Health insurance corporations are so profitable these days that even with net income consistently in the billions, investors may remain unimpressed. Such appears to be the case with Elevance Health (ELV +0.97%), the health insurer that rebranded itself from Anthem last year, which reported a GAAP net income of $24.81 per share in 2022, a total of almost $6.03 billion -- dropping by 1.3% from 2021.
The company's net income appeared to have stalled out last year after a two-year uptrend perhaps driven by the initial phases of the COVID-19 pandemic. In the two years leading up to 2020, net income had swung back and forth but appeared basically flat over time, so perhaps 2022 marked a return to the historical norm.
Elevance could outperform in earnings this year, but investors should monitor claim delays
It could also be that investors were unimpressed that while Elevance added 2.2 million medical enrollees last year compared to 2021, up 5% to a total of 47.5 million members, profits didn't rise to match.
In 2023, Elevance is looking for GAAP net income to rise to more than $29.80 per share, which would be an increase of more than 20%. Analysts seemingly think the company is being modest, estimating EPS will come in between $32.45 and $33.31. Assuming Elevance's modest forecasts, operating gains would then increase from the 2022 figure of $8.5 billion to more than $9.3 billion this year.
NYSE: ELV
Key Data Points
So stable growth is in the offing for the short term, and analysts also foresee double-digit earnings growth (just over 12% annually) for the next five years, but the long-term outlook could face some uncertainty.
One possible warning sign is that Elevance reported "Days in Claims Payable" of almost seven weeks -- 47.7 days -- as of Dec. 31, 2022, an increase of 2.5 days compared to Dec. 31, 2021. This metric for health insurers measures the length of time it takes for the company to pay claims, and the meaning of the increase is that customers were waiting longer on average to have their medical claims paid. For comparison, fellow health provider Humana reported an average of 45.9 days in claims payable as of the end of 2022, up from 43.7 days at the end of the previous year, and UnitedHealth Group's days in claims payable were 49.9 in the fourth quarter compared to 46.8 a year previously.
Could this industry trend backlog spell trouble down the road? According to the Employee Benefits Security Administration, a part of the U.S. Department of Labor, "plans are required to pay or provide benefits within a reasonable time after a claim is approved," although the Employee Retirement Income Security Act of 1974 doesn't set a specific time limit.
States also regulate insurance companies, and in Maryland and Washington state, for example, health insurers are supposed to pay out within 30 days of receiving a "clean" claim that meets certain legal requirements. Even though the delays seem to be industry-wide, investors may want to watch how regulators approach this issue. It's not impossible that Elevance could be held liable to fines or have limited ability to operate in certain states in future years if it doesn't get the delay in paying out claims under control. But bigger than that, this could affect how consumers view the company's reputation in the future if it falls behind the industry in this area.
Federal lawsuit alleges Elevance kept Medicare overpayments, but that likely won't hinder growth
Downside litigation risk for the Indianapolis-based insurer includes a federal lawsuit in the U.S. District Court for the Southern District of New York alleging that the company kept more than $100 million in Medicare Advantage overpayments. If the company is found liable, it could have to pay out treble damages under the False Claims Act, as well as take a reputational hit and possibly lose customers who have the ability to choose another health insurance carrier. Historically, federal prosecutors have highlighted their successes in clawing back illegitimate private-sector gains at the expense of Medicare and Medicaid, so despite the outcome, investors can expect the company's defense will be costly.
Market reaction to the 2022 annual report was muted, with shares dropping from $492.30 on Jan. 25, the day of the announcement, to closing at around $470 on March 3. But no investor will want to ignore a company that reports such consistently high profits over time and has a customer base numbered in the tens of millions and growing. The litigation and delay in payment risks are ones Elevance can likely handle with ease even in the worst case, given its profitability and lofty cash position ($34 billion).
Elevance has a current price-to-earnings (P/E) ratio of 18.7, which is well under both the insurance and health support service industry P/E ratios of 31 and 32, respectively. The company's share price certainly seems to be well positioned for growth in the short and longer term.
