Cracks in the Coverage: Health Insurers Face Rising Costs and Scrutiny

The health insurance sector is experiencing significant financial strain as people increasingly utilize their medical plans, leading to a surge in benefit payouts. This trend is notably impacting major players like Centene, Elevance Health, and Molina Healthcare, particularly within their government-subsidized Medicaid and Medicare offerings.

Centene reported an adjusted loss of $79 million in the second quarter, with its health benefits ratio (the proportion of premium revenue paid out for medical care) climbing to 93%, a notable increase from 87.6% in the same period last year. Similarly, Elevance Health's benefit expense ratio rose to 88.9% in the second quarter, up from 86.3% a year prior. Molina Healthcare also adjusted its earnings outlook downwards, attributing this to a temporary imbalance between premium rates and accelerating medical cost trends.

These rising costs have directly affected stock performance. Elevance Health's shares dropped by more than 10% after its earnings report, while Molina's stock fell by approximately 8%. Centene's shares initially saw a premarket decline of around 15% following its results but recovered to a gain of approximately 6% by the market close, buoyed by the reinstatement of earnings guidance and reported revenue of $48.7 billion, surpassing estimates. The broader healthcare sector has underperformed in the S&P 500 this year.

UnitedHealth Group, a prominent insurer, is also under close watch as it prepares to release its second-quarter earnings. Its medical care ratio is anticipated to increase to 89.3% from 85.1% in the prior year's second quarter, suggesting tighter margins. This comes after the company previously lowered its forecast, causing its stock to drop by more than 20% in a single day.

Adding to the industry's challenges, UnitedHealth Group recently confirmed it is cooperating with a criminal and civil investigation by the Department of Justice regarding its Medicare Advantage program. The investigation, which reportedly involves inquiries into billing practices, follows earlier media accounts of potential fraudulent activity. UnitedHealth has stated its full confidence in its practices, noting a history of compliance and independent audits affirming its accuracy. Despite a previous civil challenge concluding with no evidence of wrongdoing, the ongoing probe adds an element of uncertainty for the company and the wider sector.