Rising Healthcare Costs: Implications for Insurance Premiums

Current Trends in Healthcare Costs

Healthcare costs are experiencing sustained high trends, driven by elevated utilization levels and unit cost inflation. Companies like Cigna and CVS have planned for these elevated trends to persist throughout 2024, while Humana anticipates regulatory changes to further impact costs in 2025.

"Now taken all together, we are seeing sustained high cost trends, yet these are broadly in line with our guidance as we planned and priced for the elevated utilization levels that began in 2023 to continue throughout 2024. Now specifically in the second quarter, we did not witness aggregate acceleration or deceleration of care patterns within the quarter." --- (CI, earning call, 2024/Q2)

"The remaining approximately $400 million of medical cost pressure in the first quarter is driven by elevated utilization trends that our guidance now assumes will persist for the remainder of 2024." --- (CVS, earning call, 2024/Q1)

"Specific to 2025, we expect benefit levels, planned stability and choice for seniors to be negatively impacted by the final MA rate notice, which is not sufficient to address their current medical cost trend environment and regulatory changes." --- (HUM, earning call, 2024/Q1)

"Medical Cost Trends. Our medical cost trends primarily relate to changes in unit costs, care activity and prescription drug costs." --- (UNH, sec filing, 2024/Q1)

"As noted previously, we had planned and priced for 2024 medical cost trend to be above 2023 levels, which took into account both unit cost inflation as well as continued elevated utilization. Year-to-date, we have seen elevated cost trends, consistent with our planning and pricing assumptions." --- (CI, earning call, 2024/Q2)

Impact on Insurance Companies' Financial Performance

Rising healthcare costs have pressured insurance companies' financial performance, with Cigna and Humana noting impacts on adjusted EPS and tax rates. UnitedHealth Group, however, reported strong performance despite these pressures, indicating varied resilience across the industry.

"We use the term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance. In our remarks today, we will be making some forward-looking statements, including statements regarding our outlook for 2024 and future performance." --- (CI, earning call, 2024/Q2)

"First quarter has played out in that respect. If you look at the performance of Optum Health and our MA business within UnitedHealthcare, both very strong performance during this quarter despite the pressure that's been incurred on them from the rate notice last year and I think that bodes super well for the rest of this year and the strategy that we've laid out for the next three. Thanks, Lisa. Next question." --- (UNH, earning call, 2024/Q1)

"We are evaluating the final rule and its impact on our disclosures. We intend for the discussion of our financial condition and results of operations that follows to assist in the understanding of our financial statements and related changes in certain key items in those financial statements from year to year, including the primary factors that accounted for those changes." --- (HUM, sec filing, 2024/Q1)

"For the six months ended June 30, 2024, the effective tax rate increased substantially driven by a valuation allowance relative to the impairment of equity securities, partially offset by decreases in state taxes and a decrease relative to the businesses held for sale. Developments Sale of Medicare Advantage and Related Businesses" --- (CI, sec filing, 2024/Q2)

"Thereafter, Humana made several additional disclosures about its profitability and financial condition, however, Defendants continued to downplay pressures on the Company's adjusted EPS resulting from increased medical costs associated with pent-up demand for healthcare procedures (especially as COVID concerns abated) which, contrary to the Company's assurances, resulted in increased utilization rates and costs." --- (HUM, press release, 2024/06/03)

Changes in Insurance Premium Rates

Insurance premium rates are rising significantly due to higher Medicare premiums, the Inflation Reduction Act, and unprecedented pricing changes. Companies like Humana and Cigna are experiencing substantial increases, while UnitedHealth is actively shaping future rates with state partners. MedSup premiums are also expected to see disproportionate hikes next year.

"Premiums Revenue Consolidated premiums revenue increased $2.7 billion, or 10.6%, from $25.6 billion in the 2023 quarter to $28.3 billion in the 2024 quarter primarily due to higher per member Medicare premiums and individual and group Medicare Advantage membership growth." --- (HUM, sec filing, 2024/Q1)

"As you step back, it was clear that the Inflation Reduction Act as it was designed and the ultimate implementation of it was going to cause PDP premiums to rise meaningfully." --- (CI, earning call, 2024/Q2)

"And while there's just a slight gap in the second quarter, we really like how our 7/1 rates are shaping up and continue to work with state partners to influence key assumptions before those rates become final in the future." --- (UNH, earning call, 2024/Q2)

"Then the majority is MedSup. So we have been hearing that we might see disproportionate Med Sup premium increases next year as well, which should prompt some, again, further consideration of MA as a better value prop." --- (HUM, conference, 2024/05/14)

"The industry hasn't priced to this level of change in a single year before." --- (HUM, conference, 2024/05/14)

Role of Government Policies and Regulations

Government policies and regulations significantly impact healthcare costs and insurance premiums. Changes in Medicare funding and risk adjustment mechanisms, recent legislation on transparency, and government interventions in market pricing structures all play crucial roles in shaping the financial landscape of healthcare.

"Key Regulatory Trends and Uncertainties • The Company is exposed to funding and regulation of, and changes in government policy with respect to and/or funding or regulation of, the various Medicare programs in which the Company participates, including changes in the amounts payable to us under those programs and/or new reforms or surcharges on existing programs, including changes to applicable risk adjustment mechanisms." --- (CVS, sec filing, 2024/Q1)

"I think some of the more recent legislation that we've seen has focused on transparency and will be fully compliant with that." --- (CVS, conference, 2024/05/14)

"Many of the parts of the UK economy that don't work are the ones where a working pricing structure (ie. markets) have been removed or altered by govt policy." --- (CVS, Twitter, 2024/06/24)

Effect on Consumers

Consumers are facing increased insurance premiums due to rising healthcare costs, with disruptions in traditional fee-for-service markets and Medicare Supplement plans. Despite these challenges, Medicare Advantage plans remain a compelling value proposition, though the industry anticipates volatility and adverse selection risks impacting product viability and member costs.

"That was the basis on which people were choosing MA for a decade. So we still think again very compelling value proposition for consumers, which is why nobody in our mind is going to go back to original Medicare because of this." --- (HUM, conference, 2024/05/14)

"PDP and med sup. So as members, potential members are evaluating their choices, they're going to have to take a look at what are the price increases and some of the disruption that's going to happen in the traditional fee-for-service market." --- (CVS, earning call, 2024/Q1)

"Susan Diamond: Yes. On MedSup, interestingly enough, the change health care disruption was particularly disruptive to our MedSup business." --- (HUM, earning call, 2024/Q1)

"And so there's going to be a lot of discussion, I imagine in the industry, certainly hearing about what product is ultimately viable for us as we think about the potential risks and volatility that could result from putting out a product, and the impact of potential adverse selection in terms of who you attract, the types of members you use, brand utilizers, specialty utilizers, etc." --- (CVS, earning call, 2024/Q1)

Technological Advancements in Healthcare

Technological advancements in healthcare are driving efficiency and consumer-centric solutions. Humana's investment in Healthpilot and UnitedHealth's Optum highlight the focus on leveraging cutting-edge technology to enhance healthcare services and decision-making processes, while innovations in medical devices continue to shape the industry.

"Investment in Healthpilot supports Humana's efforts to develop a more efficient, transparent, and consumer-centric healthcare ecosystem by leveraging cutting-edge technology." --- (HUM, press release, 2024/07/17)

"And what I mean by that is looking back over the past decade or so, much of the innovation in health care has been in medical devices." --- (CI, earning call, 2024/Q1)

"Change is a healthcare technology company that provides data solutions aimed at improving clinical decision making and simplifying payment processes across the healthcare system." --- (UNH, press release, 2024/07/09)

""This investment in Healthpilot represents a strategic step forward in Humana's digital growth journey and underscores our commitment to leveraging cutting-edge technology to further enhance payor-agnostic, omnichannel broker capabilities," said David Dintenfass, President of Enterprise Growth at Humana." --- (HUM, press release, 2024/07/17)

"Optum provides technology-enabled services to the healthcare market, while UnitedHealthcare offers health insurance to individuals, employers, and small businesses in the United States." --- (UNH, press release, 2024/07/12)