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US managed care stocks dip as Medicare Advantage weighs on Q3 2023 earnings


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US managed care stocks dip as Medicare Advantage weighs on Q3 2023 earnings

Leading US managed care insurers have seen modest declines in stock values in the weeks since the start of the release of third-quarter earnings that indicated elevated medical costs.

The largest listed US health insurers saw their shares fall 1%-4% in recent weeks during an earnings season that was again dominated by Medicare Advantage cost concerns. This was in contrast to the wider market as the S&P 500 rose 1.17% during the same period and the S&P 500 US Insurance index gained 2.23%.

Analysts expected Medicare Advantage and its utilization rates to be a major focus of third-quarter earnings. Medicare Advantage is a more expansive version of government-subsidized insurance offered to those with certain disabilities or above the age of 65.

"Our insurance segment benefit ratio exceeded expectations by 40 basis points due to higher medical costs in our Medicare Advantage business," Humana Inc. CFO Susan Diamond said during the company's earnings call.

While most major US managed care insurers said utilization trends were in line with projections, they still exceeded figures from recent years when COVID-19 discouraged nonessential procedures.

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United sees elevated costs

UnitedHealth Group Inc., the first major US managed care insurer to release third-quarter earnings figures, set the tone for managed care insurers during its Oct. 13 call.

UnitedHealth was trading at $539.40 per share by close of trading Oct. 13 and closed at its lowest point since the release of its earnings Oct. 23, at $521.57. However, by close of trading Nov. 7, the insurer's stock price had risen to $537.83 per share, just a 0.76% decline from its Oct. 13 value.

The managed care giant revealed double-digit revenue growth, but the specter of heightened care concerns remained. CFO John Rex pointed to a rise in outpatient care for seniors, particularly in the orthopedic and cardiac procedure categories.

The elevated medical costs remain in UnitedHealth's expected range, said Rex, who affirmed that 2024 earnings per share growth would be in the 13%-16% range.

Despite issues with medical costs, UnitedHealth should be able to reach its EPS goal, according to a research note from J.P. Morgan analyst Lisa Gill.

"Over the last four years, UnitedHealth has reported adjusted EPS roughly 3% above the high-end of the initial range it provided at its investor day," Gill wrote. "This gives us incremental confidence 2024 adjusted EPS growth should be within UnitedHealth's long-term range."

Cigna Medicare Advantage sale rumors

Since Oct. 13, The Cigna Group has been among the managed care insurers to experience the sharpest decline in value, falling more than 3% to $295.03 from $305.09 per share by Nov. 7.

The insurer's value has also fallen since its Nov. 2 earnings call, when it traded at $318.89 per share at market close.

Cigna delivered the strongest, cleanest third quarter, according to a research note from Gill following the insurer's earnings call. Cigna's pharmacy benefits manager, Evernorth Health Inc., was a standout despite new contract headwinds, Gill wrote.

"We believe Evernorth momentum will continue to build in 2024 and we see potential incremental upside opportunity from higher biosimilar utilization, incremental programs around [diabetes and weight loss drugs] and weight management coupled with potential specialty conversion from the [Centene] contract," Gill wrote.

However, according to a report from Reuters, Cigna is evaluating options for its Medicare Advantage business, including a potential sale that could bring in several billion dollars.

Humana sees sharpest drop

Humana saw the sharpest drop in value immediately following its third-quarter earnings call, during which President and CEO Bruce Broussard acknowledged "modest higher-than-anticipated" Medicare Advantage costs.

Since UnitedHealth's Oct. 13 earnings call kicked off the managed care earnings season, Humana's stock value has fallen 1.54%, hitting $498.18 per share by close of trading Nov. 7.

Humana saw a pre-earnings release bump and was trading at $523.69 per share Oct. 31, but its stock dropped following its Nov. 1 earnings call. The insurer hit its lowest Nov. 3 when it traded at $477.01 per share, an 8.91% decline from Oct. 31.

The insurer's EPS is expected to be at the low end of its 11%-15% range due to higher-than-expected utilization, which is expected to continue into 2024, Gill wrote. Despite the utilization tailwind, Gill rated the company "neutral," pointing in part to Humana's CenterWell primary care business, which reported better-than-expected patient volume and revenue along with lower-than-anticipated utilization.

Elevance Health Inc. and Centene Corp. also posted modest drops in stock values, falling 0.41% and 0.97%, respectively, from Oct. 13 through Nov. 7. Similar to the other major US managed care insurers, both companies experienced declines in stock value following earnings releases before recovering.