Elevance Health Inc. (ELV) shares stumbled after the health insurer reported fourth-quarter earnings that looked fine on the surface but came wrapped in some decidedly gloomy guidance for 2026. The company beat on earnings but missed on revenue, and more importantly, painted a picture of a year ahead filled with shrinking membership, rising costs, and pressures that aren't going away anytime soon.

The Numbers Tell a Mixed Story

Fourth-quarter revenue came in at $49.3 billion, up 10% year over year but just shy of the $49.82 billion analysts were expecting. For the full year 2025, operating revenue hit $197.6 billion, up a solid 13%. That growth was fueled by higher premium yields in the Health Benefits segment, some strategic acquisitions, and growth in Medicare Advantage membership. The downside? Membership losses in Medicaid offset some of those gains.

On the earnings front, Elevance posted adjusted earnings of $3.33 per share, comfortably beating the consensus estimate of $3.10. So far, so good. But then came the real story.

Rising Costs Are the Real Problem

The benefit expense ratio—a key metric that shows how much of premium revenue goes to paying medical claims—jumped to 93.5% in the fourth quarter, up 110 basis points. The culprit? Higher medical cost trends, especially in Affordable Care Act health plans, plus increased Medicare Part D seasonality driven by changes from the Inflation Reduction Act. For the full year, that ratio hit 90%, up 150 basis points compared to 2024.

Meanwhile, the operating expense ratio was 11% in Q4 and 10.6% for the year, or 10.8% and 10.5% on an adjusted basis. Nothing alarming there, but when medical costs are rising faster than premiums, the math gets uncomfortable quickly.

Segment Performance Showed Diverging Trends

The Health Benefits segment brought in $41.8 billion in Q4 revenue, up 11% thanks to higher premium yields, acquisitions, and Medicare Advantage growth. But medical membership fell to approximately 45.2 million as of December 31, 2025, down 1% year over year as Medicaid enrollees dropped off.

On a brighter note, Carelon—the company's services arm—posted operating revenue of $18.7 billion, up 27%. Growth came from CarelonRx product revenue, expanding risk-based solutions in Carelon Services, and the acquisition of CareBridge.

Management Sets a Cautious Tone

During the earnings call, executives made it clear that 2026 would be a year of "execution and repositioning." Translation: things are going to get tougher before they get better. The company expects Medicaid membership to decline further, with the population's health needs potentially shifting over time. More concerning, Medicare Advantage membership is projected to drop by a high-teens percentage in 2026—a significant hit to enrollment.

Management also warned that costs for Medicaid and Obamacare plans will likely remain under pressure throughout the year. And they weren't shy about criticizing the Centers for Medicare & Medicaid Services' proposed payment rates for 2027, saying they don't align with current trends in medical costs and utilization.

The 2026 Outlook Disappoints

Here's where things get rocky. Elevance Health expects fiscal 2026 adjusted earnings of at least $25.50 per share, compared to Wall Street's estimate of $26.90. Revenue is expected to decline in the mid-single digits, driven by lower premiums. The benefit expense ratio is projected at 90.2%, plus or minus 50 basis points, with the adjusted operating expense ratio at 10.6%, plus or minus 50 basis points.

Medical enrollment is forecast to end 2026 between 43,175 and 43,875 members, down from 45,232 in 2025. That's a meaningful contraction in a business where scale matters.

Adding insult to injury, CMS announced a modest payment growth of just 0.09% for 2027, translating to more than $700 million in additional payments to Medicare Advantage plans. That sounds decent until you realize the industry was expecting rate increases of roughly 4% to 6%. The gap between expectations and reality is massive.

ELV Price Action: Elevance Health shares were up 3.37% at $333.80 at the time of publication on Wednesday, recovering most of their premarket losses.