U.S. health insurers face pressure at the end of 2024: rising medical loss ratios cast a shadow over profit prospects

U.S. health insurers ended 2024 in a difficult position: profits from insurance operations continued to decline, while guidance issued by several companies indicated that medical costs could continue to rise this year.

In the fourth quarter, payers continued to face high medical cost pressure in the Medicare and Medicaid programs. Signs of rising costs also emerged in the commercial insurance population, previously considered relatively safe, suggesting that working-age Americans are in worse health than before.

Overall, the medical loss ratio (MLR), a key metric measuring spending on patient care, for major publicly traded insurers rose by an average of 2.8 percentage points from the fourth quarter of 2023 to the fourth quarter of 2024. This is a significant change. Investors closely monitor MLR movements because even a 0.1 percentage point fluctuation can mean a significant change in an insurer's underwriting profit.

Medical costs grow faster than premium revenue

As the medical loss ratio rose, operating profits in insurers' health benefits businesses also declined. In the fourth quarter, except for Centene and Molina, all major payers reported lower insurance plan revenue than in the same period last year (although each company reported year-over-year revenue growth).

Among them, CVS's Aetna unit suffered the largest operating loss at $757 million, compared with a profit of $266 million in the same period in 2023. Humana's insurance segment also recorded a massive operating loss of $646 million in the fourth quarter, widening from a loss of $426 million in the same period last year.

Elevance's health benefits business operating profit fell 73% year-over-year, while Cigna's fell 47%. In contrast, UnitedHealth was less affected, with its health benefits segment's operating profit declining only about 5%.

Insurers attributed the results to various factors during fourth-quarter earnings calls. However, the rising loss ratios can largely be attributed to one major trend—increased medical spending among members of government programs, an issue that has plagued insurers since 2023.

In the fourth quarter, the cost of medical care for seniors in private Medicare Advantage plans continued to exceed insurers' expectations. Meanwhile, payers were still digesting several regulatory policy changes that reduced revenue. Additionally, as states re-verified Medicaid members' eligibility, spending in the safety-net program increased, but states did not correspondingly raise rates, and payers continued to bear this cost pressure.

Although executives repeatedly promised last year that they were having productive conversations with state regulators about adjusting rates, insurers ended the fourth quarter still stating that Medicaid costs exceeded the reimbursements they received. Felicia Norwood, who oversees Elevance's Medicare and Medicaid businesses, said on an investor call late last month that rates remain "inadequate."

Until now, only Cigna had been shielded from rising medical costs because it primarily sells employer-sponsored plans. But that changed in the fourth quarter, as its CFO, Brian Evanko, attributed most of the profit decline to unexpected costs from large employee claims, including specialty drugs and cancer treatments. CVS also pointed to increased spending in its stop-loss program, which protects employers from catastrophic medical costs.

Looking ahead to 2025: Insurers proactively shrink, focusing on profit margins

Insurers are trying to revive profits this year, including by shedding unprofitable Medicare Advantage members. On fourth-quarter calls, major Medicare insurers said they had successfully lost members who were dragging down margins and moved other beneficiaries into plan designs where they can better control spending.

Humana said it will lose 550,000 MA members this year due to plan reductions, about one-tenth of its individual MA business. CVS CFO Tom Cowhey said MA membership is expected to decline by a "high single digit" percentage from the end of 2024, which will result in a total membership decrease of more than 1 million people this year. Centene CEO Sarah London said Centene lost about 200,000 Medicare members after the fall 2025 enrollment period.

Meanwhile, insurers that are adding Medicare members—UnitedHealth and Elevance—tried to assure investors that growth is under control. UnitedHealth, already the largest MA insurer, expects to add 800,000 MA members this year, an increase of about 10%. Elevance expects to add about 280,000, an increase of about 8%.

Executives at both companies said on investor calls that the MA cost trends observed in 2024 have been fully incorporated into this year's plan bids, and that plan designs are aimed at improving profit margins rather than pursuing growth. They specifically pointed to growth in HMO (health maintenance organization) plans, which limit coverage to specific providers, giving payers more control over spending, as evidence of an improved MA population mix after open enrollment.

UnitedHealth CEO Andrew Witty said he is "very pleased" with the company's membership; Elevance CEO Gail Boudreaux said she is "indeed satisfied." Similarly, Cigna, which is divesting its high-risk MA business to Chicago-based insurer HCSC, saw its CFO Evanko say that the Medicare business, including HMO products, saw "attractive growth." He said: "We are ready for the handover."

JPMorgan analyst Lisa Gill wrote in a February report that payers "appear to be prioritizing margins over growth, with fewer companies driving significant market share gains in 2025. We view this strategy as prudent and an acknowledgment that, in a dynamic environment, 'growth at all costs' adds complexity and unpredictability."

Still on the defensive: dual challenges of costs and policy

However, as insurers seek to improve profit margins, they also face other issues that could keep spending high. First, although insurers expect Medicaid rates to increase by 3% to 4% this year, analysts believe the disconnect between reimbursements and disease severity will persist at least through the first half of 2025.

Similarly, insurers are urging the federal government to grant healthy Medicare payment increases in the spring, citing persistently high spending on care for seniors. According to financial outlooks, four of the seven major publicly traded payers expect medical costs as a percentage of premiums to be higher this year than in 2024. (Notably, both CVS and Humana expect their MLRs to decline this year, and these two companies experienced the most severe medical cost increases last year.)

Washington also brings significant uncertainty to the industry. As congressional Republicans seek to fund President Donald Trump's tax agenda, the likelihood of Medicaid cuts is increasing. Any federal Medicaid spending cuts would hit insurers like Centene and Molina hard, as these companies derive most of their revenue from the safety-net program (and do not operate health services businesses that could hedge against fluctuations in the insurance segment).

Additionally, many market observers expect Congress to allow the more generous subsidies for Affordable Care Act (ACA) plans to expire at the end of this year. The disappearance of the subsidies—combined with the Trump administration reducing funding for organizations that support the exchanges—could cause millions of people to lose ACA coverage next year. This is also a serious problem for insurers like Centene that rely on stable ACA profit margins to offset fluctuations in Medicare and Medicaid.

Insurers also face a major obstacle in improving public trust. Previously, the killing of UnitedHealthcare CEO Brian Thompson intensified existing public anger over the role payers play in controlling Americans' access to medical services.

On investor calls, payer executives blamed other players in the U.S. healthcare industry for the problems, including rising patient utilization and price increases by hospitals and pharmaceutical companies, while also acknowledging that they themselves can improve. Some made commitments to reform. UnitedHealth's Witty said the company will improve claims processing, prior authorization, and member communication; Humana CEO Jim Rechtin said the company is committed to improving preventive care, communication, and navigation services.

Cigna went a step further, committing to make medical and pharmacy services cheaper and easier for customers to access, and announced specific actions about a week after its earnings call, such as tying executive bonuses to customer satisfaction.