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Martin Baccardax

Humana tumbles, UnitedHealth and CVS slide on Medicare Advantage hit

Humana  (HUM)  shares fell sharply in early Tuesday trading, while rivals UnitedHealth UNH and CVS Health  (CVS)  traded firmly in the red, as the health insurance industry received yet another blow to its 2024 profit forecasts. 

All three major health insurance groups have trailed the broader market this year, with Humana down nearly 25%, amid concern that profit margins will be hit by a surge in medical costs tied to a rise in elective procedures. Those procedures had been delayed by the covid pandemic. 

UnitedHealth's medical-cost ratio, a key industry metric, rose nearly 3 percentage points, to 85%, over the final three months of last year, suggesting that a larger portion of its collected premiums were paid out on insurance claims.

Humana said its benefit-expense ratio rose more than 3 percentage points, to 90.7% over the 2023 fourth quarter compared with the year-earlier period. It also was up more than 3 percentage points from third-quarter 2023 levels.

President Joe Biden has vowed to protect Medicare and strengthen the program's ability to negotiate with big drug and health insurance companies. 

The group noted "elevated Medicare Advantage utilization trends," which it said "further increased in 4Q23, driven by higher-than-anticipated inpatient utilization, primarily for the months of November and December, as well as a further increase in noninpatient trends, predominantly in the categories of physician, outpatient surgeries and supplemental benefits."

Humana health cost warning

Humana in fact sought to mitigate those pressures late last year when it unveiled merger talks with Cigna Group  (CI) , noting that the group "continued to experience an increase in covid admissions in the third quarter." 

The talks were ultimately scrapped, however, amid concern that the Federal Trade Commission, which has taken a far more active role in challenging megamergers under the leadership of Chairwoman Lina Khan, would block the proposed $120-plus billion tie-up.

Related: UnitedHealth hit by antitrust probe and ransomware hacker report

The FTC is also continuing its probe into the three largest pharmacy-benefit managers – CVS's Caremark, Cigna's Express Scripts and UnitedHealth's OptumRx – and has warned the group of likely changes to the industry's broader regulation.

Medicare Advantage payouts flat

Further pressure was added to profit margins Tuesday when the U.S. Centers for Medicare & Medicaid Services said Medicare Advantage payments would rise only by an average of 3.7% next year.

Analysts were looking for an increase of around 4.7%, based on the CMS's January proposal of 3.7% following increases of around 1.22% each year between 2019 and 2024 to preliminary CMS figures. 

The payments, which reimburse insurers for treatment of U.S. patients over age 65, will be effectively lower than current levels when adjusted for costs and inflation.  

More Health Care:

"We see Humana as most-exposed both from its 84% revenue exposure to Medicare Advantage, and on sentiment given its challenging turnaround of the Medicare book," said Cantor Fitzgerald analyst Sarah James. 

"We would also flag CVS as more exposed on sentiment than the 17% revenue exposure would imply, particularly given the outsized investor focus on 2024 Medicare Advantage margins and 2025 bid strategy for the company," she added.

Humana shares were marked 14.4% lower in early Tuesday trading to change hands at $300.91 each, the lowest in four years and a move that extends the stock's 2024 slum to around 36%

CVS shares slumped 8.5% to $72.78 each while UnitedHealth was marked 6.8% lower at $456.50 each.

Related: Veteran fund manager picks favorite stocks for 2024

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