Humana Withdraws 2025 Earnings Outlook On Unsatisfactory MA Rates

Dive Brief:

• Humana has pulled its profit outlook for 2025, citing declining Medicare Advantage payment rates and other factors creating more uncertainty than normal.
• Previously, the insurer expected between $6 and $10 in adjusted earnings per share growth next year. The withdrawal followed the release of first-quarter financial results on Wednesday, wherein Humana beat Wall Street expectations for earnings and revenue with a topline of $29.6 billion, up 11% year over year. However, the payer’s net income fell to $741 million, down from $1.2 billion during the same time last year, due to a surge in medical expenses.
• Humana has already lowered its profit outlooks twice this year because of elevated spending. However, the insurer reiterated its full-year outlook for adjusted earnings on Wednesday. Overall, the results “could give investors some incremental confidence in the 2024 outlook,” wrote J.P. Morgan analyst Lisa Gill in a note.

Dive Insight:

Humana executives spent much of a Wednesday morning call regarding its first-quarter earnings trying to convince investors that the MA sector is sound, despite notable regulatory and medical spend pressures winnowing earnings growth.

“While the current environment will create disruption for the industry in the near term, we continue to believe in strong core fundamentals and growth outlook of the MA industry,” said CEO Bruce Broussard.

That disruption is spearheaded by new MA payment rates for 2025 released by the CMS earlier this month. Insurers have slammed the rates as a cut and insufficient to cover elevated medical spending, though regulators have pointed out they will still result in billions of dollars more going to insurers in the program next year.

MA payers are also struggling to control the dogged increase in medical spending that began last year as seniors sought out more care following the COVID-19 pandemic.

In the first quarter, Humana reported a medical loss ratio, a metric of how much in premiums a payer spends on the medical care of its members, of 88.9%. That’s compared to an MLR of 85.5% during the same time last year.

Humana noted the MLR, while high, is in line with expectations. It reflects elevated inpatient admissions in January and February, though those decelerated in March as the insurer adjusted to the effect of the two-midnight rule, according to CFO Susan Diamond. The rule requires payers to cover an inpatient admission if the patient is expected to require hospital care for at least two midnights.

Humana is seeing some positive early indicators of easing medical costs, but it’s too early to say for certain given limited visibility into claims at this point of the year, Diamond said.

The insurer also has less visibility than normal into claims patterns given disruption from the cyberattack on claims clearinghouse Change Healthcare earlier this year.

As a result, Humana has booked additional claims reserves to cover any unexpected delayed expenses, Diamond said. Other insurers, including Elevance and Change parent company UnitedHealth, have done the same.

“Our hope is that we will see that creates some conservatism, but we will see how that develops as all of these claims are received and processed,” Diamond said.

Still, as a result of the turbulence, Humana’s 2025 profit outlook is no longer an appropriate range, according to Broussard. The CEO noted the outlook is impacted by a number of variables that the payer won’t have clear visibility into until later this year, including how medical cost trends evolve, where it lands on MA bid pricing and how its MA competitors price their own bids.

Humana and its peers in MA have said they plan to focus on profits over growth in light of the challenges, whether cutting benefits, raising premiums or even exiting markets.

The insurer’s executives noted they’ll have to double down on those actions in light of the final MA rates.

“It will require larger benefit reductions to achieve stable margins,” Diamond told investors. “We’ve said all along we will be evaluating plan and county exits … and also look for opportunities within the bids to optimize benefit changes for further margin improvement.”

Humana now expects to bring in 50,000 more MA members this year than previously expected, bringing its total membership growth expectations to 150,000 seniors. That’s after seeing higher volume than expected in the open enrollment period in the quarter, especially among seniors newly aged into Medicare, according to Diamond.

Still, Humana expects its net membership to decline next year after it finishes its plan and county exits.