Investors have flocked to publicly traded health insurers, as evidenced by soaring stocks so far in 2015. Although optimism runs high in the managed-care sector, signs have emerged that medical costs are on the rise and could dampen earnings.
The most prominent sign came Wednesday from HCA, the nation's largest for-profit hospital operator by revenue. The company said its inpatient, outpatient and emergency room admissions were all up significantly in the first quarter this year, an announcement that immediately brought down the stock prices of every large payer.
Health insurers have enjoyed tepid medical-loss ratios during the past several quarters. For example, UnitedHealth Group, the largest health insurer in the country, said in January that its medical-loss ratio in 2014 was 80.9%, down from 81.5% in 2013.
Medical-loss ratios show the percentage of premium dollars that are spent on medical care. Low MLRs indicate patients are not going to hospitals and doctors as frequently and mean insurers don't have to pay out as much in medical claims. That allows them to keep more in profit. The Affordable Care Act, however, set minimum thresholds for medical-loss ratios, requiring them to be at least 80% for health plans in individual and small-group markets and 85% for large-group plans.
UnitedHealth is the bellwether for health insurers and will report earnings Thursday morning. Most financial pundits believe investor-owned insurers will post solid first-quarter earnings. But some such as Scott Fidel, a health insurer analyst at Deutsche Bank, realize that “external data show some heat” coming down on those comfortable health-spending ratios.
The Altarum Institute's Center for Sustainable Health Spending estimates spending on hospital care jumped 9% from February 2014 to February 2015. That's a “giant” increase, said Paul Hughes-Cromwick, a senior health economist at the Altarum Institute. If that's the case, insurers had to fork over more payments to hospitals and health systems this past quarter, which could eat away at their bottom lines.
Deutsche Bank's hospital volume tracker also “showed inpatient hospital discharges trending higher over the past three months in commercial, Medicare and Medicaid,” Fidel said in a research note Wednesday.
HCA's preliminary first-quarter earnings showed same-hospital admissions grew 5.1%, compared with analysts' expectations of 1.4%. Same-facility emergency room visits increased 11.5% from the same quarter of 2014.
Sheryl Skolnick, a managing director at Mizuho Securities USA who tracks UnitedHealth and HCA, said she hasn't seen that kind of inpatient volume growth in the hospital sector in the past decade. “It is not unprecedented, but it is highly unusual,” Skolnick said.
HCA's figures are one isolated instance of the latest medical-cost trends, and HCA gave no details about the geographic regions where volumes were up the most or what specialties drove the growth. But when coupled with other economic indicators—such as lower unemployment, higher spending on hospitals and prescription drugs, and more people having and using their health coverage—the news could cool off the extremely bullish expectations in the health insurance industry.
“It is hard for us to see how with these type of volume numbers from HCA, overall healthcare utilization did not increase” during the first quarter, Fidel said in the research note. “As a result, we do see the HCA pre-announcement as a cautionary data point for managed care.”
Potentially higher medical claims in the first quarter have not prompted insurers to lower financial expectations, and some such as UnitedHealth have stood by their predictions for 2015.
“The commentary from United coming out of the fourth quarter was, 'Your estimates are too low.' They have not backed off that,” Skolnick said.
And Hughes-Cromwick added: “Reserves seem to be very high, and I'm pretty certain there's some give before (insurers) would see a big hit to profitability.”
The average stock price of publicly traded health insurers has increased about 20% so far in 2015, greatly outpacing the broader S&P 500 index, which is up 2.5% this year.