Source: Modern Healthcare
The health insurance industry is showing signs of life after several tough years.
Major insurers that reported first-quarter earnings in recent weeks outperformed Wall Street expectations and demonstrated improvements in medical spending, suggesting longstanding cost pressures may be receding.
UnitedHealthcare parent company UnitedHealth Group, Aetna parent company CVS Health, Cigna, Elevance Health, Centene and Alignment Healthcare saw medical expenses decline during the period and upgraded their annual earnings guidances. Humana, Molina Healthcare and Clover Health bested earnings projections for the quarter.
UnitedHealthcare, Aetna and Molina Healthcare characterized their first-quarter results as the product of premium increases, benefit cuts and exits from unfavorable geographic markets. UnitedHealthcare, Elevance Health, Humana and Molina Healthcare also reported declines in hospital stays and inpatient admissions.
Wall Street has noticed, and health insurance stock has rebounded, particularly from the lows seen in January, when the Centers for Medicare and Medicaid Services proposed a meager Medicare Advantage rate increase.
Share prices for health insurers and their parent companies collectively have risen 20.1% this year through Tuesday, compared to 8.3% growth in the S&P 500.
“If you look at the public markets, we’ve gone from six weeks ago, ‘The sky is falling. Payers are a terrible business,’ to, all of a sudden, ‘Everything is solved,’” said Ari Gottlieb, an independent health insurance consultant.
During the COVID-19 pandemic, patients deferred care, hospitals limited elective procedures and rising interest rates yielded strong investment returns, leading to record profits and reserves for insurance companies. Insurers raised premiums, anticipating that patients would flock to providers with more severe health conditions and higher costs when the crisis waned.
Their predictions came to fruition in June 2023, when UnitedHealth Group called out a spike in utilization among Medicare Advantage enrollees. High expenses subsequently spread to other lines of business and ate into profits at most insurers.
Health insurance companies assured investors that 2026 would bring improvements, then swiftly got bad news from the federal government.
CMS proposed nearly flat rates for Medicare Advantage insurers in January, and investors responded by erasing $96 billion in market capitalization in a single day. After intense lobbying, CMS finalized a 2.48% increase in April, which sent share prices up.
Investors also feared that the expiration of enhanced subsidies for health insurance exchange plans and nearly $1 trillion in Medicaid cuts would squeeze revenue and membership even as costs continue to climb.
The full effects of those policy shifts won’t be felt for months or years. But several companies indicated that, for the first quarter at least, costs were coming under control.
Leading Medicaid carriers Elevance Health, Molina Healthcare and Centene reported declining expenses for home healthcare, specialty pharmacy and behavioral healthcare. Molina Healthcare and Centene predicted lower spending on autism therapy amid an anti-fraud push. UnitedHealth Group also broadly cited fraud intervention as a source of savings.
Medicaid managed care contractors also said they expect states will boost rates to match medical expenses by the end of the year.
Medicare Advantage market leaders UnitedHealthcare and Humana reported medical cost trends in line with the 7.5% growth they projected.
Yet health insurance companies may have benefited from unusual circumstances during the first quarter, such as a milder-than-expected flu season and natural disasters preventing members from accessing care.
Headwinds remain across the sector. Health insurance exchange enrollment is shrinking, and large numbers of customers selected high-deductible Bronze plans over more comprehensive Silver plans as premiums soared. Elevance Health and Cigna — which will not participate in the exchange next year — expect costs for those members to rise later in the year.
“We likely were too negative on the downside six weeks ago, but have we gotten a little too positive?” Gottlieb said.
Moreover, a lag in claims processing for hospital stays and procedures means companies and investors don’t have a complete picture of how the first quarter turned out, said David Windley, a senior healthcare analyst at the investment bank Jefferies.
Humana and Molina Healthcare acknowledged the claims delay and indicated they are waiting to see how the trend unfolds through the second quarter before raising their financial guidance.
“My instinct is that there are glimmers of hope,” Windley said. “There are some signs that trend may be rolling over, but not enough for me to upgrade the stocks.”
