Health insurance giant Humana Inc. plunged over 11% on Thursday after the company reported disappointing fourth quarter financial results and issued a grim profit forecast for 2024. Humana blamed higher-than-expected healthcare utilization and medical costs for the downgrade.
Q4 Results Miss Estimates Amid Surging Medical Costs
Humana posted a loss of $541 million in Q4 2022, a sharp decline from earnings of $1.62 per share a year ago. Analysts were expecting earnings of $1.46 per share. Revenue rose 6.6% to $22.44 billion but fell short of estimates.
The losses were driven by Humana’s Medicare Advantage business which reported a 54% jump in medical costs in the latter half of 2022 compared to projections. Humana said more seniors sought elective surgeries and other deferred care in 2022, driving utilization above historical trends.
“The demand for healthcare services in the second half of last year far exceeded anything we have seen historically,” said Humana CEO Bruce Broussard.
Humana shares plunged 18% in pre-market trading on the dismal results and outlook. The stock is on track for its lowest close since January 2022. Other health insurers like UnitedHealth and CVS Health also sank on concerns higher medical costs will eat into profits.
2024 Profit Outlook Slashed By Over 50%
Alongside the weak fourth quarter results, Humana slashed its 2024 earnings per share guidance range to $25-$27 from the previous outlook of $55-$60 per share issued last December.
The drastic reduction indicates Humana expects the current surge in healthcare utilization and medical costs to persist throughout 2024. Management says medical cost trends are still elevated coming into early 2024 with no clear signs of abating.
Deutsche Bank downgraded Humana shares after the disappointing forecast, stating: “It is going to be a bad year, or more, for the Medicare business.” Many analysts reduced price targets given the challenging road ahead.
Humana Explains Why Medical Costs Have Skyrocketed
Humana management outlined several key factors driving medical costs drastically higher, shocking analysts and investors:
- Surge in elective procedures: Seniors who postponed care during COVID came flooding back for hip, knee, and other elective surgeries in 2022. Humana says hip and knee replacements jumped 25% last year.
- Expensive new therapies: Pricey breakthrough gene and cell therapies as well as high-cost prescription drugs boosted medical spending.
- Labor costs: Staff shortages led to wage inflation for nurses, doctors and healthcare workers. Humana also cited higher administrative costs managing Medicare Advantage plans.
- CHRONIC conditions: Ongoing pandemic lockdowns exacerbated chronic illnesses like diabetes and heart disease, requiring more intensive treatment.
- Flu impact: Humana stated this year’s severe flu season increased hospitalizations beyond historical averages.
“All of the trends in healthcare right now are going in the wrong direction from a cost perspective,” stated Humana CFO Susan Diamond. “We have not seen any evidence these factors driving costs higher will abate materially in 2024.”
Humana’s Response To Soaring Costs
Humana states it is taking actions to mitigate losses from higher medical spending, including:
- Tightening authorization criteria for elective procedures
- Steering members towards lower-cost care settings
- Renegotiating contracts with providers
- Adjusting drug formularies to favor lower-cost therapies
- Offering digital chronic disease management tools
However, Humana expects these initiatives will only have a “modest offsetting impact” on overall medical cost trends in 2024.
Impact On Other Health Insurers
Humana’s warned that the surge in medical costs will be an industry-wide issue in 2024, causing shares in other major health insurers to sink. UnitedHealth, the largest Medicare Advantage provider, fell 4%. Many insurers may face pressure to raise premiums in 2025 to offset losses.
Humana’s results also dragged down overall stocks in the healthcare sector. The S&P 500 Managed Health Care index plunged nearly 6% as analysts warned the issues plaguing Humana will likely impact peers.
With over 28 million enrollees, Humana’s disappointing forecast indicates trouble ahead for private insurers focused on government-funded Medicare Advantage plans. Some analysts speculate enrollment in the plans could decline if premium hikes outpace Social Security cost-of-living adjustments.
“If medical cost trends continue rising faster than reimbursement from the Center for Medicare and Medicaid Services, that will pressure the entire managed care industry,” warned Mizuho analyst Ann Hynes.
What Happens Next
Humana stock is likely to remain under pressure in coming weeks until signs emerge of medical cost trends slowing. With the company forecasting ongoing losses in 2024, shares will struggle to regain the large losses posted on Thursday.
Many analysts see risks tilted to the downside if medical spending growth fails to moderate. Deutsche Bank warned “it is highly unlikely that 2024 consensus estimates reflect the reality of the Medicare Advantage growth environment”. Some analysts say a best-case scenario is Humana ekes out a minor profit in 2024.
For long-term investors, Humana noted its 2024 forecast assumes no changes to Medicare Advantage benchmark payment rates from the government. Significantly higher reimbursement would provide some buffer to offset rising medical costs.
Ultimately, Humana’s ability to steer seniors to lower-cost, high-quality care will determine if its Medicare business can navigate the challenging years ahead while remaining profitable. But in the near-term, all eyes will be on medical cost trends.
Key Quarterly Financial Metrics
Below is a table summarizing Humana’s fourth quarter 2023 financial results versus analyst estimates:
| Financial Metric | Actual | Estimate | Year-Ago |
|---|---|---|---|
| Adjusted EPS | ($3.29) loss | $1.46 profit | $1.62 profit |
| Revenue | $22.44 billion | $22.70 billion | $21.05 billion |
| Medical Cost Ratio | 88.7% | 86.5% estimate | 83.4% |
The higher than forecast medical cost ratio – the percentage of premium dollars spent on medical claims – indicates why Humana struggled with profitability despite growing revenue. Management will be tasked with bringing medical costs back in line to return Humana’s bottom line back into the black.
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