Runaway medical expenses are hurting the finances of Medicare Advantage plans, risk-bearing providers and digital health companies, leading investors and insurers to question their positions in the market.
Large insurers UnitedHealthcare, Humana and Aetna have begun to warn investors and regulators that higher-than-anticipated utilization in Medicare Advantage mean they may miss their financial targets for 2023 and that profitability may be squeezed this year.
These challenges have trickled down to value-based care providers and technology companies, particularly those that have banked their businesses on the private Medicare program. Primary care and physician enablement companies Agilon Health, Cano Health and CareMax in recent months told investors that higher Medicare Advantage costs are hurting their bottom lines.
The trend calls into question the future of the $403 billion Medicare Advantage market and could drive desperate companies to place themselves on the auction block, diversify beyond the program and intensify already-heated contract negotiations.
Outgoing Humana CEO Bruce Broussard told investors last Thursday that the second-largest Medicare Advantage carrier by membership remains open to acquisitions, but that he is confident about its focus on Medicare Advantage and its relationships with risk-bearing providers.
“With our providers that are taking risk, we do see a number of them having challenges as a result of this. To be honest with you, we’re going to probably see more,” Broussard said. “We have seen these challenges over the years. We don’t feel that’s a headwind for us.”
'They missed the mark'
Health insurers first called out the unexpected spike in Medicare Advantage enrollees scheduling orthopedic, cardiac and other outpatient procedures in June. Carriers and providers attribute the trend to pent-up demand from earlier in the COVID-19 pandemic and anticipate medical expenses will remain above pre-pandemic levels through 2024, although uncertainty abides regarding how long costs will grow, to what degree and for what services.
Insurers’ faulty assumptions will likely lead more value-based providers to report financial struggles because of high Medicare Advantage costs, said Rick Kes, senior healthcare industry analyst for the consulting company RSM.
“They missed the mark, and that's what happens,” Kes said. “The unique thing about risk-bearing providers is a claims expense might hit the insurer in Q4 of 2023 and the risk-bearing provider isn’t going to have the data to update their analysis until a couple of months later, at best.”
Lagging claims data made it hard for Agilon Health to realize its 2023 medical expenses were up until the year had already ended, CEO Steve Sell told investors Jan. 5. The same day, Agilon Health announced that Chief Financial Officer Timothy Bensley would retire once the company finds a successor.
“Our 2023 underperformance was largely driven by two issues: A forecast that failed to recognize these elevated cost trends and a data and analytics gap that led to our being late in both recognizing the magnitude and source of the utilization shifts,” Sell said. Agilon Health declined to make an executive available for an interview.
Agilon Health cut its financial projections for 2023 and 2024 because Medicare Advantage patients cost $90 million more in orthopedic and other procedures than anticipated.
Primary care chain CareMax, meanwhile, completed a reverse stock split Monday to raise its share price above the Nasdaq Stock Maret’s $1 listing minimum. The Miami-based company blamed its financial difficulties on Medicare Advantage members scheduling more surgeries and using over-the-counter flex cards more than anticipated, lags in claims data from insurers, and enrollment growth.
CareMax is renegotiating contracts with insurers to prioritize profitability, Chief Financial Officer Kevin Wirges said during the company’s third-quarter earnings call in October.
“Rapid growth in our Medicare Advantage book of business has created some near-term fluctuations,” Wirges said. “We are working closely with our health plan partners to ensure completeness and timeliness of data and, over time, we expect these efforts to translate into more predictable financial outcomes.”
Primary care rival Cano Health likewise announced a $100 million medical cost management program in November after its Medicare Advantage members recorded higher utilization and use of over-the-counter insurance benefits than anticipated.
CareMax and Miami-based Cano Health did not respond to interview requests.
After the gold rush
Unfavorable regulatory changes, medical costs and slowing population growth signal the end of what has been a decade-long gold rush in Medicare Advantage, said Gary Taylor, managing director and senior equity research analyst at TD Cowen. For instance, CMS proposed a modest cut to the benchmark rate for 2025, which is an improvement from last year but not enough to make up escalating costs, he said.
In response, insurers and providers will emphasize profitability over market share growth, reduce generous supplemental benefits and curtail expansions, Taylor said. Health insurance companies will also likely raise commercial premiums next year to make up for narrower, or negative, Medicare Advantage margins, he said.
“Everyone’s going to earn below their MA target margins in ‘24 and some companies will actually lose money in MA. I think that's going to be a very specific catalyst to see benefits cut and higher prioritization of margin versus enrollment for ‘25,” Taylor said.
Uncertainty about medical costs and regulations are dragging Medicare Advantage companies' stock prices down, which could make some of them attractive acquisition targets, Taylor said.
Health Care Service Corp., for example, offered $3.3 billion for Cigna's Medicare Advantage operations on Wednesday. That proposed deal could pave the way for Cigna to acquire Humana in a deal rumored for months but unconfirmed by both companies.
Cigna CEO David Cordani "has wanted to buy Humana for a decade, and now the asset is massively on sale, so it'd be logical to imagine you would reassess that,” Taylor said. “He's handicapped a little bit by the fact that he announced a stock repurchase and a focus on tuck-in acquisitions. But plausibly you could go to your board and shareholders and say, ‘Hey, the situation has changed. Humana's become much cheaper.'”
Cigna and Humana did not respond to interview requests.
Some providers are banking on rising patient demand for surgical and other services. HCA Healthcare, for example, announced a plan Tuesday to invest $2 billion in outpatient, emergency department and other facilities to meet growing needs. Medicare Advantage admissions increased roughly 10% in 2023, CEO Sam Hazen said during the Nashville, Tennessee-based health system's fourth-quarter earnings call on Jan. 4.
“Is there an acceleration in our [medical] trend? Yes,” Hazen said. “Obviously, there’s aging baby boomers in the mix there, number one. Number two, we think we’re taking out market share.”