Humana plunges on major health care cost warning; UnitedHealth, CVS tumble

Humana (HUM) - Get Free Report shares tumbled in early Thursday trading, dragging rival health insurers firmly into the red, after warning that higher medical costs would eat into its near-term profit.

A big spike in demand for elective and nonemergency medical procedures following the worst of the Covid pandemic, first highlighted by UnitedHealth (UNH) - Get Free Report last spring, has led to significant cost increases for the country's biggest health insurance providers.

Related: UnitedHealth slumps as higher medical costs cloud Optum performance

That's added to pressures on the medical-cost ratio – a key metric of profitability – for not only UnitedHealth but for rivals such as Humana and CVS Health (CVS) - Get Free Report, which owns Aetna, as larger portions of collected premiums are paid out on insurance claims.

Humana, in fact, sought to mitigate those pressures late last year when it unveiled merger talks with Cigna Group (CI) - Get Free Report, noting that the group "continued to experience an increase in covid admissions in the third quarter."

Americans are opting for more elective surgeries in the post-covid era, significantly increasing health insurers' costs.Getty Images

The talks were ultimately scrapped, however, amid concern that the Federal Trade Commission, which has taken a far more active role in challenging megamergers under the leadership of Lina Khan, would block the proposed $10 billion tie-up.

Humana warns on costs

Humana, which is set to report fourth-quarter earnings next week, told investors Thursday that higher medical payouts would not only clip its end-of-year profit but also its overall bottom line in 2024.

Humana's third-quarter benefit-expense ratio, which tracks payouts on claims against collected premiums, rose more than a percentage point from a year earlier to 86.4%. It likely surged to around 91.4% over the final three months of last year, the company said.

"Actual fourth-quarter results reflect an additional increase in Medicare Advantage medical-cost trends, driven by higher than anticipated inpatient utilization, primarily for the months of November and December," Human said in a Securities and Exchange Commission filing.

"A further increase in noninpatient trends, predominantly in the categories of physician, outpatient surgeries and supplemental benefits, (also) emerged with the November and December paid claims data."

Humana shares were marked 14.6% lower in premarket trading to indicate an opening bell price of $382.52 each. UnitedHealth shares, a Dow component, slumped 4.2% to $503.00 while CVS Health fell 5.3% to $72.92 each.

Last week, UnitedHealth said its medical-cost ratio was 85%, up from 82.8% over 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.

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FTC probes pharmacy-benefit managers

The FTC is also continuing is 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 mangers] 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.

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