Insurers brace for continued Medicare Advantage medical costs

Medicare Advantage medical costs dominated fourth-quarter discussions between health insurers and investors, after higher healthcare utilization popped up like weeds in some segments of each payers’ business.

Yet health insurers’ forecasts for how higher utilization will affect their performance in 2024 are night and day.

Some payers controlled medical costs more effectively than analysts expected, said rising spending shouldn’t affect their outlooks for this year or guided to a stronger 2024 than previously forecast. That group includes UnitedHealth, Centene, Elevance and Cigna.

However, Humana and CVS cut their 2024 earnings outlooks on the heels of last year’s results, and said they expect elevated medical costs to continue this year.

Humana’s outlook is especially grim: The Kentucky-based payer’s earnings expectations for 2024 came in about half as low as analysts had expected.

Even payers that emerged from 2023 with their financial outlooks unscathed said they plan to cut benefits or raise premiums this year. The plan redesigns are to protect margins in MA — a business that historically generates significant profits, but is facing challenges that threaten to kill the golden goose.

Why didn’t payers see medical costs coming?

MA plans have skyrocketed in popularity. More than half of Medicare seniors are currently signed up for the plans, attracted by benefits like lower monthly premiums and dental and vision coverage. An onslaught of marketing by insurers didn’t hurt, either, as payers jockey for members. Competition is fierce, as MA margins per enrollee can be twice as high as those in other types of plans.

Yet, more members are creating more problems for some insurers because of rising medical utilization. Starting in the second quarter last year, seniors sought out medical care they had delayed during the COVID-19 pandemic, hiking insurers’ spending.

For example, CVS added 800,000 MA enrollees for 2024, mostly nabbed from other payers after CVS aggressively expanded its benefits. But that’s coming back to haunt the Rhode Island-based insurer, which cut its earnings per share outlook for this year due to high medical costs.

There are a few potential explanations for what’s driving the elevated utilization, and why insurers might not have properly forecast the uptick in trend, according to J.P. Morgan analyst Lisa Gill.

Enrollees in MA tend to be healthier than those in traditional Medicare. But as more seniors join MA, the program’s risk population could be skewing sicker, Gill wrote in an early February research note. Insurers could have missed early warning signs of higher acuity as seniors avoided doctor’s offices during the pandemic.

Higher demand could have also existed earlier, but providers might not have been able to address it because of labor shortages that have now ameliorated, Gill said. Similarly, insurers could have added new MA enrollees with less diagnosis history relative to the rest of their population, resulting in lower visibility into their conditions.

Medical loss ratio is a useful metric for understanding how unexpectedly high utilization is affecting insurers.

Medical loss ratio, or MLR, is a percentage of how much in healthcare premiums insurers spend on clinical services and quality improvement. The higher the MLR, the less in premiums insurers are spending on administration or marketing — or retaining as profit. As such, insurers generally try to keep their MLRs low (though within regulatory bounds to avoid sanctions).

MLRs soared in payers’ Medicare businesses in the fourth quarter, as the utilization trends that emerged earlier in 2023 conflated with a typical seasonal rise in medical spending during the winter months.

Utilization inflation

Insurers chalked the increase in medical costs up to different drivers.

Seniors covered by UnitedHealth and Humana, which together hold almost half of the total MA market share, continued to seek outpatient care in droves in the fourth quarter, including procedures like orthopedic surgeries.

UnitedHealth’s members required more spending on seasonal diseases like the flu, COVID or respiratory virus RSV. Elevance, Centene and CVS also reported elevated outpatient care overall for things like elective procedures, along with higher spend on seasonal needs.

That wasn’t the case for Cigna — which had lower than expected spending on seasonal diseases — and Humana. Humana’s uptick in care was “not respiratory driven,” said CFO Susan Diamond on the payer’s fourth-quarter earnings call in January.

“We don’t have any clear indicators that it is something you can reasonably assume is seasonal,” Diamond said.

As for inpatient care, Centene and CVS didn’t report higher utilization of hospital services than expected. Elevance also didn’t say that inpatient trends were contributing to growing costs.

Yet, UnitedHealth and Humana warned investors about rising inpatient costs, which is concerning for insurers given hospital care is more expensive to cover. UnitedHealth blamed pricey COVID admissions, while Humana said it was seeing more short stays in hospitals across the board.

Humana’s Diamond said recent government regulations requiring MA payers to comply with coverage determinations in traditional Medicare could be a potential driver of the higher inpatient spend. The rule requires insurers to cover an inpatient admission if the patient is expected to require hospital care for at least two midnights.

Other insurers said they had planned for the so-called “two-midnight rule.”

On Feb. 6, Centene CFO Drew Asher told investors that the payer had factored the rule into its planning for 2024. Meanwhile, CVS CFO Tom Cowhey said one day later the company had adjusted internally in response to the rule.

Looking forward

The increase in utilization — combined with weaker payment rates, changes to MA quality ratings and a shifting risk adjustment model — have created an updraft for MLRs, especially for insurers with high exposure to MA like Humana and UnitedHealth.

The big question is how much of this utilization will carry over into this year, and whether payers have properly accounted for utilization changes in their plan designs.

Every major insurer besides Elevance expects to record a higher MLR in 2024 than in 2023. Though, the size of the growth ranges from a 0.8 percentage point increase for UnitedHealth to a 2.7 percentage point increase for Humana.

The outlier, Elevance, expects its MLR to remain flat.

Payers expect elevated utilization pressure to continue this year

MLR of major U.S. insurers, 2018 to 2024 (projected)

In response to the challenging financial environment, payers — even those that excelled in controlling medical costs last year — said they’ve been pulling back benefits, raising premiums or exiting underperforming markets to boost profitability.

That’s true for insurers that expect their MA membership to grow this year (UnitedHealth, CVS), and those that expect it to fall (Cigna) or stay flat (Elevance).

As a result, further growth could be curtailed as payers prioritize margins.

“We are first and foremost focused on recovering margin, and market share gains is a secondary consideration,” Brian Kane, who leads CVS’ health benefits division, told investors during its February earnings call.

“I look at next year as a year that I think the whole industry will possibly reprice. I don't know how the industry can take this kind of increase in utilization along with regulatory changes that will continue to persist in 2025 and 2026,” Humana CEO Bruce Broussard said on the payer’s earnings call.

Insurers said they could revise plans further in light of MA rates for 2025 that the government proposed midway through the earnings reporting season. The rates represent a renewed effort by regulators to rein in growing spending in Medicare.

Executives with Humana, Centene and CVS all said the payment changes are insufficient to cover cost trends. Humana and Centene said the rule would result in a 1.6% and 1.3% drop in rates, respectively. (That’s before risk scoring, which should result in an overall increase in reimbursement in 2025).

Insurers warned regulators that seniors could see their benefits reduced if they finalize the rates as proposed.

“We’ll just adjust the bids accordingly,” Asher said on Centene’s call. “The products may be a little less attractive for seniors from an industry standpoint if we don’t make a lot of progress on the final rates.”

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