Medicaid Challenges Cloud Elevance's 2026 Profit Outlook
- Oct 24
- 3 min read
Elevance Health, the Indianapolis-based insurer, kicked off the health insurance earnings cycle this week by reporting financial results for the third quarter of 2025 that largely outperformed analyst expectations. The company achieved net income of $1.2 billion, marking a 17% increase year-over-year (YOY). Operating revenues advanced 12% YOY, reaching $50.1 billion or $50.7 billion, depending on the report. The adjusted earnings per share (EPS) of $6.03 surpassed the Zacks Consensus Estimate by 21.1%.
This strong performance was attributed primarily to higher premiums and controlled medical costs for members. The Health Benefits segment benefited from increasing Medicare Advantage (MA) membership growth and higher premium yields. The health services division, Carelon, also posted a robust revenue surge, increasing operating revenue by 33% to $18.3 billion, driven by recent acquisitions in home health and pharmacy services and the scaling of risk-based solutions.
Despite the strong financial metrics, not all segments were flawless. The overall medical membership dipped by 0.9% YOY, largely due to ongoing Medicaid eligibility reverifications. Additionally, operating income for both Health Benefits and Carelon came in below analyst expectations, citing significant planned operational investments, including in technology. The medical loss ratio (MLR)—a key benchmark tracking spending on patient care—was 91.3%, an increase from 89.5% the prior year, reflecting elevated cost trends in the Medicare business, though still better than analyst forecasts.
While the current results were positive, executives provided an early outlook that signaled potential profit constraints beginning in 2026. Elevance is the first major insurer to release earnings this cycle, and its executives gave investors a "gift" of early insight due to significant volatility currently impacting the sector.
The primary concern centers on Medicaid Challenges and Profit Outlook. Elevance expects its Medicaid margins to decline by at least 125 basis points (1.25 percentage points) in 2026 compared to this year. Insurers have complained that state payment rates are lagging the actual cost of providing care, especially since policy shifts following the pandemic left them with a sicker Medicaid population. CFO Mark Kaye stated that while state rate updates are expected to be modestly above historical levels, they will "still trail trend into 2026". This warning bodes ill for other managed care organizations with substantial Medicaid presence, such as Molina and Centene.
Future profit growth will also be stifled by several hundred million dollars in planned investments focusing on the Carelon division, artificial intelligence capabilities, and Medicare Advantage star ratings.
The Affordable Care Act (ACA) marketplace presents another moving target. The potential expiration of generous ACA subsidies remains a driving policy issue. If subsidies expire, an estimated 4 million to 5 million people are expected to lose coverage, leading to a "material contraction in the ACA marketplace". Insurers expect the remaining enrollees to be sicker and therefore more costly, necessitating sharper premium increases. Elevance CEO Gail Boudreaux confirmed the company is prepared for a range of policy outcomes.
In response to challenges in government programs, Elevance is already adjusting its strategy for 2026. The insurer elected to trim its Medicare Advantage footprint and entirely exit Medicare’s prescription drug plan market. Instead, it is pushing HMO plans—which allow greater control over costs—and dual Medicare-Medicaid plans, which typically offer a higher margin, in a bid to improve overall profitability.
Ultimately, earnings pressure in Medicaid and the ACA, coupled with increased internal investments, points toward lower profit growth in 2026 before a potential recovery is anticipated in 2027. The company plans to provide specific earnings guidance in January 2026, once there is greater clarity on updated Medicaid rates and the status of the ACA subsidies.
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