Enrollment Mix and Cost Inflation Collide#

The Medicaid headwind is both structural and cyclical, creating a complex dynamic that management acknowledges will persist through at least 2026. Following the end of the COVID-era continuous-enrolment provisions, states redetermined eligibility and healthier members disproportionately rolled off the rolls, leaving behind a sicker, more resource-intensive population requiring more medically intensive services. Simultaneously, costs for behavioural health and new obesity treatments—particularly GLP-1 drugs—have erupted across the government-backed universe. Elevance's Medicaid membership fell 3.1 percent year over year to 8.645 million lives, a manageable decline but one that masks the profound unit economics deterioration beneath the surface. The health benefits segment's 62.5 percent operating margin decline on 10 percent revenue growth starkly illustrates how pricing power has evaporated against cost inflation.

The company's disclosures confirm that management views this as a multi-year problem rather than a cyclical disruption. Elevance declined to provide 2026 guidance, citing the need for "clear visibility" on potential policy changes—particularly the anticipated expiration of enhanced premium tax credits for individual Affordable Care Act plans. This carefully worded opacity is itself a strategic signal: management is positioning for downside optionality and wants flexibility to navigate policy uncertainty without being held accountable to a formal guide. The Medicaid pressure, combined with individual market subsidy cliff risk, has created a forecasting environment where management simply cannot commit to specific earnings targets. For institutional investors accustomed to carrier predictability, this messaging is a red flag that obscures more fundamental doubt about near-term profitability.

The 2026 Trough and Path to Recovery#

Chief Financial Officer Mark Kaye's comment that "2026 is the low point" is the earnings call's most consequential statement, because it implicitly acknowledges that the company expects one more year of meaningful margin pressure before conditions stabilize. This forecast defers the recovery narrative to 2027 at the earliest, meaning institutional investors must endure two consecutive years of Medicaid profitability depression while watching peers manage similar pressures. The company has reaffirmed its full-year 2025 adjusted earnings guidance of approximately $30 per share, but the guidance package feels increasingly defensive—management is essentially asking investors to hold steady through 2026 in anticipation of 2027 normalization.

That deferral of recovery creates acute timing risk for shareholders. Rising interest rates have compressed the multiple paid for healthcare stocks, and margin compression typically triggers investor rotation out of the sector. Elevance is asking investors to maintain faith in a 2027 recovery while accepting 2026 as a "low point" for profitability—a plea that requires unusual conviction given rising macroeconomic uncertainty and competitive pressures. The company will issue formal 2026 guidance in January; that pronouncement will be closely watched for evidence of stabilization in Medicaid unit economics or further deterioration. If costs remain elevated through the first half of 2026, management's recovery narrative risks becoming untenable.

Carelon and Capital Deployment Provide Offset#

Elevance's strategic response to Medicaid headwinds rests on two pillars: accelerated diversification through Carelon and aggressive capital returns to shareholders. Both initiatives signal management's confidence in long-term cash generation, yet both also mask underlying uncertainty about near-term profitability. The company is simultaneously investing heavily in new platforms while returning substantial cash to shareholders—a balancing act that tests the durability of the underlying earnings base.

Platform Scaling at the Cost of Margin#

Elevance has pursued an aggressive diversification strategy by building Carelon—a pharmacy and healthcare services platform—to capture higher-margin, non-insurance revenue. The division served 97.6 million consumers in the third quarter and adjusted pharmacy scripts grew 6 percent. Yet the operating margin of 3 percent in Carelon Services reflects the company's deliberate choice to sacrifice short-term profitability for market share and scale. The company is ploughing earnings back into technology, workforce strengthening, and platform integration, betting that this investment will compound over time. The question for investors is whether this bet pays off before Medicaid headwinds fully erode group earnings—a central tension in the Elevance investment thesis.

Reuters reported that the Carelon strategy is essential to Elevance's long-term diversification, yet near-term earnings accretion remains muted. Carelon's revenue surged 33 percent to $18.3 billion, driven largely by acquisition integration in home health and pharmacy services, yet operating margin compression signals that the company is prioritizing growth over near-term profitability extraction. This strategy may ultimately prove correct—platform investments in healthcare services typically require several years to mature—but the timing creates earnings drag precisely when the parent company is facing Medicaid margin pressure. Investors must judge whether management's diversification strategy will ultimately offset insurance profitability headwinds before patient capital becomes scarce.

Aggressive Capital Returns Amid Uncertainty#

Despite the profitability headwinds, ELV has returned $3.3 billion to shareholders year-to-date through share repurchases and dividends. In the third quarter alone, the company bought back 2.9 million shares at a weighted average price of $303.48 and paid a $1.71 per-share dividend, distributing $381 million in total. This capital discipline stands in marked contrast to the company's earnings guidance, suggesting management confidence in long-term cash generation even if reported profits are under temporary pressure. The company has $7.2 billion of board-approved repurchase authorization remaining, providing a substantial capacity for continued buyback activity.

Yet the gap between capital confidence and earnings uncertainty is widening, and shareholders are noticing: the stock's intraday retreat suggests the market is questioning whether near-term buybacks are genuinely value-accretive given the 2026 profit trough ahead. Operating cash flow declined to $4.2 billion year-to-date from $5.1 billion in the prior year, a $0.9 billion headwind that raises questions about the sustainability of current capital return rates should margin pressure persist. Management's willingness to return capital aggressively despite guidance uncertainty reads as confidence in the recovery thesis—but it also raises the stakes should 2026 disappoint. For value-conscious investors, the combination of aggressive buybacks, margin compression, and deferred recovery creates a riskier proposition than the headline earnings beat suggests.

Policy Uncertainty and Path to Stability#

The outlook beyond 2026 hinges on two interconnected variables: the trajectory of Medicaid medical cost inflation and the durability of policy support for individual market subsidies. Both remain subject to regulatory and macroeconomic forces outside management's direct control, forcing the company into a posture of strategic flexibility rather than confident forward guidance. Management has explicitly chosen to withhold 2026 guidance until January, citing the need for clarity on policy changes that could materially affect individual and government market profitability. This forecasting gap reflects genuine uncertainty, but it also signals that management harbours meaningful doubts about near-term earnings predictability.

ACA Subsidy Expiration Compounds Uncertainty#

A secondary but material risk looms in the individual health insurance market, where Elevance expects elevated claims as members utilise benefits ahead of anticipated changes to Affordable Care Act subsidy design. The potential expiration of enhanced premium tax credits in 2026—a COVID-era measure set to sunset—introduces acute policy risk that the company has explicitly chosen not to forecast. Management cited the need to wait for regulatory clarity before issuing formal 2026 guidance, a stance that respects the genuine uncertainty but also signals that management is not confident in its ability to navigate this variable. Individual business revenue grew 13.3 percent to $2.358 billion in Q3, reflecting elevated medical utilization and pricing discipline, but that expansion masks the structural uncertainty surrounding subsidy policy.

BusinessWire reported that the company is "prepared for a range of policy changes," but that bland assurance rings hollow in the context of declining profit expectations and management's explicitly cautious 2026 guidance. For institutional investors accustomed to carrier predictability, policy-driven forecasting opacity is a red flag. The company's decision to withhold 2026 guidance until January suggests management has not yet modelled a coherent 2026 earnings scenario under its baseline assumptions. That gap between current uncertainty and formal guidance represents material information risk.

The Recovery Narrative Starts in 2027#

Elevance has positioned itself as a managed care operator in transition: shedding legacy Medicaid drag, scaling higher-margin services platforms, and harvesting faster-growing Medicare Advantage populations. The third-quarter earnings beat validates the operational discipline and premium pricing power within this core strategy. Yet the 2026 trough extends the patience horizon for recovery, and institutional investors have limited tolerance for extended margin pressure in an era of rising interest rates and competitive tension. The company will issue formal 2026 guidance in January; that pronouncement will be closely watched for evidence of stabilization in underlying unit economics or further deterioration in Medicaid medical loss ratios.

For now, ELV remains a story of genuine strategic merit hampered by temporary but severe cost inflation. The company's willingness to explicitly call 2026 the profit "low point" suggests management has internalized both the severity of the challenge and the multi-year timeline required for normalization. That honesty may ultimately serve shareholders well if the recovery thesis proves correct—but it also means investors must tolerate a prolonged earnings trough while betting on a 2027 rebound. The market's 4 percent intraday retreat suggests scepticism that temporary cost inflation will not become structural. Management must deliver evidence of stabilization in the coming quarters to restore investor conviction in the long-term value proposition.