Big Healthcare Struggling

Utilization and poor rate hikes are crushing health plan margins

Big Healthcare has been going through some major financial woes of late. Many of these big companies reported poor 2024 financials and some bad news is now popping up in 2025. Recently, UnitedHealth Group reported rising utilization, especially in its Medicare Advantage (MA) line. What was surprising is that United was bullish on MA for 2025 and added significantly to its rolls during the recent enrollment season while some other big companies contracted in MA. United also had to back off its 2025 investor guidance.

So, what is up here?

First, utilization has gone up considerably recently. A good share of this ties back to the tremendous drop in normal medical utilization during COVID. Utilization began recovering in 2022 but has really taken off since then. And there appears to be no sign of a significant slowdown right now.

Second, rates in government programs have also impacted bottom lines. The Centers for Medicare and Medicaid Services (CMS) announced a new risk model in Medicare Advantage (MA) that took over 7% out of rates over a three-year period (2024 through 2026). This meant a negative rate hike for 2024 and 2025. Initial hikes for MA for 2026 were just 2.23% but surged in the final announcement to 5.06%. Plan actuaries indicate that MA trends are as high as 9%. So, while the increase is welcome, it does not solve all the financial woes.

In Medicaid, plans saw major rate hikes during the COVID years because of surging enrollment and a plethora of additional federal funding available to state. But with redeterminations coming back and the end of enhanced federal reimbursement, Medicaid managed care plans are now seeing rising adverse selection as rolls are trimmed and much tighter rate hikes from states due to contracting Medicaid revenue.

Last, employer coverage costs are surging as well. Cost trends have been 5% or more since 2023. More recent costs are up annually between 6% and 9% through 2025 and similar trends are expected in 2026. Driving the costs are a return of utilization, trends in specialty drugs, and use of GLP-1s. While plans normally push such annual cost hikes onto the employer groups (usually self-insured), employers are pushing back and asking plans to better manage care. Plans are reducing benefits and looking for novel ways to administer benefits outside of traditional plan channels. All of this hits commercial plan margins as well.

Impacts on margin

All of this has brought some of the poorest margin results throughout the industry. The consulting firm McKinsey & Company published a recent study (see link at the end of the blog) analyzing the profit of various sectors within the US healthcare industry. I looked closely at the projections for health plans in MA, Medicaid, and the employer sector. Here is what I found from the study:

MA – McKinsey says that MA margins saw pressure in 2024, dropping to between 1 and 1.5% overall, with 46% of entities below EBITDA breakeven in 2023. Again, the causes were lower rate increases, the new risk model, a 5% rise in costs due to utilization, and the impact of the Inflation Reduction Act (IRA) on Medicare Part D. The IRA lowered beneficiary cost-sharing and shifted major costs to plans. Star performance could continue to complicate things as well.

McKinsey says that a recovery of 150 to 200 basis points should occur in 2025, leading to a rebound to long-term margins of between 3 to 3.5% by 2028. McKinsey says the recovery will occur due to product optimizations (which have already begun in 2025), market consolidation, and smaller loss-making carriers exiting the market. Lower member acquisition and greater value-based care penetration could factor in as well.

I tend to agree with McKinsey’s assessment on MA. MA plans have realigned products and geographies and will continue to do so. They are investing heavily in Special Needs Plans (SNPs). The 5.06% rate hike helps plans hit targets. The one unknown is how long will major trends in utilization continue and could this derail plans’ financial improvement. Certainly, the United announcement raises some questions here.

Medicaid – McKinsey says that a decline in Medicaid enrollment could shift the risk mix adversely and further strain margins compared to peak levels in 2021 and 2022. We clearly are seeing this. While health plans are urging states to align rates to recognize the greater adversity as rolls drop, state revenue is much tighter with the loss of enhanced Medicaid monies. McKinsey also points out that Medicaid hikes tend to trail recognition of utilization and other changes demonstrably. It says rates should move up, but it could take 18 to 24 months.

I would note that the plans that serve both Medicaid and Exchnage populations could be even more vulnerable. The likely expiration of the enhanced premiums subsidies in the Exchange could trim rolls here by millions.

Employer – McKinsey says EBITDA for the commercial segment declined from $17 billion in 2019 to $13 billion in 2023. It says health plans likely will raise premiums by 2.5 to 3 percentage points more than the historical range to compensate for higher provider-rate increases, higher utilization, and other increased costs. McKinsey also sees a trend of less generous plan offerings. McKinsey estimates the commercial segment’s EBITDA margins to recover by 2028 and reach $21 billion. Margin percentages are expected to remain below pre-pandemic levels.

McKinsey sees a further shift from fully insured to self-insured businesses as premiums rise. At the same time, McKinsey notes that while utilization is rising and rebounding post-COVID, certain services have not yet fully recovered and there should be a shift toward non-acute settings. Interestingly, McKinsey says that by 2028, government program business is expected to generate 75% more EBITDA than commercial.

Comparison to other healthcare

The table below shows how badly plans really have had it during COVID and as the healthcare system recovered. Health plans had negative margins (technically EBITDA below), while providers turned a small margin. Pharmacy and services/technology maintained strong margins. It is important to note that much of Big Healthcare has vertically integrated, so their margins have the strength of pharmacy and services and the drag of health plans and to some degree providers.

But United’s recent announcement of its financial woes had an interesting twist. Its Optum services subsidiary performed relatively poorly, showing that even the healthcare service sector could be hurt by ongoing trends in the industry.

Study: https://www.mckinsey.com/industries/healthcare/our-insights/what-to-expect-in-us-healthcare-in-2025-and-beyond

#medicareadvantage #medicaid #managedcare #healthplans #employercoverage #margins #rates

— Marc S. Ryan