That knee surgery you’ve been putting off could soon put insurance giants in trouble


    From a financial standpoint, the pandemic years have been good for managed care companies. Hospitals have faced unprecedented labor shortages in recent years as nurses and doctors quit their jobs, forcing many patients to defer expensive care, a boon to insurers.

    One data point says it all: The medical loss rate at UnitedHealth Group, the largest managed healthcare company, has beaten Wall Street analyst consensus in 10 of the last 11 fiscal quarters, according to data from FactSet.

    But that could shift next year. UnitedHealth on Monday forecast adjusted earnings per share for 2023 of $24.40 to $24.90, slightly below analyst expectations of $24.92, according to FactSet.

    The slight miss is caused by a medical loss ratio of 82.6%, which was higher than the analyst consensus of 82.3%. The higher the MLR number, the higher the costs for the insurance companies. By comparison, UNH’s MLR ratio in the most recent quarter was 81.6%.

    UNH’s senior MLR guide suggests that management expects increased patient utilization as the hospital’s labor shortage eases, wrote Sanford Bernstein’s Lance Wilkes.

    Since the start of the pandemic, hospitals have faced unprecedented margin pressure as nearly 20% of their workforce has been laid off. The mass exodus of healthcare workers increased salaries for those who stayed, while limiting the capacity of hospitals to provide services. The lower capacity and perhaps lingering concerns about Covid-19 among the elderly meant that many patients continued to postpone lucrative procedures such as hip replacements. That trend is finally starting to reverse.

    In a recent note cutting shares of UNH and Cigna earlier this month, Raymond James’ John Ransom noted that it will be difficult for managed care companies to replicate another low-cost year, with many of the doctors and nurses escapees on “revenge journey” in the third quarter returns, increasing capacity. He also highlighted the “triple threat” of the flu, RSV and Covid hurting insurers’ profits in the winter months.

    It is likely that UnitedHealth is being overly cautious with its estimates. UNH is known for providing conservative outlooks and then consistently beating those projections. Mr. Wilkes wrote that UNH usually improves earnings estimates by 3% to 6% and is likely to be cautious about medical expenses.

    An important question is how big the backlog in procedures really is. Many analysts were baffled by this year’s low occupancy rate, even as Covid-19 eased. Mr. Ransom, who is still positive about the sector, said he doesn’t believe “the idea that there will be a long term elective backlog – we think we would have seen it by now.”

    Still, the challenge for investors is that managed care companies have delivered outstanding returns that will be hard to replicate. Cigna’s stock is among the best performers in healthcare so far this year with a 40% increase, while UNH is up 5.1% and Humana is up 15%. That compares to a 17% drop for the S&P 500. Meanwhile, managed care price-to-earnings ratios are nearly above their four-year average.

    Managed care companies have been excellent defensive stocks during the pandemic, and especially during this year’s bear market. Next year may not be so bad, but it could still suffer in comparison.

    This story was published from an agency news agency with no edits to the text

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