Humana Inc. has issued a dire forecast for 2024, citing a substantial escalation in medical costs that far exceeds analyst expectations. This development is a clear indicator of the mounting pressures facing the broader insurance industry, particularly in the wake of the COVID-19 pandemic.
Humana, predominantly serving government-backed insurance through the Medicare Advantage program, has projected adjusted earnings of about $16 per share for the year 2024. This figure starkly contrasts with the $29.10 per share anticipated by analysts, as per LSEG data, formerly known as Refinitiv.
The root of Humana's challenges lies in the surge of medical expenses. An increasing number of older adults, who had deferred procedures such as joint and hip replacements during the pandemic, are now flocking to hospitals, significantly driving up costs. This trend was unexpectedly high in the final months of 2023, leading Humana to forecast higher ongoing expenses, potentially extending into 2024 and beyond.
Humana's bleak outlook has triggered a ripple effect, causing a downturn in other health insurance stocks. Shares of industry giants like UnitedHealth and CVS Health, alongside others such as Cigna and Centene, have all experienced notable declines.
The situation has raised eyebrows on Wall Street, leading to a reassessment of profit expectations for health insurance companies. Humana's forecast, confirmed in a recent earnings call, noted a medical benefit ratio of 90.7% for the fourth quarter, surpassing analysts' estimates of 89.7%. This ratio, indicating the percentage of premiums paid out in claims, reflects the higher-than-anticipated medical costs incurred by the company.
While some insurers, like Elevance Health, have managed to keep medical costs in check, Humana's announcement underscores a broader industry challenge. This challenge is not limited to Humana but is reflective of an "industry dynamic," as described by Humana leaders in a statement on Thursday. They anticipate that these increased costs may persist for an extended period, or could even permanently reset the cost baseline for the industry.
The impact of these soaring costs is not just confined to Humana's bottom line but also casts a shadow over the entire health insurance sector. UnitedHealth Group Inc., another major player in the Medicare Advantage space, has also grappled with similar cost hikes. However, unlike Humana, UnitedHealth's leaders have expressed confidence that these rising costs won't significantly impact their 2024 expectations.
This stark difference in outlook between the two industry giants has led analysts to reassess their projections. Jefferies analyst David Windley expressed surprise at Humana's low forecast, noting that even a conservative estimate didn't anticipate such a drastic drop in earnings.
Humana's announcement has thus stirred a sense of uncertainty and caution in the health insurance market. As shares plummet and investors reassess their positions, the industry braces for what might be a turbulent period ahead, marked by elevated medical costs and challenging profit margins. The situation highlights the intricate balance health insurers must maintain between managing costs and ensuring affordable, quality care for their customers, a balance that will be tested in the months to come.
