Major U.S. health insurers beat Wall Street expectations for financial performance in the third quarter, but face considerable pressures — including a dogged rise in medical costs — as they look to close out 2023.

Costs have proven hard to shake as Medicare Advantage seniors utilize more outpatient care. Also in MA, payers reflected on quality ratings improvements in the third quarter, though not all insurers were happy with their results.

Payers are also starting to better sense the impact of Medicaid redeterminations, as states are roughly halfway through the process of rechecking member eligibility for the safety-net program. Redeterminations seem to be driving special enrollment in the Affordable Care Act exchanges. However, much remains up in the air.

Similarly, insurers are navigating disruption in the pharmaceutical space, hoping to lower drug costs amid skyrocketing demand for pricey weight loss medications — though those drugs are boosting earnings for pharmacy benefit manager subsidiaries.

Here are the five biggest takeaways from a jam-packed third quarter.

1. HIGHER UTILIZATION COSTS

Health insurers began seeing warning signs that members, especially MA seniors, were utilizating more healthcare than expected and driving higher medical spending earlier this year. Payers’ medical loss ratios, or MLRs — a marker of spending on patient care — rose as a result in the second quarter, though the impact was more muted than investors feared.

Higher-than-expected utilization continued to dog insurers in the third quarter, though the impact was mixed payer-to-payer.

CVS said its MA seniors used more outpatient and supplemental benefits in the quarter, including dental and behavioral healthcare. UnitedHealth called out higher utilization in outpatient orthopedic and cardiac procedures, while Molina said its higher MA spend was due to more seniors using outpatient and in-home services.

It wasn’t all outpatient, however. Humana reported higher inpatient admissions from COVID-19 infections.

Payers expect higher levels of utilization to continue through the end of 2023, with UnitedHealth reminding investors of the normal seasonal cost bump in the fourth quarter from cold and flu.

2. MA STAR RATINGS

In MA, star ratings — a measure of plan quality and customer satisfaction — help determine lucrative bonus payments. Many MA providers were hoping to see theirs improve following a dip in stars released last year.

That was the case for most payers in star ratings for the 2024 plan year, which the CMS released in October smack dab in the middle of third-quarter earnings.

Executives for CVS, Cigna and Humana cheered their stars results in calls with investors, noting the ratings position their plans competitively for 2025.

Centene’s stars also improved from the year prior, though the insurer received some of the lowest scores among its peers. CEO Sarah London said Centene would continue to work on improving its stars.

Meanwhile, Elevance could see a $500 million hit to its quality bonus revenue in 2025 after stars for its three largest MA plans fell.

“We’re extremely disappointed,” CEO Gail Boudreaux told investors, blaming the score decrease on a new statistical methodology used to calculate stars.

3. MEDICAID REDETERMINATIONS

Health insurers in the Medicaid program got a clearer picture of the impact of ongoing redeterminations in the third quarter. States resumed checking Medicaid members’ eligibility in the safety-net program in the spring, a process that disproportionately affects insurers with a large share of Medicaid members.

More people are being booted off Medicaid than insurers expected, but they’re rejoining at faster rates, multiple payers said.

Centene — the largest Medicaid managed care organization in the U.S. — said its rate of rejoiners has risen to about 25%, while Molina and Elevance put their rate of reconnects at around 30%.

UnitedHealth’s reenrollment rate is between 15% and 20% depending on the state, said Tim Spilker, head of UnitedHealthcare’s Medicaid business, during the payer’s third-quarter call.

In addition, states are revising rates to reflect changing acuity as payers’ membership rolls change, which should insulate insurers from extreme unexpected medical costs.

Centene, for example, lowered its 2024 earnings guidance earlier this year because of redeterminations uncertainty. But executives said in the third quarter there’s reason for optimism from state partners making rate concessions.

Payers are still operating amid a high degree of turbulence from redeterminations, however, from factors like coverage gaps and the high degree of administrative churn.

Molina lowered its member retention assumptions once redeterminations are complete from 50% to 40%. Elevance reiterated that it expects to retain about 40% to 45% of Medicaid members, but “it’s just going to be a little bumpier or rockier along the way,” said Boudreaux.

4. INDIVIDUAL EXCHANGE GROWTH

Major insurers that sell plans in the Affordable Care Act marketplaces reported strong membership growth in that business. Some chalked the trend up to the effect of Medicaid redeterminations causing people to shift from Medicaid to the individual exchanges.

Molina’s monthly special enrollment in ACA plans was “averaging 8,000 to 9,000 a month until the redetermination process happened, and it’s increased to 12,000 a month and growing,” said CEO Joe Zubretsky on the payer’s third-quarter call.

Centene’s exchange members grew 75% year over year in the quarter. Year-to-date, Elevance’s individual membership has grown 27%, according to Boudreaux, who attributed the growth to catching members in ACA plans who newly lost Medicaid coverage.

Amid the growth, CVS and Cigna said they were repricing their ACA products to improve their margins come 2024.

5. PBM DISRUPTION

Health insurers that operate pharmacy benefit managers are facing significant disruption from new drugs in the market along with the threat of legislation later this year around PBM business practices.

The advent of GLP-1s, pricey diabetes drugs with efficacy for weight loss, are pressuring these payers’ earnings in health benefits, while helping boost margins at their PBMs.

At CVS, for example, demand for the medications is pressuring Aetna, but contributing positively to Caremark’s margins, executives said. UnitedHealth said it’s struggling with the list price of GLP-1s in the U.S. as its plan clients consider covering the medications.

Cigna’s health business Evernorth, which includes its PBM Express Scripts, is seeing tailwinds from GLP-1s and biosimilars, which both present an opportunity to improve access while lowering costs for customers, said Evernorth chief executive Eric Palmer.

More biosimilars are expected to hit the market soon, increasing competition for high-cost drugs and lowering costs for insurers. CVS launched a biosimilar manufacturing subsidiary in the quarter, beginning with biosimilars for popular immunosuppressant Humira. CEO Karen Lynch said the business was a “significant opportunity” for the insurer on a third-quarter earnings call. 

Cigna also begun to benefit from the launch of biosimilars for Humira in the quarter, Palmer noted.

CVS, Cigna and UnitedHealth own the three largest pharmacy benefit managers in the U.S. Those businesses negotiate with drugmakers to cover medications and manage formularies for health insurers. Congress is currently considering multiple pieces of legislation targeting PBMs’ business practices.

On third-quarter calls with investors, PBM operators said they were prepared for legislation later this year, but signaled they were more open to bills injecting transparency into the industry than more sweeping changes.

“Any legislative activity or regulatory activity should not remove choice, especially from the commercial market for employers as well as health plans,” said Cigna CEO David Cordani. “Having said that, there is intensified activity around transparency, and we are highly supportive of transparency so long as it is targeted and constructive.”