U.S. dollar banknotes and medicines are seen in this illustration taken, June 27, 2024. REUTERS/Dado Ruvic/Illustration

By Sriparna Roy and Sneha S K

(Reuters) -Elevance Health said on Tuesday it expects elevated medical costs in its Medicaid business to persist into the next year and possibly subside only in 2027.

The comments on the Medicaid business overshadowed the initial enthusiasm around the company's third-quarter profit beat, sending its shares down as much 4% in early trading.

Health insurers have been battling with persistently high costs after a churn in enrollement in Medicaid, government plans for low-income people, hit the industry. As states redetermined eligibility, many healthier members fell off the rolls, making space for those requiring more medical services.

"We see 2026 as the low point," said Chief Financial Officer Mark Kaye in a conference call with analysts, referring to Medicaid profitability. He added that the insurer expects improvement through 2027.

The primary concern for investors is the company's Medicaid segment, with 2026 representing the trough year for the business, said Daniel Barasa, portfolio manager at Gabelli Funds.

The company said elevated demand across behavioral health as well as weight-loss drugs has been pressuring costs across its government-backed plans.

The hit to Medicaid margins could constrain Elevance earnings for a third year in a row, said Morningstar analyst Julie Utterback.

EXPIRATION OF SUBSIDIES

Elevance also expects higher costs in the fourth quarter as members utilize their benefits ahead of expected changes next year in the company's individual plans, which conform to the Affordable Care Act, known as Obamacare.

The anticipated expiry of additional premium tax credits, implemented during the COVID-19 pandemic for people purchasing Obamacare plans, in 2026 has also added uncertainty to patient enrollments.

Elevance said it is prepared for a range of policy changes, including renewal and modification of enhanced subsidies, but would wait until it has clear visibility before issuing a formal 2026 forecast. Elevance expects to set a forecast in January.

The company also reaffirmed its 2025 adjusted profit forecast of about $30 per share, as well as its medical loss ratio, the percentage of premiums spent on medical care, at 90%.

Its third-quarter medical loss ratio of 91.3% was not as bad as analysts' estimates of 91.73%.

The company's adjusted profit per share of $6.03 beat estimates of $4.93, as per data compiled by LSEG.

(Reporting by Sneha S K and Sriparna Roy in Bengaluru; Editing by Leroy Leo and Shinjini Ganguli)