The health insurance company Humana has reported a 2023 loss of $541 million, even as it generated a revenue of $26.6 billion. Humana blames the loss on an unforeseen influx of “utilization” (people using health insurance) during Q4. The trend in utilization is persisting, which leads Humana to believe this is not due to a seasonal increase and may be the new normal for the company. With the age of the population increasing, this is possible.
Specifically, costs from high rates of in-patient “short-term” stays. These short-term stays reportedly have a 4x higher average unit cost per observation event. Accompanied by non-inpatient costs such as physicians, outpatient surgical care, and supplemental benefits. Across the board, competitors such as United Health and Cigna reported having higher utilizations but were still profitable in 2023.
The loss is now forcing Humana (the 5th largest health insurance company) to explore price increases for the 2024 year. Humana can only increase once annually, so they must test thoroughly to see how elastic the price can be without customers dropping their plans. Additionally, they must get the pricing correct for 2024 to account for higher costs. If they set the 2024 price too low, it may lead to another annual loss. Not stopping at price increases, Humana plans to cut benefits as a way to improve the profit margin.
The perceived troubles don’t stop for Humana and the Health Insurance industry. The CMS (Centers for Medicare & Medicaid Services) is a government regulatory body that proposes regulations to manage the health insurance industry. Recent regulations from CMS have been passed for 2024, which go after Medicare Advantage plans. These new regulations significantly affect a struggling Humana, as it shifted its focus in 2022 to providing primarily Medicare Advantage and Medicaid plans.
Medicare Advantage has been a controversial product since 2003. Receiving blame for helping drain the Medicare Trust Fund (which gets money from general revenues, payroll taxes, and premiums).
Simply explained - within the Medicare Advantage system, areas in which policyholders live have a star system, higher quality = higher benchmarks for plans. The Medicare Advantage companies submit “bids.” Bids are what companies think they’ll need to cover plans for policyholders in that area, which they provide to CMS. Bid amounts are always submitted lower than the area's benchmark. According to healthaffairs.org, some MA companies may cherry-pick high-star areas with these high benchmarks to submit higher bids.
These bids are furthermore risk-adjusted, utilizing codes to highlight a patient's diagnosis. The amount of codes attributed to a patient determines the risk rate for the plan. Higher risk = even higher prices.
These codes may even be accurate for the patient, but some argue that MA companies account for codes unnecessarily. Diagnoses like “alcohol dependence” and “obesity” are commonly found as examples of unnecessary codes added to patients. MA companies argue that accurately accounting for all codes for a patient should not be viewed as harmful and that surpluses on plans allow the companies to provide more benefits for the insured.
Humana believes that the overall health insurance environment will need to adjust to the current trend in utilization and regulation. Competitors say the current influx aligns with their planned models and will operate normally. These opposing statements can mean one of two things. Humana’s projection modeling is faulty, which spells bad news for them, or the trend will eventually impact the entire health insurance market by exceeding competitor cost projections. If it’s the latter outcome, that may result in higher health insurance costs with lower benefits for everyone.
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