Healthcare insurance giant Humana released its fourth quarter 2023 financial results on January 25th, projecting billions in losses for 2024 amid soaring medical costs that are squeezing the insurer’s bottom line. Humana’s stock plunged as much as 17% in pre-market trading following the earnings release.
Humana Posts $541 Million Loss in Q4 As Medical Costs Surge
Humana reported a net loss of $541 million, or $4.58 per share, in the fourth quarter ended Dec. 31, compared with net income of $246 million, or $1.93 a share, a year earlier. Excluding one-time items, Humana lost $1.62 a share.
The quarterly loss was driven by higher-than-expected growth in healthcare utilization and costs, especially among Medicare Advantage members. Total medical costs in the quarter jumped 33% year-over-year. Humana CEO Bruce Broussard stated:
“The intensity and frequency of services these members are using are greater than anticipated in our pricing assumptions for 2023.”
Humana’s revenue rose 6.6% to $22.44 billion from $21.05 billion a year ago, which fell short of analysts’ expectations of $22.5 billion. Membership grew 5.5% in Medicare Advantage plans and 7.6% in state-based Medicaid plans during 2023.
Humana Forecasts Up To $2 Billion Loss in 2024 As Costs Remain Elevated
Adding to investor worries, Humana issued full-year 2024 earnings guidance that was far below Wall Street’s projections. The insurer said it expects to post an adjusted loss per share between $1 and $3 next year, compared to analysts’ expectations for earnings per share of $31.
This implies Humana is anticipating losses between $440 million and $1.3 billion in 2024. The company blamed “a higher level of healthcare utilization and medical cost trends versus pricing assumptions.”
Humana Chief Financial Officer Susan Diamond explained on the earnings call:
“We have assumed elevated cost trends will persist throughout 2024 before moderating in 2025.”
The dismal forecast suggests insurers and government health programs like Medicare Advantage are struggling to keep up with post-pandemic demand for healthcare services and treatments that were postponed earlier in the crisis.
|| Financial Metric | Q4 2023 | Q4 2022 | Change |
|–|–|–|–|–|
| Revenue | $22.44 billion | $21.05 billion | +6.6% |
| Net Income | -$541 million | $246 million | -319% |
| Adjusted EPS | -$1.62 | $1.93 | -184% |
| Membership | ~17 million | ~16 million | +5.5% |
Table 1. Summary of Humana’s Q4 2023 earnings results.
Humana CEO Says “Pricing Has Not Kept Pace With Trends We Are Seeing”
In prepared remarks, CEO Bruce Broussard indicated the surge in demand has outpaced Humana’s ability to price insurance plans accordingly, stating:
“Pricing has not kept pace with trends we are seeing, which reinforces the uncertainty in targeting medical costs, especially in Medicare.”
Broussard noted utilization trends moderated in early 2022 as the pandemic waned before ramping up dramatically later in the year, catching the industry somewhat off-guard.
Humana has been viewed as a leader in Medicare Advantage plans. But the larger headwinds now facing the privatized government health program indicate the industry failed to predict how spending growth would accelerate as more seniors started accessing delayed care treatments.
Broussard admitted that current cost trends are “well in excess of industry pricing assumption levels over the past decade.”
Stock Cratered Over 12% This Week As Investors Bail on Humana’s Outlook
Humana’s share price plunged as much as 17% to $285 per share in Thursday’s pre-market session following the dismal earnings release. The stock cratered over 12% in the past week since reporting fourth-quarter financial results.
Most Wall Street analysts were shocked by the projection of up to $2 billion in losses next year. Morgan Stanley analyst Joshua Raskin called it an “extremely disappointing profit forecast for 2024.”
Humana also halted share repurchases, which can help boost stock prices. As medical claim costs eat further into margins, the insurer no longer has excess cash to allocate toward buybacks.
Several analysts downgraded Humana shares and / or reduced their price targets. Citigroup, Credit Suisse, Evercore ISI and Wells Fargo all downgraded the stock. Barclays cut its price target from $540 to $500 per share.
Broader Insurance Sector Falls In Tandem Over Cost Concerns
Other health insurance stocks also sank on Thursday amid worries higher medical costs will pressure the broader industry’s profitability.
Shares of UnitedHealth Group lost over 4% in early trading, while CVS Health was down approximately 2%. Centene and Cigna Corp stock also fell nearly 3%.
Humana’s warning suggests the insurance sector failed to accurately predict how utilization trends would snap back as COVID-19 recedes further. Medical cost growth appears back-loaded, potentially catching payers off guard due to an inability to properly price plans.
Many insurers were unable to sufficiently stockpile reserves during peak pandemic demand destruction. As seniors return to physicians’ offices and operating rooms, claims are now soaring above expectations.
Regulatory Risks Also Hang Over the Sector With Policy Headwinds
In addition to medical cost and utilization concerns, health insurers face multiple regulatory and political threats that add to the stock’s risk profile.
With the 2024 election cycle underway, more progressive “Medicare for All” proposals represent an existential danger for private payers. While still unlikely to pass in the near-term, these policies add to the sector’s uncertain future.
There are also pricing pressures in Medicare Advantage itself. As enrollment grows, the Biden Administration is closely scrutinizing plan reimbursement levels along with marketing and enrollment practices. Cuts to payments rates could further strain margins.
Taken together – an unfavorable policy backdrop, medical cost spikes and the sudden evaporation of pandemic-era financial tailwinds makes owning health insurer stocks riskier today. Humana’s guidance cut confirms the operating environment has rapidly shifted for the worse for industry players.
Outlook Remains Gloomy in Short Term But Costs May Moderate Later
In the wake of Humana’s disappointing results, insurance stocks broadly sold off amid fears of margin compression and earnings headwinds. Investors are justifiably shaken by the shocking $2 billion projected loss.
However, the surge in medical demand is likely not sustainable for multiple years. As the remaining pent-up demand is absorbed, usage growth should moderate even if not returning to pre-pandemic levels.
There also tends to be a lag between medical cost inflation spikes and the industry’s ability to accurately price plans on the exchanges. Pricing will eventually catch up to normalize payers’ loss ratios.
In the short run though, Humana and its insurance peers still face intense uncertainty and variability around utilization trends. More volatility around earnings and membership growth should be expected amid this shaky period.
While the worst is potentially priced into shares now, the bad news for health insurer margins could linger for several quarters. Risk-averse investors may choose to avoid this sector until cost trajectories stabilize.
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