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Q3 Earnings
Molina & Elevance continue positive payer vibes in Q3
Early returns from Q3 earnings calls confirm what we expected to hear: payers are doing quite well in government programs in 2026. Both Molina and Elevance joined UHG in posting solid quarterly results across their respective businesses. The market also doesn’t seem surprised by these results this far into the year, as Molina and Elevance’s stock prices were roughly flat on the news this week. Here’s a bit more on the strategic implications from each call:
Molina
While Molina’s Q2 earnings call focused on its ACA challenges, it sidestepped them on this call, noting it will reduce its footprint to seven states and return that business to break-even in 2027. Molina’s Medicare Advantage pivot away from MAPD and toward Duals seems to be performing well early on. Virtually all of Molina’s earnings Q&A focused on 2027 Medicaid, with analysts largely asking questions about the impact of work requirements. Recall that Molina has previously told Wall St it expects 10% attrition in Medicaid membership overall due to work requirements over the next several years. It shared on this call that it expects 6% of that attrition in 2027, with the remainder spread across 2028 and 2029. Molina shared that based on Nebraska’s implementation, it expects a more “gentle” approach to work requirements from states, and feels confident about its assumptions around rates and acuity. It helps that rate increases for Jan 1, 2027 are coming in at 7%, while the underlying trend is only 4.5% (with an additional 1% from the acuity shift with work requirements). With those kinds of rate increases vs trend numbers, it’s easy to see why Medicaid MCOs are consistently referring to 2026 as the trough year. It’s also easy to see why analysts are so fixated on this acuity shift question in Medicaid.
Elevance
Elevance noted outperformance across Medicaid, Medicare Advantage, and individual ACA. In Medicaid, Elevance didn’t provide as many specifics on rates and trends as Molina, but similarly noted it is comfortable with rates catching up to acuity entering 2027 and expects margin improvement. In Medicare Advantage, Elevance noted its focus on HMO and D-SNP plans are helping it move back toward its target margin range in 2027, and it expects to hit 2% margins in 2026. In ACA, it expects a higher full-year margin because it is not seeing expected seasonal cost increases, particularly among bronze members. The commercial group business conversation was particularly interesting, as Elevance noted strong demand in Anthem’s balanced-funded product and that, in the jumbo market, boomerang clients are returning to Anthem after 12 months of trying a new ASO. So while the private markets talk at length about the disruption in the employer market, the BUCA players don’t appear very concerned here. Elevance also took a more muted posture on the IDR, noting the challenges, but also saying the IDR process is putting the most pressure on its ASO book, implying its really large employers are feeling cost pressure from the IDR process.
One last thought bubble for now: an underlying trend we have been following in the Medicare Advantage market is payers consistently shifting to focusing on higher-acuity populations in SNP plans and HMOs, both of which seem correlated with more profitable plan designs. It’s an obvious move for the industry on the heels of v28-induced profitability challenges. Molina, Elevance, and UHG all shared similar narratives in Q3 earnings about sculpting their Medicare Advantage product portfolios around special needs plans and HMOs in 2027. We think this is a logical industry progression, as MA plans increasingly apply managed care principles to support complex populations, where they have the most opportunity to outperform by coordinating benefits. It’ll be particularly interesting to watch the conversation around D-SNP and C-SNP plans, as different plans are taking different approaches with respect to SNPs. Both Molina and Elevance specifically discussed D-SNP as the opportunity on their earnings calls, not C-SNP. I’d imagine this is because Medicaid integration presents an opportunity for those plans, given their Medicaid footprints. Contrast this with Devoted, which doesn't offer Medicaid and is leaning heavily into C-SNP plan growth instead. Given general trends in federal and state funding for healthcare dollars, D-SNP plans seem like a more durable, longer-term opportunity, even if C-SNPs are having a moment in the sun.
Chart of the Week
Healthcare’s new Rule of 200 companies: IDR arbitrators
Question: how many companies do you know that are not just Rule of 40, but Rule of 200?
I have one for you: iMPROve Health, a Michigan-based non-profit. Tara Bannow’s report in STAT on Monday about No Surprises Act arbitrators highlighted how the IDR process has turned iMPROve from a struggling non-profit organization into one of the best-performing businesses on the planet. In 2022, iMPROVe had a bleak future, losing $2+ million in profit on ~$6 million in revenue. Then along came the IDR arbitration opportunity, and three years later, iMPROve is generating 90% revenue growth and 115% profitability growth.
Check out iMPROve’s revenue and profit from the last five years, per STAT:
Lest you think this is just a financially motivated bad actor taking advantage of the IDR process, remember that iMPROve Health is a non-profit founded in the 1980s, which isn’t exactly the typical origin story of a company exploiting a financial opportunity. Instead, it seems more likely that the IDR process has been an unexpected financial windfall for an organization struggling to keep up with the demand. For instance, iMPROve’s CEO compensation in 2025 was only $736,000, up 27% from 2024. Mind you, this came after two years of profits growing by $25+ million each year, up from essentially zero. iMPROve strikes me as an organization that can’t find ways to spend the profits from IDR fast enough.
Irrespective of the underlying motivations of arbitrators, a nonprofit reporting a 70% profit margin on $50+ million of profits offers another example of the strange implications of the IDR process as currently constructed. I’d imagine that there are investors looking at that chart above with an intense curiosity. If that kind of performance represents a durable growth opportunity, it’s not hard to imagine more capital flowing into this market, further entrenching it as a new profit pool in the healthcare ecosystem.
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A Quote to Ponder
AI’s principal-agent problem
I missed this Substack post from Bob Wachter last week, musing on an alignment issue between humans and AI, particularly in clinical care, but a friend shared it with me this week and I think it is worth spending some time on. This paragraph in particular has stuck with me:
The key point is this: most clinical decisions don’t have a single correct answer. Instead, they have several defensible paths. Whether an AI decision-support tool recommends the “best” option (damn the costs) or the most cost-effective one (even if it isn’t optimal for an individual patient) is a values choice, not a technical one. If the machine is spring-loaded to optimize care for every individual, we’ve put our entire system, indeed our society, on a path toward bankruptcy. But make cost-effectiveness the default setting, and “AI death panels” will reenter the public discourse within a week.
It articulates the core challenge ahead for clinical AI programs that attempt to deflate healthcare costs incredibly well, especially as we enter a contentious midterm election season. When a “cost-effective” decision conflicts with the “best” option for an individual, who decides which path to pursue? I can say pretty confidently, especially with all the investor dollars flowing into consumer marketplaces, that the individual will choose what is best for them. That is a values choice we are collectively making; it's also worth recognizing that it conflicts with deflating costs, which will inevitably bring hard trade-offs, reminiscent of the tragedy of the commons conversation Trilliant Health has highlighted in recent weeks.
Wachter also followed up his original post this week with a second post highlighting a recent study that AI-suggested care was 3.2x as expensive as physician care, and that AI-centric care routinely recommends more testing than physicians. Again, when you think about the incentives of D2C marketplaces, this seems like a feature, not a flaw, of consumer-oriented AI solutions.
It’s not hard to imagine a world where we’re hearing a lot of the “AI death panel” phrase in the next few years. We have already seen that narrative emerge over CMMI’s embattled WISeR model.
A(nother) Quote to Ponder
The drug discovery opportunity
Recall that a few weeks ago, we discussed here in the newsletter how OpenEvidence quietly announced it was entering the drug discovery market, focused on rare oncology therapies. Nadler appeared to double down this week in the Financial Times, noting that the drug discovery opportunity dwarfs that of its current business in this quote from a Financial Times profile on OpenEvidence:
“The end game is literature-based drug discovery,” Nadler said, referencing the field of data mining scientific literature for insights. “The economic value of that as a company is going to dwarf by orders of magnitude whatever we could have charged hospitals or advertisers.”
I find it fascinating that Nadler seems to be moving so quickly away from OpenEvidence's core business today, jumping with both feet into drug discovery. It strikes me as odd to see a business pivot so quickly from fighting a red-ocean battle with Doximity over pharma advertising dollars to completely eschewing it, to the point that he refers to the advertising model in the past tense in the quote above. But if the Doximity/OpenEvidence legal discovery revealed anything, it’s that Nadler is focused on maximizing OpenEvidence's economic value via a sale in a short time horizon. The Board conversations that are (or I suppose maybe aren’t) happening here around OpenEvidence’s strategic path forward must be fascinating.
Nadler is likely right that the potential drug discovery opportunity dwarfs that of pharma ads; after all, the entire pharma industry spends a reported $33 billion on advertising in the US each year, which is only ~$1 billion more than Keytruda alone generated in revenue in 2025. Successful drugs are a winning financial proposition.
Nadler certainly isn’t the only one beating the drum right now on the opportunity around AI drug discovery. I feel like everywhere I look, there is something happening in the drug discovery world:
Warp Sciences raised $215 million as it comes out of stealth at an $865 million valuation for a U.S. based contract research organization. Warp notes in the press release it doesn’t have a proprietary drug pipeline; instead, it is building the infrastructure for others.
OpenAI acquired Orchestra Bio, combining its team with OpenAI’s Rosalind tools for life sciences, which are supposed to support speeding up the lifecycle of developing new medicines
Mark Cuban is moving beyond generics into manufacturing for n-of-1 rare disease treatments.
Molly O’Shea’s Sourcery podcast has taken on a distinct life sciences flavor in recent weeks, with Oak HC/FT’s Annie Lamont and Thrive Capital’s Nworah Ayogu joining her to discuss the opportunity in drug discovery (among other healthcare opportunities) in depth.
Nadler’s sentiment, along with the activity above, both seem to indicate that it would be wise to get well-versed in drug discovery for the decade ahead.
Top Headlines
Cencora acquires American Oncology Network (AON), a network of 350 oncology providers across 21 states. Cencora previously owned 4% of AON and is acquiring the remaining equity interest at a $2.4 billion valuation. Cencora also recently announced that it acquired the outstanding equity in OneOncology, valuing it at roughly $7.4 billion. I am reminded of a podcast interview I often think about between LRVHealth’s Keith Figlioli and JPMorgan’s Lisa Gill, where Gill describes attending a VBC oncology conference where oncologists went out of their way to tell her how much they enjoy working for the drug distributors. Why? Because of the investments that the drug distributors are making in the practices, providing an increased level of independence and capital, particularly compared to other employment options (i.e. hospitals). I think it’s interesting to do a “Five Whys” style exercise to ponder why oncologists seem to have so much more freedom when working for a drug distributor than, say, a hospital.
Summit Health (along with CityMD operations in New Jersey) found a new home this week, as Horizon BCBS acquired it for a reported $1 billion. This is Horizon’s second notable acquisition recently, after it acquired HealthEZ for a reported $360 million in 2025 to expand in the TPA market. Walgreens/VillageMD originally acquired Summit for $8.9 billion in 2023, and Cigna’s Evernorth division also bought a stake in the business at the time.
Risant has signed a definitive agreement to acquire its third health system, INTEGRIS Health in Oklahoma. The press release touts Risant’s VBC model and the transformation it will bring to INTEGRIS, noting that Risant has driven a 1% improvement in operating margin at Geisinger. Geisinger last publicly shared an operating loss of 0.5% in 2023 ahead of its merger with Risant. I’d be curious to know what Cone’s operating margin improvement has been under Risant as well. When Risant launched in 2023 with its partnership with Geisinger, it said it expected to add 4 to 5 additional health system partners over a five-year horizon, implying we should expect a few more deals over the next year or two. While VBC transformation is a big part of the narrative, the results of the first three years suggest a more traditional scale play afoot.
Tufts and BCBS Massachusetts announced a new strategic partnership. The work includes streamlining prior authorizations, with both parties leveraging Humata Health to speed up prior auths. Tufts’ new HMO health plan will be offered to BCBS employees, and the two parties are working on broader transformation efforts around cost and quality. These kinds of collaborations strike me as an interesting area to watch; historical partnership efforts like this have often fallen victim to innovation theater-y challenges and while not driving much material change, but the challenges in the current environment may present a more meaningful opportunity for change.
Speaking of the current environment in Massachusetts, the Boston Globe reports Mass General Brigham is conducting another round of layoffs after its operating margin reportedly fell below zero. In a memo to employees, MGB leadership said its target operating margin is 1.5%. 65% of MGB’s expenses are labor-related, and it appears from the article that these cuts are going beyond administrative roles and affecting some clinical departments that are money-losers, i.e. pediatrics, mental health, endocrinology.
It is interesting to see all of these Boston-based entities in the news this week and revisit Andrew Tsang’s excellent piece on the negotiation between Tufts Health Plan and Partners (Mass General Brigham) two decades ago, along with BCBS MA's role in that negotiation. It’s a good reminder of the historical baggage these markets can carry as these large entities navigate the landscape.
Aon is getting into the D2C consumer marketplace fracas, launching an offering called Access Choice, a name I can’t help but chuckle at, since it seems like something only a B2B healthcare organization could conjure for a consumer marketplace. Despite my amusement over the naming convention here, it’s an interesting move by Aon, which gives employers access to a vetted suite of D2C offerings for their employees. Seems very indicative of the overall interest in D2C healthcare at the moment.
Redesign Health is merging with ARC Global, and the two collectively are purchasing AVIA Health to build an innovation network for health systems. The approach moving forward seems to be embedding within partner health systems to launch businesses, although the partner health systems have yet to be named.
Funding Announcements
Oxbridge Health, a new bundled payment model for employer episodes of care, raised $45 million. Eir Partners led the round, with Optum Ventures participating. Oxbridge is now quoting for self-insured employers in a handful of states (Texas, New York, New Jersey, and Connecticut) for its “Episode Advantage Health Plans.” Oxbridge notes that it currently has 135 episodes live, collectively representing 43% of a typical employer’s healthcare spend. Per the website, the model generates 10% to 25% savings versus traditional plans, mostly from an employer setting an episode allowance, generally in the 60th to 90th percentile of local prices. Notably, Oxbridge’s founder, Steve Wiggins, previously founded Oxford Health Plan (which UHG bought for $4.9 billion in 2004) and Remedy Partners, one of the largest BPCI entities. As employers look for creative ways to address rising trends, this seems like an opportunity to drive more adoption of value-based care concepts in the employer market.
Baba, a startup providing care coordination and advocacy services for Medicare enrollees, raised $40 million. FirstMark Capital led the round, with participation from CVS Health Ventures, Valtrius, General Catalyst, and others. Baba notes it has currently supported 10,000 families, up from 6,000 when it announced Seed funding in February, and has another 100,000 on a waitlist. Baba is taking an AI-centric approach and is also a participant in all four initial tracks of the ACCESS program.
What I’m Reading
a16z’s Vineeta Agarwala hosted a fascinating interview with TJ Parker of General Medicine about the company’s plans to build a new healthcare store. General Medicine is quickly becoming one of the more interesting healthcare companies to watch, given the people involved, the capital raised, and the breadcrumbs available on strategy. If you’re thinking about the evolution of the healthcare front door, I find it a worthwhile listen. Two things in particular stood out to me in the session:
First, I didn’t realize before this interview that General Medicine has built its own medical group to serve initial consumer demand on its marketplace; part of a deliberate choice to solve demand first. A full-time PCP role posted on the website offers a glimpse into the medical group—interestingly, they’re using Nabla as an AI scribe and Athena as EMR. Equally interestingly, the comp for a full-time PCP is $180k to $200k annually, which seems… low? I’m pretty sure PCPs are unionizing elsewhere in the country despite meaningfully higher salaries, but I suppose institutions like MGB aren’t offering equity upside.
Second, Parker seems to hint at upcoming partnerships with incumbent providers, retailers, and payers. I am curious to see what these partnerships look like; Parker went into detail on what a potential health system partnership might look like, so it seems relatively safe to assume we’ll hear something new on that front. If the pitch to a health system is something along the lines of $0 CAC qualified referrals into the commercial specialty volume you want, I can see the appeal. At one point in the interview, Agarwala mentions being surprised that she could book a same-day appointment for a specialty that typically has a months-long wait, and asks how that is possible. It seems the answer is that General Medicine is making it possible through its own medical group. But if that's the case, it seems to undercut the premise of the marketplace. This supply-side dynamic and health system partnership model will be worth watching.
Bryce Platt shared a good read from Drug Channels Institute on employer satisfaction in the PBM market, finding that the Big Three PBMs have almost caught up to alternative PBMs in customer satisfaction. Platt notes that as alternative PBMs win market share, they now face the challenge of demonstrating value to benefits leaders after contracts are signed. Needless to say, this dynamic is worth watching if you’re tracking the alternative PBM market and the broader potential disruption of the Big 3. Given the general narrative about the benefits of alternative PBMs compared to the Big 3, one would think it should be easy for the alternatives to demonstrate value to benefits leaders.
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