Higher medical costs are hitting CVS and UnitedHealth

Good afternoon! Health insurers are feeling the pressure as older patients go to the doctor more than expected.

CVS, owner of health insurer Aetna, on Wednesday cut its full-year profit outlook, citing the possibility that higher medical costs will hurt its profits. That warning came two weeks after insurance giant Humana cited the same factor in issuing dismal 2024 earnings guidance.

Medical costs for Medicare Advantage patients have skyrocketed over the past year as more seniors return to hospitals for procedures they had delayed during the Covid pandemic, such as joint and hip replacements.

Medicare Advantage, a type of private 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, attracted by lower monthly premiums and additional benefits not covered by traditional Medicare, according to health policy research firm KFF.

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

CVS executives said on an earnings conference call Wednesday that the company's insurance division reported slightly higher rates of outpatient care, including hip and knee surgeries, in the fourth quarter. They also noted increased use of fringe benefits, such as dental and vision care, and “some pressure” from RSV vaccines.

Executives said hospital 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 same period a year earlier. A lower ratio generally indicates that the company collected more in premiums than it paid in profits, resulting in higher profitability.

Last month, Humana said it saw an even larger increase in medical costs in the fourth quarter. The company said the increase was partly due to increased outpatient activity, but largely attributed it to an unexpected increase in hospital care in November and December.

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

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

They added that there is no other part of Humana's business that can significantly cushion the impact of higher medical costs on the insurance side. Humana has a specialty pharmacy segment called CenterWell, but it only generated about a fifth of the revenue the company's insurance division posted for the fourth quarter.

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

Another insurance giant that has been experiencing higher medical costs, UnitedHealth Group, also has large healthcare services and pharmaceutical operations that diversify its profit streams.

The biggest question for all three companies is how exactly a new policy called the “two midnight rule” will affect their insurance businesses.

Starting this year, Medicare Advantage plans must cover their members' hospital stays at the higher inpatient rate if their doctors predict they will have to stay past two midnight. That policy has been applied to traditional Medicare plans for nearly a decade.

Problems on 23andMe

It's been a tough few months for 23andMe.

The genetic testing company, which rose to fame with its at-home DNA testing kits, reported tough fiscal third-quarter results last week. 23andMe posted revenue of $45 million for the quarter, down from the $67 million it reported in the same period last year.

During the company's quarterly call with investors, co-founder and CEO Anne Wojcicki said 23andMe is considering splitting off its consumer and therapeutics businesses to help boost its stock price, which has been trading below $1.

The company received a deficiency letter from the Department of Qualifications for listing on Nasdaq in November, giving it 180 days to get its stock price back above the dollar. If 23andMe fails to clear the threshold, it will be delisted from the exchange.

“We haven't made any final decisions about what we're going to do,” Wojcicki said during the call.

23andMe is also facing mounting legal problems, facing more than 30 class-action lawsuits following a data breach it disclosed late last year that affected nearly 7 million people. The company has so far incurred $2.7 million in expenses related to the incident.

For now, investors are watching how 23andMe navigates the challenging road ahead.

Layoffs at Amazon Pharmacy and One Medical

Last week, Amazon eliminated “a few hundred positions” in its One Medical and Pharmacy units, the company confirmed to CNBC's Annie Palmer.

In a memo to employees, Amazon Health Services leader Neil Lindsay said the company has “identified areas where we can reposition resources,” which has led to the reductions.

Amazon has entered the healthcare industry in recent years as it works to build its own medical ecosystem.

In 2018, the company announced plans to buy online pharmacy company PillPack, which would then help Amazon launch its own pharmacy. Four years later, Amazon announced it would acquire primary care provider One Medical for approximately $3.9 billion.

But despite its lofty healthcare ambitions, the segment is not exempt from CEO Andy Jassy's aggressive cost-cutting efforts. The company has announced job cuts within its Audible, Prime Video, Twitch, MGM Studios and Buy with Prime divisions in recent weeks, adding to the more than 27,000 layoffs the company began making at the end of 2022.

You can read the full memo regarding the recent Amazon Pharmacy and One Medical layoffs here.

Feel free to send tips, suggestions, story ideas, and facts to Annika at [email protected] and Ashley at [email protected].