Humana Inc. experienced a significant drop in stock value following the release of its fourth-quarter 2023 results, which revealed higher-than-anticipated costs associated with Medicare Advantage. Medicare Advantage refers to expanded versions of government-subsidized health plans aimed at seniors. The increased utilization of services led to elevated medical loss ratios, impacting managed care insurers throughout 2023.

Humana's earnings call on January 25 highlighted the unexpected rise in Medicare Advantage medical costs, which reached 91.4%, surpassing the 89% estimate by analysts. As a result, Humana's earnings per share (EPS) declined, causing its share price to plummet by 11.7%.

"The thought process is that seniors really were the last to return to care and to utilize their benefits in a post-COVID environment," explained Francesca Mannarino, an analyst from S&P Global Ratings. "Overall, the industry has mostly noted elevated utilization trends really seen in the outpatient setting; orthopedic and cardiac services and also usage of some supplemental benefits like dental and vision."

Although managed care insurers had observed increased utilization trends earlier in the year, the fourth quarter of 2023 surpassed expectations for companies like Humana and UnitedHealth Group Inc. Bruce Broussard, CEO of Humana, stated during the earnings call that the elevated costs were not related to COVID-19 or seasonal health issues like RSV. Rather, they were a result of a combination of unrelated outpatient and inpatient services.

Humana plans to treat the fourth-quarter elevated medical utilization as a new baseline and expects industrywide repricing of Medicare Advantage in 2024. However, it remains uncertain whether the elevated medical loss ratios and regulatory pressures faced by Humana will become a broader issue across the entire Medicare Advantage book.

"We think Medicare Advantage holistically still represents a strong growth opportunity for the sector, given the aging population and the bipartisan support that exists, but we do think because of all these headwinds that revenue might slow for 2024," said Mannarino.

Despite internal debate, Humana's decision to take a prudent approach in an uncertain environment may prove beneficial. J.P. Morgan analyst Lisa Gill wrote in a research note, "We are optimistic the company's conservative approach could be a source of upside to 2024 EPS and could imply a higher starting point for 2025."

Humana's spokesperson declined to comment on the company's stock value but referred to a statement regarding the medical loss ratio. The statement emphasized that the elevated Medicare Advantage medical costs are an industry dynamic and not specific to Humana.

Managed care stocks, in general, have experienced a decline since the beginning of the year. Humana's shares dropped by 24.4% from January 2 to January 25, while UnitedHealth's stock value declined by 8.5% during the same period. Elevance Health Inc. has remained relatively stable since the start of the year, with a 0.3% increase in its stock value. The Cigna Group and Centene Corp., which are yet to release their fourth-quarter 2023 results, have seen modest declines of 3.7% and 4.3%, respectively.

These performances of the five largest listed US managed care insurers contrast with the broader market. While the S&P 500 was up 3.19% during the same period, the S&P 500 Insurance index recorded a 5.21% increase.