Humana Inc. stunned Wall Street Wednesday by significantly lowering its 2023 earnings forecast, warning investors that a spike in healthcare utilization has led to higher-than-expected medical costs towards the end of 2022.
The health insurance giant said it now expects adjusted earnings per share (EPS) of $25.00 to $25.50 for 2023, down from its previous guidance of $27.85 to $28.35 issued just two months ago in November.
Medical Costs Soar in Fourth Quarter
The Louisville, Kentucky-based company said medical costs came in nearly 9% higher than projected in the fourth quarter amid a rise in doctor visits, hospital admissions and prescription drug use. This represents a sharp increase from the third quarter, when utilization was running just 1-2% above expectations.
Humana attributed the surge to a confluence of factors, including:
- A severe flu season that is sapping healthcare resources
- The expiration of public health emergency provisions that had kept utilization artificially low
- Pent-up demand for elective surgeries deferred during the pandemic
- Worsened behavioral health conditions like depression and substance abuse
“Quite candidly, the visibility into sequential deterioration of utilization and medical cost trend between the third and fourth quarter was lower than it should have been,” said Humana CEO Bruce Broussard on a conference call with analysts.
Humana CFO Susan Diamond warned not only that medical costs will remain elevated in the first half of 2023 amid high flu hospitalizations, but said the company expects “a multi-year journey” before healthcare utilization normalizes to historical levels.
Rivals Feel the Sting
The startling guidance slash sent Humana shares plunging over 10% to $441.58 on Wednesday, their lowest level since 2021. The sell-off also dragged down other major health insurers like UnitedHealth and CVS Health amid fears the entire sector could take a hit from runaway medical inflation.
| Company | Stock Price Change |
|---|---|
| Humana | -10.5% |
| UnitedHealth | -4.3% |
| CVS Health | -5.9% |
“This is a warning sign for the entire managed care industry,” said Barclays analyst Steve Valiquette. “Investors are concerned that other insurers could preannounce negative updates to their 2023 bottom lines as well.”
JPMorgan analyst Gary Taylor downgraded Humana shares to ‘Neutral’ from ‘Overweight,’ saying “the situation appears more serious than a simple guidance cut.” Even after today’s plunge, Taylor believes Humana stock could still trade sideways or move lower in the near-term.
Bracing For Tougher Regulatory Headwinds
The shock earnings warning also comes at a delicate time politically for the health insurance sector. Medicare Advantage plans like Humana are already under heightened scrutiny from regulators about allegations of improper billing and overstated health risk scores to obtain higher payments from the government.
With Democrats now in control of both Congress and the White House in 2024, managed care stocks face renewed calls for pricing reforms that could limit profits.
“It’s unfortunate Humana had to cut numbers right as the new administration is vowing to crack down on [Medicare Advantage] and drug pricing – it fans the political flames,” said Jefferies analyst David Windley. “Investors need to price in a tougher outlook for government payors.”
While Humana still sees Medicare Advantage membership growing by 150,000-200,000 members in 2023, executives warned COVID-era tailwinds that helped drive enrollment gains are slowing. CFO Diamond also noted newer members added during the public health emergency are proving “less profitable” on average.
“The days of breezing through double-digit bottom line growth are over,” said Windley. “Hospitals were given a blank check the past few years and are making up for lost revenue – now insurers have to foot the bill.”
What’s Next For Humana
With medical trends showing no signs of reversing in the near-term, analysts broadly expect it will take significant cost control efforts for Humana to deliver earnings growth in 2023.
As CEO Broussard explained, that includes tightening provider contracts, prior authorization requirements, and boosting care management programs to keep members healthier and out of expensive care settings.
However, more extreme measures could also be on the table – including scaling back sales and marketing expenses for Medicare Advantage or narrowing provider networks to exclude costlier hospital systems.
“Managing medical costs is priority one, two and three for the C-Suite,” said Bank of America analyst Kevin Fischbeck. “They will throw everything but the kitchen sink to right-size spending after this guidance shocker.”
For long-term investors, analysts say Humana still offers an attractive play on America’s aging demographic profile. But with medical cost uncertainty now clouding 2023 projections, most agree it could require patience for Humana’s growth story to shine through again.
“This is a reset year,” said Fischbeck. “The train came off the tracks for a quarter or two – now Humana gets back to proving why it’s one of the best [insurers] at what they do.”
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