Medicare Advantage insurers’ long-term profit margins will decline to a floor of 3% amid a tightening regulatory environment and slowing demographic growth, Humana executives said during the company’s first-quarter earnings call Wednesday.
The 3% margin assumption represents a departure from the high single-digit profit margins Medicare Advantage insurers have recently reported, which are generally even higher if carriers – like Humana – own providers to which they can refer patients. Humana operates a chain of primary care clinics and home health services through its CenterWell division. The company last year reported a net profit margin of 2.6% across its insurance segment, which includes its Medicare, Medicaid, commercial and other insurance lines.
Related: Humana eyes $700M cuts amid $541M loss
Humana anticipates flat Medicare Advantage profit margins for this year, outgoing CEO Bruce Broussard said during the call. The insurer announced a $700 million cost-cutting plan in late 2023 in response to a surprise jump in Medicare Advantage medical expenses.
"We believe the industry will adjust to the current funding and regulatory environment over time and normalize at an appropriate margin of at least 3%," Broussard said. "We remain committed to profit recovery and margin growth through multiyear pricing actions."
Humana reported a medical loss ratio of 88.9% in the first quarter, higher than 85.5% reported in the prior-year quarter. The metric represents medical costs as a percentage of premium revenue. Inpatient and outpatient medical expenses improved from the fourth quarter of 2023, although there is a lag in provider outpatient claims submissions because of the Change Healthcare cyberattack, Chief Financial Officer Susan Diamond said during the call.
Humana’s net income dropped 40.2% to $741 million, or $6.11 per share, from $1.2 billion reported during the first quarter last year. Revenue rose 10.7% to $29.6 million. The carrier's stock opened at $336.40 per share on the New York Stock Exchange, up 2.6% from Tuesday’s close.
The company reaffirmed its adjusted earnings guidance of $16 per share for 2024 but withdrew its growth projections for next year, with executives citing a marginal decline in the Medicare Advantage base rate. Humana previously aimed for $6 to $10 of adjusted earnings per share growth for 2025 and did not provide updated assumptions. The insurer also anticipates a $150 million revenue headwind this year because of Congress authorizing a slight boost to physician pay.
Humana and other Medicare Advantage insurers will need to cut benefits and plans in response to core reimbursement rates from the Centers for Medicare and Medicaid Services that do not cover medical costs, incoming CEO Jim Rechtin reiterated during the call. Rechtin will take over as CEO in the second half of the year.
“There will be a continued need to drive efficiency on the operating side and to get stronger medical cost management over time,” Rechtin said. “We expect by the end of the year to have more to say on where the exact opportunities are, and how we intend to go after them.”
The insurer reported total membership of 16.2 million, down nearly 1 million from the 17.1 million it reported during the same time last year as it exited its commercial book of business. The company boosted its net Medicare Advantage membership growth for the year by 50,000 to 150,000 because of higher than anticipated sign-ups during open enrollment.
Humana anticipates its Medicare Advantage membership to decline next year because of market exits, Diamond said. Margin recovery is “likely going to take a bit longer than the two years we had hoped previously,” she said.
