Humana (HUM) has had a rough start to 2024.
Shares of the insurance giant are trading near a four-year low after the company reported a surprise loss in the fourth quarter due to higher usage in its Medicare Advantage business. Humana said costs in this segment will remain elevated through the end of the year.
A surge in older patients seeking care last year tipped the balance between premiums and the cost of care for Humana, with delayed care and procedure volumes rising post-pandemic.
"The Medicare Advantage sector is navigating a complex and dynamic period of change as we are all working through significant regulatory changes while also absorbing unprecedented increases in medical cost trends," Humana CEO Bruce Broussard told analysts on a call this week.
"The increase in utilization that emerged late in the fourth quarter was a significant deviation from an already elevated level impacting the industry."
The company now expects adjusted earnings in 2024 to reach $16 per share, down from $26.09 in 2023. Humana's 2025 earnings forecast now stands at $22-$26 per share; as of November, the company had expected to earn $37 per share in 2025.
Following its earnings report on Thursday, Humana stock fell 12%. Earlier this month, shares fell 12% after pre-announcing these downbeat fourth quarter results. Over the last year, the stock is down nearly 28%; the S&P 500 has gained over 20% during this same period.
A surge in usage
Medicare Advantage has been a highly profitable market and criticized for realizing these profits at the expense of taxpayers.
Medicare Advantage was first created in 2003 through legislation. It is supposed to be a more efficient, and sometimes cheaper, alternative to supplemental Medicare plans, known as Medigap. Since 2003, established health insurers and startups alike have oscillated in and out of the market.
According to KFF data, 51% of eligible Medicare beneficiaries enrolled in a Medicare Advantage plan last year.
Changes in utilization rates, payments from the federal government, and changing demographics all contributed to Humana's woes in 2023.
Primarily, a rise in older patients seeking care resulted in higher-than-expected costs late last year. The company's benefits expense ratio, or medical loss ratio (MLR), hit 91.4% during the fourth quarter in its insurance segment. Analysts had expected this ratio to come in closer to 89.5% during Humana's fourth quarter. MLR is the share of premiums an insurer pays out toward care.
In the same quarter last year, Humana reported a benefits expense ratio of 87.4% for this segment.
The Affordable Care Act mandates that companies have an MLR of at least 80%-85% each year. Companies like to stay on the lower end of that range, but Humana expects it will stay in the 90% range for 2024.
Humana's biggest segment
UnitedHealth Group (UNH), which has the highest share of MA membership among all the market's major players, said it is adjusting to lower reimbursements from the Biden administration and is ready to manage the pressure of higher expenses.
"Despite the shift in care patterns and the commensurate pressure felt during '23, we have been able to both deliver on our growth commitments and invest and prepare for a reduced [Medicare Advantage] funding cycle over the next three years," said CEO Andrew Witty on the company's earnings call this month.
Humana ranks second among MA plans, with 18% of the total market. United, by comparison, has 29%, according to KFF data.
CVS (CVS), through Aetna, has 11%, and Centene (CNC) — once a Medicare Advantage giant — has just 4%. Cigna (CI) serves just 2% of the MA market.
But Humana's fortunes are far more tied to the Medicare Advantage business than that of its larger rivals.
Take UnitedHealth, for example, which brought in $113 billion in revenue from its Medicare & Retirement segment in 2022, counting for about 45% of the company's total annual revenue. Humana, for its part, saw 81% of its annual revenue come from its Medicare segment in 2022, and over 70% from individual enrollment in Medicare Advantage.
Humana has tried for the past several years to merge or be acquired.
It first attempted to merge with Aetna in 2015 before a Justice Department ruling in 2017 scuttled the proposal; Aetna later merged with CVS in 2018. More recently, Cigna had sought to acquire Humana before talks broke down.
The pressure Humana is facing is also similar to the story for Centene, which recently laid off workers and is expecting further negative impact from the changed star ratings criteria.
Silver tsunami fades
On the one hand, the pressure Humana and others in the Medicare Advantage market are facing could be short-lived as the whole industry reacts to the surge in usage seen in late 2023.
"I look at next year as a year that I think the whole industry will possibly reprice," Broussard told analysts last week. "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. And therefore, I look to the industry to have disciplined pricing as a result of this."
On the other hand, enrollment growth in Medicare Advantage plans going forward may not be as explosive as it once was, as demographic forces — or the "silver tsunami" — that once made this market boom fade.
As JPMorgan analysts wrote in a note this week: "By the time the industry has lapped [2023's] headwinds and HUM is positioned to return to a more balanced margin/membership profile, we think investors could be focusing more on slowing demographic trends, as growth in the 65+ market is expected to moderate from [high-single digits] to [mid-single digits] in the back half of the decade."
Data from the Census Bureau projects the US population 65 and older to grow from 56.1 million in 2020 to 73.1 million by the end of this decade. Next decade, however, the rate of growth among this demographic is expected to slow, with the Census Bureau projecting that 80.8 million Americans will be over 65 by 2040.
Anjalee Khemlani is the senior health reporter at Yahoo Finance, covering all things pharma, insurance, care services, digital health, PBMs, and health policy and politics. Follow Anjalee on all social media platforms @AnjKhem.