(Bloomberg) – Private Medicare plans, which have driven growth for U.S. health insurers for years, may become less profitable and burden older people, Humana Inc.’s results show, leading to an industry-wide decline in profitability. Stock prices fell.
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Humana, the No. 2 Medicare Advantage company, struck a pessimistic tone after it withdrew its 2025 revenue forecast and its 2024 profit forecast fell short of analysts' most pessimistic forecasts. Stock prices in New York fell by as much as 15%, the biggest intraday drop since June.
As health care costs rise, Humana will need to raise prices and cut benefits to boost profit margins, executives said on a conference call Thursday, expecting competitors to do the same. There is. That could end the Medicare Advantage boom for health insurers.
Outgoing CEO Bruce Broussard said in a conference call that the industry as a whole may reassess its pricing regarding next year's plans. “We do not know how the industry will respond to this increase in usage, in addition to the regulatory changes that will continue into 2025 and 2026.”
Humana now expects adjusted earnings of about $16 per share in 2024, according to a statement Thursday. That would return earnings per share to levels not seen since 2018, shocking some analysts.
“I didn't think $16 was possible,” Jefferies analyst David Windley wrote in a research note. Humana plans to grow from that level to $6 per share in 2025 to $10 per share.
Rivals offer different explanations for rising health care costs, adding uncertainty to a struggling industry. UnitedHealth Group, the largest seller of Medicare Advantage plans, told investors on January 12 that the higher costs seen late last year are seasonal and will not persist until 2024. Ta. Elevance Health, a Medicare small business, hinted at that this week. They were setting prices to cover rising costs.
Still, Humana's forecast weighed on the sector. UnitedHealth fell as much as 6.6%, Cigna Group fell as much as 4.3%, CVS Health Corporation fell as much as 5.4% and Centene Corporation fell as much as 4.9%.
worse than feared
Currently, more than half of U.S. seniors enrolled in Medicare receive benefits through private plans. Humana is more exposed to changes in the Medicare Advantage market than its major competitors. A preview of the company's fourth quarter results released last week showed an increase in medical costs.
Last year, the U.S. proposed new interest rates and other changes to limit how insurance companies pay. The government also finalized a plan to recover past overpayments, a policy Humana is challenging in court. These changes are colliding with rising costs as some patients resume treatment they had put off during the pandemic.
Government billing changes are being phased in over three years from 2024, which means even more pressure on businesses. The United States is expected to announce the first 2025 rate updates for Medicare Advantage plans in the coming weeks.
Humana's 2024 outlook assumes that the increase in medical costs that emerged in the fourth quarter will continue into the year. RBC Capital Markets analyst Ben Hendricks said in a research note that this is a “significant revision of expectations” for the Medicare Advantage sector.
Humana executives said Thursday they expect to remain focused on Medicare. The company was reported late last year to be in talks with Cigna to build a larger, more diversified business, but talks quickly fell apart.
“We believe that being a specialty player in the fastest growing segment of the industry today provides the greatest value for our shareholders,” said Mr. Broussard.
long term question
As recently as November 1, Humana committed to a 2025 profit target of $37 per share. But those hopes quickly faded, even as the risks to Medicare Advantage became clearer into 2023.
The rising cost trend takes hold as insurers price their 2024 plans, and Humana told investors that it takes insurers' “early emergence” into account in pricing. Humana cited an increase in hospital stays, doctor visits and outpatient surgeries, resulting in medical costs soaring beyond what the company had set aside for late 2023.
The company is considering a multi-year adjustment to get back on the earnings track that investors had bet on. Humana executives, including Chief Operating Officer Jim Rechtin, who will take over as CEO later this year, expressed optimism about the company's long-term prospects.
JPMorgan Securities analyst Lisa Gill wrote that it will be difficult for Humana to return to its long-term multiple, which is the stock's price to earnings level. By the time Humana overcomes the challenges ahead, “investors will likely focus more on the demographic slowdown, as growth in the 65+ market is expected to slow in the second half of the 2020s.” she wrote.
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