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Humana (HUM) is off to a tough start heading into 2024.
The insurance giant’s stock is trading near four-year lows after it reported an unexpected loss in the fourth quarter due to increased usage of its Medicare Advantage business. Humana said costs in the sector will continue to rise through the end of the year.
As the number of elderly patients seeking treatment surged last year, Humana experienced an imbalance between insurance premiums and treatment costs, leading to treatment delays and an increase in the number of procedures after the pandemic.
Humana CEO Bruce Broussard told analysts on a conference call this week that “Medicare Advantage continues to absorb unprecedented trends in health care costs while absorbing significant regulatory changes.” “We are in a period of complex and dynamic change.”
“The increase in utilization that emerged late in the fourth quarter was a significant departure from the already elevated levels impacting the industry.”
The company now expects adjusted earnings to reach $16 per share in 2024, down from $26.09 in 2023. Humana’s 2025 earnings forecast is currently between $22 and $26 per share. In November, the company expected to earn $37 per share in 2025.
Humana stock fell 12% after Thursday’s earnings release. Shares fell 12% earlier this month after such lackluster fourth-quarter results were pre-announced. Last year, the stock price fell by nearly 28%. The S&P 500 rose more than 20% during this same period.
A spike in usage
Medicare Advantage is a highly profitable market and has been criticized for realizing these benefits at the expense of taxpayers.
Medicare Advantage was first created by law in 2003. It is considered a more efficient and sometimes cheaper alternative to supplemental Medicare plans known as Medigap. Since 2003, established health insurance companies and startups alike have moved in and out of the market.
According to KFF data, 51% of Medicare eligible people enrolled in a Medicare Advantage plan last year.
Changes in utilization, federal payments, and demographic changes all contributed to Humana’s 2023 woes.
We incurred higher-than-expected costs late last year, primarily due to an increase in the number of elderly patients seeking treatment. The company’s benefit expense ratio, or medical loss ratio (MLR), in the company’s insurance division reached 91.4% in the fourth quarter. Analysts expected this ratio during Humana’s fourth quarter to approach 89.5%. MLR is the percentage of premiums that insurance companies pay for care.
In the year-ago period, Humana reported a benefit expense ratio for this segment of 87.4%.
The Affordable Care Act requires companies to achieve an MLR of at least 80% to 85% each year. Companies prefer to stay at the lower end of that range, but Humana expects it to remain in the 90% range in 2024.
Humana’s largest segment
UnitedHealth Group (UNH), which has the highest share of MA members among the market’s major players, said it was adjusting for reimbursement reductions from the Biden administration and was prepared to handle rising cost pressures. .
“Despite the changes in care patterns and associated pressures felt over the last 23 years, we have been able to execute on our growth initiatives, make investments, and position ourselves to reduce healthcare costs. [Medicare Advantage] “We are strengthening our funding cycle over the next three years,” CEO Andrew Whitty said on an earnings call this month.
Humana ranks second among MA plans, accounting for 18% of the total market. United, on the other hand, are at 29%, according to KFF data.
CVS (CVS) via Aetna owns 11%, while Centene (CNC), the former Medicare Advantage giant, owns just 4%. Cigna (CI) serves only his 2% of the MA market.
But Humana’s fortunes are more tied to its Medicare Advantage business than those of its larger rivals.
Take UnitedHealth, for example, which brought in $113 billion in revenue in 2022 from its Medicare and Retirement division, accounting for about 45% of the company’s total annual revenue. In Humana’s case, in 2022, 81% of his annual revenue came from the Medicare division, and more than 70% came from individual enrollment in Medicare Advantage.
Humana has been experimenting with mergers and acquisitions in recent years.
The company first attempted to merge with Aetna in 2015, but the proposal was rejected in a 2017 Justice Department ruling. Aetna then merged with CVS in 2018. Most recently, Cigna was looking to acquire Humana before negotiations broke down.
The pressures facing Humana are similar to the story of Centene, which recently laid off employees and is expected to experience further fallout from changes to its star rating criteria.
The silver tsunami disappears
However, the pressure facing Humana and other companies in the Medicare Advantage market may be short-lived as the industry as a whole reacts to a surge in usage seen in the second half of 2023.
“We think next year is going to be a year where the entire industry may reprice,” Broussard told analysts last week. “We do not know how the industry will respond to this increased usage and continued regulatory changes through 2025 and 2026. Therefore, I urge the industry to adopt pricing discipline in response. I look forward to it.”
On the other hand, future enrollment growth in Medicare Advantage plans may not be as explosive as in the past, similar to the demographic forces or “silver tsunami” that dampened this market boom in the past. .
JP Morgan analysts wrote in a note this week: [2023’s] There are headwinds and HUM is positioned to return to a more balanced margin and membership profile, but with growth in the over-65s market expected to slow from this year, investors are betting on a demographic slowdown. I think there is potential for more attention. [high-single digits] to [mid-single digits] In the late ’10s. ”
The number of people 65 and older in the United States is projected to grow from 56.1 million in 2020 to 73.1 million by the end of this decade, according to Census Bureau data. However, this population growth rate is expected to slow over the next decade, with the Census Bureau projecting that 80.8 million Americans will be 65 or older by 2040.
Anjalee Khemlani is a senior health reporter at Yahoo Finance, covering all areas of pharma, insurance, care services, digital health, PBM, and health policy and politics.Follow Anjali on all her social media platforms @AjKhem.
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