Photo credit: www.cnbc.com
UnitedHealth Group experienced a significant drop in its stock value, plummeting by 20% on Thursday after it revised its annual profit expectations downward, attributing the change to unexpectedly high medical costs associated with its privately managed Medicare plans.
This stark announcement from a prominent figure in the health insurance sector could serve as a red flag for other companies offering Medicare Advantage plans, as suggested by several analysts on Wall Street. The news follows a challenging year for health insurers, characterized by reduced government funding, escalating medical expenses, and public outcry in the wake of the tragic death of UnitedHealthcare’s former CEO, Brian Thompson.
As the largest provider of Medicare Advantage plans in the United States, UnitedHealthcare witnessed its share prices drop, prompting a decline in competitors; Humana saw a decrease of 5%, while Elevance Health and CVS faced drops of over 1% and 2%, respectively. Notably, Cigna, which does not have a Medicare Advantage division, saw its stock rise by nearly 1% on the same day.
The first-quarter performance report from UnitedHealth highlighted potential “ominous signs” of rising medical costs within the Medicare Advantage segment, according to analyst Ryan Langston from TD Cowen. He pointed out that UnitedHealth had previously indicated an increase in medical expenses back in 2023, indicating that this latest development could cast doubt on the annual forecasts for all insurers in the sector.
The insurance industry as a whole has contended with higher medical costs over the last year, primarily as an increasing number of seniors resumed hospital visits for previously postponed procedures, such as joint surgeries that were delayed during the COVID-19 pandemic. However, UnitedHealthcare had not previously indicated that it faced significant challenges.
According to Barclays analyst Andrew Mok, companies like Humana and CVS, which have exited several Medicare Advantage markets, might not be as heavily impacted by the troubles facing UnitedHealth. Many insurers opted to withdraw from unprofitable Medicare Advantage markets last year, influenced by rising medical expenses and dwindling federal reimbursement rates.
In contrast, companies that have expanded their presence in the Medicare Advantage arena, such as Elevance Health and Alignment Health, may face more considerable repercussions from the current situation.
UnitedHealth reported that usage of medical care within its Medicare Advantage business exceeded their planned increases for the year. CEO Andrew Witty indicated that the actual care activity had surged “at twice” the expected rate, especially in outpatient services and consultations that do not require overnight hospital stays.
Lance Wilkes, a senior equity analyst at Bernstein, remarked on CNBC’s “Squawk Box” that the rise in service utilization was unexpected following the high level of activity health providers had sustained in the past year. He noted that UnitedHealth and the broader healthcare sector might be reconsidering how they manage utilization rates, potentially causing dissatisfaction among patients due to practices like prior authorization, which requires providers to obtain pre-approval for specific treatments.
Wilkes speculated that these adjustments could be influenced by the recent scrutiny of UnitedHealth, including the tragic event surrounding Brian Thompson and the ongoing investigations by the Department of Justice into the company’s Medicare billing practices.
Additionally, UnitedHealth acknowledged challenges related to the evolving patient demographics within its Optum healthcare sector, which encompasses its pharmacy benefit manager tasked with negotiating drug rebates and managing drug formularies.
Witty expressed optimism, stating that the company is implementing strategies to rectify the challenges it faces and views both the Optum-related issues and heightened medical expenses as manageable going forward, particularly with an eye on 2026.
In a more positive development, insurers are expected to benefit next year from an increase in reimbursement rates for Medicare Advantage plans announced by the Trump administration in April, which revised an earlier proposal from the Biden administration to provide substantial financial boosts for these insurers.
Source
www.cnbc.com