Health insurers are ending the year on a sour note, with several headwinds ranging from Congress’ attempt to rein in costs to declining profits due to increased use of benefits.
The combination of several factors has made 2024 more difficult than previous years and suggests an uncertain start to 2025.
“Managed care stocks have significantly underperformed in 2024 (-20% vs. +27% S&P), facing unprecedented policy, reimbursement and utilization headwinds alongside more recent oversight of the sector. key variable,” Morgan Stanley analysts wrote in a note to clients this month.
Earlier this year, health insurers began seeing declining profits from Medicare Advantage, the popular Medicare plan administered by commercial insurers, as more seniors began seeking care after delaying during the pandemic. This has Humana particularly impacted (HUM), which sees about 30% of its insurance revenues in this market, as is the case with other major players, including Aetna (CVS).
Medicare Advantage plans offer benefits that aren’t available with traditional Medicare, such as gym memberships, and insurers have been able to leverage the system to get larger reimbursements for the seniors they cover through compared to traditional Medicare. Recent studies have shown that Medicare pays about $300 more per person enrolled in an Advantage plan compared to traditional Medicare.
Despite this, major insurers came under pressure throughout the year as increased usage meant they lost more premiums and fewer profits. In fact, some insurers reduce commissions for brokerswhich would discourage greater schooling.
The amount insurers spend on healthcare can be tracked by the medical loss ratio (MLR) – or the share of premiums paid compared to the amount collected. This figure is also far from ideal for the sector this year.
Big players saw this increase throughout the year. Humana, for example, saw its MLR climb to 88% in fiscal 2023, up from 86.6% in 2022. Year-to-date in 2024, that number has risen to 89.2%.
The Affordable Care Act required insurers to pay between 80% and 85% of all claims, and insurers and investors want numbers at the lower end of that range. But almost all insurers have had high MLRs since the end of 2023.
CVS, for example, reported an MLR of 95.2% in the third quarter of 2024 for the nine months through September, compared to 85.7% during the same period a year ago.
HONG KONG, CHINA – 2024/06/23: In this photo illustration the logo of American multinational managed healthcare and insurance company UnitedHealth Group (NYSE: UNH) is seen displayed on a smartphone along with an index chart economic stock market in the background. (Photo illustration by Budrul Chukrut/SOPA Images/LightRocket via Getty Images) ·SOPA images via Getty Images
Over the past decade, since the Affordable Care Act took effect in 2014, health insurance revenue has skyrocketed as more people have been covered by insurance, paying premiums as well as federal grants. But the profits do not have has increased so drastically – particularly in recent years, and despite efforts to reduce costs, including claim denials.
Yahoo Finance reviewed financial reports dating back to 2013 and found that UnitedHealth Group reported revenue of $372 billion last year, up from $123 billion in 2013. The profit margin reported last year was by 6%, compared to 4.6% in 2013. Likewise, Elevance (ELV) reported $170 billion in revenue last year and a 5% margin, up from $70 billion in revenue in 2013 with a 5.7% margin.
The data shows that even with outsized revenue growth, the cost of managing each new member’s healthcare costs has kept margins largely stable – with minimal increases and decreases over the years.
Wendell Potter, a Cigna alumnus (CI), vice president of communications, told Yahoo Finance that “the commercial insurance industry is just not growing, it’s been stagnant for some time.”
UnitedHealth has had more problems this year than some other insurers — with a cyberattack earlier this year ending with the tragic loss of its insurance chief. Additionally, the Federal Trade Commission and Congress have sought ways to break up the industry giant and its various verticals, including the largest owner of medical practices and pharmaceutical benefits.
These incidents also weighed more broadly on the sector and prepared the industry for an uncertain 2025.
“We think UNH is attractive here in the long term, but it will take time to recover. The forecast is conservative, though, so at least management has set the bar low for next year,” he said. writes Mizuho healthcare expert Jared Holz in a note to clients this month.
But UnitedHealth Group’s stock action has had an overall effect on the sector.
“The outlook around the UNH situation further compounds the situation and affects how dedicated healthcare investors and more general fund managers look at the stock/peer group,” Holz said.
This is why, in addition to the constant pressures specific to the industry, a new Trump administration – with the threat of drastic changes to the ACA, but support for Medicare Advantage – will impact industry performance in 2025.
Anjalee Khemlani is the senior healthcare reporter at Yahoo Finance, covering all things pharmaceutical, insurance, healthcare, digital health, PBMs, and healthcare politics and policy. This of course includes GLP-1. Follow Anjalee on social media platforms X (Twitter), LinkedIn Bluesky @AnjKhem.
