Humana plunge intensifies on medical-cost warning

Updated at 9:45 AM EST

Humana (HUM) - Get Free Report shares extended their recent collapse Thursday after the health insurance giant warned that a surge in medical costs would hammer industry profits over the next two years.

Humana, which warned earlier this month that a spike in demand for elective and nonemergency medical procedures following the covid pandemic would add to its underlying costs, doubled down on its concern following a dismal fourth-quarter-earnings report.

Related: Humana plunges on major health insurance warning; UnitedHealth, CVS tumble

Health-insurance groups are seeing payouts to policyholders surge as more Americans, typically those in retirement age, find the time and space for elective surgeries in hospitals that were previously overwhelmed by covid patients.

That's added significant pressure to the medical-cost ratios of the industry's biggest companies, including UnitedHealth Group, CVS Health (CVS) - Get Free Report and Cigna. The ratio, a key profitability metric, isolates an insurer's payouts against the premiums it collects.

Humana said its benefit-expense ratio rose more than 3 percentage points, to 90.7% over the 2023 fourth quarter compared with the year-earlier period. It also was up more than 3 percentage points from third-quarter 2023 levels.

Humana shares have been underwater for much of the past three months.

The group noted "elevated Medicare Advantage utilization trends," which it said were "further increased in 4Q23, driven by higher than anticipated inpatient utilization, primarily for the months of November and December, as well as a further increase in noninpatient trends, predominantly in the categories of physician, outpatient surgeries and supplemental benefits."

Humana's adjusted fourth-quarter loss was 11 cents a share, compared with Wall Street forecasts of a 15-cent profit, while revenue rose 20.8% to $25.73 billion.

As for 2024, things aren't looking much better, with Humana forecasting adjusted profit of $22 to $26 a share, well shy of the LSEG forecast of $34.50.

Humana shares were marked 11.8% lower in early Thursday trading to change hands at $355.24 each, a move that would extend the stock's three-month decline to around 31%.

UnitedHealth shares, a Dow component, slumped 4.5% to $489.82 while CVS Health fell 3.6% to $71.55 each.

Earlier this month, UnitedHealth (UNH) - Get Free Report said its medical-cost ratio was 85%, up from 82.8% in the year-earlier period. Overall premiums rose 13.2% to $73.23 billion and operating costs were up 14.3% to $86.74 billion.

That offset a stronger-than-expected set of fourth-quarter earnings, which included record revenue of $92.4 billion and a bottom line of $6.16 per share.

Humana-Cigna talks scrapped

Humana had earlier looked to mitigate medical-cost pressures late last year when it unveiled merger talks with Cigna (CI) - Get Free Report.

The talks were scrapped, however, amid concern that the Federal Trade Commission, which has taken a far more active role in challenging megamergers under the leadership of Chairwoman Lina Khan, would block the proposed $120-plus billion tieup.

More Health Care:

Johnson & Johnson updates 2024 forecast after solid Q4 report Health-insurer stocks pay price as more people seek elective care Top health scientist warns of the major risks facing shift workers

The FTC is also continuing a probe into the three largest pharmacy-benefit managers – CVS's Caremark, Cigna's Express Scripts and UnitedHealth's OptumRx – and has warned the group of likely changes to the industry's broader regulation.

"As drug prices have soared and independent pharmacies have shuttered, scrutinizing the practices of [pharmacy-benefit managers] is more critical than ever," the FTC said in a statement on July 20.

"The FTC is now pursuing an inquiry into the PBM industry, one that is designed to capture and detail the current realities on the ground in this complex marketplace," the statement added.

Related: Veteran fund manager picks favorite stocks for 2024