Health insurer laments about a recent string of bad Medicare Advantage news might give some people the idea that these companies are in trouble.
Surprisingly high medical spending last year combined with a series of unfavorable policies from the Centers for Medicare and Medicaid Services, including a proposal to slightly reduce the benchmark payment rate next year, compelled top Medicare Advantage carriers such as UnitedHealth Group, Humana and Aetna to warn investors that earnings may not meet previous projections. Threats of higher premiums and slimmer benefits followed.
Related: Rising Medicare Advantage costs squeeze providers, insurers, tech
The bleak picture some health insurance companies have painted, and the way Wall Street reacted, may create an impression that the Medicare Advantage party is over after enriching the industry for decades or that the sector is in dire straits.
Not so, said Paul Ginsburg, senior fellow at the University of Southern California Schaeffer Center for Health Policy and Economics. "We're not talking about any risk to the financial integrity of these companies at all,” he said.
“The Medicare Advantage business is very viable long-term because they're providing something that more and more Medicare beneficiaries are deciding they want,” Ginsburg said. “Will it be as great for the next few years as it has been? Probably not. It'll still be very good, though.”
AM Best projects that health insurance company market capitalizations will rise this year even as profits from Medicare and Medicaid "return to more normal levels," the credit rating agency wrote in a report published Thursday.
"The strong earnings reported over the past few years have contributed to the U.S. health insurance industry’s capital strength," AM Best wrote. "Capitalization should remain strong, with another favorable year of capital expansion expected." AM Best predicts Medicare Advantage carriers will raise premiums to counter higher medical spending.
To be sure, some big health insurance companies endured high medical costs in 2023. Medical loss ratios for UnitedHealth Group's UnitedHealthcare subsidiary, Humana and CVS Health subsidiary Aetna were up last year, chiefly because of Medicare Advantage costs.
UnitedHealth Group
But these companies are not all the same. Take Medicare Advantage market leader UnitedHealth Group.
UnitedHealth Group was the first publicly traded insurance company to report fourth-quarter and full-year earnings for 2023 and the first to suffer a hit to its share price when it acknowledged its Medicare Advantage operations weren't as profitable as projected.
While subject to the same Medicare Advantage pressures as rivals such as Humana, Aetna, Elevance Health, Centene and Molina Healthcare, the conglomerate has grown beyond health insurance and can rely on other lucrative lines of business to offset underperformance in other areas.
“Their ability to derive earnings from so many sources really just makes the importance of any one segment much less important,” said Dean Ungar, a vice president at Moody’s Investors Service. "But then, because of their scale and market power, they actually do better even in the pressured segments."
In health insurance alone, the UnitedHealthcare subsidiary is successful in employer health benefits, individual plans, Medicaid and other markets. The company's Optum subsidiary includes one of the largest pharmacy benefit managers, OptumRx, and provides healthcare services as the largest employer of physicians in the U.S.
Optum generated nearly half of UnitedHealth Group’s $32.4 billion earnings from operations last year. The subsidiary's revenue grew 24% to $226.6 billion and its operating profit increased 13.4% to $15.9 billion.
UnitedHealth Group, Humana and Aetna were the largest Medicare Advantage carriers in 2022, with respective market shares of 28%, 18% and 11%, according to a report the American Medical Association published in December.
Even companies more heavily invested in Medicare Advantage and more exposed to short-term financial and regulatory trends aren't exactly in crisis.
“We view this as sort of a temporary hurdle to deal with and some companies will just be affected more by it than others,” said Brad Ellis, senior director at Fitch Ratings.
Humana
Humana is going through a rough patch, having reported higher fourth-quarter losses and initiated a $700 million cost-cutting campaign in January. But Humana was still profitable in 2023 and projects higher profits this year and next.
Last year, Humana increased its reliance on Medicare Advantage when it pulled out of the commercial insurance market, which generated $4 billion in 2022. At the same time, though, Humana built up its CenterWell healthcare services operations. CenterWell revenue increased 6.3% to $18.4 billion and operating income rose 8.8% to $1.4 billion in 2023.
And Humana's commitment to Medicare Advantage also has a significant upside because the company has vast experience attracting and serving beneficiaries.
“There’s value in diversification as well as value in understanding the Medicare Advantage customer in terms of bidding, sales and marketing, interacting with brokers, and working with providers,” said Joshua Weisbrod, managing partner of Americas healthcare and life sciences practice at Bain & Co.
