Elevance Health (ELV) 2025 Earnings Quality Report

Grade: D — Significant Concerns

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-06) + Yahoo Finance

Auditor: Ernst & Young LLP — Clean opinion (Indianapolis, Indiana; auditor since 1944)

Fiscal Year: 2025 (ended December 31, 2025)

One-line verdict: Elevance Health's 2025 10-K documents a $310M decline in net income on a $22.1B revenue increase — the hallmark of a health insurer whose benefit expense ratio moved against it. Revenue grew 12.5% to $199.1B while net income slipped 5.3% to $5,662M, producing a 2.8% net margin (down from 3.4% in 2024). The benefit expense ratio rose 150 basis points to 90.0% from 88.5%, meaning Elevance paid out an additional 1.5 cents of every premium dollar in medical claims — against a backdrop of Medicaid redetermination complexity and the July 2025 passage of the One Big Beautiful Bill Act (OBBBA). E&Y — auditor since 1944 — issued an unqualified opinion with one Critical Audit Matter: Valuation of Incurred but Not Paid Claims, where the $17.1B medical claims payable represents 22.1% of total liabilities. Cash flow quality deteriorated materially — CFFO fell 26.1% to $4.29B while revenue grew 12.6%, producing a CFFO/NI ratio of 0.76 (below 1.0). The D grade reflects two fails (goodwill at 90% of equity; revenue vs. CFFO divergence) plus two watch items (AR outpacing revenue; CFFO/NI below 1) against six checks that can't be completed because of insurance accounting format. The Altman Z-Score of 1.99 sits in the grey zone.

The 2025 Numbers: Revenue Up 12.5%, Net Income Down 5.3%

The MD&A lays out the consolidated financial comparison:

The 10-K states: "Net income attributable to the shareholders of Elevance Health was $5,662, a decrease of $318, or 5.3%, from the year ended December 31, 2024. The decrease in net income was primarily due to decreased operating gain within our Health Benefits segment. The decrease was partially offset by decreased income tax expense, increases in operating gain in our CarelonRx and Carelon Services businesses and an increase in net investment income. Our fully-diluted shareholders EPS for the year ended December 31, 2025, was $25.21, a decrease of $0.47, or 1.8%..."

The 45.7% drop in income tax expense is notable. The 10-K explains: "Our effective income tax rate decreased from 24.5% to 15.6%, due to a discrete non-operating tax benefit and favorable resolution of uncertain tax positions. The discrete non-operating tax benefit related to an internal restructuring of certain Elevance Health subsidiaries." Without this $884M tax benefit, net income would have declined approximately 20% year-over-year instead of 5%.

The Benefit Expense Ratio Story

From the MD&A: "Benefit expense ratio 2 90.0 % 88.5 % 87.0 % 150 bp 150 bp. Operating expense ratio 4 10.6 % 11.4 % 11.8 % (80) bp (40) bp. Income before income tax expense as a percentage of total revenues 3.4 % 4.5 % 4.5 % (110) bp 0 bp. Shareholders net income as a percentage of total revenues 2.8 % 3.4 % 3.5 % (60)bp (10) bp."

A 150 basis point rise in the benefit expense ratio is material. Applied to $165B in premium/benefit revenue, 150bp of incremental medical cost is approximately $2.5B of pre-tax income impact. The offsetting 80bp improvement in operating expense ratio only partially absorbs it — and that improvement is driven by revenue growth outrunning operating expense growth (+12.5% revenue vs. +4.8% operating expense).

The trajectory from 87.0% (2023) to 88.5% (2024) to 90.0% (2025) is what investors in managed care call the "medical cost trend" — a multi-year acceleration in utilization that Elevance, like every other health insurer, is working to price into premiums. When reprice cycles lag the trend, the benefit expense ratio rises and net margin compresses.

Four Reportable Segments

The 10-K identifies: "We report our results of operations in the following four reportable segments: Health Benefits, CarelonRx, Carelon Services and Corporate & Other (which includes our businesses that do not individually meet the quantitative thresholds for an operating segment, along with certain enterprise-level corporate expenses not allocated to our other reportable segments)."

Health Benefits — The core BlueCross BlueShield affiliated health plan business: "Our Health Benefits segment offers a comprehensive suite of health plans and services to our Individual, Employer Group risk-based, Employer Group fee-based, BlueCard, Medicare, Medicaid and FEP members."

CarelonRx — The pharmacy benefit manager. The 10-K states: "CarelonRx contributes to affordability and outcomes for our members by integrating pharmacy, specialty drug management, and clinical programs with our broader whole-health model. Key drivers impacting the results of operations for this segment include specialty drug trends, script volume, clinical program adoption, network optimization, rebate and pr[icing]..."

Carelon Services — A diversified services business encompassing behavioral health, post-acute care, home health, and other integrated care delivery capabilities. It includes Paragon Healthcare (acquired earlier) and the Centers Plan for Healthy Living and BCBS-related assets.

Corporate & Other — Smaller business lines and unallocated corporate expense.

Medical membership: "serving approximately 45.2 million medical members through our affiliated health plans as of December 31, 2025." This makes Elevance second in scale only to UnitedHealth Group among commercial health insurers.

The OBBBA: A July 2025 Legislative Shock

Elevance's MD&A includes an unusually detailed Trends and Uncertainties section on the One Big Beautiful Bill Act. The 10-K reproduces: "The federal budget reconciliation legislation, known as the One Big Beautiful Bill Act (the OBBBA) was signed into law on July 4, 2025. The OBBBA includes provisions that could impact our business and operations including: requiring more frequent Medicaid redeterminations for beneficiaries receiving coverage under a state's Medicaid expansion program implemented pursuant to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, as amended, (collectively, the ACA); imposing work or community engagement requirements on certain adults in the ACA Medicaid expansion population; and requiring specific cost-sharing for certain services used by adults in the ACA Medicaid expansion population."

The 10-K continues: "The OBBBA also makes changes to federal requirements regarding Medicaid state directed payments and provider taxes, including taxes on managed care organizations; delays implementation of Medicaid final regulations on certain eligibility and enrollment provisions; reduces the allowable home equity asset threshold for individuals seeking eligibility for long-term care under Medicaid; establishes a new Rural Health Transformation program; eliminates the repayment limit for excess advanced Premium Tax Credits (PTCs) under the ACA; modifies the rules regarding Health Savings Account (HSA) eligible plans under the ACA and makes permanent an extension of the safe harbor first established under the Coronavirus Aid, Relief, and Economic Security Act..."

And importantly: "Additional federal and state guidance is being issued to implement these OBBBA provisions. Implementation dates vary..."

The OBBBA is the single most consequential federal healthcare legislation since the ACA itself. For Elevance, which serves millions of Medicaid expansion population beneficiaries, the work requirements and more frequent redeterminations will likely reduce Medicaid enrollment over the next 12-24 months. The 10-K is warning investors that the Medicaid book of business will shrink.

Medicare Advantage Star Ratings

The 10-K provides a year-over-year Star Ratings update: "CMS Medicare Advantage Star Ratings system, CMS annually awards between 1.0 and 5.0 Stars to Medicare Advantage plans based on performance in several categories. Plans must have a Star Rating of 4.0 or higher to qualify for bonus payments. Our 2025 Star Ratings, which are used for payment year 2026, reflect that approximately 40% of our Medicare Advantage members were enrolled in plans rated at least 4.0 Stars or higher. CMS released our 2026 Star Ratings in October 2025, which will be used to determine our Medicare Advantage bonus payments in 2027. Our 2026 Stars Ratings reflect that approximately 59% of our Medicare Advantage members are enrolled in plans rated at least 4.0 Stars or higher, or the equivalent."

The improvement from 40% (2025 ratings / 2026 payment year) to 59% (2026 ratings / 2027 payment year) is a meaningful positive signal. Star Ratings drive bonus payments that flow directly to margin — a 19-percentage-point increase in the share of members in 4-Star-plus plans is a 2027 tailwind. That said, it comes from a low base; competitors like Humana and UnitedHealth Group historically run higher Star Rating percentages.

Auditor's Critical Audit Matter — IBNR Claims Estimation

E&Y issued an unqualified opinion signed "Indianapolis, Indiana. February 6, 2026." The audit report states directly: "We have served as the Company's auditor since 1944." Eighty-two years of auditor tenure.

The Critical Audit Matter is Valuation of Incurred but Not Paid Claims. From the 10-K: "Medical claims payable was $17,084 million at December 31, 2025, a significant portion of which related to the Company's estimate for claims that are incurred but not paid. As discussed in Note 2 to the consolidated financial statements, the Company's liability for incurred but not paid claims is determined using actuarial methods that include a number of factors and assumptions, including completion factors, which represent the average percentage of total incurred claims that have been paid through a given date after being incurred, and trend factors, which represent an estimate of claims expense based on recent claims expense levels and healthcare cost levels. There is significant uncertainty inherent in determining management's best estimate of completion and trend factors, which are used to calculate actuarial estimates of incurred but not paid claims. Auditing management's estimate of incurred but not paid claims was complex and required the involvement of our actuarial specialists due to..."

The $17.1B medical claims payable represents 22.1% of total liabilities. For a health insurer, IBNR estimation is the single most material accounting judgment — and when the benefit expense ratio is rising 150 basis points in one year, the estimation becomes especially delicate. E&Y's response involved actuarial specialists, which is standard for an insurer of Elevance's size.

Cash Flow: The Biggest Red Flag in the Report

The screening engine flags A3 as a FAIL: "Revenue grew 12.6% but CFFO declined -26.1%." It also flags C1 as a WATCH: "CFFO/NI = 0.76. Below 1.0."

The CFFO/NI ratio has deteriorated from 1.35 (2023) → 0.97 (2024) → 0.76 (2025). Free cash flow has declined from $6.8B to $4.6B to $3.2B — a cumulative 53% decline over two years while revenue grew 16%. This is the cleanest warning signal in the entire screen.

The mechanism behind the decline is typically working capital in an insurer: when medical cost trend runs ahead of premium pricing, cash outflows for claims payments rise faster than premium receipts. As medical claims payable and accrued liabilities unwind, operating cash flow is hit. That said, a three-year trend of deteriorating CFFO is material and warrants close attention.

The screening engine flags A2 as a WATCH: "AR growth 25.7% exceeds revenue growth 12.6%." Premium receivables rose from $8,011M to $10,073M (+25.7%) while revenue grew 12.6%. This may reflect timing of Medicaid state payments (which are frequently slow), Medicare Advantage risk adjustment settlements, or payer mix changes — but the double-revenue-growth rate flags it for attention.

Balance Sheet and Acquisitions

The screening engine reports D1 as a FAIL: "Goodwill+Intangibles $39.5B = 90% of equity. Over 50%."

Goodwill is $28.3B and intangibles net are $11.2B. Total is $39.5B against equity of ~$43.9B.

Recent acquisitions disclosed in the 10-K: "On December 31, 2024, we completed our acquisition of Centers Plan for Healthy Living LLC and Centers for Specialty Care Group IPA, LLC ('Centers'). Centers is a managed long-term care plan that serves New York state Medicaid and dual-eligible Medicaid/Medicare members, enabling adults with long-term care needs and disabilities to live safely and independently in their own home. This acquisition aligns with our strategic plan to grow the Health Benefits segment and leverage industry-leading expertise while serving Medicaid and dual-eligible Medicaid/Medicare populations. On December 10, 2024, we completed our acquisition of RSV QOZB LTSS, Inc. and certain affiliated entities (d/b/a CareB[ridge]..."

Earlier 2024 acquisitions included Paragon Healthcare, Inc. The 10-K describes Paragon's fit: "CarelonRx contributes to affordability and outcomes for our members by integrating pharmacy, specialty drug management, and clinical programs..." Paragon adds specialty infusion capabilities to CarelonRx.

Goodwill and intangibles decreased 2% year-over-year per the screening engine, suggesting no major 2025 acquisition activity. But the ratio of goodwill+intangibles to equity (90%) remains structurally high because of the legacy of WellPoint's Anthem merger, the 2020 Beacon Health Options acquisition, and subsequent bolt-ons.

Liquidity and Debt

The screening engine passes C4: "Cash $35.4B covers debt $32.0B." This is because Elevance holds a large investment portfolio backing insurance reserves, which shows up as "cash and cash equivalents" plus "fixed maturity securities" plus "equity securities" on the balance sheet. The 10-K discloses: "Cash and cash equivalents $ 9,491 $ 8,288 Fixed maturity securities (amortized cost of $ 25,773 and $ 25,879; allowance for credit losses of $ 21 and $ 6) 25,884 25,201 Equity securities 740 1,192."

Total investable assets of ~$36B against $32B of debt is a strong liquidity position for an insurer. The 10-K references debt activity: "senior notes due 2025 and the $500 aggregate principal amount of our 4.900% senior notes due 2026. We intend to use the remainder of the net proceeds for working capital and general corporate purposes, including, but not limited to, the funding of acquisitions, repayment of other short-term and long-term debt and the repurchase of our common stock pursuant to our share repurchase program. On January 15, 2025, we repaid, at maturity, the $1,250 outstanding balance of our 2.375% senior unsecured notes."

The 18-Point Screening

Revenue Quality

Expense Quality

Cash Flow Quality

Balance Sheet

Acquisition Risk

Manipulation Score

Additional Scores: F-Score probability of misstatement 0.65% (low). Altman Z-Score 1.99 (grey zone — reflects insurance accounting, not distress).

Key Risks from the 10-K

1. OBBBA Medicaid Redetermination Impact — The 10-K's Trends and Uncertainties section explicitly flags the One Big Beautiful Bill Act as a material development: "The OBBBA includes provisions that could impact our business and operations including: requiring more frequent Medicaid redeterminations... imposing work or community engagement requirements on certain adults in the ACA Medicaid expansion population; and requiring specific cost-sharing..." Medicaid expansion membership will shrink as redeterminations occur. Timing of implementation varies by provision and by state.

2. Medical Cost Trend — The benefit expense ratio rose from 87.0% (2023) to 88.5% (2024) to 90.0% (2025). Each 100 basis points of benefit expense ratio deterioration translates to approximately $1.65B in pre-tax income. The 10-K does not use the word "elevated utilization" in the passage extracted, but the 150bp jump in one year points to exactly that pattern.

3. CFFO Deterioration — CFFO has declined from $8.06B (2023) to $5.81B (2024) to $4.29B (2025), a cumulative 47% decline while revenue grew 16%. This is the single most material forensic-accounting signal in the report. The 10-K attributes part of this to timing, but a three-year trend is not a timing issue.

4. Medicare Advantage Star Rating Dependency — The 10-K explicitly warns about "our ability to maintain and achieve improvement in Centers for Medicare and Medicaid Services Star Ratings and other quality scores and funding risks with respect to revenue received from participation therein." The 2026 Star Ratings improvement to 59% is positive for 2027 payments, but 41% of MA members are still in plans that don't qualify for bonus payments — a meaningful opportunity cost.

5. Regulatory Oversight — From the 10-K: "Supervisory agencies, including federal and state regulators, departments of health and insurance and secretaries of state, have broad authority to: grant, suspend and revoke licenses to transact business; regulate our products and services in great detail; regulate, limit, or suspend our ability to market products, including participation in Medicare and the Public Exchanges; determine through a procurement process our ability to participate in certai[n programs]..." State insurance regulators have particular leverage in a national insurer like Elevance.

6. Goodwill Concentration — $39.5B in goodwill and intangibles represents 90% of book equity. The Centers Plan for Healthy Living and CareBridge acquisitions completed December 2024 added to the balance. No impairment was recorded in 2025, but the 10-K's impairment policy describes the testing protocol and the sensitivity to "future revenue, expenses and net income derived from our internal planning process."

7. Effective Tax Rate Volatility — The 2025 effective rate dropped to 15.6% from 24.5% due to "a discrete non-operating tax benefit and favorable resolution of uncertain tax positions." This was an $884M benefit that masked operating deterioration. A return to the 24-25% normal range in 2026 would pressure reported EPS by approximately $3 per share at current income levels.

8. CarelonRx PBM Risk — The CarelonRx segment is increasingly important to Elevance's integrated model. PBM practices are subject to the same regulatory pressure facing CVS Caremark and OptumRx, with ongoing ERISA litigation and potential federal regulation.

Summary

Grade: D. Significant concerns on earnings quality and cash flow dynamics.

The D grade reflects two hard fails (goodwill at 90% of equity; CFFO declining while revenue grew 12.6%) plus two watch items (AR outpacing revenue by 13 percentage points; CFFO/NI at 0.76) against a framework that can only complete 12 of 18 checks because insurance accounting format limits the leverage, gross margin, SG&A, M-Score, and impairment computations.

The accounting itself is honest. Ernst & Young has served as Elevance's auditor since 1944 — eighty-two years — and issued an unqualified opinion on both the financial statements and internal controls. The single Critical Audit Matter is the valuation of incurred-but-not-paid claims, the inevitable CAM for any health insurer, supported by actuarial specialists. No revenue recognition issues, no impairment concerns, no going-concern language.

The real issues are business and cash flow dynamics. The benefit expense ratio rose 150 basis points to 90.0% in 2025 — the medical cost trend is real and persistent. CFFO fell 26.1% while revenue grew 12.6%, and the three-year pattern shows CFFO declining in absolute terms even as the business grew by $28 billion. Free cash flow of $3.2B against net income of $5.7B (FCF/NI = 0.56) is well below where it should be for an insurer of Elevance's scale.

Layered on top is the One Big Beautiful Bill Act, signed into law July 4, 2025, which will reduce Medicaid expansion enrollment through redetermination, work requirements, and cost-sharing changes. The 10-K's Trends and Uncertainties section walks through the OBBBA provisions in detail and notes "additional federal and state guidance is being issued to implement these OBBBA provisions. Implementation dates vary."

There are positive signals too. The 2026 Medicare Advantage Star Ratings jumped to 59% of members in 4-Star-plus plans (from 40% the prior year), meaning 2027 bonus payments will be materially higher. CarelonRx and Carelon Services are growing. Total revenue of $199.1B is strong. And the investment portfolio of $36B provides liquidity that few other managed care peers have at this scale.

Buying Elevance today is betting that (a) the benefit expense ratio peaks at 90.0% and reprices down, (b) CFFO reverses its three-year decline, (c) the OBBBA Medicaid impact is manageable within the CarelonRx/Carelon Services growth offsets, (d) the 2027 Star Rating bonus payments are material, and (e) no material goodwill impairment emerges from the Centers Plan for Healthy Living or CareBridge 2024 acquisitions. The 10-K is a thorough read and management is transparent about each of these risks — but each is a live question, and the CFFO decline is the single most important signal in the report.

**Disclaimer**: This report is based on Elevance Health's 2025 10-K (SEC EDGAR, filed 2026-02-06) and public financial data. This is NOT investment advice.

**About EarningsGrade**: We screen earnings reports for financial red flags. Grade D means significant concerns were detected that require investigation before proceeding.