risk-based solutions (behavioral health, oncology, home-based care), external retention above 90% across most products, and new 2027 wins. It also named a new Carelon president, Jeff Park, citing his record in scaling health services and pharmacy businesses.

"We have exceeded 90% across the majority of our product and clinical risk solutions, and that gives us a very durable base on which to add new business." — Mark Kaye, CFO

Assessment: The year-over-year recovery is genuine, but a 3.8% margin on a sequentially lower base is not yet the growth engine the 2027 bridge describes. A leadership change at the segment carrying the most promissory weight in the bridge is a reasonable bet on execution, and it is also an admission that execution needed a new owner. Carelon Services is the line we will watch most closely in the January guide.

Key KPIs

Key Topics & Management Commentary

Overall Management Tone: Management was more assured than at Q2, and the vocabulary shifted from defending the outlook ("prudent") to describing improvement ("visibility," "momentum," Medicaid "moving from stabilization to improvement"). On Medicaid, answers stayed at the framework level: a direct question on whether the segment's MLR rose or fell year over year went unanswered, and the path to the 2%-4% target was deferred to January. It was the most confident call since the Q4 2025 guide, with the confidence resting on the baseline rather than the headline.

1. The Beat Was Below the Line Again, and Larger

For the third straight quarter, a non-operating item put the headline well above consensus, and this time it was the largest of the year. Management was again transparent about the split, leading the CFO remarks with the $0.50 of operating outperformance before naming the $1.85.

"We also recorded a net non-operating benefit of $1.85 per share, primarily related to valuation adjustments within investment income, partly offset by certain state tax items." — Mark Kaye, CFO

Unlike Q2, the windfall was not explicitly earmarked for incremental one-time spending. It flows into the reported guide, partly offset by a fourth-quarter tax item.

Assessment: The investment marks are real money and they are excluded from the baseline, so they do no damage to the 2027 math. They do make the reported EPS a poor guide to earnings power: nine-month adjusted EPS of $27.06 contains roughly $3.65 of below-the-line help. Investors who anchor on the $29.00 guide will be disappointed by a 2027 growth rate measured from $26.75.

2. The Baseline Moves $0.75: The Number That Actually Matters

Management framed the baseline as the more important revision, and it was right to. The $0.75 increase is the third consecutive upward step ($25.50 in January, $25.75 at Q1, $26.00 at Q2, $26.75 now) and the largest. It reflects Q3 operating outperformance and a better full-year ACA outlook.

"More importantly, we're raising our 2026 earnings baseline to at least $26.75. That increase reflects better underlying results and greater confidence in the durability of that performance." — Gail Boudreaux, President and CEO

Assessment: This is the strongest positive in the print. A cumulative $1.25 baseline increase since January says the trough year is finishing well above its starting point, and the floor for 2027 is now ≥$29.96. At Q2 we called the baseline step "real but small." This one is real and material.

3. Medicaid: From Stabilization to Improvement, With a Gap

The Medicaid narrative moved from a prudent hold at Q2 to "moving from stabilization to improvement." The improvement is rate-driven, with cost trend stable at an elevated level, and management was explicit that the work is not finished.

"Importantly, I note here, there is a lot of work still to do. Rates have certainly not fully caught up with the underlying costs, and our focus here is really on closing that gap and then executing against our targeted medical cost actions." — Mark Kaye, CFO

The cost-action list was specific: behavioral health clinical oversight and evidence-based review, payment integrity including behavioral health payment guidelines and AI-assisted detection of inappropriate billing, network alignment, pharmacy and site-of-care actions. ABA therapy, one of the highest-utilization categories, was named as an area where states are now working with the company.

Assessment: The direction is now right and the evidence is in the numbers, so the Bull-1 pillar moves back to on track. The candor about the remaining gap is also useful: if rates "have not fully caught up," the 2027 rate cycle is the swing factor, and the cost actions are the margin of safety.

4. Medicaid 2027: Work Requirements and a Target With No Date

The 2027 Medicaid debate now centers on H.R.1. States are still designing verification methods and timing for community-engagement requirements, and some, but not all, are building them into 2027 rate assumptions. Management is planning for incremental acuity pressure as membership falls under the new rules and still expects the margin to improve in 2027.

"Over time, to your question, we continue to view 2%-4% as the appropriate margin target for Medicaid. The pace of recovery here is principally going to depend on how quickly rates align with the underlying cost of care." — Mark Kaye, CFO

Assessment: A 2%-4% target from a 2026 margin near -1.75% is a 375-575bp journey, and management gave no timeline for it. Our working assumption is a modest 2027 step (perhaps 50-100bps) with the target a 2028-2029 event at best. The January call is where this becomes falsifiable.

5. Medicare Advantage: Improve on 2% in 2027, Stars at Half

MA has moved from repair to measured improvement. Management will carry the HMO and dual-eligible emphasis into the 2027 annual election period with plan designs that "prioritize stability in the benefits members value most," and it now explicitly expects 2027 margin above the ≥2% achieved this year.

"We recently received our 2027 star ratings and are pleased that approximately half of our Medicare Advantage members will be enrolled in plans rated 4 stars or higher." — Gail Boudreaux, President and CEO

Assessment: The margin trajectory is intact. The Stars result is the limiting factor: with roughly half of members outside 4-star plans, quality bonus revenue will not do much of the lifting toward 3%-5%, so the path stays dependent on plan design and medical-cost management.

6. Individual ACA: Membership at 1.3M and a Higher Margin

The ACA book kept surprising favorably on both cost and retention. Passive-renewal lapses after the 90-day grace period were lower than expected, effectuation was better, and expansion-market sales ran ahead of plan. Management raised year-end membership guidance to at least 1.2M and the full-year margin to "modestly higher."

"Enrollment also remains ahead of expectations, reflecting the value our plans deliver, and we now expect to end the year with at least 1.2 million members." — Mark Kaye, CFO

Assessment: The year-end guide implies fourth-quarter attrition of up to ~150K members from the ~1.35M Q3 level, which management attributed to consumers adjusting to higher premium responsibility. That is conservative positioning, consistent with how the company handled ACA favorability at Q2. The bull pillar is strengthened.

7. Commercial: Priced for Low Double-Digit Trend, With IDR in View

Commercial trend is running in line with pricing that already assumes a low double-digit cost environment for 2026 and 2027. Management devoted unusual time to the IDR process, calling for regulatory and legislative change and describing awards "in excess of what is reasonable." Its own IDR experience has matched its assumptions, and the pressure is concentrated in self-funded (ASO) business, where employers rather than Elevance bear the claim cost.

"Specifically, we priced 2026 and 2027 for a low double-digit cost trend environment." — Mark Kaye, CFO

Assessment: Pricing for low double-digit trend two years running is the conservative choice, and it de-risks the fully insured margin into 2027. The IDR advocacy matters more for ASO client retention than for Elevance's own P&L. Employers absorbing those awards are the ones who will shop their contracts.

8. Carelon: Operating Gain +17% and a New President

Carelon's combined operating gain rose 17% to $0.9B, and Carelon featured in four of the call's 17 questions, second only to Medicaid's six. It described a model that proves value inside Elevance's own health plans before scaling to external clients, external retention above 90% across most products, and 2027 wins in behavioral health, clinical care services, and specialty and post-acute. It also announced Jeff Park as President of Carelon.

"As a result, Carelon is becoming an increasingly important contributor to both affordability and enterprise earnings growth." — Gail Boudreaux, President and CEO

Assessment: CarelonRx and the year-over-year Carelon Services recovery support the claim. The sequential decline in Services and a change in segment leadership in the same quarter say the external-scaling story is still more pipeline than earnings. Carelon is necessary for the ≥12% bridge, but it is not yet sufficient on its own.

9. The Investment Program Lives in the Operating Expense Ratio

The one-time investment program announced at Q2 is now visible in the numbers. The adjusted operating expense ratio rose 90bps year over year to 11.3%, funding member experience, medical cost management, Carelon's value-based solutions, dual-eligible growth, and quality and Stars initiatives. Management offered early payback evidence: its Elevate medical cost platform has identified more than $300 million in anticipated savings this year, and its cancer care program reduced avoidable inpatient admissions by 15% in commercial.

"Our adjusted operating expense ratio increased 90 basis points to 11.3%. This quarter, we again made targeted one-time investments in member experience, medical cost management, and Carelon's value-based solutions." — Mark Kaye, CFO

Assessment: The investment is why Health Benefits operating gain fell 27.5% even as the MLR improved. Because the spending is labeled one-time and excluded from the baseline, its reversal is an implicit 2027 tailwind. The "$300 million in anticipated savings" figure is the first quantified return, but "identified" and "anticipated" are two steps removed from realized.

10. Capital Deployment: "Intentionally Disciplined"

Buybacks rose to $330M from $234M in Q2, at an average $398.75, still far below the $1.1B pace of Q1. Asked what 2027 assumes for capital deployment, management said its near-term posture would be "very disciplined or intentionally disciplined," with priority on balance-sheet strength and targeted investment, opportunistic repurchases, and selective M&A in integrated capabilities. Detail on 2027 capital assumptions was deferred to January.

"We're looking to really maintain that balance sheet strength. We're looking to fund targeted investments that support margin enhancements and Carelon growth, and we will remain opportunistic on share repurchases." — Mark Kaye, CFO

Assessment: With the stock near $440, a slower buyback is sensible, but it also means 2027 EPS growth must come from operations rather than share count. The phrase "selective M&A" alongside a new Carelon president is worth watching: a services acquisition would be consistent with both.

11. The Implied Fourth Quarter and the Discrete Tax Item

Nine-month adjusted EPS is $27.06, so the ≥$29.00 guide implies a fourth quarter of at least $1.94, well below the $3.33 reported in the fourth quarter of 2025. Management named one cause, a discrete tax item it did not size; normal fourth-quarter seasonality is the usual other factor.

"Our revised guidance reflects third quarter outperformance and a strengthened ACA outlook, partially offset by a non-recurring discrete tax item we expect to recognize in the fourth quarter." — Mark Kaye, CFO

Assessment: Because the tax item and the investment spend sit outside the baseline, the low implied Q4 does not threaten the 2027 floor. It does set up a weak-looking fourth-quarter print in January, and the size of the tax item is a disclosure gap the January call should close.

Guidance & Outlook

Management's framing was that 2027 now starts from a higher and better-understood base. Its stated drivers are continued Health Benefits margin improvement (Medicaid and MA), broader adoption of Carelon's value-based solutions, and operating efficiency, with the CEO repeating that management is "not relying on any single business market or assumption." Detailed 2027 assumptions, including the Medicaid path and capital deployment, are reserved for the January call. The CFO's guidance language was precise about what is recurring: the baseline captures Q3 outperformance and the ACA improvement, while the reported guide also carries the investment marks and the fourth-quarter tax item.

Implied ramp: The ≥$29.00 guide requires at least $1.94 in Q4 from $27.06 through nine months. The ≥$29.96 2027 floor requires 12% growth from the baseline, about $3.21 of incremental clean EPS, to come from margin repair in government lines, Carelon growth, the roll-off of one-time spending, and modest buybacks.

Street at: FY2026 consensus was ~$27.24 before the print, so the reported guide sits ~6.5% above it; nearly all of that gap is non-recurring. For 2027 the Street had been roughly $29.5, so the new ≥$29.96 floor nudges estimates up by about 1.5%, not a step change.

Guidance style: Conservative and consistent. Every 2026 update has raised the baseline, every below-the-line gain has been excluded from it, and management has used "at least" floors throughout. That pattern earns the floors credibility. It also means 2027 consensus will likely settle a little above $29.96 rather than well above it.

Analyst Q&A Highlights

Whether the 2027 ≥12% depends on Medicaid recovery

The opening question asked directly whether the 2027 algorithm needs Medicaid margin improvement and whether it assumes any easing in cost trend. Management answered at the portfolio level: confidence comes from the higher baseline and from multiple drivers, and the plan is not dependent on any single line. It did not say whether the plan assumes trend relief.

Q: "Is it dependent upon Medicaid margin improvement next year? And maybe any comment on the underlying cost trends assumed across the major business lines. Is that similar to 2026, or are you assuming any improvement when you talk about 12% earnings growth?"
— A.J. Rice, UBS

A: "But I think to your question, importantly, we're not relying on any single business market or assumption, and that's really what gives us the confidence in both the outlook and the durability."
— Gail Boudreaux, President and CEO

Assessment: The diversification answer is the same one given at Q2, and it is credible because MA, ACA, Carelon and the one-time-spend roll-off can carry most of the bridge. The trend-assumption half of the question went unanswered, which leaves the January guide to show whether 2027 assumes any cost relief.

Was Medicaid's MLR up or down year over year?

A precise question noted that the release did not list Medicaid as a driver of the year-over-year MLR improvement and asked whether Medicaid's MLR rose, fell or held flat, and whether the better rates were prospective or partly out-of-period. Management described Medicaid as better than expected on July rate actions with stable trend, and the CEO summarized it as moving from stabilization to improvement. Neither answer gave the year-over-year direction.

Q: "First, can you help us understand whether Medicaid MLR was up, down, or flat versus 3Q 2025? Second, are the better rates generally captured in prospective rates, or is there a big out-of-period element that you would need to continue to fight for?"
— Andrew Mok, Barclays

A: "In Medicaid, performance was better than expected, and that was primarily because of recent rate actions. The July 1st updates did provide greater support to the second half margins, especially as states incorporated more recent cost experience. Importantly, the underlying cost trend here remains elevated and broadly stable."
— Mark Kaye, CFO

Assessment: "Better than expected" is a comparison with the outlook, not with last year, and the release's attribution of the MLR gain to MA and ACA suggests Medicaid's year-over-year MLR did not improve much, if at all. The reference to July updates implies prospective rates, which is the better kind, but the question deserved a direct answer.

Why rates improved more than the margin did

The sharpest Medicaid question quantified the gap: the Q2 rate outlook implied roughly 100bps of improvement versus the initial plan, while the full-year margin moved only slightly. The question asked how much of the difference was cost and acuity and how much was investment. Management confirmed the sequential uplift, characterized trend as elevated but stable, and conceded that rates still trail costs.

Q: "I guess when we think about the difference between the improved rates and the improved margin, I guess what are the key kind of blocks that we should think about there? I guess how much of that is maybe cost or acuity above initial expectations, and how much of it, I guess, would potentially be incremental investment that you've made and how to think about whether that investment is part of the baseline or more opportunistic in 2026?"
— Stephen Baxter, Wells Fargo

A: "As we mentioned a moment ago, our July 1st rate action that we received did deliver a sequential margin uplift that we expected while the underlying cost trend did remain broadly elevated, but stable and very consistent with what we saw in the second quarter."
— Mark Kaye, CFO

Assessment: Management did not decompose the gap, but the answer implies it is mostly cost: trend absorbed most of the better rate, and the uplift was the one "we expected." That is consistent with our Q2 read that trend runs close to rate. The difference now is that the margin moved at all.

How work requirements will hit 2027 membership and acuity

Questioning on H.R.1 asked how work requirements would change 2027 membership and acuity, and whether states are pricing for them now. Management said states are still designing implementation and only some have included the requirements in 2027 rate assumptions. The CFO added that the plan assumes incremental acuity pressure and still expects margin improvement.

Q: "Is there anything you could share with us on your early views on work requirements in terms of potentially how you think it's going to affect membership on a year-over-year basis and maybe the impact on cost trend or acuity and any early rate actions that states are taking?"
— Justin Lake, Wolfe Research

A: "...we are planning for incremental acuity pressure from some of those rate changes that Felicia, membership changes that Felicia spoke about here, and we do expect Medicaid margins to improve in 2027."
— Mark Kaye, CFO

Assessment: Planning for acuity pressure is the right posture. With state implementation unsettled and only some states pricing for it, the 2027 Medicaid margin is exposed to a timing mismatch between member loss and rate recognition. This is the single largest unquantified risk in the 2027 bridge.

How long until Medicaid reaches target margins

A follow-up asked how long the return to target margins would take and what the biggest variables are beyond work requirements. Management restated the 2%-4% target, tied the pace to rate alignment, and promised more detail in January.

Q: "Can you just remind us how long you think it might take for you to get back to target margins and kind of what the biggest variables are maybe outside of just the impact of work requirements?"
— Kevin Fischbeck, Bank of America

A: "Over time, to your question, we continue to view 2%-4% as the appropriate margin target for Medicaid. The pace of recovery here is principally going to depend on how quickly rates align with the underlying cost of care."
— Mark Kaye, CFO

Assessment: No timeline was offered, and the answer made the pace a function of state rate-setting, a lever management does not control. The January call has to put a number on 2027 Medicaid improvement for this pillar to support a higher multiple.

Commercial trend, pricing for 2027 and the IDR process

A question on the commercial underwriting environment asked whether 2027 pricing assumes stable or accelerating trend and how IDR factors in. Management said trend is elevated, stable and in line with pricing, that both 2026 and 2027 were priced for a low double-digit environment including IDR, and that its own IDR experience has matched assumptions.

Q: "I am just curious on whether you are sort of pricing for a stable view on trend or some further acceleration."
— Scott Fidel, Goldman Sachs

A: "Commercial Group cost trend remains elevated, relatively stable, and most importantly, in line with our pricing assumptions. Specifically, we priced 2026 and 2027 for a low double-digit cost trend environment."
— Mark Kaye, CFO

Assessment: A clear, quantified answer, and the conservative one. Commercial is the least likely source of a 2027 surprise, and the pressure management identified sits in ASO, where Elevance does not carry the claim risk.

ACA year-end membership and the post-subsidy risk pool

A question noted that the ≥1.2M year-end ACA guide implies a sequential drop from the Q3 level and asked whether that reflects a specific dynamic or conservatism, and how the market would develop in 2027. Management described better effectuation, lower passive-renewal lapses and strong expansion-market sales, and said the guide allows for above-historical fourth-quarter attrition.

Q: "It would suggest that would be something close to a mid to high single-digit sequential drop in exchange enrollment, versus this quarter. Is there anything specific driving that dynamic or is that just conservatism?"
— Jason Cassorla, Guggenheim Securities

A: "So fourth quarter still allows for some attrition above historical levels as consumers adjust, but even with that assumption, we now expect to end the year with at least 1.2 million Individual ACA members."
— Mark Kaye, CFO

Assessment: The guide is conservative by construction, which is consistent with how management has treated ACA all year. Combined with the comment that the risk pool needs more than one renewal cycle to normalize, it signals a cautious 2027 ACA plan rather than an extrapolation of 2026's favorability.

Whether 2027 assumes a return to the MA target margin

A question asked whether the 2027 algorithm assumes MA returns to its long-term target margin. Management said 2027 should improve on the ≥2% of 2026 and that the business continues along the trajectory to 3%-5%, implicitly not all the way in 2027.

Q: "In Medicare Advantage, is it fair to say, at least right now, that the 12% earnings growth next year does not assume getting back to your long-term target margin?"
— Ryan Langston, TD Cowen

A: "As we move into 2027, the expectation is that we improve on that margin position. So we feel good about how we are positioned from a Medicare Advantage perspective, and we will continue along the trajectory to move to our long-term target margin range of 3%-5%."
— Felicia Norwood, Chief Health Benefits Officer

Assessment: The answer confirms the 2027 bridge does not need MA at target, which makes the ≥12% more achievable and leaves upside if MA moves faster. Combined with "approximately half" of members in 4-star plans, a gradual path to 3%-5% is the realistic case.

What They're NOT Saying

1. Medicaid's year-over-year MLR direction. Asked directly whether Medicaid's MLR was up, down or flat versus Q3 2025, management answered with "better than expected." The release credits the 70bp consolidated improvement to MA and ACA, which suggests Medicaid's own year-over-year ratio did not improve much.
2. The Medicaid market exits. At Q2, management announced the D.C. exit and further market exits over the following 12-18 months. In Q3 the program went unmentioned in prepared remarks, and a question on footprint rationalization drew an answer about provider networks instead. Investors still cannot size the revenue or margin effect of the exits.
3. What the investment marks are. The $1.85 came "primarily" from "valuation adjustments within investment income," the third such gain this year, without any description of the assets involved or whether further marks are likely. Repeated valuation gains of this size deserve a line of explanation.
4. The size of the fourth-quarter tax item. The implied fourth quarter of at least $1.94 includes a "non-recurring discrete tax item" that management did not quantify. By our arithmetic, the tax item and other offsets total roughly $0.60 per share.
5. Why cash flow guidance sits below the year-to-date figure. Operating cash flow through nine months is $7.5B, but the full-year guide is at least $6.5B, implying a fourth-quarter outflow of about $1.0B. Q2 cash flow benefited from a state Medicaid pass-through payment, and a timing reversal is the likely explanation, but management did not address it.
6. That Health Benefits earned less. The call led with the MLR improvement. It did not dwell on Health Benefits operating gain falling 27.5% to a 1.0% margin, or on the one-time investment spending, labeled non-recurring for a second quarter, that caused it.

Market Reaction

• Pre-print setup: ELV closed at $440.18 on October 20, a 52-week closing high, up 12.8% from the $390.33 close after the Q2 print. The stock entered the report up 25.6% year to date (the S&P 500 was up 12.7%), up 25.9% over the trailing twelve months and up 7.5% over the trailing 30 days, at the top of a $280.74-$440.18 52-week closing range.
• Reaction day (October 21): ELV opened at $445.00 (+1.1%), traded between $426.13 and $450.69 (-3.2% to +2.4%), and closed at $434.13, down 1.4% (-$6.05), on 2.5M shares, 1.9x the 30-day average. The S&P 500 rose 0.6%, so ELV lagged the index by about two points.
• Peers on the day: Managed care traded lower as a group: UNH -0.5%, CI -0.7%, HUM -0.5%, CNC -0.8%, MOH -2.2% and CVS -1.4%. ELV's decline was in line with the group's weakest names, not an outlier.
• Following sessions: The stock rose 2.6% to $445.28 on October 22 and eased 1.2% to $439.95 on October 23, essentially flat against the pre-print close.
• Where it sits: At $439.95, ELV trades at ~15.2x the ≥$29.00 reported guide, ~16.4x the ≥$26.75 baseline and ~14.7x the ≥$29.96 2027 floor.

A round trip inside one session. The 5.6-point intraday range tells the story better than the close. The stock opened higher on a 49% headline beat and a $2.00 guide raise, then sold off as the market digested that most of the beat was investment marks and that Medicaid's improvement was modest and undated. By the close it had given back the gap and more, finishing near the weaker managed-care names. This is the Q2 dynamic in milder form: the market discounts the headline and prices the baseline.

Why it was not another 8.5% day. In July the market sold a stock at a 52-week high because the core went backward. This time the core moved forward: the MLR improved, the adjusted operating margin stopped compressing, Medicaid lifted on rates, and the baseline rose three times as much as in July. The stock had also already run 12.8% from the Q2 close into the print. The result was a muted reaction and a two-day recovery to the pre-print level, which is what a well-anticipated, good-quality-underneath quarter looks like at full price.

What the tape is saying. Flat over the week after a beat-and-raise means the improvement was priced in, not that it was doubted. Sell-side targets moved up broadly after the print, mostly into the high $400s and low $500s, but the stock did not follow, which suggests holders are waiting for the January 2027 guide before paying a higher multiple.

Street Perspective

Debate: Is a 49% beat that is mostly investment marks a real beat?

Bull view: Strip out the $1.85 and the quarter still beat by roughly 9-10%, the MLR was about 80bps better than modeled, and the baseline rose $0.75. The marks are a bonus on top of a genuinely better operating quarter, and management's baseline discipline means no one is being misled.

Bear view: Three straight quarters of below-the-line help now total about $3.65 per share, Health Benefits operating gain fell 27.5% and missed the segment estimate, and the implied fourth quarter is weak. The reported EPS line has stopped being informative, and the operating segment that matters most is earning less.

Our take: The bull has the better of it this quarter. The operating beat was real and the baseline moved materially, which is the opposite of Q2. The bear's point about Health Benefits is mostly an artifact of one-time spending that is excluded from the baseline. We stop treating the headline as the problem and start treating the baseline as the scorecard.

Debate: Has Medicaid turned, or is the margin still lagging rates?

Bull view: July rates lifted the margin as promised, revenue per member is rising fast, cost trend is stable, states are pricing 2027 with more recent experience, and management says the business is moving from stabilization to improvement. 2026 is the trough and 2027 improves.

Bear view: Rates came in well ahead of plan and the margin moved only slightly, so trend is still eating most of the rate. Work requirements will push acuity higher in 2027 before states recognize it in rates, management will not date the path to 2%-4%, and the market exits have gone quiet.

Our take: Medicaid has turned, but slowly. The first positive margin step is enough to restore the trough-holds pillar; it is not enough to underwrite a fast recovery. The 2027 margin path in the January guide is the next decisive data point, and we expect it to be modest.

Debate: At a 52-week high and ~14.7x the 2027 floor, is the recovery priced?

Bull view: The floor keeps rising, management has beaten every 2026 floor it set, and a ~$30 2027 number growing at 12% toward ~$33.50 in 2028 deserves a mid-teens multiple. Sell-side targets now cluster near $500, and the stock is a buy on any dip.

Bear view: The stock is up 25.6% year to date and 12.8% since July, and it already trades near 15x a 2027 number that has yet to be guided. Medicaid's pace and the H.R.1 acuity effect are unknowns, and a January guide that merely confirms ≥$29.96 could leave the stock flat or lower.

Our take: At $439.95 the stock sits at the midpoint of our raised fair-value range. The fundamentals improved, and the price rose by about the same amount, so the risk/reward is balanced. We would need either a lower entry or a January guide that quantifies a faster Medicaid path to move back to Outperform.

Model Update

Valuation framework: We raise fair value to $425-$455 from $375-$410: 14-15x our ~$30.25 2027 estimate, up from 13-14x a ~$29.12 number. Two things changed. Earnings power rose, since the baseline gained $0.75 and the 2027 floor $0.84. The multiple also deserves a turn more, because the reasons we applied a discount at Q2 (a compressing operating margin and a Medicaid margin that would not move on better rates) both reversed this quarter. We stop short of ELV's historical mid-teens because Medicaid's pace is undated, H.R.1 acuity is unknown, and earnings quality at the reported line remains low. Against the $439.95 close, the $440 midpoint implies essentially flat price return over twelve months, plus a ~1.6% dividend yield. That is a Hold.

Thesis Scorecard Post-Earnings

Overall: Thesis strengthened. Q3 answered the two questions that drove the Q2 downgrade in the right direction: a Medicaid rate cycle lifted the margin, and the operating margin stopped compressing while the baseline rose $0.75. Every bull pillar is now on track, and the earnings-quality bear has eased. What did not change is the price. The stock re-rated ahead of the evidence, so the improvement is reflected in the valuation rather than available as upside.

Action: Maintain Hold; raise fair value to $425-$455. We do not chase a stock at the midpoint of fair value, and we do not sell one whose fundamentals are improving. The path back to Outperform is specific: a January 2027 guide that quantifies Medicaid improvement toward 2%-4% with a 2027 number above ~$30.50, or a pullback to the low $390s (~13x the 2027 floor) without a change in the fundamentals. The path to Underperform is a January guide that only matches the ≥$29.96 floor while H.R.1 acuity pushes the Medicaid recovery into 2028, or a reversal in the MLR improvement.