UnitedHealth’s guidance cut may mean trouble for more insurers

UnitedHealth Group‘s stock sank 20% on Thursday after the corporate slashed its annual profit forecast, citing higher-than-expected medical costs in its privately run Medicare plans. 

Those bleak results from a healthcare giant seen because the insurance industry’s bellwether might be a warning sign for other firms with so-called Medicare Advantage plans, in line with some Wall Street analysts. It comes after a turbulent 2024 for health insurers, hurt by lower government payments, soaring medical costs and public backlash after the murder of UnitedHealthcare’s top executive, Brian Thompson.

UnitedHealthcare, the insurance arm of UnitedHealth Group, is the nation’s largest provider of those plans. Shares of competitor Humana fell 5%, while Elevance Health dropped greater than 1% and CVS tumbled 2%. Cigna has no Medicare Advantage business. Its stock was up almost 1% on Thursday.

UnitedHealth’s first-quarter results reveal “ominous signs” of accelerating medical costs in Medicare Advantage businesses, TD Cowen analyst Ryan Langston said in a note on Thursday. He added that the corporate “appropriately foreshadowed” increasing medical costs back in 2023, so Thursday’s comments “will call into query” the full-year outlooks for each insurer. 

Higher medical costs have dogged your entire insurance industry over the past 12 months as more seniors return to hospitals to undergo procedures they’d delayed in the course of the Covid pandemic, such a joint and hip replacements. But the difficulty had previously not been as significant at UnitedHealthcare.

Barclays analyst Andrew Mok said UnitedHealth’s problems could also be less of a difficulty for firms that made “significant” exits from some Medicare Advantage markets, including Humana and CVS, in line with a note on Thursday. Many insurers last 12 months exited unprofitable Medicare Advantage markets on account of higher medical costs and lower reimbursement rates from the federal government. 

Meanwhile, the difficulty might be an even bigger deal for firms that gained greater market share in Medicare Advantage, resembling Elevance Health and Alignment Health, in line with Mok.

UnitedHealth said the rise in care use – or utilization – in its Medicare Advantage business got here in far above what the corporate planned for the 12 months, which was for care activity to extend at a rate consistent with what it saw in 2024. But trends that became apparent toward the top of the primary quarter suggest that care activity increased “at twice” that level, UnitedHealth Group CEO Andrew Witty said during an earnings call on Thursday. 

The jump was particularly notable in doctor and outpatient services, which don’t involve overnight hospital stays, he added. 

“It’s extremely, very unusual,” Lance Wilkes, Bernstein senior equity analyst, told CNBC’s “Squawk Box” on Thursday. He said rising utilization is “really surprising” coming off the high level of care activity that the industry saw over the past 12 months.

Wilkes added that UnitedHealth and the broader industry could also be “pulling back” the “intensity of a few of the activity they do to administer utilization,” which causes dissatisfaction amongst patients. For instance, some insurers require prior authorization, which makes providers obtain approval from a patient’s insurance company before administering specific treatments.

“I believe it’s probably United pulling back due to policy headwinds and the scrutiny on the corporate,” Wilkes said. “I do think the horrible thing that happened to Brian Thompson and the corporate is part of this, and I believe it’s reflective of also the Department of Justice scrutiny on United over the past couple years.”

UnitedHealth is reportedly grappling with a government investigation of its Medicare billing practices.

Also on Thursday, UnitedHealth pointed to issues related to changes within the profile of patients treated under its Optum healthcare unit. That segment includes its pharmacy profit manager, which negotiates drug rebates with manufacturers on behalf of insurers and maintains formularies, amongst others responsibilities. 

But Witty said the corporate is taking motion to enhance results and considers the problems related to Optum and elevated medical costs “highly addressable as we stay up for 2026.” 

If nothing else, insurers are set to get a lift next 12 months: The Trump administration in April said it could substantially increase reimbursement rates for Medicare Advantage insurers, mountaineering an earlier proposal from the Biden administration.