Rising medical costs are hitting health insurer stocks lately but these diversified companies should … [+]
Rising medical costs are hitting health insurer stocks lately but these diversified companies should be just fine.
Heading into earnings season when companies like UnitedHealth Group, Elevance Health, Cigna, Centene, Humana and CVS Health, the parent of Aetna, report their second quarter profits, some are seeing some not so familiar headwinds: rising medical costs and the loss of customers.
Throughout the Covid-19 pandemic, many health insurers reported record profits in part because Americans weren’t using the system as much as before the 2020 lockdowns. When people don’t go to the doctor, a claim isn’t filed with the health plan so the insurance company makes more money.
What’s more, the U.S. public health emergency kept record numbers of people covered by not kicking anyone off Medicaid while Congress and the Biden administration increased and expanded subsidies so more Americans to afford individual Obamacare coverage under the Affordable Care Act.
These trends helped most health insurers achieve record profits. UnitedHealth Group, for example, earned net income of $20.6 billion in 2022 after making $17.3 billion in 2021 and $15.4 billion in 2020. Before the pandemic UnitedHealth made $13.8 billion in 2019. The company, which operates the health insurer UnitedHealthcare and the medical care provider services business Optum, is on pace to make more this year than last. UnitedHealth, which made $5.6 billion in the first quarter of this year, reports second quarter earnings on July 14.
But things are beginning to change now, which some see as a threat to health insurance company bottom lines the insurer’s have been familiar with given the end in May of the U.S. public health emergency that boosted the number of Americans covered when Medicaid redetermination temporarily ended three years ago. Medicaid redetermination, also described as Medicaid renewal or Medicaid recertification, is essentially when people are asked to show they are qualified for such coverage.
Some states are beginning the Medicaid redetermination process as part of the U.S. public health emergency ends, but the process could take several months to a year or longer. The process is expected to impact health insurers like Centene that have a significant business administering Medicaid coverage for states.
But analysts believe health insurers have what it takes to weather the storm of higher costs from increased health system usage and the introduction of more expensive drugs.
“U.S. health insurers have adequate ratings headroom to withstand the mounting cost pressures driven by growing drug shortages, rising pharmaceutical and other input costs as well as higher utilization,” Fitch Ratings said in a report last month. “The structural advantages afforded to health insurers within the broader healthcare system, business model diversification and stable key financial metrics are key drivers supporting credit profiles.”
To be sure, CVS and UnitedHealth, in particular, have been gobbling up providers of medical care, spending billions of dollars to grow their health services and networks of doctors and outpatient care operations. This should increase revenue to these large healthcare conglomerates on the medical care provider side of the business even as expenses rise on the insurance side of the business.
Health insurers also have an advantage of higher rate increases they’ve already requested from their clients, including employers and governments. And some analysts think the federal government’s rate increase for Medicare Advantage plans is enough to help these insurers weather any increase in costs for that growing business.
“Humana is raising 2023 MLR guidance to the high-end of the range due to elevated utilization,” Mizuho Americas analyst Ann Hynes said last month about Humana’s medical-loss ratio, which measures medical costs of health insurers. “(Humana) is reiterating 2023E adjusted EPS guidance, but the MLR headwind will likely limit upside going forward. Importantly, Humana stated that the elevated utilization was contemplated in 2024 Medicare Advantage bids submitted earlier this month, which should relieve some investor fears.”