Humana (HUM) shares fell sharply in early Tuesday trading, while rivals UnitedHealth UNH and CVS Health (CVS) traded firmly in the red, as the health insurance industry received yet another blow to its 2024 profit forecasts.
All three major health insurance groups have trailed the broader market this year, with Humana down nearly 25%, amid concern that profit margins will be hit by a surge in medical costs tied to a rise in elective procedures. Those procedures had been delayed by the covid pandemic.
UnitedHealth’s medical-cost ratio, a key industry metric, rose nearly 3 percentage points, to 85%, over the final three months of last year, suggesting that a larger portion of its collected premiums were paid out on insurance claims.
Humana said its benefit-expense ratio rose more than 3 percentage points, to 90.7% over the 2023 fourth quarter compared with the year-earlier period. It also was up more than 3 percentage points from third-quarter 2023 levels.
The group noted “elevated Medicare Advantage utilization trends,” which it said “further increased in 4Q23, driven by higher-than-anticipated inpatient utilization, primarily for the months of November and December, as well as a further increase in noninpatient trends, predominantly in the categories of physician, outpatient surgeries and supplemental benefits.”
Humana health cost warning
Humana in fact sought to mitigate those pressures late last year when it unveiled merger talks with Cigna Group (CI) , noting that the group “continued to experience an increase in covid admissions in the third quarter.”
The talks were ultimately scrapped, however, amid concern that the Federal Trade Commission, which has taken a far more active role in challenging megamergers under the leadership of Chairwoman Lina Khan, would block the proposed $120-plus billion tie-up.
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The FTC is also continuing its probe into the three largest pharmacy-benefit managers – CVS’s Caremark, Cigna’s Express Scripts and UnitedHealth’s OptumRx – and has warned the group of likely changes to the industry’s broader regulation.
Medicare Advantage payouts flat
Further pressure was added to profit margins Tuesday when the U.S. Centers for Medicare & Medicaid Services said Medicare Advantage payments would rise only by an average of 3.7% next year.
Analysts were looking for an increase of around 4.7%, based on the CMS’s January proposal of 3.7% following increases of around 1.22% each year between 2019 and 2024 to preliminary CMS figures.
The payments, which reimburse insurers for treatment of U.S. patients over age 65, will be effectively lower than current levels when adjusted for costs and inflation.
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“We see Humana as most-exposed both from its 84% revenue exposure to Medicare Advantage, and on sentiment given its challenging turnaround of the Medicare book,” said Cantor Fitzgerald analyst Sarah James.
“We would also flag CVS as more exposed on sentiment than the 17% revenue exposure would imply, particularly given the outsized investor focus on 2024 Medicare Advantage margins and 2025 bid strategy for the company,” she added.
Humana shares were marked 9.2% lower in premarket trading to indicate an opening bell price of $318.70 each. CVS shares slumped 5% to $75.56 each while UnitedHealth was marked 4% lower at $469.95 each.
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