As Medical Costs Pummel Private Health Plans, What’s the Answer?

Jan. 18, 2024
The announcements by Humana and UnitedHealthcare that they are experiencing soaring medical costs, only reinforce the need for intensifying care management health system-wide

Sometimes, even when difficult news is predicted in advance, it still creates an impact when it arrives. That certainly has been the case this month, as two of the largest private health insurers in the United States, UnitedHealthcare and Humana, announced that they were being affected by soaring medical costs among its insured members.

First, on Jan. 12, UnitedHealthcare executives announced that medical costs had soared by 16 percent in the fourth quarter of 2023; and then on Jan. 18, Humana executives, who will share fourth-quarter 2023 financial results on Jan. 25, announced that they expected their company’s medical-loss ratio to have risen from 89.5 percent to 91.4 percent in the fourth quarter of 2023. Stocks of all the major public health insurance companies slid on the twin sets of bad news.

Reporting on Jan. 18, Reuters’ Sriparna Roy wrote that “U.S. health insurer Humana (HUM.N), opens new tab said on Thursday an increase in demand for medical care among older adults would hurt fourth-quarter results and added uncertainty to its 2024 outlook, sending its shares down 14 percent. Higher demand would drive up medical costs in the fourth quarter, Humana said, becoming the second major insurer to flag a jump in such expenses in less than a week. Larger rival UnitedHealth (UNH.N), opens new tab on Friday reported higher-than-expected medical service costs but said it did not expect those levels to remain through 2024. Shares of UnitedHealth, CVS (CVS.N), opens new tab and Elevance Health (ELV.N), opens new tab fell between 2% and 5%, after Humana signaled higher costs could be an industry-wide issue,” Roy wrote.

What’s more, she wrote, “Health insurers recorded higher medical costs in 2023 due to a rise in demand for procedures such as orthopedic and heart-related surgeries. Demand for medical care rose during November and December among people enrolled in Medicare Advantage plans for those aged 65 and older, Humana said. Along with higher-than-expected demand for inpatient services, patients were also opting for more outpatient surgeries.”

That followed an Associated Press report filed on Jan. 12, which began thus: “UnitedHealth Group turned in a better-than-expected fourth quarter but surprised Wall Street with medical costs that soared 16 percent. Shares of UnitedHealth and other major health care and insurance providers slipped Friday after the company announced results,” the report noted, adding that “Health insurers dealt with rising medical costs for much of last year. UnitedHealth has said claims jumped from its Medicare Advantage business as more seniors got heart and orthopedic outpatient procedures. The company covers about 7.7 million people with Medicare Advantage plans, which are privately run versions of the government's Medicare program mainly for people age 65 and older. UnitedHealth also saw claims grow toward the end of the year in part from COVID-19 and because people sought vaccines and had other care addressed when they went to the doctor, company leaders told analysts.”

“Seniors did really respond strongly to RSV vaccinations and scheduled physician visits,” chief financial officer John Rex told the AP. Further, “UnitedHealth's medical costs, its largest expense, jumped to $62.23 billion in the quarter from $53.6 billion at the end of 2022. But company leaders stressed that the rising costs wouldn't affect their expectations for 2024. The company said in late November that it expects adjusted earnings ranging between $27.50 and $28 per share in the new year. FactSet says analysts forecast earnings of $27.87 per share. Overall, UnitedHealth’s profit climbed nearly 15% to about $5.5 billion in the final quarter of 2023, and the company earned more than $22 billion on the year. Earnings adjusted for one-time items totaled $6.16 per share in the fourth quarter, as revenue climbed 14% to $94.43 billion,” the report added.

As a result, Anna Wilde Matthews reported in The Wall Street Journal on Jan. 18, “Shares of Humana fell nearly 12% and its managed-care competitors also dropped Thursday after the Medicare-focused insurer warned that medical costs were running higher than expected and signaled that the pressure might impact its 2024 results as well. Humana also said it added fewer new members than it had projected during the fall enrollment period for its core Medicare business The company’s news, following UnitedHealth Group’s recent disclosure of higher fourth-quarter medical costs, adds to Wall Street concerns about health insurers’ results, particularly in the Medicare business. UnitedHealth, CVS Health, Elevance and Centene were also down,” Matthews wrote.

An MSN article posted on Jan. 18 put it this way: “Humana (NYSE:HUM) shares dipped 13 percent to its lowest levels since February 2022 after the health insurer revised its annual profit outlook citing higher-than-expected medical costs. The company now expects $26.09 in adjusted earnings per common share for the year ended December 31, 2023 compared to previous guidance of at least $28.25. Analysts expect Humana (HUM) to earn $28.30 a share in the year.

"The company anticipated the higher level of medical utilization experienced during the third quarter in its Medicare Advantage business would continue for the remainder of the year. Actual fourth quarter results reflect an additional increase in Medicare Advantage medical cost trends, driven by higher than anticipated inpatient utilization, primarily for the months of November and December, as well as a further increase in non-inpatient trends," the company said in a filing.

And the MSN article went on to state that “The Louisville, Kentucky-based firm is currently assessing the expected impact of emerging utilization trends on its 2024 outlook, which is anticipated to be material if current trends continue, and will provide an update on its fourth quarter 2023 earnings call, which has been rescheduled for January 25th, 2024.” "Humana believes the emerging trends are impacting the industry broadly and anticipates the trends will be contemplated in the 2025 Medicare Advantage pricing cycle," the company added in its statement.

A complicated moment for payers

All this comes at a particularly challenging time for the purchasers, payers, providers, and consumers of healthcare in the United States. As devastating as the COVID-19 pandemic was along multiple dimensions, the pandemic also artificially suppressed patient care utilization for at least a year; now, healthcare utilization is surging once again, and with it, the costs to payers. And on a very fundamental level, the utilization and the costs are increasing organically, as the U.S. population ages and the percentage of Americans living with chronic diseases continues to accelerate.

So what are the implications of all of this? Well, for one thing, some major national health insurers are dramatically changing their focus. As Rylee Wilson wrote in a March 22, 2023 report in Becker’s Payer Issues, Humana is set to exit the commercial group medical insurance business, phasing out its employer group commercial medical products over the next 18 to 24 months. The exit leaves just under 1 million members who will need to shift to other payers.  Most of the payer's commercial business is concentrated in Florida, Texas, Georgia and Kentucky, where Humana is headquartered.  According to the company's end-of-year earnings report, at the end of 2022, Humana had 556,300 fully-insured commercial members and 430,100 members in self-funded plans that Humana administers. Humana will continue to offer specialty insurance, including vision and dental, in the commercial market.  Humana plans to shift its focus to government-funded insurance. The payer had 5.1 million individual Medicare Advantage members at the end of 2022.”

But now, the medical-loss ratio for the company is rising even in its Medicare Advantage (MA) plans. Again, there is an inevitability to that development, given the aging of the population and the rapid increase in the proportion of Americans living with chronic diseases.

So, two implications seem clear here: first of all, the purchasers and payers of healthcare are inevitably going to be intensifying their pressure on the providers of healthcare to enter into value-based contracting, and increasingly, risk-based (two-sided) contracting, in order to try to reduce potentially excessive utilization, as well as to reward cost savings and improved clinical outcomes (which go hand in hand in any case).

And, per that, payers are increasingly going to be using data analytics to encourage providers to proactively identify candidates for care management, and to enroll those patients in care management programs as early and “upstream” in their journeys as possible. Indeed, Chiquita Brooks-Lasure said as early as January 2021, that it was her goal to have all Medicare recipients cared for in alternative payment models by 2030—an ambitious goal indeed.

A very active debate around the Medicare Advantage program continues forward, but the bottom-line reality is that however it happens, Medicare recipients and other Americans living with chronic illnesses, will need to experience care management, whether through MA or some other outlet, in order for them as a whole to optimize their health outcomes. And the increased cost burden on the private health plans, which is echoing what’s been happening in the Medicare and Medicaid programs, only reinforces the challenges going forward.



Sponsored Recommendations

Trailblazing Technologies: Looking at the Top Technologies for the Emerging U.S. Healthcare System

Register for the first session of the Healthcare Innovation Spotlight Series today to learn more about 'Healthcare's New Promise: Generative AI', the latest technology that is...

Data: The Bedrock of Digital Engagement

Join us on March 21st to discover how data serves as the cornerstone of digital engagement in healthcare. Learn from Frederick Health's transformative journey and gain practical...

Northeast Georgia Health System: Scaling Digital Transformation in a Competitive Market

Find out how Northeast Georgia Health System (NGHS) enabled digital access to achieve new patient acquisition goals in Georgia's highly competitive healthcare market.

2023 Care Access Benchmark Report for Healthcare Organizations

To manage growing consumer expectations and shrinking staff resources, forward-thinking healthcare organizations have adopted digital strategies, but recent research shows that...