Health insurers are facing financial strain as medical costs continue to rise, particularly for Medicare Advantage patients. CVS, the owner of health insurer Aetna, recently lowered its full-year profit outlook due to the potential impact of higher medical costs on its profits. This follows a similar warning issued by insurance giant Humana, which cited rising medical costs in its earnings guidance for 2024.
The spike in medical costs for Medicare Advantage patients can be attributed to older adults seeking procedures they had delayed during the Covid-19 pandemic, such as joint and hip replacements. Medicare Advantage plans, which are privately run health insurance plans contracted by Medicare, have traditionally been a source of growth and profits for the insurance industry. More than half of Medicare beneficiaries are enrolled in these plans due to lower premiums and additional benefits not covered by traditional Medicare.
However, investors are becoming increasingly concerned about the escalating costs, with insurance companies suggesting that they may not decrease in the near future. Other companies operating in the Medicare Advantage space, such as UnitedHealth Group and Elevance Health, are also experiencing the impact of higher medical costs.
CVS executives noted higher rates of outpatient care, including hip and knee surgeries, in the fourth quarter. They also observed increased use of supplemental benefits like dental and vision care, as well as pressure from RSV vaccinations. Inpatient care, on the other hand, remained in line with expectations. The medical benefit ratio for CVS’s insurance segment, which measures total medical expenses paid relative to premiums collected, increased to 88.5% in the fourth quarter compared to 85.8% in the previous year.
Humana reported an even larger surge in medical costs during the fourth quarter. The company attributed the increase to higher outpatient activity and an unexpected rise in inpatient care in November and December. As a result, Humana’s medical benefit ratio for its insurance segment reached a staggering 91.4% for the quarter, up from 87.4% in the same period the previous year. This poses a greater challenge for Humana, as it relies more heavily on its Medicare Advantage business, which accounts for over 80% of its earnings. UBS analysts noted that there is no other part of Humana’s business that can substantially offset the impact of higher medical costs on its insurance segment.
Unlike Humana, both CVS and UnitedHealth Group have diversified earnings streams, thanks to their large health services and pharmacy operations. However, all three companies face uncertainties regarding the new “two-midnight rule” policy, which requires Medicare Advantage plans to cover members’ hospitalizations at the higher inpatient rate if their doctors anticipate a stay of more than two midnights. The policy has been in effect for traditional Medicare plans for nearly a decade.
In addition to the challenges faced by health insurers, genetic testing company 23andMe has also encountered difficulties. The company reported lower revenue for the fiscal third quarter and is contemplating separating its consumer and therapeutics businesses to boost its stock price, which has fallen below $1. Furthermore, 23andMe is grappling with over 30 class-action lawsuits following a data breach that affected nearly 7 million individuals.
Lastly, Amazon has recently implemented layoffs across its One Medical and Pharmacy units as part of its cost-cutting efforts. Despite its foray into the healthcare industry with acquisitions like PillPack and One Medical, Amazon has been reducing its workforce in various divisions in recent weeks.
Overall, health insurers are under strain due to rising medical costs, particularly for Medicare Advantage patients. The impact on profitability and the uncertainties surrounding new policies pose challenges for companies like CVS, Humana, and UnitedHealth Group. Additionally, 23andMe and Amazon are facing their own hurdles, with 23andMe contending with financial and legal troubles and Amazon implementing layoffs across its healthcare units as part of broader cost-cutting measures.
