Higher medical costs are pinching CVS, UnitedHealth

A UnitedHealth Group health insurance card is seen in a wallet, Oct.14, 2019.

Lucy Nicholson | Reuters

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

CVS, which owns health insurer Aetna, on Wednesday slashed its full-year profit outlook, citing the potential for higher medical costs to bite into its profits. That warning came two weeks after insurance giant Humana cited the same factor as it issued a dismal 2024 earnings guidance.

Medical costs from Medicare Advantage patients have spiked over the last year as more older adults return to hospitals to undergo procedures they had delayed during the Covid pandemic, such as joint and hip replacements. 

Medicare Advantage, a type of privately run 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, enticed by lower monthly premiums and extra benefits not covered by traditional Medicare, according to health policy research firm KFF. 

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

CVS executives said on an earnings call Wednesday that the company’s insurance division saw slightly higher rates of outpatient care, including hip and knee surgeries, in the fourth quarter. They also saw more use of supplemental benefits such as dental and vision care, and “some pressure” from RSV vaccinations.

The executives said inpatient 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 year-ago period. A lower ratio typically indicates that the company collected more in premiums than it paid out in benefits, resulting in higher profitability.

Last month, Humana said it saw an even bigger jump in medical costs in the fourth quarter. The company said the increase came partly from higher outpatient activity, but the company largely blamed it on an unexpected increase in inpatient care in November and December. 

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

Higher medical costs may be a larger problem for Humana than they are for CVS and other insurers. That’s because Humana is more dependent on its Medicare Advantage business than its rivals, as it accounts for more than 80% of its earnings, UBS analysts said in a Jan. 25 note.

They added that there is no other part of Humana’s business that could meaningfully dampen the hit from higher medical costs on the insurance side. Humana has a specialty pharmacy segment called CenterWell, but it only brought in roughly a fifth of the revenue that the company’s insurance division booked for the fourth quarter. 

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

Another insurance giant that has been seeing higher medical costs, UnitedHealth Group, also has large health-care services and pharmacy operations that diversify its earnings streams. 

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

Starting this year, Medicare Advantage plans have to cover their members’ hospitalizations at the higher inpatient rate if their doctors predict they’ll have to stay beyond two midnights. That policy has applied to traditional Medicare plans for nearly a decade. 

The latest in health-care technology

A sign is posted in front of the 23andMe headquarters on February 01, 2024 in Sunnyvale, California. 

Justin Sullivan | Getty Images

Trouble at 23andMe 

 It’s been a rough few months for 23andMe

The genetic testing company, which rose to prominence with its at-home DNA testing kits, reported rocky fiscal third-quarter results last week. 23andMe posted revenue of $45 million for the quarter, which is 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 up its consumer and therapeutics businesses to help boost its stock price, which has been trading under $1.  

The company received a deficiency letter from the Nasdaq Listing Qualifications Department in November, giving the company 180 days to bring its share price back above $1. If 23andMe fails to clear the threshold, it will be delisted from the exchange.

“We have not made any definitive decisions about what we are going to do,” Wojcicki said during the call. 

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

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

 Layoffs across Amazon Pharmacy, One Medical 

Last week, Amazon cut a “few hundred roles” across its One Medical and Pharmacy units, the company confirmed to CNBC’s Annie Palmer. 

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

Amazon has pushed into the health-care industry in recent years as it works to build out its own medical ecosystem.

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

But despite its lofty ambitions in health care, 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 carrying out in late 2022. 

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

Feel free to send any tips, suggestions, story ideas and data to Annika at annikakim.constantino@gmail.com and Ashley at ashley.capoot@nbcuni.com