As we are a few days away from 2025, the health insurance industry faces a trifecta of challenges, all of which have been tarring and feathering performance. Facing growing pressure to curb escalating healthcare costs and growing consumer dissatisfaction, the industry has faced a host of headwinds. Managed care stocks have significantly underperformed this year, with some major players seeing their stock prices plunge by as much as 20%, a stark contrast to the S&P 500’s 27% gain. While insurers are challenged by increased usage, policy changes, and regulation, the 2025 outlook is still unclear and it seems that there is potential for volatility.
What lies at the core is the escalating cost of healthcare consumption. In the midst of high numbers of US citizens specifically elderly patients who are delaying care due to pandemic-induced cancellations, CNAs report an increase in claims, notably Medicare Advantage. It has also been particularly difficult for organizations like Humana (HUM), where Medicare Advantage revenues constitute more than 30% of its overall revenues.
This program, which offers a variety of other cost savings (eg, gym memberships, prescription drugs), has always been financially more advantageous for insurers than traditional Medicare, with reimbursement rates paid out to providers being higher. But as claim numbers increase and insurers are having to pay out more in premiums they have to pay, this has eaten into profit margins.
Medical loss ratio (MLR), one of the most important indicators to calculate the fraction of premium dollars spent on health care services, has been increasing for the majority of the big insurers. Humana, for example, saw its MLR climb to 89.2% in 2024, up from 86.6% in the previous year. The Affordable Care Act requires insurers to spend between 80% and 85% of premiums on healthcare, but many insurers are struggling today to meet them while being profitable. In a few instances, insurers have adopted the strategy of reducing brokers’ commissions to reduce the number of new enrollments.
Health Insurance Industry Faces Uncertainty Ahead of 2025, Murder of UnitedHealth Group CEO Adds to Chaos
In particular health insurers have also faced an unprecedented mix of events including the tragic murder of an insurance worker. This incident, together with the growing unrest and disapproval of the public, has a firm basis for calls for reform in the industry. The recent uptick in scrutiny from both the Federal Trade Commission and Congress, particularly focused on industry giants like UnitedHealth Group (UNH), has compounded the challenges facing insurers.
Despite the challenges, insurance companies continue to report unprecedented revenue growth driven by a larger share of insured individuals and government rebates. In contrast, UnitedHealth for the year 2023 disclosed revenue of $372 billion, which is an order of magnitude higher than $123 billion in 2013. No doubt, while the top-line growth has been stunning, the profit margin has not grown accordingly, reflecting the cost growth arising from the expansion of the insured population.
What’s Next for Health Industry?
Looking into 2025, the industry continues to be uncertain. The possibility of a regulatory shift, including due to a new administration and current political struggle over the fate of the Affordable Care Act, may make the field even more disruptive. Simultaneously, pressure for further competitive cost and increased disclosure can be expected to also trigger renewals of business practices for insurers.
Health insurers have to extraordinarily navigate these evolving needs to be able to rebound and stabilize in the year to come. Meantime, investors are getting ready for a rough time, since the industry henceforth presents itself in 2025 in the face of several attacks.
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