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Health insurer Elevance Health (ELV -13%) wilts to 52-week lows today after posting a rare earnings miss in Q3 and slicing its FY24 EPS outlook. The Medicaid business is to blame; management described the current challenges in its Medicaid business as unprecedented. The company's benefit expense ratio, or BER, which measures the percentage of premiums used to cover costs, rose dramatically in Q3, swelling 270 bps yr/yr to 89.5%, due largely to a timing mismatch between Medicaid rates and the higher acuity, or severity and priority of members' medical conditions.

ELV is not alone in battling with bubbling medical costs and the adverse impacts of state-driven Medicaid member redeterminations -- the process by which states determine who remains eligible for Medicaid. Earlier this week, UnitedHealth Group (UNH) discussed the ongoing timing mismatch that weighed on ELV, noting that states tend to use old care activity data that, when eligibility is shifting considerably, the number and average acuity of people covered changes significantly. UNH anticipated this headwind to be transitory, adding that the volume impact is probably now behind it. ELV's tone was not as optimistic, but management conveyed similar remarks, noting that it is confident rates will eventually reflect the acuity of its members as enrollment continues to stabilize.

However, given the magnitude of ELV's guidance cut today, alongside unyielding cost headwinds from Q3, investors are not sharing ELV's confidence.

• The jump in ELV's BER in Q3 shows up immediately with its sizeable earnings miss, delivering a 7% contraction yr/yr to $8.37 when analysts forecasted growth. Part of the rising costs are a byproduct of the mix shifts associated with the end of the pandemic. States have been disenrolling members no longer eligible since last year. As a result, the total number of members continued to fall yr/yr, down 3.3% in Q3.
• Still, the largest component of increasing costs stems from Medicaid cost trends developing worse than expected. ELV remarked that even though Medicaid rate increases are set to reach record levels this year, they are inadequate to cover cost trends ranging from three to five times greater than historical averages. ELV is working with its state partners to ensure they capture the acuity of the company's Medicaid membership in future rates.
• Unfortunately, over the near term, headwinds will persist. As a result, ELV slashed its FY24 adjusted EPS outlook to approximately $33.00 compared to its prior outlook of at least $37.20. Management projects its BER will be 100 bps higher than it previously targeted, bringing it to around 88.5% for the year.

There is some good news. ELV's revenue growth flipped positive in Q3, growing by 5.3% yr/yr and topping estimates. ELV also anticipates sustained momentum in its commercial business, buoyed by expanding exchange offerings to three new states. ELV also boasts an expansive economic moat, commanding an exclusive license of the Blue Cross Blue Shield brand across over a dozen states. Nevertheless, near-term cost pressures have no clear ending in sight, eroding investor confidence.