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Doing business with the government is not all it is cracked up to be.
Just ask the US health insurers. For years, the sector enjoyed record sales and profits. Ageing baby boomers meant a surge in enrolment in Medicare, the government-sponsored insurance programme for the elderly. The introduction of the Affordable Care Act in 2010, which expanded Medicaid coverage for low-income families and individuals with disabilities, brought an influx of new business.
The gold rush is over. Shares in Medicare- and Medicaid-focused insurers such as UnitedHealth Group, Humana, Centene, Elevance and Molina Healthcare have been battered this year amid changes to how the government administers these programmes. The Biden administration has lowered payment rates for private Medicare plans, just as medical costs for seniors have spiked. On the Medicaid front, states are cutting enrollees that were added into the programme during Covid, causing a sudden drop in members. A shake-out looms.
One of the biggest losers is Aetna, CVS’s health insurance division. The unit made a big bet on Medicare, aggressively expanding. Operating income for the division was down about 50 per cent in the first half, year on year, attracting the attention of an activist hedge fund.
Last week, the company abruptly ousted its chief executive as it warned that third-quarter results would fall well below expectations amid mounting costs at Aetna. Its medical benefit ratio — a gauge of how much of the premiums an insurer collects is paid out to medical providers — is expected to come in at 95.2 per cent for the third quarter, up from 85.7 per cent a year ago.
Those woes will echo across the sector. Humana, the only large US health insurer focused almost exclusively on Medicare, has lost about half of its market value this year. Its troubles have been exacerbated by a cut to crucial Medicare quality ratings, which are linked to billions of dollars in revenue. The drop in its value has stirred talk of renewed takeover interest from Cigna. The latter has benefited thanks to its relatively small exposure to government-funded plans.
Even industry leader UnitedHealth cautioned last week that the mismatch between reimbursement rates and higher than expected medical expenses would pressure their earnings. Centene and Molina may do the same when they report earnings.
Long term, the trends remain in insurers’ favour. Annual spending on Medicare and Medicaid are projected to reach nearly $2.9tn by 2030, compared with $1.7tn in 2022. Health insurers could claw back profits by raising premiums, withdrawing coverage or cutting back on some benefits. But that would take time and face push back from regulators. The health insurance sector has volatile times ahead.
pan.yuk@ft.com
