Humana Inc. stock plunged this week following fourth-quarter 2023 results highlighting higher-than-anticipated Medicare Advantage costs — a trend its leadership expects to continue through 2024.
High costs associated with Medicare Advantage — expanded versions of government-subsidized health plans aimed at seniors — have been an issue plaguing managed care insurers throughout 2023 as increased utilization of services hit medical loss ratios.
Ahead of a Jan. 25 earnings call, Humana noted much higher-than-anticipated Medicare Advantage medical costs, which had climbed to 91.4%, above the 89% expected by analysts.
Ultimately, the elevated costs led to a decline in Humana's EPS and hit the insurer's share price hard, which fell 11.7% from $402.40 a share on Wednesday, the day before the call, to $355.36 a share by noon ET on Friday.
"The thought process is that seniors really were the last to return to care and to utilize their benefits in a post-COVID environment," said S&P Global Ratings analyst Francesca Mannarino. "Overall, the industry has mostly noted elevated utilization trends really seen in the outpatient setting; orthopedic and cardiac services and also usage of some supplemental benefits to like dental and vision."
While elevated utilization was noted by managed care insurers earlier in the year, the 2023 fourth quarter exceeded expectations for insurers like Humana and UnitedHealth Group Inc., the latter of which largely attributed the increase in part to seasonal health issues, like RSV.
However, during Humana's fourth-quarter earnings call, CEO Bruce Broussard said the increased costs were not related to COVID-19 or RSV but to a combination of unrelated outpatient and inpatient services.
After acknowledging some internal debate, Broussard said Humana would treat the fourth-quarter elevated medical utilization as a new baseline and he expected industrywide Medicare Advantage repricing in 2024.
While Humana is already looking to reprice in 2024 heading into 2025, Mannarino said it remains to be seen whether the elevated medical loss ratios and regulatory pressures noted by Humana will become a broader issue across the entire Medicare Advantage book.
"If we're looking at revenue from an earnings perspective, we think Medicare Advantage holistically still represents a strong growth opportunity for the sector, given the aging population and the bipartisan support that exists, but we do think because of all these headwinds that revenue might slow for 2024," Mannarino said.
Despite being a source of apparent internal debate, Humana's decision to take a prudent approach in an uncertain environment may pay off, J.P. Morgan analyst Lisa Gill wrote in a research note.
"We are optimistic the company's conservative approach could be a source of upside to 2024 EPS and could imply a higher starting point for 2025," Gill wrote.
A spokesperson for Humana declined to comment on the company's stock value but pointed to a statement regarding the medical loss ratio.
"We believe the elevated [Medicare Advantage] medical costs are an industry dynamic, not specific to Humana, and that they may persist for an extended period or, in some cases, permanently reset the baseline," the statement read.
Across the board
Managed care stocks have broadly seen a decline so far this year. Humana had the sharpest drop, with its shares dropping 24.4% from Jan. 2 to Jan. 25.
UnitedHealth, which reported similar but less severe cost pressures during the fourth quarter of 2023, saw its stock value decline 8.5% during the same period.
Elevance Health Inc., the last of the major US managed care insurers to have so far reported fourth-quarter 2023 figures, has stayed relatively flat since the start of the year, with its stock up 0.3% since Jan. 2.
The Cigna Group and Centene Corp., which are set to deliver their fourth-quarter 2023 results during the first week of February, have seen modest declines of 3.7% and 4.3%, respectively, during the same period.
The performance of the five largest listed US managed care insurers contrasts with that of the broader market. The S&P 500 was up 3.19% during the same period while the S&P 500 Insurance index was up 5.21%.