1706261783 Humana39s Dire Forecast Shows Private Medicare Boom Is Coming to

Humana's Dire Forecast Shows Private Medicare Boom Is Coming to an End

(Bloomberg) — Humana Inc.'s results showed that private Medicare plans that have driven years of growth for U.S. health insurers are less profitable and may be costing seniors more money, sending stocks across the sector lower.

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Humana, the second-largest Medicare Advantage company, struck a somber tone as it raised its 2025 profit forecast and forecast 2024 profits that fell short of analysts' most pessimistic forecasts. Shares fell as much as 15% in New York, the most intraday reading since June.

As medical costs rise, Humana must raise prices and cut benefits to shore up profit margins, executives said in a conference call Thursday, and they expect competitors to do the same. If that happens, it could spell the end of the Medicare Advantage health insurer boom.

“The entire industry may be reassessing its plans for next year,” outgoing Chief Executive Bruce Broussard said in a conference call. “I don’t know how the industry will cope with this increase in utilization combined with the regulatory changes that will continue into 2025 and 2026.”

Humana now expects adjusted earnings of about $16 per share in 2024, according to a statement Thursday. That would return earnings per share to levels not seen since 2018, shocking some analysts.

“We didn’t think $16 was possible,” Jefferies analyst David Windley wrote in a research note. From this level, Humana plans to grow between $6 and $10 per share through 2025.

Humana39s Dire Forecast Shows Private Medicare Boom Is Coming toHumana39s Dire Forecast Shows Private Medicare Boom Is Coming to

Rivals have offered different explanations for the rise in medical costs, adding to uncertainty in the beleaguered sector. UnitedHealth Group Inc., the largest seller of Medicare Advantage plans, told investors on Jan. 12 that higher costs late last year were seasonal and would not last into 2024. Elevance Health Inc., a smaller Medicare provider, said this week it had set a price to cover rising costs.

The story goes on

Nevertheless, Humana's forecast weighed on the sector. UnitedHealth fell as much as 6.6%, Cigna Group fell as much as 4.3%, CVS Health Corp. up to 5.4% and Centene Corp. by up to 4.9%.

Worse than feared

More than half of seniors in the United States who receive Medicare now receive 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 rising medical spending.

The U.S. proposed new tariffs and other changes last year to limit the way insurers are paid. The government has also finalized plans to repay previous overpayments, a policy that Humana is challenging in court. These changes come with an increase in costs as some patients return to treatment they had put off during the pandemic.

Photos of the Humana Fit, Fun and Forever Week activities taking place as part of the 2014 Humana Challenge at the La Quinta Senior Center in La Quinta, California.  (Rodrigo Pena/AP Images for Humana)Photos of the Humana Fit, Fun and Forever Week activities taking place as part of the 2014 Humana Challenge at the La Quinta Senior Center in La Quinta, California.  (Rodrigo Pena/AP Images for Humana)

More than half of seniors in the United States who receive Medicare now receive their benefits through private plans. (Rodrigo Pena/AP Images for Humana) ((Rodrigo Pena/AP Images for Humana))

The changes to government billing will be phased in over three years from 2024, meaning pressure on the company is increasing. The US is expected to announce its first rate update for 2025 Medicare Advantage plans in the coming weeks.

Humana's 2024 outlook assumes that higher medical costs that occurred in the fourth quarter will continue throughout the year. It's a “great reset of expectations” for the Medicare Advantage segment, RBC Capital Markets analyst Ben Hendrix wrote in a research note.

Humana executives said Thursday they expect to remain focused on Medicare. The company was reportedly in talks with Cigna late last year to build a larger, more diversified company, but the talks quickly fell apart.

“We believe the greatest value for shareholders today is to be a specialty provider in the fastest-growing part of the industry,” Broussard said.

Long term questions

As recently as November 1, Humana reiterated its 2025 profit target of $37 per share. But those expectations quickly dissipated, even as the risks to Medicare Advantage through 2023 became clearer.

Rising cost trends prevailed as insurers set prices for 2024 plans, and Humana told investors it was taking their “first appearance” into account when pricing them. Medical spending rose above what the company expected at the end of 2023, as Humana cited higher inpatient stays, doctor visits and outpatient surgeries.

The company faces years of adjustments to return to the earnings trajectory that investors had bet on. Humana executives, including Chief Operating Officer Jim Rechtin, who will take over as CEO later this year, expressed optimism about the company's long-term prospects.

Lisa Gill, an analyst at JPMorgan Securities, wrote that it is difficult to imagine Humana returning to its long-term valuation level, the level at which the stock trades relative to earnings. Until Humana overcomes the difficult period ahead, “we believe investors could focus more on slowing demographic trends as growth in the over-65 market is expected to slow in the second half of the 2020s.” “, she wrote.

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