(Bloomberg) — Humana Inc.’s recent financial results revealed that private Medicare plans, which have been a major growth driver for US health insurers, are becoming less profitable and may end up costing seniors more money. This has led to a decline in shares across the sector. As a major Medicare Advantage company, Humana sounded the alarm when it withdrew its earnings guidance for 2025 and projected 2024 profits that fell short of analysts’ most pessimistic expectations. This caused shares to drop as much as 15% in New York, the biggest decline since June. As healthcare costs continue to rise, Humana will have to increase prices and reduce benefits to maintain profit margins, the company’s executives said on a conference call. They also anticipate that competitors will need to do the same. This may signify the end of the Medicare Advantage boom for health insurers. “The whole industry will possibly reprice” plans for next year, outgoing Chief Executive Officer Bruce Broussard said on a conference call. “I don’t know how the industry will take this kind of increase in utilization along with regulatory changes that will continue to persist in 2025 and 2026.”Humana now anticipates adjusted earnings of around $16 a share in 2024, according to a statement Thursday. This would bring its per-share profit back to a level not seen since 2018, a revelation that surprised some analysts. “We did not think $16 was possible,” Jefferies analyst David Windley wrote in a research note. From that level, Humana plans for growth of $6 to $10 a share in 2025.
Different insurers have offered varying explanations for the spike in medical costs, adding more uncertainty to the already turbulent sector. UnitedHealth Group Inc., the largest seller of Medicare Advantage plans, informed investors on Jan. 12 that the higher costs observed late last year were seasonal and would not continue through 2024. Elevance Health Inc., a smaller player in the Medicare industry, indicated this week that it had adjusted its prices to account for rising costs. Despite this, Humana’s forecast had a negative impact on the sector. UnitedHealth fell as much as 6.6%, Cigna Group as much as 4.3%, CVS Health Corp. as much as 5.4%, and Centene Corp. as much as 4.9%.More than half of US seniors on Medicare are currently receiving their benefits through private plans. Humana is more vulnerable to changes in the Medicare Advantage market compared to its major competitors. A preview of the fourth-quarter results last week indicated a significant rise in medical expenses. Last year, the US proposed new rates and other changes to limit how insurers are reimbursed. The government also finalized plans to recoup past overpayments, a policy that Humana is challenging in court. These changes are colliding with a surge in costs as some patients are resuming previously deferred care due to the pandemic.
More than half of US seniors on Medicare are currently receiving their benefits through private plans. (Rodrigo Pena/AP Images for Humana) ((Rodrigo Pena/AP Images for Humana))The government billing changes will be implemented over three years starting in 2024, which means that there will be additional pressure on the industry. The US is expected to announce its initial 2025 rate update for Medicare Advantage plans in the coming weeks. Humana’s 2024 outlook assumes that the higher medical costs observed in the fourth quarter will persist throughout the year. RBC Capital Markets analyst Ben Hendrix described this as a “wholesale rebasing of expectations” for the Medicare Advantage segment. Humana’s executives mentioned that they intend to maintain their focus on Medicare. The company was reportedly in discussions with Cigna late last year to create a larger, more diversified business, but the talks quickly fell through. “We do believe today being a specialty player in the fastest-growing part of the industry is the best value for the shareholders,” Broussard said.Even as recently as Nov. 1, Humana reaffirmed its 2025 profit target of $37 a share. However, these expectations quickly unraveled, while risks to Medicare Advantage became clearer through 2023. Rising cost trends emerged as insurers set prices for 2024 plans, and Humana informed investors that it factored in their “initial emergence” in its pricing. Medical expenses surged beyond what the company had anticipated in late 2023, with higher inpatient stays, doctor visits, and outpatient surgeries cited by Humana. The company is anticipating years of adjustments to return to the earnings trajectory that investors had been banking on. Humana executives, including Chief Operating Officer Jim Rechtin, who is set to take the CEO position later this year, expressed optimism about the company’s long-term prospects. JPMorgan Securities analyst Lisa Gill stated that it’s challenging to see Humana returning to its long-term multiple, a measure of how the stock trades relative to earnings. By the time Humana overcomes the current challenges, “we think investors could be focusing more on slowing demographic trends, as growth in the 65+ market is expected to moderate” in the second half of the 2020s, she wrote.Most Read from Bloomberg Businessweek©2024 Bloomberg L.P.
