In the first quarter of 2024, the U.S. health insurance industry was dominated by two major events: the ongoing turmoil in the Medicare Advantage market and the cyberattack on Change Healthcare, a giant medical claims exchange. These two events brought significant uncertainty to the industry at the start of the quarter, with investors initially anticipating the worst.

However, the final results showed a clear divergence: the former led to a sharp decline in profits for several insurers, while the latter had a relatively limited financial impact on payers—even for Change's parent company, UnitedHealth.

During spring investor calls, insurers also revealed other noteworthy information, including that the Centers for Medicare & Medicaid Services (CMS) final rule on dual-eligible populations could become a major growth engine for Medicaid insurers, as well as progress on Medicaid contract bidding in multiple states. Here are the most important observations from the quarter.

The Change Healthcare incident: much ado about nothing

In February, the healthcare industry was shaken by a cyberattack on Change Healthcare, a large payment processor owned by UnitedHealth. After the attack, Change took its systems offline, halting reimbursements to healthcare providers and pharmacies, threatening the operations of many small businesses, and prompting UnitedHealth to launch a loan assistance program under immense public, legal, and governmental pressure.

UnitedHealth CEO Andrew Witty was summoned to Capitol Hill earlier this month over the incident and faced questioning from lawmakers about the attack. Legislators also raised criticisms regarding UnitedHealth's size and whether it stifles competition in the healthcare industry, which Witty attempted to address during the insurer's first-quarter earnings call.

Witty said: "Following the attack, we were able to marshal the substantial resources of UnitedHealth Group to drive recovery and begin mitigating the impact—resources that a standalone Change Healthcare would not have had access to." He also described UnitedHealth as "a relatively small part of the $5 trillion U.S. healthcare system," despite the company being the largest healthcare enterprise in the country, with businesses spanning health insurance, pharmacy benefit management, physician clinics, banking, and more. The company is currently facing an antitrust investigation by the Department of Justice, which has growing concerns about monopoly power in the healthcare industry.

In stark contrast to the severe impact the cyberattack had on healthcare providers, insurers were largely unaffected by the incident in the first quarter. This conclusion even applies to UnitedHealth itself—the company expects to incur up to $1.6 billion in costs this year due to the attack, but compared to its annual revenue of $37.2 billion, this is a drop in the bucket. UnitedHealth also stated that it does not expect the attack to have a material impact on its 2024 earnings.

As for other peers, Elevance CEO Gail Boudreaux told investors in April: "We were not significantly impacted." Some insurers did experience a slight increase in operating expenses, but the biggest impact of the attack was that the downtime of Change's systems made it harder for insurers to predict the amount they might need to pay for members' medical expenses. As a result, several large payers set aside hundreds of millions of dollars in reserves to cover claims incurred but not yet received during the quarter. However, executives assured investors that they were confident in the adequacy of the reserves, and that the majority of delayed claims had arrived by the end of the quarter.

Centene CEO Sarah London told analysts on the company's April call: "By the end of the quarter, the impact was already very limited."

Rising Medicare Advantage utilization catches some companies off guard

As more seniors in Medicare Advantage plans sought medical services after the COVID-19 pandemic, payers continued to deal with sustained growth in medical costs. Utilization began rising in early last year and remained high during the quarter, as reflected in Elevance's outpatient services (such as radiology and cardiovascular procedures) and CVS's mental health and medical pharmacy services.

Inpatient care also increased, as noted by Centene, Humana, Elevance, and CVS. Given the higher costs of covering hospital services, this trend is concerning for insurers. Some payers attributed the cause to the "two-midnight rule," which requires insurers to cover inpatient costs when a patient is expected to need hospitalization for at least two midnights.

All Medicare Advantage insurers reported that their members used more medical services. But some companies planned adequately for the rise in utilization, including Elevance, UnitedHealth, and Cigna, which said they were satisfied with their 2024 pricing and benefit design. For example, Elevance saw its net profit increase 13% year-over-year due to significantly higher member premiums.

Other companies—such as Humana and CVS—appeared less prepared. Humana's net profit for the quarter fell to $741 million from $1.2 billion in the same period last year, due to surging medical costs. The second-largest Medicare Advantage payer, behind UnitedHealth, even withdrew its 2025 earnings outlook, citing turmoil in the Medicare Advantage market. CVS also blamed utilization pressure for its decline in net profit, which fell to $1.1 billion in the first quarter, roughly half of the prior-year period. This performance caused CVS shares to suffer their biggest one-day drop since 2009 and prompted investment bank TD Cowen to downgrade its rating.

Notably, insurers are still profitable—just not at expected levels, nor enough to satisfy Wall Street's demand for Medicare Advantage growth. The program has historically generated substantial returns for the industry. TD Cowen analyst Gary Taylor wrote in a post-quarter report that the key questions after the first quarter are: "Will medical cost trends moderate in 2024? If so, when and by how much?" and "Who will benefit the most?"

The 2025 payment rates set by regulators to combat bad behavior in privately run Medicare plans came in lower than insurers expected, further exacerbating the difficulties. Insurance executives expressed dissatisfaction during quarterly calls. Elevance's Boudreaux said she was "disappointed" with the rates, while CVS CEO Karen Lynch called them "inadequate" and a "significant additional disruption" to the program.

Facing challenges, insurers plan to shift focus from growth to profitability, taking measures such as cutting benefits, raising premiums, or even exiting markets. UnitedHealth's Witty said the 2025 payment rate notice, while "slightly disappointing," is unlikely to change how UnitedHealth prepares for next year. Other companies said they would have to make deeper cuts. Humana CFO Susan Diamond said the rates "will require greater benefit reductions to achieve stable margins."

Cowen's Taylor noted that all major Medicare Advantage insurers could see margins "well below" target this year and "will be forced to significantly cut supplemental benefits for 2025." This could reshape the current Medicare Advantage market share. Insurers are currently finalizing their 2025 bids, which will be submitted to CMS in early June.

Medicaid redeterminations cool down, contract competition heats up

Medicare Advantage is not the only source of turmoil facing insurers: Medicaid redeterminations—the process by which states recheck beneficiaries' eligibility—have been ongoing since last spring. Millions of Americans have been disenrolled due to the redeterminations, raising concerns that the health severity of payers' membership may no longer match the reimbursement rates states pay.

Although insurers assured investors that rates remained actuarially sound, the mismatch between rates and health status pushed up medical costs for Centene and CVS this quarter. Executives at these companies said they are in discussions with states to adjust rates. Meanwhile, for many payers, membership growth in the Affordable Care Act (ACA) market, along with a steady proportion of "rejoiners" (those who re-enroll in Medicaid after being improperly removed), offset the most severe impacts of Medicaid attrition.

The prevailing sentiment on first-quarter calls was that the business was about to return to normal, as redeterminations were approximately 90% complete, according to Centene, Molina, and Elevance. However, some payers were less satisfied with recent Medicaid contract awards in Florida, Michigan, Virginia, and Texas. Molina lost contracts in Florida and Virginia, which is expected to cost the company $500 million in revenue this year. Meanwhile, Centene lost the Texas contract, and UnitedHealthcare lost the Florida contract.

Molina and Centene said on first-quarter calls that they plan to challenge the decisions, while UnitedHealthcare, though not explicit, hinted it might protest. In addition to contesting existing losses, insurers are also preparing to compete for upcoming contracts. According to Molina CEO Joe Zubretsky, approximately $60 billion in premiums are expected to be up for bid over the next three years.

CMS opens the door for D-SNPs

Centene and Molina, two large Medicaid insurers, told investors that a new rule finalized by CMS in April presents a significant growth opportunity. The rule aims to streamline continuity of care for people who are dually eligible for Medicare and Medicaid. Currently, many dual-eligible members receive Medicaid and Medicare benefits from two different insurers. The rule will essentially move these misaligned members into Dual Eligible Special Needs Plans (D-SNPs) operated by their Medicaid insurers.

As a result, insurance executives said that having a broad Medicaid footprint will become a catalyst for Medicare Advantage growth, especially as the D-SNP population is expected to grow. Centene's London said: "The strategic link between Medicare and Medicaid is becoming clearer. By the end of this decade, a Medicaid footprint will be a prerequisite for D-SNP growth."

Molina executives said the rule should help the company achieve its target margin in the mid-single digits in Medicare—higher than some competitors, given its already high proportion of dual-eligible members. These members typically have poorer health, so the government pays insurers more to manage their care. Molina's Zubretsky said: "We are bullish on the D-SNP business, not only because it generates excellent margins, but also because over time, converting our Medicaid footprint into dual-eligible market share will be a significant growth catalyst for us."