Healthy Returns: Higher medical costs are pinching insurers
Good afternoon! Health insurers are feeling the squeeze as older patients head to the doctor more than expected.

CVS, which owns health insurer Aetna, on Wednesday slashed its full-year profit outlook, citing the potential for higher medical costs to bite into its profits. That warning came two weeks after insurance giant Humana cited the same factor as it issued a dismal 2024 earnings guidance.

Medical costs from Medicare Advantage patients have spiked over the last year as more older adults return to hospitals to undergo procedures they had delayed during the Covid pandemic, such as joint and hip replacements.

Medicare Advantage, a type of privately run health insurance plan contracted by Medicare, has long been a key source of growth and profits for the insurance industry. More than half of Medicare beneficiaries are enrolled in such plans, enticed by lower monthly premiums and extra benefits not covered by traditional Medicare, according to health policy research firm KFF.

But investors have become more concerned about the runaway costs, which insurance companies say may not come down anytime soon. Other companies in the Medicare Advantage space are UnitedHealth Group and Elevance Health.

CVS executives said on an earnings call Wednesday that the company's insurance division saw slightly higher rates of outpatient care, including hip and knee surgeries, in the fourth quarter. They also saw more use of supplemental benefits such as dental and vision care, and "some pressure" from RSV vaccinations.

The executives said inpatient care, or formal hospital admissions, was in line with the company's expectations for the period.

The insurance segment's medical benefit ratio — a measure of total medical expenses paid relative to premiums collected — increased to 88.5% for the fourth quarter from 85.8% during the year-ago period. A lower ratio typically indicates that the company collected more in premiums than it paid out in benefits, resulting in higher profitability.

Last month, Humana said it saw an even bigger jump in medical costs in the fourth quarter. The company said the increase came partly from higher outpatient activity, but the company largely blamed it on an unexpected increase in inpatient care in November and December.

That pushed its medical benefit ratio in its insurance segment to a whopping 91.4% for the quarter, up from 87.4% for the same period a year ago.

Higher medical costs may be a larger problem for Humana than they are for CVS and other insurers. That's because Humana is more dependent on its Medicare Advantage business than its rivals, as it accounts for more than 80% of its earnings, UBS analysts said in a Jan. 25 note.

They added that there is no other part of Humana's business that could meaningfully dampen the hit from higher medical costs on the insurance side. Humana has a specialty pharmacy segment called CenterWell, but it only brought in roughly a fifth of the revenue that the company's insurance division booked for the fourth quarter.

Meanwhile, CVS has a retail pharmacy business and a health services segment, both of which posted stronger-than-expected revenue for the quarter.

Another insurance giant that has been seeing higher medical costs, UnitedHealth Group, also has large health-care services and pharmacy operations that diversify its earnings streams.

The bigger question for all three companies is how exactly a new policy called the "two-midnight rule" will impact their insurance businesses.

Starting this year, Medicare Advantage plans have to cover their members' hospitalizations at the higher inpatient rate if their doctors predict they'll have to stay beyond two midnights. That policy has applied to traditional Medicare plans for nearly a decade.