Despite increased sales, most large insurers saw profits from offering health insurance plans shrink in the third quarter as pressure from government programs continued into the second half of the year.
With Medicare Advantage, seniors still use more medical care than their insurance companies anticipated when pricing the plan. And in Medicaid, payers say states' payment rates remain well below the cost of caring for beneficiaries in safety-net programs.
These forces have banded together to attack insurance companies, bashing some, particularly CVS-owned Aetna and Humana, and bashing others. Aetna was particularly affected, posting a significant decline in operating income year over year.
Health insurance offerings saw an overall decline in profits in the third quarter
Changes in insurance segment third quarter operating profit (2023 to 2024)
Only two insurance companies, Cigna and Molina, reported year-over-year increases in insurance operating profits. That's because Cigna has most of its members in commercial insurance plans, which protects payers from the headwinds of government plans. Molina attributes this to risk corridors absorbing the worst of unexpected cost trends and rate updates from Medicaid states.
But overall, the medical loss ratio, a key measure of spending on patient care, increased by 3.3 percentage points year over year when averaged across seven major publicly traded insurers. That's a big leap. Again, Aetna has seen the most dramatic changes, with management warning investors that MLR could rise further from 95.2% this quarter to 95.5% in Q4. I did.
The percentage of premiums spent on health insurance claims has skyrocketed over the past year
Insurance company MLR from Q3 2023 (left) to Q4 2024
Medicaid peak heart rate and severity discrepancy
Insurers that contract with states to manage care for Medicaid recipients blamed a deep mismatch between payment rates and member interest levels for the quarter's revenue squeeze.
The disparity is a side effect of states reaffirming the eligibility of beneficiaries of safety-net programs, a process known as rollback or mitigation. redetermination — which left more than 25 million Americans out of coverage. Those individuals who remain are more likely to become ill, resulting in higher costs for payers.
Payers have warned that they are concerned about this trend since the rollback began last spring. However, as the redetermination phase winds down, the gap between interest rates and urgency widens, overtaking MA as insurers' biggest concern in the second quarter. And third, an interesting dichotomy emerged in payer comments regarding cost increases.
Elevance, the second-largest Medicaid managed care organization with contracts with more than 20 states, said Medicaid cost trends are three to five times higher than historical averages.
That would mean an upward trend of 9% to 20%, and Leerink analyst Whit Mayo said Elevance's Medicaid margin would likely fall to near 0% in the quarter. . elegance The company has revised its profit forecast for 2024 downwards based on the company's performance.
But Molina, which has Medicaid contracts with 18 states, said cost trends have remained at about 6%, compared with the 3% originally expected. Although it is still increasing, it is significantly smaller than what Elevance pointed out.
Analysts said the conflicting explanations were confusing, but could be explained by differences in the size and timing of interest rate updates in each state, as well as differences in each state's easing status. Molina and Elevance can also have different internal metrics to assess trends.
In any case, insurers agreed that costs are rising and are likely to continue rising. Centene, the largest U.S. Medicaid payer, said third-quarter MLR should be the “highest level” of the year, while Humana said current health care spending levels are a new normal for insurers. said.
Insurers also agreed that state rates remain inadequate, but assured investors that the spread between rates should stabilize as states continue to adjust rates.
Medicare Advantage headwinds
On Medicare Advantage, insurers' positions heading into next year suggest it will become increasingly difficult to profit from privatized Medicare plans.
The rise in utilization is expected to continue into next year, while the Biden administration is reining in reimbursements and upcoding and setting higher standards for reaching valuable star ratings. Payers believe that significant changes in benefit design and plan geography should improve their positioning and result in fewer, but more profitable, MA seniors.
This is clear when looking at the insurance plans offered by major insurance companies when enrolling annually in 2025, with fewer additional benefits overall and higher deductibles and co-payments for the elderly (however, insurance premiums is relatively stable).
On January 1, 7% of current MA enrollees are expected to lose coverage due to plan termination, according to an analysis of CMS data by Medicare Market Insights. Insurers are also trying to lure members away from less lucrative plans by refusing to pay brokerage fees to help seniors sign up for insurance.
But with former President Donald Trump's recent return to the nation's highest office, payers also have reason to be optimistic.
Despite uncertainty about the incoming Republican's healthcare priorities in his second term, President Trump is widely expected to be more friendly to the MA industry than the current administration. Managed care stocks reacted positively to last week's election results.
Morgan Stanley analysts wrote in a note earlier this month that “the Trump administration appears to make Medicare Advantage participants more friendly to the program following unfavorable interest rate notices and revisions to onerous risk models. I expect him to do well down there.”
It is noteworthy that many of the largest insurance companies in the United States have evolved into large medical conglomerates with revenue sources other than providing medical insurance. UnitedHealth and Cigna both operate large medical services divisions, which helped offset some of the worst profit losses from the insurance division and boosted overall results. Both UnitedHealth and Cigna increased their consolidated operating profits compared to the same period last year.
CVS also operates a major medical services and retail pharmacy business, but its performance wasn't enough to offset the insurance headwinds. CVS' consolidated operating profit decreased by 77% compared to the same period last year.
