In recent years, health insurers have invested heavily in government-run health insurance programs, expecting substantial profits and growing membership. However, under sustained operational pressure, the profitability of privately run Medicare Advantage (MA) and safety-net Medicaid plans is shrinking, and this anticipated reversal of fortune is frustrating insurance company executives.

For most of the past year, insurers have complained about headwinds in MA plans as spending surged due to seniors using more medical services. But in the second quarter, many payers said Medicaid had become a bigger problem as states removed ineligible beneficiaries from safety-net coverage, worsening insurers' risk pools and saddling them with higher costs.

This quarter, revenue in insurers' health benefits segments trended downward, prompting some large national payers to lower their 2024 financial outlooks. According to analysts, CVS and Humana struggled the most in controlling rising pressures in government programs, with particularly disappointing quarterly results.

However, headwinds in MA and Medicaid affected the medical loss ratios (MLR)—a metric for patient care spending—of all major U.S. insurers this quarter. Generally, the higher the MLR, the less profit a payer retains from providing medical coverage.

All payers except Elevance saw medical loss ratios rise year over year

Insurers' MLRs for Q2 2023 and Q2 2024

Even Elevance, the only large publicly traded insurer to avoid a year-over-year MLR increase, lowered its long-term revenue guidance for its health benefits segment after the quarter, citing significant membership losses due to Medicaid eligibility redeterminations and slower MA growth.

Meanwhile, CVS raised its 2024 MLR guidance, while UnitedHealth, Elevance, and Centene said their MLRs would be at the high end of existing guidance. Many executives said Medicaid was the primary driver of higher MLRs.

Cigna, which focuses on employer-sponsored insurance and is therefore shielded from the worst of MA pressures, also expects its MLR to rise in the second half of the year.

However, headwinds in core insurance segments did not always translate into profit declines. Payers have evolved into sprawling conglomerates with other revenue streams that boosted financial results.

This is especially true for CVS, Cigna, and UnitedHealth, which all operate large health services segments that offset the worst losses in their insurance segments. On calls with investors, executives said they would vigorously defend these lucrative businesses amid growing public concern over their market power and corporate practices.

Medicare Advantage struggles persist

In MA plans, the government contracts with private insurers to manage care for Medicare members. These plans can offer extra benefits like dental care and gym memberships, in addition to more traditional Medicare coverage, making them increasingly popular among U.S. seniors. According to government data, enrollment in MA plans has tripled since 2010 to 33.9 million people, representing more than half of the entire Medicare population.

Not only has interest in MA surged among Medicare-eligible individuals, but payers have also invested heavily in building these plans, attracted by their lucrative profit margins, which are often much higher than other types of insurance coverage.

However, insurers have been hit by rising spending since MA members began using more medical services last year. Executives said utilization remains high, especially in inpatient care, dental services, and pharmacy, which significantly affected insurers' finances in the first half of 2024.

These headwinds have hit some insurers harder than others. For example, Elevance said it had factored the worst-case cost increases into its actuarial assumptions when submitting its 2024 bids, so higher utilization this quarter was covered by higher premiums.

Other payers were caught off guard by sustained spending growth, especially CVS and Humana.

Health benefits profitability dropped sharply in Q2

Insurers' second-quarter operating income from health benefits segments

After reporting second-quarter results, CVS cut its full-year earnings guidance for the third time this year, launched a $2 billion cost-cutting plan, and fired its top insurance executive. Management attempted to adjust its Medicare business through bid changes submitted in June for 2025, which CVS expects will result in losing up to 10% of its MA members. The company said it exited some underperforming counties and, in some cases, resubmitted less generous plans in those areas to circumvent federal limits on how much benefits can be cut in a given year.

Meanwhile, Humana expects to lose hundreds of thousands of MA members next year after cutting benefits and markets in 2025. CVS and Humana are signaling particularly large cuts, but all MA payers said they have carefully planned benefit reductions in their 2025 bids in an attempt to boost profit margins.

For example, Centene's MA subsidiary WellCare will exit six states entirely next year. According to a research report from investment bank Stephens, these market exits will affect approximately 37,000 members, about 3% of Centene's current MA membership. Executives at UnitedHealth and Elevance told investors they are carefully balancing growth with profit protection while hoping to avoid adding members who bring higher costs in the short term. Humana and CVS also expressed confidence in their 2025 bids, despite signs of trends continuing into the summer.

Meanwhile, Cigna is exiting the MA business entirely, having agreed in January to sell its Medicare business to Chicago-based insurer Health Care Service Corporation. Management said on the second-quarter call that the deal remains on track to close early next year.

Medicaid reimbursement mismatch

Medicaid has experienced significant upheaval over the past year as states resumed membership checks after pausing them during the COVID-19 pandemic. According to a tracker maintained by health policy firm KFF, nearly 25 million people have lost Medicaid coverage during the eligibility redetermination period so far, with many removed due to administrative errors (such as missing documents) rather than actual ineligibility.

Those remaining in Medicaid are typically sicker. This has driven up costs for insurers this year, who are scrambling to negotiate higher rates with states. All Medicaid payers pointed to a mismatch between rates and disease severity in the second quarter. Some companies like Elevance added that they are also seeing more Medicaid members use healthcare, possibly out of fear of soon losing coverage.

However, on earnings calls, payer executives assured investors that states will continue to raise rates to maintain actuarial soundness. Centene CEO Sarah London called the disconnect "temporary and solvable," while CVS CFO Tom Cowhey said it should "self-correct over time." Analysts also believe the mismatch should ease over the next 6 to 12 months, alleviating financial pressure on insurers.

Payers are also counting on high levels of re-enrollment as members who were incorrectly removed rejoin once redeterminations are complete. A recent string of contract wins and reprocurements has also helped large government insurers like Centene and Molina grow. Additionally, executives said growth in the Affordable Care Act (ACA) marketplace should continue to offset the worst Medicaid headwinds. For example, Centene raised its full-year revenue guidance after the second quarter due to ACA membership growth.

Elevance said it plans to expand its ACA plans in areas with high Medicaid exits to attract more individuals seeking coverage, according to CEO Gail Boudreaux. In addition to the large number of people losing Medicaid turning to ACA plans for coverage, ACA payers also benefit from increased exchange subsidies implemented during the COVID-19 pandemic. A record 21.4 million people enrolled in ACA plans this year, boosting membership for insurers offering coverage on the exchanges.

Without congressional action, subsidies expire next year—a result payers hope to avoid. Centene's London said on the second-quarter investor call that Washington should preserve this financial assistance, noting it has been an important driver of the payer's recent growth.

Health services become a key profit backstop

Despite the struggles in health benefits segments, most major insurers still posted solid profits in the second quarter—many thanks to businesses that serve other healthcare companies, including pharmacy benefit managers (PBMs), which are controversial middlemen in the drug supply chain.

According to a Healthcare Dive analysis of financial statements, health services segments accounted for 49%, 58%, and 68% of total operating income at UnitedHealth, CVS, and Cigna, respectively. These three insurers own the nation's three largest PBMs and find these businesses under attack from Congress, antitrust regulators, independent pharmacies, patient advocates, and others over their role in rising drug prices and reduced consumer choice.

Executives pledged on earnings calls to aggressively defend these businesses, portraying them as the only check on drug manufacturers' pricing power. CVS, UnitedHealth, and Cigna touted new pricing models as proof of PBM value. Meanwhile, Cigna CEO David Cordani said the company plans to increase engagement with Congress, sponsor more research on PBM value, and strengthen collaboration with independent pharmacists to reverse the PBM's poor public image. CVS CEO Karen Lynch similarly promised a "very aggressive approach" to changing the public conversation around these businesses.