There's uncertainty ahead for the health insurance industry in 2025

Health insurers are ending the year on a poor note, with several headwinds ranging from Congress's attempt to reign in costs to lowered profits from higher utilization of benefits.

The recent tragic shooting of an insurance executive added an even bigger problem: an angered American public calling for the industry to change.

The combination of factors made 2024 tougher than recent years and portends an uncertain start to 2025.

"Managed care stocks have significantly underperformed in 2024 (-20% vs. +27% S&P), facing unprecedented policy, reimbursement, and utilization headwinds alongside more recent industry scrutiny. While many of the aforementioned overhangs will continue into 2025 and utilization remains a key variable," Morgan Stanley analysts wrote in a note to clients this month.

At the start of the year, health insurers began to see a dip in the profits for Medicare Advantage, the popular Medicare plan administered by commercial insurers, as more and more seniors began to get care after delaying during the pandemic. That has particularly impacted Humana (HUM), which sees roughly 30% of its insurance revenues from this market — as is the case with other major players, including Aetna (CVS).

Medicare Advantage plans offer perks that aren't available with traditional Medicare, such as gym memberships, and insurers have been able to leverage the system to get greater reimbursements for the seniors they cover compared to traditional Medicare. Recent studies have shown that Medicare pays about $300 more per enrollee in an Advantage plan compared to traditional Medicare.

Despite that, major insurers were pressured throughout the year as increased utilization meant more premium dollars out of their pockets and less profit. In fact, some insurers cut commissions for brokers, which would discourage greater enrollment.

Medical loss ratio

How much insurers spend on care can be tracked by the medical loss ratio (MLR) — or the portion of premium dollars paid out compared to how much is collected. This number has also been less than ideal for the sector this year.

Major players saw this increase throughout the year. Humana, for example, saw its MLR jump to 88% in fiscal year 2023, compared to 86.6% in 2022. Year to date in 2024, that number has increased to 89.2%.

The Affordable Care Act required insurers to pay between 80% and 85% of all claims, and insurers and investors want numbers on the lower end of that range. But almost all insurers have had elevated MLRs since the end of 2023.

CVS, for example, reported an MLR of 95.2% in the third quarter of 2024 for the nine months through September, compared to 85.7% in the same period the year prior.

Profits

For the past decade, since the Affordable Care Act went into full effect in 2014, health insurance revenues have skyrocketed as more individuals were covered by insurance, paying premiums along with federal subsidies. But profits haven't grown as drastically — especially in recent years, and despite efforts to curb costs including claim denials.

Yahoo Finance reviewed financial reports dating back to 2013 and found that UnitedHealth Group reported $372 billion in revenue last year, compared to $123 billion in 2013. The profit margin reported last year was 6%, compared to 4.6% in 2013. Similarly, Elevance (ELV) reported $170 billion in revenues last year and a 5% margin, compared to $70 billion in revenues in 2013 with a 5.7% margin.

The data shows that even with outsized revenue growth, the cost of managing each new member's health costs has kept margins largely flat — with minimal increases and decreases over the years.

Wendell Potter, a former Cigna (CI) vice president of communications, told Yahoo Finance that, "the commercial insurance business just simply is not growing, it's been stagnant for some time."

UnitedHealth has had more problems this year than some of the other insurers — with a cyberattack at the start of the year and ending with the tragic loss of its insurance executive. In addition, the Federal Trade Commission and Congress have been looking for ways to break up the industry giant and its various verticals — including the largest owner of doctors practices and pharmacy benefits.

These incidents have also weighed more broadly on the sector and have set the industry up for an uncertain 2025.

"We think UNH is attractive here on a longer-term basis but will take time to recover. Guidance is, though, conservative so at least management has set a low bar for next year," wrote Mizuho's healthcare expert Jared Holz in a note to clients this month.

But UnitedHealth Group's stock action has had a blanket effect on the sector.

"The optics around the UNH situation make this even worse and are affecting the way in which both Healthcare dedicated investors and more generalist fund managers are looking at the stock/peer group," Holz said.

It's why, in addition to ongoing industry-specific pressures, a new Trump administration — with the threat of drastic changes to the ACA, but support for Medicare Advantage — will impact how the industry performs in 2025.

Anjalee Khemlani is the senior health reporter at Yahoo Finance, covering all things pharma, insurance, care services, digital health, PBMs, and health policy and politics. That includes GLP-1s, of course. Follow Anjalee on social media platforms X (Twitter), LinkedIn Bluesky @AnjKhem.

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