Health insurance

U.S. Health Insurers Are Tumbling: Should You be Worried?

The market hasn’t been kind to the U.S. health insurance industry, commonly referred to as Health Maintenance Organization (HMO), over the past week. During this period, the HMO industry fell 7.2% against the 0.6% rise in the overall medical sector. The Zacks S&P 500 composite has also jumped 0.9%. Investors are concerned about the rising costs being witnessed by the health insurers.

Let’s delve deeper.

Early last week, UnitedHealth Group Incorporated UNH leadership pointed out at the Goldman Sachs Global Healthcare Conference that seniors are now undergoing elective surgeries, which were delayed due to the pandemic. This will likely result in higher-than-expected medical costs. Although inpatient figures are somewhat balanced, outpatient levels are witnessing a spike due to pent-up demand. Companies providing surgery services and medical equipment are expected to gain from this.

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After that, major industry players, including UnitedHealth, Humana Inc. HUM, Centene Corporation CNC and Molina Healthcare, Inc. MOH, witnessed a serious drop in share prices. Later that week, Humana signaled a higher-than-expected increase in non-inpatient utilization trends. HUM expects its benefit expense ratio for the year to drift toward the upper limit of the guidance range of 86.3-87.3%.

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Zacks Investment Research

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Demand for procedures like hip and knee surgeries is rising, which will leave fewer premiums in hand after paying for the procedures for the health insurers. This will increase the medical loss ratio of the industry players, which concerns investors.

Now the question follows: should we be worried about these rising medical costs?

Increasing medical costs are nothing new for health insurers. These companies diversify their operations to reduce the risk associated with such events. For example, UnitedHealth’s Optum Health unit is likely to witness higher utilization, especially in ambulatory surgery operations from the resumption of the procedures.

Although the rising number of elective surgeries can have a short-term impact on health insurers’ earnings, the effect is bound to diminish in the long run. Also, the situation is expected to provide the industry players with a window to hike the insurance rates.

Humana, currently carrying a Zacks Rank #2 (Buy), reaffirmed its 2023 adjusted earnings guidance at $28.25 per share minimum, which indicates an 11.9% jump from the 2022 figure, despite expecting increased medical costs now. This signals growing strength in its operations, especially in its Medicaid business line. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The growing premium base stemming from membership growth will keep aiding the health insurers. Centene, based in Saint Louis, MO, can be one good example of this. Furthermore, numerous contract wins and its data analytics solutions operations are likely to boost its results.

The HMO companies already have their respective cost-curbing measures in place to improve efficiency and margins. This will likely offset the impact of rising medical costs. A similar approach was adopted by Molina Healthcare, which included streamlining organizational structure and boosting the speed and quality of decision-making. This helps the company to improve its profitability.

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