How The Mighty Have Fallen

The mighty big healthcare companies have fallen, in this case a victim of their own financial mismanagement and shenanigans.

The struggles and in some cases the near implosion of several large national vertically integrated health plans or Big Healthcare have been surprising to many, including me. The biblical phrase “How the mighty have fallen” from Samuel seems particulary relevant right now. David’s lament for King Saul and Jonathan indicates no one is immune from hardship, not even the long-standing, go-to investments in healthcare.

Big Healthcare certainly had some external forces undermining its health, but it too was a victim of its own financial mismanagement and shenanigans. The crash offers some insights into the wrong way to attack running a health insurance business these days.

United’s woes

The most notable failure of late is the UnitedHealth Group. After consistently reporting better news than most of its peers the past year or so, United has literally crashed. What is going on?

• United now admits its financial reporting on revenue, medical expense, and margin was far too optimistic. Its CEO resigned or was forced out.
• Utilization is much higher than anticipated across the board, but especially in Medicare Advantage (MA).
• United’s normally strong Optum services entity is also showing weakness due to the ripple effect from the softness of its insurance entity. After all, special and opaque arrangements exist within United to ensure revenue stays within the family. See more below when I discuss inter-company transfers.
• The company faces numerous probes and lawsuits, many alleging fraud.
• United’s pharmacy benefits manager (PBM), OptumRx, is under scrutiny and being sued for anti-competitive behavior.
• United brought the healthcare world in America to a near halt in 2024 after the Change Healthcare cyberattack proved United cared more about acquisitions and revenue than integration and security.
• There are numerous accusations that United engages in anti-competitive behavior, including with its proposed acquisition of an additional homecare entity.

Other big names are struggling too.

Other Big Healthcare companies have taken it on the chin, too.

• CVS Health saw its insurance entity Aetna nearly implode too, with an over-zealous MA expansion in 2024. Its PBM, too, is being sued for the same behavior as OptumRx. It has struggled with its primary care investments and retail pharmacies. It also ousted its CEO.
• Humana’s MA-dominant business was the first to report issues. Its CEO retired, leaving the new boss with a years-long recovery to plot.
• While Cigna has largely escaped huge problems, its PBM is in the same mess as CVS and United.

Relying too much on suspect strategies

Investors flocked to put money into these big names due to their reliability and seeming ability to escape the vagaries of healthcare. But these vertically integrated behemoths relied far too much on suspect ways to generate revenue and curb costs.

• Many set up robust MA risk adjustment shops that pushed the limits of law – or stepped over the line.
• They, too, went heavy on prior authorization (PA) and claims denials to lower medical expense.
• Some entered into unseemly and perhaps illegal agreements with third party marketing organizations and brokers to steer MA lives to their plans.
• In all lines of business, they leveraged vertical integration and entered into inter-company transfers within their broader enterprise (e.g., PBMs, physician groups, specialty pharmacies, retail pharmacies, and service entities) to possibly shield medical expense from the minimum medical loss ratio (MLR) law and to pay itself higher-than-market prices for services and drugs.
• They also used their size in the market and acquisitions in many areas, including PBMs, to increase price and their return.

The regulatory backlash

In the end, some of these will continue on and mean returns to investors. But a good deal could go away. Competition regulators could stop further consolidation and perhaps force the breakup of the mega Big Healtcare businesses over time. Vertical integration will be investigated and unseemly inter-company deals stopped. Risk adjustment in MA likely will be radically reformed. PA and claims denial reforms have been instituted and more will come on line in the future. Radical PBM reform will come.

Current financial trends and comparing big healthcare vs. regional players

Actuary Milliman looked at insurance filings to gauge performance of MA plans in 2023 and 2024 to determine differences between national and regional players. Overall MA-Part D (MA-PD) MLRs went up by 2.8% to 90% from 2023 to 2024. For MA-Part D (MA-PD), underwriting margin (UWM) decreased by 18.7% on average from 2023 to 2024. UWM is total premium revenue less total claim costs. This is the amount left to be used to cover administrative costs, capital/surplus contributions, and profit margin.

Big MA does have an advantage – at least they did:

• Milliman found that MA-Part D (MA-PD) regional carriers experienced loss ratios roughly 4.1% higher than national carriers in 2024, which is slightly lower than the 5.5% gap in both 2022 and 2023.
• MA-PD underwriting margin (UWM) was much greater for big MA plans than regional ones — $184 vs. $100 in 2023 and $148 vs. $85 in 2024

But national players got hit harder recently:

• Milliman notes that, on average, financial headwinds for national carriers were larger in 2024 (3.1% hit in MLR) than regional carriers (1.7% hit in MLR), but a large gap remains (4.1%). I think a good deal of this could be some of the big healthcare behaviors I noted above.
• Big MA took a UWM hit of $36 hit (or 20%) from 2023 to 2024 vs. $15 (or 15%) for regional carriers.

Millian does note that the unfavorable impacts for national carriers are primarily driven by a single payer with a 10% increase in loss ratio in 2024 versus 2023. Excluding this one payer results in a +2.0% increase in the average loss ratio for national carriers, more in-line with regional carriers. But it is clear that things are changing.

MA enrollment impacts

While the MA industry as a whole realigned for 2025, big MA plans took the biggest hit overall. My analysis finds that Big MA plans likely contracted much more than the other plans and their growth (or contraction) footprint shows it:

• Big Plan MA enrollment rose from 25.568 million in January 2024 to 26.348 in February 2025, an increase of 780K or 3.1%. This is down from 2.111 million or 9% from 2023 to 2024.
• Non-Big MA plan enrollment (including the prominent startups) grew at a healthy pace year over year as well – about 688K or 8.7% from January 2024 to February 2025. Again, this compares to just 3.1% for Big MA plans. Non-Big MA grew about 406K during the enrollment season (about 5%), while Big MA grew by just 16K – basically flat.
• Big Plan MA enrollment represented about 76.38% in January 2024 and is about 75.41% as of February 2025, down by about 1%. More interesting is that only about 53% of all growth from January 2024 to February 2025 was from Big Plan MA. Now, Big Plan MA still dominates the program (it is just 3% of all sponsoring organizations), but the decline in its share (ever so slightly) is a sign that the big plans are hurting financially, are pulling back on over-expansion, and that other MA plans may be getting better traction.

Conclusion

Big Healthcare was able to leverage its size, other companies, and various schemes to continue to thrive, especially in MA. But some of those tactics are under threat and could go away. While regional players have been hit by a financial downturn too, their greater focus on member care and relationships (as opposed to the suspect behaviors of the national plans) seem to be helping win the day from a financial front and growth right now. For sure, no one is counting big healthcare out, but its future is cloudy.

Milliman study: https://www.milliman.com/en/insight/emerging-medicare-advantage-part-d-2024-financial

#healthcare #healthcarereform #healthplans #medicareadvantage 

— Marc S. Ryan