BofA Downgrades Elevance Health On Medicaid Pressure And Lowered Peer Valuations

Wednesday, Elevance Health Inc. ELV reported second-quarter revenues of $43.2 billion, down 0.4% year-over-year, marginally above the consensus of $43.05 billion. 

The decrease was driven by attrition in Medicaid membership, partially offset by higher premium yields reflecting the medical cost trend.

In the second quarter, UnitedHealth Group Inc UNH and Elevance Health reported increasing pressure on Medicaid, creating uncertainty about when Medicaid margins will bottom out and when a potential recovery might occur.

Centene Inc. CNC, Cigna Corp CI, and Molina Healthcare Inc. MOH are trading at a 3x lower valuation than Elevance Health. While Elevance Health’s diversification and quality justify some premium, this also limits its potential for further gains.

BofA Securities observes that Elevance Health has traditionally been seen as an investment lacking Medicare Advantage (MA) exposure. However, this perception may change following UnitedHealth’s stronger-than-expected results and a potentially improving regulatory landscape.

BofA has lowered the price target from $646 to $530 and downgraded Elevance Health to Neutral from Buy.

The potential for insufficient rates (to cover a worsening risk pool) has been a concern since the suspension redeterminations (four years ago) started. BofA analysts downgraded Medicaid-focused names earlier this year.

However, companies have long argued that states know risk pool shifts and that rates would proactively reflect the sicker population. Even though many companies built in some margin mean reversion into the 2024 guide, the margin pressure is still higher than expected.

The analyst writes, “Ultimately, we believe rates will reflect acuity over time, but the fact that ELV also called out underlying utilization accelerating as a separate dynamic, while hospitals are talking about Medicaid volume acceleration, raises the likelihood that pressures could continue into 2025.”

Other analyst reactions:

• RBC Capital maintains Elevance Health with an Outperform and raises the price target from $575 to $585.
• Barclays maintains Elevance Health with an Overweight and lowers the price target from $621 to $611.

Price Action: ELV stock is down 2.7% at $506.85 at last check Thursday.

Image via Shutterstock

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