Key points
- UnitedHealth Group is the nation’s largest Medicare Advantage plan insurer, with more than 9 million enrollees.
- UnitedHealth Group acknowledged the rising costs but did not cut its 2024 EPS estimates as dramatically as Humana did, blaming higher Medicare Advantage utilization rates.
- Cigna sold its Medicare Advantage business for more than $3 billion to Health Care Services Corp., which is expected to close in the first quarter of 2025.
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Medicare Advantage plans made headlines in 2024, but not in a positive light, at least for health insurance companies. Medicare is a government-sponsored health insurance service; generally for retirees aged 65 or older. For the most part, money for Medicare Part B health insurance or Medicare Advantage Part C plans is taken directly from Social Security benefits each month, along with a relatively small monthly payment from the patient. Nearly half of the Medicare population is enrolled in Medicare Advantage Part C plans. In the medical industry, however, there have been clashes between healthcare providers and medical insurers.
The deception of poorly managed care?
Managed care insurers have profited greatly from Medicare Advantage plans, earning billions in annual profits. They attribute this financial wizardry to the use of sophisticated data analytics, preventative care, cost optimization, provider networks, evidence- and value-based care, and risk mitigation strategies. However, doctors, hospitals and health care providers say insurers are simply finding more creative ways to not pay them by setting up complicated authorization processes and denying claims.
Caught with his hands in the cookie jar
MAP insurers, also known as Medicare Advantage Organizations (MAOs), routinely deny millions of medical claims each year. A 2022 report from the U.S. Department of Health and Human Services’ Office of Inspector General found that MAOs unfairly denied nearly 20% of eligible medical claims. Of the denials for medical services, the report found that 18 percent of them met Medicare coverage and MAO billing rules and should have been approved.
The Humana bomb
Health insurers are feeling the pinch from the Medicare Advantage plan population. Humana Inc. NYSE: MOOD dropped a bombshell in its fourth-quarter 2023 earnings report when it cited the unexpected increase in medical costs incurred by its Medicare Advantage patients in November and December 2023. Inpatient utilization costs skyrocketed in the fourth quarter .
Apparently, that was no fluke as Humana went on to dramatically lower its EPS forecasts for 2024 and 2025 by 50% and 70%, respectively. For full-year 2024, Humana’s adjusted EPS guidance was lowered to $16.00 from $29.14. For full-year 2025, Humana lowered its EPS guidance even more dramatically to the range of $6.00 to $10.00 from $37.00. While annual EPS has remained stagnant for the past three years, the drastic EPS cuts are shocking. This is staggering, considering they earned annual EPS of $25.31, $22.67, and $22.08 in 2020, 2021, and 2022, respectively.
The changing landscape
The health insurer Aetna, acquired by CVS Health Co. New York Stock Exchange: CVS in 2018 and insurer Centene Co. New York Stock Exchange: CNC have expressed concern about the proposed reduction in the Medicare Advantage base rate in 2025. This is supported by experts who argue that MAOs are being overpaid and is costing taxpayers billions.
Meena Seshamani, deputy administrator of the Centers for Medicare and Medicaid Services, commented that the proposals aim to make “Medicare Advantage less susceptible to gambling and protect the long-term stability of the Medicare program.” Insurers are willing to reduce benefits and shift the cost burden to patients. Medicare will release its fee schedule in April 2024.
Cigna abandons Medicare Advantage altogether
The Cigna Group NYSE:CI recently announced the sale of its Medicare Advantage business for $3.7 billion to Health Care Services Co. Perhaps they saw the writing on the wall and made the prudent decision to jump ship. However, Medicare Advantage represents only 4.4% of revenues in 2022. The deal is expected to close in the first quarter of 2025.
Will the other shoe drop?
Since Humana is the second largest Medicare Advantage insurer in the United States, logic would dictate that the largest Medicare Advantage insurer, UnitedHealth Group Inc. NYSE: UNH, it must also be influenced. However, that doesn’t seem to be the case, but they reported before Humana. This raises the question of whether Humana is the only loser with Medicare Advantage or just ahead of lowering its forecast, and UnitedHealthcare investors can expect the other shoe to drop.
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Better managed or simply behind the curve?
UnitedHealth Group reported its earnings on January 12, 2024, before Humana released the bombshell news on January 25, 2024. UnitedHealth Group noted rising costs in the fourth quarter of 2023 as its medical care ratio (MCR) increased by 220 basis points to 85%, which is the percentage of premiums used to pay claims. Full-year 2023 saw an increase up to 83.2% compared to 82% for full-year 2022. UnitedHealth didn’t seem overly concerned about rising costs. In fact, management said the company expects to add 450,000 to 500,000 Medicare Advantage plan members in 2024.
Management says it is still well positioned in the business heading into 2025 and 2026. UnitedHealth’s full-year 2023 adjusted net earnings were $25.12. Unlike Humana, UnitedHealth grew its annual EPS from $17.23 in 2020 to $18.08 in 2021 to $21.18 in 2022 and $25.12 in 2023. Analysts still expect adjusted EPS for 2024 between $27.84 and $28.18 in 2024.
Andrew Witty, CEO of UnitedHealth Group, commented: “Despite changing care models and the commensurate pressure felt during ’23, we were able to both deliver on our growth commitments and invest in and prepare for a funding round BUT reduced over the next three years.”
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