US managed care insurers' third-quarter earnings season was characterized by generally higher medical costs amid changes to federally subsidized healthcare plans that, in some cases, resulted in lower earnings-per-share estimates.
Many of the top publicly traded US managed care insurers' medical costs grew during the third quarter, resulting in lower revenues and lower-than-anticipated EPS, largely in line with analyst projections.
Critical of federal changes
In recent quarters, various managed care insurers have been highly critical of changes made by the Centers for Medicare & Medicaid Services (CMS), with Humana Inc. in particular both facing lawsuits related to its Medicare practices and filing lawsuits against CMS.
According to CMS, Humana has roughly 1.6 million, or 25%, of its members enrolled in plans that are rated four stars or higher for 2025 — a sharp decrease from 94% in 2024. Humana noted that a substantial driver of the change is due to one of its larger contracts decreasing from a 4.5-star rating in 2024 to a 3.5-star rating.
Medicare Advantage plans are offered by private companies that are akin to the federal government's Medicare program for people 65 and older.
Despite Humana's legal woes, the Louisville, Kentucky-based insurer slightly raised its estimate for adjusted EPS, bucking third-quarter cost trends that plagued its competitors this earnings season.
While the need for pricing updates to Medicare Advantage and fellow government subsidized Medicaid plans has been a focus of several managed care earnings calls this season, CEO Susan Diamond said during an earnings call that Humana "feels good" about the medical loss ratio it has been targeting going into 2025.
"We continue to evaluate emerging trends versus what we expected at the time of bids; we continue to feel confident in how we've approached the trend assumptions within our pricing," Diamond said.
Elevance Health Inc.'s third-quarter earnings fell below expectations, largely due to costs associated with Medicaid and an "unprecedented" shift in membership, according to comments by President and CEO Gail Boudreaux during an earnings call.
For the third quarter, Elevance posted adjusted diluted EPS of $8.37, down from $8.99 in the prior-year period.
Boudreaux acknowledged the earnings dip on the call, pointing to high Medicaid costs, some of which she said are attributable to a mix shift among Medicaid members as some with less medical acuity were kicked off the government subsidized plans amid ongoing Medicaid redeterminations.
These short-term headwinds are a byproduct of the large scale and unprecedented mix shifts associated with the end of the COVID-19 public health emergency and rates that do not yet address the shortfall, Boudreaux said.
While it remains to be seen how CMS will operate under President-elect Donald Trump, various Medicare Advantage-levered stocks saw a bump the week of his election.
Mixed results
Despite facing similar headwinds from Medicaid redeterminations, Centene Corp. maintained its full-year EPS outlook amid a high-cost quarter.
Since Medicaid redeterminations resumed in April 2023 after years of delays related to COVID-19, millions of Americans have been transitioned out of Medicaid across the country, materially shifting the Medicaid risk pool in a way that requires action by state partners to adjust program rates, CEO Sarah London said during an Oct. 25 earnings call.
"While there is still work to do with respect to the sufficiency of rate adjustments, our conversations continue to be productive and we are encouraged by the engagement and the incremental movement we saw as the quarter unfolded," London said.
UnitedHealth Group Inc. similarly weathered the third-quarter earnings storm, dealing with the same medical cost woes as its competitors while also contending with the fallout from a cyber breach at one of its subsidiaries.
The Minnesota-based healthcare giant posted $100.8 billion in revenue for the third quarter, up from $92.4 billion in the prior-year period, even as it faced Medicare rate cuts and Medicaid redeterminations.
Despite the revenue growth, the managed care giant presented an adjusted EPS outlook of $27.50 to $27.75 for the full year, down from $27.50 to $28.00 affirmed in the prior quarter. The weaker earnings outlook was partially the result of United absorbing an estimated 75 cents per share loss of business disruption impacts from the Change Healthcare Inc. hack, according to CFO John Rex.
Other problems facing UnitedHealth are related to an upshift in Medicare Advantage costs related to payment coding, a mismatch between the current health status of Medicaid members and state rate updates and an acceleration in prescribing of certain high-cost specialty medications, Rex said.
"We believe a contributing factor to the acceleration was the Inflation Reduction Act, which eliminated the individual coinsurance requirement during the catastrophic coverage phase," he said. "As many of you know, more people enter this phase in the second half of the year."