While pharmaceutical manufacturers are absorbing the spotlight in the debate over drug pricing, managed care insurers are quietly grappling with their own set of challenges. Rising utilization, shifting Medicaid enrollment and evolving regulatory requirements have weighed on results, not to mention the fatal shooting of United Healthcare CEO Brian Thompson last December, leaving many of these stocks trading at modest valuations relative to their long-term prospects.
Finding Value In Health Care – ELV & CVS
Elevance Health (ELV) is a prime example. In July, shares tumbled over 25% after the company reported elevated medical costs in Q2, particularly in Medicaid. EPS of $8.84 missed expectations, with overall membership falling by 200,000 and the benefit expense ratio rising to 88.9%. Medicaid redeterminations and Affordable Care Act enrollment shifts pushed costs higher while morbidity trends added to pressure. Management responded by trimming 2025 EPS guidance by more than 10% to $30.
Those headlines were disappointing but they overshadowed encouraging trends elsewhere in the business. Carelon, Elevance’s services arm, continued to post impressive growth, with pharmacy revenue up 20% and services revenue up more than 50%. The segment is expanding its risk-based relationships and benefiting from scale in specialty pharmacy. Operating efficiency is also improving, with the adjusted expense ratio falling 140 basis points to 10%.
Importantly, Elevance derives a larger share of earnings than peers from Administrative Services Only contracts where employers rather than insurers bear medical risk. That gives the company resilience relative to competitors with heavier government exposure. With shares now trading for just 10x estimated adjusted earnings and yielding more than 2%, I view the selloff as overdone. CEO Gail Boudreaux’s recent open market purchase of 8,500 shares suggests she shares that view.
CVS Health (CVS) has fared better, supported by its diversified model. Q2 EPS of $1.81 exceeded expectations, aided by Aetna’s margin recovery and 6.7% operating income growth in the Pharmacy & Wellness segment. Management raised full-year EPS guidance to $6.30–$6.40 while reaffirming plans to invest $20 billion over the next decade to modernize care delivery and simplify the patient experience.
CVS also secured a high-profile PBM win with CalPERS, highlighting the competitive advantage of its integrated structure. The company’s mix of insurance, PBM operations and retail pharmacy provides multiple levers of profitability, helping to cushion volatility in any single segment. At just 11x earnings with a 3.7% dividend yield, CVS shares strike me as an attractive combination of income and value.
In Conclusion
Of course, political crosscurrents remain. Medicaid work requirements, eligibility reviews and changes to Medicare Advantage bid assumptions will all shape the earnings trajectory for insurers. But as we have seen in other industries, volatility tied to policy can often create opportunity. When markets punish stocks repeatedly for the same issue, the pendulum can swing too far. Managed care may be under pressure but valuations already reflect much of the concern. Elevance and CVS combine scale, diversification and attractive capital return with relative valuations that look appealing relative to long-term earnings power.
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