Humana's dire forecasts show that the private Medicare boom is over

(Bloomberg) — Private Medicare plans that drove years of growth for U.S. health insurers are becoming less profitable and may cost seniors more money, Humana Inc. results showed, sending stocks across the sector lower.

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Humana, the second-largest Medicare Advantage company, struck a gloomy tone when it withdrew its 2025 earnings guidance and forecast 2024 earnings lower than more pessimistic analysts forecast. Shares fell as much as 15% in New York, the biggest intraday decline since June.

As medical costs rise, Humana will have to raise prices and roll back benefits to shore up profit margins, executives said Thursday on a conference call, and they expect competitors to do the same. If that happens, it could spell the end of health insurance companies' health benefits boom.

“The entire industry will likely reprice” its plans for next year, Bruce Broussard, outgoing CEO, said on a conference call. “I don’t know how the industry will accept this kind of increase in usage coupled with the regulatory changes that will continue in 2025 and 2026.”

Humana now sees adjusted earnings of about $16 per share in 2024, according to a statement issued Thursday. This would return earnings per share to a level not seen since 2018, shocking some analysts.

“We didn’t think $16 was possible,” Jefferies analyst David Windley wrote in a research note. From this level, Humana plans to grow by $6 to $10 per share in 2025.

Competitors offered different explanations for the jump in medical costs, adding to uncertainty in the affected sector. UnitedHealth Group Inc., the largest seller of Medicare Advantage plans, told investors on Jan. 12 that the higher costs seen late last year were seasonal and would not last until 2024. Elevance Health Inc., a smaller player in Medicare, noted , this week indicated that it had been priced to cover the increased costs.

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However, Humana's forecasts affected the sector. UnitedHealth fell as much as 6.6%, Cigna Group fell as much as 4.3%, and CVS Health Corp. fell as much as 6.6%. up to 5.4%, and Centene Corp. Up to 4.9%.

Worse than feared

More than half of U.S. seniors who receive Medicare now get their benefits through private plans. Humana is more exposed to changes in the Medicare Advantage market than its major competitors. Last week, a preview of fourth-quarter results showed an acceleration in medical expenses.

The United States last year proposed new rates and other changes to restrict how insurers get paid. The government has also finalized plans to claw back previous overpayments, a policy that Humana is challenging in court. These changes collide with an uptick in costs as some patients resume seeking care they had been putting off during the pandemic.

Photos of Humana Fit, Fun and Forever Week activities taking place at the La Quinta Senior Center in La Quinta, California, as part of the 2014 Humana Challenge. (Rodrigo Pena/AP Photos for Humana)Photos of Humana Fit, Fun and Forever Week activities taking place at the La Quinta Senior Center in La Quinta, California, as part of the 2014 Humana Challenge. (Rodrigo Pena/AP Photos for Humana)

More than half of U.S. seniors who receive Medicare now get their benefits through private plans. (Rodrigo Pena/AP Photos for Humana) ((Rodrigo Pena/AP Photos for Humana))

The changes to government billing will be phased in over three years starting in 2024, meaning more pressure on the company is coming. The United States 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 experienced in the fourth quarter will continue throughout the year. “It's a wholesale recast of expectations” for the Medicare Advantage sector, Ben Hendricks, an RBC Capital Markets analyst, wrote in a research note.

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Humana executives said Thursday they expect to continue to focus on medical care. The company was reported to be in talks with Cigna late last year to combine a larger, more diversified business, but discussions quickly collapsed.

“We believe that being a niche player today in the fastest-growing segment of the industry is the best value for shareholders,” Broussard said.

Long term questions

On November 1, Humana confirmed its 2025 earnings target of $37 per share. However, these projections have quickly collapsed, even as risks to Medicare Advantage through 2023 become clearer.

The rising cost trends took hold as insurers set prices for 2024 plans, and Humana told investors it took “priming” into account in its pricing. Medical expenses jumped beyond what the company had prepared for in late 2023, with Humana citing higher rates of inpatient stays, doctor visits and outpatient surgeries.

The company is looking at years of adjustments to return to the earnings trajectory that investors were betting on. Humana executives, including Chief Operating Officer Jim Richten, who is set to take over as CEO later this year, were optimistic about the company's long-term prospects.

It's hard to see Humana returning to its long-term multiple, the level at which the stock trades relative to earnings, JPMorgan Securities analyst Lisa Gill wrote. By the time Humana overcomes the next rough patch, she wrote, “we believe investors can focus more on slowing demographic trends, as growth in the over-65 market is expected to moderate” in the second half of the 2020s.

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