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>>> Humana’s dire forecast shows private Medicare boom is ending


Bloomberg

by John Tozzi

January 26, 2024


https://finance.yahoo.com/news/humana-plunges-2024-forecast-misses-120703264.html


(Bloomberg) — Private Medicare plans that drove years of growth for US health insurers are getting less profitable and may cost seniors more money, Humana Inc.’s results showed, sending shares down across the sector.

The second-largest Medicare Advantage company, Humana struck a dire tone as it pulled its earnings guidance for 2025 and forecast 2024 profits short of analysts’ most pessimistic outlooks. The shares fell as much as 15% in New York, the most intraday since June.

As medical costs rise, Humana will have to raise prices and pull back on 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 may be the end of health insurers’ Medicare Advantage boom.

“The whole industry will possibly reprice” plans for next year, outgoing Chief Executive Officer Bruce Broussard said on a conference call. “I don’t know how the industry will take this kind of increase in utilization along with regulatory changes that will continue to persist in 2025 and 2026.”

Humana now sees adjusted earnings of approximately $16 a share in 2024, according to a statement Thursday. That would set its per-share profit back to a level not seen since 2018, shocking some analysts.

“We did not think $16 was possible,” Jefferies analyst David Windley wrote in a research note. From that level, Humana plans for growth of $6 to $10 a share in 2025.

Rivals have given different explanations for the jump in medical costs, adding uncertainty to the buffeted sector. UnitedHealth Group Inc., the largest seller of Medicare Advantage plans, told investors Jan. 12 that higher costs seen late last year were seasonal and wouldn’t persist through 2024. Elevance Health Inc., a smaller player in Medicare, indicated this week it had priced to cover rising costs.

Still, Humana’s forecast dragged on the sector. UnitedHealth fell as much as 6.6%, Cigna Group as much as 4.3%, CVS Health Corp. as much as 5.4% and Centene Corp. as much as 4.9%.

Worse than feared

More than half of US seniors on Medicare now get their benefits through private plans. Humana is more exposed to changes in the Medicare Advantage market than major competitors. Last week, a preview of fourth-quarter results showed accelerating medical expenses.

The US last year proposed new rates and other changes to restrict how insurers get paid. The government also finalized plans to claw back past overpayments, a policy Humana is challenging in court. Those changes are colliding with an uptick in costs as some patients resume seeking care they had deferred during the pandemic.

The changes to government billing are being phased in over three years starting in 2024, which means more pressure on the business is coming. The US is expected to announce its initial 2025 rate update for Medicare Advantage plans in the coming weeks.

Humana’s 2024 outlook assumes the higher medical costs that materialized in the fourth quarter will persist for the year. It’s a “wholesale rebasing of expectations” for the Medicare Advantage segment, RBC Capital Markets analyst Ben Hendrix wrote in a research note.

Humana executives said Thursday that they expect to remain focused on Medicare. The company was reported to be in talks with Cigna late last year to assemble a bigger, more diversified business, but discussions quickly fell apart.

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

Long-term questions

As recently as Nov. 1, Humana affirmed its 2025 profit target of $37 a share. Yet those expectations unraveled swiftly, even as risks to Medicare Advantage became clearer through 2023.

Rising cost trends took hold as insurers set prices for 2024 plans, and Humana told investors it considered their “initial emergence” in its pricing. Medical expenses jumped beyond what the company prepared for in late 2023, as Humana cited higher inpatient stays, doctor visits and outpatient surgeries.

The company is looking at years of adjustments to get back to the earnings trajectory investors were betting on. Humana executives including Chief Operating Officer Jim Rechtin, who is set to take the CEO seat later this year, projected optimism about the company’s long-term prospects.

JPMorgan Securities analyst Lisa Gill wrote that it’s difficult to see Humana returning to its long-term multiple, the level the stock trades relative to earnings. By the time Humana overcomes the rough spot ahead “we think investors could be focusing more on slowing demographic trends, as growth in the 65+ market is expected to moderate” in the second-half of the 2020s, she wrote.

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