Major payers are being downgraded by investment banks and research firms in advance of their earnings season, with analysts citing pricing and regulatory uncertainty in Medicare Advantage in addition to cost pressures in the commercial market.
On Wednesday, Wolfe Research downgraded both Elevance Health and Centene to peer perform from outperform. Late last week, J.P. Morgan downgraded Humana to neutral from overweight.
Payers, which benefited from deferred healthcare utilization during the pandemic, are facing new financial pressures. Analysts are watching closely as the second quarter earnings season kicks off Friday, when managed care giant UnitedHealth reports results. The earnings are viewed as a bellwether for industry performance in the quarter.
UnitedHealth and Humana flagged for investors in June a surge in outpatient utilization among seniors, driving higher-than-anticipated spending on patient care. Both payers said they incorporated higher outpatient utilization into MA plan bids for 2024, and Humana noted it planned to offset higher costs through outperformance in other segments of the business, along with expense reductions.
Stocks in managed care companies took a dive following the disclosures.
“We think 2Q earnings will provide some clarity on whether higher Medicare Advantage utilization is a company-specific or industry-wide issue and will help investors assess potential earnings exposure in 2023 and 2024,” J.P. Morgan managing director and senior healthcare analyst Lisa Gill wrote in a note on Humana’s downgrade.
Gill also noted concerns over political and regulatory scrutiny of MA heading into the 2024 election, which could result in greater volatility for less-diversified payers with a large MA footprint such as Humana.
“While we like [Humana’s] long-term exposure to MA, we prefer more diversified managed care names over the near-term given uncertainty around 2023 MA utilization and 2024 pricing,” Gill wrote. “We believe [Cigna] and [Elevance] are most defensively positioned heading into 2Q earnings given greater exposure to the Commercial market vs. peers.”
Wolfe Research also pointed to cost pressures in downgrading Elevance and Centene in notes cited by Seeking Alpha. Centene, as the nation’s largest Medicaid managed care organization, has significant exposure to the effects of Medicaid redeterminations.
Analysts said they’re closely watching payer commentary in second-quarter calls on Medicaid redeterminations for insight into disenrollment trends and potential risk pool changes and acuity shifts, though it’s still too early in the process to get a clear picture of redeterminations’ impact.
Centene also has an unclear trajectory to improve its MA star ratings, Wolfe Research said. Centene is one of several payers that saw their star ratings, a measure of plan quality and member satisfaction that results in bonuses, fall for 2023, pressuring earnings targets.
The CMS is expected to release 2024 star ratings in October.