Dive Brief:
Actions taken by Humana to weather tumult in the Medicare Advantage program appear to be bearing fruit. On Wednesday, the insurer reported better-than-anticipated third quarter results and modestly increased its 2024 earnings guidance after retaining more MA seniors than expected — and those members having higher risk scores, boosting reimbursement.
Humana now expects to add 265,000 individual MA members this year, representing 5% growth, compared to its previous guidance of 225,000 new MA members.
Despite the stronger membership, Humana doesn’t expect earnings growth in 2025 because of heavy investments the insurer plans to make to boost its MA stars — valuable quality ratings linked to plans’ revenue in the privatized Medicare program.
Dive Insight:
Humana, the second-largest MA payer in the country, has been slammed by higher costs in MA as seniors continued to utilize more medical care than expected. The trend has pressured once-comfortable margins in the program, leading Humana to slash its earnings guidance multiple times this year and sending its stock plummeting.
The value of Humana’s stock has almost halved over the past 12 months
$HUM price at close, Oct. 30, 2023 to date
Humana has hustled to change the story, paring back its MA offerings for next year and exiting poorly performing markets entirely.
The cuts should decrease the insurer’s membership base but leave remaining members more profitable — and now, any losses will be subtracted from a larger total than Humana previously expected.
However, the insurer still expects to lose a few hundred thousand members next year.
Humana’s membership growth started slowly after the annual enrollment period, or AEP, last fall, but the insurer has made “pretty significant gains” over this year, especially from investing in internal sales, CEO Jim Rechtin told investors on a Wednesday morning call.
As a result, Humana bumped its adjusted earnings-per-share expectations for 2024 from “approximately” $16 to “at least” $16.
“Exactly where we land is largely dependent on a number of investment decisions in AEP and in stars that we continue to evaluate,” Rechtin said.
Despite the progress, Humana expects 2025 earnings to be in line with results this year. Since the Kentucky-based insurer has committed to margin improvement in MA, including reaching a 3% margin target by 2027, the flat outlook is “somewhat disappointing,” Leerink Partners analyst Whit Mayo wrote in a note Wednesday.
Earnings next year will be depressed by new investments Humana wants to make in its business that Rechtin defended as necessary for the insurer’s long-term success.
Humana also plans to target investments toward profitable membership growth, managing medical costs and streamlining administration.
“Our intent is to balance long-term earnings potential with near-term earnings progression. We need to balance those. All in all, we’re not going to do things that harm the business long-term to work our way through a short-term issue,” the CEO told investors.
Humana is reeling from a steep drop in its star ratings for 2025, which could cause the payer to lose billions of dollars in revenue. The insurer plans to invest to improve measures like patient and provider engagement, Rechtin said. Humana is also suing the government in a bid to overturn the results.
Rechtin allowed that Humana will also need to make meaningful improvements to star ratings to reach its 3% MA margin target by 2027.
Though Humana declined to provide an exact sum, analysts estimate investments could be to the tune of $500 million to $700 million.
In the third quarter, medical expenses generally came in where Humana expected, with lower inpatient costs balancing out higher costs outside of the hospital. CFO Susan Diamond called out specialty drug spending in areas like oncology as particularly elevated.
Humana was also affected by a mismatch in the cost of Medicaid beneficiaries’ care and state payment rates in the quarter.
The disparity is a side effect of states rechecking beneficiaries’ eligibility for the safety-net program — a process known as unwinding or redeterminations — that’s removed tens of millions of Americans from the coverage. Individuals who remain are more likely to be sick, saddling payers with higher costs.
In third-quarter earnings calls, Medicaid insurers have assuaged investors that most states are bumping their rates, including off-cycle. The disparity isn’t affecting all payers equally — Elevance, for example, lowered its 2024 profit guidance as a result, while Medicaid-heavy insurers Centene and Molina were able to keep it from affecting their bottom lines.
Higher medical costs drove Humana’s insurance segment to post a medical loss ratio of 90.6% in the quarter, up from 87.6% same time last year.
Meanwhile, Humana’s primary care business, called CenterWell, continues to exceed expectations, management said. Humana has focused on growing the business — quietly closing an acquisition of Dallas-based home health and hospice provider Intrepid in the quarter — and sees opportunities for additional M&A, management said.
Humana expects to operate roughly 340 CenterWell locations by the end of the year.
Overall, Humana posted revenue of $29.4 billion in the quarter, up more than 11% year over year.
Still, the insurer’s net income of $480 million is almost half of Humana’s $832 million profit at the same time last year.
